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Economics Vital for Lasting Russian Freedom

Economics More Vital than Politics for Lasting Russian Freedom

By Ivan Eland*
June 6, 2005

Although the conviction and harsh sentencing of Mikhail Khodorkovsky, a Russian tycoon, for fraud, embezzlement and tax evasion are only two of many steps that Russian President Vladimir Putin has taken to turn Russia back toward authoritarianism, they are two of the worst. In the years of Putin’s crackdown, the international media have predictably focused on the erosion of press freedoms—first against independent television and now against newspapers. But in the long-term, prospects for the reemergence of liberty in Russia may be most damaged by the loss of economic freedom, as dramatically illustrated by the Khodorkovsky case.

The international media have highlighted Khodorkovsky’s plight primarily because of his star quality—after all, he was once the richest man in Russia. In fact, Khodorkovsky is so well known that President Bush—normally an apologist for the Russian regime as a blood brother in the fight against Islamic radicals—looked into Putin’s eyes again and didn’t see such good intentions toward the tycoon: “Here, you’re innocent until proven guilty [with the obvious exceptions of “enemy combatants” detained indefinitely without trial or access to a lawyer], and it appeared to us, at least people in my administration, that it looked like he had been judged guilty prior to having a fair trial.”

Also, the media have focused on Khodorkovsky’s funding of opposition activities against the Putin government as the reason for his prosecution. He was indeed engaged in promoting opposition to the Putin regime. But there is another reason for his persecution. Khodorkovsky’s arrest allowed the Russian government to dismember his Yukos Oil Company and re-nationalize its most important parts. Clearly, his trial was an effort to intimidate other rich Russians who could pose a problem for the regime and reassert state dominance over a company in a “strategic” industry that is a source of significant hard currency earnings for Russia. In fact, an aide to President Putin admitted that the trial was a warning to the Russian business community. The government instigated parallel legal proceedings against Yukos, and most of its executives have been jailed or have fled the country.

Yet Khodorkovsky and his business colleagues are being prosecuted for transactions initiated and endorsed by the government itself during the sell-off of state assets in the 1990s after the fall of the Soviet Union. The uncertain business climate caused by the breakdown in the rule of law, illustrated by such capricious government reversals on what is legal business behavior, is disastrous for both local Russian business and the confidence of foreign companies and individuals who might be interested in investing in Russia. The re-nationalization of any company or industry, especially in a country with a history of communism, sends shudders through the international business community. In a reaction to the Khodorkovsky prosecution, some foreign companies have torn up plans to invest in Russia. Even worse, capital flight has tripled in the last year into an $8 billion hemorrhage, and Russia’s economic growth has become more sluggish.

All this does not bode well for an eventual reemergence of liberty in Russia. According to Newsweek journalist and author Fareed Zakaria, academic researchers have noted a positive relationship between stable and viable liberal democracies and a certain level of economic development. Often, nations successfully transitioning from autocracies to liberal democracies—for example, Chile, Taiwan, and South Korea—have instituted economic reforms before gradually and peacefully undertaking political reforms. As nations get richer economically, a better-educated, more cosmopolitan and politically potent middle class develops and demands greater individual and political freedoms.

After the demise of the Soviet Union, Russia reformed politically but did so on a shaky economic base. Mr. Putin is taking away those political rights gradually, and no powerful middle class stands in his way.

Russia will likely need to try political reform again when economic prosperity is more widespread. Unfortunately, the Khodorkovsky affair indicates that Putin’s regard for the sanctity of private property and the rule of law are very shallow. Thus, the bad business climate in Russia may well stifle the economic prosperity needed to eventually throw off the shackles of political tyranny. That will be a tragedy for the Russian people.


Ivan Eland is Senior Fellow and Director of the Center on Peace & Liberty at The Independent Institute in Oakland, California, and author of the books The Empire Has No Clothes, and Putting “Defense” Back into U.S. Defense Policy.

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