THE NEW RUSSIAN MODEL. WHAT DOES IT MEAN FOR INSTITUTIONAL DEVELOPMENT, INTERNATIONAL ENERGY...

THE NEW RUSSIAN MODEL. THE NEW RUSSIAN MODEL. WHAT DOES IT MEAN FOR WHAT DOES IT MEAN FOR

INSTITUTIONAL DEVELOPMENT,INSTITUTIONAL DEVELOPMENT,INTERNATIONAL ENERGY SECURITY, INTERNATIONAL ENERGY SECURITY, LONG-TERM ECONOMIC GROWTH, LONG-TERM ECONOMIC GROWTH,

AND RUSSIAN-EUROPEAN INTEGRATIONAND RUSSIAN-EUROPEAN INTEGRATION

A. Illarionov,A. Illarionov,CATO Institute, Washington, USACATO Institute, Washington, USA

Institute of Economic Analysis, Moscow, RussiaInstitute of Economic Analysis, Moscow, Russia

WIIW Spring Seminar “EU-27 and Its Neighbourhood”, WIIW Spring Seminar “EU-27 and Its Neighbourhood”,

Vienna, March 23, 2007Vienna, March 23, 2007

© © CATO Institute, InstituteCATO Institute, Institute of Economic Analysisof Economic Analysis

www.cato.orgwww.cato.org, , www.cato.ruwww.cato.ru, , www.iea.ruwww.iea.ru

http://www.cato.org/

http://www.cato.rg/

http://www.iea.ru/

© ИЭА2

"Russia is a riddle "Russia is a riddle wrapped in a mystery wrapped in a mystery

inside an enigma.“inside an enigma.“

WinstonWinston ChurchillChurchill

© ИЭА3

1. Creation of the New Russian Model.

© ИЭА4

1. Appropriation of executive power by the Corporation of secret police (CSP).2. Capture of the Russian state bodies (security services, tax agency, courts, Prosecutor offices, MFA, MoD, parliament, media) by the CSP and use of these bodies in the interests of the CSP. 3. Concentration and monopolization of all significant resources (political, legal, military, security, economic, financial, mass media) in the hands of the CSP. 4. Destruction of the rule of law with new rules of the game: law is above people, the CSP is above law, no people/law above the CSP.5. Ideology and practice of “nascism” (“our ownism”) with selectiveness/absence of identical rules as a leading principle. 6. Rise of state monopolies with privatization of profits and nationalization of costs as a leading principle.7. Siloviki-type PPP (public-private partnership) – coercion of private business to fulfill orders of the CSP and bear the costs.8. Main award of the CSP is “paratrooping” its members (doesn’t matter - whether Russian or foreign) into the state or state-friendly company.

New Russian (siloviki) model.

© ИЭА5

““The Federal government plus regional governors corps… The Federal government plus regional governors corps… should work like one corporation.”should work like one corporation.”

President of Russia at the State Council Meeting,President of Russia at the State Council Meeting,December 24, 2005December 24, 2005..

“The accumulation of powers, legislative, executive, and “The accumulation of powers, legislative, executive, and judiciary – in the same hands, may justly be pronounced judiciary – in the same hands, may justly be pronounced

the very definition of tyranny.”the very definition of tyranny.”James Madison. Federalist papers, # 47.James Madison. Federalist papers, # 47.

“The people should not know “The people should not know who governs them.“who governs them.“

Mikhail Boyarsky, Russian popular actorMikhail Boyarsky, Russian popular actor

© ИЭА6

Professional background of government personnel in modern Russia.

© ИЭА7

Division of powers in modern Russia. Distribution of flash-lighted cars among branches of power:

judicial, legislative and executive (including security).

© ИЭА8

Areas of Areas of public lifepublic life

Departing point Departing point inin 1991 1991

European/European/

US modelUS modelNew Russian model New Russian model

EconomyEconomy Centralized Centralized plannedplanned

Free market Free market economyeconomy

State monopoly State monopoly capitalismcapitalism

Political Political systemsystem

Communist Communist dictatorshipdictatorship

Liberal Liberal democracydemocracy

Militocratic (siloviki) Militocratic (siloviki) dictatorshipdictatorship

Nature of Nature of state state mechanismmechanism

Party monopoly Party monopoly statestate

Competitive Competitive statestate

Corporatist state Corporatist state (state captured by (state captured by the CSP)the CSP)

Foreign Foreign policypolicy

Confrontation Confrontation and aggressionand aggression

Friendly Friendly neighboringneighboring

Confrontation and Confrontation and aggression (energy, aggression (energy, wine, etc.) wine, etc.)

State State ideologyideology

Communism, Communism, social hatredsocial hatred

Social patience Social patience and ethnic and ethnic tolerancetolerance

““Nascism” (sovereign Nascism” (sovereign democracy)democracy)

Path of Russia’s Transition.

© ИЭА9

2. Implications of the New Russian Model for Russia’s institutional development is

“Zimbabwean Disease” –

establishing next to total control of executive power over public and social life

leading to destruction of virtually all political and economic institutions

of civilized society – legislative and judicial powers, political parties,

private businesses, mass media, NGO, religious organizations.

© ИЭА10

Zimbabwean disease: Political Freedom in Zimbabwe and Russia, 1991−2006

© ИЭА11

Deterioration in Electoral Process Index in Russia.

© ИЭА12

Deterioration in Judicial Framework & Independence Index in Russia.

© ИЭА13

Deterioration in Civil Society Index in Russia.

© ИЭА14

Deterioration in Independent Media Index in Russia.

© ИЭА15

Deterioration in Governance Index in Russia.

© ИЭА16

Level of violence in Russia. Level of violence in Russia. Crimes against personality Crimes against personality

per 100 thousands population per 100 thousands population (1998 г. =100%)(1998 г. =100%)

© ИЭА17

3. Implications of the New Russian Model for availability of energy supply is

“Venezuelan Disease” –

nationalization and quasi-nationalization of private assets in oil and gas as well as in

transportation, construction, automobile industry, aviation, shipbuilding, etc.

© ИЭА18

Private sector share ofPrivate sector share of Russian oil production shrank from Russian oil production shrank from 83,5% in 2003 to 42% in 200683,5% in 2003 to 42% in 2006

Source: Oil & Capital

© ИЭА19

Financial results of Yuganskneftegaz after transfer from private YUKOS to state-owned ROSNEFT became

a triumph of ineffectiveness and incompetence. Yuganskneftegaz’ financial results

in Jan-Sep 2005 in constant prices as % in Jan-Sep 2004.

© ИЭА20

After 4 years of unprecedented growth in 2000-2003 within YUKOS the “pearl” of Russia’s oil industry, Yuganskneftegaz,

saw its output collapsed. Yuganskneftegaz oil output growth as % to previous year

© ИЭА21

Oil output of the fastest growing and the most transparent Russian company YUKOS has collapsed

© ИЭА22

Oil output in Russian companies Oil output in Russian companies in Octoberin October 2006 2006 as % of September 2004 as % of September 2004.


© ИЭА23

Oil output in foreign companies operating in Russia Oil output in foreign companies operating in Russia in 2006 as % of 2005in 2006 as % of 2005.


© ИЭА24

In a response to the assault by the CSP, annual growth rate in oil output fell

from 12% in June 2003 to about 2% in late 2006. Oil Production Annual Growth Rates, January 1996 – December 2006

© ИЭА25

Source: Rosstat.

Growth in oil output in Russia has slowed significantly and Growth in oil output in Russia has slowed significantly and not reached the Soviet level yet.not reached the Soviet level yet.

© ИЭА26

Gas output of Gazprom remained flat for the last 7 years, Gas output of Gazprom remained flat for the last 7 years, while independent producers more than doubled itwhile independent producers more than doubled it.

Source: Institute of Energy Policy, “Gazprom”

100,0

130,3

147,4155,8

170,9

191,5199,4

226,5

100,693,7 95,5 100,299,898,995,7100

50

70

90

110

130

150

170

190

210

230

250

1999 2000 2001 2002 2003 2004 2005 2006

Independent gas producers "Gazprom"

© ИЭА27

4. Implications of the New Russian Model for reliability of Energy Supply is

Saudi Disease –

use of nationalized and quasi-nationalized energy resources and energy infrastructure

as a weaponin domestic and international relations.

© ИЭА28

Backed by an unstoppable influx of financial resources into the country

the Russian government’s foreign policy became more assertive, more arrogant

and more aggressive.

Energy warfare has been recently used against Ukraine, Moldova, Georgia, Poland, Lithuania, Belarus.

© ИЭА29

5. Implications of the New Russian Model for

Long-Term Economic Growth is

Darvensazimus disease

© ИЭА30

Darvensazimus disease

is a rather rare, complex and dangerous illness consisting of at least 5 diseases:

- “Dutch” Disease- “Argentinean” Disease- “Venezuelan” Disease- “Saudi” Disease- “Zimbabwean” Disease

© ИЭА31

Dutch Disease:Dutch Disease:GDP per capita in the Netherlands as % of the USAGDP per capita in the Netherlands as % of the USA, 1975–, 1975–

19881988

© ИЭА32

Argentinean DiseaseArgentinean Disease: : GDP per capita in Argentina as % of the USAGDP per capita in Argentina as % of the USA, 1958–2005, 1958–2005

© ИЭА33

Venezuelan DiseaseVenezuelan Disease: : GDP per capita in Venezuela as % of the USAGDP per capita in Venezuela as % of the USA, 1957–2005, 1957–2005

© ИЭА34

Saudi diseaseSaudi disease: : GDP per capita in Saudi Arabia GDP per capita in Saudi Arabia as % of the USAas % of the USA, 1973–2005, 1973–2005

© ИЭА35

Zimbabwean DiseaseZimbabwean Disease: : GDP per capita in Zimbabwe as % of the USAGDP per capita in Zimbabwe as % of the USA, 1982–2005, 1982–2005

© ИЭА36

Annual average rates of lagging behind by “sick” countries during their “diseases”,

as a percentage of the US GDP per capita level.

© ИЭА37

Losses in economic growth rate due to quality of policies and institutions.

Real GDP growth adjusted for windfall profits received.GDP real growth minus windfall profits, percentage of GDP

© ИЭА38

Russia’s real GDP growth rates among FSU countries Russia’s real GDP growth rates among FSU countries during 3 sub-periods,during 3 sub-periods, 1999–200 1999–20066

© ИЭА39

Industrial output (January 1990 = 100%)

© ИЭА40

Russia’s GDP as % of FSU, 1989-2006

© ИЭА41

Russia’s GDP as % of total in countries in transition, 1989-2006.

© ИЭА42

6. Implications of the New Russian Model to

International Relations is

growing isolation from the West and CIS

© ИЭА43

Since 2001 intensity of the Russian President’s international summits was constantly falling.

After November 2006 it fell by half.

© ИЭА44

Country’s preference of the Russian president’s summits has change dramatically,

especially after November 2006

© ИЭА45

Structure of the Russian President’s summitshas undertaken radical changes

© ИЭА46

Intensity of Russian President’s summits by groups of countries

© ИЭА47


Russia’s relations with the EU is

failure of Russian-European integration

and further Russia’s departure

from economic and institutional standards of the EU

© ИЭА59

By changes in Political Freedom Index in 1991-2005 Russia occupies 190th place

among 193 countries of the World.

© ИЭА62

Monthly Average of Political Freedom Index for the countries with leaders of whichthe Russian president held summits

© ИЭА63

1. IPO of Rosneft at the London Stock Exchange.

2. G8 summit in St. Petersburg.

3. US support for WTO membership in October 2006.

4. Foreign business leaders’ gratitude to the Russian

leadership for their expulsion from Sakhalin, Kovykta,

Stokman and other projects.

5. The US President Bush response to the Russian

President Putin speech in Munich.

9. International approval of the New Russian model

(esp. since July 2006)

© ИЭА64

Great Leader Appreciation Disease – Great Leader Appreciation Disease –

irresistible passion to be thankful irresistible passion to be thankful

for everything under the Sunfor everything under the Sun

to the Great Leader to the Great Leader

(Stalin, Mao, Kim Il Sen, Turkmenbashi) (Stalin, Mao, Kim Il Sen, Turkmenbashi)

© ИЭА65

“He’s done a helluva of a job. The country has made tremendous strides in the time we’ve been there, and you’ve got to give Putin credit for that. He did a lot of positive things in a very short period of time.”

Mark Mobius, Tempelton Asset Management Ltd.WSJ, January 22, 2007

“Two key factors in any emerging market are economic predictability and political stability. Russia has the first thanks to oil, and the second thanks to Putin.”

Chris Weafer, chief economist, Alfa Bank,WSJ, January 22, 2007

“Thank you for supporting this truly historic event. We sincerely welcome Gazprom as one of our partners in the project… This is historical situation for all sides… I am grateful to you, Mr. President, for your assistance.”

Van der Veer, Royal Dutch Shell,Meeting with the Russian President, December 21, 2006

© ИЭА66

Press Conference by the President George W. Bush, February 14, 2007, White House:

“Q Is the Vladimir Putin who said the United States is undermining global security and provoking a new arms race the same Vladimir Putin whose soul you looked into and found to be trustworthy? Has he changed? Are U.S.-Russian relations deteriorating?

THE PRESIDENT: I think the person who I was referring to in 2001 is the same strong-willed person. He is a person with whom I have had agreements and disagreements… I've tried to convince Vladimir that NATO is positive… We work together on… common interests, we can accomplish important things for the security of our own people, as well as the security of the world.There's also a relationship in which we can find common ground to solve problems. And that's the spirit -- that's the spirit I'll continue to work with Vladimir Putin on.” http://www.whitehouse.gov/news/releases/2007/02/20070214-2.html

http://www.whitehouse.gov/news/releases/2007/02/20070214-2.html

© ИЭА67

The main implications of New Russian Model:

1. Destruction of institutions of modern society in Russia.

2. Less available and less reliable energy supply for the world

markets.

3. Reduction in potential long-term rate of growth.

4. Growing isolation of Russia from the West and CIS. Shift in

preferences of contacts from the West and CIS to the East.

5. Failure of Russia-EU integration. Further departure from

economic and institutional standards of the EU.

6. Export of Political Non-Freedom from Russia.

7. The Western approval of the New Russian Model at the highest

level.

Intermediate conclusions

THE NEW RUSSIAN MODEL. THE NEW RUSSIAN MODEL. WHAT DOES IT MEAN FOR WHAT DOES IT MEAN FOR

INSTITUTIONAL DEVELOPMENT,INSTITUTIONAL DEVELOPMENT,LONG-TERM ECONOMIC GROWTH, LONG-TERM ECONOMIC GROWTH,

ENERGY SECURITY, ENERGY SECURITY, AND RUSSIAN-EUROPEAN INTEGRATIONAND RUSSIAN-EUROPEAN INTEGRATION

A. Illarionov,A. Illarionov,CATO Institute, Washington, USACATO Institute, Washington, USA

Institute of Economic Analysis, Moscow, RussiaInstitute of Economic Analysis, Moscow, Russia

WIIW Spring Seminar “EU-27 and Its Neighbourhood”, WIIW Spring Seminar “EU-27 and Its Neighbourhood”,

Vienna, March 23, 2007Vienna, March 23, 2007

© © CATO Institute, InstituteCATO Institute, Institute of Economic Analysisof Economic Analysis

www.cato.orgwww.cato.org, , www.cato.ruwww.cato.ru, , www.iea.ruwww.iea.ru

http://www.cato.org/

http://www.cato.rg/

http://www.iea.ru/

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