2008 March 03 Monday
Examining Russian Economic Growth Under Putin

We've had recent debates in the comments of posts here at ParaPundit on the question of the quality of Vladimir Putin's rule in Russia. Stanford University political scientist Michael McFaul says Vladimir Putin's successes with Russia's economy have been exaggerated.

While Russia can claim that wages have risen, its economy is expanding and poverty rates have been cut, there have been real setbacks in health care, public safety and corruption.

The state has undergone a massive expansion under Mr. Putin, with the number of state employees doubling to 1.5 million, Prof. McFaul said. The murder rate has increased and alcoholism and mortality rates remain high. Public health spending, meanwhile, has not increased in the past decade.

He also argued that Russia was well on the road to economic recovery as early as 1998, after the crashing ruble forced federal officials to control government spending and reduce the state's role in the economy.

But since then, its growth rate has stalled; in 2000, Russia's economy was the second fastest growing among former Soviet countries. Today, it is 13th, Prof. McFaul noted in an article he co-authored in Foreign Affairs, an international relations journal.

Edward Lucas, author of The New Cold War: How The Kremlin Menaces Both Russia And The West, says the level of corruption in Russia today will prevent full economic development.

Oil-fuelled crony capitalism does not bring lasting prosperity.

The real route to lasting progress is in solid, honest public institutions: courts, efficient bureaucrats, a good education system, strong anti-monopoly laws.

Russia not only lacks these, it has the opposite. Whereas the courts used to be merely bribable, they are now a branch of government. The education system is plagued by corruption.

Meanwhile, state bureaucrats shamelessly indulge in what they call "velvet reprivatisation": a euphemism for arbitrarily bankrupting companies and buying them at bargain prices for themselves.

By far the most likely explanation for Mr Medvedev's sudden elevation to the top job is that having smeared opponents as dangerous extremists and used oil wealth to muffle public protest, Russia's rulers have snapped up the lion's share of the country's assets to the tune of tens of billions of dollars.

Their priority now is to squirrel the proceeds away abroad.

That arbitrary bankrupting of companies is especially worrisome. Capitalists can pay a predictable rate of taxes and a predictable rate of extorted bribes. But the loss of everything doesn't just deprive the capitalist of incentive to work and invest. The bureaucrats who take over companies are not likely to run them well.

But Jim Heintz says the economy in Russia is growing quite rapidly.

The ruble is stable and even being touted as a potential reserve currency. The economy grew 8.1 percent last year, and the middle class has grown dramatically. Russia stands 79th on the World Bank's ranking by gross national income per capita at $5,780 behind Mexico but ahead of EU members Romania and Bulgaria.

The single most important factor in this stunning transformation has been skyrocketing prices for oil and gas. Oil was about $20 a barrel when Putin took office, roughly a fifth of current prices. Russia has earned about $1 trillion in oil and gas revenues during Putin's years, according to calculations by Moscow's UralSib bank.

"There's no doubt about it, they got extremely lucky with the oil price," said UralSib research head Chris Weafer. But "they did a couple of positive things as well, such as reforming the tax system from what was a real upturned plate of spaghetti in terms of all the various options and routes and exceptions that were in the system."

The Economist does an especially good job at examining the recent economic history of Russia. Putin was lucky to come to power at a point when Russia was already on the rebound.

In fact, Mr Putin came to power at an unusually benign moment. The debt crisis and devaluation of 1998 had flushed out the financial system, removed constraints on the rouble and enforced fiscal discipline. With much of the economy in private hands and most prices liberalised, recovery inevitably took off. By the end of 1999 Russia was already growing by more than 6% a year. In 2000 growth accelerated to 10%, a rate still not matched eight years later. Symbolically, four days before Mr Putin was officially elected as president, the first IKEA store opened in Moscow.

To be fair, at first Mr Putin worked hard to consolidate growth. His government simplified and cut taxes. Budget reform brought clarity and stopped the government making unrealistic pledges on spending. Mr Putin not only chose a liberal economist, Andrei Illarionov, as his economic adviser, but also listened to him. For the most part Russia used its oil windfall prudently, repaying debt, building up reserves and filling its stabilisation fund. Many of the reforms conceived in the 1990s were passed at last, including legislation to improve the judicial system and allow a free market in land. The benefits of Mr Putin's early efforts are still felt today.

Mr. Putin didn't cause the huge run-up in oil prices that made oil and natural gas into almost a third of Russia's economy.

The share of oil and gas in Russia's GDP has increased, according to the Institute of Economic Analysis, from 12.7% in 1999 to 31.6% in 2007. Natural resources account for 80% of exports. Like a powerful drug, oil money has masked the pain caused to the Russian economy by the Kremlin. But the disease remains.

That is an astoundingly large percentage of GDP just from fossil fuels.

Transparency International finds no drop in corruption under Putin.

According to Transparency International, a watchdog group based in Berlin, corruption has increased slightly in Russia since 1999 and the country is now ranked 143rd among 179 countries profiled. Its national business environment ranking compiled by the World Economic Forum's Global Competitiveness Report has also fallen since 2001, from 56th to 70th, though most of that is due to the addition of new countries. In addition to corruption, the report cites tax regulations, bureaucracy, and inflation as some top concerns.

The top leaders in Russia are now former KGB. They've probably created a more orderly system of bribery. The KGB turned into the FSB and now companies all have to hire FSB agents into top positions.

Current and former FSB officers work in large private companies as well. Another former FSB official said the Kremlin wanted the officers to make sure the companies do not act against Russia's interests.

"Big companies in Russia consult with the Kremlin before striking any big deal. The officers working for those companies are there to make sure that things are done properly or the way the Kremlin wants," the official said.

The companies, who pay generous salaries to the officers, feel they get their money's worth. The officers make sure they do not have problems with the Kremlin.

"All big companies have to put people from the security services on the board of directors," said a banker with a large private bank. "Many are appointed as directors or deputy directors. They are called 'active reserve agents,' and we know that when Lubyanka calls, they have to answer them."

These arrangements place severe limits on the extent of competition based on price and quality of service. Russia can't grow up to its potential as long as companies act like extensions of the state and corruption serves as an additional tax.

Share |      By Randall Parker at 2008 March 03 10:15 PM  Russia

Kenelm Digby said at March 4, 2008 3:55 AM:

What I really cannot stand are the many nasty little attacks by 'The Economist*' magazine and one of its paid lackeys (Edward Lucas - perhaps he's being paid handsomely by Mr. Berezovsky?)on the state of the ruuian economy.
'It's only a commodity exporter' they cry, 'It depends on oil', 'It has no proper industrial base' etc etc.
I just wish these people would look a little closer to home and realise that Britain scratched out a living for the past three decades on the proceeds of North Sea Oil - largely wasted, there was never a British 'Sovereign Wealth Fund', that enabled it to live beyond its means - Britain's industrial base wa largely destroyed from the 1960s to 90s, its trade deficit in ALL goods , including manufactures is ridiculous, in fact Britain is only kept afloat by means of its distorted, ridiculous property market, whereby funds for bloated mortgages are imported from the far East, to provide foreign exchange to pay the import bill.Google up 'Yen Carry Trade'.

*The most dangerous (because fuck-wit, shallow, pompous politicians take it seriously, publication on the planet.Rather pompously think they have a 'direct-line' to Britain's famed 'Foreign Office' establishment - of course they don't - they are merely poseurs and upstarts.

Ned said at March 4, 2008 8:02 AM:

Pretty much spot on. I visited Russia last September - my previous visit was almost twenty years ago. I thought the difference was dramatic. St. Petersburg looked much better - lots of nice stores and good restaurants. The streets were choked with cars, including many expensive German, American and Japanese models. The people were mostly well-dressed and seemed happy. Much of this is oil-driven prosperity, of which Putin is the lucky beneficiary. Nonetheless, the improvements are real. But corruption is a serious problem, and much of the infrastructure is still pretty bad. And the long term demographics are terrible - Russia has a rising death rate, with many deaths coming from AIDS, TB, alcoholism, and tobacco. The birth rate is stagnant. Plus, Russia is mostly surrounded by hostile neighbors and contains restless minorities. Really, Russia under Putin doesn't seem too different from Russia under the Tsars. And he is very popular with the ordinary Russians, who want peace, stability and prosperity and don't much care about democracy and freedom. Many of the ruling class seem to be moving their money out of the country - I had dinner last night with some folks just back from Croatia - they said the Russians were buying up all the expensive seafront properties. So Westerners should pretty much leave the Russians alone to sort out their own problems - the West has almost no ability to effect any sort of change in Russia anyway. The Cold War is over and isn't coming back. The Russian military, though improving, lacks the punch to project power much beyond its own borders. And the Russian economy ($2 trillion GDP) is far behind that of the US (almost $14 trillion GDP) and the EU (slightly over $14 trillion GDP). Russia certainly has the capacity to stir up trouble among her neighbors (the Ukraine, Georgia, Armenia, Azerbaijan and Central Asia), but the hard shells of NATO and the rapidly advancing China will prevent too much damage. So Russia will probably be inward looking for the immediate future, concentrating on her own problems. And she's going to have plenty of them, especially when the oil and gas start running out.

Randall Parker said at March 4, 2008 5:31 PM:


The revenue from the North Sea was a far smaller fraction of the British economy than oil and natural gas are of the Russian economy.

Skot German said at March 4, 2008 9:35 PM:

From the article: "Russia stands 79th on the World Bank's ranking by gross national income per capita at $5,780"

Something is wrong with what is being measured. Simply compare Russian and Mexican technology. Russia has a space program, ICBMs, advanced fighters, submarines, nuclear weapons and all sorts of other advanced military hardware that they developed themselves. If Mexico has any of this, I never hear of it. Russia seems way more modern and advanced than Mexico.

m said at March 4, 2008 11:43 PM:

I dont trust the world bank, so what is happening in Russia is more measureable by what their people say. The voted for the KGB-candidate overwhelmingly, and Putin is incredibly popular, their birthrates are rebounding, and they are protecting their own industries from cheap dumping while they modernize. Putin ran Russia for the benefit of Russia and the Russians, not for international corporations. Sure, the guys up top did a little looting to Swiss banks--skimming a bit for themselves. This happens everywhere. Expensive corporate residnences on various continents and slack money has been availaible to our elite since WW2----. Russia is resisting a globalization of its own nation. They dont want for Russia what our elite want for America. Its their OWN business, not ours. She is one of the few nations on the planet that could exist quite well with very little interaction with anyone else as they have pretty much what they need there. The US has bigger fish to fry right now with Islam, and circumstances in its own hemishphere. The Russian "rebound" will keep the Kremlin busy for another 20 years.....................

MlR said at March 5, 2008 1:24 AM:

"Something is wrong with what is being measured. Simply compare Russian and Mexican technology. Russia has a space program, ICBMs, advanced fighters, submarines, nuclear weapons and all sorts of other advanced military hardware that they developed themselves. If Mexico has any of this, I never hear of it. Russia seems way more modern and advanced than Mexico."

Even at the height of the Cold War the USSR was commonly referred to as the Upper Volta with missiles. It was a upper-tier third world country with a strong research and military sector, not surprising considering the amount of money put in. Today it's still largely coasting on that in these areas.

Kenelm Digby said at March 5, 2008 3:48 AM:

Britain's great economic 'Achilles' heel' throughout the late 20th century was its persistent and ultimately insoluble trade deficit.
This is (or was) the real brake that thwarted all attempts by various British governments to try to 'grow' Britain out of relative economic decline.Study the 'Sterling crises of 1967, 1976 and 1992 for example.
In the mid 70s the situation was terminally dire - this lead to the IMF 'rescue package' of 1976 that ultimately resulted in a massive deflation and the persistence of mass unemployment, parsimony in state spending on hospitals, schools, welfare etc.
tHe situation was mitigated somewhat by the coming on-stream of North Sea Oil from the mid 70s onwards, which in the 1980s resulted in a trade surplus, now the situation is changing as the oil runs out.

Dimitar Velinov said at March 9, 2008 9:29 AM:

Russian economy - Oil, Gas, coal, military technology and a few KAMAZ trucks for those who can't afford any other trucks. That's it. Sorry to say that. Russians are great people but the just don't have the luck to have good economy. And it won't happen till they don't stop drinking that much.
Putin - a good diplomat and strategist. But still... China is the really groing economy, not Russia. China produces clothes, desks, washers, dishwashers, air-conditionings, cars, computers and... and...
Russia? It exports it's natural resources.
I hope all that will change. Because Russia is an European country and has given a lot for european (and world) culture - music, writers, scientists and so on.
Japan and to some extent China is what should be an example for Russia.
Start inventing commercial things, russians. Or you will be a military giant and an economic dwarf forever...
With all my love for Russia:

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