Indirect threat to oligarchs: is Putin doing like the Soviet Union?

Saturday 20th March 2021

Indirect threat to oligarchs
Does Putin do business like the Soviet Union?

From Kevin Schulte

The Russian economy is growing, but only very slowly for a number of years. Despite favorable tax policies, the richest Russians in particular prefer to invest their money abroad. President Putin knows that too. That is why he has new plans for billionaires and oligarchs that are reminiscent of Soviet times.

During the pandemic, seldom has so much capital been raised in a single video conference as last week in Russia. president Vladimir Putin has spoken to the country's richest and most influential business leaders. 66 billionaires and directors of state-owned companies attended the virtual meeting, reports the business portal "The Bell", which is operated by Russian journalists from exile in the USA.

The aim of the meeting was to stimulate the Russian economy. Because it has been paralyzing for years, says Janis Kluge in the ntv podcast "Learned again". The economist works for the Science and Politics Foundation in the research group Eastern Europe and Eurasia. "Russia has been in long-term stagnation for a number of years. The economic growth rates have been very low since the end of the global financial crisis. And average growth rates of only 1.5 percent are expected for the next few years. That is a very good thing for an emerging country low value. "

As part of the economic round, President Putin therefore called on the wealthy elite to increase their investments in Russia by 70 percent by 2030. According to "The Bell", Putin is said to have said that the time has come to invest in Russia. The crisis in the commodity markets is over and Russian exporters will be making high profits in 2021.

Those who cause problems have to pay

But even Vladimir Putin obviously does not convince billionaires to invest their money in their own country. At least not so far. It's too dangerous, explains Kluge. "In addition to the lack of the rule of law and the issue of corruption, the prosecution of entrepreneurs is something that creates a lot of uncertainty. That is why many entrepreneurs or people who make money in Russia may not like to invest this money in Russia. Instead they are more likely to go abroad. "

In order to force the billionaires to invest their money in Russia, Putin made it clear what would happen the next time they got into trouble, writes "The Bell". An indirect threat, so to speak. Addressed, among others, to the currently richest Russian of all: Vladimir Potanin.

The major shareholder of the mining giant Nornickel was sentenced to the equivalent of 1.6 billion euros in damages at the beginning of February for environmental pollution. Last year in May, 21,000 tons of diesel oil leaked from a damaged power plant tank of a Nornickel subsidiary in Norilsk, Siberia, into the two rivers Daldykan and Ambarnaja and from there into the freshwater lake Pjasino. Environmentalists speak of the worst oil spill in the Russian Arctic ever.

Those who stay out of politics are left alone and are allowed to enrich themselves. Anyone who creates problems gets to feel it. Like Potanin. The Russian President makes this clear with his suggestion. And reminds the Russian journalists more and more of the economic hardliners of the early 1980s. Economic Discipline, Domestic Investment, and Price Controls? That sounds like the Soviet Union, they write.

"Russia is a market economy"

Janis Kluge, however, is not convinced of the thesis: "Russia is already clearly a market economy today. And I think that you cannot turn back the clock. Accordingly, the risks and stability issues of today's economy are completely different than they were at the time Soviet Union. " The economist adds, however, that the state is trying to exert influence "with methods such as price controls". "They worry about food price inflation." But that is also due to the parliamentary elections this year, emphasizes Kluge. "One really wants to prevent negative news. I don't think that nationalizations or state price controls on a large scale will happen in Russia."

So the expert cannot see a creeping return of the planned economy. Rather, Kluge emphasizes that "Russia actually has a very liberal economy, with low tax rates and extensive privatization." However, this hardly leads to economic progress. I.n the first years of Putin up to the 2008 financial crisis, the Russian economy grew by an average of six percent. Since then, economic growth has averaged just one and a half percent.

There are many reasons for the poor economic situation. Vladimir Putin has a large stake, he has ruled the country for over 20 years. And has not managed to detach the Russian economy from oil and gas during this time. The dependence on raw material exports is huge. In addition, there are economic sanctions from Western countries as a reaction to the annexation of Crimea and a special demographic situation. In Russia, after the end of the Soviet Union in the 1990s, extremely few children were born; the group in their mid-twenties is tiny and underrepresented in the labor market. Russia is currently losing a million workers every year. Bad for the local economy.

Tax havens for rich Russians in Russia

In order to attract rich Russians to domestic investments, Russia has set up its own offshore zones in the Russian exclave of Kaliningrad on the Baltic Sea and in Vladivostok on the Pacific. Oligarchs can relocate there with their companies previously registered abroad. The offer: low taxes, the levies on profits are between zero and five percent. In return for the tax havens, the Russian state is demanding investment in the domestic economy.

"There are no conceivable positive surprises for the Russian economy in the next few years," analyzes Kluge. Economic growth averaging three percent in this decade is unrealistic. "Fundamental changes would have to change for this, corruption would have to be brought under control, the rule of law would have to improve. But these are all processes that take several decades to complete."

The economist expects at most slight economic growth in this decade as well. Russia will continue to export a great deal of oil and gas, but there are also many risks: The economic sanctions will not go away overnight, and a possible foreign policy escalation in eastern Ukraine is still threatening seven years after the conflict began. And of course the question remains, how things will actually go on with Vladimir Putin himself. In any case, the president doesn't seem to be as firmly in the saddle as he was a few years ago.