Anne L. Clunan,
Dr., Associate Professor,
Department of National Security Affairs / Naval Postgraduate School,
Despite its impressive gains during the 2000s and current standing as the one of the fifteen largest economies in the world, Russia today is ill-equipped to thrive in the 21st century global economy. This reality is not widely recognised among the Russian leadership or its elites. Russian leaders and foreign policy experts routinely acknowledge the need for Russia to modernise its economy. However, there is neither the understanding of the global economy nor the political will to transform the economy into one that can rival those of China, Germany, India, let alone the United States.
Russia’s position in the global economy at first glance appears to belie this pessimistic assessment. Russia’s leaders can rightly claim that their economy is the 6th largest in the world (in purchasing power terms) and is 28th in the world in the World Bank’s Doing Business rankings. It has a highly favorable financial position, with little public debt, high international reserves, and a new macroeconomic policy to adjust the economy to the new era of lower oil prices. Its tax collection system boasts of a 1% gap between revenue owed and collected, in contrast to about a 10% gap in the United States. Its Reserve Fund, sourced from oil revenues, is almost replenished after its depletion to finance 2014-2017 budget deficits. Inflation and unemployment are low, and the government is acting to address weaknesses in connectivity, infrastructure and its aging population through increasing the retirement age and government infrastructure projects.
Yet the rapid growth of the 2000s, averaging 7%, when Russia was first classed as one of the BRICs, is a thing of the past. Russia underwent de-industrialisation in the 1990s and re-emerged as a leading petro-state in the 2000s. Based largely on high oil prices and the housing and construction boom that followed, prospects of such growth rates have vanished in the wake of the shale-oil-and-gas revolution and declining growth in China and Europe, driven in large measure by aging populations. The supply of oil and gas worldwide is set to rise over the near term, putting downward pressure on energy prices, even when global shifts towards renewable energies are not taken into account. Russia’s own workforce is aging, depleting the human capital needed to increase productivity. In the wake of the Ukraine crisis, Russia has sought to shift its dependence on Europe for consumption of its energy exports to China, but the above trends bode ill for this approach. The Ukraine invasion has also turned Russia into a foreign investment desert. Russia’s economy has stalled at less than 2% growth rates since 2010, even in the presence of high oil prices, and the World Bank forecasts that this trend will continue, failing institutional reforms.
In the areas of technological competition, Russia is falling farther behind and it has not put in place the institutions necessary to develop indigenous innovation and technological development, as the failed Skolkovo innovation hub shows. An average Russian’s wealth is three times lower than that of the OECD average. Russia is losing its best and brightest, who emigrate abroad in increasing numbers. One fifth of the population, Gallup reported in 2019, to want to emigrate, with 44% of those between 15-29 years old wanting to leave Russia.
Russia’s leadership has signally failed to make the needed reforms to bolster efficiency and competition even in the oil and gas sector, and to reduce the dominance of that sector in Russia’s gross national income and wealth. Its efforts to improve its economic position through greater integration of the Central Asian republics in the Eurasian Economic Union have faltered after its aggression against Ukraine.
Given all the genius and talents of the Russian people and Russia’s immense natural resource wealth, why have Russia’s leaders failed to create an economy that reflects and energises that human and natural wealth? The answers lie in the leadership’s, particularly Vladimir Putin’s, understanding of the world. The central lessons informing Putin’s view of the domestic and global economy are the centrality of the state, and the imperative of sovereign independence.
Domestic stability and territorial integrity, on this view, require a strong centralised state to hold the vast Eurasian country together. From the 1990s, the Russian leadership learned that dependence on foreigners for financing and domestic prosperity threatens Russia’s ability to independently chart its course and assert its international status as a great power. In response Putin put in place conservative macroeconomic and fiscal policies designed to allow Russia to weather downturns in the global economy and price of oil. These same policies are focused on ensuring the Russian government is not indebted to the West. This has required macroeconomic policies that place the burden of Russia’s geopolitical aims on social welfare benefits, risking greater social protest, and financing from non-Western sources, increasing Russia’s dependence on China for economic growth.
At the root of the disconnect between the Putin regime’s understanding of the global economy and inability to modernise its own economy are its geopolitical understanding of the state and the peculiarities of Putin’s bases of support. Putin’s regime rests on the support of commercial elites in the extractive industries whose loyalty is are rewarded with subsidies and privileges. They have no interest in the type of reforms necessary to diversify and modernize Russia’s economy. Schumpeter’s “creative destruction”, so fêted in the global tech sector and the United States, is anathema to these elites as it directly threatens their personal fortunes.
In addition, on Putin’s view, the state is the only actor that matters in world affairs and Russia as a great power does not have to play by the same rules as lesser states, nor concern itself with commercial non-state actors. As a result, Russia’s companies and banks are viewed and used as tools to attain Russia’s foreign ambitions. The results often backfire, as when the 2006 “gas war” with Ukraine led the EU to reduce its reliance on Russian energy or when the corrupt 2014 nuclear energy deal struck between Rosatom and South Africa’s Jacob Zuma galvanised public opposition and the scuttling of both Zuma and the deal. More fundamentally, Putin and his team, unlike China, cannot seem to fathom that that non-state actors and their networks are critically important factors in the 21st century global economy.
The Russian leadership believes that the West is in permanent decline, and the distribution of power and economic dynamism has shifted to China. Accordingly, Russia simply needs to refocus its exports towards Asia, and its economic prosperity will follow. This perspective is dangerous for Russia’s international influence and domestic stability of the current regime. Whether the global economy moves in the direction of three mega-regions (North America, Europe, and East Asia) or continues the current form of globalisation and customisation of production, Russia is posed to lose out if it continues its present course.
The views expressed here are the personal views of the author, and do not represent the views of the U.S. government, Department of Defense or the U.S. Navy.
Expert article 2661