Igor O. Logvinenko - Global Finance, Local Control: Corruption and Wealth in Contemporary Russia

GLOBAL FINANCE, LOCAL CONTROL

Corruption and Wealth in Contemporary Russia

Igor O. Logvinenko

CORNELL UNIVERSITY PRESSITHACA AND LONDON

It is an odd admission, but I remember exactly where I was the first time I thought about rules and regulations governing international financial flows. It was on the evening of July 1, 2006. I was sitting in my parents living room in Bishkek, Kyrgyzstan, half-paying attention to the 9 p.m. broadcast of Russias most popular evening news program Vremya on the state-controlled Channel One. As usual, the news extolled the virtues of Russias leadership and the revival of the countrys economy, but I noticed a strange headline on the chyron: Ruble equal to the euro and the dollar. All restrictions on the movement of capital are removed. The first part seemed like the usual hyperbole, but the second sentence seemed perplexing. By 2006 Russia had become an autocracy. All of the independent TV channels had been brought under the Kremlins control, elections of governors had been abolished, opposition parties had been neutered, several famous oligarchs had been imprisoned or expelled, and the most valuable assets in the oil and gas sector had been put under state control. Vladimir Putin was only interested in more power and control, so why would his government opt for less control over capital movements? Why would an authoritarian regime embrace financial internationalization? How long could this possibly last?

During the next fifteen years, these questions would preoccupy me as an academic researcher and writer. After a while, I began to see a link between financial integration and the problem of contestability of property rightsa persistent issue that was just as acute under Boris Yeltsin as it is under Vladimir Putin. Corruption, lawlessness, and kleptocracynot authoritarianismemerged as the relevant analytical categories for my analysis. Indeed, Putin and his clique are not the first among the Russian elites to strategically use financial openness to solidify their hold on recently reshuffled assets. A variant of this form of financial integrationremoval of restrictions on minority foreign ownership that follows the establishment of control over assets by powerful local eliteswas used in the 1990s. In terms of the viability of financially integrated authoritarianism, it turns out that Russia would remain financially open long enough for me to finish a book that has a whole chapter about the durability of this model for the country. As I write these words, despite years of sluggish economic performance, painful sanctions, and the onset of the COVID-19 pandemic, Russias financial borders are as open as ever.

This book demonstrates that two phenomenadeepening financial internationalization and weak rule of laware closely linked in Russia. At each crucial juncture between 1991 and 2005, the countrys reentry into global capital markets was deeply entangled with unruly fights for control over the vestiges of the Soviet industrial empire that reliably took place outside the bounds of the rule of law. Once in control, the winning business interests supported policies that would allow foreign investors to obtain and hold minority positions in their firms in order to increase the legitimacy of their property rights. After the Global Financial Crisis of 20089, financial internationalization only intensified while a more entrenched form of autocracy took root in Russia. Old and new economic elites continued to rely on open financial borders to bolster the legitimacy of their property rights while benefiting from weak local rule of law. This story of Russias integration into the global financial system delivers a somber lesson for those who advocate for financial internationalization of emerging market economies. Absent credible domestic property rights protections, deep economic integration only further strengthens oligarchic capitalism and kleptocratic regimes.

Since 2016 many ordinary Americans learned the names of Russian politicians and oligarchs, the compromised nature of their wealth, and their ability to influence political outcomes inside the United States and other Western nations. Russia has become an object of acute internecine political conflict in the United States. Yet, a fuller understanding of the history of Russias peculiar reintegration into the global financial system (itself a consequence of never-ending contests for property control and earlier US-led efforts to open the Russian economy for Western investors) is still missing from the heated discourse. Above all else, I hope the readers of this book will understand that policies that promote the integration of corrupt economies into the globalized financial markets can also lead to the spread of kleptocratic practices into the very core of the global economy.