Johnson’s Russia List #7395, 1 November 2003
I have seen a lot of comments on the recent arrest of Mikhail Khodorkovsky, and the opinion is unanimous: Khodorkovsky is no guiltier than any other Russian businessman and his arrest is bad for Russian business and for Russian democracy. I believe that this analysis is incomplete: it is hard to built a democracy on a basis of unbridled robbery and the rules and “laws” that existed to help Khodorkovsky to climb to the top were not changed to their very opposite the moment Mikhail became wealthy; on the contrary, they are now deeply engrained. We have in Russia exactly the regime we have been building ever since the collapse of the Soviet Union. Let us not show false modesty or faint surprise when the regime shows its real face.
Let me start with two definitions that come from my recently published book, Russia As It Is: Transformation of a Lose/Lose Society:
Capitalist is one who uses the means of production to create goods and services in a market environment. Thus, a capitalist is not one who simply “owns” a factory, but one who both owns a factory and aims to put it to long-term productive use operating in a competitive market environment. If you obtained title to a factory through your bureaucratic connections and then sell it piecemeal to buy diamonds and limos for yourself, you are not a capitalist.
Democracy is not just a society that holds “elections”, but primarily a society where the majority of people are prepared to live according to the win/win principle. Only this type of society can be based on laws that are equitable for all. Only then will the strong be unable to abuse the laws to exploit the weak, and only then will the weak be willing to uphold the laws as their own. The win/win principle means that people develop their own resources rather than claim the resources of others. Since most of the people are independent, and do not ask the state to redistribute resources, the people become stronger than the state. That puts the law above the state, not just above the poor. Democracy thus becomes a hierarchy where the law comes first, the people follow, and the state bureaucracy comes last.
Now we are ready to examine the Khodorkovsky case.
First, let us discuss the meaning of the word “billionaire”. Creators of Microsoft and Yahoo are a part of my daily life (almost like JRL): each of them has made a very useful product. The Queen of England is rich because she represents quite a chunk of the history of this planet. But what did Khodorkovsky do to become a billionaire? He came into a room in the Kremlin and signed on a dotted line, that is what. Now, that is a bit different. Let’s discuss these differences in more detail.
First difference has to do with connections, alliances, and obligations. One could have access to some senior guy at IBM and have an uncle working as a butler to the Director of the FBI. These are fine qualities, but this is NOT how Bill Gates became wealthy. Bill Gates created a useful product, and then another one, and another one. To get wealthier Gates thinks about a product, not about an elaborate scheme leading to planting a wet kiss on somebody’s ass.
Khodorkovsky started his career as a head of a cooperative and then opened a bank. There are several important questions here: who served as his krysha, who helped him to obtain a banking license? Why are these questions important? Because Khodorkovsky is likely to be junior partner of these individuals.
And here we come to another important matter, a document known as the Declaration of Trust. This is a document that simply says “even though I will represent myself as an owner of this company, I hereby declare that the real owner is Mr. So-and-So, and I will always, in all times carry out his wishes and will transfer to him all monies, assets, and stock as soon as he so requests”. Once this is done, the real owner is hidden, and the world has to assume that a certain unshaved young man is somehow extremely wealthy.
I have lived in Russia long enough, and I have never given a bribe to a bureaucrat. I come to their offices, and ask who in this office is a “problem-solver”. Usually it is a lawyer, a driver, or a secretary. As these individuals are not elected officials, but private citizens, you can pay for their consulting services, while they have a perfect right to enter the bureaucrat’s office to discuss how much they (not the bureaucrat, of course) should charge for their consulting services. You pay the secretary, and then the bureaucrat is very friendly, totally uninterested in any financial matters, honest, incorruptible, and very well disposed towards you. This may be so, but I doubt that the secretary kept all the money I had given her. One Russian oligarch’s entire professional description is that he knows The Mayor, while The Mayor himself bravely subsists on his official salary.
Same with the Russian oligarchs. Some people in power allowed certain other people in business to appear or to actually become extremely wealthy. Public servants in Russia are often subsisting on a hundred dollar a month salaries, working, according to their diamond-studded Rolex watches, very long hours.
A bureaucrat may be powerful, but he is not a creator. In Russia, all he can do is to redistribute property and give and withhold permissions. When Putin came to power, he put some of his friends in important bureaucratic positions. These people worked for the same hundred dollar a month salary, and their watches were Timex, or worse. And they discovered that all property had already been distributed, and that the bureaucrats appointed by Yeltsin wore watches costing the equivalent of their salary for 300 years, and had some worrying familiarity with the document called the Declaration of Trust.
Now, the Russian oligarchs are not like Mr. Gates or Mr. Buffett. They are young boys who were in good graces at the time of Yeltsin’s reelection, and were in good graces still at the time of the “loans for shares” scheme. Whatever a Russian oligarch may have, it was not earned by the sweat of his brow.
Putin’s problem was that there were some other people who wanted to become beneficial owners of some assets, and they wanted a few other boys to sign some Declarations of Trust in their favor.
Another problem Putin had was that since the only requirement for the boys was that they should be in good graces, it appears that a Jewish last name helped a lot. Berezovsky, Gusinsky, Abramovich, Friedman, Khodorkovsky - the oligarchs are a homogeneous group, with a few exceptions here and there. If we assume that the ethnic Russians do not deserve to own a piece of their country, I personally would prefer to see among the Russian oligarchs some Spaniards or Norwegians. I am a Jew, and I am proud that people of this ethnicity have often been on the forefront of business, science, and arts. But by the same token I do not appreciate when Jews are involved in backroom deals and thefts of the century, claiming that a contract killing is just “something that everybody did at the time”. Wrong. I lived at that same time and I have not done a contract killing.
Capitalism is a system that holds private property in very high regard, because this property is both a basis of individual creativity and a reward for productive work. Russian oligarchs have not created their enterprises: they signed on a dotted line to conditionally hold certain property until such time as the Kremlin so desired. Thus, Khodorkovsky has nothing to complain about: the same hand that giveth then taketh away.
But one thing did manifest itself, yet again: we have not succeeded in fundamentally transforming Russia: there still is no democracy, no laws, no free enterprise, no civil society, and no real prosperity. It is, in a way, an end of an era of hopes.
As someone who has been involved in the process of Russian transformation from 1992 and as an American citizen, I look at the last twelve years with very mixed feelings.
There was Jonathan Hay, whose wife presented the City of Moscow with oh-so-cute bronze duckies, soon after Mr. Hay was accused of insider trading. US Ambassador, James Collins, was on hand to admire the ducks; and yet, Mr. Hay was a key to our effort to privatize Russia “fairly and equitably”. It was a bit as if General MacArthur were to take stock in Japan’s major companies.
When my book, Understanding Russia, written back in 1995, mentioned the words of “corruption” and “mafia”, it was withdrawn and shredded by the USAID. Yet, mafia was real, and Americans Felix Lvov and Paul Tatum lost their lives trying to defend their business from it.
At that time, tens of thousands of Americans and other Westerners moved to Russia. They were establishing businesses, teaching, preaching, having fun. That helped Russia a lot, made it a freer and better society. But the official American message was different. It was one of tacit acceptance of corruption, and it was destructive for Russia. When the Eurasia Foundation, a largest US-funded grant-giving organization in Russia, was found to have lost $385K to employee theft, Sarah Carey, who led the Foundation, kept her position and her status within the assistance community. The Moscow Times, the expatriate newspaper of record, gave six full pages to its Special Report about truly outrageous theft and mismanagement at Defense Enterprise Fund (”DEF”). The only result of that was an official vendetta instituted against DEF’s whistleblower. Yet, how can we advocate democracy and accountability if the largest Special Report in the Moscow Times’ history elicited no official reaction? Sarah Carey was a Director of DEF, and she is the one who is now being proposed for the new Board of Directors of Yukos, the Khodorkovsky’s company.
Since Yukos is being held up as an example of transparency and good governance, Sarah Carey will be a good addition to the Board of Yukos. They are lucky to have her available again, as by the end of the year DEF will close, having lost its entire $67M grant in a two year orgy of theft, false reporting, waste, and excess.
As we discuss Khodorkovsky, we should not forget the fate of his predecessor, Vladimir Gusinsky. While the US public opinion tried to defend Gusinsky’s TV channel, NTV, from a politically motivated confiscation, the official US position was far more reserved. When an American citizen, Boris Jordan, played an unsavory role in the NTV affair, together with America’s darlings, Anatoly Chubais and Alfred Kokh, Jordan received no rebuke.
What will happen now to the other sudden billionaires of Russia? I think they will be asked to give up some of their spoils, and there will be a serious discussion of Declarations of Trust, which could be a bit inconvenient for Mr. Chubais, the former generous distributor of billion dollar fortunes, who is currently busy holding high the banner of Russian democracy at the helm of the Union for Right Forces.
Talking about democracy, we should also note that Khodorkovsky was a major supporter of Yabloko, another Russian party that appears democratic to everyone who does not know its leader, Mr. Yavlinsky, personally. I used to know Mr. Yavlinsky, so I am bit wiser than that.
And yet, without SPS and Yabloko, two empty shells, we have nothing in a way of democracy here. This is a sad, sad result.
Why did Putin arrest Khodorkovsky in such a caddish manner, why did he cause the seemingly suicidal stock market collapse? Because he reverts to his core Russian constituencies, ones that are firmly based on the lose/lose view of the world, that are xenophobic, self-aggrandizing, anti-semitic, anti-capitalist, anti-American, and, most of all, statist, convinced that the Secret Police knows best while the people know and deserve nothing. Congratulations, we have arrived.
I agree with those who called special attention to Putin’s speech, extolling “equality before law and independent judiciary”. We deserve to have our democratic formulas vomited back at us at the moment when the mask comes off and we are witnessing the collapse of our effort.
We have had a historic chance to introduce the win/win mentality to Russia, and we have largely (though not entirely) blown it. It is time for Sarah Carey to move on and sit on the Board of Directors of the Iraqi division of Haliburton. We are again trying to give democracy to a backward country, and that makes me mighty proud. Yegor Gaidar, the architect of one monumental disaster, is already in Iraq. And that only proves my point: marauders cannot build a system of free enterprise as it is based on the win/win, respect for individual rights and human creative potential, and a profound sense of personal responsibility.
Matthew Maly is the author of Russia As It Is: Transformation of a Lose/Lose Society