Third Time Lucky in Russia: Can Putin Build a Real Economy from Oil and Rigour?
By Anthony de Jasay
What is Mr. Putin planning to do? He has an approval rating that is exceptional even by Russian standards, and he is riding on a tide of oil and gas revenues that make his dirt-poor country suddenly look affluent and eager to turn its back on the humiliation of the Soviet fiasco. The national mood lends itself more than it ever did to a make-or-break try to lift the Russian economy out of its old rut and make it function like the much envied economies of the Western bourgeois world.
For the moment, the numbers say that Russia resembles an oil sheikdom rather than a developed Western economy. For the moment, the numbers say that Russia resembles an oil sheikdom rather than a developed Western economy. Although its population is 142 million, its economy is only about one-eighth the size of the German and one-fifth of the French economy, and as far as the USA are concerned, it is best to look the other way. Since the financial catastrophe of 1998, national income has admittedly grown quite briskly, the growth rate last year reaching 5.7 per cent and in the latest quarter at 7 per cent. However, if the numbers can be trusted, more than the whole of recent growth was due to sharply higher oil prices and the 10 per cent output rise these prices have called forth. Valuing their often heavy and high-sulphur oil at $20 a barrel f.o.b., one reaches the startling conclusion that as much as one-third of Russian national income is accounted for by hydrocarbons.1 (Valuing Russian hydrocarbon output, including home consumption, at world prices admittedly overstates their contribution to national income; but even a much reduced figure should worry their economic policy-makers).
The broad result is that Russia today is suffering from what has become known as the Dutch disease. In the 1970s, Holland was a very large exporter of natural gas. Export receipts pushed up domestic incomes and costs, and brought in a flood of imports with which Dutch industry could not compete. Likewise, today’s visitor to Moscow or St Petersburg sees hardly any Made in Russia goods in the shops; imports are everywhere, from cars, furniture and clothes down to such humble items as bread and milk. Oil is generating plenty of income, while productivity is often abysmal and the quality of local products repellent. The major cities look prosperous, though the countryside is just as stagnant and miserable as it has always been; 38 per cent of farm land is still state or municipal property.
Should the world price of crude slump in the near future, Russia would be in deep trouble. For the time being, she has a lease on life by courtesy of Saudi Arabia’s price leadership at the head of the oil cartel. Mr. Putin must use the good times and the easy money to re-equip industry, rebuild the railways and renew the country’s decrepit infrastructure. Above all, he must create confidence in the rule of law, whose lack, combined with an autocratic state, has always been the fatal obstacle to organic economic development.
This will be the third attempt in Russian history to reform society and allow a real, self-equilibrating economy to grow up. The first two, that we may ascribe to Piotr Stolypin and Boris Yeltsin, have largely failed. The current Putin attempt may be a case of third time lucky, though the chances are probably no better than even.
The first attempt goes back to the liberation of the serfs in 1861, a measure that for complex reason has generated more resentment than satisfaction. The social climate was becoming tense, the state poured resources into its repressive apparatus, but the more the political police spied on them, the more the radicals and nihilists flourished. Grudging concessions by the court were taken as signs of failing strength. After the mini-revolution of 1905, Stolypin was put at the head of the government and embarked on thoroughly intelligent liberal reforms. Grass roots development took off, an independent peasant class rose out of serfdom and in the cities the beginnings of an entrepreneurial middle class started to show. The nihilists began to panic that the Stolypin reforms might succed too well and make their movement irrelevant. They assassinated him in 1911. A bellicose turn in foreign policy, the outbreak of World War I and the Bolshevik takeover in 1917 finally put Russian society back in the Stone Age.
The second great try was made under Boris Yeltsin’s presidency after 1991. Its core was the handiwork of Anatoly Chubais, who wanted to get as much state property into private hands as possible as fast as possible before either the Communists could rally and stop him or some other of those nasty turns occur that Russia specialises in. The ensuing fire sale, in which insiders, bazaar traders and mafiosi bought up the country’s natural resources for a song, created immense fortunes of murky or worse origin, established the class of “oligarchs” and made “privatisation” and “Chubais” the bitterest hate-words in the language.The putrefying carcass of the state was the ideal food for corruption of all kinds. The regulated rouble price of oil was about $2 a barrel and an export permit turned that into $20 or so; no prizes for guessing how export permits came to be procured. Because all this was too good to last, extreme short-termism became the rule of prudence, investing in long-lived assets would have been foolhardy, and profits were simply smuggled out. In a peak year, illegal capital flight reached $30 billion, a drain Russia could not really afford. Playing at capitalism without capital, or more precisely without the least assurance of secure ownership, could not achieve the decisive transformation the liberals of the Yeltsin era were hoping for.
Putin is putting heavy reliance on the siloviki, like himself middle-level graduates of the KGB and other security services who are ruthless but not arbitrary, rigorous, rule-bound and not corrupt. If they manage to reduce theft, graft and tax fraud, popular hatred and rejection of property and profit might be mitigated and capitalism might gain a degree of social respectability and acceptance. Such a regime of rigour will not foster democracy; Putin’s Russia will be more like a police state than that of Yeltsin, let alone the ideal Western-style state the best intellectuals of the post-Soviet era are dreaming of. However, first things first: let capitalism truly take root, and then perhaps we shall see.
Oil production so far in 2004 is running at 9 million barrels a day with exports at 3.7 million barrels a day. Gas production is comparable in energy equivalent but somewhat lower in value. Oil, and in particular gas, are still underpriced on the internal market, which leads to wasteful consumption.