Financial sanctions have proven quite effective on Russia. The US dollar rules the world of finance, and every dollar passes through one of the three biggest banks in New York and is thus subject to US jurisdiction. Financial sanctions have reduced investment and output in Russia, though to a limited extent. A potential danger is that the United States overexploits financial sanctions, undermining the international role of the dollar. Moreover, the impact of financial sanctions declines over time as the sanctioned country reduces its financial dependence on the West, as Russia has done through its conservative financial policy.
As discussed in chapter 5, Putin has protested most of all against personal sanctions, the Sergei Magnitsky Act of 2012, and the sanctions of his friends, indicating that they have had considerable effect. Of all the types of sanctions, personal sanctions against people close to Putin appear to be the most effective.52
The United States and the rest of the West need to reformulate the task. It is not Russia or Russians but Putin’s crony capitalism that should be contained. The sanctioned Putin cronies hold tens of billions of dollars in the West. Most of the ill-gotten Russian wealth is presumably in the United States and the United Kingdom, which have frozen few assets. The West can reveal and freeze this wealth if it unites and adopts this as its goal. The United States needs to take five steps:
1. First, the intelligence community should be asked to assess how much laundered Russian money is held in the United States and how much of that is held by designated individuals and entities.
2. Congress should adopt legislation prohibiting the formation of new anonymous companies in the United States, and existing anonymous companies should be required to provide their beneficiary owners within a limited time, such as two years. The Financial Crimes Enforcement Network could be charged with assembling this information.53
3. The temporary exemption granted to real estate in the Patriot Act should be ended through an executive decision by the Treasury. All financial flows into the United States should go through regulated financial institutions.54
4. Similarly, international money transfers should no longer be considered as subject to attorney-client privilege but should have to go through regulated financial institutions.55
5. With its expanded tasks, FinCEN should be given far greater resources to implement stricter anti–money laundering regulations. The United States has actually cut the funding of such investigations in recent decades, minimizing the risk of detection.56
Transparency is the greatest and most important weapon the West possesses. It must deploy it with full force. The European Union has already adopted relevant legislation, but it has to implement it. For the United States, the prohibition of anonymous companies stands as the top item on the legislative agenda. If the West takes these steps, tens of billions of dollars of hidden wealth of Russian criminals would be revealed, which would benefit both Russia and the West. Without its fourth circle of secure offshore wealth, Russia’s crony capitalism could collapse.57
Today’s Russian crony capitalism is unlikely to persist. It is too petrified and brittle to stand the challenges of our time. The current official Russian mentality is reminiscent of the late Brezhnev period in the early 1980s before Gorbachev’s perestroika. Sooner or later, the Russian people are likely to stop the extraordinary looting by the Putin circles. Then, the populace can start contemplating the establishment of an orderly state based on the rule of law. The people will need to rebuild elementary state institutions, especially the judiciary and law enforcement.
In spite of the deinstitutionalization under Putin, Russia has progressed immensely since communism. It has gone through a far-reaching modernization in the past quarter-century. Russia has a relatively well functioning and open market economy, even if cartels are a concern. It enjoys macroeconomic balance, and it has a well-functioning state administration, a decent infrastructure, and a vast number of well-educated citizens.
As one of the founders of modernization theory, Seymour Martin Lipset, would see it, Russia is too wealthy, too well educated, and too open to be so authoritarian. A strong authoritarian tradition and imperial legacy can delay democratization but hardly block it forever. The curse of oil is a more serious obstacle, but low oil prices reduce it. The essence of the oil curse is that rents were concentrated in the hands of the ruling few. The Russian economy can be diversified through lower oil prices or more economic growth. Political scientist Larry Diamond observes that there is good hope that the current “democratic recession” will eventually end.58
This is a propitious time to consider the many mistakes and mishaps in the late 1980s and early 1990s that aborted the postcommunist transition so that it did not lead to democracy and rule of law with convergence with Western democracies as in the new EU members. The next generation of Russian reformers needs to learn from the mistakes of the past to get it right. In the early 1990s, Russia’s economic collapse was the primary concern. Russia did not have time or ability to build institutions at that time. Whenever a new democratic breakthrough comes, the focus must be on creating new political and state institutions.59
To begin with, Yeltsin did not dissolve the KGB; he only split and weakened it. Second, Russia had no early founding election of its parliament. Third, the Soviet constitution was only amended, leaving a poison pill that was not discarded in time. Fourth, no early judicial reform occurred. Fifth, the reformers failed to gain control over the Central Bank and break up the ruble zone, so they could not stop monetary emissions. Sixth, the West played only a minor role, since it did not offer any material support for reform early on. Seventh, deregulation was too slow and limited, allowing considerable monopolization and rent seeking. Eighth, privatization was not adjusted to political demands.
Today Russia’s main problem is that the state has been captured by a small group of top officials. Technical competence is no longer a problem. Many senior officials are highly competent, but they have the wrong objectives, namely their own enrichment at the expense of the state and society. Russia needs to surgically cut out this cancer, the three ruling circles of the Putin system, and establish checks and balances that can maintain a new system.
A new political elite needs to be elected. A new Russian transformation should start with a democratic breakthrough, leading to early elections of president, parliament, and regional authorities, under a sound electoral system. Instead of a constitution with strong presidential powers, Russia should opt for a parliamentary system that has proven conducive to democracy throughout the European Union.60
The ensuing step should be the abolition of the secret police, the FSB. Normal countries do not have a secret police that check their populations, whereas they have foreign intelligence and domestic counterintelligence. Russia should finally carry out a proper decommunization, condemn Stalin’s terror, and topple all the monuments of terrorists.
The third step should be to build a new judicial system with new people. Both the institutions and their officeholders need to be replaced simultaneously. East Germany, Estonia, and Georgia did so successfully, abolishing the old prosecutors’ offices and courts, building up new institutions with outsiders. Given the small numbers of officeholders required, this is perfectly feasible with lawyers from the private sector and newly minted lawyers plus returning émigrés.61
After these three critical political and judicial tasks, the ordinary slog of economic reforms could start. The best means to fight corruption are transparency and democracy, embodying good governance. A democratic Russia should opt for maximum transparency, especially of ownership of banks, real estate, and enterprises. The big state enterprises need to be disassembled once again, and the state enterprises should be privatized in a transparent fashion through open auctions. It would be much easier now when markets and market prices exist. Markets need to be deregulated and opened up for normal competition. Public procurement must be exposed to real competition.
The Russian public is greatly concerned
about the privatization of large enterprises in the 1990s, which many see as the “original sin.” The eventual owners became very wealthy. Yet this must not be the policy focus. All of these enterprises, with the single exception of Norilsk Nickel, have been renationalized and their former owners have emigrated. They became so wealthy because they managed to turn their companies around. Because Russia never had strong property rights, corporate governance was poor, and an enterprise could be successful only if ownership was concentrated, which by necessity means that the owners become very rich. Today, Russia needs to focus on strengthening property rights first through a sound judicial reform. Then it should split up the state companies and demonopolize all markets, exposing them to normal competition. At this time, Russia should privatize using standard Western techniques; the nation will have time for this unless it suffers a new financial collapse, which is not on the horizon as yet.
Last, the West needs to engage. This is likely to be primarily the European Union, which has proven in eleven postcommunist accession countries that it knows how to build democracy and the rule of law. The European Union should engage with the same agenda in Russia after the end of cronyism. Article 49 of the European Union’s Lisbon Treaty states: “Any European State which respects the values referred to in Article 2 and is committed to promoting them may apply to become a member of the Union.”
By every definition, Russia is a European country. Its level of GDP is slightly higher than in the poorest EU country, Bulgaria. The European Union should engage fully with Russia, as well as with Ukraine, Belarus, Moldova, the Caucasian countries, and, of course, with the Western Balkans.
Notes
Introduction
1. On oil and gas, see Sachs and Warner 1997; Gaddy and Ickes 2005, 2009; Goldman 2008; Gustafson 2012; and Dabrowski 2015.
2. On Putin’s respect for the KGB, see Felshtinsky and Pribylovsky 2008; and Baker and Glasser 2005; as a free marketer and fiscal conservative, see Goldman 2008; and Hill and Gaddy 2015; as an advocate of state capitalism, see Åslund 2007a; and Sutela 2012; as a kleptocrat, see Nemtsov and Milov 2010a; Gessen 2012; and Dawisha 2014; Lee Myers 2015 might offer the most balanced view in competition with Hill and Gaddy 2015.
3. Chris Miller’s 2018 book is titled Putinomics.
4. Åslund 1989, 194.
5. Brzezinski 1983; Pipes 1984, 49–51.
6. Judah 2013, 325.
7. Dawisha 2014, 350.
8. Zygar 2016, 346.
9. For Putin as the new tsar, see, e.g., Steven Lee Myers 2015.
10. On ideology, see Laqueur 2015; and Clover 2016.
11. Pomeranz 2017; Barber 2017.
12. On the 1990s, my main contributions are Åslund 1995 and Åslund 2007a. Michael Alexeev and Shlomo Weber 2013 edited the giant Oxford Handbook of the Russian Economy, which covers everything. Like-minded contributions are Gaidar 1999, 2007, 2012; Shleifer 2005; Shleifer and Treisman 2000; and Treisman 2011. Opposing views include Reddaway and Glinsky 2001; and Goldman 2003, 2008.
On the economy since 2000, the most substantial contributions are Miller 2017 and Sutela 2012, but Sutela discusses only up to 2009.
13. Felshtinsky and Pribylovsky 2008; Nemtsov and Milov 2008, 2010a, 2010b; Dawisha 2014.
ONE The Origins of Putin’s Economic Model
1. Ostrovsky 2015; Mau and Starodubrovskaya 2001; McFaul 2001.
2. Pipes 1974; Pipes 2005, 1.
3. For Uvarov, see Pipes 2005, 100; and Laqueur 2015, 214; for Ivanov, see Ivanov 2006; on nationalisms, see Smith 2010; for Eurasianism, see Clover 2016.
4. Malia 1999.
5. Ibid.
6. Raikin quoted in Izvestiya, October 12, 1986.
7. Kornai 1992, 360–365; the preceding classic was Nove 1977.
8. The story is eminently told by Dobbs 1997 and Ash 1983.
9. This section draws on my books Åslund 1995, 102–136; and Åslund 2013, 19–35. My preferred source on the demise of communism and the Soviet Union is Dobbs 1997; see also Dunlop 1993 and Remnick 1994 for lively, detailed accounts of the Soviet collapse.
10. Gaidar 2007.
11. Nove 1989 details how glasnost proceeded with one revelation after the other. Kolakowski quoted in Murphy, Shleifer, and Vishny 1992.
12. Åslund 1990.
13. Gorbachev 1987a, 86.
14. On the Brezhnev doctrine, see Brown 1996, 240; Gorbachev quoted in ibid., 225.
15. Putin 2000a, 81.
16. Gorbachev 1987b, 118.
17. On the financial crisis, see Åslund 1991; for the budget deficit, see EBRD 1994.
18. Lieven 2000.
19. Aron 2000, 459.
20. Putin 2000a, 79.
21. Ostrovsky 2015 describes the 1990s well.
22. For opinion polls, see Levada Center 2017.
23. There are two excellent biographies of Yeltsin: Aron 2000 and Colton 2008. The two last of Yeltsin’s three memoirs are very substantial, even if they are considered to be ghost-written to a large extent (Yeltsin 1994, 2000). My fondest memory of Yeltsin is a meeting in the Moscow White House on December 11, 1991. The last time I saw him was at a dinner in London in July 2004.
24. Remington 2005, 235.
25. On the dissolution of the tsarist imperial service, see Pipes 1990, 298–300. Yeltsin 1994, 129. When I last saw Yeltsin in July 2004, he said that he spent most of his time reading one history book a day.
26. Yeltsin 1994, 115.
27. Both Gaidar and Chubais were my friends at the time and Chubais still is, though Gaidar passed away far too early in 2009, deeply unhappy about where Putin had taken Russia. Their views are well represented by Gaidar and Chubais 2012. Yeltsin quoted in Yeltsin 1991.
28. Gaidar 1999, 114.
29. Yeltsin 1991.
30. The main programmatic document was the academic book Boycko, Shleifer, and Vishny 1995. For 1995 statistics, see Blasi, Kroumova, and Kruse 1997, 189, 192–193.
31. On the drop in Russian GDP, see Åslund 2002, 113–158.
32. On Yeltsin’s attempt to rule by decree, see Remington, Smith, and Haspel 1998.
33. Dunlop 1998; Lieven 1998.
34. Russian organized crime has attracted a huge literature, some of it serious, some fiction. The main sources for this section are Volkov 2002; Gilinskiy 2000; Handelman 1995; and Dixelius and Konstantinov 1998. Organized crime has been a dominant theme in Russian fiction, films, and TV programs. Vadim Volkov 2002 has analyzed the evolution of crime and protection in Russia in line with Gambetta’s analysis. For the comparison with Chicago, see ibid., 19.
35. On “powerful” oligarchs, see Klebnikov 2000, 44. The two outstanding books on the oligarchs are Freeland 2000 and Hoffman 2002. Fortescue 2006 offers a refreshing positive view of the economic role of the oligarchs, while Klebnikov 2000 focuses on the criminal sides of the oligarchy.
36. For the seven oligarchs, see Freeland, Thornhill, and Gowers 1996. On the demise of Russia’s democracy, see Freeland 2000.
37. Chubais 1999; Kokh 1998, 115–130; Freeland 2000; Hoffman 2002; Klebnikov 2000, 135.
38. Shleifer and Treisman 2004; Shleifer 2005, 167.
39. Åslund 2007a, 205–206.
40. This section draws on Åslund 2007a, 189–232; Sutela 2012; and Baker and Glasser 2005.
41. EBRD 2003.
42. McKinsey Global Institute 1999.
43. Osnovnye 2000.
44. Putin quoted in Baker and Glasser 2005, 86–87.
45. On Russian taxes, see Shleifer and Treisman 2000; for reforms, see Owen and Robinson 2003; and Gaidar 2003.
46. On legalization of the sale of agricultural land, see Remington 2002; and Kirchik 2004; for other reforms, see CEFIR 2003; and Yakovlev and Zhuravskaya 2007.
47. Shevtsova 2005, 262.
48. On rising oil prices, see Åslund 2007a, 235–236.
49. On Yukos, see ibid., 234–241.
50. On Igor Sechin, see Gustafson 2012, 340; on Gazprom, see Åslund 2007, 253.
51. �
�slund 2007a, 251–254.
52. Ibid., 264–267.
53. Putin 2006b.
54. Strategiya-2020 2008.
55. Guriev and Tsyvinski 2010, 13–14.
56. Sergei Ivanov speaks excellent Swedish, and we speak Swedish together.
57. Medvedev 2009d.
58. Yuri Kovalchuk’s brother Mikhail Kovalchuk is the director of the famous Kurchatov nuclear research institute in Moscow. Arkady Rotenberg’s younger brother Boris Rotenberg is also involved in business, living in Finland as a Finnish citizen. A fourth major crony is Nikolai Shamalov, whose son, Kirill, was married to Putin’s daughter Ekaterina. See Dawisha 2014, 115. On Bank Rossiya, see Felshtinsky and Pribylovsky 2008; Nemtsov and Milov 2010a, 2010b; and Dawisha 2014.
59. Nemtsov and Milov 2010a, 2010b; for Gazprom stock price, see symbol OGZD:LI.
60. Quoted in Lee Myers 2015, 384–385.
61. I attended one of his campaign events at a business conference.
62. Zubarevich 2015.
63. Putin 2018b.
64. Putin 2016c.
65. Minxin Pei 2016.
TWO Putin’s Consolidation of Power
1. Hill and Gaddy 2015, 386.
2. Nemtsov and Milov 2008; Felshtinsky and Pribylovsky 2008; Dawisha 2014.
3. On Putin’s views, see Stent 2014; on the Orange Revolution, see Åslund and McFaul 2006; Hill and Gaddy 2015, 385.
4. On plagiarism, see Hill and Gaddy 2015, 197; on Litvinenko, see Dawisha 2014, 101; on the dissertation, see Gaddy and Danchenko 2006; and Hill and Gaddy 2015, 198–199.
5. Baker and Glasser 2005, 47; Felshtinsky and Pribylovsky 2008; Dawisha 2014; Åslund 2007a, 201.
6. On Putin quoting Ilyin, see Laruelle 2017; and Clover 2016.
7. Laqueur 2015, 180, 181.
8. Snyder 2016; Laruelle 2017.
9. On Putin’s avoidance of attachment, see Barbashin and Thoburn 2015; on his praise of Gumilev, see Clover 2016; and Putin 2012c.
10. Åslund 2007a, 275.
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