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Putin’s Fleas

George Papandreou and Vladimir Putin shake hands in front of Greek and Russian flags
Vladimir Putin and George Papandreou, then-Prime Minister of Greece, in 2010.
Photo courtesy the Prime Minister of Greece on Flickr.

It was Benjamin Franklin who recounted the saying, in Poor Richard’s Almanack, that “He that lieth down with dogs shall rise up with fleas.” I believe Franklin would have known exactly what to make of Vladimir Putin.

Putinism” has become synonymous with corruption, aggression, authoritarianism and deception. In his second go-round as president of Russia, Putin has all but stamped out a generation’s hopes and expectations that post-Soviet Russia would become a country typically European in its outlook, its democratic values, and its consideration for human rights and peaceful coexistence.

Putin temporarily stepped aside, at least in name, from 2008 to 2012, since the Russian Constitution forbids a president from holding office for more than two consecutive terms. He stayed close, however, serving as Prime Minister under his own former chief of staff, Dmitri Medvedev. Even had Putin actually stepped back from the seat of Russian power in earnest, however, his first run at the presidency had already given ample indication of the kind of political animal he really was.

Putin’s tolerance for violence toward and intimidation of the Russian press, politicians and business leaders who opposed him was plain to see within the first few years of his first term. Perhaps no one incident made his disdain of his opponents more obvious than his blatant asset grab from Yukos Oil Co. The incident was part of Putin’s campaign to put the energy sector firmly under state control, and served the secondary purpose of furthering his politically motivated prosecution of Yukos’ CEO, Mikhail Khodorkovsky.

Khodorkovsky was once the wealthiest man in Russia, but he was arrested in 2003 on charges of tax evasion and, later, charged with embezzlement as well. It was clear, however, that his real crime was opposing Putin through financing his opponents and through his own rumored political ambitions. (He was released in December on a presidential pardon after 10 years in jail and now lives in Switzerland.) After Khodorkovsky’s arrest, the government forcibly dismantled Yukos through a combination of tax claims and asset freezes.

Western leaders in both the public and private sectors simply refused to see what was directly in front of their faces at the time. Westerners rushed to invest in Russia, especially in its energy industries, despite the limited control and business freedom Russian companies were (and are) permitted. And, in 2012, Russia was welcomed into the World Trade Organization.

It is not, then, the realities of Russian business under Putin that have changed substantially. Rather, it is Western investors’ perceptions that have begun to change.

Last week, The Permanent Court of Arbitration in The Hague found that Russia owes the former owners of Yukos over $50 billion in compensation for grabbing the oil company’s assets. I wish them luck collecting on that. While Russia faces penalties if it does not pay the award by mid-January, it seems unlikely that Russia is about to start respecting the rule of law, even if it loses the appeal that the country’s Finance Ministry has already said it will pursue. Some analysts predict the ruling could still hurt Russia’s borrowing ability, however, The New York Times reported.

The decision may have also consequences in the meantime for Rosneft and Gazprom, Russia’s two biggest corporations by market value, both of which are state-run energy companies and both of which were beneficiaries of assets seized from Yukos. Since government assets worldwide are mostly protected by diplomatic immunity, government-run companies may make easier targets for the plaintiffs if Russia refuses to pay up.

Meanwhile, sanctions against Russia are steadily increasing due to Putin’s recent aggression in Ukraine, including the annexation of Crimea in March. And Michael McFaul, a former U.S. ambassador to Russia, noted that these sanctions and Putin’s internal constraints on enterprise have together triggered uncertainty for both Russian and foreign investors and have driven many Russian entrepreneurs elsewhere. Yet the biggest potential for economic dislocation clearly still lies in front of us, as displayed by Russia’s imposition of retaliatory sanctions against Western goods yesterday.

All those big Western investments in Russia suddenly look much shakier - but that’s just a matter of looks. They were always shaky, because Putin’s Russia has always been an economic dog heavily burdened by the fleas that come with tyranny.

When Westerners complain about the risks to their businesses and investments that come with standing up to Putin, the proper response is to ask, “What did you expect? Look who you got into bed with.”

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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