Putin’s Russia

Twenty years after the election of Vladimir Putin as president of Russia, the country is at a crossroads, a critical juncture due to the invasion of Ukraine. The situation prior to the conflict was essentially positive. Despite strong state monopolies, Russia basically has a capitalist economic system and can operate much more efficiently than its predecessor, the USSR.^[1] The government is technocratic and innovative (in terms of technical innovations and the digitization of the administration), but has failed to shift the nation’s economy away from its dependence on the extraction of natural resources. There is a very great risk that the nation is setting itself up for years of economic stagnation.

There are, of course, different opinions, some of which describe Russia as a normal developing country with all the problems and peculiarities of such a transition. It can also be seen as an antithesis to Western liberalism (which many conservatives in Russia consider to be a compliment). According to this view, “Putinism” poses a declared challenge to liberalism and “liberal democracy,” and has meant military modernization, aggression in the post-Soviet sphere, and construction of a global propaganda network. Putinism is described as a conservative and populist form of autocracy. It is conservative not only because it emphasizes so-called “traditional values,” such as the family, consisting exclusively of husband, wife and children and religion,  because it generally wants to maintain the status quo. It desires no change, not even in the economy. It needs no change, nor reform, because it lives off the sale of extracted resources.

Russia’s oil economy offers the ruling elites a greater opportunity to enrich themselves than the slower economic development that could be achieved through long-term reforms. Instead of supporting the diversification and development of the industrial and service sectors, Putinism concentrates wealth in the hands of a few. Instead of fostering the rise of a middle class and an autonomous and up-to-date entrepreneurship, those people who serve the state and depend on it are promoted. It seems that competent officials who also show capacity for initiative are not needed in an economy based on oil exploitation. And there are cases in which local administrators are dismissed,  not when their regions fail to achieve economic growth, but when they do not vote for the president or the governing party in the elections.^[2]

The state of the economy and the performance of the president are what most Russians care about. This is also what determines the survival (or not) of the system Putin has created. Russia having been made a purely – or mainly – hydrocarbon economy, one can fear that the duration of the “Putin system” will be only a few years, because, despite all the difficulties, the transition of the world economy to “greener energies” is progressing. It is very difficult to imagine a significant change of course in the short term, especially when, without neglecting the problems of the economy, there seem to be other priorities on the horizon, such as geopolitical competition with the United States.

Of course, not all of the country’s problems can be attributed to the current government. Putin inherited an economy in a very poor state and managed to stabilize it and grow it, thanks to the help of good collaborators, such as the then Finance Minister Alexei Kudrin.  Skyrocketing  oil and gas prices did the rest. In almost 10 years, from 1999 to 2008, Russian GDP grew by 94 percent and the incomes of Russians also increased at the same rate. The subsequent period, on the other hand, can be described as a period of transition from stability to stagnation. The global economic crisis also hit Russia hard, and it became clear that the development model, based on the sale of raw materials, was no longer working. Annual economic growth from 2010 to 2019 reached only 2 percent. As in the 1990s, capital flight again reached remarkable levels: from 2014 to 2018, $320 billion was taken out of the country. It was necessary to find another model, and far-reaching reforms were made, but they were not as bold as the situation required.

The year 2014 was particularly difficult for Russia. The crisis triggered on the Ukrainian border worsened relations with the West, which had a negative impact on the willingness of foreign companies to invest in Russia. The sudden drop in oil prices also had dramatic consequences. Since then, Russian incomes have been steadily declining: in 2020 they were lower than in 2014.

The government has done a great deal to cushion the impact of falling oil prices, to mitigate the repercussions of Western sanctions and to reverse the downward course of the Russian economy. According to IMF data, sanctions applied by Western countries have reduced Russian GDP by only 1.5 percent. Some sectors have even grown. For example, agriculture has benefited, but also the agricultural mechanical engineering industry. In addition, as a result of sanctions, the government has invested heavily in industries that are important to the military, such as those producing engines for aircraft, helicopters and ships, many of which were previously imported from Ukraine. Russia has also secured the financial sector: gold reserves have been increased and they developed their own payment system for electronic funds transfer called Mir.

But these are just a few exceptions to a situation that continues to be far from ideal. Despite all the efforts and state investments, growth is fluctuating between 1 and 2 percent per year. This is not sustainable for a country like Russia.

The main problem is that the ideas and prospects for long-term economic growth have been sacrificed in favor of the obsessive search for national and geopolitical stability. The economy is improving, but too slowly. The main actor is the state, which wants to replace the lack of private investment with so-called “national projects.” State investments are concentrated in a few large projects, in which only people close to the government are involved. Small and medium-sized entrepreneurs suffer from sanctions and the lack of opportunities to raise capital. In fact, the percentage of small and medium-sized businesses in the Russian economy has fallen from 22 percent in 2017 to 20 percent in 2020. To make a comparison, the percentage of small and medium-sized businesses in the Baltic countries, which were also part of the USSR, represents more than two-thirds of the production force.

Two of the biggest problems further exacerbating Russia’s economic condition are inequality and poverty. In 2018, the richest 3 percent of Russians owned 87 percent of all wealth. The number of billionaires rose in one year ( 2018 to 2019) from 78 to 110, and the number of millionaires from 172,000 to 246,000. In contrast, 21 percent of Russians live in poverty. The biggest concern of Russian people is not politics, but the economy: 72 percent are worried about rising prices, 52 percent about rising poverty, and 48 percent about unemployment.^[3]

Unfortunately, the economic data recorded during the pandemic showed this trend strengthening, just as the dependence of the Russian government on oil and gas revenues increased. Although the growth in 2021 (over 4 percent) compensates for the decline in 2020 (3 percent), once again it became evident how heavily the country’s development depends on the exploitation of natural resources. As the price of gas and oil soared in 2021, the budget could have provided a surplus. But the budget is also the only source of funding for social services for a population in crisis – health spending has increased significantly – and for investments to revive the economy. Moreover, the looming danger is that the technological transformation of the global economy will very soon lead to a drop in demand for fossil fuels. This will have very serious repercussions for Russia.^[4] The time has come to choose between geopolitics and economics.

One of the most significant problems is that the ruling class pays a lot of attention to the publication of statistical analyses, but the data does not always correspond to reality. Meanwhile, Russians are not interested in encouraging illusory statistics, but only in the actual  quality of their  lives. It is enough to remember what happened recently in Kazakhstan, where the official data on economic development were even better than in Russia. The Russian government expects economic growth of more than 4 percent and rising budget revenues, while real incomes have been in free fall for more than 10 years.

Many argue that the time has come to spend more money on social projects, but this will not solve the problem of low productivity and, consequently, low incomes. What is needed, instead, is innovation and private investment, especially from abroad. But as we know, in order to achieve all this, the political conflict with the West would have to be resolved. Instead, the conflict with Ukraine has made matters worse. The harsh reality is that Russia is an economically weak country and could not afford a policy which presupposes conflict. It is not a question of establishing “who is right or who is to blame.” Politics is the art of the possible and not of mere wishes.^[5]

Russian citizens are tired of the current policy, which is unable – and whose promoters are  unwilling – to create conditions for a normal life. It also puts the geopolitical dreams of the ruling class before the welfare of ordinary citizens.^[6]

The state and civil society

It is well known that, with the exception of a few particular periods – 1917 or the 1990s – Russia has always had a government that gives its own authority a key role. Putin and those around him are merely carrying on an old tradition in this regard. During his first two terms in office, Putin was able to end the rule of criminal groups that hid behind slogans of “freedom” and “democracy.” He brought “stability.” At that stage, he claimed – rightly – that Russian society was weak and fragmented and needed reconciliation. In reality, the new stability was achieved not through reconciliation, but through demobilization and pacification. Society partly voluntarily surrendered to the state its rights, and partly saw them taken away. In Putin’s first 10 years, the state focused on internal consolidation and did not interfere in society’s affairs.

The economy grew, and many Russians were able, for the first time in their lives, to consider themselves as “middle class” and enjoyed material prosperity. However, this did not last long. The 2008 global economic crisis, the Ukrainian crisis, and the recent effects of the pandemic hit the country hard, and so the promise of long-lasting  prosperity evaporated.

Now it can be observed that the population is tired of the bombastic propaganda – “We must defend ourselves against the enemies surrounding the country!” – and no longer takes it seriously. The government is losing not only contact with its own society, but also its ideological influence over it. Evidence of this is in the ongoing peace demonstrations in Russia. According to Tatiana Stanovaya, a researcher at the Carnegie Moscow Center, as of 2018 society’s attitude to the state  can be described by a maxim: “We owe you nothing.”^[7]

According to public opinion, the current crisis in relations with the West is what could end the “Putin system.” After the events of 2014, most Russians considered the clash with the West and the economic crisis as “a new normal.” Unfortunately, something similar happened with the perception of war. Since the conflict in Georgia in 2008, war – in Ukraine and  Syria – has become a constant element in daily life. With the current Ukrainian crisis, the danger of war on a global scale is real. War has caused the ruble’s exchange rate and Russian markets to collapse, and this will not lead to a rapprochement between society and the government. Russian society is modern and has entered the “post-heroic phase,” in which not everyone is ready “to die for the Fatherland and for Putin.” On the contrary, not only war itself, but the economic consequences of war – especially if long lasting – may lead to discontent that will most likely turn into a protest with strong political connotations. Such a protest will not be only in the big cities, or limited to politically active citizens, but will involve masses of the population, pensioners and provincial workers, that is, those who up to now have been strong supporters of government policy. Although it is almost unthinkable that the protests will lead to political change, the myth of the “Putin model” will almost certainly be diminished.

Russia, despite all the crises and catastrophes that until today have caused incredible suffering to its people, has continued to exist and has become a great political and military power, but not an economic one. In fact, from an economic point of view, Russia is unable to match the power of the United States or China.

Russia, even under Putin, is confirmation that the destiny of a country is determined by its traditions and its history, and that profound changes, for better or for worse, can be implemented only very slowly. Today the risk of remaining isolated and experiencing dramatic economic stagnation is very real.

Photo: Protest slogan: “Occupation of the Crimea is a shame on Russia” peace protest, Moscow, March 15, 2014

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DOI: La Civiltà Cattolica, En. Ed. Vol. 6, no.3 art. 8, 0322: 10.32009/22072446.0322.8

^[1].      The fact that Russia is a net exporter of agricultural products reveals a major difference from the USSR, which could not feed its population without imports.

^[2].      See M. S. Fish, “The Kremlin Emboldened: What Is Putinism?”, in Journal of Democracy, Vol. 28, No. 4, October 2017.

^[3].      See R. E. Beris, “The State of the Russian Economy: Balancing Political and Economic Priorities”, in www.nti. org/analysis/articles/state-russian-economy-balancing-political-and-economic-priorities

^[4].      See V. Inozemtsev, “Oil, COVID and prospects of economic growth in Russia”, in Riddle Russia (www.ridl. io/en/oil-covid-and-prospects-of-economic-growth-in-russia), November 18, 2021.

^[5].      See Id., “Time to choose geopolitics or stability”, in Riddle Russia (www.ridl.io/en/time-to-choose-geopolitics-or-stability), January 7, 2022.

^[6].      See “Russian public covers ears as state media heighten Ukraine rhetoric”, in Financial Times (www.ft.com/content/e5bd10cc-d4de-4600-bbdd-83e8d52e8e08), January 26, 2022.

^[7].      Cf. R. E. Berls Jr., “Civil Society in Russia: Its Role under an Authoritarian Regime”, in www.nti.org/analysis/articles/civil-society-russia-its-role-under-authoritarian-regime-part-i-nature-russian-civil-society