Hidden Problems of the Russian Economy

Posted in Russia | 23-Jul-07 | Author: Dmitry Udalov

"There are problems behind the façade of the modern village of Potemkin."

While Russia can boast of positive macroeconomic indexes, there are a number of hidden problems that should be addressed now in order not to ruin Russia’s future. The most pressing social problems include the inequality of the distribution of national income, problems in the educational and healthcare systems and the long-term demographic problem.

While the Soviet social system was not ideal and relatively weak compared to Western systems, especially the Scandinavian system of social guarantees, it still was able to provide everyone with basic means such as free education (from free kindergartens to university education), free healthcare for everyone and low-cost sports and leisure facilities of tolerable quality. Some social groups like military officers, scientists and party bureaucrats were provided with advanced social benefits. The transformation of this system to Western market standards, when people lost most of their government social guarantees, caused a wave of public disappointment. However, people weren’t disappointed in a Russian government that couldn’t provide mild, step-by-step, effective transformation; the people were disappointed in the West, which in their minds imposed its unfair social system to weaken Russia. This sentiment is quite popular among common Russians who lost a lot during the reform period and became the so-called “lost generation” – similar trends could be outlined in Eastern Germany and other post-Socialist European states.

In order to promote reforms in crucial social sectors, President Putin launched four national projects: Education, healthcare, agriculture and housing. The state invested excessively in these spheres using oil money. Dmitry Medvedev became the chairman of the council on those four national projects, which by the way provided him vast public support for performing the role of a wizard who travelled around the country handing out money. Though the idea of national projects was widely supported by many Russians, the amount of state funding is viewed as too little to change tremendously the situation in those sectors.

There is no doubt that the private sector should engage in changing the situation in the Russian economy and social life. But the state with its vast money reserves believes it wiser to keep the situation under its control. While the Russian government controls more than 50% of enterprises (in terms of the GDP they produce), Russian businesses and especially small businesses are almost suppressed by the bureaucratic machine. While the Kremlin declares one of its goals to be the development of small businesses, the situation in this field has worsened badly for the past six years. Due to the vast and useless bureaucratic control, which leads to massive red tape and corruption, Russia has become a state of bureaucrats. According to Mihail Kasianov, in 2001, 16% of Russian GDP was produced by small businesses. By 2006 this figure thanks, to wise “state support of small businesses,” reduced to 7%. Excessive government regulations, inspections, controls and constant extortion of bribes makes the life of a private businessman a nightmare until he learns to play the rules of the game.

In theory, all of these issues are to be addressed during the upcoming election campaign. But in Russia, it is doubtful that it will be done this way. One reason for this is not Putin’s system, but because of the very weak democratic tradition in Russia. The point is that one of the major aims of the election process is not only the change of power elites, but the main goal for the nation is to outline the major problems and find the best people to deal with them for the upcoming period of time. In Russian election campaigns, the major issues are not the details of healthcare plans or educational reforms, but it is all about personalities and basic, simple mottos like a “strong Russia is a united Russia” (who would question this?) and never about the concrete plans of how to deal with the major issues. To my mind this is one of the most significant dangers for the future of Russian democracy. People are not ready to outline and discuss burning issues; instead, they are hypnotized by peanut-politicians who turn elections into a big national show. That’s why a number of showmen, current pop and sports stars have joined Russian political parties recently.

Thus, Russia needs true democracy to address its economic problems and pave the way to a stable future.