Russia’s Neo-Feudal Capitalism

Anders Åslund. | (Project Syndicate) | – –

WASHINGTON, DC – Vladimir Putin’s Russia is looking more and more like the sclerotic and stagnant Soviet Union of the Leonid Brezhnev era. But in one area, Putin’s regime remains an innovator: corruption. Indeed, in this, the 18th year of Putin’s rule, a new form of crony capitalism has been taking hold.

Over the last decade, Putin has overseen a major renationalization of the Russian economy. The state sector expanded from 35% of GDP in 2005 to 70% in 2015. It would seem that, in Lenin’s words, the state had regained control of the “commanding heights” of the economy.

And yet it would also seem that state-owned firms like the energy giants Gazprom and Rosneft operate like modern businesses. After all, they have corporate-governance rules and policies, supervisory and management boards, and annual shareholders’ meetings. They undergo independent international audits, publish annual reports, and maintain boards with independent directors.

But appearances can deceive. Major state-owned companies’ rules and policies are mere formalities. They are not even really run by the state. Instead, they are controlled by a small group of cronies – former KGB officers, ministers, and senior officials in the president’s administration – who act as Putin’s personal representatives.

The system carries the hallmarks of the ancient feudal model described by Harvard’s Richard Pipes in his classic Russia under the Old Regime: it affords a maximum of freedom to the ruler, who delegates tasks to the feudal lords. In effect, Russia’s state-owned companies have transformed public property into a new model of czarist ownership.

International investors have caught on. They buy Russian stocks, but only for the sizeable dividend yields – not for shareholder influence. No surprise, then, that Gazprom’s market capitalization has collapsed from a peak of $369 billion in May 2008 to some $55 billion today.

The operations of the so-called state corporations are particularly problematic. Legally, these firms, which include Vnesheconombank (VEB) and Russian Technologies (Rostec), are independent nongovernmental organizations. But they are established through the donation of state funds or property: when six such corporations were created in 2007, some $80 billion of assets and $36 billion of fresh state funds were transferred to them. This puts them under Putin’s direct control.

State capitalism is usually associated with publicly directed strategies for investment and technological development. And, indeed, Russia’s state corporations are supposedly focused on advancing the public interest or creating public goods. In reality, managers do whatever they want, such as favoring friends through discretionary procurement or selling assets at submarket prices.

Loyal chief executives of Russia’s big state companies enjoy long tenures, regardless of whether they meet ordinary standards of efficiency, profit, or innovation. No CEO has destroyed more value than Gazprom’s Alexei Miller, yet he has been at the company’s helm for 16 years and counting. In 2013, Miller’s official salary totaled $25 million. Today, there is no telling what he earns, as state executives’ remuneration is no longer published.

In exchange for their outsize paychecks and ritzy fiefdoms, Putin’s lords must advance his interests – particularly when geopolitical issues emerge that threaten the regime’s survival. For example, Gazprom has obediently cut off gas flows to recalcitrant neighbors whom the Kremlin wants to punish, at major commercial cost, while supplying all of Russia, regardless of whether it gets paid. Rosneft has loaned billions to Venezuela’s state oil company – with the Venezuelan-owned US refiner Citgo as collateral – in a clear bid to exploit the country’s dire economic situation to gain access to its oil fields.

Of course, Russia’s economy is not at its strongest, either. Yet Putin’s system seems equipped to survive even the disappearance of oil rents. Putin has allowed the “systemic liberals” in his administration to impose hard budget constraints even on the large state companies. Rosneft, for example, has been forced to abandon its most value-destroying investments, such as petrochemicals. As a result, financial stability is likely to be maintained. In any case, if the oil price remains at around $50 per barrel, Russian oil rents will remain substantial.

Nonetheless, new challenges to this system are emerging – beginning with nepotism. Russia’s crony capitalism has bred a small class of incredibly wealthy individuals, whose children are given top state positions by the time they turn 30. Unsurprisingly, this breeds resentment among the young, able, and ambitious.

For example, Petr Fradkov, the son of former Prime Minister Mikhail Fradkov, became first deputy chairman of VEB at the age of 29. Sergei Ivanov, the son of Putin’s former chief of staff of the same name, became first vice president of Gazprombank at 25 (and president of Alrosa, Russia’s state diamond company, at 36). Rosneft CEO Igor Sechin’s son Ivan became deputy director of a Rosneft department at 25.

Anders Åslund is a senior fellow at the Atlantic Council in Washington. He is the author of Ukraine: What Went Wrong and How to Fix It and, most recently, Europe’s Growth Challenge (with Simeon Djankov).

Licensed from Project Syndicate

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Related video added by Juan Cole:

CGTN America: “Charles Ortel on the current state of Russian Economy”

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9 Responses

  1. isn’t Aslund the guy who helped Yelsin create the oligarchs and destroy the Russian economy on behalf of the USA?

  2. Prof. Robert David English writes in Foreign Affairs:
    note that in 2000, when Putin became president, oil stood at $30 per barrel and petroleum accounted for 20 percent of Russia’s GDP. But in 2010, after a decade’s rise pushed oil over $100 per barrel, petroleum had nevertheless fallen to just 11 percent of GDP, according to the World Bank. Thus as oil boomed, Russian agriculture, manufacturing, and services grew even faster.

    Krugman’s fellow columnist Thomas Friedman similarly decried Russia’s low life expectancy over a period “that coincides almost exactly with Putin’s leadership of the country … the period of 1990–2013,” while blaming Putin for “slow gains in the life expectancy of an entire nation.” In fact, the first half of this period coincides almost exactly with Yeltsin’s leadership, when male life expectancy fell by over six years—unprecedented for a modern country in peacetime. Under Putin, both male and female life expectancy have made rapid gains, and their combined average recently reached 70 years for the first time in Russian history.

    foolish simply because that is how American leaders look when they mock Russia’s prospects, as former U.S. President Barack Obama did when he said, “Russia doesn’t make anything. Immigrants aren’t rushing to Moscow in search of opportunity. The population is shrinking.”

    In fact, Russia’s population has been growing since 2010, and the country has one of the higher birth rates in Europe. Russia is the world’s third-largest immigrant destination in the world, behind only the United States and Germany. And Russian products include the rockets that ferry U.S. astronauts into space.

    link to foreignaffairs.com

    • FIrstly, how much has the proportion of natural gas changed over that time?

      Secondly, there are plenty of third-world states that are manufacturing powers, and fourth-world states that are agricultural powers. The type of manufacturing makes the difference between an India and a Germany.

      And as to “services”, we must recall that much of the bubble economy of the USA has been in financial “services” and “real estate” – including our fraudulent billionaire ruler. What services are being performed that are outpacing fossil fuels?

      Since when has it been enough for a dictator to claim he’s making the trains run on time? We know how hollow a state capitalist economy under a dictator can be.

  3. Professor Cole you do your credibility no favours by publishing unredacted hatchet jobs from dubious sources like Anders Aslund.

    Even back in 2002, Aslund had lost all credibility in Russia, cavorting with carpetbaggers:

    The World Bank recently appointed Anders Aslund to inspect the books and determine how well World Bank funds were used in Russia in the past decade. Aslund spent the decade asserting his own superiority and did financially well out of his relationship with Gaidar and Chubais, his close friends. The World Bank has sent a moral rat to check if anything went wrong when the moral worms stopped moving. The new World Bank representative in Moscow, Julian Schweitzer, says, “We don’t necessarily take his advice.”)

    Aslund aided and abbetted CIA agents to steal Russian state funds and who were later tried and convicted in the USA for their misdeeds:

    Helping hands with Hay that year were Gaidar and Anders Aslund, the current chairman of CASE’s Advisory Council. On April 25, 2013, President Putin publicly identified Hay as a CIA agent. Referring to Hay’s work on Russian asset privatization for Chubais, and the subsequent US prosecution, Putin said: “we learned today that officers of the United States’ CIA operated as consultants to Anatoly Chubais. But it is even funnier that upon returning to the US, they were prosecuted for violating their country’s laws and illegally enriching themselves in the course of privatisation in the Russian Federation. They did not have the right to do this as active CIA officers. In accordance with US law, they were not allowed to engage in any kind of commercial activity, but they couldn’t resist – it’s corruption, you see.”

    Recently Aslund has worked as a hired scribe on the payroll of Ukrainian oligarch Viktor Pinchuk.

    Aslund has been writing stupid things about Putin for decades now (see deeper analysis). It’s a shame to see Informed Comment reprinting straight Empire propaganda. You may as well invite Avigdor Lieberman to write even handedly on the Palestinian – oh sorry – Arab – question.

    • As Informed Comment evolves into a magazine it inevitably syndicates a wide range of views. Publication of them is not an endorsement of the author but an invitation to think critically about the points made. That Russia has become an oligarchy of some sort is not controversial.

  4. The rhetoric we here from US capitalists is often about getting the state off their backs and shrinking the public sector. But capitalists like Trump and Putin love the state. If they control it, its a source of limitless wealth and power. They can use the state to legally take someone’s private property and give it to their friends. Our huge military industrial complex feeds at the public trough. Trump loves eminent domain and asset forfeiture, because they are legal ways to steal private property. The institution of private property is the foundation of capitalism. So, because people don’t act the way idealists think they ought, capitalism eats itself. Socialism also fails because people will not ever get with the program.

  5. Whatever Russia is, sclerotic or not, what really counts is the judgement of the Russian people, by all accounts, their standard of living improved under Putin compared to Yeltsin, our alcoholic man.

    Maybe we don’t like it, but the Russian people like it.
    @https://en.wikipedia.org/wiki/Public_image_of_Vladimir_Putin
    Jump to Ratings and polls – Observers see Putin’s high approval ratings as a consequence of the significant improvements in living standards and Russia’s reassertion of itself … A joint poll by World Public Opinion in the US and Levada …
    link to en.wikipedia.org
    Jump to Ratings and polls – Observers see Putin’s high approval ratings as a consequence of the significant improvements in living standards and Russia’s reassertion of itself … A joint poll by World Public Opinion in the US and Levada …

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