The country closed around Putin’s promotion of revanchism abroad and conservatism at home. As for the urban middle class, the growth in the size of the state sector, ballooning to one-third of the entire Russian workforce, focused the country on the Kremlin’s economic policy. In particular, young people were increasingly looking to the state for stable jobs; 36 percent of the entire workforce under the age of thirty had state jobs by 2009, as compared to 12 percent in OECD countries.19 Those in the nonprofit sector who protested the turn toward authoritarianism in 2011–12 lost hope that they would be able to build any kind of free society and vibrant balanced economy in these conditions, and they started to pack their bags, spurred by news stories like that of the influential economist Sergey Guriyev, who fled to Paris. As head of the New Economic School, Guriyev was listed among the top one hundred experts connected to the Kremlin. Yet he was called in for repeated interrogations in early 2013, mainly over his testimony before the Human Rights Council that Khodorkovskiy’s second trial had been politically motivated. The day before he was due to once again appear before the Investigative Committee of Putin’s classmate Aleksandr Bastrykin, he “concluded that my next meeting with them could result in the loss of my freedom.”20 In an eerie echo of the 1930s, when the purges started, he stated, “A journalist from a state-owned news agency called and said that she had seen a press release about my arrest, dated the following day.”21 Putin’s response to a question at a news conference about Guriyev’s flight was classic: “[If Guriyev has] not violated anything, he is 100 percent safe. If he wants to come back, let him come back. If he wants to live in Paris, he’s free to do so.”22 Such an admission that everyone is expendable stoked the numbers of people who expressed an interest in permanently leaving the country.23
By 2014 Russians had settled into a disturbing cycle. Only 5 percent felt that the Kremlin’s new anticorruption efforts were serious or would succeed.24 But at the same time, polls also showed a decrease in Russians’ regard for Western-style democracy and institutions to 29 percent, following the spring events in Ukraine, which Putin and the Russian media portrayed as Western-inspired.25 In 2014 Freedom House continued to negatively assess political rights and civil liberties in Russia that had started to slide as soon as Putin became president in 2000 (see Table 4).
Table 4. Freedom House Ratings of Freedom in Russia
1999
2002
2006
2010
2014
Freedom
4.5
5.0
5.5
5.5
5.5
Civil Liberties
5
5
5
5
5
Political Rights
4
5
6
6
6
Status
Partly Free
Partly Free
Not Free
Not Free
Not Free
Notes: The ratings are based on a scale of 1 to 7, with 1 representing the highest level of democratic progress and 7 the lowest. Each score is an average of ratings for the subcategories tracked in a given year.
Source: Freedom House (2014).
This steady deterioration obviously did not come about accidentally but was the product of willful planning and steady execution from within the political elite. The rules governing elections have been changed bit by bit to become less inclusive of non-Kremlin-backed parties since Putin came to power. Alternative centers of power, whether parties, regions, or elites, have been relentlessly attacked and weakened. The media and the public space in general have become less and less tolerant of the free expression of ideas.
An increase in the sense of political hopelessness on the part of the vast majority occurred at the same time that Moscow vied with New York and London as the billionaire capital of the world. (Some of the New York and London billionaires were originally from Russia.)26 In many countries the gap between rich and poor has grown in the past decade, but in Russia the gap is widest and the percentage of the country’s wealth owned by the richest was the largest: 110 individuals, including Putin’s cronies, control a staggering 35 percent of the country’s wealth. Average household wealth has risen sevenfold since 2000, from $1,650 in 2000 to $11,900 in 2013, which sounds fabulous, but in 2013 median (midpoint) wealth in Russia was $871: that is, 50 percent of adults in Russia had total household wealth of $871 or lower. This was compared with median wealth of $90,252 in Canada—with roughly the same population size and latitude as Russia, or $1,040 for India, which has a population almost ten times larger than Russia’s and is an importer not exporter of oil.27
The increase in the gap between rich and poor has occurred at the same time that there has been an increase in the number of people seeking employment with the state. The growth in the size of the state, combined with a concomitant decline in the dynamic growth of the nonextractive sectors of the economy, has put a classic burden on the country. In states such as Saudi Arabia, where the economy relies on oil revenues, only a small percentage of the population is involved in the oil economy, and the state’s coffers are the principal recipient of these revenues. Under such conditions, it is possible to see the inner workings of a sustainable nondemocratic political system: the government doesn’t rely on taxes for its revenues, thereby decreasing the leverage the population has to demand change.
It is tempting to see Russia as one of these so-called rentier states. But is Russia really a classic rentier state?28 Is the population so complacent? Typical rentier states do not have a vast pool of highly skilled professionals; most are nondiverse economies dependent on revenues from energy export. The Russian economy is becoming more dependent on energy exports as a percentage of the total, but between 25 and 35 percent of its export revenues still come from nonenergy sources—mainly military hardware—throughout the Putin period.29 In Russia the percentage of the budget derived from oil and gas has certainly increased, from 30 to over 50 percent over the past decade, but it is still much less than the comparative figure of 92 percent in Saudi Arabia.
Russia is nevertheless tipping toward “the Dutch disease,” in which an economy’s overreliance on one source of income suppresses investment in other sectors. And this disease can also lead to a “resource curse,” which the economist Guriyev described as “a trap, where democratic political and economic institutions do not develop because rents coming from natural resources provide incentives to the elite not to develop institutions.”30
While Putin uses the revenues from oil and gas to fund large capital projects, from the multiple state residences to the Sochi Olympics, or allows his cronies to take it abroad, the population must contribute significantly to the budget through a combination of income taxes, high value-added taxes, and high duties on imported consumer goods. But the population also contributes a “tax” by paying bribes. Instead of cracking down on corruption, the state uses bribes both to feed the venality of the elites and as a way to supplement the insufficient salaries of low-paid workers. Instead of paying them from state coffers, the state allows low-level civil servants to supplement their meager incomes with petty bribes. This constitutes an additional tax on the population and a drag on the economy’s overall efficiency. Over the long term this “corruption effect,” equivalent to $2,000 per Russian and equal to the size of the Russian budget, can only slow economic growth and increase popular resentment, including among civil servants who feel degraded by the system. One policeman, Aleksey Dumovskiy, appealed on YouTube to Putin to do something to stop systemic corruption in which police had to meet their financial quotas from their bosses, leading them to “detect non-existent crimes and imprison people who are not guilty.” He was immediately arrested on fraud and corruption charges.31 What he failed to understand is that everyone in Russia, except Putin, has to meet a quota.
The silver lining in the 2000s was that wealth from oil and gas flowed int
o Russia in staggering amounts, increasing from $30 billion in 1995 to approximately $175 billion annually only a decade later. However, a study by the former deputy minister of energy Vladimir Milov (who was obliged to resign after the study’s release) showed that the imposition of state control and its concomitant lack of transparency gradually eroded efficiency and profitability even in the bloated energy sector.32 Under such circumstances, it can be expected that prices and inefficiencies will increase, since rents and bribes become part of the cost of doing business, and inefficiency is not punished by the market, as the state protects and promotes this behavior. Preferential treatment of some firms over others and some sectors over others makes market entry for new firms more difficult, suppresses the desire or need for innovation as a way of gaining market share, and reinforces the tendency to invest in traditional and economically “reliable” sectors over other sectors that might promote the country’s modernization but only in the long run.
Not only has corruption malformed Russia’s society and its economy; it has also gradually distorted the state. The 1993 Russian Constitution created the broad institutional framework for a democratic system, with separation of powers, rotation of elites through elections, and guarantees of rights and freedoms. To be sure, even under Yel’tsin this system faced tough challenges. But elections were held in which influential candidates lost (including Anatoly Sobchak in 1996, for whom Putin was the campaign manager), and the individual rights and freedoms guaranteed in the Constitution were more or less upheld.
Certainly even in the 1990s, the oligarchs around Yel’tsin’s Family sought to secure the wealth they had amassed through privatization schemes that largely excluded the average population. Popular hatred for individuals like Boris Berezovskiy and Anatoliy Chubays fueled the rise of Putin and his security elite, who were presented as incorruptible and willing to show a strong hand to those—like the Chechens—who would defy the Russian state. They launched a plan to remake the Presidential Administration and through it the Russian state from the earliest days of 2000. The leaked document Reform of the Administration of the President of the Russian Federation stated in writing what Putin ended up doing in practice: replacing the “self-regulating” nature of a democratic, market-driven, and rule-by-law system with manual control from the top. Written before he was even inaugurated, the document stated that the president did not need to rely on a self-regulating political system. He could control everything from the Kremlin, and he could achieve the best results by using “professionals” from the FSB. The results Putin achieved were indeed fast, and certainly not in a democratic direction.
The imbalance between state and society, in which society has not been able to countermobilize to prevent the strengthening in the power of the state over time, has been driven by Putin’s desire from the beginning to control economic activity and to distribute profits to regime loyalists. Getting a position in the customs inspectorate, the tax office, or the presidential property administration became a more lucrative avenue for advancement than going into business. Massive companies that had previously flourished in the private sector, like Mikhayl Khodorkovskiy’s Yukos, were raided and taken over by Kremlin insiders. And their economic performance suffered. They didn’t become state companies so much as they became Putin’s friends’ companies. Putin gave loyalists directorships and memberships on the boards of these companies, like Gazprom and Rosneft, and these cronies then controlled the companies’ activities and investments. Under Igor Sechin, Rosneft took over the most profitable parts of Yukos after it was raided in 2003, and yet Rosneft’s market capitalization fell from $80 billion in 2006 to $69 billion in 2013. When Rosneft took over the well-performing TNK-BP in 2012, even the Putin ally Minister of Finance Aleksey Kudrin lamented that once again “an inefficient company absorbs an efficient one . . . [and] unfortunately, the company will be managed by the old Rosneft management.”33
And Putin is directly involved in these companies. For instance, on March 3, 2009, he signed an executive order “on nominations of Russian Federation representatives and independent directors to the Boards of Directors and Auditing Commissions” of sixteen joint-stock companies, including Gazprom, Transneft, United Aircraft, Russian Railways, Almaz-Antey, United Shipbuilding, and Aeroflot.34 These are companies that may have controlling shares owned by the state but are publicly traded in New York and London, in which billions from Western pension funds are invested. The disregard for the rights of outside investors was underlined when Rosneft took over TNK-BP in 2012 and in response the price of the publicly traded TNK-BP stocks fell by 40 percent. Rosneft chief Sechin shot back at an investors’ meeting that minority shareholders shouldn’t expect to be treated equally and shouldn’t expect such large dividends in the future, since Rosneft is “not a charity fund.”35I But in truth it is such a fund for the Russian state and its elites. And the emergence of Rosneft as another largely state-owned company only strengthened the trend away from a market economy and toward state capitalism.37
This drag on economic performance caused by massive, systemic corruption makes prospects for economic development bleak, a remarkable situation considering that a decade of high oil revenues means that Russia has no sovereign debt. The Central Bank of Russia issued cautionary statements in 2014 predicting zero or negative growth if inflation and capital flight are not curbed. All this leads one to conclude that if rates of growth are not maintained and if something is not done about the high rate of income inequality in which those closest to the Kremlin become billionaires and ordinary citizens are pushed to the wall, then it is possible that analysts will repeat the nineteenth-century historian Vasiliy Klyuchevskiy’s lament about Russian autocracy: “The state grew fat while the people grew thin.” This was the path that ultimately led to revolution.
Putin’s Home: Gazprom
In order to assess Putin’s own role in this turn toward state control, it is worth looking more closely at his role in Gazprom, the publicly traded but majority-state-owned gas company. Gazprom is one of the largest companies worldwide, and its activities provided 8 percent of Russia’s GDP in 2011. Mikhayl Krutikhin of RusEnergy, a consultancy firm, stated bluntly, “Gazprom has one manager: Putin.”38 And this assessment is no hyperbole. According to the websites of the Russian government and the Kremlin, Putin has met Gazprom chief Aleksey Miller, who served as Putin’s deputy on the Committee for Foreign Liaison in St. Petersburg, over one hundred times—including dozens of one-on-one meetings, since Miller became head of Gazprom in 2001. By way of comparison, the number of times American and British government websites list President Obama or Prime Minister Cameron meeting one-on-one with the CEOs of Exxon or British Petroleum? Zero.
Financial analysts express concern that as much as 70 percent of Gazprom’s capital investments are nontransparent, non-gas-related capital expenditures, and that such behavior is tantamount to “value destruction.”39 In the early years of Putin’s presidency there were still independent members of boards of directors. One such was Bill Browder, an American with British citizenship who was chairman of Hermitage Capital Management. Browder had been a huge backer of Putin and had endorsed the arrest of Khodorkovskiy and the expropriation of Yukos assets.40 He seemed like a perfect candidate to be on Gazprom’s board. But there was a hitch: he happened to believe that greater transparency would allow minority shareholders to understand why the company was not producing better returns.
Hermitage became a major investor in Russia, investing $3.3 billion by 2005.41 Browder bought millions in Gazprom shares, earning his company the right to vie for one of the independent slots on the board. He had started his company in the 1990s and correctly calculated that the profits from investing in Gazprom, even taking corruption into account, would be phenomenal. He, and his investors, became fabulously rich in the new Russia. But believing that minority shareholders could press the company to reduce “inefficiencies,” he became involved in trying to increase transparency and accountability to sharehold
ers. As an activist shareholder, he lobbied for open disclosure of the reasons for the decline in the company’s profitability. He had the temerity to suggest, as a major Gazprom investor, that Gazprom would be more profitable if it didn’t rely so much on questionable intermediaries, like RosUkrEnergo.42
As a result, in 2005, as he was returning to Russia from the United Kingdom, he was barred from entry as a “threat to national security.” Browder’s companies were subjected to corporate raiding by an organized group of tax officials, police, and businessmen who reregistered the companies, declared them bankrupt, and then applied for, and received, a refund of the $230 million that Browder’s companies had paid in taxes in 2006. The refund was the largest in Russian history, and they received it one day after applying. Browder’s employees were subjected to arrest, illegal document seizures, and ultimately death when Sergey Magnitskiy, one of Hermitage’s Moscow-based lawyers, died in 2009 in pretrial detention after being beaten and denied medical treatment.
Putin's Kleptocracy_Who Owns Russia? Page 39