How Can Russia Succeed? Peter Conradi and Mikhail Khodorkovsky

June 20, 2018

On June 18 Mikhail Khodorkovsky joined Peter Conradi, foreign editor of the Sunday Times, to discuss the future of the Russian economy at the British House of Commons.  Here’s a breakdown of some of the highlights of the discussion:

How does Russia’s economy differ from that of the United Kingdom, or the USA?

There are two fundamental differences between the Russian economy and the British economy, or perhaps it’s better to say one and a half.  The real difference is the existence of institutions in Britain which regulate the economy.  If you do business in Britain then you more or less aware of what is going on according to the rules, and what is going on outside them.  You more or less understand that if a conflict arises, that this conflict will be resolved by an independent court in accordance with well-established rules.  We have no such system in Russia.

In Britain people are confident that the essential rules of business will not suddenly change without any prior warning.  Even if the rules are changed, the position of every party concerned will be given a hearing.  The people who get together in this very building to make decisions will make balanced ones.  In Russia today the significance of parliament has been reduced to 0, and the significance of the government itself has also been reduced to negligible quantities.  Therefore, if a person manages to reach the ear of Vladimir Putin and he makes a decision, this decision will suddenly appear as a law and will be adopted no matter how many mistakes it contains.  So it’s not only that the voting is lacking; there is no professional debate.

And now what I referred to earlier as the “half difference”.  The British economy is more effective because it is less monopolised, although less effective than the American economy.  In Russia in recent years very serious monopolisation of the economy has taken place.  It has taken place in the sphere of oil and gas, the financial sphere, the insurance industry and in auto production.  All of this has brought the efficiency of the economy down.

 

Does the Russian economy have more in common with the economies of the far East?

I would make one remark here, and that’s that people are often mistaken in comparing Russia’s economy with that of other oil-producing countries.  In actual fact, oil and gas revenues have a less significant influence on the Russian economy than in Saudi Arabia, for instance.  If we were to ask the question what percentage of Russian GDP is made up of oil and gas, then many people would answer somewhere in the region of 30-50%, but this would be an incorrect answer, and the experts know this.  The correct figures would be around 12-13%.

Oil and gas revenues make up around 24% of the Russian budget, however this is both export and internal consumption.  But if we’re going to talk about the federal budget, then the figure will be around 50%, perhaps higher.

And finally if we’re going to talk about the Kremlin’s income, that is the money that the Kremlin can use both for all its corruption schemes and for the support of the secret services, then the income from oil and has export will come to 50%, perhaps even to 70%.  This is done so that the people don’t get the impression that it is they themselves who are supporting the government.  Nevertheless, for every dollar that is spent on oil and gas, 70 cents goes to the Kremlin.

Does this explain the sensitivity of Putin towards the price of oil? 

Absolutely, Putin is much more sensitive to oil prices than to the Russian economy as a whole.

That means he’s been quite happy in recent months?

This is one of the reasons why he likes Donald Trump so much.

Has monopolisation in the Russian economy reached a fixed point? Or is moving further?

Interesting question.  I’m mostly following the oil and gas aspect, and I can see that Igor Sechin, the man who is actually behind all the monopolisation in the sphere of oil and gas in the Russian economy; he really does not want to stop.  I think that his next target will be Lukoil, but it seems that Putin hasn’t yet given his approval.  Will he continue to hold Sechin back in the future? It’s hard to say.  For example, if we remember the most recent seizure, the story of the company Bashneft, Mr. Putin was quite firm in saying that this company (Bashneft) should not become a state company.  The budget should receive money from it, rather than the money moving from one pocket to another.  Some people believed him, and as a result they ended up in prison, and by this I mean former Minister of Economy Mr. Ulyukaev.  Bashneft then became a part of Rosneft.  Therefore it’s hard to say whether Sechin will be prevented from moving further.

We see the same thing in auto production with Mr. Chemizov.  We can also see the same thing in the regions with the regional heads.  We can see a similar situation even with the internet, although it seems that this should have been impossible.  Nevertheless, the Kremlin is trying to shot down the popular messenger app Telegram in order to make room for a new messenger program belonging to a person from Putin’s inner circle.

What advice would you give to someone who wants to go and do business in Russia? 

If somebody is making 50-70% profit annually, it’s not my place to try and stop them from doing business.  But of course these people should really bear in mind the risks that exist and have the opportunity to insure against these risks.  The first risk is obvious: sanctions.  We cannot predict whether Putin will seek to negotiate, or whether he will try to provoke the West further, which is why we can’t say how the sanctions regime will operate.  When you start doing business with a company you can’t really know whether this company in fact belongs to somebody who is under sanctions.  This can only emerge some time afterwards, or some kind of a takeover can happen at a later date.  These are the simpler risks.

The second type of risk is of course related to the fact that you cannot count on an independent judiciary.  Perhaps you don’t know, but when we had a temporary swap-over when the role of president was played by Mr. Medvedev, his friend Mr. Ivanov became the head of commercial arbitration court.  I don’t like Mr. Ivanov, but he made good steps towards a free commercial court.  When Putin returned to the presidency he united the commercial court with ordinary civil courts.  As a result the majority of achievements that were made previously were lost.  Therefore you should remember that even if your contract states that conflicts are to be solved in a different jurisdiction, the implementation of the decisions will still have to go through a Russian court.  This is a lose-lose scenario.

If you want to get involved in business in Russia you have two ways to go about it.  Either you conduct business on a regional level so that your activity isn’t noticed, in which case you may exist for a certain period of time in a more or less normal way, if you don’t make too many profits.  Secondly, you can do big business, which means business that has been approved by the Kremlin.  But in that case you become hostage of the relations between your country and the Kremlin.  Sometimes this is a plus, sometimes it’s a minus.

Can Russia change, could Russia be changed under a new leadership? How easy would it be for Russia to take a more positive path? 

There were optimists who said that there could be positive changes in the economy without positive political changes.  This is what Alexey Kudrin and his people had been saying.  Now, as far as I can see, even they hold a different opinion.  For Putin, institutional changes are unacceptable.  There is a saying: how can we predict what Putin is going to do? What option will he choose?  People long ago noticed that he always takes the option which allows him at the next stage to have more options to choose from.

As you know, institutions actually restrict this freedom of choice at the next stage, and that’s why Putin doesn’t concern himself with them.  However, today Russia is encountering problems in the sphere of technology, in the sphere of financing military rearmament, as well as problems in the decrease of productivity in the economy and the decrease of the working population.  All of these factors are forcing Putin seek cooperation with the West.  When we’re talking about “the West”, we primarily mean Europe, and in this sense Britain is still a part of Europe.  That’s why it is still possible to talk about the high level of profit combined with the high level of risks.

Is the Russian Economy in terminal decline, or is it on the way up? What do you see for the next 6-10 years?  

As I have already mentioned today, in Russia the professional parliament and professional government are excluded from taking decisions today.  That’s why the decisions that are being made today are really quite bizarre.  Putin has one holy grail in life, and that’s the currency reserve.  Russia’s currency reserve, as you know, is pretty big, and Putin will do anything in order not to make it any smaller.  That’s why Russia has just taken the decision to raise the pension age although there was no real necessity to do so.  At the same time they are increasing VAT, which will syphon money out of the private sector of the economy and will subdue economic growth.

If we pose the question: where is all this money going? The answer will be: infrastructure projects.  But to the question of which specific infrastructure projects will receive money, there is no answer.  So we are taking money out of the economy to some infrastructure which the state is going to carry out, but these projects even today have not been specified.  In such a situation it’s not really very realistic to talk about the question of economic growth.  Although, in contrast to the UK and America, everything can change in an instant.  Tomorrow Putin will announce a new mission, and the day after you’ll see a weakening in monetary policy, the subsequent law about it will be issued the day after tomorrow but will be backdated to yesterday.

If you were made president of Russia, what would you do to change things?

I have said many times that I am very much a supporter of the parliamentary system of government, not the presidential model.  So if I were in office that would be my first decision: self-liquidation!

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