A third core element was Putin’s belief in a strong state. As the ‘Millennium Manifesto’ stressed, ‘our state and its institutions and structures have always played an exceptionally important role in the life of country and its people’. A strong state, he argued, was a precondition for individual liberty, for only it could provide security and stability. As he explained in July 2000, ‘an effective state and democratic state’ alone can defend basic freedoms and create ‘the conditions for the social well-being for our motherland’. Six years later he defended his efforts to rebuild a strong state, which could ensure ‘the implementation of the laws that have been adopted’ and see that they were adopted in the first place. In particular, Putin insisted on the need to reclaim the power that Yeltsin had devolved on the eighty-nine regions of the Russian Federation. Putin’s idea of a ‘new federalism’ was essentially a call to restore the ‘power vertical’, the hierarchy of authority that accorded primacy to central institutions, laws, and practices. Putin’s stint as Yeltsin’s deputy chief of staff for relations with the regions had convinced him that ‘the vertikal, the vertical chain of government, had been destroyed and that it had to be restored’. In some sense, Putin was simply affirming the importance of ‘good governance’—a central theme since the late 1990s, when even ardent advocates of globalization (such as the World Bank) rejected the neoliberal programme and emphasized the need for effective governance. The United States, itself once a bastion of neoliberalism, came to the same view; its Millennium Challenge Accounts, established in 2002, made good governance a precondition for US foreign aid. Putin, at least in part, simply applied that new theme in global development to Russia itself.
But Putin went further, arguing not only for good governance but for a strong state, which should play a prominent role in the economic sphere. Reflecting the new emphasis on the linkage between ‘good governance’ and economic growth, as well as the strong statist traditions of Russian history, Putin insisted that the state must direct economic development. That view permeated his kandidat dissertation, ‘The Strategic Planning of Regional Resources during the Formation of a Market Economy’, defended at the St Petersburg Mining Institute in 1997 (after Putin moved to Moscow and became immersed in administrative duties). The 218–page dissertation, distilled in an article published two years later, specifically argued that the state should have the final voice in energy and natural resource policy. It was not, however, a reversion to a Soviet command economy: ‘The state must regulate the extractive complex using purely market methods, and in this regard the state must assist the development of processing industries based on the extractive complex.’ Such a state, argued Putin, would enable Russia to grow at twice the rate of the West and reduce ‘Russia’s lag behind developed countries in terms of GDP per capita’. Although some passages were allegedly plagiarized, the dissertation expressed Putin’s own vision of a ‘managed economy’, the antithesis of the neoliberal ‘Washington Consensus’, yet in no ways identical with the étatisme of the Stalinist command economy.
A fourth, less salient component of Putin’s thinking was a stress on social solidarity and justice. At one level, he referred to the need to provide the social services and safety net that so distinguished the Soviet system; even if that meant adjustments (converting some benefits to monetary amounts, or reconfiguring the social security system of pensions), Putin professed a commitment to the idea of a ‘social market’—one rooted in the fundamentals of the free market, but constrained to serve the essential needs of the population. In May 2004, for example, he declared that the market must support the social sphere—by developing a mortgage market, reforming health care, and implementing educational reform. That ‘social market’ idea remained a consistent theme; when asked in December 2008 to define Russia’s political and social system, he responded that it is ‘a social welfare state with a market economy’.
Economy: From Bust to Boom
The crisis of 1998 triggered a catastrophic drop in GDP, but then gave way to a burst of sustained economic growth. The turnaround was already apparent in 1999, with clear signs of recovery, including a modest increase in GDP, and that heralded eight years of impressive growth, with an average annual increase of 7 per cent in GDP. By 2007 Russia had largely overcome the devastating contraction of the 1990s, its GDP slightly surpassing that of 1991 (but still below the level in 1989). Under Putin the GDP in ‘purchasing power parity’ (PPP, which corrects distortions of nominal currency values) rose from 1.115 trillion dollars (2000) to 2.087 trillion (2007), making Russia’s economy the eighth largest in the world.
This economic surge had a salutary impact on a host of indicators. The per capita GDP (PPP) rose from 4,200 dollars (2000) to 14,600 dollars (2008); personal income also increased (fourfold). The growth also brought a huge increase in state revenues, which enabled the government to increase expenditures on social needs (e.g. pensions) and state institutions, yet run a budget surplus for seven straight years. The government was also able to retire some of the public foreign debt inherited from Soviet times and doubled in the Yeltsin years; by 2008 early repayment had saved billions of dollars on servicing the debt and reduced public debt from 130 per cent to 18 per cent of GDP (below that of developed European states). Putin’s government simultaneously amassed huge foreign exchange reserves (rising from a mere 8 billion dollars in 1999 to 460 billion dollars by the end of his presidency, peaking a few months later at 598 billion dollars)—the third largest foreign exchange reserves (surpassed only by China and Japan). In 2004 his government created a Stabilization Fund (special resources for a ‘rainy day’), which was divided in February 2008 into a Reserve Fund (liquid assets to cushion fluctuation in budget revenues) and National Well-Being Fund (based on a Norwegian model and designed to turn petrodollars into profitable investments in blue-chip companies).
This rapid growth was primarily due to the red-hot global economy of those years, which generated a sharp surge in demand for commodities, especially hydrocarbons, metal, and timber—Russia’s principal exports. The rising demand for oil, for example, brought a 1,225 per cent increase in the price on global markets (from 12 dollars a barrel in 1998 to 147 dollars in July 2008). Each dollar increase in oil prices, in turn, meant approximately an additional billion dollars in Russian export earnings. This same pattern prevailed in the prices for other Russian commodity exports, such as natural gas and metals like steel and aluminium. The Russian economic boom was also due, paradoxically, to the crisis of 1998, which led to a sharp devaluation of the rouble that, in turn, made exports ‘cheaper’ and imports ‘dearer’. The result was not only more exports but a surge in domestic demand, especially for consumer goods; the increase in personal incomes also stimulated greater consumer demand that provided a further spur to production and growth.
But the global economic boom was not the only cause of Russia’s economic recovery: government policy was also a factor. In contrast to the neoliberal ‘Washington Consensus’ that dictated Russian policy in the 1990s (privatization, deregulation, macroeconomic stability, and budget austerity that marginalized the state), the new ‘Moscow Consensus’ ascribed a major role to the state. Given Russia’s traditional étatisme and the new global emphasis on ‘good governance’ (propounded by the World Bank and leading economists), Putin’s stress on the state was neither original nor surprising. In Russia’s case, it meant more government control, even controlling ownership; that was especially true of ‘strategic’ sectors—the energy and metal production that dominated Russia’s exports and generated growth and prosperity. It was not, however, merely a matter of ‘renationalization’ in key sectors: Putin also sought to stimulate private investment by improving the business environment—by simplifying the licensing procedure, by introducing international accounting standards, and by requiring greater transparency. His government also cut the corporate tax rate from 32 to 24 per cent to encourage foreign direct investment (FDI), which had been negligible in the 1990s—in contrast to other transition communist states. Although the accrued FDI did increase (from 12 billion dollars in 2000 to 45 billion in 2007), it remained comparatively modest and tended to be narrowly focused in the hydrocarbon sector, as multinationals attempted to exploit Russia’s enormous natural resources. Putin took steps to staunch capital flight, as Russian entrepreneurs and enterprises shifted their wealth to safe havens abroad; he not only reduced the outflow of capital but even managed, by 2006–8, to achieve some capital repatriation for investment in Russia. Impressive as the growth was, it did have its dark sides.