RUSSIAN ECONOMY UNDER PUTIN

RUSSIAN ECONOMY UNDER PUTIN

The economy stabilized and improved greatly under Putin, who took office in 1999. Growth rates were high, salaries and pensions were increased and paid on time, IMF loans were paid back in some cases ahead of time, unemployment went down, and foreign investment increased (although overall investment was initially small compared to former Eastern block countries like Poland and Hungary).

Putin took office in the wake of his nation’s 1998 financial crisis. Making economic stability a cornerstone of his leadership, he lowered taxes, overhauled the judicial system, legislated private ownership of land and adopted new banking laws. He wooed companies like ExxonMobile and United Technologies and proposed reforms to fight poverty and help small and medium size businesses. Putin devoted much of his energy to cleaning up Soviet-era debts and creating new markets for Russia's nearly bankrupt heavy industries. Russia was helped immensely by high oil prices that rose around the time that Putin came into office.

Some described Russia’s economic policy under Putin as “fascist capitalism” and “the Chinese model” in which economic growth is spurred by exploiting natural resources, utilizing cheap labor and maintaining control over business while the government remains in authoritarian hands.

In 2000, Putin sacked some Yeltsin appointees accused of corruption. In 2001, he launched a serious to crackdown on corruption out of concern corruption scared away foreign investors and Russia needed foreign investors if it was going to prosper. Putin fired his energy minister after people in the Far East had their limbs amputated due to frostbite because they were unable to get enough heat.

Putin and the Oligarchs

Although Putin promised “the oligarchs will cease to exist as class”, gained political capital through public loathing of them and is believed to have been behind a few widely publicized crackdowns on them, the oligarchs increased in number and became richer under his watch. Under Putin, eight oligarchic clans controlled 85 percent of the value of the top 64 companies in Russia in 2002, according to one study. They were active in all sectors of the economy. Under Yeltsin they were mostly into just oil, metals, banking and the media.

After becoming President, Putin held a meeting with the oligarchs and basically told them you can keep your property, regardless of how it was obtained and carry on with your businesses, as long as you stay out of politics. Putin told the Oligarchs he would not change any of the shady Yeltsin-era privatization deals in return for a promise from the Oligarchs "to uphold the state’s interests while conducting their affairs."

Under Putin, oligarch groups took over entire industries and sectors, including coal, steel, car manufacturing, aluminum and timber. Their tactics were often no less underhanded than in the old days and in some cases were more heavy-handed. In 2002, one oligarch group hired a private army to take over a large pulp and paper mill, whose owner at the time had barricaded himself inside with buses and train cars and possessed his own army.

The oligarchs acted more responsibly once they possessed their properties. They paid their taxes and modernized company infrastructure. In many cases, they rescued industries that were decaying, neglected and were looted by previous owners. These oligarchs also increasing sought foreign investment and advise and expertise from the West. Still in many cases the oligarchs only began behaving responsibly when ruthless tactics were no longer needed and many wondered if they could really give up their hard ball ways.

Revival of the Russian Economy Under Putin

By the early 2000s, capital flight was no longer a serious problem and the economy was flush with cash from oil profits. By 2002 there was more money entering the country than leaving it. Russians had confidence in the ruble and were keeping their money at home rather than sending it abroad, and they were spending it too. In some places—notably the Moscow area—growth was spurred by domestic consumption. Growth was 5 percent in 1999, 8.2 percent in 2000, 5.2 percent in 2001, 4.6 percent in 2002, 7.2 percent in 2003 and 6.7 percent in 2004.

The turn around had more to do with high oil prices and the devaluation of the ruble than anything else. An increase in production caused by the increase in demand combined with higher prices for Russian oil and gas halted the economic slide caused by the collapse of th ruble and spurred growth. High oil prices had a bad side as well as a good side. They hide problems in other sectors of the economy and raised concerns about inflation.

By the early 2000s foreign investors began flocking back to Russia. The value of the Russian stock market increased 91 percent in 2001. Some companies even listed on the New York Stock Exchange. With the help of money from oil resources, Russia paid back many of its IMF loans in advance.

But everything was not great. In the early 2000s, GDP was still 30 percent below what it was in 1990. As of 2001, most of the economic activity was still centered in Moscow but successful businesses were beginning spring up in Novosibirsk, Nizhniy Novgorod, St. Petersburg, Samara and Yekaterinburg. But many people were left out. Economic improvements had no impact on their lives. Their wages and pensions lagged behind inflation.

Changes in the Russian Economy Under Putin

Stability, growth and reforms in the Russian economy encouraged more transparency and strengthened the rule of law. Tax and legal structures became more business friendly, Russia’s cooperate tax of 24 percent is among the world’s lowest. Companies began paying taxes, moved towards transparency and observed international accounting standards. They paid regular dividends and protected minority shareholders.

Kleptocracy started to fade. The oligarchs lost their ability to manipulate the government. One oligarch was billed $140 million for allegedly rigging a privatization auction. He promptly paid up. One businessman told National Geographic in 2001 that people first made money by "by dividing up pieces of the old state pie. The oligarchs were thinking, 'I can't take this guy's pie because he's too powerful.' So they want to grow their piece of the pie, they want good managers running their businesses, and they want respect, because in Russia it’s all about respect."

A poll taken on economic reform in 2003 by the Trance Group, an American Republican think tank found: 1) 43 percent of Russians said the government should take back control of important industries and economic sectors; 2) 41 percent said the government should take back control of all sectors or the economy; 3) 7 percent said the government should not interfere with the free-market economy; and 4) 8 percent were unsure or other. seems to be more hope and promise.

Putin Reigns in the Regional Governments

The presidency made strong by Yeltsin was made stronger by Putin. Putin reduced the power of Russia's 89 elected regional governorships by dividing Russia into seven federal zones, headed by seven super governors. Five of the seven were formal generals from the military or security forces. The plan was widely praised as way to control lawlessness, corruption and inefficiency that prevailed in the hinterlands. Critics claimed the move was anti-democratic.

In 2000, Putin introduced legislation that allowed the president to dismiss elected governors and dissolve local legislatures whose policies are determined by the courts to violate federal law, and for governors to sack local officials. Putin also changed the composition of the upper house from local elected officials to legislatures appointed by Moscow. This prevented regional governors from automatically getting a seat. Bowing to demands by Putin, the governors voted to abolish their own seats in the upper house

The changes greatly weakened the power of the regional governors, who were often unruly and openly defied the Kremlin. Among those who praised Putin for doing this was Gorbachev, who gave Putin credit for reigning in the power of regional leaders and forcing them to abide by national laws rather than create their own fiefdoms.

Putin reduced the power of Russia's 89 elected regional governorships by dividing Russia into seven super regions (or districts or federal zones), headed by seven super governors appointed by and loyal to Moscow. The move was made to return power to Moscow that was lost to regional politicians under Yeltsin. The seven super region plan was widely praised as way to control lawlessness, corruption and inefficiency that prevailed in the hinterlands. Critics claimed the move was anti-democratic.

The seven districts are: 1) Central (including Moscow and St. Petersburg); 2) South, or North Caucasus (between the Black and Caspian Seas and home of Chechnya); 3) Northwest (home of Arctic ports Murmansk and Arkhangelsk); 4) Volga; 5) Urals (rich in resource); 6) Siberia (rich in resource); ; and 7) Far East (large diamond deposits).

In December 2004, the selection method of governors was changed, increasing the power of the national executive over subnational governments. Instead of direct popular election in the jurisdiction, governors now are nominated by the president, then appointed by the jurisdiction’s legislature. The legislature can reject a nominee, but after three rejections the president can dissolve the legislature. In 2005 all of President Putin’s more than 30 nominees were approved immediately by the respective legislatures. [Source: Library of Congress, October 2006 **]

Putin and the Oligarchs

Although Putin promised “the oligarchs will cease to exist as class”, gained political capital through public loathing of them and is believed to have been behind a few widely publicized crackdowns on them, the oligarchs increased in number and became richer under his watch. Under Putin, eight oligarchic clans controlled 85 percent of the value of the top 64 companies in Russia in 2002, according to one study. They were active in all sectors of the economy. Under Yeltsin they were mostly into just oil, metals, banking and the media.

After becoming President, Putin held a meeting with the oligarchs and basically told them you can keep your property, regardless of how it was obtained and carry on with your businesses, as long as you stay out of politics. Putin told the Oligarchs he would not change any of the shady Yeltsin-era privatization deals in return for a promise from the Oligarchs "to uphold the state’s interests while conducting their affairs."

Under Putin, oligarch groups took over entire industries and sectors, including coal, steel, car manufacturing, aluminum and timber. Their tactics were often no less underhanded than in the old days and in some cases were more heavy-handed. In 2002, one oligarch group hired a private army to take over a large pulp and paper mill, whose owner at the time had barricaded himself inside with buses and train cars and possessed his own army.

The oligarchs acted more responsibly once they possessed their properties. They paid their taxes and modernized company infrastructure. In many cases, they rescued industries that were decaying, neglected and were looted by previous owners. These oligarch also increasing sought foreign investment and advise and expertise from the West. Still in many cases the oligarchs only began behaving responsibly when ruthless tactics were no longer needed and many wondered if they could really give up their hard ball ways.

Economy Under Putin During his Second Term

After winning his second term in 2004 and gaining a majority in the Duma Putin used the mandate with varying degrees of success to close tax loopholes that allowed rich companies to avoid paying taxes; decreased taxes paid by ordinary people; supported the banking system to create growth of small and mid-size businesses; improved infrastructure, and streamlined the bureaucracy.

In 2004 Putin promised to double GDP by 2013. In 2004, the stock market reached all time highs, making it the best performing market in the world between 1999, when Putin took power, and 2004. Foreign investment reached $30 billion in 2003, 50 percent higher than the year before.

Most the cash that poured in as a result of high energy prices was used to pay off foreign debt. Many thought it could have been better spent helping small and mid size businesses. Russia needed desperately to diversify so it wasn’t so dependent on oil and gas. Banking reform was also badly needed to create an engine for growth. A banking crisis loomed after several banks collapsed. The government’s solution to buy some of the troubled banks through state-owned banks. Many analysts thought this was the wrong direction for the Kremlin to take.

Image Sources:

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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