Corruption is Russia’s biggest export

It is nice to poke fun at oligarchs who are trying to play their game with a poker face, or to track how Rusal (Russian aluminium company) shares are falling in Hong Kong or London. The US sanctions made a lot of noise both in the American and Russian media. But could we talk about their long-term consequences?

All Russian oligarchs support the regime because they are not western-style entrepreneurs who do private business. They disproportionally depend on assistance from the Russian state, which can, at any point, imprison them or simply expropriate their capital. Literally, there is no split of the elite in Russia. Have their businesses suffered? Absolutely! But the main problem is their companies can’t be qualified as business in the western understanding. There is no market economy in Russia because there is no differentiation between public and private property. In order to protect their properties, oligarchs do not think how sanctions may affect them. Instead, they worry about their loyalty to the regime. Rather than thinking in euro or dollars, loyalty is the main currency utilised by Russian oligarchs. The question the West should ask itself is “Are the sanctions the best way to break this loyalty”? Yes, the sanctions do have an influence over the nominal values of Russian oligarchic wealth, but their loyalty to the Kremlin is not targeted, therefore there is no impact on the Kremlin’s policy. Of course, now the Kremlin may have fewer resources to continue with its current policy, but this will not push it to change its strategy. I recently published a report How to Select Russian Oligarchs for New Sanctions? which got traction among staffers in Congress who devise sanctions. In this report I argue that the US government now has wider criteria to sanctions real insiders of Putin’s regime like the Alfa Group of oligarchs and Roman Abramovich in the new sanctions. After the disastrous Helsinki Summit there is a great appetite in Congress to expand sanctions against Putin’s regime and its proxies.

Vladimir Putin’s new presidential term has just begun. How will he design an economic policy that will bring loyalty from both the oligarchs and the citizens?

The instruments of maintaining the loyalty of the general public remain the same. Of course, Russian citizens can expect some benefits, but the main instruments of retaining their loyalty will be propaganda, brainwashing and the development of the besieged fortress concept. The Kremlin will probably look to create more conflicts in order to blame some third party for the bad economic situation. Now Putin definitely has more limited resources to carry out his internal policy than before annexation of Crimea. Otherwise, there are still plenty of resources in Russia, both inside the country and in the regime’s offshore accounts, to feel confident it can meddle in western elections. The sanctions are quite superficial; they are just touching Russian welfare based on oil and gas. Most Russian corporations can borrow capital in the West. Oligarchs are flexible and adaptive, they find ways to circumvent or even break the sanctions.

 It became more complicated for Russian companies to get credit from foreign banks. At the same time, Russian business is indebted to western institutions by around 350 billion US dollars. Is a default of Russia possible?

I don’t think Russia faces the threat of default. Russian businesses will have a smaller amount of resources, some secondary oligarchs and less influential people will go down and probably their reduced assets would be taken over. But the Kremlin’s inner circle will continue to prosper and Putin will find ways to support them. I actually expect him to give some support to Oleg Deripaska, because Deripaska is a member of his inner circle. The sanctions in place so far must be just the beginning if we want to change Putin’s policy.

The topic of the Nord Stream 2 pipeline was discussed in Brussels and Washington. Along with American’s sceptical attitude towards the project, there is Finnish and Swedish approval as well as conditional German approval (Angela Merkel has said the pipeline project has a political nature, and if realised Ukraine’s interest should be taken into account). Should Kyiv and its western allies be worried that Nord Stream 2 will be built and all they can do is simply minimise the losses?

Any rational policy maker should prepare for all scenarios. Everyone who understands Russian subversion in Europe should be vocal and try stopping the Nord Stream 2 pipeline. The Nord Stream 2 issue still remains on the fence, it is not certain. It is a good sign that Merkel finally called it “a political project”. But to be frank, I think the Europeans aren’t capable of solving the problem on their own, just like with the South Stream pipeline project. They need the US. The EU today is too divided and too prone to Russian subversion. Too many lobbyists, politicians and corrupt officials allow this issue to dominate in a way that is beneficial to the Kremlin. Here the US should take the lead and show that Nord Stream 2 is not a question of economics, but a question of national security; it would bring much wider negative implications to the transatlantic partnership and NATO. The subversion which is now taking place in Germany could be replicated around the EU, with Putin sympathisers and truly corrupt members of the national elite. I expect the US to interfere in a constructive way and show the Europeans that it is in their own long-term interest to put security above all issues beyond immediate commercial gain.

Moscow tries hard to retain the loyalty of European politicians. But what does it offer to its closest allies – members of the Eurasian Economic Union?

Co-operation inside the EEU is not so close. It is quite superficial. Of course, Russia can always reduce some tariffs, improve some regulations and facilitate cross-border trade. But otherwise, the EEU is inefficient and quite a superficial entity where all the other partners, including Belarus and Kazakhstan, are wary that Russia will turn this co-operation into political domination. In the EEU the rules are constantly being broken on all sides. Russia and Kazakhstan, for example, have numerous trade disputes inside the EEU. The EEU is not a true trade union. It is a political compromise where everyone tries to get a piece of the pie. The organisation functions not through market forces but thanks to government relations. And these governments do not believe in the free market.

Does participation in the EEU limit the chances of Belarus, Kazakhstan and Armenia to behave independently on the international arena?

To some extent, yes. But at the same time they need to accommodate Russia, so EEU membership is a balancing act for them. They reluctantly agree to some things but simultaneously try to extract benefits. These states definitely do not want to go much further into political integration. The EEU countries cannot emulate the partnership showcased by the EU because they are corrupt and authoritarian themselves, and they are wary of Western democratic initiatives. So they are balancing with the West too, which they cannot fully embrace, and therefore pick-n-choose to co-operate on a very limited level.

The main carrot that Russia traditionally offers to loyal states is cheap energy. What else can be attractive for potential allies?

There are still some other natural resources that might be attractive. Russia is a large country and a lot of trade links have existed since Soviet times. But now one of the biggest Russian export commodities is corruption. Kremlin officials invite top level politicians and national oligarchs to insider deals and joint ventures which they hide in offshore accounts. They help other authoritarian regimes launder money, organise fake elections and imitate each other’s repressive measures against their own people. Today’s Russia has built a powerful industry around political and economic corruption.

If the US and EU both continue their sanctions policy, could it lead to the economic isolation of Russia, similar to the Soviet isolation of the 1970s?

It depends how persistently Putin will continue in his effort to destabilise the international order. I think the West has been reluctant to impose proper sanctions. Putin has performed crude acts of aggression and subversion, so the West had no other choice but to react in some limited but authoritative way. Unfortunately, the Kremlin will likely continue its rogue policy because it only understands power and containment. There is not enough power and containment against it right now. Current sanctions are more symbolic than functional. There is a good chance an incremental isolation of Russia will emerge, but it will not happen overnight. Western countries are slow – the US needed a year to react after it was proven that Russia meddled in elections. But even with sanctions, a total Cold War-style isolation isn’t yet possible. Unless it devolves into outright economic conflict, similar to the current situation with Iran – but we are far away from that.

Sanctions have a double meaning: a symbolic way of punishing an aggressor and a tool to correct its behaviour. Maybe even to change the situation inside the target country. Could large sanctions lead to a change of the regime in Russia?

This is a difficult question. How will Putin’s regime fall? I do not believe any analyst who predicts these things with certainty. The West cannot rectify Putin’s policy with the current level of sanctions. Could western politicians introduce such sanctions that would make Putin’s behaviour extremely painful for him? Yes, they can. The EU should minimise purchase of Russian energy sources and do it only under stricter and more competitive EU regulation. But the West would then bear a significant cost. Firstly, there should be a public campaign for western societies to accept such a scenario. We are not at that point yet. If the oil and gas exports minimised or even stopped, the collapse of the regime would not be a question of how brainwashed and suppressed the Russian people remain versus how infuriated they are. But it is a delicate topic.

What could force the majority of the Russian people so they finally realise they should do something about this regime? For now, I see two options: Putin’s regime slowly dies naturally, then the leaders become simply too old to continue, like it was with Mugabe and Castro; or a palace coup or some other direct overthrowing of Putin. He could become an unofficial national leader and give the formal post to some less aggressive policymaker. But if I had to bet, I would say this regime is confident and bold, and if it does not face extraordinary challenges, it will remain in power for the foreseeable future, for the next decade at least.   

Ilya Zaslavskiy is head of research at the Free Russia Foundation and a member of the advisory board of the Kleptocracy Initiative of the Hudson Institute (Washington, DC). He also runs a research project on post-Soviet kleptocracy and its impact on the West called Underminers.info.

Olena Babakova is holds a doctorate degree in political sciences, she is a contributor to the Nash Wybir magazine and Eurointegration.com.ua. She is also a project coordinator at WOT Foundation in Warsaw.

corruption, oligarchs, Putin, Russia