MACROECONOMICS IN RUSSIA AND THE SOVIET UNION

MACROECONOMICS IN RUSSIA AND THE SOVIET UNION

Russia has 11.2 percent of the world’s territory but only 2.3 of the population and about 1.1 of the world’s gross domestic product. Russia is heavily dependent in oil and mineral resources, with its fate often hinging on the price of oil and production limits. The Russian economy lacks modern institutions such as a banking system and investment rates are very low.

Although only half the size of the former Soviet economy at the time of the Soviet Union break up, the Russian economy included formidable assets. Russia possesses ample supplies of many of the world's most valued natural resources, especially those required to support a modern industrialized economy. It also has a well-educated labor force with substantial technical expertise. At the same time, Soviet-era management practices, a decaying infrastructure, and inefficient supply systems has hindered efficient utilization of those resources. [Source: Library of Congress, July 1996 *]

Some have divided the Russian economy into three major sectors: 1) the old economy of the Soviet Union that is having a rough time and is slowly dying: 2) the resource economy of oil, natural gas aluminum, nickel , which makes up a large part of gross national product; and 3) the new economy, which didn't exist in the Soviet era and is constantly evolving.The University of Maryland economist Mancur Olson told Newsweek, "The essence of Stalin's system, and of communism now, is that everything is owned by the top guy or the Politburo. Everyone else therefore has no incentive to protect that property but to steal it back."

The location of Russia's raw materials often has presented a transportation problem. As the industrial centers of European Russia used up nearby fuels and other resources, the more distant supplies of Siberia have become critical but expensive alternatives. The sheer volume of available raw materials encouraged tremendous waste in the Soviet system; central planning took into account neither the possibility of running out of materials nor the grave environmental damage caused by uncontrolled exploitation. *

Economists have struggled to achieve accurate measurement of the Russian economy, and they have questioned the accuracy of official Russian economic data. Economic statistics are often very unrepresentative and incomplete. So much activity takes place in the underground economy and is not recorded in government statistics. All the goods that are sold at kiosks and open markets are generally not recorded.

Although the market now determines most prices, the Government (Russia's cabinet) still fixes prices on some goods and services, such as utilities and energy. Furthermore, the exchange rate of the ruble to the United States dollar has changed rapidly, and the Russian inflation rate has been high. These conditions make it difficult to convert economic measurements from rubles to dollars to make statistical comparisons with the United States and other Western countries. [Source: Library of Congress, July 1996 *]

Soviet-Era Economy

For nearly 60 years, the Russian economy and that of the rest of the Soviet Union operated on the basis of central planning--state control over virtually all means of production and over investment, production, and consumption decisions throughout the economy. Economic policy was made according to directives from the communist party, which controlled all aspects of economic activity. The central planning system left a number of legacies with which the Russian economy must deal in its transition to a market economy. [Source: Library of Congress, July 1996 *]

The central planning system allowed Soviet leaders to marshal resources quickly in times of crisis, such as the Nazi invasion, and to reindustrialize the country during the postwar period. The rapid development of its defense and industrial base after the war permitted the Soviet Union to become a superpower. *

Kirill Nourzhanov and Christian Bleuer wrote: “Stalin’s strategy of forced industrialisation, which had transformed the USSR into the world’s second-largest economy and allowed it to compete with a varying degree of success with the United States for global domination, was based primarily on the extensive means of growth: expansion of production was achieved through channelling natural and human resources to certain sectors of the economy, heavy industry in particular, at the expense of others. By 1960, however, ‘it was clear to the Soviet leadership that the scope for further extensive growth was exhausted. Capital accumulation was at maximum levels and the labour resources of the country were fully mobilised.’ [Source: “Tajikistan” by Kirill Nourzhanov and Christian Bleuer, Australia National University, 2013 ><]

But, Myron Rush argued in 1985, when Gorbachev came to power, the USSR was not poised for a collapse, nor was it even in acute crisis … The economy was stagnant and falling farther behind the West, but inflation was not a serious problem; agriculture … fed the Soviet people adequately, perhaps better than in the past; and industry provided them with their basic needs. There was no compelling need for the Soviet Union to enter on the dangerous path of systemic reform. The system had enough internal resources to stay afloat for decades, tackling the symptoms, if not the causes, of its numerous maladies. ><

Soviet Economic Policy

Economic policy in the Soviet Union was the exclusive domain of planners in the central government, whose quotas and distribution decisions ruled virtually all economic activity in Russia and the other Soviet republics. Resource apportionment in that system favored heavy industry and the military-industrial complex at the expense of consumer production, token revival of which was attempted sporadically beginning with the regime of Nikita S. Khrushchev (in office 1953-64). The services sector remained underdeveloped, and agricultural production policy precluded private landownership and relied almost entirely on collective farms and state farms . [Source: Glenn E. Curtis, Library of Congress, July 1996 *]

Central allocation of resources and price establishment created an inflexible economic system whose production and consumption sides had no relation to each other. The basic unit of planning, the five-year plan , set long-term goals whose basis in real economic conditions often was nonexistent by the end of the period. The Soviet planning system also produced a substantial class of state bureaucrats, many of whom preserved their influential and highly profitable positions in state enterprises (and hence their stubborn opposition to economic reform) well into the post-Soviet era.*

The Soviet state also had full control of foreign trade. The vast majority of Russia's overseas commercial activity was conducted with the nations of the Community for Mutual Economic Assistance (Comecon), all of which followed the Soviet model of the centrally planned economy, and all of which were governed by Comecon's artificial system for allocation of production responsibilities. This closed commercial system included a high percentage of barter arrangements. The system was supplemented by equally regimented commercial links among the republics of the Soviet Union. An important result was that Russian products were exposed to very little genuine competition in world markets, despite periodic efforts to cultivate commercial relationships outside Comecon.*

Kirill Nourzhanov and Christian Bleuer wrote: “A Western author, analysing budgetary practices in the centre–periphery relationship in both Soviet and post-Soviet times, has judged that the fiscal system in the former Soviet Union was ‘not truly a “system”, but rather a series of ad hoc bargained agreements, non-transparent at best, whose effects and incentives are not well understood’. It is safe to assume, however, that tax-sharing schemes and direct, centralised subsidies constituted two major elements in Soviet fiscal federalism.” [Source: “Tajikistan” by Kirill Nourzhanov and Christian Bleuer, Australia National University, 2013 ><]

Five Year Plans

A five-year plan is a comprehensive plan that set the middle-range economic goals in the Soviet Union. Once the Soviet regime stipulated plan figures, all levels of the economy, from individual enterprises to the national level, were obligated to meet those goals. Such plans were followed from 1928 until 1991.

Much of the structure of the Soviet economy that operated until 1987 originated under the leadership of Joseph V. Stalin (in office 1927-53), with only incidental modifications made between 1953 and 1987. Five-year plans and annual plans were the chief mechanisms the Soviet government used to translate economic policies into programs. According to those policies, the State Planning Committee (Gosudarstvennyy planovyy komitet--Gosplan) formulated countrywide output targets for stipulated planning periods. Regional planning bodies then refined these targets for economic units such as state industrial enterprises and state farms (sovkhozy ; sing., sovkhoz) and collective farms (kolkhozy ; sing., kolkhoz), each of which had its own specific output plan. Central planning operated on the assumption that if each unit met or exceeded its plan, then demand and supply would balance. [Source: Library of Congress, July 1996 *]

The government's role was to ensure that the plans were fulfilled. Responsibility for production flowed from the top down. At the national level, some seventy government ministries and state committees, each responsible for a production sector or subsector, supervised the economic production activities of units within their areas of responsibility. Regional ministerial bodies reported to the national-level ministries and controlled economic units in their respective geographical areas. [Source: Library of Congress, July 1996 *]

The plans incorporated output targets for raw materials and intermediate goods as well as final goods and services. In theory, but not in practice, the central planning system ensured a balance among the sectors throughout the economy. Under central planning, the state performed the allocation functions that prices perform in a market system. In the Soviet economy, prices were an accounting mechanism only. The government established prices for all goods and services based on the role of the product in the plan and on other noneconomic criteria. This pricing system produced anomalies. For example, the price of bread, a traditional staple of the Russian diet, was below the cost of the wheat used to produce it. In some cases, farmers fed their livestock bread rather than grain because bread cost less. In another example, rental fees for apartments were set very low to achieve social equity, yet housing was in extremely short supply (see Housing). Soviet industries obtained raw materials such as oil, natural gas, and coal at prices below world market levels, encouraging waste. [Source: Library of Congress, July 1996 *]

Gorbachev and Attempts to Reform the Soviet Economy

The record of Russian economic reform through the mid-1990s is mixed. The attempts and failures of reformers during the era of perestroika (restructuring--) in the regime of Mikhail S. Gorbachev (in office 1985-91) attested to the complexity of the challenge.

By 1980 the Soviet economy had entered a decline from which it never was to emerge. It became obvious that the strong central controls that traditionally guided economic development had failed to promote the creativity and productivity urgently needed in a highly developed, modern economy. As one of the two world superpowers, the Soviet Union was acutely conscious that the West, and especially the United States, was bypassing it in many areas outside the military field. So, beginning in the mid-1980s, Soviet leader Mikhail S. Gorbachev (in office 1985-91) experimented with unprecedented economic reforms, including limited application of free-market principles, in a policy called perestroika (rebuilding). However, the Gorbachev concessions were too small and too late, so the system's inherent flaws remained. The standard of living and productivity both continued to fall until the Soviet Union dissolved and central planning was discredited in 1991.*

Economic Policy After the Break Up of Soviet Union

As Russia has attempted to meet the standards for inflation and budget deficits set by international lenders, a key element has been limiting the money supply, which was poorly controlled until 1995. The more stringent policies established that year brought loud complaints from regional governments, an increase in noncurrency payments that hampered the collection of state revenue, and continued wage arrears in state and private enterprises suffering cash shortages. Although the annual inflation rate for 1996 was 22 percent, compared with 131 percent in 1995, authorities in the Government and elsewhere blamed a new economic downturn on the tight-money policy because private enterprises lacked capital with which to expand their operations. [Source: Glenn E. Curtis, Library of Congress, July 1996 *]

The 1997 monetary plan of the Russian Central Bank (RCB) called for increasing the money supply by 22 to 30 percent during that year, a level not projected to raise inflation above the 12 percent annual increase forecast by the 1997 national budget. At the end of 1996, the RCB planned for a ruble depreciation of 9 percent during 1997, which would maintain the exchange rate at between 5,750 and 6,350 rubles per United States dollar at the end of the year. During 1996 the exchange rate moved from 4,640 rubles to the dollar to 5,560, an increase of nearly 20 percent.*

A Government goal for 1997 was reducing the interest rate for domestic bank loans to 20 or 25 percent to provide working capital for stagnant enterprises and limit the haphazard, uncontrolled interenterprise loans and in-kind payments that had proliferated as capital became scarce. However, shares in most enterprises remained unavailable to the general public, and the high-interest bonds sold by the Government in 1996 had attracted large amounts of bank capital away from more risky investment in private ventures.*

The Government's draft 1997 budget, which had been revised by a conciliation commission of legislators and Government representatives, was approved by the State Duma in January after the four readings required by law. After the first two drafts were rejected, the Government added about $6 billion in spending and new tax breaks to stimulate economic activity. The changes swung the votes of the Communist Party of the Russian Federation (Kommunisticheskaya partiya Rossiyskoy Federatsii--KPRF) and its allies, who had lobbied for additional government spending, but democratic parties such as Yabloko voted against the budget because of inadequate fiscal restraint. The Federation Council (the upper house of the parliament) approved the budget but expressed serious doubts about the realism of its revenue projections.*

As approved, the budget was based on projections of 11.8 percent annual inflation and GDP growth of 2 percent for 1997. The planned budget deficit of about $16.5 billion would be 3.5 percent of the projected GDP figure. However, Russian and Western experts, including Russia's minister of economics, Yevgeniy Yasin, called the GDP projection greatly exaggerated. Yasin's ministry forecast zero GDP growth for 1997, with recovery beginning in 1998 at the earliest. The budget did not include a 10 percent increase in Russia's minimum wage that went into effect in January 1997 and that would entail additional state spending. In 1996 the government's issue of bonds with interest rates exceeding 100 percent had complicated the budget-balancing process by tripling the government borrowing of 1995 and inflating the public debt from 16 to 26 percent of GDP.*

Economic indicators for the first half of 1996 were mostly negative. According to an independent Russian survey, compared with December 1995 the real volume of production and services dropped by 11 percent, the number of employed persons dropped by 4 percent, the real volume of capital investment dropped by 54 percent, the average prices of manufactured products and purchased products rose by 14 percent and 25 percent, respectively, and the average wage rose by 10 percent. In the first nine months of 1996, total GDP dropped by 6 percent, and industrial output dropped by 5 percent compared with the same period in 1995. Light industry, construction materials, and machine building showed the sharpest drops in production, and domestic investment declined by 17 percent.*

In the first nine months of 1996, agricultural production dropped by 8 percent. Russia's 1996 grain harvest was 69 million tons, one of the smallest in the last thirty years and only a 9 percent improvement over the disastrously low harvest of 1995. An estimated three-quarters of farms lost money, and only two-thirds of 1996 budget allotments for farm support were paid out. As of early 1997, the restructuring of the agricultural system was one of the major unfulfilled promises of Yeltsin's presidency.*

Emergence of the Private Sector in the Russian Economy

The pain of the restructuring has been assuaged somewhat by the emergence of a new private sector. Western experts believe that Russian data overstate the dimensions of Russia's economic collapse by failing to reflect a large portion of the country's private-sector activity. The Russian services sector, especially retail sales, is playing an increasingly vital role in the economy, accounting for nearly half of GDP in 1995. The services sector's activities have not been adequately measured. Data on sector performance are skewed by the underreporting or nonreporting of output that Russia's tax laws encourage. According to Western analysts, by the end of 1995 more than half of GDP and more than 60 percent of the labor force were based in the private sector. [Source: Library of Congress, July 1996 *]

An important but unconventional service in Russia's economy is "shuttle trading"--the transport and sale of consumer goods by individual entrepreneurs, of whom 5 to 10 million were estimated to be active in 1996. Traders buy goods in foreign countries such as China, Turkey, and the United Arab Emirates and in Russian cities, then sell them on the domestic market where demand is highest. Yevgeniy Yasin, minister of economics, estimated that in 1995 some $11 billion worth of goods entered Russia in this way. Shuttle traders have been vital in maintaining the standard of living of Russians who cannot afford consumer goods on the conventional market. However, domestic industries such as textiles suffer from this infusion of competing merchandise, whose movement is unmonitored, untaxed, and often mafiya -controlled.*

Gangsters and the Russian Economy

Another obstacle to economic stability after the break up of the Soviet Union was the pervasive influence on economic activity of the mafiya—as commonly used in Russia, a term including gangsters, dishonest businesspeople, and corrupt officials. In the 1990s, Russia was suffering the effects of an increasingly prosperous national network of criminals who extort protection money from an estimated 75 percent of businesses and banks. Individuals refusing such payments often were the victims of violent crimes. [Source: Library of Congress, 1996 *]

In 1995 gangs controlled an estimated 50,000 private and state enterprises and had full ownership of thousands more. Unlike organized criminal groups in the West, which specialize in illegal activity such as drug trafficking and prostitution, Russia's mafiya spans the entire range of the economy, discouraging private enterprise and siphoning off 10 to 20 percent of enterprise profits that were neither taxed nor reinvested in legitimate business. Organized crime also was involved in the movement of a huge amount of capital--estimated at $1 to $2 billion per month--out of Russia in the mid-1990s. Such activity prospered mainly because of strong links with corrupt officials; an estimated 30 to 50 percent of organized crime's proceeds was spent on bribes to procurators, police, and bureaucrats.*

This connection was not new in the post-Soviet era; already in the Brezhnev era, officials took bribes from the underworld as the black market responded to gaps in Soviet production. In the early post-Soviet years, reformers implicitly condoned such activity in the hope that it would hasten the development of a legitimate private-enterprise sector. In 1993, however, government measures against criminals were stimulated by publicity about Russia's crime wave and by the success of ultranationalist political groups who stressed the crime issue. Many of the Yeltsin administration's law enforcement decrees of 1993 and 1994 were of questionable constitutionality, and they had had little overall effect in the mid-1990s because law enforcement agencies remain corrupt.*

Geographical Distribution of Wealth in Russia

The geographical distribution of Russia's wealth has been skewed at least as severely as it was in Soviet times. By the mid-1990s, economic power was being concentrated in Moscow at an even faster rate than the federal government was losing political power in the rest of the country. In Moscow an economic oligarchy, composed of politicians, banks, businesspeople, security forces, and city agencies, controlled a huge percentage of Russia's financial assets under the rule of Moscow's energetic and popular mayor, Yuriy Luzhkov. Unfortunately, organized crime also has played a strong role in the growth of the city. Opposed by a weak police force, Moscow's rate of protection rackets, contract murders, kickbacks, and bribes--all intimately connected with the economic infrastructure--has remained among the highest in Russia. Most businesses have not been able to function without paying for some form of mafiya protection, informally called a krysha (the Russian word for roof). [Source: Library of Congress, July 1996 *]

Luzhkov, who has close ties to all legitimate power centers in the city, has overseen the construction of sports stadiums, shopping malls, monuments to Moscow's history, and the ornate Christ the Savior Cathedral. In 1994 Yeltsin gave Luzhkov full control over all state property in Moscow. In the first half of 1996, the city privatized state enterprises at the rate of $1 billion per year, a faster rate than the entire national privatization process in the same period. Under Luzhkov's leadership, the city government also acquired full or major interests in a wide variety of enterprises--from banking, hotels, and construction to bakeries and beauty salons. Such ownership has allowed Luzhkov's planners to manipulate resources efficiently and with little or no competition. Meanwhile, Moscow also became the center of foreign investment in Russia, often to the exclusion of other regions. For example, the McDonald's fast-food chain, which began operations in Moscow in 1990, enjoyed immediate success but expanded only in Moscow. The concentration of Russia's banking industry in Moscow gave the city a huge advantage in competing for foreign commercial activity.*

Federal Budget in Russia

Budget: revenues: $416.5 billion; expenditures: $408.3 billion (2014 est.). Taxes and other revenues: 20.2 percent of GDP (2014 est.); country comparison to the world: 161. Budget surplus (+) or deficit (-): 0.4 percent of GDP (2014 est.); country comparison to the world: 32. [Source: CIA World Factbook =]

From 2000 through 2005, Russia’s federal budget showed surpluses each year. Tax revenues tripled between 1999 and 2002. Following the tax reform of 2001, which established a flat 13 percent income tax rate, income tax revenues increased annually through the early 2000s. The 2001 reform also reduced the corporate tax rate from 35 percent to 24 percent, and in 2004 the value-added tax was reduced from 20 percent to 18 percent. Although some 32 percent more income tax money was collected in 2005 than in 2004 and the Federal Taxation Service campaigned to eradicate unreported salaries, in 2006 an estimated one-third of wage payments still were unrecorded. [Source: Library of Congress, October 2006 **]

Tax revenues for 2005 were $153 billion. In 2005 the budget showed a surplus of $51.1 billion, based on revenues of $176.7 billion and expenditures of $125.6 billion. The budget for 2006 called for $197 billion in revenues and $144 billion in expenditures, a surplus of $53 billion. In the first eight months of the year, the actual budget surplus was $56 billion. In 2006 the government’s Stabilization Fund, established as a hedge against future decreases in oil revenue, had about $27 billion. The preliminary 2007 budget called for $260 billion in revenues (based on further rises in oil prices) and $211 in expenditures. By 2005 the failure to use budget surpluses efficiently had become a controversial issue in the government. **

Foreign Reserves and Debt in Russia

Reserves of foreign exchange and gold: $385.5 billion (31 December, 2014 est.) $509.6 billion (31 December 2013 est.); country comparison to the world: 7. [Source: CIA World Factbook =]

Russia's treasury is kept in several underground repositories knows as "Closets." One of them is reportedly in a secret site in the Urals. Another lies 30 feet below the streets of Moscow. Unlike Fort Knox, which hold only gold, the Closets hold huge cashes diamonds, emeralds, silver, platinum and other gems and precious metals and more than 140 tons of gold and rare coins and jewelry. The value of the treasure is a closely guarded state secret.

In 1992, Russia's Committee on Precious Metals and Gems developed a plan to escape De Beer's grip by setting up a diamond center in the United States. According to the plan a half billion dollars of gems and precious metals was to be shipped to the United States and used as collateral to obtain a line of credit from the Bank of America. This would give them money to finance their entrance into the diamond trade.

Public debt: 13.4 percent of GDP (2014 est.); 8.1 percent of GDP (2013 est.). The data covers general government debt, and includes debt instruments issued (or owned) by government entities other than the treasury; the data include treasury debt held by foreign entities; the data include debt issued by subnational entities, as well as intra-governmental debt; intra-governmental debt consists of treasury borrowings from surpluses in the social funds, such as for retirement, medical care, and unemployment, debt instruments for the social funds are not sold at public auctions; country comparison to the world: 147. [Source: CIA World Factbook =]

Debt - external: $683.6 billion (31 December 2014 est.) $728.9 billion (31 December 2013 est.); country comparison to the world: 20. =

In August 1999 after the collapse of the ruble in 1998 Russia's foreign debt was $150 billion, compared to a GNP of $111 billion. A rise in oil prices and oil tax revenues allowed Russia to remain productive without taking more loans and pay back its existing loans.

Central bank discount rate: 17 percent (2014 est.); 8 percent (31 December 2011). This is the so-called refinancing rate, but in Russia banks do not get refinancing at this rate; this is a reference rate used primarily for fiscal purposes; country comparison to the world: 6

Commercial bank prime lending rate: 11.3 percent (2014 est.); 9.47 percent (31 December 2013 est.); country comparison to the world: 71.

Energy in Russia

Russia is the world's largest producer of crude oil and the second-largest producer of dry natural gas. Russia also produces significant amounts of coal. If you combine proven oil and gas reserves, Russia is the world's leading energy producer. , with about 15 percent more proven reserves than Saudi Arabia.

Russia was the world's largest producer of crude oil including lease condensate and the third-largest producer of petroleum and other liquids (after Saudi Arabia and the United States) in 2014, with average liquids production of 10.9 million barrels per day (barrels per day). Russia was the second-largest producer of dry natural gas in 2013 (second to the United States), producing 22.1 trillion cubic feet (Trillion cubic feet ). [Source: U.S. Energy Information Administration, July 2015 ~]

Energy plays a central role in the Russian economy because it drives all the other elements of the system--the industrial, agricultural, commercial, and government sectors. In addition, energy, particularly petroleum and natural gas, is the most important export and source of foreign exchange for the Russian economy. Experts forecast that the energy sector will continue to occupy this central position until Russian manufacturing reaches a level competitive with the West. [Source: Library of Congress, July 1996 *]

In the 1990s and the early 2000s, the oil and gas industries relied largely on existing deposits and infrastructure. As of 2006, they had built no new refineries for 15 years, and geological exploration ceased entirely for several years. Extraction efficiency from existing deposits is extremely low. A 2003 law aimed to restructure the energy sector substantially, including extensive privatization of energy provision and elimination of the Unified Energy System. In 2006 plans called for encouraging foreign investment in generating infrastructure.[Source: Library of Congress, October 2006 **]

Political and Economic Power of Russian Energy

Russia possesses abundant resources for energy production, making it a net exporter of electric power and the largest producer of energy in the world. Increasingly, Russia has used this position as a geopolitical lever to enhance its influence in the states of the former Soviet Union and to influence world energy prices. In 2006 the oil and gas industry contributed as much as 25 percent of gross domestic product, and oil accounted for 35 percent of Russia’s exports. [Source: Library of Congress, October 2006 **]

Russia's economy is highly dependent on its hydrocarbons. Russia is a major producer and exporter of oil and natural gas, and its economy largely depends on energy exports. Russia's economic growth is driven by energy exports, given its high oil and natural gas production. Oil and natural gas revenues accounted for 50 percent of Russia's federal budget revenues and 68 percent of total exports in 2013. [Source: U.S. Energy Information Administration, July 2015 ~]

Russia and Europe are interdependent in terms of energy. Europe is dependent on Russia as a source of supply for both oil and natural gas, with more than 30 percent of European crude and natural gas supplies coming from Russia in 2014. Russia is dependent on Europe as a market for its oil and natural gas and the revenues those exports generate. In 2014, more than 70 percent of Russia's crude exports and almost 90 percent of Russia's natural gas exports went to Europe. ~

The dominant player in the fuels sector is the Gazprom company, which controls natural gas production, owns the gas pipeline system, and has diversified into transport and gas processing as well as telecommunications. Gazprom, in which the state holds majority ownership, controls an estimated 30 percent of the world’s natural gas reserves. The extensive Shtokman natural gas field in the Barents Sea is expected to be productive for as much as 50 years, but Russia has delayed exploitation to coincide with increased world demand for liquefied natural gas. Yukos, until 2004 Russia’s largest oil company, lost most of its assets during the government’s campaign against its president, Mikhail Khodorkovskiy. At that point, an estimated 30 percent of oil output came from state companies. The largest such company, Lukoil, is responsible for 18 percent of production. **

Oil and Gas and the Russian Government

Oil and natural gas revenues account for more than 50 percent of Russia’s federal budget revenues. Before Putin came to power, Russia oil and gas accounted for 15 percent of the economy but paid only 4 percent of the taxes. In contrast, Indonesia's oil and gas sector accounted for 12 percent of the economy and 34 percent of its taxes.

The Kremlin keeps control over the energy industry by placing Kremlin loyalists in key positions in the main oil companies and selectively applying the complex and often arcane laws that affect the oil industry to project government interests.

In 2004, production taxes and export duties were raised for oil companies and loopholes that saved the oil companies millions were closed. Some that this wold, yes, bring n more revenues of the government but hurt the oil industry making it less transparent and scaring off foreign investors.

Dependence on Energy in Russia

Russia is one of the most energy-dependent countries. Many years of high energy prices bolstered Russia’s economy with an infusion of cash, but other industries were left underdeveloped, making the nation particularly vulnerable to declines in oil prices. The International Energy Agency of the Organisation for Economic Co-operation and Development (OECD) estimated that in 1993 it took 4.46 tons of oil equivalent (TOE) to produce $1,000 of Russia's GDP, compared with an average of 0.23 TOE to produce $1,000 of GDP for the OECD member countries. [Source: Library of Congress, July 1996 *]

Russia's excessive consumption of energy results from the Soviet system, which artificially priced energy far below the level of world market prices and thus subsidized it. Soviet energy-pricing policies disregarded resource utilization in the quest for higher output volumes and discouraged the adoption of conservation measures. Soviet planners also skewed resources toward the defense-related and heavy industries, which consume energy more intensively than other sectors of the economy. Until the 1980s, the national economy managed to survive under such policies because of the Soviet Union's rich endowment of natural resources. *

The problems that plagued the Russian energy sector in the last decades of the Soviet Union were exacerbated during the transition period. Since 1991 the output of all types of fuel and energy has declined, partly because of plummeting demand for energy during a time of general economic contraction. But the energy sectors also have suffered from the intrinsic structural defects of the central planning system: poor management of resources, underinvestment, and outdated technology and equipment. *

The structure of energy and fuel production began to change dramatically in the 1980s with the exploitation of large natural gas deposits. In the mid-1990s, natural gas accounted for more than half of Russia's energy consumption, a share that is expected to increase in the next decades. Oil accounts for another 20 percent, a proportion that is expected to remain approximately constant. Coal and other solid fuels, water power, and nuclear energy account for smaller shares that experts predict likely will decline after 2000. Despite the waste of fuel in the Russian economy, Russia manages to produce a surplus of energy for export. Exports, particularly of natural gas and oil, have accounted for 30 percent of Russian energy production, and this share is expected to hold steady. *

Russia's drive to become a market economy should help to alleviate some of the problems of the energy sector. Russian energy pricing policies have changed. Since January 1992, energy has been gradually deregulated, closing the gap between world market prices and domestic prices and forcing consumers to conserve. Russia is also adopting Western technology and more efficient management techniques that will improve productivity in the sector. *

Poland versus Russia

In 1989, Poland was in about the same shape as Russia, but it had the political will to carry out reforms and responded to help form the West to create monetary, budget, trade and legal controls. In the 2000s, Poland was one of Europe's fastest growing economies.

Poland’s success was attributed to two main factors: 1) Balcerowitz's rule, named after Finance Minister Leszek Balcerowitz, which essentially allowed to entrepreneurs to sell anything they wanted, where they wanted and at what price they wanted; and 2) allowing insolvent and inefficient companies to go bankrupt rather that propping them up and draining the government or scarce funds. The "shock therapy" meant some tough and lean years in the early 1990s, but the economy was able to correct itself and people were redirected into jobs where they were needed.

In early 1990s, the Yeltsin government followed a similar path. Balcerowitz's rule was embraced but ultimately the government didn't have the will to let companies go bankrupt and put people out of work. The insolvent companies drained money and laws were passed to make it difficult for new businesses to start up. The economy stagnated, people were working where they weren't needed and problems that existed in 1990 hadn't been resolved while the economy of Poland has matured and prospered and people were working where they were needed.

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Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, U.S. government, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

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© 2008 Jeffrey Hays

Last updated May 2016

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