The Putin-era ruling bureaucracy is selling Russia to the West

The outlines of the strategic trade-off with the West became clear in 2005. Russia will surrender more and more control over sectors of particular interest to the West. In exchange, Russia’s ruling bureaucracy gets the status of a legitimate ally and the West’s silent support for everything it does.

The main feature of the Russian economy today is how it’s being forcibly brought under state control: covertly at first, in the form of “stealth nationalization,” and then openly, with revenues from state-controlled companies being used not for the public good, but for the benefit of certain individuals. The racket run by the security and law enforcement people (siloviki) is expanding, along with the bureaucracy’s abuses, and ordinary citizens are suffering more and more from both phenomena.

State-controlled companies and foreign capital, protected from the siloviki racket, will use their uncompetitive advantage over Russian-owned private companies to purge those companies from the Russian market. As Russia crawls into the World Trade Organization, a stronger ruble and a more open market will make it easier for imports to crush all domestic producers (other than raw materials exporters).

As a result, we’re not catching up with Portugal or even Poland (with its unemployment rate of over 20%), but moving in the direction of Nigeria: an economy that’s state-controlled (overtly or covertly) and based on raw materials, pervasive corruption, a dumbed-down state, with the security and law enforcement agencies doing whatever they please. The state-controlled corporations will be managed very badly indeed, due to lack of competition as well as the ruling bureaucracy’s focus on personal gain rather than the public good.

Competitive medium-sized and large companies will be bought up by international corporations, as companies in Eastern Europe have been, and their profits will go to the home countries of those corporations, rather than serving Russia.

Clannishness in small business will increase, because the bureaucrats who head most of the clans ignore all the rules of the game with impunity. Our whole society will rapidly become more clannish, and this will make it uncompetitive – repelling not only skilled workers, but any normal individuals. The rot is setting in fast: already, for example, numerous young political analysts and journalists genuinely don’t believe that they can have opinions of their own, let alone express them – rather than simply being paid to transmit the opinions of their “master.”

Strangling Russia in the name of anti-inflation

Dramatic changes are taking place in the structure of national savings: the proportion contributed by the private sector, which amounted to 20.7% of GDP in 2001, fell to 15.4% of GDP by 2003 and 14.2% of GDP in 2005.

In 2001-03, this decline was due to the increasing proportion of savings contributed by individuals: from 3.9% to 6.1% of GDP – but this figure then started falling, down to 4.9% of GDP in 2005.

From 2004 onwards, the proportion of national savings contributed by the private sector has declined due to the increasing proportion contributed by the state (in the form of money sterilization and money accumulated by state-controlled companies): this came to 7.9% of GDP in 2001, 7.2% in 2003, 11.3% in 2004, and 14.4% in 2005.

Between 2001 and 2005, national savings increased by 1% of GDP (from 32.5% to 33.5% of GDP), with the savings of private companies falling by 6.5% of GDP (from 20.7% to 14.2% of GDP), the state’s savings growing by 6.5% of GPD (from 7.9% to 14.4% of GDP), and the savings of individual citizens growing by 1% of GDP (from 3.9% to 4.9% of GDP).

The changes over the past two years are even more striking: national savings grew by 4.7% of GDP in 2003-05, from 28.8% to 33.5% of GDP. The savings of private companies decreased by 1.2% of GDP (from 15.4% to 14.2% of GDP), and the savings of individuals also decreased by 1.2% (from 6.1% to 4.9% of GDP), while the state’s savings doubled, from 7.2% to 14.4% of GDP – exceeding the savings of private companies. The scale of the allegedly anti-inflationary policy that prescribes monetary sterilization, depriving Russia of investment, is plain to see.

In the course of 2005, 815.9 billion rubles was frozen in the unused remnants of the federal budget alone, and they grew by 90% – from 933.4 billion rubles to 1.7493 trillion rubles. Counting the 523.6 billion rubles directed into early repayment of foreign debt, a total of 1.3395 trillion rubles was sterilized in the federal budget for 2005: that’s 6.3% of GDP, over a quarter of budget revenues, over half of tax revenues. And this obviously had nothing to do with fighting inflation; these days, inflation is caused not by a surplus of money, but by the harmful practices of the monopolies (which is why attempts to reduce inflation by means of tighter fiscal policy end in embarrassing failures).

This policy generates a gap between savings and investment – Russia’s loans to developed nations – and that gap exanded by 50% in 2003-05, from 8.4% to 12.6% of GDP.

That money and (most importantly) those years have been lost for development. This is a gift which the ruling bureaucracy has given to our strategic rivals, at our expense.

A bribe for the West

The craving for consumption (both material and symbolic), being the key motivation of the ruling bureaucracy, makes it incapable of defending Russia’s interests in competition with the West. By providing more convenient consumption, the West automatically becomes the master of the siloviki oligarchy’s designs, even if those oligarchs do feel like they’re in charge of an “energy superpower.”

The outlines of the strategic trade-off with the West (primarily the United States) became clear in 2005. Russia will surrender more and more control over sectors of particular interest to the West (nuclear facilities, oil and gas reserves), and participate (even if inconsistently) in containing China. In exchange, Russia’s ruling bureaucracy gets the status of a legitimate ally of the West and the West’s silent support for everything it does.

Even access for TNCs to the Russian market, growing to the point of dominance and entrenched forever by accession to the WTO, is less important for the developed nations!

For Russia, all this entails colonialist agreements and preferences for Western capital. Thus, the Caspian Pipeline Consortium continues to operate. Not only is it contrary to Russia’s interests, as a source of competition for our oil exports – not only does it bring us losses rather than profits – but it actually contravenes Russian law!

Even the Auditing Chamber has noted that cabal-type Production Sharing Agreements (PSA) are monstrously disadvantageous for Russia. Each ton of oil extracted on PSA terms brings us more and more debts, not profits – yet this self-evidently unprofitable mechanism is still likely to be used for developing the Shtokmanovsky field.

The second stage of the notorious Sakhalin 2 project is also likely to get the green light. Once the ever-increasing costs of foreign investors have been repaid, our country will end up getting only 10% (!) of the gas produced there – and not even in liquefied form, so a gas pipeline will have to be built.

Within the framwork of the “energy dialogue” with the United States and the European Union, the ruling bureaucracy will continue to make further concessions, heightening Russia’s dependence on TNCs. The right to re-export gas, which was Russia’s payment to the Europeans for their silence regarding the YUKOS affair; an increasing amount of direct participation by foreign capital in nominally Russian corporations; new large-scale projects, not related to Russia in any way other than by geographic location; allowing Ukraine, Turkmenistan, and Uzbekistan access to the European Union’s gas market – all this delineates a deliberate, consistent policy.

The ruling bureaucracy is leading our country toward a loss of control over its natural resources.

Empty talk of “national projects,” this storm in a teacup full of murky Kremlin water, diverts attention from one of the New Era’s significant deals: Gazprom’s purchase of Sibneft at an inflated price, probably with kickbacks involved. The timing of this operation was crucial: $13 billion of borrowed money lawfully taken out of Russia, just before trading in Gazprom shares is deregulated, making it possible for foreigners to own more of the company.

As the experience of the Yeltsin-era oligarchs showed, crude property-grabs cause public disgust in Russia and raise doubts in the West, so they cannot be long-lasting. In order to make their position stable, Russia’s new masters – the siloviki oligarchs – need the West’s approval.

This can only be gained by mimicking Western capital. It’s necessary to climb into its skin, so that in protecting the interests of its global monopolies, the West would also entrench the siloviki oligarchs’ control of Russia.

The mechanism is simple. Assets are not taken over from Russia; they are acquired from Europe, in the name of companies registered in the developed world. Thus, part of the Sibneft shares acquired by Gazprom went to a Gazprom subsidiary registered in the Netherlands (saving $1 billion in taxes via a scheme similar to the one that Mikhail Khodorkovsy was prosecuted for using – a relatively minor detail, only supplementing the strategic goal).

Thus, the siloviki oligarchy’s real plan seems to involve taking tens of billions of dollars abroad, laundering the money, and using it to buy up the competitive parts of Russia. The use of some fairly simple schemes, perfected during the Soviet Union’s death throes and in the Gaidar era, will make it possible to withdraw any amount of money from Russia; so Russia, deprived of its assets, will also be burdened with foreign debt.

No wonder the rise in foreign debts owed by state-controlled companies (not counting Gazprom, at least) has been so spectacular: from $570 million in 2000 and $1.75 billion in 2002 to over $20 billion in 2005!

Putin’s poisoned legacy

Once the transfer of property rights to Russia’s key assets to the jurisdiction of the developed nations has become irreversible, the West will return to “common human values,” which it uses as a weapon. The Western elites, infuriated by having to make concessions, may already be planning for their St. Petersburg partners to meet the same fate as some former “friends” like Slobodan Milosevic or Saddam Hussein.

Most likely, the siloviki oligarchs who have entrusted themselves to the Western elite will end up losing their property rights to Russia and the right to demand payment of artificially-created foreign debts. At best, and only if they’re completely submissive, Russia’s current rulers can count on being allowed to keep minor assets, enough for individuals to live in luxury but not giving them any influence at all. That will be the conclusion to the process started by Gorbachev: bartering national interests for minor personal (not only material) benefits. (It’s interesting to note that the siloviki oligarchs are acting in the same style as Boris Berezovsky, whom they hate, and who worked with Anatoly Chubais to bring them to power!)

The siloviki oligarchs are naive, but not only because they’re counting on keeping their luxurious lifestyles. Let’s not forget that although these people are fairly cunning and not stupid, their overall mindsets are rather limited. In “Tale of the Troika,” the Strugatsky brothers had a character called the Talking Bedbug, who believed that the universe was shaped like a mattress. The members of Putin’s team who have replaced Yeltsin’s Family at the feeding-trough seem to believe just as sincerely that the universe is shaped like their own wallets.

The arguments set out above imply something terrible: the next generation of Russia’s leaders will have to gather up Russia’s assets (without which modernization is impossible) as well as its lands, and enter into direct confrontation with the West: too much of what has been given away to the West will have to be reclaimed.