A brief history of communism in Russia

1. RISE OF CORPORATIST STATEIN RUSSIA(The 2006 Long Telegram) A.Illarionov Cato Institute, March 7, 2006 © Instituteof Economic Analysis www.iea.ru

2. “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. © ИЭА

3. Historical analogies are usually subjective, never perfect, but provide valuable historical perspective to look upon today’s situation and possible future developments. © ИЭА

4. The 2006 Long Telegram: 1. Periods in recent Russian history.2. Russian authorities’ Economic policy.3. Russian authorities’ Domestic policy.4. Russian authorities’ Foreign Policy. 5. What made Russian economic boom?6. Russia’s Corporatist State. 7. Russia is a member of G8. Which G8? © ИЭА

5. 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? © ИЭА

6. 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? © ИЭА

7. Overall diagnosis for Russian authorities’ current policies is Darvensazimus disease. • DARVENSAZIMUS is the disease that Illarionov says Russia has contracted. The name comes from the mix of:Dutch Disease, Argentinean Disease, Venezuelan Disease , Saudi Disease and Zimbabwean Disease. According to Illarionov, such nasty mix of economic, political and social distortions preclude Russia from being a member of the G-8, which is, after all, the most exclusive club of industrialized democracies. © ИЭА

8. Darvensazimus disease is a very rare, complex and dangerous illness. It consists of at least 5 diseases:- “Dutch” Disease.- “Argentinean” Disease.- “Venezuelan” Disease.- “Saudi” Disease.- “Zimbabwean” Disease. © ИЭА

9. Combination of 3 diseases – “Dutch Disease”,“Argentinean Disease”, and “Venezuelan Disease” can be used for description of the current economic policy. © ИЭА

10. “Dutch Disease” – sustaining high rate of inflation andnational currency’s real appreciationleading to “undesirable” structural changesand budget profligacy. © ИЭА

11. 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 © ИЭА

12. … to sustaining high money supply growth rate...Annual increase in M2, % © ИЭА

13. … to sustaining high inflation rate,..Annual increase in CPI, % © ИЭА

14. … to fast real appreciation of Ruble exchange rate,..Russian Ruble real effective exchange rate (July 1998 = 100%) © ИЭА

15. … to sharp increase of the energy sector role in the Russian economy,..Value of energy exports as % of GDP © ИЭА

16. … to a relative decline of non-oil sectors’ share in industrial output.Non-oil output as % of industrial output © ИЭА

17. “Argentinean Disease” – use of “industrial policy” to “correct” “undesirable” structural changesby redistributing value added from energy sector into other sectors, primarily machine building © ИЭА

18. Beginning of industrial policy in Russia, 2002-2004: • Increase in taxation of oil companies • Increase in government expenditure, including government investments • Setting up different government-regulated transport and energy tariffs for different sectors, industries and companies • Further differentiation of import duties • Introduction of import quotas © ИЭА

19. The fastest growing item was government’s expenditure on military and police…National defense and police expenditure as a share of GDP © ИЭА

20. … as well as on administration.National expenditure on administration as a share of GDP © ИЭА

21. As a result, the number of bureaucrats and their share in total employment have dramatically expanded.Public administration as a share of total employment © ИЭА

22. The rise in government expenditures has also led to increase in non-market employment…Employment in non-market sector as % of total © ИЭА

23. … therefore reducing employment in market sector.Employment in market sector as % of total © ИЭА

24. 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, % © ИЭА

25. 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 © ИЭА

26. Industrial policy led to decline in growth rates in other sectors. © ИЭА

27. 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%!

28. New stage of industrial policy – “development policy” (MERT), 2005-2006: • Differentiation of taxation for different companies. • Destruction of Oil Stabilization Fund. • 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. • Creation of Special Economic Zones. • Granting taxation privileges to different municipalities. • Adoption of programs of Development for different industrial sectors. • Introduction of limitation to foreign ownership in 39 “strategic” companies and sectors. • Adoption of Innovation and Technology Development programs. • Preparation of the Program for Government Support of Design. • “Actually, we have many more ideas...” © ИЭА

29. “Venezuelan Disease” –nationalization and quasi-nationalization of private assets in oil, gas, transportation, construction, automobile industry, aviation. © ИЭА

30. Accumulation of huge financial resources by oil companies made them very attractive for government intervention. Oil companies revenues © ИЭА

31. Quasi-nationalization began from the most successful oil companies.YUKOS’ oil outputhas almost doubled within 5 years, 1999–2004. © ИЭА

32. 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. © ИЭА

33. 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 © ИЭА

34. 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. © ИЭА

35. 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 © ИЭА

36. 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 © ИЭА

37. 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. © ИЭА

38. 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. © ИЭА

39. Rent-seeking behavior becomes incredibly attractivenot 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) © ИЭА

40. “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. © ИЭА

41. 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 thatleading 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. © ИЭА

42. Deterioration in Electoral Process Index in Russia. © ИЭА

43. Deterioration in Judicial Framework & Independence Index in Russia. © ИЭА

44. Deterioration in Civil Society Index in Russia. © ИЭА

45. Deterioration in Independent Media Index in Russia. © ИЭА

46. Deterioration in Governance Index in Russia. © ИЭА

47. Public demand for independent analysis, non-government mass-media, opposition politicsis falling fast and sharply. Their financial support by the private business is quickly drying up as authorities stifle the civil society. © ИЭА

48. “[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. © ИЭА

49. 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. © ИЭА

50. 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. © ИЭА