Susanne Oxenstierna - The Challenges For Russia's Politicized Economic System

The Challenges for Russia’s Politicized
Economic System
During the early 2000s the market liberalization reforms to the Russian economy,
begun in the 1990s, were consolidated. But since the mid-2000s economic pol-
icy has moved into a new phase, characterized by more state intervention with
less efficiency and more structural problems. Corruption, weak competitiveness,
heavy dependency on energy exports, an unbalanced labour market, and unequal
regional development are trends that have arisen and which, this book argues, will
worsen unless the government changes direction. The book provides an in-depth
analysis of the current Russian economic system, highlighting especially struc-
tural and institutional defects, and areas where political considerations are caus-
ing distortions, and puts forward proposals on how the present situation could be
remedied.
Susanne Oxenstierna holds a doctorate in Economics and is Deputy Research
Director at the Swedish Defence Research Agency, FOI.
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The Challenges for Russia’s
Politicized Economic System
Edited by Susanne Oxenstierna
London and New York

First published 2015
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Contents
List of figures xi
List of tables xiii
List of contributors xv
Abstract xviii
Preface xix
List of abbreviations and acronyms xxi
1 Introduction 1
SUSANNE OXENSTIERNA
2 Putin’s rent management system and the future of

addiction in Russia 11
CLIFFORD G. GADDY AND BARRY W. ICKES
3 Between light and shadow: Informality in the

Russian labour market 33
VLADIMIR GIMPELSON AND ROSTISLAV KAPELIUSHNIKOV
4 State–business relations in Russia after 2011:

‘New Deal’ or imitation of changes? 59
ANDREI YAKOVLEV
5 Is Russia an entrepreneurial society?

A comparative perspective 77
RUTA AIDIS
6 The role of institutions in the Russian economy 96

SUSANNE OXENSTIERNA
x Contents
7 The impact of oil prices, total factor productivity
and institutional weakness on Russia’s declining growth 113
MASAAKI KUBONIWA
8 From the dual to the triple state? 128

RICHARD SAKWA
9 The basis for institutions among the population in Russia 145

CAROLINA VENDIL PALLIN
10 Russia’s emerging civil society 164

JENS SIEGERT
11 Regional inequality and potential for modernization 182

NATALIA ZUBAREVICH
12 Promoting sustainability in Russia’s Arctic: Integrating local,

regional, federal, and corporate interests 202
ROBERT W. ORTTUNG
13 Russian regional resilience: Cooperation and

resource abundance
A case study of Khanty-Mansi Autonomous Okrug 220
IRINA ILINA, CAROL SCOTT LEONARD AND EVGENIY PLISETSKIY
Index 238
Figures
2.1 The categories of rent 13

2.2 Decomposing Russia’s rent windfall into price and quantity effects 14
2.3 World oil prices, 1880–2013 15
2.4 The world oil price and Russia’s production of rail freight cars,
1996–201420
2.5 Employment in railroad rolling stock industry, 1998–2009 21
2.6 Russia’s economic warming rate, 1925–2011. Change in
‘temperature per capita’ (TPC) per year 22
2.7 Russia’s ‘temperature per capita’ (TPC), 1926–2030 23
2.8 Total value and its components 24
2.9 Categories of rent distribution 24
2.10 Strikes in Russia, 1988–2013 30
3.1 Employment and GDP growth, 1999–2011 (1999 = 100) 38
3.2 Change in total employment, formal and informal employment,
2000–12 (million persons)39
3.3 Informal employment, self-employment and entrepreneurial activity,
men, 1998–2010, RLMS 40
3.4 Informal employment, self-employment and entrepreneurial activity,
women, 1998–2010, RLMS 41
3.5 Real monthly earnings in formal and informal employment,
men, 1998–2010, RLMS 50
3.6 Real monthly earnings in formal and informal employment,
women, 1998–2010, RLMS 51
6.1 Schematic model of a rent-dependent economy 100
6.2 Types of boundaries and control in a rent-dependent economy 101
6.3 Government effectiveness and regulatory quality, Russia, 2000–12 103
6.4 Rule of law and control of corruption, Russia, 2000–12 104
6.5 Voice and accountability, Russia, 2000–12 105
7.1 Share of value-added of the oil and gas industry in overall GDP (%) 114
7.2 Average share of value-added of the oil and gas industry
in overall GDP (%) 115
7.3 Oil prices and terms of trade 117
xii Figures
7.4 Trading gains (terms of trade adjustment) at constant USD 2,000 117
7.5 Increase in energy efficiency (decreases in energy intensity) 118
7.6 GDP growth and oil prices 119
7.7 Capital stock and employment 120
7.8 Manufacturing output and oil prices 121
7.9 Net capital inflow/outflow: private sector (bln USD) 123
7.10 Absolute low level of worldwide governance (rule of law)
of 212 countries/regions, 2013 123
7.11 Russian car market, 2000–13 (thousand units) 126
9.1 Distribution of the total income among five groups of the
population, 1980–2012 (%) 150
9.2 In your opinion, what should be the relationship between the
state and its citizens? (%) 158
9.3 Values in Russian society – actual, desired and those important
for the future Russia (% of answers)160
11.1 Per capita GRP of Russian regions as per cent of the national
average (adjusted for regional prices differentiation) 186
11.2 Russian regions budget revenues, transfers from federal
budget and share of transfers in regions’ budget revenues 187
11.3 Inequality of Russia’s regions: Gini coefficient for
socio-economic indicators 189
Tables
2.1 Historical GDP growth rates in countries with per capita

income of USD 5,000 or more, 1950–2010 16
2.2 Attitudes towards the oligarchs 26
3.1 Labor productivity 2005–11 (value added per hour; RUR in
constant 2008 prices) 42
3.2 Incidence of informality, 1998–2010 (%) 44
3.3 Mobility in the Russian labor market (4 states), 2003–10 47
3.4 Mobility in the Russian labor market (7 states), 2003–10 47
4.1 Main periods in the evolution of state–business
relations in post-Soviet Russia 63
5.1 The BRIC countries compared using the GEDI 2013 results 82
5.2 Russia, Sweden and the USA compared using the GEDI 2013 results 83
5.3 The 2013 Gender-GEDI rankings 84
5.4 The BRIC countries compared using the 2013 Gender-GEDI results 85
5.5 Startup Ecosystem rankings for top 20 global start-up hubs 86
5.6 World Enterprise Survey corruption indicators, 2012 89
5.7 World Enterprise Survey: regulations, taxes and business
licensing indicators, 2012 90
5.8 Access to funding: Russia and G20 compared 91
5.9 Worldwide Governance Indicators for Russia, 1998–2012 91
6.1 Russia’s Corruption Perception Index and rank 104
6.2 Russia in World Bank ‘Ease of Doing Business Index’, 2013 106
7.1 Comparison of countries in ‘Ease of Doing Business Index’
as of December 2013 125
9.1 Internet penetration in different cities and localities in
summer 2013 (%) 155
9.2 Value orientations in different age groups (%) 157
9.3 Russians on their rights according to consumer status (%) 159
9.4 Are you afraid of a return of mass repression? (%) 160
11.1 Per capita investment in 1999–2012 188
xiv Tables
11.2 Regional inequality of Russia, Ukraine and Kazakhstan:
Gini coefficient for GRP and money income per capita 191
12.1 Key actors addressing sustainability in Russia:
interests and capacities 204
12.2 Gazprom contributions to the Yamal-Nenets Autonomous
Okrug budget (bn RUR)211
12.3 Expenditures in the YaNAO 2012 regional budget
(thousand RUR)213
13.1 Oil- and gas-producing regions, 2012 227
13.2 Standard of living indicators, 2011, Khanty-Mansiysk
Autonomous Okrug, Moscow city, Russian Federation average 228
13.3 Debt in resource regions (% of GRP)229
13.A1 Tax structure in resource regions in Russia, 2005–11 (% of
total revenues) 231
Contributors
Ruta Aidis is Senior Fellow at the Center for Entrepreneurship and Public Policy
(CEPP), School of Public Policy, George Mason University; VP, Research and
Business Development, The GEDI Institute; and President and CEO, ACG
Inc. Dr Aidis specializes in comparative entrepreneurship development, insti-
tutions, gender and public policy.
Clifford G. Gaddy is Senior Fellow at the Brookings Institution, Washington,
DC, and Senior Scientific Advisor of the Center for Research on International
Financial and Energy Security (CRIFES) at Pennsylvania State University.
Vladimir Gimpelson is Director of the Centre for Labour Market Studies and
Professor at the Higher School of Economics in Moscow. He specializes in
labour market developments in transition countries with a special focus on
Russia. Among his multiple publications is the book The Russian Labour Mar-
ket Between Transitions and Turmoil (Rowman & Littlefield 2001).
Barry W. Ickes is Professor and Associate Head of the Department of Economics
and Director of CRIFES at Pennsylvania State University, and Non-resident
Senior Fellow at the Brookings Institution, Washington, DC.
Irina Ilina is Professor at the Department of Regional Studies at NRU-HSE and
Director of the Institute of Regional Studies and Urban Planning at HSE. She
is former Deputy Mayor of Moscow.
Rostislav Kapeliushnikov is Chief Researcher at the Institute of World Economy
and International Relations, the Russian Academy of Sciences, in Moscow and
Deputy Director of the Centre for Labour Market Studies at the Higher School
of Economics in Moscow. Among his publications is the book The End of the
Russian Model of the Labour Market? (2009).
Masaaki Kuboniwa is Professor at the Institute of Economic Research, Hitotsub-
ashi University in Tokyo. He received his PhD from Hitotsubashi University
and has an Honorary Doctorate from the Central Economics and Mathematics
Institute (TsEMI), Russian Academy of Sciences. He is Executive Officer of
the Association for Comparative Economic Studies.
xvi Contributors
Carol Scott Leonard is Professor and holds the Department Chair of the Higher
School of Economics in Moscow as well as being Emeritus Fellow of St Ant-
ony’s College, Oxford. She is also a member of the Presidential Academy of
the National Economy and Public Administration and is the author of Privat-
ization in Transition in Russia in the Early 1990s (Routledge 2013).
Robert W. Orttung is Associate Research Professor of International Affairs and
Assistant Director of the Institute for Russian, European, and Eurasian Studies
at the Elliott School of International Affairs at George Washington University.
He is also a visiting fellow at the Center for Security Studies at the Swiss Fed-
eral Institute of Technology in Zurich. He is managing editor of Demokratizat-
siya: The Journal of Post-Soviet Democratization and co-editor of the Russian
Analytical Digest.
Susanne Oxenstierna is Deputy Research Director at FOI. After completing her
PhD in Economics at Stockholm University, she has worked for more than
twenty years in a wide range of research and technical assistance projects for
Russia and other transition economies. Among her recent publications is the
co-edited volume Russian Energy and Security up to 2030 (Routledge 2014).
Evgeniy Plisetskiy is Assistant Teacher in Public Administration and Regional
Management at the Faculty of Management and researcher at the Center of
Regional Research at HSE in Moscow.
Richard Sakwa is Professor of Russian and European Politics at the University
of Kent and Associate Fellow of the Royal Institute of International Affairs,
Chatham House. His recent books include Putin: Russia’s Choice (Routledge
2008) and The Crisis of Russian Democracy: The Dual State, Factionalism,
and the Medvedev Succession (Cambridge University Press 2011).
Jens Siegert holds a Master’s in Political Science. From 1988 to 1999, he worked
as a journalist, and from 1993 onward he was based in Russia. In 1999 he
became the Director of the Moscow office of the Heinrich-Böll-Stiftung, a
position he still holds. He is an expert on Russian domestic and foreign politics
with a special focus on civil society issues.
Carolina Vendil Pallin is Deputy Research Director at FOI. She holds a PhD in
Political Science from the London School of Economics. Her previous posi-
tions include Senior Research Fellow at the Swedish Institute for International
Affairs and special advisor for the Swedish Defence Commission. Vendil Pal-
lin is also a member of the Royal Swedish Academy of War Sciences.
Andrei Yakovlev is Director of the Institute for Industrial and Market Studies
(IIMS) at the Higher School of Economics in Moscow. He was awarded a PhD
in Economics and Statistics at Moscow State University in 1992. Among his
recent publications is the co-edited volume Organization and Development of
Russian Business: A Firm-Level Analysis (Palgrave Macmillan 2009).
Contributors xvii
Natalia Zubarevich is Professor in the Department of Geography at Moscow
State University and Director of the Regional Programme of the Independent
Institute for Social Policy in Moscow. She became Doctor of Science at Mos-
cow State University in 2003. She has worked as an expert in the UN Devel-
opment Program in Russia.
Abstract
What are the challenges for the Russian politicized economic system and what
potential does it have to spur growth? Will the dependence on oil and gas prevail?
Would strengthening of the institutions underpinning the market economy make
a difference? And is there any chance of reform initiatives from below through
democratization? The book The Challenges for Russia’s Politicized Economic
System explores different aspects of the close intertwining of politics and econom-
ics in the Russian economy. The economic system maintained by the authorita-
tive regime under Vladimir Putin in 2014 entails that large parts of the economy
are governed not by the market but by the state. The heritage from the Soviet
economy in the form of informal institutions and the industrial infrastructure has
become increasingly evident and potent. There are no drivers to modernize the
economy and the incentives for entrepreneurs are weak. A dozen international
scholars contribute their viewpoints on matters central to the functioning of the
economic system. Key conclusions are that rent addiction is a strong powerful and
political force, that the eroding constitutional state and deficient institutions hin-
der attempts to modernization and entrepreneurial activity, and that NGOs have
grown stronger under repression. The basis for establishing modern institutions
exists among some groups in Russian society. However, the ongoing downturn
of the economy and the country’s geopolitical aspirations obstruct the develop-
ment and provide a fertile environment for authoritarian rather than democratic
institutions.
Susanne Oxenstierna holds a doctorate in Economics and is Deputy Research

Director at the Swedish Defence Research Agency, FOI.
Preface
This book was initiated in the fall of 2013 when it had become evident that, despite
weakened growth, economic policy during President Vladimir Putin’s third reign
would not be geared at modernizing the Russian economy and addressing its long-
term systemic problems. In order to increase the understanding of the present
interrelations of politics and economics and the internal impediments and drivers
to growth in Russia, I invited a group of international scholars to write about the
long-term systemic issues of the Russian economy as they saw them. This volume
is the result and it is a great pleasure to present new and original work of some
of the most well-known specialists on Russian economics and politics on these
urgent topics.
The book project included a conference in Stockholm on 20 March 2014, where
the contributors presented preliminary versions of their paper to an audience from
the Swedish business community, government offices and academia. The four
sessions at the conference were chaired by Silvana Malle, Professor Emeritus of
Economic Sciences, Verona University; Anders Fogelklou, Professor Emeritus
of Law, Uppsala University; Associate Professor Ann-Mari Sätre, Uppsala Cen-
tre for Russian and Eurasian Studies (UCRS), Uppsala University; and Professor
Michelle Micheletti, Stockholm University. I would like to express my deep grat-
itude for their genuinely first-class contribution to the conference.
My own work in the project has been supported by the Russia project ‘RUFS’
at FOI, which is financed by the Swedish Ministry of Defence. The conference
was funded by a special grant from Riksbankens Jubileumsfond (The Swed-
ish Foundation for Humanities and Social Sciences) which is hereby gratefully
acknowledged. I warmly thank Veronica Bard Bringéus, Sweden’s Ambassador
to Russia, for her engaging opening keynote speech and Heinz Sjögren, Chairman
of the Swedish Chamber of Commerce for Russia and CIS, my energetic and
most supportive co-organizer, for his indispensable contributions to a successful
conference. Sanna Aronsson provided excellent management of all administra-
tive tasks in connection with the event and the law firm Mannheimer Swartling
provided the conference venue and support during the conference day which was
greatly appreciated.
In addition, particular thanks are due to Michael Bradshaw, Professor of Global
Energy at University of Warwick, and Michelle Micheletti, Lars Hierta Professor
xx Preface
of Political Science at Stockholm University, who each peer-reviewed a couple
of the preliminary papers within their special areas of competence. Finally, I am
indebted to Christina Lönnblad who competently edited the English language of
the Russian, German, Swedish and Japanese authors.
Stockholm 31 August 2014

Susanne Oxenstierna
Deputy Research Director (PhD Econ.)
Department of Defence Economics
Swedish Defence Research Agency (FOI)
Stockholm
Sweden
Abbreviations and Acronyms
AO Autonomous Okrug
APEC Asia-Pacific Economic Cooperation
ASI Agency for Strategic Initiatives
BEEPS Business Environment and Enterprise Performance Survey
bn billion
BRIC Brazil, Russia, India and China
BRICS Brazil, Russia, India, China and South Africa
CEFIR The Centre for Economic and Financial Research
CEPP Center for Entrepreneurship and Public Policy
CIS Commonwealth of Independent States
CIT Corporate Income Tax
CPI Corruption Perception Index
CPRF Communist Party of the Russian Federation
CPSU Communist Party of the Soviet Union
CRIFES Center for Research on International Financial and Energy
Security (US)
CSO civil society organization
CSR Centre for Strategic Analysis (RF)
DOLS dynamic OLS
EBRD European Bank of Reconstruction and Development
ECA Eastern Europe and Central Asian countries
EPL Employment Protection Legislation
EU The European Union
FE fixed effects model
FOM Foundation for Public Opinion in Society
FSB Federal Security Service
GDI gross domestic income
GDP gross domestic product
GEM Global Entrepreneurship Monitor
Gender-GEDI Gender Global Entrepreneurship and Development Index
GKO Gosudarstvennoe Kratkosrochnoe Obyazatyelstvo (T-bills)
GONGO government organized non-governmental organizations
GPO General Prosecutor’s Office
xxii Abbreviations and Acronyms
GRP gross regional product
HDI Human Development Index
HSE National Scientific University – Higher School of Economics
(Moscow, RF)
HT Hausman–Taylor Model
ILO International Labour Organization
IPO Initial Public Offering
IS RAN Institute of Sociology of the Russian Academy of Science
KGI Committee for Civil Initiatives
KhMAO Khanty-Mansi Autonomous Okrug
LAO limited access order
LGBTI lesbian, gay, bisexual, transgender, intersexual
M&A merger and acquisition
Mbit/s megabits per second
MET high mineral extraction tax
MNL Multinomial Logit Model
NATO North Atlantic Treaty Organization
NGO non-governmental organization
NITs Scientific Research Centre for Management, Economics and
Information Technology
OECD Organization for Economic Co-operation and Development
OLS ordinary least squares (a method used in a linear regression
model)
OMON Special forces of the Ministry of Interior RF
OPORA association for small and medium-sized enterprises in Russia
PES public employment service
PPP purchasing power parity
RAIPON Russian Association of the Indigenous Peoples of the North
RIA Regulatory Impact Assessment
RIA Rating Rating Agency of the Rossiya Segodnya International Infor-
mation Agency
RIC Russian Investigative Committee
RLMS-HSE Russian Longitudinal Monitoring Survey – Higher School of
Economics
RMS rent management system
Rosstat The Russian Federal Statistical Service
RSPP The Russian Union of Industrialists and Entrepreneurs
RUR Russian roubles
S&P Standard & Poor’s Rating Services
SNA system of national accounts
TEA Total Entrepreneurship Activity
TFP Total Factor Productivity
TG trading gains
TPC temperature per capita
Abbreviations and Acronyms xxiii
ToT terms of trade
TsEMI Central Economics and Mathematics Institute of the Russian
Academy of Sciences
UB unemployment benefits
UI Swedish Institute for International Affairs
UK United Kingdom
UMI upper middle income countries
UNDP United Nations Development Programme
UNWTO The United Nations World Tourism Organization
US United States of America
USD American dollars (United States Dollar)
VAT value-added tax
VC venture capital
VTsIOM All-Russian Centre for Studying Public Opinion
WGI Worldwide Governance Indicators
WTO World Trade Organization
YaNAO Yamal-Nenets Autonomous Okrug
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1 Introduction
Susanne Oxenstierna
What are the challenges for the Russian politicized economic system and what
potential does it have to spur growth? Will the dependence on oil and gas pre-
vail? Would strengthening of the institutions underpinning the market economy
make a difference? Is there any chance of reform initiatives from below through
democratization?
The purpose of this volume is to explore different aspects of the close intertwin-
ing of politics and economics in the Russian economy. In the economic system
maintained by the authoritative regime under Vladimir Putin in 2014 large parts of
the economy are governed not by the market but by the state. Since the mid-2000s,
and particularly since the economic crisis in 2009, the tendency in economic pol-
icy has been toward more state intervention rather than more market orientation.
During this period the heritage from the Soviet economy in the form of informal
institutions and the industrial infrastructure has become increasingly evident and
potent. There are no drivers to modernize the economy and provide conditions for
the creation of new, innovative companies that could spur growth. Instead, oil and
gas rents are used to subsidize old loss-making enterprises and regions for polit-
ical reasons. To the present government maintaining the power balance between
different power groups is a more important imperative than economic prosperity.
The book takes as its starting point the rich literature on the political and eco-
nomic transition in Russia and the situation in Russia after the economic crisis in
2009 to which all of the western and Russian authors in this volume have con-
tributed. The literature is extensive and references are given in individual chap-
ters, but some recent publications that have influenced several chapters should
be mentioned here; for example, the handbook on the Russian economy edited
by Alexeev and Weber (2013) has served as an inspiration by providing a broad
collection of analyses covering systemic topics and an analysis of the main sectors
of the Russian economy as well as social and regional issues. Its starting point is
the Soviet economic system and phenomena in transitional Russia are analysed
drawing on the Soviet heritage as a reference point. Another reference volume is
the handbook on economics and political economy of transition edited by Hare
and Turley (2013) which is organized according to standard economic topics.
This book is devoted to problems that are typical of all transition economies, not
only applicable to Russia. It shows that the problems of weak institutions, a poor
2 Susanne Oxenstierna
business climate and the issue of state versus private ownership are common to all
these economies to various degrees and remain problem areas in some of them.
The monograph on Russia’s political economy by Sutela (2012) analyses the Rus-
sian economy up to the crisis in 2009 with a stress on developments in energy, the
financial sector and welfare. By contrast, this volume goes beyond the situation
in 2009 and discusses developments up to 2014. It focuses on four areas in which
Russia’s economy faces challenges: central issues of the economic system; weak
institutions and poor business climate; the implications of the shortage of democ-
racy on the economy; and the inequality of regional development.
By focusing on the systemic, institutional and other principal long-term prob-
lems in Russia’s economic development, the contributions of this book emphasize
the complexity of Russia’s political economy – there is no quick fix for this hybrid
economic system. Political reforms are needed for the state to transform and pro-
vide institutional support and promote modernization.
The context
When the economic reforms started in Russia and other East European countries,
nobody actually knew how they would work out and what was going to happen.
The desired outcome of the reform process was known, but there was no map for
how to go from a command economy to a market economy. Reform governments
and economic experts embarked on a huge experiment where the main tools came
from standard economic theory. Their recipe included the liberalization of prices
and trade, macroeconomic stabilization and privatization.
The former socialist countries that eventually became candidates for accession
to the European Union (EU) got a crucial anchor in the reform process and sub-
stantial support in the process of creating the institutions supporting a market
economy. Russia also received assistance in building new institutions, such as a
tax service and a public employment service and in reforming the public admin-
istration; however, the country’s federal structure, huge geographical area and the
possibility of keeping old institutions intact meant that there was only a partial
adjustment of the administrative and legal framework of the economy. In addition
to formal institutions not fulfilling their role, old informal institutions, in the form
of values, beliefs and networks, have remained in the place.
There was also a belief that market reforms would facilitate the development of
democracy in the former socialist countries. The countries of Central and Eastern
Europe, many of which had a tradition of democracy before becoming Soviet
satellites during the Cold War, have been able to develop into democratic market
economies within the EU. Russia has taken a different turn, from an evolving
democracy under its first president Boris Yeltsin to an authoritarian regime under
President Vladimir Putin. The very fact that Putin is now serving a third term
as president is an indicator of the anti-democratic tendencies. According to the
Russian Constitution, presidents can only serve two successive terms, but Vlad-
imir Putin let his ally Dmitry Medvedev serve one period after his second term,
thus creating a short break before his return to the presidency in 2012. Before
Introduction 3
his re-election, the presidential term was increased from four to six years which
means that Putin could stay in power until 2018 or even 2024.
Many people opposed Putin’s re-election. As early as December 2011 protests
started in Moscow and in the big cities all over the country against the fraud in
the Duma elections that had favoured the dominant party Edinaya Rossiya. These
increased when Putin announced that he would stand for office again. Neverthe-
less, drawing on his extensive administrative resources, Putin secured a landslide
victory. Only a fraction of the Russian population has liberal values and would
like to see its country develop in a democratic direction. The majority prefers
a strong leader who will set things right and reinstate Russia as a global great
power, a view of the country which corresponds with that of the dominant group
in Putin’s power circle, the members of the security structures, the siloviki. As a
result, civil rights have been circumvented, there has been an increase in national
security and defence spending in the federal budget, prestige events such as the
Olympics in Sochi have boosted nationalistic feelings and Russia’s military power
has been demonstrated in its attempts to destabilize Ukraine and the annexation
of Crimea in 2014.
Putin’s economic policies have also had a negative effect. In 2013, the Russian
economy grew by 1.3 per cent and forecasts for 2014 are around 0.5–1 per cent
growth in the best case, but the World Bank (2014) also predicts a contraction of
1.8 per cent in its high-risk scenario. This is well below the earlier plans of 3–4
per cent. Although progress in 2014 has been affected by the conflict in Ukraine
and its consequences, the fundamental causes of the weakening growth are due
to the structural problems that have escalated in the Russian economy since the
mid-2000s.
Organization of the book

The book is organized in four parts, each containing three chapters. The first part
is devoted to basic issues of the economic system. In Chapter 2, ‘Putin’s rent
management system and the future of addiction in Russia’ Clifford G. Gaddy
and Barry W. Ickes argue that three concepts are central to an understanding
of Russia’s political economy: resource rents, resource addiction, and the rent
management system (RMS). The chapter explains these concepts and how they
interact. Gaddy and Ickes discuss the critical importance of resource rents for
the economy, and how the presence of rents leads to addiction. They examine the
distinctive RMS established by Vladimir Putin and analyse how its likely further
evolution will shape the prospects of the economy. The conclusions are that:
(1) increasing rent is the only source of significant growth for Russia; (2) rent
addiction is a serious problem for the current system and will continue to grow;
and (3) for all its flaws, Putin’s current RMS is well suited to the likely future
possibility of stagnant rents and stronger claims by rent addicts.
In Chapter 3, ‘Between light and shadow: informality in the Russian labour
market’ by Vladimir Gimpelson and Rostislav Kapeliushnikov, another distinc-
tive feature of the Russian economic system is discussed – the prevalence of a
substantial informal economy. Gimpelson and Kapeliushnikov find that labour
is reallocated from the formal labour market to the informal sector and explore
the consequences of this tendency. In their view, informality has become a
salient feature of the Russian labour market. In the first decade of this century
economic growth in Russia almost doubled the country’s GDP, but brought lit-
tle in terms of additional formal employment. More precisely, the growth was
accompanied by a substantial reallocation of labour to the unregulated sector
while the level of formal employment was in gradual decline. This raises a set
of research and policy-related questions. What is the role of institutions in this
productivity-reducing reallocation? Who were the most exposed to informality
and its associated outcomes? What are the implications of this expansion of
informality for wage inequality, social mobility and earnings opportunities?
Chapter 4, ‘State–business relations in Russia after 2011: “New Deal” or imi-
tation of changes?’ by Andrei Yakovlev, investigates the changes in the politics
of the Russian ruling elite towards ordinary businesses, particularly with regard
to measures designed to improve the investment climate in 2011–12. During this
period, the Russian government pushed a number of measures, including the cre-
ation of the Agency for Strategic Initiatives, the establishment of an ombudsman
for entrepreneurs in the Kremlin administration and the elaboration of roadmaps
to improve the business regulations. As a result, in 2013, the World Bank noted a
significant improvement of Russia’s position in its Doing Business Index. How-
ever, simultaneously Russia faces a strong capital flight, and entrepreneurs com-
plain about the predatory policy of federal and regional authorities. The chapter
considers contradictions in the implementation of the new policy as well as pre-
conditions for a real improvement of the business climate in Russia.
The three chapters in the next part of the book are devoted to the effects of defi-
cient institutions and a weak business climate. Chapter 5, ‘Is Russia an “entrepre-
neurial society”? A comparative perspective’ by Ruta Aidis, considers Russia’s
potential to develop new businesses. The country possesses a large, expanding
consumer market and there are abundant opportunities for business start-ups.
However, Aidis also points to the fundamental challenges that exist to ensure the
viability of business growth and expansion. She uses a comparative perspective
to assess Russia’s current situation, including results from the 2013 Global Entre-
preneurship and Development Index (GEDI), the 2013 Gender-GEDI Index on
focused female entrepreneurs and the Startup Ecosystem Report. Aidis identifies
a number of key impediments. First and foremost, corruption, combined with the
potential for arbitrary prosecution, results in a climate of tremendous uncertainty
for Russian businesses. In addition, there is an absence of entrepreneurial edu-
cation, civil society and financing for all stages of business development. Aidis
concludes that in failing to address these fundamental issues, Russia will not reap
the benefits of the more recent efforts to encourage entrepreneurial development.
Chapter 6, ‘The role of institutions in the Russian economy’ by Susanne Oxen-
stierna, analyses the effects of rent dependence and Putin’s rent redistribution
system on small and medium-sized enterprises, the new private sector in the Rus-
sian economy. The Worldwide Governance Indicators (WGI) are used to analyse
Introduction 5
the institutions supporting the market economy and the author argues that when
a dominant part of the economy is ruled by the management of oil rents to secure
the power of the regime, the role of market-oriented institutions becomes limited.
The chapter stresses the role of a functioning civil society for the development of
institutions and analyses the effects of the present restrictions on voice and civil
society for institutional development in Russia. Presently, there seems to be little
hope for reform from below of the system.
Chapter 7, ‘The impact of oil prices, total factor productivity and institutional
weakness on Russia’s declining growth’ by Masaaki Kuboniwa, presents an anal-
ysis of the impact of oil prices, total factor productivity (TFP) and institutional
weakness on the declining growth in Russia. He looks first at the background of
the Russian economy, estimating the value-added of the oil and gas industry, the
terms of trade and trading gains and energy efficiency. Secondly, he presents the
impact of oil prices and TFP on declining growth in the light of GDP–oil nexus
and production function. Thirdly, he reports the elusive impact of institutional
weakness on Russia’s growth, employing the World Bank’s Governance Indica-
tors and Ease of Doing Business Index.
The third part of the book is devoted to the interdependency of democracy
and the economy. In Chapter 8, ‘From the dual to the triple state?’, Richard
Sakwa states that Russia remains locked in an extended moment of transition,
giving rise to a dual state and economy and a stalemated political order. Two
regulatory regimes in the political and economic sphere coexist, which in short-
hand we can label the democratic and the dirigiste. Neither system is allowed a
free rein and the inherent ordering principles of both are stymied. The long-term
balance between the constitutional state and the administrative regime allows
the development of a dangerous third arm, the corruption associated with the
third state of crony capitalist relations where meta-corruption dissolves into
extensive venal corruption.
Chapter 9, ‘The basis for institutions among the population in Russia’ by Car-
olina Vendil Pallin, examines the opinions and attitudes of the Russian popu-
lation to the social and economic development. Pallin argues that a favourable
socio-economic development has made a growing section of the Russian popu-
lation put forward new demands on the country’s authorities. These groups still
constitute a minority, but an important minority in that they compromise the
younger cohort of society and the growing middle class. Catering for these groups
or finding ways of not doing so will be one of the main challenges ahead for
Russian authorities at the federal, regional and local levels. The chapter analyses
socio-economic development in Russian society and opinion polls and attitudes
among different sections of the Russian population.
In Chapter 10, ‘Russian civil society. Recent developments’, Jens Siegert inves-
tigates the relationship between Russian civil society organizations (NGOs) and
the state. The relationship is both mixed and complex. In some respects, the NGOs
are the advanced party of a Russian middle class, developing new, integrative
rules of participation, which might help the country on its way to modernization,
both socially and economically. Siegert has followed the development of Russian
NGOs from Moscow since the beginning of the century. He finds that so far the
NGOs have succeeded in opposing the Kremlin’s attempts to suppress them due
to their own skill and support from abroad and have emerged stronger than before.
The outcome of the post-2012 attempt to suppress NGOs is still uncertain, but
Siegert hopes that the NGOs will be successful again.
The final part of the book is devoted to the issue of regional development.
In Chapter 11, ‘Regional inequality and potential for modernization’, Nataliya
Zubarevich investigates the inequality between regions in Russia and the redistri-
bution that has occurred between 1998 and 2012. Zubarevich compares per capita
gross regional product (GRP), the impact of redistribution of oil rent over the
federal budget, social indicators and the Gini coefficient and finds that inequality
has been declining in these indicators from the mid-2000s due to different fac-
tors. She also examines Russia’s internal heterogeneity with the centre–periphery
model. The analysis shows that the populations of metropolitan areas, midsize
cities, small towns, and rural areas display different degrees of potential for mod-
ernization and employ different adaptation strategies in times of economic and
political change.
Chapter 12, ‘Promoting sustainability in Russia’s Arctic: integrating local,
regional, federal, and corporate interests’ by Robert Orttung, examines which
actors are most active in promoting sustainability by examining a case study of the
relationship between Moscow and the Yamal-Nenets Autonomous Okrug, Rus-
sia’s most important region for the production of natural gas. In addition to the state
institutions, the analysis considers the role of the corporations involved. Orttung
begins by examining the interests and capabilities of the various actors. He then
traces the evolution of Yamal-Nenets politics and considers how the region imple-
ments social policy. The central conclusion is that those actors with the greatest
interest in promoting sustainability have the least influence over policy-making
processes.
Finally, Chapter 13 ‘Russian regional finance: managing resource abundance.
A case study of Khanty-Mansi’ by Irina N. Ilina, Carol S. Leonard and Evgenii E.
Plisetskiy, studies if capacity building has an effect on one oil-abundant region, or if
growth is constrained by federal budget policies. The chapter is part of a larger proj-
ect on governance and growth in Russia’s regions that examines the Khanty-Mansi
budget strategy for diversification and growth in an oil-abundant region.
Key challenges and conclusions

The general message of the book is that there is little hope for a revival of the
Russian economy in the next coming years. All of the chapters identify serious
challenges that are not being addressed by the political leadership; on the con-
trary, in many instances they are reinforced. The military aggression against
Ukraine in 2014 further demonstrates that Russia is currently looking backwards
instead of forwards. In attempts to reinstate its superpower status it engages in
geopolitical and territorial ambitions instead of promoting economic strength and
Introduction 7
prosperity through technological and social development. Russia currently has the
third-highest military expenditure in the world and in recent years defence spend-
ing has risen as a share of GDP. Putin supports the subsidized defence industry
instead of providing new entrepreneurs with conditions for expansion. Appar-
ently, Russia currently opts for military strength rather than economic power.
The chapters present many interesting conclusions on precise topics. Here I
restrict myself to highlight some of the key conclusions regarding the challenges
for the Russian politicized economic system that are explored in the volume.
The dual state and the modernization blockage

The notion that Russia is a distinctive type of ‘dual state’, in which the consti-
tutional state is balanced by the administrative regime, emphasizes the severity
of Russia’s political and economic crisis. Two regulatory regimes coexist in the
political and economic sphere and neither the democratic nor the dirigiste orders
have free rein. Instead, Russia suffers from a modernization blockage and a polit-
ical stalemate. Russian politics is characterized by sublation, the undercutting of
one institution by another, eroding the legitimacy and efficacy of the first. In the
framework of the analysis of the dual state, sublation is the mechanism whereby
the institutions of the constitutional state lose their autonomy. The long-term bal-
ance between the constitutional state and the administrative regime is in danger of
allowing the development of a dangerous third arm, the corruption associated with
the third state of crony capitalist relations where the sublationary practices of the
administrative regime dissolve into systemic corruption.
Rent addiction and rent management is the most powerful

economic and political force
Rent addiction and the central role of rent management in balancing the power
structure is a central feature of the economic system and an exceptionally power-
ful economic, social and political force in Russia. To endure, anyone – any leader,
any movement, right or left – that attempts to lead Russia will have to deal with
the addicts. This means that any other leader would face the same challenges
as Putin and his RMS. Whether democrat or autocrat, the issues are the same:
accommodate the addicts and watch the economy degenerate progressively more.
Moreover, the problem does not stop there. At some point, it may be impossible
to satisfy the addicts by diverting flows from other claimants. Rent flows to the
addicts themselves will be reduced, which is a trap.
Deficient market institutions deter entrepreneurial activity

The Russian market offers immense opportunities but, at the same time, there
are fundamental challenges that still need to be addressed in order to ensure the
viability of private business and an entrepreneurial society. These include creating
the conditions that foster business growth, improving entrepreneurial education
and financing for all stages of business development. Corruption acts as a deter-
rent for potential business start-ups or business growth. It results in an absence
of start-ups and the existence of businesses that do not grow. Russia lacks a civil
society that provides stability and assurance to entrepreneurs so that they will be
able to reap the benefits of their business activities or, if they fail, so that they
have the opportunity to try again. In addition, its role as watch dog is missing
and, along with it, the rule of law so that businesses do not have to worry about
arbitrary and or politically motivated interference.
Rent-addicted sector blocks market reforms

New small and medium-sized businesses represent the growth potential of the
Russian economy. However, they need stronger market-oriented institutions
such as the rule of law, a high quality of governance and that corruption is kept
at sustainable levels. Moreover, they must be able to access financial resources
and profit from a supportive business climate. The old loss-making rent-addicted
sector, however, is not interested in changes in that direction and has a strong
degree of political leverage to maintain the existing order where personal ties
to the political hierarchy rather than competitive business activities can ensure
survival.
New modernization or new mobilization?

The Russian elite faces a choice – either to carry out economic modernization
‘from above’ relying on coercion from the centre, or to rely on the incentives and
initiatives of economic agents themselves. The new business – successful medium-
sized companies that rose on the tide of the economic boom in the 2000s – can
become the driving force of market modernization. However, practical steps to
create the necessary competitive environment would limit the power and influ-
ence of the siloviki group in the Russian elite and could trigger counter-initiatives
of ‘new mobilization’ in the spirit of the Izborsk Club.1 Thus, it is difficult to
foresee a ‘new spring’ for the entrepreneurial groups in the economy, given the
extremely restricted possibilities to voice different opinions, organize collective
action around new ideas and hold politicians and other decision makers to account,
meaning that there is no effective reform pressure from below. Instead, improve-
ments in the performance of the economy are entirely dependent on reform ini-
tiatives from above, and under the present leadership initiatives that could spur
growth are not forthcoming. Important but still quite marginal measures such as
the introduction of a position of ombudsman for entrepreneurs in the Kremlin,
an amnesty for entrepreneurs, and so on, have so far failed to produce any real
outcomes in terms of economic growth and an increase in investment – because
Russian elites do not share a common vision of the future and different groups in
the elite try to realize different modernization scenarios.
Introduction 9
The rise of informality
Informality is another salient feature of the Russian economy. The level of infor-
mal employment is increasing, standing at present at around 20–30 per cent of
total employment. Since much of the adjustment in the Russian labour market
comes from the informal sector, the issue of formal job creation is a daunting
economic and political challenge. If informality continues to grow, segmentation
in the labour market may become more pronounced, with stronger implications in
terms of growing poverty and inequality. Meanwhile, modern economic growth is
based on the development of human capital, and informality is not a fertile ground
for human capital accumulation and its efficient utilization. The much lower pro-
ductivity in informal jobs equals the underutilization of education and skills. Thus,
the growing fraction of the labour force stuck in a low human capital-intensive
economy should be of concern to decision makers.
The basis for establishing institutions is growing, but unevenly

As a result of the social and economic development in Russia, a growing section
of society, consisting of urban dwellers with higher incomes and education, as well
as the younger generation has become inclined to embrace values conducive to the
establishment of democratic institutions. Overall, the basis for establishing institutions
is growing in Russian society, but unevenly between different groups and regions.
However, an external threat or a downturn of the economy could have negative
effects, which would delay – or even reverse – the development and provide a fertile
environment for the development of authoritarian rather than democratic institutions.
NGOs grow stronger under repression

Over the past quarter-century Russian non-governmental organizations (NGOs)
have developed into a stronghold of democratic belief and behaviour within
Russian society. Until 2000, the state had largely ignored rather than supported
them. Since Vladimir Putin became president, there have been to date three
unsuccessful attempts to subordinate the NGOs to the state. As a result, para-
doxically, NGOs have become more competent, more professional and better
skilled after each attempt. But this outcome gives no guarantee for the future at a
time when Russian domestic policy as well as foreign policy are both becoming
increasingly anti-democratic and anti-western.
New generations and value change

Russia has seen the emergence of a growing urban middle class with western
values and aspirations. However, the voice of this group in political life has
waned and instead they engage in different exit strategies, such as sending their
children abroad for education and employment and buying property abroad to
enable temporary or permanent emigration. The young Russians, however, who
have not experienced Soviet times and have grown up in a time with access
to information and travel and exposure to both Russian and western culture,
represent a different force. Not all of them embrace western values and liberal
economic thought, but, in common with most people, they do aspire to achieve
a rising living standard and social development. Thus the new generations of
Russians will present new opportunities for the development of democracy and
a market economy in their country.
Actors with an interest in promoting sustainability have

the least influence
In Russia’s politicized economy, actors with the greatest interest in promoting
sustainability have the least influence over policy-making processes. Local gov-
ernments and civil society groups generally have the greatest interest in sustain-
ability, but they have little ability to affect policy. The federal government and
Russia’s major energy corporations have the most power, and they place little
emphasis on sustainability. For example, Russia’s centralized system makes it
possible for the federal government to exercise considerable control over the
development of the Arctic. In theory, this oversight could provide for resource
development policies that take into account the human needs of the population
while minimizing the impact of resource production on the environment. How-
ever, the nature of the current government in Moscow places the greatest priority
on the development of resources to ensure the ability of the current elites to stay
in power. As a result, they have little concern for the environment.
Note
1 The Izborsk Club brings together leading patriotic, anti-liberal Russian analysts with
people close to the Kremlin.
References
Alexeev, M. and Weber, S. (eds) (2013) The Oxford Handbook of the Russian Economy,
Oxford and New York: Oxford University Press.
Hare, P. and Turley, G. (eds) (2013) Handbook of the Economics and Political Economy of
Transition, Abingdon, UK and New York: Routledge.
Sutela, P. (2012) The Political Economy of Putin's Russia, Abingdon, UK and New York:
Routledge.
World Bank (2014) Russia Economic Report. Confidence crisis exposes economic weak-
ness, World Bank, 31, March. Online. Available: www.worldbank.org/en/country/rus-
sia/overview (accessed 24 April 2014).
2 Putin’s rent management
system and the future of
addiction in Russia
Clifford G. Gaddy and Barry W. Ickes
This chapter explores the interaction of three concepts that we believe are cen-
tral to an understanding of Russia’s political economy: resource rents, resource
addiction, and the rent management system. Our goal is to explain these concepts,
how they interact, and how they form the basis for Russia’s political economy and
shape its prospects for the future. Our fundamental methodological idea is that the
three concepts are basic, and they are interlinked as follows:
1 Russia is a country whose economy is dominated by the rents from its natural
resources, mainly oil and gas. Resource rents are defined as the difference
between the market value of resources produced and the actual cost of pro-
ducing them (we elaborate, below). Russia has been dependent on resource
rents for centuries, and it is likely to remain dependent for decades to come.
2 Russia, like every rent-dependent country, has a characteristic set of insti-
tutions and mechanisms by which those rents are produced, collected, and
redistributed throughout the economy. These institutions, together with the
mechanisms that enforce them, are the rent management system, or RMS.
3 The combination of Russia’s resource abundance and the peculiarities of the
non-market, command-administrative economic system that prevailed in the
country during the Soviet period made it possible for Russia to develop a
physical structure of the economy that was so thoroughly dependent on rents
that it deserves the appellation rent addiction.
These three features – rent abundance, a rent management system, and rent addic-
tion – are a ‘three-legged stool.’ They provide the context for all Russian political
economy, in both the Soviet and post-Soviet eras. Almost no major issue – from
economic issues such as ‘modernization,’ ‘innovation,’ and ‘diversification’ to
the very nature of the political system – can be understood outside this inter-
action between resource abundance, inherited economic structure, and political
economy.
In analysing the future of the system that ties the three elements together, we
will argue that: (1) increasing rent is the only source of significant growth for
Russia; (2) addiction is a more serious problem than ever and will continue to
grow; and (3) for all its flaws, the current rent management system, established
12 Clifford G. Gaddy and Barry W. Ickes
by Vladimir Putin, is well suited to the likely future possibility of stagnant rents
and stronger claims by addicts. In the following we ask how each of the legs of
the ‘three-legged stool’ might evolve in the future. What will happen to the rent,
the addicts, and the rent management system? In each case we begin by briefly
defining the concept in question and then proceed to answer the key questions
for each. For rent, the question is how much can be expected in the future. For
addiction, we want to know how strong the phenomenon is now and how it might
be expected to evolve in the years ahead. For the rent management system, the
critical issue is how robust and appropriate the current system is to managing rent
flows in an environment when the amount of rent and the strength of addiction are
as we have established.
Defining rent
We define rent as the revenue received from the sale of a resource minus the cost
of producing it.1 We emphasize that the definition must be applied rigorously,
especially as regards how we understand both revenue and production cost. Each
of these must be viewed in terms of opportunity cost. Rent is thus the value to the
economy of the resource that is utilized. Value is measured by opportunity cost.
Hence, the revenue used to calculate rent is not the actual revenue earned from the
sale; rather, it is the potential revenue if the resource were sold at market value.
This means that any difference between what might be received from the sale of
the resource and what is actually received is still part of the rent. Its existence
reflects decisions made about distribution of the rent.
In a similar way, production cost is not necessarily the actual cost reported but
what the cost would be in a competitive, efficient market economy. Anything
above that competitive cost – which we term the natural cost of production – is
excess cost. It is by our definition part of the rent that has been allocated.
The purpose of our definition of rents is to draw a sharp distinction between the
value of rent that is produced and its distribution to various recipients. It is the
distribution of rents that is crucial to political economy. It is apparent that some
components of the total rent are often hidden from view. We have already noted
two components of rent – subsidies and excess costs – that must be included to
properly measure total rent. There are other hidden components of rent that are
important not for estimating total rent but for analysing how the rent is distrib-
uted, ‘shared’, among various recipients in society. Most notable among these are
informal taxes. Informal taxes, informal price subsidies, and excess production
costs are like the part of the iceberg that lies beneath the surface: they may turn
out to be most important in assessing current and future economic and political
developments.
Figure 2.1 is a stylized decomposition of total rent into its most important com-
ponents. In the figure, the relative sizes of the five components are not intended
to reflect precise measurements. It is more important to understand that each of
the components is significant. Each represents a share of the total rent, and each
has a ‘constituency’ – vested interests. How the shares are allocated has important
Putin’s rent management system 13
price subsidies
after-tax profit
pre-tax profit
formal taxes
Total Rent
informal taxes
excess
extraction reported
cost cost of
production
natural extraction cost
Figure 2.1 The categories of rent.
political consequences. To take one example, one frequently hears statements about
the effect that a decline in oil prices would have on the Russian economy, and
arguments are usually framed in terms of the effect on revenues to the government
budget. But this line of thinking is based on looking at formal taxes alone. In fact,
the formal taxes and the formal budget are only a part of the picture. Informal
rent-sharing sustains a much broader part of the economy and society. Lower oil
prices mean smaller overall rents, and thus less to be shared among all the catego-
ries – not just the part represented by formal taxes. We will return to this point in
thinking about the future.
How much rent will there be in the future?

Since rent equals the quantity of the resource produced and the per unit price, less
the cost of production,2 we can ask how each of these three variables contributed to
the increase in total rent in recent years in Russia. The change in natural extraction
cost turns out to have played a very small role. Changes in the quantities of oil
and gas produced, and their price, have been far more important. To decompose
the extra rent into the price and quantity effects, we performed an exercise whose
results are shown in Figure 2.2. Between 1999 and 2013, total rent grew by about
USD 4.2 trillion. Of that, 3.2 trillion was due to the increase in the oil and gas
prices, and 1.0 trillion to the increase in the quantity of oil and gas produced. That
is, over the period higher prices accounted for about 76 per cent of the increase in
rent and greater production volumes for about 24 per cent.
USD billions
$600
$400
Extra rent from increase in oil and gas prices:

USD 3.2 trillion
$200
Extra rent from increase in oil and gas

output: USD 1.0 trillion
Baseline rent: USD 1.2 trillion
$0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Figure 2.2 Decomposing Russia’s rent windfall into price and quantity effects.
Source: Authors’ calculations.

Note: ‘Baseline rent’ is a counterfactual based on assuming constant prices and quantities of oil and
gas produced in Russia at levels as of the beginning of the period. The price used here is the average
prices of oil and gas for 1997–99 and quantities produced in 1999. (The price of oil in 1999 was around
USD 23 per barrel.) The extra rent each year is calculated as the difference between actual rent and
baseline rent. The extra rent is apportioned each year into two parts—the part attributable to increased
price and the part attributable to increased volume.
This chart on ‘extra’ rent is valuable in helping to understand how unlikely it

is that the rent increase of the 2000s will be repeated. Consider that from 2006 to
2011 Russia’s total rent rose by about 50 per cent. Securing that much extra rent
between now and 2020 would require that the world oil price rise steadily to over
USD 150 a barrel in today’s prices by the end of that period. There is no current
consensus about where oil prices might be in 2020, with some forecasts of USD
70 per barrel of oil and others predicting USD 160.3 There is much discussion
about how reduced demand in advanced economies and increased supply of oil
and gas from unconventional sources will result in lower, rather than higher prices
in the future.4 At the same time, one should not forget how poor our ability to
predict oil prices is. Oil prices are highly volatile, and the time series since 1973
looks like a random walk. It is always useful to keep the long historical record
of oil prices in mind (Figure 2.3). Moreover, even if the rise in prices was more
important for the past rent boom than the increase in production, quantity cannot
2013 USD per barrel
$100
$80
$60
Annual average price

15-year centered average
$40
$20
$0
1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Figure 2.3 World oil prices, 1880–2013.

Source: Authors’ calculations using current dollar oil price data from EIA (2014). Adjusted to 2013
prices using US GDP deflator.
be ignored. Maintaining even current rates of production of oil and gas in Russia
is a challenge. If production declines, prices will have to increase even more to
result in an increase in rent.5
Growing without oil and gas?

The rent increase drove GDP growth during the boom years. How fast could Rus-
sia be expected to grow without a rent boom? The historical record of growth
across countries may provide a baseline. The Penn World Table (version 7.1) has
data for a large number of countries between 1950 and 2010, including over 3,800
observations of growth in countries with per capita income over USD 5,000. We
used these data to determine the average growth rate for a country at Russia’s
current income level (Table 2.1).
Russia’s per capita income today is close to USD 15,000. That suggests it is
unlikely to grow faster than 2 per cent a year (line 3 of Table 2.1 shows that the
average growth rate of a country in the USD 15,000–20,000 range is 1.9 per cent).
But Russia’s income is as high as it is thanks to oil. Its institutional structure is
closer to that of a USD 10,000 per capita income country, which makes a differ-
ence in expected growth prospects. In part, this is good news for Russia. The less
Table 2.1 Historical GDP growth rates in countries with per capita income
of USD 5,000 or more 1950–2010
Per capita Number Percent Average Average Average
income of years positive positive negative overall
growth growth growth growth
years (%) rate (%) rate (%) rate (%)
(1) 5–10,000 1,529 74 5.3 –4.7 2.72
(2) 10–15,000 660 78 5.1 –4.9 2.93
(3) 15–20,000 526 73 4.0 –4.0 1.85
(4) 20–30,000 660 79 3.5 –3.3 2.10
(5) > 30,000 459 71 3.7 –3.9 1.52
(6) Total > 5,000 3,834 75 4.6 –4.3 2.16
Source: Penn World Table 7.1.

Note: The table is inspired by Table 1.2 (‘Growth rates in good and bad years by per capita income in
2000’), North et al. (2009: 5). The data come from Penn World Table 7.1. The GDP growth variable
is ‘PPP Converted GDP Per Capita (Chain Series), at 2005 constant prices.’ Penn World Table 7.1 has
data for 190 countries, for a maximum of 61 years (1950–2010). Of the total data set there are 3 834
observations of growth for countries with per capita income of USD 5 000 or greater.
wealthy a country is, the faster it can be expected to grow. Hence, Russia actually
has more room for so-called ‘catch-up’ growth than might appear judged solely on
its income level. By this logic, instead of having an expected growth rate of under
2 per cent, Russia’s is 2.9 per cent (line 2 of Table 2.1).
On the other hand, these hypothetical growth rates are for countries that are nor-
mal. Of course, all countries have their own peculiarities, but by normal we mean
that they, unlike Russia, do not have the legacies of spatial and other misalloca-
tion from a Soviet past. Russia’s vast space and incredible cold, combined with
its Soviet past, provide a special set of handicaps. We have referred elsewhere to
Russia’s legacies as ‘Bear Traps’ (Gaddy and Ickes 2013a). They are like annual
taxes on the level of Russia’s wealth. They also impede institutional reforms, and
hence they prevent Russia from taking advantage of the extra catch-up growth it
should have. How big a penalty do the Bear Traps represent? In previous work,
we estimated that Russia’s direct location penalty may be as much as 1.5–2.25
per cent of GDP per year (ibid.: 48–9). Indeed, this is only part of the total loca-
tion penalty – that part due to the cold. There is also a penalty due to distance,
or remoteness. Netting out the positive effect of a possible faster catch-up rate
(because its oil wealth has reduced Russia’s gap to the world leaders more than is
warranted by its economic fundamentals) and the negative effect of ‘Bear Traps’,
we could put Russia’s likely growth in the range of 0.7–1.4 per cent a year over
the coming decade.6
There are two fundamental points about this exercise which might seem obvi-
ous, but which we feel we need to stress for those who might continue to insist
there are clear paths to higher growth for Russia. First, the exercise refutes the
notion that so-called institutional reform is the answer. The projected modest
growth rates we arrived at are for a Russia that has carried out all these reforms!
That is another part of what the notion of a ‘normal’ Russia implies: it assumes
that Russia improves its current below-average institutions, investment climate,
and so on to the level of the mean country of its income range. To repeat: in a
world with flat oil prices, all the measures typically proposed to improve insti-
tutions, reduce corruption, and so on are highly unlikely to raise Russia’s annual
growth rate to any substantial extent. The implications of the exercise for a second
favourite recipe for growth, namely, the diversification of the economy away from
oil and gas, should be even more obvious. The countries being analysed to derive
an expected growth rate for Russia had no oil at all.
The inescapable conclusion is that it is futile to expect to replace the growth
that came from the increase in oil price with some other source. Russia’s fate is
to be dependent on oil and gas for decades to come. But that is not in itself a bad
thing. Russia’s problem is not rent dependence. The question is: what is the nature
of the dependence and where does it lead? The form of rent dependence that
exists in Russia is based on a model that formally and – much more importantly –
informally taxes the resource sector in order to support backward, mislocated
industries inherited from the Soviet era (a problem now increasingly exacerbated
by plans to build new ones equally ill-located). A constructive model of rent
dependence is one that embraces the oil and gas industries and makes them the
engine of technological development and sustainable growth. It does not tax oil
and gas for the sake of supporting inefficient industries. The former model – the
one Russia inherited from the Soviet Union – is one that perpetuates the current
state of rent addiction; the latter holds the promise of a more globally integrated
and interdependent Russia with a chance at leadership positions in important tech-
nological areas. We have termed this latter development path the resource track
(see the final chapter in Gaddy and Ickes 2013a).
We can frame the question of the longer-term future of Russia’s political econ-
omy in exactly these terms: Can the country move from addiction to the resource
track? If the answer to that question is negative, Russia’s future becomes increas-
ingly uncertain. If the system remains trapped by addiction, what happens as the
regime tries to manage the addicts when the addictive substance is in shorter sup-
ply? There are various scenarios, almost all alarming, about which we speculate
in the final section of this chapter.
The rent management system and addiction

Every resource abundant economy has some kind of system to control the flow
of rents. From the standpoint of the leaders of the economy, the function of that
system is to channel rents to their preferred uses and to prevent their dissipation or
diversion. If the management system is weak, then rents will be appropriated by
various stakeholders near the source of production. If it is centralized and strong,
rents will flow upwards to the leadership.
In the Soviet period, direct dissipation of rents was limited. Rents could not be
transformed into consumption on anywhere near the scale on which they were
produced. Nor could the rents easily be shifted to private accounts abroad. Rather,
those who controlled the flow and wanted to appropriate some for personal gain
were limited to semi-legitimate activities. Party leaders and economic planning
officials, as well as plant directors, could live better than ordinary citizens on the
perquisites of office. But most of the rents were channelled to the production of
things that enhanced the leadership’s stature and authority, as well as the legiti-
macy of the Soviet state. This created the phenomenon of addiction through pro-
duction, which transformed the Soviet economy.
Addiction through production meant investment in enterprises that created
goods. It was manifested, above all, by production in heavy industry in giant
enterprises – symbols of Soviet accomplishment since the rise of Stalin. The more
metal, the more energy, and the more transportation services the plants consumed,
the greater the power, prestige, and privilege enjoyed by their directors. The pri-
ority users of the equipment produced in such plants were agriculture and defence
because they were so well suited to serving the interests of the self-perpetuating
elite. And it is no coincidence, therefore, that farming and the military in the
Soviet Union were two of the most wasteful sectors in the entire Soviet economy.
The goal of the managers was not to produce the most food for a given amount
of inputs or to present the most fearsome military for given numbers of men and
weapons, but to demand as much equipment and support as many jobs as possible.
So, in a way, the real function was to be just that – costly and wasteful.
The production structure that evolved – and this included not just factories, but
cities and the USSR’s infrastructure of power plants, canals and railways followed
the same principle of cost enhancement. The system, therefore, had to be fed
with increasing amounts of resources to offset the value destruction. This is the
essence of rent addiction. It is important to distinguish addiction, which creates a
persistent claim on resources, from wasteful spending, which creates a temporary
claim. An addicted enterprise creates a persistent claim on resources. The famous
‘bridge to nowhere’, from Alaska fame, or the Olympic park in Sochi, on the other
hand, are examples of wasteful spending, but they create no permanent claim. If
when rents are high they are wasted on the ‘bridge to nowhere,’ it is easy to cut
this off when rents decline. But if the rents are used to create new addicts, then
there will be permanent claimants who will demand to be satisfied even as rents
dry up.
When the USSR collapsed, the Soviet rent management system collapsed
with it. The post-Soviet Russian government, however, had nothing to put in its
place. Reformers had a long list of reforms to implement, especially the triad of
enterprise privatization, market liberalization, and macroeconomic stabilization.
But they did not recognize the crucial role of rent management to the Russian
economy. Thus, without a strong management from the top, rent management
was decentralized. This bottom-up rent management system that developed in the
low-rent years of the 1990s was known as Russia’s ‘virtual economy’ (Gaddy and
Ickes 2002). Towards the end of the decade, just before resource rents exploded
in the wake of rising global oil prices, it was replaced by a variant created and
managed by Vladimir Putin.
Putin’s rent management system
Putin’s system combines strong state influence with private ownership of enter-
prises. The particular role of private owners in this system begs an explanation.
Most of the companies in Russia’s core industrial sectors had been privatized in
the 1990s and have remained private. The only significant exception is the oil
company, Yukos, which was effectively re-nationalized following the 2003 arrest
in of its owner, Mikhail Khodorkovsky, who had challenged Putin’s system. The
lucrative metals and mining sector is also almost entirely in private hands.
Contrary to conventional wisdom, the Russian leadership under Putin is not
hostile to private ownership, even to private ownership of vital sectors of the
economy. Putin is aware that private ownership is the only way to make the Rus-
sian economy more efficient. The highest priority for the regime with respect
to private owners is to ensure that they continue to support the rent distribution
system that serves the interests of the regime. For the rent-producing compa-
nies, whether state-owned or private, the most important requirement is that they
directly support the production and supply chains linking the addicts – the ineffi-
cient enterprises inherited from the Soviet economy. Suppliers of material inputs
(fuel and energy, metals, components) and services (rail and pipeline) are required
to serve the machine-building enterprises. The prices of virtually all these critical
inputs are set to transfer value to the rent addicts. Those very same input suppliers
are then obliged to purchase the machinery and equipment produced with the
implicit subsidies.
Note the method behind the seeming madness. Rather than collecting oil and
gas rents exclusively as formal taxes, and then redistributing some of them to
addicted enterprises, energy producers provide much of the transfer directly –
either in physical form as below market price inputs or in money as excessive
payment for orders to the equipment manufacturers, or via intermediate produc-
tion sectors that serve the oil and gas industry, such as transport infrastructure con-
struction, the electric power sector, or the processing industries. The supply chains
can thus be regarded as rent distribution chains. They are mechanisms to disperse
rents from resource producers to the addicts who need the rents to survive.
The distribution of rent through production is the most important way rents
from natural resources are shared in today’s Russian economy. And it is all
informal: it is not written into law, and it does not show up on a government
budget. Oil and gas rents thus form the currency of power in which corpora-
tion owners, the oligarchs, top government officials, and governors of the most
important regions are on a nearly equal footing. They are, in effect, rent man-
agement division heads in the gigantic enterprise that ought to be known as
‘Russia, Inc.’ The system combines the virtues of stability, by ensuring that rent
is distributed to the regions, cities and plants with the most clout, and efficiency,
by assuring that the private owners of rent-generating industries have strong
incentives to maximize profits and thereby create more rents. In effect, it pre-
serves the ownership rights of the oligarchs in exchange for their maintenance
of the rent distribution system.
How strong is addiction today?
How strong is addiction today? The answer to this question has both an objec-
tive and a subjective component. Objectively, it is the number and size of the
enterprises that are dependent on rent infusions for their survival, and the degree
of their dependence. The subjective element is their political clout – how import-
ant are they, for instance, in terms of Putin’s political priorities? In other words,
strength of addiction is measured not only by quantitative demands for rents but
also by the political power that lies behind those claims. That power has grown
and is reflected in Putin’s post-2011 decision to conduct war on the Moscow-based
‘creative class’ by prioritizing his core constituencies in the heartland of Russia
(Gaddy and Ickes 2013a: 96–100). Putin’s extraordinary attention to plants like
the famous tank and railcar manufacturer, Uralvagonzavod, located in the Urals
city of Nizhnyi Tagil, is exemplary. Railway freight cars are the paradigmatic
product of the old Soviet-legacy plants in Russia, and it is remarkable how closely
output in that industry tracks the ups and downs of the resource rent flow into
Russia (Figure 2.4). As plants like Uralvagonzavod persist, they claim more and
more physical and labour inputs – and more rent to sustain them.
As Figure 2.5 shows, between 2002 and 2008, 63,000 net new jobs were added
in plants producing railroad rolling stock – a 43 per cent increase. Meanwhile,
Annual rate
of production Oil price
of freight cars (USD/barrel)
$130
$110
60,000
Railcars [left axis]

Oil Price [right axis] $90
40,000
$70
$50
20,000
$30
0 $10
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Figure 2.4 The world oil price and Russia’s production of rail freight cars, 1996–2014.
Source: Authors’ calculations. Data on railcar production from Rosstat. Oil price from IMF (2014).
A net increase of 63,000 200,000
jobs from 2002 to 2008 (in
an economy that otherwise
lost 1.7 million manufacturing
jobs in that period.)
150,000
100,000
50,000
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Figure 2.5 Employment in railroad rolling stock industry, 1998–2009.

Source: Rosstat.
overall manufacturing employment shrank by 15 per cent (1.7 million workers). In

the crisis year of 2009, the output of the railroad rolling stock companies dropped
45 per cent, but employment was down by only 1.5 per cent. Overall manufactur-
ing employment dropped over 11 per cent in 2009.
As part of Russia’s defence industrial complex, Uralvagonzavod benefits from
the single largest effort to support the addicted part of the economy, the massive
programme of defence industry modernization launched by Putin. The plan is
to channel a total of RUR 23 trillion (around USD 670 billion at 2014 exchange
rates) into that sector.
The defence modernization programme, plans to support so-called monotowns,
the various Siberian/Far East development programmes – all of this perpetuates
the Soviet structural legacy and therefore strengthens addiction. It is not a simple
matter to quantify this effect directly. However, the following exercise may offer
an indirect approach. Addiction is defined as a dependence on rents to sustain oth-
erwise unviable enterprises. In the Russian economy, viability is critically affected
by location. Enterprises located in cold and remote areas are burdened with extra
costs. Since cold and distance act, in effect, as a tax on viability, they contrib-
ute to the objective component of addiction. Moreover, remoteness in particular
enhances the political strength of addicts. When addicts are isolated, their claims
on rents have extra strength. Refusing the claims of addicts in remote areas threat-
ens workers who cannot easily move to other companies when the plant is far
away from all others. All of this means that by studying shifts in the geographical
distribution of economic activity, we can infer something about the dynamics of
addiction. Specifically, if the concentration of enterprises in cold and distant loca-
tions decreases, then we can conclude that the conditions that promote addiction
are weakening (and vice versa).7
In earlier work (Gaddy and Ickes 2001; Hill and Gaddy 2003) we created
an index called temperature per capita (TPC) to measure the distribution of a
country’s economic activity in relation to the cold. TPC is simply the popula-
tion-weighted mean temperature of the country. For example, if the population
moves from warmer parts of Russia to colder, eastern regions, TPC falls. This is
what happened in the Soviet period as industry was moved from western parts of
Russia to the Urals, Siberia, and the Far East.8 This meant that from the late 1920s
to around 1960, Soviet Russia’s average ‘economic temperature’ dropped precip-
itously. This trend was then interrupted for a decade, but it resumed in 1970–90.
Figure 2.6 traces the TPC index in Russia over the entire period of Soviet and
post-Soviet history.
What is important for our current discussion about addiction is the trend in the
index after the collapse of the Soviet Union. In the decade after 1990, Russia’s
TPC increased, reflecting a shift of population to warmer areas. But since 2003 the
Degrees Celsius/year
0.04
0.03
0.02
0.01
0.00
−0.01
−0.02
−0.03
1925 1935 1945 1955 1965 1975 1985 1995 2005
Figure 2.6 Russia’s economic warming rate, 1925–2011. Change in ‘temperature

per capita’ (TPC) per year.
Source: Authors’ calculations using data on regional temperatures and populations from Rosstat.
‘economic warming’ of Russia has slowed substantially. Various projections of
future population growth by regions suggest the current trend will hold. Figure 2.7
presents the same picture in finer resolution. It measures the year-to-year change
in TPC and more clearly illustrates the dramatic difference between the 1990s and
the most recent few years.9
To state this in terms of addiction, during the 1990s perhaps the most import-
ant condition that promotes addiction – namely, geographical location – was
weakened. But then in the 2000s that trend was dissipated. In short, contrary
to the hopes of some that the legacy of the Soviet physical structure would
attenuate over time, the history of the past 15 years shows that this has not been
the case.
How can the rent management system cope?

The current system worked exceptionally well during the period of the rent boom.
But how well can it cope with shrinking rent and stronger addicts and still achieve
its goal of stability and popular legitimacy? Who loses when addicts’ claims have
to be met but rent overall shrinks? We can take another look at the chart that
breaks down the categories of rent, this time identifying who the recipients of the
shares are (Figures 2.8 and 2.9).
Degrees Celsius
−11.6
−11.8
−12.0
−12.2
−12.4
−12.6
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030
Figure 2.7 Russia’s ‘temperature per capita’ (TPC), 1926–2030.

Source: Authors’ calculations using data on regional temperatures and populations from Rosstat.
Categories of Rent Distribution
Formal Profits
FP
Informal Profits
IP Pre-tax
profit
Formal Taxes
FT Total Potential
Rent Sales
Informal Taxes
IT Revenue
Price Subsidies
PS
EC
Excess Costs Reported
cost of
production
Natural Costs
Figure 2.8 Total value and its components.
Categories of Rent Distribution
What? Who? Why? “The Future”
Resources to reinvest
Formal Profits
FP Outsiders = Creation of future rent
Personal wealth enhancement
IP
Insiders = Incentive to stay in business,
Informal Profits help manage rent-sharing
Reduce debt, build reserves
FT
= Financial Security and Sovereignty
Formal Taxes Government Defense
= National Security and Sovereignty
Social programs and production subsidies
Informal Taxes
IT = Social Stability
Price Subsidies
PS Users Social Stability
Excess Costs
EC
Natural Costs
Figure 2.9 Categories of rent distribution.

What are the margins for adjustment when rents shrink? An obvious answer is
to end the funding of addicted enterprises. We will explain below why this is not a
reasonable outcome. If we exclude this possibility, it follows that some other cur-
rent recipients of rent flows will have to be denied. There are three ways to do that:
1 Reduce formal and informal profits in favour of higher formal and informal
taxes.
2 Cut non-addict budgetary spending such as social, education and health in
favour of flows to addicts such as spending on military industry.
3 Reduce investment in future rent production
The problem with each of these choices is that those from whom the rent is being
diverted are, by all rational considerations, more valuable users of the rent than
the addicts are. Moreover – and this is not evident in the bar chart – there are other
measures that can be taken on behalf of the addicts, for instance, greater con-
straints on factor mobility or stronger protection of rent distribution chains. Such
measures benefit the addicts by strengthening their claims on rents.
There will always be a RMS; the question is the particular form it takes. The
existence of addiction dictates a set of options for the RMS. That is, given addic-
tion, the primary purpose of the RMS is to deal with the addicts – either keep the
addicts supplied with the substance or somehow manage the addiction. Putin’s
RMS is one particular way of managing the addicts. Russia has had Putin’s RMS
since 2000. This is a centralized system. One of its key features is that many of
the companies that play a critical role in rent distribution are privately owned. But
those owners – the so-called oligarchs – are under Putin’s control, and their par-
ticipation in the system is enforced by what is in effect a ‘protection racket’ run by
Putin (Gaddy and Ickes 2011). This component of Putin’s system – the method of
enforcement of rent distribution – is robust, since the oligarchs are in greater need
of Putin’s protection now than ever before. Popular sentiment in Russia about
the illegitimacy of the oligarchs’ property has remained at consistently high (90
per cent or more) levels for years (Table 2.2). The current crisis in Ukraine and
the climate of national unity and patriotism make it unthinkable that any oligarch
would challenge Putin.
The problem for Putin is not the mechanism by which rent is distributed but
rather the difficulty of its successful operation under conditions of flat, per-
haps shrinking, rent. It will have to reallocate flows disproportionately, because
addicts’ claims have priority. As a result of this priority status the flows of rent to
addicts are less volatile than to other sectors of the economy. Given his author-
ity, why cannot Putin resolve this difficulty by curtailing the flow of rents to the
addicts or by even beginning to eliminate them? The answer is that while this
may have been an option for him earlier, Putin is no longer in such a position.
Addicts are the source of his political power and legitimacy. He is hostage to
them in the same way a lender can end up being hostage to a debtor. It is ironic
that he has ended up in this situation as a by-product of the 2011 demonstra-
tions: to counter the ‘creative class’, Putin turned more to his core constituency
Table 2.2 Attitudes towards the oligarchs
Which of these views on state ownership in industry most closely matches your view?
(% of sample)
Apr-02 Dec-07 Apr-08 Jan-09 Oct-11 Jun-13
1) All large companies 51 46 41 50 49 45
should be
state-owned
2) The country’s 43 46 53 41 42 48
most important
companies should
be state-owned;
the rest can be held
privately
1) + 2) 94 92 94 91 91 93
3) All large companies 3 2 2 3 2 3
should be in
private hands
Difficult to say 4 6 4 6 6 4
Source: Sberbank Russia Economic Monthly (2013: 10). Based on an opinion poll by the Levada Center.
based in cities and regions dominated by the addicts, the Uralvagonzavods and
the Nizhnyy Tagils. So he reinforced the addiction. Putin’s priorities have always
been sovereignty and stability. Stability meant deepened addiction. Just as Putin
is hostage to the addicts now, the same will be true for any successor. Whether
for or against Putin, no successor will be able to rule Russia in even quasi-dem-
ocratic fashion without accommodating the addicts. Any serious attempt to deny
their fix will lead to chaos.
The addicted structure is the most powerful economic, social, and political
force in Russia. To endure, anyone – any leader, any movement, right or left – that
attempts to lead Russia will have to deal with the addicts. Any other leader will
face the same challenges as Putin and his RMS. Whether democrat or autocrat, the
issues are the same: accommodate the addicts and watch the economy degenerate
progressively more. Moreover, the problem does not stop there. At some point it
may be impossible to satisfy the addicts by diverting flows from other claimants.
Rent flows to the addicts themselves will be reduced. This is a trap.
Is it possible that time alone will kill off the addicts? The lessons of the past
offer little promise. The 1990s showed that passive means will not work. You
can deprive addicts of the rent flows, but you cannot kill them. If Putin could not
curtail addiction, could some other strong leader cut the addicts off from formal
budget support or deny them subsidized energy? It would require enforcing the
break-up of the rent distribution chains. To see how that would work, take the
counterfactual example of Mikhail Khodorkovsky being successful in his attempt
to have Tomskneft cancel contracts with Sibkabel.10 This would require either a
Khodorkovsky running the state, or, at the very least, a federal government that
would have intervened and backed Khodorkovsky against the coalition of local
government and addicts.
Rather than protect the addicts, our hypothetical alternative leader would, in
other words, enforce the hardship caused by the demise of the addicts. The gov-
ernment would need to use force against the addicts and their political allies. It
seems unlikely that some hypothetical leader will arise who will use authoritarian
means to impose hardship on the public to eliminate addiction. Moreover, as time
passes the dilemma becomes worse. The longer Russia continues on its current
path, the deeper the addiction. This means an increasingly more aggressive shift-
ing of allocations from other users of rents to the addicts.
Scenarios to eliminate addiction

What other scenarios might one imagine in which the addicts were eliminated?
How could that happen? There are two forces of relevance to take and hold the
power that would be required to eliminate addiction in Russia: (1) the oligarchs and
(2) the siloviki.11 Without explaining how either the oligarchs or the siloviki could
be expected to wrest control from Vladimir Putin, let us merely assume this hap-
pens. How might each of them behave, in combination and or against one another?
There are several political scenarios we can examine. Again, assume Putin has
vanished from the scene. Then:
(1) The hard-core market economists and oligarchs join together to battle
regional governments and the addicted enterprises. Liberals would have full con-
trol over the siloviki and would be prepared to use them to suppress democracy.12
For their part, the siloviki accept being subordinate instruments (‘tools’) of the
radical market reformers and the oligarchs. Beyond the question of how the oli-
garchs and liberals might induce the siloviki to play this subordinate role, the
problem with this scenario is that to offset the burden of closing ‘dinosaur’ enter-
prises the government would have to tax the oligarchs. But how can a government
of liberals and oligarchs effectively tax the oligarchs? This scenario is a replay of
what happened in the mid-1990s.
(2) The siloviki – or someone commanding the siloviki – begin by eliminating
the oligarchs but still pursue a policy to eliminate the addicts. They cut off the
addicts from the rent and break up the rent distribution chains. They shut down
factories, quell dissent, and forcibly relocate populations. The problem with this
scenario is the lack of internal logic. No matter what the siloviki’s motivation for
eliminating the addicts – whether it be to make the economy more efficient and
competitive or whether it be to simply appropriate the addicts’ rents for them-
selves – they need to worry about future rent production. But in the absence of the
business talents and experience of the oligarchs, the siloviki would be incapable
of efficiently managing the resource sector, far less so than even the bureaucrats
of the Soviet planning system. Moreover, the harsh political climate that would
inevitably accompany their repressive measures would almost certainly make
it impossible to induce sufficient investment to guarantee the necessary flow of
future rents to sustain the economy.
Consider another hypothetical alternative related to this one. Suppose there
were a strongman autocrat who was committed to comprehensive reform and
therefore wanted to shut down the dinosaurs for reasons of efficiency and who had
the interests of the population at heart. He would nationalize resource industries
and use the rents to compensate the losers, who would be many. Nationalization
of resource producers would be necessary to be able to buy off all the losers from
a shutdown of the dinosaurs. How might this turn out?
Here, too, there are problems. First, there is the internal logic. The national-
ization of privately owned companies would be seen as an anti-market move.
While it might be possible for this ‘good dictator’ to argue that this was a nec-
essary step to implement broader reform and bolster his case by citing the per-
ceived illegitimacy of privatization of the resource industries in the first place,
he faces the practical problem of disentangling pure resource companies from
ancillary and interconnected businesses in nearly all other sectors. The resource
sector is highly integrated with the rest of the economy, in particular the finan-
cial sector.
Moreover, the strongman autocrat faces the same problem as the siloviki in
the previous scenario: if he eliminates the oligarchs who will run the resource
companies? Who can produce future rent? But the biggest problem of all that the
benevolent autocrat would face is the sheer cost of compensating the losers in
the process. This is the problem reformers inside and outside Russia have faced
for over two decades. The scale of transfers that would be needed to keep the
population content is staggering. It has never been done anywhere in history on
this scale.13
To get a sense of the magnitudes that would be involved, we construct a back
of the envelope calculation. Suppose that the benevolent autocrat will make a
transfer equivalent to Russia’s average personal income for five years in a lump
sum payment to each affected person. The recipient can then use this as income
support and to be able to move from isolated regions. In exchange, the benev-
olent autocrat will cease to supply addicted enterprises, so that rents can be
utilized more efficiently for reform. Russia’s average per capita income is USD
13,000, so the lump sum transfer would be USD 65,000. How many people
would be affected? A very conservative estimate is 25 million people.14 This
gives a figure of USD 1.625 trillion. How large is this figure in the Russian
context? Russia’s annual rent from oil and gas is about USD 600 billion, so
the lump-sum transfers required would be 2.7 years’ worth of Russia’ s total
resource rents from oil and gas!
The size of the transfer wipes out all uses of rent, including formal and infor-
mal taxes, for almost three years. This wipes out all government functions and
leaves the autocrat with no resources to reform the economy. Why is the amount
so large? The current system of coping with the addicts provides just enough
resources to keep the ‘lights on’ in the affected factories and cities (Gaddy and
Ickes 2013a). To compensate the employees of affected and associated enterprises
sufficiently to maintain their welfare levels is obviously much more expensive,
since most will have to move to new regions to find employment when the facto-
ries are closed.15
(3) To avoid having to clash directly with the population themselves, the siloviki
allow the market liberals and the oligarchs to do the unpleasant work of eliminat-
ing the addicts. That is, they unleash the oligarchs to follow their natural mar-
ket instincts and act against the addicts. The siloviki protect the oligarchs against
backlash from the population – but only long enough to eliminate the addicts.
They then make the oligarchs the scapegoats, repressing them and the liberals and
thereby posing as the ‘saviours of the people’. This scenario necessarily requires
rather myopic oligarchs.
To the siloviki, there must be clear appeal in the second step in this scenario.
Nothing would be easier than making the oligarchs the scapegoats. (As we saw
above in Table 2.2 on popular attitudes in Russia towards the oligarchs’ status.)
Getting rid of the oligarchs would thus be an easy step politically. But what then?
How do the siloviki manage the continued fallout from the hardship? The oligarchs
are useful only as long as they exist. Once gone, who gets the blame? Moreover,
without the oligarchs the siloviki are back in the nationalization scenario. They
cannot manage the resource sector efficiently, and they cannot obtain investment
for ensuring future rent flows.
The key concept in all these scenarios is that you can only eliminate addiction
by illiberal means, by force. But the use of force and repression threatens the
supply of future rents.
The alternative is to accommodate the addicts. But then we are back to the
basic question for today, not the future. How dangerous will it be for Putin begin
to reduce rent flows to established claimants? What happens when the addicts
themselves begin to see their doses of the drug reduced? How well can Putin and
the FSB manage this, preventing a repeat of the strikes by coal miners, and so
on? Officially, there seems to be no threat. Officially, there is not a whisper of
labour unrest in Russia (Figure 2.10). But somehow, these almost surreal official
statistics on strikes, and so on, do not seem comforting. Rather, they suggest a
powder-keg waiting for a spark.
And yet, no matter how bad things may get under Putin and his RMS, what
is the alternative? We analysed them above. Consider also this hypothesis: the
addicts today, in contrast to earlier, know that they are addicts. Before, they per-
haps really thought they were productive. In the 1990s they may have been sus-
ceptible to the argument that with some reform, despite the dislocation and pain,
the factories would be successful and competitive. Now they know that is not the
case. Their only hope is Putin and his RMS. He and only he is their protector. So
no matter what happens, they cannot go against Putin.
This is the paradox of Putin’s power. His policies have not weakened the lega-
cies of the Soviet past. The ‘Bear Traps’ still constrain Russia’s future, and addic-
tion remains central. Yet Putin’s system of rent management is the only means
present to cope with addiction and the production of sufficient rent to keep the
economy functioning. This is the legacy of rent abundance and addiction.
17007
11162
8856
8278
7285
6273
5993
2575
1755
817
514 291 80 67
175 221 260 264
8 7 4 1 0 2 6 3
1988 1993 1998 2003 2008 2013
Figure 2.10 Strikes in Russia, 1988–2013.

Source: Rosstat.
Notes
1 We analyze resource rents more fully in Gaddy and Ickes (2005) and discuss the
measurement and problems of estimating rents in Gaddy and Ickes (2013b).
2 We stress that these variables must be measured correctly. Therefore, in calculating rent
we use world prices to reflect the opportunity cost of oil and gas. With regard to cost it
is important to exclude any expenditure in excess of the natural cost of production.
3 The median estimate of forecasters in a Reuters (2013) poll from October 2013 was
USD 80 per barrel in real terms in 2020.
4 Note, however, that much of the discussion of increased supplies from unconventional
sources ignores the fact this production is dependent on high prices due to high costs of
production.
5 The world market for oil is highly integrated so what matters for predicting rents is
the world oil price, not what happens in individual markets for Russian oil. Histori-
cally, natural gas prices have been tied to oil prices so the volatility in oil prices was
transferred to gas prices. Unconventional supplies of gas have led to some decoupling
of prices. Moreover, with respect to gas there is the issue of Europe’s desire to reduce
dependence on Russian gas. Russia, however, has finally signed a long-term contract to
deliver gas to China. It seems likely that Russia will be able to find markets for its gas
for the foreseeable future.
6 Note that this is the net rate, including both positive and negative growth years. As
Table 2.1 shows, growth in the positive growth years is typically about two percentage
points higher than the overall average. Popular perceptions of GDP growth rates tend
to focus only on the positive rates and forget about the effect of recessionary periods
on the long-term average.
7 It is important to recognize that the impact of climate and distance on economic per-
formance is not fixed, and to distinguish the natural, unavoidable costs of geography
from policy-induced extra costs. Russia has an abundance of cold, remote locations,
but there is no reason that economic activity had to be located in these regions. The
problem is that Soviet location policy ignored these costs. Canada and the US also
have locations with extremely low temperatures, so a simple comparison should be
instructive. Suppose we compare Eastern Siberia and the Russian Far East with Alaska
in terms of their relative shares of population and territory for Russia and the United
States. If Alaska had been populated according to the Russian model, it would have
today not 710,000 residents, but 13 million. Canada’s Northwest Territory and Yukon
Territory would together have 1.5 million residents instead of the 79,000 they actu-
ally have. Conversely, if Eastern Siberia and the Russian Far East had followed the
American and Canadian patterns, they would in total have barely one million residents
instead of their current 15 million (Gaddy and Ickes 2013a: 51).
8 An initial motivation for this shift was to move industry, especially defense enterprises,
further east in anticipation of attacks on the USSR from the west. But in Eurasia, as one
moves eastward, temperatures fall. This is discussed further in Gaddy and Ickes (2001)
and Hill and Gaddy (2003).
9 Our colleague, Professor Richard E. Ericson of East Carolina University, once
remarked that since a rise in the TPC indicates that Russia is overcoming its inherited
Soviet spatial handicap, the annual rate of change of Russia’s TPC could be considered
an ‘index of economic rationality’.
10 Panyushkin (2006) tells the story of how in the early 2000s Mikhail Khodorkovsky
was summoned to a hearing before the Tomsk provincial legislature. The deputies
had expressed concern that Khodorkovsky’s local YUKOS subsidiary, Tomskneft, was
demonstrating ‘lack of support for the local economy’. When Khodorkovsky tried to
rebut the charges by citing the huge proportion of regional budget revenues that came
from Tomskneft’s tax payments, the deputies interrupted to say that he was not getting
their point. One of the deputies gave an illustration: Tomskneft had stopped placing
orders with the local producer of heavy cables, a major employer in the region. (The
deputy in question happened to be the director of that plant.) Why? Khodorkovsky
explained that he had made that decision on the basis of simple business principles: the
plant’s products were of lower quality and more expensive than alternative suppliers.
Khodorkovsky confidently asserted that that was the way he would do business in the
future as well. That is, he was only willing to purchase from local suppliers if the price
did not include excess costs. Khodorkovsky was thus violating one of the basic rules of
Putin’s RMS. His arrest came not long after this meeting.
11 The term siloviki refers to persons working in or with a past in Russia’s security structures.
12 This would be an extreme version of Anatoly Chubais’s initial plan for Russian eco-
nomic reform ‘By means of a hardline course’, Vek XX i mir (1990).
13 The only empirical example that might apply is the case of West German transfers to
eastern Germany after reunification. Former German Finance Minister Peer Steinbrück
(2011) stated: ’Over a period of 20 years, German reunification has cost EURO 2 trillion’.
Converted to dollars, that means that West Germany paid an estimated USD 2.76 trillion to
bring the 16 million residents of East Germany up to income levels in the west. (And they
still remain around 30 per cent lower than in the west.) Admittedly, German living stan-
dards are much higher than Russia’s. On the other hand, Russia’s population is far larger.
14 The best estimate of the excess population in Siberia and the Far East is between
9.6 million and 17.6 million by Mikhailova (2004, cited in Gaddy and Ickes 2013a: 48).
The number of addicted enterprises in the Urals region alone far exceeds that of Siberia
and the Far East. So 25 million seems very conservative.
15 Needless to say, we are ignoring here the question of what happens when the lump sum
payments run out (which, of course, does not necessarily come at the end of five years,
as planned).
References
EIA (2014) ‘U.S. Crude Oil Wellhead Acquisition Price by First Purchasers (Dollars
per Barrel)’, U.S. Energy Information Administration. Online. Available: www.eia.
gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=F000000__3&f=A (accessed 14 June
2014).
Gaddy, C.G. and Ickes, B.W. (2001) ‘The Cost of the Cold’, Working Paper, Pennsylvania
State University, May.
Gaddy, C.G. and Ickes, B.W. (2002) Russia’s Virtual Economy, Washington, DC: Brook-
ings Institution Press.
Gaddy, C.G. and Ickes, B.G. (2005) ‘Resource Rents and the Russian Economy’, Eurasian
Geography and Economics, 46(8): 559–83.
Gaddy, C.G. and Ickes B.W. (2011) ‘Putin’s Protection Racket,’ in Korhonen, I. and
Solanko, L. (eds) From Soviet Plans to Russian Reality: Essays in Honor of Pekka
Sutela, Helsinki: WSOYpro Oy, pp. 109–23.
Gaddy, C.G. and Ickes, B.W. (2013a) Bear Traps on Russia’s Road to Modernization,
Abingdon, UK and New York: Routledge.
Gaddy, C.G. and Ickes, B.W. (2013b) ‘Russia's Dependence on Resources’, in Alexeev,
M.V. and Weber, S. (eds), The Oxford Handbook of the Russian Economy, Oxford:
Oxford University Press, pp. 309–40.
Hill, F. and Gaddy, C.G. (2003) The Siberian Curse: How Communist Planners Left Russia
Out in the Cold, Washington, DC: Brookings Institution Press.
IMF (2014) Primary Commodity Prices, IMF. Online. Available: www.imf.org/external/
np/res/commod/index.aspx (accessed May 2014).
Mikhailova, T. (2004) Essays on Russian Economic Geography: Measuring Spatial Ineffi-
ciency. Unpublished PhD Dissertation, The Pennsylvania State University.
North, D.C., Wallis, J.J. and Weingast, B.R. (2009) Violence and Social Orders: a Con-
ceptual Framework for Interpreting Recorded Human History, Cambridge: Cambridge
University Press.
Panyushkin, V. (2006) Uznik tishiny, Moscow: Sekret firmy.
Penn World Table (version 7.1), Groningen Growth and Development Centre. Online.
Available: www.rug.nl/research/ggdc/data/penn-world-table (accessed May 2014).
Reuters (2013) ‘Oil by 2020 to Fall to $80 in Real Terms – Reuters Poll’, 30 October.
Online. Available: www.reuters.com/article/2013/10/30/brent-poll-idUSL5N0I-
J3ED20131030 (accessed 30 October 2013).
Sberbank Russia Economic Monthly (2013) Report on Opinion Poll by Levada Center on
Ownership in Industry, August.
Steinbrück, P. (2011) ‘Interview with Former German Finance Minister: “Germans Will
Have to Pay”’, Der Spiegel, 12 September. Online. Available: www.spiegel.de/interna-
tional/europe/interview-with-former-german-finance-minister-germans-will-have-to-
pay-a-785704-3.html (accessed 12 September 2011).
Vek XX i mir (1990) ‘Zhestkim kursom’, Vek XX i mir, 6: 15–19.
3 Between light and shadow
Informality in the Russian
labour market
Vladimir Gimpelson and
Rostislav Kapeliushnikov1
Many transition economies are characterised by widespread and increasing labour

market informality (Packard et al. 2012). The persistence and proliferation of this
phenomenon have multiple causes, including a structural shift towards the small-
scale service sector, poor governance and the existence of often unfriendly insti-
tutions (the ‘grabbing hand’ of the state), increasing competition and growing
costs for formal businesses and unemployment protection. Many individuals and
households are either directly or indirectly affected by the rise in informality and
many others appear to be at risk. Though there are a large number of reasons for
becoming informal and this has a number of implications, there is one common
feature. The informal economic activity unfolds in the shadow of regulations and
beyond the reach of state institutions, raising questions about both the quality of
these jobs and the quality of the state.
The purpose of this chapter is to summarise our knowledge of informality in
the Russian labour market and to embed it into a more general political-economic
framework that links it to particular institutional developments. The main ques-
tion we will consider can be formulated as follows: how did informality in the
Russian labour market evolve, and what are its political implications?
Russia presents an interesting case for the study informality since it differs in
several important respects from most other informality-ridden countries. First,
it is a non-agricultural economy, with the agricultural share of employment cur-
rently standing at under 10 per cent and the share of rural population at around 25
per cent. Second, most of the informal employment consists of hired labour, rather
than the self-employed, as is often the case in the developing world. Third, the rise
in informality can largely be attributed to a protracted transition towards a mar-
ket economy rather than to the patterns of rural–urban migration that generally
accompany underdevelopment. Finally, compared with those in other countries
informal workers in Russia possess relatively high levels of education.
The chapter is organized as follows. The first section provides a brief over-
view of recent labour market trends and describes the institutional framework
in Russia. We then use several different data sources to consider the evolution
of informal employment and we also investigate the main determinants of infor-
mality. The third section looks at the issue of labour market segmentation: is the
Russian labour market segmented, with informality forming a special segment?
34 Vladimir Gimpelson and Rostislav Kapeliushnikov
We address this question by exploring mobility patterns and the consequences of
informality on earnings. The chapter then discusses political challenges in relation
to informality. The final section concludes with a summary of our findings.
Labour market developments and the institutional

setting in Russia
Going informal is often considered as a reaction to the difficulties in getting a
formal job when there is weak support for the unemployed. Since access to for-
mal positions for wage and salary workers depends on the tightness in the labour
market, in this section we provide a short overview of the major developments at
the macro level in the Russian economy over the last decade. Since informality is
often related to rigidities in the labour market, we also give a brief description of
its particular country-specific institutional properties.
Main labour market developments

Shortly after the financial crisis of 1998, the Russian unemployment rate reached
an all-time record high of 14.6 per cent. However, in early 1999, unemployment
started to decline rapidly, reflecting the economy’s return to a path of growth.
Boosted by the strong devaluation of the national currency and supported by the
rise in world oil prices, that year the Russian economy entered a period of rapid
growth that lasted until 2008. Thereafter unemployment declined gradually, fall-
ing to under 6 per cent by the middle of that year.
Meanwhile, the economic recovery was also reflected in other labour market
indicators. The employment to population ratio increased by five percentage
points, accumulated wage arrears dwindled, the incidence of underemployment
was reduced, and the number of annual hours worked increased. Hiring rates
remained high and were positively correlated with vacancy rates. The most
impressive labour market development, however, was in real wage growth,
which, according to Rosstat, stood at between 12 and 15 per cent per annum over
the period. As a result, within less than a decade, the performance of the Russian
labour market had changed radically for the better. A closer look, however, pres-
ents a more complex picture. Protected employment in all types of firms decreased
from 52 to about 48 million, or by 7–8 per cent, while there was an increase in
the proportion of workers in temporary, casual and informal sector jobs. In other
words, the fraction of workers employed in various ‘bad’ jobs rose continuously,
in spite of a robust macroeconomic performance (Gimpelson and Kapeliushnikov
2007; Lehmann et al. 2011).
The economic crisis that erupted in 2008–9 caused Russia’s GDP to fall by 8
per cent in 2009, but had no immediate measurable consequences in the labour
market. There was little actual overnight downsizing in 2008. By 2009, how-
ever, the unemployment rate reached 8.3 per cent and other labour market indi-
cators also began to deteriorate: real wage growth turned slightly negative, wage
arrears, though quite modest, reappeared, and under-employment rose again.
Informality in the Russian labour market 35
evertheless, this grim period was relatively short-lived and all indicators started
N
to improve soon afterward, signalling that the major threats in the form of unem-
ployment or underemployment as they were seen by the Russian government had
been left behind. In 2011–13, the unemployment rate fell further, down to a his-
torical low of 5.5 per cent. This was associated with relatively stable total employ-
ment but a continuing gradual reallocation of labour from the formal sector to
broadly-defined informal or semiformal jobs. This reallocation can be interpreted
as a sign of the trade-off between unemployment and informality, with priority
being given to the latter.
Institutional setting
There are many causes for informality. It is often regarded as a direct consequence
of excessively rigid labour market institutions. The minimum wage, if set too
high, can push low-skilled workers out of formal jobs. Excessively strict employ-
ment protection legislation (EPL), collective bargaining pressures, high labour
taxes and a high wage premium in the public sector are all likely to suppress
labour demand and job creation in the formal sector. As a result, workers can be
excluded from formal employment. If, at the same time, unemployment benefits
are low and/or difficult to obtain, workers can easily end up in informal jobs, as
they provide the only alternative option. Is the Russian labour market excessively
rigid, thus raising the likelihood of informality? Not at all. The institutional set-
ting during the transition years did not hinder wage flexibility and accommodated
very strong external shocks, though through non-conventional price adjustment
(OECD 2012; Gimpelson and Kapeliushnikov 2013). During most of the tran-
sition, the minimum wage was fixed at a level that was hardly binding for the
majority of firms. Its ratio to the average wage was below 10 per cent during most
of the period. Adjustments were irregular, lagged far behind inflation, and had
little effect on relative earnings.
The level of unemployment benefits (UB) can also have an impact on the infor-
mality (Margolis et al. 2012; Vodopivec 2013; Bosch and Esteban-Pretel 2013).
If set too high relative to the median or average wage, it pushes up reservation
wages, thus causing a reduction in employment. Some of those displaced can go
into informality but are more likely to transit into unemployment. If UB are low,
the unemployed state is not a viable option for those in need of income. In this
case, informal economic activity can play a buffering role as an effective alterna-
tive to non-employment. In Russia, the average UB to wage ratio reached a peak
of 30 per cent in 1998 but gradually eroded thereafter, ultimately dipping below 8
per cent. This is a very low level by international standards2 and, given the chronic
lack of decent job vacancies at the disposal of the Public Employment Service
(PES) can also play an effective role in making informality an alternative option
instead of lowering the job search costs for formal job seekers.
EPL is another important pillar. Strict EPL protects insiders from job loss.
By doing so, it restricts the outflow from formal jobs but also discourages
new job creation. In theory, therefore, it may inhibit labour market mobility,
including flows in both directions between formal and informal jobs. Regard-
less of how we estimate the nominal stringency of Russian EPL, most experts
agree that its enforcement is far from perfect. Due to its poor enforcement, the
EPL per se is unlikely to be a valid cause for expansion of informal employ-
ment. However, given the uneven and incomplete enforcement, firms and
workers may choose the optimal degree of informality, trading off its costs
and potential benefits.
The taxation of labour is yet another standard candidate for those seeking an
explanation of informality expansion in transition countries (Packard et al. 2012;
Slonimczyk 2012). Creating a tax wedge, it decreases the demand for labour
among taxpaying firms. In 2001, the government introduced a tax reform that
drastically reduced taxation levels and simplified the process of filing taxes. The
pre-reform progressive personal income tax rates were replaced by a single and
low flat-rate tax of 13 per cent and there were also changes to payroll taxes. From
2001 onwards, social contributions were unified into a single and smaller social
tax with a regressive scale.3
As suggested by this short overview, Russian labour market institutions do not
appear to represent a significant source of rigidity causing informality. On the
contrary, the trade-off between employment and wages was, on every occasion,
solved in favour of keeping employment at a stable level, though some institu-
tional decisions might have had an effect. However, there were other factors at
work outside the labour market per se that could suppress labour demand and
explain the expansion of informal employment. Most important among them were
the existence of a notoriously unfriendly business climate and the low enforce-
ment capability of the Russian state. According to the World Bank ‘Doing Busi-
ness Index’, Russia is among the lowest-ranked countries (see further Chapters
5 and 6 in this volume). A poor business climate reduces economic activity, dis-
courages new investments, and deters both the entry and growth of formal firms,
which reduces labour demand in the formal sector and, thus, makes informality
the second-best option for job seekers.
The evolution of informality

The relationship between GDP growth and labour market informality are ambig-
uous. If economic growth is associated with intensive employment generation
in the formal sector, informality can shrink as long as informal workers end up
in formal positions. To achieve this positive outcome requires the presence of
an institutional environment conducive to massive job creation. However, it is
not difficult to think of circumstances in which the rapid economic growth can
itself act to speed up informality. Such an outcome is likely, for example, if the
growth is largely driven by micro-entrepreneurship and small-scale services that
are prone to informality. Another example assumes that the aggregate growth in
the country is driven by the formal sector but that its gains stimulate informal
economic activity. If a massive injection of incoming petro-dollars is distributed
over the population and generates a growing demand for personal services such as
home construction, this may easily translate into informality given the generally
unfriendly environment for conducting business activity in full accordance with
formal rules.
The evolution of informal employment

Labour market informality can be measured in various ways and using different
data sources. The estimates usually vary depending on measurement methodology
and available data sets, though we expect them to provide a largely coherent picture.
The Russian official statistics applies a version of the productivity-based defini-
tion (Hussmans 2004), which links informality to the characteristics of enterprises
rather than to particular jobs. Using the standard System of National Accounts
(SNA) divisions by institutional sectors, we can say that the Rosstat definition
classifies all those who work in entities related to ‘the corporate sector’ (regis-
tered companies) or to ‘the government sector’ as formally employed, while all
those who work in household-related productive units are considered informally
employed notwithstanding whether or not they are registered with tax authori-
ties or social protection agencies. Put differently, ‘formal workers’ according the
Rosstat definition are employed by organizations – legal entities – while ‘informal
workers’ are those who work outside such bodies. This definition of informality
encompasses all of the self-employed, as well as those wage and salary workers
employed by unincorporated micro-businesses or by private individuals outside
the formal sector, but it largely overlooks informal workers in formal enterprises.
The first and most straightforward approach to measuring employment in the
informal sector is to use the available labour force survey data for the period
1999–2013. The second, ‘residual’ approach relies on the same definition of
informality but measures in a different way, based on regular enterprise statis-
tics. It estimates the difference between total employment and employment in
all firms and organizations. The latter component can be obtained from the reg-
ularly updated statistical registry which covers all firms officially registered as
legal entities. This residual measure (total employment minus employment in all
legal entities) encompasses self-employment (both with and without formal reg-
istration), workers hired by non-incorporated individual entrepreneurs or house-
holds, and family workers, while again also excluding informal workers in formal
enterprises. The rationale for considering these groups as working informally (or
semi-formally) is that, even if formally registered, they are not covered by stan-
dard labour, social security, accounting and tax legislation. These regulations, if
even applied at all, are enforced in a simplified and truncated form with multiple
exemptions. This residual approach provides a broader but less conventional mea-
sure of informality.
According to the first approach, in 2013 informal workers made up about one-
fifth of total employment, while the second, ‘residual’ approach estimate puts the
figure at closer to one-third. The gap between the two figures arises from the
different methodologies of measurement. The Labour Force Survey (LFS) may
not identify all of those who work in small non-incorporated or fully unregistered
businesses as informal workers, if such LFS respondents state simply that they are
employed by ‘a firm’. Having accounted for this omission, we may get a higher
LFS measure and a narrower gap. In its turn, the residual approach may misiden-
tify some fully formal workers, thus inflating the estimate. But neither way of
measurement fully captures those working in formal firms but without a written
contract.
However, the growth rates for both measures are almost identical, as suggested
by Figure 3.1. This presents the general trends in informality and economic
growth over the period. During this time GDP grew by an impressive 80 per cent
over the period 1998–2008. But did it pull workers from informal jobs? As can be
seen, the answer is: Quite the opposite! Informality, by either definition, increased
at about the same rate and, by the end of the period, it was approximately 60 per
cent higher than at the beginning. Meanwhile, there was only a very small change
in total employment, while the levels of regulated and protected employment in
all types of firms and organizations actually fell. In sum, at this time a large and
growing fraction of employment generation happened outside the regulated sector.
The economic crisis of 2008–9 brought a short break in the trend and caused a
significant fall (of around 8 per cent) in GDP. This was not immediately reflected
in total employment. However, the informal sector in the LFS-based definition
200.000
180.000
GDP
Total employment
160.000 Inf employment, “residual”

definition
Informal employment, LFS
definition, main job
140.000
120.000
100.000
80.000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Figure 3.1 Employment and GDP growth, 1999–2011 (1999 = 100).

Source: Authors’ estimates based on Rosstat data.
accepted by Rosstat suffered a visible negative shock with a one-year lag. Employ-
ment in the residual (outside registered firms) sector was on the rise during the
whole period, apparent from some slowdown in 2006–8. Figure 3.1 shows a diver-
gence between the paths followed by the informal employment according to the
LFS-based and the residual-based definitions in 2009–10. While the former shrank
mostly due to a decrease in the number of dependent wage workers, the latter con-
tinued to grow. It is not easy to determine whether this fall in informality was a
temporal statistical artefact or actually reflected the real phenomenon. However, in
2011–13, the informal employment (following the LFS-based definition) returned
to its pre-crisis peak.
Figure 3.1 presents the hypothesis that during this period, there was a significant
reallocation of workers from the regulated formal to the unregulated informal sec-
tor. Figure 3.2 illustrates the structure of this reallocation in 2000–12. During this
period the formal sector reduced its workforce by almost five million individuals.
This contraction was more than compensated for by the expansion of the unregu-
lated sector. In total, the latter gained over 7.5 million workers. Under an extreme
assumption that informality was not a possible option, the economy would then
have lost over four million jobs rather than gained around three million. The
10000
8000
6000
4000
2000
2000
4000
Difference Total Formal Sector Informal

6000
8000
Figure 3.2 Change in total employment, formal and informal employment, 2000–12

(million persons).
Source: Authors’ estimates based on Rosstat data.
expansion of the unregulated sector occurred mostly in activities such as trade,
construction, and transportation. These are industries that are largely populated by
micro-businesses and the self-employed.
So far, we have discussed estimates based on official data. As official statistical
agencies are usually not very accurate at measuring informality, we may want to
check these findings by bringing in alternative data sources that can better serve
this purpose. One such a source is the Russian Longitudinal Monitoring Survey
(RLMS-HSE) which is a reliable and representative household panel with various
informality-related questions.4 It covers the period 2002–12 using the consistent
definition.
Figures 3.3 and 3.4 present the evolution of informal employment according to
the RLMS data. The great advantage of this source is that it draws a clear distinc-
tion between different forms of informal employment. We can differentiate all
employed according to two criteria: formality–informality and self-employed–
hired workers. In addition, those involved in irregular informal activities and
marginally attached to the labour market but who may occasionally do some paid
work constitute the fifth group of workers. As shown by the figures, the expan-
sion of informal employment occurred almost exclusively in wage and salary
12
11.4
Males
11.0
10.9
10.7 10.6
10.4
10
9.6
9.1 9.2
9.0
8.6 8.5 8.6
8.3
8 8.1 8.0
7.6 7.5
7.2 7.1
6.9 7.0
6.7 6.6
6 5.9
5.5
4.4 4.5
4 4.1 4.1
4.0 3.9 3.8 3.8
3.7
3.5 3.5
3.3 3.3
Main Job Entrepreneurs/Self-Employed

2
Main Job Wage and Salary Workers
Irregular Activities
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Figure 3.3 Informal employment, self-employment and entrepreneurial activity, men,

1998–2010, RLMS.
Source: RLMS, Gimpelson, Kapeliushnikov and Slonimczyk (2014).
10.0
Females
9.0 9.0
8.1
8.0 7.9 8.0
7.7
7.3 7.2
7.0 7.1
6.8
6.5
6.2 6.2
6.0
5.7 5.8
5.5
5.2
5.0 5.0
4.6
4.4 4.4
4.3 4.2 4.2
4.0 3.9
3.8
3.0
2.8 2.9
2.7 2.7 2.7 2.7 2.6 2.6
2.4 2.4 2.5
2.3 2.2 2.2
2.0
Main Job Entrepreneurs/Self-
Employed
Main Job Wage and Salary Workers
1.0
Irregular Activities
0.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Figure 3.4 Informal employment, self-employment and entrepreneurial activity, women,

1998–2010, RLMS.
positions. Self-employment fluctuated around its average level, around 4 per cent
for males and 2.5 per cent for females, while there was a fall in the proportion
of workers performing irregular or casual activities. All of this is in line with the
Rosstat data.
In sum, various data sources estimate informal sector employment to be within
the range of 20–30 per cent. How does this look in cross-country comparisons?
Perry et al. (2007) provide approximate relationships between various measures
of informality and country per capita GDP. According to them, Russian GDP per
capita corresponds to an informality level of 25–30 per cent. As we can see, the
actual level is somewhat lower than that which one can follow from these compar-
isons. Naturally, any cross-country informality comparisons are very approximate
and allow only broad conclusions to be drawn. One can safely say that the level
of informality in Russia is comparable to that observed in other Eastern European
countries and Southern Europe, but is significantly higher than that in the most
advanced market economies. However, it would also be fair to say that Russian
labour market informality is much more modest than that observed in other BRIC
countries and in most other emerging economies. Its current level does not pose
any real concern, but its rapid increase may present future challenges. Most of
the growth comes through hired employment, rather than self-employment. In
this sense, informality is not a form of early micro-entrepreneurship which could
potentially be creative and productive.
Informality and productivity

If informal employment is less productive than formal employment, then the
reallocation of labour into informality reduces growth and productivity. This also
means that an increasing proportion of the total labour force is being used less
efficiently than would be the case if formal employment was higher. According
to the SNA data, the fraction of Russian GDP produced by the informal sector
decreased from about 15 to 7 per cent during the period of 2002–11. Meanwhile,
informal employment continues to expand, as we could see, as did the total num-
ber of hours worked in the sector. Trying to reconcile these two tendencies, we can
say that the formal–informal productivity gap is large and tends to grow further.
Unsurprisingly, productivity is much higher in the formal sector than in the infor-
mal sector (see Table 3.1).
This gap can be explained in part by the simple fact that household-based sub-
sistence agriculture is inefficient, while at the same time quite popular. Many
Russian households are involved in this type of activity, using primitive technol-
ogies and little human capital. If this produce is consumed within households and
not intended for market sales, then such activity is not considered to be income
gaining employment (according to the standard ILO criteria). Then, including
agriculture in estimates of formal–informal productivity comparisons is likely to
inflate the gap. Exploiting the fact that almost all household-based production
is concentrated within the agricultural sector, we can re-estimate the difference
including only non-agricultural economic activity. This adjustment produces a
smaller gap of ‘only’ about three times instead of four or five times if agriculture
Table 3.1 Labor productivity 2005–11 (value added per hour; RUR in constant
2008 prices)
Total economy Agriculture excluded

Formal sector Informal sector Formal sector Informal sector
2005 263 63 272 95
2006 281 67 291 103
2007 301 68 312 108
2008 319 65 330 99
2009 305 69 315 105
2010 316 66 328 103
2011 326 67 337 106
Source: Authors’ estimates based on SNA Rosstat data.
is included. However, even in this case, the productivity gap gradually becomes
larger over time, rather than smaller.
In any case, it is fair to argue that the observed reallocation of jobs from the for-
mal to the informal sector – the ‘de-formalization of employment’ – slows down
aggregate productivity growth and, therefore, presents an additional challenge to
the modernization of the economy.
Who is more exposed to becoming informal?

Even if the informality level is modest on average, it can be quite high for partic-
ular demographic groups. As shown by Table 3.2, which is based on RLMS data,
informal salaried work and irregular activities are most prevalent among young
men and women with low levels of formal schooling. Informal entrepreneurship
and self-employment, by contrast, are more common among middle-aged men
with technical or university degrees. Informal work is concentrated in service,
agricultural and low-skilled occupations. Informal entrepreneurs are usually clas-
sified under managerial occupations.
One important issue is whether some age groups are more exposed to informal-
ity than others due to a sort of lifecycle (age) effect. New entrants into the labour
market are more likely to find jobs in the informal sector. Having accumulated
some work experience, they gain formal positions and may finally move back into
informality close to or after retirement. This pattern can potentially apply to every
cohort. An alternative story is that some cohorts are more vulnerable to informal-
ity because they enter the labour market during a period when labour demand in
the formal sector is low.
In order to examine this issue in more detail, we estimated a multinomial logit
model (MNL) of sector choice with these and other variables as determinants of
informal status (Gimpelson et al. 2014). This exercise was conducted separately for
males and females using the whole data pool for 2000–10. We explored whether
the determinants of informality changed over time by estimating the MNL model
separately for different subperiods. Among the most remarkable results, we find that
the likelihood of informal wage and salary work falls with age. The risk of irregular
activities, however, does not differ significantly across age groups. Men with any for-
mal education see the risk of casual work being significantly reduced, but only tech-
nical and university degrees seem to have a negative effect on informal wage work.
For females, education does not seem to significantly affect any job types besides
irregular activities. Finally, the groups in which informality is more prevalent are
found in the service, agriculture and fishery activities, and in ‘unskilled’ occupations.
Summing up, our findings are consistent with the existence of additional search
frictions that individuals of young and old age are likely to face. Individuals with
low human capital are also more likely to go informal. Finding the first good job
appears to be tough and people might churn for some time between informal jobs
as a second-best opportunity. The same is true for preretirement and retirement
age individuals. In addition, being a student or getting a pension decreases the
reservation utility expected from formal employment.
Table 3.2 Incidence of informality, 1998–2010 (%)
Men Women
Formal Inf Formal Inf W & All Irreg. Formal Inf Entrep Formal Inf W & All Irreg.
Entrep. Entrep W & Sal Sal Activ Entrep. W & Sal Sal Activ
Age 16–24 0.1 1.7 63.6 13.7 21.0 0.2 1.3 71.0 14.8 12.8
25–34 1.5 3.8 73.8 12.0 8.9 0.7 1.8 82.1 9.7 5.7
35–44 2.3 4.9 74.3 9.2 9.3 1.0 2.7 84.1 7.5 4.7
45–54 1.6 2.8 78.6 7.9 9.0 1.2 2.7 85.1 5.9 5.1
55–65 0.9 1.6 84.6 5.5 7.4 0.7 2.2 84.5 6.0 6.7
Education HS Inc 0.8 2.0 64.2 14.7 18.3 0.6 2.2 70.2 12.5 14.5
HS 1.0 3.8 70.1 10.6 14.5 0.7 2.4 75.2 11.4 10.2
Voc 0.6 2.7 76.0 11.3 9.4 0.7 2.7 77.6 11.9 7.1
Tech 1.8 5.1 78.8 8.5 5.8 1.1 2.8 85.4 6.4 4.3
Univ 4.0 3.7 83.4 4.6 4.2 1.0 1.6 91.6 3.5 2.3
(Continued)
Table 3.2 (Continued)
Men Women
Formal Inf Formal Inf W & All Irreg. Formal Inf Entrep Formal Inf W & All Irreg.
Entrep. Entrep W & Sal Sal Activ Entrep. W & Sal Sal Activ
Occupations Legislators, 14.1 16.2 66.3 2.3 1.1 9.7 20.1 67.4 2.6 0.3
Senior
Managers,
Officials
Professionals 1.4 1.4 94.3 1.8 1.1 0.5 0.5 97.4 0.8 0.8
Technicians & 1.1 1.9 86.4 7.4 3.2 0.4 0.4 94.2 3.4 1.7
Assoc Prof
Clerks 0.6 0.9 89.0 4.7 4.7 0.3 0.0 94.1 3.7 1.9
Service & Sales 0.9 6.5 67.6 10.1 14.8 1.2 5.6 57.2 25.8 10.2
Workers
Skilled Agric & 8.5 12.2 53.0 4.9 21.3 2.6 7.9 50.0 10.5 28.9
Fishery
Workers
Craft & Related 0.5 3.4 71.3 11.6 13.1 0.4 2.6 66.5 8.6 21.9
Trades
Plant & Machine 0.3 2.0 82.8 10.0 4.9 0.1 0.2 94.3 3.2 2.2
Operators and
Assemblers
Unskilled 0.0 0.8 63.3 16.2 19.6 0.0 0.1 80.0 8.4 11.4
Occup
Is the labour market segmented or integrated?
This is a key question in the exploration and explanation of informality. One
approach sees this sector as a kind of semi-isolated ghetto populated by bad jobs.
It assumes that low-educated and low-skilled workers enter the sector involun-
tarily and have limited exits to better employment and are also overexploited
and underpaid there. Much of the literature generated by the ILO follows this
research paradigm (Kucera and Ronkolato 2008). Another view sees the labour
market as integrated. According to this view, workers choose their preferred sector
of employment, voluntarily maximizing their expected utility (Maloney 2004).
Therefore, any emerging wage gaps are small, and can be explained by differences
in non-wage job amenities. Meanwhile, cross-sector flows provide additional tests
on segmentation and, if large, they point out the integrated nature of the labour
market. These opposing views suggest ultimately different remedies. Exploring
what view of the Russian labour market is more convincing and better supported
by the data, we look first at mobility and then at earnings.
Mobility patterns
We explore mobility patterns using two complementary approaches. First, we
examine transition matrices linking different labour market states to analyse the
intensity and direction of labour market flows. Second, we estimate an MNL
model that controls simultaneously for past labour market states and demographic
and job characteristics. Jobs in the informal sector are typically considered to
be less secure since they are unprotected by regulations. This is well reflected
in both the shorter tenures and the higher mobility of informal workers, though
that in itself is not sufficient proof for the segmentation hypothesis. They can be
mobile in both ways across formality borders. Segmentation means that informal
employment becomes an absorbing state with a limited exit. If the pool of infor-
mal workers is stagnant with little outflow, then we can expect a segmentation
in the labour market. Significant flows but going largely into non-employment
could also be considered a valid argument. In contrast, the dynamic interchange
between the formal and informal sectors would indicate that the labour market
remains integrated without strong internal divisions. The picture becomes more
complex if we consider the informal labour market as internally heterogeneous
and multi-tiered. In this case, some informal workers are integrated with the for-
mal sector while others are separated in absorbing dead-end jobs. This picture is
consistent with the multi-tiered vision of the informal sector suggested by Fields
(1990; 2009).
The informality in our data consists of three different substates: informal entre-
preneurs, informal salary workers, and casual workers. We estimated conventional
transition matrices linking origin and destination states for the period 2003–10.
Table 3.3 presents mobility between four aggregated labour market states (formal,
informal, unemployed and not in the labour force) and Table 3.4 disaggregates
the formal sector into formal salaried employment and formal self-employment,
Table 3.3 Mobility in the Russian labor market (4 states), 2003–10
TRANSITION PROBABILITIES: Pij

Formal Informal Unemployed Not in labor force Pi.
Formal 0.891 0.056 0.018 0.036 0.651
Informal 0.254 0.563 0.046 0.138 0.146
Unemployed 0.304 0.221 0.186 0.289 0.038
Not in labor 0.106 0.125 0.057 0.711 0.166
force
P.j 0.646 0.147 0.035 0.172
Formal Informal Unemployed Not in labor force
Average 9.1 2.3 1.2 3.5
duration
Table 3.4 Mobility in the Russian labor market (7 states), 2003–10
TRANSITION PROBABILITIES: Pij

FS IS SEF SEI IA U NLF Pi.
Formal salaried 0.890 0.034 0.003 0.004 0.015 0.018 0.036 0.640
Informal salaried 0.333 0.448 0.009 0.038 0.058 0.037 0.078 0.066
Self-employed 0.187 0.038 0.524 0.206 0.017 0.004 0.025 0.011
formal
Self-employed 0.077 0.090 0.116 0.621 0.057 0.007 0.032 0.024
informal
Irregular activity 0.172 0.106 0.003 0.031 0.358 0.073 0.258 0.055
Unemployed 0.302 0.090 0.002 0.012 0.119 0.186 0.289 0.038
Not in labor 0.105 0.037 0.001 0.006 0.082 0.057 0.711 0.166
force
P.j 0.634 0.069 0.011 0.025 0.053 0.035 0.172
FS IS SEF SEI IA U NLF
Average 9.1 1.8 2.1 2.6 1.6 1.2 3.5
duration
Note: Acronyms in columns correspond to the titles in rows.
while the informal sector is broken down into informal salaried employment,
informal self-employment and irregular informal activity.
A detailed look at conventional mobility measures calculated and averaged for
the whole period of 2003–10 shows that annually about 11 per cent of those in
the formal sector left that sector to move to alternative states (the informal s ector,
unemployment or out of the labour force). Of these, the informal sector was the
leading destination, with this outflow constituting about 6 per cent of the ini-
tial stock. These values are higher than those reported by Lehmann and Pignatti
(2007) for Ukraine, where most of those leaving the formal sector ended up in
non-employment. The differences are remarkable considering the multiple institu-
tional and structural similarities between the two countries. If the informal sector
is disaggregated, informal wage and salary employment emerge as the destination
for 3.4 per cent of those leaving formal salaried employment in the sector of origin.
If we take informal employment as the initial sector, about a quarter of the
workers in the stock ended up in formal salaried employment one year later, illus-
trating high mobility, while 56 per cent remained informal as before. At the same
time, informal workers (compared to formal) faced much higher risks of losing
employment. However, the probability of a return to employment was also high.
Within one year about 30 per cent of the unemployed and 11 per cent of the inac-
tive had secured formal jobs. Migration from non-employment to any informal
employment was also very buoyant, especially from unemployment. For individ-
uals moving from unemployment, informal jobs were identified as the destination
by 22 per cent of all respondents. These rates were comparable to the outflows
from unemployment to formal employment.
The breakdown of informality by substates provides additional evidence
that both salaried employment and irregular activities are actively involved in
the exchange with other labour market states, while informal self-employment
interacts actively with formal self-employment. High rates of exchange between
formal and informal employment do not suggest that a strong segmentation of
these sectors is a likely outcome. However, informal workers face higher risks of
becoming unemployed and especially inactive than do formal workers. Russian
informal workers do not form a stagnant pool, and most of those entering the
informal sector have good chances of getting out relatively soon.
In other words, the general picture that emerges is a mixed one. On the one
hand, counter flows between the formal and informal sectors are of compara-
ble intensity; outflow from the formal sector into informality dominates flows
into non-employment; one-third of informally hired workers move into the
formal sector within a year; most unemployed and about half of the economi-
cally inactive enter the formal sector, avoiding informality as a transient state;
any self-employment decreases the risk of unemployment; formal and informal
self-employment are involved in an intensive exchange. All of this analysis indi-
cates that rigid barriers separating formal and informal jobs hardly exist.
On the other hand, the fact that employment growth in Russia was driven by
the expansion in informality can be interpreted as clear evidence of the difficul-
ties of entering the formal sector. These difficulties can be caused by depressed
labour demand in the formal sector, such as a combination of weak job creation
by new firms and a slow expansion of employment in existing firms. The dispo-
sition of formal workers to move out was low, new vacancies in the formal sector
were generated in limited quantities and were not easily accessed by outsiders;
states of unemployment, inactivity, informal salaried employment and irregular
informal activity are strongly connected by cross-flows, suggesting that infor-
mality emerges as a dead-end state. These findings tend to suggest that the labour
market is segmented, rather than integrated.
The transition matrices show flows across sectors without conditioning on
worker characteristics. The MNL model for sectoral choice controlling for lagged
employment statuses suggests that any form of employment decreases the risk
of non-employment in the next period. Second, any prior entrepreneurial expe-
rience increases the probability of both formal entrepreneurship and informal
self-employment. One may speculate that both forms of entrepreneurship are not
strictly separated and resemble communicating vessels. However, informal entre-
preneurship also increases the relative risk of doing informal salaried work. Third,
we find that the only status that significantly increases the relative risks of irregular
activities is irregular activities themselves. In general, these workers are marginally
attached to the labour force, but such activities appear to constitute an entry point
for informal entrepreneurship and, to a lesser extent, informal wage and salaried
work. Finally, formal salaried workers are less inclined to any outward transition.
Summing up, our findings are consistent with Fields’ idea of a two-tiered struc-
ture of the informal labour market (Fields 1990, 2009). On the one hand, informal
self-employment seems to be integrated with formal entrepreneurship, and there
is some evidence that irregular activities and informal wage and salaried work
sometimes lead to entrepreneurial activities. On the other hand, all informal types
of employment are self-reproducing and are largely separated from the formal
labour markets. The fact that workers who obtain formal salaried positions are
less likely to move to any other type of job suggests that they assign a high value
to formality and prefer it over the alternatives.
Informal earnings
An alternative way of testing segmentation is to estimate the formal–informal
wage gap.5 If segmentation is associated with persistent earnings differentials, the
integrated labour market is unlikely to produce such gaps. How can formal and
informal jobs be compared in terms of wages in the Russian case?
Figures 3.5 and 3.6 are based on RLMS data and show the evolution of earnings
in each form of employment for men and women, respectively. The decade under
consideration was characterized by a continuous increase in living standards in
Russia. According to official statistics, in 2010, the average official real wage
was 2.7 times higher than in 1998. Informal earnings also increased significantly,
though the rate of growth varied across job types. In terms of relative rankings in
remuneration, however, there was very little change.
Both male and female entrepreneurs have the highest earnings throughout the
period. Unsurprisingly, entrepreneurial income appears to be more volatile rel-
ative to other forms of employment. Salaried workers are one step below in the
earnings distribution. These figures also suggest that formal status has no strong
impact on earnings for wage and salary workers. Finally, individuals performing
only casual or irregular activities are at the bottom of the earnings distribution.
12,000
Formal Entrepreneurs/Self-
Employed
Informal Entrepreneurs/Self-Empl
10,000
Formal Wage Workers
Inf Wage Workers
8,000
6,000
4,000
2,000
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Figure 3.5 Real monthly earnings in formal and informal employment, men,

1998–2010, RLMS.
One important factor affecting the distribution of earnings is the wide varia-
tions in average monthly hours worked across different employment types. Two
points are worth emphasizing here. First, one reason for higher earnings is simply
that entrepreneurs work a larger number of hours per month. In particular, formal
entrepreneurs work 20 per cent more hours than formal employees during the
same reference period. Second, workers performing irregular activities have very
low hours. On average, individuals in this category work only around 20 hours
per week. A simple calculation of an implicit hourly wage puts irregular activities
above those of wage and salary workers. As a result, workers performing irregu-
lar activities have median wages comparable to those of entrepreneurs. Average
earnings differentials across job types can reflect the non-random selection of
skills and other productive characteristics into certain types of jobs. We estimated
earnings regressions, controlling for some of the factors that might affect earnings
and be correlated with job type. The specification we used allowed for the effect of
hours to vary across employment types; it also included the set of standard control
variables and added year dummies. In order to partially remedy the potential bias
of the pooled OLS estimator, we estimated the panel fixed effect (FE) model and
the Hausman–Taylor (HT)-type random effects models.
12,000
10,000
Formal self-employed
Informal Self-employed
Formal wage workers

8,000
Informal wage workers
Irregular activities
6,000
4,000
2,000
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Figure 3.6 Real monthly earnings in formal and informal employment, women,

1998–2010, RLMS.
Formal entrepreneurs appear to earn on average 36 per cent (males) and 56 per
cent (females) higher earnings than formal wage workers, if other factors are kept
constant. Informal entrepreneurship brings the same wage premium for males and
only a slightly lower premium for women. Informal salary workers only face a
small penalty relative to formal salaried workers. Finally, workers in casual and
irregular activities are not, on average. paid less than formal salaried workers.
This seems surprising, but it reflects the effect of short hours supplied by a worker
in this type of employment.
The pooled OLS results suggest that formal entrepreneurs earn a relative pre-
mium. The alternative FE and HT models are more ‘sceptical’ in this regard,
denying that this group of income earners enjoy a potential advantage relative to
others. The entrepreneurial premium emerges as much smaller in size and statis-
tically insignificant.
If demand for working time is strongly constrained by employment type and
workers would be happy to supply more hours than they do, it would still be
possible to find a positive and significant effect of formal and informal entrepre-
neurship relative to any salaried work. This is also the case in relation to the short
duration of irregular activities.
Summing up the evidence on earnings across job types, it seems safe to assert
that any self-employment brings a statistically significant wage premium com-
pared to observationally similar formal wage workers, while informal salary
workers are not significantly penalized given the number of working hours they
supply. Male workers involved in an informal irregular activity can even win in
relative terms, while female workers emerge as losers in these comparisons. These
results are significantly driven by variations in the hours actually worked across
job types. As an additional test, this exercise does not provide any strong support
for the segmentation hypothesis but detects some signs of it. Given the clear trend
to an expansion of informality, the risk of stronger segmentation in the medi-
um-term future can hardly be dismissed.
Informality as a systemic institutional failure

The informality issue cannot be confined by or reduced to partial labour market
imperfections. Its persistence raises a number of questions concerning more gen-
eral relationships between citizens and the state. Still, a modest incidence of the
Russian informality and weak symptoms of labour market segmentation should
not serve to pacify since the rate of increase in informality against the background
of economic growth seems to be troubling, and signalling mounting dysfunctions.
As pointed out by Saavedra and Tommasi (2007: 280), ‘dimensions and measures
of informality are indeed a reflection of broader systemic failures’. Inferior pro-
ductivity in informal jobs is one of the salient indicators.
Russian informality has a number of features which are characteristic of such
failures. Among the most emblematic are the following, though this list is far from
complete:
1 Interaction between shrinking labour demand in the formal sector and low
unemployment benefit replacement ratios;
2 Distrust in the state and state institutions;
3 Incomplete and selective enforcement of formal regulations;
4 The erosion of the tax base, which potentially leads to underproduction of
public goods;
5 Exclusion from access to social protection and various public services;
6 Blurred borderlines between formal and informal activities.
It is easy to see that all of them are strongly interconnected and manifest different
dimensions of the same complex phenomenon. ‘In other words, several aspects
of informality are ultimately a reflection of the way individuals interact with the
state and with each other – that is, of the degree of ‘formalization’ and inclu-
siveness of each country’s social contract’ (Saavedra and Tommasi 2007: 280).
These interactions are shaped by various state-related incentives and constraints
that are mutually reinforcing. If individuals do not trust the ability of the state
to provide high-quality public goods including judicial and social protection to
all fellow citizens, then the incentives to pay taxes are seriously undermined.
The erosion of the tax base leads to further underproduction of public goods,
including the enforcement of regulations. Weaker institutional enforcement-
related capacity kills the incentives to follow formal rules. In such a situation
we are likely to enter a vicious circle that is hard to exit. Informality becomes a
deep-rooted social norm that can enforce and reproduce itself and expand into
the larger population.
Multiple equilibria and dynamics of social norms

Individual participation in informal transactions (including informal employment)
is shaped by incentives and costs, on the one hand, and by social norms, on the
other. Social norms can work as additional incentives or contributions to total
costs. These norms themselves reflect the long-term evolution of informality and
specify a particular path of dependence. If few firms or individuals work infor-
mally, because such work is considered illegitimate and is widely condemned,
dominant social norms deter the expansion of informality at the given level of
enforcement technology. It can be called a good equilibrium. However, if, for any
reason, the numbers of informal workers or informal firms in the economy tend
to grow, the costs of being informal may decrease and the incentives for it may,
on the contrary, increase. This change does not affect solely social norms (how
the society sees these violators and whether it is ready to condemn and punish)
but also the institutional capacity of the state. The costs of monitoring increase,
the likelihood of detection falls, and ultimately the enforcement technology is
likely to weaken. Over time, this changes the ratio between formal and informal
workers. After reaching a tipping point, this ratio moves towards predominantly
informal relationships, which corresponds to a new (bad) equilibrium.
We can impose this simple framework on the Russian informality dynamics
that were discussed earlier. The growing rate of informality is an outcome of two
macro factors. The first relates to the demand for informal labour, the second
constrains workers’ choices on the labour market if they leave a job. As we could
see, the demand constrained by an unfriendly business climate and inefficient
regulations has been in permanent decline. Workers exiting the (formal) sector
face limited (and shrinking) employment opportunities in the formal sector, while
the replacement ratio of unemployment benefits affecting unemployment as an
alternative option remains extremely low. In this context, informal employment
emerges as the second-best income-generating option.
The path of dependence in the evolution of the Russian informality has multiple
roots and a variety of reasons. However, the Russian state has played a significant
role in launching the process in the recent transitional years. Though the macro-
economic shocks were extremely strong, the formal safety net that could support
the Russian population in coping with hardships remained weak and piecemeal,
and it was not even considered to be an urgent policy priority. This sent a clear
signal to everybody that survival should rely on available informal and personal
resources. A widespread allocation of small land plots and a reduction in the offi-
cial working hours conducted by the state at that time increased such resources
that people might have at their disposal and use as productive assets in their infor-
mal activities (Gimpelson and Kapeliushnikov 2007).
Trust
Trust is another important ingredient in the complex web of social interactions.
Lower trust in the state and state institutions undermines expectations of public
goods. In other words, the lack of confidence undermines the social contract
connecting citizens and the state, thereby leading to even higher informality
through the creation of positive feedback loops. Ultimately, by opting to be
informal, an individual seeks to exit the state-controlled space; she wants to
avoid the regulations imposed by the government as well as the associated
responsibility.
Aghion et al. (2010) present a model explaining the co-evolution of distrust
and regulations. They argue that government regulation is strongly and negatively
correlated with trust. Distrust in society, including general distrust and distrust
of economic agents in the state, leads to heavier government regulation. Eco-
nomic agents themselves are not able to coordinate efficiently, but corrupt and
inefficient state bureaucrats generate even more distrust through their activity.
Informality can also be a part of this multivariate equation. On the one hand, infor-
mality emerges as a reaction to distrust in the state that major economic agents
express. On the other hand, it pushes the state to regulate (government officials
often consider informality as a symptom of incomplete regulations that should be
expanded) even more, and therefore leads to further regulative failures. We end
up with even more regulation, but less trust and more informality. In this triangle,
informality is an important element and may emerge as a positive one, since it
functions as an adjustment buffer when regulation critically fails.
Of course, important caveats should apply to these arguments. A conven-
tional interpretation of the social contract assumes that individuals and the state
exchange tax contributions for the provision of public goods completely volun-
tarily and consciously. In the Russian context, this condition should be modified.
Regardless of their employment status, all individuals are eligible by law for basic
pension and free health care. This universal coverage is usually combined with a
low level (in terms of quantity and quality) of this provision. At the same time,
these goods are financed by oil and gas rent revenues, rather than tax receipts. This
has several major implications: access to basic public goods is not conditional
upon formal employment and personal contributions, individuals (taxpayers) are
alienated from the state and government bureaucrats are not accountable to tax-
payers. All these properties are positively correlated with informality.
Incomplete enforcement and blurred borderlines

between formality and informality
The division of the Russian labour market into two distinct sectors is too simpli-
fied. In fact, formality and informality are intimately intertwined states and form a
stretched continuum, rather than providing a black–white dichotomy. Though the
formal sector is largely governed by formal regulations, it is also heavily contam-
inated by informality. Meanwhile, the informal sector is not 100 per cent ignorant
of the acting legislation. Gimpelson and Kapeliushnikov (2014: 169) present esti-
mates of compliance with labour legislation, according to which Russian formal
workers estimate the level of compliance at 88 per cent, and informal workers at
59 per cent. Formal workers believe that, on average, 8.4 chapters (of a total of 10)
of the Labour Code are fully enforced, while informal workers give 5.1 as the
estimate. The difference is significant, but so also is the role of informality in the
formal sector. These figures are simple averages, while the actual distributions of
informal relationships in formal and informal jobs are more complex and largely
overlaid.
Poor law compliance in Russia is clearly not a new phenomenon and has a
long tradition in the country’s history. The well-known saying ‘the stringency
of Russian laws is offset by their non-observance’ is attributed to the Russian
satirist Mikhail Saltykov-Shchedrin (1826–89). He was not just a great writer but
also a vice-governor of one of the provinces and was, therefore, well informed to
comment on the subject. Non-observance of laws and rules is one of the key ele-
ments of the flexibility that allows the Russian labour market to adjust to shocks
today and, therefore, to perform relatively well. Given the current trend to over-
regulation followed by the Russian government in all major spheres of life, such
non-observance becomes a challenge and simultaneously a well-embedded prop-
erty. In the early 2000s, the Russian authorities announced far-reaching plans to
bring ‘more law and order’ into all areas of economic life, including the labour
market. In the context of these measures, for example, the non-payment of wages
on time became a serious crime punishable by imprisonment. This helped curb
the wage arrears epidemic but brought little adherence to the law in other areas.
On the contrary, firms began to seek ‘refuge’ in less regulated and not so well-
monitored areas.
Conclusions
The expansion of labour market informality poses several political challenges,
which are all intrinsically intertwined. Though labour market informality in
Russia is increasing, it has not yet become a problem of the scale facing many
Latin American countries. However, this can hardly be a valid argument for
ignoring it completely. Many Latin American countries have been trying to
reduce informality, while Russia seems to be moving in the opposite direction.
The rate at which informality is expanding says more about the problem than
the current 20–30 per cent of total employment being accounted for by infor-
mal workers. If informality tends to crowd out formality, it can be concluded
that job creation in the formal sector faces tough constraints and barriers. As it
appears, much of the adjustment in the Russian labour market comes from the
informal sector, which is able to expand and react quickly, while the formal
sector appears to be overregulated and semi-frozen. This makes the issue of job
creation in formal and informal sectors both an economic and a political chal-
lenge. It is economic since it affects growth and productivity, and it is political
since it relates to the whole set of institutional conditions within which firms
are functioning.
The second challenge concerns the ‘quality’ of informality. Our study sug-
gests that wage opportunities in the Russian informal sector are by and large
comparable to those in the formal sector. This – together with the fact of
large cross-sectional flows – paints a picture of a rather integrated, not a
strongly segmented, labour market. A better account of the non-wage charac-
teristics of jobs would probably add benefits and gains to the formal sector in
its competition with the informal sector, though this would hardly change the
main conclusion. However, this relatively benevolent picture is not a given
forever. If informality continues to expand, then segmentation may become
more emphasized, with stronger implications in terms of growing poverty
and inequality. These implications are obviously not politically and socially
neutral.
The third challenge relates to human capital. Modern economic growth is based
on human capital, while informality is not a fertile ground for its accumulation
and efficient utilization. Much lower productivity in informal jobs represents the
underutilization of education and skills. If workers entering informal jobs are
already well equipped with human capital, they face a high risk that much of that
will be in little demand. If they enter their working life earlier, with few skills,
they are unlikely to acquire many more skills later on. Whatever the reason, it is
likely in future that an increasing proportion of the labour force is stuck in a low
human capital-intensive economy.
Finally, the fourth challenge deals with the endogenous interaction of informal-
ity and regulations, which goes both ways. Since most regulations are introduced
and enforced by the state, this challenge is undoubtedly political. Informality
emerges as a direct reaction to regulatory failures when regulations are excessive,
while the state has only low capacity to enforce them. In such situations, politi-
cians are often prone to introduce still more regulations, thereby contributing to
further de-formalization. The vicious circle turns into a reality, while the chances
for breaking it become slimmer.
Notes
1 Support from the Basic Research Program of the National Research University
Higher School of Economics is gratefully acknowledged. The authors thank Fabian
Slonimczyk.
2 The unemployment benefit replacement ratio in the EU-15 is close to 50 per cent and
in the Central and Eastern European countries, it is around 25 per cent (Lehmann and
Muravev 2011).
3 In 2010, the rates for social contributions were raised again.
4 More on RLMS see www.hse.ru/en/rlms/.
5 The discussion on earnings is based on Gimpelson et al. (2014).
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4 State–business relations in
Russia after 2011
‘New Deal’ or imitation of changes?
Andrei Yakovlev1
After the 2008–9 crisis, the Russian government began to pay much more atten-
tion to the improvement of the country’s investment climate. Since then a wide
range of important practical steps have been taken in this sphere, including the
introduction of a regulatory impact assessment in 2010 and the establishment of
the Agency for Strategic Initiatives in 2011. In February 2012, Vladimir Putin
announced the ‘100 steps programme’, whose aim is to move Russia’s ranking
up from 120th to 20th in the Doing Business rating compiled by the World Bank
and also to establish a post of Presidential commissioner for the rights of entre-
preneurs. That announcement was followed by the development of road maps
to simplify getting access to electricity and obtaining construction permits, the
change of customs regulations, and the promotion of exports. In September 2012,
a special presidential decree was passed concerning governors’ activity evalua-
tions regarding the business climate in their regions.
Can these changes be regarded as a ‘New Deal’ in the government’s policy with
respect to business, akin to President Franklin Roosevelt’s introduction of the
New Deal following the Great Depression of 1929–33 in the United States? Or is it
rather an imitation of changes designed to weaken the possible protest sentiments
among entrepreneurs after mass-scale opposition rallies against the malpractices
of the parliamentary elections in 2011? In this chapter, we will find answers to
these questions relying on the model of limited access orders developed in the
latest works of Nobel Prize Winner Douglass North2 and his co-authors.
In the first section, I characterize the main features of this new theoretical
model and map out the general logic of its possible application to the Russian
transition economy. I then use the terminology of this model to show the evolu-
tion of state–business relations in Russia before the 2008–9 crisis. The chapter
then considers the consequences of the global financial crisis, its impact on the
distribution of rent flows, and changes in the policy towards business. I then
analyse the views of opponents of these policy changes and show the reasons for
internal contradictions of the economic policy, causing a slowdown in economic
growth and a cut in investment. The main conclusions are formulated at the end
of the chapter.
60 Andrei Yakovlev
Concept of ‘limited access orders’ and its
applications for Russia
The fact that business conditions in Russia are unfavourable has been discussed for
a long time (Puffer et al. 1998; Hellman et al. 2003; Kuznetsov and Kuznetsova
2003; Yasin et al. 2006; Golikova et al. 2007). However, the Russian authorities
have recently begun to make visible efforts to change the investment climate.
What caused the turnaround toward business, and why had it not happened ear-
lier? To answer that question, it would be useful to consider the situation in Russia
from the point of view of a new concept formulated in the latest works of Dou-
glass North and his co-authors (North et al. 2007; North et al. 2009; North et al.
2013). In these works they argue that, in general, any active individual faces two
options – he can either try to earn his bread through some kind of productive activ-
ities, or he can make an attempt to take away something his neighbour has earned.
The second option has destructive implications because the net gain of a winner in
an armed conflict is always smaller than the total losses of the losers. In addition,
violence curbs opportunities for development because the threat of a compulsory
waiver of earned incomes lowers the incentives for productive activity. Thus the
limitation of the risks for violence is optimal from the social welfare point of
view, but it can act against the interests of individuals with a violent potential.
According to North and his co-authors, the resolution to this problem is related
to the emergence of organizations, which defend their members against external
violence and, at the same time, impose sanctions on those members who break the
established rules of internal cooperation.
Historically, the first organization of this type was a clan (kin, tribe) headed by
a military leader. However, the appearance of clan-type or tribal communities did
not resolve the problem of violence; rather, it shifted it to another level, where
clashes and conflicts occurred not between individuals but between clans. And
here appeared the need for the emergence of the state as a mechanism to limit and
control violence. North and his co-authors define the social system that emerges at
this stage as a ‘natural state’ or ‘limited access order’ (LAO). In its initial phases,
a natural state is a system of personal agreements between ‘specialists in violence’
who head individual clans and form the elite of a future state. For a leader of an
individual clan, the non-use of force is reasonable, if he and his crowd regularly
get sufficient compensation or receive a rent. For this very reason, barriers to
access to economic activity, which generate rents for influential social groups,
become an essential condition for the existence of a natural state. Equally essen-
tial is the limitation of access to political activities, which makes it possible to
support rent-making rules of the game.
However, such a social system proves fragile because it is based on personal
privileges for ‘specialists in violence’, and any change in the balance of power
between them becomes an occasion for a revision of a formerly achieved agree-
ment on the ‘non-use of force’. In this context, North and co-authors emphasize
that, contrary to the standard belief shared by many scholars, the monopoly of the
state for legitimate violence in the historical context is an exception rather than a
State–business relations in Russia 61
rule. In the contemporary world, this exception exists only in the most developed
countries where the consensus of elites in the framework of democratic institu-
tions provides conditions for the exercise of centralized political control over mil-
itary forces and law enforcement agencies. North and his co-authors define these
societies as ‘open access orders’ and stress that the transition from limited access
to open access is a key element of social progress and a key challenge for human
history. The very first step of this transition is related to a shift from personal priv-
ileges to a system of impersonal rights, which are guaranteed, in the first place, to
the elite, and only later, to wider groups of citizens. In this context, ‘the rule of law
for the elite’ is the precondition for social stability and economic development. In
addition, two further preconditions are important for the shift to the open access
order: the rise of economic and political organizations that are independent of the
state, as well as of their direct founders. North et al. (2009: 23) define them as
‘perpetually living organizations’, and formations of mechanisms for collective
political control of the application of violence by the elites.
A sharp reduction in rent gives grounds for the revision of agreements and
changes in the ruling coalition. When there is a decline in the levels of rents, elites
either start a ‘war against all’ again or attempt to reach a new agreement. The lat-
ter outcome is more probable if the ruling coalition is comprised of a wide vari-
ety of social groups, which are capable of solving the problems faced by society.
Thus, social and economic development may be considered to be the process of the
gradual extension of access to economic opportunities and political activity, as the
involvement of new participants results in greater stability. The stability of the rules
is especially important in the context of shock impact – when a country faces eco-
nomic crises, or social or political shocks. This theoretical approach was selected for
analysis because, in my opinion, it explains the realities of the social and economic
development in countries such as Russia much better than mainstream economic
theory. According to the standard approach, the main problem of emerging econo-
mies is their insufficient efficiency caused by a lack of competition and barriers to
new market entrants. At the same time, the lack of market competition is explained
by a lack of competition in the political sphere. Proceeding from this logic, the
recommendations of international financial institutions concerning reforms in the
early 1990s included privatization, liberalization, and democratization. All of these
measures did actually increase the access to economic and political activity for new
players and created favourable conditions for raising economic efficiency.
However, the removal of barriers also diluted rent sources, which had formed
the basis for the existence of the ruling coalition, and thereby presented the groups
that possessed the potential to use violence with an incentive to use such force.
For this reason, in many developing countries, liberal and democratic reforms
were accompanied by crime waves, serious social conflicts, and even civil wars.
In the economic sphere, this violence assumed different forms – from racketeering
businesses, the illegal capture of attractive assets and assassinations of competi-
tors to the deliberate ruin of those firms whose owners were not loyal toward the
‘ruling coalition’. Such violent pressure on business has destructive implications
for economic development as it destroys all incentives for investment.
62 Andrei Yakovlev
This violence can be stopped and, consequently, motivations be created for
productive entrepreneurship, to use the term coined by Baumol (1990), only if
an agreement is reached between the key elite groups on new mechanisms for
generating rent and its distribution among the participants of the ‘ruling coalition’.
Bureaucracy, including the police and the army, controlling the means of state
coercion, and business investing (or not investing) capital in national economic
development represent key elite groups in ‘limited access orders’ Hence, I will
hereinafter try to understand the way in which the format of relationships between
bureaucratic and business elites was changing in Russia, and how sustainable and
productive the present round of negotiations between them will be. In this analysis
I use a schematic description of the main stages of evolution of the state–business
relations, presented in Table 4.1.
Table 4.1 shows the composition of the ruling coalition for each period, its main
sources of rent that support it, and the wider groups constituting its social basis.
A separate column is devoted to factors predetermining the movement from ‘state
capture’ in the 1990s to the dialogue of the early 2000s, the subsequent change
of the model for ‘business capture’ with the active participation of members of
the law enforcement agencies (siloviki) in the mid-2000s, and the resumption of
dialogue after the crisis of 2008–9.
Evolution of state–business relations before the 2008–9 crisis

It has been well established in the literature that the size and stability of rent flows
are the essentials of the Russian economy and determine the relationship between
society, the development of institutions, and economic dynamics (Åslund 1996;
Boone and Rodionov 2002; Åslund 2004; Gurvich 2010). In the 1990s, the main
sources of rents were privatization, an enormous difference in the prices for the
same goods on the domestic and world markets, and domestic and international
borrowing (Table 4.1). The key players were the federal and regional bureaucra-
cies and oligarchic businesses. However, all of the sources of rent were largely
temporary. By the second half of the 1990s, the most attractive assets had been
privatized, the difference between domestic prices and world market prices for
consumer goods and raw materials had begun to disappear, and the Russian debt
burden had reached a critical level. Meanwhile, the lack of agreements among
elites regarding a mutual consideration of interests and the non-observance of
uniform rules led to chaos and entailed widespread non-payments and a perma-
nent redistribution of property. Such a ‘virtual economy’ could not last long and it
collapsed in August 1998.
The default on short-term state treasury bills (‘GKO’) and the sharp devalua-
tion of the rouble did not only become an economic shock, but also led to serious
political changes when, for the first time since 1991, the government included rep-
resentatives of the Communist Party.3 As a result, the 1998 crisis became some-
thing of a ‘cold shower’ for the new Russian elite. The largest losses from the
crisis were inflicted on the middle class. Nevertheless, representatives of the elite
understood that in the event of another social cataclysm, they could lose both their
Table 4.1 Main periods in the evolution of state–business relations in post-Soviet Russia
Period Composition of Main sources of rent (formal and informal) Social base of regime Causes of break in elite pact
ruling coalition*
1992–8 Big business, Super profits from export and import due Small business mostly in Exhaustion of the sources of rent of the
federal to gambling on the difference between trade and services – due to ‘transitional period’ (as they were all
bureaucracy, domestic and international prices; price liberalization and the temporary), aggravated by the 1997
regional privatization proceeds; super profits on absence of any enforcement ‘Asian’ crisis  deep monetary and
bureaucracy + the government bonds market (similar to of regulation financial crisis in August 1998
criminal groups financial pyramids at that time); technical
assistance and loans from international
financial organizations
1999–2003 Federal Growth in profits of business and tax Economically active Commenced growth in world prices of
bureaucracy & revenues based on the increase of import population and business energy sources and struggle for the
big business + barriers and the reduction of exporters’ in the real sector of the control over natural rent between the
siloviki costs as a consequence of a dramatic economy – owing to federal bureaucracy and big business
devaluation of the rouble, and on the wage increases and the  the YUKOS case symbolizing
strengthening of the law enforcement opportunity to work for the political defeat of big business
system growing domestic market
2004–8 Siloviki & federal Growing budget earnings from oil export + Managers and employees The 2008–9 crisis accompanied
bureaucracy + informal expropriation of part of the of enterprises and by a sharp increase in the social
big business + proceeds of successful small and medium organizations subsidized budget spending and the decrease
state owned businesses by siloviki or financed by the state in the amount of rent available
enterprises (hospitals, universities, for distribution  prevalence of
schools, the agro-industrial short-term interests within the elite
complex, the defence striving to ‘have all rents just now’
sector) + pensioners
2009–… Siloviki, federal Continued (albeit no longer growing) Military personnel and law Upset balance, where the amount of
bureaucracy + budget proceeds from oil export – against enforcement officers, rent in the long-term is insufficient
state owned the backdrop of drastically increased workers of the public to finance the liabilities of the ruling
firms + big social and defence expenditures and sector and state-owned coalition
business deceleration in economic growth enterprises, pensioners
Note: *Bold depicts the elite group dominant in the ruling coalition.
64 Andrei Yakovlev
status and their assets. The awareness of that threat motivated different groups of
elite to negotiate the new agreement, which created the conditions for economic
development – including a very radical tax reform, at that time characterized by
US newspapers as a ‘tax revolution’ (Wall Street Journal 2002).
The period of 1999–2003 is interesting because during this time the state
attempted to create new organizations for the collective representation of busi-
ness interests, and it adhered to the rationale of North’s concept. In particular, the
Russian Union of Industrialists and Entrepreneurs (RSPP), the largest and most
influential business association, which had been established by Arkady Volsky
in 1990, was reformed. Initially, RSPP united directors of large state-owned and
privatized enterprises, but mostly it did not include representatives of new private
companies. As stressed by Hanson and Teague (2005), in the 1990s, RSPP was
in opposition to the government. In 2000, the RSPP management structure was
reorganized and the Bureau of RSPP Board was set up, which was comprised of
owners of all the largest private and state-owned companies. From the summer of
2000 onwards, meetings of Russian President Vladimir Putin with the Bureau of
RSPP Board were held two times a year, where the problems facing business and
governmental initiatives in economic policy were discussed. Although no formal
decisions were made at such meetings, they were objectively extremely important
for the coordination of plans on both sides – the state and big business. These
meetings undoubtedly facilitated the development of a more adequate economic
policy and reduced uncertainty and risks facing businesses.4
Along with the reform of RSPP in 2000–1, two new all-Russian business asso-
ciations were established: OPORA of Russia represented the interests of small
business, and Delovaya Rossiya (Business Russia) represented the interests of
medium-sized business. These associations’ activities led to reforms aimed at the
reduction of administrative barriers to small business – including the simplifi-
cation of registration and licensing procedures and the reduction of the number
of supervisory bodies’ inspections. In addition to the previously mentioned tax
reform,5 alterations were conducted in the customs regulation system, such as
the unification and reduction of customs tariffs. On the whole, all those measures
resulted in a noticeable legalization of Russian business and a significant growth
in the tax payments to the federal budget. The restoration of the capacity of the
law enforcement system led to a suppression of criminal activity and crime bosses
were squeezed out of business and politics. Thus, in Russia in the early 2000s,
there was a trend toward the maintenance of a dialogue between the state and
business, which created preconditions for economic development and a forming
of the ‘rule of law for the elite’ along the lines of North’s concept of ‘limited
access order’. However, since the mid-2000s, those tendencies have been explic-
itly reversed. What caused that turnaround?
In spite of all the positive changes of the early 2000s, certain grey zones still
remained in the relations between state and business. One of these concerned prop-
erty relations. The meeting of oligarchs with Vladimir Putin in June 2000 resulted
in an informal agreement between big business and the state according to which
big business would not interfere in politics and the government would not revise
the privatization results (Hanson and Teague 2005). However, that arrangement
remained on a strictly informal basis. Moreover, oligarchs understood property
guarantees as the right to obtain full income from properties, while the represen-
tatives of the top bureaucratic elite interpreted them differently. That ambiguity
became the ground for a revision of the arrangements when social differentiation
began to increase, and the rise in the global market’s oil prices entailed the occur-
rence of a new significant rent source.
It should be noted that rapid economic growth nearly always intensifies levels
of social differentiation. That process was also observed in Russia in the early
2000s when the gaps between rich and poor regions, different sectors, and social
groups began to increase. The federal bureaucratic elite perceived that tendency
as dangerous, because the maintenance of social stability was one of the funda-
mentals of the existing political regime. As a result, the state needed additional
resources to decrease social differentiation. Therefore, by introducing a new min-
eral resources extraction tax, the state tried to redistribute oil export earnings in
its favour. Big business resisted the tax because such policy was perceived as an
encroachment on its profits. The business resistance (most evident on the part
of the largest Russian oil company, Yukos) became apparent in stonewalling,
through ‘friendly’ State Duma deputies, a number of bills initiated by the govern-
ment and in financial support to opposition parties, including CPRF and Yabloko.
Nevertheless, the power balance between the state and business had already
changed by that time (Hanson 2005; Sakwa 2009). The top members of the
bureaucratic elite brought about the de facto nationalization of Yukos and sent
its former owners to prison by relying on members of the security services and
law enforcement agencies (siloviki) as part of building a power vertical. Criminal
cases initiated against the owners of Yukos were obviously a selective application
of the law, considering that almost all large companies used similar schemes of
tax optimization at this time. Nevertheless, as demonstrated by the results of the
2003–4 parliamentary and presidential elections, the public broadly supported the
state actions against Yukos (Yakovlev 2006). In my opinion, this support derived
from the widespread feeling in society that the results of the privatization process
were unjust, a sentiment that had been ignored by big business.
This conflict led to the collapse of the relatively equal dialogue between the
state and business that took place at the beginning of the 2000s. In 2003–4,
this model was replaced by the undoubted dominance of the state. Big business
became a junior partner, subordinate to the state, and the top federal bureaucracy
and siloviki became the key players. During this period, the ‘state people’ believed
that they knew everything and had no need of any outside advice. Evidence of
this supreme confidence appeared after the resignation of Prime Minister Mikhail
Kasyanov’s government when the state adopted an active industrial policy
(involving creating the Investment Fund, and establishing special economic zones
and state corporations) and forced big business to secure state approval for all
international agreements.
Many liberal experts did not like this state-dominated model of capitalism
(see Ledeneva 2012). Nevertheless, it is necessary to admit that much of what
66 Andrei Yakovlev
the government did coincided with the interests and expectations of a significant
number of market players. For example, the restoration of a unified economic
space, which resulted from bringing the regional governors in line, was profitable
for most ordinary businesses. The same profitability was observed concerning
the relations between the government and large business. While it is possible to
support a variety of opinions regarding what was done to Yukos, most players
did not like the era of 1996–8, when economic policy was subordinated to the
interests of a few large business groups which had supported Boris Yeltsin in his
election campaign in 1995–6. Therefore, most business people perceived the new
dominating role of the state as the ‘lesser evil’.
One significant factor in support of this policy was that at the beginning of and
in the middle of the 2000s, the state primarily did what it had previously prom-
ised to the public. While one could disagree with the methods used to remove the
oligarchs from participating in politics or with forcing the regions into the ‘power
vertical’ system, the state set specific goals and subsequently implemented them.
As a result, people began to feel a degree of trust regarding the consistency and
predictability in policy, which led to the formation of positive expectations for
long-term social and political stability and encouraged active foreign investments
in Russia in 2006–7. Those representatives of the middle class who were unhappy
with the situation within the country had the opportunity to leave Russia, due to
the high demand for specialists in other countries. This migration allowed the
country to let off steam. Thus, the distribution of rent between different social
groups helped to keep the stability of Russian ‘limited access order’ and provided
few incentives for resistance.
The 2008–9 crisis and its consequences

The 2008–9 crisis demonstrated that the ‘power vertical’ created in Russia in
2000s is inefficient. Even before the crisis, this system had only worked when
signals from the top level met the interests and expectations of the people at lower
levels of the bureaucratic hierarchy. At the same time, a serious built-in defect of
that model was the asymmetry in passing information signals, which is typical
for large hierarchical systems: the lower-level bureaucrats readily reported their
success, but were in no hurry to inform the higher authority about problems or
failures in their areas of responsibility. During the crisis, it became clear that the
authorities knew far from everything about what was happening and only had
limited capability to take action.
In particular up to the late autumn of 2008, the government leaders appearing
on the central TV channels were telling the audience that Russia’s problems with
the stock market and the banking sector were only the fallout from the bankruptcy
of leading American financial institutions. As early as the summer of 2008, how-
ever, large firms in the metallurgy and chemical industry sectors came across a
sharp drop in demand and prices on global markets, and in August–September,
they started to put workers on forced leave. And the government only initiated a
full-scale anti-crisis programme in December 2008. This late response led to an
increase in uncertainty and a reduced confidence in the politics of the government.
Therefore, many company owners preferred to put their businesses on hold and
wait until the government clarified its economic policy. As a result, in 2009, the
Russian economy lost 8 per cent of its GDP, a figure that was out of line with
contemporary economic indicators. In contrast to the Eastern European countries
and Mexico at this time, Russia had no significant external debt, was not facing a
large budget deficit, and was not suffering from high inflation. What did cause the
downturn, however, were the contradictory signals from the government which
resulted in negative expectations regarding government policy.
The destruction of expectations happened not only among market agents but
also on the side of the state machinery itself. During the years of economic boom
of the mid-2000s, representatives of the bureaucracy and the siloviki initially
gained informal control over the cash flows of many entities in both the public and
the private sectors. Before the crisis, these representatives had expected to draw
dividends from that control for many years which, to a certain extent, decreased
the current corruption load on business. However, under sharply increased levels
of uncertainty, these people determined that it was more prudent to extract the
maximum revenue as quickly as possible, leading to increased corruption and the
exertion of violent pressure on businesses (Firestone 2010; Zhalinsky and Rad-
chenko 2011a, 2011b; Gans-Morse 2012). These changes provoked businesses to
respond with an intense capital outflow from the country.
Finally, the crisis also induced a change of mood in society. Well-educated
middle-class professionals, who did not accept life under the ‘managed democ-
racy’ and who could earlier have considered the possibility of emigration, now
observed that because of the global crisis, there had been a decline in demand
for their services in developed countries. This meant that they and their children
would have to continue to live in Russia. Therefore, it is possible to view the mas-
sive protests against electoral fraud at the end of 2011 as a result of the crisis: the
protests represented an outburst of accumulated social tension, which in earlier
periods would have resulted in emigration.
However, despite all sceptical points listed above, the crisis did have some
positive consequences. The theses about modernizing the economy announced
by President Medvedev in 2008 and the series of reforms conducted in 2004–8
(including the reform of public procurement in 2005–6, the decision to force pub-
lic employees to declare their income, and others) demonstrate that the authorities
did understand the need for change. However, before 2008, in the absence of
significant pressure from outside or below (from non-elite layers of society), the
ruling coalition was not ready to change the rules of the game or impose limits
on the elite.
The 2008–9 crisis and the resulting changes in the world market led to an
increased pressure on Russian authorities. Initially, that pressure came from
outside – due to a reduction of the natural rent available for distribution and the
intense capital flight to countries with more favourable investment climates. How-
ever, the pressure later began to strengthen from the inside – due to the change in
expectations, a split among elites and the change of the public mood. As a result,
68 Andrei Yakovlev
the authorities began to adopt significant policy changes in reaction to domestic
and international pressure in the post-crisis period. As early as 2010–11 the gov-
ernment tried to seek feedback from the business community – with the focus on
medium-sized businesses, driven by the hope of integrating them into the social
base of the regime. Contrary to the widely held opinion, this group of Russian
firms is not small. According to a special project initiated by the Expert magazine,
by 2006 there were approximately 13,000 companies with an annual revenue of
between USD 10 and 400 million and the total sales of these firms were about 80
per cent of those of the large enterprises (Vinkov et al. 2008; Yudanov 2010).
Moreover, the medium-sized enterprises have the greatest growth potential, a fact
that has motivated the new focus of governmental policy (Yakovlev et al. 2010;
Kuznetsov et al. 2011). At the same time, because they lacked sufficient politi-
cal connections, this group of firms became an object for violent pressure from
bureaucracy and law enforcement structures. Before the crisis, the side effects of
the bad business climate had been compensated for by high profitability, but when
high margins no longer existed, business barriers remained in place.
The first signs of this change in policy toward the interests of medium-sized
business were important amendments to the Criminal Code and Criminal Proce-
dure Code adopted by the State Duma in 2009 and being implemented in 2010.
These amendments restricted the pre-trial arrests and other applications of crimi-
nal sanctions on entrepreneurs (Firestone 2011). In May 2010, following the best
practices of European countries, the Russian government introduced the Regu-
latory Impact Assessment (RIA). This is the procedure that stipulates that drafts
for federal laws, decrees of the Russian President, and resolutions of the Russian
Federal Government should be analysed for exposure of provisions, which:
(a) introduce excessive administrative limitations for entrepreneurs; and (b) make
entrepreneurs and budgets at all levels of the fiscal system of the Russian Federa-
tion involved in groundless expenditures. The key elements of the RIA procedure
are public hearings, with the spokesmen of leading organizations representing
interests of the business community.
Initially, the RIA procedures functioned solely on the federal level and were
applied to legislative acts concerning the organization and implementation of pub-
lic control, the setting of technical and quality standards, and the introduction of
production safety requirements. According to the Ministry of Economic Develop-
ment of the Russian Federation, more than 1,700 legislative acts were evaluated
in 2010–12. In 2012, a decision was made to introduce the RIA at the regional
level, beginning in 2013, and also to extend the RIA to amendments to tax and
custom regulation.
The next step in the elaboration of the ‘new policy’ of the government can be
connected to two big analytical projects that were advanced in 2010. The first was
the ‘Doing Business in Russia’ project commissioned by the Ministry of Eco-
nomic Development to the World Bank, with the idea of comparing conditions
for starting businesses, registering property, obtaining construction permits, and
getting access to electricity in 30 regions (see also Chapters 5 and 6). The second
was the Russian BEEPS survey of 4,300 firms in 37 regions (including 30 covered
by the ‘Doing Business in Russia’ project). Taken together, these two projects
demonstrated significant differences in business climate conditions between the
Russian regions and identified a number of arguments for changes in the incen-
tives system for regional governments.
As stressed above, the 2008–9 crisis revealed the absence of feedback mech-
anisms in Russia’s public administration. The recognition of this fact led to the
search for new means of state–business interaction. One of these was the Agency
for Strategic Initiatives (ASI) established by the Russian government as an auton-
omous non-commercial organization in the summer of 2011. Putin is the chairman
of the ASI supervisory board. The officially declared goal of ASI is the ‘creation
of prospects for self-realization of young ambitious leaders who are able to lead
Russia to the front line in the world’. The Agency’s mission includes the pro-
motion of projects and initiatives advanced by fast-growing medium-sized busi-
nesses and social sector leaders, growth in the number of new leaders emerging
in medium-sized businesses and in the social sector, and a general improvement
of the overall business climate. To achieve these goals, substantial funds were
provided to the ASI, and the Agency was able to recruit onto its staff (which
amounted to about 150 employees) a number of qualified experts with business
experience. To monitor the effectiveness of its projects, ASI invited well-known
consulting firms, including the Boston Consulting Group.
The further tasks of the ASI were defined in Putin’s February 2012 campaign
statement and subsequent decrees on economic policy, which aimed, among other
things, to improve Russia’s position on the World Bank’s Doing Business rank-
ing from 120th to 20th place, and to change the way the governors and federal
agencies are evaluated. The practical result of ASI’s work was the development of
roadmaps for reducing barriers in getting construction permits, changing customs
regulations, stimulating exports, and introducing new standards for regional gov-
ernments’ activity to provide an attractive investment climate. In the summer and
autumn of 2012, these ‘road maps’ were approved by the government and became
obligatory for government offices. The ASI, in collaboration with 11 regions, has
realized a pilot project ‘Standard of business climate improvement at the regional
level’, based on the analysis of best practices shown by regional governments in
their investors’ relations. In September 2012, a presidential decree included indi-
cators of this standard in a system of gubernatorial activities evaluation.
Another important innovation in the field of state–business relations was the
establishment of the post of Presidential Commissioner for Entrepreneurs’ Rights
and the appointment of Boris Titov to this position in June 2012 (Financial Times
2012). According to the federal law adopted by the State Duma in April 2013, posi-
tions of commissioners for entrepreneurs’ rights were introduced in all regions of
the Russian Federation. As an ‘ombudsman for entrepreneurs’, in 2012–13 Titov
pushed a number of initiatives, including the re-examination of criminal cases
against entrepreneurs and a proposal about broad amnesty for entrepreneurs who
faced criminal prosecution in the 2000s. Both ASI and the office of the ombuds-
man for the entrepreneurs are working in close cooperation with leading business
associations. Their activities help to identify effective officials inside the present
70 Andrei Yakovlev
public administration, to establish horizontal links between them, and to dissem-
inate best practices. However, the ultimate effects of the activities of ASI and the
ombudsman for entrepreneurs will depend on the will and ability of the Krem-
lin to appoint and promote top-level officials according to their efforts to invite
investments and create incentives for economic growth, rather than by the criteria
of their political loyalty and personal commitment.
Who is against the ‘New Deal’ with business and

who supports it?
I cannot say that all these measures pushed by ASI or Boris Titov and supported
by the Ministry of Economic Development and the Ministry of Finance have
resulted in a real change in the business climate in Russia. Moreover, ASI experts
believe that regional governments and federal agencies have quickly learned how
to respond to the orders from above without there being any changes in the real
practice of interaction with business. However, the events of early 2013 indicated
that the absence of any effects in the new policy of relations with business is not
due solely to covert resistance at the middle and lower levels of the bureaucratic
hierarchy. There are influential groups in the Russian elite who, in principle, deny
any need to meet the interests of business and, on the contrary, insist on a tough-
ening of regulations and firmer control and supervision. These groups are rep-
resented, first of all, by the siloviki – including the Investigative Committee, the
Office of Prosecutor General, the Federal Security Service, the Federal Customs
Service, the Federal Tax Service, the Accounting Chamber of Russia, and a num-
ber of other agencies. By tradition, the top managers of a number of state-owned
companies and state corporations, including the president of the Rosneft Com-
pany, Igor Sechin, and the president of the Russian Railways, Vladimir Yakunin,
are also associated with the group of siloviki.
In the post-crisis period, the general consolidation of the positions of this group
of the Russian elite occurred for a number of reasons. First, the crisis aggravated
the issue of corruption. Having faced a visible toughening of the budget constraints
in 2009 and the subsequent years, the Kremlin and the Federal Government made
an attempt to curb the losses from corruption, which had expanded under the
period of state capitalism in the mid-2000s. However, the fight against corrup-
tion was conducted by strictly administrative methods – by relying on the stricter
formal control of spending of public funds and public procurement procedures.
Despite numerous criminal cases, this policy failed to bring about a decline in the
level of actual corruption – because under the superfluous and controversial sys-
tem of administrative regulations established in the 2000s, practically any Russian
public official who made decisions on the allocation of funds could be accused of
violating some regulations. Nevertheless, the anti-corruption campaign resulted in
a substantial rise in the influence of security and law enforcement agencies.
Second, the crisis of 2008–9 and the related uncertainty of economic poli-
cies led to substantial capital outflows from Russia. The government responded
directly with an attempt to carry out a stronger persecution of entrepreneurs for tax
evasion and the use of offshore accounts. Another argument in favour of tougher
administrative regulation and control was a number of accidents related to the bla-
tant violations of safety requirements by entrepreneurs, which had caused many
deaths. These additional pretexts for investigations became an additional way of
exerting ‘power pressure’ on business. In a certain sense, it gave rise to reciprocal
collective actions on the side of the business community, which started to lobby
for liberal amendments to the Criminal Code and the Code of Criminal Procedure,
changes in the practice of law enforcement, and the introduction of regulatory
impact assessment procedures.
Third, political protests in 2011–12 played a substantial role in consolidating
the positions of the siloviki. In particular, immediately after the mass protests
against electoral fraud in December 2011, the government announced a large-
scale expansion of financing the army, the Ministry of the Interior, and securities
services. In addition, criminal cases were opened against the most active represen-
tatives of the political opposition. In 2012, a law ‘On Foreign Agents’ (Federalnyi
Zakon 2012) was enacted in an attempt to impose substantial limitations on the
activities of non-governmental organizations (NGOs), and in the spring of 2013,
the Public Prosecutor’s Office launched a campaign to reveal the ‘foreign agents’
(see Chapter 10). Finally, the Investigative Committee instituted legal proceedings
against the experts who had conducted an independent assessment of the second
criminal case against the owners of Yukos Co. on behalf of the Human Rights
Council, under the president of the Russian Federation. In May 2013, these activ-
ities of the Investigative Committee forced one of Russia’s leading economists,
Sergei Guriev, to emigrate (New York Times 2013).
Such shifts in political life were accompanied by the development of an ideo-
logical grounding for the ‘mobilization scenario’. In this context, the activities
of the ‘Izborsk Club’, which was established in September 2012, deserve some
attention. The economists Mikhail Delyagin and Sergey Glazyev and the political
journalists Alexander Prokhanov and Mikhail Kalashnikov became key experts
of this new think-tank. The main propositions of the Club’s manifesto, prepared
in October 2012 and published in January 2013, include an accelerated develop-
ment of the defence industry, the positioning of the public sector as the ‘core’
of the national economy, and a requirement to renew and cleanse the national
elite (Izborsk Club 2013). The experts of the Izborsk Club believe that all these
measures are predetermined by the increased intensity of the geopolitical struggle
for control over resources. This struggle will lead to regional wars, larger wars in
Eurasia or Africa, armed interventions into many countries, especially those with
large unexplored resources (minerals, water, land) and a new world war cannot be
ruled out. The experts of the Izborsk Club name Peter the Great and Josef Stalin
as the main heroes of Russian history, and regard Stalin’s industrialization as the
model for the ‘project of mobilization’ today.
Since its very earliest activities, the Russian mass media has regarded the
Izborsk Club as a think-tank close to the Kremlin (Kommersant 2013a). It is worth
mentioning that public statements made by the vice-premier Dmitry Rogozin have
echoed many of the arguments of the Izborsk Club (Rossiiskaya Gazeta 2013).
72 Andrei Yakovlev
Statements of a number of experts from the All-Russian National Front made
after the Front’s convention in June 2013 are also close to the ideas of the Club
(Kommersant 2013b). However, it would be wrong to conclude that Russia’s top
political elite made its choice in favour of an anti-market ‘mobilization scenario’.
Pro-business policies do continue to be promoted. In particular, regardless of the
siloviki’s resistance, Vladimir Putin finally supported the project of amnesty for
entrepreneurs, which had been advocated by Boris Titov. In June 2012, Alexan-
der Galushka from Delovaya Rossiya (‘Business Russia’) became one of three
co-chairmen of the All-Russian National Front and in September 2013, he was
appointed Minister of Far East Development. In May 2014, Putin announced the
rating elaborated by ASI with the support of the Boston Consulting Group and
leading business associations that rank the investment environment for Russian
regions (Financial Times 2014).
Therefore, rather, we can say that at present the Russian elite is standing at a
crossroads. On the one hand, Russia is in acute need of modernization in order to
compete successfully with other developed and developing economies. Modern-
ization and improvements in the efficiency of resource deployment are the very
means for giving new incentives for economic growth, which the ruling elite needs
in order to maintain social stability and prevent political protests. The ‘new busi-
ness’ – successful medium-sized companies that grew up on the tide of the eco-
nomic boom in the 2000s – can become the driving force of this modernization.
These companies have strong teams of managers; they know the Russian market
and have sufficient financial resources. However, in order to realize their potential,
these companies need a competitive environment and the protection of property
rights. This implies, first, that the unlawful actions of law enforcement bodies must
be limited, and the independence of the court system must be guaranteed. In terms
of North and co-authors, such measures would mean ‘rule of law for the elite’ and
the expansion of access to business opportunities for new economic agents.
However, practical steps in this direction clash with the stance of the ruling elite,
which is fearful of political protests (with the ongoing concern that something on
the lines of an ‘Arab Spring’ could emerge in Russia). This fear constitutes the
foundation of the increasing influence of the siloviki, which began to exercise
dominance not only over business, but over the entire bureaucratic machine, state
corporations, and large-scale public sector organizations. This fear is the ‘culture
medium’ for projects of ‘new mobilization’ in the spirit of the Izborsk Club. And
although hardly anyone in the Russian elite in practice believes seriously that such
scenarios can guarantee a steady economic development, the very fact that they
are voiced in public, along with unlawful activities of law enforcement bodies,
produces very strong negative signals to business and the bureaucratic elite.
These signals, essentially, cancel out all effects of attempts to improve the
business climate. In particular, I believe, political reasons alone suffice to explain
the sharp deceleration of economic growth and the increase in capital flight from
Russia since the beginning of 2013. Moreover, these signals rouse negative expec-
tations not only in the business environment, but also in the state machinery
(including at its highest levels). The consolidation of law enforcement bodies in
the absence of a positive programme, which could take into account the interests
of the main elite groups, is understood as nothing more than an attempt of the rul-
ing elite to hold on to its power as long as possible – until an inevitable collapse
of this regime and a reiteration of the chaos of the early 1990s.
In other words, the Russian elite is facing a choice – either to carry out eco-
nomic modernization ‘from above’, relying on coercion from the centre, or to rely
on the incentives and initiatives of economic agents themselves. It is not the first
time in Russian history that this choice has been faced: let us remember the late
1920s and the period from the 1950s to the 1960s. However, the present phase has
a number of distinct features.
First, the composition of social groups that can be losers in a turn to the ‘mobi-
lization scenario’ is much wider. They are not only owners and managers of big
and medium-sized business, but also people from other elitist groups – including
the federal and regional bureaucracy, managers of state corporations, and public
sector organizations. Second, in the last twenty years, all of these actors have
acquired new and very important skills and knowledge – having had experience
of living in a market environment (however imperfect it is), in an atmosphere of
open information. Consequently, any attempt to ‘strengthen the reins of power’
can meet much more resistance in the elite. And strictly because people in the
elite have acquired new knowledge and experience, there are more opportunities
to find compromises in settlements, which can ensure the balance of political and
economic interests and prevent a reiteration of the year 1991.
In Russia, the choice of development scenarios will depend on how much the
present ruling elite will be able to look beyond its narrow interests and enter into
a dialogue with other elite groups, including not only business but also regional
elites and public sector entities. In turn, the readiness of the top elite to conduct
this dialogue will largely depend on whether the above mentioned wide social
groups will be able to reach an agreement about collective action and work out a
new unifying and pragmatic agenda.
Conclusion
In this chapter, we examined the evolution of state–business relations in Russia in
recent years from the point of view of the ‘limited access orders’ concept devel-
oped by North and his co-authors. In our analysis, we described the practical steps
taken by the Russian government to improve the investment climate in 2010–13
and tried to find an answer to the question of whether this turnaround was a man-
ifestation of the ‘New Deal’ in economic policy or, on the contrary, the imitation
of changes devised to cool off the voices of protest in the business community.
In my opinion, the government’s actions are not a mere imitation of changes.
The ruling elite needs sustainable economic growth, since the related increase in
the incomes of the population constitutes an important factor of social support of
the ‘limited access order’ that currently prevails in Russia. The rapid pace of eco-
nomic growth before the 2008–9 crisis was a result of increasing oil prices on the
world market. The crisis put a stop to the growth of Russia’s budget revenues from
74 Andrei Yakovlev
the export of primary commodities. Attempts taken by the government in the sec-
ond half of the 2000s to stimulate economic development by public investments
did not produce the desired results. Moreover, in order to maintain social stability
at the time of the crisis, the government has undertaken a radical increase in social
spending, which has restricted the opportunities for further economic growth.
In other words, the events of the 2008–9 crisis have once again shown that
sustainable economic growth, which was necessary to maintain the stability of
‘limited access orders’, was possible only on the basis of private investments.
However, a considerable improvement in the business climate was necessary
to resume the inflow of private investments. The acknowledgement of this fact
became the basis for the resumption of the dialogue between the state and business –
initially with Delovaya Rossiya, which represented the interests of successful
medium-sized business. According to the concept of North et al., this dialogue
and subsequent measures aimed at reducing the costs of doing business could be
interpreted as an attempt to extend the composition of the ‘ruling coalition’ and
provide broader access to economic activity for medium-sized businesses.
However, those measures did not produce the desired results, as the steps to
accommodate medium-sized business meant an actual limitation of informal
sources of rent for siloviki who, following the Yukos affair, became the leading
group in the ‘ruling coalition’. Moreover, the positions of siloviki became even
stronger following mass-scale protests against the disputed parliamentary elec-
tions in December 2011. As a result, the government was trying to take steps in
favour of successful medium-sized business without infringing on the interests of
the law enforcement bureaucracy, which led to the pursuit of an internally contra-
dictory policy course and insufficient trust from the business.
Therefore, measures to improve the investment climate cannot yet be char-
acterized as a ‘New Deal’ in state–business relations. This is because different
elite groups on the side of the state are still pursuing different interests and, on
the whole, the senior political elite lacks a coherent ‘vision of the future’ and
a relevant strategy for Russia’s development. The existence of such a strategy
supported by the main groups within the elite is a precondition for confidence in
economic policy and the resumption of investment and economic growth. The
participation of a successful medium-sized business in the development of such a
strategy could contribute to a strengthening the stability of ‘limited access order’
in Russia, but to date it is unclear whether the present participants in the ‘ruling
coalition’ are ready to take such steps.
Notes
1 This chapter is based on the results of the projects conducted by HSE Institute for Indus-
trial and Market Studies as part of the HSE Program of Basic Research in 2013–2014.
The author is grateful to Vladimir Gimpelson, Evsei Gurvich, Juuso Kaaresvirta,
Silvana Malle, Yakov Pappe, Thomas Remington and Tseren Tserenov for their com-
ments and suggestions. The assistance by Meagan Neil is gratefully acknowledged.
2 Douglass North was awarded the Sveriges Riksbank Prize in Economic Sciences in
Memory of Alfred Nobel in 1993.
3 Thus, Yuri Maslyukov became the first vice-premier in charge of economic policy and all
economic agencies in the government of Yevgeny Primakov. Before this appointment, he
was a notable CPRF figure, the former Chairman of the USSR Gosplan and a member of
the Politburo of the CPSU Central Committee. Another member of the CPRF fraction in
State Duma Gennady Khodyrev became the Minister for antimonopoly policy.
4 The Yukos affair in 2003 ended this practice of regular high-level consultations
between the government and big businesses.
5 With the simplification of the taxation system, the introduction of a flat income tax rate,
and regressive rates of the unified social tax.
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5 Is Russia an entrepreneurial
society? A comparative
perspective
Ruta Aidis
Over the past decade, Russia has imprisoned nearly three million entrepreneurs
(Kesby 2012). Currently, 7 per cent of Russia’s prison population are incarcerated
for business-related activities (Boyde 2013).1 Though we do not know why all
these entrepreneurs went to prison anecdotal evidence indicates that at one of
end of the spectrum, entrepreneurs are thrown into jail for minor transgressions
where perhaps a warning would have been a better approach. At the other end of
the spectrum, there are politically motivated, high-profile cases such as that
of Mikhael Khodorkovsky, arrested in 2003 and released in 2013. These types
of arrests create a situation of uncertainty where political action may take place
against entrepreneurs at any given time.
Nonetheless, this rather sobering statistic seems to have little effect on a con-
tinuous stream of entrepreneurial start-ups but, as this chapter will argue, it does
impede business growth and expansion which results in a stunted business envi-
ronment. According to the data collected by the Global Entrepreneurship Moni-
tor (GEM),2 6 per cent of the Russian population is engaged in business start-up
activities and 35 per cent of these start-ups are necessity driven. To put this into
an international context, in the US, 13 per cent of the population is engaged in
business start-up activities and 21 per cent are necessity driven, whereas in Swe-
den, 8 per cent of the population is engaged in business start-ups and 10 per cent
are necessity driven. Clearly, Russia has comparatively lower start-up rates and
a higher percentage of necessity-driven entrepreneurs. One future challenge for
Russia is to attract the best and the brightest opportunity-driven individuals to
become entrepreneurs.
Entrepreneurial societies have many benefits. Through business development
and growth, entrepreneurship is a job creator and can provide employment for a
broad group of individuals, but especially for skilled labour. Since entrepreneur-
ial innovation is unpredictable it promotes diversity – the winning idea, product
or service can come from any part of the population. Entrepreneurship can also
lead to democratization since it is based on ability and talent and promotes social
organization. It also leads to increases in productivity. However, the exercise of
creative talents in society can be disruptive and challenging to the status quo.
Fostering an entrepreneurial society is an additional challenge of Russia given its
78 Ruta Aidis
rigid political and economic system which has favoured oligarchical development
to the detriment of innovative activity through entrepreneurship.
This chapter is structured as follows: the first section discusses the formation
of the entrepreneurial society while the second section presents some of the cur-
rent initiatives for entrepreneurship development in Russia. The chapter then pro-
vides a comparative analysis of entrepreneurship development in Russia using the
results of the 2013 Global Entrepreneurship and Development Index (GEDI) as
well as the 2013 Gender-GEDI results which focus specifically on female entre-
preneurs. In addition, I analyse the conditions and characteristics for start-ups in
Moscow using the Startup Ecosystem Report. Following this, I present the specific
strategies adopted by Russian entrepreneurs and then discuss the four main chal-
lenges to business growth and development. This chapter ends with a concluding
section.
The formation of an entrepreneurial society

Entrepreneurship is a very broad term that is used to define an equally broad
range of activities. For the purposes of this chapter, we define entrepreneurship as:
(1) the ability of individuals to perceive and create new economic opportunities
through innovative activity; (2) to introduce their new ideas to the market (facing
uncertainty and risk); (3) as a result to establish a viable business that contributes
to national economic growth and personal livelihood (adapted from Thurik and
Wennekers 1999). The entrepreneurial society is made up of individuals acting
within the constraints and opportunities provided by the context, which is made
up of both formal and informal institutions. In many advanced market economies,
it is possible largely to ‘ignore’ the impact of institutions where, for the most
part, market institutions are present and functioning. However, there is a growing
recognition in the literature of the importance of the institutional environment
for entrepreneurship. In 1993, Douglass North received the Prize in Economic
Sciences in Memory of Alfred Nobel3 for his contributions to understanding how
economic and political institutions change over time. He stressed that economic,
political and social factors must be taken into account if we are to understand the
development of those institutions that have played a role for economic growth
and how these institutions have been affected by ideological and non-economic
factors.
The work of North4 has been illuminating in its identification of different insti-
tutional influences on economic development. Institutions are defined as any form
of constraint that human beings devise to shape human interaction. North makes
a clear distinction between formal and informal institutions. Put simply, formal
institutions are the visible 'rules of the game' such as constitutional law, which can
be altered quickly to adapt to changing economic circumstances. Moreover, formal
rules are generally enforced by governments. In contrast, informal institutions are
the invisible 'rules of the game' made up of norms, values, acceptable behaviours
and codes of conduct. Informal rules tend not to be legally enforced. Change to
informal rules occurs more indirectly and usually as a result of accidents, learning,
Is Russia an entrepreneurial society? 79
natural selection and, most of all, the passage of time (North 1990: 88). Informal
rules most often evolve to complement formal rules. North has also identified the
often conflictual role between formal and informal institutions in both the historical
perspective and in transition economies. Within North’s framework, organizations
such as firms – existing or potential ones – will adapt their activities and strategies
due to the opportunities and limitations in the formal and informal institutions.
Institutional development can be intentionally affected by organizational players
such as entrepreneurs (North 2005).
Interestingly, institutions can be maintained over long periods of time, even if
they are inefficient (DiMaggio and Powell 1983; North 1990). There are several
reasons for inefficient institutional outcomes. First of all, even when they clash
with new formal rules, informal rules have a tenacious ability to survive because
they have become embedded in habitual behaviour (that is, culture) and informal
institutions provide a sense of stability. Second, informal institutions may change
more slowly due to the influence of path dependence. Though the past cannot be
used to neatly predict the future, pre-existing incentive structures in the environ-
ment can illuminate the direction in which institutions affect further economic
development. This occurs because institutional change is usually incremental and
is seldom discontinuous (North 1990: 10). As a result, unproductive paths may
persist and, in that sense, history matters. Thirdly, lock-in can occur as a result
of a symbiotic relationship between existing institutions and organizations that
have evolved as a consequence of the incentive structure provided to those insti-
tutions. Even when there are changes in the formal rules, organizations which
benefitted from the outdated informal rules and which would lose their benefits if
they adopted new informal practices complementary to formal rule changes will
continue to participate in detrimental informal rule practices in order to retain
their position of power. Fourthly, when formal and informal institutions clash, as
in the case where formal rules are changed but informal rules have not changed,
noncompliant behaviours proliferate and this can result in the formation of under-
ground economies (Feige 1997: 22). North's emphasis on the influence of formal
and informal rules and institutions on economic outcomes is relevant for emerging
economies such as Russia (Aidis and Estrin 2013).
If the institutional framework rewards piracy then ‘piratical’ organizations will
come into existence; and if the institutional framework rewards productive activi-
ties then organizations and firms will come into existence to engage in productive
activities (Baumol 1990). In the case of Russia, the oligarch model of wealth
creation and industry domination has created a culture where rules do not apply to
the well-connected and powerful but are applied indiscriminately to those who do
not enjoy this special status.
A considerable literature argues that weak institutions, notably the quality of
the commercial code, the strength of legal enforcement, administrative barriers,
extra-legal payments and the absence of market-supporting institutions, represent a
significant barrier to entrepreneurship (McMillan and Woodruff 1999, 2002; Djan-
kov et al. 2004; Aidis et al. 2008). In a study comparing new firms in Poland, Slo-
vakia, Romania, Russia and Ukraine, Johnson et al. (2000) establish that insecure
80 Ruta Aidis
property rights, in addition to weaknesses of macroeconomic stability and adequate
financing, inhibit the development of the private sector.
Important institutional influences on entrepreneurship include social norms
and values (informal institutions). They determine access to critical resources
such as education and access to markets. In addition, formal institutions create
the legal framework and business regulations and they also affect the rule of
law. But well-functioning institutions, no matter how strong, cannot substitute
for individual drive and aspirations for entrepreneurship. Therefore the two basic
components of the entrepreneurial environment are (i) individual entrepreneurial
motivations, activities and characteristics and (ii) informal and formal institutions.
As shown in Chapter 2 of this volume, Russia’s resource-driven economy and
its overreliance on oil exports is an impediment to the development of an entre-
preneurial society – resource-driven economies in general have little incentive to
embrace ‘disruptive’ activities. Rather they tend to go hand in hand with a ruling
elite, monopolistic behaviour and the unequal distribution of access to resources –
in other words, they tend to be resource-rich but innovation-poor.
Improvements for SME development in Russia

Since coming to power in 2000, President Putin has focused on growing the state-
owned conglomerates, giving them tax breaks and encouraging them to expand.
Entire industries, including banking and transportation, have become dominated by
state-controlled companies, which at present account for at least 50 per cent of the
Russian economy (Vasileva 2013). The development of small and medium-sized
firms (SME) was not prioritized, was often criminalized and was not seen as an
important contributor to Russia’s economic development. However, during Pres-
ident Medvedev’s rule (2008–11), several new initiatives were created to address
the problems in the Russian business environment. In order to address the lack of
funding, in 2007 the Russian government established the venture capital company
Rusano, whose mission was to invest in niche companies operating in the nano-
technology domain. So far it has invested USD 6.3 billion in more than 100 firms
within and outside Russia. In 2011, the Agency for Strategic Initiatives (ASI) was
created specifically to improve the conditions for entrepreneurship, facilitating dia-
logue between business and government and promoting business-friendly reforms.
A year later, in 2012, the government appointed Boris Titov as an ombudsman to
safeguard the rights of entrepreneurs. The creation of industrial parks has been
one of the most effective business development initiatives in Russia. According
to Ernst and Young’s Entrepreneurship Barometer, 32 per cent of entrepreneurs
surveyed in Russia currently use or have used business incubators, compared to the
G20 average of 21 per cent (Ernst and Young 2013). This is a positive sign that new
initiatives are taking root in supporting and helping new business development.
Moreover, in 2013 the Russian government allocated USD 200 million govern-
ment-backed financing to invest in internet start-ups (ibid.). Russia has also made
some improvements to business regulations as measured by the World Bank’s Ease
of Doing Business Index. In the 2013 Index, Russia climbed 19 places to be ranked
92nd out of 189 countries and is now the leader for BRIC5 countries (see also
Chapter 6, Table 6.2 in this volume).
Russia has been active in raising its international profile for entrepreneurship.
In March 2014, it hosted the 3rd annual Global Entrepreneurship Congress in
Moscow. The Global Entrepreneurship Congress is an interdisciplinary gathering
from around the world where entrepreneurs, investors, researchers, thought lead-
ers and policymakers work together to help bring ideas to life, drive economic
growth and expand the development of entrepreneurship. Improving regulations
and access to funding as well as building incubators and innovation parks are
important, but do not address the most fundamental and detrimental issues affect-
ing Russian businesses. In a survey of 6,000 businessmen conducted by OPORA6
in 2012, 42 per cent of the respondents reported ‘severe difficulties’ in starting a
new company. Corruption is often cited as the underlying cause: 27 per cent added
that frequent inspections by regulators led to bribes being paid (Vasileva 2013).
In addition, as mentioned earlier, the threat of criminal prosecution is another
continuing problem for Russia's businesses. The combination of corruption and
the potential for prosecution creates tremendous uncertainty in Russia’s business
environment.
Comparative GEDI analysis of Russia

The Global Entrepreneurship and Development Index (GEDI) is a diagnostic tool
used to distil the complex relationship between individuals, institutions and entre-
preneurship into clear and implementable results (Acs et al. 2013). Countries are
ranked according to their identified strengths and those areas where improvements
are required. Pairs of institutional and individual variables form pillars that are
further divided into three main subindices. Tables 5.1, 5.2, and 5.3 provide com-
parative insights into Russia’s strengths and areas that are in need of improvement.
Russia ranks in 69th place out of 118 countries in the GEDI 2013 index, with
an overall score of 0.23. Table 5.1 shows the three top strengths and the three
top areas for improvement for Russia and also the other three BRIC countries.
Russia’s main strengths include the fact that many of its start-up business owners
are college educated and that its population is generally well educated. A criti-
cal feature of a start-up with high growth potential is the entrepreneur’s level of
education (Bates 1990). It is widely held that entrepreneurs with higher education
degrees are more capable and willing to start and manage high-growth businesses.
Russia also boasts a large domestic market. The main areas for improvement for
Russia are the low levels of informal investors,7 the low levels of exporting start-
ups and the high levels of corruption. Informal investors are an important source
of financing since they provide an alternative and often more flexible financing
for businesses than do banks or other formal institutions. The low number of
exporting start-ups is unsurprising given the size of Russia’s domestic market. Yet
moving into foreign markets is a critical step for growth-oriented businesses and
offers important scope for innovation. When we compare the three main strengths
and areas for improvement in Russia with the other BRIC countries, there are
82 Ruta Aidis
Table 5.1 The BRIC countries compared using the GEDI 2013 results
Country Rank Strengths Areas to improve

Russia 69 • High level of college-educated • Few informal investors*
business owners • Low levels of exporting
• Highly educated population start-ups
• Large domestic market size • High levels of corruption
Brazil 72 • Large domestic market size • Few informal investors*
• Entrepreneurship is considered • Low levels of exporting
a good career choice with high start-ups
social status • Low level of start-ups
• Risk acceptance by the general introducing new products or
population services
China 59 • Large percentage of the • Low percentage of start-ups
population say they know an active in the technology sector
entrepreneur • Low levels of exporting
• Most markets are not start-ups
dominated by only a few firms • Few start-ups are active in
• Risk acceptance by the general markets where there are few
population competitors selling the same
product
India 89 • Large percentage of the • Few informal investors*
population say they know an • Few growth oriented start-ups
entrepreneur • Low percentage of start-ups
• Entrepreneurship is considered active in the technology sector
a good career choice with high
social status
• Most markets are not
dominated by only a few firms
Source: Data compiled from Acs et al. (2013).
Note: *An informal investor refers to a person who invests his or her own money in a start-up
company. In return this individual receives convertible debt or ownership equity in the company.
two primary issues. On the one hand, it is encouraging to see that access to ter-
tiary education for the general population, and for business owners in particular,
is much higher in Russia than in the other BRIC countries. On the other hand,
the high levels of corruption are also a uniquely Russian problem. In terms of
strengths, Brazil also boasts of the large size of its domestic market as one of its
top three strengths. Two of the three areas in need of improvement are also similar
for a number of the BRIC countries: Russia, Brazil and India have few informal
investors, and Russia, Brazil and China have low levels of exporting start-ups.
In Table 5.2, Russia’s top-scoring and worst-scoring three variables are com-
pared with those of Sweden (ranked in 2nd place) and the USA (ranked 1st). It
may be noted that Russia and the USA shared the same two strengths: a highly
educated population and a large domestic market. However, it is revealing that
while Sweden and the USA count the presence of a good business climate as one
of their top three strengths, this measure is not as high scoring for Russia. Even
more striking is that while Sweden includes a low level of corruption as one of
Table 5.2 Russia, Sweden and the USA compared using the GEDI 2013 results

Russia 69 • High level of college- • Few informal investors
educated business owners • Low levels of exporting start-ups
• Highly educated population • High levels of corruption
• Large domestic market size
Sweden 2 • Good business climate – • Few growth oriented start-ups
low business risk • Few start-ups using new
• High level of new technology
technology absorption by • Few informal investors
companies
• Low levels of corruption
USA 1 • Good business climate – • Small percentage of the population
low business risk say they know an entrepreneur
• Large domestic market size • Few start-ups using new
• Highly educated population technology
• Small percentage of the population
recognize good conditions for
starting a business
Source: Data compiled from Acs et al. (2013).
its top strengths, for Russia a high level of corruption is one of its main areas in
need of improvement. The results of this analysis indicates that while a number
of areas in the business environment need to be strengthened, in Russia’s case,
it is important that other SME-focused initiatives do not take precedence over
addressing corruption, the most insidious and detrimental factor that underlies the
functioning of an entrepreneurial society.
The Gender-GEDI
The Gender-GEDI is an adapted version of the GEDI index that includes a num-
ber of additional gendered indicators to measure ‘high potential’ female entrepre-
neurship development. The Gender-GEDI was launched in 2013 and included 17
countries (Table 5.3). Russia was ranked in 10th place, the USA was ranked in 1st
place and Uganda was ranked in 17th place. In Table 5.4 we compare the pillar
scores for the BRIC which were all included in the Gender-GEDI Index. In terms
of final rankings for the BRIC countries, China ranked in 8th place, Russia in 10th
place, Brazil in 14th place and India in 16th place.
In order to gain some insights into Russia’s specific strengths and areas for
improvement, we compared Russia’s six main strengths and three main weak-
nesses to those of the other BRIC countries. We limit our analysis here to gendered
issues, though the factors affecting the general business environment discussed
in the GEDI analysis above must also be taken into consideration in the case of
female entrepreneurs (see Table 5.4). Three of Russia’s strengths are unique when
compared to the BRIC countries. These include the fact that a high percentage of
84 Ruta Aidis
Table 5.3 The 2013 Gender-GEDI rankings
Rank Country Overall score Rank Country Overall score

1 USA 76 10 Russia 40
2 Australia 70 11 Turkey 40
3 Germany 63 12 Japan 39
4 France 56 13 Morocco 38
5 Mexico 55 14 Brazil 36
6 UK 51 15 Egypt 34
7 South Africa 43 16 India 32
8 China 41 17 Uganda 32
9 Malaysia 40
Source: Aidis et al. (2013).
female start-ups are growth oriented (32 per cent); there is a relatively high per-
centages of female start-ups in the tech sector (5 per cent); and a large percentage
of female business owners are highly educated (87 per cent). Russia and Brazil
both have reasonably good levels of female managers (37 per cent and 36 per cent
respectively) and all BRIC countries are characterized by moderately good access
to childcare.8 Russia’s female start-up activity ratio is 6:10, i.e. 6 female start-ups
to every 10 male start-ups, which is at a moderate level. Both and China have
higher female start-up activity ratios at 9:10 and 8:10, respectively. India has a
lower female start-up activity ratio than other BRIC countries with only five female
start-ups for every ten male start-ups. In terms of areas to improve, all four coun-
tries have low levels of exporting businesses (the lowest being for Brazil at 6 per
cent while Russia has 13 per cent exporting female start-ups). Low levels of female
internet use also characterize all of the BRIC countries, with India having the low-
est percentage of 6 per cent of internet users being female and the figure for Russia
being substantially higher, at 32 per cent. Russia and India both chart a low level
of SME support and training. This indicator considers if training is available over
a wide geographical area, is accessible to women as well as men, and is affordable
for the majority of intended beneficiaries. It also evaluates if the length of training
takes into account women’s time burdens, and if it is culturally appropriate.9
Through this analysis, we find that in Russia, well-educated female entrepre-
neurs are tending to start businesses that are growth-oriented and a proportion of
which are in the tech sector. Compared to other BRIC countries, Russia is at a
good starting point. In order to increase the pool of high potential female entrepre-
neurs, however, Russia will need to focus on improving access to SME training
and support programmes, providing broader access to the internet as well as intro-
ducing initiatives to facilitate exporting by female entrepreneurs. However, as
was already raised in the GEDI analysis above, fundamental barriers to business
development such as corruption must be addressed.
Table 5.4 The BRIC countries compared using the 2013 Gender-GEDI results

Russia 10 • High growth-oriented start- • Low exporting business 13%
ups (32%) • Low female internet use 32%
• Moderate female managers • Low SME support & training 2/5
(37%)
• Moderate/Low-tech sector
start-ups (5%)
• Highly educated business
owners (87%)
• Moderate female start-up
activity ratio (6.4 for 10
men)
• Moderate childcare 3/5
Brazil 14 • High female start-up activity • Low tech sector start-ups 0%
(9.4 to 10) • Low highly educated business
• Moderate female managers owner 12%
(36%) • Low growth oriented start-up 7%
• Moderate SME support 3/5 • Low exporting start-ups 6%
• Moderate childcare 3/5 • Low female internet use 36%
China 8 • High female start-up ratio • Low tech sector start-ups 0%
8:10 • Low highly educated business
• Moderate childcare 3/5 owner 19%
• Moderate SME training 3/5 • Low growth oriented start-up 7%
• Low exporting start-ups 15%
• Low female internet use 35%
• Low female managers 17%
India 16 • Moderate access to childcare • Low tech sector start-ups 0%
3/5 • Low highly educated business
owner 11%
• Low growth oriented start-up 6%
• Low exporting start-ups 14%
• Very low female internet use 6%
• Low female managers 14%
• Low SME support 2/5
• Low female start-up activity
ratio 5:10
Source: Data compiled from Aidis et al. (2013).
Moscow as a start-up hub

To gain a comparative perspective as to the specific characteristics of Moscow as
a high-tech start-up hub, we use research conducted by the Startup Genome. In
2012, Moscow was identified as one of the top 20 global cities for start-ups. Using
seven separate indices ranging from funding, performance and talent to support,
mindset and trendsetter, Moscow is ranked 14th out of 20 cities (Table 5.5). Silicon
Valley is ranked in 1st place followed by Tel Aviv (2nd), Los Angeles (3rd)
and Seattle (4th), while Melbourne, Bangalore and Santiago are ranked in 18th,
Table 5.5 Start-up Ecosystem rankings for top 20 global start-up hubs
Start-up hub Ranking Start-up out- Funding Company Talent Support Mindset Trendsetter Differentiation
city put index index performance index index index index index from SV index
Silicon Valley 1 1 1 1 1 1 1 1 1
TelAviv 2 2 1 12 8 5 9 17 18
Los Angeles 3 4 6 2 3 13 11 4 11
Seattle 4 19 7 6 2 4 6 11 14
New York City 5 3 4 8 12 9 8 7 8
Boston 6 10 1 7 8 7 7 5 20
London 7 7 5 10 9 2 3 14 17
Toronto 8 6 9 3 10 3 15 12 5
Vancouver 9 13 12 9 4 14 2 9 19
Chicago 10 8 15 5 14 7 13 18 9
Paris 11 14 13 4 17 6 12 15 6
Sydney 12 5 14 16 6 12 16 1 3
Sao Paulo 13 9 10 15 19 11 5 16 4
Moscow 14 16 19 18 11 10 14 8 22
Berlin 15 15 11 13 13 20 18 5 10
Waterloo 16 11 18 14 16 17 17 10 13
Singapore 17 18 8 19 8 16 20 19 12
Melbourne 18 12 17 20 8 10 19 3 18
Bangalore 19 17 16 17 18 15 10 20 10
Santiago 20 20 20 11 20 19 4 13 7
Source: Startup Genome (2012).
19th and 20th place respectively. Interestingly despite is moderate overall ranking,
Moscow is ranked 2nd in terms of the ‘Differentiation to Silicon Valley’ Index.
Moscow’s high rank indicates that its start-up entrepreneurs are very similar to
those found in Silicon Valley in terms of demographics and their types of start-up
companies. Also similar to Silicon Valley, new businesses in Moscow tend to
quickly adopt and integrate new technologies, management processes and busi-
ness models. There are also some notable differences, however: In Moscow, more
entrepreneurs tend to be highly educated than is the case in Silicon Valley (69 per
cent have a Master’s degree in Moscow compared with just 37 per cent in Silicon
Valley). Moscow receives relatively low scores in the areas of funding, company
performance and start-up output. Moscow is ranked 19th out of 20 countries for
funding (finishing ahead of only Santiago). In terms of numbers, Moscow start-
ups receive, on average, 80 per cent less funding than Silicon Valley start-ups.
The funding gap is most prevalent in the early stage of funding yet later stage
funding is also in short supply. In terms of company performance, Moscow’s
start-ups tend to stay small and do not expand. In terms of numbers of start-ups,
there are 89 per cent fewer start-ups in Moscow than in Silicon Valley.
Specific strategies for start-up success in Russia

There are other characteristics specific to the entrepreneurial culture in Russia
that are considered in further detail below. It is not uncommon for young Russian
entrepreneurs to start three or more companies at the same time (Naumov 2013).
This seems to occur in response to Russia’s market volatility as well as being a
response to the uncertainties of potential political action. This strategy can have
its drawbacks, however. Russian entrepreneurs need to divide their efforts, energy
and finances over several companies while in the USA, most founders dedicate
100 per cent of their time and energy to a single start-up.
Given Russia large domestic consumer markets, many of Russia’s most suc-
cessful tech start-ups have been based on adapting established western internet
models to fit the domestic market. Examples of these types of firms include Dar-
berry (similar to Groupon) and Yandex (a search engine similar to Google). This
strategy provides tremendous opportunities in the short term, but to secure sus-
tained long-term growth, Russian start-ups will need to adopt a ‘born global’10
strategy and build globally viable companies. This is also visible in Russia’s rel-
atively low level of start-up companies that export their goods or services: 10 per
cent in 2012, compared with 21 per cent in Easterm Europe and Central Asian
countries (ECA) or 20 per cent for Upper Middle Income (UMI) countries (World
Bank 2012). However, highly successful high-tech companies, such as the email/
website company Mail.ru, have entered the global arena to finance additional
expansion and growth through its successful Intial Public Offering (IPO) on the
London Stock Exchange in 2010.
Elena Masolova is just one example of the new generation of successful Rus-
sian high-tech serial entrepreneurs. In the early 2000s she had founded Pixonic,
a game developer and publisher for worldwide social networks. She is Pixonic’s
88 Ruta Aidis
CEO with 46 employees, 40 games and 20 million users (Risner 2012). Masolova
also created Darberry which, after only six months of operation, was acquired
by Groupon for an estimated USD 50 million. Masolova has also been involved
in making plans to improve Russia’s business environment. For example, she
founded AddVenture, a seed investment fund and is also a partner at Ruvento,
an accelerator and venture fund. In 2013, Masolova founded Eduson.tv – a new
online business learning service for which she received USD 1 million in seed
financing. Yet the rather young and emerging nature of Russia’s entrepreneurship
culture also results in a lack of mentors, advice and support for entrepreneurs. A
survey of entrepreneurs revealed that 61 per cent identified the need for mentors
(Ernst and Young 2013).
Challenges for business growth and development

There are a number of challenges for business growth and development in Rus-
sia. The most important are corruption, financing, education and civil society. In
this section I discuss each of these four challenges as it manifests in the Russian
environment.
Corruption
Corruption was endemic in Russian society during the Soviet period and, in con-
trast to its Baltic neighbours, corruption continues to impact Russian society on
a large scale. According to Transparency International’s Corruption Perceptions
Index, in 2013, Russia was ranked 127 our of 175 countries (similar to Iran and
Kazahkstan) . This indicated a small improvement from 2012 when Russia was
ranked 133 out of 176 countries (see also Chapter 6).
Corruption can be particularly detrimental for business development and
growth. As Aidis and Adachi (2007: 393) noted: ‘It is very difficult, if not
improssible to engage in legal business practices without also engaging in illegal
business practices such as bribing and corruption’. Take, for example, the case of
Yoanna Gouchtchina, a successful mobile tech entrepreneur who founded ZeeR-
abbit (similar to AddWords – an app that sends targetted advertisements to users).
Gouchtchina wanted to expand into the pharmaceuticals industry but she soon fell
foul of the pervasive culture of bribery in that sector (Anderson 2014). She was
adamant that she would not engage in such practices and as a result, after months
of preparation, she exited without even having had the chance to start.
Table 5.6 presents some of the key corruption indicators, as compiled by the
World Bank’s Enterprise Surveys. According to the World Bank’s Graft Index,
16.1 per cent of Russian firms responded that they had been asked or expected to
pay bribes, compared with only 7.5 per cent for firms in UMI countries (World
Bank 2012). However, when firms are broken down according to size classes, 23.4
per cent of medium-sized enterprises (20–99 employees) in Russia were asked or
expected to pay bribes. In fact, in terms of the five additional measures of corrup-
tion including tax inspectors, government contracts, construction permits, import
Table 5.6 World Enterprise Survey corruption indicators, 2012
Corruption indicators Russian Small Medium Large EEA UMI

Federation Firms Firms Firms
Incidence of Graft Index 16.1 12.5 23.4 9.1 13.3 7.5
Percentage of firms 7.3 4.1 8.0 15.2 12.5 7.5
expected to give gifts
in meetings with tax
inspectors
Percentage of firms expected 20.7 18.1 25.8 12.1 17.6 15.9
to give gifts to secure a
government contracts
expected to give gifts to
get a construction permit
get an import license
get an operating license
Source: World Bank (2012).
Key: Small Firms (1–9 employees); Medium-sized Firms (20–99 employees); Large Firms (100 +
employees)EEA = Eastern Europe and Central Asia countries; UMI = Upper Middle-Income countries
Note: The Graft index represents the share of all interactions between firms and public officials in
which a bribe was expected.
licenses and operating licenses, Russia’s percentages for corruption exceed those
in ECA countries, UMI, countries, as well as those in Higher Income countries.
In Russia, the enforcement of laws occurs in a selective and arbitrary manner
and there is no consistency or stability from the regulatory environment on which
firms can rely.11 This creates an environment where functioning under the radar is
often the preferred strategy. Table 5.7 shows some key metrics for the regulatory
environment. On average, Russian firms spend more days obtaining basic licenses
and permits than is the case in either Eastern Europe and Asia (EEA) or UMI
countries.
Education
Russia has historically invested heavily in education and it continues to produce
a highly education population. Around 88 per cent of the adult population have
attained at least an upper secondary education and 54 per cent have a tertiary
qualification, making the proportion of the Russian population with a tertia-
ry-level qualification one of the highest in the world. Only three countries have a
higher tertiary attainment rate among 25–34-year-olds than that found in the Rus-
sian Federation (55 per cent) (OECD 2012). Concerns about future skill levels in
90 Ruta Aidis
Table 5.7 World Enterprise Survey: regulations, taxes and business licensing indicators,
2012
Regulations, taxes and Russian Small Medium- Large EEA UMI

business licensing indicators Federation firms sized firms firms
Days to obtain import license 47.1 27.6 54.6 49.2 16.7 23.3
Days to obtain construction- 129.6 125.8 131.1 134.4 80.2 83.3
related permit
Days to obtain operating license 56.3 46.2 56.8 71.9 26.0 40.9
Key: Excerpt from larger table; EEA = Eastern Europe and Central Asia countries; UMI = Upper
Middle Income countries.
Russia are focused more at the secondary level, where the country’s participation
rate is below the G20 average. Despite large increases in national income invested
in education in recent years, expenditure on education represents 5.5 per cent of
GDP, a much lower value than the OECD country average (6.3 per cent) (ibid.).
Kirill Varlamov, a software developer, expresses a different opinion regarding the
business education: ‘Education is probably the weakest area of the Russian entre-
preneurship ecosystem. We need more programs and higher quality. In particular,
we badly need world-class training at MBA level’ (Ernst and Young 2013: 5).
Similarly, entrepreneurship has yet to be embedded fully in Russian culture.
Fewer than 50 per cent of local respondents agreed that their culture is supportive
of entrepreneurship or that it is encouraged as a career choice (ibid.). Russia’s
entrepreneurship culture is still comparatively young and the broader population
has no adequate understanding of the fundamental cycle of entrepreneurship from
start-up and growth to IPO and exit or the fact that high business failure rates
often characterize thriving business ecosystems. According to the survey of Flash
Eurobarometer (2012), in Russia only 48 per cent of the respondents agree that
their school education helped them to develop a sense of initiative and a sort of
entrepreneurial attitude.
Without this basic knowledge, entrepreneurs have a harder time accessing the
resources they need, whether they be employees, clients or investors. In addi-
tion, skills shortages are a real bottleneck for some businesses who have difficulty
in recruiting people with the right marketing, sales and strategic skills. In order
to build a knowledge-based economy, Russia needs to integrate more business
elements into its education system (Ernst and Young 2013). As Varlamov further
notes: ‘We need more people graduating from higher-quality programs and also
better business schools’ (ibid.)
Financing
In most countries, entrepreneurs complain about the lack of financing. But
research in Russia shows that large gaps in financing exist which may be lead to
fewer start-ups and less growth potential. In a recent survey, 59 per cent of local
entrepreneurs surveyed say that it is difficult to access funding in Russia (Ernst
and Young 2013). As is shown in Table 5.8, Russia does exhibit higher levels of
Merger and Acquisition (M&A) funding relative to other G20 countries,12 but this
seems to be an exception since venture capital (VC) and IPOs are very limited.
Moreover, Russian entrepreneurs are faced with two problems: not only is it diffi-
cult to access equity capital, but Russia’s banking system is not a viable option for
providing initial start-up or growth capital through debt financing.
Civil society
The final and perhaps most fundamental challenge facing Russia’s business envi-
ronment is the development of civil society and the fostering of a culture of ‘giv-
ing back’. Table 5.9 provides a comparative view of Russia’s rankings for the
Table 5.8 Access to funding: Russia and G20 compared
Access to funding Russia G20 average Average for time

period
IPO amount invested (% of GDP) 0.01 0.22 2009–11
Domestic credit to private sector (% of GDP) 44.5 99.0 2008–10
Venture capital availability (scale: 2.3 3.0 2009–11
1 = impossible to 7 = very easy)
M&A deal value (% of GDP) 5.0 3.4 2010–12
Source: Ernst & Young Entrepreneurship Barometer 2013 – Russia. (Original sources: The World
Bank, Dealogic, IMF, World Economic Forum.)
Table 5.9 Worldwide Governance Indicators for Russia, 1998–2012
Governance indicator 1998 2004 2012

Voice and Accountability 24.13 30.29 19.91
Political Stability 14.90 7.69 20.85
Governance Effectiveness 21.95 43.90 40.67
Regulatory Quality 30.39 50.00 38.76
Rule of Law 18.18 19.14 23.70
Control of Corruption 17.56 25.37 16.27
Key: Voice and Accountability: measures political, civil and human rights; Political Stability measures
the likelihood of violent treats to, or changes in, government including terrorism; Government
Effectiveness measures the competence of the bureaucracy and the quality of public service delivery;
Regulatory Quality measures the incidence of market-unfriendly policies; Rule of Law measures
the quality ofcontract enforcement, the police, and the courts, as well as the likelihood of crime and
violence; Control of Corruption measures the exercise of public power for private gain, including both
petty and grand corruption and state capture.Yearly scores shown in percentile ranks (0–100).
92 Ruta Aidis
Worldwide Governance Indicators in the 1998–2004–2012 time period. Russia’s
scores for four out of six indicators has declined since 2004 in the critical areas
of Voice and Accountability, Government Effectiveness, Regulatory Quality and
Control of Corruption. This is of great concern for Russia’s future as an entrepre-
neurial society. Without the fundamental assurance of a stable, reliable and func-
tioning governance structure, entrepreneurial activities will be prevented from
reaching their full potential. Even though Russia’s score has been increasing for
two measures, Political Stability and Rule of Law, their overall percentile rank, at
20.85 and 23.70 respectively, is still at comparatively low levels.
Another aspect of civil society that needs to be developed in Russia is
philanthropy and the concept of ‘giving back’ to society. At present, this is
still in its infancy, but there are some positive signs of development. The
female entrepreneur Elena Masolova, referred to earlier, has become active in
improving the start-up environment in Russia through founding AddVenture,
a seed investment fund. She is also a partner at Ruvento, an accelerator and
venture fund. When entrepreneurs are successful, it is important that they also
use their wealth for greater social good. The Giving Pledge is a voluntary cam-
paign that invites the world’s wealthiest individuals and families to commit
to giving more than half of their wealth to philanthropy or charitable causes
either during their lifetime or in their will. It was initiated by Bill Gates and
Warren Buffett in 2010 and at the time of writing has more than 60 participat-
ing billionaires. In 2013, Vladimir Potanin became the first Russian to sign the
Giving Pledge.
Conclusions
Russia possesses a large and expanding consumer market and in the short and
medium term there will be abundant opportunities for Russian start-ups. The low
starting point of Russia’s business environment also provides plenty of room for
improvements through the copying of western business models and adapting them
to the Russian market which will remain a large and profitable market. The institu-
tional environment has also been improving for entrepreneurs through government
initiatives such as the ASI, VC funding through Rusano and funding targeting
high-tech start-ups. The various attempts to fill the large funding gaps by the gov-
ernment signals a positive shift in public policy. In addition, the appointment of
an ombudsman to safeguard entrepreneur rights indicates that there are further
attempts to support an entrepreneurship culture. The fact that Moscow is identified
as one of the world’s top 20 start-up hubs is also a very positive sign. It indicates
that many conditions in Russia are right for developing an entrepreneurial society.
However, some fundamental challenges still need to be addressed in order
to ensure the viability of private business and an entrepreneurial society. These
include creating conditions that foster business growth, and improving the stan-
dard of entrepreneurial education and financing for all stages of business devel-
opment. Corruption and civil society impact entrepreneurial society in the most
profound and fundamental ways. Corruption acts as a deterrent for potential
business start-ups or business growth. It results in an absence of start-ups and
also the proliferation of businesses that do not grow. Civil society provides the
stability and assurance to entrepreneurs that they will be able to reap the benefits
of their business activities or, if they fail, that they will have the opportunity to
try again. Ideally, it ensures the rule of law so that businesses do not have to
worry about arbitrary and or politically motivated interference. Russia does not
ensure these yet.
The new generation of young, bright and enthusiastic entrepreneurs in Moscow
provides hope for the development of a productive entrepreneurial society in Rus-
sia. If they succeed, they will be the mentors, angel investors and entrepreneurial
advocates for future generations. The presence of individual entrepreneurial drive
is clear and by reducing and removing corruption and regulatory interference
from the equation, more start-ups will follow. To see them grow and flourish,
however, Russia must be committed to taking further steps to improve its business
environment.
Notes
1 In 2013, an amnesty for thousands for Russian businessmen convicted of economic
crimes was announced but in reality affected only 12,000 while thousands more remain
behind bars (Boyde 2013).
2 The Global Entrepreneurship Monitor (2013) uses what it calls ‘Total Entrepreneur-
ship Activity’ (TEA) to measure business start-up activities. TEA is the percentage of
18–64 population who are either a nascent entrepreneur or owner-manager of a new
business (no more than 42 months old).
3 Sweden's Central Bank’s Prize in Economic Sciences in Memory of Alfred Nobel,
established in 1968.
4 See, for instance, North (1990, 1994, 1997).
5 Brazil, Russia, India and China.
6 OPORA ROSSII is a civil organization for small and medium-sized enterprises in Rus-
sia. It organizes about 450,000 entrepreneurs.
7 An informal investor refers to a person who invests his or her own money in a start-up
company. In return, this individual receives convertible debt or ownership equity in the
company.
8 In terms of availability, affordability and quality. This indicator also includes the role
of the extended family in providing childcare.
9 These data are from 2010 and is originally from the Women’s Economic Opportu-
nity Report by the Economist Intelligence Unit. It is used in the 2013 Gender-GEDI
Index.
10 In contrast to a firm that is initially focused on the domestic market and then expands
its operations internationally, a born-global firm is a venture launched to exploit a
global niche from the first day of its operations (Kudina et al. 2008).
11 The high-profile case of Mikhail Khodorkovsky, founder of Yukos, is an example of
this. Though he was charged with tax evasion, the political motivations for his arrest
and imprisonment were obvious.
12 G20 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India,
Indonesia, Italy, Japan, Korean Republic, Mexico, Russia, Saudi Arabia, South Africa,
Turkey, United Kingdom, United States.
94 Ruta Aidis
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6 The role of institutions in the
Russian economy
Susanne Oxenstierna
Following a strong recovery in 2010 after the 2008–9 economic crisis, the Russian
economy has shown signs of declining growth in 2012–13. Growth in 2012 was
3.4 per cent, and in 2013, 1.3 per cent, which is well below the expectations in
earlier official strategies and forecasts. Part of the explanation for this decline lies
in the stagnation of global demand for Russian commodities and it is quite clear
that the Russian growth model, which is largely based on the growth of foreign
demand for Russian hydrocarbons, is now exhausted. Future growth requires that
productivity increases through structural change, investment, organizational mod-
ernization and technical innovation. The confidence crisis following the Ukrainian
crisis in early 2014 has added to the systemic problems and makes the prospects
for the Russian economy even more uncertain, as is manifested in capital flight
and a weak propensity to invest. Growth forecasts for 2014–15 vary between a
decline in GDP to growth of just 1–2 per cent (World Bank 2014a).
Is the present politicized economic system able to meet the challenges and
restore growth? Can it facilitate a more efficient allocation of resources among
sectors, less resource waste, innovation, productivity increases and stronger
competition? Are stronger institutions part of the remedy? Following the shift
away from a command economy in the 1990s and the consolidation of the mar-
ket reforms at the beginning of the 2000s, the Russian economy has experienced
re-nationalizations and increasing political interference. As a result, in early 2014,
the Russian economic system is a hybrid of, on the one hand, the old Soviet her-
itage and state intervention and, on the other, a market economy, with private
ownership, modern and sound budgetary rules, and accession to the World Trade
Organization (WTO). In addition, this economic model is characterised by an
increasing shadow economy and widespread corruption. Liberal economists in
Russia argue for a renewed market reform for Russia to allow it to compete in the
global environment, overcome capacity constraints and support innovation. They
have also started to emphasize the need for real democracy to enable moderniza-
tion (Åslund 2012: 382).
The purpose of this chapter is to analyse the systemic characteristics of eco-
nomic development in Russia after 2009 and to assess the potential of the eco-
nomic system under Vladimir Putin to resolve the impediments to future growth,
in particular by improvements in the economic institutions. As a starting point,
The Role of institutions in the Russian economy 97
the chapter uses a development of the model of Gaddy and Ickes (2010; see
also Chapter 2) on ‘rent addiction’ and the ‘rent management system’ to create
a framework for the discussion of how different parts of the economy may be
affected by market-oriented institutions. Hence, the emphasis of the analysis does
not lie on rent addiction in itself but on its effects on the parts of the economy still
under market forces, ‘the new private sector’, which has been added to the model.
The nature of institutions important for economic growth is investigated using the
Worldwide Governance Indicators (WGI 2014). These institutions are relatively
weak in Russia because of the shortage of democracy. The chapter discusses the
implications of the ‘democracy shortage’ on economic development, particularly
through the restrictions on civil society and generally weak channels of ‘voice’ for
citizens and organizations.
The chapter is organized as follows: The first section presents a simplified
model of the economic system and analyses the implications of rent addiction and
rent management for the rest of the economy. The second section discusses the
quality and development of economic institutions and other business indicators in
Russia. The third section explores the role of civil society for economic growth
and the final, fourth, section draws the conclusions.
The economic system under Vladimir Putin

In 2002, the European Union (EU) proclaimed that Russia was a market economy
(EU Commission 2007: 5) and ended most technical assistance in the economic
field. However, despite the dramatic change of the economic system at the begin-
ning of the transition, throughout its transformation towards market and democ-
racy, Russia has retained aspects of the old Soviet economy. When prices and
trade were liberalized in 1992, a new private sector began to emerge, driven by
new entrepreneurs. Trade was the activity in which many of these gained their ini-
tial capital. The result of this change is that at present over 20 per cent of Russian
GDP comes from small and medium-sized enterprises (SMEs), which account for
around 22 per cent of total employment (OPORA 2010). Some of these new pri-
vate companies have even grown into big corporations. Yet this is still a very low
share of GDP for SMEs since in most developed economies, a share of over 50 per
cent would be expected. However, in Russia, the informal sector plays a large role
in the economy and, since 2012, several policy measures, such as the increase in
social taxes, have led many SMEs to de-register and continue their activity infor-
mally. The role of the small-scale sector may therefore be larger than is suggested
by official statistics (see a further discussion on the informal sector in Chapter 3
and on SMEs and entrepreneurship in Russia in Chapter 5).
However, parallel to this market-oriented development, large Soviet-type com-
panies, sometimes privatized but mostly state-owned or state-controlled, have
survived in the defence sector and other parts of machine building and traditional
heavy industry. These companies have adopted a variety of survival strategies to
cope with the transition. As described by Gaddy and Ickes (2002), in the 1990s,
barter chains and a ‘virtual economy’ emerged that kept these companies alive.
The labour market was another area where adjustments took their particular Soviet
course. Prior to the start of the economic reforms in 1991, labour market experts
were convinced that market reform would lead to a considerable displacement of
workers and high unemployment in Russia. At the time, predictions of unemploy-
ment rates of around 25 per cent were common (Gimpelson and Kapelyushnikov
2013: 693–4). However, this did not happen in Russia. Instead, the main part of
the labour market adjustment took place through wage flexibility. Wages fell dra-
matically while employment fell only marginally and unemployment rose slowly.1
The phenomenon of ‘wage arrears’ is another specific characteristic of Russia’s
labour market. It means that labour is not laid off, but instead that wages are not
paid and, in the best cases, workers are paid in kind. This has kept the rate of open
unemployment low, but wage arrears are an alien form of adjustment compared to
what usually occurs in a western capitalist market economy, where labour market
adjustment takes the form of unemployment and the reallocation of workers to
more productive sectors. During the 2009 crisis, wage arrears increased and real
wages decreased, while unemployment even declined, which shows that a large
part of the economy is not competitive (Oxenstierna 2009: 20–1).
In the 2000s, there was a surge in oil prices and growth picked up. This implied
an improvement in the fiscal situation and Russia entered a period of high growth
during which it was possible to subsidise inefficient companies with low produc-
tivity.2 However, in 2009, this inefficiency became very costly and more prob-
lematic due to the economic crisis and the fact that financial and real resources
had become scarce. At first, it seemed that the Russian government intended to
address these problems with then President Dmitry Medvedev’s modernization
programme, but since Vladimir Putin resumed the presidency in 2012, the ‘Soviet-
type sector’ has regained government support both morally and financially, and
instead of energy, IT and pharmaceuticals, quoted by Medvedev as core industries
for the modernization, the defence industry is seen as a driver in the attempt to
increase growth and innovation (Oxenstierna 2009, 2012; Putin 2012). However,
assessments of the Russian defence industry show that it is both obsolete and
inefficient. In its report to the Duma Defence Commission in 2012 the Russian
Audit Chamber noted that 30 per cent of the defence industry companies were
loss-making and that only 20 per cent of the companies were deemed to be in
such a shape that they could be modernized. According to the Audit Chamber,
the remaining 50 per cent of the industry are in such a state that any restructuring
would be meaningless. Instead, it would be better to build new companies and
replace them (Oxenstierna 2013: 114).
Soft budget constraints and soft credit prevail and obviously conserve the old
industrial structure. Why is the subsidized sector maintained and why is it so dif-
ficult to modernize it? There are several reasons for this. First of all, it is evident
that during his election campaign, Putin made promises to regions dominated by
such companies to continue to support them. In Russia, there are still so-called
monotowns, cities or even regions that are dependent on one single company. It
is estimated that there are around 400 of these, of which half are big energy and
exporting companies, and half belong to sectors that are problematic (Oxenstierna
2011: 8). These companies fulfil a social role and it is difficult to close them
because there are no other employers in the city or region. The relative geograph-
ical isolation of many defence companies has contributed further to immobilizing
the workforce, for which there are few alternative job openings (Oxenstierna and
Westerlund 2013: 15–17).
The rent-dependent economy

The more general explanation for the continuing existence of loss-making firms
in the economy is that they are an important part of Putin’s power and control
system and also part of what Clifford Gaddy and Barry Ickes characterize as ‘rent
addiction’ in Russian society.3 The concept of ‘rents’ refers to the profits earned
from owning or controlling an asset, usually natural resources. In the Russian
case, these are generated primarily by the extraction and exports of commodities
such as oil and gas. Rents are redistributed by the regime and Gaddy and Ickes
also introduce the concept of a ‘rent management system (RMS)’, which means
that rents are distributed to where they are needed to balance the power elites. In
the model advanced by Gaddy and Ickes, the use of rents to subsidize loss-making
companies creates ‘addicts’ that demand more and more rents and, since many
people are employed in these enterprises and they represent important political
support for the regime, this makes it impossible to get out of the vicious circle.
Rent addiction creates a distorted allocation of resources, inefficiency and exces-
sive costs of production that are borne by all actors.
The rent management system is a heritage from the Soviet era when, for ideo-
logical reasons, extra money such as oil rents in periods of high oil prices could
not be spent on private capital or consumption goods by the power elites. Opening
a factory and spending the money on productive assets was possible, however. In
addition, the advantage of productive assets, in comparison with financial assets
or consumption, is that they can be used to extract more rents over a long period
of time since they employ workers and have a need for investment. The system of
rent management is an important part of Putin’s power vertical and one rationale
behind the inefficiency that prevails in the Russian economy. Rents may be col-
lected by the state in the form of taxes. They may also be collected and redistrib-
uted in the form of the excessive costs for inputs and services, such as high prices
for railway transport, or high-cost construction which is typical for companies in
the rent-dependent sector (see Figure 2.1 in Chapter 2). The indirect costs of lack
of infrastructure and other societal services also affect the economy and create
extra costs for all economic actors.
In this study, the emphasis of the analysis does not lie on rent addiction in itself
but on its effects on other parts of the economy. In addition to the ‘rent-creating
sector’ and the ‘addicts’, here named the ‘rent-dependent sector’, a third sector,
called the ‘new private sector’, has been added to the model. The ‘new private sec-
tor’ represents the SMEs, the parts of the economy that are not directly involved
in the rent management system but operate on the market. This is the part of
the economy that is most affected by prevailing market institutions. Figure 6.1
Rent-
Rent-creating dependent
sector sector
Government
New
private
sector
Figure 6.1 Schematic model of a rent-dependent economy.

Notes: Transparent/white arrows – tax payments. Checked arrow – subsidies. Striped/shaded
arrows – extra payments to rent-dependent sector due to high monopoly prices and high costs.
Source: The author.
depicts a simplified model of a rent-dependent economy consisting of four sec-

tors: the government, the rent creating sector, the rent-dependent sector, and the
new private sector. The rent creating sector earns rents by selling commodities, in
Russia predominantly oil and gas. It pays taxes to the government [transparent/
white arrow] and rents are redistributed by the government to the rent-dependent
sector in the form of subsidies, transfers and state orders [checked arrow]. How-
ever, the state also redistributes rents when it procures goods and services from
the rent-dependent sector or invests in this sector by paying a high price due to
inefficiency and excessive costs in the rent-dependent sector [striped arrow]. The
rent creation sector also has rents directly extracted by the rent-dependent sector
when it buys goods, invests or lend money directly to rent-dependent companies
[striped arrow].
The new private sector, consisting mainly of SMEs, operates in a market frame-
work and pays taxes [transparent/white arrow]. It is also indirectly affected by the
rent management system through high cost levels, the lack of infrastructure, and
other aspects, but it is not a formal part of the rent management system. This is a
reason why the conditions for SMEs have been highly neglected and many times
worsened under the present regime.
Types of boundaries and control

Rent addiction and rent management imply that large parts of the economy are
controlled by political forces rather than by market forces (Figure 6.2). The rent
creating sector is dependent on external markets and the rules prevailing there,
which means, for instance, that stronger competition rules on export markets will
affect the behaviour of rent creating companies abroad and have an impact on their
costs and revenues. The influence of external markets is depicted by the oval with
Rent-
Rent-creating
dependent
sector
sector
External
Govern- Political
ment
New
private
sector
Market and
institutions
Figure 6.2 Types of boundaries and control in a rent-dependent economy.

Notes: Oval with whole line – ‘controlled by external markets’. Oval with dotted line – ‘control
by Putin and the rent management system’. Circle with dashed line – boundaries set by market
and institutions.
Source: The author.
the whole line labelled ‘external’. However, the oil and gas companies are under
political control at home and need to follow political directives on the domestic
scene. The rent-dependent sector is entirely under political control. The exercised
political control is depicted in Figure 6.2 by the oval with a dotted line labelled
‘political’. The new private sector is the only sector that can truly be influenced
by market forces, economic policy and market oriented institutions such as rule of
law and competition. The control of markets and institutions is illustrated by the
circle with a dashed line.
When a substantial part of the economy is controlled by a political rather than
an economic rationale raising productivity and efficiency in the economy becomes
difficult since it is not the goal of the system. It follows that the role of market
institutions in the economy is limited and their effect severely constrained.
Are stronger institutions a remedy?

Institutions are a set of basic principles essential for the economic system to
work that are upheld by structures in the economy (Ericson 2013: 59).4 For
instance, competition is protected by laws that are followed up by state agencies
such as an anti-monopoly or a consumer protection agency. Similarly, free trade,
which is considered vital for growth and development, is reflected in a country’s
trade policy, protected by multilateral agreements and upheld by international
organizations such as the WTO. It is evident that the institutions supporting
a market economy differ from those found in the Soviet command economy.
However, it deserves to be noted that even though the formal institutions col-
lapsed quite quickly in the 1990s, the informal institutions of the Soviet system
have mostly remained intact throughout the transition, and this has disturbed
the modelling of the new market-oriented institutions in Russia. It follows that
the institutional environment for transitional Russia has largely been formed
by Soviet attitudes rather than by the formal western models on which market
institutions are based (ibid.).
The politicized economic model introduced under Putin has further aggra-
vated the difficulty in developing a fully market-oriented institutional framework.
As was presented above and can be seen in Figure 6.1, the economic model has
three sectors, where it is the ‘new private sector’ that would primarily profit from
better market institutions. This sector could grow if the business climate, entry
and competition improved and governance became more business-friendly. The
rent-dependent sector, however, would not gain from increased market orientation.
It defies competition and is better off with the informal rules that give it preferential
treatment on a non-market basis. The rent creation sector with its dual framework –
the external market on the one hand and the politicized rent distribution on the
other – could gain from a better market allocation on the domestic market; how-
ever, since this sector also suffers from efficiency problems, stronger competition
from private companies may not be readily accepted.
Taking the temperature of Russia’s institutions

Russia’s deficient institutions are reflected in the Worldwide Governance Indica-
tors (WGI 2014). The WGI project constructs aggregate indicators of six broad
dimensions of governance. The six aggregate indicators are based on 31 under-
lying data sources reporting the perceptions of governance of a large number of
survey respondents and expert assessments worldwide:
• Political stability and absence of violence/terrorism;

• Voice and accountability;
• Government effectiveness;
• Regulatory quality;
• Rule of law;
• Control of corruption.
The aggregated estimate of governance lies in the range between –2.5, very weak,
and +2.5, very strong. I will not comment here on the indicator ‘Political Stability
and Absence of Violence and Terrorism’. However, the last four indicators reflect
the quality of vital market-supporting institutions, and the indicator ‘Voice and
Accountability’ reflects the degree of democracy and the possibility of making
politicians responsible.
Figure 6.3 describes regulatory quality and government efficiency. As can
be seen, both of these indicators improved dramatically at the beginning of the
2000s. This was under Putin’s first presidency and the time of the ‘Gref plan’
which, to a large extent, consolidated the reforms of the 1990s. Both these indica-
tors deteriorated, however, in the mid-2000s during Putin’s second term and have
since stabilized at around –0.4.
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Government effectiveness Regulatory quality
Figure 6.3 Government effectiveness and regulatory quality, Russia, 2000–12.

Source: WGI (2014).
Note: The estimate lies between –2.5, very weak, and +2.5, very strong.
Figure 6.4 depicts the development of rule of law and control of corruption.
On both of these indicators, Russia scores much worse than it does for both gov-
ernment effectiveness and regulatory quality. Rule of law improved from a low
of –1.2 at the beginning of the 2000s to about –0.9, where it remained until 2008,
when it improved again slightly to over –0.8. Control of corruption, however, has
deteriorated since the improvement in 2002–3 and is now below its value at the
beginning of the 2000s.
Corruption is usually defined as the misuse of public office for private gain.
It comes in many varieties – from the extortion of bribes and kickbacks from
businessmen and citizens to the embezzlement of budget funds (Treisman 2013:
209). The worsening of the control of corruption WGI indicator is accompanied
by an inferior rank in the Corruption Perception Index (CPI) of Transparency
International (TI). As shown by Table 6.1, in 2013, Russia’s rank in the TI CPI
was 127th of the 177 countries surveyed with a score of 28. TI considers that a
CPI under 50, on a scale from 0 (highly corrupt) to 100 (highly clean), indicates
a serious problem with corruption. This rank is considerably worse than it was
in 2001, when it stood at 79, although, at that time, Russia’s score was worse,
at 23. This reflects the fact that a country’s ranking is dependent on which other
countries are included in the survey and how they score. In 2013, several coun-
tries have the same score and rank as Russia: Azerbaijan, Gambia, Lebanon,
Madagascar, Mali, Nicaragua and Pakistan. The only countries in the former
Soviet space that have a worse CPI than Russia are Kazakhstan, which ranks
140th (with a score of 26), Ukraine, which ranks 144th (with a score of 25) and
the Central Asian Republics.
0
0.2
0.4
0.6
0.8
1.2
2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Rule of law Control of corruption
Figure 6.4 Rule of law and control of corruption, Russia, 2000–12.

Source: WGI (2014).
Note: The estimate lies between –2.5, very weak, and +2.5, very strong.
Table 6.1 Russia’s Corruption Perception Index and rank
2001 2002 2003 2004 2005 2006 2007 2008 2009 20010 2011 2012 2013
CPI 23 27 27 28 24 25 23 21 22 21 24 28 28
score
Rank 79 71 86 90 126 121 143 147 146 154 143 133 127
Source: Transparency International (2014).
That citizens have voice, that is, the opportunity to voice their opinions and
influence their situation, and that politicians can be made accountable are essen-
tial ingredients in any democracy. In Putin’s Russia, the voice and accountability
indicator has seen a steady decline since Putin first came into power in 2000, when
the estimate stood at –0.4. By 2012, however, it was down at –1.0 (Figure 6.5). I
would argue that the low voice and accountability indicator largely explains the
low score in other WGI indicators such as ‘rule of law’ and ‘control of corrup-
tion’. The declining trend in the voice and accountability indicator summarizes
the increasing democracy shortage in Russia and implies that citizens have very
limited opportunities to influence policies in their country.
The analysis of Russia’s institutions using the WGI shows that the institutional
framework is weak and has deteriorated in recent years. The fact that such a large
part of the economy is governed by political goals and the leadership’s need to
balance power, rather than by economic logic, makes it difficult to anticipate
0.00
0.20
0.40
0.60
0.80
1.00
1.20
2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Voice and accountability
Figure 6.5 Voice and accountability, Russia, 2000–12.

Source: WGI (2014).
Note: The estimates lies between –2.5, very weak, and +2.5, very strong.
improvements in the institutional framework. Better institutions would benefit the

‘new private sector’ that would get better opportunities to expand under a stronger
rule of law and less corruption. However, in the case of the rent-dependent sector,
which relies on its political contacts, stronger institutions would be a disadvantage
(see Figures 6.1–6.2).
The business climate

In his initial economic decree, Putin (2012) called for an improvement of the
rating of Russia in the World Bank Doing Business Index from 120th place in
2011 to 50th in 2015 and 20th in 2018. Thus, it is pertinent to ask: How do
Russian businesses experience the business climate? In recent years, various
surveys have been conducted to investigate this question. The European Bank
of Reconstruction and Development (EBRD) and the World Bank periodically
poll executives of firms in transition countries in the Business Environment and
Enterprise Performance Survey (BEEPS) which has existed since 1999 (Treis-
man 2013: 210). The 2012 BEEPS5 for Russia nationally and for 37 regions
shows that most enterprises in Russia identify corruption, the lack of access to
finance and the absence of skills in the workforce as the main constraints on
doing business. Medium-sized enterprises cite workforce skills as their main
constraint ahead of access to finance. Large enterprises primarily suffer from
lack of properly skilled workers followed by corruption. Innovative companies
have more problems with the business environment as a whole than an average
enterprise (BEEPS 2012). In some regions, deficient infrastructure – transport,
electricity, and telecommunications – is a first-hand binding constraint. How-
ever, tax administration, business licensing, and customs and trade regulations
do not seem to be perceived as constraints (ibid.). The latter point at measures
intended to ease the starting business procedure and tax payments over the years
have had some effect.
The World Bank’s ‘Ease of Doing Business Index’ is used widely to compare
the business climate in different countries and it provides a ranking of the relative
attractiveness of the business environment. This is the index to which Putin chose to
relate his business climate targets. Judging from this index, the business climate in
Russia is not very attractive. In 2013, an improvement to the 92rd rank (from 120th
in 2011) was registered (out of a total of 189 countries). The index has ten different
aspects that are listed in Table 6.2 and the separate rank is indicated after each indi-
cator. As seen in Table 6.2, only in enforcing contracts and resolving insolvency is
Russia among the top 50 economies, the rank sought by 2015 according to Putin’s
plan. Russia is flanked by Croatia (89), Albania (90), Barbados (91), Serbia (93),
Jamaica (94) and the Maldives (95). China is ranked 96th (World Bank 2014b).
If Russia is compared to the group of 26 countries in Eastern Europe and
the former Soviet space, it has a total rank of 21, outperforming only Serbia,
Ukraine, Bosnia and Herzegovina, Tajikistan and Uzbekistan. Russia’s partners
in the Customs Union, Belarus, with a global rank of 63, and Kazakhstan with
50, do much better, with rankings of 11 and 8, respectively, among the former
socialist countries. Moreover, in this entourage, Russia scores best on enforcing
Table 6.2 Russia in World Bank ‘Ease of Doing Business Index’, 2013
Rank among Rank among 26

all 189 countries EE & CA countries*
Ease of Doing Business Rank 92 21
Starting a business 88 22
Dealing with construction permits 178 22
Getting electricity 117 14
Registering property 17 7
Getting credit 109 22
Protecting investors 115 21
Paying taxes 56 9
Trading across borders 157 21
Enforcing contracts 10 1
Resolving insolvency 55 8
Source: World Bank (2014b).
Note: *EE – Eastern Europe; CA – Central Asia.
contracts (followed by Belarus as second), registering property and paying taxes
(see Table 6.2).
Thus, despite years of measures and legislation aimed at making the busi-
ness climate more appealing, Russia still finds itself near the bottom of the East
European and CIS league and sits somewhere in the middle of the 189 countries
ranked in the index. The reason is that such a large part of the economy is part of
the rent management system and that the large companies and strong economic
players in Russia are not particularly interested in changing the situation. Making
it easier for new companies to enter the market and thereby getting competitors
is not in their interest. Rich companies can manage the high cost environment
and loss-making companies rely on their political contacts and their lobbying
strength.
The shortage of democracy and civil society

The weak rule of law and voice and accountability in the Russian economy reflects
the fact that the separation of powers between the legislative, executive and judi-
cial branches of state power, defined in the Russian Constitution from 1993, is
not actually manifested in Russian society. The executive branch, primarily rep-
resented by the president, is involved in all branches of power and there is no
independent judiciary. Developments with regard to diminishing citizens’ rights
and basic freedoms follow from this breach of the constitution. Putin showed
a positive attitude towards civil society in his political programme in 1999, but
when in power he tried to bring independent NGOs under state control. The Civic
Assembly initiated in November 2001 was an attempt to establish platforms of
communications between the state and NGOs but it failed (Siegert 2011: 538–9).
A complete breakdown in the dialogue between the state and civil society came
with the arrest of Mikhail Khodorkovsky, who had used the Open Russia Founda-
tion to finance NGO projects and the ‘Orange Revolution’ in Ukraine. From the
Kremlin’s point of view, NGOs supported by western donors played an important
part in the events in Ukraine (ibid.). During Putin’s second term control over civil
society increased.
The restrictions on the freedom of speech and assembly in Russia, imposed
since 2012, the lack of independent media and the crackdown on civil society
organizations imply that there is very limited room for Russian citizens to voice
their opinions and influence the direction of social and economic development.6
Instead, development in Russia is again unilaterally managed from above and pol-
iticians are not accountable to their electorate in any efficient way. Under the
present leadership, economic development will be restricted by the continuation
of the subsidizing of unprofitable rent-addicted industry and the redistribution of
oil rents. The main goal of Putin is to remain in power and secure his position,
and the rent distribution system is needed to regulate the power balance between
different groups. This is quite a different goal compared to stimulating growth and
supporting innovative new companies.
The importance of ‘voice’ and civil society
The concept of ‘voice’ in the economic literature comes from the theory first
advanced in Exit, Voice and Loyalty (Hirschman 1970). Hirschman takes standard
economic theory as his starting point and attempts to explain behaviour that is not
predicted by standard economic models. Market actors express ‘voice’ when they
try to influence the quality of goods and services instead of just choosing another
provider. ‘Exit’ is the predicted behaviour of an economic agent that is dissatisfied
with a good or a service, at least in a competitive environment where there are
alternatives.7
Translated into a political setting, ‘voice’ is how citizens try to influence the
political elites and get their main concerns onto the political agenda. In democ-
racies, there is a mutual interest in effective channels of voice since power elites
and political parties want to stay in power and adjusting to citizens’ demands may
increase their chances of doing so. Citizens may also choose ‘exit’ by voting for
somebody else. When that is not possible, however, and the space for voice is
restricted, exit may take the form of emigration or ‘internal emigration’ which
means that citizens withdraw from political life and do not participate in social
activities that require an interface with power structures. They vote with their feet.
Internal emigration was a common behaviour in the communist states of the past
where political opposition was repressed. Hence, civil society strengthens ‘voice’
in a society by giving support, structure and sustainability to certain ideas and
movements. It strengthens ‘voice’ and makes individuals refrain from ‘exit’ by
offering organized channels of expression and protest and a party for negotiation
with power. For that reason, a strong civil society is seen as an important ingre-
dient of democracy.
What functions could civil society perform and why is it so important also for
the economy that people participate in it? Civil society is often associated with its
advocacy role since it can identify problems that are not addressed by the political
elite and bring them to public attention, thereby creating public opinion, aware-
ness and change. In many countries, NGOs have taken on a ‘watchdog’ function:
they monitor consumers’ rights, freedom of speech, ecological matters or anti-
corruption schemes and generally act as bodies that hold the politicians account-
able. These issues are represented both by local civil society organizations and by
international NGOs such as Greenpeace, Amnesty and Transparency International.
Economists often refer to civil society when investigating the development of
social capital (see Glaeser et al. 2002). Participation in civil society organizations
gives individuals the opportunity to develop as they meet and work with peo-
ple outside their own group, class or work environment, which strengthens social
cohesion. Large parts of civil society are engaged in expressive functions, such
as book clubs and different networks, which play an important role in forming
and diversifying social capital. Furthermore, in many countries, civil society is an
important economic actor in itself, generating employment and value added. As
reported by Ghaus-Pasha (2004: 4–5), a survey of 36 countries by Johns Hopkins
University shows that the civil society sector spent on average 5.4 per cent of GDP
and employed an equivalent of 4.4 per cent of the economically active population
in the period in the surveyed countries 1995–2000. According to another report by
Johns Hopkins University (2013), the employment share is as high as 7.4 per cent
in the 13 countries examined. The contribution to GDP was 4.5 per cent (ibid.).
Finally, some civil society organizations complement or replace the state in
certain functions and regulations. In many countries, trade unions and employers’
organizations are fully responsible for wage negotiations within a framework set
by the state. Another example of the state delegating regulatory functions is the
occurrence of certain professional associations that certify their members’ right to
operate in their profession through conferring a certain title – such as lawyers or
auditors – so-called ‘self-regulation’.
In Russia, all of these functions of civil society are still in their embryonic state.
Due to the present restrictions on the freedom of speech and assembly, organized
civil society will not develop. Because real citizen participation is not encouraged,
the economy forgoes many initiatives from the population that could improve
quality of life and standards of living. When civil society is weak, society has to
rely solely on reforms from above and when the regime is neither democratic nor
market-oriented, modernization and democratization are far-fetched.
Conclusions
Market institutions play only a limited role in the Russian economy and improv-
ing the prospects for growth with ‘western’ economic policy or improving the
institutional framework will be difficult and have a limited effect. Only some
parts of the economy profit from market reforms and stronger institutions. The
old rent-dependent sector has a high degree of political support. It follows that
more substantial political reforms are needed to solve the structural impediments
and efficiency problems of the Russian economy. Society needs to become more
democratic and more transparent.
The present politicized economic system does not facilitate a more effi-
cient allocation of resources between sectors, less resource waste, productivity
increases or stronger competition by enabling the ‘entry’ of new actors into dif-
ferent areas. Thus, economic growth cannot be restored to previous levels within
the present economic system. The World Bank (2014a) expects at best 1.1–1.3 per
cent growth in 2014–15 and, in a more pessimistic scenario, a contraction by 1.8
per cent in 2014. The confidence crisis caused by the Ukrainian events in early
2014, causing capital flight and uncertainty regarding to what extent Russia will
respect its commitments, has contributed to this picture.
The reforms in the 1990s, and their subsequent consolidation in laws and reg-
ulations in the early 2000s, managed to break the hegemony of the Soviet com-
mand economy and introduced a private sector and strong market elements into
the Russian economy. However, the changes never completely overcame the old
Soviet heritage that is embedded in both the infrastructure and the industrial struc-
ture. Many Soviet-type enterprises survived, and with them formal and informal
behaviour. Even though formal institutions were abolished, informal institutions
and networks remained, which has systematically undercut the development of
new market-oriented institutions and their supporting social capital.
The remedy to attain stronger growth is to allow the growth of the new private
sector, mainly consisting of SMEs. This requires stronger market-oriented insti-
tutions. Growing innovative companies need to be able to rely on the primacy
of basic institutions such as rule of law, a high quality of governance and that
corruption is kept at a reasonable level. They must also be able to access finan-
cial resources and profit from a supportive business climate. The old loss-making
sector, however, is not interested in changes in that direction and has a strong
political leverage to maintain the existing order where personal ties to the politi-
cal hierarchy rather than competitive business activities can ensure survival. For
change to happen, the rent dependence and rent management system needs to
be deconstructed, which is not in the interest of the present regime. Redistribu-
tion of rents is a vital tool for maintaining political stability. It may be expected,
therefore, that political management of the economy and state intervention will
continue, with economic stagnation as a result.
The restricted possibilities to voice different opinions, to organize collective
action around new ideas and to hold politicians and other decision makers respon-
sible mean that there is no effective reform pressure from below. Instead, improve-
ments in the performance of the economy are entirely dependent on reform
initiatives from above, and initiatives that could spur growth are not forthcoming
under the present leadership. As a matter of fact, the Russian campaign to destabi-
lize Ukraine may be seen as a way of diverting attention from an already stagnat-
ing living standard. The uncertainty it has caused regarding Russia’s economy has
hurt the confidence in the Russian state as a business partner, however, and made
the prospects for growth even gloomier.
The democracy shortage in Russia is thus closely interlinked with the efficiency
challenges of the economy. The preferences of the population are not reflected in
the direction of economic development since economic policy does not rest on a
democratic foundation. Indicators reflecting the institutions ‘voice and account-
ability’ have followed a downward trend since Putin’s first presidency. Today,
Russian society is polarized on many political and economic issues, but civil soci-
ety is weak and restricted and cannot fulfil its function either as watchdog or as
a channel of ideas and entrepreneurship. Without political reform and a market-
oriented democratic government, it is difficult to see how the performance of the
economy could improve.
Notes
1 High wage flexibility and low sensitivity of employment to fluctuations in output
has been a trademark of the Russian labour market in the 2000s as well. GDP dou-
bled between 1998 and 2008, but total employment grew by only 7–8 per cent over
this ten-year period (Gimpelson and Kapelyushnikov 2013: 695). Real wages, how-
ever, grew by 10–20 per cent annually and cumulatively tripled over this period
(ibid.: 701).
2 As an example of low productivity, on SIPRI’s lists of the world’s 100 largest defence
industry companies between 2007 and 2010, the few Russian companies included have
between twice and four times as many employees as western companies with compa-
rable sales revenues (Oxenstierna and Westerlund 2013: 17–18).
3 See Chapter 2 in this volume and Gaddy and Ickes (2010, 2013a, 2013b).
4 See also Chapter 4 by Andrei Yakovlev and Chapter 5 by Ruta Aidis on Douglass
North’s pioneering work on institutions.
5 The survey comprises more than 4,200 randomly selected enterprises.
6 A comprehensive account of the development of Russian civil society in recent years
is found in Chapter 10 by Jens Siegert.
7 Hirschman also introduces the concept of ‘loyalty’ as a bridge between exit and voice.
If the individual has a loyalty bond with the organization or company that he/she is
dissatisfied with, there is a greater chance that he/she will try to use voice to improve
the situation before taking the exit option.
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7 The impact of oil prices,
total factor productivity and
institutional weakness on
Russia’s declining growth
Masaaki Kuboniwa
The chapter presents an analysis of the impact of oil prices, total factor productiv-
ity (TFP) and institutional weakness on the present growth retardation in Russia.
First, I discuss Russia’s dependence on oil and natural gas and provide an esti-
mate of the value-added of the oil and gas industry generated by revenues from
domestic production and exports of oil and gas. Russia’s oil windfalls are captured
using the concepts of terms of trade and trading gains (terms of trade adjustment).
The GDP–oil nexus is also explained through energy efficiency or intensity. Next,
the impact of oil prices and TFP on growth is analysed using the estimation of
regressions for the GDP–oil nexus and production function. There then follows an
investigation of the relationship between TFP and growth in the present Russian
economy. Finally, the elusive impact of institutional weakness on Russia’s growth
is considered, using the World Bank’s Governance Indicators (WGI) and the Ease
of Doing Business index.
Value-added of the oil and gas sector in Russia’s GDP

Based on Russian official statistics, the average share of value-added of oil and
gas (crude oil, oil products and natural gas) in overall GDP for 2005–13 was only
10 per cent. If this were true, it cannot be claimed that Russia relies heavily on oil
and gas. As shown by Kuboniwa et al. (2005), the official picture is a result of its
specific methodology where all revenues from exports of oil and gas are included
in the trade and transportation sectors and the net taxes on exports. In order to
capture the correct picture of the role played by the oil and gas industry in the
Russian economy, it is necessary to rearrange revenues from exports of oil and
gas and export taxes on these as part of the value-added of the oil and gas sector.
The export revenues from the oil and gas industry are measured by calculating
the differences between exports in foreign trade prices and domestic producer
prices. Exports of oil and gas in foreign trade prices are taken from foreign trade
data in USD (available on the websites of Rosstat and the Bank of Russia). Exports
of oil and gas in producer prices are calculated from the official data on export
quantities (ton or cubic meter) and quarterly or monthly producer prices.
Export taxes on oil and gas are paid by the export revenues. Data on export taxes
are available from a website of the Russian Ministry of Finance or the database
114 Masaaki Kuboniwa
of the federal laws of Russia. I regard all revenues from exports of oil and gas as
part of the value-added of that sector at basic prices. Although export taxes can
be considered to belong to a category of taxes on products or indirect taxes, I here
consider taxes on oil and gas exports as corporate income taxes according to the
usual practice in most oil exporting countries, for example Norway.
Figure 7.1 shows the result of our estimates for 2005–13. Figure 7.2 summarizes
the average picture for the period. The average share of the estimated value-added
of the oil and gas industry in overall GDP is 20 per cent – that is, twice the offi-
cial figure of 10.2 per cent. The average gross revenue from oil and gas exports
amounts to about 10 per cent of GDP, of which 6.8 per cent are paid to the federal
government as export taxes and 3.1 per cent remain in the companies. It should be
emphasized that export taxes are much larger than companies’ net revenues from
exports. The share of total value-added of the oil and gas industry reached its peak
of 22 per cent in 2005, fell to 17.5 per cent in 2009 due to the reverse oil shock
coupled with the Lehman shock, and increased to 20 per cent in 2013.
The estimates of the share of total value-added of the oil and gas industry for
2005–6 are slightly smaller than the results of 24–5 per cent recorded in Ustinova
(2010) and Kuboniwa (2012) based on input–output tables because the latter
includes additional domestic activities of the oil and gas industry and taxes on
oil and gas other than export taxes. Due to the lack of disaggregated input–output
%
25
22.1 21.5
20.4 20.8 20.2
19.3 19.8
18.7
20 17.5
6.1
6.9 6.5
5.4 6.8 6.5 6.0
5.3
15 5.2
4.6
3.8 3.8 3.1
3.9 4.1 3.0
4.3
10 3.6
11.4 10.9 11.1

5 10.0 9.5 8.7 9.1
10.4 10.4
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
export taxes on oil & gas
net revenue of oil & gas industry from exports
official oil & gas industry value added at basic prices
estimated oil & gas industry value added at basic prices
Figure 7.1 Share of value-added of the oil and gas industry in overall GDP (%).
Source: Author’s calculations from Rosstat website and Ministry of Finance website.
Oil, TFP and institutional weakness 115
25
20.0
20
government
revenue from foreign
6.1 trade
total revenue
15
from
production and industry net
foreign trade 3.8 revenue
10
from
domestic
production
5 10,1
0
2005–2013
export taxes on oil & gas
net revenue of oil & gas industry from exports
official oil & gas industry value added at basic prices
estimated oil&gas industry value added at basic

prices
Figure 7.2 Average share of value-added of the oil and gas industry in over-
all GDP (%).
Source: Figure 7.1.
tables from 2007 onward, our simple method may also be appropriate. It should
also be noted that our estimate only considers the formal activities of the oil and
gas industry. However, our methodology is rather robust because it can always
be reproduced from systematically written evidence. The results may also pro-
vide evidence for part of the resource rents suggested by Gaddy and Ickes (2010,
2013).
Terms of trade and trading gains

Windfalls arising from rapidly rising oil prices for Russia can be captured by trad-
ing gains due to improvements in terms of trade. The concept of ‘trading gains/
losses’ is explained in United Nations et al. (2008) System of National Accounts
(SNA) This concept is called ‘terms of trade adjustment’ in the World Bank’s
WDI. According to the SNA 2008 (United Nations et al., 2008, section 15.188),
the real gross domestic income (GDI) measures the purchasing power of a coun-
try’s total income generated by its domestic production. The terms of trade (ToT)
is defined as the ratio of the export price P e to the import price P m that is to
say, P e / P m Here, P e = E n /E r and P m = M n /M r where En and Mn are exports and
imports in current prices, respectively, and Er and Mr are exports and imports in
constant prices, respectively. Due to improvements in the ToT caused by the rise
in export prices relative to import prices, the purchasing power of the country in
international markets increases in relation to real GDP. The trading gains (TG)
or terms of trade adjustment from the changes in the ToT can be formulated as
nominal net exports deflated by the import price index minus the conventional
real net exports:
( ) ( )
TG = E n − M n / P m − E r − M r (7.1)
It follows from equation (7.1) that
( )
TG = E n / P m − E r = E r P e / P m − 1 (7.2)
It follows from (7.2) that TG >=< 0 if ToT = P e / P m >=< 1. If the terms of trade or
P e / P m improve (worsen), the trading gains should increase (decrease). At the base
period P e = P m = 1 and, hence, TG must be zero.
The real GDI is defined as the real GDP plus the real trading gains:
real GDI = real GDP + real TG (7.3)
In general, if imports and exports are large relative to GDP and if there is a marked
change in ToT resulting from a large increase in export prices relative to import
prices or a decrease in import prices relative to export prices, the magnitude of
potential trading gains or losses would be large. Indeed, as will be shown, this is
true for the Russian economy. It can be noted that trading gains can also be spent
on additional purchases of imports and domestically produced goods. Although,
in the literature, real GDI is often discussed as an alternative welfare concept
in place of, or in addition to, real GDP, Kuboniwa (2012, 2014) focuses on the
impact of changes in terms of trade or trading gains (losses) on real GDP.
Figure 7.3 shows annual data on movements of ToT along with Urals oil prices
for 1990–2013 in Russia. As can be seen, the ToT has a strong positive relation-
ship with oil prices. In 2000–8, rising oil prices caused substantial improvements
in ToT. Huge improvements in ToT with rapidly rising oil prices imply that import
prices did not show any large increases in response to oil shocks. In contrast to
the 1970s, the 2000s did not witness sufficiently parallel changes in import prices
with oil prices.
Figure 7.4 demonstrates that improvements in the ToT brought about trading
gains or terms of trade adjustments. The trading gain in 2000 constant prices
amounted to USD 155 billion in 2008 (36 per cent of GDP). In 2009 this fell
to USD 46 billion (12 per cent of GDP). It then showed a continuous recovery,
amounting to USD 162 billion (37 per cent of GDP) in 2012 and USD 174 billion
(39 per cent of GDP) in 2013. Kuboniwa (2012) clarified the strong positive
impact of oil prices on GDP through the channel of terms of trade or trading gains.
2000=100 US$/bbl
200 140
120
terms of trade (ToT)
150
100
Urals oil price (right)
80
100
60
40
50
20
0 0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Figure 7.3 Oil prices and terms of trade.

Source: WDI, Bloomberg-Thomson Reuters and author’s estimates.
constant
2000 bln US$ 2000=100
700 200
GDP
180
600 trading gain (terms of trade adjustment)
GDI 160
500 terms of trade (ToT) right 140
400 120
100
300
80
200 60
40
100
20
0
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
100 ( 20)
Figure 7.4 Trading gains (terms of trade adjustment) at constant USD 2,000.
Source: Author’s estimation based on WDI (accessed 15 August 2014).
In addition, Kuboniwa (2014) demonstrates the impact of increases in oil prices

on GDP through another channel, namely improved energy efficiency in Russia.
Figure 7.5 shows movements in energy consumption, including oil and gas con-
sumption, electricity consumption and total primary energy consumption along
with real GDP for 1990–2013. In the 2000s there were energy-saving efforts in
2000=100 GDP
200
oil & gas
consumption
180
electricity
consumption
160
primary energy
consumption
140
120
100
80
60
40
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Figure 7.5 Increase in energy efficiency (decreases in energy intensity).

Source: BP (2014) and Rosstat website.
Russia, although the absolute level of energy consumption is still very high, also
in comparison with other emerging economies and developed countries. Unlike
in the Soviet Union, the present Russia was forced to save energy in response to
rising domestic prices for oil and gas resulting from increases in their international
prices, even though domestic prices for crude oil and gas are still much lower than
their international prices. Improvements in the energy efficiency or the energy
intensity of a country have a direct impact on its further modernization or total
factor productivity (TFP).
Present situation of the impact of oil prices and TFP

Figure 7.6 shows the seasonally adjusted quarterly real GDP of Russia, with
quarterly nominal Urals oil prices for 1995Q1–2014Q2.1 As shown by this fig-
ure, Russia faced a 5.2 per cent contraction of GDP in 1998 during the Russian
financial crisis, with falling oil prices. Russia recovered quickly from its reces-
sion and showed steady growth, with rising oil prices for 2000–7. During this
period, Russia grew at an annual average rate of 6.7 per cent. In 2009, due to the
world financial crisis coupled with the collapse of the oil bubble, Russia showed
2000=100 US$/bbl
200 140
180 120
160 100
real GDP
140 Urals oil price (right) 80
120 60
100 40
80 20
60 0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Figure 7.6 GDP growth and oil prices.

Source: Rosstat website and Bloomberg-Thomson Reuters.
a large decline in its GDP – –7.8 per cent. Russia witnessed a rather strong
recovery immediately after the world financial crisis in 2008–9. However, it
has now begun to show a decline in growth with a growth rate of 1.3 per cent
in 2013.
Using DOLS (dynamic OLS) for the sample 1995Q3–2014Q2,
gdp = 0.181oil + 0.0056 t (annualized trend rate of 2.3%). Adj. R 2 = 0.972, (7.4)
[ 4.803] [4.453]
where gdp = log(real GDP), oil = log(oil price), t = a

linear time trend and [.]
denotes t-statistic. Equation 7.4 shows the long-run relationship between changes
in real GDP and nominal Urals oil prices, that is to say, {gdp, oil} . Oil prices for
Russia are Urals oil prices. The correlation coefficient between the logarithms of
Brent and Urals oil prices is 0.999.
It follows from equation 7.4 that a 10 per cent increase in oil prices leads to
approximately a 1.8 per cent increase in the growth of Russia’s GDP. The under-
lying annualized growth trend of about 2.3 per cent corresponds approximately to
the TFP growth, which reflects Russia’s modernization processes. Equation 7.4
thus shows the long-run relationship between growth in total factor productivity,
oil prices and GDP. Both oil prices and TFP contributed to economic growth in the
2000s (Kuboniwa 2012, 2014).
When using DOLS for sample (adjusted) 2008Q2–2013Q2, the equation is
gdp = 0.110oil + 0.0037t (annualized trend rate of 1.5%), Adj.R 2 = 0.985. (7.5)
[8.610 ] [9.160]
Equation 7.5 implies that a 10 per cent increase in oil prices leads to only a 1 per
cent increase in GDP growth. The underlying annualized growth trend of about
1.5 per cent is much less than 2.3 per cent. Both elasticity with respect to oil prices
and TFP fell markedly during this period. Considering that the oil price decreased
by 2.2 per cent in 2013, equation 7.5 offers a quite good approximation of the
growth result in 2013 (0.11* −2.2 per cent + 1.5 per cent = 1.3 per cent).
Consider a Cobb–Douglas production function with a steady technical prog-
ress: Y = Aexp( l t)K a L1− a , where Y = real GDP, K = capital stock adjusted for
utilization based on the REB (Russian Economic Barometer), L = actual employ-
ment, l = TFP, a = capital distribution ratio, and A = a constant. I estimate the
linear regression: y = a k + l t + log A, where y = log(Y / L) and k = log(K / L).
Data on fixed capital adjusted for utilization and employment are shown by
Figure 7.7. Using a canonical co-integrating regression (CCR) for the sample
1995Q2–2013Q4 based on the data compilation method in Kuboniwa (2011),
y = 0.342 k + 0.0067t (annualized trend rate of 2.7%). Adj. R 2 = 0.956. (7.6)

[3.966 ] [4.513]
2000=100
220
200
180 fixed capital stock adjusted for utilization

capital-labor ratio
160 employment
140
120
100
80
60
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Figure 7.7 Capital stock and employment.

Source: Author’s estimation based on data supplied by Rosstat, website of Rosstat and REB.
That is to say, a = 0.342 and l = 0.0067. This implies that the capital distribution
ratio accounts for 34 per cent, which corresponds to a conventional ratio, while
the annualized rate of l (TFP) accounts for 2.7 per cent, which corresponds to
a time trend coefficient of equation (7.1a). With the sample 2009Q1–2013Q4,
productivity becomes
2
y = 0.194 k + 0.0039t (annualized trend rate of 1.6%). Adj. R = 0.979. (7.7)

[ 4.716 ] [4.046]
Both the capital distribution ratio and TFP show marked decreases. TFP in equa-
tion (7.7) corresponds to that in equation (7.5). This implies that the present
growth retardation has been caused by large decreases in the elasticity of the cap-
ital-labour ratio and overall TFP.
It is helpful to look at manufacturing output in this context in order to
achieve a correct understanding of Russia’s dependence on oil. Figure
7.8 presents data on the real monthly manufacturing output of Russia for
1995M01–2014M07 with its Hodrick–Prescott filter trend ( l =14, 400 ). 2
Monthly data on Russia’s manufacturing output for 1995–98 are estimated
by using the regression based on the official data on manufacturing output
for 1999–2014 and the data on industrial output for 1995–2014. International
Financial Statistics (IFS) monthly data on Russian industrial output for 1995–
2000 =100 US$/bbl

200 140
manufacturing output
180 120
HP trend
Urals oil price (right)
160 100
140 80
120 60
100 40
80 20
60 0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Figure 7.8 Manufacturing output and oil prices.

Source: Based on CEIC database and Bloomberg-Thomson Reuters.
98 are modified by adjusting for the official annual data for 1995–98. Russian
manufacturing recovered after the world crisis and reached its pre-crisis peak
level in 2013M11.3
Using DOLS for sample (adjusted) for 1995M10–2014M06, we get
manu = 0.233oil + 0.0014 t (annualized trend rate of 1.7%). Adj.R 2 = 0.947, (7.8)
[ 7.155] [3.857]
where manu = log(real manufacturing output). Equation 7.8 also shows a strongly
positive relationship between changes in oil prices and manufacturing output for
1995–2014. It follows from this equation that a 10 per cent increase in oil prices
leads to a 2.3 per cent increase in Russia’s manufacturing growth. The underlying
annualized trend rate of 1.7 per cent reflects TFP in manufacturing. The elasticity
of manufacturing with respect to oil prices is larger than that of GDP, whereas the
underlying trend of manufacturing is smaller than that of GDP. However, for the
sample (adjusted) 2010M01–2014M04
manu = 0.241oil + 0.0015t (annualized trend rate of 1.8%). Adj.R 2 = 0.946. (7.9)
[11.084 ] [5.873]

In contrast to overall GDP growth, both the elasticity and the trend rate for 2010–
14 are slightly greater than those for the whole sample. This suggests that recent
growth retardation might have been brought about through TFP losses in mining and
trade sectors other than manufacturing. However, this should need further inves-
tigation. For instance, using equation 7.9, I approximate a manufacturing output
growth of 1.3 per cent in 2013 ( 0.241* −2.2 per cent + 1.8 per cent = 1.3 per cent )
that is much larger than the actual figure of 0.5 per cent.
The impact of institutional quality

Figure 7.9 shows the net capital inflow/outflow of the private sector. As is well
known, a large capital outflow occurred during the world financial crisis, reflect-
ing the institutional weakness of the Russian economy. After some recovery of
growth, Russia’s capital inflow/outflow has shown a negative trend with rather
chaotic movements. The capital outflow of about USD 60 billion in 2013 was
largely brought about by Rosneft’s absorption of TNK-BP.
One well-known indicator of institutional quality is the Worldwide Gov-
ernance Indicators (WGI), a research dataset summarizing the views of the
quality of governance provided by a large number of enterprises, citizen and
expert survey respondents in an economy (Kaufmann et al. 2010). Figure 7.10
shows Russia’s absolutely low level of worldwide governance (rule of law),
which ranks it at 162nd of 212 countries/regions in 2013. The first is placed
by an oil/gas-rich country, that is, Norway. India, Brazil and China are 101st,
bln US$
80
40
40
80
120
160
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Figure 7.9 Net capital inflow/outflow: private sector (bln USD).

Source: website of Bank of Russia and CEIC database.
0.4
0.2
0
India Brazil
0.2 China Russia
0.4
2000
4000
0.8
1.2
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Figure 7.10 Absolute low level of worldwide governance (rule of law) of 212 countries/
regions, 2013.
Source: WGI.
103rd and 130th, respectively. Russia shows an improvement during the world
crisis in 2009. Generally, this indicator does not reflect a country’s growth
performance in a well-defined manner. For a small annual sample 2002–12 of
Russia, I have
gdp = −1.2log (WGI + 2.5) + 0.05t. Adj.R 2 = 0.955. (7.10)

[ −5.3211] [10.813]
GDP growth has a strongly negative relationship with the WGI that should reflect
the quality of the institution.
Another well-known indicator of the quality of a country’s investment climate
is the ‘Ease of Doing Business Index’. A high ranking on this index means that
the regulatory environment is more conducive to starting and operating a local
firm. This index averages the country’s percentile rankings on ten topics, made up
of a variety of indicators, giving equal weight to each topic. The latest ranking is
benchmarked to June 2013.
Table 7.1 shows this index for Russia and other BRIC countries. The 2013 edi-
tion presents new opportunities for foreign companies and investors, bearing in
mind that Russia moved up 19 places from 2012 and became the top-ranked BRIC
country, emerging ahead of China (96th), Brazil (116th) and India (134th). This
change pleased President Vladimir Putin, and many expected a higher growth in
2013. However, the growth results in 2013 and the first half of 2014 were rather
disappointing. Russia’s moving up was primarily the result of a large improve-
ment in ‘getting electricity’, which rose from 184th place to 117th place. Follow-
ing the break-up of the Unified Energy System, there are many players, including
the generator, local governments, and private distributors’ intermediate, and ‘get-
ting electricity’ is not a transparent process. The Ease of Doing Business Index is
based on interviews with businesses. Additional anecdotic evidence of the prob-
lems can be attained in discussions, for instance, Nissan in St Petersburg was
forced to pay USD 5 million for getting electricity (author’s interview at Nissan
in Japan). Anyway, this indicator does not reflect a country’s short-run growth and
investment opportunities. In general, it is complicated to design a good index of
the quality of institutions in relation to the economic growth of a single country.
Cross-section or panel data for many countries are needed. Wedeman (2012: 178)
found a weakly hump-shaped relationship between the Transparency Interna-
tional Corruption Perceptions Index (CPI) score (inverted) or national corruption
and the average growth of many countries for 1992–2008, although he regarded
China as an outlier with a much higher growth than other countries with similar
levels of corruption. Ahmad et al. (2012) also statistically found the existence of
a hump-shaped relationship between corruption and long-run economic growth,
using the International Country Risk Guide corruption index of 71 countries. In
other words, up to a certain development level, the deepening of corruption of a
country may increase the level of economic growth. In this context, Russia may
Table 7.1 Comparison of countries in ‘Ease of Doing Business Index’ as of December 2013
Russia China Brazil India Singapore USA Norway Japan

2013 2012 2013
Ease of Doing 92 112 96 116 134 1 4 9 27
Business
Rank
Starting a 88 101 158 123 179 3 20 53 120
Business
Dealing with 178 178 185 130 182 3 34 28 91
Construction
Permits
Getting 117 184 119 14 111 6 13 17 26
Electricity
Registering 17 46 48 107 92 28 25 10 66
Property
Getting Credit 109 104 73 109 28 3 3 73 28
Protecting 115 117 98 80 34 2 6 22 16
Investors
Paying Taxes 56 64 120 159 158 5 64 17 140
Trading Across 157 162 74 124 132 1 22 26 23
Borders
Enforcing 10 11 19 121 186 12 11 4 36
Contracts
Resolving 55 53 78 135 121 4 17 2 1
Insolvency
Average 90 102 97 110 122 7 22 25 55
Source: http://www.doingbusiness.org/rankings.
Notes: Average scores are author’s calculations. The number of ranked countries is 189.
still remain at a developing stage with a mutually complementary or dependent

relation of institutional deficiency and growth.
In Russia, as is shown by Figure 7.11, even the assembly of foreign-made auto-
mobiles is facing a declining growth due to its relatively narrow technological
base. To sum up, it is difficult to identify some major breakthrough leading to the
subsequent development of the Russian economy.
Concluding remarks
This chapter has analysed Russia’s recent economic slowdown from the perspec-
tives of oil prices, TFP and institutional quality. Overall declining growth can be
captured by the impact of oil prices and TFP, whereas the estimated TFP decline
3500
3000 imported
Russian make
2500
foreign make
2000
1500
1000
500
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Figure 7.11 Russian car market, 2000–13 (thousand units).

Source: Autostat, CEIC database and author’s estimates.
does not satisfactorily explain the growth of output in manufacturing. Indexes of

quality of institutions, including WGI and the ranking in the World Bank’s ease of
doing business, are insufficient to capture the output performance in present-day
Russia. It is rather difficult to find some major breakthrough leading to a further
diversification development of the Russian economy. Furthermore, recent devel-
opments in Russia–Ukraine relations may deepen Russia’s declining growth more
than had been expected at the beginning of 2014.
Notes
1 Q1, Q2 etc. denote the first quarter of the year, the second quarter, etc.
2 Russian official data are seasonally adjusted by X-13. X-13ARIMA-SEATS is a sea-
sonal adjustment software developed by the United States Census Bureau.
3 M stands for month. M01 is January; M11 is November, etc.
References
Ahmad, E., Ullah, M. and Arfeen, M. (2012) ‘Does Corruption Affect Economic Growth?’,
Latin American Journal of Economics, 40: 277–305.
BP (2014) BP Statistical Review of World Energy 2014, London: BP.
Gaddy, C. and Ickes, B. (2010) ‘Russia After the Global Financial Crisis’, Eurasian Geog-
raphy and Economics, 51(3): 281–311.
Gaddy, C. and Ickes, B. (2013) ‘Russia’s Dependence on Resources’, in Alexeev, M. and
Shlomo, W. (eds), The Russian Economy, Oxford and New York: Oxford University
Press, pp. 309–40.
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8 From the dual to the triple
state?
Richard Sakwa
Russian politics is characterised by the dominance of a powerful yet diffuse

administrative regime, recognising its subordination to the normative state on the
one side and its formal accountability to the institutions of mass representative
democracy on the other. However, it is not effectively constrained by either, hence
the ‘regime’ character of the dominant power system. Russia is therefore a dis-
tinctive type of ‘dual state’, in which two regulatory regimes in the political and
economic sphere coexist, which in short-hand we can label the democratic and the
dirigiste, allowing neither free rein and impeding the inherent ordering principles
of both. The Russian dual state is unlike the one in Nazi Germany, where the
system was based on a degree of predictability, with the prerogative regime oper-
ating in certain defined instances. Ernst Fraenkel (1941, reprinted 2006) described
how the prerogative state acted as a separate law system of its own, although the
formal constitutional state was not dismantled. There were two parallel systems
of law, with the ‘normative state’ operating according to sanctioned principles
of rationality and impartial legal norms while the ‘prerogative state’ exercised
power arbitrarily and without constraints, unrestrained by law. In Russia, how-
ever, at any given time it cannot be predicted which order will predominate. No
full-blown ‘prerogative state’ has emerged, ruling through emergency decrees and
sustained repression. Instead we have an ‘administrative regime’ as the protago-
nist of the normative state. There is no prerogative state as such in Russia, consti-
tuted through formal but extra-constitutional decrees or laws, but instead there is
informal behaviour by an administrative regime that fulfils some of the functions
of the prerogative state but that has no independent legal or institutional status of
its own.
I have described the workings of this dual state elsewhere (Sakwa 2010, 2011).
The question posed in this chapter is whether the arbitrariness of the adminis-
trative regime has transformed into something else, dubbed in this chapter the
‘triple state’. By the triple state I mean the degeneration of the administrative
regime into a primarily self-serving body where personal self-interest trumps
the pursuit of rational, although possibly mistaken, public policy goals. The
classic dual state of the first two terms of Vladimir Putin’s presidency set itself
up as a tutelary body standing outside the constitutional order. Its legitimacy
derived from the claim that by constituting itself as a separate domain it could
From the dual to the triple state? 129
challenge the powerful interests, notably the oligarchs and regional bosses, that
had benefitted from what Joel Hellman (1998) called the ‘partial reform equilib-
rium’. Special interests could be brought to heel and the interests of the state be
defended. In the early years of Putin’s leadership this was a defensible, although
highly contested, claim.
An activist state, in the form of a distinct administrative regime, emerged that
broke the independent power and authority of the early winners (oligarchs and red
directors), notably in the Yukos affair (Sakwa 2014). The economy now became
systemically politicised, accompanied by elements of predatory state intervention-
ism. This was more than the conventional notion of a weak state environment, but
one in which the institutions of the constitutional state (notably impartial adjudi-
cation by the courts) were susceptible to interference and distortion by the admin-
istrative regime. One part of ‘the state’ in certain respects was too strong, allowing
the administrative regime to shape outcomes; while the other part, the legal and
regulatory side, was too weak. A recent study of international partnerships illus-
trates the bargaining relationship between foreign and domestic partners in a weak
institutional environment, nicely bringing out the dynamics of the politicised dual-
ism of Russia’s business environment (Henderson and Ferguson 2014).
The chapter will move in four steps. First, I will consider the workings of the
dual state. This will be followed by a discussion of the concept of sublation, the
mechanism whereby the administrative regime subverts, but does not destroy
the autonomy of the institutions associated with the constitutional state. In the
third part I examine various models of the third state, including a discussion of the
‘deep state’ idea as applied to Italy and Turkey. The fourth section draws a paral-
lel with Second Empire France, a situation which has remarkable similarities with
contemporary Russia, and reinforces the point by further examining the parallels
between Putinism and Berlusconi. The conclusion seeks to draw out the broader
arguments of the chapter.
The dual state

In modern political theory the constitutional state is an entity that exists separate
from any particular ruler, endures beyond the life span of a particular government,
and is rooted in the public good. It is regulated by impartial norms of law and
managed by a disinterested bureaucracy. In Russia, this Weberian ideal has been
subverted by the administrative regime, which draws its legitimacy from claiming
to apply the principles of the constitutional state and authority from its represen-
tation of the common good, but in practice the polity and the state effectively
become the property of the regime, and increasingly of the leader himself. When
talking about strengthening the state, the system in fact too often only reinforced
the prerogative powers of the regime. In other words, a new form of a patrimonial
regime was consolidated.
Instead of consolidating the rule of law, the authority of constitutional insti-
tutions such as parliament and the formal procedures of modern governance,
regime practices predominate accompanied by the development of a whole range
130 Richard Sakwa
of para-constitutional bodies, such as the seven (later eight, joined by a ninth with
the annexation of Crimea in March 2014) federal districts, the State Council and
the Civic Chamber. The regime never repudiated the formal framework of the
constitution, but the sphere of discretion (which exists in all political systems) has
become extraordinarily wide. The tutelary politics of the administrative regime
are predicated on its high level of decisionism; the ability to decide in a Schmit-
tian fashion who is a friend or foe; and what is or is not right for the country and
its economy. This fosters the practice of legal populism, allowing the regime to
avoid direct coercion. The law is used to advance policies that run counter to the
spirit of constitutionalism, thus eroding trust in its institutions. The legal system
has been subordinated to political authority and in certain cases, such as in the
Yukos prosecutions, undermined the consolidation of independent courts and the
rule of law in general.
The administrative regime takes the form of a dominant power system, but is
balanced by the constitutional state. The administrative regime is careful not to
step outside the bounds of the formal letter of the constitution, but it is constantly
pressing against the limits of its spirit. The administrative regime is embedded in
a range of para-constitutional institutions, each of which undermines the official
constitutional body created to fulfil parallel functions. This is accompanied by the
development of a range of para-political bodies. For example, instead of allowing
United Russia to develop as an autonomous political force of its own, facing up
to its own weaknesses, lack of coherent programmatic development, and over-
whelmingly bureaucratic character, Putin created the People’s Front to offset the
failings of his own creature. This was a classical Putinite trope: fearing falling
hostage to a body of his own making, he created another. As for the factions, nota-
bly the conventional distinction between the siloviki and the civiliki, it is import-
ant to stress that these are not deeply entrenched clans. Their existence does not
reflect profound societal cleavages but situational political preferences and the
distinctive class structure of a semi-reformed post-communist state. Although the
great army of officialdom and the securocracy exploit the arbitrariness fostered by
the administrative regime, the system is not simply its servant. Russia’s develop-
mental stalemate is predominantly of a political character.
Two political systems operate in parallel. On the one hand, there is the system
of open public politics, with all of the relevant institutions described in the consti-
tution and conducted with pedantic regulation in formal terms. At this level, par-
ties are formed, elections fought and parliamentary politics conducted. However,
at another level a second para-political world exists based on informal groups,
factions, and operating within the framework of the inner court of the presidency.
As long as Putin remained the indisputable arbiter, this Byzantine level did not
openly challenge the leader but sought to influence his decisions. This second
level is more than simply ‘virtual’ politics, the attempt to manipulate public opin-
ion and shape electoral outcomes through the exercise of manipulative techniques,
but acts as a substantive alternative sphere of policy contestation. The suffocation
of public politics intensifies factional processes within the regime and corruption
in society as a whole. Putin cannot control the factional process, but his statecraft
lies in the ability to balance the factions and to ensure that none delivers a knock-
out blow to its rivals, endangering not only their political status and property, but
possibly their physical existence as well. This would allow the dominant group to
dominate the executive, and thus effectively capture the presidency. To counter
this, Putin plays a whole orchestra of instruments, including bringing in the pop-
ulation through para-constitutional and para-political instruments to maintain the
formalism of the constitutional state.
The regime governs by exploiting uncertainty, and this practice has now spread
into the operation of other spheres. In such a system there tends to be few perma-
nent winners or losers, hence attempts by those who temporarily find themselves
in a winning position to grab as much as they can while the going is good before a
new turn drives them into the loser’s camp. This has provoked the systemic stale-
mate in which Russia now finds itself. This is more than the ‘hybridity’ character-
istic of regimes in post-Soviet Eurasia but represents a historical conjuncture of
extended developmental stasis. Historical experience suggests that such a block-
age is overcome by either revolution or collapse. However, the distinctive features
of Russia’s dual state may allow an evolutionary transcendence of the stalemate;
but it may equally spiral into rampant authoritarianism, corruption and decay.
Sublation
In geology sublation is the process whereby one continental plate forces itself
under another, and in politics sublation means the undercutting of one institu-
tion by another, gradually eroding its legitimacy and efficacy. In our analysis
of the dual state, sublation is the mechanism whereby the institutions of the
constitutional state lose their autonomy. As we have seen, the dual state in
Russia does not openly proclaim its superiority over normal procedures of law,
electoral competitiveness and constitutionality, as would be the case if a state
of emergency was openly promulgated, and instead more subtle mechanism
operate. Three mechanisms are crucial to understanding how the administrative
regime operates.
The first is para-constitutionalism, the creation of institutions that are not
directly anti-constitutional but which subvert the operation of constitutional insti-
tutions. These include the creation of the seven (now nine) federal districts (which
undermined federalism), the State Council (undermining the work of the upper
chamber, the Federation Council), and the Public Chamber (which acts as a public
forum detracting from the State Duma). These are all formally constituted bodies
which lack constitutional underpinning but which the regime uses to buttress its
authority and legitimacy and a method through which it tries to enhance the man-
ageability of public affairs. As far as Putin was concerned, the public good (as
he saw it) took precedence over the tiresome proceduralism of the constitutional
state, although punctilious in regard to pedantic legalism. These bodies did pro-
vide some short-term benefits, but at the cost of the long-term credibility of the
institutions which they shadowed. Their existence subtracted from the efficacy of
the constitutionally-mandated bodies, the process of sublation.
132 Richard Sakwa
Second, para-politics is the process whereby entities are created in the public
realm to stymie and shape the conduct of free and open pluralistic politics, but
which lack the autonomy to act as independent subjects of a competitive political
sphere. Following the Orange Revolution in Ukraine in Autumn 2004 the creation
of the Nashi youth organisation was an exemplary case, designed to occupy the
streets to prevent colour-style popular rallies against the regime (Horvath 2013).
In a rather more sophisticated version, the creation of the All-Russian People’s
Front by Putin on 6 May 2011 was designed to broaden the flagging appeal of
the United Russia by co-opting civic associations and to help him win the presi-
dential elections in 2012. Putin stated that 185 Front members would be included
on United Russia’s 600-strong candidate list for the Duma election, while only
167 of the 315 current deputies would be included (Smirnov 2011). Thus even
before the ‘coup’ of September 2011 Putin was mobilising his political resources
to prepare for a possible return to the Kremlin. In the end, the Front subtracted
from the regime’s own pedestal party, United Russia. Faced by sustained attack
in the 2011–12 elections, and irredeemably tarnished by the moniker ‘party of
thieves and swindlers’, the regime looked to an alternative instrument to mobilise
the electorate and to associate its supporters. Sublation in this case saw the Front
assuming some functions of United Russia.
Third, the existence of factions is another example of sublation compromising
the public political role of political parties. The Russian policy process is shaped
by the clash of competing factions. I avoid using the term ‘clan’ to describe the
phenomenon since this would suggest a permanency and hardness to the groups
that is typically lacking (Sakwa 2011: 85–130). Factional constellations are
groupings based on broad professional, geographical and ideational alliances that
are constantly shifting, but which, although held together by the ‘weak force’ of
mutual self-interest and policy orientations, nevertheless exist and populate both
the formal and informal spheres of politics. Important issues of policy are deter-
mined not by open parliamentary or party politics, but by shadowy groups based
on teams working in the interstices of the political system. For example, in his
study of energy policy in the Arctic, Orttung (2011: 9) argues that ‘The unstable
nature of the Russian political system, which is characterized by clan conflict
rather than far-sighted planning, means that the country is unlikely to develop a
coherent strategy to develop its Arctic resources’.
The siloviki are the archetypal faction, with a clear presence in Russian pol-
itics but for that no less hard to pin down. The easiest way is simply to look at
those with a security service background, and this does help estimate the scale of
their presence, but it says little about the struggles between various subfactions
within those with a security background. In 2007 there was a nasty ‘siloviki war’
as two subfactions fought for power and access to state resources, one of whom
appealed to the allegedly selfless traditional values of the security services (Sakwa
2011: 184–209). The St Petersburg contingent that has dominated Russian politics
following the rise of Putin is conventionally split between the security officials,
and the liberal economists and lawyers. Surkov, deputy head of the presidential
administration until December 2011 with responsibility for managing political
life, was associated with a ‘democratic statist’ orientation, which advanced the
notion of sovereign democracy in an attempt to combine the universals of democ-
racy (as they understood the term) and the particular challenges facing Russia.
The siloviki were temporarily balanced by the civiliki in the Medvedev years,
comprising only about a quarter of top officials, but with Putin’s return to the
Kremlin for a third term they soon occupied nearly half of the top posts.
Sublation inhibits not only rational policy making but, above all, contributes
to the impasse in constitutional development, and this has been something appar-
ent from the very beginning of Russia’s state development. The gulf between the
visible part of politics and various subterranean processes became apparent very
early on in Boris Yeltsin’s rule. The ‘democratic’ revolution of 1991 was quickly
captured by the Yeltsin group, which, despite its reformist achievements pushed
through by the economic liberals, soon became transformed into ‘the family’,
with all of its mafia ‘deep state’ implications. The first incarnation of the siloviki,
the Alexander Korzhakov, Mikhail Barsukov and Oleg Soskovets group, provoked
the first Chechen war in December 1994, but was effectively defeated by the
counter-move of the liberals led by Chubais in 1996; however, the same Chubais
sponsored Putin’s move to Moscow in 1996 and helped smooth the ascent of the
‘enlightened securocrats’ later in the decade. The degradation of the constitutional
state continued as representatives of vlast became in certain respects the power of
avtoritety, the godfathers in the mafia tradition (Sakwa 2014: 68–73).
The factional networks of personal affiliations cut across occupational and
professional categories, such as the courts, the executive and the legislature, and
even to a degree beyond conventional alignments such as the siloviki and the
liberals. An example of the latter is the Ozero dacha collective of Putin’s closest
associates, who all have a country cottage near Putin’s not far from St Petersburg
(Pribylovsky 2012). The factions engage in sublation by undermining the formal
channels of policy aggregation through the informal advancement of programmes
and principles. In some spheres their influence is stronger, and, as one would
expect, the economy is one of these, and in others weaker, notably foreign policy,
where since 2004 the foreign minister, Sergei Lavrov, has effectively dominated
the process. The various oligarchs lack a recognisable factional identity of their
own, and instead align themselves with political leaders, although as a group they
undoubtedly look back to the Yeltsin period, when they were independent polit-
ical actors. After the Yukos affair, they kept their heads under the parapet and
instead fought behind the scenes to advance their interests.
In politics, factional contestation is determinative. In the Medvedev years
the factional groupings in the end aligned along a classic bipolar axis. Those in
favour of a second term for Medvedev were led by economic liberals such as
Arkady Dvorkovich, the former head of the presidential administration Alexan-
der Voloshin, and the first deputy prime minister Igor Shuvalov. Opposing them
were the more conservative partisans of Putin’s return for a third term, led by the
deputy prime ministers Igor Sechin and Sergei Ivanov, and the head of Russian
railways, Vladimir Yakunin. There were some fundamental policy disagreements,
notably over the pace of privatisation, oil revenue taxation and strategy, regional
134 Richard Sakwa
policy and state investment in the economy and the management of state enter-
prises, debates that continued after Putin’s re-election. The key element in Putin’s
‘regime-craft’, a skill no less important in the Russian context than statecraft, was
the ‘levelling of elites’; ensuring that no group acquires excessive influence. This
requires tactical skills of the highest order, but is in constant tension with the more
strategic vision required to achieve success in statecraft. On his return it appeared
at times that Putin was tired of endless tactical balancing and threw in his lot with
the conservatives, accompanied by the attempt to transcend factional logic by
elevating a more personalistic style of leadership.
Putin’s return represented a victory for the Sechin camp, but in the manner typ-
ical of Putin’s management of factional politics, this victory was diluted. Putin
remained true to his promise to appoint Medvedev prime minister, and thus the
liberal camp retained a powerful institutional base. In addition, Putin appointed
Dmitry Rogozin as deputy prime minister responsible for the military-industrial
complex, and thus an alternative leader of the siloviki camp was introduced.
However, Putin was forced to dismiss the minister of defence, Anatoly Serdyu-
kov, when Sergei Ivanov, Rogozin and Alexander Bastrykin, the head of the
Investigative Committee of Russia (Sledstvennyi komitet Rossii, SKR) closed
ranks to ensure his dismissal to face corruption and personal misconduct charges.
This was one of the rare occasions on which Putin was forced to give up a trusted
ally against his personal inclinations. Sechin went on to head Rosneft and the oil
sector in general, and feared, on the one hand, the further consolidation of the
power of alternative leaders of the siloviki faction, Rogozin and Ivanov (with
whom he does not enjoy close relations); and, on the other hand, the replacement
of the weakened Medvedev by a more active liberal at the head the government,
such as Kudrin or Dvorkovich, who would dismantle the state capitalist features
of the economy. Kudrin acted as a ‘strategic reserve’ for Putin on his return to
the Kremlin.
The concept of sublation is thus crucial to understanding the policy process in
the Putin years, but it is also important to understand its limits. The creation of the
tutelary administrative regime, governing through various practices of sublation,
means that Russia is not Ukraine, where powerful oligarchs have traditionally
been key players in shaping policy, and indeed political, outcomes (Matuszak
2012). Sublation in Russia is of a distinctive sort, reflecting the shifting balance
between the two wings of the dual state.
Models of the third state

Russia remains locked in an extended moment of transition, giving rise to a dual
state and economy and a stalemated political order. The combination of the two
provided Russia with a degree of short-term managerial capacity, but there remains
a blockage on economic modernisation accompanied by a political stalemate. The
long-term balance between the constitutional state and the administrative regime
is in danger of allowing the development of a dangerous third arm, the corruption
associated with the third state of crony capitalist relations where the sublationary
practices of the administrative regime are in danger of dissolving into systemic
corruption. What would such a ‘third state’ look like? To help our analysis of
dualism in Russia, a comparative and conceptual analysis of some other countries
will help put our problem in context.
One such model focuses on the concept of the deep state. The administrative
regime and the constitutional state are joined by what in Italy is called the ‘deep
state’. This is a subterranean nexus of bureaucratic power, the security services
and various types of criminal organisations. In Russia, this dense network of cor-
rupt relationships is variously called ‘the mafiya’ or some similar designation. In
both Russia and Italy this third state reaches into the very heart of government and
is characterised by two types of corruption. The venal sort is focused on classic
bribe taking and giving, transferred for services that should be free but which
take on a pecuniary character in a system in which elements of degradation erode
ordinary transactions. The scale of this is unknown, of course, but is reflected in
Transparency International’s Corruption Perception Index. There is a second form
which I call meta-corruption, when the autonomy of the political system is eroded
and administration is placed at the service of criminal and inappropriate activities,
undermining the independence of the courts and the impartial management of
social processes. The concept of the ‘deep state’ is applied in several contexts. In
Italy it is used to describe the interaction of state officials, security agencies and
organised crime, and was particularly prominent during the period of political
stress in the 1970s (McSherry 2005: 43–5). Several incidents from that time still
remain unexplained, notably the death of Aldo Moro, prime minister from 1963 to
1968 and then again from 1974 to 1976, who was kidnapped by the Red Brigades
on 16 March 1978 and killed after 55 days of captivity precisely at the time when
he was reciprocating the Communist Party of Italy’s idea of a ‘historic compro-
mise’ to create a ‘national solidarity’ government (opposed by the United States).
The bombing of Bologna railway station on 2 August 1980 killed 85 people amid
persistent rumours of Italian secret service involvement (for a popular account,
see Jones 2007).
But it is in Turkey that the idea of a deep state has had the most profound
impact, and the most pertinent comparisons with Russia. Following the military
coup of 1980, the 1981 constitution reserved a privileged place for the military as
the defender of the Kemalist secular, nationalist, militarist and semi-isolationist
(in the sense of keeping out of wars, although Turkey joined NATO in 1952)
political order. This tutelary element is reminiscent of Putin’s representation of
the functions of his regime in defending political order by transcending the spirit
of the constitution, dubbed a ‘domain democracy’ (Merkel 2004). In Turkey, the
military was empowered to intervene to defend the constitution, and thus, by defi-
nition, became supra-constitutional. The relevant clauses were abolished by the
government of Recep Tayyip Erdoğan in the early 2000s as it pursued its ambition
to join the European Union. Hailed as a progressive measure by Turkey’s allies,
paradoxically the removal of a balance against the Justice and Development Party
(AKP) after its crushing electoral victory (winning 52 per cent of the popular vote
in the 2012 election) opened the door to majoritarian populism and accelerated
136 Richard Sakwa
Islamisation. The persecution of the Ergenekon secularist and nationalist ‘Kemal-
ist’ organisation (allegedly part of the deep state) by then had already led to the
imprisonment of some 500 officials and officers, including members of the High
Command, while in separate prosecutions the same number of journalists had
been detained. The ‘Putinisation’ of the Turkish regime became a matter of popu-
lar discussion following the harsh crackdown on the wave of protest catalysed by
plans to redevelop Taksim Square, including the destruction of Gezi Park, from
May 2013.
The idea of ‘Putinisation’ became popular, but the level of repression there
far outweighed anything that Putin had done by that stage. Putinism in Russia
has tried to avoid direct coercive behaviour, although enormous resources are
devoted to maintaining the security apparatus. This brings us to the second type
of ‘third state’, a deeply embedded security state. Russia spends some USD 60
billion a year, about 3 per cent of GDP, on the security services, and roughly the
same amount in addition on regular military forces. A core Putinite practice is
the allocation of resources to groups who would normally be disadvantaged in a
market economy – state employees, pensioners, and, in the case under discussion,
the security apparatus. The overblown security apparatus generates interests of
its own, with department piled upon section, each of which fights for its own
perpetuation, its slice of the budgetary pie, and to advance its vision of the world.
More than this, Russia’s security state is a core element of the politicised econ-
omy, allowing raiding by security officials in cahoots with susceptible judges and
corrupt officials (Hanson 2014).
A powerful description of the rise and operation of various security force fac-
tions is provided by Felshtinsky and Pribylovsky, including the way that the Kor-
zhakov faction provoked the first Chechen war. Putin was appointed head of the
FSB on 25 July 1998 to reform the body and not simply as their emissary in the
power system (Felshtinsky and Pribylovsky 2008: 87–92). In other words, even in
their sensationalist account a political level remains outside the deep state, which
retains decisional autonomy. This is also reflected in the excellent account of the
‘new nobility’ by Soldatov and Borogan, in which they note that ‘Putin opened the
door to many dozens of security service agents to move up in the main institutions
of the country, perhaps hoping that they would prove a vanguard of stability and
order. But once they had tasted the benefits, agents began to struggle amongst
themselves for the spoils’ (Soldatov and Borogan 2010: 241). There is no unity
of purpose in Russia’s third state, and instead a mix of venal and meta-corruption
erodes the quality of government at all levels.
This has not prevented a great flood of literature describing how ‘the secret
police control all the centres of the economy, security and social life’ – a quota-
tion taken from Francesca Mereu’s addition to the genre, My Friend Putin, which
was published in Italian (2011). The book contains a foreword by the well-known
journalist and politician Paolo Guzzanti, who chaired the parliamentary commis-
sion into the so-called Mitrokhin case, examining KGB activities in Italy between
2002 and 2006. Guzzanti was a close friend of Berlusconi but broke with him over
the latter’s continued commitment to Putin, whom he called ‘friend Vladimir’,
from which the book draws its title. Like Masha Gessen’s book of the same genre,
the basic idea is that Putin was the spearhead of a group of former security offi-
cials who took control of Russia, including quite explicitly its economic assets.
For Gessen (2012), Putin came to power with a conscious plan to install some sort
of dictatorship, and her analysis leaves out any complicating details such as policy
conflicts over the economy or external relations, and assumes some sort of perfect
state of governability. Mereu (2011) sees Putin more as a figurehead for the group,
talking in terms of ‘Putin’s project’. He came to power as the representative of the
‘the family’, the Yeltsinite group that being desperate to manage the succession in
1999–2000 to preserve the status quo under a new leader.
According to Mereu, the oligarchs headed by Berezovsky offered Putin a deal
whereby he would occupy the presidency while they would continue to rule from
behind the throne. Putin allegedly agreed to the deal unreservedly. The bombings
of the apartment blocks in September 1999 and the second Chechen war were then
organised by the KGB in support of Putin’s election. Once in power, the KGB
then turned its hand to exploiting vulnerable entrepreneurs, closing down media
diversity, killing enemies such as Alexander Litvinenko and Anna Politkovskaya,
and it thrived in conditions of high oil prices. A rentier class consolidated its
power, disposing of the country’s wealth to its personal advantage. An appendix
argues that Berlusconi adopted and imitated from Putin such features as the per-
sonality cult, the stifling of media freedom and attacks on the independence of
the judiciary, rather than the other way round. The ensuing merger of power and
property with little public oversight and minimal public scrutiny created the new
system of ‘Putin incorporated’ (Kalashnikov 2013).
Putinism thus represents a new international style of governance. In contrast to
the Soviet years, there is no need for total media control, and thus websites and
newspapers were largely left untouched – at least until the Ukraine crisis of 2013–
14 unleashed a wave of repression against potential ‘colour revolution’ technolo-
gies. As is argued by Derk Sauer, the head of Sanoma Independent Media, which
own 60 per cent of the Russian magazine market, Putin modelled himself not on
Brezhnev but on Berlusconi: ‘It’s not for nothing that they are such good friends.
They understand that if you control the main TV stations and make propaganda
there, you’ll go far’. This led to the paradoxical outcome that ‘there’s complete
press freedom for the informed but none for the uninformed’ (Kuper 2013).
But does this constitute a deep state? Is there some force in Russia that can
override elections, the government and administration to impose its will, by force
if necessary? In Egypt the deep state was based on a ‘power triangle’ between
the military (above all the army), the security services (the police and security
policy under the control of the interior ministry), and the political authorities.
The coup of 3 July 2013 showed the power of this deep state, which overthrew
the legally elected Muslim Brotherhood president that had taken office in June
2012, Mohamed Morsi, and thereafter ruled as a junta, reinstating Mubarak’s
secret police, gunning down oppositionists, and reimposing the emergency rule
of the Mubarak years. Putin and his associates warn constantly against popular
democratic revolutions spinning out of control like this, and with some justice. In
138 Richard Sakwa
the Soviet Union and in Russia the regular military has long resisted becoming
politicised, especially after the bitter experiences of 1991 and 1993 when they
were drawn into political battles, but the MVD and other security agencies have,
in effect, armies of their own who could act as the praetorian guard of the regime.
The dual state model suggests that even in Russia’s politicised economy there
are opportunities for individuals to exploit the tensions between the two branches
of the dual state to achieve justice. Equally, the constitutional state provides the
normative framework for a pushback against the abuses of the third state. Pres-
ident Dmitry Medvedev’s reform of the militia in 2010 demonstrated concern
that the abuses of the third state were beginning to threaten the very notion of
governance. Rather than fighting criminality, there was much evidence that militia
personnel were themselves engaged heavily in a range of illegal activities, includ-
ing extortion and various scams, the most notorious of which were the Hermitage
Capital affair and the death of Sergei Magnitsky. As a report in The Economist
(18 March 2010) noted, ‘Police violence is not new in Russia, but a recent wave
of publicity is. A simple explanation is that police lawlessness has exhausted peo-
ple’s patience and that pent-up anger has finally burst into newspapers, websites
and even state television.’ Medvedev fired Moscow’s police chief and launched
a reform of the interior ministry (MVD). Police numbers were slashed by 20 per
cent and central control was reasserted over regional police forces. There were
new requirements on police conduct during searches and other operations, and
all police personnel were re-certified in further efforts to root out corruption and
incompetence. The Soviet-style name ‘militia’ was rebranded with the west-
ern-style ‘police’. Thousands were fired as part of the re-attestation of all serving
officers, but there were also questions over the efficacy of the reforms. Taken in
isolation and without a reform of the state, police reform was not able to change
the fundamental relationship in which, in the words of The Economist report, ‘The
main function of law-enforcement agencies in Russia is not to protect the public
from crime and corruption, but to shield the bureaucracy, including themselves,
from the public. To ensure loyalty the system allows police and security services
to make money from their licence for violence.’ One of the most common was
‘raiding businesses for competitors’.
More disturbingly, under Putin traditional antagonisms were overcome and the
MVD fell under the influence of the Federal Security Service (FSB), which inter-
vened at all levels of business life, including into the affairs of state agencies and
corporation, although the legwork was left to the police. In that context, police
reform could only be successful if the abuses of the third state more broadly
were addressed. As the lawyer and independent scholar Vladimir Pastukhov
(2013; and see also 2012) argues, Putin did not eliminate arbitrariness but gave
it ‘a more or less organised character’. The securo-judicial apparatus remained
a powerful instrument of regime power, but it was as factionalised as the rest of
the system. Despite Medvedev’s calls for reform, the law enforcement agencies
remained a law unto themselves. On 1 January 2011 the Investigative Committee
was removed from the jurisdiction of the General Prosecutor’s Office (GPO)
to become the free-standing Russian Investigative Committee (RIC) answerable
directly to the president. The head of the GPO, Yuri Chaika, was furious at this
drastic reduction in his power, but this was just one of the interdepartmental
conflicts plaguing the Putin system of Byzantine politics. The separation rep-
resents yet another case of sublation, weakening the procuracy and creating a
counter-weight to its authority. Headed by the pugnacious Mikhail Bastrykin,
who became one of the most powerful and independent figures in Putin’s power
elite, RIC was involved in the prosecution of some high profile individuals,
including Sergei Storchak, Magnitsky and latterly, the opposition activist Alexei
Navalny. Bastrykin stressed that one of RIC’s main tasks was to fight corruption
(Yamshanov and Vasenin 2010).
In short, it is an exaggeration to argue that Russia has a ‘deep state’ as defined
above, but the powerful security–economic nexus acts as part of the blockage on
modernisation and has now constituted itself as a type of third state, undermining
the normative claims of the administrative regime to govern in Russia’s best inter-
ests. In the context of a dual state a regime has emerged that can trump the stip-
ulations of the constitution, but which remains constrained by the constitutional
framework. Its subversions of legality remain illegitimate as defined by the system
itself, and there has been no legal invocation of emergency rule. Instead, there is a
system of meta-corruption, in which the agents of the state are heavily implicated
and which potentially constitutes itself as a third state. The security forces have a
special role, but even their illicit political and economic activities are balanced by
other features of the complex organism that is the Russian power system. Unable
to act as a state within the state, they have operated as a substate within the regime.
In other words, the administrative regime is itself in danger of being sublated by
the forces that it has unleashed in the third state.
Second Empire Russia

One of the more potent comparisons of contemporary Russia could well be with
Second Empire France. We have a Bonapartist situation where social forces are
equally balanced (above all between the bureaucracy and nascent political rep-
resentations of the middle class), allowing the regime to act with autonomy. The
Russian government continued the revolution in property and power that had
begun in the late Gorbachev years, but at the same time restored elements of the
previous regime. Promoted as the ideology of reconciliation, invoking shades of
the trasformismo of late nineteenth-century Italy, the inconclusive nature of the
system takes the form of a dual state, with all of its inherent contradictions and
accompanying stalemate that has allowed elements of the third state to flourish.
Both contemporary Russia and the France of Louis Napoleon were hybrid in
their very essence. Neither are a ‘regime type’ in the classical sense understood
in political science. Instead, both represent what Stepan and Linz (2013: 20) call
a ‘situation’, a condition of impermanence, however long it may last. Thus the
Putinite stability is unstable in its very essence. There can be achievements, such
as the Sochi Olympics, economic investments and elements of modernisation,
but until the regime question is resolved the whole system remains ‘provisional’,
140 Richard Sakwa
even if it lasts for decades. Like Napoleon III’s France, an enormous amount of
development can take place, yet the clash between two different orders and types
of regulatory regime means that the system is indeed a ‘situation’. This applies
equally to the political sphere, where in both countries elections gained a plebi-
scitary character and the political authorities were not held accountable to their
outcomes, yet the whole procedure of elections was important for the stability of
the system. Thus the comparison between the two countries has important heu-
ristic qualities, and helps shed light on the character of contemporary Russia’s
politicized economy.
Following the 1848 Revolution and the overthrow of the ‘bourgeois’ rule of
Louis Philippe, Louis Napoleon seized power in a coup in 1849 and ruled until
the Franco-Prussian War of 1870, at which point he went into exile in England.
In 1850 he declared the creation of the ‘Second Empire’ and thereafter he ruled
as Napoleon III. The subsequent two decades witnessed enormous economic
development, with the massive expansion of industry and the railways and the
reconstruction of Paris under the guidance of Baron Haussmann. However, fun-
damental political issues remained unresolved as the ideals of the French Revolu-
tion, principally the concept of popular sovereignty, came into contradiction with
renewed imperial rule. Like the Putin system, the second empire represented a
system in which the potential for evolutionary political development was blocked,
yet did not repudiate the revolutions to which they were heir.
Putin’s administration claims to stand above the historic divisions of the mod-
ern era, and indeed, purposely sought to reconcile the forces that had torn Russia
apart in the twentieth century. The democratic process was managed by a force
that stood outside democracy, co-opting those elements of political society will-
ing to compromise and marginalising the rest. This is a type of passive revolution,
which for Antonio Gramsci entailed ‘an abortive or incomplete transformation
of society’. This can take a number of forms, including one where an external
force provokes change, but this lacks a sufficiently strong domestic constituency
and runs into the resistance of entrenched interests. When the forces are equally
balanced a stalemate emerges, giving rise to a situation of ‘revolution/restoration’
(Gramsci 1971: 104–20). We have a Bonapartist situation where class forces (in
particular, the entrenched bureaucracy resisting the challenge of an independent
bourgeoisie) are equally balanced, allowing the regime to act with autonomy (cf.
Cox 1999: 16). The Russian government continued the revolution in property and
power begun in the late Gorbachev years, but at the same time restored elements
of the previous regime.
Thus the Putinite ‘situation’ and the politicised economy can be better under-
stood by comparison with mid-nineteenth-century France. The contradictions that
brought Louis Bonaparte, the nephew of Napoleon I, to power in the coup on
2 December 1851 were powerfully described by Marx (1968: 97–180), and his
eloquent indictment has resonance today for the Putin system: ‘Instead of society
having conquered a new content for itself, it seems that the state only returned to
its oldest form, to the shamelessly simple domination of the sabre and the cowl’
(1968: 99). The ‘virtual politics’ of the time is sharply characterised:
[A]lliances whose first proviso is separation; struggles whose first law is
indecision; wild, inane agitation in the name of tranquillity, most solemn
preaching of tranquillity in the name of revolution; passion without truth,
truths without passion; heroes without heroic deeds, history without events;
development, whose sole driving force seems to be the calendar, wearying
with the same tensions and relaxations; antagonisms that periodically seem
to work themselves up to a climax only to lose their sharpness and fall away
without being able to resolve themselves; pretentiously paraded exertions and
philistine terror at the danger of the world coming to an end, and at the same
time the pettiest intrigues and court comedies played by the world redeem-
ers… (Marx1968: 116)
Following the coup Marx notes that France appeared to have escaped the despo-
tism of a class (the bourgeoisie) only ‘to fall back beneath the despotism of an
individual’, and in comments that have resonance today argued ‘This executive
power with its enormous bureaucratic and military organisation, with its ingenious
state machinery, embracing wide strata, with a host of officials numbering half a
million, besides an army of another half million, this appalling parasitic body, …
enmeshes the body of French society like a net and chokes all its pores’ (1968:
170), a description that is astonishingly apt for the workings of the administrative
regime. In sum, ‘Only under the second Bonaparte does the state seem to have
made itself completely independent. As against civil society, the state machine
has consolidated its position…’ (1968: 171). To overcome the contradiction and
to keep the public gaze on himself, Napoleon III needed to ‘spring constant sur-
prises, that is to say, under the necessity of executing a coup d’état en miniature
every day’ (1968: 180). This is not unlike the Putinite system, with its surprising
turns, sudden demarches, and unpredictable decisionality.
In the Russian case these miniature coups are prevalent at times of succession,
precipitated by the regular cycle of elections and constitutional term limits. The
heightened decisionism of the administrative regime ultimately becomes a mode
of governance, undermining the quality of the decisions at home and tempting
voluntaristic actions abroad. As argued in this chapter, duality is a feature of all
political systems, but as D’Arcais puts it in his study of ‘Berlusconismo’: ‘All
Western governments, more or less, are marked by the gap between the poetry of
constitutions and the prose of power as it is exercised. What is decisive, however,
is precisely the degree of this “more or less”’ (D’Arcais 2011: 139). Italy, in his
view, had endured a long-term creeping coup that subverted the independent func-
tioning of institutions and allowed the deep state to flourish. The response here
and elsewhere could only be the genuine consolidation of the liberal democratic
constitutional state.
Conclusion
Putin came to power in 2000 promising to root politics in the normative power
of the constitution, but instead the neopatrimonial order brought all institutions
142 Richard Sakwa
and political processes under the tutelage of the administrative regime. The power
system is susceptible to weaknesses of its own, above all fragmentation and elite
factionalism. Putin’s reconstitution of the state shifted the basis of presidential
hegemony away from dependence on oligarchic or other forces. However, the
failure to move away from the ‘manual control’ of political processes prevented a
more self-regulating system from emerging, and instead the mechanical approach
created a system that showed signs of brittleness and a lack of adaptive resources.
Above all, the dualism identified earlier is in danger of degenerating into a triple
system in which the merger of power and property jeopardises the viability of the
economy as a whole. Venal corruption in an uncontrolled triple state is in danger
of metastising into meta-corruption and degeneration of the whole system.
A number of cultures contend for primacy. The traditional tsarist-patrimonial
view is in part supplanted by Soviet progressivism, and this in turn is challenged
by a westernising project based on markets, democracy and international inte-
gration. The internal clash of civilisations and inherent value pluralism entails
very different representations, for example, of the role of private enterprise and
property rights, and, equally, about Russia’s place in the world. The lack of a sin-
gle natural hegemony allows Putin’s eclecticism to triumph. The stalemate thus
assumes a cultural and civilisational dimension, as various projects of modernity
jostle to dominate but none enjoys that peculiar combination of class, ideology,
and institutional resources to enjoy a hegemonic position, and instead a number of
partial projects have combined to create an explicitly self-referential social order
exposed to attack from all sides. None of its constituent elements has been able
to enjoy the fruits of victory, but by the same token none has been definitively
defeated. The ‘situation’ allows a new form of second empire to emerge, in which
very similar developmental and great power concerns are prominent.
The Putinite system represents managed modernisation in an era where the col-
lapse of the communist system was accompanied by the exhaustion of original
ideas for social renewal in their entirety. Thus Putin devised a synthesis of his
own, drawing on parts of the Soviet debris but also devising some original solu-
tions to Russia’s distinctive developmental challenges. The terrain in which he
operates encompasses not just the ruins of state socialism, but also one in which
the great ameliorative projects of modernity, of both the right and the left, had run
into the ground, and thus all that was left was the attempt to revive a centrist ide-
ology and pragmatic and incremental political project. These were the elements
that thrived before the great ideologies of modernity, notably in Second Empire
France. Putin’s mix includes state-led developmentalism, traditional statist pater-
nalism, accompanied by a critique of the sovereignty-eroding tropes of globalisa-
tion theory. It also contains the potential to degenerate into a self-serving ‘third
state’, where the regime’s developmental rhetoric is engulfed by meta-corruption.
The self-proclaimed tutelary administrative regime is in danger of succumbing to
the temptations of the third state.
In Russia a single regime has perpetuated itself since 1991, with elections a sec-
ondary, legitimating, practice. Elections are not determinative of government, but
they do send a signal to the regime, and are thus not entirely nugatory. The regime,
however, discredits its operative legitimating mechanisms, which becomes evi-
dent when there is a divergence between popular attitudes and electoral outcomes.
Above all, just as the constitutional state is vulnerable to the depredations of the
administrative regime, so the latter’s developmental purpose is undermined by
the pathologies of the third state. It is only a matter of time before ‘the situation’
is transcended. This could take the form of intra-systemic reform that allows the
constitutional state to strengthen; or it could take the catastrophic form of regime
collapse provoked by external conflict, as in France in 1870.
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9 The basis for institutions
among the population in
Russia
Carolina Vendil Pallin
He will never understand me or my mother, since he has not lived a single day
in a Soviet country. I… and my son… and my mother… We all live in different
countries, even though all this is Russia. But we are all tied together in a
monstrous way. Monstrous! We all feel betrayed.
Svetlana Aleksievich (2013: 284)1
The quote above comes from the last part of Svetlana Aleksievich’s trilogy of
Russian voices and is intriguing even though it mirrors something that should
be obvious in a society that has undergone such profound crises and transfor-
mations as have taken place in Russia during the past two to three decades. The
way deeply held beliefs and behaviour patterns change and coexist in society
often receives considerably less attention than, for example, the day-to-day
power struggles within the Kremlin, the opinion rating of Vladimir Putin and
the possible future of opposition figures such as Aleksei Navalnyi or Mikhail
Khodorkovskiy. However, the existence of certain values and norms among the
population is imperative for the successful establishment of democratic institu-
tions in society (Inglehart and Welzel 2005: 158; Tikhonova 2011: 12; IS RAN
2013: 7–8).
Among the most important institutions that underpin a democratic society is
rule of law, that political leaders are held accountable in free, open and fair elec-
tions as well as respect for basic human rights and freedoms such as a free media
and the right to form political parties and movements, religious freedom and the
right to express one’s opinion freely as long as this does not infringe on the rights
and freedoms of others. All these democratic institutions can also play an import-
ant role in economic reform. For instance, rule of law is a necessary precondition
for the right to dispose of one’s property or for companies to seek arbitration
against corrupt or otherwise incorrect decisions of authorities and the abuse of
power of individual officials. Addressing the problem of corruption without insti-
tuting a greater degree of rule of law is difficult to imagine in Russia. A free
media, transparency and the existence of an opposition that can contest power in
elections are equally imperative in order to detect and combat arbitrary decisions
and misuse of power.
146 Carolina Vendil Pallin
This chapter aims to establish whether there is a growing demand for demo-
cratic institutions in Russian society. This is done by looking at how income and
consumption patterns have changed in society, but also at changes in values and
norms in society.
Modernization and development of values in society

Socio-economic development tends to set powerful forces in motion. First, this
chapter assumes that with increased income and investment in housing and more
durable consumption such as a car, a demand for institutions, such as rule of law,
that protect property is more likely to emerge. Likewise, as sections of the popula-
tion get used to consumption that is tied to increased mobility both when it comes
to travelling and with regard to using the internet and mobile phones to access and
share information, they are more likely to embrace institutions that guarantee the
right to use this mobility freely, such as a democratic polity that guarantees, for
example, freedom of information, the right to travel and a free media.
Second, there is a growing literature on the connection between socio-economic
development and the development of values conducive to democracy. There has
been a debate on whether the establishment of institutions can foster democratic
values (see, for example, Di Palma 1990) or whether the pre-existence of values
beneficial to democracy is necessary for institutions to survive. Ronald Ingle-
hart and Christian Welzel (2005) have argued convincingly that social change
is, above all, a process of human development and that what they term as self-
expression values, in other words values that place an emphasis on the individual,
on human rights and freedoms, make it more likely for democracy to root and
develop. Their modernization theory says that in a post-industrial society, where
people are no longer concerned with existential security and making ends meet,
where socio-economic development has led to an increase in GDP per capita and
the economy has become diversified with more and more people working in the
service sector, self-expression values are likely to become increasingly wide-
spread. The younger generation is the first to embrace new values as they experi-
ence increasing existential security during their formative years (ibid.: 94–114).
There are also cultural differences and one of the experiences that Inglehart and
Welzel single out as having had a negative impact on the development of self-
expression values is the number of years spent under communism. In addition, the
economic hardships for the population in Russia in the 1990s made development
go backward rather than forward as a large section of the population found their
existential security threatened. As a result, self-expression values did not develop
during this period (ibid.: 81–3).
Another factor that works against the development of self-expression values
among the Russian population is the tendency for wealth in oil-exporting coun-
tries with rent-seeking economies to end up in the hands of the elite rather than
being more evenly distributed (ibid.: 160). Even in Russia, however, the economic
wealth entailed by increasing incomes from energy exports incomes did trickle
down to sections of society other than the very rich. Socio-economic development
The basis for institutions in Russia 147
has taken place and this is especially true for large urban centres where increasing
per capita incomes have been coupled with a growing diversification of the econ-
omy with large shares of the population working in the service sector. Smaller cit-
ies and the countryside have not seen the same development, as will be evidenced
below. In other words, at least some of the younger cohorts have experienced bet-
ter material conditions in their formative years than the above generations. They
have got used to better living conditions, to owning a mobile phone and the access
to computers and internet.
The overall aim of this chapter is to explore whether there is a growing demand
for institutions in Russian society based on how the behaviour and values of the
population have evolved. More specifically, the chapter explores the differences
between different sections of the population, between different age groups and
different strata according to socio-economic development. We would expect
that among sections of the population with higher incomes as well as among the
younger generation, it should be possible to observe an evolution of self-expression
values, that is, values that place more emphasis on individualism. The view of the
state and its role should change from one that provides employment security and
material support to a state that guarantees the rules of the game, but where citizens
are by and large left to their own devices to build their future. At the same time,
if socio-economic development has been slow or almost non-existent for certain
sections of society, we would expect a much lower rate of self-expression values
here and more concern about existential security and material support.
In order to examine the basis for establishing democratic institutions in Rus-
sian, this chapter first explores different and often overlapping groups in society
that are identified according to socio-economic development and age. Second,
some changes in behaviour are analysed such as consumption and investment
patterns, investments in real estate and the increasing mobility in Russian society.
Belonging to a specific group in society based on income, education, age and
where you live as well as consumption patterns and property will provide expe-
riences that, in turn, form a value and norm system. Finally, the overall trends in
opinion surveys are examined.
Rather than focusing on politician’s ratings in opinion polls, this chapter thus
aims to explore deeper patterns of values and behaviour. Specific political pref-
erences can change almost overnight as a result of a political or economic event
or even after a single foolish or, for that matter, brilliant political speech by a
politician. Norms and values concerning freedom, rule of law and private property
as well as other aspects of human rights, on the other hand, are bound to have
evolved with time and thus be durable and tied to aggregated individual experi-
ences rather than to single events. Indeed moral, social and political values can be
considered as the ‘ultimate underpinnings of attitudes’ (Feldman 2013: 602; see
also Shestopal 2011: 36). The emphasis is on examining how society has changed
during the past decade, but this is, when possible, done against the backdrop of
behaviour and values in the 1990s.
The chapter builds on secondary sources that include opinion polls, focus group
surveys, other sociological research and statistics. The fact that the sources are
secondary ones invariably leads to a certain time lag. Even articles published as
late as in 2013 in peer-reviewed journals draw on material that will have been col-
lected a couple of years earlier. As far as possible, recent research has been used
and whenever the latest data are older than 2010, this is highlighted. However,
since changes in values occur over long time periods, finding the latest data is of
less importance than tracing long-term trends and finding data that break down
values according to which population group the respondents belong.
As stated above, an effort has been made to use material with long timelines or
that breaks down research according to different groups in society, since the aim
is both to map the current situation and to detect changes that have occurred in
Russian society following the fall of the Soviet Union. Since the chapter builds
on a variety of research rather than on data from an individual project, it is often
difficult to draw comparisons; questions have been stated differently, timelines
constructed with various measure points, and so on. The aim is to provide an over-
all picture of values and changes in behaviour rather than exact measurements
and the use of different surveys and statistics has been considered to be a valid
approach.
Some of the research used is possibly coloured by political bias. For example,
the research carried out by the Centre for Strategic Analysis (Tsentr strategich-
eskikh razrabotok, CSR) headed by Mikhail Dmitriev was closely tied to, and at
times even commissioned by Aleksei Kudrin’s organization, the Committee for
Civil Initiatives (Komitet grazhdanskikh initsiativ, KGI). Similarly, the Levada
Center2 is often considered as belonging to the liberal flank, although it does
have a reputation for independence and sound methodology. The Russian Federal
Statistical Service, Rosstat, on the other hand, is sometimes accused of inflating
data. Opinion pollsters such as All-Russian Centre for Studying Public Opinion
(VTsIOM) and the Foundation for Public Opinion in Society (FOM) list the Pres-
idential Administration among their most important customers and are considered
to be less independent from the authorities than, for example, the Levada Center.
The chapter must be read, therefore, with these caveats in mind. The fact that a
wide range of data are used should give a broad picture rather than one skewed in
one particular political direction. Overall, opinion polls often fail to deliver clear-
cut answers and are open to interpretations. The results often appear to be coun-
terintuitive and contradictory because they challenge presuppositions or because
the questions were constructed in a specific manner (for discussions on this, see
Hale 2011; Levinson 2012, 2013).
Different groups in Russian society

Following the unexpected demonstrations in 2011–12, a great deal of attention was
given to the middle class. However, focusing on a young, urban technology-savvy
middle class risks missing a number of important societal trends as concerns
development. Among those who have contributed to nuancing the picture of
Russian society is Aleksei Levinson at the Levada Center, who talks of a ‘func-
tional differentiation’ that is considerably more than just differences in income
d istribution. Rather it is a rising ‘multitude of role situations, in which individuals
find themselves (different occupations, professions, positions inside groups and
associations)’ (Levinson 2013: 33). The social stratification according to a middle
class and a lower class and the periphery of these is one important way of analys-
ing Russian society. However, it is equally important to keep in mind the widen-
ing gap between regions and between urban centres and the periphery as well as
the considerable differences between age groups and gender.
A Russian middle class? And the rest?

The size of a Russian middle class is a topic that has generated both research
and debate. Indeed, the middle class has even been discarded as a myth, a class
that does not exist in Russia (Samson and Krasilnikova 2012). Nevertheless, most
researchers do acknowledge that it is a usable concept, although they differ in
how to define and measure it and, consequently, come up with different sizes
and development trends for it. Usually, the middle class is defined using a mix of
income bracket, education, self-image and functional specifics (Franke and Vendil
Pallin 2013: 30–1; Tikhonova and Mareeva 2009: 75ff.). Using such definitions,
the middle class constitutes 20–30 per cent of the Russian population.
However, mapping the values and concerns of other sections of society is of
equal importance in attempting to understand human development in Russia. The
question of how to divide the rest of the population into classes or social strata
is even more open to debate than that of the size of the middle class. In the early
1990s there was a sharp increase in income inequality in Russia. This is indi-
cated by the Gini coefficients for both income inequality and wage inequality
(Ovcharova et al. 2013: 15–16). When the population is divided into five groups,
ranging from the 20 per cent that have the highest income to the 20 per cent with
the lowest income, it becomes obvious that the group which is best off receives
increasing shares of the total income per year whereas the group with the lowest
income is receiving a dwindling share of total incomes in Russian society (Figure
9.1). It is also quite clear that those who constitute the nucleus of the lower class
are more likely to remain there. In Tikhonova’s (2012) analysis, about 6–8 per
cent of the population belong to the underclass and the nucleus of the lower class.
Moreover, almost as many are at risk of ending up in the lower class in the next
few years. These groups have only elementary education, they are more often
employed in temporary jobs and with little or no prospect of saving up money to
improve their living conditions. The sense of insecurity is often acute (ibid.).
Differences between regions and centre–periphery

Furthermore, there are substantial differences between regions in Russia. Among
the most developed are oil- and gas-rich regions and the federal cities Moscow and
St Petersburg whereas certain ethnic republics struggle with serious economic and
social problems. This is evident from a survey of the Human Development Index
(HDI), which measures incomes, education and longevity (Zubarevich 2011).
100
90
80
70 5th group (with the largest

incomes)
60 4th group
50 3rd group
40 2nd group
30 1st group (with the smallest

incomes)
20
10
0
1980 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012
Figure 9.1 Distribution of the total income among five groups of the population,
1980–2012 (%).
Source: Rosstat (2012: 186).
Note: Each groups constitutes 20 per cent of the population. For the years 2005–10, the data from the
2010 population census has been used.
However, it seems that the divide between centre and periphery is of even greater
importance. Nataliya Zubarevich (2013) has divided Russia into four Russias.
The first Russia consists of cities with a population of over 250,000 citizens and
with diversified economies, while industrial cities with a population of 20,000–
250,000 constitute the second Russia. The first Russia is likely to protest against
poor institutions, but the second Russia is more likely to become involved in
socio-economic protests. Indeed, ‘the two Russias speak a different language
and have difficulty understanding each other’ (ibid.). The third Russia consists
of villages and small, rural towns. Its population is aging and shrinking and lives
mainly off the land, while the fourth Russia consists of the underdeveloped repub-
lics in the North Caucasus and Tyva and Altai in southern Siberia. These republics
are reliant on transfers from the federal budget and constitute actual or potential
trouble spots (see further Chapter 11 in this volume).
Zubarevich’s findings are substantiated by other research and federal statistics.
Living in a village and/or in a region that is among the least prosperous constitutes
one of the most prominent factors connected to poverty. Among the low-income
households in Russia, an overwhelming majority (66 per cent) lived in villages and
cities that were smaller than 50,000 people (Rosstat 2012: 193). There is a widely
held assumption that pensioners are poorer than other groups in the population,
but in fact where you live is a more important factor in determining affluence or
poverty in Russia (Ovcharova et al. 2013: 22–9). The official statistics are sub-
stantiated by research on the societal structure in Russia (Tikhonova 2012: 33–7).
Indeed, the Russian sociologist Nataliya Tikhonova notes the tendency towards a
‘ghettoization of a substantial proportion of “small town” Russia, with the increas-
ing spread there of the type of culture that characterizes an underclass’ (ibid.: 42).
Within the first Russia, Moscow stands out as an exceptional case for a number
of different reasons. It has the most diversified labour market, the highest level of
education among its citizens, the highest influx of a diversified workforce and the
lowest level of unemployment as well as the highest level of wages and consump-
tion (even after adjusting for higher costs of living). On the downside, it also has
the largest housing problems and a low share of children among its population.
Furthermore, Moscow is a federal city and not a municipality.3 This makes the city
more independent since it receives budget revenues without having to depend on
transfers from the federal centre (Zubarevich 2012).
The special conditions that apply to the population in Moscow, both the advan-
tages and the disadvantages, are bound to colour the values and moral systems
of its inhabitants. Those who are lucky enough to own an apartment or a house
in Moscow or in greater Moscow are bound to regard it as a security and capital
given the rapid rise in property prices. This will have consequences for how citi-
zens in Moscow view rule of law and the protection of the right to own property.
Moscow’s mayor Sergei Sobyanin noted in 2013 that in Moscow ‘the level of
demand, demands on authorities are considerably higher than in the countryside’
(Gabuev and Surnachevaya 2013). This is probably true and is evident also in
focus group surveys and opinion polls, where Moscow often stands out. In the
2013 CSR study, respondents in Moscow were more concerned with what they
described as a cultural and moral crisis than was the case in the rest of the coun-
try. They furthermore expressed discontent with insecurity, the lack of respect
for individual rights and freedoms and the state of the social sphere. Overall, the
Moscow respondents harboured a higher degree of anxiety (trevozhnost) for the
future as compared to other cities (CSR 2013: 44–57).
Age groups and gender

The differences in income between age groups are not as large as one would per-
haps expect intuitively. As evidenced above, where you live is a more important
factor than age in determining your level of income. Often, the similarities between
age groups are more striking than the differences. For example, in CSR’s research,
there is no significant difference in the degree to which the respondents in different
groups according to age express anxiety or aggression (CSR 2013: 32–3).
Nevertheless, a number of interesting trends can be observed. In a study carried
out by VTsIOM, it was clear that, for example, people aged 24–33 with a middle to
higher education were more likely to believe that the internet provided the oppor-
tunity to influence the authorities (Nechaev and Brodovskaya 2013: 10). A major-
ity of Russians think that they cannot significantly influence their circumstances
themselves but are dependent on the state and the economic situation of the coun-
try as a whole. Overall, there is a strong belief that changes must be initiated and
controlled from above, but there is a notable difference between age groups. Those
under thirty are more likely to assert that their own circumstances depend on their
activity rather than on the state whereas the eldest take the opposite view (see Table
9.2). That those over sixty depend on the state is hardly surprising, but the fact that
younger people are more looking to their own abilities than the cohort of the popu-
lation that is in its most productive age, with higher incomes than the under-thirties
is noteworthy. This is, furthermore, well in line with earlier research that focuses on
attitudes among the younger generation, such as the study carried out in Yaroslav
in 1993–2004 by Hahn and Logvinenko (2008) and research on the confidence in
achieving one’s dreams presented by Gorshkov and Tikhonova (2013: 10–11).
When it comes to differences between genders, there is an overrepresentation by
women among the group in society that constitutes a ‘low-resource group’. More-
over, the ratio of women who are raising young children is substantially higher
(about two-thirds) in what Tikhonova (2012: 39) calls the ‘zone of formation of
the lower class’ compared to about a third in the middle class, and ‘about 60 per
cent are raising children in incomplete families (common law marriage, divorce,
single mothers, etc.)’. This will, in turn, most probably have consequences for
their outlook on life.
Consumption patterns, housing and mobility

The Russian middle class is the section of society that is more likely to own prop-
erty(including a house or an apartment), use the internet regularly, own mobile
phones and travel abroad (Dmitriev and Misikhina 2012: 66–7). This is connected
to its incomes but also to its relative high level of education and its own sense of
identity. At the same time, it is clear that consumption across the whole popula-
tion has increased. When it comes to capital goods, a protracted period of eco-
nomic growth has resulted in figures of 170 television sets per 100 households in
2011 and 122 refrigerators and freezers per 100 households; the numbers in 2000
were 124 and 113, respectively (Rosstat 2012: 201). Even taking into account the
considerable income differences, many households appear to have been able to
increase consumption at least on the margin.
Consumption and investment patterns

Overall, in the 2000s there has been an increase in the consumption of goods other
than foodstuffs and services (Ovcharova et al. 2013: 30–1). The middle class has
the highest level of consumption and its consumption pattern differs from that of
other groups since it devotes a considerable share of its resources to vacation and
culture events (Dmitriev and Misikhina 2012: 60). Furthermore, it tends to own
more capital goods, not least foreign cars (ibid.: 60–4). When considering overall
statistics, it is obvious that consumption patterns have changed for the population
as a whole over the past decade. Food and clothing no longer constitute more than
half of consumption (Rosstat Online). This feature is most pronounced among the
share of households that dispose of the highest incomes, where approximately
a third of consumption is spent on food and clothes. This group of households
spends considerably more on transport and leisure than other households (Rosstat
2012: 198).
Housing
The middle class has better living conditions overall, but especially when it
comes to the Russian eternal ‘housing question’ (zhilishchnyi vopros or kvartirnyi
vopros). A considerable proportion of the middle class owns housing and capital
goods which leads to new demands on what the state should be able to deliver
in terms of property protection, fighting corruption and building institutions that
eradicate fortune seekers and embezzlers in the sphere of, for example, private
health care (Dmitriev and Misikhina 2012: 59–78). The middle class is in favour
of private ownership in the housing sector, and this appears to be the case even
for those who have not benefitted from the privatization programme. Although
it has been suggested that when tenancy rights were strengthened in the Soviet
era, tenants came to see themselves as de facto owners of their apartments, legal
ownership is crucial ‘to a sense of autonomy, security and satisfaction’ (Attwood
2012: 925).
For the middle class an important aspect of owning an apartment or a house
is the fact that it regards this as part of its savings towards its pension. For most
people belonging to the middle class, it is reasonable to expect to receive that their
pension payments will amount to only around 10–20 per cent of their income
during their working lives (Dmitriev and Misikhina 2012: 70–1). The current pen-
sion system has in fact been created in order to achieve a balance between state
income and expenditure than to diminish the difference in incomes at different
stages in life. In conditions of high inflation and crises in the fund market, it there-
fore makes more sense for the middle class to invest in its own health or in real
estate (Ovcharova et al. 2013: 12).
In the ‘nucleus’ of the lower class, around 40 per cent are renting only a room
or a bed in a dormitory rather than having their own separate flat or house. This
is especially noteworthy considering that a majority lives in small villages, where
the shortage of housing should be less pressing than in large urban centres (Tik-
honova 2012: 40). Connected to the question of privatization of housing is that of
the cost of utilities. These have risen sharply in some municipalities, but this is
also something that sparks protests, particularly among an elder generation ‘who
spent much of their adult lives under the Soviet regime, since they have come to
see cheap housing as a civil right’ (Attwood 2012: 908).
Transport
Over the past couple of decades, the use of public transport has fallen from its
highest point, measured in terms of billions of kilometres travelled by passengers
(passenger-kilometres), when it reached 791 billion (in 1990) to a figure of just
502 billion in 2011 (Rosstat 2012: 486; Popov 2012: 154). Following the pat-
tern in western countries, meanwhile, car ownership increased significantly even
during the economic crisis in the 1990s. And it did so in spite of the substantial
and increasing costs involved (such as service and running costs, car insurance
and taxes) and the risks for traffic accidents – four times higher than in lead-
ing countries in Western Europe (Popov 2012: 156). Even the traffic jams and
the access to a developed infrastructure for communal travel in Moscow do not
appear to have dampened the wish to own a car, considering that there have con-
sistently been more cars per capita in Moscow compared to Russia as a whole
(Rosstat 2012: 203).
Car ownership is, furthermore, connected to a sense of freedom. Consequently,
any infringements on this liberty or abuse of privilege by the elite (such as the
undue use of priority lanes, parking that obstructs traffic or frequent disruptions
of traffic for VIP motorcades) spark protests on the internet in the form of blogs
and YouTube-clips, but also develop into real life protests (Lonkila 2011; Franke
and Vendil Pallin 2012: 45).
Travelling abroad
Travelling abroad is another way in which Russians are becoming more mobile
and one important aspect of this is ‘the growth of transnational flows that in turn
form a culture of individual long-distance travel’ (Popov 2012: 152). ‘Over the last
few decades considerable numbers of Russian citizens have become acquainted
with the role of the “international tourist”’ (ibid.). In 2011, just under 30 million
Russians travelled to the ‘Far Abroad’, that is, to countries that are not members of
the Commonwealth of Independent States (CIS). The most important tourist des-
tinations during this period were Turkey, China and Egypt (Rosstat 2012: 304).4
In an international comparison, Russian tourists became the fifth-largest spend-
ing group – behind those from China, Germany, the USA and the UK (UNWTO
2013: 13). Rosstat does not divide the travellers into groups according to income
bracket, but it is safe to assume that travelling to the West for tourism is some-
thing that is out of reach for most people that do not belong to the middle class or
the rich. The fact that those who are well off value the right to travel abroad as a
human right is furthermore an indication of this (Levada Center 2014b).
Internet and mobile phones

There has been a rapid increase in both internet penetration and mobile phones in
Russia. In 2013, 46 per cent of the population aged above 18 stated that they used
the internet daily while 57 per cent used it at least once a month. Internet use is
the highest among young people and within the middle class. The next generation
(‘kids online’) use the internet already and live with it (Oates 2013: 79–80). The
younger share of the population and especially those belonging to the urban mid-
dle class are mobile both when in terms of travelling and with regard to s earching
Table 9.1 Internet penetration in different cities and localities in summer 2013 (%)
City/locality Internet penetration (%) Share of Internet users in

Russia (%)
Moscow 74 11
Saint Petersburg 69 4
City of 1 million or more 62 11
City of 500,000–1,000,000 61 8
City of 100,000–500,000 64 19
City of less than 100,000 56 27
Village 44 20
Source: FOM (2013).
for information outside the state-controlled sphere (Franke and Vendil Pallin
2013: 32–3). They are furthermore the group in society that immediately feels the
consequences of attempts to limit these freedoms.
Moscow and other big cities have higher levels of internet penetration than
other regions in Russia (see Table 9.1). There are two factors that may have influ-
enced this situation: the infrastructure for using the internet is more developed
there and the costs are considerably smaller measured in RUR per Mbit/s (NITs
Ekonomika 2011: 13; Yandex 2012).
Values and attitudes among the Russian population

The ratings of Vladimir Putin stopped falling in 2012, but there had been a slow,
but steady change in values among the population. According to a report based
on opinion polls, focus group surveys and psychological research, the think-
tank CSR (2013: 9–10), a new equilibrium had become established by 2012–13,
where Putin and United Russia were viewed favourably by just above 40 per cent.
In their view, the lower threshold for Putin’s ratings was decided by the ‘charisma
of a strong leader’ and patriotism, whereas the ceiling for his popularity was
determined by the ‘loss of hope’ and the fear of strong power authorities (ibid.:
26–7). These changes were bound to have political consequences even in a polit-
ical system such as that of Russia which appears to be cemented in conservatism
(Gorshkov 2013: 3).
Liberalism vs conservatism
According to Lilia Ovcharova (2012), the middle class is dominated by peo-
ple who are younger and better educated and who live in large urban centres.
However, whereas it became dominated by business people during the 1990s,
it has turned increasingly conservative as it has come to be dominated by civil
servants and the employees of state companies. Caution should be exercised
when trying to distinguish between conservative and liberalist approaches in
Russian society and should always be made bearing in mind its historic experi-
ences. Thus, in asking questions about how respondents perceived democracy,
a Russian research team distinguished between liberal-individualists, those
with an authoritarian-communitarian inclination, and people with mixed ideo-
logical preferences. The liberal understanding of democracy was distinguished
by an emphasis on freedom of thought and free elections as well as ‘personal
and economic freedom’. Further important components were that the state
answers to society, and that there is equality before the law and equal oppor-
tunities. In the authoritarian-communitarian understanding of democracy, the
emphasis is based on features like power, submission, discipline, the need
for order, appeals to the law and moral norms. The power relationship was
described in terms of the authorities, the state, people, the people or simple
people (Shestopal 2011: 38–9).
The individual vs the collective

Perhaps even more interestingly, in today’s Russia collectivism appears increas-
ingly to be giving way to individualism. Whereas collectivism implies an identity
that emphasizes the importance of belonging to a group and ‘sacrifice of individ-
ual goals for the common good is highly valued’, individualism goes hand in hand
with autonomy and is linked to high levels of self-expression values (Inglehart and
Welzel 2005: 136; see also Sakwa 2009: 1–29).
To capture the potential for modernization in shifting values and norms in
Russian society, Tikhonova (2011) notes how individualism is gradually grow-
ing at the expense of collectivism by asking respondents to choose between pairs
of statements (Table 9.2). What is striking is the degree to which the younger
generation is prone to give individualist answers rather than relying on the
collective.
The question is, of course, whether this is explained primarily by age varia-
tions rather than changing values that are first embraced and entrenched among
the young. In other words, will the young become more collectivist as they enter
the higher age brackets? However, an opinion poll from Levada suggests that
these developments are part of an ongoing trend of changing values in society
towards individualism. When it comes to the relationship between the state and
the citizens, the trend is clear: the view that the state should take care of its citizens
is giving way to the opinion that the role of the state should rather be confined to
establishing ‘the rules of the game’ (Figure 9.2).
Rule of law and corruption

Another interesting and related change is the increased emphasis overall in society
on the need for rule of law. For example, Tikhonova (2011: 22) concludes that
there is an increasing readiness to embrace the law as the main social regulator.
The middle class is more worried about corruption and crime than about material
Table 9.2 Value orientations in different age groups (%)
Values in alternative pairs 18–30 31–40 41–50 51–60 60 and

older
I am convinced that I can take care of myself 53 45 42 33 12
and my family and therefore I do not need
material support from the state.
Without material support from the state I and 47 55 58 67 88
my family would find it difficult to survive.
My circumstances now and in the future will 59 54 50 35 20
depend first and foremost on my [actions].
Little depend on my [actions], the economic 41 46 50 65 80
situation in the country is important.
Changes in Russian society must be conducted 58 65 65 66 71
from ‘above’ and the authorities must be in
control of how they are carried out.
Changes must be carried out from ‘below’ and 42 35 35 34 29
depend on people who take initiative and
the healthy forces within society itself rather
than on authorities.
The affairs of the country depend on simple 23 21 19 20 17
citizens.
The affairs of the country do not depend on 77 79 81 80 83
simple citizens at all, but only on managers
(rukovoditeli) and politicians.
Source: Tikhonova (2011: 24–5).
problems such as making ends meet at the end of the month – although it does
express concern about issues such as healthcare and future pensions. At the same
time, the middle class is more likely to think about emigration and send its chil-
dren to school abroad. It thus has the possibility to opt out of trying to transform
society. ‘Strategies of “vote” give way to strategies of “exit”’ (Samson and Krasil-
nikova 2012: 21).
Human rights and freedom

Closely related to questions of rule of law is the issue of human rights. The view
of freedom is changing with it being increasingly interpreted as ‘freedom to
protect one’s interests within the framework prescribed by the law’ rather than
‘freedom from’ the actions of others (Tikhonova 2011: 23; see also Sakwa 2009:
5–11). A Levada Center (2014b) poll on Russian attitudes to human rights con-
firms an overall trend towards a greater emphasis on human rights among the
population. Among the noteworthy differences between different income groups
are that those that are designated as poor appear less anxious about human rights
issues such as freedom of speech and the right to travel abroad. Instead, this group
80
70
60
50
40
30
20
10
0
2001 (Jan.) 2006 (Mar.) 2007 (Oct.) 2009 (Oct.) 2011 (Oct.) 2013 (Dec.)
The state should meddle as little as possible in the life and economic activity of its citizens
The state should establish unified “rules of the game” for everyone and make sure that they are not violated
The state should take care of all its citizens and ensure them adequate standards of living
Difficult to answer
Figure 9.2 In your opinion, what should be the relationship between the state and its
citizens? (%).
Source: Levada Centre (2014a: 47).
is most concerned about the right to receive free education, healthcare and their
security in old age and in case of illness. The right to work is, moreover, a high
priority, whereas the right to information as well as freedom of speech and con-
fession are rated considerably lower (Table 9.3).
Overall, those with a better economy also rate the right to life and free edu-
cation very highly. However, the group designated as ‘rich’ stands out in that
it rates the inviolability of private life and home as higher than the right to life.
Concurrently, it is also concerned with freedom of speech and the right to elect
political representatives (Table 9.3). It is interesting to note that these latter
values are among the rights that have increased the most in rating since 1994,
according to the yearly polls by the Levada Center (2014b). Furthermore, when
the interests of the state are pitched against the rights of the individual, a majority
feels that the individual should have at least the right to fight for its right against
the state (ibid.).
Another interesting aspect is the gap between the moral and value system that
Russians stated they preferred in their country, on the one hand, and the one that
they perceived to exist in a study published in 2013, on the other. The desired
moral and value system includes ‘the family and home’, ‘law’ and ‘human rights,
but respondents did not consider these to be the prevailing principles in Russia
today. The difference was especially striking when it came to law and human
rights (Figure 9.3).
Table 9.3 Russians on their rights according to consumer status (%)
Total Poor Medium Well Rich

income off
The right to life 69 66 70 72 58
The right to free education, healthcare and 65 81 66 55 55
care in old age and during illness
The right to a well-paid occupation 53 62 52 47 50
according to one's education/training
Inviolability of private life, home 52 56 50 53 60
Freedom of speech 39 34 40 38 51
The right to a subsistence minimum 37 43 38 32 33
guaranteed by the state
The right to own property 37 31 38 38 34
The right to information 27 19 29 25 23
Freedom of confession 27 16 27 31 25
The right to elect representatives to 21 20 22 18 36
institutions of power
The right to travel to another country and return 20 10 21 24 27
Difficult to answer 4 1 4 5 11
Source: Levada Center (2014b).
Note: The poll was conducted 20–24 December 2013 and is based on 1 603 people above 18 years old. Poor –
needs to save in order to buy food and clothing; medium income – money enough for food and clothing, but
need to save to buy more expensive things (television or refridgirator); well-off – can buy certain expensive
things (television or refridgirator), but needs to save in order to buy a car; rich – can buy a car.
Fear and anxiety

The present-day Russian population has a number of fears and anxieties. Tikhon-
ova (2012: 40) identifies a ‘nucleus of the lower class’ that lives with a more or
less constant ‘sense of unfairness regarding what is happening, and, at the same
time, a feeling of hopelessness’. She also notes that 56 per cent in this group fear
for themselves or their loved ones and that many live in poor housing conditions.
Moreover, many find themselves in long-term unemployment or are working odd-
jobs and as many as 90 per cent believe that they will be unemployed in the com-
ing year (ibid.: 42). In other words, this group still lives under conditions where
it has to fight for its existential security. The middle class, as mentioned above, is
more likely to worry about crime and corruption.
There is, furthermore, a continuing fear of repression in society. In a 2013 focus
group study that involved a psychological test, respondents reacted very negatively
to pictures of the special forces OMON of the Ministry of Interior Affairs (MVD).
They were perceived as ‘a force directed against the people’ (CSR 2013: 17).
Overall among the population, the fear of repression had once more increased in
2013 with a majority constantly or from time to time fearing its return (Table 9.4).
90
80
70
60
50
Which principles prevail in Russian society?

40
And upon which foundations and principles

30 should Russian society rest?
Which values are the most important for

20 future Russia?
10
Figure 9.3 Values in Russian society – actual, desired and those important for the future
Russia (% of answers).
Source: IS RAN (2013: 15).
Table 9.4 Are you afraid of a return of mass repression? (%)
1994 1999 2003 2008 2013

Not afraid at all/rather not scared 26 34 51 47 38
Sometimes yes, sometimes no 16 14 21 17 23
Constantly afraid/afraid 37 28 19 17 30
Difficult to answer 20 23 10 19 10
Number of respondents 3,000 2,000 2,000 1,500 1,600
Source: Levada Center (2014a:18).
Conclusion
The most frequent answers to a question about what unites modern Russia apart
from history, culture, language and territory were ‘common hardships’ (obshchie
bedy) at 38 per cent and ‘dissatisfaction with the authorities’ (nedovolstvo vlastyu)
at 36 per cent. Only after this came ‘friendly relations’ (35 per cent), religion (29
per cent), the state or pride in one’s country (IS RAN 2013: 37–8).5 The aim of the
question was to try to identify what are the components of the identity of a Rus-
sian citizen. The result brings us back to the quote by Aleksievich at the beginning
of the chapter. A multitude of values and behaviour patterns exist side by side in
Russia today. The country is united by history, culture, language and territory, but
it would be naïve to believe that this unity automatically leads to a unity of opinion
and interests among the population.
Indeed, there are substantial differences between income groups and between
generations. As is evidenced above, socio-economic development has resulted in
a situation where it is of importance to examine not only the aggregated changes
in income, consumption and values but also those that have taken place within
different groups in society. The different groups have radically different concerns
and therefore also different values. There is a well-off group in society that owns
property and is increasingly mobile and there is also a considerable difference in
outlook between different age cohorts. Urban dwellers with higher incomes and
the younger generation are more inclined to embrace self-expression values con-
ducive to the establishment of democratic institutions.
This suggests that the basis for developing institutions is growing in Russian
society, albeit unevenly between different groups and regions. However, Ingle-
hart and Welzel (2005: 93) emphasize that their predictions are ‘probabilistic not
deterministic’. Russia’s cultural tradition, as well as its historic experiences, will
continue to colour its development path. The fact that the Russian population has
been quick to acquire tendencies of increased authoritarianism as expressed in an
increasing fear of mass repression is probably linked to its historic experiences
during communist rule. The future values in Russian society will, moreover, be
influenced by external events and crises. The conflict with Ukraine, and by contin-
uation with the West, has the potential to result in a situation where the population
is again more concerned about threats to their survival. A severe downturn in Rus-
sia’s economy could also have negative effects, which delay or even reverse the
development of values of self-expression, thereby providing a fertile environment
for authoritarian rather than democratic institutions.
Nevertheless, there is every reason to expect that in a longer-term perspective,
socio-economic development will change the value systems in Russia. The over-
all trend during the past ten years and also comparing with the data from the 1990s
is one where there is a greater emphasis on self-expression values such as indi-
vidualism, human rights and freedoms and rule of law and this is especially true
among those who have experienced a higher degree of socio-economic develop-
ment and among the younger cohorts. The perceived gap between the moral and
value system that Russian respondents desire and that which they perceive to exist
is striking and suggests that there is a growing demand for institutions that guaran-
tee values such as law and human rights. The view that the state should establish
the rules of the game rather than provide social guarantees is also winning ground
among the younger section of the population and the urban middle class. This
trend constitutes a challenge for the Russian political leadership to reform Russian
society and the political system in order to accommodate and mediate between
different groups’ expectations, demands and aspirations.
Notes
1 Author’s translation.
2 The Levada Center is a Russian non-governmental organization that conducts socio-
logical research and opinion polls. The center is named after the Russian sociologist
Yuri Levada (1930–2006).
3 St Petersburg is also a federal city and is the second most affluent city, but it lags consid-
erably behind Moscow in spite of this. Since the annexation of Crimea, Sevastopol has
joined this group of federal subjects. This city has even less in common with Moscow.
4 Finland was also among the top destinations, but not exclusively for tourism, but rather
for trips with ‘private purpose’ (chastnaya tsel).
5 The respondents were allowed to choose several answers to each question.
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10 Russia’s emerging civil society
Jens Siegert
Ever tried. Ever failed. No matter.

Try again. Fail again. Fail better.
Samuel Beckett
What is civil society? This question is not as banal as it might appear. Most authors
and agents use the term ‘civil society’ as a sort of acting subject. But that is, in my
opinion, an incorrect perception. ‘Civil society’ is not an acting subject. What can
be identified as subjects are civil society organizations which I will refer to below
as non-governmental organizations (NGOs). Civil society is rather a normative
concept for judging whether a society behaves in a more or less civil way.
The purpose of this chapter is to examine the development of Russia’s civil
society and its NGOs, which are autonomous organizations independent from
the state. NGOs are subjects acting in the collective, the social and often even
political sphere of a society. It is possible to describe them, ask them about their
views and analyse how they act. Quite often they are registered in accordance
with governmental regulations. Sometimes they ally themselves with each other.
In other cases, they compete against each other or they challenge the actions of
the government. It is not uncommon for NGOs not to adopt any legal status, but
to exist only as informal associations of citizens.
The term civil society refers to a social partnership between individuals and
families on the one hand, and the state on the other. The term refers to people
who have voluntarily formed an association to together carry out a socially useful
activity or philanthropic work. This definition of civil society excludes organiza-
tions carrying out an economic activity with the purpose of drawing profits. It also
places no importance on the institutional forms of these organizations. They do
not need to have an official legal status and they can operate without having the
approval of the state. The underlying principle of civil society is that it has to be
voluntary, autonomous from the public authorities and its composition is always
in the process of change, which is what gives it such diversity.
The outline of the chapter is as follows: In the first section, I discuss the general
basis of civil society. The second section describes the emergence of NGOs in
Russia since the break-up of the Soviet Union. In the third section, a comparison
is made of the conditions during Soviet times and Putin’s relationship with civil
Russia’s emerging civil society 165
society in his first and second terms of office. The fourth section discusses the
interim period with President Medvedev. The fifth section analyses the situation
of the Russian civil society before and after Putin’s return to power in 2012. In
the sixth section, I raise some special issues that are relevant for understanding
the relationship between the state and civil society in modern Russia. The seventh
section analyses the NGOs during the protests in 2011–12. Section eight presents
the conclusions of the study.
The research presented in this chapter is based on my more than 20 years of
work as a resident collaborator of the German Heinrich Böll Foundation, a for-
eign NGO based in Moscow. In this capacity, I worked together with many Rus-
sian NGOs, engaged in different thematic fields such as human rights protection,
ecology, gender issues, migration and refugees, consumer protection, freedom
of expression and freedom of speech, the protection of rights of those liable to
military service, urban development and many others. In describing the devel-
opment of Russian civil society, I mainly resort to this personal and professional
experience.
Civil society – theory and reality

Civil society actors and NGOs are an essential part of the political system because
they notice and identify problems in society earlier than the state authorities, if the
latter even become aware of this at all. Somewhat simplified, one can divide civil
society actors into three main groups (Habermas 1971: 46):
• NGOs operating in the space between the state and society, that is, playing an
intermediary role.
• Groups involved in building up social capital; this includes self-help groups,
veterans’ associations, cultural groups, sports clubs, and so on, as well as
Christian bodies and other religious groups, which represent a specific case
by virtue of their particular relations with the state authorities.
• Non-governmental charitable organizations, such as cooperatives and church
organizations providing social assistance. This category also includes the
Red Cross.
In theory, all of these organizations are parts of civil society, but such a broad
definition is impractical for the purposes of making a more detailed analysis of
relations between the state and civil society. Therefore, in this chapter I concen-
trate on the first group – that is, organizations that perform an intermediary func-
tion between state authorities and society, which are usually referred to as NGOs.
The areas in which NGOs work can be called the focus of civil society activity
The involvement of the general public in NGOs’ activities – their desire and need
to act in the public good – makes it possible to say that NGOs are the bearers of
a new political culture. In cases where the public recognizes that NGOs’ activi-
ties are genuinely useful for society, this can give rise to new legitimate forms
of social and political interaction. Civil society organizations also help establish
166 Jens Siegert
trust between public agents. Trust is an ephemeral factor that reduces the transac-
tion costs and facilitates the diversity of public structures and relations in society
(Luhmann 2000). In today’s increasingly complex societies, trust is becoming
increasingly important. Today, neither the state authorities nor public groups, and
even more so individuals, can foresee all consequences and ensuing risks that
their actions might have. Therefore, to be able to act in the public sphere, they all
need to trust their own and others’ professional assessments. Trust is therefore the
’lubricant’ for public progress, above all economic progress. Without this lubri-
cant, the wheels turn more slowly, action is less effective, and there is a constant
threat of breakdown.
This is why in modern societies, whether in the private or the public sphere,
coercion or the framework providing for them is being increasingly replaced by
trust and right as the prime resources for managing and resolving conflicts. How-
ever, going against this trend, Russian society is dominated by an atmosphere of
complete distrust on all sides. This distrust is primarily directed against the state
authorities, including the legal system, and economic agents, but it also extends to
public organizations. Paradoxically, this mistrustful attitude is often linked to the
altruistic principles that underlie social and political efforts.
Russian civil society emerges

One of the main differences between the political systems of today’s Russia and
that of the former Soviet Union is the constitutional right of freedom of asso-
ciation of the former. That right applies not only to political parties, but also to
civil society organizations, of which there are already several hundred thousand
in the country. Another important differentiating characteristic between the Soviet
Union and Putin's Russia was, until 2012, the widespread freedom of its people
to define their lives as they wished. The freedom to think what you want and to
say what you think, to travel where you want to go, return when you like, to live
with whom you wish, to love whom you wish, to work where you wish, all within
the framework of given social and economic possibilities, was naturally part of
the social contract between Putin and the population of the 2000s. According
to the social contract, Putin determines politics and controls the most important
economic resources. But he also cares for the growing prosperity of as many peo-
ple as possible, does not interfere in the private lives of his citizens, and does not
bother about what they think and believe. Since Putin’s return to the Kremlin in
2012, however, these liberties have been threatened.
To understand the developments of Russian civil society, one must take a closer
look at how Russia’s NGOs have evolved since the end of the Soviet Union. Even
before the end of the Soviet Union, in the last years of perestroika, civil activists
played a role in mediating between the state and society. A certain alliance was
linking part of the old Soviet political elites and the new democrats took shape
in the very early independent Russia. That alliance was not very stable, however,
and it finally broke up in connection with the constitutional crisis in 1993, which
led to a small but bloody civil war in the autumn of that year, the first Chechen
War and the circumstances surrounding the presidential elections in 1996. As a
result of those three events, the temporary – and unequal – partners NGOs and the
state went different ways. The gap between ethical imperatives and political com-
promises should not be too large in NGO activities. One reason for this is that for
NGOs, this gap must certainly be significantly narrower in NGO activities than in
the sphere of politics. The influence of NGOs is based not on holding high offices
but instead mainly on achieving a good reputation in society and trust among the
citizenry. Many civil activists were either unable – or did not want – to subordi-
nate their behaviour and activities to the political power struggle.
Putin’s first and second terms: managing the NGOs and

controlling civil society
Following Vladimir Putin’s first election to the presidency in 2000, the Kremlin
immediately began to subjugate all parts of the Russian political sphere. Previ-
ously, actions in those spheres had not been independent in the proper sense of the
word but they were, at least, controlled by different centres of power. Civil society
actors also became the object of the Kremlin campaign.
The more prominent among the NGOs responded by establishing regional and
supraregional coalitions. During the first part of Putin’s first term, the Kremlin
recognized some of the leaders of these NGOs as negotiation partners. The Civil
Forum, the creation of which the Kremlin called for in the autumn of 2001, rep-
resents the first serious attempt to integrate independent NGOs into the system
of what at a very early stage began to be called the managed democracy. That
attempt proved largely unsuccessful and a peace, of a sort, prevailed between
the Kremlin and a group of independent NGOs until the autumn of 2003. Two
political events occurred at the end of that relatively peaceful period: the arrest of
Mikhail Khodorkovsky and the Orange Revolution in Ukraine.
In the eyes of the Kremlin, NGOs supported by Western donors played a deci-
sive role in the regime change in Ukraine in the winter of 2004–5. That view,
combined with the fear that something similar could happen in Russia, led the
Russian authorities to set up a Public Chamber, fully under their own control, and
to adopt a new law on NGOs in early 2006. That law replaced all prior regulations
on civil society organizations and tightened the controls over them. Perhaps even
more importantly, it sent a signal to society and governmental authorities at all
levels: NGOs are suspected of being a potential threat to state security.
The state attempted to use the Public Chamber to legitimize ‘officially elected’
representatives of civil society as a whole and, at the same time, to de-legitimize
the independent NGOs that were not members of the Public Chamber. But the
de-legitimizing part of this move did not succeed. Although most civil society
organizations did not enjoy the support of a broader public, the NGOs exhibited
an impressive resilience and remained steadfast. The tightening of state controls
over the sphere of politics, particularly over the party system, compelled the Rus-
sian NGOs into the role of surrogate political parties. In some cases, they were
forced to play a double role – a role, although a weakening one, that they continue
168 Jens Siegert
to play today – acting both as a political opposition and as a channel of commu-
nication between the political elite and society. The difficulty for the Russian elite
was how to strike a balance between providing the economic freedom required for
effective development while preventing this freedom from spreading into aspects
of political and public life. In the end, the state agents chose the ‘hands-on man-
agement’ method as their means of establishing control over civil society.
This situation has created a type of NGO in Russia that is practically unknown
in developed democracies – organizations acting as mediators between the state
authorities and parts of the general public. Some of these communication channels
have been given institutional form – for example, the Presidential Commission
on Human Rights, which was set up in 2002 with Ella Pamfilova as chairwoman.
In 2004, the Commission was reorganized as the Presidential Council for Devel-
oping Institutions of the Civil Society and of Human Rights. Up until the end of
Putin’s second presidency, the council members included a number of people
from influential opposition NGOs.
The outcome of these first ten years of Vladimir Putin’s rule was contradictory
for many Russian NGOs. In the first term after his election, NGOs experienced
growing pressure from state authorities to integrate in a new established corporate
political system. The state focused its attacks on them in the sphere of administra-
tive regulations, such as tax laws, questions of registering as legal bodies or their
reporting duties to state authorities. As a result, NGOs transformed themselves
into organizations, thus working in a more professional way.
The interim period: Medvedev’s modernization rhetoric

In February 2009, then President Dmitri Medvedev showed some liberal signs.
Among other matters, he approved a renewed list of members for Pamfilova’s
Presidential Council, half of whom were now people known for their uncom-
promising criticism of the Kremlin. With the help of the council, some of the
provisions in the 2006 law on NGOs that had particularly been hampering the
work of small NGOs and those in the regions were amended, and some efforts
were made to reduce the red tape, thus making it hard to establish new NGOs.
Pamfilova stepped down as the council’s chairwoman in the summer of 2010, crit-
icizing the fact that the state continued to limit the possibilities for NGOs to work
independently. The circumstances surrounding the appointment of her successor,
Mikhail Fedotov, did, however, show that the Kremlin still wanted to maintain
contacts with opposition-minded NGOs.
Recent surveys show that civil society activity is not regarded particularly
highly in today’s Russia (Levada Center 2011). But, at the same time, an as
yet diffuse sense of discontent is growing in society as people become sick of
the slow pace of reform, corruption, bureaucratic arbitrariness and the Krem-
lin’s monopoly on power. The economic crisis has made problems linked to the
political system more visible, and President Medvedev responded by proposing
a renewed version of modernization rhetoric, reminiscent of that heard during
Putin’s first term.
Not later than December 2007, after the parliamentary elections, the last more
or less independent political parties lost their final hope of re-entering parliament.
In this situation, the opposition had three broad options:
• They might have joined one of the parties of the so-named systemic opposi-
tion, at that time the Communist Party, the so-named Liberal Democrats of
Vladimir Zhirinovsky or the Just Russia Party. However, the Kremlin some-
times did not give its permission.
• They could go on and become marginal political actors under the threat of
being criminalized.
• They could join existing NGOs or found a new one themselves, join some
‘higher school’ or university as a lecturer or become journalists at one of the
not so many remaining newspapers or radio stations, which had been able to
preserve at least some independence.
The return of Putin and the winter of protest

The situation changed fundamentally in the autumn of 2011, with two decisions
by Vladimir Putin playing a decisive role in the developments. First, he declared
his intention to once more run for the presidency in March 2012. Second, on 5
December 2011, policemen in Moscow and St Petersburg arrested several hundred
people who were protesting against the falsification of the parliamentary elec-
tions the previous day. The announcement of Putin’s almost certain return to the
Kremlin acted as something of a trigger for what happened afterwards. However,
one must be aware that nearly all agents and observers of the Russian political
development, Putin’s advisers as well as the majority of oppositional politicians,
experts and journalists, at that given time agreed that Putin did have the power to
make such a decision without being aware of serious political drawbacks.
Surprisingly, the political establishment and its opponents did not bear in mind
the relevance and importance of elections. Almost nobody thought that election
fraud could be a possible trigger for political protest in Russia. This is particu-
larly astonishing since, within the last decade, elections have been playing an
important and decisive role in changing several (semi-)authoritarian regimes like
in Georgia, Ukraine, Tunisia and Egypt. In reality, history seldom works like a
time continuum, but makes smaller or bigger leaps forward. In such times, peo-
ple become particularly aware of sudden changes in society – and, in particular,
societies that have become immobile. Such ossified political systems lose their
ability, or their will, or often both, to react appropriately to societal, political and
economic challenges. Something similar was occurring in Russia in the protests
of winter 2011–12. Without doubt, Russian society changed and progressed more
quickly under the surface than what we could see. Another determinant of the
events could be characterized as ‘Putin’s modernization dilemma’. It consists of
two parts:
First, the economic modernization of the country was a principal aim of
Putin’s policy from the beginning. Moreover, it was perceived by the Kremlin
170 Jens Siegert
as an inevitable precondition to enable Russia to achieve the status of a super-
power. This importance attributed to economics is what explains the temporary
alliance between market-liberal economists and certain groups from the state
security structures, mostly the so-called gosudarstvenniki (people who always
put the interest of the state first), which also includes the siloviki (people from
within state security structures). However, at a very early state in Putin’s rule,
economic modernization had to play second fiddle to the interests of staying
in power. The economic crisis, which began at the same time, in 2008, when
the interim president Dmitry Medvedev came into office, showed clearly that a
comprehensive economic modernization would be unsuccessful unless the polit-
ical system were opened up at least a little. Even before the protests in Decem-
ber 2011, a large proportion of active, well-educated and mobile young people
had lost their faith in Putin. Yet it is these very people who are most likely to
carry out the crucial necessary modernization. At the same time, these very peo-
ple are also most likely those who might reinforce a more civil development of
Russian society.
Second, in his foreign policy, Putin encountered a similar problem. Over these
years the country’s foreign policy acquired an increasing anti-western momentum.
At the same time, notwithstanding Russia’s membership in the BRICS,1 a club of
countries with emerging economies, there will be no sustainable modernization in
Russia without good (or at least not bad) economic as well as political relations
with the West. In the end, the West is still the leading force in the world regard-
ing modern technologies and institutions. Moreover, Russia is in urgent need of
foreign investment and incoming know-how. Furthermore, an open confrontation
with the West, especially a military one, would be very expensive and would be
considered to slow down the process of modernization.
However, this was only true until the spring of 2014. At the beginning of his
third term as president in 2012, Putin yet seemed to be undecided about how to
find a way out of this dilemma.
Different parts of Russian society continue to drift apart. How far this process
has already advanced is shown by the formula of The Four Russias, proposed by
Natalia Zubarevich (2012) (see also Chapter 11 this volume). I would suggest
adding another complementary aspect, a sociocultural division of Russian soci-
ety into a modern–postmodern Russia and a patriarchal and religious pre-modern
Russia with memories of the Soviet myths. Lev Gudkov (2012: 10), a sociologist
and head of the Moscow-based Levada Center, even makes a threefold distinction
between a pre-modern, a modern and an anti-modern Russia. This division is not
a new one; it can be traced back in Russian history at least to the beginning of the
nineteenth century. In 2011, however, there was an intensification of the ‘cultural
confrontation’. On the one hand, Putin’s state is, step by step, more openly sup-
porting those forces in society that adhere to a patriarchal worldview. On the other
hand, it makes increasing use of the obscurant, anti-western flank of the political
spectrum, to counter the ongoing erosion of its power. From 2013 onwards, Putin
launched a re-ideologization of state politics, relying more and more on this worl-
dview. This will be discussed in more detail below.
In all this discussion one should not forget the significant sections of society
who are losers in the modernization processes – or who at least consider them-
selves to be on the losing side. These people constitute a natural foundation of
support for Putin. For them, he might no longer be the admired leader, who is
guiding the country from a glorious past into a bright future, as he was in his
first and second term as president. Yet he remains a kind of last resort against the
upcoming modernity with all its impositions. On the other side of Russian society,
the modern-postmodern one, we can see a growing demand for certain rules and
effective state institutions that leads to a resolute rejection of Putin’s rule. From
their point of view, the protest against Putin has a sociocultural character. It is
directed against a traditional model of relations between the state and society,
which is not only becoming less and less effective, but which modernized Russian
people perceive as an illegitimate restriction of their freedom.
Key issues in the evolution of civil society
A society without politics

One thing had been quite obvious for many years: participation in any debate con-
cerning institutionalized power was politics. Accordingly, in the Soviet Union,
politics did not exist outside the Communist Party or, more accurately, no politics
was permitted outside the party. Anyone who dared to try would be punished
harshly and vanish, first into labour camps and later often into enforced exile. All
of this changed with perestroika. Politicians began to emerge, initially from under
the maternal wings of Gorbachev’s Communist Party and gradually increasing in
independence. The brief flowering which followed lasted roughly until the early
autumn of 1993 when Yeltsin ordered shots to be fired at the parliament building.
During that interlude, politics was indeed rather free and democratic. In terms of
political history, Russia was suddenly very modern.
The realms of political politics (politicheskaya politika) – that is, the struggle
for political power that is organized primarily, although not exclusively, through
political parties – on the one hand, and civic politics (grazhdanskaya politika) on
the other, parted ways after 1993. This slight confusion of terms, which essen-
tially continues to this day, was not meaningless. The widening of the notion of
the political, which in the West was closely linked to the emergence of the civic
initiative movement during and after 1968, and the related process of dismantling
hierarchies, particularly in terms of the power relations between state and soci-
ety, as well as the individual, man and woman, did not really begin in Russia or
Eastern Europe until after the collapse of the Soviet Union. German philosopher
Jürgen Habermas (1971) coined the term structural transformation of the political
sphere to describe this widening legitimacy of political involvement outside the
structures provided for and controlled by the state when it took place in the West.
In the West, the transformation of the political sphere resulted in a considerable
expansion of the notion of politics, as expressed in the once-popular dictum that
172 Jens Siegert
‘the private is political’ (Roth and Rucht 2008). Issues, such as domestic violence,
that had previously been regarded as private affairs suddenly became political. As
a result, it gradually became legitimate, as opposed to legal, which had been the
case before, to stand up for one’s rights without the direct use of political parties
and state institutions. This newly developed sphere, where one engaged in poli-
tics without becoming a politician, was initially named ‘new social movements’
before being later labelled ‘civil society’. Most Soviet dissidents and later Russian
political and civil actors, like, indeed, many of their western precursors, were, of
course, unaware of, let alone familiar with, these fancy notions, even though the
dissidents in communist Poland, the Soviet Union or Hungary had made a signifi-
cant contribution to their development. They simply grasped the freedom because
they demanded, quite rightly, the right to determine the fate of their societies, and
their own fates in particular.
The innocence of the perestroika period ended suddenly in 1993, when fire was
opened on the parliament building in Moscow and later with the 1994 Chechen
War, followed by Yeltsin’s rigged election of 1996 and the bankrupting of the
oligarchic state in 1998 during Yeltsin’s second term in office. In the minds of
most people, politics once more became separated from the involvement in public
affairs. Politics were regarded as dirty, corrupt, dangerous and morally suspect,
and involvement in public affairs as beneficial and endowed with a certain dig-
nity, albeit that it was viewed with some suspicion by those used to being deprived
of their dignity, while at the same time being increasingly marginal. ‘I’m/we’re
not involved in politics’ was the new mantra of the civil activists, aimed at win-
ning the support of the population as well as at signalling to the powers that be that
they represented no threat to their power.
This relationship was subsequently formalized by Vladimir Putin’s introduc-
tion of ‘managed’ and later ‘sovereign’ democracy. He quickly transformed him-
self into ‘Russia’s only politician’, with a clear line being drawn between politics
and involvement in public affairs. Politics was exclusively a matter for the Krem-
lin. Whoever did not accept this was either marginalized or eliminated. At the
same time, involvement in public affairs that did not follow explicitly political
goals was co-opted by the state. A human rights NGO registered with the Min-
istry of Justice was allowed to deal with human rights issues; an environmental
NGO with the environment; and a sociological research institute could carry out
opinion polls. To put it briefly, experts were allowed to speak about their areas
of expertise.
Many NGOs were thus constrained by means of various special advisory bod-
ies, panels, committees and commissions reporting to the president, the govern-
ment, the ‘X ministry’ and the ‘Y governor’, the police or the mayor while, at the
same time, gaining some, albeit limited influence in decision-making as well as
a degree of protection against state repression, or so most of them would believe.
Similar corporate structures were set up for non-state research institutions, think-
tanks and lobby groups. What appeared to be a permanent arrangement was, how-
ever, disrupted in the winter of 2011–12 by the resurgence of mass protests and,
thus, the return of a politics that was outside the Kremlin’s control.
A different middle class
In the year after the winter of the protests 2011–12, many observers wondered
whether the genie was now out of the bottle and whether the Kremlin would
attempt to squeeze it back in using ploys and threats. Two years later opinions
still vary. Some think that Putin has taken back the control. Others see the current
peace as the calm before the next storm. I would tend towards the latter viewpoint,
though it is hard to predict. The most important question is therefore not whether
there will be unrest in the country in some foreseeable future, but rather how and
where, who will be the bringers of possible changes and how they imagine their
future world.
It was the protests of the winter of 2011–12 which, at least in part, turned pol-
itics back into a public affair in Russia. There were, of course, protests against
Vladimir Putin and his government before this period. But they all had their lim-
its, from the pensioner protests against the so-called overhaul of state benefits at
the beginning of 2005, to the Strategy-31 protests against restrictions on freedom
of assembly since 2009 (article 31 of the Russian Constitution establishes the
freedom of assembly). None of these had a direct impact on the political system
and its legitimation mechanisms. However, the winter of 2011–12 was different,
leading to considerable shifts.
This analysis has focused on that part of the protest against Putin which was
fuelled by the idea of a liberal, market-oriented state, which observes the rule
of law. This was the emancipatory protest of an emerging urban, well-educated
and economically fairly prosperous middle class, which is demanding more
democratic involvement, more freedom and a more open society – both inwards
and outwards. But the protest also has another side, a dark side, which is most
visibly reflected in consistently fiery xenophobic protests. The supporters of
these protests are mainly people living in relatively precarious situations which,
although primarily of a particular social nature, are also significantly character-
ized by the experience and fear of decline – by experiences and fears that touch
individuals and small groups, but also by a collective fear which applies to the
country as a whole.
President Putin continues to respond experimentally to the presently very
marked regional, sectorial and social differentiations in society. Managed democ-
racy was one such experiment which worked quite well for a time. It built upon
the notion of a ‘united Russia’ which incorporated all of the people in the country
as far as possible. By contrast, since Putin's return to the Kremlin in the spring of
2012, there has been talk of an ‘overwhelming majority’ which is represented by
Putin's politics, whereby, logically, minorities are excluded. As with all politics,
a populist ruler such as Putin needs a social basis upon which he can depend.
This social basis must thus agree with him on the essentials. Or such agreement
must be generated and preserved without any unjustifiably great effort, such as by
means of propaganda. And this agreement, of course, also needs to be supported
by material interests. The majority, which lends its consent, must gain from the
order imposed from above.
174 Jens Siegert
Across the developed world, the middle classes function as a stabilizing force
with regard to political authority. Yet the middle class in Russia which, accord-
ing to its number and significance, could stabilize the country, leaves much to be
desired. The number of people who can be counted among the Russian middle
class has been at around 20 per cent since the beginning of the twenty-first cen-
tury and has barely changed. The size of the Russian middle class is a very much
debated issue. I am using the term middle class in this text, according to the
Russian economist Alexander Auzan (2012), predominantly determined from
a pattern of sociocultural behaviour and not one measured solely by income
only. The World Bank (2014) stated, in its Russian Economic Report 31, that
the size of the Russian middle class grew from 30 per cent of the population in
2001 to 60 per cent in 2010 and linked this principally to economic factors. A
research report of the Institute of Sociology of the Russian Academy of Science,
released in the spring of 2014, finds the lower proportion of 42 per cent in 2014
(Tikhonova 2014).
There is actually a difference between Moscow as well as, with a few reserva-
tions, St Petersburg and some other million-plus cities, and what can be roughly
described as the ‘rest of the country’. This difference is also manifested in the
sociocultural characteristics of each inhabitant who can be counted as members of
a middle class according to their living conditions and their income. In Moscow,
St Petersburg and a clutch of other million-plus cities, people often have a higher
level of education and in the last 10 to 15 years, their lifestyles have caught up
to rival those of the inhabitants of Western European cities. They are relatively
mobile, tend mostly towards more or less liberal views, often work in industries
removed from the state and in their private lives also keep themselves removed
from the state, as far as this is possible.
In the ‘rest of the country’, such people are much more difficult to find. There,
the middle class, defined in economic terms, consists mainly of civil servants. I
want to try to paint a small portrait of this group in the next few paragraphs. This
portrait is based primarily on my observations, reading and conversations. I am
unaware of any comprehensive studies which concern this part of the population.
The following may be considered, therefore, as a hypothesis.
The ‘provincial’ middle class largely consists of relatively young people. They
are often in the process of climbing the regional career ladder. These include
small businessmen, managers in medium-sized or large companies, but first and
foremost they are officials of all stripes: in the police force, the state prosecutor’s
office, the regional and town administrations and subdivisions of federal author-
ities. Socioculturally, most representatives of this class continue to live a very
Soviet lifestyle, albeit with a few striking differences. If asked, almost all these
people would consider themselves patriots. As such, they tend towards harsh,
often violent solutions to political questions. The problems in North Caucasus,
for example, are not understood as a result of state politics heavily reliant on the
army, police and secret services; rather, in contrast, they are perceived as a sign
that the Russian central state is too soft against ‘the Caucasians’. Everyday racism
and everyday xenophobia are widespread. In these circles, Vladimir Putin is not
just a political, but also a moral leader. Many also feel close to Putin because he
rose through the state from ordinary circumstances, something that corresponds
to their own life experiences. Putin’s enemies are also the enemies of this middle
class, with liberal political views having a hard time in this environment. Broadly
speaking, two groups can be distinguished. The older generation leans towards
a kind of humanized Stalinism, and supports the idea of a strong leader who is
broadly benevolent, but who can be tough when necessary. The younger group
has a pointedly more nationalistic political preference. There is also a leadership
cult here, but with a strong ethnic Russian element.
Mission of NGOs in a society with deep authoritarian roots

At the end of the first decade of the twenty-first century, without possessing polit-
ical authority and declaring themselves as non-political, most NGOs in Russia
gained a status of groups supporting the state on the one hand, but claimed a
certain moral superiority on the other hand. By and by, this status might have
been converted into political influence and, if things went well, have led to the
appearance of new, more democratic norms and practices and even transformed
into new sustainable institutions. Authoritarian states tend to react towards such
non-political movements only if they become too public, too political, and too
active. The Russian state did so in 2005–6 as a reaction to the Orange Revolution
in Ukraine. It adopted a new law on NGOs to tighten the control and limit their
political impact.
By and large, a state has three means at its disposal to limit the influence of
civil society actors: economic welfare, the participation of its citizens and the
exercise of force. The less of the two former that is at hand, the more authoritarian
tendencies tend to dominate state actions. The participation of citizens in deciding
what is good for their country has systematically been limited since Putin came
into power in 2000 with his social contract. The economic development of Russia
since 2008–9 is not very optimistic. In the short and medium term, the state must
count on fewer material resources being available. It has been Putin’s repeated
reaction to tighten the screws and limit the participation rights of the Russian cit-
izens and NGOs have been the main target of authoritarian measures every time.
This approach worked out well in his first two terms as president and it helped
keep him in power after the protests in the winter of 2011–12.
The tightening of control by those in power in authoritarian regimes in crisis
situations has proven quite effective. But such an approach does not solve the
underlying problems and, therefore, its positive effects from the point of view
of the government will dwindle away sooner or later. In our case, the above-
mentioned Putin’s dilemma indicates that the tightening of control reduces the
state’s ability to address the problems, as emphasized by many experts. In other
words: Putin pays for the tightening control over society through the weakening
of institutions. NGOs, on the other hand, demand better institutions. This explains
why NGOs in Russia have repeatedly become a target of the state’s repressions in
times of crisis in the first case.
176 Jens Siegert
NGOs and the protest winter of 2011–12
Within the last 25 years, more than 200,000 NGOs have emerged, in almost all
sectors of Russian society (Siegert 2011). Many NGOs had covered a long dis-
tance from rather inexperienced activists in the 1990s, than gone through a phase
of rapid development and professionalization, which often occurred as an answer
to the attempts of the state to make them part of the corporate system of the man-
aged democracy, in order to end up in the role of a surrogate opposition in the
second presidential term of Vladimir Putin. At the same time, many NGOs acted
as communication channels between the Kremlin and a big part of society. This
was also in the Kremlin’s interest because the people there were in need of making
decisions, but could not be certain that their controlled media drew an appropriate
picture of what was happening in the country. At the same time, quite a number
of citizens, working in NGOs, experienced that mutual trust often makes things
much easier to deal with than playing the zero-sum game.
In practice, the state and independent NGOs cooperated constantly on many
different issues, even on an institutional basis. During President Medvedev’s term
(2008–12) organized political competition did almost not exist and different kinds
of NGOs developed three different patterns of behaviour towards the country’s
leadership. A first group openly and without any limitation cooperated with the
state. Among these NGOs, one can find many so-called government organized
non-governmental organizations (GONGOs). A second group consisted of those
NGOs which were convinced that limited cooperation with the state, even an
authoritarian state, is necessary, because they have to solve practical problems
which would, in many cases, not be possible without cooperation. A third group
comprised NGOs which preferred to cooperate with the state only on a very lim-
ited number of practical questions. Most NGOs in this group were in close rela-
tions with the so-named non-systemic opposition. It goes without saying that it
is not always possible to demarcate the borders between these three groups very
clearly. One and the same NGO could both cooperate with the state and simulta-
neously criticize it harshly. But those have been exceptions.
Each of these three groups has had its favoured institutional information and
cooperation channel with the state: The first acted through the Kremlin-controlled
Public Chamber, set up in 2006; representatives of the second group have, in
many cases, been members of the Presidential Council for the Development of
Civil Society and Human Rights; the third group preferred to act through the
expert council at the office of the Commissioner for Human Rights of the Russian
Federation, chaired by Vladimir Lukin until the spring of 2014 and since then by
Ella Pamfilova.
The re-opening of the public political field in the autumn of 2011 not only shat-
tered this pattern of behaviour on the part of the Russian NGOs, which had been
hitherto rather stable for quite a long period of time, but it forced them to recon-
sider their public and political role. The most important experience they gained at
the very beginning of the protest was that the unexpected return of public politics
did not lead to increased influence of the NGOs. Some of the functions that NGOs
conducted turned out to be redundant. The surrogate opposition was, within days,
replaced by a real one. At the same time, as organizations the NGOs did not play
a leading role in the newly established protest movement on the streets. The NGO
leaders mostly retained their influence, but more often as individuals rather than
as representatives of their organizations.
Nevertheless, the organizational, infrastructural and knowledge resources of
many NGOs played a certain, but not decisive role in strengthening the protest
movement. However, this did not safeguard the NGOs against becoming a main
target for the attempts of the state to counter and push back the opposition. One
of the reasons for state pressure on NGOs has been that the Kremlin probably
overestimated the role of the NGOs and the foreign funding of their activities and
underestimated the profound changes that the Russian society was undergoing in
the Putin years.
The rollback after the winter of protest 2011–12

After a short fight or flight response, the Kremlin decided to punch back hard in
the spring of 2012. Ever since this time, the Kremlin has been trying to take over,
fence in and limit politics and its protagonists. This is basically the main purpose
of all pieces of new legislation that were quickly cooked up, mainly in 2013: the
liberalized law on parties, the re-criminalizing of the law on slander, the tightened
law on treason, and the laws imposing restrictions on the Internet.
As far as NGOs are concerned, the most significant of these new laws is the
so-called foreign agent’s bill. This piece of legislation imposes a new definition of
politics, one that is, ironically, not more limiting but rather more comprehensive.
Everything is now politics and, as a result, the state prosecutors have found poli-
tics in everything: sociology is now politics; environmental initiatives are politics;
legal scholars and practicing lawyers exerting influence on the practice of law and
the dispensation of justice is politics; providing advice to the local government is
politics; monitoring legal violations by the state is politics. And to ‘conduct polit-
ical activity’ is forbidden, if an NGO gets foreign funding and does not register as
someone ‘functioning as a foreign agent’.
By the spring of 2014, about 1,000 NGOs have been controlled by prosecutor’s
offices, the Ministry of Justice, the tax authorities and several other government
bodies. About 60 NGOs got an administrative decision from the prosecutor’s
office. More than 20 of these NGOs have been ordered to register as a ‘foreign
agent’, because, from the point of view of the prosecutor’s office, they have been
violating the law and virtually all have been acting as ‘foreign agents’. The other
NGOs got a ‘warning’ that they might violate the law and where asked to register
as a ‘foreign agent’ in advance of ‘conducting political activities’ (ClosedSociety.
org 2014). Almost all of the NGOs complained against these decisions. Many of
them succeeded in challenging the decision in court. Some NGOs, mostly those
dealing with LGBTI (lesbian, gay, bisexual, transgender, and intersexual) issues
and observing elections, dissolved themselves, because their leaders were under
threat of being criminalized under the ‘foreign agent’s bill’ and they assumed that
178 Jens Siegert
they would not be able to protect themselves in court. No NGO actually registered
itself as a ‘foreign agent’. As the Memorial Society had stated as early as Septem-
ber 2012, two months before the law came into effect, they believed that the law
was ‘unethical and unlawful’ (Memorial 2012). In May 2014, the Ministry of Jus-
tice got the right to include NGOs in the register of ‘foreign agents’ without their
content. Five organizations, among them two branches of the election monitoring
NGO Golos, were instantly labelled ‘foreign agents’. All five of these NGOs had
been ordered to register as ‘foreign agents’ by court decisions, but did not comply.
What has made the relationship between Putin and civil society such a complex
one? In fact, it is hardly surprising. Nearly all the powers that be in the second
half of the twentieth century and the early twenty-first century have struggled with
self-organized groups. Since Putin came into power, there have been three waves
of protests. One main task of the campaigns against NGOs, at least up to the spring
of 2014, was to discredit them in the eyes of the population. This proved to be quite
effective. Furthermore, the NGOs have been very busy defending themselves since
the new law came into effect. A large amount of resources had to be raised to orga-
nize and conduct this defence. So far, Russia’s NGOs have emerged, from each
round of confrontation with Putin, stronger, more skilful and with an enhanced
reputation. Over the past 25 years, a considerable section of Russian society has
developed a profound sense of its own civic dignity that simply will not allow it to
subject itself to the kind of self-humiliation and eating of humble pie required of the
NGOs under the foreign agent’s law. And to this, Russia’s authorities under Putin
have certainly made a significant – albeit reluctant and involuntary – contribution.
Re-ideologization – from the United Russia to an

overwhelming majority
The most important differentiating characteristic between the Soviet Union and
Putin’s Russia until 2012–13 was the widespread freedom of its people to define
their lives as they wished. This freedom was a part of the social contract of the
2000s. On the whole, Putin kept his promise, probably because it is only in this
combination that both strands of his power base could hold together: on the one
side the so-called gosudarstvenniki, and on the other a free-market liberal elite.
Their free-market liberal economic policy is to increase Russia’s prosperity, to
make it great again and, not unimportantly, through their economic successes,
to secure Putin's sovereignty and thereby his power. This all worked very well
until the economic crisis of 2008–9. Up to this time the majority of people in
Russia were certainly satisfied with the overall result. During the economic cri-
sis, however, confidence in a rosy future for the country took a hit. The discourse
on modernization under the interim president Medvedev restored a little hope
and fresh air. But, once Medvedev declared in September 2011 that he would
step down and Putin came back in the spring of 2012, this air quickly ran out.
The switch from an ideologically neutral or, better yet, only selectively and
instrumentally ideological state, to one which calls for following the ideology
and, at the very least, restraint in its dissent, showed itself at first in a change
of concept. Instead of being president of a ‘united Russia’, from early 2012
Putin claimed to be representing only the politics of an ‘overwhelming majority’
(Chechel 2013).
The outline of this form of politics was sketched quickly. It can, conveniently,
be seen in the repressive measures taken against the protesting opposition, espe-
cially against NGOs. Ever since that time the political classes have been con-
ducting themselves, as has been conveyed to western societies, like right-wing
conservatives, religious zealots, closer to or already past the limits of obscuran-
tism. The most prominent examples are the anti-homosexuality laws, the so-called
‘Dima Yakovlev law’ which forbids the adoption of Russian children by US citi-
zens, the law to ‘protect religious feelings’ and the increasingly hysterical public
discussion of apparent falsifications of history, in particular involving World War
II. Taken together, these events come together as a kind of antithesis to the ‘west-
ern’ maligned, reviled democratic modernity, an antithesis of the open society that
has prevailed in the West since the middle of the twentieth century. And with time,
this crude mixture of a sense of threat and resentment towards the foreign and the
human, neo-religious bigotry and a geopolitical worldview intensified into a kind
of ideology – not yet a very consistent one, but thoroughly usable. Internally, it is
employed against the opposition and externally against the West.
Vladimir Putin gave credence to these ideological substrata in detail for the first
time in September 2013 in a half-hour speech before the Valdai Club (2013), an
annual meeting of politicians, experts and journalists working on Russia. A quick
summary of the report is as follows: the West, and in particular Europe, which
here means the EU, has strayed from its Christian occidental path and deteriorated
into a hotbed of decadence, sin and weakness. A textbook example of this is the
claim of the ‘rise of gays’ everywhere, which is believed to have led directly ‘to
discrimination against supporters of traditional sexual relationships’. A new, but
essentially old mission for Russia has arisen from this: saving the Christian West,
even though it does not deserve it. There is not much fundamentally new in any
of this. It was the preoccupation of the Soviet Union, to not be the West, to be the
anti-West or the better West.
Outlook
In the winter of 2011–12, Russia’s democratic awakening took both the Kremlin
and the opposition completely by surprise. Putin had to come up with a new, con-
vincing narrative that would legitimize his third presidency. The ‘overwhelming
majority’ and the ‘traditional value’ have been attempts to create such a narrative.
The narrative of Putin’s first term in office was the salvation of Russia’s statehood,
the reinstating of vertical power and the dictatorship of law. The motto of his sec-
ond presidency was to maintain the gains made during his first presidency. Dmitry
Medvedev’s presidency tried to present a narrative of the country’s modernization
when the financial and economic crisis shook people’s faith in ‘business as usual’.
It was a failure. Stability, the magic word of the late 2000s, has enjoyed a happy
comeback. And it has certainly achieved some results. Fear of a new period of
180 Jens Siegert
unrest continues to haunt the population. By stoking this fear and presenting him-
self as the guarantor of peace, Putin has managed to neutralize the protests so far.
The events in Ukraine since mid-November 2013, the growing protest on the
Maidan Square in Kiev, the killing of more than 100 people there on 20–21 Feb-
ruary 2014, the following flight of President Viktor Yanukovich and the regime
change in Ukraine altered things fundamentally. The Kremlin reacted to this
direct threat to its own power in two ways: With a preventive ideological count-
er-revolution within the country and an increased anti-western political course in
the outside world.
The revolution within Russia was directed primarily against all remaining
islands of independent societal actors such as NGOs, but also the last parts of
the free press, mainly the internet, independent scholars and the small number of
oppositional politicians. Inside Russia, the anti-western course in foreign policy,
culminating so far with the annexation of the Crimea Peninsula and the meddling
in the eastern part of Ukraine did lead to a patriotic consolidation and further
marginalized different opinions, and even made them in a way dissident again.
For Russian NGOs, this development further narrows their space for manoeu-
vres. Once more, the whole concept of an independent civil society organization
became suspicious. On 18 March 2014, in his address to the Federal Assembly
to mark the annexation of the Crimea, President Putin made reference to a ‘fifth
column’ or groups of ‘national traitors’ active inside Russia (Putin 2014).
All this points to the fact that those in power will most probably continue to
try to gain control of the still-independent groups or will try to close them down,
because they perceive them largely as a threat. The main danger in this scenario
is that a further deteriorating situation in the country could lead to a radicalization
of a broader part of the NGO community. It is not unlikely that those in power
would react to such a radicalization by tightening political control and repression.
As a result, NGO activists might regress to their earlier role of dissidents in a
mainly closed society. If this were to happen, and the development turns in this
direction, it will be very difficult to speak about the existence of a civil society in
Russia at all.
Note
1 Brazil, Russia, India, China, South Africa.
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11 Regional inequality and
potential for modernization
Natalia Zubarevich
The issue of regional inequality is highly politicized in Russia with its vast and
heterogeneous territory. Both politicians and public opinion are influenced by a
number of settled stereotypes concerning the issue, for example it is claimed that
‘Regional inequality is so deep that it becomes an obstacle to further develop-
ment’, or ‘Inequality is growing in Russia, as opposed to the developed countries’.
Another common view is that ‘Inequality can be reduced by applying a policy of
large-scale equalizing economic development level of the regions’. Some geog-
raphers and regional economists in Russia concur with these widely expressed
views. However, consensus in the expert community has not yet been reached on
the issue of the objective nature of inequality of spatial development and the role
of regional policy.
There are still relatively few scientific studies of the causes of and trends in
regional inequality in Russia. Instead, regions with extreme characteristics are
compared, and the results are used to argue that regional differentiation in Russia
is extremely high and ever growing. The first quantitative studies applying mod-
ern methodologies appeared only in the 2000s. These studies use econometric
methods (Drobyshevskiy et al. 2005 Gaidar Institute 2007). Later Novosibirsk
economists have used the decomposition method to identify the contribution of
individual industries to the inequality of regions by per capita gross regional prod-
uct (GRP) (Gluschenko 2010; Lavrovskiy and Shiltsin 2009). Another approach
is to use the Gini coefficient to estimate the social and economic inequality of
regions of Russia and countries in the post-Soviet space (see, for example, Maleva
2007; Zubarevich 2008; and for Russia, Kazakhstan and Ukraine, Zubarevich and
Safronov 2011).
In contrast to the common sayings about inequality in Russia, quantitative
studies from the mid-2000s show no sustained trend of divergence or conver-
gence among the regions of Russia. The mixed results are understandable. First,
the measurement period is too short: statistics of GRP, employment and income
of the population did not appear until the mid-1990s. Second, Russia and other
countries of the Commonwealth of Independent States (CIS) have experienced
several crises and a period of growth, while various economic trends may have
different impacts on regional disparities. Third, the reliability of regional statistics
is rather low, especially for per capita money income and GRP. Fourth, the studies
Regional inequality and modernization 183
use d ifferent methods of measurement of regional inequality, which significantly
affects their results.
The purpose of this chapter is to investigate the inequality between regions
in Russia and the redistribution that has occurred between 1998 and 2012. First,
the analysis focuses on a comparison of per capita GRP, the impact of redistri-
bution of oil rent over the federal budget, social indicators and the Gini coeffi-
cient. The trend from these indicators shows that inequality has been declining in
these indicators from the mid-2000s as a result of a number of different factors.
The first and most significant is the huge redistribution of oil and gas rents via
federal budget transfers. The second is the crisis of 2009 which had a negative
influence on the more developed regions. In 2012–13, transfers from the federal
budget were shrinking in nearly all of the less developed regions. Next, the chap-
ter compares regional inequality between Russia, Ukraine and Kazakhstan, and
shows that Russia has a trend of more convergence in equality between regions
than the other countries in the 2000s. Finally, the chapter analyses heterogene-
ity in human capital, living conditions and the modernization of values between
different parts of Russia using the centre–periphery model. This analysis allows
conclusions regarding the heterogeneity of political views and strategies to adapt
to economic and political change based on geographical factors and the level of
living conditions.
The outline of the chapter is as follows: The first section gives a background of
issues and literature in the area of spatial inequality. The second section analyses
inequality between regions using standard indicators such as GRP per capita, fed-
eral budget transfers, employment and unemployment rates, the Gini coefficient
and the Human Development Index (HDI). The third section compares trends in
inequality in Russia, Ukraine and Kazakhstan. The fourth section analyses the
heterogeneity of Russian regions with the centre–periphery model. The fifth sec-
tion draws conclusions for regional policy for the different groups of regions and
their problems in the medium and the long term.
Factors and trends of spatial inequality

Opportunities for mitigating economic and social disparities among regions are
one of the most controversial topics in regional science. The tendency toward a
concentration of economic activity in territories with favourable conditions for
businesses was discovered by Myrdal (1957) in the mid-twentieth century. Core–
periphery theory or the theory of polarized development, by Friedmann (1966),
has become an important contribution to understanding spatial development pat-
terns. The new economic geography established at the end of the twentieth cen-
tury has applied quantitative methods to explain the causes of concentration of
economic activity and workforce mobility.
In recent years, under the influence of ‘the new economic geography’, there has
been a paradigm shift from a rigid equalizing policy to a more adequate vision of
the range of opportunities to address this problem. A considerable contribution to
the shift was made in studies devoted to economic geography by Krugman (1991),
184 Natalia Zubarevich
artin (2005), and the World Bank (2009). Competitive advantages of territories
M
depend on the two groups of factors – first and second nature (Krugman 1993).
Dominance of first nature factors is a characteristic trait of the post-Soviet countries.
First of all, it is the abundance of mineral resources, oil, gas, and metals. Second
nature factors in post-Soviet countries often take the shape of obstacles to devel-
opment: the institutional environment continues to be unfavourable; investments in
human capital are low; infrastructure is underdeveloped; agglomeration effects are
rather weak, except in the largest Moscow agglomeration. The number of big cities
with a population over 200,000 people is under 10 per cent, that is, only 91 out of
1,099 cities in Russia. The actual barriers to development are rather strong.
European experiences
The World Bank (2009) shows that in the developed European countries, regional
inequality as measured by per capita GRP was the deepest at the end of the nine-
teenth century and the first half of the twentieth century, when rapid industrial devel-
opment took place. Growth of inequality became slower by the end of the twentieth
century due to the predominance of second nature factors. In the long run, the sec-
ond nature factors tend to diminish the growth of economic inequality of regions.
The less developed countries of Western Europe that joined the European Union
(EU) in the 1970s and 1980s have managed to close the development gap as mea-
sured by per capita GDP, which existed between them and the older EU members.
But the price of success was the growth of regional inequality in the majority of
these countries (Duro 2001). As shown by Martin (2005), divergent and conver-
gent tendencies do not coincide for EU countries and their regions. The inequality
of regions within a country increases because the business invests in the regions
with competitive advantages. The investment priorities therefore polarize the coun-
try's economic space. However, differences among countries may at the same time
decline because regions with competitive advantages provide higher returns on
investments and, thus, make the whole country's economy grow faster. So, the Euro-
pean integration stimulates convergence at the level of countries but does not lead
to a convergence of their regions, which is noticeable in less developed countries.
Those Central and Eastern European countries that have joined the EU during
the past decade face the same tendencies. Companies make their investments,
first of all, in regions close to capitals and to the western borders with older EU
members. Investment strategies make it possible to use competitive advantages,
such as the agglomeration effect and the short distance to markets, which reduces
costs. As a result, regional inequality also grows in these countries and leaders
leave peripheral regions far behind.
Development, human capital and institutions

In large developing countries, spatial economic inequality also grew at the end
of the twentieth century. This is a consequence of the accelerated develop
ment of regions with explicit competitive advantages. In China, these are
maritime regions; in Brazil, agglomeration; and in India, territories featuring
higher human capital. This led to faster economic growth of these countries as
a whole. Only in recent years has China begun to pay attention to the develop-
ment of inner territories. The global experience shows that catch-up develop-
ment always takes place and the regional polarity of space may become even
stronger. For developing countries, the main priority is to promote economic
development of territories with competitive advantages such as a favourable
geographical location, an agglomerative effect, and the availability of natural
resources.
The other aspect of the problem is social inequality, which is measured by a
set of indicators, namely, differences in income and employment rates, as well
as qualitative features, such as health and education. The social inequality of
regions hinders the growth of human capital and the modernization of institu-
tions. Therefore, its growth adversely affects the development itself. How does
social inequality change in the long run? The World Bank (2009) shows that
during the 1960s–70s, social inequality (measured by per capita income rates)
decreased in many developed countries. One cause for this change is the effec-
tive targeted social policy of a state that is supporting low-income groups of the
population. The European experience shows that income inequality of regions
can be smoothed by an effective redistributive social policy, rather than by stim-
ulating regional policy aimed at attracting investments and creating jobs in less
developed regions.
Regional inequality in Russia

The problem of differences between the levels of economic development is
viewed as paramount, but regional inequality, in fact, is exaggerated. Except
for the main oil- and gas-extracting regions1 and Moscow, at one extreme, and
a few underdeveloped republics,2 at the other extreme, there is no great differ-
ence estimated in per capita GRP between the levels of economic development
of most Russian regions (Figure 11.1). Moreover, regional economic disparities
have decreased through the 2000s: the ratio between the richest and the poorest
regions, respectively the oil- and gas-extracting Tyumen Region and the under-
developed Republic of Ingushetia, fell from about 30 times in 2005 to 13 times
in 2010 (per capita GRP adjusted for price level differences). The reduction in
inequalities was promoted by the huge growth of oil rent, the centralization of oil
and gas revenues in the federal budget and large-scale redistribution by increased
federal transfers to the less developed regions. In 12 regions,3 federal transfers
account for over half of all budget revenues, and in Chechnya and Ingushetia,
they are close to 85–90 per cent. In the leading oil- and gas-extracting regions,4
these industries play an important role in regional economies, creating well-paid
jobs and providing large revenues for regional budgets. However, the domina-
tion of such segments and the formation of single-industry regional economies
increase development risks due to the instability of oil prices and the depletion of
natural resources in the long term.
100
150
200
250
300
350
400
450
50
0
Tyumen Region
Sakhalin Region
Moscow
Chukotka Autonomous District
Komi Republic
Republic of Tatarstan
St. Petersburg
Republic of Sakha (Yakutia)
Belgorod Region
Krasnoyarsk Territory
Leningrad Region
Orenburg Region
Tomsk Region
Arkhangelsk Region
Sverdlovsk Region
Magadan Region
Perm Region
Republic of Bashkortostan
Irkutsk Region
Kemerovo Region
Kaluga Region
Moscow Region
Novgorod Region
Omsk Region
Vologda Region
Republic of Udmurtia
Samara Region
Murmansk Region
Lipetsk Region
Yaroslavl Region
Nizhny Novgorod Region
Chelyabinsk Region
Krasnodar Territory
Kaliningrad Region
Republic of Khakassia
Amur Region
Republic of Karelia
Khabarovsk Territory
Novosibirsk Region
Kursk Region
Voronezh Region
Volgograd Region
Astrakhan Region
Primorsky Territory
Saratov Region
Orel Region
Ulyanovsk Region
Kostroma Region
Ryazan Region
Zabaikalsky Territory
Smolensk Region
Tula Region
Kamchatka Region
Jewish Autonomous Region
Vladimir Region
Tambov Region
Republic of Mariy El
Republic of Chuvashia
Penza Region
Tver Region
Rostov Region
Republic of Mordovia
Bryansk Region
Kurgan Region
Pskov Region
Altai Territory
Kirov Region
Republic of Buryatia
Republic of North Ossetia-Alania
Republic of Adygea
Stavropol Territory
Republic of Dagestan
Republic of Kabardino-Balkaria
Ivanovo Region
Republic of Karachaevo-Cherkessia
Republic of Kalmykia
Altai Republic
Republic of Tyva
Republic of Ingushetia
Republic of Chechnya
2012
2005
1999
Figure 11.1 Per capita GRP of Russian regions as per cent of the national average
(adjusted for regional prices differentiation).
Source: Rosstat database.
9 30
8 27
25
7 23 23
21 Regions budget incomes, trillion
6 19 20 rubles (right scale)
19
5
16 16 Transfers from federal budget,
15
trillion rubles (right scale)
4
3 10 Share of transfers in regions

budget incomes, % (left scale)
2 1.6 1.8 1.7
1.5 1.6
1.2 5
1 0.6 0.6
0 0
2006 2007 2008 2009 2010 2011 2012 2013
Figure 11.2 Russian regions budget revenues, transfers from federal budget and share of
transfers in regions’ budget revenues.
Source: Federal Treasury database.
It follows that positive levelling trends that are based on the redistribution of
oil and gas rents are not stable. If the federal redistribution policy weakens, the
economic disparities will grow. This process may be noted since 2012 as a con-
sequence of the deteriorating economic situation in Russia. During the crisis of
2009, the federal budget increased transfers to the regions by 34 per cent and
helped to minimise the negative effects. In 2009 there was a huge growth in fed-
eral transfers, but in 2012–13 the transfers from the federal budget and the share
of transfers in regional budget revenues have been shrinking (Figure 11.2). This
implies that there is a risk of change in the trends in economic inequality – from
convergence to divergence – which may be emphasized by a growing role of
regions’ competitive advantages and investment spatial disparities.
The spatial inequality of investment has reproduced regional economic dispari-
ties. During the 2000s, investments were concentrated in the oil- and gas-extract-
ing regions, the federal cities Moscow and St Petersburg and their agglomerations
and to the regions where major federal projects were underway (Table 11.1). Per
capita investment in the less developed republics and depressive regions were 2–4
times lower than the average in the rest of the country. In the crisis year of 2009
investments decreased by 16 per cent, and this decline in investment had still not
been overcome by the end of 2013, neither in Russia as a whole, nor in half of
the regions. The slow recovery in investment reflects the unfavourable investment
climate and economic stagnation that began in 2013.
Public investments over the federal and regional budgets represent one-fifth
of all investments in Russia and are divided roughly equally between the fed-
eral and regional budgets. Investment from the federal budget flows mainly to
the regions of ‘big projects’. For example, Krasnodar and Primorsky Territories
Table 11.1 Per capita investment in 1999–2012
Annual regional averages* in 2011 constant prices, thousand RUR

Leaders Outsiders
Oil and gas extracting regions Depressive regions
Nenets Autonomous District 1194 Kirov Region 25
Yamal-Nenets Aut. District 680 Republic of Mariy El 24
Khanty-Mansy Aut. District 293 Kurgan Region 23
Sakhalin region 260 Ivanovo Region 21
Republic of Sakha (Yakutia) 125 Bryansk Region 21
Komi Republic 111 Altai Territory 19
The largest agglomerations Less developed republics
Leningrad Region 104 Republic of Kabardino-Balkaria 24
Moscow 75 Republic of Dagestan 23
St Petersburg 59 Republic of North Ossetia 20
Regions of the “big projects” Republic of Karachaevo-Cherkessia 20
Krasnodar Territory 75 Republic of Ingushetia 13
Republic of Tatarstan 73 Republic of Tyva 13
Note: * Russia average = RUR 54 thousand.
received almost 20 per cent of all investments from the federal budget in 2011–12
to allow them to prepare them for the Winter Olympic Games in Sochi 2014 and
the APEC5 Summit, respectively, while Tatarstan received 5 per cent as it pre-
pared to host the World Student Games. In total, in 2011 these three regions took
a quarter of all investments from the federal budget. Another 10 per cent went
to Moscow, which has its own huge budget. Only 10 per cent from the federal
budget were invested in the North Caucasus republics. As a result, the federal
investment policy has a poor equalizing effect.
Social indicators show the contradictory trends of regional inequality. The
unemployment rate diminished from 10.6 per cent to 5.5 per cent in the period
2000–13 (labour surveys according to ILO methodology), but regional differenti-
ation is still large enough: from 39 per cent in the Republic of Ingushetia and 26
per cent in the Chechen Republic to 2 per cent in Moscow and St Petersburg. The
real money incomes of the Russian population grew by 2.6 times in the decade
of economic growth (1999–2008) and regional inequalities, measured by average
per capita income, have been in decline for the past decade.
For the more correct measuring of regional inequality trends, one may study
the coefficient of variation and the Gini coefficient.6 The Gini coefficient and the
coefficient of variation were weighted by the population of the region to minimize
the influence of the huge heterogeneity of Russian regions in terms of population
(a population from 43–50 thousand in Nenets and Chukotka Autonomous Districts
to 10.9 million in Moscow and 7 million in the Moscow Region). Calculations of
the Gini coefficients for GRP per capita show the changing trends (Figure 11.3).
The period of divergence (the first years of growth after the economic crisis of
1998 and the beginning of the boom in oil prices in 2004–5) has been alternating
with the period of convergence as a result of redistributing interbudgetary policy
growth in the 2000s and the crisis that began in 2008. However, the trend over
the whole period is clear: there has been an increase in the economic inequality of
regions in terms of per capita GRP.
The Gini coefficient for the variable ‘money income per capita’ shows a trend
of a stable decline of regional inequality (Figure 11.3). Russian regions converg-
ing in terms of all living standard indicators: income, salaries and wages, poverty
rate, and consumption, which is measured by the turnover of per capita retail
trade. Recent successful years of economic growth and the increased redistribu-
tion of oil revenues resulted in the rapid growth of public sector employees' wages
as well as social subsidies for low-income groups. The share of public sector
employees is higher in underdeveloped regions because of the absence of other
jobs, as well as the proportion of low-income groups. As a result, measures of
social policy reduced regional income inequality. Increases in pensions, which
took place in 2008–12, had the strongest impact on the money income of the pop-
ulation of semi-developed regions of the European Center and North-West, where
the age structure of the population is the oldest. The consequence of this was a
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
GRP per capita Unemployment rate

Average wages Money incomes per capita
Poverty rate
Figure 11.3 Inequality of Russia's regions: Gini coefficient for socio-economic

indicators.
significant drop in the Gini coefficient, because it is more sensitive to differences
among medium regions of a certain range.
The growth of regional disparities in employment continued until the crisis of
2008. One of the main causes is low investments in the less developed regions
(see Table 11.1) and the lack of new jobs, which reinforced the regional differ-
ences in unemployment rates. The change of trends under a transformation of
the economic conditions corresponds to models of developed countries (Martin
2005). In regions with low unemployment, economic growth leads to faster job
creation, and unemployment tends to decrease more rapidly, while it grows more
quickly during the initial stage of a crisis. Underdeveloped regions with higher
unemployment rates are more stable in any phase of the economic cycle.
These trends can be supplemented with a complex HDI, including indicators
of life expectancy at birth, level of education and GRP per capita. The measure-
ment of regional development using the HDI presents a favourable picture: during
the 2000s the index rose substantially in all regions (UNDP 2013). A signifi-
cant increase of life expectancy at birth had been an important social achieve-
ment over the period. The regional differentiation is almost unchanged, however:
20 per cent of Russia's population live in relatively prosperous regions (including
8 per cent in Moscow); about 10–12 per cent live in ‘outsider’, poorer regions, and
more than two thirds live in regions with an average level of human development.
These proportions have not changed during the 2000s and the inequality in human
development is still high and stable.
Regional inequality in Russia, Ukraine, and Kazakhstan

Gini coefficient calculations show that the level of regional inequalities in three
large post-Soviet countries – Russia, Ukraine, and Kazakhstan – differs, being at
its highest in oil- and gas-extracting Russia and Kazakhstan and lower in Ukraine
(Table 11.2). The general trend in the 2000s has been for a growth in economic
inequality in the regions until the beginning of the crisis of 2008–9. This coincides
with the trend in other developing countries. Only in Russia has the growth of
economic inequality been less stable and in the mid-2000s it alternated with the
trend of convergence under the influence of large-scale interbudgetary redistrib-
uting measures. In Kazakhstan and Ukraine, the trends of economic divergence
of regions have been more explicit, which follows from a stronger oil and gas
specialization of the economy in Kazakhstan, on the one hand, and a weak redis-
tribution and investment policy under conditions of significant political instability
in Ukraine (Zubarevich and Safronov 2011).
As noted above, the regional disparities in living standards decreased in Russia
due to a social policy based on the redistribution of oil and gas revenues. This trend
is similar to the dynamics of regional income inequality in developed European
countries with a strong social policy, for example, France and other countries.
However, the strengthening of the state does not always lead to a convergence of
regional average money income. In Kazakhstan, the process of regional conver-
gence has been noticeable only in terms of per capita money income and is not
Table 11.2 Regional inequality of Russia, Ukraine and Kazakhstan: Gini coefficient for GRP and money income per capita
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
GRP per capita
Russia 0.353 0.337 0.334 0.336 0.350 0.382 0.376 0.367 0.360 0.339 0.339 0.335 0.322
Ukraine 0.184 0.226 0.228 0.235 0.248 0.248 0.253 0.271 0.268 0.258 0.263 0.254 0.258
Kazakhstan 0.336 0.336 0.364 0.376 0.387 0.410 0.430 0.390 0.396 0.382 0.391 0.375 0.361
Average wages
Russia 0.239 0.242 0.224 0.222 0.216 0.217 0.213 0.211 0.207 0.202 0.206 0.205 0.203
Ukraine - - 0.085 0.081 0.091 0.092 0.100 0.108 0.117 0.126 0.126 0.123 0.136
Kazakhstan - 0.269 0.266 0.27 0.266 0.272 0.236 0.233 0.243 0.239 0.231 0.217 0.208
Sources: Author’s calculations from databases of Rosstat, State Statistics Committee of Ukraine and Statistics Agency of Kazakhstan.
present in terms of salaries and wages or poverty rate. This is a consequence of a
less developed social policy and the lower standard of living among the rural pop-
ulation. In the rural households of the southern and western regions of Kazakh-
stan, which are the main recipients of social assistance, poverty is deeper than in
Russia, and the birth rate is higher. As a result, social subsidies cannot lift poor
households with many dependents above the poverty rate. Ukraine is the most
striking example of divergence between regions by all social indicators, which is
caused by a weak social policy.
A comparison of the trends in regional disparities in employment shows that in
all three countries, the period of recovery growth after the 1998 crisis was accom-
panied by the divergence of regional unemployment rates, while the beginning
of the crisis of the 2008 is characterized by convergence. These trends are also
affected by economic cycles: in periods of economic growth, divergence prevails,
while in times of crises, there is a decline in the regional differences in unem-
ployment rates. However, in Kazakhstan there is a very high proportion of the
self-employed, estimated to one third of all employed, and it is impossible to
identify trends.
Thus, among the three large countries – Russia, Ukraine and Kazakhstan –
Russia has shown the more explicit convergence trends in the social develop-
ment of regions during the 2000s, although the initial differences were very high.
Ukraine has displayed the opposite case: a divergence of regional social and
economic development levels has taken place, whereas inequality was initially
less pronounced. Kazakhstan lies in between these two countries in terms of the
trends in regional disparities in social indicators. Although authoritarian regimes
are more likely to exercise a policy of equalization, in Kazakhstan there is a
synthesis of a relatively liberal social policy and dirigisme in the regional eco-
nomic policy. In Russia, an authoritarian regime is more consistent: the redistrib-
utive paternalistic social policy and redistributive dirigisme of regional policy
fit together. The reduction of differences between Russian regions in the 2000s,
particularly with regard to inequalities in incomes and poverty levels, has played
an important role in the stabilization of economic development and the stability
of Putin's regime.
However, the role of regional policy should not be overestimated. The laws
of spatial development are stronger than political regimes. Spatial development
is inertial, with its factors and barriers being long term in nature. It is unlikely
that any significant changes will take place over the next 10–15 years. The actual
drivers and barriers will continue to influence the trends in regional inequality
in the same way. This means that economic disparities among the regions will
grow under the influence of objective factors such as comparative advantages and
competitiveness. The development of regional disparities of economic and labour
market indicators will continue to be impacted by economic cycles. This leads
to a divergence in periods of growth and convergence in recessions. Russia has
faced the new crisis cycle with visible trends of economic stagnation in 2013 and
prospects of downturn.
From regional inequalities to the centre–periphery model
While the regional differences are great, they are generally not the most import-
ant ones. Things become very intuitive if we change the scale, and instead of one
Russia or 83 (the number of regions), we distinguish four parts of Russia (see also
Zubarevich 2013 for a similar analysis). This way, Russia’s modernization can be
interpreted through the centre–periphery model. The country’s population can be
divided into three roughly equal parts in accordance with the centre–periphery
model (Friedmann 1966), and a small and distinct fourth part can be added to them.
The centre–periphery model explains the hierarchical settlement pattern where set-
tlements are arranged from most modernized urban areas to patriarchal rural areas.
Centre–periphery distinctions are typical of other countries, especially those char-
acterized by ‘catching-up development’. But they have their own peculiarities in
Russia, where the largest cities are well ahead of the rest of the country and indus-
trial cities face diverse issues, but, most importantly, there is a vast deteriorating
and depopulating periphery. The centre–periphery model can be used to describe
Russia’s internal heterogeneity. The populations of metropolitan areas, midsize
cities, small towns, and rural areas display different modernization potentials and
employ different adaptation strategies in times of economic and political change. In
December 2011, it was in the big cities, rather than in smaller settlements, that pro-
testors took to the streets after the Duma elections and demanded fair elections. The
regional elections held in 2013 also demonstrated that there are different Russias.
The first Russia

The first Russia primarily includes the big cities with a population of over or close
to 1 million, and containing approximately 21 per cent of Russia’s inhabitants.
This means that one in five Russians lives in the 14 cities with populations of
around one million or more. The federal cities – Moscow and St Petersburg – are
at the top of this group and about one in nine of the population lives in just these
two cities. The advantages of life in two ‘federal’ cities are obvious. They are
at the heart of the post-industrial economy, enjoying a high level of economic
development. Moscow’s economic indicators are all considerably higher than the
averages for Russia. In terms of spending power (PPP), Moscow’s GRP translates
as USD 47,000 per capita and that of St Petersburg as USD 22,000, both of which
are comparable with the developed world. Both cities have the highest shares of
the middle class – up to 40 per cent of city residents, the most educated population
(39–43 per cent of city residents over the age of 15 have a higher education), as
well as the most diverse labour market and the highest-paid jobs, higher shares of
small business employees and widespread internet access. The inhabitants of both
cities have a higher standard of living than that elsewhere in Russia. But it is also
worth noting that the two cities have an older population, with about 25 per cent
of the inhabitants above retirement age.
The federal cities, especially Moscow as the capital, incorporate the financial
and human resources of the entire country. Political transformation is particularly
rapid here; protest sentiments and demands for regime modernization are also on
the rise in these cities. The election data also point in this direction: for example,
the opposition candidate won 27 per cent of the vote in the Moscow mayoral elec-
tion, and less than half of the Muscovites voted for Putin in the 2012 presidential
election. The results of this election were marred by greater electoral fraud in St
Petersburg; nevertheless, the protest potential is also strong.
The past twenty years have also brought change to the other ‘million-plus’ cit-
ies.7 The pace of transformation is faster in Yekaterinburg and Novosibirsk, since
being macroregional centres of the Urals and Siberia works to their advantage.
These cities also experience a more rapid transformation from an industrial to a
post-industrial economy and major service industry centres. They attract more
migrants and create more modern high-paid jobs. Patterns of employment have
changed in all ‘million-plus’ cities: the proportion of white-collar workers has
risen, there are more medium-sized businesses, and even in the public sector,
there is greater demand for staff with high qualifications. These cities are the first
to adopt the capitals’ consumer lifestyle, although the salaries are substantially
lower than in Moscow. It is here that you find the middle class, the ‘angry urban-
ites’ that came out on the streets in December 2011 – although it must be said that
the majority of these live in Moscow. The smaller cities are much less active –
since their middle classes are not large enough to make a difference. But prob-
ably this is just a question of time. Objectively speaking, the ‘grapes of wrath’
are ripening: migration in Russia is directed towards the largest cities, the only
difference being that greater Moscow and St Petersburg and its contiguous Lenin-
grad region attract migrants from all over the country, 60 per cent and 20 per cent,
respectively, of all net migration in Russia, while for their growth, regional cities
rely on an influx from their own regions, mostly young people going into higher
education. The increasing concentration of active and well educated citizens in the
big cities ‘tolls the death knell of the “power vertical”’.
If cities with a population over 500,000 are added to this category, the number
of people living in large cities reaches 31 per cent. Examples of such cities are
Sochi, Kaliningrad and Tver. Practically all cities with populations over 500,000
are regional centres, which helps them to concentrate regional resources, espe-
cially human capital. On the whole, city size and high human capital concentration
are key factors in modernization. Compared with the ‘million plus’ cities, cities
with a population over 500,000 change more slowly, especially if their inhabitants
have lower income and education levels, and higher percentages are employed in
the public sector and the industry. But even here, the differences are vast.
About 9 per cent of the Russians live in cities with populations between 250,000
and 500,000, with most of these cities also being regional capitals. In Russia,
being a capital makes for more sustainable city development but, in most cases,
such cities lack the financial and human resources to modernize. This is a tran-
sition zone between the first and second Russias. These cities vary enormously,
from an academic hothouse such as Tomsk with its academic specialization (one
person in five is a student), independent TV channels and a flourishing cultural
life, to much more traditional centres of some republics. The boundaries of the
‘first Russia’ will vary according to the criteria used: if one talks about the dynam-
ics of change, then it stops at the ‘half-million’ cities; if the criterion is stability,
then it includes towns with a population of over 250,000.
The share of large-city residents in Russia’s population is growing steadily as
a result of migration. It is in the large cities that Russia’s 50 million internet users
are concentrated, as well as the Russian middle class that is demanding change.
This group’s activism is not founded on a fear of imminent crisis, but the scary
prospect of a long Putin’s stagnation which will put the brakes on social mobility.
The stimulus for protest in this ‘first Russia’ was not an economic crisis or a col-
lapse in the price of oil, but rather a moral repugnance.
The second Russia

The second Russia encompasses smaller cities and towns with populations
between 20,000 and 250,000, accounting for around 30 per cent of Russia’s pres-
ent-day population. Not all of these towns have retained their industrial profiles
during the post-Soviet era, but Soviet values and way of life still remain strong.
They have large numbers of blue-collar workers and public sector employees of
lower qualifications. There is usually little in the way of small business, either
because of low spending power of consumers or a high level of cronyism. There
are, of course, exceptions; in Magnitogorsk, for example, there is a wide variety
of small businesses, but they are critically dependent on its famous iron and steel
works: if the steel workers’ wages fall, then so does demand for their services.
A study by the Independent Institute for Social Research in Moscow shows
that industrial towns, even the more successful ones specializing in the oil- and
gas-extracting industries and metallurgy for the global market, are losing their
attraction for residents (Zubarevich and Safronov 2013). At times of economic
growth, wages there have risen more slowly than in regional centres; the govern-
ment has been quick to raise public sector and managerial salaries on the back of
enormous oil revenues, but the industrial sector has been unable to increase its
wage bill to the same extent. During the 2009 economic crisis, wages also fell
faster because of the slump in the industry. As a result, the population numbers
in the vast majority of second Russia cities and towns are falling rapidly. Young
people move to the larger cities and the capital for educational opportunities as
well as more appropriate jobs, and they rarely come back.
The location of medium-sized towns, both industrial and post-industrial, is cru-
cial. If they are close to large population centres then their future is assured: they
will gradually be absorbed into the conurbation, and sustainable enterprises will
emerge to service the metropolitan market. Towns situated on main arterial roads
also have more of a future. All towns on the Moscow–Minsk motorway, the road
to Europe, are gradually being transformed into logistics and handling centres
for the Moscow agglomeration. However, if a town is less fortunately located,
it is shrinking. The 2009 economic crisis hit metallurgic and heavy engineer-
ing company towns such as Magnitogorsk and Nizhnyi Tagil particularly hard.
The government’s main response was to protect jobs at any price, regardless of
c ompanies’ viability. There was widespread recourse to reduced working hours
and work creation programmes, and despite a huge fall in production, the employ-
ment levels were maintained thanks to large injections of government finance.
A longer term support strategy, based on economic diversification, was not a suc-
cess. The complex investment plans mostly remained on paper.
Those living in the second Russia do not like the political situation in the coun-
try either. The results of the 2011 Duma elections showed that the numbers of
votes cast for United Russia in many industrial towns were as low as they were
in larger regional centres (29–38 per cent). In the presidential election, however,
the second Russia voted for Putin, since people living there place a high value
on stability, stable employment and wages. Liberal ideals of political moderniza-
tion are unlikely to take hold here, unless they are accompanied by strong social
policies. The results of the presidential election provide more evidence of polit-
ical cleavage. Should a new crisis arise, it is the second Russia that will be hit
the hardest. The old problems have not gone away, and the last crisis confirmed
that the industry is declining faster than other economic sectors. There are few
alternative sources of work in these towns, and the local populace suffers from a
lack of mobility and low levels of qualifications. Even if a new economic crisis
does spark a mass protest, the second Russia will be fighting for work and wages,
increasing the pressure on the federal and regional authorities to make conces-
sions, but it will remain indifferent to the issues that rally the middle class. The
Russian government recognizes the danger of social protest in the second Russia
and will probably be able to calm the situation through economic and administra-
tive measures as long as the federal budget can afford it.
The third Russia

The third Russia is the vast peripheral territory of villages, semi-urban villages
and small towns that are home to around one-third of Russia’s population. The
third Russia lives off the land and is indifferent to politics. Depopulated small
towns and semi-urban villages with an elderly population are scattered across
the country, but there is a higher concentration in Central Russia, the north-west,
and the industrial areas of the Urals and Siberia. Villages are most common in the
south of Russia and the north Caucasus, where 27 per cent of the country’s rural
population are concentrated. The southern ‘Russian’ village is still a viable demo-
graphic unit that survives thanks to the intensive exploitation of the region’s fertile
black earth on its residents’ individual smallholdings. Large-scale agribusiness
is expanding in the most profitable and non-labour-intensive areas of production
(grain and sunflower oil), depriving many locals of work, and young people are
flooding out of the villages into the towns.
Third Russia is represented by the traditionalist and extremely passive rural
periphery and semi-urban villages as well as by small towns of less than 20,000
people; cumulatively, they account for 36 per cent of Russia’s population. The
lowest levels of both education and mobility can be found here. Employment in
the public sector and agriculture predominates and there is much involvement in
the shadow economy. The periphery lies outside of politics and always votes for
the regime. In addition, the third Russia is depopulating rapidly. Local conflicts are
caused by ethnic clashes and occur primarily in the southern regions. They cannot
spread over extensive territory and are quickly extinguished by the authorities.
The borders between the three Russias are blurred and rather tentative. It is
quite evident that population concentration is not the sole factor in determining
the pace of modernization. The fastest transformation of rural areas occurs within
the boundaries of the Moscow agglomeration, where a lot of new jobs are uncon-
nected with agriculture. And even in the villages around Moscow, many people
have come from other regions, and migrants are always more energetic and adapt-
able. In the depopulated peripheral areas, the situation is more depressing. In the
Pskov region, for example, 40 per cent of the female population are pensioners.
The potential protest power of the third Russia is minimal, even if a crisis brought
delays in the payment of pensions and wages.
The fourth Russia

The three previous Russias have been defined using the centre–periphery model,
which explains social variations by the position in a hierarchy of settlements from
the most modernized large cities to the patriarchal rural periphery. This model is
perfectly valid for most of the country, but we need to abandon it to define a fourth
Russia. This name can be given to the less developed republics of northern Cau-
casus and, to a lesser extent, southern Siberia, the Tyva and Altai republics, which
are home to less than 6 per cent of the country's population. They differ substan-
tially from the rest of the country: they are at an earlier urban transition stage; the
demographic transition is still in progress; birth rates are high; the clan structure
endures; and ethnic and religious tensions run high. The centre–periphery gradi-
ent is much weaker here. The cities have not yet digested the growing migration
from the rural areas; an urban lifestyle and values are just beginning to be formed;
and the modernized urban segment of society is small and grows slowly, since
some educated and competitive young people leave for the largest Russian cities.
Like the other ‘Russias’, the fourth Russia is not homogenous. For instance, the
more urbanized North Ossetia and Adygea, where ethnic Russians predominate,
are substantially more socially modernized than Chechnya.
In the fourth Russia, the rural population is rising in number and, in contrast to
other regions, it is still comparatively young. Young people actively migrate from
the villages to regional population centres, but few of them find work there. To get
a job you need help from your clan, who will either buy you a legal public sector
job, or find you one in the shadow economy. The fourth Russia is also the most
corrupt, with fierce fighting between clans for power and resources and numer-
ous ethnic and religious conflicts. It must be said that the populace of the cities
of north Caucasus is undoubtedly less traditional in its thinking, but not to the
extent of creating a trend towards modernization in the whole region. The fourth
Russia will not break away, no matter how much that is presented as a threat, or a
promise. The overwhelming majority of people in the north Caucasian republics
consider themselves to be Russian citizens. The region has many problems and
federal politics have an enormous role to play in their solution. At first glance, the
policy seems to consist of throwing more money at places where there is unrest.
In 2010–13, the republics of the northern Caucasus, home to just 5 per cent of
Russia’s population, received 10.6 per cent of all federal government subsidies
given to the Russian regions. Of this figure, more than one-third of this went to
Chechnya. However, federal aid to less developed areas is not spent rationally
and transparently, which leads to increased corruption. This is a huge problem in
the Caucasus, but the situation is not much better in other regions. The problems
of the Caucasus can only be solved by governmental reform at the federal level.
Conclusions: regional inequality and regional policy

The priorities of spatial development in Russia have not yet been defined, regional
policies are formulated in the framework of dirigisme: objective factors and barri-
ers to regional development are not taken into account appropriately, which reduces
the effectiveness of the decisions taken. As a result, these policies have almost no
effect on regional disparities in economic development. Long-term development
needs effective social and regional policy, taking account of the specificity of dif-
ferent regions of the Russian Federation. Several groups of Russian regions can
be identified with particular combinations of development problems and priorities
for addressing them. In other regions, the specifics of the problems are less clearly
expressed, as they occupy an intermediate position between the groups. The iden-
tifiable groups and their problems are as follows:
• Federal cities and their agglomerations. Environmental and infrastructure

problems caused by a rapid growth of vehicle and a large-scale inflow of
migrants, social problems due to a high level of income inequality and the
problem of migrants’ adaptation.
• Main resource extraction areas in the north and east of the country. Acute
environmental problems, a depletion of the resource base and long-term
economic risks of reliance on a single industry, outward migration in most
regions, strong income inequality, higher risks of unemployment.
• Industrial regions of the Urals and Siberia. Bad ecology, poor infrastruc-
ture and difficult living conditions, marginalization of people living in small
industrial towns and rural areas, high risk of rising unemployment, particu-
larly in single-industry towns.
• Central and north-western regions. Aging population and depopulation, low
incomes, shrinkage of social services, degradation of rural areas, low invest-
ment attractiveness.
• Regions of the Far East and the Trans-Baikal area. Poor infrastructure, low
incomes accompanied by an increasing cost of living, higher unemployment
and long-term outward migration.
• The least developed republics. Dominance of the informal economy, low invest-
ment attractiveness, high levels of unemployment, poor education and health care.
Russian regional policy is, to a large extent, focused on support for the two most
problematic groups of regions – those which are geographically remote and those
which are the least developed. Federal programmes are being implemented for the
development of regions in the Far East and around the Lake Baikal region, and
also for the North Caucasus republics. The federal budget invests substantial sums
in these programmes. The focus of regional policy on specific territories is insuf-
ficient; instead a broader institutional reform is needed. The institutional reforms,
which are most required, are as follows:
• Deregulation and decentralization of management, the transfer of responsibil-

ities and tax revenues to regions and municipalities. This approach involves
risks: regional inequalities will increase and efficiency improvements will
not be achieved everywhere, since the quality of management in different
regions and municipalities differs. However, decentralization will facilitate
the development of more developed regions and cities, particularly that of
large regional centres.
• Improving the efficiency and transparency of the redistributive policy imple-
mented by the federal government, increasing the share of transfers allocated
through a transparent formula that takes account of the level of development
and living conditions in the regions. Similar changes are a need for the redis-
tributive policies, which regional authorities exercise towards municipalities
in their regions.
• Social policy adaptation to regional conditions without using a single template
for the whole country. Regions are able to create a variety of ‘best practices’,
taking into account regional conditions. Federal government policy should
encourage the spread of ‘best practices’ and reduce institutional barriers.
• Feedback to improve management quality, public assessment of management
decisions. The best feedback mechanism could gradually be achieved by a
direct election of mayors and governors.
• Russia desperately needs a two-stage decentralization that will first delegate
authority and resources to the regions and then further down to the munici-
palities. Large cities, that is, the most modernized first Russia, stand to gain
the most from this. To be honest, decentralization comes at a great cost. It
will inevitably lead to territorial economic inequality growth and will create
a political patchwork of territorial units ranging from principality and khan-
ate-like regions to modernizing large cities.
Reducing the costs of decentralization will be an important objective. Regional

development and social inequalities reduction can be addressed by measures of
social and institutional policies, aimed at increasing human capital and population
mobility, targeted social support to vulnerable population strata, and the modern-
ization of institutions. These recommendations have become commonplace, but
it is necessary to repeat them again and again, as at present the main barriers to
the development of Russia are the bad institutions and the deterioration of human
capital. For the future development of the country, it is necessary to alleviate the
social disparities among regions. As shown by the experience of developed coun-
tries of the EU, one of the means to achieve this goal is a large-scale and efficient
social policy, which becomes feasible with the growth of state revenues and the
modernization of institutions. The second tool is the promotion of development
zones in less developed regions, that is, zones featuring competitive advantages,
to accelerate the development of a region as a whole. As shown by international
experience, such a policy is rarely successful. However, success could be possible
if effective institutions are in place. As a result, the circle closes: without modern-
izing institutions, the problems of regional inequality in Russia cannot be solved.
Notes
1 Tyumen region, including Yamal-Nenets and Khanty-Manti Autonomous Districts),
Sakhalin region.
2 Republics of North Ossetia; Kabardino-Balkaria, Karachevo-Cherkessia, Dagestan,
Kalmykia Ingushetia, Chechnya, Altay and Tyva.
3 All the less developed republics of the North Caucasus and Kalmykia, Siberian repub-
lics (Altay, Tyva) and the three Far East regions (Kamchatka territory, Amur region
and Jewish Autonomous Region).
4 Tyumen and Sakhalin regions.
5 Asia-Pacific Economic Cooperation.
6 The Gini coefficient measures the inequality among values of a distribution, for exam-
ple levels of income. A Gini coefficient of zero expresses perfect equality, where all
values are the same (for example, where everyone has the same income). A Gini coeffi-
cient of one (or 100 per cent) expresses maximal inequality among values (for example
where only one person has all the income).
7 Novosibirsk, Ekaterinburg, Nizhny Novgorod, Samara, Kazan, Ufa, Chelyabinsk,
Perm, Omsk, Rostov-on-Don, Volgograd (Voronezh and Krasnoyarsk were added to
the million cities in 2012–13).
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12 Promoting sustainability in
Russia’s Arctic
Integrating local, regional, federal,
and corporate interests
Robert W. Orttung1
In Russia’s federal system of government, which player is more likely to have an

interest in promoting sustainability in the Arctic’s resource development regions
and put such policies into practice? Within the Russian state, the key players are
the federal government, regional governments, and local governments. In terms
of society, the main players are corporations (both Russian and international) and
civil society organizations (again both Russian and international). Each of these
actors has a different set of interests and capabilities. Asking which of these actors
is most likely to pursue sustainability is important because currently we see exten-
sive development of Arctic resources, but little attention to key concerns, such as
protecting the environment, preparing for climate change, or designing and imple-
menting a coherent set of policies for stewardship of the north.
This chapter will examine which player is most likely to promote sustainabil-
ity goals by focusing on a case study of the Yamal-Nenets Autonomous Okrug
(YaNAO). While there are several Russian Arctic regions that deserve attention,
YaNAO is important because it is the centre of Russia’s natural gas industry and
an area of burgeoning growth where 84.9 per cent of the population lived in urban
areas in 2010. The high level of urbanization is important because it is at the city
level that most decisions about sustainability are made. Cities, particularly cities
in the north, concentrate large numbers of people and resources, so this is the
point where human interaction with nature is most keenly felt (Rasmussen 2011).
The analysis reaches a disheartening conclusion: the players with the greatest
interest in promoting sustainability often have the fewest resources to do so. The
Russian federal government and various Russian and international corporations
have the largest set of resources to promote sustainability, but they seem least
inclined to do so. In contrast, local governments and Russian and international
civil society organizations are the loudest advocates for sustainability causes,
but have the least ability to influence policy-making. As the analysis here shows,
the centralization of decision-making authority in Russia has shifted power from
actors who are interested in promoting sustainability to actors who give such goals
low priority.
Before proceeding to the analysis, it is necessary to explain what we mean by
the term sustainability. As a concept sustainability often eludes precise defini-
tion, with many scholars and policy-makers conceptualizing it differently, leading
Sustainability in Russia’s Arctic 203
to a cacophony of ‘sustainababble’ (Engelman 2013). For purposes of intellec-
tual clarity, we rely on the original definition of the concept from ‘Our Common
Future,’ the report of the World Commission on Environment and Development
chaired by Gro Harlem Brundtland, as meeting ‘the needs of the present without
compromising the ability of future generations to meet their own needs’ (World
Commission on Environment and Development 1987). Long-term economic sta-
bility, a lower environmental impact from natural resource extraction, and a social
sphere that meets the needs and aspirations of Arctic residents comprise the cen-
tral elements of sustainability for the cities of the Russian North (Orttung and
Reisser 2014).
For resource-producing centres, the sustainability discourse presents an addi-
tional problem, as the production of non-renewable resources is inherently unsus-
tainable. The resource curse literature has demonstrated a strong connection
between resource extraction and economic volatility (Ahrend 2005; Åslund 2005;
Gelman 2010; Ross 2012). Moreover, the Arctic is deeply affected by climate
change, with rising temperatures reducing sea ice and making it possible to extract
resources while at the same time thawing permafrost is undermining the foun-
dation for the very infrastructure needed to bring Arctic oil and gas to market
(Anisimov and Reneva 2006; Streletskiy et al. 2012). Because energy extraction
industries are the economic lynchpin of many northern regions, and indeed of
much of the Russian economy as a whole, the concept of sustainability can be
adapted to the Brundtland Commission’s idea of socioeconomic sustainability.
Within this definition, resource extraction activities can be considered sustainable
as a way to increase the overall level of social and economic development as long
as the environmental impact does not undermine the ability of future generations to
meet their own needs (Langhelle et al. 2008). Because natural resource extraction
is such a crucial component of the economy of the Russian North, any conception
of sustainability must, at least under the current economic circumstances, integrate
continued resource production with the social and environmental needs of north-
ern peoples. At the same time, Russia should be working to overcome the Soviet
legacy (Gaddy and Ickes 2013; Hill and Gaddy 2003) while also making provi-
sions for a time when oil and gas are no longer the centrepiece of the economy.
The chapter will proceed as follows. First, it will lay out the interests and capa-
bilities of the key players at the federal, the regional and local levels, and among
corporations and social groups. Second, it will trace the evolution of centre–
periphery relations between Moscow and the regions. Third, it will examine the
evolution of decision-making in YaNAO. Fourth, it will lay out the outcome of
some key policies in the region. Finally, it will draw conclusions about these
political processes for sustainable development in the Arctic.
Defining the interests and capacities of the key players

The key players involved in Russia’s Arctic policy-making and implementation
can be divided roughly into two groups: state and society. Within the state, the key
actors are the federal, regional, and local governments. In society it is corporations
204 Robert W. Orttung
Table 12.1 Key actors addressing sustainability in Russia: interests and capacities
Actor Interests Capacity

Federal Government - +
Regional Government - -
Local Government ++ -
Corporations (Russian, International) - +
International Organizations + -
Russian Civil Society +/- -
Source: The author.
and organizations, both international and domestic. Table 12.1 lists these actors
and scores their interest in sustainability as either positive or negative and their
capacity to implement their policy desires, again as either positive or negative.
Federal government
Even though the focus here is on the Arctic, Moscow is the key player in Russia’s
centralized political system. It generally makes Arctic policy with little regard for
regional interests and scant participation from them (Wilson Rowe 2009a, 2009b).
At the federal level, there are a variety of players with a wide range of interests.
The key figure in the process for Russia’s energy sector and Arctic policy is Pres-
ident Vladimir Putin. He sees energy development as central to maintaining the
power and vitality of the Russian state and takes a personal interest in the devel-
opment of the energy industry and the distribution of the money that it generates
(Balzer 2006). He plays a personal role in all large deals and important decisions
that are made (Gustafson 2012). Many of these decisions are made behind closed
doors and for reasons that are not made public, in a system that Russians call
‘manual control’.
Putin works closely with key figures in the energy industry in making deci-
sions, including Igor Sechin, the chairman of Rosneft, Alexei Miller at Gazprom,
and Gennady Tymchenko, who owns half of Novatek. Given the personalized
nature of the process, normal market signals are less important in decision-making
than they would be in a less centralized political economy, but economic reality
still works in shaping what actually happens on the ground in the Arctic – the
much-heralded Shtokman project has been delayed, for example (Emmerson
2013; Tamnes 2011). While a wide variety of federal agencies, such as the Min-
istry of Economic Development, Ministry of Regional Development, Ministry of
Energy, and others, take part in policy formation, we will devote less attention
to them since they are all dependent on the support of the president to influence
policy-making.
The interests of the president in energy and the Arctic are focused on ensuring
his continuing political power. In difficult economic times and under conditions
where the president’s popular approval has been bolstered mainly by nationalist
rhetoric surrounding the Winter Olympics in Sochi and the use of military force
and occupation of territory in Ukraine, the government needs a large and reliable
source of money to support its current policies (Gudkov 2014). Since gaining
the presidency in 2000, Putin has centralized power in the Kremlin, significantly
reducing the ability of the regional governors and energy business leaders to act
independently of the Kremlin (Orttung 2011). A key aspect of this centraliza-
tion process has been to gain much stronger federal control over the financial
flows generated by the energy industry and redirect them away from regional
governments and independent private companies and into Kremlin control to be
redistributed according to the priorities established by Putin and his closest advis-
ers. Accordingly, any type of tax reform in the Russian energy sector that would
change this basic system is unlikely as long as Putin remains in office. In partic-
ular, the government will want to maintain a high mineral extraction tax (MET)
in order to ensure that it has the financial resources to support projects it deems
important (Kryukov and Moe 2006; Kryukov et al. 2011).
In this sense, Russia’s Arctic development programme fits into the larger pat-
tern of Russian development, which focuses heavily on mega-projects. Today the
most prominent effort is Russia’s plan to pour resources into developing the Far
East (Kinossian 2013). The Olympic-inspired redevelopment of Sochi and sur-
rounding areas is another clear example. Development of the Arctic has much in
common with these other mega-projects because the centralized, non-transparent
process provides fertile grounds for corruption, giving the authorities a conve-
nient way to redistribute money and lucrative contracts to their clients and thereby
helping to perpetuate Russia’s existing neopatrimonial system (Hale 2012; Ort-
tung and Zhemukhov 2014).
Theoretically, the federal government could be the best actor to promote sus-
tainability in Russia because it has the broadest perspective and can use Arctic
resources to best serve the national interest. It also has the resources to think about
‘big picture’ issues, such as climate change. On the other hand, the Russian state
has effectively been captured by a small group of individuals who use its assets
for their personal enrichment. The result is an approach to governing that pays lit-
tle attention to environmental and sustainability issues. For example, in the pres-
ident’s Strategy for the Development of the Arctic Zone, published 20 February
2013, there are some mentions of the environment and climate change, but they
are well buried among other goals (Putin 2013). In short, the federal government
has excellent capacity to address issues of sustainability, but little desire to do so.
Regional government
Russia’s governors stand at the nexus between federal and local interests. On one
hand, regional interests naturally oppose the centralization of resources and deci-
sion-making power in Moscow and try to bring as much back to the regional
level as possible. While the federal government may see the Arctic as a source of
income that can be redistributed throughout the country, the regional leaders there
have an interest in retaining as much of the proceeds as possible at the regional
level to improve the standard of living for residents there and to support their own
client networks.
On the other hand, in Russia’s highly centralized system, the regional govern-
ments have relatively little power on their own since the Kremlin tightly controls
who serves as governor (appointing governors from 2004 to 2012 and strictly con-
trolling the voting process after restoring gubernatorial elections in 2012). Addi-
tionally, Moscow controls most of the financial flows in the country. Because their
ability to remain in office depends on the approval of the president, the governors
must work closely with the federal government and relevant corporations while
also trying to direct some of the profits from the resource development projects to
their region. As Andre Schultz and Alexander Libman (2013) have pointed out,
to be successful in their policy-making, governors must have strong local knowl-
edge, namely a detailed understanding of the local elite and how to work with
them, and good contacts in Moscow that ensure access to necessary resources.
Since the governors are constantly seeking a balance between their constituent
interests at the regional level and the necessity of maintaining good ties within
the federal bureaucracy, they have little interest or capability to pursue environ-
mental concerns unless either federal or local interests strongly demand it. At the
interface between the two levels, their main interest is to maintain stability in their
particular part of the country. They do not have the time or inclination to step back
and examine the bigger picture.
Local government
Around 85 per cent of the Yamal-Nenets Autonomous Okrug’s residents live in
cities, making mayors key actors in the region. These city leaders have a much
greater interest in promoting issues of sustainability than governors. Cities con-
centrate people and services in one place, making them an important area of
interaction between human activity and the natural environment. In contrast to
policy-makers working at the national level, city managers deal with direct trade-
offs between economic growth and development, the quality of human life, and
preserving and protecting the natural environment (Katz and Bradley 2013). In
key ways, mayors can be crucial to pursuing important policy goals when national
politics become dysfunctional (Barber 2013).
Despite Russia’s centralized system, the reach of federal power should not be
overestimated (Stoner-Weiss 2006). Even under conditions in which the central
government maintains a large degree of policy control, regional policy has tan-
gible effects on the development and sustainability of northern cities. The diver-
gent evolution of power relationships between northern cities and their regional
administrative centres demonstrates how important local policy can be. The cities
of Gubkinsky and Muravlenko, similarly sized urban centres in the YaNAO, have
experienced starkly differing outcomes chiefly due to the different policy mod-
els applied in each (Pilyasov 2013). In Muravlenko, the closer proximity to the
administrative centre of Noyabrsk resulted in a governance framework primarily
focused on interaction with the higher-level administration to the exclusion of
local concerns. Gubkinsky’s more independent policy situation allowed it to focus
instead on its own development, noticeably improving local outcomes relative
to Muravlenko. Small business growth, economic diversification, and cultural
expenditures were all significantly stronger in the more independent Gubkinsky,
while Muravlenko has continued to stagnate.
These trends reinforce the argument that efforts by distant administrative cen-
tres to hamper local decision making tends to result in ill-adapted policies, with
negative consequences for economic and social sustainability. Mayors in Russia
have comparably much less authority than do city executives working in devel-
oped democracies. In the Russian context, centralized control blocks local offi-
cials from taking action to promote sustainability, even though it is precisely these
officials who have the greatest interest in it. Moreover, much of the future resource
development in the Arctic will take place offshore, under federal rather than local
jurisdiction. In the case of Sakhalin, where resource development is also taking
place offshore, the federal authorities reneged on plans to share resources with
regional and local levels of government (Bradshaw 2010; Graybill 2009).
Russian and international corporations

Both Russian and international energy corporations see the Arctic as a place to
make large profits from developing resources; they have little interest in sustain-
ability issues. The 2008 law on subsoil resources defines a category of ‘strate-
gic’ hydrocarbon fields and allows only Russia’s state-controlled energy national
champions – Gazprom and Rosneft – to develop the lucrative offshore resources
that are expected to provide the energy sources of the future (Adachi 2009). Nev-
ertheless, the involvement of foreign energy corporations is key to Kremlin plans
to develop the Russian Arctic. Although Gazprom’s plans to develop the Shtok-
man off-shore gasfield have been put on hold, in April 2012, Rosneft signed an
agreement with ExxonMobil, ENI, and Statoil to develop offshore oil sites. Gaz-
prom is a monopolist in Russia, producing about 80 per cent of the country’s
natural gas, controlling all of its gas pipelines, and holding the only export license,
while Rosneft is increasingly the favoured oil producer, now controlling more
than 50 per cent of the market with the acquisition of energy assets from Yukos
and TNK/BP (Åslund 2010; Lunden et al. 2013; Moe and Rowe 2009; Overland
et al. 2013; Stern 2005; Victor and Sayfer 2012). Novatek is an independent gas
producer that is active in YaNAO and is responsible for about 20 per cent of Rus-
sian gas production. Its key owner has close personal connections to Putin, who
seems to use the company as a lever for exerting pressure on Gazprom. The tax
revenues from Russia’s oil and gas production provide a key source of revenue for
the government.
Because output is dropping at the traditional gas-producing fields of the Nadym-
Pur-Taz Basin and its three super-giant fields Medvezhe, Urengoy and Yamburg,
corporate attention is now focused on the Yamal Peninsula and its vast untapped
gasfields. Given the need to build new facilities north of previous production sites,
all of the companies face rising production costs and naturally lobby the govern-
ment to lower tax rates. Russian gas producers face a variety of challenges on
international markets: they had hoped to sell gas into the U.S. market but those
plans have been scrapped due to the development of shale gas supplies in North
America; other producers are bringing on line capacity to ship more liquefied
natural gas; an EU lawsuit is seeking to force Gazprom to change the way that it
prices its gas for sale in Europe; and the ongoing fighting in Ukraine has called
into question Russia’s ability to ship gas supplies to Europe on a reliable basis.
On the positive side, Russia hopes to open new markets to Asia, building on a
pipeline deal signed with China in 2014, and to develop ways of using natural gas
for the transportation sector.
In facing these challenges and opportunities, Russia’s major energy compa-
nies focus on generating money, ultimately used for a variety of state and pri-
vate purposes. While the corporations interact with all levels of government, they
are typically more powerful than regional and local interests due to their strong
connections within the federal government. Accordingly, it is only the federal
government that can impose regulations on them. Given the various interests of
the federal and corporate actors, the corporations have devoted few resources to
pursuing sustainability goals.
Russian and international civil society organizations

Space constraints prevent a full examination of domestic and international civil
society organizations. In short, we can observe that they have an interest in pro-
moting sustainability issues, but little ability to affect policy. When Greenpeace
sought to block Russia’s offshore oil production in Arctic waters in September
2013, Russia arrested the protesters and detained them for four months. The
Kremlin has similarly cracked down on local groups who act independently. In
the Arctic region, the case of the Russian Association of the Indigenous Peoples of
the North (RAIPON) is the most prominent example of a civil society organization
that has faced official repression. Of course, Russian society is not monolithic and
many people freely support the development of Arctic resources despite the risk
to the environment. In this sense, the relationship between society and resource
development is complex and deserves more careful further research.
Evolution of centre–periphery relations in Russia since 1991

Since the collapse of the Soviet Union, the relationship between the federal,
regional, and local governments and Russia’s largest corporations has evolved
through a variety of stages. The result has been to reduce the power of the actors
who have an interest in promoting sustainability while strengthening the hand of
those who have other priorities. Understanding the current situation requires a
sense of the evolution of centre–periphery relations. The main driver of change
in this evolution is the strength of the federal government. Throughout most of
the 1990s, the federal government was relatively weak and that allowed regional
governors, corporations, and to some extent, mayors, to play a much more autono-
mous role. After Putin’s election to the presidency in 2000, he was able to consol-
idate power relatively quickly and placed considerable constraints on lower-level
officials and corporations.
While Yeltsin had allowed the citizens of each region to elect their governors
beginning (with some exceptions) in 1996, Putin overturned the system in 2004
and restored the president’s right to appoint governors. This reassertion of central
control changed the fundamental political calculus in the thinking among Rus-
sian governors – no longer was their main aim to please their constituents to win
re-election; now they sought to curry favour with the Russian president so that he
would continue to allow them to remain in their posts. However, the longer Putin
stays in power, the less popular he becomes with the electorate; the invasion of
Ukraine revived Putin’s rating, but this change is likely to be short-lived, as in the
case of the 2008 war with Georgia. While declining popularity does not threaten
his ability to stay in office, it does put into question his ability to rule effectively.
In the wake of the December 2011 protests about the lack of fairness in the State
Duma elections held that month, then President Medvedev announced that Rus-
sia would return to a system of electing governors. The first elections were held
in five carefully selected regions in October 2012 followed by eight similarly
stage-managed elections in September 2013. While the restored regional elec-
tions are far from free and fair, they suggest that some small amount of power is
returning to the regions.
Control over the money flows between the federal government and the regional
and local governments reflect a similar trajectory as the overall distribution of
power. Accordingly, the situation of the regions depends heavily on the devel-
opment policies adopted in Moscow, which determine how much money flows
to which regions, the level of investments in those regions and the situation of
the population (Zubarevich 2013). In simple terms, shortly after the Soviet col-
lapse, the regional governments were able to control a substantial amount of the
taxes generated on their territory. Through 2001, for example, the law on subsoil
resources stipulated that the taxes collected from resource extraction would be
divided so that 40 per cent went to the federal government, 30 per cent to the
regional government, and 30 per cent to the local government of the resource-
producing region (Kryukov et al. 2011: 265).
During the period when citizens directly elected their governors, regional lead-
ers could play a relatively independent role negotiating among the federal gov-
ernment and corporations. In particular, they could favour one corporation over
another by providing access to land rights, using their influence to direct more
resources to the regional level. However, in the late 1990s, the federal government
began to exert intense pressure on the regions. After 2001, tax and budget legis-
lation, not the subsoil law, defined the distribution of resource rents between the
federal and regional governments and since these were federally controlled, the
distribution began to heavily favour the federal government. A new law in the late
1990s allowed Russian corporations to pay taxes in Moscow where their head-
quarters were located rather than the regions where they actually worked (Brie
2004; Colton 1995). This law had a major impact on the development of Russia
because it drew money out of the regions and concentrated it in the capital. Begin-
ning in 2005, federal law limited the rights of the autonomous okrugs, a change
which required YaNAO to sign an agreement with Tyumen Oblast that allowed it
to preserve its ability to work with its own budget while also transferring money
to the oblast (Kulikov no date). The government introduced the mineral extraction
tax in 2002. Initially, the federal government received 80 per cent of the revenue
and the regional governments received 20 per cent. Over the 2000s, the regional
share of this income dropped (Kryukov et al. 2011: 276). Since 2010 all funds
from this tax flow directly into the federal budget. In order to compensate for this
loss, Moscow began to provide subsidies to regions like YaNAO. While in 2010
this income almost fully compensated for the lost income, such compensation was
being phased out over four years and will eventually end. As Natalia Zubarev-
ich (2013) points out, the structure of the transfers from the federal budget to
the regional governments and the criteria for making them are not transparent.
YaNAO in 2011 was one of the largest recipients of the most opaque form of
federal subsidy, in the category ‘other grant income’, receiving 15 billion roubles
(11 per cent of its budget income). Also, at the same time that YaNAO started to
lose the income from the mineral extraction tax, the authorities again changed
the system of taxation for large corporations, requiring them once again to pay
their taxes in the areas where they work rather than where their headquarters are
located. This new law went into effect at the beginning of 2012 and is being
gradually implemented over several years. Since Gazprom is one of the largest
taxpayers, its payments in the YaNAO should increase while cities like Moscow,
St. Petersburg, and Tyumen, the home of many head offices, will receive less
income (BOFIT 2012).
Relations between corporations and regional governments have also evolved
over time. Gazprom and YaNAO signed their first general partnership agree-
ment in February 1995. Beginning in January 1997, bilateral annual agreements
laid out the terms of their financial relations, including the level of Gazprom’s
tax payments. A November 1997 agreement obliged the company to pay the
okrug government USD 51 million per month during 1998, up from USD
31 million the previous year. The agreement also allowed the okrug to sell USD
375 million worth of gas and oil on its own. Since these arrangements included
barter deals, there were many dubious deals and the actual size of Gazprom’s
payments dropped in the late 1990s and early 2000s (Kusznir 2006). The two
sides signed the agreement for 2013 on 25 November 2013 (Gazprom 2013).
Over the six-year period 2008–13, Gazprom invested more than 1.6 trillion
roubles in the region. According to recent agreements, Gazprom paid 35 bil-
lion roubles into the YaNAO budget in 2010, 45 billion in 2011, 53 billion in
2012, and more than 59 billion in 2013 (see Table 12.2). Once the Bovanenkovo
development comes on line, Gazprom expects these payments to reach as high
as 70 billion roubles a year (Gazprom 2012). Key priorities of the agreement are
developing hydrocarbons in YaNAO, providing natural gas to residences in the
region, and carrying out the programme to increase energy efficiency. YaNAO
Table 12.2 Gazprom contributions to the Yamal-Nenets Autonomous Okrug budget
(bn RUR)
2010 2011 2012 2013 Estimated future annual

contributions
35 45 53 59.2 70+
Source: Gazprom (2012; 2013). The 2012 figure is extrapolated from data for the first nine months
of the year.
will provide tax benefits for organizations involved in developing, transporting,

and processing hydrocarbons, gasification, and working on energy efficiency,
and provide help in obtaining land rights for construction of industrial and
socially important projects. Gazprom will make it a priority to hire local work-
ers and indigenous people who have the necessary qualifications and build sport
complexes for local children.
Evolution of Yamal-Nenets politics

The key player in YaNAO politics during most of the 1990s and the 2000s was
Governor Yury Neelov. He had a long history in Siberian politics, working his way
up through the Komsomol and Communist Party of the Soviet Union (CPSU).
Yeltsin appointed him governor in 1994 and he subsequently won elections in
1996 and 2000. He long sought to have Yamal-Nenets secede from Tyumen Oblast
so that it would have more independence (YaNAO has a confusing status in the
Russian federal system in which it is simultaneously an independent region and a
part of Tyumen Oblast). Although Neelov personally did not wield much political
clout, he gained power by picking leaders to follow in Moscow (Orttung et al.
2000: 632–8). During the 1990s, he criticized Moscow’s role in the regional econ-
omy, complaining that the federal government made it difficult to attract invest-
ment to develop the region’s resources. He argued that the federal government
abused its power to suppress the initiatives and activities of the regions.
Given the scope of its wealth and activities in the region, Gazprom plays a major
role in YaNAO politics (Kusznir 2006). In the 1993 State Duma elections, the
region voted for a candidate critical of Gazprom because the company at that time
had not paid salaries or made its social contributions. In order to regain its footing,
Gazprom backed Neelov, the newly appointed governor, and made him a mem-
ber of the Gazprom board of directors. When Gazprom registered in Moscow and
began to pay the bulk of its taxes there, the reduction in income angered Neelov and
he began to favour other companies and give them licenses to work in the region.
Accordingly, Neelov’s relations with Gazprom soured and he was not re-elected
to the Gazprom board in 1999. Instead, he focused his attention on oil companies,
such as Rosneft and Sibneft, and small independent gas companies. In particu-
lar, Deputy Governor Iosif Levinson helped nurture the development of Novatek,
which went on to become a major player. Neelov’s victory in the 2000 gubernato-
rial election showed that he had a powerbase independent of G azprom. After 2000
Gazprom bought up many of the other companies working in the region (including
Sibneft), though Novatek remained independent. As a consequence of the Gazprom
acquisition spree, the regional economy became dependent on the gas monopolist
again, particularly as Gazprom’s share of taxes to the budget comprised over 70
per cent of revenue in the mid-2000s. (Tax revenues from oil and gas production
account for more than 90 per cent of regional revenue for YaNAO) (Kusznir 2006).
Putin’s return to a system of gubernatorial appointments substantially reduced
Neelov’s leeway in appointing his own subordinates, and he had to dismiss Levin-
son. As Julia Kusznir has pointed out, the relationship between Gazprom and
the governor is what determines the nature of the interactions between the other
political and economic players. In short, between 1994 and 1999, Neelov cooper-
ated with Gazprom; between 2000 and 2005, he tried to build relations with other
companies, and between 2005 and 2010, the close ties between Gazprom and the
federal government weakened the governor and expanded the influence of Gaz-
prom in the region (Kusznir 2006).
Gazprom has strong representation in the regional legislature. From 2000–5
28.8 per cent of the deputies were directly associated with Gazprom. In 2005–10,
the figure grew to 36.4 and fell slightly in 2010–15, to 30.0 per cent. Usually exec-
utive managers of regional subsidiaries represent the company in the regional par-
liament. In the current body, Novatek has one representative. Medvedev replaced
Neelov as governor with Dmitry Kobylkin in 2010. By the time of his removal,
Neelov had become a relatively reliable Gazprom ally in the region. Neelov
resigned suddenly after being summoned to Moscow following the appearance of
a petition from YaNAO residents warning that not appointing him to an additional
term would lead to street protests (Plyusnina 2010). Medvedev largely cleared
out the Yeltsin-era governors during his tenure in the Kremlin and particularly
bristled at being put under pressure by regional groups.
Kobylkin, in contrast to Neelov, came out of the Novatek hierarchy, having
been the director of Purneftegazgeologiya, a Novatek subsidiary at the time of his
leadership tenure. From October 2005 to his appointment as governor, he served
as head of the Pur Raion. While Medvedev did not explain why he appointed
Kobylkin governor, analysts speculated that the appointment was an effort to
boost Novatek in a region dominated by Gazprom. In any case, Kobylkin con-
tinued the late-Neelov policy of working closely with Gazprom and continued to
sign the annual cooperation agreements with the monopolist. Perhaps the federal
authorities supported him because he did not have the lobbyist contacts in Mos-
cow that his predecessor had developed over time and therefore would be easier
to manage from Moscow.
YaNAO is a donor region so its budget has its own sources of revenue and does
not depend heavily on transfers from the federal government. Given the high level
of energy production in the region, the main sources of revenue are the corporate
profit tax (approximately one-third), income tax on individuals (approximately
one-quarter), corporate property tax (one-quarter), and others. Table 12.3 lists
the expenditures of the YaNAO budget, showing which areas it prioritizes. Direct
spending on protecting the environment is particularly low.
Table 12.3 Expenditures in the YaNAO 2012 regional budget (thousand RUR)
National Economy (roads, agriculture, forestry, etc.) 28,479,707

Housing 20,623,037
Education 17,397,144
Healthcare 16,263,631
Subsidies to regions and municipalities 16,262,813
Social Policy 12,557,855
State Administration 3,307,183
National Security and Law Enforcement 2,350,453
Culture, Cinematography 1,907,648
Physical education and sport 1,422,602
Media 1,245,092
Protecting the environment 627,927
National Defense 17,326
Total 122,462,418
Source: YaNAO Legislative Assembly (2012). Budget figures 2012.
How are policies implemented on the ground?

Policy implementation in YaNAO is difficult because the economy is heavily
dependent on the fluctuations in the price of oil and natural gas. The constant
shifts in the energy sector create population flows in and out of the region and
make it hard to develop coherent housing and education policies. Additionally,
it is hard for the regional government to anticipate federal investment and social
policies; changes in these policies, for example, could shift resources away from
YaNAO to other regions (YaNAO Department of the Economy 2011).
YaNAO has many positive attributes. It boasts high income, low poverty, a
young population and significant natural growth, as well as a well-financed social
sphere thanks to strong budget revenues. On the negative side of the ledger, how-
ever, are an undiversified economy that relies heavily on the energy sector, a high
cost of living, low provision of social infrastructure, such as schools and child
care (a problem inherited from the Soviet era), and a poorly developed voca-
tional education system (Kulikov no date). The population grew dramatically in
the 1980s and then began to oscillate with the natural gas boom and bust cycles.
Up to 1959, the entire population of the region was just 62,000 individuals. The
development of the gas industry meant that the population grew rapidly from 1979
to 1989, swelling from 158,000 to 486,000. Half of the urban population is in the
two largest cities – Novy Urengoi and Noyabrsk – which are focused on resource
development. In the early 1990s, after the collapse of the USSR, many residents
began leaving. In post-Soviet Russia, the population dynamics followed cyclical
trends depending on the state of the gas industry. There was another great outflow
in 1999 following the drop in gas prices, but then in-migration as prices rose
in 2001–4. During the 2000s, the quickest growth took place in Novy Urengoi,
Salekhard, and Noyabrsk. From 2005 there was an outflow, with people leaving
and coming in approximately equal numbers.
The cycles of the energy sector make it hard to deliver services to the popu-
lation. There are significant problems with the healthcare system in terms of old
equipment and difficulty in gaining access to the system. There is also a shortage
of qualified doctors. Many of the health problems in the region are concentrated
among the indigenous population. In 2011, YaNAO was one of the regions with
the greatest increase in healthcare spending. But Zubarevich questions how effec-
tive this spending has been, pointing out that the media is full of stories describing
schemes for increasing the prices for medical equipment that is purchased and
various forms of kickbacks (Zubarevich 2013).
Providing educational services is also a problem. There is a higher than average
share of children in the population (21 per cent versus 16.1 per cent for all of Rus-
sia). As of 2010, there was a shortage of places for kids in pre-school (10 per cent
more kids than spaces) and many have to go to the second shift for schooling. In
2011, YaNAO increased spending on education by 150 per cent.
Providing sufficient housing is a key problem because the housing industry
is driven by the boom–bust cycle in the natural gas economy, which makes it
extremely unstable from year to year. High gas prices in 2006–7 led to rapid
growth in housing starts. However, the 2008 crisis cut housing construction in half
(Kulikov, no date). Overall, YaNAO ‘preserves the extremely expensive Soviet
strategy of providing mass housing in resource-extracting regions located in
extreme climactic conditions instead of developing the more economical shift-la-
bour forms of employment. Such an approach makes sense in Khanty-Mansi, but
that region benefits from milder climate conditions and there are larger cities with
a more developed service sector’ (Kulikov, no date). Approximately 15 per cent
of the workforce have their permanent homes outside the region and live in camps
when they are working in YaNAO (YaNAO Department of the Economy 2011).
At the same time, less than 50 per cent of the residences are supplied with gas.
Additionally, only 3 per cent of families receive housing subsidies, even though
more than twice that many live in poverty (Kulikov no date).
Currently 9.6 per cent of the housing stock is dilapidated. This share is increas-
ing, even though the YaNAO authorities are spending considerable sums to
address the problem. Additionally, the authors of the strategic plan to develop
YaNAO through 2020 complain that many pensioners are moving into the region,
which puts an additional strain on the budget (YaNAO Department of the Econ-
omy 2011). The share of the population older than working age grew from 4.4 per
cent in 2000 to 7.9 per cent in 2009.
Finally, the region faces important environmental problems as it starts to
develop new fields in previously untouched territory. A key problem is the
increased pressure on the water resources of the region. A major cause of the
damage to the environment is the use of old technology for hydrocarbon devel-
opment, which leads to flaring natural gas. Difficulties in transporting waste from
both production and consumption sites also create problems (YaNAO Department
of the Economy 2011).
The regional government has been able to attract financing from Gazprom
to fund key development projects to address these problems. Under the Yamal
Megaproject, several domestic development projects for YaNAO are being
funded and led by Gazprom according to agreements between the company and
the region. In exchange for continued tax benefits, Gazprom has allocated 7.5
billion roubles to run the Comprehensive Yamal Development Program, which
includes the construction of school facilities, urban infrastructure, gasification of
the region, and land reclamation projects. Additionally, Gazprom has assisted in
the YaNAO government’s effort to eliminate dilapidated housing stock by 2020
by building new housing and assisting other residents in relocation to other cities
and regions.
Conclusion: Implications for Arctic urban sustainability

The central challenge for Russia’s politicized economy is developing a political
system that allows the various actors to better express their interests through effec-
tive policy-making. Overall, Russia’s current system has a variety of state and
societal actors that have an impact on its ability to promote sustainability goals.
These include federal, regional, and local governments as well as Russian and
international corporations and civic organizations. Despite the diversity of actors
and interests, the evolution of Russia’s political system since the collapse of the
Soviet Union has shifted power from regional and local actors to the federal level.
The result is that the groups that support sustainability goals no longer have much
influence over the policy-making process while groups that have little interest in
sustainability control the essential levels of power.
This process can be seen in detail in the YaNAO. The evolution of Russia’s
political system since the end of the Soviet Union has shifted considerable power
from the local level to the federal level, making it hard for local officials to address
sustainability issues on the ground. Current policy is aimed at producing resource
rents from oil and gas development rather than making concern for the environ-
ment a top priority.
Russia’s centralized system makes it possible for the federal government to
exercise considerable control over the development of the Arctic. In theory, this
oversight could provide for resource development policies that take into account
the human needs of the population while limiting the impact of resource pro-
duction on the environment to a minimum. However, the nature of the current
government in Moscow places the top priority on the development of resources to
ensure the ability of the current elites to stay in power. Resource rents are needed
to fund Russia’s neopatrimonial system, which drain resources away from other
forms of investment.
While mayors and some civil society groups may have a strong interest in carry-
ing out work to promote sustainability and otherwise improve the living standards
of their residents, the system does not provide them with sufficient resources to
be able to implement these kinds of policies. Of course, managing the trade-off
between development and environmental preservation is difficult in any country.
In the Russian case, the centralization of power and the incumbent elite’s need
to earn and distribute rents makes it even harder for the pro-sustainability voices
in Russian society to influence policy than would be the case in more democratic
countries.
Looking forward, there is little reason for optimism. As long as President Putin
remains in power, there are few possibilities to change the political system in any
fundamental way that would allow local or societal groups to have a greater say
over policy. Similarly, there is no evidence that Putin himself will change in this
direction in the future. Accordingly, Russia is essentially in a holding position
in which the current status quo will remain in place until the country reaches a
breaking point. Future research should investigate potential pressure points on the
Russian political and policy-making system in order to better understand where
potential sources of change might arise.
Note
1 I am grateful to The George Washington University Elliott School of International
Affairs SOAR Project Initiation Fund for providing the seed money that helped launch
this project. Additionally, I would like to thank the National Science Foundation for
funding the Research Coordination Network-Science Engineering and Education for
Sustainability: Building a Research Network for Promoting Arctic Urban Sustainabil-
ity in Russia (award number 1231294). I would like to express my gratitude to my
George Washington University colleagues Colin Reisser and Luis Suter, who provided
invaluable research assistance supporting this chapter.
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13 Russian regional resilience:
cooperation and resource
abundance
A case study of Khanty-Mansi
Autonomous Okrug
Irina Ilina, Carol Scott Leonard and
Evgeniy Plisetskiy1
This chapter examines regional financial resilience in Russia in the period follow-
ing the global financial crisis. The level of risk continued to rise for several years
after the financial crisis struck in 2009, as government emergency finance fell
rapidly; the result was that some regions raised loans to cover even operational
expenses. Most ‘resource’ regions, however, rebounded rapidly, despite having
been severely affected by the crisis, particularly in relation to its impact on the
Corporate Income Tax (CIT), the main source of regional revenue. This chapter
examines the experience of one mineral resource-abundant region, Khanty-Mansi
Autonomous Okrug (KhMAO), the largest ‘donor’ to the federal budget. It traces
developments since the dramatic budget reforms (from the late 1990s to 2005),
including the centralization of revenues and rationalized programme expenditure
(Alexeev and Weber 2013). It assesses regional budget and debt management
in response to pressures from the federal budget, the post-crisis withdrawal of
subsidies, and the rolling out of new debt guidelines. It describes and explains
KhMAO’s stability and relatively flexible planning as part of the fiscal federalist
regime, which support competitive regions and cooperative bargaining.
KhMAO is clearly an outlier in regard to revenue, as are most other
resource-abundant regions, such as Orenburg Region, Yamalo-Nenetsk AO, Kem-
erovo Region, Republic of Sakha, Sakhalin Region and others. Its budget flexibil-
ity, investment potential, and per capita income, in particular, diverge from that
of more typical less well-off regions. However, along with the enormous quanti-
tative literature on aggregates in Russia’s highly centralized fiscal federalism in
the 83 regions (Spilimbergo 2007; Alexeev and Weber 2013a; Christenko 2002;
Ilina et al. 2014), it is important also to examine outliers. Considering both budget
and credit management, it would seem, in at least one region with steady growth
potential, that regional finance is seemingly secure, even though, as a resource
region, one would expect to find financial fragility as a consequence of price vola-
tility. We ask: Why are some ‘donor regions’, which were more badly affected by
the crisis than others, also possibly more resilient in the medium term? Is Russia’s
growth core of regions financially stable because of federal intervention? How
Russian regional resilience 221
vulnerable is the resource region to future oil price shocks? Our findings are ten-
tative, since there remain questions about transparency and soft budget constraints
(Plekhanov 2006). We shows that federalism is most supportive of competitive-
ness in oil regions, and this is in part because of cross-regional action to influence
federal policy.
We use a case study approach for a number of reasons. Most important, although
there is a considerable quantitative literature on Russia’s fiscal federal system, it
remains unclear how flexible regional budgets have become after more than a
decade of reform. Our case is a snapshot of a particular group of regions with
common economic structures. A case study approach, isolating for close exam-
ination either extremes in a trend or a typical case, is used widely for conceptual
clarification prior to and during statistical analyses of large databases (Eisenhardt
1989). Since we examine the growth process rather than, for example, inequality,
we choose to explore regional finance in a territory that is particularly vulnerable
in term of its growth potential and not its general economic state.
The chapter is divided into subsections. This introduction is followed by a
brief review of the large literature on fiscal federalism, with an emphasis on that
analysis appropriate to oil-abundant federations. This is intended to establish a
foundation for considering KhMAO in a comparative context. Russia’s fiscal fed-
eralism is of scholarly interest both within and beyond the borders of Russia in
large part because of intense and continuing effective reform through the 2010s,
improving the delivery of both equity and efficiency. We use this literature about
ongoing centralizing reform, however, to examine the continuing diversity still
apparent in regional finance and regulatory regimes across the enormous country
(Commander et al. 2013). We note in conclusion the importance of cooperation
as well as competition among oil-abundant regions, although the exploration of
cooperative federalism in any great detail is beyond the scope of our research. The
final section is a conclusion.
Fiscal rigidity in Russia

There is widespread agreement among researchers about fiscal rigidity on the rev-
enue side of Russia’s federalism. Following the transformation of Russia’s fed-
eralist system in the 2000s, revenues have been almost entirely centralized, with
funds being allocated to cover federal social policy along with other expenditures.
Revenues are collected centrally and allocated to regions according to a formula
in the form of transfers, earmarked grants, subsidies and other allocations, which,
in turn, are partially allocated to districts and municipalities (Alexeev and Weber
2013; Vartapetov 2011). Local government provides services in health, education
and social welfare (Searle 2007). Reviewing the major budget reforms, Fitch rat-
ings (28 September 2005) finds that:
… budgetary results showed increasing budgetary rigidity among the regions,

the subordination of budgets to rapidly growing social spending and a lack
of capital expenditure. Budget reforms have introduced a more structured
222 Irina Ilina, Carol Scott Leonard and Evgeniy Plisetskiy
system of public administration, but regional governments now operate under
considerable constraints of having revenue sources reduced through central-
ization and responsibilities increased by higher social welfare targeted expen-
ditures. The vital indicator is economic development-related expenditure as a
proportion to total expenditure. (Fitch 2005a)
The important constraint is not the collection of revenues but rather the access to
them through shared spending authority. The spending side, for all regions, has been
pressed by President Putin’s ‘May 7 decrees’ in 2012, guaranteeing a standard of
services, including a pay rise for government staff, and the provision of benefits to
all citizens. Of course, these decrees were not only a constraint but a benefit, prom-
ising greater efficiency, the reduction of duplication and waste, and monitoring of
the implementation of federal programmes (Prikaz 2012: N556n). Rigidity in the
budget process, however, as Fitch points out, is important because it conflicts with
another key priority objective: ‘At the same time, there is a clear policy to reduce
regions dependency on federal revenues and stimulate greater tax initiative and
new local resources’ (Fitch 2005a). In other words, excessive centralization will
inhibit local initiatives in finding resources, which many economists find to be the
key objective of intergovernmental fiscal policy. As Qian and Weingast maintain:
The state must maintain ‘positive’ market incentives that reward economic
success. When the government is tempted to take away too much income and
wealth generated by the future success, individuals have no incentives to take
risks and make effort today. In the terms of North (1990), this is the ‘state pre-
dation’ problem. The state must also commit to ‘negative’ market incentives
that punish economic failure; if the government is tempted to bail out failed
projects or continue costly, inefficient public programs, individuals have no
incentives to avoid mistakes and waste. In the terms of Kornai (1986), this is
the ‘soft budget constraint’ problem. (Qian and Weingast 1997: 84)
An incentive orientation is an argument for decentralization that among advanced

countries has mostly replaced the former ‘cooperative fiscal federalism’ as the
dominant approach in intergovernmental relations (Musgrave 1997: 65).
Russia’s seemingly relatively inflexible budget rules, therefore, seem not to
be aligned with current trends toward decentralization. The history of Russian
budget reform offers one explanation of the situation. In order to end a decade
of struggle with separatism, after 2000, the evolving post-Yeltsin state under
President Putin sharply reduced the political autonomy of regions. Putin ended,
briefly reinstated, and then ended, once more, direct gubernatorial elections. The
government helped to forge a single dominant party and bring to heel ‘regional
authoritarianism’, which was an obstacle to well-functioning political and market
institutions (Golosov 2008; Stoner-Weiss 2006).
Centralization also brought economic reforms, which disadvantaged small
and medium-sized enterprises. Concentration in economic activity increased, as
nation-wide companies penetrated local markets. State intervention in the private
sector has led, now, to its ownership of two-thirds of the market capitalization in
the Russian stock market, which is limited to four industries – energy (oil, gas,
and electricity), banks, defence industries and transportation. The government has
also centralized investment-oriented economic policy (Ilina et al. 2014).
It is important to underscore that centralization has not resulted in the degree
of uniformity or equalization that had undoubtedly been anticipated. Regional
incomes, polarized in the 1990s, may be converging, but GDP per capita is not
(Fedorov 2002; Gurev and Vaukulenko 2012). The regulatory environment
remains diverse in the degree of enforcement of federal laws,
…substantial inter-regional variation in terms of the quality of the business

environment. The differences are particularly large in the areas of competi-
tion from the informal sector, access to physical infrastructure, access to land
and tax administration. (Commander et al. 2013: 43)
The reform of the historical regional revenue and expenditure system is

described in detail in numerous articles (Siluanov et al. 2009; Vartapetov 2010,
2011; Siluanov 2011; Mamedov et al. 2013), and in the Oxford Handbook of
the Russian Economy by Alexeev and Weber (2013b). Emphasis on key devel-
opments before 2002 can be found in Desai et al. (2005) and Lavrov et al.
(2001). Briefly, to review Russia’s budget reform history: under President
Putin, the government eliminated most of the disadvantageous bilateral tax trea-
ties between the federal government and the regions and much of the opacity,
which stood in the way of further reform (Gurev et al. 2008; Martinez-Vazquez
and Boex 2001; Solanko 2001).
The results are as follows: 100 per cent of the VAT was recentralized in the
1990s, along with 80 per cent of the oil and gas extraction tax, leaving by 2012
one quarter of the revenue base of regions from the corporate profit tax (including
on resource industries) and personal income tax (28 per cent), approximately the
same percentages as regional revenues from these sources in Canada. The property
tax represents, on average, some 9 per cent of regional revenues in 2011, amount-
ing to 1.9 per cent of GRP, roughly in line with property taxes elsewhere (0.5 to
1.5 per cent of GRP) (OECD 2014) . Total regional tax revenues in Russia amount
to roughly 11 per cent of GRP (Siluanov et al. 2009; Vartapetov 2010), again,
comparable to other states (Canada 12.1 per cent, Australia, 4 per cent; Germany,
7.9 per cent; and the US, 5 per cent). As in other countries, expenditures are allo-
cated by equalization grants (mainly for balancing the budget), earmarked grants
(including unconditional grants for center-delegated spending (subventions) and
earmarked matching grants (subsidies) for priority federal programmes, and com-
pensation grants to adjust distribution of these allocations (Vartapetov 2011).
The main result of these reforms, we argue, is the standardization of Russia’s
budget process, which is ‘partially centralized’. Revenue collections are central-
ized for efficiency of the collection process, an essential step in the evolution of
Russian governance dating from the late 1990s. However, regions have tended
to retain a steady share of total revenues (in the consolidated budget), which has
varied between 38 and 51 per cent, since the start of reforms; in 2011, the regions’
share was 46.8 per cent, within the range observed in other federations – from
34 per cent in the US to 44 per cent in Canada (Blöchliger and Rabesona 2009: 5).
Budget rules have become increasingly transparent, although there remains some
uncertainty in annual adjustments to the rules (Shleifer and Treisman 2005;
CEFIR 2006; Hauner 2008; Kondrateva 2008; Siluanov 2011).
There are numerous advantages in centralizing revenues. By reducing the
‘beggar-thy-neighbor’ outcome and the misallocation of factors of produc-

tion produced by autonomous budgeting, centralization can increase efficiency
(Ahmad and Tanzi 2002; Broadway and Shah 1994). The federal level can best
manage resources for equalization, especially where endowments are uneven, as
in Canada, Russia and Australia. Taxes on energy production and export tend to
be collected at the federal level, which can absorb the uncertainty and volatility of
oil prices. Searle (2007: 11) summarizes: ‘the usual starting point in an allocation
of revenue sources between levels of government is that the level with the greatest
fiscal capacity has the best tools for overcoming fluctuations in revenue collec-
tions.’ Taking oil extraction revenues away from the regions is only one option,
but slimmer budgets tend to make more efficient use by regions of the profit tax,
or corporate income tax, to diversify expenditures (Cottarelli 2012). It may also
diminish the influence that oil interests can have in the shaping of regional policy
in resource regions (Freinkman and Plekhanov 2009). Centralization mitigates
the curse, while guaranteeing comparable services at comparable taxation and
providing ‘insurance’ for region-specific shocks (Otto 2001; Bishop and Shah
2011: 549). Finally, centralized revenues assist the federal level take responsi-
bility for equalization (Mello 2000; Iimi 2005; Sepulveda and Martinez-Vazquez
2011; Hatfield and Miquel 2012; Alexeev and Weber 2013a).
Fiscal federalism ‘best practice’ is not well established, and there is a range
among federations. In Australia, horizontal fiscal imbalance drives a strong trend
toward centralization, with revenue sharing and allocations by formula (accord-
ing to measures of regional fiscal capacity) in transfers, grants, subventions and
subsidies to sub-national governments. By contrast, in Canada, problems of asym-
metry have resulted in greater autonomy of regional revenues: mining royalties
are allocated to the regions, for example, a considerable source of revenue from
non-renewable resources that is missing in Russia’s regional budgets. Further-
more, Canada removes restrictions on how provinces can raise money, while the
federal level has taken over the unemployment programme. In Canada, mineral
resource-abundant regions thus have considerably more autonomy than in the
Russian Federation. The results of different regimes, however, are at best trade-
offs: all of these federations experience political pressure from regions, some
favoring more autonomy and some, more equalization.
In regard to spending, the region’s role in the Russian Federation varies across
the country. In 2012, for example, in Russia, officially recorded transfers from
the federal to regional level at an average of 20.8 per cent of total income, but the
range was from 86.4 per cent (Republic of Ingushetia) to 4.9 per cent KhMAO.2
Among sources of support during the crisis for the regions in Russia has been the
Fund for Financial Support to regions with high deficits, and for social expendi-
tures. It is difficult to determine the ‘system’ of allocations: rules exist, but they
are not always public information (Siluanov et al. 2009; Vartapetov 2010). In
general, these transfers consist of: (1) equalization grants, or formula-based grants
aimed at building capacity to deliver country-wide a standard level of services;
(2) earmarked unconditional grants to finance center-delegated spending and ear-
marked matching grants designed to co-finance regional expenditures that the
federal government considers important; and (3) compensation grants, or one-off
unconditional grants to adjust the above allocations (Vartapetov 2011).
Although centralization produces some rigidity, it has clear advantages in a
federation such as Russia. For one thing, decentralization would not necessarily
produce higher growth. Even in advanced economies, decentralization is not nec-
essarily associated with higher rates of growth (Iimi 2005: 449). Under central-
ized systems, transfers can be used to promote growth. Clearly, KhMAO seems
one of a few regions across Europe3 that actually uses transfers to this effect:
normally transfers will have a growth effect only where human capital is signif-
icant and institutions are strong (Becker et al. 2013). The one evident advantage
of decentralization lies in community–government relations (Allers and Ishemoi
2011). In Russia, in other words, centralization has been beneficial in resolving
both the inadequacy of some territorial administrations in the post-Soviet era and
in uprooting deeply embedded informal networks, by which ‘rentier’ regions
(those with mineral resource abundance) derived rent revenue from ‘explicit and
implicit taxation of extraction of mineral resources, primarily oil and gas’ (Desai
et al. 2005; Kumar et al. 2007). Finally, one may note that in Russia, there is a cur-
rent expectation that the government will supply services and considerable public
support for the May decrees, expectations that can best be met in the transforming
economy by some centralization.
To summarize, by 2011, it was evident that after being rescued by budget equal-
ization funds, regional fiscal stability passed a ‘stress test’ of sorts in the financial
crisis (Vartapetov 2011). By 2013, the funds were dramatically cut back, how-
ever; for the first eight months of 2013, transfers were 7 per cent lower than in the
previous year; corporate income tax also fell by 20 per cent less (Chernyavskiy
2013). Regions were now encouraged to rely on credit to cover deficits. Regions
(and municipalities) began to borrow more heavily, albeit within strict limits,
and some regions were allowed to do so on international capital markets (Marti-
nez-Vazquez and Timofeev 2008). This helped by 2011-12 in reducing financial
transfers to the weaker regions and fostered hope of ending regional ‘dependency’
on ‘non-reimbursable (bezvozmezdnye)’ federal subsidies (see Appendix Table
13.A1). In its review of the budget in 2012, however, the Accounts Chamber
of the Russian Federation recommended more reform and further adjustments to
budget rules, to resolve problems of regional indebtedness (Accounting Cham-
ber 2013: 263–7).4 Recommendations were in the direction of greater indepen-
dence on the part of regions, encouraging local initiative in attracting investment
resources, more competition for funds among regions, and greater budget effi-
ciency (Siluanov 2011).
Case study: Khanty-Mansi Autonomous Okrug
Risk in oil-abundant countries is generally held as a potential curse, which can
lower the rate of growth level over the long term and hollow out the non-oil sector
(Sachs and Warner 2001; Papyrakis and Gerlagh 2007; Alexeev and Conrad 2009;
Freinkman and Plekhanov 2009; Walker 2013). To be sure, Alexeev and Conrad
(2009) argue that empirically in a survey of countries this threat is not borne out.
In regions, the same kind of risk is not relevant, but oil is nevertheless important
for regional budgets in producing opportunities as well as rents.
Resource regions in Russia

Resource regions have grown rapidly and steadily since the early 1990s and
expanded their lead over other regions, on a per capita basis, in part because of
their low population density. The pace of per capita growth of the ten leading
regions in 1992 exceeded those in the slowest growing by 2.5 times; by 2000,
the ratio was even greater, 3.2 times. The presence of oil – among oppor-
tunities offered – attracted federal cluster policies and funding in the mid-
2000s for the attraction of non-oil investment and more skilled labor. Resource
regions learned how to retain their budgetary surplus and low debts; KhMAO
has an enviable standard of living. To what degree is this region vulnerable if
the oil sector loses its productive potential and/or oil prices fall dramatically,
followed by a plunge in the corporate and private income tax, the outmigration
of highly mobile unemployed labor and the decreased productivity of fields
and mines?
The vulnerability of resource regions lies, first, in their financial dependence
upon the CIT. In the budget of KhMAO in 2012, this tax formed 40.6 per cent, and
in 2013–15, 43.5 per cent of okrug revenues (Korosteleva and Kurbanova 2014).
The large share of the CIT is characteristic for resource regions, with their signifi-
cant endowments of globally traded natural resources. A second risk, however, for
which insurance is required, are the unusually adverse natural and climatic condi-
tions creating high transport costs, steep infrastructure (including transportation)
requirements for production, low population density and extensive casual migrant
labour. An exacting taxonomy of regions by vulnerability has been developed by
Russian scholars, but most simply, they are grouped with little discussion of risk
as attractors of investment and high-skilled, mobile labor (Polynev 2010; Demina
and Vlasiuk 2012).
For a setting of regions similar to Khanty-Mansi, we select eight with produc-
tion of oil land gas at over 40 per cent of GRP as in Table 13.1.
These regions have a substantially greater than average per capita income –
for KhMAO, for example, indicators for living standards exceed even those for
Moscow city. Located within but autonomous with respect to Tyumen Region –
KhMAO is a so-called ‘composite region’, along with Yamalo-Nenetsk – and
pays a subsidy to Tyumen for this special arrangement. KhMAO is among seven
Table 13.1 Oil- and gas-producing regions, 2012
Russian regions Share of oil and gas production

in GRP (%)
Russian Federation 11.4
Nenetskii Autonomous Okrug 78.5
(located within Arkhangelsk Region)
Khanty-Mansiysk Autonomous Okrug 67.2
(located within Tiumen Region)
Sakhalin Region 60.9
Tiumen Region 52.2
Yamalo-Nenetsk Autonomous Okrug 48.3
(located within Tiumen Region)
Orenburg Region 36.9
Source: Rosstat (2013).
regions (including Moscow and St Petersburg) at investment-grade rating, and

since two rating agencies have provided that assessment, it is allowed to obtain
funds in international capital markets, where interest rates are considerably lower
(8–10 per cent) and repayment extends over a longer period (3–5 years) than
domestically. KhMAO is among three regions actually doing so (Vedomosti
2013a). Table 13.2 shows its relatively high standard of living at a level between
that of Moscow city and that of the rest of Russia.
Population trends are stable in KhMAO, across periods of decline in oil
extraction, which is not always the case in resource regions and shows its resil-
ience in that regard (Ilina et al. 2014). Fundamentally, the reliance in this region
is a sign of how its endowment has been used: in 2012 the profit tax from the oil
and gas sector comprised some 95 per cent of KhMAO’s operating income. In
this year taxes from the major oil and gas companies comprised 52.1 per cent of
total revenue (51.5 per cent in 2011) (Fitch 2013b). Falling extraction at major
fields and a dip in the share of oil in GRP to less than half (43.6 per cent) is a
cause of concern. The forecast without estimation of investment returns is that
by 2030, according to the region’s Energy Strategy, the annual production of oil
will fall at a minimum from 260 to 222 million tons (mt), and, more likely, to 196
mt, as costs of extraction increase due to flooding and technological challenges
(Ria Novosti 2013). It is not that technologies are unavailable to KhMAO pro-
ducers—oil is a global industry. It is that these technologies, hydraulic fracturing,
horizontal drilling, three-dimensional seismic modeling, are especially costly in
the initial stages. This puts pressure on the region to attract more investment and,
especially, exploration. Resilience requires special concern, under such condi-
tions, for the stability of future income and well-being under volatile price con-
ditions. Is there a threat here exceeding the capacity of current preparations to
resolve it?
Table 13.2 Standard of living indicators, 2011, Khanty-Mansiysk Autonomous Okrug,
Moscow city, Russian Federation average
Average per household member, Average per household

rubles per month member, rubles per month
Income extremely poor households

Percent households on internet
Expenditure on non-food items
Minimum sustainable monthly

Income poor households
Expenditure on services
income set by region

Expenditure on food
Disposable income
Consumption
Average 15,816 10,460 3,250 4,178 2,615 53 4,858 2,637 6,090

Russian
Federation
City of Moscow 25,629 21,145 4,720 8,220 6,900 82 8,287 NA 8,656
Khanty- 27,061 15,278 3,240 7,112 4,494 71 7,094 3,073 5,234
Mansiysk AO
Source: Regions of Russia (2013).
Post-crisis finance in Russia’s regions

There is a general optimism about long-run regional growth in Russia, as expressed
in scholarship and at Davos 2014 (RIA Rating 2013; World Economic Forum
2014; Russia Beyond the Headlines 2014; Berkowitz and Dejong 2011). At the
same time, however, accumulating regional government debt in the short term is
also of widespread public concern (Vavulin and Simonov 2013: 32).5 Professor
Zubarevich, a regional expert at Moscow Lomonossov State University, writes:
…regional budgets are buckling. Revenues in the first half of 2013 decreased due
to a 20 per cent decline in profit tax revenue and a 15 per cent cut in federal bud-
get transfers. Meanwhile, spending grew 5 per cent to fulfill the president's prom-
ises to increase public sector wages. Budgets are running deficits in two thirds of
all regions, and aggregate regional and municipal debt has surpassed 25 per cent
of (tax and non-tax) revenue. The regions are reducing investment spending, but
it's not enough… the decline in public sector employment is accelerating… Laid
off workers have difficulty finding another job. (Vedomosti 2013b)
Total municipal and regional tax and non-tax debt is about 20 to 25 per cent of
income of Russia’s regions. Regional rating reports, carried out by RIA rating,
Fitch and S&Ps, and Ministry of Finance open access data show the importance
of debt. RIA Rating (2013) reported that the total public debt of all subnational
entities increased by 15.6 per cent in 2012 and on 1 January 2013 amounted to
1.335 trillion rubles. Similarly, S&P flagged its concern by reporting Ministry
viewpoints as “excessively optimistic”: a decline in the profit tax cast doubt on
Ministry forecasts of 8–10 per cent growth of regional revenues over 2014–16.
‘The regional deficit will rise to 3 trln roubles more than planned, double the cur-
rent amount.’ It goes on, ‘the regional gap will widen and in half of the regions,
debt will exceed 60 per cent of operational income (as it does now in 15 regions),
and average debt service will reach 10 per cent of revenues and in half of the
regions, over 15 per cent’ (Finmarket 2013).
These fears bear little relevance, however, to the wealthiest regions, which
have most of the outstanding regional bonds: Moscow, Krasnoyarsk, Nizhniy
Novgorod, Samara and Moscow regions (64 per cent), regions that can easily
cover their obligations (RIA Rating 2013). The term structure of obligations and
debt service matter, and Russia’s debt service is high, about 10 per cent of rev-
enues compared with the US to an average of 5 per cent, a ceiling for state debt
(Cherniavskii 2013; Dinopoli 2012). However, resource regions have a low level
of debt to income, far below than the average, at 10 per cent (Granik and Sama-
rina 2013). Russia’s resource regions mostly have lower total debt figures than
the average for the country and even by international comparisons (Table 13.3).
Regions with elevated debt include Mordovia (179 per cent), Vologda Region
(92 per cent), and Riazan (91 per cent); ten others have debt over 70 per cent of
their income; and 19 regions have debt ranging from 50 to 70 per cent. However,
in sum, the average level of regional debt in 2013 is 26 per cent of GRP, and
in the view of the Ministry of Finance, relatively low in a global perspective
Table 13.3 Debt in resource regions (% of GRP)
2010 2013*
Region Debt, Debt, regional & Debt regional Debt, regional &
regional municipal (% GRP) municipal
(% GRP) (% GRP) (% GRP)
Nenetsk AO 18.2 19.5
Orenburg Oblast 1.9 2.1 4.4 5.4
Tiumen Oblast 0.0 0.0 0.1
Khanty-Mansyisk AO 0.6 0.7 0.8 0.8
Yamalo-Nenetsk AO 0.3 0.7
Kemerovo Oblast 2.9 3.3 5.7 5.9
Republic of Sakha 4.0 4.4 5.4 6.0
Sakhalin Oblast 0.1 0.6 0.3 0.7
Notes: *The gross regional product (GRP) for 2013 is estimated from forecasted annual growth rate
2005–10.
(Krizis-kopilka 2013; Newsland 2013; RIA Rating 2013). In regard to continued
dependence on federal budgets, Orenburg and Sakha show greater dependence
than KhMAO, which derives a very small percent of its budget from transfers.
What have reforms meant for budget rigidity? Looking at the ratio considered
by Fitch as critical in regard to rigidity, economic spending to total expenses of
the consolidated budgets. Protown.ru (2014) explains that economic spending
supports infrastructure investment and science.6 To summarize, what does a closer
look at resource regions, in particular, at KhMAO, show in regard to resilience?
One may begin with the impact of global financial crisis. The profit and income
tax fell, in some regions (Chelyabinsk and Kemerovo) by 90 per cent. The well-off
resource regions, including KhMAO, suffered most (Iandiev 2013a,b). However,
it is those regions that suffered least, in part due to emergency federal support, that
are now in a worse position. In the resource regions, the liquidity of banks quickly
recovered and oil and gas firms’ profits rose, once again boosting revenues.
Budget priorities for 2014–16 for KhMAO were ambitious, including repeated
assurances of fulfilling the May decrees of 2012 and the creation of a fund for cap-
ital investment. Tax objectives for KhMAO are aligned with federal interest and
long-run modernization and diversification; significant property tax breaks are
now given to small and medium size enterprises, to incubators that promote them,
to non-profits with socially oriented objectives, to production that reduces envi-
ronmental risk, to organizations that rent property for affordable housing, and to
firms producing gas by fracking (Rasporiazhenie 2014). Even more ambitious is
the effort among resource regions to increase the regional share of corporate taxes
allocated to regions and eliminate the federal share (of the 20 per cent tax 2 per
cent is currently given to the federal government); a broad lobbying effort includ-
ing Urals and Siberian governors has led to a law giving the regions the entire 20
per cent, which is making its way through the Russian parliament (Vd-tv.ru 2013).
Bargaining and informal arrangements (public/private and intergovernmen-
tal) are difficult to follow, as some regions seek amendments to legislation (Dahl
1961). It is at the level of the region and blocks of regions, however, that tax
policies of enormous importance are made, lobbied and adjusted (Yakovlev et
al. 2011). The case of one resource region by no means necessarily captures the
overall dynamic. However, this study suggests that those regions which are most
competitive are in no real danger from debt or instability; there will be no likely
slimming of federal programmes and federal guidelines are observed in preparing
the long-run budget, but there is considerable autonomy. Ensuring the stability of
resource regions is a priority cooperation of regional governors and ministry offi-
cials and past and present representatives of the oil companies, who meet infor-
mally as a ‘Board of Directors of Ugra’, discussing, essentially, policy options for
the country as well as the region (Vd-tv.ru 2013).
Conclusion
For the European Union (EU), there is a major investigative effort to discover fac-
tors in regional ‘resilience’, as illustrated in the October 2012, European Commis-
sion’s brief on ‘The EU approach to resilience’, formulated for an EC action plan.
Russia’s wealthiest regions exhibit that resilience in some of the regions hardest
hit by the recent financial crisis 2008–9. Budgets show that some donor regions
suffered a substantial decline in corporate and personal income tax receipts during
2009, but without taking on much credit, they re-established a surplus, while also
covering the increased salaries and other obligations announced in President
Putin’s ‘May decrees’.
The resilience in the instance of KhMAO, we have argued, is due to its finan-
cial flexibility in the fiscal federalist regime. KhMAO’s stable finance can be
attributed to relatively successful multi-year budgeting, which includes setting
revenues aside in a reserve fund. Adaptability and representation of local inter-
ests are evident in fiscal management despite revenue centralization. The case
illustrates that, at least in one critically important region, Russia’s fiscal federalist
regime is more cooperative than decentralized, and the budget process shows con-
sideration of a wide range of stakeholder interests.
In the long run, per capita economic indicators show a steady rise and pop-
ulation growth, including in periods of volatile oil prices. KhMAO cluster pol-
icy has attracted industrial giants other than in the oil sector, and the business
environment, which includes maintenance of a relatively high standard of living,
is supported regional level by innovation-oriented budgets. Most fundamentally,
there is evolving multi-region cooperation, groups of regions acting together to
secure negotiated decisions on tax allocations and spending requirements and US
style private/public partnerships in governance at the regional and national level.
Our conclusion supports that of Chebankova (2008), who uses the term adap-
tive federalism; we apply it to budget reform. Not top-down federal intervention
but cooperation and coalitions, as a fiscal federalist regime, help explain regional
resilience.
Appendix
Table 13.A1 Tax structure in resource regions in Russia, 2005–11 (% of total revenues)*
A1-1 Corporate Income Tax (CIT) (% of revenues)

2005 2006 2007 2008 2009 2010 2011
Russian Federation 31.8 30.6 31.7 28.3 18.0 23.2 25.2
Nenetsk AO 39.5 32.5 21.9
Orenburg Oblast 29.9 30.3 33.6 30.0 22.8 25.4 29.6
Tiumen Oblast 66.8 59.6 42.2 42.1 37.4 49.1 58.8
KhMAO 95.7 47.0 37.5 38.9 28.5 31.5 37.4
Yamalo-Nenetsk AO 40.8 32.9 27.5 29.5 23.1 32.5 34.4
Kemerovo Oblast 25.2 17.8 19.6 29.3 9.4 19.8 28.0
Republic of Sakha 14.6 12.3 16.4 17.5 8.4 13.9 18.9
(Yakutia)
Sakhalin Oblast 15.5 17.2 17.1 19.9 34.4 29.9 31.6
A1-2 Personal Income Tax (PIT), % revenues
2005 2006 2007 2008 2009 2010 2011

Nenetsk AO 20.4 17.9 12.2 6.9 6.7 5.9 5.3
Orenburg Oblast 22.8 23.8 22.4 22.5 22.2 22.8 22.0
Tiumen Oblast 5.1 5.8 11.1 10.2 12.6 11.8 10.7
KhMAO 18.8 27.4 29.2 27.7 31.9 30.8 27.4
Kemerovo Oblast 23.5 28.3 28.3 24.2 25.6 24.8 24.9
(Yakutia)
Sakhalin Oblast 35.6 33.4 28.3 22.3 24.5 27.4 27.7
A1-3 Property Tax (% revenues)
2005 2006 2007 2008 2009 2010 2011

Nenetsk AO 13.1 13.7 16.5 24.3 47.6 44.7 35.6
Orenburg Oblast 10.8 10.2 8.7 8.7 10.3 10.9 9.9
Tiumen Oblast 1.6 1.6 2.9 2.3 3.6 3.6 3.0
KhMAO 9.7 12.9 13.2 12.6 19.3 19.6 17.2
Kemerovo Oblast 9.1 12.6 13.0 7.8 11.2 10.6 10.4
(Yakutia)
Sakhalin Oblast 6.1 5.3 3.9 2.7 2.8 3.5 3.7
A1-4. Transfers from Federal Budget (% revenues)
2005 2006 2007 2008 2009 2010 2011

Nenetsk AO 3.4 2.7 5.1 33.8 35.0 23.6 19.9
Orenburg Oblast 12.4 10.3 13.5 18.0 24.3 22.5 20.1
Tiumen Oblast 0.9 1.1 3.2 4.2 5.3 27.7 19.9
KhMAO -42.8 -2.0 3.2 4.8 5.9 4.9 8.2
Kemerovo Oblast 15.2 13.0 13.9 17.0 29.9 20.0 12.6
(Yakutia)
Sakhalin Oblast 19.9 23.2 27.3 30.5 21.4 23.8 14.6
Notes: *Some revenues are not identified, and the total listed does not add up to 100.
Notes
1 This chapter is part of a larger project on governance and growth in Russia, which has
received funding from the HSE Basic Research Program under grant agreement No.
TZ-43 / D.95674.
2 Data regarding regional budgets are from the database of the Russian Federation
Ministry of Finance and as reported by the Russian state statistical agency (Rosstat).
3 In the EU, some 30 per cent.
4 The Accounting Chamber of the Russian Federation recommended that regional allo-
cations from taxes be increased in percent, that only regions be allowed to establish
tax exemptions for firms (a loss in 2012 of some 200 billion roubles to the regions
from federal regulations), and that – as soon as the cadastral survey was complete –
individual property tax on expensive real estate be raised.
5 Debt was used to cover the impact of a simultaneous cut in subsidies and bud-
get deficit from the rise in obligations from the ‘May decrees’. It proved difficult
to cover the cost of increased pay for teachers and doctors to the average level
of regional salaries. According to the Ministry of Finance of the Russian Federa-
tion, by 2013, sub-national entities (excluding Moscow city and Moscow Region)
needed in 2013 an extra 337.4 billion roubles are required, although allocations
from the federal level rose only to 209.1 billion roubles. According to the Audit
Chamber of the RF, the total regional debt just to pay salaries of administrators was
150 billion.
6 Expenditure commitments of the section ‘national economy’ are determined by Federal
laws, decrees of the President of the Russian Federation, resolutions of the Government
of the Russian Federation on extraction and use of mineral resources, development of
agriculture, forestry and water economy, transport, road management, communications,
science and scientific and technical policy, space activities, Federal target p rogrammes,
as well as international agreements and treaties.
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Index
2008–9 crisis 59, 62–3, 66–7, 69, 73–4 China xxi, 30, 82–5, 93, 106, 122–5, 127,
see financial crisis 154, 180, 184–5, 208
Accounting Chamber 70, 225, 233 Chukotka 186, 188
addicts 3, 7, 12, 17–21, 23, 25–9 CIS xix, 75, 107, 154, 182
Aidis, Ruta xv, 4, 77 civil society organizations 5, 107–10,
AKP 135 165–7, 202, 208
Albania 106 civiliki 130, 133
All-Russian People’s Front 132 Communist Party xxi, 62, 135, 169, 171
Altai 150, 186, 188, 197 control of corruption xi, 91–2
Arab Spring 72, 144 corporation 20, 76, 139, 209
Arctic: regions 202; Russia’s x, 6, 202, Corruption Perception Index xiii, xxi,
204–5, 218 103–4, 112, 135
Audit Chamber 106 see Accounting CPRF xxi, 65, 75
Chamber Crimea 3, 130, 162, 180
Australia 84, 93, 127, 223–4 Croatia 106
Bangalore 85–6 Dagestan 186, 188, 200

Barbados 106 Delavaya Rossiya 64, 72, 74
Bastrykin, Alexander 134 democracy: domain 135; managed 67,
Bastrykin, Mikhail 139 167, 174, 176; shortage 97, 104, 110;
Bear Traps 16, 29, 32, 111, 217 sovereign 133, 172
BEEPS 68, 105–6, 111 demographic groups 43, 45
Berlusconi, Silvio 129, 136–7, 143 dirigisme 192, 198
big business 63–5, 75 dirigist 5, 7, 128
Brazil xxi, 82–5, 93, 122, 124–5, 180, 185 dual state 128–9, 131, 134, 138–9, 143–4
BRIC xi, xxi, 41, 81–5, 124 Dvorkovich, Arkady 133–4
BRICS xxi, 170
budget process 222, 224, 231 Ease of/ Doing Business Index xii, 4, 5,
business climate 2, 4, 8, 36, 53, 59, 68–70, 36, 80, 105–6, 113, 124–5
72, 74, 82–3, 102, 105–7, 110 Edinaya Rossiya 3 see United Russia
Böll, Heinrich xvi, 165 Egypt 84, 137, 154, 169
election/s: free 156; fraud 169
Canada 31, 93, 223–4 employment: formal 4, 35, 42–3, 48, 54;
capital outflow/s 67, 122 informal xi, 9, 33, 36–42, 46, 48, 50–1,
centre-periphery 6, 149, 183, 193, 197, 53, 57–8; growth 39
208, 218 energy efficiency xii, 113, 117–18, 210–1
Chaika, Yuri 139 entrepreneurial activity xi, xviii, 7, 40–1
Chechen war 133, 136–7, 172 entrepreneurial society ix, 4, 7, 77–8, 80,
Chechnya 185–6, 197, 200 83, 92–3
Index 239
entrepreneurs’ rights 69–70 informal sector 4, 9, 34, 37, 38, 39, 41–3,
Exit, Voice and Loyalty 108, 111 46–8, 55–6, 57, 97, 223
informality: in the Russian labour market
factions 130–3, 136 ix, 3, 33, 57
federal bureaucracy 63, 65, 206 Ingushetia 185–6, 188, 200, 224
federal cities 149, 187, 193, 198 Institutional: failure 52; quality 122–3;
Federation Council 131 setting 34–5
financial crisis 34, 59, 63, 111, 118–19, institutions: democratic xviii, 9, 61,
122, 126, 220, 225, 230–1, 237 see 145–7, 161; formal 2, 78, 80–1, 101,
2008–9 crisis 109; informal xviii, 1, 2, 78–80, 101,
fiscal federalism 237 109; modernization of 185, 199–200
foreign agent 177–8 Investigative Committee xxii, 70–1,
France 84, 93, 129, 139–43, 190 134, 138
Franco-Prussian War 140 investment climate 4, 17, 59–60, 69, 73,
freedom: of speech 107–9, 157–9; 74, 76, 124, 189
to think 166 irregular activity 47, 52
French Revolution 140 Ivanov, Sergei 133–4
FSB xxi, 20, 136, 138 Ivanovo 186, 188
Izborsk Club 8, 10, 71–2, 76
G20 xiii, 80, 90–1, 93–4
Gaddy, Clifford G. xv, 3, 11 Jamaica 166
Gazprom xiv, 204, 207–8, 210–12, 215, Japan 84, 93, 124–5
217–19
GEDI xiii, xv; 4, 78, 81–4, 94; Kabardino-Balkaria 186, 188, 200
Gender- xxi, 78, 83–5, 93 Kaliningrad 186, 194
Georgia 169, 209 Kalshnikov, Mikhail 71, 137, 143
Germany 84, 154, 223; East/eastern 31, 32; Kapeliushnikov, Rostislav xv, 3, 33
West 31 Karachaevo-Cherkessia 186, 188
Gimpelson, Vladimir xv, 3, 33 Kazakhstan xiv, 103, 106, 182–3, 190–2
Gini coefficient xii, xiv, 182–3, 188–91, Kemerovo 186, 220, 229–32
200 Khanty-Mansi x, xxii, 6, 214, 220, 226
GKO 62 Khodorkovsky, Mikhail 19, 26–7, 31, 76,
Glazyev, Sergey 71, 111 77, 93, 107, 163
Golos 176 Kirov 186, 188
GONGOs 178 Komi 186, 188
Gorbachev, Mikhail 139–40 Krasnodar 186–7, 188
Government effectiveness xxi, 91, 102–3 Kuboniwa, Masaaki xv, 7, 113
Gramsci, Antonio 136 Kudrin, Alexei 134
GRP xiv, xxii, 6, 182, 184, 190, 193, 223, Kurgan 186, 188
226–7, 229; per capita xii, 183–6, 189
Gudkov, Lev 170, 181, 205, 217 labour legislation 55
Guzzanti, Paolo 136 labour market: formal 4; informal 46, 49;
segmentation 9, 33, 46–9, 52, 56–7
Habermas, Jürgen 163, 171, 181 Latin America 58, 144
Hausman-Taylor xxii, 50 Latin American countries 55
Hermitage Capital 136 Lavrov, Sergei 133, 223
Hirschman, Albert O. 108, 111 Leningrad region 186, 188, 194
human rights 71, 91, 145–7, 157–8, 161, Levada Center 26, 32, 148–9, 154, 157–60,
165, 172, 176 162, 168, 170, 181
LGBTI xxii, 177
Ickes, Barry W. xv, 3, 11 Liberal Democrats 169
Ilina, Irina xv, 6, 230 limited access orders 59–60, 62, 73–4, 76
India xxi, 82–5, 93, 122–5, 180, 185 Los Angeles 85–6
informal economy 4, 57, 198 low-educated 46
240 Index
low-skilled 46 Novosibirsk 182, 186, 194, 200
Lukin, Vladimir 176
occupations 43, 149
Magnitsky, Sergei 138–9 oil and gas sector 113, 127, 227
Malaysia 84 oil price/s xi, 14–15, 17, 20–1, 30; decline
Maldives 106 in 13; high 99, 137; Urals 116, 118–19
Mariy El 186, 188 oil rent/s 5, 6, 99, 107, 183, 185
Marx, Karl 140–1, 143 OLS xxi–xxii, 50–1, 119
medium-sized enterprises 68, 88, 105 Olympics 3, 139, 205
Medvedev, Dmitry xvii, 2, 6, 80, 98, ombudsman 4, 8, 69–70, 80, 92
133, 134, 138, 144, 165, 168, 170, opinion polls 5, 147–9, 151, 155, 162, 172
176, 178–9, 209, 212 OPORA xxii, 64, 93, 97, 112–14
Melbourne 85–6 Orange Revolution 107, 132, 167
Mereu, Francesca 137, 143 Orenburg 186, 220, 227, 229–32
meta-corruption 5, 135–6, 139, 142 Ortung, Robert xvi, 6, 202
Mexico 57, 67, 84, 93 Oxenstierna, Susanne xvi, 4, 96
middle class: provincial 172; prosperous
173; Russian 5, 149, 152, 174, 195 Pamfilova, Ella 168, 176
military power 3 perestroika 166, 171–2
Ministry of Defence xix Plisitskiy, Evgenii xvi, 6, 230
Ministry of Economic Development 68, political economy 1–3, 10–12, 17, 75, 94,
70, 204 112, 204, 218, 235
Ministry of Finance 70, 113–14, 229, 233 political stability 66, 91–2, 102, 110
mobilization scenario 71 power struggle 167
modernization: blockage 7; economic profits: informal 24, 25
8, 169–70; ‘from above’ 73; defence Prokhanov, Alexander 71
21; dilemma 169; of the country 169; Public Prosecutor’s Office 71
industry 21; market 8; Mevedev’s 98, Putinisation 136
168; political 196; process 171; Putin’s
169; regime 194; Russia’s 119, 193; real monthly earnings ix, 50–1
scenarios 8; theory 146 regional financial resilience 220
modernizing: the country 67 regional inequality x, xiv, 6, 8, 182–5,
Morsi, Mohammed 135 188–92, 198, 200–1, 234
Moscow: city xiv, 226, 228, 233; region regional resilience 220, 231, 235
186, 189, 233 Regulatory Impact Assessment xxii, 59,
Mubarak, Muhammad Hosni El Sayed 137 68, 71
multiple equilibra 53 regulatory quality xi, 91–2, 102–3
MVD 138, 159 rent distribution system 19, 107
rent management system ix, xxii, 3, 11–12,
Napoleon, I 140; III 139–40; Louis 17–19, 23, 97, 99–101, 107, 110
139–40 rent: addiction xviii, 3, 7, 11, 17–18, 97,
Nashi youth organization 132 99–100; dependence 4, 17, 110
NATO xxii, 135 rent-dependent 11, 99, 100, 101, 102, 105,
New Deal ix, 4, 59, 70, 73–4 109
NGOs: independent 107, 167, 176 repression xiii, xviii, 9, 29, 128, 136–7,
Nizhnyi Tagil 20, 195 158–61, 172, 180, 208
norms: social 53, 80; and values 80, 117 resource abundance x, 6, 12, 220, 225
North Caucusus 150, 174, 188, 196–7, resource regions xiv, 220, 224, 226–7,
199–200 229–30, 231
North Ossetia 186, 188, 197, 200 resource: addiction 3, 11; rents 3, 11, 18,
North: D. 32, 95; Douglass 60, 75, 78; 28, 30, 32, 115, 209, 215
et al. 16, 60–1 RIA xxii, 68
Norway 114, 122, 125, 218 RLMS: HSE xi, 40
Novatek 204, 207, 211–12 RMS xii, 3, 7, 11, 25–6, 29, 31, 99
Index 241
Rogozin, Dmitry 71, 134 state-business relations ix, xiii, 4, 59, 62–3,
Rosneft 70, 134, 204, 207, 211 69, 73–4
rule of law xi–xii, 8, 61, 64, 72, 80, 92–3, structural transformation 171
101–5, 107, 110, 129–30, 145–7, 151, sublation 7, 129, 131–4, 139
156–7, 161, 175 sustainability x, xiv, 6, 10, 108, 202–9, 215–18
Russian Longitudinal Monitoring Survey Sweden xiii, xx, 77, 82–3
(RLMS) xi, 40 System of National Accounts xxii, 37,
115, 127
Saint Petersburg 155 see St Petersburg
Sakha 186, 188, 218, 220, 229–32 Tatarstan 186, 188
Sakhalin 186, 188, 200, 207, 216–17, 220, tax structure xiv, 231
227, 229 Tel Aviv 85
Sakwa, Richard xvi, 5, 128 temperature per capita xi, xxii, 22–3
Saltykov-Schedrin, Mikhail 55 terms of trade xi–xii, xxiii, 113, 115–17
Santiago 85–7 third state 5, 7, 129, 134–6, 138–9, 142–3
Scott Leonard, Carol xvi, 6, 230 third state 5, 7, 129, 134–6, 138–9, 142–3
Seattle 85–6 Titov, Boris 69–70, 72, 80
Second Empire 129, 139–40, 142–3 Tiumen 227, 229, 231–2
self-employment xii, 37, 40–3, 46, 52; Tomskneft 26, 31
informal 47–9 ToT see terms of trade
self-regulation 109 total factor productivity x, xxii, 5, 113,
Serbia 106 118–19
Serdyukov, Anatoly 134 trading gains xiii, 115–17
shadow economy 197 Trans-Baikal 198
Shuvalov, Igor 133 Transparancy International 95, 103–4, 108,
Siberia 22, 31, 150, 194, 196–8 112, 125
Siberian: curse 32; Far East development trust 54, 74, 130, 166–7, 176
programmes 21; governors 230; politics Tunisia 169
211; republics 200 Turkey 84, 93, 129, 135, 154
Sibneft 212 Tver 186, 194
Siegert, Jens xvi, 5, 164 Tyva 150, 186, 188, 197, 200
Silicon Valley 85–7
siloviki 3, 8, 27–9, 31, 62–3, 65, 67, 70–2, Uganda 83–4
74, 130, 132, 133–4, 170 UK xxiii, 84, 154
Singapore 86, 125 Ukraine xiv, 3, 6, 25, 48, 57, 79, 103,
SKR 134 106–7, 110, 126, 132–4, 137, 161,
small and medium-sized enterprises xxii, 167–9, 175, 180, 182–3, 190–2, 205,
4, 93, 97, 222 208–9
SME/s 10, 83–5, 97, 99, 100, 110 United Russia 130, 132, 155, 178, 196 see
Sochi 139, 188, 194, 205, 218 Edinaya Rossiya
social capital 108, 110–11, 165 Uralvagonzavod 20–1
social cohesion 108 USA xiii, 82–4, 87, 125, 154
social mobility 4, 195
socio-economic development 5, 146–7, wage: gap 49; inequality 4, 149
161, 201 value-added xii, xxiii, 5, 113–15
South Africa xxi, 84, 93, 180 Vendil Pallin, Carolina xvi, 5, 145
Soviet: command economy 101, 109; violent pressure on business 61
dissidents 170; heritage 1, 96, 109 voice and accountability xi, 91–2, 102,
St Petersburg 124, 132–3, 149, 162–3, 104–5, 107, 110
169, 174, 186, 188, 193–4, World Student Games 188
210, 227 World Trade Organization see WTO
start-up hub 85–6 Worldwide Governance Indicators xxiii, 4,
State Council 130–1 91–2, 95, 97, 102, 122, 127
state treasury bills (GKO) 62 WTO xxii, 96, 101
242 Index
Yabloko 65 Yeltsin, Boris 2, 66, 133, 17; -era governors
Yakovlev, Andrei xvi, 4, 59 212; group 209, 211; post- 222
Yakunin, Vladimir 70, 132 Yukos 19, 31, 63, 65–6, 71, 74–6, 129–30,
Yakutia 186, 188, 231–2 133, 163, 207
Yamal Nenets Autonomous Okrug xiv,
xxiii, 6, 202, 211 Zhirinovsky, Vladimir 169
Yanukovich, Viktor 180 Zubarevich, Natalia xvii, 6, 182

Susanne Oxenstierna - The Challenges For Russia's Politicized Economic System

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The Challenges for Russia’s Politicized

1  iberal Nationalism in Central

2 Civil-Military Relations in 9 Russian Television Today

3 The Extreme Nationalist 10 The Rebuilding of Greater

24 Russian Mass Media and 33 Russian Multinationals

35 The Post-Soviet Russian 44 The Fall of the Iron Curtain

39 Power and Legitimacy – 48 Business Leaders and New

53 Digital Russia 59 Religion, Nation and

Edited by Susanne Oxenstierna

London and New York

2 Putin’s rent management system and the future of

3 Between light and shadow: Informality in the

4 State–business relations in Russia after 2011:

5 Is Russia an entrepreneurial society?

6 The role of institutions in the Russian economy 96

8 From the dual to the triple state?  128

9 The basis for institutions among the population in Russia 145

10 Russia’s emerging civil society 164

11 Regional inequality and potential for modernization 182

12 Promoting sustainability in Russia’s Arctic: Integrating local,

13 Russian regional resilience: Cooperation and

2.1 The categories of rent 13

2.1 Historical GDP growth rates in countries with per capita

Susanne Oxenstierna holds a doctorate in Economics and is Deputy Research

Stockholm 31 August 2014

Organization of the book

Key challenges and conclusions

The dual state and the modernization blockage

Rent addiction and rent management is the most powerful

Deficient market institutions deter entrepreneurial activity

Rent-addicted sector blocks market reforms

New modernization or new mobilization?

The basis for establishing institutions is growing, but unevenly

NGOs grow stronger under repression

New generations and value change

Actors with an interest in promoting sustainability have

natural extraction cost

Figure 2.1 The categories of rent.

How much rent will there be in the future?

Extra rent from increase in oil and gas prices:

Extra rent from increase in oil and gas

Baseline rent: USD 1.2 trillion

Source: Authors’ calculations.

This chart on ‘extra’ rent is valuable in helping to understand how unlikely it

Annual average price

Figure 2.3 World oil prices, 1880–2013.

Growing without oil and gas?

Source: Penn World Table 7.1.

The rent management system and addiction

Railcars [left axis]

Figure 2.5 Employment in railroad rolling stock industry, 1998–2009.

overall manufacturing employment shrank by 15 per cent (1.7 million workers). In

Figure 2.6 Russia’s economic warming rate, 1925–2011. Change in ‘temperature

How can the rent management system cope?

Figure 2.7 Russia’s ‘temperature per capita’ (TPC), 1926–2030.

Figure 2.8 Total value and its components.

Categories of Rent Distribution

What? Who? Why? “The Future”

Personal wealth enhancement

1 iberal Nationalism in Central

6 The role of institutions in the Russian economy 96

8 From the dual to the triple state? 128

9 The basis for institutions among the population in Russia 145

10 Russia’s emerging civil society 164

11 Regional inequality and potential for modernization 182

2.1 The categories of rent 13

Figure 2.6 Russia’s economic warming rate, 1925–2011. Change in ‘temperature

Figure 3.2 Change in total employment, formal and informal employment, 2000–12

Figure 3.3 Informal employment, self-employment and entrepreneurial activity, men,

Figure 3.4 Informal employment, self-employment and entrepreneurial activity, women,

Figure 3.5 Real monthly earnings in formal and informal employment, men,

Figure 3.6 Real monthly earnings in formal and informal employment, women,