By the spring of 2008, Russia will have a new president and parliament. Though Putin’s popularity ratings are extremely high—if elections were held tomorrow, opinion polls suggest he would win in the first round with over 50 per cent of the vote—the constitution bars him from seeking a third term. There has been much discussion in the press of candidates to succeed him—Dmitry Medvedev, First Deputy Prime Minister, is mentioned most frequently—but there can be little doubt that Putin himself will nominate his successor. It is even possible that Putin will remain as leader of the dominant party, head of government, or both. The transfer of power is therefore likely to be smooth, ensuring the continuity of the present regime. However, an examination of Russia’s recent social and economic fortunes reveals a number of problems that Putin’s successor will inherit, presenting him with a difficult agenda.
After losing 45 per cent of its output in 1989–98, the Russian economy started to expand as of 1999: gdp grew by 6 per cent that year, 10 per cent in 2000, and 4–7 per cent in 2001–06. The major impetus for this came from the devaluation of the rouble in 1998 and, later, from higher world prices for oil and gas (Figure 1); but Putin can at least take credit for not ruining this growth. Inflation fell from 84 per cent in 1998, when prices jumped after the August 1998 currency crisis and rouble devaluation, to 10–12 per cent in 2004–06.
In comparative perspective, however, Russia’s performance is not that impressive. Many other former Soviet republics—Azerbaijan, Belarus, Estonia, Kazakhstan, Latvia, Lithuania, Turkmenistan, Uzbekistan and, according to some calculations, Armenia—reached or exceeded their pre-recession (1989) levels of output by 2006, whereas Russian gdp was still only at 85 per cent of the 1989 level (Figure 2). Russia’s Human Development Index (taking account not only of gdp per capita, but also life expectancy and levels of education) is still inferior to that of the ussr and even below that of Cuba, where life expectancy is 77 years, against 65 in Russia. China, with a life expectancy of 72, is rapidly approaching Russia’s hdi ranking (Figure 3).
But at least there is more stability in Russia today than during the rocky 1990s. The government budget balance moved from deficit to surplus, the decline in the share of state revenues and expenditure was halted (Figure 4), government debt—domestic and external—decreased (Figure 5), and foreign exchange reserves increased to over $250 billion by the end of 2006 (Figure 6). In 2004 the government created a Stabilization Fund to hold the windfall profits from fuel exports; by the summer of 2006 the Fund contained over $80 billion. Several analysts, however, have pointed out that, given the increase in world fuel prices in recent years, one could have expected an acceleration of economic growth, rather than the slowdown that actually occurred in 2001–06 as compared to 2000.
The reason for the 2001–06 deceleration in growth was the overvaluation of the real exchange rate (Figure 6, above)—the typical Dutch disease that Russia has developed once again. It first arose in 1995–98, leading to the currency crisis of August 1998, and it now seems that history is repeating itself. Optimists argue that, unlike in 1998, Russia currently has large foreign exchange reserves (over $250 billion), but pessimists point out that if oil prices drop and capital starts to flee at a rate of $5 billion a week, as it did in July–August 1998, these reserves would be depleted very quickly. A future devaluation could take the form of either a currency crisis or a ‘soft landing’, but there is little doubt that it will eventually take place.
Besides, current growth is not based on solid foundations: wages and incomes in recent years have been growing systematically faster than productivity (Figure 7), so that the share of consumption in gdp has increased at the expense of investment. As a result, whereas Russian personal and public consumption has already exceeded the pre-recession level, investment is still below 40 per cent of what it was in the last year of existence of the ussr (Figure 8). Russian gross savings are large—over 30 per cent of gdp—but they have been funnelled away via the outflow of private capital and the accumulation of foreign exchange reserves; gross investment therefore amounts to less than 20 per cent of gdp.
There is also another important deficiency in the current growth: the government has failed to use windfall revenues from oil and gas exports in 2000–06 to repair badly damaged state institutions and to restore the provision of crucial public goods, such as law and order, education and health care. Instead, the government cut tax rates, allowing profits from natural resources to accumulate as personal and business income, and has amassed a budget surplus. The share of state spending in gdp has barely increased at all, remaining at the extremely low level of 1999—less than half that of the ussr (see Figure 4, above).