Resurgent Russian Economy?
| Published date | 01 June 2008 |
| DOI | 10.1177/002070200806300202 |
| Date | 01 June 2008 |
| Author | Vladimir Popov |
| Subject Matter | Russian Resurgence |
Resurgent Russian
economy?
Putin’s policy without Putin?
On 1 October 2007, two months before the parliamentary elections of 2 De-
cember 2007 and less than half a year before the presidential elections of 2
March 2008, President Vladimir Putin agreed to put his name on the elec-
toral ballot sheet of the largest Russian party that had always supported
him—United Russia—although he had never been a member. In Decem-
ber’s parliamentary elections, United Russia received 64 percent of the votes,
whereas Just Russia—a party that was more left-oriented but also openly sup-
ported Putin—received another eight percent of the votes. Only two opposi-
tion parties managed to overcome the seven-percent barrier in the
proportional representation elections to get their deputies into parliament:
Communists (12 percent) and the nationalistic Liberal Democratic party
(eight percent). Other parties altogether received less than eight percent of
the votes.
Shortly after December 2007, Dmitry Medvedev, then deputy prime
minister, became a joint presidential candidate of four parties (United Rus-
sia, Just Russia, and two minor parties not represented in parliament) and
immediately offered Putin the post of prime minister in the future govern-
ment. Putin accepted, making it clear he was going to stay in politics even
Vladimir Popov is professor at the New Economic School in Moscow and at Carleton Uni-
versity in Ottawa.
| International Journal | Spring 2008 | 247 |
| Vladimir Popov |
after his second presidential term came to an end. On 2 March 2008,
Medvedev was elected president by an overwhelming majority and nomi-
nated Putin as prime minister.
Putin’s decision to stay on board in a new administration is understand-
able: he is prohibited from running for a third presidential term by the con-
stitution but he remains extremely popular—53 percent of the electorate
voted for Putin in 2000, 71 percent in 2004, and over 60 percent said they
would vote for him in September 2007, even though he was not going to
run. The secret of his high popularity is simple: he left the country in better
shape than when he came into power eight years earlier.
PUTIN’S LEGACY: ECONOMIC ACHIEVEMENTS
The stabilization of the past eight years was especially impressive, if com-
pared to the period of disarray of “the rocky 1990s.” The Russian economy
lost 45 percent of its output during the transformational recession of 1989-
98, income inequalities increased significantly, the crime rate doubled, and
life expectancy dropped from 70 to 65 years. The short-lived stabilization of
1995-98 (when the ruble was pegged to the dollar and inflation subsided)
ended with the spectacular currency crisis of August 1998, when the ruble
lost over 60 percent of its value in several months, resulting in the acceler-
ation of inflation, crime, suicides, and mortality rate.
However, after the 1998 currency crisis, the Russian economy started
to grow. The average annual growth rate totaled about seven percent in 1999-
2007, so now GDP is gradually approaching its pre-recession level of 1989.
Real incomes and personal consumption increased even faster—more than
doubling in 1999-2007—and have already surpassed the pre-recession level
of the late 1980s. The major push was given by devaluation of the ruble in
1998 and by higher world prices for oil and gas later, but Putin can at least
take credit for not ruining this growth. Inflation fell from 84 percent in 1998,
when prices jumped after the August 1998 currency crisis and dramatic de-
valuation of the ruble, to 10-12 percent in 2004-07.
Economic growth and high world fuel prices helped the government to
collect more tax revenues, so the government budget moved from a deficit to
surplus, and government spending as a proportion of GDP increased since
1999, allowing the partial restoration of the institutional capacity of the state
that was lost in the 1990s. Moreover, high oil and gas prices in the world
markets allowed Russia to enjoy high foreign trade surpluses and to accumu-
late foreign exchange reserves, which increased from less than $15 billion
| 248 | International Journal | Spring 2008 |
| Resurgent Russian economy? |
right after the 1998 currency crisis to nearly $500 billion at the beginning of
the 2008.
By comparative standards, Russian performance is not that impressive.1
In 2007, many other former Soviet republics—Armenia, Azerbaijan, Be-
larus, Estonia, Kazakhstan, Latvia, Lithuania, Turkmenistan, and Uzbekistan,
not to speak of central European countries—well surpassed the pre-recession
level of output, whereas Russian GDP was still only 99 percent of the 1989
level. Russian HDI (the human development index, accounting not only for
GDP per capita, but also for life expectancy and levels of education) at 65
years, is still below the USSR level and even below that of Cuba, with a life
expectancy of 77 years. China, with a life expectancy of 72 years, is rapidly ap-
proaching the Russian level of HDI. At least there is more stability in Russia
today than there was in the rocky 1990s.
No wonder Russian citizens appreciate the new stability of recent years
and are not interested in seeing new leadership or changes to the current
course. Opinion polls conducted in September 2007 showed that over 60
percent of Russians were willing to see Putin as their next president (even
though he does not have the right to run and said many times he wouldn’t
try), whereas the majority was apparently willing to vote for any candidate
that would be supported by Putin, which led to Medvedev winning in March
2008.
PUTIN’S LEGACY: STATE CAPACITY AND SOCIAL TRENDS2
A strong and efficient state is one that has the power to enforce its rules and
regulations, no matter what those are. The crime rate and the size of the
shadow economy are natural measures of strength in state institutions. A
strong state may be more or less democratic. China and some central Euro-
pean countries—with murder rates of about two per 100,000 inhabitants—
1 For a comparison of the performance of transition economies (China, Vietnam, Mon-
golia, Eastern Europe, and the former USSR), see Vladimir Popov, “Shock therapy ver-
sus gradualism: The end of the debate: Explaining the magnitude of the
transformational recession,” Comparative Economic Studies 42, no. 1 (spring 2000):
1-57; and Vladimir Popov, “Shock therapy versus gradualism reconsidered: Lessons
from transition economies after 15 years of reforms,” Comparative Economic Studies
49, no. 1 (March 2007): 1-31.
2 This section is partly based on Vladimir Popov, “Russia Redux?” New Left Review, no.
44, March-April 2007.
| International Journal | Spring 2008 | 249 |
| Vladimir Popov |
would appear to have a stronger state than Russia, which had about 20-30
murders per 100,000 inhabitants since 1993.
The very notion of the state implies that public authorities exercise at
least three monopolies: on violence, tax collection, and money emission
(coinage). All three monopolies were undermined in Russia during the
1990s to such an extent that the very existence of the state was in question.
Government failure became pervasive and much more visible than market
failure.
In 1998, right before the currency crisis, the payment system was on
the brink of collapse—barter deals exceeded 50 percent of total transactions
and the enterprises were accumulating nonpayments (trade, tax, and wage
arrears), delaying payments to their partners, the government, and their
workers. After economic growth resumed in October 1998, nonpayments
and barter transactions quickly disappeared, but there is no guarantee that
they would not rise again if monetary authorities resort to a tight monetary
policy....
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