Russia: Recovery and Stagnation (1999 to 2022)
The economy that resulted from this chaotic period of crisis was a highly corrupt one, substantially controlled by a small group of oligarchs and caught in the Staples Trap (Haley 2011; Carter 2018); significantly more dependent upon the exports of raw materials and minerals than the USSR. Russia was significantly smaller in population than the Soviet Union, but retained the vast majority of the previous state’s oil and gas production within its borders. During the period that started with the first Putin presidency, Russia has been unable to generate a significant manufacturing export sector. In 2017 45% of exports were oil and oil products, 6% natural gas, 5% coal and 6% petrochemicals; 63% fossil fuels. Another 26% of exports were metals, precious metals, wood products and food. Only 6% of exports were made up of instruments, machines and transportation products while nearly half of imports consisted of goods in those categories (OEC 2019). As Sherstnev (2014, p. 82) states:
The Russian economy has become much less diversified, and its structure is dominated by the primary sector industries … the predominant source of commodity supply and the aforementioned growth of personal consumption is imports. All the talk, especially popular during the perestroika years, about restructuring and converting military production by using its technological capabilities for civil production basically remained talk. A significant part of the industry was simply lost during the reforms that were actually implemented.
Oil and gas activities also provided 25% of state revenues in 2017 on a direct basis (World Bank Group, 2018), and significantly more when indirect effects are taken into account. Movchan (2017) notes the extreme sensitivity of the Russian state budget to oil prices:
If oil prices start rising again, every $10 price increase will add $20–$40 billion to the budget. In other words, oil prices of $65–$70 a barrel will virtually eliminate the budget deficit for the time being. Likewise, an oil price of $30–$35 a barrel would seriously exacerbate the deficit problem and could trigger a serious budget crisis as early as 2019–2020.
The first decade of the twenty-first century repeated the Soviet experience of the 1970s, with a continuous increase in oil prices ending in a high plateau that lasted from 2006 to 2014 (excluding the temporary peak and fall around the Global Financial Crisis in 2009). As with the 1970s Soviet case, additional foreign exchange earnings also came from significant increases in natural gas exports. During this period, the Russian economy grew rapidly. The Russian economy hit bottom with the financial collapse of 1998, with the economy contracting by 5.3%. In the next decade, the economy grew at an average annual rate of 7%, nearly doubling its size. After the contraction of 7.8% the year of the Global Financial Crisis of 2009, the Russian economy grew an average of over 4% for three years (World Bank 2019). With the steep drop in oil prices in 2014, together with the added impact of Ukraine-related sanctions, the Russian economy slowed, then contracted (2.3% in 2016 [Ibid.]) and then stabilized at the low growth rates reminiscent of the Soviet period of stagnation.
The GDP per capita of the USSR in 1988 was approximately one third of the US level (Ricon 2016) of US$21,417 (Worldbank 2019a) – about US$7,000. This was for all of the USSR and the territory that now constitutes Russia would be expected to have a significantly higher GDP per capita. Russian GDP per capita in 2018 was US$11,288 (Worldbank 2019b). Accepting the problem of measuring Russian GDP per capita in US$ (instead of PPP), and the difficulty of measuring GDP in centrally planned economies, this comparison still shows how little real progress has been made in three decades. If the 1980s were the “lost decade” for Latin America, Russia may be seen as having three lost decades. In that period the growth of the US, European, Chinese and other South East Asian economies have left Russia far behind. This very significant per capita relative decline, together with a Russian population that is only half that of the previous USSR, shows how much less powerful Russia is within the international system than was the USSR. The lack of a “Soviet Bloc” only adds to the relative decline with respect to the USSR. If the Cold War US administrations can be seen as having greatly exaggerated the threat that the Soviet Bloc constituted, the current hysterical US claims of the Russian threat make those previous administrations’ claims seem relatively attached to reality. The recent stabilization of the Russian economy was aided by a significant fall in the ruble exchange rate. Such a flexible exchange rate is only part of the required policies to overcome the volatility of fossil fuel rents:
oil and natural resources are important assets that can contribute to the prosperity of the country and its citizens if managed well. That requires sticking to a policy of letting the exchange rate adjust to changes in oil prices to manage short run macro issues and long-term structural reforms that would allow Russia to become a modern market economy where intangible wealth is an order of magnitude larger than its subsoil wealth. (Becker 2016)
Fossil fuel interests that maintain significant control over state policies, from both within and without, constitute a significant barrier to the required long-term structural reforms needed to accelerate growth outside the primary sector. A case in point is the removal of individual company emission quotas and a carbon trading system from proposed Russian climate change legislation in 2019, under pressure from the Russian Union of Industrialists and Entrepreneurs (RSPP) and the fossil fuel industry-friendly ministries of Energy and Industry & Trade, in favor of voluntary actions (Butrin & Shapovalov 2019).
the model on which the Russian economy has been based for the past 20 years is dying. Everybody needs to find a way to move money into low-carbon areas of the economy. Under the leadership of Rosneft and Gazprom, this cannot be done. (Yulkin quoted in The Moscow Times 2019)
The result is that Russia’s economic growth has remained tightly correlated with fossil fuel rents (Becker 2016). The dependency upon fossil fuel revenues places Russia in an extremely disadvantaged position with respect to an energy transition to alternative energy sources, especially when it does not possess a competitive manufacturing and services sector that could replace lost oil revenues and take advantage of green technology opportunities. Russia has some advantage in the arms manufacturing and nuclear power sectors, but even these advantages are at risk in the medium term from large customers such as China and India developing their own capabilities. As Movchan (2017) states:
Essentially, Russia needs to develop new export industries, but that ambition requires a financially efficient production capacity on its own territory and a reasonably high quality of product. Unfortunately, Russia is incapable of delivering on either of these goals.
The Putin state has reasserted its control to a significant degree, but power is still negotiated between the state and the oligarchs. Those oligarchs that accepted the rebalancing of power between themselves and the state have remained, while those that have not, have been imprisoned or have fled. After a period of privatization of fossil fuel assets in the decade after the collapse of the Soviet Union, the Russian state has worked to reassert control over these assets, with state backing becoming “a vital factor determining the success of [fossil fuel] players in Russia’s state managed capitalism” (Kretzschmar, Simpson & Hack 2013, p. 778). The result has been state management but not necessarily nationalization, “even state behemoths such as Rosneft and Gazprom are organized like private companies, geared primarily to pay dividends to shareholders – of which the state is simply the largest” (Wood 2018, p. 24). The need to keep fossil fuel revenues flowing to the state and a “predatory, authoritarian elite” (Ibid., p. 171), together with an institutional inability to increase domestic energy efficiency and low-carbon sources, is evidenced in Russia’s extremely weak Paris commitment of 25-30% below 1990 levels (Climate Action Tracker, 2018). Due to the decimation of heavy industry in the decade following the Soviet collapse this target allows for the country’s GHG emissions to grow “6-24% above 2016 levels by 2020 and 15-22% by 2030” (Ibid.). To all intents and purposes Russian fossil fuel centric GDP growth is not constrained by its Paris commitment.
The reorientation of the relationship with the US and the West became apparent with the arrest of the oligarch Khodorkovsky in 2003 and the Georgia crisis of 2008, and then gained speed with the NATO regime change intervention in Libya in 2011 and the start of the Ukrainian crisis in 2013 (see chapter 2.1. for more details); this reorientation has fundamentally changed the geopolitical environment for Russia and its ability to exploit its energy resources. Sanctions that included restrictions on the provision of technologies for fossil fuel exploration, together with credits and financial transactions for state banks and oil companies, have had serious impacts. These sanctions have also restricted the possibilities for the Foreign Direct Investment (FDI) flows into Russia that could facilitate a general technology upgrading of Russian economic capabilities (Becker 2009), restricting a development path heavily utilized by China. The US has made it clear that it does not accept a Russia with an independent foreign policy, a local sphere of influence, or a nationalistic elite not fully open to US elite ownership of strategic domestic assets. Escalating Cold War rhetoric from both US state actors and the mainstream media continue to support this position (Cohen 2019).
The Ukrainian crisis directly impacted the ability of Russia to control its natural gas exports to Europe, as major gas pipelines transited through that country. Ukraine failed to pay for delivered supplies, and later defaulted upon the accumulated debt (supported by the IMF against its own rules). Russia had shut off natural gas supplies to the Ukraine to pressure it to pay its debts, but Ukraine simply diverted supplies meant for other European customers. As an alternative Russia has attempted to construct alternative pipeline routes. The South Stream route through Bulgaria was stopped due to pressure from the EU (which wanted to diversify its gas supplies) and the US (Stratfor 2015). The Blue Stream pipeline to Turkey (16 bcm/yr) and the Nord Stream pipeline to Germany (55 bcm/yr) were successfully constructed prior to the Ukrainian crisis. The TurkStream pipeline to Turkey (31.5 bcm/yr) was constructed after the failure of South Stream, and there are plans to extend Turkstream to supply gas to Greece, Italy and the Balkans. After much resistance from other EU members and the US, in late 2019 Denmark approved the final section of the Nordstream II pipeline to Germany (55 bcm/yr), although US sanctions affecting the pipe laying corporations will further delay completion. The fracking revolution in the US has turned that country into an LNG exporter, placing it in direct economic, as well as geopolitical, competition with Russia for the European market.
Given falling German natural gas production, the planned 2022 termination of Dutch production, and a move from coal to gas in electricity generation, Europe may face a shortfall of between 100 and 300 Bcm/yr of natural gas, increasing its need for plentiful and cheap external supplies (Dohmen, Jung & Nelles 2019); “Beyond the political rhetoric, there is an energy pragmatism that recognizes that Europe needs to import a lot more gas and a lot of that is going to come from Russia” (Weafer quoted in Simes 2019). Russia has also made fossil fuel and pipeline investments in Iraq, which together with its alignment with the Syrian state, provide an impediment to European attempts at supply diversification (Koduvayer & Everett 2019).
As noted in Chapter 2, Russia has typified the US and its allies as attempting to restrict the development of Russia and its attainment of a greater geopolitical role. As Western sanctions have escalated, and the problematic relationship with the EU became evident, Russia has established a deepening relationship with China. The latter provides the still fast growing and largest national economy (in PPP terms) as an alternative and increasing source of demand for fossil fuels and other exports, as well as possible financing for new projects. It is also increasingly becoming an alternative source of high technology products that the West may become unwilling to sell to Russia. In addition, on the basis of “my enemy’s enemy is my friend” the two are natural military, geo-economic and diplomatic allies against Western pressure. Russia is also looking at other Asian nations, such as the non-aligned India, as an outlet for its fossil fuel exports.
Unlike the post-WW2 period, Russia’s heavily diminished economic and geopolitical position has placed it in the position of junior partner to China. From being a global superpower in the mid-1980s, the position of Russia has been reduced to one close to that of the WW1 Brest-Litovsk treaty. A German-dominated European Union and a US-dominated NATO have integrated the Eastern European and Baltic states, with the ex-Soviet republics of Georgia and the Ukraine seen as “aspiring” members. The presence of Western-centric governments and NATO troops on its border in the Ukraine and the Baltic states underlines Russia’s diminished position. Putin may have played a weak hand relatively well, but that does not change the generally weak and defensive position that he brings to the table.
Russia has a mixed economy with a large private sector, and a relatively small state that levies a 13% flat tax on income (a 15% tax on incomes above 5 million rubles has recently been proposed), has a budget of approximately 20% of GDP, and provides free healthcare and education, while targeting budget surpluses when the economy is not in recession. The central bank also runs a conservative monetary policy, partly to protect the Russian economy against the volatility of fossil fuel prices. In many ways, Russia could be said to be at least as neoliberal as the US, while both experience the dominant political and economic power of their respective oligarchies. Without the glaring ideological differences that communism created between the West and Russia, the underlying relationship is laid bare – a competition between powers with Russia viewed as part of the periphery that should be subjugated to the West. A compliant Russia that opens up its economy to Western capital and maintains a deferential foreign policy, as under Yeltsin, is acceptable. “If they'd say 'uncle'”[1] (Ronald Reagan quoted by Cannon 1985) to the US/West and accept the “benign” stewardship of the Global Policeman then the relationship would be deemed acceptable. A nationalist elite with an independent foreign policy, rather than a comprador elite, is not.
The extreme concentration of wealth and income that resulted from the period of primitive accumulation and looting has led to a very low median income, with half of Russian workers earning less than 35,000 rubles (US$550) per month (The Moscow Times 2019a), with an average of about 45,000 rubles (US$705) per month (The Moscow Times 2019b). Monthly earnings have been falling slowly in real terms since the fall in oil prices in 2012 (Ibid.). Such low monthly earnings are mediated somewhat by the very high home ownership rate and lack of mortgage debt (the state gifted homes to those living in them), together with the free healthcare and education (including higher education), and an exchange rate that does not properly reflect lower Russian prices (i.e. it significantly underestimates Russian PPP). Russian GDP per capita PPP was US$30,820 in 2017, about the same level as Greece (IMF 2020) and about 50% higher than China. This includes non-wage incomes that are highly concentrated in the top one percent of households though; i.e. it is not representative of the incomes of the vast majority of Russians, as is also the case for the US and China.
[1] Used by Ronald Reagan in reference to the Nicaraguan government during the illegal Contra war against that country, with “uncle” used in the slang form, denoting acceptance of defeat.