Russia: Reforming the Reformers

February 27, 2004

an Interview with Michael Hudson for Counterpunch


On Sunday, March 14, Russians will re-elect Vladimir Putin for a second term as president. In the Duma elections three months earlier, on December 7, his United Russia party won such overwhelming support that he will have the power to rewrite the constitution dictated by former Pres. Yeltsin under force of arms a decade ago.

In which direction will Mr. Putin go? Will he continue to support the oligarchs who designated him to succeed Pres. Yeltsin? Their privatizations in the mid-1990s have gutted Russian industry and led to collapsing living standards, public services, science and technology, emigration and population shrinkage. Will this prompt Mr. Putin to shift gears to enforce what he has called a “new social contract”? If so, what does this slogan mean in practical terms?

The right-wing Union of Right Forces (formerly Russia’s third largest party, with 32 Duma seats) and its sister party Yabloko (fourth ranking, with 16 seats) failed to crack the 5% electoral barrier, and hence will not have any membership in the 450-member Duma under Mr. Putin’s second term in office. Both these parties were funded by Mikhail Khodorkovsky, Russia’s richest man (his fortune is estimated at $8 billion) and former head of Menatep Bank and Yukos Oil. (He also donated to other parties, including the Communists.) But on October 25 he was arrested in Siberia for tax evasion and fraud, escalating the June arrest of his lieutenant Platon Lebedev. Arrest warrants were issued for ten more Yukos officials and insider shareholders in January, including three who already had followed their money and moved abroad.

Khodorkovsky’s arrest was the final straw prompting Kremlin chief-of-staff Alexander Voloshin to resign. This act signaled the opposition of Yeltsin’s “Family” to Putin’s prosecution of the man whose bank had been the paymaster for insiders in the 1996 loans-for-shares scandal.

The question now being asked is whether the oligarchs will sell off ownership of Russia’s natural resources to the West as they bail out of Russia, or whether the nation will rescue itself from the insider privatizations by recapturing the revenue and wealth taken by the oligarchs.

In the West one hears mainly of reversing and renationalizing the giveaways of the 1990s. But in Russia itself Sergei Glaziev, Dmitri Lvov and other economists are proposing a rent-tax to recapture the oil and gas, land and mineral rent for the economy. If this route is taken, it will represent a revival of a “third way” of economic development proposed already in 1991 by many Western economists, including a substantial number of Nobel Economics Prize-winners. The remarkable thing is how little attention in the West this fiscal and monetary policy has received.

Under Dr. Lvov’s guidance, Dr. Hudson has made numerous trips to Russia to address Duma committees and other groups with regard to shifting Russia to a rent-tax policy.

SS. Everyone expects Vladimir Putin to be re-elected, but they differ with regard to how they expect him to lead the new Duma. What do you see?

MH: To most observers Mr. Putin appears as a Rorschach test. Old Cold Warriors look at his KGB background and fear a resurgence of totalitarianism. Neoliberals–fronting for the oligarchs who hope to sell their companies to Western investors–depict his attempt to re-assert state power, efficient taxation and law enforcement as nothing less than “red-brown” fascism. But many businessmen are charmed by Putin’s promise that Russia’s stock market will benefit from the stability he has brought.

SS: How do you explain this ambivalence?

MH: Mr. Putin governs in much the say that Franklin Roosevelt did. Roosevelt was famous for appointing cabinet members and aides with sharply divergent views. Some people have criticized this as if it were a kind of schizophrenia. But Roosevelt simply wanted to hear both sides of the major issues. He wanted his advisors to “duke it out.” And they did.

This is pretty much what Putin is doing. On the one hand he was obliged to appoint liberal “reformers,” that is, advocates of free market supported by Russia’s oligarchs such as German Gref and Anatoly Chubais. He also retained Yeltsin’s Prime Minister Kyuzanov and chief-of-staff Alexander Voloshin in office, keeping the promise he made to Yeltsin’s “Family” of cronies and backers.

But Putin also has another set of advisors. One rising light has been Sergei Glaziev, an early market reformer already before 1990 but opposed to Yeltsin’s coup d’êtat in 1993 and the “shock therapy” of “grabitization” that followed. He subsequently saw that a least distorted way for Russia to recover was by a tax on economic rent, that is, the value of land and natural resources that exists independently of labor and capital investment. The aim is to untax industry and labor, and make Russia’s natural resources monopolies finance the government. But these are precisely the assets that Yeltsin’s kleptocrats were the first to grab. So this intellectual policy fight has now been raging for a decade.

Glaziev has become the most prominent politician for a group that wants to encourage industrial investment as distinct from buy-outs of assets and property already in place. Industrial recovery and employment require that taxes be shifted from industry and labor onto raw-materials exports–the companies that the oligarchs have been so eager to grab, precisely because their revenue is passive an unearned, or what is called rentier income in the West.

SS: How many major figures support this policy?

MH: Their ranks include former Prime Minister Yevgeny Primakov, and now even Gorbachev, as well as Dmitri Lvov, a prominent economist from Russia’s Academy of Sciences, and Vladimir Litvinenko, rector of the St. Petersburg Mining Institute.

Glaziev is a student of Lvov, who has focused his theorizing on the role of rent in the economy. Lvov was a schoolmate of Primakov. Their closeness turned out to be a major reason why Yeltsin disposed of Primakov so hurriedly for a series of successors he felt would prove more reliable to his Family’s rent-grabbing interests.

SS: Most attention in the West is paid to Anatoly Chubais and other holdovers from the Yeltsin interregnum–and of course the arrest of Mikhail Khodorkovsky.

MH: On December 23, Putin gave a speech to Russia’s Chamber of Commerce without mentioning Yukos but clearly referring to it. He reassured his audience that he didn’t intend to reverse privatizations, but reminded them that everyone had a chance to follow the law in the 1990s, and it wasn’t fair to let those who played by the rules end up losing out to dishonest grabbers. Inasmuch as nearly all the privatizations involved fraud under the anarchic conditions that Yeltsin’s neoliberals created, applying lawful standards would seem to imply a reversal of at least the most blatant privatizations, or a demand for enormous fines and paybacks.

The implicit threat of this speech was that if any other oligarchs got out of line, their fate would be that of Mr. Khodorkovsky and other Yukos stockholders.

SS: What were the specific grounds for his arrest? Was it just the first step to de-privatize or re-nationalize what the oligarchs had taken, or was it a case of selective prosecution?

MH: Mr. Khodorkovsky’s fraudulent activities were so blatant that it is amazing that the Western press has been so lax in reporting them. In fact, the fury with which Bush Administration officials and even the normally liberal media have criticized Russia’s government for the Yukos arrest reflects the degree to which they backed the kleptocrats from the outset, recognizing that in the end these individuals would cash out their gains by selling Russia’s natural resources at prices still so low as to be nearly giveaway prices. The U.S. fear is that now the financial takeover of Russia may be interrupted, and that Western investors may have got all they are going to get.

To put matters in perspective it is necessary to realize how far Mr. Khodorkovsky’s activities go back far before Yukos, to his Menatep bank that financed his buyout at a “fixed” insider auction in which higher bids simply were ignored. An former insider published some of the intriguing details in a Pravda article in November:

Menatep (Khodorkovsky’s bank) was the vehicle through which almost all the transfers of serious money in and out of Russia took place from 1992 to 1998. When we started ‘tolling’ aluminium and others started tolling copper and nickel we did not send the proceeds of our sales back to Russia. On the advice of Russian Prime Minister Silayev, Deputy Prime Minister Oleg Soskovets, presidential aide Aleksandr Korzhakov and Speaker Ruslan Kasbulatov we were told to make all our payments to Menatep Bank. Sometimes it might be Menatep Cyprus, sometimes Menatep Gibraltar, Menatep Finance Geneva, Menatep Inc. New York, etc. When we sold the metals we had tolled a small fee was paid to the smelters. A payment was sent them through their designated bank, often Citibank in NY. The bulk of the money was sent to Menatep marked ‘for onward transfer to -.Company or -. Account at–Bank’. We did not know the recipient at the end of the chain. It wasn’t our business. We paid what we had agreed and that was all. Only Menatep know exactly to whom these payments were going after we deposited the funds.

These were not trivial sums; our payments alone often amounted to US$60 million a month. Menatep monitored the cash flow and directed the funds to the accounts of the highest powers in the land v the Presidency, the Government and the Chekists who staffed the parallel infrastructure. Menatep had been set up by these people and Khodorkovsky chosen to be at its head; not the other way round.

There was virtually no aspect of what Menatep was doing which wasn’t controlled by, monitored by and directed by these same leaders. This included providing government-sanctioned services to organised crime. From its early days the young men at Menatep have provided financial services to the Solntsevo, Lyubarsky, Uralmash and Izmailova families. Through his connections with Semyon Mogilevich Menatep began moving currencies and investments to and through Hungary and then to the U.S. Menatep handled the foreign exchange business of Grigory Luchansky in Nordex and moved large sums into the U.S.

A U.S. law suit involving the Avisma Corp. revealed the details of how Menatep was the perpetrator of a gigantic con in which tens of millions of dollars were diverted from the company. Khodorkovsky and fugitive banker Alexander Konenyikin started the Antigua-registered European Union Bank which was described in a House Banking and Financial Services Committee as a ‘KGB money-laundering operation with stolen funds that were passed through Khodorkovsky of Menatep Bank as a KGB-controlled front firm.’ According to the investigators the entire operation was coordinated at SVR headquarters and was personally supervised by Aleksandr Korzakov.

Through Korzakhov and his friendships with Mikhail Stepashin and Yuri Primakov, Khodorkovsky was given access to the Bulgarian and the Hungarian services to replicate his work for them. The main person in charge of security operations in Khodorkovsky’s companies has been Mikhail Yosifovich Shestopalov former head of the Division for Combatting Thefts of Socialist Property and Speculation of the Ministry of Internal Affairs. The head of Menatep’s and Yukos’s information and analysis section was Karabinov, former head of the KGB Centre for Public Relations (the man who ran the ‘Miss KGB’ contest).

The point of this is not to attack Khodorkovsky. It is to make clear that virtually everything he did was directed, supervised and monitored by the very people who are now attacking him. There were Chekists at every level of Menatep and Yukos. There were no mysteries. The politruks and the pakhans supervised everything. He was a predurok in a controlled system.

Everyone knew what was happening. When we made our payments we had a good idea who was being looked after; if only to avoid mistakes. Because of Menatep we had no direct ties, except when we had to provide credit cards top key individuals. One might reflect that Vladimir Putin’s first job when he left the KGB was to supervise metals sales for Sobchak.

So there is no point in extrapolating from the fall of Khodorkovsky a great animus against ‘oligarchs’ or ‘privatisation’. That isn’t what this is about. This is about a man who knows where all the money has gone; who knows who have been the beneficiaries of the greatest money-laundering scheme in the history of the world. If such a man decides to go into politics he is a danger.

More details soon came out of London. The Evening Standard reported that Alexei Golubovich, a former finance director of Khodorkovsky’s Yukos oil company, was wanted for questioning by the Interior Ministry investigators who are holding Khodorkovsky. Kremlin officials are wading through thousands of documents sent by Yelena Collongues-Popova, who used to work for Golubovich and Khodorkovsky in the nineties, but turned on the Russian tycoons after the French police noticed her transactions and hit her with a massive tax bill, which her Moscow masters refused to pay. In a desperate effort to clear her name, she sent the Russian police the huge bundle of documents that she claims incriminate Golubovich.

Collongues-Popova, 50, whose first husband was a KGB colonel, admits that between 1995 and 2000 she handled £800 million that Golubovich transferred from Moscow into 30 shell companies she set up for him in tax havens such as Switzerland, the Seychelles, the British Virgin Islands, the Bahamas, Panama and Luxembourg. . . . Papers seen by Financial Mail show transactions involving the Isle of Man, Barclays, and the London office of US investment bank JP Morgan Chase. They appear to indicate that Collongues-Popova set up bank accounts in London using a signature stamp, which is illegal.

Some papers showing that her identity was used were supplied to her by Russian investigators. The papers relate to Yukos, Menatep, Rosprom and Avisma–all companies linked to Khodorkovsky’s spectacular rise to fame and fortune after the collapse of the Soviet Union.

Collongues-Popova explained that “It meant executive jet flights all the time–to the Caribbean, to the Seychelles and the Isle of Man. It was a life of luxury hotels, top restaurants and endless supplies of cash to bribe the right people. I cannot remember how many pearl necklaces–at £80,000 apiece–that I bought to win over the wives of our go-betweens in tricky money-laundering operations. Yukos and Menatep used the [offshore] companies to minimise tax and disperse shares to avoid problems with the Russian state anti-monopoly committee. They wanted it to appear that their companies and enterprises were not owned by a single person, though in fact they were.”

Forbes editor Paul Klebnikov summarized the situation in the Wall Street Journal:

Mr. Khodorkovsky’s arrest is not the start of a campaign to ‘get the rich.’ It does not herald the emergence of a totalitarian dictatorship or of Soviet-style nationalization of the ‘commanding heights’ of the economy. Neither is this a case of a man being framed for fictitious crimes in the manner of the Stalinist show trials. On the contrary, the problem is that so many other top Russian businessmen could be accused of the same crimes allegedly perpetrated by Mr. Khodorkovsky.

So what is going on in Russia? We are witnessing the final death agony of the kleptocracy that was Boris Yeltsin’s Russia. Nothing illustrates the flaws of Yeltsin-era privatization better than the infamous ‘loans-for-shares’ auctions of 1995-97 that provided Mr. Khodorkovsky with his fortune. In the fall of 1995, his Menatep Bank was given the right to conduct an auction for a 45% stake in the state-owned oil giant Yukos. Once foreign investors and rival Russian bidders had been disqualified, Mr. Khodorkovsky and his five partners ended up with a 78% stake in Yukos–for which they paid $309 million. How absurd was this sum? In the summer of ’97, two months after this deal was finalized, Yukos was trading on the Russian stock exchange at a market capitalization of $6 billion. (Today its market cap is $24 billion.)

When you buy state assets in such a dubious backroom deal and at such a steep discount to market, chances are your property rights will never be truly secure. You will always be regarded by the population as a crook and by the government as more of a custodian of state assets than an owner. Imagine for a moment if Margaret Thatcher’s privatization of British industry in the ’80s had been similarly flawed. Imagine if state-owned British Petroleum had been sold off in 1987 not for $40 billion, but for $400 million–and with 78% of the company going to a close friend of the PM’s son. Would future British governments let such a result stand? And if they did, what kind of a foundation would that be for the future of the British economy?

Although “his arrest certainly looks like a case of selective justice,” Mr. Klebnikov acknowledged, “this is still better than no application of justice at all. During the Yeltsin era, well-connected businessmen could routinely embezzle millions from the state treasury or even organize the murder of rivals–all without the prosecutors making a squeak. The result was relentless economic decline and the collapse of the ruble in 1998.”

SS: So there has been disillusionment with the reform process.

MH: The neoliberal reformers promised that the property turned over to private holders would yield profits that would be invested in new means of production. But this did not happen. It was easier to grab rent-yielding resources–mineral rights and land–than to design and organize factories to produce more goods. So Russian consumers had to import what they needed. And oil exports provided the foreign exchange to finance this growing import dependency.

This explains why popular pressure has grown for Putin to turn against the oligarchs. In the up-coming election he is seen as their nemesis. For example posters are now being plastered around Moscow featuring two elegant hands in handcuffs. The text reads: “What was privatized before 2000 must be returned.” But so far, Putin has managed to avoid being forced to choose between granting an amnesty to the privatization grabs (that is, announcing that the statute of limitations has run out) or reversing the sell-offs.

Either policy will create major problems, and that is why Putin has not yet moved. An amnesty to Yeltsin’s Family and other privatizers would doom Russia to deteriorate into one of the most polarized and impoverished nations in the world. On the other hand, to reverse the privatizations would mean a fight with the United States which had sponsored the “reformers” and their rip-offs from the outset, going back to Yeltsin’s military attack on the Duma in 1993 and subsequent seven years of rule by dictatorial decree.

SS: Why did the arrest occur seven years after Yukos was bought? Why was it done only last year?

MH: That is always the important question to ask: “Why just now? Why right at this time?” The explanation almost always is that political action is taken to protect against some imminent danger.

To start with, Mr. Khodorkovsky violated Mr. Putin’s insistence that the oligarchs stay out of politics. They were about to buy up the Duma and use their power to destroy the powers of the presidency, that is, of Mr. Putin himself. This is the strategy of neoliberalism. It is a two-stage process. The first stage is to make use of centralized state power to promote insider dealings and give a patina of legitimacy to the theft of public resources. Most of the great fortunes have been obtained in this way, including the aristocratic holdings stemming from the Norman Invasion of England in 1066.

The second stage involves closing ranks to prevent anyone else from doing this, once the prizes have been handed out. A campaign is mounted against government power to reduce and even eliminate the state’s ability to exert a countervailing force on the propertied oligarchy. The narrow oligarchy becomes society’s new centralized planners, replacing the state. Russia is now in this stage, and the oligarchs are trying to mobilize popular support against the government–while Putin for his part is turning populist to mobilize support against the oligarchy.

To promote their program the oligarchs have bought up the television and other news media, funded think tanks, and financed politicians to install their own representatives on all the government regulatory committees.

SS: So the oligarchs are more than merely wealthy individuals. It is an essential part of their program that they translate their personal interests into a neoliberal political program. This suggests that the stand-off which Putin proposed four years ago–that he would leave the oligarchs with their spoils, as long as they stayed out of politics–was inherently unstable.

MH: Yes. To be a member of an oligarch means not only to be rich, but to play a role in controlling the social system as a whole, not only via wealth directly but by the media and then the government. As former Prime Minister Primakov explained: “An oligarch is not just a big businessman. It is a businessman who stuffs his pockets by using machinations, including tax [evasion], desperate to get into politics, and corrupts bureaucrats and parliament deputies.”

Khodorkovsky was doing all these things. He started his own neoliberal think tank, he tried to buy his way into U.S. society by giving philanthropic contributions to Laura Bush’s charity and to the Library of Congress, he ran Yukos officers and front men for the Duma, and there was talk of plans to run for president himself in 2008. He explained his basic logic in a 1997 article for Nezavisimaya Gazeta: “The most profitable business in Russia is politics and that’s the way it will always be. We got together and drew lots to decide who should go into government. Potanin came up lucky. In government, he did a great deal for his own company Unexim. Next time, it will be someone else’s turn.”

SS: Mr. Khodorkovsky and Vladimir Potanin certainly were not alone in this.

MH: Boris Berezovsky did much the same thing when he bought up Media-Most and used the TV channel to shape the news so as to re-elect Yeltsin in 1996, despite the president’s abysmal standing in public opinion polls. Control of the media became the essence of Russia’s “managed democracy” or “façade democracy.” Instead of using force, power was achieved through control of the TV and news media–what Yabloko leader Grigory Yavlinsky has called “Stalinist capitalism.”

SS: Can you give some examples of other oligarchs’ political activity?

MH: Vyacheslav Kostikov, former press secretary to Pres. Yeltsin (1992-95) and ambassador to the Vatican (1995-96), has described Russia’s oligarchy as having created a “new Nomenklatura,” that is, private-sector counterparts to the Soviet apparatchiki who controlled the nation’s bureaucracy prior to 1991. Until quite recently almost all of Kremlin chief of staff Alexander Voloshin’s deputies were linked to lobbying groups. “As for the government, it is known for sure with which minister or deputy minister works for any particular oligarchic group. Besides, tycoon clans have ‘distributed’ department leaders as well. This concerns the Duma, the prosecutor’s office, and the Interior Ministry. Deputies’ business is parliamentary requests, promotion or blocking of laws and amendments. The prices are very high here. For example, to have the Duma to block the amendments to the law on the natural resources rent, oil tycoons are paying tens of millions to ‘mobilize’ deputies and ‘PR’ in the media. This issue is worth billions of dollars.” Kostikov added that “The recent Yukos scandal clearly demonstrated the merging of the new nomenklatura, the elite, and big business. The security structures who initiated the examination were severely attacked. The tycoons’ media outlets launched a real collective hysteria campaign, both in Russia and abroad.”

In a radio interview on Nov. 4, Primakov warned that “A small group of people who have acquired sufficient funds but they use these funds in order to propel themselves into a position of power. . . . a considerable part of Duma deputies use these funds to lobby certain laws or amendments to laws for the benefit of oligarchs. This also happens in the Federation Council. This happens when appointments are made to key ministerial positions or second tier positions in ministries.” Defending the prosecution of Khodorkovsky, Mr. Primakov said that it was the oligarchs themselves who were pushing President Putin to become more authoritarian rather than permitting the laws to be followed democratically.

A New York Times article noted that “The nation’s largest businesses, from oil giants to banks to manufacturers, have not only poured money into the parliamentary elections to be held on Sunday [Dec. 7], but have also filled party tickets with dozens of their own executives. . . . The [Yabloko] party has candidates from prominent companies controlled by other oligarchs. Two oil companies, T.N.K. and Lukoil, have executives running on the party’s ticket, as do Russian Aluminum and the steel giant Severstal. An analysis of United Russia’s federal and regional party lists by The Moscow Times showed that more than a quarter of United Russia’s parliamentary candidates represented big businesses.”

The oligarchy was seeking to run Russia directly. The thought that Mr. Khodorkovsky might do in Russia what J. Edgar Hoover did in America–compile blackmail files on all the richest Russians for whom he had organized deals as paymaster through Menatep–gave a note of urgency for Pres. Putin to insist on a separation of powers between oligarchy and the state. The alternative was for government power to dwindle and the President to be reduced to only a figurehead. The rumor was that the oligarchs sought to win the Duma elections, install their own lobby as Prime Minister, and then proceed to reduce the powers of the President.

A national security consideration also lent a note of urgency. In the spring of 2003 Mr. Gusinsky–who had immigrated to Israel three years earlier–sold off a big chunk of his stock in Russia’s natural resources to buy a British soccer team. This evidently came as a surprise to Mr. Putin, and he saw that if he did not staunch the capital flight, Russia would be left high and dry. The oligarchs were starting to cash out, selling their holdings for dollars, sterling, real estate, British soccer teams and so forth. Their move to the West would have insulated them from future fiscal and criminal prosecution from within Russia.

Mr. Khodorkovsky was about to merge Yukos with Sibneft and sell his 44 percent of Yukos shares to Exxon-Mobil. This would have relinquished control of Russia’s major natural resource and tax payer. The U.S. and British oil majors have shown themselves adept at minimizing their tax liability by setting up administered pricing through flags of convenience located offshore.

SS: But you said that under international law Russia could levy a rent tax.

MH: Legally it could have done so. But politically, taxing economic rent has become the bête noir of neoliberal globalism. It is what property owners and rentiers fear most of all, as land, subsoil resources and natural monopolies far exceed industrial capital in magnitude. What appears in the statistics at first glance as “profit” turns out upon examination to be Ricardian or “economic” rent.

The first plank of the Communist Manifesto called for nationalizing the land, and non-communist reformers also focused on taxing the “unearned increment” of land and natural monopolies. Their logic was that these belong to the nation and people as a whole as its patrimony, and as its largest and most natural tax base.

So when Mr. Khodorkovsky was rumored to be selling out his majority control of Yukos, along with the shares of his partners for $25 billion, Pres. Putin was obliged to act for Russia’s future. Imagine if the government of China, Korea or an OPEC member used its surplus dollar reserves to buy control of a major U.S. oil and minerals company. Such a transfer of resources had little more chance of occurring in Russia than it would in the United States. Russia would have been turned into a giant Dallas, with a shrinking population lacking employment while the richest individuals cashed out and abandoned Russia’s sinking economic ship to become cosmopolitan Western-style billionaires.

What finally enraged Mr. Putin was a willfully arrogant act by Mr. Khodorkovsky and his Yukos insiders. “Only about 18 percent of Yukos stock trades publicly. The rest is held by insiders. As the tax evasion investigation proceeded, Yukos’ board of directors declared an extraordinary $3 billion dividend distribution, an increase of 400 percent over the previous year.” Rather than using this money to modernize their oil extraction or invest in the industry, they were simply stripping the company’s assets before letting it go. “There was no market justification for the huge dividend. Prosecutors seized the stock after deducing that the intent was to loot the company’s cash and send it overseas before the criminal case concludes. Mr. Khodorkovsky is suspected of cheating the government out of $1 billion in taxes. The seizure guarantees that the government can recover the money if it wins the case.”

SS: How did the other oligarchs respond to Mr. Khodorkovsky’s arrest?

MH: They quickly fell into line. Everyone feared they would be next if they protested. Almost nobody stood up for Mr. Khodorkovsky–except for Prime Minister Mikhail Kasyanov, who seems about to be pushed out of Pres. Putin’s administration.

Right-wing politicians accused the arrest of inaugurating a “national security” state, nothing less than national socialism. Most Western media, along with the Bush administration, adopted the neoliberal line that the oligarchs had stolen their property fair and square, and that to begin enforcing laws at this late date would destabilize Russia’s stock market.

A few writers accused Putin of trying to set up his own Family of St. Petersburg siloviki, that is, his associates from the intelligence services and local St. Petersburg politics, where Putin had been an aide to the city’s mayor Solchak in the early 1990s.

The most popular response was to ask for a moratorium on government investigations into the wild privatizations of Yeltsin’s reign. The oligarchs asked for a statue of limitations to provide property with “security,” ostensibly to support the Russian stock market and attract foreign capital. This argument was rather lame, however, as foreigners buying Russian stocks were not supplying any new capital to finance direct investment by these enterprises.

The most threatening reports warned that for Putin to take on the oligarchs and question their “property rights” would plunge Russia into social chaos. Translated into the language of Realpolitik this meant, “We will fight.” That’s what property owners always have done for what they have managed to gain control of.

SS: What will Putin do now?

MH: He has set up an “honesty commission” to investigate Yeltsin’s privatizations and decide whether there was fraud or tax evasion–and if so, how much should be paid back to the government.

He gave some teeth to the potential power of such a commission on January 27, when the prosecutor’s office issued arrest warrants for ten of the leading Yukos stockholders and managers, including three core shareholders who fled abroad last year–Leonid Nevzlin, Vladimir Dubov and Mikhail Brudno–on charges of tax evasion, false invoicing and other crimes. A week earlier the general director of Yukos’s oil refinery was arrested.

SS: Who’s likely to be next?

MH: One of the most hated men in Russia is Anatoly Chubais, who managed the notorious “voucher” scheme that was supposed to give Russians equal shares in their nation’s public enterprises back in 1994 and 1995. Chubais now heads the electricity monopoly. He’s felt obliged to stand by Putin to avert attack, but like Khodorkovsky he had plans to run for the presidency in 2008. His major allies are the aluminum magnates, who obtain their electricity at concessionary prices, while consumers face rising prices. They aluminum magnates may also be at risk.

SS: What are Pres. Putin’s major challenges? Or more to the point, what are his objectives?

MH: He needs to come up with a coherent, focused policy to juxtapose to the neoliberalism that Yeltsin forced on Russia after his 1993 coup. I think he now realizes that the Washington-backed destruction of Russian industry and nurturing of an oligarchic class was the final stage of the Cold War. From this perspective his objective is how to rebuild Russia into a world power once again.

SS: Can you elaborate on what you mean by saying that privatization was the final stage of Cold War U.S.-Soviet relations?

MH: Warfare traditionally has had the effect of building up productive capacity in countries at war. Destructive as World War II was, Russia and even Germany emerged in 1945 with a larger industrial capacity than had existed at the outset of fighting in 1939.

The Cold War had no such silver lining for Russia. The nation was able to maintain nuclear parity with the United States down through 1990, but the ensuing decade found Russians suffering a disaster as they took U.S. economic advice on how to restructure their economy. The shock therapy and selloffs of the public domain recommended by the World Bank, the IMF and U.S. A.I.D. advisors as seemingly newfound friends proved more destructive than any enemy attack ever had been.

When the dust settled at the end of the 1990s, Russia’s potential rivalry to America was destroyed. Privatization of its industrial and agricultural base cut its gross national product in half. Collective farms saw their equipment left to rust in the fields, and manufacturing was in ruins. Russian industry had concentrated on military production that no longer could be afforded or seemed needed. The army had abandoned its sapping war in Afghanistan, although Yeltsin’s war in Chechnya triggered a debilitating terrorist warfare. Consumer goods never had been produced at home in much quantity. Under these conditions Russia became more dependent on paying for its imports of food and consumer-goods with oil, gas and other raw materials, not with the products of its labor and industry.

The tax system meanwhile burdened honest industry, but favored crooked exporters, who quickly gained the money to buy a widening swath of Russia’s natural resources, aluminum companies and other key sectors.

The population was shrinking, and most Russian engineers, university professors and other skilled professionals was nearing retirement age. So many new graduates were emigrating that the average age of engineers was reported to be 58 years old, in a country where the average male life expectancy had shrunk to only 62 years as alcoholism, AIDS and suicides were rising.

Under this philosophy of privatization as opposed to centralized government planning, most public opinion polls found people coming to believe that Russia had ended up being even more disastrously planned as it was before. It was planned by the “Seven Bankers” and their colleagues, the kleptocratic class that took over from the old Soviet nomenklatura. And Stage 2 of their plan was to sell out their takings at a capital gain to American and other foreign investors, leaving Russian resources in the hands of non-Russians.

The hypocrisy of American pretense to help Russia create an honest and fair market economy was laid bare late in 2003, when Putin’s government finally began to roll back the most crooked privatizations by moving against the largest tax evaders and embezzlers. The U.S. response was a series of hand-wringing complaints that “private enterprise” was being threatened by a renewed statism. It was as if Anatoly Chubais and Mikhail Khodorkovsky were heroic entrepreneurs, not insider dealers and kleptocrats.

The ideological pretense was that there was no middle ground between Russia’s kleptocracy and the old Stalinist bureaucracy, no such thing as a mixed economy with mutual checks and balances. The absurd claim was made that there simply was no alternative.

No wonder Russian public opinion was turning anti-American and anti-oligarchic. Was there really no middle ground? Did Russia have no choice between “wild capitalism” at one extreme and the old Soviet bureaucracy at the other?

Both systems were beginning to look suspiciously similar. Both had their black market economies and respective dynamics of economic polarization. Both post-Soviet elites and the new American investors had little desire to see the “American” textbook model of workers paid sufficient wages to buy the goods they produced. Rather, the Russian market was to remain impoverished so that more raw materials could be exporters. Russian and U.S. investors sought a return to property, not to labor and physical capital. The return to property was quickest in the banking sector and in raw materials. Russia was to survive by exporting minerals and fuels, and by selling off yet more shares in companies to U.S. and other foreign investors.

SS: So what is Putin likely to do?

MH: His most important task is to rebuild Russian manufacturing industry. This involves subsidizing it, providing the kind of technical education that turned out Russian engineers and scientists prior to 1990. National encouragement is needed to stem Russia’s Brain Drain to the West. A large proportion of Russian professors and many leading engineers already are in their fifties or sixties, and no replacements are being trained–or if they are, they are seizing every opportunity they can to move abroad, where they can earn more.

A re-industrialization strategy also is seen to involve shifting the tax off of manufacturing and technology onto the land and natural resources via a rent tax. These objectives will deter Russia from entering the World Trade Organization, which denounces such self-help policies as “interfering with the free market.”

SS: What are likely to be the first or most controversial steps?

MH: The rent tax. Putin is coming to realize is that it is not necessary for the state to own Russia’s natural resources outright. Despite the fact that it has sold them off, the government has the power to tax their rental income.

SS: Isn’t Russian industry already so tax-ridden that new investment is uneconomic?

MH: Yes indeed, but a rent-tax would not be an income tax. It would fall on the “unearned increment” that derives from natural endowments.

SS: Is Putin mobilizing support for this?

MH: At a news conference on Nov. 6, former President Gorbachev was asked for his response to the Khodorkovsky affair. “If authorities had solved the question of the rational in the interests of the nation, the question of natural rent and all related issues on time,” he replied, “this case might not have come round.” Rent can be estimated and taxed at any time.

Two days earlier Mr. Primakov noted that the wealthiest individuals in China were men who had developed high technologies, automotives and construction, but “in Russia it’s only oil or gas. But why? Apparently these people have huge funds that they have acquired not because of excellent management but because they use resources that were given by God to all people. And they pocket these funds.” Russian processing industries reported profits of 12 to 14 percent, but the oil industry reported 27 percent–and this is net of its offshore price maneuverings and quasi-embezzlements! “Now, this group of people . . . uses various schemes to evade taxes,” Mr. Primakov continued. “I have recently made a trip to the North, and everybody told me openly that most oil companies create subsidiaries. These subsidiaries are fully owned by these companies but are registered either in special territorial zones where taxes are low or in off-shore zones abroad. Then products are sold to these enterprises at an artificially low price and these enterprises do not pay taxes to our budget at all.”

Later in the month Yegor Gaidar, director of the Institute for the Economy in Transition and an SPS (Union of Right Forces) candidate in the upcoming State Duma elections, announced in a radio interview that “Revenue from the Russian oil industry has risen by $11 billion since 2002. This is currently the fastest-growing source of income for the national budget.” However, since May-June 2003 the oil industry had opposed government plans to raise taxes on extracting minerals in 2004. He estimated that another $3 to $4 billion could be taxed without restricting the oil industry’s growth. So the ground was being prepared for much higher oil taxation.

The most practical means of doing this is by calculating the rent or “surplus profit” being taken. This is why the Rodina or Motherland Party of Glaziev and Dmitri Rogozin “has sent shivers through Russia’s biggest industry, oil production, by advocating a controversial ‘rent’ program that would require oil companies to return a major share of their profits to the public for the right to use natural resources. ‘Today the people gave a clear answer that an end will be put to the irresponsible course under which oligarchs fill their pockets at the expense of social justice,’ Glaziev declared Sunday night [Dec. 7].” The idea of using land and resource rent as the tax base also has been adopted by the Pensioners’ Party. The right-wing Yabloko “is warning that natural rent will melt away when oil prices fall, but in principle has no objection to confiscating natural rent in one form or another.” Finally, the SPS is calling for an excessive profits tax on the oil industry, which in practice means “the confiscation of natural rent. No party is opposed to natural rent.”

Putin has announced the government is considering how to redistribute oil company windfalls, and that he wants representatives of the business community to participate voluntarily in making the decision. “One of the mechanisms would be an export duty, another would be a tax on the extraction of natural resources,” he said, while recognizing that the government should tax oil fields based on their individual characteristics rather than through the existing flat-rate system that encourages companies to increase extraction at less productive wells.

What has been realized is that it is not necessary to take the radical step of (re)nationalizing the oil and gas, minerals and land. The rent itself can be taxed, in a specific tax based on “economic” or “natural-resource” rent (basically the Ricardian concept) rather than profit. As long as this tax is applied evenly through the economy as a whole it is legal under international law.

Almost none of this background is reflected in Western reports. Instead of calling Russia’s oligarchs thieves, most press reports depict the pro-oligarchic party as advocates of “free enterprise.” This would make sense only if one considers theft to be the ultimate expression of free enterprise.

Although the oligarchs denounce this as fascism, nationalism, socialism or a “brown-red” alliance, the fact is that the theory of economic was developed in the early 19th century to bolster David Ricardo’s free-trade logic. Modern libertarians such as Milton Friedman in America, and Patrick Minford (one of Margaret Thatcher’s advisors) in Britain have endorsed a rent-tax as being essential for “purely” free enterprise to exist. In tsarist Russia a rent tax was endorsed most notably by Leo Tolstoy (who became a follower of the American land and tax reformer Henry George). This policy was about to be endorsed by the Duma under Alexander Kerensky in 1917 just before Lenin’s October Revolution.

The policy has been endorsed by a group of leading American economists who published an open letter to President Gorbachev on November 7, 1990. It was drafted not by socialists but by economics professors at the opposite side of the political spectrum, market economists and even libertarians who espoused the ideas of Henry George, headed by Nicolaus Tideman of Virginia Tech, future Nobel Economics Prize-winner William Vickrey, Mason Gaffney and Lowell Harriss. Other Nobel winners included James Tobin, Robert Solow and Franco Modigliani, as well as such prominent economists as William Baumol of Princeton, Richard Musgrave and Zvi Griliches at Harvard, and Alfred Kahn. “Dear Mr. Gorbachev,” they wrote,

The movement of the Soviet Union to a market economy will greatly enhance the prosperity of your citizens. But there is a danger that you will adopt features of our economies that keep us from being as prosperous as we might be. In particular, there is a danger that you may follow us in allowing most of the rent of land to be collected privately.

It is important that the rent of land be retained as a source of government revenue. While the governments of developed nations with market economies collect some of the rent of land in taxes, they do not collect nearly as much as they could, and they therefore make unnecessarily great use of taxes that impede their economies–taxes on such things as incomes, sales and the value of capital. . . .

The rental value of land arises from three sources. The first is the inherent natural productivity of land, combined with the fact that land is limited. The second source of land value is the growth of communities; the third is the provision of public services. All citizens have equal claims on the component of land value that arises from nature. The component of land value that arises from community growth and provision of services is the most sensible source of revenue for financing public services that raise the rental value of surrounding land. These services include roads, urban transit networks, parks, and public utility networks for such services as electricity, telephones, water and sewers. A public revenue system should strive to collect as much of the rent of land as possible, allocating the part of rent derived from nature to all citizens equally, and the part derived from public services to the governmental units that provide those services. When governments collect the increase in land value that results from the provision of services, they are able to offer services at prices that represent the marginal social cost of these services, promoting efficient use of the services and enhancing the rental value of the land where the services are available. Government agencies that use land should be charged the same rentals as others for the land they use, or services will not be adequately financed and agencies will not have adequate incentive or guidance for economizing on their use of land.

Some economists might be tempted to suggest that the rent can be collected publicly simply by selling land outright at auction. There are a number of reasons why this is not a good idea. First, there is so much land to be turned over to private management that any effort to dispose of all of it in a short period would result in an extreme depression in prices offered. Second, some persons who could make excellent use of land would be unable to raise money for the purchase price. Collecting rent annually provides access to land for persons with limited access to credit. Third, subsequent resale of land would enable speculators to make large profits unrelated to any productive services they offer, resulting in needless inequity and dissatisfaction. Fourth, concern about future political conditions would tend to depress offers. Collecting rent annually permits the citizens of future years to capture the benefits of good future public policies. Fifth, because investors tend to be averse to risk, general uncertainty about the future will tend to depress offers. This risk aversion is sidestepped by allowing future rental payments to be determined by future conditions. Finally, the future rent of land can more justly be claimed by future generations than by today’s citizens. Requiring annual payments from the users of land allows each year’s population to claim that year’s rent. While the proceeds of sales could be invested for the benefit of future generations, not collecting the money in advance guarantees the heritage of the future against political excesses.

This letter warned specifically against precisely the problems that would develop under Yeltsin’s “shock therapy” reformers and kleptocrats. But the U.S. Government, World Bank and IMF had other ideas, and blocked this basic approach, with well-known tragic results.

During the 1990s I made four trips to Russia with Prof. Tideman, who had initiated the letter. We met many dedicated people at various levels of government and academia who worked to promote the idea of a rent tax. But on balance we found the major problem to lie in the fact that most of the government people we met wanted to get rich off Russia. Yeltsin’s supporters were out purely for themselves. The main way they wanted to get rich was to gain control of land or some other rent-yielding resource. They were the last people to put in place a system designed to counter this kind of free-loading.

Even today, would-be Western reformers have sought almost any alternative to taxing economic rent. Prof. Stiglitz, for instance, points to the fact that Yeltsin’s economic policies created “incentives that led to asset stripping rather than wealth creation,” and notes that the “security of property rights–and the growth it enables–depends primarily on the legitimacy with which those rights are viewed by society. If those who hold wealth are seen as having obtained it in ways that lack legitimacy, no legal system can make property secure.” However, the longer Russia takes “to recapture some of the oligarchs’ ill-gotten gains,” the harder it will be to do so. “Once Khodorkovsky and his ilk sell their stakes to foreign interests and take their money out of Russia, there will be little that can be done.”

Prof. Stiglitz proposes an “excess capital gains tax”, analogous in spirit to the tax imposed on US oil companies when their profits soared, through no effort of their own, from high oil prices in the 1970s. A tax could be imposed, say, at the rate of 90%, on the “excess” gains from the acquisition of state assets–e.g., on gains in excess of 10% cumulative returns on original equity investments. The tax would be payable either when the company is listed on a stock market or when the assets are sold. Such a tax would leave the oligarchs with plenty, and could even compensate them for their efforts at restructuring enterprises.”

This approach has a number of serious problems. First is that of the proverbial “innocent buyer” who bought stocks from Russians who sold out early, and have continued to enjoy price gains as the oligarchs have defended their takings? How do you tax secondary and tertiary buyers? A related problem is that the managers of these enterprises have been looting them by false invoicing and under-reporting of actual sales proceeds. Such embezzlements need to be recaptured by the tax collector.

As for Russians who have kept their shares, the “excess capital gains tax” would in many cases be near the magnitude of 90 percent of the current value of these stocks. The only way to pay this tax would be for holders to sell the great bulk of their shares. This sudden supply would crash the price, wiping out the present holders.

SS: Could that be Mr. Stiglitz’s covert purpose?

MH: It’s more likely that he hasn’t recognized this likelihood. Coming as he does from the World Bank, he has what Thorstein Veblen called an “educated incapacity” to see the rent issue for how important it is.

Given the blank stares one usually gets when discussing a rent tax as opposed to a general income tax on labor and industry, it seems remarkable that a hundred years ago the idea of supporting governments by taxing landlords and monopolists was a widely held ideal. After all, this is how governments supported themselves from antiquity down to about the 17th century.

Approaches were made to the World Bank and to Washington to gather support for Russia to lease out its resources rather than selling them off under conditions where Russian savings were wiped out by the hyper-inflationary “shock therapy.” But the World Bank and U.S. Government made it clear that their aim was to turn over Russia’s public enterprises to individuals outright. These individuals then proceeded to sell out to U.S. and other Western buyers. This created booming financial markets, but at the cost of eroding the economy at large.

The neoliberal assumption was that economic self-interest would lead the new appropriators to behave in an enlightened way as entrepreneurs are supposed to act in the economic textbooks. The failure of the U.S.-backed policy in Russia therefore signals the shortcomings of this kind of textbook model and the neoliberal slogans repeated so unthinkingly by the press today.

By the same token, Russia may be the first to undergo a great experiment, this time not of bureaucratic government ownership but to become a “mixed economy” where the public domain of land and natural resources is retained and leased out to users at market prices rather than appropriated by absentee owners and turned into an economic overhead.

A Critique of the Schleifer-Treisman Foreign Affairs article
Prof. Michael Hudson, University of Missouri (Kansas City) (
February 22, 2004
Dear David,

The Foreign Affairs article by Schleifer and Treisman, “A Normal Country,” reads like a legal defense brief. In view of the pending court case against H.I.I.D., I suppose this was its inspiration. As an apologia for Russia’s development along the lines that Schleifer, A.I.D., the IMF and World Bank tipped the balance, it is written in accordance with the adversarial legal practice of countering the prosecutor’s accusations by setting forth a seemingly plausible alternative version.

Lawyers call this brazening it out. It often works, but in this case I suspect that the authors have gilded the lily too flagrantly. To me their apologia recalls Chico Marx being caught in a woman’s bedroom, saying to the man, “Who are you going to believe–me or your eyes?”

It also recalls the surrealistic comic assumption of Mr. Joyboy’s mother in “The Loved One”: a manic obese over-eater whom Mr. Joyboy treats as if she were perfectly normal. The authors’ main contention is that Russia has succeeded–in becoming a normal “middle-income capitalist country.” But what happened in Russia is surely a parody of capitalism–unless we wish to paint a dystopian picture of what today’s “capitalism” has become for the corrupt middle-income countries they cite.

The traditional characteristic of capitalism is for industrialists to hire labor to produce goods for sale at a profit. That is Marx’s definition of surplus value. To employ labor is to exploit it, creating an economic surplus (profit and depreciation) in the process. But as I put matters to a Duma committee in 1995, the Russians need have little fear that Americans or domestic oligarchs seek to exploit Russian labor in this way. What the privatizers want is Russia’s natural resources, its land and real estate, its oil and mineral endowment, and (for Mr. Chubais) its natural monopolies. The objective is not to earn a profit in the traditional capitalist sense, but to collect economic rent–the “free ride” deriving from land and resource rent, along with capital gains by making the privatization of these rents more “secure” from public collection or taxation.

The key to the authors’ bias lies in what they leave out of account. The Russian “success story” they construct is centered on Russia’s public resource domain, not its manufacturing, skilled labor, educated work force or even its basic economic infrastructure. Rather, the Western investors on whose behalf at least Prof. Schleifer acted did not want resource rents taxed.

The important point is to compare Russia’s development in the 1990s not with corrupted economies such as Mexico et al., but with what Russia might have become. On November 7, 1990, a group of U.S. economists including several Nobel Prize winners (Bill Vickery, Robert Solow, James Tobin and Franco Modigliani) as well as two Harvard professors (Richard Musgrave and Zvi Griliches) published a public letter to President Gorbachev urging him to rationalize Russia’s tax system by taxing what was visible and clear–its land and mineral rent. The letter warned against precisely what happened: Premature privatization would leave Russia’s natural tax base, its land and mineral wealth, to be privately appropriated. If this occurred, the letter warned, Russia would have to tax its manufacturing (fixed capital formation) and labor, crippling its chance to create a competitive and self-reliant industrial and agricultural base.

Dmitri Lvov of the Academy of Sciences has supported this position for a decade, as has his school chum Yevgeny Primakov and his PhD student Sergei Glaziev. As former Pres. Gorbachev explained in his press conference last Nov. 6 (as JRL reported on Nov. 11), “If authorities had solved the question of the rational in the interests of the nation, the question of natural rent and all related issues on time, this [Khodorkovsky] case might not have come round.”

American property appraisers were invited to Russia to help create land-value maps as a basis for taxation, with the intention of freeing Russian labor and industry from taxes which made it all but impossible for honest manufacturing firms to operate. However, the World Bank and Washington planners opposed this policy. They transplanted a crude version of the U.S. tax system on Russia, replete with tax breaks for special interests that deformed the Russian tax code. Meanwhile, Yeltsin’s coterie played dirty political tricks on Duma members who supported rent collection. The popular Vyachislav Zvolinsky of the Agrarian Party, for example, found himself mysteriously off the ballot in his home district.

The issue does not lie in comparing Russia to corrupt countries such as Mexico, Brazil under the generals, or Argentina under its disastrous dollarization policy of the 1990s. Rather, what is important is what Russia did that has led to its present export monoculture pattern, and what it may do to achieve a more balanced and self-reliant growth.

Schleifer and Treisman employ a series of euphemisms to conceal what has happened. In the case of the loans-for-shares program, surely they must know that no bona fide “loans” were involved at all. The government held deposits in the banks that managed the auctions. The banks sent a check to the government–a check whose proceeds were backed by the government’s own deposits. The government duly recorded the money as having been received, and then re-deposited the checks in the banks that “bought” the oil and minerals companies. In Mr. Khodorkovsky’s purchase of Yukos, the bank was Menatep. On balance the government got nothing. In terms of actual payment, the transaction was a wash.

The authors are silent on Russia’s equally needless decision to back its domestic rubles with U.S. dollars. These were unnecessary for purposes of paying domestic workers for spending at home. The effect was simply to stifle the domestic market. The government aggravated its problems by “borrowing” money via GKOs paying 100% interest to banks for lending it what the government already had deposited. The effect of this financial maneuvering was to create an oligarchy of insiders.

Mexico and other “middle-income” kleptocracies had their insiders too, of course. But to present this as a success story is to confuse parasites with their hosts, lawbreakers with entrepreneurs.

With regard to the authors’ description of the 1998 ruble crisis, surely the authors must know that it was created by the IMF loan proceeds being used to back dollar/ruble forward swaps that quickly ate up the proceeds. Only insiders were permitted to draw up such contracts, as these were a guaranteed win. When the ruble was devalued, holders of dollar options cashed out–and left Russian depositors in their own banks to go bankrupt. In effect, they bet against the depositors and the government–and did so as government insiders. So whom did the government really serve?

The Russians entailed a debt to the IMF for having enriched their own banking oligarchy. So if Russia is indeed a “normal middle-income capitalist country,” what does this imply about Mexico, Argentina, Croatia, Korea, et al? They too suffer flight capital that returns as offshore loans to the government. This phenomenon has left these countries so deeply indebted to their own oligarchy, operating offshore and merging its claims with those of foreigners, that they have lost their domestic autonomy to IMF planners following the Washington Consensus.

The Foreign Affairs article reads as if Russia has moved away from being a planned economy without acknowledging how warped its planning has become at the hands of the rentier oligarchy put in power under Yeltsin, with heavy U.S. subsidy by administrators such as Prof. Schleifer. Russia is still a planned economy. But the financial sector is doing the planning, and it does this in such a way as to maximize its own rentier gains, not to develop the nation along lines favoring industrial development, agricultural self-dependency and upgrading labor productivity.

The authors say not to worry, because this is typical of corrupt Latin American and Asian dictatorships. But was the objective in 1991-93 to turn Russia into a Mexico or Korea? Was there no better alternative to post-Stalinist bureaucracy, no third way–a mixed economy, with market feedback mechanisms without creating an oligarchy seeking to sell out its holdings to foreigners?

The authors claim that Russia is moving toward an economy governed by the rule of law. But last year when Pres. Putin began to apply the laws against tax evasion and financial fraud against the largest abuser, Mikhail Khodorkovsky who had become Russia’s wealthiest oligarch, the Bush administration wrung its hands as if this were an attack on private property and free enterprise.

As for the authors’ technical economic analysis, it too is fundamentally misleading. They refer to income inequality, and suggest using government statistics on consumer goods and electricity usage as a proxy. If matters are as good as they claim, why do Russian public opinion polls show so many people claiming that they lived better under the previous system? As for the statistics themselves, I was informed that the Goskomstat’s figures for final household consumption simply report imports for manufactured goods. This implies an almost unparalleled foreign dependency–a dimension that the authors do not address, and which Mr. Putin is just now starting to confront, to the great distress of neoliberals.

The authors acknowledge that much Russian income is “under-reported.” They do not point out that the main tactic to under-report income occurs in the export sphere, where foreign buyers pay the balance between the reported price and the “real” price into the accounts of the embezzlers. Does this practice not explain the lion’s share of the oligarchy’s wealth? If so, shouldn’t it be called “primitive accumulation” rather than bona fide capitalist profits?

A basic flaw in the article’s analysis of inequality is a principle as true for the United States as it is for Russia. Inequality of wealth (assets in the form of land, stocks and bonds) far exceeds inequality of income. This occurs because the wealthiest individuals do not seek (reportable) income. They seek property ownership and its capital gains. The booming Russian stock market enriches wealth-holders at the expense of income-earners.

This dynamic of Russian privatization reflects the failure of its tax policy for the past decade. To sweep it under the table would be a losing strategy in any court of law where the witnesses could be cross-examined and counter-witnesses produced with regard to the failures in which Prof. Schleifer played an active role. One therefore must suppose that the article was written primarily for consumption by readers unfamiliar with the specific details that characterized Russia’s kleptocracy–details which Johnson’s Russia List has been careful to bring to the attention of its own readers, and for which we all must be grateful.

The article’s conclusion, that “Oligarch-controlled companies have, in fact, performed extremely well,” neglects to point out that they have performed well for foreign buyers, not for the Russian tax collector, Russian workers or the Russian economy. A monoculture syndrome is not the way to develop an economy. That is why Mr. Primakov recently contrasted Russian development with that of China, pointing out that China’s wealthiest individuals earned their money by organizing industrial ventures to employ domestic labor.

This bears upon the article’s concluding point: “What does the future hold for Russia?” Is the oligarchic system stable, or is it about to receive a structural shock? What will happen when electricity prices and other carrying charges for Russian homes rise sharply to international levels? The World Bank and IMF are urging Russia to develop a mortgage market, so that Russians can borrow against their homes to pay these charges. I see a scenario in which they will borrow to get by, and end up forfeiting their apartments to the creditors.

The largest sector even in the most highly developed industrial economies such as the United States and Britain consists of real estate. For Russia, the land value is followed by natural resource wealth. The “good performance” of the oligarchs reflects Russia’s crippled ability to tax this wealth, which was not created by the efforts of its present owners but was a legacy of the pre-privatization public domain that has been stripped away in a simple asset grab.

Mr. Gusinsky, Mr. Berezovsky and now Mr. Khodorkovsky have started to sell out properties that they bought virtually for nothing (or at most for a penny on the dollar) for two cents to ten cents on the dollar to foreigners, so as to convert their takings into more secure foreign holdings (British soccer teams, villas in the world’s prime real estate enclaves, etc.). As Russian land and mineral rights are sold, this will turn domestic attempts to tax resource rent into a political crisis as the WTO and Washington Consensus protest.

But it is fair under international law, as long as Russia taxes its oligarchs and foreigners equally with regard to their rental income. This looming political and economic instability promises to become the major feature of Pres. Putin’s second term. The Foreign Affairs article reads as if it is trying to mobilize support against a Russian policy that may begin in 2004 to set Russia on the track that it would much better have started back in 1991.

SS: How does Mr. Putin’s firing of Prime Minister Kasyanov on February 24 play into your scenario?

MH: Kasyanov had been acting on behalf of the oligarchs to block moves to tax resource rent ever since he was installed by Yeltsin’s Family. Two weeks ago he distributed a glossy report denouncing Glaziev’s proposal to tax resource rent. The Western press picked it up, imagining that it was an attack by Putin’s government on Glaziev — not realizing that in fact it was an attempt by the oligarchs to keep their money free of taxation.

What the Western press did not realize was that Putin saw this as an attack on the policy that he himself was moving toward as he broke free of oligarchic control. Rather than seeing this as a step toward Russian democracy and self-determination, the press sees this as an authoritarian power grab by the silovaki. There simply is no understanding of the idea of land and resource rent as the fiscal basis for Russia (and now for British transportation as well, it seems from recent editorials in the Financial Times).

A few weeks ago Glaziev was asked whether he would become part of Putin’s government. “That all depends on its policies,” he replied. With the firing of Kasyanov, the road is now open for him to become a minister in the government after March 14.

I can imagine, for instance, the federal prosecutor Stepachin becoming prime minister. At the very least, you can expect a man who will not fight against the rent-tax as Kasyanov consistently did.

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