Russia's Crony Capitalism Read online

  Russia’s

  Crony

  Capitalism

  OTHER BOOKS BY ANDERS ÅSLUND

  Private Enterprise in Eastern Europe: The Non-Agricultural Private Sector in Poland and the GDR, 1945–83

  Gorbachev’s Struggle for Economic Reform

  Post-Communist Economic Revolutions: How Big a Bang?

  How Russia Became a Market Economy

  Building Capitalism: The Transformation of the Former Soviet Bloc

  How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia, the Caucasus, and Central Asia

  Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed

  How Ukraine Became a Market Economy and Democracy

  The Last Shall Be the First: The East European Financial Crisis, 2008–10

  How Latvia Came through the Financial Crisis, with Valdis Dombrovskis

  Ukraine: What Went Wrong and How to Fix It

  Europe’s Growth Challenge, with Simeon Djankov

  Published with assistance from the foundation established in memory of Philip Hamilton McMillan of the Class of 1894, Yale College.

  Copyright © 2019 by Anders Åslund.

  All rights reserved. This book may not be reproduced, in whole or in part, including illustrations, in any form (beyond that copying permitted by Sections 107 and 108 of the US Copyright Law and except by reviewers for the public press), without written permission from the publishers.

  Yale University Press books may be purchased in quantity for educational, business, or promotional use. For information, please e-mail [email protected] (US office) or [email protected] (UK office).

  Set in Minion type by IDS Infotech, Ltd.

  Printed in the United States of America.

  Library of Congress Control Number: 2018957954

  ISBN 978-0-300-24309-3 (hardcover : alk. paper)

  A catalogue record for this book is available from the British Library.

  This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper).

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  Contents

  List of Acronyms and Initialisms

  Introduction,

  ONE The Origins of Putin’s Economic Model,

  TWO Putin’s Consolidation of Power,

  THREE Conservative Fiscal and Monetary Policy,

  FOUR The Rise of State Capitalism,

  FIVE The Expansion of Crony Capitalism,

  SIX How Large Is Russian Wealth, and Why Is It Held Offshore?,

  SEVEN From International Economic Integration to Deglobalization,

  EIGHT Liberalism versus Statism, or Reform versus Corruption?,

  Conclusion: Where Is Russia Going, and What Should the West Do?,

  Notes

  References

  Acknowledgments

  Index

  Acronyms and Initialisms

  APEC

  Asia-Pacific Economic Cooperation

  BRICS

  Brazil, Russia, India, China, and South Africa

  CBR

  Central Bank of Russia

  CEO

  Chief executive officer

  CIS

  Commonwealth of Independent States

  CMEA

  Council of Mutual Economic Assistance (also called COMECON)

  CPSU

  Communist Party of the Soviet Union

  DCFTA

  Deep and Comprehensive Free Trade Agreement

  EAEU

  Eurasian Economic Union

  EBRD

  European Bank for Reconstruction and Development

  ECB

  European Central Bank

  EU

  European Union

  ECHR

  European Court of Human Rights

  FATF

  The Financial Action Task Force

  FCPA

  Foreign Corrupt Practices Act

  FDI

  Foreign direct investment

  FSB

  Federal Security Service

  FSO

  Federal Protection Service

  FSU

  Former Soviet Union

  G-7

  Group of Seven (Canada, France, Germany, Italy, Japan, United Kingdom, and United States)

  G-8

  G-7 plus Russia

  G-20

  Group of Twenty biggest economies in the world

  GATT

  General Agreement on Tariffs and Trade

  GDP

  Gross domestic product

  GNP

  Gross national product

  Gosplan

  State Planning Committee

  GRU

  Main Intelligence Directorate

  IFI

  International financial institution

  IMF

  International Monetary Fund

  IPO

  Initial public offering

  KGB

  Committee for State Security

  NATO

  North Atlantic Treaty Organization

  OECD

  Organization of Economic Cooperation and Development

  OSCE

  Organization for Security and Cooperation in Europe

  PPP

  Purchasing power parities

  Rosatom

  Russian State Atomic Energy Corporation

  Rostec

  Russian Technologies

  SCO

  Shanghai Cooperation Organisation

  SIPRI

  Stockholm International Peace Research Institute

  SVR

  Foreign Intelligence Service

  USAID

  United States Agency for International Development

  USSR

  Union of Soviet Socialist Republics

  VAT

  Value-added tax

  VEB

  Vnesheconombank

  VTB

  Vneshtorgbank

  WTO

  World Trade Organization

  Russia’s

  Crony

  Capitalism

  Introduction

  On December 3, 1991, I received my own office in the former Central Committee headquarters of the Communist Party of the Soviet Union, at the Old Square beside the Kremlin in Moscow. It was an exhilarating moment: Russia had never been so free and open, and I was an economic adviser to the new government. Two years of intense reforms ensued in Russia, but it was only after the financial crash in 1998 that the market reforms were completed and economic growth resumed.

  A quarter of a century has passed since the Soviet Union collapsed on December 25, 1991, and few now remember how free Russia was in the 1990s.

  On New Year’s Eve 2000, the ailing president Boris Yeltsin resigned and appointed Prime Minister Vladimir Putin his successor. In March 2000, Russia held an early presidential election, which Putin won. It was Russia’s last competitive election.

  Putin took his seat at the head of a table that was already laid with macroeconomic stability and high economic growth. His government continued reforms from 2000 to 2003, and for a golden decade, from 1999 to 2008, Russia enjoyed an impressive average annual growth of 7 percent, and the standard of living grew even more. After 1999, Russia ran budget surpluses, and the public debt dwindled.

  But this happy state of affairs was not to last. In 2008, the global financial crisis hit Russia hard, and since then Russia’s economy has barely grown—its average growth since 2009 has been just 1 percent. Putin’s eighteen years of rule comprise nine years of high growth and nine years of near stagnation. By the end of 2017, Putin had ruled Russia for as long as Leonid Brezhnev led the Soviet Union, and although a sense of political and economic stability prevail
s, so does stagnation.

  Why did the Russian economy switch from seemingly sustained high growth to lasting stagnation? The standard answer is oil. Russia is a petrostate. When oil prices were high, from 2011 to 2013, oil and gas accounted for roughly two-thirds of Russia’s exports, half of its state revenues, and one-fifth of its GDP. But oil can be managed in many ways, by the state or by competing private entrepreneurs, and part of the answer lies in the way Putin has managed Russia’s vast oil and gas revenues.1

  At the World Economic Forum in Davos in January 2000, the US journalist Trudy Rubin famously posed the question to a panel of prominent Russians, “Who is Mr. Putin?” Wisely, nobody answered. The interpretation of Putin’s objectives remain disputed, but increasingly less so. Everyone has noticed his great respect for the old Soviet security service, the KGB. Early on, many saw him as a fiscal conservative and a free marketer. While he has stayed fiscally conservative, he has become an advocate of state capitalism. A rising view is that he is a kleptocrat. Each of these observations provides part of the explanation for why Russia’s economy went from high growth to stagnation.2

  My argument in this book is that Putin has usurped Russia’s large energy rents to build his crony capitalism. Energy rents have made that possible, but the choice has been his. Putinism is authoritarian kleptocracy, and his economic policy, or Putinomics, as historian Chris Miller has named it, is a combination of macroeconomic stability with kleptocracy.3

  I have followed the Russian economy closely ever since I arrived in Moscow in 1984 for three years’ service as a Swedish diplomat. Having lived with perestroika, I published the book Gorbachev’s Struggle for Economic Reform in the fall of 1989. My assessment at the time was that the most likely scenario for Russia’s future was “radicalized economic reform with far-reaching democratization. As Soviet reformist economists are waking up from their imposed lethargy, they are becoming ever more radical, because they realize that the state of the economy was worse than they had imagined and that half-measures do not offer any results.”4

  Following this experience, from November 1991 until my resignation in January 1994, I had the honor to work as an economic adviser to the reform government effectively led by Yegor Gaidar, spending a large part of my time in Moscow. Immediately afterward I wrote the book How Russia Became a Market Economy (1995), making the point that a market economy had been born.

  As reforms slowed, the drama dissipated. I waited to write my third book about the Russian economy until 2007, when my key observation could once again be found in the title: Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed. The oil boom was about to reach its peak. The regime of Vladimir Putin had ended democracy, but the market economy was still holding sway, even if the state sector was expanding.

  Today, Russia has passed another milestone. On March 18, 2018, Putin was reelected to the presidency with 77 percent of the vote in an authoritarian procedure in which no serious opponent was permitted to stand for election. President Putin has now started his formal fourth—and actual fifth—term in office. As in the mid-1980s, the Russian economy is again caught in stagnation, and there is little hope for improvement so long as the current regime lasts. The Russian political and economic systems are too petrified to meet the future successfully. This appears a propitious time to take the measure of the Russian economy.

  My aim in this book is to analyze how the Russian economic system has developed under Putin’s leadership, how it actually works, and how it may evolve in the future. I do not to try to understand Vladimir Putin’s psychology but instead record in these pages what he has actually done. Although great and radical reforms of the 1990s have not continued, Russia’s system has been transformed. The changes have been gradual but carried out with great determination, as has been characteristic of Putin’s policy making. They have not been well understood because Putin has skillfully operated by stealth.

  Far too often, people claim, “Russia has always been like that,” but during the past three decades the changes in Russia have been monumental. In 1984, Moscow was a gray and dark place. The broad consensus was that the Soviet Union, though stagnant, was perfectly stable and could not possibly change in the foreseeable future. I never believed that. The backwardness and ossification of the Soviet system were all too evident. Within months Mikhail Gorbachev became secretary general of the Communist Party of the Soviet Union (CPSU), and six years later the Communist Party and the Soviet Union were history.

  Just before Gorbachev’s elevation to power, two articles summed up the situation with great foresight. The outstanding strategic thinker Zbigniew Brzezinski noted that the Soviet Union was a Third World country with nuclear arms. The great historian of Russia Richard Pipes emphasized the petrification of the communist system and concluded that the Soviet Union was in a crisis “camouflaged by massive disinformation and saber-rattling, [and that it] fits very well the concept of a ‘revolutionary situation’ as defined by Lenin,” when the ruling elite could no longer rule and the population would no longer follow.5

  Today, Russia’s physical appearance is better than ever. It is modern, colorful, and clean, thanks to a decade of high economic growth. But the mood in Moscow is remarkably reminiscent of 1984. Russia has gone through a systemic and political reversal. The British journalist Ben Judah has eloquently summarized the state of affairs: “After Yeltsin a regime was built in Russia that was both highly sophisticated and deeply backward at the same time. . . . The Kremlin tried to build institutions that were outdated and inefficient even when they were young—a vertical of power restoring the Soviet chain of command.”6

  Yet Russia’s reversal is not to the Soviet Union but to the bygone era of the tsars. After two years of economic contraction in 2015–2016, a new stability has emerged. The expected economic growth is minimal, but the fear of economic destabilization has eased. Just as in the time of Brezhnev, secretary general of the CPSU from 1964 to 1982, domestic politics have evaporated as Russia has become increasingly authoritarian. The general expectation is that Putin will remain president forever and that little will change. I beg to differ, but change requires a new regime.

  The aims of this book are manifold. My focus is on the Russian economic system rather than the people, even if we cannot ignore them. What kind of a beast has the Russian economy become? How does it really work? What are its strengths and weaknesses? How much growth can it produce? Is it sustainable? Can it reform? A second group of questions pertains to the likely choices of the Russian leaders. How will they act? Will they opt for reform, austerity, or international action? A third cluster of issues concerns how Russia can change its economic policy. Last, how can and should the outside world deal with Russia?

  Vladimir Putin has designed the current Russian system with great skill. As the dominant decision-maker, he has built a system to his liking: an authoritarian kleptocracy. The outstanding Russia scholar Karen Dawisha summarized its essence in the title of her book Putin’s Kleptocracy. In this compelling work, Dawisha offers ample evidence that the current ruling Putin circle can be best understood as an organized crime gang. She concludes “that the group now in power . . . [is] committed to a life of looting without parallel. This kleptocracy is abhorrent.”7

  Russia’s development under Putin was not ordained by history, culture, or circumstance—it is Putin’s deliberate choice. He has built an elaborate and consistent political and economic system. His great sophistication in implementing these policies has no positive meaning. Putin outlined many of its features in his 2000 book of interviews, First Person. He has constructed a system that offers him full control and great security.

  Some analysts, such as the Russian journalist Mikhail Zygar, have argued the opposite view, that “Putin, as we imagine him, does not actually exist. It was not Putin who brought Russia to its current state.” Zygar insists that Putin did not wish, for example, to shut down Russia’s independent television channels, concluding that �
��today’s image of Putin as a formidable Russian tsar was constructed by his entourage, Western partners, and journalists, often without his say.” But to take over the top television channels was clearly a major aim of Putin’s policy from the outset. Moreover, Putin has selected all his close collaborators himself and has done so with great care, emphasizing personal trust. There can be no doubt that Putin knows what he has been doing and has done so intentionally. The only question is how detailed his design is. In this book I will try to clarify to what extent Putin has had clear ideas from the outset and how they have evolved.8

  Putin has built his regime on men loyal to him. He has picked these men along his career path starting as a teenager in Leningrad, through university, to the KGB in Leningrad and Dresden, among business friends, and to the mayor’s office in St. Petersburg. After moving to Moscow in 1996, he became more reserved with acquaintances and embraced new followers more cautiously. One can divide the men loyal to Putin into three categories: KGB officers, technocrats, and cronies. Moreover, Putin clearly requires three essential personality traits: trust, obedience, and secrecy. Merit, effectiveness, and ideological bent are all subordinate characteristics.

  Putin’s system consists of four circles. His friends from the St. Petersburg KGB form the first circle. They have successfully seized control of the Federal Security Service (FSB), other security agencies, the state apparatus, and the judiciary. Putin has built his “vertical of power” and “dictatorship of law” while eliminating all checks and balances except rivalry among the security services.