Authoritarian capitalism and sovereign economic actors

György Schöpflin

Diplomaatia (Tallinn), Spring 2008

There is a long accepted proposition in political science, that whereas a dictatorship can coexist with markets, for democracy a market is a necessary condition.  What this proposition does not analyse, though, is the nature and quality of these phenomena -- what we mean by authoritarianism and how our social and political life should be determined by market actors.  Globalisation has added an intensifier to the question, in that supra-state market actors can affect democratic politics in virtually any state in the world and multinationals do exactly this.  A further turn of the screw can be seen in the emergence of consensual authoritarianism with a stronger legitimacy than in traditional dictatorships, and equally in the rise of systems that simulate democracy and markets. To these can be added the spread of the resource curse as a direct result of globalisation, namely the near total freedom of capital movements and a massive growth in demand for raw materials, especially energy carriers, thanks above all to the transformation of China and India.

A direct consequence of the resource curse, then, is that in the states affected by it society can be bribed to stay outside politics and at the same time, the large sums of money derived from raw materials sales can be accumulated in sovereign wealth funds that are outside any but elite control. These funds can then be used elsewhere, in market democracies, for example, to achieve political objectives.  By this complex mechanism politics has been reintroduced into global market relations, but in a way that represents a serious threat to democracy.  What we are seeing is the rise of sovereign economic actors that mimic some of the qualities of multinationals, but simultaneously retain the political and legal protection enjoyed by state sovereignty.

The entire problem is exacerbated by the ideologues of globalisation who cannot or will not see the problem of the non democratic actors' entry into the global system.  They assume that all actors in global markets are economic, that they are motivated by economic aims which are nothing but economic; the evidence that authoritarian states with the resources to do so are active for political purposes is, it seems, not understood or not believed or is ignored or is dismissed.  This gives the authoritarian states a free ride and allows them to play their dual role of representing authoritarian modes and using the secure institutions of democracy to this end. The rule of law is the most important, as it permits these actors to find a safe-haven for their funds and equally to build political leverage in the democratic states concerned.

As far as these latter see it, at any rate for the time being, is that "money has no odour" (pecunia non olet) and an investment is an investment regardless of where it comes from. Ethical business practices may be imposed on all democratic state actors, like fines for corrupt practices abroad, but the activities of authoritarians are not subject to the same scrutiny.  Similarly, any Western economic actor which looks like constructing a monopoly and is using it to distort the market is made subject to legal sanctions; authoritarian economic-political actors are not.  A good illustration is the decade-long campaign waged by the EU against Microsoft and its restrictive practices.  Gazprom has not been targeted in the same way.

Sometimes an argument is made that sovereign economic actors are not basically different from Western multi-nationals, that they are exploiting their economic power in much the same fashion as the multinationals, but do so not primarily in the interests of profit-seeking shareholders but the citizens of the state concerned.  Even if there is overlap between some state economic actors and multinationals -- which there is -- they are still qualitatively different from one another, partly because their aims are different (political against economic) and equally it because state economic actors are not in any way open to risk.  True, multinationals seldom go bankrupt, but their assets are bought and sold, whereas those of sovereign economic actors are by definition not exposed to risk and their assets are protected by the state in which they have their origins. Thus both Rosneft and Gazprom  have very high debt-to-earnings ratios - 106 and 70 respectively - but no one seriously expects them to go belly up. They will be bailed out by the Russian state, if the need arises.

In the 1980s it became widely accepted that the private sector was inherently more efficient than the state and denationalisation -- the privatisation of state assets -- followed.  This proposition is largely true, though not invariably because cultural factors also played a role, some states being more efficient than others. Privatisation was accompanied by a global opening of markets, especially permitting the free flow of capital internationally and this created an opportunity, initially for Western economic actors, but by 2000 non-Western actors entered the scene and many of these were closely tied to authoritarian states.. The other enabling factor favouring state economic actors has been the very high price of certain strategic raw materials, as noted, which has also been caused by globalisation.  Globalisation's chickens have come home to roost as vultures.

The dominant belief system, especially in Anglo-Saxon capitalism, but to a greater or lesser degree present throughout the democratic West is that the private sector is a more efficient user of scarce economic resources than the state.  In essence, the post-1945 experiment in extensive state provision was seen to have produced too many inefficiencies that only private sector skills and market discipline could correct.  There was a fair measure of truth in this, though there always was a problem with the process of privatising natural monopolies, but when the privatisation revolution was launched in the 1980s, no one dreamt that state economic actors from outside the West, particularly those flush with money from the raw materials market would ever return as investors.  Consequently, no thought was ever given to elaborating a code of conduct or constructing a legal regime that would ensure a degree of protection from sovereign economic actors and their potential for exploiting their economic power.

The power linkage is at the heart of this.  A sovereign economic actor from a democratic country, like Norway say, operates in a reasonably transparent fashion and is, presumably, ready to accept both political and economic constraints wherever it operates, reflecting the democratic assumptions of the state of origin.  In the case of a sovereign economic actor from an authoritarian state, and it may be from a consensual authoritarian state, meaning that the authoritarian government can act more aggressively than a traditional authoritarian system, the chances are high that the authoritarian assumptions of the state of origin will be transmitted to the democratic economic space abroad in which it is seeking to operate.

Let us be realistic. Western states are not Platonic actors either and they are ready to use their political weight if that produces an advantage, the Anglo-Saxons included. Think of the Dubai Ports World investment bid for various port facilities in the US (in 2006) frustrated by political pressure or the activities of British arms salesmen and their corrupt practices in Saudi Arabia. From this perspective, sovereign economic actors are similar, more up front about their objectives, except that in the final analysis, Western states do respect some limits and there does exist an attenuated, mediated political control over such activities, which is completely absent in authoritarian states. Besides, what Western states do in this murky area remains just about within economics and even committed free market globalisers are a bit shamefaced about what goes on, unlike authoritarians.

The jury is still out as to whether all authoritarian capitalist systems are alike. Not least this entire phenomenon is still at an early stage of evolution and its outlines can only just be discerned, so that new sovereign economic actors could change direction and operate differently in different political-economic environments.  What is clear, however, is that sovereign economic actors will only abide by the rules to the extent that they are forced to do and they will explore every loophole, to some degree following the example of multinationals.  Certainly they will also exercise undue pressure on the weak, unprotected governments in order to widen their opportunity structures.

It is important to distinguish these new sovereign economic actors from an earlier generation of authoritarian capitalists, like Taiwan, South Korea and Chile, all of which squeezed consumption by suppressing society - quite cruelly - to launch a process of capital accumulation, with quite some help from the US in the form of inward investment, but these states had no ambition to project their systems beyond the frontiers of the state. In addition, these states, however reluctantly, accepted that relatively free economic activity would allow a middle class to emerge and eventually demand a voice in politics. Arguably China might have been moving vaguely in this direction in the 1980s, when Tiananmen put paid to that.

What is striking about the new generation of authoritarian capitalists is that they have no desire to see the emergence of autonomous middle strata with political aims, they are actively engaged in global processes that may result in neglecting the home market and are consistent in ensuring that political power will always be superior to economic interest. It is noteworthy that this applies to their domestic dimension as well, in that the distribution of wealth is arranged by opaque political rules and criteria - there is very little trickle down or reinvestment at home and this even includes upgrading the infrastructure that supplies the raw materials boom.

Russia as a case study

It is worth looking in some detail at the case of Russia, because this example illustrates the phenomenon of authoritarian capitalism most vividly.  In sum, Russia has become the beneficiary of a huge financial windfall with a surge in the cost of energy carriers and under Putin it has opted to use it for clear-cut political objectives, primarily it to reassert its power positions, to extend them where possible and to pursue revanchism for the humiliation that Russia suffered in the aftermath of the collapse of the Soviet Union.  It is worth noting that while the rise in the price of energy was a necessary condition for this shift, it was not a sufficient one. Russia also needed to import western technological and management skills -- oil resources are extracted much more efficiently than in Soviet times.  And it also required a political leadership and a new elite, the siloviki, with the will to launch this new strategy.

The need for up-to-date technology has created a reverse opportunity structure. Western investors have acquired a presence in Russia, but unlike in the West, the Russian fiscal and economic environment has become more rather than less opaque; indeed, Western investors are regarded by Moscow as enjoying excessive power over Russian resources.  This is quite logical, given that Moscow sees its raw material assets as a source of power, so that foreign shareholder ownership is understood as a threat.

These Western investors have seen this power clawed back by the by the abuse of legal instruments (like environmental regulations) and sometimes by straightforward threats -- sell up or else.  So, we can see that a key quality of authoritarian capitalism is that it does not tolerate reciprocity -- there is one law for inward investors, that determined by supreme political power, and another for Russian political activity in the West, which demands the full openness of market conditions in the West for Russia's outward investment. Indeed Russian spokesman have repeatedly insisted that their investments are like anyone else's, obeying the laws of the market.  This is not actually true.

Still, the opportunities for Russia as an authoritarian capitalist actor in the well-established rule of law states of the West are considerable, above all because Western political forces have been very slow in recognising or accepting the political aims of Russian economic-political activity -- too many Western governments and politicians are living in the world of the 1990s, when the dream of integrating Russia into the Washington consensus had some reality.  These days are over and under Putin, Russia made no secret of this; the surprise is how long so many in the West have been holding onto their illusions. The positive reception given to Putin's anointed successor, Medvedev, reflects the persistence of these illusions - somehow there is a strong normative belief that Russia is, at heart, looking to find a way to become a Western democracy, despite the all the evidence that points in the contrary direction.

What we have witnessed in the second half of the current decade is the steady expansion of Russian economic power, spearheaded by the energy industry, which basically means Gazprom.  The principal instrument used here by Russia has been the appeal to Western acquisitiveness. Just as Lenin is said to have remarked that capitalists will sell you the rope by which they will be hanged, so Western investors, seeing no political dimension to Russian economic activity, have queued up to take Moscow's money, with the most egregious case evidently being that of Gerhard Schröder, who moved from being Chancellor of Germany to a senior position in Gazprom in one easy step.  Paralleling this, German industry has been salivating at the chance of building the North Stream pipeline under the Baltic Sea, seemingly oblivious to the strategic implications with respect to the Baltic states and Poland, not to mention environmental dangers.

Juicy contracts trump solidarity, and even a strategic interest, that of loyalty towards Germany's EU partners. The Gazprom-German energy relationship ties each of them to the other and self evidently restricts the German government's room for manoeuvre, as has been clear from Angela Merkel's inability to change the terms of Gazprom's stranglehold. Germany is not alone, though its size and prestige mean that its intimacy with Gazprom sets a rather bad example. At the same time, this serves as an encouragement to Russia, as a message to the effect that there really is no limit to Western investors' greed.

The state behind authoritarian capitalism functions in ways that the West regards as corrupt, because political power decides what the rules are - the law is subordinated to power - hence the rules can readily be changed for the advantage of those who have power. In the case of Russia, the arrest and imprisonment of Khodorkovsky is a clear illustration. What, then, are the other instruments by which authoritarian capitalism tries to extend bits reach? Using human greed offers an obvious opportunity, especially in the free-for-all atmosphere of globalisation and the boom of the last decade. But the list does not stop there. Where the rule of law and transparency are strongly established, bribes do not work well and the scandals that ensue can make the attempt less than worthwhile. But in states where strict compliance with legal regulation is incomplete, indirect forms of corruption can be successful. Most vulnerable are the former communist states, where the rule of law is not trusted and the habits of mind of seeing the law as a political device live on still. Here Russia has another advantage, the networks of influence from the communist period may have been neglected during the Yeltsin period, but are being reactivated currently.

At the heart of the vision of the sovereign economic actor is the conversion of economic power into political by the mechanism of predatory investment. The political aims of the state concerned override other considerations, including profitability, the interests of shareholders, the values of the state in which the predatory investment is made and, by definition, the very idea of stakeholding. The deployment of this political power can take many forms, like the denial of contracts to suppliers who are disliked by the political masters of the sovereign economic actor or, alternatively, the direct denial of supplies to a targeted state (e.g. Ukraine,. Lithuania, Georgia by Russia). If another economic actor is looking to acquire an asset that cuts across the strategic aims of the sovereign economic actor, then resistance is punished. Down the line, one can foresee a predatory investor deliberately killing off competition, so that it is quite conceivable that Gazprom, say, could intervene in the development of renewable energy sources if ever these looked like supplying a sizeable share of the market. Beyond that, a sovereign economic actor could readily purchase media outlets to ensure favourable publicity for itself or float political parties to represent its interests. The building of networks of influence, through bribery and blackmail, could function in much the same way as it did during the Soviet period, using the methods developed by the KGB.

Basically, authoritarian capitalists, but especially Russia, spotted a political vacuum, that there is no political control to speak of over economic actors, and decided to move into the vacant space. The overlap between liberal and Marxist ideology, with globalisers insisting that that no political control was necessary because the market could solve any problem that might arise, enhanced this. The West should rapidly construct the necessary instruments of control over both types of economic actor, multinationals as well as sovereign economic actors, but re-establishing control over the multinationals would would in any case set a useful precedent and legitimate action targeted at authoritarian capitalists. Near complete economic freedom has been going on for over two decades and it is clear enough that this creates as many problems as it solves, above all in the damage that is being done to democratic norms and democracy itself. It is time reexamine the assumptions that have allowed this freedom to damage democracy and to take the necessary steps to curb the sovereign economic actors, the parasitical growth spawned by the globalised market.