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RISE OF CORPORATIST STATE IN RUSSIA (The 2006 Long Telegram) A. Illarionov Cato Institute, March 7, 2006 © Institute of Economic Analysis www.iea.ru.

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Presentation on theme: "RISE OF CORPORATIST STATE IN RUSSIA (The 2006 Long Telegram) A. Illarionov Cato Institute, March 7, 2006 © Institute of Economic Analysis www.iea.ru."— Presentation transcript:

1 RISE OF CORPORATIST STATE IN RUSSIA (The 2006 Long Telegram) A. Illarionov Cato Institute, March 7, 2006 © Institute of Economic Analysis

2 © ИЭА2 “If you are not behind bars yet it is not your merit, it means the system does not work properly.” Russian people’s wisdom. “Our system must work better.” Russian government’s documents.

3 © ИЭА3 Historical analogies are usually subjective, never perfect, but provide valuable historical perspective to look upon today’s situation and possible future developments.

4 © ИЭА4 The 2006 Long Telegram: 1. Periods in recent Russian history. 2. Russian authorities’ Economic policy. 3. Russian authorities’ Domestic policy. 4. Russian authorities’ Foreign Policy. 5. What made Russian economic boom? 6. Russia’s Corporatist State. 7. Russia is a member of G8. Which G8?

5 © ИЭА5 Periods in recent ( ) history of the Russian authorities’ policies: 1. Jan 2000 – June 2003: “Sturm und Drang” Period. 2. July 2003 – Nov 2004: Period of Questions. 3. Dec 2004 – Nov 2005: Period of Answers. 4. Since Dec 2005: No Debate Period.

6 © ИЭА6 The most popular question among business people in the 1990s up to mid-2003: What will be the exchange rate of Ruble tomorrow? Day after tomorrow? In a week? In a month? By the end of the year?

7 © ИЭА7 The most popular question among business people since mid-2003 and especially in the last two years: Is it not too late to leave the country? Should I leave Russia by the end of the year? In a month? In a week? Day after tomorrow? Tomorrow? Right now?

8 © ИЭА8 Overall diagnosis for Russian authorities’ current policies is Darvensazimus disease.

9 © ИЭА9 Darvensazimus disease is a very rare, complex and dangerous illness. It consists of at least 5 diseases: - “Dutch” Disease. - “Argentinean” Disease. - “Venezuelan” Disease. - “Saudi” Disease. - “Zimbabwean” Disease.

10 © ИЭА10 Combination of 3 diseases – “Dutch Disease”, “Argentinean Disease”, and “Venezuelan Disease” can be used for description of the current economic policy.

11 © ИЭА11 “Dutch Disease” – sustaining high rate of inflation and national currency’s real appreciation leading to “undesirable” structural changes and budget profligacy.

12 © ИЭА12 Higher oil prices led to a sharp increase in the inflow of financial resources into Russia... Value of Russia’s oil and oil products export

13 © ИЭА13 … to sustaining high money supply growth rate... Annual increase in M2, %

14 © ИЭА14 … to sustaining high inflation rate,.. Annual increase in CPI, %

15 © ИЭА15 … to fast real appreciation of Ruble exchange rate,.. Russian Ruble real effective exchange rate (July 1998 = 100%)

16 © ИЭА16 … to sharp increase of the energy sector role in the Russian economy,.. Value of energy exports as % of GDP

17 © ИЭА17 … to a relative decline of non-oil sectors’ share in industrial output. Non-oil output as % of industrial output

18 © ИЭА18 “Argentinean Disease” – use of “industrial policy” to “correct” “undesirable” structural changes by redistributing value added from energy sector into other sectors, primarily machine building

19 © ИЭА19 : Beginning of industrial policy in Russia, : Increase in taxation of oil companies Increase in government expenditure, including government investments Setting up different government-regulated transport and energy tariffs for different sectors, industries and companies Further differentiation of import duties Introduction of import quotas

20 © ИЭА20 The fastest growing item was government’s expenditure on military and police… National defense and police expenditure as a share of GDP

21 © ИЭА21 … as well as on administration. National expenditure on administration as a share of GDP

22 © ИЭА22 As a result, the number of bureaucrats and their share in total employment have dramatically expanded. Public administration as a share of total employment

23 © ИЭА23 The rise in government expenditures has also led to increase in non-market employment… Employment in non-market sector as % of total

24 © ИЭА24 … therefore reducing employment in market sector. Employment in market sector as % of total

25 © ИЭА25 While economic activities in processing industries sharply slowed down, expenditure on government administration, national defense and social security skyrocketed. Growth rates in value added by sectors, %

26 © ИЭА26 Implementation of “industrial policy” led to fall in growth both in oil industry as well as in machine building, and to a notable slowdown in overall industrial growth. Annual growth rates in 1999–2004, 2005 and in January 2006

27 © ИЭА27 Industrial policy led to decline in growth rates in other sectors.

28 Dreams of adherents of industrial policy have been finally implemented. Arrival of “industrial policy” in Russia has led to fall in industrial output growth rate by 50%!

29 © ИЭА29 : New stage of industrial policy – “development policy” (MERT), : Differentiation of taxation for different companies. Destruction of Oil Stabilization Fund. Expanding of old and creation of new state financial developmental institutes – Russian Bank of Development, creation of the Government Investment Fund, creation of Government Venture Funds. Creation of Special Economic Zones. Granting taxation privileges to different municipalities. Adoption of programs of Development for different industrial sectors. Introduction of limitation to foreign ownership in 39 “strategic” companies and sectors. Adoption of Innovation and Technology Development programs. Preparation of the Program for Government Support of Design. “Actually, we have many more ideas...”

30 © ИЭА30 “Venezuelan Disease” – nationalization and quasi-nationalization of private assets in oil, gas, transportation, construction, automobile industry, aviation.

31 © ИЭА31 Accumulation of huge financial resources by oil companies made them very attractive for government intervention. Oil companies revenues

32 © ИЭА32 Quasi-nationalization began from the most successful oil companies. YUKOS’ oil output has almost doubled within 5 years, 1999–2004.

33 © ИЭА33 Having launched their assault on Yukos, the authorities by the end of 2004 have essentially destroyed the most effective, most transparent and fastest growing company. Its most valuable and effective part – Yuganskneftegaz – has been handed over to the state-owned company Rosneft.

34 © ИЭА34 As a result of the forced transfer to Rosneft, Yuganskneftegaz, the “pearl” of Russia’s oil industry, saw its output collapsed after 4 years of unprecedented growth within Yukos. Yuganskneftegaz oil output growth as % to previous year

35 © ИЭА35 Financial results of Yuganskneftegaz activity under state management became triumph of ineffectiveness and incompetence. Yuganskneftegaz’ financial results in Jan-Sep 2005 as % in Jan-Sep 2004.

36 © ИЭА36 The transfer of Yuganskneftegaz from Yukos to Rosneft neither increased, nor even sustained the combined output of these two companies. It reduced their combined output. Total Oil Output of Yukos and Rosneft combined, 3 MMA, January 1999 – November 2005

37 © ИЭА37 In a response to the government’s assault, private investments in the oil sector in 2004 fell by 20%, and growth in Russia’s oil output fell from 12% in June 2003 to 0,9% in August Oil Production Annual Growth Rates, January 1996 – January 2006

38 © ИЭА38 Political process became concentrated over distribution and re-distribution of monopoly rents and creation of their new sources, not over formation of favorable conditions for creation of value added. Vibrant politics is devolving into rent-seeking politics.

39 © ИЭА39 Not only political elites, but the whole Russian society is evolving into a rent-seeking society, where weak and ineffective people are demanding subsidies and protectionism (and receive it), and the most talented, educated and entrepreneurial people are looking for possibilities to distribute and redistribute rents. National labor ethics en masse is evolving in a rent-seeking ethics. Grand populism (in a form of the so-called “national projects”) has arrived.

40 © ИЭА40 Rent-seeking behavior becomes incredibly attractive not only for today’s political and economic elites, but also for future generations. Changes in preferences of future jobs by Russian youth (FOM polls, 1997–2005)

41 © ИЭА41 “Only in this land which had never known… indeed any tolerant equilibrium of separate powers, either internal or international, could a doctrine thrive which viewed economic conflicts of society as insoluble by peaceful means… They sacrificed every single ethical value in their methods and tactics. Today they cannot dispense with it...” G. Kennan, The Long Telegram, February 1946.

42 © ИЭА42 The Russian authorities’ attitude towards domestic politics and civil society can best be described as “Zimbabwean Disease” – establishing total control of executive power over public and social life that leading to destruction of virtually all non-state political and economic institutions of modern civilized society – legislative and judicial powers, political parties, regions power, businesses, mass media, NGO, religious organizations.

43 © ИЭА43 Deterioration in Electoral Process Index in Russia.

44 © ИЭА44 Deterioration in Judicial Framework & Independence Index in Russia.

45 © ИЭА45 Deterioration in Civil Society Index in Russia.

46 © ИЭА46 Deterioration in Independent Media Index in Russia.

47 © ИЭА47 Deterioration in Governance Index in Russia.

48 © ИЭА48 Public demand for independent analysis, non-government mass-media, opposition politics is falling fast and sharply. Their financial support by the private business is quickly drying up as authorities stifle the civil society.

49 © ИЭА49 “[They] work toward destruction of all forms of personal independence, economic, political or moral. Their system can handle only individuals who have been brought into complete dependence on higher power. Thus, persons who are financially independent – such as individual businessmen, estate owners, successful farmers, artisans and all those who exercise local leadership or have local prestige, such as popular local clergymen or political figures, are anathema.” G. Kennan, The Long Telegram, February 1946.

50 © ИЭА50 Government propaganda saw return of the Cold War syndromes. Today “enemies of people” include liberals, business people (“oligarchs”), westerners, potential “orange” forces. In preparation to the next round of parliamentary and presidential elections the authorities are de-facto encouraging activity of nationalistic groups and simultaneously creating officious “anti-fascist movement”. Using “antifascist” demagogy as a pretext they attack dissenting voices in the society.

51 © ИЭА51 To frighten political and intellectual opponents the state of fear is being created. For those who are not feared, number of different instruments are used: - provocations, harassments, beating, hostage-taking, - for Russian citizens – expulsion, - for foreigners – non-granting visas, expulsion, too. The latest decision is Anti-Terrorist Act taking basic personal liberties away from Russian citizens.

52 © ИЭА52 “Efforts will be made… to disrupt national self confidence, to hamstring measures of national defense, to increase social and industrial unrest, to stimulate all forms of disunity. All persons with grievances, whether economic or racial, will be urged to spelt redress not in mediation and compromise, but in defiant violent struggle for destruction of other elements of society. Here poor will be set against rich,.. young against old, newcomers against established residents, etc.” G. Kennan, The Long Telegram, February 1946.

53 © ИЭА53 Zimbabwe disease: Political Freedom in Zimbabwe and Russia, 1991−2005

54 © ИЭА54 By dynamics of Political Freedom Index in 1991−2005 Russia has demonstrated one of the worst performances in the former USSR

55 © ИЭА55 By changes in Political Freedom Index in 2005 Russia and Ukraine occupy polar positions.

56 © ИЭА56 Foreign policy of the current Russian authorities can best be described as Saudi Disease – use of energy weaponry in international relations.

57 © ИЭА57 Backed by unstoppable influx of financial resources into the country regardless of quality of government policy (in reality – rewarding irresponsibility and interventionism) Russian authorities’ foreign policy becomes more and more arrogant and aggressive.

58 © ИЭА58 Energy warfare has been recently used against democracy-oriented Ukraine, Moldova, Georgia. At the same time Russian authorities are positioning themselves as a strong ally of political regimes in Belarus, Uzbekistan, Iran, Syria, Venezuela, and of such political forces like Palestinian HAMAS. At the same time government-controlled media launched anti-European, anti-American, and in general anti-Western hysteria.

59 © ИЭА59 The Russian state is being transformed into Corporatist State. It means: - ownership of the Russian state by the Corporation, - use of the Russian state bodies (security service, tax service, courts, others) in the interests of the Corporation, - destruction of rule of law, absence of identical rules, - main award of the Corporation is paratrooping its member (Russian or foreigner – does not matter) into the state-owned company, - privatization of profits, nationalization of costs, - PPP (public-private partnership) – coercion of private business to fulfill orders from the Corporation and bear the costs, - selectiveness taken as absolute principle, - ideology of “nascism” (“our ownism”).

60 © ИЭА60 “The so called enlarged government, i.e. federal government plus regional governors must work like one corporation.” President of Russia. “The accumulation of powers, legislative, executive, and judiciary – in the same hands, may justly be pronounced the very definition of tyranny.” James Madison. Federalist papers, # 47.

61 © ИЭА61 What is to expect? Some historical analogies/warnings.

62 © ИЭА62 Dutch Disease: GDP per capita in the Netherlands as % of the USA, 1975–1988

63 © ИЭА63 Argentinean Disease: GDP per capita in Argentina as % of the USA, 1958–2005

64 © ИЭА64 Venezuelan Disease: GDP per capita in Venezuela as % of the USA, 1957–2005

65 © ИЭА65 Zimbabwean Disease: GDP per capita in Zimbabwe as % of the USA, 1982–2005

66 © ИЭА66 But… Wait a minute! What about economic growth? Consumption growth? Investment growth? Stock market growth? Foreign exchange reserves growth? Is it fictitious? No. It is real!

67 © ИЭА67 Since 1998 GDP in dollar terms grew almost 5-fold.

68 © ИЭА68 Money income of population grew 4,5 times.

69 © ИЭА69 Volume of consumption market in dollar terms grew 4-fold. Retail turnover, US$ bn

70 © ИЭА70 Foreign exchange reserves including Stabilization fund grew 23-fold.

71 © ИЭА71 Since December 1999 Russian stock market grew 10-fold. RTS Index, December 1999 – February 2006

72 © ИЭА72 But it happened almost exclusively due to terms of trade change rather due to contribution of policies of the Russian authorities.

73 © ИЭА73 GDP in dollar terms grew almost 5-fold, but in real terms – by only 58%. Cumulative GDP increase (1998=100%)

74 © ИЭА74 Private consumption in dollar terms grew 4,1 times, but in real terms – only by 63%. Cumulative private consumption increase (1998=100%)

75 © ИЭА75 While Russia’s economy grew in last 6 years by 48%, physical volume of imports surged more than 4-fold. Cumulative increase in GDP and imports (1999=100%)

76 © ИЭА76 Even Russian stock market is driven primarily by world energy prices, not by domestic economic policies. Russian Oil Export Price and RTS Index, January 1998 – February 2006

77 © ИЭА77 It means that domestic policies contribute negatively into economic performance. Mainstream economic policy of has being transformed into rent-seeking policy.

78 © ИЭА78 Quality of economic policy has sharply deteriorated. Real GDP growth rate adjusted for windfall profit received

79 © ИЭА79 FDI as a share of GDP fell sharply, especially in non-fuel sectors.

80 © ИЭА80 Capital flight increased more than five-fold. Non-finance enterprises and households’ investments in foreign assets,

81 © ИЭА81 Actual economic growth fell compare to potential ones. GDP growth rates: actual and potential

82 © ИЭА82 From the first glance Russian economic growth looks impressive (though not compare to China or India). What is more important, it is by half lower than in other oil-exporting countries during periods of high oil prices (periods no less than 6 years).

83 © ИЭА83 Darvensazimus. “It is a Russian Disease” (Hugo Chavez)

84 © ИЭА84 Russia is a member of G-8. Really?

85 © ИЭА85 GDP per capita by PPP at 2002 price in G8 countries, 2005.

86 © ИЭА86 Real GDP Growth Rates in G8 countries,

87 © ИЭА87 Real GDP growth rate in G8 countries adjusted for windfall profit received,

88 © ИЭА88 CPI in G8 countries,

89 © ИЭА89 Political Rights Index in G8 countries, 2005.

90 © ИЭА90 Civil Liberties Index in G8 countries, 2005.

91 © ИЭА91 Political Freedom Index in G8 countries, 2005.

92 © ИЭА92 Changes in Political Freedom Index in G8 countries in

93 © ИЭА93 Another G-8? Which one?

94 © ИЭА94 Another G8 by negative GDP Growth in * Adjusted to ToT

95 © ИЭА95 Another G8 in CIS by speed of degradation of political freedoms in

96 © ИЭА96 In 2005 Political Freedom Index in Russian fell lower than even in the OPEC countries

97 © ИЭА97 By changes in Political Freedom Index in Russia occupies 190th place among 193 countries of the World.

98 © ИЭА98 Another G8 by speed of degradation of political freedoms in the World in

99 RISE OF CORPORATIST STATE IN RUSSIA (The 2006 Long Telegram) A. Illarionov Cato Institute, March 7, 2006 © Institute of Economic Analysis


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