Putin'S Russia - Aei

INTRODUCTION 5Another factor is the political, or rather apolitical, national culture,in which mistrust of any authority translates into mistrust of politics.Finally, cemented in large measure by the “power-property alliance,”the regime does its best to “retain its power monopoly at the cost ofsabotaging modern political institutions.”Yet, while very formidable, the obstacles to Russian civil societywere and are not insurmountable. Makarenko reminds us that the“perennial subject,” the Russian people, did rise against the existingorder in 1905, 1917, and 1991. There has also been a perceptibleaccumulation of what might be called “initial social capital,” alsodescribed by Dmitriev and Zubarevich. This term refers to the growing number of Russian men and women who “owe their prosperityto their own efforts rather than government paternalism,” resultingin values and attitudes “comparable to those of Western societies.”These and other precedents and trends amount to what Makarenkosees as structural factors “conducive to the emergence of a Russianculture of citizenship.”It is this culture, along with the values and behavior of its mainbearer, the middle class, that Makarenko and Dmitri Oreshkin portray in fine detail, correcting, along the way, a few stereotypes aboutthe demographics of the Russian protesters, civil society’s ability toorganize political actions, and the attitudes of society at large towardthe public protests.To Oreshkin, the most significant trend within Russian civil society has been the emergence of “self-governing” civil society groupsthat fill the vacuum left by the state, which is inefficient, corrupt,“free from any responsibility to the electorate,” and unable or unwilling to provide services and protect “the rights of the public.” Pragmatic and nonideological (or, one might say, ideologically inclusive),these nongovernmental organizations are involved in activities ranging from charity to traffic safety to exposing corruption, includingfalsification of educational certification, especially doctorate degrees.One of the most impressive tests of civil society’s ability to selforganize was the monitoring of the 2011 Duma campaign in Moscow. Because of the monitoring, the authorities felt more constrainedin their falsification methods during the 2012 presidential election;

6 PUTIN’S RUSSIAas a result, Putin received less than half of Moscow’s vote, accordingto the official count—and probably closer to 40 percent in reality.During the September 2013 Moscow mayoral election, even moredivergent were the tallies from polling stations monitored by volunteers versus those where authorities were in complete control.By contrast, Alexey Malashenko delves into a segment of Russiancivil society that is in many regards opposite to the one analyzed byMakarenko and Oreshkin. He details the symptoms and causes ofthe radicalization of Russian Muslims outside the North Caucasus,most notably in Tatarstan, “the heart of the Russian Muslim community.” Despite terrorist acts in Tatarstan and the neighboring Bashkortostan, the spread of Islamic fundamentalism in Europe’s oldestcontinuously Muslim community—5 million strong and predatingthe Christianization of Russia and the emergence of Russian state—has gone largely unnoticed. Yet it fits well within the pan-Europeantrend of the radicalization of younger and seemingly assimilatedMuslims.The appeal of “nontraditional” Islam, especially to young RussianMuslims, is undeniable and has been growing since the early 2000s.The Arab Spring and the war in Syria have further radicalized theSalafist (Wahhabist) movement in Russia. Unfolding in parallel havebeen fundamentalist trends among Russia’s estimated 2.5 to 3 million migrant workers from Muslim Central Asia.In the end—whether in the precarious state of the Russian economy, the relationship between Russia’s center and periphery, thedivergent paths of the “four Russias,” public opinion trends, or thestate of civil society—emerging in these pages is a finely texturedportrait of a society rife in complexities, contradictions, and postponed but looming crises.Now that your appetites are thus sufficiently whetted, I invite youto be edified and stimulated by the original, searching, and powerfulchapters that follow.

PART IPolitical Economy,Political Geography,and the Politicsof Federalism7

Political Origins and Implications of theEconomic Crisis in RussiaSERGEI GURIEVRussia’s economic performance in the last 15 years has surprisedobservers at least three times. First was the Russian economic miracle of 1999–2008. According to the International Monetary Fund’sWorld Economic Outlook, over these 10 years, Russia’s per-capita grossdomestic product (GDP) doubled in constant prices (equivalent tothe average annual growth rate of 7 percent) and grew sixfold in nominal dollars—from 270 billion to 1.7 trillion in current prices.1The second surprise was the catastrophic performance in 2008–09 during the global economic crisis. In 2009, Russia’s GDP collapsed by 8 percent, more than that of any other large economy.Finally is the recent economic slowdown turned crisis. After theRussian economy seemingly recovered from the global economiccrisis—growing at 4 percent per year in 2010 and 2011—it startedto stagnate. Even before the annexation of Crimea, Russian economic growth had slowed to zero. Despite solid macroeconomicfundamentals, robust growth in the US and China, better-thanexpected performance of the eurozone economy, high oil prices,and the return of political stability under President Vladimir Putin(who promised serious pro-business reforms), the Russian economystopped growing.In this paper, I will not discuss the first two episodes.2 Instead,I will focus on the postcrisis slowdown, which mushroomed intothe current crisis. My goal is to explain the origins of the slowdown,understand its political implications, and analyze its interaction withthe 2014 crisis in Crimea and eastern Ukraine.8

ORIGINS AND IMPLICATIONS OF THE ECONOMIC CRISIS 9I will first state that the economic miracle preceding the crisis wasreal—and so is the current slowdown. Second, I will show that theonly explanation of the latter is the poor investment climate, whichis an essential part of the current political equilibrium. Third, I willspeculate that current economic conditions imply the need to departfrom the social contract that prevailed during the economic miracleyears. This social contract presumed that the public would give upits political freedoms in exchange for economic growth. The slowdown effectively destroyed this contract and, in doing so, may havecontributed to the decision to turn to imperial ideology and territorial expansion. Finally, I will try to forecast what all of this means forthe Russian economy and the world.Russian Economic Miracle—and the New StagnationIn 1995, Daniel Yergin and Thane Gustafson wrote a book that contained three scenarios for Russia in 2010.3 One of the scenarios waschudo (Russian for “miracle”). Another scenario included rebellionsin frontier regions and ultimate disintegration, while the third scenario foresaw a grim military dictatorship bent on expansion.As often happens, real life turned out to be a mix of the three scenarios. In terms of domestic and external politics, Russia eventuallyfollowed the latter two scenarios. On the other hand, the economicperformance of 1999–2008 was indeed miraculous from both aninternational and historical perspective.4 Despite the beating delivered by the global economic crisis, Russia was officially classifiedby the World Bank in 2013 as a high-income economy and wason track to join the Organisation for Economic Co-operation andDevelopment (OECD, “the club of developed countries”).As my focus here is the slowdown rather than the miracle,I will need only to rely on the following two takeaways from myand Aleh Tsyvinski’s analysis of the miracle years. First, this 1999–2008 growth was indeed impressive and trickled down to all partsof Russian society. Second, the sources of this growth—growth incommodity prices, cheap and abundant labor, underutilized production capacity, low-hanging fruit of macroeconomic stabilization,

10 PUTIN’S RUSSIAFigure 1Russian GDP Growth, Quarterly Data 9–10%Sources: New Economic School and Renaissance Capital, RenCap-NES Macro Monitor: Russia (April 2014).and first-generation institutional reforms of the 1990s and early2000s—were by and large exhausted by 2008. Therefore, to continue the growth after the crisis, Russia needed to carry out substantial reforms to improve the protection of property rights, rule of law,and competition.These reforms have not happened. After the postcrisis recovery,Russian growth rates fell substantially. Figure 1 presents quarterlyGDP growth data, which show that the slowdown started in 2012.During the recovery in 2010 and 2011, the growth rates were above4 percent, but in the second half of 2012 they fell to just 2 percent.The official GDP growth in 2013 was just 1.3 percent. The forecastsfor the first half of 2014 entered negative territory even before theCrimean crisis.One of the most interesting features of this slowdown is that itwas a surprise to many observers. The World Economic Outlook, the

ORIGINS AND IMPLICATIONS OF THE ECONOMIC CRISIS 11Figure 2Russian Economic Growth in 2013 as Forecastedby the International Monetary 0920102011201220132014Date of the forecast (World Economic Outlook)Source: World Economic Outlook (2009–14).flagship biannual publication of the International Monetary Fund(IMF), consistently predicted the 3–4 percent growth in 2013 upuntil October 2013, when it reduced its forecast to 1.5 percent. (Seefigure 2.) Even though the slowdown started in the second half of2012—right after Vladimir Putin returned as president after DmitryMedvedev’s one term in office—the IMF was still predicting growthas high as 3.4 percent as recently as April 2013.The IMF was certainly not alone—the 3–4 percent expectedgrowth was the official forecast made by the Russian Ministry of theEconomic Development that was revised only in Spring 2013. In January 2013, Prime Minister Dmitry Medvedev actually expressed hisdissatisfaction with the fact that the growth forecast was too low andsaid that Russia needed 5 percent growth per year for the years tocome. This is not a coincidence: in his programmatic January 2012article “We Need a New Economy” and in his first economic decree

12 PUTIN’S RUSSIA(no. 596), signed on his inauguration day, May 7, 2012, newly electedPresident Putin made a number of promises for the 2012–18 presidential term, all based on the 5–6 percent growth goal.Only in the Fall 2013 did long-term stagnation become the essential part of the mainstream economic forecast. In October 2013,Minister of Economic Development Alexei Ulyukaev spoke of thebaseline scenario of 2–3 percent annual growth for the years tocome. And in May 2014 he finally acknowledged that Russia was ina “technical recession” (negative growth in two quarters in a row).5Why a Slowdown?Why has Russian growth slowed down? Initially, the 2012–13 declinewas blamed on the business cycle. The narrative was that the Russianeconomy was below its potential steady-state growth rate; hence,the government needed to increase spending to support weak aggregate demand. However, this explanation was not consistent with thedata. Contrary to the textbook description of an economy in recession, the Russian economy was characterized by low unemployment(5.0–5.5 percent), high inflation (exceeding the official target of 6.0percent), booming consumer credit (by 40 percent in 2012 and 30percent in 2013), and robust growth in consumption (7.0 percent in2012 and 3.5 percent in 2013).These data eventually debunked the cyclical explanation, and thegovernment recognized the structural nature of the slowdown. Yet,initially, it preferred to blame the structural problems on external factors. There have been two versions of this argument. First, the “Westis weak” version argued that the Russian economy is strongly integrated into the global economy and therefore suffers from the crisisin the global economy and, in particular, in the West. The secondversion, on the contrary, was based on the “West is strong” theory:the West was not weak but was jealous and hostile to Russia andused its strength to undermine Russia’s reputation and, eventually,Russia’s successful development. Putin spokesperson Dmitry Peskovformulated it in the following terms: “strong, successful, wealthy andhealthy—such as we are now—are often disliked by others.”6

ORIGINS AND IMPLICATIONS OF THE ECONOMIC CRISIS 13The first argument, relating the weakness of the Russian economyto that of the West, is also not consistent with the data. Unlike 2011and the beginning of 2012, when the US and Europe indeed continued to struggle after the crisis, in the end of 2012 and in 2013,the US economy embarked on a solid recovery. While the European economy was and is still weak, it is doing much better thancould have been expected in mid-2012 when the Russian slowdownstarted. Finally, none of the major emerging market economies had asubstantial slowdown in 2013; most of them actually had a growthacceleration, and so did the global economy as a whole. Not surprisingly, oil prices remained at historically high levels.The second argument is essentially a conspiracy theory and bydefinition cannot be refuted by data. It is, however, unlikely that wewould have learned nothing about such an anti-Russian economicplan after Edward Snowden’s and other leaks. Eventually even Putinhimself, in his annual address to the Russian Parliament in December2013, did acknowledge, “Let’s be frank: the main reasons for the slowdown in our economy are internal rather than external in nature.”7What were the internal problems? Unlike its OECD counterparts,Russia was not suffering from a debt crisis. During the miracle years,Russia paid off virtually all foreign debt and even accumulated fiscalreserves. Currently, Russia’s sovereign debt stands only at 10 percentof its GDP, and its two sovereign wealth funds (the Reserve Fundand the National Welfare Fund) add up to 185 billion, also about10 percent of GDP.Therefore, we cannot explain the slowdown by Russia’s macroeconomic problems. Figure 3 shows that the main source of Russia’s economic decline was the fall of investment. Although the othercomponents of Russia’s GDP did not fall or recovered after the crisis,investment is still below its 2008 peak. This simple fact pinpointsa very intuitive explanation for the slowdown: Russia is no longerattractive for investors, neither foreign nor Russian. This explanationis also consistent with the fact that Russia experienced a net capitaloutflow of 3 percent of its GDP in 2012 and 2013. Also, Russianstocks were traded at about a 50 percent discount to other emergingmarkets even before Crimea.

14 PUTIN’S RUSSIAFigure 3Dynamics of Russian GDP and Its Components in 2003–1312,00010,0008,0006,0004,0002,00002003 2004 2005 2006 2007 2008 2009 2010 2011 2012 xportsImportsNote: Quarterly data, 2008 constant prices.Source: Rosstat.The investors are leaving Russia for a very simple reason: Russia’sinvestment climate (the rule of law and protection of investors’ rights)is very poor—at least relative to competing capital destinations. Fora high-income, urbanized, and educated country, Russia is unusuallycorrupt. Figure 4 shows corruption and level of development aroundthe world. In this graph, Russia is one standard deviation more corrupt than the countries with a similar level of development (EastEuropean and Latin American countries). The level of corruption inRussia is on par with that of the poorest countries in the world.The unusually high level of corruption in Russia is hardly newsto investors or to the Russian government. In particular, Putinflagged the investment climate and corruption in 2012 as the mostimportant barriers to economic growth. However, what is new is the

ORIGINS AND IMPLICATIONS OF THE ECONOMIC CRISIS 15Figure 4Per-Capita GDP and Control of Corruption (2012)Note: The line represents a nonparametric trend. Control of corruption is higher inless-corrupt countries.Source: World Bank, Worldwide Governance Indicators, and author’s calculations.Russian government’s complete inability or unwillingness to tacklethese problems and, consequently, investors’ ultimate disillusionment with government promises. Now that other sources of growthsuch as rising commodity prices, cheap labor, and spare production capacity have been exhausted, growth in investment is unlikelywithout reform, and therefore, stagnation is inevitable.Given that the government has recognized and discussed this somany times, why does Russia not reform? It is not because the government does not know what to do. The very same government haswritten many reform programs—from Gref Program 2001–2010 toStrategy 2020 and Putin’s May 7, 2012, presidential decrees. However, these institutional reforms are now contrary to the interests of

16 PUTIN’S RUSSIAthe ruling elite. Rule of law and fighting corruption constrain theelite’s ability to extract rents from the economy and, thus, to hold onto power. Although these reforms are likely to result in faster GDPgrowth and prosperity for the whole country, they will reduce theincumbent elite’s ability to enjoy this prosperity.Indeed, even if the opposition promises to preserve today’s elites’wealth after the change of political power, it is not clear how theopposition could credibly commit to respecting this promise. Thisconundrum is formulated by Daron Acemoglu as the absence of thePolitical Coase Theorem.8 Politics are different from the corporateworld, where the more efficient investor can take over an inefficient company by simply paying out the existing shareholders (theeconomic version of the Coase Theorem). By definition, in politics,there is no external enforcement of contracts between outgoing andincoming elites, especially in countries without strong and legitimatepolitical and legal institutions. In such countries, the enforcementultimately depends on the party in power.This problem is the key explanation of the Russian elite’s preference for the status quo. The elite chooses to avoid institutionalreforms that may raise the probability of political transition. Moreover, high oil prices, and therefore substantial resource rents, furtherincrease aversion to reforms by making incentives for staying in control even higher.The situation is therefore very close to the Brezhnevist zastoi (literally, “stagnation”), the last period of Soviet history when high oilprices resulted in a lack of economic dynamism in the Soviet Union.Important economic reforms were delayed, economic growth disappeared, and once oil prices went down in the mid-1980s—theSoviet Union went bankrupt and disintegrated.9Tsyvinski and I predicted that these risks may materialize in postcrisis Russia as well and described a “70–80” scenario.10 When oilprices were at 40 per barrel, we argued that if prices would rise backto 70–80 per barrel, then Russia would return to a 1970s–1980sstyle of stagnation, with Putin’s approval ratings at 70–80 percentbecause of the spending of the petrodollars, but necessary reformswould be forgone. We made only a quantitative mistake in not p

calls a "political equilibrium," responsible for the relative stability of the regime during that period. Delving into the causes of Putin's personal popularity within the