Analysis: Putin on 'Putinomics'
UPI - United Press International
Published on January 13, 2005
by PETER LAVELLE

MOSCOW, Jan. 13 (UPI) -- This week Russian President Vladimir Putin blasted his government's inability to diversify Russia's economy away from heavily reliance on the export of energy resources. Two of Russia's leading liberal economists have spoken out as well, publicly stating that current economic policy is leading Russia in the wrong direction.

In theory, Putin and the economists are correct. In practice, the Kremlin has done everything in its power to ignore the diversification of the economy for the better part of two years. What explains this? It is called "Putinomics."

Meeting with Internet technology experts and scientists in the city of Novosibirsk late on Tuesday, Putin said the government has failed to diversify the economy and reduce Russia's dependence on natural resource exports. He added: "We know that one of our main tasks is the diversification of the economy. That it is essential to depart from a model based on (the exploration of) raw materials is obvious."

Unfortunately, Putin's comments in Novosibirsk and the Kremlin's extraordinary interest in capturing Russia's energy export sectors for the state is anything but obvious. Putin used almost exactly the same words about the need to diversify Russia's economy in his state of nation address in 2000. However, since then, particularly during the last two years, the Kremlin appears to have largely abandoned any meaningful intention of economic diversification.

Putin's comment this week on Russia's economy is no coincidence. It was a clear response to the events surrounding the recent forced breakup, auction and state acquisition of what was Yukos' largest production Yuganskneftegaz, as well as the strong criticism leveled against the Kremlin by two of Putin closest economic advisers -- Andrei Illarionov and German Gref.

State acquisition of Yuganskneftegaz, and its future integration into other state energy assets, will create a mega-energy entity unrivaled in the world. This same energy entity will also dominate Russia's economy. Both Illarionov and Gref, in sharp contradiction to the Kremlin's plans, have warned that overwhelming state involvement in the energy sectors is an excuse to ignore badly needed structural reform, continues Russia's over reliance on energy sectors and slows economic diversification.

How can Putin speak of economic diversification away from the energy sectors while at the same time pursue the creation of state control entity that will dwarf the rest of the economy? At face value, it would seem this is an obvious contradiction. The answer to this question is how Putin understands the interface of where economics and politics meet -- or what could be called "Putinomics."

"Putinomics" is a momentary hybrid of political imperatives and economic rationality. In principle, Putin is an economic liberal and he clearly understands Russia cannot afford to depend on energy exports to prop up the state's budget forever. His understanding of economic liberalism and economic diversification was make abundantly clear when announcing during his meeting in Novosibirsk that special economic zones will be established in some of Russia's regions to promote economic diversification and growth.

Putin said, "We came to the conclusion that we will establish such zones in Russia." These zones will have a "favorable administrative regime, and advantageous tax regime and a liberal customs regime."

How does creating an energy mega-giant fit into "Putinomics" when calling for further economic diversification? Putin and the Kremlin do not see the energy sectors as being purely economic issues. The Kremlin's control of the energy sectors is more of a political nature and thus is an imperative beyond strict economic rationality. While many Western commentators declare the Kremlin's intense interest in the energy sectors as a new form of re-nationalization of former state assets or outright theft for personal gain, few can argue that the politics of energy is an important Kremlin foreign policy tool impacting national security as well as a means to contribute to state coffers.

Is "Putinomics" by its very nature dysfunctional? In the longer term the answer is yes. Putin has spent valuable time and expended important resources to recast Russia's energy sectors at the expense of the rest of the economy.

If the state's control of Russia's energy resources is efficiently utilized and moving forward, the Kremlin will have the opportunity to focus its attention elsewhere. On the other hand, if the Kremlin rests on its laurels in the wake of its gains in the energy sectors, the medium and long-term prospects for Russia's economy is bleak.

And if Putin is serious about economic diversification, sweeping administrative reform should be at the top of the Kremlin's agenda. Setting up special economic zones in principle is a fine idea. The most successful precedents of special economic zones are Hong Kong and Luxembourg. Both have been successful because each has highly efficient administrations. State administration in Russia is anything but efficient.

The ultimate goal of "Putinomics" should be to make itself redundant. It should be expected that the political imperative of "Putinomics" will continued to be used, though to a lesser degree, against selected oligarchs. Economic rationality focused on broader administrative reform coupled with sound economic policy would likely see the economy diversify. The sooner Putin deals with the former, the better chance the latter can be made a reality.

If Putin succeeds in both areas, "Putinomics" will be seen as a momentary political-economic model of success. If he fails, "Putinomics" will be remembered for how Russia's economy never truly achieved its enormous potential.

Return to the Current Articles page