Time.com December 31, 2005 Q&A: Time’s Yuri
Zarakhovich talks with Andrei Illarionov, the Russian President’s key
economic adviser who resigned this week By YURI ZARAKHOVICH
“When I took the job, we spoke about pursuing
a liberal economic policy. Now, the state has evolved in quite the
opposite direction," explained economist Andrei
Illarionov during a news conference where he announced his resignation
as a key economic adviser to President Putin. Within hours of Illarionov's
public decision, Putin's press-service said the President had accepted
the resignation.
Illarionov’s decision to resign comes at a moment when the Kremlin
is escalating its intention to dramatically hike gas prices in Ukraine
by as much as a four fold increase. On Saturday (December 31), Putin
made Ukrainians another offer: Sign on the new price now, start paying
three months later. Unless they accept the offer, which they hardly
can, Putin ordered Gazprom to turn off the tap at 10am on January 1st.
On Saturday (December 31), Illarionov told TIME: “Over the last 48 hours
things between Russia and Ukraine have been developing under the worst
possible scenario on the gas issueand not just the gas issue. This
(gas) war was the last drop in my decision to resign. I
was offered to take part in it as a propagandist who would explain why
the price hike and everything else that is being done in our bilateral
relations are liberal economic policies. However, the
factors that led to this decision have nothing in common with liberal
economic policies.”
Illarionov, 44, started in the Russian government at the heyday of
the nascent and short-lived Russian democracy back in the 1990s as a
member of “young Turks” economists headed by Yegor Gaidar, Yeltsin's
Acting Premier. In 1994, Illarionov quit the cabinet in the wake of
his conflict with Premier Victor Chernomyrdin, whom he accused of stifling
liberal reforms and staging an “economic coup d’etat”.
Always a maverick, he had called for a sharp devaluation of the Russian
ruble before the August 1998 financial meltdown. Illarionov is also
credited with playing an important role in
making the 13 percent flat income tax the reality. From the
outset of Putin’s presidency, Illarionov struggled to curb state interference
in the economy and oppose the monopolist economic policies of natural
gas, electricity and railway corporations.
Illarionov’s recent criticism of Putin had put him in the crosshairs
and he was being eased out of office. He was stripped of his crucial
job as Russia's envoy to the G-8, and his Kremlin staff had been gradually
reduced. But it was Illarionov who took the final step to resign this
week.
In a lengthy interview with TIME Illarionov sat down to discuss
his decision to leave office, the tense situation in Ukraine and
his harsh criticism of the current administration.
TIME: You said that you stayed on the job “while
there was an opportunity for you to speak out, but now that opportunity
is gone.” When did it go? What served as the watershed?
Illarionov: The process of this state evolving into a new corporativist
(sic) model reached its completion in 2005. Quantitative changes have
evolved into qualitative ones. The Freedom House best summed it up
six months ago, when it downgraded Russia
to "completely unfree" from "partially unfree."
My job assumed the ability to hold free public discussions of ongoing
processes. My willing suspension of this ability would have been a
gross dereliction of official and professional duties on my part.
I chose to resign instead.
TIME: Did you discuss the reasons for your resignation
with President Putin? When did you see him last?
Illarionov: We talked one day before I resigned. However, I have
never commented on my relationship with the President while I worked
for him, nor do I intend to do so now.
TIME: What is the real picture in the economy?
Illarionov: The economy is doing fineif you gauge it in traditional
ways. The growth of GDP is 6.2%, which is good. The market is growing.
Russia's state foreign debt has been brought down to $86 bln. This
is 11% to 12% of the GDP versus 96% six years ago. But do we compare
Russia to developed countries or to a country like China that has
the GDP growth of 9%or oil producers like Azerbaijan with 12%, or
Kazakhstan with 19%. This way, we see that Russia's achievement is
more than modest. Under oil windfall profits, Russia's GDP should
have grown by 15% to 16% in 2005. Once you dismiss the windfall profits,
you see a poor quality of the economic policy that has proven negative
to the tune of losing some 9% to 10% of the GDP growth.
TIME: Still, Russia is awash in cash?
Illarionov: Our Stabilization Fund is $40 bln now. This is 6% of
the annual GDP. But Norway's Stabilization Fund makes 70% of the GDP.
China imports oil, but its hard currency reserves have grown by 22%.
Russia's GDP is worth $200 billion (bln). Some $100 to 110 of it comes
from the oil windfall profit. According to Russia's Central Bank,
the export of capital this year has reached some $40 bln.
TIME: Where did it go wrong?
Illarionov: The strengthening of the corporativist state model and
setting up favorable conditions for quasi-state monopolies by the
state itself hurt the economy. Like Gazprom purchasing Sibneft, and
another state monopoly purchasing other private company. The state
generated some $30 bln in debt to do just that. Or take the case of
RAO UES (the electricity monopoly) buying a sizable part of the Power
Machines Plant. When the state unraveled Yukos, officials insisted
it was a single such case rather than a trend. But it soon became
obvious that Yukos was not a single case, that this concerns the entire
economy. Just this month, officials of the state-owned Rosoboronexport
(the weapons trade monopoly) has taken over the privatized AVTOVAZ
(a major automotive plant).These and other such cases show that Yukos
was a campaign, which is intensifying weekly. [И
сразу же господдержка автопрома?]
TIME: So what kind of an economy is Russia ending
up with?
Illarionov: One can assume that it'll be an economy, controlled by
quasi-state corporations in energy, infrastructure, in all the cash
flow realms.
TIME: You emphasize the word "quasi".
Illarionov: Thank you for having noticed this. Indeed, this is important.
What we witness is a case of corporations that have the status of
state-owned, and indeed their stock belong to the state. But the way
they operate has quite little in common with the state interests.
Quite to the contrary, they do act against the state interests. Take
the case of Rosneft (the state-owned oil company). Now, Rosneft is
preparing its IPO, which is advertised as a major event for the Russian
economy. Rosneft will issue dozens millions worth shares to cover
its assetswith not a single dollar earmarked for the state budget.
It's not privatization; it's IPO by a state-owned company. In this
context, the action does look like stealing state funds on a multi-billion
scale. This is just one example of many. Cabinet members or key Presidential
Staff executives chairing corporation boards or serving on those boards
are the order of the day in Russia. In what Western countryexcept
in the corporativist state that lasted for 20 years in Italyis such
a phenomenon possible? Which, actually, proves that the term "corporativist"
properly applies to Russia today. We are witnessing aggression on
the part of quasi-state run corporations against whatever private
businesses capable of generating cash flows. In fact, this aggression
spreads outside Russia as well.
TIME: How so?
Illarionov: By using economic weaponsparticularly, energy as a weaponRAO
UES bought a power station in the Transdniester Republic (a breakaway
Moldova province, very much under Moscow's influence), and then cut
off Moldova from this key power supplier, until Moldova met its terms.
Transneft (Russia's state-owned oil pipe monopoly), blocked oil flowing
from Kazakhstan to Lithuania, because Russia coveted Lithuania's oil
refinery. The latest such case is abruptly raising natural gas prices
four fold for Ukraine.
TIME: The Kremlin says it just charges market
prices.
Illarionov: There is no such thing as a gas market prices, because
there is no such thing as gas market. What they are doing to Ukraine
is obvious price discrimination. Because Russia offers quite different
terms for analogical (i.e., former republics that surround Russia)
countries, while nobody has even suggested that the fuel basket price
be calculated for Ukraine, the way they do for Germany, say. When
watching all this, one can't avoid the impression that this price
escalation during the negotiating process aims at NOT reaching the
agreement rather than at reaching one. One feels that the main objective
is having the negotiating partner sufficiently insulted in order to
make reaching the agreement impossible. One feels that Russia seeks
frustrating the deal for some duration. Actually, Konstantin Kosachev,
Chair of the Duma's Foreign Relations Committee, put it succinctly
when he said the other day that no deal would be reached before Ukraine
has its parliamentary election in March. I guess Mr. Kosachev knows
what he is talking about. Hence, all the hysteria that Russia is whipping
up, making the talks so public. Even with Georgia, with which the
relations are way more strained, the gas talks have been held quietlyand
the price is two times less. Another thing, Russia has made it plain
it wants Ukraine's gas transporting system. Then, Gazprom says, the
prices will go down. This is the same usage of an energy weapon, as
OPEC did in November 1973, when they placed the U.S. and Holland under
oil embargo for siding with Israel. Prices skyrocketed; Saudi Arabia
enjoyed a couple of years of fat profits. Then, the U.S. and other
Western countries improved their economies, and adjusted to new prices,
while per capita income in Saudi Arabia has sharply dropped since.
A country that is prepared to wield energy weapons must know that
it is going to lose in the long run. History gives an unequivocal
answer to where Russia will slide, should it embark on this road.
TIME: What is your view of Russia's political
scene today? How meaningful or symbolic is the new legislation restricting
NGOs?
Illarionov: I see the reduction of the volume of political freedom,
more restrictions clamped on political parties, the media, public
expressionall this is obvious. The trends that have been long accumulating,
found their completion and finally shaped up in 2005. That Freedom
House report I mentioned came six months agonobody in Russia has
even tried to deny it officially. Now that Russia has passed this
new law restricting NGOs, I think it will push Russia's next year
rating even lower.
TIME: You were Russia's envoy to the G-8. You
worked hard to secure Russia's membership in G-8. Do you think now that
Russia really belongs there?
Illarionov: I wish Russia would be a G-8 member as a developed, free
and democratic country. I worked to that end. At the time when Russia
was invited to the political part of G-8, nobody suspected such changes
in political trends. But they would have hardly accepted Russia, if
the Yukos affair and all other things that started in 2003 were happening
even then.
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