Russia: An Oligarchic Kleptocracy with Dreams of Empire

As a nation, Russia has always been a significant outlier.  It maintained a monarchical system long after other European countries progressed to forms of representative government.  It was still led by the Tsar as Russia entered World War I.  The Tsar was supported by a class of nobles and was just a few decades past finally releasing (for a price) their serfs from involuntary servitude.  Then, against all odds, the nation succumbed to a communist revolution that immediately brought entirely new economic and political elements to bear in a remarkable experiment.  That experiment failed with Russia and its Soviet Union dissolving.  That set off another remarkable experiment as Russia and other former communists nations had to transform themselves into some form of representative government and accept modern capitalism as the economic paradigm.  Russia again chose a unique path which resulted in what in many ways looks similar to the Tsarist days with the Tsar being replaced by Vladimir Putin and his supporting nobles becoming billionaire oligarchs who support him and do his bidding. 

In the course of this history, Russia went from one of the most unequal societies to one of the most equal and then all the way back to extreme inequality.  These are the types of transitions that intrigue Thomas Piketty and motivated the writing of his massive work Capital and Ideology.  As he often reminds his readers, the societies and economic systems we arrive at are not driven by fundamental laws of economics or human nature, but rather by the circumstances we encounter and the choices we make.  In other words, they depend on the ideologies we choose to embrace.  Piketty’s book provides considerable insight into the choices Russia made, and allows us to better understand why Russian society was what it was in the past and why it is what it is now.

Piketty points out, over and over again, that the character of a society and the degree of economic inequality is a function of how private ownership of property is treated.  He uses the term “sacralization of private property” to define the extreme primacy given to private ownership, even if obtained by theft or violence, over any socialization of the benefits of property ownership.  Property ownership became “sacred” because its sanctity was believed (by property owners) to be necessary for a stable society.   Property is capital, and as Piketty pointed out in his previous work, Capital in the Twenty-First Century, capital has traditionally earned income at a higher rate than labor.  Therefore, the degree that property is privately owned and protected from taxation and regulation will determine the degree of economic inequality.

Russia, prior to World War I, incorporated this sacralization of ownership similarly to other European nations, but had not modernized its society in other ways.

“Not only had the Tsarist regime been deeply inegalitarian; it had also failed dismally to develop Russia’s economy, society, and schools.  The Tsarist government relied on noble and clerical classes directly descended from premodern trifunctional society [nobles. clergy, workers].  It abolished serfdom in 1861, only a few decades before the Russian Revolution of 1917.  At the time serfs still accounted for 40 percent of the population.  At the time of abolition, the imperial government decreed that former serfs must pay an annual indemnity to their former owners until 1910 in return for their freedom.  The spirit was similar to that of the financial compensation awarded to slave owners when the United Kingdom abolished slavery in 1833 and France in 1848, except that the serfs lived in the Russian heartland rather than on remote slave islands.  Although most payment ended in the 1880s, the episode places the Tsarist regime and Russian Revolution in perspective by reminding us of the extreme forms that sacralization of private property and the rights of property owners sometimes took before World War I (regardless of the nature and origin of the property).”

Given this history, it is not too surprising that a revolution of some sort would occur, and the goal of the new government would be to distribute the accumulated wealth of the nobles widely to form a more egalitarian society.  The communist rule that ensued was ultimately unable to compete effectively with capitalist systems, but initially it did provide a more modern, more efficient, and a much more egalitarian society, although brutality was often required.  Humans will naturally form a degree of hierarchy within their society, but in communist Russia the benefits of rank were not expressed in income but in other types of privileges.

“With the Tsarist regime as point of comparison, the Soviet regime had no difficulty portraying its project as one that held out great promise for the future in terms of both equality and modernization.  And in spite of repression, ultra-centralization, and state appropriation of all property, public investment in the period 1920-1950 clearly did lead to rapid modernization that brought the Soviet Union closer to Western European levels, especially in the areas of infrastructure, transportation, education (and literacy), science, and public health.  Within a few decades the Soviet regime had considerably reduced the concentration of income and wealth while raising the standard of living, at least until the 1950s.”

As the political competition between the Soviet form of communism and the US and Western European form of capitalism progressed, each side hardened its attitudes toward private property, not daring any excursion that might add efficiency, in order to maintain ideological purity.

“Just as the proprietarian ideology of the nineteenth century rejected any attempt to challenge existing property rights for fear of opening Pandora’s box, twentieth century Soviet ideology refused to allow anything but strict state ownership lest private property find its way into some small crevice and end up infecting the whole system.”

The capitalist nations would begin to fear any public ownership as a similar existential threat to private ownership.

“Ultimately, every ideology is the victim of some form of sacralization—of private property in one case, of state property in another; and fear of the void always looms large.”

When the Soviet Union began to falter and eventually disassemble, the capitalists, with their sacralization of private property, did a victory lap.  They were firmly convinced that Russia’s future must immediately involve mass privatization of public entities lest communist tendencies reemerge and “infect the whole system.”  There was clearly pressure on it to proceed in this fashion (the so-called shock therapy).  This path would be disastrous for the Russian people and quickly create, and exceed, the inequalities endemic in other capitalist nations.  Piketty suggests that this approach—and its outcome—may have been welcomed by an influential subset of the Russian population.

“…in less than ten years, from 1990 to 2000, postcommunist Russia went from being a country that had reduced monetary inequality to one of the lowest levels ever observed to being one of the most inegalitarian countries in the world.”

“Russia chose to inflict on itself the famous ‘shock therapy,’ whose goal was to privatize nearly all public assets within a few years’ time by means of a ‘voucher’ system (1991-1995).  The idea was that Russian citizens would be given vouchers entitling them to become shareholders in a firm of their choosing.  In practice, in a time of hyperinflation (prices rose more than 2500 percent in 1992) thar left many workers and retirees with very low real incomes and forced thousands of the elderly and unemployed to sell their personal effects on the streets of Moscow while the government offered large blocks of stock on generous terms to selected individuals, what had to happen did happen.  Many Russian firms, especially in the energy sector, soon fell into the hands of small groups of cunning shareholders who contrived to gain control of the vouchers of millions of Russians.  Within a short period of time these people became the country’s new ‘oligarchs’.”

This march to inequality and crony capitalism was further enhanced by laws and practices quickly put in place by its leaders.  Piketty says it is extremely difficult to determine who has the money in Russia and how much they have.

“This is due in large part to decisions taken first by the governments headed by Boris Yeltsin and later by Vladimir Putin to permit unprecedented evasion of Russian law through the use of offshore entities and tax havens.  In addition, the postcommunist regime abandoned not only any ambition to redistribute property but also any effort to record income or wealth.  For example, there is no inheritance tax in postcommunist Russia, so there is no data on the size of inheritances.  There is an income tax, but it is strictly proportional, and its rate since 2001 has been just 13 percent, whether the income being taxed is 1,000 rubles or 100 billion rubles.”

“According to the classifications published by Forbes, Russia thus became within a few years the world leader in billionaires in all categories…By the 2000s, the total wealth of Russian billionaires listed in Forbes  amounted to 30-40 percent of the country’s national income, three or four times the level observed in the United States, Germany, France, and China.  Also according to Forbes, the vast majority of these billionaires…have done particularly well since Vladimir Putin came to power in the early 2000s.  Note, moreover, that these figures do not include all the Russians who have accumulated not billions but tens or hundreds of millions of dollars; these Russians are far more numerous and more significant in macroeconomic terms.”

Russia’s oligarchs have been very efficient at removing money from Russia and investing it, mainly in real estate, in other countries.  If there is an outrageously priced luxury apartment anywhere, there is likely a Russian billionaire or two waiting to bid on it.  Piketty estimates the amount of money that has been moved out of Russia is mindboggling.

“…the country enjoyed enormous trade surpluses in the period 1993-2018: Russia’s annual trade surplus averaged 10 percent of GDP over this twenty-five year period, or a total of nearly 250 percent of GDP…In principle, then, the country should have accumulated enormous financial reserves…But Russia’s official reserves in 2018 amounted to less than 30 percent of GDP.  Something like 200 percent of Russian GDP has therefore gone missing (and this does not even take into account the income those assets should have produced).”

Oliver Bullough provided a humorous illustration of the extent of kleptocracy in Russia in his book Moneyland: The Inside Story of the Crooks and Kleptocrats Who Rule the World. 

“Luxury watches are popular among officials, since they provide a discreet but effective way of advertising their power.  In 2009, the Russian newspaper Vedomosti mischievously published a compilation of photographs of the watches worn by top officials at public events, noting each one’s price and contrasting that with the declared income of the official in question.  The cheapest watch belonged to the head of the Audit Chamber, costing a mere 1,800 Swiss francs.  The majority were in the $10,000-50,000 range, beyond which a handful of officials had really splashed out.  The deputy mayor of Moscow won both first and second place, with watches costing $1.04 million and $360,000; while Chechen president Ramzan Kadyrov’s watch came third, with an estimated price of $300,000.  The article caused some embarrassment to top officials, which is perhaps why the official photographer photoshopped a $30,000 Breguet timepiece off the wrist of the Patriarch of Moscow as he sat at a highly polished table in 2012.  The photographer neglected to remove the watch’s reflection, however, which both made the Patriarch look ridiculous and also rather undermined his attempts to argue for a return to asceticism and traditional values under the moral leadership of himself.”

Early on, observers were worried that Russia might slip back into a modified form of communism.  They should have been more concerned that a bunch of Russian insiders were tired of playing a losing game and were waiting for the opportunity to take control and throw their weight around more effectively.  Piketty describes the conclusions to be drawn from a series of interviews of Vladimir Putin conducted by the movie maker Oliver Stone in 2017.

“In substance, Putin concluded that only an unambiguous renunciation of egalitarianism and socialism in all their forms could restore Russia’s greatness, which depended above all on hierarchy and verticality in both politics and economics.”

If Russia’s greatness is to be recovered, it will be accomplished via the reduction of other countries’ greatness.  The US seems to be a specific target.  Whatever Donald Trump’s motives, he has convinced US allies that Putin’s Russia, a longtime enemy, is potentially a more reliable ally than the US.  Apparently, Putin has the resources and power to do anything he wishes: invade a country, interfere in elections on a global scale, coerce the president of a country….