Economic Downfall in Dagestan

Categories: EconomicsEconomy

Dagestan loosely translates as the “land of the mountains” and this aptly describes the geography of this country. The country is located in the turbulent region of the North Cuscuses and borders Georgia, Chechnya, Azerbaijan, and the Caspian Sea. Some of its mountains are so high that one could only access them by helicopter. The country has linguistic and ethnic diversity with a sizeable number of Muslims. The region has vast reserves of oil and gas and has the potential to produce enough fish for local consumption and export.

However, the region remains poor following the spectacular collapse of its economy. Various reasons have been cited for the economic collapse. Among the reasons given is the structure of the economy, crime, violence, political instability, reliance on Russia, and foreign interventions, among others. This paper reviews the Republic of Dagestan and explores the reasons it witnessed the most spectacular economic collapse.

From the outset, it is important to point out that the economy of the country is planned.

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The implication for this is that nearly all economic activities fall under the control and management of the government . The economy is government-centered, which means all major economic activities fall under the direct control of government officials. The structure of the economy is a relic of the Soviet era . It has been overtaken by time and events, but the authorities have not seen the reason to make the urgent reforms needed to jumpstart it. Besides, most of the institutions that the government manages are riddled with corruption.

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In essence, the endemic corruption makes the region unsuitable for investment. The market reforms that Russia undertook in the 1990s had a fundamental effect on the country’s planned economy. Furthermore, the market reforms hit hardest its most vibrant industries, notably aviation, shipbuilding, nuclear sector, electronics, and the military complex. Subsequently, the economy shrunk, and unemployment levels increased substantially. The country has never managed to recover from the economic downsizing.

The involvement of the government in the economic affairs of Dagestan has been detrimental to growth. The government owns and controls nearly 70% of all the important assets . The implication for this is the levels of inefficiency are high because of the slow manner in which the state makes investment decisions. On the same note, the government’s bureaucracy borrowed from Soviet-era makes it hard for doing business . Investors want destinations where getting the required paperwork is easy and effective. This does not apply in Dagestan, which makes investors look for alternatives that would give them value for their money. Of concern is the mismanagement of the economy under the government. Most of the important sectors, such as construction, manufacturing, and agriculture are in the hands if the relatives of government officials. Some of the lack the technical skills needed to run these critical industries. The government has also divided its most important resources, such as fish, oil, and gas. The result is that it does not enjoy the economies of scale that would have helped to turn around its economic fortunes.

Figure 1: Map Showing the Location of Dagestan


Another overriding challenge for the economy of Dagestan is the influence of oligarchs. For a long time, the region’s economy has been in the hands of a few families, whose monopoly has hurt growth considerably. Some of the most influential are the clans that belong to the former head of State Council and other high-ranking officials. The result has been the rise of powerful individuals that do not understand how a market economy should function. The lack of clear policies focused on the growth of the economy is a critical problem for the country. The rising levels of unemployment and the attendant disillusionment do not augur well for the country’s economic prospects. It is imperative for the country to carry out comprehensive reforms and liberalize the economy for it to grow. As it currently stands, the continued control of the economy under the government is counterproductive.

High poverty levels in the country point to the effects of the economic decline. In the capital Makhachkala, young people without any meaningful economic engagement roam the streets. The lack of access to means of earning income means they must resort to unorthodox means, such as crime and delinquency. However, it is also worth noting that the country’s history and geographic location have a role to play. For instance, the Georgian and Chechnya wars badly affected the region . Subsequently, there was a massive capital flight as investors sought to protect their resources. The same investors have been long in coming because the political environment remains unstable. Arguably, one could not expect them to come back so soon without concrete assurances of the safety of their investments. The Georgian war was most devastating to its economy because Georgia was one of its most reliable trading partners .

Figure 2: Violence in the North Caucus


Contrarily, ineffective fishing policies in the Caspian Sea to the east of the country has led to a massive decline in annual fish harvests. The result has been low income and a steady rise in the levels of unemployment. Notably, the fishing industry was one of the country’s most important employers and a source of income for many young people. Poor policies coupled with lack of control of the industry and corruption ruined what was one of the most lucrative industries. The international market for its fish came down while the continued government intervention stalled efforts to revive it. Investors were unwilling to work with the government because of the uncertainties and risks involved. Local consumption shrunk due to the low levels of income and minimal disposable income. The result has been a sustained fall in consumption levels and income.

The geography of the area is a disadvantage because most of the land is unutilized. The region is mountainous, and farmers can only cultivate a small portion. Furthermore, the agriculture sector suffers from a lack of investment in equipment and fertilizers. The government does not subsidize this important sector despite its potential. Farmers do not have a ready access to foreign markets because of the poor infrastructure and geography. The areas that have not been put under agriculture are said to be the most productive. Unfortunately, farming such areas will require an initial investment from the government because the ordinary citizens do not have the capital or resources needed to advance the sector. Hence, the country’s agriculture sector continues to suffer even though it remains potentially lucrative.

The country could revive its economy if it exploits its oil and gas sector effectively. The country began large-scale production of oil in 1936 in the city of Izberbash, but it never reached its full potential . Natural gas extraction is quite stable, but the challenge is that it remains in the hands of a few influential people. The company should desist from exporting the crude oil and instead build capacity to refine. The crude oil does not bring the value the country needs to turn around its economic fortunes. Additionally, there is a need to diversify the economy to make it responsive to current trends. The global economy is more interconnected than ever before, and Dagestan should take advantage of its strategic position on the Caspian Sea to expand its export volumes to the nearby markets. The continued control of the economy should be abandoned because it creates inefficiency and discourages foreign investment. Economic reforms should help to liberalize the economy, while technocrats should be given a free hand to implement the reforms, they see necessary for turning the economy around.

Figure 3: Makhachkala City, Dagestan


One critical aspect that might affect the economic recovery efforts is security. The region has struggled with the effects of war and the emergent fundamentalism for a long time. The region suffered considerably because of the ethnic and religious forces. The situation deteriorated quickly, and that occasioned the start of the economic decline. Admittedly, Russia had made sweeping economic reforms after the Soviet Union’s collapse. However, the war in the North Caucus had debilitating effects on the country’s struggling economy. The number of foreign countries that left in the wake of the war is high. The loss of jobs for young people had adverse effects on the economy, while the agriculture sector was disrupted as people abandoned their farms as they sought safety.

The rebels that crossed into Chechnya and Dagestan with the key intention of forming an Islamic nation further weakened this country’s economy . Eventually, they were driven out, but the damage they had done to the economy was critical. The effects remain to-date, and it is evident it will take a long time before the country recovers. In the meantime, it is important for the country to expand its trading capacity with Russia. In the modern global economy, trade with large partners is the surest way small countries can see their economies grow. Dagestan must expand its trade through diversification and must look for new markets. The overreliance on oil and gas is risky because of the turbulent nature of the industry. In this respect, it will be important for the country to look for alternative industries that can guarantee a steady income for many of its unemployed citizens.

In summation, a combination of factors occasioned the collapse of the economy of Dagestan. The state’s control of important industries remains a critical challenge because it impedes meaningful economic reforms. There is a need for the country to implement effective, policy-driven reforms that would change the structure of the economy while putting control of important industries into the hands of knowledgeable investors. The degree of economic decline raises critical questions concerning the country’s ability to survive as a republic. The economic situation might have improved marginally since the late 1990s, but the underlying causes of the decline. Rampant corruption and government control are two of the most critical challenges to economic recovery. The government should relinquish control of the economy, strive to eliminate corruption and curtail the underground economy.


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Economic Downfall in Dagestan. (2021, Sep 22). Retrieved from

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