Book Ex­tract: Puti­nomics Power and Money in Resur­gent Rus­sia By Chris Miller

FICCI Business Digest - - Contents - 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.unc­

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