Whatever Happened to Russia's Economic Miracle?

By Dmitry Travin

Does Russia have a strong or a weak economy? It's very difficult to judge by just looking at its Gross Domestic Product (GDP). In the 1990s the GDP fell steadily, creating an impression that the Russian economy was in meltdown. But after reaching its lowest point in 1998, it began to grow again, showing an annual rise of up to 7-8%, considerably higher than the equivalent figures in developed countries. People began to talk about Russia, under its new leader Vladimir Putin, undergoing radical change and gradually emerging as a front runner in economic development. In the first years of the new century it was talked about in the same breath as other large rapidly developing states such as China, India and Brazil. Some optimists even expected an ‘economic miracle' that would put Russia in the forefront of global economic development.

Then suddenly it all changed. The economic crisis of 2008 hit Russia especially hard. By autumn the GDP was starting to fall, and the overall figure for the year reached barely 5%. The following year was catastrophic: instead of rising by 8% GDP fell by the same amount, confounding many of the experts who analysed the situation. The Russian government, however, tried to gloss over this apparently disastrous state of affairs, blaming the West for the crisis and claiming that everything was fine: the economy was healthy and it was just a question of overcoming the negative effect of problems originating in the USA.

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Three years have passed since the 2009 crisis - long enough to allow an accurate assessment of the real state of the Russian economy. We can say that it has recovered from the catastrophe of 2009, but that it has failed to return to the astounding rate of growth that marked the mid 2000s. At present the increase in GDP is about 4% per annum, half the rate of its best performance, and there is a growing pessimism among Russians about possibilities for further growth, let alone a return to the figures of several years ago.

Why all the boom and bust?

So what caused these extreme swings in GDP, from collapse in the 90s to rapid growth, then the crisis of 2008-9 and the slow increase of the last three years? To answer that question, it is essential to understand the enormous changes that have taken place in the Russian economy over the last two decades.

The collapse of the 1990s was a result of a radical change in the structure of Russia's economy: many areas of production developed in the Soviet period could not remain unchanged in the switch to a market economy. The defence industry, for example, shrank heavily, since Russia's reformers wanted to leave behind the Cold War and the arms race, and the government was no longer interested in financing the production of tanks, warships and artillery. So those factories that couldn't rapidly convert their production from military to civilian and consumer hardware basically had to close down, and this was of course reflected in the GDP. The events of the 90s were a hard test for Russia, but not in any sense a catastrophe: the widespread closure of industrial plants was a necessary step towards a complete break with the Stalinist model of a strongly militarised economy.

The rapid growth of GDP between 1999 and 2007 was a sign of serious renewal in the Russian economy. This had, however, very little to do with Vladimir Putin, who came to power in 2000. Putin influenced growth only through a reform of the tax system (initiated by his Finance Minister Aleksey Kudrin), which lowered the rates of almost all principal taxes. This reform was a very sensible measure, but the main reasons for rapid growth lay elsewhere.‘

In the first place, at the end of the 90s a decline in the rouble exchange rate brought about a steep fall in foreign imports. The empty shop shelves began to be filled with locally-produced goods. In the second, a steep rise in oil prices brought soaring profits for Russian energy companies: oil and gas are Russian industry's key products and a favourable situation on world markets had brought benefits for the development of the country as a whole. Given Russia's strong dependence on oil and gas exports, it was no surprise that the 2008 crisis affected GDP. Global prices fell: so much for the Russian ‘economic miracle'.

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Dmitry Travin is Research Director at the European University in St. Petersburg's Centre of Modernization Studies. This article originally appeared on Open Democracy and is reprinted here under a Creative Commons license.

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