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World Affairs | 13May2015 | Karen Dawisha

The Putin Principle: How It Came to Rule Russia

In reacting to Russia’s annexation of Crimea and support for pro-Russian separatists in Ukraine in early 2014, the US government did not call the Sixth Fleet into action; it did not ban all exports to Russia; it did not stop all cultural and educational exchanges. Rather, key elites close to “a senior Russian government official” -- President Vladimir Putin -- were targeted with asset seizures and visa bans.

Probably the most serious international crisis since the end of the Cold War, and the White House targets individuals? It seemed an odd response to some observers. But it made sense. At last, after 14 years of dealing with Putin as a legitimate head of state, the US government has finally acknowledged that he has built a system based on massive predation on a level not seen in Russia since the czars. Transparency International estimates the annual cost of bribery in Russia at $300 billion, roughly equal to the entire gross domestic product of Denmark, or many times higher than the Russian budgetary allocations for health and education. Capital flight totaled $335 billion from 2005 to 2013, or about 5 percent of GDP. But then in 2014, with the ruble and oil prices tumbling, it reached more than $150 billion -- a figure that has swollen Western bank coffers but made Russia the most unequal of all economies, in which, according to Credit Suisse, 110 billionaires control 35 percent of the country’s wealth.

And these billionaires, far from being titans of industry motoring the modernization of the Russian economy or independent centers of power pushing for reform, have secured and increased their wealth by relying on and bolstering the centralized power of the state. The wealth of the oligarchs and political elites who came to power with Putin in 2000 has been more stable than in any other Group of 7 country. Political leaders close to Putin have become multimillionaires, and the oligarchs around them, according to Forbes, have become billionaires who understand that their wealth and power will be secure as long as they don’t challenge Putin politically. Under this return to state capitalism, the state nationalizes the risk but privatizes the rewards to those closest to the president in return for their loyalty.

Within weeks of Putin’s coming to power in 2000, the Kremlin began to erode the basic individual freedoms guaranteed under the 1993 Russian Constitution. Beginning immediately to deny citizens the rights of free press, assembly, and speech, Putin was assisted by very favorable global economic conditions that muted dissent over what was happening. Indeed, as the price of oil shot up to more than $140 a barrel, the Kremlin was initially able to provide an increased standard of living for ordinary Russians and the emerging middle class while also creating greater social stability. 

But in addition to an assist from favorable economic conditions, Putin also benefited from the existence of a tight-knit circle that came with him from St. Petersburg and with whom he had worked for more than a decade. Working together, they sought to establish a regime that would control privatization, restrict democracy, and return Russia to great power (if not quite superpower) status. Many in this circle used public positions for personal gain even before Putin became president in 2000. The trail leads to the establishment of Bank Rossiya, now sanctioned by the United States; the rise of the Ozero Dacha Consumer Cooperative, founded by Putin and others now subject to visa bans and asset seizures; the links between Putin and Petromed, the oil company that diverted millions in state funds to build “Putin’s Palace” near Sochi; and the role in big business of security officials from Putin’s KGB days in Leningrad and Dresden.

Elections in all new democracies suffer from problems of weak party stability, loose and fluid electoral laws, and voter manipulation and fraud. In theory and practice, these problems should decrease over time, leading to the consolidation of democratic institutions. In Russia, however, they have only increased, until in the 2011–12 electoral cycle the fraud and abuse were considered so widespread that popular demonstrations broke out. By the end of 2011, having come through a thoroughly fraudulent and publicly documented sham election for the Duma (the lower house of Russia’s Parliament), it became clear that the ability of opposition activists to seek democratic change was significantly inferior to the regime’s willingness to suppress them.

After Putin publicly wept, possibly from relief, when he was declared the winner of the 2012 presidential elections, targeted repressions began again, reminiscent of the early 1930s or the late 1960s in the USSR. Nonviolent demonstrators were once again sentenced to either prison or indefinite psychiatric treatment. With the economy suffering a downturn -- mainly because of elite plundering -- the crony regime’s inner logic was revealed: Putin would use force to maintain his potentially indefinite hold on power so that his group could continue to loot the country under the guise of “restoring Russian greatness,” while the opposition was able only to hold endless Internet discussions about the bespredel -- the limitless and total lack of accountability of the elites.

It is this kleptocratic tribute system underlying Russia’s authoritarian regime that the US government sought to expose and punish beginning in March 2014. For the first time, the White House explicitly referred to Putin’s “cronies” and targeted their money abroad, exposing the fact that Western governments have known for some time the broad details of where this group’s money is, what their private rules are, and what high crimes and misdemeanors they have committed to establish and maintain their sistema.

Because this system is complex and clever, full of interesting details and inner rules despite its opacity, we should conclude that it came about by intelligent design rather than by chance. Putin is not an “accidental autocrat” or a “good czar surrounded by bad boyars.” Of course, the boyars -- now called oligarchs -- are mainly bad. And of course, not every detail of their ascent was planned; certainly they met with deep resistance from other rivals, in both St. Petersburg and Moscow. And Putin’s group could never have predicted how successful they would be and how little their acquisition of power would be resisted by Russians and the West. But what is clear is that the group around Putin today is the same as the one that brought him to power from St. Petersburg in the 1990s and that rather than getting lost on the path to democracy, they never took that path in the first place.

Why did the West not firmly resist “Putin’s project” until now? Many Western officials stationed in Russia certainly knew from the early 1990s what kind of operative Putin was and whom he depended upon to get things done. But he was regarded as a relatively low-level person in one city in one very turbulent country. And so the eyes of Western intelligence were wide shut until, after less than two years, Putin rose from being an out-of-work deputy mayor, whose boss had just lost his bid for re-election, to the head of the Federal Security Service (FSB), the modern-day KGB. One year later, in 1999, Putin was prime minister; six months after that, he was president. Jobless to president in three and a half years. Only then did Western journalists and policymakers focus closely on his background and the composition of his circle, but by then it was too late. According to government leaks at the time to Newsweek, US government analysis of Putin’s personal involvement in a money-laundering scheme through a German-based company, SPAG, led in 2000 to Russia’s being placed on an international money-laundering blacklist: “A key reason, said a former top US official, was a sheaf of intelligence reports linking Putin to SPAG,” including documents showing he “signed important St. Petersburg city documents for the company’s benefit.” The pattern of helping his friends to the detriment of his people was set early.

The facts of Putin’s rise might have become part of the West’s critique of his governance, but then, at the Slovenia summit in June 2001, President George W. Bush looked into Putin’s eyes and saw his soul, and Putin quickly joined the “war on terror.” Putin was transformed into a reliable partner in helping the West target Islamic extremists, especially in Afghanistan, since there were Chechen fighters in al-Qaeda camps. Only slowly did Putin’s malevolence dawn on Western governments, especially in light of the Kremlin’s transparently predatory actions in taking apart Russia’s largest private oil company, Yukos, and imprisoning its independently minded owner, Mikhail Khodorkovsky, in 2005. 

The following year, at the Group of 8 meeting in St. Petersburg, Bush called for “strengthened international efforts to deny kleptocrats access to our financial system,” but he still did not mention Russia by name. The New York Times subsequently reported that in 2007 a CIA assessment of Putin’s personal wealth “largely tracked” with assertions made by the Russian political analyst Stanislav Belkovsky, who claimed that Putin had holdings totaling about $40 billion in the commodity-trading company Gunvor, the publicly traded state-majority-owned gas giant Gazprom, and the oil and gas company Surgutneftegaz. At last, it seemed that the West might start to stand up against this vast scheme, with its potential to undermine not only Russia’s development but Western financial institutions, the banks, equity markets, real estate markets, and insurance companies that were showing signs of being subverted internally by employees eager to receive a cut of the Putin circle’s illicit transactions.

But then President Obama decided to push the “reset” button in US relations with Russia. As a result, Putin spent only minutes in the penalty box for the 2008 invasion of Georgia before being embraced at the 2009 G8 meeting of the world’s leading industrial nations. The meeting was hosted in Italy by Putin’s personal friend, Prime Minister Silvio Berlusconi, whom US government cables -- through WikiLeaks -- alleged to be “profiting personally and handsomely” from secret deals with Putin that included the “exchange of lavish gifts.” From 2008 to 2014, six more years were lost while low-level government officials in the West gathered materials on Putin’s wealth and high-level political appointees ignored them.

Clearly, in the 1990s democracy was in fact both being built and failing, but the more critical narrative was that there were elites (centered on Putin and his security cabal, the so-called siloviki)who sought from the beginning to establish an authoritarian regime in Russia and to kill the democracy others were trying to build, because it would inevitably force them to someday surrender power. 

When these shadowy figures came to see themselves as the personal guardians and guarantors of Russia’s future, this only increased the possibility that they would not only resist the rotation of elites, critical to a democracy, but actively seek to stymie it. And they used many methods to achieve this, including engaging in criminal behavior, controlling the legal system and the media, and, above all, maintaining group cohesion through combinations of threats and rewards.

Putin and his circle could have passed and upheld laws to protect, promote, cement, and sustain democratic institutions, but they chose not to. On the contrary, they have established what they themselves internally call a sistema that undermines, mocks, and mimics democracy but that actually serves the purpose of creating a unified and stable authoritarian state that allows individuals close to Putin and his associates to benefit personally from the unparalleled despoliation of Russia’s vast natural resources. To be sure, Putin has built a legalistic system, but its net effect is to control, channel, and coerce the middle class and the broader elite while at the same time allowing the inner core to act in accord with what has been called Putin’s “vertical of impunity,” according to the adage “For my friends, anything. For my enemies, the law!”

This is not to say that the Russian ruling elite does not see the benefits of a robust rule-of-law system. That they do is shown by their eagerness to park their money in Western banks. The situation calls to mind American economist Mancur Olson’s idea that in the transition from dictatorship to democracy, “roving bandits” will over time gain an interest in laws to vouchsafe their gains and will settle down, and from their self-interest in the stability and predictability of the system they control, democracy will emerge. Under Putin, as the regime has made the transition from “roving” to “stationary” bandits, inter-elite violence has decreased, and the streets have become safer, as Olson predicted. What Olson failed to foresee was the extent to which globalization would allow Russian elites to continue to maximize their gains by keeping domestic markets open for their predation while minimizing their own personal risk by depositing profits in secure offshore accounts.

The story starts with the collapse of the USSR, when, as the archives of the Communist Party of the Soviet Union reveal, the KGB moved the party’s vast financial reserves offshore, out from under President Mikhail Gorbachev’s control, thus further crippling his regime. The August 1991 coup by Communist and KGB hard-liners failed, but their aspirations remained. One of the chief strategists of Putin’s 2000 victory, Gleb Pavlovsky, subsequently put it like this, after he had been sacked by the Kremlin: “Putin belongs to a very extensive but politically invisible layer of people who after the end of the 1980s were looking for a ‘revanche’ [seeking the return of lost glory] in connection with the fall of the Soviet Union.” The 1990s was devoted to preparing for that moment.

Putin’s early life was spent yearning to join the KGB and finally being accepted. By his own account, his favorite songs are Soviet standards, not Western rock. He has been deeply conservative his whole life. Yet he has also been a keen collector of every possible trapping of material wealth. When he was stationed in East Germany, he had the leaders of the German Red Army Faction (also known as the Baader-Meinhof Group) steal stereo speaker systems for him when they had a moment free from their terror campaigns. Back in Russia in the early 1990s, Putin acquired a substantial country house, or dacha, and an apartment in a prestigious section of St. Petersburg within his first years of working in the city; neither of these could have been purchased with his meager official salary.

This pattern of uncontrollable greed, of wanting what rightfully belongs to others, which the journalist Masha Gessen calls “pleonexia,” has resulted in 20 official residences, 58 planes, and four yachts. Putin does not “own” any of these, except his St. Petersburg properties and perhaps his first yacht, Olympia, which was presented to him as a gift by a group of oligarchs headed by Roman Abramovich just prior to his becoming president in 2000, and delivered in 2002. Without the presidency, Putin theoretically would not be allowed to keep any of these accoutrements of power, except perhaps for the $700,000 in watches that he routinely sports -- six times his declared annual income, a subject of constant Russian journalistic interest. Thus his motivation to leave power is reduced to zero. Those who say politicians can’t be called corrupt unless the police find $20,000 in small bills in their freezer, or who say, “But the US presidents have Camp David,” should contemplate how much has been taken from public funds to finance the construction, maintenance, furnishing, and round-the-clock staffing of these 20 residences, most of which did not exist, or at least not in their current gilded state, prior to Putin’s rule.

The demands of this tribute system have meant that the cost of doing business in Russia has escalated to such an extent that Russian and foreign businesses alike wonder whether they can even turn a profit. The global Swedish furniture chain Ikea threatened to call it quits after years of trying to run a clean business in Russia. When the head of Ikea in Russia, Lennart Dahlgren, left the company in 2006, he revealed that the company had been subjected to years of legal traps that it sought to solve by meeting personally with Putin. But a high-ranking official told them that a meeting with Putin would cost $5 million to $10 million. Not knowing whether the officials were serious or joking, Dahlgren told reporters, “I sensed that it would be better not to get into that discussion any deeper.”

A 2010 cable from America’s ambassador in Moscow, John Beyrle, to the US secretary of state, released through WikiLeaks, provided the following description of how money, elections, criminal activity, and the Kremlin interact:

X. [name redacted by me] stated that everything depends on the Kremlin and he thought that . . . many mayors and governors pay off key insiders in the Kremlin. X. argued that the vertical [“vertical of impunity”] works because people are paying bribes all the way to the top. He told us that people often witness officials going into the Kremlin with large suitcases and bodyguards, and he speculated that the suitcases are full of money. The governors also collect money based on bribes, almost resembling a tax system, throughout their regions. He described how there are parallel structures in the regions in which people are able to pay their leaders. For instance, the FSB [successor to KGB], MVD [Ministry of Internal Affairs], and militia all have distinct money collection systems. Further, X. told us that deputies generally have to buy their seats in the government. They need money to get to the top, but once they are there, their positions become quite lucrative money making opportunities.

Vladimir Putin is both a product and a producer of this pervasive system of corruption. Of course, he is not the only Eurasian or Western leader to have collected gifts and tributes. But to have created, with this clique, an entire system that spans 11 time zones is by any measure an impressive achievement and one that the West should take into account as it ponders how to respond to the Russian leader. 

Karen Dawisha is the director of the Havighurst Center for Russian and Post-Soviet Studies at Miami University and author of Putin’s Kleptocracy: Who Owns Russia? from which this article is adapted.