The Law Of Thieves; Putin's Reaction To Sanctions Is Destroying The Economy And China Won't Help

Putin's Reaction To Sanctions Is Destroying The Economy And China Won't Help:
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What Won't Help?


Things are not going well for Vladimir Putin. The price of oil and the ruble continue to fall. Top Russian officials admit that the economy is in big trouble, despite Putin’s denials. Likely presidential candidate, Hillary Clinton, has declared that Putin must be contained. Putin’s counter sanctions are making things worse. The most ominous sign, however, is that Putin is weakening the foundations on which his power is based. He is cutting off foreign investment by bailing out his friends, and he is breaking the social compact on which his KGB-Mafia state is founded.
Karen Dawisha, in her unblinking scholarly expose appropriately titled Putin’s Kleptocracy, reports that 110 billionaires own 35 percent of Russia’s wealth (p. 350). Consider this figure in context: Thomas Piketty, in his best-selling Capital in the Twenty-First Century, based his case for a wealth tax on the fact that 320,000 Americans (the top one percent) own 30 percent of the nation’s wealth. If Western capitalism is in need of Piketty’s income redistribution, Russia needs it a thousand fold. America is a hotbed of equality compared to Putin’s Russia.
According to Dawisha (pp. 330,350): “None of this would have been possible without the personal involvement of Putin….The group (the 110 billionaires) now in power started out with Putin from the beginning. They are committed tolooting without parallel… In any Western country, this would be calledcriminal malfeasance. In Russia, it is called governance.”
Putin’s kleptocracy is based on the following principles of (mis)governance: 1) The state determines what is legal and what is not; there is no rule of law. 2) The state serves the interests of Putin and his inner circle, not of the people. 3) Putin’s kleptocracy uses its media monopoly to brainwash the people with Goebbels-like big lies. 4) Putin determines property rights – who owns what. 5) Disloyalty will be punished by confiscation of property, banishment, prison, or worse. Loyalists can rest easy, however. Their property is safe, or at least says their friend, Vladimir Putin.
If any of these principles are broken, the Putin kleptocracy would loose its internal consistency. A real rule of law, especially one that secures property rights, breaks the link between loyalty and property rights. If the state serves the interests of the people, it cannot allow the wholesale looting by the inner circle. A free press would expose the theft of property by Putin’s associates. If disloyal members of the inner circle are not punished, others will be encouraged to do the same. Putin’s so-called power vertical is built on a wobbly structure. If one support beam collapses, the others follow.
Putin’s Bigger Threat
Putin’s reactions, more than the European and American sanctions themselves, threaten his equilibrium. While the Western press focuses on thelosses to the sanctioning countries–such as reduced sales of Big Macs or a weaker luxury home market in London–the greater danger is to Putin’s kleptocracy as a result of  his own tit-for-tat counter sanctions.
The Western sanctions on Russia’s corporate giants cut them off from major capital markets. With heavy debt loads and short loan maturities, “national champions” like Rosneft and Gazprom must refinance maturing loans. Rosneft’s CEO, Igor Sechin (the ultimate Putin insider),  has already petitioned for almost $50 billion from state reserves, following Dawisha’s principle (p. 332) that “the state nationalizes the risk but privatizes the reward.” There is little doubt that all or part of Rosneft’s bailout request will be granted.
But Rosneft apparently wants more than state bailout funds. In the scramble for resources following the sanctions, Sechin sees an opportunity to strengthen Rosneft’s balance sheet by “acquiring” Bashneft, a “private” oil company, owned by loyal oligarch, Vladimir Evtushenkov–listed on Forbes as Russia’s 15thrichest man (net worth of $5.5 billion). Sechin’s denial of interest in adding Bashneft to his holdings does not seem to hold much water.
Despite his loyalty to Putin, Evtushenkov has been charged with illegal privatization and money laundering, and faces devastating fines and jail time. He is currently under house arrest. Presumably, his legal troubles will go away if he agrees to give up Bashneft, no questions asked. If he behaves, he can emigrate to more friendly climes with the pittance of $100 million or so that Putin will allow him to keep.
As remarks another former Putin insider, who chose to fight when his shipyard empire was taken away in a similar manner: “In Russia, there is no private property. Russian businessmen are serfs of Putin.”
The sanctions, as expanded in late July, target Putin’s inner circle as well as the businesses they run. Under the sanctions, their personal assets hidden abroad–bank accounts, real estate, and other valuables– can be frozen. So far, only Italy has frozen $40 million in villas owned by Putin’s judo partner, Arkady Rotenberg. Rotenberg was among those sanctioned in the first round. Western banking authorities perhaps have yet to sort out the concealed assets of other inner circle members.
Putin has taken the sanctions on his inner circle as a personal affront. He complained in May of 2014 after the first set that “All the sanctions target my friends, people who are close to me personally…And whom have they selected: Two Jews (Rotenberg and his brother) and a Ukrainian, can you imagine” (Dawisha p. 339).
Putin’s United Russia party has introduced a bill, which has passed its first reading in the Russian Duma. The bill allows the Russian state to seize foreign assets to compensate any of Putin’s friends whose assets are frozen. There is no dearth of foreign assets that could be seized to compensate those persons close to Putin personally: A Ford assembly plant, a dairy owned by PepsiCo, or Exxon Mobil drilling equipment that it has to leave behind when it closes its Russian operations.
Loyalty Is No Longer A Guarantee
The arrest of Yevtushenkov and the impending confiscation of his Bashneft threatens a major buttress of Putin’s kleptocracy. Under the implicit contract of 2003, Putin agreed that his inner circle of oligarchs could keep their wealth as long as they were loyal to him and followed his instructions. Yevtushenkov kept his end of the bargain. No one has said otherwise. Putin has broken his social compact. Not one of  his 110 billionaires knows who will be next. They have all been reminded that they are not “businessmen but serfs of Putin.”

As “serfs of Putin,” they understand that loyalty is no longer a guarantee. Their best course of action therefore is to strip assets, ship them abroad, and perhaps even cautiously form alliances to become “serfs” of someone they can trust. For them, there is no incentive to invest, hire or create value in their companies.
The seizing-foreign-assets bill winding its way through the Duma will slam, once adopted,  the door shut on any investment from a “civilized” corporation, sanctions or no sanctions. Why invest in a lawless country that feels free to expropriate your assets to bail out miscreants who are personal friends of the guy on the top of a strange vertical of power?
Russia’s minister of economics tried to argue common sense in opposing the bill: “There is no better way to create capital outflow than passing or even discussingsuch legislation.”
What About China?
Today’s Wall Street Journal considers another “out” for Putin. If Europe and the United States don’t want Russian business, Putin will give it to China.  TheJournal describes “an isolated Russia” signing “40 agreements spanning energy, finance, and technology as the Kremlin looks to deepen its strategic ties with China…” Putin himself is spinning China as a way out of the West’s sanctions, but not so fast.
China is no different from any other investor. Although it is being said that Chinese investors are being given priority, they also understand that they cannot risk deals with a partner that could confiscate their property when things go wrong. I imagine that China will not resort to arbitration courts or to friendly negotiations when Putin tries to sic his environmental authorities, investigations commission, or tax police on his Chinese Communist Party partners. China will demand low prices, punishing terms, and will engage in its own arbitrary actions when Putin tries to play his tricks. China is also aware that there are relatively few countries standing in line to make deals with Russia and is relishing the harsh concessions it can extract.
Near their end, the Soviet gulags were serfodms of the King/president.


As remarks another former Putin insider, who chose to fight when his shipyard empire was taken away in a similar manner: “In Russia, there is no private property. Russian businessmen are serfs of Putin.”
The sanctions, as expanded in late July, target Putin’s inner circle as well as the businesses they run. Under the sanctions, their personal assets hidden abroad–bank accounts, real estate, and other valuables– can be frozen. So far, only Italy has frozen $40 million in villas owned by Putin’s judo partner, Arkady Rotenberg. Rotenberg was among those sanctioned in the first round. Western banking authorities perhaps have yet to sort out the concealed assets of other inner circle members.
Putin has taken the sanctions on his inner circle as a personal affront. He complained in May of 2014 after the first set that “All the sanctions target my friends, people who are close to me personally…And whom have they selected: Two Jews (Rotenberg and his brother) and a Ukrainian, can you imagine” (Dawisha p. 339).
Putin’s United Russia party has introduced a bill, which has passed its first reading in the Russian Duma. The bill allows the Russian state to seize foreign assets to compensate any of Putin’s friends whose assets are frozen. There is no dearth of foreign assets that could be seized to compensate those persons close to Putin personally: A Ford assembly plant, a dairy owned by PepsiCo, or Exxon Mobil drilling equipment that it has to leave behind when it closes its Russian operations.
Loyalty Is No Longer A Guarantee
The arrest of Yevtushenkov and the impending confiscation of his Bashneft threatens a major buttress of Putin’s kleptocracy. Under the implicit contract of 2003, Putin agreed that his inner circle of oligarchs could keep their wealth as long as they were loyal to him and followed his instructions. Yevtushenkov kept his end of the bargain. No one has said otherwise. Putin has broken his social compact. Not one of  his 110 billionaires knows who will be next. They have all been reminded that they are not “businessmen but serfs of Putin.”

As “serfs of Putin,” they understand that loyalty is no longer a guarantee. Their best course of action therefore is to strip assets, ship them abroad, and perhaps even cautiously form alliances to become “serfs” of someone they can trust. For them, there is no incentive to invest, hire or create value in their companies.
The seizing-foreign-assets bill winding its way through the Duma will slam, once adopted,  the door shut on any investment from a “civilized” corporation, sanctions or no sanctions. Why invest in a lawless country that feels free to expropriate your assets to bail out miscreants who are personal friends of the guy on the top of a strange vertical of power?
Russia’s minister of economics tried to argue common sense in opposing the bill: “There is no better way to create capital outflow than passing or even discussingsuch legislation.”
What About China?
Today’s Wall Street Journal considers another “out” for Putin. If Europe and the United States don’t want Russian business, Putin will give it to China.  TheJournal describes “an isolated Russia” signing “40 agreements spanning energy, finance, and technology as the Kremlin looks to deepen its strategic ties with China…” Putin himself is spinning China as a way out of the West’s sanctions, but not so fast.
China is no different from any other investor. Although it is being said that Chinese investors are being given priority, they also understand that they cannot risk deals with a partner that could confiscate their property when things go wrong. I imagine that China will not resort to arbitration courts or to friendly negotiations when Putin tries to sic his environmental authorities, investigations commission, or tax police on his Chinese Communist Party partners. China will demand low prices, punishing terms, and will engage in its own arbitrary actions when Putin tries to play his tricks. China is also aware that there are relatively few countries standing in line to make deals with Russia and is relishing the harsh concessions it can extract.
Near their end, the Soviet gulags were increasingly managed by the most brutal convicts, who ran the camps according to a “law of thieves.” Karen Dawisha’s book shows that Putin’s kleptocracy is run according to a similar law of thieves. Once the laws are broken, however, the whole thing can fall apart. It is not the sanctions that might break Russia but Putin’s reaction to them.


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