November 04, 2003

Czar Vladimir's Khodorkovshchina

The Financial Times's Martin Wolf tries to make sense of Russia:

FT.com Home US: A clash between arbitrary power and illegitimate wealth. That is the conflict between Vladimir Putin, Russia's president, and Mikhail Khodorkovsky, estwhile chairman of Yukos. Power will surely win. The question is how it will use that victory. Will it support a market economy or lead to a new cycle of predation? Either way, Russia's progress towards what contemporary westerners regard as normality is to be measured in decades, not years.

Secure private property is the foundation of both a market economy and democracy. Parliamentary control emerged in England because the Crown had to obtain the consent of the propertied to taxation. In time, the suffrage widened with the circle of those whose consent was necessary. In the Russia of Peter the Great, however, the state owned everything. When private property was granted, under Catherine the Great, it took the form of absolute ownership of the country's principal resource: its people. Inevitably, as Harvard's Richard Pipes notes, property "was widely viewed as an enemy of both freedom and social justice". The serfs were at last emancipated in 1861, only to be re-enslaved, after 1917, by perhaps the most despotic state in history.

That this history made a swift transition to a law-governed, property-owning democracy nigh on inconceivable is evident. Yet how far Russia has gone backwards to its future is astonishing. An arbitrary, but ineffective, state faces vast, but illegitimate, wealth.... A less foolish comparison is with the successful reformers of central and eastern Europe.... Russia failed to carry through such [comprehensive] reforms, as it struggled with the simultaneous collapse of its ideology, its empire and its regime. Partial reforms allowed a group of shrewd people to amass huge fortunes. Privatisation permitted both them and existing managers to seize industrial assets. Finally, the notorious "loans for shares" scheme of 1995 transferred much of the country's natural resources to private hands....

[S]izeable improvements have been made. Gross domestic product this year is forecast to be some 36 per cent above its trough in 1998.... Yet these improvements, albeit real, must not be exaggerated. The data... suggest GDP is still below 1990 levels.... The Economist Intelligence Unit estimates capital flight at $191bn from 1994 to this year inclusive, and $23bn this year alone. The cumulative flight is not much short of twice annual exports and two-thirds of GDP.

The question is whether Mr Putin's authoritarian state will improve the economy further. This is possible, but doubtful. The Khodorkovsky affair can only underline the insecurity of property and the discretion available to the state. Those who support Mr Putin understandably resent the wealth of the new tycoons. That is a recipe for ongoing capital flight and corruption. Finally, the basis of wealth in Russia remains natural resource rents. As long as this is the case, the pursuit of wealth will be seen as a zero-sum game, with victory to the powerful.

Posted by DeLong at November 4, 2003 05:14 PM | TrackBack

Comments

While Khovanshchina is one of my very favorite operas (and I applaud Brad for the mention).....

Shouldn't this really be labelled Khodorkovshchina?

Posted by: MCroche on November 4, 2003 05:39 PM

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Touche. Oh, if only I'd thought of that....

I'm going to change the title...

:-)

Posted by: Brad DeLong on November 4, 2003 05:57 PM

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Ah yes, the problem of vast illegitimate wealth was caused by partial reforms. It always is, isn't it? I mean, if something didn't work the problem is always that you should have done more of it, right?

Posted by: Ian Welsh on November 4, 2003 09:35 PM

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So if even the FT characterizes the outcomes of the Yeltsin/Chernomyrdin privatization wave as corrupt, does the current effort to undo some of it really "undermine" property rights and the market economy in Russia?

Maybe. But the U.S. economy managed to survive the great antitrust actions of the last century, for instance, not to mention the instant closure of several industries that came with Prohibition.

I'm not pleased with Putin's antidemocratic and anti-press tendencies, but I'm not sure the Khodorkovsky arrest and the forced divestiture of some of the oligarchs' questionably-gotten assets is such a bad thing. If it sets a precedent for Russia's local and regional governments to think twice before holding more rigged sales of public assets or doing state business via cronyism, maybe it'll be good for the economy. The Russian economy needs transparency above all else, and if this puts a little fear of getting caught in business owners' hearts, it might just get it.

Everyone knew privatization was a scandal when it was happening, but the World Bank et al didn't do a thing about it. Everyone knew "loans for shares" was more of the same, but again, nothing was done that might disturb the New Russia's delicate stability. Now the Putin government has a firm enough grip on the executive and the Duma that it can do something about the, well, rampant corruption of the Yeltsin era, and -- surprise -- we're being told by the Economist and the FT among others that such a move will jeopardize the foundations of Russia's economy.

I'm not sold on this. Any foreign firm that invested in something that might get re-nationalized or seized in a sweep of the Oligarchs knew it was buying tainted goods. You don't buy hotels, mining rights and shoe factories at a fraction of their value, pay for rigged lowball appraisals, and hire employees whose job is to deliver cash bribes, without a sense of what you're doing.

Posted by: s.m. koppelman on November 4, 2003 11:29 PM

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with the tone you expect from an indie-press screed, http://www.nypress.com/16/45/news&columns/cage.cfm is nevertheless my favorite comment on Russia right now.

"In Russia, the methods are a little different: an untimely car accident, an exploding briefcase, a mysterious fatal illness contracted after a routine phone conversation. Absolutely the most civilized of these options is imprisonment and seizure of assets."

a fun read, and a worthwhile perspective. in the early '90s a friend of mine rode a motorcycle through eastern Europe and Russia, and the stories he brought back sound a lot like Taibbi's.

Posted by: wcw on November 5, 2003 12:04 AM

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I am with s.m.koppelman on this. Not sure that this is not really just an attempt to emforce the law (which one of the many, though?).

It is certainly strange that this happens to an owner/executive of a relatively open company. If Yukos is indeed better at reporting to investors, then why not pick on all the rest?

But we don't know how accurate any of the reporting is. It could be that the Russians have picked up some of the really bad American practices. If that were the case, imagine Bush gone, and a Democrat getting corporate evildoers arrested, including Bush. What would the business establishment and the Right say?

I changed my mind after Enron (some sort of "marking to market"). And I am not happy with sounding like Conspiracy Brother these days.

Posted by: Wolf on November 5, 2003 07:14 AM

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the contrast between the post on Russia and previous post on China is amazing. or I should say lack of contrast. Simply plug in China for Russia and a Chinese businessman like Yang Bin for Khodorkovsky and the rest of Martin Wolf's article reads entirely true. Even the bit about comparisons to Eastern Europe.
On Yang Bin see:
http://www.time.com/time/asia/magazine/printout/0,13675,501021014-361789,00.html
So why the outrage over Putin's arrests and the silence by men like Sasser in Yang's arrest, or the arrest of poets, posters to Internet chat rooms and lawyers who defend Chinese state-employees who are evicted when their state property is confiscated and "sold" to party-cum-investors?
http://news.bbc.co.uk/1/hi/world/asia-pacific/3220643.stm
The obvious reason is because foreign investors like clients of Sasser and Sandy Berger and Cohen and Kantor and Kissinger and Haig and Carla Hills and McLarty and Carlucci and William Perry and...
http://www.washingtonpost.com/wp-dyn/articles/A55124-2003Nov2.html
have gotten their hands in the cookie jar. And confronting 'the power' in China would be viewed as challenging authority by the communist one-party dictatorship there just as Putin viewed Khordorkovski's challenge. And the outcome would surely be the same - for the Chinese in a similar position that is since the investors have their passports and their connections and people like Sasser.
look at the work of Huang Yasheng at Harvard on the limits to access of capital for domestic interests in PRC and the over-reliance on FDI as driver of prodcutive growth. it is not hard to see where the party has made a deal with the foreign investors to keep their domestic faults under-scrutinized in exchange for access to market/labor/earnings.
why Brad is the laying bare of China's empty reforms known as China bashing? is describing an 'imperfect' implementation of a flawed WTO accession agreement a departure point for China bashing?
you know of course that there are at least multi-party elections and constitutional protections of private property in Putin's Russia. For the record, I think Putin's actions are rightfully criticized. But China's free pass is an embarrassment and apologists like Sasser are an insult to Chinese in jail or in exile. I've worked with many of those exiles so I've gotten an earful on the duplicity of officials who earn their consulting fees from business in China and then spew forth the same relativism or Chinese exceptionalism as Sasser.
I read your blog regularly Brad because you spend the time getting good info and post it as a public service. I won't stop coming back for that. But the recent string of China bashing links were too much for me to take silently.

Posted by: Skippy Walker on November 5, 2003 07:50 AM

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the contrast between the post on Russia and previous post on China is amazing. or I should say lack of contrast. Simply plug in China for Russia and a Chinese businessman like Yang Bin for Khodorkovsky and the rest of Martin Wolf's article reads entirely true. Even the bit about comparisons to Eastern Europe.
On Yang Bin see:
http://www.time.com/time/asia/magazine/printout/0,13675,501021014-361789,00.html
So why the outrage over Putin's arrests and the silence by men like Sasser in Yang's arrest, or the arrest of poets, posters to Internet chat rooms and lawyers who defend Chinese state-employees who are evicted when their state property is confiscated and "sold" to party-cum-investors?
http://news.bbc.co.uk/1/hi/world/asia-pacific/3220643.stm
The obvious reason is because foreign investors like clients of Sasser and Sandy Berger and Cohen and Kantor and Kissinger and Haig and Carla Hills and McLarty and Carlucci and William Perry and...
http://www.washingtonpost.com/wp-dyn/articles/A55124-2003Nov2.html
have gotten their hands in the cookie jar. And confronting 'the power' in China would be viewed as challenging authority by the communist one-party dictatorship there just as Putin viewed Khordorkovski's challenge. And the outcome would surely be the same - for the Chinese in a similar position that is since the investors have their passports and their connections and people like Sasser.
look at the work of Huang Yasheng at Harvard on the limits to access of capital for domestic interests in PRC and the over-reliance on FDI as driver of prodcutive growth. it is not hard to see where the party has made a deal with the foreign investors to keep their domestic faults under-scrutinized in exchange for access to market/labor/earnings.
why Brad is the laying bare of China's empty reforms known as China bashing? is describing an 'imperfect' implementation of a flawed WTO accession agreement a departure point for China bashing?
you know of course that there are at least multi-party elections and constitutional protections of private property in Putin's Russia. For the record, I think Putin's actions are rightfully criticized. But China's free pass is an embarrassment and apologists like Sasser are an insult to Chinese in jail or in exile. I've worked with many of those exiles so I've gotten an earful on the duplicity of officials who earn their consulting fees from business in China and then spew forth the same relativism or Chinese exceptionalism as Sasser.
I read your blog regularly Brad because you spend the time getting good info and post it as a public service. I won't stop coming back for that. But the recent string of China bashing links were too much for me to take silently.

Posted by: Skippy Walker on November 5, 2003 07:55 AM

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I too, think this article from the NY Press has the real answers... http://www.nypress.com/16/45/news&columns/cage.cfm

Posted by: Josh Narins on November 5, 2003 10:30 AM

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My worry is that this is a case of selective prosecution, where Khodorkovsky's "crime" was funding space for voices of democratic opposition.

My big worry that this is a case of selective prosecution, where Khodorkovsky's "crime" was increasing the transparency of his own operations.

But, things are sufficiently opaque that I really don't know what the motivations are.

Posted by: Tom on November 5, 2003 06:30 PM

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My worry is that this is a case of selective prosecution, where Khodorkovsky's "crime" was funding space for voices of democratic opposition.

My big worry that this is a case of selective prosecution, where Khodorkovsky's "crime" was increasing the transparency of his own operations.

But, things are sufficiently opaque that I really don't know what the motivations are.

Posted by: Tom on November 5, 2003 06:35 PM

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I was having a go at the WSJ on this subject last Friday. I knew it was doomed but couldn't resist the tweak ...

Dear Editor:

Irony? On the WSJ Editorial pages? Nah, it had to be an accident.

The juxtaposition between the Op Ed piece on the Russian Yukos fiasco, "Business As Usual," and Letters To The Editor ranting about Senator Liberman's tax plans this morning (10/31) was priceless.

One Letter writer noted "the top 1% of earners pay 33.8% of the tax burden." Well yeah, that's because they enjoy a grotesquely disproportionate share of government benefits. Elliot Spitzer isn't running around NY protecting the Park Avenue crowd from chain snatchers. He's trying to make sure scam artists aren't wiping out their portfolios.

Our national experiment with "free markets" back around the turn-of-the-century should be a poignant reminder of why our financial system needs and prospers from government supervision. And just across the gutter, the Russian article should be a poignant reminder that a fairly substantial bureaucracy isn't such a bad thing.

Russia's slim, trim and ideologically aligned government, lacking all of America's regulatory waste and bloated machinery of checks and balances, let a couple dozen "oligarchs" become obscenely rich. The way they made that money would almost certainly have landed every one of them in jail in this county. And now that same government, with a judiciary that obviously abhors American style activism, may simply steal it back.

Against the backdrop of Russian outrageousness, rich Americans complaining about taxes sounds pretty silly. Those taxes let them get rich in the first place and help make sure they stay that way.

Sincerely,
JT

Posted by: Jason Thomas on November 6, 2003 11:38 AM

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