Russia Considers a New Economic Model
Well, not new. Russia under Lenin experimented with state capitalism for a short period of time with concrete success (it was called the New Economic Program), but Stalin ended it.
Russia does have a surplus (at the national level) of about $170B, and may tap into that to assist small to medium enterprises (not large corporations). One major problem is that oil and gas remain the majority of its revenue base.
The flaws in Russia’s economy might be too deep to gloss over. At an annual civil forum in Moscow on Saturday, Alexei Kudrin, the chairman of Russia’s Accounts Chamber and finance minister from 2000 to 2011, spoke rather pessimistically about the Russian economy. He predicted a drop in economic output this year of 4.5 percent, a significant fall in living standards and that 1 million more people will slide into poverty. It’s no secret that the Russian economy is under serious stress – made worse by the coronavirus pandemic – but Kudrin’s remarks were unusual for a government that has been promoting the rehabilitation of Russia’s economy by 2022. Given the unavoidable economic difficulties ahead, the Kremlin appears to be changing tone and priming the public for more hardship – and potentially a massive economic transformation.
From Bad to Worse
At the forum, Kudrin said Russia needed a new economic model, and it’s hard to argue with that. Oil remains the backbone of the Russian economy. Approximately half its exports are of mineral resources (mostly natural gas and oil), and oil and gas revenues make up about 30 percent of its federal budget (and that’s excluding tax revenues from oil and gas giants like Rosneft and Gazprom). The pandemic, however, has cratered economic activity, and thus demand for energy, and OPEC+ members including Russia agreed to cap production for the time being. In these circumstances, it is difficult for an economy that depends on energy exports to remain afloat. And even after demand recovers, Kudrin said he believes oil consumption will start to decline from its peak in the next 5-10 years, forcing Russia in the 2030s to shift away from oil exports.
One significant challenge is finding an effective economic model that can ensure Moscow’s continued control of its vast territory and far-flung regions. Today, the Kremlin maintains control using not only the security apparatus and political institutions but also the redistribution of budget revenues between regions. These revenues, however, depend on the oil and gas industry. Beyond its own borders, Moscow has offered neighbors discounted energy in exchange for greater regional influence and security, defending itself and its sphere from encroachment by China in the east, Turkey in the south and Europe in the west. But as the role of oil and gas in the Russian economy declines, the Kremlin will need its new economic model to serve a similar purpose with respect to building and maintaining allied relations with its neighbors.
During his speech at the civil forum, Kudrin suggested that what Russia’s economy needs is “revolutionary deregulation.” He recommended a model he called NEP 2.0 to encourage entrepreneurship, a reference to Lenin’s New Economic Policy of the 1920s following Russia’s Civil War. Under the original NEP, the Soviet Union temporarily turned toward state capitalism and away from extreme centralization – with noticeable success. By 1928, the national income had surpassed prewar levels and the material situation of citizens of all stripes had grown more stable. But when Stalin took power that same year he abandoned the NEP, whose legacy remains controversial in Russia to this day.