“Political and Economic Changes in Russia under Putin”

Overview

Since the break up of the Soviet Union in 1991, Russia has made much progress, but it was plagued by corruption, political and economic decline, leading some to refer to this period as “Weimar Russia”.   Currently President Vladimir Putin has moved Russia out of its Weimar period by strengthening state institutions and is overseeing an economic revival in the nation.  This paper will explore how the Putin-era has resulted in a competitive authoritarian regime, which consists of systematic violations of free elections, voter eligibility, civil liberties, the independent media, and opposition parties; and how the market reforms intended to promote democracy have further undermined the prospects for democracy.

Political Developments

After Yeltsin stepped down in 2000, Putin assumed the presidency and gradually transformed Russia into a competitive authoritarian regime in the process.  The difference between competitive authoritarian regimes and other nondemocratic regimes is that they do not eliminate democratic rules, but rather use them to consolidate political authority.  Since Putin came to power, the Russian competitive authoritarian regime has actively undermined democracy in the electoral area, legislature, judiciary and the media.

First, in a competitive authoritarian regime free and fair elections exist, but are affected by abuses in state power.  These abuses of state power would consist of biased media coverage, harassment of the opposition and a lack of transparency.   In Russia, the state uses its media and political resources as a means to maintain their power and to influence their elections.  The December 2002 parliamentary elections were won by the pro-Putin United Russia due to biased coverage from the state media, while the opposition parties such as Yabloko, SPS, and the communists lost because they did not receive coverage.  Additionally, the state media gave coverage to the smaller pro-Putin Liberal Democrats and the “Motherland” bloc so they can steal seats away from the communists.  Another way the state tampered with the elections was by discouraging their parties to have any public debates and by encouraging them to copy each other’s political platforms to depoliticize the election, which would lower voter turnout.   Moreover, the abuse of state resources also existed in the March 2004 Presidential elections, which were criticized by the Organization for Security and Co-operation in Europe (OSCE) for lacking, “vibrant political discourse and meaningful pluralism”.  Not only did the state-controlled media restrict access to other candidates, the government also kidnapped an anti-Putin presidential candidate to scare him into dropping out of the election.

Second, in most competitive authoritarian regimes, legislatures lack real power, but are sometimes filled with opposition activity.  As a result of their success in the December 2003 parliamentary elections, United Russia won 37 percent of the vote and gained more than 200 seats in the State Duma, giving them two-thirds majority and the power to amend the constitution.  In 2001, the government passed a law that limits the number of political parties by requiring them to have at least 10,000 members with 100 in each of the 89 regions to be recognized.    This law has effectively undermined any hope for a strong opposition since it has restricted the number of parties and has made it extremely difficult to form new parties.  Furthermore, in 2002, the Federal Assembly passed laws that allowed the government to ban “extremist parties,” which gives them a greater hand in weakening the opposition.  More recently, the minimum threshold for representation in the State Duma has been raised from 5 to 7 percent in the 2007 elections, making it harder for smaller parties to gain seats.   In addition, Putin has passed legislation that prevents regional governors and heads of regional legislatures from serving in the Federal Council (upper house of the Federal Assembly) and replacing them with appointed representatives.

The judiciary is a third area where competitive authoritarian regimes are active by bringing the judiciary under their control with various forms of coercion.  Russia’s judiciary has already experienced these abuses long before Putin came into power.  During the Russian Constitutional Crisis of 1993, then-President Boris Yeltsin severed the Constitutional Court’s phone lines and removed their security guards when it ruled against Yeltsin’s right to dissolve parliament.  The judiciary was further subordinated under Yeltsin when his constitution placed the judiciary under the Ministry of Justice and made the ministry in charge of the judges’ salaries, which resulted in increased corruption, inadequate funding, and a lack of competent judges.  Under Putin, the legal system has been politicized to serve state interests when he used the state to arrest Mikhail Khodorkovsky in October 2003 on charges of tax evasion, fraud and embezzlement when he made plans to enter Russian politics.  Moreover, there is still criticism from human rights groups regarding the use of torture to extract confessions and the courts’ reluctance to handle their duties.

The media is a fourth area where competitive authoritarian regimes are active since it is such an influential force in society.  After taking power in 2001, Putin began a policy of utilizing its state-controlled energy companies to take over independently owned media networks.  The early victims of the state-sponsored takeover in a bid to eliminate dissent were ORT and NTV, two networks that had been critical of the Putin administration and the Chechen wars.  By 2003, the state had taken over TV6, a network run by former NTV employees, and TVS, which gives the government the power to influence the country since it now owns all the major television networks.  Moreover, local state-controlled stations now follow orders from regional executives and the remaining private television stations have apolitical programming.  In addition to controlling the airwaves, the state also harasses or arrest journalists who investigate the political and corporate elites tied to the government.  President Putin has even referred to journalists who criticize his handling of problems as traitors and the Committee to Protect Journalists, a nonprofit organization, has named Russia as one of the ten worst places to be a journalist.

Another notable change is the relationship between the state and the oligarchs.  During the Yeltsin-era, the oligarchs, who acquired much of their wealth from privatization, were able to use their vast wealth and resources to exert influence on the government until Putin came to power.  After taking power, Putin and his supporters used state resources to either crackdown or arrest oligarchs who criticized him because they were concerned the oligarchs were buying power by funding the opposition.   Notable oligarchs that were prosecuted by the state were Boris Berezovsky and Vladimir Gusinsky, who were both exiled from Russia, and Mikhail Khodorkovsky.  However, many oligarchs are allowed to exist and retain their wealth by the state as long as they remain apolitical.  Additionally, the state’s ongoing prosecutions could encourage capital flight from the country by forcing oligarchs to continue business outside of Russia.

Economic Developments

After the collapse of the USSR, Russia implemented economic reforms to move towards a market economy.  In 1991, Boris Yeltsin and his advisors established a series of reforms that focused on macroeconomic stabilization and economic restructuring, which involved cuts in government spending, reducing the deficit, reducing inflation, privatization and lifting price controls.  However, these reforms turned out to be extremely difficult to implement and by 1996, Russia’s gross domestic product (GDP) had declined by about 50 percent while unemployment increased due to the shutdown of unprofitable state firms.   These problems reached their peak in 1998 with the collapse of the economy, which resulted in an IMF bailout and a devaluation of the ruble.  In spite of these problems, Russia’s economy eventually recovered due to high oil prices and with the return of foreign investment.  Because of these economic improvements, both the European Union and the United States designated Russia a market economy and supported its entry into the World Trade Organization (WTO).

The World Trade Organization was created on January 1, 1995 to replace the General Agreement on Tariffs and Trade (GATT) with the long-term goal of abolishing trade barriers.  The organization’s basic rules consist of trade protection only through tariff with an obligation not to increase agreed tariff levels, applying the same trade rules to all countries, treating all foreign goods like they were domestic goods, and the prohibition of subsidies that create unfair advantages for domestic goods.   These rules mean that Russia must open their economy for competition and export opportunities, set maximum tariff rates that are gradually reduced in WTO trade negotiations, conform to the organization’s intellectual property rights rules, and eliminate state subsidies.  Nonetheless, Russia will benefit as a member by seeing a positive impact on foreign investment and growth; having access to the WTO Dispute Settlement Body to fight against predatory pricing or dumping; gaining opportunities to influence WTO decisions; and getting equal treatment for its exporters in WTO markets.  Additionally, Putin argues that WTO membership will allow Russia to exert the same influence it has in the United Nations Security Council and the G-8.

Russia’s WTO Accession involves a series of negotiations with a multilateral working party and bilateral negotiations with interested member-states.  Based on the multilateral and bilateral negotiations, the country is expected to implement the legal and structural reformed agreed in the negotiations.  The Accession is made easier because it is recognized as a “market economy” by both the United States and the European Union for their efforts in liberalizing energy prices, improving transparency in the corporate sector, improved protection of property rights, and having a freely convertible ruble.  Moreover, the government has also reformed custom, taxation, intellectual property, and foreign trade laws and regulations to conform to WTO standards.

Despite these developments, Russia still has problems in the steel industry, automotive industry, agriculture, and technical standards, which can delay WTO entry.   First, the steel industry is one of the main areas that still heavily subsidized by the state and is an area where the WTO failed liberalize.  As a result, Russian steel faces trade quotas from the EU because it has import duties for scrap iron while the US raised steel to tariffs to 30 percent, which was later ruled to Russia’s favor by the US International Trade Commission in an anti-dumping investigation.  Secondly, Russia has import tariffs as high as 25 percent for cars, in addition to excise and value-added taxes, which creates barriers to imported vehicles.  Despite this high degree of protection, the domestic auto industry is still underdeveloped and heavily subsidized to promote restructuring and modernization.  Thirdly, although Russia has reduced agricultural subsidies, the state still provides support with cheap energy, subsidized loans, free housing and free seeds, which are considered indirect subsidies.  They are expected to limit their state subsidies before WTO entry, but they justify their subsidizes as a way to offset dumping from subsidized products from the US and EU.  Last, technical standards are still a barrier to imports and exports because of bureaucratic certification procedures, which are currently being streamlined to conform to international standards.

Although Russia has completed the economic transition towards a market economy, it still suffers from problems created during the economic reforms.  First, Russian privatization resulted in what economist Joseph Stiglitz calls an “insider buyout”, where state managers were able to acquire a controlling share of the company through their networks, which may have contributed to the growth of oligarchs.   Moreover, the “insider buyout” encouraged workers who were shareholders to implement policies that favored their interests, but were counterproductive to economic growth.  Second, the state removed price controls without dissolving soviet-era monopolies, which resulted in price increases because there were few incentives for competitive price and because of inflation.  These increases in prices coupled with rapid inflation, forced the state to respond by raising interest rates and tightening the money supply, which made it difficult for firms to borrow money to invest in resources and to pay for wages.  Third, Russia continued to use soviet-era institutions to help regulate the market economy, which had made it quite difficult for firms to borrow money and discouraged investment since these institutions lack the resources to perform their duties.  In addition, these weak institutions have encouraged a “capital flight”, where Russians invested their money in overseas banks and markets.   Fourth, problems during the economic transition caused a decrease in wages for Russian professionals, such as doctors and academics, which forced them to emigrate in response to the deteriorating conditions at home, creating a “brain drain”.   As a result, Russian education standards have declined due to a leak of qualified teachers and other industries are currently lacking competent employees.

Despite these problems created during the economic transition, Russia still had many successes from the market reforms.  The flat tax introduced by Putin in 2001, helped increase tax revenue and reduced tax evasion since it did not increase tax rates based on income.  This tax reform has encouraged traditional tax cheats to pay their taxes because the new system was simpler, which resulted in increased tax revenues to $12 billion in 2002, up from $6.2 billion in 2000.   The service sector, particularly retailing, has seen success by showing growth of about 20 percent a year, while other industries have suffered during the reforms because of their inability to compete in the market economy.   Part of this growth in the service sector is attributed to the booming Russian economy, due to high oil prices, as well as an increase in Russians’ real income.  Moreover, growth in retailing has also been driven by “shuttle trading”, where individual entrepreneurs travel abroad to purchase goods and sell them in Russia at competitive prices.   Another success from the economic transition is a growth of investment after long periods of capital flight, which has decreased from $8.1 billion in 2002 to about $2.9 billion in 2003.  The increase in investment has also led to a rapid growth in the Russian stock market, which suffered from years of decline.

Currently, most of Russia’s economic strength is concentrated in large cities and urban areas, particularly Moscow.  This concentration of economic power is due to Moscow’s rapid privatization during the economic transition and due to the concentration of foreign investment in the capital.   As a result, Moscow and other large cities have a relatively higher per capita income (7,770 rubles) than the rest of the country (5,524 rubles).   While urban Russians have the means to purchase consumer goods outside of the cities, rural Russians barely have enough money to purchase such goods.  In spite of the recent economic boom, there is still a decline in population and living standards in areas outside of large cities, which is evident by the shrinking or abandoned villages in rural Russia.  Moreover, this population decline in rural Russia combined with the continuing “brain drain” of Russian professionals, have led to the UN’s Population Division to project a “worse case scenario” where Russia’s population would decline to approximately 100 million by 2050.

In addition to inequality among its regions, Russia has also experienced an increase in social inequality as well.  The oligarchs are the group that has benefited most from the economic transition, since they were able to acquire their wealth through their contacts within the government, which allowed them to purchase state assets at extremely low prices.  In 2000, the income of the richest 10 percent of Russians was about 14.3 times higher than the poorest 10 percent.   The wide gap between the rich and the poor is due to the fact that the top 2 percent of Russians get about 33.5 percent of the total national income while the bottom 10 percent only get 2.9 percent of it.  The unequal concentration of wealth amassed by the oligarchs has allowed them to exert greater influence in Russian politics at the expense of the poor and middle class.  Furthermore, older generations who were unable to adjust to the market economy have also suffered.  In a Russian “human development” report from the United Nations Development Program, social scientists found that the generations born in the 1920s and the 1950s felt marginalized by the reforms while the younger generations born in the 1970s believed they were contributing to Russia’s progress because they have the knowledge needed to adapt to the economic transition.   Additionally, the report found that the younger generations generally have higher living standards than the older generations and that they were often involved in small businesses.

In theory, a liberal market economy would be beneficial in democratizing Russia, since a liberalized Russia would promote freedom by reducing the scope of state control and allowing individuals to participate in the newly created opportunities.   In practice, the poorly implemented economic reforms left much of the country’s wealth in the hands of oligarchs, allowed for the continuation of soviet-era institutions, and the continued existence of powerful state firms.  The unequal distribution of wealth has allowed the oligarchs to influence politics through their political parties and their ownership of various television networks.  Their ability to influence Russian politics has come at the expense of ordinary Russians, who are often ignored by politicians because they lack the influence of the oligarchs.  On the other hand, the continued existence of soviet-era institutions, such as the judiciary, has made it difficult to properly enforce laws, regulations, and contracts and implement reforms, which discourages foreign investment, and economic growth.  Moreover, the presence of powerful state firms, such as Gazprom, has allowed the state to have great influence over key economic sectors and at the same time use these resources for political purposes, such as acquiring independent television networks that are critical of the state.   Consequently, instead of promoting democratic values, the poor implementation of market reforms has actually undermined the prospects of democracy because it has given oligarchs an uneven advantage in influencing the government; weak state institutions have encouraged a culture of lawlessness; and the powerful state firms have allowed the state to exert influence in both economics and politics.

Conclusion

Based on these current developments, in the next five to ten years Putin or his successors will continue to move Russia out of its “Weimar Russia” phase.  In the political sphere, the state will continue reforms that will strengthen institutions but acquire more nondemocratic traits, making the government closer to becoming an authoritarian regime.  Then again, opposition parties will continue to exist, but future legal and institutional arrangements will make it increasingly difficult for them to have any significant impact.  Although the Kremlin will use greater state resources to campaign for their candidates, it is unlikely that they will fix the elections in light of what has happened in both Ukraine and Georgia.  Within the next five to ten years, the economy will continue to grow within the next 5 to 10 years as it enters the WTO.  Nonetheless, inequality between the rich and the poor will increase due to the uneven distribution of wealth and there will be greater migrations towards urban areas as rural Russia continues to decline.  On the other hand, there may a chance that Russia will democratize in the future if there is an economic decline due to the decline of oil prices and if the authorities are unable to control any problems in Chechnya and terrorism.  The remote possibility of these problems happening would result in a sharp decline in government support, which could possibly led to reforms or a regime change in favor of a pro-Western government.

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