Why Did Financial Openness Reforms Succeed in Russia and Not in China?

In: Russian Politics
Igor Logvinenko Associate Professor, Diplomacy & World Affairs, Occidental College Los Angeles, CA USA

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The twenty-year period of modernization of the Russian economy under the leadership of Vladimir Putin, prior to the invasion of Ukraine in 2022, was characterized by a consistent trend towards a statist domestic orientation, coupled with an increasingly radical policy of financial openness. Despite numerous domestic economic reforms, which were oriented towards free-market principles, being either reversed or significantly altered, foreign economic policy reforms proved to be more enduring. In this paper, I argue that the differential outcomes along the axis of internal and external economic reforms are interrelated. The absence of a robust rule of law domestically enabled the reversal of privatization reforms, but also made financial openness policies more appealing to political elites. Furthermore, the society’s expectation of welfare paternalism enabled the regime to tolerate the negative aspects of greater integration by relying on distributive policies rather than widespread repression. In contrast, I demonstrate that the inheritance of a less developed welfare state and an over-reliance on repression led the Chinese Communist Party to adopt a more cautious approach towards financial integration.


The twenty-year period of modernization of the Russian economy under the leadership of Vladimir Putin, prior to the invasion of Ukraine in 2022, was characterized by a consistent trend towards a statist domestic orientation, coupled with an increasingly radical policy of financial openness. Despite numerous domestic economic reforms, which were oriented towards free-market principles, being either reversed or significantly altered, foreign economic policy reforms proved to be more enduring. In this paper, I argue that the differential outcomes along the axis of internal and external economic reforms are interrelated. The absence of a robust rule of law domestically enabled the reversal of privatization reforms, but also made financial openness policies more appealing to political elites. Furthermore, the society’s expectation of welfare paternalism enabled the regime to tolerate the negative aspects of greater integration by relying on distributive policies rather than widespread repression. In contrast, I demonstrate that the inheritance of a less developed welfare state and an over-reliance on repression led the Chinese Communist Party to adopt a more cautious approach towards financial integration.

1 Introduction

It seems like a description of a past long gone, but between 2006 and 2022, Russia was one of the most financially open emerging market economies. In 2006, for the first time in nearly a century, capital began moving freely across Russian borders. The Central Bank of Russia (CBR) stopped requiring exporters to sell dollar-denominated proceeds of foreign sales. Residents and nonresidents were no longer obligated to reserve a portion of the cross-border capital transfers with the CBR. Most importantly, the authorities removed controls on Russian companies’ foreign borrowing. Going forward, residents could purchase securities abroad, and nonresidents could invest in Russian domestic securities without restrictions. The new approach towards financial openness continued right up until the invasion of Ukraine in 2022, despite sanctions and restrictions placed on Russia externally since 2012. Successful integration of the Russian economy into the global financial system has been one of the major successes of post-communist reform efforts.1

The relinquishing of controls over the financial flows by the otherwise control-obsessed regime of Vladimir Putin is puzzling. The politicians at the helm of the Russian state in the early 2000s were keenly aware of the dangers of financial exposure based on their experiences in the late 1990s. Yet, in the course of Putin’s rule, decontrol of cross-border economic transactions and amplified control over domestic political and economic life went hand in hand.

Putin and his political allies made the contrast between the ‘stability’ of the 2000s and the ‘chaotic’ 1990s into a rhetorical, legitimating foundation of their rule. ‘Political stability’ and ‘economic prosperity’ were sold together in a single package. Yet greater openness, whatever benefits it may deliver, did little to promote greater financial stability, especially in an economy mired in fundamental structural imbalances. As a result, the regime that did everything to avoid sharing power became more beholden to foreign capital markets. Putin and his cabinet understood that greater exposure to external financial pressures could be destabilizing, yet they decided that the benefits of the policy outweighed the costs.

In contrast, since 1978, China’s approach to capital account deregulation has been consistently based on restraint. On rare occasions when Beijing introduced greater financial openness, it did so in limited experiments, at first with the goal of accessing foreign exchange, and later in order to create incentives for long-term foreign investment that would aid the development of domestic industries, and the transfer foreign technological and managerial expertise. The Communist Party jealously guarded monetary autonomy through significant controls and regulation of foreign exchange operations and prevention of any short-term fluctuations in the markets. As Russia was liberalizing its capital account, nonresidents were not permitted to sell or issue capital market securities in China. Chinese residents, except for authorized financial institutions, were not allowed to purchase, sell or issue securities abroad, unless these actions were coordinated with the People’s Bank of China, the State Administration of Foreign Exchange and the Securities Supervisory Board.2 Essentially all transactions with money market instruments, collective investment securities, and derivatives were either prohibited or limited to state-approved entities.

This article aims to shed some light on these puzzles by focusing on the role of a little-studied aspect of post-communism: redistributive policies under authoritarianism, or the Authoritarian Welfare State (AWS). I hope to show that extensive redistributive capacity allows authoritarian regimes to engage in risky policies, like capital account deregulation. Political elites in control of such capacity are able to tolerate the downsides of financial openness, and therefore adopt more liberal policies on the movement of capital. The argument is evaluated against several alternative explanations a brief comparison of divergent financial openness policies of Russia and China.

It is imperative to emphasize that the analysis presented here is strictly limited to the circumstances preceding Russia’s invasion of Ukraine in 2022. The ramifications of this aggressive action were profound and far-reaching in regards to global financial markets. There was a mass exodus of companies from Russia and a precipitous drop in stock values as investors grappled with the potential for an escalated conflict and the disruption of trade. The cost of oil and natural gas, which are both integral components of Russia’s economy, experienced significant fluctuations, stabilizing somewhat in early 2023. This article should serve as a catalyst for further examination of the relationship between globalization and authoritarian regimes, and the events surrounding Russia’s invasion of Ukraine should serve as a cautionary tale for those who view economic integration as a panacea against war and despotism.3

2 Financial Globalization and Authoritarian Politics

Regardless of the regime type, more financial openness implies more volatility with significant economic ramifications and, at times, devastating political consequences.4 Countries with weak domestic market institutions are likely to suffer even worse downsides from openness, including more intense capital flight and political unrest.5 Governments in financially open non-democracies are likely to be restricted in their use of full range of policies. For example, in case of domestic turmoil heavy-handed policies to control the masses could further reinforce volatility, generate capital outflows, and even lead to sanctions and boycotts.

Financial integration expands the total amount of wealth that can be expropriated, while also strengthening potential regime opponents, specifically the middle class, which tends to hold predominantly mobile assets.6 Some researchers have noted the rise of the state, in particular in East Asia, as a way by which authoritarian regimes delt with greater volatility and the ease with which an opposition be financed, associated with financial globalization.7 Another set of arguments actually shows that financially integrated autocracies are more likely to democratize. Critically, the authors argue that greater de jure financial openness policies (official abolition of capital controls) alters the de facto mobility (actual recorded movements of capital) of the otherwise ‘trapped’ assets, influencing the outcomes of social conflict within autocracies.8 This article builds on this recent research efforts to gain a clearer understanding of the politics of domestic reforms and foreign economic policymaking in Russia.

2.1 Financial Openness and the Value of Assets

Integration into global financial markets serves as a ‘governance solution’ to the problem of asset specificity. The value of a site-specific asset declines when it is used outside of its ‘site’, which in this case means the political jurisdiction of a sovereign state. By liberalizing the rules that govern the movement of capital in and out of the country, Russian political elites effectively reduced the specificity of assets they control. This lowered transaction costs and raised the value of assets under their control. For example, when foreign investors were allowed to purchase stocks issued by domestic firms on domestic exchanges, this effectively made those specific holdings ‘more mobile’, in the sense that a share in the asset can be exchanged for more liquid assets held by foreign investors, and with greater ease due to increased frequency of trade.9 By removing the tax on exporting capital, or by inviting foreign equity investors into the domestic markets, the Russian elites made it easier to access financing, allowing them to capture yet larger segments of the local market, raising the valuation of their assets and further increasing their political clout. This in turn bolstered Putin’s regime by giving it more flexibility to manage the overall economy. Financial openness policies in Russia thus can be understood endogenously within its domestic political economy based on corruption, informality and weak rule of law.

2.2 Financial Openness as a Political Gamble

Financial openness, however, is risky business. Capital account deregulation, greater foreign access to domestic markets, and other forms of financial openness amplify the potential for instability. Indeed, the ‘double-edged sword’ nature of capital account liberalization encapsulates most of the academic and policy debates concerning this subject (IMF 2012; Gallagher 2011). While the elites may capture many of the gains associated with greater openness, the empirical evidence on the broader benefits of financial globalization is mixed.10 Significant downside risks, including most especially severe financial crises, are more serious and frequent among developing economies with weak financial markets and governing institutions.11 Emerging markets with underdeveloped financial and legal institutions are exposed to greater volatility and higher chances of growth reversals when they lower the barriers of entry to the flow of foreign finance. All of these potential downsides are extra troublesome from the perspective of authoritarian regimes, since financial openness restricts their ability to use repressive policies to quell political instability, because capital reacts negatively to increased violence. The puzzle of financial openness in Russia and financial caution in China serves as a useful way to explore the question of why authoritarian regimes vary in their willing to embrace the risks of globalized finance.

3 Temptations of Financial Openness

Financial openness policies have allowed Putin and his allies to magnify the gains of increased control over the economy. By 2005 Putin’s Kremlin was able to re-establish state control over major natural resource assets in the country, most notably Gazprom and Rosneft.12 Immediately after capital account deregulation policies went into effect in July 2006, Rosneft underwent an initial public offering, in which 15% of shares were sold on the London Stock Exchange and on Moscow exchanges for a total of $10.7 billion. Rosneft, having been appraised at about $4 billion in 2004 was valued at $100 billion in 2007, emerging as Russia’s biggest oil company and the 10th largest in the world.13 Between September 1, 2005 and September 1, 2006, capitalization of Gazprom increased by three-fold and that of Rosneft by 23-fold. The Russian stock market entered a qualitatively new stage of development after 2006, as foreign investors rushed to invest. Depository receipts for 75 Russian companies became available for foreigners, with most of those having emerged on the scene during Putin’s early tenure.14 Soon large price discrepancies between Gazprom’s ADRs and locally traded shares went away as the government united the market for Gazprom shares, creating a bonanza for Gazprom’s investors. Without question, state-owned companies reaped the greatest rewards of openness in Russia.

Although the Chinese government never adopted the swift approach taken by Moscow in 2006, Beijing ‘flirted’ with financial openness on several occasions during the last twenty years. In 1996 China signed onto several important articles of the IMF’s Articles of Agreement. By accepting Article III, Chinese authorities committed to current account convertibility for the renminbi and even made pronouncements about its intentions for full capital account deregulation by the year 2000. The Asian Financial Crisis of 1997-98 put an end to the talks of capital account deregulation.15 Global instability combined with the start of SOE reforms that included reduction of the state-employed labor force by tens of millions, made the Party very nervous. Beijing especially feared capital flight, which put at risk its unstable banking system – by then already beleaguered by non-performing loans. Although de jure controls remained on the books, authorities went even further, sending ‘tens of thousands of auditors’ to track down illegal capital transfers abroad.16 Later in 1998, strapped for liquidity, the four major state-owned banks received major capital injections, creating a precedent that would repeat itself numerous times through the years. This two-pronged approach of using repressive mechanisms and massive bailouts demonstrated the extent to which the regime lacked confidence in its ability to respond to economic downturns through political exchange. The experience of the crisis continued to inform the decision-making of many among the Chinese elite for years to come, especially those who were already predisposed to favor a conservative approach toward managing engagement with financial globalization.17

The next episode of experiments with financial openness came in mid- 2000s, but these policy innovations were also short-lived.18 In 2002, the Qualified Foreign Institutional Investors (QFII) program was launched, which allowed foreign entities to purchase Yuan-denominated A-shares with certain restrictions. These first cautious experiments following the Asian Financial Crisis made the regime apprehensive about further financial openness. A new four-tier classification of industries where foreigners can invest was introduced, most consequentially opening the services industry to foreign investment. The government withdrew the requirement to register with SAFE to borrow foreign exchange from domestic banks in 2003. Foreign investors gained access to more than 1200 Chinese companies listed in Shanghai and Shenzhen.19

Yet, the cautiousness of the Party leadership prevailed even against these very modest increases in financial openness. The CSRC required QFII participants to hold their investment for a minimum of 12 months before repatriating the gains. At the end of 2004, only 23 foreign investment banks received approval for a total amount of a meager $3.2 billion.20 Despite the initial success of the program, approval of new applications came to a halt as a way to limit hot money inflows.21 Ultimately, the impact of QFII, in terms of the total amount of inflowing funds was negligible.

Approaching the onset of the 2008-09 Global Financial Crisis, Chinese foreign financial policies were a bundle of contradictions. The new foreign exchange regime of managed float that was introduced in 2005, actually required stricter scrutiny for inflows. New requirements, aimed at preventing undue fluctuation of the Chinese currency, prohibited foreign inflows into RMB accounts.22 As a sign of how attractive Chinese assets were to foreign money, and despite the major de jure restrictions on the inflows remain, large volumes of money poured into the country’s real estate and equity markets through illegal schemes, especially through over and under-invoicing of current account transactions.23 To lessen the pressure on the RMB, Beijing abolished several important limitations on outflows. These included new higher limits on foreign currency conversions for residents, and, more importantly, the Qualified Domestic Institutions Investors (QDII) program introduced in 2006, which allowed Chinese residents to invest in foreign equities for the first time. By end of 2007, $27 billion were invested – a far greater amount that was allowed under the QFII scheme.24 Using the familiar restrictions lever the State Administration of Foreign Exchange froze the program at $90 billion (less than 10 percent of total assets in domestic funds), with at least a quarter of the QDII funds being forced to suspend subscriptions.25

In all of the episodes of experimentation with openness – just like in Russia’s case – the state-owned companies stood to gain the most, yet Beijing chose a cautious approach, presumably more concerned about the downside risks. When the China Securities Regulatory Commission released guidelines for Chinese companies seeking foreign listings (principally in Hong Kong) in 1999, the rules were tailored for large state-owned companies.26 The QFII program allowed large investment institutions entry into the domestic equity market, and the 2005 reform, which let non-tradable shares (mainly owned by government entities) to be converted into tradable shares.27 It was in the first decade of this century that SOEs’ fraction of total equity market capitalization increased from about 70 percent to over 80 percent.28 When qualified foreign entities were in fact given a limited entry into the Chinese stock markets, the SOEs and the regime benefited most. What is notable, however, is not that the Party favored SOEs, but rather how much capital (both in terms of additional valuations, easier financing and additional income) was ‘left on the table’ by keeping the restrictions.

4 Why Open Capital Markets in Russia, but Not in China?

The contrast between Russia and China is compelling for several reasons. The two economies share many similarities, including long periods of largely autarkic development, weak financial markets, uncompetitive politics, and a legacy of state-owned enterprises with an oversized role in the economy. At the turn of the century, both countries had accumulated enough resources to advance foreign economic policies independently of other nations and international financial institutions. Despite these commonalities, only Moscow opted for a course of radical capital account deregulation, while Beijing continued the cautious approach of retaining significant capital controls. Indeed, one might expect that a growing economy, stable political system and sizable foreign exchange reserves would have given the Chinese Communist Party sufficient confidence that it could withstand any ‘storm’ in the global financial markets.

Before turning to the role of redistributive capacity in Russia and China, let us first consider why other possible explanations come up short in addressing the question at hand. Differences in authoritarian political institutions, the health of domestic financial systems, the types of goods the two countries export, and ideational issues cannot explain the variation in financial openness policies between China and Russia. In fact, these variables often suggest that China should have outpaced Russia in financial integration. While one could construct post hoc explanations for different policy choices based on these factors, if the opposite choices had been made (if China had opened and Russia had not) one could have constructed equally plausible explanations based on those same explanans. It is the crucial difference in the two regimes’ capacities for redistribution that far more plausibly explains this variation in financial openness policies.

4.1 Regime Type and Political Institutions

China is a long-standing single-party regime, which has become increasingly personalistic, while Russia has long been a fully personalistic ‘patronal’ authoritarian system.29 Chinese leadership is more constrained by institutions than their Russian counterparts, producing different time horizons and credibility of commitments vis-à-vis different facets of the global economy.30 Yet differences in authoritarian institutions other than patterns of state control and redistributive capacity cannot explain the difference in financial openness policies between China and Russia. If single-party regimes with vast control over the economy are more likely to engage in financial integration, China should have outpaced Russia in financial openness. If more politically institutionalized authoritarian regimes produce greater confidence in both domestic and foreign investors, we ought to expect a long-standing authoritarian regime like China’s to be less – and Russia’s personalistic regime to be more – cautious about economic volatility.

4.2 Fragility of the Chinese Banking Sector

China’s fragile banking system is often seen as its ‘Achilles heel.’31 State-owned banks dominate the financial system, controlling over three quarters of all lending, with the bulk of these funds being directed to other state-connected entities through preferential arrangements resulting in massive accumulation on non-performing loans (NPL).32 According to one conservative estimate by China’s own National Audit Office, local governments alone had amassed debt equivalent to about 27 percent of China’s GDP by the end of 2010.33 It is possible that the Party’s concern about the fragility of the Chinese banking system cautioned it against greater financial openness. However, Russia’s banking sector is equally state-concentrated and fragile, having been almost entirely wiped out during the 1998 crisis.34

Even focusing solely on China there are reasons to be skeptical about the ‘fragile banking system’ hypothesis. First, it is not obvious that additional inflows of funds would be bad for Chinese banks. Foreign financing could have eased the NPL problem, at least in the short term. Troubles in the Chinese banking sector that persisted since at least the late 1990s did not detract from record breaking IPOs of state-owned banks on the Hong Kong Stock Exchange.35 Second, restrictions on capital flows and foreign ownership of the domestic banking sector do not have to go hand-in-hand.36 If the Chinese authorities were concerned with the fragility of the banking system, they would be far more reluctant to allow direct branches of foreign banks. The opposite is true however, as China has had fewer restrictions on foreign participation in the banking sector than Russia, having abolished restrictions on foreign branching in 2009.37

4.3 Nature of the Economy

Although the export profile of the two economies is very different, it is notable that both are export-oriented. Consequently, they face some of the same issues concerning current-account surpluses during boom years and problems with capital flight and volatility during downturns in international demand for their exports. Oil and other natural resources tend to fluctuate much more wildly than do manufactured goods, so Moscow in theory should be more concerned with volatility. Maintaining a policy of keeping the currency artificially underappreciated would be more difficult with an open capital account, but entirely possible given the massive foreign currency reserves. In fact, as the Chinese economy has slowed down in recent years, Beijing opted for a confusing policy of quasi-fixed exchange rates, while still largely aiming for exchange rate stability – all the while keeping many fundamental restrictions on movements of capital in place to deal with capital flight.38 These concerns are very familiar to the Russian government, which has seen the value of the ruble plummet and capital fight accelerate in the early 2010s-without resorting to any interference in currency operations.39 Even though the swings in the value of the ruble were far greater than in the yuan, the Kremlin remained committed to financial openness.

Although largely unsettled, a vast literature on resource-rich states suggests that these policies may exhibit distinct behavior with respect to various policy arenas.40 Russia’s oil wealth is significant, but it is by no means comparable to some of the wealthiest mineral exporting countries. On a per capita basis Russia’s revenues are similar to Australia’s.41 At the same time, some of the biggest state-owned enterprises in China are, in fact, entirely site-specific and capital intensive – in other words, ones that would benefit from abundant and perhaps more selective foreign capital. According to a 2016 report in The Financial Times, ‘state-owned enterprises are clustered in smokestack industries like steel, coal, shipbuilding and heavy machinery.’ In other words, similar to Russia, the portfolio of regime-controlled industries in China are dominated by ‘trapped’ assets, as opposed to more mobile asset types, like technology, healthcare and financial services.42 Undoubtedly, there are other key differences in the composition of the two economies with political economy implications that influence the policies of the two countries in varying directions. But these differences alone cannot account for the policy choices.

4.4 Ideational Variables

Scholars have identified a variety of channels through which ideas and processes of social construction influence politics and policymaking.43 Yet it is often difficult to deduce predictions about financial openness policies that are specific to the two countries. Some constructivist scholars attribute significant changes in these countries’ foreign economic policymaking in recent decades to a process of socialization occurring through both domestic and international channels.44 Other scholars emphasize unique forms of civilizational identities, which are stable and should lead to more consistent approaches towards managing globalization.45 But the policies of international economic integration have been inconsistent through time or across policy arenas. China has been reluctant to embrace financial openness, but quite eager to facilitate trade openness. The opposite has been true in Russia’s case. Similarly, the ‘personnel-is-policy’ thesis points in a different direction in outcomes between China and Russia.46 It is true that the policymakers who were in charge of the technocratic aspects of the reform in Russia were of the neo-liberal persuasion. However, they also had powerful opponents within the regime, and there are almost no Western-educated policymakers among the Russian technocratic elites.47 Conversely, Western-educated policymakers are well-represented at the higher echelons of Chinese technocratic elite.48 Constructivist arguments based on the worldviews of key personnel would have predicted a more open China, and a less open Russia.

4.5 Redistributive Capacity under Authoritarianism

A key through-line connecting many possible explanations of Chinese reservations with respect to further liberalization is Beijing’s concerns about social unrest. Authoritarian political institutions, which are much stronger in China than in Russia, are better prepared to deal with political turbulence, but Russia’s system of redistributive institutions and social safety net is far better equipped to deal with social instability. If the fragility of the banking system or the over-reliance on exports is what leads Beijing to avoid greater financial openness, the underlying worry, presumably, has to do with the Party’s fundamental inability to handle the consequences of a banking collapse or a global recession. The second-order worries come down to the regime’s lack of institutional capacity to handle social unrest without resorting to violence.

To explain why Russia accepted the risks of openness and China did not, we must understand these regimes’ evaluation of costs and benefits of these policies, including the tools they possess to address domestic political vulnerabilities. While other variables certainly played a role, focus on redistributive capacity allows us to explain why Putin’s regime could accept more risks in the global financial arena. In contrast, underdeveloped redistributive capacity and dependence on repression forced the Chinese Communist Party to opt for a cautious approach despite a stellar economic performance.

In authoritarian regimes, the elites control the preponderance of assets and exclude the non-elites from manifesting their preferences over the distribution of those assets. This generally means that the wealthy are better off and the poor are worse off under authoritarianism. This however does not mean that autocracies do not redistribute income or support vast welfare states, as many post-communist authoritarian regimes demonstrate.49 Scholars of economic integration among the advanced industrialized democracies have long been aware of the association between exposure to the global economy and compensatory government policies.50 Under certain conditions, authoritarian leaders are able to gain access to the global economy while maintaining domestic stability. Given substantial redistributive capacity, these regimes can shield supporters and appease opponents who are harmed by the ‘downsides of openness’ during episodes of externally-originated crises. Having financial resources, like foreign reserves or revenues from exports of natural resources, is not sufficient to mitigate the risks of openness. Redistributive capacity allows nondemocracies to ‘afford’ more financial openness than they would be able to afford otherwise.

Ronald Wintrobe was among the first to observe what many scholars of state socialism always understood: authoritarian rulers rely on a mix of coercion and what he called ‘political exchange.’51 Authoritarian governments, just like their democratic counterparts, ‘provide services to citizens: they build roads, hospitals, and schools and protect property.’52 Redistributive policies are fundamentally about ‘allocations of government goods and services to identifiable localities or groups.’53 ‘Redistributive capacity’ then captures the reach of those allocations; the potential of the state to use welfare institutions and labor policies to provide subsidies, direct employment, and services to the population. Chinese and Russian political elites ‘preside’ over states with vastly different redistributive capacities. The highly developed redistributive capacity that Russia inherited from the Soviet Union can remove uncertainty about the regime’s ability to maintain order without resorting to repression. The extent of redistributive capacity influences whether authoritarian elites can accept the risks associated with greater international financial integration.

5 Authoritarian Policy Options during Economic Downturns

By studying the choice of policy tools that a given regime employed in its responses to the Global Financial Crisis in 2008-09, we can learn a great about their views about the political elites’ assessment of their strengths and weaknesses. Both Russia and China had at its disposal some combination of repressive and redistributive responses. Both provided significant stimuli using massive reserves accumulated before the crisis to ease the access to financing, especially for the SEOs. Yet, although the severity of the crisis was greater in Russia, the Kremlin almost entirely relied on mechanisms of political exchange through its vast redistributive capacity, while the Chinese regime relied heavily on fiscal policy and repressive policies to ensure social stability. While only an account that includes a multitude of factors could fully explain Moscow and Beijing’s responses, it is clear that different redistributive capacities offered the two states different policy options.

The redistributive capacity of the modern Russian state was inherited from the Soviet welfare-state.54 Soviet authorities began to ‘minimize conflict, while cultivating the support of the mass public through an expanding welfare state’ starting in the mid-1960s.55 Because the Soviet government guaranteed full employment, the communist welfare state did not provide unemployment insurance. Instead, the system was based on a system of ‘categorical benefits’ (l’goty) that entitled certain classes of citizens to in-kind benefits and subsidies. These included free public transportation, medications, utilities and housing. Being the recipient of l’goty was a badge of honor, a sign of high social esteem, signifying achievement or membership in respected career fields, like the military, healthcare and education. By the end of the 1980s the USSR developed a massive welfare system of nearly universal reach, enveloping the population in a wide network of benefits and perks, even if the monetary value of these services was relatively low.56 Although state socialism collapsed, reliance on redistributive capacity as a policy tool is deeply woven into the fabric of Russian polity at all levels. Even during the chaos of the 1990s, revenue-starved regional government introduced new subsidies and l’goty to shore up political support and compensate public sector workers.57

This institutional legacy of welfarism manifested remarkably in Russian labor statistics during the transition period. Unlike in Eastern Europe, where economic downturns were just as painful, Russian unemployment did not increase significantly.58 As Julie Hemment points out, ‘Russia is something of an outlier even among the members of the Commonwealth of the Independent States’ in the resilience of its welfare system post-1991.59 In the crises of 1998 and 2008-09, the Russian firms systematically reduced hours, drastically lowered real wages and delayed payment, and only infrequently used layoffs to cut costs.60 Significant portion of the labor force is enveloped in the redistributive institutions through the legacy system of enterprise-based social benefits. Because many fringe benefits are still delivered through employers, many workers are bound to state enterprises. This approach has resulted in a continual merging of industrial and welfare policies in Russia under Putin.61 To this day the combination of flexible wages and inert employment is what cushions the governing regime from political blowback of economic shocks.62 As a result, a 40 percent decline in GDP between 1992 and 1998 resulted in a top unemployment rate of ‘only’ 13 percent.

The Russian retirement pension system, while providing meager benefits, has a truly extraordinary reach at a relatively modest cost to the government. In 1991 nearly a quarter of the Russian population received pensions, but as a percentage of GDP these payments amounted to only 5 percent, as compared to the international standard of about 12 percent.63 Just before the crisis of 2008, the government was still spending only between 5-6 percent of GDP on pensions.64 Kremlin’s ability to directly raise incomes of nearly one-third of the population and the most vocal part of the politically active population is instrumental to its goal of maintain stability. Even if the recovery from crisis can be seen as a ‘paradox of success’ (given that the approach taken exacerbated many problems inherent in Russian political economy), it worked well in the short-term.65 The regime learned how politically explosive the reaction to the changes to the redistributive bargain could be when it attempted to reform the pension system. Introduced in 2004, the infamous Law 122 led to the largest wave of protests in modern Russian history, uniting opposition movements on all stripes and mobilizing both the retirees and students, leading the government to backtrack on most of the more drastic parts of the law.66 The unsuccessful welfare reforms effort demonstrated to Putin that re-negotiation of the redistributive pact was dangerous even during times of economic prosperity. The 2018 reforms did raise the retirement age of women to 63 and men to 65, but these efforts too led to social pushback and ultimately the government relented to make these increases gradually over the course of a decade.67

If the reach of the Russian welfare state is remarkable even among the group of post-Communist countries, redistributive capacity available to the CCP is among the least impressive for this group of states. The unparalleled scale of labor dislocation that took place in China in the last three decades put immense pressure on Beijing to maintain social stability. The implicit social contract that has sustained the rule of the CCP over the last three decades has been based on the promise of continued economic expansion. In fact, the ‘Open Door’ policies started by Deng Xiaoping were themselves intended as a transition away from Mao’s failing, repression-based rule towards a system that incorporated elements of political exchange. In many ways, Deng’s initial gamble proved to be successful. By the start of the 21st century, there were 600 million fewer people living in poverty, while per capita consumption by urban and rural residents tripled and quadrupled.68

Success of ‘development as priority’ (fazhan shi ying daoli) approach masked immense governance challenges for the regime.69 In the cities, the richest 10 percent made 3.3 times more than the poorest households in 1992. By 2002, the ratio increased to 7.9 and the Gini coefficient increased from .38 to .47 between 1988 and 2004.70 In 2014, China surpassed the U.S. in measures of income inequality – an issue often ranked as the top social challenge in surveys, ahead of corruption and unemployment.71 By many accounts it was only at the start of this century that the CCP began developing a social policy aimed at mitigating regional and urban-rural disparities, expanding the healthcare coverage, introducing minimum wage and old-age pension.72 As late as 2009-10, fiscal policy remained the only viable instrument of mending social strife.73

Although the Communists aimed to build Soviet-style institutions immediately following the 1949 revolution, Mao would denounce Khrushchev and Brezhnev for their ‘softening.’ As one observer put it, the Soviet Union ‘offered all citizens a ‘blanket’ of social protection, whose thickness, however, depended on one’s professional status and industrial productivity.’74 In contrast, the PRC left the vast majority of its population without any ‘blanket’ at all. Before the start of Deng’s reforms, urban Chinese workers were enmeshed in the ‘iron rice-bowl’ system, whereby the state guaranteed certain protections to the industrial force, chief among them guaranteed life-long employment.75 The 80 percent of the population residing in the rural areas were subjected to what Whyte referred to as ‘socialist serfdom’ in the agricultural sector.76 Maoist rule, although devastating in many respects, left the Chinese society remarkably equal, with little variation not only in income, but also in the ‘style of dress, housing quality, consumer possessions, and other indicators of social inequality.’77 Given a relatively dormant citizenry, population control was manageable during this period.

The initial economic reforms of the 1980s were likely ‘Pareto-improving’, allowing workers to take advantage of the new opportunities while still maintaining their connection to the SOEs and farm communes.78 The 1990s put an end to the ‘reform without losers’ paradigm, leading to major changes in the state-society bargain, resulting in two major social problems. First, the export-oriented growth model was based on abundant cheap labor, which implied large rural-urban population dislocations, exacerbating the issue of population control. Secondly, the SOE reform of the 1990s nearly halved the state-employed labor force, which relied on these enterprises for many social protections. In lieu of the welfare state, the Chinese regime has relied on the household registration system (hukou) to exercise population control since 1958, but especially since the onset of the 1990s reforms. Chinese authorities began allowing rural residents to move into urban centers, without granting them an official status that would entitle them to meager social benefits. These ‘floating populations’ without urban hukou continue to be denied access to government services in the cities. In some export-oriented cities, rural migrants constitute 30 percent of the actual population while the unemployed and unemployable concentrate in the countryside.79 By some estimates, more than 100 million people are still living on less than $1 per day in rural China.80 These imbalances have heightened protest activity and increased chances of further destabilization. The CCP has clearly made social policy into a major priority in the past decade, having made significant progress, but the extent of the challenges is enormous.81 It will likely take another decade before even a modest welfare system is in place in China. Until then coercive mechanisms like hukou will likely continue to be in frequent use, especially during episodes of economic downturns.82

5.1 Moscow’s Response to the Crisis: Stabilization through Redistribution

It is difficult to overstate how badly the Global Financial Crisis of 2008-09 battered the Russian economy. On September 16, 2008, trade on Moscow’s two main exchanges RTS and MICEX were suspended, after they registered the largest single day losses since 1998.83 By this point the RTS index had plunged by 54 percent since the start of the year.84 The financial carnage continued through the fall. Another selling panic broke out on October 6th when the two exchanges gave up 20 percentage points.85 In October, Russia registered the largest to-date monthly capital outflows of $50 billion, as official reserves declined by $100 billion. By November, the price of oil settled at $50 per barrel (down from $140 in July), and by the end of the year Russian stocks lost more than $1 trillion in valuation.86 The crisis quickly spread into the real economy, as the GDP declined by 7.8 percent in 2009. The World Bank sounded an alarm in early 2009, warning of 13 percent unemployment, 9 million Russians being pushed into poverty with no signs of return to growth for years to come.87

Several prominent Russian and Western commentators made dire predictions about the GFC’s catastrophic consequences for Russia. Evgeny Gontmakher, head of the Center for Social Policy at the Russian Academy of Sciences, outlined several grim scenarios, projecting 10 million people unemployed, emptied supermarket shelves, police crossing the barricade lines to join the protesters, and people taking over emptied government buildings.88 Anatoly Chubais (then head of the state-owned Russian Nanotechnology Corporation), assigned a 50 percent chance to the possibility of ‘serious economic, social, and perhaps even political turmoil.’89 Pavel Baev wrote of a ‘pronounced fear factor in [Putin’s] political behavior … TV pictures of angry demonstrations in Reykjavik and Athens, Riga and Vilnius accentuate this fear.’90 Two of Putin’s biggest critics, late Boris Nemtsov and Vladimir Milov, suggested that the Russian economy ‘began literally to collapse’ in the aftermath of the crisis.91

Although the regime was clearly concerned about the possibility of social unrest, none of the dire predictions materialized. While there were some protests, most of them were in response to new restrictions on imports of used foreign cars, or concentrated in singe-factory towns. Political upheaval in these ‘mono-towns’, where some 12 percent of the Russian population resides, appeared as the most threatening to the regime. Putin personally visited one of these locales to publicly confront a Kremlin-friendly oligarch, Oleg Derepaska, while outside of the public view state-controlled banks guaranteed billions of dollars in loans to save his business from bankruptcy.92 As Gerald Easter points out, during the crisis ‘when local administrations or big businesses failed to pay employees on time, Putin went into the ‘good tsar’ mode by publicly chastising chief executives, after which money for back wages was found.’93 At the end of the day Putin was able to maintain the loyalty of both the oligarchs and the broader public using redistributive channels.

Reserves accumulated during the boom years played a role. The National Wealth Fund stood at $225 billion, or 17 percent of GDP, with no external official debt.94 But it was the vast redistributive institutional capacity that made the crisis response effective, largely allowing the regime to abstain from using repressive approaches. The government directed reserve funds to aid welfare recipients and industries with a large number of employees.95 The $90 billion stimulus package increased spending for the elderly and young families by 18 percent.96 The government-controlled car manufacturer Avtovaz, which employed 70,000 people in Togliatti – a town largely dependent on it – received more than $1 billion in support during the crisis.97 The 2009 budget proposed a substantial fiscal stimulus, amounting to additional discretionary spending of 4.1 percent of GDP, with close to 50 percent of the package earmarked for social spending and 30 percent for direct support of large enterprises.98 Finally, the government took action to raise wages of federal bureaucrats by up to 30 percent.99

As spring 2009 approached, protest activity subsided. In March 2009, only 26 percent of Russians stated they would likely participate in a protest, levels similar to a March 2005 poll, conducted on the heels of benefits monetization reforms. More than half of Russians had not heard about protests associated with the lowering of living standards.100 Vladimir Gimpelson and Rostislav Kapeliushnikov showed that there ‘was no revival in strike activity during the 2008-09 crisis … despite a visible deterioration in wage and employment conditions for a large part of the labor force.’101 Daniel Treisman wrote that the regime ‘succeeded in sheltering the public from the full pain of the crisis.’102 Despite a severe decline in total output (close to 8 percent), real wages declined by only 2.8 percent, while pensions were raised by 10.7 percent in real terms. Because of the far larger government footprint in the economy prior to the crisis, the stimulus package was quite effective in preventing a rise in unemployment: it increased from 5.7 percent (July 2008) to 8.2 percent (December of 2009), returning to pre-crisis levels within 24 months.103 In the course of the crisis, Sergey Ignatiev, the head of the Central Bank of Russia, firmly announced that monetary authorities were ‘not planning to introduce direct controls on the movement of capital, which were in place before 2006. Capital account will remain free and liberal …’104

5.2 Beijing’s Response: Fiscal Policy as Social Policy and Population Control

Although the Chinese economy was well positioned to weather the Global Financial Crisis, it is clear the crisis unnerved policymakers in Beijing. Like many other stock markets in the emerging economies, the Chinese equity markets reached all-time highs in 2007, so the declines following the subprime mortgage crisis in the United States were especially breathtaking. The Shanghai Composite Index recorded an all-time low in October, having lost over 70 percent of its value since 2007.105 Yet, the chief worry in Beijing had to do with economic slowdown in the largest export markets, leading to a wave of unemployment and instability.106 According to several experts interviewed by the Wall Street Journal in early 2009, China’s economic growth was predicted to decline to 5-7 percent, leading to tens of millions of newly unemployed migrant workers returning to the countryside.107 Chinese government’s own reporting suggested that 20 million migrant workers lost their jobs by the end of 2008. Although the unemployment statistics in China are notoriously unreliable, the China Daily predicted the unemployment rate of 4.6% – worst since 1980.108 Among the most troubling signs of potential for unrest was a rise in protest activity. According to the Ministry of Public Security, popular protests increased from 87,000 in 2005 and 180,000 in 2010.109 The rise in protests was directly related to serious deprivations, even ‘sustenance crises’ among laid-off workers, pensioners and other vulnerable groups.110 In notable contrast to Russia, at the start of this century China ‘in most of the country … [had] no safety net for retirees’, making pensioners an especially potent source of protest activity.111 Ultimately, the official GDP figures registered a miniscule slow-down from 9.6 to 9.2 percent growth, even though as Jeremy Wallace documents, electricity consumption, rail traffic and export data suggested drop off economic activity on the order of a 10 percent decline.112

Initial reviews of Beijing’s response to the GFC were praised for being significant and well-executed. The government in Beijing clearly attempted to take advantage of the crisis moment to invest in new affordable housing projects, construction of new schools and implementation of new social services.113 But the overwhelming majority of the $630 billion stimulus was directed at tax breaks, preferential financing for state-connected firms and infrastructure spending – largely because the Communist Party lacked the capacity to directly affect the incomes of most vulnerable segments of the population. By 2012, economic growth slowed again and Beijing was forced to announce yet another round of stimulative spending in the amount of $157 billion.114

The crisis response, including data manipulation, is indicative of the kinds of issues the regime saw as most troubling for its survival, and the policy tools it saw fit to address them. Chinese government adopted a two-pronged approach of stimulus financing of labor-intensive industries in the coastal cities and building of new industrial capacity in the underdevelopment inland provinces. Both approaches had to be adopted in the absence of wide redistributive capacity in order to placate the dislocated migrant labor. However, this fiscal-as-social policy strategy was not enough alone – and required a system of population control. In the absence of developed social insurance schemes the regime could target unemployment only through fiscal measures. However, in order to do it, Beijing had to direct tens of millions of migrant workers in the coastal cities back to their villages, where they could find jobs in industrial relocation projects.115 The ‘safety-valve’ of urban-to-rural migration, implemented through hukou made the investment-heavy approach feasible.116

Lacking broadly embedded mechanisms of political exchange, Beijing still extensively uses repressive mechanisms like hukou for stability maintenance.117 Given these realities, in times of economic downturn regime stability in China largely depends on repressive tactics and short-term stimulus spending. In the aftermath of the crisis, the Party has been creating ad hoc solutions to respond to mounting social instabilities. One of them has been the decentralization of stability maintenance to the local level. The 2005 National Petition Regulation and 2008 CCP proclamation on integrated security management codified this approach in law.118 In the absence of an institutionalized redistributive bargain, Chinese localities have developed a system of huaqian mai pingan, or ‘paying cash for peace.’ Some district governments in Beijing operate ‘stability maintenance funds’ reaching into tens of millions of RMB.119 Meanwhile, the Public Order Administration Office set up by the Ministry of Public Security revealed it spent 701.8 billion Yuan (about 111 billion USD) in 2011 to fund all the public order administration missions (wei wen), exceeding national defense spending for the first time. With the rise of protest activity in China over the years, a ‘gray market’ for ‘petitioner-interception, security contracts, and payoffs’ has developed on the local level.120 Chinese elites to this day have only limited access to non-repressive mechanisms of upholding political stability, leaving them in a weak position if financial openness policies were to be adopted.

6 Conclusion

This article aimed to explain how authoritarian regimes in Russia and China dealt with the two-pronged challenge of financial globalization: the temptation of the financial rewards of hyper-mobile capital available to the elites, and the hazards of financial globalization that could destabilize the regime. By situating the policymaking calculus of the elites within a set of international and domestic opportunities and constraints, the article offered a new perspective on the comparative political economy of authoritarianism in China and Russia. This approach provides an insight into authoritarian politics by focusing less on political structures (parties, parliaments or patrimonial networks), and more on state capacities that permit stable modes of political exchange between the regime and citizenry. Moreover, the nature and extent of these domestic structures and capacities inform the decisions of authoritarian leaders with respect to engagement with the global economy. If the differences between Moscow and Beijing’s willingness to embrace financial globalization lie in the vastly different redistributive capacities available to the two governing regimes, we are likely to see China more eagerly embrace financial openness after it develops institutional capacity for redistribution.121

Although much of this analysis is based on policy decisions made prior to 2022, the article holds important lessons for understanding how autocratic regimes will aim to navigate engagements with globalization going forward. Financially integrated autocracies will continue to confront significant additional constraints on their policymaking both in the domestic and foreign economic arenas. These developments will create conflicting policy agendas between the political aims of the leadership and increased pressures from globalized finance. Certainly, the experience of financial sanctions against Russia in the aftermath of the invasion of Ukraine have already resonated with CCP’s leadership. Meanwhile, the Russian leadership began deploying redistributive politics almost immediately after the impact of post-February’22 sanctions began to byte.122 This article suggests that redistributive capacity can aid the perseverance of a financially integrated regime facing this ‘double bind’ of globalization. If redistributive capacity begins to deteriorate further in Russia, we are likely to see greater instability, more use of political repression, or renewed efforts to restore welfare capacities, as a way to maintain social peace.


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