Russia in 2003
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Russia in 2003
UPI Senior Business Correspondent
The Tragedy of Errors (Book Review)
The Betrayal of History (Book Review)
Russian Roulette - The Security Apparatus
Russian Roulette - The Energy Sector
Russian Roulette - The Financial Sector
Russian Roulette - The Russian Devolution
Russian Roulette - Russian Agriculture
The Chechen Theatre Ticket
Russia's Middle Class
NEW BOOK : ECONOMICS AND GEOPOLITICS
Title : "Putin's Russia"
Author : Shmuel (Sam) Vaknin, Ph.D.
DOWNLOAD FREE E-BOOK
Russia's economy and politics under Vladimir Putin.
Contrary to recent impressions, Russia's Western (American-German)
orientation is at least as old as Gorbachev's reign. It was vigorously
pursued by Yeltsin. Still, 2002 marks the year in which Russia became merely
another satellite of the United States - though one armed with an ageing
Russia's economy has revived remarkably after the 1998 crisis, but it is
still addicted to Western investments, aid and credits. Encircled by NATO to
its West and US troops stationed in its central Asian hinterland, Russia's
capitulation is complete. In the aftermath of conflicts to be engineered by
the United States in Afghanistan, Iraq, North Korea, Iran, Syria and,
potentially, Cuba - Russia may feel threatened geopolitically as well as
economically. Both Iran and Iraq, for instance, are large trading partners
and leading export destinations of the Russian Federation.
If anything can undo the hitherto impressive personality cult of Russia's
new "strong man", Vladimir Putin, it is this injured pride among the more
penumbral ranks of the country's security services. Russia's history is
littered with the bloodied remains of upheavals wrought by violent
ideological minorities and by assorted conspirators.
Hence Putin's tentative - and reluctant - attempts to team up with China and
India to establish a multi-polar world and his closer military cooperation
with Kyrgyzstan and Armenia - both intended to counter nationalistic
opposition at home.
Luckily, the sense of decline is by no means prevalent.
Russians polled by the American Pew Research Center admitted that they feel
much better in a world dominated by the United States as a single
superpower. The KGB and its successors - Putin's former long-term
employers - actually engineered Russia's opening to the West and the
president's meteoric ascendancy. And no one in the army seriously disputes
the need for reform, professionalization and merciless trimming of the
Reforms - of the military, Russia's decrepit utilities, dilapidated
infrastructure and housing, inflated and venal bureaucracy, corrupt
judiciary and civil service, choking monopolies and pernicious banking
sector - depend on the price of oil. Russia benefited mightily from the
surge in the value of the "black gold". But the windfall has helped mask
pressing problems and allowed timid legislators and officials to postpone
much needed - and fiercely resisted - changes.
Russia's "economic miracle" - oft-touted by the "experts" that brought you
"shock therapy" and by egregiously self-interested, Moscow-based, investment
bankers - is mostly prestidigitation. As the European Bank for
Reconstruction and Development (EBRD) correctly noted in November, Russia's
20 percent growth in the last three years merely reflects enhanced usage of
capacity idled by the ruination of 1998.
Neutering the positive externality of rising oil prices, one is left with no
increase in productivity since 1999. Industrial production - outside the oil
sector - actually slumped. As metropolitan incomes rise, Russians revert to
imports rather than consume shoddy and shabby local products.
This, in turn, adversely affects the current account balance and the
viability of local enterprises, some of which are sincerely attempting to
restructure. According to Trud, a Russian business publication, two fifths
of the country's businesses are in the red. Russia's number of small and
medium enterprises peaked at 1 million in 1995-6. They employ less than one
fifth of the workforce (compared to two thirds in the European Union and in
many other countries in transition).
Thus, falling oil prices - though detrimental to Russia's ability to repay
its external debt and balance its budget - are a blessing in disguise. Such
declines will force the hand of the Putin administration to engage in some
serious structural reform - even in the face of parliamentary elections in
2003 and presidential ones the year after.
Russians - wrongly - feel that their standard of living has stagnated.
Gazeta.ru claims that 39 million people are below the poverty line. Many
pensioners survive on $1 a day. In truth, real income per capita is actually
up by more than 8 percent this year alone. Income inequality, though, has,
Responding to these concerns, though, in a "coattails" effect, the president
is expected to carry pro-Kremlin parties back into power in 2003 - a modicum
of elections-inspired bribing is inevitable. State wages and pensions will
outpace inflation. The energy behemoths - major sources of campaign
financing - will be rewarded with rises in tariffs to match cost of living
Russia faces more than merely a skewed wealth distribution or dependence
on mineral wealth. Its difficulties are myriad. On cue from Washington, it
is again being hyped in the Western press as a sure-fire investment
destination and a pair of safe geostrategic hands. But the dismal truth is
that it is a third world country with first world pretensions (and nuclear
weapons). It exhibits all the risks attendant to other medium-sized
developing countries and emerging economies.
External debt repayments next year will exceed $15 billion. It can easily
afford them with oil prices anywhere above $20 and foreign exchange reserves
the highest since 1991. Russia even prepaid some of its debt mountain this
year. But if its export proceeds were to decline by 40 percent in the
forthcoming 3-4 years, Russia will, yet again, be forced to reschedule or
default. Every $1 dollar decline in Ural crude prices translates to more
than $1 billion lost income to the government.
Russia's population is both contracting and ageing. A ruinous pension crisis
is in the cards unless both the run-down health system and the abysmally low
birthrate recover. Immigration of ethnic Russians from the former republics
of the USSR to the Russian Federation has largely run its course. According
to Pravda.ru, more than 7 million people emigrated from the Federation in
the last decade.
Russia's informal sector is a vital, though crime-tainted, engine of growth.
Laundered money coupled with reinvested profits - from both legitimate and
illicit businesses - drive a lot of the private sector and underlie the
emergence of an affluent elite, especially in Moscow and other urban
centers. According to the Economist Intelligence Unit, Goskomstat - the
State Statistics Committee - regularly adjusts the formal figures up by 25
percent to incorporate estimates of the black economy.
Russia faces a dilemma: to quash the economic underground and thus enhance
both tax receipts and Russia's image as an orderly polity - or to let the
pent-up entrepreneurial forces of the "gray sectors" work their magic?
Russia is slated to join the World Trade Organization in 2004. This happy
occasion would mean deregulation, liberalization and opening up to
competition - all agonizing moves. Russian industry and agriculture are not
up to the task. It took a massive devaluation and a debilitating financial
crisis in 1998 to resurrect consumer appetite for indigenous goods.
Farming is mostly state-owned, or state-sponsored. Monopolies, duopolies and
cartels make up the bulk of the manufacturing and mining sectors -
especially in the wake of the recent tsunami of mergers and acquisitions.
The Economist Intelligence Unit quotes estimates that 20 conglomerates
account for up to 70 percent of the country's $330 billion GDP. The
oligarchs are still there, lurking. The banks are still paralyzed and
compromised, though their retail sector is reviving.
Russians are still ambivalent about foreigners. Paranoid xenophobia was
replaced by guarded wariness. Recently, Russia revoked the fast track work
permit applications hitherto put to good use by managers, scholars and
experts from the West. Foreign minority shareholders still complain of being
ripped-off by powerful, well-connected - and minacious - business interests.
With the bloody exception of Chechnya, Putin's compelling personality has
helped subdue the classic tensions between center and regions. But, as Putin
himself admitted in a radio Q-and-A session on December 19, this peaceful
co-existence is fraying at the edges.
The president will try to reach a top-down political settlement in the
renegade province prior to the 2004 elections, but will fail. Reform is
anathema to many suborned governors of the periphery and the Kremlin's
miserly handouts are insufficient to grant it a decisive voice in matters
provincial. Devolution - a pet Putin project - is more about accepting an
unsavory reality than about re-defining the Russian state.
The economic disparity between rural and urban is striking. The Economist
Intelligence Unit describes this chasm thus:
"The processing industry is concentrated in the cities of Moscow, St
Petersburg, Yekaterinburg and Nizhny Novgorod. These larger cities have
managed the transition relatively well, as size has tended to bring with it
industrial diversity; smaller industrial centers have fared far worse. The
Soviet regime created new industrial centers such as Tomsk and Novosibirsk,
but Siberia and the Russian Far Eastern regions remain largely
unindustrialised, having traditionally served as a raw materials and energy
base. Owing to the boundless faith of Soviet planners in the benefits of
scale, one massive enterprise, or a small group of related enterprises,
often formed the basis for the entire local economy of a substantial city or
region. This factor, compounded by the absence of unemployment benefits,
makes the closure of bankrupt enterprises a politically difficult decision."
The politically incorrect truth is that Russia's old power-structure is
largely intact, having altered only its ideological label. It is as
avaricious, nefarious and obstructive as ever. Nor does the Russian state
sport any checks and balances. Its institutions are suspect, its executive
untouchable, its law enforcement agencies delinquent.
Russians still hanker after "men of iron" and seek tradition rather than
innovation, prefer unity to pluralism, and appreciate authority more than
individualism. Russia - a ramshackle amalgamation of competing turfs - is
still ill-suited for capitalism or for liberal democracy, though far less
than it was only ten years ago.
Conspicuous consumption of imported products by vulgar parvenus is no
substitute to true modernity and a functioning economy. Russia is frequently
praised by expats with vested interests and by international financial
institutions, the long arms of its newfound ally, the United States.
But, in truth, "modern", "stable", Russia is merely a glittering veneer
beneath which lurk, festering, the old ills of authoritarianism,
lawlessness, oligarchy, aggression, ignorance, superstition, and repression
mingled with extremes of poverty and disease. Here is one safe prediction:
none of these will diminish next year.