Stealing Russia Blind

Issue Date April 2015
Volume 26
Issue 2
Page Numbers 165-169
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Putin’s Kleptocracy: Who Owns Russia? By Karen Dawisha. Simon and Schuster, 2014. 445 pp.

How does someone who was unemployed twice in the 1990s become president of Russia in less than four years, and then by 2014 head the Forbes magazine list of “The World’s Most Powerful People”? In Vladimir Putin’s case, luck has clearly been involved. He has benefited (at least until recently) from a tenfold increase in the price of oil between 1999 and 2008. Inheriting one of the world’s two largest nuclear arsenals did not hurt either.

Yet talent of a particular variety has been in the mix as well. Putin has adroitly assembled a reliable group of cronies who have shown vast expertise at extracting rents (both natural and artificial) while creating their own media reality, and they have helped him to cut a path to wealth and power. Karen Dawisha’s thorough account of Putin’s rise is important. Indeed, if you are going to read only one book on Putin’s Russia, this should be it. Dawisha not only traces the growth of predatory power under Putin, but shows the toll that it has taken on Russian society and the country’s long-term development prospects.

In her opening pages, Dawisha introduces us to a Russian sistema (system) based on massive predation that has produced the most unequal wealth distribution in any developed economy. She sees this system, in both its political and its economic aspects, as the intended product of an “intelligent design”:

Within weeks of Putin’s coming to power, the Kremlin began to erode the basic individual freedoms guaranteed under the 1993 Russian Constitution. [End Page 165] This pattern of gradually closing the public space and denying citizens the rights of free press, assembly, and speech was present and planned from the very beginning, as will be shown in my discussion of a document, never before published outside Russia, detailing the plans made in late 1999 and early 2000 to reshape the entire Presidential Administration to achieve these ends (p. 2).

Dawisha’s account contains ample details about the Putin clique’s wealth and its implications for Russia and for the world. There are many themes in the book that might be touched on, but I will focus on five: 1) Putin’s disdain for electoral politics; 2) his transformation of a merely corrupt state into a ruthless predator; 3) the close-knit nature of the group that benefits the most from this sistema; 4) the social consequences of a regime that fosters massive inequality even as it destroys the climate that legitimate businesses require; and 5) the international ramifications of a state run by crony predators who safeguard their loot by relying on public goods produced in the very democracies that Putin’s political technologists disparage.

About the Author

Harley Balzer is associate professor of government and international affairs and a faculty associate in the history department at Georgetown University.

View all work by Harley Balzer

After serving in the KGB in Dresden from 1985 until 1990, Vladimir Putin experienced two employment crises. The first came in 1990, when about a third of all KGB employees stationed abroad were pushed into the active reserve. He returned to his hometown of Leningrad (again named St. Petersburg in 1991) and eventually found work on the staff of its mayor, the democratic icon Anatoly Sobchak (1937–2000). Dawisha presents evidence that Putin’s relationship with Sobchak stemmed from KGB concern about Sobchak’s probes into the security service’s appropriation of Communist Party assets and plans to ship tanks abroad to discredit Mikhail Gorbachev’s reforms. The assignment given to Putin, who rose to become first deputy mayor in 1994, was to bring Sobchak “under control” (p. 28).

Some may question Dawisha’s claim that Sobchak probably knew about Putin’s past and his assignment. In the 1990s, Boris Yeltsin supporters used to tell me how proud they were to have on their side an old KGB hand who had seen the light and come over to join the good guys. Russian democrats might have wondered why so many Yeltsin supporters employed someone whose major resumé item was “KGB officer.”

The second job crisis came in 1996, after Putin mismanaged Sobchak’s reelection bid. Putin later told Yeltsin that he disliked campaigns so much he did not want to run for president. Putin himself ran for office only after Yeltsin resigned on the last day of 1999 and Putin became acting president in his place.

Dawisha cites evidence that the results of both the 1999 legislative elections and the 2000 presidential balloting were fraudulent. Specifically, she says, the Kremlin erased the success of the Fatherland–All Russia Party in the Duma races (p. 228). Yury Luzhkov, Fatherland’s leader, accepted a deal to be reelected to Moscow’s mayoralty in return for acquiescing in the results.

In place of competitive elections, Putin has created a predatory state [End Page 166] that allows his loyal cronies to reap tremendous rewards. Putin and his closest associates have garnered most of the rents from hydrocarbons. Dawisha describes how they run a tribute system, trading permission to do business in Russia in return for complete loyalty and contributions to specific projects. The cronies have nearly free rein to exploit other resources and raid businesses.

Dawisha cites dubious behavior beginning during Putin’s KGB days in Dresden, where he acquired audio equipment through the terrorist Red Army Faction (as the Baader-Meinhof Gang came to be called). Once he began to work with Sobchak in St. Petersburg, Putin became more subtle. Nevertheless, he was accused of corruption when the St. Petersburg legislature investigated how an allowance for food imports worth US$122 million somehow produced just two railroad cars of cooking oil.

Putin’s responsibilities in Petersburg included overseeing foreign economic activity, and his signature was required on key documents. Russians paid to be allowed to conduct business. Western businessmen, including some who suffered confiscation of assets, overwhelmingly state that Putin was the can-do person, and that he never asked for a bribe. Dawisha shows why he did not need to solicit direct payments. Real-estate contracts included a 25 percent overhead charge for the city’s infrastructure and social programs. Putin exerted control over these contributions through the mayor’s contingency fund.

Putin sat on the advisory board of the St. Petersburg Real Estate Holding Company (SPAG), created in 1992. Other players in SPAG included the head of the Tambov mafia group, and SPAG was alleged to be involved in laundering money for, among others, the Cali drug cartel. When German investigators raided 27 offices and banks connected with SPAG, Chancellor Gerhard Schroeder blocked the investigation and turned the documents over to President Putin. Not long after, in late 2005, Schroeder left office and became head of the shareholders’ committee of Nord Stream AG. This firm was in the process of laying what is now the world’s longest ocean-bottom pipeline, designed to carry Russian natural gas along the floor of the Baltic Sea directly to Germany. Matthias Waring, a former officer in the East German Stasi and a friend of Putin’s from his Dresden days, became Nord Stream’s head.

Dawisha describes Putin’s special approach to making illegal activity legal (p. 158). His business activities have included involvement with the Tambov and Malyshev crime groups in the Petersburg Fuel Company to “fix prices, evade taxation, and skim deliveries” (p. 142). This led Spanish authorities to tell the U.S. Embassy in Madrid that Russia was a “virtual mafia state” and to express concern that Putin was involved with the mafia (p. 144).

Bodies eventually began to pile up. Nearly three-hundred people, for instance, were killed in the September 1999 apartment-building bombings in Moscow and two other cities that introduced the Second Chechen [End Page 167] War. More than twice that number were injured. Dawisha provides an astonishing account of convenient accidents, murders, and unsolved disappearances of whistleblowers, disaffected cronies, journalists, and people whose businesses or other assets were attractive acquisitions. The luckier targets were able to retire or move abroad.

Although Dawisha focuses on the formative years of Putin’s system, she also provides glimpses of his presidency. These reveal some consistent patterns. One of the most disturbing involves Roman Tsepov, who became Putin’s bodyguard and died in September 2004 following his bid to take a cut from the carcass of the Yukos oil company. After Tsepov drank tea in the St. Petersburg office of a senior figure in the Federal Security Service (or FSB, the successor to the KGB), his body was found to contain an amount of radiation that was a million times the normal level. Two years later in London, FSB whistleblower Alexander Litvinenko would also die from radiation poisoning.

The core of Putin’s elite consists of a relatively small group that has been together for a long time. Many have Soviet or Russian security-service backgrounds; a few were Stasi. Some were Putin’s judo partners, some are economists or other colleagues from St. Petersburg. Dawisha describes these interlocking networks in detail.

Early on, they acquired their own bank. Bank Rossiya was incorporated in June 1990, with initial capital of $840 million from Nikolai Kruchina, who handled the Communist Party’s financial assets abroad. (Kruchina fell, jumped, or was pushed off a balcony shortly after the failed August 1991 Communist hard-liners’ coup attempt, a fate that also, a few months later, befell the man whom he had replaced.) In June 1991, when Putin became head of the Committee for Foreign Economic Liaison in the St. Petersburg mayor’s office, he joined Bank Rossiya in purchasing shares in the new Petersburg World Trade Center. The documents for registering this and subsequent ventures involving the city and private firms were drafted by Putin’s legal advisor, a young law professor and Sobchak protégé named Dmitry Medvedev. Bank Rossiya was involved, sometimes at Putin’s insistence, in many of the joint enterprises that the city established with foreign firms.

Putin’s associates have done well. Aside from political ventures, Medvedev became involved in the Ilim Group, which deals in timber and wood-pulp products. By 1994, he owned 10 percent of Europe’s largest pulp and paper mill. In 1999, he sold his Ilim shares for $80 million.

In 1992, Putin bought two parcels of land on Lake Komsomolskoye outside St. Petersburg, an acquisition that was beyond his city-employee’s salary at the time. Twentieth Trust, an entity that Putin had helped to establish using his authority in the mayor’s office, built a two-story dacha for him with money diverted from the city’s coffers (pp. 94–95, 145). When the house burned down in 1996, the sauna was determined to be the problem, and the company had to rebuild the half-million-dollar dwelling. When [End Page 168] Sobchak was defeated in the 1996 mayoral election, Putin’s group lost its access to the mayor’s contingency fund and needed another way to share investments. Putin and seven cofounders registered the Ozero (Lake) Dacha Consumer Cooperative. This gated community violated shoreline-access laws. More important, the Ozero Cooperative had a bank account that allowed Putin to share in wealth without having to receive money directly.

Putin’s kleptocracy has made Russia the planet’s most unequal large country. Dawisha reports that between 1991 and 2011, Russia’s super rich doubled their wealth, while in 2011 the bottom 20 percent of Russians were earning 55 percent of their 1991 income in real terms. While growing inequality is an issue in many countries, Russia’s inequality is extreme. Dawisha cites Credit Suisse data that while globally billionaires control 12 percent of total household wealth, Russia’s 110 billionaires possess 35 percent of the country’s wealth.

The massive increase in total wealth in Russia since 1999, overwhelmingly due to the increase in world hydrocarbon prices, has not produced public goods or the economic diversification that is needed to ensure stable growth in the future. In May 2008, Russia was more dependent on hydrocarbons than it had been when Putin took office.

Dawisha notes that under Putin, Russia’s total fertility rate has risen from 1.3 to 1.7, though it remains below the 2.1 children per woman needed to end population decline. Whether the higher birth rate reflects government policy or demographics (a temporary bulge in the number of women of child-bearing age) will be answered in the coming decade. Dawisha cites data indicating that the billions of dollars spent on a national health program have done little to improve Russians’ health. Russian women die of cardiovascular disease at a rate five times greater than women in Europe. The life expectancy of a 15-year-old male in Russia is three years less than that of a male his age in Haiti.

Infrastructure remains a black hole for investment. While some new train service has been provided, highway construction lags. China, a less affluent society, has on average built 7,017 kilometers of modern highways annually for the past ten years; in 2010, Putin said that Russia would spend five years building just twice that distance of new roads. In building pipelines to Germany, construction on the Russian side has cost 5.8 million euros per kilometer, while on the German side construction has cost only 2.1 million per kilometer. Dawisha cites Russian sources claiming that more than half the funds allocated to build facilities for the 2014 Winter Olympics at Sochi simply vanished.

Russians who get rich do so playing by Putin’s rules. Little hindered by Russia’s weak legal system, Putin’s cronies have a host of ways to gain immunity from prosecution. They can become members of the Duma, or even honorary consuls for the Seychelles. A growing number use the public goods created in societies based on the rule of law to protect their wealth and the physical security of their families. [End Page 169]

Corruption and predation have extended to the East European borderlands and the Commonwealth of Independent States. It is worst in territories that have been “liberated” by Russian military groups. Dawisha describes the South Ossetia enclave (pried away from Georgia by force) as a “wholly owned subsidiary” of the Russian mafia and security-service network (p. 345). Russian business’s biggest cross-border stake, however, lies in Ukraine. Much of the $17 billion per year worth of Russian arms exports goes through the Ukrainian port of Odessa on the Black Sea. Dawisha concludes that “Russia has real and deep interests in this region that will not be compatible with a closer relationship between Ukraine and the EU” (p. 347).

In the early 1990s, Putin told a documentary filmmaker whom he had recruited to do a film about him that totalitarianism cannot be imposed on a people from above, but rather is—as Putin put it while speaking on camera—“embedded in our own people’s mentality” (p. 67). If Putin truly believed this, he might not be pushing the world to the edge of war by seeking to impose that system on neighboring countries such as Ukraine, where majorities have clearly demonstrated different values and a desire to escape dead-end economic practices.

Karen Dawisha closes by warning that “Putin’s ability to rule with a charm offensive has been largely exhausted . . . . maintaining control will more and more depend on coercion (p. 348).” Putin, she adds, “will not go gentle into the night.” Even his former public-relations aide “believes that Putin will never leave power and, indeed, is hampered by the idea that Russians will always decide matters by violence” (p. 349). Today’s Russia is Vladimir Putin’s handiwork, the expression of his will to power. As such, it is something profoundly disturbing to behold.


Copyright © 2015 National Endowment for Democracy and Johns Hopkins University Press