Russia's Crony Capitalism

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Russia's Crony Capitalism Page 28

by Anders Aslund


  Putin has been one of the global leaders of the reversal of democracy, building a neofeudal, patrimonial, and plutocratic system. He has meticulously annihilated the budding institutions of capitalism, democracy, and the rule of law that emerged in Russia in the 1990s. In their place, he has formed a strong vertical of power controlled by his cronies, who oppose the rule of law, favoring their own unlimited powers over the state. The current Russian rulers, who have destroyed all beneficial institutions, will not start rebuilding them.

  This ruling group has proscribed civil society with discretionary laws. The Soviet prohibition against “speculation” impeded the emergence of a normal market economy. Now trade is allowed, but similar laws against “extremism” hinder the evolution of a normal civil society. An undesired view can send a culprit to prison for up to six years. Independent nongovernmental organizations can be prohibited as “undesired” or as “foreign agents.” With political control of the judiciary, anybody can be sentenced to prison for some obscure economic crime not committed; Alexei Navalny is the prime example.15

  Russia is not alone. The Corruption Perceptions Index of Transparency International depicts vast corruption in the region. Ten of the twelve post-Soviet countries are among the worst ranked, ranging from 107th to 167th (out of 180 countries ranked in 2017), and the situation has not improved but deteriorated slightly in the past decade. Russia ranks 135th. Only Georgia has managed to get corruption under control, rising to 46th place, and Belarus ranks 68th.16

  Authoritarianism and corruption go together. The postcommunist countries fall into three distinct groups. The eleven countries in Central and Eastern Europe that have joined the European Union are all full democracies, as defined by Freedom House, and have corruption under control, according to Transparency International. They represent a positive, stable equilibrium. Their opposites are seven post-Soviet countries led by Russia that are both highly corrupt and authoritarian, forming a negative stable equilibrium. Both equilibriums are strong and not easily shaken. The fundamental insight is that corruption is not an accident but cherished by the ruling elite (fig. 9.1).17

  The most interesting country is Ukraine because it is a complete outlier (together with Moldova). It is as corrupt as Russia but is almost a full democracy, reflecting an extreme disequilibrium. Either Ukraine moves toward authoritarianism, as under President Viktor Yanukovych, or Ukraine’s democrats gain control over the state and establish real democracy with the rule of law. Ukraine is therefore the natural battleground between the Kremlin and the European Union, which Putin seems to understand better than most. This is a battle of unmitigated enrichment of the elite versus democracy and the rule of law, and not a fight over the reestablishment of the Russian Empire. Putin might be right in seeing this struggle as the greatest threat to his regime in Russia.18

  Fig. 9.1 Democracy and corruption, 2017. Sources: Freedom House (2018); Transparency International (2018)

  Russia has experienced nine years of stagnation since 2009. Its GDP per capita approaches $10,000 at current exchange rates. Is this a middle-income trap? An IMF paper defines “middle-income trap” as “the phenomenon of hitherto rapidly growing economies stagnating at middle-income levels and failing to graduate into the ranks of high-income countries.” This growth slowdown usually occurs around $10,000 per capita.19

  The concept of middle-income trap is statistically controversial, but Russia appears to have gotten stuck in such a trap at a typical middle-income level. Its public and external finances are stable, but it does not generate much innovation or increased productivity. In 1976, Soviet leader Leonid Brezhnev talked about the need to move from extensive to intensive growth at the Twenty-Fifth Congress of the Communist Party of the Soviet Union in a similar fashion. Naturally, it never happened. Although Russia currently has a market economy, competition is restricted, and its institutions do not appear to allow much economic growth.

  The critical feature is probably Russia’s institutional transformation. Distinguishing between the enforcement of property rights and contractual obligations, the economists Daron Acemoglu and Simon Johnson find that “property rights institutions have a major influence on long-run economic growth, investment and financial development, while contracting institutions . . . have a more limited impact on growth.”20

  This Russian model of combined corruption and authoritarianism matches the idea of Daron Acemoglu and James Robinson of regimes as either inclusive or extractive, entering vicious or virtuous cycles of governance. Russia’s model is extractive, and the country is firmly stuck in a vicious equilibrium. Market economic reform is unlikely under Russia’s current administration, because it requires judicial and political reforms, which are anathema to this regime. Periodic reports that Putin is preparing serious market reforms can be dismissed as propaganda or disinformation. Only a new regime collapse is likely to initiate reforms aiming at the building of the rule of law and democracy, though nobody can guarantee that a new government will succeed.21

  An additional observation by Acemoglu is that property rights and the rule of law are more important for economic growth at a higher level of economic development. He argues that oligarchic property rights might deliver faster growth at an early stage of development with large economies of scale and limited technological demands, when the dominant obstacles are administrative barriers, which big business can break more easily. An intermediary industry, such as steelworks, has done well under oligarchic rule in Russia. At a higher stage of economic development, the rule of law and the reinforcement of intellectual property rights are more important for economic growth because they boost small and medium-sized enterprises, innovations, and creative destruction.22

  Economic growth is determined by capital (investment), technology, human capital, and institutions. Because of the capital flight, Russia loses 3–4 percent of GDP in investment each year, and about as much does not arrive as foreign direct investment because of poor property rights and Western sanctions. Russia’s labor force is projected to decrease by slightly less than 1 percent a year for the next decade, and Russia’s expenditures on education are miserly. Russia is suffering from a steady deinstitutionalization. The only plausible positive influence would come from imported technology, rising commodity prices, and foreign demand.

  Russia is thus caught in an antireform trap, maintained by both political and institutional forces. The ruling elite of top state officials, law enforcement, state corporations, and cronies holds power, and this elite would be the chief victim of reform. The rich and powerful would suffer a loss of rents if property rights and the rule of law were enforced at home, whereas they enjoy excellent legal protection abroad. Meanwhile, the opposition is weak, and its freedom and resources are shrinking. The deinstitutionalization and personalization of Russian state power have gone far. Therefore, no institutional preconditions appear to exist for Russia to break out of the middle-income trap short of regime collapse.23

  Russia is a classical declining power, but its powers wane at different speeds. The disparity between its current military and economic powers is great and potentially explosive, and Russia’s economic regression aggravates this tension.

  The first dimension of power is demographic. Russia’s population has been roughly stagnant at 143 million since the dissolution of the Soviet Union in 1991. If 2 million Crimeans are included, the population increases to the current official number of 145 million. Many have forecast a drastic contraction of Russia’s population, but high immigration from poorer former Soviet republics has balanced low Russian birth rates and high death rates, leaving Russia’s population stagnant. At present, Russia is the ninth most populous country in the world after Bangladesh but before Mexico. Several countries, including Ethiopia and the Democratic Republic of Congo, are set to soon overtake Russia, squeezing it out of the top ten.24

  The second dimension is economic. GDP is measured either at current exchange rate or at purchasing power parities (PPP), which is consi
dered more relevant for the comparative economic strength of a country. The International Monetary Fund, which publishes the authoritative statistics, ranked Russia sixth in the world in terms of GDP at PPP in 2017, accounting for no less than 3.2 percent of global GDP, superseded only by China, the United States, India, Japan, and Germany, though the Russian numbers look strangely high. Russia’s GDP in current US dollars, by contrast, was merely $1.53 billion, leaving Russia as the twelfth largest economy in the world after South Korea and just before Australia and Spain. Similarly, by export volume Russia ranks eleventh in the world.25

  The level of economic development is illustrated best by GDP per capita. In 2017, Russia’s GDP per capita at current exchange rates was merely $10,608, according to the IMF, leaving it in the sixtieth place in the world, after all EU countries except Bulgaria and after Argentina, but just before the BRICS partners China and Brazil. Whereas Russia’s GDP at current exchange rates swings with the price of oil, it is essentially an upper-middle-income country with a GDP per capita of about $10,000.26

  A third dimension is military power, where Russia excels. According to the authoritative Stockholm International Peace Research Institute (SIPRI), Russia has the third largest military expenditures in the world at $69 billion in 2016, though US military expenditures were nine times larger at $611 billion, and the Chinese spent $215 billion. Whereas most other countries have been disarming since 1991, Russia has been arming since 2008. Carrying out a major rearmament and modernization of its forces, it boosted its military expenditures from 3.3 percent of GDP in 2008 to 5.3 percent in 2016, according to SIPRI (fig. 9.2). Meanwhile, the United States reduced its military expenditures from a peak of 4.7 percent of GDP in 2010 to 3.3 percent in 2016. Russia cannot rival the United States or China militarily, but it is far stronger than any other military power in Europe. It remains a superpower in one single area, nuclear arms, with the United States as its only peer.27

  Russia could have other dimensions of power. Starting in 2006, after oil prices had surged, Russian leaders began to talk about Russia as an “energy superpower.” In recent years, Russia, Saudi Arabia, and the United States have rivaled one another as the largest energy producer in the world, but after the halving of energy prices in 2014, energy has lost much of its allure. Russia had the preconditions to excel in research and technology, but since it has not developed these favorable conditions, numerous outstanding Russian researchers and high-tech entrepreneurs have emigrated to the United States.28

  Fig. 9.2 Russian military expenditure as percentage of GDP, 2000–2016. Source: SIPRI Military Expenditure Database

  Russia’s assets lack balance. With the world’s ninth largest but stagnant population, Russia is set to decline economically and militarily. In economic strength, it ranks from sixth to twelfth depending on the measure, and it will fall further. Its military still ranks number three, but its military strength will dwindle with the weakening economy. Only in nuclear arms can Russia spar with the United States. Such a combination of assets is scary and characteristic of a declining power. For the Kremlin, the temptation might be overwhelming to exploit its military strength while it still can. Quite logically, it has pursued three wars since 2014—the annexation of Crimea, the incursion into eastern Ukraine, and the military intervention in Syria.

  Putin’s understanding of the sources of his regime’s legitimacy appears impressive. His first two terms, 2000–2008, can be summarized as political stability and a rising standard of living. Russians were tired of the unruly 1990s. They desired political stability, democratic or not. Initially, Putin spoke favorably of democracy. He denied that Russia would need a special path, claiming that it had “already been found. It’s the path of democratic development,” though he gradually played down democracy’s benefits. In 2012, Putin exclaimed, “The anarchy of the 1990s led to the discrediting of the market economy and democracy as such.” But he explained, “Democracy is first of all the implementation of laws.”29

  In February 2008, Putin made a triumphant speech before the State Council, summarizing his accomplishments. “Russia has returned to the global stage as a strong state,” and “the main thing we achieved is stability.” The decade 1999–2008 delivered the greatest growth in Russia’s history. The average annual real GDP growth was 7 percent, and the standard of living rose even faster. At current exchange rates, Russia’s GDP skyrocketed from $200 billion in 1999 to $1.9 billion in 2008. Lev Gudkov, head of the Levada Center, an independent polling organization, notes that “popular support for Putin is based primarily on consumption growth.”30

  Since 2009, by contrast, the Russian economy has almost stagnated, and a broad consensus expects the growth rate to linger at 1.5–2 percent a year for the foreseeable future. The Russian people have not yet expressed much discontent, but this figure cannot arouse much enthusiasm. As discussed in chapter 3, Putin focuses successfully on macroeconomic stability, with low inflation and minimal unemployment, but his policies are barely raising the standard of living. The Russian popular reaction to the global financial crisis was a grateful remembrance of the good decade: “It was too good. It could not last forever.” But for how long will that satisfaction last?

  Political stability has gradually turned into political repression and manipulation. In the 1990s, Russia’s television, led by Vladimir Gusinsky’s NTV, was outstanding, but with increasing Kremlin control it has become so propagandistic that it is losing credibility. Most Russians still rely on television for their news, but eventually the discrepancy between official television and reality is likely to become too blatant.

  By standard definitions, Putin’s regime is a personal authoritarian system. Such regimes usually end with the death or ouster of the incumbent. The regime has no spiritual source of legitimacy, such as monarchy, ideology, party, nationalism, or religion. As Lilia Shevtsova wrote before Putin’s departure as president in 2008: “There is a growing fear that with his departure [as president in 2008] Putin’s pyramid will begin to crumble, since it was created for a particular individual.” It did survive, because Putin did not leave, but if he ever does, the legitimacy of his regime would crumble.31

  Putin seems acutely aware of his need for another source of legitimacy besides stability. The Kremlin keeps itself well informed with several alternative opinion polls to understand what is going on among the population, and the FSB is focused more on gathering intelligence than on repression. Putin sees popular uprisings in Russia’s global neighborhood as a threat to his power in Russia but also as an opportunity to enhance his legitimacy by rallying the nation against an external enemy.

  An oft-quoted line in official Russian discourse is: “We need a small victorious war.” The tsarist minister of interior Vyacheslav von Plehve uttered these words in early 1904 before the disastrous Russo-Japanese War, which became neither small nor victorious, but the Russian foreign policy elite continues to cherish this idea, just as the Roman emperors offered the people bread and circus. With less bread available, the demand for circus increases, and today circus equals war.

  Putin knows how to boost his legitimacy through small, victorious wars. He rose to popularity and the presidency on the back of the housing bombings in the fall of 1999 and the ensuing second Chechen war. In 2003, his arrest of Khodorkovsky amounted to a war on the oligarchs. It won him the Duma elections in December 2003 and the presidential elections in March 2004.32

  After President Mikheil Saakashvili had quashed organized crime and corruption in Georgia, Putin pursued a five-day war in Georgia, August 8–12, 2008. It was an ideal small, victorious war. It was a real war, but brief and not very costly. It raised Putin’s popularity to a new height, according to the Levada Center.33

  In the winter of 2013, a new democratic outbreak occurred in Ukraine, but this time Putin was prepared. In February 2014, he instigated the swift occupation of Crimea, and on March 18 he annexed it before the new Ukrainian government could organize any resistance. This action was approved by n
o less than 88 percent of Russians, according to the Levada Center, taking Putin’s popularity to the highest point ever.34

  The Crimean success encouraged the Kremlin to proceed. It attempted uprisings in the half of Ukraine with a predominantly Russian-speaking population in April–May 2014, but it failed except in parts of the two easternmost regions of Donetsk and Luhansk, where troops backed, equipped, and commanded by Russian military have been bogged down in a low-intensity war without evident solution. The war in the Donbas has been neither small nor victorious, though the Russian government has shown great financial restraint, limiting its costs.

  The Russian war in the Donbas indicates a major Russian weakness. The Kremlin tries by all means to hide the human losses of Russian soldiers, volunteers, and locals. Independent activists have reported hundreds of concealed deaths, but they have been subject to uncommonly severe repression and censorship, showing that the Kremlin does not want to let these numbers out. By contrast, the Ukrainian government publishes its losses daily; more than ten thousand people have been killed on the Ukrainian side. Presumably, the losses on the Russian side are of a similar nature, but we have no summarized data. The body bags coming home from Afghanistan are widely considered a major reason for the late Soviet aversion to war, and their number was limited to fifteen thousand, so the large secret human losses in the Donbas might be a dangerous destabilizing factor for the regime.35

 

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