Putin’s authoritarianism has a sad logic

By Chrystia Freeland
January 7, 2011

For anyone who ever hoped Russia could become a liberal, free-market democracy, the grim trial last month of Mikhail Khodorkovsky, the former oil tycoon who was once his country’s richest man, offered a slender solace—it was widely and loudly condemned.

David Remnick, editor of The New Yorker, compared the prosecution to that of the late poet and Nobel laureate Joseph Brodsky. Joe Nocera, writing about the business and economic consequences in The New York Times (whose global edition is the International Herald Tribune), described the Kremlin’s tactics as “boneheaded.” Secretary of State Hillary Clinton warned that the case would “have a negative impact on Russia’s reputation,” and particularly on its “investment climate.” What was notable about this chorus of foreign criticism was the implication that, even judged by the Kremlin’s own standards of realpolitik, the treatment of Mr. Khodorkovsky was a mistake. Moscow’s leaders want to restore Russia’s wealth and greatness: Western assertions that the Khodorkovsky trial had hurt Russia’s reputation and would discourage foreign investment suggested that the Kremlin was harming its own cause.

But some investors, economists and political analysts are drawing a different, and much starker, conclusion: The Khodorkovsky verdict was an inevitable and logical act of self-preservation by a regime that is fully and lucratively in control of Russia.

In this reading, there is nothing accidental about Mr. Khodorkovsky’s continued imprisonment. It is, instead, the clearest possible statement of the rules of Kremlin capitalism, and of Prime Minister Vladimir Putin’s confidence that, at least as long as Siberia has oil, there is plenty of private capital willing to play.

“Within Russia, everyone who matters understands exactly what the Kremlin is trying to say – that there is no one above the rule of the Kremlin,” said Roland Nash, co-founder of Verno Capital and a 16-year veteran of doing business in Moscow.

The message, according to Sergei Guriev, one of Russia’s leading economists and rector of the New Economic School, is this: “It is to show that Putin is fully in control. It is not a question of Khodorkovsky getting out of jail, it is a question of other businessmen not following in Khodorkovsky’s footsteps.” Ian Bremmer, author of a recent book on state capitalism and president of Eurasia Group, a global political risk and consulting firm, said the verdict was “rational” and “predictable.” “If you are in a sector the state cares about in Russia,” he said, “you either play ball with the Kremlin, or you leave.’’ Mr. Nash did remark that the Khodorkovsky case had exacted a real, quantifiable economic cost. “The Russian equity market would be worth several hundred billion dollars more if it weren’t for the critical Western perception of Russia, and the Khodorkovsky case is the principal example of that perception,” he said.

Critics of Putinism, especially Western ones, like to point to this lost value as proof that the treatment of Mr. Khodorkovsky, and the authoritarian politics that his case represents, is a mistake. But that analysis, according to Mr. Guriev, a liberal who laments the path Russia has taken, leaves out the essential political calculus of Putinism.

“Economic growth per se is not important to a ruler, if he is not there to enjoy it,” Mr. Guriev said. “Better to stay in control of a stagnant, but large and rich, country than to be kicked out of a growing one. Everyone wants a bigger cake, but better a small cake than none at all.” And while the Russia cake is surely not as big as it could be, it’s big enough, and growing steadily: Gross domestic product rose 3.7 percent last year, below China’s red-hot 10.5 percent, but better than the United States’ 2.6 percent. The Russian stock market jumped 22 percent in 2010.

One reason the cake is still big enough for Mr. Putin and his allies is that many foreign investors are still willing to tolerate an economy run according to Kremlin rules.

“I haven’t talked to one corporation that used the Khodorkovsky trial, as opposed to corruption more generally, as a factor in their investment decision,” Mr. Bremmer said. Companies in extractive industries, still the dominant sector in the Russian economy, are accustomed to dealing with all kinds of governments. Playing by the authoritarian logic of state capitalism, in Russia and elsewhere, is familiar, even reassuring, he suggested.

Emerging-market investors have similar experiences. As the flows of capital between emerging markets—rather than between emerging markets and the West—become more important, so does tolerance for Russian, or Chinese, or Middle Eastern state capitalism.

“There is a much better understanding of the nuances and the differences in the rules of the game in the emerging world than there is in the developed countries,” said Mr. Nash, whose biggest investor is from Abu Dhabi. “There are now sources of capital that don’t care so much about issues like the Khodorkovsky trial.”

14 comments

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Ms. Freeland, it is very simple. Putin doesn’t allow non-Russian capital to own Russian strategic resources. He is approved by 98% of the Russians, because of that. Trying to convince the American public that somebody is authoritarian, because he didn’t sell for pennies his country’s oil fields to British Petroleum doesn’t make him less popular. Even the American business people recognize that.

Btw, America is lucky to not have Khodorkovsky here, we have the Goldman Sachs thieves, no need of more :).

Posted by Ananke | Report as abusive

If the day ever comes to hang all the investment bankers, you will find them bidding on the oil futures contract.

Ultimately though, if Russia decides to sell to the Chinese instead of the Germans no one there will blink at anything Putin does, and their stock market will go up anyway. And the Chinese can afford to buy anything Putin chooses to sell.

All he has to do is figure out how to sleep with a billion highly industrialized affluent Chinese on his border.

Posted by ARJTurgot2 | Report as abusive

Was anybody else involved, or was it just Putin? Did Putin actually arrest, try, convict, or sentence Khodorkovsky or no? And is an oil tycoon really anything like a poet Nobel laureate other than that they’ve both men in Russia? From what I’ve read, the oligarchs were no great bunch of leaders. They were in with the mafia and created the corruption and bribe system, which ironically then led to the trial, no? We can’t all be as decisive and highfalutin as American white women, you know? Some of us actually have to live in Russia without protection, so there are certainly other interests served, though the point is noted. Most billionaires could learn something from a nice long stay in a Russian gulag, by the way. I don’t expect Reuters to blog that, but it’s a fact.

Posted by adamt78 | Report as abusive

We have had one in Chile: Pinochet sold, for pennies, and in a private bid, SQM Chile to his son-in-law, Julio Ponce back in the 80′s.
It is now one of the biggest Chilean companies trading on the NYSE.
Crooks!

Posted by Pavlov | Report as abusive

I commend Putin and the Russian capital – they are protecting their resources for their country, rather than letting outside interests run their future into the ground, like what has been done here in America. We mericans can learn from this…maybe. Our country has been sold out, and the people are the ones who are being victimized through a rise in poverty. All it takes, is for someone else to come in and defunct our way of life, by buying our companies, and closing them down, like so many American companies have seen – outside interests also choose to move our jobs overseas, to places Americans aren’t welcome to work – this I found troubling, because it has been Americans who used to buy these products, and now have to decide between food, and gadgets which expire faster than milk.

Posted by Mudaphrknmark1 | Report as abusive

Crony capitalism is alive and well all around the world. We really need to start thinking about whether this model is best for business. I’m quite certain all the Davos men and plutocrats prefer it. They can just pay off whatever dictator happens to serve their needs. Better yet, just become part of those governments. Democracy is a transitional and, apparently, fleeting form of government on the way to the Russian and Chinese model. Multi-national corporations merged with governments are the next economic model. :(

Posted by silliness | Report as abusive

“Thieves belong to jail” – V. Putin.
Most people worldwide, myself included, would sign their name to that assertion.
It’s not a question of Khodorkovsky being or not being guilty of the crimes he was charged with – he surely is. There’s no way a simple Soviet engineer owning nothing but the clothes on his back – not even the apartment he lived in (he rented it from the state just as everyone did in Soviet times) – could have become an oil baron and billionaire in just a few years in a completely honest, transparent, and, most importantly, legal way in crime-ridden post-Soviet economy.
It’s quite another matter that Putin used his case to make other oligarchs toe the line. But then, if this approach helps keep Russian society and economy stable (and apparently it does) – let it be.

Posted by anonym0us | Report as abusive

Putinism is ok, but I believe the correct word is Russianism, I mean, has Russia ever had a transparent government? I think Putin is just another Russian ruler. I think the opposition tries to put a face to the monster with the hope that once Putin is gone, this Russian-style of politics will be gone…but I don’t think it will work like that, it will take several generations and facing the problem the wrong way will just prolong it.

Ananke: As a brazilian I understand what you mean when you talk about the selling of strategic national assets for pennies, and I find it funny when I see people looking at just one side of the coin. But the americans will soon understand that better with the rise of China. It’s happening already with the right in America talking viciously about how China owns part of their debt.

Now, I’m all for human rights everywhere, but Khodorkovsky apparently did a ton of illegal things, so should’t this “nobel prize winner” time be focused on non-corrupted champions? Khodorkovsky would be way down on my list…but it is an interesting story though, kind like a Russian novel.

Posted by Eduardo_Luz | Report as abusive

excellent comment so true too!

Posted by Slove | Report as abusive

Well…that’s basically what defines authoritarianism. Prosperity, economy, all that comes a distant second to preserving and further entrenching the regime. It’s the same reason our sad attempts to defuse North Korea with economic carrots have failed so hard…whether Koreans want gadgets is irrelevant if their rulers want to live in the 18th century and have enough guns to shoot anybody who disagrees.

Posted by CppThis | Report as abusive

@Ananke, well said.
Khodorkovsky broke the golden rule of Russian oligarch’s, Stay out of politics.

Posted by Sinbad1 | Report as abusive

well said Ananke. The comments are sometimes worth much more than the article.

Posted by johny2 | Report as abusive

A market is any one of a variety of systems, institutions, procedures, social relations and infrastructures whereby businesses sell their goods,

Posted by smileluckyday | Report as abusive

Its stupid to talk about Kremlin, when west has its own Big banks, Big oil, Pentagon…tycoons, same thing, different style :)

Posted by ajrolaf | Report as abusive