Half a century earlier, Trotsky had warned that turning directors into owners would be a mistake: the bureaucrats would be happy but no progress would come out of it.7 It so happened that Trotsky was correct and Summers wrong. Delayed salary payments, redundancies and murders dominated the news. In 2004, Paul Khlebnikov, a Russian-American journalist, was killed in Moscow while reporting on corruption for Forbes; he was one of the first victims of Russia's war against muckraking journalists. It also turned out that Andrei Shleifer had been investing in Russian securities in violation of conflict-of-interest rules. The US government sued Harvard University. The case was settled in 2005; both the University and Shleifer paid out millions of dollars in fines - it was the biggest settlement in Harvard's history.8 Summers became the President of Harvard but resigned following another scandal in 2006. Known for his math-heavy publications, Shleifer remained at Harvard.
By privatizing agricultural land, the Kremlin transformed the old Soviet collective farms into agricultural corporations. Rural workers were retained on salaries; despite privatization they did not own their land or tools. Still, the production of grain and other staples increased significantly, and the country became a major exporter of food. Big agricultural holdings, some of them as large as European states, produced staple crops such as wheat, sunflower seeds and sugar beets. Oligarchs bought yachts and villas with the profits, but agriculture's share of GDP was decreasing every year. Export of grain was growing, but oil and gas accounted for more than 90 percent of the annual profits of Russian businesses. The new oligarchs hedged their assets by buying land. One example is Vladimir Evtushenkov, who began by purchasing a majority stake in the privatized Moscow Telephone Network. In 2009, he bought oil and gas fields in Bashkiria and an agricultural holding near Moscow. In 2014, he was charged with money laundering - the most powerful oilman in Russia, Igor Sechin, wanted his assets. Three years later, Putin passed the Bashkirian oil fields to Sechin, but left Evtushenkov the non-oil parts of his estate. In 2018, Dmitry Patrushev, a son of the director of Russia's security service (FSB), became the minister of agriculture. The young Patrushev was a member of the board of Gazprom and had a PhD in economics. It was proven that he had massively plagiarized his dissertation.
Members of the Soviet collective farms had used (but did not own) micro-slots of land, mostly vegetable gardens. After 1991, millions of peasants and dacha owners privatized their small households and gardens. In 1999, a quarter of the Russian population owned a subsidiary plot and was cultivating it. They worked 7 percent of the country's arable land but produced more than 40 percent of its agricultural output. Amazingly, they provided 92 percent of Russia's potato harvest, three quarters of its vegetables, almost all of its fruit, and half of its milk and meat.9 In 2009, the numbers were similar.10 This was an intensive but premodern agribusiness: whole families worked with shovels on miniscule plots, while elderly women sat on the side of the road, selling herbs by the gram or potatoes by the kilo. But these people were free: the only levy they paid was property tax; they chose their seeds, tools and methods; they owned their land and could sell it whenever they so desired. Russian agriculture had the same two-tier structure as other sectors: one part of the system, populous but mostly poor, fed the ordinary folk with perishable produce that could not be exported; another part, small but wealthy, produced the staples at volume, selling them abroad for convertible cash.
Unlike the Soviet leaders, whose Marxist training and aversion to the West spurred them to reduce class differences, the leaders of the new Russia were instructed by top Harvard economists. They created the new rich whose yachts and villas grew bigger every year. When the Harvard Boys left, it turned out that the new Russian rich were just the same Soviet bureaucrats - lazy administrators on a flat learning curve. Competition and growth did emerge in those sectors of the economy that were close to final consumption, such as retail or restaurants. But while extractive industries and final services were booming, everything in the middle, the rest of the industrial economy, was collapsing. If there was growth, it followed the price of oil. You could be a good manager, a bad manager or an absentee manager, but this kind of growth would always be with you. Inequality grew frenetically. Economists from Harvard and Moscow alike believed that economic growth would be the source of all good in Russia, that accumulated wealth would triclde down to the poor, that the rising tide would lift all boats. In fact, it lifted only the yachts of the rich. The boats of the poor leaked, and they drowned in the tide.
Enter corruption
Rejecting Soviet institutions but preserving their cadres, Putinism developed a new, profoundly anti-socialist ability to appropriate wealth. But where did this wealth come from if Russia's institutions and businesses were generally so unproductive? The answer was old and Soviet: from trade in natural resources. Extraction, not production, was Putin's best hope and worst-kept secret. An enormous security apparatus and a corrupt bureaucracy recycled the wealth produced from holes in the earth rather than by the work of the people.
In the early 1990s, the Kremlin decided that while oil would be fully privatized, natural gas would remain in the hands of the state. Created in 1989, Gazprom was given control of Russia's gas sources, transportation infrastructure and trade. The former Soviet minister Viktor Chernomyrdin - a popular figure who combined grey-headed refinement with folkish sayings - was appointed chairman of Gazprom, before going on to become Russia's prime minister several years later. While the Russian government distributed oil fields to new owners in the name of competition, Chernomyrdin made sure that Gazprom remained the sole proprietor of Russian gas. In his words, this corporation, the largest in the country, was "a natural monopoly" and "the spine of Russia."11 The reason was simple. To use an agricultural metaphor: while oil was like staple crops, natural gas was like potatoes in being equally difficult to store. Impossible to transport by sea without expensive liquefaction, gas remained an inland commodity.12 Moved via a fixed network of pipelines or reserved in underground caverns, gas was sold on the basis of long-term, guaranteed contracts. Free markets preferred oil, but natural gas was ideal for a planned economy.
In 2003, the FSB arrested Mikhail Khodorkovsky, head of the Yukos oil company and the richest man in Russia. A product of the ill-fated privatization campaign, Yukos was not much different from other Russian oil companies in its exploitation of Soviet derricks, pipes and specialists. Drilling in the key fields of Western Siberia, it produced one-fifth of Russia's oil. Had a prospective merger with its rival Sibneft gone ahead, it would have become the fourth largest private company in the world. Unlike his rivals, Khodorkovsky was gradually Americanizing his company. Yukos had five Americans on its board and its chief financial officer was also American. In 2001, Khodorkovsky established the Open Russia Foundation, modelled after George Soros's Open Society. He also tried to reform Russian higher education, donating money to the Russian State University for Humanities in 2003 and appointing his deputy, Leonid Nevzlin, as its rector. That same year, at a televised meeting in the Kremlin, Khodorkovsky informed Putin that corruption was costing Russia thirty billion dollars a year, or 10-12 percent of GDP. He also spoke critically about Russian higher education: it was wrong to emphasize law and order over science and scholarship, he said. For Putin, both criticisms were shocking and their combination unprecedented. Khodorkovsky's arrest was followed by several trials and ten years in prison. From a business perspective, the timing was perfect for renationalizing his assets: the price of a barrel was rising steadily and would continue to do so for a number of years. The shining towers of the Kremlin were connected to the oily derricks of Western Siberia by elective affinities that passed through the forgotten towers of the Gulag.