Transcript RISE AND FALL OF FREEDOM IN RUSSIA

RISE OF CORPORATIST STATE
IN RUSSIA
(The 2006 Long Telegram)
A. Illarionov
Cato Institute, March 7, 2006
© Institute of Economic Analysis
www.iea.ru
“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.
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Historical analogies are usually subjective,
never perfect,
but provide valuable historical perspective
to look upon today’s situation
and possible future developments.
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The 2006 Long Telegram:
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Periods in recent Russian history.
Russian authorities’ Economic policy.
Russian authorities’ Domestic policy.
Russian authorities’ Foreign Policy.
What made Russian economic boom?
Russia’s Corporatist State.
Russia is a member of G8. Which G8?
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Periods in recent (2000-2006) 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.
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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?
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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?
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Overall diagnosis for Russian
authorities’ current policies is
Darvensazimus disease.
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Darvensazimus disease
is a very rare, complex and dangerous illness.
It consists of at least 5 diseases:
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“Dutch” Disease.
“Argentinean” Disease.
“Venezuelan” Disease.
“Saudi” Disease.
“Zimbabwean” Disease.
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Combination of 3 diseases –
“Dutch Disease”,
“Argentinean Disease”,
and “Venezuelan Disease”
can be used for description
of the current economic policy.
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“Dutch Disease” –
sustaining high rate of inflation and
national currency’s real appreciation
leading to “undesirable” structural changes
and budget profligacy.
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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
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… to sustaining high money supply growth rate...
Annual increase in M2, %
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… to sustaining high inflation rate,..
Annual increase in CPI, %
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… to fast real appreciation of Ruble exchange rate,..
Russian Ruble real effective exchange rate (July 1998 = 100%)
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… to sharp increase of the energy sector role
in the Russian economy,..
Value of energy exports as % of GDP
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… to a relative decline of non-oil sectors’ share
in industrial output.
Non-oil output as % of industrial output
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“Argentinean Disease” –
use of “industrial policy”
to “correct” “undesirable” structural changes
by redistributing value added from energy sector
into other sectors, primarily machine building
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Beginning of industrial policy in Russia, 2002-2004:
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Increase in taxation of oil companies
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Increase in government expenditure, including
government investments
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Setting up different government-regulated transport
and energy tariffs for different sectors, industries
and companies
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Further differentiation of import duties
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Introduction of import quotas
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The fastest growing item was government’s
expenditure on military and police…
National defense and police expenditure as a share of GDP
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… as well as on administration.
National expenditure on administration as a share of GDP
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As a result, the number of bureaucrats
and their share in total employment
have dramatically expanded.
Public administration as a share of total employment
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The rise in government expenditures has also led
to increase in non-market employment…
Employment in non-market sector as % of total
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… therefore reducing employment in market sector.
Employment in market sector as % of total
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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, %
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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
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Industrial policy led to decline in growth rates
in other sectors.
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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%!
New stage of industrial policy –
“development policy” (MERT), 2005-2006:
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Differentiation of taxation for different companies.
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Destruction of Oil Stabilization Fund.
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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.
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Creation of Special Economic Zones.
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Granting taxation privileges to different municipalities.
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Adoption of programs of Development for different industrial
sectors.
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Introduction of limitation to foreign ownership in 39 “strategic”
companies and sectors.
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Adoption of Innovation and Technology Development programs.
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Preparation of the Program for Government Support of Design.
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“Actually, we have many more ideas...”
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“Venezuelan Disease” –
nationalization and quasi-nationalization of private
assets in oil, gas, transportation, construction,
automobile industry, aviation.
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Accumulation of huge financial resources
by oil companies made them very attractive
for government intervention.
Oil companies revenues
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Quasi-nationalization began from the most successful
oil companies.
YUKOS’ oil output has almost doubled within 5 years, 1999–2004.
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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.
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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
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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.
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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
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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 2005.
Oil Production Annual Growth Rates, January 1996 – January 2006
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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.
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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.
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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)
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“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.
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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.
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Deterioration in Electoral Process Index in Russia.
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Deterioration in Judicial Framework & Independence
Index in Russia.
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Deterioration in Civil Society Index in Russia.
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Deterioration in Independent Media Index in Russia.
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Deterioration in Governance Index in Russia.
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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.
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“[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.
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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.
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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.
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“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.
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Zimbabwe disease:
Political Freedom in Zimbabwe and Russia, 1991−2005
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By dynamics of Political Freedom Index in 1991−2005
Russia has demonstrated one of the worst performances
in the former USSR
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By changes in Political Freedom Index in 2005
Russia and Ukraine occupy polar positions.
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Foreign policy of the current Russian authorities
can best be described as
Saudi Disease –
use of energy weaponry
in international relations.
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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.
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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.
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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”).
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“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.
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What is to expect?
Some historical analogies/warnings.
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Dutch Disease:
GDP per capita in the Netherlands as % of the USA,
1975–1988
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Argentinean Disease:
GDP per capita in Argentina as % of the USA, 1958–2005
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Venezuelan Disease:
GDP per capita in Venezuela as % of the USA, 1957–2005
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Zimbabwean Disease:
GDP per capita in Zimbabwe as % of the USA, 1982–2005
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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!
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Since 1998 GDP in dollar terms grew almost 5-fold.
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Money income of population grew 4,5 times.
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Volume of consumption market in dollar terms
grew 4-fold.
Retail turnover, US$ bn
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Foreign exchange reserves including Stabilization fund
grew 23-fold.
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Since December 1999 Russian stock market grew 10-fold.
RTS Index, December 1999 – February 2006
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But it happened almost exclusively
due to terms of trade change
rather due to contribution of policies
of the Russian authorities.
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GDP in dollar terms grew almost 5-fold,
but in real terms – by only 58%.
Cumulative GDP increase (1998=100%)
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Private consumption in dollar terms grew 4,1 times,
but in real terms – only by 63%.
Cumulative private consumption increase (1998=100%)
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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%)
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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
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It means that domestic policies contribute
negatively into economic performance.
Mainstream economic policy of 2000-2003
has being transformed into rent-seeking policy.
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Quality of economic policy has sharply deteriorated.
Real GDP growth rate adjusted for windfall profit received
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FDI as a share of GDP fell sharply,
especially in non-fuel sectors.
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Capital flight increased more than five-fold.
Non-finance enterprises and households’ investments
in foreign assets, 1992-2005
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Actual economic growth fell compare to potential ones.
GDP growth rates: actual and potential
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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).
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Darvensazimus.
“It is a Russian Disease”
(Hugo Chavez)
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Russia is a member of G-8.
Really?
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GDP per capita by PPP at 2002 price in G8 countries,
2005.
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Real GDP Growth Rates in G8 countries, 2000-2004.
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Real GDP growth rate in G8 countries adjusted
for windfall profit received, 2000-2004.
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CPI in G8 countries, 2001-2005.
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Political Rights Index in G8 countries, 2005.
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Civil Liberties Index in G8 countries, 2005.
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Political Freedom Index in G8 countries, 2005.
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Changes in Political Freedom Index in G8 countries
in 1991-2005.
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Another G-8?
Which one?
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Another G8 by negative GDP Growth in 2000-2004
* Adjusted to ToT
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Another G8 in CIS by speed of degradation
of political freedoms in 1991-2005.
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In 2005 Political Freedom Index in Russian
fell lower than even in the OPEC countries
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By changes in Political Freedom Index in 1991-2005
Russia occupies 190th place
among 193 countries of the World.
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Another G8 by speed of degradation of political
freedoms in the World in 1991-2005.
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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