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The Consumer Market
On August 11, 2004, Vladimir Putin publicly ordered the government to publish the state's achievements in various sectors in recent years. “The government needs to show the whole country and the people where we are now in the context of, let's say, the last four or five years,” the president said. “As I understand it, this may be a revelation for our citizens.” Deputy Prime Minister Aleksandr Zhukov agreed with the president: “This wasn't done earlier, and it really could be a revelation for many citizens. We must show the dynamics of the parameters for each person; people have to know how their lives have changed in the last few years.” Without waiting for the government to show “where we are”, Vlast has carried out an inventory of the country's property and discussed the fundamental changes that have taken place in the business world during Vladimir Putin's first presidential term in series of articles under the general heading of Who Owns Russia. That is, we have shown where we are. Vlast ends the series in this issue. In the concluding article, we have tried to determine how the changes that have taken place in the last four years are reflected in the main component of Russia's economy – its citizens.
History: 2000-2004
The positive changes in Russia's socioeconomic indicators might be considered a result of the policy of Vladimir Putin's administration and Mikhail Kasyanov's government. But in fact many successes were achieved because the authorities reinterpreted some of their slogans and failed to implement others.
The History of the Business State
The fact that private business in Russia was subjected to repressions probably needs no proofs. The point is not even the political and criminal persecutions of businessmen Vladimir Gusinsky, Boris Berezovsky, and Mikhail Khodorkovsky. The idea of state intervention in the economy in 2000-2004 was mainly implemented at a lower level.
Before 1999, business autonomy and infrequent and always predictable contacts between business and the state at all levels were generally common practices; but the situation changed drastically during Vladimir Putin's first term in office. In the mid-1990s, a businessman involved in, e.g., exporting scrap metal from Russia to Finland (in the president's home town of St. Petersburg, many people are inclined to believe that Vladimir Putin is fairly well acquainted with this business) knew in advance at what point in the business process he would have to interact with the state and how, whether filling out forms, paying bribes, conducting negotiations on the size of the “kickback”, going for a steam bath with customs officials, or having breakfast in a restaurant with a vice governor. This situation began changing rapidly in 2000, and today no one can ever predict which call from which office might force a businessman to change his plans. (The changes in relations between business and the state are also very apparent in the increasing prestige of government service.)
We note that the government's involvement in business affairs cannot be interpreted as being only harmful to businessmen. On the contrary, the integration of government and business (denoted in legalese by the unpleasant word “corruption”, but this is not the point) is usually a useful factor for businessmen. Under Boris Yeltsin, having a high-ranking patron in the force structures at the ministerial or departmental level or in parliament was considered a competitive advantage for a company. However, relations between the bureaucracy and business at that time were still built around the standard “money-for-favors” scheme. In 2000-2004, going into government service became a variation of going into business, and bureaucrats practically stopped trying to hide their excellent knowledge of business realities and their status as a partner in a large corporation. Granted, in bureaucratic circles, it is still customary to deny that this partner status is simultaneously the status of beneficiary. It appears that this natural modesty, which among other things is still condemned by the RF Criminal Code, will gradually disappear by 2008.
Much of the consumer boom in Russia in 2000-2004 was directly connected with the rise of private business in partnership with the state. In fact, the boundary between officialdom and the business class was obliterated during Vladimir Putin's first term; at least you could see absolutely no difference between the bureaucrat and the merchant in Moscow boutiques. I assure you that you could see it earlier, just as you could see it in luxury car salesmen, upscale house builders, and tour operators.
It is hard to say to what extent the process of bureaucratic enrichment has contributed to the closing of the income gap among various sections of the population. But it has obviously been significant.
However, the merger of business and the state, which took place in complete contradiction to Vladimir Putin's declared “equidistancing” (which in practice was observed only with respect to business giants), has another interesting aspect. This process made all of the state's dirigistic efforts and plans to “lead” the country's economic development in a certain direction virtually meaningless. The interests of business have always been in dominating a corrupted union of state and business. Any projects connected with vague objectives like “ restructuring domestic metallurgy”, “increasing the social responsibility of textile magnates”, or “defining growth areas in the pharmaceutical industry” are given verbal support. But only the metallurgical plant, textile mill, or pharmaceutical laboratory with a real bureaucrat who is interested in their development will get real state support (from speeding up bureaucratic procedures to tax credits).
Thus, most of the infrastructure of Russia's consumer society in Vladimir Putin's first term owed its existence to corruption.
The History of the Middle Class
Is the present compromise between bureaucracy and business stable? In the first two years of Vladimir Putin's first term, the answer to this question would usually have been “no”. By 1999, the level of cooperation between state and business in Russia was fixed, and only individual business structures, usually large ones, tried to “raise the bar”. The rest of business simply saw no need for this; and the initiatives of federal and regional authorities seeking to “be needed” by whatever means did not give businessmen any reason for optimism. By 2001, the point of “friendship with bureaucrats” had been found, and the structure began to appear stable. So stable that for all its foolishness, nearly all businessmen considered the United Russia (Edinaya Rossiya) party an organization worth joining. And the brainchild of Sergei Shoigu, who was upset by the impossibility of quickly building a “corporate state” (the term is taken from the economic rhetoric of Mussolini's regime in Italy before 1943) and Boris Gryzlov, who proclaimed “the unity of interests of the state and business” (a phrase beloved by governments in the socialist countries of Eastern Europe before 1990), began to formulate its plans for at least ten years in advance.
However, the situation began changing again in 2004. Mikhail Khodorkovsky was one of the logical originators of a regime of “peaceful coexistence” between state capitalism and private initiative. After him, an increasing number of businessmen saw no prospects for advancement of the present regime, and this is not accidental. For all its originality and consistency, it could not count on lasting very long.
This was primarily because corruption destroys a state by not allowing it to fulfill either those functions that it doesn't actually need (e.g., controlling privatized sectors of the economy by drawing up future development plans for spontaneously developing processes, etc.) or those demanded by society today. Especially by the celebrated “middle class”, which never managed to become the social basis of the regime that took shape in the first four years of Vladimir Putin's presidency.
However you define the middle class, whether through income level, consumer behavior, potential social activity, or cultural traits, it remained unwanted in Russia in 2000-2004. It could not have been otherwise.
In actual fact, the corrupted union of bureaucracy and business does not need any social basis. However, this union is producing a byproduct in the economy – a sizable number of hired employees who are quite confident of the demand for their professional skills in their companies' present activities, socially mobile, and able to make reasonably competent evaluations of trends in social development. The problem is that for this section of the population, the alliance between bureaucracy and proprietors is not only useless, but also directly interferes with their personal plans.
The virtual impossibility of asserting their professional rights or of forming their own business has been the visible result of the last four years for them. In addition, the middle class is the first to feel the negative social aspects of a state that bases its economic development on corruption (these are the victimization of public policy directly connected with it, degradation of the institution of social mobility, and simply the official lie as a generally accepted practice).
Strictly speaking, increased political activity (within permissible limits, of course), e.g., monetization of privileges, could be explained as the middle class's indirect reaction to what is going on. But in fact, this is not the case: the middle class in Moscow and other large cities and in the provinces is more absorbed by something else. By consumption to be exact.
The History of Consumption
Probably the most important thing that happened in the Russian economy in Vladimir Putin's first term was the gradual formation of the infrastructure of a consumer society. Its appearance is already the main factor driving political and economic processes in the country in his second term from 2004 to 2008.
We will list only the main achievements of the Russian economy in the last four years – the ones that are seen as perfectly natural now but which were impossible to imagine even five years ago.
An increase in real incomes of the population to a level of about $200-250 per month per worker; in large cities, to $400-500 per month. Achievement of this level by a significant proportion of the population allows Russia to enter the “golden billion” (i.e., the 1 billion out of a world population of more than 5 billion with the highest average incomes) and gain access to the main benefits of European civilization, even if not at the level of the United States of Western European countries. These benefits are as follows: the availability of one's own minimally comfortable housing, affordability of a basic basket of food and consumer goods, affordable transportation within the city (car or well-developed public transport), affordability of basic education for children, and basic access to the information infrastructure (television, cellular communications, Internet, books). A significant proportion of the population gained access to these benefits with the steady growth of salaries in 2000-2004.
The appearance of a system of consumer lending. The Russian banking system actually began orienting itself toward the mass, rather than the elite consumer in 2004. However, the infrastructure for it was set up during Vladimir Putin's first term in office.
An increase in housing construction and a change in mass consumer standards in the area of housing. The number of new buildings in Russia against the background of a declining population is surprising, especially considering the sharp increases in real estate prices – an order of magnitude ahead of income growth. This has nothing to do with the appearance of mortgage loans as a mass development –mortgages have not really come into being yet; their development is considered one of the most important task of Vladimir Putin's second term. Nevertheless, the construction industry is on the rise.
The appearance of a national entertainment industry. In principle, it existed even earlier, but it really acquired a mass character in 2000-2004. The number of movie theaters, bowling alleys, restaurants, and clubs has been increasing since 2002, almost as quickly as the number of supermarkets. It was during Vladimir Putin's first term that Russia again recalled that bestsellers could be routinely published in the country and that a large number of Russian citizens could discuss the successes and failures of the national team at the football championships. It would have been hard to believe in 1996 that one of the main topics of e-mail spam would be offers of tours to Tula, Suzdal, and St. Petersburg. The development of a domestic tourism infrastructure also began in 2000-2004.
The appearance of private investment opportunities. More usual instruments for a consumer society began to replace high-risk bank deposits and investments in various commercial operations and consumer items. For the most affluent segment of the middle class this meant investing as a partner or owner in a small operating business; for the lower ranks of the upper crust, it meant investing in the stock market, bonds, and low-paying but risk-free deposits.
Finally, the appearance of a modern commercial infrastructure – the foundation of the Western consumer society. The concepts of “supermarket”, “discount card”, “plastic card”, and “sale” have entered Russian life (and not just in large cities) in the last four years. And the process is just beginning.
All these achievements of the Russian economy in the first four years of Vladimir Putin's presidency will ultimately lead to the destruction of the economic basis of the existing political regime. A new society and new economy were being built independently of one another in Russia 2000-2004, but in 2004-2008, they will start to interfere more and more with each other, thus bringing about changes. To be sure, it is still too early to say how quickly this will happen and what form it will take. Despite the dynamic development of the economy, analysts predict a worsening of the political situation. Many expect a “crisis of overconsumption” – in actual fact, a crisis of the government's economic policy – by fall 2004.
by Dmitry Butrin
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What Has Left the Scene
Political Business
Before 2000, nearly every businessman had the chance to become an independent politician. The most striking examples were Boris Berezovsky and Vladimir Gusinsky, and their persecution by the authorities could be written off as political differences with Vladimir Putin's administration and considered an exception. However, from 2000 on, stories about how a regional businessman who had his own views on the future of his region or district had lost his business could be heard in all Russian regions, from Smolensk to Kamchatka.
Owner-Managers
The words “owner” and “manager” stopped being synonymous in Russia during Vladimir Putin's first term. Of course, corporate governance in the country has not reached the level where this combination has become a rarity. However, the main trend in this area in 2000-2004 was the transformation of an owner into the president of the company responsible for government relations and the business's main beneficiary. An increasing number of owners of medium-sized businesses (in terms of turnover) are moving away from direct management of their companies and entrusting their authority to hired professionals. And an increasing number of owners in Russia no longer take an interest in the companies they control – the revenues from them are enough.
Mob “Covers”
The image of “criminal Russia” during Vladimir Putin's first term was maintained mostly by federal TV channels, which showed series like Brigade (Brigada), Streets of Broken Lights (Ulitsy razbitykh fonarei), etc. In fact, big-time, dangerous criminality was more of a rarity than an everyday occurrence in Russia in 2000-2004. Of course, the gangsters have not gone away, but the shift of their assets from the area of “romance of knife and axe” to the area of “honest businessman” was nearly complete during this period. But nature abhors a vacuum: in place of “mob covers”, “cop covers” for small business and “FSB covers” for medium and large business appeared nearly everywhere. At the beginning of Vladimir Putin's second term, the best place to look for a model for films about “savage, brutal criminal customs” was the nearest police station.
Easy Money
The chaotic structure of nongovernmental redistribution of money in the economy in 1989-2000 led to the existence of the phenomenon of “easy money” in Russia. The fate of easy money had little to do with how redistribution was put in order: it was doomed, and in 2004, stories about how your college friend who was forever bumming ten rubles for a beer had bought himself a Porsche and a house in Rublevka [a prestigious residential district of Moscow] and then once again became a pauper have finally become the stuff of legend. Today the only reminders of easy money are ads for numerous casinos and slot machine chains, although no game of chance can compare with the passion of the unsuccessful hunt for big money that gave some relief from life for a sizable section of the population before 2000.
Freedom to Set Up a Business
Along with easy money and the authorities' relative lack of interest in small business, one of the fundamental freedoms that few people had ever appreciated – the freedom to start your own business from scratch – virtually disappeared from Russian economic reality in 2000-2004. At first glance, this process was entirely unrelated to the government's economic policy – the number of market niches where you could quickly develop a profitable business without competition had been steadily decreasing since the early 1980s. However, in many respects the crisis in small business stems from the fact that corruption and the merger of state and business at all levels makes the price of an “admission ticket” to any market prohibitive. But this situation cannot last forever: sooner or later these constraints will become an obstacle to the development of entire classes of small business, which as before will be in great demand.
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What Has Arrived on the Scene
The Entertainment Industry
In many respects, the appearance of a homegrown entertainment industry is one of the political foundations of the president's steady ratings and the ruling party's relative popularity. The lack of a mass entertainment industry in Russia was precisely what created the sensation of the futility of life in the younger generation in the mid-1990s. Therefore, the appearance of Night Watch (Nochnoi dozor), Harry Potter, Haruki Murakami, and Paolo Coelho and the popularity ratings of Ksenia Sobchak, Anastasia Volochkova, and Nikolai Baskov should not be dismissed as unimportant and worthy of contempt. Russia is going through an accelerated period of mass cultural development, which Western Europe and the United States went through 20 years ago. And this is why the entertainment industry will soon bare very sharp fangs at the authorities: at least there is no reason to believe that a mechanism in operation around the world can be easily tamed by political technocrats in the president's administration.
Consumer Lending
The development of a consumer lending system in Russia is almost entirely due to the appearance of branch offices of large Western banks. These are the Austrian Raiffeisenbank, Citibank, and the Czech Home Credit. And although Russian banks grant the bulk of the loans, the national banking system shifted to the mass consumer only when Western professional rivals appeared on the horizon. The scale of consumer lending in Russia is still nowhere near the scale in the EU and the United States. Nevertheless, the possibility in itself of buying on credit in 2004 became one of the driving forces of business in Russia, which is developing at previously unimaginable rates.
Pervasive Corruption
The struggle against “werewolves in uniform” begun by the Russian authorities during the election campaign in the winter of 2004 at the very end of Vladimir Putin's first presidential term was seen as a joke by most of the population. There are good reasons for this. Rumors about “kickbacks” the Prime Minister of Russia received could only have spread in a situation of absolute corruptibility of the state apparatus. As things stand in the country in 2004, it is impossible to believe that anyone working for the state is pursuing idealistic goals and has no personal self-interest, or that the rates for appointing deputy ministers and the heads of departments of internal affairs, or for electing deputies could be published in the open press. The fact that this phenomenon has a positive side in no way compensates for the damage that corruption does to Russia's economy.
Affordable Cosmopolitanism
The development of the tourist industry and the actual opening of the world not just for the elite of Russian society, but also for the middle class was an important consequence of the growth of real incomes of the population in 2000-2004. At the same time, it makes no sense to reduce the openness of the world to Russian citizens only to the opportunity to see the beauty of Paris on a tour or to lie on a beach in Turkey. As an evolving phenomenon, “affordable cosmopolitanism” Russian style also means a rise in the popularity of English in Russia; an increase in international contacts for businessmen; the removal of many psychological barriers to emigration and re-emigration; and a sharp increase in the speed with which a new book, clothing style, political idea, or simply a popular song reaches Russia. And goes from Russia to the West, which is of no small importance.
Careerism
The possibility of making a career always existed in the Russian reality of the 1990s. But as in the case of easy money, conscious efforts to ascend the career ladder even for a minute could not compare in effectiveness with the idiotic force of circumstances that elevated a citizen from number-three assistant to a street cleaner to vice president of development of a corporation with a turnover of $50 million. The wealth of such circumstances together with traditional Russian nepotism made careerism in Russia almost senseless: it was simpler to wait or look for an opportunity. It was only in Vladimir Putin's first term that careerism as an idea took hold of the masses of office workers. With the right shirt, the right speaking style, the right performance of duties, the right pastimes, and the right extravagances, we'll be sitting in the boss's chair in about 15 years!
All the Article in Russian as of Aug. 16, 2004
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