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Op-ed

Putinomics

by Anders Aslund, Peterson Institute for International Economics

Op-ed distributed through Project Syndicate
December 3, 2007

© Project Syndicate


President Vladimir Putin turned Russia's parliamentary election into a referendum on himself—and won by a landslide. But while he refuses to spell out his plans for remaining in power once his second term expires next spring, his economic policy is clear.

The strangest thing about the Duma election was that Putin lost his nerve. He overexposed himself in public appearances that were as aggressive as they were vague in substance. He ran against the West and the "chaos" of the 1990s, just as he raged against Chechen terrorists in 1999 and against oligarchs in 2003.

The Kremlin abandoned democratic procedures, controlling which parties were allowed to run and their candidates, while Putin's United Russia monopolized media coverage. Opposition activists were blocked from most campaigning and often arrested, while Kremlin-controlled courts denied their complaints. People were intimidated into voting for United Russia on a mass scale. Independent election monitors were barred.

As a consequence, the new State Duma has not been elected so much as appointed. It lacks legitimacy and its members are unknown. But Putin's legitimacy has also been tainted by pervasive fraud. His only "mass" meeting in Moscow drew no more than 5,000 people. The main questions are how authoritarian he will become or whether this pathetic campaign will weaken him.

Putin's policy is easy to understand if one realizes that he usually does the opposite of what he says. In his first term, Putin appeared to be an authoritarian reformer, undertaking substantial market reforms, such as introducing a 13 percent flat income tax. But in his second term, Putin was simply authoritarian, undertaking no economic or social reforms worth mentioning. The expropriation of the oil company Yukos, valued at $100 billion, was the signal event and was followed by rising corruption.

Putin has established a purely personal dictatorship. He rules through the presidential administration and competing secret police forces without ideology or party. United Russia is little more than a bunch of state officials. He has sapped most power from other state institutions.

Personal authoritarianism rarely survives its founder. Since Putin has created an overcentralized regime that cannot survive without him, he has to stay as president. Law is of minimal relevance, as he can always order the constitutional court to approve his third term.

Putin's regime may be described as a group of clans, consisting of state-dominated corporations, such as Gazprom, Rosneft, Vneshtorgbank, Rosoboronexport, and the Russian Railways, together with the security agencies. Putin's KGB cronies, usually from St. Petersburg, control these institutions and tap them for huge kickbacks. At the same time, Putin has made sure that they all hate one another, so that they need him as arbitrator or godfather.

In a sensational interview before the election in the Russian newspaper Kommersant, one of these previously unknown KGB managers explained how they use state extortion against private enterprises to accomplish their "velvet reprivatization" through state corporate raiding. According to the European Bank for Reconstruction and Development, the share of GDP originating in the private sector has declined from 70 percent to 65 percent under Putin. Renationalization through extortion is likely to accelerate.

This renationalization has not been justified ideologically but rather cynically: The purpose is simply to generate corrupt revenues for top Kremlin officials. Although corruption has been declining in most of the former Soviet Union, it has surged in Russia since 2004, becoming more rationalized and concentrated. None of Putin's KGB kingpins has been arrested or even demoted.

As renationalization gained momentum, the public economic rhetoric changed and become statist. Putin now favors protectionism, state intervention, and subsidies. In this climate, no progressive structural reforms are likely.

Until recently, Russia has pursued an admirably conservative macroeconomic policy, running up huge budget and current account surpluses. It has paid off its foreign debt and built up foreign currency reserves of $450 billion.

Before the Duma election, however, Putin jeopardized this last vestige of responsible economic policy. Currently, Russia's greatest economic concern is growing inflationary pressure, driven especially by food prices. Rising food prices are an international phenomenon, and Russia's inflation is driven by the large current account surpluses and capital inflows. But Russia's government is no longer trying to mitigate these factors and is instead pursuing an inflationary policy.

Monetary policy has been loose for the last year, and before the Duma election, the government started pouring huge sums into pensions and other social welfare transfers. Not surprisingly, inflation has shot up from 7 percent last spring to 11 percent currently and may reach 15 percent in the spring.

Naturally, monetary and fiscal policy should be tightened, but that is difficult when Putin is trying to placate the population. He could liberalize the exchange rate and let it float upwards, but he is not even doing that. Instead, using an old Soviet tactic, Putin has imposed informal price controls, which cannot hold for long in a privatized economy.

Russia's economic growth is still driven by the sound market reforms undertaken in the 1990s and Putin's first term, together with high oil and gas prices. But while growth is not likely to stop any time soon, Russia's economic success increasingly hinges not only on high but rising oil and gas prices.

The main question about economic policy in Putin's third term, then, is how fast it will deteriorate.


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