The Russian Economy

By Yuval Weber

Since Tsarist times, Russia’s leaders, rather than pursue economic growth for its own sake, have sought control over economic activity as a means to manage their own support base, respond to perceived security threats and to facilitate their wider geopolitical ambitions. Balancing the needs of an authoritarian state with the tentative and inconsistent use of the market has defined Russia’s modern economic history from the nineteenth-century Stolypin reforms to Lenin’s New Economic Policy through to the high Soviet years, Gorbachev’s perestroika, and Yeltsin and Gaidar’s shock therapy. And it is no more evident today than in Putin’s management of Russia’s natural resource-based economy.

Yuval Weber provides a concise economic history of modern Russia, which explains how its economy works both at an economic level but also strategically serving its elites’ personal and political agendas. At a time when the global importance of Russia’s oil and gas reserves is in full view, the book examines the Russian Petrostate and considers the long-term challenges for an economy reliant on natural resources for its resilience. The country’s regional imbalances, the demands of its huge military-industrial complex and the legacy of centralization are considered alongside the rising consumerism of its citizens, and other human factors, such as ethnicity, health and demography.

The book offers readers seeking to understand Russia’s economic resilience in an increasingly fractured global economy, an illuminating historical perspective on Russia’s political economy and the power structures underpinning Putin’s governance.

• Language: English
• Publisher: Agenda Publishing
• Release date: May 4, 2023
• ISBN: 9781788215329

Yuval Weber

Yuval Weber is Research Assistant Professor at Texas A&M’s Bush School of Government and Public Service in Washington, DC. He also serves as the Bren Chair of Russian Military and Political Strategy at the Brute Krulak Center for Innovation and Creativity at Marine Corps University.

Book preview

WORLD ECONOMIES

A series of concise modern economic histories of the world’s most important national economies. Each book explains how a country’s economy works, why it has the shape it has, and what distinct challenges it faces. Alongside discussion of familiar indicators of economic growth, the coverage extends to well-being, inequality and corruption, to provide a fresh and more rounded understanding of the wealth of nations.

Published

Stephen L. Morgan

THE CHINESE ECONOMY

Matthew Gray

THE ECONOMY OF THE GULF STATES

Frances M. B. Lynch

THE FRENCH ECONOMY

Matthew McCartney

THE INDIAN ECONOMY

Vera Zamagni

THE ITALIAN ECONOMY

Hiroaki Richard Watanabe

THE JAPANESE ECONOMY

Enrique Cárdenas

THE MEXICAN ECONOMY

Yuval Weber

THE RUSSIAN ECONOMY

Sunil Kim and Jonson Porteux

THE SOUTH KOREAN ECONOMY

© Yuval Weber 2023

This book is copyright under the Berne Convention.

No reproduction without permission.

All rights reserved.

First edition published in 2023 by Agenda Publishing

Agenda Publishing Limited

PO Box 185

Newcastle upon Tyne

NE20 2DH

www.agendapub.com

ISBN 978-1-78821-027-0 (hardcover)

ISBN 978-1-78821-028-7 (paperback)

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library

Typeset by Patty Rennie

Printed and bound in the UK by

CPI Group (UK) Ltd, Croydon, CR0 4YY

Contents

Acknowledgements

List of tables and figures

Map

INTRODUCTION

1. POWER VERSUS MARKETS

2. RUSSIAN ECONOMIC REFORM IN HISTORICAL PERSPECTIVE

3. HOW PUTIN’S ECONOMY IS GOVERNED: COMMANDING HEIGHTS AND CONTROLLING ELITES

4. MEASURING PUTIN’S ECONOMY: THE VICTORY OF RESILIENCE OVER GROWTH

5. SOCIAL FACTORS IN PUTIN’S RUSSIA

6. THE RUSSIA YOU SEE IS THE RUSSIA YOU GET: FORMALIZING INFORMALITY AND INFORMALIZING POWER VIA SISTEMA

CONCLUSION: RESILIENCE, WAR AND RUSSIA’S FUTURE

Chronology

Notes

References

Index

Acknowledgements

This book is the culmination of many people putting their time, energy, paper revisions, long discussions, and especially love into making me who I am.

I must start with my family: Daphna and Shlomo Weber, my parents, who gave me everything; my spouse, Laura, who is (excessively) wonderful to me, and her parents, Alan and Barbara Gold; my brother Doron and his family, Sharon and Nati; and, to my grandparents, whose stories shaped me.

My community of Russia friends/nerds is immense and each one of them has been so important in helping me get some sense of the country, its culture, and its people. I must start again, however, with my father, who was born in Moscow but left under duress in the 1970s. He returned in a professional capacity in the 2000s and attempted to dissuade me from studying the country by saying that it was a lifelong matter. He was right. Russia does not leave anyone indifferent and through my study of Russia I had the unique experience of getting to know my father for a second time, albeit this time in his native language. I never knew how funny he was until I heard him in Russian!

Through him I made acquaintance with Sergei Guriev, Konstantin Sonin, Jim Leitzel, Michael Alexeev, and the other professors, students, staff and friends of the New Economic School in Moscow, a marvellous institution where I spent my first year in Russia. During this time I met so many wonderful people, including Chris Miller, Yakov Feygin, Octavie Bellavance, Alessandro Iandolo and Kristy Ironside. When I stayed on in Russia at the Higher School of Economics, that was my postgrad education in Russia, and for that I thank Andrej Krickovic, Sergey Karaganov, Anastasia Likhacheva, Dmitry Suslov, Timofey Bordachev, Dmitry Novikov, Andrey Sushentsov, Ben Noble, Ryan Berg, David Szakonyi, Noah Buckley, Andrew Matheny, Andrew Roth, Matthew Luxmoore, Amy Eagleburger, Fabienne Bossuyt and Theocharis Grigoriadis.

After that period of my life I had so much more assistance along the way. From the Davis Center for Russian and Eurasian Studies at Harvard, I must thank Timothy Colton for giving me my big break, and Alexandra Vacroux, Rawi Abdelal, and their awe-inspiring staff. From there I made my way to Washington, DC thanks to Matt Rojansky and Will Pomeranz at the Kennan Institute and Diana Davis Spencer and Abby Moffat. From Moscow to Washington in two years made my head spin, but in the other capital I have met so many people who have made understanding Russia the central mission of their lives. If you think Washington’s policies towards Russia are bad, they would be much worse without Anthony Lauren, Gavin Wilde, Nick Birman-Trickett, Mike Smeltzer, Marlene Laruelle, Jim Goldgeier, Angela Stent, Harley Balzer, Aaron Schwartzbaum, Chris Jarmas, Sam Skove, Ethan Krauss and Ed Lemon. I would also like to thank Val Jackson, Ian Brown and Amin Tarzi at Marine Corps University’s Brute Krulak Center for Innovation and Future Warfare for being such great friends and colleagues. Last, but certainly not least, I must deeply and humbly bow before Andrew Lockett and Steven Gerrard at Agenda, who both displayed such superhuman patience with me that I shall be sending them a very nice Christmas present.

The acknowledgements section of a book is usually the very last thing written, but it captures everyone who made the person before he or she sat down to put thoughts to paper. Apologies to those I have omitted. To all of you, To the success of our hopeless cause! За успех нашего безнадежного дела!

YUVAL WEBER

Tables and figures

TABLES

4.1 Agriculture, industry and services: percentages of total employment and value added per worker in 2018

4.2 Notable sanctioned individuals and companies

FIGURES

1.1 Long-run GDP per capita, 1800–1915

1.2 Long-run GDP per capita, 1915–2015

4.1 Gross domestic product, 1999–2019, in billions of current US dollars

4.2 Gross domestic product, PPP, in billions of current international dollars, 1999–2019

4.3 GDP per capita, 1999–2019, in thousands of current US dollars

4.4 GDP per capita, PPP, 1999–2019, in thousands of current international dollars

4.5 Soviet oil production vs Soviet and Warsaw Pact consumption, 1965–91

4.6 Soviet oil export revenues

4.7 Oil production and fuel export revenues as a percentage of the economy, 1992–2018

4.8 Russian sovereign wealth funds, 2004–19

4.9 Russian exports to China as share of total exports and Chinese exports to Russia as per cent total of Chinese exports

4.10 Russia’s share of China’s imports and China’s share of Russia’s imports

4.11 Three-month interbank rates, 2011–20, Russia, Germany, United States

4.12 Net spending on research and development as a share of GDP, 1999–2018

4.13 Sector employment, resource extraction, agriculture and R&D, 2005–20

4.14 Top 10 per cent income share in Russia, United States and France, 1905–2015

4.15 Income shares in Russia, 1905–2015

4.16 Gini coefficient scores, Russia, 1905–2015

4.17 Volume of regional debts by type of debt instrument, 2011–19

4.18 Regional debt-to-revenue ratios, Russian regions in 2017

4.19 Household and non-financial sector debt vs real income levels, 2017–25

5.1 Alcohol consumption in Soviet Russia and Russian Federation, 1970–94

5.2 Basic demographic and health indicators, 1960–2000

5.3 Basic demographic and health indicators, 2000–20

5.4 Federal health statistical indicators, 2001–20

5.5 Hospital beds for women and children, 1970–2020

5.6 Natural change in population, 2000–20

5.7 Federal budget on healthcare and social spending in rubles (trillions), 2006–20

5.8 Consolidated budget on healthcare and social spending in rubles (trillions), 2006–20

5.9 Resettlement by federal programmes, 2010–20

5.10 Indicative polling for attitudes about Central Asian immigration, 2005–20

5.11 Migration patterns

5.12 Federal and regional budgets on education spending, 2006–20

6.1 Polling data on sources of news, 2013–24

6.2 Trust in news sources, 2013–24

Map of Russia and neighbouring countries

Introduction

A classic story of Russian folklore finds Nasreddin Hodja deep in an old and faraway Central Asian khanate.¹ The ruler of the land, the khan, is cruel yet vain, seeking adoration from all, even as he inflicts cruelties upon the people. Though the khan appears to be very strong, reports of rebellions in far-flung provinces and collusion with foreign invaders have started to reach the capital, leading to rumors of intrigue around the palace.

One day, Nasreddin seeks an audience with the khan, an extremely audacious request that shocks and impresses the ruler’s court. The khan, taken with the boldness of this simple man, grants the audience and is interested to know why an unknown commoner would approach the ruler. The khan’s capriciousness and cruelty are well known, so any insolence certainly would be punished severely and swiftly.

As the khan’s retinue and hangers-on focus intently on this impudent character, the ruler bellows out, Who are you and what do you seek! To this command, Nasreddin bows low and, from his stooped position, addresses the khan in the softest and most obsequious of tones, O grand and wise khan, I come to you with a simple request. Although it will cost a small fortune, I beg for the opportunity to train a goat to sing a song in your praise, a poetic ode to your genius and strength. Although it will take at least ten years to train the goat, when I have completed this task … you will have the only talking and singing goat in the universe. Your fame will last for every generation and your enemies in every land shall hear of your feats and cease their disturbances.

The court was shocked! Nasreddin will surely find himself in a dungeon soon for such an impertinent request! Yet the khan takes a moment, furrows his brow, breathes deeply and says to the surprise of all, Yes. My fame is great, but a talking and singing goat will spread my fame across the lands for every generation.

Later, Nasreddin returns home with the first salary installment to support his goat arts and entertainment programme to find his friends waiting outside, fearing for the life of their friend and anxiously awaiting to hear his plans. As they see him, they yell, Goats cannot talk, let alone sing! The khan will invent new tortures for you when you fail to train a goat to praise him!

Nasreddin then stopped, looked at his friends, and said, I will try my hardest to train this goat to sing, but in any case, in ten years, either I will be dead, the khan will be dead, or surely the goat will be dead.

Nasreddin’s humorous fable shows that talking and singing goats might not solve problems of rebellions and foreign policy, but reframed in more general terms, it shows that states sometimes attempt to solve foreign policy problems with domestic policy solutions that promise to change everything but are insincerely or lamely pursued on purpose. When and why they do so, and specifically, when and why Russian leaders have attempted to solve Russia’s foreign policy problems with economic reform programmes, is the subject of this book. I show that the big pro-market reform programmes from the late nineteenth century to the present day that promise to reshape the entire economy are superficially designed to succeed but not, actually, to be successful. This paradox, where reform is meant to be a success, but not to succeed, reveals both how power has been practiced in Russia for the last several centuries as well as the shape and structure of Russia’s contemporary political economy (see Chaudhry 1997). At the core of Russia’s reform paradox is a cynical presumption: pro-market economic reforms are domestic tactical responses to external pressures and pursued to avoid changing the way Russian political economy runs.

This claim – that Russian leaders pursue economic reform to preserve the political status quo instead of changing it – explains the tension at the heart of Russia’s political economy for the past century and a half and the persistence of the state as the leading actor in Russia, no matter which regime type is in place. On one side is the ruler’s demand for centralization, in which access to economic opportunity lies chiefly at the discretion of the tsar, general secretary, or president. On the other are the demands of the market, a force that seeks to find and redirect capital. The former is a top-down process that allows the leader to pick and choose winners and losers in the economy, while the latter seeks to allow the winners and losers to pick themselves through competition. Although both such descriptions are ideal types, this book explores how the battle between modernization from the top or greater openness from below have defined the ups and downs of Russia’s economy and the pattern of Russian economic reform to the present day.

The inconsistent use of the market as a method of organizing economic exchange defines the modern economic history of Russia and explains the difference between Russia and Western states with respect to the extent, and in which sectors, the market exists in Russia.² The narrative presented in this book shows that the introduction of market elements into the Russian economy has neither been consistent over time nor has been motivated by the usual political impulses to optimize growth for purposes of development. Rather, it has occurred in reaction to perceived external security threats. When poor or declining economic performance threatens to weaken the Russian state’s ability to defend itself and extend its own borders – meaning that the economy becomes a security risk relative to peer competitors – Russian leaders have adopted a recognizable pattern. To bridge the gap between the acute security crisis and later regime stability, they have turned to specific economic reformers to introduce a programme promising greater market elements, including greater acceptance of globalization and trade, foreign direct investment, foreign technology and expertise. Those specific elements of marketization promise (and often deliver) economic growth, but marketization threatens the ruler’s ability to control the structure of economic opportunity within the country. As a result, leaders wind down reforms and turn away from the market towards greater statism when the political costs begin to outpace the economic benefits.

These turns towards and away from the market have bedeviled foreign observers of Russia for centuries because they violate the presumed teleological outcome for Russia. That is, primarily Western observers of Russia who see its leaders adopting the sorts of market reforms that have been successful in their own countries subsequently observe Russian leaders turning aside those reforms just when they appear to be working, causing tremendous consternation in the West and recriminations over when Russia was lost or by whom. To explain these turns, Chapter 1 provides the theoretical and institutional background of how (carefully) power is practiced in Russia. Leaders recognize that some market reforms are good because they permit the economy to start catching up, but that too much reform empowers alternative political and economic actors who may challenge the power of the leader to decide political and economic outcomes. This pattern of reform when necessary but curtailing it when it threatens the leader and his power has occurred under very different political regime types, such as monarchist, communist, and sovereign democratic.

I explain the origins and durability of this pattern in the idiosyncratic origins of the Russian empire in medieval times and Russia’s ongoing rivalry with Western (liberal) powers over the past centuries. Unlike expansion that has occurred in Western empires in which a nation formed a state that colonized faraway lands, the expansion of Muscovy, the medieval core of the later Russian state, over contiguous land expanses meant that nation, state, and empire expanded jointly and simultaneously, creating the conditions for later tension between power and markets. As a challenge anywhere in the empire from internal or external foes was a challenge to the entire state, the political and economic liberalism that was introduced into international political and economic relations by the French Revolution (and Grand Armée invading Russia a little more than a decade later) and Britain’s Pax Britannica challenged Russian sovereignty and its entire governing model. The Western promotion of liberalism (democratization, globalization, and global governance) shaped Russia’s defence of anti-liberalism (autocracy, mercantilism, and state sovereignty) from the turbulent long nineteenth century through the present day, and which helps explain the wariness of Russian leaders to the market as a concept from that time until the present.

Chapter 2 demonstrates the tensions between power and market and the conflict between liberalism and anti-liberalism. It outlines five critical reform episodes in Russian political economy where leaders recognized the security liability of poor economic growth, appointed reformers to introduce market elements when the status quo alternatives stopped working but curtailed those efforts when they became alarmed by the political consequences of the market. Although current Russian president Vladimir Putin is often understood outside of Russia as a strikingly unique political figure, Chapter 2 shows that he has found himself in situations very familiar to his predecessors. The source of Putin’s political success and longevity has been his recognition of the limits of the market in Russia: if the market becomes stronger than he, the Russian president will be the object of power instead of its subject. Chapter 2 concludes by outlining how a leader like Putin might lose power a lot more quickly than anticipated by mishandling the dynamics of transition.

The following four chapters provide a complete picture of the size, shape, and mechanics of Russia’s contemporary political economy. Chapter 3 describes the reassertion of central control over Russia’s economy by Vladimir Putin, including the systematic removal of rivals to power, redistributing oil wealth to the population, and centring the state as the main vehicle of Russia’s foreign economic policy. The chapter shows how Putin has been in power for more than 20 years at this point, namely by balancing elite factions, increasing the economic dependence of society on access to state resources, and privileging Russia’s geopolitical agenda over economic growth at home.

Chapter 4 then examines the size and shape of Russia’s economy throughout Putin’s tenure, in which the increases in the country’s wealth and individual living standards were already under considerable pressures prior to the wider invasion of Ukraine in 2022. The Russia that is being left behind by the conflict will expose the faultlines that Putin and his successors will have to manage for years to come, particularly being an oil and gas exporter whose main customers in Europe are actively decoupling decades of resource dependence alongside a sanctions regime that is arresting Russia’s ability to advance as a modern economy.

Chapter 5 captures the improvements to human capital under Putin, including improvements to public health, life expectancy, population recovery through increased births and attraction of migrants, and living standards throughout society compared to the nadirs of the late Soviet and early post-Soviet eras. More recent, albeit incomplete, data suggest that the war against Ukraine will erode many of those gains.

Chapter 6 addresses the institutional elements of Russia’s economy, specifically the rules of the game – how politics works behind the scenes and the instrumental uses of corruption and connections to bind participants to the system. The strength of this system is how Putin maintains resilience against change and challengers, but it inhibits what the Russian state can do to invigorate its economy and act as a peaceful member of the international community.

The concluding chapter outlines potential scenarios for Russian political and economic development given Putin has, in early 2020, overseen the successful adoption of constitutional reforms that will allow him two additional terms to stay in office as president of Russia until 2036, while simultaneously addressing the third major economic recession of his tenure caused initially by the Covid-19 public health crisis and then deeply accelerated by the repercussions of the decision to invade Ukraine in early 2022.

This book is aimed at those who have probably heard a lot about Russia but do not know much about the country, beyond, perhaps, the last few years of Russia’s involvement in wars in Georgia, Ukraine, and Syria, and its (alleged) manipulation into the elections and domestic politics of other states. The foreign policy agenda of Putin is obviously critical to understanding Russia, but it is not the only thing. The challenge of understanding Russia is to differentiate between what can be compared of the Russian experience to those of other countries, what is unique to Russia itself, and how scholars and other observers have distinguished between the Russia that exists in reality and the Russia that serves as an image for use in one’s own domestic political fights.³ My hope for this book is to explain how it all hangs together and, in the process, to demystify the country and its leadership and show how an individual like Putin can govern Russia for decades on end.

1

Power versus markets

The historical practice of power in Russia is important to understand modern-era economic reform and to illuminate how, over time, Russian leaders have understood the limits of reform. The country’s rulers have made similar decisions over time because they have been in similar positions with similar limitations, regardless of whether they have served as tsars, general secretaries, or presidents. It is as true today as it was in the time of Peter the Great that Russia is territorially vast with few natural barriers to external threats, possesses an unevenly distributed population that makes sustained development difficult, possesses numerous valuable export commodities, and suffers from capital deficiency that makes leaders reliant on patrimonial relations with elites and puts the country’s external economic relations in a peripheral position to more advanced states.

This chapter outlines why and how the practice of power in Russia is different from that in other states and the historical processes by which the rules of the game came to exist. Many states are weakly democratic or authoritarian, or have had authoritarian periods in their history, but what makes Russia different is how the country’s leadership seems to toggle consciously between opening up and closing down.¹ The switching is usually understood in reference to the West,² and this chapter begins by explaining the two major images of power in Western historiography about Russian leaders: the Iron Tsar who rules vertically by forcing his will upon subordinates, and the Balancer who rules horizontally by being first among equals with other powerful actors and balancing different elite factions. A tremendous amount of scholarship focuses on which type any one ruler may be – the dictator who coerces his subjects or a master of palace intrigue – but I break from the conventional wisdom by showing that leadership in Russia is not one or the other style but, instead, different phases of governance. Individuals in Russia might take power by demonstrating coercive capabilities, but they can sustain power only by balancing different factions. In cruder terms, the successful Russian leader is a person who knows when to help others, when to hurt them, and when to draw back altogether. Leaders in the Russian context must be mindful of their elites, who also recognize, as is shown throughout this book, that economic reform is not a permanent choice, but a domestic tactic when the external circumstances require it. For example, in the several episodes of economic reform highlighted in Chapter 2, they consistently accept market reforms as a tactical decision for the benefit of the system altogether, but when they began to believe that reform would mean permanent limitations on their privileged access to economic opportunity, they have responded with assassinations, purges, coups and asset stripping of the country.

The Russian practice of power – alternating between acting as the iron tsar versus balancer – has been formed through a series of leadership lessons that Russian leaders have followed to gain and to sustain power over internal and external challengers. The balancing act between coercion and cooperation emerged in the medieval period and crystallized through Russia’s rivalry and antagonism with the West over the past two centuries, when the basis of the Russian state became trying to maintain traditional forms of governance in the face of the liberal governance that emerged over the course of the long nineteenth century.³ The political and economic liberalism introduced by the French Revolution and the Pax Britannica stressed democratization, globalization, and global governance and challenged the autocracy, mercantilism, and state sovereignty favoured by Russian leaders as paragons of the ancien régime. The stark ideological cleavage between Russia and its Western rivals, between decentralization and hyper-centralization of power, formed the contours of Russia’s geopolitical competition over the past two centuries. When ideological pressure from abroad has threatened to overwhelm Russia by forcing imposition of norms and functions of democracy, globalization, and global governance, Russian leaders have sought to alleviate the pressure on themselves by copying the marketization of the West – long enough to stave off competition from it. The most concerted efforts to catch up to its peer competitors through an emulation strategy occurred in the periods after the Crimean War and after the Cold War (see Figures 1.1 and 1.2), both experiences in which Western models held up better in short and long-term conflict. The conscious decisions to pursue growth as a defensive mechanism and not as a general strategy to optimize growth at the expense of control and leadership stability is the story of Russian power.

Figure 1.1 Long-run GDP per capita, 1800–1915

Source: Angus Maddison data.

Figure 1.2 Long-run GDP per capita, 1915–2015

Source: Angus Maddison data.

THE IRON TSAR VERSUS THE BALANCER:

RULING VERTICALLY AND RULING HORIZONTALLY

As a nation, we began by declaring that all men are created equal. We now practically read it all men are created equal, except negroes. When the Know-Nothings get control, it will read all men are created equal, except negroes, and foreigners, and Catholics. When it comes to this I should prefer emigrating to some country where they make no pretense of loving liberty – to Russia, for instance, where despotism can be taken pure, and without the base alloy of hypocrisy.

Abraham Lincoln, on the benefits of Russia’s open