TCS Daily

Waiting for Putin

By Sascha Tamm - November 18, 2004 12:00 AM

Many analysts are optimistic about Russia's economic prospects. They trust in the market orientation President Vladimir Putin's administration and the good economic performance of Russia during the last years. And they seem to be right. Since the financial crisis of 1998 growth rates have averaged between 6 and 7 percent. The admiration for Russia's pro free market policies under Andrei Illarionov, Putin's chief economic adviser, increased when Russia initially refused to ratify the Kyoto protocol.

But Russia finally ratified Kyoto as a result of bargaining with the European Union. So there's still cause to be skeptical. Putin's policy is led neither by economic reasoning nor the principles of market economy - much less democracy or the rule of law. His administration wants to maintain power and to strengthen its influence all over the country. Admittedly, that is also true for many other governments in the world. But some pressing problems concerning the economy and the internal stability make Russia's situation specific and difficult. Russia depends largely on the export of oil and other natural resources. The oil and gas sector accounts for 25 percent of the GDP while employing only 1 percent of the population. Furthermore Russia has strong corruption and a terrorist and secessionist threat from different ethnic groups. Chechnya is the best known example but not the only one.

The means available to solve these problems are to some extent contradictory. Putin needs market forces to improve the economic situation and to attract investment. He has to make many Russians significantly better off than they are now. Otherwise he will gradually lose public support. Small government and decentralized decision-making are the only promising methods to reach this goal.

On the other hand, the only way Russian leaders know to push through their policies and to control the country is the bureaucracy (and the servile media). In Russia, bureaucracy has always had -- and still has -- a strictly hierarchical and centralized structure. Putin has made it even more strictly top-down than it was in the 1990s, using the experience of the old communist officials. The paradox is that he needs all the high-ranking officials if he wants to carry out a pro-market policy against the opposition of local leaders. But the vast majority of the "chinovniki" are strictly opposed to ideas like free markets or open society.

The best to expect from them is lip service to market economy and the rule of law. Accordingly, Putin has to fight corruption with the help of corrupt officials, he has to fight against separatism with a degenerated army made up of officers selling weapons to terrorists. The other option, to cooperate with a strong and independent middle-class, big companies, free media and an open society to counter the pressing problems, is out of mind for Putin and Russia's politicians. There are only a few exceptions. Also, the "open society option" does not appear to be on the agenda of the vast majority of the Russian population.

Some developments and decisions of the year 2004 illustrate very clearly the direction Russia is taking: Consider the Yukos scandal, the list of companies that could not be privatized without prior consent of the Kremlin or even the newly implemented procedure of appointing instead of electing governors. Then there is the role that pro-market officials like Illarionov play in the game, though it is not a major one in the decision-making process.

However, the optimists are not completely wrong at least in the long run. The case for a real market economy is very strong in a country with well-educated and highly-skilled people with growing needs. Russia can not be ruled like Saudi Arabia or Nigeria or other countries suffering from the "Dutch Disease". Economic reason will erode the dysfunctional power structures of big governments.

The case for decentralization and open society is very strong, too. To secure the unity of a large country with great ethnic and religious diversity, decentralized power structures and subsidiarity are the only reliable methods. Still, it will take a long time until Russia's government and the Russians will realize that. It is hard to say how long it may take, but we will see a lot of crises before major improvements.

The author is the head of politics for the Institute for Free Enterprise in Berlin


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