Dagestan’s Economic Crisis: Past, Present and Future

Publication: North Caucasus Weekly Volume: 7 Issue: 42

The economy of the republic of Dagestan in the mid-2000s remains in crisis, though the situation has improved from what it was in the 1990s. The planned government-centered economy built up during the Soviet period was destroyed by the shock-therapy market reforms undertaken in Russia during the 1990s. Shipbuilding, aviation, electronics and the nuclear sector of the military-industrial complex were hit particularly hard, declining from their previous position of 85% of the heavy industry to only 15% [1]. In the majority of the mountainous regions (which make up 55% of Dagestan’s territory), there are insufficient production assets and social infrastructure, with a lack of employment opportunities, basic living amenities and roads. More than 25% of the overall population is unemployed, a majority of whom are highlanders. 73% of the population lives below the poverty line, while 16% are close to it.

Almost 70% of the main assets within the republic belong to the government. It holds a 56% share in manufacturing, 58% in construction and 88% in agriculture. Through the sale of shares, government property has essentially been divided among the families of the most important officials in the republic, thereby dividing the republic’s main resources – oil, gas and fish. The mayor of Makhachkala, Said Amirov, controls the housing and public transportation market of the capital city via a number of municipal businesses (Chernovik, June 2). The former prime minister, Khizri Shikhsaidov (retired since October 2004), created the “Dagestani Investment Fund” while in office and has used it to bypass the Dagestani and Russian budgets and transfer money from offshore companies. According to President Mukhu Aliev, the shadow economy accounts for roughly 70% of the total economy of the republic. The richest men (bankers, businessmen and others) generally do not pay taxes, and create the most beneficial conditions for themselves through their positions in government at the local or the republican level.

The economy is controlled by ethno-regional groups of influential local oligarchs. The most influential are the “clans” of the former head of the State Council, the Dargin Magomedali Magomedov; the recently elected president (summer 2006), the Avar Mukhu Aliev; and the mayor of Makhachkala, the Dargin Said Amirov (Yuzhnyi Reporter, February 6). Certain opposition leaders have made their way into the government, and, like Gadzhi Makhachev (representing the “Imam Shamil Avar National Front”), have made it into the State Duma of the Russian Federation. Having allied themselves with the rulers of the republic, Makhachev became the CEO of the large “Rosneft-Dagneft” corporation (formed in 1994), which he heads to this day.

Other opposition leaders that have used business as a springboard to governmental posts have been destroyed. Such victims include the head of the “Elbrin” bank and the economic minister of the republic, the Dargin Gamid Gamidov and the former leader of the “Kazi-Kumukh” Lak national movement Magomed Khachilaev, who headed the republic’s fish concern “Dagryba” in the late 1990s. On April 17th, 2005 Sharaputdin Musaev, the head of the “Dargin mafia” of Kaspiisk and the former head of the Dagestani pension fund, was shot down in Moscow. Musaev’s name is tied to the theft of 43 million rubles (US$1.6 million) from the pension fund in 1998.

Another feature of the Dagestani economy has been its need for subsidies, with 78.8% of the republic’s budget coming from federal funds (Chernovik, July 1, 2005). A recent inquiry by Dmitry Kozak has shown that Dagestan is costing the Russian government too much money, yet in 2007, the republic will receive the largest set of federal subsidies in the country – 483,134,200 rubles ($18,086,792) drawn from the Fund for Regional Development (Dagestan News agency, August 25). Roughly 59% of the republic’s budget is earmarked for paying salaries and financing social development, but 70-80% of these funds are actually stolen.

The degree of economic decline in Dagestan should not be overemphasized [2]. A certain stabilization of the economy was already noticeable in 1999, and during the last 5-6 years manufacturing has grown by 2.8 times, light manufacturing has increased by 57.2%, and the wine industry by 40%. Dagestan produces roughly a quarter of Russia’s brandy, and 14% of its wine (www.e-dag.ru). Small business is growing (with over 2,000 companies), with 41% of such businesses being devoted to trade, 20% to construction, 17% to manufacturing, 12% to the service industry, 5% to agriculture, 3% to transport, and 2% to communications.

47.9% of the republic’s GDP comes from the service industry and the market of consumer goods, while 15.5% is derived from manufacturing and 8.9% from construction. Nine folk-craftsman manufacturing plants are in operation in the mountain and foothill regions, including the famous Kubachin factory for rug production. Agriculture remains a crucial branch of the economy, accounting for 25.5% of the republic’s economy and employing a third of all of the republic’s workers. More than 900 agricultural enterprises have been registered, along with 36,000 individual farmer’s (peasant) households. Private agricultural production provides more than 67% of the total output of such products as potatoes, fruits, vegetables, and berries. Poultry production is the most profitable, with the animal stocks of poultry-producing enterprises growing from 93.1% to 168% over the last six years. The profit margins in livestock and winemaking are even lower, with enterprises showing only a growth of 31% and 17.1% respectively. The development of agriculture is limited by the worn out machinery (up to 70% of the total) and other tools, insufficient investment, and competition from imports.

A sizable potential for economic growth rests in the energy sector. Experts believe that Dagestan has 161 million tons of oil and gas condensate reserves (10.4 million are already explored) and up to 155 billion cubic meters of natural gas (44 billion cubic meters in known deposits). Industrial oil production near the city of Izberbash began in 1936 and peaked in 1970 (with 2.2 million tons), but dropped subsequently due to the exhaustion of the Yuzho-Sukhokum deposit (to 400,000 tons). Natural gas extraction is more stable, having reached 890 million cubic meters per year due to the development of the Dimitrov deposits. The largest energy production company is “Dagnefteprodukt” (accounting for more than 500,000 cubic meters). It is based around a pre-revolutionary oil-processing center created in Makhachkala in 1888. Instead of processing diesel, motor oils, and aviation fuel coming from Azerbaijan, Turkmenistan, and Kazakhstan, as it did in the Soviet period, this enterprise has recently switched to processing Russian oil and gasoline being shipped to Iran via the Caspian Sea [3].

Dagestan remains an important transport hub for southern Russia. The Baku-Novorossiisk oil pipeline (274 km), Mozdok-Kazimagomed (297 km) and Makat-North Caucasus (129.4 km) gas pipelines stretch across the republic, providing 36.8% of its tax revenue. The port of Makhachkala processes more than 1.2 million tons of cargo and 3.3 million tons of oil products annually. The economy of the republic depends on imports, receiving more than 75% of its grain, 80% of its flour, and 64% of its meat from other regions of the Russian Federation. Most imports arrive (as in the past) from Azerbaijan (with 88% of the total), with other goods and raw materials coming from Iran and Turkey. The republic’s exports generally consist of raw materials and include brandy and wine, meat and wool, and canned fruits, vegetables and fish. The republic has 7,858 km of roads, of which 649 km are federal highways, as well as 1,190 km of railroads. 130,000 passengers are carried annually by air transport, with the movement of cargo and passengers being generally carried out by Russian companies (83% of all passengers, 40% of the cargo, 96% of the postal cargo).

Along with goods, sizable investment capital flows into Dagestan from Russia. Among the twelve regions of the Southern Federal District of the Russian Federation, Dagestan has the most lending institutions, and is the fifth most capitalized region. While in the mid-1990s private banks came to monopolize this industry, most of them were swept away by the 1998 default. Today, several dozen small, private banks exist in the republic along with Russia’s “Sberbank,” with 41 such institutions occupying places ranging from 24 to 139 in the list of the most important banks of the Southern Federal District [www.rating.rbc.ru]. 55% of the market for consumer lending belongs to the “Eno” bank, 21% to “Andzhibank,” and 12% to the “Bank of Izberbash,” though lending tends to be very short term. Three Dagestani banks provide credits to Dagestani businessmen working in Moscow (34.7 million rubles of credits in 2003), Moscow oblast (8.9 million rubles), and Northern Ossetia (12.3 million), though 75% of all credits issued within Dagestan come from banks outside the republic [5].

In conclusion, the degree of Dagestan’s economic decline poses tremendous problems for the future wellbeing of the republic. Although its economic situation has improved somewhat since late 1990’s, many underlying problems remain to be resolved, chief among them the rampant corruption that consistently undermines any attempts to improve the local economy there. Until that happens, the recovery taking place there will remain slow, as its economic future will remain highly dependent on the underground economy and the subsidies coming from the central Russian government. By doing so, any real chance of achieving a higher level of autonomy remains bleak as the current economic crisis will continue to cloud the future of the Dagestani highlands.


1. Dagestan at the Century Mark – Priorities of Stable and Safe Development (Moscow, 1998), p. 57

2. Certain economists compare Russia’s economic crisis of the 1990’s with the American Great Depression. See, for example, Medvedev, M. and Chukanov, N. “The Great Russian Depression.” Moscow, 1997. 16.

3. “Nasha vlast – liudi i dela,” 2006, #7-8.

4. Dagestan at the Century Mark, p. 64

5. www.finance.rol.ru/news/article0236E and www.bdm.ru/arhiv/2003/10/60-61.htm