A century after Lenin’s radical economic reforms, little has changed in Putin’s ‘modern’ Russia

Is Russia on the path to modernisation or treading old ground? A look back at early Soviet history shows the country may not have come far

Vladislav Inozemtsev
Wednesday 17 March 2021 13:45 GMT
Russia s Tanking Economy And The Putin Effect

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Louise Thomas

Louise Thomas


One hundred years ago, on 14 March 1921, the 10th congress of the All Russia Communist Party passed a resolution “on replacing the food appropriation system with an agricultural tax”. This allowed the Russian peasants to render to the state 25 to 40 per cent of everything they produced instead of being constantly robbed by armed people expropriating their harvests for the sake of “perpetual revolution”.

From this time on, the villagers could sell the remainder wherever they wished at market price. The change Vladimir Lenin called the New Economic Policy (NEP) restored free trade, reinstalled private property, denationalised small enterprises, allowed foreign companies to do business in Soviet Russia, and turned the ruble into a fully convertible currency in less than a year.

The new policy was introduced at a hard time: just a week before, the Kronstadt uprising showed that the Bolsheviks’ most devoted supporters, the naval mariners, had started to turn away from the party leadership. The change was badly needed, and the new course yielded encouraging results: the annual growth rate for 1921-26 shot up to 25.4 per cent; by 1927 the agricultural production exceeded pre-First World War levels; the industry destroyed by war was on the rise. Foreign trade between 1921 and 1927 grew by an average of 36 per cent per year, and some economic sectors developed even more rapidly.

Meanwhile, the NEP was doomed from its start. On the one hand, the Bolsheviks treated it as a “temporary retreat” from their major goal of building a centralised, state-controlled economy, so the “deal” with the peasantry began to fail as early as 1923, when wholesale prices for agricultural produce started to be pushed down by the government, while the value of industrial goods increased.

By 1927, as grain procurements were disrupted, the fate of the project was obvious. On the other hand, private entrepeneurship wasn’t able to create the heavy industry Communists dreamed of. The most dynamic medium and small businesses supplied the consumer market, so in the second half of the 1920s the industrial growth slowed, reflecting limited consumer demand.

The result is well known: in 1929, the first five-year plan was adopted, collectivisation had begun, and soon the market economy disappeared while the engineers and managers were substituted by secret police servicemen and party bureaucrats.

But looking back on the path Russia traversed in those years, one may notice how similar it was to what happened 80 years later. In 2000, after eight years of economic demise, impoverishment and hyperinflation, newly elected President Putin reestablished “normalcy” of some kind. The government introduced a low flat income tax rate; stabilised the foreign exchange market and even announced its desire to turn the ruble into a reserve currency. Economic liberalisation and the return of order pushed the stock market 5.5 times higher between 2000 and 2005, as many industries that were virtually absent in the Soviet and first post-Soviet periods developed dynamically.

Russia has become a second home for highly paid foreign managers, while the real per capita income increased 2.5 times by 2007. Even the symbolic reconciliation of the two First World War losers – Soviet Russia and Germany – that marked the time of Lenin’s new policies, echoed the unexpected alliance between the Russian Federation and the United States, two “innocent victims” of international terrorism.

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However, the NEPs of the 21st and 20th centuries were similar also in some other aspects. In the 1920s the resource-based agrarian economy was the basis for the country’s rise; in the 2000s the energy sector performed the same role due to an upswing in oil and natural gas prices that delivered a massive cash inflow to Russia. The oil export revenues between 2000 and 2004 were on average $33.5bn a year higher than in 1999; the difference grew to $223.6bn between 2005 and 2008 and to $394bn between 2011 and 2013.

As before, the growth was driven by consumer market oriented industries (retail and wholesale trade, residential construction, financial services, and, of course, telecommunications and internet accounted for 62 per cent of the overall GDP increase between 2000 and 2007), and by the time Russia’s economy was hit by the global financial crisis of 2008, the sources for growth were almost exhausted. But similar to the 1920s, the recovery growth did not in itself guarantee technological modernisation.

Once again, just like 80 years before, the country was ruled by bureaucrats and servicemen that didn’t recognise business as an equal partner to the government: the first clash between the authorities and entrepreneurs again took place three years after the launch of the new policies, and it cost freedom and fortune to the richest people in the country – specifically the owners of the Yukos oil company.

Starting from this time on, the government, albeit in much more civilised ways than before, consolidated the largest companies under its control and started to revise “the terms of the deal”: to increase the tax burden, to reduce the powers of regional authorities, to cut education and healthcare expenses and finally raise the retirement age.

By the second half of the 2010s, it was clear a new “power elite” had formed; foreign capital began to be squeezed out of the country; the first elements of a foreign trade monopoly appeared (recall the unique status of Gazprom as a gas exporter and “counter-sanctions” as an analogy of state import regulation); the former secret service members and retired military turned statesmen established an effective control over the main financial flows.

Of course, no one is saying Russia is now facing the prospect of new collectivisation, militaristic hysteria or repressions similar to Stalin’s “purges”: no matter how critical one may be towards the current government, such statements would indicate a clearly inadequate perception of reality. However, several important parallels are clearly visible.

First of all, I would argue that the NEP policy in one way or another does not lead to large-scale modernisation – the global practice shows economic breakthroughs are secured by strong governmental lead over the economy and setting of long-term goals, as happened in Japan, Korea, Taiwan, or Brazil. The NEP of the 1920s, as well as the NEP of the 2000s, were able only to restore the economy to its pre-crisis levels while adapting to changing consumer demands.

The fundamental difference between the 1930s and 2010s was that in the first case, the Bolsheviks focused on achieving a new level of economic development by any means and despite any sacrifices, while the current generation of operatives is quite satisfied with benefiting from a typical economy of the “second world”. The degree of militarisation of Soviet society by the early 1940s compared to cartoons about pioneering missiles, and the few new tanks and aircraft which the public is presented with in early 2020s, show this clearly.

The second important point was that the rapprochement between the Soviet/Russian and world economies was a fiction. The perception of elements of Western technological and economic culture turned out to be superficial, and in no way affected the fabric of society or its institutions. Both then and now, the outside world was perceived solely as a source of capital, equipment and technology, but not as a role model in lifestyle and by no means as a beacon for basic liberal values. As international tensions became more serious, economic self-sufficiency prevailed – although, of course, the degree to which it affected actual independence from the outside world is questionable.

Finally, the curtailment of both NEPs occurred primarily due to the ruling nomenklarura’s need to secure its power. In Soviet times it could be achieved through a much more radical breakdown than today, when one can act a bit leniently – but the degree of political control over the economy is steadily growing as we see more attempts of “requisition of excess profits”, price regulation, freezing of pension savings, restrictions on export and import of certain goods, and much more.

At the same time, it’s clear that, while in the late 1920s the ruling class set ambitious goals for the country and were ready to pursue them by almost any means, today’s elite is focused on securing purely economic benefits. This leads to two conclusions: on the one hand, one shouldn’t expect any reckless moves from Putin’s regime, but, on the other hand, no one should hope Russia will turn to the West seeking ways and means for an intensive modernisation, either economic or social.

The parallels between the “new economic policies” of the 20th and the 21st centuries show that for more than a 100 years Russia has not been able to find its own model for sustainable economic and social development. For it, “modernisations” remain alien and sometimes out of reach, requiring harsh political coercion to bring about. Economic stability is about restoring past conditions, not progress. And alliances with the outside world were and remain temporary and situational, while the domination of state power over businesses is enduring and unchanging.

Century after century, Russia turns to innovative recipes for economic growth only at times of complete hopelessness, quickly abandoning them as soon as the period of hardship seems over. And it may well happen that in 100 years from now, the country will find itself on another lap of its endless circuitive journey.

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