Russia
July 27, 2004
Russia's New Direction (Part Two)
By Sam Wilkin, Editor in Chief
[printer-friendly version]
Russia’s economy is booming and its debt rated investment grade. And yet, in the past week alone – a near-miss bank run, threats of bankruptcy for energy giant Yukos, and the editor of Forbes magazine’s Russia edition gunned down in an apparent contract hit. Where is Russia headed? (Part two of a two-part series.)
To follow the plot in Vladimir Putin’s Russia, one needs to know the characters. In order of appearance –
The oligarchs. Russia is amply supplied with so-called “gangster capitalists.” But a few stand head and shoulders above the rest, with fortunes straddling natural resources, industry, banking and the media. A World Bank study – unraveling complex cross-shareholdings and shell companies – uncovered 23 of these “oligarchs,” who between them control an astonishing one-third of Russian industry (by sales) as well as seventeen percent of all banking assets in the country. The oligarchs’ wealth and control of media makes them politically influential. Indeed dominant, in Yeltsin’s day.
But they are also vulnerable. Most have broken laws of one kind or another – hard not to, given the chaotic environment of the 1990s. So they are vulnerable to legal attacks. And they are also politically vulnerable. The distribution of wealth in Russia is profoundly inequitable: according to Forbes, Moscow now has more billionaire residents than New York (33 against New York’s 31), yet the average Russian salary is $200 per month – a fact that inspires intense public anger. Not to mention that of the top seven oligarchs, six are Jewish, in a country that remains profoundly anti-Semitic. Two have been hounded into exile, and one, Mikhail Khodorkovsky, is in jail, and this is extremely popular. Some 54 percent of Russians say they are in favor of Khodorkovsky’s arrest, with only four percent strongly opposed. In the two weeks after he went to prison, poll ratings for the pro-government United Russia party rose by four points.
The siloviki. The term refers to former Soviet intelligence and military officials now at the top levels of the Russian civilian government. The rise of the siloviki – documented by Russian sociologist Olga Kryshtanovskaya – has been widely publicized by Putin’s political opponents hoping to cast his government in a sinister light. But the trend is both long-standing and, in a sense, natural. The siloviki – KGB and the military – were the Soviet elite; they are gradually becoming the Russian elite. In Gorbachev’s day, the siloviki made up only five percent of the Politburo. By 1993, under Yeltsin, their share of the National Security Council was 30 percent. By 1999, over 45 percent. And under Putin, nearly 60 percent.
But sinister or not, the siloviki’s rise changes things. The Russian state has been revitalized – more confident, more competent, at least at the highest levels. And also more dominant. The siloviki are thoroughly accustomed to government that is above the people, not of the people. At times, the wisps of Soviet nostalgia solidify into images some thirty years out of date. Washington Post columnist Anne Applebaum tells the story of a hydroelectric power project opening in 2003, complete with a band, speeches by Russian writers and the president, and cheering crowds. “We have managed not only to resuscitate and recreate everything that the energy sector of the Soviet Union and of Russia was proud of,” said Putin on the occasion, “but also to make steps forward.”
Small business. Small business has a role in the new Russia? No, and that is the point. The economy may have regained basic functioning but this is no broad-based revival. The plagues of corruption, predatory bureaucrats, and weak legal enforcement remain. Hence small and medium businesses account for only 10 to 15 percent of Russian output against 50 percent in the more advanced parts of Eastern Europe.
And this is unlikely to change. Small business gets little sympathy from the siloviki, who want to boost growth with state projects (like the Soviet-style dam). Nor from the oligarchs, who are actually helped by the poor business environment – smaller, less-well-connected competitors are hounded out of business, which keeps the oligarchs on top.
Oil. With small businesses relegated to walk-on roles, oil has taken the spotlight. According to the World Bank, oil and gas alone accounts for as much as a quarter of Russia’s GDP. Make no mistake, the more time passes the more Russia comes to resemble a petro-state. Natural resources now generate some 80 percent of Russia’s exports – nearly on par with Venezuela.
And with this come the trappings of the oil state – a government, enriched by oil revenues, that tends to dominate politics and the economy (as in Venezuela, Nigeria, Saudi Arabia, and so on). It is a slow process in Russia. Yukos and other oil companies were not paying their tax bills. (Taking advantage of legal loopholes, Yukos paid corporate income taxes of 20 percent last year, lower than the minimum of 24 percent.)
But it is a process reinforced by the key political players. The siloviki with their top-down instincts are happy to exert more economic control – and will, as they gain control of the oil sector. And Putin, who has now achieved direct or indirect state control of most major media outlets, is a natural when it comes to state-dominated politics.
Vladimir Putin. Which brings us to Putin himself. It is easy to imagine who Putin will see when he looks in the mirror a few years from now: a Saudi prince, or Nigerian general. Putin is not presiding over the “re-Sovietization” of Russia, as some have said – it is the “Saudification” of Russia. An economy where the state is the key player, and leading businesses stay that way through political favoritism. A politics where the people have little say in how they are governed. This is not a happy future. Putin’s Russia is dynamic, but oil states over time – thanks to their state dominance and corruption – tend to suffer economic sclerosis and political dysfunction. (Emerging in the form of Hugo Chavez in Venezuela and Islamic terror in Saudi Arabia.)
And yet. Forecasts of who Putin will see when he looks in the mirror a few years down the line have been wrong before. The players who were forecast to star in Putin’s Russia (oligarchs, regional governors) have instead been relegated to supporting roles. What if there were now a dramatic fall in oil prices? A major scandal? A presidential change of heart? The plot in Russia is still uncertain. Russia’s new direction may not be a promising one at present. But this is still a show worth watching.
[printer-friendly version]
Russia’s economy is booming and its debt rated investment grade. And yet, in the past week alone – a near-miss bank run, threats of bankruptcy for energy giant Yukos, and the editor of Forbes magazine’s Russia edition gunned down in an apparent contract hit. Where is Russia headed? (Part two of a two-part series.)
To follow the plot in Vladimir Putin’s Russia, one needs to know the characters. In order of appearance –
The oligarchs. Russia is amply supplied with so-called “gangster capitalists.” But a few stand head and shoulders above the rest, with fortunes straddling natural resources, industry, banking and the media. A World Bank study – unraveling complex cross-shareholdings and shell companies – uncovered 23 of these “oligarchs,” who between them control an astonishing one-third of Russian industry (by sales) as well as seventeen percent of all banking assets in the country. The oligarchs’ wealth and control of media makes them politically influential. Indeed dominant, in Yeltsin’s day.
But they are also vulnerable. Most have broken laws of one kind or another – hard not to, given the chaotic environment of the 1990s. So they are vulnerable to legal attacks. And they are also politically vulnerable. The distribution of wealth in Russia is profoundly inequitable: according to Forbes, Moscow now has more billionaire residents than New York (33 against New York’s 31), yet the average Russian salary is $200 per month – a fact that inspires intense public anger. Not to mention that of the top seven oligarchs, six are Jewish, in a country that remains profoundly anti-Semitic. Two have been hounded into exile, and one, Mikhail Khodorkovsky, is in jail, and this is extremely popular. Some 54 percent of Russians say they are in favor of Khodorkovsky’s arrest, with only four percent strongly opposed. In the two weeks after he went to prison, poll ratings for the pro-government United Russia party rose by four points.
The siloviki. The term refers to former Soviet intelligence and military officials now at the top levels of the Russian civilian government. The rise of the siloviki – documented by Russian sociologist Olga Kryshtanovskaya – has been widely publicized by Putin’s political opponents hoping to cast his government in a sinister light. But the trend is both long-standing and, in a sense, natural. The siloviki – KGB and the military – were the Soviet elite; they are gradually becoming the Russian elite. In Gorbachev’s day, the siloviki made up only five percent of the Politburo. By 1993, under Yeltsin, their share of the National Security Council was 30 percent. By 1999, over 45 percent. And under Putin, nearly 60 percent.
But sinister or not, the siloviki’s rise changes things. The Russian state has been revitalized – more confident, more competent, at least at the highest levels. And also more dominant. The siloviki are thoroughly accustomed to government that is above the people, not of the people. At times, the wisps of Soviet nostalgia solidify into images some thirty years out of date. Washington Post columnist Anne Applebaum tells the story of a hydroelectric power project opening in 2003, complete with a band, speeches by Russian writers and the president, and cheering crowds. “We have managed not only to resuscitate and recreate everything that the energy sector of the Soviet Union and of Russia was proud of,” said Putin on the occasion, “but also to make steps forward.”
Small business. Small business has a role in the new Russia? No, and that is the point. The economy may have regained basic functioning but this is no broad-based revival. The plagues of corruption, predatory bureaucrats, and weak legal enforcement remain. Hence small and medium businesses account for only 10 to 15 percent of Russian output against 50 percent in the more advanced parts of Eastern Europe.
And this is unlikely to change. Small business gets little sympathy from the siloviki, who want to boost growth with state projects (like the Soviet-style dam). Nor from the oligarchs, who are actually helped by the poor business environment – smaller, less-well-connected competitors are hounded out of business, which keeps the oligarchs on top.
Oil. With small businesses relegated to walk-on roles, oil has taken the spotlight. According to the World Bank, oil and gas alone accounts for as much as a quarter of Russia’s GDP. Make no mistake, the more time passes the more Russia comes to resemble a petro-state. Natural resources now generate some 80 percent of Russia’s exports – nearly on par with Venezuela.
And with this come the trappings of the oil state – a government, enriched by oil revenues, that tends to dominate politics and the economy (as in Venezuela, Nigeria, Saudi Arabia, and so on). It is a slow process in Russia. Yukos and other oil companies were not paying their tax bills. (Taking advantage of legal loopholes, Yukos paid corporate income taxes of 20 percent last year, lower than the minimum of 24 percent.)
But it is a process reinforced by the key political players. The siloviki with their top-down instincts are happy to exert more economic control – and will, as they gain control of the oil sector. And Putin, who has now achieved direct or indirect state control of most major media outlets, is a natural when it comes to state-dominated politics.
Vladimir Putin. Which brings us to Putin himself. It is easy to imagine who Putin will see when he looks in the mirror a few years from now: a Saudi prince, or Nigerian general. Putin is not presiding over the “re-Sovietization” of Russia, as some have said – it is the “Saudification” of Russia. An economy where the state is the key player, and leading businesses stay that way through political favoritism. A politics where the people have little say in how they are governed. This is not a happy future. Putin’s Russia is dynamic, but oil states over time – thanks to their state dominance and corruption – tend to suffer economic sclerosis and political dysfunction. (Emerging in the form of Hugo Chavez in Venezuela and Islamic terror in Saudi Arabia.)
And yet. Forecasts of who Putin will see when he looks in the mirror a few years down the line have been wrong before. The players who were forecast to star in Putin’s Russia (oligarchs, regional governors) have instead been relegated to supporting roles. What if there were now a dramatic fall in oil prices? A major scandal? A presidential change of heart? The plot in Russia is still uncertain. Russia’s new direction may not be a promising one at present. But this is still a show worth watching.
July 13, 2004
The Russian Supertanker Turns on a Dime (Part One)
By Sam Wilkin, Editor in Chief
[printer-friendly version]
Russia’s economy is booming and its debt rated investment grade. And yet, in the past week alone – a near-miss bank run, threats of bankruptcy for energy giant Yukos, and the editor of Forbes magazine’s Russia edition gunned down in an apparent contract hit. Where is Russia headed? (Part one of a two-part series.)
[Rewritten 7/21/04]
“Probably about a year after he moves into the Kremlin, Russia’s next president will look in the mirror and see not himself but Boris Nikolaevich Yeltsin.” – Russia scholar Daniel Treisman, in 1999.
It would be hard to imagine a more unenviable position than that of Russian president Vladimir Putin when he took office in 1999. Russia was not just a sinking ship. It was a sinking ship with all hands employed either bailing more water onboard or puncturing additional holes in the hull.
In the midst of this maritime disaster, changing captains – as Daniel Treisman pointed out – seemed unlikely to make much difference. There is a point at which momentum overcomes heroism, and 1990s Russia seemed long past that point. Supertankers do not turn on a dime.
Or do they? A few short years after suffering a financial crisis, the Russian economy is now booming and its debt rated investment grade. The key to understanding how this was possible is to look below deck. The captain was critical. But so was the crew.
Bear in mind that Russia’s post-communist relaunch was met with great expectations. It was a course into the unknown, to be sure. But Russia had rich natural resources, extensive industry and infrastructure, a well-educated workforce, top-notch scientists. This was no third-world country. It was a former superpower that had challenged the US for global dominance and put a man in space.
It was almost incomprehensible, then, when the world realized, in the mid-1990s, that the Russian ship was actually sinking. Rising alcoholism, falling life expectancy, and the average Russian made 50 percent poorer within a decade.
What Russia, illustrated, stunningly, was that good piloting and fair seas are little help to a ship that is being disassembled by its crew. There was more to economics, it emerged, than budgets and interest rates. Oil prices spiked in the early 1990s. But all the money went to Saudi Arabia as Russian oil production inexplicably collapsed.
The key is to understand the incentives that faced the average Russian. Price controls were (partially) lifted; markets (partially) opened. All well and good. But there was little law – and even less enforcement – to protect property. This made it very hard to run any business larger than a kiosk. Either the mafia or corrupt bureaucrats would come along and snatch a piece of it. Far more lucrative to get in on the snatching oneself. (And then send the proceeds offshore where it would be safe.)
The stories of such behavior are by now well known. Scholar Anders Aslund estimates that some $24 billion – a staggering 30 percent of Russia’s annual economic output – was snatched via “underselling” of Russia’s natural resources. Managers of state oil companies, for instance, could buy a ton of crude oil for 30 rubles – the price of a pack of Marlboros – at state-controlled prices. They could then freely sell it for thousands of dollars on world markets. “Underselling” – or, more accurately, the theft of state property.
Mikhail Khordorkovsky – the former manager of Yukos, now on high-profile trial for tax evasion – snatched this crown jewel in one of the now-infamous “loans for shares” deals. He picked up Yukos for about $159 million. A western oil company of similar size was valued at $85 billion. The “sale of the century,” they said.
But what went under-appreciated is how much the situation in Russia had changed by 1999. (Even though, on the surface, the decline was yet ongoing.) By the time Putin took office, the country’s prime assets – its oil, and oil companies – were in private hands. Over 90 percent of output was produced by the private sector. Which meant there was not much left to plunder.
Hence the interests of Russia’s most talented, ambitious and influential citizens changed. From maintaining the loopholes and weak enforcement that facilitated asset theft to creating the stability that would make possible the protection of the assets they had.
Instead of poking more holes in the boat, they were now patching it up. Merrill Lynch estimates that capital flight dropped from about $25 billion per year throughout the 1990s to a more manageable $12 billion in 2001 and $10 billion in 2002. Hence in fair seas, the Russian vessel was no longer sinking. A large currency devaluation actually improved the current account balance – as one would expect in a functioning economy.
The oil story was even better. During the 1990s, when Russia’s oil and oil firms were being snatched, Russian production plummeted – from 11 million barrels per day to under six million. Thieves make bad managers. But once the assets were all in private hands, oil production rebounded. Seven million barrels per day in 2001; eight and a half by 2003. So when another oil price spike came along the Russian economy reaped the rewards.
To be sure, much credit goes to captain Putin. There were difficult shoals – rapacious bureaucrats, powerful governors, influential industrialists – that could have sent Russia off course. That these did not testifies to a steady hand at the helm.
But credit also the crew. It was not Putin’s doing that Russia’s assets were in private hands by the end of the 1990s. But that was crucial to economic recovery. With basic economic function restored, Russia was finally able to take advantage of favorable global conditions.
Russian reformer Anatoly Chubais put it this way in 1995: “they are stealing absolutely everything and it is impossible to stop them. But let them steal and take this property. They will then become owners and decent administrators.” An ugly thought. But in the end, he was right. And the Russian supertanker is seaworthy again.
Editorials will be on vacation next week. In two weeks, the continuation: where is Russia headed?
[printer-friendly version]
Russia’s economy is booming and its debt rated investment grade. And yet, in the past week alone – a near-miss bank run, threats of bankruptcy for energy giant Yukos, and the editor of Forbes magazine’s Russia edition gunned down in an apparent contract hit. Where is Russia headed? (Part one of a two-part series.)
[Rewritten 7/21/04]
“Probably about a year after he moves into the Kremlin, Russia’s next president will look in the mirror and see not himself but Boris Nikolaevich Yeltsin.” – Russia scholar Daniel Treisman, in 1999.
It would be hard to imagine a more unenviable position than that of Russian president Vladimir Putin when he took office in 1999. Russia was not just a sinking ship. It was a sinking ship with all hands employed either bailing more water onboard or puncturing additional holes in the hull.
In the midst of this maritime disaster, changing captains – as Daniel Treisman pointed out – seemed unlikely to make much difference. There is a point at which momentum overcomes heroism, and 1990s Russia seemed long past that point. Supertankers do not turn on a dime.
Or do they? A few short years after suffering a financial crisis, the Russian economy is now booming and its debt rated investment grade. The key to understanding how this was possible is to look below deck. The captain was critical. But so was the crew.
Bear in mind that Russia’s post-communist relaunch was met with great expectations. It was a course into the unknown, to be sure. But Russia had rich natural resources, extensive industry and infrastructure, a well-educated workforce, top-notch scientists. This was no third-world country. It was a former superpower that had challenged the US for global dominance and put a man in space.
It was almost incomprehensible, then, when the world realized, in the mid-1990s, that the Russian ship was actually sinking. Rising alcoholism, falling life expectancy, and the average Russian made 50 percent poorer within a decade.
What Russia, illustrated, stunningly, was that good piloting and fair seas are little help to a ship that is being disassembled by its crew. There was more to economics, it emerged, than budgets and interest rates. Oil prices spiked in the early 1990s. But all the money went to Saudi Arabia as Russian oil production inexplicably collapsed.
The key is to understand the incentives that faced the average Russian. Price controls were (partially) lifted; markets (partially) opened. All well and good. But there was little law – and even less enforcement – to protect property. This made it very hard to run any business larger than a kiosk. Either the mafia or corrupt bureaucrats would come along and snatch a piece of it. Far more lucrative to get in on the snatching oneself. (And then send the proceeds offshore where it would be safe.)
The stories of such behavior are by now well known. Scholar Anders Aslund estimates that some $24 billion – a staggering 30 percent of Russia’s annual economic output – was snatched via “underselling” of Russia’s natural resources. Managers of state oil companies, for instance, could buy a ton of crude oil for 30 rubles – the price of a pack of Marlboros – at state-controlled prices. They could then freely sell it for thousands of dollars on world markets. “Underselling” – or, more accurately, the theft of state property.
Mikhail Khordorkovsky – the former manager of Yukos, now on high-profile trial for tax evasion – snatched this crown jewel in one of the now-infamous “loans for shares” deals. He picked up Yukos for about $159 million. A western oil company of similar size was valued at $85 billion. The “sale of the century,” they said.
But what went under-appreciated is how much the situation in Russia had changed by 1999. (Even though, on the surface, the decline was yet ongoing.) By the time Putin took office, the country’s prime assets – its oil, and oil companies – were in private hands. Over 90 percent of output was produced by the private sector. Which meant there was not much left to plunder.
Hence the interests of Russia’s most talented, ambitious and influential citizens changed. From maintaining the loopholes and weak enforcement that facilitated asset theft to creating the stability that would make possible the protection of the assets they had.
Instead of poking more holes in the boat, they were now patching it up. Merrill Lynch estimates that capital flight dropped from about $25 billion per year throughout the 1990s to a more manageable $12 billion in 2001 and $10 billion in 2002. Hence in fair seas, the Russian vessel was no longer sinking. A large currency devaluation actually improved the current account balance – as one would expect in a functioning economy.
The oil story was even better. During the 1990s, when Russia’s oil and oil firms were being snatched, Russian production plummeted – from 11 million barrels per day to under six million. Thieves make bad managers. But once the assets were all in private hands, oil production rebounded. Seven million barrels per day in 2001; eight and a half by 2003. So when another oil price spike came along the Russian economy reaped the rewards.
To be sure, much credit goes to captain Putin. There were difficult shoals – rapacious bureaucrats, powerful governors, influential industrialists – that could have sent Russia off course. That these did not testifies to a steady hand at the helm.
But credit also the crew. It was not Putin’s doing that Russia’s assets were in private hands by the end of the 1990s. But that was crucial to economic recovery. With basic economic function restored, Russia was finally able to take advantage of favorable global conditions.
Russian reformer Anatoly Chubais put it this way in 1995: “they are stealing absolutely everything and it is impossible to stop them. But let them steal and take this property. They will then become owners and decent administrators.” An ugly thought. But in the end, he was right. And the Russian supertanker is seaworthy again.
Editorials will be on vacation next week. In two weeks, the continuation: where is Russia headed?