Putin’s Good Fortune

For the first time in its post-Soviet history, Russia is poised to pass a balanced federal budget into law. On Dec. 14, the federal budget for 2001 was adopted by the State Duma, passing the crucial threshold in the budget process. A week later, the budget was approved by the Federation Council. Significantly, the government pushed its draft budget through the legislature on its first attempt without having to haggle over the draft’s fundamental parameters and without having to make significant spending concessions to the communists and their allies.

In addition, much of the debate this fall in Moscow has been surprisingly similar to recent budget debates in Washington – focusing on what to do with surplus revenues. All of this stands in stark contrast to the familiar patterns of Russia’s budgetary politics throughout most of the 1990s when protracted bargaining, concessions to the opposition and high deficits were the rule.

That Russia will pass a budget with no deficit this year is remarkable. Just two years ago, the country teetered on the brink of financial collapse in the aftermath of the August 1998 crisis. As recently as 1994, Russia passed a federal budget with a deficit of about 10 percent of gross domestic product, and Russia did not bring its actual federal deficit below 5 percent until just last year.

Now Russia appears to be getting its finances in order. At first glance, it might appear that the balanced budget is the result of new, tougher, more resolute leadership from President Vladimir Putin. But this is not the case. Putin has been the fortunate beneficiary of this turnaround in budgetary politics, not its architect. He has benefited from more complex factors, the onset of which predates his presidency: favorable economic conditions, a more pliable State Duma, and the long-term effect of International Monetary Fund programs.

Putin became Russia’s president just as a number of favorable economic conditions began to have palpable effects on Russia’s bottom line. First, the price of oil on world markets has risen and remained high – hovering around $28 a barrel. Because so much of Russia’s budget revenues comes from its petroleum exporters, this has meant a significant injection of cash into state coffers. This petro-windfall has provided some breathing room as the government has tried to make ends meet.

Second, the weak ruble – devalued in the August 1998 crisis – has allowed Russia’s domestic producers to become competitive against imports and has revived some areas of domestic manufacturing contributing to growing tax revenues.

Third, Russia appears to be emerging from its post-communist depression and is finally experiencing significant growth. The Russian economy grew by 3.5 percent of GDP in 1999 and is forecast to grow by 7 percent this year. Although Russia will not be able to sustain this rate of growth, the economy should continue to grow in 2001 at a rate of 4 percent, according to a recent IMF forecast.

Putin was not only bequeathed the presidency, but he also inherited virtual control over the State Duma. In the fall of 1999, President Boris Yeltsin’s administration carried out an aggressive plan to secure a more loyal Duma. Yeltsin’s inner circle orchestrated the formation of the pro-presidential Unity movement and the People’s Deputy group, while it destroyed the Kremlin’s main rival, Fatherland-All Russia, in the state-run media.

The success of Yeltsin’s administration in this electoral project resulted in a near majority for pro-presidential forces in the Duma and a major shift in the political landscape. So while successive Yeltsin governments, including Putin’s, generally had to haggle, promise and compromise to piece together a winning budget coalition, Prime Minister Mikhail Kasyanov’s government has proceeded calmly and confidently, refusing to bargain over the budget’s key parameters.

Finally, in achieving Russia’s first balanced budget, Putin owes much to the programs
of the IMF. While the IMF’s record in Russia is certainly not perfect and the IMF may
have inadvertently pushed Russia to adopt unrealistic budgets during the 1990s, its
major role in getting Russia to commit to lower deficits and financial stabilization is
undeniable. Since 1994, when Russia agreed to a major funding program with the IMF,
Russia has dramatically and persistently reduced its budget deficit.

After the August 1998 crisis, IMF lending programs to Russia have been the targets of constant, intense criticism on both sides of the Atlantic. But it was during this very period that these programs passed a crucial test, as Russia’s policy-makers continued to pursue fiscally responsible policies even in the absence of imminent financial rewards from the IMF. A commitment to living within the country’s means has now become a mainstream idea among Russia’s political elite. Putin’s administration has the past cooperation between the IMF and the Yeltsin administration to thank for this change in thinking.

As we reflect on Putin’s first year in power, it may be tempting to ascribe all recent changes in policy to his leadership. But Russia’s first steps toward financial stability were made possible by a more complex set of factors, set in motion before Putin’s ascendance to the presidency. Nonetheless, the passage of Russia’s first balanced budget emphasizes the fact that Putin now possesses a real window of opportunity to bring Russia back to long-term financial health and turn to long-overdue structural reforms. The extent to which he is able to take advantage of this opportunity will shape Russia’s future economic integration with the West and define his presidency.