Democracy Lab

Why Putinomics Isn't Worth Emulating

Don't let the Russian economy fool you: It's still all about oil.

Vladimir Putin's claim to political legitimacy is closed tied to his record as the strongman who brought economic order and a modicum of prosperity out of the chaos of post-Soviet, post-Yeltsin Russia. And, as he once again seeks the presidency -- this time facing unexpectedly vigorous opposition -- he'll surely be playing the economic stability card whenever possible. But this time around, it's hard to make the case that his election is key to keeping Russia on a growth track. Far from it: Putin's brand of top-down rule undermines the prospects of building a productive, diversified economy.

To see why, consider the economy's roller-coaster ride over the past two decades. In its last years, the economy of the Soviet Union was a bizarre mélange of First and Third World: a military superpower, with a scientific elite to match, that sucked anything of real value from a backward industrial economy bedeviled by corruption and inefficiency. The trouble is that the economy of today's Russian Federation still more or less fits that description.

To be fair, some things have changed since the USSR was consigned to the dustbin of history. In big cities, shops are full of consumer goods that no longer look like props from Terry Gilliam's black comedy, Brazil. Government pensions get paid in a currency that actually buys something. And Moscow's streets are so clogged with private cars that the city now struggles with worse traffic than London. But the economy is still largely a Potemkin façade that depends on the sale of raw materials and weapons to keep the lights on.

Even hindsight doesn't offer much enlightenment into how the economic collapse that paralleled the Soviet Union's political collapse might have been avoided. GDP fell by more than one-third in the 1990s, as the crumbling planned economy self-destructed. Output only recovered to the 1990 level in 2004. Meanwhile, much of the country's vast natural resource wealth was sold for a song to a new class of political connected oligarchs.

The hopelessly inefficient industrial base has been partly scrapped, partly refurbished with the aid of foreign technology and management practices. And the cowboy capitalism of the transition decade gave way after the 1998 financial meltdown to a more predictable sort of monopoly-dominated crony capitalism in Putin's Russia. Growth averaged seven percent annually between 1999 and 2008. Taxes are now collected, and a modest level of public services is delivered in return.

But the key to the Russian economy's success in the last decade was the global commodity boom. As the world's largest producer of crude oil and the second largest producer of natural gas, Russia has benefitted mightily from the run-up in fossil fuel prices. Indeed, thanks to booming oil revenues, Moscow was able to muster a $200 billion bailout for its banks after the economy was slammed by the global recession in 2008.

If you don't look too closely, the economy now seems in pretty good shape. Per capita income, in terms of purchasing power, is approaching $20,000 - small potatoes compared to the United States ($47,000) or Germany ($37,000), but not far from, say, Portugal ($26,000), and probably double the output bequeathed by the Soviets. The government's fiscal house is in order. In fact, unlike virtually any other economy you can name, the budget is in surplus, and the government's financial assets actually exceed its debts. Elite education in the sciences, one of the few genuine achievements of the USSR, is still good. And one can see some payoff in the emergence of a world-class software industry.

But the view is decidedly less tidy from close up. For starters, there's the not-so-small matter of inequality. The economist's favorite yardstick of household income inequality, the GINI index, is middling by comparison with other countries in Russia's income range. But the impact of poverty is all too visible in health statistics. Life expectancy is eight years less than in China and barely above that of Papua New Guinea. Infant mortality is triple that of Spain. Arguably the most telling statistic: the total fertility rate (the number of children the average woman will have in a lifetime) is 1.4 -- a shockingly low rate that reflects, at the very least, housing scarcity and, more likely, deep pessimism about the future.

Well, at least the macroeconomic fundamentals are in decent shape, right? Yes and no. As noted above, the government budget is in surplus - but only because of copious oil and gas revenues. Without energy royalties, Moscow would be running a deficit equal to 10-11 percent of GDP!

Consider, too, that while the economy would be damned without the energy revenues, it is damned with them as well. The behemoth industrial complexes that stood as cathedrals to Stalinist faith are mostly shuttered. Yet Russia's productivity problems linger: little that Russia makes is competitive outside domestic markets.

Now, economists happily explain that international competitiveness is largely a function of exchange rates: If rubles were cheap enough to buy with dollars or euros, the cost of production at Russian factories would be sufficiently low to make Russian products competitive in global markets.

That's where the oil exports become a liability. Hefty earnings from foreign sales prevent the ruble from depreciating to the point that, say, Russian cars and farm machinery could compete with similar products made in Korea and the United States. As a result, roughly four-fifths of the country's export revenues derive from oil, gas and other natural resources. Much of the rest comes from weapons sales produced in government-owned factories at only-Putin-knows-what cost.

Actually, Russian oil exports are doubly cursed. The only time the post-Soviet Kremlin has felt compelled to listen to calls for growth-enhancing economic liberalization has been when the government needs foreign loans to contain inflation and keep the financial system afloat. So oil exports at high prices effectively insulate Putin from pressure to deregulate markets at the expense of his plutocratic allies and vast bureaucratic patronage machine.

Other economies (think India) have recovered from the hangover of central planning and long isolation from global markets. But Russia's economic malaise runs very deep.

Corruption is notorious. Transparency International ranks Russia 154th out of 176 countries on its Corruption Perceptions Index - behind Yemen and the Central African Republic. And a bureaucracy that still takes its inspiration from Leonid Brezhnev makes it exceptionally difficult for those lacking political juice to make and sell goods. Russia rates 120th on the World Bank's Ease of Doing Business Index. No wonder: on average, it takes 281 days to get an electricity hookup and 423 days to get a construction permit.

Some foreign investors have braved the hostile business climate. But most have been speculators hoping to get in and out before the next stock market bubble bursts, and such "hot money" only exacerbates economic instability. Most of the rest are multinational corporations investing in oil and hard minerals; they are only willing to take enormous business risks in return for the possibility of enormous profits. The sorts of investors Russia needs most -- long-term investors in manufacturing and services who bring advanced process technology along with management and marketing skills -- are far more likely end up in China or Brazil.

Home-grown enterprise that might help to fill the gap is sadly lacking. Perhaps that's a reaction to the barriers created by official corruption, bad regulation, inefficient capital markets and organized crime. Perhaps it's a consequence of long authoritarian rule that discouraged fresh thinking. Perhaps it's because the most entrepreneurial Russians have emigrated to the United States, Europe and Israel. Probably it's all of the above.

It's not clear how Russia could cleanse itself of the toxic economic legacy left by communist rule and further entrenched by the new plutocracy. What is clear, though, is that Vladimir Putin has been part of the problem to date, and offers no reason to believe he will be part of the solution in the future.

In emerging-market countries ranging from China to Egypt to Malaysia, apologists for autocrats have argued - sometimes plausibly -- that the uncertainty associated with the transition to political pluralism undermines growth. But in Russia, where Putin has apparently tied his fate to the status quo, real democracy just might be what it takes to bring the economy into the new century.



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