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February 27, 2004
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February
27, 2004
Russia: Reforming
the Reformers
An
Interview with Michael Hudson
By STANDARD SCHAEFER
On Sunday, March 14, Russians will re-elect Vladimir
Putin for a second term as president. In the Duma elections three
months earlier, on December 7, his United Russia party won such
overwhelming support that he will have the power to rewrite the
constitution dictated by former Pres. Yeltsin under force of
arms a decade ago.
In which direction will Mr. Putin go?
Will he continue to support the oligarchs who designated him
to succeed Pres. Yeltsin? Their privatizations in the mid-1990s
have gutted Russian industry and led to collapsing living standards,
public services, science and technology, emigration and population
shrinkage. Will this prompt Mr. Putin to shift gears to enforce
what he has called a "new social contract"? If so,
what does this slogan mean in practical terms?
The right-wing Union of Right Forces
(formerly Russia's third largest party, with 32 Duma seats) and
its sister party Yabloko (fourth ranking, with 16 seats) failed
to crack the 5% electoral barrier, and hence will not have any
membership in the 450-member Duma under Mr. Putin's second term
in office. Both these parties were funded by Mikhail Khodorkovsky,
Russia's richest man (his fortune is estimated at $8 billion)
and former head of Menatep Bank and Yukos Oil. (He also donated
to other parties, including the Communists.) But on October 25
he was arrested in Siberia for tax evasion and fraud, escalating
the June arrest of his lieutenant Platon Lebedev. Arrest warrants
were issued for ten more Yukos officials and insider shareholders
in January, including three who already had followed their money
and moved abroad.
Khodorkovsky's arrest was the final straw
prompting Kremlin chief-of-staff Alexander Voloshin to resign.
This act signaled the opposition of Yeltsin's "Family"
to Putin's prosecution of  the man whose bank had been
the paymaster for insiders in the 1996 loans-for-shares scandal.
The question now being asked is whether
the oligarchs will sell off ownership of Russia's natural resources
to the West as they bail out of Russia, or whether the nation
will rescue itself from the insider privatizations by recapturing
the revenue and wealth taken by the oligarchs.
In the West one hears mainly of reversing
and renationalizing the giveaways of the 1990s. But in Russia
itself Sergei Glaziev, Dmitri Lvov and other economists are proposing
a rent-tax to recapture the oil and gas, land and mineral rent
for the economy. If this route is taken, it will represent a
revival of a "third way" of economic development proposed
already in 1991 by many Western economists, including a substantial
number of Nobel Economics Prize-winners. The remarkable thing
is how little attention in the West this fiscal and monetary
policy has received.
Under Dr. Lvov's guidance, Dr. Hudson
has made numerous trips to Russia to address Duma committees
and other groups with regard to shifting Russia to a rent-tax
policy.
SS. Everyone expects Vladimir Putin
to be re-elected, but they differ with regard to how they expect
him to lead the new Duma. What do you see?
MH: To most observers Mr. Putin appears
as a Rorschach test. Old Cold Warriors look at his KGB background
and fear a resurgence of totalitarianism. Neoliberals--fronting
for the oligarchs who hope to sell their companies to Western
investors--depict his attempt to re-assert state power, efficient
taxation and law enforcement as nothing less than "red-brown"
fascism. But many businessmen are charmed by Putin's promise
that Russia's stock market will benefit from the stability he
has brought.
SS: How do you explain this ambivalence?
MH: Mr. Putin governs in much the say
that Franklin Roosevelt did. Roosevelt was famous for appointing
cabinet members and aides with sharply divergent views. Some
people have criticized this as if it were a kind of schizophrenia.
But Roosevelt simply wanted to hear both sides of the major issues.
He wanted his advisors to "duke it out." And they did.
This is pretty much what Putin is doing.
On the one hand he was obliged to appoint liberal "reformers,"
that is, advocates of free market supported by Russia's oligarchs
such as German Gref and Anatoly Chubais. He also retained Yeltsin's
Prime Minister Kyuzanov and chief-of-staff Alexander Voloshin
in office, keeping the promise he made to Yeltsin's "Family"
of cronies and backers.
But Putin also has another set of advisors.
One rising light has been Sergei Glaziev, an early market reformer
already before 1990 but opposed to Yeltsin's coup d'êtat
in 1993 and the "shock therapy" of "grabitization"
that followed. He subsequently saw that a least distorted way
for Russia to recover was by a tax on economic rent, that is,
the value of land and natural resources that exists independently
of labor and capital investment. The aim is to untax industry
and labor, and make Russia's natural resources monopolies finance
the government. But these are precisely the assets that Yeltsin's
kleptocrats were the first to grab. So this intellectual policy
fight has now been raging for a decade.
Glaziev has become the most prominent
politician for a group that wants to encourage industrial investment
as distinct from buy-outs of assets and property already in place.
Industrial recovery and employment require that taxes be shifted
from industry and labor onto raw-materials exports--the companies
that the oligarchs have been so eager to grab, precisely because
their revenue is passive an unearned, or what is called rentier
income in the West.
SS: How many major figures support
this policy?
MH: Their ranks include former Prime
Minister Yevgeny Primakov, and now even Gorbachev, as well as
Dmitri Lvov, a prominent economist from Russia's Academy of Sciences,
and Vladimir Litvinenko, rector of the St. Petersburg Mining
Institute.
Glaziev is a student of Lvov, who has
focused his theorizing on the role of rent in the economy. Lvov
was a schoolmate of Primakov. Their closeness turned out to be
a major reason why Yeltsin disposed of Primakov so hurriedly
for a series of successors he felt would prove more reliable
to his Family's rent-grabbing interests.
SS: Most attention in the West is
paid to Anatoly Chubais and other holdovers from the Yeltsin
interregnum--and of course the arrest of Mikhail Khodorkovsky.
MH: On December 23, Putin gave a speech
to Russia's Chamber of Commerce without mentioning Yukos but
clearly referring to it. He reassured his audience that he didn't
intend to reverse privatizations, but reminded them that everyone
had a chance to follow the law in the 1990s, and it wasn't fair
to let those who played by the rules end up losing out to dishonest
grabbers. Inasmuch as nearly all the privatizations involved
fraud under the anarchic conditions that Yeltsin's neoliberals
created, applying lawful standards would seem to imply a reversal
of at least the most blatant privatizations, or a demand for
enormous fines and paybacks.
The implicit threat of this speech was
that if any other oligarchs got out of line, their fate would
be that of Mr. Khodorkovsky and other Yukos stockholders.
SS: What were the specific grounds
for his arrest? Was it just the first step to de-privatize or
re-nationalize what the oligarchs had taken, or was it a case
of selective prosecution?
MH: Mr. Khodorkovsky's fraudulent activities
were so blatant that it is amazing that the Western press has
been so lax in reporting them. In fact, the fury with which Bush
Administration officials and even the normally liberal media
have criticized Russia's government for the Yukos arrest reflects
the degree to which they backed the kleptocrats from the outset,
recognizing that in the end these individuals would cash out
their gains by selling Russia's natural resources at prices still
so low as to be nearly giveaway prices. The U.S. fear is that
now the financial takeover of Russia may be interrupted, and
that Western investors may have got all they are going to get.
To put matters in perspective it is necessary
to realize how far Mr. Khodorkovsky's activities go back far
before Yukos, to his Menatep bank that financed his buyout at
a "fixed" insider auction in which higher bids simply
were ignored. An former insider published some of the intriguing
details in a Pravda article in November:
Menatep (Khodorkovsky's bank) was the
vehicle through which almost all the transfers of serious money
in and out of Russia took place from 1992 to 1998. When we started
'tolling' aluminium and others started tolling copper and nickel
we did not send the proceeds of our sales back to Russia. On
the advice of Russian Prime Minister Silayev, Deputy Prime Minister
Oleg Soskovets, presidential aide Aleksandr Korzhakov and Speaker
Ruslan Kasbulatov we were told to make all our payments to Menatep
Bank. Sometimes it might be Menatep Cyprus, sometimes Menatep
Gibraltar, Menatep Finance Geneva, Menatep Inc. New York, etc.
When we sold the metals we had tolled a small fee was paid to
the smelters. A payment was sent them through their designated
bank, often Citibank in NY. The bulk of the money was sent to
Menatep marked 'for onward transfer to -.Company or -. Account
at--Bank'. We did not know the recipient at the end of the chain.
It wasn't our business. We paid what we had agreed and that was
all. Only Menatep know exactly to whom these payments were going
after we deposited the funds.
These were not trivial sums; our payments
alone often amounted to US$60 million a month. Menatep monitored
the cash flow and directed the funds to the accounts of the highest
powers in the land v the Presidency, the Government and the Chekists
who staffed the parallel infrastructure. Menatep had been set
up by these people and Khodorkovsky chosen to be at its head;
not the other way round.
There was virtually no aspect of what
Menatep was doing which wasn't controlled by, monitored by and
directed by these same leaders. This included providing government-sanctioned
services to organised crime. From its early days the young men
at Menatep have provided financial services to the Solntsevo,
Lyubarsky, Uralmash and Izmailova families. Through his connections
with Semyon Mogilevich Menatep began moving currencies and investments
to and through Hungary and then to the U.S. Menatep handled the
foreign exchange business of Grigory Luchansky in Nordex and
moved large sums into the U.S.
A U.S. law suit involving the Avisma
Corp. revealed the details of how Menatep was the perpetrator
of a gigantic con in which tens of millions of dollars were diverted
from the company. Khodorkovsky and fugitive banker Alexander
Konenyikin started the Antigua-registered European Union Bank
which was described in a House Banking and Financial Services
Committee as a 'KGB money-laundering operation with stolen funds
that were passed through Khodorkovsky of Menatep Bank as a KGB-controlled
front firm.' According to the investigators the entire operation
was coordinated at SVR headquarters and was personally supervised
by Aleksandr Korzakov.
Through Korzakhov and his friendships
with Mikhail Stepashin and Yuri Primakov, Khodorkovsky was given
access to the Bulgarian and the Hungarian services to replicate
his work for them. The main person in charge of security operations
in Khodorkovsky's companies has been Mikhail Yosifovich Shestopalov
former head of the Division for Combatting Thefts of Socialist
Property and Speculation of the Ministry of Internal Affairs.
The head of Menatep's and Yukos's information and analysis section
was Karabinov, former head of the KGB Centre for Public Relations
(the man who ran the 'Miss KGB' contest).
The point of this is not to attack Khodorkovsky.
It is to make clear that virtually everything he did was directed,
supervised and monitored by the very people who are now attacking
him. There were Chekists at every level of Menatep and Yukos.
There were no mysteries. The politruks and the pakhans
supervised everything. He was a predurok in a controlled
system.
Everyone knew what was happening. When
we made our payments we had a good idea who was being looked
after; if only to avoid mistakes. Because of Menatep we had no
direct ties, except when we had to provide credit cards top key
individuals. One might reflect that Vladimir Putin's first job
when he left the KGB was to supervise metals sales for Sobchak.
So there is no point in extrapolating
from the fall of Khodorkovsky a great animus against 'oligarchs'
or 'privatisation'. That isn't what this is about. This is about
a man who knows where all the money has gone; who knows who have
been the beneficiaries of the greatest money-laundering
scheme in the history of the world. If such a man decides to
go into politics he is a danger.
More details soon came out of London.
The Evening Standard reported that Alexei Golubovich,
a former finance director of Khodorkovsky's Yukos oil company,
was wanted for questioning by the Interior Ministry investigators
who are holding Khodorkovsky. Kremlin officials are wading through
thousands of documents sent by Yelena Collongues-Popova, who
used to work for Golubovich and Khodorkovsky in the nineties,
but turned on the Russian tycoons after the French police noticed
her transactions and hit her with a massive tax bill, which her
Moscow masters refused to pay. In a desperate effort to clear
her name, she sent the Russian police the huge bundle of documents
that she claims incriminate Golubovich.
Collongues-Popova, 50, whose first husband
was a KGB colonel, admits that between 1995 and 2000 she handled
£800 million that Golubovich transferred from Moscow into
30 shell companies she set up for him in tax havens such as Switzerland,
the Seychelles, the British Virgin Islands, the Bahamas, Panama
and Luxembourg. . . . Papers seen by Financial Mail show
transactions involving the Isle of Man, Barclays, and the London
office of US investment bank JP Morgan Chase. They appear to
indicate that Collongues-Popova set up bank accounts in London
using a signature stamp, which is illegal.
Some papers showing that her identity
was used were supplied to her by Russian investigators. The papers
relate to Yukos, Menatep, Rosprom and Avisma--all companies
linked to Khodorkovsky's spectacular rise to fame and fortune
after the collapse of the Soviet Union.
Collongues-Popova explained that "It
meant executive jet flights all the time--to the Caribbean, to
the Seychelles and the Isle of Man. It was a life of luxury hotels,
top restaurants and endless supplies of cash to bribe the right
people. I cannot remember how many pearl necklaces--at £80,000
apiece--that I bought to win over the wives of our go-betweens
in tricky money-laundering operations. Yukos and Menatep used
the [offshore] companies to minimise tax and disperse shares
to avoid problems with the Russian state anti-monopoly committee.
They wanted it to appear that their companies and enterprises
were not owned by a single person, though in fact they were."
Forbes editor Paul Klebnikov summarized
the situation in the Wall Street Journal:
Mr. Khodorkovsky's arrest is not the
start of a campaign to 'get the rich.' It does not herald the
emergence of a totalitarian dictatorship or of Soviet-style nationalization
of the 'commanding heights' of the economy. Neither is this a
case of a man being framed for fictitious crimes in the manner
of the Stalinist show trials. On the contrary, the problem is
that so many other top Russian businessmen could be accused of
the same crimes allegedly perpetrated by Mr. Khodorkovsky.
So what is going on in Russia? We are
witnessing the final death agony of the kleptocracy that was
Boris Yeltsin's Russia. Nothing illustrates the flaws of Yeltsin-era
privatization better than the infamous 'loans-for-shares' auctions
of 1995-97 that provided Mr. Khodorkovsky with his fortune. In
the fall of 1995, his Menatep Bank was given the right to conduct
an auction for a 45% stake in the state-owned oil giant Yukos.
Once foreign investors and rival Russian bidders had been disqualified,
Mr. Khodorkovsky and his five partners ended up with a 78% stake
in Yukos--for which they paid $309 million. How absurd was this
sum? In the summer of '97, two months after this deal was finalized,
Yukos was trading on the Russian stock exchange at a market capitalization
of $6 billion. (Today its market cap is $24 billion.)
When you buy state assets in such a dubious
backroom deal and at such a steep discount to market, chances
are your property rights will never be truly secure. You will
always be regarded by the population as a crook and by the government
as more of a custodian of state assets than an owner. Imagine
for a moment if Margaret Thatcher's privatization of British
industry in the '80s had been similarly flawed. Imagine if state-owned
British Petroleum had been sold off in 1987 not for $40 billion,
but for $400 million--and with 78% of the company going to a
close friend of the PM's son. Would future British governments
let such a result stand? And if they did, what kind of a foundation
would that be for the future of the British economy?
Although "his arrest certainly looks
like a case of selective justice," Mr. Klebnikov acknowledged,
"this is still better than no application of justice at
all. During the Yeltsin era, well-connected businessmen could
routinely embezzle millions from the state treasury or even organize
the murder of rivals--all without the prosecutors making a squeak.
The result was relentless economic decline and the collapse of
the ruble in 1998."
SS: So there has been disillusionment
with the reform process.
MH: The neoliberal reformers promised
that the property turned over to private holders would yield
profits that would be invested in new means of production. But
this did not happen. It was easier to grab rent-yielding resources--mineral
rights and land--than to design and organize factories to produce
more goods. So Russian consumers had to import what they needed.
And oil exports provided the foreign exchange to finance this
growing import dependency.
This explains why popular pressure has
grown for Putin to turn against the oligarchs. In the up-coming
election he is seen as their nemesis. For example posters are
now being plastered around Moscow featuring two elegant hands
in handcuffs. The text reads: "What was privatized before
2000 must be returned." But so far, Putin has managed to
avoid being forced to choose between granting an amnesty to the
privatization grabs (that is, announcing that the statute of
limitations has run out) or reversing the sell-offs.
Either policy will create major problems,
and that is why Putin has not yet moved. An amnesty to Yeltsin's
Family and other privatizers would doom Russia to deteriorate
into one of the most polarized and impoverished nations in the
world. On the other hand, to reverse the privatizations would
mean a fight with the United States which had sponsored the "reformers"
and their rip-offs from the outset, going back to Yeltsin's military
attack on the Duma in 1993 and subsequent seven years of rule
by dictatorial decree.
SS: Why did the arrest occur seven
years after Yukos was bought? Why was it done only last year?
MH: That is always the important question
to ask: "Why just now? Why right at this time?" The
explanation almost always is that political action is taken to
protect against some imminent danger.
To start with, Mr. Khodorkovsky violated
Mr. Putin's insistence that the oligarchs stay out of politics.
They were about to buy up the Duma and use their power to destroy
the powers of the presidency, that is, of Mr. Putin himself.
This is the strategy of neoliberalism. It is a two-stage process.
The first stage is to make use of centralized state power to
promote insider dealings and give a patina of legitimacy to the
theft of public resources. Most of the great fortunes have been
obtained in this way, including the aristocratic holdings stemming
from the Norman Invasion of England in 1066.
The second stage involves closing ranks
to prevent anyone else from doing this, once the prizes have
been handed out. A campaign is mounted against government power
to reduce and even eliminate the state's ability to exert a countervailing
force on the propertied oligarchy. The narrow oligarchy becomes
society's new centralized planners, replacing the state. Russia
is now in this stage, and the oligarchs are trying to mobilize
popular support against the government--while Putin for his part
is turning populist to mobilize support against the oligarchy.
To promote their program the oligarchs
have bought up the television and other news media, funded think
tanks, and financed politicians to install their own representatives
on all the government regulatory committees.
SS: So the oligarchs are more than
merely wealthy individuals. It is an essential part of their
program that they translate their personal interests into a neoliberal
political program. This suggests that the stand-off which Putin
proposed four years ago--that he would leave the oligarchs with
their spoils, as long as they stayed out of politics--was inherently
unstable.
MH: Yes. To be a member of an oligarch
means not only to be rich, but to play a role in controlling
the social system as a whole, not only via wealth directly but
by the media and then the government. As former Prime Minister
Primakov explained: "An oligarch is not just a big businessman.
It is a businessman who stuffs his pockets by using machinations,
including tax [evasion], desperate to get into politics, and
corrupts bureaucrats and parliament deputies."
Khodorkovsky was doing all these things.
He started his own neoliberal think tank, he tried to buy his
way into U.S. society by giving philanthropic contributions to
Laura Bush's charity and to the Library of Congress, he ran Yukos
officers and front men for the Duma, and there was talk of plans
to run for president himself in 2008. He explained his basic
logic in a 1997 article for Nezavisimaya Gazeta: "The
most profitable business in Russia is politics and that's the
way it will always be. We got together and drew lots to decide
who should go into government. Potanin came up lucky. In government,
he did a great deal for his own company Unexim. Next time, it
will be someone else's turn."
SS: Mr. Khodorkovsky and Vladimir
Potanin certainly were not alone in this.
MH: Boris Berezovsky did much the same
thing when he bought up Media-Most and used the TV channel to
shape the news so as to re-elect Yeltsin in 1996, despite the
president's abysmal standing in public opinion polls. Control
of the media became the essence of Russia's "managed democracy"
or "façade democracy." Instead of using force,
power was achieved through control of the TV and news media--what
Yabloko leader Grigory Yavlinsky has called "Stalinist capitalism."
SS: Can you give some examples of
other oligarchs' political activity?
MH: Vyacheslav Kostikov, former press
secretary to Pres. Yeltsin (1992-95) and ambassador to the Vatican
(1995-96), has described Russia's oligarchy as having created
a "new Nomenklatura," that is, private-sector counterparts
to the Soviet apparatchiki who controlled the nation's
bureaucracy prior to 1991. Until quite recently almost all of
Kremlin chief of staff Alexander Voloshin's deputies were linked
to lobbying groups. "As for the government, it is known
for sure with which minister or deputy minister works for any
particular oligarchic group. Besides, tycoon clans have 'distributed'
department leaders as well. This concerns the Duma, the prosecutor's
office, and the Interior Ministry. Deputies' business is parliamentary
requests, promotion or blocking of laws and amendments. The prices
are very high here. For example, to have the Duma to block the
amendments to the law on the natural resources rent, oil tycoons
are paying tens of millions to 'mobilize' deputies and 'PR' in
the media. This issue is worth billions of dollars." Kostikov
added that "The recent Yukos scandal clearly demonstrated
the merging of the new nomenklatura, the elite, and big business.
The security structures who initiated the examination were severely
attacked. The tycoons' media outlets launched a real collective
hysteria campaign, both in Russia and abroad."
In a radio interview on Nov. 4, Primakov
warned that "A small group of people who have acquired sufficient
funds but they use these funds in order to propel themselves
into a position of power. . . . a considerable part of Duma deputies
use these funds to lobby certain laws or amendments to laws for
the benefit of oligarchs. This also happens in the Federation
Council. This happens when appointments are made to key ministerial
positions or second tier positions in ministries." Defending
the prosecution of Khodorkovsky, Mr. Primakov said that it was
the oligarchs themselves who were pushing President Putin to
become more authoritarian rather than permitting the laws to
be followed democratically.
A New York Times article noted
that "The nation's largest businesses, from oil giants to
banks to manufacturers, have not only poured money into the parliamentary
elections to be held on Sunday [Dec. 7], but have also filled
party tickets with dozens of their own executives. . . . The
[Yabloko] party has candidates from prominent companies controlled
by other oligarchs. Two oil companies, T.N.K. and Lukoil, have
executives running on the party's ticket, as do Russian Aluminum
and the steel giant Severstal. An analysis of United Russia's
federal and regional party lists by The Moscow Times showed
that more than a quarter of United Russia's parliamentary candidates
represented big businesses."
The oligarchy was seeking to run Russia
directly. The thought that Mr. Khodorkovsky might do in Russia
what J. Edgar Hoover did in America--compile blackmail files
on all the richest Russians for whom he had organized deals as
paymaster through Menatep--gave a note of urgency for Pres. Putin
to insist on a separation of powers between oligarchy and the
state. The alternative was for government power to dwindle and
the President to be reduced to only a figurehead. The rumor was
that the oligarchs sought to win the Duma elections, install
their own lobby as Prime Minister, and then proceed to reduce
the powers of the President.
A national security consideration also
lent a note of urgency. In the spring of 2003 Mr. Gusinsky--who
had immigrated to Israel three years earlier--sold off a big
chunk of his stock in Russia's natural resources to buy a British
soccer team. This evidently came as a surprise to Mr. Putin,
and he saw that if he did not staunch the capital flight, Russia
would be left high and dry. The oligarchs were starting to cash
out, selling their holdings for dollars, sterling, real estate,
British soccer teams and so forth. Their move to the West would
have insulated them from future fiscal and criminal prosecution
from within Russia.
Mr. Khodorkovsky was about to merge Yukos
with Sibneft and sell his 44 percent of Yukos shares to Exxon-Mobil.
This would have relinquished control of Russia's major natural
resource and tax payer. The U.S. and British oil majors have
shown themselves adept at minimizing their tax liability by setting
up administered pricing through flags of convenience located
offshore.
SS: But you said that under international
law Russia could levy a rent tax.
MH: Legally it could have done so. But
politically, taxing economic rent has become the bête
noir of neoliberal globalism. It is what property owners
and rentiers fear most of all, as land, subsoil resources
and natural monopolies far exceed industrial capital in magnitude.
What appears in the statistics at first glance as "profit"
turns out upon examination to be Ricardian or "economic"
rent.
The first plank of the Communist Manifesto
called for nationalizing the land, and non-communist reformers
also focused on taxing the "unearned increment" of
land and natural monopolies. Their logic was that these belong
to the nation and people as a whole as its patrimony, and as
its largest and most natural tax base.
So when Mr. Khodorkovsky was rumored
to be selling out his majority control of Yukos, along with the
shares of his partners for $25 billion, Pres. Putin was obliged
to act for Russia's future. Imagine if the government of China,
Korea or an OPEC member used its surplus dollar reserves to buy
control of a major U.S. oil and minerals company. Such a transfer
of resources had little more chance of occurring in Russia than
it would in the United States. Russia would have been turned
into a giant Dallas, with a shrinking population lacking employment
while the richest individuals cashed out and abandoned Russia's
sinking economic ship to become cosmopolitan Western-style billionaires.
What finally enraged Mr. Putin was a
willfully arrogant act by Mr. Khodorkovsky and his Yukos insiders.
"Only about 18 percent of Yukos stock trades publicly. The
rest is held by insiders. As the tax evasion investigation proceeded,
Yukos' board of directors declared an extraordinary $3 billion
dividend distribution, an increase of 400 percent over the previous
year." Rather than using this money to modernize their oil
extraction or invest in the industry, they were simply stripping
the company's assets before letting it go. "There was no
market justification for the huge dividend. Prosecutors seized
the stock after deducing that the intent was to loot the company's
cash and send it overseas before the criminal case concludes.
Mr. Khodorkovsky is suspected of cheating the government out
of $1 billion in taxes. The seizure guarantees that the government
can recover the money if it wins the case."
SS: How did the other oligarchs respond
to Mr. Khodorkovsky's arrest?
MH: They quickly fell into line. Everyone
feared they would be next if they protested. Almost nobody stood
up for Mr. Khodorkovsky--except for Prime Minister Mikhail Kasyanov,
who seems about to be pushed out of Pres. Putin's administration.
Right-wing politicians accused the arrest
of inaugurating a "national security" state, nothing
less than national socialism. Most Western media, along with
the Bush administration, adopted the neoliberal line that the
oligarchs had stolen their property fair and square, and that
to begin enforcing laws at this late date would destabilize Russia's
stock market.
A few writers accused Putin of trying
to set up his own Family of St. Petersburg siloviki, that
is, his associates from the intelligence services and local St.
Petersburg politics, where Putin had been an aide to the city's
mayor Solchak in the early 1990s.
The most popular response was to ask
for a moratorium on government investigations into the wild privatizations
of Yeltsin's reign. The oligarchs asked for a statue of limitations
to provide property with "security," ostensibly to
support the Russian stock market and attract foreign capital.
This argument was rather lame, however, as foreigners buying
Russian stocks were not supplying any new capital to finance
direct investment by these enterprises.
The most threatening reports warned that
for Putin to take on the oligarchs and question their "property
rights" would plunge Russia into social chaos. Translated
into the language of Realpolitik this meant, "We
will fight." That's what property owners always have done
for what they have managed to gain control of.
SS: What will Putin do now?
MH: He has set up an "honesty commission"
to investigate Yeltsin's privatizations and decide whether there
was fraud or tax evasion--and if so, how much should be paid
back to the government.
He gave some teeth to the potential power
of such a commission on January 27, when the prosecutor's office
issued arrest warrants for ten of the leading Yukos stockholders
and managers, including three core shareholders who fled abroad
last year--Leonid Nevzlin, Vladimir Dubov and Mikhail Brudno--on
charges of tax evasion, false invoicing and other crimes. A
week earlier the general director of Yukos's oil refinery was
arrested.
SS: Who's likely to be next?
MH: One of the most hated men in Russia
is Anatoly Chubais, who managed the notorious "voucher"
scheme that was supposed to give Russians equal shares in their
nation's public enterprises back in 1994 and 1995. Chubais now
heads the electricity monopoly. He's felt obliged to stand by
Putin to avert attack, but like Khodorkovsky he had plans to
run for the presidency in 2008. His major allies are the aluminum
magnates, who obtain their electricity at concessionary prices,
while consumers face rising prices. They aluminum magnates may
also be at risk.
SS: What are Pres. Putin's major challenges?
Or more to the point, what are his objectives?
MH: He needs to come up with a coherent,
focused policy to juxtapose to the neoliberalism that Yeltsin
forced on Russia after his 1993 coup. I think he now realizes
that the Washington-backed destruction of Russian industry and
nurturing of an oligarchic class was the final stage of the Cold
War. From this perspective his objective is how to rebuild Russia
into a world power once again.
SS: Can you elaborate on what you
mean by saying that privatization was the final stage of Cold
War U.S.-Soviet relations?
MH: Warfare traditionally has had the
effect of building up productive capacity in countries at war.
Destructive as World War II was, Russia and even Germany emerged
in 1945 with a larger industrial capacity than had existed at
the outset of fighting in 1939.
The Cold War had no such silver lining
for Russia. The nation was able to maintain nuclear parity with
the United States down through 1990, but the ensuing decade found
Russians suffering a disaster as they took U.S. economic advice
on how to restructure their economy. The shock therapy and selloffs
of the public domain recommended by the World Bank, the IMF and
U.S. A.I.D. advisors as seemingly newfound friends proved more
destructive than any enemy attack ever had been.
When the dust settled at the end of the
1990s, Russia's potential rivalry to America was destroyed. Privatization
of its industrial and agricultural base cut its gross national
product in half. Collective farms saw their equipment left to
rust in the fields, and manufacturing was in ruins. Russian industry
had concentrated on military production that no longer could
be afforded or seemed needed. The army had abandoned its sapping
war in Afghanistan, although Yeltsin's war in Chechnya triggered
a debilitating terrorist warfare. Consumer goods never had been
produced at home in much quantity. Under these conditions Russia
became more dependent on paying for its imports of food and consumer-goods
with oil, gas and other raw materials, not with the products
of its labor and industry.
The tax system meanwhile burdened honest
industry, but favored crooked exporters, who quickly gained the
money to buy a widening swath of Russia's natural resources,
aluminum companies and other key sectors.
The population was shrinking, and most
Russian engineers, university professors and other skilled professionals
was nearing retirement age. So many new graduates were emigrating
that the average age of engineers was reported to be 58 years
old, in a country where the average male life expectancy had
shrunk to only 62 years as alcoholism, AIDS and suicides were
rising.
Under this philosophy of privatization
as opposed to centralized government planning, most public opinion
polls found people coming to believe that Russia had ended up
being even more disastrously planned as it was before. It was
planned by the "Seven Bankers" and their colleagues,
the kleptocratic class that took over from the old Soviet nomenklatura.
And Stage 2 of their plan was to sell out their takings at a
capital gain to American and other foreign investors, leaving
Russian resources in the hands of non-Russians.
The hypocrisy of American pretense to
help Russia create an honest and fair market economy was laid
bare late in 2003, when Putin's government finally began to roll
back the most crooked privatizations by moving against the largest
tax evaders and embezzlers. The U.S. response was a series of
hand-wringing complaints that "private enterprise"
was being threatened by a renewed statism. It was as if Anatoly
Chubais and Mikhail Khodorkovsky were heroic entrepreneurs, not
insider dealers and kleptocrats.
The ideological pretense was that there
was no middle ground between Russia's kleptocracy and the old
Stalinist bureaucracy, no such thing as a mixed economy with
mutual checks and balances. The absurd claim was made that there
simply was no alternative.
No wonder Russian public opinion was
turning anti-American and anti-oligarchic. Was there really no
middle ground? Did Russia have no choice between "wild capitalism"
at one extreme and the old Soviet bureaucracy at the other?
Both systems were beginning to look suspiciously
similar. Both had their black market economies and respective
dynamics of economic polarization. Both post-Soviet elites and
the new American investors had little desire to see the "American"
textbook model of workers paid sufficient wages to buy the goods
they produced. Rather, the Russian market was to remain impoverished
so that more raw materials could be exporters. Russian and U.S.
investors sought a return to property, not to labor and physical
capital. The return to property was quickest in the banking sector
and in raw materials. Russia was to survive by exporting minerals
and fuels, and by selling off yet more shares in companies to
U.S. and other foreign investors.
SS: So what is Putin likely to do?
MH: His most important task is to rebuild
Russian manufacturing industry. This involves subsidizing it,
providing the kind of technical education that turned out Russian
engineers and scientists prior to 1990. National encouragement
is needed to stem Russia's Brain Drain to the West. A large proportion
of Russian professors and many leading engineers already are
in their fifties or sixties, and no replacements are being trained--or
if they are, they are seizing every opportunity they can to move
abroad, where they can earn more.
A re-industrialization strategy also
is seen to involve shifting the tax off of manufacturing and
technology onto the land and natural resources via a rent tax.
These objectives will deter Russia from entering the World Trade
Organization, which denounces such self-help policies as "interfering
with the free market."
SS: What are likely to be the first
or most controversial steps?
MH: The rent tax. Putin is coming to
realize is that it is not necessary for the state to own Russia's
natural resources outright. Despite the fact that it has sold
them off, the government has the power to tax their rental income.
SS: Isn't Russian industry already
so tax-ridden that new investment is uneconomic?
MH: Yes indeed, but a rent-tax would
not be an income tax. It would fall on the "unearned increment"
that derives from natural endowments.
SS: Is Putin mobilizing support for
this?
MH: At a news conference on Nov. 6, former
President Gorbachev was asked for his response to the Khodorkovsky
affair. "If authorities had solved the question of the rational
in the interests of the nation, the question of natural rent
and all related issues on time," he replied, "this
case might not have come round." Rent can be estimated
and taxed at any time.
Two days earlier Mr. Primakov noted that
the wealthiest individuals in China were men who had developed
high technologies, automotives and construction, but "in
Russia it's only oil or gas. But why? Apparently these people
have huge funds that they have acquired not because of excellent
management but because they use resources that were given by
God to all people. And they pocket these funds." Russian
processing industries reported profits of 12 to 14 percent, but
the oil industry reported 27 percent--and this is net of its
offshore price maneuverings and quasi-embezzlements! "Now,
this group of people . . . uses various schemes to evade taxes,"
Mr. Primakov continued. "I have recently made a trip to
the North, and everybody told me openly that most oil companies
create subsidiaries. These subsidiaries are fully owned by these
companies but are registered either in special territorial zones
where taxes are low or in off-shore zones abroad. Then products
are sold to these enterprises at an artificially low price and
these enterprises do not pay taxes to our budget at all."
Later in the month Yegor Gaidar, director
of the Institute for the Economy in Transition and an SPS (Union
of Right Forces) candidate in the upcoming State Duma elections,
announced in a radio interview that "Revenue from the Russian
oil industry has risen by $11 billion since 2002. This is currently
the fastest-growing source of income for the national budget."
However, since May-June 2003 the oil industry had opposed government
plans to raise taxes on extracting minerals in 2004. He estimated
that another $3 to $4 billion could be taxed without restricting
the oil industry's growth. So the ground was being prepared
for much higher oil taxation.
The most practical means of doing this
is by calculating the rent or "surplus profit" being
taken. This is why the Rodina or Motherland Party of Glaziev
and Dmitri Rogozin "has sent shivers through Russia's biggest
industry, oil production, by advocating a controversial 'rent'
program that would require oil companies to return a major share
of their profits to the public for the right to use natural resources.
'Today the people gave a clear answer that an end will be put
to the irresponsible course under which oligarchs fill their
pockets at the expense of social justice,' Glaziev declared Sunday
night [Dec. 7]." The idea of using land and resource rent
as the tax base also has been adopted by the Pensioners' Party.
The right-wing Yabloko "is warning that natural rent will
melt away when oil prices fall, but in principle has no objection
to confiscating natural rent in one form or another." Finally,
the SPS is calling for an excessive profits tax on the oil industry,
which in practice means "the confiscation of natural rent.
No party is opposed to natural rent."
Putin has announced the government is
considering how to redistribute oil company windfalls, and that
he wants representatives of the business community to participate
voluntarily in making the decision. "One of the mechanisms
would be an export duty, another would be a tax on the extraction
of natural resources," he said, while recognizing that the
government should tax oil fields based on their individual characteristics
rather than through the existing flat-rate system that encourages
companies to increase extraction at less productive wells.
What has been realized is that it is
not necessary to take the radical step of (re)nationalizing the
oil and gas, minerals and land. The rent itself can be taxed,
in a specific tax based on "economic" or "natural-resource"
rent (basically the Ricardian concept) rather than profit. As
long as this tax is applied evenly through the economy as a whole
it is legal under international law.
Almost none of this background is reflected
in Western reports. Instead of calling Russia's oligarchs thieves,
most press reports depict the pro-oligarchic party as advocates
of "free enterprise." This would make sense only if
one considers theft to be the ultimate expression of free enterprise.
Although the oligarchs denounce this
as fascism, nationalism, socialism or a "brown-red"
alliance, the fact is that the theory of economic was developed
in the early 19th century to bolster David Ricardo's free-trade
logic. Modern libertarians such as Milton Friedman in America,
and Patrick Minford (one of Margaret Thatcher's advisors) in
Britain have endorsed a rent-tax as being essential for "purely"
free enterprise to exist. In tsarist Russia a rent tax was endorsed
most notably by Leo Tolstoy (who became a follower of the American
land and tax reformer Henry George). This policy was about to
be endorsed by the Duma under Alexander Kerensky in 1917 just
before Lenin's October Revolution.
The policy has been endorsed by a group
of leading American economists who published an open letter to
President Gorbachev on November 7, 1990. It was drafted not by
socialists but by economics professors at the opposite side of
the political spectrum, market economists and even libertarians
who espoused the ideas of Henry George, headed by Nicolaus Tideman
of Virginia Tech, future Nobel Economics Prize-winner William
Vickrey, Mason Gaffney and Lowell Harriss. Other Nobel winners
included James Tobin, Robert Solow and Franco Modigliani, as
well as such prominent economists as William Baumol of Princeton,
Richard Musgrave and Zvi Griliches at Harvard, and Alfred Kahn.
"Dear Mr. Gorbachev," they wrote,
The movement of the Soviet Union to a
market economy will greatly enhance the prosperity of your citizens.
But there is a danger that you will adopt features of our economies
that keep us from being as prosperous as we might be. In particular,
there is a danger that you may follow us in allowing most of
the rent of land to be collected privately.
It is important that the rent of land
be retained as a source of government revenue. While the governments
of developed nations with market economies collect some of the
rent of land in taxes, they do not collect nearly as much as
they could, and they therefore make unnecessarily great use of
taxes that impede their economies--taxes on such things as incomes,
sales and the value of capital. . . .
The rental value of land arises from
three sources. The first is the inherent natural productivity
of land, combined with the fact that land is limited. The second
source of land value is the growth of communities; the third
is the provision of public services. All citizens have equal
claims on the component of land value that arises from nature.
The component of land value that arises from community growth
and provision of services is the most sensible source of revenue
for financing public services that raise the rental value of
surrounding land. These services include roads, urban transit
networks, parks, and public utility networks for such services
as electricity, telephones, water and sewers. A public revenue
system should strive to collect as much of the rent of land as
possible, allocating the part of rent derived from nature to
all citizens equally, and the part derived from public services
to the governmental units that provide those services. When governments
collect the increase in land value that results from the provision
of services, they are able to offer services at prices that represent
the marginal social cost of these services, promoting efficient
use of the services and enhancing the rental value of the land
where the services are available. Government agencies that use
land should be charged the same rentals as others for the land
they use, or services will not be adequately financed and agencies
will not have adequate incentive or guidance for economizing
on their use of land.
Some economists might be tempted to suggest
that the rent can be collected publicly simply by selling land
outright at auction. There are a number of reasons why this is
not a good idea. First, there is so much land to be turned over
to private management that any effort to dispose of all of it
in a short period would result in an extreme depression in prices
offered. Second, some persons who could make excellent use of
land would be unable to raise money for the purchase price. Collecting
rent annually provides access to land for persons with limited
access to credit. Third, subsequent resale of land would enable
speculators to make large profits unrelated to any productive
services they offer, resulting in needless inequity and dissatisfaction.
Fourth, concern about future political conditions would tend
to depress offers. Collecting rent annually permits the citizens
of future years to capture the benefits of good future public
policies. Fifth, because investors tend to be averse to risk,
general uncertainty about the future will tend to depress offers.
This risk aversion is sidestepped by allowing future rental payments
to be determined by future conditions. Finally, the future rent
of land can more justly be claimed by future generations than
by today's citizens. Requiring annual payments from the users
of land allows each year's population to claim that year's rent.
While the proceeds of sales could be invested for the benefit
of future generations, not collecting the money in advance guarantees
the heritage of the future against political excesses.
This letter warned specifically against
precisely the problems that would develop under Yeltsin's "shock
therapy" reformers and kleptocrats. But the U.S. Government,
World Bank and IMF had other ideas, and blocked this basic approach,
with well-known tragic results.
During the 1990s I made four trips to
Russia with Prof. Tideman, who had initiated the letter. We met
many dedicated people at various levels of government and academia
who worked to promote the idea of a rent tax. But on balance
we found the major problem to lie in the fact that most of the
government people we met wanted to get rich off Russia. Yeltsin's
supporters were out purely for themselves. The main way they
wanted to get rich was to gain control of land or some other
rent-yielding resource. They were the last people to put in place
a system designed to counter this kind of free-loading.
Even today, would-be Western reformers
have sought almost any alternative to taxing economic rent. Prof.
Stiglitz, for instance, points to the fact that Yeltsin's economic
policies created "incentives that led to asset stripping
rather than wealth creation," and notes that the "security
of property rights--and the growth it enables--depends primarily
on the legitimacy with which those rights are viewed by society.
If those who hold wealth are seen as having obtained it in ways
that lack legitimacy, no legal system can make property secure."
However, the longer Russia takes "to recapture some of the
oligarchs' ill-gotten gains," the harder it will be to do
so. "Once Khodorkovsky and his ilk sell their stakes to
foreign interests and take their money out of Russia, there will
be little that can be done."
Prof. Stiglitz proposes an "excess
capital gains tax", analogous in spirit to the tax imposed
on US oil companies when their profits soared, through no effort
of their own, from high oil prices in the 1970s. A tax could
be imposed, say, at the rate of 90%, on the "excess"
gains from the acquisition of state assets--e.g., on gains
in excess of 10% cumulative returns on original equity investments.
The tax would be payable either when the company is listed on
a stock market or when the assets are sold. Such a tax would
leave the oligarchs with plenty, and could even compensate them
for their efforts at restructuring enterprises."
This approach has a number of serious
problems. First is that of the proverbial "innocent buyer"
who bought stocks from Russians who sold out early, and have
continued to enjoy price gains as the oligarchs have defended
their takings? How do you tax secondary and tertiary buyers?
A related problem is that the managers of these enterprises have
been looting them by false invoicing and under-reporting of actual
sales proceeds. Such embezzlements need to be recaptured by the
tax collector.
As for Russians who have kept their shares,
the "excess capital gains tax" would in many cases
be near the magnitude of 90 percent of the current value of these
stocks. The only way to pay this tax would be for holders to
sell the great bulk of their shares. This sudden supply would
crash the price, wiping out the present holders.
SS: Could that be Mr. Stiglitz's covert
purpose?
MH: It's more likely that he hasn't recognized
this likelihood. Coming as he does from the World Bank, he has
what Thorstein Veblen called an "educated incapacity"
to see the rent issue for how important it is.
Given the blank stares one usually gets
when discussing a rent tax as opposed to a general income tax
on labor and industry, it seems remarkable that a hundred years
ago the idea of supporting governments by taxing landlords and
monopolists was a widely held ideal. After all, this is how governments
supported themselves from antiquity down to about the 17th century.
Approaches were made to the World Bank
and to Washington to gather support for Russia to lease out its
resources rather than selling them off under conditions where
Russian savings were wiped out by the hyper-inflationary "shock
therapy." But the World Bank and U.S. Government made it
clear that their aim was to turn over Russia's public enterprises
to individuals outright. These individuals then proceeded to
sell out to U.S. and other Western buyers. This created booming
financial markets, but at the cost of eroding the economy at
large.
The neoliberal assumption was that economic
self-interest would lead the new appropriators to behave in an
enlightened way as entrepreneurs are supposed to act in the economic
textbooks. The failure of the U.S.-backed policy in Russia therefore
signals the shortcomings of this kind of textbook model and the
neoliberal slogans repeated so unthinkingly by the press today.
By the same token, Russia may be the
first to undergo a great experiment, this time not of bureaucratic
government ownership but to become a "mixed economy"
where the public domain of land and natural resources is retained
and leased out to users at market prices rather than appropriated
by absentee owners and turned into an economic overhead.
A Critique of the Schleifer-Treisman
Foreign Affairs article
Prof. Michael Hudson, University of Missouri (Kansas City) (hudsonmi@aol.com)
February 22, 2004
Dear David,
The Foreign Affairs article by
Schleifer and Treisman, "A Normal Country," reads like
a legal defense brief. In view of the pending court case against
H.I.I.D., I suppose this was its inspiration. As an apologia
for Russia's development along the lines that Schleifer, A.I.D.,
the IMF and World Bank tipped the balance, it is written in accordance
with the adversarial legal practice of countering the prosecutor's
accusations by setting forth a seemingly plausible alternative
version.
Lawyers call this brazening it out. It
often works, but in this case I suspect that the authors have
gilded the lily too flagrantly. To me their apologia recalls
Chico Marx being caught in a woman's bedroom, saying to the man,
"Who are you going to believe--me or your eyes?"
It also recalls the surrealistic comic
assumption of Mr. Joyboy's mother in "The Loved One":
a manic obese over-eater whom Mr. Joyboy treats as if she were
perfectly normal. The authors' main contention is that Russia
has succeeded--in becoming a normal "middle-income capitalist
country." But what happened in Russia is surely a parody
of capitalism--unless we wish to paint a dystopian picture of
what today's "capitalism" has become for the corrupt
middle-income countries they cite.
The traditional characteristic of capitalism
is for industrialists to hire labor to produce goods for sale
at a profit. That is Marx's definition of surplus value. To employ
labor is to exploit it, creating an economic surplus (profit
and depreciation) in the process. But as I put matters to a Duma
committee in 1995, the Russians need have little fear that Americans
or domestic oligarchs seek to exploit Russian labor in this way.
What the privatizers want is Russia's natural resources, its
land and real estate, its oil and mineral endowment, and (for
Mr. Chubais) its natural monopolies. The objective is not to
earn a profit in the traditional capitalist sense, but to collect
economic rent--the "free ride" deriving from land and
resource rent, along with capital gains by making the privatization
of these rents more "secure" from public collection
or taxation.
The key to the authors' bias lies in
what they leave out of account. The Russian "success story"
they construct is centered on Russia's public resource domain,
not its manufacturing, skilled labor, educated work force or
even its basic economic infrastructure. Rather, the Western investors
on whose behalf at least Prof. Schleifer acted did not want resource
rents taxed.
The important point is to compare Russia's
development in the 1990s not with corrupted economies such as
Mexico et al., but with what Russia might have become. On November
7, 1990, a group of U.S. economists including several Nobel Prize
winners (Bill Vickery, Robert Solow, James Tobin and Franco Modigliani)
as well as two Harvard professors (Richard Musgrave and Zvi Griliches)
published a public letter to President Gorbachev urging him to
rationalize Russia's tax system by taxing what was visible and
clear--its land and mineral rent. The letter warned against precisely
what happened: Premature privatization would leave Russia's natural
tax base, its land and mineral wealth, to be privately appropriated.
If this occurred, the letter warned, Russia would have to tax
its manufacturing (fixed capital formation) and labor, crippling
its chance to create a competitive and self-reliant industrial
and agricultural base.
Dmitri Lvov of the Academy of Sciences
has supported this position for a decade, as has his school chum
Yevgeny Primakov and his PhD student Sergei Glaziev. As former
Pres. Gorbachev explained in his press conference last Nov. 6
(as JRL reported on Nov. 11), "If authorities had solved
the question of the rational in the interests of the nation,
the question of natural rent and all related issues on time,
this [Khodorkovsky] case might not have come round."
American property appraisers were invited
to Russia to help create land-value maps as a basis for taxation,
with the intention of freeing Russian labor and industry from
taxes which made it all but impossible for honest manufacturing
firms to operate. However, the World Bank and Washington planners
opposed this policy. They transplanted a crude version of the
U.S. tax system on Russia, replete with tax breaks for special
interests that deformed the Russian tax code. Meanwhile, Yeltsin's
coterie played dirty political tricks on Duma members who supported
rent collection. The popular Vyachislav Zvolinsky of the Agrarian
Party, for example, found himself mysteriously off the ballot
in his home district.
The issue does not lie in comparing Russia
to corrupt countries such as Mexico, Brazil under the generals,
or Argentina under its disastrous dollarization policy of the
1990s. Rather, what is important is what Russia did that has
led to its present export monoculture pattern, and what it may
do to achieve a more balanced and self-reliant growth.
Schleifer and Treisman employ a series
of euphemisms to conceal what has happened. In the case of the
loans-for-shares program, surely they must know that no bona
fide "loans" were involved at all. The government held
deposits in the banks that managed the auctions. The banks sent
a check to the government--a check whose proceeds were backed
by the government's own deposits. The government duly recorded
the money as having been received, and then re-deposited the
checks in the banks that "bought" the oil and minerals
companies. In Mr. Khodorkovsky's purchase of Yukos, the bank
was Menatep. On balance the government got nothing. In terms
of actual payment, the transaction was a wash.
The authors are silent on Russia's equally
needless decision to back its domestic rubles with U.S. dollars.
These were unnecessary for purposes of paying domestic workers
for spending at home. The effect was simply to stifle the domestic
market. The government aggravated its problems by "borrowing"
money via GKOs paying 100% interest to banks for lending it what
the government already had deposited. The effect of this financial
maneuvering was to create an oligarchy of insiders.
Mexico and other "middle-income" kleptocracies had
their insiders too, of course. But to present this as a success
story is to confuse parasites with their hosts, lawbreakers with
entrepreneurs.
With regard to the authors' description of the 1998 ruble crisis,
surely the authors must know that it was created by the IMF loan
proceeds being used to back dollar/ruble forward swaps that quickly
ate up the proceeds. Only insiders were permitted to draw up
such contracts, as these were a guaranteed win. When the ruble
was devalued, holders of dollar options cashed out--and left
Russian depositors in their own banks to go bankrupt. In effect,
they bet against the depositors and the government--and did so
as government insiders. So whom did the government really serve?
The Russians entailed a debt to the IMF for having enriched their
own banking oligarchy. So if Russia is indeed a "normal
middle-income capitalist country," what does this imply
about Mexico, Argentina, Croatia, Korea, et al? They too
suffer flight capital that returns as offshore loans to the government.
This phenomenon has left these countries so deeply indebted to
their own oligarchy, operating offshore and merging its claims
with those of foreigners, that they have lost their domestic
autonomy to IMF planners following the Washington Consensus.
The Foreign Affairs article reads as if Russia has moved
away from being a planned economy without acknowledging how warped
its planning has become at the hands of the rentier oligarchy
put in power under Yeltsin, with heavy U.S. subsidy by administrators
such as Prof. Schleifer. Russia is still a planned economy. But
the financial sector is doing the planning, and it does this
in such a way as to maximize its own rentier gains, not
to develop the nation along lines favoring industrial development,
agricultural self-dependency and upgrading labor productivity.
The authors say not to worry, because this is typical of corrupt
Latin American and Asian dictatorships. But was the objective
in 1991-93 to turn Russia into a Mexico or Korea? Was there no
better alternative to post-Stalinist bureaucracy, no third way--a
mixed economy, with market feedback mechanisms without creating
an oligarchy seeking to sell out its holdings to foreigners?
The authors claim that Russia is moving toward an economy governed
by the rule of law. But last year when Pres. Putin began to apply
the laws against tax evasion and financial fraud against the
largest abuser, Mikhail Khodorkovsky who had become Russia's
wealthiest oligarch, the Bush administration wrung its hands
as if this were an attack on private property and free enterprise.
As for the authors' technical economic analysis, it too is fundamentally
misleading. They refer to income inequality, and suggest using
government statistics on consumer goods and electricity usage
as a proxy. If matters are as good as they claim, why do Russian
public opinion polls show so many people claiming that they lived
better under the previous system? As for the statistics themselves,
I was informed that the Goskomstat's figures for final household
consumption simply report imports for manufactured goods. This
implies an almost unparalleled foreign dependency--a dimension
that the authors do not address, and which Mr. Putin is just
now starting to confront, to the great distress of neoliberals.
The authors acknowledge that much Russian income is "under-reported."
They do not point out that the main tactic to under-report income
occurs in the export sphere, where foreign buyers pay the balance
between the reported price and the "real" price into
the accounts of the embezzlers. Does this practice not explain
the lion's share of the oligarchy's wealth? If so, shouldn't
it be called "primitive accumulation" rather than bona
fide capitalist profits?
A basic flaw in the article's analysis of inequality is a principle
as true for the United States as it is for Russia. Inequality
of wealth (assets in the form of land, stocks and bonds)
far exceeds inequality of income. This occurs because
the wealthiest individuals do not seek (reportable) income. They
seek property ownership and its capital gains. The booming Russian
stock market enriches wealth-holders at the expense of income-earners.
This dynamic of Russian privatization reflects the failure of
its tax policy for the past decade. To sweep it under the table
would be a losing strategy in any court of law where the witnesses
could be cross-examined and counter-witnesses produced with regard
to the failures in which Prof. Schleifer played an active role.
One therefore must suppose that the article was written primarily
for consumption by readers unfamiliar with the specific details
that characterized Russia's kleptocracy--details which Johnson's
Russia List has been careful to bring to the attention of its
own readers, and for which we all must be grateful.
The article's conclusion, that "Oligarch-controlled companies
have, in fact, performed extremely well," neglects to point
out that they have performed well for foreign buyers, not for
the Russian tax collector, Russian workers or the Russian economy.
A monoculture syndrome is not the way to develop an economy.
That is why Mr. Primakov recently contrasted Russian development
with that of China, pointing out that China's wealthiest individuals
earned their money by organizing industrial ventures to employ
domestic labor.
This bears upon the article's concluding point: "What does
the future hold for Russia?" Is the oligarchic system stable,
or is it about to receive a structural shock? What will happen
when electricity prices and other carrying charges for Russian
homes rise sharply to international levels? The World Bank and
IMF are urging Russia to develop a mortgage market, so that Russians
can borrow against their homes to pay these charges. I see a
scenario in which they will borrow to get by, and end up forfeiting
their apartments to the creditors.
The largest sector even in the most highly developed industrial
economies such as the United States and Britain consists of real
estate. For Russia, the land value is followed by natural resource
wealth. The "good performance" of the oligarchs reflects
Russia's crippled ability to tax this wealth, which was not created
by the efforts of its present owners but was a legacy of the
pre-privatization public domain that has been stripped away in
a simple asset grab.
Mr. Gusinsky, Mr. Berezovsky and now Mr. Khodorkovsky have started
to sell out properties that they bought virtually for nothing
(or at most for a penny on the dollar) for two cents to ten cents
on the dollar to foreigners, so as to convert their takings into
more secure foreign holdings (British soccer teams, villas in
the world's prime real estate enclaves, etc.). As Russian land
and mineral rights are sold, this will turn domestic attempts
to tax resource rent into a political crisis as the WTO and Washington
Consensus protest.
But it is fair under international law, as long as Russia taxes
its oligarchs and foreigners equally with regard to their rental
income. This looming political and economic instability promises
to become the major feature of Pres. Putin's second term. The
Foreign Affairs article reads as if it is trying to mobilize
support against a Russian policy that may begin in 2004 to set
Russia on the track that it would much better have started back
in 1991.
SS: How does Mr. Putin's firing
of Prime Minister Kasyanov on February 24 play into your scenario?
MH: Kasyanov had been acting on
behalf of the oligarchs to block moves to tax resource rent ever
since he was installed by Yeltsin's Family. Two weeks ago he
distributed a glossy report denouncing Glaziev's proposal to
tax resource rent. The Western press picked it up, imagining
that it was an attack by Putin's government on Glaziev -- not
realizing that in fact it was an attempt by the oligarchs to
keep their money free of taxation.
What the Western press did not realize was that Putin saw this
as an attack on the policy that he himself was moving toward
as he broke free of oligarchic control. Rather than seeing this
as a step toward Russian democracy and self-determination, the
press sees this as an authoritarian power grab by the silovaki.
There simply is no understanding of the idea of land and resource
rent as the fiscal basis for Russia (and now for British transportation
as well, it seems from recent editorials in the Financial Times).
A few weeks ago Glaziev was asked whether
he would become part of Putin's government. "That all depends
on its policies," he replied. With the firing of Kasyanov,
the road is now open for him to become a minister in the government
after March 14.
I can imagine, for instance, the federal
prosecutor Stepachin becoming prime minister. At the very least,
you can expect a man who will not fight against the rent-tax
as Kasyanov consistently did.
Professor Michael Hudson is an independent Wall Street financial economist.
After working as a balance-of-payments economist for the Chase
Manhattan Bank and Arthur Anderson in the 1960s, he taught international
finance at the New School in New York. Presently, he is Distinguished
Professor of Economics at the University of Missouri (Kansas
City). He has published widely on the topic of US financial dominance.
He has also been an economic adviser to the Canadian, Mexican,
Russian and US governments. His books include Trade, Development,
and Foreign Debt (Pluto, 1992, 2 vols.). He is the author of
Super
Imperialism.
Standard Schaefer is an independent economic journalist, a cultural
historian, literary critic, poet and short-story writer. He teaches
at Otis College of Art and Design. He is the non-fiction editor
of the New Review of Literature. He can be reached at
ssschaefer@earthlink.net.
©2004 Hudson and Schaefer, from
book-in-progress.
Weekend
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