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.
This article was originally published on Countryrisk.com, before I sold the website to Roubini Global Economics.