Mundo #23 - Russian Lessons
Updated: Dec 8, 2020
G'day, and welcome to edition 23 of Mundo. Why do some regimes and their leaders cling to power, despite shaky economic models and international condemnation? Some recent books I've read helped me shed light on this question, particularly Catherine Belton's book "Putin's People". The book details the intricate web of KGB men who aided, consolidated and continue to prolong Vladimir Putin's hold on Russia.
But I'm no expert on Russia, so why should I, or you, care and read on? Because there's a broader framework to take from Belton's book in thinking about other malevolent regimes. My Colombian readers are often dismayed at the longevity of the Chávez/Maduro regime in Venezuela. Other analysts have predicted China's collapse in the next year, for the past 20 years. This edition presents a framework for thinking about this, which is vital for those in government, those with international business, and those who want to challenge their thinking.
So I invite you to grab yourself a cup of coffee and read on. It's a little detailed, but there's fulfilment to it. To me, this reinforces the tremendous value of broad reading beyond your own field to apply different frameworks to your own situation.
Thanks to my wife Helena Doná and mate Tommy Dyer for their feedback on this edition.
Please share this with others who might enjoy it.
Approximate reading time: 6 minutes.
The fragility and antifragility of regimes
"Putin's People" is an analysis of illicit networks, political rivalries, and shadowy opportunism, underpinned by an elaborate exploitation of the global financial system.
More broadly, the book gives insight into the surprising durability of regimes. Putin's Russia, alongside states like China and Venezuela have long misled the West with overtures to integrate to the status quo international order, while continuously confounding doomsday predictions of their imminent collapse.
Such regimes are constantly on a fragile - antifragile spectrum popularised by Nassim Nicholas Taleb. With antifragile properties, they benefit from chaos and unrest, by opportunistically undergoing what Jared Diamond identifies as "selective change". However, their antifragility has limits. They eventually regress to a state of fragility as their agility to chaos ossifies via self-interested networks and encroaching international pressure.
When countries are faced with crisis, their ability to undergo selective change is a key driver in their ability to adapt, ie. to be antifragile. If they don't, they collapse. The characteristic of selective change is agnostic to how a state "should" evolve according to Western ideals or not.
As the Soviet Union economically stagnated through the 1980s and social disquiet festered, Belton details how one KGB faction ("Putin's People") prepared for life in a post-communist Russia. Rather than resist the growing social momentum for political reform, this group quietly built an international network of front companies and trusted associates to funnel cash abroad, outside of official state coffers.
Through the Boris Yeltsin years (1991-99), this group pushed for a selective form of post-Soviet capitalism. Again, selective change. Belton argues they came close to losing control to Yeltsin's newly enriched oligarchs, before wresting it back with a far more tightly-controlled and overt form of Kremlin capitalism, that still prevails.
Analytically, we should be mindful of hindsight bias here. This wasn't a brilliantly forethought grand strategy by the Russian state, predicting the timing and collapse of their own empire. Rather, Belton's book is an account of the winning KGB faction that prevailed in a period of historic political chaos and volatility. As the Soviet Union buckled, "Putin's People" survived the turmoil, while other factions pursuing alternate strategies didn't. This was survival of the fittest, and Putin's People were fortunate to be the most adaptive to a new reality.
The use and abuse of global capital markets
The financial network of front companies, financiers, and middle men (yes, every example Belton cites in the book's 500 pages was male) established at the end of the Cold War formed a pipeline that continues to grow and serve Putin's People and their political and financial interests. These networks blur the private sector with the state, licit and illicit, personal and collective interests, creating plausible deniability when various fronts are exposed. Recent reporting of the Panama Papers and the FinCEN Files shed light on the underground cash networks that sustain regimes such as Putin's Russia, their success at exploiting Western capital markets, and their political influence over foreign banks and investors.
Without making allegations of China's official and obscured international financial behaviour, the United States, Europe, and other financial centres have also realised their misplaced optimism over China's economic and political integration with the West, and underestimated China's overt and covert political influence. As Belton notes, foreign investors made a similar false assumption with Russia in the 1990s and early 2000s, only to realise their naivety.
Who controls who? Are they Putin's People, or the People's Putin?
Belton's coverage of "Putin's People" speaks to the importance of analysts and investors knowing the landscape of a country's political and economic stakeholders, and appreciating the fluidity of these relationships. In an autocratic regime like Putin's Russia, the power structure is circular. The people who Putin controls, and the people who control Putin are in continual flux.
As Belton makes clear, Putin has an array of stakeholders connected to his fate, entangled by kompromat and financial self interests that sustain their support in the status quo. This gives surprising resilience to such regimes, and counters naysayers who focus solely on broader macroeconomic conditions as confirmation of a regime's ever-imminent downfall.
The circularity of political power should also give pause to those who predict swift reforms at the removal of a leader. Western investors were deceived when Dmitry Medvedev succeeded Putin as president in 2008, only to realise Putin still retained the true political power.
The manipulation of crises
Putin has successfully manufactured and manipulated crises throughout his rule to dramatically portray his power and influence to the Russian populace. All the while diverting attention from nagging domestic political and economic issues. Belton levels evidence that cases of domestic terrorism and hostage crises were manipulated by the Kremlin, as did Russia's interventions in Georgia (2008) and the Ukraine (2014).
2020 - a year of fragility?
This year has been particularly challenging for Putin and his People. They face the public health and social strains of the Covid Crisis, sagging oil prices, and growing U.S.-led economic sanctions. In July, domestic protests swelled in Russia's far east after Putin ousted the region's popular governor. A political uprising in neighbouring Belarus saw a botched poisoning of Russian opposition figure Alexei Navalny in July, drawing international sanctions. The ongoing conflict between Armenia and Azerbaijan is also dragging Russia into another proxy conflict with Turkey.
At some stage, the antifragile qualities of regimes begin to wane. The regime loses agility by their own sclerotic control of the political economy. It's extremely difficult to predict when that tipping point is reached, but Putin undoubtedly faces a confluence of challenges in 2020. Hastily passed constitutional changes to allow his continued leadership (analysed in Mundo #2) was perceived by some as a sign of weakness. This increases the fragility of his regime by reducing the likelihood of a smooth transition to an anointed successor, and raises the stakes for a future chaotic transition.
A note on "rogue" status
The apparent antifragility of states like Russia bare a point of consideration. The appointment of "rogue state" status to a country is always a belated title. In reality, Russia was arguably a rogue actor in the eyes of the West ever since Putin took power in 2000, and perhaps through the Yeltsin years too. Yet the West was willing to believe Yeltsin and Putin's lip service to integration with Western capital markets and conformity to the U.S. led international order.
When Putin's true intentions became abundantly apparent, the sudden shift in international perception ultimately harms regimes like Russia. It gives them less room to adapt and change amidst encroaching international pressure, and their own entrenched network of political and economic stakeholders who benefit from the status quo.
I highly recommend Putin's People. You can hear from Belton directly in this discussion from July.
In coming editions
I'll dive into parallels and differences with similar actors such as China and Venezuela in subsequent editions, and how foreign businesses navigate such markets.
Thanks to everyone who has emailed me with their thoughts and ideas. Keep them coming! Forward this along to others who might find this an interesting read. Stay calm, think of others, stay healthy. Mitch