Even if no large reserves are found, the present reserves are enough to provide Russia with an enormous financial windfall. As a look at Table 4.2 indicates, each year Russia generates an enormous trade surplus. In 2006, for example, the surplus amounted to $140 billion. That contrasts with $20 billion in 1995, when petroleum prices were much lower. Petroleum exports were $140 billion in 2006, which accounted for almost half of the overall export earnings and the entire trade surplus. Strategically, petroleum has brought Russia unaccustomed wealth. In addition to over $120 billion in its Stabilization Fund in 2007, it also held over $420 billion in the treasury and Russian Central Bank, which as we saw earlier in this chapter provides Russia with the world’s third largest stash of dollars, gold, and convertible currencies.52 This cash windfall has allowed it to prepay its debt to its creditors in the G-8 countries and several other groups. Not bad, considering that in 1998, a bare nine years earlier, the vault was effectively empty.
While its petroleum exports provide Russia with its new financial wherewithal, it is natural gas that brings Russia unprecedented political clout. Combined, the need for these two commodities makes Europe very dependent on Russia. At the same time, some Europeans insist that the Russians are equally vulnerable. As they see it, once an expensive pipeline is built and natural gas deposits developed, Russia will be as dependent on its customers in Western Europe to buy and pay for that gas as Europe will be to have access to it.53 That may be true, but only as long as Europe acts as a united bargainer and no European country seeks to sign a private agreement with Russia. It also assumes that Russia cannot find an alternative customer in need of natural gas. That also assumes that neither Gazprom nor Russia has a leader capable of trapping the Europeans into playing off against one another or of finding other large customers in a world frantic to assure themselves of secure energy supplies. As we shall see shortly, that mind-set seriously underestimates the analytical insights and talents of those in the Kremlin, especially Vladimir Putin or his successor. It also seems to overlook the Russian penchant for chess and the ability to check the moves of their opponents. Just how premeditated and masterful Putin has proven to be will be the subject of Chapter 5.
TABLE 4.2 Russian Exports and Imports ($US, Bill.)
5
Putin Takes Over
The Return of the Czar
IT WAS NOT THE BEST OF TIMES
It was not an auspicious beginning for the new prime minister. Having been the head of the FSB (the modern day KGB), Vladimir Putin certainly was aware of the problems confronting his country, but awareness of problems is not the same thing as coping with them. And Russia had problems. In August 1999, it was still reeling from the financial bloodletting of August 17, 1998, twelve months earlier. In the wake of the government default on its debt, most of the country’s larger private commercial banks had shut their doors—some, such as Togobank, forever. Millions of Russians lost their savings, including former president Mikhail Gorbachev and the director of the Marinsky Opera of St. Petersburg, Valery Gergiev.
For the Marinsky, this was nearly catastrophic. Gergiev had set aside $2 million in his bank to pay for the ensemble’s trip to China. Now the bank was closed and its money gone. Had Phillips Electronics of the Netherlands not come to the rescue with $1 million, the famed St. Petersburg ensemble would have been forced to cancel its tour. Others without such a fairy godcorporation to turn to were not so fortunate. Businesses closed down, staffs were fired, and the whole concept of a market economy was cursed.
Investors fared no better. They watched helplessly as their portfolios went to zero. The RTS index (the Russian counterpart of the Dow Jones Index of Russian stocks) had been one of the world’s best performing indices prior to October 1997. But that was then. As we saw, from a high of 571, the index fell to 39 by October 1998, a mere twelve months later.
It was not only the well-off who suffered. As industrial output declined and unemployment increased, the number of Russians below the poverty level, which had fallen to 21 percent in 1997, suddenly soared to 33.3 percent, a new high. Western companies exporting to Russia were also hit. With the devalued ruble, few Russians could afford the cost of imported dollar- or euro-denominated products.
If it was not a good time to be in business, neither was it a good time to be in government. Within the subsequent twelve-month period, President Boris Yeltsin went through four prime ministers. Looking for a scapegoat, a week after the crash on August 23, 1998, Yeltsin fired Sergei Kiriyenko, a financial specialist and the presiding prime minister at the time. He was replaced with Evgeny Primakov, who lasted eight months—until May 1999. Yeltsin then appointed Sergei Stepashin. After barely three months in office, Stepashin was also pushed aside. His replacement was Vladimir Putin. Unlike Primakov and Stepashin, both of whom had also headed the FSB, as the KGB subsequently became known, Putin apparently was more amenable to ensuring Yeltsin that he and his ambitious daughters would be guaranteed legal immunity from any future investigation into contract kickbacks. From all reports, they needed such protection. It was widely rumored that the daughters had pocketed tens of millions of dollars from Swiss companies that had won contracts to refurbish the Kremlin and the Russian White House, among other projects. Reflecting the temper of the times, jokesters enjoyed recounting what happened to the Moscovite who one day drove his car into the Kremlin compound and parked it. Immediately a policeman ran up to him shouting, “You can’t park your car there. That’s right underneath Yeltsin’s window!” “Don’t worry, don’t worry,” calmly replied the driver. “I’ve locked the car.”
One month after his appointment as prime minister, Putin moved immediately to tighten control. He ordered government troops to return to Chechnia to reassert Russia’s authority there. This was done in response to the bombing of some Russian apartment houses by what appeared to be Chechen terrorists as well as the incursion into the adjoining province of Dagestan by a Chechen group led by the Chechen leader Shamil Basayev. Who actually bombed the apartment building remains in dispute. Some, such as the one-time oligarch Boris Berezovsky now in exile in London, insist that the available evidence implicates the FSB, not the Chechens. Whoever the actual bombers were, Putin used the apartment bombing, as well as the Dagestan invasion, to justify stronger measures from the Kremlin. By doing so, he put an end to dreams of any other secessionist malcontents in the regions who might have entertained similar notions of establishing an independent country.
THE ECONOMY RECOVERS
Putin’s determination to reestablish Moscow’s dominance over some of Russia’s restless regions was enhanced by the fact that five months before his appointment the economy began to improve. As Table 5.1 shows, in September 1998, industrial production was 15 percent below production of September 1997, but by March 1999 it once again began to grow.
TABLE 5.1 Monthly Changes to Industrial Production
By August 1999, when Yeltsin made Putin prime minister, industrial production was already roaring along. In May 1999, for example, industrial output exceeded that of the previous May by 6 percent. Fortunately for Putin, he took office just as the Russian economy began to benefit from the recovery in Southeast Asia, the region that had triggered the economic downturn the year before. In all fairness, if anyone deserves the credit for the economic upturn, it should be Primakov because the improvement began in early spring 1998 when he was prime minister. But more than the actions of any one prime minister or Kremlin official, the best explanation for the recovery is that the recovery in commodity prices, particularly petroleum prices, made the difference.
Because of the increase in oil prices, Russia’s rebounding economy would make whoever was in office at the time look like an economic genius. To his credit, Putin did nothing to hamper economic growth. On the contrary, he brought in some of his talented associates from St. Petersburg, such as German Gref and Alexei Kudrin, and put them in charge of reviving the economy. They had previously worked with Putin on economic and financial matters
in the St. Petersburg governor’s office and were regarded as competent technocrats. (We can include them as “FOP,” Friends of Putin.) Following their advice, Putin introduced a flat 13 percent income tax and proposed a series of other initiatives, including a program to simplify and reduce the bureaucratic maze that entrepreneurs had to fight through before they could open a new business.
While the benefit of a flat tax as a stimulus to economic growth is hotly debated in the United States, it appears to have done little damage when it was introduced in Russia; to the contrary, based on the way Russian GDP grew, it seems to have had a positive impact. Previous to its passage, the maximum tax rate was set at 30 percent. Few Russians were paying any tax, much less their required share. Clearly, a low tax was better than no tax. With the rate at only 13 percent, Russians had less incentive to cheat.
In a departure from the propaganda of the Soviet era, Putin also insisted on acknowledging the seriousness of the country’s economic condition. While Russia may have thought of itself as an economic superpower in the Soviet era, by 2000, Russia’s per capita income was actually lower than Portugal’s, then the poorest member of the European Union. Putin acknowledged that if Russia were ever to catch up, it would have to double its GDP in ten years. It could do this, however, only if it increased its GDP by at least 7 percent a year, a goal that he set for the country. Except in 2001 and 2002, Russia did come close to this although its growth was consistently due to high world energy prices more than a revitalized manufacturing sector (see Table 4.1).
The improvement in Russian GDP certainly added to Putin’s popularity. Yet the GDP is still not large enough to provide for a superpower’s military force, at least not one that would measure up to previous Soviet standards. Nonetheless, Putin has substantially increased the size of Russia’s military budget, by 27 percent in 2005 and 22 percent in 2006. But unless he severely curbs consumption, Russia will not be able to afford the large funds needed to support its superpower military ambitions.
A ROAD MAP TO SUPERPOWER STATUS
Putin’s concern for Russia’s struggling economic and lost superpower status long predates his appointment as prime minister. In a dissertation submitted in June 1997 to the St. Petersburg Mining Institute and in a subsequent article “Mineral’no-syr’evye resursy v strategi razvitiia Rossiiskoi ekonomiki,” published in Zapiski Gornogo Instituta in 1999 and translated by Harley Balzer in Problems of Post-Communism in January 2006, Putin outlined a plan, a sort of “owner’s manual” for Russia’s recovery and return to economic and political influence. The thesis itself was probably written just before and after his boss Anatoly Sobchak, governor of St. Petersburg, lost his reelection in 1996. Since Putin worked for Sobchak, this loss meant that Putin was also without a job.
In his dissertation Putin called on the Russian government to reassert its control over the country’s abundant natural resources and raw materials. “The process of restructuring the national economy must have the goal of creating the most effective and competitive companies on both the domestic and world markets.” He viewed this as probably the best way to reestablish Russia’s status as a superpower, an energy superpower. Instead of allowing the country’s oligarch-controlled corporations to focus exclusively on making a profit, Putin proposed that they should be used instead to advance the country’s national interests. To reclaim some of the assets spun off to private interests under Yeltsin, Russia should commandeer these companies and once again integrate them vertically into industrial conglomerates so they could compete better with Western multinational corporations such as Exxon-Mobil and Shell. In Putin’s words, “Regardless of who is the legal owner of the country’s natural resources and in particular the mineral resources, the state has the right to regulate the process of their development and use. The state should act in the interests of society as a whole and of individual property owners, when their interests come into conflict with each other and when they need the help of state organs of power to reach compromises when their interests conflict.”1
In Putin’s thesis, he acknowledged that Russia would have a hard time becoming a competitive manufacturer. In a subsequent article, he also warned that if Russia’s economy continued to be isolated too long from world markets, its technology would never be competitive.2 Even in 1997, when the economy seemed to be booming, it needed large injections of capital to help develop those resources. To attract that capital, he proposed that Russia open its heretofore closed doors to foreign direct investment. Russia should welcome the infusion of foreign capital investments, but those investors must understand that Russia would retain operating control, investment or no investment. He stressed, however, that no matter who legally came to own Russia’s commodity-producing companies, whether private parties or foreign corporations, the state should coordinate and regulate their activities. As he saw it, if left on their own, private owners become too absorbed in pursuing their own interests and are more interested in damaging their competitors than helping the state. They become so self-centered they ignore legitimate state interests. He insisted that it is a mistake to rely on the private owners and markets alone.3 When Russia did that in 1991, the country’s production suffered badly. Moreover, private monopolists obstruct innovation.4 By redeclaring control if not ownership, particularly of these resource-based companies, Russia, he argued, has the potential to emerge “from its deep crisis” and restore “its former might.”5
NATIONAL CHAMPIONS
This thesis was written considerably before Putin became head of the FSB. No one, including Putin, could have dreamed in 1996 or 1997 that he might someday be appointed prime minister as he was in August 1999, much less acting president five months later. In this thesis, Putin emphasized the concept of what he and others have come to call “national champions.” But Clifford Gaddy of the Brookings Institution, has found that this notion of “national champions,” which became so important during Putin’s presidency, actually did not originate with Putin. In a remarkable piece of textual detective work, Gaddy and his Russian assistant, Igor Danchenko, discovered that almost sixteen pages of Putin’s dissertation, “The Strategic Planning of the Reproduction of the Resource Bases,” were copied almost intact from an earlier 1978 study entitled, “Strategic Planning and Policy,” written by two University of Pittsburgh analysts, William King and David Cleland.6 Their book was subsequently translated into Russian and Putin includes it in his bibliography, but there is only a single citation of it in the text.7
Regardless of whose idea it was originally (Charles de Gaulle advocated something similar when he was president of France in the 1950s), as soon as he became president, Putin took it as his own and began to create his own national champions. As he envisaged it, these national champions would put promotion of the state’s interest over profit maximization. At home that might mean keeping energy prices low as a form of subsidy for the public. Outside Russia, it might mean suspending deliveries to countries that refuse to support Russian foreign policy or advance its interests. These national champions would most likely be more than 50 percent owned by the Russian government. But with the right type of guidance and pressure, there was no reason that predominantly private companies could not also serve as national champions. Should there be times when a private company might decide to rebuff state guidance, the state should use its powers to induce compliance. That might involve sending in state tax auditors or inspectors from the environmental agencies to check for wrongdoing. In the case of petroleum or gas producers, refusal to go along with the state or advocating undesired initiatives could be remedied by refusing such mavericks access to Russia’s oil and gas pipeline monopolies that control shipment to both domestic and foreign markets.
FROM BLUEPRINT TO ACTION
As a first task in initiating his national champion program, Putin staffed Russian state-owned companies with leaders who would be more amenable to doing his and the state’s bidding. This meant that he had to remove some of Russia’s more notable and p
owerful oligarchs from their only recently privatized companies. As an indicator of Putin’s success in reclaiming the state’s ownership of the country’s oil output, when he took over as president in 2000, the state’s share of total crude oil production was 16 percent; by late 2007, it had increased to about 50 percent.8
Almost immediately after his election as president in March 2000 Putin set to work. Just three months later in June 2000, he forced Viktor Chernomyrdin out of his sinecure as chairman of Gazprom’s board of directors, a post he had acquired only a year earlier in mid-1999 (see Table 5.2). In the Soviet era, Chernomyrdin had been minister of the Gas Industry. In 1989, only two years before the collapse of the Soviet system, he took the initiative in transforming his ministry into “Gazprom Konsern,” making himself its president in the process. In late 1992, Gazprom Konsern was carried one step further and became the Russian joint stock company, Gazprom (RAO Gazprom).9 Described by Jonathan P. Stern as the “partly privatized joint stock company,” RAO Gazprom in February 1993 was in turn transformed into OAO Gazprom, an Open Joint Stock Company.10 As we saw in Chapter 4, until mid-2005 when Putin arranged for the state to buy 50 percent plus one share of Gazprom’s stock, the Russian government held only 35–40 percent of the company’s shares.11
Petrostate:Putin, Power, and the New Russia Page 13
