Putin Changes Course As He Gives Up On Trump

With Trump and Putin, we are returning to the Reagan-Gorbachev era, but under less favorable conditions for the Russian side. The USSR had a larger population than the US and its GDP was around one half. Can Putin really hope to compete with a country two and a half times Russia’s population and a GDP a 14 times Russia's? Can he sacrifice his peoples’ living standards, health, and education even more? I doubt it.


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Questioning China's Economic Model: One Spark?

The New York Times’ As Growth Slows, China’s Economic Model is Questioned sets a tone in marked contrast with its enthusiastic accounts of China’s prowess. One of its most respected columnists, Thomas Friedman, has been singing the praises of  Chinese infrastructure for years. In New York City, Friedman sees potholes. In China, gleaming highways. Friedman never met a cement mixer he does not like. China has plenty. We have too few because the Republicans won’t authorize an infrastructure bank. We have political stalemate, while China is run by wise technocrats dressed in muted business suits who decide what is best for the country and are not hobbled by the rule of law, property rights, and other small things that get in the way of progress.

The Times piece raises an uncomfortable question for those who regard the Chinese model as the way of the future. Could it be that China is a house of cards, ripped apart by political infighting over political power and spoils, that is kept alive only by embattled  private enterprise?  Could it be that the polite men in dark business suits, who are feted in Washington as our equals, rob state enterprises for their personal benefit, suppress dissent because they know that one spark can destroy their party monopoly, and compete among themselves to see who can waste public savings the fastest by pouring concrete faster than their regional competitors.

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Memories of Twenty Years Back: The Soviet Putsch

I was planning to return to Moscow on August 23, 1991. We were about to begin an advisory project for the USSR Oil and Gas Ministry. I was in Houston, Texas.

It must have been August 20. I awoke to the news that hardliners organized a putsch against the vacationing Gorbachev. His reforms were too much for them. CNN showed a rather sorry group of  old and typical party apparatchiks. They did not exude confidence.

Everything was in flux. The commentators had nothing so say. CNN turned to live feed from the streets. No commentary. Crowds were everywhere. Tanks and troops were everywhere.

One live feed convinced me that the Yeltsin side had a good chance. It was a scene of an old woman, pleading with a young soldier in a tank: “Please do not fire. Do not do anything. Just go home.”

CNN then showed the huge crowds around the White House. The famous scene of Yeltsin mounting the tank to address the crowds. Finally, there was the withdrawal of troops and tanks. The reformers had won.

I remember Gorbachev’s return. He appeared before the Duma. No one paid him attention. The old communist Soviet Union was, in effect, no more.

I was in Moscow several days later. I must have stayed there three weeks or so. The most vivid memory was the sense of optimism and joy. I talked to a friend whose sons had joined the crowd protecting the White House. I asked: Did you not try to persuade your sons not to go. At that time, the best guess is that they would have been shot.  Her answer: I was proud that they went. The cause was worth it.

I was in the White House shortly after the victory. I remember the optimistic parliamentary deputies saying: Now we have the power. We will transform Russia. One made a special point to show me the White House cafeteria. Its food was no better than anyone else’s. What a change from the communists.

By looking backwards from the present-day Putin KGB state, I understand the sense of disappointment of the Russian people. Russia had its brief chance and blew it. What a shame.

Straight Talk: Why Would a Dictator “Reform?”

Dictators in the Middle East are advised by Western politicians that they should introduce democratic reforms if they want to stay in office. This might work for the most moderate of rulers, such as in Jordan. It worked in Spain and Portugal, but only after the death or incapacitation of the dictator made a smooth transition possible. For other dictators, there is no way to split the difference between a dictatorship and a democracy. No brutal dictator can navigate the fine line between meaningful reform and remaining in office. True reform requires transferring or sharing power with others. Once your democratic partners have some degree of power, they will make sure that you will be out of office. Pinochet tried to protect himself by parliamentary immunity and spent the final years of his life fighting off criminal charges. The “power sharing arrangements” in Iran and Zimbabwe have been shams in which the democratically elected partner (Khatami and Tsvangirai) is rendered powerless by the Mullahs or Mugabe.

Any brutal dictator who allows a meaningful reform is, in effect, committing political suicide. There was no chance for a Mubarak to continue in office in a “reformed” Egypt. Under the best of circumstances, he could have been a transitory figure head. At the worst, he would have been put before a firing squad like Ceausescu. Mubarak had no way of winning once the democratic genie was let out of the bottle. It was in his interest to keep the genie firmly locked in the bottle.

The current reform advice to dictators reminds me of earlier advice to Soviet rulers to allow meaningful reform of their political-economic system. The aging Soviet leaders after Stalin were not particularly bright, but they understood one basic fact: Real reform meant the end of the system as they knew it. It was not until Gorbachev – the first Soviet leader too young to be part of Stalin’s coterie – that the USSR was led by a communist party leader who did not understand that real reform would destroy the pillars of the entire system, which it did.

I presume that brutal dictators throughout the Mid East -- Kaddafi, Assad, the Iranian mullahs -- understand better than Gorbachev that meaningful reform means the end of their careers. Our pleas for them to become “democrats” will go unheeded. From their perspective, this is very bad advice.

Russia Needs Our Money Now, But For How Long? Medvedev in Davos

Dimity Medvedev’s Davos charm offensive was cut short by the suicide bombing at Domodedova airport. He could not afford to be seen mingling with “Davos Men” as victims of the tragedy lay dying. Vladimir Putin learned this PR lesson when he continued his vacation as the Kursk submarine sailors suffocated under water. Medvedev returned today to Davos, his agenda reduced to two events: meeting with world business leaders and delivering a keynote address. In both events, he will deliver the same message: Russia is open for business. His listeners will be told that state companies are being spruced up for sale. Only a few will remain off limit to foreigners. Goldman Sachs has been gearing up, beefing up its presence in Moscow. Goldman and other venerable investment houses will lend an air of credibility to the undertaking.

There is no mystery why Russia is again open to foreign investment. The state budget receives half its revenues from oil and gas, whose prices are no longer soaring and whose outputs are stagnant. The Russian economy has been in a funk for a few years, and tax revenues are down. The vaunted rainy-day fund from the halcyon days of the energy boom is almost exhausted. In a word, the Russian state badly needs money.

Putin and company will be actually interested in selling state companies at high prices this time around. Previous “privatizations” have brought precious little into state coffers. The most lucrative state companies have already been sold (or resold) to the Kremlin’s friends at bargain basement prices. None remain under the control of unreliable oligarchs to be confiscated as was Khodorkovsky’s Yukos. Not that much remains to be sold. Rossneft, now owned ten percent by BP, is the big prize, so to speak. Other companies on the auction bloc are less appealing, such as RusHydro and Sovcomflot.

Medvedev’s invitation is not the first, nor will it be the last. Mikhail Gorbachev counted on a huge influx of foreign investment when he liberalized rules in 1986, but no one came. The Yeltsin administration courted foreign investment, but few ventured in. There were still no laws and rules. Willing foreign investors were subjected to endless waits for finalized versions of production sharing agreements and the underlying “normative acts.” Putin came to power on a platform of offering stability and a rule of law. BP, Exxon, and Shell took the bait to be bloodied by arbitrary tax police, environmental agencies, and local oligarchs. The passive foreign investors in Russia’s best-run oil company, Yukos, saw their investments fall to zero as Putin’s tax police and courts dismembered Yukos on phony charges.

We are now assured by Medvedev that this time it will be different. Russia is truly open for business as a reliable partner. It is said that Putin himself stands behind such deals. Medvedev’s economic team is spreading further good news at Davos, such as the government’s intent to streamline rules and lower taxes. Are such siren songs to be believed?

Recent history warns that foreign buyers should be wary for a number of reasons:

First, it matters little whether Putin and Medvedev both stand behind these deals. Putin, or whoever else is in charge in the future, can always change their minds, as BP, ExxonMobil and Shell can attest. In the absence of a rule of law, whatever those in power say is the law is the law. And there are number of ways to break agreements without violating the words written in the contract.

Second, the state will likely remain the major shareholder; minority shareholders would have to search the world for a worse partner. The Russian state will continue to use companies in which it has controlling shares as instruments of state power without much real interest in creating shareholder value.

Third, potential foreign investors should be aware that, despite the participation of the world’s leading investment bankers and accounting firms, they will have to buy a “pig in a poke.” As far as I know, there has been no real audit of any substantial Russian company, despite the respected accounting firms whose names are listed in the prospectuses. A real audit cannot be conducted because it would reveal the web of corruption and related party transaction that lie buried beneath the surface of each of these companies.

The most likely outcome is that foreign money will indeed flood in (the unknown is the price, of course). Putin, Medvedev and the Russian state will behave as long as they need access to world capital markets. With the money safe in its coffers (either in Russia or Switzerland), Russia will again at some point put the screws to hapless foreign partners when the price of oil soars or some other serendipitous event occurs.

Any foreign investor considering investing in Russia for the long run must consider two metrics: Russia currently ranks 154 out of 178 countries in corruption, equal to Tajikistan, Cambodia, and Laos, lower than Pakistan. In terms of political risk, it ranks 186 out of 196. These miserable numbers are not made up. They reflect the reality of what it has been like to do business in Russia.

How Western investors accept the Medvedev-Putin invitation is yet another test for world capital markets. If bids are low enough to reflect the reality of Russian risks and corruption, it will have done its job, and Russian public finances will not be bailed out by naïve foreign investors. If foreign investors pay prices that ignore this reality, they are again like Charlie Brown rushing forward to kick the football that Lucy will snatch away at the last moment.