The Way It Is

Russia’s Second Historic Turning Point

A friend of mine who is a the owner of one of the largest intellectual property-based businesses in Russia, but who became an amateur historian while investigating the death of so many of his family in the Purges, has a view about the current presidential election which illustrates the fundamental dilemma which Russia faces today. He is anti-Putin, yet he hopes that Putin will continue to falsify elections in his favour. Let me try to explain why.

He thinks that if there were genuinely free elections in Russia, the country would go socialist and he would lose his business. He understands that Putin and his clique want power for personal rather than public political ends, but he prefers personal greed to the sort of “patriotic” motivation which became so dangerously tainted during the twentieth century.

My friend is not thinking only, or even mainly, about money. He is both rich enough to ignore that and unusual amongst Russian millionaires in being pretty uninterested in money, still living in the flat where he grew up. He loathes corruption, to such an extent that he has moved much of his business abroad. Yet his fear of communism is greater. It killed most of his grand-father’s siblings. He would rather have corrupt capitalism than a return to the Soviet Union. As a historian he takes the long view. As a Russian and an old-fashioned patriot, he sees the need for patience.

To put it in historical terms, my friend is neither a Slavophile nor a Westerniser. He could probably best be described, paradoxically, as a Westernising Slavophile—if that makes sense. In that, I suspect, he is like a great many of the people who have demonstrated at Bolotnaya Ploshchad and elsewhere since the Duma elections last December.

It is the dilemma of Russia today. But it is a dilemma that is not just the result of the peculiar circumstances of the breakup of the Soviet Union. It is one which has been at the heart of Russian governance since the middle ages.

Most Western students of Russia are familiar with the geographical and cultural explanations for Russia’s sense of separateness from the West. I want to concentrate instead on the economic aspects and, especially, that area of life where economic analysis intersects with politics and culture. This is what bond market researchers and currency traders study today, and what merchant adventurers looked at in centuries past.

The first point to stress is that until the arrival of the Mongols, Russia was much like any other European country, only perhaps a little more primitive. Kiev was one of the largest cities in Europe, and correspondingly wealthy and cultured. Novgorod, the second city of the Rus, was a Europeanised commercial hub which connected the Hanseatic merchants of the Baltic with the vast resources of fur, wax and honey that were available between the Gulf of Finland and the Urals.

Both cities were evolving a type of public control over the affairs of the state, in the form of the veche, or assembly, which appears to have taken major decisions by a form of consensus. It was more highly developed (and lasted longer) in Novgorod and other kindred cities, like Pskov, than in Kiev. So much so that many modern historians think of Novgorod as a merchant oligarchy, in which the Prince’s primary duty was to protect the freedom to trade. It was more advanced than England: though the Magna Carta had been signed in 1215, parliament had yet to develop.

In 1240 the Mongols arrived in Russia and imposed a system of plunder. They preferred to operate indirectly, through a system of “tax farming”, in which sub-contractors collected the tribute that the Mongols wanted. Over the course of the following century, the Grand Princes of Moscow made themselves the chief of these tax collectors, extracting the wealth of their kinsmen for delivery to the Great Khan of the Golden Horde at Sarai on the Volga. In return, the Mongols helped Moscow subdue any Russians who tried to revolt against this system of organised plunder.

Russian leaders have never understood the fundamental fact of world history that in ultimate, global terms economics eventually trumps politics. Ivan III’s approach may have been right at the time, but it is out of date now.

By the end of the fourteenth century, internecine strife had weakened the Golden Horde to the point where Moscow was able to take advantage of its position as tax collector-in-chief. It continued to extract the tribute, but forwarded only a small portion to Sarai, and kept the rest for itself, further buttressing its position among the Russian Princely states. Moscow used Mongol methods to establish control over the Rus. The Grand Prince’s primary concern was to protect his freedom to tax.

The first victim was Novgorod, which Ivan III attacked and subdued, with great violence, in 1478. He pointedly destroyed the veche bell which had by then been summoning the popular assembly for over three hundred years. More importantly still, he scattered the Novgorod merchants throughout Russia, and cut the city off from its trade with the Baltic. Public participation in government was abolished as was the idea that commerce should be the organising principle of the state.

From then until the end of the twentieth century, politics predominated over economics in the lands which fell under the control of the ever-expanding Muscovite, then Russian, empire. During the five hundred years from Ivan III to the death of Konstantin Chernenko in 1985 there was, with the partial exception of the half-century before the First World War, a more or less consistent approach to state economic organisation. It was completely different from that in the other countries of the European world, and it ended in failure.

Despite that, it is still popular amongst the mass of Russians who do not understand the reason why it failed, or who are nostalgic for the apparent benefits it brought them. But there are others who see things more clearly, and who understand the world outside Russia. The spirit of Novgorod is alive once more, and it is at odds with the spirit of Muscovy.

Ivan III’s new political priorities necessitated an essentially military organisation for the expanding state. Almost everyone had to be a servant of empire. The only substantial exception was the Church, but that was charged with delivering a message of patriotic obedience to the power of the Tsar. Otherwise, land was held conditionally upon military service, and the people who remained on the land providing sustenance for those who fought for the Tsar were gradually turned into serfs.

The gentry were freed from their obligation to serve the state in 1762, and permitted to travel abroad without first obtaining permission. (Ivan IV had treated the desire for foreign travel as treason.) The serfs were “emancipated” in the 1860s. But still both classes continued to live in a militarised state in which the only institution that commanded general respect was the Army. After 1917 the gentry were either killed or exiled, and the rest of the population returned to a form of serfdom, from which they were not fully emancipated until 1991.

The tiny percentage of the population that was not engaged in war, war production or opinion control constituted the merchant class. Until the late nineteenth century, they were primarily contractors to the state. More importantly, they were individual contractors.

From the early middle ages, Europe had been developing corporate forms of organisation. In the commercial field, this started as guilds and evolved towards charter companies, like the Bank of England or the East India Company. Later, jointstock companies were introduced. People acquired the habit of working together, sometimes in opposition to the state. Not so in Muscovy or Russia.

The first foreign corporation to operate in Russia was the English Muscovy Company, which obtained a concession from Ivan the Terrible in the 1560s to trade with Persia through Arkhangel and Moscow. The English traders encountered a commercial world they found baffling and strange. The local people felt the same about them. A century later, a Russian tract expressed the sense of wounded pride which the existence of foreigners on Russian soil evoked, and the fear which was provoked by the local merchants’ total dependence on the state for protection from foreign competition:

“If everyone is allowed to trade with foreigners, or if foreigners receive permission to live among us, the people suffer greatly. They take our wealth away from us and we starve, while they consume the fruit of our land before our eyes. All of our Slavic people are so cursed that everywhere they look they see Germans, Jews, Scotsmen, Gypsies, Armenians, Greeks and merchants of other nations sucking their blood.”

The solution the writer suggested was to expel all foreigners and for the Tsar to establish a monopoly on foreign trade—which is what Stalin later did.

Without corporate structures, Russian merchants could not build anything larger than a family enterprise. The result was extreme short-termism since corporate goals can only be pursued by a body whose aims and existence survives the death or departure of one its members. Russians concentrated on immediate gain. That meant that they saw no reason not to cheat each other, and also the hated foreigners.

They operated by the bazaar rather than the market principle. A market is a closed corporation which allows members to trade—the stock exchange is a good example—only when satisfied that they will play by the rules. Otherwise they will, in the ringing phrase of old London, be “hammered on ‘Change”, meaning they will be forbidden from doing business.

The Russian approach was that of the Asiatic merchant who arrives from the East, laden with precious goods for sale. He lays out his stall, takes when he can get, whether honestly or not, then melts away into the forest with his gains, ill-gotten or otherwise. He has no reputation to defend and therefore no reason to be honest.

Such people acted that way because it was the rational thing to do in the circumstances of an autocratic state which gave no security for property and which, as soon as it saw wealth accumulating, tried to tax it or confiscate it. The further result of that was the absence of substantial capital formation, which further reduced the need for co-operative thinking and increased the dependence on foreigners.

Another consequence of the lack of corporate activity, was that Russians never traded abroad. Ships were (and still are) the largest machines mankind has constructed. That was especially so several centuries ago, when operating them over long, trans-ocean voyages required massive corporate organisation, not only of sailors and merchants, but shipyards bankers and insurance markets. In Russia, if this was done at all, it was done by the state. When Peter the Great felt nautical, Russia had a navy; at other times, it had only weak maritime forces. At no time, did Russia have a blue water merchant fleet.

Neither were there Moscow merchant houses operating in London, Amsterdam or Hamburg—much less in New York, Buenos Aires, Sydney or Shanghai. Russia depended for her foreign trade on merchants coming to Moscow—where they were treated with suspicion. As a result, none of the wider infrastructure of an entrepreneurial economy developed. It was not until 1836 that the first law providing a framework for corporate organisation of business was passed, and not until 1856 that the first commercial bank opened in Russia. In the meantime, everything went to the Army.

The consequences of the militarisation of Russian society were revealed in the fiasco of the Crimean War when Russia was shown, in an increasingly “global”, entrepreneurial and industrial age to be hopelessly ill-equipped to compete with the West. That provoked Alexander II’s reforms which give Russia some semblance of a free economic environment, and allowed foreign capital to come in, up to 1917 when everything shut down again.

The First World War showed Russia to be a giant with feet of clay. It could not fight long wars against economically sophisticated enemies because, and this is the most important lesson the country still has to learn, a militarised society is ultimately weak militarily. The Russian Army fell apart in 1916. Prior to that there had been a shortage of hospitals for the wounded, boots for the soldiers, horses and fodder for the front. Then there was a shell crisis, followed by a weapons crisis and finally a transport crisis which was so severe that food could not be brought from the country, where it was abundant, into the towns where it was desperately needed. The result was the bread riots in St Petersburg in February 1917, and revolution shortly afterwards.

Even the Second World War, when examined closely, demonstrates the same point. Without the massive resources of the international capitalist economy Russia would almost certainly have been defeated—for all the courage of her soldiers and the resourcefulness of her civilians—by a nation which was much smaller but which was economically more creative, capitalistic and diversified. The country with the by far biggest wartime production potential was the one that had had the smallest peace-time army of all the great powers at the time, namely the United States.

Russian leaders have never understood the fundamental fact of world history that in ultimate, global terms economics eventually trumps politics. Ivan III’s approach may have been right at the time, but it is out of date now. Yet Putin recently promised to spend $600 billion dollars (nearly half the country’s annual GDP) on more missiles and other weapons, at a time when the country’s roads are full of potholes, the postal system is a joke and the Moscow commuter railways slower and scruffier than the trains that connect Johannesburg with Soweto. I was at the Pro-Putin demonstration on 4th February at Poklonniy Gori. Predictably perhaps, the only colourful sight amongst the bored-looking attendees was a group of Cossacks. Once again: militarism is the message.

Whoever wins the current election, the most important task for Russia is to abandon the five hundred-year old strategy of international intimidation and internal control, and to go over to one in which the enormous creative potential of the Russian people can be let loose on the vast resources of the Russian land to develop the country in peace, friendship and co-operation with the rest of the world. Russia must, like my pro/anti-Putin friend, take the long view. We are at a historic turning point. Russia changed fundamentally when Ivan III crushed Novgorod; it has to change equally fundamentally now, and in the opposite direction. The alternative, it seems to me, given the modern geopolitical circumstances, is national death.