Here's a Russian Indicator Everyone Should Watch

Jan. 17 (Bloomberg) — So Angela Merkel has pledged, after her visit to Moscow, to continue "very intensive dialogue" with President Vladimir Putin about topics such as democratic freedom. That's not good enough. She needs to pressure Putin on a specific sort of freedom, one that was represented, until recently, by a single name: Andrei.

That's Andrei, as in Andrei Illarionov. Illarionov is the man who until December advised Putin on economics and served as his sherpa to meetings of the Group of Eight industrialized nations. Now, however, he is trying hard to figure out what sort of future he might have, post-government, after a rough falling-out with his boss.

"Russia is ceasing to be free," Illarionov said in a telephone interview last week. "It is impossible to do politics. Politics is closed." People he knew had been threatened into silence.

To understand the implication of such creepy words coming from a person like Illarionov, it helps to go back to the sunnier Russia of the 1990s. Several free-market academics, among them Illarionov and economist German Gref, were fighting for reform. With an acuity that often seemed lacking in Western Europe, they insisted that state capitalism would not suffice to make Russia economically or politically stable. Only true market capitalism would do.

Incentives, Freedom

Illarionov talked to visitors about how entrepreneurs needed incentives and the freedom to fail; he was thinking about replacing the country's progressive tax rate structure with a low, flat tax. This last idea the nomenklatura — Europe's own economic nomenklatura, that is — did their best to liquidate. Flat taxes for little, desperate countries might be fine, but a flat tax for a big country? And a country where oil revenues might give the flat tax a boost? Dangerous. It was exciting for the rest of us to see Russian free marketeers outdoing their officious Western counterparts.

Putin did bring the free market dissidents into government — Gref became economics minister — and implemented some of their ideas. The changes, including a 13 percent flat tax, helped Russia's economy grow. Russia discovered that tax collection didn't require deploying men in ski-masks with automatic weapons. Sure, all that oil cash helped. But the free marketeers' laws meant that Russia might also have a future as something more than a petro-state.

Markets Man

Something subtler also was at work. It was the exhilarating signal sent by the presence of a markets man at the top. In 2002, Illarionov told Business Week that delay in paying off old Soviet debt was "hooliganism" — wonderful!

Then there was Illarionov's position on Kyoto. In 2004, Russia held the key to the survival of the Global Warming Treaty. It was a tense diplomatic moment. Tony Blair saw Kyoto as his own personal moral challenge. The U.K. prime minister's scientists bullied Putin's scientists as if they were first-year weaklings at an English boarding school.

Yet there was Andrei, bullying back, jetting around the world making the case against Russia's signature with PowerPoint presentations. Signing Kyoto, he argued, meant forgoing growth at a time when Russia needed to expand fast to stay democratic. Illarionov was always blunt: "Kyoto kills growth."

Though Putin eventually signed Kyoto, the discussion that Illarionov forced made Putin's Russia seem liberal in the best Anglo-American sense. Even Illarionov's e-mail address was a sort of emblem of post-Soviet potential: "adviser@kremlin.ru."

Buying Time

What became clear in the last year or so was that Putin was merely buying time to consolidate power. Locking Yukos executives in a cage in a courtroom was bad enough. Then came Russia's dirty role in the Ukrainian election, and now, Russia's decision in the new year to cut off gas to Ukraine. Though Illarionov hung on, Putin put him in the shadows. Illarionov's weakened position permitted people to trash him as too wild or marginal for government.

Last week, the supposedly wild Illarionov took a moment to clarify his thinking on gas for Ukraine. The papers had said he called Russia's price increases illegal. That didn't capture it. His issue was Russia's habit of arguing that it was "free market" to raise prices selectively.

"I said that the attempt to raise prices was legitimate," he said. "The problem is that these decisions should be universal. While Russia has one price for Byelorussia and another for Ukraine, fivefold different, we don't have a liberal economic policy. We are dealing with market discrimination."

Keep Them Honest

Hearing Illarionov make this academic but fine point, I was reminded of an old truth: Governments need their Andreis to keep them honest. An Andrei is an indicator of stability and freedom. Of course you can argue that Illarionov's is just one story about a typical disgruntled staffer who should have quit 18 months earlier. This last part is true — a man of integrity could have avoided the trashing. Perhaps it was wrong to hang on.

But then the rest of us were hanging on too, waiting for Putin to turn back toward democracy. We still are. We are pretending that it doesn't matter about the Ukrainian gas, just as we are pretending it doesn't matter that Gazprom hired an anti-Andrei, Gerhard Schroeder, a man who couldn't tell the difference between market capitalism and state capitalism for the life of him.

This summer Putin will be hosting U.S. President George W. Bush and the other industrialized nations at the G-8 summit. If Merkel doesn't, Bush should ask: Where are your Andreis?

(Amity Shlaes is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2006 Bloomberg

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