Institute of Modern Russia

Anders Aslund, a senior fellow at the Atlantic Council’s Eurasia Center, is a well-known expert in Russian economic policy who advised the Russian reform government in the early 1990s during Boris Yeltsin’s presidency. He described this early experience in his 1995 book How Russia Became a Market Economy.

In his latest study, Russia’s Crony Capitalism, Aslund traces the country’s economic transformation under Vladimir Putin and argues that its authoritarian turn “was not ordained by history, culture, or circumstance—it is Putin’s deliberate choice.” He looks into the political, economic, and social conditions that shaped Russia in the 1990s following the collapse of the Soviet Union, and provides a timeline of the Putin regime’s evolution—from the establishment of the “vertical of power” through the emergence of state capitalism to the rise of cronies.

 

The Putin System

While the book is an attempt at a broad overview of the almost two-decade history of the Putin system, which means that large portions of its factual information have already been published elsewhere (see, for example, Karen Dawisha’s 2014 book Putin’s Kleptocracy), Aslund’s expert take is valuable as it illuminates the economic dimension of the regime’s evolution. Another recent study of the Russian economy under Putin is Putinomics (2018) by Chris Miller, assistant professor at Tufts University’s Fletcher School of Law and Diplomacy. But whereas Miller provides an excellent scholarly analysis and argues that the Russian president’s economic strategy has been quite successful, Aslund offers his views as a practitioner and active participant in shaping Russia’s early economic policy and points to the side effects of such “success.” Being a long-term Russia observer, Aslund has accumulated a vast knowledge of who is who in the Putin system and reportedly advised the U.S. Treasury on the list of sanctioned Russian individuals.

Aslund envisions the Putin system as relying upon “four circles of power”: Putin’s friends from the KGB and St. Petersburg who now hold key positions in the “vertical of power”; his close associates who run major state enterprises; his “cronies” from St. Petersburg who built lucrative private businesses; and Anglo-American offshores that safeguard large portions of Putin’s and his cronies’ wealth taken out of Russia. 

This system is defined by Aslund as “crony capitalism,” but unfortunately the author doesn’t elaborate on the term, which exists in continuum and has been previously used to describe various forms of connections between the business and political classes in different countries. Conceptual fuzziness of terminology persists throughout the book, as Aslund uses other expressions too—“patrimonialism,” “new tsarist aristocratic system,” “hereditary plutocracy,” and “neofeudal, patrimonial, and plutocratic state.”

In an email conversation, Mr Aslund responded to my question as to whyhis preferred term to describe the Putin system is “authoritarian kleptocracy” when many others also work. “The essence of the Putin system is authoritarianism and insecure property rights, which may be described as semi-state, crony, captive, or [M]afia,” he explained. 

There is a certain hierarchy to the system, according to Aslund: “The most important circle… is the state, especially the FSB (the real power) and the judiciary (which permits everything). The second circle [state corporations] delivers the money to the third circle of cronies and their companies. Yet the system is not complete without the fourth circle, the Anglo-American offshore, where the fortunes are held that are supposed to reassure the Putin circle of its power at home.” 

However, it seems that the fourth component of Putin’s power, the Anglo-American offshore, is a conceptual misfit in the system as described by Aslund. While the first three circles constitute and serve the president’s “vertical of power,” the offshores clearly exist outside his system. Although a crucial factor in Putin’s accumulating and preserving wealth, the offshores are rather a channel connecting Russia and the West in the globalized economy. But including them as a “fourth circle of power” in the Putin system might suggest that the Russian president has a say in the offshores’ operations, which would grossly exaggerate his reach.

 

Law vs. Ponyatia 

How does this system work? It has been said before—and Aslund alludes to this notion in his book—that Russia is ruled by ponyatia, a Mafia term, which the author loosely translates as “everyone knows what to do.” I would argue that the meaning is less vague: it is a term describing a specific code of behavior (“unwritten rules”) inherent to criminal environment. This means that while Russia has a constitution and a legal system that ostensibly applies to all Russians, there is a small group of people holding top positions (the “commanding heights”) in the government and private business who put themselves above the law. A quote by the Peruvian president, Óscar R. Benavides, captures the essence of this conundrum: “For my friends everything, for my enemies the law.” 

Another question that often arises in analyses of Putin’s leadership is how he has managed to build and sustain this system. In short, Aslund’s answer is that it was a combination of lucky circumstances and a number of calculated, strategic moves that took advantage of public grievances in the midst of various crises. 

One of the lucky circumstances that Putin (undeservingly) takes credit for is the decade of high economic growth that came as a result of the reforms implemented in the wake of the 1998 financial crash. In 1999, Putin “arrived at a laid table” and became one of the key beneficiaries of the reforms that he personally had nothing to do with. Surging global oil prices gave the economy an additional boost that Putin, again, took advantage of.

As for strategic moves aimed at consolidating power, Aslund writes that Putin initiated administrative and judiciary reforms, appointed trusted individuals to the key government positions, took control over major media outlets, and reined in the parliament and political opposition. The 2003 Yukos affair and imprisonment of Mikhail Khodorkovsky marked the turning point. From that moment on, Putin began building his system of crony capitalism.

Initially, the Kremlin decided to build state capitalism through “national champions,” but the way it was pursued—ignoring competition, investment, technological development, and entrepreneurship—undermined the idea. The newly established state corporations (Rostec, Vnesheconombank, and others) were essentially used to concentrate Putin’s political and economic power and to enrich his friends.Similarly, two key Russian companies—Gazprom (gas) and Rosneft (oil)—were turned into “cash cows” for the Putin system. Aslund quotes the findings of a report on corruption in Gazprom prepared by opposition politicians Boris Nemtsov and Vladimir Milov, who estimate the total value stripped from the gas monopoly in 2004-2007 at $60 billion. The author names Gennady Timchenko, Arkady Rotenberg, and Yuri Kovalchuk as Putin’s unholy trinity who benefitted most from the asset-stripping and ascended to the billionaire ranks in just a few years.

  

Offshores

As mentioned above, the Anglo-American offshore is the link in the Putin system most pertinent to the Western audience. Aslund estimates Putin’s personal wealth at $100-160 billion, and as recent investigations have shown, at least parts of it are safely parked in offshores and held, if not directly by the president, then by his close associates, such as cellist Sergei Roldugin or childhood friend Petr Kolbin.

Why offshores? The answer is clear: money is not safe in Russia. Aslund reminds the reader that property rights in the country are weak, the banking system is unreliable, the government keeps raiding successful companies, and business life in general is tough (a couple of hundred thousand businesspeople find themselves in pretrial detention daily). As a result, all wealthy Russians transfer their liquid assets abroad. Aslund gives various estimates of capital outflow from Russia during the period 1992-2017, ranging between $780 billion (IMF) and $1,118 billion (Global Financial Security).

Most money from Russia flows through Cyprus (due to a favorable double taxation agreement), often proceeding to the British Virgin Islands and the Cayman Islands through a series of other offshores. While in Russia money is unsafe, these former or current British territories enjoy rule of law and protect anonymity. But as Aslund notes, in the end, the money gravitates to the United States (the tax haven states, such as Delaware, Nevada, Wyoming, and South Dakota) or the United Kingdom. The most popular investment for this money is real estate. According to Aslund, every year more than $100 billion of foreign funds flow into U.S. real estate alone—more than half of it in cash. 

 

What’s next?

The entire arc of the book on Putin’s cronyism comes down to one question: why should the West care about Putin’s cronyism in Russia? While for some observers the question might remain rhetorical, Aslund gives a few good answers.

First, while Russia is a classic declining power, various dimensions of this power are diminishing at different speeds (e.g. the demographic situation is bad, the economy is stagnating, but its military power remains potent), which causes a disbalance in its assets—a risky trend in the long-term. Second, having exhausted the sources of his original legitimacy (economic growth in return for political apathy), Putin is currently looking for a new one and finds it primarily in opposing a foreign enemy (mostly, the United States). Third, Aslund believes that, while the Putin regime is rational, well-informed, and has lots of sustenance, its base is shrinking, which means that Putin might take greater risks than he should—for instance, start another war. Overall, these issues signal the West that in international relations Putin’s Russia will act rather as a spoiler than a constructive partner.

Aslund’s recommendations for the West, however, seem slightly generic—rhetorical calls for solidarity, to maintain credible military defenses, and to not engage in a war with Russia. Similar calls have been made before by numerous experts, politicians, and human rights activists all over the world, but to no avail. Although Western leaders have repeatedly demanded that Russia end its aggression in Ukraine, things haven’t budged there either. Additionally, Aslund voices support for the sanctions policy, noting that personal sanctions against Putin’s cronies appear most effective. Still, despite most of these cronies being designated, changes in the Kremlin’s policies have yet to be seen. 

It seems that exposure of Putin’s wealth, if it is indeed kept in U.S. and U.K. tax havens, could strike a painful blow to the Putin system. Aslund concludes by calling for more transparency and accountability in the West, including prohibition of anonymous ownership for the sake of national security in the U.K. and U.S. (most EU countries have already done that). On balance, despite conceptual fuzziness and a certain repetitiveness, the book serves its purpose by drawing a comprehensive picture of the Putin system’s economic basis and tying its sustainability to Western offshores. It also gives a clear incentive to the West to try and clean up its act to counter Putin’s kleptocracy and mitigate its risks in the long term.

While it is unclear whether London and Washington will follow these recommendations, Alsund doesn’t leave the reader on a gloomy note. In fact, he reserves some room for optimism, positing that Putin’s crony capitalism is unlikely to stand the challenges of time. Russia, in his opinion, is “too wealthy, too well educated, and too open to be so authoritarian.”