Russia’s economy under Vladimir Putin: achievements and failures

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Achievements

1. A rapid economic growth. The progress made by the Russian economy in the past eight years is truly impressive. GDP has gone up about 70%, industrial growth has been 75% and investments have increased by 125%, regaining Russia its place among the world's top 10 economies. Russia's GDP in 2007 reached the 1990 level, which means that the country has overcome the consequences of the economic crisis that devastated it in the 1990s. Now it is facing a more challenging task of making a transition to an innovation-driven economy.

2. Russia has become an energy superpower thanks to a policy under which the government controls a substantial part of the oil and gas sector and its revenues. The same is going on in the bulk of raw materials producing countries.

State control of the sector in Russia has made the fuel and energy companies completely open and transparent to investors.

After the government has taken over a controlling stake in Gazprom, the energy giant became a truly public company, and liberalized its share market.

Rosneft, the largest state-controlled oil company in Russia, went public in 2006, attracting thousands of Russian and foreign investors, including many individuals.

The ultra-liberal reform of electricity monopoly RAO UES is to result in its liquidation this summer. The government will hold only the grid and distribution services, while all energy sales and generating companies will belong to private investors.

3. An efficient management of oil revenues. It has become clear by the end of Vladimir Putin's second term that the state has adopted a wise policy of managing oil export revenues, considering that oil prices have been growing for the past eight years.

The Stabilization Fund was established in 2004 to accumulate oil revenues for a rainy day. A year later it exceeded 500 billion rubles ($18 billion) and within two years it accumulated enough revenues to repay all of the Soviet Union's debts. Deductions to the fund helped reduce the inflation pressure on the economy.

In 2007, the fund accumulated enough for investment; some of it was channeled into Russian development institutions. In late January 2008, it was split into the Reserve Fund (designed to protect Russia from possible global financial shocks) and the National Welfare Fund, whose revenues will be used for the pension reform.

4. A growth of industrial production. The 1998 financial crisis in Russia boosted industrial development. According to the Federal State Statistics Service, industrial growth made 11.9% in 2000 but slowed down to 3.7% in the next two years as the effects of the crisis wore off. A new rise began in 2003 and industrial growth reached 6.3% in 2007. The situation in manufacturing was especially good, its growth exceeded that of GDP. Last year, production in manufacturing grew by 9.3%, while growth in mining was only 1.9% and electricity production dropped by 0.2%.

5. A growth of incomes. In the last eight years, real incomes in Russia more than doubled while poverty halved. The proportion of population living below the poverty line decreased from 30% in 2000 to 14% now. The average wage increased from 2,200 rubles ($90) to 12,500 rubles ($500) over the past eight years, and the average pension, from 823 rubles ($33) to 3,500 rubles ($140). Most importantly, wages and benefits have been growing faster than inflation (by 20%-25% in 2007).

Failures

1. A high inflation. The government failed to contain the growth of prices. In the last eight years, inflation was kept at the forecast ceiling only twice, and the government lost the grip on prices in 2007, when the inflation rate exceeded the 2006 level.

The trend persisted at the beginning of 2008. The authorities promised to do their best to contain inflation and even hinted that they might cool the economy in order to attain this goal. But experts doubt this can be done, as the government has not yet taken firm anti-inflation measures and is making only populist steps, such as freezing prices of basic foods.

2. A commodities-based economy. The Russian economy so far remains commodities-driven despite its growth. Payments from the fuel and energy sector in the form of customs duties and taxes reached 3.1 trillion rubles ($128 billion) last year, or nearly half of the federal budget's revenues.

Besides, a substantial share of companies in manufacturing and trade process oil and market oil products, and are therefore part of the fuel and energy sector. Raw materials and fertilizers make up the overwhelming majority of Russia's exports. Machinery and equipment account for only $17 billion of the $352 billion export revenues.

3. High dependence on food imports. The share of imported foods in Russia exceeds 40% (70% and even 85% for some foods in large cities). The growth of agriculture, which began in the past two years, so far cannot satisfy the increasing market requirements. This has led to a dramatic rise in food imports.

Russia is currently the largest importer of poultry meat and butter, and the second largest importer of apples (after Germany). The share of imports is especially large (50%) in the meat sector (the main suppliers are the United States, Latin America and the European Union) and in the dairy sector (Germany and eastern Europe).

4. A growing gap between rich and poor. Statistics of wage and pension growth do not reflect the broadening gap between Russia's rich and poor. A good pointer is the income differentiation ratio, which shows that the 10% of Russia's rich live increasingly better than the 10% of the poor.

In 2000, the incomes of the rich were approximately 14 times larger than the incomes of the poor, while the figure for 2007 was 17 times. It is not the majority of Russians who receive the average monthly wage of 12,500 rubles ($500), which is made up of the super-profits of a very small class of top managers and the low wages of the bulk of economically active Russians.

The number of people living below the poverty line (those who receive less than the subsistence wage) has halved since 2000 but frozen at 15% (more than 21 million Russians) in the past two or three years. Poverty has become a chronic disease in Russia, affecting a substantial part of pensioners (the average pension is 3,500 rubles, over $140) and unskilled workers in depressive regions.

5. People have not learned to invest in the stock market, the indicator of the largest companies' capitalization. Only 1 million of the 140-million Russian population are involved in stock trading. About 70% of Russians have no savings, while 26% of the remaining 30% keep their savings in cash, many of them at home rather than in banks.

The reason for this is the insufficient development of stock market tools, although the attraction of ordinary people's savings is an earnest of financial and social stability. At the same time, the fact that a considerable number of Russians have started investing in different financial instruments points to the development of the middle class.
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