Abstract
Many observers have seen Russia as a transition economy gradually moving to an economic system of the Western type. This paper disagrees with that and argues that Russia’s economic system is a natural-resource-based capitalist one with Russian characteristics. The most important specifically Russian characteristics are its location, its unaccountable government, its dependent judiciary, the insecurity of private property, the importance of state planning, and the role of military factors. Taking these issues into account, some thoughts are offered on likely future developments.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Gaddy and Ickes, who are well aware of the importance of defense factors, nevertheless write about ‘mistakes’ of location policy (p.36). This is a market economy perspective by economists from a country that has not experienced a war in its own territory for a century and a half. It ignores the conscious policy in the Soviet period to locate production, especially defense production, a long way from vulnerable frontiers. Was this a ‘mistake’? Or was it just a necessary cost of a dangerous international environment? Would it have been more sensible to concentrate tank production in Leningrad? The high transport costs and loss of agglomeration effects resulting from the violation of Zipf’s law were the result of a conscious policy aimed at minimizing losses from attack. As Khrushchev put it in 1960, ‘Of course in the event of a new world war all countries will suffer. We too will experience big misfortunes and we too will have many victims. However, we will survive because our territory is huge and the population less concentrated in large industrial centres than in many other countries. The West will suffer much more’ (Ellman, 2014, p. 248).
For a discussion of accountability in contemporary Russia, see Sakwa (2008).
For an attempt to reconcile this fact with the large and growing use of the courts, see Hendley (2012).
Payment to Members of Parliament, other than Ministers, was only introduced in 1911. Until then, they were expected to live on their income from (landed, commercial, financial, or industrial) property (and/or, in a minority of cases, part-time earnings as lawyers, businessmen, or writers).
Haddad (2002, p. 243) in his book on economic systems noted that ‘If the distribution of income and wealth is highly skewed, or if the wealth of the few is seen by the rest of the population to have been acquired illegitimately, low-income groups will feel that they are not receiving their just rewards; they will only do the minimum amount of work they can get away with. A society where many workers are dissatisfied and poorly motivated will tend to be socially and politically unstable and, in turn, economically unstable and wasteful’ (see also Polishchuk, 2013).
Royal Dutch Shell is a long-term investor in giant projects and would have preferred to retain all its shares in the project to obtain the expected long-term positive cash flow. On the other hand, for the Japanese partners, the terms were more attractive. Other notorious cases are the UK-based Hermitage Capital Management and the Norwegian Telenor.
This was forcefully argued by the former oligarch Khodorkovsky at the second Yukos trial in November 2010. In his final statement he said, inter alia, ‘The security bureaucracy can do anything. There is no right to private property. Those who clash with the system have no rights whatsoever. Even though they are enshrined in law, rights are not defended by the courts, because the courts are either afraid of or part of the system. Can we be surprised that rational people don’t strive for self-fulfillment here in Russia? Who will modernize the economy? The prosecutors? The police? The chekists [security officials]?’ (Ledeneva, 2013, p. 20).
The term ‘modernization’ applied to Russia today is ambiguous. It may mean economic, technological, and military modernization. It may also mean socio-political modernization, that is, a reduction in the role of networks, personal relationships, and informal methods of governance. It may also mean both together. This paper is primarily about the former type of modernization, but the two are actually related in complex ways that cannot be fully explored here. A surprising official example of the former was given by Prime Minister Medvedev in a TV interview on 10 December 2014 (http://government.ru/news/16036/, accessed 16 December 2014). He stated that 25% of the workforce was currently employed in small businesses and that this figure would have to grow to 50% to reach the level of a modern economic system. A popular exposition of the latter kind of modernization has been given in a novel by V.Pelevin quoted by Ledeneva (2013, p. 3). Modernization in this sense means ‘that trains in Russia would follow the timetable, bureaucrats would not demand kickbacks, judges would ignore telephone commands, natural resource traders would not take their money to London, traffic policemen would live on their salary, while Rublyovka [an elite residential district near Moscow] residents would move to Chistopol’skaya krytaya [a prison]’.
The weakness of the Russian bourgeoisie, and the resulting need for another actor to take on the task of modernizing the country, is a long-standing theme of Russian politics. The Manifesto of the First Congress, held in Minsk in 1898, of the Russian Social-Democratic Workers’ Party, which later split into Bolshevik and Menshevik factions, argued that ‘The further east one goes in Europe, the politically weaker, more cowardly and meaner becomes the bourgeoisie and the greater the share of cultural and political tasks which fall to the proletariat’ (Kommunisticheskaia, 1970, p. 15). Similarly, the need for the state to play a major role in the economy because of specifically Russian conditions and the mentality of the people is a commonplace of modern Russian writing (eg, Kirdina, 2000; Volkonsky, 2002).
For the text of the law, see http://www.kremlin.ru/acts/46126, accessed 13 October 2014. For a brief background to Russia’s strategic planning, see Monaghan (2014, pp. 8–10). For a more detailed and very well-informed account, see Cooper (2012).
For the text of the speech, see http://www.kremlin.ru/news/46713, accessed 13 October 2014.
For the text, see http://onf.ru/leader/ukazy/, accessed 13 October 2014.
Although the 2018 goal for the World Bank’s Doing Business ranking seems over-ambitious, Russia has made some progress in this regard. The 2011 ranking was 120th, the 2014 ranking 92nd. Obviously, ambitious presidential goals can be useful if they incentivize officials to take measures to move toward them, even if they are not 100% attained.
The draft 2015 budget, which anticipated a deficit of just 0.5% of GDP, which would have been very modest compared with the United States and many European countries, was based on an oil price of US$96 per barrel. On 15 October 2014 the price of Urals crude, the Russian export blend, was about $83 per barrel. Two months later it was about $60 a barrel. The decline in oil prices also has a negative effect on the price of Russia’s natural gas exports.
At a meeting of the State Council and Commission for Monitoring Key National Development Indices in December 2013, Putin said, ‘I would like to direct the attention of departments, the Government as a whole and the regional authorities to one systemic and, unfortunately, chronic problem. As in the past, it often happens that a basic law or document is adopted, but the detailed instructions detailing precisely how it is to be implemented are neglected. As a result nothing happens. I request everyone to see that the gap in issuing these detailed instructions is closed as quickly as possible’ (http//www.kremlin.ru/news/19882, accessed 13 October 2014). As he pointed out at the same meeting, the 2013 plan for rehousing people from condemned housing was 96% underfulfilled. On the difficulty of implementing top-level decisions in Russia, see Monaghan (2012).
At the end of 2012, a quarter of the money allocated by the federal authorities to the regions to implement the national housing program was unspent. It was expected that the situation would be the same in 2013. See the report of the joint meeting of the State Council and Commission for Monitoring Key National Development Indices in December 2013 (http://www.kremlin.ru/news/19882, accessed 13 October 2014).
For the text, see http://onf.ru/leader/ukazy, accessed 13 October 2014.
The desirability of attracting private companies to work, for instance, in fulfilling defense programs has been stressed by Putin. In an expanded meeting of the Security Council on 31 August 2012 he stated, inter alia, ‘It is necessary to improve the mechanisms for private-state partnership in the defense-industry sector. It is necessary to eliminate many traditional stereotypes, for example, that only special state institutions or organizations can work on defense matters. We already have the successful experience of private companies which have developed and produced the most complex, most wanted, and most sensitive from a defense point of view, products’ (see http://www.kremlin.ru/transcripts/16328, accessed 29 October 2014).
For the way in which micromanagement undermines attempts to implement a long-term strategy, see the discussion by the anonymous insider quoted in Ledeneva (2013, pp. 50–51).
The figures for 2014–2017 come from Cooper (2014) and are cited with permission. For further information on Russian military expenditure, see Cooper (2013). The figures quoted in the text are for total military expenditure. This includes items such as military pensions, the internal troops of the Ministry of the Interior, and the border guards of the FSB (the state security service). It exceeds the more narrowly defined, and often-quoted, defense expenditures. For example, in the draft 2015 budget, defense expenditures narrowly defined are 4.2% of the GDP, but total military expenditures are 5.4%. It should be noted that the budgeted share of military expenditures in GDP depends not only on budgeted military expenditures but also on the expected rates of growth of the economy and the expected rate of inflation. If the military budget in rubles remains constant while inflation rises above the anticipated level, then real military expenditures will fall, relative to the budgeted level, and military expenditures as a share of GDP will fall, relative to the budgeted level. Conversely, if the GDP falls instead of rising as anticipated, and real military expenditures remain as budgeted, then the share of military expenditure in the GDP will rise, relative to the budgeted level. Ex ante budget figures are just estimates. It is the ex post budget outcome figures that determine what military expenditure as a share of the GDP actually was.
The Ministry of Finance has naturally opposed the sharp increases in defense spending. In 2011 the then Minister of Finance, A. Kudrin, was dismissed after criticizing the planned defense budget for 2012–2014. The current Minister of Finance, A. Siluanov, has also spoken out against excessive military expenditures.
This was stated at an expanded meeting of the Security Council of 31 August 2012.
The term ‘liberal’ is used in this paper in the European sense.
For a brief explanation of the Soviet system of mobilization planning, see Ellman (2014), Chapter 4.
This statement was made at an expanded meeting of the Security Council on 31 August 2012.
References
Brancato, E . 2009: Markets versus hierarchies. Elgar: Cheltenham, UK; Northampton, MA.
Cooper, J . 2012: Reviewing Russian strategic planning: The emergence of strategy 2020. NATO Defense College: Rome.
Cooper, J . 2013: Russian military expenditure: Data, analysis and issues. FOI Report, FOI-R-3688-SE, Swedish Defense Research Agency (FOI): Stockholm, http://www.foi.se/Documents/foir_3688.pdf, accessed 5 November 2014.
Cooper, J . 2014: Military expenditure in the draft federal budget of Russia for 2015 and the ‘planned’ years 2016 and 2017. Unpublished note: Birmingham.
Ellman, M . 1989: Socialist planning, 2nd Edition. Cambridge University Press: Cambridge.
Ellman, M . 2013: What did the study of transition economies contribute to mainstream economics? Japanese Journal of Comparative Economics 50 (1): 9–30.
Ellman, M . 2014: Socialist planning, 3rd Edition. Cambridge University Press: Cambridge.
Elster, J . 1983: Sour grapes. Cambridge University Press: Cambridge.
Gaddy, C and Ickes, B . 2013: Bear traps on Russia’s road to modernization. Routledge: Abingdon, UK; New York.
Gel’man, V and Marganiya, O (eds) 2010: Resource curse and post-Soviet Eurasia: Oil, gas and modernization. Lexington Books: Langham, MD.
Gerasimov, V . 2013: Tsennost’ nauki v predvidenii, Voenno-promyshlennyi kur’er no. 8 (27 February–5 March).
Graham, L . 2013: Lonely ideas. Can Russia compete?. MIT Press: Cambridge, MA.
Gustafson, T . 2012: Wheel of fortune. The battle for oil and power in Russia. Harvard University Press: Cambridge, MA.
Haddad, L . 2002: Towards a well-functioning economy. Elgar: Cheltenham, UK; Northampton, MA.
Hall, P and Soskice, D . 2001: Varieties of capitalism. Oxford University Press: Oxford.
Hanson, P . 2014: Reiderstvo: Asset-grabbing in Russia. Chatham House: London.
Hedlund, S . 2005: Russian path dependence. Routledge: London.
Hedlund, S . 2006: Vladimir the great, grand prince of Muscovy: Resurrecting the Russian service state. Europe-Asia Studies 58 (5): 781–785.
Hedlund, S . 2008: Such a beautiful dream: How Russia did not become a market economy. Russian Review 67 (2): 187–208.
Hedlund, S . 2011: Invisible hands, Russian experience, and social science. Cambridge University Press: Cambridge.
Hendley, K . 2005: Making sense of business litigation in Russia. In: Sharlet, R and Feldbrugge, F (eds). Public Policy and Law in Russia: In Search of a Unified Legal and Political Space. M.Nijhoff: Leiden and Boston.
Hendley, K . 2012: The puzzling non-consequences of societal distrust of courts: Explaining the use of Russian courts. Cornell International Law Journal 45 (3): 517–567.
Hill, F and Gaddy, C . 2003: The Siberian curse. Brookings Institution: Washington DC.
Khanin, G . 2006: A mobilization scenario for the contemporary Russian economy. In: Ellman, M. (ed). Russia’s Oil and Natural Gas. Anthem: London and New York.
Kirdina, SG . 2000: Institutsional’nye matritsy i razvitie Rossii. TEIS: Moscow.
Kommunisticheskaia. 1970: Kommunisticheskaia Partiia Sovetskogo Soyuza v Rezolyutsiiakh i resheniiakh s’ezdov, konferentsdii i plenumov TsK tom pervyi 1898–1917. Politizdat: Moscow.
Kontorovich, V . 2006: The importance of geography. In: Ellman, M. (ed). Russia’s Oil and Natural Gas. Anthem: London and New York.
Krotkov, VO . 2014: Avtoritarnaia vlast’ Kremlia v usloviiakh sotsial’no-politicheskogo tranzita. ROSSPEN: Moscow.
Kuboniwa, M . 2012: Diagnosing the ‘Russian disease’: Growth and structure of the Russian economy. Comparative Economic Studies 54 (1): 121–148.
Kuzminov, Ia, Radaev, V, Yakovlev, A and Yasin, E . 2005: Instituty: ot zaimstvovaniia k vyrashchivaniiu: opyt rossiiskikh reform vozmozhnoe kul’tirovanie institutsional’nykh izmenenii. Higher School of Economics: Moscow.
Ledeneva, A . 2013: Can Russia modernise?. Cambridge University Press: Cambridge.
Lynch, AC . 2005: How Russia is not ruled. Reflections on Russian political development. Cambridge University Press: Cambridge.
Monaghan, A . 2012: The vertikal: Power and authority in Russia. International Affairs 88 (1): 1–16.
Monaghan, A . 2014: Defibrillating the vertikal? Putin and Russian grand strategy. Chatham House: London.
Oleinik, A . 2011: Vlast’ i rynok: sistema sotsial’no-ekonomicheskogo gospodstva v Rossii ‘nulevykh’ Godov. ROSSPEN: Moscow.
Parshev, AP . 2001: Pochemu Rossiya ne Amerika. Krymskii Most-9: Moscow.
Polishchuk, L . 2013: Institutional performance. In: Alexeev, M and Weber, S (eds). The Oxford Handbook of the Russian Economy. Oxford University Press: Oxford.
Pugachev, S . 2014: Businesses in Russia ‘serfs’ to state, says ex-Putin aide, Financial Times 9 October, pp. 1, 8.
Putin, V . 2012: O nashykh ekonomicheskikh zadachakh, Vedomosti 30 January.
Rosefielde, S . 2005a: Illusions of transition: Russia’s muscovite future. Eastern Economic Journal 31 (2): 283–296.
Rosefielde, S . 2005b: Russia: An abnormal country. European Journal of Comparative Economic 2 (1): 3–16.
Rosefielde, S and Hedlund, S . 2008: Russia since 1980: Wrestling with westernization. Cambridge University Press: Cambridge.
Sakwa, R . 2008: Constitutionalism and accountability in contemporary Russia: The problem of displaced sovereignty. In: Smith, G and Sharlet, R (eds). Russia and its Constitution: Promise and Political Reality. M. Nijhoff: Leiden; Boston.
Smith, G . 2007: The procuracy, Putin, and the rule of law in Russia. In: Feldbrugge, F. (ed). Russia, Europe, and the Rule of Law. M. Nijhoff: Leiden; Boston.
Solomon, P . 2007: Informal practices in Russian justice: Probing the limits of post-Soviet reform. In: Feldbrugge, F. (ed). Russia, Europe, and the Rule of Law. M. Nijhoff: Leiden; Boston.
Volkonsky, V . 2002: Drama dukhovnoi istorii: Vneekonomicheskie osnovaniia ekonomicheskogo krizisa. Nauka: Moscow.
Yakovlev, A . 2006: The evolution of business – State interaction in Russia: From state capture to business capture? Europe-Asia Studies 58 (7): 1033–1056.
Acknowledgements
The author would like to thank J. Cooper, P. Ellman, D. Fomin, S. Hedlund, G. Khanin, V. Kontorovich, S. Rosefielde, and J. Shapiro for their helpful comments. The author alone is responsible for any remaining errors of fact or interpretation. This paper could not have been written without the facilities provided by the Amsterdam Business School, for which the author is very grateful.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Ellman, M. Russia’s Current Economic System: From Delusion to Glasnost. Comp Econ Stud 57, 693–710 (2015). https://doi.org/10.1057/ces.2015.9
Published:
Issue Date:
DOI: https://doi.org/10.1057/ces.2015.9