Imploding assets: Deprivatization may end unexpectedly badly for the Kremlin

Following a nod from the Prosecutor General's Office, Russian courts are digging back through the results of the asset privatization process that followed the collapse of the Soviet Union. In 2023 alone, 15 enterprises involved in the Russian military-industrial complex were returned to state ownership as part of a campaign that Prosecutor General Igor Krasnov characterized as an attempt to “protect Russia's interests and restore justice.” The seizure of the companies, which are valued at more than 333 billion roubles ($3.56 billion) in total, raises questions about how much further the expropriation might go. Andrei Yakovlev, an associate researcher at Harvard University's Davis Center, lays out three possible scenarios: a North Korean-style takeover of all key industries, the development of a more moderate model more similar to that of Belarus, and the kind of destabilizing social explosion not seen in Russia since 1917.

RU

Businesses in Russia — not only those of the oligarchs, but large and even medium-sized enterprises — are nervous. . You can feel it in conversations with people who remain in the country. They are afraid of losing what they have earned, given how the flywheel of property redistribution is spinning. And these fears are absolutely justified. There are many different private interests behind nationalization processes, as people close to the Kremlin or the security services want to get their hands on assets.

Putin's recent statement that the current elite is not the elite, and that the real elite are those who served in the so-called “special military operation,” provided a very strong wake-up call — not only for the business community, but also for the state bureaucracy. To put it mildly, there are not enough business assets nationwide to satisfy all veterans of the “special military operation,” but there may be sufficient space for most of them within the structures of the bureaucracy.

There won’t be enough business assets for all the “special military operation” vets

Businessmen and bureaucrats are closely linked in Russia. From a certain level — for example, deputy minister or vice-governor — an official cannot remain independent. If one does not belong to a certain clan or group, it will be difficult to remain autonomous, as a lack of friends in the right places leaves officials vulnerable to being supplanted by rivals within the state service or caught up in the next anti-corruption investigation. Therefore, any purge of big businessmen will undoubtedly lead to the officials associated with these companies losing their positions as well.

This is not good for the economy. If we take the experience of the past two years, it is obvious that Russia was able to withstand the shock of 2022 precisely because it had a market economy and because the overwhelming majority of its enterprises were private companies. These profit-driven actors therefore had every incentive to look for new niches in the market, new suppliers, to somehow find a way to survive — and thanks to them, the economy survived.

In the short term, deprivatization may be advantageous for the state as a way to acquire liquid assets, including account balances, along with the companies that controlled them. In the past, such assets were mostly transferred abroad, but now it is technically difficult to do so. Therefore, after a profitable 2023, many people still have quite a lot of cash. On the other hand, in the long run, the losses of the nationalized companies will be the losses of the state.

A broken contract

In the informal contract between the Russian state and the country’s business community, the authorities have always assumed one duty: to create conditions for good profits — not just for the oligarchs, but for business as a whole.An integral part of the contract was the refusal to review the results of privatization, a point that has now been called into question.

A no less important element of this agreement provided for the low cost of labor. — By design, trade unions had no influence in Putin's Russia, and officials themselves intervened in favor of workers' interests only in extreme cases. Cheap and disenfranchised labor was an important source of rent for all businesses.

In 2023, this part of the contract also began to be renegotiated. The state had created a total labor shortage — through war, mobilization, and provoked emigration — which was only exacerbated by the country’s unhealthy demographic trend. At the same time, the defense industry, faced with increases in the volume of state orders and the need to hire workers, began to compete for labor by raising wages. In response, other economic sectors had to raise wages to retain workers. On the one hand, this further stimulated demand and supported the economy in 2023. On the other hand, rising wages reduce profits. Cheap labor will no longer be available in Russia — not even at the expense of migrants, who are under increasing pressure.

As a result, the “carrot” of the state is rapidly being replaced by the “stick” of higher taxes and expropriation of property. It is safe to say that in 2024, the main victim will be the economy, which the authorities will exploit in order to alleviate — at least temporarily — the problems caused by the war. The only question is how far this process will go. Russia is now at a fork in the road between today's Belarus, with its state-dominated economy, and North Korea, with its almost complete absence of private property.

In 2024, business will fall victim to the Russian authorities, who will exploit once private enterprises to alleviate the problems caused by the war

Scenario one: Belarus

As I have heard from various sources, in mid-2023 there were around150 large companies on the Prosecutor General's list for nationalization. I was told that Roman Abramovich's assets were on it, but he was able to get them struck from the list. Andrei MelnIchenko, the billionaire founder of the fertilizer producer Eurochem and coal energy company SUEK, was also able to protect his assets.

If the state stops after the nationalization of another hundred or so large enterprises (according to the calculations of experts and journalists, 180 have already come under state control since the start of the war), this will still be a rather moderate scenario. Its main feature will be the devouring of the weak. First of all, companies owned by those living abroad are going to be attacked. In these cases, personal presence is of the utmost importance, as a problem like nationalizationcannot be solved over the phone. And at the same time, it is a signal to others — return to Russia, or you will lose your business.

Further development in this direction may lead to the “Belarusian scenario,” in which large industrial enterprises are nationalized and handed over to state-run macro-corporations (like Rostec) for their day-to-day management. The rest will be associated with government officials. Nevertheless, this model still retains an open economy with active foreign relations and limited — but not completely foreclosed — opportunities for technological development. Recall the success of the IT industry in Belarus up until 2020.

Moving towards Belarus may be more realistic than moving towards North Korea. But that depends on the repressiveness of the regime.

Scenario two: North Korea

Scenario two involves a return to the world of Stalin, which has been preserved in the DPRK in almost its original form. All key enterprises are state-owned and operate according to the state plan.

However, this does not mean 100% nationalization. Just as there were personal subsidiary farms and hotels in Stalin's USSR, in North Korea there are small and micro businesses at the very bottom, largely existing in an informal “gray zone.” These businesses are connected to officials, mostly from the intelligence services, who use them to get extra income. These businesses are responsible for providing essential goods to the end users. Otherwise, the population would not be able to survive — quite literally. There have been several cases of mass starvation in the DPRK over the last 30 years.

This model involves a closed economy that interacts with the outside world only through administrative channels. They may have ways of sending citizens to work — there were restaurants in Moscow and the Russian Far East before the war that were run by North Koreans, who earned hard currency for their government — but they were under the strict control of the security services.

Scenario three: 1917

I would not rule out a third scenario, one in which the system explodes as the result of excessive internal pressure before it ever arrives at North Korea or Belarus. The main difference between Russia and North Korea is that people living in the “hermit kingdom” today have experience of an alternative, while Russians quite recently spent three decades experiencing something resembling freedom. Indeed, political freedoms have been deliberately curtailed since the mid-2000s, but the level of economic and personal freedoms remained high until recently. As a result, not only the elites, but also tens of millions of people who now make up the urban middle class, have become better off.

The system could explode from excessive internal pressure before it arrives at North Korea or Belarus

All of these people are tired of the war, and in this regard, it is worth recalling the experience of the Russian Empire, which on the eve of 1914 had a fairly developed and fast-growing economy — and by no means the worst bureaucracy in the world. Nevertheless, by 1917, the senselessness of WWI had led to the accumulation of a mass of contradictions both among the elites and in society, ending in revolution.

So far, such a scenario for modern Russia seems unlikely. Thus today’s Russian elites largely try to follow the path they know best, using their existing connections to minimize the risks for themselves and, in the best case scenario, to get their companies removed from the nationalization lists. This is similar to the reaction of big business to the Yukos affair, when potential future targets of Kremlin persecution attempted to defend themselves while leaving the rest to eat the rest. The difference, of course, is that in 2003 Russia had a growing economy, and the elite believed that if they just surrendered Khodorkovsky, the government would not come after them — the pie was growing, and there would be enough for everyone.

Now, however, there is a realization that the pie won’t grow. Big business is especially aware of this. Of course, Russia’s economy showed 3.5% growth in 2023, but everyone understands that this growth came at the expense of public funds. This means further stagnation in the best case, and fiscal destabilization in the worst case. Because military spending is a black hole that the Ministry of Finance and the government cannot control, it is capable of swallowing everything.

Military spending is a black hole that the Ministry of Finance and the government cannot control — it is capable of swallowing everything

The feeling that the pie is shrinking, coupled with the reality that the appetites of those who have started to divide it are growing, may unite business and bureaucrats, serving as an impetus for collective action. This is reminiscent of the eve of the 1996 presidential elections, when oligarchs and top Russian bureaucrats realized that they could both lose radically from a change of power. The key difference here is that the influence of the security services was weaker then, due to their failures in the first Chechen war. Even against this background, though, they attempted a coup between the first and second rounds of the 1996 election — Sergei Lisovsky, the organizer of the “Vote or Lose” campaign, and Arkady Yevstafyev, a close associate of Anatoly Chubais' campaign chief, were detained while in possession of a cardboard box containing $538,000 in cash. Despite the attempt, the siloviki failed in tilting the scales in their favor.

The reality that the appetites of those dividing the pie are growing may unite business and bureaucrats

Now the siloviki seem much stronger. Still, there is very little information about what is really going on inside the security services. Numerous stories of arrests of high-ranking officials initiated by competing agencies are well-documented. The story of the Wagner Group and Yevgeny Prigozhin's mutiny is a vivid example of the contradictions within such circles.

Today, relations between the army and the FSB are hardly better than they were a year ago. That is why, despite the external stability of Putin's model, supposedly backed by 87% of the Russian population in the recent “elections,” I would not rule out the third scenario: a rapid collapse of Putin’s system, one that could be triggered by a chain of random events set against the backdrop of growing tension in society and disagreements within the elites. Aside from the February 1917 Revolution in St. Petersburg, one need only recall the history of the Ceausescu regime in Romania, which was considered one of the harshest in the socialist camp before its leader met an end Vladimir Putin would certainly prefer not to repeat.

SEE ALSO

We really need your help! Subscribe to donations!

Subscribe to our weekly digest