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Political barriers to economic development in Russia

Obstacles to modernization under Yeltsin and Putin
Neil Robinson
Department of Politics and Public Administration, University of Limerick, Limerick, Ireland
Abstract
Purpose The purpose of this paper is to question the periodization of Russian political and economic development that sees a break occurring between the Yeltsin and Putin presidencies. It does this by looking at how political problems common to late developing nations inuenced the development of reform programs in Russia under its rst two presidents. Design/methodology/approach The paper applies concepts from the literature on development to Russia, using it as a case study to develop an alternative historical narrative on Russian political economy. Findings The paper nds that there was more continuity in political conditions between Yeltsin and Putin and that economic change in Russia under Putin was not achieved because a political consensus over economic policy developed but because the wealth generated by hydrocarbon exports enabled Putin to buy support. Whilst this has meant that there was less contest over economic policy during the Putin presidency, it is far from certain whether this means of managing the economy can last over the longer term if the price of oil declines. Originality/value The paper demonstrates the need for political reform in Russia as a condition of economic change, something that is beginning to be taken seriously in Russian political circles after the experience of economic crisis that followed Putin. Keywords Russia, Political economy, Economic development, Modern history Paper type Research paper

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Introduction The development of Russias post-Communist economy appears a tale of two parts. In the rst, economic reform failed and Russia became stuck in a partial reform equilibrium, doomed to economic contraction that seemed likely to be endless, or at least very prolonged (Hellman, 1998; Tikhomirov, 2000). In the second part, beginning at the end of the 1990s and lasting at least until 2008, Russias economy turned around. The chaotic capitalism of the 1990s was transformed into state-led capitalism (Lane, 2008), and the post-Communist depression was dramatically reversed (Rutland, 2008). This neat division of Russias political economy into two historical phases ts if we look at the outward face of the Russian economy and contrast GDP decline, industrial contraction and state scal crisis with GDP growth, industrial output expansion and budget surpluses, or the economic struggles of the Yeltsin years, with its oligarchs (Schroder, 1999), property battles and bank wars (Goldman, 2003), with the order of Putins managed democracy and the consolidation of economic power around the state (Balzer, 2003; Radygin, 2004; Durand, 2008), and emergence of a new class

International Journal of Development Issues Vol. 10 No. 1, 2011 pp. 5-19 q Emerald Group Publishing Limited 1446-8956 DOI 10.1108/14468951111123300

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of silovarchs (a combination of oligarchs and siloviki, members or former members of the security services) (Treisman, 2006). However, this neat division of Russias development in two belies certain continuities. The most well known of these are the problem of corruption, which remains endemic, and the fact that energy sales have been vital to Russias economic health since 1991 (Hanson, 2007; Robinson, 2007). This paper argues that there is another continuity across the divide between the bad 1990s and the better 2000s that should be considered: that Russia has continued to struggle with its problems engaged in a process of economic modernization. These problems are peculiar to Russia because of the combination of relatively advanced social structure (predominantly urbanized, relative high standards of average educational attainment, established welfare structures) and industrialism, with underdevelopment of economic exchange, institutions of nancial intermediation (particularly of investment banks), and skewed industrial development that created an unbalanced economy both sectorally (the dominance of heavy industrial monopolies) and geographically (a dispersal of economic activity and social development unsympathetic to market needs, see Bradshaw and Prendergast (2005)). This paper examines Russias problems of dealing with modernization as a late developer engaged in catching up with developments elsewhere[1] and argues that Russias failure has in part been due to the problems of constructing political coalitions around reform and state building. Under Yeltsin, there was instability around such coalitions and this meant that economic reform was constantly contested. This contest ended under Vladimir Putin not because of the achievement of a political consensus over economic policy that would generate modernization but because the wealth generated by hydrocarbon exports has enabled the centre to buy support and to weaken tendencies to uncontrolled rent seeking by parts of the economic elite. This created a facsimile of state building but whilst it meant that there was less contest over economic policy during the Putin presidency it is far from certain whether this means of managing the economy can last over the longer term and/or produce development especially as the price of oil is in decline and may stay low, or at least far lower than its recent historic high. The paper looks at these issues by rst discussing the issue of late development, state building and economic reform. It then discusses how the problems of dealing with late development intersected with state building in Russia. The paper concludes that Putins successes relative to Yeltsin are not as impressive as the headline economic gures might seem to indicate and that in many ways Putin was and as Prime Minister remains a transitional leader. Modernization, late development and state building: a general outline of the problem Modernization, late development and state building go hand in hand since state building accompanies such development and is undertaken to support it. Initially, state building for development requires putting in place institutions that can overcome traditional obstacles economic, social or political, or some combination thereof to growth. This form of state building often involves the state substituting for organic social action by economic agents and creating institutions that foster development. When late developing nations play catch-up, they automatically state build by developing different organizational structures to their more advanced rivals; late development requires institutional instruments for which there was little or no counterpart in an established

industrial country (Gerschenkron, 1962, p. 7). Through developing such institutions, the late developing state can insure through political control and/or policy that those investment resources that exist within a society its old wealth as Gerschenkron (1962, p. 13) called it are deployed for the purpose of investment rather than for consumption. State autonomy, a measure of freedom to divert resources to developmental ends, and state capacity to develop and implement policies that direct investment to target areas and insure growth, are both key facets of state power that ease the path from late development. Many states have some residual power and incentive to shift resources from consumption to investment, but this does not guarantee that such a shift will lead either to prolonged development, that is to continued ows of resources to investment over time, or to intensive development, that is to development that is supported not only by the transfer of resources from consumption to investment, but also by growth generated by cost efciency, raised labour productivity, the production of goods of higher value that can supported diversied (away from primary and simple manufactures) export-led growth. One reason that neither of these forms of development is guaranteed is that developing and sustaining state capacity and autonomy to foster either form of development is difcult. Much late development occurs in societies that are politically, but not socially, discontinuous. They are politically discontinuous in that they have to either remake their polities and systems of public administration or because the state itself is a recent construct (created, for example, after independence). Political discontinuity does not necessarily mean social reconstruction, however. Processes of state development and late economic development begin with structures of old wealth, hierarchies of social inequality, intact. This means that late developers face the classic problem of a weak state facing off against a strong society (Migdal, 1988). Political structures are new and have less immediate authority over the day-to-day actions of citizens than enduring social relations. Developing a state with autonomy and capacity becomes a matter of political calculation where such patterns confront any late developer. Economic development is a public good, albeit not a pure one: the basic aims of development (greater availability of goods and services, higher per capita GDP) are, if achieved, largely non-exclusive even if they are accessed unequally. Consequently, there are collective action problems in achieving economic reform. A majority may have what Geddes (1994, p. 24) calls a latent interest in development in that they might gain from it, but they have low incentives to organize and agitate for reform; they will incur costs if they do organize and agitate for reform, but will gain from the public good of economic reform if they free ride. The uncertainty of reforms needed to produce developmental success reinforces free-rider problems. The immediate benets of free riding are clear (the avoidance of the personal costs of political or market activity, the continued derivation of benet from traditional economic activity and relationships) but the benets of reform, and hence development, are deferred. On the other hand, losers from change those who enjoyed consumption, old wealth, before policies to tackle late development were put in place, have incentives to oppose reform. Their losses (privileged access to goods and resources, etc. undisturbed consumption) are born directly by them and outweigh the gains that they would derive from the public good of reform. Consequently, not all states take action and some that do back down. The reason for this is popular demand rarely transforms itself simply and directly into pressure for politicians to provide a public

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good so that the delivery of such reform goods that underpin development is not routinized (Geddes, 1994, pp. 38-41). Information asymmetries (it is difcult for voters to determine whether a politician is responsible for providing the benets of a public good) and inuence asymmetries (politicians may serve limited constituencies to accrue resources necessary to ght political campaigns rather than the larger constituency of voters with a latent interest in reform) mean that the delivery of public goods will be inconsistent. This means that politicians have a degree of choice about providing public goods and building the political structures that can help to deliver them. They must choose whether to reform or not; to build state autonomy so as to facilitate the provision of public goods or to maximise their freedom to accumulate resources that they can use for their own ends; to consolidate state autonomy or compromise it in the interest of servicing some important group or groups. As a result, politicians calculations about state building and development turn on what Geddes (1994, p. 42) calls the politicians dilemma:
[. . .] politicians who might otherwise consider offering reforms as a strategy for attracting support will not be able to afford the cost in lost political resources as long as they compete with others able to use such resources in the struggle for votes.

The state-regime structures in which politicians act may not support their acting autonomously of specic interests to the general benet of all those who have a latent interest in reforms success. The depth of the politicians dilemma can be inuenced by contestation over the question of development itself and the ability and willingness of politicians to adapt development over time. In the rst instance, the extent to which politicians state build depends on the degree to which there are divisions within political society over development and over other issues that may politicize development policy by creating divisions over it to back up policy preferences in other areas. If development has occurred, ability and willingness to adapt development complicates reform decisions because politicians need to restructure political and social formations that have generated earlier development. In particular, they might need to change the terms on which investment is made through the state in order to force higher productivity or incentivise investment in higher value products in order, for example, to move from import substitution to export-led growth. Where divisions over development (or other issues that politicize development) are great, there is little chance of developing a developmental state that can sustain development over the long term by both forcing a transfer of resources from old wealth and consumption into investment and insuring that this investment is targeted and concerned to move from basic industrialization to economic diversity and competitiveness, which includes enhanced economic productivity, cost control, production of high-value goods, etc. As Waldner (1999, p. 2) has argued where there is a high degree of conict and elites are divided, they will seek to co-opt actors from wider society to stabilize their hold on, or access to, power. Some economic development will occur in such a situation since the state will have some residual power to alter the overall balance between investment and consumption to generate some industrial growth. But the broad base of power will also encourage investment in inefcient sectors and equalize the claims of consumption and investment. The result is that at best only a low level of development is secured or politicians do not adapt development over time so that development lags behind advanced states or adaptive states. Policies are adopted that work against economic

diversity and enhanced productivity since its policies setting tariff barriers, making welfare payments and schemes, indulging in poor scal planning and loose industrial policy deter or skew investment and capital formation, and what investment there is cannot used by the state to encourage better economic productivity and growth in high-value sectors. In particular, such policies can work against foreign investment and technology transfers that might come with it since the state may lack the means to make such investment attractive via policies that can discipline labour to the benet of investors, maintain low costs through control over consumption, etc. Whilst foreign investment is never a panacea for late development, failure to attract it can make modernizing plant and production processes harder and can close off entry into some high-value sectors that are technically advanced and require technology transfer. In short then, obstacles to launching development are great and the incentives to backtrack from development, by, for example, skewing the market to favour a particular group (domestic or international), or subverting the market when it proves too hard to manage, are numerous for the late developer (Chaudry, 1993). Where this happens the state does not develop either the autonomy or the capacity to move beyond a low level either absolutely in the worst case or relatively in a better case of development. The problems that this can cause may be recurrent. They might be escaped for a time due to circumstance so that growth ensues but unless this circumstance leads to a change in the states capacity overall and specically in its ability to create incentives for, or discipline economic actors to generate higher labour productivity, invest in high-value production, etc. these problems will likely resurface as problems of economic and political management in the future. There is, in other words, a high degree of path dependency that xes late development in place. Russia, late development and modernization under Yeltsin the Soviet legacy and the problem of reform constituencies Russia is a developed nation in many ways and has been for some time. Indeed, it could be argued that it had caught up with the West at one point. However, the nature and operation of the Soviet economy meant that then fell behind again because of the uneven development of its economy and its inability to move from directing resources from consumption into investment to getting higher returns on that investment and growing though the production of high-value production. Together, these locked in relative backwardness to the advanced industrial economies of the West and meant that by the time that it achieved its independence from the USSR Russia had fallen behind other late industrializers like the Asian economies, which had begun their drives for economic modernization after it. The reasons for this are well known: central planning and the bureaucratic institutions that supported it, as well as party management of the economy that focussed on short-term goal fullment at the expense of economic restructuring, combined to lock in the economic underperformance and decline by making the economy inimical to change[2]. Overtime, this institutional blockage developed social dimensions too. These social dimensions were partly the result of political compromise and partly the result of ideological commitment. Political compromise locked in the USSRs relative backwardness as the post-Stalin settlement stabilized the Soviet bureaucracy to create a neo-traditional regime marked out by corruption and the subversion of public policy and regime developmental goals (Roeder, 1993; Jowitt, 1983). Ideological commitment to raising living standards and the ideological necessity of being able to say,

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in Stalins words, that Life has become better, life has become merrier made dealing with these problems harder. The growth of Soviet welfare and consumption in the post-Stalin era limited the pressure that could be put on workers to raise productivity since constraints on income and welfare would have attacked the implicit social contract that legitimized Soviet power as Stalinist coercion declined (Cook, 1993). Gorbachevs reforms aimed to deal with these problems and to end Soviet relative backwardness one of the early-declared aims of perestroika was to raise Soviet levels of productivity to levels comparable with the most productive nations globally but their failure need not detain us. What is important, however, is that whilst perestroika eventually destroyed the central institutional barriers to combating the USSRs legacy of late development it did not alter either local elite structures or the social relations that had grown up around daily economic life. Political change at the centre simply outpaced change in the economy (Rozman, 1992). Russia was thus politically, but not socially, discontinuous. The social and sub-national elites that had held Russia in a state of relative backwardness remained in place. The calculation to reform was determined by the need to close the gap between political and economic reform so that weak political structures could counterbalance social and elite structures left over from the USSR. Economic reform was thus a form of state building (Woodruff, 1999; Robinson, 1999). It was designed to deal with the problems of Russias relative backwardness by breaking down what were perceived to be the social obstacles to development through marketization. This would alter the balance of power between political authorities and the remnants of Soviet local and economic administration that had not been ousted by the limited turnover of sub-national political and economic elites (McAuley, 1992; Johnson and Kroll, 1991). This made the strategy of reform politically attractive: central political authorities gained power relative to social interests by launching reform because the actual capacity of the state was so low that any gain was a signicant improvement. Moreover, reform solved some short-term problems and promised success in the near future. Short term, it enabled Boris Yeltsin to form a government based around the reform economists associated with Yegor Gaidar and resolve the issue of Russias relationship to the USSR, an issue that had been left hanging in the air following the effective collapse of central Soviet power in the wake of the August 1991 coup. In the near future, the political pay-offs of being able to form a government and building up the power of central Russian authorities relative to society were reinforced by the promise of reformers to bottom out the transitional recession in Russia, which had already started due to the disruptions to the economy caused by perestroika, within the space of the political business cycle. The recession, according to the timeline of the new government, would have reached its nadir by the end of 1993 and the economy would be in recovery for at least one year before presidential elections (Russian Government, 1992, p. 70; Gaidar and Matyukhin, 1992). Moreover, because the new governments policies focussed on nancial stabilization it was hoped that success would increase foreign trade, incentivizing production of higher value goods in the Russian economy, and facilitate foreign investment and technology transfers to modernize Russian plant. The political gains that reform brought, were, however, not enough to secure reform and orientate production away from Soviet heavy industrial staples and primary products towards high-value goods. Reform was not supported by a well-dened and consolidated elite, and became less so overtime. Politically, there was not even consensus even within the executive (the Presidential Administration and the government)

itself over the issue of reform (Robinson, 2000). Although economic reform was adopted in outline relatively easily at the end of 1991, it soon became highly politicised because of the spillover from other political issues, indeed from all other political issues, as various struggles over power and domestic and foreign policy crystallized around the issue of economic reform. Reform was opposed by a wide constituency of managerial, political and social interests there was even a short-lived alliance of such forces, Civic Union, between the summer of 1992 and the spring of 1993 (Lohr, 1993) as well as by a variety of nationalist and Communist groupings. Both of the conditions that act to limit the effectiveness of the state to deal with obstacles to late development therefore pertained in Russia. Not surprisingly, reform was compromised and political survival became a key issue in its place. The next few years of Yeltsins rule were dominated with the issue of stitching together shifting coalitions of regional, economic (including liberals who were necessary to access international funds) and political allies to maintain power and secure Yeltsins re-election (Shevtsova, 1999; Breslauer, 2002). The breadth of Yeltsins alliance building was wide and the loyalty of allies frequently shallow (Willerton, 1998). This pushed Yeltsin to extend his alliance building even further to overinsure his power by incorporating as many interests within his coalition as possible (Breslauer, 2002, p. 212). Economic policy became unfocussed in this political climate and practices that undermined economic change and development the demonetization of economic exchange through barter, payment of wages and taxes in kind thrived. Instead of the reallocation of capital either by the market or through state institutions to create investment (of any kind let alone in high-value production or economic diversity) economic actors either used access to local institutions or extant networks of inuence to maintain production and their power (Gaddy and Ickes, 2002). Investment in the economy plummeted and output contracted. Hoped for gains in foreign trade and investment also proved elusive as foreign trade and investment remained focussed on the energy sector. In effect, social relations and practices that supported relative backwardness were locked in place at cost to general social welfare and consumption as tax payments and wage payments shrank. The broad constituency that held development in check could not endure, however, since it pushed the state into deeper scal crisis. This crisis began to come to a head by the end of 1996 and led to fresh effort at reform. This effort centred on the collection of taxes from Russias biggest businesses, the nancial industrial groups that largely had grown out of the merger of banks and strategic, particularly, energy, companies, and which were the biggest tax defaulters[3], and along side this budgetary discipline, stabilization of the ruble, anti-corruption measures and renewed monetization of the economy. Although this was not a big push for economic reform like the rst wave of reform in 1992, the purpose of reform and the requirements of reform were broadly the same. The purpose, once again, was to empower the state and create conditions for overcoming obstacles to development: if the state developed its control over the tax system and stabilized the ruble this would increase its power relative to nancial industrial groups and those parts of the real economy that were demonetized. It would also give the state the scal wherewithal to foster development since it would have resources to invest and the means to inuence investment decisions once it controlled tax and had a stable currency. To achieve this reform and the associated change in powers of the state that would accompany it required a restructuring of the ruling coalition. Yeltsins re-election

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was a joint triumph for economic liberals and for big business interests: the former supplied the ideas, the latter the media backing. The move to reform split this bloc. The rst signs of change came in the autumn of 1996 with reform of the administration of tax collection to squeeze defaulters, but the push for reform really began in March 1997 when Vladimir Potanin, the main representative of the nancial-industrial groups was removed from the cabinet; Anatoly Chubais, the architect of earlier privatization and the de facto leader of the economic liberals, moved from the Presidential Administration to the government, and Boris Nemtsov (the ex-Governor of Nizhny Novgorod oblast), was brought into government[4]. Chubais and Nemtsov were made deputy prime ministers with, respectively, responsibility for economic reform and the Ministry of Finance, and for energy monopolies. This reshufe was quickly followed by a government order requiring companies in debt to the state to hand over 50 percent plus one share of their equity to the government. The other main policy plank of reformist effort was an attempt to reform and control the activities of the energy monopolies. Nemtsov forced Gazprom to pay its back taxes in the summer. Nemtsov also tried to break up the power of the energy lobby by pressing for improved corporate governance and for conditions in which foreign capital could balance the power of the large commercial banks in the sector. This would have opened the sector up for modernization. Steps were also taken to rein in the regions by curtailing the independent taxation powers of regions. Many of these policies portended the policies that the Putin administration was to adopt post-2000. Yeltsin was, of course, less successful in making these policies stick. The reasons were both domestic and international. Domestically, pressure to pay taxes using money rather than in kind was only partially on from government through nancial industrial groups to the rest of the economy. Whilst tax take went up overall the amount of tax paid in money was still modest. The governments scal crisis was thus not eased and worsened in 1998 as oil prices dipped and tax revenue from energy sales fell. This was compounded by the crisis in Asian markets that made the costs of government borrowing more expensive at rst and then dried up the ow of foreign monies to the Russian exchequer. Finally, the ability to credibly commit to reform was shaken as the economic liberals ran into trouble after the privatization of Svyazinvest created the bank wars of the summer of 1997. Although Yeltsin held the line for a time, eventually the weakness of the government combined with the changes in the international environment caused the August 1998 crisis and ended the new push to reform and create a state machine with the means to restart Russias modernization. Putin half-way there? The last year and a bit of Yeltsins presidency was a time of economic re-ghting and struggles over controlling his succession rather than developing a new strategy for reform. This period, however, was very important for the way that it created political conditions that allowed for the consolidation of presidential power. The August 1998 crisis weakened Yeltsins authority, in particular, his ability to command loyalty from regional leaders and some economic leaders, and threw open the question of his succession. Several elite groups began mobilizing early in 1999 with an eye to capturing support, competing in the December 1999 elections and starting a bandwagon that would last through the 2000 presidential election. The divide between government and business and the weakening of the centres control over the regions made them competitors in the succession struggle, rather than parties that negotiated as they had

negotiated Yeltsins 1996 re-election. Yeltsin was forced to nd a successor from within his administration Vladimir Putin and use the extensive formal powers of the presidency to reclaim some degree of control over the political process. Yeltsin and Putin were then lucky in that Putins appointment as prime minister in August 1999 and Yeltsins ceding of authority to him developed a bandwagon effect in late 1999 that swamped the efforts of his rivals. The net effect was that Putin won the presidency in 2000 in what turned out to be a non-contest the only real question was whether Putin would secure a rst-round victory and he did in which Putin made no promises to any group, voter or vested interest, to win. Once Putin had won the presidency in 2000, the effect of the 1998 crisis on politics reached its conclusion as he used his mandate to recreate central political authority. This recreation of central political authority took several forms and years and was not economic in the sense that it saw a direct state effort at economic reform. The recreation of central political authority was political in intent and form: the oligarchs targeted where those with media interests, control was asserted over regional leaders by changing the federal structure and their place in central legislative bodies. Some economic changes supported this directly the changes in tax collection in the summer of 2000 that weakened local control over revenue transfers to Moscow, for example but mostly the impact of economics was indirect as economic growth contributed to Putins popularity and helped him construct a political base without having to develop economic policy in such a way as to create social opposition as Yeltsin had done in 1992 or elite opposition as in 1997-1998. This enabled Putin to develop a broad base to his emergent regime. Putin was aided in this because one of the effects of the 1998 crisis was to carry through some of the objectives of reform without the government having to take strong action. In particular, the economy remonetized as the weakness of the ruble meant that consumers turned back to Russian producers because they could not afford foreign goods: the value of imports fell by US$17 billion in 1999 and continued to be relatively low in 2000-2002. Growth in demand for Russian goods boosted sales and the use of money, rather than payment in kind. The amount of barter in industrial sales fell from 46 to 33 percent between January 1999 and January 2000 and continued to decline thereafter as the economy remonetized. Even before Putin took the presidency, therefore, what had been key reform goals in 1997-1998 were being implemented because of the structural effects of the 1998 crisis so that Putin had little to do. Economic policy changes such as the introduction of a at rate income tax, lower corporation taxes, simplied social taxes, introduced in the summer of 2000 helped to lock in this remonetization by making it administratively easier to tax and cheaper to pay in money than in kind. However, these tax changes are also a case in point that there was no bold reform that endangered Putins consolidation of power. Where major energy interests were concerned, there was a process of negotiation over tax in the rst instance (Jones Luong and Weinthal, 2004). It was only later that the threat of coercion backed up the collection of taxes and changed the balance of power in favour of the Kremlin (Easter, 2008; Appel, 2008). The build-up of central authority was thus not a stimulus of change and modernization per se. Political changes lagged behind economic recovery. Growth started before the rst moves against oligarchs or regional leaders and thus helped complete the political realignment that followed the August 1998 crisis rather than the other way around. Political realignment in favour of central political authorities continued unabated across Putins two terms as president but despite the numerous

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changes Putin made to the balance of political power the capacity of the state has remained low. Corruption is still a major problem, and overall the effectiveness and competence of many state agencies is still low (Colton and Holmes, 2006). Changes in central executive power have thus not quickly translated into changes in public administration so that reform has been more rhetorical than actual as far as the state generally is concerned (Holmes, 2002; Hashim, 2005). It might even be the case that political developments helped to stimulate economic growth after 2000 for the wrong reasons. Fearing that they would be next privately owned oil companies reacted to the moves against oligarchs with media interests by expanding production massively. The export value of oil, gas and metals nearly doubled in dollar terms between 1998 and 2002. This was partly due to increased prices and partly due to increased export volumes. Volume growth was particularly marked in 2000, the year in which Putin expanded his power, when oil exports were 171.5 percent of what they had been in 1999; this level of output was more or less maintained in 2001 and then expanded again in 2002 (Ustinov, 2004, pp. 136-137). Six major private oil rms accounted for nearly all of these additional exports since state-owned rms barely expanded production. This expansion of oil exports accounted for about a quarter of Russias growth in 2001-2004 (Ahrend, 2006, pp. 15-16). A large proportion of post-1998 growth was thus not planned or balanced but the result of a scramble by oligarch oil rms to cash in before property rights were lost. Where economic reform was planned, it was often compromised by the poverty of public administration and because of political risk. The monetization of welfare benets is a case in point: poor public administration meant that much of the reform could not be implemented, and certain key provisions of the policy were delayed after protest and as regional governments were unable to administer the policy (Ross, 2008, pp. 116-18; Sinitsina, 2009). Reform was thus not complete and it did not involve the targeting of policy to modernize Russian industry. The broad constituency that Putin constructed to limit political opposition was supported economically across the board rather than policy developed to promote growth in areas where Russia might develop a comparative advantage in high-value goods, or to force the development of greater economic efciency. This broad support took two forms. First, there was a continued lag in domestic energy prices to international market prices so that the subsidies to industry that began with Soviet price differentials between domestic and international energy markets is still in place. Second, for much of the Putin presidency there was Central Bank intervention in currency markets to try to protect Russian industry from imports and maintain competitiveness. This was only partially successful. Increases in the volume of imports grew at a greater rate than domestic production. The Russian Central Bank has intervened in the foreign exchange market heavily to slow the appreciation of the ruble, but this appreciation has still been signicant and fast so that the bank was constantly chasing a moving and costly target. This massive intervention helped maintain industrial competitiveness by leaving the ruble undervalued by about 10-20 percent depending on the methodology used to calculate value (IMF, 2007, p. 6). Institutional development particularly in the nancial sector was slow and hampered modernization. In ofcial surveys, the main factor reported as limiting business activity by industry has consistently been insufcient monetary instruments capital and credit both before and after the 1998 crisis, although the decline of barter has lowered

the overall number of respondents seeing it as a problem as might be expected (Rosstat, 2004, p. 531, 2006, p. 380). Credit levels were low in Russia in comparison with other emerging economies let alone for developed market economies: private credit is growing in Russia but as percentage of GDP it is approximately a third of levels in the Eurozone or other developed market economies (OECD, 2006, p. 84). With capital and credit still in relatively short supply in industry, much of the change that took place involved laying-off workers and achieving productivity gains without expanding output, or the utilization of capacity that lay dormant in the 1990s. In short, the Russian economy grew, very often, on its Soviet manufacturing base under Putin. As a result, industry did not recover or reach a point where it was integrated into the global economy via external ownership or trade. Recovery has certainly not been based on foreign capital coming in and taking advantage of Russian weakness. There were net outows of foreign capital in 2000, 2002 and 2003. There were high inows after 2004 but, again, relative to other states the amount was small. Moreover, these inows were concentrated on the energy sector, which has taken the lions share of industrial FDI and year on year since 1999 (and before that) has regularly accounted for most of any increase in industrial FDI (and indeed domestic industrial investment). Russias export structure was also unchanged: it still depends on hydrocarbon exports to generate its balance of payments surplus and fund imports (which have grown massively since 2002), and has not been able to diversify exports. This points to continued fundamental weaknesses in the national economy. The terms of trade are benecial to Russia because of high state spending to keep the ruble relatively undervalued. Despite the positive terms of trade, Russian industry is still uncompetitive and is perhaps likely to remain so as any comparative advantages that it has in terms of developing as a knowledge economy are eroded by developments in other emerging economies (Cooper, 2006; Connolly, 2008; Garanina, 2009). The weakness underlying Russias economic recovery under Putin was, of course, not something that the Russian Government missed. Putin (2008) summed it up in one of his last major speeches as President introducing the new state development plan that was supposed to run to 2020:
Although we have had some successes over these last years we have still not yet succeeded in breaking away from the inertia of development based on energy resources and commodities [. . .] even with the economic situation in our favour at the moment, we are still only making fragmentary attempts to modernize our economy.

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To overcome this, a slew of announcements and changes were made in 2007 and early 2008 to try to force the pace of Russian development. The money for this was to come for the most part from the Stabilization Fund, the money set aside from oil revenue by the state to carry state nances over any drop in energy prices, which would be split up and part used for economic investment. The problem remained, however, of how to invest this money in the economy. Part of the money was to go through state corporations, large conglomerates and holding companies formed to channel investment into priority economic sectors under the supervision of state ofcials. A number of these were set up over 2006-2008 but there are issues over how far they are actually state-run or private, and what the balance of their activities and who the beneciaries of these activities will be (Volkov, 2008). Moreover, there is suspicion that both in timing and in form the new emphasis on development that began in 2006-2007 and which formed a major part of the rhetoric around the transfer of power from Putin to Dmitry Medvedev and the formers

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move to the prime ministership was a cynical manipulation of the funds set aside from the years of scal abundance to ease the transfer of power. The way that the investment fund was set up would, some experts contended, favour existing industrial structures and allow regional authorities to access off budget funds for local projects (Pappe and Zudin, 2008). The development plan, in other words, was a means of transferring resources to the existing economic structure so that it replicates itself and supports the regime in its new format (Makarenko, 2008). Conclusion During the 1990s and 2000s, Russia failed to modernize and overcome its relative backwardness and late development. The Yeltsin years did not manage to put in place market structures or secure the stabilization of the ruble so that the state could begin to wield power over the economy sufcient to begin the process of modernization. Putin developed the authority of the presidency and secured his regime, but the economic growth that accompanied this was not a product of political change but of changes in world energy prices: productivity rose but not because of modernization; what diversity was created came from spillovers in the economy from the oil boom (corresponding booms in services and construction), but did not spread to industry and other exporting sectors. Although these were a greater emphasis on development and modernization at the end of the Putin era, the policies and changes introduced alongside the transfer of the presidency to Dmitry Medvedev did not have time to bear fruit even if they could have done before the global nancial crisis hit Russia. This leaves Russias future modernization up in the air, especially since the international economic crisis hit Russia harder than most other states. The fact that Russias problems are political was something that Putin began to address with the recentralization of political power, but his recognition of the fact was not a solution to it in the end. This too has been recognized in Moscow, as evidenced by President Medvedevs (2010) calls to change Russias development paradigm, and by the calls made by Medvedevs think-tank, the Institute for Contemporary Development (2010), for political change to take place alongside economic modernization. But again, recognition of a problem is not the same as its solution especially now resources are once more tight due to the costs imposed by international crisis.
Notes 1. As Makarenko (2008, p. 35) notes, stating that Russia is involved in catch-up modernization provokes an angry reaction [. . .] [that] is absolutely groundless. Any form of modernization, as the very etymology of the word indicates, involves catching-up. 2. On these problems, generally see Kornai (1992). For the intractability of the Soviet economy see, inter alia, Aslund (1989) and Hewitt (1988). On the party and the economy, see Rutland (1992). 3. Many of the most signicant defaulters on tax payments were industries in the energy and petrochemical sectors controlled by nancial industrial groups, where enterprises had tax debts much higher than the average for the industrial sector (Easter, 2008, p. 78). 4. Change might have begun earlier but for Yeltsins health, which as Colton (2008, p. 384) puts it meant that from the summer of 1996 to the spring of 1997, Yeltsins leadership was in reactive mode.

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