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

Abstract

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.