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'An economic crisis will sober them up' Economist Andrei Yakovlev on the nature of Russia's ruling coalition — and why elites have failed to stop the war

Source: Meduza

It’s been more than three months since Russia invaded Ukraine and there haven’t been any major resignations from the Russian government. Indeed, no top officials have publicly spoken out against the war. Meduza spoke to the economist and Gaidar Prize laureate Andrei Yakovlev about what Russia’s elites are thinking, why they aren’t trying to influence the President, where the war is headed, and why the ruling class replacement system fell apart as soon as the Soviet Union collapsed.

Since the beginning of the war, a lot of people have been asking, “What are Russia’s elites thinking? Why aren’t they doing anything to stop the war, and what do they see ahead of them, at least for their personal futures?” 

I think that since February 24, a great number of people have stopped talking about the future and started living in the developing, day-to-day reality, where every day, there's news of millions of refugees, cities being bombed, and new victims of the war in Ukraine. People are beginning to come to terms with the fact that this horror might go on for months or years. And behind this everyday horror, it’s important to understand another, deeper reality: Russia is standing on the threshold of some major transformations.

I don’t know when we will begin to see them — it could be three months from now, or it could be two years from now. But it’s clear to me that the ongoing war in Ukraine and sweeping sanctions are leading Russia into a major economic crisis. It will come with growing social tensions and, sooner or later, a political crisis. That’s why it’s important to start thinking now about where we'll end up once the war ends and after the inevitable regime change. 

Inevitable? What is it going to look like? 

Based on analogous historical moments, I can imagine two basic scenarios. The first one is the total collapse of the old system and new people with no relationship to the old regime coming to power. Examples of this include France in 1789 and Russia in 1917. 

The second possibility is the transformation of the old system and its transition into a new phase. This process may be extremely painful, as were the early 90s transitions of the former Soviet republics or the case of South Africa in the mid-90s, after apartheid was abolished.

I am consciously avoiding comparing modern-day Russia with Germany or Japan in 1945, after they lost their wars. No one is going to come occupy Russia. Our regime will collapse under the weight of our own economic problems. The difference between these two basic scenarios is that, as a rule, the first one comes with the physical destruction of the former elite and the deaths of a large number of regular people. The second scenario comes with large economic losses for the elites, and for the masses, but perhaps, not at the price of their lives. 

So what will determine which one of these scenarios comes to pass? 

The key factor is the quality of the elites and their ability to come to terms with each other in the case of an acute systemic crisis. They need to be able to establish relationships with representatives from larger groups seeking a different role in the economy and society. By “elites” I mean the rather narrow influential groups that make the key decisions in economics and politics. 

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In addition to participating in key decisions, the elites are defined by another key feature. Influential groups can gain power thanks to their capital or power resources, but they can only maintain their position at the top when they are creating meaning and value for society at large, generating images of a desirable future. Having general values (as opposed to total cynicism) is important for the elites themselves since these values make dialogue between elite groups easier and make it possible for them to come to agreements about the rules of the game. 

Do the Russian elites share common values? 

We need to begin with the history of our elites. An important characteristic of the Soviet Union was the fact that it had an essentially progressive ideological foundation, “We are bringing the bright future to the whole world and we will sacrifice today for that better tomorrow.” This ideology undergirded the entire system. But it began falling apart in the middle of the 1960s. 

The Khruschev period was very typical of this. We went to space, created a ton of new universities – there were real, major investments into science and education. Khruschev declared that the USSR would catch up to and overtake America within three years in 1957; that in that time period, the Soviet Union would start to produce more butter, more milk, and as much meat as the population wanted. He seemed to have believed this sincerely: we’d won the war, built the bomb, and launched the sputnik – what couldn’t we do? This was a matter of deep confusion caused by the fact that after the Stalinist repressions, the people who remained in power were still completely incompetent when it came to economics. Nonetheless, during that period, the elites still believed in communist ideals. 

When Khruschev’s attempts to “catch up to and overtake” America clearly failed, it undermined the regime as a whole by exhibiting a vast disparity between what had been promised and the reality. Under Khruschev, the USSR truly attempted to compete on a global level. People who lived in the Soviet Union – both regular people and those at the top – believed that this was really possible. Naturally, the propaganda and the Iron Curtain played a huge role here by limiting people’s access to information. However, even among the dissidents of the 1960s, most people were not against the regime itself, they were just fighting for “socialism with a human face.” 

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Paradoxically, for a long time, the Soviet system resembled the Chinese one, not because of its regulated turnover of who was in power, but because of Stalinist repressions. The Party apparatus was then substantially revamped under Khruschev. In order to get ahead, young bureaucrats needed to demonstrate their ability to achieve results, first and foremost, in terms of achieving the objectives set in the economic plans passed down from the top. The system changed under Brezhnev and became clannish. The emergent clans stayed at their posts until their very deaths at the beginning of the 1980s. For those who were a step or two lower, this had an extremely negative effect. The impossibility of true career growth propagated the proliferation of fake work among the Party and administrative bureaucrats. 

This moral decay had its greatest impact on the children of the nomenklatura elite. They were allowed to take trips abroad, provide a good life for themselves, and they were completely uninterested in building communism. At the same time, they weren’t able to come into true power because the old men at the top wouldn’t make room for them. Meanwhile, the younger generation saw how much better the elites lived in the West. The USSR’s defeat in the economic competition with the West and the subsequent crisis in the Plan system became a good pretext for them to attempt to move into positions of power, using new slogans about the free market and democracy. Our problem was that it wasn’t a new elite that came to replace the old guard, but a younger generation of that same nomenklatura that had come of age in the 1970s and 1980s, who was extremely cynical. 

Which is to say that they never had those values in the first place? That they believed in the bright future of capitalism rather than communism right from the outset? 

They didn’t believe in any kind of “bright” anything – they just wanted a free market and their own personal freedom. There were exceptions, of course, like the scholar Andrei Sakharov and Yegor Gaidar. But there were very few people like them, unlike in Western Europe. 

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Counter-elites in Western Europe with different fundamental values from the ruling class had been able to come into some power there. In China, there was an old guard with its own values which was able to build new institutions when faced with a crisis. We got the worst of all possible worlds [in our time of crisis]: extremely cynical people came to power who tried to convert this power into advantages and revenues that would benefit only them. 

But they’re not immortal, either. Or do you see this breed of elites as self-replicating? 

According to Nobel laureate Douglas North and his co-authors, economic historian John Wallace and political scientist Barry Weingast, the elites do not represent a single, coherent political actor. Instead, North et. al put forth the concept of “limited access orders,” according to which power is distributed along axises of inter-elite conflicts and alliances, which then form social conditions of limited or open access to power. For me, this concept seems very appropriate for analyzing what is going on in Russia.

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According to North’s theory, there is a “leading coalition” of elites. This includes groups that, through their limited access, hold real power and redistribute revenue streams amongst themselves. 

As I see it, this coalition was formed in Russia in the context of the 1996 presidential elections. Even back then, this coalition was formed of three key groups: oligarchs, the leading bureaucrats, and the security forces. In the middle of the 1990s, the oligarchs dominated this coalition, controlling the greatest share of financial resources following privatization and loans-for-shares auctions. The higher level officials of the government apparatus were weak, while the security forces, who played a critical role in the conflict with the Supreme Soviet in 1993, had subsequently discredited themselves during the First Chechen War.

The domination of the oligarchs, who had pushed through the policies advantageous to them while blocking the leading officials’ attempts to stabilize the financial system and begin collecting taxes, became one of the biggest causes behind the default and devaluation of the ruble in August 1998. The chief victim of this collapse was the burgeoning middle class; however, the elites then realized that if the crisis came in a second wave, they were the next in line to lose everything. They were at risk of losing the assets and the power that they’d gained in the 1990s. This stimulated the beginning of the negotiations between the elite groups. 

On the whole, after the 1998 financial crisis, although the coalition at the top remained the same, the oligarchs had lost part of their previous influence, and the bureaucracy became more powerful. The security forces became weaker, although they were able to reestablish themselves following the Second Chechen War. As a result, the upper-level bureaucracy and the oligarchs came to hold equal sway. 

Another feature of the situation at the beginning of the 2000s was that this was a period of hopes and expectations and, ultimately, rather noticeable reforms. The tax reforms in particular were extremely radical, quickly launched, and very rapidly implemented. 

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But then, all of that fell apart. Why? 

Because the high-level officials and big business, who had had to come to certain agreements, actually never trusted each other. This was the Soviet past rearing its head; people were used to suspecting the other side of opportunism. 

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From 1999 to 2003, there was a relatively equitable balance between the oligarchs, the high-level officials, and the security forces, who remained a third, less influential group. So the main negotiations were between the oligarchs and the bureaucrats. After 2003, the structure of the leading coalition changed: oligarchs turned into junior partners while the main partners became high-level officials and security agents. Then, there was a relative balance between these groups that lasted until 2011: the security forces were an influential but not yet dominant group. The officials were also influential, and yet they also could not dominate. As a result, they were in constant dialogue about policy: foreign, domestic, and economic. 

And the business world would just sit in wait for what the “elder comrades” told them to do? 

During the 2000s, the Russian elite wanted to become a part of the global elite, to integrate into the world community. At first, it was maximally open toward Europe and to the rest of the world. Putin was one of the first world leaders to have talked on the phone to George W. Bush on 9/11 — that’s also a part of our history, it’s the exact same people! But it’s important to understand that we’re living in a world where everyone is competing with one another. The West was in no way interested in total devastation and chaos breaking out in Russia in the 1990s, and that was why they supported us – maybe not astronomically, but they helped out how they could. 

However, beginning in the 2000s, when Russia began getting back on its feet, it began to be viewed as a potential competitor. And so the reaction to Russia’s new openness was temperate, so to speak. I’m not trying to say that we’re surrounded by enemies or anything – that’s not the case at all. But we are all competing with each other, including on the post-Soviet territory. Beginning in 2003-2004, the losses in this competition started causing great tension in the Kremlin. 

From 2004-2005 onward, as oil prices grew, there was a period of euphoria when it seemed like people had gotten control over their assets and everyone in the country was now on their feet. Now was the time to build a new Russia that the West would have to respect. They may not like us, but they’re going to have to deal with us: we may be behind in terms of technological progress, but we have oil and gas, and that’s our leverage. 

Like “we’re an energy superpower?" 

Exactly. And alongside China, India, and Brazil, we can stand up to the “collective West” and make everybody respect us. The apotheosis of this history was Putin’s 2007 speech in Munich. But then came the 2008-2009 financial crisis, which demonstrated that despite all of our reserves, the model was shaky after all. We ended up spending a significant portion of those reserves in literally one year. People began to acknowledge that we needed to change the model. And that was the modernization that came during Medvedev’s time – investment, innovation, and all that, all still following the logic of, “We’re going to integrate ourselves into the global market, but we will do it on our own terms, and make people take us seriously, too.” This was the same period when there was an attempt to re-launch US-Russia relations following the war in Georgia, which also came at the same time as the modernization and re-armament of the army. As I see it, this was a reflection of the relative balance of power between the high-level officials and the security forces. 

This balance broke in 2011, during Arab Spring and the December protests against the falsified elections in the State Duma. I think the people in the Kremlin were strongly affected by the personal outcomes of Mubarak and Qaddafi. This became one of the reasons behind the swap between Putin and Medvedev in September 2011. 

And then, during the mass protests, which came as a surprise to the people in power, it turned out that at least some part of the big business community and the upper-level bureaucracy held liberal views, and sympathized with the protestors. All of this caused a sharp turn in domestic policy, not only with harsh repression of the opposition and the beginning of the hunt for “foreign agents,” but with a campaign for nationalizing the elites. It was against this backdrop that the security forces came to unequivocally dominate the ruling coalition. 

And have they stably held onto that dominating role ever since? And has business or the upper-level bureaucracy resisted this? 

This was, of course, only the beginning of their stronghold over this position, which has only grown stronger. That was when there began to be pressure on upper-level bureaucracy through the arrests of governors and federal ministers. Before that, as a rule, the “war on corruption” was limited to the Vice Governor level at most, department heads, or, best case scenario, federal deputy ministers. But coming for governors and ministers, that didn’t begin until 2014 [...] I should also mention the criminal charges against oligarchs who had been close to Medvedev in 2008-2011. 

Why did the pressure on the upper-level bureaucracy and business increase in this particular period? What was the nature of that pressure: was it “we’re doing it just because we can,” or was it that the security forces actually still saw themselves as somewhat weak? 

As I see it, I think it’s the latter. There had already been technical pressure on the elites from the part of the security forces in the 2000s, and it was applied to the business community, like with Vladimir Gusinksy and Mikhail Khodorkovsky. The relationship between the security forces and the upper echelons had been “live and let live.” Until 2008-2009, there was enough money to go around anyway. However, the financial crisis demonstrated that this model was actually shaky. And then, in 2011, a terror of all political liberalism spread through the ruling elite. [...]

Another important factor was that during the first years of the Putin regime, there’d been a consolidation of the state apparatus and a reinstatement of control over the power structures. 

But the problem was that the idea of getting the security apparatus under control was realized at the same time as there was a systematic limiting of political competition, NGOs, and independent media due to the risks these were seen to pose, like destabilization and potential color revolutions. As a result, the bloating security apparatus, which includes the FSB, the Ministry of Internal Affairs, the Investigative Committee, the Prosecutor General’s Office, and the Federal Penitentiary Service, came to be controlled by the Kremlin in terms of who ran each of these agencies. In reality, the security bloc had taken on a life of its own since the people in the Presidential administration who answered for these agencies only learned about their activities through the agencies’ own reports, or, in the best case scenario, from the mouths of their “contractors in epaulets.” As a result of this process, toward the end of the 2000s, we already saw mass abuse of power at these agencies, which did noticeable damage to the reputation of the federal government. The attempts to ameliorate the situation, Medvedev’s 2011-2012 police reforms, did very little. After 2012, the security forces took on the role of the base of the regime, and the rest of the upper elites found themselves dependent on them. 

Why did this happen? 

In the second half of the 2000s, the regime had two main bases – the upper-level bureaucracy and the security forces. The bureaucracy was interested in economic development (I am talking about the conscientious cohort of the bureaucracy), and was completely consciously attempting to stabilize the financial system, create reserves, and make it possible for Russia to integrate into the world economy. Because of these efforts on the part of the upper-level bureaucracy and especially thanks to its economic bloc, the Russian economy has yet to have collapsed. These people really did do their jobs, but they were still coming at their task from a particular perspective: they saw Russia as a part of the global landscape; they believed that despite all the tensions, conflicts, and divergent interests, Russia was still a part of the global world. 

By contrast, the security forces had never strived to integrate with the West. They weren’t against assets or revenues, but the model of the world they were used to was defined by confrontation. This was where the interests of the upper-level bureaucracy diverged, as it was more interested in development and integration, while the security forces proposed another model and emphasized security. 

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So what is going on with the elites today? Can we get a picture of that from some sort of obtuse angles or from what we knew about them before? 

The elites have become extremely closed off and afraid of all contacts. I believe that all of them are acting in awareness of the fact that all of their conversations are being surveilled, and so they are as patriotic as possible even in casual conversations with journalists that they know. This makes it really hard to understand what they are actually thinking. 

Several years ago, when the situation was different, we did a project analyzing the mood among the elites and how they saw the future. We interviewed officials on the federal level and business people and officials on the regional level, as well. The federal officials we talked to were both liberals and government supporters, but all of them understood that the situation was difficult, that the country was heading toward a crisis, and they were very specific in how they defined its problems. 

The paradox lay in the fact that on one hand, people agreed that if nothing was done, then in a decade, we’d find ourselves in a very deep crisis. However, at the same time, the overwhelming sense was that nobody was prepared to do anything to prevent this. The level of anti-sociality was extremely high, as was the distrust among the officials. The lack of communication was clearly apparent: while people within their own camps were still in contact with one another, there was absolutely no communication between groups. And a vision of the future and development strategy is impossible without communication. No one person can create these things. 

The economic situation is getting worse every month. Could there be anything that would make the elites come to their senses? 

I think that a major economic downturn will sober them up, after all. At the end of the Soviet period, in the beginning of the 90s, the government was very weak because it had bad financial policy – the money just ran out. First, they tried printing more, then they tried borrowing it from the IMF, the World Bank and so on, and then it turned out that there was just nothing left. The weakening of the centralized power structure was also apparent from the fact that there were no resources for sustaining the security forces' power structures, which led to decentralization – that whole parade of grabs for sovereignty that began in the republics, and then, under Yeltsin, started to happen within Russia. 

At the beginning of our conversation, you mentioned that violence between elite groups can be held off by the presence of revenue. So if there is no more revenue, are the elites going to find themselves in an “everyone for himself” situation? 

Yes, exactly. Loss of revenue leads to contradictions in the ruling coalition, stimulating reassessment of how revenue should be distributed. And then all hell breaks loose. The fact that the most influential faction are the security forces is an extra risk factor. Because they’ve become accustomed to feeling in charge, and the less resources there are to hold them back, the more reason they’ll have to, unfortunately, put pressure on business and directly redistribute property. 

So super-centralization, which we saw in the past decade, and which has culminated to essentially having a single person in charge, will, in the future, be like a spring that decompresses, and leads to super-decentralization? Is that right? 

It’s extremely difficult to predict right now. As I’ve already said, we don’t know what’s going to happen in Russia in three months or in a year and a half, but regardless, we are currently entering a deep economic crisis that will sooner or later lead to political transformation. Because of that, we have to think about what’s going to happen to Russia after the war with Ukraine and the fall of our current regime now. History shows us that the chain of events depends on many factors as things unfold during a crisis; factors that we don’t know and cannot prognosticate. But there are things we can talk about as being extremely likely to happen. 

First of all, put in the terms of North’s concept, which we discussed earlier, Russia, like the majority of other modern states, is part of the limited access orders. The new social order that will rise on the ashes of this one will also be limited access simply because the transition to open access, if it ever happens here at all, takes 40-50 years and Russia’s elites and the active parts of its population are not very far along on this journey at all. If we get lucky and we find new leaders among us, capable of coming to agreements with one another and the world, then we will have a limited access order but with a broader ruling coalition, which better reflects the interests of the active, non-elite social groups, which will create the conditions for growth. But in any case, it’s important not to fall prey to delusions – we cannot simply leap over the objectively necessary stages in development. 

Second of all, there are two possibilities for how we will transition to a new system: either the old order will completely collapse and completely new people will come to power or there will be an extremely painful transformation of the old system. [...] If we want to lower the cost of our transition, we need to acknowledge that avoiding waves of violence and transforming the old regime will require new leaders to work cooperatively with some factions of the present-day elite. And for this, they will need to come to agreements and compromises, despite all the moral failings of this process. 

Thirdly, Russia is an extremely large and diverse country. If there is a serious crisis and depletion of resources during objective conflicts among regions, the country will only remain unified if the administration is decentralized for the purposes of finding local solutions appropriate to local conditions on the ground. This factor was one of the most important ones in how the 1990s played out. There were many new charismatic politicians in the regions that got the country through that crisis. The new leaders that we don’t yet know. who will get us through the new crisis, will most likely also come from the regions. 

Formulating a possible model for Russia’s development is impossible without understanding Russia’s place in the global world. In 1991 and 1998, despite how hard these crises were on the people running the country, things were simpler in that there was a clear external system of coordinates defining the global model of capitalism that allowed them to determine the policies they needed to institute in order to emerge from the crisis and bring about economic growth. We could discuss how successful and appropriate the recipes that were provided at that time to developing countries and transitioning economies by the World Bank, the IMF, and the G7 countries, but regardless of what we think of them, what we can clearly see now is that the developed countries themselves have a ton of their own problems, as well, and they can hardly be seen as models. 

Moreover, the fate of global capitalism itself is in question. The experience of the handful of countries that have been able to achieve real success in catching up to developed countries over the past 60-70 years demonstrates that it had never come out of copying anyone else’s experience, but out of making unique decisions that came out of the mutual cooperation of key groups from the national elites working under powerful external and internal pressure. If we want to see Russia develop after the inevitable crisis and regime change, we need to start thinking about what these kinds of unique solutions will look like here.