Washington Post - 12.10.2003

The Washington Post

Putin Is Free To Manage Capitalism 

By Steven Pearlstein

There are two schools of thought about what kind of capitalism is developing in Russia. 

The pessimists, including many western journalists and academics, see Russia drifting away from the sometimes-chaotic American model of free markets toward a corrupt and arbitrary economic regime once again directed from the Kremlin. 

These critics cite the recent jailing of Mikhail Khodorkovsky, the country's richest man and onetime symbol of economic reform, as well as earlier campaigns that drove two other "oligarchs" from the country when their media empires dared to challenge President Vladimir Putin. And now that Putin has manipulated the electoral process and crushed all the political parties pushing real economic reform, pessimists warn of a stepped-up effort by Putin to consolidate his powers. 

"Putin speaks eloquently in favor of the rule of law and free markets, but it is becoming increasingly clear he doesn't mean it," said Anders Aslund, director of Russian studies at the Carnegie Endowment. 

The opposite view comes from western money managers based in Moscow who credit Putin with restoring order to the Russian economy and standing up to the oligarchs who grew fabulously rich while the standard of living for most Russians deteriorated. 

Putin defenders note that over the past four years the Russian economy has grown smartly, the government budget has been in surplus, the ruble has rebounded, the county's credit rating has been restored and stock prices have soared. They also praise Putin for pushing through a series of laws that laid the foundation for a business sector open and honest enough to participate in the global economy. 

"Putin has restored order and imposed rules so that six guys don't wind up with everything," said William F. Browder, who runs the $1.25 billion Hermitage Fund in Moscow. "Anyone who has a chip on the table here wants him to continue what he's been doing." 

Coit Blacker, director of the Stanford Institute for International Studies, says both sides may have it somewhat right. 

On the one hand, Blacker says, Putin is clearly willing to do whatever is necessary to remain in power while reestablishing the centrality of the Kremlin in Russian life. At the same time, he's determined to be known as the guy who restored order, prosperity and greatness to a proud Russian nation. 

Putin aims to accomplish both not by micromanaging every aspect of the economy, as his Soviet predecessors tried to do, but by gaining control of the commanding heights of the economy -- a handful of large, private firms that take their cues from the Kremlin. The companies provide the government with tax revenue to operate the government and "soft dollars" to maintain political hegemony. As part of the deal, these firms are protected from damaging competition and regulation, making them attractive vehicles for badly needed foreign investment. 

The model is Gazprom, the gas monopoly run by a Putin crony. Despite the Kremlin's campaign to root out corruption elsewhere, critics charge $20 billion has been siphoned off by Gazprom's managers. It was no coincidence that when Putin met with western financiers to reassure them about his commitment to the rule of law, he took the opportunity to announce he would lift a much-ignored decree preventing foreigners from owning Gazprom shares, creating an immediate bonanza for many in the room. 

Putin's not-so-subtle message to western investors: You stick by me and we can all get what we want here. And it worked. Since then, Browder's Hermitage Fund has had its biggest monthly inflow, Deutsche Bank paid $70 million for a leading investment bank and General Motors agreed to invest $60 million in a new auto plant. 

We've seen variations of this sort of "managed capitalism" before -- in Japan, Mexico and Indonesia, among others. While it can work in the short run, history shows it eventually saps an economy of both political and economic vitality. 

For now, however, it's the model Putin has chosen for Russia, and there's nobody to challenge him.