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Russia’s Halfway House

Maxim Trudolyubov -- WASHINGTON — Vladimir Yevtushenkov, an oligarch under house arrest in Moscow since mid-September on charges of money laundering, may or may not be guilty of any wrongdoing. But he is different from many of his ilk in one important way: He is one of the rare moguls who lives and pays taxes in Russia but directly owns a major stake in his London-listed company Sistema. The vast majority of his peers operate through chains of shell-companies that lead to obscure off-shore havens.
Yevtushenkov had been thought to enjoy special protection. But the fate of the once-powerful billionaire, No. 15 on the Forbes list of Russia’s richest men, has clearly changed. We will never know exactly why he lost favor — the infighting among high-power business and political figures is as obscure as ever.
Russia is a halfway house. It has private companies, markets and all kinds of consumer wares, but it lacks crucial institutions that help us enjoy all those material goods. There are no such things as impartial courts, honest law enforcement or respect for the rules. Many Russian businesses are incorporated abroad for a reason.
The ability to trade, transfer assets across borders and to come and go as you please were among the most visible post-Soviet achievements that stayed untouched under Vladimir Putin. Although he curtailed many other rights, including freedom of speech and freedom of assembly, borders stayed open. This was not because people wanted to travel freely, but because Russia’s political system needed a vital safety valve.
The lack of political clout from businesspeople and civil rights groups has allowed the Kremlin to respond quickly to isolated cases of resistance while staving off comprehensive reforms of the judiciary, the police and most public services. The pressure has been low because, paradoxically, Russia’s business community has never really championed private property rights in any substantial way. Most businesses have long been registered in offshore jurisdictions, most entrepreneurs have long ago acquired foreign residency permits, and their money has been safely parked abroad. The elite have learned to use the education and healthcare systems of other nations while ignoring the deterioration of those services at home. Thus the Kremlin could afford to keep Russian institutions conveniently incomplete.
“The people who are the most likely to be upset by the poor quality of governance in Russia are the very same people who are the most ready and able to exit Russia,” the political scientist Ivan Krastev warned in the Journal of Democracy back in 2011. “For them, leaving the country in which they live is easier than reforming it. Why try to turn Russia into Germany, when there is no guarantee that a lifetime is long enough for that mission, and when Germany is but a short trip away?”
Relative ease of access to Western jurisdictions has prevented pressure within the Russian political system from growing. But this safety valve may soon malfunction. Moscow’s moves on Ukraine, the West’s response, and Putin’s countersanctions have dealt a blow to Russia’s openness. Opportunities for political, social and business integration are narrowing and some doors are being shut entirely.
Various Western countries have placed roughly 100 Russians and a few dozen Russian and Crimean companies under direct sanctions. On its end, the Kremlin has been compiling blacklists of foreign officials, restricting food imports and introducing informal travel bans for some categories of its own citizens, mostly law-enforcement officials and judges. Parliament is preparing comprehensive legislation limiting foreign travel for all high-ranking officials. A draft law banning them from receiving medical treatment abroad was moved recently but failed to pass. Senior officials are already prohibited from opening and operating bank accounts in foreign financial institutions.
But these measures are only the tip of the iceberg. Many Western banks have introduced internal restrictions on any business with Russia just to steer clear of potentially toxic assets. The access of Russian firms and lenders to foreign financing has been severely limited while they have to repay $134 billion in external debt before the end of 2015, according to the Russian Central Bank. Unless foreign sanctions are relaxed Russian companies will face a credit crunch in 2016, the ratings agency Moody’s said recently.
Ordinary individuals also have felt the bite of the sanctions and the general deterioration of the economic outlook. The ruble early this month reached historic lows against the dollar and the euro. Many Russians had to put plans for big purchases and foreign travel on hold.
These are just some preliminary signs of things to come if Russia continues its drift toward isolation. The price of closing the channels of exchange with the West may prove huge not just for the economy but for the political system. If more businessmen are forced to abandon their Western havens the demand for the protection of their rights within Russia will grow dramatically. Theoretically, this may even lead to gradual improvement in the quality of courts and law enforcement.
But in reality, the shadowy case against Mr. Yevtushenkov is a more likely example of what might ensue. (It appears that the Kremlin wants his conglomerate, Sistema, to spin off its Bashneft oil holdings to Rosneft, which is heavily in debt, particularly to the Chinese. Mr. Yevtushenkov objects, hence his house arrest.)
Given the half-built state of the institutional system, isolation will make whatever legal protections Russians still possess an even more scarce resource. This, in turn, will lead to a heightened role for informal “guarantors” of property and safety — the Kremlin and the high-ranking security officials it relies on. These guarantees are always ambiguous. If Russia, helped by sanctions, closes its doors, the country will degenerate in wild infighting, the outcome of which it will be impossible to predict.

Published by the International New York Times

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October 2014

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