Russia’s False Nationalization Trap

Yesterday blogger Vilhelm Konnander posted an excellent article examining Russia’s recent trend of nationalizations, and evaluating the impact it has had on the economy. First I should say that I am happy to see that there are still some people out there who grasp the bigger story of Khodorkovsky and Yukos beyond the abbreviated newspeak which has unfortunately come to encapsulate the debate for lazy reporters (an example of the revisionist history: the 1990s were chaotic, Russia claims that this individual owes them taxes, his supporters disagree, they throw him in jail after a show trial, steal the assets, period.). However there is so much more going on to this story, and one has to look at Khodorkovsky’s business outlook and strategy in the energy sector to better understand the motivations behind his unfair persecution. Konnander writes the following:

“What really was at stake, were the large investments into energy infrastructure that Yukos planned to make – the various pipelines the company wanted to build. If these plans had been realised, they would have made Khodorkovsky more or less politically independent from Russian state leverage. Still, economically, such investments would potentially have brought profits and prosperity to Russia’s economy and, indirectly, to its people. Furthermore, they were exactly the kind of investments that were economically sound and would have developed the energy sector in a positive direction. Thus, by victimising Yukos for political reasons, Russia was rendered an economic loss that the state was unable to compensate for. Consequently, as Khodorkovsky’s 2005 nine-year jail sentence serves to show, the interests of the state and private business are far from always compatible.”

Khodorkovsky’s plans for Russia’s energy sector – the construction of new, independent and competitive export routes to China and the United States, advocating the break up of state monopolies, and the near-closed deal to sell a majority stake of Yukos to a Western oil major were fundamentally adverse to the Kremlin’s plan to centralize control of both the economy and politics. All of these business and economic ideas, combined with his comments against state corruption and graft were unacceptable to the siloviki elements of the government. However, later in the article, Konnander examines whether or not nationalization benefits the Russian people. Pursuing this line of inquiry takes for granted that the Russian state has actually assumed possession of anything. At least in the case of Yukos and the acquisition of the main production arm of Yuganskneftegaz, it is extremely important to recognize the elements of personal enrichment before assuming that the state actually earned a single ruble out of these assets. The fact is, as proven by the Rosneft IPO, the so-called Yukos “nationalization” was actually nothing more than the transfer of assets from one set of private hands to another set of private hands – an outright theft of billions benefiting only a close inner circle in the Kremlin. I remind readers of the comments made by former economic advisor to Vladimir Putin, Andrei Illarionov during an event we participated in together last November at the Cato Institute (I post here an article from the Cato Policy Report Jan/Feb edition 2007 which summarizes the speech). Illarionov pointed out during his speech that following the IPO of Rosneft (a company which was pregnant with value from the seizure of major Yukos assets), none of the billions raised on the London Stock Exchange ever went back into the state coffers, but rather into the pockets of unspecified individuals. Considering this swindle, one cannot really consider the seizure of Yuganskneftegaz as an actual nationalization that would benefit the Russian state.

Andrei Illarionov, photo from Cato Policy Report, Jan/Feb 2007, pp. 19

Earlier in the speech, Illarionov also elaborated on the differences between the privately run Yukos and the state-run energy companies:

“The first area is economic – economic efficiency, corporate governance and public transparency. Between 2000 and 2003 Yukos became one of the most effective, best governed, and most transparent Russian companies. The second area is related to Russian society – the scale of charity financially supported by Yukos. The company created Open Russia, a nongovernmental organization that taught tens of thousands of Russians democratic principles of organization for society and the state, mass media freedom, civil rights, how to operate in a free country, and how to create one. None of the other Russian companies has done anything similar to what was done by Yukos. That is why Yukos became one of the most dangerous enemies for those who did not want to see Russia a free country. The third area is politics. Khodorkovsky himself openly challenged political monopolization. He stated clearly that he wanted to participate in the political process according, not to the rules set by the Kremlin administration, but to the rules that he saw as necessary elements of a politically free country. … The main conclusion from the Yukos affair is that people who create effective, transparent, dynamic, charity-providing companies in Russia have a very good chance of going to Siberian camps.” – Andrei Illarionov

But regardless of the misunderstanding over the false nationalization of Yukos, I resolutely agree with Konnander’s logic and conclusions regarding the debilitating effect this trend of interventionism is having on the Russian economy. He writes:

Still, what the modern world is about is cooperation to the common good of those who participate in it. Thus, what Putinist ideology disregards is a fact so obvious that it needs neither stating nor reiterating: Modern power derives from the relative gains of cooperation – not from conflict or absolute capabilities. Making it alone is simply not an option in the modern world, and still this is the absolutist approach that Putinist Russia is opting for. That it is no viable long-term option for any state, seems of no concern to the country’s leadership. Sooner or later, Putin’s path will, regretfully, come back with a vengeance to Russia and its people. In the meantime, the common assets of Russia are utilised to the detriment of the country and its people. Nationalisation is not good for Russia, and thus the Russian people may gradually come to understand that Putinism is simply not good enough for them. Until then, Russia is caught in a nationalisation trap.