November 02, 2003

Vladimir Putin

The Economist now believes that it is more likely than not that Vladimir Putin's reign will end in disaster:

Economist.com | Russia: Mr Putin, it has become plain, is not the sort of politician who brooks either critics or rivals. He has shut down or stifled most of Russia's independent media. As the recent elections in Chechnya and St Petersburg illustrated so graphically, he has intimidated or bought his way towards ensuring that his preferred candidates emerge as winners of any vote. Few doubt that, by hook or by crook, he will retain majority support in the Duma after December's elections: it was, indeed, the approach of those elections that gave him reason to attack Mr Khodorkovsky now. Nor does anybody expect him to tolerate any serious challenge to his re-election as president next March. In other words, the arrest of Mr Khodorkovsky must be seen as only part of a broader pattern confirming that Mr Putin is no democrat.

This, of course, may not upset the foreigners who have been pouring money into the country over the past couple of years. Stability and economic growth are what they, and arguably most Russian voters, want--and they are what Mr Putin has managed, largely thanks to high oil prices, to deliver. As the markets settled their initial nerves after this week's dramas, investors seemed to be signalling again that they would put stability above all else. Big foreign companies that have bought into Russia, such as the British oil firm BP, were quick to declare that they still had faith in the Russian government.

The trouble with this thinking is that the tacit trade-off of stability and growth against freedom and human rights may no longer work. This is because an increasingly dictatorial Mr Putin may not deliver his side of the bargain. His harassment of Mr Khodorkovsky and other oligarchs has already seen a sharp resumption of capital flight out of Russia. The run-up to the Duma and presidential elections could see more investors running from what already bore all the hallmarks of being an overbought market (see article).

The arrest of Mr Khodorkovsky is thus bad news for Russia's future. But would it have been right to leave him and the other oligarchs who benefited obscenely from the flawed privatisations of the 1990s untouched? The best approach is not to reopen those dodgy privatisations, still less to fling more of the oligarchs in jail. Such measures now would serve only to create uncertainty and instability, the last things Russia needs. It would be better to be crystal clear, as Mr Putin and his advisers have not always been, that the privatisations of the past will not be unwound, and instead to offer the oligarchs some kind of amnesty in exchange for a financial settlement. Then the oligarchs' business empires, and indeed the entire Russian economy, should be opened up to more competition and deregulation. The same remedy should be applied to the country's biggest state-owned firm, the gas company Gazprom.

Mr Putin may have one more chance, after he wins next March's presidential election, to take such a path of reform. He could take on the Gazprom empire by privatising it. He could cut through Russia's stifling array of regulations and corrupt bureaucrats. And he could press ahead with the country's negotiations to enter the World Trade Organisation, even though that will mean prising open sensitive and hitherto protected industries.

Sadly, all the signs are that, once back in office, he will do none of these things. Autocrats always like to talk up their ability to deliver growth and stability. Now and then it is even true. But in Russia they have invariably produced stagnation and, ultimately, instability. This week's arrest of Mr Khodorkovsky brings closer to fruition the bleak prediction that these are what Mr Putin, too, will leave behind.

Posted by DeLong at November 2, 2003 10:16 AM | TrackBack

Comments

The Economist has it exactly right. Khodorkovsky is, let's face it, a pretty shady character, but Putin makes him look like a boy scout. The man is a power-hungry gangster, and I don't know what Bush must have been thinking when he claimed to have looked "into [Putin's] soul" and found a man worth doing business with.

We will always have to deal with the Russians as long as they have thousands of nuclear warheads and a UN Security Council seat, but we fool ourselves if we imagine that Putin's regime deserves to be treated as if it were some sort western-style democracy. The main difference between today's Russia and China is that the former pays lip service to freedom and human rights, but that is about it.

Posted by: Abiola Lapite on November 2, 2003 10:57 AM

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Isn't this Putin the guy who Bush "looked ... in the eye" and "got a sense of his soul"? If so, no worries. Who wants pie?

Posted by: alkali on November 2, 2003 10:57 AM

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Isn't this Putin the guy who Bush "looked ... in the eye" and "got a sense of his soul"? If so, no worries. Who wants pie?

Posted by: alkali on November 2, 2003 11:00 AM

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How the reign of Putin will end will depend on one thing: oil prices. The rest is more or less irrelevant.

As to all the privatization discussion, the first thing that needs to be privatized is not Gazprom; it's land. The government is still the near-monopoly owner of land and real estate...

Posted by: Nikolai Chuvakhin on November 2, 2003 11:12 AM

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"How the reign of Putin will end will depend on one thing: oil prices. The rest is more or less irrelevant."

That statement couldn't be further from the truth. If Putin's capricious sense of justice encourages large-scale capital flight, as it already seems to be doing, even oil-shock-era oil prices won't do a damn thing for the average Russian. Ask the Venezualans or the Nigerians sometime about how high oil prices can coexist with an ever worsening standard of living.

Posted by: Abiola Lapite on November 2, 2003 11:42 AM

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And just think of the wonders that instantaneous free market reforms will do for the Iraqis!

Posted by: john c. halasz on November 2, 2003 02:14 PM

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Vladimir Putin has never been a democrat, and is doing all that is possible to concentrate power in the Kremlin. However, only the Economist may typically be surprised by this and there is little reason to believe an economic collapse or accelerated capital flight is near. The vast resource wealth of Russia covers a lot of economic ill fortune for ordinary Russians. As usual though the Economist has nothing much to offer about the lives and attitudes of ordinary Russians.

Posted by: lise on November 2, 2003 02:47 PM

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"... oligarchs who benefited obscenely from the flawed privatisations of the 1990s ..."

"... Russia's stifling array of regulations and corrupt bureaucrats ..."

"He could take on the Gazprom empire by privatising it."

Hmm the solution to bad privitisation? More privitisation! (oh and apparently corruption is still a problem, so the privitisations will prolly be just as flawed the 1990's ones were).

Posted by: Factory on November 2, 2003 04:40 PM

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"there is little reason to believe an economic collapse or accelerated capital flight is near."

The evidence is to the contrary. The news I've read indicates that more capital has left Russia in the third quarter of this year, i.e, after the arrest of Platon Lebedev in June, than did throughout all of 2002, and then there is the fact that the Russian stock market is 15 percent off the high it attained just before Khodorkovsky's arrest.

Only a fool or an extremely brave soul would wish to invest in Russia under the present circumstances, and if "the vast resource wealth of Russia covers a lot of economic ill fortune for ordinary Russians" as you claim, why haven't Russians ever really had it too good since the fall of the Tsar in 1917? After all, the same wealth of resources and more were there throughout the period from 1917 to 2000.

The ugly truth about Russia is that its' rulers have hardly ever given much thought to the well-being of their subjects, and the vast mineral wealth of the country has always gone mostly to fund either aggressive expansionism, insurgency movements in third world countries, or a massive arms buildup that has saddled the Russian state with the sorts of rickety disasters exemplified by the sinking of the Kursk submarine. See

http://econc10.bu.edu/economic_systems/economics/economic%20history/FSU/delong.htm

for more of the gory details, if you're interested. Hint: it's written by a certain Berkeley economist whose work you say you admire, and as such can't be dismissed as right-wing propaganda.

Posted by: Abiola Lapite on November 2, 2003 05:04 PM

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Here's a link that substantiates my claims about capital flight since Lebedev's arrest:
http://www.rusnet.nl/news/2003/09/19/print/businesseconomics_02_4032.shtml

Posted by: Abiola Lapite on November 2, 2003 05:07 PM

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And, for good measure, here's another that mentions capital flight, albeit in passing:

http://www.businessweek.com/bwdaily/dnflash/oct2003/nf20031028_8820_db039.htm

Posted by: Abiola Lapite on November 2, 2003 05:10 PM

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The man is a power-hungry gangster, and I don't know what Bush must have been thinking when he claimed to have looked "into [Putin's] soul" and found a man worth doing business with.

What may Bush have been thinking? This statement says at least as much about Bush as it does about Putin.

Assume for a moment that Bush really did look "into [Putin's] soul". It's hard not to immediately move Bush into the power-hungry gangster category.

Assume then that Bush was just clueless about Putin's real character. Well, then, he's even more clueless than we thought. He must not have bothered to read even two paragraphs on the man. Rather, he didn't even have one of his aides read it to him. He must have even missed the summary. No, actually it's the CIA's fault, right?

"In China there is no truth," commented one of my friends from Hong Kong last night, "There is the truth people believe, and there is the truth they are told, but neither of these represent the truth." The Bush administration has certainly become proficient at manipulating media. Let me ask which is worse: an overtly controlled media providing disinformation, or an indirectly manipulated media with enough truth to make differentiation a difficult task?

Anyway, that ended up rather off-topic. Apologies. It's depressing...

Posted by: Michael Johnston on November 2, 2003 05:11 PM

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Oh come on, Brad.
_The Economist_ has been taken over by lunatics who have only one agenda: the protection of the wealthy, not matter how they obtained their wealth. They are happy apologists for wealth acquired through outrageous means in the US, and don't appear to have any real problem with wealth acquired through theft in either the USSR or China.

But of course, like any smart publication, they don't make that obvious. Rather than, for example, simply stating that the salaries of CEOs is unjustifiable, they'll make a big song-and-dance about how shareholders should do something about this, with no acknowledgement of the many obstacles that make this a useless suggestion. "Shareholdes should deal with this" is code for "the government, consumers, labor, anyone with any useful power should NOT do anything about this"

This article about Khodorkovsky and Putin is more of the same. We get lip service paid to the fact that bad things happened, but god forbid that anyone actually try to do something to undo those bad things if it would involve hurting someone wealthy.

Dammit, Brad. Open your eyes. _The Economist_ is like the Republican party. What was once a sane reasonable instititution with ideas that made some sense has now been taken over by lunatics.

Posted by: Maynard Handley on November 2, 2003 05:26 PM

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Abiola Lapite:

I do not have much to argue with in your posts, except for the implication that the curse of Russian history began in 1917. One of the basic criticisms of revolution, (which term was originally applied as a metaphor for turning the clock back 180 degrees to recover the supposed ancient rights of the people, rather than turning the clock 180 degrees forward), is that the revolutionaries hypstatize the old order, which is supposedly to be totally overthrown, and thereby bring that old order along with them. One can argue until one is blue in the face (or an ancient Scot) over whether the Russian Revolution was "necessary", but, given the deep failure of reformist efforts in Tsarist Russia and an horrific and catastrophic world war, perhaps it was inevitable.

More generally, what we are still seeing in Russia and its "near abroad" are the effects of the "shock therapy" policy largely imposed by Washington and the neo-liberal "Washington consensus", in this case, the consolidation of what remains of the Russian state by the "Chekists". (For those who would argue with the word "imposed", the way such exercises of international power work is by using all the levers to cut off the alternatives, leaving a Hobson's choice.) That capital flight is still a problem is not surprising, since capital flight during the 1990's was massive following the "privatization"/looting of assets. That land monopoly still exists speaks to the point. The first condition of any genuine program of market-based reforms would have been the breaking up of monopolies in both agriculture and industry. This would have required time, effective administration, financial aid, (at least in the form of loan guarantees), and consideration of distributional outcomes. It makes one wonder whether, in the rush to impose reform, there was any actual genuine reforming intent, both politically and economically. (And part of the meaning of "genuine" here is "well-considered").

Posted by: john c. halasz on November 2, 2003 06:33 PM

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Khodorkovsky's company was about to do a huge deal with ExxonMobil.

I wonder how the US would feel if a Chinese oil company was about to take a large stake in Exxon, with the implication that the Chinese would exert some control at least over a lot of US strategic national oil assets?

(An aside: Tonight I've just seen an excellent documentary about electricity privatisation in Tiblisi - very instructive. 12 years after the fall of the USSR, Georgia is a hell hole. With a lot of power cuts it never used to have.)

Posted by: October Revolution on November 2, 2003 06:54 PM

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Mr.Khodorkovsky is accused of fraud, conspiracy and tax evasion.

He created a fradulent company that bought controlling stake in a goverment enterprise for 50% downpayment and the promise of investing another 50% later. He did not invest a penny and used his control of the enterprise to sell the products to his other enterprises below cost.

Being billionaire and 20% owner of Russia's largest oil company he claimed that he received his compensation as pay for "consulting services" to lower his taxes.

When Russia's Attorney General's office started its investigation, Mr.Khodorkovsky set up a scheme where his property would pass to foreign entities to make it unavalable for seisure by authorities.

He also attempted to buy himself a seat in Russia's parlament that would protect him against arrest.

A person found guilty in the same crimes in US would promptly go to jail for a long time. Mr.Khodorkovsky will probably walk out a free man after paying a fine of less than 1% of his wealth.

Sure, rich people are different from you and me. But they should not commit their crimes with impunity.

Posted by: leopold on November 2, 2003 07:21 PM

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except he's not unique. the complaint about Putin's prosectution isn't that Khodorkovsky doesn't deserve jail (and, knowing what it likely took to succeed, probably more). the issue is that as best we can tell, every Russian plutocrat deserves jail, and probably more.

prosecuting just one of these to the exclusion of the rest is bad enough. choosing the one who had of late made his political intentions plain is somewhat more frightening. there are in this particular opera. Putin seems at least as villainous as the rest.

Posted by: wcw on November 2, 2003 08:02 PM

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Well, if as you say they all deserve jail and you cannot prosecute all of them, seems logical to start with the ones that want to acquire political power. Do you really want to see a nuclear power run by a bunch of thieves?

Posted by: leopold on November 2, 2003 09:58 PM

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john, just because you keep saying it doesn't make it true:

"More generally, what we are still seeing in Russia and its "near abroad" are the effects of the "shock therapy" policy largely imposed by Washington and the neo-liberal "Washington consensus"..."

Shock therapy is a group of reforms that supposedly have to be made at once. A whole slew of reforms like such basics as land privatization were never instituted in Russia. In no way does state control of land fit into the Washington Consensus either. Your very selective definitions of "shock therapy" and the "Washington Consensus" are unique to yourself.

As you state on the Eastern Europe thread above:

"2) The economic decline of the Soviet Union began under Gorbachev. His "reforms" sought to improve central planning by decentralizing it somewhat, but in the process sought to rein in local factory managers. Yet it was these latter who actually kept the system running and actually knew what was really going on, through a "secondary" informal economy, which amounted to an industrial barter economy. Obviously the official statistics were garbage; to the extent that they were not simply lies, they nonetheless systematically misrepresented the actual sources of demand and cost-effective production. Figuring out where these were and how to bring them to the fore would have been fiendishly difficult in the absence of monetary measures and a legal-regulatory framework, but it would have been the first step of any genuine and realistic program of reform aimed at preserving and realizing what residual value there was in this system amidst its general bankruptcy."

You of course neglect to mention that the reformers had to worry about vested political interests made up of the "true believers" and the people who benefitted from the status quo. These people would fight the process every step of the way creating a virtual logjam to reform. These same people would then complain that the resulting catastrophy was the result of something that still doesn't exist (i.e., the Washington Consensus and Shock Therapy). Go figure.

Posted by: Stan on November 4, 2003 12:59 PM

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Didn't know that Dr. M. went to Russia and became M(D)r. P.

Posted by: Justin on November 4, 2003 01:42 PM

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Stan,

There are always vested interests in politics, so citing them as an obstacle to reform is slightly beside the point. The point is rather to transform those vested interests and what they are vested in. At any rate, one starts from what is at hand and that there were Communists in Russia is no surprise to anyone. But the notion that they were still ascendent, ideologically "coherent" and well-organized, and capable of restoring their system is dubious. But the issue I am raising, far too late to be of any more significance than the heuristic, is whether a more gradualist approach rather than an all at once reform would not have been both better and more realistic than an all-at-once "reform". And, though I'm obviously no expert, a more gradual approach probably would have involved some measure of protectionism and some sort of capital controls near to mid-term. (The figures on capital flight are pretty stunning.) Let's stipulate that neo-liberal economic theory is above reproach. Then, 1) it applies to a much different economic world than the one in question, one the conditions and workings of which we were largely ignorant, if perhaps irretrievably so. And 2) the political practicalities of reform can not be considered merely secondary to the economic requirements and necessities. Consideration of both the welfare and sense of legitimacy of the people actually effected, however naturally different their mindset may be from our own, is central to any project of reform, properly so-called. Simply sorting out and establishing a notion of property that would be legally and politically legitimate, the sine qua non of a market-based economy, would have been an immense and painstaking task. (That the breaking up of internal monopolies was the first task, before monetary prices and financial operations could have a salutary, galvanizing effect, is a point that was made by many others at the time, though apparently unheeded.) (Had anyone asked me at the time, I would have proposed a grand 19th century-style European diplomatic conference to consider the process of post-communist reform.)

At any rate, from here on out, the question, still unsettled, is if anything like bankruptcy re-organization is at all possible for whole nations and economies. Whether the benefits of market-based economies can be spread and realized by many in the world may, in part, hinge on such a question. And political conditions and organization are not secondary to the spread of market-based reforms, nor merely an obstacle to them. That people can actually control their own destiny may be the most dubious of propositions. But perhaps the slightest chance that it is even slightly possible is what keeps us going.

Posted by: john c. halasz on November 5, 2003 07:56 AM

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Its funny. I just now caught john c. halasz's claim that the Soviet economic decline began under Gorbachev. I guess the ugly question "why would Gorbachev need to reform if nothing was wrong?" just gets swept under the rug.

Posted by: Stan on November 5, 2003 09:59 AM

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john, there are very good political reasons to question the possibility of incremental reform and they are not beside the point. They are the point. The Command economy was part of the Stalinist political system. Control over jobs and resources gave Stalinist political leaders considerable leverage. I believe you greatly underestimate the resistance being faced to any reform away from the Stalinist system and the potential for violence in support of that system.

I believe Yeltsin's last election (where the oligarchs ran to his rescue) shows very clearly that the defenders of the status quo were very well-organized. The reformers say they were principally trying to get control of assets out status quo hands to remove Stalinist control over people's lives and prevent a political reversion. I believe there is plenty of evidence to support their claims. There was very real concern that electoral victory by these status quo forces would become another permanent mandate.

Posted by: Stan on November 5, 2003 01:52 PM

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Damn you Movable Type! I typed a response to this yesterday!

john, I cannot believe you have committed the following to type:

"At any rate, one starts from what is at hand and that there were Communists in Russia is no surprise to anyone. But the notion that they were still ascendent, ideologically "coherent" and well-organized, and capable of restoring their system is dubious."

The Soviet command economy underpinned the very real Stalinist political system. The reformers said that they were very afraid about the potential of a return to the "good old days" of a Stalinist state. Their claim is anything but dubious due to the history of that system in Russia and the very strong and very well-organized attempt by the defenders of that system to return to the good old days. The threat was very real up through Yeltsin's last election.

Control over economic assets under the command economy gave Stalinist defenders leverage. To leave large amounts of economic assets under the control of status quo defenders brooked a very good chance of any reform meeting pure failure due to reversion. In other words, the vested interests were not beside the point. They were the point. Incremental reform was a surefire way to have no meaningful reform due to the political structure.

Since the command economy was itself slowly collapsing, remaining under it would have only burdened Russian citizens with increasing deprivation until a change was finally made. You have to have pie in the sky beliefs about what was happening in Russia to think the defenders of the Stalinist state weren't well organized and capable of restoring their system. Not everybody thought that change was good. They weren't necessarily supportive of putting the question to a vote. A vote in their favor could well have been expected to be taken as a permanent mandate...

Posted by: Stan on November 6, 2003 09:00 AM

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Well, what can I say, i personally think that arrest of Khodorovski was for the good of Russia, he was not just trying to escape taxation, he was also allegedly supporting the communist party... does anyone of your foreigners ever want to see hardline communists, like Zuganov, in charge of Russian Federation? i didn't think so...
what Mr.Putin did was justified in every way, by arresting Khodorovski he did he right thing, and i really doubt that he will be able to be set free for a 1% of his wealth, once Putin puts u in jail, u stay in jail...

Posted by: Yuriy on December 17, 2003 08:18 AM

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Well, what can I say, i personally think that arrest of Khodorovski was for the good of Russia, he was not just trying to escape taxation, he was also allegedly supporting the communist party... does anyone of your foreigners ever want to see hardline communists, like Zuganov, in charge of Russian Federation? i didn't think so...
what Mr.Putin did was justified in every way, by arresting Khodorovski he did he right thing, and i really doubt that he will be able to be set free for a 1% of his wealth, once Putin puts u in jail, u stay in jail...

Posted by: Yuriy on December 17, 2003 08:21 AM

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Well, what can I say, i personally think that arrest of Khodorovski was for the good of Russia, he was not just trying to escape taxation, he was also allegedly supporting the communist party... does anyone of your foreigners ever want to see hardline communists, like Zuganov, in charge of Russian Federation? i didn't think so...
what Mr.Putin did was justified in every way, by arresting Khodorovski he did the right thing, and i really doubt that he will be able to be set free for a 1% of his wealth, once Putin puts u in jail, u stay in jail...

Posted by: Yuriy on December 17, 2003 08:21 AM

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