The Illarionov Riddle

Oil has been “the devil’s excrement” for Russia. That is the opinion of Andrei Illarionov, the chief economic adviser to Russian President Vladimir Putin. In a speech at the Regional Meeting of the Mont Pelerin Society in Rejkavik last week Illarionov pointed out that in the 1990s, when oil prices were relatively low, Russia lowered taxation (adopting a flat tax of 13%), privatised its oil industry, stimulated economic competition and attracted foreign investments.

Illarionov and Putin
Since 1999 oil prices have been on the rise, multiplying five-fold. With the high oil prices “the Dutch disease” came to Russia, said Illarionov. Money has flown in, leading to a high money supply, high inflation and a rise of the ruble.
“An exacerbation of the Dutch disease promotes corruption, impairs the quality of policies, including those of an economic nature, and demoralizes essential federal and public institutions. The flow of revenues not earned through the hard labour of the government or economic entities has a degrading effect, thus encouraging the emergence of a ‘rent-oriented’ government and a ‘rent-oriented’ society. As a result, the idea of business through creative endeavors gives way to an aggressive ideology of redistribution."

Russia soon became a “petro-economy” where the government strengthened centralisation and began to implement a so-called “industrial policy” with a sharply increased taxation of oil companies, an increase in government spending and an expansion of government companies and the non-market sector. The “petro-economy” led to the “petro-state” with what Illarionov calls the “Venezuelan Disease Syndrome.”

Venezuela went through an unprecedented economic growth until the late 1950s when its per capita incomes and consumption levels almost equalled those of the U.S. and Switzerland. However, after the authorities nationalized the oil industry and other key sectors of the economy in 1957 the country entered a decline that continues today.

“The Venezuelan disease [consists of] a policy based on increasingly stringent tax and bureaucratic controls over finances (above all, in the oil and gas industry), nationalization of the largest and most successful corporations, the continued government monopoly over infrastructure facilities, a ban on private ownership of mineral resources, exclusion of foreign investors from the development of the most promising natural resource deposits, and protectionism that creeps into all branches of the economy.”

Today the Russian authorities are reaffirming their stranglehold on the “commanding heights of the economy.” They have effectively nationalized the oil industry (Yukos). They intervene in the other economic sectors. The bureaucracy and the military are on the rise and the rule of law is dwindling. This has affected young Russians who are currently seeking career opportunities as government administrators rather than entrepreneurs.

Illarionov’s speech was, as Johan Norberg noted, “informative and powerful,” but he was so outspoken that he left his audience baffled, wondering whether they had really been listening to the man who since 2000 has been Putin’s senior economic adviser. Some of the MPS members put forward the theory that the 44-year old economist, a self-declared fan of libertarian writer Ayn Rand, has been given permission by his boss to say these things so that the latter can show the world that he tolerates criticism and freedom of speech, even at the highest level. That explanation looks far-fetched to me, but as Mr. Putin is the former head of the KGB one never knows.

An obvious (though sad) conclusion, however, is that Mr. Illarionov, while officially still the chief economic adviser of the Russian President, has no real influence on the Kremlin’s policies. In early January Mr. Putin cut back Mr. Illarionov’s competences after the latter had described the Russian government as both arbitrary and wrong-headed, criticizing its crackdown on the media, its expropriation of the main assets of Yukos, the oil giant, its centralization of political power and its foreign relations. It was noted at the time that what made Illarionov's remarks so striking was not their substance – they reflect widely held views among Putin’s critics – but their source, an insider.

Mr. Illarionov has formulated similar criticism in a recent article in Russia in Global Affairs and speaking to the Russian weekly Moskovskiye Novosti (Moscow News) in early July when he warned against "creeping communism" and provocatively said “Communism is dead. Long live Communism.”


Give that man a cigar!
And buy his books when he flees to the United States.