Schumpeterian analysis of Russia’s assertiveness in international relations

September 22, 2008

Vladimir Putin and Oleg Deripaska

 Lenin, founder of the Soviet Empire, is famous for many things, but among other for his book published in 1916 Imperialism, the Highest State of Capitalism.  Joseph Schumpeter’s response in an essay on the Sociology of Imperialism published in 1919 retorted that imperialism is the result of excessive statism forged by pre-capitalist forces (the military, agrarian interests. etc), not capitalism. The state, in a sense, instrumentalises capitalists for its aims. Who was right? These theories can be tested in the case of today’s Russia.

Russia’s Gazprom company, a former ministry that has been put back under state control in 2005 (state ownership 51%) has the monopoly over distribution and exports of gas. It controls the entire former Soviet network of pipelines that pumps gas and oil out of the former Central Asian Soviet republics. The Russian government of course likes to say that it has a “privileged interest” in the Central Asia and the Caucasus. Gazprom, and therefore the Kremlin, is not keen on seeing Kazakhstan, or Turkmenistan sell their hydrocarbons to others with independent means, i.e. pipelines that go elsewhere. In fact, it has already started happening. Kazakhstan opened an oil pipeline to China in 2007. It was therefore immediately able to raise its export prices to Russia. And it hasn’t hesitated to do it. What Gazprom wants is to buy Central Asian gas below market prices, and sell it to market prices to the West, and to other countries such as Ukraine and Belarus. The price issue has led, as we know, to the cutting of gas supplies to Ukraine and Belarus. This has in turned given a new dramatic tone to EU-Russian relations. The conflict in Georgia this August, which is a fallout of the disintegration of the Soviet Empire (dubbed by Vladimir Putin “the greatest catastrophe” that happened to Russia), cannot be completely isolated from these geo-economic and strategic issues. There are two pipelines running from Azerbaijan to Turkey, capable of pumping oil and gas to the West. The oil pipeline goes to the port of Ceyhan in Turkey and already supplies Europe with Azeri oil. The gas pipeline ends in the middle of Turkey, in Erzurum, and is due to be connected to the ever-elusive Nabucco pipeline that would pump gas from the Caspian Sea to Austria. But the divided and weak Europeans don’t manage to get that pipeline built. During the conflict this summer, the Georgian pipelines had to be shut down, and it was clearly felt that gas export independence for former Soviet republics is one of the issues that contributed to Russia’s ire this year. One should not forget that President Medvedev was Chairman of Gazprom while being Deputy Prime Minister, just before becoming president.

These stories are well known. It is also well known that since the Yukos affair in 2004, the Kremlin has asserted its power over the so-called oligarchs and renationalized part of the economy. Yukos shares are all* with Rosneft, the other main oil and gas giant, controlled by the tycoon Sergei Bogdanchikov. Khodorkovsky is sitting in jail in Siberia. In the meantime, the Kremlin and friendly oligarchs staged assaults on BP, or on Russneft, an independent oil producer that had to sell its assets to the Kremlin’s favourite billionaire Oleg Deripaska in 2007. These are a few examples of the incredibly cynical methods that are used to do what the Kremlin wants to do: control the oil sector directly, the country’s cash cow, whatever the price. The Russian government doesn’t have a cover-up ideology – Hugo Chavez from Venezuela at least states he wants 21st Century socialism, and he nationalizes openly, offering compensation, if below market value. What is orchestrated in the Russian Federation is asset-stripping, by administrative means. I recently browsed through Aslund’s brilliant “Russia’s Capitalist Revolution” and had to underline the sentence: “The most likely purpose of renationalization is corruption” (p.254). Before 2004, it was corruption from outside the Kremlin, where the oligarchs robbed the state and each other, now it is corruption orchestrated from within and from the top where officials and tamed oligarchs strip assets from others. The European Bank for Reconctruction and Development registered the renationalization of the Russian economy: in its “structural change indicators” (available here), the share of the private sector in the Russian economy declined from 70% in 2004 to 65% in the following year. In all other economies in transition the trends is at least towards a greater private sector share of the economy. The trend in Russia is backwards.

The story of Russia’s accession to the WTO is also related to this issue. Openness, and strong, predictable non disciminatory rules are the WTO’s principles. Protectionism and arbitrariness – these set in in Russia around 2004 as well, reversing the progress made before towards WTO accession. Russia has used and abused trade bans to punish recalcitrant countries: Lithuania, Georgia, Moldova, Poland…. In the aftermath of the Georgian conflict it said it would pull out of WTO agreements (but later announced it would not after all), announced it would reassess its trade agreement with Ukraine since it joined the WTO, stopped importing chicken from the United States and elsewhere, and kept Turkish (Turks are NATO members but trade a lot with Russia) trucks waiting endlessly at their borders (more here).

All this leads us to believe that it is Schumpeter who tends to be right. To him, international capitalism is in itself a force for peaceful relations. The reversal of free capitalism in Russia has gone hand in hand with aggressive foreign policies. Capitalists that wanted to go towards more freedom and rule of law, despite their dark background, such as, Khodorkovksy, were ruthlessly ousted. If Russia were in a regime of free capitalism and free trade, relations would look like this:

“in a regime of free trade, the essential advantages of international intercourse are clearly evident”. “For in such a case the citizens and goods of every nation can movie in foreign countries as freely as though those countries were politically their own (…) in a genuine state of free trade, foreign raw materials and foodstuffs are accessible to each nation as though they were its own territory”.

Protectionism, to Schumpeter stems originally from European monarchies’ quest for revenue and taxation. In the long term this means that producers have been put in the dependence of the government. And most governments of Schumpeter’s time were influenced by pre-capitalist forces (namely the military and agrarian interests). Today, the Russian state can also be considered pre-capitalist: it is after pure power, and it is predatory. The military are maybe not that important, but the secret services are. And the military have shaped the agenda in Georgia more than probably a Medvedev would have liked.

“Protective tariffs (…) move the nationals economically (…) apart, making it easier for imperialist tendencies to win the upper hand; they line up the entrepreneurs of the different countries in battle formation against one another, impeding the rise of peaceful interests; they also hinder the flow of raw materials and foodstuffs and thus the export of manufactures, or conversely, the import of manufactures and the export of raw materials and foodstuffs, possibly creating and interest in – sometimes forcible – expansion of the customs area; they place entrepreneurs in a position of dependence on regulations of governments that may be serving imperialist interests, giving these governments occasion to pervert economics relations for purposes of sharpening economic conflicts, for adulterating the competitive struggle with diplomatic methods outside the field of economics (…) “

The quoted passage is an extremely stylized description of this interaction between corporate interests and governments pursuing power games. But the correlation between a pre-capitalist state dominating and moulding domestic economic interests is striking in today’s Russia. Deripaska, the Kremlin’s favourite oligarch is said to have stated in 2007 (quoted by The Economist’s Ed Lucas in his new book The New Cold War):

“I don’t separate myself from the state. I have no other interest”.

We are not running into a New Cold War (at least in my view – this term is misleading), nor is Russia venturing (yet?) into military conquests. “Banks not tanks” has been the motto of the Kremlin since Putin took charge. But any Western and in particular European diplomacy that wants to bring Russia into the fold of civilized economic and ultimately political relations will need to find clever ways to tilt the interest of the oligarchs, those capitalist interests that, left alone, would rather favour global integration and peaceful integration, away from the Kremlin’s hardliners, away from Gazprom, away from the FSB. All these are resuscitations of the Soviet era that the 1990s did not destroy – the 1990s in Russia reformed the economy but not the state. It’s not going to be easy. However, the current financial crisis in Russia could be a good wake-up call in Russia. Prime Minister Putin told investors last week that Russia’s integration in the world economy is to continue. But how far will the Kremlin be ready to let go?

* Slight edit: Gazprom also acquired parts of Yukos. [20.04 – 22 Sept 08]

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