Property and power
When the Soviet Union collapsed, many people hoped that once liberated from communist ideology and enjoying a free market, Russia would be able to make good use of its immense natural and intellectual resources. Yegor Gaidar, the architect of the Russian reforms, was among the few who realised that the market alone could not solve Russia’s fundamental problem: the close nexus between political power and property. In an article published two years before he took charge of the economy, he wrote: “A market [by itself] does not answer the key question of who is supposed to benefit from the results of economic production; it can serve different social structures. Everything depends on the distribution of property and political power.” Yet although the 1991 revolution overturned the political and economic system and led to the sale of state assets, it did not sufficiently separate political power and property.
Part of the problem was the type of economy modern Russia had inherited from the Soviet days. Stalin’s crash industrialisation and urbanisation was designed to create a militarised autarky with a total disregard for cost, financial or human. Factories were built in cold and inaccessible places, using forced labour. The output of those factories was often worth less than the input in energy and materials. After Stalin’s death they were kept going by oil and gas money. The factory managers, known as “red directors”, travelled to Moscow to haggle with the relevant ministries for resources. They employed millions of people and had enormous lobbying power. When the Soviet Union collapsed, the only way to keep them quiet was to sell them their factories, which meant that much of industry remained in the hands of the old elite. Mr Gaidar reckoned that this was a price worth paying to prevent civil conflict.
Yet many of these companies could survive only if their energy and transport costs were subsidised. For example, Yukos, once Russia’s largest oil firm, was forced to sell 70% of its oil in the domestic market, yet since its buyers could not afford to pay an open-market price, they accumulated huge debts that in the end had to be written off, says Mikhail Khodorkovsky, the company’s former owner.
But whereas Gaidar’s government in 1992 had to act urgently to stop the country from falling apart, Mr Putin had no such excuse. When he first took over, oil prices were rising and there was broad political support for reforms. However, according to Clifford Gaddy and Barry Ickes, two American economists, Mr Putin did not merely fail to dismantle the Soviet structure; he used Russia’s windfalls to reinforce it in order to preserve social stability and votes.
It was always unrealistic to think that after the fall of the Soviet Union Russia would be able to build institutions overnight. Russia had been subjected to totalitarian rule for so long that it had no memory of life before it. Douglass North, a Nobel prizewinning economist, and co-authors have written that in Russia, as in many other countries, access to valuable rights, economic activities and resources is determined by privilege enforced by the political and military elites. This system, which he calls a “limited-access order”, relies on the ability of the elites to control rents, be it from land, raw materials or jobs for cronies. Its main objective is to preserve stability and prevent uncontrolled violence by giving those elites access to streams of rent. But that state monopoly on rent and violence collapsed with the Soviet Union.
Oligarchs and beyond
In the mid-1990s control over natural-resource firms passed to the oligarchs, a powerful group of business tycoons who emerged from the rubble of the Soviet Union. Their power rested not so much on violence but on entrepreneurship, which allowed them to accumulate capital. But they also cultivated personal connections with the liberals in the government to gain privileged access to the most valuable assets.
In 1995 they struck an audacious deal, offering to lend money to the cash-strapped government and put their resources, including the media they controlled, behind an ailing Yeltsin. In return, they asked to manage the government’s shares in natural-resource firms. When Yeltsin was re-elected in 1996, they were allowed to auction off those shares to themselves. This “loans for shares” privatisation undermined the legitimacy of Russian capitalism and compromised the idea of property rights.
To protect their assets, the oligarchs had to ensure the continuity of the regime. In 1999, as Yeltsin prepared to step down, Boris Berezovsky, the ultimate oligarch, who had worked himself into the president’s family, proposed Mr Putin as Yeltsin’s successor. According to Berezovsky, Mr Putin had originally wanted to be chairman of Gazprom, Russia’s natural-gas behemoth, but instead he was offered the job of running Russia Inc.
Mr Putin was shaped mainly by two experiences. One was his service in the KGB, which made him a statist. The other was his time in St Petersburg, where he served as deputy mayor in the early 1990s, dabbling in business. That turned him into a capitalist, but of a particular kind. Capitalism to him meant not free competition but connections, special access and, above all, deals. As Fiona Hill and Clifford Gaddy wrote in their book, “Mr Putin: Operative in the Kremlin”, “Capitalism, in Putin’s understanding, is not production, management and marketing. It is wheeling and dealing. It is not about workers and customers. It is about personal connections with regulators. It is finding and using loopholes in the law, or creating loopholes.” Mr Putin did not destroy the oligarchy but merely changed the oligarchs, creating much closer links between property and political power. He wanted to control the market, transferring its benefits to the people he trusted—friends from St Petersburg and former KGB colleagues.
But whereas the oligarchs in the 1990s were ruthless self-made businessmen driven by profit, the men Mr Putin brought to power were specialists in suppression, violence and control, driven by revenge. The siloviki, people with roots in the KGB and other powerful ministries, had no special business skills, but quickly took over the commanding heights of the economy, capitalising on popular discontent with the oligarchs and using their licence to exert violence to amass property. In 2003 they jailed Mr Khodorkovsky, the most independent and politically ambitious of the oligarchs. A year later Yukos, his oil company, was dismembered and its assets taken over by Rosneft, a state oil firm chaired by Igor Sechin, one of Mr Putin’s most trusted lieutenants and an informal leader of the siloviki.
During the years when the oil-price boom fuelled domestic consumption, the new elite not only came to control the distribution of rent, it also limited access to the market in order to reduce competition, developing a system which Kirill Rogov, a Russian political economist, describes as “soft legal constraints”. It involves writing the rules in such a way that to observe them is either prohibitively expensive or downright impossible, then handing out informal licences to break those rules.
