Russia is Becoming a Precarious Petrostate

By Henry Srebrnik, [Moncton NB] Times & Transcript

Prior to meeting U.S. president Joe Biden in Geneva June 16, Russian president Vladimir Putin has contended that the United States is trying to stifle Russia’s economy. “It wants to contain our development and publicly talks about it,” he told the Channel One television station June 4. But the country’s economic problems are mainly domestic in nature.

How has Russia fared in the decades since Putin assumed power? The post-Soviet Russian political system was supposed to develop liberal market democracy but has become increasingly dictatorial and illiberal. A form of capitalism has been built in which the market plays a role in the distribution of resources, but this is a political capitalism in which the economy is dominated by elite political interests, which take “rent” – essentially unearned profits – from the economy and use them to buy support.

The new authoritarianism in Russia is different to that of the Soviet past. The ruling Communist Party of the Soviet Union (CPSU) has been replaced by United Russia, but this is a highly personalized party loyal to President Putin; it is not a political force in its own right. Repression still exists but is less systematic than it was for most of the Soviet era.

The first decade of post-Soviet life under Boris Yeltsin had been one of dizzying opportunities for some Russians. But for the vast majority, it was a nasty fight for survival. Russia experienced a catastrophic decline of its economy. Industries were closing down, life expectancy was dropping, and people were becoming homeless and malnourished.

Yeltsin had created uncontrolled monopolies, making the oligarchs who had acquired these assets extremely wealthy. The country was in a downward spiral by the time he left office at the end of 1999.

Putin spent much of his early years as president rebuilding a “power vertical,” subordinating executive powers and the regions to one system of command and control. He intimidated into submission, drove into exile, or imprisoned oligarchs who tried to convert their vast wealth into political power. This happened concurrently with a Soviet-style institutional rebirth, doubling state control over the economy, and returning secret services to the centre stage of Russian life.

The concept of “sovereign democracy,” introduced by Vladislav Surkov, was a signal that Russia was beginning to pivot away from the west. The last few years have seen an increasingly ideological politics developed based on what Putin calls “traditional Russian values” -- respect for family, patriotism, intolerance of social difference, Orthodox Christianity, and hostility to liberalism. The Russian Orthodox Church stood at the centre of this new conservative pact, with Patriarch Kirill rejoicing Putin as a “miracle of God.”

One of the undeniable achievements of Putin’s rule was a massive reduction in absolute poverty. That was achieved on the back of historically high oil prices, an early reformist agenda and several years of high growth. Over the 10 years from 1999 to 2008, Russian GDP increased by 94 per cent. More recent years have not been as good, though.

Many analysts consider Russia to be a “petrostate,” dependent on oil and gas revenues exported abroad. Russia is ranked third in the world for oil production, producing 12.1 per cent of the world’s oil, some 11.5 million barrels per day, and exporting $72.37 billion dollars worth in 2020.

The three major companies include market leader Rosneft, which is fully owned by the Russian government, Lukoil, and Gazprom. Much of the industry is state-owned and controlled. Putin has a grip on the industry and directs it to his own ends.

Such dependence is fraught with economic danger. For example, when the price of oil declined in 2014 the Russian ruble fell in value by 59 per cent relative to the U.S. dollar in just six months.

Most oil and gas exports go to Europe, so Russia is mostly dependent on the European market for export revenues. But this is a cause for concern because Europe is striving towards a future of clean and renewable energy and trying to phase out the use of fossil fuels.

Sooner or later, Russia will have to diversify and become less tied to oil and gas exports, if it wishes to remain a major player in the global economy.