Russia’s Market Economy Under Putin Presidency
“In the last five years, everything has changed.
In the last 200 years, nothing has changed.”
According to a New York Times article dated December 7th ‘Kremlin is manoeuvring to seize’ Uralkali Russia’s major potash fertilizer company of 80 years (2008). The company is under investigation about a mining accident that happened two years ago, and Dmitri Ryobolovlev owner of the largest share in Uralkali is facing fines that could reach up to $1 billion, if found guilty. The article refers to the Yukos affair as well as the dominance of the state in the Russian economy similar to other news coverage involving Putin and the oligarchs. Such news from Russia, especially involving former president Putin’s way of dealing with the oligarchs, has sparked fears in the Western politicians, scholars and journalists. The main concern is whether this indicates a trend in Putin presidency (now Prime Ministry); a backlash in Russia’s commitment to market economy and democracy. In this paper I will try to understand whether one can observe such a trend in Russian economic policy by observing similar events involving the oligarchs over the years, as well as the economic reforms that took place during Vladimir Putin’s eight years in presidency and lastly people’s perceptions regarding government’s economic policy.
Establishing a full-fledged free market economy takes time especially for a former communist state. Russians will develop their own business culture such as Europe or U.S., and East Asia did — which differs significantly from the first two. However a different business culture does not mean there cannot be a market economy in Russia, or partnerships between these economic actors. As the head of the state, Putin took measures to strengthen state’s power on economy between 2000 and 2008. This is perceived as a threat to free markets by some Western commentators. However when compared with emergence of market culture in Japan, or the U.S. it is easy to see similar steps taken by heads of states; in order to provide the stability for business states sometimes do take bolder steps. U.S.’s $ 700 billion bailout to revitalize economy sets the most recent example of that sort. As Keenan points out stability and a powerful centralized state are two important features of Russian political culture (Keenan, pp. 128, 131). That political culture points out different expectations from economic management than that in developed free market oriented societies.
- I. Russian economic performance, an outlook
According to CIA World Fact Book Russian economy’s GDP growth averages 7% annually since the financial crisis of 1998. This was to some extent possible thanks to a significant push of revenues gained from natural resources, and good management of those resources. Kremlin has created a stabilization fund as a precaution for a steep drop in oil and gas prices. The country’s foreign currency reserves were third largest until the global financial crisis started in September 2008. It has been paying its debt ahead of schedule (Trenin, p.3). Russia’s Kommersant newspaper reports that the real income of the average Russian family is roughly 30% higher than in 1992. People not only have the income to cover their basic needs, but have money to save or invest as well. The newspaper adds that although statistics might vary, it is true that Kremlin has succeeded in wiping out the consequences of ‘Yeltsin chaos’ of 1990s (September 18, 2007).
a. Yukos Affair
With such good indications of the economy, why isn’t there a more positive view about Russian economy in the West? The concerns are caused by a few incidents involving the big businessmen of Russia, the so called ‘oligarchs.’ The most well know is the Yukos Affair, takeover of once country’s biggest oil company. In July 2004, the firm was charged with tax evasion. “Onshore-offshore” transactions were used to evade profit taxes. Billionaire oligarch Mikhail B. Khodorkovsky was put behind bars on tax charges. Some commentators suggest that severe treatment of Yukos was due to its attempt to purchase a large block of Duma deputies so as to block oil tax reform legislation. Others suggested it was Mr. Khodorkovsky’s support to liberal opposition party against Putin. European and North American press reported this as a punishment by Putin because of Khodorkovsky’s involvement in politics. It is highly probable that although the tax evasion charges are true, the main reason for the officials going after Khodorkovsky was his involvement in politics. Guriev and Rachinsky call the Yukos affair, Putin’s “political antitrust” showing the consequences of interfering in national politics (2005, p.147). It seems like a valid argument having in mind that the punishment serves as a precedent to deter others from anti competitive behavior and unfair business practices.
Khodorkovsky was one of the handful rich businessmen in Russia, commonly referred as ‘oligarchs.’ “In its current meaning in Russia, the term “oligarch” denotes a businessman who controls sufficient resources to influence national politics (Guriev and Rachinsky, 2005 p.132).” These businessmen emerged during the Yeltsin presidency’s privatization movement. Padma Desai describes the privatization process taking place in two stages. First, distribution of shares to every Russian citizen between years 1992-1994, and then sharing of Russia’s large companies to be traded to a small number of oligarchs in exchange for loans to the state budget (Desai, 2005). It was in this second stage that some unfair sales took place. Table – 1 presented in Guriev and Rachinsky paper (2005) provides a list of Russian oligarchs as of 2003, put together by IMF. As it can be seen from the table, oligarchs are especially powerful in natural resources and automotive sector and they employ 42 percent. (Although it should be noted the sample covers 60 percent of Russian industry, 42 percent is still a high ratio.)
Anatoly Chubais was part of Gorbachev’s Perestroika movement, in efforts to privatize the economy in late 1980s; he worked with Yeltsin’s transformation efforts in early 1990s. He continues working with Putin during his presidency, and seems to be more successful in his efforts to establish a market economy than with the previous two leaders. Padma Desai quotes Chubais, regarding emergence of oligarchs: “the presidential election of June 1996 raised the question of Yeltsin or Zyuganov, and they [the oligarchs who bankrolled Yeltsin’s election] definitely said Yeltsin. However in the next phase, they thought they ruled the world and could do anything. So there are positive and negative sides to the story (Desai, 2005, p.97).”
The power of oligarchs was not only unfairly used in further expansion of their empires, but they were also increasing corruption in bureaucracy. In that sense putting some checks on their power by Putin can be seen as a move to strengthen state by elimination of unfair influence in politics as well as corruption.
b. Berezovsky Affair
The second incident well covered in the press is Boris Berezovsky Affair. This is how Independent describes him:
“… the myth that has grown up around him is replete with hair-raising stories of hijacked trains, nocturnal visits to car assembly lines in southern Russia, secret cash deals, all liberally spiced with armed thugs and unexplained disappearances. A risk-taker par excellence, Berezovsky thrived in the volatility of those [Gorbachev] years, amassing a fortune that took him from cars into oil, aluminum and property and – as his weapon in what he anticipated would be the battles ahead – into television and newspapers.(November 2006).”
He went to exile, but that did not stop Moscow court to sentence him to six years after found guilty of ‘massive embezzlement’. The charge is related to 214 million roubles the tycoon stole from the state airline Aeroflot, that he used to control (BBC, November 29, 2007). Not only the Russian courts but also the Brazilian court found him guilty and issued an arrest on charges of money laundering at the Brazilian soccer club Corinthians (Kommersant, July 13, 2007). Although he won a seat in the State Duma a few months later he fled the country, reported in the media as a result of pressure from President Vladimir Putin.
Not all oligarchs received the same treatment from Putin though. Anatoly Chubais, although not listed in the oligarchs list, has been among the public figures that had enormous economic power since late 1980s. Aside from his political posts, he served as the CEO of Russia’s state electric power company, United Energy System (UES) which as of July 2007 completed privatization –opening world’s fourth biggest electricity market — to investors (Kramer, 2008). This massive privatization can be seen as the evidence of Putin’s dedication to market economy, as long as it does not threaten political stability.
Former President Putin made his commitment to market economy clear from the beginning. In open letter to voters in Kommersant newspaper in 2000, he said he will treat oligarchs no different than other entrepreneurs. He promised the oligarchs that as long as they paid their taxes and did not use their influence in carrying out political agenda, he will respect their property rights. He repeated this in a meeting with the leading oligarchs a few days later (Guriev and Rachinsky, p.146).
What we have been witnessing during Putin presidency is commitment to the promise both to the voters and to the oligarchs. He has been strengthening the center; not a deflecting from market economy. Although he acknowledges that privatizations during Yeltsin years were made with political motives Putin insists that he would not reverse what has been obtained, saying it would be unfair.
II. Who are the bad guys?
It is hard to draw a black and white picture about Russian oligarchs as it is for Putin presidency. On the one hand as mentioned earlier they benefited from the political instability of Yeltsin era, turned that opportunity into cash and tried to use their influence in illegal ways. On the other hand this story is not representative of all the oligarchs. As Desai puts it ‘loans for shares’ does not tell the whole story. It is true for Abramovich, Khodorkovsky, Potanin, Alekperov and Bogdanov but the other big businessmen we see today simply benefited from the huge opportunities during the partial reforms of Gorbachev and the room for arbitrage. Money generated in this era was used to buy assets during privatizations in 1992 (2005). How fair is it to call these earnings as unfair, especially having in mind that these companies now employ millions of workers, forming 60 percent of the economy. In addition to that the oligarchs acted as reformist forces in some respects, pressuring the government to take solid steps via Russian Union of Industrial and Entrepreneurs (RSPP). Guriev and Rachinsky explain the progress as such:
“After they secured control over the RSPP’s governance; they then created and led multiple taskforces, each responsible for a specific avenue of reform: tax reform, industrial policy, foreign trade, land reform, judiciary reform, railroad reform, international relations and many others. Since 2000, RSPP’s leaders have regularly met with president Putin to discuss economic policy, reform of bureaucracy and other strategic issues (p. 145).”
According to the authors, Russian oligarchs lobby for what most businessmen in the developed free market economies lobby, low taxes, competent judiciary, reform of bureaucracy and Russia’s accession to the WTO. They succeeded in lowering taxes, liberalizing current and capital accounts and promoting land reform (ibid, p. 145). Tax reform was handled quickly; Duma adopted a tax code reducing corporate tax rate from 34 to 24 percent. And under Putin’s presidency the joint stock company rule was enacted.
Normalcy argument of workings of Russian economy is supported by Shleifer and Treisman’s findings that show Russia is not different from other developing countries such as Mexico, Brazil, Israel and South Korea. In Italy and Sweden the largest firms are generally either state or family run, as a result of which they receive loans from the state, participate in privatization (2004, pg.2).
In a question and answer session in Columbia University, in September 2003, three years after his election, Putin made reaffirmed he will not consider revising privatizations that took place in early 1990s. “Adding such a move would do more harm than the not so well conducted privatization itself” he said (Yabloco.ru, 2003). Contrary to Western press, Russia’s liberal, former president Yegor Gaidar does not perceive Putin as a threat to market economy. When commenting on Putin’s policies Gaidar said “he does not have a good record in the field of democratic freedoms. But he has been clearest on has commitment to the protection of private property and his strong opposition to renationalization” in April 2000 (Desai, p.102).
III. People of Russia, mixed feelings
One can see Russians, have mixed feelings about oligarchs by looking at the comments section of the New York Times article about Uralkali. Although people resent the oligarchs’ wealth; believing that it was accumulated through dishonest means in the 1990’ they also worry about government seizing these companies for their own purposes. Russians are concerned that the assets would be mismanaged, based in past experiences of USSR (Levy, December 7).
Large share of Russian public deems oligarch’s property rights illegitimate. According to a poll by ROMIR, 88 percent say all the large fortunes were gained in an illegal way and 57 percent insist government launch criminal investigations against the wealthy (Guriev and Rachinsky, p. 140). Of course it is always hard to distinguish the emotional responses of have-nots, judging those who fly private jets. It has been argued before that due to its history, Russians are inclined to accept authoritarian leaders, that they are prone to tyrants. But when one looks at the history of Russia it seems they prefer oligarchs rule in order to avoid single leaders/dictators, to put checks and balances on the powerful leader. As Keenan puts it they “prefer oligarchic and collegial rule, to avoid the single leader, and to function best when the nominal autocrat was in fact politically weak. (p. 118). After all at least 42 percent of Russian workforce is employed by the oligarchs. It is hard to argue people would be happy with abolition of their most powerful entrepreneurs.
According to Guriev and Rachinsky development of democracy in Russia may take a long time. The real competition between strong political parties is more likely to emerge when financial development, competition policies and openness lower entry barriers and promote the rise of a middle class (2005).
Putin wants a powerful Russia, one that is an influential global actor and is aware that is only possible with participating and fully adjusting to world economy, therefore markets reforms are a move forward in this direction. It is a track Putin as well as Russia cannot afford to deflect from.
BBC News (2007, November 29). Moscow court convicts Berezovsky. Retrieved Dec. 14th from http://news.bbc.co.uk/2/hi/europe/7118660.stm
Dejevsky, Mary. (2006, 25 November) Boris Berezovsky: The first oligarch. The Independent. Retrieved Dec 14th from
Desai, Padma. (2005). Russian Retrospectives on Reforms from Yeltsin to Putin The Journal of Economic Perspectives, Vol. 19 (1), pp. 87-106. Retrieved December 7, 2008 from Jstor database.
Guriev, S. & Rachinsky, A. (2005). The Role of Oligarchs in Russian Capitalism. The Journal of Economic Perspectives, 19 (1), pp. 131-150. Retrieved December 12, 2008 from Jstor database.
Keenan, Edward (1986). Muscovite Political Folkways. Russian Review (45), pp. 158-181. Retrieved from courseworks.
Kommersant (2007, July 13). Brazilian Court Orders to Arrest Berezovsky. http://www.kommersant.com/p-10999/r_500/Berezovsky_Brazil_Arrest/
Kommersant (2007, September 18). Putin’s Eight Years.http://www.kommersant.com/p804651/Putin_Eight_Years/
Kramer, Andrew E. (2008, April 10). Russian electricity privatization finds investors. International Herald Tribune.Retrieved Dec. 12th from http://www.iht.com/articles/2008/04/09/business/electric.php
Levy, Clifford J. (2008, December 7). In hard times, Russia moves in to reclaim private industries. The New York Times, p. A1.
Putin opposes revision of privatization results
Shleifer, A. & Treisman, D. (2004). A normal country. Foreign Affairs, 83 (2), pg. 20.
Trenin, Dmitri. (2006) Russia: Back to the Future? Statement at Hearing of U.S. Senate Foreign Relations Committee, June 29, 2006. Retrieved from courseworks.