08.08.2007
Russia Today: Up the Down Staircase
№3 2007 July/September
Vladislav Inozemtsev

Vladislav Inozemtsev holds a PhD in Economics; he is Head of the Department of World Economy at the Faculty of Public Administration, Lomonosov Moscow State University, and Director of the Center for Post-Industrial Studies.

Discussions about the socio-political
system that has been established in contemporary Russia have long
been marked by two clearly different approaches. On the one hand,
supporters of the Vladimir Putin regime believe that over the last
seven years Russia has recovered from its economic crisis, solved
many internal problems, strengthened the state governance system,
and restored, albeit partially, its positions on the international
scene. On the other hand, opponents of Putin’s nomenklatura
emphasize that the country has been swept by corruption and
arbitrariness, the judicial and law-enforcement systems have been
built into the “power vertical” to serve its interests, Russia’s
wealth is being plundered even more intensively than before,
relations with leading Western powers and former Soviet republics
are becoming increasingly strained, and social problems in the
country are being aggravated.

However, both sides admit that the
system built over the last few years contains a wide margin of
security. It remains stable in the face of any “external threat,”
that is, it can withstand any criticism from the outside and any
mass movement inside the country. It is even less dependent on
standard economic and financial factors (for example, fluctuations
in oil or gas prices) than was previously believed to be the case.
Meanwhile, it is highly unlikely that Russia will find itself in
international political isolation, while chances are also slim that
it will get involved in military conflicts that would demonstrate
its inefficient defense potential. Finally, a social outburst,
which might be caused by increasing wealth inequality and economic
distress among a significant part of the population, is also ruled
out.

But what are the fundamentals of the
existing system – the “principles of Putinism” – that allow an
elite that emerged by sheer accident to run the country in a manner
that is highly effective for itself and not too ruinous for others,
yet in a direction that is opposite to the one chosen by the more
successful states in the world?

IN THE NEW CENTURY WITH LATE-SOVIET
MENTALITY

The present system owes its emergence
to President Putin. It reflects his mentality and the mentality of
his entourage, together with their positive and negative features.
It reflects their dreams and hopes, grievances and fears, and views
of how the world should be built. Apologists of this system
attribute to it the historical and “natural” features of Russian
society, which are in fact not peculiar to it. Thus, we are
witnessing an attempt to lead society along a path that is more
understandable to the ruling minority than to ordinary
citizens.

The majority of this elite has features
that preclude the possibility of society’s effective management
entering an information epoch. The ruling regime acquired their
qualities in the late 1970s-early 1980s, at the time when their
personalities were being formed. These are people with a
late-Soviet mentality; many of them have a record of service in the
Armed Forces, the Interior Ministry or security services. The
Soviet military’s views of the world were, as a rule,
“black-and-white;” they tended to attribute unfavorable
developments to conspiracies or actions by one or another interest
group. Such people are wary about the “risks” and “uncertainty”
associated with the contemporary world, where momentous events may
result from a coincidence of numerous circumstances and cannot be
precisely predicted. At the same time, their lifelong adherence to
a simple and even primitive worldview makes them reject all the
other points of view on any issue.

The old mentality shows in dual
peculiarities in the conduct of the Putinite elite. First, the
Soviet outlook was based on the idea that the Soviet Union had a
global mission to show the world the way to the Communist future.
Members of the present regime have preserved that world outlook,
but have discarded the “international” component, focusing their
dreams instead on the historiosophic “Russian idea” of the late
19th-early 20th century. This is why the Russian elite does not
make much effort to understand the reality: it oftentimes seeks to
find a clue to a plan given from on high.

Second, while being at odds with
reality when it comes to high politics and strategic goals, the
“workers” of Putin’s “power vertical” show exceptional commercial
enthusiasm and tailor any “administrative resource” for the purpose
of increasing their personal wellbeing. No other country has so
many ministers and high-placed officials from the presidential
administration on the boards of directors of major corporations. At
the same time, in no other country does state participation in a
company make these business entities less transparent and
accountable to other shareholders.

In 2000, power in Russia fell into the
hands of individuals who had previously served as cogs in the vast
bureaucratic hierarchy. It cannot be ruled out that many of them
still cannot get used to their rapid rise. Their narrow-mindedness,
coupled with an unnatural situation, produced an irresistible
desire to use all of the available opportunities for personal gain.
The volume of “classic” and latent corruption over the last five
years has increased three to five times.

President Putin stands out among his
associates only by his rank. He is flesh of the flesh of the team
that came to the Kremlin with him. Had he been a cut above the
others, as is believed today, he would not have brought them with
him. Today’s Russia is ruled not by a leader, but by a strong-knit
nomenklatura; it contains no individuals who would be distinguished
for their talents and abilities.

At a time when the ruling elite is not
waging a political or ideological struggle, the only chance to lose
one’s post comes when an individual is found to be professionally
unfit for his job. But since each bureaucrat knows perfectly well
that he occupies his position not according to meritocracy but
rather due to sheer accident, the desire to conduct personnel
purges is rare simply because no one feels safe. This once again
underlines an obvious fact: the present Russian elite is a cohesive
mass that recruits new members that are of a similar mental and
intellectual mold.

PHANTOM OF A STATE

The State is the main obsession of the
ideology of Putinism. In the contemporary English language, the
words ‘state’ and ‘nation’ are not only interchangeable, but the
latter is even gradually replacing the former. Meanwhile, in
Russia, ‘state’ and ‘nation’ are not only mismatching notions –
they are practically opposite in meaning to each other. The
contradictions between citizens and the state are discussed in a
way that suggests that citizens are no longer a part of the state
and the bureaucrats have long ceased to be citizens. A Putinite
state is a classic Leviathan [an absolute authority] derived from
the title of Thomas Hobbes’s book, which bears no responsibility to
the people and pursues only its own interests. In fact, the “state”
is a synonym for the ruling class and the mechanism this class has
created to uphold and consolidate its domination over
society.

Putin’s etatism graphically manifests
itself in his efforts to strengthen the ‘power vertical’ in the
country, and ‘state sovereignty’ on the international stage. Both
efforts remarkably point to the absence of one important element in
the discussions led in Putinite logic, namely efficiency. Europe
recognizes that the transfer of a portion of sovereign rights and
powers of the state to supranational institutions can improve the
efficiency of services essential for society, while in the United
States no external challenges can result in a redistribution of
state powers in favor of the federal government. In Russia,
however, the issue of efficiency of governance and the interests of
the population are not taken into account at all. It seems that
nobody has ever tried to calculate the changes in the efficiency of
power after the abolition of direct gubernatorial elections. No one
has established to what degree the needs of the disabled have been
met following the implementation of ‘monetization of benefits,’ nor
the efficiency of so-called ‘national projects.’ No one has
calculated Russia’s benefits from the ‘gas wars’ with Ukraine and
Belarus, the deterioration of relations with Georgia and
Azerbaijan, or the absence of real progress in negotiations
concerning membership in the World Trade Organization. Finally, no
one has considered the consequences of Russia’s cooled relations
with the European Union.

A Putinite state does not seek to solve
problems but rather to accumulate powers. The state in today’s
Russia is not “Vladimir Putin personally,” but rather a mysterious
“nothing.” Suffice it to cite official reports that “there are
shortcomings” in the work of public services, or that the system
“needs to be improved and reformed.” Occasionally there are obvious
failures, yet no one bears personal responsibility for them. Has
anyone been punished for the hostage-taking drama at Moscow’s
Dubrovka Theater, or for the Beslan tragedy? Has anybody been held
responsible for the educational and pension reforms, or for many
more programs that cost dozens of lives and hundreds of millions of
dollars? No one.

The Russian state not only is
ineffective; it is also irresponsible. These qualities are
essential features of the Putinite ‘power vertical;’ they stem from
the total cover-up that binds all of the individuals who are
admitted to government posts. Such a state of affairs is extremely
dangerous – a government that bears no responsibility and is unable
to determine its goals and tasks must not be extolled and given
virtually unlimited powers.

So what exactly is a Putinite state? It
is a system that provides for a three-tier structure of society, a
structure that is archaic and inefficient. This structure cannot be
described in terms of ‘democracy’ or ‘authoritarianism’ – it is
neither democratic nor authoritarian; it is simply disunited. The
first tier comprises ordinary people who make up an overwhelming
majority of the population. People are now freer than in Soviet
times: no one is forbidden to own property, leave or enter the
country, do business, or even avail themselves of the imperfections
of the Russian legal system. The second, smaller tier comprises
those “admitted” to participate in economic projects that the
federal or local elite consider to be important. This group of
citizens is much better off than the rest of the population; yet
they are seriously limited in their activities since the ruling
elite have many ways to quickly and effectively destroy their
businesses. The third tier comprises the ruling bureaucracy, which
establishes and changes the rules of the game at its own discretion
and bears no personal responsibility for the game’s
result.

This system of “divided society”
crystallized during the second term of Putin’s presidency and is
now a well-established structure. It corresponds to increasing
budget revenues, when the authorities are in the position to buy
off the population. It also gives them the ability to confidently
control limited resources, access to which opens the way to wealth
for controllable businesses and – especially – lucky
representatives of the bureaucracy.

How stable is such a system? It is
believed that the main risk is a fall in commodity prices and a
decrease of budget revenues. This is true, yet the significance of
this factor should not be overestimated. The Russian economy is now
growing not only due to petrodollars, but also because of the
multiplier effect of domestic demand. Reforms intended to reduce
imports, partially depreciate the ruble rate, and carry out minimal
demonopolization on the consumer market can remove the negative
effect of the commodity price decrease.

More dangerous would be the
disorganization of the bureaucratic class, a subject that is not
discussed at the present time. Unlike the Soviet Union, today’s
Russia is an open country. Members of the elite can transfer their
capital abroad, register property in offshore areas, and send their
families and relatives to other countries. Many industrial assets
today are pledged to attract bank loans. Therefore, the
king-for-a-day logic, which prevails amongst the ruling elite, has
every chance of being translated into practice. Any serious test,
even a test that the economy will be able to withstand, may have
disastrous consequences for the elite’s cohesion and for its
ability to continue controlling the situation inside the country.
Just like the owners of American companies who are always ready to
sell them for a good price, the Russian elite will abandon the
country if it senses that the capitalization of the “Russia
Corporation” has reached its highest level.

DE-INTELLECTUALIZATION OF THE
COUNTRY

Over the 15 years of its independence,
Russia has not come out with a national idea, while those versions
that have become widespread among the population have proven to be
nationalistic as opposed to national. Yet a way out has been found:
Putin has chosen ‘de-ideologization’ as his ideology, and the
people’s insulation from information as the main task of the
information and propaganda system.

This project embodies – perhaps in the
best way – the principles of Putinism. The authorities, which have
had to admit their inability to formulate attractive national
ideals, are now seeking to dupe the nation and thus bring its
mentality closer to the mentality of their own. News is replaced by
events, and meanings are replaced by images. Sensational scenes and
happenings that are covered by television or coffee table magazines
only serve to distract people’s attention from reality or, at
least, from attempts to understand why this reality is
such.

In contemporary Russia, it is not
information that has become the target of attack, but rather the
demand for it. This attack has been quite successful. In Soviet
times, one could not even imagine that a newspaper like Novaya
Gazeta could be freely published, or a radio station like Ekho
Moskvy could freely broadcast, or that people could freely browse
the Internet. Today, such news outlets are considered to be natural
– because the number of those who read and listen to such news
outlets and respond to their reports is insignificant, while such
people are increasingly considered to be outcasts.

The general feeling of helplessness in
citizens – and the ensuing devaluation of any information – is only
one aspect of the present regime, however. Another aspect is the
generation of images – usually abstract ones – that are intended to
substitute for major ideologies that governed the world throughout
the 20th century. Russia, Cosmos, Russian Idea, God, State, People,
West – all these different words (which are often written with a
capital letter) have flooded much of the dull writings by modern
political analysts, as if to emphasize the profundity of the
thoughts behind them. Putin’s era has created an unprecedented
demand for theories explaining specific phenomena by highly
abstract reasons or reasons veiled from the eyes of the man in the
street.

Original concepts, like ‘sovereign
democracy’ or ‘real sovereignty,’ alternate with kaleidoscopic
speed. Sometimes one even would like to believe that a united
Russia cannot be just, and vice versa. Oftentimes, fantasies are
translated into life: even the wildest speculations made in
2002-2003 about the possible clampdown on democracy in Russia are a
far cry from the present reality. At the same time, optimistic
economic goals have been overshadowed by unprecedented prosperity
over the last few years. These developments make any hope for a
“return to reality” illusory, at least for the time
being.

In recent years, the Putinite system
has completely devalued the meritocratic principle, peculiar to all
managerial structures. Amidst the absence of competition, new
bureaucrats are recruited from among those who are believed to be
incapable of undermining the positions of those individuals higher
in the hierarchy. This is the classical system of “negative
selection” where the absence of talent and ability is not
considered to be a shortcoming of a candidate, but rather a merit,
thus guaranteeing that he is less dangerous for those already
riding the gravy train. This is why the professionalism of the
decision-making process is on the decline, while the state
machinery is steadily worsening, even though poor performance is
not its goal. At the same time, ideas concerning the merits of
dilettantism, and disregard for professional qualities, are being
imposed on society as the new ideology of contemporary Russia. The
new heroes of TV now include cynical young people without any
particular profession – pop stars, for example, who decide on a
whim to skate together with world figure skating champions in front
of millions of television viewers. This is like a game where anyone
can become an “outstanding politician” if he or she attends a
presidential meeting, sitting next to the president with an
intelligent air without uttering a word.

The de-intellectualized elite of
Putin’s Russia represents the main threat to the country’s
security, whose real scope cannot be assessed only because of the
de-intellectualization of its citizens. The emergence of even
slightly uncontrolled situations drives the elite into a stupor,
making it absolutely helpless. But in our difficult and dangerous
world, such situations will often emerge, and it cannot be denied
that Russia has done its utmost to become completely unprepared for
them.

DESTRUCTIVE ECONOMY

The Putinite system rests on a
raw-material economy that dates back to Soviet times when the
worldview of the present Russian elite took shape. The mass
privatization of the early 1990s did a disservice to the Russian
economy – not because industrial assets fell into the hands of
inefficient owners, but because privatization changed the views
about their real value. Private investors, who bought factories,
electric power plants, oil fields, or pipelines, began drawing up
balance sheets on the basis of the valuation of fixed assets, at
which they purchased them. This is why nearly all serious
investment in the retooling of production facilities – especially
where the pricing instruments of competition were primarily used –
only resulted in negative results, increasing production costs, and
no advantages. Thus a “de-industrialization spiral” was launched,
which became the main economic phenomenon of post-Soviet Russia. In
1989, energy resources and raw materials accounted for 58 percent
of Soviet exports, whereas in 2005 this figure increased to 78
percent. The rapid growth of export prices promised new prospects,
but in reality little changed. Sensing an improvement in the
economic situation, oil companies quickly put into operation oil
fields that had been sitting idle and boosted supplies to
international markets. As a result, between 2001 and 2004, oil
exports from Russia increased by 59 percent. However, the vast
development potential was soon exhausted, and production peaked at
the level that the Soviet Union had reached in 1991 – not the most
successful year in Soviet history. In 2005, Russia produced only
469 million tons of oil and 637 billion cubic meters of natural
gas. By comparison, in 1991, when Russia was a Soviet Republic, it
produced 462 million tons of oil and 643 billion cubic meters of
gas. Over the same 15 years of independence, oil production in
Azerbaijan has increased from 8 million to 16 million tons, and in
Kazakhstan, from 27 million to 59 million tons. Gas production in
Kazakhstan has grown from 8 billion to 20 billion cubic meters, and
in Uzbekistan, from 42 billion to 60 billion cubic
meters.

Healthy economic news came from a
different direction: increased export revenues allowed Russia to
easily service its foreign debts. The country’s sovereign rating
was eventually upgraded, while domestic and foreign investment
began to flow into the Russian stock market, which had been
oversold in 1998. In 2003, stock exchange indexes exceeded the 1997
figures. From then on, the capitalization of major companies was a
new obsession, and was used as a gauge to assess the state of the
economy. This factor played a crucial role in the economic growth
in the period 2002-2007: business people closed their eyes to
rising costs, as they could rely on additional loans secured by
their assets – a thing inconceivable in the 1990s. At the same
time, export revenues allowed the authorities to ignore the limited
nature of the effective demand. Starting in 2004, they switched
from the tactics of intimidation and devastation, employed against
YUKOS, to the “friendly takeover” of assets that seemed attractive
to them. As a result, the capitalization of major industrial
companies went up, which did not stop the buying frenzy: Sibneft
was purchased by Gazprom when its price was at the highest, and
Norilsk Nickel, if the authorities decide to purchase it as well,
will also pass into the state’s possession at an obviously
overestimated value.

By early 2007, when the RTS [Russian
Trading System] index approached 2,000 points, the capitalization
of 10 major Russian commodity companies reached U.S. $650 billion,
or two-thirds of Russia’s GDP, and the value of Gazprom stood at
$270 billion, more than a quarter of the GDP (the market
capitalization of the most expensive U.S. company, ExxonMobil, does
not exceed 3.5 percent of the U.S. GDP). Eventually, the state
share in the aggregate equity capital of Russian companies reached
35 percent. This bubble, which had no direct relation to the
performance of these companies, caused a massive buildup of
external borrowing. While in 2003-2006, Russia’s public debt
decreased from 98 billion to 66 billion dollars, or by 49 percent,
the debt of Russian banks and industrial companies (primarily the
state-owned ones) surged from 31 billion to 167 billion dollars, or
by an astonishing 440 percent. Has this money been utilized? You
bet, as the spending of corporate investments is much less
controlled than national budget spending, and if something happens,
it will be the whole of Russia that will pay for it.

Since the demand of both consumers and
producers is considered to be unlimited, the authorities do nothing
to curb the appetites of the monopolists. As a result, average
production costs in 2003-2006 grew by 160 percent, although the
official inflation rate over the same period decreased to below 10
percent. Russia is quickly losing its last competitive advantages
and has actually become a freeloader in the global economy, trading
raw materials for industrial products. Russia lives exclusively on
the exploitation of its resources: if we would deduct the revenues
from oil and gas exports to Western Europe alone from all our
export revenues, Russia’s balance of payments in 2006 would be in
negative territory. However, it seems that the authorities do not
see that the Russian Federation is simply becoming redundant in the
world: while discussing Russia’s role as a “bridge” connecting East
and West, they fail to notice the 40-percent decrease in shipments
by the Trans-Siberian Railway following yet another rise in tariffs
by the Ministry of Communications (whose chief so much likes to
speak about the “dialog of civilizations”). But the authorities do
not consider this noteworthy: it seems that the appetites of the
Russian bureaucracy are close to satisfaction.

BALANCING BETWEEN CHAOS AND
CHAOS

What will happen in Russia in 2008?
Everyone is discussing this today, and there are serious grounds
for entertaining this question. The year 2008 will be critical for
the Putin system, most importantly because it will test the
much-publicized stability that the incumbent regime views among its
main achievements. It is for the sake of stability that the
government is increasing spending on law-enforcement agencies,
cutting down democratic norms and civil liberties, and so on. And
for the time being, Russian citizens seem willing to sacrifice
their freedom for the sake of stability.

But the problem is that the regime,
which continues to speak about stability, cannot ensure it. How can
one speak of stability when any decision can be revised as many
times as the authorities want? Or when Duma elections have never
been held by the same rules for at least two consecutive times. The
inability to achieve stability is the main problem for Putin and
the individuals he has brought to power. This is not surprising as
the source of the power and wealth of the bureaucratic class lies
in control over changes in rules rather than in their
implementation. Stability, which everyone supports in word, is
actually dangerous for the elite and therefore unattainable. This
is why public attention is now focused on
“Problem-2008.”

The year 2008 will be problematic
because the bureaucratic class is divided. One part of the
bureaucracy, which has gained control over substantial assets, is
ready in principle to formally change the image of bureaucrats for
the status of businessmen – especially since they have actually
been engaged in business for a long time already. The other part of
the bureaucracy, which has recently gained access to state funds,
or acts as a parasite on the management of financial flows, fears
any changes. The conflict between the two parts of the bureaucratic
structure remains latent, and the system has been working in a
“managed chaos” mode. “Managed chaos” is an adequate strategy in a
system that lacks clear-cut norms and rules; the problem is whether
it can grow into uncontrolled chaos.

And on this point there are obvious
grounds for concern, primarily because today we are witnessing, on
an increasing scale, a sign of a transition from managed to
uncontrolled chaos, namely a hypertrophied overestimation of
nonexistent threats. In such a situation, “Problem 2008” does not
seem to be far-fetched. If President Putin does leave his post, the
authorities will have no problems with the election of a Kremlin
protégé, which will be a kind of “confidence plebiscite.”
To all appearances, problems will emerge later, when the highest
post in the country will go to a person who only yesterday was a
cog in the system of controlled disorder. Then all the participants
in the ‘power vertical’ (including the president) will need some
new legitimization. What will this legitimization be based on? Not
on emphasizing the merits of one official or another, simply
because these merits are not so easy to detect. The main tactic
will be to whitewash oneself and organize any compromising leaks
regarding competitors. Very soon there will erupt a war of all
against all, which most certainly will be marked by an increasing
number of cases of contrasting the new order with the previous one
– simply because all compromising leaks will one way or another be
linked with events that took place under the current
administration. Putin’s image may remain unaffected, like the image
of Mao in China, but his present associates will certainly face
difficult times.

The prolongation of Putin’s rule –
through a third presidential term, amendments to the Constitution,
the introduction of a state of emergency, etc. – would not be the
worst option. Not because that would ensure further stability, but
because it would enable the system, built by the incumbent
president, to finally reach a complete stalemate, which it is now
heading for. It would show that the principles of Putinism are
ineffective not only in the absence of Putin, but also in a
situation where the symbiosis of primitive nostalgia and occasional
economic achievements, which generated this system, is becoming
history. That would cause the Russians to accept an obvious fact,
namely that they themselves – not an accidental group of former
fellow students and colleagues – must choose a way for their
country to develop.