Putin's Economic Failure

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More than a decade of Putinism has left the Russian economy, a major issue in Sunday's national election, less diversified today than when he first came to power.

putin march2 p.jpg

Reuters

Vladimir Putin, Russia's once-and-future president, has built his political reputation on a perceived ability to enforce order and revive the country's economy. But a review of official Russian government economic data, in particular import and export figures, suggests that Russia has moved backwards under Putin, at least in terms of the country's efforts to develop an advanced, high-tech economy.

Russia's presidential election will be held March 4, and it appears a foregone conclusion that Putin will return to the presidency. Whether in the capacity of president or prime minister, Putin has been in charge of Russia's economy since mid-1999, and he seems a decent bet to keep running the country for the foreseeable future.

During his tenure in power, Russia has experienced robust economic growth and benefited from a favorable balance of trade, enabling the Kremlin to amass cash reserves of just over $505 billion, according to Central Bank statistics. But trade-surplus figures provide only a partial picture of the Russian economy, creating an illusion of economic health. Russian growth is overly dependent on the export of raw materials, especially oil & gas, but also including minerals, precious metals and timber.

During his first go-round as president, Putin spoke repeatedly of a need to transform Russia's economy. In a May 2006 speech to the Federation Council, for example, he said his administration was already taking "concrete steps to change the structure of our economy, and turn it into an economy of [technological] innovation." And on May 8, 2008, the day he stepped down from the presidency and returned to the post of prime minister, he announced the government's "number one priority" was economic diversification via the "development of innovative industries."

If figures compiled by Russia's Federal Service for State Statistics (FSSS) are to be believed, Putin's quest to create a knowledge-based, high-tech economy has been a dismal failure. Import-export data for the past 12 years shows that Russia's role in the global economy remains that of raw materials supplier, and that the high price of oil & natural gas is all that stands in the way of Russia becoming a fiscal train wreck.

When it comes to the state budget, the stability of Russia's finances is dependent on an increase in the cost of energy. The Kremlin thus stands to benefit economically from increased tension between the West and Iran. Prior to the global financial crisis, Russia could balance its books with an oil price of about $90 per barrel, former Russian Finance Minister Alexei Kudrin said last September. Now, according to the Finance Ministry, the Russian budget needs an oil price of $117 per barrel this year to remain in good shape.

Trade data shows that more than a decade of Putinism has left the Russian economy less diversified today than when Putin first came to power. In some aspects, exports of Russian durable goods seem to have regressed from the point where they stood when Putin's presidential predecessor, Boris Yeltsin, resigned in on December 31, 1999.

In 1999, at the outset of Putin's first tour as prime minister, FSSS statistics show that energy and mineral products accounted for a 44.9 percent share of Russia's overall exports, worth roughly $32.6 billion. By the end of 2011, the export share of the energy-mineral products category stood at 69.2 percent over overall exports, worth roughly $357.2 billion.

Over the same timeframe, export categories that would reflect the performance of knowledge-based economic sectors have experienced declines. The share of equipment and machinery, for example, fell from 10.9 percent of all exports in 1999 to 4.5 percent in 2011. Meanwhile, exports of chemical products declined from 8.5 percent of overall exports in 1999 to 6 percent in 2011. Mitigating the percentage declines, the value of equipment-machinery exports grew from roughly $8 billion in 1999 to $23.2 billion in 2010, while the value of chemical products exports rose from about $6.1 billion in 1999 to $30.9 billion in 2010.

Import trends covering manufactured goods and other advanced items bring into sharper relief the Russian economy's inability to transform itself. FSSS figures for 1999 show Russia that year imported "equipment, machinery and vehicles" worth $10 billion, good for a 33.3 percent share of the country's overall imports. In 2010, the import percentage of the same category of manufactured goods leapt to 44.5 percent, worth more $101 billion. And the latest FSSS figures for 2011 show an even more dramatic jump - to $146.6 billion in imports of finished goods for the year, and a 48 percent share of overall imports.

Meanwhile, chemical products accounted for a slightly smaller share of overall imports in 2010, 14.9 percent, than they did in 1999, when it stood at 16 percent. Expenditures on chemical product imports have risen dramatically over the same period, however, going from $4.8 billion in 1999 to $45.4 billion in 2010.

The Russian budget is expected to see a substantial rise in costs over the near- and longer-term. Immediately after the presidential election, the state budget may need an additional 1 trillion rubles, or roughly $34 billion, to cover campaign promises made by Putin, according to some estimates. Over the longer term, Putin has outlined plans for a dramatic increase in defense spending, amounting to roughly 23 trillion rubles (about $763 billion) over the next eight years. Such expenditures could drain Russia's cash reserves.

Ongoing political protests, rooted in discontent over what activists in Russia portray as the country's rigged parliamentary elections last December, are injecting an element of uncertainty into the Russian economy. Judging by capital flight data, confidence may be waning. According to Russian Central Bank estimates, the amount of private-sector assets leaving the country spiked dramatically during the last quarter of 2011, approaching $37.8 billion. The amount that flowed out of Russia during the first three quarters of 2011 was an estimated at $46.4 billion.

Putin hasn't spoken much during the current presidential campaign about economic diversification. Instead, his highest-profile challenger, businessman and basketball impresario Mikhail Prokhorov, has seized the mantle of leading economic reformer.

"I see the Russia of the future re-building its economy to exploit the creative potential of its people and, in the process, creating demand for an educated and skilled workforce," Prokhorov says on his campaign website. "Russia's economy must be truly developed for the country to escape the humiliating status of a mere raw-materials provider to the global economy. Competition in Russia should become a fundamental principle applicable in all areas of economic life."

This article originally appeared at EurasiaNet.org, an Atlantic partner site.

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Justin Burke is EurasiaNet.org's Managing Editor.

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