Russia Profile
March 11, 2008
Recognized as Such
Russia’s Transition to a Full-Fledged Marked Economy a Long and Rocky Ride
By Daria Solovieva
It was 1985 when the grand Soviet experiment began to show symptoms of fateful miscalculations. As the West steadily outsmarted the Soviet Union in the arms race and the development of new technology, the leaders of the crumbling Soviet empire began paying attention.
The overdue economic changes did not take place overnight. It took the death of three Politburo chiefs (Leonid Brezhnev, Yuri Andropov and Konstantin Chernenko) and years of failed experiments. To this day, many question whether Russia has completed its transition to a full-fledged market economy.
But not Anders Aslund. The former Swedish diplomat and author of “Russia's Capitalist Revolution” views the Russian transition to a market economy as fully complete, achieved in a “couple of years with no significant reversal.” In his book, Aslund argues that Russia has passed all the benchmarks of a successful market economy, including freedom of individuals and firms to make independent economic decisions and the lack of state planning committees allocating of goods.
“The final proof of Russia’s status as a market economy,” Aslund wrote, “is that since 2004, the European Union and United States recognize Russia as such according to exceedingly strict legal criteria.”
One underlying assumption undermines his entire argument, though. He posits that a liberalized market and authoritarian politics cannot go hand in hand. “Either authoritarianism or the economy will have to give, and the obsolete political system is more likely to lose out," Aslund said.
He argues that Russia failed to emerge as a successful democracy because democratization was pursued as a gradual reform while the principal masterminds of perestroika were unqualified "ambitious provincials." Soviet bureaucrats’ powerful positions and Gorbachev's limited power as the general secretary within Politburo provided additional obstacles.
Yet the combined results of successful early reforms and high oil prices have led to a remarkable economic boom. The key imperatives of Vladimir Putin’s presidential agenda were aimed at reigning in the chaos of the Yeltsin years and the aftermath of the financial crisis of 1998. Aslund praises early radical economic initiatives and cites price deregulation, liberalization of imports, unification of exchange rate, and small-scale privatization as the most successful reforms.
Putin oversaw an impressive period of economic growth of 7 percent per year since 1999. He succeeded in repaying foreign debts and claimed to establish a higher standard of living.
Too early to celebrate
Motorola lists Russia among its fastest growing markets, third after United States and China. Moreover, Goldman Sachs projects that, by 2028, Russia's GDP will overtake Germany’s and become the fifth largest economy in the world.
Judging by these economic strides, it may be tempting to crown Russia as a developed market economy, but that would mean overlooking the high degree of energy dependency, surging commodity prices and aggressive economic policy pursued by the Putin administration.
Padma Desai, a professor of comparative economic systems at Columbia University, agreed that there is little reason to celebrate Russia's economic transition. "If you take the oil out of the picture, where would Russia be today?" she said. "Putin has been very lucky."
Nikolay Petrov, a scholar in residence at the Carnegie Moscow Center, likewise believes that it is too early to say whether the market economy has succeeded. “No one who has followed the purchase of the Kovytka gas field or the development of the Sakhalin project would believe that the Russian government allows Russian or foreign firms to make independent economic decisions,” he said. After all, 60 percent of Russia's federal budget comes from oil and gas revenues.
In 2007 Rosnedra, the Russian licensing agency, threatened for months on end to revoke TNK-BP's license to develop the Kovytka natural gas field. This intimidation resulted in a transfer of the British-Russian firm's largest natural gas project in Russia to the hands of the state. TNK-BP conceded and sold its 62.9 percent stake in the project to Russia's state-controlled natural gas monopoly Gazprom.
Moreover, many analysts question whether this resource-dependent growth and macroeconomic stability are sustainable.
“Inflation has already crept up to double figures. It could rise further if the government gives way to growing pressure to spend more from the stabilization fund,” the Economist magazine reported. “A weakening world economy will not only soften demand for primary commodities, but may even lead their giddy prices to fall.”
Whether or not this occurs, Russia’s resource dependency makes its economic stability far more precarious than Aslund suggests.
A market is not necessarily free
Aslund’s argument that “marketization” and economic growth will propel inevitable democratization is also flawed. The argument neglects Russia’s brief encounter with democracy during the Yeltsin years, which was destabilizing and disastrous, to the extent that neither the government nor society are especially keen on democratic governance.
“If anything, the appointment of Vladimir Putin’s protégée Dmitry Medvedev is a testament to ‘solidification of authoritarianism’ in Russia,” said Michael McFaul, a Senior Fellow at Brookings Institution.
In her work “Putin’s Russia,” Lilia Shevtsova described the disastrous legacy of the Yeltsin years, Russia’s sole experiment with democracy, on which Putinism was built.
“Russia sank deeper and deeper into social and economic crisis: falling life expectancy, a resurgence of contagious diseases that had been eliminated in the Soviet Union; decaying schools; hundreds of thousands of homeless children; millions of migrants; a shrinking economy that during Yeltsin’s tenure contracted in real terms by 40 percent; and finally, rampant lawlessness and corruption that had become a lifestyle passing for ‘normal’.”
As successor to Yeltsin’s turbulent rule, Putin came up with what was initially known as “managed democracy” and was then developed into a full-fledged authoritarian regime. The economic successes of the Putin years supports what Petrov calls an “unsigned treaty between the society and government.”
In 2004, Fareed Zakaria, the editor at Newsweek International and the author of “The Future of Freedom: Illiberal Democracy at Home and Abroad,” used the term “illiberal democracy” to reconcile the contradiction between increasing authoritarianism and apparent successes and popularity of Putin’s presidency.
His assessment of Putin back then strikes a tone of an unfulfilled prophecy. “Illiberal democracy is good because it has produced a liberal autocrat who may eventually lead his country to genuine liberal democracy,” Zakaria wrote.
Anders is also likely to be disappointed by Russia’s failure to emerge as a true market economy, as well as its signature lack of democratic fervor.