July 12, 2019 / 2:29 PM / 6 days ago

Breakingviews - Review: The struggle of Russia’s crony capitalists

LONDON (Reuters Breakingviews) - How did Vladimir Putin and his allies take control of Russia’s economy? That’s the story Anders Aslund sets out to tell in “Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy”. The president is cast as a patriarchal overlord who handsomely rewards those loyal to him. His generosity has helped to create a new elite of friends, former co-workers and relatives. What’s less clear is what, if anything, might upset this cosy arrangement.

Russian President Vladimir Putin speaks during his news conference on the sidelines of the G-20 summit in Osaka, Japan June 29, 2019.

The Swedish diplomat-turned-economist and long-term observer of Russia analyses the last 15 or so years of Putin’s rule. In that period the assets, wealth and power of the oligarchs who became rich during the chaotic privatisations of the early 1990s diminished. The president’s friends and relatives, such as his former judo partners, the Rotenberg brothers, stepped in. From a distance, it’s hard to draw a clear distinction between two classes of opportunistic businessmen. But, as Aslund’s title suggests, he sees the shift as decisive in transforming a harsh but functioning free market economy into the corrupt state that exists today.

The author describes with great insight how the Rotenbergs and others have been enriched by favourable transactions with state companies such as Gazprom. Renationalisation has been another tool for transferring wealth from the old to the new elite, as when oil giant Yukos was confiscated from Mikhail Khodorkovsky, who subsequently spent a decade in prison. Economic thinking has shifted from a liberal to an isolationist approach, particularly since 2014 when the oil price collapsed and Russia annexed Crimea, triggering Western sanctions.

Economist Alexei Kudrin, who Aslund argues was sidelined in favour of more nationalist and less liberal thinkers, recently warned of a “protest explosion” if Russia’s economy doesn’t improve. The Kremlin, which described the comments as “emotional”, has reason to be dismissive. Conservative monetary and fiscal policy, combined with a sharp fall in the rouble, has allowed Russia to maintain low but stable growth. The economy isn’t what it was in the earlier years of Putin’s reign – growth almost hit 10% before the global financial crisis - but it’s not sufficiently dire to threaten the system.

Similarly, although Putin’s approval rating has fallen from a record high of almost 90% in 2015, it’s still at 64%. During the president’s annual phone-in with the public last month, discontent with the leadership was captured in some of the rogue text messages which appeared at the bottom of the screen. “Just one question. When will you leave?”, asked one participant.

The answer remains uncertain. There’s no clear succession plan, even though Putin is officially in his final stint as president. He has manoeuvred around Russia’s official two-term limit once before. Perhaps more importantly the opposition – including Alexei Navalny, whom Aslund describes as Russia’s most interesting political leader - has limited reach outside more prosperous urban areas.

As gloomy as he is about Russia’s current set-up, Aslund appears unrealistically optimistic about what the rest of the world might do. With most private Russian wealth held offshore, Aslund argues that America and Europe can do more to challenge the crony capitalists. The United States and Europe could reveal and freeze ill-gotten spoils, for example by removing the protection of attorney-client privilege from international money transfers. 

The problem is that the West has declined to take decisive action, despite a series of terrible events such as the shooting down of a Malaysian Airlines flight by a Russian-made missile, and the poisoning of a former Russian spy and his daughter with nerve agent in Britain. Illicit money flows from Russia benefit American and European lawyers, accountants, estate agents and fund managers. They are unlikely to give up their cash cow without a fight. Dependence on Russian gas is another reason for Europe to think twice before directly challenging Putin and his cronies.

There will still be plenty of tensions in Russian business, though. Oligarchs are more susceptible to attacks from within the power structure of which they are part, than from challenges to the system itself. Putin is under pressure to crack down on corruption while keeping the money flowing. 

Commercial disputes are also getting nastier. Anecdotal evidence suggests Russia’s Federal Security Service (FSB), the successor to the KGB intelligence agency where Putin once served, is increasingly getting involved in business fights. Last month, local media reported that the FSB raided the Rolf Group car dealership, whose founder and managers have been accused by the authorities of illegally moving $63 million out of the country.

Upheaval could also come as ageing tycoons die. Members of Russia’s business elite often speak of their assets as if they are on loan from the state. There are no guarantees they will be able to easily pass on their holdings to the next generation. In the meantime, squabbling within the elite is likely to persist. That will shift resources without challenging what Aslund calls a “tsarist plutocratic system”. For the new breed of oligarchs, however, these tensions are a likelier source of change in Russia than any broader economic or political upheaval.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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