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21st-Century Sultanate

From the Magazine: Friday, November 14, 2008

Vladimir Putin has harnessed patronage, nepotism, and cronyism to build Russia’s corporatist state.

On May 7, 2008, Russia inaugurated a new president, Dmitry Medvedev, the third president the country has seen since the fall of communism. A new era in Russian history had begun.

Or had it? The very next day, Russia confirmed a new—er, old—prime minister, former president Vladimir Putin. And in so doing, Russia marked not the beginning of a new era, but the continuation of an earlier, worrisome one.

Putin is by far the strongest former leader in Russian history. He maintains heavy influence over the inner circles of power and in the minds of the public—in a national survey, 60 percent of respondents agreed that “despite Medvedev’s election, the power will remain in the hands of Putin and his entourage.”

Putin remains in a position of significant power. His continued presence within the government ensures the ongoing influence of his administration’s policies and ideology, or Putinism—a new authoritarianism that provides the foundation for a corporatist state, “Russia, Inc.”

During Putin’s reign, the state systematically recovered ownership, or at least firm control, of the country’s politics and the key sectors of the economy, creating a regime that closely corresponds to the traditional definitions of authoritarianism, as described by the political scientist Samuel Huntington. The two most recent elections (parliamentary in December 2007 and presidential in March 2008) can be more correctly called “voting” than elections; not only was the opposition shut out of the elections, but the results of both were so falsified (despite clear evidence that Putin’s party and candidate would win) that the true results cannot be calculated. The regional governors are appointed and removed by the executive, while the judicial branch is subservient to it and the media are tightly controlled by it.

In addition to the characteristics of classic authoritarianism, Putinism has a number of other distinct features that bear a remarkable similarity to common components of fascism. Under Putin, the government became one of personal power, popularity, and legitimacy. Renewed senses of nationalism and nostalgia have also sprung up under Putinism: the Soviet Union is constantly glorified, external (Western) enemies lurk everywhere, and reclaiming the assets lost with the fall of the Soviet Union, such as Georgia and Ukraine, is a priority. Medvedev has closely followed the line of Putinism and seems to see the same enemies around every corner as Putin.

Perhaps an even stronger legacy of Putinism is the sultanistic corporatism built on the foundation of his authoritarianism. Slightly over two years ago, Andrei Illarionov, who had just resigned as Putin’s personal economic adviser, noted that Russia was constructing the “corporatist” state model, with cabinet members or key presidential aides chairing or serving on corporate boards. Illarionov’s use of “corporatism” deviates from the classic meaning of “collaboration” in search of “class peace,” when the state (as in Benito Mussolini’s Italy) mediates between the key institutional economic actors, especially the main industrialists and trade unions.

Putinism has a number of distinct features that bear a remarkable similarity to common components of fascism.

Yet Putinism does correspond to a broader definition of corporatism, defined by political scientist Richard Weiner as “the institutionalized tendency of recognizing vital [economic] groups and bringing them into a privileged stable relationship of ‘collaboration’ in a particular policy area.” In the Russian case, this means an activist state that, while refraining from across-the-board renationalization, has regained majority ownership or complete control (through the so-called state corporations or goskorporatsii) over most technologically advanced or profitable sectors of the economy. These are what the Chinese functionaries, whose record of authoritarianism and modernization the Kremlin seems to admire, designate “pillar” or “lifeblood” industries.The result is what scholar Nicolas Gvosdev has called “Kremlin, Inc.” As the Carnegie Endowment’s Dmitri Trenin puts it: “Russia is ruled by people who largely own it.”

Max Weber called authoritarian regimes distinguished by patronage, nepotism, and cronyism “sultanistic.” This label captures the tendency for Putin’s friends, former colleagues, or aides to control most of the “state corporations” and ostensibly private companies majority-owned by the state. According to a Russian business daily, in the beginning of this year, “political and personal allies” of the president headed the boards of companies that together accounted for 40 percent of Russia’s economy.

President Medvedev, formerly Putin’s chief of staff and first deputy prime minister, was chairman of Gazprom until June 27, 2008, when he was replaced by the former prime minister and now first deputy prime minister, Viktor Zubkov, at the company’s shareholder meeting. Igor Sechin, a deputy prime minister, heads Rosneft, the largest state-owned oil company, while the chief of the presidential administration, Sergei Naryshkin, who reportedly attended the KGB foreign intelligence training center with Putin in the 1980s, is the chairman of Channel One, Russia’s largest television network, and also the head of the United Shipbuilding Company, which includes all of Russia’s civilian and navy docks. Naryshkin is also charged with broad government oversight of Russia’s foreign trade.

The palpably fraudulent court proceedings against Yukos and its principal shareholders, and the company’s subsequent bankrupty and sale of its most profitable divisions to the state-owned Rosneft, were meant to teach Russian entrepreneurs a lesson.

Putin’s long-time associates Vladimir Yakunin and Sergey Chemezov are, respectively, president of Russian Railways and director general of the arms export monopoly Rosoboronexport, which last year earned an estimated $7 billion. Putin’s old friend from his Leningrad-St. Petersburg days, billionaire Leonid Reiman, is the minister of information technologies and communications and is believed to be the majority owner of the leading cell phone company MegaFon. Another of Putin’s comrades, Gennady Timchenko, is the head of the Swiss-based oil-trading company Gunvor. Unknown a few years ago, the company controls the export of one-third of Russia’s oil, which is valued at around $40 billion a year.

In the Russian version, sultanism is distinguished by its almost caste-like character: nearly all of the top officers (and reputed owners) of “Russia, Inc.” began their careers, like Putin, in the mid-1970s to early 1980s in the KGB domestic or foreign intelligence. In keeping with Weber’s simile of sultanism, this group, whose powers and wealth grew continuously during Putin’s presidency, may be called a Janissary corporation after the elite corps of the Ottoman Empire’s army and the sultan’s guards, whom the sultan personally led into battle and with whom he generously shared the booty.

In the officially “cursed” 1990s, the entry to the infamous “oligarchy” was open to anyone with enough money. Openly competing under the eye of a free and aggressive media, in politics the oligarchs backed different candidates and blocs and made the 1999 Duma election highly competitive.

By contrast, the entry into the Putinist elite is virtually restricted to those with a past in the security and intelligence services, and the new “oligarchs” were said by a prominent Russian observer to be “bound” in secrecy, “the total cover-up” being a sine qua non for all those “admitted to government posts.”

Beginning with some of the most powerful men in Russia besides Putin and Medvedev—including Deputy Prime Minister Sechin and Deputy Prime Minister Sergey Ivanov—the number of KGB alumni in the top and middle ranks of the Russian government is estimated at six thousand. Among them are such top bureaucrats and corporate directors as the aforementioned Yakunin and Chemezov, and the head of the Federal Agency for the Procurement of Military and Special Equipment, Viktor Cherkesov, who also headed the St. Petersburg directorate of the FSB, Russia’s state security service, in the 1990s and served as the FSB’s first deputy director under Putin. (Chemezov served with Putin in Dresden, East Germany, as did the head of the Federal Customs Service, Andrey Belyaninov.) Though Medvedev has criticized both the existence of goskorporatsii and this practice of state officials serving on corporate boards, he furthered its practice in both his own career and in his appointments as president.

The owners of Russia’s largest firms and enterprises seem to have been divided into the “useful” (nuzhnye)—that is, those deemed politically loyal and willing to “share”—and the “useless” (nenuzhnye), those who are looked at with suspicion.

The former are allowed to prosper and expand, while many of the latter live under various degrees of pressure to sell at least some of their assets to the state or the “useful” tycoons. Last fall, an insider plausibly revealed the details of what he called the “velvet re-privatization,” in which the assets are “transferred” from the “useless” to the “useful.”

The palpably fraudulent court proceedings against Yukos and its principal shareholders, Mikhail Khodorkovsky and Platon Lebedev, and the company’s subsequent bankruptcy and sale of its most profitable divisions to the state-owned Rosneft, were meant to teach Russian entrepreneurs a lesson. “Private property, while it has grown and developed substantially, remains provisional,” noted the Carnegie Endowment’s Trenin, “subject to redistribution if an owner experiences conflict with the state or with people close to powers that be.”

Putin’s personal friends, former colleagues, or aides tend to control most of the ‘state corporations’ and ostensibly private companies majority-owned by the state.

The most recent of such conflicts involved Russia’s third-largest oil company, the Russian- British TNK-BP. In 2007, the authorities revoked the firm’s license to develop the giant Kovykta natural gas field in southeast Siberia and pressured it to sell the rights to Gazprom. TNK-BP reluctantly agreed to the sale but not to the price offered. In March, the police searched the firm’s Moscow offices in an investigation of alleged tax evasion of $254 million. FSB arrested a TNK-BP employee, and the visas of the firm’s 200-plus foreign employees were found to be invalid. In addition, TNK-BP’s largest oil field, Samotlor, in western Siberia, is under investigation.

This past spring, the BP-backed CEO, Robert Dudley, was questioned by the Moscow prosecutor’s office and Russia’s Interior Ministry for criminal investigations. BP accused the Russian co-owners of TNK-BP, Alfa Access-Renova (AAR), of trying to remove Dudley to take control of the company. Kremlin officials seemed to support the Russian shareholders, refusing work visas for BP technical workers and eventually Dudley. In August, Dudley was found guilty of violating Russian labor laws and forbidden from working in Russia for two years. TNK-BP partners finally struck a deal in September, with Dudley being replaced and the board adding three new independent members.

It remains to be seen if BP can maintain control of its half of the venture. BP’s Russian partners view the deal as a win, and there is little doubt that at least some of these operations were efforts to make the firm more forthcoming on the Kovykta natural gas field deal—also in September, Russia’s Natural Resources Ministry announced that if TNK-BP fails to close a deal on Kovykta with Gazprom by the end of the year, the ministry be forced to intervene.

Its size and the British connection at least bought TNK-BP negotiating time and room to maneuver. But Russian owners who reportedly decline offers that must not be refused are generally not as lucky. Last year, the owner of oil company RussNeft, Mikhail Gutseriyev, had to flee the country to avoid arrest on the (by now) standard charge of tax evasion. The owner of the leading cosmetic chain Arbat Prestige, Vladimir Nekrasov, has been in jail since January awaiting trial for the alleged nonpayment of $2 million in taxes. Facing the threat of bankruptcy, Arbat and its daughter companies were forced by the Russian courts to sell off a number of properties and stores early in September, which looks like the beginning of the end for Nekrasov’s company. A Russian commentator predicted that Nekrasov would probably be let free “in exchange” for his business.

In Gutseriyev’s case, the persistent “suitor” was one of the Kremlin’s favorite oligarchs and Russia’s second-richest man, the aluminum magnate Oleg Deripaska, who in July 2007 declared that he was ready—nay, willing—to give his estimated $23 billion fortune to the government at any moment. “If the state says that we must give up our companies,” Deripaska said, “we will give them up. I do not separate myself from the state.”

By contrast, in 2005 the St. Petersburg–based Rossiya Bank, whose co-owner Yuri Kovalchuk is a close friend and reportedly the “personal banker” of the former president, purchased a giant media empire that used to belong to Gazprombank. The holding included four of the leading national television channels and the country’s largest newspaper, Komsomolskaya Pravda, as well as dozens of local television and radio stations and newspapers. (Kovalchuk’s son, Boris, formerly an adviser to then– deputy prime minister Medvedev, today heads the department of “priority national projects” and thus is in charge of the trillions of rubles budgeted for developing select areas of science and technology.)

Similarly, the “useful” Deripaska’s Rusal (which stands for “Russian Aluminum”) corporation has bid for a 25-percent stake in another metal giant, Norilsk Nikel—the world’s largest producer of nickel and palladium—held by the apparently “not-so-useful” oligarch Mikhail Prokhorov. Naturally, the “offer” has been “accepted,” and the deal closed in the last week of April. Deripaska’s stake in Norilsk Nikel is likely to continue to grow, perhaps until he owns the majority of the company.

Putinism’s authoritarianism and sultanistic corporatism have destroyed the legitimacy of all key political and social institutions in Russia; the regime’s foundation lies only in its claims to economic growth and increased standards of living.

Should the economy—which has achieved the impressive average growth rate of nearly 7 percent in the past 10 years—begin to falter, so too would the legitimacy of the Putin and Medvedev regimes. The decrease in oil production, the global food crisis, and high inflation in Russia, along with the almost certain new government spending on national projects and salary and pension increases to ensure Medvedev’s popularity, make Russia’s economic and political situation look less stable than the Kremlin would like. Medvedev has declared “legal nihilism” and corruption, both of which have become widespread, a key focus of his presidency. According to Transparency International’s 2007 rankings, corruption in Russia has risen to 2000 levels (after steadily improving between 2000 and 2004). One Russian expert says this pandemic corruption has “reached the level of a national catastrophe,” yet the very nature of the regime makes fighting it nearly impossible. The complete absence of an independent parliament, judicial system, and mass media makes the fight against corruption look like what another observer has called “a ritual dance.”

In the short term, Putinism creates a strong, unchallenged political entity and offers both economic and political stability for Russia; it also represents a proud, truculent face to the world. Yet in the long term, its policies will bring economic stagnation, political destabilization, and the deterioration of external relations. As a student of Marxist “dialectical materialism,” Putin must be aware of this evolution, yet as a successful authoritarian ruler, he will doubtless ignore it, and Medvedev seems content to follow blithely in Putin’s footsteps.

Leon Aron is the director of Russian studies at the American Enterprise Institute. The author would like to thank his research assistant Kara Flook for preparing this article.

Illustration by Jeffrey Smith.

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