The Political Economy of Putin's Russia

Pekka Sutela

• Publisher: Taylor & Francis
• Year: 2013
• Print ISBN: 9781138798687
• eBook ISBN: 9781136338014
• Edition: 1
• Topic: Economics
• Subtopic: Business General
• Index: Economics

This book constitutes an up-to-date treatment of Russia's economic development and economic policies since 2000, when Vladimir Putin became the President of Russia. After the slow decline and sudden collapse of the Soviet Union, Russia embarked upon a multi-faceted change. This included transition from central management to a market economy, from one-party rule to democracy, from multi-national empire to nation state, and from relative autarchy to opening up to the European and global communities. This book concentrates on economic change, exploring how in spite of steep production decline, widening welfare differentials and increasing social uncertainty, the 1990s also created many of the institutional and policy preconditions for a functioning market economy.

1 Introduction

Burden of the past

Russia is not a textbook market economy but it is in many respects a normal country in the statistically descriptive sense of the word (Shleifer 2005; Treisman 2011b): similar to many other countries. It has a (higher) middle-income level, large income differentials, a heavy dependence on commodity exports and a strong tendency to authoritarian politics. There are many such countries in the world. Saying that Russia is a normal country in this sense is not a normative statement of what a good society should be like. It is a description of what many countries are like, whether that is desirable or not. Being Denmark or Switzerland is good, but they are the exception, not the descriptive norm. Being normal is much less good, but it is frequent. While normal countries share the kind of characteristics just mentioned, at the same time they are naturally all unique in their own ways. In Russia’s case the uniqueness has three sources. The first one is geology. Russia is exceptionally richly endowed with natural resources. That is a blessing, not a curse (Jones Luong and Weinthal 2010). The second source of Russia’s uniqueness is geography. Russia is the only country that lies in Central Europe, the Arctic, the Pacific Rim, the Caucasus and the gates of Central Asia. Therefore Russia is part of many pictures – economic, political and strategic – without necessarily being the centerpiece of them. The third source of Russia’s uniqueness is history. Russia is the only normal country that was a superpower in recent history. What is more, it was a superpower founded on an ideology, the Second World that was intended as the superior and therefore victorious alternative to the First World of market capitalism and democracy. Having been such a superpower endowed Russia with a rich industrial base, a population educated much better than in most normal countries, prominent capabilities in research and development – though usually not in innovation – and a heavy psychological burden, among other things.

Thus Russia as a normal country is at the same time arguably more different than most (Kivinen and Sutela 2000). Different paths of analysis are opened as one chooses to emphasize one or another of the defining features of Russia’s uniqueness just mentioned. Thus, Shleifer (2005) and Treisman (2011b) argue for the normalcy of Russia, while for Gaddy and Ickes (2010) resource dependence and in particular the oil price must be the starting point of any analysis of the Russian economy. Friedman (2009) is a prominent example of a study in geopolitics, that is political and strategic analysis based on the primacy of geographical factors. For this book the key fact about Russia is that it used to be the Soviet Union. Others would go further in history, emphasizing the cultural and other roots of modern Russia in the old Russia – or Muscovy – of centuries ago (Rosefield and Hedlund 2009; Popov 2010; Roland 2010).

The history-based approach does not imply historical determinism. Today’s Russia is not something determined by yesterday’s Soviet Union or the Tsarist Russia preceding it. Much in today’s Russia could be otherwise, but there are usually good reasons why things turn out as they do. Mere coincidences are rare, after all. Whether these reasons should be elevated to the category of historical laws – or, more softly, regularities – is an open question. Many analysts, especially among what has been called the Marxist wing of Russian liberalism, conceptualize the collapse of the Soviet Union in 1991 and the rise of new Russia after that as a revolution (Gaidar 1994; Starodubrovskaya and Mau 2001). In this perspective the Putin years since 2000 are those of post-revolutionary stabilization, the fulfillment of a revolutionary cycle, coming to an end as the society abandons further shocks and convulsions and its elites – partly new, partly inherited from the old regime – have both the will and the possibility of consolidating their position, power and wealth. This was very explicitly the message Vladimir Putin gave in his first programmatic statements in 2000–01: internally, what Russia needed was stability. Externally, its sovereignty had to be restored. Putin’s view of normalcy was thus very different from the one given above (Sakwa 2008).

If there are historical laws concerning revolutions and if Russia went through one, this like others inevitably had its Russia-specific peculiarities. At least in terms of international power and prestige often bordering on fear, the Soviet Union was the proudest achievement of Russia ever. The troops of Alexander the First followed Napoleon to Paris and stayed there for a couple of years. Stalin’s army went to Berlin and only left it decades later. Arguably, none of the Soviet nationalities suffered as much from socialism as the Russians did (Hosking 2001). Still they more than anyone else established, defended and tried to reform Soviet socialism. For Russia, Soviet socialism was endogenous, self-made. For the Central Europeans, it was exogenous, imported and imposed upon them by Stalin’s troops. Not only Vladimir Putin, but also Yegor Gaidar, the leading liberal and father of Russia’s transition into a market economy, saw a tragic side in the dissolution of the Soviet Union. For Gaidar it was “a geopolitical catastrophe of global dimensions, whether it is judged positively or negatively, with a plus-or a minus-sign” (Gaidar 1994: 105). In the eyes of numerous foreigners, the Soviet Union seemed to be an ascending power at least until the 1960s. It built the first civilian nuclear power plant and put the first man in space. The goal of reaching communism, the truly affluent society by 1980 was announced in 1961. As economic growth rates steadily declined, further hopes were pinned on a reformed socialism, also reinvigorated by revolutionary winds in what was then called the Third World. But in the end China and in their ways also Cuba and Vietnam diverted from the Soviet path. Central Europeans, upon whom the Soviet system had been forced, sought ways out from being captive nations. In the Soviet Union economic and political reforms stalled. Economically the Soviet system changed astonishingly little between 1932 and 1986. Welfare improved, but in terms of institutions and policies much that came into being in Stalin’s revolution in 1928–31 remained in place until the very end of the Soviet Union, and beyond. Therefore, it is proper to begin discussing recent Russia by going back to the origins of the Soviet system.

1.1 The Soviet inheritance

Contrary to capitalism, which it was supposed to overcome, the Soviet system was not an outcome of spontaneous social development. It was the result of a conscious attempt to change society. To a degree that attempt was anchored in pre-existing social thinking, Marxism. The Soviet system, adapted over decades to widely differing historical, cultural, geographic and economic environments, was by scale and cost the largest social experiment with living human beings ever. Diverging as the variants of Communist central management ranging from China and Cuba to Central Europe were, they all shared common foundations, notably the dominance of political decision-making over private initiative. That implied the axiomatic existence of planning instead of markets, political criteria over economic ones, and state ownership over private. Still, the Soviet system did not emerge ready-made from the ideas of nineteenth-century socialist theoreticians. What came to exist was a complex outcome both of pre-existing dogma on the society of the future and of adaptation to circumstances which tended to change in unexpected ways. As the Soviet economic debates of the 1920s (Erlich 1967; Lewin 1974) put it in a somewhat narrower context, there was on one hand the genesis, the historically determined facts, on the other hand telos, the goals to be reached. Judging for policy purposes a proper balance between what had been inherited and thus inevitably existed and what was teleologically desirable was ideologically and politically heavily laden. Looking back a clear-cut weighing of the role of genesis and telos in determining the outcome is not possible. This has been shown by lengthy debates on the birth and outcome of such key episodes of Russian history as the War Communism of 1918–21 and the Great Terror of the Stalin period. The same ambivalence is present always, when history does not only happen but is also made. This is eminently true also of Russia in 1991 and after that.

In practice the great contours of the new system established in Stalin’s revolution of 1928–31 were, following the example set by the early Marxists, largely defined by negation. Public, in practice state, ownership was to dominate instead of private. The economy would be organized on vertical, branch ministry-based relations instead of principally horizontal market relations. Decisions by superior bodies would be compulsory commands to subordinated units instead of the freedom of contract. Money and prices would have predominantly a passive role instead of the active impact on decisions in a market economy. Sometimes the society of the future was compared with a mechanical device like a clock. It would function in a predetermined, exact and deterministic way. In a word that would be a command economy, somewhat like the ideal model of a well-functioning bureaucracy sketched by Max Weber, the master German social thinker in the early twentieth century. Weber was no socialist, but the similarity in ideal models is no coincidence, as the admitted historical ideals were in both cases similar: the German postal service and the army of the country under von Moltke (Sutela 1984).

The ideal model did not come true. A command economy is consistent with mass political terror in a technologically simple economy whose leaders have clear priorities. With the abolishing of Stalin’s terror in the 1950s commanding the society was becoming impossible. It was also increasingly dysfunctional, leading by its arbitrariness to excessive uncertainty among the elites and withdrawal of effort by the population. Setting of priorities, the essence of any planning, was increasingly difficult, as the economy and the society were getting more complex. The Soviet Union left its most lasting inheritance by being the first country to engage in growth competition, and central management was able to mobilize resources and concentrate them into a few selected priority tasks. In practice the target was to maximize the resources available to supreme leadership to be used for heavy and military industries through urbanization and industrialization. Matters were no longer that simple by the 1950s (Yaremenko 1981). As priorities proliferated, assigning resources into alternative uses became increasingly difficult, but still the principles of priority planning both in terms of quantities and qualities of resources were never abandoned. But even before that central management never functioned like a mechanical device. Neither did the dictum of August Bebel, the German Social Democratic leader of the late nineteenth century, come true: “Socialism is science applied in all fields of human activity” (cited in Sutela 1991: 7). Organizational boundaries, rights and responsibilities were always badly defined and tended to change in unexpected ways. There were always elements of bargaining, cheating, contracting and gaming. They have been brought to increased light by access to Soviet archives (for an overview see Gregory and Harrison 2005). Not even mass terror worked like clockwork (Ellman 2010). A few examples relevant to transition experience since 1991 will bear this out.

As a growth machine for military might and competition against capitalism the Soviet system maximized production volume. Plans included other kinds of compulsory targets as well, but their consistence with one another could not be secured due to quality of available information and quantity of calculations necessary, and in practice production volume targets had absolute priority. Other goals like costs and qualities could be jettisoned as the need arose. Though cost saving was in principle encouraged, plants in fact had soft budget constraints: availability of finance was not a binding constraint, least of all in the selected priority branches. Because plan fulfillment and overfulfillment in volume terms were encouraged, plants had an interest in easily fulfilled plans, while their superiors aimed at tight plans. A plan bargaining situation arose. It was complicated by “planning from the achieved level.” Plans were typically set at achievement in the previous period plus estimated increases due to possible efficiency enhancement and additional resources. Therefore plants might well be punished for good performance by making them face an even tighter plan for the next period. But fortunately for the plants, the ministries had no interest in seeing their subordinate plants fail. That would reflect badly in the eyes of the political leadership. Plan bargaining was thus complemented by a fundamental paternalist relation between the ministry and the plants (Kornai 1980, 1992). It was not rare that the plan was adjusted at the very end of the plan period, just to ensure that plants could in fact fulfill it. Even nominal plan fulfillment ensured not only favor with the superiors, but also access to bonuses. This is not totally different from the ways in which hierarchic organizations function elsewhere and in different times.

This relation of paternalistic bargaining between the plants and their superiors had huge importance for the possibility of reforming the system. In spite of experiments with various formulas for plant targets there was little chance of abandoning the volume growth target, and though much hope was set in mathematical modeling and computer networks (Ellman 1973; Conyngham 1982; Sutela 1984, 1991) by the so-called optimal planners, a mostly reformist grouping of scholars and practitioners, even coherence of plans – not to speak about their optimality – remained a dream. Soft budget constraints and the paternalist relation between ministries and plants thus remained. Even partial markets were difficult to introduce, as rational reactions to price signals continued to be lacking. Plants could hardly be given even limited rights in pricing, wage setting and investment, as long as the underlying hierarchy remained. They probably would act differently from what the planners deemed right. Thus, slowly, enhancing the efficiency of the system became increasingly to be seen as a matter of abolishing the primacy of state ownership and politically set priorities. Practical economic proposals crossed the line into politics. This proved a huge problem. Such Central European countries as Hungary and Poland were always well ahead of the USSR in pursuing these thoughts.

Plants were no passive objects of planning. In plan bargaining, they could exaggerate their resource needs and belittle their production possibilities. They could accumulate excess reserves of resources, especially of labor, the most versatile of all resources. As central management created uncertainty of supplies plants and ministries tried to produce as many of their components as possible by themselves. Such plant autarchy was technically inefficient but unavoidable. Partitioned production chains and subcontracting came to dominate in market economies, but were avoided in the Soviet system. This is a heritage that still remains. Foreign investors are often shocked when realizing that the supplier chains so crucial in established market economies are usually absent in Russia. In terms of market structure, the shift to partitioned production chains in Russia will be of similar importance as privatization has been for property rights. What could be produced was constrained by access to supplies in the Soviet Union, by the extent of demand in market economies. In Kornai’s vocabulary, the former one was supply-constrained, the latter ones demand-constrained systems.

When faced with inconsistent plans, plants could also engage in illicit exchanges with other plants, in fact creating horizontal contracting where it was supposed to be illegal. Over time the role of both vertical bargaining and horizontal contracting increased. Factory managers correspondingly became more and more the de facto owners of the plants. This was strengthened by the post-terror paternalist relation between them and the labor force, thus replicating the ministry-plant paternalism. To simplify central management, the number of plants was to be kept limited. Many plants were therefore all the more strategic, being regional or national monopolies. For military, resource endowment and regional development reasons, plants were placed across the Soviet geographical space. Though transport costs were more or less neglected in planning and decision-making, distance and cold climate created a “Siberian Curse,” excess costs that became visible with the transition towards a market economy (Hill and Gaddy 2003). A huge number of “monogorods,” one-company towns, were at the same time created, where the dominant plant or two not only provided taxes and tax-payers but also supplied many of the local public goods ranging from district heating through transport services to child care facilities. If paternalism and soft budget constraints seemed to make privatization inevitable, plant supply of public goods made it more difficult, while the concentration of much of politically determined production in one-company towns increased hugely the perceived social cost of structural change away from resource allocation based on planners’ preferences to that based on consumer choice.

Political scientists have debated for decades whether the Soviet system was a totalitarian one or whether it should best be characterized as authoritarian or even as one based on competing interest groups (Engerman 2009). In a similar vein, economists have worked on models of command economy and central management. The former would be consistent with the political totalitarian model, the latter more with the authoritarian model. In the 1980s a group of young Soviet economists even characterized the Soviet economic system as one of administrative markets, with political power – or “the party” – playing the role that money has in a true market economy (Naishul 1991; Gaidar 1994; Kordonsky 2006). When some of these economists became key actors in the Yeltsin economic policy team, the practical implications of this insight remained unclear. On one hand, it was argued that enterprise managers had by the late 1980s acquired many of the characteristics of actual property holders of nominally state-owned industries. As such traditional Soviet bastions of central control as planning agencies and branch ministries deteriorated, a kind of spontaneous privatization took place, with managers gaining control over plants and resource flows, sometimes even over foreign trade decisions. At the same time another of the pillars of the traditional system deteriorated, as ways were found to circumvent the traditionally strong dual circulation of money. State-owned plants had basically used bank account transfers, which also facilitated control by the state monopoly bank that all transactions were in line with central plans. The exception had been wages and salaries paid in cash – traditionally literally in brown envelopes. The use of newly legalized cooperatives and other such vehicles had by the end of the 1980s to a degree muddied such distinctions, further giving leeway to plant managers. Cooperatives were used to turn non-cash into cash money, which was less closely monitored by the planners, and plant managers could use it to circumvent the state monopoly of foreign trade, often engaging in highly profitable cash-based foreign trade benefiting from systematical differences between Soviet and foreign prices.

Could such misuse of position be prevented? The reformers deemed it impossible. The state was weak and in no position to bypass many of the inherited facts of Soviet life when the time for transition came. Opinions differed on how urgent a task strengthening of state capacity was depending on how the future role of the state was seen. There was little that could be done in the short run, and the default position was that managers were a useful counterweight against what remained of formal centralism. Whatever the lack of social equality involved, formal privatization was therefore openly used to turn managerial control, the factual ownership of industries, into legally based forms (Shleifer and Treisman 2000). The alternative, Russia’s privatizers even now argue, would have been civil war waged over wealth and power. Simultaneously, political fight between Yeltsin’s Russia and Gorbachev’s Soviet Union was replicated inside the Russian Federation as regions gained power, and inside regions a fusion of plant-based economic and popularly mandated political power took place. On this level at least, state power was to a large extent captured by former managers turned into regional private capitalists (Ericson 2000; Yakovlev and Zhuravskaya 2006; Zhuravskaya 2010). Many policies were with popular support geared towards protecting inherited industries and jobs, thus repeating the paternalistic patterns typical of the Soviet Union. On the other hand, new private economic activities suffered from the privileges given to inherited ones, and the role of small and medium enterprises remained modest, often suffocated by bureaucratic procedures, outright discrimination, corruption and crime. The hand of the state was grabbing, not supporting new entrepreneurship. This was based on the regional fusion of economic and political power, not on what remained of centralized Soviet institutions. Fiscal authorities fought a losing war trying to get the new capitalists to pay their share of taxes, also on the federal and not only on the regional level, where an impenetrable network of transactions between the companies and authorities reigned (Fyodorov 2000; Gehlbach 2008; De Silva et al. 2009). Most of such transactions were based on off-sets, barter and various quasi-monies, which made tax evasion easy, stealing tempting and corruption inevitable. The energy supply system was the key playing ground here. An attempt was made in the late 1990s to create a group of major new owners, popularly called the oligarchs, through the infamous loans-for-shares scheme (Treisman 2010b) as a counterweight to traditional managers-turned-owners (Vavilov 2010: 116–117). Economically this was arguably a success, ethically a disaster, and politically the new oligarchs proved intent on capturing the state on the federal level. Reining in the political aspirations of some of the oligarchs took much of the early years of the Putin regime. In heavily laden Marxist vocabulary Putin famously declared that the oligarchs had to be abolished as a class. They had grown too powerful, but their power had been handed down by the Yeltsin regime to create a more ordinary concentrated distribution of property rights instead of the dispersed one coming out of the insider privatization of the early 1990s.

Contrary to received wisdom, the Soviet Union does not seem to have suffered from an excessively large bureaucracy, measured by the number of civil servants. The true problems were elsewhere, in the administrative uncertainties...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• List of Tables
• Preface
• 1. Introduction: Burden of the past
• 2. The Putin regime
• 3. Economic growth
• 4. Energy
• 5. Money, banking and monetary policy
• 6. Welfare
• 7. Epilogue: Russia’s response to the 2008 crisis
• Bibliography
• Index