“Tell me, please, Grandpa,” the little boy asked the Red Army veteran,
what does a war economy mean and how is it different from now
“Well, Yegorushka,” replied the old man,
our beloved President Vladimir Vladimirovich Putin explained just this week: ‘I think commonsense should prevail, after all is said and done. And this is my great hope.’
“But if the Americans want us to starve to death,” the little boy looked quizzical.
What does commonsense mean?
Last week Putin wasn’t prepared to acknowledge that the State Duma is now debating the most revolutionary transformation of the Russian economy since October 1993. That was when President Boris Yeltsin, with encouragement from Washington, opened fire on the parliament building, killing and wounding more than five hundred, and destroying the parliament’s powers.
“Just a mosquito bite”, Yeltsin telephoned President Bill Clinton. “If you need to talk to me any time in the next two days,” Clinton told Yeltsin, “I’ll be available any time of the day or night. All the best.” “Only that degree of force that was absolutely necessary,” the White House announced.
Last week the Duma began reviewing two new laws to decide whether the war economy will run on state planned lines, starting with the nationalization of the assets in Russia of all companies belonging to the hostile axis; or keep running on the oligarch model with a temporary arrangement between the oligarchs and foreign investors until the hostilities are over.
According to Putin on April 12,
we are also aware that the most correct decision in the emerging situation is to debureaucratise the economy and enable the growth of new production outlets based on newly created logistical chains. In this connection, I can say that I have much hope for the rise of small and medium-sized businesses, the initiative from below, and the emergence of new leaders in Russia.
Putin didn’t mention the alternative submitted to the Duma a week earlier on April 4, by the Crimean parliament, backed by the Communist Party and other deputies. By this omission, Putin was implying he is opposed to it; and that instead, he will support the alternative law announced on April 12 by the Kremlin party, United Russia. This second scheme is to be run–the text of the new law dictates–by Igor Shuvalov, chairman of the state Vnesheconombank (VEB).
Between the two bills, the two schemes, this is now the Russian choice between state socialism and oligarch capitalism. For the time being the mainstream Russian media have yet to realize what’s at stake; no one in the west has noticed. “Tough justice for runaway Western business,” runs the headline in the state-financed Vzglyad, except that the internet publication reports only the United Russia version of the bill without mentioning the Crimean version. Vzglyad’s editors have also omitted to tell their readers that the Crimean bill proposes to transfer the new power over nationalization to Russian voters through the elected parliaments around the country. By contrast, the United Russia bill vests the power to nationalize in the same state bureaucracy which Putin has been directing through men like Shuvalov since 2000.
Quoting Moscow lawyers and business lobbyists, Vzglyad portrays the measures in the United Russia bill as a nationalist reaction against the sanctions imposed by the U.S. and NATO on their companies to cease trading with Russia and pull out of their domestic plants and investments. Vzglyad editorializes the proposed bill is too state-controlled: instead, it favours allowing the foreign companies to continue running their Russian businesses through cutouts or arms-length trust managers they accept; or holding auctions of shares in the foreign assets on the Moscow stock exchange in which the foreigners will have the option to buy their shares back.
“In 98% of cases there will be a situation when the state will take everything,” Vzglyad reports its source saying.
Instead, it would be logical to create public joint-stock companies and conduct an IPO of shares on the Moscow Stock Exchange. Then a fair price will be set, and there will be more chances to find buyers. Minority shareholders will be able to buy shares.
Court bankruptcy procedures could be abused, Vzglyad warns.
We are talking about deliberately bringing a company to insolvency in order to take over its assets in a rigged bankruptcy procedure. The consequences of the adoption of such a law will be deplorable. Because the [state officials] will not be able to manage many of these companies effectively. Most likely, the companies will simply be taken apart. And, of course, that will not protect anyone. Competitive companies win in modern markets. And their competitiveness is determined not only and not so much by assets as by management.
Vladimir Potanin, one of the original Yeltsin oligarchs and controlling shareholder of Norilsk Nickel and the Interros group, says he favours buyouts of foreign companies on terms he will negotiate himself. He’s opposed to nationalization by the state, Potanin told the Moscow business newspaper RBK.
It actually turns out that we spend our public money on buying shares in foreign companies. There’s no need for that. This can be done for private money.
This was subterfuge. Potanin has just arranged his own purchase of Rosbank shares from the withdrawing French bank, Société Generale (SocGen), on preferential terms worked out between Potanin and the Central Bank’s governor, Elvira Nabiullina. The terms for SocGen, which had bought its stake in Rosbank from Potanin in 2006, were that it “essentially gives the business away for free,” pricing its exit at Rosbank’s current writedown value.
At the same time Potanin’s deal with Nabiullina arranged special Central Bank refinancing to cover the €500 million in Rosbank debt Potanin has agreed to take over from SocGen.
“It’s a bit distressing that ultimately this is an enormous gift to one of the wealthiest oligarchs,” Reuters quoted one of its French sources. Asked by the U.S.-government financed news agency if “SocGen’s deal meant other companies could sell their assets to Russian buyers, Kremlin spokesman Dmitry Peskov said: ‘This depends on the decision of an owner of a specific company which is leaving Russia.’” That’s Putin’s endorsement.
This scheme is also backed by Valentina Matvienko, speaker of the Federation Council, the upper house of the Russian parliament. “There is no question of nationalization in any way [which amounts to the] destruction of the institution of property,” she has declared.
This cannot be done, otherwise the world economy will be destroyed. Of course, we don’t want to turn into raiders–the way our opponents behave. But it’s unacceptable to nationalize someone else’s property.
Alexei Kudrin, the Kremlin economic adviser, has announced the scheme he favours is trust management for the foreign companies until they return–and no Russian counter-sanctions against them. Kudrin proposes to give foreign businesses the incentive to return to Russia. “I hope that no measures will be taken that will make it difficult for [them] to return,” he said, claiming the president and the cabinet of ministers agree with him.
Kudrin, officially head of the Accounting Chamber, is the last of the original founders of the oligarch system from 1996 to remain in office since Anatoly Chubais fled the country last month. An avowed opponent of Russia’s defence and military spending and pro-American candidate to succeed Putin, Kudrin is counting on the failure of the Ukraine military operation and then political capitulation by the Kremlin.
Former president Dmitry Medvedev, who is currently deputy secretary of the Security Council, has also gone on record in recent days to oppose nationalization of foreign company assets.
The United Russia version of the new nationalization bill can be read here.
For the “appointment of an external administration for the management of an organization”, the objectives are described in Article 1 as “ensuring the security of the state and financial stability, as well as the rights and legitimate interests of organizations, creditors, employees and society.” These goals are immediately qualified:
the application of the provisions of this Federal Law is not aimed at unjustifiably infringing on the rights and legitimate interests of the organization, its creditors, as well as shareholders.
The targets are “a foreign person (foreign persons, including several persons not affiliated with each other) who is associated with a foreign state which commits unfriendly actions against the Russian Federation”; “Russian legal entities and individuals (including if such a foreign person has the citizenship of this state, the place of registration of such a foreign person, the place of preferential conduct of economic activity by him or the place of preferential profit from the activity is this state), and is a controlling entity or owns in aggregate, directly or indirectly, not less than twenty-five percent of the voting shares of the organization or shares in the authorized capital the capital of the organization”; and “the organization is essential for ensuring the stability of the economy and civil turnover, the protection of the legitimate interests of citizens in the Russian Federation or in a subject [region] of the Russian Federation.”
If the impact of foreign sanctions or pressure on these foreign-owned companies to withdraw from Russia threatens domestic commodity, food supply, medical and other markets and local employment, a committee of state officials will be empowered to appoint an external administration for the foreign companies. This government committee is authorized to decide who will become this administrator. The bill identifies its preference to be the state development corporation Vnesheconombank (VEB); this is headed by Igor Shuvalov. Both VEB and Shuvalov are currently sanctioned by the U.S., UK, and European Union.
According to the bill, once Shuvalov and VEB decide on their targets for “external administration”, they will then stamp an application for a court order implementing their scheme. With advice from Shuvalov, the court ruling will then set the guidelines for share disposals, asset sales, production targets, payroll and employment, solvency and borrowing limits for the administration to follow.
VEB is also given the power in the bill to order that the external management of the target company be handed over to another Russian company or oligarch group as trustee, or placed into bankruptcy for liquidation. For the archive on how Shuvalov has been performing these operations among the oligarchs for the past twenty years, read this.
The scheme is only a temporary one, said one of the bill’s co-authors, Anatoly Vyborny. (right)
We are creating rules of the game under which foreign investors can comfortably wait out the period of turbulence. They will be able to resume operations in Russia or sell their stake. In other words, we give them the opportunity to approach this issue carefully, not to cut off the profitable business which they built in our country.
The alternative, the Crimean bill, is a scheme for nationalization which is intended to leave no ambiguity or discretion for a government committee to allow the foreign shareholders and managers to return or recover; it will exclude them permanently. The small print also targets Russians who have taken foreign passports or who live abroad. Read the text in full.
According to Article 1,
the objects of property rights located on the territory of the Russian Federation and owned as of February 24, 2022, by foreign states, foreign persons associated with foreign states which commit unfriendly actions against the Russian Federation, Russian legal entities and individuals (including if such foreign persons have the citizenship of these states, the place of their registration, the place of preferential conduct of economic activity by them, or the place of preferential extraction of profit from their activities in these states), as well as their beneficiaries and persons who are under the control of these foreign persons, regardless of the place of their registration or the place of their preferential conduct of economic activity, are subject to compulsory seizure of ownership of the subjects of the Russian Federation on whose territory they are located.
The objects of ownership include movable and immovable property, cash, deposits in banks, securities, corporate rights, other property (assets) which directly or through affiliated persons belong to foreign states and persons specified in the first paragraph of this part.
The compulsory seizure of property of foreign states and persons specified in the first paragraph of part 1 of this Article shall be carried out on the basis of a decision of the state authority of the subject of the Russian Federation authorized by the law of the subject of the Russian Federation to make such a decision on the territory of which such property is located… The compulsory seizure of property of foreign states and persons specified in the first paragraph of part 1 of this Article shall be carried out without compensation for its value.
The Crimean bill explicitly places the power to decide on nationalization in the elective parliaments, both the federal and regional ones, thus blocking the closed-door lobbying of government officials and their agencies. It also prevents the courts from intervening to suspend or stop a parliamentary order.
Communist Party deputies are backing the new bill and extensive reorganization of the state bureaucracy to implement the running of the companies after they have been nationalized. According to Karelian Communist leader Yevgeny Ulyanov,
more than 5,500 sanctions have already been imposed on our country, these are the largest restrictions in history. Now the West is preparing new ones; there is no doubt they too will begin to operate. In fact, the policy of strangling Russia is being implemented, while they are driving Europe into crisis and declaring a trade war with China. All this takes place against the background of the special operation of the Russian Federation in Ukraine.
We believe that it is possible to survive and move forward only with the help of a mobilization economy. Well, it is necessary to start with the nationalization of key industries and the banking system. But the first step is to turn the assets of foreign companies which have left Russia into state ownership….It is necessary to use public investments to launch stopped production, restore broken economic chains, including logistics, and fight unemployment and poverty. As before, we believe that it is necessary to establish a state monopoly on the production and sale of alcohol and tobacco.
A separate task is to change the taxation system. It is necessary to abolish the value added tax in the production sector and replace it with a turnover tax. At the same time, across the country, [we should] exempt the poor from income tax and increase the tax burden on the rich.
The result of these measures will be a doubling of the budget, which we propose to turn into a development budget. That is, we are gradually showing how to create a more effective socio-economic system of the country…It is important to ensure state control over exports and imports in order to develop production. The export of hydrocarbons should be combined with a reduction in prices for gas and petroleum products within the country. Accelerate the development of oil refining. We all understand that the current, constantly rising gasoline prices in Russia for consumers are abnormal for a country which is a world leader in oil production.
We believe that state planning needs to be restored in Russia. To create a special State Committee [Gosplan] for this purpose. To entrust it with the coordination of economic activities at the national, sectoral and intersectoral levels. The priorities of the new Gosplan should be the resumption of fully fledged work in the aviation, machine-tool and automotive industries, energy and metallurgy. This will make it possible to make a breakthrough in high technologies, and most importantly–to establish control over tariffs and pricing and ensure accelerated growth in the production of goods and services.
Delaying tactics on the nationalization issue are unacceptable in the present situation, adds Duma deputy Mikhail Delyagin (right), a well-known economist and member of the Just Russia faction.
For most companies, we do not see any concrete steps yet, except for declarations. Even those who have suspended their activities, for example, closed shops or restaurants, often do not break lease agreements, continue to pay the money required in such cases to employees…The authorities are showing weakness and trying to negotiate with those who are economically trying to destroy the country.
This bill [Crimean version], like any other, may have its drawbacks, which can be formally found fault with. But the principle should be very simple–if a company wants to leave the country, its property should be confiscated at the moment when it declares its intention to leave the country. No questions asked. If you are participating in an economic war against us, you are not our partner. An economic war of annihilation is being waged against us. If you are playing on both sides, then you will be destroyed.
The state is the entity that determines the rules. With whom to negotiate? With someone who wants to destroy us? Decide–either you want to destroy us, or you cooperate with us. If you cooperate, we can agree on tax regimes, on the use of tax benefits, subsidies. But if you want to destroy us, then your property will be confiscated. And the maximum good that we can do for you is to let you out of the country as individuals. And we will have state property with the preservation of the entire management, which will not leave, with some bonuses because this management has unique competencies and skills.
From the point of view of business support, it is possible, of course, to go the Ukrainian way–that’s to say, roughly speaking, to change the board of directors. If someone is afraid of sudden movements, he can choose the Ukrainian way. But our economic impotence is reaching catastrophic proportions: the situation when the confiscation of all Russian property and all Russian legal entities is officially announced in Ukraine, Ukrainian oligarchs continue to earn money in our country. A child’s question arises–does the Russian state really exist or is it a mirage?
Yegorushka, who began this story by asking these questions, was tired from listening to the old man. “You can’t figure anything out in this world”, he said.