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Op-ed

The End Seems Near for the Putin Model

by Anders Aslund, Peterson Institute for International Economics

Op-ed in the Washington Post
February 26, 2010

© Washington Post


A recent week in Moscow left one clear impression: The Putin model of crony state capitalism is dead.

For years, the structure that Vladimir Putin crafted looked invincible with its steady, high growth rates and effective, mild repression. But the system only distributed ample oil rents to the elites and the ordinary people, creating neither moral nor economic value.

Today the bill is due. In 2009, Russia's gross domestic product plunged 7.9 percent, even though Moscow had the world's third-largest international currency reserves. Russia performed the worst among the Group of 20 leading global economic powers. And as Russian elites realize that the Putin model has failed, opposition to the government is mounting.

At a business conference in Moscow this month, the suave first deputy prime minister, Igor Shuvalov, faced suggestions that the juggernaut of emerging economies in Brazil, Russia, India, and China is being reduced from BRIC to BIC because of Russia's poor performance. Questioned about responses to the global economic downturn, Shuvalov defensively claimed that Russia's actions had been successful. But the numbers do not show this.

Russia's problem is larger than day-to-day constraints. Its public finances are in good shape; its current account is sound. But during Putin's second term as president, from 2004 through 2008, a substantial renationalization of business took place, spearheaded by his confiscation of the Yukos oil company. Much of Russia's economy is now dominated by monopolistic state corporations such as Gazprom, Russian Railways, Russian Technologies, Transneft, Rosneft, and a handful of banks. They are run by Putin confidants who are close friends from his days in the KGB.

These big state corporations accounted for much, if not all, of the decline in Russia's GDP last year. They are a black hole of inefficiency. Their leaders do not know how to run a company, which leads to poor financial results, huge state subsidies, miserable services, and enormous corruption.

When oil prices were high enough to keep the circus going, elites did not complain. The government's tactics in the Yukos case, including fabricating charges against former company chairman Mikhail Khodorkovsky, had taught them to keep quiet, and besides, they were doing very well financially. Today, however, corruption spurred by state corporations is causing Russia to lag behind other countries.

Putin and his state capitalism are clearly to blame. The state sector expanded during his time in power, according to the European Bank for Reconstruction and Development; it became more corrupt, according to Transparency International; Russia became less competitive, according to the World Economic Forum; the business environment grew worse, according to the World Bank. Russia is so corrupt that it has failed to expand its road network since 2000. Such facts were known in recent years, but only because Russian elites feel the effects are people speaking up.

A cacophony of elite voices are offering critiques to the point that 2010 already bears some resemblance to 1987, the year Mikhail Gorbachev's glasnost policy of openness came to life. Igor Yurgens's Institute of Contemporary Development, which is chaired by none other than Russian President Dmitry Medvedev, has taken the lead with a full-fledged call for Western liberalism, advocating the dissolution of the Interior Ministry and the Federal Security Service (FSB), successor to the KGB. On February 18, Medvedev followed its cue and sacked 17 police generals. In December, the old Kremlin courtier Gleb Pavlovsky even called on Putin to retire, saying the prime minister is obsolete.

Surprisingly, one of the most important forces acting against Putin is Vladislav Surkov, the eternal political deputy chief of the presidential staff. Another shock came when authorities allowed more than 10,000 people—an enormous rally by Russian standards—to demonstrate in the western city of Kaliningrad on January 30, even though the protest was directed against Putin and the regional governor. Surkov's subordinate overseeing domestic politics in northwestern Russia was instantly sacked—a rare event in Putin's Russia. The buzz on the Moscow grapevine is that Putin accused Surkov of having allowed the protest to take place.

Russians are becoming less afraid than in recent years and are even ashamed of their prior cowardice. Those jumping on the bandwagon include the respected finance minister, Alexei Kudrin, who publicly criticized Putin's United Russia party, and Sergei Mironov, the Putin loyalist who chairs the Russian Federation Council.

Although Medvedev is widely deprecated domestically and abroad, it can be a gift to be underestimated. The president has criticized state corporations, law enforcement and corruption in public, providing openings for others to fill in, and he offers an alternative platform of power.

Put another way, Russia is finally experiencing a thaw in the middle of winter.


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