What holds Russia back?

Understanding Russia in the modern political climate requires first understanding the long-term challenges that determine its actions.

President Putin puts his signature on the Sakhalin-Khabarovsk-Vladivostok natural gas pipeline

Of the three great powers — Russia, the United States and China — it seems the former is lagging. Russia never reached the full-scale dominance that the US once possessed, and could not match China’s rapid development in the last decades. In spite of its resource wealth, Russia’s economy is not much larger than the Benelux region, which it outsizes by some 200 times. With its 143m people, Russia also has the human capital to put itself in a much better position than it is. Why, then, does it straggle?

The Siberia question

While Russia’s wealth of natural resources is its pre-eminent blessing, the story is more complicated than it may first seem. The USSR’s enormous dependence on hydrocarbons, particularly in the later decades, continues in Russia today. Somewhere around half of government revenue derives from energy. It is clear that it props the country up.

Although Russia’s resources are plentiful, they are remote. But just to say ‘remote’ does not do justice to the enormity of the country, which is difficult to fathom. Siberia, where most of these resources are found, by itself makes up a ninth (!) of Earth’s total landmass. Were it to be independent, it would still be the world’s largest country, and by a good margin. It is possible to travel by train and see absolutely nothing but trees before reaching the next city days later.

Though three-quarters of Russia’s landmass, Siberia only contains a quarter of its population. And no wonder — with its grim winters and expansive permafrost, Siberia is not an easy place to inhabit. Rasputitsa — the bi-annual ‘muddy season’ that afflicts all of Russia — may have stopped Napoleon, but it makes development and living difficult, particularly in remote areas. Developing infrastructure to allow access to resources in such an enormous, forbidding and sparsely populated landmass is a serious challenge.

But here’s the rub. Siberia has been developed — at least, it has been developed far more than equivalent regions (think Canada). The USSR made huge efforts in this regard, but central planning mismanaged the task catastrophically. Putting laws of efficient economic location to one side, the command economy poured vast numbers of people into remote regions and cities, resulting in an inefficient distribution of labour and capital. Hence cities like Magnitogorsk — a famously unpleasant place — arose, peaked, and now languish, simultaneously overcentralised and desolate. Such single-industry cities had purpose once, but are now a drain. Costs of living are high; none are self-sufficient; all are subsidised.

The Siberian question remains a priority for a Russian government that still invests heavily in developing its outlying areas. Aside from infrastructure investments, it has established a free trade port in Vladivostok as well as several special economic zones to attract Asian investment — but FDI from these countries remains low. Russia offers a free hectare of land to any citizen willing to put it to good use — but there have been few takers. Siberia remains sparsely populated.

Population density in Russia: people per square kilometre

So, Russia’s greatest natural benefit is an expensive one, not only in economic terms, but socially and demographically also. Thus we can summarise the Russian resource problem. A wealth of resources became a dependence on resources. But exploiting the resources is difficult because of the size, inclemency and underdevelopment of where they are located. Russia, therefore, is stuck with the obligation to continue to develop this undevelopable area.

Resource dependence has knock-on consequences. The phenomenon known as the ‘Dutch disease’ describes a paradoxical situation in which the presence of valuable natural resources in a country correlates with poor economic growth. This can explain a trend where countries rich in natural resources exhibit slower growth (see Venezuela and Nigeria).

In Russia’s case, large volumes of foreign capital enter the country through energy exports, leading to an appreciation of the currency. (The rouble is arguably controlled more by oil prices than by the central bank.) But since this capital is localised only within energy, relative deprivation and underdevelopment of other sectors follow. While the world moves to an increasingly value-based economy, Russia retains its commodity-based model. Energy comprises somewhere around half of its federal budget while Russia’s other sectors tarry. Name a Russian company unrelated to gas or oil. Anyone?

It is only natural that this has led to a lack of diversification, which in turn engenders its own slew of problems: weakened political institutions, reduced competitiveness, low innovation and a degraded investment climate. Furthemore — and crucially in Russia’s case — such economies are characterised by higher macroeconomic volatility. For the average Russian this means that their quality of life mirrors the gas and oil market: prices are high, life is good; prices are not, life is tough.

Soviet legacies

A consistent theme emerging here is that Russia suffers under a host of problems inherited from the Soviet Union. This is a vitally important point to establish, because it is true on the level of principle that Russia today cannot be understood without first understanding the nature of its transition from the USSR.

While post-war Europe’s recovery was eased by the Marshall Plan, no equivalent scheme was elaborated for Russia. A small amount of support was provided but in the form of credits, which were furthermore contingent on political preconditions sourly received in Russia. The fact that there was a real risk of starvation in the winter of 1992 increased Russian frustration with the tight purse-strings.

The reason that no Marshall Plan was ever instituted for the post-Soviet transition is straightforward: the fundamental purpose of the Marshall Plan was, quite simply, to contain communism. It was fundamentally motivated not by helping Europe but by hurting the Soviets. However, since the fall of the USSR was the fall of communism, the whole raison d’être of such a plan was absent. No USSR — no Marshall Plan.

The idea that there was no purpose for a Marshall Plan for Russia was certainly the key reason one was never elaborated. But there was an ancillary reason that is also worth exploring — that there was no need for one.

What I mean by this is that the zeitgeist of the time, all over the world but especially in the US, was marked by such confidence in the power of liberal democratic values and The Market that there was a genuine belief that the nascent Russian Federation would proceed to reform itself along these lines without any need for exterior guidance or assistance.

And why shouldn’t it? This system was, after all, the one that had prevailed. It was the system that had created prosperity in the West, and the one that proved resilient and sustainable enough to outlast its communist rival in the East. The fall of the USSR — the most significant event of the second half of the 20th century — was abundant proof that the Western model not only worked, but worked better than any other. Japan and Germany had been rebuilt with this model, and thrived. Thus there was at the time a real expectation that market forces, combined with the ‘right’ values, would lead Russia on the ‘right’ path, quite automatically.

Clearly, this is not what happened. The Russian transition to market economy was marred by a small class of businessmen exploiting informal structures to claim wealth and power with phenomenal speed. The result was the emergence of the novye russkie — the New Russians — an archetype-cum-caricature of the powerful oligarchs spawned during the era of privatisation, with whom Putin would grapple during his first term.

Deripaska, Abramovich and Usmanov

It’s not necessary to go into depths about the state of Russian corruption today, but it is necessary to mention its stifling effect. It should be taken as read that virtually every investment that is made, regardless of sector or location, will inevitably be hampered by corruption. Whether it’s a new highway to St Petersburg, a bridge in Vladivostok, stadiums for the Winter Olympics or the World Cup, a technopark to benefit startups or a cosmodrome to create more launch pads, it’s a virtual guarantee that a significant percentage of the allocated funds will be lost in the dark crevices of Russian corruption.

Thus the end of the Cold War may have brought a Russian rebirth, but it did not bring a reset. The Russian Federation inherited from its Soviet birth-mother a host of congenital diseases under which it still struggles. Resource dependence, inefficient development and corrupt economic architectures all continue to impede its progress today.

Capital and human capital

While the business climate in Russia rebounded during the early-to-mid noughties, it is again encountering difficulties. State involvement in private enterprises is commonplace, further harming FDI. Russia also suffers from an underdevelopment on the SME front — a bulwark of a healthy and developing economy — as a direct consequence of the continued enlargement of state-owned enterprises.

What efficiency in the economy that remains is checked by Russia’s crushing bureaucracy. There is a general sense in Russia that things should be at least a little difficult. Whatever you’re trying to accomplish, the feeling is that any interaction with authorities shouldn’t be too easy. Every document needs to be signed, stamped, copied, stamped again, transferred to a different governmental body, reviewed, registered, signed by a different official, returned to the original agency, and will be ready to pick up in three months’ time — provided there are no delays, of course.

No wonder, then, that Russian brain drain has become one of the most talked-about issues in the country. Plenty of entrepreneurs are choosing to ply their trade abroad. Not that emigration from the country is anything new; intermittent waves of high emigration are a consistent theme of Russian history. Most recently, during the fall of the USSR, low-skilled workers went abroad for better living conditions — and fuller grocery stores — giving rise to the term kolbasnaya emigrantsi — sausage emigration.

Russia today finds itself in another such period of high emigration, but with a difference: it is no longer in search of sausage that emigrants leave, but a better home for their ambitions. In the best case Russia’s talent flocks to its two great metropoles of Moscow and St Petersburg, reducing opportunity everywhere else in the country. In the worst (and most frequent) case it leaves the country altogether. The founder of VKontakte is now a citizen of Saint Kitts and Nevis, and chose to open his second project, Telegram, in Berlin.

Indeed, large parts of Russia’s brightest and best are now found not only in foreign business or tech, but also in foreign universities, be it as professors or students. Russian higher education may be better than it is given credit for, but it still lags behind the West as well as emerging elite universities in the East — and, in fact, even behind the standards of Soviet education. Tutors specialising in gaining entry to Western universities or private schools are high in demand with the Moscow and Petersburg elite, which generally prefers British or American education for their children.

The full range of social problems are too numerous to explore in depth, but I will mention some briefly. Russian demographic issues — also inherited from the USSR — are likely to cause a population decline in coming decades. There are consistent problems with HIV in the country, which are inadequately addressed. Alcoholism is a scourge — more than half of deaths between the ages of 15 and 54 are alcohol-related. Drug issues cripple the nation — the problem is arguably worse than the opium epidemic in the USA. It’s no surprise that the life expectancy for a Russian man is 64.

The wrong discussion

Let’s return to geographic matters and consider an old chestnut that is almost always brought up when discussing Russian limitations: warm-water ports. As geopolitics continues to attain a greater role in public discourse, it has become fashionable to discuss the great importance of warm-water ports in Russian history and strategy.

The argument typically goes like this. Historically, nations with access to warm water ports — defined as ports where the water does not freeze in winter and are therefore operational year round — fare better than those without. This seems to be borne out by examples such as Britain and Spain, both of whom built empires on the back of their naval prowess. In the modern day, China’s status as the world’s factory is actualised by its capacity to export via water — Shanghai is the world’s busiest port, and Hong Kong is not far behind. Summa summarum: a serviceable seaboard is necessary for greatness.

Russia’s problem, then, is that by geographical misfortune, its enormous size somehow failed to provide it with access to warm water. Indeed, Russia only has one true warm-water port, in Sevastopol (though St Petersburg and Vladivostok are functionally warm-water ports, as they are nowadays kept free of ice by ice breakers and thermal powerplants). The issue is, however, that none of these ports are well-positioned. St Petersburg faces the Baltic sea, which Russia does not control. Vladivostok’s access to the South China Sea goes through the strait of Tsushima, controlled by South Korea and Japan. And while Russia may now possess Sevastopol, all maritime transport seeking access to the bustling Mediterranean must pass through the Bosphorus and the Dardanelles, controlled by Turkey, a NATO member.

The problem with this line of argument is not that warm-water ports are irrelevant, but that they have become the mainstay of a series of reductive analyses. It is not difficult to find online pundits who would have you believe that all of Russian foreign policy, throughout its history, can be summarised as a quest for warm-water access. This simplistic reasoning is too often trotted out to explain Russia in general. Peter built St Petersburg purely for better maritime prospects. Russian actions in Crimea were motivated by access to the Black Sea. Its current involvement in Syria is really about the port at Tartus.

Sevastopol and Tartus in relation to the Black and Mediterranean Seas

Naturally, this is an exaggeration. Warm-water access is far less important now than it was in the past, when transport was almost entirely dependent on water. The primary reason that Russia doesn’t trade much has far more to do with the current political climate and Russia’s isolation within it than it does with lacking access to ports.

The main reason, however, for Russia’s limited trade, is quite simply that it doesn’t have much to trade with. Its by-far greatest export — energy — is transported by pipelines, not by freight. Its secondary exports — minerals and arms — are mostly bought by countries to which Russia is connected by land. Minerals are primarily bought by China and EU nations, and while exact statistics about who buys Russian arms is classified, it’s a safe assumption that China is a repeat customer here too.

The impact that lack of warm-water access does have on Russia is to limit the breadth of its maritime strategic options. Russia’s geographical position means that it can easily be blockaded, and that its vessels are vulnerable to military strikes, necessitating heightened defence investment. However — though Russia will continue to prepare itself for worst-case situations — the likelihood of such events is very slight.

None of this is to say that access to warm-water ports is an irrelevance, of course. It is only that its importance has been exaggerated in tact with geopolitical discourse becoming de rigeur. This argument is increasingly proffered as an explain-all of Russian foreign policy, a type of thinking which should always ring alarm-bells. Warm-water access is certainly a consideration of Russian foreign policy — but it is important to remember that it is one of many.

Those interested in approaching Russia and its limitations from a geopolitical perspective would be wiser to focus their attentions on the resource curse. After all, lack of access to warm-water ports has not prevented Russia from retaining great power status — so how much of a limitation is it really?

On the other hand, Russian commodity wealth is one of the most significant factors in retaining great power status, and should therefore warrant a much greater role for the geopolitically minded. Russia is both made and fordone by its resources. They safeguard for Russia a steady and significant income as well as leverage in international relations. But the resources are handicapped by geography — and Russia by its dependence on them.

While Russia did not sufficiently address the problem by diversifying its economy and creating growth in other sectors, it is clear that this problem is far from entirely of Russia’s own making. It has been to a significant degree inherited from the Soviet Union. This issue recurs across the board. The very structures whose profound defects eventually caused the collapse of the USSR are precisely the structures that came to form the backbone of Russian infrastructure, economy and governance.

Under such circumstances it is difficult to ask any nation to thrive. If Russia did not transform into a ‘modern’ state as China did, remember that true communism existed in China for only thirty years or so. If Russia did not transform into a ‘normative’ state as the Federal Republic of Germany did, consider that Thatcher-Reagan type thinking was still predominant when the USSR collapsed, that American triumphalism was high, that Fukuyama was about to write about the ‘last man’. Vast sums for nation-building, in this era? Not likely.

In light of all of the above, the distance that Russia has come in recovering from its Soviet legacy is not unimpressive. It has succeeded in improving living standards, raised real wages manyfold and lifted tens of millions out of poverty. But the issues that hold it back are long-term, endemic, systematic or geographic. Finding ways around these will be crucial for Russia’s development in the future.