Chapter 7 aims to place the phenomenon of bad governance in Russia into a broader comparative perspective and consider the implications of the analysis of the Russian case beyond the region. I argue that the drive to make bad governance work is not particularly a country-specific and context-bounded process. Rather, Russia’s experience may be perceived as a negative role model for many rulers across the globe who would like to minimize the political and institutional constraints of bad governance. In the conclusion, the book discusses prospects for improving the quality of governance in Russia, as well as related opportunities, challenges, and risks the country may face on this thorny path.
Chapter
2
Post-Soviet Bad Governance:
A
Vicious Circle?
Introduction: Russia’s Greatest Rent Machine
On New Year’s Eve 2015, the residents of more than two dozen Russian regions received an unexpected and unpleasant holiday gift from the authorities. They were notified that the commuter trains (elektrichki) that link many cities and towns with regional capitals were being cut en masse; in some regions they were completely abolished. Although the frequency of commuter trains had already been reduced, together with a steady rise in rail ticket prices, the elimination of many trains at once caused major public discontent, especially in those areas where no other public transportation had been provided. Soon after, one of the leaders of the Russian opposition, Alexei Navalny, accused both the state authorities and the top managers of the company Russian Railways (RZhD) of “genocide of the Russian people,”1 while in some Siberian regions, attempted collective action by local residents contributed to threats of rail traffic blockages. The rise in social tensions became so striking and visible that in February 2015 Russian President Vladimir Putin, speaking before TV cameras, asked state officials and the RZhD leadership to fully restore commuter trains. Shortly afterward, the return of passenger traffic was announced in the media (although it was only a partial return), so the previous status quo was restored, at least for a while.
Although at first glance this episode illustrates an accident of mismanagement of public transportation, the fact is that the abolition of commuter trains was a logical outcome of the changes to Russian railroads that had been implemented during the previous decade.2 In 2003, in accordance with a decision by the Russian government, the long-existing state agency, the Ministry of Railways (MPS), was transformed into the state-owned company RZhD, which received the key assets of the railroad sector; later on it became a joint stock company. Subsequently, the Russian railroads underwent a series of structural reforms intended to liberalize the sector. Many reform projects, oriented to follow best international practices, proposed that RZhD should separate profitable cargo transportation from unprofitable passenger traffic, while state policies should pave the way toward a competition between private companies in the market of cargo transportation. But in reality RZhD not only preserved but even strengthened its monopolist position as a provider of passenger transportation; it de-facto unilaterally dictated extraordinarily high tariffs and requested that the state cover the increasing losses of its subsidiary companies, which were in charge of operating commuter trains. These companies, in turn, leased trains and equipment from RZhD and paid it extraordinarily high fees for the use and service of trains (owned by RZhD), while their losses were fully compensated from the Russian state budget. In 2011, the responsibility for covering these losses was transferred from the federal government to the regional authorities, which do not have the funds to feed RZhD’s appetites (and in fact have to cover many other expenditures due to previous requests from the federal authorities)3 and lack the capacity to resist RZhD. Moreover, in January 2015, in accordance with a request by RZhD, the Russian federal government drastically increased fees for the use of rail infrastructure, thus aggravating the heavy financial burden on regional authorities to subsidize commuter trains.4 Putin’s subsequent call for action did not change the economic model of commuter trains; at best, responsibility to cover losses was to some extent transferred from regional budgets to federal coffers (with the annual amount estimated at twenty-two billion rubles at that time), but the taxpayers still had to pay any bills presented by RZhD.5
Although experts rightly observe that the problem of subsidizing unprofitable, yet socially important, commuter trains is hardly unique to Russia and is relevant for railroad reforms elsewhere,6 so the case of RZhD was atypical not only due to the scope of these problems but also due to its solution. In essence, reforms resulted in the transformation of a state agency, MPS (a legacy of a centralized planned Soviet economy), into a gigantic monopoly, RZhD, which was formally owned by the state and operated on the market, but was in practice outside state control and operated for the benefit of its top managers. Vladimir Yakunin, appointed as CEO of this holding in 2005, was one of the key members of Putin’s “inner circle” as one of his dacha friends since the 1990s.7
Yakunin became famous not only because of his conspicuous consumption of luxury material goods (his big estate near Moscow has been nicknamed shubokhranilishche, or “fur storage”) but also because of his spike in international status as a public intellectual. Being a doctor of political sciences who chaired the Department of Public Administration in the Faculty of Political Science at Moscow State University,8 Yakunin is also a patron of the Russian Society of Political Scientists and president of the World Public Forum “Dialogue of Civilizations” (DOC). DOC, in turn, has held numerous international events with participation from global celebrities, and among other things, sponsored publication of a book, Conversations with the World’s Foremost Thinkers, produced by a highly reputable US university press and edited by leading international scholars—an interview with Yakunin was included there alongside Nobel Prize winners.9 Despite widespread criticism of Yakunin in the media and some attempts to cancel his job contract as CEO, long-term close connections with Putin made him nearly invincible and gave Yakunin carte blanche; RZhD became a fiefdom of this crony of Putin, while its business operations remained in the shadow of numerous offshore companies connected with Yakunin (some of them were linked with his son, who resides in London).10 However, the incident with the attempted cancellation of commuter trains did not go unnoticed. In essence, Yakunin’s appetites were considered too voracious, while his threats to cancel train services came across as blackmailing the Russian state by an oligarch, which was unacceptable for Russia’s leadership in political terms.11 In August 2015, Yakunin was forced to leave his post at RZhD; later he became a full-time chair of the DOC Research Institute with headquarters in Berlin (positioned as a global think tank), gained a German residence permit,12 and more or less disappeared from Russia’s public scene. The new CEO of RZhD, Oleg Belozerov, rearranged some of the corporate governance practices that had emerged under Yakunin’s rule, but by and large, according to analysts, the principles of bad governance in this state-owned company did not change much under new leadership.13
In other words, after major reforms, a formally state-owned monopoly, the biggest employer in the country, was taken over by a private individual who turned RZhD into a tool for rent maximization and placed the burden of costs (arbitrarily set by himself) on taxpayers’ shoulders. To paraphrase the Boney M hit of the 1970s, this model of governing the railroads can be best described as “Russia’s Greatest Rent Machine.” Its social costs became much higher than those of the MPS model, which emerged in the 1930s under the leadership of Stalin’s close subordinate Lazar Kaganovich.14 MPS served as one of the pillars of the Soviet planned economy, had priority access to state resources including labor and investments, and had relatively high status in state distribution of welfare and other goods. Later, its role decreased because of technological changes and the decline of the Soviet economic model, and by the time of the Soviet collapse its impact on rent-seeking was relatively modest. While the crisis of the MPS model in the 1990s has been widely recognized,15 the consequences of the 2000s reforms may be considered a turn from bad to worse.