Is Russia Heading to Democracy?

During Russia’s transition to capitalism many things went wrong, from politics to economic decisions. People are always reluctant to change and the “Status Quo” will always fight hard to persist, for a simple reason: whoever is in a dominant or privileged position does not want to give up his/her advantages.

The communist strive to stay in power over any adversity or adversary, either smashing opposition or promoting corruption. During perestroika, who did not oppose to changes, drove to get the most out the reforms to themselves; as regions, bureaucrats, and industrial firms’ directors (Red directors) actually did. 

Regions took advantage of the Russian government weakness. In order to improve their position of power, regions let the Federal office in a precarious situation; poor tax recovery, less control over regions and unable to comply with its budgetary and fiscal obligations. While bureaucrats, politicians and “Red Directors” managed to grab as much wealth as they could. 

The privatization process was plagued of inconsistencies, improvisation, corruption and even illegality. Managers of companies being privatized end up with more power and wealth than predicted. 16,500 firms were given away, leaving Russian government in the same position as before. A plan to privatize Russia’s most valuable, public and strategic, assets was orchestrated by bankers, benefiting from the “deal”, and politicians in “Pledge Auctions”; where the first ones, end up acquiring those assets for a fraction of their value, in the middle of questionable transactions. 

Privatization is a serious matter, and may be the best option to boost an economy, or even save a country with economic and social problems:

“Governments take privatization stance to reduce its burden in terms of underutilization of resources, over and redundant employment, fiscal burden, financial crises, heavy losses and subsidies in order to improve and strengthen competition, public finances, funding to infrastructure, and quality and quantity of services in terms of management.”¹

But in this case did not go in the right way. Even though the motives to enact the “Pledge Auctions” may be durable at some extend, the actual output is not consistent with the reality, needs, and best interest of the Russian nation. If the auctions have gone right and fully transparent, the Russian government would have received more than enough money to be used to fix the enormous problems and challenges the nation was facing, without resigning to its most valuable assets at the end; or if does, would end up with a lot more cash than what actually received. 

From my point of view, this full episode of privatization, disguised as loan, starred by Oneksimbank, Menatep, Inkombank, Imperial, Stolinchny and Russian’s politicians, is more a conspiracy to steal Russian wealth than a movement to save the economy.

Monetary and fiscal policies did not follow the logic of the process, while adjusting an economy, it is imperative to maintain fiscal discipline and a tight monetary approach in order to control inflation and other economical distortions that may surge. In the other hand, pop up issues are easier to manage from austerity than from monetary liberalism.

The lack of knowledge, poor management and corruption is more than obvious in the full transition of Russia from communism to capitalism, spoiling the full process from the very beginning.

A considerable amount of trade was being conducted between EU and Russia, during the period of 1992 to 1999 (See chart below); a natural path to follow, would be deep into that already established relationship to integrate to Europe, while also open to some other neighbors like China, Japan and to U.S. as well. Hesitation is not a good adviser when making radical revolutions, and hidden agendas do not help either.

Exports and Imports by Partner, 1993-99
(millions of U.S. dollars)
	1992	1993	1994	1995	1996	1997	1998	1999
Exports
U.S.	694	1,998	3,748	5,092	4,584	4,951	4,808	6,433
EU	20,226	19,672	22,412	26,054	26,977	28,000	22,826	24,022
CIS			13,574	14,366	15,310	16,584	13,369	10,690
Other	18,822	22,377	23,344	32,083	34,567	34,619	28,727	31,938
Imports
U.S.	2,885	2,304	2,071	2,651	2,231	4,061	3,992	2,387
EU	15,953	11,198	15,383	18,005	15,669	19,578	15,427	11,102
CIS			10,309	13,450	13,935	14,081	11,015	8,339
Other	15,895	13,249	10,837	12,293	11,483	14,409	12,042	8,484
Source: IMF, Direction of Trade Statistics (Washington, D.C.: IMF, 1997-2000).

 The prelude of problems starts with Boris Yeltsin, who decided to follow a personal political agenda before the nation’s best interest; even, in the middle of a huge democratization process, to be implemented, in a country with no democratic experience at all. Russia came from a 500 years old Tsarist regime, to a communist regime, both autocratic systems. 

Complex democratization processes, like the Russian one, are supposed to be implemented gradually, with high degree of caution and transparency. The first aspect to attack may be the economic one, along with a deep legal reform to establish a framework to deal with present and future changes. In a government with fiscal and budgetary immediate needs, a privatization strategy is a durable option, but assuring that it will bring enough cash to resolve the above mentioned causes. It is also valid to consider in soliciting loans from international institutions, while well financed and under the right conditions. Price liberalization may follow with responsible fiscal and monetary management, hand to hand with a macroeconomic tune up. The political aspect may be the last to touch, due to its sensitivity and the need of a strong political capital to succeed.

It is hard to blame one or two people, or a project, or policy in particular, so many private agendas were prioritized before the national interest. Many subjects were ready to take advantage of the situation while lack of experience was reigning during the process.

After the failure, Russia faced two options, either continue to liberalization and democratization of its system or going backwards, as seems to be doing under the Medvedev-Putin “Tamdem”.²

Vladimir Putin is focused in reversing all advances made by Russia in regards of liberalization and democracy. During his mandate a low respect for the rule of law, human rights or press independence has been appreciated. Putin is seen as going in and out from Kremlin assisted by his protégé Dmitriy Medvedev. Putin ruled from 2000 to 2008 to put Medvedev in power from 2008 to 2012; just on time, to enact a reform to extend presidential periods to 6 years, instead of the former 4 years, and the State Duma (lower legislative chamber) to 5 years. After these reforms, Putin has come back, and may last for at least 12 years more in power, if the providence allows it.

Russia’s economy began to recover from the 1999 collapse supported mainly by oil and gas exports; and is still growing. Putin’s legitimization has its roots in the income generated from oil exported products and oil price increases, along with the opportunity, to show a steady economy grow, have social expenditure, and suppress social unrest.³ But the dependency on oil and petroleum products is increasing to very high levels; more than 50% of Russia’s exports, in the latest years, are coming from oil and petroleum products (See chart below).

Oil - Petroleum Products Revenues, and Exports Share
Year	Oil Revenue	Petrol. Prod. Rev.	Share for Oil and
	U$ Billions	U$ Billions	Petrol. Prod. Exports
2000	$           25.30	$                      10.90	34.3%
2001	$           25.00	$                        9.30	33.5%
2002	$           29.10	$                      11.20	37.5%
2003	$           39.70	$                      14.00	39.4%
2004	$           59.00	$                      19.20	42.6%
2005	$           83.40	$                      33.80	48.0%
2006	$        102.30	$                      46.60	48.3%
2007	$        114.20	$                      51.40	48.8%
2008	$        151.70	$                      78.30	51.0%
2009	$           93.50	$                      46.80	48.9%
2010	$        129.00	$                      69.40	51.4%
2011	$        171.70	$                      91.30	53.1%

Source: Wojciech Konończuk (April, 2012). Russia’s Best Ally: “The situation of the Russian oil sector and forecast for its future”: p.10-11. Available online at http://www.osw.waw.pl/sites/default/files/PRACE_39_en.pdf

In the other hand, problems associated with the oil exploitation, and the fall of production of the most important reservoirs across the nation, may be a sign that new strategic approach should be implemented, if the sustainability of the Russian economy is the goal. Even today, Russia is still impacted for a deficient, “unreformed healthcare system and unhealthy lifestyles, low domestic and foreign investment, corruption, high crime rates, capital flight, and unemployment.”²

Russia is still a nuclear super power and a strategic ally to U.S. in controlling the proliferation of weapons of mass destruction (WMD), and for that reason, Washington has helped with almost $19 billion from FY 1992 through FY 2010 to promote democracy and freedom for the Russians; but Russia’s conflict with Georgia in 2008 has jeopardized the cooperation.

After 2012, the cooperation in the control of WMDs has changed, and a new, and more limited agreement in this matter, has replaced the old one in June 2013. ²

If Russia should be able to continue the path to democratization, has a lot to offer to its nationals and to the world at large; with a great scope in natural resources and positioned as the second larger exporter of oil, just after Saudi Arabia, Russia may be considered a complementary economy for countries like United States in areas like “food and food processing, oil and gas extraction technology, computers, communications, transportation, and investment capital.”² An open and democratic Russia will boost its economy when interacting to the world based on its competitive advantages and the possibility to find the capital needed to execute ambitious programs, and projects, that would result in prosperity, and more stable lifestyle to its nationals. 

Cites 

    1- International Journal of Contemporary Business Studies, (October, 2011). Vol: 2, No: 10. ISSN 2156-7506

   Available online at http://www.akpinsight.webs.com

   2- Jim Nichol, (September 13, 2013). Russian Political, Economic, and Security Issues and U.S. Interest. Congressional Research Service.

   Available online at http://www.fas.org/sgp/crs/row/RL33407.com 

  3- Wojciech Konończuk (April, 2012). Russia’s Best Ally: “The situation of the Russian oil sector and forecast for its future”. 
  Available online at http://www.osw.waw.pl/sites/default/files/PRACE_39_en.pdf