By Shellie Karabell 

On the streets of Moscow things look pretty much the same as they did before the first round of sanctions were levied to punish Russia for its actions in Ukraine and the Crimea: no shortages in the shops, prices in restaurants actually lower than before sanctions went into effect. Head to the outskirts of the big cites into the countryside, and aside from the occasional oligarch’s outrageously lavish dacha, you see poverty. Just as you would have seen ten, 20, 50 years ago. These are the people who never benefitted from the hey days of high oil prices and whose lives, under sanctions, also haven’t changed.

That’s because there’s been no trickle-down in post-Soviet Russian economy: those in leadership positions when Communism collapsed took what they could with permission; others took what was in front of them and sold it where they could find a market. That includes objectionable good such as weapons and uranium to objectionable clients.

As economist Andrey Movchan, director of the Economic Policy Program at Carnegie Moscow Center writes in his report, Decline, Not Collapse: The Bleak Prospects for Russia’s Economy, “By the time Russian President Vladimir Putin took power in 2000, the majority of key assets were owned either by the state or by a small group of private individuals who had obtained these assets from the state in return for political obedience and loyalty.” Movchan and I met in Moscow recently to discuss the impact of sanctions and the future of the Russian economy for this blog.

Operating Without Money

It helps to remember that not only is Russia a country that can endure hardships like no other, but it is also accustomed to operating without money. Favors and personal privilege are equally valuable, if not more desirable, commodities with which to barter. And even under Communism everyone, including the government, depended on the black market for goods and services. It was the closet things Soviet Russia had to Capitalism, during a time when private enterprise could get you sent to a gulag if you were lucky, or to a firing squad if you were not. So it should come as no shock that those best able to handle the overnight shift in economic ideology were the black marketeers who had the experience of private enterprise and lacked the average Russian’s inbred fear of acting on his or her own.

There followed in the 1990s a transition period consisting of a liberal economy but no governance. Russia was a real wild east. Then-President Boris Yeltsin’s inability to manage the government led to stalemate in the state Duma (Parliament) and wanton disorder in the business world, involving not just corruption but sometimes murder. Putin’s ascent to power brought much of the mayhem to a halt and regained state control of the country’s oil production and trading business, which had been lost during the 1990s, under what then passed for “privatization.” Putin, writes Movchan, “arrested the rebellious oligarch Mikhail Khodorkovsky in 2003, nationalized his Yukos oil company, and ensured all other oligarchs got the message and would obey.”

By 2008, Movchan says, up to 70% of the Russian budget either directly or indirectly consisted of hydrocarbon export revenues. By 2013, no more than 10% of the country’s GDP came from the independent private sector or non-mineral-resource production. Meanwhile, Movchan writes, though inflation had been running at 6.5% in 2013 and GDP growth did not exceed 1.3%, real wages – thanks to Russia’s social policy which Movchan calls “reckless” – exceeded 11.4%.

“This was also the period when many people sold their businesses to the state. Took their money and went abroad,” Movchan claims. “That meant that the state controlled more than 70% of businesses – more than under (the last Communist leader) Mikhail Gorbachev, when the state control was 60%,” he says. “Today maybe 25% of GDP is in the hands of the private sector.”

State Secrets

Movchan says he’s loathe to accept state-generated statistics on the economy at face value because, he writes, “more than 30% of it is classified as ‘secret’. It is generally believed that the classified items in the budget are used to finance the military-industrial complex and security agencies, but there is indirect evidence suggesting that these funds may have many other uses as well. They may range from financing ‘friends of Russia’ abroad, to closing gaps in the balance of state-controlled companies and allowing top officials to make personal purchases.” Opacity, it seems, is a national characteristic rather than a fabricated Soviet-era construction.

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