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of oil and natural gas in the last five years, after stagnancy in the 1990s. Equally significant has been the unprecedented rise in oil and gas prices since 2005 to over $ 90 per barrel in the global market, which has brought rich dividends for Russia. A huge inflow of petrodollars has made a qualitative difference to the financial position of the Russian economy, a major portion of which is again invested in the energy and defence sectors.

Acquisition of Oil Assets

It is important to note that to make Russia an energy superpower, Putin has succeeded in forging close economic and political ties with the energy rich but landlocked central Asian states in which Russia’s energy giants Gazprom and Lukoil have been actively involved – in producing their oil and gas and exporting them to world markets through Russian pipelines. The Russian state and Russian energy companies have been working in tandem to achieve their strategy in the global energy market with control of about 18-20 per cent of oil and 30 per cent of natural gas in the world. This strategy has become more effective as Russia’s energy firms such as Gazprom, Lukoil and Rosneft, with support from the Russian government, have used immense reserves of petro dollars to acquire assets through energy related investments including energy infrastructure in several countries such as Kazakhstan, Turkmenistan, Uzbekistan, Belarus, Moldova, Armenia, Hungary, Algeria, Iraq, Venezuela, etc.

More significantly Russia has used the network of pipelines to assert its geoeconomic role in the global energy market. In exporting oil and gas Russia has often favoured some nations which are politically aligned and close such as Belarus and Armenia, while punishing those such as Ukraine and Georgia which have opposed it. Hence this policy has generated considerable debate since according to some western analysts, Putin has been playing political hardball with Ukraine, Georgia, and the Baltic states using pipeline diplomacy.

Fourthly, Putin has adopted a policy under which the economy has been partially renationalised and brought under the control of the state. This is particularly the

Economic & Political Weekly december 8, 2007

case with regard to “strategic sectors” such as energy and minerals in which the state has to play a critical role and hence the role of the private sector has been restricted. Control over the strategic sectors has enabled Russia to promote its geoeconomic and geopolitical interests. As a matter of policy, during the last few years Putin has also reduced the share of foreign capital and that of several international oil giants in the strategic sector, a reversal of the trend in the Russian oil industry under Yeltsin.

With enormous petrodollars at the disposal of the state, the Russian government has acquired shares of foreign companies operating in Russia to reduce them to minority shareholders. While this is done as a matter of strategy to serve Russia’s national interest, when the share of foreign oil giants was reduced in Russia’s Sakhalin-3 oil field in 2007, it raised concerns in the west about the investment climate in Russia. Hence, according to a recent study carried out by energy experts in Paris, on account of the divergent strategies adopted by Russia and the west, energyrelated tensions have increased.

Mega Corporations

Fifthly, an important policy measure relates to merging of state controlled enterprises as mega corporations, which are expected to play a dominant role in the Russian economy. For instance, the defence sector enterprises play an important role in Russia’s economic growth. They are major exporters of defence equipments and hence hard currency earners for the country. In May 2007 the Russian government created the United Aviation Corporation which combines civil and military aircraft producers such as MiG, Sukhoi, Tupolev, etc. Similarly, in July 2007 the United Shipbuilding Company was formed which combines both the civil and naval shipbuilders. This company is headed by Sergei Naryshkin, who is close to the Kremlin.

Such an approach has been taken to strengthen the hold of the Russian state on these corporations and also to enhance the bargaining power of Russia particularly in dealing with foreign countries and companies. This will also help Russia to enhance its status in the world defence market giving it a political edge vis-à-vis the US. India being one of the major importers of Russian defence equipments may also have to deal with this new development. Unlike during the Soviet era when the state was the sole organisation, Putin’s Russia may selectively intervene, leaving market elements to play its role so long as the national interest of the country is served.

Shortcomings

Some Russian economists and political leaders including a few former ministers are critical of Putin’s policies. For instance, former minister Anatoly Chubais, who played an important role in the economic reforms under Yeltsin and at present the chief of Unified Energy System, considers that the increasing role of the state in business is a tactical mistake. Former prime minister Mikhail Kasyanov has opined that excessive government interference in the economy and an increasingly servile judiciary will adversely affect the country. Andrei Illarionov who was the economic advisor to Putin for many years resigned from his position in 2005 since he had strong differences with the economic policies pursued by the Russian government. At the economic forum in London in 2006, Russia’s Alfa Bank president Pytor Aven stated,“in our country the state apparatus is growing at a gigantic speed. It poses a serious question about how effectively economic problems can be tackled in this situation.”

Over-Concentration

These critical observations are not without substance. Russian economists have pointed out that concentration and overdependence on only two sectors, namely, energy and defence, has led to the lack of diversification of the Russian economy. The agricultural sector, the industrial branches such as engineering and consumer goods have been lagging behind due to lack of investment and modernisation. Transport and infrastructure have also not received due attention and that, in due course, may retard economic growth. Perhaps an exception is the information technology sector, which has recorded an annual growth of 25-30 per cent during the last few years. But with

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agricultural growth of hardly 1-3 per cent per annum, the increasing demand for agricultural products has resulted in shortage of meat, milk, bread, etc, and rise in prices ranging between 7 and 20 per cent in 2007. This has created social unrest in different parts of the country.

As opined by a Russian economist, 80 per cent of exports comprise oil, natural gas, minerals, timber, etc, which have made Russia an exporter of raw materials and this is not a reflection of an advanced industrial country. Hence Russia suffers from the neglect of modernisation in the economy, which has affected its competitiveness and efficiency in the global market. It has been rightly pointed out by World Bank economists that Russia lacks the strategy for making use of the huge earnings from energy exports for the develop ment of infrastructure, structural reforms and social policy. While containing the role of oligarchs, Putin has not strengthened market reforms and has not promoted competition in the economy. Hence what has emerged in Russia is state capitalism and not market capitalism.

Economic Disparities

It is important to note that economic disparities among the regions, which were negligible in the past have now increased. For instance, in 2005 out of 88 regions 37 of them had an industrial growth rate of less than 3 per cent and 23 regions had negative industrial growth rates. Economic growth is concentrated in a few urban centres such as Moscow, St Petersburg and a few resource-rich regions. Hence bringing in investment and business to depressed regions will be a major task. Similarly, disparities among different sections of the society have increased. Rapid economic growth has created a high salaried class. The growing affluence in the Russian society is also evident from the reports that one-third of the list of 600 candidates of the pro-Kremlin Unified Russia party for the December 2007 elections for the Duma (parliament) are dollar millionaires.

Conditions at the Bottom

In contrast to the affluent section of the society, the condition of 12-15 per cent of the population who live below minimum subsistence level and of about 8 per cent being unemployed is worse. These are people with low levels of income in urban areas such as pensioners and agricultural workers. Their condition has worsened with the discontinuation of the Soviet era social and medical benefits without adequate monetary compensation. Moreover, corruption in Russia is rampant and so also bureaucratic interference, which are affecting the business climate in the country. Putin has not been able to solve these problems so far.

Of late there is realisation of some of these shortcomings. After witnessing the protests of pensioners in August-September 2007 Putin has ordered the revision of pensions all over the country. More importantly Putin has made major changes in the composition of the Russian government. In September 2007 he sacked several ministers including the former prime minister Mikhail Fardkov, the minister for transport Igor Levitin and the minister for social welfare. He has inducted a finance expert Viktor Zubkov as prime minister and he has effectively checked money laundering from Russia. This has created speculation as to whether Putin would support him as the next president of Russia in March 2008.

Putin’s formula has no doubt brought rich dividends for Russia so far and it has enabled him to achieve his major economic and political objectives. But in the long run it may not help Russia since in the age of globalisation only a decentralised, modernised, and diversified Russian economy will be competitive and sustain economic growth. But this will be a major challenge for Russia in the years to come since it may involve reversal of many policy measures Putin has initiated so far.

October 13, 2007

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