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Postscript CANPUTINOMICSSURVIVE? In 2000, political scientist Timothy Frye surveyed 500 businesses in Russia, including firms large and small, in several regions. He asked them about the mainobstaclestobusinessdevelopment.Theirresponsesexplainmuchabout the Russian government’s economic strategy since then (see table 1). Corruptionwasonthelistofobstaclestobusiness ,butRussia’scorporateleaders said it was only the sixth-most-pressing problem. Far more worrisome, they believed, was Russia’s high tax burden, followed by legal instability, access to credit,andalackofqualifiedmanagers.1Since2000,taxeswerecutandinterest rates lowered. A new class of corporate managers, educated abroad, now runsmostofRussia’slargefirms.Thegovernmentprovidedmacroeconomic stability, keeping inflation reasonably low and growth reasonably high. Fromtheperspectiveofthelate2000s,therefore,theRussiangovernment hadaddressedmanyofbusiness’smaincomplaintsfromthebeginningofthe decade. True, corruption was at best marginally reduced, with new oligarchs replacing old ones. The jailing of oil baron Mikhail Khodorkovsky deterred investmentbyremindingbusinessownersthattheirpropertycouldbeseized at government whim. Despite this, Russian and foreign firms continued to invest, deeming the businesses climate adequate and the opportunities substantial . After a decade of capital export in the 1990s, money began flowing into Russia in the mid-2000s, a sign of investor confidence. Yet the years after the 2008–9 crisis were a period of drift. The problem was not the financial crisis per se. Russia recovered relatively quickly, thanks to a decent economic policy response and the rapid recovery of commodity prices. The problem was politics. Putin and the coalition he assembled backed policies that resolved some of the most pressing problems of the 1990s,aboveallthepersistentbudgetdeficit,whichfueledinflationandfinancialinstability .Bythebeginningofthe2010s,however,Russiafacedadifferent 158 | Postscript set of challenges. Surveys suggested that the biggest issues facing business were different from before: now reducing bureaucracy, improving the rule of law, and increasing regulatory transparency topped the list.2 Putin has struggled to retool. The Medvedev era—when Putin’s modernizing deputy promised to diversify the economy away from commodities and make government more transparent—offered, some analysts believed, the chance to adapt to new times. Yet Medvedev was kept on a short leash during his four years as president and was not permitted to run for a second term. Reforms were discussed but rarely implemented. The bosses of stateownedenterprisesgatheredmorepower ,andasmallcircleoflong-timePutin friends,nowoligarchs,accumulatedagrowingarrayofassets.ThoughRussia returned to growth after the 2009 slump, the rate was far below the boom years of the mid-2000s. Influential Russian entrepreneurs began investing their fortunes abroad, sensing better possibilities outside of Russia.3 Austerity Begins to Bite This was the environment Russia’s economy faced when it was smashed by theoilpricecrash,theannexationofCrimea,andWesternfinancialsanctions. A status quo that in early 2014 looked stable but stagnant quickly worsened. Therubleslumped,productionfroze,andthegovernmentbudgetwasdriven deep into the red. Russia’s political class has slowly come to terms with the painful choice between large spending cuts, tax increases, or a risky bet that TABLE 1 Reported obstacles to Russian business, 2000 Scale of problem Obstacle (1 = small, 5 = large) High taxes 4.29 Legal instability 3.46 Strong competition 2.90 Difficulty finding credit 2.74 Lack of managers 2.51 Government corruption 2.43 Weak infrastructure 2.17 Government intervention 1.98 The “racket” 1.43 Source: Frye, “Capture or Exchange.” 0 2000 2001 2002 2003 2004 Year 2005 2006 2007 –10 Billion USD 30 20 10 40 50 –130 –150 –110 Billion USD –90 –70 –50 –30 –10 10 2009 2010 2011 2012 2013 Year 2014 2015 2016 FIGURE 21 Quarterly private capital inflows, 2000–2007 (billion U.S. dollars). Bank of Russia. FIGURE 22 Quarterly private capital inflows, 2009–2016 (billion U.S. dollars). Bank of Russia. 160 | Postscript theoilpricewillquicklyimprove.Theresponseemphasizedspendingcuts— but because spending on state salaries and the military had to be protected, long-term investments in health and education were hit hardest. For the first time since Putin took power, the political class has had to impose austerity in a time of recession.4 The need for austerity could not have come at a worse time on the Kremlin ’s political calendar, with a new presidential election looming in 2018. Poorlydesignedbudgetcutsandtaxhikesriskinflamingpopularsentiment.It iseasy—andnotwhollyinaccurate—toblametherecessiononuncontrollable foreign factors, above all the oil price. But when the government increases taxes or cuts spending, voters know who to blame. The Kremlin’s fear of debt makes belt-tightening inevitable. Political realities—including the fact that many individuals and inefficient state-owned companies are perceived to be untouchable—mean that most of this belt-tightening falls on average Russians. It proved manageable, though harder than some had hoped. Take tax increases. In 2015, the government introduced a new highway tax system, called Platon, to fund road construction. Collection of the tax was privatizedandgiventoacompanyownedbyArkadyRotenberg,abillionaire businessman and former judo partner...


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