Behind the question of who runs and owns Russia lies another, larger question: what kind of capitalism has taken root there since the fall of the USSR? Just as the conventional wisdom draws a sharp distinction between the chaotic but broadly liberal political system of the 1990s and the creeping authoritarianism of the 2000s, there is a tendency to depict the Yeltsin era as representing the advance of the free market, and the Putin years as a retreat back into statism. For some observers, by the mid-2000s Russia was well on its way to becoming a ‘corporate state’ – dubbed Kremlin, Inc., since its main shareholders seemed to be largely concentrated within the medieval fortress in the capital’s heart; or else KGB, Inc., for those who felt the security services were running the show.{3} The Western financial press in particular saw the apparent extension of state control as an attempt to reverse the 1990s market reforms. By 2007 Anders Åslund, a former adviser to the Yeltsin government, was bemoaning the fact that Putin had ‘unleashed a great wave of renationalization’, adding that the president’s ‘chums from St Petersburg are taking over one big, well-run private company after another, turning them into less efficient state-owned firms’.{4} This was no longer the familiar liberal capitalism of the 1990s, but an ugly hybrid of the Soviet planned economy and something older – ‘state capitalism’, ‘crony capitalism’, ‘neo-feudal capitalism’.{5}
This view, though dominant, is misguided. It is based on a fundamental misreading of the relationship between the state and private capital in post-Soviet times. It assumes, in particular, that state and business are distinct realms, and that business has since 2000 been struggling to protect its legitimate terrain of activity from the clutches of an overbearing state. The standout example usually offered of this is the dismantling of Mikhail Khodorkovsky’s oil company, Yukos, and the passage of its fragments into state hands after 2003. But in fact the domains of state and business are closely intertwined, and have been since the fall of the USSR.
The best way to understand this is to look at the Russian elite – in particular, at its emergence at the end of the Soviet period, and its subsequent mutations. The story most often told is that the oligarchs of the 1990s piled up their fortunes through the rough-and-tumble of private initiative, whereas the magnates created under Putin derived theirs solely from proximity to the Kremlin. Yet the oligarchs of the Yeltsin era were always closely entangled with the state, and from the outset owed their fortunes to it. The cronyism attributed to the Putin years was central to the making of Russian capitalism long before Putin took the stage.
The history of post-Soviet capitalism should be understood not as a lurch away from free markets toward statism, but as a series of struggles for power and profit within a single elite that spanned the worlds of government and private business. The symbiotic entwinement of the two domains accounts for many of the Putin system’s most distinctive characteristics: the strength of its grip on power and profits, but also the corruption and illegality that have done so much to undermine its domestic and international legitimacy. Often ascribed to the rapaciousness and ruthless ambition of individuals, these phenomena are also enabled by the particular form capitalism has taken in Russia.
The symbiosis of state and business that defines Russian capitalism today has its origins in the late Soviet period, when the relationship between political and economic power began to change. For most of the USSR’s history, it was not material wealth that defined the ruling elite, but an individual’s position within the party–state apparatus. The nomenklatura, the core of the administrative elite, enjoyed privileges denied to the mass of the population: spacious apartments, holiday homes, even chauffeurs and servants, as well as access to special shops stocking scarce goods. Party membership, too, conferred advantages, especially in terms of career advancement or favours that could be called in through informal channels. Economic status was firmly subordinated to political power. But in the final Soviet years, the ground started to shift.
The first seeds of a new economic elite were planted in the late 1980s, as Gorbachev’s reforms started to open up possibilities for private enrichment. For a few entrepreneurs, arbitrage was one way to make lucrative gains in these years. The state monopoly on foreign trade was abolished in 1986, but internal price controls were not, so for a time, huge profits could be made by exploiting the difference between domestic and export prices. Boris Berezovsky, then a mathematician at the Institute of Control Sciences, did especially well out of such trade, buying computers and cars at subsidized rates and then reselling them. Others of the future oligarchs of the 1990s – Aleksandr Smolensky, Vladimir Gusinsky – began to pull in tidy sums from currency speculation, betting on fluctuations in the rouble exchange rate.
Another kind of financial alchemy provided the basis for Mikhail Khodorkovsky’s fortune. As deputy head of the Communist Youth League (Komsomol) at his university, he was well placed to take advantage of the tax breaks and subsidies the organization was granted by the government – along with an almost magical monetary power. The Soviet economy used two forms of money, ‘cash’ and ‘non-cash’ roubles; the former were mainly used to pay wages, while the latter were a planning and accounting device, used to allocate resources across the entire economy – hence there were generally far more of them. ‘Cash’ and ‘non-cash’ accounts were kept strictly separate – until the end of 1987, when the Komsomol was granted permission to convert non-cash budgetary allocations into actual currency. According to Olga Kryshtanovskaia, the leading Russian expert on the Soviet and post-Soviet elites, Khodorkovsky realized he had found a way of ‘making money out of thin air’, and quickly set up his own bank.{6}
At first, Russia’s most successful entrepreneurs were those who exploited the cracks that were appearing in the planned economy. But soon enough, state enterprise managers and apparatchiks were joining the fray. In May 1988, the Supreme Soviet passed the law ‘On Cooperation’, which allowed groups of individuals to establish self-financed, self-managing cooperatives. The cooperative sector rapidly mushroomed: by 1989 there were 193,000 of them, employing a workforce of 5 million and accounting for more than 4 per cent of GDP.{7} Billed as the spearhead of a new, competitive market economy, cooperatives were in practice mostly attached, barnacle-like, to the old system. The vast majority were closely connected with state-owned enterprises. Often they were simply a way to siphon money into a few select hands: the ‘members’ who received dividends tended to be the managers of an enterprise rather than its workforce. Cooperatives were also allowed to set up their own financial arms, producing a plethora of ‘pocket banks’ that could borrow from the central bank at low rates – and of course issue ‘loans’ to members.