Russia's Crony Capitalism

by Anders Aslund

  In June 2009, President Medvedev hosted Western leaders in St. Petersburg to complete Russia’s accession to the World Trade Organization. At this time, however, Putin had lost interest in the WTO, and he upstaged everyone by proposing a customs union among Russia, Kazakhstan, and Belarus a couple of days before Medvedev’s grand event. Medvedev and his ministers were openly stunned. Putin’s message was clear: he, and not Medvedev, called the shots. Putin did so, even though this delayed Russia’s entry into the WTO by some two years. Unlike many prior Russian initiatives on cooperation among former Soviet states, the Kremlin stayed focused on this project and gradually expanded the customs union to Armenia and Kyrgyzstan, upgrading it to the Eurasian Economic Union (EAEU).

  In September 2011, Putin and Medvedev announced that they were “castling,” switching portfolios, at a United Russia Party Congress. Putin declared: “I want to tell you directly that we have long since reached an agreement on what we will be doing in the future. That agreement was reached several years ago.” Medvedev proceeded to nominate Putin: “I think it’s right that the party congress support the candidacy of the current prime minister, Vladimir Putin, in the role of the country’s president.” This obviously untrue charade came as a shock to Russia’s liberals, who had hoped that Putin would allow Medvedev to stay as president.60

  Although few thought Medvedev had much power, Russia’s liberal upper middle class had hoped for liberalization and modernization. Suddenly they realized they were facing the opposite. Putin dressed Medvedev down as a nonentity, showing that he was in charge. The December 2011 Duma elections were blatantly forged, which provoked the largest public protests in Russia since 1991. Cleverly, the Kremlin labeled the protests the “mink revolution,” suggesting that the protesters were too wealthy. This period of unrest occurred after the Arab Spring had erupted in Tunisia, Egypt, Libya, and Syria.

  Putin rarely showed himself for one and a half months, until mid-January 2012. Then, for the first time, he pursued an American-style election campaign with major public appearances every day, and he published seven big, programmatic newspaper articles. Before his inauguration in May 2012, the police had ended the protests with force. When Putin was driven to his inauguration in the Kremlin, the police had emptied the streets. Putin had restored order, but he had seen that the middle classes were ungrateful, despite all the wealth they had gained, and that he had to reach out to the lower classes and the country beyond the capital.61

  Moscow sociology professor Natalia Zubarevich divides Russia into four groups. “Russia 1,” consisting of Moscow and St. Petersburg, is too well off to rise in opposition to the government. Together with their hinterland, they account for 20 percent of Russia’s population. But she warns of coming social instability in “Russia 2,” the large industrial cities with 250,000 to 1 million inhabitants that make up 30 percent of Russia’s population. “Russia 3” constitutes 40 percent of the population, small towns and the countryside, which are dominated by old and politically passive people. These three groups make up 90 percent of the population. The final 10 percent, ethnic minority territories, mainly in the Northern Caucasus, is of little concern to the rest of Russia, allowing the Kremlin to use unlimited force. Since the election of 2012, Putin has abandoned Russia 1 and focused on Russia 2 and 3, while he enjoys nearly 100 percent of the votes in Russia 4.62

  After Putin was inaugurated, he issued eleven reform decrees on May 12, 2012, but this was little but liturgy. They were sanctimoniously treated as Putin’s reform program. Nobody expected them to be implemented, and they were not. Putin has systematically rolled back Medvedev’s few reforms.

  Russians call Putin’s current rule from 2012 “manual management” (ruchnoe upravlenie), because he micromanages without principles. Not surprisingly, the outcome has been minimal growth. The main institutional change is that the council of ministers has lost significance, because Medvedev chairs it and he has minimal authority. Putin makes the main economic decisions together with a top official visiting him or a select group of ministers. The Security Council has replaced the council of ministers as the most important policy-making forum. It is eerily reminiscent of the old CPSU Politburo, with twelve permanent members, who are mainly siloviki, representatives of the armed services, and they meet almost weekly.

  Putin’s enhanced dominance has facilitated the parallel development of state capitalism and crony capitalism. To Putin, loyalty and trust seem to be everything. Ever more corporate power is being concentrated into the hands of a limited number of state and crony executives. At the highest level, Kremlin interference is overwhelming. All business deals over $1 billion have to be confirmed with the Kremlin, which has capped the Russian stock exchange at a very low price-earnings ratio. The old large private corporations from the 1990s are gradually being squeezed out, bought by large state corporations or cronies. Most old oligarchs do not mind retiring with their fortunes abroad, where they have educated their children.

  With its occupation and annexation of Crimea in February–March 2014 and its later military aggression in eastern Ukraine starting in April 2014, the Kremlin violated all relevant international laws from the end of World War II, including the UN Charter, the Helsinki Charter of 1975 and ensuing Helsinki agreements, and the Treaty on Friendship, Cooperation, and Partnership between Ukraine and the Russian Federation of 1997. Nor did the Kremlin offer any explanation to all these violations of fundamental international law.

  The United States and the European Union reacted as one could expect, by imposing major sanctions on Russia: first individual sanctions on people and companies involved in the occupation of Crimea and then sectoral sanctions in finance, oil, and military industry. In September 2014 and February 2015, Ukraine, Russia, Germany, and France concluded two cease-fire agreements in Belarus’s capital, Minsk, but the Russian-backed forces have not maintained the cease-fire, and artillery and hot trench warfare continues. So have the Western sanctions, which are gradually being ratcheted up as Russia does nothing to comply with its prior international commitments.

  On March 18, 2018, Putin was “reelected” as president for a fourth term of six years, with 77 percent of the votes cast. This was no real election, since no real opponent was allowed and state control of the media was at its most extreme. Not even the swearing in of Putin on May 7 in the Great Kremlin Palace was joyful. Putin looked remarkably bored. This time he limited his car trip to a drive inside the Kremlin.

  As he had done in all previous elections, Putin had refused to participate in any election debates. The only time he ever campaigned was in 2012 in an apparent response to the public protests. This time around, Putin barely paid attention to the elections. While he had published seven big programmatic articles before the 2012 election, in 2018 he presented no program. His public appearances, including his annual address to the Russian Federal Assembly on March 1, were emptier than ever, reminiscent of Leonid Brezhnev, though without ideology.

  The same was true of his postelection appearances. After the 2012 election, Putin had issued eleven decrees with tasks for his six-year term, though little was achieved. This time around, he presented just one decree, itself exceedingly vague, almost without relevant numbers, though with such catchphrases as “ensure sustainable growth of real wages, as well as the growth of pensions above inflation level.”63

  Putin kept Medvedev as prime minister, even though the opposition leader Navalny had revealed that Medvedev had taken $1.2 billion in bribes and been highly ineffective. On May 18, a new government was appointed. Half the ministers were new, yet the new cabinet suggested no new political initiatives or ideas. The positions appeared more like an exercise in musical chairs, though the few Medvedev loyalists were eliminated. Before the election, some people had speculated that former finance minister Alexei Kudrin would be given a major reform role. In the end, he was appointed head of the Auditing Chamber, an irrelevant role, which clarified that no reform was intended.

  Without saying so, Puti
n made clear that he had no intention of making any significant policy changes or pursuing any economic reforms. A broad economic consensus predicts an annual growth rate of 1.5–2 percent in Russia for the next several years and a nearly stagnant standard of living. The old policy of macroeconomic stability combined with kleptocracy appeared set to continue. The two main questions were whether more repression and adventurous foreign policies were to be expected.

  Russia’s economic situation in 2018 can be summarized in two words: stability and stagnation. The collapse of the Soviet Union and the financial crash of 1998 left a deep imprint on Putin and the Russian elite, teaching them the importance of macroeconomic stability for the sake of political stability. A typical recent Putin statement is: “I note that we have achieved sustainable macroeconomic stabilization over these last few years. . . . Considering the current economic challenges, we must preserve the health and stability of the Russian economy, which is our priority.” Conservative fiscal and monetary policies have assumed the status of dogma.64

  For the rest, Putin had great leeway, and he chose state and crony capitalism. Russia had inherited a strong sentiment in favor of statism, which Putin exploited. The crash of half the private banks in 1998 brought about state dominance in banking, while rising oil production and increasing oil prices beginning in 2003 made the enrichment of the owners of oil companies look automatic, which facilitated Putin’s large renationalization drive from 2004, but it was no political necessity.

  Putin’s fondness of fast-growing emerging economies might have blinded him to the benefits of good governance. His logic appears to be: if China and India grow so much faster than Western countries, why should we bother about good governance? Not only is Russia’s crony capitalism blocking growth, but it is undermining the weak existing institutions, driving a far-reaching deinstitutionalization. China scholar Minxin Pei has written on China’s crony capitalism, and the qualitative similarities are striking.65

  At present, Putin seems to be stuck in a kleptocratic system. The three dominant circles are his friends atop the FSB, his friends running the big state companies, and his private business friends from St. Petersburg, who tap the economy on so much money, but Putin rules. This system does not permit any reform, and the question is not whether it will reform but how long it can stay reasonably stable. For how long will Russian society accept a stagnant standard of living?

  T • W • O

  Putin’s Consolidation of Power

  In his first term, 2000–2004, President Vladimir Putin methodically consolidated his power. In so doing, he revealed certain clear values, but at the same time he was skillfully everything to everybody while not necessarily revealing his real positions to the public. Now that he has been in power for eighteen years, most of his aims appear obvious, but that was not the case during his first term as president. Russia experts Fiona Hill and Cliff Gaddy have probably nailed Putin’s nature: “Vladimir Putin is a fighter and he is a survivalist. He won’t give up, and he will fight dirty if that’s what it takes to win.”1

  Putin’s many public statements can guide us to his thinking, but they must be checked against his actions, because as a clever politician he has said many nice things that were popular but he did not believe in them. Notably, Putin has repeatedly praised democratic values and freedom, yet his rule has tended in the opposite direction. Like most skillful politicians, Putin shows some strong values, while he appears opportunistic in many regards.

  Throughout Putin’s career, the KGB and now the FSB have been his mainstays, endowing him with specific ideas. Putin has persistently cherished the FSB and its values, using the security service as his main ruling lever. This means that Putin was antidemocratic from the outset, even if he tried to hide his values with many statements praising democracy and freedom. In particular, Putin has adamantly opposed a free media, especially when it mocks him, as the NTV television program Kukly (Puppets) successfully did. Further, Putin has insisted on centralized Moscow rule over the whole country.

  A couple of Putin tenets have been less obvious. His enduring lesson from the Russian financial crash of 1998 was that financial stability and fiscal conservatism were vital to sustain his political rule. More disturbingly, Putin appears to have been so entrenched in organized crime since the early 1990s in St. Petersburg that it has become part of his very being, as Boris Nemtsov and Vladimir Milov, Yuri Felshtinsky and Vladimir Pribylovsky, and Karen Dawisha have shown.2

  Naturally, Putin could not have had strong views on every important matter, and sometimes he has changed his view, most strongly in the sphere of foreign policy. What he saw as a matter of convenience, others saw as a matter of values. His most difficult political moment was probably Ukraine’s Orange Revolution in 2004. Hill and Gaddy make the crucial point that we Westerners have failed to appreciate “how dangerously little Putin understands about us—our motives, our mentality, and, also, our values.”3

  Another area in which Putin’s positions have evolved somewhat opportunistically was economic policy. Like all intelligent people, Putin also has learned from crises. His great formative moments are probably three: the collapse of the Soviet Union, the Russian financial crash of 1998, and Ukraine’s Orange Revolution.

  When Putin came to power on New Year’s Eve 1999, the obvious question was what ideas he stood for. During most of his first term, Putin evidenced great skills as a politician trying to be everything to everybody, opportunistically telling almost all what they wanted to hear. Some thought he was a hard-core nationalist, while others perceived him as a liberal Westernizer, and most thought he was something in between. Unlike his predecessor, he was definitely sober. In hindsight, Putin’s views are pretty clear, and most were evident in his interview book, First Person, hastily composed in 2000.

  Putin loved the KGB. From his youth he had cherished this repressive agency, and he aspired to join it as soon as he could. From the outset Putin was antidemocratic, but as deputy to the leading liberal Anatoly Sobchak, mayor of St. Petersburg from 1991 to 1996, he had to pay lip service to democracy, so he did.

  Putin “wrote” a doctoral dissertation in the 1990s, but it was plagiarized, drawing extensively on the American textbook Strategic Planning and Policy, by William King and David Cleland. Vladimir Litvinenko, the rector of St. Petersburg Mining Institute, where Putin defended his dissertation, received 10 percent of the shares of Phosagro, a company previously owned by Yukos, in compensation for his consultancy. Still, the dissertation is interesting, reflecting Putin’s appreciation of state ownership of natural resources, national champions, and state capitalism.4

  In the early 1990s, when Putin was St. Petersburg’s first deputy mayor for international economic relations, the city was renowned as the crime capital of Russia, and Putin dealt with the most criminal part of that economy. A report by an investigative commission chaired by the liberal politician Marina Sal’e offers overwhelming evidence that Putin was deeply involved in organized crime at least from late 1991, though he did not make a great deal of money. Crony capitalism is an original part of his system.5

  Putin claims to admire two philosophers, Ivan Ilyin and Lev Gumilev. Both are antidemocratic Russian nationalists, but of opposite kinds. Ilyin had a narrow linguistic outlook, while Gumilev preferred imperialist outreach. Putin has quoted each of them publicly, Ilyin five times and Gumilev six times. Ilyin, however, he has mentioned on major occasions, whereas he has cited Gumilev as sops to the Kazakhs and Kyrgyz and not all too deeply felt.6

  Ilyin was an anticommunist and a white philosopher who was expelled from Russia together with many other prominent intellectuals on “the philosophers’ ship” in 1922. He favored monarchy and autocracy, advocating, as historian Walter Laqueur writes, “a strong central power for post-Communist Russia, with few rights for non-Russian regions such as Ukraine or the Caucasus.” Though not quite a Nazi, he was close to it. Laqueur writes that Ilyin “considered Nazism a positive phenomenon that with some modificatio
ns could serve as a model for the future Russia.”7

  Historian Tim Snyder sees Ilyin as a key to understanding Putin. Ilyin “believed that individuality was evil” and that “the purpose of politics is to overcome individuality and establish a ‘living totality’ of the nation.” He aspired to a fascist Holy Russia to be ruled by a “national dictator.” Putin had Ilyin’s body exhumed from Switzerland and reburied at a monastery in Moscow, laying flowers on Ilyin’s grave. Putin suggests that he shares a kindred ideology with Ilyin. Like Ilyin, Putin favors a strong central power, autocracy, orthodoxy, Russian dominance in the region, and state capitalism. In an opposing view, Marlene Laruelle has objected that “Ilyin saw Russia’s essence in autocracy, statehood, messianism and cultural exceptionalism,” arguing that this is not really fascist even if Ilyin was a rabid anti-Semite and anti-Bolshevik with an attraction to fascism.8

  Still, Putin has been careful not to become attached to any specific branch of nationalism. He has repeatedly praised Lev Gumilev, who was the father of Eurasianism, the imperial form of Russian nationalism, and was strongly opposed to the narrow ethnic or linguistic nationalism of Ilyin. Gumilev was an authoritarian statist, although he spent the years 1938–1956 in Soviet labor camps. Putin has invoked Gumilev to appeal for cooperation among the former Soviet republics. In his greeting to an international academic congress honoring the centenary of Lev Gumilev in 2012, Putin expressed his confidence that it would “contribute to further promoting integration processes within the Commonwealth [of Independent States] and strengthening trust and mutual understanding in the region.”9