Thursday, March 23, 2006

What's Going On In Russia?

After some days by the banks of the Moscow River, having an unfortunate view of the hideous new monument to Peter the Great, I’m now enjoying a view over the Bosphoreous instead.

Some days in Moscow gives cause for some reflections.

What is really happening in Russia today?

Its political and economic system is increasingly preoccupied with the issue of the 2008 transition. Yes, there will be Duma elections already in 2007, but it is nowadays a rather marginalized body, and practically all power now flows through the so called vertical structures from the President and his immediate staff in the Kremlin.

A new president is thus not only a new person and the possibility of new policies, but really a question of the future of the entire system. Russia does not have the institutional stability that most other countries have.

But what then is the president system of Putin?

Well, during his first term he sought to create some stability after the rather turbulent 1990’s, as well as to enact some significant economic reforms.

Among other things, he took the Estonian rather than the Swedish model for tax policy and introduced the 13 % flat rate income tax.

But the second term has been very different. Economic reforms have stalled more or less completely, and authoritarian tendencies have multiplied. One can not today describe Russia as a country in transition to full democracy – it’s moving backwards.

The trend of this term is the gradual re-nationalisation of significant parts of the economy and the grabbing of huge resources by a group of Kremlin insiders determined to get rich very quick.

In some ways this can be seen as a reaction against the emergence of the so called oligarchs and their wealth during the Yeltsin years. The aim seems to be both to cut them down to size and to transfer vast wealth to a new group of Putin oligarchs.

We might not see more leading businessmen dramatically arrested and sent off to Siberia as is the case with Mikhail Khordokovsky. Everyone could see what that was all about.

But what is happening is that different businessman are suddenly “encouraged” to “sell” parts of or their entire assets at low prices to new Kremlin-controlled state bodies. If they were to resist, there tends to be difficult tax cases and other legal difficulties arriving very fast.

This is happening with increasing frequency.

In today’s Moscow Times one can read that Viktor Vekselberg is now intending to sell his part of VSMPO-Avisma, the world’s biggest titanium miner, to state-controlled Rosoboronexport which wants to take control of the company.

Rosoboronexport is the state military export company. It recently used means like the ones described to grab control over one of the country’s carmakers as well. And you can rest assured that as part of these transactions the Putin circle ends up with very substantial private assets.

And now it evidently intends to grab the large aluminum industry as well.

That's just an example from today's newspaper.

Where will all this end?

It will certainly not be to the benefit of the competitiveness of Russia’s economy. I can say that with some force after having stayed the last few days at a Moscow hotel run by the Kremlin administration.

It wasn't the Soviet mismanagment any longer. That's worth noting. But neither was it the modern world. Something in between...

And the long-term political effects?

Will it make a new group of oligarchs interested in preserving private property, since it is now suddenly theirs? Or will it just initiate a new wave of asset-grabbing and stealing when a new group at some time climbs to the height of power in the country?

No one really knows.

Least of all the Russians. There is uncertainty in the country.