Well over a year and a half into the global economic crisis, it is still not clear how events will ultimately play out. It has been a dramatic time for all countries, including Russia. Prior to the start of the crisis, many in Russia thought that they were “decoupled” from what happened in the leading industrial economies. But the Russian economy was hit hard. The world financial crisis and the bursting of the asset bubble presented Russia with a double shock. Oil prices collapsed, which had a huge direct impact. And capital was withdrawn from Russia in the flight to safety. Both of these shocks were primarily due to events abroad. It is important to stress this point, because some observers have argued that Russia’s crisis is home grown. It is not. Russia’s structures and policies have determined how the shock played out in Russia, but the shock itself was external.
On the surface, this is similar to what happened a decade earlier, as oil prices in 1998 plunged in response to the Asian Crisis of the previous year, and Russia suffered a financial crisis with near-catastrophic consequences, including a twofold real devaluation and a default on domestic debt. But the current crisis differs significantly from the one 10 years ago. Then, Russia’s inability to deal with its own fiscal crisis allowed the external shock to have the particular effects it did. In 2008, Russia was fiscally prepared for an external shock, something that spared the country from a much worse outcome than it might otherwise have suffered. Still, there have been some serious effects. It is important to sort out which are transitory and which are likely to last.
In this paper, we will describe the causes and consequences of the crisis in Russia. But our main purpose is to focus on the fundamental factors that explain these developments, and which allow us to understand Russia’s economic future—both the structure of the economy and the policies that the leadership will pursue in light of the lessons they draw from recent events. We organize our analysis around three fundamental points.
First, the crisis has reminded us of how thoroughly dependent Russia is on oil and gas.
Looking at the period before the crisis, during the crisis, and now in the rebound, the picture is unambiguous. Very few important developments, positive or negative, cannot be traced back to fluctuations in the volume of wealth—the rents—that accrue to Russia from these resources. This dependence will continue.
Second, Russia is addicted to the resource rents. This is a point distinct from the first. Our concept of addiction means more than dependence alone. Addiction refers to a specific condition in which there is an imperative to allocate rents to the backward production structure that Russia inherited from the Soviet Union. Addiction’s most pernicious feature is that it is self-reinforcing, which means that it continually deepens and reproduces backwardness and inefficiency in the Russian economy.
Third, Russia, like all resource-abundant economies, has a specific system of management of its resource rents. Because of the overwhelming importance of the rents in Russia, the rent management system is key to the entire political economy. Fundamental changes in the political economy of Russia are necessarily changes to the rent management system. In its history, Russia has had a number of distinct systems. For the past 80 years they have all been inseparably linked to the phenomenon of addiction mentioned above. Russia’s current system was designed and implemented by Vladimir Putin and his closest associates. We refer to it as Putin’s Protection Racket. This is a concept we will explain in some detail below. But we can note already here that, despite the name, this is not purely an exploitative scheme. Rather it is a mutual defense pact that benefits all participating parties. It has proven to be robust in the crisis and is likely to continue.
In the following, we will expand on each of these points, showing how the three factors—rent dependence, rent addiction, and rent management—were manifested before and during the crisis. We will conclude by asking how each was affected by the crisis and how they might look in the future. We will argue that Russia’s experience is more than just oil and gas dependence. Many countries have this. What makes Russia unique is the combination of resource dependence with addiction and its specific rent management system.