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#20 - JRL 9229 - JRL Home
Date: Sun, 21 Aug 2005 00:52:07 -0400
From: Gabe Collins <gabe.collins@gmail.com>
Subject: Russia article from '05 Princeton grad who lived in St. Petersburg all summer

[click here for article:
Chopping off the Branch Upon Which You Sit: Arbitrary Governance is Undermining Russia's Economic Future
]

Dear Mr. Johnson,

I wrote an article for Johnson's Russia List on the Yukos affair in December. The main things that have changed since then is that I am now a new Princeton graduate (cum laude BA in Politics), I understand Russia and Russian a little better, and that my e-mail has changed! Now to business...

I lived with a Russian family in St. Petersburg all summer and spent a good chunk of each day speaking with Russians from all walks of life and reading on political and economic issues in the Russian press.

I have condensed some of my observations into a 740 word piece on how I feel Russia's current system of governance is undermining long-term economic growth.

PS--My author information is as follows--

I graduated Princeton with a BA in Politics, cum laude, lived all summer with a Russian family in St. Petersburg and studied Russian at Nevsky Institute, and will study energy politics at MGIMO in Moscow beginning Sep. 1.

--------

Chopping off the Branch Upon Which You Sit
Arbitrary Governance is Undermining Russia's Economic Future

By Gabe Collins

Russia's highly educated population and rich natural resources give it an excellent foundation for large scale economic growth, but this potential is being short circuited by arbitrary governance. Americans should be concerned with this situation.

We are on the verge of becoming a major liquefied natural gas importer. Holding 35 percent of global gas reserves, Russia is the Saudi Arabia of natural gas. A strong commercial relationship based on the energy trade can be the anvil on which Washington and Moscow forge a strong political relationship. Energy is the foundation of Russia's ties with the European Union, and the two groups appear to be working well together.

Strong political ties between Russia and the US may reduce Russia's incentives to ally with China, a key strategic competitor of the US. A positive relationship between Russia and the US would yield dividends in the form of increased co-operation in the fight against terrorism and weapons proliferation. Like Americans, Russians live with the daily threat of terrorist attacks and understand that it takes more than dialogue to combat this threat.

Unfortunately, the win-win situation that strong ties between Moscow and Washington would bring remains a pipe dream due to the way Russia is currently governed. Many argue that President Vladimir Putin's crackdown on the oligarchs who command the high ground in Russia's economy will help the country. To a degree, this is true. However, these maneuvers have a central and absolutely critical flaw­they are carried out in an arbitrary and personalistic way that highlights the weak rule of law in Russia.

The result is that businessmen adopt a "raider" mentality, instead of the entrepreneurial "builder" mentality that Russia so badly needs. Rather than long-term business plans and new entrepreneurial ventures, much of the focus is on squeezing the last possible drop out of a business's current set-up. If the government can come in overnight, appropriate a company, and jail its operators, businesspeople are best off stashing capital overseas and buying an "exile home" abroad, to which they can flee if the political situation sours. When business people feel this way and refrain from investing in future expansion and improvements, national economic growth suffers. Arbitrary governance also frightens away foreign investors, who bring badly needed capital and experience to Russia. When politically motivated attacks on businesses are in full swing, it is difficult for the CEO of a multinational company to convince shareholders of the viability of a billion dollar venture in Russia. By way of comparison, the Chinese have structured their economy to be foreign investor-friendly, and are reaping a golden harvest.

The Khodorkovsky/YUKOS affair has reminded Russian businessmen that the days of politically motivated attacks on them did not end with the fall of Communism. Like most of the oligarchs, Khodorkovsky gained control of his assets in ways that our SEC would not approve. Yet when he was arrested, he was deep into the process of making the transition from "raider" to "builder." He was restructuring YUKOS to make it transparent and hoped to sell it to a large Western energy company. For Russian businessmen, the "tax investigation" has become the equivalent of the Soviet era "three a.m. knock on the door." Since many of today's large Russian business operators gained control of their holdings through questionable means during the economic Wild West of the early 1990s, the government and tax services can always find a "reason" to investigate and dismantle a company.

If Russia fails to establish strong rule of law, the natural resource sector will come further under the control of Putin's circle of silovik advisers and will not reach the full potential that it would under private management with foreign investment. More importantly, weak rule of law will short-circuit economic diversification and entrepreneurialism that capitalizes upon the human potential of Russia's highly educated population. This in turn will kill Russia's chance to become a true economic power, and instead make it into a Northern edition of the Middle Eastern petrostates.

If Russia is to break with its long history of being unable to fully harness the potential of its well educated populace and rich natural resources, it needs to close investigations of how wealth was obtained in the early 1990s and focus on building a strong rule of law based system that can carry it into the future. Until such an amnesty is put into place, a large anvil will hang over the head of every Russian businessperson who profited during privatization, and this will hinder domestic and foreign investment in Russia's future.