No Obituaries Yet for Capitalism in Russia

The unique form of capitalism that developed following the Yukos affair seems likely to survive the current economic upheaval, writes Samuel Charap in Current History.

The global economic crisis devastated Russia’s economy. With the exception of its neighbor Ukraine, Russia suffered perhaps more than any other emerging market. In addition to the credit crunch and capital flight that occurred in practically all these markets, Russia was also hit by a collapse in demand for its main export commodities, in particular hydrocarbons. When world oil prices dropped by more than half in the past year, Russia found itself in deep trouble.

The statistics are grim. Gross domestic product could drop by as much as 10 percent this year, after a decade in which growth averaged nearly 7 percent annually. Industrial production has collapsed at an even steeper rate than it did during Russia’s 1998 economic meltdown. Unemployment has reached double digits, decimating the country’s nascent middle class. By the end of this year, over 17 percent of the population, or 24.6 million people, will be living below subsistence level. In the first six months of 2009, foreign direct investment into Russia plummeted 45 percent year-on-year, the steepest drop on record. The stock market has tanked. The number of Russian billionaires has fallen to 32, from 110 just last year. And for the first time in 10 years, the government this year will run a budget deficit—a whopping 7.5 percent of GDP.

As the crisis gathered steam in the fall of 2008, observers predicted an incompetent government response and a new wave of property redistribution in favor of the state. A trend toward greater state control over the economy had already begun with the so-called “Yukos affair.” (The term refers to the government’s assault on the oil giant Yukos—including the arrest, trial, and conviction of the top shareholders of Yukos’s parent company, Platon Lebedev and Mikhail Khodorkovsky, on fraud and tax evasion charges, and the eventual dismantlement of the company’s assets and their sale to state-controlled firms. The affair continues through the present day, as the imprisoned Lebedev and Khodorkovsky stand trial a second time, this time on embezzlement charges.) Many suggested the trend toward state control would now become even more severe.

They predicted that entire sectors would be gobbled up by corrupt officials seeking to extract rents. The heads of state-owned or state-controlled corporations, or tycoons with close connections to leadership, would receive direct government support and would be empowered to take over other enterprises—this would represent a “soft” nationalization of sorts. Many feared a reversal of the privatizations that had occurred in the 1990s, and a wholesale redistribution of assets from the private sector to the state or its agents. Some observers even claimed that Russia was embarking on a path toward a new economic system, one completely dominated by the state.

These predictions have proved unfounded—at least thus far. Indeed, the government’s program of anti-crisis policies has been relatively successful, especially in the financial sector. Few nationalizations have occurred, and those that have taken place were essentially forced upon the state. To be sure, the government’s response has been far from ideal: Policy implementation in many cases has been terrible, and selective bailouts seem to have been driven by favoritism. But the Kremlin has not fundamentally altered the country’s economic structure. The crisis has not put an end to Russia’s market economy.

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