The Ukrainian crisis serves Putin's geopolitical vision of Russia's neighborhood at the detriment of its economy and economic environment, deterring the long-awaited emergence of the Russian middle class. The threat of an isolation of the Russian economy combined to its low degree of diversification would lock the Russian middle-class down and do away with hopes of a liberal democratic transition, the best bid at a safe Eastern European neighborhood.
Civil society in the democratic transition
A healthy civil society is a necessary condition for a transition to a democracy and acts as a check on authority, provides political society and the state apparatus with new members, and fuels economic activity. However, Russian civil society does not fulfill any of the above roles.
The Russian media lacks independence needed to reflect a plurality of opinions in a democratic society: Freedom House reports that “In the 2008 presidential election, state dominance of the media was on full display, debate was absent”. This trend was in no way reversed as the Russian state’s control of the media deepened with a restructuring of the state media and a purchase of Profmedia by Gazprom, showing further formal control of the media by governmental authorities.
In the democratization process, citizens wielding economic power categorizing them as middle-class yet who are independent from the government are of key importance: they are able to provide a material base for democratic life. For a country’s middle-class to develop, it is important that its income both grows and spreads rather equally among its citizens. Russian GDP does show that the first criteria is met (see graph). However, the increase in revenues has not resulted in the expansion of the middle class nor in the second criterion being met, a more equal spread of revenues: the GINI index, a measure of income inequality, has worsened in Russia (37 in 2004, 40 in 2010, 42 in 2012). Despite the prosperity of its economy, the existence of a middle class is considered rather uncertain by analysts such as Lilia Ovcharova. In the early 2000’s, 20% of the Russian population constituted the middle class.
Source: World Economic Outlook
In 2008, well into the economic boom, the population share was identical although the composition of that middle class was quite different: business people were replaced by bureaucrats who exert considerable influence on the outcome of entrepreneurial activities in the Russian red-taped economy (Ovcharova (2012)). This is illustrated well with the income in Russia stemming from entrepreneurial activity dropping steadily since a peak in 2000 (see graph with data from Ovchara (2012)).
Source: Lilia Ovchara's Russia’s middle class: at the centre or on the periphery of Russian politics? European Union’s Institute for Security Studies
Why the middle-class is blocked
A 2013 IMF working paper has demonstrated the importance of the diversification of exports in the avoidance of the middle-income trap. To put the economic reasoning simply, when many parts of society are contributing to the growth of its economic, more opportunities for technological spillovers from one sector to another are possible and the mobility of both capital and human factors of production is higher. Not only is it necessary to diversify exports but also moving up the technological ladder is necessary to avoid the middle-income trap.
Nearly 70% of Russian exports in value stem from the energy sector (see graph below for a visual presentation of Russian exports). The 2008 Economic Complexity Index of its exports is 0,314, which is very low compared to indexes of China and Mexico (0,982 and 1,156). As such, Russia has neither the diversification nor technological added-value required to put the country on a path of sustained across-the-board development that would warrant the blossoming of a middle class.
Source: The Observatory of Economic Complexity
The high reliance of the Russian economy on the energy sector prevents it from achieving higher and more equal growth that would permit the blossoming of a middle-class essential to a democratic state. For as long as the oligarchic kleptocracy will thrive on the current petro-dependent state of the economy, the long-awaited democratic transition of Russia shall remain wishful thinking.
How the Ukrainian crisis affects the Russian middle class
As CNN reports, Russian lawmakers drafted a law allowing Russia to confiscate foreign assets in the event that sanctions would be imposed on Moscow. This climate of uncertainty and risk in the protection of foreign investments, combined with the track record of the arbitrary judiciary system under the control of political powers (e.g. the Shell 2006 Sakhalin-2 project) and risks of armed conflict, is likely to drive away foreign investments which are crucially needed diversify the Russian economy beyond natural ressources and strengthen the middle class. A weak middle class and an economic dependence on the state-controlled energy sector are exactly what Putin needs to perpetuate the kleptocratic oligarchic political system.
In this context, de-escalation efforts by the United States and the European Union may be the best bid to ensure that a democratic transition will one day occur in Russia. International economic isolation combined with a further dependence on the petro-industry will set the fragile Russian middle class back. Nervous knee-jerk muscle-flexing might appear as an attractive option in the short run but will set the Western agenda back on the long run: sacrificing the Russian middle class by entering into an economic and military conflict to protect Ukraine is not worth the candle. Rather, a tense path towards a non-violent outcome of the Ukrainian crisis combined with a reduction of the European dependence on Russian energy are the West's ideal strategy, though it is an ambitious one that requires heaps of political leadership and cooperation between Western states. In the long term, a Russian liberal democracy is the best bid for a safe Eastern Europe.
References
Aiyar, Shekhar et al. 2013. Growth Slowdowns and the Middle-Income Trap. IMF working paper. Retrieved from http://www.imf.org/external/pubs/ft/wp/2013/wp1371.pdf on 2013-08-28.
Trading Economics. GINI index in Russia. Available at http://www.tradingeconomics.com/russia/gini-index-wb-data.html. Accessed 2014-04-20.
World Factbook. Country comparison: Distribution of family income - GINI index. Available at https://www.cia.gov/library/publications/the-world-factbook/rankorder/2172rank.html. Accessed 2014-04-20.
Civil society in the democratic transition
A healthy civil society is a necessary condition for a transition to a democracy and acts as a check on authority, provides political society and the state apparatus with new members, and fuels economic activity. However, Russian civil society does not fulfill any of the above roles.
The Russian media lacks independence needed to reflect a plurality of opinions in a democratic society: Freedom House reports that “In the 2008 presidential election, state dominance of the media was on full display, debate was absent”. This trend was in no way reversed as the Russian state’s control of the media deepened with a restructuring of the state media and a purchase of Profmedia by Gazprom, showing further formal control of the media by governmental authorities.
In the democratization process, citizens wielding economic power categorizing them as middle-class yet who are independent from the government are of key importance: they are able to provide a material base for democratic life. For a country’s middle-class to develop, it is important that its income both grows and spreads rather equally among its citizens. Russian GDP does show that the first criteria is met (see graph). However, the increase in revenues has not resulted in the expansion of the middle class nor in the second criterion being met, a more equal spread of revenues: the GINI index, a measure of income inequality, has worsened in Russia (37 in 2004, 40 in 2010, 42 in 2012). Despite the prosperity of its economy, the existence of a middle class is considered rather uncertain by analysts such as Lilia Ovcharova. In the early 2000’s, 20% of the Russian population constituted the middle class.
Source: World Economic Outlook
In 2008, well into the economic boom, the population share was identical although the composition of that middle class was quite different: business people were replaced by bureaucrats who exert considerable influence on the outcome of entrepreneurial activities in the Russian red-taped economy (Ovcharova (2012)). This is illustrated well with the income in Russia stemming from entrepreneurial activity dropping steadily since a peak in 2000 (see graph with data from Ovchara (2012)).
Source: Lilia Ovchara's Russia’s middle class: at the centre or on the periphery of Russian politics? European Union’s Institute for Security Studies
Why the middle-class is blocked
A 2013 IMF working paper has demonstrated the importance of the diversification of exports in the avoidance of the middle-income trap. To put the economic reasoning simply, when many parts of society are contributing to the growth of its economic, more opportunities for technological spillovers from one sector to another are possible and the mobility of both capital and human factors of production is higher. Not only is it necessary to diversify exports but also moving up the technological ladder is necessary to avoid the middle-income trap.
Nearly 70% of Russian exports in value stem from the energy sector (see graph below for a visual presentation of Russian exports). The 2008 Economic Complexity Index of its exports is 0,314, which is very low compared to indexes of China and Mexico (0,982 and 1,156). As such, Russia has neither the diversification nor technological added-value required to put the country on a path of sustained across-the-board development that would warrant the blossoming of a middle class.
Source: The Observatory of Economic Complexity
The high reliance of the Russian economy on the energy sector prevents it from achieving higher and more equal growth that would permit the blossoming of a middle-class essential to a democratic state. For as long as the oligarchic kleptocracy will thrive on the current petro-dependent state of the economy, the long-awaited democratic transition of Russia shall remain wishful thinking.
How the Ukrainian crisis affects the Russian middle class
As CNN reports, Russian lawmakers drafted a law allowing Russia to confiscate foreign assets in the event that sanctions would be imposed on Moscow. This climate of uncertainty and risk in the protection of foreign investments, combined with the track record of the arbitrary judiciary system under the control of political powers (e.g. the Shell 2006 Sakhalin-2 project) and risks of armed conflict, is likely to drive away foreign investments which are crucially needed diversify the Russian economy beyond natural ressources and strengthen the middle class. A weak middle class and an economic dependence on the state-controlled energy sector are exactly what Putin needs to perpetuate the kleptocratic oligarchic political system.
In this context, de-escalation efforts by the United States and the European Union may be the best bid to ensure that a democratic transition will one day occur in Russia. International economic isolation combined with a further dependence on the petro-industry will set the fragile Russian middle class back. Nervous knee-jerk muscle-flexing might appear as an attractive option in the short run but will set the Western agenda back on the long run: sacrificing the Russian middle class by entering into an economic and military conflict to protect Ukraine is not worth the candle. Rather, a tense path towards a non-violent outcome of the Ukrainian crisis combined with a reduction of the European dependence on Russian energy are the West's ideal strategy, though it is an ambitious one that requires heaps of political leadership and cooperation between Western states. In the long term, a Russian liberal democracy is the best bid for a safe Eastern Europe.
References
Aiyar, Shekhar et al. 2013. Growth Slowdowns and the Middle-Income Trap. IMF working paper. Retrieved from http://www.imf.org/external/pubs/ft/wp/2013/wp1371.pdf on 2013-08-28.
CNN. Kerry on Ukraine: Solution is tough, but situation better than yesterday. Retrieved from http://edition.cnn.com/2014/03/05/world/europe/ukraine-russia-tensions/ on 2014-04-20
Eichengreen, Barry et al. 2013. Growth Slowdowns
Redux: New Evidence on the Middle-Income Trap. NBER Working Paper 18673. Retrieved from www.nber.org/papers/w18673 on 2013-08-27.
Jesus
Felipe. Tracking the Middle-Income Trap: What is It, Who is in It, and Why? Asian
Development Bank. 2012. Retrieved from http://www.adb.org/sites/default/files/pub/2012/economics-wp-306.pdf and http://www.adb.org/sites/default/files/pub/2012/economics-wp-307.pdf on
2013-08-27
Freedom House.
Freedom in the world. 2012.
Available at http://www.freedomhouse.org/report/freedom-world/2012/russia-0#.UujhTvk1jIV. Consulted 2014-01-29.
Daniel Kimmage.
Undermining Democracy: Russia –
Selective Capitalism and Kleptocracy.
Freedom House. 2009. Available at http://www.freedomhouse.org/sites/default/files/russia.pdf. Consulted 2014-01-29.
Juan J. Linz and Alfred Stepan. Problems
of democratic transition and consolidation.
1996. Johns Hopkins University
Press.
The Observatory of Economic
Complexity. Country rankings (2008).
Available at http://atlas.media.mit.edu/rankings/.
Consulted 2014-01-29.
Lilia Ovcharova.
Russia’s middle class: at the centre or on the periphery of Russian
politics? European Union’s Institute for
Security Studies. 2012 February 16. Available at http://www.iss.europa.eu/publications/detail/article/russias-middle-class-at-the-centre-or-on-the-periphery-of-russian-politics/. Accessed 2014-01-29.
Reuters. Putin
dissolves state news agency, tightens grip on Russia media. Available at http://www.reuters.com/article/2013/12/09/us-russia-media-idUSBRE9B80I120131209.
Consulted 2014-01-29.
The Telegraph.
Russia look to control world's gas
prices. 27 Dec 2008. Available at http://www.telegraph.co.uk/earth/energy/gas/3982543/Russia-look-to-control-worlds-gas-prices.html. Accessed 2014-01-29.
Trading Economics. GINI index in Russia. Available at http://www.tradingeconomics.com/russia/gini-index-wb-data.html. Accessed 2014-04-20.
World Factbook. Country comparison: Distribution of family income - GINI index. Available at https://www.cia.gov/library/publications/the-world-factbook/rankorder/2172rank.html. Accessed 2014-04-20.
