Monday, October 2, 2023

The Russian economic model is not an example for Ukraine

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Today’s Ukraine is making a huge effort trying to reform its economy so that it can transform it into a modern, competitive, corruption-free and digitally operating market that is naturally interconnected with the economies of the European Union so that it can act as a mediator between the economies of the West and East.

Achieving this strategic goal is not a simple task. First of all, it means the total reconstruction of all spheres of Ukraine’s socio-economic life. Tactically, it means a temporary, but a very serious, deterioration of the country’s living standards for the vast majority of the Ukrainian population. This will lead to lower support for the government and possibly unrest within the population. The worst-case scenario is that this would threaten the reform course itself.

Experts dwell on the public’s support for reforms and their influence on local society. These analysts often compare the current economic development in Ukraine with the economies of two economically stronger and more significant neighbouring states – Russia and Poland – both of which are diametrically different in their approach to doing business.

Those two countries are the most attractive for Ukraine’s huge labour force, which usually leads to the widely-held belief that the economic models employed by Moscow and Warsaw need to adopted by Ukraine in order for the latter to finally become a successful and stable state. To some extent, this is understandable when it comes to NATO and EU-member Poland, as it is a strategic asset for Ukraine, but could the same also be said for the Russian Federation?

Another question that arises is whether or not it true that the Russian economy has developed so robustly in recent years that it may be viewed by Ukrainians as a perfect example for their own country, as both were core constituent republics in the Soviet Union? Many Ukrainian experts don’t believe this is the case. Undoubtedly, the Russian economy had steadily grown over the last 20 years, but the pace and quality of its growth usually did not coincide with the expectations of average Russian citizens or that the Kremlin helped usher in a period of prosperity that helped Russia reach its enormous potential.

Since the collapse of the Soviet Union, the fundamental basis of the Russian economy was its oil and natural gas extraction and exports. It made Russia quite vulnerable to the volatility of global oil prices because more than 70% of its state budget depended on oil and gas revenues. The danger of this total dependence on a single sector was obvious for the Russian government and it proclaimed a new economic policy that aimed to diversify national industrial and mining production operations and to reduce oil and gas foreign trade dependence.

Though some of these endeavours were seen by the federal government as reform successes, the facts are that this is a rather dubious claim as 60% of all Russian exports, 45% of the budget income and 20% of the GDP, all consist of oil and gas revenues. It defines the Russian economy to the point that suppliers of simple raw materials are incapable of fixing the price of their own products.

This means that in 20 years the Russian leadership – to be more precise, Vladimir Putin – failed to implement its own economic reform program and was unable to effectively and properly invest the income from oil and gas production.

During most of the 2000s and the earliest part of the last decade, the Russian economy enjoyed a period of very high oil prices and strong economic growth. This process was slightly marred by the global economic crisis of 2008, which hinted at the inevitability of future oil price reduction and therefore the necessity for economic reforms to achieve a secure level of diversity for the national economy.

Instead of diverse investments that went into economic reforms that would improve the poor living standards of the vast majority of the population, especially retirees in far-flung regions of Russia, the Kremlin preferred overabundantly financing the process of centralisation, militarisation, and enhancing the state’s vast state security and intelligence apparatus and, surely, self-enrichment.

This led to the gradual elimination of key opposition figures and the spread of endemic corruption. The Russian leadership finally created a unique oligarchy system of power, based on the distribution of revenues from sales abroad.

After oil prices fell, however, to a more reasonable level in 2015, the Russian economy started to suffer. It registered only 0.9% growth for the last five years, and it failed to convince the Russian leadership to change its overall economic policy. Instead, they sacked the government, blaming it for the failure of economic reforms and social policy incompetence.

But the new government immediately continued the practices of putting the maximum pressure from its erroneous economic policy on the general population by suggesting that it reduce the average living wage by 4% because average food prices have decreased throughout the country. This would deal a severe blow to a country where 25% of the population lives below the poverty line. Another 50% of Russia’s population lives exactly on a monthly minimum wage of €655.

Instead of economic reform and an increase of the living standards, the Kremlin has launched so-called national infrastructure projects – the Crimean Bridge, the two Nord Streams, and TurkStream. All of them are extremely expensive prestige projects that carry hefty political weight. They are, however, also major sources of corruption because they were implemented by the same Russian oligarchs that increased their wealth by $27 billion in 2019, compared with the rest of Russian population, which increased its wealth only by $18 billion during the same year and saw the country’s GDP grow by only 1-1.5%.

The fact is that all of these projects are mostly viewed as a burden for a federal budget which could redirect its expenses to Russia’s social and demographic needs. In other words, these are exactly the sort of high-profile money pits that Ukraine needs to avoid if it ever plans to raise its own population’s living standards while also rooting out the social rot and deeply embedded corruption that every Ukrainian government has helped nurture since 1991.

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