It is easy to list what Russia needs to put in place for its economy to grow successfully over the long-term and for its citizens to improve their lives: secure property rights, protection for investors, reliable commercial courts and significantly reduced volumes of regulation. Instead of strangling business at every opportunity and bending it to its will, the state should allow business to develop freely within the bounds of the law.
© AP/Scanpix

However, these simple principles are anathema to a system that has evolved to advance and protect not the interests of its 140 million citizens but those of a small group of officials at the top of its political hierarchy. To safeguard their privileges, these people have co-opted the country’s bureaucracy and its security agencies to develop a system of patronage that rewards loyalty, forbids freedom of action and suffocates innovation.

This system took shape in the years of booming commodity prices after 2000 as the new political class pocketed the rents flooding Russia on an unprecedented scale. It has embedded itself so deeply that the country cannot shake itself free from its dependence on raw material exports. Despite oil prices plunging to below $50 a barrel and the rouble depreciating dramatically against the dollar, there should be no expectations that the system will suddenly find the will or capacity to adopt long overdue structural reforms. To do so will require changing the relationship with business and giving it the space to invest and grow without arbitrary interference to ensure its subservience.

I am one of those entrepreneurs who experienced first-hand how the Putin system established control over business, demanding loyalty and destroying commercial value if business owners resisted.

My wife Irina and I established the North-West Timber Company in 1997 and over ten years turned it into the most profitable paper producing business in Russia. We did not acquire assets through rigged auctions. Nor did we rely on favours from officials. We invested in bankrupt factories and installed the best available western equipment, becoming the first company in Russia to produce certain types of paper that we sold on global markets. We created jobs, cleaned up the environment and paid taxes. We also undertook social investment projects to help address the problems of the communities where our plants were located. We won many awards and earned the praise of many officials at both regional and federal levels.

Our major investment program began in 2001 shortly after President Putin began his first term. We were encouraged by his energy and his commitment to make government efficient. We wanted to believe that Russia was on the right track and that we were making a positive contribution to its development. By 2004, we could sense change – but of a kind that made us uneasy. By this time, Russia’s richest man, Mikhail Khodorkovsky, was behind bars and his company Yukos was being dismembered. Business owners had received a clear signal from the Kremlin: you are either with us or against us.

Emboldened by Khodorkovsky’s arrest, mid-level officials began to intimidate businesses with raids by masked men, snap inspections and the sort of offers that could not be refused. It was clear that the operating environment was changing but we continued to believe that the president would never allow these practices, if he knew about them.

We refused to accept the offers made to us and carried on with our investments. We did not believe that we could be vulnerable because we were running a business that was clearly bringing major benefits to our regions.

Meanwhile, Irina was attracting the attention of the “United Russia” party in Moscow and she received an invitation to become the party’s leader in Moscow. She declined and I supported her.

We realised at the time that this decision would have consequences. Yet nothing could prepare us for the dramatic events that followed.

In 2007, a criminal gang kidnapped our 16-year old daughter and returned her only after we paid a ransom. We were under constant surveillance and next felt the pressure from three state banks that had provided loans to our company. The banks stopped talking to us and in 2008 abruptly called in the loans on the pretext that we had supposedly been one day late with a tiny interest payment.

Our company was now raided - but not with the intention of passing it as a functioning entity to another owner. The business was too complicated for that, so the administrators limited themselves to selling our assets at knockdown prices to related parties without bothering to repay the loans. New equipment awaiting installation was sold for scrap metal and two of our factories stopped working within six months. A business worth around $400 million at the time was destroyed using a loan less than a third of its value.

Consistent with the usual pattern in these cases, the instigators of the raid then blamed us for the theft of the outstanding loans. Warned that we faced arrest, we fled Russia, but were told by a senior Kremlin official that we could return and sort out all our problems if we paid a massive bribe. We again said no and our defiance predictably led to the filing of criminal charges against us.

In retrospect, we can see how quickly the business climate changed after 2000 and how we, like many others, found ourselves on the wrong side of a new system that identified business owners as either friend or foe. Unwittingly, we had demonstrated political disloyalty.

We can also see how Russia has been suffering an increasingly severe crisis of governance. The system that has taken root over the past 15 years is now so corrupt and criminalised that it cannot create the conditions to support healthy business and diversify the economy. Its rapacious and destructive instincts simply will not allow it to do so. As a result, Russia’s economy will continue to contract in the absence of high commodity prices, and Russian citizens will increasingly feel the pain.

Anti-western propaganda may alleviate the population’s discomfort for a while, but the inflexibility of the Putin system is likely to have consequences far beyond its control.

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Igor Bitkov and his wife Irina left Russia in 2008 and settled in Guatemala. They were arrested in January this year in Guatemala City on charges related to the use of illegally issued documents and are currently in pre-trial detention. They deny any wrongdoing.

A website has been set up to support the Bitkov family: http://www.supportthebitkovs.com/

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