Kleptocracy and kakistocracy in the 1990s Russia

Almost all books on Russia are depressing. Paul Klebnikov’s (Forbes Russia editor) brilliant, extremely well-documented and eye-opening “Godfather of the Kremlin”(published in 2000) is no exception. Although it is focused on Berezovsky’s “career”, it is much more than that: it is about how Russia transited from state socialism, not to what in the “pensée unique” media was called market economy, but to a rule of kleptocrats and the mob.  

The book covers the entire de facto and formal Yeltsin’s rule, from the failed Communist coup in August 1990 to Putin’s election in 2000. The judgment on the Yeltsin’s rule is severe and just: “For the Russian people the Yelstin era was the biggest disaster (economically, socially and demographically) since the Nazi invasion in 1941” (p. 320).

What actually happened was the privatization of all government functions and the transfer of wealth to which over decades, if not a century, millions of people contributed, often having been paid miserable wages. That wealth created by millions and owned by the state was then frittered away or given to several hundred individuals, most of them with no merit except for the ability to manipulate others, to know how to run private militias, and to be free of any moral scruple. They thus  became immensely wealthy.

To his credit Klebnikov distinguishes between kleptocrats who wished to at least create something, that is to maintain or create running enterprises, from the kleptocrats whose objective was to destroy as many enterprises as possible.  Among the first group he puts Vadit Alekperov, then and now the manager and part-owner of Lukoil, and even in part Gusinski (currently in exile in Israel), and in the second category, Berezovsky, Abramovich and many others, only slightly less evil or less successful in their ill intentions.

Klebnikov very clearly explains the modus operandi of the destructors, mostly through Berezovsky’s actions and his direct statements  collected in the interviews. The destructors’ approach was simple, efficient and apparently never imagined by the hundreds of creative and highly paid US and Western “advisers”  to the Yeltsin government. Instead of privatization being  used to increase enterprise efficiency as these ingenues believed, it was used by Berezovsky and others to destroy the enterprises. The first and the most important step was “privatization of profits”. Berezovsky discovered it in the early 1990s when he “raided” a large automaker Avtovaz and he kept on applying it even since.

The approach consists in coopting the management of the target companies either through financial inducement (division of the loot) or through threats which, if not operative, lead in many cases to reluctant managers suddenly drowning in rivers or jumping from the windows. Once the management is coopted, it intentionally makes decisions that go against the interest of the company and its workers. In the case of Berezovsky and Avtovaz it meant that the company sold its cars at less than the production cost to auto dealerships established by Berezovsky. Very simple: if the production cost of a car is 100, you sell it to Berezovsky for 50; he then sells it to customers for 200 (market price). He takes 150 and divides it with you; the company loses money, fires people, goes bankrupt, stops production and is auctioned off for peanuts. If you believe there is still something worth looting you buy it for almost nothing;  if not, you just move to another company to destroy.

Berezovsky applied the same trick over and over again. In the case of Aeroflot (which he “conquered” thanks to Yeltsin’s daughter), he created a number of subsidiaries which ostensibly managed Aeroflot foreign exchange flow. They managed it in a very particular way. You paid $100 for your ticket. That money, instead of going straight to the  Aeroflot account would instead go to Berezovsky’s who would then lend (yes, lend) $100 to Aeroflot at interest rates of 30% per year and moreover assess a “management fee”. Aeroflot was lucky to have received $1 out of $100 that you paid for the ticket. At times, Aeroflot would actually own money  to Berezovsky.

Berezovsky and Khodorkovsky applied the same approach to the Russian government. They would be allocated, under various pretenses, government money which they would onlend to government at usurious rates.

The focus on Berezovsky is only one part of the book. It is the whole system that is indicted. The alliances and enmities were formed from case-to-case and while a group of oligarchs were together on one deal, they would fall out in the next and, then in some cases, commission contract killings. What is today at times represented as a free-wheeling Yeltsin “democracy” was, as Klebnikov documents detail-by-detail, gun fights between the  “siloviki” of the various kleptocrats, or their mutual accusations  aired on the TV channels they controlled.

But we shouldn’t forget the pollical enablers of kleptocracy. The key was Yeltsin (personally not corrupted) and his family and close environment (thoroughly corrupt). The origin of kleptocracy predates the famous loans-for-shares deal in 1995-96. It goes back to the last years of the Gorbachev reforms, but then accelerates under Yeltsin, fueled in large part by the hysterical fear of Communists’ return to power. Zyuganov was no Stalin but in most of Russian and US media he was portrayed as such. This gave a license to “reformers” to privatize as soon as possible, giving things away practically for free and stimulating looting  in the correct expectations that (a) the new owners of the looted property will use their wealth and control of the media to twist the election results in  favor of Yeltsin and, (b) once property has either been destroyed or privatized with money stashed abroad, there would be nothing for Zyuganov’s communists, even if they were to come to power, to nationalize. This was the political—and absolutely crucial—underpinning to kleptocratic privatization. Without that we cannot understand why a country would want to destroy itself.

When electoral spinning was insufficient, stronger tactics were used. Yeltsin disbanded the Parliament when it began impeachment proceedings against him and eventually bombed the deputes out. I doubt The Washington Post today would support the same “democratic approach” if used by Trump.  But it did for Yeltsin in 1993.

Klebnikov is very critical of “young reformers”. I do not think he is fully right there because Gaidar, in early 1992, had no option but to liberalize prices lest the county falls into famine—so horrendous were the conditions at the time. Klebnikov  disagrees with Chubais, the mastermind of privatization, but he gives him credit for having realized, after the 1996 election, that the government needed to change course, stop the lawlessness of Berezovsky and friends, and arrest them.  

This is not a history with shades of grey. This is history with darkness and a few, far between, points of light: Yavlinsky, the perennial oppositionist; Gromov, the gruff general; Primakov, the short-lived Prime Minister.

Epilogue. Berezovsky, who managed to manipulate everybody, eventually manipulated Yeltsin into anointing Putin as his heir. But hubris caught with him: he thought that Putin will be at his beck-and-call. It turned out differently: Berezovsky had to flee to England, where after squandering much of his wealth, he lost the remainder in the most expensive lawsuit ever filed against his erstwhile associate Roman Abramovich. He was found hanged in a mansion where his former wife allowed him to live rent-free.

Much more sadly, Paul Klebnikov, a brilliant journalist and economic historian (I ran into Klebnikov's writings first time when I found his Ph D dissertation on Stolypin reforms here) was murdered on a Moscow street in 2004, when an assassin fired nine bullets in him. It is especially poignant to think that Klebnikov in describing many political and financially-motivated murders of the 1990s unwittingly described his own too: cause of murder, unknown; assassins, unknown. Case closed.

Learning history

Tonight, at a dinner time conversation in Barcelona, we went into Catalan history. And I argued how living or spending time in a place that has political problems today leads you, whether you want to do that or not, into trying to figure out the roots of those political problems. That inevitably leads you to history. And you learn so much about the places about which you knew so little before. That was my experience in Catalonia.

But it was just one of the many similar experiences that, as I wrote in Non-exemplary lives, can come only with personal involvement or interest in a given issue.

Let me distinguish between school history and “real” history. The school history  is absolutely crucial. We learn it (as the name says) in school. I learned reasonably well the Communist history of Yugoslavia (focused on the World War II and different Communist party congresses while the Party was illegal in the 1920s and 1930s), and then I learned quite well the Continental European history in my high school in Belgium. I do say explicitly “Continental” because the English, or more broadly “Anglo-Saxon”, history did not feature much in our curriculum. It was basically ancient Greek, Roman, French, German, and a bit of Central European and Russian history that we learned. And nothing outside of Europe.

There is also a “real” history, a history that you want to learn to understand who you are and your place in the world. For me it was the Communist history: from Marx to Mao. Reading about it, in my twenties, was like going to the forbidden edges of the Christian theology: to the time when Christ was just a man among other men, walking around and telling stories. Marx was likewise only a forlorn German philosopher in London. Lenin was an angry émigré among the many in Zurich. Herr Bronstein was reading the newspapers in Café Central. Yes, Enrico Berlinguer said in the 1970s: “The October Revolution was not our Christmas”. But it was. I was reading that history like somebody eager to discover who he was and who were his parents.

About the time when the Wars of the Yugoslav succession were about to break out my interest in Yugoslav history, as such, was minimal. I was interested in it solely to the extent that it was part of the general Communist history—I suppose the same way that a true Catholic or a true Muslim may be interested in French (or Persian) history as a subset of the general Christian (Islamic) history.

The Yugoslav wars though were not about the Communist history but about something much older and more profound. So my knowledge of Lenin, Adler, Engels and Hilferding was useless. I started reading about the history of the Habsburgs and the Ottomans, about the Serbian history and most importantly about the Eastern Roman Empire. The latter led me to my first paper in economic history (Income and inequality in the early 11^th century Byzantium, at the time of Basil II) which led to the definition of the Inequality Possibility Frontier, a concept that has since been used quite often in economic history.

It had three other consequences. Having read Jaroslav Pelikan’s great book on the Eastern Roman Empire, and his forceful critique of Gibbon, led me to one of life-changing experiences, which is the reading of Gibbon’s “The decline and fall…” I would have never come to that point were it not for the dissolution of Yugoslavia, and my being personally affected by it.

I then also read the book that I still suggest to everybody who asks me about the best book to read on the break-up of Yugoslavia: AJP Taylor’s “The Habsburg Monarchy”. It is only after having read Taylor’s dissection of all the ways, and all the failures, to create a multinational state in Central/Eastern Europe, that one  can understand the centrifugal forces that devoured the last such attempt. It is a much better book to read, if you want to understand  the topic, than any of the contemporary non-fiction.   

And it also prompted me to read lots of literature on the Serbian modern (19^th century) history. I never mastered it as well as I mastered the Communist history but I was quite good at it—to hold my own when I had discussions with most rabid Serbian nationalists; I could see, in their eyes, and at times in their explicit acknowledgment, the appreciation for my knowledge—even when they thoroughly disagreed with my views. It made me realize that most of national grievances and extremism (as Hobsbawm indeed noticed) were really grounded in the feeling of inferiority and in dominant cultures’ disregard of other “less important” experiences. I became convinced that if you know Russian/Islamic/Chinese/American  history well and speak the language fluently, there is no Russian/Islamic/Chinese/American nationalist, however extreme (assuming that he is not a fraud but somebody who knows the facts well), who would not give you a grudging recognition and would not be willing to moderate his opinions.

Learning the pieces of Catalan and Spanish history now (mostly from the others) made me realize--again--how the “real” history, the history of the place we happen to be at a given point in time, is crucial. And how important it is to have varied experiences, to live in many different places, to speak different languages, for we cannot learn that “real history” unless we have skin n in the game.

Sometime I wonder: how can people who live in "happy" countries where history does not matter “feel”  history? I do not know.