Above all, Russia was heavily dependent on commodities, but the demand (and price) for these goods directly reflect international economic conditions, good as well as bad, and historically these have been highly volatile. Russia’s commodity dependence was extraordinary; in 2006, for example, oil and gas alone accounted for 55 per cent of export earnings and 52 per cent of treasury revenues (up from 25 per cent in 2003). The sheer profitability of commodities tended to distort investment and growth, with far less allocation of fixed capital for other sectors, such as manufacturing. Failure to diversify, in turn, left Russia unusually dependent on commodity exports and hence all the more vulnerable to global economic dynamics. No less important, Russia found it difficult to increase, or even sustain, current production levels. The pipeline system was thirty to forty years old and costly to maintain; new oil fields in the north and north-east posed severe climatic and soil conditions, making their development increasingly expensive and problematic. The government compounded these problems by limiting the role of foreign companies in ‘strategic’ economic spheres, thereby forfeiting the chance to attract the FDI needed to exploit the new deposits.
Despite Putin’s pro-business policies, Russia’s business environment still laboured under a poor reputation. Thus the World Bank’s ‘Doing Business’ reports ranked Russia 120th of 181 countries, listed serious difficulties and disadvantages, and emphasized the pervasive corruption. Annual reports by Transparency International—based on surveys of businesses—gave Russia a low ranking; the report for 2008, for example, ranked Russia 147th of 180 countries (below Kenya and Bangladesh). A Transparency International survey that focused on 22 developed and rapidly developing countries placed Russia at the very bottom (below India, Mexico, and China). A study by INDEM (Information Science for Democracy, founded in 1990 as one of the first Russian NGOs) reported a sevenfold increase in bribes between 2001 and 2005; the next year it found that companies diverted 7 per cent of their turnover for bribes and kickbacks. It was not only a matter of rampant bribery; the requisite institutional framework (laws and organizations to regulate the economic sphere) remained inadequate and invited abuse and delay. The Putin government attempted to improve corporate governance and the banking sector, but failed to meet the international standards needed to reassure foreign investors. Not that ‘regulation’ was effective in developed countries, even in the United States;until the financial crash of 2008, however, Western institutional safeguards seemed sufficient and put Russia at a distinct disadvantage.
Some critics argue that the ‘Moscow Consensus’ so exaggerated the state’s role that it was counter-productive. They argue that Putin favoured large-scale enterprises like Gazprom (the natural gas monopoly) to the detriment of small and medium-sized enterprises, which play a central role in the economic growth of developed countries. Thus, whereas these small enterprises account for over half of economic activity in developed countries, in Russia they produce just 15 per cent of the GDP. Putin’s critics also argued that state intervention can lead to political distortions: Putin wanted not only to ensure state control over strategic sectors, but also to rein in politically active oligarchs, especially those linked to Yeltsin’s ‘Family’ and those who displayed political aspirations. In particular, it was widely thought that political motivation, not economic planning, led to the prosecution of powerful ‘oligarchs’ like Boris Berezovskii, Vladimir Gusinskii, and Mikhail Khodorkovskii. Whatever the merits of such accusations, they had a chilling effect on global investors and tarnished Russia’s image in international business circles. Finally, some critics argued that renationalization led to slower growth, even stagnation, as in oil production; the cumbersome state proved far less efficient and tended to repulse, not attract, FDI.
Politics and Power
Such criticism and reservations notwithstanding, the Putin presidency brought prosperity to the people and popularity to its president. His approval ratings rose to stratospheric heights—75 per cent in December 2005 and 86 per cent three years later. That popularity guaranteed an overwhelming victory in presidential elections; his 53 per cent in March 2000 jumped to 71 per cent in March 2004 (with the Communist candidate garnering just 14 per cent). Although Putin experienced brief phases of popular dissatisfaction (most notably in 2005, when he modified the various entitlements of pensioners), the overall trajectory was precisely the opposite of Yeltsin—upward, not downward.
Putin converted popularity into power. Although initially beholden to the ‘Family’ and its oligarchs, he reduced their role and replaced them with his ‘own’ people. The most striking change was the growing presence of the siloviki (people of the ‘power ministries’—the security organs, interior ministry, and military). He showed a strong preference for people from his home base, St Petersburg, and appointed these people to the Security Council, Presidential Administration, and executive branch. For all his adulation of the state, Putin distrusted rank-and-file officialdom and relied on trusted associates to impose his will.
Putin also made the election of a ‘presidential parliament’—one ruled by supporters, not adversaries—a priority. The election of 1999, on the eve of Putin’s accession to the presidency, produced a ‘loyal’ Duma, and Putin (who claimed to be a ‘supra-party president’ and ran as an independent) actively promoted a new presidential party, ‘United Russia’. By winning the support of other parties, by dispensing patronage, and by establishing a large base of party members, the pro-government party won an overwhelming majority in the 2003 and 2007 Duma elections. As a result, pro-government deputies increased from 26 per cent in 1993 to 75 per cent in 2007 (consisting mostly of United Russia party members), with a corresponding decrease in parliamentary opposition. The Communist Party, once the largest party in the Duma, fell from 33 per cent in 1995 to 12 per cent in 2007, its membership rolls shrinking from 500,000 in the mid-1990s to 165,000 in October 2007 (when United Russia, revealingly, reported a membership of 2 million). The nationalist Liberal Democratic Party of Russia, headed by the flamboyant Vladimir Zhirinovskii, dropped from 24 per cent (1993) to 12 per cent. Even more dramatic was the decline of the liberal parties, which fell from 29 per cent in 1993 to 4 per cent in 2007 and failed to meet the minimum threshold to qualify for representation in the Duma.