EDITOR’S NOTE: This is the second installment of our series from Dave Essel translating the latest issue of the Nemtsov White Paper condemning the Putin years. The first installment is here, and the prior issues are here.
An independent expert report by
Vladimir Milov and Boris Nemtsov
Translated from the Russian by Dave Essel
CHAPTER THREE: Russia as Raw Materials Appendage
When “Putin – The Results”, the first edition of our report, was published back in February 2008, Putin was happily boasting about economic successes. On 8 February 2008, he addressed a sitting of the State Council. Talking about the results of his presidency, he made much of the facts that GDP had risen during it and that in 2008 alone Russia had attracted $83 billion on inward investment.
Even then, however, we warned that the economic model being constructed by Putin was just a speculative bubble that could burst at any moment. And that is precisely what happened six months after our report was published: a massive economic crisis broke in Russia in 2008, a crisis far worse than the 1998 default, one which if it is to be compared with anything, then only with the period of the collapse of the Soviet economy and the economic depression of 1992-1994.
In 2009, Russia GDP fell by 7.9%. That is a record. The 1998 default happened after a smaller fall – 5.3%. This drop is on a par with 1992-1994.
Why did the Putinomy collapse so fast? In his attempts to cover up the failures of his economic policies, Putin tried to put all the blame for the crisis on America. But that does not help explain why the rate of decline of the Russian economy was far more severe than that of the leading Western countries or indeed of the other countries of the BRIC. Russia came out as one of the 15 countries that suffered the most from the crisis.
The explanation which is usually pushed is that in 2009 Russia was still wallowing in oil dependency, relying on its oil and gas exports and the world price of oil. There’s plenty of truth in this. But in that case, how come Saudi Arabia, the world’s largest oil producer, whose economy is even more dependent on oil than Russia’s, not only did not suffer a fall in GDP but actually manage a slight growth – of 0.2%?
The decline is Russia was one of the sharpest seen in the CIS. In fact, 8 of the 12 CIS actually achieved economic growth in 2009! Apart from Russia, only the Ukraine, Armenia, and Moldavia suffered declines.
Yet while the economy trends ever down, Russia retains relatively high inflation of 9% a year, while in Western Europe prices are not rising at all and in the US, Japan, and China they are actually dropping.
What sort of economic monster has Putin actually built that it can produce both deep depression and high inflation simultaneously?
All these years we’ve been forced to listen to endless empty talk of the need to “make the economy less centred on raw materials”. And what has happened? Look at the table below. Raw materials made up 44% of Russian exports in 1999. More recently they have constituted 66-69%. Exports of manufactured goods and equipment have dropped from 11% to 5%.
While Putin has been ruling the country, Russia has become even more of a raw materials appendage to the world economy than ever before.
Putin’s “economic miracle” for his second presidential term was built on the influx into Russia of short-term speculative money from abroad. This did indeed lead to the high economic growth rates of 2005-2008 when over $140 billion flowed in. But this money was mainly in the form of loans. So when the crisis started, capital poured back out of Russia and the “economic miracle” finished.
Putin’s growth model was rickety because it was not founded on investments in modernising production, increasing labour productivity, or conducive to the development of small and middle business.
Economies like this can only “rise from their knees” if they get constant injections in their joints in the form of cheap credits from the West.
Looking back we can therefore see for ourselves that the main myths of Putinite economic success were outright lies. Russia’s development rates did not stand out in any particular way from the other CIS countries. This means that the economic growth of the 2000s was more probably the result of the post-Soviet countries ridding themselves of Soviet economic ways. Growth rates in oil-rich Russia were amongst the lowest in the CIS. Back in 2000, Russia enjoyed the 2nd highest GDP growth rate in the CIS. By 2008, it was in 8th place. By 2009, we led the pack for rate of decline.
Having been granted a spectacular gift from heaven – unprecedentedly high oil prices – the Russian economy should have grown considerably faster. Export oil prices were three times as high under Putin as they had been under Yeltsin (average $47 pb in 2000-2009 and $60-90 during 2006-2009 as against $16.7pb in the 1990s).
With a windfall such as this, our economy should have shown growth of 9-15% a year, like our oil-exporting neighbours Kazakhstan and Azerbaijan.
Furthermore it is not Putin we have to thank for what economic growth we did show. All he did was hitch onto the positive trends that had appeared before he came to power. Economic growth resumed in Russia as early as 1997 and then again, after the default, in 1999, when the country GDP grew by 6.4%. Putin had nothing to do with this.
If only the last decade had been used to really modernise the country, to make long-term investments in the renovation of industry, to build roads and airports, to create a modern army and pension system… We may never again be presented with such a chance and painful changes (for example, pensions reform) will be far harder to carry out.
Structural reforms were needed in order to modernise. But everything was done back to front and inside out: assets were expropriated – from Yukos to Sakhalin-2 to Euroset while more and more was spent on paying for the growing apparatus of state, the special service, and financing the newly reformed state corporations.
Putin began the 2000s with a budget surplus and and ended the decade with a growing deficit (which in 2009 amounted to 5.9% of GDP). How to patch the holes? Putin found an answer: raise social security payments and the pensionable age. Russia also went back to borrowing abroad.
At the same time and paradoxical as this may seem, tax on the oil-and-gas sector is being reduced. In 2009, Putin offered tax breaks worth over $6 billion to the oil industry and again refused to increase tax for Gazprom, although the corporation pays considerably less in tax than do Russia’s oil companies (for more detail see our report “Putin and Gazprom”). In the deal called “Gas in Exchange for the Black Sea Fleet”, Putin released Gazprom from $4 billion a year in taxes. We citizens of this country will pay for this in higher taxes and utilities bills.
The measures claimed to have been taken by Putin in connection with the crisis are revolting in their one-sidedness. They make it perfectly clear that the banking sector and a small circle of corporations have been prioritised to receive the greater part of this aid. Instead of supporting the people, Putin has provided financial aid to oligarch O. Deripaska to the tune of $4.5 billion and another $1.8 billion to his friend R. Abramovich. Meanwhile, Rosneft friends Sechin and Bogdanovich received $4.6 billion in aid from state banks.
And we, the people of Russia, will be doing the paying to keep afloat the corrupt unreformed raw materials appendage they have built.