15 min read

"Don't blame the mirror if your face is awry"

"Don't blame the mirror if your face is awry"
KGB capitalism is a compelling, but deeply flawed narrative that raises more questions than it answers

First things first: I've linked here my first post laying out the situation with subscriptions and plans to eventually change them out given the price change.

I'd been meaning to read Putin's People by Catherine Belton ever since it was released. The collective obsession with Putin as the godhead of Russia analysis, a shapeshifting focal point upon which laymen, journalists, and specialists alike can heap their own peccadilloes, projections, or else professional aspirations, has interested insofar sociologically more than anything else. One's approach to describing Putin and his coterie quickly gives away one's politics and, equally importantly, the context and intended audience of any given text. However, when the political system of a state as large and relatively important as Russia is far more personalist than counterparts in developed democracies, it's impossible to entirely avoid psychological and personal analysis and the reconstruction of old practices among Cold War Sovietologists. As Fiona Hill and Clifford Gaddy stressed in the coda to the second edition of Mr. Putin: Operative in the Kremlin, "He will make good on every promise or threat . . . Vladimir Putin is a fighter and he is a survivalist. He won’t give up, and he will fight dirty if that’s what it takes to win." And not just that. "Vladimir Putin is, and is supposed to be, unknowable to the outsider. The goal is to keep everyone confused and off balance." Whenever a work like Putin's People drops, there's a certain thrill to reading it. It's as if we're violating these sacred precepts of the Kremlin's political and strategic culture and piercing the veil to see what's really going on. That transgressive affect pervades the text.

But being someone more interested in systems, structures, markets, and the inertia of bureaucracies – an artifact of my limited experience interning in the US senate – I found myself far more curious about the implications of Belton's writing than the stories of various sources with axes to grind or the "plot against Russia" wherein a highly organized cadre of KGB men systematically took over the state executing tactics, strategies, and plans going back to the late Soviet period. Any story about Putin that heavily features and relies upon Sergei Pugachev among other personalities on the outs from the past inner circle or who else have an interest in maintaining the mystique put up around Putin and the presidential administration must be scrutinized. This is all the more true when anonymous sources are used at key points. The book is a well written and often compelling work of synthesis and investigative journalism digging lots of interesting and frequently damning facts and episodes. It fails, however, to prove its central thesis on "KGB capitalism" because of the manner in which it tells the story of Putin's rise and the extent to which it is focused on his earlier years. Medvedev's term is mostly skipped over, Putin's time in office after 2011-2012 understandably isn't covered much relative to the 90s and early 2000s, and the book closes with a long section on Trump's various ties to Russians with criminal and FSB connections. I was struck by how the book felt firmly rooted in a context that's already begun changing. It's a book written for a world where Trump's still in office. It's an anti-Trump project, a means of calling for far more aggressive anti-kleptocratic efforts targeted at Russia and the threat of foreign influence. Ultimately, the text tells us more about the insecurity of western readers and observers than how events played out in Russia despite many individual insights and observations that deserve a lot more thought. It does, however, do a fantastic job of creating space to better think through the context in which security elites came back to such prominence and the political economy of its implications.

Belton begins her story in the 1980s, specifically with the passage of the 1987 joint venture law that attempted to bring in foreign investment into the Soviet Union. While the KGB, trade, and industrial ministries had used front companies abroad to facilitate the illegal transfer of western technology and goods into the Soviet Union for some time, the creation of the legal form of joint ventures allowed for a new generation of cross-border business ties between the USSR, eastern bloc partners, and western business interests. Countless KGB hands realized that this was an opportunity to raise finances for foreign communist parties and for themselves by exploiting their foreign networks. If we take this account at face value, these KGB hands led by figures like Yevgeniy Primakov realized that the Soviet system was doomed to failure without some level of market reforms and change was needed. They helped set reforms in motion under Gorbachev and immediately exploited said changes to capture exporting industries for profit and geopolitical influence by creating massive piles of cash they could deploy outside the state's reach. But Belton's version of the story leaves out that Soviet market reform debates go back all the way to the 1950s. In fact, the rise of the KGB entrepreneurial class she captures so well is itself indicative of the failures following from Alexei Kosygin's compromise reforms in 1965. Instead of price liberalization and a host of changes akin to the shock therapy that would occur as the Soviet and then Russian state disintegrated, the primary thrust of the reforms was to incorporate profitability and sales into enterprise performance indicators, elevate enterprises as the locus of planning activity by simplifying the indicators they had to meet, and granting them the power to direct investment into capacity, arrange supply contracts, and otherwise offer bonuses to reward labor for productivity. Without price liberalization and related market mechanisms folded into the reform effort, what this really did was begin the steady diminution of the state's capacity to maintain a planning apparatus while also failing to change the fundamental balance of political power between the defense industrial complex, heavy industries, and the hoped for light industries that would drive future growth. Oil windfalls after the Arab oil embargo worsened the problem by creating the illusion that the half-hearted reform agenda was sustainable and also led to the squandering of resources in third world conflicts before Brezhnev finally opted to invade Afghanistan. The story Belton is telling is actually not so much one of the cunning of the KGB, but rather the inevitable failure of Gorbachev's reform efforts in a system that had increasingly moved towards state capitalism in its form, decentralizing economic power even before Perestroika began with parallel attempts to open up the political system to real competition. Shock systemic reform to the economy could have potentially worked in the 60s with a much more unified state and far less nationalized elites among the republics. By 1986-87, the situated had changed. Organized cadres at the KGB had penetrated every part of the economic system in some way at some point. Many suddenly found themselves dealing with the calamity of impending political collapse from a privileged vantage point.

We see a great deal in the book about Putin's early time in St. Petersburg and the extent to which criminal and former KGB interests took over the city in often violent conflict. Though the narrative hints at the degree of the chaos, it focuses on the extent to which everyone was skimming fortunes off of the export of goods. But economic output was collapsing and the Soviet Union, to its great shame, had been a large importer of grain and other foodstuffs because of its inefficiencies. In the absence of complete capital account liberalization and a functioning banking sector and financial infrastructure, the only companies and individuals who had access to the money needed to purchase imports from abroad were exporters. Given the degree to which the state had disintegrated it's exceedingly difficult to imagine a scenario in which graft would not hold the system together. Soviet economies of shortage after the 1960s had bred an ever-expanding array of personal favors, corrupt practices, enterprises and individuals using state resources for their own ends, black market economic activity, and more. None of this is to say that the FSB and mafia in St. Petersburg weren't bastards, thieves, and murderers, but even bastards, thieves, murderers don't want their families and friends to starve. Their critics were completely correct to challenge their actions and seizure of political power. Criticism wouldn't resolve these import-export problems without a stronger federal state capable of stabilizing the economy. This book paints a context in which KGB members navigating the post-collapse world would have been the natural allies of the IMF and orthodox reform efforts to free up the country to the inward and outward flow of capital. I'll return to that later and think that's crucial.

Belton's account of the early to mid 90s fascinated me because it focuses how the book suffers from an over-determination problem: everything by the time the book gets towards the end of the time covered becomes the Kremlin. Bureaucracies, informal systems, and political institutions may all have governing principles, strategies, goals, and ideologies, but are negotiated by individuals with personal agendas whose worldviews may clash, differ, or challenge parts of or the entirety of what any given institution stands for. To put it another way, plenty of honest people might quickly realize that bribery is the only means of making sure supplies of basic goods keep flowing into the city and situate themselves accordingly even if they hate it. The constellation of interests and actors whose actions might be ascribed to the Kremlin is remarkably heterogenous and reflective of the weakness of the state's capacity to govern through formal institutions with defined boundaries, instead leading to a constant developmental catch-22 of needing a strong state underpinned by relatively weak formal governance. To use a more high-minded example, economic reformers in Russia often hated the influence of the FSB. They still recognized their influence could help pursue individual policy or personal aims. When Yevgeniy Primakov was nominated PM by Boris Yeltsin in the wake of Russia's domestic default in August 1998, his pitch to the Duma on the economy was clear:

"The state must intervene and regulate many of the processes taking place in the economy. This would not mean a return to the system of command administration, far from it. But the state must do this. After all, nobody accused the United States, for example, when President Roosevelt introduced elements of state regulation in the economy after the Great Depression. Do we prefer to reproduce the sort of wild capitalism which we had before, or use the experience already gained by mankind?"

State intervention didn't necessarily mean seizing everything. It actually was intended to drive macroeconomic stabilization alongside conservative monetary policy since non-payments of taxes, wage arrears, and the incestuous marriages between banks and industries had created a host of logistical nightmares for a state that, based on Primakov and other leaders' words, was at risk of breaking up. There were undoubtedly intentions to seize a great deal of private wealth and many assets to be looted by those working for the state, however the resurrection of a strong, unified state capable of adequately governing the country was basic consensus across the political spectrum. The oligarchs of the 1990s would never have been capable of fostering a true rule of law and real property protections by buying Duma reps since their power would be constrained and wealth could be reasonably taxed, seized, or regulated by a truly democratic state. Anti-trust and competition enforcement were huge risks since they'd benefited from the absence of true competition when building their fortunes, both of which would be crucial to any reform effort intended to rein in the maleffects of privatization. Khodorkovsky was part of the world of the Ministry of Finance and Central Bank before the collapse after all! Belton notes that Alexei Kudrin was quite supportive of Putin's takedown of Mikhail Khodorkovsky in 2003 because it restored a degree of balance to the political and economic system absent by the late 1990s, implying that even a liberal like Kudrin is complicit in what she eventually settles on calling KGB capitalism. It's the kind of assumption made that undermines her argument when examined closely, and further weakens at a few points where sloppiness massages a good story and reveals a preference for narrative over rigor.

A relatively brief section on the 2008 financial crisis in Russia opens up a host of misunderstandings, some of which are still useful and raise important and true points. In the book's account, Russia relied on loads of loans to bailout businesses so that these businesses would in turn owe the state. It sounds good and highlights the reality that credit provision in Russia can be used as a political tool to discipline firms and regional governments. Yet it doesn't add up in this case. Prior to the crash in September 2008, inflation was a growing concern. In the previous year, the government had begun to negotiate food prices with wholesalers and retailers in hopes of staving of more rapid price increases due to the height of the global commodities rally. The Ministry of Finance and most leading Russian economists always link large budget deficits with higher inflation. Further, only about 10% of household transactions were conducted by bank credit by 2008, meaning that the bankings sector was geared towards serving businesses and bank credits to companies pre-crisis were over 26% of GDP from around 12-13% in 2001 because of Russia's economic growth. The leverage argument also doesn't really jibe with the structure of the state's response and use of available reserve funds. It seems far likelier that it was more efficient to use the banking sector to provide liquidity and backstop it with sovereign holdings and assurances from the state than to expand fiscal stimulus unbacked by any reserve to an even larger degree based on their fears as well as their decision to slowly devalue the ruble and avoid a sharp devaluation.

This then sets up a bizarre few pages later trying to paint Obama's reset as a gift to the Kremlin while signaling the US had gone soft on Russia as oil prices broke $100 a barrel post-crisis, far higher than their pre-crisis average of $35 a barrel. I had to read it three times. Average annual oil prices climbed above $35 a barrel in 2004 and Brent crude hit $140 over the summer of 2008 before falling. Immediately it was apparent that as far as oversights go, it was quite self-serving for the narrative to paint Russia as coming out of the crisis in a position of economic strength despite declining growth but it may have just been missed in editing. Later on, an investment banker is cited suggesting that as of 2013, Russia was on course to become the world's 5th largest economy by 2020. That of course was also bunk since it had entered stagnation prior to Crimea and the 2014-2015 oil shock, but could have been true assuming continued recessions in Europe I guess. On a rather more arcane note from an earlier passage, Belton cites several philosophers and thinkers to talk up Putin's intellectual inspirations. None of them are convincing and what's worse, there's an improper reference to Sergei Uvarov, Nicholas I's minister of education. Uvarov's theory of "orthodoxy, autocracy, and nationality" is cited as an historical inspiration for Putin's own approach to creeping Russian chauvinism and linguistic and cultural supremacy in Russia. Yet Uvarov's theory properly described better captures the traditional mode of governance wherein the orthodox religion of any given region is respected while allowing for Russian orthodoxy, local autocrats are coopted and incorporated into the imperial polity rather than cast out or harshly subjugated if they're loyal, and one's identified nation is recognized within the estate system. Weirdly enough, Uvarov was the one who setup free schools for Jews living in the Pale of Settlement to be taught in Russian and incorporate them in exchange for allowing Jewish religious education and Hebrew to be included in local curricula. I know that's a rather nerdy example, but it reinforces the extent to which history or economic and world events are consistently deployed to further a specific vision of Putin and the Kremlin rather than critically analyze what happened.

I came away from the book confused about what point it was really making about KGB capitalism. Little evidence is provided anywhere to substantiate the claim that Russian ownership of foreign firms, property, or other assets abroad leads to a large degree of influence or else has proven successful at changing Russia's position internationally. The most salient cases like Germany can just as easily be explained by the structure of domestic political interests. A massively oversized industrial export sector wants cheap energy and prefers to view international relations in economic rather than security terms when possible. Similarly, if there's so much money lying around for strategic purposes, why isn't it being spent? Investment levels have fallen since 2013, infrastructure needs continue to grow, and there are a host of strategic economic initiatives important to any long-term strategic vision Putin and the KGB cadre that came to power ostensibly have or at least partially share based on the book. That they aren't doing so to the detriment of Russia's position as a global power contradicts the core premise and, I think, exposes the problem of assigning shared intent 0n the basis of affiliation from past service. Security services are a fractious bunch competing for budget money, glory, recognition, you name it. And they like having money parked abroad where it can't be taken from them in case they need it.

The extended investigation of Trump's ties bored me because, frankly, I'm over it. It can't conclusively prove anything beyond Trump being a terrible businessman from a world full of fakes, phonies, and crooks in constant need of adoration and cash. There are still many stories of interest in here and it's a useful reminder of the long shadow of Trump mania on our collective psyche. Mikhail Zygar's account All the Kremlin's Men is a useful counterbalance of the same sort of analysis, chock full of anecdotes and ah-ha moments that can't be verified and fold into the infinite multiplicity of "Putin." Zygar's account, I think, is superior in one basic respect: he paints very well the venality and self-interest of those close to power, a truth in most any political system and one often worse when it's so easy to plunder the country for personal gain. Belton's account is rather built on the opposite – people who used to be inside the system or are now explaining how terrible it is. There's little sense of just how fractious the security services are and more of the traditional conjecture that the FSB was responsible for the bombings that secured Putin's place in Russian politics in his first term and led to conflict in Chechnya. Everything seemed to belong to Putin at some level from these interviews, prompting a very basic question: what would happen if important individuals simply refused an order? There's an ouroboros quality to the world depicted, one that is simultaneously unified around the leader and yet transparently disunited in all but financial interest.

Throughout the text, one gets the impression that Western markets, politics, and institutions are great. Only a few mentions are made of European austerity in relation to Russia's influence operations bankrolling parties and Angela Merkel, one of the chief actors responsible for the Eurozone's catastrophic response to the global financial crisis and ensuing near decade of crises, is held up as a leader of the free world at one point. Markets good, state control bad. The dialectic is simplified for easy reading, but ends up distorting the story. Absent from Putin's People is a far scarier thesis than Russia buying influence with illicit cash and "infecting" or "corrupting" western states and institutions. That corruption is domestic in nature, part and parcel of a world where orthodoxy dictates we do not hinder the flow of capital everywhere and successive iterations of economic orthodoxy in the West since the late 70s have led to an explosion of inequality, particularly in the Anglosphere. It's rather funny to lecture Russia on illicit networks today when the City of London helped develop Islamic finance in conjunction with the British state to help Middle Eastern petrostates funnel their oil rents into British banks. The Saudis, Emiratis, and compatriot Israelis supporting Trump's election had far more access to him throughout his presidency than Russia ever did. Acknowledging that or how the various rents the US still engages with across the Middle East play a huge role in the Trump story might shift the perspective a bit.

The story told here is one in which the Russian state disintegrated into a world where this was possible and already happening between the transnational elites holding vast wealth, only to rebuild itself in the worst way possible based on a wide range of political constraints, personal preferences, the bloodiness of Nikolai Patrushev, accidents, and apparently a long-term plan. If we're going to talk about the threat of kleptocracy from states like Russia, and we should, we need to operationalize what that threat looks like in proper economic, social, and political context. That Belton is now under attack in court in the UK is far better, and more worrying, evidence of the material threat it poses than the passage of money from Russian policy entrepeneurs into the hands of property developers or foreign interests who themselves are playing Russia for the money. Unfettered capital and indifference to the pilfering of shared growth and prosperity at home begot the appearance of Russian 'black cash' across the West in search of influence. Russia and other states will use these levers of influence to the best of their ability no matter the ethics. Alexander Cooley and John Heathershaw's seminal Dictators Without Borders reminds us that instruments of transnational corruption and repression are still rooted in legal, financial, and political choices and practices from the West, some of which are distorted and exploited and some of which function by design. I truly hope that the madness of the libel case concludes swiftly in Belton's favor. It's enough of a stain as it is that the legal system here allowed it to be brought in the first place.

I highly recommend you read the book as an historical document of when it was written as much as a dive into Russia, which offers a series of fragments and vignettes that serve as useful jumping off points for further thinking and reading. You get far more out of it that way instead of treating it as a definitive text.

Like what you read? Pass it around to your friends! If anyone you know is a student or professor and is interested, hit me up at @ntrickett16 on Twitter or email me at nbtrickett@gmail.com and I’ll forward a link for an academic discount (edu accounts only!).

Subscribe now