Book Extract: Putinomics Power and Money in Resurgent Russia By Chris Miller
In September 2013, notables from across Europe and the world gathered in the Livadia Palace, a vacation retreat built by the last emperor of Tsarist Russia just outside of Yalta, a resort town in the Crimean Peninsula. The Livadia Palace was where Stalin, Churchill, and Roosevelt met in February 1945 to carve up Europe at the end of World War IL The Yalta Conference, and the deal that the "Big Three" signed there, is remembered primarily for separating Europe into two halves, one capitalist and the other communist, laying the ground for a decades-long Cold War.
Most attendees of the 2013 conference in Yalta-including a former Ger man chancellor, CIA director, and World Bank presidentdid not fully understand the historical irony at play. One person who did understand was Sergey Glazyev, President Putin's leading adviser on Eurasian integration, who represented Russia at the conference. Inlate 2013, the European Union appeared ready to sign a free-trade deal with Ukraine, a move the Kremlin saw as Western intrusion on its sphere of influence. Speaking at the confer ence, Glazyevwarned the audience that for Ukraine, the long- discussed trade agreement with the European Union would be "suicidal:' He urged Kyiv to sign a Russian trade pact instead. Petro Poroshenko, then Ukraine's trade minister and now its president, struck back, telling Glazyev that thanks to punitive Russian trade sanctions on Ukraine, "for the first time in our history more than 50 percent of people support European integration. Thank you very much for that, Mr. Glazyev:'1 The audience, mostly of Western officials and business leaders, applauded.2
At the sidelines of the conference, Glazyev spoke with journalists to make sure that his point got through. "Ukrainian authorities make a huge mistake if they think that the Russian reaction will become neutral. . . . This will not happen:' To the contrary, he promised that the trade deal with the European
Union would lead to Ukraine's default and an economic crisis. He predicted that Ukraine would suffer social division if it signed the trade agreement, hint ing that separatist movements in the Russian-speaking eastern and southern provinces of Ukraine might be one result. "We don't want to use any kind of blackmail," Glazyev claimed. "This is a question for the Ukrainian people.
But legally, signing this agreement about association with [the] EU, the Ukrainian government violates the treaty on strategic partnership and friendship with Russia:' The risk-or threat-was clear. "Signing this treaty will lead to politi cal and social unrest," Glazyev insisted. "There will be chaos:'3
On that score, Glazyev was right. Less than six months later, Russia seized Crimea and fomented a rebellion in eastern Ukraine, prompting international financial sanctions and sending investors fleeing. At around the same time, the price of oil crashed, from over $100 per barrel in early 2014 to half that price by the middle of the year. Russia's economy was already teetering on the brink of recession before it was hit by the combination of war and an oil shock. The years following 2014 were the most difficult Putinomics had faced. The Kremlin responded by betting that 2014 and 2015 were a repeat of 2008 and 2009, years that also saw recession, low oil prices, and foreign wars.As in 2008 and 2009, Putin's mix of cautious fiscal and monetary poli cies proved sufficient to steer Russia through the crisis, but failed to restart rapid economic growth.
No Time for a Crisis
Even before the shocks of 2014, Russia's economy was veering toward reces sion. Investment and GDP growth were sliding downward. Annual growth of around 4 percent in 2010 and 2011 fell to barely 1percent by 2013. The causes of the slowdown were varied. Putin's return to the presidency in 2012 had done little to improve things. An atmosphere of stagnation set in, and pri vate investment slumped. During the 2008 crash, money fled the country, as foreigners and wealthy Russians alike moved capital to more secure markets. But though the country had seen strong levels of capital inflows in the years before the crisis, the end of the recession did not see capital return to Russia. Instead, money continued to flow out, not at the devastating rate of 2008, but leaving nonetheless . That meant less capital to fund investments in Russia.
One reason for the investment slowdown was that Putin's cronies were playing an ever-larger role in the economy. In 2012, for example, Rosneft, the state-owned firm run by long-time Putin associate Igor Sechin, announced it was buying TNK-BP, an oil company jointly owned by a group of Russian businessmen and BP, the British energy giant. It was not only in the energy sector that big, state-owned, crony-controlled firms expanded. By 2013, the three biggest state-owned banks controlled 60 percent of all banking sector assets. Meanwhile, the government failed to significantly improve conditions for private sector firms, with Russia ranking in the bottom half of Wodd Bank metrics on the ease of getting a construction permit or trading across borders .4
The government responded to falling private investment by boosting public investment, especially through big prestige projects. The 2014 Sochi Olympics, for example, were not only a sporting event.Nor were they simply a PR project to boost the government'spopularity-though, like every Olym pics, that was surely part of the government's goal. Sochi was also a massive construction project, designed to revitalize the entire region. In2012, Vladi vostok hosted the Asia-Pacific Economic Cooperation (APEC) summit-and received a $21 billion infrastructure investment in advance to spruce up the city.5 Kazan got similar funds before a 2013 sporting event.
Russia needs infrastructure investment, especially outside of Moscow and St. Petersburg. Yet projects such as the Sochi Olympics cost far more than they will provide in future growth. Estimates of the total cost of the Olympics vary depending on what types of investments are included in the calculation. What is clear, however, is that a significant share of the funds invested were wasted or stolen. Alexei Navalny 's Anti-Corruption Foundation has alleged numerous well-documented instances of corruption related to Sochi con struction projects.6
The way that Sochi was financed allowed its costs to be hidden from public view, at least at first. Most of the major construction projects in Sochi-from hotels to transport to the Olympic village-were managed either by oligarchs or by state-owned firms. This model was chosen because it gave powerful groups access to large revenue streams, and because it gave the government specific individuals to hold responsible if problems
emerged. As a manage ment model, the system was far from optimal, though it was well suited to the oligarchic class that Putin had raised.
The individuals and state-owned firms who received contracts to build Sochi got most of their funding from the state. This came not in terms of cash grants but through "loans" from a"bank"Vneshekonombank, or VEB, the state development bank. VEB is called a bank, but it does not accept deposits and in practice functions like an investment fund. Its mandate is to lend to projects that boost longterm growth. VEB played a crucial role in funding Sochi, extending credit for hotels, a new airport, a new power plant, and even the Olympic village itself.7 Most of these transactions, however, were not re ally loans. When real banks make real loans, they expect them to be repaid. At VEB, by contrast, it is unlikely that managers expected most of their Sochi "loans" to be repaid. From the beginning, it was clear that costs were inflated, that expectations of post-Olympics income were overestimated, and that the oligarchs who received VEB credit had the political clout they needed to wiggle out of whatever repayment commitments they made. VEB disbursed around 250 billion rubles (over $7 billion) for Olympics related projects.8 By labeling handouts as "debt"-as if it would be repaid in the future-Russia's leaders disguised reckless and corrupt spending schemes as "investment," postponing the bill for several years by hiding the true cost on VEB's balance sheet. The final price tag for VEB's bailout will be billions of dollars.9 Stuffing VEB with corruption-fueled debt was a clever political move. But schemes like this were hardly the type of investment that Russia needed to restart economic growth.
The University of North Carolina Press I ISBN: 9781469640662 I Pages: 218 I Price: $28.00
From Putinomics: Power and Money in Resurgent Russia by Chris Miller. Copyright © 2018 by the University of North Carolina Press. Used by permission of the publisher. www.uncpress.org