Russian Economy and Oil Industry during Putins Leadership - Essay Example

Russian Economy and Oil Industry during Vladimir Putin’s Leadership It was not a promising start for Vladimir Putin as the newly appointed Russian prime minister. Having been the leader of The Federal Security Service of the Russian Federation (FSB), Putin definitely knew the issues facing his country, yet being aware of these problems is not similar to dealing with them.1 In 1999, Russia was still having a really difficult time after the dispute of the previous year. After the government failed to pay its debt, almost all of the major private commercial banks in Russian had went bankrupt. The Russian people were seriously affected financially, including Valery Gergiev, the head of the Marinsky Opera of St. Petersburg, and Mikhail Gorbachev, the former president.2 Businesses failed, employees were sacked, and the entire notion of a market economy was in the brink of total collapse. This essay discusses the contribution of Vladimir Putin to the Russian economy and Oil Industry. Even investors were not able to escape the economic downfall. The RTS index, which was the Russian equivalent of the Dow Jones Index of Russian stocks, had been a high performing index before 1997.3 Unfortunately, the index significantly dropped by 1998. It was not merely the wealthy who were badly affected. As industrial productivity dropped and the rate of unemployment rose, the population of Russians living below the poverty threshold, which had dropped to 21% in 1997, quickly rose to 33.3%.4 Western firms trading with Russia also suffered. With the undervalued Russian currency—ruble—only a handful of Russians could bear the price of imported euro- or dollar-based goods.5 Still, the 1990s built the courageous period of Russia. In 1991, Boris Yeltsin proclaimed his market reforms. Yegor Gaidar, the leading reformer, promoted trade and price liberalisation, transforming Russian into a normally functioning market economy by 1994.6 The Minister of Privatisation, Anatoly Chubais, carried out the privatisation process quite effectively that by 1997 roughly 70% of GDP comprised the private sector. Due to unusual political opposition by rent seekers (e.g. new oligarchs and old state company executives) Russia had a typical deficit of 9% of GDP between 1993 and 1998.7 As stated by the World Bank, the corporate subsidies in Russia totalled roughly 16% of GDP by 1998, yet they did not bring in substantial social gains. The long-term extreme budget deficit unavoidably brought about Russia’s terrible economic slump in 1998 with both a massive devaluation and a non-payment on treasury bills.8 Yet, in truth, Russia’s economic dip pushed the market reform into completion. It showed the Russian leaders the value of macroeconomic duty. Russia has been experiencing a strong budget excess since 2000.9 The downturn had diverse unexpected outcomes. Primarily, the debt non-payment encouraged important fiscal changes. Since financing and investing thru tax income was not available anymore, there was no other choice but the get rid of the budget deficit. The government cut down public spending by 14% of GD from 1997 to 2000.10 The political incapability of Russia to stabilise its budget vanished because the sole option was hyperinflation, which no one desired. Every assumption about the unlikelihood of cutting down public spending weakened. Thus almost all subsidies were removed, which also stabilised the economy for Russian businesses. In addition, the financial slump undermined the regional governors and strengthened central state authority. The federal government could engage in a thorough centralisation by redirecting income to the federal government. Federal income nearly doubled as GDP’s share between 1998 and 2002, whereas overall state income was on the point of stability.11 Foreign trade tariffs rose markedly because of devaluation. The federal government could at last demand monetary transactions, which removed barter. The administration of Yevgeny Primakov carried on the tax fight on the oligarchs that the activists had begun in 1997, and the freshly toughened state could defeat the challenged oligarchs.12 The government began imposing the tax laws to large companies, particularly the oil and gas firms, which had formerly gained from independently established taxes. A new forceful liquidation or bankruptcy decree enforced rigid budget limits on companies. Consequently, sum unpaid of state wages and pension dropped, and the monetisation created fair opportunities and advantages. As a result, numerous companies convert ownership, which restored them.13 The devaluation, monetisation, and financial stabilisation were the major driving forces behind the stable and rapid growth of the Russian economy. All the key prerequisites of economic development that Gaidar (1999) had developed at last came into being: “macroeconomic stability and low, predictable rates of inflation, an open economy plus access to promising markets, clear-cut guarantees of property rights and a respectable level of financial liability, high levels of individual savings and investments, and effective programs to aid the poor and to maintain political stability.”14 Immediately after an unfamiliar Vladimir Putin stepped into the limelight. He is widely recognised for these accomplishments, but economic stabilisation was already underway in 1998, prior to his appointment as prime minister, and Russia was by then developing rapidly. Setting the Economic Stage: The Russian Economy before Putin’s Leadership The narrative of the Russian economy in the 1990s is the narrative of a determined effort toward fast, general system transformation by a government—or, more precisely, a chain of governments—having restricted political power and managing a weakened state system. This governmental and political limitation is important to appreciating the irregular movement of market reforms in the 1990s.15 Such reforms that benefitted from the backing of powerful political interests and demanded little of the state’s administrative ability developed quickly. Hence, large-scale, though not thorough, liberalisation of foreign trade and local prices were enforced quite quickly, and privatisation continued swiftly, if messily. In every instance, the level of the reforms was restricted by the need to satisfy diverse local or national interests; fast privatisation became likely only after important negotiations were reached with corporate entities (e.g. employees and managers) and an array of regulations on both local prices of unstable products (e.g. fuel) and foreign trade stayed operational.16 The narrative of macroeconomic planning was widely the same. Strengthened by sizeable outside subsidies, the government was successful, for a while, to reduce inflation by depending mainly on the regulation of exchange rate—a technique that weakly pressured state capabilities, provided that the Bank of Russia was ready to buy rubles and sell dollars at its desired exchange rate.17 On the contrary, reforms were stopped when they put the government into disagreement with influential deep-seated interests or made too much demands on the state’s government capabilities. Russia was trapped, as unfinished previous reforms raised winners who opposed additional reforms. These initial winners acquired greater benefits from the ‘transition rents’ produced by unfinished reform than from the total execution of the reform plan.18 The liberalisation of trade and price, for instance, slowed down after the earlier ‘big bang’, largely because changes brought in by the existing regulations produced ‘arbitrage’—the real-time selling and buying of commodities, currency, or securities in various markets so as to exploit varying prices for the same asset—chances for established agents to gain substantial profits.19 Likewise, the early insider-based privatisation of voucher created a system of firm insider influence that altered later privatisation strategies and raised barriers to the reform of enterprises and the formation of a strong market in corporate hold.20 Governmental and political limitations also made sure that a set of other structural changes, in areas including banking and electricity, slowed down. This limitation also weakened attempts to stabilise the macroeconomic system, because the government was incapable of controlling its own financial structure: economic union would have demanded the collaboration of all components of the state, including a serious reform in both tax and customs services and tax legislation.21 These undertakings were obviously too much for the governments that assumed power in 1992. In the end, this irregular pattern of changes became very difficult to maintain: the effort to maintain stabilisation based on exchange rate without fiscal integration or structural change resulted immediately in the economic slump of 1998.22 Although this economic slump was forgotten during the unexpectedly strong recovery that occurred afterwards, it would be hard to overstate the value of this crisis for making sense of the economic reforms throughout Putin’s leadership. The lessons from the 1998 crisis kept on influencing the perspective of Russian officials about economic reforms during the initial term of Putin.23 Hence, economic strategy became rooted in three major aspects: “careful exchange-rate management, fiscal consolidation and the implementation of a range of micro-level structural reforms that are needed to complete Russia’s systemic transformation by creating much of the basic legal and organisational infrastructure of the new market economy.”24 It is worth mentioning that structural reform and fiscal consolidation both demand the rebuilding of the administrative and legislative capabilities of the state. If the earlier batch of Russian activists abolished the socialist structure and let loose market dynamics, then the main interest of the next generation has thus far been state rebuilding. This requires more than merely the restoration of capabilities damaged in the 1990s. Russia does not only demand a tougher state; it requires a state completely different from that which it received from the USSR.25 Soviet governmental agencies were mainly interested in ‘supervising’ economic operations. The function of the state in a market economy, on the contrary, is certainly ‘regulatory’. In almost all instances, the role of the state is not to inform economic entities what objectives to seek but to behave as a neutral mediator and a supplier of public goods in a market economy filled with independent players deciding and going after their own goals.26 By 1999, when Yeltsin appointed Russia’s new Prime Minister, Vladimir Putin, industrial outcomes were by then climbing sharply. For instance, in 1999, industrial productivity surpassed that of the earlier period by 6%.27 Luckily for Putin, he assumed power at the same time as the Russian economy started to gain from the restoration in Southeast Asia, which had previously caused the economic slump the year prior. To be fair, if anybody is worthy of recognition for the economic recovery, it would be Primakov since the recovery started in 1998 when he was in power.28 Still, more than the measures or strategies of any single Kremlin leader or Prime Minister, the top reason for the recuperation is the recuperation in commodity prices, especially the prices of petroleum. Vladimir Putin’s Economic Reforms Putin’s focus on economic goals and visions surfaced as one of the most unique and vital aspects of his foreign policy towards Western countries. There was an intense focus on the economic components of foreign policy in the address delivered by Putin to the Russian Parliament in 2002.29 He discussed an image of the world wherein economic forces and economic power establish a country’s global position and defined competition as a core feature of the world: I wish to draw attention to another thing: norms in the international community, norms in the modern world, also mean harsh competition—for markets, for investment, for political and economic influence. And in the struggle—in this struggle—Russia has to be strong and competitive.30 In his address he raised the value of the Commonwealth of Independent States (CIS)—members are former Soviet republics, established during the separation of the Soviet Union -- to the economy of Russia.31 He stated the CIS was critical to Russia in ensuring competitive advantages on the global market. The Commonwealth of Independent States is a genuine factor in stability across an extensive part of the world’s territory, an influential group of states with a wide range of objectives and interests. Work with the countries of the CIS is Russia’s main foreign policy priority. This priority is linked, among other things, to the securing of competitive advantages on world markets. The CIS countries have many opportunities to carry out large-scale, joint, infrastructure, transport and energy projects. I am sure that their implementation will increase the solidity of our integration, and will provide new opportunities for the Russian economy, and for others besides.32 Even though the states of Central Asia were not included in the speech they were implicit in his mention of the CIS transport and energy plans. Hence, the economic value of Central Asia to the Russian economy was acknowledged for the first time—within the framework of global economic rivalry.33 The statement of Putin was very different to the actual status of Russia’s economic relationship with Central Asia. Immediately after the collapse of the USSR, economic integration inside the CIS had been proclaimed a major mission for Russian legislation, and still steps had not been taken. Despite many proclamations and resolutions there was no organisation of tax, credit, or economic policies, and no responsibility structure for the execution of decisions.34 The explanation for this was quite straightforward. There was no sincere economic concern in Russia for building economic partnership with Central Asia. Central Asia was considered as an economic priority for Russia merely in broad terms and in a long-range standpoint. It did not appear to provide any economic advantage for the time being or in the short term.35 Thus Russia stayed indifferent in the economic arena in Central Asia and, for the time being, the Central Asian countries redirected themselves in other paths. When Putin became the Prime Minister he attempted to revive CIS economic partnership and introduced the recommendation in 2000 to form a new association, the Eurasian Economic Community (EEC), to take the place of CIS Customs Union.36 The EEC was provided a federal component in its policymaking systems so as to make it more efficient and productive. Putin proclaimed, just like Yeltsin, that he was planning to form a Russian-headed economic body the same as the EU. The problems accompanied by the formation of the EEC made it appear useless. Putin thus placed greater focus on bilateral relationships, because they had a greater likelihood of success.37 In an earlier research, the author argues that Russia ever since 1997 focused more on building partnership with regard to the strategically vital energy assets of the Caspian Sea area, and that such revealed a new inclination towards a geo-economic interest and strategy. The larger emphasis on energy concerns intends to strengthen Russian interests in relation to the investment, exploration, mining, and transport of energy resources on previous territories of the Soviet Union.38 The earliest indication in this concern was a proclamation in 1997 by Boris Nemtsov, the Deputy Prime Minister during that time, demanding greater Russian participation and influence in the growth of the Caspian oilfields so as to neutralise or counteract expanding Western control in the area.39 The research made a conclusion that “the new Russian focus on energy issues can… be viewed as an effort to concentrate resources and efforts on a few key sectors vital for maintaining Russian control over Central Asia”.40 When Putin became Russia’s leader, energy concerns advanced to the forefront. In 2000, Putin mentioned in the Russian Security Council that Russia must become more involved in the Caspian Sea territory. He demanded more intense Russian involvement in the exploration and utilisation of the Caspian energy resources and the harmonisation of Russian strategy by ministries and corporations.41 The post of Representative of the President in the Caspian region was formed, with duty for consolidating policy and handling all foreign policy concerns regarding the territory, as well as the legal partitioning of the Caspian Sea. Viktor Kalyuzhnin, the ex-Minister for Energy, was granted the position. Being a Caspian coast state with massive gas reservoirs, Turkmenistan became a concern for Russia.42 The post-9/11 scenario provided a new push to Russian attempts in the energy arena. On the 27th of April 2003, at the EEC summit convention, a four-year plan was agreed upon with an enormous emphasis on energy partnership.43 To many observers, the plan appeared too aggressive and determined. Nevertheless, it revealed a new Russian focus on transport and energy connections with Central Asian economies, and hence showed this new element of Russia’s perception of its strategic focus in Central Asia. Since 2001, Russia had been paying greater attention to the energy resources of all four states in Central Asia. In the past, its focus had been on the oil and gas reserves of the Caspian Sea territory. Yet, focus was then expanded to the non-Caspian Central Asian states—Kyrgyzstan, Tajikistan, and Uzbekistan—and to involve hydro-energy as well.44 The important function of energy partnership in the foreign policy of Russia became more prominent. Putin pushed the energy concern to the top of the Russian plan for partnership with Central Asia. In 2000 Putin had introduced the concept of gas cooperation between Kazakhstan, Uzbekistan, Turkmenistan, and Russia.45 In 2002, he introduced a scheme for a Eurasian Alliance of Natural Gas Producers, to take in these four countries. On the 1st of March 2002, the heads of Uzbekistan, Turkmenistan, Kazakhstan, and Russia approved a declaration of intent on Cooperation in Energy Policy and Measures to Defend the Interests of Natural Gas Producers.46 As stated in the joint declaration, natural gas alliance would guarantee “stable supplies to the world and CIS markets”.47 Another proclamation approved on October 23 verified such intention, even though the final resolution was entrusted to more negotiations.48 Putin highlighted the significance of bringing together the efforts of Turkmenistan and Russia, the main producers of gas, and Uzbekistan and Kazakhstan, which supply their gas pipelines for transport. The four states planned to organise their investment and import-export strategies and to endorse a shared ‘energy security strategy’.49 A gas coalition would provide Central Asian producers access to the Russian natural gas pipeline system. These Central Asian producers wanted to enter European markets. Another pipeline would pass a current direction from the border of Kazakhstan with Russia, at Alexandrov-Gay, to the north of Lugansk Oblast, Ukraine.50 Since the pipeline system in Central Asia was already there, the key issue was a settlement on the point of access to the European market. Nonetheless, the Central Asia-Centre pipeline network was declining, with restricted capacity and decaying pipes, and thus required investment on a huge extent.51 Russia had solid economic justifications to insist on the co-operation, which would allow it to raise energy trades to its Western clients with the aid of the Central Asian states. Another benefit of the gas co-operation for Russia linked to its contracts with Turkmenistan. It was proclaimed in 2002 that the state oil and gas corporation of Turkmenistan, Turkmenneftegaz, and Gazprom—the world’s biggest natural gas extractor and one of the biggest corporations in the world—were at last to approve a long-term agreement on gas trade and transit.52 This agreement would not be possible without the more far-reaching gas co-operation built with other Central Asian countries because the current Central Asia-Centre pipeline system passes Kazakhstan, Uzbekistan, and Turkmenistan before connecting with the distribution system of Russia.53 Due to the rises in oil prices, the recovering economy of Russia would raise whoever was in power at the moment as the economic hero. In all fairness, Putin did not in any way hinder economic development. In contrast, he used several of his skilled and experienced colleagues from St. Petersburg, like Alexei Kudrin and German Gref, and tasked them to restore the economy.54 They had worked with Putin on financial and economic issues in the past in the office of the St. Petersburg governor and were considered as capable technocrats. Listening to their ideas, Putin launched a flat 13% income tax and introduced a chain of other programmes, as well as a plan to reorganise and make the bureaucratic network simpler that businesspeople had to undertake before they could start a venture.55 In turning away from the agenda of the Soviet period, Putin also demanded recognising the severity of the economic situation of Russia. The rise in the GDP of Russia definitely enhanced the popularity of Putin. But the GDP is not sufficient to build a highly powerful military. Still, Putin has considerable raised the amount of the military budget, by 27% in 2005 and 22% in 2006.56 Yet without sharply reducing consumption, Russia will not be capable of paying for the massive resources required to sustain its superpower military goals. In his recent address, Putin recognised that “the state apparatus is to a considerable extent a bureaucratised, corrupt system, which is not motivated to support positive changes or dynamic development”57; in fact, hindering corruption in Russia demands democratisation, which has lowered Ukraine’s corruption.58 Conclusions One of the trademarks of Putin’s leadership has been the nationalisation of profitable, stable, and major private corporations. A key objective is reducing nationalisation and abolishing it. Russia will not be a democracy or a productive market economy so long as the country is ruled by oligarchs or a small number of state monopolies. But the best contribution of Putin to the Russian economy is his insistence to expand the involvement of Russian in the Caspian Sea region and to form an oil and gas alliance with Central Asian states. This regional co-operation based on shared energy security policy has reinforced Russia’s foreign policy and, consequently, its economy. Such is the economic legacy of Vladimir Putin. Works Cited Arutunyan, Anna. The Putin Mystique: Inside Russia’s Power Cult. New York: Skyscraper Publications, 2014. Print. Aslund, Anders. “An Assessment of Putin’s Economic Policy.” Peterson Institute for International Economics N.p., July 2008. Web. 11 March 2015. Dawisha, Karen. Putin’s Kleptocracy: Who Owns? New York: Simon and Schuster, 2014. Print. Gessen, Masha. The Man Without a Face: The Unlikely Rise of Vladimir Putin. New York: Penguin, 2012. Print. Hanson, Stephen. “The Uncertain Future of Russia’s Weak State Authoritarianism.” East European Politics & Societies, 21.1 (2007): 67-81. Jonson, Lena. Vladimir Putin and Central Asia: The Shaping of Russian Foreign Policy. London: I.B. Tauris, 2004. Print. Kuma, Rajan. “Putin’s Legacy and the State of Democracy in Russia.” International Studies, 45.2 (2008): 89-103. Print. Leahy, Anne. “Putin’s Russia.” International Journal: Canada’s Journal of Global Policy, 55.4 (2000): 633-646. Print. Lo, Bobo. Vladimir Putin and the Evolution of Russian Foreign Policy. London: John Wiley & Sons, 2008. Print. Popov, Vladimir. “Resurgent Russian Economy?: Putin’s Policy without Putin?” International Journal: Canada’s Journal of Global Policy Analysis, 63.2 (2008): 247-261. Print. Ross, Cameron. Russian Politics Under Putin. New York: Manchester University Press, 2004. Print. Warhola, James and Egemen Bezci. “The Return of President Putin and Russian—Turkish Relations: Where Are they Headed?” SAGE Open, 3.3 (2013): 1+. Print. Read More