Weekly 29 May 2021

Reviving the gulag

Hello! This week our top story is on moves to create a modern counterpart for the gulag prison system to accelerate infrastructure development and compensate for a fall-off in migration caused by coronavirus border restrictions. We also look at the negotiations that saw state-owned bank VTB and Roman Abramovich given influence at ‘Russia’s Netflix’, and how the fallout from Belarus’ decision to force a Ryanair jet down on its territory is bringing Russia and Belarus closer together.

A modest proposal to kick-start the economy — bring back the gulag

The ongoing ‘Sovietization’ of the Russian economy is not just reflected in price caps on food. This week the government — which is struggling with a chronic labor shortage due to border closures — revealed it is looking to bring back Soviet-era gulag prison camps to provide the manpower for large-scale infrastructure developments. The first project to use convict labor is set to be one of the most notorious slave labor projects from the Stalin-era: the Baikal-Amur Railroad (BAM) in the Far East.

  • Sometimes, decisions in Russia are taken quickly. The idea of using prisoners to work on infrastructure projects was first mooted at the end of April in a meeting with Deputy Prime Minister Marat Khusnullin (he oversees construction). By the end of May, state-owned Russian Railways was already preparing the first group of 600 convicts to be sent to work on upgrades and maintenance on the BAM.
  • The government needs prisoners to take up the slack after thousands of migrant workers from Central Asia headed home during the pandemic. Construction Minister Irek Fayzullin has said he needs another 600,000 workers and is concerned there will not be enough labor available for a post-pandemic building boom.
  • The speed of the decision — and Fayzullin’s worries — are caused by one thing: the pressure to implement President Vladimir Putin’s infrastructure projects that are slated for massive state funding (6.3 trillion rubles or $85 billion, according to a 2019 plan). At the moment, this is the only idea (apart from possible new taxes) that the government has to try and ensure the Russian economy meets its target of 3 percent annual growth.
  • The first project chosen for convict labor is rich in unintended symbolism. BAM runs thousands of kilometres over permafrost and was planned as an alternative to the Trans-Siberian railroad in case of conflict on the Chinese border. The first attempt to lay tracks in the 1930s became one of the biggest projects tackled by Stalin’s gulag prison camp system. In 1938 alone, there were 250,000 convicts working on the line and official figures show that 40,000 died of starvation and illness in the space of five years. Even so, the railroad was not finished until several decades later and after Stalin’s death, when the final kilometers were laid by contracted workers.
  • While the state does everything possible to airbrush the repression of the 1930s from public consciousness, the gulag system remains one of the darkest moments of Russian history. Amid the new decision to use convict labor, modern propaganda outlets have rushed to explain why gulag weren’t so bad after all. State media agency RIA Novosti published a column entitled “The gulag is coming back to Russia”, in which the author unashamedly espoused the positives of Stalinist forced labor. It’s worth quoting a whole chunk of the text by Viktoria Nikiforova: “For the intellectuals in the big city, life in camp dormitories may have been a nightmare… But for poor peasants, for the urban proletariat, for the homeless children who literally starved every day of their lives, a labor camp promised three meals a day, a warm bed and some kind of medical care. Back in the late Soviet era, our affluent urban philistines were contaminated with an enduring disgust for physical labor and today this has reached almost pathological proportions. Meanwhile, there is no better remedy for the blues, no better cure for a sense of helplessness, than good old hard graft.” The column provoked such an angry reaction that, within a couple of days, RIA Novosti had to change the headline. But the text itself remained unaltered.

Why the world should care

The speed with which Russia is resurrecting its Soviet past is frightening. Once again, nobody is learning from history. Aside from anything else, the gulag was deeply inefficient (like any slave labor system) and the centrality of this flawed system to the Stalinist economy became a major reason for the long economic crisis that led to the collapse of the Soviet Union.

Ryanair scandal sends Lukashenko running back to Putin

Russia continues to position itself as the only remaining friend of Belarusian President Alexander Lukashenko, sacrificing significant tranches of Russian money and even its own citizens. The reason is obvious: only with Lukashenko in power can the Kremlin ensure Belarus remains economically dependent on Russia. The expected Western sanctions after a Ryanair jet was forced to land in Belarus so the authorities could arrest a journalist will only deepen that dependence.

  • On the record, Russian officials insist Moscow knew nothing of Lukashenko’s intentions to force the Ryanair plane into an emergency landing – and for once, this is believable. After last summer’s opposition protests, Lukashenko has been in need of Russia’s help more than ever. However, he does not automatically discuss every important political issue with Moscow. And the Kremlin is busy preparing for Putin’s June 16 summit with U.S. President Joe Biden, so any new scandal involving Lukashenko is an unwelcome distraction.
  • Moreover, there is little personal sympathy for Lukashenko in the Kremlin, and the general reaction to Lukashenko’s antics can usually be read in the stony-faced expression adopted by Prime Minister Mikhail Mishustin when he is sent to Minsk to calm the latest crisis. In September, Mishustin had the misfortune to be required to sit through Lukashenko’s conspiracy theories about ‘intercepted NATO communiques’. And last Thursday, he wore the same anguished look while defending Lukashenko at talks in Minsk.
  • Even so, Russia continues to offer rhetorical support to the Belarusian leader. Foreign Ministry officials spent the whole week berating the European Union for its angry reaction to the Ryanair incident, and wasted no opportunity to remind everyone about when a jet carrying Bolivian president Evo Morales was grounded in Vienna in 2013 because it was suspected of having whistleblower Edward Snowden on board. Putin brought up this incident Friday when he welcomed Lukashenko to his residence near the Black Sea resort town of Sochi.
  • Criticism of Putin has largely revolved around Russia’s apparent indifference to the fate of one of its citizens, Sofia Sapega, the girlfriend of journalist Roman Protasevich who was arrested when the Ryanair flight was forced down. Sapega was also detained and now faces obviously trumped-up charges of organizing mass disorder. Lukashenko’s dependence on Putin is such that Russia could easily demand her release but, so far, nothing has been done. As Putin and Lukashenko met in Sochi, a Minsk court ruled Sapega’s detention was legal.
  • Putin is far more concerned with global issues. His conversation with Lukashenko lasted over five hours and, in keeping with tradition, the details were kept secret. But there is little doubt Lukashenko asked Putin for economic support when the EU imposes new sanctions.
  • This time, the sanctions may be serious. According to Bloomberg and Reuters, the EU is considering sanctions targeting two key Belarusian exports: potash fertilizers and oil products (the first seems far more likely). In theory, the U.S. could copy Europe.
  • The Bell spoke to several Belarusian economists who agreed that any export ban on fertilizer or oil products would be catastrophic. “The Belarusian economy can be stifled by sanctions on just two export categories – oil and fertilizer. An export ban on those would wipe out the country’s entire export potential, reducing GDP by 15 to 20 percent and make it simply impossible for Belarus to exist as an independent state,” said Jaroslav Romanchuk, director of the Minsk-based Mises research center. Such sanctions would cause a sharp drop in foreign-currency earnings, putting pressure on the Belarusian ruble and, potentially, leaving the country unable to service its foreign debt, according to Katerina Bornukova, director of the BEROC Belarusian Economic Center. She added that a collapse in the bond market could spark a banking crisis that would oblige Russia to commit billions of dollars if it wanted to keep the Belarusian economy afloat.

Why the world should care

The parlous state of the Belarusian economy is one reason why — in spite of everything — the Kremlin puts up with Lukashenko. Only with Lukashenko in power can Belarus be forced to become a Russian vassal state. The Kremlin sees this as the way to keep the country in Russia’s orbit and push political integration (something Lukashenko has evaded for 20 years). The only problem is that most Belarusians oppose integration — and Russia’s backing for Lukashenko reduces its popularity inside Belarus.

Abramovich and VTB help ‘Russia’s Netflix’ resolve problems with the government

Russia’s leading IT companies — like their counterparts around the world — frequently face government pressure. However, they are generally not suspected of infringing user rights or monopolistic behavior like in the West. In Russia, the government’s big concern is ensuring that these companies remain under the control of Russian shareholders (meaning the authorities have a lever of influence).

  • The latest example of this is Russia’s leading streaming service ivi. Last year, the company began preparations for an IPO in New York and was hoping for a valuation of up to $1 billion. But these plans were scuppered by Anton Gorelkin, a deputy in the Russian parliament who has been at the forefront of clamor for tighter restrictions on the IT sector.
  • Gorelkin announced a proposal to limit foreign ownership of Russian audio-visual services to 20 percent. “Foreigners can buy up our domestic online cinemas before they are fully grown,” he fumed. He said his idea would stop foreign competitors “swallowing” Russian companies.
  • For ivi founder Oleg Tumanov (interviewed here for our ‘Russians are OK!’ project), this was bad news. Foreign funds including private equity outfit Baring Vostok already owned a stake in his company. So, Gorelkin’s initiative meant ivi could no longer risk an IPO. Apparently, ivi then embarked on a series of long negotiations with the authorities.
  • The end result was that ivi announced a new round of funding Tuesday worth $250 million. The group of new investors is led by VTB Capital, the investment arm of state-owned VTB bank. A VTB representative will take a seat on the ivi board of directors. In addition, the streamer service got new shareholders linked to billionaire Roman Abramovich and his partners Alexander Abramov and Alexander Frolov.
  • The timing is curious. Gorelkin unexpectedly announced in April that he was reviewing his proposals and the new version — which ivi supports — only mandates regulations for “service management”. That implies foreigners will only be able to own preferred shares in companies, or that operational management will be transferred to purely Russian-owned companies.
  • This sort of compromise brings to mind the story of Russian IT giant Yandex. In 2019, Gorelkin also sought to limit foreign investment in the company. To water down his proposal, Yandex also had to change its management structure and create a special vehicle through which the state could influence business decisions. Within a year of this deal, VTB and Abramovich also appeared among the minority shareholders at Yandex.

Why the world should care

It seems ivi is still pressing ahead with its planned IPO. But foreign shareholders should keep in mind that the government will do everything in its power to keep Russia’s IT giants on a short leash.