The Economic Sustainability of Russia

Abstract

The election of Vladimir Putin as President of Russia in 2000 significantly brought on quick, and very much needed, economic changes. The Yeltsin Era left Russia with a fragile GDP and high inflation that provoked insecurity at home, and a collapsed ruble that alarmed foreign traders. In his veiled reach for absolute power, Putin understood that providing economic stability would secure his position as head of state. The Putin regime implemented policy changes to balance the budget, fix the tax system, and strengthen the ruble. Though Russia is recovering steadily from its’ previous conditions, the economic system that Putin created in the 2000s promises growth only in the short-run, and there are imperative issues that stand in the way of long-run growth. If Russia continues making the acquisition and sell of resources the main priority, as well as inciting human-rights controversies at home and overseas, the country's current economic system is doomed to fail. A focus on promoting investment through the image of a “modern Russia”, and financing health, education, and infrastructure will allow Russia to reach the levels of economic security of its competitors in the West.

Introduction:

Due to generations of incompetent economic policies, Russian society has become accustomed to a low standard of living. President Putin personally experienced the starvation and scarcity of consumer goods of the Soviet regime as he was growing up. The wealth that the country has accrued through its’ abundant resources has allowed for the introduction of diverse consumer goods, though this raised quality of life is dangerously dependent on the state rather than the productivity of the labor force. While it is estimated that the energy sector contributes from twenty to thirty percent to the GDP, less than two percent of all Russian jobs are in the energy sector. This creates an unbalanced system that is not rooted in the strength of the workforce, and raises questions about the sustainability of Russia without the abundance of resources. The largest economic sectors in a country should ideally provide numerous opportunities of employment to ensure that there is smooth flow of capital throughout the economy.

This uneven structure contributes to an already concerning “middle class dilemma”, in which society is witnessing a diminishing middle class due to the exponentially growing wealth of government connected elites and the forgotten importance of small businesses. The Putin administration’s first public policy changes were goals of dismantling the influence of oligarchs at the regional level and fighting the corruption that was causing the extensive outflow of money by elites who sought to avoid taxation. Putin's creation of a vertical system of power was widely regarded to many Russian and foreign politicians as a successful effort to end the corrupt bureaucratic control that Yeltsin allowed to flourish. The reality is that illicit activities have continued, what has changed is that these activities are now under the direction and order of president Putin. Government connected officials are granted with an outstanding number of privileges, while the rest of Russia is shrinking into a homogeneous socioeconomic group. The implementation of a 13% flat tax in 2001 was originally seen as a positive step towards a stable economic system, and studies have found that Russian society is pleased with this policy. “Does Labor Supply Respond to a Flat Tax?”, an analysis by researchers Denvil Duncan and Klara Sabirianova Peter, found evidence that “individuals responded to the flat tax rate along the extensive margins of labor supply. The probability of finding a job increased for both males and females, and more females transitioned from one job to multiple jobs after the reform” (32). However, the implementation of a progressive tax that limits the obscene accumulation of wealth by elites would be greatly beneficial in the process of closing the large gap in economic status among citizens. At an address to the congress of the Russian Union of Industrialists and Entrepreneurs, president Putin switched from the focus of promoting economic growth in the country as a whole, to a realization that the promotion of business growth at a smaller scale was imperative to the future of Russia. According to Putin, the government is working on tax policy changes that focus on “encouraging economic growth and development in the social sector, the regions, and the municipalities” (“It’s Time to Reform Russian Tax System”). Though his speech lacked deeper explanation, it seems that Putin is beginning to acknowledge that he must strengthen the middle class for the benefit of both the social and economic spheres. Only time can tell if Putin has truly realized the long-run efficiency of creating a strong middle class, or if he is merely maintaining the facade of a democratic and humanistic regime.

Resource Dependency:

The leadership of Vladimir Putin has witnessed some of the most significant changes in the country’s dependence on natural resources. When Russia saw a spike in oil and gas prices in the 2000s, it did not have a structured economic system to correctly obtain the most benefit from its natural resources without becoming heavily dependent on them. The Russian government is profoundly intertwined with the dealings of the energy sector, as the Putin regime saw a shift towards de-privatization. The deep connection between the government and energy corporations is made most obvious with Russia’s use of its abundant resources as a weapon in cases of political conflicts with neighboring states. “Gazprom: Challenged Giant in Need of Reform”, a study by international economist, Anders Aslund, noted that Gazprom, a state owned corporation and the largest gas producer in the world, “eliminated deliveries for two weeks to 16 European countries because of a dispute with Ukraine” in 2009. “The European customers were neither guilty nor forewarned, and several of them, especially the Balkans, suffered badly” (159). Putin’s use of gas and oil as a political weapon is a shortsighted scheme that greatly decreases the willingness of foreign investment in Russia. Given it’s history of unreliability, it will be very difficult for Russia to create loyal partnerships in its own attempts to join globalization movements.

To further examine the incompetent structures of Russia's economic system, Aslund points out that Gazprom does not pay a fair share of taxes. “In 2007, Gazprom paid $7.3 taxes per barrel of oil produced...while private companies paid $31 to $34” (153). This exposes the economy of the energy sector in two major ways. First, much of the favoritism given to Gazprom is due to the fact that the Russian government often appoints officials to high positions in the corporation in exchange for their loyalty. Secondly, the fact that Gazprom gets serious tax advantages reveals that their real profits are not as high as they are made out to be. One could justifiably wonder if the Russian economic system would be able to function successfully if it followed its own laws and policies. In a desperation to increase the standard of living for Russian citizens, most of the consumer industry is upheld by the economic wealth that the state has obtained from the energy sector. The state has turned a blind eye to the prosperity of labor productivity, and instead has made many fiscal decisions solely based in on the prices of oil. The government has a tendency to decide on public expenditure cuts when the prices of oil rise, revealing the lack of diverse pools of revenue in the economy. The Russian economy under the Putin regime has seen many ill-considered economic decisions for the sake of maintaining short term economic growth. Putin understands that he is powerful as long as continues to promise economic security to Russian citizens with constant reassurance of growth achievements. But only once Russia begins to opt for stability rather than momentary results will the economy be able to promise slow, yet, true advancement.

Natural resources will unquestionably be the most important source of wealth in the Russian economy, especially in future years as Russia continues to follow its aspirations of Arctic exploration. However, it can also be observed that Putin is beginning to acknowledge the economic advantages of globalization. Putin has clearly expressed his discomfort with relations with the United Nations, and argues that Russia will become involved in global affairs at its own place without western guidance. The creation of the Eurasian Economic Union has been an essential step towards the promotion of foreign economic investment. To Russia, the EEU is a form of competing with the weakening control of the EU. This desire to compete with strong economic powers influences a great flow of capital into providing incentives for investment in Russia.

Foriegn investment is currently being incentivized through the promotion of a humanistic and moral Russia. Putin strategically made it a point to speak out on the importance of religion in one’s life, and has even created a “Pussy Riot Law” that imposes criminal penalties for publicly insulting the religious values of individuals. The importance of adherence to traditional values has also been been asserted, as the Putin administration argues for the protection of the youth from being exposed to homosexual imagery and influence. Though controversial, Putin's expression of his moral ideals are appealing to the eastern countries who he is most economically involved with. Anyone with a memory and knowledge of Russian history would feel skepticism with the idea of investing in Russian businesses, however, Putin's constant mentioning of creating a transparent economic system has convincing and hopeful effects.

Infrastructure

Large-scale infrastructure investment projects will prove to be efficient in the attraction of foreign investment. The government has neglected the improvement of the conditions of the country’s transport railways, roads, and airports. Both industries and citizens are hurt by inadequate infrastructure that make basic tasks more tedious than they should be. A study on “Improving Transport Infrastructure in Russia” by the Organization for Economic Co-operation and Development found that as Russia increases its economic relations, the demand for adequate infrastructure by a modernizing society is high. However, the current conditions of the majority of roads “are not adapted to heavy vehicles: less than 30% of federal and regional roads are adapted to standard modern axle loads of 10 tonnes or more” (8). This greatly diminishes the capabilities of Russian industries that are trying to create greater economic growth. Simply traveling to and within Russia is a tedious task, as “airport infrastructure, with the exception of the biggest airports, is underfinanced. The smaller airports were transferred to the regions which often cannot finance them properly and many were closed or face bankruptcy” (9). Russia cannot attract investment opportunities if it cannot provide basic commodities to its society. The modernization of current infrastructure throughout Russia is essential to the creation of the image of a country that is a valid competitor with modern world powers. Additionally, large-scale infrastructure investment will aid in the creation of jobs.

Conclusion:

In order for Russia to thrive economically, it must prioritize visions of long-term sustainability and growth. The Russian economy is currently functioning under a false sense of security, as the dependence on natural resources for economic stability has created an unbalanced system. The promotion of small businesses and attention to the middle class is critical for the formation of a non-oil deficit that will diversify the Russian pool of revenue. New interests in globalization will prove to be beneficial in the encouragement of investment. The Putin administration must realize that honesty and transparency are strong influencers of foreign investment.

Works Cited

Aslund, Anders​.​ ​“Gazprom: Challenged Giant in Need of Reform” Peterson Institute for International Economics​, January 2010. Duncan, Denvil & Peter, Klara Sabirianova, 2009. "​Does Labor Supply Respond to a Flat Tax? Evidence from the Russian Tax Reform​,"​ ​IZA Discussion Papers​ 4257, Institute for the Study of Labor (IZA). Kolik, A., A. Radziwill and N. Turdyeva (2015), "Improving Transport Infrastructure in Russia", OECD Economics Department Working Papers,​ No. 1193, OECD Publishing, Paris, Putin, Vladimir. “Putin: It's Time to Reform Russian Tax System” Online Video Clip. ​Russian Insight​. YouTube, 18 Mar. 2017. Web. 3 Dec. 2018.