Oil and gas in the capitals

	Vol. 229 No. 2
JACQUES SAPIR, CONTRIBUTING EDITOR, FSU

A maturing post-Soviet model

Since 2003-2004, the post-Soviet Russian economic model seems to have stabilized. From the wild, oligarch-dominated kleptocracy of the mid-1990s, something new has appeared and consolidated, which is quite consistent with political changes emphasizing a strong and partly authoritarian state. Its emphasis on state intervention makes it easy to label a “move back to Soviet times.” This would be wrong not just because the current situation is far removed from the actual Soviet system, but also because the new economic model results not from any kind of political nostalgia for Soviet times, but directly from what happened in the ’90s under Boris Yeltsin.

Large, integrated companies are prominent in the new Russian model. Not only has the government favored the development of very large enterprises like Gazprom, Rosneft and Transneft in the energy sector and RusAl, Severstal, Renova and Uralmash in heavy industry, but state influence-open or covert-is a decisive factor in industrial development.

Most Western observers have focused on state-dominated energy giants like Gazprom and also on newly created conglomerates like the Unified Aircraft Corporation, the Unified Shipbuilding Corporation, Rosatom (for nuclear energy) and RosTechnologia. State influence, however, is more widespread than just a few large companies. Strategic decisions in large, private conglomerates like RusAl are now always made in close cooperation with authorities. Mikhail Khodorkovsky’s fate is a good reminder for all surviving oligarchs of what can happen if they are tempted to break away from the state economic strategy. The return of Norilsk-Nickel into the state-controlled sphere is proof that public authorities are consolidating their hold on the commodities sector.

This is not to say that the heads of these private conglomerates are just obedient servants of their political Master. The system allows large companies considerable tactical freedom. Close cooperation is not to be confused with backseat control. The very fact that most state-owned companies have chosen join-stock status also signals that the government has no intent to meddle with the day-to-day management of the industry.

However, the days of the oligarchs have passed. In the Putin era, the balance of power clearly favors the state. This is even more important at the regional level, where local authorities are extremely active in the economic sphere and public investments are particularly important, Table 1.

TABLE 1. Sources of investment in the Russian economy

What developed in Russia is an economic system emphasizing strong public influence, whatever form it takes. It would be an easy mistake to confuse this with a return to Soviet times. The current system is actually the result of three factors.

First, in economies where commodities are important, the growth of state influence can be seen all over the world. Second, the troubled situation of the Russian banking system after the August 1998 crash has prevented bank credit from playing its usual role in economic development. Financial markets were and are still quite weak in Russia. For these reasons, inter-firm crediting and “inside finance” in large conglomerates became an important part of the investment process. As the tax system was collecting a large part of the raw-material rent, the state became by necessity an important player in the investment game.

A third and very important factor, frequently overlooked by Western observers, is the complete lack of legitimacy of the 1995-1998 large-scale privatization. This was the result both of the way this privatization was implemented and of the subsequent behavior of oligarchs it produced.

When he came to power in late 1999, Vladimir Putin quickly acknowledged this issue as the most serious for political and social stability. There was no obvious quick fix; only by progressively putting oligarchs under control could Putin make the system produced by Yeltsin’s regime politically acceptable. To some extent the current emphasis on state control came about to save the principle of private ownership deeply weakened by Yeltsin-era practices.

By December 2007, Putin went so far as to say that state capitalism was not his goal but that the state had to take the lead when the private sector proved unable or unwilling to do so. This sums up quite accurately the undercurrents behind the development of current Russian state interventionism and explains why the country has embraced the “development state” model.

What is taking shape appears to be a crossover between East Asian industrialism (and particularly Japanese Kereitsu and Korean Chaebols) and Western European state interventionism of the ’50s and ’60s (as in France and Italy).

Long-term sustainability is more difficult to assess. Foreign experiences demonstrate that there is nothing wrong with such an economic model. However, countries where it succeeded historically have had a strong civil service tradition. The current widespread corruption among Russian administrations and possible lack of skilled personnel, therefore, could be a serious problem.

The current choice of Dmitry Medvedev as Putin’s successor, therefore, may be understood as an acknowledgment of the necessity to modernize Russian administrations. Medvedev’s experience in managing “national priorities” since 2005 has probably given the man a good view of problems plaguing Russia’s civil service.

If so, there is some reason to think that the economic model developing in Russia will endure for at least one generation. 

Jacques Sapir is professor of economics at EHESS-Paris and at the Higher School of Economics in Moscow. He is a regular contributor to this column.