Putin Miscalculated, But Entrenched Kleptocracy May Delay Regime Change
"Russian elites fear Putin. But they no longer respect him. He has ruined their lives...and may now have turned society away from them," former U.S. Ambassador to Russia Michael McFaul, tweeted on Feb. 27.
The Russian president's invasion of Ukraine has sparked much dissent in his country. Protesters have massed in Putin's hometown of St. Petersburg and other cities. Elena Kovalskaya, director of the state-run Meyerhold Center theater, called Putin a "killer" and resigned. Retired Russian Gen. Leonid Ivashov, chair of the All-Russian Officers' Assembly, criticized the war. And the oligarch Mikhail Fridman, who is originally from Ukraine, told employees of his private equity firm, LetterOne, that "war can never be the answer."
It could seem, then, that some Russian power-brokers are turning away from Putin. The economic effects of Western sanctions and fallout from the country's new pariah status, including in international sports, will likely increase disaffection among influential Russians.
Yet regime change may not come quickly. Authoritarian governance can be durable. A study of the endings of almost 300 autocratic states between 1946 and 2010 showed that more than half exchanged one anti-democratic regime for another. Democratization is not the norm.
If that authoritarian state is also a kleptocracy and the leader has spent years making elites complicit in the thievery (the result is sometimes politely called "crony capitalism"), there is even more incentive to continue the spoils system.
All authoritarian states legalize forms of corruption, but few have transformed the relationship between the state and the economy as thoroughly as Putin's Russia, where legal and illegal economies are intertwined.
When criminal methods such as extortion have been normalized as a means of getting business done, both in the private sector and within state agencies, fear of exposure leads to further complicity and a "mutual covering up," as Rasma Karklins writes in her aptly titled book The System Made Me Do It: Corruption in Post-communist Societies.
For the ultra-wealthy, Putin's system of managed conflict places oligarchs in competition for state resources, while reminding them that kompromat (compromising information collected as leverage over individuals) or prosecution can ruin them at any moment. “In the special world, everyone’s wealth is deliberately tainted,” write Fiona Hill and Clifford Gaddy, summing up the way Putin keeps even the most powerful in line.
For protection, oligarchs have always kept capital and properties abroad, but the White House has announced a search-and-freeze operation for physical assets. Such measures, together with sanctions, could prove destabilizing to that system of control, but it's too early to know how that would affect Putin's personal power.
Collective thievery structures the Russian economy and drives financial and corporate transactions at the highest level. For years, Putin’s inner circle has headed Russia’s biggest state-owned companies, populated the boards of private enterprise, taken "loans” from state banks, and plundered state companies through no-bid procurement, asset stripping, stock manipulation, and extortion.
Take the energy conglomerate Gazprom, which produces up to 80% of Russia’s oil and is often termed "a state within a state" because of its size and power. In 2014 Barron's judged it “The Worst Managed Company on the Planet,” and in 2019 the World Bank rated it the most unproductive company in Russia. This inefficiency is, in part, by design. Gazprom was simply too big of an asset not to become the heart of Russian kleptocracy.
Putin used Gazprom to consolidate his power early on by staging hostile takeovers of the companies of his enemies. In 2001, Gazprom bought independent television channel NTV from the exiled media mogul Vladimir Gusinsky.
Soon, though, Gazprom became a target of Kremlin plunderers. It was stripped of many major assets by Putin-allied Bank Rossiya, which by 2010 controlled Gazprombank, Gazprom-Media, and more. Some $60 billion worth of Gazprom's assets were also taken out of Russia (a process known as exfiltration) from 2004 to 2007.
Such aggressions by Kremlin-allied elites, as well as the 2008 recession, contributed to Gazprom’s market value decline from $369 billion in 2008 to $60 billion in 2019 (market capitalization now stands at $73.5 billion). Gazprom, Gazprombank and other subsidiary assets face new debt and equity restrictions as per the latest White House sanctions announcement.
There is one sector of Russian society that may be more amenable to regime change, whenever that occurs: businesspeople. From 2000 to 2010, clan networks allied with the government targeted a shocking one-third of Russian businesses for raids. Thousands of business owners have gone into exile, escaping the fates of over 70,000 others who were jailed or faced criminal proceedings from 2002 to 2012 on technicalities or fabricated charges like tax evasion. By 2018, one in six business owners faced prosecution.
These predatory practices continue today. As the private equity CEO and anti-corruption activist William Browder told me, "In fact, there is no business in Russia that is not targeted...if you have money, it's very likely someone is going to try and take it away from you. Almost universally, the oligarchs of Russia become delegates and business partners of Putin or those close to him."
A chain of complicity links these potentates with their enforcers in law and policing, who prepare the trumped-up charges and carry out the raids. All of these individuals may have an interest in keeping the current order going.
Yet the disastrous economic and human consequences of practices that aim to "destroy them and everyone close to them," as Browder puts it, means that Putin has created a large pool of educated and enterprising Russians who would be only too happy to see him removed from power.
Browder has personal experience: In 2005 Putin’s allies raided his companies and arrested his employees on trumped up charges of tax evasion. His lawyer, Sergei Magnitsky, subsequently died in detention (the Kremlin claims he died of a heart attack).
Browder was instrumental in the passage of the 2012 Magnitsky Act in the United States, which sanctions human rights abusers, and of similar legislation in the EU and around the world.
It's no surprise that those who know the most about how Russian kleptocracy operates advocate the most aggressive sanctions possible against the Kremlin, and also view Putin's invasion of Ukraine as a costly mistake for him. "I genuinely believe Putin's regime is coming to an end," McFaul said in an interview on MSNBC. Yet he cautions that it may take years.
Like all strongmen who feel threatened, Putin will be at his most dangerous in the coming weeks and months. A Russian military escalation designed to inflict the most casualties possible could lead to a puppet government in Ukraine.
Elites make, and break, strongmen. How Russian elites behave will also determine Putin's longevity. If jettisoning Putin would mean the dismantling of Russian kleptocracy, he may survive longer than expected.
More resources on Russia's kleptocracy:
Catherine Belton, Putin's People
Tom Burgis, Kleptopia
Karen Dawisha, Putin's Kleptocracy
Thank you Ruth for a wonderful piece. I’ve shared it a lot.
As Hilary Clinton said (“pleaded”) on Rachel Maddow, what if saner people who are close to him will try to stop his criminally destructive behavior—(take away his military and nuclear toys).