It takes a while for hype to converge on fair value. But eventually the physics of frauds, fads and fanatics plays out. That’s been true of technology stocks twice in my life, true with artists and bitcoin and true with leaders, including Vladimir Putin, once viewed as a real-life Darth Vader and now revealed to be an impulsive, reckless tyrant.
When I’ve met famous people, there is always a surprise, the part of them left off camera. Putin has a bowlegged, hurried swagger, like a guy trying to act tough. He is a small man who radiates barely concealed belligerence. He has been in power since 2000 and given his track record of poor decisions, culminating with a catastrophic war in Ukraine, it is time to think about what Russia looks like after Putin, whenever that day comes, which is what today’s post is about.
Given how much senseless death Putin has unleashed, it is tempting to think things will immediately improve upon his exit. They might. Legally, Prime Minister Mishustin, a former tax collector, would take over. However, predicting one of Russia’s periodic thaws—under Khrushchev in the 1950s and Gorbachev in the 1980s—is impossible. There are hopeful examples elsewhere in history, like Spain’s post-Franco rebirth.
The stark reality though is that Russia’s long-term political, psychological and economic backdrop is extremely difficult and will remain so. Whoever takes over from Putin will contend with a fragile political structure, traumatized population and predatory neighbors. If you take the Russian backroads, the scene out the window is similar to this.
Photo: Paul Fetters.
Political Backdrop
Over 100 years of efforts to reform Russia have accomplished little. Today there is still a Czar with supreme power and vassals albeit with electricity, basic literacy and vaccines. The disobedient (Ukrainians, dissidents, journalists) get thrown in the dungeon or die. This despite much well-intentioned effort to change by waves of reformers and bizarre efforts by the Kremlin to make it appear as if there are real elections.
The first laws limiting the Czar’s power came about in 1904, roughly 800 years behind Europe’s first efforts to limit a sovereign via the Magna Carta and over 100 years after the Estates-General in France in 1789. Amid Bloody Sunday (1905), debilitating labor strikes, right-wing gangs (the Black Hundreds), Russia’s Congress—the Duma—did indeed come into being. But even with that reform, the Czar still possessed powers unheard of in Europe. In 1911, political reformer (and Putin hero) Stolypin was murdered; in 1917, the Bolsheviks shot and bayonetted the Czar and his family, both examples of settling differences with violence as opposed to laws.
When Putin came to power, he was initially viewed sympathetically by some, including statesmen like Singapore’s Lee Kuan Yew. After the chaos of the Yeltsin years—including his alcoholism and two coups—at last, here was some order for a nuclear power. I witnessed some of this chaos first hand. In the 1990s, contract killings were frequent, often at the hand of former KGB snipers who took out rival mob bosses in downtown Moscow, as this dated article from the Washington Post details.
Yet, under Putin Russia has gone backward. Corruption (see last week’s post), land-grabs and violence are the regime’s notable characteristics. The Duma today is almost as ceremonial as the King is in England. When the Soviet Union collapsed in 1991, Poland, Czechoslovakia and Hungary had a Democratic history to return to; Russia did not and Putin’s rule asphyxiated what tentative political modernization there was.
Psychological Backdrop
Politics don’t come from thin air. They reflect and reinforce the psychological condition of the population itself. In Russia, the psychological heritage includes a significant former slave population, state-sponsored violence and frequent economic disturbances.
When railroads came to Russia in the mid-19th century, they entered a land little changed since the founding of Moscow in 1147. Technology brought new, disruptive ideas, e.g. that people shouldn’t be chattel. Recall that slaves (serfs) made up 37% of the Russian population when they were freed in 1861!
Jump to the 20th century and Stalin murdered roughly one-tenth of Russia’s population. At a party I attended a few years ago where I was the only American, I asked for a show of hands of families that had been personally touched by Stalin’s purges. Every hand rose. Russia was also invaded twice in the 20th century—once by Germany and once by an international coalition during the Civil War (1917-1923). The 1991-2000 period preceding Putin was not only violent, it was economically unstable. Banks failed. Ponzi schemes (like what just happened with FTX) proliferated. Russia defaulted in 1998.
Addressing the cumulative impact of this psychology likely requires honestly staring at Russia’s past, along the lines of a truth commission. While this does happen in countries (Germany, Spain, South Africa and Argentina) it isn’t easy. Downtown Berlin is dotted with reminders of the holocaust. In Russia, reminders of Stalin’s rule are exceedingly rare.
Photo: Paul Fetters
Financial Backdrop
A country is like a person, they have income and borrowing. At present, Russia’s income is almost entirely tied to oil and natural gas, poorly distributed and increasingly at the mercy of the Chinese. There is enormous, untapped potential in Russia’s educated population, which could become an IT hub if and only if there was rule of law.
Of Russia’s 148 million people, a tiny fraction is elite and lives in Moscow or St. Petersburg. In the hinterlands, life is brutal and short.
The murder instrument of choice is a frying pan. Forty percent of Russians live without reliable sanitation, according to the World Bank.1
The combination of energy export dependence and lawlessness pushes Russia into the arms of Xi. It should be clear by now that Xi is not a nice guy. To survive, a Putin successor is going to need to sell a lot of energy to China, which will in turn demand tough conditions. Could these conditions include reclaiming Siberian lands the Qing Dynasty ceded to Russia in the 19th century? That sounds far-fetched, but so did a war in Ukraine.
Russia has been “in transition” since roughly when the serfs were freed. Every bout of instability or violence since sends another wave of the elite abroad and the Ukraine war is no different. Essentially Russia’s politics and population remain partly, confusingly a mix of modern and pre-modern. That’s the reality Putin’s successor faces, tough sledding for even the most capable.
By the way, if you want to explore this further, we have some excellent podcasts, including: Dmitry Bykov, Andrew Weiss and Dr. Alexander Vanyukov. Also, a question for you.
Investment Outlook
We are in murky-ville, some things point one direction, some things point another.
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