Chancellor Konrad Adenauer, recognized as one of the greatest German leaders of all time, came into conflict with industrialists, but also created a new German economy. Will Putin also be able to move from confrontation to cooperation with Russian business?

Andrei Shmarov

Vladimir Putin began his reelection campaign amidst an acute conflict between government authorities and big business, epitomized by the Yukos affair, and clearly emerged victorious. What will the president do next? Will he limit himself to March 2004 and explaining his attitude toward fallen oligarch Mikhail Khodorkovsky, head of one of Russia’s biggest oil companies, Yukos? Or will he aim for systematic transformation of the Russian economy? Who are the main players on the economic scene, and how will it evolve in the near future? What kind of bizarre capitalism with a Russian twist are we creating? Who, in the end, will double the GDP, and in what kind of country?

These very questions were discussed at the round table organized by the Expert Analytic Center.

Participants included Andrei Belousov, director of the Russian Academy of Science’s Center for Macroeconomic Analysis and Short-Term Forecasting; Andrei Bugrov, deputy CEO of Interros Holding; Mikhail Moshiashvili, head of the United Financial Group board of directors; Alexander Muzykantsky, a minister in the Moscow city administration; Alexei Rodzyanko, CEO of Deutsche Bank Moscow; Boris Titov, CEO of Interkhimprom; Igor Yurgens, vice president of the Russian Union of Manufacturers and Entrepreneurs; Yevgeny Yuryev, president of the Aton Investment Group; and Yevgeny Yasin, Academic Director at the Higher School of Economics. The discussion was led by Alexander Shokhin, head of the Oversight Commission at Renaissance Capital Investment Group.

The New Entrepreneurial Milieu and “Turkish” State Capitalism

According to Belousov, a crucial moment has arrived for the Russian economy. In the five years since the default, a new group of nearly 1,000 second-tier companies have come to the fore, joining the large natural resources exporters. These medium-sized companies focus on the domestic market, operate competitively and show high growth rates. However, now this energetic business milieu is encountering serious resource limitations. In contrast to large corporations, they do not have the ability to mobilize investments, they lack the capacity to innovate, and they face a dearth of human resources. Another threat to this group is the penetration into Russian economic space of Western corporations that bring new conditions for competition. If Russian companies, due to efficiency, have not been able to withstand usual price competition, innovative competition will simply do them in. 
As Belousov himself put it, “the issue is extremely critical: Will the authorities be able to offer something to this group of businesses? If not, we will see a rapid segmentation of this group. Some of them will be able to enter the world capital market and integrate with Western transnational companies. The others, ideologically bolstered by leftist ideas, will begin to make more insistent demands on the government to protect the domestic market. All in all, government passivity will mean the initiative to modernize the Russian economy has failed. An active government economic policy would create the conditions for jumpstarting development of mid-sized businesses, which are literally raring to grow. They are accustomed to growing, they want to grow, their markets are growing, but they have reached the limit of their possible resources. This means that the state needs to create an infrastructure friendly to these businesses. We need a set of concrete - in the American sense - government initiatives capable of addressing the problem of resource access for growing, mid-market entrepreneurs.”
However, Yevgeny Yasin believes that this group also has another option for possible cooperation with the authorities, namely subordination, loyalty and unquestioning compliance with government fees and taxes. “The so-called oligarchs were the first stage in the development of Russian capitalism. Russia had natural resources capable of competing on the world market, and those who took over natural resource production got control over the economy. Now the second stage is unfolding as the government and bureaucracy try to regain their former position. The future, third state is competitive market capitalism. To be more precise, ours will be a mixed economy, where free competition coexists with large corporations who will divide up the market. Without large corporations, we will not have a serious economy. We have to understand that. The danger lies in the fact that the second stage could hamper development of the third. Then we will end up with the 'Turkish' model, when the entire economy is privately owned but dictated from above. Something like, 'let them work as long as they bring us our money."
Alexander Shokhin noted that “it seems that this is some kind of new, informal state capitalism. Corporations are private, and the state is no longer involved in their capital, but you had better stay loyal, be it politically or economically. If not, it won’t be the controlling stake that comes into play, but the Basmanny district court [the Moscow court handling legal proceedings related to the Yukos affair] or other similar methods.”

Economic and Political Conflict

Igor Yurgens thinks there is no economic basis to the conflict between big business and the authorities, and that the problem is purely one of politics and corruption: “We have begun to move actively away from oligarch capitalism toward an ideology of competitive market capitalism: business ethics, civilized financial policy, social responsibility, and the battle against corruption. The public has reacted reasonably well to this. When the Yukos affair began, Russia hadn’t seen a single strike in a year, and real incomes had grown by 15 percent for the third year in a row. But the [December State Duma] election campaigns required that the situation with Russia’s biggest companies escalate drastically and artificially in order to put the problem of government corruption on the back burner.”
Yurgens’ predictions for the future are fairly grim: “Here’s what will happen: A single-center model with a single party reinforced by a bureaucracy that, by the way, Putin resolved to fight, will destroy Russia. The need for administrative reform has become more acute, but it is now opposed once again by a huge party whose members will demand government posts. By 2006, we will all still slide by, because the government that could use Putin (with his permission of course) to push this through the Duma will not have formed yet. But there is no opposition, and the business community has been chased into its corner, meaning there is no stimulus whatsoever. Then, in 2006, the security and law enforcement corporation within the government will dare to say, `The president can’t cope. That’s why we need someone tougher.’ And they’ll find their man.”
Yevgeny Yuryev began his analysis with a strong, if somewhat abstract, assumption: Large, multi-industry holding corporations similar to South Korean chaebols are very harmful to Russia. Yuryev then suggested a bold paradox: “Let’s assume that Putin and his security clique guys have an extremely liberal outlook and the best of intentions regarding free-market capitalism. Is there any other way for them to turn the country away from the chaebols?” No, Yuryev said, answering his own question, as “big business, having acquired its assets as the result of privatization, was far more economically powerful than the authorities. The political resource of the parliament was also up for grabs. If it hadn’t been for the Yukos affair, the Duma elections would have turned out very differently. Meaning the only resource left for the authorities was their administrative power. And this power worked for them. Now they have their political power back, and when taxes are reformed in the natural resource sector, they will also have economic equality. The situation has stabilized.”
Alexander Muzykantsky also dwelt on politics, though not as pessimistically as Yugrens and not as cheerfully as Yuryev. His main assertion was that authoritarianism has been established but that we still have a chance. “Russian society is evolving based on private property and an authoritarian regime. According to Zbigniew Brzezinski, an authoritarian regime differs from a totalitarian one in that the former can be reformed and can evolve, while the latter cannot. The central danger of an authoritarian regime is that it can slide into totalitarianism. Yet on the other hand, there’s no one to blame, as everything is concentrated in a few hands. And by all means, please go ahead and work and show us the results. The whole issue is whether there will be anyone in four years to ask for the results. If there will be, then there’s hope that Russia will evolve in a civilized direction. The most important result of what has happened is that we finally understood that you can’t run a democracy by fiat. You need experience. Democracy couldn’t just appear out of nowhere in February 1917 or in 1991. For exactly the same reason, it isn’t possible to go and draw up a modern market economy without legislation and without the habits of hard work and savings that develop over generations. We need to admit that we have a long, long road ahead of us.”
Boris Titov offered a similar perspective, though he saw the threat of totalitarianism as insignificant “because the United Russia party represents today the most right-wing part of the State Duma, and it’s the majority. But we need to start the painstaking, mundane task of building a new capitalist market society. Sure, we thought we were already on the right track, but it turned out that we weren’t, and we need to start over again.”
Mikhail Moshiashvili took a different position, deeply rooted in economics. He turned his attention to two theories. First of all, it is not obvious that the growth in the capitalization of Russia’s largest companies is exclusively the result of the managerial efforts of their oligarch owners. Some believe that, to a significant extent, it is the achievement of previous Soviet generations. The second theory is that all the problems started the moment Western strategic investors arrived in Russia and the moment Russian corporations seemed poised to integrate into the world economy in the near future. “When subject of liquidity came up, everything escalated. Some companies succeeded in concluding profitable deals with major foreign companies (such as the merger of one of Russia’s largest oil company, TNK, and BP). Since that moment a new trend has emerged. It is absolutely clear today that the liquidity of assets acquired in the process of privatization could only come from the West. Sure, we get cheap capital from strategic investors, but along with it we also get growth rates typical for Western economies. Is globalization an undeniably good thing for Russia? Not necessarily. The majority of entrepreneurs that I know of are ready and willing to pay more for capital. They are more concerned with growth rates. What’s the essence of the choice between the price of capital and growth rates? It’s simple. The cost of capital is only of concern to twenty or thirty companies at most. This is why society is objectively more interested in higher growth rates, even if that means capital costs more, rather than the other way around.”
What does Moshiashvili propose? “Yes, as a tool for attracting capital, we need Western investors. But as a tool for managing manufacturing, not necessarily. That is why the sale of large stakes to strategic foreign investors should have to be approved either by government order or parliamentary decision. There can’t be any limitations on the liquidity of assets that belong to you, because that would violate the principles of private property. However, if the government wants to deter the entrepreneur who got his assets at extremely low prices, to put it mildly, it should say, 'Don’t sell. Manage them until you can demand a fair price for your assets as the result of your labors.' Thus, the alternatives are not a competitive market or state capitalism, but rather whether Russia will attract cheap capital and grow three or four percent a year, or rely on our own sources for investment, including those not physically in Russia, and grow by something closer to 10 percent. To put it even more simply, either the headquarters of the largest companies will be here in Russia and decisions will be made here, even if 75 percent of their shares are in the portfolios of Western investors. Or Russian corporations will become subsidiaries of global companies, and their strategies and growth rates will be defined somewhere else.”
Alexei Rodzyanko took a similar position, noting that the issue of liquidity is particularly crucial when discussing corporations with assets acquired in the process of privatization. No one is questioning whether it is possible to sell an investment bank or a company like Wimm-Bill-Dann, built practically from scratch by its owners. If the government received taxes from each deal (this is currently problematic, as most property has been transferred to off-shore jurisdictions), the problem would be solved.

What About the Government?

Alexander Shokhin believes that due to the government’s lack of clear regulations in its relationship with business, a bizarre kind of transparency is emerging in Russia. In order not to wind up in jail, business is inclined to go to officials and ask, “So guys, what exactly do you want?” And they reply, “We want this much in this form.”
Andrei Bugrov commented: “This isn’t transparency, but blatant government racketeering. The most disturbing thing of all is that while the corporate sector is striving toward more openness, accountability and a change to international standards, state agencies have continued to operate according to the principle of the black box, just like they did in the past. They need similar reforms, but that’s exactly what isn’t happening. The government is a forbidden zone ruled by the principle of `let them hate us, as long as they fear us.”
What should business do? Shokhin said that the most important thing, no matter how paradoxical it may sound, is not to get stuck at the current phase of oligarch capitalism. “Great, there are limits on liquidity. If big businessmen don’t push these limits and agree to strategic deals with those in charge, no one will bother them. If not, they will be replaced. I think the main danger is that this twisted Russian state capitalism will reproduce itself.”
Regarding the current conflict with big business, Shokhin believes that we urgently need to come up with rules of the game. “For example, take businesses created by the government and by owners that were practically appointed. We understand perfectly well that all the major privatization auctions were conducted so that the winners were known ahead of time. This means that the government should have jus primae noctis when these people leave the business. Properly speaking, Putin has already declared that they need to consult the government. However, we don’t know who to talk to, what the procedure is, what conditions need to be observed so that we won’t be rejected, and so on. It needs to be articulated publicly whether this process will be a law or a procedure approved by the parliament, government or president.”

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