Russian economy of the post-Soviet Union
Building a strong and vibrant economy is no easy task, especially when the remnants of an old structure continue to haunt the present. Combine this with the resource curse and it becomes tempting to postpone the project altogether. Do not believe me ? Well, take a look at Russia, a former communist country, stuck in the middle of a transition to a more liberal market economy, endowed with an abundance of oil and natural resources, and whose economic fortunes fluctuate with the price of these Resources. These are the characteristics that best describe Russia’s economic struggles since the collapse of the Soviet Union.
Transition from communism to capitalism (1991-1998)
Boris Yeltsin became Russia’s first elected president in June 1991 and by the end of that year he had agreed with the Ukrainian and Belarusian leaders to dissolve the Soviet Union.Immediately he began to implement a number of sweeping economic reforms, including price liberalization, mass privatization and stabilization of the ruble.
Privatization reforms would see 70% of the economy privatized by mid-1994 and in the run-up to the 1996 presidential election, Yeltsin launched a “loan-for-stock” program that transferred ownership of some natural resource companies to powerful businessmen in exchange for loans to help with the government budget.These so-called “oligarchs” would use some of their newly acquired wealth to help fund Yeltsin’s re-election campaign. Yeltsin would win the election and remain in power until his failing health forced him to appoint a successor – Vladimir Putin.
Despite Yeltsin’s reforms, the economy performed horribly for much of the 1990s. From about 1991 to 1998, Russia lost almost 40% of its real gross domestic product (GDP) and suffered losses. numerous inflationary surges which have decimated the savings of Russian citizens.The Russians have also seen their disposable income decline rapidly. In addition, the capital was leaving the country in droves, with nearly 150 billion dollars paid between 1992 and 1999.
In the midst of these negative indicators, Russia manage to survive growth in 1997, the first positive growth recorded since the collapse of the Soviet Union.But as things started to look upbeat, the financial crisis that began in Asia in the summer of 1997 quickly spread to Russia, prompting a speculative attack on the ruble.The currency crisis would soon be exacerbated by falling oil prices at the end of the year, and in mid-1998 Russia devalued the ruble, defaulted on its debt and declare a moratorium on payments to foreign creditors.Real GDP growth turned negative again in 1998, declining 4.9%.
Period of rapid growth (1999-2008)
While the 1998 financial crisis had immediate negative effects and severely damaged Russia’s financial credibility, some argue that it was a “blessing in disguise” as it created the conditions that allowed Russia to achieve rapid economic expansion for most of the next decade. A heavily depreciated ruble helped boost domestic production, leading to a surge in economic growth over the next few years with real GDP growth reaching 8.3% in 2000 and around 5% in 2001.
The coincidence of Putin’s succession to power in 1999 with the reversal of the economic situation has earned the new president considerable popularity, and he has set himself the goal of avoiding the economic chaos of the previous decade and advancing the countries towards long-term growth and stability.Between 2000 and the end of 2002, Putin adopted a number of economic reforms, including simplifying the tax system and reducing the number of tax rates.It also facilitated the simplification of business registration and licensing formalities, as well as the privatization of agricultural land.
Yet in 2003, when the reforms were only partially implemented, Putin confiscated Russia’s largest and most successful company, the oil company Yukos. This event marked the beginning of a wave of takeovers of private companies by the state.Between 2004 and 2006, the Russian government renationalized a number of companies in sectors considered “strategic” of the economy.An OECD estimate claims that the government’s share of total market capitalization stood at 20% in mid-2003 and had increased to 30% by early 2006.
With an average real GDP growth of 6.9% per year, a 10.5% increase in average real wages and a 7.9% growth in real disposable income, all occurring during the period of 1999 In 2008, Putin received a lot of credit for this era of “unprecedented prosperity”.However, much of Russia’s economic success during this period coincided with the rise in the price of oil in the early 2000s, one of the country’s most important resources.
In fact, while many expected the Russian economy to return to its poor performance of the 1990s following the export stimulus effects of the ruble devaluation, it has been argued that the main drivers of the post-crisis economic growth came from the natural resource sector, particularly petroleum. Between 2001 and 2004, the natural resources sector contributed more than a third of GDP growth, with the petroleum industry directly responsible for almost a quarter of this growth.
Russia’s dependence on oil and other natural resources has been exacerbated by Putin’s return to a more centrally planned economy. The takeover of Yukos and other key sectors of the economy allowed Putin to build a centralized management system that extracts economic rents from oil and other natural resources in order to channel them into the sectors of the economy. economy considered the most important. Rather than trying to steer and diversify the economy towards less resource-dependent activities, Putin has made his key sectors even more dependent on these resources.
Since the global financial crisis
While oil and other natural resources were a major factor in Russia’s rapid economic expansion from the late 20th century to 2008, it should be noted that the reforms Yeltsin undertook and the pre-renationalization reforms of Putin were also important to the success of the economy. . But, the global financial crisis of 2008 and the fall in the price of oil revealed the nature of the Russia’s resource-dependent economy and underlined the need for further structural reforms.
The Russian economy was hit hard by the global financial crisis with production falling 7.8% in 2009.But, as the price of oil recovered and global financial markets began to stabilize, growth returned, albeit far from where it was before the crisis. The return to moderate growth; However, would be short-lived as the conflict with Ukraine would see harsh economic sanctions imposed by the West, and the onset of the oil price rout in mid-2014 would once again expose the flaws in the Russian economy. .
The bottom line
During the Yeltsin years following the collapse of the Soviet Union, it seemed that Russia was on the path to a more liberal market economy. However, Putin’s return to more Soviet management and the inability to pursue much-needed reforms have increased the country’s dependence on resources to the detriment of long-term economic stability and growth. Perhaps Russia’s most recent crisis will help shake its popularity with the Russian people and force them to start taking economic reforms seriously.