Streetwise Professor

Earlier this week, Russian authorities arrested billionaire Vladimir Yevtushenkov, 64 percent owner of the Sistema conglomerates, whose holdings include the mobile operator MTS, retail interests, and . . . the independent oil company Bashneft.

Yevtushenkov was put under house arrest for alleged money laundering related to the acquisition of Bashneft. The company has its roots in the Republic of Bashkortostan, and its privatization was a dodgy affair, even by Russian standards. The company ended up under control of the son of the president of the republic, Murtaza Rakhimov. The son-Ural-is now a fugitive in the west.

But all of this is old news. The company was privatized in 2003, and Sistema acquired it in 2009. Litigation over the privatization has been going on since. So why now? Something new must have resulted in the green-lighting of the escalation of an investigation of old news.

As is always the case with Russia, there are numerous competing hypotheses, and the outcome is probably overdetermined. A leading explanation is that Sechin covets Bashneft, and made Yevtushenkov an offer he couldn’t refuse . . . which he promptly did, leading to his current predicament.

Just exactly what that predicament is is obscure, again in a typically Russian way. After a couple of days in which Yevtushenkov was supposedly unable to communicate with anyone by phone or use the internet, Sistema claimed in a press release that the house arrest had been lifted, and Yevtushenkov supposedly spoke to a journalist by phone. But the Investigative Committee denied that the house arrest had been lifted.

Sistema lawyers filed an appeal of the Investigative Committee’s actions agains the company (though apparently not Yevtushenkov) with the Prosecutor General’s Office. This is interesting-and again typically Russian-because the Investigative Committee and Prosecutor General’s Office are sworn enemies answering to different clans within the siloviki. So maybe there is a bulldogs under the carpet clan war component to this as well.

Sistema’s stock price cratered by 35 percent on news of the arrest, and the affair has sent huge shock waves through the Russian business community. Khodorkovsky flashbacks are epidemic, and many are making dire warnings about how this will accelerate capital flight, further demolish Russia’s investment climate, and worsen the already fraught economic conditions.

Which is probably all true. And Putin is perfectly aware of this, yet has permitted this to escalate nonetheless. Either because he’s especially fond of Sechin, or believes that Rosneft’s condition is sufficiently dire in the aftermath of sanctions that it needs a fillip in the form of the acquisition of a relatively progressive, technologically advanced oil producer at a knock-down price, or because he has another, more political agenda. (Note, that once Rosneft acquires it, it will cease to become a progressive, technologically advanced oil producer.) Or all the above. Plus other things.

Don’t discount the political agenda. One of the alleged purposes of the sanctions is to create an uprising of the oligarchs against Putin and the siloviki. In his paranoia, Putin almost certainly believes that’s true: he, and most of those around him, believe that the US is hell-bent on regime change in Russia.

Putin is therefore likely to interpret any disagreement by an oligarch as a challenge to his power. He may not even believe that Yevtushenkov is challenging him politically, but is afraid that a refusal to knuckle under to Sechin can be interpreted by others as an act of insubordination, which would encourage further acts of destabilizing independence unless it is punished ruthlessly. Thus, Yevtushenkov has to pay the price, pour encourager les autres.

The FT quotes many in Russia, some on the record, some anonymously, who claim that this is an indication of how sanctions are actually having the perverse effect of empowering the siloviki and destroying those who would be “friends of the West.” I think the cause and effect is mixed up here. The sanctions are the result of Crimea and Donbas, which could only happen because Putin and the siloviki reigned supreme. Putin attacked each precisely because he and the siloviki were unchecked within Russia: the “liberal” elements in the Russian elite, such as they were, had been kicked to the curb long ago. One can date the definitive decline of the moderate, economy-oriented elements in the elite to Putin’s decision to resume the presidency. Since then the trajectory of repression, revanchism, paranoia, and statism within Russia has been unmistakable. At most, sanctions have accelerated what was an unmistakable and inexorable trend.

I still shake my head at the silly commentaries that were so common at the time of the Putin restoration to the effect that he would have to-have to!-reform and adopt moderate policies in order to rejuvenate Russia’s sputtering economy. Talk about projection and mirror imaging. Nothing of the sort was ever in prospect.

Even overlooking the fact that aging leopards don’t change their spots, Putin’s mental model of the economy does not associate moderate liberal or “neoliberal” actions with economic progress. He is a statist enamored of national champions controlled from the center.  He also distrusts biznessmen outside of his control who could get uppity and pose a political challenge: why do you think that one of his first priorities upon assuming the presidency the first time was to liquidate the oligarchs as a class, and why would you think that he would countenance their renaissance? Thus, both economic and political reasons compelled Putin to move in the exact opposite direction that fuzzy headed, mirror-gazing commentators recommended in 2012-2013. That was happening before the sanctions, and would have continued even if sanctions had never been imposed.

Those of a dialectical turn of mind, or who believe in “the worse, the better”*, might find reasons to welcome any acceleration of the perfection of Putinism, and therefore welcome any tailwinds provided by sanctions. The sooner this happens, the more rapidly the internal contradictions of his economic and political models will become manifest, and lead to his demise. Not that what will replace Putin and Putinism are likely to be anything that would bring a smile to Adam Smith’s face. The Who-meet the new boss, same as the old boss-is likely to be the best guide to a post-Putin Russia. If we ever get there.

That is, the Yevtushenkov affair is just another day in Putinistan. A continuation, not a change in course. If you’re surprised, it only means that you haven’t been paying attention or were too busy projecting.

*This phrase is widely attributed to Lenin, but there is no definitive citation. The concept is found in a novel by Nikolay Chernyshevsky which allegedly influenced Lenin.