Building a strong and vibrant economy is not an easy task, especially when remnants of an old structure continue to haunt the present. Combine that situation with the resource curse and it becomes tempting to put the project off altogether. Don’t believe me? Well, just take a look at Russia - a former communist country, stuck in the middle of a transition towards a more liberal market economy, endowed with an abundance of oil and natural resources, and whose economic fortunes rise and fall with the prices of those resources. It is these characteristics that best describe Russia’s economic struggles since the collapse of the Soviet Union.
The Transition from Communism to Capitalism (1991-1998)
Boris Yeltsin became Russia’s first elected president in June of 1991 and by the end of that year, he had agreed with the leaders of Ukraine and Belarus to dissolve the Soviet Union. Right away, he began implementing a number of radical economic reforms including price liberalization, mass privatization, and stabilization of the ruble.
The privatization reforms would see 70% of the economy privatized by the middle of 1994 and in the run-up to the 1996 presidential election, Yeltsin initiated a “loans-for-shares” program that transferred ownership of some natural resource enterprises to some powerful businessmen in exchange for loans to help with the government budget. These so-called “oligarchs” would use some of their newly acquired wealth to help finance Yeltsin’s re-election campaign. Yeltsin would win the election and remain in power until failing health forced him to appoint a successor - Vladimir Putin.
Despite Yeltsin’s reforms, the economy performed horribly through much of the 1990s. From about 1991 to 1998 Russia lost nearly 30% of its real gross domestic product (GDP), suffered numerous bouts of inflation that decimated the savings of Russian citizens. Russians also saw their disposable incomes rapidly decline. Further, capital was leaving the country en masse, with close to $150 billion worth flowing out between 1992 and 1999.
In the midst of these negative indicators, Russia would manage to eke out 0.8% growth in 1997, the first positive growth experienced since the collapse of the Soviet Union. But just as things were beginning to look optimistic, the financial crisis that began in Asia in the summer of 1997 soon spread to Russia causing the ruble to come under speculative attack. The currency crisis would soon be exacerbated by the drop in oil prices at the end of the year, and in the middle of 1998, Russia devalued the ruble, default on its debt, and declare a moratorium on payments to foreign creditors. Real GDP growth became negative again in 1998, declining by 4.9%.
Period of Rapid Growth (1999-2008)
While the 1998 financial crisis had immediate negative effects and severely damaged Russia’s financial credibility, some argue that it was a “blessing in disguise” as it created conditions that allowed Russia to achieve rapid economic expansion throughout most of the next decade. A significantly depreciated ruble helped stimulate domestic production leading to a spurt of economic growth over the next few years with real GDP growth reaching 8.3% in 2000 and approximately 5% in 2001.
The coincidence of Putin’s succession to power in 1999 with the reversal of economic fortunes gained the new president significant popularity, and he made it his goal to avoid the economic chaos of the previous decade and move the country towards long-term growth and stability. Between 2000 and the end of 2002, Putin enacted a number of economic reforms including simplifying the tax system and reducing the number of tax rates. He also brought about the simplification of business registration and licensing requirements, and the privatization of agricultural land.
Yet, in 2003, with reforms only partially implemented, Putin confiscated Russia’s largest and most successful company, the Yukos oil company. This event signaled the beginning of a wave of takeovers of private companies by the state. Between 2004 and 2006, the Russian government renationalized a number of companies in what were considered to be “strategic” sectors of the economy. An estimate by the OECD claims that the government’s share of total equity market capitalization sat at 20% by mid-2003 and had increased to 30% by early 2006.
With average real GDP growth of 6.9% per year, an increase of 10.5% in average real wages, and growth of 7.9% in real disposable income all occurring within the period from 1999 to 2008, Putin received a lot of credit for this era of “unprecedented prosperity.” However, much of Russia’s economic success during that period coincided with the early 2000s rise in the price of oil, one of the country’s most important resources.
In fact, while many expected the Russian economy to revert to its poor performance of the 1990s following the export stimulus effects of the ruble devaluation, it has been argued that the chief drivers of the post-crisis economic growth came from the natural resource sector, most notably oil. Between 2001 and 2004, the natural resource sector contributed to more than a third of GDP growth - with the oil industry being directly responsible for nearly a quarter of that growth.
Russia’s dependence on oil and other natural resources has been exacerbated by Putin’s return to a more centrally planned economy. The takeover of Yukos and other key sectors of the economy allowed Putin to construct a centralized management system that extracts economic rents from oil and other natural resources in order to be channeled into the sectors of the economy deemed most important. Rather than trying to direct and diversify the economy towards less resource-dependent activities, Putin has made its key sectors even more addicted to those resources.
Since the Global Financial Crisis
While oil and other natural resources were a major factor in Russia’s rapid economic expansion from the end of the twentieth century to 2008, it should be noted that the reforms undertaken by Yeltsin and the pre-renationalization reforms of Putin were also important to the economy’s success. But, the 2008 global financial crisis and the drop in the price of oil have revealed the nature of Russia’s resource-dependent economy and highlighted the need for continued structural reforms.
Russia’s economy was hard hit by the global financial crisis with output declining by 7.8% in 2009. But, as the price of oil recovered and global financial markets began to stabilize, growth did return, although not nearly to the level it had been prior to the crisis. The return to moderate growth; however, would be short-lived as conflict with Ukraine would see harsh economic sanctions imposed by the West, and the beginning of the oil price rout in the middle of 2014 would once again reveal the cracks in Russia’s economy.
The Bottom Line
During the Yeltsin years following the collapse of the Soviet Union, it looked as though Russia was on the path to a more liberal market economy. However, Putin’s return to more Soviet-style management and failure to continue with much-needed reform has served to reinforce the country’s resource dependence at the cost of achieving long-term economic stability and growth. Perhaps, Russia’s most recent crisis will help to shake his popularity with the Russian people and force him to begin taking economic reform seriously.