Wild, Wild East: Rise of Russia?

Tatsiana Yakautsava

Since the break-up of the Soviet Union, the three “Slavic sisters” Russia, Belarus and Ukraine followed very different political and economic trajectories despite their strong cultural similarities.

As someone who was born in the USSR and as an economist by Western training, I have always been interested in Eastern economics of transition as well as the events currently unfolding in these three countries. How did these economies weather the storm of Soviet collapse? What makes up their political landscape today? What does the future hold for them? And finally, why should we care?

There are no easy answers to these questions but the challenge of getting to the bottom of it is exciting. I shall start with the region’s main actor – Russia. Russia’s relative might in Eastern Europe is obvious: it boasts the highest GDP, claims one of the most rapid growth rates, and above all, this country has always enjoyed political influence over its less-endowed neighbours. Dispassionate analysis of Russian economics and politics (especially politics!) is rather scarce in today’s media. Indeed, between cynical accounts of Western-centric journals such as the Economist, where Russia is often portrayed in negative light or not portrayed at all, and rampant pro-government propaganda of state-owned Russian news channels such as ORT, there isn’t much to pick from if one were to search for pure objectivity.

Yet, today, as presidential elections are looming over the Russian electorate, it has become fashionable among those truly concerned to look back 20-25 years or so in order to make a sound judgement about the future. Since hindsight gives better vision forward and since I am not the only one fascinated, intrigued, tantalized and sometimes confused by Russia, I want to go back in history before jumping to conclusions about its present and about its future possibilities.

Perestroika and its Legacy

Today, Russia’s average 5% annual growth does look better next to EU-27’s feeble 1.5%.  Russia has not always been this confident in its economic strength. Only a couple of decades ago, when the USSR was clearly losing the Cold War, came the years (1980’s and early 1990’s) of radical economic restructuring commonly know as perestroika. Pioneered by Mikhail Gorbachev, these intentions of restructuring the socialist economy towards market-led growth required rapid privatization of state businesses. On the political front, supremacy of Communist Party was finally repealed. Russia and its fourteen neighbouring Soviet Republics were about to undergo a multi-layered reform and its consequences, to put it mildly. To put it less mildly, the collapse has begun.

Post-perestroika period began on January 2nd 1992. The “shock therapy” of liberal economics was fully launched that day by Yegor Gaidar, top economist of those times. It was based on three pillars: price liberalization, massive privatization and opening up to foreign trade. Price liberalization brought in drastic inflation, deterioration of purchasing power, and above all, mistrust towards authorities. Shortages of consumer goods became an everyday sad reality for many.

Russian consumers had to spend long hours in line-ups simply to buy food

Massive privatization triggered economic crime, corruption and abuse of public office by bureaucrats. If any graduate student were to write a dissertation on corruption (as I did this summer) he would encounter gigantic amount of anecdotal evidence on bribery in Russia. According to two leading specialists in economics of corruption, Andrei Shleifer and Robert Vishny, the surge of corruption in Russia during the 1990’s must have been chiefly due to the crumbling monopoly over bribe collection – by quickly collapsing centralist government gave way to many separate “institutions” independently capable of extracting even more bribes from desperate consumers, severely constrained in their purchasing choices.

Wild Wild East

The sudden capitalism of the wild 1990s translated into a large-scale looting of public wealth. Valuable state assets were quickly purchased for artificially low prices by a skillful few, who consequently became the famous Russian nouveaux riches or, as they are often called, the oligarchs. Moreover, scant funds rarely made it into public treasury requiring authorities to tax heavily. High taxes drove businesses into the shadow economy where criminal activities were thriving. Millions have suffered from shady machinations of pyramid-like financial companies à la Ponzi. The most scandalous case was “MMM” scheme craftily executed by Sergei Mavrodi.

Politics of Open Doors

Much pressure was put on those in power to embrace free trade in the 1990’s. Thus begun the colossal importation of all things Western: from brand-name consumer goods to seemingly democratic ideals. As a result, demand for less glamorous domestic products plummeted and output shrank. Russia began to suffer from deindustrialization, moving toward resource-based economy. “Open doors” politics created ideal conditions for easy smuggling of natural resources abroad, lowering the price of its exports and thereby deteriorating Russian terms of trade. Sudden taste of freedom also induced a heavy brain drain; many emigrated to the West, mesmerized by the prospect of fulfilling the American dream.

To boot, Russia was then largely dependent on international financial institutions. Its external debt was rising, particularly because Russia took on its shoulders the responsibility to settle other USSR countries’ debts. In August 1998, mismanagement of public funds and artificially high price of ruble on foreign exchange culminated in a financial crisis. Foreign investors pulled out. In the midst of this economic mess, President Boris Yeltsin continued to shuffle his ministerial appointments until he finally handpicked a new guy, former KGB agent as prime minister. His name was Vladimir Putin. Yeltsin declared in his traditional New Years public address that he was “tired” and that Mr. Putin shall serve as an interim Head of State.

2000’s: Putin’s Russia

Charismatic, athletic, articulate and composed. Vladimir Putin was gaining incredible popularity in no time, especially among women who comprise the predominant majority of Russian demographics. On March 26th 2000, he won presidential elections. This outcome hardly surprised anyone. Thus began another chapter in Russia’s economic and political history. For almost exactly a decade Russian economy was on the rise until growth slowed in the midst of 2008 crisis.

2000s were years of recovery for Russia.

2000s were years of recovery for Russia.

The public attributed this positive economic trend to Putin’s presidency. While the process of economic growth is complex, Russian economy may have indeed benefited from a number of public policies at that time, particularly those in the realm of taxation. Or perhaps, the confidence that Putin projected translated into consumer confidence as well as the confidence producers and investors, which in turn made the economy tick again. Finally, market-based economic growth was not only recognized, but appreciated through actual experience. However, growth (that is a simple rise in GDP per capita) is not synonymous with economic development, the latter being far more multifaceted and complex. Putin years brought about a significant increase in the middle class; many finally had the chance to climb above the poverty line.

Income Inequality: Everyones problem 

According to TradingEconomics, Gini index in Russia has not declined at all throughout the 2000’s suggesting that inequality remains a problem in Russian society. Moreover, Russia saw an important surge in productivity from 1995 to 2005 as noted by a 2007 World Bank study of productivity in Eastern Europe and former Soviet economies. Thus, 5.8% growth in productivity was the principal driver of total growth. This is usually the case of any economy – productivity is the engine of growth.  However, in the Russian case productivity lift was the eventual consequence of painful economic restructuring several years before. In other words, was Putin lucky to get elected right after the economy finished its stressful transition to more efficient mode of production, or is charisma and confidence an implicit driver of growth?

In either case, Putin and his team understood well that the mix of popularity and favourable economic circumstances gives a great opportunity to solidify power. Even when Dmitry Medvedev assumed presidential office in 2008, everyone knew that the real boss remains Mr. Putin. Only few were surprised that Putin had forwarded his candidacy for president in 2012. With Putin in power, governing administration became more centralized.  There is even a specific expression for this phenomenon in Russia – solidification of “power vertical” (lit: vertical’ vlasti). This strange combination of weakening democracy and growing economy causes much confusion for those economists who theorize about fundamental causes of economic growth.

Eye candy for many, he proved himself capable of consolidating the “vertical of power”, that is enhancing power of federal authorities. Russian governance is becoming increasingly centralized. Is Russia moving backwards?

Today and Tomorrow

Presidential elections are coming up, while concerned citizens are reflecting on what they should value most – democracy (which for many seems West-imposed) versus rising and stable living standards.  Many believe that change of government, even if were a clear triumph of democracy, would bring about too much instability for Russians to handle. For many of them, turbulent restructurings of 1990’s are still fresh in their memory. For others, change is good.

Russia is still heavily dependent on natural resources. A natural question arises: how long largely resource-based economy can sustain its growth without diversifying? Current governing team in Russia recognized its weakness and even attempts to do something about it. For example, President Medvedev seems to be obsessed with nanotechnology development, which presumably should trigger Russian productive forces to move into more skill-intensive production. As a testament of this commitment, in 2009 Medevev launched an uber high-tech Skolkovo innovation center, commonly known as a Russian Silicon Valley.

Why should we care about Russia?

Today, Russia’s largesse is hard not to notice: its economy is the 11th highest by nominal value. Moscow (that never sleeps) is a place of residence number one for billionaires world-wide. It is a megapolis where wealthy consumers are always ready to spend, making every internationally-oriented investor want a piece of Russian market. More importantly, Russia’s economy has not been hit nearly as hard as that of Europe during the last financial crisis. This is a testament of relative economic strength. Above all, the restructure and macroeconomic stabilization that Russia came through for the last two decades is unparallel in history. Perhaps today the slowly recovering West have lessons to learn.