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Putin and the Russian Economy

September 23rd, 2013 · No Comments · Capitalism, Democracy, Economics, International affairs, Politics, Populism

In the Fall of 1952, Vladimir Vladimirovitch Putin was born in Leningrad, now St. Petersburg, to Vladimir Spirodonovich and Maria Ivanovna Putin. His father was at that time a factory worker and a member of the NKVD. The NKVD under Joe Stalin was basically the Russian Communist Gestapo. They infiltrated every segment of society, an internal security system, spying on citizens. Stalin used the NKVD to arrest millions, murder them without trial and send millions more to gulags, which were either penitentiaries or concentration camps, depending on how you look at it,

Both of Putin’s parents worked hard. His father was a skilled laborer and his mother worked at a variety of unskilled jobs. The family lived comparatively well, which has prompted many to think that Vladimir Spirodonovich was making pretty good money on the side from an affiliation he continued after leaving a full time job as a member of NKVD during the war. They had a small walk up apartment but also a small place outside the city. As a young man, Vladimir somehow was able to afford a small car, a rarity for young Russian men in those days. He attended the local high school and then Leningrad state university, graduating from what was called the law department

On graduation in 1975, Putin went right into the KGB. At this point, it is important to note that in his personal recollections and any writing he has done about his early life, Putin likes to characterize himself as a belligerent, tough acting, thug. The scant biographies done of him do the same. He doesn’t claim any criminal activity, merely someone who would respond to a slight or an insult with a kick or a punch, or later, after he had studied enough judo, by tossing someone into a snow bank.

So, having grown up with a somewhat pugnacious attitude, and having been very short in stature, some might say that he has a “Napoleonic” complex. Whatever it is, Putin is definitely and painfully unpleasant so far as the American public can see.

The Russians themselves are a complex nation. Having suffered almost like American blacks for hundreds of years under the oppressive regimes of the Czars, they went to the opposite extreme in Communism but could not make it work economically. When the Soviet Communist regime fell, which by then was basically just a group of countries attached to a giant military organization, the Western countries and opportunists within Russia came in and stole the country blind.

Many Russians remain Socialist in the true and best sense of the word. Yet the conversion of the Socialist to the Capitalist economy was nearly as brutal and as temporarily devastating as the war. Under Communism, to distribute the wealth more equally, subsidies and price controls meant that what would have meant unequal abundance and deprivation was leveled out somewhat.

Capitalism came in on the wave of what many called “shock therapy” but was really a lack of proper planning and personal selfishness on the part of Communist Party officials, prices soared to as much as 25 times what they had been before. Scarcity became the rule. And the Ruble became virtually worthless.

Under Boris Yeltsin, Russia transitioned in a short time. So quickly did things change that the country went from a Socialist state to an oligarchical state in less than a decade. Many of those made wealthy were former Communist Party members, members of Yeltsin’s family, political associates of Yeltsin’s and other individuals who were somehow connected to Yeltsin. It is said by some that the majority of economic activity was handed over to as few as 8 large families in the transition.

Some examples.

Boris Berezofsky. As with so many others, Berezofsky was a part of President Yeltsin’s inner circle in the 1990s. He was able to acquire numerous assets that were being privatized, principally the national television network, Channel One. He supported Putin after he became President, but, like so many of the Russian Oligarchs, fell out with Putin and was subsequently accused of “economic crimes.” He fled to Great Britain where he continued to challenge Putin’s regime. Berezofsky died in his London apartment of hanging, supposedly a suicide, but under suspicious circumstances.

Mikhail Borisovich Khodorkovsky. As one of the early capitalists, Khodorkovsky, a chemical engineer, accumulated wealth in oil, eventually becoming the owner of Yukos, a giant private oil company. He held numerous posts in the Communist party and in the Russian government related to oil. He and others developed a bank, Menatep, which is how, after privatization, he was able to acquire a large share in the oil giant, Yukos.One of the richest oligarchs, but an outspoken enemy of Putin, he was arrested and jailed and his company’s assets forfeited. When he continued to argue against the Putin regime from prison, he and his former partner were accused and convicted of fraud, leading to a longer sentence. Many people think all this has to do with Putin and politics. They play rough in Russia.

Regardless of who owned what, the Russian economy—the one handed over to the well-connected Communist-turned-Capitalist Russians in the 1990s was a mess. The old Communist rules applied. There had been no such thing as equity, assets, debt, and…business management. This was all done in the Communist way, which meant that the People, represented by the Party—supposedly—were the stockholders. Without profits and rewards, all rewards were based on merit. Merit is in the eye of the beholder and if your brother-in-law or your friend is the one making the recommendations, so much the better. Loyalty becomes equity.
In business, what had been good Communist policy became corruption. Take care of your friends and they will take care of you. And…if your friend has a criminal mind or a criminal background…why not use him to dispose of the competition! After all, if it is all about friends and enemies…and making money…the rules get a little vague. The entire system became the wild, wild west.
Putin had spent enough years in the Party and in the KGB to know where all the secrets were buried. Because he is a very secretive man both by instinct and by training, it is difficult to know whether he was outraged at corruption or outraged at being late to the party where corporations were being handed out like playing cards at a poker game.
However his mind worked, there was corruption…certainly by our standards…and nepotism and the outright purchase of public enterprises for payoffs but also the theft of assets from those corporations.
To put things into context about how bad the Russian economy was, let’s make some comparisons. In Russia right now, the poverty level is about $2,400 per year. That enables the government to bring the poverty level down to about 12% of the population, or roughly 17 million of 143 million people.
But the economic conditions, while worse, are not that much, not 5 times the level of the United States, where an individual poverty level income would be about $11,500. The point is that, while, yes, the Russian standard of living is far lower than ours, the Russians are claiming that they have fewer poor people than they really do.

In other words, the standard of living is higher in the United States, but if you raised the level of income that is really poverty in Russia, which would probably be around $5.000, then Russia would have many more poor than they admit. There would be something like 34 million people in poverty in Russia, out of 143 million, which common sense would tell you is closer to the reality of the situation.

Now of course, after Putin and Medvedev and now Putin again, life in Russia, one must say, has improved from the disastrous 1990s. The next ten years saw dramatic improvements. The corruption was still there. Criminal gangs proliferated. But both white collar and individual crimes were met with severe punishment.

By the time the investigations of corruption were through, 13, 600 businessmen were convicted of various kinds of corruption and jailed. Now there is a plan afoot by an organization of Russian entrepreneurs to give pardons to at least 6,000. That should indicate which ones really are white-collar criminals and which are political prisoners.
The question today is…how much of the attack on the Russian Oligarchs was real corruption on their part and how much was an attempt to, in a sense, “claw back” a large amount of the assets from these oligarchs and restore them to the people. And that begs the question, how much does Putin want to return to the pot for his own political friends? Finally, we know that Putin does not like to be challenged. He does not hide his antipathy for his enemies or his intentions to silence them. And he seems motivated by his hatred for those who make him “eat their dirt” as he calls it.

There has been a lot of speculation about KGB (now KSB) involvement in political affairs. After all, Putin became a member of KGB from his first day of work, after college was KGB all throughout the 1970s and 1980s. He only left the KGB to enter politics as a deputy to the mayor of St. Petersburg who had been one of the instructors at Leningrad University when he was a student.

There is a lot of speculation about murder and politics involving Putin.

In 2003 a man by the name of Sergei Yushenkov, co-chairman of the Russian Liberal party who had been investigating Putin was shot down and killed in the doorway of his apartment building.

In 2004, Paul Klebnikov, editor of the Russian edition of Forbes, after investigating rumors of money laundering involving Chechnian construction contracts reaching into the functions of leaders in the Kremlin and the KSB (successor to the KGB) was shot and killed in Moscow.

Then there was the famous case of Alexander Litvinenko, the former FSB officer who accused the service of staging bombings in Moscow and blaming Chechnians. He claimed that this was done to help elect Vladimir Putin . He fled to Great Britain to avoid prosecution or assassination but continued to write against the Putin administration.

On the first of November, 2006 he had lunch with two former KSB associates, Andrei Lugovoy and Dimitri Kovtun at the Millenium Hotel bar. Later that day, he took ill. He grew worse and it was suspected that he had been poisoned. It turns out that he had been poisoned with polonium 210, a radioactive substance detectable only after death. Litvinenko died on November 27 and the Russians have never let anyone from outside Russia investigate the issue.

In September of 2004, the leading candidate for President of the Ukraine, Viktor Yushchenko, an opponent of Putin’s candidate, was poisoned with something called, T-2, a mycotoxin used by the Russian military in the Afghaninstan-Russian war. Miraculously, he survived but was horribly disfigured.

In October of 2006, Anna Politkovskaya, an author of books on the war with Chechnia and on potential problems in the Kremlin that might have led to Putin was shot and killed in her own home.

And finally on this subject, is it merely a coincidence that both Daniel McGrory and Paul Joyal, both involved with reporting the Litvinenko case in London, both critics of Putin, should have deadly consequences within a few days of each other? A healthy McGrory died suddenly at home of a heart attack at age 54 and Joyal was shot by a supposedly random attacker, although he lived.

We know how the KGB operated. We know how the KSB operates. And there is a lifelong KGB agent at the helm of the Russian government. How much evidence is needed to put the dots together? There is not much question that if the CIA or MI-5 could release their records we would know about these crimes and likely many more that have never been acknowledged. The KGB has made many people disappear completely and that is not conjecture but absolute fact.

So, do you want to be a Russian entrepreneur? Sounds a little risky. But you need to know the context. Not many Americans have been treated in this way by Putin. Most American offenders were simply kicked out, and with no real constituency inside Russia, they were of little consequence to the Russian President.

Let us suppose that you are a Russian President and you have things that you want to do, legal things that you may want to accomplish. After all, very few men spend their entire days and nights plotting assassinations and murders unless that is their principal occupation.

So, if you are a dictator, which people in your country could cause you the most trouble? One group is obviously billionaires. They have the money and the power to make things happen, and in Russia clearly there are people willing to take all kinds of risks if you have enough money to pay them to do it.

We have seen this situation before. The definition of sociopath is one who understands the consequences of disregarding laws and rules about the welfare of others in society but simply disregards them. That is not classified as a mental illness, but it is certainly the definition of someone who should be kept out of society and out of decision making for society. Yet, too often, such as in the case of people like Hitler and Pol Pot and Idi Amin sociopaths too often do become not only leaders but despotic rulers of countries.

Before anyone decides to do business in Russia, they should consider the facts. All these murders point pretty clearly to the Russian government. Putin, the former KGB agent, is President. The question is this: is Putin innocent or guilty? If he is guilty, then it is pretty clear that the Russian state has devolved into that kind of authoritarian rule that typified the Joseph Stalin era. The economy, not coincidentally, has slowed.

Is there a counter-argument to the evidence that Putin is a despot? Is there evidence that, while an aggressive personality, he is not deliberately sociopathic?

Well, there is this: Russia is a place where life has been cheap and death has been a fairly regular outcome. Americans lost 500,000 people in WWII. Russia lost tens of millions, certainly more than 20 million and perhaps up to 50 million. Stalin killed off another 5 million at least with a variety of harsh government measures.

Putin’s actions have helped to bring the Russian economy and the Russian people much closer to the standard of living of modern day Europe. From 1991 to 1998 under Boris Yelsin, the shock therapy of moving from a government-owned economy to an independently owned, capitalist economy resulted in an economic contraction of about 40%. Before Putin, despite a well-educated workforce and a relatively strong manufacturing infrastructure, the change was chaotic.

Remember that the ownership of private businesses had been basically illegal throughout the history of Communist Russia and even through the period of perestroika under Mikail Gorbachev. Consequently, the establishment of a free market economy with independent businesses and a system to control competition, corporate ownership, consumers’ rights, and business law all had to be created from scratch.

A further problem was that, under Communism, with no financial rewards, no cash bonuses, raises or stock options, functionaries in the system were beholden to their superiors in whatever job they held. And because the Communist Party held all jobs, loyalty to the Party and loyalty to one’s boss was prized as a means of advancement. It led to what we call the “buddy system.” Friendships, relationships, connections were the means of moving ahead. You could not leave one company for another. Management was the same everywhere. Corruption was defined as taking more for It was accepted, even if it was considered a corrupting influence.

When the change to a capitalist system came, it was only natural that pals would help pals. Yeltsin helped his family and his family helped their friends. Criminals found their way into ownership of formerly government enterprises because that is what criminals do. And many others who were perceptive enough to see that these former government entities had huge potential because they already had huge customer bases bought these services for cents on the dollar.

In the early 1990s, many services which under Communism had been government services, like communications, oil producting, banking and some manufacturing were sold to the people. Each citizen was given shares of stock in the government entities. But individuals who eventually became the Russian Moguls, backed by investors began to buy up these shares. With the people’s lack of understanding of the Capitalist system, the major corporate entities soon fell into the hands of a new class of Russian Oligarch.

In the transition to a market-based economy, the GDP of Russia by 1993 had fallen by 50%. Inflation was a serious problem, interest rates were raised to dramatic double-digit levels and the welfare system cut dramatically. Russia was in a full-blown Depression. This would continue throughout the 90s.

By 1998, the country was in a financial crisis. In August, the Russian government devalued the ruble, defaulted on domestic debt, and declared a moratorium on payment to foreign creditors. Food prices had quadrupled. Inflation was at 84% and a number of banks had closed.

Putin was just coming into national prominence, first as head of security, then as Prime Minister, and eventually appointed by Yeltsin as his successor. From 2000, when he took over to 2003, there had been a quick bounce back from the 1998 “Depression” but then things slowed. In 2003, they took off again and never looked back until the world crisis at the end of the first decade of the 21st Century.

Industrial production, which had slowed after an 11% increase in 2000, bouncing back from the bad years slowed to 3.7%. But from 2003 onward, it grew to 6.7% annually by 2007 and in 2012 hit 9.3%. As Russia is the 3rd largest exporter of oil in the world, growth in manufacturing is the sign of a more balanced economy. Some of those products are fertilizer and petro-chemicals, but other manufacturing has been growing.

Incomes have grown. In the last 8 years, incomes in Russia have doubled while poverty has halved. Given the caveat mentioned before about how the Russian government calculates poverty, that could be an optimistic number, but still incomes are growing. The average wage increased from roughly $90 a week to approximately $500 a week and the average pension from $33 to $140.

Putin is a puzzle to those in the west not involved actively in gathering intelligence. Evidence says that he may be an assassin, directing the actions of assassins. Not unusual in the history of the USSR and the KGB, but not a clear picture, because Putin carefully avoids scrutiny.

Or could we be wrong? Putin is also what we in the U.S. might call “hard scrabble” or someone who grew up street wise. And let’s now assume for a minute that a U.S. President decided to take oil revenues into the public coffers. In other words let’s assume that—rather than EXXON paying no taxes, he wanted them to pay high taxes…let’s say, split all oil revenues coming from wells in the United States 50/50.

And let’s say that the American owners, the American oil oligarchs, seeing their huge incomes diminish and those of the population at large, which many of them consider vassals at best and sub-human at worst, decide not to let that happen. They decide not to pay taxes. These are billionaires. How much trouble do you think they could cause and how much disinformation do you think they could spread about kidnappings or murders by a President that he did not order?

Russia,under Putin in 2004 established the Stabilization Fund. It would gather in revenues from oil exports to the country. Soon it exceeded the equivalent of $20 billion. Later, it had accumulated enough revenues to pay off all of the Soviet Union’s debts and reduce the inflation in the Russian economy. By 2007, the fund had enough revenue to invest in domestic development projects.

In late January of 2008, it was split into the Reserve Fund (designed to protect Russia from possible global financial shocks) and the National Welfare Fund, whose revenues will be used for the pension reform. On the other hand, income inequality in Russia continues to grow, with the average worker making about 15 times less than the top income earners. It isn’t as if all the moguls are in jail.
There are dozens of these current Russian billionaires including people like Alexander Abramov, head of the largest steel conglomerate, Roman Abromavich, investment banker, in oil and aluminum, and the richest Russian, and supposedly the richest man in the United Kingdom, Alisher Usmanov, with holdings in steel, and television and publishing and god knows what else.

Only about 1 million of the 140 million Russians have any money in stocks and only 30% have savings, most of which is under the mattress rather than in banks. If the banking sector in Russia should ever develop a strong consumer banking model, and government regulations are both strong and enforceable, the Russian economy could heat up in a hurry.

Russia is still a developing economy. Its exports are mostly raw materials. But they have the educational system and the desire to manufacture that could build a very strong domestic economy and add a variety of things to exports, which are now primarily minerals, oil and chemicals.

But it is Putin’s economy. Putin must tell the world, prove to the world, that he is no despot. If that happens the world will beat a path to Russia’s door. If Putin is sincere about creating a strong Capitalist country for the people, which he has given some indication may be his inclination, then he will go down in Russian history in a very positive light.

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