Russia Won’t Recover Unless It Reforms Its State

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Russia is “a state nation” more than a nation-state. The state looms large in education, healthcare, media, transport, business, and, of course, politics. Political discussions rotate around the state, its functions, its attributes, and its role in the economy. Pro-government media hail the state, opposition politicians and commentators lambast it.

It is in the language too: the word gosudarstvo (state) is used much more frequently than the words for “society,” “citizen,” or even “government,” according to a Frequency Dictionary of the Russian Language.

The state, being what it is in Russia, a living creature with aspirations and idiosyncrasies of its own, may start saving itself, rather than saving the nation.

Despite being so important, it is not a well-defined concept: to a Russian speaker, the “state” feels larger than just a political apparatus or the administrative bureaucracy running it. It is a superior actor, an almost Hobbesian creature that has its aspirations and idiosyncrasies—distinct from those expressed by your average individual citizen.

The state has been the protagonist of the Putin years. Both the Kremlin and Russian society at large agreed in seeing a strong state as a cure to all of Russia’s ills. Under Putin’s tutelage, the state has built up its administrative capacity, consolidated political and economic control, and has been, all in all, a big winner. It was also the biggest beneficiary of a decade-long bonanza of record-high prices for oil, gas, and metals, Russia’s primary export commodities.

But it is about to dawn on the Russian public that the state, which was seen as a solution under favorable market conditions, may become a problem under adverse conditions. The state, being what it is in Russia, a living creature with aspirations and idiosyncrasies of its own, may start saving itself, rather than saving the nation.

While the state was expanding, the economy was showing a more complicated dynamic. The oil windfall had two peaks: the first happened between 2004 and 2008, the second between 2010 and 2013. Russia entered the first wave of high-price oil when its oil sector was predominantly private, but by the time the second wave came about, two-thirds of the oil export revenues were accrued by state-owned companies. The second instance of the oil boom brought in almost $2 trillion in revenue as opposed to the first instance’s $1.5 trillion, and yet economic growth was much better under the first wave than under the second, analyst Kirill Rogov pointed out in 2014.

The Russian economy grew 7.1 percent, on average, between 2004 and 2008 and only 3.4 percent, on average, between 2010 and 2013. The economy’s response to an influx of petrodollars was significantly muted by the time the state had consolidated power and oil assets (including those formerly owned by Yukos) under its ownership and management.

The state was also taking up more and more responsibility for social entitlements. This was motivated by political struggle. If the Kremlin wanted to be at the top of its game, it needed to raise pensions, salaries, and social benefits, in order to prevent the social agenda from being taken over by an opposition. The protests of 2011 and 2012 that specifically addressed the quality of Russia’s public institutions only put additional pressure on the Kremlin in that respect: Putin could not change the quality of his state (or did not want to), but he could afford to be generous with money.

Expenditure of Russia’s budget system has gone up from 31 percent in mid-2000s to 38 percent more recently. Apart from the social spending, the military and security services were the primary beneficiaries of the Kremlin’s spending spree. On top of taking over oil assets, the Kremlin has created a number of state-owned industrial conglomerates and, by quiet attrition, became a dominant force in banking. The state sector comprises, according the IMF, more than 70 percent of the Russian economy. State-owned enterprises take up 80 percent of the country’s top-ten firms’ shareholder capital. 

Many Russians are dependent on the state in one way or another. About 14 million people are employed by schools, hospitals, universities, and other organizations directly funded by the state budget. If we add state-owned companies and the 40 million retirees, we would see that more than half of the entire Russian population depends on the state for its income, wrote Kirill Rogov in a recent opinion piece.

It has never occurred to the Kremlin that a day may come when its smoothly running state machine would have nothing to redistribute. 

The state machine developed under Putin was supposed to be a just and reliable mechanism to redistribute windfall revenue (the extent to which it succeeded is another question). It has never occurred to the Kremlin that a day may come when its smoothly running state machine would have nothing to redistribute. Huge industrial assets, failing banks, and enormous social entitlements become liabilities as soon as your main source of income, oil, goes into free fall.

Russia’s current crisis is fundamentally different from those of 1998 and 2008, which most Russians remember well. The country that went through these crises was a chaotic and rapidly developing Russia, a Russia that was eager to join the broader world. But the Russia that is in crisis today is a very different country. It has chosen political, not economic, expansion and it has ruined its relations with everybody in its immediate vicinity. Its state is obsolete and unable to be a force for modernization.

It became clear long ago that the bigger the state became, the worse Russia performed economically. The next step for the Russian public is to recognize that the Russian state, in its current shape and form, cannot be a solution to the crisis because it is what has caused the crisis. 

The opinions expressed here are solely those of the author.