NBR Analysis: Volume 13

Obstacles and Opportunities to Russia’s Economic Reforms

THE NATIONAL BUREAU OF ASIAN RESEARCH NBR ANALYSIS VOLUME 13, NUMBER 2, APRIL 2002 Normalization of the Russian Economy: Obstacles and Opportunities for Reform and Sustainable Growth James R. Millar The Political Dimension of Economic Reform under Vladimir Putin: Obstacles, Pitfalls, and Opportunities Lilia Shevtsova 107 147 [This page intentionally left blank.] Foreword SincebecomingpresidentoftheRussianFederation,VladimirPutinhassoughtsimultaneouslytoreversethedevolutionofpoliticalpowerthatoccurredduringtheYeltsineraandto pushliberaleconomicreform. IfPutinistoreestablishRussia’seconomicviability,alitanyof challengesmustbeovercome,includingeconomicandpoliticaltransparency,developmentof small-andmedium-sizedbusiness,thenurturingofruleoflawandpoliticalpluralism,anda redefinitionofRussia’sinternationalroleasajuniorpartnertotheWest. Importantly,thereforms Putinintendstoimplementwillrequireconsiderablecommitmentfromthepoliticaleliteand oligarchs,theveryintereststhatbenefitfromtheinefficienciesoftheeconomy. Atthesametime, Putinhimselfmayhavecontributedtosomeoftheseobstaclestoreformthroughhisownpolicies ofgrantingconcessionsinordertogarnerpoliticalsupport. DoesPutinhavethepoliticalwill andpowertoimplementtheextraordinaryreformsstillrequired? Toaddresstheseissues,NBR hascommissionedthestudiespresentedinthisissueofthe NBRAnalysis. Inthefirstessay,Dr.JamesR.Millar,professorofeconomicsandinternationalaffairsat GeorgeWashingtonUniversity,examinestheeconomicobstaclesandopportunitiesforcontinuedreformunderPresidentPutin .Dr.Millarbeginswithanexaminationofthemacroeconomic indicatorsofthepost-Sovietera,identifyingthepersistentchallengesforreformbutalsoacknowledgingtheaccomplishmentsofthepastdecade .AmongthebiggestobstaclestoRussia’s growth,Dr.Millarcitesthedeclineinhumancapitalthathasresultedfromdecreasedspending ineducation,thedominationofindustrybybusinesselitesandtheirconglomerates,thetremendousneedforsmallbusinessesandagriculturaldevelopment ,andtheunavoidablenecessityof relocatingmuchofRussia’sindustrialbase.Inaddition,hecontends,oneofthebiggestchallengestoRussia ’sintegrationintotheglobaleconomyisthereluctanceofitsleaderstoabandon their“empireenvy.”Insteadofrecognizingthatthecountry’smajortradingpartnersarethestates oftheEuropeanUnionandworkingtowardgreatereconomicintegrationwiththeWest,Russia’s leadershavestriventocounterbalancewesternpowerbydevelopingexpensiveallianceswith partnerswhoareweakerandpoorerthanRussia.Movingtowardcompliancewiththenorms of the European Union will not only improve Russia’s economic conditions but, Dr. Millar 105 Richard J. Ellings President The National Bureau of Asian Research argues,isalsolikelytoadvanceRussia’sprogresstowarddemocraticreform.AlthoughMillar providesevidenceoftroublingtendenciesinVladimirPutin’sreformagenda,heconcludesthat Putin’s“slowbutsteadysupportforreformmayrepresentthepolicyofaverycarefulpolitician” and“mayalsobeverygoodeconomicpolicy.” Lilia Shevtsova, senior associate at the Carnegie Endowment for International Peace, contributedthisissue’ssecondessay,whichaddressesPresidentPutin’sroleineconomicliberalizationandthepoliticalsupporthiseconomicreformpoliciesreceivefromtheRussianelite andthegeneralpopulation.Uponcomingtopower,Putindrewsupportfromthecentralbureaucracy ,thesecretpolice,andthearmedforcestoquicklyconsolidatepowerthroughasystem ofsubordination,compliance,andloyalty.Fornow,accordingtoShevtsova,Putinhasreined intheoligarchs—bymakinganexampleofthosewhohaveopposedhim—buthehasnotmanaged to sever the ties between state power and business. Looking toward the continuation of economicreform ,ShevtsovafindsthatPutinmustcourtabroaderbaseofsupportfromsmall-and medium-sized business and the pro-reformist social sectors, as the bureaucracy, the power apparatus,andtheloyaloligarchswillresistreformsintendedtounderminetheirprivilegedposition in the economy. To pursue the reform course, Putin must bridge the gap between power and society,and,throughaprocessofhand-pickingindividualsandorganizationsloyaltothepresident , the Kremlin has attempted to use a top-down approach to construct elements of civil society.Althoughtheseeffortsmightseemlikegroundworkfortheintroductionofanewspurt ofliberalreforms,Dr.ShevtsovasaysthatinsteadtheyarePutin’sefforttoeliminatepolitical opposition and power struggles that may compromise his tremendous approval rating as he lookstothe2004presidentialelections.Dr.Shevtsova,nevertheless,iscautiouslyoptimisticthat theremightbeacatalystinthenearfuturethatstrengthensthewillofPutinandthepoliticalclass. She sees Putin’s shift toward the West in response to the events of September 11, despite domesticdivision,assuchacatalyst.Theoutcomeofthisshift,Dr.Shevtsovaconcludes,will bedeterminedbyPutin’swillingnesstomoveawayfromautocracy—themainobstacletoRussia’s economicliberalization—andRussia’sabilitytocommittothelimitsonitssovereigntyandthe adoptionoftheliberalrulesofthegamethatintegrationwiththeWestwillrequire. We are very grateful to the Russell Family Foundation for supporting these studies.As withallNBRreports,theauthorsaresolelyresponsibleforthecontentandrecommendations of their papers. 106 Normalization of the Russian Economy: Obstacles and Opportunities for Reform and Sustainable Growth James R. Millar This article takes a multilayered approach to examining the principal obstacles and opportunities for the continuation of economic reform in Russia and identifies certain troubling tendencies of the Putin regime. The author initially provides a brief summary of the macroeconomic and social trends following the collapse of the Soviet Union, the conditions leading up to the August 1998 financial crisis, and the subsequent devaluation and oil-driven recovery. This review facilitates examination of the obstacles that continue to impede Russia’s successful economic reform, including a decline in education and health care, the self-serving interests of the “oligarchs,” the absolute neglect of the agricultural sector, and the legacies of the illogical Soviet industrial base. While taking into account these obstacles, the article also notes Russia’s progress in economic reform and the opportunities that could arise from Russia’s integration with the states of the European Union, its Asian neighbors, and Putin’s policies toward the United States both before and after the tragedy of September 11. It is Russia’s informal integration with the European Union, the author states, that holds the greatest potential for Russia’s economy rebuilding and democratization. In conclusion, the article considers Putin’s commitment to reform and questions whether Putin has the political will and power to effectively propel the Russian economy to growth. James R. Millar is Professor of Economics and International Affairs at the Institute for European, Russian, and Eurasian Affairs of George Washington University. He is also editor of the journal Problems of Post-Communism. 107 “The irony is that having spent nearly eight decades proving that the Karl Marx theories for organizing society were dead wrong, Russia has spent the past decade proving his critique of capitalism dead right: The rich get richer, the poor get poorer.” —Mike Thompson, Detroit Free Press.1 Introduction The quote is an exaggeration, but there is more than a grain of truth to what Mr. Thompson wrote. It has been more difficult and costly in human terms to dismantle and begin to replace the old Soviet economy with market institutions than anyone dreamed at the outset. Progress to date has featured serious distortions, inequities, and a degree of criminality that no one anticipated either. Early on in the process of reform, during the attempt at shock therapy, a Russian babushka was interviewed on Moscow...