December 26, 2021, will mark 30 years since the Soviet Union was officially dissolved. As such, the Institute of Modern Russia is launching a series of interviews with experts to discuss the post-Soviet decades, identify the key issues of the Russian transition, and their impact on Russia's political system and society today. In the third installment of the series, professor of the Paris Institute of Political Studies (Sciences Po) and economist Sergei Guriev discusses the Putin regime’s economic problems, the political reasons for the stagnation, and the future of Russia’s information autocracy.
According to Sergei Guriev, the main problem of the Russian economy is politics. Photo: Petros Karadjias | AP Images.
Part I: Economic Results of Transit
Part I: Economic Results of Transit
Olga Khvostunova: What, in your opinion, are the main economic results of Russia’s transit over the past 30 years?
Sergei Guriev: Russia’s history has both achievements and failures. If we look at the situation in 2013, Russia was a high-income country that had just joined the WTO and was negotiating to join the OECD, the club of developed countries. Overall, despite problems with democracy, at that moment one could say that the country was on the right track. But in 2014, everything changed. Oil prices collapsed, and it became clear the Russian economy had not been diversified and still heavily depended on oil. And the story of Crimea [annexation] has shown that Russia’s political system is designed in such a way that it needs a war to boost its legitimacy. After that, nothing good can be said about Russia’s transit. What we see today is not transit, but stagnation.
OK: Still, until 2013, the transit process was also difficult. What was a success and what was a failure?
SG: One way or another, market institutions were created. Russians today, even after almost ten years of stagnation, are living as they have never lived before. On the other hand, the country managed to create unthinkable inequality—inequality of wealth and, accordingly, inequality of opportunity. Previously, Russia was a relatively egalitarian country, but following the Soviet Union dissolution, in 10-15 years of privatization, Russia became the world champion in inequality, and this is especially noticeable now. For example, ten years ago it was still possible to say that there were a handful of very rich people in the country, but at the same time the incomes of the rest of the population were also growing. Now the situation has changed: the oligarchs, people close to the government live well, while everyone else lives badly. Previously, one could name the industries created in Russia from scratch that were quite competitive—IT, steel, retail, housing construction, financial sector, which were all quite successful until the 2008 crisis. But recent years have been a history solely of problems, failures, mistakes, and stagnation.
OK: Since you have already mentioned privatization, I will ask: what are its objective results from an economic point of view? According to polls, the vast majority of Russians consider themselves deceived by privatization. What, in your opinion, was the result of the reformers’ mistakes, what was the inevitable consequence of the Soviet system’s collapse, and what was the outcome of the public’s lack of information about these processes?
SG: In the 1990s, the incomes of almost all Russians fell significantly, while during the “aughts” incomes of all households, including the poorest, increased. Therefore, when people say that life was very bad for them in the 1990s, and then got better, it is true. But what really happened in the 1990s? First, it must be well understood that the economic recession began even before the collapse of the Soviet Union, already in 1990, because the Soviet model had reached a dead end. The situation spiraled out of control, and the economic system’s collapse was inevitable, as well as the collapse of the state’s ability to collect taxes and finance government spending. At the same time, oil prices were low. Second, the reformers made many mistakes. You mentioned one of them: they did not inform the population that the situation was much more dire than it seemed, and that it would get worse. They did not explain to people that there was no money in the savings banks not because [the leader of the reformers Yegor] Gaidar stole it, but because it had been spent long ago. There were other mistakes as well. The Russian authorities, for example, acknowledged the debts of the Soviet Union, unlike Poland, which wrote off half of its debts. The Russian authorities did not secure large aid from the West (which is a great fault of the West, too) and therefore were unable to support the most vulnerable groups—those with lower levels of education and income, living outside the big cities, and most affected by the market transition. This predetermined the subsequent public rejection of the reforms. Not all the reformers turned out to be honest people—I will not name names. The loans-for-shares auctions have become a symbol of the injustice of privatization. Yes, it was difficult to carry out mass privatization, and many things could have been implemented with greater transparency.
Still, by the standards of Putin’s corruption, the loans-for-shares auctions are a rounding error; roughly speaking, assets worth two billion dollars were sold for one billion. But this was the beginning of the process, in which corruption, nepotism, and the chance to flout the rules flourished at the top levels of the Russian government. These problems predetermined further inequality growth in Putin’s Russia; but the nature of the largest rise in fortunes in Russia both in the 1990s and in the 2000s is the same: corruption and proximity to power. There are, of course, big fortunes in Russia acquired by honest means, but most of the wealthy people in one way or another have benefited from a special relationship with the authorities. In general, everything that happened in the first decade after the collapse of the Soviet Union made it possible for the Putin government to say that the 1990s were all bad, and now it will be good.
Part II: The Stagnation Trap
OK: How do you see the main problems, or “diseases,” of the Russian economy today, and how do you assess the current government’s economic policy in this context? Political scientist Vladimir Gelman, for example, has a theory of bad governance, according to which the Russian authorities understand the importance of macroeconomic stability for maintaining the regime. Therefore, this area is controlled by the Central Bank, which “conducts a meaningful policy and is managed by qualified, responsible people.” Do you agree with that?
SG: Yes, Vladimir and I discussed this theory, including the Central Bank’s role, and I absolutely agree with him. The most interesting thing in his book is how and why pockets of competence and meritocracy arise within a corrupt system. After the 1998 default, Putin realized that sound macroeconomic policies ensured Russia’s independence from the IMF and the White House. He decided that he needed to listen to competent people who could prevent the next macroeconomic crisis. Although these people also made mistakes—for example, during the 2008-2009 financial crisis, by then the country had a large sovereign fund, which helped stabilize the situation and prevent going cap in hand to the West. During the 2014 crisis, mistakes were avoided precisely because the Central Bank had learned its lessons. Today we can say that yes, Russia has a good Central Bank and a good finance ministry, both pursuing a responsible macroeconomic policy. This, however, does not mean that there is nothing to criticize them for. For example, if a bank with ties to the Russian state violates the rules of the game established by the Central Bank, the latter will turn a blind eye to it. And if the same is done by a private bank, which has no special relations with the political leadership, then the Central Bank acts as it should: it takes control of the bank from the shareholders, recapitalizes it, restores solvency, etc. The Russian banking system today is dominated by either state-owned banks or banks close to Russian politicians. On balance, Russian macroeconomic policy is designed in such a way that a repeat of the 1998 crisis should not be expected.
OK: And outside of macroeconomic policy, what problems do you see?
SG: The Russian economy has remained undiversified, and today it is also isolated from the world due to sanctions and counter-sanctions. Russia’s desire to self-isolate from the world after 2014 is a problem that makes it impossible to get out of the stagnation trap. Corruption, lack of competition, and state dominance constitute another block of problems that arose under Putin. If before 2003-2004 we could say that Putin implemented reforms that boosted growth, then after the mid-2000s, his policy reversed. The authorities began to imprison businessmen, state-owned companies started taking over private assets, new oligarchs gained strength. A model has emerged in which oligarchs and state-owned companies hinder economic competition. It is important to understand that, one way or another, the world will move from hydrocarbon energy sources to renewable ones, and Russia will need new sources of growth, which, for example, can be rooted in human capital. But as we see now, entrepreneurial, educated people tend to leave the country, instead of trying to make a career in Russia. The state dominance and the regime’s closeness create a toxic environment for business. This is the main problem for the Russian economy.
OK: The Russian economy is often criticized for its dependence on oil and gas, but not so long ago new official data came out which showed that in 2020 the share of oil and gas revenues in the federal budget was slightly less than a third, while the share of the oil and gas sector in the economy was less than a fifth. This is in line with global averages for similar countries. In other words, is oil and gas dependence such a serious problem for Russia?
SG: Yes, I have seen this data, and it is close to other estimates. The right way to assess this is the following: the share of oil and gas in Russian GDP is relatively small—about 20 percent when oil prices are low, 30 percent when high. With the budget, the situation is different, but again, if oil prices are low, the share of oil and gas revenues will be smaller, and if they are high, then up to half of revenues can come from oil and gas. Russia, of course, is not Saudi Arabia; it is a much more diversified economy. Still, Russian exports and therefore the Russian ruble are highly dependent on oil prices. In this sense, Russian macroeconomic policy’s achievement lies in the Central Bank’s ability to manage inflation, despite dependence on oil prices and the ruble’s volatility. (This is a relatively recent achievement; it was not so in the 2000s.) There is also a budgetary rule according to which, when oil prices are high, part of the income is sent to the sovereign fund, which can finance budget expenditures during an unfavorable period. But the oil nature of the Russian economy creates long-term difficulties, and that is a political problem. Oil creates rents—the main prize in the political strife. There is only enough rent to “feed” the Russian elite, so there is a struggle for the right to be in the elite. If you want to be a successful entrepreneur in Turkey, you still need to build a business; in Russia, you need to take over an oil company. For example, the head of Rosneft Igor Sechin, a man with no engineering education, no special knowledge in physics or chemistry, runs the world’s largest (by some indicators) oil company. There are few success stories in the management of the Russian oil and gas industry, but there is so much rent that as long as the price of oil is at the current level, anyone without education or special entrepreneurial talents can make a killing. And this money is then used for political control—to bribe politicians, pay wages to security officials, fund censorship and propaganda.
Part III: Economics vs Politics
OK: In other words, political problems are at the heart of Russia’s stagnation, right? By the way, Vedomosti wrote about this, summing up the results of the last 20 years in Russia: the Russian authorities figured out macroeconomic stability, but were unable to ensure the country's economic development.
SG: Yes, of course, the main problem of the Russian economy is politics. Over the past 20 years, Putin has built a model of the Russian economy that fully reflects his preferences as a politician who seeks to stay in power. What is this economic model? Good macroeconomic policy, the economy’s commanding heights are controlled by the state or state-linked oligarchs, no anti-corruption fight, no welcoming investment climate, no independent courts. None of these factors contribute to either economic growth, or creation of new businesses, or attraction of foreign investment, so one should not be surprised that there is no growth—it has nowhere to come from. On the other hand, they ensure stable state control over the economy and preservation of power for the ruling elite.
OK: You have already touched on the topic of the sanctions policy, and this is one of the factors that determine not only the state of the Russian economy, but also Russia’s relations with the West. How do you assess the effectiveness of sanctions?
SG: The effectiveness of the sanctions policy should be assessed in accordance with its objectives. Usually, sanctions are introduced not to change a regime that violates the international rules of the game, but to change its behavior or force it to enter into negotiations. And this was done. When sanctions were imposed after Crimea, Russia did not annex Donbass, although a referendum on independence in eastern Ukraine was held in early May 2014. When sanctions were imposed after the downing of the Malaysian Boeing, Russia entered into negotiations in the so-called “Minsk format,” stopped talking about Novorossia—six Ukrainian regions that were supposed to become part of Russia—and declared that Donetsk and Luhansk are part of Ukraine. In this sense, sanctions have been completely successful. Sanctions against Russian meddling in the 2016 U.S. elections apparently led Russia and the United States to negotiate mutual cyberattacks. We do not yet know whether this negotiation is successful or not, because cyberattacks are non-public.
OK: Is there a possibility of a radical tightening of sanctions and complete isolation of Russia? Are the fears of the Russian elite justified?
SG: Will Russia be completely isolated? There is no such appetite in the West yet. For this to happen, Russia must commit a much more serious violation of the international order, but it is clear that it is not ready to do this. There is a very important precedent: the 2018 sanctions imposed on certain Russian individuals and companies, including Oleg Deripaska and Rusal. These sanctions were quickly revised, because it became clear that Rusal is too important a global company in the aluminum market, and the United States is not interested in a sharp rise in world aluminum prices. So far, no one is interested in introducing an oil embargo against Russia, as happened in the case of Iran. But this means that the sanctions have room to expand. There are still many friends of Vladimir Putin who are not fully sanctioned, and there is a huge list of Russian oligarchs who have not been sanctioned at all. But the addition of each new person to the blacklist, of course, raises tensions in the Kremlin. This can be seen in how harshly the Kremlin speaks out against sanctions, how it tries to fight them through its lobbyists in Washington and in Europe.
Part IV: Information Autocracy
OK: Together with political scientist Daniel Treisman, you are developing the theory of information autocracies, and you deem Russia to be one of them. What are these regimes’ key characteristics?
SG: Information autocracies have largely developed over the past 30 years. The reasons for their emergence are partly related to the end of the Cold War and the difficulties for a number of countries to be traditional dictatorships based on mass repressions. Previously, the West cooperated with such dictatorships if they opposed the communists, but with the fall of the communist regimes such reasoning became obsolete. The West, of course, supports some dictatorships even today—for example, its allies in the war on terrorism, but the war on terrorism is an existential problem compared to the Cold War, and there are very few such regimes. Therefore, after the end of the Cold War, non-democratic regimes had to pretend to be democracies.
The second factor, which emerged around the same time, is the proliferation of information technology, the emergence of global media such as CNN, and global human rights NGOs such as Amnesty International or Human Rights Watch. These changes have led the non-democratic regimes to understand that they cannot live like North Korea—they had to somehow ensure economic growth and raise living standards, and to achieve these goals they needed educated citizens. But then they faced a problem: as soon as citizens become more educated, they begin to demand political change. To prevent this from happening, non-democratic regimes turned to propaganda and censorship. Information autocracy is thus based not on fear, but on deception: when such a regime is engaged in censorship, it claims that there is no censorship. When it is engaged in targeted repression, it claims that a person is imprisoned not for political, but, say, for economic reasons. When it kills political rivals, it says: “This is not us.” Stalin, for example, never claimed that [Bolshevik leader Nikolai] Bukharin poisoned himself—on the contrary, he openly condemned and shot him. For informational autocracies, and Russia is one of them, it is very important to pretend. [Russian opposition leader] Alexei Navalny is officially imprisoned not for his politics, but for fraud—and this is a rule for modern autocracy, not an exception.
OK: How stable is information autocracy, how long can it last in Russia, and what are the conditions for its collapse?
SG: From an economic point of view, the need to expand the educated class in such regimes is growing, and therefore we believe that in the long run information autocracies are doomed. To silence the educated class, one must either constantly bribe it or somehow censor it, so that it cannot tell the rest of society that the country is going in the wrong direction. There are already a lot of educated people in Russia, and the regime faces the dilemma of what to do about it. The further we go, the more expensive co-optation, censorship, and propaganda are. Since the Russian economy is not growing, finding the money to cover these expenses becomes increasingly more difficult. The regime can try and reform the education system so that Russian students can receive their diplomas and still believe the state propaganda. Lots of money has already been invested in this. And so Russian education, especially social sciences, becomes a sham. But, ultimately, there are only two ways out: to move towards democratization, like, say, Singapore, which reduces political control and liberalizes in order to keep sources of growth; or return to a direct dictatorship of the 20th century, as happened with Venezuela. The Chávez regime was an information autocracy, but the Maduro regime has already become a traditional dictatorship based on violence.
OK: Is such a rollback possible in Russia?
SG: Unfortunately, starting last year, we may already be seeing Russia’s return to the repressive dictatorship of the 20th century. This will lead to negative economic consequences, because models based on violence cannot ensure prosperity. The transition from an agricultural to an industrial economy can probably be done under a dictatorship, but the transition from a middle-income country, from an industrial country to a post-industrial one, cannot—this requires freedom, competition, or, as the case of Singapore shows, information autocracy. The Russian authorities openly use repression and do it increasingly more often. The use of laws on extremism, in a sense, is a direct signal that the regime is transitioning to old instruments. Secret censorship and attacks on [independent investigative media outlet] Project are standard tools in the information autocracy arsenal, but the mass closure of the Anti-Corruption Foundation’s offices, the only opposition force in the country, for political reasons is already reminiscent of a 20th-century dictatorship.
OK: There is a view that the current regime is limited by Putin’s life span or his stay in power in some status. What’s your prediction?
SG: I think that after Putin the regime will be different. The current regime is largely based on his personal popularity—it has no other source of power. There is no party: United Russia is not one, and it is certainly not Putin’s base. There is no corporation—neither the army nor the FSB is one. The FSB is not a corporation based on an idea or a code of conduct, but simply a group of people extracting money from Russian citizens’ pockets. And there is no religion or royal family. This is how today’s Russian regime differs from a monarchy, theocracy, or military junta. There are many generals around Putin who would probably like to establish a military dictatorship, but they need Putin’s personal popularity, without which they cannot achieve high legitimacy. Therefore, they cannot eliminate Putin—he is valuable: a plurality, if not a majority, of Russians vote for him. We do not know if it is 60 percent or 30 percent, but clearly there are still more people who trust Putin over [Security Council Secretary Nikolai] Patrushev. We do not know what kind of regime will emerge after Putin—it is quite possible that things will be worse. But Russia is a very educated country on the borders of Europe. The fact that it is so undemocratic and corrupt is a paradox in itself. Perhaps this is due to the Soviet experiment or the imperial legacy. Still, predicting Russia’s future is very difficult. As they say, its past is wonderful, the future is brilliant, only the present is problematic.
Other interviews from the series:
