Dear Mr. President,
Your September 10 article on Russia's challenges is laudably frank and incisive in its analysis and call for sweeping reform. You voiced the belief of many in Russia, and among its friends abroad, that a better life requires more freedom, diversity, and dynamism. Since you gave less emphasis to how Russia should achieve the lofty goals you set forth, we will offer a few suggestions in response to your gracious open invitation for ideas.
Denis Corboy is director of the Caucasus Policy Institute at Kings College London and was European Commission ambassador to Georgia and Armenia. William Courtney was US ambassador to Kazakhstan and Georgia. Kenneth Yalowitz is director of the Dickey Center for International Understanding at Dartmouth College in Hanover, N.H., and was US ambassador to Belarus and Georgia
Whatever path the country takes, Russia's history and traditions must be respected and built upon. You are right to eschew "permanent revolution" and seek a considered, gradual reform process. As you caution, and as Mikhail Gorbachev learned two decades ago, powerful internal forces will oppose change. Building a broad and durable constituency for reform is essential.
Your overall direction is farsighted - Russia must modernize, and in doing so deepen its ties with the advanced democracies and in some areas emulate them. Europe and America lack monopolies on ideas for reform but between their experiences and Russia's own, important lessons have been learned. The most important is the value of open debate and competitive institutions.
You are right that Russia possesses enormous advantages, including "a huge territory, colossal natural wealth, substantial industrial potential, [and] an impressive list of brilliant achievements in the sphere of science, technology, education, and art."
These strengths will enhance productivity and the quality of life if they are invigorated by economic competition built on an open economic and political environment. They will also require greater investments in health and education, a more equitable division of constitutional powers, and new ways to stimulate individual initiative.
Let us look at a few ideas as to how Russia can achieve these aims.
First, do not under-value "the habit of existing on raw materials exports, in effect exchanging these for finished products." Russia will continue to accumulate wealth faster by developing its natural resources than by any other path. But more competitive internal markets, diminished government control and subsidies, and sharply reduced corruption are vital enablers.
For example, breaking up Gazprom and Rosneft into smaller, competing units, and ending subsidized internal prices for energy, would lead to more efficient energy markets and higher productivity. The new companies would generate far more savings and investment for growth than the two lumbering and wasteful giants ever could.
A challenge is to ensure that the returns from raw materials exports do not disappear into private foreign bank accounts, and that control of the new firms does not fall victim to Kremlin intrigues. Depoliticizing the energy sector would also make Russia a more reliable energy supplier to Europe.
Second, you point to "age-old corruption that has drained Russia from time immemorial," because of "the excessive presence of the state in any remotely important sphere of economic or other social activity" and the chronic lack of initiative and technological innovation.
More "checks and balances" are the best way to reduce the heavy burden of corruption on Russian economic life. Tools for doing this include effective legislative oversight of executive power, a free press which exposes corruption and governmental malfeasance, an independent judiciary which holds corrupt officials and business executives accountable, and independent non-governmental organizations (NGO's) which have specialized expertise and can educate and rally public opinion against corrupt practices. These institutions and organizations "compete" against abuse of governmental power and against each other, lessening risks that watchdogs themselves could be corrupted.
Third, you called attention to demographic and health crises, including a declining population and virtual epidemics of cardiovascular disease, AIDS and TB. These challenges may well prevent Russia from meeting your goals for labor supply and a healthy military corpus.
Solving these problems will require systemic changes in diet, lessening the scourges of alcohol and smoking, and improving primary medical care and prevention. Demographics and disease are a greater threat to Russia than any external enemy.
Coercive, top-down approaches, as in the anti-alcohol campaign of the Gorbachev era, ought to be avoided. Building wide public support will be critical. Hence, the government should rely mainly on public education, open discussion, greater investment in the health sector, and reform in the delivery of medical care with a new emphasis on prevention.
Greater openness to immigration from poorer neighboring countries is likely to be the only way a dynamic Russian economy can meet its labor needs. It is time now to begin preparing your countrymen. A continued pattern of overt, sometimes ugly, discrimination will only hurt Russia.
Fourth, you are right to call for legislation to "ensure comprehensive support for the spirit of innovation in all spheres of public life and the creation of a market in ideas, inventions, discoveries, and new technologies." In Europe and America, generous government financing of research and development is paired with competitive, peer-reviewed mechanisms to allocate funding. Keeping politics at bay in decision-making will help Russian science.
Equally important is an economy which can quickly apply the fruits of research and development in innovative ways. For example, nanotechnology researchers probably never dreamed their labors would lead so quickly to a product with such world-wide market penetration as the iPod.
Fifth, your call for "competition among open political associations" is vitally important. Independent political parties and free and fair elections would go a long way to enhance political stability, and lead to governments which expose and prosecute corruption irrespective of the political influence of perpetrators. This is a great strength in the European and American political systems, buttressed by frequent alternations in political power.
Some in Russia equate competitive politics with the "chaos" of the 1990s, and even the "Time of Troubles" four centuries ago. But history shows that political competition, as it develops, tends to marginalize extremist views. This is sorely needed in Russia, as the wave of neo-Nazi criminal acts shows. Competitive politics are what makes advanced democracies so stable. Russians are well educated and more than ready for democracy.
Finally, you speak of doing "everything possible to normalize the life of people in the Russian Caucasus." Calming tensions there will require a secure environment, political openness, and better economic opportunities. Multi-candidate elections, security without abuses, and improved agriculture will help a lot. Moscow city authorities should crack down on the harassment of people from the Caucasus and Central Asia who sell in farmers markets.
These are times of change in the world economy. New creative and competitive energies will be released, and uneconomic activities will be punished by markets. Economic and political reform can position Russia to take stronger advantage of the new opportunities.
America and Europe not only wish Russia well in its reform effort, but believe they have a stake in its success. A secure and prosperous Russia will be less likely to have conflicts with its neighbors, and be a valued economic partner and source of innovation and ideas from which the whole world will benefit.
No one in the journalist world seemed to have had any warning that Medvedev would be gripped with a "sudden passion" to write. There was no mention in the morning papers that the article was going to come out. But several Internet publications immediately reacted, and also posted the article on their sites. Its appearance was picked up soon afterwards by the democratic radio station "Ekho Moskvy".
The most surprising thing was that Medvedev's article was only posted on the official presidential site http://www.kremlin.ru/ at midday. All this combined to make it look as if the appearance of the text on the Internet was spontaneous, which gave an aura of sincerity to Medvedev's address to Russian citizens.
But what was behind all this? What did the text actually contain?
As I am finishing a book about the history of Russian reforms since the time of Mikhail Gorbachev (since the mid-1980s) at the moment, it all felt very familiar. It was as if I'd suddenly gone back a quarter of a century, to the time of my youth, of naïve hopes, empty shops and the rusting iron curtain.
I don't know whether the similarities are obvious to young Russians, who don't remember the events of 1985 very clearly, or to my contemporaries, for whom the events are not fresh in their minds. But it seemed to me that Medvedev's text might almost have been written at the time of Gorbachev's perestroika.
I should remind you that it was then that the leader of the Soviet Communists Mikhail Gorbachev began tentatively to undermine the system that had existed since Lenin's day, and remove conservatives from the political leadership of the USSR. In 1985, it seemed that he was only trying to improve the effectiveness of the Soviet system, while with every year changes took place which turned this system into its opposite - into a society with elements of a market and democracy.
But let us return to Medvedev. The first important point his article makes is to admit that mistakes have been made. This is a cautious affirmation, one that does not undermine the foundations of the system. Medvedev points out the problems that have been revealed by the crisis, the "drop in production that is greater that in other economies (my italics - DT) during the present crisis. The excessive fluctuations of the stock exchange. All this proves," the Russian president concludes, "that we certainly did not do everything that was necessary in previous years. And we certainly did not do everything correctly."
Many Russian readers probably did not realize that in saying this he was taking issue directly with Prime Minister Vladimir Putin, and with the report of the Russian government on results of activity for 2009. Putin, who presented the report at the Duma on the 6th of April, declared: "A severe slump is being experienced by practically all industries of the world economy. In some places, things are better, in some they are worse, but on the whole the situation in the Russian economy is fundamentally no different (my italics - DT) from world tendencies".
In Russia, official Kremlin propagandists constantly emphasize the fact that Medvedev is Putin's successor to the position of president, that he is his younger comrade, and that there can be no disagreements between the two leaders. However, Medvedev's article demolished this notion. And significantly, this is taking happening thanks to an initiative taken by the president himself, and not during a press conference or interview, when things might get said in the heat of the moment which shouldn't have been.
Medvedev is not setting out to confront Putin directly. But at the start of perestroika Gorbachev did not directly oppose his predecessors, either. He was giving the Soviet intellectuals, who were used to picking up on Aesopian allusions, the chance to fill in the blanks for themselves.
Medvedev not only discussed the economy in his article, but also political problems. He noted that "democratic institutions have on the whole been formed and stabilized, but their quality is very far from ideal". This also looks like an attack on Putin, who - even if ironically - in one interview called himself such an absolute and pure democrat that since the death of Mahatma Gandhi he did not even have anyone to talk to.
Medvedev's assessment of the state of Russian democracy is very similar to the early theses of Gorbachev, who showed his confidence in the correctness of the socialist democracy, but proposed to strengthen it. In the spirit of Lenin, so to speak.
Medvedev is essentially saying directly that in future, Russia must move to a parliamentary democracy, where the "leaders in the political struggle will be parliamentary parties which regularly replace each other in power". He is practically repeating the theses of the democratic opposition. But where this is something that the opposition wants to happen today, for Medvedev it is a task for the future. For the moment, according to the president, we must be satisfied with the fact that "political parties have received fresh opportunities to influence the formation of executive power in federation regions and municipalities".
We should remember that under Gorbachev, democratization also began in 1988-89 with the construction of a very unusual system, in which elections were not actually equal, secret and direct, as is customary in modern democracies. That is to say, Gorbachev was prepared to experiment with democratization, but he was afraid to start building a real democracy right now.
It is characteristic that Medvedev is categorical about one thing: we cannot return to the "democratic 1990s". In this, he agrees with Putin, who in recent years has said again and again that in the 1990s capitalism established itself in the country under the guise of democracy, serving its own selfish interests, and also those of its foreign (primarily American) sponsors. Medvedev does not dare to make a drastic break with his older comrade.
In Gorbachev's early years, he too rejected a return to capitalist democracy. The feeling was: why should we move backwards? We will do everything better than under capitalism, we will build socialism with a human face.
Another feature very characteristic of Medvedev is the way he declares a new way of thinking in international relations. He talks of the need for rapprochement with western democracies, something that Putin has not discussed seriously for many years. Medvedev also stresses that "petulance, arrogance, insecurity, mistrust and especially hostility must be eliminated from Russia's relations with leading democratic countries".
As Vladimir Putin has essentially been responsible for creating the parameters of Russian foreign policy since 2000, and foreign ministers have simply been the obedient followers of his policy, words about petulance and arrogance can only apply to Putin. And indeed, some Russian analysts have noted that Putin's behaviour betrays the marks of his difficult childhood, and his unwillingness to forgive insults by other boys, a subject I have written about in detail for openDemocracy.
Another view of Medvedev's: "We must be able to interest partners, and involve them in joint activity. And if we need to change something in ourselves, get rid of prejudices and illusions, in order to be able to do so, and then we must do so." In the mid-1980s, the idea of the need to change something in ourselves was first expressed not by Gorbachev, but by Boris Yeltsin in his speech in the 27th Communist party congress. This was very much in the spirit of Gorbachev's perestroika.
Now let us try to compare the specific picture of the changes which Medvedev is now announcing with the changes Gorbachev was announcing a quarter of a century ago.
Right at the start of perestroika in the USSR, the issue of combating drunkenness came up. Quite recently, it came up once again, and Medvedev gives it pride of place in his article. Under Gorbachev, the war on drunkenness was virtually the only large-scale campaign of his first two years in power.
But there is also another important similarity between Medvedev's approach and that adopted under perestroika. People do not remember that well today that along with the anti-alcohol campaign, the head of the Soviet government Nikolai Ryzhkov did his best to speed up socio-economic development. And the way being proposed was by developing machine-building, i.e. through technology alone. It was only in June 1987 that the issue of changing the economic system was raised. Before that what we mainly heard about was the wonderful breakthroughs that would be achieved by advanced technology combined with sober workers.
And now Medvedev has outlined the five strategic vectors of economic modernization. Typically, he says nothing about the issues that are being discussed by economists. Medvedev, as a new-wave technocrat, simply paints a picture of a bright future where Russia will become a leading country in all key spheres of high technology: new types of fuel, nuclear technology, information technology, advanced satellites, and breakthrough in creating medical equipment. But how are we going to achieve all this, given the raw materials focus of the country, and our dependence on world oil prices, which I have written about in detail in another of my articles? Medvedev does not offer us any insightful discussion about this.
As we may recall, in the 1980s Gorbachev meant to raise Russian automobile construction to a world level by developing the Volga automobile factory (VAZ), without any foreign investments and equipment. To this day, VAZ produces very poor cars that are inferior to western models. Medvedev also forgets about the poor quality of the automobile industry, and immediately talks about more advanced technology.
And in conclusion. How did Soviet citizens see the structure of society during the time of perestroika? On the one hand, there were supporters of perestroika, and on the other there were opponents. This naïve approach pitted good against evil on different sides of the barricades. All the officials and appratchiks were declared to be opponents of perestroika, and the entire people headed by Gorbachev were declared to be supporters.
What does Medvedev write? "People will try to interfere with our work. Influential groups of corrupt officials and "entrepreneurs" who do not engage in any actual enterprise." Once more, we can see an attempt by the political leader to identify himself with the people, and marginalize his opponents.
Even yesterday it was perhaps still hard to imagine to what extent Medvedev would strive to copy Gorbachev's path. He was afraid to oppose Putin, and only took symbolic steps to consolidate his popularity in intellectual circles - a subject I have also written about for openDemocracy.But today Medvedev's intentions are clear. There is, however, one important differrence between the positions of the two men. Gorbachev was put forward by the Soviet leader Yury Andropov, who was the head of the KGB for a long time. Gorbachev only became the leader when Andropov died. There was nothing to stop him from breaking with the policy of his dead predecessor. But Medvedev rules Russia in tandem with Putin. How can policy be changed in this situation?
The obliging bankers immediately responded to the criticism. Two of the country's major financial institutions - Sberbank and Vneshtorgbank (VTB) - announced that they were prepared to reduce their interest rates. At least, for borrowers they described as strategic.
Almost every week since the beginning of spring I have been going to our dacha.
I take the metro, the suburban train, the bus and then walk for 10 minutes. It takes me just as long to get back.
In the spring Dmitri Gaev, the head of the Moscow metro, said that 400,000 fewer people are now using the metro every day because of the crisis. 400,000! But I've asked around and no one thinks the metro is less crowded. I don't think so either. At 6 p.m. last Friday at Komsomolskaya metro station, I was surrounded by a crowd of sweaty, wild, hurrying, tipsy, half-naked, noisy people with rucksacks on their backs. These were not people who had been put off taking the metro by the crisis.
I'm always interested to know how the dry statistics in economic reports relate to real life. In Estonia, for example, GDP fell by more than 15% in the first quarter of this year. And what happened? Did cafes and bars close down? Did prices rise? Were there fewer tourists? I was in Tartu at the end of April and didn't notice anything of the kind.
As I was setting off for the dacha, I wondered what effect the economic crisis has had on life in the suburbs. Russian Railways assert that passenger flows in the first months of 2009 dropped by 20-30%, but this is not obvious in the overcrowded suburban train. What I have noticed is that for the first time I can remember ticket inspectors have appeared in trains from Moscow to Golutvin. When I was a child my friends and I would go to Zolotovo to swim in the gorges and I do remember that there would occasionally be some obscure, unshaven guys who wandered up and down the aisles of the train, but no one ever fined us. Later on, even these disappeared: when turnstiles were installed at central stations the Russian Railways turnover evidently increased to such an extent that checking passengers' tickets between small stations became completely unnecessary.
But now - in both directions - we have people in special jackets with badges of the "Central Suburban Rail Company". Almost no one objects to them, not even people without tickets, who get a special receipt, which gets them through the turnstile, if necessary.
The Central Suburban Rail Company is a new player in the railway transport market. It was created over a year ago as a subsidiary of the state monopoly, Russian Railways, and operates using their staff and rolling stock. Ticket inspectors may have appeared over the last year, but the company's website is still not finished. It bears the information that "the company serves passengers on routes extending over XX kilometres, and carries over XX passengers every day." No, this doesn't mean 20 kilometres or 20 passengers. It means that the company itself doesn't know how many passengers it carries.
Or here's another difference in the "anti-crisis" journey out of Moscow: all the fences used to have graffiti in black paint saying things like "Azeris, get out of Russia", or "Believe and you will be saved". Now the graffiti are more romantic: "Crisis, war, revolution". All in the same black paint.
When I get to the dacha, I notice another change. Our dacha cooperative "Torfyanik", which means peat moor, used to be looked after by a family of Armenians. Now we have Tajiks. What does this mean? An escalation in the battle between ethnic clans for construction jobs in the Moscow region? A drop in the demand for building fences, showers, toilets and garden paths? No, it turned out to be much more prosaic: the Armenians have gone to "Orbita", the cooperative next door, where the pay is better...
My father arranged with some of the Tajik guards to fix his roof. First the bargaining, then they reached an agreement and walked around the house, discussing the details in broken Russian. My father asked them: "If you've all come to Russia, who's left to build houses in Tajikistan?" "Who do you think?" the Tajik replied. "The Chinese. They're cheap labour".
According to official data, immigrants from Tajikistan send $1.5-2 billion home every year (the unofficial figure is much higher). Along with the export of cotton and aluminum, income from Tajiks working abroad forms the basis of the country's budget. The revenue from these migrants could drop by at least a third in 2009, according to forecasts by the Tajikistan government. But it obviously won't be because of one individual dacha cooperative...
15 years ago there used to be flower and vegetable beds at the dachas, but they were dug up about five or six years ago and grass was planted. Now it needs to be mown. By 2009 everyone in the area had bought lawn mowers, and mowing the grass became a popular occupation. "We came here yesterday, and the grass has grown up so much," my father complained, as he turned the lawnmower on again. The neighbour to the left was also doing some mowing; he and my father were competing. The neighbour opposite was envious, as he only has a manual trimmer. Next year he's thinking of buying a lawnmower... Out of interest, I looked on the internet to see how much they cost. A trimmer costs from 3-23,000 rubles (US$ 100-800). A lawnmower from 3-46,000 (US$ 100-1500).
But even such expensive equipment is not the dacha owner's biggest outlay. The neighbour with the trimmer was still building his house. The other neighbour was finishing off his garage. My father was fixing his roof.
Do I need to tell you that the market selling building materials next to our dachas has not closed down because of the crisis? Judging by the way sales are going, it's not exactly poor either.
Or was that just my impression? Again official statistics tell a different story. According to the Moscow Region Statistics Board, concrete production fell by 28.3% in the first quarter of 2009 by comparison with the same period last year. The production of pre-cast concrete structures and units dropped by 41.5%, and of bricks by 47.2%. This means that building materials markets should have only their old supplies to sell. But there is plenty of selling going on - I can see it for myself.
I also see crowded dacha plots. 10 years ago I used to spend all my free time at the dacha. Village life was dying out there, along with the old people. Muscovites increasingly came to Torfyanik only at weekends, to make merry with their friends in a natural setting.
Now everything has changed. Boys and girls run up and down the streets again, and kids ride their bikes. You can even hear babies crying in the houses at bath time. The smell of cabbage soup or shchi wafts between the houses, mixing with the smell of smoke from barrels of burning rubbish.
Can the reawakening of dacha life be explained by statistics? Yes it can: travel agents' figures show that tourism to foreign beach resort destinations has fallen by 25% in 2009. So where did all these people go? To dachas, of course. To their forgotten mothers-in-law, grandfathers, friends from childhood, or even to rented houses...
Is this logical? Of course. But prices for renting dachas are not only not increasing, they are actually falling, in line with the overall trend in the property market. Some experts quote a 30% drop, while others say it's 20-25% compared with last year. Supply on the market continues to exceed demand... so many dachas must be standing empty. The only thing is I haven't seen any.
And last of all. Upstairs at my dacha I have a small library of "second wave" books. These are books I would never read in Moscow, but which I feel are important. Soviet classics, generals' war memoirs and old copies of the literary journals Novy Mir and Roman-gazeta....
I remembered about these books as I was leaving the dacha. I looked at the shelves, and decided to take Engels' "Anti-Duehring" to Moscow. After all, the statistics tell us there's a crisis going on. And soon it'll be the second wave.
After Putin's announcement on June 9 I was tempted to place another bet that accession would not take place either this year or next. However, Medvedev's recent intervention in the debate makes it far more likely.
Strictly speaking, Vladimir Putin's declaration that Russia would now be applying for admission to the WTO as part of a Customs Union with Belarus and Kazakhstan could hardly have been described as anti-liberal or harmful to the development of Russia's international relations. On the contrary, it was very much in tune with the world tendency towards strengthening regional trading links, as opposed to multilateral. The best example of this is the European Union. The creation of the WTO stimulated the growth of regionalism and the failure of the Doha Round further accelerated this process.
Why then has Prime Minister Putin's stance found no support among the experts, or at least those who do not have any special interests? The answer is that stressing regional links with Kazakhstan and Belarus to the detriment of developing multilateral links within the WTO is not actually in Russia's interests. Indeed it sworks against them.
The main victim of this decision will be the diversification of the Russian economy, the need for which has been discussed for a long time and in the highest places. To be more precise, not the diversification, but its frail green shoots. What is implied by diversification is the increase of the non raw-material sector in Russia's output: the priority development (or, in current conditions, the slower decline) primarily of the manufacturing industry and the service sector, as these are the areas where we can compete on world and domestic markets. In order for a sector to grow faster (or to slow down the decline) priority needs to be given to investment of both financial and human capital. What is needed to make a sector competitive is investment in three areas: new technologies, more qualified workers and management personnel. Omitting even one of these categories will render the others meaningless. Investing in general and professional education and new business schools is first and foremost a matter for Russian investors, but only foreign investments will enable Russia to acquire new technologies.
It seems to me that no right-thinking person in Russia, whatever their economic or political affiliation, can hope that new technologies will appear in Russia without foreign investment. But the last 50 years have revealed something else , which is less well known to the general public: the volume of direct foreign investment between two countries is proportionate to the volume of trade between them. Russia will acquire new technologies as she develops her trading relations with those partners who have those technologies. As with everything in economics, this does not guarantee the immediate arrival of new technology in the country, of course, but it significantly increases its probability.
The message of the government's new rhetoric would appear to be that Russia is banking on Kazakhstan and Belarus to provide new technologies. Unfortunately I can't recall anything particularly high-tech or competitive in the economies of these countries, which could contribute to the diversification of Russia's. But volumes could be written about new technologies developed by other countries, with whom trading relations have today been downgraded.
There are no grounds for hoping that the loss of investment potential will be compensated by Russian manufacturing successes in the wider reaches of the Belarusian and Kazakh markets. The industrial structure of these countries are much too similar - they have, after all, sprung from a single Soviet stem - and not one of the members of the future Customs Union can boast conditions favourable for business.
So from an economic point of view the idea of a custom union with Kazakhstan and Belarus should not regarded as a priority for Russia's trade policy at all. Strengthening Russia -EU trade relations and WTO accession are the instruments of trade policy that would help diversify Russia's economy and ensure its stable development.
But barely had we finished reading this article when there was more bad news. In April the Federal Service of State Statistics' index of industrial production showed a further deterioration, a fall of 16.9% by comparison with the previous April. This was the most significant fall since February 2009 - 16%. It was also the biggest fall since production fell by 18% in 1994. Between January and April industrial production fell by 14.9% by comparison with the same period in the previous year. Although March saw a growth of 11% over February, there was a further fall in April of 8.1%.
Mining production figures remained unchanged between March and April at 11.8%. There was a slight increase in the production and distribution of electricity and gas (by 0.3% to 2.6%).
As for manufacturing, there was a 20.8% fall in March by comparison with the previous year, and the April figure was 25.1%. The headlong downward spiral in manufacturing has continued and has spread to the production of gas and steam turbines, which fell in April by 60.1% and 90.1% respectively.
A preliminary report on fluctuations in GDP from the Russian Ministry of Economic Development for the first quarter suggests that there has been a decline of 9.5%. It is clear from this report that Russians have not yet felt the full force of the crisis. Real incomes and salaries have only fallen by 2.3%. Turnover in the retail sector has decreased by even less (1.1%), and activity in the service sector has fallen by 1.5%.
However, the prospects are far from rosy. In previous years the main engines of growth were wholesale and retail trade, vehicle repairs and motorcycles, household goods and items of personal use. In 2009 the picture will be very different. The Ministry's figures show a decline of 6.1% in value added in the wholesale and retail sectors.
Thus, a review of the wholesale sector leads to the conclusion that the current comparatively comfortable situation in the retail and service sectors will not last long. The situation in retail did not look so bad in the first quarter of 2009 because of the rush to stockpile durables in expectation of worse times to come.
The situation in the labour market is serious. According to the International Labour Organization there were 7.5 million people unemployed in March 2009. This represents 10% of the economically active population. Furthermore, as the Ministry report shows, the number of unemployed is likely to increase if people who are now working part time, on down time or taking unpaid leave proceed to lose their jobs. As of 18 March this year the total number of such employees was 1.2 million.
According to Evgeny Gontmakher, head of the Centre for Social Studies at the Russian Academy of Sciences, unemployment may reach 10 million by the end of 2009. This would mean that one in seven Russians of working age would be unemployed. But some officials are more optimistic. On 30 March Deputy Prime Minister Alexander Zhukov said that fewer people were signing on and that peak unemployment had passed.
Any review of the Russian economy and its problems, particularly employment, should bear in mind that the socio-economic situation of the country's many regions is very different. There are also many so-called "mono-industrial cities", where a single major enterprise provides employment to a large section of the population and life in the city depends on it.
"Bad debt" is often cited as one of the most serious threats in Russia at the moment. Indeed, Finance Minister Alexei Kudrin has suggested that a sharp upturn in non-performing loans might lead to a further deterioration in the economy. The Ministry's report shows that in the overall volume of loans to non-financial organisations the percentage of outstanding debts has increased from 2.1% on 1 January to 3.1% two months later - though Kudrin gave a much higher figure at a meeting with bankers.
This discrepancy was later explained by the Minister himself in an interview with the Russian newspaper Vedomosti on 22 April. "In Russia non-performing loans include defaults on specific payments. But in the West the methodology is more complex. To bring the Russian figure into line with international standards, it should be multiplied by 2.5". This means that as of 1 March the figure for credit defaults in Russia was 7.75%. Pyotr Aven, president of Alfa Bank, one of Russia's largest private banks, forecasts that by the end of this year this figure may reach 15-20%. Similar predictions have been made by the former deputy chairman of the Central Bank of Russia and the present deputy president of the Association of Russian banks Alexander Khandruev. The latter believes that a level of "bad debt" of 10-15% is critical for the stability of the entire Russian system.
The second threat, about which there was a lot of discussion last winter, concerned the foreign liabilities of Russian companies and banks. This is now mentioned much less often. But the threat has not gone away. The Minister for Economic Development and Trade Elvira Nabiullina announced on 19 March that the external liabilities of Russian companies and banks had increased from $175 billion to $500 billion in the last three years.
Russia's foreign debt payments for 2009 will amount to $152 billion. Companies and enterprises account for $86 billion of this. Russian banks owe another $60 billion. The foreign debts of enterprises and banks comprise liabilities on both loans and bonds they have issued. Many commentators believe it highly likely that Russian companies and banks will look for ways to restructure their debts.
At the end of May the head of the Russian Central Bank Sergei Ignatiev said that there would be no fall in the upper limit of the dollar-euro basket, which had been set at 41 rubles. On the day he said this it was fluctuating around the level of 37.7 rubles.
Experts warn of the likelihood of further devaluation, as a result of which the dollar-euro basket could rise to 45 rubles. From July of last year to February of this year, the ruble-dollar rate fell by over 50%, after which the ruble began to pick up again. As a result, the ruble is now 35% lower in value than it was last July.
Russia is nevertheless experiencing a period of temporary stability at the moment. The price of oil has risen to more than $60, and stock indexes have doubled. The question is how much longer this period of grace will last.
The new year in Russia
Russia's new economy
Russian rights at the crossroads
Beyond the gastarbeiter: post-Soviet migration
Madeleine Reeves (Manchester University, UK) presents the other side of post-Soviet migration.
Russia's year of elections
Women, tradition and power in the North Caucasus
Privatizatsiya, twenty years on
Russian economy: trying to please people doesn’t help, Dmitry Travin
Privatisation, but no private property, Andrei Zaostrovtsev
Is corruption in Russia's DNA?, Pyotr Filippov
Russia’s crony capitalism: the swing of the pendulum, Vladimir Gelman
Russian reforms, twenty years on. Introduction to the series, Dmitry Travin
Russian economy: trying to please people doesn’t help, Dmitry Travin
Privatisation, but no private property, Andrei Zaostrovtsev
Is corruption in Russia's DNA?, Pyotr Filippov
Russia’s crony capitalism: the swing of the pendulum, Vladimir Gelman
Russian reforms, twenty years on. Introduction to the series, Dmitry Travin