On the eve of the arrest of Mikhail Khodorkovsky, I wrote an article with the headline "Putin’s Self-Destruction," but I hardly realized how true those words were. One date marks the end of President Putin’s highly successful first term and the beginning of his ever more disastrous second term: October 25, 2003, the day of Mikhail Khodorkovsky’s arrest.
This arrest was never a matter of one person or his actual acts. It signified the end of the oligarchs as a political force. The reason for the many successful reforms and Putin’s great popularity during his first term was that he had balanced two strong groups, the old oligarchs and his rising KGB friends from St. Petersburg. As a result, a small group of decent liberals arbitrated between then, pursuing sensible and responsible policies. Politically, Putin appear everything to everybody, becoming very popular.
After Khodorkovsky’s arrest, the remaining oligarchs were allowed to make money, even more than before, but they were ousted from politics. At the same time, Putin transformed himself from the President of the whole of Russia to the President of a small group of KGB men from St. Petersburg. At present, the same kind of negative selection from an extremely narrow ruling group is taking place that Andrei Amalarik prophesized would break the Soviet Union in 1984.
This narrow interest group of siloviki from Peter sit on top of the state administration and the big state enterprises. They have no interest whatsoever in reforms, which are therefore precluded. They distrust everybody and have therefore centralized decision-making to so few that both the quantity and quality of decision-making has lapsed to a Soviet depth. As true KGB men, they do not believe in open or real information, persistently disinforming themselves. Such a dysfunctional and unrepresentative regime cannot last for long.
Three of the greatest reforms Putin undertook in his first term were his tax reform, the judicial reform, and the reinforcement of property rights. Through the Yukos case, Putin has effectively jeopardized all these great achievements. The causes proposed for the arrest of Khodorkvosky are many, but in the end only two reasons appear significant. First, Putin wanted to increase his political control, and, second, close associates of his wanted to grab Yukos’ assets.
A patent post-Soviet problem has been Russia’s arbitrary and lawless tax system. Putin did a great deal to improve the tax system, but with the Yukos case he has reversed most of these reforms. A more lawless tax persecution than what has happened to Yukos is difficult to imagine. The company appears to have utilized legal loopholes, and to an outsider no crime is apparent, but the government has the audacity to claim $28 billion for no apparent reason, and on top of everything claim immediate payment so that Yukos was effectively confiscated.
Similarly, Putin’s persistence at judicial reform has been rendered a joke, as it has been so obvious that every turn of the Yukos story has been ordered from the Kremlin. Nobody can believe in the integrity of the Russian judicial system after this. The inability to come to a conclusion of the Yukos affair appears to reflect nothing but Putin’s indecision, and the more indecisive he is the deeper a hole he digs for himself.
The very worst long-term effect is that property rights in Russia have been severely undermined. If not even the richest capitalist can be sure of his property rights, how can anybody? Ironically, for this reason, any supporter of private property rights needs to defend the property rights of the richest. With the arrest of Khodorkovsky, Putin unleashed a property rights populism that may be very difficult to stop. The result is that the political risk premium for investment in Russia remains much higher than otherwise.
Paradoxically, the short-term economic effects have been the least negative. As Russia was flooded with oil money, a limited capital outflow just saved Russia from over-heating and higher inflation. The macroeconomic performance has remained stellar. Direct investment and bond markets were not much influenced, while the stock market’s depression was of little consequence for the real economy.
In the medium term, however, the economic effects might be much more harmful. Although capital outflow seems to speed up, its cost might remain limited. More important is that Russia’s investment in fixed assets is rising far too slowly, especially in the oil industry. At a time of high oil prices, Russia should try to produce as much as possible. Instead, Russia’s oil production that has grown by about 10 percent a year for four years is approaching stagnation this year, and it could start declining very soon. Bottle-necks are likely to grow worse as Minister of Finance Alexei Kudrin has pointed out.
In short, it is difficult to imagine anything that President Putin could have done that would have damaged him worse politically than to arrest Khodorkovsky, but with characteristic stubbornness, Putin is just continuing digging a deeper hole for himself. Strangely, through this act Putin reversed his foremost reforms. The question for us analysts is how deep this hole needs to be before he disappears from Russia’s political stage altogether.
Anders Åslund is director of the Russian and Eurasian Program at the Carnegie Endowment for International Peace.