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03/26/2015

Putin, Part II

Stephen Kotkin is Professor of History and International Affairs at Princeton University and the author of “Stalin, vol. 1, Paradoxes of Power, 1878-1928.” In the March/April 2015 issue of Foreign Affairs, he has an essay (as part of a review of three books on Vladimir Putin) and following are a few more of his comments. Part II focuses on the economy under Vlad the Great.

Stephen Kotkin: 

From 1999 through 2008, Russia’s economy grew at a brisk seven percent annually, thereby doubling its GDP in ruble terms. Real individual income growth was even brisker, increasing by two and a half times. In dollar terms, because of the ruble’s appreciation over time, the increase in GDP was exceptionally vivid: from a nadir of around $196 billion in 1999 to around $2.1 trillion in 2013. A new, grateful Russian middle class was born, some 30 million strong, able to travel and shop abroad easily. More broadly, Russian society was transformed: cell-phone penetration went from zero to 100 percent, unemployment dropped from 12.9 percent to 6.3 percent, and the poverty rate fell from 29 percent to 13 percent. Wages rose, pensions were doled out, and the immense national debt that had been accumulated by previous leaders was paid off early. Foreign investors reaped rich rewards, too, as Russia’s stock market skyrocketed, increasing 20-fold. 

Many analysts have attributed the Russian boom to luck, in the form of plentiful fossil fuels. Yet although oil and gas have generally brought in approximately 50 percent of the Russian state’s revenues, they have accounted for no more than 30 percent of the economy at large – a high number, but significantly lower than Middle East petrostate proportions. Even adding in all the knock-on effects around hydrocarbons, the most sophisticated analyses of Russian economic growth credit oil and gas with at most 40 to 50 percent of GDP during the boom. An immense amount of other value was created during these years as well, and Putin was partly responsible. 

As president, Putin delegated handling of the economy to Mikhail Kasyanov, his prime minister; German Gref, the minister of economic development and trade; and (Alexei) Kudrin, then the finance minister, who introduced a raft of anti-inflationary and liberalizing measures (Gazprom excepted).  Tax cuts increased incentives to work and reduced incentives to hide income. Simplification of business licensing and reduced inspections led to a burst of entrepreneurialism. Financial reforms and sensible macroeconomic policy facilitated investment. And land became a marketable commodity. 

The impact of these pro-market reforms, which Putin supported and signed, was magnified by favorable trade winds. Russia had undergone a searing debt default and currency devaluation in 1998, and most commentators thought the country would be devastated. But in fact, the devaluation unintentionally made Russian exports cheaper and thus more competitive. At the same time, China’s ongoing rise lifted global prices for Russian products, from fertilizer and chemicals to metals and cement. Insatiable Chinese demand brought Soviet legacy industries back from the dead. Brand-new sectors surged as well, such as retail, food processing, biotechnology, and software, driven by increased domestic demand and global outsourcing. Many of the Soviet legacy industries, such as coal and steel, underwent significant rationalization, as unprofitable mines or plants were phased out. (Agriculture, however, was never really revived, let alone rationalized, and Russia became dependent on food imports.)

Skeptics take note: oil prices during Putin’s first presidential term, when growth was robust, averaged only around $35 a barrel; during Putin’s second term, the average grew to around $65 a barrel. In recent years, with oil prices consistently at or above $100 a barrel, Russia’s economy has stagnated.” 

[Ed. so then the sanctions related to Ukraine were levied, targeting individuals, not economic sectors....] 

Putin’s Kleptocracy, by Karen Dawisha, shows why (the approach of targeting individuals) makes sense.... Dawisha details how they all got filthy rich thanks to the noncompetitive privatization of state assets, no-bid government contracts, dubious loans, fake bankruptcies, phantom middleman firms, tax ‘refunds,’ patriotic megaprojects (such as the Olympics), and other favors. She maintains that Putin, too, is a thief, and, calling attention to the $700,000 worth of watches publicly spotted on his wrist, she repeats guesstimates that put his personal wealth at $40 billion. 

Ed. I’ll continue to cover Putin’s foreign policy in depth in my “Week in Review” columns. 

Hot Spots will return in a few weeks.

 
Brian Trumbore


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03/26/2015

Putin, Part II

Stephen Kotkin is Professor of History and International Affairs at Princeton University and the author of “Stalin, vol. 1, Paradoxes of Power, 1878-1928.” In the March/April 2015 issue of Foreign Affairs, he has an essay (as part of a review of three books on Vladimir Putin) and following are a few more of his comments. Part II focuses on the economy under Vlad the Great.

Stephen Kotkin: 

From 1999 through 2008, Russia’s economy grew at a brisk seven percent annually, thereby doubling its GDP in ruble terms. Real individual income growth was even brisker, increasing by two and a half times. In dollar terms, because of the ruble’s appreciation over time, the increase in GDP was exceptionally vivid: from a nadir of around $196 billion in 1999 to around $2.1 trillion in 2013. A new, grateful Russian middle class was born, some 30 million strong, able to travel and shop abroad easily. More broadly, Russian society was transformed: cell-phone penetration went from zero to 100 percent, unemployment dropped from 12.9 percent to 6.3 percent, and the poverty rate fell from 29 percent to 13 percent. Wages rose, pensions were doled out, and the immense national debt that had been accumulated by previous leaders was paid off early. Foreign investors reaped rich rewards, too, as Russia’s stock market skyrocketed, increasing 20-fold. 

Many analysts have attributed the Russian boom to luck, in the form of plentiful fossil fuels. Yet although oil and gas have generally brought in approximately 50 percent of the Russian state’s revenues, they have accounted for no more than 30 percent of the economy at large – a high number, but significantly lower than Middle East petrostate proportions. Even adding in all the knock-on effects around hydrocarbons, the most sophisticated analyses of Russian economic growth credit oil and gas with at most 40 to 50 percent of GDP during the boom. An immense amount of other value was created during these years as well, and Putin was partly responsible. 

As president, Putin delegated handling of the economy to Mikhail Kasyanov, his prime minister; German Gref, the minister of economic development and trade; and (Alexei) Kudrin, then the finance minister, who introduced a raft of anti-inflationary and liberalizing measures (Gazprom excepted).  Tax cuts increased incentives to work and reduced incentives to hide income. Simplification of business licensing and reduced inspections led to a burst of entrepreneurialism. Financial reforms and sensible macroeconomic policy facilitated investment. And land became a marketable commodity. 

The impact of these pro-market reforms, which Putin supported and signed, was magnified by favorable trade winds. Russia had undergone a searing debt default and currency devaluation in 1998, and most commentators thought the country would be devastated. But in fact, the devaluation unintentionally made Russian exports cheaper and thus more competitive. At the same time, China’s ongoing rise lifted global prices for Russian products, from fertilizer and chemicals to metals and cement. Insatiable Chinese demand brought Soviet legacy industries back from the dead. Brand-new sectors surged as well, such as retail, food processing, biotechnology, and software, driven by increased domestic demand and global outsourcing. Many of the Soviet legacy industries, such as coal and steel, underwent significant rationalization, as unprofitable mines or plants were phased out. (Agriculture, however, was never really revived, let alone rationalized, and Russia became dependent on food imports.)

Skeptics take note: oil prices during Putin’s first presidential term, when growth was robust, averaged only around $35 a barrel; during Putin’s second term, the average grew to around $65 a barrel. In recent years, with oil prices consistently at or above $100 a barrel, Russia’s economy has stagnated.” 

[Ed. so then the sanctions related to Ukraine were levied, targeting individuals, not economic sectors....] 

Putin’s Kleptocracy, by Karen Dawisha, shows why (the approach of targeting individuals) makes sense.... Dawisha details how they all got filthy rich thanks to the noncompetitive privatization of state assets, no-bid government contracts, dubious loans, fake bankruptcies, phantom middleman firms, tax ‘refunds,’ patriotic megaprojects (such as the Olympics), and other favors. She maintains that Putin, too, is a thief, and, calling attention to the $700,000 worth of watches publicly spotted on his wrist, she repeats guesstimates that put his personal wealth at $40 billion. 

Ed. I’ll continue to cover Putin’s foreign policy in depth in my “Week in Review” columns. 

Hot Spots will return in a few weeks.

 
Brian Trumbore