2006 Marked by the Rise of the Corporate State

The IHT is running a year end wrap-up article about the biggest conceptual developments in business and economics that have helped shape our world in 2006. Among the most notable and troubling developments in 2006 was the return of the corporate state, as originally described by Andrei Illarionov (see Sean Guillory’s balanced summary here)

Return of the corporate state Karl Marx wrote that the state was nothing more than the executive committee of the bourgeoisie. But in Russia, President Vladimir Putin has stood Marx on his head: the state dominates many of the most important businesses, not the other way around. A new hybrid of country and corporation has been created, fusing the public and private sectors to serve the Kremlin. Andrei Illarionov, who in December 2005 resigned as an economic adviser to Putin, calls it “a corporate state.” This goes way beyond mere cronyism. Dmitri Medvedev is both a deputy prime minister and the chairman of the state natural gas monopoly Gazprom, which controls one-fifth of the world’s natural gas reserves. Igor Sechin, Putin’s deputy chief of staff, was appointed chairman of the sprawling state-owned oil company Rosneft. The Kremlin has also tightened its control over other industries. In February, Putin consolidated Russian aircraft makers into one state-owned corporation. Last month, the secretive state arms trader Rosoboronexport grabbed a controlling stake in Vsmpo-Avisma, the world’s largest maker of titanium, with Rosoboronexport’s director, Sergei Chemezov, becoming the company’s chairman. As Illarionov put it, “There is no free economic space remaining anywhere in Russia.” The corporate state is more than a way for Putin apparatchiks to get rich — although it is certainly that. According to Keith Darden, a Russia expert at Yale University, it is in large part a solution to an enduring political headache for authoritarian rulers: how can you maintain enough of a market economy to generate wealth without allowing the creation of independent businesses that could grow to challenge your authority? First, Putin cracked down on oligarchs who had dared to cross him. Now the Kremlin seems to be consolidating control over the remaining potential bases of opposition. The corporate state shows no signs of withering away. Medvedev, the Kremlin’s man at Gazprom, may well be Putin’s pick to be the next president of Russia. — Gary J. Bass

I think that this short IHT article underscores one of the primary misconceptions about the theft of Yukos, the Kremlin’s aggression toward private businesses and organizations, and the growing role of the state in general: people actually believe that these assets are being “nationalized” for the “public good.” This is actually not quite accurate. As Andrei Illarionov pointed out during a speech at the Cato Institute last month, in the case of Yukos, these energy assets were transferred by illegal means not from one private owner to the people, but rather from one group of individuals to another group of individuals. It is absurd to pretend that this is a real nationalization when it is only a small group of private individuals within the government lining their pockets with the rents from these businesses. In regards to the mechanics of this new corporate state, Pavel Baev writes the following:

A particularly striking feature of this systemic corruption is the positive identification of personal profit with the passionately proclaimed “state interest.” This is typical for the St. Petersburg cadre that Putin brought into the colossal bureaucratic pyramid in order to enhance his control. These “Putin people,” with backgrounds in the special services, were expected to show discipline, efficiency, and above all clan loyalty. The resentment of losers in the privatization of the 1990s sustained their zeal in restoring the power of the state, but they were not immune to the temptation to mix business with pleasure. Easy access to overflowing streams of money has eroded discipline and efficiency, but it is the very real p rospect of Putin’s retirement that has deeply undermined their loyalty (Ezhednevny zhurnal, September 20). The so-called siloviki, or “power guys,” have turned into feuding gangs that settle their scores in the long Kremlin corridors. This war to capture the unraveling networks reached a climax in June, when one group of “loyalists” convinced Putin to sack the over-zealous Prosecutor-General Vladimir Ustinov, and another “team” quickly arranged his reassignment as minister of justice. After the summer break, the battles acquired a new intensity, as the cadre reshuffling in the judicial system has taken down Ustinov’s lieutenants who supervised the rigged investigation against the oil giant Yukos and its owner M ikhail Khodorkovsky (Kommersant, September 21). No explanation has been given for the chain of resignations and firing in the FSB central apparatus, but the leaks about internal corruption investigations and corruption in the department of internal investigations are growing into a deluge (Ezhednevny zhurnal, September 18).

More attention should be paid to how private interests are being advanced in Russia under the mantle of “the public good.”