Putin has always known that history will judge his long period of rule by the extent to which Russia modernizes its economy. A constantly stated goal, it must nevertheless not conflict with his geopolitical strategy. Initially, when Russia and America were cooperating, he endorsed a wide-ranging programme of reforms that had proved beyond Yeltsin’s capacity to enact. Putin and Kasyanov, his first prime minister, committed themselves to overdue measures of fiscal reform, judicial reform, agrarian reform, pension reform, banking reform, tariff reform, housing reform, natural-monopolies reform – and it was Kasyanov’s job to oversee their passage through the State Duma and their implementation.1
Both knew this to be a Herculean task. It was all very well to snatch back control of those natural resources grabbed by Berezovski and other private entrepreneurs. The greater task was to create an advanced economy. Most Soviet scientific institutes and nearly all factories had for decades been uncompetitive on the global stage, and Yeltsin had involuntarily officiated over Russia’s de-industrialization. As America’s Silicon Valley invented and diffused its products of information technology, the Russian economy became an avid purchaser. Russia had trouble in becoming a producer, far less an exporter, even of sophisticated manufactured goods. The advanced capitalist countries, which now included some in east and south-east Asia regarded until recently as ‘underdeveloped’, were now pulling ahead.
Kasyanov kept the floodgates unlocked for as long as he enjoyed the president’s approval and support, and together they set about implementing change sector by sector. Although the Constitution of 1993 guaranteed the right of private ownership of land, Yeltsin had proved unable to get the State Duma’s approval for a full legal enactment. Putin and Kasyanov picked up the baton and, despite rancorous debate in the Duma, secured assent to a Land Code.2 Kasyanov also secured the passage of a new Labour Code: it was not perfect, but nevertheless replaced the many obsolete laws of the communist era.3 The reform of the pensions system, another contentious matter, Kasyanov resolved by drawing together the leaders of all parties of both houses of the Federal Assembly to produce an agreed national scheme to reduce people’s dependence upon the state.4
In 2001 the government introduced a flat rate of income tax of 13 per cent, lowering corporation tax from 35 to 24 per cent, and lightening taxes on small businesses, too – all on the basis that a lighter fiscal load would make individuals and companies more amenable to cooperation with the authorities.5 A consolidated new fiscal law was introduced in December 2003 and applied retrospectively against Mikhail Khodorkovski’s companies. Kasyanov himself saw this involved some unfairness, perhaps even illegality, but the higher goal was to achieve a stable, predictable fiscal framework for business and government, which justified overruling Khodorkovski’s protests.6 Khodorkovski’s arrest delivered sharp proof that the political leadership’s patience had run out. Tax receipts swelled as Russia’s corporations, who until then had customarily minimized their fiscal contributions, accepted the new regime, the oil giants Sibneft and Lukoil leading the way. The revenues that accrued to the Finance Ministry allowed the government to manage its finances with more assurance.7
The scope of economic reform widened as Putin and Kasyanov looked at the Russian budget’s heavy reliance on oil and gas exports, a degree of dependency, advisers argued, that was no way to secure the status of a great power. In sketching out his own perspective, Putin used uncharacteristically abstract language:
Of course, the most important task is to shift our economy on to an innovative path of development. It’s not a simple matter to do this even with high energy prices, when in general it’s easier to achieve a positive result. It’s difficult enough to switch the basic monetary flows to that sector because that requires the creation of the most favourable conditions for the development of the processing branches of production.8
He and his fellow rulers have assimilated the truism that any country aspiring to modernity has to do more than offer for sale what can be physically mined from its territory. They know that Russia must develop a strong base in advanced civilian technology.
Talking up Russia is Putin’s passion. He now contends that the Russian IT industry has become globally competitive in the production of software, and is gaining strength in the hardware sector.9 Whether it has done more than supply the country’s Defence Ministry, however, is doubtful. Putin was more convincing when he sounded an alarm:
As regards the fact that we have exhausted the opportunities for extensive growth in connection with high energy prices – that is also true . . . It is not just a question of high prices for oil. Favourable or unfavourable external conditions still depend on the state of our partners’ economies. For example, oil prices might be high, but those of metals can fall because there is reduced demand for metals on the world market. And this is a very fundamental factor that triggers a whole chain reaction. The demand for coal falls and so on. A smaller volume of goods is conveyed, the transport sector begins to suffer – there is a whole chain that is involved. External economic factors therefore for the moment remain favourable, but already they also cannot be said to be completely favourable.10
He was speaking in 2013; just over a year later the prices for oil and gas plummeted, and the Russian budget went into a downward spiral.
Economic reformers have had posts in all Putin’s cabinets, but had to fight their corner against ministers speaking for the military and security lobbies. Putin held the ring. When dispute appeared intractable, he stepped in to adjudicate, and sometimes was willing to annoy the champions of state intervention.11 The marketeers, known to their enemies as neo-liberals, argued the case for reducing political interference in the economy, enhancing the rule of law and improving conditions for start-up businesses; the interventionists recalled the havoc that overmighty entrepreneurs had wreaked during the Yeltsin presidency. Marketeers, moreover, have a reputation for never having got their hands dirty with real work, whereas interventionists are regarded as overzealous practitioners of the command style of administration. Both claim to have the interests of the Russian people at heart. The lobbyists for private enterprise can point to the personal greed displayed by the advocates of state ownership and control; their opponents accuse the leading businessman Anatoli Chubais, a frequent spokesman for the private sector, of a callous attitude to the Russian poor.12
Victory has increasingly accrued to the statist lobby, but the struggle goes on. Even after being forced out of the cabinet in September 2011, former Finance Minister Kudrin continued to canvass for his alternative strategy. In April 2013 he took part from the floor in Putin’s ‘Direct Line’ TV programme, issuing a warning that the continuing rise in wage levels lessened scope for the overdue turnaround in the economy. In Kudrin’s opinion, there was a need for labour productivity to grow at a faster rate than wages and salaries. Putin rejected this argument, describing Kudrin as having been the finest Finance Minister but not the best minister on social questions.
‘You know,’ Kudrin retorted, ‘I worked for a long time as the deputy prime minister and was responsible for the economy, but today’s system of half-measures and half-reforms is not going to work and Russia won’t break free from its oil dependence.’13 He cautioned Putin against ignoring what both of them knew: that future economic success depended upon reducing the size of the state sector and liberating entrepreneurial initiative. That Putin has even allowed Kudrin to debate with him in this manner is a sign he is aware that state capitalism alone is too narrow a foundation.
Putin remained keen to decouple the Russian people from social welfare benefits in public transport, medicine, housing and utilities: he is almost American in his zeal to foster individual self-reliance. Under communism there was a system of universal material support, even though in comparison with advanced Western economies the USSR had a low standard of living. Putin followed Yeltsin in setting out to replace subsidies for utilities with monetary grants, though only cautiously, since the new grants were smaller than the subsidies. Ministers tried to accustom the electorate to reduced expectations of state welfare, aiming to make the Russian people less reliant on handouts and more self-supporting.14
Several benefits and entitlements inherited from the Soviet decades and maintained under Yeltsin had remained either free of charge or at heavily discounted rates, but on 1 January 2005 the government introduced further cuts, hitting certain groups in society hard: pensioners, veterans, the disabled, single parents and orphans. To ease the transition, the government offered financial compensation. The snag was that the new payments would be delayed for a month and fall short of the value of the welfare benefits that had been abolished. Street protests by pensioners turned into the biggest against Putin since the 2000 presidential election. Elderly bus and tram passengers were reported as having come to blows with drivers who, in line with the new rules, insisted on payment of fares. Roads were blocked by irate citizens of pensionable age; their actions spread to eighty out of Russia’s eighty-five regions. Putin was receiving a lesson in the limits of his authority. He dealt with the embarrassment by blaming the government for misjudging how to implement the measure. Ministers introduced adjustments, and the police were instructed to avoid excessive force when dispersing the crowds; business moguls were easier to confront than an angry mob of the retired poor.15
The debacle pushed Putin in September 2005 to proclaim four new ‘national programmes’ in housing, social welfare, agriculture and health care, to be overseen by Medvedev, first deputy prime minister at the time. The idea was to assure the electorate that the authorities still had its interests at heart. Acknowledging that overzealous economic liberalization held dangers for war pensioners, Putin promised to tread softly in moving away from the old benefit system. He rejected the advice from Kudrin:
We disputed about this for a long time, and I told him, ‘Alexei, you won’t be able to do this right and it won’t work out.’ He said, ‘No, we’ll succeed.’ We know what came of this. We had to pour out money to deal with the problems and shoulder great sociopolitical expense. To be frank, I had thought this would be the outcome. But really, if we had done nothing about it, public transport would surely have come to a halt in several regions because the number of people using subsidized tickets in several regions is much greater than the number of people who paid the full fare But why am I saying this? Because tough action in the economic sphere regardless of consequences in the social sphere isn’t always justified, especially in our country, where our citizens’ incomes are still very modest.16
This was the president speaking as Father of the Nation.
But Putin had not forgotten the advice Kudrin had given him. When he tried to tempt him back into the government, Kudrin refused, unless Putin changed economic strategy. ‘He’s a butterfly,’ joked Putin. ‘He doesn’t want to work. As soon as he feels things getting heavy, he spreads his wings.’
Kudrin hit back:
Today we do not have a programme for freeing our economy from its dependence on oil, a programme where we would put everything in its due place in proper measure: money, institutional and structural reforms and the role of the regions. That’s the problem, Vladimir Vladimirovich. I am not ready to oversee other, inertial processes and manual administration. I want to be involved with real work.17
No longer a minister, but still a friend of the president and member of the uppermost elite, he felt free to speak his mind.
Together they had achieved much, both during Kasyanov’s premiership and afterwards. Kudrin and Kasyanov had convinced Putin to take a long view on Russian policy. Economic Development and Trade Minister German Gref drew up a strategic plan through to 2010 and beyond. All of them agreed to prioritize paying off the enormous foreign loans contracted by the USSR and then the Russian Federation in the last two decades of the twentieth century, to free future generations from the financial burden that Gorbachëv and Yeltsin had left behind. Capital and interest would be paid off expeditiously, and eventually the rise in revenues from gas and oil exports made this possible. The important thing was to lay the groundwork for an accelerated regeneration of the economy that would end Russian dependence on foreign powers and banking groups. No longer, resolved Putin and his ministers, would they have to go cap in hand to the International Monetary Fund.18
At the same time they wanted to deepen Russia’s integration in the world economy. Talks went on during Putin’s first presidential term for entry into the World Trade Organization, which Kasyanov and Kudrin reasoned would lower the tariff barriers to Russian exporters. Progress was slowed by Russia’s desire to protect its producers from being overwhelmed by a tidal wave of imports. By 2006, satisfactory terms appeared in sight, but important details proved intractable. When in 2008 there was a global financial downturn, Russian politicians expressed relief that Russia was not more integrated in worldwide commerce after all. ‘We tried with all our heart to get into the World Trade Organization,’ Putin told European Commission president Juan Manuel Barroso a year later, ‘but fortunately you refused us admission.’19 Nevertheless the economic liberals in the Russian ruling group did not give up. In 2012 Russia entered the World Trade Organization as its 156th member.20
This was achieved despite strong opposition from the Russian agricultural sector. Agriculture itself was undergoing a transformation, as government policy changed to promote large-scale farming. State credits and tax reliefs were provided, leading to a drastic surge in cereal production as commercial and financial interests got involved. For the biggest of the cereal producers, the World Trade Organization offered the prospect of low customs dues abroad and higher profits. Russia’s dependence on foreign wheat was reversed, and the country rose to become one of the world’s leading exporters.21 Even foreign direct investment began to flow into the countryside. Dairy and vegetable farmers, however, were terrified by the prospect of foreign imports. Their representations were ignored.
So, too, were those of Russian manufacturing. Putin had set himself the goal of integration in the world economy, and fobbed off those – including Sergei Glazev, who became his official economic adviser in 2012 – who called for protectionist policies until such time as Russia could see off the international competition.22
In the early 2000s Kasyanov and Kudrin fended off calls to expand the military budget, pushing instead – Kudrin’s legacy as Minister of Finances – the idea of putting aside an ample portion of the growing oil and gas revenues into a Stabilization Fund. The idea was to copy other oil-producing countries like Saudi Arabia and Norway, which had established sovereign wealth funds to invest in foreign securities. High oil and gas prices, went Kudrin’s thinking, could not be a permanent phenomenon, and he persuaded Putin to make savings in the current good years to prepare for the inevitable downturn. After paying off Russia’s external debts, he wanted to prepare for the future. The Finance Ministry favoured US Treasury bonds, which gave guaranteed revenues, over the risk of buying shares in American corporations.23 And if ever hydrocarbon sales tailed off again this Russian sovereign wealth fund would be an invaluable asset. This was a project for the restoration of national pride as well as a bulwark against the vagaries of world markets.
The policy outlasted the Kasyanov premiership and stayed intact through to 2007–8, when the global economic recession hit Russia. A malaise that had started with ill-considered schemes for house purchases in the United States had damaging consequences for the global financial system. There was nothing the Russian government could do to avoid an infection that now swept round the world. Companies, directors and employees were blighted. Putin and Medvedev alleviated the crisis by reaching into the sovereign wealth fund. For them, this was one of those emergencies for which it had been devised. Step by step they reduced the size of Kudrin’s cherished legacy. In February 2008 Kudrin divided it into a Reserve Fund and a National Well-Being Fund.24 Whereas the Reserve Fund of $125 billion had been invested in low-risk foreign securities, the $32 billion in the National Well-Being Fund was established to support the welfare system.
In August 2008 the cost of invading Georgia intensified pressure on the budget. Primakov, who as leader of the Chamber of Trade and Industry usually supported the military, industrial and construction lobbies, warned of the need to prioritize both the rule of law and the protection of small business start-ups. He also wrote memoranda pointing out that foreign companies were hugely more dynamic than Russian ones, and that the privileges enjoyed by the country’s big corporations had not fostered a good environment for industrial innovation. Norway’s Statoil Hydro, for example, was eight times more productive than Lukoil and twelve times more than Gazprom.25 But Primakov’s intervention was brushed aside before the urgency of forestalling an imminent economic crisis. From 2013, the authorities ran down the Reserve and National Well-Being Funds to finance projects to improve transport, communications and other parts of the country’s infrastructure.26 Kudrin had protested in vain at the increase in military expenditure. His exasperation would be the background to his forced departure from the government in September 2011.
Several leading public figures had always objected to the strategic course plotted by Kudrin and the Finance Ministry since 2000. They questioned the sense in maintaining the Reserve Fund and National Well-Being Fund and criticized their management. Sergei Naryshkin, who held a succession of high political posts before heading the Foreign Intelligence Service in 2016, had always disliked Kudrin’s pet scheme.27 Andrei Belousov, one of Putin’s economic advisers, disliked the idea of Russian money being used to support the American economy.28 He argued for all but 5 per cent of the Reserve Fund’s assets to be made available for governmental contracts29 – which, as Belousov knew, would have almost extinguished the very point of having a Reserve Fund. For years Sergei Glazev had been arguing for more revenues to be dedicated to infrastructure projects. He and a growing group of consultants ramped up their demand to sweep away the vestiges of the laissez-faire policies that were Kudrin’s legacy.30
With his own economic advisers divided, Putin had to feel sure that policy was based on reliable analysis, so on 6 November 2013 he convened a wide-ranging consultative meeting. After heated discussion it was decided to make a drastic switch in strategy. The new plan was to draw down heavily on the two funds, albeit without reducing them to extinction – Kudrin’s dream still had life in it. Finance had to be released, the meeting resolved, to develop Siberia and the Far East and rebuild the main rail line between Moscow and Nizhni Novgorod. Large Russian private companies were to receive grants for taking part, and there would be state assistance to secure adequate capitalization for the Russian banking system.31
The Kremlin leadership did not confine itself to Russia’s internal concerns. In December 2013 Putin consented to bail out Ukraine’s President Viktor Yanukovych by buying $15 billion of Ukrainian Eurobonds to relieve pressure on Kyiv’s loan repayments and end Ukraine’s quest for membership of the European Union.32 This was not the first time that the ambition for international influence and prestige triumphed over national economic self-interest. At the start of the twenty-first century, Russia had forgiven Iraq its vast debts, a sign of the renewed Russian desire to increase the country’s influence and prestige beyond its borders. The subsidy to Yanukovych followed the same policy.
While all this was going on, the government looked for foreign direct investment. Ministers knew that if economic improvement was to accelerate, the country had to attract many more enterprises from abroad. The results were puny. The European Bank for Reconstruction and Development kept a tally of investments from abroad in countries emerging from communism. Central Europe and the Baltic States did best, registering $4,492 per capita in the two decades through to 2008. Ukraine recorded a mere $899, and Russia even less again at $304.33
This intensified calls from Russian economic liberals for a more stable legal environment. As the official commitment to state capitalism grew, Kudrin and his supporters warned that Russia was being driven down a cul-de-sac: instead of being opened up to the world economy, it was putting up political barriers. If the Russian government wanted an influx of foreign capital, it had to implement the rule of law. Global firms were unwilling to take the risks in establishing branches in Russia while concerns were rife about physical safety, judicial maladministration and political interference. Both foreign and economic policy had to be overhauled.
But by the end of Putin’s first presidential term, he had abandoned his zeal for further reforms to the Russian state and society. New legislation tended to regulate only the lives of the poorer strata of society, while the rich remained a law unto themselves. Putin’s appointees to the large corporations were allowed to be as arrogant and greedy as Berezovski and his contemporaries. Though Putin had disciplined unruly ‘oligarchs’, he was neglectful of the rights and needs of ordinary citizens.