Contents | May 2001
In This Issue (Contributors)
More on foreign affairs from The Atlantic Monthly.
Russia Is Finished - Page 2
1 | 2 | 3 | 4
Oligarchs at the Trough
mall businesses account for less than a tenth of Russia's economy. Most economic activity—and theft—is conducted by those who have become known as the oligarchs. Until the collapse of the Russian economy, in August of 1998, the oligarchs, who number around fifteen, garnered praise from many Western journalists and aid officials as the glamorous magnates of the New Russia, daring pioneers out to establish a free market that would ensure the political demise of the Communists. Just as Russia was dubbed the Wild East, the oligarchs were christened the country's Robber Barons. But the appellation is misleading: the oligarchs rose to prominence not by building railroads and industries but by exploiting antiquated pricing systems, disorganized legal codes, and—most important—Soviet-era connections with the government. In the early 1990s, in accordance with the economic "shock therapy" advocated by the West, the state relinquished control over the ruble and freed prices (which had been held artificially low) on consumer goods, but maintained more or less fixed prices on oil, gas, timber, precious metals, and other natural resources. The ruble plunged against the dollar, and within days the life savings of millions were wiped out. Absurdities resulted: for example, the one dollar for which a pack of Marlboros sold in Moscow would buy three tons of crude oil or a trainload of prime Siberian timber; one could buy a plane ticket and fly halfway across the country for the cost of a pound of potatoes.
Those—including Boris Berezovsky, Vladimir Potanin, and Mikhail Khodorkovsky—with ties to the ministries that control natural resources took advantage of price irregularities to make export deals at astronomical profits. Thus it was their connections, rather than entrepreneurial initiative, that made these men wealthy; they used their wealth to buy influence in the media and the government. Wealth begat wealth and influence spawned influence. The oligarchs also established banks and arranged to have them designated conduits of state money, much of which—including hundreds of millions of dollars that Moscow later allocated for the rebuilding of Chechnya after the first Chechen war—simply disappeared. Some oligarchs won tax exemptions from the government (spelled out in presidential decrees) which allowed them to import alcohol, cigarettes, and luxury cars duty-free. Tax exemption was eventually extended to others with ostensibly noble motives: by the mid-1990s the Russian Orthodox Church and the National Sports Fund were importing hundreds of millions of dollars' worth of alcohol and cigarettes a year. This aroused little public anger: people accepted as a given that those in power would use their positions for aggrandizement.
While the oligarchs were amassing their wealth, most press attention, both in Russia and abroad, was on the state privatization scheme conceived and implemented by Anatoly Chubais, the State Property Committee Chairman, and blessed by Western governments. In 1992 and 1993 the government doled out vouchers (vauchery) that Russians could use to invest in state enterprises that were to be put on public auction blocks. Although 41 million Russians acquired shares in 17,000 enterprises, the scheme amounted to a sham—little more than a way for the government to divest itself of moribund enterprises that the Soviet Union had gone bankrupt supporting. The state's most profitable assets—the oil and precious-metals industries—did not come under the purview of the initial scheme. Russians quickly understood that they had been deceived, and vauchery came to mean worthless chits of paper; privatizatsiya was popularly punned into prikhvatizatsiya (from the verb prikhvatit'—"to seize or grab").
Elsewhere on the Web
Links to related material on other Web sites.
"Policy Reform in Russia's Oil Sector" (Finance & Development, June 1996)
"Despite difficult circumstances, policy reform in Russia's oil sector has been impressive. Nevertheless, further reforms and investments in excess of $60 billion over the next 10 years will be needed to help the sector realize its potential." By Charles P. McPherson
Although Russia's largest and most valuable company, the natural-gas enterprise Gazprom (its exact worth is unknown, but estimates have reached as high as $950 billion), was divided secretly among the state, management, and unknown investors in the early 1990s, the rest of Russia's energy and precious-metals industries hit the auction block in late 1995. The auctions, organized by Anatoly Chubais and hailed as "competitive," were rigged by those oligarch-owned banks and companies to which Chubais entrusted them. Large stakes in oil, nickel, and telecommunications companies were sold at a fraction of their real value to the oligarchs and their affiliates; significantly higher bids were disqualified on technicalities. As a result the oligarchs found themselves in control of Russia's most profitable strategic resource: oil. After Saudi Arabia, Russia contains the largest oil reserves on earth; it is the third largest oil producer in the world.
Having acquired these companies for next to nothing, the oligarchs set about looting them, stripping them of assets for the quickest possible gain and shipping the profits abroad. Through an elaborate scheme known as transfer, or corporate pricing, by which a Russia-based subsidiary of an oil company sells oil to the parent company or to another subsidiary abroad at an artificially low price (so that the latter can resell a large portion of the oil at Western-market prices), the oligarchs have since cheated the state out of billions of dollars of tax revenues a year (roughly $9 billion last year alone). They have also transferred shares to offshore holding companies, arranged for the theft of equipment, and embezzled funds. Russian judges, law-enforcement agents, and state officials who objected to the looting were intimidated into acquiescence or bought off.
The oil industry, plagued by obsolete and decrepit equipment and deprived of needed investment, has over the past ten years cut production by 50 percent. To protect their "investments" the oligarchs have been the staunchest advocates of the status quo: in 1996 they financed Yeltsin's re-election to the presidency, giving the ailing, boozing leader campaign funds (thirty times more than election law permitted) and media coverage that took him from single-digit approval ratings to victory over the Communist Party candidate Gennady Zyuganov.
As bad as all that sounds, throughout the 1990s in Moscow the standard of living rose. (Moscow is where most of the oligarchs live; where the banks, restaurants, shops, medical centers, and travel and service industries that cater to them are located; and where the greatest share—perhaps 80 percent—of Russia's capital is parked.) The city underwent a glitzy transformation, in part owing to preparations for its 850th anniversary—an occasion that might have gone uncelebrated if the mayor, Yuri Luzhkov, had not been pursuing presidential ambitions. Muscovites working for finance, oil, and investment companies and earning $5,000 to $20,000 or more a month constituted the upper class. Many of my well-off friends were spending their entire salaries on clothes, new apartments, restaurant meals, and travel abroad. (Profligate spending made sense, because there was no safe place to save money.) Designer boutiques opened across the city; the already high numbers of Mercedes, BMWs, and SUVs on the streets increased further. As the rest of the country slipped into medieval poverty, Moscow was becoming, at least by superficial measures, a world-class capital.
But the country was nearing collapse. The government and state enterprises were failing to pay salaries to millions of Russians in the hinterland, often for months on end—while the directors of those enterprises received hundreds of millions of dollars in state support, which they presumably funneled to accounts abroad. International banks and Western economists ignored evidence of corruption and identified Russia's main problem as insufficient tax collection. They made loans (totaling roughly $10 billion) contingent on improved levies. They urged the Russian government to do all it could to increase its take, and the government complied. Yeltsin's administration floated the idea of setting up a CheKa (an acronym that stands for "emergency committee," harking back to Lenin's bloodthirsty secret-police organ of the same name) to oversee tax collection; it formed tax-police SWAT teams that began raiding entrepreneurs, often acting on tips from informers. In cities across the country giant posters appeared carrying citations from the constitution set against the Russian tricolor, adjuring citizens to pay taxes or else. For those unmoved by the call to patriotism or by fear of the tax police, other posters showed teary-eyed grandmothers pleading with arms outstretched for citizens to pay taxes so that the old women could receive their pensions.
It didn't work. Most businessmen were (quietly) outraged. They knew that the payment of taxes by oligarchs and those close to the state was a matter of negotiation, and that many tax exemptions, though declared annulled in 1995 at the request of the IMF, still functioned. Indeed, the state paid compensation to certain companies for income lost in the abolition of exemptions. If they were not operating secretly out of unmarked offices, or changing locations and names to evade taxes, private enterprises (and even government agencies, including the Tax Ministry itself) made use of loopholes in the law which allowed certain kinds of expenses—for insurance, meals, and so on—to go untaxed, while only income that fell under the rubric "salary" was taxed. The result, to this day, is that companies pay perhaps a tenth of their employees' compensation as taxable salary and nine tenths under various other categories, often in chornyi nal ("black cash"). This proves profitable for employees and employers both. Only the state loses. But then, no one gives a damn about the state. Why?
"Those government thieves aren't getting any of my money!" summarizes the feelings of Russians toward taxes and their state. When Russians talk of their politicians, they frequently speak of "thieves," "bandits," and "swindlers"—and not hyperbolically: the presence of criminals in the Duma is a well-publicized fact. (To acquire immunity from prosecution, some of Russia's most notorious scofflaws have gotten themselves elected to seats in the legislature.) Russians refer to the state itself as the kormushka, or "trough." The notion that a politician could be serving his constituents while dipping his morda ("snout") in the kormushka (whether stealing state funds or IMF dollars), or that laws written by "bandits" and "swindlers" could be just or justly applied, or that pigs at the trough and people coerced into parting with their earnings to fill that trough have anything in common, is laughable.
The Death of "The Common Good"
he hostility that Russians feel toward their government comes not from some innate lack of civic duty but from the terror, violence, and deceit that have since the late Middle Ages characterized the way in which their rulers have treated them. This repression has roots in a history very different from that of the West—a history that gave birth to the civilization of Russian Orthodox Christianity. In 988 the principalities of Kievan Rus' (the predecessor of Russia, Ukraine, and Belarus) accepted Christianity from the Byzantine Greeks, rather than from the Romans—a matter of no small import, given that Byzantium was moribund, its religion having suffocated the intellectual traditions of the Hellenes. When the Eastern and Western Churches excommunicated each other and Christendom divided, in the Great Schism of 1054, the Kievan Russians found themselves religiously estranged from and in political opposition to Western Europe. To this day Russians refer to themselves as "Christians" or "Orthodox" (Pravoslavnye: "those who glorify God in the proper manner") but call people of Western Christian denominations "Catholics"—a term implying heresy and harking back to the schism.
The estrangement from Western Europe alone might have been crippling for Russia's development (assuming that interaction with the West would have exerted a positive influence), but two centuries after the schism an event that was permanently to poison citizen-state relations befell the country: the invasion of Mongol hordes. Sweeping into Kievan Rus' on small, swift horses, firing arrows of bone that pierced Russian armor, the hordes pillaged, massacred, and enslaved the Slavic population to such an extent that most Kievan principalities were knocked out of the history books for 200 years. No comparable calamity befell the West. Mongol rule had the effect of further isolating Russia; interaction with the West was limited. Mongol khans, with all their pomp and cruelty, became the figures on which many Russian rulers would model themselves.
The Kievan Russians believed that God had sent the hordes as punishment for their impiety—a belief endorsed by the Orthodox Church, which prospered under Mongol protection. But the princes colluded with their Mongol overlords, extorting dan' from their subjects for their masters, and saw the fractiousness that had prevailed among their principalities as having invited invasion.
Eventually Moscow subjugated other Russian principalities and grew strong enough to throw off the Mongol yoke. Muscovite czars, Ivan the Terrible foremost among them, destroyed all institutions that could rival their power, turning the nobility into servants, enslaving the peasants to the nobility, and employing Orthodoxy as their official ideology—for Orthodoxy proclaimed the czar God's chosen representative on earth. The czars exploited the people to strengthen the state. The Muscovite court adopted administrative and military practices similar to those of the former Mongol masters, with symbolism borrowed from the Byzantine Greeks. The concept of an omnipotent state as a divine bulwark against external heathen threats became paramount, and was embodied in the absolutism endorsed by the Orthodox Church.
When Constantinople fell to the Turks, in 1453, Moscow became, in Russian eyes, the Third Rome (the first was the Rome of the Latins, which had fallen to the barbarians and was now in the hands of Catholic "heretics"; the second was the Rome of the Greeks, the Byzantine Empire), the sole standard-bearer for the true faith. Thus, while Europe enjoyed the Renaissance, the Reformation, and the Enlightenment, Russia, isolated and infused with a messianic sense of its own superiority over the West, suffered the predations of rulers bent on building a strong state. It also expanded in every direction, subsuming territories populated by non-Slavic ethnic groups, transforming itself from Muscovy into the Russian Empire. The absolute ruler would permit the development of no civil society that could mount any opposition. Until the last days of czarism the choice before the Russian people was either forehead-banging submission to authority or scythe-swinging revolt. Opposing the czar was tantamount to defying God; faith and political allegiance were one.
Against this historical backdrop the Bolsheviks came to power, in 1917. Taking full advantage of Russia's absolutist traditions, Joseph Stalin followed in the footsteps of Ivan the Terrible and Peter the Great and set about strengthening the state, enacting programs of industrialization and agricultural collectivization: he enslaved vast segments of his population to build industries, mine the earth, and gather crops. Under his direction the state pillaged its citizens, dispossessing them of land, factories, homes, and personal wealth, murdering them by the millions in purges designed to crush potential resistance. Whatever legitimacy the state had came from its ability to inspire fear while providing the masses with a modicum of economic security, and from the ideology of Marxism-Leninism, which, with its themes of universal justice and the eventual triumph of the working class, accorded well with Russians' messianic view of their country's place in the world. The state's ability to inspire fear began to diminish with the death of Stalin; the end of the USSR began with the thaw of Nikita Khrushchev.
In Soviet days only criminals engaged in commerce for large-scale profit (the state chief among them: it lived off the sale of oil, gold, and gas to the West, often extracted from the earth with slave labor). The hypocrisy of Soviet ideology and the slaughter of the Stalin era deadened respect for law and order. Crooks became heroes. To get by, the masses improved on medieval traditions of deceiving the authorities. When the Soviet Union disintegrated, the last thing that Russians wanted to hear about was a new set of obligations that were ostensibly to serve the common good. No viable notion of common good had survived the Soviet decades, when neighbors betrayed neighbors, children betrayed their parents, and the state enslaved or murdered its subjects, justifying its actions with words about patriotism and peace on earth. As long as Russians lived in fear, they mouthed state slogans and obeyed. When they ceased being afraid, they in effect told the state, Go to hell.
Copyright © 2001 by The Atlantic Monthly Group. All rights reserved.
The Atlantic Monthly; May 2001; Russia Is Finished - 01.05; Volume 287, No. 5; page 35-52.