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Putin’s Tsarist Plutocratic System

By Meagan Reid

“How did Putin and his allies take control of Russia’s economy?”

This is the central question to a staggering work by former Swedish diplomat and economist Anders Åslund. His book Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy depicts Vladimir Putin’s assumption of power through the use of different strategies, ranging from power centralization, company nationalization and asset stripping, to international money laundering. Students at the Fletcher School of Law and Diplomacy, Tufts, and Harvard listened carefully as Åslund spoke to them of the ways in which the elite within Russia managed to centralize and secure their political and economic power.

Putin’s personal background is essential to understanding his patterns of behavior and how these personal tendencies may influence Russia in the future. Putin grew up in St. Petersburg (at the time named Leningrad), and served as the city mayor’s advisor when the Soviet Union collapsed in the early 1990s. In the ensuing chaos, St. Petersburg was home to large-scale organized crime in Russia, and Putin was known as “the prime person in the prime place for organized crime” (Anders Åslund). Given the opportune setting, Putin was not interested in petty corruption but capitalized in the area of grand corruption.

Solidifying his relationships with individuals in Saint Petersburg was important for the Russian political and economic spheres, and by bringing many of them to Moscow, Putin created a new elite who were loyal to him. It included the Rotenberg brothers, who acquired their riches through favorable contracts with Russia’s oil giant Gazprom; Gennady Timchenko, owner of Novatek, Siber, and other gas and pipeline constructions; and Yuri Kovalchuk, the owner of the 20 out of 22 TV channels and Bank Rossiya.

Putin’s rise to power was strategic and patient. During his first term, he gained control over the state finances, the Federal Security Service (FSB), and the judiciary, sturdily consolidating his control and centralizing power. With the appointment of friends from the elite, as well as former coworkers and relatives, Putin created a kind of a patriarchal overlord system which rewarded those who proved their loyalty. Thus, as Åslund says in his book, Putin “revealed certain clear values, but at the same time he was skillfully everything to everyone while not necessarily revealing his real positions to the public” (Åslund).

Once the centralization was set, Putin introduced state capitalism to Russia and renationalized many of the large private companies through governmental purchases or through corporate raiding (Åslund). These state enterprises were then expanded through acquisitions, yet some private entities were illegally seized from their owners with the assistance of the law enforcement agencies (FSB). During this time, Putin’s allies, who now controlled many national companies, stripped their assets and transferred the money abroad. Putin created a system in which no rule of law and no property rights had power. This way, “Vladimir Putin is a fighter and survivalist. He won’t give up, and he will fight…” (Åslund), and if he is ousted, it is likely that he will lose everything that he has worked towards.

Putin, however, does believe that the macroeconomic stability is essential. Today, the international currency reserve is $490bn, public debt is 12 percent of the GDP, inflation is at 5 percent and the unemployment rate is 4.8 percent. Yet, since the 2008 recession, Russia’s GDP has been nearly stagnant with a 1 percent increase per year. With this in mind, a conservative estimation states Putin and his allies have been able to strip almost $800bn from the country since 2006. The outflow of this cash internationally has revealed the vast network in which the Russians could launder money. The majority of these holdings are located in the United States (Delaware), the Cayman Islands, the British Virgin Islands, and the United Kingdom.

Little is expected to change in Russia. Åslund has some explanations for continued corruption. He argues that, because Russia is a kleptocracy, and any reform would threaten the power and wealth of the rulers, any major political or economic changes are unlikely. The West can and does stand up to Russia by maintaining and reinforcing sanctions, specifically personal sanctions on the elite and they could apply stricter anti-money-laundering laws in Europe to apply more pressure. Putin has been intelligent with his ascension to power but, thanks to the work done by Andres Åslund and others, we are finally starting to better understand how the “tsarist plutocratic system” works in reality.

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