What a difference a decade makes. In 1992, the Russian GDP fell by 14 percent. In 2002, it will probably rise by 3-4 percent. Because this turnaround seems to coincide with Vladimir Putin’s appointment as prime minister on August 9, 1999, to what extent is this growth a consequence of Putin’s actions and how long is it likely to continue?
Putin has certainly been good for the economy, but the turnaround actually precedes his coming to power. Industrial output stabilized in March 1999 after a near catastrophe–the financial collapse of August 17, 1998. When the recovery began, Yevgeny Primakov was prime minister, and was viewed by some as somewhat less enthusiastic about market forces than his immediate predecessors. Two months later, on May 12, 1999, Sergei Stepashin replaced Primakov. The pace of growth then began to accelerate. Three months later (August 9), when Stephashin was in turn unexpectedly ousted in favor of Vladimir Putin, the economic recovery was in full bloom.
True, Putin did nothing to halt the recovery, but he does not deserve the credit for sparking it. As many have noted, the growth is largely due to two factors: the jump in the price of petroleum from about $12 to as much as $30 per barrel, and the massive devaluation of the ruble from $1:RU6 in early August 1998 to $1:RU24 by March 1999.
Even though the world price of petroleum has fallen from its high to about $25 per barrel, the higher prices have made higher profits possible. This is important, critically so. In effect, the new prices doubled Russia’s energy export earnings, which in turn account for about 60 percent of Russia’s total export revenue. These profits have spurred Russia’s oil producers into increasing petroleum extraction. Given the profits to be made, Russia is working to increase its share of the world petroleum market. Output during the first quarter of 2002 rose 8.6 percent. While this may not be good news for OPEC members, it is good news, both for those of us who worry about cutbacks in the world’s oil supply and for the Russian economy.
This increased output has also fueled Russia’s newfound economic vitality. The increase in petroleum output not only increased oil company profits, but also led to an increase in tax revenues and hard currency reserves. Because an important factor in Russia’s financial collapse the year earlier had been the government’s inability to collect enough tax revenue to cover its expenditures, the tax windfall made a follow-up crisis less likely.
More important, Russia no longer needed to borrow money from international bodies like the International Monetary Fund. Rather the opposite: The resurgence of export earnings not only brought with it a comfortable balance of trade surplus, it also caused a tripling of the country’s hard currency reserves from about $11 billion in September 1998 (that is, at the height of the crisis) to $38.8 billion in October 2001. These factors made it possible in 2001 for Russia to prepay $1 billion of its debt to a somewhat surprised IMF and in the process end its stance as a supplicant.
The higher price of petroleum enhanced the business climate not only for the oil oligarchs, but also for the economy overall. As the oil companies became awash in dollar earnings, the increased flow of rubles through the economy helped sharply reduce both bartering between businesses and the backlog of wage arrears. Moreover, as memory of the August 1998 crisis began to fade, foreign business investors began to resume their purchase of Russian securities, especially in the energy sector.
Not everyone benefited, of course, especially not those outside of Moscow. Nevertheless, the turnaround did much to limit the economic despair that had arisen from the August collapse. The situation was very serious. The number of Russians below the poverty line soared from an already large 46 million during the first quarter of 1998 to as high as 64 million a year later. After the jump in GDP in 2000 and 2001, however, the number below the poverty line in the fourth quarter of 2001 fell to 35 million, a drop of 45 percent from its peak. While that still leaves 24 percent of the country in dire straits, the fact that so many were able to improve their well-being so quickly helps explain why the public is so favorably disposed to Putin, even if he had nothing to do with the jump in the price of oil and the initial turnaround.
The fall in the value of the ruble was almost as important to the economic turnaround, especially to the recovery of the manufacturing sector. With the ruble worth only one-quarter of what it had been prior to August 1998, Russian consumers could no longer afford most foreign imports, which up until that point had made up as much as 60 percent of Russian retail sales. As a result, imports fell to half of what they had been before the crash. In their place, Russians had to settle for cheaper Russian substitutes. This provided a critical windfall for Russian manufacturers, many of whom took advantage of the new opportunity.
How long will Russia be able to sustain this recent growth? The pace of industrial output has already slackened from the almost 9 percent GDP growth of 2000 to about 3 percent today. Moreover, unless Russia can reduce its annual rate of inflation, which has hovered at around 20 percent for the last two years, it will lose its cheap ruble advantage. Already some domestic manufacturers have begun to complain that once again imports are pushing out what now have become more expensive Russian products. Imports have jumped 10 percent so far this year, and export earnings are down 18 percent.
Putin has been trying to address many of the unfortunate legacies of the past. He may not be able to do much about oil prices or the dollar/ruble rate, but he has set out to curb the excessive regulation, corruption, crime, and disregard for commercial codes and minority stockholder rights that characterize the country. He knows that, without such measures, he will have trouble convincing foreigners to invest in Russia, and that wealthy Russians will continue to send their capital to overseas havens such as Cyprus and Switzerland. Such Western companies as the Subway Sandwich joint venture (St. Petersburg), Sawyer Research Products (Vladimir), Archangel Diamond Corporation (Northwest Russia), and Norex Petroleum, Kinross Gold Corporation, Ivanhoe Energy, Pan American Silver and Bitech Petroleum (all in Siberia) have found that their investment efforts came to naught as either their joint venture partner or the local government authorities seized their assets.
Putin has signaled that he will enforce the law, but his laudable curbs against some oligarchs and governors are often offset by the tolerance, if not support, of other oligarchs and governors with whom he had previously worked in St. Petersburg or who have proven to be more amenable or less critical toward Putin.
There are other echoes from the past. When Putin’s advisors forecast that economic growth next year would range between 3.8-4.4 percent, like the general secretaries of the Soviet Communist era, Putin demanded higher growth, something on the order of 5-6 percent a year. And, as in the Soviet era, his subordinates agreed to meet the higher targets. They may indeed do so, but it would have been better for the Russian economy in the long run if Putin had never issued such an imperial order. Undoubtedly Russia is moving closer to the market but all too often, its leaders as well as its oligarchs still respond as if they were operating under the old Soviet planning system rules.
Marshall I. Goldman is the Davis Professor of Russian Economics at Wellesley College and the Associate Director of the Davis Center for Russian Studies at Harvard University.