The global economic crisis devastated Russia s

Transcription

1 The unique form of capitalism that developed following the Yukos affair seems likely to survive the current economic upheaval. No Obituaries Yet for Capitalism in Russia SAMUEL CHARAP Governments & Markets Second in a series The global economic crisis devastated Russia s economy. With the exception of its neighbor Ukraine, Russia suffered perhaps more than any other emerging market. In addition to the credit crunch and capital flight that occurred in practically all these markets, Russia was also hit by a collapse in demand for its main export commodities, in particular hydrocarbons. When world oil prices dropped by more than half in the past year, Russia found itself in deep trouble. The statistics are grim. Gross domestic product (GDP) could drop by as much as 10 percent this year, after a decade in which growth averaged nearly 7 percent annually. Industrial production has collapsed at an even steeper rate than it did during Russia s 1998 economic meltdown. Unemployment has reached double digits, decimating the country s nascent middle class. By the end of this year, over 17 percent of the population, or 24.6 million people, will be living below subsistence level. In the first six months of 2009, foreign direct investment into Russia plummeted 45 percent year-on-year, the steepest drop on record. The stock market has tanked. The number of Russian billionaires has fallen to 32, from 110 just last year. And for the first time in 10 years, the government this year will run a budget deficit a whopping 7.5 percent of GDP. As the crisis gathered steam in the fall of 2008, observers predicted an incompetent government response and a new wave of property redistribution in favor of the state. A trend toward greater state control over the economy had already begun with the so-called Yukos affair. (The term refers to the government s assault on the oil giant SAMUEL CHARAP is associate director for Russia and Eurasia in the national security and international policy program at the Center for American Progress. Yukos including the arrest, trial, and conviction of the top shareholders of Yukos s parent company, Platon Lebedev and Mikhail Khodorkovsky, on fraud and tax evasion charges, and the eventual dismantlement of the company s assets and their sale to state-controlled firms. The affair continues through the present day, as the imprisoned Lebedev and Khodorkovsky stand trial a second time, this time on embezzlement charges.) Many suggested the trend toward state control would now become even more severe. They predicted that entire sectors would be gobbled up by corrupt officials seeking to extract rents. The heads of state-owned or state-controlled corporations, or tycoons with close connections to leadership, would receive direct government support and would be empowered to take over other enterprises this would represent a soft nationalization of sorts. Many feared a reversal of the privatizations that had occurred in the 1990s, and a wholesale redistribution of assets from the private sector to the state or its agents. Some observers even claimed that Russia was embarking on a path toward a new economic system, one completely dominated by the state. These predictions have proved unfounded at least thus far. Indeed, the government s program of anti-crisis policies has been relatively successful, especially in the financial sector. Few nationalizations have occurred, and those that have taken place were essentially forced upon the state. To be sure, the government s response has been far from ideal: Policy implementation in many cases has been terrible, and selective bailouts seem to have been driven by favoritism. But the Kremlin has not fundamentally altered the country s economic structure. The crisis has not put an end to Russia s market economy. THE INTERVENTION TREND While fears of radical state enlargement have not been realized since the crisis hit, the preceding 333

2 334 five years did in fact witness a shift toward significantly greater government intervention. The backdrop to this period of statist policy was the retrenchment of the government that occurred in the 1990s. In those years, Russian policy makers had sought to reduce the state s role to a minimum by liberalizing trade, limiting intervention in markets, and embarking on what would become the largest privatization effort in world history. The results were far from perfect, as demonstrated most vividly by the so-called loans-forshares privatization, in which the state essentially sold off its most valuable enterprises for a song. But the reforms did definitively prevent a return to the Soviet-era command economic model. A free market was created, flawed as it might have been. Then-President Vladimir Putin for the most part continued the liberalization trend in his first years in office with the prominent exception of his handling of the military-industrial complex. When energy prices skyrocketed and budgetary receipts grew accordingly, the government stowed away the new money in a stabilization fund instead of using it on popular spending projects that would have increased the state s role. The Yukos affair put an end to this trend. Indeed, it was a watershed: After the dismantling of Yukos the government became a central actor in Russia s economic life. The state asserted itself across wide areas of the marketplace, particularly in strategic sectors such as energy, aviation, shipbuilding, and banking. In the energy sector in addition to the nationalization of Yukos and the acquisition of another oil major, Sibneft, by Gazprom the state coerced international oil majors into selling to Gazprom their majority stakes in two large gas fields, Sakhalin and Kovytka. (By the time the economic crisis hit, the state controlled over 80 percent of gas production and over 40 percent of oil production.) The government consolidated major industries, including aviation and shipbuilding, into state-owned holding companies. In aviation, for example, the United Aircraft Corporation was created, bringing together the majority of Russian firms in the industry. A deputy prime minister chaired the new company s board. In this period a new form of enterprise, the state corporation, took on a major role in the Russian economy. These corporations, of which there are The economic conditions that once allowed the Russian government to interfere in the market with impunity are a thing of the past. now seven, are technically state-owned and receive funds through the budget, but the government exercises little oversight over their activities. One such corporation, Russian Technologies, which is chaired by a former KGB colleague of Putin s, has vastly expanded its purview beyond its original military-industrial portfolio and has entered sectors such as automobiles and metals, consolidating hundreds of enterprises under its umbrella. GETTING IN LINE Overall, during the period following the Yukos affair, the public sector s share in Russia s market capitalization grew from approximately 20 percent to more than 35 percent. Of the voting shares in Russia s 20 largest enterprises, the state came to hold over 40 percent compared with 11 percent when Khodorkovsky and Lebedev were arrested in On the political level, the Yukos affair marked a transition from one model of state-business relations to another. Some have termed this new relationship state corporatist, with the government largely dictating the rules of the game to business. Russia s oligarchs lost their direct influence on policy making and were often forced to conduct their commercial activities in accordance with government mandates. In 2006 then Prime Minister Mikhail Fradkov summed up the government s new attitude in a question addressed to big business: Are you ready to get in line? Yet, despite this expansion of the state s role, Russia remained a market economy however flawed. Outside of strategic sectors, private enterprises thrived. Even within strategic sectors, the government did not assert absolute control. The privately owned Lukoil remains the second largest oil producer, and TNK-BP, a joint venture between a Russian firm and BP, still operates. Yukos s demise did not lead to the downfall of all the Russian oligarchs, who largely maintained their positions as major actors in the private economy. For them, the major cost of the Yukos affair was that they were forced to pay their taxes in full and to underwrite the informal expenditures expected of them by the government under the banner of corporate social responsibility. In certain cases, the government even took steps toward liberalization. In December 2005

3 No Obituaries Yet for Capitalism in Russia 335 Gazprom lifted the so-called ring fence that had prevented foreign investors from buying shares in the firm directly on the Russian market. Now 49.9 percent of Gazprom is publicly traded, with a large proportion owned by nonresidents. Other statecontrolled firms, such as Rosneft and the banking giant VTB, conducted initial public offerings on Western exchanges, and there are plans for partial privatization of some of the new state-controlled holdings, such as United Aircraft. Western companies and foreign multinationals still operate in Russia, despite major problems with corruption and inadequate rule of law. TIME TO WORRY When the economic crisis hit, a collective Cassandra emerged in the Western commentariat warning that the Kremlin would use the crisis as a pretext to alter the economy fundamentally. In a widely discussed article that appeared in Foreign Affairs this spring, the political scientist Ian Bremmer advanced a thesis about the impact of the economic crisis on the relationship between markets and states across the world, including in Russia. He asserted that the economic crisis would precipitate a new wave of state capitalism a term he used to describe Russia s economic system in the post-yukos era. In other words, the crisis would catalyze even greater state control over the economy. The economic downturn would both provide opportunities for factions in the government to extract greater rents and spur social pressures that essentially would compel the state to push toward near-total control. Many other Russia watchers shared similar opinions. Some warned of a Yukos redux wherein the authorities would use the crisis as an excuse to move beyond control of the economy s strategic sectors and establish a stranglehold on other areas. To date, however, that has not happened. And Russia s crisis policies have proved a moderate success. In the tumultuous fall of 2008, the government s first task was to stabilize the banking and financial systems, which were near the point of implosion. Some regions experienced runs on banks, and a number of institutions stopped allowing withdrawals. The chairman of Russia s central bank said that he expected between 50 and 70 banks to fail. At one point, the stock market was down 75 percent. Policy makers responded rapidly and on a massive scale. Measures taken included: using the state-owned bank Vneshekonombank (VEB) to purchase shares in order to support the stock market; providing banks with subordinated loans to match TransCoop Program Funding for Research Visits to Germany for Scholars in the Humanities, Social Sciences, Economics and Law The Alexander von Humboldt Foundation will grant up to half of the funding for a new collaborative project, such as a joint study, critical edition or seed money for an international conference, up to a maximum of EUR 55,000 over three years. Application for the TransCoop Program is open to scholars at research institutions in Germany, the United States, and Canada who are working in the humanities, social sciences, law and economics. Applications must be submitted jointly by at least one German and one U.S. or Canadian scholar. Ph.D. required. U.S. and/or Canadian funds must cover the balance of the cost of the project. Application deadlines: April 30 and October 31. Information and applications are available at: foundation.de info@avh.de

4 336 capital raised by shareholders; switching deposits from the central bank to commercial banks; injecting capital into the four major state-controlled or state-owned banks; offering private banks a wide array of liquidity facilities; and increasing deposit insurance. The state was also forced to bail out more than a dozen banks, but it nationalized only five and these were on the verge of total collapse. Their failure could have caused a domino effect in the financial sector. To date, these measures have succeeded: No major institution has failed, and the localized runs on banks stopped soon after they started. The barter and nonpayments that were prevalent during the 1990s did not return. Once the banking and financial systems were stabilized, the government s next task was to prevent Russia s big businesses from collapsing under the weight of their massive debts. Russian firms had obtained an astonishing $500 billion in credit from international lenders in the years of plenty leading up to the crisis. When the crisis erupted, a $50 billion fund was established by the stateowned VEB (the board of which is chaired by Prime Minister Putin) to allow enterprises to refinance their debt to foreign creditors. The bank put stringent conditions on the loans: It has the right to demand any collateral it sees fit; borrowers need permission to take out additional loans, launch new share issuances, or sell assets; and the bank can install its representatives on the boards of companies that receive loans. Because the borrowers were forced to offer large stakes in their firms as collateral, the VEB refinancing program stoked fears of a nationalization campaign. For example, the metals companies Rusal and Evraz both controlled by the oligarch Oleg Deripaska took advantage of the VEB assistance. If Deripaska fails to repay his debts and VEB does not prolong or restructure the loans, the state could end up with a major stake in the metals sector. Indeed, there has been discussion of consolidating various metals companies in order to form a national champion. GETTING REAL As the crisis spread from the financial sector to the real economy, the Russian government took further steps. It cut the corporate tax rate and introduced measures to stimulate production The government, in its response to the economic crisis, decided against taking the nationalization path. in the energy sector. It directly supported enterprises deemed strategic, critical to the functioning of a particular sector, or those located in onecompany towns. This support has mostly come in the form of state guarantees for loans, credits from state banks, and government procurement programs. In April 2009, the government passed a revised budget with stimulative measures such as more aid for strategic sectors and major spending increases for defense, health care, and pensions. The government also provided incentives to banks to extend credit, and implemented measures to support small and medium-size enterprises. Russia s planned fiscal stimulus for (excluding support to the financial sector) is, as a percentage of GDP relative to a 2007 baseline, the third largest to have been introduced in any Group of 20 country, behind only Saudi Arabia and China s. The central bank has also played a major role in the anti-crisis effort. When oil prices dropped precipitously in the fall of 2008 and international investors pulled out of emerging markets, the ruble which had strengthened significantly during the pre-crisis period came under new downward pressure. This forced the central bank to devote massive amounts of its currency reserves to keeping the ruble within its specified exchange rate corridor. Beginning in November, the bank launched a gradual devaluation, allowing the ruble to depreciate by more than 50 percent against the dollar compared to the July 2008 exchange rate. In so doing the bank spent tens of billions of dollars worth of foreign currency reserves. The central bank has come under criticism for not allowing a sharp, one-off devaluation, and for sticking to its policy of maintaining a range of acceptable exchange rates instead of letting the ruble float freely. Such policies would have avoided utilizing the reserves to the same extent. But from a social and political point of view, the gradual devaluation was a success. It prevented a destabilization of Russia s social order in a time of economic upheaval, and the populace s confidence in the government remained high. In an unprecedented step for the Russian bureaucracy, where traditions of secrecy dating from the Soviet era remain strong, the Kremlin in March 2009 released the details of its anti-crisis program

5 No Obituaries Yet for Capitalism in Russia 337 on the government s website and in the official state newspaper. The program as published outlined seven government priorities during the crisis: fulfilling the state s social obligations; maintaining the country s technological and industrial potential; stimulating domestic demand; fostering innovation and structural reform; improving the investment climate through institutional reform and deregulation; modernizing the financial and banking systems; and maintaining macroeconomic stability. The most recent revision, in June, also included a list of 123 measures to be taken before the end of this year. A STEP FORWARD Although it remains to be seen how much of the plan will be implemented and how many shortterm moves associated with the plan will correspond to its long-term goals such a program, in the Russian context, represents a step forward in terms of both its public nature and its strategic outlook. The anti-crisis plan explicitly rejects an expansion of the state s role in the economy and thus far the government has stuck to this principle. VEB cut off its lending facility after distributing only one-fifth of the $50 billion in the fund it had established. Other state lending mechanisms have been restricted as well. And the government urged state banks to roll over loans to domestic enterprises so they could avoid bankruptcy. VEB quickly followed suit, prolonging its loans to Rusal and Evraz for one year. Foreign banks have essentially done the same, issuing waivers to avoid defaults, since they cannot afford more writedowns on their balance sheets. True, the state (most often through a stateowned or state-controlled bank) has nationalized about 20 large enterprises. But unlike previous examples of nationalization, which often saw the government take over profitable firms at the commanding heights of the economy, the companies acquired in this instance are likely to be more of a burden than a boon to their new owner. The nationalizations, outside of the banking sector, have included incomplete residential construction projects, unexplored oil fields, and stakes in real estate development firms. Private businesses remain junior partners in the policy making process, but they do play a consultative role at a political level. Meetings between business associations and government leaders occur on a more or less regular basis; individual oligarchs are brought in for one-on-one consultations; and business representatives attend meetings of the government s anti-crisis commission. In short, there has been no repeat of the campaign of government intervention that began with the Yukos affair. The government, in its response to the economic crisis, decided against taking the nationalization path for several reasons. First, policy makers have little desire to take on the debts and liabilities of troubled firms. Second, policy makers worry that bankruptcies at major enterprises, and resulting changes in ownership and management, could precipitate social unrest. They are especially wary of such problems in one-company towns, but more generally they recognize that state ownership is not always the solution to management problems. Third, the leadership appears to realize that it needs to change its approach to economic policy if future crises are to prove less severe than the current one. The economic conditions that once allowed the Russian government to interfere in the market with impunity are a thing of the past. Following the Yukos affair, sky-high commodity prices ensured investor interest in Russia despite the state s intervention campaign. Now Russia must improve the investment climate to get funds flowing again. Indeed, without a boost in investment, the Russian economy is unlikely to recover in the medium term and has little chance at diversification. Although oil prices have risen recently, investors today have little money to spend, and a new nationalization campaign would make them loath to spend it in Russia. CONFLICTING PRESSURES The fact that Russia has not launched a new nationalization campaign does not mean the state has taken a hands-off approach to the behavior of the country s major enterprises. Sometimes the state has done just the opposite, most infamously in the town of Pikalevo, which depends heavily for its livelihood on a cement factory. When the company ceased production during the height of the economic crisis, residents took to the streets, blocking a major highway and demanding that Putin personally intervene. And eventually he did. In a meeting that was broadcast on the evening news, Putin lashed out at local officials, federal ministers, and Deripaska (who owns the plant) for letting the situation get out of control. At one point Putin summoned Deripaska to his seat, threw down a pen, and demanded he sign a contract to get the plant operating

6 338 again. (Putin has also insisted that executives at state-owned banks forgo their summer vacations, while President Dmitri Medvedev has decried the corporate egoism of private banks, evident in their failure to give out loans.) Some forces in the political elite are pushing for greater government control of the economy. Following the Pikalevo incident, the Duma introduced a bill that would have nationalized the enterprises in that town. Russia s umbrella trade union has called for stepped-up intervention and state takeovers. Further, the government s relatively hands-off approach enjoys little support among the populace over 80 percent of Russians are in favor of nationalizing major enterprises. For now, however, the government has not succumbed to these forces. Given Russia s highly centralized political system, outside pressures on the executive branch have far less impact than they do in other countries. Of course, if the crisis continues to cause social displacement, the state might have no choice but to take a more activist role. With the economy likely to recover slowly after this year s potential double-digit contraction, and with inflation still over 10 percent, such a scenario is not far-fetched. Furthermore, the government s anti-crisis policies have not been flawless. Selective bailouts suggest government favoritism verging on outright corruption. Implementation of some policies has been a catastrophe: The decision making process essentially buckled under the weight of the huge number of initiatives called for by the government program. In the absence of strongly institutionalized interagency processes, rent-seeking and graft have been rife. The legislation and government edicts meant to implement anti-crisis measures were badly written. Policies have often reflected the government s poor understanding of conditions in the economy. DIVERSIFICATION DEFERRED And while the government has not used the crisis to put an end to the free market, neither has it taken advantage of the crisis to modernize and diversify the country s economy. Medvedev and Putin pay constant lip service to the notion that moving away from an economic model based solely on commodity exports is the only way to ensure Russia s long-term economic security, but few if any steps have been taken to translate these words into concrete policies. The structural reform agenda has largely been stalled since The leadership even appears to be wavering in its desire for Russia to become a member of the World Trade Organization a step that would significantly improve the environment for investors both foreign and domestic. Indeed, the climate for investment remains poor today, and the rule of law continues to be notable for its absence. Systemic corruption stifles economic growth and foreign investment, as vividly demonstrated by IKEA s recent decision to discontinue its expansion in the Russian regions due to local officials demands for kickbacks and bribes. (IKEA eventually reversed its decision after Moscow, apparently shamed into action by extensive press coverage of the announcement, intervened.) Infrastructure bottlenecks, another impediment to growth, are not being addressed funding for infrastructure, already low, has been cut in next year s budget. But even though economic modernization remains a pipe dream, Russia has not abandoned the free market. The crisis created both opportunities and pressures to embark on a new nationalization campaign, yet the government so far has resisted that urge and appears determined to continue resisting it. The unique form of capitalism that developed following the Yukos affair seems likely to survive the current economic upheaval.