In late 2014, a headline “Putin Watches Russian Economy Collapse Along with His Stature,” blared in Time magazine. Yet three years have passed since the price of oil crashed in 2014, halving the value of the commodity that once funded half of Russia’s government budget. That same year, the Western countries imposed harsh economic sanctions on Russia’s banks, energy firms, and defense sector, cutting off Russia’s largest firms from international capital markets and high-tech oil drilling gear. Many analysts, both in Russia as well as abroad, thought that economic crisis might threaten President Vladimir Putin’s hold on power.
Today, IMF and World Bank report revealed that Russia’s economy has stabilised, inflation is at historic lows, the budget is nearly balanced. Russian media highlighted that fact that President Putin has recently overtaken Soviet leader Leonid Brezhnev as the longest-serving Russian leader since Joseph Stalin. They also reported that economic stability has underwritten an approval rating of President Putin that hovers around 80 percent. Chris Miller, noted Russian expert, stated that “Putinomics” made it possible for Russia’s president to survive repeated financial and political shocks. Here, the most important question is, how did he do it?
Chris Miller noted that Russia survived the twin challenges of the oil price crash and Western sanctions thanks to a three-pronged economic strategy. First, it focused on macroeconomic stability, keeping debt levels and inflation low above all else. Second, it prevented popular discontent by guaranteeing low unemployment and steady pensions, even at the expense of higher wages or economic growth. Third, it let the private sector improve efficiency, but only where it did not conflict with political goals. This strategy will not make Russia rich, but it has kept the country stable and kept the ruling elite in power.
That said, the other question worth mentioning is that, does President Putin really have an economic strategy? According to Chris Miller, a common explanation of President Putin’s longevity is that he survives because Russia’s oil revenues keeps the country afloat. A number of economic analysts adamantly argued that Russia’s economy is known more for corruption than for capable economic management. But the Russian government could have adopted different economic policies and some of the alternatives would have made it harder for President Putin to sustain his hold on power. They might also have left Russians worse off. Consider what Russia looked like in 1999 when Vladimir Putin first became President: a middle-income country in which oil rents constituted a sizeable share of GDP. A country led by a young lieutenant colonel KGB officer committed to using the security services to bolster his power. A president who claimed the mantle of democratic legitimacy in part based on his ability to force big business and oligarchs to follow his rules, whether by fair or foul means.
A Russian economist, Anatoly Gregor explained that this could well describe Chavista Venezuela, still governed by an autocratic regime, still dependent on declining oil revenues, and still failing to build an economy based on rules rather than political whim. The difference is that Venezuela’s Chavistas spent recklessly during the oil boom while presiding over a mismanagement-induced collapse in oil production and, now, painful shortages of consumer goods created by poorly conceived price controls. According to World Bank estimates, Venezuela was wealthier on a per person basis than Russia in 1999. No longer now.
Willie Buster of Leeds University stated that the Russian government’s skill in mustering and distributing resources explains why the Russian elite has maintained power for nearly two decades and how it has deployed power abroad with some success. According to Willie Buster, many oil-fueled dictatorships squander their oil revenues on luxury goods like Ferraris and Fendi handbags. Russia’s ostentatious oligarchs have certainly accumulated their share of British football teams and hundred-million-dollar yachts armed with missile defense systems. But unlike its own spendthrift 1990s, Russia during the 2000s saved hundreds of billions of dollars during the good years, stowing resources in reserve funds for use when oil prices fell.
President Putin’s aim in economic policy has not been to maximize GDP or household incomes. Such a goal would have required a very different set of policies. But for President Putin’s objectives of retaining power at home and retaining the flexibility to deploy it abroad, the three-pronged strategy of Putinomics, macroeconomic stability, labor market stability, and limiting state control to strategically important sectors, has worked.
To understand Putinomics much better, let’s start with macroeconomic stability. Alexander Potonin of Warsaw University stated that Russia is a relatively rare kleptocracy that gets high marks from the IMF for its economic management. Why? Since the beginning of Vladimir Putin’s time in office, he and the Russian elite more generally have prioritized paying down debt, keeping deficits low, and limiting inflation. According to Alexander Potonin, having lived through devastating economic crashes in 1991 and 1998, Russia’s leaders know that budget crises and debt defaults can destroy a president’s popularity and even topple a regime, as Boris Yeltsin and Mikhail Gorbachev both discovered.
Willie Buster explained that when Vladimir Putin first took power, he devoted much of Russia’s oil earnings to paying back the country’s foreign debt ahead of schedule. In the current crisis, Russia has slashed spending on social services to ensure that the budget remains close to balance. In 2014, oil and gas earnings constituted around half of Russia’s government budget. Today, it is widely reported that oil trades at half the 2014 level, but thanks to harsh budget cuts, Russia’s deficit is around one percent of GDP which is far lower than in most Western countries. To ensure macroeconomic stability, President Putin has implemented a harsh austerity program since 2014, but there have been few complaints.
The second prong of President Putin’s economic strategy has been to guarantee jobs and pensions, even at the expense of wages and efficiency. During the economic shock of the 1990s, Russian wages and government pensions often went unpaid, causing protests and a collapse in President Boris Yeltsin’s popularity. When the recent crisis hit, therefore, the Kremlin opted for a strategy of wage cuts rather than allowing unemployment to rise.
The third prong of Putinomics is to let private firms operate freely only where they do not compromise the President Putin’s political strategy. The large role that oligarch-dominated state-owned firms play in certain key sectors is justified in part by their willingness to support President Putin in managing the populace by keeping unemployment low, media outlets docile, and political opposition marginalized. Alexander Potonin noted that the energy industry, for example, is crucial to the government’s finances, so private firms have either been expropriated or wholly subordinated to the state.