As Putin’s Russia and the Western world seem to inch their way ever closer to a new Cold War, debate in the United States has turned toward several proposals to contain Russia. One aspect of that debate, however, has frequently gotten short shrift: cost.
This is unfortunate, for the price tag of containment could be huge. From 2007 to 2016, while annual global military expenditures grew by $215 billion, NATO nations, the United States included, were slowly cutting down their overall defense allocations; billions of dollars will be needed every year to reverse this trend. We would do well to pause a moment and ask ourselves: Why should the West risk exhausting itself when Russia is ruled not by Stalin- or Hitler-like leaders obsessed by ideologies oriented toward world domination but rather by a gang of kleptocrats who put their money in Western banks, buy Western real estate, educate their children abroad, and hold foreign passports or residence permits.
These people do not rule Russia as they would if they truly sought global or even regional domination. Rather they rule so as to capitalize on their ownership of “Russia, Inc.” When something upsets this arrangement, they grow annoyed. During periods of growth (e.g. 2000–07) or of stable recovery (for example, 2009–11), for instance, Russia has been quite “civilized,” but when harder times have approached (as in 2008, or in 2014–15) it has fought low and dirty. It’s as if the Kremlin were trying to substitute a lack of financial capitalization with some additional form of “political” capitalization.
This insight lends itself to a rather unconventional solution to the West’s looming challenges with respect to Russia. If Russia in fact acts not as a rationally organized modern nation but rather as a “corporate state” under the ownership of local kleptocrats, then its conduct would be better described not as intergovernmental but intercorporate. And in the corporate world the best possible move to be made with respect to a small but aggressive company is to try to buy it out and merge it within a larger business conglomerate.
How much, then, would Russia cost? By this I mean not the price of its people, or its territory, or its natural wealth, but the assets which are considered by the ruling bureaucracy as its property? The answer is simple: All Russian companies traded on the Moscow exchange were valued at 33.6 trillion rubles as of August 1, 2017, or $559 billion, placing it somewhere in between Alphabet and Microsoft. There are of course some privately owned assets, as well as the income extracted from state unitary corporations, but if we double the above amount it still only comes to $1.1-1.2 trillion. At the same time we should deduct some assets that belong to “real” foreign investors (that is, not Russian-controlled offshore companies) and to the businessmen who do not want to sell their companies under any circumstances. So let’s settle on a rough estimate of $1 trillion.
Since 2008, the dollar value of all these assets has plunged by at least two thirds: On May 19, 2008 the record valuations and a strong “pre-Crimea” ruble put the overall capitalization of Russian public corporations at $1.52 trillion. The downward trend has hardly pleased the Russian ruling class. I would also say that up until now the assets controlled by the elite have produced positive returns equaling perhaps 10-12 percent of their market value—or as much as $65-85 billion annually. For some reason this figure corresponds to the net capital flight from the country (officially estimated at $644.7 billion for 2008–16 by the Bank of Russia). This means that the “owners” are trying to extract as much wealth as they can from Russia (I’m not talking about the greatest sell-offs by the “official” billionaires like Prokhorov or by the team behind the Alfa Group). Guess what would happen if all these people were offered a “fair” price for their property—for example, $2 trillion, or thirty times their net annual profits?
The Russian political and business elite isn’t behaving as if it had any serious hopes for stability thirty years down the line. Indeed a huge part of the elite is quite prepared to lose all its Russia-based assets tomorrow. Would these people drive a hard bargain if they got a good bid from a serious buyer? I doubt it.
But how huge a sum is $2 trillion really? It’s less than a half of the $4.79 trillion the United States has already spent on a useless war in Iraq. It’s roughly two U.S. defense budgets ($824.7 billion for FY 2017/18). One may recall that the Federal Reserve balance sheet increased by $1.45 trillion in just two months in 2008 when the government decided to save America’s big banks. Is it such a big deal to do this once again? I don’t think so. Last, but not least, $2 trillion equals a tenth of the U.S. federal debt—the sum by which this debt increases every two years. This is hardly a high price for wiping out the greatest existential threat to the United States.
We shouldn’t think of this $2 trillion as money wasted and forgotten. A Russia buyout could become the best ever investment made by the U.S. government. Russian companies are grossly undervalued, trading at a mere fraction of their U.S. counterparts. If Russia were someday to acquire a more responsible leadership and a more transparent judicial system—in other words if Russia were one day to become a more “normal” country rather than one that positions itself contra mundum—these assets would rise in value at least fivefold. In 2008 the Treasury bought a majority stake in the AIG insurance company for $40 billion and sold it to investors by the end of 2012 for a gain of $23 billion—but in our case the return on investment could be even higher, and the profits even more massive.
Such a deal might be equally beneficial for all parties. Naturally one could presume that everyone on the Russian side would receive immunity from prosecution for financial crimes committed before the deal; that all the money deposited to escrow accounts would be free from any money-laundering probes; and that the participants offering assets worth more than $20 million would be granted Western passports or permanent residency permits. So the Russian bureaucracy’s business affairs would end with a peace, not a truce. The money the West would spend on this deal, moreover, would actually remain inside Western economies, being reinvested into real estate, stocks, and other assets in the developed nations. Western businesses would get an extraordinary new market, open to the world and in need of being “civilized”: an immense wealth of resources and talent. And, of course, ordinary Russians would become the biggest beneficiaries, since the grand deal would bring law and accountability to a vast land that has never before experienced such things.
The majority of Russia’s problems arose from the fact that its leadership has fought to enrich itself while pretending be a modern, law-abiding political elite. The only difficulty Russia faces today is the impossibility for the elite of legalizing its wealth in the globalized world—this fact alone, and nothing else, makes Russia hostile to this world. If the West could invent a tool to resolve this problem, it might get Russia and its people—a people that is rational and European in its essential features—on board, securing a crucial advantage in a turbulent world.
One might say this project is unrealistic because it lumps together politics and business. I might agree with that—but perhaps we should try to realize it anyway, as the two have already been thoroughly mixed in the form of the larger-than-life businessman now occupying the White House.