Paul Andreas Fischer
The Russia of V. V. Putin
Centrally administered socialist states replaced democratic divisions for regional conflicts. Ultimately it was seen as a failure, with GNP across Eastern Europe dropping below that of the United States, though it did allow some substantial growth. The reasons for this failure will be seen as a combination of the motivations and consequences of such an economic system in Soviet Russia.
There were multiple debates which preceded decision making, and which later bound the workers to their decisions. Most frequently these would take the form of five-year plans and determined important factors such as the rate of growth and technological investment. While some sectors, such as mining, did keep up with the United States, the reality of the Soviet failure to provide for citizens can be found across the economy. Japan and America combined had a fifty times greater hold on science and academic intensive industries.
Stalin believed that the internal logic of capitalism would exploit labor. This drove the attempt to mirror growth in capitalistic countries. Inevitability of communism played a key role in this belief, and the losses which were incurred by forcibly or prematurely establishing a command economy would be offset by greater losses if this were not preconceived. The paradox of how to create an industrial technologically advanced economy became a question for Soviet leaders.
New economic policies also focused on collectivization of land. The goals of the Party could not be achieved under post-war circumstances, operating at 5% pre-war levels, and so denationalization of small scale production occurred in a series of decisions known as New Economic Policies (NEP). This was effective and saw the rapid expansion of production. It was not as effective as the command economies which saw 50 years of technological progress attained in a decade within the Soviet Union, a fact proven by the defeat of as well as by virtue of invasion by Nazi Germany, among the leading capitalist nations in the world, a couple decades later.
A grain supply crisis by 1928 followed expulsion of the left, the Trotskyists, and foreign relations deteriorated. Success of nationalization efforts under those dire consequences lead to a great realignment. This lead to the year of the Great Break, in 1929. This was the source of Stalin’s emphasis on increasing the scope of five-year plans dramatically. His emphasis on command economies would be combined with fear of war, which was dramatically foreseen.
Soviet planning was successful in its creation of technological and industrial growth amongst an era of crisis. A long-term period of peace, embodied in the Cold War, however, saw the expansion of a shadow or black market amongst industrial goods. Since liberalization of price markets, the Russian shadow economy has grown from 15% to a quarter or perhaps as much as 40% of the overall economy. It is not, as was the case during command economic eras, concentrated in industrial sectors. Deep problems with Stalinist economic systems began to emerge after the war period, and one of these was removal of k/n ratios meaning that normally benign corruption struck into military or industrial bases upon which the Russian economy was dependent.
A break in this rule was found in the aggressive campaign in Afghanistan. With troops only coming home in 1988, the drawn out war nearly exhausted the superpower’s capability to succeed. It is ironical to watch the dominance espoused by Kruschev among third world countries to have crumbled to this point. After years of funerals for leadership, the Soviet Union’s last “strong man” dissolved the union following secession of the Ukraine and worldwide velvet revolutions. This is a second point, that communism, which appeared to be successful in the threat or reality of war but lost ground during peacetime, would also crumble partially as a consequence of military operations.
The Helsinky conference is perhaps the beginning of the manifestation of what some saw as the end of the Soviet Union as early as Hungarian protests in 1968. In 1975 the agreement signed there forced recognition of human rights violations and ensured prevention of exploitation of workers through political dictatorship throughout member states. The way that the Russian economy was prevented from continuing the unbridled success that lead to the rise of the Soviet Union is the cause of this symptom of political malaise.
When Marango described the fall of the Soviet Union later, reference is made to the fundamental issues with communism as an economic system and the inconsistencies it creates. The same argument for the existence of government among economic systems also defeats efficiency of communism except in very particular circumstances. This argument will be summarized shortly.
Certain freedoms exist which the government has neither the capability nor the interest in being involved in. On another end of the spectrum, there are industries which undertake to provide services in which government presence is necessitated. Within this spectrum, every industry requires different levels of government involvement. This is represented by the fact that not all taxes are excise taxes, but vary based on income or revenue both in total amounts and proportions of income paid.
Communism was successful in the face of a total war, because in that economic period, with a grain shortage, the involvement of the government in every industry became necessitated. Micromanagement was an asset, and while a free market may have succeeded as well, even the option of failure in any of the industries would have represented a destabilizing impact on political and social structures. During the Afghanistan war as in the post-war period there was a greater need to emphasize government control of certain modes of production.
This risk of shadow market equality can still be seen today, but it should be argued that growth of the shadow market in Russia is healthy because it represents a movement from industries critical to health and security such as food production and industry into those less critical. In other words, it is not that there was too much waste occurring, but more that it occurred in areas where such waste could not occur. During a period of crisis, the government could ask for near complete obedience, outside of those conditions such a request lead to uprisings. Finally, as with any such capitalist economy, incentivizing the movement of the shadow economy requires an incentive, traditionally reflected in interest which banks offer to firms in order to invest their profits in other industries and here seen in the overall growth of such an industry.
A new form of leadership has arisen in Russia, and with it have come a resurgent emphasis on some very old traditional values. The siloviki are those with security backgrounds, which include V. V. Putin. These are supporters generally who share belief in persistent existence of hierarchy. As Russia’s equipment ages and the share of GDP devoted to the military has dropped, it is important to understand this terminology as a manifestation of the re-emphasis of political goals. Rather than losing importance, removing control from regional governors was critical to siloviki as well as Putin’s early agenda.
One interesting aspect of the siloviki is whether the eight-fold increase among political elites of this group is in spite of, because of, or causal to the rise of cronyism and oligarchy in Russia. Cronyism is the use of nepotism or familiar ties beyond quid pro quo into the realm of fraud. Oligarchy seeks to justify these objectives by establishing this method of control as the political status quo. “Taming” these forces have made the tools, such as export revenue taxes, of soft authoritarianism usable.
Soft authoritarianism has arisen in Russia as a reaction to these two forces coming in conflict with strong nationalism. One tool which was used to concretely describe this change was the Gref Plan, already in place prior to Putin’s election. Redefining fiscal federalism only went so far, though, and relative control or stabilization of industries through the Gref Plan promised to destabilize the economy. The answer appeared in the United Energy Systems reform and dissolution.
The targeting of natural monopolies in the electricity sector remains among the longest standing successes of Putin’s presidencies, and the market was liberalized in 2011. Creation of competition in markets has been seen in dominant industries such as the railways as well. Ending cronyism among the Gazprom and Rosneft oil and gas industries has become a dominant feature of the presidency of Dmitry Medvedev.
After eight years of Putin’s leadership, the constitution necessitated leadership change. At a critical juncture for many political goals, and unwilling to see those goals go unfulfilled, Medvedev was found to allow Putin to retain a position of leadership without breaking his norms of soft authoritarianism. With public support in excess of 80% for most of his presidency, it would have been hard to find any suitable candidate outside of the president himself.
The most important aspects of his administration also build on Putin’s own goals. Russia was once the IMF’s greatest debtor, and during the period was able to pay back all foreign debt. Foreign currency reserves, the warchest of a modern economy, had dropped to levels similar to a large corporation and have now been buttressed. Despite economic gains, the statement that presidency left was dominantly a political one, demonstrating soft authoritarian principles that would not give way to dictatorship.
Dual economic functions arose in many industries as an inheritance from the Soviet Union, and original liberalization of markets, including the oil industry, has given way to nationalization. Those responsible include Yegor Gaidar, one of the liberal technocrat from Moscow or, like Putin, St. Petersburg. Selections of such geographically and politically oriented individuals are an example of cronyism despite the resurgent siloviki class and reaction to Yeltsin era cronyism.
The bribe tax is a concept which has arisen under various conditions. Sutela points to abuses of market liberalization as impeding the stabilization which would have been the second step in the political transformation in the resurgent democracy expected from Russia. These include health hazards of dropping alcohol taxes and rule breaking in the corporate field. Others would point to the gutting of educational and healthcare expenses as a consequence of massive expenditures in waging war against Afghanistan.
The Russian economy is underdeveloped as a result of dramatic losses in the realm of intellectual property, as stated above. Even within the production efficiency frontier, however, there remains a dramatic discrepancy in levels of output. This is due partially to cronyism and pursuant economic policies. It is also a relative indicator of the cost of fighting the expansion of the systems of oligarchy which have become entrenched. The inefficient small-scale factories which are left over from the Soviet era are also fingered as a causal factor.
The bottom line, however, is that the massive credit which Putin’s regime won great acclaim, and rightfully so, for paying back was misappropriated. While the rating of Russia has increased by around 9 levels due to this progress in repayment, the fact still remains that the funds available were neither sufficient nor appropriately used to employ the full capacity of productive force, which could be massive. The majority of the factories are Soviet-era remnants, and frequently one factory cities dominate, with a quarter or a third of factories being built after 1992. This creates a picture of success, but obsoletion of manufacturing machinery has erased the gains of more efficient modern construction.
Russia’s primary source of revenue, as Europe’s gaspump, fails in contradiction to the primary sources of employment in the country. Because much of the product is prepared for export, the domestic market actually reduces income. That creates a unique economic situation. When employment rises, revenue falls and unemployment or lower levels of economic activity in various sectors of the Russian economy means a greater cash flow for the largest corporations, which are now publicly owned.
There is not a full explanation in the rise of corruption in the post-Soviet era which can be found there, and this should be considered the least of the symptoms of this critical paradigm. Failure to expand markets appropriately has other consequences, which one should look to China as a method of comparison. The excess of labor in China is a result of a different set of priorities. Wages there cannot go any lower and the price demanded can vary almost completely, this means that an increase or decrease in the population has virtually no impact on the function of the economy within practical limits, while every good consumed domestically will provide dividends abroad.
In Russia, it can be seen that conversely, wages and domestic consumption may vary greatly while increases or decreases in the price of oil have widespread repercussions throughout the world. Every barrel extra which can be exported increases the Russian importance in the world while the marginal price of oil is difficult to increase as a result of domestic consumption increases. This creates an incentive in Russian economics which may date back to Soviet era relationships with client states in Eastern Europe to eliminate domestic consumption by distribution of rent across populations. This economic anomaly or irregularity may also help to explain how the Soviet Union was able to maintain competitiveness for such an extended period of time.
Rosneft is the Russian oil producer which has become the subject of scrutiny and nationalization in recent history. It is an oil giant, and has a history with partners such as Norway’s Statoil and England’s British Petroleum. They are frequently the subject of political thrusts, and this can be seen in a recent press release that features a picture of Vladimir Putin in which concerns for global oil reserves are made clear.
While the Italian interview details a recent potential discovery of 100 million tons of oil equivalent, a finger is pointed at the United States for dropping oil production, which has lead to the recent report estimating expiration of oil supplies in the near future. Igor Sechin, the CEO of Rosneft, announces pleasure in the oil discovery but is concerned about the future. He is a prime example of the expansion of the siloviki class among business and political elites. This can be seen in his position in Moscow under Putin.
The alternative to this source of oil, both politically and mechanically, would be Gazprom. Efforts to subdue the giant, founded in 1989, found themselves in a greater quagmire of issues for various reasons including those political. The bias in political stories around the company also varies dramatically from that authorized by the nationalized Rosneft. In one article from the New York Times, European nations are depicted as standing firm against bullying efforts from Russian firms, including Gazprom. Proposals included in consideration are limiting supplier shares to 40% and establishing a Nordstream pipeline to bypass the Ukraine.
The purpose of such legislation would be to avoid a repeat of the Gas Wars of 2006 and 2009. Today Gazprom provides ⅓ of the gas to the European Union. This brings parallels to regulatory action in the news from the Gas Wars in which titans of Russian industry were actually incarcerated, frontlining some newspapers with mug shots or photos of the executives in prison garb.
Finally, there is the future which is seen perpetually in uranium. While the world’s largest producer of the energy is Khazakstan, Russia remains a premier supplier of the product. Nations such as France depend nearly entirely on atomic power for energy concerns. Along with coal and hydro power, uranium represents a reserve of energy which is substantial beyond the economic capability of the Russian state.
Some of this is left over specialization from the Cold War and client states, but most of this reserve is unique to Russia’s situation. The reserves and production are augmented by decommissioning nuclear weapons, which should be finished by 2030, and provide further sources of supply. With his master’s in mining, these are concerns which Putin is specifically able to address, and he has used his expertise to win big political victories in these economic fields. If his goals are attained, the massive increase in nuclear power generation may be the greatest and most dramatic legacy of a Russian leader since the remilitarization efforts which supported the Vietcong in Southeast Asia.