Mr. Putin: Operative in the Kremlin, Part 10 of 14
Liberal economic reformers around Anatoly Chubais correctly concluded that the vicious circle of a weak state unable to collect taxes and no taxes leading to a weak state had to be broken.
This is the truth of what brought Putin to power:
However, if he was to deal with the oligarchs, Chubais would need muscle. His team was made up almost exclusively of academic economists. They were young and had no experience dealing with seasoned Soviet–era politicians and officials or with the ruthless businessmen who now owned most of Russia’s wealth. Chubais realized that something more was needed. He turned to his former St. Petersburg colleague, Alexei Kudrin. Chubais’s memo specifically recommended bringing Kudrin in from St. Petersburg. It did not mention Vladimir Putin, but Putin nonetheless came along with Alexei Kudrin.
In a chaotic and lawless society, the reformers needed a tough guy who could bring some muscle. That is exactly what Putin brought. He also brought some keen insights about when to use violence and when to "work with people" using blackmail. He was the perfect person for the moment, which perhaps explains how he came out of nowhere and yet rose to the top of the Russian government in just a few years.
And why was there a crisis? Because of a lack of tax revenue. And why was their a lack of tax revenue? Because the state was weak. And why was the state weak? Because of a lack of tax revenue. And how was this cycle to be broken?
Mao Tse Tung said "Power grows out of the barrel of a gun." But Karl Marx had said that, in any era, the government is an expression of the underlying economic reality. So which is it? With an army you can use the threat of violence to raise taxes, which can then pay for the army. Or, if you have revenue, you can use it to create an army, which you can then use to raise taxes, which would allow you to build a bigger army. So which comes first? Do you need any army to get money, or do you need money to raise an army? If you don't have money, how can you create an army? If you don't have an army, how can you get money? What is the starting point?
Charisma. Going back thousands of years, the starting point is always someone who can create a believable promise. Someone has to be able to identify existing strengths and weaknesses, and then make a persuasive pitch. "Follow me, I'll make you rich" or "Follow me, I'll make you powerful" or "Follow me, I'll end the chaos and restore stability."
It is the person with charisma who starts the process, convincing some to fight, and thus giving them an embryonic army. Or such a persuasive, intimidating voice enables them to convince others "Give me money and I'll end the chaos and restore order." Charisma is the starting point, it lets a person go to the bank human hopes and take out a loan of political capital, which can then be invested in an army and a tax revenue, starting a cycle which, with intelligent management, can then lead to peace and stability and prosperity.
But that final bit is the real catch: intelligent management. Individuals of great charisma are not necessarily people who know how to run an economy, or understand the importance of establishing a rules-based order. Over the last few thousand years we have seen many many revolutions, very few of which were followed with a happy epilogue. Often the circumstances that lead to crisis also ensure that the recovery from the crisis restores stability in ways that lack of accountability, and therefore sets the stage for the next crisis. We can see this in the case of Russia:
One of the most immediate causes of the weakness of the Russian state in the 1990s was its inability to collect taxes. This created a vicious circle. In the Soviet years, when all factories were owned by the state, the director of a large enterprise was effectively the mayor of a small town. After privatization in the early 1990s, the so–called nonproduction assets on the books of a factory that had been set up to cater to the social needs of the workers – the daycare centers, clinics, recreation facilities, summer camps, and so on – were supposed to be handed over to the local municipal governments. Instead of the enterprises paying directly for these services, their operations were supposed to be financed by local government budgets out of the tax revenues paid by the enterprises and local workers and residents. In theory, this would be both more efficient and more equitable than the old Soviet system. With economies of scale, the town or city could manage the facilities more cheaply, and all citizens, not just those who worked at a big plant, could use them.
The weak link was the assumption that tax revenues would pay for everything. There was no tradition of individuals or companies paying real taxes. There was also no administrative framework for assessing and collecting the taxes. The state, at both the local and national level, was broke and unable to perform the functions and services previously provided by the enterprises. As a result, a bottom–up system for survival developed – without government funding. Tax evasion became the norm. The team of liberal economic reformers around Anatoly Chubais in the Yeltsin government correctly concluded that the vicious circle of a weak state unable to collect taxes and no taxes leading to a weak state had to be broken. The critical step was to enforce tax compliance.
Chubais made repeated efforts to enforce tax discipline during his time in office. They all failed because the wealthiest new business owners used their money to suborn and collude with government officials to evade taxes. They purchased influence over tax legislation and enforcement at the very highest as well as lower levels of government. This problem was compounded when the Yeltsin team chose to make a Faustian bargain to secure enough money from top businessmen to win reelection in the 1996 presidential election. The critical step in this bargain was taken just weeks before Vladimir Putin came to Moscow from St. Petersburg in August. The businessmen who gave Yeltsin their financial and media support expected that, in return, they would get full title to some of the most valuable companies in the Russian resource sector. In the immediate wake of the election, they also began to fight over the initial distribution of property.
We can ask, for any society in crisis, how long does the period of crisis last? We can answer simply: it lasts until a new system is established which most of the public regards as legitimate. And what makes a new system legitimate? Stability is a necessary prerequisite, but it is not sufficient in itself. Someone in a leadership position also needs to be able to sell the system to the public, as a system that offers something to everyone. In a previous essay, we covered the extraordinary efforts that Putin engaged in to establish the legitimacy of the new system. Indeed, his populist use of television, in an authoritarian system, seems to have been his main original and creative contribution to political theory. He might have been the first to take such a hybrid approach, projecting an open, direct, populist persona over mass media in a weak but authoritarian system.
It remains an open question whether Putin wanted the system to be weak. It seems he could have built a stronger system if he had wanted to. Perhaps he felt a stronger system would have weakened his personal rule? While we can say he did an effective job developing a populist persona that the Russian public supported, it is also true that he would not have needed to invest so much in that persona if the overall Russian system had been seen as more legitimate in the eyes of most Russians. So, again, the question needs to be asked: did he feel that he personally gained strength by keeping the overall system weak, or did he simply not know how to make the system stronger?
What we can say for sure is the weakness of the political situation contributed to the weakness of the economic situation. This has been true for 30 years now. It is almost certain that if Putin had built a stronger political system, then the economy would also be stronger now. But it is also true Putin did make some progress, at least at first, from 2000 to 2012 or 2014. The link between the weak political situation and the weak economic situation was the most obvious back in the 1990s:
Despite their vast wealth, Russia’s oligarchs in the 1990s were constantly at risk from the public, which almost universally regarded their ownership of the country’s largest corporations as illegitimate. At the same time, the oligarchs were individually at risk from one another. They were constantly predating on each other’s businesses and could not trust each other. Thanks to their own efforts to reduce any power of the government to control them, they had also undermined the state as the one institution that could protect all their property rights. As a result, they were reduced to trying to protect themselves individually. The biggest vulnerability each of them had was the information about their financial status and their financial operations. In such circumstances, the only protection the oligarchs had was to make everyone equally vulnerable. They focused on digging up potentially damaging information about each other. The threats and counter–threats deterred aggression. The result was a mutual and perpetual state of blackmail – what is known as a “mutual conflict equilibrium” in game theory. In other words, delicate balance is better than war, but only barely so.
To maintain the equilibrium, the oligarchs had to expend a huge amount of effort and resources that they could otherwise have used to manage their companies and generate more wealth. They also ran the constant risk that the balance would tip, that the infighting would get out of control, and the whole system would come crashing down around them. For their own sake, the oligarchs needed an outside arbiter. They needed a completely and clearly impartial agent who would be strong enough to enforce the peace in a credible and sustainable way – and who, most important for them, would never become a rival, another oligarch. This arbiter would, in effect, have to hold them all hostage so that each of them would have the opportunity to disarm and conclude a non–aggression pact. If the state could not do this, by enforcing the rule of law, then something or someone else would have to step in.
We’ve written before that oligarchy tends to lead to tyranny, but this offers us an unusually clear example. We can see how the lack of economic prosperity kept the public weak, and therefore unable to mount a challenge to the oligarchs, and also it becomes clear how the oligarchs themselves were seen as illegitimate, and so they needed a tyrant to protect them from the rage of the public.
Those who argue in favor of libertarianism seem to think a society can exist without a government, though it isn't clear how property owners would protect their private property without a government. Perhaps the idea is that everyone should protect their own property, in which case we rapidly end up in a feudal world, where the only people with private property are those who are strong enough to protect themselves -- everyone else quickly becomes a slave of the strong. Or perhaps some libertarians hope that violence can be abolished, if only people, out of the goodness of their hearts, learn to respect the private property of others. This amounts to a kind of religious dream of personal righteousness, of the type that most theologians would mock. As the great Protestant reformer Martin Luther put it "If all men were true Christians then no government would be needed, but hardly one man in ten is a true Christian, and so the Prince, armed with a sword, is necessary in the affairs of men."
That kind of wisdom used to be at the heart of the Western political tradition, but after the 1960s we saw that the insights from the field of economics began to replace much of the Western tradition. Insights from game theory were seen as more penetrating than the words of Thucydides. With a bit of exaggeration, we can say that math was suddenly seen as the only true marker of "science." While we can admire the intellectual clarity of math, when applied to real phenomena such as physics, it is less clear why we should admire math when it is applied to the highly stylized scenarios that economics address. In economics, it is understood that the real world is hopelessly multi-variate, and therefore the only way to get traction on it is to build extremely simplified models that only look at a tiny number of the relevant variables. (In a previous essay we looked at ways that economics might improve; see Permanent disequilibrium models, plus agent based simulations, will eventually alter the way we see history.)
On some level, we all know that politics will always be an art, never a science, but somehow "political science" has become a respected field with a department at every major university, whereas "political art" does not have a single department at any university. Why is that?
With only slight exaggeration, we can say the rise of economics, as the most important intellectual discipline shaping politics, has fed the rise of many fundamentalist interpretations that help feed the idea that we don't need government. Such dangerous libertarian delusions keep people from seeing reality as it is, and in crucial moments, such as the 1990s in Russia, these beliefs led to an absurd overestimation of the benefits of markets and private property, to an extent that most of the wisdom of the previous 2,500 years of the Western political tradition was erased and forgotten. The problem has been widespread — all over the world simplistic game theory ideas emerged from economics and caused ancient political wisdom to be forgotten -- Milton Friedman was thought to be wiser than Plato or Machiavelli. These inaccurate beliefs did damage everywhere, but maybe the clearest case of failure was in Russia.
The above quotes are from this part of the book:
Mr. Putin
Operative in the Kremlin
Fiona Hill & Clifford G. Gaddy
Copyright © 2013 The Brookings Institution
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Page 183–184
One of the most immediate causes of the weakness of the Russian state in the 1990s was its inability to collect taxes. This created a vicious circle. In the Soviet years, when all factories were owned by the state, the director of a large enterprise was effectively the mayor of a small town. After privatization in the early 1990s, the so–called nonproduction assets on the books of a factory that had been set up to cater to the social needs of the workers – the daycare centers, clinics, recreation facilities, summer camps, and so on – were supposed to be handed over to the local municipal governments. Instead of the enterprises paying directly for these services, their operations were supposed to be financed by local government budgets out of the tax revenues paid by the enterprises and local workers and residents. In theory, this would be both more efficient and more equitable than the old Soviet system. With economies of scale, the town or city could manage the facilities more cheaply, and all citizens, not just those who worked at a big plant, could use them.
The weak link was the assumption that tax revenues would pay for everything. There was no tradition of individuals or companies paying real taxes. There was also no administrative framework for assessing and collecting the taxes. The state, at both the local and national level, was broke and unable to perform the functions and services previously provided by the enterprises. As a result, a bottom–up system for survival developed – without government funding. Tax evasion became the norm. The team of liberal economic reformers around Anatoly Chubais in the Yeltsin government correctly concluded that the vicious circle of a weak state unable to collect taxes and no taxes leading to a weak state had to be broken. The critical step was to enforce tax compliance.
Chubais made repeated efforts to enforce tax discipline during his time in office. They all failed because the wealthiest new business owners used their money to suborn and collude with government officials to evade taxes. They purchased influence over tax legislation and enforcement at the very highest as well as lower levels of government. This problem was compounded when the Yeltsin team chose to make a Faustian bargain to secure enough money from top businessmen to win reelection in the 1996 presidential election. The critical step in this bargain was taken just weeks before Vladimir Putin came to Moscow from St. Petersburg in August. The businessmen who gave Yeltsin their financial and media support expected that, in return, they would get full title to some of the most valuable companies in the Russian resource sector. In the immediate wake of the election, they also began to fight over the initial distribution of property.
From 1996 to 1999, the alliance Chubais and the Yeltsin team had forged between the government and the oligarchs steadily unraveled. Chubais wanted to reinstate the rule of law, as indicated in the 1997 poslaniye, and level the playing field again in the Russian economy. With the emergency of the 1996 presidential election campaign in the past, the sweetheart deals with Russian business were over. Privatization would continue, but the process would now be open and transparent. Chubais hoped that a proliferation of new owners in the economy would prevent the kind of collusion among a handful of the wealthiest owners that had marred Russia’s early privatization process, and would mark progress toward realizing his and others’ goal of competitive capitalism. They oligarchs, however, were now at the peak of their power, and they had to be disciplined so rules could be enforced again.
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Page 185
However, if he was to deal with the oligarchs, Chubais would need muscle. His team was made up almost exclusively of academic economists. They were young and had no experience dealing with seasoned Soviet–era politicians and officials or with the ruthless businessmen who now owned most of Russia’s wealth. Chubais realized that something more was needed. He turned to his former St. Petersburg colleague, Alexei Kudrin.
Chubais’s memo specifically recommended bringing Kudrin in from St. Petersburg. It did not mention Vladimir Putin, but Putin nonetheless came along with Alexei Kudrin. Chubais assigned Kudrin to take charge of the GKU, the presidential administration’s Main Control Directorate. The GKU was the government’s financial inspectorate, and an agency Chubais had previously strengthened through an ukaz (presidential decree) on March 16, 1996. The decree gave the GKU new logistical support from the Presidential Property Management Department. At the same time that Alexei Kudrin was appointed head of the GKU (in August 1996), Vladimir Putin was made deputy head of the property management agency. In November 1996, another decree gave the GKU even more power, enabling Kudrin to deploy inspectors all across Russia to probe the finances of government and federal agencies and uncover acts of corruption, embezzlement, and misuse of funds.
In March 1997, only a short time after Boris Yeltsin delivered the poslaniye to the Russian parliament about the importance of cracking down and reestablishing order, Chubais appointed Kudrin deputy finance minister. He also, at Kidrin’s recommendation, named Putin head of the GKU on March 26. When Kudrin handed over the reins to Putin in 1997, Russian journalist Andrei Kolesnikov described the GKU as a “menacing structure.” On April 3, 1997, another presidential decree gave the GKU primary responsibility for issuing edicts to implement the crackdown necessary to reestablish order, including oversight of Russian financial and business sectors and authority to collect financial and other company information.
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Page 186–187
THE OLIGARCHS’ DILEMMA: MR. PUTIN’S SOLUTION
Despite their vast wealth, Russia’s oligarchs in the 1990s were constantly at risk from the public, which almost universally regarded their ownership of the country’s largest corporations as illegitimate. At the same time, the oligarchs were individually at risk from one another. They were constantly predating on each other’s businesses and could not trust each other. Thanks to their own efforts to reduce any power of the government to control them, they had also undermined the state as the one institution that could protect all their property rights. As a result, they were reduced to trying to protect themselves individually. The biggest vulnerability each of them had was the information about their financial status and their financial operations. In such circumstances, the only protection the oligarchs had was to make everyone equally vulnerable. They focused on digging up potentially damaging information about each other. The threats and counter–threats deterred aggression. The result was a mutual and perpetual state of blackmail – what is known as a “mutual conflict equilibrium” in game theory. In other words, delicate balance is better than war, but only barely so.
To maintain the equilibrium, the oligarchs had to expend a huge amount of effort and resources that they could otherwise have used to manage their companies and generate more wealth. They also ran the constant risk that the balance would tip, that the infighting would get out of control, and the whole system would come crashing down around them. For their own sake, the oligarchs needed an outside arbiter. They needed a completely and clearly impartial agent who would be strong enough to enforce the peace in a credible and sustainable way – and who, most important for them, would never become a rival, another oligarch. This arbiter would, in effect, have to hold them all hostage so that each of them would have the opportunity to disarm and conclude a non–aggression pact. If the state could not do this, by enforcing the rule of law, then something or someone else would have to step in.
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Page 188–189
When he was propelled into the highest Russian offices in 1999–2000, Putin first offered himself to the oligarchs as a protector. He reassured them that he would not dispossess them. He would recognize the basic parameters of their 1996 deal with Yeltsin in acquiring their business assets. He also reminded the oligarchs that few others in Russia saw their ownership as legitimate. He used this reminder, in February 2000, to announce that Russia’s businesses would now be “equidistant from power.” They could not use any of their old levers to buy influence and cultivate goodwill across the Russian Federation. They would have to start from scratch. Their only key relationship would be with Putin’s Kremlin, and this would be for their protection, from disappropriation, not for their influence.
In a televised meeting in July 2000, Putin laid down the ground rules with the oligarchs. Putin sketched out a scheme that essentially resembled a “protection racket.” It was the kind of deal he might have forged as a KGB case officer trying to recruit a double agent in Dresden. The oligarchs would be allowed to continue to pursue their businesses and increase their wealth, but they would have to agree to a new tax regime that would give the federal government more resources. They must not try to change this regime as they had in the past, or there would clearly be consequences. They must also actively consider Russian national interests, as defined by Putin and the state, when engaging in economic activities abroad. This was private enterprise with strings attached. Their property rights were ultimately dependent on the good will of the Kremlin. The logic of this approach – keeping the oligarchs in place, but pulling them close – was explained by presidential aide Vladislav Surkov to a Russian journalist. Surkov told Yelena Tregubova that Putin and his team understood that they could not just dispossess the oligarchs and find another group of businessmen to take over their companies. There were simply not enough capable entrepreneurs in Russia in 2000. The group of businessmen was “very thin and very precious...they are the bearers of capital, of intellect, of technologies.” In many respects Russia’s oligarchs, like their assets, had to be treated carefully. “The oil men,” Surkov opined, “are no less important than the oil; the state has to make the most of them both.”
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Page 190
THE SYSTEM
Putin’s July 2000 televised meeting with the oligarchs, which laid out the terms of his deal with them, is emblematic of his style and system of governance. All the evidence from Putin’s words and actions since 1999–2000, when he first moved from the shadows into the position of prime minister and then acting president, indicates that there is nothing contrived or secret about his goals and his policies. Putin’s practice has been to state them directly. On the other hand, there has been a significant discrepancy between the transparency of Putin’s goals and the non–transparency of the means by which he intends to achieve them. How he goes about implementing his policies has been mostly off–limits for general discussion. Politics and the political system – how Putin rules Russia in order to achieve the goals he has laid out – are supposed to be unquestioned by those outside (and perhaps even many inside) the inner circle.
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Page 191–192
Beyond this protection scheme at the core of the system, Mr. Putin plays the role of the chief executive officer, the CEO, of the “corporation” that is Russia – the sum of all the assets managed either by the oligarchs or by the appointed stewards of state enterprises. In carrying out these functions, Putin is assisted by a very small group of trusted aides – in essence, the staff of the CEO’s office. Outside this small group lies the larger, vast sphere of the state apparatus of Russia, which includes officials of both the federal (central) and regional governments. In Putin’s idealized version, this is the sphere of governance that is supposed to function like a “Swiss watch.” It is not supposed to require his personal attention – although, to his evident frustration, it constantly does. Finally, beyond the circles of governance are the governed, the Russian populace. They have no voice in the operation of the corporation or the system.
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A PROHIBITORY SYSTEM
Former Kremlin adviser Gleb Pavlovsky, in his January 2012 interview with The Guardian, makes many of the same points about the deal Putin concluded with the Russian population in 2000:
We are talking about managed democracy, but I think that maybe you in the West have forgotten that this concept was widespread in the 1950s in Europe in countries where there had been totalitarianism….In Germany, for example, there was the same idea: that German people have a tendency to totalitarianism and they must not be allowed near politics. So they must have the possibility to choose, (vote) freely, but the people who control real politics must be the same, they must not yield. So a prohibitory system [zapretitel’naya sistema] must be created….Is it cynical from the point of view of the theory of democracy? Probably yes, but here it didn’t look like cynicism….What we need to note here is that a certain “Putin consensus” existed….A consensus of the people and the elite….No ideology is necessary….It will be a state without ideas oriented on common sense and on the average man, the citizen. Nonetheless, the masses must not be given access to power.
The fact that Putin did not describe any particular design for governance beyond a series of basic deals in the Millennium Message or elsewhere is not strange. When he began his presidency in 2000, he was not proposing to overthrow the institutional order that he inherited. He was actually promising to fulfill it. Putin was and remains a restorationist, a conservative reformer. He was not, and is not, a revolutionary.