Monday, December 30, 2013

Soviet Nationality Issues Live On in Modern Russia

24 December 2013 | Issue 5283

Klipping The Moscow Times

Vladimir Filonov / MT

Nationalists at the annual “Russian March” call for a crackdown on gastarbeiters and immigrants in Moscow.

In his famous 1994 essay "The USSR as a Communal Apartment," Yury Slezkine chronicles the rise of nationalism in the Soviet Union, likening the state to a communal apartment in which each "recognized" ethnicity has their own private room in which to flourish.
For the West, the 1990s were a period in which all of the myriad nationalities previously hidden within the aegis of the Soviet Union surged outwards, creating their own histories, literatures, and diasporas. Over the past two decades, we have managed to differentiate in our consciousnesses some of the new states created, and historians have begun looking back with greater clarity at how these nations formed.
Jeremy Smith's new book "Red Nations: The Nationalities Experience in and after the USSR" is an in-depth look at Soviet nationality policy, tracing the development of this policy from its inception with Lenin's promotion of nationalism, through Stalin's deportations, all the way to the collapse of the Soviet Union into constituent republics and the post-Soviet world.
Covering a vast region and a huge number of groups over a period lasting nearly a century, Smith's project is extremely ambitious. The scope of his work prevents him from going into great depth about any particular group or policy, yet this same broadness forces him to streamline his work, avoiding excessive detail that might have put off casual readers.
As it is, Smith's work is an interesting read for a serious student of history or an armchair enthusiast. Focusing on the entire history of the Soviet Union and into the post-Soviet era, readers can see the issue of nationality develop, as successive Soviet leaders fail to adequately confront the issue of the multinational state, using a variety of mechanisms to temporarily "fix" the nationality problem, either harnessing nationality to serve their purposes, or repressing national movements in favor of Soviet unity.
Beginning with a brief overview of nationality policies and populations in the Russian Empire, the "prison-house of nations," Smith starts his narrative with the Russian Revolution, noting the disparity between the solidly Russian Bolsheviks of Petrograd and Moscow, and the multiethnic residents of the far-flung empire.
This contrast creates the conflict that drives the narrative for the rest of the book, as successive leaders try to reconcile the ruled ethnicities both with each other and with their Russian rulers. Lenin first encourages national movements in order to win over support
during the civil war and later limits the number of "recognized" nationalities that are allowed to have autonomous structures.
Under Stalin, the situation is reversed — national movements are discouraged, ethnic leaders are purged, and mass deportations are inflicted on the peoples of the Baltic and the Caucasus. The backlash against Stalin leads to a reversal of this policy under Khrushchev and a general growth of national movements until the era of Gorbachev and Perestroika, when the Soviet leadership failed to control the burgeoning nationalism of the union republics, resulting in the collapse of the U.S.S.R.
Reading the book makes one realize the extreme difficulty of trying to govern a multiethnic state like the Soviet Union, and the fine balance between encouraging and suppressing national movements that the Soviets never quite seemed to attain.
Furthermore, one cannot help but note the many similarities between the problems of the Soviet Union and the Russian Federation. While the union republics may have seceded, Russia still has huge ethnic minorities, and many regions with predominantly non-Russian populations.
Putin's government has generally promoted a policy of ethnic tolerance, generously subsidizing the republics of the Caucasus and attempting to discourage separatism in Tatarstan and the Far East. However, a new generation of opposition politicians like Alexei Navalny have loudly criticized government support for non-Russians, and race riots like those at Biryulyovo illustrate the ongoing discomfort felt by Russians about their place in a multiethnic state.
While open warfare in the Caucasus has largely ended, ongoing violence suggests unresolved ethnic issues, and continuing immigration from the former Soviet republics, as well as Chinese immigration into Siberia and the Far East, promises future demographic issues.
While Putin's government seems to be trying to find the proper balance between nationalism and unity, it remains to be seen whether he will be able to hold back the rising tide of Russian and Orthodox nationalism, and what will happen in the eventual post-Putin era.
Connecting Soviet history to modern Russia, Jeremy Smith's "Red Nations: The Nationalities Experience in and after the USSR" is a fascinating read for anyone interesting in questions of nationality in the post-Soviet space. The book is available from Cambridge University Press for a list price of $34.99. ISBN: 9780521128704

Contact the author at g.golubock@imedia.ru

Wednesday, December 18, 2013

Why Russia Is Just as Good as China

15 December 2013 | Issue 5277

By Charles Hecker and Kent Kedl

Klipping The Moscow Times

Russia and China are both two large, emerging markets. Both have growing middle classes topped with a frothy layer of the super-rich, and both have thorny, challenging business environments that are fraught with corruption. So why do investors leap at the chance to get into China and balk at Russia?
What a difference a billion customers makes.

How mesmerizing to think of selling something to a billion people. Who could say no to an opportunity like that? In reality, few do, despite the considerable challenge corruption poses in China.

If you dismiss Russia only because it small size relative to China fails to justify the never-ending battle with corruption, you will miss a key market. If you rush into China because its enormity dwarfs any concerns about corruption, you risk crashing on the China superhighway.

But when talk turns to Russia, with only 143 million customers, the conversation grows difficult. For some reason, investors find Russian corruption harder to metabolize. It is puzzling. The problem is as corrosive in one country as in the other.
This divergent approach to investing in Russia and China puts investors in both countries at a disadvantage. If you dismiss Russia only because its small size relative to China fails to justify the never-ending battle with corruption, you will miss a key market. If you rush into China because its enormity dwarfs any concerns about corruption, you risk crashing on the China superhighway.
It is not just a question of market size. The split stance on doing business in Russia and China echoes the equally split public dialogue on the two countries. Russia gets far harsher treatment than China for the role corruption plays in its economic and political systems. Everyone keeps complaining that corruption seems to be part of Russian culture. In the West, this kind of talk verges on reflex, rooted in decades of anti-Soviet invective that finds its modern incarnation in Russia-bashing.
That criticism is applied unevenly. Though China was the power-behind-the-throne during the Korean war, the West seems to have forgotten that and re-engaged with China in the early 1970s through ping-pong diplomacy and eventually full recognition over the Taiwan upstart. Although a Communist system, China never grabbed the West’s attention as the “evil empire” as the Soviet Union once did and as Russia still does to a large extent.
This does not mean that every investor rushes headlong into corrupt transactions in China without considering the implications. On the contrary, many international companies doing business in China prepare exhaustive anti-bribery and corruption policies to protect themselves from taint and regulatory zeal in their home jurisdictions. The U.S. Justice Department looks at China as prime hunting ground to catch companies breaking Foreign Corrupt Practices Act statutes.
Of the companies that actually adopt comprehensive anti-bribery and corruption policies, few will do much to bring them to life. Their policies remain on paper. Some launch a flashy e-learning tool that sits near the bottom of in-boxes in their Chinese subsidiary. Others will at best make a few token anti-corruption gestures — a company-wide e-mail from the CEO perhaps — and see how it goes. This remains a problem in Russia, too.
The anti-corruption environment in China is taking on new energy with the cases around pharmaceutical companies and Chinese health care, a system widely known to be corrupt to its very core. This is where the billion-customer motivation runs most true. Not everyone wants a car or the latest electronic gadget, but everyone at some point in his life will need health care. Multinational companies that are directly or indirectly related to the health care sector are drooling at the prospect of more than a billion patients.
In the world of compliance, we talk about “adequate measures” that a company takes to protect itself against corruption. But the recent probes into health care companies in China are forcing companies to redefine the meaning of “adequate.” For example, one adequate measure is due diligence: doing background checks on suppliers, distributors and other third parties with whom you will do business. The same is the case in Russia. Whether you’re doing business in central Moscow or the provinces, you need to know as much as possible about your partner and the potential risks that a company presents to you.
In most environments, a quick look at a business database and a credit check are sufficient. But in China, where neither databases nor credit checks are possible, “adequate” due diligence means sending people out to discreetly talk to the partner’s customers, vendors, regulators and former employees to get a deep sense of who the company is and how they do business. Russia presents a strong parallel here, as well. Quick database or credit checks are either hard to come by or fail to present a complete picture.
Many of the problems with health care companies in China today are a result of not doing adequate due diligence. Who cares if there are a billion Chinese customers if you’re going to destroy your company and your reputation in trying to reach them?
So Russia may not have a billion potential customers. It may also be a popular whipping boy for its business behavior. But companies who avoid Russia because of corruption and rush into China because of its market size are missing the point. Both countries contain the same risks, and each harbors significant reward.

Charles Hecker is a former head of Control Risks’ Moscow office. Kent Kedl is managing director, Greater China and Northern Asia, at Control Risks and a long-term resident of China.

Ukraine's Two Nations

15 December 2013 | Issue 5277

By James Brooke

Klipping The Moscow Times

To understand what is happening in Kiev today, remember that Ukraine has a larger landmass in Europe than France, the largest nation of the European Union.
Western Ukrainians look to Poland, Austria and Germany. People consider themselves European to the core. City halls in Western Ukraine now fly EU flags. In schools, children study German and Polish. This new post-Soviet generation speaks Russian poorly, if at all.
Travel 1,200 kilometers to the east, and Ukrainians look to Russia. They produce goods that are exported to Russia. They speak Russian. The Soviet generation often has a hard time speaking Ukrainian, the national language.

For three years as president, Viktor Yanukovych has tried to balance these two sides, roughly comparable to the way pre-Civil War U.S. presidents tried to keep America's house together by waffling on slavery.
Now, the EU and the Kremlin are telling Ukraine: make your choice! This winter, in the biggest political crisis since Ukraine won independence in 1991, foot soldiers for both sides are on the march.
At Kiev's pro-government camp, Grisha, a 30-year-old tattooed construction worker from the Russian-speaking city of Nikolaev, says his opposition to the EU is a no brainer. Reeling off the names of his city's three remaining factories, all from the Soviet era, he says: "If Russia refuses to buy, the factories simply shut down."
But one kilometer down a cobblestone street, views are diametrically opposed.
In normal times, Oleg works in a pharmaceutical warehouse in Lviv, the western Ukrainian city near Poland. But now, he mans a 3-meter high barrier that faces Kiev's government quarter.
Taking a break from scrutinizing a constant flow of pedestrians entering the pro-Western camp, Oleg says the EU is a no brainer.
He is confident that by orienting his country toward the EU, Ukraine can be Europe's next Poland. He says: "The country will be more open, and investment will come, and factories will work again."
In Kiev, the capital, people are responding overwhelmingly in favor of the "Euromaidan." Specialized Facebook groups channel a steady flow of warm clothing, tents, firewood and food to Kiev's Independence Square. Some of Ukraine's best pop groups sing nightly on the stage. After three weeks of police attacks and freezing temperatures, the Euromaidan keeps bouncing back, always larger than before.
The Ukrainian Interior Ministry no longer views Kiev police as politically reliable. Repressive actions are carried out by riot police trucked in from Russian speaking areas of Ukraine. But, in general, policemen are known to be fans of Vitali Klitschko, the 2-meter tall boxing prize fighter who is the opposition's rising star.
Ukraine's financial oligarchs now are covering their bets. Two of the nation's richest men, Victor Pinchuk and Rinat Akhmetov, have broken their silence and called on the president to start serious talks with the opposition.
Ducking responsibility, Yanukovych blames the police violence on rogue policemen and the fact that he did not sign a EU trade and political association agreement on his own negotiators.
On Monday, he travels to Moscow to sign economic agreements.
For three centuries, much of what is modern day Ukraine was ruled from the Kremlin. Under the tsars, it was called "Little Russia."
In 2008, at a NATO meeting President Vladimir Putin told U.S. President George W. Bush, "Ukraine is not a real country."
Time will tell if Yanukovych can keep Ukraine's two nations under one roof.

James Brooke is the Moscow bureau chief of Voice of America.

Russia's Path to Progress Goes Through OECD

11 December 2013 | Issue 5275

By Chris Weafer

Klipping The Moscow Times

Russia's Path to Progress Goes Through OECD

In terms of symbols that give investment and business credibility, being a member of the Organization for Economic Co-operation and Development, or OECD, ranks at the very top of the list. Unsurprisingly, membership is not easy to acquire, as evidenced by the fact that even though the organization has been in existence for more than 50 years, there are currently only 34 member countries. Face control was never this tough at Moscow's glitziest nightclubs. The Kremlin is now desperate to gain admittance to this exclusive club and, put frankly, if Russia is to make progress in boosting inward investment and attracting more foreign businesses, the OECD is a club which the country needs to join sooner rather than later.

Gaining membership in the exclusive OECD club would help bring around investors who are reluctant, or even dismissive, of the very idea of coming to Russia today.

But, as with all of the best sought-after clubs, the membership rules are very demanding. As it stands, Russia is a long way from satisfying many of the exacting entry requirements. The government has a lot of work to complete if it is to achieve its goal. It is therefore encouraging that the commitment made during the Group of 20 euphoria, that Russia aimed to join the OECD "within three years," has now been followed up with the announcement of a new task force headed by Deputy Prime Minister Igor Shuvalov. At this point, the critics are reaching for their keyboards to scream "more committees, more talk, more planning … where's the action?" And quite rightly too. But everything has to start with some action, no matter how small.
The OECD was established in Paris in 1961. Its exclusive membership comprises the world's highly developed economies. Six of the former Soviet bloc states in Eastern Europe are members by virtue of the fact that they are also now part of the European Union. Turkey and Mexico are the only non-EU emerging markets to have acquired OECD membership.
According to the OECD's mission statement, the organization aims to "promote policies that will improve the economic and social well-being of people around the world." Unlike the World Trade Organization, which specifically works to improve trade between countries, or topic specific organizations, such as the International Energy Agency, the OECD has a more general focus. Its members must have open economies where entrepreneurs and businesses of all sizes can operate in a legally safe environment; where the rules are known and applied predictably and without bias. That means no corruption, no intrusive bureaucracy, a strong rule of law and a small state footprint across the economy. These are exactly the issues that Russia must work to address in order to attract much needed investment.
But beyond the business and investment rules, the OECD agenda also includes social and environmental change. In many ways, it is a system of behavior based on best practices, developed by observing how others have succeeded and failed in building sustainable economies against a backdrop of social development.
The OECD mission statement also states "the common thread of our work is a shared commitment to market economies backed by democratic institutions and focused on the well-being of all citizens. Along the way, we also set out to make life harder for the terrorists, tax dodgers, crooked businessmen and others whose actions undermine a fair and open society." Any country asking foreign investors to trust them with their money really needs to be a member of that club.
Or does it? While Russia is pushing hard to join, many other big emerging economies, such as China, India and Brazil, are less interested in joining and yet attract a bigger volume of foreign direct investment — as a percentage of gross domestic product — into new industries and infrastructure projects than Russia does. Yet all of those countries have had corruption scandals in the upper echelons of government, and all have had corporate governance issues with local companies listed on foreign exchanges. All three countries also ranked below Russia on the recent update of the World Bank's Ease of Doing Business index. China's response to persistent poor scores was to start a campaign to have the annual survey scrapped as unfair.
Yet it is Russia that routinely generates headlines about corruption, bureaucracy and poor rule of law, while the other so-called BRIC countries get greater investment inflow. As much as any other reason, this is why Russia now has to fight harder and gain entry into the OECD while the others can take more time.
For plenty of fair and unfair reasons, Russia has a worse image with international investors than the other big emerging economies. That is a simple fact, and it has to be addressed with more aggressive actions.
The OECD member countries have recently set out some key goals that they need to achieve. That list is also almost exactly the same as the wish list for investors, reformers and the new generation of Russians in an expanding middle class. Russia will have to tick those boxes, and none will be easy for a country still dealing with more basic problems. The OECD list includes membership goals:
To restore confidence in markets, and the institutions and companies that make them function.
To re-establish healthy public finances as a basis for future sustainable economic growth.
To look for ways to foster and support new sources of growth through innovation and environmentally friendly "green growth" strategies.
To ensure that people of all ages can develop the skills to work productively and satisfyingly in the jobs of tomorrow.
Chinese philosopher Lao Tzu is credited with the quote "the journey of a thousand miles begins beneath one's feet, with the first step." Over the years Russia has taken the first step in many a journey towards reform.
What's different this time? One factor that is certainly different this time is that Russia is now on the cusp of a long period of low growth, which in an emerging economy will feel like stagnation. That can only be avoided if a new investment-orientated driver model can be successfully created. I have said previously that the government does not get enough credit for a raft of improvements and reforms since May 2012. The Russian Direct Investment Fund, for example, has achieved significant success in attracting big ticket investment commitments from sovereign wealth funds this year. But of course, from such a low base, a huge amount more needs to be done.
Gaining membership in the exclusive OECD club would help bring around investors who are reluctant, or even dismissive, of the very idea of coming to Russia today. Shuvalov's task force is not exactly the first step in the long process. Russia has already signed up to the OECD's Anti-Bribery Convention and has been in informal talks with the group's secretariat for some time. But now finally there is a formal focal point within the government to coordinate the process.
Reluctant foreign investors probably have another memorable quote in mind, this one from the larger than life western actor John Wayne: "Hey pilgrim, we know you can talk the talk, but can you also walk the walk?"

Chris Weafer is senior partner with Macro Advisory, a consultancy advising macro hedge funds and foreign companies looking at investment opportunities in Russia.

When Swine Rules the U.S., Russia and Ukraine

08 December 2013 | Issue 5272

By Alexei Bayer

Klipping The Moscow Times

Alexei Bayer

A banker friend noted recently that even though several investment banks were wrecked by corruption, greed, rigging rates and currency markets and selling fraudulent financial products, their senior executives went home safe and rich. No one was stripped of their assets or thrown in jail.
"The Russians can only look at the U.S. elite with amazement and admiration. But do they?"
Indeed, there are striking similarities between top-heavy income distribution in Russia and the U.S. The two countries are increasingly run for the benefit of their super-wealthy. Their elites are also similar: They did not inherit wealth and privilege but made their fortunes over the past two decades. Although there were differences in the standards of living and quality of life, they came from middle-class families in their respective societies. Russians got free Soviet education, and their U.S. counterparts went to universities on scholarships or through government-subsided loans. In other words, they benefited from systems which had to be whittled down for them to become so wealthy — and which their untaxed wealth continues to undermine.

Not surprisingly, there is growing kinship between the super-wealthy in Russia and the U.S. They have more in common with each other than with their countrymen. They share pastimes, own adjacent real estate and attend each other's parties.
This is all quite Orwellian — not from "1984" but from George Orwell's "Animal Farm," a biting satire of Bolshevism as well as a sardonic reflection on the impossibility of equality. In this fairy tale, work animals take over Farmer Jones' farm and proclaim equality and dignity. But in short time, their leaders, the pigs, become new, harsher masters and start hobnobbing with human masters.
Absolute wealth corrupts just as much as absolute power. As political commentator Andrei Piontkovsky recently observed, Roman matrons paraded naked in front of their slaves since they did not regard them as human. Americans and Russians could feel a kind of solidarity: They are both ruled by swine.
Russia, where political power and wealth have merged, functions almost exactly as Orwell's animal farm — except Russia's swine do not need to work their countrymen very hard. Their wealth comes from the Earth, and they only need to pump it out of the ground. The U.S. swine rule indirectly by pouring money into politics, suborning both political parties and stirring and diverting the resentment of the middle class that is worried by its declining income and status. While U.S. investor Warren Buffett, one of the world's richest men, has for years publicly said his income tax rate is less than half of his secretary's, nothing at all has changed except that the rich keep getting richer, the country's infrastructure is falling apart, and the government sinks deeper into debt.
The rich classes got a scare in the 1930s and 1940s, when financial markets sank and communism and fascism were on the rise. After World War II, there was a major rethinking of the predominant social and economic models. In Europe, the system endures, distributing wealth more equally inside individual countries and across the European Union. In the U.S. and Russia, those lessons have been forgotten. So far, protests such as the white-ribbon movement in Russia and Occupy Wall Street in the U.S. have been laughable. But the peaceful revolt in Kiev, where the population is rising up against their own swine, may show Russians and Americans how to change the system.

Alexei Bayer, a native Muscovite, lives in New York. His detective novel "Murder at the Dacha" was published by Russian Life Books in 2013.

Putin Wins Over Ukraine With Gas Deal and $15Bln Bailout

18 December 2013 | Issue 5279

By Ivan Nechepurenko

Klipping The Moscow Times

Michael Klimentyev / RIA-Novosti / Reuters

President Vladimir Putin, left, shaking hands with his Ukrainian counterpart Viktor Yanukovych during the pair’s meeting at the Kremlin on Tuesday.

President Vladimir Putin and his Ukrainian counterpart, Viktor Yanukovych, agreed to landmark deals in the Kremlin on Tuesday that will see Russia cut the price of gas supplies to Ukraine by one-third and grant Ukraine a much-needed $15 billion bailout.
The raft of agreements, which appear to secure Russia's influence over Ukraine for the time being and stall Ukraine's ambitions to move closer to the European Union, will provide much-needed assistance in keeping the suffering Ukrainian economy afloat. The funds may even last until Ukraine's 2015 presidential vote, in which Yanukovych will seek to win reelection.

For the past month, Ukraine has been caught in limbo between Russia and the EU, which has been trying to convince Ukraine to sign an association agreement. Yanukovych had originally planned to sign the deal at a summit in Lithuania last month but backed out at the last minute in favor of closer relations with Russia, triggering massive ongoing protests in central Kiev.
"Given the difficulties faced by the Ukrainian economy, which are to a large extent connected with the world financial and economic crisis, with the aim of helping the Ukrainian budget, Russia's government has made the decision to convert $15 billion of its reserves into Ukrainian bonds," Putin said following the negotiations.
Those funds will help Ukraine to pay off the more than $17 billion in loan payments that it faces next year, an amount almost equal to its central bank's depleted currency reserves. Yanukovych has cited the need for an immediate injection of cash as the main reason why he refused to sign the EU Association Agreement on Nov. 29.
The price of gas was also key for Yanukovych to maintain support in his political power base, the industrial, energy-hungry regions of eastern Ukraine, where ties with Russia are largely favored. Gas subsidies to Ukrainians were also becoming unsustainable for the Ukrainian budget.
Under the deal signed Tuesday, the price of gas that Russia sells to Ukraine will go down from $400 to $268.5 per 1,000 cubic meters. Yanukovych's government has repeatedly called the former gas deal, signed in 2009 by currently jailed former Prime Minister Yulia Tymoshenko, as "enslaving."
Speculation was rife that in return for bailout money and a gas discount, Russia would force Ukraine to join a Russia-led Customs Union with Kazakhstan and Belarus, but Putin denied that this was part of the deal. Indeed, no concessions from Ukraine to Russia in return for the cash infusion were publicly announced.
"I want to draw your attention to the fact that this is not tied to any conditions. I want to calm you down — we have not discussed the issue of Ukraine's accession to the Customs Union at all today," Putin told reporters at a news conference following the talks.
Putin has repeatedly emphasized that Russia would respect Ukraine's possible decision to establish a free-trade area with the EU, but that such a move would force Moscow to lift the current preferential trade regime between the two countries.
To hammer that point home, in the weeks before the Eastern Partnership summit in Vilnius where Ukraine was to sign the EU agreement, Russia imposed harsh restrictions on Ukrainian imports.
On Tuesday, Putin and Yanukovych signed a roadmap for lifting these restrictions.
Viktor Mironenko, head of the Center for Ukrainian Research at the Russian Academy of Sciences, said that despite its economic problems, geopolitically crucial Ukraine represented something highly valuable for both the EU and Moscow.
"Ukraine is not liability but a prize, and whoever is willing to pay the price for it first will win it," Mironenko said.
"The fact that Putin said we will help Ukraine without conditions because it is in such a difficult situation is a very powerful message," he said.
The liberalization of the trade regime between Russia and Ukraine is likely to increase the interdependence of the two economies and stifle the incentives for Ukraine to move closer to the EU. At the same time, the pro-Western opposition in Ukraine will almost certainly continue to demand integration with Europe.
"The old conflict will remain: Ukraine will be tied to Russia economically but will cling to Europe politically," Mironenko said.
Ukrainian opposition leader Vitali Klitschko, a probable rival to Yanukovych in the 2015 presidential race, said after the deals were announced Tuesday that Yanukovych had up given up national interests, independence and prospects for a better life for Ukrainians, using the country as a financial deposit to raise $15 billion, Reuters reported.
Yanukovych, who in the past has expressed a desire to balance ties with Western Europe and Russia, signaled that there was no turning back from the path chosen Tuesday.
"We need to learn our lessons for the future and never make such mistakes," Yanukovych said, referring to the trade clash with Russia.

Contact the author at i.nechepurenko@imedia.ru

Putin's Conservative State Capitalism

18 December 2013 | Issue 5279

By Anders Åslund

Klipping The Moscow Times

The essence of President Vladimir Putin’s annual address to the Federal Assembly on Dec. 12 was that his enchantment with state capitalism and Soviet economics is continuing. Rather than promoting higher economic growth, he wanted to go after the remaining prominent private businessmen.
Russia’s most urgent economic concern is the disappearing economic growth, but only in the middle of his speech Putin arrived at the need for the “renewal of sustainable economic growth.” This time he did not blame the euro crisis, but he admitted that “the main causes of the slowdown are not external but internal.”

Putin sounded completely Soviet during his address to the nation. He seems unaware both of the collapse of the Soviet economic system and why it happened.

Liberal economists usually blame corruption, expanding state capitalism, red tape, decreasing competition and stalled international economic integration as the main causes of the declining growth. In a more positive language, Putin mentions four “new factors of development” — namely “high quality of professional education, a flexible labor market, good investment climate and modern technology.”
All are correct but hardly key. Putin boasts about the minor improvements in the business climate that have occurred in the last two years and calls for further improvements, which are to be welcomed.
His talk of technological and professional development sounds like a Soviet throwback. It makes sense to revive Soviet-style vocational training, which corresponds to apprenticeships in Germany, Switzerland and Austria, but the unmentioned critical concern is that Putin’s policies are forcing good, modern managers to emigrate.
When Putin talks about technology, it gets worse. Characteristically, he does not use Prime Minister Dmitry Medvedev’s favorite words “innovation” or “modernization.” The only thing he wants to modernize is the defense industry. In Putin’s Russia, everything has to be done by the state: “We must form a domestic demand for high technology.” He wants to do so by “using the system of state procurement and investment programs of the state corporations.”
Naturally, Putin’s state must establish technological standards, measure them and control them. He sounded completely Soviet: “I propose to create a system of statistical evaluation of the level of technology in various branches of the economy to obtain an objective picture of our competitiveness. In the Soviet period such a system worked,” Putin said. “It was liquidated, and nothing else was created. It is necessary to recreate it.”
Sorry, we have seen that show, and it was disastrous. I participated in the destruction of that system because it produced a miserably low level of technology. The iPhone and the iPad were not created by state standards but by competition on the market. Incredibly, Putin seems unaware both of the collapse of the Soviet economic system and why it happened. So here we go again.
In addition, the word privatization was missing in this speech. Putin criticized Rosneft’s purchase of TNK-BP because it occurred abroad, but the real scandal is that this was the largest nationalization since the confiscation of Yukos. Putin wants to tax the profits of Russian offshore companies, but he offers no proposal for how to do so. He could easily abolish the Russian double-taxation agreement with Cyprus, which provides the legal base for these flows, but that would hurt him and his friends personally.
It makes sense that he wants to deprive offshore private companies of state support, but the restrictive policy he outlined will persuade private businessmen to increasingly sell their companies to state corporations, further reducing competition and efficiency in the economy. Private capital will flee all the faster, further depressing Moscow’s stock market.
Putin mentions Russia’s key problem, corruption, four times, but he has little to say about how to fight it, indicating his lack of interest. He advocates external audit of the top dozens of state corporations, but this will presumably be carried out by the Audit Chamber, which is now headed by Tatyana Golikova. But she appears completely subordinate to Putin, unlike her predecessor Sergei Stepashin, who once was a competitor of Putin, so this control seems a chimera.
If Russia really wants to fight corruption, it needs to move toward competitive and open procurement of the large state enterprises. But since Putin’s closest friends are considered to have made their fortunes on such nontransparent procurements, he said nothing about that.
Currently Putin is instigating the merger of the corrupt ordinary court system and the well-functioning economic courts, which in all likelihood will render the economic courts as corrupt as the ordinary ones. Not very convincingly, Putin argued that “unifying these courts will allow us to bring judicial practice onto one track, and therefore strengthen the guarantees protecting a crucial constitutional principle, the equality of all before the law.” Of course, the president cannot state openly that he is promoting the inequality of corruption.
This speech does not advocate more market competition but discretionary state intervention. The only market Putin seems to favor is the labor market. He does use words, such as competition and entrepreneur, but rather than encouraging competition and economic freedom he calls for “targeted support for small and medium business.”
As usual, Putin becomes most incomprehensible when he arrives at the Customs Union. “We are not imposing anything on anybody. … Our integration project is based on equal rights and on real economic interests,” Putin claims. But this flies directly in the face of Russia’s severe trade sanctions that it levied against Ukraine for its intention to sign the Association Agreement with the European Union. Meanwhile, he is increasing corruption and protectionism by abrogating the TIR convention, which has facilitated the customs procedures of containers.
One of Putin’s old favorite themes, the BRICS, received just a passing mention, which makes sense after the BRICS have become a sign of economic weakness. The same is true of the Group of 20 and G8, although Russia is hosting their summits this and next year, respectively. And he said nothing about the $51 billion price tag for the Sochi Winter Olympics, which was initially budgeted at $12 billion. This omission might tell us something about what he is really worried about.
Vedomosti columnist Maxim Glinkin recently summarized the essence of the speech appropriately: “Putin told the establishment: I have returned seriously and for a long time. Everything goes according to my scenario and for the time being we are not going to change anything in essence.” Or as Putin himself put it with regard to his support for traditional values: “Of course, this is a conservative position.”
Putin and his rule appear increasingly obsolete like former Soviet leader Leonid Brezhnev, and we know what happened to Russia after him.

Anders Åslund is a senior fellow at the Peterson Institute for International Economics in Washington.

Thursday, November 28, 2013

Russia Can't Grow and Steal at the Same Time

27 November 2013 | Issue 5264

By Anders Åslund

Klipping The Moscow Times

Russia Can't Grow and Steal at the Same Time

The Kremlin's two key goals are to maintain political power and to enrich the ruling elite. At best, economic growth is the third-ranking goal, and it contradicts the two primary aims. Logically, the current Kremlin policy leads to economic stagnation.
Political analyst Yevgeny Minchenko captures the new system best with his concept of Politburo 2.0. This is no vertical of power but an old-fashioned feudal system, where the ruler functions as an arbiter or godfather between nine major lords: three private businessmen from St. Petersburg, three top state enterprise managers and three leading state officials. This system of rule is reminiscent of Soviet leader Leonid Brezhnev's Politburo in 1980, which stood out for its petrification. It can maintain political power for a long time, but it cannot be reformed. Such a system can only collapse.

The second goal of the ruling elite is its own enrichment. The concept of conflict of interests is unknown in Russia, and senior officials are never accused of corruption. The quickest road to riches is to receive an overpriced pipeline or road contract from the state or a state corporation without competition. Alternatively, a state manager can buy a private company expensively and demand a kickback. Or he can sell a state company cheaply and request a kickback from the private buyer. There are many other ways of corrupt revenues, such as extortion by private businessmen, theft and embezzlement, but they are more labor-intensive and generate less remuneration. Sometimes the perks are legal, as when the presidential administration distributes luxury housing to deserving officials. Yet all these means of elite enrichment are parasitical and harm economic growth.
During Russia's growth spurt from 1999 to 2008, growth was generated by the market reforms of the 1990s, ample free capacity, rising oil prices and redundant human capital. By 2008, the free capacity had largely been exploited, and the oil prices have leveled out at $100 to $120 per barrel with some fluctuations. No significant market reforms have been carried out since 2002.
From 2010-12, the growth rate moderated to 4 percent. A major cause of the lower growth was that the government bailed out the worst big state and private corporations during the crisis in 2008-09, so that they crowded out more productive companies. Arguably, the growth came from two sources: human capital and international economic integration.
Persistently, economic growth has come from the private sector, consisting of tycoons, small and medium-sized businesses and large foreign investors. The old oligarchs are now tightly circumvented. They are allowed to sell their companies to the state — when the state so desires — at a price determined by the state, but they are not allowed to buy other big companies, only medium-sized firms. Therefore, the biggest tycoons have little choice but to take their money out of the country. They have ceased being an entrepreneurial force.
The small and medium-sized enterprises are checked from all sides. Many have hit a glass ceiling and sell to the country's wealthiest businessmen for whom the glass ceilings are so much higher. Small enterprises are facing tougher taxation and government extortion, and hundreds of thousands have chosen to close down this year. The announced amnesty of 100,000 dubiously jailed businessmen dwindled to 1,000. President Vladimir Putin is now advocating harder tax repression of private firms through the Investigative Committee, which of course will aggravate corruption and further enrich officials of that agency. As the total number of enterprises declines, competition diminishes and productivity stagnates.
Paradoxically, the happiest companies in Russia may be large multinational corporations producing in the country. They roll in with their high technology and enjoy minimal competition, which drives up both sales and prices, though admittedly costs increase as well. Yet, their share of Russia's economy remains tiny, so they do not contribute much to economic growth.
Management consultants point to the shortage of good managers as the greatest bottleneck in the country's economy, followed by roads. The thieving at the top makes it impossible to build roads, so corruption is the key problem.
Until recently, much of the growth could be ascribed to skillful new managers moving to more poorly managed companies. With state companies expanding their dead hands over the economy, this process has gone in reverse. When Rosneft bought TNK-BP, one of Russia's best-managed big companies, Vedomosti reported that 90 percent of the 1,600 employees in the TNK-BP headquarters left, presumably many of them emigrated. Instead, Igor Sechin, an apparatchik without management experience, took over Rosneft and imposed his micromanagement.
Similarly, Russia adopted many liberalizing laws to enter the World Trade Organization, which helped open up the economy to more global competition. When Russia finally joined the WTO last year, this process also went into reverse. The Customs Union with Belarus and Kazakhstan is a harebrained protectionist scheme that will damage the Russian economy through trade diversion and by compelling the Kremlin to pay large subsidies to other countries that agree to participate.
Russia's economic problems are not financial. The budget remains close to balance and will be so even with a falling oil price because of the novel floating exchange rate. Although the current account surplus has dwindled, it is still in surplus, and Russia's international reserves are impressive at more than $500 billion.
Any fiscal or monetary stimulus would only cause higher inflation and more illegal immigration because Russia's economy is working at full capacity. Unemployment is low at 5 percent, while inflation remains a concern at 6 percent. Russia's investment rate is too low at 21 percent of gross domestic product and probably much lower in reality because of the extraordinary kickbacks. Russia needs to fight its top-level corruption before it can start building roads.
Unperturbed, at each of his many crisis meetings about falling economic growth, Putin proposes another mega investment that will undoubtedly aggravate corruption.
As long as the president pursues an anti-growth and pro-corruption policy, no economic growth is likely.

Anders Åslund is a senior fellow at the Peterson Institute for International Economics in Washington and author of "Russia's Capitalist Revolution."

Ukrainian Protests Compared to 2004 Orange Revolution

26 November 2013 | Issue 5263

By Oleg Sukhov

Klipping The Moscow Times

Sergei Chuzavkov / AP

Protesters squaring off with riot police in front of the Ukrainian Cabinet of Ministers building in Kiev on Monday.

Protests against the Ukrainian government's decision to delay an association deal with the European Union last week in favor of closer ties with Russia continued in Kiev on Monday, prompting memories of the 2004 Orange Revolution, while the EU issued a statement condemning Russia's actions in the dispute.
Just as nine years ago, the protests have been driven by a feud between pro-Western and pro-Russian forces over the future of Ukraine, a key geopolitical prize in eastern Europe.

The Kremlin was deeply angered by the outcome of the Orange Revolution, which saw demonstrators protest against the Russian government's favored presidential candidate and current Ukrainian President Viktor Yanukovych, who then lost to pro-Western politician Viktor Yushchenko in a re-run election. President Vladimir Putin has already accused the EU of being willing to sponsor protests to get its way this time around as well.
Russia appears to have the upper hand in this dispute, but the European Union may end up drawing Ukraine into its fold eventually.
"There is no geopolitical victory for Russia" in the suspension of EU talks, said Stanislav Belkovsky, head of the National Strategy Institute. "The vector for European integration is irreversible … and the current protests are cementing that vector."
According to various estimates, 50,000 to 200,000 people took to the streets in Kiev on Sunday, the largest protests since the Orange Revolution, while smaller rallies took place all over Ukraine. The Kiev protesters set up a protest camp on central square Evropeiska Ploshcha, clashed with police and tried to break a police cordon around the Cabinet building.
Most of the people either went home or were dispersed by the police by Monday morning. But some remained, and more protesters poured into central Kiev on Monday, flocked to the Cabinet building again, fought with police and blocked Vulitsya Grushevskogo.
The police used batons and tear gas to disperse the demonstrators, and the authorities initiated a criminal case against protesters who clashed with police on Sunday on charges of hooliganism and resisting arrest. In Lviv — the major stronghold of Ukrainian nationalism and pro-Western sentiment — about 10,000 students demonstrated against the government on Monday, and all classes at universities were canceled, Kommersant reported.
As the standoff with the government escalated, Ukraine’s center-right Svoboda party urged the parliament to pass a vote of no confidence in the Cabinet, while the liberal Batkivshchina party asked the Prosecutor General’s Office to initiate a criminal case against Prime Minister Mykola Azarov and the Cabinet for allegedly exceeding their authority by suspending the deal with the EU.
The EU reacted to the developments in the country by issuing a statement Monday decrying Russia’s actions in relation to Ukraine.
“While being aware of the external pressure that Ukraine is experiencing, we believe that short-term considerations should not override the long-term benefits that this partnership would bring,” said European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso in the statement. “It is up to Ukraine to freely decide what kind of engagement they seek with the EU.”
“Ukrainian citizens have again shown these last days that they fully understand and embrace the historic nature of the European association,” the EU leaders said, apparently referring to the protests.
“We therefore strongly disapprove of the Russian position and actions in this respect. Stronger relations with the EU do not come at the expense of relations between our Eastern partners and their other neighbors, such as Russia. The Eastern Partnership is conceived as a win-win where we all stand to gain,” they said.
Russia has been accused of pressuring Ukraine to suspend the deal with the EU by introducing cumbersome customs checks on Ukrainian imports and initiating a dispute over gas supplies in recent months. Putin said Monday that Russia would have to put restrictions on Ukrainian imports if the country signed the Association Agreement. During the 2004 Orange Revolution, Russia was also accused of interfering with Ukrainian events in favor of Yanukovych, while the Kremlin said Western money and intelligence agencies were behind the revolution.
Some observers said the current protests could trigger changes similar to the Orange Revolution, when hundreds of thousands of people protested on Maidan Nezalezhnosti in Kiev from November 2004 to January 2005 against perceived election fraud. As a result of the uprising, Yanukovych’s victory in a presidential vote was canceled, and Yushchenko came to power in a repeat election.
Jailed former Prime Minister Yulia Tymoshenko, one of Yanukovych’s chief political foes and a leader of the Orange Revolution, said Sunday that the ongoing protests marked an anniversary of the 2004 events.
“Due to a mystical turn of fate, Yanukovych again made us take to the streets during the same days of the month as nine years ago,” she said in a statement. “This means that we must complete what we failed to do after the 2004 Orange Revolution. We must once and for all expel corrupt clans out of the government.”
But Konstantin Zatulin, head of the CIS Countries Institute and a State Duma deputy, dismissed comparisons with the power transition of 2004.
“Color revolutions happened in countries where the government was weak and unconsolidated,” he said, adding that Yanukovych’s current position was strong, unlike that of then-President Leonid Kuchma in 2004.
The Orange Revolution was partially a result of Kuchma’s intrigues, and he lost his influence as a result of unsuccessful efforts to get his protege Yanukovych elected, Zatulin said. But now Yanukovych is fighting for his own future, not that of a successor.
“He will fight until the end,” Zatulin said.
Belkovsky said Yanukovych had already opted for a pro-European course, however, and was using the current delay in talks on the EU agreement as a bargaining chip to get $10 billion in EU loans that he needed for the 2015 presidential election.
Belkovsky added that Kiev was likely to sign an association deal with the EU within a year — and that the Kremlin can do nothing about it.

Contact the author at o.sukhov@imedia.ru

Why Yanukovych Spat in the EU's Soup

27 November 2013 | Issue 5264

By Yulia Latynina

Klipping The Moscow Times

President Vladimir Putin can now rejoice. Ukraine will not sign an association agreement with the European Union.
Russia focused its foreign policy for the last six months on preventing Ukraine from developing closer ties with the EU, and now it can claim complete success. Russia will always have one advantage over the EU in that Moscow has no qualms about spitting in its neighbor's soup, while Brussels would never stoop that low.
Of course, the most compelling reason Ukrainian President Viktor Yanukovych decided not to sign the Association Agreement was because he does not want to release former Prime Minister Yulia Tymoshenko from prison. This was a much more important factor than whatever Moscow threatened to do to in terms of economic sanctions if Yanukovych signed the agreement with Brussels. According to his punk way of thinking, freeing Tymoshenko would not just create a potential political rival. It would have made him look like a chump, and nobody would respect him.

But the main problem is that none of the three parties involved in this conflict — Yanukovych, Putin and the EU — is guided by rational considerations.
First, why would Europe have any interest in Ukraine? Is it a thriving economy? Does it have a real democracy? No, Ukraine is a corrupt, semi-authoritarian morass, and Europe wants it for the same reason it wants Greece: only as a means for expanding the EU bureaucracy. But now, in times of crisis, the European bureaucratic monster that imposes regulations on how sharp the curve must be on cucumbers and hands out subsidies for "clean energy" considers it a vitally important task to show the world that it is still a beacon of hope to surrounding countries. And imagine how many thousands of bureaucrats would be assigned to the Ukraine project alone. Given Ukraine's sorry political and economic state, any attempt to bring the country even close to EU standards would require huge human resources.
Meanwhile, not a single Western politician today is prepared to risk voters' lives or money in order to confront an international bully — that is, Russia. To save face, the West tries to explain why the bully is not actually a bully. The Tagliavini Commission's report on the 2008 Russia-Georgia war was a perfect example. Putin showed during the international security conference in Munich back in 2011 that he was the first modern politician to realize that Europe would make even greater concessions to new authoritarian regimes than former British Prime Minister Neville Chamberlain and former French Prime Minister Edouard Daladier.
Putin's problem is that after he had demonstrated his ability to manipulate Europe before the entire Commonwealth of Independent States, two of his students turned out to be even better at the game: Yanukovych and Belarussian President Alexander Lukashenko. Both hold little or no responsibility to their own citizens, both can switch their political course as swiftly and capriciously as medieval kings and both could not care less about the havoc such behavior wreaks with their economies. What's more, both have learned how to play the alliance-with-Putin card to manipulate Europe.
In this sense, Russia's use of blackmail against Ukraine to achieve a major tactical victory reflects a new geopolitical reality. In a world in which states foreswear the use of war to resolve their differences, victory will always go to those states willing to spit in their neighbor's soup without worrying about the cost to their own economies.

Yulia Latynina hosts a political talk show on Ekho Moskvy radio.

What the Soviet Union and Khmer Rouge Share

27 November 2013 | Issue 5264

By Marilyn Murray

Klipping The Moscow Times

I toured the Nazi death camps of Dachau in Germany and Terezin in Czechoslovakia in the 1970s and have stood in front of the Lubyanka in Moscow, where thousands were annihilated by the KGB. I also learned of the horrors of Soviet gulags from members of my own family and many of my Russian students. But the reality of inhuman torture never impacted me as deeply as walking through the Killing Fields and S21 prison of the infamous Сommunist Khmer Rouge in Cambodia.
Two weeks ago, I presented an all-day session in Phnom Penh, the capital of Cambodia, regarding the treatment of trauma to more than 100 health professionals from 21 countries. In preparation, I twice watched the award-winning movie, "The Killing Fields" and two documentaries regarding the period from 1975 to 1979, when the Khmer Rouge ruled Cambodia, and read more than 1,000 pages written by survivors of this reign of terror.
As I walked though Cambodia's bloody history, I was struck by the similarities of the Soviet and Cambodian Communist regimes. But I also was intrigued by the things that were different: Why did one last more than 70 years and the other only four?

Their similarities were:
• Citizens were required to pledge their highest loyalty to the Communist parties in both countries.
• Religion was not allowed. Places of worship were destroyed, and clergy were killed or imprisoned. The Party, called Angka in Cambodia, replaced God.
• The Party was never wrong. It was infallible and had to be obeyed without question. Violators faced imprisonment or death.
• The individual had no rights or value.
• If millions died to fulfill the goals of the party, their deaths were justified.
• Leadership was extremely paranoid and saw "enemies" everywhere, destroying anyone deemed to be a threat or disloyal.
• They confiscated all property and imprisoned or killed persons declared to be "enemies of the state": noble families, anyone connected with prior government, clergy, owners and management of business and industry, intellectuals and artisans who did not follow the Party line, and industrious peasant farmers.
• Collective farms were created where peasants were forced to turn over all private property and work only for the collective.
• Food shortages were widespread.
• Families were separated. Parents were told their priority was to work, and the Party would take care of their children.
• Everyone was declared equal, but the lives of Party leaders were radically different from the common citizen. They had better living conditions and food along with other special privileges. Meanwhile, they told the average person he must work harder and sacrifice more for the Party.
• Bribery and corruption were endemic.
But at the same time, there were many differences. Russia had a long history of education and culture. The Soviets saw education as one of their top priorities and had a literacy rate nationwide of about 98 percent. By demanding that every citizen had a good command of Russian, it guaranteed the absorption of nonstop Communist propaganda. Education was free, and many citizens had university degrees.
Music, literature, theater, art and the cinema were encouraged by the Party but were often heavily censored as was all the media.
Soviet leadership realized Russia was far behind Europe and the U.S. in industrialization. They determined not only to catch up but to exceed them. Urban industrial growth became the primary focus. New cities were established throughout the entire Soviet Union. Dams, electrification, water canals and railroads were primary projects.
They created a strong Communist youth movement starting in preschool to prepare children to be faithful Party members. Many Russians today have warm youthful memories of parades and patriotic events. Russians in general had strong national pride in the great accomplishments of their country.
In Cambodia, however, the Khmer Rouge was very different. Their major leaders came from landowner or civil servant families. They were intellectual urbanites largely educated in Paris, where they were introduced to orthodox Marxism-Leninism. Yet they initiated a paradoxical political program in the name of communism that made the destruction of all cities a primary goal and created a forced evacuation of every city dweller to the countryside. A primitive, rural agrarian culture devoted to Angka was declared to be the only path acceptable to the Khmer Rouge.
They closed all schools, hospitals, government offices, businesses, factories, the media and cultural activities. They executed anyone who worked for the previous government, police or military. Professionals, teachers, doctors and business owners were killed. Any connections with a foreign country or knowledge of a foreign language meant being accused of being a CIA agent and certain arrest and likely death. Anyone who wore glasses was labeled a member of the "intelligentsia" and subject to arrest and execution.
The majority of the Khmer Rouge soldiers were illiterate peasants armed with weapons from Russia and China. Their AK-47s gave them rank and authority. They seemed to enjoy shooting innocents at random. They were boys and girls starting from age 10. The average age was 15.
Men, women and children from the cities became "war slaves" who were forced to work from 12- to 20-hour days at hard labor in the fields, building roads and clearing jungle. They were overworked and starving. Each day, the sadistic Khmer Rouge picked people at random to torture and beat to death with shovels and axes. They did not want to waste bullets.
S21 prison, a former high school in the middle of Phnom Penh, had 17,000 prisoners, including children and babies. Only seven people survived. All the rest were savagely tortured then slaughtered and buried in the Killing Fields a few miles from the city.
Cambodia had a population of 7.3 million before the Khmer Rouge enslaved the country. It is estimated they created a genocide that annihilated about 2 million people, more than one-quarter of the entire population in four years. Those who survived suffered post-traumatic stress from their great loss of family, health, home, culture and country.
The Soviets enslaved and killed innocents, but they also built a country of educated people, many of whom were loyal Party members. The system, however, was flawed and thus eventually imploded. In Cambodia, the atrocities were so vicious, extreme, and widespread they gained no public support except within the ranks of the Khmer Rouge. Foreign invasion finally drove them from power after four years.
A person or entity that is obviously evil often is disarmed early on. But others who are able to hide their malevolence by appearing healthy and strong enjoy power and longevity.

Marilyn Murray is an educator specializing in the treatment of trauma, abuse and deprivation, with more than 2,000 people attending her classes in Russia over the past 11 years. Her latest book, "The Murray Method," is available in English and Russian.