Streetwise Professor

May 2, 2012

The Natural (State) Order of Things: Privatization as Politics By Other Means in Russia

Filed under: Economics,Politics,Russia — The Professor @ 8:02 pm

The hallmark of the natural/patrimonial/extractive state is the complementarity between property and political power.  Property is allocated through political means, giving an incentive to achieve political power; moreover, access to property  permits the purchase of political fealty through the distribution of the rents the property generates.

The renewal of my interest in Russia can be traced precisely to my interest in it as a classic example of this institutional economics insight.  And events surrounding Putin’s resumption of the presidency provide an excellent example of this phenomenon in action:

A struggle for position and power in Vladimir Putin’s new government has been intensifying as liberals vie with conservatives, insiders say, ahead of the planned unveiling of the new cabinet next week.

At stake is how, and how fast, tens of billions of dollars in state assets are sold under ambitious privatisation plans being eyed by foreign and Russian investors – plans drawn up by Dmitry Medvedev, the Russian president, who is due to swap places with his mentor Vladimir Putin to become prime minister.

The primary implication of the article is that Medvedev and the other “liberals” (civilikis would probably be more accurate) have pursued, and are pursuing privatization not out of some belief that this will help make the Russian economy more efficient, or to meet fiscal needs, but because it strikes at the heart of the power of their deadly rivals, the silovikis in general, and Igor Sechin in particular.

For his part, Sechin is waging an aggressive fight to delay privatization-and through delay, to kill it-and Medvedev and his cohort along with it:

As the jockeying has intensified, Mr Sechin embarked on a lobbying campaign to delay some privatisations. In a letter to Mr Putin leaked this year and seen by the Financial Times, Mr Sechin argued strongly for a delay to many of the sales due to “volatile” conditions on world markets that could see some of Russia’s biggest assets sold at prices far below their peaks.

The most outlandish arguments that Sechin raises relates to the notoriously corrupt state oil pipeline company, Transneft, which Sechin says cannot be privatized “until the company had completed a programme to consolidate its accounting under international standards.”  Yeah.  Whether that happens depends on who controls the company-and if the current lot do, that means right after OJ finds the real killers.

Putin, of course, is the ultimate arbiter here, hence Sechin’s appeals to him.  He will use his ability to allocate property and control over it to secure support, and to maintain a balance among the competing factions.  Sechin and the other elements associated with the security services pose the greatest threat to him, so it is likely that they will prevail in most of the disputes.  But Putin cannot afford to let them become too strong either, so he needs the civilikis as a check on their power.  He will therefore make some concessions to them, and refuse to grant all of Sechin’s wish list.

This is the order of things in the natural state.  “Privatization”, or the lack thereof, is not primarily an economic policy: it is an instrument of political policy used to allocate wealth and power among competing factions.

To the extent that privatization does go forward, and these struggles become more than a spectator sport for westerners, one thing should be kept in mind.  If things are privatized for pressing political reasons, they can be unprivatized for equally pressing political reasons.  There is no ideological commitment to privatization, or any real legal or constitutional checks on future reversals.  If you invest in privatized companies, you are basically taking a position on future political developments.   Given the fragility of political equilibria in natural states, and the utter opacity of the process to outsiders, this is a risky position indeed.  Which is a major reason why Russian companies sell at such discounts, which in turn provides the strongest argument of Sechin and his ilk not to privatize in the first place, and which “justifies” future unprivatizations to undo the unjust theft of the state’s patrimony by those who paid low prices for shares in privatized companies.  This is a very bad equilibrium, but one that is difficult indeed to escape from.

Hence: Putin’s purgatory, and the hamster wheel from hell.

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  1. Our good Professor, you will recall the high hopes We had for Russia back in the 1990s, detailed by by the wise scholar Richard F. Starr in an article “Russia and the West”, Mediterranean Quarterly, Fall 1995 pgs 76-77″

    The Most Hopeful Scenario

    This would include a genuine transition to democracy and economic relations, based on private enterprise. A ten-year projected decline of the Russian population by 16.5 million to 131.5 million by the year 2005, coupled with about four hundred thousand tons of grain exported for 1996, suggests that the country finally would become able to feed itself. The military-industrial complex is closed down and the armed forces reorganized into a constabulary force, without offensive combat capabilities.

    After the young economist Grigory A. Yavlinsky has been elected president and proclaims a Compact with Russia, an enormous rescue operation is mobilized by the industrialized world. It dwarfs the Mexican bailout. Moscow offers as collateral its natural resources, valued at $29 trillion. The World Bank, International Monetary Fund, European Bank for Reconstruction and Development, the G-7 organization of seven leading economic powers, and (a – We especially loved this part) private banks in the West and Japan all join in support of this largest assistance program in history.

    The new leadership in Moscow proposes to transform the Federation of Russia, with its twenty-one republics, into a United States of Russia that would encompass forty-six territorial units. Five of the latter are Cossack republics, named after historic military settlements along the border of the former tsarist empire. A continental congress, convened at St. Petersburg, drafts a new constitution and a bill of rights.


    From Our perspective, the important points of this plan were:
    1) Decline of Russia’s population to ~130 million.
    2) Elimination of Russia’s military-industrial sector.
    3) Elimination of Russian military capabilities.
    4) Western control of Russia’s then-$29 trillion natural resources sector, at a price of ~$100 billion (The Mexican bailout Our good Professor Starr referred to came to about $50 billion).
    5) The multiplication of territorial units in Russia, to ensure when that ramshackle country fell apart there would be as many small pieces as possible.

    Imagine Our shock and consternation to read the following recent post on the Financial Times Aplhaville blog:

    “While its fellow BRICs have rapidly growing populations, Russia’s has only recently been bucking its trend of decline. In 2004, downside forecasts had the country’s population falling to 125 million by 2025 — something that doesn’t exactly shout “invest here!”. This negative demographic is sometimes referred to as one of Russia’s “most persistent discount factors”, according to economist Marcus Svedberg of East Capital.

    However, it would seem that all those early morning river-swims and shirtless horseback rides have been helping. And things are going in the right direction for the other 142,864,999 people who live in Russia too — they are living longer

    They are also having more babies

    Getting to the economic impact, there has been a corresponding increase in the numbers of the economically active and employed.

    Of course living longer also means increased pension obligations and healthcare costs, but hopefully increases in the overall level of economic prosperity will be able to help with that.

    Perhaps the most interesting graph shows how Russia’s recent population growth spurt has exceeded even the optimistic scenario outlined in 2010.”

    Instead of declining to ~130 million by 2005, as was Our fond hope in 1995, Russia’s population is ahead of the pace projected in 2010 for increasing to about 147 million by 2025! And Russia is rebuilding its military-industrial sector, which We had hoped would rust away to uselessness, making Russia powerless to resist Our will!

    Our horror at these developments cannot be put into words. There is every indication that Russians will flourish, and will remain sufficiently armed that her energy sector out will be of Our reach.

    And it is all that Putin’s doing!

    Comment by a — May 3, 2012 @ 4:34 am

  2. And, as usual, a couple of comments follows the quoted post on the Financial Times Aplhaville blog ( For example unokai writes “The uptick in population is caused only by positive migration balance. Native population is declining. Furthermore, recent uptick is also caused by the biggest cohort of people born in 1980s, which is now in childbearing age. The next cohort – people born in 1990 is almost twice smaller because the fertility rate declined dramaticaly after the fall of USSR and the current uptick is just an demographic echo of the uptick in 1980s. When the 1990s cohort will come to childbearing age we will see the decline.”

    Comment by Dixi — May 3, 2012 @ 7:13 am

  3. “The uptick in population is caused only by positive migration balance.”

    Indeed.  That criminal Vladimir Putin has diverted so much money to wages, that rightfully belongs to Us, that Russian jobs and Russian wages are highly attractive.  Another thing We damn him for.  How are We supposed to retain a reserve of labor now?

    “Native population is declining.”

    This might not be true for 2012, regretfully.  Births may exceed deaths in Russia this year.

    “Furthermore, recent uptick is also caused by the biggest cohort of people born in 1980s, which is now in childbearing age. The next cohort – people born in 1990 is almost twice smaller because the fertility rate declined dramaticaly after the fall of USSR and the current uptick is just an demographic echo of the uptick in 1980s.”

    Unfortunately, this fact has been known since, well, the 1990s.  This fact is incorporated in both the 2004 population projection, and the 2010 population projection.

    And the actual data exceeds the “optimistic” bound in both projections.

    “When the 1990s cohort will come to childbearing age we will see the decline.”

    Yes, We reposed great confidence in this.  As Our good professor Starr postulated back in 1995, the political success of Our favored socio-economic policies in the 1990s under our assiduous servant Boris Yeltsin gave Us reason for great hopes that Russia had been permanently diminished, rendered geopolitically powerless and irrelevant forever.  Unfortunately, it appears that the amount of time the Russian government held to Our policy prescriptions was insufficient for them to have had a decisive effect.

    Damn Vladimir Putin!!

    Comment by a — May 3, 2012 @ 2:50 pm

  4. A, by “Native Births” that means ethnic Russians.

    The ethnic Russian share of births is still declining. The positive birth rate is among non ethnic populations, few of whom have any liking for Russians due to the racist attitude of said Russians.

    Comment by Andrew — May 3, 2012 @ 10:29 pm

  5. Our dear Andrew,

    So the birth rate of Russians has not risen? Please provide Us the data!

    Comment by a — May 4, 2012 @ 3:28 am

  6. “…Russian jobs and Russian wages are highly attractive. Another thing We damn him for. How are We supposed to retain a reserve of labor now?”

    Yes, this would help retaining the number of ethnic Russians at its present level, provided the most of the migrants were ethnic Russians. Is this so? Hardly, for according to “ever so independent” Russian Federal Statistics Service’s own figures ( in 2010-2011 72 % of all the migrants came from the Muslim-dominated Central Asiatic “Stans” or from the other non-slavic CIS-countries.

    “Births may exceed deaths in Russia this year.”

    Or they still may not, as has been the case for so long…

    “This fact is incorporated in both the 2004 population projection, and the 2010 population projection.”

    Dear readers, can you guess the source of all these projections?! Besides, 1. the time perspective does not cover the time after the 1980s cohort having left the childbearing age; 2. The objective and most up-to-date projection 2010 seems to flatten out towards 2020 being in line with the much smaller 1980s cohort starting taking the lead.

    “And the actual data exceeds the “optimistic” bound in both projections.”

    You did not remove first the share of the Central Asiatic or other non-slavic migrants coming from the CIS countries, did you? Besides, one year of actual data is hardly a very meaningful basis for any kind of future trend.
    And finally, as well as an answer to the question above, the data source of all the predictions and figures mentioned in this discussion is “the one and only” Russian Federal State Statistics Service. No doubt, a very very independent island in the middle of the Putinstan…

    “Our dear Andrew,
    So the birth rate of Russians has not risen? Please provide Us the data!”

    Andrew did not say that. He talked about “the ethnic Russian share of births” being still declining. And as long as you don’t come with a more up-to-date data source our readers need to content themselves with the following source from 2002 ( ) showing that, except for Jews, all the other ethnic groups living within Russian Federation had a higher fertility rate (i.e. more births per a woman of childbearing age) than the ethnic Russians.

    Comment by Dixi — May 5, 2012 @ 4:47 pm

  7. Correction: the beginning of the first sentence of my comment should have read, “Yes, this would help retaining the SHARE of ethnic Russians at its present level,…” Sorry for that.

    Comment by Dixi — May 5, 2012 @ 4:57 pm

  8. ““Births may exceed deaths in Russia this year.”

    Or they still may not, as has been the case for so long…”

    Our dear Dixi,

    In 1995, We were able to eagerly look forward to a Russian population of about 130 million by 2005. Now you tell Us that Russia’s population will “flatten out” near 147 million around 2020?? We are deeply disappointed!

    “No doubt, a very very independent island in the middle of the Putinstan…”

    Please be specific where the errors or distortions of the Russian Federal State Statistics Service are.

    Comment by a — May 5, 2012 @ 6:05 pm

  9. How would you improve road safety in Russia? Here is how Russian traffic police do it:

    Comment by Ivan — May 6, 2012 @ 7:36 am

  10. Alas, none of Dixi, or Andrew, or Ivan are able to reassure Us that Russia will descend into financial bondage to Us and into geopolitical irrelevance, as We had firmly hoped in 1995, and as We had firm grounds for hoping, as illustrated by the wise professor Starr.

    We had such hopes of enriching ourselves from Russia’s energy sector! Failing that, we must now exercise Our First Principle “All for Ourselves and nothing for other people” on non-residents of Russia.

    Though We thank The Streetwise Professor for ridiculing those who would oppose Us!

    Comment by a — May 9, 2012 @ 5:07 pm

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