Russia's Bridge to Nowhere

So who are the winners and losers in Russia's particularly painful economic crisis? Will a sustained drop in the price of oil provide a long-awaited opening to political reformers, and loosen the iron grip of Vladimir Putin and the warring junta of former KGB officers? Or will these autocratic elements simply be further entrenched as the state assumes an even larger role in the economy?

Some Russians are optimistic that the crisis could paradoxically be good for Russia. I recently spent time with the civil society leader Oleg Kozlovsky, who commented to me that the crisis might cause the masses to "lose their illusions" about the regime and "breathe fresh life" into the political process.

That may prove to be true, but recent events leave one much less sanguine about the weakening of the regime.

Over the past few months, we've seen some negative developments which show the ascendency of the wrong groups within the Kremlin.  First, a Russian court granted parole to former Deputy Finance Minister Sergei Storchak, who spent the last year jailed on what are widely believed to be politically motivated charges. Storchak seemed to be a hostage of the internecine "clan wars" between hard-line and more liberal, market-oriented Kremlin factions.

The release of a political prisoner by this government is unlikely to be a gesture of altruism. Storchak's release is likely to draw some major concessions from one of Russia's last remaining economic liberals, embattled Finance Minister Alexei Kudrin, who has spent years fending off various bureaucratic factions from dipping into Russia's $515 billion stabilization fund (I should mention that the fund has dropped perciptiously).

The national piggy bank has already sprung some big leaks lately. After bailouts of several Kremlin-connected banks, favored oligarchs, and state-owned business, it was announced that Russia's national wealth fund would invest $6.9 billion into domestic securities via Vneshekonombank, a move that Kudrin has long opposed, not least because of the enormous risk that corruption will shift the funds hither and fro. In the longer run, most market analysts agree we are about to observe a historic re-nationalization of private sector assets by the state.

Following the Storchak-Kudrin episode, the Kremlin made a boldface attempt at energy market manipulation in announcing an OPEC-style gas cartel was being considered along with Qatar and Iran, followed by the signing of an agreement for a massive new "oil consortium" with Venezuela. The Russians began flirting with OPEC to discuss new levels of cooperation to help drive prices back up.

Unlike oil, natural gas is a mostly regional commodity whose price cannot be manipulated easily through production quotas, however the carve-up of markets significantly reduces competition and can have a real impact on consumers. As Carl Mortished wrote in the Times of London, "what we can expect, and what we ought to fear, is the exchange of information about prices, development schedules and investment plans" among the members of this new gas troika.

Part of Russia's rationale in announcing these cartels was to feed the panic in the markets and encourage profitable instability. Similar moves have been made in the oil market. In late October, Deputy Prime Minister Igor Sechin, among the most powerful of the siloviki, announced that the government may attempt to raise the price of oil through the creation of a new domestic production reserve, where Russia could store its oil until the state feels the price is right. That same week, OPEC Secretary General Abdullah al-Badri was feted about Moscow while the government flirted with joining in on coordinated non-member production cuts.

Both the gas cartel and the partial embrace of OPEC form part of a larger and long established pattern by Russia to disrupt energy markets, preceded not only by the supply cuts to the Ukraine and ongoing campaigns to defeat alternative supply pipelines, but also by a rash of deals everywhere from Nigeria to Bolivia. Some argue that an important factor behind the war in Georgia was to target the only non-Russian energy conduit from Central Asia.

In combination, events like these point Russia in the wrong direction. The resolutely anti-competitive and anti-market practices of this oligopoly appear to be deepening. The last guardian of economic orthodoxy is being marginalized as the state once again makes itself an arbitrary kingmaker rather than an impartial overseer of entrepreneurial activity.

The good news is that this Putinist system of authoritarian racketeering is not sustainable in the long-term. Russia's ability to survive the years following this financial crisis is entirely dependent upon something the country has very little of: transparency.

While the total value of Russia's stabilization fund exceeds all ruble deposits in the country by more than $100 billion, low levels of trust and confidence in the state persist. Many doubt the accuracy of key economic indicators, as well as the state's ability to keep foreign reserves "reserved."

With free market capitalism in the throes of crisis, the time is ripe for bold proposals for a new world economic order. Russia made a weak attempt at assuming a leadership role at the October 8 meeting in Evian, France, when President Dmitry Medvedev outlined his country's vision for a multipolar world of strictly sovereign nations, whereby no one would seek to force their norms upon others. Medvedev's speech had admirable and compelling ideas, but at the end of the day, Russia failed to define its national project beyond that of contrast with and opposition to the United States, and the protection of the enormous personal wealth accrued by government officials who double as state corporation executives.

Much like the home state of the former vice presidential candidate (and self-proclaimed Russia expert) Sarah Palin, Putin's Kremlin has created an economic, political, and social bridge to nowhere. Russia's stability is underpinned by a group of millionaire (and billionaire) businessmen whose fortunes are dependent not on their competitiveness or business acumen, but on arbitrary political decisions, tied selling, market manipulation, and, sometimes, outright theft and bullying of the shrinking private sector. This is by nature a system of diminishing returns for each additional participating member, where merit and efficiency are punished rather than rewarded.

Don't be fooled into thinking that Russia's brand of authoritarian capitalism represents a viable alternative to liberal democracies and markets. A system of institutionalized corruption and graft should not be confused with a real ideology or vision for the world.