ASIA
28 December 2024
Understanding Russia’s crony capitalism
Anders Aslund’s study of Russia’s crony capitalism provides many insights into Russia’s invasion of Ukraine and its international behaviour more generally, writes John West.
From the fall of the Soviet Union in 1991 until Russia’s aggression against Ukraine in 2014, the US political elite viewed with great optimism the outlook for political developments in Russia. They interpreted Russia through the “modernisation paradigm”. This means that as the economy develops and diversifies, and the society becomes more middle class, Russia would inevitably become a democracy.
This was always a misreading of Russia, according to Swedish economist, Anders Aslund, in his book, Russia's Crony Capitalism: The Path from Market Economy to Kleptocracy. Following his ascension to the leadership of Russia in 2000, Putin developed Russia into a mafia-type neo-feudal society.
Aslund defines crony capitalism as capitalism without property rights. It involves the fusion of Russia’s secret service (formerly the KGB, now FSB) and organised crime.
Much attention focuses on Putin’s former role as a KGB spy in East Germany. But what may be equally important according to Aslund was Putin’s role in the 1990s as first deputy mayor of St Petersburg, where he was responsible for international investment and heavily involved in organised crime.
Through capturing state institutions, extorting and taking over private companies, and participating in organised crime, Putin has arguably become the richest person in the world, and many of his cronies are billionaires or millionaires.
Why do Putin and his cronies want so much money? Aslund argues that they are in a competition for status and power. Putin must have the most money, palaces, private jets and watches, and the longest yacht to demonstrate that he is the most powerful Russian – and therefore the most respected and untouchable, something which is critical in a country without rule of law.
Putin’s motivation in this system of crony capitalism is quite simply getting power, keeping power, and perpetuating authoritarian kleptocracy. A new aristocracy is also being created as children of Putin’s cronies are being given leadership positions.
Aslund’s book is of particular interest in that it was published in 2019, before Russia’s recent invasion of Ukraine, and offers many insights for the cottage industry of theories of Russian 2022 aggression.
Aslund does not believe that Putin’s aggression against Ukraine (which started in 2014) was motivated by fears of NATO enlargement, a desire to restore the Soviet empire or a wish to relitigate post Cold War arrangements in Russia’s favour.
His acts of aggression are designed to perpetuate his wealth and power by ensuring the continuity of his authoritarian kleptocratic regime. In a highly prescient point, Aslund argues that Putin likes small victorious wars (such as Georgia 2008 and Crimea 2014) to improve his image and popularity. But these victories are merely tactical, and of little strategic value.
It seems that this is precisely what Putin had in mind for his invasion of Ukraine in 2022, with victory hoped for in a matter of days. But Putin quite obviously miscalculated.
More generally, being treated as a great power, such as when Russia was a member of the G8, was important for Putin’s domestic image, not so much for any power that accrued.
It is also useful if Putin can give the impression that he is making Russia great again, even if it is not really happening. Russia’s seizure of Crimea was a question of nostalgia for the Russian people, and gave a stimulus to Putin’s popularity.
According to Aslund, there would be $1 trillion of Russian private wealth hidden abroad in shell companies, mainly in the US. Around one-quarter to one-third of this money would belong to Putin and his friends.
Since Russia does not enjoy the rule of law, the money must be hidden offshore in order to protect it. The ability to hide money in the US is facilitated by the ability to create anonymous companies (there would be more than 2 million such companies in the US). It is ironic that Russia’s elite exploit the absence of the rule of law in Russia, and then seek the protection of the rule of law in the US and the UK.
.
How did all this happen?
Over time, Putin built up four circles of power. During his first presidential term, 2000-04, he achieved control of the state, notably the FSB, state finances and judiciary. He also started a war on the oligarchs.
During his second term, 2004-08, he built state capitalism, beginning with confiscation of the Yukos oil company, and the arrest of Mikhail Borisovich Khodorkovsky, the richest man in Russia. He also took control of big state corporations, notably Gazprom, and various military/industrial companies.
Expropriation of money from Gazprom has been Putin’s greatest source of wealth. With natural resource revenues benefiting the elite more than the people, Russia would be the quintessential example of a “natural resource curse” country.
From 2008-2012, Putin dropped back from the presidency to the position of prime minister under President Medvedev. Nevertheless, he remained the real power, and began asset stripping of state companies and transferring the funds abroad, under the names of close friends and relatives. In sum, Putin has chosen kleptocracy over national strength and citizen welfare.
Putin’s fourth circle of power is the Anglo-American offshore finance industry where his monies are hidden.
Aslund provides troubling insights into the destination of Putin’s hidden money. The US and the UK are by far the favoured destinations thanks to their good rule of law and deep financial markets, and the ability to create anonymous companies.
Initially, the money leaves Russia through Cyprus, and more recently through Dubai. The money then continues to the British Virgin Islands, and Cayman Islands, then mainly lands in Wilmington Delaware (US) and the UK.
According to the US Treasury, the Cayman Islands investment in US Treasury bonds is $2.5 trillion. But since this investment is anonymous, the US Treasury does not know who the investors are. Aslund guesstimates that Russia would be behind about half a trillion dollars of this investment.
There are different sources for this information. But the “Panama papers” is an important one, as well as a 2017 paper by Filip Novokmet, Thomas Piketty, and Gabriel Zucman.
What is the solution to all this dark money? Transparency. Transparency. Transparency.
So what has been done by Western governments to stop facilitating kleptocracy since Russia’s full-scale invasion of Ukraine?
As Tom Keatinge has observed, since Putin’s full-scale invasion of Ukraine, political leaders have been shamed into action, passing long-overdue legislation and creating task forces and other initiatives in an attempt to make up for lost time. Whether they will succeed remains to be seen.
Keatinge writes “But kleptocracy is not unique to Russia. Funds stolen from national exchequers across the world, funds that should be spent on health care, education and sanitation, continue to find their way into real-estate and other investments in Western financial centres.
We should certainly strive to identify and confiscate ill-gotten gains from those that have supported and benefited from the patronage of President Putin, but so too must we ensure that the tools and mechanisms that have facilitated their financial dealings are no longer available to kleptocrats and the corrupt from elsewhere across the globe.”
This was always a misreading of Russia, according to Swedish economist, Anders Aslund, in his book, Russia's Crony Capitalism: The Path from Market Economy to Kleptocracy. Following his ascension to the leadership of Russia in 2000, Putin developed Russia into a mafia-type neo-feudal society.
Aslund defines crony capitalism as capitalism without property rights. It involves the fusion of Russia’s secret service (formerly the KGB, now FSB) and organised crime.
Much attention focuses on Putin’s former role as a KGB spy in East Germany. But what may be equally important according to Aslund was Putin’s role in the 1990s as first deputy mayor of St Petersburg, where he was responsible for international investment and heavily involved in organised crime.
Through capturing state institutions, extorting and taking over private companies, and participating in organised crime, Putin has arguably become the richest person in the world, and many of his cronies are billionaires or millionaires.
Why do Putin and his cronies want so much money? Aslund argues that they are in a competition for status and power. Putin must have the most money, palaces, private jets and watches, and the longest yacht to demonstrate that he is the most powerful Russian – and therefore the most respected and untouchable, something which is critical in a country without rule of law.
Putin’s motivation in this system of crony capitalism is quite simply getting power, keeping power, and perpetuating authoritarian kleptocracy. A new aristocracy is also being created as children of Putin’s cronies are being given leadership positions.
Aslund’s book is of particular interest in that it was published in 2019, before Russia’s recent invasion of Ukraine, and offers many insights for the cottage industry of theories of Russian 2022 aggression.
Aslund does not believe that Putin’s aggression against Ukraine (which started in 2014) was motivated by fears of NATO enlargement, a desire to restore the Soviet empire or a wish to relitigate post Cold War arrangements in Russia’s favour.
His acts of aggression are designed to perpetuate his wealth and power by ensuring the continuity of his authoritarian kleptocratic regime. In a highly prescient point, Aslund argues that Putin likes small victorious wars (such as Georgia 2008 and Crimea 2014) to improve his image and popularity. But these victories are merely tactical, and of little strategic value.
It seems that this is precisely what Putin had in mind for his invasion of Ukraine in 2022, with victory hoped for in a matter of days. But Putin quite obviously miscalculated.
More generally, being treated as a great power, such as when Russia was a member of the G8, was important for Putin’s domestic image, not so much for any power that accrued.
It is also useful if Putin can give the impression that he is making Russia great again, even if it is not really happening. Russia’s seizure of Crimea was a question of nostalgia for the Russian people, and gave a stimulus to Putin’s popularity.
According to Aslund, there would be $1 trillion of Russian private wealth hidden abroad in shell companies, mainly in the US. Around one-quarter to one-third of this money would belong to Putin and his friends.
Since Russia does not enjoy the rule of law, the money must be hidden offshore in order to protect it. The ability to hide money in the US is facilitated by the ability to create anonymous companies (there would be more than 2 million such companies in the US). It is ironic that Russia’s elite exploit the absence of the rule of law in Russia, and then seek the protection of the rule of law in the US and the UK.
.
How did all this happen?
Over time, Putin built up four circles of power. During his first presidential term, 2000-04, he achieved control of the state, notably the FSB, state finances and judiciary. He also started a war on the oligarchs.
During his second term, 2004-08, he built state capitalism, beginning with confiscation of the Yukos oil company, and the arrest of Mikhail Borisovich Khodorkovsky, the richest man in Russia. He also took control of big state corporations, notably Gazprom, and various military/industrial companies.
Expropriation of money from Gazprom has been Putin’s greatest source of wealth. With natural resource revenues benefiting the elite more than the people, Russia would be the quintessential example of a “natural resource curse” country.
From 2008-2012, Putin dropped back from the presidency to the position of prime minister under President Medvedev. Nevertheless, he remained the real power, and began asset stripping of state companies and transferring the funds abroad, under the names of close friends and relatives. In sum, Putin has chosen kleptocracy over national strength and citizen welfare.
Putin’s fourth circle of power is the Anglo-American offshore finance industry where his monies are hidden.
Aslund provides troubling insights into the destination of Putin’s hidden money. The US and the UK are by far the favoured destinations thanks to their good rule of law and deep financial markets, and the ability to create anonymous companies.
Initially, the money leaves Russia through Cyprus, and more recently through Dubai. The money then continues to the British Virgin Islands, and Cayman Islands, then mainly lands in Wilmington Delaware (US) and the UK.
According to the US Treasury, the Cayman Islands investment in US Treasury bonds is $2.5 trillion. But since this investment is anonymous, the US Treasury does not know who the investors are. Aslund guesstimates that Russia would be behind about half a trillion dollars of this investment.
There are different sources for this information. But the “Panama papers” is an important one, as well as a 2017 paper by Filip Novokmet, Thomas Piketty, and Gabriel Zucman.
What is the solution to all this dark money? Transparency. Transparency. Transparency.
So what has been done by Western governments to stop facilitating kleptocracy since Russia’s full-scale invasion of Ukraine?
As Tom Keatinge has observed, since Putin’s full-scale invasion of Ukraine, political leaders have been shamed into action, passing long-overdue legislation and creating task forces and other initiatives in an attempt to make up for lost time. Whether they will succeed remains to be seen.
Keatinge writes “But kleptocracy is not unique to Russia. Funds stolen from national exchequers across the world, funds that should be spent on health care, education and sanitation, continue to find their way into real-estate and other investments in Western financial centres.
We should certainly strive to identify and confiscate ill-gotten gains from those that have supported and benefited from the patronage of President Putin, but so too must we ensure that the tools and mechanisms that have facilitated their financial dealings are no longer available to kleptocrats and the corrupt from elsewhere across the globe.”
REFERENCES:
- Anders Aslund. Look Inside Also Available: Russia's Crony Capitalism The Path from Market Economy to Kleptocracy- Panama Papers
- Filip Novokmet, Thomas Piketty, Gabriel Zucman. From Soviets to Oligarchs: Inequality and Property in Russia 1905-2016
- Tom Keatinge. Combating Kleptocracy Lessons from the Response to Russia’s War in Ukraine