The second circle comprises the state enterprises, which are run by Putin’s close associates, who are absolutely loyal to their boss. The chief executives control vast resources, and they possess multiple ways of transferring assets to private beneficiaries.
Putin’s cronies, private businessmen who are his longtime friends from St. Petersburg, form the third circle. All have become billionaires through preferential deals with the Russian government, mainly by receiving large no-bid procurement orders from Gazprom and by buying Gazprom assets cheaply. This system, set up in 2004–2006, generates large capital outflows to their personal benefit.
The fourth circle is less noticed. It consists of the Western offshore havens, mainly in the United States and the United Kingdom, where companies with anonymous owners are allowed to thrive. Strangely, this circle is the least known and discussed because of the great secrecy that prevails in the Anglo-American offshore.
These four circles compose the Putin system of authoritarian kleptocracy, one that is strikingly similar to Russian tsarism before Tsar Alexander II’s reforms of the 1860s. Putin is often called the new tsar, and for good reason. Legally, his power is unlimited. With his loyal aides he controls the state apparatus, security services, judiciary, and state enterprises. Because of supreme state powers and a far-reaching deinstitutionalization, Putin’s Russia lacks any real property rights. Rather than developing a meritocracy, Putin has built a new aristocracy. The sons of his close friends have become vice presidents of state companies in their twenties.9
How strongly ideology motivates the Putin regime is up for debate. A certain nationalism and orthodoxy are present, and definitely Russian traditionalism. The dominant ideology is statism, but the true aims of this regime are personal enrichment and power. In chapter 6 I analyze what we know about Putin’s personal wealth and propose a probable range of $100–$160 billion, making him the richest man in the world, but this assessment is based on several assumptions that may be questioned. With such a focus on personal enrichment, it would be surprising if Putin could attain many other objectives.10
The Kremlin attitude to the Russian revolution is indicative of the current official mood. Usually Russia celebrates major anniversaries more than other nations, but the centenary of the Russian revolution in 1917 was almost ignored. This deeply conservative authoritarian regime favors stability and abhors revolutions. The February revolution was liberal and led to chaos, while the October revolution was communist. The current conservative regime rejects both liberalism and socialism and all the more so revolution and opposition to the rulers. Instead, the Kremlin decided to celebrate the seventy-second anniversary of the victory in the Great Patriotic War all the more. As Tony Barber of the Financial Times put it: “For Mr Putin, 1917 stands out as a time of tremendous political and social disorder. The state was weak and unable to exert control. In Mr Putin’s eyes, this makes 1917 an inappropriate year to celebrate.” Indeed, it sounds like the “damned nineties.”11
This book focuses on the functioning of the Putin regime’s economic system and economic policy. Rather than offering a chronological narrative, it is thematic, concentrating on the main systemic features.
Chapter 1 offers the reader a brief picture of the richness of Russia’s historical inheritance and thought and a periodization of the Putin reign. Even if Putin’s reversal to authoritarianism and statism can be seen as a natural postrevolutionary and postimperial development, the changes between his different terms have been substantial. They were based on his choices and were by no means inevitable.
How Putin consolidated political power and seized control over the state apparatus from 2000 to 2003 is the subject of chapter 2. Putin possessed a base in the KGB and relied on trusted associates with whom he had long worked. On becoming president, he started to build his “vertical of power,” restoring federal control over Russia’s various regions. His greatest challenge came not from Russia but from attempts at democratization in Ukraine. In the judicial system, Putin established his “dictatorship of law,” which implied Kremlin control over the courts. Putin developed a plethora of competing law enforcement agencies that obtained far-reaching mandates. Today Russia’s supreme body is the Security Council.
Chapter 3 records Russia’s conservative macroeconomic policies. The financial crash of 1998 was a major shock to the country’s policy makers, including Putin. Their lesson was that macroeconomic stability is a sine qua non for political and economic stability, and these policies prevail today.
The major endeavor of Putin’s second term was to build state capitalism, the topic of chapter 4. The turning point was the regime’s confiscation of the oil company Yukos in 2004–2005, which initiated a steady expansion and consolidation of the big state enterprises. Close associates of Putin run the biggest state companies, and they are responsible only to him. Four of these big state enterprises are showcased: Gazprom, Rosneft, Vnesheconombank, and Rostec.
The cronies and their enterprises form a more exotic part of Putin’s system. A small group of private businessmen who are old personal friends of Putin from St. Petersburg have flourished immensely under his reign, thanks to preferential deals with the government and with state enterprises, and their sons have been given privileged starts in life through early promotions. Putin’s four most important cronies and their businesses—the pinnacle of Russia’s new crony capitalism—are analyzed in chapter 5.
In chapter 6, I report on and assess information of the wealth of Putin’s friends as well as of Putin himself. This chapter illuminates the role of the fourth circle, the Anglo-American offshore, where most of this great wealth is stored. It also presents a number of Putin’s lesser-known friends, who might hold wealth for him.
Chapter 7 scrutinizes how Russia’s foreign economic policy has changed. Until 2009, Russia embraced globalization, manifested in its ambition to join the World Trade Organization. Then, however, it turned around, preferring limited regional economic cooperation within the Eurasian Economic Union, the five member states of which are Russia, Kazakhstan, Belarus, Armenia, and Kyrgyzstan. Russia’s aggression against Ukraine since 2014 has provoked significant Western sanctions on Russia, which have reinforced its protectionist tendencies.
The Putin period has been characterized by a continuous ideological strife over economic policy between liberals and statists, described in chapter 8. Former finance minister Alexei Kudrin stands out as the leader of the market economic wing, while Putin’s adviser Sergei Glaziev is the most prominent statist. In practice, the systemic liberals have won on macroeconomic policy, while the statists have been victorious in all other fields. The rising opposition leader Alexei Navalny is instead focusing on corruption, as a new nonideological paradigm has evolved, reform versus corruption.
Chapter 9 concludes with an assessment of what the Russian economy has become and offers a policy outlook. The Putin regime is an extreme form of plutocracy that requires authoritarianism to persist. Because of its poor institutions Russia is stuck in a middle-income trap. Its assets are substantial but unbalanced, with far more military than economic power. The regime can no longer base its legitimacy on economic growth so it has switched to small victorious wars. The West needs to face up to Russia’s new asymmetric warfare. It should respond with greater demand for transparency. The last section suggests what reforms Russia should prioritize the next time it becomes serious about reforms.
Fortunately, many sources of high quality are available for a study of this nature. The literature on Russia in the 1990s is substantial, though surprisingly little attention has been devoted to the Russian economy from 2000.12
The amplest source is actually President Vladimir Putin himself. In early 2000, he published a revealing book of interviews, First Person, which appears his most honest account of his actual views. For all his years as president, Putin offers extensive documentation on his website, www.kremlin.ru, which has a good search engine. Few political leaders have published so much about thems
elves and provided it in such an accessible form. All Putin’s big speeches and many meetings are documented there. Twice a year, Putin makes three-to-four-hour-long television appearances: one international press conference and one call-in program. On these occasions, he comments on many controversial issues, which is an effective technique to minimize the publicity about them, but Putin is on the record on all these topics. This book contains numerous quotations by Putin. Most are taken from his website. The references are made to the English version, though I have sometimes improved the translations from the Russian version, and some materials are available only in Russian.
A few people have done eminent research on Putin and his economic activities in the 1990s. Yuri Felshtinsky and the late Vladimir Priby-lovsky have documented Putin’s economic activities in St. Petersburg in great detail. In parallel, my late friend Boris Nemtsov and Vladimir Milov studied how Putin’s friends tapped Gazprom for money and who obtained those funds. Nemtsov was murdered outside the Kremlin’s wall on February 27, 2015. The late Russia scholar Karen Dawisha elaborated further on this analysis in her pathbreaking book Putin’s Kleptocracy. Alexei Navalny and his Fund for the Fight against Corruption have pursued outstanding studies of top-level Russian corruption.13
The vast journalistic Organized Crime and Corruption Reporting Project has taken investigative financial journalism to a new height. It got plenty of air under its wings in April 2016 with the leak of the Panama Papers, from the Panamanian law firm Mossack Fonseca; suddenly, 11.5 million financial documents, containing substantial revelations about Russian offshore funds. In Russia, the fiercely independent Novaya Gazeta, whose investigative team is headed by Roman Anin, has taken the lead, while Luke Harding at the Guardian has carried out heroic efforts.
Edward Lucas of the Economist has exposed Putin’s friend Gennady Timchenko and his business practices. A Reuters investigative team led by Stephen Grey has worked wonders. Ben Judah has unmasked the kleptocracy in Britain. Other excellent sources are Novoe Vremya and its editor Evgeniya Albats. The business newspapers Kommersant, Vedomosti, Forbes, and Russian Business Consulting publish plenty of interesting economic news. Of course, a researcher needs to stick to known sources because the web is full of strange disinformation.
In the early 2000s, Paul Klebnikov of Forbes, an acquaintance of mine, started assessing the wealth of Russian tycoons. He did so until he was murdered in 2004. Fortunately, Russian Forbes has continued his valuable work, giving us some relevant assessments of the wealth of important Russians.
Ordinary statistics are pretty straightforward. My preferred source is the International Monetary Fund’s World Economic Outlook database. The main Russian statistical sources remain good, notably the Central Bank of Russia and the Ministry of Finance, but also Rosstat (the Russian Federal State Statistics Service). The Bank of Finland Institute for Economies in Transition offers an excellent service by elaborating and compiling these key statistics. In most cases, I have recalculated ruble sums into dollar sums at the exchange rate of the given date. Opinion polls are often of dubious character, and so I use only one source, the independent Levada Center, where I know the main people and trust their integrity.
O • N • E
The Origins of Putin’s Economic Model
The continuity in Russia’s economic policy since 2000 is easily exaggerated because Vladimir Putin has ruled all along and he has emphasized stability, but the Russian economy has gone through major structural changes under his rule. Each of Putin’s terms represents a distinct economic policy. Since 1999 macroeconomic policy has been conservative, aiming at stability, whereas the economic system has deteriorated from a reasonably competitive market economy to crony capitalism, which has resulted in nine years of high growth being followed by nine years of near stagnation.
A common view is that Putin’s consolidation of authoritarian power was the only natural outcome of his leadership, but this is hardly true. Russia has many different traditions. The liberal Moscow journalist Arkady Ostrovsky has emphasized the intellectual metamorphosis back and forth in the past thirty years in Russia. Few countries have seen such great intellectual and real changes. Vladimir Mau, who was an influential adviser to Russia’s great reformer Yegor Gaidar, and his coauthor Irina Starodubrovskaya view the Russian drama as a revolutionary process, anticipating reaction. The prominent political scientist Michael McFaul’s thoughts run on the same line: Russia had gone through a revolution but it had not been completed; the reversal to authoritarian political power was neither surprising nor inevitable.1
Russia has a rich historical inheritance, and interpretations of that history vary greatly. Some scholars emphasize how peculiar Russia is, whereas others see the country as basically European. Conversely, in the nineteenth century, Russian intellectuals were divided between Slavophiles and Westernizers.
The preeminent historian of Russia, the late Harvard professor Richard Pipes, has pursued one dominant line in his historiography: the patrimonial state in which the tsar owns both the land and its inhabitants. In his classic work Russia under the Old Regime, Pipes emphasizes as major features of this model the weakness of all social groups, the absence of property rights, and the prevalence of a strong secret police. More recently he summarized: “The dominant strain in Russian political thought throughout history has been a conservatism that insisted on strong, centralized authority, unrestrained either by law or [by] parliament.”2
This system reached its perfection under Tsar Nicholas I (1825–1855). In 1833, his minister of education, Count Sergei Uvarov, formulated the famous conservative triad: “Orthodoxy, Autocracy, Nationality.” In 2006, Minister of Defense Sergei Ivanov alluded to this triad, claiming that “the new triad of Russian national values is sovereign democracy, strong economy, and military power.” Today, nobody talks about “sovereign democracy,” and the economy is weak. The Russian Orthodox Church is dominated by the state and not allowed to assume a life of its own. What remains of the old triad is autocracy and a strong secret police. Russia’s nationalism, like most European nationalisms, is divided between two major streams. One is exclusive, favoring ethnic or linguistic Russians over Central Asians and Caucasians. The other is Eurasianist or imperialist, maximizing the size of the Russian Empire. Putin toys with both without committing himself to either.3
Russia has also a strong liberal tradition. The late Berkeley professor Martin Malia produced the most comprehensive argument, in his book Russia under Western Eyes, that Russia was a part of Europe’s politics and culture, fully involved with the Enlightenment from 1700 until World War I. The Russian aristocracy consisted largely of Poles and Germans and spoke French. The Russian exile Alexander Herzen was one of the great mid-nineteenth-century liberal thinkers. And the liberal tsar Alexander II (1855–1881) carried out impressive reforms and liberated the serfs two years before Abraham Lincoln ended slavery in the United States.4
During the two last decades before World War I, capitalism flourished in Russia, delivering high growth. The war devastated not only the Russian Empire but also the German and Austro-Hungarian Empires, all facing communist revolutions. Until 1917, Russia’s exceptionalism from continental Europe must not be exaggerated.5
The Russian revolution, the civil war, and communism brought about terrible destruction of people and institutions. At the end of the Soviet Union, Russians saw the year 1913 as the ideal. The late comedian Arkady Raikin quipped: “If it is better than in 1913 than it is already good.” Accordingly, one of the first private restaurants to open in Leningrad was named “1913.” The outstanding director Alexander Sokurov made his monumental film The Russian Ark about the last great Tsar’s Ball in the Winter Palace in 1913. Television advertisements for banks in the early 1990s displayed the buildings as they looked just before World War I to engender trust. The leading new business newspaper Kommersant presented itself as a continuation of a prerevolutionary newspaper that had “temporarily” ceased publication in 1917 but reemerged in 1
989. Russians saw themselves as natural risk takers. An old Russian saying was revived: “Who does not take risks, does not drink champagne.”6
The foremost student of the communist economic system, Hungarian professor János Kornai, has eminently summarized its key economic features. This was the most thoroughly politicized system the world had seen, with undivided centralized political power of the ruling Communist Party and the suppression of all opposing forces. All means of production were nationalized. This near-complete nationalization was a poison pill supposed to render impossible the restoration of capitalism. The market was replaced with centralized bureaucratic allocation carried out by the State Planning Committee (Gosplan), which focused on physical output. Prices were regulated below a market clearing level, guaranteeing permanent shortages. No real money existed, and currency played no active role, being reduced to a unit of account. The ideal was autarky, insulating the domestic economy, but because foreign trade was necessary, the state monopolized foreign trade.7
The socialist economy aimed at building a strong military industry rather than boosting living standards. The Soviet government held back both wages and private consumption to the benefit of investment and military expenditures. Soviet leaders prided themselves on full employment, which was facilitated by low regulated wages and high investment.
The main drawback of the communist economy was a permanent shortage of goods and services. Shoddy work, poor quality, low efficiency, and demoralization became natural consequences and the system’s hallmarks. Real socialism was popularly summarized in the phrase, “They pretend to pay us, and we pretend to work.” The most positive aspects of communism were full employment and that it provided good education, general literacy, good mathematics, and plenty of engineering; for ideological reasons, the social sciences, law, and languages were intentionally neglected, leading to extraordinary parochialism. Health care was miserable.
Russia's Crony Capitalism Page 2
