Putin’s Trick, or What is Ownership a la Russe

15. 3. 2017

The social contract between private owners and the Russian government that existed for the past ten to fifteen years is being revoked before our eyes. What will replace it?

Russia is an incomplete project, a halfway house. The mortar has not hardened—too much of it can be altered easily. Builders move walls, replace the roof, patch the fence and hang ever stronger padlocks on the gate. The architectural concept also changes every few years and even the direction of the façade—whether the front porch should overlook the west or east— is subject to questioning.

One needs vast reserves of composure or indifference to placidly live in a house like this. After all, its very foundations—the relations between inhabitants and owners, and between owners and the government—are constantly questioned. The rules seem to exist, and yet they constantly change. One can earn a lot, but just as easily lose everything. And even surrounded by all imaginable goods, one cannot fully enjoy the material life, as there is no clear and predictable application of law and respect for it, no possibility to plan one’s future.

Western political scientists consider such unfinished constructions fragile and quite justly expect that demand for a more perfect system of government is about to grow in Russia. But the Russians, like many other communities who live in fragile structures, have solved the problem without completing the building. One of the components of the Russian know-how is to locate and register property wherever it can be protected, i.e. in the world’s best jurisdictions and, as a consequence, leave more money abroad than take back to the country.

A political scientist Ivan Krastev is convinced that this had guaranteed the stability of the Russian political regime in the years preceding Russia’s sharp anti-Western turn (2013–2014). The paradox is that the opening of borders and opportunities to live and work abroad has prevented the reformist political activity from taking place. “The people who are the most likely to be upset by the poor quality of governance in Russia are the very same people who are the most ready and able to exit Russia,” Krastev warned in the Journal of Democracy back in 2011. “For them, leaving the country in which they live is easier than reforming it. Why try to turn Russia into Germany, when there is no guarantee that a lifetime is long enough for that mission, and when Germany is but a short trip away?”

Open borders have thus become a safety valve. The possibility to outsource legal services and thus gain better asset protection abroad has reduced the pressure for change that would otherwise emanate from inside the system. The use of foreign institutions has allowed people to not engage in the establishment of their own.

Russia is still affected by its heritage of “emergency justice” (it should be borne in mind that the Russian law enforcement system is rooted in the state bodies designed to combat counterrevolution and sabotage, such as Cheka, the Extraordinary Commission for Combatting Counterrevolution and Sabotage) and its heritage of “socialist legality” wherein the objectives of the state predominated over the citizens’ rights. However, until recently, it did not prevent people from growing rich and preserving their riches— the formal ownership guarantees, even though missing in Russia, existed abroad. This dual system of guarantees—informal codes and agreements within Russia, and formal and legitimate rules outside—granted this system stability.

Major assets in Russia have never fully become private property: Mikhail Khodorkovsky’s attempt to start moving in this direction was stopped ruthlessly and demonstratively. Thus, an old Muscovite principle was back in the relationship between the government and property: ownership is not absolute, and is conditioned by service. Ivan the Terrible had divided his subordinates into “those who serve nearer” and “those who serve farther,” regardless of their background and wealth. The oprichnina’s terror was directed both against the owners of old estates, and against those servers who sustained relative independence or sympathized with the gentry. The confiscation of land from anyone who was not “near,” who had not proven his willingness to unconditionally fulfill the will of the Tsar, would knock any opposition off its feet—as historian Daniel Alshits reflects on the policy of Ivan the Terrible.

The former owner of “United Industrial Corporation” Sergei Pugachev, who is wanted internationally, has said in a recent interview that there are no private property owners in Russia: “There are only Putin’s serfs.” The comparison with serfs is not quite accurate. There are businessmen who still seem to believe that they can be independent, and there are businessmen who realize that they are no owners but only holders of large assets. Some of them, in various forms, have pledged that they can hand over their property to the state anytime, including Oleg Deripaska, Vladimir Potanin and Gennady Timchenko. Whatever they say, it is clear that behind the scenes, one way or the other, all the major owners have signed this new social contract with the government.

Putin’s trick was that he has in fact canceled the privatization deals of the Yeltsin era without carrying out an explicit nationalization. He has solved the problem of illegitimacy of big property, not by making it legitimate, but by restoring its indefinite, “pre-proprietary” state. The main thing about the trick was that even though Putin has forced his associates to succumb, he has so far escaped their revolt. Elsewhere, such revolts of owners usually gave rise to the emergence of property rights guarantees, and subsequently— to the appearance of more inclusive social systems in those very countries where today’s wealthy Russians keep their assets and valuables.

This “double-pillar” system of ownership is now under threat (its third element—small and personal property—faces its own problems, but those are a different story). All has been changed by an occurrence that apparently has little to do with property—the act of Russian territorial expansion, namely the annexation of Crimea. Territorial expansion and curbing of freedoms in Russia are historically linked—as historian Alexander Etkind reminds in his excellent book Internal colonization. Russia’s Imperial Experience. Earlier, this notion was voiced by an outstanding historian Vasily Klyuchevsky: “In Russia, spatial expansion has been inversely proportional to the development of civil freedoms.”

Before 2014, the Russian elite was inclined to conquer new territories by purchase and not by physical takeover. Russian business tried to buy up Western assets, and in case of large industrial enterprises in Europe and the United States this experience cannot be considered too successful. In the post-Soviet period, which now can be evidently regarded as past, people and money could not sit still. It makes one recall historian Sergei Solovyov’s famous remark on the features of Russian identity: “This restlessness, vagueness, the habit to leave whenever one comes across an inconvenience, have created this semi-settled way of life, the lack of attachment to one place, which impaired the moral focus, made people inclined to search for easy work, to be careless, to live run-of-the-mill, from day to day.”

The post-Soviet era was favorable to freedom but adverse to arranging one’s life. Due to their semi-settled way of life, the citizens, especially the wealthy ones, did not feel the urge to seek guarantees of life, liberty, and property. The big question, however, is whether it is realistic to expect the people to seek quality institutions, if they are locked inside the country?

The post-Crimean Russia—by itself, and forced by the sanctions—has begun moving towards “settlement.” In 2012–14 Russia saw the tightening of regulations concerning relations with foreign countries, including the freedom to travel abroad. One of the laws passed restricts the civil servants’ opportunities to hold bank accounts and property abroad, and another one introduces a legal obligation to notify the migration service of one’s second citizenship or residency in another country. Some informal restraints have been introduced with regard to foreign trips by members of the security ministries, other government agencies, courts and major hydrocarbon corporations.

This may signify that a fundamental political decision was made to abandon the objective of keeping the property and valuables abroad. This decision is accompanied and strengthened by statements pointing out to serfdom as Russia’s spiritual clamp. Presumably, all this should indicate that the previously existing opportunity of resorting to foreign institutions of rights protection will no longer be available.

But the main thing is missing. Western institutions can be rejected if one seriously sets about to create one’s own. However, within the last years Russia has seen the reverse process—even those institutional accomplishments that had existed, such as the Supreme Arbitration Court system, are being destroyed.

Shutting the doors will prove costly. What can be achieved by wrecking the safety mechanism and bringing at least a part of the capital back into the country? One inevitable achievement will be the growing demand for guarantees of survival and preservation of capital within the country. However, guarantees are in short supply anyway, as the only person in the country who can give guarantees is the man in the Kremlin. An even those guarantees are not absolute, as they lack clarity and unambiguousness. Some owners, even the major ones such as Vladimir Yevtushenkov, who is now under house arrest, may have thought that their property and freedom were protected, while they actually weren’t. They will learn that their fate has changed when their companies became subject to a search, and they are imprisoned or put under house arrest. Why is that? Perhaps some large state corporation had its eye on the businessman’s assets. Perhaps there were other reasons. But one thing is clear: the guarantees in their current form are not enough to maintain even a fragile peace among holders of large property. Inevitably, the “boyars” will be forced to increasingly rely on informal means of conflict resolution—by resorting to informal “police,” informal “courts” and informal supervision over the observance of rules. This will furthermore increase the significance and cost of services of these informal “guarantors,” i.e. the representatives of power institutions in the first place. It’s the same as letting the sharks prey on one another.

In a system devoid of a safety valve, the pressure will but increase. The social contract between the power and property, formed by the current ruling elite, is extremely fragile. A suspended form of ownership, neither state-owned nor private, conditioned by one’s faithful service and other circumstances, cannot be considered a sustainable one. A new review of these relations is inevitable. The Kremlin, whoever it is represented by now and in the future, will have to either increasingly rely on brute force to maintain order, or begin to negotiate with owners and other active minorities. And the history of Russia, with all its dukes, tsars, general secretaries and presidents attempting to find the philosopher’s stone of the Russian state—a perfect and ultimate solution to the problem of power versus property—will once again unfold before our eyes.

Maxim Trudolyubov

Editor of the “Comments” section in Vedomosti daily. This article is a part of his forthcoming book People behind the fence: Privacy, power and property in Russia.

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