Russia. A History

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.

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.