Russia s s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed

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1 Russia s s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed Anders Åslund Senior Fellow Peterson Institute for International Economics Washington, DC, November 19, 2007

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3 1. Revolution ISSUES 2. Why did market reform succeed? 3. Why did democracy fail? 4. Bush policy toward Russia 5. Russia s s future?

4 1. Key to Understanding Russia s Transformation: It Was a Revolution Literature on Russia s transformation fall into two categories: those who recognize it as a revolution and the others.

5 Revolutionary Situation communist societies are in the throes of a serious systemic crisis which fits very well the concept of a revolutionary situation as defined by Lenin. [a] stalemate between the ruling elite of a country and its population: the former could no longer rule, and the latter would no longer let themselves be ruled in the old way. Richard Pipes, Foreign Affairs, 1984

6 A Revolution Means Temporary breakdown of all institutions minimizes state capacity. A A few policymakers have great freedom for half a year. Policymakers need to act fast and focus on essence. But mistakes are inevitable.

7 To wait means to fail. Mart Laar, former Prime Minister of Estonia, and

8 2. Why Did Market Reform Succeed? Sound Policymaking IDEA: Radical market reform Yeltsin s s Program Speech, Oct 1991 A Brief Window of Opportunity of Extraordinary Politics Parliamentary support received Reform Government appointed, Nov 1991 Policy actions elaborated Implementation, Jan 1992

9 Why Did Market Reform Succeed? Enough was done in the brief window of opportunity to secure the market economy. BUT Initial economic results poor because reforms insufficient. Financial crash cleansed the market economy and completed financial stabilization.

10 Substantial Deregulation EBRD transition index, = low 1= high

11 Fast Privatization Fast Privatization Sources: EBRD % of GDP from private sector

12 Frightful Budget Deficit Led to Financial Crash in % of GDP Sources: EBRD

13 Budget Consolidation through Sharp Expenditure Cuts % of GDP Expenditures Revenues Sources: EBRD

14 GDP Growth Bounced with Subsidy Cuts GDP growth, % est Sources: EBRD, IMF World Economic Outlook

15 3. Why Did Democracy Fail? No concept No program Therefore, no early democracy building Old, unrepresentative parliament survived for too long and stunted party development. New constitution: Excessive presidential powers Putin chose authoritarian rule.

16 Yeltsin s Greatest Mistake

17 Russia s s Authoritarian Reversal Was Not Inevitable From 1=free to 7=not free Russia Ukraine Source: Freedom House

18 4. US Policy on Putin

19 Bush on Putin (1) I I looked the man in the eye. I found him to be very straightforward and trustworthy... I was able to get a sense of his soul, a man deeply committed to his country and the best interests of his country. June 2001

20 Bush on Putin (2) I I respect President Putin s s vision for Russia: a country at peace within its borders, with its neighbors and with the world, a country in which democracy and freedom and rule of law thrive. September 27, 2003

21 Bush on Putin (3) But one thing I've found about Vladimir Putin is that he is consistent, transparent, honest... I know he's always telling me the truth. July 2, 2007

22 Bush on Putin (4) I d d rather spend some time with Vladimir Putin finding out exactly what went on. Now, in terms of whether or not it s possible to reprogram the kind of basic Russian DNA, which is a centralized authority, that s s hard to do. October 17, 2007

23 Bush on Putin President George W. Bush has never publicly criticized: Putin or his destruction of democracy Putin s s confiscation of $7 billion of Yukos shares held by Americans What can he say now?

24 5. Where Is Russia Heading?

25 Putin : 2003: Authoritarian Reform Second Chechnya War Media control Recentralization of power from regions Tax reform Dictatorship of law

26 Putin : 07: Pure Authoritarianism Yukos confiscation Renationalization Reinforced authoritarianism: Deinstitutionalization Acceptance of rising corruption

27 High Oil Price from 2003 Allowed Putin to Indulge Himself Brent, US Dollars per Barrel

28 Putin s s Choice: Back to Nicholas I Overcentralization of state power Media control Ruling through the secret police Repression as is necessary Anachronism!

29 Putin s s Future: President Why? Personal authoritarian rule: rarely survives a succession No real institutions left Vicious competition between KGB clans controlling state corporations: Only Putin can arbitrate Putin says he will leave, but he usually does the opposite of what he says.

30 Putin s s Future: President How? Kremlin-organized popular campaign organized for third term: 30 million signatures Putin possesses authoritarian control. United Russia programmed to win 70%. New Duma can change constitution. Putin controls Constitutional Court.

31 Russia s s Future: Democracy Too rich, pluralist, and educated to be so authoritarian (Lipset( Lipset) Only source of legitimacy: economic growth and stability Corruption main issue in all democratic East-Central European elections Renewed democratization likely

32 Conclusions 1. Contradiction between sound economic development and anachronistic political system is too great. 2. Russia s s market economy seems secure. 3. A new wave of democratization is likely.

33 What Should the West Do? 1. Promote economic integration: Admit Russia to the WTO! 2. Do not count on political stability! 3. Tell the truth!

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