August 7, 2007

Transcript of the lecture by Anders Åslund

at the ICDS on 29 May 2007. Ukraine vs. Russia: Two Alternative Post-Soviet Models? Edited Transcript of a Lecture by

at the ICDS on 29 May 2007.

Ukraine vs. Russia: Two Alternative Post-Soviet Models?
Edited Transcript of a Lecture by Anders Åslund, at ICDS, 29 May 2007

The post-communist world can be divided into five groups of countries.  The leading group is the Baltic states, characterised by full democracies, high economic growth rates of 8-9% a year and full transformations to market economies and private enterprise.  The second group is Central Europe which, with only half the economic growth rates of the Baltic states, is on a quite different economic trend line.  The third group is Southeast Europe.  The fourth group includes the hard line dictatorships and true tyrannies of Belarus, Turkmenistan and Uzbekistan, which have neither privatised nor marketised.  They have retired their Communist Parties, but everything else remains much as it was during Soviet times, perhaps just a little softer around the edges.  This leaves the nine most interesting countries – most of the former Soviet Union – which have created market economies and privatised about ⅔ of their GDP.  They have considerably more corruption than Central Europe, but politically they are neither tyrannies nor full democracies: they are mildly authoritarian or mildly democratic.

Russia and Ukraine sit in this group.  These two countries are quite similar economically.  Their economic growth since 2000 has been 7%, not bad even if the average in the region is 9%.  They have large market economies.  ⅔ of their GDP comes from the private sector and they are dominated by big, heavy industry corporations: in Ukraine, steel, and in Russia, metals more broadly and energy.  They have similar levels of corruption, which are quite respectable by international standards but are nonetheless high.

Politically, however, these two countries look very different.  They were quite similar at the end of the 1990s, but since then Putin has systematically built a centralised dictatorship, while Ukraine has moved through the Orange Revolution towards democracy.  The differences are clear in every regard.  In Ukraine, there is strong organised opposition, strong political parties and movements, strong political competition, considerable transparency, free non-governmental organisations, and real elections.  Political stability has been comparable with the Baltic states and Poland – these four countries, widely seen as successful reformers, have changed governments on average once a year.  The common view in political science – that it is good to have political stability – is simply not true.  In a transition period, unstable governments benefit reform because the old establishment tends to corrupt any government that stays too long.  Short-lived governments are a sign that democracy is strong and alive.

There are, however, shortfalls in the Ukrainian system.  The constitutional order is not clear and not well-accepted.  And unlike other countries with unstable governments, no reforms have really taken place since the Orange Revolution; this is a stalled revolution.  But it discredits democracy if nothing gets done. As Kadri [Liik, Director ICDS] once said in a seminar a couple of years ago, “Corrupt democracy discredits democracy.”  This is a fundamental danger with the present Ukrainian situation.

So there is a paradox with these two countries, which are economically very similar, but politically night and day.  What are the crucial differences between them?  Where did they come from?  And what can be done about them?

There are three big differences between the two countries.  Firstly, while Ukraine is an oligarchy restored, very much built around checks and balances, Russia is a centralised state.  There are four dominant oligarchic groups in Ukraine, all stronger than the state.  They are essentially from one industry: steel.  Two of the groups are from Donetsk, and two from Dnepropetrovsk.  And they all hate one another, which is a precondition for successful balancing.  These groups – System Capital Management and Industrial Union of Donbas in Donetsk, Private Group and Interpipe in Dnepropetrovsk – have about 100,000 employees each.  System Capital Management supports Yanukovych, the Industrial Union of Donbas supports Yushchenko, while Private Group has been closest to Tymoshenko, but tends to buy services from all political groups.  Victor Pinchuck, owner of Interpipe, has mostly withdrawn from politics.  Ukraine is also divided into East and West, which are approximately equally strong so they have to respect and balance one another.  So Ukraine is likely to remain very much subject to checks and balances.

The second big difference is that Ukraine is dominated by private corporations, while Russia is dominated by state corporations – Gazprom and Rosneft especially, but also the State Railways, Transneft and so on.  So even if the share of the economy that is private is about the same, the power relations are very different.

The third main difference is that Russia is ruled by the KGB and is a real police state, while Ukraine is not, as could be seen in the standoff between Yanukovych and Yushchenko.  The Ministry of Interior is effectively divided between the West and the East.  The West supports Yushchenko, the East supports Yanukovych. The former KGB – the SBU, which has about 40,000 officers – is with Yushchenko.  The military is with Yushchenko too, but it is not very involved politically and could not be used for political purposes.  There are no such constraints in Russia.

Where did these differences come from?  The obvious answer is the Orange Revolution, when Ukraine took off in one direction and Russia in the opposite.  But there are also similarities across the group of nine CIS countries.  Kazakhstan and Azerbaijan, like Russia, are centralised powers.  Tajikistan, a much poorer country, could also be added to that group.  Georgia, Moldova, Armenia and Kyrgyzstan sit with Ukraine – countries that remained oligarchic rather than moving in a more democratic direction.  But if the choice is between an oligarchic state and a centralised police state, competition between several strong people is much better than the centralisation of state powers.

Why are these countries not full democracies?  Unfortunately, it is not possible if you have power concentrated between a few people.  Another feature of these regimes is that while the Russia group has strong presidential powers, the others – Ukraine, Moldova, Armenia, Kyrgyzstan and, to a lesser extent, Georgia – are all moving in a parliamentarian direction.  In transition situations, a presidential system is simply wrong.  It leads to a concentration of power, which in turn leads to a dictatorship.  A mechanism of checks is needed right from the start.  It is much easier to introduce transparency and accountability if you have a parliament that scrutinises all the operations of power.

And, of course, there is oil.  The oil curse in Russia, Kazakhstan and Azerbaijan allows rulers to easily centralise enough revenue to overcome the entire power of the state and line their pockets.  This is particularly obvious if you look at Azerbaijan, where essentially there is only one big company, the state oil company.  And the next biggest company is the state pipeline company.  The person who controls the state oil company in Azerbaijan controls the state.  This is also true in Tajikistan, where the person who controls the state aluminium company and the hydropower company controls the state.

Some factors that don’t seem to matter much are often mentioned here.  One is Russia’s imperialist past.  But this is a story of the concentration of power thanks to oil and police power; the imperialist issue is irrelevant.  Nor does foreign policy come into this.  It mattered in the expansion of the European Union, because the EU made very hard demands that the aspirant countries should be democratic; and the EU imposes its own institutions, which are democratic.  But the European neighbourhood policy does not really include that element.  And the US is perfectly happy with Kazakhstan and Azerbaijan even though they are moving in a more authoritarian direction than Armenia and Kyrgyzstan, which are closer to Russia.  So foreign policy is not really an issue.  Nor does ideology matter.  It is dead.  So is nationalism.  What we are seeing in these countries is that money talks and an extraordinary level of cynicism prevails.  The other thing that matters is power.  Money and power, not ideas, make up the post-Soviet reality today.

This is not necessarily bad for economic development – the same things could have been said about East Asia before the big growth period.  Perhaps this part of the world has had too much ideology and needs to get down to some hard work.  The same point could also have been made about post-Second World War Germany.  And perhaps these models of the two groups of countries of the former Soviet Union don’t matter much.  Until 2000, Russia had done more and better in economic and political reforms than Ukraine and yet recently has headed off in a totally different direction.  So the differences between these countries cannot be explained by differences between their previous reform strategies, although they have been significant.

So what can be done?  There are three things we should care about when we have the chance to have an influence.  Firstly, encouraging privatisation.  The division of power is fundamental and, in reality, the only possible division is between oligarchs, so we should encourage competition between them.  Related to this we should resist any demands for re-privatisation or re-nationalisation.  The strongest case of re-nationalisation in this part of the world is in Russia.  It directly serves Putin’s centralisation of power.  Three years ago, only 10% of Russia’s oil production was in state hands; today it is 55%.  Rosneft and Gazprom have expanded.

It might sound stark, but almost every privatisation is better than no privatisation.  Privatise when you can, and how you can.  Of course, one person should not get everything, like the Nazarbayev family.  But short of that, any privatisation is better.  Once enterprises are out on the market, others will pick them up if they fail.  The leading controversial oligarchs in Russia are those who either got their money through insider privatisation, as with Lukoil, or the people who bought on the secondary market, like Deripaska, Popov and Melnichenko.  So, get rid of whatever major state property is left.  It is dangerous and a threat to democracy.  In Poland, for example, the remaining state enterprises breed campaign financing, which corrupts Polish politics.  The same can be said about Italy for that matter.  You won’t clean up politics until you privatise capital. 

Secondly, cut state powers.  The threat to democracy, to pluralism, comes from the state.  In Ukraine, Kutschma was playing everybody against everybody, in particular with regard to the police forces.  If there is an oligarch-controlled police force within the Ministry of Interior, you dare not use the police.  In the Orange Revolution, they did not really know who controlled what, which is the best form of control over the police forces.  Putin, on the other hand, has successfully centralised control over the KGB.  There is some competition between different police groups, but they are all totally loyal to Putin, not to some thief or chieftain as was the case in Ukraine.  The idea in the early 1990s, that the police had to be strengthened at any price to achieve rule of law, has turned out to be totally wrong.  The police themselves are the main threat to law and order.  The average murder rate under Putin has been higher than the average murder rate under Yeltsin.  So Putin, who has supposedly brought all this stability to Russia, has not even cared about reducing the murder rate, which should be relatively easy in Russia.  Yeltsin could not do anything; Putin just does not care.  But the main threat to democracy in Russia is the KGB.  It should have been cleaned up at the beginning, as it was in Estonia – that is why Estonia has the lowest corruption levels among the post-communist countries and is in a highly respectable group along with some old EU-members like Greece and Italy.

And thirdly, push parliamentarianism and stand up against an excessive presidential role.  Looking more broadly, it is clear that we know how to build a market economy.  There are only three countries in the post-communist world that are not market economies today: Uzbekistan, Turkmenistan and Belarus.  The radical economic reform programmes worked and were well coordinated with IMF and World Bank advice.  But look at democracy.  Of 21 post-communist countries in the former Soviet bloc (leaving the Balkans aside) only nine are democracies and twelve are not.  The only way of building democracy is to emulate EU institutions.  Political science has made no contribution to democracy whatsoever.  Political scientists do not know what democracy is, did not know how to build it, and so did nothing.  So when, for example, we complain about Yeltsin not building democracy, we must recognise that he had irrelevant advice and could not do it.  He knew how to finish off the Soviet Union – although most people in the West thought he was wrong to do so – but he did not know about democracy.

While we have international organisations for building market economies, we have none for building democracy or the rule of law.  We know how to build market economies; we do not know how to build democracies, as is so evidently shown by the Americans in Iraq at present.  To get democracy right, we need to push parliamentary systems, block presidential systems and go for proportional elections (it is more difficult to buy seats if you have proportional elections).  Make sure you have an election whenever there is a political upset, as Ukraine now sensibly does.  Ukraine should have had parliamentary elections right after the Orange Revolution, but it did not fit with the old constitutional order.

In summary then, encourage privatisation, cut state power, and push parliamentarianism in the former Soviet Union.  Particularly in Ukraine, even if right now it seems to be supporting Yanukovych against Yushchenko.  It is the system that is important, not the people

Thank you.

Filed under: Events