Sergey Aleksashenko on Russian Economic Policy From the 1990s to Today

Sergey Aleksashenko on Russian Economic Policy From the 1990s to Today

On February 7th, Dialogues sat down with Sergey Aleksashenko, former deputy Minister of Finance of the Russian Federation and former first deputy chairman of the Russian Central Bank, to discuss the lasting legacies of the economic policies of the 1990s on Russia today.

GJIA: Based on your experience as the deputy Minister of Finance of Russia and as the first deputy chairman of the Central Bank of Russia, what would you say are the most lasting implications of the “shock therapy” that was applied to the Russian economy in the 1990s?

SA: I would say that Russia is a very specific country in many aspects, particularly with regard to macroeconomic stabilization. Let's take Poland as an example of the best-case scenario. Leszek Balcerowicz started his policy of shock therapy in January of 1990. If I remember correctly, by May of 1990, inflation had fallen to around 6 or 7% annually. Russia started its macroeconomic stabilization in January of 1992, two years later. The first time Russia achieved 7% inflation was around mid-1997, and the next time it happened was not until 2015. Russia is a very good example of an unsuccessful attempt to implement shock therapy, and it was very evident why.

What are the implications today of Russia’s inability to implement shock therapy?

When the people and businesses within a country live in a high inflation environment for a long time, their reality and vision of the future become distorted. This, in turn, distorts their savings behavior and their propensity to keep savings in the national currency vis-à-vis foreign currency. Russia experienced all of these effects. When people are uncertain about the safety and value of their savings because of steep jumps in inflation, it prevents them from keeping their savings in the ruble; instead, they keep their savings in dollars or euros. That is not good for the economy. This is the most significant implication, because these economic fears fester in the subconscious of the people and this has a generational effect. In fact, the twenty-five years that Russia needed for macroeconomic stabilization defined the life of a generation. That means that a whole generation of people still remembers the threat of hyperinflation and acts based on that fear.

From an outsider’s perspective, it seems as though President Vladimir Putin has played a central role as president in shaping Russian policy. How institutionalized have Putin’s changes to political and policy changes become, and do you see his consolidation of power in the executive continuing after Putin?

In my book, Putin’s Counterrevolution, I describe how Putin lead Russia off of its path towards democracy. However, his role in doing so does not make him the dominant hero in the history of Russia. As the president and leader of his country, Putin has managed all of the recent changes Russia has experienced. He was the person grabbing power from other branches of government – from the legislature, judiciary, and media – and transferring it to the executive. But those actions were Putin as the president, not Putin as himself. He was just a public figure surrounded by a group of people, some of whom criticize him today and others of whom still help him implement his policies. We must understand that it is not only Putin undertaking these changes, but also a big group of people around him. The second question is how institutionalized his changes are. The Russian Constitution is very well written. On paper, we have freedom of speech, checks and balances, an independent judiciary, and so on. Given Putin’s control and subordination of the legislature, however, he has fairly broad ability to change the laws. He has not changed the actual provisions Constitution, but he has implemented hundreds of laws that limit the Constitution’s interpretation and norms. For example, according to the Constitution, Russian citizens have freedom of assembly, but in reality, we don’t have it at all. If you want to have an assembly, you must write an appeal to the local authorities saying that you want to hold a certain gathering. In almost every case, they will respond by refusing to grant you approval. In this way, the nature of the institutions and provisions set out by the Constitution has been corrupted and distorted by hundreds of laws. Putin will eventually leave his position one way or another, but I cannot predict the future beyond that. Putin’s successor could be of the same mindset as him, or they may have a mindset more similar to that of Gorbachev or Yeltsin and focus on rebuilding democracy and republican institutions. The future could also simply be chaos in the uncertainty after Putin leaves.  There is one thing I am sure about – Putin’s changes cannot survive without him.

How has the role of Russian oligarchs evolved since your time working in the government in the 1990s?

There are very few oligarchs from the 1990s who live in Russia today and who still keep some wealth. These would include Potanin, Alekperov, and, to a certain extent, Fridman. All of the other Russian billionaires emerged during the time of Putin. If you look at the number of Russian billionaires at the time of Yeltsin, it was around six or seven. Today, that number is over a hundred. That said, I cannot entirely blame Putin for the rise of these billionaires. Circumstances have changed - the economy has changed, society has changed, the capitalization of the country has changed - so it is not fair to compare 2017 to 1998. However, there is still a significant difference to account for. In the Greek language, an oligarch is not just someone with money, but rather a rich person who influences the politics of their country. That individual plays a dual role, working in both business and politics. A lot of people believe that Yeltsin and his government were puppets of oligarchs who could influence government decisions. I disagree, however, with the notion that oligarchs could just demand whatever they wanted from the government, because in reality it was not that simple. The exception here is oligarchs in the media. For example, one of federal TV channels was owned by Gusinsky and the other managed by Berezovsky, so in this case they were both oligarchs participating in political life because of their access to and control of media. Yeltsin and his government did believe that it was necessary to listen to those individuals because of their ownership of media. Still, it was not quite as simple as them dictating their desires to the government. In my own experience, in both the Ministry of Finance and the Central Bank, there were many instances in which oligarchs walked in and asked me to give them money, and the answer was always no. They would have to take certain steps before discussing any funding requests or business disputes; in other words, they would first have to solve their problems themselves. Under Putin, however, there are no oligarchs, because none of the billionaires in Russia at the moment can influence political life. There was a transitional period around 2010 when some of Putin’s friends, like Timchenko and Kovalchuk, were able to meet him often and in that way influenced him. But Putin is not generally an easy guy to influence, even for his closest circle. He is very capable of listening to you and demonstrating to you that he shares your values, so you walk away thinking that you were able to influence him, but, in reality, nothing will change. Today, none of his friends has free entry into his office. Kovalchuk still plays a very significant role because he is the second largest owner of media after the government. There are plenty of rich people in Russia, but I would not call them oligarchs.

Which group or individual has the most influence over Putin’s decision making?

I think it is people from the security and law enforcement sphere who have the most influence, specifically Nikolai Patrushev, the secretary of the Security Council and the former Federal Security Service (FSB) director, and Bortnikov, the current chief of the FSB. Additionally, the CEOs of Rosneft and Gazprom are very influential in their own spheres of the energy sector, but not beyond that. 

Some political and economic pundits have claimed that Russian foreign policy can be traced back to the commodity price of oil. Based on your experience, has Russian economic policy been more of a result or a driver of Russian foreign policy?

I disagree with the notion that Russian foreign policy is oil-driven. In Putin’s mind, foreign policy and domestic policy are not interconnected, and many experts say he has no strategic vision because of that approach. In one meeting, Putin may discuss issues of defense, intelligence, and foreign policy, but if there are economic issues to be discussed, there will not be any economic minsters present. Then he will go to the next meeting and speak with domestic ministers, including economic ministers, on issues regarding sanctions, Crimea, or Donbass, but none of the foreign policy ministers will be present.

Oil is the pillar of the Russian economy, representing 50% of Russian exports. Add to that gas exports, and the two resources together make up 65% of exports. If you add all of the other exports from natural resources, such as wood and metals, you are at around 85% of all Russian exports. It is a natural resource-driven economy. Oil is the most important of these because it brings in the most amount of money, and that money allows Putin to finance his activities in Syria and in Donbass. It allows him to bribe judges and redistribute money, which is the basis of his presidency. Oil income also allows Putin to feel economically comfortable. Put yourself in his shoes and imagine that you are president of the second largest military power in the world, being in a hybrid war with the largest military power in the world, the United States. The most important question about the economy for you is whether there is money in the budget. Because of Russian oil, the answer to that question for Russia’s leader is always yes. Every week the president goes to the Minister of Finance to ask how much money is in the budget. The Minister’s answer is “as much as you need.”

In your discussion of the distinction between domestic and foreign policy, you placed Donbass and Ukraine under the umbrella of domestic policy. In Putin’s mind, is the current conflict in Ukraine a domestic issue?

Ukraine is very important to Putin for many reasons. First, because of its geographic proximity, which makes Putin want to have Ukraine as an ally rather than a launching ground for American or NATO missiles. Second, in his mind, the countries nearest to Russia – the area of the former Soviet Union – lie within his sphere of influence, therefore he may dictate to them what to do and how to do it. According to him, these countries are not only Russian allies, but loyal Russian allies. Third, for Putin, Ukraine is a double example of “color revolutions,” which breed instability; Ukraine also decided to be independent from Russia, which for Putin is unacceptable. He is ready to bring Ukraine to its knees in order to make it loyal.

Russia is engaged in a deal with Germany to build the Nord Stream 2 Pipeline, which would bypass Ukraine. Is this part of the effort to put pressure on Ukraine?

Yes, because Ukraine currently receives around $3.5 billion of revenue for the transit of Russian gas into Europe. Ukraine’s GDP is around $120 billion, so losing that revenue has an enormous impact. All of Putin’s pipeline initiatives are meant to bring Ukraine into submission.

How much of an effect did the 2014 sanctions regime, imposed on Russia in response to the crisis in Crimea, have on encouraging Russia to lean closer to China and embrace Chinese investment?

Before Crimea, Putin was strongly opposed to any Chinese investment, most of all in Russian natural resources. He didn’t even allow Chinese companies to invest in real estate in Moscow. After Crimea and the 2014 sanctions, Western investment in Russia disappeared; only then did Putin accept Chinese investment. There are now dozens of cases where Chinese companies have invested in Russian natural resources. The Russian authorities did make a crucial mistake, however. Their announced position was that they were going to substitute Western capital for Chinese capital. What they failed to realize was that Western capital is based on the market, whereas Chinese capital is controlled by the government. Any big injection of Chinese capital must be approved by the government. You do not deal with the companies or the banks, but rather with the Chinese government, and the Chinese government is not keen on giving money to Russia. The idea that Chinese investment would simply substitute for Western funds was false. 


Sergey Aleksashenko is the former deputy Minister of Finance of the Russian Federation (1993-1995) and former first deputy chairman of the Russian Central Bank (1995-1998). Currently a Nonresident Senior Fellow of Global Economy and Development at The Brookings Institute, Aleksashenko focuses on monetary policy, international financial infrastructure, and transitional processes in the region of the Commonwealth of Independent States (CIS) and Eastern Europe. Aleksashenko is also a member of the Board of Boris Nemtsov Foundation for Freedom and Free Russia Foundation. He has served as the managing director of Interros Holding in Moscow and ran the Moscow office of Merrill Lynch (2006-2008). He is a graduate of Moscow State University and earned his Ph.D. in economics from the Central Economic and Mathematical Institution at the USSR Academy of Sciences.