PUTIN’S POLICIES AND A DECADE OF ECONOMIC REFORM

By A. I. Kolganov

Ten years have elapsed since the Russian government headed by Boris Yeltsin (then combining the roles of president and prime minister) embarked on its policy of so-called radical market reforms. With it came a fundamental change in the country’s economic order, the dismantling of what remained of the planned economy and the triumph of market principles. But what has this radical change of direction done for the country and its people?

The reforms, no matter how negatively their outcome is regarded, the reforms have also had some positive results. No policy can consist of undiluted errors and failures. On the economic front, the clear positives include the elimination of the debt economy and the restocking of retail outlets. These have made consumer choice possible and released the public from time-consuming shopping expeditions and queuing, and businesses from the need to ‘track down’ their resources. Economic criteria, rather than arbitrary whim, have begun to govern management decisionmaking. As far as market reforms are concerned, the continued evolution and consolidation of liberalizing trends in the business world, first seen in the years of Gorbachev’s perestroika, should also be seen in a positive light.

But this is the sum total of the positive.

ECONOMIC DEVELOPMENT

Ten years of “reform” have had a catastrophic effect on Russia’s economy. Gross domestic product has shrunk by almost a half. The level of production investment has seen a four-fold fall, which has resulted in a progressive deterioration of the technical equipment base and production infrastructure. There has been a sharp drop in high-tech production–significantly further than the fall in production generally. Expenditure on research and development has been substantially cut. The proportion of the economy now accounted for by the fuel and raw materials sector has grown significantly and Russia has become even more heavily dependent on the export of oil and gas than was the case in the Soviet days. The population’s earnings have shrunk substantially. Meanwhile, a new class of entrepreneurs have, after cutting the productivity and wages of their employees, then given themselves a huge increase. And this is no more than a brief sketch of the economic situation overall. If you take a more detailed look at the economy, sector by sector, the catalogue of maladies and misfortunes caused or aggravated by the reforms assumes colossal proportions.

THE CASE FOR REFORM

The pro-reform lobby usually raises two objections to counter these indisputable facts. First of all, while acknowledging that there have been some errors and omissions in the implementation of the reforms, they claim that the outcome has nevertheless been a healthier and more effective–market-based–economic mechanism, which brings in turn the prospect of healthier and more effective growth. Arguments of this kind still had some currency back in 1995-1996, but the financial crisis of 1998, and the three- year period of relatively rapid economic growth which followed, showed us just how healthy and effective the economic mechanism created for us by the reformers really was.

The process of financial stabilization, which–we are assured by these same reformers–began in 1995, never could quite manage to generate an economic upturn. The financial crash of 1998 brought it to an end. This crash, and the concomitant introduction of some less liberally inclined politicians into the government (albeit though not for long–once they had secured an economic upturn, they were all thrown out, from Yevgeny Primakov downwards) did go some way towards improving the health of the economy. This, together with 1999’s favorable state of the world’s raw materials and fuel markets, created the conditions for rapid economic growth throughout the 1999-2001 period. It is fair enough to say, then, that the economic growth in these years occurred largely despite, or at least independently of, the radical market reform policy.

Putin, however, swore to pursue that liberal path. He could not bring himself to deal with the big business interests associated with the policy, however. Thus the stockpile natural resources and capital assets from the Soviet period was expended in fairly short order. The government made no attempt to correct the problem, caused by narrowly self-centered and short-sighted behavior on the part of Russia’s entrepreneurs.

As a result, the opportunities that arose to resuscitate and modernize the Russian economy, which might have made for more stable economic growth, were squandered. Unfavorable economic indicators were already building up by the middle of 2000. By late 2000 and early 2001, growth was slowing and becoming unreliable. Expert assessments indicate that from 2002 onwards economic growth will be possible at an annual rate of at most 3.5-4 percent, interspersed with periods of zero growth and even decline.

Second, the pro-reform lobby blames the failure to secure normal economic development on the heavy burden of the Soviet past. There is no denying that the Soviet economic system was not efficient, and has bequeathed us a multitude of extremely complex problems: the hypertrophied defense industry and the underdevelopment of the consumer sector, low technical standards in the civilian manufacturing industries, an investment famine. However, the question is whether the reforms implemented have eradicated these problems or aggravated them.

The problem of the hypertrophied defense industry was resolved by almost completely destroying it, and at the same time civilian production at military plants also disintegrated. Already low industrial standards fell even further, in line with the deliberate cutting of expenditure on scientific research and development. The investment famine turned into an investment hole. A five-fold fall in the level of investment in fixed capital meant that not even the replacement of obsolescent equipment could be assured, while the country was witnessing an outward flow of US$10-12 billion per year, with the ten-year total for this capital flight, even in the most conservative estimates, exceeding US$200 billion. The problem of the underdeveloped consumer sector was resolved by importing consumer goods, the expenditure on which accounts for the lion’s share of the country’s earnings from the export of its natural resources.

THE 2003 PROBLEM

This term refers in fact to two distinct problems. The phrase “2003 problem” is used by some experts to refer to the problem of Russia’s external debt payments, which are due to peak in 2003. But the high oil export earnings of 1999-2001 have in fact allowed the government to start paying off its debts ahead of schedule, which gives some hope that at least some easing of this problem may be possible–provided that oil prices fall no further.

Other experts use the term “2003 problem” to mean the predicted withdrawal from service during 2003-2005 of fixed capital assets across a number of economic sectors as a result of physical deterioration. This problem will have the greatest effect on the energy sector, agriculture and the urban infrastructure (water, heating and electricity supplies), though the aging of fixed capital will put other sectors under very great strain too.

Similar problems have built up in the sectors on which Russia’s economy well-being currently hinges: Oil and gas production. Inadequate investment in exploration and the development of new deposits has produced a steady annual decline in oil extraction. Any serious economic upturn now will rapidly create a shortfall either of fuel or of resources available for export. Gas production is still stable, but experts predict that in ten to fifteen years it will cease to meet existing levels of demand.

What do the authorities intend to do to deal with these approaching problems?

ECONOMIC STRATEGY

The biggest secret about Vladimir Putin’s economic strategy is that he doesn’t have one. Instead, he has a series of uncoordinated resolutions for the foreseeable future, chief of which is the mechanical pursuit of the existing “policy of reform.” Programs for market restructuring rail transport and the UES Russia energy utility (that is, programs for the break-up and partial privatization of their unified management structures) have been announced as a means to reinvigorate the energy and rail transport sectors with fresh private initiatives and to attract private investment. So long as there is still a shortfall in generating capacity, however, new private energy companies will patently steer clear of implementing troublesome and expensive investment projects and opt instead to increase their electricity tariffs (as happened in California when a similar restructuring took place). As concerns the reforms proposed for the housing and utilities sector, for which plans to create a competitive market environment have also been announced, their prospects are even more obscure. All that can predicted with any degree of accuracy is that there will be a more than two-fold increase in the cost of communal services and rents, with the aim of covering fully the running costs of buildings and the provision of water, gas, electricity and heating. But there is no doubt as to whether any of the organizations servicing this housing sector will be restructured along market-based lines. They clearly won’t. It is impossible to see any prospect of transforming the current monopolistic housing and utilities system into a system consisting of commercial companies competing each other. Furthermore, the current management system lacks any ordered cost accounting for the provision of specific services. There is no clear delineation of the powers and responsibilities falling to the various tiers of the system. Neither is there any strict definition of the system’s obligations towards its customers–the residents.

Is it possible to make this system work along market lines under such circumstances? Obviously not. Its reform will therefore have no effect on the black hole into which state funds are now disappearing. The only difference will be that once the reforms are implemented the hole will be swallowing up money belonging not to the state but to private citizens. And, as a result of rising tariffs, it will consume twice as much. That these reforms will do nothing to help modernize the urban infrastructure, which is now on its last legs, does not take much proving.

Putin’s team therefore has no answer to the central question of how to mobilize investment resources for the large-scale replacement of outdated fixed capital across the whole of Russia’s economy. And the most deplorable thing is that they haven’t even posed the question in this form.

It is still possible, however, to be rich and get richer still even in an impoverished country with a crumbling economy. And Putin’s first steps, whether successful or not, pose no threat to the prospects of further enrichment for big business. Quite the reverse, in fact. In this respect, Putin is indeed continuing Yeltsin’s policy of reform. One has to wonder what will it take to persuade him to think seriously about the future of the rest of the Russian people.

It is as if the Russian elite has convinced itself that the interests of the little man cannot possibly be relevant to big politics. And so long as this remains the case, big politics in Russia will remain as it has been for the last ten years.

Andrei Kolganov is a doctor of economics and a senior research fellow at Moscow State University.