Putin Can Only Blame Himself for the Russian Economy

Ibrahim Kaher

This essay will present various arguments that describe Russia’s state capitalism – when the “commanding heights” of the economy are controlled by the state (Taylor 2018, 119) – and centralized crony capitalism – when “economic-political networks” influence the business-state relationship to such a degree that “state connections matter more than market forces” (84) – as the results of predetermined historical legacies I will then dispute these arguments and present my own view, that some aspects of Vladimir Putin’s world outlook manifested to the detriment of other aspects Therefore, state capitalism and centralized crony capitalism was not the only possible outcome of Putin’s world outlook nor were they a predetermined result of the historical legacies created by communism and the Boris Yeltsin administration.

Russia’s state capitalism and centralized crony capitalism can be seen as the result of communist modernization and Yeltsin’s privatization The great costs to restructure Russia’s economic infrastructure and make Russian industry globally competitive come from the big industrial cities created by Soviet planning in Siberia, the Urals, and the Far East This great cost prohibits private ownership, as their geography raises the cost of production, undermining their competitiveness Thus, post-Soviet Russia inherited “the world’s largest ever assemblage of obsolete equipment” (Taylor 2018, 110-111). Instead, it is much cheaper to maintain uncompetitive state ownership Furthermore, addressing cronyism requires confronting the large corporations and prominent oligarchs who benefited from cronyism under Yeltsin Yet, the great political risks this confrontation entails prohibits such undertakings. These corporations and oligarchs are intimately tied to “ a form of crony capitalism” that was “established in Russia in the 1990s” (112) via the 1995 “loans for shares” deal “[S]ome of the crown jewels of the Russian economy ” were given to “ a small group of well-connected oligarchs,” forming “the basis of some of Russia’s largest corporations” (109) Therefore, maintaining the status quo is a much more politically secure option.

These historical legacies do not operate in this way. The companies that were privatized found great success meaning the costs of production they faced must not have prohibited private ownership, contradicting the communist modernization argument. During the 1995 loans for shares deal, oligarchs became principal owners of mineral and oil firms like Yukos, Norilsk Nickel, and Sibneft (Åslund 2019, 24). These oligarchs should have found the costs of production too high to succeed in the global market, yet according to economist Andrei Shleifer and political scientist Daniel Treisman, “[b]etween 1996 and 2001, the reported pre-tax profits of Yukos, Sibneft, and Norilsk Nickel rose in real terms by 36, 10, and 5 times, respectively” (24). Since this predated the 2003 oil boom (Åslund 2019, 28; Taylor 2018, 108) and since oil production rose “ an astounding 50 percent from 1999 to 2004” (Åslund 2019, 27-28), an increase in demand or a downsizing of operations cannot explain this rise in profits The communist modernization argument maintains that natural resource industries suffer raised costs of production that prohibit private ownership A large aspect of contemporary Russian state capitalism is state ownership over the oil industry (Taylor 2018, 115), so if the communist modernization argument refused to explain state ownership over the oil industry, it could not explain contemporary state capitalism either

Whatever opposition Putin might have faced from oligarchs cannot explain the “ new dimension of crony capitalism” (Åslund 2019, 32) he actively created, contradicting the argument that confronting oligarchs is politically risky. “Putin spearheaded a swift stripping of assets” (Åslund 2019, 32) to make his friends billionaires (Taylor 2018, 121) According to Boris Nemtsov and Vladimir Milov, “the total value of assets removed from Gazprom and placed into the private hands of Putin’s friends from 2004 to 2007 [are] about $60 billion” (Åslund 2019, 32) Being powerless against cronyism and being participatory in cronyism are very different things

1. Centralized crony capitalism refers specifically to

Russia “became and Putin himself” (84).

Therefore, Russian state capitalism and centralized crony capitalism are better explained as the deliberate manifestation of the aspects of Putin’s world outlook related to control such as imposed consensus and managed democracy State capitalism and centralized crony capitalism are reasonable extensions of Putin’s aspiration for managed democracy – de facto control over whatever party is in power – since Putin is ensured de facto control over the oligarchs driving politics Putin believes that ideally “the people who control real politics must stay the same, ” with “ a periodic rotation of an elite group ” that do not “aspire to destroy each other.” To avoid destroying each other, “ we [President Putin and his allies] must be both here and there, that is, controlling both parties” (Pavlovsky 2014, 58-59). This form of managed democracy contextualizes Putin’s confidence in “maximum oneness of state and business” (Pavlovsky 2014, 57) – the oligarchs, whoever they are, must pay fealty to him.

Putin aims to leave the elite no choice but unconditional subordination so that Putin remains the dominant actor – a tactic known as imposed consensus State capitalism and centralized crony capitalism are reasonable methods for achieving this imposed consensus. By leaving the elite “ no choice of strategic behavior other than unconditional subordination,” Putin “become[s] a dominant actor not only de jure but also de facto” (Gel’man 2015, 7374) To build this imposed consensus, Putin “reasserted control over … major state-controlled companies … while the prosecutors and the police were able to target anyone ” (80) Putin also “promoted his long-standing friends and followers to top positions … located or established secure and unimportant niches for precarious and unreliable ‘fellow travelers,’ and isolated potential rivals” (75) Therefore, state capitalism and centralized crony capitalism are strategies to replace fickle elites with trusted allies through whatever means necessary, leaving the rest with no choice but subordination.

The manifestation of the aspects of Putin’s world outlook related to control come at the detriment of other aspects of Putin’s world outlook, specifically his aspiration for “capitalist predators on our side” (Pavlovsky 2014, 56) The collapse of the Soviet Union taught Putin and his advisers like Gleb Pavlovsky that Russia should emulate western capitalism to achieve the revanche they were looking for The term revanche here means “the resurrection of the great state in which we had lived” (Pavlovsky 2014, 56; Taylor 2018, 34) “in a historical sense ” (Pavlovsky 2014, 57) It is this aspiration for greatness in contrast to the dissolution of the Soviet Union that caused Putin to abandon communism to “be bigger and better capitalists than the capitalists” (57) and to “give the capitalist predators on our side a chance to develop and devour the capitalist predators on theirs”

(Pavlovsky 2014, 59; Taylor 2018, 113)

Putin’s aspiration for capitalist predators collides with Putin’s aspiration for control. Achieving state capitalism undermines the property rights required to develop capitalist predators while centralized crony capitalism directly opposes the meritocracy alluded to by Gleb Pavlovsky By targeting “[p]erceived violators of the rules of the game ” with the “legal and coercive power of the state,” the property rights of all Russian entrepreneurs are undermined (Taylor 2018, 107; Gans-Morse 2012, 278-279). As a result, “the small capitalists that are essential for developing contemporary market capitalism” are “caught in a web spun by state lawyers and guns preying on the small capitalists” (Taylor 2018, 124; Gans-Morse 2012, 280-297; Hendley 2018, 112-113) “[I]n 2002 Putin denounced ‘unjustified administrative pressure’ on entrepreneurs” (Taylor 2018, 126), so Putin must have quickly realized that the state predation and cronyism he later indulged in would exacerbate this problem.

The way Gleb Pavlovsky describes capitalist predators as developing and devouring one another seems most consistent with a meritocratic system For example, the state may award the most productive businesses assets of those businesses that do not meet some minimum productivity standards This does not look like the rent-seeking cronyism that Putin and his friends indulge in at the expense of Russian business Putin must have ultimately let go of his aspiration for capitalist predators in favour of control. The recent dogmatic adherence to conservative fiscal and monetary policy (Åslund 2019, 36) “hoping that world energy prices will rebound” (Taylor 2018, 128) supports this.

Putin’s aspiration for control was informed by historical legacies such as the collapse of the Soviet Union (Åslund 2019, 36), Putin’s role as vice-mayor in St. Petersburg (Taylor 2018, 122), and Yeltsin’s 1993 attack on Parliament (Pavlovsky 2014, 62-63) However, Putin’s aspiration for capitalist predators is arguably equally as important and equally as informed by historical legacies, thereby making the development of state capitalism and centralized crony capitalism one of the multiple possible outcomes of Putin’s world outlook

2. See Gans-Morse 2012 for some of the cases in which perceived violators were faced with state coercion (i.e.: The Khodorkovskiy affair), and how this left a shadow that “hangs over all major businesses” (279).

Furthermore, the idea of capitalist predators is intimately tied to Putin’s perception of revanche and the fall of the Soviet Union Had Putin developed liberal market capitalism and secured property rights, perhaps to a degree comparable to Eastern Europe, one could make an equally compelling case that historical legacies predetermined this. The collapse of the Soviet Union left a deep imprint on Putin and the Russian elite, teaching them the importance of liberal market capitalism for the sake of revanche, and failing to do so would lead to “another Belovezhsky Accord, after which Russia would no longer exist” (Pavlovsky 2014, 56). Thus, it would be improper to argue that ideas informed by historical legacies predetermined the trajectory of the Russian economy Instead, legacies that inform ideas supporting state capitalism and centralized crony capitalism equally inform ideas supporting liberal market capitalism and secure property rights.

Key crossroads where different paths could have been chosen illustrates these different possible outcomes For example, the 2000-2003 liberal reforms were an opportunity to steer the Russian economy in a more liberal direction. While Russia probably cannot become a second Singapore, this is not the same as being forced into state capitalism and centralized crony capitalism. As Taylor (2018) writes: “[F]rom 2000 to 2004, Putin’s economic course arguably was trending in the direction of stronger formal market institutions, with the state assuming its role as the neutral arbitrator of the economic rules of the game ” (108, 114) This led Veteran Kremlinologist Lilia Shevtsova to assess Putin as “ a statist and a Westernizer” (Åslund 2019, 26-27). This era presents an interesting alternate history where the regime economic liberalization indispensable to regime stability Gel’man (2015) explains why Russia probably could not succeed in authoritarian modernization (109-112), but this does not make economic liberalization prohibitive in its entirety, only that the extent it could be achieved may be limited. Nor does it make state capitalism and crony capitalism the only remaining option While the 2003 arrest of Mikhail Khodorkovsky spelled the end of Putin’s liberalization (Taylor 2018, 108), it could have been a warning that demonstrated Putin’s credibility when he said “stay out of politics and I will not revise the results of privatization” (Åslund 2019, 26; Taylor 2018, 117). If the oligarchs respected this warning, Putin could then pursue further economic liberalization

3. See Gans-Morse 2012 and Hendley 2018 for some of the strategies and schemes that law enforcement and judicial officials use to prey upon small businesses, such as the practice of “illegal corporate raiding (reyderstvo)” to seize a firm’s assets by bribing a corrupt judge (Gans-Morse 2012, 281282).

4. i.e.: The state capitalism that created massive South Korean conglomerates like Samsung, Hyundai, LG, etc.

It should be clear then that the historical legacies created by communism and the Yeltsin administration did not predetermine the creation of state capitalism and centralized crony capitalism. Rather, state capitalism and centralized crony capitalism owe their manifestation to the aspects of Putin’s world outlook on control that were detrimental to other aspects of Putin’s world outlook like his aspiration for capitalist predators It is these different aspects of Putin’s world outlook that makes state capitalism and centralized crony capitalism one of multiple possible outcomes

5. Åslund argues “The collapse of the Soviet Union and the financial crash of 1998 left a deep imprint on Putin and the Russian elite, teaching them the importance of macroeconomic stability for the sake of political stability” (Åslund 2019, 36).

6. I repeat Åslund verbatim except I replace “macroeconomic stability" with "liberal market capitalism" and “political stability” with “revanche” to demonstrate that while Åslund's argument is compelling, one can't take this to a deterministic end.

Bibliography

AÅslund, Anders. 2019. Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy. New Haven: Yale University Press.

Gans-Morse, Jordan. 2012. “Threats to Property Rights in Russia: From Private Coercion to State Aggression.” Post-Soviet Affairs 28 (3): 263-295. DOI: https://doi.org/10.2747/1060-586X.28.3.263.

Gel’man, Vladimir. 2015. Authoritarian Russia: Analyzing Post-Soviet Regime Changes. Pittsburgh: University of Pittsburgh Press.

Hendley, Kathryn. 2018. “Chapter 8. Assessing The Rule of Law in Russia.” In Developments in Russian Politics 9, edited by Richard Sakwa, Henry E. Hale, and Stephen White, 108-118. London: Bloomsbury Publishing Plc. ProQuest Ebrary.

Pavlovsky, Gleb. 2014. “Putin’s World Outlook.” Interview by Tom Parfitt. New Left Review 88 (July-August): 54-66.

Taylor, Brian D. 2018. The Code of Putinism. Oxford: Oxford University Press.