Russia's Crony Capitalism

by Anders Aslund

  The greatest problem in postcommunist transition has been to establish the rule of law. Without it, no property rights can exist. Businesses have to defend their property with extrajudicial means, such as private security and political connections. In the Soviet system, judges had a low status and were subordinate to prosecutors.35

  When the Soviet Union collapsed, legal chaos existed, and protection rackets ruled over the many budding entrepreneurs. In an excellent book on property rights in Russia, the political scientist Jordan Gans-Morse emphasizes the great developments in judicial reform in the 1990s under Yeltsin. Commercial courts were established in 1992. The 1993 Constitution enshrined the principle of an independent judiciary. Two parts of the Civil Code were adopted, as were laws on bankruptcy, the security market, and joint stock companies. As early as 1997, the legal scholar Kathryn Hendley concluded that “for the most part, the legal infrastructure needed for a market economy has been created—at least on paper.”36

  Putin is a lawyer by training, and in 2000 he presented judicial reform as a key goal: “First, we need to guarantee property rights. I believe that one of the main purposes of the state is to create rules—universal rules—in the form of laws, instructions, and regulations. And secondly, to comply with these rules, and guarantee their compliance.” He emphasized that “the state should not command business.”37

  A problem, however, was that Putin ambiguously called his judicial reform “dictatorship of law.” He elaborated on this concept in his first presidential address to the Federal Assembly on July 8, 2000:

  State functions and state institutions differ from entrepreneurial ones in that they should not be bought or sold, privatized or transferred for use or lease. Professionals are needed in state service, for whom the only criterion of activity is the law. Otherwise, the state is opening the path of corruption. And the moment may come when it is simply transformed, and ceases to be democratic. This is why we insist on a single dictatorship—the dictatorship of the Law. Although I know that many people do not like this expression. This is why it is so important to indicate the limits of the area where the state is the full and only owner.38

  He asked one of his closest aides, Dmitri Kozak, a deputy head of his presidential administration and a fellow lawyer from St. Petersburg, to lead a presidential working group of judicial reform. In December 2001, Russia adopted a package of new judicial laws that came into effect in 2002. They improved the status of judges and the financing of the courts as well as renewed all procedural legal codes. One goal was to strengthen the independence and autonomy of courts and judges. As a part of the reinforcement of federal power, judges became independent of regional authorities. They had already tenure, but the law on their status of December 2001 eliminated the requirement to consult regional legislatures when appointing or promoting a judge. Judges were still appointed without term limit, though they were forced to retire at fixed ages (sixty-five on regular courts and seventy on the top courts). Their protection from prosecution for criminal offenses was weakened.39

  The 2002 Criminal Procedure Code reinforced the powers of the judges, entitling them to sign arrest and search warrants and to decide on pretrial detention. Finally, they were supposed to become superior to prosecutors. With the powers of the prosecutor’s office trimmed, the chances of frivolous arrest and detention had been reduced. Further, the practice of sending cases back to the law-enforcement authorities for additional investigation was stopped under the new code, raising a defendant’s chances of being acquitted.40

  All this sounded good, but the main effect of the judicial reforms was centralization, making the judges dependent on the presidential administration rather than the regional governors. Gans-Morse concludes that Russia’s legal defense of property rights was at its best between 1999 and 2003.41

  The Yukos affair put the whole judicial reform into doubt (see chapter 3). The origins of this court case were political, spiced up with the opportunity for someone to seize valuable assets cheaply. The main accusation against the oil company was that it had followed the letter of the new tax code and used a big loophole. Nevertheless, the government won all court judgments, proving that these courts were not independent from government.42

  The Yukos affair marked the end of Putin’s apparent ambition to build the rule of law and secure property rights. From the late 1990s, Russian private companies had faced “illegal corporate raiding” (reiderstvo), which implied that law enforcement officials stole private companies with the use of state powers. As Gans-Morse writes, “From the mid-2000s onward, countless entrepreneurs faced arrest on trumped-up charges as law enforcement officials . . . sought to acquire firms’ assets at below-market rates.” Similar affairs were to follow with Russneft, Euroset, Bashneft, and many others of less significance. Corporate raiding with the help of the courts became ever more audacious, and the victims more obedient. The rising impression was that the omnipotent law enforcers enjoyed free rein and even billionaires could not defend themselves.43

  Deinstitutionalization has further damaged the judicial system. Until 2014, Russia’s economic courts were considered professional and fair, often judging against state agencies, notably the tax authorities. In 2014, however, Putin signed a law merging the economic courts with the ordinary court system, whose quality was far inferior. The whole judicial system was now put under full political control, being deprived of integrity and independence.44

  In 2010, Columbia University professor Timothy Frye concluded that “strengthening the rule of law requires changes in political relations that level the playing field between the powerful and the powerless, and on this front Russia has made far less progress. Indeed, some argue that Russia has moved from state capture by private business to capture of private business by the state.” Since those words were written, the state capture has become evident.45

  Occasionally Putin speaks sharply about the need to fight corruption, especially when he appears before law enforcers. In March 2015, he stated that “the policy of cleaning out all state agencies, including the Interior Ministry, will continue consistently and firmly. The statistics show that the measures we have taken have already helped to bring down the level of corruption, but . . . this problem is still far from being solved. . . . Last year, more than 11,000 corruption-related cases were sent to the courts.”46

  Increasingly, however, Putin tends to dismiss concerns about corruption as exaggerated, using Ukraine as the showcase of corruption. In July 2017, he stated to a group of students: “Corruption should not be a matter of speculation, since it exists across the world. . . . Look at what has happened with our neighbors. The current [Ukrainian] government was voted into power on promises to fight corruption. . . . Unfortunately, they chose to do it by staging a government coup. Now that they have the power, what are the results? There is even more corruption. Ukraine is choking with corruption from the top to the very bottom.”47

  In recent years, several senior officials have been arrested or prosecuted for corruption, notably Minister of Defense Anatoly Serdyukov in 2012, Economy Minister Alexei Ulyukaev in 2016, a few regional governors, state enterprise managers, and quite a few law enforcement generals. Ulyukaev was sentenced to eight years in prison for allegedly having taken a bribe of $2 million from Igor Sechin, Putin’s close associate and the CEO of Rosneft, who refused to appear in court. Even in these cases, the actual reason for the arrest is perceived to have been not corruption but conflicts with senior people in Putin’s entourage. Many of his protégés appear to have legal immunity. They include nearly all the top state officials, the big state enterprise managers, Putin’s cronies, and Chechnya’s president Ramzan Kadyrov, who has been sanctioned by the United States for violations of human rights.48

  Each year, the Kremlin publishes an extensive and detailed list of the property, incomes, and expenditures of the president and leading members of his administration and their families, but these lists have no relation to reality. Nor are the f
ilings amended when independent media or anticorruption activists uncover major unreported assets of the truly powerful.

  A decade ago, a prominent US chief executive who had done extensive business in Russia and around the world told me that to his mind Russia was the most corrupt big country in world history. According to Transparency International, Russia ranked 135 out of 180 on its Corruption Perceptions Index for 2017, lower than any other G-20 country.49

  In few areas has Putin changed his policy more than in foreign affairs. As newly elected president in 2000, Putin went out of his way to be helpful and accommodating to other great powers, including the United States. He ignored the NATO bombing of Yugoslavia in 1999, which had marked a low point in postcommunist US-Russia relations. In 2000, Putin was quite positive on NATO, stating, “I don’t see any reason why cooperation between Russia and NATO shouldn’t develop further; but I repeat that it will happen only if Russia is treated as an equal partner.”50

  Former deputy secretary of state Strobe Talbott summed up the situation: “Putin wanted to join the West, but on terms that were more respectful of Russia’s national interests and national anxieties.” The fundamental problem is that the West tends to believe that foreign policy should embrace certain values, whereas Putin has adopted an extreme position of pure realpolitik.51

  Before the G-8 summit in Okinawa in July 2000, Putin made a flashy, unprecedented visit to North Korea, presenting himself as a global fixer. Putin started off well with George W. Bush when they met in June 2001. Bush uttered: “I looked the man in the eye. I found him to be very straightforward and trustworthy. . . . I was able to get a sense of his soul, a man deeply committed to his country and the best interests of his country.” On September 11, 2001, Putin was the first foreign leader who managed to call Bush after the Al-Qaeda terrorist attacks in New York and on the Pentagon. He offered logistical support for the US military in Afghanistan.52

  The war in Afghanistan suited Putin perfectly because it was a war against international terrorism, which was how Putin saw the domestic Chechen rebellion in southern Russia, while others considered his policy in Chechnya to be domestic repression and human rights violations. Putin has persistently driven this theme with his Western counterparts, and George W. Bush showed a great deal of understanding.

  Soon, however, a series of events permanently altered Putin’s foreign policy outlook and his view of the United States. The three most significant incidents were probably the US unilateral withdrawal from the Anti-Ballistic Missile (ABM) Treaty in July 2002, the US initiation of the war with Iraq in March 2003, which Russia opposed together with Germany and France, and the Orange Revolution in Ukraine in November–December 2004.

  Time and again, Putin has returned to the ABM Treaty as the breaking point in his relations with the United States. In his presidential address in March 2018, Putin stated: “Back in 2000, the US announced its withdrawal from the Anti-Ballistic Missile Treaty. Russia was categorically against this. . . . We did our best to dissuade the Americans from withdrawing from the treaty. All was in vain. The US pulled out of the treaty in 2002. Even after that we tried to develop constructive dialogue with the Americans. . . . All our proposals, absolutely all of them, were rejected.” The US ambitions to build missile defense in Eastern Europe became a permanent bone of contention.53

  Before the United States launched the war in Iraq in 2003, Putin spoke like a peacenik, underlining “the new quality of Russia as a country peace-loving and oriented toward solving all the disputes arising in the world solely by peaceful means and on the basis of international law. . . . The same applies to the situation around Iraq.” After the war and the execution of President Saddam Hussein, Putin became embittered: “Everyone remembers well what happened to Iraq and Saddam Hussein. Hussein abandoned the production of weapons of mass destruction. Nonetheless, under the pretext of searching for these weapons, Saddam Hussein himself and his family were killed during the well-known military operation. Even children died back then. His grandson, I believe, was shot to death. The country was destroyed, and Saddam Hussein was hanged.” He lamented the Western intervention in Libya and the killing of President Muammar Gaddafi in 2011 in a similar tone. That Gaddafi and Hussein had killed thousands of their own citizens was of no interest to Putin.54

  For a long time, President Bush avoided responding to Putin’s criticism of the United States. In September 2003, for example, Bush stated: “I respect President Putin’s vision for Russia: a country at peace within its borders, with its neighbors and with the world, a country in which democracy and freedom and rule of law thrive.” Putin made his first anti-American statement after the Beslan massacre in southern Russia in September 2004.55

  Ukraine’s Orange Revolution in November–December 2004 probably delivered the greatest shock Putin has experienced as a ruler. He claimed that “our European and American partners decided to support the orange revolution even against the Constitution,” presenting it as a Western political conspiracy. Putin saw the uprising as an attempted Western coup against a fellow authoritarian ruler, and he feared that he would be the next victim. He saw the Orange Revolution as the greatest democratic challenge facing his rule, fearing that Russians would follow the Ukrainians’ example and rise in protest against the Kremlin’s authoritarian power and usurpation of Russia’s wealth, even though Ukraine did not commit any hostile acts against Russia. In 2005, Putin responded by prohibiting all conceivable preconditions for an Orange Revolution in Russia, adopting strict laws against nongovernmental organizations.56

  His attitude to the West deteriorated radically. He had expressed nostalgia about the Soviet Union all along, but in his famous Munich speech in February 2007, Putin displayed his anti-Americanism in full: “Today we are witnessing an almost uncontained hyper use of force—military force—in international relations, force that is plunging the world into an abyss of permanent conflicts. One state and, of course, first and foremost the United States, has overstepped its national borders in every way.” He lashed out against the United States: “Incidentally, Russia—we—are constantly being taught about democracy. But for some reason those who teach us do not want to learn themselves. I consider that the unipolar model is not only unacceptable but also impossible in today’s world.”57

  The Orange Revolution was not the only popular uprising worrying Putin. In 2003, Georgia had its Rose Revolution, that brought Mikheil Saakashvili to the presidency, and in March 2005 Kyrgyzstan had its Tulip Revolution. Putin was reviled by the Arab Spring movement, which started in Tunisia in December 2010 and spread through Libya, Egypt, Yemen, and Syria in 2011. Putin steadfastly and vocally supported the “legitimate” incumbent rulers.

  The Munich speech was followed by a more aggressive foreign policy. In May 2007, Russia pioneered cyber warfare with a big attack on Estonia’s government and its commercial banks. Since 2008, Russia has increased its military expenditures and modernized its military, hardware, and tactics. It has broadened its military toolbox, putting more emphasis on intelligence, insurgents, disinformation, and cyber warfare.

  In January 2008, President George W. Bush suddenly started campaigning for NATO Membership Action Plans for Ukraine and Georgia to be adopted at the April NATO summit in Bucharest. The United States presented this idea too late to be able to persuade the other member states. The Bucharest April 2008 NATO summit communiqué concluded boldly: “NATO welcomes Ukraine’s and Georgia’s Euro-Atlantic aspirations for membership in NATO. We agreed today that these countries will become members of NATO.” But NATO did nothing to make this commitment credible, rendering the declaration harmful.58

  This communiqué provoked the Kremlin while leaving Georgia and Ukraine without security guarantees. Absurdly, Putin was invited to the NATO summit. In a closed meeting he made a militant statement, disqualifying Ukraine’s right to sovereign statehood and territorial integrity. “This is a complex state formation. If the NATO issue is added there, along with other proble
ms, this may bring Ukraine to the verge of existence as a sovereign state. . . . Ukraine is home to as many as 17 million ethnic Russians. Who will dare to claim that we don’t have any interests there?”59

  Putin called the transfer of Crimea to Ukraine in 1954 illegal: “Crimea was simply given to Ukraine by a CPSU Politburo decision, which was not even supported with appropriate government procedures that are normally applicable to territory transfers.” Immediately after this near declaration of war, President George W. Bush went to a friendly meeting with Putin at his residence in Sochi, which Putin could only interpret as a US acceptance of his stand. Within six years, Russia had attacked both Georgia and Ukraine, calling NATO’s bluff, and NATO did very little. In August 2008, Russian troops entered Georgia for a five-day war, and on August 26, Russia recognized the sovereignty of the small autonomous territories in Georgia, Abkhazia and South Ossetia, which were occupied by Russian troops.60

  In the winter of 2013–2014, Ukraine posed a new challenge to Putin’s regime. Once again Putin faced a popular democratic revolt in his East Slavic neighborhood. This time, the Kremlin was prepared. Domestically, it had tightened the screws with antidemocratic legislation, and it had prepared its military with contingency plans for Ukraine. After Ukraine’s president Viktor Yanukovych had failed to impose a Putinlike regime in Ukraine despite killing some 125 people in Kiev, he fled to Russia on February 22, 2014.

  The Kremlin acted instantly. Starting on February 27, Russia surprised the world with “small green men”: Russian special forces without insignia started occupying Crimea from Russia’s leased naval base in Sevastopol, and they encountered no armed resistance. They swiftly occupied Crimea before anybody realized what was going on. Their medals and an official Russian propaganda film date the start of their operation as February 20, two days before Yanukovych’s ouster.

  On March 18, Russia surprisingly annexed the occupied Crimea, killing two birds with one stone. National euphoria erupted over Russia’s regaining of the popular Soviet holiday resort peninsula. The independent Levada Center measured 88 percent approval, including many liberals. Ukraine had been transformed into an enemy. As a consequence, Russians no longer discussed Ukraine as a democratic experiment but instead called it a failed state, serving the Kremlin’s desire for stability at home.61