The russian economy under Putin

Contents

Introduction

1) Wladimir Putin

2) Oligarchy
2.1 Conspiracy theories about the Yukos Affair

3) Economic reform program

4) Reforms
4.1 Tax Reform
4.2 Land Reform

5) Privatization

6) The bank sector
6.1 Structure
6.2 Conclusion

7) Trade Policy

Conclusion

Literature

Introduction

Putin promotes himself as a big reformer but no real actions have been undertaken so far, which would prove that true. Therefore I am asking myself, if President Putin is rather a reformer or a power-politician.

Where are the necessary reforms Putin is talking about? Does Putin really want to reform the country for the better or is his major concern to maintain his position as president? Are the new reforms meant seriously or are they just a way to quiet up the critics and protect his position? It is very unclear where Russia is heading too. If you believe the official statement, you would see a democratic reformed Russia. Unfortunately if you dig deeper, Putins words need to be doubted. No effective reforms were installed that would have turned the country around.

What are Putins real intentions, aims and goals? I am questioning myself what kind of influence he has on the Russian economy.

In my paper I will try to answer all these questions. Further I choose this topic as discussions about Russia’s economical strength are constantly going on.

For me, Wladimir Putin is a very interesting man. It seems very difficult to figure him out or for what he is actually standing for. His behaviour on certain issues is much contradicted what makes him a very difficult business partner. He seams to have two faces.

1) Wladimir Putin

Before 9/11 Putin tried to restore political and economic relations with the Soviet Union's old allies such as Iran, Iraq, Cuba and North Korea. At the same time, he attempted to protect his influence in the former Soviet Unions states through energy dependency and aggressive military exercises. Putin changed his course when he supported Bush’s war on international terror. When the Iraqi war happened, Putin showed the cold shoulder again. At the same time, he let Bush place U.S. troops in Uzbekistan and other places in Central Asia. Putin also acceded to the actions in Afghanistan. His policies are completely contradicted. It seems like Putin needs to straighten which direction he wants to go. (Millar 2005: 132-136)

Recent movements of President Putin included the engagement with the US Bush administration after 9/11 in order to support the global war on terror and the urge to join the World Trade Organization. Putin was never known as a big "westener" but in order to join the WTO, which should have occurred by 2005, he modernized the political system.

He was able to stabilise Russian's economy at least in part. While his predecessor Yeltsin was attacking the entire Soviet era, Putin reacted a little bit more moderately. Putin indeed re-instated the tune of the Soviet anthem as the official national anthem of the Russian Federation and he retained the national icon of the Tsarist double/headed eagle. At the same time, he committed towards open trade to more involvement in the international political economy. (Worth 2005:142-144)

Since the beginning of Putins term he had to deal with the economic problems left by the Yeltsin era and he attacked the Oligarchs in order to get the state's power back. The Oligarchs stand high up on Putins agenda for a structural economic reform.

Key goals of this plan are macroeconomic stability, the reduction of inflation and the privatisation process. Through these measures the state's apparatus should be strengthened. He attempts to strike an even balance between macro-economic management and micro-economic reform. Although Putin is gearing towards the liberalization, strategic neo-communist thinking is still part of Putins dealing with economy.

To join the WTO, it would be very important because it would be essential for the industrial modernisation. Internal structural reforms had to be carried out as well, in order to join the WTO. It is inevitable that such reforms will not come along with the ideas of the Oligarchy. The Oligarchs resisted against the tax and land laws as these new laws would reduce bureaucratic interference in the economy. These new laws made it uncomplicated to investigate companies on tax infringements from the state.

Tax and Labour reforms demonstrate the deep commitment to the envisioned WTO membership. (Worth 2005: 148-149)

2) Oligarchy

Putins attacks against certain oligarchs are most likely the most published strategy out of his economical strategies. Under Yeltsin the oligarchs could do whatever they wanted. Therefore the attacks found great support worldwide, as the oligarchs practice standards which did not meet the standards of the international market. The structures of monopolies did not adhere to market competition.

These attacks started shortly after he won the presidential elections in 2000. He created the tax police which was sent out to find companies who do not properly pay their taxes.

The first Oligarch investigated was Gusinsky. Vladimir Gusinky was one of the most famous oligarchs. Media-Most's NTV was critical of Putin's election campaign. In the end, he lost his media empire. Later on Gusinsky was arrested, expelled from the country and lives now in exile. Allegedly there was fraud involved when purchasing.

It does not seem that Putin was concerned about economic power, but he was concerned with shutting down political criticism of his policies. (Millar 2005:132)

The next attack was in 2000 against Potanin's group. More significantly of Berezovskys industrial connections with Avtocay was his control of the TV-station ORT.

The second wave of attacks on Oligarchs was in 2003. The key shareholder of Yukos was arrested for the embezzlement of shares while Khodorkovsky was put in jail because of charges of mass fraud. Berezovsky who was granted asylum in London called both cases politically motivated. The clampdown was a sign of Putins personnel fear of insecurity.

(Worth 2005: 150).

Fact is that Khodorkovsky was pushing oil pipeline deals what was not in Putins sense. He used democratic rhetoric to build a tremendous political power base at home and abroad. On October 26, 2006 Khodorkovsky's plane was stormed in Novosibirsk. He was put in prison in Moscow and was charged with defrauding the state of $500 billion. In 2004 he wad forced to pay $6.4 billion on taxes back. He was convicted for economic crimes and sent to prison for 9 years in May 2005. The message sent was clear. The rest of the oligarchs knew by then what would happen to them if they challenge Putin. (Rosefield 2007: 175)

The president of Yukos was Khordokowsky and was rated the richest person in Russia with an estimated $8 billion estate. He was ranked in 2003 in the Forbes magazine as the 26th richest man in the world. The company itself was one of the largest and most successful private businesses in Russia. Khordokowsky made publicly clear that this was an attack of Putins inner circle, the so called St. Petersburg siloviki. It is the security service personnel who worked with Putin in St. Petersburg. The market value of Yukos fell immediately, so did the Russian Trading System stock market index. As Putin kept silent about the affair, this undertaken action had a significant impact on Russia’s economic system. International concerns about Russia’s justice system were raised and people began to question if you can and should trust business in Russia. (Bacon 2006: 163)

Other oligarchs were left alone or they even profited from the administration change. It is said that they align themselves with the Kremlin in forms of political support or with generous donations.

For a time it seemed that the oligarchs were the big winners of the post-communism era. A couple of smart business men and old cronies were ruling the state, routing Russia's liberals and the security services. If they needed to, they cooperated with both factions for tax cuts or military reforms. The oligarchic priorities seemed prior even after Putins attacks on them.

But with the attack on Khodorkovsky it was clear that Putin was more interested in state power than in private interests. (Rosefielde 2007:174-175)

Fridman is the best example of the oligarchs who could strengthen their control over Alfa-Bank. Alfa-Bank is a financial holding that remained almost untroubled by the 1998 crash. The bank was moving to such prominence that it attracted the name "Kremlin court bank".

Alfa-Bank is one of the first institutions that shifted their interest from national to multinational investments. Fridman made great deals with BP and other energy and engineering companies in Europe.

The investigations of Oligarchs, which power structures where installed under Yeltsin, have supporters and critics. Western observers fear that the arrests of oligarchs lead to a re-nationalisation process and move away from global economic integration.

Putin tries though to break the monopolies in Russia in order to control inflation and to secure greater foreign investments. He tries to cope with the progress that should be made, demanded by the World Bank, GATT and the WTO. (Worth 2005: 150-151)

2.1 Conspiracy theories about the Yukos Affair

Although it was officially claimed that the Yukos Company was a threat to economic security, it is believed that this incident had something to do with Khordorkovsky's funding to opposition political parties’ namely SPS and Yabloko. When Putin first came into power there was an informal agreement between him and the leading oligarchs that they stay out of politics and in return they can keep doing their business unhindered. Yukos was known as one of the most effectively managed and transparent companies in Russia.

Another theory is that this affair should show off that the time of the oligarchs is running out and that it is known that they came to their wealth illegally and that this behaviour is no longer tolerated. Political observers see the Yukos affair as a conflict between rival clans in the Kremlin. It is a conflict between the "Yeltsin Family" and the St. Petersburg silovikis with Viktor Ivanov. Khordorkovsky and other big oligarchs who gained their wealth in the years when Yeltsin was in power belong to the Yeltsin Family circle.

There are further thoughts that Putin himself or the Putin administration did not want the supposed engagement of Yukos and Sibneft which was announced in April 2003. These two companies combined would make the world’s largest private oil firm. This envisioned fusion was definitely not what the government wanted. They did not want to have competition in a strategically sector that is more important than anything else for Russia. The state would have no or only very little influence and control over this union.

Putin wants a leading role for the state in the energy sector. To have a leading role in the energy sector is most important for the international standing and economic development for Russia. This was something that could have not been given up so easily. The entire economy is based on the energy sector. Important decisions are depending on the situation of the energy sector. Putin believes that Russia needs state control and regulations otherwise it will not be possible to transform Russia into a strong economic power. Russia should even be the owner of the countries pipeline system.

This was proven when the state took over the core production unit of Yukos. Now there is a creation of a powerful, state-controlled integrated gas and oil corporation going on. Leading key positions in state controlled companies in the energy sector are now occupied by members of the presidential administration. This behaviour became more and more popular since Putins second term in 2004. In 2004, Dimitrii Medcedec chaired the board of Gazprom. Russia’s state owned Oil Company. (Bacon 2006: 163-168)

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