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Russia in 2003

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  • Sam Vaknin
    The edited version of this article was published by United Press International (UPI): http://vakninupi.cjb.net It is also published on these web sites:
    Message 1 of 1 , Jan 1, 2003
      The edited version of this article was published by United Press
      International (UPI):


      It is also published on these web sites:





      Feel free to forward this article INCLUDING ALL THE WEB SITES ABOVE.

      To reprint - kindly write to: palma@...

      Russia in 2003

      Sam Vaknin

      UPI Senior Business Correspondent

      Skopje, Macedonia

      Also Read

      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



      Title : "Putin's Russia"

      Author : Shmuel (Sam) Vaknin, Ph.D.




      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
      nuclear arsenal.

      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
      bloated corps.

      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,
      indeed, gaped.

      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.
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