Russia. A History

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.