Oligarchs and Corruption in Putin's Russia: Of Sand Castles and Geopolitical Volunteering
Markus, Stanislav. Georgetown Journal of International Affairs; Washington Vol. 18, Iss. 2, (Summer/Fall 2017): 26-32. DOI:10.1353/gia.2017.0017
The article analyzes Russia's elite corruption from domestic and international perspectives. While corrupt proceeds make Russian elites invested in the political system, corruption also acts as a destabilizing force in Russia. I argue that corruption is a double-edged sword for the oligarchs and the Kremlin alike. As a competitive kleptocracy in which corrupt elites have the option of international exit via offshores, Russia currently lacks any clear "top-down" path toward the rule of law. Furthermore, the country's elite corruption presents political problems for the West. The article concludes with some policy recommendations.
Full Text
The rapid accumulation of private wealth and its symbiosis with political power is not unusual in post-communist societies. However, Russia's vast energy resources, the absence of societal checks on the state, and the power of the security apparatus under Putin have generated a particularly entrenched state-business nexus. Emerging economies such as South Korea or Latvia have moved past their "oligarchic interlude" via bottom-up popular pressure. Autocratic rulers in countries such as Belarus or Uzbekistan have disciplined oligarchs through top-down crackdowns. Russia, however, has settled into an oligarchic equilibrium.
This article examines three questions. First, what is the nature of Russia's oligarchic corruption? Second, what do the Russian oligarchs want? Third, what policy challenges does Russia's corruption present for the West?
Oligarchs, Putin, and Corruption
Russia's wealth inequality is among the highest in the world. The top 10 percent of Russian wealth-holders own 89 percent of total household wealth; the corresponding figure is 73 percent in China and 78 percent in the US, the only two countries with more dollar billionaires (but lower wealth concentration) than Russia.1 Billionaire wealth from the crony sectors in Russia is the highest in the world as a percentage of GDP (18 percent), followed by Malaysia (13 percent) and the Philippines (11 percent); it has also risen since 2014 (from 16 percent).2
Russia's two-stage privatization process drove the initial accumulation of extreme wealth in the 1990s. The 1992–94 "voucher privatization" of medium and large enterprises involved significant concessions to the firm insiders, resulting in the ownership of newly privatized firms by old Soviet-era management. The second stage began in 1995 and involved for-cash sales to outsiders. Marred by corruption, this stage saw the exclusion of competitive bidders and the transfer of "commanding heights" of the Soviet economy––often from the natural resource sector––to well-connected individuals.
Since Putin assumed power in 2000, the specter of revising the results of privatization has haunted Russia's politics. Yet while the issue continues to inflame popular sentiment in Russia, it is largely moot for practical purposes. On the one hand, the most valuable energy assets in Russia have been returned to state control through buyouts with varying degrees of pressure applied by the state. On the other hand, a whole new generation of oligarchs has become super-rich in ways other than privatization. State contracts are the key avenue through which many of the Putin-era oligarchs have become super-rich. Public procurement in many sectors, including infrastructure, defense, and healthcare, has seen regular overcharging of the state treasury by private suppliers, sometimes at prices equal to double or triple times the market rate and with kickbacks to the state officials involved.
Access to the highly lucrative state procurement [End Page 26] system and other benefits is defined by the oligarchs' proximity to power. In today's Russia, this proximity implies three types of oligarchic networks. First, Putin's friends are personally connected to the president through the Ozero dacha cooperative and through Putin's hobbies and career; this is the most exclusive set of networks. Second, the so-called silovarchs are business elites who have leveraged their networks in the FSB or the military to amass extreme personal wealth.3 While the circles of Putin's friends and the silovarchs partly overlap, the silovarchs comprise a larger group, most of whose members are not Putin's friends. Third, an even larger number of the super-rich in Russia are outsiders not personally connected to Putin, the military, or the FSB. (Their "outsider" status is only in reference to the two other groups; most outsiders are still deeply embedded in the Russian state.)
Putin's friends and the silovarchs dominate Russia's political economy. Since 2003, oligarchs from these networks have steadily risen to control crony sectors of the economy and to hold important positions in the executive branch. They are disproportionately represented on corporate boards of the so-called "state corporations," and they often own large stakes in firms from sectors where profitability depends on government favor (e.g., oil, utilities, telecommunications, defense, construction). Today, politically influential big business in Russia is as much a subset of the state as it is an independent force.
Observers commonly see corruption as the cement of Putin's "sistema."4 Corruption generates oligarchic loyalty to the regime and gives the regime some control over the oligarchs. Still, the apparent stability of Russia's corruption pyramid is subject to important caveats.
Russian corruption is less stabilizing than conventionally seen because it is fundamentally competitive: rival state-oligarchic clans compete viciously for opportunities to monetize state access, a fact that should not be obscured by the universally proclaimed loyalty to Putin. In the context of a shrinking economic pie, kleptocratic rivalry has undermined key priorities of the regime, including national security, sufficient popular support, and the prevention of an economic collapse.5 Between 2012 and 2016, high-profile procurement scandals in the military (particularly through Spetsstroi, which is responsible for special military-related construction projects), the space agency (Roskosmos), and the railways have uncovered that billions of dollars were drained from the budget to the benefit of affiliated contractors. Since 2014, Russia's banking sector has seen a wave of fraud and asset theft by senior bank managers, leading to widespread bank failure (including that of large banks such as Vneshprombank, Pro-businessBank, and Nota Bank). Against this background, the government has responded aggressively, closing some federal agencies (Spetsstroi), firing top oligarchs (Yakunin of the Russian Railways), and revoking the banking licenses of circa 10 percent of all Russian banks. [End Page 27]
Another centrifugal force generated by systemic corruption concerns popular support of the regime. Having shifted his legitimacy basis from economy to geopolitics, Putin has managed to remain popular in the wake of the 2011 electoral protests, economic crisis, and sanctions following the annexation of Crimea. The regime's Achilles' heel remains corruption, whose exposure has given rise to Alexei Navalny, Russia's only independent politician enjoying popular support today.
Finally, Russia's state control over abundant energy resources generates easy rents, fuels corruption, and reduces pressures to diversify the economy. Through vested interests, corruption reinforces the reliance of Russia's budget on revenues from oil and gas. Such reliance has historically held the country hostage to the global energy markets.
Overall, while corruption serves an important purpose for the Kremlin, it is also seen as being dangerously high by the Russian sovereign.6 In Russia, corruption is not so much cement as it is water holding together a sand castle. To remain effective as a source of systemic cohesion, corruption will require active top-down "management," lest the castle that Putin built be torn apart by conflict among predatory elites, collapse economically, or be undermined from below. Too little or too much water, and the sand won't hold.
Rule of Law and the Oligarch's Predicament
Corruption is a double-edged sword not only for the Kremlin but also for the individual oligarchs. The absence of rule of law implies that political capital can be converted into immense wealth; at the same time, the legal void means that this immense wealth will be unprotected once acquired. It is then logical for the oligarchs to be quiescent about corruption until one's wealth level is perceived as satisfactory, after which the oligarch in question would demand the rule of law so as to safeguard his assets in a predictable fashion. (Indeed, this was a key assumption behind privatization in the 1990s.) Such demand has not materialized in Russia. Why?
Russia's business elites have ample possibilities to retire their capital abroad. Such exit decreases their demand for institutional change at home.7 Furthermore, even when business elites voice their disagreement with Putin's system, they often limit their demands to the protection of a specific firm, e.g., through stakeholder alliances with labor, community, or foreign investors.8 Such alliances serve as ersatz institutions, allowing business owners to protect their specific firms while avoiding the need for country-level rule of law. Finally, the lack of rule of law allows the oligarchs to continue to accumulate wealth rapidly, e.g., through a variety of corrupt schemes commonly referred to as "raiding."9 Contrary to the "satiation [End Page 28] hypothesis," as individual fortunes continued to grow, the supposed point at which an oligarch's wealth would turn his incentives from acquisition (predation) to defense (institution building) has continued to recede.
Yet to conclude that the oligarchs are content with the status quo is premature. To identify what the oligarchs want, we must move beyond "rule of law" as the benchmark.
Russia's super-rich may not want institutionalized accountability writ large (competitive and honest elections as well as legislative and judiciary independence). But there is demand for de facto elite accountability.10 From the oligarchs' perspective, the latter could theoretically be achieved in several ways, including (1) a relatively impartial elite arbiter, à la Soviet Brezhnev or Ukraine's Kuchma before the Orange Revolution; (2) an empowered oligarch-controlled parliament, e.g., the Ukrainian Rada after the Orange Revolution; (3) Singapore-style authoritarian legality guaranteeing property rights without competitive politics; or (4) powerful associations of large businesses that can check the state, as in Porfirian Mexico.
The demand for such de facto elite accountability, in whatever form, is rising. The conditional nature of oligarchic ownership in Russia has long been acknowledged, another local joke being that there are no billionaires in Russia, only people working as billionaires. Yet the conditionality imposed on the oligarchs by Putin early in his first tenure (stay out of politics, keep your property) is becoming unreliable.11 The irregular application of unwritten rules makes Russia's business elites nervous. A careful observer may also note that the group of Putin's friends itself is rather fluid. By 2010, Putin distanced himself from friends of the late 1990s and his first presidency, reaching out instead to friends from his younger years, i.e., from the early to mid-1990s (e.g., from the Ozero dacha cooperative) and even from childhood (as in the case of Arkadii Rotenberg). Is there a guarantee that Putin will not "unfriend" some of them, too?
Overall, there is demand for greater predictability in business-power relations on the part of the oligarchs––but no vision on how to achieve it.12 Given Putin's erratic decisions, the oligarchs have no reason to trust him with the role of a stabilizer or enforcer, even if he plays that role by default. A more institutionalized form of authoritarian legality is also unpalatable to many oligarchs, given how diligently the FSB has been collecting kompromat (evidence of legal wrongdoing that can be used for blackmail) on business elites, including the silovarchs themselves. Meanwhile, popular resentment of the super-rich in Russia makes honest and competitive elections a risky proposition. Russian business elites have watched closely the instability in Ukraine in the wake of democratizing, including both the reprivatization attempt after the 2004 Orange Revolution and some anti-corruption initiatives after the 2014 ouster of Yanukovych.13 Finally, the oligarchs' experience with the Russian Union of Industrialists and Entrepreneurs (RUIE) and its mixed record in improving state-business relations has cooled business elites' enthusiasm for association building.14 RUIE's requests on behalf of Khodorkovsky and Yevtushenkov were ignored by the Kremlin. At the end of the day, the question facing the Russian oligarchs is urgent but unanswered: which way from here?
International Dimension
If corruption in Russia were a purely domestic problem, the analysis could stop here. It is the international dimension of Russia's corruption that presents urgent policy challenges for the West.
First, its provision of employment, loans, [End Page 29] or donations to potential political decision-makers abroad has allowed Russia to place bets on political players who may have strategic value for Russia in the future. The Russian bank FCRB lent nine million euros in 2014 to the populist anti-EU party of Marine Le Pen in France. Russia's biggest private oil company, Lukoil, paid a $1.4 million state fine for Martin Nejedly, a key adviser to the Czech president in 2016, allowing Nejedly to keep his influential position. Germany's former chancellor Gerhard Shroeder has been employed by Gazprom in its Nord Stream pipeline projects for more than ten years. In 2010, Renaissance Capital, a Russian investment bank, paid $500,000 to Bill Clinton for a speech whose timing coincided with the review by the Committee on Foreign Investment in the US of a sensitive purchase by Rosatom, the Russian nuclear agency, of a Wyoming uranium mine. To the extent that the use of political influence by Western public figures in exchange for monetary benefits from Russia qualifies as corruption, these are cases of Russia's propagation of corruption abroad. It is noteworthy that such monetary benefits are not directly provided by the Russian government but rather by Russian companies or banks. It is likely that at least some oligarchs initiate geopolitically significant transactions voluntarily to create rapport with the Kremlin. In the 2000s, the strategies of Russian oligarchs to protect their companies from the Kremlin centered on cultivating foreign investors;15 today, they seem to involve "geopolitical volunteering" on behalf of the Kremlin.
Second, consider the effects of massive flows of Russian capital to Western jurisdictions, both offshore and onshore. According to government figures, since Putin came to power in 2000, Russia has experienced a total net outflow of more than $550 billion; some independent experts put the total at over $1 trillion. Some of this money was legally earned. Of concern here is dirty money, which is, in effect, laundered in the West. Funds obtained through bribery, stolen from the Russian treasury, or plundered from the Russian bank deposits find safe haven in the West through luxury investments and, most importantly, through secret bank deposits. The ramifications of this arrangement are profound. To begin, the availability of Western havens for dirty cash adversely changes the incentives of the Russian elites. Why invest in any future-oriented policy (state building, economic growth, rule of law, societal peace) if one can plunder and hide successfully? By dramatically lowering the risk of domestic exposure and punishment for corruption or theft, foreign off-shores reward such behavior.
Furthermore, the deluge of corrupt proceeds from Russia, China, and many other developing countries has created an entire money laundering industry in the West, involving bankers, lawyers, accountants, and other professionals who instruct their Russian clients on the specifics of shell companies, artificial bankruptcies, reputation-enhancing investments, and financial secrecy.16 This manifold Western money-laundering industry is a vested interest in the status quo on behalf of Russian corrupt officials and oligarchs, particularly in countries such as Switzerland, the United Kingdom, Austria, the United States, Luxembourg, and others. The expectation that closer socioeconomic engagement would transform economic elites in the developing countries was rather naïve––the transformation goes very much both ways.
Finally, weak enforcement of anti-laundering laws in the West further undermines its soft power in Russia by exposing the promise of clean government, a key attraction of Western democracy that inspired two Maidan revolutions in Ukraine, as hypocritical. [End Page 30] The Russian state media has been at pains to criticize the Western governance model: the fact that the West indirectly encourages Russian corruption by accepting and safeguarding its dirty cash supports that narrative.17
The United States has already begun to address some of these issues. If initially the United States erred on the side of attracting foreign capital by not fully implementing the OECD anti-laundering standards, the Department of Justice has recently aggressively pursued suspect foreign cash. The government's Kleptocracy Asset Recovery Initiative, launched in 2010, combines the expertise of the Department of Justice, the FBI, and other enforcement agencies to confiscate corrupt proceeds of foreign officials (and, if possible, return them to the countries harmed). With almost $3 billion in currently frozen foreign assets in twenty-eight different cases, the Initiative has taken aim at officials from Nigeria, Ukraine, Uzbekistan, Malaysia, Honduras, and other developing countries (plus Canada). Notably absent from this list is Russia. The United States government could also work closer with the private sector, particularly banking, to ensure its compliance with the Bank Secrecy Act, which requires financial intermediaries to know their customers and report any suspected unlawful activity. (In a promising development, since 2016, transactions of cash buyers of luxury real estate in Manhattan and Miami must now be reported to the Treasury Department's Financial Crime Enforcement Network.)
Perhaps the greatest challenge, with respect to Russia and more generally, concerns the anonymity of global offshore finance. On this front, the US administration would find some cooperation from Moscow. Economically, the Russian treasury has been losing vast sums to offshores. Politically, the Kremlin is keen to strengthen its control over bureaucrats and oligarchs, two groups for whom offshore nest eggs provide an alternative to Putin's Russia. Since 2013, the Kremlin has pursued a "deoffshorization" campaign encouraging businesses to repatriate capital and stop registering companies offshore; additional legislation has restricted the Russian state employees' foreign asset ownership. A joint US-Russian effort, however limited, to end the anonymity of corrupt cash flows in Western jurisdictions would serve the interests of both countries.
Notes
1. Shorrocks, A. and others, Global Wealth Report 2016. Credit Suisse.
2. The Economist (2016) Comparing crony capitalism around the world. May 5.
3. Treisman, D. (2008) Putin's Silovarchs. Orbis, 51, 141–153.
4. Ledeneva, A. (2013) Can Russia Modernise?: Sistema, Power Networks and Informal Governance, Cambridge University Press.
5. Markus, S. (2015) Property, Predation, and Protection: Piranha Capitalism in Russia and Ukraine, Cambridge University Press.
6. Ibid.
7. Markus, S. (2017) The Atlas That Has Not Shrugged: Why Russia's Oligarchs Are an Unlikely Force for Change. Daedalus 146 (2).
8. Markus, S. (2008) Corporate Governance as Political Insurance: Firm-level Institutional Creation in Emerging Markets and Beyond. Socio-Economic Review, 6, 69–98; Markus, S. (2012) Secure Property as a Bottom-up Process: Firms, Stakeholders, and Predators in Weak States. World Politics, 64, 242–77.
9. Markus, Property, Predation, and Protection.
10. See, for example, the Mikhail Fridman's 2016 interview with the Financial Times. Available at [End Page 31] https://www.ft.com/content/9527e2be-f5b5-11e5-96db-fc683b5e52db.
11. The contrast between the 2004 case of Mikhail Khodorkovsky and the 2014 case of Vladimir Yevtushenkov, both oligarch targets of Putin's Kremlin, is telling. One could easily argue that Khodorkovsky flouted Putin's "rules" by financing opposition parties and threatening to interfere with Russia's foreign policy (via plans for Yukos's pipelines and asset sales to US firms). Yevtushenkov, however, epitomizes oligarchic loyalty to Putin. Yevtushenkov abandoned his patron Luzhkov, the ex-mayor of Moscow, when Luzhkov's relations with the Kremlin grew tense in 2010. But no matter: Yevtushenkov's oil company Bashneft was expropriated, decimating the oligarch's wealth, despite the fact that Yevtushenkov's progressive buy-up of Bashneft shares in 2005–09 had been meticulously coordinated with the Kremlin.
12. Yakovlev, A. (2015) Krizis v glovakh: kak rossiiskaia elita poteriala obraz budushchego [Ruin in the Heads: How the Russian Elite Lost Image of the Future]. Forbes. Available at http://www.forbes.ru/mneniya-column/vertikal/309241-krizis-v-golovakh-kak-rossiiskaya-elita-poteryala-obraz-budushchego
13. Markus, S. (2016) Sovereign Commitment and Property Rights: The Case of Ukraine's Orange Revolution. Studies in Comparative International Development, 51, 411–433; Markus, S. and Charnysh, V. (2017) The Flexible Few: Oligarchs and Wealth Defense in Developing Democracies. Comparative Political Studies.
14. Markus, S. (2007) Capitalists of All Russia, Unite! Business Mobilization Under Debilitated Dirigisme. Polity, 39, 277–304; Markus, S. (2015) Property, Predation, and Protection.
15. Markus, S. (2008) Corporate Governance as Political Insurance, 69–98.
16. See the excellent report by Judah, B. (2016) The Kleptocracy Curse: Rethinking Containment. Washington, DC, Hudson Institute.
17. E.g., Chesnokov, E. (2016) Biznesmen Aleksandr Lebedev: V Londone-rai dlia nashikh provorovavshikhsia chinovnikov i bankirov [Businessman Alexander Lebedev "London is paradise for our thieving bureaucrats and bankers"]. Komsomol'skaia Pravda. [End Page 32]
AuthorAffiliation
Stanislav Markus