Tuesday, February 07, 2006

Feb 06/06 - The Venezuelization of Russia: an true insider's perspective

PMBComments: this is a very blunt and troubling article by Andrei Illarionov, who until December was Putin’s very outspoken economic advisor (and until a few months before, also point man for G-8 matters).

Those of us who do business in Russia had grown accustomed to his pointed criticism – from the Kremlin - which had the effect of fresh breeze in the summer and warm air in the bitter winter. But I have to admit that this article goes way beyond anything he had expressed before, and presents a vision of Russia that is both disheartening and very real. What he calls the Venezuelization of Russia’s economy is nothing but the predictable consequence of a sustained oil boom that allows governments to both defy gravity, and to believe they are doing a great job…when in truth, good things happen in spite of their arrogance, and incompetence.

The mayor question that one must ask when reading such a dire report is: Will Russia be able to move forward and occupy a place among the prosperous democracies of the world, or will it soon join the ranks of those willing to kick the board of a game they have not been able to excel at? PMB

International Herald Tribune

February 4, 2006

Op-Ed Contributor

Russia Inc.



RUSSIA today is not the same country it was only six years ago, when Vladimir Putin became president. Back then, the country was unsettled, tumultuous and impoverished, but it was free. Today Russia is richer — and not free.

A new model of Russia has taken shape. The state has become, essentially, a corporate enterprise that the nominal owners, Russian citizens, no longer control. Indeed, changes in legislation and limitations on political freedoms have effectively devalued the shares in this company — call it Russian State — that ordinary Russians hold, while an elite class of investors enjoys ever increasing privileges.

State-owned companies have become the assault weapons of this corporate state. Having mastered the main principle of state-corporatism — "privatize profit, nationalize loss" — they have turned to taking over private-sector companies, sometimes at cut-rate prices. Their victims include major industrial companies like Yuganskneftegaz, Sibneft, Silovye Mashiny, Kamov, OMZ, and Avtovaz.

Companies that are still in private hands resemble ever more closely their state-owned siblings. Any request from the state — whether it's a donation to a project or the sale of the company itself to "correct" buyers — is fulfilled. The fate of Mikhail Khodorkovsky, the chief executive of the Yukos oil company who is now in a penal colony after falling out with the Kremlin, is known to all.

Meanwhile, a guiding principal of Russia's new economic model is selectivity. One company is confronted with the maximum possible (and sometimes impossible) tax bill; another gets unique exemptions. One company is forbidden to sell shares to foreigners; another gets overwhelming state support for such a move (along with financing beyond any limits set by law). One company is not allowed to hire foreign workers; another is encouraged to do so. One set of buyers pays one price; another, five times as much.

It is not only economic freedom that has disappeared in Russia. Political freedom is also gone. The human rights monitor Freedom House last year moved Russia from the group of "partly free" countries to the "not free" group, which includes Cambodia, Rwanda and Sudan.

Politically, the corporate ideology may seem unclear: it does not look communist, or liberal, or nationalistic, or imperial. Instead, it is an ideology of "nash-ism," or in English, "ours-ism," in which subsidies, credits and powers are handed out to those who are "nashy."

This ours-ism does not know national or ethnic boundaries. The former chancellor of a foreign country is made a member of the corporation and becomes "our man in Europe." Meanwhile, a Russian businessman who created a company that brought billions into the national treasury turns out to be an "other" and is exiled to the depths of Siberia.

The entire might of the Russian State is thrown behind "our" members of the corporation, whether this means refusing to allow Kazakhoil to travel to Lithuania via a Russian pipeline, switching off electricity to Moldova or waging a "gas war" against Ukraine. Russian imperialism has taken a distinctly corporate image.

The point of the new model is to redistribute resources to "our own." The rule of law is only for civilized countries. Fair business practices are only for countries that want to catch up with the developed world. Good relations with foreign neighbors are necessary only if Russia is interested in long-term development. The corporation has other goals.

Is it only in Russia that this model exists? No, there are other countries like this: Libya and Venezuela, Angola and Chad, Iran and Saudi Arabia. Russia is one of them now. And yes, this politico-economic model can last for quite some time. In some OPEC countries it has survived for a third of a century; in Venezuela, for half a century. It can survive even without high prices for energy. Cuba and North Korea have even more impressive models, and they don't even have oil. And then, of course, there was the Soviet version of this model.

So from a historical point of view, there's nothing particularly novel about the new Russian model. But choosing it today, at the outset of the 21st century, is nothing other than deliberately choosing the third-world model. More precisely, the model of a very specific group of countries in the third world whose long-term prospects are well known no matter how much money they get from oil, no matter how many pipelines they control at home and abroad, and no matter what saccharine stories they tell on TV.

It is a historical dead end. No country that has set off on this road has become richer or stronger or more developed. Nor will Russia. It will fall farther behind. And the price will be paid, as usual, by Russian citizens.

In a democracy, political change is linked to a change of rulers, which occurs regularly and at minimal social cost. In countries with limited freedom, a change of rulers also occurs — as with the "velvet revolution" in Czechoslovakia and the "orange revolution" in Ukraine — but the social costs are much higher.

Measures that the corporation has taken to prevent a similar revolution make change highly unlikely in Russia in the short term. But power will shift — sooner or later. When it does happen, it may not be as velvet. In this case, the cost to the country will be incomparably higher.

It is difficult to say when or how this change of power will occur. For those who cannot accept a corporate state, or the Venezuelization of the economy, or the degradation of social life, the current situation seems nauseating: before there can be a deed, there must be a word, and the most important mass media are under the corporation's control.

But one can start one's own separation from such a state through a campaign of non-participation. In this way, working from below, one can begin to restore civil, political and economic freedoms, freedoms that were offered to Russian citizens in 1905, 1917 and again in 1991, but squandered. If we succeed, we may get a new Russia — free, open and tolerant. A dynamic, developed and steady country, standing on its own feet, genuinely respected by its neighbors. A country with a future. Another country.

Andrei Illarionov was an economic adviser to President Vladimir Putin of Russia until resigning in protest in December. The article, a version of which originally appeared in the Russian newspaper Kommersant, was translated by The International Herald Tribune from the Russian.