Rethinking Russia and the U.S.-Russian Relationship The New Russia: A Look at Internal Developments
Andrei Kortunov President, New Eurasia Foundation, Moscow
Thursday, February 5, 2009 Kennan Institute, Woodrow Wilson Center Washington, DC
Most current discussions about the economic crisis in Russia are centered on its political dimension. Will mounting economic problems lead to a split within the political establishment? Do Vladimir Putin and Dmitrii Medvedev have different approaches to handling the situation? Could the crisis create new opportunities for opposition parities? If so, who will ride the tide – liberals or communists and nationalists? Is it likely that Moscow will take a more conciliatory position toward the West, or will the Kremlin instead stick to its traditional “siege mentality” of trying to blame the crisis on external factors and, above all, on the “economic egotism and arrogance” displayed by the United States?
The importance of all these questions notwithstanding, I still tend to believe that the analysis of the crisis should start with its social dimension. It is exactly the social dimension that will define to a very large extent the future of Russia’s political development and the future of the Russian economy. Social reactions to the changing environment will have a profound impact on other aspects of the Russian transformation. They will create opportunities for or limitations to political changes; accentuate or conceal splits in the Putin-Medvedev “tandemocracy;” and create incentives or disincentives to revise Russian foreign policy. Of course, external independent variables (global oil prices, the state of Western economies and stock markets, possible changes in the international financial architecture) will play critical roles in shaping Russia’s future, but their influence should also be considered through the prism of how specific social groups within the country may react to these independent variables.
Three sets of issues deserve special consideration. First, we have to look back at the social picture of Russia on the eve of the crisis. Second, we can now analyze the
The New Russia: A Look at Internal Developments 1 Andrei Kortunov immediate impact of the crisis on the Russian population. Third, we might speculate about short- and medium-term social reaction should the crisis deepen.
It is well known that Russia experienced a rapid economic recovery over the last 10 years, which had a fundamental impact on the Russian population. Double digit annual growth rates in real incomes led to a substantial decline in the poverty levels, and the number of poor in the country was cut in half. Russia had almost resolved one of the most painful problems of 1990s: the so-called “white collar” poverty associated with the very low income of teachers, doctors, civil servants, and scholars. Many Russian and international experts argued that the country had finally generated a middle class constituting between one quarter and one third of the whole population.
The change has gone well beyond Moscow: anyone traveling across the country could see a lot of residential and office construction, new shopping malls and restaurants, plenty of foreign-made cars in the streets, and other manifestations of wealth. For the first time after the break of the Soviet Union, average life expectancy and birth rates have gone up. A resurgence of Russian national pride has accompanied these positive developments, which have largely coincided with Putin’s two administrative terms. The high level of political stability manifested during the transition of the presidency from Putin to Medvedev was a predictable result of the economic boom (though one should not discard the persistent efforts of the Kremlin to undercut any meaningful political opposition).
The overall positive social picture, however, was saturated with contradictions, making it quite fragile. The energy-based recovery did not generate badly needed structural changes in the Russian economy, and the apparent consolidation of Russian society did not eliminate the basic dividing lines that had emerged over 1990s. Instead, a number of these dividing lines became even more graphic than they had been under President Yeltsin. On the other hand, the rapid economic growth itself increased social and economic expectations, and social stability itself has lost its appeal as the ultimate value. One can argue that even without the crisis, many social problems still constitute major challenges for President Medvedev’s leadership.
The New Russia: A Look at Internal Developments 2 Andrei Kortunov First, the gap between the “haves” and “have nots” became deeper, at least in the perception of the Russian population. In the 1990s, the main villains, in the eyes of most Russians, were oligarchs who had privatized national assets at the expense of the population. In the 2000s, the focus of public discontent shifted to the “wealthy” on the whole. Surveys taken before the crisis indicate that the contradiction between “poor and wealthy” was regarded by Russians as the main problem facing the country. It would be tempting to attribute this perception to envy and to a residual Soviet egalitarian mentality, but polls suggest that Russians are no longer opposed to private property and are not ready to fight any class wars. Their notion of “wealthy” includes upper level bureaucrats, managers of large companies, pro-Kremlin opinion makers, and “domesticated” oligarchs – in other words, the economic and political establishment of the country. The predominant perception is that the “wealthy” are totally detached from the rest of the country, are concerned only with their own narrow self-interest, and have no sense of social responsibility or even understanding of what occurs beyond their small circle. The so-called “elite” is not regarded as the legitimate representative of ordinary people; and its capacity to communicate any messages to society at large is low at best.
The second gap, also inherited from the 1990s, is the gap between generations. Since older age groups were not able to make use of the economic boom in the country, the “youth chauvinism” of the labor market became even more explicit than it had been before. Voting patterns were also quite telling: support for opposition parties (both left and right) was, on average, stronger among older generations, while younger voters turned out to be more conformist and status quo-oriented. Again, one could attribute this to the legacy of the Soviet Union and to the “traditionalist mentality” of older age groups. However, we should not forget that those Russians who are now entering their 60s were in their mid-30s back in 1985, when Gorbachev started his perestroika reforms. In a sense, this generation proved to be the most innovative and radical in Soviet society. It seems instead that the generation gap has deeper roots: Russia is simply not friendly to its older citizens, and the permanent failure to initiate a meaningful pension reform or public health system is yet another demonstration of this sad observation. Since the country is only becoming older, the generation gap is likely to acquire more significance in future.
The New Russia: A Look at Internal Developments 3 Andrei Kortunov Third, regional disparities in Russia were stark even before the crisis. The Putin Administration tried hard to equalize economic opportunities across the Russian Federation, but over the last 10 years, the divide between affluent regions and depressed areas has only become sharper. The difference in living standards between urban and rural areas remains profound, and most old Soviet-era company towns were not able to diversify their economic and social infrastructure. Of course, this led to discrepancies in both external perceptions and self-perceptions. For example, on the eve of the crisis, about 80 percent of Muscovites claimed to be generally satisfied with their life, while the corresponding result was 26 percent for Riazan, and 22 percent for Pskov. It is interesting to note that during the second Putin administration, regional discrepancies were regarded by Russians as more important than ethnic or national differences.
Finally, one of the clear negative side effects of Russia’s relative economic prosperity has been the revival of paternalistic relationships between state and society. The experience of Weimar Germany led scholars to develop the concept of the “phony” middle class – a stratum that seems to be middle class in terms of incomes, lifestyles, and practices. However, this class of people is not rooted in medium and small businesses that are truly independent from the state. In Russia, after Putin’s two terms, the number of business startups is almost negligible, and the economic system is still quite oligarchic. Despite a lot of rhetoric, the state accomplished very little in promoting medium and small businesses. The financial system remains to a large extent unreformed, and administrative reforms also have not succeeded.
Who are these people who appeared to be Russia’s emerging middle class under Putin and Medvedev? A large portion of these people are bureaucrats, managers of large companies, and consultants to energy companies and financial institutions serving the export sector of the Russian economy. Their incomes and lifestyles are largely based on a system of corruption that is tolerated, if not encouraged, by the political system, rather than on their own personal accomplishments. It is therefore not very likely that this particular stratum of Russian society would generate new innovative ideas or emerge as a driving power for structural changes in the Russian economy. According to surveys, during the 1990s, young Russians most desired careers as entrepreneurs with independent businesses. In the early 2000s, the preferred choice was manager of
The New Russia: A Look at Internal Developments 4 Andrei Kortunov a large company. In 2008, the top choice was state bureaucrat. In other words, the energies and ambitions of the younger generation, badly needed in the economic and social sectors, are gravitating to the corrupt and inefficient state machinery. Political loyalty in exchange for stability and a permissive attitude to personal enrichment through corruption – that was the social contract between the Russian “middle class” and Putin’s administration. Clearly, this arrangement, even under the most favorable economic conditions, did not reward commitment, integrity, or creativity.
On the other hand, 10 years of relative prosperity and fast growth of living standards has resulted in highly inflated expectations at all levels of the Russian society. In the Kremlin, these expectations took the form of triumphalism, arrogance and ambitious social development projects. Russian oligarchs started thinking about global domination in their respective business sectors. Average Russians were asking for greater salary increases. The Russian labor market was dominated by supply, not by demand; it was clearly overheated, and competition for jobs (at least in large cities) was almost nonexistent. Needless to say, such a situation did not produce too many incentives to pursue a better education, in-house training, etc.
Against this backdrop, the financial and economic crisis came as a completely new and unexpected shock to the political leadership, to Russian business, and to the population at large. The 1998 default had already been forgotten. Members of the younger generation were building their careers under the conditions of a non-stop economic boom and had no experience surviving in a harsh economic environment. Comparative sociological data from late 1998 and late 2008 is very indicative. Ten years ago, about 50 percent of Russians were ready to take direct personal actions to cope with the crisis. Today, that figure is only one third of the population, while another third prefers not to think about the crisis at all, and almost 20 percent say that they would not do anything, no matter what. The attitude behind these responses is that the state should somehow resolve economic and social problems and put the country back on track.
The first evident manifestation of the crisis was the disappearance of affordable mortgages and cheap consumer credit. Back in 1998, neither form of credit was developed in any significant way, but in 2008 these financial instruments were in
The New Russia: A Look at Internal Developments 5 Andrei Kortunov wide use by many Russian consumers. The traditional Soviet dream—to own an apartment, a car, and a country house—seemed to be within reach to many in the summer of 2008, but in the fall the dream suddenly became elusive once again. Public confidence in the Russian financial system plummeted, and the Russian stock market started sinking after years of spectacular growth. And while mutual funds had not yet become a standard savings instrument for the majority of Russians, the financial turmoil in the fall of 2008 was serious enough to raise doubts about the stability of Russia’s entire financial system.
The second manifestation was a deep devaluation of the national currency at the end of 2008 and beginning of 2009. The government’s intention was to stop, or at least to slow, capital flight. Within two months, the Ruble lost about 50 percent of its value (the exchange rate slid from R23 to R34 to the U.S. Dollar). The immediate result was that many Russians converted their Ruble savings into Dollars and Euros and shifted from private banks to more reliable, state-owned financial institutions. A more significant impact was the rapid price increase on all imported goods, ranging from machine building equipment to drugs to imported food to consumer electronics. Since Russia, especially in large cities, is highly dependent on imports, the price increase was quite painful. The pain was further exacerbated by impulsive government attempts to protect domestic producers by imposing higher import tariffs on imports (foreign-made cars being the most explicit example). The rise in import costs helped push inflation over 13 percent in 2008, and inflation is likely to rise even higher in 2009. Another likely result will be a decrease in the number of Russians traveling or studying abroad.
The third consequence of the crisis is, of course, growing unemployment. The impact of unemployment is not yet as visible as that of surging inflation because Russia’s labor legislation is very protective of employees. The natural response of employers to a crisis situation is not to lay off staff, but to cut salaries and announce “unpaid vacations.” Still, it is already clear in early 2009 that for some parts of the country, (especially for company towns facing plant shutdowns and inevitable layoffs) unemployment would be an even more serious challenge than inflation. According to most forecasts, by the end of 2009, the unemployment rate (both registered and unregistered) among the labor force is likely to hit between 10 and 15 percent. For
The New Russia: A Look at Internal Developments 6 Andrei Kortunov Russia, unemployment might present a particular threat, given the low labor mobility and significant regional discrepancies in economic and social development. Another important dimension of unemployment in Russia is the large number (5-7 million at least) of labor migrants from the CIS and other countries who now play a critical role in the Russian economy. It is clear that these people will be the first to suffer. Many of them are not properly registered and do not have the same labor rights as Russian citizens. If the crisis deepens, one can predict a new wave of xenophobia, political radicalism, and ethnic conflicts.
Unemployment will affect the entire country, but regional impacts will vary. Most of the traditional machine-building and metallurgical regions will be the first to suffer, along with the majority of ethnic republics (with the exception of the strong and relatively diversified economies of Tatarstan and Bashkortostan). Southern Russia (excluding the North Caucasus) and the Volga region are in a better position, with more developed economic infrastructure and better communication lines. Oil- and gas-producing territories will manage the social impacts of the crisis provided that the global oil price stays at the level of $45–55 per barrel. Moscow and St. Petersburg will suffer less than the rest of Russia, though in both cities certain sectors (such as finance, retail, and entertainment) will be affected in a serious way. In an attempt to mitigate mounting regional problems, the Kremlin has started replacing governors who have failed to cope with the situation on the ground. However, many of these personnel decisions seem very arbitrary and questionable. In most cases, the efficiency of newly appointed regional leaders has been defined not by their managerial skills, but rather by their abilities to lobby for additional subsidies from Moscow.
The initial reaction of the Kremlin to the crisis was impulsive and not very consistent. After a period of denial, the government has finally accepted the grim reality. However, there is still little unity within the Russian political establishment and the expert community about the nature, expected length, and consequences of the economic downturn. In practical terms, the first priority in the fall of last year was to prevent potential social unrest by supporting large enterprises and by trying to tame inflation. These efforts, however, were not too successful. They clearly lacked a systemic approach and were quite often driven by specific institutional interests rather
The New Russia: A Look at Internal Developments 7 Andrei Kortunov than by any strategic thinking. Corruption was a major factor limiting the effectiveness of subsidies from the center intended to help the regions cope, and was particularly glaring in areas such as housing and public health.
The public reaction to the crisis was and continues to be somewhat paradoxical. On the one hand, there is a growing mood of concern and pessimism about the future of the country as well as the future of individuals. Every passing month finds more polling respondents expressing dissatisfaction with the current situation and concern that it will get worse. On the other hand, the approval ratings of the President and Prime Minister remain high, and the ruling party, United Russia, has successfully been able to defend its candidates in regional elections, notwithstanding a number of notable exceptions. This seeming paradox might have a number of explanations.
First, one can argue that most of Russians still believe that the crisis is an imported phenomenon. Therefore, the government need not change its fundamental political and economic models. The only thing that Russia has to wait for is a return of high oil prices, which will certainly happen once the leading economies pull themselves—and the rest of the world—out of the crisis and start showing positive growth. Of course, the political leadership nourishes such perceptions and evidently shares them.
Another explanation might be that most Russians understand that the last decade was simply too good to last forever and that they now have to moderate their expectations. Some of them have already increased their personal savings and some are ready to cut down on their consumption. Even if the situation should get more complicated, perhaps Russians believe that it is a fair price to pay for the prosperity of the last 10 years, which to a large degree was unearned.
But another way to explain the relative passively and political loyalty of the population is to point out the clear absence of alternative mechanisms of political and social mobilization. Opposition parties remain largely discredited in the eyes of most, civil society institutions remain weak, independent trade unions are almost nonexistent, and most of the influential media are state controlled. The government (and Vladimir Putin personally) remains one of very few symbols of stability and hope. If we look at social protest actions in Russia today, we see that most of them are
The New Russia: A Look at Internal Developments 8 Andrei Kortunov sporadic, poorly organized, and insulated from other similar actions. Social movements take the form of “single issue” coalitions that are very fragile and unstable.
The current Russian discourse on the likely political implications of the present crisis might be reduced to two possible scenarios. First, the “radical” scenario implies that there will be more and more active manifestations of social unrest this year, especially in company towns and depressed regions. The approval rating for President Medvedev and Prime Minister Putin will decline and opposition parties will grow in popularity. Eventually, the social, economic, and political structures built under Putin in the early 2000s will be replaced by new ones that are more adequate to the post- crisis world. Second, the “conservative” scenario is based on the assumption that the current regime has a margin of safety that will enable it to cushion social protest and to channel it in a non-threatening direction. Some concessions to the opposition are likely to take place, but the core of the Putin regime will not change, at least until after 2011, when the Duma elections give the opposition the first real chance to change the balance of power in the country.
Which scenario emerges will depend on the flexibility of the Russian state machinery, the level of unity within the political establishment, and the degree of commitment within the now fragmented opposition. But it seems evident that in order to move ahead, the country needs a new social contract between state and society. Such a contract will require at least a partial dismantlement of Putin’s vertical of power in order to address the low capacity of local leaders to meet the needs of their constituencies. The current crisis has exposed the weaknesses of Putin’s system, but it will be difficult for those invested in the current system to undertake the difficult choices necessary to change it.
The New Russia: A Look at Internal Developments 9 Andrei Kortunov