Putin and the Economy

Russia’s economy has expanded steadily since President Vladimir Putin took office in 2000, and supporters have touted economic stability as a major achievement of Putin’s eight years in office. GDP has risen past the 1990 level, when Russia spiraled into recession. Incomes and industrial production have grown. The country has accumulated currency reserves and has extinguished international debts. Yet as Dmitri Medvedev, Russia’s new president, prepares to take over, Russia’s economy may be more unstable than ever, as serious challenges remain.

For every perceived Putin victory, analysts point out serious failures and new problems that have emerged, including rising levels of inflation and widespread corruption. Furthermore, critics question the significance of Putin’s economic plan, and suggest that factors beyond the president’s control, like sky-high oil prices and reforms under Boris Yeltsin, contributed more to the economy.

As the Economist magazine explained in a recent article, GDP growth began before Putin even took office, reaching 6% in 1999 and 10% in 2000. Since then, it has leveled around 7% –an impressive result when compared to Western industrialized nations, but just average when compared with other former communist countries in Eastern-Europe. And unfortunately, much of Russia’s expansion is associated with little more than sky-rocketing energy and natural resource prices.

The Institute of Economic Analysis shows that the share of oil and gas in Russia’s GDP rose from 12.7% in 1999 to 31.6% in 2007. Natural resources constitute 80% of the country’s exports. Russia is now heavily dependent on world commodity prices, and has failed to use cash flows to diversify and improve other domestic industries. Foreign Direct Investment in sectors other than energy actually fell (from 1.6 to 0.65%) since Putin took office. Russian infrastructure, such as roads, remains disastrous and outdated, and unnecessarily raises the costs of doing business. State take-overs of privatized companies also dealt a blow to efficiency. Since Mikhail Khodorkovsky’s Yukos was dismantled early in Putin’s reign, growth in oil output fell drastically from a rate of 9% to 1% by 2007.

According to RIA Novosti, a further issue has been a widening gap between Russia’s rich and poor, which has skewed wage and income statistics. In 2007, the incomes of the top 10% were 17 times higher than the incomes of the bottom 10%, up from 14 times in 2000. Aside from a small class of the very wealthy, most Russians have felt their incomes rise quite gradually. Moscow, by some estimates the world’s most expensive city, overtook New York this year to house the most billionaires in any world city. Yet the per capita monthly wage in 2007 was just 30,000 rubles (€820 or $1,250). According to Rosstat, Russia’s statistics agency, incomes in the rest of the country are one tenth of that. More than 21 million Russians, or 15% of the population, remain below the poverty line.

The government has also been unable to conquer steady inflation, which reached double digits in 2007 and has eaten into growth. Prices on all consumer goods and services shot up in recent months, as much as 4 percent in some Siberian regions in January and February of this year alone. Some staple food items have grown by 20 and 25%. The Kremlin’s response has been largely ineffective, and the most notable methods used to deal with inflation have been fixed prices on certain goods.

Unprecedented levels of corruption and subservient courts have also emerged under Putin. Russia now ranks among the world’s worst countries for corruption, according to rankings from the World Bank, Transparency International, Freedom House and the World Economic Forum. The Kremlin’s uncanny destruction of one of Russia’s most open companies, Yukos, has removed any impression that businesses are protected by the rule of law.

The Economist quotes Vitaly Naishul, who tracks Russian institutions:
“The problem is not that the Russian legal system is weak. The problem is that it does not exist. The Russian justice system has as much to do with justice as the Soviet system of trade with trade.”

When Dmitri Medvedev formally takes over in May, with Putin as his prime-minister, he will stand at the helm of a formidable economic power. But a slight change in world energy or commodities markets could quickly reverse Russia’s fortunes, as continuing corruption pushes investors away.

Until serious reforms sweep the country, then, a crisis will always be just around the corner.