Two objections are being raised against Navalny. One is that he has been toying with Russian nationalism with his earlier slogan, “Stop feeding the Caucasus!” (Khvatit’ kormit’ Kavkaz!), but Putin’s support for Chechnya’s ruthless dictator Kadyrov through massive state subsidies has been a mainstay of his power. Moreover, most European center-right parties combine a mixture of three elements: economic liberalism, mild nationalism, and some religious values.
The other criticism of Navalny is that he does not have a full economic policy program, but the Russian democratic opposition is nowhere near achieving political power. It needs to concentrate on a few key questions to gain cohesion and popular support rather than splintering because of policy details. Navalny wisely tries to keep a broad front together by focusing on corruption.
The official economic debate in Russia is stuck. It remains ideologically frozen with a division between liberalism and statism. Even the combatants remain the same as in the 1990s, though they are twenty years older. The public discourse is repetitive and timid, since the freedom of expression has been reduced, and the participants know that the probability of implementing serious reform is minimal. It appears as an imitation of a debate, like a reshuffling of the deck chairs on the Titanic.
Alexei Kudrin’s Center for Strategic Research stands against Boris Titov’s Stolypin Club. Both groups agree that Russia suffers from near stagnation because of minimal growth in productivity, which is further depressed by the declining workforce. Kudrin wants to resolve this problem through structural reforms to stimulate supply, whereas Titov wants to jumpstart the economy with fiscal and monetary stimulus, which he alleges will somehow also stimulate productivity.
Kudrin and his systemic liberals have won Putin’s support when it comes to macroeconomic stability because Russia’s financial crash of August 1998 taught Putin that financial destabilization also means political destabilization. For the rest, the statists have won. The state sector expands steadily in spite of miserable economic and innovative performance, becoming more secretive and monopolistic. To the limited extent that Putin cares about technical progress, he expects it to come from the state-owned military-industrial complex. In foreign trade, he has chosen import substitution, protectionism, and the Eurasian Economic Union, taking his cue from Glaziev. Putin shows no credible interest in the reform of law enforcement or the judiciary.
This official economic discussion is stale because the economists do not really want to discuss the main problems—corruption and weak property rights. None of these problems can be solved without democratization. Both liberals and statists seem to agree on this, without saying so too loudly, but as a result, they have all lost touch with the real popular concerns.
Rather than improving technicalities, the economic debate needs to focus on Russia’s essential problem, the capture of the state by a small ruling elite. Navalny has done this by focusing on corruption and has thus risen to be the central political opponent of the current policy, as the undisputed opposition leader. He has transformed the Russian economic debate. It is no longer liberalism versus socialism that is the relevant paradigm but reform versus corruption.
The new Russian government in May 2018 showed that Putin was not interested in any reform or change. Many ministers changed, but most could be described as technocrats, lacking particular views and political platforms. Their main property is loyalty to Putin. Kudrin did not get a government job but was appointed head of the apolitical Auditing Chamber, which has not had any impact under Putin.
Conclusion
Where Is Russia Going, and What Should the West Do?
We must not have any illusions. My aim in this book is to establish what regime Vladimir Putin has built, where it is going, how it is likely to act, and how the West can influence it. Putin has constructed an iron quadrangle of four circles of power. The first circle is the vertical state power; the second circle consists of the big state enterprises; the third circle comprises his cronies; and the fourth circle is the Anglo-American offshore havens, where he and the cronies can safely keep their money.
This system can deliver macroeconomic stability but only minimal economic growth: it is so petrified that it is more likely to collapse than reform. Its minimal economic growth may not suffice for political stability. Russia’s assets are unbalanced in favor of military, not economic, power, which naturally tempts the Kremlin to opt for armed aggression, which can mobilize the nation to give Putin some legitimacy.
The West needs to safeguard its military defenses to avoid being drawn into war, but its main approach to Russia should be transparency at home. Hundreds of billions of dollars of ill-gotten Russian wealth is hidden in Western offshore havens, primarily in the United States and the United Kingdom. All Western countries should demand the revelation of all beneficiary owners. All monetary flows should be subject to ordinary bank regulation, and Western governments should devote sufficient resources to investigate tainted funds in the West. Then they can break up the fourth circle of the Anglo-American offshore havens.
With the help of his loyal friends, Putin has built three circles of power—the state, the state enterprises, and the cronies’ companies. Putin’s first term appears to be a masterpiece of consolidation of power by a budding authoritarian. He was everything to everyone. In the eyes of liberals, he pursued excellent market economic reforms and seemed to build the rule of law. The giveaway was his immediate clampdown on independent television, which was well understood by human rights activists, but he pursued an elaborate salami tactic, cutting off one television channel after the other, accusing each one of poor finances or specific crimes.
State power comprises Putin’s first circle. As chairman of the FSB in 1998–1999, he seized control over the secret police. In the summer of 2000, he took charge of television. Next, he established his “vertical of power” over the federal and regional administrations. His “dictatorship of law” over the judicial system ensued. In the elections in December 2003, Putin gained solid control over the State Duma and the Federation Council. At the Security Council, the pinnacle of power, his top men are three contemporary KGB generals from St. Petersburg, his successors as FSB chairs—Sergei Ivanov, Nikolai Patrushev, and Alexander Bortnikov.
Putin’s second circle consists of the big state enterprises. He seized control of them one by one, starting with Gazprom in May 2001. He appointed his loyalists as chief executives and chairmen of their supervisory boards and rounded off his victory lap with the formation of the state corporations in 2007. The state enterprises have been allowed to expand with cheap state funding, often monopolizing their sector. They have been buttressed with protectionist measures, and the only governance that matters is obedience to Putin. Russian state capitalism is peculiarly disinterested in competition, investment, technological development, entrepreneurship, and productivity. The state sector is treated as a source of power and rents instead of an object of economic growth. The three top state managers are Igor Sechin of Rosneft, Alexei Miller of Gazprom, and Sergei Chemezov of Rostec.1
The third circle is more idiosyncratic. It comprises Putin’s top private cronies and their companies. The four top cronies appear to be Gennady Timchenko, Arkady and Boris Rotenberg, and Yuri Kovalchuk. Their activity usually appears not only corrupt but kleptocratic. Yet because he controls Russian legislation, Putin has legalized many of their dubious activities. The cronies are entitled to buy assets from state companies at basement prices and provide state procurement at high prices without competition. Since 2006, the ruble has been fully convertible and Russia maintains liberal currency regulations. The cronies can thus transfer their palpable gains to offshore havens.
International offshore havens form the fourth circle. The two biggest offshore havens are the United States and the United Kingdom. The United States even allows law firms to circumvent bank regulations on a massive scale. The US and UK acceptance of secrecy of ownership and anonymous currency inflows is critical for the susten
ance of the Putin regime.2
The Putin economic system is based on monopolies and cartels. The most important economic sectors are divided among a few companies, which in turn are each dominated by one person. Oil and gas production belongs to five companies—Gazprom, Rosneft, Novatek, Surgut, and Lukoil. Pipelines are built by the companies belonging to either the Rotenbergs or Timchenko. The crony company Sogaz is the leading insurance company. Rotenberg’s Mostotrest is responsible for big road construction projects. Mergers are allowed, but antitrust is not. Creative destruction appears to be declining, as is new enterprise formation. Competition is dissuaded or worse, allowing the incumbent companies to reap monopoly rents. Outstanding new entrepreneurs tend to emigrate. The South Korean chaebols (family-owned conglomerates) are quite an inspiration. This system is the opposite of a competitive market economy.3
These four circles comply with the German fascist thinker Robert Michels’s idea of the iron law of oligarchy, with various circles of power reinforcing one another and, eventually, all organizations controlled by a leadership class. In 1993, Daniel Yergin and Thane Gustafson published a book offering various future scenarios for Russia in 2010. One scenario, the “two-headed eagle,” is remarkably similar to contemporary Russia. It “is based on a coalition of three groups, managers of large industries (with the defense industries at their core); the central bureaucracies in Moscow; and military, police, and state-security officers.” The only elements missing are the cronies and the financial offshore havens.4
The countries that are most comparable to Russia are China and Brazil, which are both big countries with a system of crony capitalism that are at a similar level of economic development, but they are very different. China is fast-growing and innovative, still ruled by the Communist Party. The Chinese state sector is far smaller than the Russian, and shrinking, and China is more decentralized. But Russia has a freer market than China and has long been recognized as a market economy by both the European Union and the United States.5
Brazil appears to be a more relevant comparison for Russia, but its disparities are also great. However imperfect, Brazil is a democracy, and it has a surprisingly strong judicial system that, in sharp contrast to Russia, has sentenced its past three presidents to prison. Brazil’s private sector is far larger than Russia’s, but so are its income and education differentials.
In a BRICS context, Russia stands out as having particularly centralized authoritarian politics, a large monopolistic state sector without interest in development or profits, and an elaborate crony system, while it performs well in terms of economic level, education, and openness.
The behavior of Russia’s super-rich raises many eyebrows. Why do multibillionaires want to make so much more money? Why are they so short-sighted and invest so little? Why do they transfer billions abroad, investing in real estate or large yachts they rarely use? Why do they waste so much money on lavish consumption? Why don’t they stand up to Putin?
The main answer to all these questions is that property rights are very weak in Russia. Everybody adjusts their behavior accordingly. Tragically, Russia has reverted to what Richard Pipes has termed the patrimonial state, a state with weaker property rights than a feudal state and in which everything depends on the whims of the tsar.6
In the absence of a reliable judiciary, trust and obedience become the basic values. In First Person, Putin repeatedly returned to the topic of trust. When pressed by KGB colleagues to betray St. Petersburg mayor Sobchak in the early 1990s, Putin rebuked them: “Can’t you see that this man trusts me?” When asked about his later longtime close collaborators Sergei Ivanov and Alexei Kudrin, Putin answered “trust.” He did not specify, but he appeared to mean absolute loyalty. In his choice of early partners, Putin did not differ from the early oligarchic groups, such as Menatep (Yukos) or the Alfa Group, which were formed by men who had been college pals. All these groups were based on trust, based on friendship among young men.7
In the early 2000s, leading Russian private companies, such as Yukos and Lukoil, opted for transparency and good corporate governance. They formalized and publicized their ownership. They published audited financial results, appointed independent directors, listed on international stock markets, and attracted minority shareholders. The erstwhile oligarchs were gentrifying at an amazing speed, and the public trading of their stocks enhanced their fortunes. If this process had continued, Russia might have been able to become a normal capitalist country with transferable ownership and democracy.
But Putin ended this process abruptly with the lawless confiscation of Yukos in 2004–2005. In Putin’s eyes, Khodorkovsky had committed many sins, such as opposing him, setting up his own political block in the Duma, and pursuing his own foreign policy, but Putin’s main objective seemed to be to defeat the oligarchs as a class by taking out the wealthiest and most daring of them.
The jailing of Khodorkovsky and the confiscation of Yukos had many consequences. Once again, ownership became concealed, anchored in offshore havens, and property rights became less safe. Russia’s big businessmen know that they can keep their assets only if they prove their obedience to the ruler and pay him the required tribute. In medieval fashion, political opposition can be punished through the confiscation of all property. After the seizure of Yukos, Russia’s oligarchs started talking about their property as something temporary they had borrowed from the state.
Human beings are fragile, and the men of Putin’s generation have reached retirement age, necessitating a mechanism for transfer of their wealth. Putin faced three choices. One was to democratize and modernize. Another option was to build a fascist police state, a Sparta. A third possibility was to establish a new aristocracy, drawing on Russia’s tsarist tradition, which appears to be Putin’s choice. Political scientist Francis Fukuyama notes that “the natural human propensity to favor family and friends— . . . patrimonialism—constantly reasserts itself in the absence of strong countervailing incentives.”8
Russia is developing a new tsarist aristocratic system, a hereditary plutocracy. The princes are immensely rich, but they are all dependent on the tsar. They are building themselves eighteenth-century palaces either in the late baroque manner of the Italian architect Francesco Bartolomeo Rastrelli or in the neoclassical style of Catherine II’s favorite architect, Scotsman Charles Cameron. Such conspicuous luxury is characteristic of people who know that their gains are ill gotten and easily lost.
Stalinism severely disrupted the family, but today it has recovered at the expense of the Soviet collective. Family has taken over from political and judicial institutions, and it rules Russia through a vertical state apparatus confusingly similar to tsarist Russia. It is distinct from the Soviet regime with its Marxist-Leninist ideology and Communist Party, though all three regimes share a tradition of a strong secret police and military. The new dominance of the family testifies to the deinstitutionalization of the state. The outstanding Russian political analyst Lilia Shevtsova noticed this pattern as early as 2005.9
Wealthy businessmen outside the immediate Putin circle are left without secure property rights. They have little choice but to pay tribute to the rulers in the Kremlin, the single political authority. During Putin’s first term, two oligarchs told me that when they were called to the Kremlin, they were asked to put up $10 million or $20 million in “donations,” either for Putin’s reelection campaign or for some other charitable purpose. . . . Putin attracted $300 million in “donations” for the reconstruction of the Konstantinov Palace in St. Petersburg, which became the president’s official residence there.10
The Panama Papers show how private big Russian businessmen have paid large “donations” to Putin’s cellist friend Sergei Roldugin, who seems to hold funds for Putin. The eloped junior Putin partner Sergei Kolesnikov named two major donors to the Putin funds, the big businessmen Roman Abramovich and Alexei Mordashov. At the end of 2003, just after Khodorkovsky’s arrest, Mordashov’s steel and mining company Severstal bought 9 p
ercent of Bank Rossiya for $20 million, which was later written down. The Panama Papers record that companies close to Mordashov had paid Roldugin $30 million for “consulting services.”11
The oligarchs from the 1990s who have not fallen out with Putin have gradually sold off their holdings in Russia and transferred their fortunes to safer places abroad. Prominent examples are Roman Abramovich, who sold Sibneft to Gazprom and the television company ORT to the Russian government; the four owners of Alfa Group, Viktor Vekselberg, and Len Blavatnik, who sold TNK-BP to Rosneft; and Dmitry Rybolovlev, who sold Uralkali to other Russian businessmen. Although they still own substantial assets in Russia, these and other wealthy businessmen are no longer leading forces in the country but tread softly, and they appear to spend most of their time abroad.12
In the early 2000s, the ideas of peace and free markets had conquered the world, but that time has passed. In 2005, Berkeley professor Steven Fish assessed that democracy had been derailed in Russia. The Freedom House has documented that for the past decade democracy has not gained but lost ground worldwide. Thomas Wright concludes that the convergence myth is over, and so is the transition to democracy. Samuel Huntington’s famous third wave of democratization, which started with the Carnation Revolution in Portugal in 1974 and went through Southern Europe, Latin America, and Eastern Europe, is long over.13
Russia is no longer pursuing democratic or market economic reforms. The current regime is a personal authoritarian rule that aims to maintain and enrich its ruling elite. The nation and its people do not really matter to these rulers as long as they “hang in there,” as Prime Minister Dmitri Medvedev so vividly put it in a conversation with pensioners in Crimea in 2016. Unless energy prices skyrocket or Russia seizes large foreign assets, its economy cannot generate significant growth, while macroeconomic stability is likely to hold. As political scientist Ivan Krastev states: “Russia is not an illiberal democracy by default: it is an illiberal democracy by design.”14
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