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CHAPTER5 Restructuring Russian Industry Sergei Roldugin has expensive taste in musical instruments. Or so one might conclude from the Kremlin’s explanation of how the cellist spent the $2 billion that was discovered to have been funneled out of Russia through shell companies and Panamanian bank accounts in his name. The 2016 leak of the Panama Papers, records from a law firm that helped clients hide money from tax authorities, presented a side of Russian business and finance that was widely suspected but rarely so visible. Roldugin, who has been a friend of Putin since the 1970s, is said to be the person who introduced the Russian president to his former wife. He is the godfather of Putin’s daughter Maria. These connections, rather than any evident business skill, allowed him to amass a tremendous fortune.1 ThestructureofRoldugin’sapparentwealthprovidesimportanthintsinto how Russia’s elite manages its money, and how it distributes the perquisites of power. Roldugin—who everyone knows is a friend of the president—is alleged to have received stakes in oligarch-owned companies, a type of tribute to the tsar. He and his companies were granted massive unsecured loans from state-owned banks, including $650 million from the Cyprus branch of VTB,Russia’ssecond-largeststate-ownedlender.2 “Iamproudofpeoplelike Sergei Pavlovich,” Putin said when asked about the enterprising cellist. “He spent almost all the money he earned on musical instruments abroad and brought them to Russia.”3 Business in Putin’s Russia NotallfortunesinRussia,however,stemfromconnectionswiththeKremlin. Corruption is widespread, of course, and some Russian businesses thrive on contracts doled out by bribable bureaucrats. But Russian industry is diverse: 80 | Restructuring Russian Industry somesectorsareinefficientandunreformed;othershaveboostedproductivity and compete internationally. There are several factors that differentiate the better-run Russian firms from their backward peers. The country’s big state-run companies remain, on average, corrupt and badly managed. The state-owned energy sector wastes large sums of money, including on corruption schemes. State-owned banks such as VTB and VEB make lending decisions that are shaped as much by politics as by profit. But other sectors function quite differently. Retail has grown quickly, led by domestic chains that expanded across the country and drove down cost. And Russia’s tech firms,includingYandex,VKontakte,,drawonthecountry’sdeep well of programming talent to outcompete American giants like Google and Facebook on the domestic market. Has Russian business succeeded under Putin? It depends on where you look. Here, too, the priorities of Putinomics prevail. Banks and energy firms are important politically, so political goals takeprecedenceovereconomicefficiency.Butinindustriesnotcloselylinked to politics, market incentives tend to dominate decision making. Corruption, Property Rights, and Investment ThefailuresofRussianbusinessareobvious,evenwhenshieldedbehindshell companies and anonymous bank accounts. Take Sergei Roldugin. No evidence has emerged to support Putin’s claim that Roldugin used his oligarchfunded shell companies to acquire a secret stash of Stradivariuses, though he did buy at least a couple.4 Evidence is plentiful, however, that the system of shell companies and offshore bank accounts that Russia’s elite use to hide their financial dealings from prying eyes has shaped Russian financial and corporate life. Every quarter, Russia’s central bank publishes data on foreign investmentintoRussia,listingwhichcountriesspendthemostmoneybuying Russian assets. Every quarter, sunny islands such as Cyprus, Bermuda, and theBritishVirginIslandsleadthelist,oftensurpassingcountriessuchasGermany and Britain. Russian economists have shown that “investment” from such tax havens is more likely to be directed to corrupt Russian provinces than well-governed areas, suggesting that some of these flows are linked to money laundering.5 Russians are not alone in using shell companies and tax havens, of course, but the country’s oligarchs and political leaders have come to rely heavily on such schemes. They need offshores and shell companies to conceal illegal dealings and, no less important, to hide their assets from the grabbing hands of other oligarchic clans in Russia. Offshores are so embeddedinRussiancorporatelifethatitishardtoimaginebusinesswithoutthem . Restructuring Russian Industry | 81 The oligarchs and political elites who govern Russia are, in the words of one Russian commentator, an “offshore aristocracy.”6 You might suspect that such a system would deter investment by making honestbusinessmoredifficult.Thecombinedrisksofcorruptionandexpropriation , which are far worse in Russia than, say, in Poland, do indeed reduce investment and slow growth. Yet here, too, the past two decades present a story that is more complicated than it at first appears. Continued corruption has coincided with tremendous economic growth. Even as oligarchs milked state-owned firms for personal use, parts of the private sector have thrived. During almost every year since the Soviet collapse, more capital has left Russia than has arrived...


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