December 2011 marked twenty years since the disintegration of the Soviet Union; a collapse predetermined by the systematic flaws of the Soviet economic and political system. The Soviet institutions, which had mostly been formed at the turn of 1920s/1930s, were too rigid and unable to adapt to the challenges of the end of the twentieth century, including rapid industrialization, excessive military spending, a constant crisis of the agricultural industry and the weakness of the processing industry. In the 1970s and early 1980s, high oil prices allowed the government to keep these problems under control. However, it was obviously insufficient to save the Soviet Empire.
Remembering the breakup of the Soviet Union, I can’t help but ask the following: Will Russia share the fate of the USSR? Which factors make such a hypothetical catastrophe possible?
The budget of the Soviet Union depended strongly on the raw material revenues. The dramatic fall of oil prices in the mid-1980s triggered a heavy economic crisis, which resulted in the collapse of the communist regime. The budget of Russia today is also critically dependent on the export of raw materials. In 2010, the share of oil and gas revenues in the federal budget was 46.1%. Before the 2008 crisis, only the smaller part of raw material revenues was transferred to the budget as the so-called “oil and gas transfer,” and the rest was accumulated in the National Wealth Fund and the Reserve Fund; now entire oil and gas revenues are spent to cover the budget deficit. Only a minimum oil price of $120/b could cover the 2011 budget deficit. However, the period of extremely high prices for energy carriers will eventually end. Then an acute budget crisis may break out in Russia. To avoid this possible scenario, the Russian government has to review drastically the policy of budget spending.
However, the government doesn’t even seem to begin to think of it. The 2012-14 federal budget project is calculated from $100 per barrel in 2012, $97 in 2013 and $101 in 2014. It entails unprecedented growth in defense, homeland security and law-enforcement spending. In 2009, these budget expenditures were 22.7% of all federal budget spending, in 2011 they represented 27.4%, and in 2014 they will total 40.1% of the budget. Most of the expenditure growth is attributed to the classified budget clauses such as State Defense Order and the like. If in 2009 this represented 10% of expenditure in the federal budget, in 2014 it will hit 22.3%. This is an excessive burden for taxpayers who in 2011 were pressed by a sharp increase of insurance payments to the public pension fund.
Stagnation of Economy
A dynamic growth of economy and a sharp increase of living standards in 1999-2008 were the key factors in popularity of the ruling elite. Economic growth was a result of radical reforms (microeconomic liberalization, financial stabilization and privatization) that were implemented in the 1990s to create a market economy that replaced the socialist model of the USSR. In 1999-2003, the industrial basis of the Soviet period was the key growth factor. In 2004-2008, a huge increase in raw material revenues and investments came into play.
Negative economic factors such as poor business climate, rampant corruption and the weakness of Russia’s processing industry went unheeded at the time because of the money shower of 2000-08. Later, in 2008-09, the same negative factors were responsible for the worst GDP decline among the G20 countries, and slowed down Russia’s economic recovery in 2010 (to only 4% GDP growth ). Russia’s economy will no longer be able to grow on the factors mentioned above. Unless urgent drastic structural reforms are implemented, the economic growth rate may decrease to 2.5%. Weak growth will widen the lag between Russia and developed countries, and undermine social stability.
The major problem of the modern Russia is corruption of its public institutions – the judicial system, law enforcement, political police, and prosecutors. The largest public corporations – Gazprom, Transneft, Russian Railways, VTB, Vneshekonombank, Rosatom, Sovkomflot – are also hotbeds of corruption. In 2011, Russia took the 143rd place in the corruption perceptions index of Transparency International, close to some developing African countries (Nigeria, Togo and Uganda). According to the INDEM fund estimates, the annual corruption turnover in Russia has reached USD300 billion, which is comparable with Russia’s budget.
Corruption in Russia’s electoral system is unprecedented. The Russian and foreign experts who participated in a special Wall Street Journal investigation estimate the level of falsification in the December 4th parliamentary elections as 14 million votes. The mass protests in some Russian cities that ensued were evidence of the illegitimacy of the parliament formed as a result of the dishonest elections. Such large-scale falsifications took place in the March 2012 presidential election. That’s why Russia has an illegitimate president. And this is a delayed-action mine under Russia’s political system.
Troubles in the North Caucasus
The instability in the North Caucasus is a serious challenge to Russia’s national security. For the last twenty years, the Russian population has been consistently squeezed out of the North Caucasian republics. According to the 1989 census, the Russian population of Checheno-Ingushetia and Dagestan totaled up to 500,000 (15% of the population); in 2002, there lived less than 170,000 (4%) Russians. Sociological polls show a high level of intolerance of Christianity and a growth of pro-Wahhabism support. The political regime in the North Caucasus republics is much more rigid than in other regions in authoritarian Russia: the freedom of elections, of the press or civil rights are non-existent. The Constitution of the Russian Federation doesn’t act in this region, neither de jure nor de facto. It questions the existence of the North Caucasian republics as part of Russia in the long run.
The Kremlin allocates considerable funds to the North Caucasus republics. In 2011, RUB130 billion was funneled into the Chechen Republic, Dagestan, Ingushetia, Kabardino-Balkaria and Karachaevo-Circassia. The federal transfers in the budgets of these republics total 75–80%. As a result, the republics with a young and fast-growing population, natural resources and a beneficial geographical position are being accustomed to complete financial dependence. The Russian government substantiates the multi-billion subsidies by the necessity to fight terrorism. However, the level of terrorist threat in the region increases every year. Thus, from January to September 2011, 335 terrorist attacks were registered in the North Caucasian federal district – 90% of all terrorist attacks in Russia.
Foreign Policy Conflicts
One of the continuous trends of the Russian history of the last two centuries has been an alternation of liberal reforms and anti-liberal counter reforms. The reforms that marked the beginning of Alexander I’s reign were succeeded by aracktheevshina – the period of voluntarism and military despotism associated with then-member of the state council Arakcheev. The failure of the Decembrists triggered the counter reforms of Nicolas I. Alexander II’s reforms were cancelled out by the counter reforms of Alexander III, the Vitte-Stolipin reforms were followed by the so-called war-communism period, the new economic policy of 1920-s – by Stalin’s repressions, Khruschov’s Thaw – by Brezhnev’s Stagnation, Gorbachov’s perestroika and democratic reforms of 1990 were offset by Putin’s creation of a strict “vertical of power.”
It should be noted that lost wars put an end to some of the counter reforms. The Crimean War occurred at the end Nikolai I’s counter reformation. The 1904-1905 Russian-Japanese War summed up the results of the political conservation begun by Alexander III. The war in Afghanistan became the final event of Brezhnev’s stagnation in the USSR. The counter reforms in the modern Russia may end similarly. A potential source of instability is the territory of the former USSR. The competition of Russia, European Union and China for the influence on the post-Soviet space may trigger political and military conflicts. The August 2008 war in South Ossetia demonstrated the importance of the cautiousness and flexibility at settling smoldering demarcation disputes. Should new regional crises arise, Russia will be especially vulnerable since its elite considers the collapse of the USSR the largest geopolitical catastrophe of the twentieth century.