Tag Archives: Boris Yeltsin

Boris Yeltsin was the Deng Xiaoping of Russia

Russia has lost her “Deng Xiaoping.” She lost her chance at a “Jiang Zemin.” Instead, she got Putin.

No Jiang Zemin for Russia
No Jiang Zemin for Russia

Boris Yeltsin was China’s Deng Xiaoping. Like Deng, he introduced dramatic free-market reforms that opened up investment with the west. Yeltsin, like Deng, initailly worked but eventually eclipsed the party-line communists of a previous era (Liu Shaoqi and Mikheil Gorbechev). Yeltsin, like Deng, cleverly managed political reforms, at some times leaning towards democracy (to put pressure on unpopular political opponents) and at other times leaning towards authoritarianism (to prevent radicals from changing course).

Unfortunately for Russia, Yeltsin proved as physically frail as Deng was physically dynamic. Yeltsin’s alcoholism (an inherited condition) and a back injury (an environmental one) compounded each other, and led to a shift in political power a generation early. In China, Deng realized that change was a generational affair, and so an entire generation of successors was bypassed (such as Hu Yaobang) until a new one that had politically matured under the reform period was ready to assume power (such as Jiang Zemin). In Russia, by contrast, Yeltsin was too physically weak to hold on, and Russia got Putin instead.

It has been clear for years that Putin is dismantling Yeltsin’s diplomatic legacy. The Moscow Times has a good piece on how Putin is dismantling Yeltsin’s economic legacy, too:

Russia’s nationalistic energy policy after 2003 has stalled the development of major new energy investments (apart from the Sakhalin projects, which date back to the Boris Yeltsin era). Gazprom and Rosneft have financed themselves with foreign debt rather than with equity capital, accounting for almost one-fifth of Russia’s corporate foreign debt of $490 billion. Gazprom’s aggressive pricing and delivery disruptions have scared away customers, reducing the demand for its gas.

Huge public funds are being diverted to state corporations, which either hoard the money or siphon it off. In their new book “Putin and Gazprom,” Boris Nemtsov and Vladimir Milov have offered a staggering and credible account of how Putin and his friends pilfered assets of $80 billion from Gazprom during his second term as president. Investors have taken notice, slashing Gazprom’s market capitalization from $350 billion last spring to $70 billion at its nadir. Although Russia is the 46th-richest country in the world in per capita terms, it is ranked 147 out of 180 countries on Transparency International’s corruption perception index for 2008. Only Equatorial Guinea is both richer and more corrupt than Russia.

Under Putin, transparency has systematically been reduced, and we no longer dare to trust the government’s public statements on its currency reserves. Officially, they have declined by $163 billion, or 28 percent, from $598 billion in early August to $435 billion in early December. But when Vneshekonombank was given $50 billion of state reserves to help Russian oligarchs with refinancing, nothing was deducted from the official reserves as it should have been. In an article on Gazeta.ru on Oct. 24, Alexei Mikhailov plausibly claimed that another $100 billion or $110 billion of “other reserves” had been transferred to the banking system and were nothing but rubles. To my knowledge, no official denial has been issued. If that were correct, the reserves have fallen by more than half to less than $300 billion, but the government sheds no light on this.

Russia’s largest corporations have turned out to be much more leveraged than anybody had thought. The government has made clear that it will refinance their foreign loans to secure “strategic” ownership. So far, $13 billion has been paid, out of which United Company RusAl has received $4.5 billion and Altima $2 billion, but such private pledges are huge. Vneshekonombank has $37 billion left to spend, but it has already asked for $30 billion more from the government, and more is likely. Thus, Russia can swiftly lose more than $100 billion of reserves.

Instead, Vladimir Putin
Instead, Vladimir Putin

Putin has persistently denied that anything is wrong with the country’s economic policy, while everything but its fiscal policy has been wrong. Domestic and foreign businesspeople realize that he does not talk about reality, which undermines confidence in the Russian market. Without free public debate, rational policy decisions are unlikely.

Incredibly, the government is repeating its mistake from 1998 to maintain a pegged exchange rate in the face of falling commodity prices. Until this summer, this policy provoked speculative capital inflows that boosted the money supply excessively and propelled inflation to 15 percent. Now, the pegged exchange rate, which is probably overvalued by up to 25 percent, promotes speculative capital outflows, quickly reducing the currency reserves. Devaluations in very small steps only convince the market that a major depreciation is inevitable. The coming combination of loose fiscal policy, negative real interest rates, current and capital account deficits and an overvalued ruble is unsustainable. The incentives for capital flight are overwhelming.

The global economic crisis is testing Putin’s system. He has undermined the ground under the house Yeltsin built, transforming the country into a house of cards ready to tumble. He has wasted the oil wealth rather than investing it in infrastructure, health care, education and law enforcement reform. Russia needs fundamental change; above all, it needs to uproot — or at the very least contain — the country’s pervasive corruption, which has gotten markedly worse under Putin. Nothing would serve the country better than the retirement of the failed prime minister, but that is evidently not in the cards.

When Boris Yeltsin gave way to Vladimir Putin, Russia lost her chance to continue opening up to the world. Instead, she faded into the gap of the global economy, and is once again a country that produces nothing war, death, and vodka.

The Best and the Brighest

The KGB was not the best and brightest of the Soviet Union. This must be understood.

The leaders of the Soviet Union were the best and the brightest.

Men like Boris Yeltin, Leonid Kuchma, Alexander Lukashenko, Eduard Shevardnadze, and Islam Karimov were the best and brightest. These men had reached ;positions of influence by surviving a complicated, multiethnic, and obscure political system. Surviving the Soviet required somehow fulfilling the desires of higher-ups while not making any serious enemies in a multiracial empire that had to accommodate populations from the great civilizations of the classic world (Catholic, Orthodox, Muslim, and so on). Thus it is no surprise that when the Soviet Union broke up, these same men found themselves in leadership positions in the post-Soviet states. The same scales that helped survival domestic USSR politics enabled success in international CIS politics. Soft power was the rule of the day, as elites attempted to consolidate power, either becoming the newly rich themselves or co-opting those who did so.

In the American system, the analogues to the men like Yeltsin are the CEOs and business entrepreneurs. Risk-takers and survivals, their skilled were perfectly matched to the late Imperial position they found themselves in. (Indeed, perhaps European “softness” on Communism was largely a function of recognizing the Russians as possessing the same sort of multiethnic empire than they had so recently possessed, or at least aspired to.)

Those who could not survive this systme, but still wanted respect and power, naturally gravitted into the Soviet Union’s “B-team.” Our “B-team” is composed of the political class — senators, presidents, and the like — who typically begin with a law degree and try to make their way in the aristocracy of poll. Russia’s “B-team” was the KGB, who likewise could not hack it in the big leagues but nonetheless could contribute in a relatively narrow if high-profile and important domain. Government is safer than business in the United States because your government will not dissolve, but your company might. In the Soviet Union, if you were on the path to the central committee mistakes you make today might haunt you in twenty years time: the KGB afforded the anonymity necessary for tolerating more mistakes.

Russia’s current President, Vladimir Putin, is a KGB. It shows.

Consider this post by Tom from Febuary 2006:

Moscow will say their recent behavior on pricing energy exports is just normal “market principles,” and there’s some truth to that, but there’s also plenty of truth to the charge that Putin seems to think that selling energy equates to pol-mil power, when it doesn’t.

There is a natural limit to this, and that limit is Russia’s continuing and large need for outside capital to upgrade its infrastructure throughout the economy–not just in the energy sphere. Right now, Gazprom’s death grip on the gas market is restricting the ability of independent Russian producers to attract foreign money for this most capital-intensive industry. It’s an old issue: control the pie too much and it won’t grow.

So do I expect Putin or his successors to give up control over the energy sector out of their love for democracy? No. I expect them to loosen their grip out of greed.

This is logically correct. Merely exporting energy just gives you the blip that the Arab states enjoyed in the 1970s. Turning that into sustainable power requires connectivity to the west. But it requires the long-term thinking of the men like Yeltsin, not the operatives like Putin.

Putin’s solution. Squeeze Belarus. Attack the Southern Energy Corridor in Georgia. Cause havoc, temporarily raising the marginal utility of energy sent through your own pipes.

Putin is the high school student who, desiring more money, quits school to work more hours at McDonalds.

Operationally brilliant.
Strategically idiotic.