Volume I, Number 5; 11 December 12

Eurasia Analyst

Volume 1, Number 5                                                                        11 December 12

In this issue:

The Serdyukov Affair and Its Wider Implications

By Professor Stephen Blank

 

 

The Serdyukov Affair and Its Wider Implications

By Professor Stephen Blank

The spectacular, unexpected, and rapid fall of Russian Defense Minister Anatoly Serdyukov is no longer breaking news, but the implications of this tawdry affair merit closer analysis and not just because of their implications for Russia’s defense policy.  During a police raid at 6 a.m., Serdyukov was found wearing only a bathrobe and slippers, in the home of his subordinate, Ludmilla Vasilyeva, former head of the property department at Oboronservis, a ministry organization responsible for the sale of military (i.e. state) property. Oboronservis was being investigated for having undersold these properties by about  $100 million (3 Billion rubles) and Vasilyeva was found to have jewels and other property worth hundreds of thousands of dollars given to her by Serdyukov.  This police raid could have been authorized only by President Putin, and there is a widespread belief that Serdyukov’s enemies, Dmitry Rogozin (Deputy Prime Minister for the Defense Industry), Sergei Chemezov (kingpin of Rostekhnologii, the huge defense industry holding company), and one of Serdyukov’s predecessors, Deputy Prime Minister Sergei Ivanov, conspired to destroy him. (1)  It also has been reported that Serdyukov had run afoul of the FSB (Federal’naya Sluzhba Bezopasnosti) as well as the career military. (2)

Subsequently, several respected Russian military analysts have expressed concern that Serdyukov’s fall will engender either stagnation or the actual rollback of his reforms, and this rollback now appears to be underway. (3)  It had long been clear that many of the reforms that Serdyukov and his partner, Chief of the General Staff, General Nikolai Makarov, had launched were foundering or perhaps even ill-considered, and may have fallen victim to the determined opposition of those affected by them.  By 2010, efforts to build a professional army already were proving to be a failure, thus signaling Russia’s return to conscription, which would have profound consequences for overall defense policy. (4)   This failure undercuts Russia’s ability to realize the dream of a professional, highly educated, and motivated army capable of fighting a high-tech conventional war that lay at the heart of the reforms.  As a result, Russia may well have to invoke nuclear threats as a surrogate for what otherwise would have been a genuinely robust high-tech conventional capability and deterrent.

The Russian defense industry’s concurrent inability to modernize to the point where it can satisfy demands for serial production of reliable high-tech weapons and platforms or implement system integration capabilities was clear before the reforms commenced and has not improved, in fact, quite the opposite has occurred.  Despite huge and growing subsidies to the defense industry lobby, it continues to falter, a fact that forced Makarov and Serdyukov to go to Israel, France, Germany, Finland, and Italy for modern technologies and weapons.  This sector’s ensuing fury at losing out to foreign companies for access to these Russian state funds was and is palpable.  Undoubtedly its present leader, Deputy Premier Dmitry Rogozin, whose main talents appear to be as a megaphone for the regime and in the more subtle art of backstairs wire-pulling, played an important role in engineering Serdyukov’s downfall.  Serdyukov’s ouster, however, only further ensures that even with huge defense expenditures, Russia will fail to realize the armed forces’ comprehensive modernization by 2020.

Beyond these implications for defense policy there are other, equally portentous insights about Russian politics that can be gleaned from this episode. Apparently, there now is a second probe of Oboronservis ongoing, as well as other major scandals, which involve the misappropriation of millions of rubles for the organization of the annual Asia-Pacific Economic conference (APEC) in Vladivostok and for the Global Navigational Satellite System (GLONASS). (5)  The concurrent revelations of these scandals may suggest that Putin is moving to respond to popular disgust at large-scale official corruption by firing several of the most flagrant offenders like Serdyukov.  For his part, Serdyukov’s most serious crime seems to be that he insulted his wife and by extension his father-in-law, former Prime Minister Viktor Zubkov, by getting enmeshed in this scandal.  Serdyukov thus insulted “the family” or “the corporation” (as the government is known) and had to be removed. (6)  The other scandals now surfacing may allow Putin to purge some of the more egregious offenders and simultaneously assuage the public while filling the vacancies left by the purge with a new set of loyal (but quite possibly equally corrupt) officials.

The Serdyukov case confirms the assertion that it is not simply a question of the system being corrupt rather the system is corruption, a much more dangerous and insidious threat. In July 2010, the Association of Russian Attorneys for Human Rights reported that about 50 percent of Russia’s $1.2 trillion GDP involves corrupt transactions. (7)  The corruption has, if anything, worsened since then.  The pervasiveness and scale of such corruption also affects the country’s defense spending where at least 20% of annual defense expenditure is routinely stolen, misappropriated,  lost, or just wasted.   As the GLONASS, APEC and other scandals illustrate, such behavior is endemic to the system:

“According to the Russian Statistical Committee, the volume of the shadow economy in Russia was 15% [of GDP] in 2011, whereas in [the] 1990s it was 22-23% of [the] overall economy.  At the same time the Ministry of Economic Development estimated that the shadow economy contributed more than 50% of the population’s income in 2011.  The Federation of Independent Trade Unions stated that more than half of 2011 salaries paid in Russia were paid outside legal channels.  Viktor Zubkov, than Deputy Prime Minister, said that about a trillion rubles were taken out of Russia illegally in 2011 that corresponds to 4% of GDP and represents almost half of all money taken out of the country; it is almost equal the entire budget of the MVD (this would amount approximately $70 billion and the disparity with other reported figures show that officialdom has no exact idea how much is leaving the country except for the fact that the sums are enormous-SJB).  Zubkov also estimated that about a trillion rubles was laundered in Russia in 2011.” (8)

Such corruption has several profound consequences.  It adds to the widespread preexisting disregard and contempt for the law and the culture of due process; it also reinforces arbitrary rule, which Russians call Proizvol.  Second, it renders the country inhospitable to large-scale foreign and direct investment or even to investment by wealthy Russians who routinely ship money off shore.  Thus, estimated capital outflows in 2011 amounted to $85 billion. (9)  Third, it demoralizes many younger potential elites who already are voting with their feet and leaving Russia to use their talents elsewhere.

Fourth, it corrupts the country’s overall national security policy, not least because it is clear that high officials are for sale, even to foreign or private interests. (10) Personal pecuniary interest often trumps national interest, presenting a particular threat in key areas such as arms sales, or in the energy market.  As a result, officials face huge temptations to engage in what might be called black operations (e.g. running weapons to Iran) which ultimately undermine Russia’s vital security interests. (11)  In 2009, at the bottom of the economic crisis, Igor Sechin and Sergei Bogdanchikov, the heads of Rosneft and Transneft, pushed through loans from China to their organizations on condition that they build an oil pipeline to China.  This conditions undercut Russia’s national interests, which demands that a pipeline service more than one customer.  The move also damaged Russia’s railways, which previously had received handsome Chinese subsidies for carrying the oil to China.   It is difficult to imagine that their motives were not tinged with bureaucratic and personal incentives.  Moreover, their behavior is characteristic of the system, not an anomaly.  As a result, Russia is still hobbled in the Far East, as regards energy sales to Japan, South Korea, and other potential buyers.

Fifth, corruption deprives the economy of the capital needed for technological and military recapitalization, investment, and modernization.  It consigns the country and its citizens to greater poverty and incompetent or suboptimal goods and services.  Consequently neither the Russian military nor its customers truly can rely upon Russian weapons.  In 2007-2008 Russia had to take back 15 Mig-29 fighters that were part of a larger $8 billion deal with Algeria when the Algerian government refused them on the grounds of poor quality, as they had been constructed from old parts.  Algeria then asked Russia to replace them with 14-16 SU-30KA Fighters.  Eventually, Algeria stopped making payments on the MiG-29s and apparently opted instead for the French Rafale Fighter.  Meanwhile, Russia reacted by stopping shipment of the Su-30s to Algeria (although the shipments of Su-30s have now been completed). (12)  In a demonstration of Moscow’s contempt for its own soldiers, it remitted the returned planes to its own air force! (13)  In some cases, the Russian armed forces have refused to accept weapons produced for them by their own arms industry, e.g. the Pantsir air defense system – a system that Moscow also exports. (14)   The decision made by Makarov and Serdyukov  to buy weapons abroad may have been justified, but likely will be reversed now with potentially serious consequences for Russia.

Sixth, due to the attraction of corruption, the state sector has grown voraciously. The Economist reported that during the past decade the number of bureaucrats in Russia has risen by 66 percent from 527,000 to 878,000.  The cost of maintaining this state structure has risen to 20 percent of GDP. (15)   With accountability and enforcement of anti-corruption laws minimal, the opportunities for graft are endless.

Finally, the Serdyukov episode tells us not only that the forces of corruption and malfeasance within the defense sector clearly have won another major victory and appear more entrenched than before, but also that the very concept of national interest in Russia must be viewed cautiously.  Undoubtedly foreign and defense policymakers, as well as others, frequently address issues of Russia’s national interest.  In actuality, for far too many officials personal and/or sectoral interests trumps national interest, and governance is largely a matter of loot.  Mancur Olson’s famous distinction between “roving” and “stationary” bandits only partly applies here. (16)  Where banditry and criminality remain the essence of state behavior it matters little if the bandits are roving ones or stationary — interested in forming a state.  More accurate is North, Weingast, and Wallis’ analysis of what they call a “limited access order or natural state.” (17)   They explicitly use this label for Putin’s Russia throughout their work.  Such orders are based on personal or personalized norms of rule.  They are weakly developed in regard to social organizations, and cannot therefore rely on third-person enforcement of legal norms or contracts.  Long-term economic growth in such states approaches zero, which suggests that for every period of growth there is one of decline in per capita income.  The deficiencies of such orders with respect to forming impersonal and binding institutions also mean that they are much more permeated by violence unless potentially violent elements are bought off by rents.  As they note,

Systematic rent-creation through limited access [to assets-SJB] in a natural state is not simply a method of lining the pockets of the dominant coalition; it is the essential means of controlling violence.  Rent creation, limits on competition and access to organizations are central to the nature of the state, its institutions, and the society’s performance.  Limiting the ability to form contractual organizations only to members of the coalition ties the interests of powerful elites directly to the survival of the coalition, thus ensuring their continued cooperation with the coalition. (18)

As they point out, such a state is inherently unstable and also prone to collapse, because it ultimately cannot grow enough to sustain its population, nor then stave off the resulting violence.  Serdyukov’s fall may have been a “peaceful” one.  But ultimately it tells us that Russia’ s ship of state is sailing with a corpse in the cargo.

 

 

Notes:

1) Anna Arutunyan, “Shady Dealing, Sex Scandals, and Russia’s Defense Crisis,” The Moscow Times, November 12, 2012; Aleksandr’ Golts, “What Serdyukov and Sobchak Have in Common,” The Moscow Times, 7 November 2012; Pavel K. Baev, “Russia: Andropov’s Shadow over the Kremlin Clan Feuds,”  Eurasia Daily Monitor, 12 November 2012.

2) Alexander Bratersky “Amid Defense Ministry Shakeup, Corruption Case Grows .” The Moscow Times, 8 November 2012.

3)  Roger McDermott, “Shoigu Suspends the “Serdyukov” Military Reform,” Eurasia Daily Monitor, 20 November 2012.

4) Aleksandr’ Golts, “End of the Contract Army,” Moscow Times, March 16, 2010

5) Ellen Barry, “Russians Look Askance at Anticorruption Drive Even as New Scandals Arise,”  New York Times, 17 November 2012 via www.nytimes.com.

6) Arutunyan; “Russian Defense Chief Crossed Putin’s Political “Family” Reuters, 8 November 2012.

7) “Report: Russia Perceived as Most Corrupt Major Economy,” Voice of America (VOA), 25 October 2010 via http://www.voanews.com/content/report-russia-perceived-as-most-corrupt-major-economy-105774753/170290.html.

8)  Los Alamos National Laboratory in English, 20 September 2012, Summary of Reporting on Russian & FSU Nuclear issues – 09/20/2012, Foreign Broadcast Information Service Central Eurasia (Henceforth FBIS SOV), 20 September 2012.

9) “Russia Dumps Excessive Money: Capital Outflow Over $84bn in 2011 – Kommersant,” http://www.cbonds.info/eng/news/index.phtml/params/id/544307, 16 January 2012.

10)  E.G. Stephen J. Blank, “Civil-Military Relations and Russian Security,” Stephen J. Blank, Ed., Civil-Military Relations in Medvedev’s Russia: Carlisle Barracks, PA: Strategic Studies Institute, US Army War College, 2010, pp. 30-42.

11) “Global Alternative: The Logical Conclusion of a Major Failure of Russian Intelligence,” Moscow, in Russian, 9 November 2009, available from www.forum.msk.ru, FBIS SOV, 9 November 2009.

12)  “Algeria Asks Russia To Swap Mig-29s for Su-30 Fighters-Paper,” RIA Novosti, May 15, 2008; “Russia suspends Fighter Jet Delivery to Algeria Worth 1.5BLn USD-Rpt,” www.Forbes.com, March 28, 2008; “Algeria To Return 15 MiG Aircraft to Russia over Inferior Quality,” RIA Novosti, 18 February 2008; Nabi Abdullaev, “Fighter Swap May Restore Algeria-Russia Deal,” 16 May 2008 via www.defensenews.com.

13) “Russian Air Force To Get 34 Warplanes Rejected By Algeria” RIA Novosti, 13 January 2009 via http://en.rian.ru/russia/20090113/119463780.html.

14) Ivan Konovalov, “Ground Forces Reject Pantsir: Antiaircraft system’s Performance Unacceptable to Defense Ministry,” Moscow, Izvestiya Online, in Russian, 14 September 2012, Open Source Center, FBIS SOV, 15 September 2012.

15) “The State of Russia: Frost at the Core,” www.theEconomist.com, December 11-17, 2010.

16) Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups, Second printing with new preface and appendix, Cambridge, MA: Harvard University Press, 1971.

17) Douglass C. North, John Joseph Wallis, Barry R. Weingast, Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History; Cambridge: Cambridge University Press, 2009.

18) Ibid., p. 17.

By Professor Stephen Blank

~~~

 

In the Next Issue:  The Bases of Russian Foreign Policy, Part 3

 

Copyright © 2012 resides with individual authors.  All rights reserved.  Send requests for permission to EurasiaAnalyst@gmail.com

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