“We know exactly what to do”

January 28, 2016


Mikhail Khodorkovsky

Last year many of us realised that our economy was built on the sand of high oil prices, and that it was dependent on Western investments.

Given our low starting point, the decline in GDP of almost 4% is no joke. The twofold devaluation of the national currency means it is the Russian population that has financed the preservation of the remains of the gold and foreign currency reserves. Even someone who has never held a dollar in his hand notices the effect when he looks at the amended price tags in the shops.

But what kind of terrible disaster has brought about such a catastrophe?

The world economy has been steaming forwards (growth rate about 3%), the average oil price for 2015 was approximately 50 USD a barrel. In Russia, there is no investment, but there are no interest payments on loans either. To refresh your memory, in 1999 (when our current leader took over the reins) the average price per barrel was approximately 18 USD and the investment situation was fairly dire, but the rouble only fell to 27 to the dollar. The GDP growth rate was 6.4%.

Incidentally, total foreign debt not covered by gold and foreign currency reserves remains the same (of the order of 200 billion USD).

So nothing dramatic outside our control is going on in the world, but before Putin, when the average oil price for a year was almost three times lower, there was rapid growth whereas now we are in the middle of an economic crisis. What is going on?

Apologists for the regime will tell you stories about what “our enemies” are up to, about the wild 90s … they’ll confuse you with dozens of figures, but they won’t answer the question: why, after sixteen years in power, with such favourable conditions, and having received more than 300 trillion roubles of excess profits at today’s prices, the government has managed only to increase Russia’s dependence on the oil price?

Today’s misfortunes stem from the system for governing Russia, and the people in the ruling team.

The answer is actually very simple: today’s misfortunes stem from the system of governing Russia, and the people in the ruling team.

For effective management of the riches that had fallen into their laps, they should have developed competition, sought out and helped talented people in business, science, education and politics. Given people a chance to show what they could do: taking independent decisions, receiving their due, and shouldering complete responsibility for any failure.

The state’s job was to pass just laws and ensure that they were unswervingly observed; to create a civil society in Russia and agree maximally favourable conditions with its neighbours. Not easy, but given the resources, which had almost literally fallen out of the sky, perfectly feasible.

Initially this was what happened. Relations with our neighbours were friendly, and business was developing.

But then greed kicked in

But then greed kicked in. They asked themselves, “How can this be? We are in power and on a salary, but there’s so much money swirling around … and it’s going right past us!  What should we do?” The answer was very simple and very traditional: corruption and embezzlement of public funds.

We have to ensure the power and the financial flows are in the hands of our own close circle. That’s the only way we can exact tribute from everyone. This means that the regions will be on starvation rations, independent profitable business under our control – or for the chop – and all the money is for our friends’ projects. There are not many friends, and not enough time, or people, to keep up with whatever is going on, so we need mega-projects. But they don’t wash their face, and our friends are the very same government officials that are good at taking the money, but useless at organising any work.

Never mind! The main thing is that they’re all part of our circle. It’s not hard to siphon off 50-70%, and for the rest – we’ll find sub-contractors. The loyalty of the next layer down has to be rewarded, and a minimum allocated to the people, so they don’t make a fuss.

The result of all this? There are revenues, but there’s no real economy. There’s an army, but what is there to defend? The riches have all been squandered, and there’s no industry or infrastructure. Education and science are a train-wreck.

What shall we tell the people?

What shall we tell the people? The same as ever – our enemies are to blame for everything!

It’s our enemies who over 16 years have failed to build a modern railway, even from St Petersburg to Moscow.

It’s our enemies who are now sending freight trains through [the historic city of] Yaroslav.

It’s our enemies who have built the pipeline to China in such a way that we have ended up in debt to the Chinese.

Our enemies have poured fantastic amounts of money into an aeroplane that no one wants to buy.

Our enemies are building new gas pipelines for export (when exports are declining), instead of installing gas supplies throughout the country.

It’s our enemies who are using money from European Russia to build the “biggest mosques in Europe” in Grozny. They are also keeping more than 20,000 soldiers on the payroll (when in the most difficult years of the second Chechen armed uprising there were no more than 5000).

With a government like this there will never be enough resources!

What is to be done?

I will come right out and say that I have no advice for this government. They will not be able to do anything. If they’re lucky, the oil price will increase by 2-3% in a year or two; if they’re not, there’ll be no growth at all. We shall continue slowly to fall to pieces while the rest of the world is developing.

The government will eventually go. If we’re lucky they won’t ruin the country before disappearing, though it has to be said they will have done all they can to set the scene for its ruin. We shall have to act very quickly. And here is what we need to do.

And here is what we need to do

1. The development of a dozen metropolises throughout the country: infrastructure, universities, devolved government – Moscow cannot remain the only centre of growth; sucking the blood from the rest of the country to protect the interests of the people inside the Kremlin.

2. The formulation for investors of stable and fair rules of play with an emphasis on the modern economic sectors, which are engaged in small-size or one-off production (since trying to compete with Asia in large-scale conveyor-belt production is pointless). These rules should be backed up with good-quality, independent courts, and professional work from a much more influential parliament with fairly elected deputies and a government that is accountable to its parliament.

3. Equity shares and financial resources, which have been gained from unlawful transactions involving the distribution of state resources (as a result of privatisation or corruption) should be transferred to investment funds run for the good of the people. And shares in all state property, which is not directly related to the national interests should be transferred there as well.

4. All taxes on small businesses, apart from the profit tax relating to private consumption, should be waived, and the taxation of medium-size businesses drastically reduced. It is in any event the taxpayers who pay for the upkeep of their state, and these payments will become transparent with a progressive income tax from 10 to 35%. Any person will have the right to ask, and see, what his personal financial contributions have been spent on, and to question them. The machinery of government will have to get used to living within its means.

This kleptocratic government is by its very nature unable to put these reforms in place.

The state’s business is to work out the rules of the game and to monitor their implementation, rather than engaging in business. It will be essential to tackle the problem of corruption swiftly. For this to happen, people will just have to stop lying that “corruption comes from the grassroots!” We have all known since we were children that fish rots from the head, so this corrupt head should be cut off without mercy.

These innovations will be backed up by regular changes of government resulting from free and fair elections. Every official has to know that his work will be checked by his peers; and the sooner this happens, the happier the voters will be.

Russia is facing difficult times with the disintegration of a corrupt, ageing government. We have to survive them – by fighting, grinding our teeth, or hiding our head in the sand of internal emigration.

Everyone will make his own choice. But these times will come to an end. We are more than halfway there. And we have a very clear idea of what we shall have to do then.

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