There was never much suspense about whether Vladimir Putin would win the election on Sunday, but there is at least some question about which Putin will show up for his fourth term as Russia’s president.
It’s long forgotten now, but Mr. Putin was once a classic economic reformer. He took over as president in 2000, after a decade in which Russia was devastated by financial crisis, twice. With his country’s back against the wall, Mr. Putin in his early years pushed major economic reforms, including a simple flat tax and opening Russia to the world. His stated goal was to make Russia feel like any other European country. By the end of the decade, boosted by soaring oil prices, Russian per capita income had more than quintupled to over $11,000.
Then, as so often happens to even the best reformers, success made Mr. Putin complacent if not arrogant. By 2010 Russia was a middle-income country, and to make the next step in development it needed to reduce its reliance on oil, which had provided $1.5 trillion in revenue over the previous decade. And it needed dynamic new private companies to replace the doddering state-owned oil and gas giants that still dominated the economy.
Instead, the economic reformer of the early 2000s gave way to Putin the hyper-nationalist, stirring fears of a new Cold War. He is now widely seen as a geopolitical provocateur who has dispatched disguised soldiers to invade Ukraine and internet trolls to disrupt American and European elections, and who this month boasted of a new intercontinental missile capable of piercing Western air defenses “like a meteorite”.
However, on the domestic economic front, a very different Putin has been at work: responsible and cautious to a fault, focused only on guaranteeing stability, controlling inflation rather than stimulating growth and insulating the economy from foreign pressures.
Going forward, Mr. Putin’s legacy depends on which personality prevails: the genuine reformer of the last decade or the inward autocrat of this decade, aggressively provocative abroad and cautious to a fault at home.
The current siege mentality has roots in the multiple financial crises Russia has suffered since the fall of Soviet Communism in 1989. Serial crises sent the value of the ruble into free fall, considerably decreasing real incomes and making it nearly impossible for the Kremlin to pay its foreign debts. When oil prices collapsed in 2014 and threatened to start this humiliating cycle all over, Mr. Putin’s government shifted its focus further inward.
While other emerging economies fought the oil price collapse by either carrying out economic reforms to attract new foreign capital or trying to spend their way out of trouble and racking up more debts, Russia went the opposite direction. It restrained spending to shrink its deficit and pay down hundreds of billions of dollars in foreign debt. Instead of lowering interest rates to stimulate growth, it raised rates to choke off inflation.
To a large extent, these Fortress Russia policies worked. Government debt is just 15 percent of gross domestic product, and the Kremlin is now less vulnerable to foreign interest payments than any emerging world government save Thailand’s. Inflation has plummeted to below 3 percent from 13 percent in 2015 — so low by Russian historical standards that many people have a hard time believing it won’t come roaring back.
More remarkably, Russia has developed a new policy to prevent the ruble from swinging wildly with oil prices — as most oil currencies do — and that has worked too. The ministry of finance now buys foreign currency to prevent the ruble from increasing in value when oil prices rise above a set target and sells when oil falls below that target. For the past 18 months, the ruble has held relatively steady against the dollar.
Caution has a cost, alas. Belt tightening in the face of an economic downturn made the recession last through 2016 and limited the recovery in 2017, when economic growth rebounded weakly to just 1.5 percent.
Mr. Putin will be hard pressed to restore Russia as a great power — his avowed goal — if the economy grows at a pace that invites comparisons with the Brezhnev era of stagnation.
Russia is aging fast. The working-age population is shrinking at a pace of more than 1 percent a year, and with fewer people entering the work force, the only way to generate faster growth is to increase output per worker, which is now almost stagnant. To increase productivity, Mr. Putin would need to reform an economy that still exports mainly oil, wheat and guns, and relies on a unique mix of mom-and-pop businesses and huge state-run companies, much as it did in the Soviet era.
More than any other large emerging economy, Russia has a deficit of small- and medium-size companies — the sector that is often the hotbed of innovation and entrepreneurship, as well as productivity and job growth.
For all its foreign adventures, Mr. Putin’s Russia has dispatched not even one company capable of disrupting global markets. Russia has no companies in the top 100 global brands, compared with 22 from China and 46 from the United States. The Moscow stock exchange lists not one global manufacturer.
Russia punches well below its weight in commercial competition in part because its brand of state capitalism fosters so little competition at home: As Renaissance Capital, a Russian investment bank, has pointed out, the three most valuable companies in Russia today were also the three most valuable 10 years ago. Over the same period, the United States and China have seen dramatic churn in their top companies. Moreover, the failure to diversify the economy away from hydrocarbons means Russian livelihoods still swing with oil prices.
There is some reason to believe that Russia’s stagnant economy will be enough to push Mr. Putin back onto the economic reform path. In the same speech this month, when he unveiled his “meteorite” of a missile, Mr. Putin said all the right things about the economy, apparently at the behest of his few reform-minded advisers. He spoke of the need to boost growth in gross domestic product and productivity, trim the state’s role in the economy, diversify beyond oil and encourage more small- and medium-size enterprises.
Unfortunately Mr. Putin’s actions in recent years, as opposed to his recent speech, suggest no change in his essentially feudal view of capitalism or his unwillingness to ease state control over the economy, which he has embraced since his university days. His Ph.D. thesis extolled state support for large conglomerates that could “compete as equals” with Western multinationals.
Mr. Putin’s defensive economic mind-set also reflects the desire of the voters who just rubber-stamped his return to power. In a 2015 survey, in which the Levada Center, an independent pollster, asked what issues matter most, the largest share of Russians said “stabilization of the political and economic situation.” Next came “social protection,” job security and “on-time payment of wages and pensions.” Not even 10 percent said “continuation of reform,” encouraging entrepreneurship or any of the bolder moves Russia needs to stir a dormant economy out of its slumber. The poll is three years old, but there is little evidence that Russian attitudes have changed.
To the extent Russians want “decisive change,” they want more protection from global competition and inflation, and are vehemently opposed to any cuts in their bloated pension benefits. Even among the Moscow business elite, the buzz before the election was not about fixing the economy. It was about how Washington’s recent sanctions on Russia for election interference only further increases the need to reduce Russia’s vulnerability to global pressures.
So which side of Mr. Putin will we see in his fourth term? Clearly the best outcome for Russia would be a return of the early Putin, an aggressive reformer keen on making Russia a genuine economic power. There are pressures pushing him in that direction. But the weight of evidence suggests that we’ll see more of the recent Putin, a defensive economic manager at home and an aggressor abroad.
Ruchir Sharma, author of The Rise and Fall of Nations: Forces of Change in the Post-Crisis World, is the chief global strategist at Morgan Stanley Investment Management and a contributing opinion writer.