EBRD speech
Robert Skidelsky
The European Bank for Reconstruction and Development | Saturday, October 28, 2006

Most people agree that the first 10 years of Russia’s so-called transition from a centrally planned to a market economy -1988 to 1998 – was uniquely disastrous.I start with 1988 because the transition started under Gorbachev, not Yeltsin. The speed and depth of the collapse of the Russian economy, coupled with the collapse of the Soviet empire,and the virtual disintegration of the Russian state, completely swamped positive developments, not least in the mind of the Russian people –namely the start of a competitive political and economic system, much disfigured though they were by criminality and corruption.
This collapse of state and economy gave President Putin his agenda: to restore state power and to punish the oligarchs for their plunder. This was not exactly the reform agenda being urged by liberal economists and politicians, but at first Putin found the right words, and to some extent he still does. In his state of nation address of 8 July 2000 he committed himself to state rehabilitation. Only a strong state, he said, could uphold civil,political,and economic freedoms. He also used the phrase ‘dictatorship of the law’ –diktatura zakoni.
I was having dinner with Margaret Thatcher soon after this speech,and she fastened like a tiger on the word ‘dictatorship’. I argued that Putin had meant only the ‘supremacy’ of the law. But that word ‘dictatorship’ troubled her, and she was right to be troubled. For Russia has been reverting to this form of unchecked power, with the law being used as a weapon of autocracy not as a check on it. Whether this is a return to some centre of gravity that suits most Russians is of course highly debatable. We know from opinion surveys that 70 per cent of Russians say they prefer a strong leader to good laws: certainly Putin’s personal approval rating has never fallen below 70 per cent. Most of them react with defensive hostility to the suggestion that Russia has taken the wrong turning. According to Deloitte and Touche, Russians are optimistic about their country’s future; interestingly they do not believe that economic growth will benefit them. It seems that they get more satisfaction from the recovery of Russia as a great power than from the rapid economic growth of the last seven years.
It is in the light of this that I read in the EBRD strategy review of Russia, dated 24 November 2006, that, while Russia has attained a reassuring measure of political and economic stability, there was a worrying ‘continuation of a trend in which the implementation of...basic elements of a democratic polity has wavered...’
This is the standard view, diplomatically expressed, as befits a public institution which plans to make 41% of its investments in Russia by 2010. But I would argue that this standard characterisation of Russia’s present prospects –good economics, bad politics - might do as a snapshot but is a poor prognostication. The bad politics will crowd out the good economics, in fact are already doing so.
Let me just explore with you for a few minutes the theme of a ‘return to the centre of gravity’.
Take first the remark attributed to Tsar Paul I: ‘In Russia an important person is only the one I am talking to and only as long as I am talking to him’.Putin would not be as tactless as to put it like this (Paul was assassinated), but he has personalised power almost as completely as any traditional tsar. By that I mean that he has suppressed or emasculated all the independent centres of power which were emerging, however chaotically, under Gorbachev and Yeltsin, in order to restore the so-called ‘vertical structure of power’ by which Russia was always ruled.
In politics he has obliterated all the independent institutions left over from the Yeltsin era. Except for the declining Communists, Russia’s political parties are creatures of the Kremlin, stage props, Potemkin villages. He has also emasculated the other great barrier to unchecked power – a free media. In economics, he has replaced Yeltsin’s corrupt oligarchic capitalism by a corrupt presidential- administration capitalism, ‘a patrimonial fusion of raw executive power and material wealth’. (Allen C. Lynch, The American Interest, 63).
The main political consequence of personalised rule has been a drastic narrowing of the bases of support needed to drive through a coherent programme. Putin is hostage to bureaucratic factions which use the super-presidency to pursue their own interests. In Russian politics there is the Prince, who can’t be criticised,and his squabbling entourage. We have a capricious, and sometimes brutal state, but not a strong state. In the light of recent murders in Moscow and London one might well ask: of what use is a super-presidency if the President cannot control his subordinates? So the political stability of which the EBRD talks is deceptive.
In economics, Putin has locked up much of the potential for economic growth by trying to force the economy into the straitjacket of the vertical power structure. The marriage of power and wealth - the Russian words vlast (power) and ownership (vladenie) have a common root - is the key to understanding the modus operandi of the Russian economy.But there is a massive contradiction between treating ownership as a weapon of power and building a broadly-based market system which can exploit Russia’s enormous comparative advantage in science and high technology. High oil prices have so far given the presidential circle the resources it needs to enrich itself and to leverage Russia’s international position as an energy superpower.This a classic example of how the ‘oil curse’ works, at the expense of self-sustaining growth.
But the elite has come to understand that Russia is approaching the political limits of the ‘petro-economy’. There is no long term future in being a natural resource appendage of the west. Hence I think the belated drive to exploit Russia’s second major resource –the scientific and technological prowess of its people. But the only way a regime of this kind can think of doing this is to recreate the military-industrial complex dismantled when the Soviet Union collapsed. This is a natural reversion to Russia’s self-image as a great military power and ‘the deep-seated geopolitical thrust in Russian thinking’, (Paul Dibb, National Interest, 83) , now directed to recovering Russia’s ‘natural sphere of influence in its ‘near abroad’, where 25 million Russians live.
Russia has already started to use its oil revenues to increase defence spending –up by 28% in real terms since 2003. Foreign firms like Boeing, Intel, and Motorola see Russian-based R & D as integral to their global development; the Russian state sees its people’s capacity for unexpected technological breakthroughs as the route back to superpower status. As one commentator has noted, the old Soviet Union was more of a status quo power than the new Russia is likely to be.
Let’s move forward from Tsar Paul 1 to Tsar Alexander II (also assassinated). Surveying his record, one contemporary wrote: ‘For some reason everything good in Russia is fated to start but not to conclude. With one hand we create...improvements, with the other, we undermine them’. Alexander was hated by the conservatives for starting reforms, and by the liberals for stopping them –a fate subsequently suffered by Gorbachev. The early Putin years did see some genuinely valuable economic reforms,and these (together with the soaring oil export prices) have helped fuel the rapid consumption growth of recent years. Good numbers can be rolled out for recent years –including the halving of those living below the official poverty line - and they will remain positive for a while longer.
But the reforming phase of the Putin administration is over, overcome by the logic of political concentration.
The clearest example of this is the failure to specify and enforce property rights. The state has been increasing its ownership and/or control over strategic sectors of the economy, reversing the privatisations of the Yeltsin era. Today state ownership of the gas industry covers 90% of gas production; in addition the state monopoly Gazprom owns all the export pipe lines. State control of the oil industry has grown from 19% in 2004 to 34% currently, and will rise to 40% and with Rosneft’s acquisition of Yukos. But despite frequent promises,Putin’s government has failed to define the boundaries between the state and non-state sectors of the economy. As Professor Hanson has pointed out, this has left private businesses in the natural resource sector facing ‘greater uncertainty than before about both the formal and informal rules of the economic game in Russia’.
The Russian leadership understands that uncertainty is bad, but can’t deliver clear rules, even clear informal rules, because it is in their own interest to have unclear rules. EBRD calls for the Russian state to improve incentives for private, including foreign, investment, ignore the fact that the incentives of the Presidential administration are not aligned with this goal. Oil and gas policies in Russia are joint by-products of geopolitical logic and the struggle for rents, not of ambition to increase the economic welfare of society. The slowdown in oil production since 2004 springs from state action. So does the massive underinvestment in infrastructure, new equipment and exploration. Gross fixed investment grew last year by only 10%. But increases of 20-25% are needed even to prevent a decline in energy output.
The Kremlin signals that foreign investment is not welcome in key sectors. New rules are being repeatedly promised aimed at clarifying in which sectors foreign investment will be welcomed and in which not. They have not appeared.
The bottom line is that private owners lack confidence in their property rights to invest long term. Many of the funds raised by IPOs are not used for investment at all, but for purchases of foreign assets. There is an interesting split between foreign and Russian business perceptions: western bank loans to, and investments in, Russian companies have grown in parallel with the flight of Russian capital to the more secure shores of western Europe and the United States.
My last glimpse into Russian realities concerns the future of the President. Putin has to play a difficult role of pretending simultaneously that he is leaving and staying. This isn’t just because a lame-duck president cannot control Russia, but because his staying is the guarantee that wealth will stay in the hands where he has put it, including his own. The solution is the handpicked successor, ratified by popular vote. But there are huge uncertainties leading up to this; and as the Yeltsin succession showed, the leaving president’s cronies are still at risk from his successor. There is always the temptation in these circumstances to change the constitution to allow Putin to stay on for a third term, as Lukashenko did in Belarus. But this will reduce his personal legitimacy. And even if he goes, the question remains: in choosing a new Putin, what will the real Putin do?
To conclude with a well-known aphorism: the situation is hopeless, but not serious. Russia doesn’t care much for outside opinion, but it is not entirely immune to it, and interdependence is a fact, and growing. In foreign policy, as Katinka Barysh of CER says, Russia’s confrontational rhetoric hides pragmatic cooperation on concrete matters. Although, as I have argued, Russia tends to swing back to its ‘centre of gravity’, this does not remain exactly the same, and the new dispensation, while recognisable from the past, is an improvement on it. But the riddle remains. ‘Where are you speeding? Answer me’ asked Gogol, who gave the only truthful answer to the question he asked Russia: ‘It does not answer me’.