June 23rd 2007

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COVER STORY: Foiled terror attack on New York's JFK airport

EDITORIAL: Making sense of carbon-trading

GOVERNMENT: Political appointments: the unseen costs

CANBERRA OBSERVED: Keating rains on Kevin Rudd's parade

ECONOMIC AFFAIRS: Realistic emissions policy torpedoed by ideology

GLOBAL TRADE: Leading Americans force a rethink on globalism

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SPECIAL FEATURE: Personal web pages - the dark side of the internet

BIOTECHNOLOGY: Children's rights trampled by medical Dr Strangeloves

MEDICAL SCIENCE: 'Scientific' spin on cloning unravels

RUSSIA: Russia's slide back into tyranny

Danger of downplaying climate change (letter)

Undermining scientific truth (letter)

Housing prices - don't blame property investors (letter)

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Russia's slide back into tyranny

by Joseph Poprzeczny

News Weekly, June 23, 2007
Has President Putin's Russia succumbed to the "oil curse", whereby energy-rich countries often end up being controlled by a few powerful individuals? Joseph Poprzeczny reports.

Post-Soviet Russia is encountering problems similar to those of other energy-rich nations, and so is developing into a polity with a narrow but powerful system of patronage surrounding its presidency rather than a diversifying democracy.

This is the view of Lord Professor Robert Skidelsky, economist and author of a three-volume biography of one of Britain's greatest economists, John Maynard Keynes.

Skidelsky argues that President Vladimir Putin's Russia has a single-track economy that's being driven by rising energy and commodity prices, leading to the accumulation of massive foreign exchange reserves.

"The dominance of the energy sector is the result of two factors: the failure of 'shock therapy' to restructure the Soviet economy in the 1990s, and the belief that energy - oil, gas, pipelines - keeps Russia in the great power game," Skidelsky says in the English intellectual monthly, Prospect.

"Since 2001, energy prices have more than doubled. By 2006, oil and gas made up 40 per cent of GDP; energy and minerals accounted for 60 per cent of Russian exports, and 40 per cent of government revenue. Commodity stocks comprised 80 per cent of the stock market.


"The economy is more dependent on the production and export of natural resources than it was in Soviet times, a unique case of de-industrialisation.

"In the short run, Russia has benefited hugely from the energy boom. But the long-run effects are quite possibly dire. This is because of what economists call the 'oil curse', or the 'natural resource curse'."

However, countries lacking natural resources must utilise other attributes, says Skidelsky. Japan, South Korea and Taiwan have utilised their abundant labour, while Singapore, Israel and Switzerland have exploited their people's entrepreneurial attributes.

"By contrast, a resource-rich country can become wealthy quickly by exploiting its abundant natural resources, even if it also has cheap labour," Skidelsky says.

"But this may be at the cost of its long-term future."

According to Skidelsky, likely problems are volatility of commodity prices, with such economies being vulnerable to price shocks and large foreign cash inflows from commodity sales, which raise the exchange rate and harm the competitiveness of resource-based industries.

He says natural-resource economies were more likely to be politicised economies, since those resources are viewed as part of a nation's "patrimony", to be kept out of foreign hands and made available for political deployment.

Natural-resource abundance tends to divert economic and political energy from wealth-creating endeavours to conflict over its distribution.

"The wealth is already there: the question is, who will control the 'rents' from it?" he says.

"It decreases the demand for democratic representation, as governments don't need to rely so much on income tax to finance expenditure. This promotes authoritarianism.

"Finally, it makes control of territory a central concern of politics. The uneven distribution of resources within a resource-rich country can either encourage resource-rich regions to try to break away, or encourage resource-poor regions to establish control over the whole country by dictatorial means. Both pulls have been evident in Iraq."

Although policies can be devised to counter such tendencies - as energy-rich Norway has shown - Putin's Russia hasn't opted for such an approach.

"Putin's first-term (2000 to 2004) reforming zeal, in which there was judicial and land reform, an attempt at social security and education reform, and serious debate about restructuring and privatising the 'natural monopolies' (gas, electricity, etc), has dried up," says Skidelsky.

"Property rights remain revocable, as the confiscation of the oil giant Yukos in 2005 showed.

"This did not deter stock-market speculators, but it inhibited long-term investment in oil and gas exploration, and production in these areas is stagnant and even falling.

"Abundant oil revenues have meant that small and medium-size enterprises (SMEs) have played a much smaller part in Russia's economic growth than in resource-poor countries. Russia's economy is highly monopolised.

"State ownership of the gas industry covers 90 per cent of gas production; in addition, the state monopoly Gazprom owns all the export pipe-lines. State control of the oil industry has grown from 19 per cent in 2004 to 34 per cent, and will rise to 40 per cent with Rosneft's acquisition of Yukos.

"In the metal industry, there are three non-ferrous giants (Rusal, Sual and Norilsk) and four steel giants (Severstal, MMK, NLMK and Yevraz).

"By contrast, the SME sector's share of GDP is below 25 per cent - the lowest in emerging market economies, where it normally accounts for 35 to 40 per cent (the European Union average is 60 to 65 per cent).

"There has been little incentive for the Kremlin to reduce over-regulation and corruption, which are formidable barriers to entry.

"Although foreign banks have been allowed in, the banking system is still state-dominated and crony-ridden, keeping old businesses going while choking off capital for new ones.

"The central bank has closed a number of under-capitalised and/or crooked banks - which may well have cost Andrei Kozlov, the reforming deputy chairman, his life (he was shot dead last September)."

Skidelsky then asks just how solid is Russia's political system.

Wildest dreams

"Here the stability is very impressive," he answers. "There is hardly any political opposition, and Putin enjoys an approval rating of 70 per cent - beyond the wildest dreams of any Western leader.

"Stability is a crucial element of the political predictability that investors crave. However, there is a serious problem of the succession. Who or what after Putin? This is a question which will need to be answered before the next presidential election, due in early 2008.

"Putin, and his intentions, remain enigmatic. Is he puppet or puppet-master? To journalist Anna Politkovskaya, who paid for her views with her life, he was the epitome of mediocrity: an over-promoted middle-ranking KGB officer with the attitudes of a secret policeman."

Skidelsky disagrees with Politkovskaya, seeing her assessment as "a serious underestimation". He sees Putin's success as owing much to his being persistently underestimated by cleverer, or more charismatic figures.

"He has also stamped his authority on the government in a way unknown since Stalin, though by consensus rather than terror," he says.

"He is not a democrat, but neither is he a tyrant. He has imposed as much coherence in policy and decision-making, and in carrying out decisions, as the clash of sectional interests and the confusion over Russia's identity allow, carefully balancing liberals and conservatives."

Skidelsky says that the Putin ruling group are from St Petersburg, with many of his ex-KGB officials also from there.

"Concentration on the energy sector thus has a geopolitical as well as an economic logic to it," he says.

"Since he became President, Putin has replaced local elections by appointments to governorships and supervision by seven presidential plenipotentiaries. Except for the declining communists, Russia's political parties are creatures of the Kremlin: fakes.

"He has cut off funding from the political non-government organisations, secured the loyalty of the Orthodox Church by giving it a religious quasi-monopoly, and crippled that other great barrier to unchecked power, the independent media.

"He has ensured that the political pillar of the vertical structure is subservient to the Kremlin. In doing this, Putin has created a highly personalised system of rule more like that of the tsars than communist party general secretaries."

This power structure has weaknesses, not least the fact that Putin's support base is narrow and unlikely to encourage constructive criticism. Moreover, his support is personal not institutional.

Skidelsky says that this means links between the Kremlin and the populace make the Putin consensus "skin-deep" despite his popularity.

"But Putin's most striking innovation has been to integrate the political and economic pillars into the vertical system of command," he says. "A web of Kremlin staffers and government ministers have been put in charge, or on the boards, of the largest state-controlled companies.

"Five Kremlin officials chair companies controlling at least a third of GDP, while continuing with their day jobs on the President's staff. This fusion of power and wealth is key to understanding the modus operandi of the Russian system.

"By concentrating economic power in this way, Putin has locked up much of the potential for economic growth. There is a massive conflict between treating ownership as an instrument of power and building a broad-based economy which can exploit Russia's comparative advantage in science and technology.

Kremlin-watcher, Robert Cottrell, wrote in the New York Review of Books in 2004 that Putin and his generation were "reconstructing the secretive, centralised, militarised political culture of their youth, reversing much of what was good, and what was bad, about the Yeltsin years".

"Caught between 'his need for economic growth and his need for political control', Putin, Cottrell accurately predicted, will choose political control, because he can get economic growth too, as long as oil prices stay high," says Skidelsky.

One-track power

"Soviet Russia was called a one-track superpower; post-communist Russia is a one-track great power. It has traded its military-industrial complex for an energy complex.

"This has stopped the diversification of the economy, but given it more choices in foreign policy.

"Oil has enabled Russia to avoid defining its national interest, or sorting out its confused identity; oil wealth has drowned the classic debates about its place in the world, whether it is Western or Eastern, a nation or empire, a partner or a pole.

"It enables Russia to punch above its weight.

"We are back to the oil curse. It is this that makes the economy brittle, the political system unstable, partnership unreliable while shielding Russia from the full consequences of the failure to reform, the failure to democratise, the failure to embrace a realistic destiny."

- Joseph Poprzeczny.

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