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Approaching The New “Time of the Troubles”

Dr. Gary K. Busch - 7/10/2012

There was a period in Russian history known as the Time of the Troubles (Смутное время) in which all manner of calamities befell the Russian state and its peoples – roughly between the death of the Tsar Feodor Ivanovich in 1598 and the establishment of the Romanov Dynasty in 1613. Catastrophic weather led to the failure of the crops and mass starvation. The great nobles refused to recognise the legitimacy of the power exercised by Boris Gudonov who had taken took over after the death of Feodor Ivanovich, but insisted on their rights and privileges even though the failing state had no means of supporting them. This was, indeed, a time of troubles.

Modern Russia is on the edge of a decline in its economic fortunes and a time which will be very troubling. Like the first time of the troubles it results from a failure of the mechanisms of the state and state governance and delayed and ineffective response to problems which have occurred for reasons largely outside the control of the government. This situation has arisen because of the creation of Putin’s “Power Vertical” in Russia and rise of a class of security operatives who have moved into positions of power in government and state enterprises and exercise these powers as a means of self-enrichment – “oligarchs in epaulets”.

The most important and fundamental change under Putin has been the emergence of a new class of powerful, largely unelected, people who have been put in charge of virtually all the levers and agencies of power in the state as well as in charge of the vast private enterprises which emerged from the privatisation schemes of the Yeltsin period.

There is a spectre haunting Europe. Despite the notion that Communism died with the fall of the Soviet Union, the state, its agencies and its companies are populated by the Undead; the unreconstructed nomenklatura of the failed communist system. In his book, Capital, Marx wrote that 'capital is dead labour which, vampire-like, lives only by sucking living labour' He coined the term ‘Vampire Capitalism”; of corporations whose exploitations 'only slightly quenches the vampire thirst for the living blood of labour', and that 'the vampire will not let go while there remains a single muscle, sinew or drop of blood to be exploited'. What Putin has created is a society of Vampire Communism where the Undead suck the life blood from private corporations and government agencies; leaving drained and powerless structures behind them.

The new and powerful people (‘siloviki’) have been almost exclusively drawn from the ranks of the ‘Chekists’. A ‘Chekist’ is a general, if pejorative, term for those who are or once were employed in the security operations of the Soviet state- KGB, GRU, MVD, FSB etc. (the ‘Organs’) Dzerzhinsky’s original agency was the Cheka. Under Putin, these new ‘siloviki’ have been firmly installed in the corridors of power. During the period of the Medvedev Presidency these siloviki expanded their reach and have become fully entrenched in the various businesses and ministries of the State and have become immensely wealthy. With the return of Putin to the Presidency they have taken on a more political role and are a separate power base. It is they who must be consulted and managed by Putin. This has eliminated a great deal of the flexibility of the response to real challenges to the Russian economy.

For those who have studied Marxism this type of situation was accurately described by Marx and Engels in 1852 with the publication of the pamphlet “The Eighteenth Brumaire of Louis Bonaparte” demonstrating how the class struggle in France created circumstances and relationships that made it possible for a grotesque mediocrity to play a hero's part. The 18th of Brumaire is a date in the Revolutionary calendar when Napoleon Bonaparte intervened and became ‘First Consul’ of France. The takeover by Napoleon’s nephew through his 2 December 1851 coup was viewed as a parody of his uncle’s coup. Marx’s pamphlet begins with the oft-quoted "Hegel remarks somewhere that all great world-historic facts and personages appear, so to speak, twice. He forgot to add: the first time as tragedy, the second time as farce”. Louis Napoleon’s takeover was portrayed as more of a farce. He became the head of a state run by the security organs and the bureaucracy. ‘Bonapartism’ has been used to describe a government that forms when the security forces of the state wield the real power and establish order; the tail wagging the dog. Putin’s own Eighteenth of Brumaire has added to this brew the state or parastatal corporations, run by the security services or their former colleagues.

When Putin took over from Yeltsin he found an economy with concentrations of economic power in the hands of private sector ‘oligarchs’. Upon taking office, Putin directed his energies towards stripping or reducing the oligarchs of their economic power. To do this his introduced and supported the rise of the siloviki. The new Chekists, who came in with Putin, were no more competent than their predecessors but they were much greedier. The key question is why these ‘siloviki’ have been so determined to move into business and take over control of public companies and take others back into public ownership? The answer is very simple – greed. There are no laws against insider trading in Russia. There were phenomenal sums of money being earned in Russia as a consequence of the government agencies manipulating private companies like Yukos. There was no insider trading law which prevented this. The government agencies (under the control of the siloviki) knew when they were going to make an announcement about Yukos; an announcement that would send its shares up or down dramatically. It knew when it would announce news about stopping or starting oil flows; an announcement that would send oil prices up or down. If they knew all this they could use their banks (run by the siloviki) and broking companies (run by the siloviki) to ‘anticipate’ the markets. Fortunes were made .Most of the money gained was from Western investors.

Over the last decade, the siloviki waged a quiet cultural counterrevolution with tremendous effect. They worked to systematically devalue and compromise liberal values, standards, and institutions -- values that had massive public support in the early 1990s. This was coupled with repression, and murder, of bankers. journalists and commentators hostile to their views. They have indoctrinated the new youth of Russia, who remember little of the Soviet Union, that the siloviki control access to their future jobs, careers and good fortune in business, government and the civil service.

The Russian economy has been booming, Raw material prices for metals, gas, petroleum and ores were very high. Until recently the value of Russian oil production was soaring. On the other hand, even with all this wealth, Russia remains desperate for foreign investment and is cash-poor for domestic investment.

Those independent Russian private companies which still exist are taking their investment portfolios out of Russia as quickly as they can. Flight capital is at fever pitch in Russia. Companies are listing themselves on the London and New York stock markets to attract foreign partners; not for the cash but for widening of the shareholder base outside of Russia to make re-nationalisation more difficult when the siloviki decide that it their industry which must be retaken for ‘the national security’. Any Russian company of note has succeeded or is in the process of widening its shareholder book to include non-Russians. This has also meant that the cash has stayed outside of Russia as well, as a new ‘internationalism’ has energised Russian companies. They are now moving into the US, Canadian, Latin American and African markets in search of suppliers, alliances with competitors and safer markets.

The rise of the siloviki has had several major effects in Russia. The first is that the private companies they control have become part of the state system. In Russia, this has always meant that there has never been a direct linkage between company activity, productivity and performance with the resources needed for its survival or expansion. The money pot (the ‘obshak’) where the profits are kept is held by the state, as owners of the shares, and is made available to the companies which generated these funds at the whim or fortune of the group of competing siloviki who control the company in the name of the state. Theoretically these state-owned companies are the responsibility of a board of directors and management appointed by the state, but their retained capital and cash-flows are controlled outside of the company structure.

This has proved useful when the state wishes to purchase more shares in companies. The state used mirrors and smoke and fake transfers to acquire companies like Yukos; pretending that these funds have been made available to Rosneft or Gazprom. There are enormous amounts of funds transferring about the Russian economy for share purchases; but no cash. The state can acquire companies this way, but they cannot make them work. Work requires investment in capital equipment; cash for repairs and maintenance; money for research and development, etc. The siloviki companies are all competing for their share of the obshak and are dependent on which group of competing siloviki has the ear of the keepers of the purse string.

One needs go no further than the Komi Republic to see massive oil spills from broken pipes; radioactive Inuit glowing in the Arctic night from nuclear leakages, and a rapid depopulation of the region due to the government’s inability to manage or invest in repairs. When the state takes over more and more of the oil and gas industry, where will the cash come for the purchase of pipes; the costs of drilling; the maintenance of the rights of way? Ownership doesn’t mean that there will be an end product. If that were true all the poor people with oil, copper and metals concessions in Africa would be immensely wealthy. They are still poor but they have valuable concessions. Modern business requires cash; a massive amount of cash and the Russian government is not making this available.

Now Russia has announced that it will engage in a massive program of privatisation.
At a recent economic forum the various ministers and business executives complained that there has been a woeful lack of private investment. Russia only invests around 2.5 per cent of its GDP in infrastructure while the United States and many European countries invest close to six per cent from a higher baseline. Russia, like most former Soviet states, inherited the bulk of its infrastructure facilities from the Soviet Union, but harsh climatic conditions, insufficient state investment and widespread corruption have pushed most into a state of disrepair or near-collapse, especially the road system.

Over the past ten years, the federal government has spent 1.9 trillion rubles ($57 billion), or about 45 per cent of its federal target program funds, to improve the state of the country's infrastructure
but in order to maintain the various infrastructural projects in a decent state, the government needs to spend an additional 1.5 trillion rubles ($45 billion) that it does not currently have (said Maxim Sokolov, Russia's minister of transport).

The Russians intend to privatise in phases. The new Russian government's revised privatisation plan foresees asset sales this year and next, with the state set to exit as an owner of some major assets within four years. Reuters did a useful summary of these projects (Russia's Upcoming Privatization Plans, Reuters 23/6/12). These include banks, mineral companies, food producers, etc. The state will still keep a majority control in most of these companies. The only companies they intend to sell off completely are:

Russia's second-biggest bank kicked off the state's privatisation plan with a secondary listing of a 10 per cent stake in London in 2011, raising $3.3 billion. The state now owns 75.5 per cent and aims to exit completely by 2016.

The state-owned business leases equipment to the farm sector. The proposed privatisation is one of Russia's undertakings under its WTO accession agreement and a complete sale by 2016 is planned.

Russia's fourth-largest bank is a government agent for federal programmes in the farm sector. The bank works with the rural population and has more than 1,600 offices countrywide. The state owns 100 per cent, and aims to sell out by 2016.

The flagship airline is in the process of merging with five regional carriers, tightening its grip on the domestic market, after which it should proceed with privatisation. The state owns 51.17 per cent and aims to sell it by 2016.

Russia's biggest hydroelectric power producer is also on the auction block, with the government hoping for a full sale of its 58 per cent stake by 2016.

Russia's largest oil company is already listed following a $10 billion initial public offering in 2006 and the state now wants to sell its 75.1 per cent stake by 2016. New CEO Igor Sechin, energy 'tsar' in the last government, is pushing back against Rosneft's privatisation.

*Sheremetyevo Airport

Russia hopes to combine the Moscow airport with the smaller Vnukovo, renovate them and sell them off. The state owns 100 per cent and aims to sell this by 2016.

The energy explorer develops oil and gas fields mainly abroad, in countries like Vietnam and Cuba. The state aims to sell its 100 per cent stake by 2016.

The Russian state electricity holding company is 60 per cent owned by the government and other state entities. Mining giant Norilsk Nickel holds a 14 per cent stake and minority shareholders 27 per cent. The proposed exit by the state is opposed by Sechin, also a former chairman of InterRAO.

It was no less of an observer than Mr. Ulyanov (a.k.a. Lenin) who said "The Capitalists will sell us the rope with which we will hang them." Well, the market for imported ropes has been drying up but the market for imported cash has never been higher in Russia. The reconstruction of the Russian economy into a perverse form of state capitalism is not a market structure that would have been familiar to Lenin or his successors. The current structure is a kleptocracy without ideology which manages to combine most of the failings of the former Soviet system with rhetoric of a free market. The problem is that there is a diminishing interest among Western companies in investing in Russia.

A key factor has been the drop in the price of oil. Russia has made most of its new wealth in the sale of oil and gas and its raw materials. The arms industry, another staple, has been diminishing as quality has been dropping and new designs becoming reduced. As long as Russia could sell oil at over US$ 115 per barrel of Urals crude (the price at which the budget was set) it was making money. Now the price of oil is low (around the $85 per barrel mark) and falling. This is partially to do with dropping demand as the result of Europe’s problems and partially because the Arab states of OPEC refuse to reduce production as a political move against Russia’s role in Syria and the Middle East. Troubles in Nigeria and a boycott of Iranian oil have maintained the current price but some observers feel that a long-term price for oil will be around $60 to $65 dollars a barrel. This is a real crisis for Russia. The exploitation of shale gas and oil reserves in the U.S. has threatened even greater problems for Russia. US. gas prices have dropped almost seven-fold. The U.S. is building large export trains for the shipping of LNG to the world’s markets at a price at which the Russians can’t compete; still less build expensive pipelines.

At the St. Petersburg International Economic Forum, also known as “the Russian Davos” last week (22 June) Putin recognised the need for making foreign business easier in Russia. Putin re-affirmed the government's long-awaited privatisation programme and said foreign investors would also have the opportunity to take part. He proposed an ombudsman to help regulate the problems but the appointment of an ombudsman appears to signal that Putin continues to rely on the system of political protection, rather of setting clear and transparent rules and a fair judiciary. Putin identified corruption as the biggest threat to Russia and conceded that the country's oil price dependence was its Achilles' heel.

In his speech Putin stated “It is impossible to become truly competitive in the international arena without honest domestic competition, without the rule of law, without truth and justice in relations between business and the state. Competition in politics and the economy is the main engine of development. So I ask the Government of the Russian Federation to conduct a major revision of the practice of antitrust legislation and competition support. It must be done in close contact with the direct participants in the economy”. – President Vladimir Putin, June 21, 2012

However, no matter what speeches Putin makes it is clear to anyone doing business in Russia that the system is skewed away from transparency. Corrupt bureaucrats change the rules at will, often expensively. Security of property is less than elsewhere. The on-going saga of TNK-BP is a case in point. The windows of opportunity in Russia are closing. There are better and safer places to invest.

The value of the ruble is falling. According to Bloomberg, (BRICs Biggest Currency Depreciation Since 1998 To Worsen, 26 June 2012) currencies from Brazil, Russia and India will probably decline at least 15 per cent by year end. The 11.5 per cent depreciation in the ruble and 10 per cent drop in the rupee was almost twice the retreat in the euro. The ruble sank 2.4 per cent last week. The drop is likely to continue.

The time of the troubles is just starting for Russia as a lack of cash will stifle the planned infrastructural reforms needed, the promised refurbishment of the military, and the provision of improved housing conditions for the bulk of the country. However, the control of the economy by the siloviki remains. In the few short years of Putin’s rule the chaotic expansion and reconstruction of the Yeltsin years has been altered. The siloviki factions are not united in any common policy. There are more factions of siloviki than there were of Trotskyites in the Fourth International. These factions have made a good start in reconstructing the control system of the Soviet Union and trying to restore the blind patriotism which substituted for good food, housing, health care and free expression which Russians expected in the removal of communism. This control is not especially attractive to foreign investors.

In addition there will be many changes required when Russia joins the World Trade Organisation, as envisioned by the Russian leadership. It will not be able to continue its high tariffs, restrictions on foreign competition, and complaints of injury when the WTO membership is agreed. The question is why, and for how long, foreign capitalists will be willing to sell Russia the rope of direct investment? Surely there are better investments elsewhere. Russia’s skewed economic development manages to combine much of what is wrong in its history with the sad deficiencies of its present. If history is a guide, Russia is driven by small, greedy men, controlling giant assets and will remain so unless the foreign cash tap runs dry. All in all, it is probably wiser to buy Russian private shares on the Western exchanges than to roll the dice by investing inside Russia.

A good deal of the blame can be put on the Undead, the rise of Vampire Communism and the dedication of what Marx called “that Wallachian boyar”, Vlad Dracula, in spreading his cloak over the remaining light in the society.

Dr. Gary K. Busch has had a varied career-as an international trades unionist, an academic, a businessman and a political affairs and business consultant for 45 years. Gary Busch has been a Chairman and CEO of International Bulk Trade, Transport Logistics, Transport Africa and the North Pacific Lines. These companies have owned, chartered and operated many marine dry cargo vessels and cargo aircraft worldwide. He set up the transport and logistics systems for the Russian aluminium industry for Trans World Metals and operated transport and port facilities across Russia as well as cargo airlines in Africa. He was a professor and Head of Department at the University of Hawaii and has been a visiting professor at several universities. He was the head of research in international affairs for a major U.S. trade union and Assistant General Secretary of an international union federation. He has been a consultant on international political developments for several major international corporations, think-tanks and private intelligence companies. He has authored six books and fifty-eight specialist studies, and has hosted and executive-produced several extended PBS documentary series... He is currently the chairman of both Transport Logistics and Chunguza Associates. His articles have appeared in the Economist Intelligence Unit, Wall Street Journal, WPROST, Pravda and several other news journals. He is the editor and publisher of the web-based news journal of international relations

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