The Quest for 2nd Term Economic Success

Although most independent observers agree that last week's presidential election was unfair, there is little doubt that Vladimir Putin would have won re-election by a landslide even in an honest election. That's because a campaign slogan used to great effect in America 12 years ago -- "It's the economy, stupid" -- also holds true in Russia.

An economic record similar to Putin's would assure the incumbent's re-election in almost any democratic country. By almost any measure, the record is outstanding.

Despite the global economic slowdown, gross domestic product has grown spectacularly during his tenure, at an average rate of 6.5 percent annually. Putin has presided over four consecutive years of budget and trade surpluses. Foreign debt has declined to 30 percent from 50 percent of GDP; foreign currency reserves have tripled, and now exceed annual imports.

Meanwhile, capital outflow has finally come to a stop. Last year, Moody's Investors Service upgraded Russian bonds to investment grade; the other two major rating agencies are expected to follow later this year. The stock market is still narrow, but its performance has been impressive: Since Putin took over, the benchmark RTS index has increased sevenfold in dollar terms.

And contrary to conventional wisdom, the benefits of this growth have reached beyond the rich. The average household is now 53 percent better off in real terms than four years ago; real wages are up 86 percent. Inequality is still very high, but poverty and unemployment have declined by a third. About one in four Russians now has a cellphone, up from about 0.5 percent of the population four years ago, and the number of Internet users has tripled. Real estate prices have doubled in dollar terms, and car ownership has increased by 10 percent.

To what extent can Putin take credit for this success? Certainly, he has been exceptionally lucky. Oil prices have been extraordinarily high during his tenure, and according to various estimates, rising oil prices account for one-half to two-thirds of recent economic growth. In addition, when Putin took over, the economy was at a low point, with all the foundations for a quick recovery -- undervalued ruble, cheap labor, unused capacity -- in place.

Yet Putin has played a strong hand well. His economic policies have been consistent and predictable. Putin's foreign policy has helped Russia become more integrated in the world economy, and will pay even greater benefits in the coming years with an increase in foreign investment and acceptance into the World Trade Organization.

Perhaps most important, Putin's administration has not surrendered to powerful interest groups -- especially regional governors and big business. Four years ago these groups seemed invincible, but Putin has managed to play them off against each other. In virtually all parts of Russia, for example, Putin's popular support is probably higher than that of the regional governor.

Putin's strategy toward the so-called oligarchs has been more controversial. The vast majority of voters deem oligarchs' wealth illegitimate. Expropriating the oligarchs' wealth, however, would destroy investment incentives in a large part of the economy. According to various surveys, the oligarchs (who own the 20 or so largest business conglomerates) control at least a third of industrial output -- more than all other private owners combined.

Moreover, these groups control the very same natural resource companies that have been the engine of Putin's economic growth. Hence, Putin had to choose between undermining capitalist values (mainly secure property rights) or democratic values (mainly the respect for the views of the majority). Putin's approach was as pragmatic as it was cynical.

In 2000, Putin struck an informal deal with oligarchs: the Kremlin would respect their property rights if they supported the Kremlin's position in federal and regional politics. This deal has indeed provided the oligarchs with sufficient incentives to invest their export revenues in Russia, restructure their assets and create new jobs. It has also eliminated any remaining domestic opposition to the president.

The public's antipathy toward the oligarchs, meanwhile, was simply used as a threat to enforce the deal -- a threat that was proved to be credible when Mikhail Khodorkovsky was arrested last year.

Khodorkovsky had become a champion of modern corporate governance, restructuring his oil company, Yukos, and making it more transparent and efficient. The company became one of Russia's largest investors and taxpayers, and Khodorkovsky and his partners donated money to schools, universities and other charitable projects.

None of this helped him, however, when Khodorkovsky began to support parties other than Putin's. The retaliation was swift and not necessarily respectful of the law. Yet there was little public outcry over the Kremlin's tactics because Khodorkovsky is still disliked by about three-quarters of voters.

By now, nobody has any illusions about Putin's respect for property rights or democratic values: He simply pays them lip service in order to consolidate his power. With last week's election, this task is finally accomplished. Putin now rules free from any campaign promises or political obligations. Political opposition is almost nonexistent. In contrast to his position four years ago, the president can finally pursue whatever agenda he wishes.

Assuming that Putin genuinely wants to build a new, stronger Russia, can his second term be as economically successful as his first? Russia can still continue to grow, albeit at a slower rate, even if oil prices fall. The economy is rich in natural resources and human capital, and Russian firms have grown more efficient at exploiting them. Foreign debt is low, reserves are high, and Russia can bridge whatever deficits arise by borrowing abroad at low rates.

Long-term economic growth, however, can no longer come from the natural resource industries. Although they have performed well in recent years, they may have reached their peak. And to make the manufacturing and services sectors competitive, Russia must carry out several structural reforms, in both the educational and financial systems, that have been delayed during Putin's first term.

A prerequisite for these reforms is an honest, competent and accountable bureaucracy. Unfortunately, the Russian bureaucracy has always been notoriously inefficient and corrupt -- and that didn't change during Putin's first term. While he recognizes the need to reform the bureaucracy, he is facing an enormous challenge: The bureaucracy will not willingly release its grip on the economy, and Putin has alienated or weakened many reform-minded elements in society that might have been willing to help him.

In 2001, when asked about his vision for Russia in 2010, Putin said: "We will be happy." His first term has certainly delivered its share of economic happiness. But the very strategy Putin used to achieve such success in his first term may make it more difficult for Russia to complete the quest during his next term.

Sergei Guriev is an assistant professor at the New Economic School in Moscow. This comment first appeared in The New York Times.