Is neoliberalism applicable to Russia? A response to Ilya Matveev

Attempts to call the Putin regime “neoliberal” get one fundamental thing wrong: capitalism doesn’t exist in Russia. Русский

Anastasiya Ovsyannikova
20 May 2016

Moscow city. СС BY-SA 4.0 GURken / WikiMediaCommons. Some rights reserved.oDR recently published an article by Ilya Matveev, “Russia, Inc”, which positioned neoliberalism as an organic part of the Putin regime. The intense discussion that followed brings us back to two central questions: what is neoliberalism, and can it describe what is happening in Russia?

Here, I won’t criticise certain elements of Matveev’s article. Rather, I will use Matveev’s article to illustrate that “neoliberalism” is not so much a technical term, as a marker of an ideological agenda. For me, using this word reduces our understanding of the nature of political and social realities of contemporary Russia.

So what is neoliberalism, anyway?

The word “neoliberalism” was coined in 1938 by Alexander Rüstow, a German sociologist and economist, who suggested it as an alternative to the traditional laissez-faire type of liberalism. Neoliberalism was thus initially understood as a kind of “third way”, a combination of capitalism and free trade with state intervention in the economy and the provision of social welfare.

It was the ideas of Rüstow and his fellow-thinkers that were to a large extent behind the “German Economic Miracle”, the post-war reforms carried out by Ludwig Erhard. At the same time, critics of Rüstow from the right, especially Ludwig von Mises, insisted that Germany’s success was a result of the free market component of the reforms, in particular the rejection of centralised planning and price deregulation, and opposed the dirigiste elements of the neoliberalism. The word itself, by the way, failed to catch on.

“Neoliberalism” reappeared in the 1970s, with an already rather different meaning. Critics of Chile’s economic reform began to use it, and to this day — any leftist opponents of pro-market economic politics. Various people attempted to appropriate it for themselves, but without success.

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Alexander Rustow (1885-1963). Source: http://www.ruestow.org.Political scientists Taylor Boas and Jordan Gans-Morse carried out a meta-analysis of 148 articles in academic journals published between 1990 and 2004, and their conclusion was that, “the term is often undefined; it is employed unevenly across ideological divides; and it is used to characterize an excessively broad variety of phenomena.” Rajesh Venugopal of the London School of Economics has also remarked that anyone and everyone is happy to talk about neoliberalism — apart from professional economists.

For instance, the word is largely absent from the vocabulary of Paul Krugman or Josef Stiglitz, who are well known for their dirigiste views. As Venugopal writes: “Neoliberalism serves as a rhetorical tool and moral device for critical social scientists outside of economics to conceive of academic economics and a range of economic phenomena that are otherwise beyond their cognitive horizons and which they cannot otherwise grasp or evaluate.”

Given that defining the term neoliberalism is impossible, I’ll rely on a dictionary definition so we can continue our discussion: “a modern politico-economic theory favouring free trade, privatisation, minimal government intervention in business, reduced public expenditure on social services, etc.”

Ilya Matveev uses the following definition, or rather, description: “Over the course of the post-war decades, neoliberalism has transformed from a marginal ideology into a powerful force, changing the rules of the game in the global economy. Neoliberal reforms include cutting barriers for the movement of goods and capital; monetarist economic policy oriented towards fighting inflation; moving from the state’s direct participation in the economy towards arms-length regulation; and, finally, privatisation not only of state companies, but also certain functions of the state, foremost in the social sector.”

Even with the help of elastic terminology, you can’t present Putin’s economic policies as “neoliberal”: reality stubbornly refuses to fit to ideology

Here we need to turn our attention to Matveev’s particular conceptualisation of history. Not only the history of the word “neoliberalism”, which has taken on new meanings over the post-war decades. But contemporary economic and political history. As Matveev sees it, there exists, or existed some kind of original, primordial model of the role of the state in the economy, which neoliberalism is now transforming: “moving from the state’s direct participation in the economy towards arms-length regulation”; “privatisation of state companies and certain functions of the state in the social sector”.

In reality, the direct participation of the state in the economy, the very existence of state-owned companies and the size of the welfare state (all of which the market reforms of the last few decades were designed to shrink) were the fruits of either earlier interventionist experiments such as America’s New Deal and the British post-war consensus, or effectively socialist ones from Nazi Germany to Allende’s Chile and including the former Soviet bloc.

In other words, however much you criticise liberal reforms, it is more correct to consider them not a deviation from the “preordained order”, but a return to it. But even with the help of elastic terminology, you can’t present Putin’s economic policies as “neoliberal”: reality stubbornly refuses to fit to ideology.

Call it what you like, it still leaves a bad taste

Matveev structures his article chronologically, dividing recent Russian history into periods of five to ten years (the 1990s to the early 2000s; 2003-2008; 2009-2016), with each section giving an outline of the political context and the corresponding “wave of neoliberal reforms”.

If, however, you look closely at how Matveev describes these “neoliberal reforms”, you will find very few concrete changes in terms of economic liberalisation, and this makes perfect sense — there weren’t many. Let us for a moment move away from polemic and admit that, for Matveev, ideology is often more important than facts.

A clear example of this is the quotation from a recent interview with the poet Timur Kibirov, who Matveev calls the “hero of Russia’s liberal intelligentsia”: “I wanted to believe that he [Putin] would be the Russian Pinochet, he’d squeeze and cut freedoms, but quickly carry out liberal economic reforms. Our freedoms are cut down, reforms haven’t been carried out.” Kibirov did say this. But this excerpt is preceded by another: “At the start of Putin’s rule I had illusions, completely shameful and stupids ones, for a very short period of time”. The poet’s public confession is thus turned into a expose of the liberal intelligentsia’s love for authoritarianism.

In Russia, the state is about something completely different. The government is dependent on neither the voters nor the taxpayers, nor indeed elite groups, as was the case in the 1990s

Writing, for example, about the economic reforms of Putin’s first presidential term, Matveev devotes much more attention to “the class interests of the bourgeoisie” rather than a simple list of these reforms (let alone any attempt to analyse them). At the same time, he throws in a statement of astronomic scale: evidently the reason for Russia’s drift towards authoritarianism was, in fact, its neoliberal reforms. Putin had to restrict the Russian Duma precisely in order to carry them out.

The next section, devoted to the period of rapid growth in the mid 2000s, describes “state capitalism à la russe”. On the one hand, the transfer of economic control, and more specifically the state sector, to the siloviki (people with a background in the security services who were close to Putin) and, on the other, a steep rise in funding for the social sector.

Of the few economic reforms that were more or less carried out, Matveev only mentions the “monetisation of welfare benefits”, but this doesn’t stop him from characterising the general trend as “neoliberal as before”. Admittedly, here Matveev formulates what he obviously believes to be his key argument: that Putin’s Russia is a corporate state. He obviously sees this real takeover by the state of the monopoly on legitimate violence as the triumph and apotheosis of “the neoliberal idea”; we shall return to this interpretation below.

In Matveev’s section covering the last few years, the “neoliberalism” that he attributes to the Russian government is reduced, on the one hand, to unrealised plans, projects filed away in ministerial offices and official statements of economic guru Mikhail Dmitriev, long since banished from the corridors of power for his criticism of the government’s economic policy. And on the other hand, it is the result of cuts in public spending on the social sector, in particular the notorious “May directives” of 2012, which gave public sector workers steep salary rises at a heavy cost to the education and health sectors. According to Matveev, these were “the result of the same neoliberal strategy” and “reprisals against the public sector” as part of “austerity economics”.

Matveev’s concluding section boils down to a claim that “Putin’s rule was not a radical market experiment” and that business suffered from the attack of the siloviki, but that nonetheless “neoliberal reforms have been and remain an organic part of the regime”. What arguments does he present to back these ideas?

He has three: firstly, a refusal to go back on the privatisation of the 1990s; secondly, the emergence in Russia of dollar billionaires (who did not exist in the 1990s) and thirdly, his constant repetition of the word “neoliberal”, which appears 40 times in the text.

What reforms went through and what did they change?

After deconstructing this “bottom line”, we are left with the following economic measures taken by the Putin government that Matveev sees as neoliberal.

In Matveev’s first period these were the 2002 Labour Code, the flat income tax rate, the reduction in corporation tax and pension reform. In “the Golden Years’ of 2003-8 there was ‘the monetisation of welfare benefits” and the creation of “Russia, Inc.” And in the years between 2009 and the present we have the introduction of insurance based health services, cuts in public spending and the “May Directives” with the changes they brought about in the education, health and social security sectors. Even if we were to agree with Matveev that these reforms were carried out as was intended and that they had a “neoliberal” character, they still don’t amount to much for a government that has been in power for 16 years.


July 2001: people picket the passing of Russia's new Labour code. (с) Vladimir Fedorenko / VisualRIAN. All rights reserved.But let’s agree: the tax reforms of 2001 were carried out and they did represent a liberal trend (the previous progressive income tax scale had kicked in for incomes of over 200,000 roubles a year, which at the exchange rate of 1 January 2001 amounted to less than 600 US$ a month). If we stick to the confines of Matveev’s narrative, that was basically it. It’s funny that Matveev himself, in a reference to the optimisation of the public sector quoted from an article by Mikhail Dmitriev and Aleksei Yurtaev, failed to notice figures included in that article on the implementation rates for the “Strategy-2010” measures at the heart of many reforms of the 2000s: 39% for modernisation of the economy and governmental reforms and 31% for modernisation of the social sphere.

The 2002 Labour Code, which replaced the previous Soviet version designed to operate in a planned economy, alas, did not lead to any liberalisation of labour relations in Russia. Despite the turbulent history of its adoption, it was a case of much ado about nothing. It did indeed reduce the power of the trade unions, but strengthened workers’ rights — obliging employers, for example, to provide a written contract and making them financially responsible for delays in paying their employees as well as outlawing payment in kind. Workers also benefited from being able to take paid holidays after only six months in a job, rather than eleven as before, and the working week was cut from 41 to 40 hours. The new code did not make it easier to dismiss workers either, although some leeway was introduced for heads of organisations.

The pension reform has now been overturned in favour of a return to a pay-as-you-earn system — this is a well known fact. Health reforms have been halted before even getting off the ground

As regards the monetisation of welfare benefits, it is worth remembering that, according to prominent social economist Lilia Ovcharova, before this reform, 27% of the population were in receipt of one concession or benefit or another. Moreover, fewer people from the poorest sectors of the population received the most important welfare payments. Only 28% of those households classified as poor, for example, had reduced rental and utility bills, as opposed to almost 50% of more financially typical households.

In addition, 70% of the new benefits and concessions introduced in post-Soviet Russia were not actually being financed. So reform was not only due — it was overdue. But it was badly implemented: Ovcharova found that only four administrative areas had embraced monetisation fully; six, including Moscow, had rejected it completely. The reform also caused a wave of protests that were only halted after a rise in pensions and the introduction of national social service projects, made possible thanks to the meteoric rise in oil prices mentioned by Matveev.

The pension reform has now been overturned in favour of a return to a pay-as-you-earn system — this is a well known fact. Health reforms have been halted before even getting off the ground: the current system has nothing in common with insurance based health services elsewhere.

As for attempts at privatisation, economist Oleg Buklemishev finds them laughable: in 2010-2014, the Russian state received only 20% of the revenue it was due from privatisation and in 2015 only 5%, and even today, during a severe budget crisis, the proceeds from privatisation will provide only 1% of GDP. Ilya Matveev, to give him his due, does mention the failure of privatisation plans, although in his view this is for some reason more evidence against the regime for its “neoliberalism”.

We can share Matveev’s disapproval of the effects of the “May Directives” on public sector salaries. But his hypothesis — that the populist nature of these measures was a mere screen to hide a strict austerity policy — does not fit the figures. In March 2012, when Putin “won” the presidential “elections”, oil was priced at almost $120 per barrel; by May it had, admittedly, fallen to $98, but in June it had risen again to $115 and remained in the $110-115 range until August 2014. And even at a press conference in December 2014, when the oil price had crashed below the $53 mark, Putin pronounced his famous phrase about the economy rebounding within two years, such was his attitude to balancing his budget as it strained at the seams.

In 2012, however, there was, of course, no question of any austerity measures. As leading Russian regional specialist Natalya Zubarevich and her co-author Yelena Gorina point out, between 2011 and 2014, there was no significant change in the proportion of the overall state budget allocated to the education and health sectors. It’s clear why Matveev is keen to find cuts: otherwise he couldn’t pass the “May Directives” off as “neoliberal”, even in terms of his own dubious and flaky terminology. Alas.

Beyond the cognitive horizon

It is time to return to our initial theme: the working definition of “neoliberalism” adopted in the context of this article as meaning free market fundamentalism. To say that from this point of view here can be nothing more anti-liberal than Putin’s Russia is an exaggeration: after all, there are also North Korea, Venezuela and Belarus. But even so…

Free trade? Are we talking about the eradication of small shopkeepers or sanctions on the import and/or export of food products? Privatisation? In 2014, the IMF reported Russia’s state sector as representing 71% of its GDP, while the number of companies under state control exceeded the number of state organs, organisations and institutions. Austerity economics? Yes, that’s happening now: doctors and teachers are being cut to protect the jobs of the siloviki: Russia is the fourth highest country in the world in terms of military expenditure, which rose from 3.5% of its GDP in 2006 to 5.4% in 2015. A paradise for private business? The net drain of capital is forecast at 3-4% of GDP in 2016, and the government is evidently regards this as a good result. What else? Arm’s length government? Or shall we rather say manual management? What kind of capitalism can you talk about when any property, from a flat to a huge company, can be confiscated at any moment in Russia, and you can think yourself lucky if they don’t arrest you or kill you in prison, as they did Sergei Magnitsky.

In the World Bank’s “Doing Business” Rating, our country comes in at the relatively decent 51st place, but the rating only looks at procedures and the Russia’s rating was compiled from figures only from Moscow and St Petersburg. And in the 2016 Index of Economic Freedom we only make the 153rd place out of 173, between Lesotho and Algeria. We are the second to last in the ‘mostly unfree’ category – another two places down and we would find ourselves in the company of North Korea, Cuba and Zimbabwe.

It’s worth looking at the reason for this shameful position we have earned, despite passable figures for trade barriers, tax system and currency controls. It is, of course, all about our levels of corruption, absolute lack of protection of property rights, unfavourable investment climate and the lack of freedom of the financial sector.

One can list Russia’s restrictions on economic freedom endlessly. But here’s a paradox: the more detailed and fundamental their description, the more one can misunderstand their nature. To think of Russia as “simply” a strongly regulated and state-controlled economy (similar to France, for instance) would be as great a mistake as to see it as an economically liberal economy.

In Russia, the state is about something completely different. The government is dependent on neither the voters nor the taxpayers, nor indeed elite groups, as was the case in the 1990s. The state, regarded as a system of coercive institutions (what Marxism describes as “an apparatus of violence”) is itself held captive, and everyone knows by whom (and it’s not businessmen or even oligarchs). Russia has no parliament and no judiciary, and therefore no rule of law — the only function that even the most hardcore liberals recognise as belonging to the state.

While people in the normal world use money to try to buy power, in our world, power, or proximity to it earned by mastery of judo or playing the cello, automatically gives you access to enormous amounts of money. How this works was clearly revealed in the Panama Papers, and a little earlier in a report by Aleksei Navalny’s Anti-Corruption Foundation about how close links with Russia’s General Prosecutor can facilitate success in “business”.

Referring to Russia as “Russia, Inc.”, Matveev makes the same mistake as Mikhail Khodorkovsky, who paid for his with 10 years in prison. The number of votes “owned” by each shareholder of a corporation depends on the amount of money they have invested. A corporation has hired staff, whose jobs depend on the owners. The corporation takes account of and protects, to a greater or lesser extent, the interests of it minority shareholders. It makes its profits by selling something on a more or less free market, which means it depends on the opinions of outside stakeholders, from contractors to consumers, from workers to the local public and from environmentalists to the media.

In Russia, life is arranged somewhat differently. In what way, is a question, thank goodness, beyond the scope of this article. But if one were to come up with an analogy, it might be a cross between the Federal State Unitary Enterprise “Russia” and an offshore company registered to ghost owners.

What do you think? Read the original and tell us what you think. Free on 8 June? Join us at the London School of Economics  for "Politics of Plunder" to discuss offshore practices, authoritarianism and the post-Crimea world order. Find more of openDemocracy's coverage here.  

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