Putinomics: Putin’s Economic Inheritance

The following is an excerpt from Chris Miller’s Putinomics: Power and Money in Resurgent Russia.

When Vladimir Putin first took power in 1999, he was a little-known figure ruling a country that was reeling from a decade and a half of crisis. In the years since, he has reestablished Russia as a great power. How did he do it? What principles have guided Putin’s economic policies? What patterns can be discerned? In this new analysis of Putin’s Russia, Chris Miller examines its economic policy and the tools Russia’s elite have used to achieve its goals. Miller argues that despite Russia’s corruption, cronyism, and overdependence on oil as an economic driver, Putin’s economic strategy has been surprisingly successful.

Explaining the economic policies that underwrote Putin’s two-decades-long rule, Miller shows how, at every juncture, Putinomics has served Putin’s needs by guaranteeing economic stability and supporting his accumulation of power. Even in the face of Western financial sanctions and low oil prices, Putin has never been more relevant on the world stage.

Miller’s Putinomics was recently featured on our Russia and the former Soviet Union recommended reading list. Last month, Miller also wrote an Op-Ed for the New York Times about Russia’s attack on Ukraine.

President Boris Yeltsin was on vacation when the crisis smashed into Russia in mid-August 1998. Storm clouds had been gathering for months. Russia’s government was debt-ridden and nearly bankrupt, reliant on short-term loans to pay pensions and fund basic public services. The Kremlin spent too much and raised too little in taxes, filling the difference by borrowing at extortionate interest rates or by printing money, which fueled inflation. By the summer of 1998, as Russia’s borrowing rates spiked ever higher, everyone knew that a painful adjustment was inevitable. The only question was when it would come—and how traumatic it would be.

On July 13, the International Monetary Fund (IMF) led a coalition of international lenders in announcing $22.6 billion of financial support for Russia. In exchange, Russia’s government promised sharp tax hikes and spending cuts, a package that was political suicide. But Russia’s leaders had no choice but to agree. Yeltsin cut short his summer vacation to assemble parliamentary support for the necessary legislative changes. By early August, however, the political process in Russia had ground to a halt. The government and the Duma disagreed over how to resolve the country’s budgetary imbalance. Everyone in Yeltsin’s government and in the Duma believed that Russia had time to debate, to discuss, and to play political games. They underestimated the speed with which debt investors were losing faith in Russia’s ability to repay—and losing interest in repeatedly rolling over Russia’s short-term debt. Yeltsin himself was disengaged. After failing to broker a solution to the political impasse, the president returned to his summer vacation just as the situation was beginning to spin out of control.

Speculative attacks on emerging market currencies had sparked chaos in Thailand, Indonesia, and South Korea earlier that year, and many investors—including those whose loans funded Yeltsin’s government—were nervously asking whether Russia would be next. The victims of crisis in Southeast Asia had all been forced to devalue their currencies, a move that amounted to a tax on consumers. When the Indonesian rupiah and Thai baht crashed in 1997 and 1998, those countries’ citizens were made poorer in dollar terms, and in response they drastically cut back on purchases of imports, bought with dollars. This restored these countries’ financial balance at the cost of impoverishing consumers.

Russia appeared on the brink of a similar fate. The currency was overvalued, and the central bank was spending huge sums to prop it up, keeping it pegged at a set rate against the dollar. The overvalued ruble not only made Russian exports less competitive but also created a dilemma for the central bank, which had a limited quantity of dollars with which to buy rubles. Yet Russians and foreigners alike were looking to sell rubles and get their hands on a more stable currency. Unless the situation turned, the central bank would run out of dollars and be forced to abandon the ruble’s peg. Economists refer to such a move as floating the currency. This was the wrong metaphor: if the central bank stopped supporting the ruble, it would sink like a rock.

Yeltsin “loudly and clearly” declared that Russia would not devalue the ruble. Prime Minister Sergey Kiriyenko promised that “there will be no changes in the monetary policy of the central bank.” But talk is cheap, and the Kremlin did not back it up with actions. The more the government insisted that it would stand by the currency and repay its debts, the more investors concluded that it was time to sell. On August 13, markets began to panic as investors raced for the exit. Foreigners and Russians alike dumped rubles and bought dollars, forcing the Russian central bank to spend down its dollar reserves to dangerously low levels. New lending to the Russian government all but stopped, as interest rates on one-month government bonds reached 160 percent. The Moscow stock exchange plummeted so rapidly that trading was repeatedly suspended.

Something had to give. Prime Minister Kiriyenko appealed for more foreign aid but was turned down. He was left with no choice but to surrender. The central bank let the ruble fall against the dollar. Starting at six rubles per dollar, the ruble fell to twenty-five. Consumer prices more than doubled. Russians paid the cost of adjustment as they discovered that their wages suddenly bought only half as many goods as before.

At the same time, the government announced it would default on its debts, forcing bond holders to bear some pain, too. Russian banks that held government bonds teetered on the brink of bankruptcy, a trend that was exacerbated by depositors rushing to withdraw their money and stuff it under the mattress. As the ruble plummeted, demand for dollars was so high that currency exchange booths ran out of cash. “Russia,” grumbled one disillusioned investor, “now ranks somewhere between Nigeria and Kenya.”

Chris Miller is assistant professor of international history in the Fletcher School of Law and Diplomacy at Tufts University.