Russia's Crony Capitalism

by Anders Aslund

  Yeltsin and Putin held opposite views of the Soviet Union. In his 1994 memoirs, Yeltsin concluded: “In signing this agreement [on the dissolution of the Soviet Union], Russia was choosing a different path, a path of internal development rather than an imperial one.” Yet Yeltsin enjoyed the annual CIS summits and the company of the presidents of other CIS countries, who had similar backgrounds, spoke Russian, and understood one another. Sometimes Yeltsin went along with the Russian state administration dealings with the CIS, which was Soviet in its outlook, for example, in forming a new union state between Russia and Belarus, but eventually he abandoned such initiatives or put them on the back burner. Though inconsistent, Yeltsin was an anti-imperialist with no real designs on the CIS.4

  In 2000, Putin entered the presidency with the opposite attitude. He expressed sympathy with the communist putschists in August 1991: “In principle, their goal—preserving the Soviet Union from collapse—was noble.” In his annual address in April 2005, Putin made his most famous statement along these lines: “The collapse of the Soviet Union was the greatest geopolitical disaster of the century. . . . Tens of millions of our co-citizens and compatriots found themselves outside Russian territory. . . . Old ideals [were] destroyed.” But initially Putin lacked any clear idea of what to do with the CIS. He devoted less attention to the CIS summits than Yeltsin and did not enjoy the company of the other CIS presidents. Thus, neither Yeltsin nor Putin knew how to work with the former Soviet republics.5

  In January 1991, President George H. W. Bush made a visionary State of the Union speech: “What is at stake is . . . a big idea: a new world order, where diverse nations are drawn together in common cause to achieve the universal aspirations of mankind—peace and security, freedom, and the rule of law. Such is a world worthy of our struggle and worthy of our children’s future.” Unfortunately, little followed.6

  Later that year, as a newly independent country, Russia jeopardized its old empire, but where did it belong? Where should it go? President Boris Yeltsin wanted Russia to join the new world order, the West, and its economic institutions, notably the International Monetary Fund and the World Bank, to build a normal market economy.7

  Russia had abandoned communist prejudices against these institutions and swiftly acceded to both the IMF and the World Bank in June 1992, becoming a permanent member of their executive boards. The European Bank for Reconstruction and Development was formed to manage the transformation of the former Soviet Bloc. These three organizations have played major roles in Russia’s economic development and spearheaded most of its economic reforms.

  The World Trade Organization, by contrast, offered far greater challenges and less support. Russia joined only in 2012. Russia has still not acceded to the Organization for Economic Cooperation and Development, which is the guardian of legal standards.

  Russian democrats looked at the European Union with great sympathy, but the European Union turned its back on them. In 1991, the European Union had only twelve members, but it was about to expand to fifteen and soon to accept the East European members of the former Soviet Bloc. President Yeltsin aspired to join the European Union, but German chancellor Helmut Kohl rebuked him that Russia was too big and powerful ever to do so. The European Union offered Russia and other former Soviet republics a rudimentary Partnership and Cooperation Agreement with minimal market access, providing miserly technical assistance of Ä1.2 billion from 1991 to 1999.8

  The eleven other former Soviet republics were Russia’s obvious partners, but the breakup of the Soviet Union destroyed their relationship. The recent memory of the Soviet Union, Moscow’s dominance, and attempts at integration and Russification aroused resistance among the other newly independent countries against renewed integration with Russia. They all looked to the outside world, whereas the Russian officials who took charge of economic cooperation with their neighbors tended to come from old Soviet institutions and maintained a Great Russian perspective.

  The former Soviet republics fell into two groups in their relationship with Russia. One group, comprising Belarus, Kazakhstan, Kyrgyzstan, Armenia, and Tajikistan, desired close cooperation with Russia. Belarus and Kazakhstan were so dependent on Russia that they had little choice, while Kyrgyzstan, Tajikistan, and Armenia were small countries far from Russia that needed its support for their security. The other six—Ukraine, Moldova, Georgia, Azerbaijan, Turkmenistan, and Uzbekistan—by contrast, wished to minimize their contacts with Russia as soon as they could afford to.

  The Soviet Union’s great pride had been that it was one of the two superpowers, the only nuclear power that could match the United States, but economically it was a dwarf. The Soviet Union was always swinging between megalomania and an inferiority complex, and Russia has not yet been healed from this tendency.9

  Both Yeltsin and Putin cherished grand international events with pomp and gravitas over tedious but economically useful organizations. They had an unfortunate infatuation with the Group of Seven (G-7) biggest industrial democracies. Soviet President Mikhail Gorbachev first met with the G-7 leaders on the sidelines of their summit in London in 1991. Beginning in 1992, President Boris Yeltsin participated, but he was allowed to attend only half the summit. In Denver in 1997, President Bill Clinton invited Yeltsin to attend the whole summit, which he called G-8. Yet Russia was never invited to the full meetings of the G-7 ministers of finance and central bank governors.10

  This integration process unraveled in 2014 when the other G-7 members suspended Russia’s participation in protest of its annexation of Crimea and the G-7 itself became the main coordinating body for Western sanctions. Since the G-7 is a club of the big and powerful rather than an international organization, Russia’s participation in the G-8 hardly contributed to its economic development. In 2008, the United States invited Russia to be a full-fledged member of the newly constituted G-20 of the twenty biggest economies in the world, which was a better fit for Russia.

  In June 2009 in Yekaterinburg, Russia hosted the first summit of BRICS, consisting of Brazil, Russia, India, China, and later South Africa, the community of large, fast-growing emerging economies. None of the BRICS nations had good governance, but even so they were growing faster than the Western countries. Apparently, Putin drew the conclusion that corruption and state ownership do not harm growth. As oil production and oil prices rose, the Kremlin toyed with the concept of Russia becoming an energy superpower, but Russia did not perceive the oil-producing countries as its peers.11

  Several regional initiatives involving some post-Soviet states and various other countries have offered Russia high-level contacts but minimal institutional integration. In 1998, Russia joined the Asia-Pacific Economic Cooperation (APEC), which organizes grand annual summits. Russia hosted its lavish summit in Vladivostok in 2012.12

  In 2001, six countries—Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan—formed the Shanghai Cooperation Organisation (SCO) as a permanent intergovernmental international organization, focusing on Central Asia. China initiated this organization with an agenda involving both security and economic cooperation. One of China’s main aims appears to be to support its economic integration into Central Asia with its One Belt One Road infrastructure initiative.13

  However Russia tried, it remained an odd fit in international contexts. It was too big for its neighborhood and the EU, and it had no obvious peer. The two organizations that have attracted the most Russian policy attention have been the WTO and the Eurasian Economic Union (EAEU).

  In August 2012, after nineteen long years as an applicant, Russia joined the WTO, but its integration was aborted by international conflicts. Russia’s WTO accession illustrates its evolving thinking about trade policy. In June 1993, Russia applied to join the General Agreement on Tariffs and Trade (GATT), which soon became the WTO. A large GATT Working Party on Russia’s accession was formed, but it worked at a leisurely pace and the Russian government devoted little attention to it.14

  In 2000, Putin made
Russia’s accession to the WTO a priority for his first term. His chief reformer, Minister of Economic Development and Trade Herman Gref, pursued this task energetically. It was a key element in the Gref reform program and Putin’s extensive institutional reforms from 2000 to 2003.15

  In his annual address in April 2002, Putin advocated Russia’s membership in the WTO at length: “The WTO is a tool. Those who know how to use it become stronger. . . . Membership in the WTO should become a tool to protect Russia’s national interests on the world market.” But for Putin, the WTO was probably most interesting because it would raise Russia’s international standing, and China had entered the organization in 2001. Russia was the only G-8 member that was not a WTO member, and Russia’s long-standing foreign policy ambition was to have a seat at every worthy international table.16

  The WTO enhances access to export markets, which is important for exporters of goods sensitive to protectionist measures, but not for an oil and gas exporter, such as Russia. Liberal Russian economists had long advocated WTO membership to open up their economy to more competition to spearhead modernization and diversification. The World Bank and the Russian Ministry of Economic Development and Trade commissioned several studies of the potential effects of WTO entry on the Russian economy. The estimated impact was limited, boosting Russia’s economic growth by 0.5 percent to 1 percent a year in the medium term. The gains would come mainly from the improvements in Russia’s domestic economy through the liberalization of foreign direct investment in the service sector, and not from improved market access for Russian exports.17

  Russia’s comparative advantage is overwhelmingly in hydrocarbons, other crude materials, and chemicals. British researcher Julian Cooper finds that Russia had a “revealed comparative advantage” (defined as a country’s share of world exports of a particular good divided by its share of total world exports) in seventy product groups. Of these, only four were manufactured goods—namely, nuclear reactors, condensers for steam boilers, rail freight wagons, and steam turbines. All were traditional Soviet products exported primarily to former Soviet republics. Russia was not ready to break into new export markets of manufactures. It has comparatively high wages because of its ample raw material exports.18

  In substance, it was much easier for Russia than for China to fulfill the conditions for entering the WTO, because Russia has a far more open market economy. But Russia was much less motivated to comply with WTO demands than China, for which market access for its manufactures was vital. Nor did Russia have the same need as China for WTO guidance for its reforms.19

  After having promoted Russia’s accession to the WTO for three years, Putin reversed course to become its biggest obstacle. In 2003, he lost interest in WTO accession and instead launched the idea of a Common Economic Space among Russia, Ukraine, Kazakhstan, and Belarus. In 2009, Russia’s WTO accession became one of the goals of the Barack Obama–Dmitri Medvedev “reset.” Possibly for that reason, in June 2009, Putin repeated his trick of 2003, proposing a customs union between Belarus, Kazakhstan, and Russia, which yet again delayed Russia’s WTO accession.

  In August 2012, Russia finally became the 156th member of the WTO, but its practical impact became limited, as Putin focused on his new Eurasian Economic Union instead. The United States could not recognize Russia’s WTO membership unless it granted Russia permanent normal trading rights, which it did in December 2012, but it did so together with the Sergei Magnitsky Rule of Law Accountability Act, which sanctioned a number of Russian officials responsible for the murder of this lawyer. As of 2018, the United States has sanctioned forty-nine Russians for related human rights violations, including Alexander Bastrykin, the chairman of the Investigative Committee and Putin’s law school friend from St. Petersburg. At least six more countries have adopted similar Magnitsky Acts.20

  While Washington saw the adoption of permanent normal trading relations with Russia as the essential legislation, Putin got greatly upset over the accompanying Magnitsky Rule Act. Although its aim was to punish looters of the Russian state, the Kremlin saw it as a hostile act, seemingly acknowledging complicity in the crime. The Kremlin took revenge with a law prohibiting the adoption of Russian children by Americans in early 2013, named the Dima Yakovlev Act for a Russian adopted child who died in the United States.

  In 2016, the US Congress adopted the Global Magnitsky Human Rights Accountability Act, which sanctions violators of human rights throughout the world. In December 2017, the first designations were made. It sanctioned one Russian, Artem Chaika, the son of Russia’s prosecutor general, who had been vilified by Alexei Navalny. The US Treasury stated that Chaika had “leveraged his father’s position and ability to award his subordinates to unfairly win state-owned assets and contracts and put pressure on business competitors.”21

  As discussed in chapter 2, Putin became increasingly disenchanted with the West, starting with the US withdrawal from the Anti-Ballistic Missile Treaty in July 2002. In trade, a new strife started in March 2003, when Putin initiated a Common Economic Space between Russia, Ukraine, Kazakhstan, and Belarus. It was supposed to be a free trade area, a customs zone, and eventually a currency union. These countries already had a free trade zone but because of the absence of an agreed arbitration mechanism it did not work. They needed the WTO’s well-functioning arbitration rather than more far-reaching integration proposals that could not be implemented. Yet Putin insisted.

  In September 2003, a four-nation agreement on the Common Economic Space was adopted, and it was ratified by all four parliaments. In parallel, the European Union launched its low-key European Neighborhood Policy, which aimed at some integration of the European post-Soviet countries. Putin had planted a new seed of geopolitical competition.22

  Putin’s priority since 2003 was to integrate Ukraine together with Kazakhstan and Belarus, and he wanted to do so before Ukraine’s presidential elections in the fall of 2004. Putin met with Ukraine’s president Leonid Kuchma once a month that year, even campaigning for the presidential candidate Viktor Yanukovych, although Putin did not think much of him. Instead, the Orange Revolution upset Putin. After Yanukovych lost the 2004 presidential elections, the Common Economic Space was forgotten, though it had delayed Russia’s accession to the WTO.23

  Putin hardly said so in public, but he clearly favored an East Slavic, or Russian, alliance of Russia, Belarus, Ukraine, and Kazakhstan in line with Alexander Solzhenitsyn’s famous 1990 essay “Rebuilding Russia,” advocating a “Russian Union” encompassing Ukraine, Belarus, Russia, and the ethnic Russian parts of Kazakhstan, and he wanted to use trade policy for this purpose.24

  Instead, Putin faced a new Ukrainian crisis. In the summer of 2013, Russia started sanctioning Ukrainian companies that were pro-European. Russia opposed Ukraine’s intention to conclude a Free Trade Agreement with the European Union. The tension between Russia and the West escalated with the Russian annexation of Crimea and further military aggression in eastern Ukraine. In March 2014, the West started imposing sanctions on Russia because of its aggression in Ukraine.

  In June 2009, Prime Minister Putin surprised everybody, including his cabinet, by declaring that Russia, Belarus, and Kazakhstan would form a customs union. This time Putin’s endeavor was serious. In 2010, these three countries created a Customs Union. In a next step in 2012, they constituted a Single Economic Space, and finally in January 2015, they formed the Eurasian Economic Union. Armenia decided to join in September 2013, and Kyrgyzstan did so in May 2015.25

  The Eurasian Economic Union mimics the European Union. Its declared purpose is economic integration and freer trade. When the Customs Union came into existence in 2010, common customs tariffs and a joint customs code were established. In January 2012, border controls were abolished. A joint secretariat, the Eurasian Economic Commission, designed like the European Commission, was set up in Moscow that year with a staff of more than a thousand well-paid international civil servants. The Eurasian Development Bank in Almaty, Kazakhstan, and an arbitrat
ion court in Minsk were also established.26

  The Treaty of the Eurasian Economic Union is a massive tract that runs to 855 pages in English. Its structure and content are reminiscent of the Treaty of the European Union, which is its obvious model. Russia wanted to drop “Economic” and call it the Eurasian Union, but Kazakh president Nursultan Nazarbayev prevailed, insisting that the EAEU be entirely economic.27

  This is the first attempt at a supranational institution among post-Soviet countries. The commission is balanced by the absence of any weighted voting that would favor Russia, so decisions are supposed to be made by consensus. However, national governments nominate all commission members, in practice controlling them. Its secretariat is located in Moscow and chaired by a longtime Russian minister, Viktor Khristenko. The highest body of the EAEU is its Supreme Council, which consists of the presidents of the member states. Neither the Eurasian Commission nor the Eurasian court has any power of enforcement. Therefore, the Eurasian Commission is intergovernmental rather than supranational. This is a Russian initiative, dominated by Russia. The eminent German Russia scholar Hannes Adomeit observes: “The ostensible purpose of [the Eurasian Economic Union] is economic. Its primary objectives, however, are geopolitical, and these are to be achieved in large part by economic means.”28

  The EAEU offers less than meets the eye economically. Its proclaimed customs union is not even a free-trade area. Not all tariffs have actually been unified. Many agricultural goods are not permitted into Russia because of its national sanitary regulations (seemingly inspired by protectionist agricultural producers), blocking Russian consumers from the benefit of cheaper food. Kazakh officials complain bitterly that they are not allowed to transit oil or gas through Gazprom or Transneft’s pipelines. Export tariffs persist and have not been harmonized but are negotiated bilaterally. The free movement of services is unlikely to be realized anytime soon.29