PhDr. Miloš Balabán, Ph.D.

Head of the Center of Security Policy

Center for Social and Economic Strategies

Faculty of Social Science

Charles University

The principal features of Russia’s political and economic development in the first decade of the 21st century and the country’s future prospects

(study)

2008

1. Russia’s political and economic development in the first decade of the 21st century

During the 2000s Russia had to overcome the political and social turmoil that was characteristic of the period immediately following the dismantling of the Communist autocracy and the breakup of the Soviet Union in the early 1990s. The first Russian president, Boris Yeltsin, and the associated group of reform-minded politicians did manage to dismantle the fully state-directed command economy and the authoritarian power structures, but failed to replace them with a workable concept of further political, economic and social development. The result was a deep crisis of the society, so serious and far reaching that Russia found itself on the verge of collapse.[1] There was also a real threat of disintegration, provoked by the large-scale and ill-organized devolution of powers to the regions. As the influence of oligarchic structures grew, the weak central government was less and less able to control the situation in the country. The then-unexpected rise of Vladimir Putin to the presidential post could thus also have been dictated by a pragmatic decision of an influential part of the political elite that wanted to reverse the unfavourable trend which undermined even Russia’s international status.[2]

All the aforementioned negative trends were arrested and in some aspects even reversed after Vladimir Putin’s accession to presidency in the 2000s.

At the end of this decade, Russia faces six major tasks, likely to have a long-term impact on its internal and foreign policy:

  1. maintenance of its international status as the largest country in the world which, despite the fact that the breakup of the USSR and a decade of crises[3]had temporarily degraded it to a regional power of medium importance, now wants to take advantage of its economic development and the newly-emerging multi-polar world model to resume the position of a major world power;
  2. formation of a working market economy after decades of command economy and isolationist economic policy;
  3. integration of the Russian economy into the global economy while globalization continues and global competition increases;
  4. overcoming Russia’s considerable dependence on the exploitation of energy resources and the related challenge of innovating and modernizing the economy;
  5. an overall modernization of the country and its social infrastructure;
  6. formation of a pluralist political system, including real self-government, reducing corruption to a minimum, improving the underdeveloped civic and political structures, administrative and enforcement mechanisms.

The key factor of Russia’s present-day development is the consistent economic growth that the Russian economy has been experiencing especially since the 2004 global sharp rise in oil prices. The link can be easily documented, as these prices, too, have been growing steadily: in 2004 a barrel of Brent oil sold for $38, in 2005 for more than $54, in 2006 the same barrel cost $65, in 2007 the price climbed over $72 and in 2008 it reached $140. The same is true for gas. In 1999 the EU countries paid $64 for 1000 m3, while in the first quarter of 2008 it was $350[4]. These circumstances have opened a uniquely favourable “window of opportunity” for Russia, since the income from oil exports can be used to ensure stable economic growth, modernize the economy, science and research and finance welfare programmes. In the 2000s the economy grew by an annual 7% on average, the GDP increase in 2007 being 8.1%. Oil and gas production and export still forms the base of Russia’s economic prosperity. The fuel and energy complex supplies 37% of the federal budget revenues, and makes up 20-25% of the GDP and 60% of export revenues.[5] This makes it easier to understand why the state significantly tightened its control over the energy sector in the 2000s (in 2008 more than 50% of oil production was state controlled). The dominant position of the state in the two key energy companies, Gazprom and Rosneft, turns private profits into one of the instruments of national economic policy.

It cannot be said though that the marked growth of the Russian economy during the Putin administration was solely the result of the increasing oil revenues. During Putin’s first term a number of reform steps were implemented, including rouble devaluation, company restructuring, a streamlining of the customs system (several dozen tariff rates were replaced by four basic ones, a measure that considerably curtailed opportunities for evasion). The year 2001 also saw the introduction of a 13% flat-rate income tax, by far the lowest in Europe, and the corporate tax was cut from 35% to 24%. Although small and medium-sized enterprises produce a mere 13% of the GDP, the reform measures stimulated the development of consumer goods production and a related expansion of the retail trade[6], building, or (another rising sector) telecommunications. One fifth of the Russian population regularly use the Internet (seven times as many as in 2000) and almost all Russians now use a mobile phone. The use of modern forms of communication can significantly enhance political pluralism in the Russian society.

Judging from the above, Russia can no longer be regarded as a traditional “oil state”. The efforts of the Russian government to modernize the country confirm this conclusion. Concrete goals were defined by Vladimir Putin in his speech to the extended session of the State Council on 8 February 2008, when he still held the presidential office. The priorities defined in the speech entitled “The strategy of Russia’s development till 2020”[7] were based e.g. on the “National Projects” announced in 2005, which should ensure further development of healthcare, agriculture, housing and education. Russia faces other challenges as well: in particular those connected with the development of transport and industrial infrastructure. At present the country has only one transcontinental railway (Moscow-Vladivostok) and (as opposed to Europe, the US or China) virtually lacks a highway network. An already approved investment project worth $550-570 billion and aimed at improving transport infrastructure, i.e. building new railways, airports, roads and ports, should help remove this deficit. However, modernizing the country and its industry will also mean a faster-growing internal fuel and energy consumption. Ensuring a sufficient volume of fuel and energy production, or, more precisely, a balance between export and the needs of the internal market, will be of supreme importance. Another long-term task is to ensure economic development of the large territories of Eastern Siberia and the Far East, with considerable resources of oil (13.5% of the total Russian oil wealth) and gas (19%). The development of these territories may, however, be limited by the very low population density: a mere 6.7 million people scattered over 10.3 million square kilometres.[8]

Since 2004 the accumulation and use of funds acquired primarily thanks to high oil prices have become a very important part of Russia’s strategy of economic and social development. An important step in this direction was the 2004 foundation of the Stabilization Fund as a tool for coping with two potential problems: a safeguard against a possible drop in oil prices and a brake on the excess expansion of money supply that could trigger off inflation. At the price of $27 per barrel oil revenues would no longer flow into the budget, but into the Stabilization Fund whose volume at the end of 2007 was $157.3 billion.[9] The foreign exchange reserves are also high, ranking third largest in the world. According to the data released by the Central Bank of the Russian Federation, Russia had $413.8 billion at its disposal in 2007. The same can be said about direct foreign investment, which reached the aggregate sum of $202.003 billion in 2007.[10]

Another factor that is crucial for the future development of Russia is the educational and scientific potential, which has been preserved despite a marked stagnation and problems in the 1990s.[11] In his book After the Empire,the French historian and political scientist Emmanuel Todd did not hesitate to call Russia an entirely unique economic force due to the relatively high education level of the active population coupled with the country’s complete energy independence.[12] The facts support this conclusion: two-thirds of Russia’s young people study in pre-graduate or post-graduate college or university programmes, the country still has a relatively strong potential in the mathematical sciences and basic research, which can be used in developing high-tech industries. Examples include not only military material, Russia’s (or Soviet Union’s) traditional staple,[13] but also e.g. nanotechnologies. The development of nanoindustry was marked as a high priority.By 2015 Russia should attain a 3% global share in the industry, which is to be ensured by a 180-billion-rouble financial injection from the state budget. Other priority industries of strategic importance include energy, air transport, nuclear and construction industry and shipbuilding. In the case of the aforementioned industries, the government’s economic strategy and the promotion of the state’s interests is typically ensured by the formation of large state corporations uniting the strategically important companies, since in the eyes of the government this is the only way to succeed in the ever-fiercer global economic competition.[14] We are thus witnessing the formation of state or semi-state monopolies and oligopolies, which is another sign of the consolidation of state power after the turmoil of the 1990s. The state has begun to regulate the entry of foreign capital into strategic industries[15], a step whose primary purpose is to restore, or enhance, the country’s economic security, disturbed by the nineties’ unbridled privatization. Speaking of economic security, one should not fail to mention the emphasis put by Russia’s leaders on achieving food independence, a topical issue as the late 2000s are seeing a global food crisis.[16]

All the above indicates that Russia has a comparatively favourable starting position for further economic growth. In 2007 it was among the seven largest economies in the world, according to GDP calculated on the basis of purchasing power parity. It is also likely that in 2017 Russia will be the largest European economy.[17] On the other hand, there are many problems and retarding factors that present risks and challenges to Russia’s future development.

In the first place it is the population decline, caused by the negative economic situation that had persisted since the demise of the Soviet Union, and was further accelerated in the independent Russia. According to the World Bank report published in December 2005[18], the 1992-2003 period saw a dramatic six-million drop in population numbers: from 149 to 143 million people). In the next twenty years social problems – and related health problems[19] – could reduce the population to 129.2 million. This could, of course, have a negative impact on the Russian economy, causing a shortage of labour. It would also entail the need to take care of a large number of ill and old people and, last but not least, complicate the task of ensuring Russia’s security.[20] To illustrate the problem, let us mention just one figure: in 2016-2017 Russia will have only 650,000 men aged 18 that are capable of military service.

In his May 2006 address to the Federal Assembly[21] President Putin introduced an extensive complex of long-term political and economic measures designed to bring about some improvement in the state of health and birth rate of Russia’s population. The purpose of this government policy is to avert the danger of a “demographic winter” which could make the achievement of the principal goals of the country’s economic development much more difficult. The population decline has not yet been arrested, but there is a clear slowdown of the current downward trend. In the first nine months of 2007 birth rate was the highest in 15 years and death rate the lowest in the last 18 years.

The chief factor contributing to the negative demographic situation is the persistently high welfare instability. Approximately 18.5 million people (i.e. about 13% of the population) live beneath the poverty line. The level of welfare polarization in the society is also extremely high: the income gap between the richest 10% and the poorest 10% has expanded 16.5 times over the last eighteen years.[22] What is also evident are the marked differences in living standard among Russian regions. In the rich regions, such as Moscow or St Petersburg, the living standard comes close to that of the Central European countries (with GDP per capita around $8,000 a year), while in many rural regions and the south, especially Northern Caucasus (Chechnya, Dagestan, Northern Ossetia, Ingushetia), the living standard is closer to the Third World countries (with GDP per capita around $1,000 a year). This economic backwardness in turn contributes to the permanent security instability manifested e.g. in the activities and influence of Islamist fundamentalist movements in local communities. There is also (in spite of the relatively successful political and security stabilization, particularly in Chechnya) a potential risk of growing separatist tendencies that could aggravate the instability. This would have a negative impact on Russian security as such and jeopardize its territorial integrity.

As is clear from the above, welfare stabilization is one of the most urgent tasks faced by the Russian government. A proof of this is the massive financial support of education, healthcare, housing and agriculture, which, all together, received almost $10 billion in 2007. Still, the extent of the “welfare deficit” is evident from the fact that only this year the real income of the population finally reached the level of 1990. On this basis it may be possible to maintain social truce – a very difficult task notwithstanding all the above. The Russian government cannot avoid economic reforms that will bring above all a rise in energy prices and a change of the pension system. Welfare stability can also be disturbed by inflation.[23] Still, even if the reforms caused increased social tension, the government currently has – and probably will have – sufficient funds for compensation payments that should “soften” the impact of reforms on the population.

If the dynamism of economic development is to be maintained over a longer period of time, Russia will have to undergo a more extensive “economic democratization”. For this reason the long-term development of the economy will depend crucially on institutional economic reforms that could enhance the level of economic freedom. That level is very low at present: Russia ranks 122. out of 157 countries of the world. The chief problems include the lack of effective ownership protection, excessive regulation, restrictions on foreign investment and corruption, the last having been mentioned by President Medvedev himself as a threat to national security.[24] Other problems include low quality of public administration, excessive protectionist measures, inadequate law enforcement and also a high crime rate. Overcoming all these negative phenomena will thus be a major political topic and challenge for Russia’s leaders at least for the next decade.

The course of the economic reforms and the maintenance of economic growth conditions also the formation of the middle class, which should become the mainstay of the Russian society, a pillar of economic and social reforms, and a guarantee of social stability.[25] According to the estimates of Russian economic ministers, by 2010 the share of the middle class in the total population will increase from the current one fifth to one third..[26] The political reflections of the Russian political elite also include a postulate about the necessity of promoting the formation of a “national bourgeoisie”, which is to emerge by a transformation of the present-day business community that would, however, be integrated into the Russian society.[27]

“Bourgeoisation” of a considerable part of the population may also lead to its greater political emancipation, accompanied by a more assertive pursuit of this group’s political interests, including demands for democratic reforms that would strengthen the capitalist nature of the economy. This, however, belongs to a more distant future. During Vladimir Putin’s presidency, after the liberals had temporarily discredited politics and governance in the 1990s, Russia embraced the model of a “guided” or “sovereign” democracy based on an authoritarian or semi-authoritarian style of government that enjoys the support of the public.[28] The centralization of political decision-making (the strong role of the president, limiting the powers of the government, parliament and the regions, the guided formation of a multi-party system with the dominant position of a single party, “United Russia”, whose membership comes chiefly from the ranks of the government cadres), a product of the need to overcome the state “failure” in the 1990s and its consequences in the following years, is probably still considered an effective tool for addressing Russia’s transformation problems. A marked feature of this model is the intertwining of business and political elites,[29] comparatively stronger than in standard Western democracies, though these, too, are not immune to it.