Streetwise Professor

I’ve argued that the current financial strife in Russia is an opportunity for sharks to take big bites from state funds, for the connected to get at the various reserve funds that have tempted them for a long time, but have been out of reach until now. Pavel Baev’s recent piece in the Eurasian Daily Monitor agrees:

All these voices are lines in a long rhyme that invariably ends with the reference “… in the house that Jack built,” and everybody in Russia knows who the architect in question is. That Vladimir Putin has never been able to admit a mistake is only part of his motivation for stonewalling the analysis of the unfolding disaster. A greater part of this determination comes from the need to keep the system of unaccountable redistribution of financial resources going for as long as possible, while the key players seek to compensate their colossal and totally unexpected losses.

Two features of this desperate looting of fast-shrinking reserves came into sharper focus last week. First was the mind-boggling scale of the external indebtedness of Russian companies, not only of all state-owned energy giants like Gazprom and Rosneft but also private “oligarchic” empires close to the Kremlin. The sharp fall of their market capitalization has triggered many “margin calls” for repaying the borrowed money since the collateral has lost value. As a result, Russian “champions” have to pay back up to $210 billion by the end of 2009 (The New Times, October 20). The political decision to rescue the loyal entrepreneurs by providing $50 billion for refinancing their foreign debts can solve some immediate problems, but the applications have already exceeded the designated sum, and many investment programs that are supposed to support Russia’s continuing growth, for instance in the newly-privatized electricity sector, have been gutted.

The second feature is the spectacular increase in corruption schemes and channels in the emergency situation of siphoning off hard-currency reserves that still amount to half a trillion dollars, which is approximately equal to the corporate debt. The decisions about rescuing banks that are known to be “close” to certain officials and opening credit lines to companies with unknown ownership structures are so opaque that the international financial services company Standard & Poor’s revised its outlook on Russia’s sovereign credit rating from “stable” to “negative” last week (www.newsru.com, 23 October). Corroborating this was Transparency International, which gave Russia its worst mark in eight years, so that in the Corruption Perception Index it now shares 147th place (out of 180) with Bangladesh, Kenya, and Syria (Nezavisimaya gazeta, October 24).

Medvedev quite possibly feels the need to add more substance to his anticorruption initiatives and provide some explanations for the apparent lack of results from the much-advertised interventions. Putin, however, cannot tolerate dissent from his junior partner, since any crack in the monolithic system of power could trigger an avalanche of desertions and revelations that would demonstrate that corruption is not a mere defect in his course of expanding state control over the economy but its core substance. His approval ratings may still remain high; but the social contract of “Putinism,” according to which the population enjoys the fruits of petro-prosperity while ignoring the shameless thievery of the ruling elite, is about to expire (www.gazeta.ru, October 22). The peculiar two-headed form of leadership was designed by the over-confident “tsar” for presiding over a permanent party of distributing tons of easy money; but it cannot function in the situation of escalating squabbles between elite clans and gathering social discontent. Cutting Medvedev down to size with his address was easy, but now Putin has to decide how much longer he can postpone the hard tasks of managing rather than explaining away the crisis that has transformed his pet projects into toxic assets.

Three of Baev’s points in particular echo my previous analyses: (a) “the spectacular increase in corruption schemes and channels in the emergency situation of siphoning off hard-currency reserves that still amount to half a trillion dollars”, (b) “any crack in the monolithic system of power could trigger an avalanche of desertions”, and (c) “the social contract of ‘Putinism,’ according to which the population enjoys the fruits of petro-prosperity while ignoring the shameless thievery of the ruling elite, is about to expire (www.gazeta.ru, October 22). The peculiar two-headed form of leadership was designed by the over-confident ‘tsar’ for presiding over a permanent party of distributing tons of easy money; but it cannot function in the situation of escalating squabbles between elite clans and gathering social discontent.”

In a nutshell: Baev portrays a brittle natural state with stability dependent on simultaneously redistributing wealth to favored and powerful interests while generating enough growth to pacify the larger populace that is vulnerable to collapse due to defections of the powerful when the rents run low.

The impetus for Baev’s piece is that Medvedev’s speech to the Duma scheduled for last week has been delayed indefinitely, with no explanation that passes the laugh test. It is passing strange that in the midst of an existential crisis, the President’s speech has been delayed. It certainly gives the lie to the air of confidence that the government is attempting to project.

Maybe Kevin Bacon can do a public service announcement to help them out.

Let’s start a campaign: Free Dmitri Medvedev!