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| Speaker: | Padma Desai, Professor of Comparative Economic Systems, Columbia University; Author, Conversations on Russia: Reform from Yeltsin to Putin |
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| Presider: | Chrystia Freeland, U.S. Managing Editor, |
May 11, 2006
Council on Foreign Relations
New York, NY
CHRYSTIA FREELAND: Thank you very much for coming. I’ve been informed very strictly by e-mail that the Council prides itself on its promptness and punctuality, so thanks for all coming to your seats at exactly 6:00.
My name is Chrystia Freeland. I am the U.S. managing editor for the Financial Times. And I’m really delighted to be here this afternoon to introduce and to guide our discussion with the wonderful Padma Desai, who has just written a great book on Russia, “Conversations on Russia.” Padma, as I think everyone must know, is a professor of economics at Columbia University, and is also the director of the Center for Transition Economies.
For me she’s been a real guiding light and authority on Russia and the Soviet Union and the economic change for a very long time, and I think her book contains a lot of wonderful insights.
What I’d like to do now is ask Padma to speak for a few minutes and give use a bit of an overview of her book, then I will ask her one or two questions, and then I’ll throw it open so we can all ask her some questions.
Padma.
PADMA DESAI: Thank you very much, Chrystia, for the generous introduction. I’m very happy to be here. I feel like an old hand at the Council.
I have been traveling around talking about the book— Moscow, Helsinki, London, Oxford, and going again to Europe. And people have been asking me lots of questions, especially at the universities, “Why Russia?” When I was going to interview (Oleg Vyugin) who was then the monetary policymaker in charge of the monetary policy of the Central Bank of Russia, his young secretary sees me in the Mercedes car and she asked me why Russia? And I said because of Dostoevsky. And she said, “But he’s so disturbing.” And I said that’s exactly why, that when I was a teenager in India, 13, 14 years of age, I read Dostoevsky’s translations by Constance Garnett, and I said to myself, “I’ve got to read these in the original Russian.” That’s why I went into Russian studies at Harvard. When I was doing my economics, I also started learning Russian.
Another personal remark, which is where do I come from, where do I come from in terms of my thinking, where do I belong? And I like to think I sort of belong to the world and the thinking and the views of the Scottish philosophers, Adam Smith, David Ricardo, David Hume. I am a liberal. I believe in the liberal political and economic order. When in the 1960s, ‘67, Jagdish Bhagwati and I, we wrote a book on Indian planning, which became Oxford’s best-seller later on. And we criticized male socialist policies. This is what I tell my students—this was way back before some of them were born—that I do believe in market systems, liberal political systems, but I do not believe ideologically that, for example, we should have a liberal political and economic order in Russia here and now. I do not believe in that, because as a trained economist I like to think of—I like to look at the evidence on the ground. I like to also go back to the history and then make up my judgment about where it is going and what is the speed, how speedily can it go from the communist system to a liberal system, and whether it is likely to evolve into a liberal political system. And I tend to be, on the whole, quite optimistic.
The work which I have been doing in this—my third comment—as an economist, the technical work, when I talk about policy on Russia, like Chrystia and I were discussing with some of you, is there a Dutch disease in Russia, meaning is the oil sector-/energy sector-driven economy in Russia hurting its manufacturing sector because the ruble has become very strong. That is the Dutch disease. Is there a Dutch disease in Russia? How does one reach a judgment on that? For that I would need a model, for that I would need a lot of information, which I get, and if my model says yes, then I would abide by that judgment. But in my work I do come across a result, which will be published in the American Economic Review, that there is no Dutch disease in Russia. And the sense that the Russian manufacturing sector has its own problems, and that the strong ruble is not creating problems for it—that sort of a judgment. But in doing that kind of work, I use information data which is available from American sources, Russian sources.
Here in this book I reverse the process in the sense that I wanted to create a historical record, a sort of an archival record of this period from Yeltsin to Putin—interview the top-most policymakers. The Yeltsin interview was done for me by someone else. But from the top-down there and here, what were they thinking about when they took certain policy decisions? Because people write their own memoirs, but when they write their own memoirs, they say what they want to say. Well, I want to find out from them what—why they took certain decisions. And so I like to think that this book will serve as a record for that period. And anyone who wants to find out about what happened during the initial years of Russia’s dramatic transition under Yeltsin will have to go back to the book.
The—a couple of more minutes—the interview project, of course—as you will see, the interviewees, they’re not only political policymakers, politicians, but also monetary policy people, businessperson, investors, historians and so I have to really have a firm grasp on a wide spectrum of subjects. And my background—I mean, I have been buried in the Soviet-Russian field for the last four decades, and that came in very handy. And my whole—some of my views changed as a result of these interviews, maybe became firmer.
What I like to sort of summarize is that I feel that under Yeltsin, or before that under Gorbachev, we had a common viewing of interests and values, whereas this interview with Jack Matlock, Yeltsin—sorry, Gorbachev and Ronald Reagan are walking, followed by journalists in the Kremlin in the courtyard, and somebody asks, “Mr. President, what about the evil empire?” And Ronald Reagan says, “That is a different time, a different era.” So another question, “Who was responsible?” “Of course, Mr. Gorbachev. He’s your leader.” “What about the Cold War? Who won the Cold War?” “Both sides won the Cold War.” That is Ronald Reagan, an ideologically driven president, but very pragmatic.
And so the common values, the common interest—the Cold War is behind us. It’s in our interest. It also conforms to our values. Under Yeltsin, the same scenario. Strobe Talbott, who gave me three interviews, he said—you know, he says, the hysteria of this period, eight years between the two presidents, Bill Clinton and Boris Yeltsin, that was a story of the bond, the chemistry between these two guys. This was it. And then he comes out with a one-liner, which is reported also in his book—he said the policy signal was very Clinton-esque, that Yeltsin drunk is to be preferred to any alternative sober. (Laughter.) We are here to destroy the communist planned economy and political system. Yeltsin wants the same; our interests and our values collide, and therefore, this is a common demolition project. And that is the story of that period.
Putin—well, we have our interests with the Russians—terrorism control, nuclear nonproliferation, scaling down the bilateral strategic forces—but our values seem to be differing because of his backsliding in strengthening the federal authority.
So that is the problem. And the way I look at Putin’s policy agenda is to sort of give it an analytical twist, that here is a state authority that presented by the federal powers, the government, and the Kremlin—and here are the oligarchs who have created, as a result of the privatization in Russia under Yeltsin. So how does one create a balance between these two—the state authority and the big business—when legal authority in the country, legal system, is very weak? That is his problem. And so I would like to think that he would sort of not overstep and control the oligarchs too much. But in our case, of course, it came under Teddy Roosevelt and then of course later on the antitrust legislation and all that. But that is his problem. And I will not go into the one-hour speech which he gave, addressed to the parliament where we may have questions during the question hour, but he raises the same issue, and that, I think, is the way he looks at his policy agenda.
Now, the final point is that—you know, we think that Putin is authoritarian, therefore, we have problems with him in the Russian neighborhood, in Ukraine, Georgia and with regard to the gas energy problems with Western Europe. I don’t think so. I think even a fully reconstructed Russia, we will continue to have problems because of what I call in the newspaper interview, our “systematic sensibilities” are slightly different.
But more to the point, I think that unlike Europe and Japan, Russia always will have geopolitical interests, and—in its neighborhood, the southern boundary, in East—on the eastern side with China, and that’s why we will always have to deal with Russia, even when it becomes fully democratic. But we will have to learn to deal with it by negotiations, and I think—my feeling is that—and what disturbs me right now with what’s going on is that if we—when we pull Russia more and more into the energy dialogue, into giving—(inaudible)—retail energy systems in Europe, involving them more and more into these kinds of activities are the way to go, and that will sort of make the task more manageable.
Thank you.
FREELAND: Okay. Thank you very much, Padma.
I should mention two quick housekeeping things before we launch into our discussion. We’re all supposed to turn off our mobile phones. It sounds like everyone has done that. And in contrast with the usual routine here, this discussion is on the record, and as one of the dangers of journalists present, I should warn everybody about that.
They say that Napoleon had one quality he valued most in his generals, which was that they should be lucky, and as an editor, the quality I value most in my reporters is that they should also be lucky and should chance upon subjects that happen to become high profile. I think Padma clearly has this quality because her book has come out at a moment when interest in Russia is intensifying, and we’ve had in a sign of this, really, quite a remarkable speech by the vice president in Vilnius.
I wanted to ask Padma what she thought about that speech and whether it marks a change in U.S. policy towards Russia.
DESAI: I don’t think it marks a change in policy. I was upset, but, well, not surprised at what the vice president said. I was not even surprised that from Vilnius he chose to go to Kazakhstan in search of oil and gas for us, negotiating with Nursultan Nazarbayev, who is one of the world’s leading dictators. So—but the—and I thought the vice president was not particularly original in the sense that I am worried about the fevered Putin bashing and Russia bashing in our media. So in that sense, he was not original, though he may have crossed the boundary. But he said the democratic—the backsliding on the democratic management of Russia, and then, of course, that Gazprom was intimidating and blackmailing the Europeans. Those were the two points.
Now, if you would like me to talk about that aspect I could right now.
FREELAND: Why don’t you say a few words on that.
DESAI: But the gas—the energy situation, and the dialogue the two—between Brussels and Moscow, Gazprom, I think the first point I would like to make is that Russia is as much worried about the reliability of Europe as its customers—as its chance, as Gazprom is worried, as the Europeans are worried about Russia’s reliability of supplying gas to it.
So this is a situation which economists would call sort of a bilateral monopoly. These are—both parties are almost equally balanced in the sense that gas—Russia Gazprom gas goes through this pipeline; one of the pipelines going through Ukraine, Poland and Germany, which carries 80 percent of the gas to Europe, and Europe as a whole, I think 25 percent of natural gas consumption comes from Russia and Germany. It goes up to 40 percent of its natural gas consumption.
So Russia is a big supplier, but in the short run, the gas has to go through the pipeline. It cannot be diverted somewhere else, and in that sense, Russia is as much a prisoner of the relationship as the Europeans are, and that is one point.
And the second point is that when the Europeans say we will get our gas from Libya or from distant Qatar or from Algeria, that scares Gazprom as much as the Europeans are scared about Gazprom reliability as a supplier. So when I was in Moscow, I was sitting down with one of the top most reformist people who was high up in Gazprom and we were talking, and he said: You know, in the old days, it was so difficult to get into the German market. He said: Today, Ruhrgas has 6 percent of the stake in Gazprom, but in the old days—and he was talking about 15, 20 years ago—we were told that getting Russian gas in Germany is like getting a Russian bank in Germany. This is what we were told, and so we were exploring other customers, other clients, and later on, Ruhrgas came on board.
So he was reciting this example to me. And so they are as much worried as the Europeans are. This is a bilateral monopoly situation.
Another aspect which—and I think that is where Gazprom should be given a bigger role, is—see, the price at the border of Gazprom gas is about $218 per 1,000 cubic meters. What is the price of the gas to the retail buyers in Europe of this gas or natural gas? For EU as a whole, one number which I got, which is cited by Keith Bush in one of his articles, is about $518 per 1,000 cubic meters.
Look at the difference. Some of the difference is retail marketing and all that, but a lot of it is tax. And so the Gazprom suppliers are saying, “Maybe we would like to get into the retail market,” because in my viewing, Gazprom thinks, “We are like the African, Ghanaian cocoa bean sellers who sell our cocoa beans to the Swiss, and then they make these fancy chocolates and make enormous profits on those, so why can we get into the retail market?” What is more, most of the European distributors are—the majority owners in these distribution systems in Europe, France, Spain, the state is the majority owner.
In the same time, Brazil is telling Russians, Gazprom, free up your pipeline system for everybody, for Turkmen gas, for Russian private natural gas producers. And the Russians are saying no, we cannot do it because we have a price of about $40 per thousand cubic meters for our households and our industry, and the European wholesale price is set at $218. So if we free up the price of the gas pipelines, then these guys will ship their gas to Europe, and who will supply gas to our domestic consumers, households and industry?
Now, this kind of domestic policy, is there some kind of a law here which says if your internal price is lower than the external world price, there should be some external lawmaking or rules here? Because we in the United States, we have lower energy prices. We haven’t signed the Kyoto agreement. So countries follow their domestic policies. Russians want to protect their manufacturing sector, their households. If prices are raised at one shot, which they are raising gradually year by year, it will push up inflation, which currently runs at about 11 percent a year. And they’re saying this is a big policy issue for us, inflation control, so we are raising the prices gradually for our households and for our industry, but do not force us to undertake domestic policy measures which are hurtful to us. All countries, including us, follow our own domestic policies. If we make a suggestion that gasoline prices, high as they are, should be taxed even higher, I’ll be thrown out (inaudible but unnecessary) when I make the suggestion, right?
So I think that taking all this into account, the best way is to go the way BAFF (sp) signed an agreement with Gazprom when Chancellor Angela Merkel was announced, and I think that’s the way to go, bring Russians like Gazprom more and more into the retail marketing systems. If they stop the supply of gas, we can’t seize their assets. Who would want to do such a mad thing? I don’t think so.
FREELAND: Okay, I just have time for one more quick question, then throw open the discussion. You did 30 in-depth interviews in this book with 17 people. What was the biggest surprise? What one thing did someone tell you that really astounded you?
DESAI: You know, I have interviewed the reformers. All of them are my close friends. And some of the things which they said surprised me. Anatoly Chubais is history’s most famous privatizer, and he said Russia should practice economic imperialism in the “Near Abroad.” I mean, meaning, you know, become a very active, self-interested, motivated promoter of Russian business in Ukraine, Georgia, Moldova and what have you. And I was really surprised.
The other thing I was surprised about was how afraid, how scared all of them are about the Chinese. It almost borders on xenophobia. And the reformers themselves were telling me: The Chinese are settling down in our sparsely populated, Far Eastern areas; then they will grab some of our territories—and China is next door—and so how can we be—how should we be able to say no? Anatoly Vishnevsky, Russia’s leading demographer, he shows the same worries about China.
And the current aspect was, when it comes to—and Mr. Putin brought up this in his parliamentary address yesterday—the strategic balance of nuclear forces between the two countries—bilateral—all of them said do not ask us to reduce this unilaterally, that we should reduce our nuclear forces, and you stay where you are. We’re going to do it together. And this is—and all this coming from these reformers. And this is what made me think that—you know, this is—I mean, I think about Winston Churchill quite a bit these days. I mean, what is it he said? Russia is a riddle wrapped in a mystery inside an enigma. But there is a key, and the key is national interest. And that came out in whoever I was interviewing—is not—I think we have this sense that Putin is the dangerous guy and that he’s for Russia’s, say, self-interest and a strong state. But when I probed the reformers on some of these issues, their attitudes really surprised me.
FREELAND: Okay. Well, that’s excellent. Should we start open to questions? Who would like to ask the first one?
Please.
QUESTIONER: Informed Americans operating a long time in Russia, like George Rohr, say that there’s a chasm in difference between perception of Putin and Russia outside the United States in the Western media and within Russia. Is that fair?
DESAI: I think so. I think when I go to Russia and I—I think I said somewhere else—we had a huge meeting in Colombia with a whole set of foreign policy experts who came to us from the State Department from Europe, and I was talking with them. And the perception—I lived in Russia—in the Soviet Union in 1964, when Khrushchev was sent on pension, and I traveled in the country, and got on top of the language, sort of. And today—and I have been going there maybe two, three times a year for work, traveling—it’s a changed country. People have changed. At the bottom, there are inexorable changes, and that should—makes me a little bit optimistic that this road to a liberal order in Russia, and in my view, the reformers’ big plan, that idea in the land of Lenin and Stalin—they planted the liberal idea when Yeltsin was in charge—they destroyed the communist system. That was their main contribution. That idea will move forward. It will have a bumpy ride.
But the changes on ground are so inexorable that no leader from the top can stop the process. I mean, if you take the economic changes, they are momentous. I mean, there are no fixed prices. There are—the ruble is more or less convertible. Mr. Putin says in his address that it should be made freely convertible by July 1—that’s what he’s telling his government—he’s saying, why is the ruble not becoming one of the world’s important currencies? Most of the assets are privatized. The judicial system is weak, but they have undertaken a whole new set of laws.
So in lots of respects, they have moved forward. And I don’t think any of these changes are going to be reverted. Gaidar said something, that he doesn’t think—while he has his reservations about Putin’s democratic credentials, on his privatization attitudes, on his—in his market beliefs, Putin is firmer than in his democratic credentials. And then he added, saying, I do no think that in a highly urbanized, educated system like Russia that authoritarianism can ultimately prevail, given the changes that have taken place.
So there is—I think what I find in the media, among the reporters is, I think, a very ideologically preconceived position, and not much awareness of the changes which have taken place, how it has changed from what it was. So—
QUESTIONER: Thank you.
FREELAND: Next question?
Yes?
QUESTIONER: Hi. I work in the microfinance industry, and I had a chance to recently be in Samara in Russia. And I guess my—I’ll give you a story and ask a question. And the story is, we happened to be celebrating the 10,000 th loan to a client in that region, which had been a closed city. And I was reading her bio and realized that she and I had been born in the same year, had had equivalent levels of education both in high-level graduate degrees, and she now runs a gas station.
And so my question is, is while you were talking about the macroeconomic system, is the distribution of wealth in Russia occurring in a way that will actually help that country develop a stable political system?
DESAI: Yes. I think it is the distribution—is wealth earned in a way—in such a way that I think there are sort of two reactions. First is, I mean what did the distribution of assets do to begin with, right? I mean under Chubais and under Yeltsin—which Chrystia has written a whole book on that—I think in the viewing of the Russian public, they felt that it was a huge robbery; that they created the assets together under Stalin, and then a few people benefitted as a result of the privatization that was undertaken.
Now, Putin—I think the mandate was not to overturn the privatization. The Accounts Committee of the Duma has also said privatization of the assets is not going to be undone, it’s going to stay, except Yukos, which we can talk about separately.
But the thing which he mentioned in his parliamentary address again yesterday, which is relevant to your question, I think he comes back to this thing again and again, the few and the masses; the economy must grow, therefore our poverty is reduced and people benefit from it. That’s something he says all the time. Maybe it’s his background; he grew up in communal housing. Maybe because he’s a politician. Whatever. That’s what he does. And he said a few people cannot step on the toes of the many, they shall not be allowed to be stepping on the toes of the many because they want power or wealth or both, because the welfare of the many is, you know, our concern. And he said, you know, I would have liked to say these words, but these words were uttered by Franklin Deleano Roosevelt. He quotes Roosevelt. And that was the way he deals with the oligarchs. That was just one paragraph in his address.
Now, what is missing there, I mean, is wealth earned—okay, forget about privatization, all that emergence of the oligarchs. You have a deeper question, is people earn their living in a way which gives you hope. I think what is missing in Russia is small entrepreneurs. In all developed economies of the world, small businesses really provide an impetus to growth, employment, betterment of living conditions, and in a legal setup. And that is the problem, and that is a problem because unlike China, in the Soviet days the whole economy was so centrally owned and governed—I mean everything, including restaurants, bookstores, shops, laundries—everything was state-owned and managed. There was no scope for private initiative or enterprise to develop. Small business is: Where will I set up a shop, where will I borrow money from, what kind of activity? These are business decisions. The Russians never learned these decisions, unlike the Chinese, because China was never that much centralized. And that is the main problem. And they’re learning.
But, you know, the American ambassador, Vershbow, said last year that a business person has to get 40 permissions before he can start a business. So that is the issue. Get rid of this kit and kaboodle of—and Kasyanov talks about it in his interview—there’s this inspector and that inspector, and always giving money under the table. And that is the problem of loaning money to small businesses in an honest, professional way.
FREELAND: I remember being very distressed when our office manager very proudly said the tax authorities were going to start giving us an official receipt for the bribes we had to pay to register our cars. She saw this as real progress. So these things do take a long time to get rid of.
We have a question from the Sakharov Foundation.
QUESTIONER: Padma, I’m reading the book now, and I want to commend you on it. It’s absolutely wonderful to see such a human side to reformers we’ve known and watched for many, many years, and to see them at different periods speaking about their dreams and aspirations, and seeing what has been developed brings a very human feeling to a very important historic moment. Most of us were there for the euphoria of perestroika and glasnost.
What is—do you have—I shouldn’t say which one it is—do you have any disappointment in the people who seemed to be so full of promise and wanted to change the world, and did to a great extent? But is there anything in these bright young men, who we watched early on, have they not achieved what you had hoped they would? Have they changed in any way—has politics changed them so much? Is there any disappointment?
DESAI: Yeah, I saw them in Moscow, March, and even earlier last year, and at my age I can lecture to them because they are almost half my age. So I think first of all, they came across as terribly elitist. They are, in my viewing also, and in the viewing of the Russian public, they are their elitists and intellectuals, and their whole approach was very technocratic. And –Nemtsov at one stage when I pushed him and pushed him in front of 200 Columbia college students, I said, –Boris, all of you undertook a technocratic approach and you forgot that there were elections and that people were hurting and that they were going to throw you out of power. You forgot all that, didn’t you? Oh, he said, yeah, we thought if we privatized assets, if we free up the ruble, things would work out, and it didn’t. So I said you forgot that there are the have nots, and it was not that you did not think about policies to benefit them in some ways, but it was not even there in your conceptualizing of your program. There were just pure neoclassical economists. And as Sergei Rogov says in his interview—he’s the director of the Canada-U.S. Institute—he must have smoked 50 cigarettes while I interviewed him; he had a pile of cigarette butts. And he was saying—you know, he’s a social democrat, his leaning is that. And he said you know what these guys did, these young reformers? They brought Friedmanism in place of Leninism. I mean, go like, you know, very broad judgments.
And so I think the disappointment was that there really—I think there is a whole Russian tradition from the old czarist days—and I do talk about the history also here in the book—that from the very old days, unlike here and in Europe, there are no outsiders, are not sort of involved into policymaking, right? There was—I mean, under the czars the intellectuals who wrote and who rebelled and who were sent out to Siberia. But they wrote, and they suffered. But that was about it. And under the Soviet Communists, under the Feldman plan, the heavy industry plan, it was not his thinking or his plan, he was just okaying the heavy industry-led plan which Stalin and his gang had worked up. He was just saying this is okay; we should go that route. It was not—Suslov, for example, Academician Suslov, he was just giving a policy goal to the pronouncements of Brezhnev. But they were not independent objective advisors or policymakers.
And so I thought that the first change which was brought by Gorbachev and Yeltsin was to bring professionals, young people, into policymaking. The 500-Day Plan, that was a revolutionary—it was the wrong plan in my view, but that’s a different story. They were brought out into policymaking. And that was a change. But they were still learning. They were inexperienced, right, because there was no tradition of that kind.
QUESTIONER: They had no opportunity to implement any of the—I mean, Yavlinsky’s 500-day plan. He had no administrative experience.
DESAI: Yes.
QUESTIONER: I wanted to ask you, Padma, about Khodorkovsky. There seems to be a bright red line of difference in perception. In America he’s like a hero or something, and you even get U.S. senators who are reminiscing about the injustice of his incarceration. In Russia, people are thrilled that he’s in jail, exactly where he belongs.
My allegory is—I go around and talk to business leaders all over the country—is that there were 10 guys going down the thruway at 100 miles an hour, and one guy was in a small red sports car, and he flipped the bird to the trooper. And guess who the trooper pulled over?
And I wonder what your feeling is as you talk to these people. Do they view the Khodorkovsky affair as a positive one which has resulted in the channeling of all the incentives so that people are paying their taxes and—not getting out of politics but, you know, minding their own business, so to speak?
DESAI: We discuss Khodorkovsky, but some, but my viewing is if a man acquires a company which is worth $300 million, and within a matter of eight to 10 years the market capitalization of the company goes up to, say, $15 (billion), $17 billion, this man has to know, as the CEO of the company, whose interest he’s supposed to protect. It’s the interest of the shareholders. That is his primary obligation, I think, and that’s what he forgot.
I think he also misjudged the situation politically. That he was taking too many chances. It’s like I tell my teenage daughter, don’t go in Central Park in the middle of the night to jog, because some danger might happen to you; you might be killed, raped, mugged, whatever. And she says, “No, I’m going to go.” So that was Khodorkovsky. Don’t do this. Because the 2003 Duma elections were coming up and throws his money around, from the Communists to the Yukos—to the SPS of Chubais and Nemtsov, to the party of Grigory Yavlinsky, trying to conquer the lower house of the Duma, maybe conquer the Cabinet, maybe become the prime minister, and influence legislation of the Duma. That was his plan. It was almost like the—as I mentioned in my Wall Street Journal article, “Give Putin a Chance”—over the pocket bureaus in England, which—the 18 th century? Yes. That was Khodorkovsky. And Putin saw through this.
And I also cite German Gref, the minister, who is still the minister in charge of trade and development. And he said, “I do not like”—he’s a market reformer—“I do not not like what is happening to Khodorkovsky. “ This is during the persecution of Khodorkovsky. “I do not like it, I do not agree with it, but I do not like the man.” This is what German Gref said. “I do not like him because he came to me once when I was minister, and he said to me, “Change this law. This law goes or you go.” So I cite the minister, with the source and everything
But this was Khodorkovsky. So there were these two Americans who were on the board of directors of the Yukos. I said, “What were you doing? Didn’t you tell him that this is not the route to go?” Privately they said to me, “He never listened to us.”
FREELAND: I’ll interject one small reminiscence about Khodorkovsky. I did what I think was the last interview with him before he was arrested. And the pressures were already mounting. I spent a couple days with him, flying around with him. It was clear that things were on the edge.
What was really surprising to me about his attitude at that moment was he was very aware of the risks. I think he clearly miscalculated to some extent, because his view at that moment, three weeks before his eventual arrest, was there was a 50 percent chance he would be arrested. But even at that time, he was absolutely determined not to leave the country, to run that risk. And his rationale was that being arrested, for him, held a political upside. I think that this is turning out not to be the case, but his thinking was very much that being arrested, being imprisoned would have a sort of political cleansing effect on his reputation publicly. And he did then have a real vision of himself in the future—
QUESTIONER: Could I have a rejoinder?
FREELAND:—and he is a young man—as having a possibility of being a modern-day Andrei Sakharov.
QUESTIONER: Yeah, he was a megalomaniac.
QUESTIONER: Let her finish.
QUESTIONER: As Padma said, role playing is extremely important. And when you’re the CEO of a public company, you have to play a certain role. If you want to put aside that role and go into politics or something else, and so other people have a regard for the interests of the shareholders, that’s your right. But he tried to combine all these roles. It’s almost an impossibility. And it’s amazing that nobody’s ever sued him personally for the destruction of shareholder value. They blame everybody else by Khodorkovsky.
QUESTIONER: (Off mike)—finish out what you were saying. Why was he so confident?
FREELAND: He wasn’t confident that he wouldn’t be arrested. He thought that was a strong chance. But he really believed that by being arrested, that would have a political advantage for him. He was conscious that his possibilities as a politician in Russia from his position as a wealthy Jewish oligarch were limited, and he felt that by showing a courage of being willing to be arrested, of losing everything, of suffering, that that would make him a martyr in the public perception and give him the possibility of emerging personally as the man who defied the regime.
QUESTIONER: I mean that is inside Russia.
FREELAND: Inside Russia.
QUESTIONER: Did he expect a lot of outside support for him from the West, from the United States, from Europe?
FREELAND: Actually, no. He expected some. That was why he was talking to me. But he was—he and the people around him I think were quite aware that Western support would not get him out of Putin’s jail. And he was also aware of the possibility that he wouldn’t survive imprisonment, you know, that he might die in jail.
QUESTIONER: Well, he spent a lot of money in Washington.
FREELAND: For sure. For sure. But he—
QUESTIONER: Do you know how much his American directors were paid to serve for a year on the board of directors of that company?
DESAI: (Chuckles.) Quite a bit, I’m sure!
FREELAND: They would have to be compensated quite a lot for their reputational damage.
QUESTIONER: Seven hundred thousand dollars a year—well above GE or GM or any of the major American—can you be an independent director at $700,000 a year? I don’t think so.
FREELAND: Okay, maybe we should move—is there any further—maybe we should move off of Khodorkovsky.
We had a question—which I am afraid I wasn’t fully in command of the technology—coming over the telephone.
QUESTIONER: Thank you. It’s Liz Sherwood-Randall in California.
FREELAND: Hi. Thanks for joining us.
QUESTIONER: It’s wonderful to be a part of this. And I’m happy to hear your voice again after so many years.
I’m interested in knowing Dr. Desai’s assessment of the impact of American policy across time. I haven’t yet had the opportunity to read the book, and I look forward to doing so.
But I wonder if you could give us a sense of how much in your interviews you got the impression that American policy had an influence on the reformers and how much it really has not. And in terms of the trajectory of developments in Russia, how American policy has played.
DESAI: Well, American policy—I mean as I said in my introductory remark, I mean under Gorbachev and Yeltsin, the top influence between the presidents at both ends was quite prominent, quite remarkable, I would say, where our values and interests coincided.
But if you’re talking of the reforming team of Nemtsov and Chubais and Gaidar amd Dubinin, the central bank chairman, and how much they were influenced by—I think if you read the interview by Chubais, he talks very candidly—and I asked him, how come you, who grew up in the Soviet days, became such a market believer, a believer in market reforms, a liberal system? And he tells a whole story of how difficult it was for them to read the works of Hayek and Friedman and grasp the meaning of what they were saying about neoclassical system. But we did, and we met and reformed the groups. And he said—very emphatically he said there were only two possibilities, it was we or the Communists, and that was it. And the United States and U.S. aid, funding, was naturally directed towards the reformers.
But I think there’s a whole debate going—I mean, Columbia, we have another appointment where we discuss the whole issue of how much of this is indigenous—
QUESTIONER: Yes—
DESAI:—the reform process. I think in the case of Russia, these young people, they knew what markets are, what a liberal system is like. And they disavowed the whole thinking under Gorbachev. It was so –muddled—we will free prices first or we will bring the budget deficit under control? Which shall we do first? Let us bring the budget deficit under control, then we will free administered prices.
And then comes Gaidar in 1992, January, and he says we are going to do the two things together—bring the budget deficit under control, bring it down to zero, just slash the subsidies, remove—procurement was slashed down for military items by half. Bring the budget deficit down and free up the prices, and then control the money supply. This was your “shock therapy.” And he understood it. They all understood it.
No, I mean, if you read Gaidar’s book, one of the later books, he does not even mention Jeffrey Sachs in his memoirs. (Laughter.)
FREELAND: Jeffrey’s not here, so we’re safe in saying that.
DESAI: Jeffrey is very much at Columbia. But it’s fine. (Laughs.)
FREELAND: Okay, we have five minutes left. So I think if we’re disciplined, we could get in two more questions.
QUESTIONER: May I suggest a less charitable interpretation of the Putin presidency, that there’s less coherence in the economic strategy than I think you may be imputing to it. We had a couple of wings in the administration—a Gref-Kudrin wing and a Sirvikin (ph) wing. And it seems to me that the Gref-Kudrin wing was able to accomplish a fair amount in the first Putin term, until the summer of 2003 tax reforms and a number of—Gaidar was involved, obviously, and he was optimistic.
But then we saw a shift, it seems to me, in the summer of 2003 as we had this so-called conspiracy oligarch turn against Yukos, dismantling of Yukos, and the strategy of nationalizing oil and gas assets to use them in a mercantilist way for an expansionist state policy. We’ve given up on serious reform of the financial system, of breakup of the natural monopolies; no serious effort to combat corruption. Do you think, really, that this reflects, therefore, a triumph of the wing represented by Seichin (ph) and Rosneft (ph) and Sirviki (ph) , who have persuaded Putin that, really, this is the way the state is going to be stronger, and that it isn’t with either markets or democracy?
DESAI: I think that’s a good question; have reforms really stopped? I mean, Kasyanov, who was the prime minister from 2000 to 2004, he talks about all the reforms he undertook, which is what you’re talking about, the legislation that was implemented—the 13 percent personal tax rate, lowering of the corporate tax rate, the joint stock company bill, the privatization of the land with some restrictions—all that was legislated.
Now, what are the reform issues now? I mean, the first thing which Putin and his team do is get some control over the energy sector. And I think there the thinking is that if this sector is going to be responsible for Russian revival, economic revival, then it cannot be left to the private sector by itself, the state has to have some control. And that was why Gazprom is what it is today—51 percent state-owned. It’s taken over Sibneft, for which Western banks have given $13 billion so that Gazprom can acquire Sibneft. And so even after having acquired Gazprom and consolidated it, it will supply one-third of oil. The remaining will be supplied by private companies, oil companies, Lukoil and the rest.
But the whole point is that this resource, energy resource, which is the salvation, economic salvation, cannot be left to private initiative. Also, decisions like whether the oil or gas pipeline should go through China or through Japan, or whether the Shtokman natural gas fields be opened up for liquefied natural gas to come to the United States—all those decisions have foreign policy implications. It cannot be left to private oil companies. That was one.
The second point—I mean, the restructuring the monopolies—this is not—just think of the Soviet-era monopolies. The UES, the United Energy Systems, the energy company—electricity company had 800,000 employees, and it was one holding company in an 11-time zone country. One company. Now, how do you break this apart? That is what Chubais is doing currently. And we discussed the plan at length when I was in Moscow recently. So these are very tough issues under the best of circumstances.
Finally, they are trying to undo the social contract which was given to the people under Soviet communism. Almost free entitlements of medicine, health, housing, education—now they want to convert it into a cash system. They tried last year, and the pensioners went out protesting, so there is a slowing-down. But, look, I mean, we are trying to reform our Social Security system here, so—right? I mean, you are trying to undo—we are trying to undo a whole arrangement which was put in place by Roosevelt, right?
QUESTIONER: What about the media?
DESAI: Well, I mean, so these are very tough issues, and I think they will be done over time. But I must finally say that the reformist theme in the government is there. Kudrin, Gref, Zurabov, the health minister, social services minister, they’re all reformers, and he has kept them. So have the reforms stopped? Yes and no. They’re very tough issues.
FREELAND: Okay. I realize this is a painful moment at which to stop, but I think we must. It’s 7:00, sorry. It’s actually quite an appropriate moment at which to stop because I think we’ve reached the really central question about Russia today, which is are reforms continuing or not?
I have my own quite strong views, but I won’t try your patience with them right now. It’s a really important question. I’m really glad that we reached it.
Thank you for a really lively and incredibly informed discussion. It’s been a privilege for me to listen to your questions, and most of all to listen to Padma’s answers. They are as nuanced and as historically textured as the book. (Applause.)
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