Russia’s neo-feudal capitalism

Vladimir Putin’s Russia is looking more and more like the sclerotic and stagnant Soviet Union of the Leonid Brezhnev era. But in one area, Putin’s regime remains an innovator: Corruption. Indeed, in this, the 18th year of Putin’s rule, a new form of crony capitalism has been taking hold.
Over the last decade, Putin has overseen a major renationalization of the Russian economy. The state sector expanded from 35 percent of gross national product (GDP) in 2005 to 70 percent in 2015. It would seem that, in Lenin’s words, the state had regained control of the “commanding heights” of the economy.
And yet it would also seem that state-owned firms like the energy giants Gazprom and Rosneft operate like modern businesses. After all, they have corporate-governance rules and policies, supervisory and management boards, and annual shareholders’ meetings. They undergo independent international audits, publish annual reports and maintain boards with independent directors.
But appearances can deceive. Major state-owned companies’ rules and policies are mere formalities. They are not even really run by the state. Instead, they are controlled by a small group of cronies – former KGB officers, ministers and senior officials in the president’s administration – who act as Putin’s personal representatives.
The system carries the hallmarks of the ancient feudal model described by Harvard’s Richard Pipes in his classic “Russia under the Old Regime”: It affords maximum freedom to the ruler, who delegates tasks to the feudal lords. In effect, Russia’s state-owned companies have transformed public property into a new model of czarist ownership.
International investors have caught on. They buy Russian stocks, but only for the sizable dividend yields – not for shareholder influence. No surprise, then, that Gazprom’s market capitalization has collapsed from a peak of $369 billion in May 2008 to some $55 billion today.
The operations of the so-called state corporations are particularly problematic. Legally, these firms, which include Vnesheconombank (VEB) and Russian Technologies (Rostec), are independent nongovernmental organizations. But they are established through the donation of state funds or property: When six such corporations were created in 2007, some $80 billion of assets and $36 billion of fresh state funds were transferred to them. This puts them under Putin’s direct control.
State capitalism is usually associated with publicly directed strategies for investment and technological development. And, indeed, Russia’s state corporations are supposedly focused on advancing the public interest or creating public goods. In reality, managers do whatever they want, such as favoring friends through discretionary procurement or selling assets at submarket prices.
Loyal chief executives of Russia’s big state companies enjoy long tenures, regardless of whether they meet ordinary standards of efficiency, profit or innovation. No CEO has destroyed more value than Gazprom’s Alexei Miller, yet he has been at the company’s helm for 16 years and counting. In 2013, Miller’s official salary totaled $25 million. Today, there is no telling what he earns, as state executives’ remuneration is no longer published.
In exchange for their outsized paychecks and ritzy fiefdoms, Putin’s lords must advance his interests – particularly when geopolitical issues emerge that threaten the regime’s survival. For example, Gazprom has obediently cut off gas flows to recalcitrant neighbors that the Kremlin wants to punish, at major commercial cost, while supplying all of Russia, regardless of whether it gets paid. Rosneft has loaned billions to Venezuela’s state oil company – with the Venezuelan-owned US refiner Citgo as collateral – in a clear bid to exploit the country’s dire economic situation to gain access to its oil fields.
Of course, Russia’s economy is not at its strongest, either. Yet Putin’s system seems equipped to survive even the disappearance of oil rents.

Anders Aslund is a senior fellow at the Atlantic Council in Washington.

Source: Arab News


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