Putin's Kleptocracy_Who Owns Russia?

by Karen Dawisha

  But it is in Ukraine that Russian business has the greatest interest. Russian elites and their Ukrainian partners have long shared the spoils of the gas trade by allowing a percentage of the gas supplied cheaply to the Ukrainian domestic market to be re-exported at higher world prices, with both sides sharing the proceeds. In addition Russian elites are significant landowners in Crimea and have long held sway there. Putin himself was said to have been the ultimate beneficiary of a sale by the pro-Russian Ukrainian regime of Leonid Kuchma of the storied Dacha No. 1 (also called Glitsynia or Wisteria) on 20-hectare (50 acres) grounds on the Crimean Coast near Yalta to Moscow’s Vneshtorgbank for $15 million, as the “official residence of the Russian President in Crimea.” The terms were challenged by his successor after the Orange Revolution, Viktor Yushchenko, but understanding how much the property meant to the Kremlin, Yushchenko stated that “having such a property as a vacation resort for members of the Russian government is a question that deserves attention . . . We will propose an honest, public and legal alternative, so that both sides can demonstrate their transparency and openness and not base their relations on scandalous properties.”91 Putin is said to have continued to visit the dacha, which formally was on Ukrainian soil. Immediately after the annexation of Crimea by Russia, the Crimean authorities announced that all Ukrainian state properties would now revert to Russia, including “the state-owned dachas and resorts in Yalta.”92

  In Ukraine’s eastern and southern regions Russian and Ukrainian arms manufacturers collaborate to produce and ship, from the Oktyabrsk port in Odessa, military equipment for Syria, Algeria, India, Vietnam, and beyond. In 2012 Russia exported $17.6 billion worth of arms, and a significant percentage went out through Odessa. Russian and Ukrainian regional and national leaders are linked in a network that makes the business mutually beneficial. On the Russian side, according to a detailed study of “the Odessa Network,” are companies linked to both Igor Levitin, who served as the Russian minister of transportation in 2004–12 and then as a personal advisor to Putin, and Sergey Chemezov, head of Rosoboroneksport and a key Putin ally.93 Chemezov was added to the U.S. sanctions list in April 2014.94 Russia has real and deep interests in this region that will not be compatible with a closer relationship between Ukraine and the EU. These interests include a long history of national collaboration as well as the personal interests of key Russian leaders. As Lev Gudkov, the director of the Levada Center, writes, “Putinism is a system of decentralized use of the institutional instruments of coercion . . . hijacked by the powers that be for the fulfillment of their private, clan-group interests.”95 The Russian leadership’s attitude toward Ukraine is deeply affected by these interests.

  Putin’s Kleptocracy: What Now?

  Whether, and how, the Russian government, or any government, so completely captured by these motivations can overcome them is a subject of significant importance. It is logical that as the Russian population at large begins to understand that the “public goods” produced by the state are not for public consumption, increasing amounts of coercion will be required to maintain the system. Additionally, reliance on Putin as an arbiter can be maintained only to the extent that he is interested in the increasing effort and risk required to play this role over time. The U.S. Embassy is only one of many players who observed that Putin’s interest in putting in a full day’s work has definitely declined.96 As predation’s rewards fall, the risks will become less attractive.

  And there is an increasing risk that the country will be driven into a renewed hard authoritarian regime. In Putin’s earliest career in St. Petersburg he declared, “However sad and frightening it may sound, . . . I think that in our country a return to a totalitarian past is possible. The danger is not from the organs of state power like the KGB, MVD, or even the army. It is a danger in the mentality of our people, our nation, our own particular mentality. We all think in this way . . . and I also sometimes think in this way that if only there was a firm hand to provide order we would all live better, more comfortably and in security.” It is ironic that he went on to predict that any such illusions would be “short-lived, because a firm hand will be tight and very quickly strangle us.”97

  Once the state is captured, unity among the top elite is required. Yet while all know that unity is in their collective best interest, there is the classic “prisoner’s dilemma,” in which, in the absence of trust, each person’s interest can be safeguarded only by caring only about his or her own fate and not about the group’s. As an unattributed commentary posted as early as 2007 on the Russian website Gazeta.ru succinctly put it, “Attempts to safeguard one’s children and oneself from possible persecution by former colleagues along the ‘power vertical,’ along with the desire to maximally enrich oneself while in power, has become practically the main purpose of all political and economic decisions.”98

  Putin’s ability to rule with a charm offensive has been largely exhausted. Many Russians still admire his tough-guy approach against weaker neighbors, but the days when he could believably protest that he did not know Anna Politkovskaya, Sergey Magnitskiy, or any of the other regime targets are over. As Anders Åslund correctly observed already in 2007, “Putin reestablished the public lie as the standard as in the Soviet Union.”99 By 2014 the U.S. State Department was posting “lies” uttered by the Russian president on its website.

  With a decline in both the economy and Putin’s personal stature among the Russian middle class, maintaining control will more and more depend on coercion. The actions that Putin has taken since the beginning of his third term would appear to support this. The May 2014 promotion of Viktor Zolotov from the position of head of Putin’s personal security detail to commander in chief of the 190,000 Interior Ministry troops does not bode well in this regard. He is the person who, according to local journalists, carried Putin’s “black cash” (chyornyy nal) in Petersburg.100 He was the one who, according to the account of Sergey Tretyakov, as discussed earlier, worked with General Yevgeniy Murov, director of the Federal Protection Service, “to make a list of politicians and other influential Muscovites whom they would need to assassinate to give Putin unchecked power.” Tretyakov, who was resident in New York City from 1995 to 2000, reported, “After the two men finished their list, Zolotov announced, ‘There are too many. It’s too many to kill—even for us.’ ”101 This man, who has been by Putin’s side from the very beginning and, one assumes, is utterly loyal, is now in charge of all special forces troops.

  Putin will not go gentle into the night. He shows himself to be less flexible and more bombastic in his public appearances, and those in his inner circle suggest that after the 2011–12 election demonstrations, there is also fear.102 Gleb Pavlovskiy, his PR guru for over a decade, believes that Putin will never leave power and, indeed, is hampered by the idea that Russians will always decide matters by violence. Pavlovskiy says he heard Putin say, “We know ourselves . . . we know that as soon as we move aside, you will destroy us. He said that directly, you’ll put us to the wall and execute us. And we don’t want to go to the wall.”103

  Of course they do not want to be taken to the wall, given the obscene concentration of power and wealth in their hands. When all is said and done, this is the house that Vladimir Putin has built. Today’s Russia is not the Russia of Leonid Brezhnev, Mikhayl Gorbachev, Boris Yel’tsin, or even Dmitriy Medvedev. It is the Russia of Vladimir Putin, built in his own image, subject to his will and whim, to his penchant for “manual control.” When the new prime minister of a Central Asian state paid his first visit to Moscow, he met with Putin, and after the cameras had left the room, Putin is said to have loosened his tie, leaned forward, and in a menacing snarl told the startled leader, “Listen here (slushay syuda), I decide everything. Don’t forget it.” If he is willing to say this to the leader of a sovereign country, what does he say, and do, to his own Russian rivals? This is a man who thinks in zero-sum terms—your loss is his gain. Period. In an effort to live his life beyond the control of others, h
e has forced a whole people to submit. The most that can be said is that he will never reintroduce the gulag. Why should he? He just invites those who oppose him to leave the country.

  And for those left behind, the gap between rich and poor has become the greatest in the world. To repeat the figures already cited in the book, the midpoint of wealth for Russians is only $871—as compared to the other BRIC countries—$5,117 for Brazil, $8,023 for China, and $1,040 for India, all energy importers. And on the other side, 35 percent of the total wealth in the country is owned by one hundred ten billionaires. Russia has become the country where the super-rich receive the greatest protection from the state. None of this would be possible without the personal involvement of Putin.

  Nor has this come about by historical accident. The book has shown that the group now in power started out with Putin from the beginning. They are committed to a life of looting without parallel. This kleptocracy is abhorrent not just because of the gap between rich and poor that it has created, but because in order to achieve success this cabal has had to destroy any possibility of freedom. They have fed ordinary Russians pabulum of “unique culture” and “Russian values” to camouflage their throttling of civil society and the rule of law.

  Putin responded to Western sanctions in 2014 by telling Russians it will be good for them, it will make them more self-reliant. It will stimulate business. But he’s been in power fourteen years, and what has he done to stimulate business? What was he waiting for? The biggest threat to the success of ordinary Russians occurs not, as he claims, from Western business investments in Russia, but rather when Russia’s all-powerful overlord, or one of his cronies, demolishes a village to build a palace, steals the money intended for health reforms, stymies innovation by maintaining state ownership of patents, or sends waves of tax, fire, and health inspectors as part of a shakedown. The only way for ordinary Russians to avoid state predation is to keep their heads down and believe in fate, or turn into cheerleaders of the system in order to gain insurance and a few crumbs from the table. Russians have a long history of great contributions to world culture, literature, and arts. They deserve better.

  * * *

  I. By comparison, the Norwegian oil company Statoil, which is similarly largely owned by the state, operates on the principles that all shareholders will be treated equally and the board of directors will be independent, with no conflicts of interest between shareholders, the board, and the company’s management.36 Rosneft and Statoil are jointly exploring the Arctic, so their economic profile is similar, yet Statoil’s share price grew almost 400 percent from 2010 to 2014 while Rosneft’s declined 25 percent in the same period.

  II. There is a vast literature on the Hermitage case, including a case study by Stanford Business School.45

  III. This conversation was quoted both in Kupchinskiy and in a classified document released by Wikileaks of key articles circulated within the U.S. government, lending it credibility.50 For more on the Ukrainian tapes, see Kochiw (2013).

  IV. The vast literature on captured states, where private firms pay public officials and politicians for preferential market entry, legal protection, and economic performance, is best reviewed in Hellman et al. (2003).

  V. Putin’s own figures, as presented at the United Russia Interregional Conference on the Development Strategy for Central Russia through 2020, March 4, 2011, http://premier.gov.ru. He referenced the fact that the state expects to be paid back with interest but had only received 200 billion rubles to date.

  VI. Another notable close to the Kremlin is the conductor Valeriy Gergiev, who was named consul for Luxembourg.66 Members of the Ozero group formed an association of honorary consuls in St. Petersburg. The rights and responsibilities of these consuls is amply detailed in http://honoraryconsul.ru.

  VII. As the children of the top Kremlin elite enter their thirties, there has indeed been a clear tendency for parents to pass their positions on to their children and relatives. Putin’s own nieces and nephews and other relatives have seen success: Igor Putin became vice president of Master Bank; Vera Putina became a member of the board of directors of Ganzakombank; Mikhayl Putin became the deputy director of SOGAZ. (Nemtsov, 2012) Other Kremlin insiders who have placed their sons in leading positions include Sergey Ivanov, whose thirty-one-year-old son became head of the supervisory board of the Russian Agricultural Banks, whose CEO was Dmitriy Patrushev, son of Security Council chief Nikolay Patrushev. Ivanov’s other son, Aleksandr, became head of structured and credit financing at Vnesheconombank, where his father sat on the board in 2011.71 Putin himself fatalistically addressed this issue at the Valdai meetings in 2007 (attended by the author) when he was asked about the growth of this phenomenon. In response he laughingly repeated the anecdote in which one guy complains to another that a minister’s sons have been appointed to direct leading banks. The other responds by asking whether those sons could even be appointed to the army. The first retorts, “Never. After all, generals have their own sons.”

  VIII. A possible reference to Timchenko and the Rotenbergs who were named in the sanctions list.

  IX. In Kyrgyzstan the previous Bakiyev government promised Russian businessmen a controlling share in the country’s second-largest company, the cell phone company Megacom, in return for the Russian state delivering fuel to the country tariff-free. The fuel was delivered, but when the Bakiyev regime was overthrown, the new government nationalized Megacom and denied Russian businessmen access to the company. This was a perfect example of Russian state assets (tariff-free fuel) being provided to leverage stock for Russian businessmen in a private company (Megacom).

  X. A U.S. Senate report states, “Corruption within Transnistria’s law enforcement institutions and its absence of civil society watchdog groups have allowed Transnistria to fester as a source of trafficking in persons, arms, and other illicit goods. In 2010, Moldovan authorities broke up a criminal ring in Chisinau with reported ties to Transnistria that attempted to sell four pounds of uranium-238, reportedly worth $11 million on the black market, that could be converted to plutonium-239 (fissile material for nuclear weapons) or a dirty bomb. In the past, authorities have seized weapons, including anti-tank grenade launchers without serial numbers (ideal for trafficking) that were reportedly manufactured in Transnistria.”90

  ACKNOWLEDGMENTS

  THIS BOOK has already had a rather storied past. I had submitted it to Cambridge University Press, which declined to publish it for fear of running afoul of libel laws in the U.K. This has become a growing trend in the book world, where the rich and the corrupt from many different countries use U.K. courts for libel tourism as a way of suppressing investigative work into their worlds. Some authors walk away and find another publisher. Others have gone ahead with publication in the U.K. and then have had to face a court case and the ultimate pulping of their books, sometimes over a single paragraph. I have never blamed CUP, with whom I have had a long relationship, for their decision, and the fact that Simon & Schuster also has decided not to publish this book in the U.K. underscores that the problem lies with U.K. libel laws, not with CUP.

  In my own case, I decided to alert the academic and policy community to this sorry state of affairs by giving the exchange of correspondence to the Economist. The book in its present form would likely not have seen the light of day had it not been for Edward Lucas at the Economist, who not only brought the circumstances of its April 2014 rejection by CUP to light both in his blog and in the print edition of the Economist (www.economist.com/blogs/easternapproaches/2014/04/russia), but who also introduced me to Melanie Jackson, who became my agent. She moved quickly to find a publisher, and within literally thirty-six hours the deed was done.

  At Simon & Schuster, I’m indebted to my editor, Alice Mayhew, for committing to the book so quickly and for her clear vision of the book’s promise and potential. She has an able and nimble team who have worked hard, long, and fast to get the book to print, including associate editor Jonathan Cox and assis
tant editor Stuart Roberts, as well as Judith Hoover, Anthony Newfield, and Jay Schweitzer in copyediting. Navorn Johnson was the production editor, Jackie Seow art directed the great jacket design, Larry Hughes is in charge of publicity, and Stephen Bedford handles marketing. A special thanks also goes to Elisa Rivlin, who gave the whole manuscript a very thorough legal read.

  For reading and providing invaluable comments on the whole manuscript or parts of it, I am indebted to Anders Åslund, Martin Dewhirst, John Dunlop, and Edward Lucas, and to several of my Russian friends, who shall go nameless.

  For discussions and exchanges about the nature of Russian politics, I would like to thank Leon Aron, Sir Rodric Braithwaite, Ambassador James Collins, Cliff Gaddy, Helena Goscilo, Fiona Hill, Hon. Jan Kalicki, David J. Kramer, Steve LeVine, Ambassador Richard Miles, Steven Lee Myers, John Pepper, Ambassador Thomas Pickering, Arkady Ostrovsky, Peter Reddaway, Thomas Remington, Richard Sakwa, David Satter, Sandy Saunders, Louise Shelly, Angela Stent, and Elizabeth Teague. I also interviewed many other active and retired U.S. and British government officials who served in Moscow and St. Petersburg in the 1990s and who have had long careers in Russian analysis. I was greatly aided in my research by access to the files of Yuriy Felshtinskiy, whose work with Vladimir Pribylovskiy provided some of the earliest indication of the nature of the current regime.

  At the Wilson Center and the Kennan Institute, I was fortunate to have fellowships in the first half of 2012 that allowed me not only to work full-time on the writing but also to meet many colleagues with shared interests, including Rob Litwak, William Pomeranz, Blair Ruble, Michael Van Dusen, and Sam Wells. Big thanks also go to the Kennan library staff, and to David Agranovich, who tirelessly and with great talent worked as my intern there.