'Political capitalism' and corruption in Russia

By Boris Kagarlitsky

Boris Kagarlitsky is a contributing editor of Links. His books include Square Wheels: How Russian Democracy Got Derailed and The Mirage of Modernisation.

The Western press discovered corruption in Russia in the late 1990s. At this time, the Western reader was deluged with reports describing not just the crimes of the "Russian mafia"—whose origins were invariably traced back to the old political police, the KGB—but also bribe-taking, embezzlement and illegal transfers of funds abroad by top-ranking bureaucrats. The high point of the criticism was a scandal, which the press termed "Russia-gate", concerning Russian accounts in the Bank of New York. The family and close associates of President Boris Yeltsin were linked to the illegal transfer of funds to the West. Later, former Kremlin chief of staff Pavel Borodin was even arrested in the US on charges brought against him in Switzerland during the heat of Russia-gate. The Russian prosecutor's office, however, was clearly reluctant to collaborate with its Swiss and US counterparts, and the affair began to dissipate.

The scandals of 1998-99 revealed not just the scale of the corruption in the Russian leadership. They also showed the extreme bias and ideological nature of the Western press, as well as the incompetence of many Western politicians and specialists concerned with Russia.

It is not as though the scale of the corruption in Russia was exaggerated in the Western reports. Any Russian citizen who has dealings with the world of business or bureaucracy can cite just as many instances as all the authors of reports on the Bank of New York or Borodin affairs, merely on the basis of his or her own experience. It is significant, however, that the Western press discovered corruption in Russia only after the collapse of the rouble and the onset of financial crisis in 1998. Most of the facts cited by Western journalists had been publicised by the opposition press in Russia three or four years earlier, and sometimes as early as 1992-93. These reports were well known to Western specialists and correspondents in Moscow, but the materials they contained were rejected as tendentious and unworthy of belief.

The ease with which a vast number of facts were "discovered" and brought to the attention of readers in the US and western Europe is due precisely to the fact that this material did not have to be sought out. It lay on the surface, and for the most part was never concealed. All that was needed was for the political positions of the Western observers to change.

The Western view: from optimism to pessimism

Until 1998, in line with the neo-liberal ideology that prevailed in the West, the commentators viewed privatisation, the liberalisation of prices, and other "liberal reforms" as indisputable successes, setting Russia on the road to prosperity. The only problem seen was the resistance of "conservative forces" trying to maintain Communist ways of doing things. Only a few writers, such as Stephen Cohen, Janin Wedel and Peter Reddaway,1 saw fit to dispute this interpretation. Their voices, however, were drowned in the general chorus. In fact, most of the people who opposed the neo-liberal course had in no way been supporters of the Communist regime, just as most of the neo-liberals of the 1990s had been former Communist functionaries.

Resistance to the reforms was crushed in 1993 by force of arms, with Western leaders finding nothing contrary to the principles of democracy either in the disbanding of representative organs (starting at the regional level), or in the abrogation of the constitution, or in the shelling of parliament, or even in the introduction of prior censorship in the autumn of 1993.

After the "resistance to the reforms" had been broken, one might have expected Russia to make a rapid breakthrough into the future. The period between 1994 and 1998, however, ended in an unprecedented financial crash, and in a full-scale economic and socio-political crisis out of which the country was led only by a team of "conservatives" applying a Keynesian approach to the economy.

It was in this period that the Russia experts, whose forecasts had proven catastrophically wrong, began trying to explain why the course that had been pursued had failed. If the experts declared that from the very beginning this course had been mistaken, even in part, they would discredit themselves. Consequently, the most popular theory was that the Russian reforms were not working because of corruption. Meanwhile, corruption was presented exclusively as a continuation of the old Soviet order, or as the result of specific errors by the reformers. Ultimately, the attempt to explain corruption as the result of "Soviet survivals" amounted to reinvoking the original myth of conservative resistance, only on a new level. In the earlier case, Soviet bureaucrats had been accused of unwillingness to "join in the market"; now, they were accused of joining in the market in the wrong fashion and, in the process, ruining it.

The authors of such articles studiously ignore the fact that a significant proportion of these scandals, if not most of them, broke out among members of the group of "young reformers", the bearers of progressive Western values. In just the same way, the involvement of Western experts, business entrepreneurs and entire companies in Russian corruption scandals has been ignored or, at least, not incorporated into the analyses. This is despite the fact that the Swiss prosecutor's office in the late 1990s cited a whole list of names and organisations.

Privatisation and corruption

To understand how events really developed, it is essential to return to the situation in the years between 1989 and 1991, when the strategy for neo-liberal reforms in Russia and the countries of central and eastern Europe was being worked out. The first thing one is struck by is that this orientation of the regimes in the post-Communist countries was not aimed simply at implanting market mechanisms and permitting private business, but at the sweeping (and in the case of Russia, almost total) privatisation of state property. As early as 1990, it had been calculated that effective demand for state property in the republics of the Soviet Union did not exceed one per cent of its value. It can be argued that the authors of these studies assigned too small a sum to the hoards of "shadow capital". But even if we suppose that they were out by several times, the picture is not radically different. Nor were hopes of massive foreign investment any more realistic.

The more extensive privatisation was, the less the prospect that state property could be sold advantageously. The early 1990s were a time when the sell-off of state property was occurring on all sides. It was not enough that the disintegrating and privatising Soviet Union, for all its inefficiency, represented the second largest economy in the world; mass privatisation was occurring in eastern Europe, Africa, Latin America, several Asian countries, and even in the West. In other words, the value of the goods on offer exceeded by many times the effective demand not only on the internal market, but on the world market as well. Add to this the world economic recession of the early 1990s, and it becomes obvious that in 1991-92 successful privatisation on a market basis was impossible as a matter of principle. This meant that proclaiming the goal of entering the market through accelerated privatisation contained an unresolved contradiction. Privatisation led not to the development of market relations, but to a sweeping bureaucratic redistribution.

Unable to sell enterprises at appropriate prices, the ruling bureaucracy was doomed to take the road of "political capitalism", handing out property to its partners and clients. The fact that this course suited the ruling elite perfectly was another matter entirely. The attractiveness of "political capitalism" to the political elite (the nomenklatura) serves to explain the ease with which a large section of the bureaucratic apparatus, and even of its professional ideologues, made the switch from "Marxism-Leninism" to neo-liberalism. As the well-known sociologist Ivan Szelenyi and his co-authors observe, "people who were in nomenklatura positions prior to 1989 were able to retain their power and privilege through the post-communist transition by converting their political capital into private economic wealth".2 Conservative and even reactionary in its social content, the privatisation reform, in Szelenyi's words, was transformed into "the great bank robbery".3

Meanwhile, "political capitalism" inevitably gave rise to its own rules of the game. "The system of 'political capitalism', along with its shadow economy, is chronically unstable", writes the sociologist Georgy Derlugyan. "It depends to an excessive degree on personal ties, informal agreements and bureaucratic intrigues, and under post-Soviet conditions criminal violence and the mobilisation of mass protests have come to figure among its constituent parts".4

Another structural factor in this situation is corruption. The most sober ideologues of the reforms were not only aware of this, but also took steps to turn corruption into a legitimate and socially approved norm of behaviour. In the early 1990s, the Mayor of Moscow, Professor Gavriil Popov, came out with a string of articles and interviews devoted to justifying corruption in theoretical terms. In Popov's view, generally recognised norms of legality and morality could not be applied during the transition from an "abnormal" society of the Soviet type to a "normal" capitalist society. Accordingly, deceit, bribery and embezzlement had to be seen as socially useful activities if they led ultimately to the desirable goal of the development of private entrepreneurship. "Civilised" norms of behaviour would triumph only after the final victory of capitalism, with the advent of a new generation of entrepreneurs.

Irrespective of how one regards such theories in moral terms, they contain methodological flaws. Corruption is turned into a structural phenomenon. It reproduces itself through the existing systems of relationships, established ties and habitual norms.

Naturally, the particular forms which corruption takes have changed in the course of time. In the early 1990s, Moscow newspapers were full of advertisements for firms offering their services as intermediaries in the taking of official decisions (in other words, acting as brokers in the giving of bribes to government functionaries). During those years such firms were very useful, since their clients did not always know who precisely should be bribed, or how much should be given, in order to yield the desired result. By the end of the decade such advertisements were no longer appearing, but this did not mean that fewer bribes were being given. It was just that the system had sorted itself out and become stabilised.

During the 1990s, corruption in effect became a way of life for the elite, and the main rational basis for decision making. The personal ties and personal interests of bureaucrats were the sole criterion. The problem was not that the people who took the decisions were especially wicked, but that the system was fundamentally incapable of working out other criteria. Any attempt to operate according to the rules quickly brought the system to paralysis, as was shown by the experience of Viktor Polivanov, who in 1995 was appointed head of Goskomimushchestvo, the state body in charge of privatisation. Polivanov's attempts to impose some sort of criteria of efficiency in the transfer of property to private hands led rapidly to the paralysis of the entire system, halted the privatisation process, and soon brought the sacking of Polivanov himself.

The overall result of privatisation during the 1990s was that the bulk of the enterprises were sold for a sum no greater than 1.5 per cent of their market value. Only three companies were sold for a price exceeding the cost of the railing that in 1993 was installed around the main government office building, the Moscow White House.

If corruption "from above" was a direct continuation of the privatisation process, corruption "from below" was born of the government's tax policies. Through privatisation, the government renounced what had been the main source of state revenues since tsarist times—the income from state enterprises and trade monopolies. Fearing inflation, the authorities were at the same time forced to try to make up for the budget shortfall through high taxes. The sharp rise in the tax burden meant that large sections of small and medium business were loss-making, big business was relatively unprofitable, and a high wage was ruinous for the person who received it.

In the press, this escalation acquired the name of "the state racket". The result was a veritable epidemic of the concealment of wealth from the tax authorities, a practice in which virtually every one of the country's citizens with an income above $100 per month took part. In this situation, a substantial number of perfectly legal business operations "went into the shadows". As the historian Roy Medvedev notes, the ideologues of liberalisation had promised that once the reforms began, the share represented by the "shadow economy" would dramatically decline. In practice, what happened was precisely the opposite: "Large numbers of the newly formed commercial structures and enterprises went over into the sphere of shadow business, because they simply could not exist amid the excessive taxes and other exactions of the state and the bureaucrats".5

Meanwhile, the ability of an enterprise to remain "in the light" also depended to a large degree on the ties its owner possessed with key people in the official apparatus, people who were able quite legally to grant tax breaks and lucrative contracts. The beneficiaries included the largest enterprises in Russia, as well as semi-criminal associations founded by sports clubs and veterans of the war in Afghanistan. Also among those that profited was the Russian Orthodox Church, which, thanks to such arrangements, was transformed into the largest importer of alcoholic beverages and tobacco goods in the country.

The benefits enjoyed by a favoured few were paid for by everyone else, in the form of an additional tax burden. Keeping two sets of books became normal accounting practice. The state, which had rejected all mechanisms of regulation apart from financial ones, was for its part confronted by a society which did not react in any way to efforts to impose order through financial stimuli or sanctions.

Significant numbers of Western and Russian writers try to explain the orgy of corruption as the result of "imperfect legislation" and the weakness of the court system. The lack of independent courts in Russia is an obvious fact, but the protests concerning "imperfect legislation" can hardly be considered convincing in and of themselves. If the criterion that determines the quality of a law is to be its accordance with accepted Western practice, the legislation in Russia is at least as good as in any of the countries of eastern and central Europe. Writes the economist Mikhail Delyagin:

One of the most damaging of reformist myths is that a law-governed state is characterised by achievements in the field of law-making as such, and not in that of bringing order to economic and social life. From this flows the adoption of numerous pieces of legislation that are quite at odds with reality, and the result is that it is impossible to manage a business without breaking the law. Divergences between the informal norms of economic behaviour and the officially proclaimed ones have become commonplace. The perception of laws as declarations of intent is just as widespread, and so too, ultimately, is a lack of confidence in the law as such.6

On this level, laws written on the basis of the best Western models have not only failed to solve the problem of corruption, but have aggravated it, since the gap between the officially proclaimed requirements and the norms of real life has increased. The better the laws were from the point of view of liberal public opinion, the worse they functioned. Corrupt practice in essence filled the gap between legislation and life, allowing the former to coexist with the latter.

Meanwhile, there were also people with a need to control the "norms of everyday life". The inability of the state apparatus of coercion to organise life according to the law led to the privatisation of coercion and violence by private structures, resting on informal norms, established customs and bandit "understandings".

It was this, and not mythical "imperfections" in legislation or the "Soviet heritage", that explained the rampant organised crime of the 1990s. Former operatives of the Soviet repressive organs went over to the ranks of the bandits in significant numbers, but only because society displayed an effective demand for the activity of criminal groups, while the the number of jobs in the organs of state coercion was being cut. In conditions where incomes were invariably concealed, and "shadow deals" were universal, going to court when a conflict arose was useless. The bandit had become the health attendant to the market, while the mafia was now the structure ensuring that business would be regulated and that entrepreneurs would observe certain norms in their relations with one another. The hired killer had taken the place of the attorney.

"The paradox of liberalisation", wrote the well-known economist Sergey Glazyev,

is now that the removal of the state as the main agent of control in the economy has not led to market self-organisation and competition, but to this function being assumed by organised crime. Instead of the state, it is now well-organised mafia structures that dictate the rules of behaviour in the market. In these rules, arbitrariness holds sway. Unlike a court, which acts on the basis of the law and of precise rules of conduct, the rules in a settling of accounts between bandits are set by the strongest, and they are liable to change depending on who holds real power. Earlier, an aggrieved party appealed to the state, but now he or she appeals to bandit gangs.7

Meanwhile, substantial numbers of people were becoming convinced that the bandits not only resolved problems more effectively and expeditiously, but that they were also more just and less biased than the state. Needless to say, this latter view was incorrect, but during the 1990s the mafia showed, for example, a far greater practical interest in the development of small business than the government.

The consolidation of the criminal gangs, their links with business and their efforts to win an air of respectability inevitably led to the establishing of links between the mafia and the bureaucracy. Ethnic or local ties played a considerable role. In speaking of the criminalisation of power, it must also be acknowledged that the reverse process was also important—the state structures drew the mafia associations into their activity, granting them respectability and ensuring their control over the process. The well-known political scientist Aleksandr Tarasov notes that while initially the new owners of property consisted mainly of people from the Soviet party-state apparatus, in the course of privatisation the criminal world became transformed into a sort of "forge of cadres" for the new elite: "The interpenetration of the criminal world and of officialdom (that is, the formation of typical mafia structures) occurred on the basis of the merging of these two groups into a new ruling class".

Nevertheless, it was ultimately the "bureaucratic bourgeoisie" which came to occupy the key positions in business. As Tarasov observes, since 1994 "a gradual but systematic strengthening of the bureaucracy has occurred, to the detriment of the positions of all the rest (including the second largest group, the criminals)".8 The most paradoxical thing is that the strengthening of the role and numbers of the bureaucracy was not only unaccompanied by a strengthening of state intervention in market relations, but on the contrary, occurred against a background of the consistent triumph of the principles of the free market in official theory and practice. The refusal by the state to intervene directly and to regulate economic processes was accompanied by the open dominance of the same bureaucrats, now acting as key shareholders and private owners. Proposals aimed at changing this situation, and references to a "conflict of interests", were categorically rejected on the basis that forbidding state officials from engaging in business would be a violation of economic freedom, amounting to state interference and regulation, from which nothing good could come as a matter of principle.

While corruption and mafia practices had become the main element in the country's general economic and social life, management on the basis of criminal and "shadow" processes had become an essential element in the administration of society and its various regions. The criminal associations were legalised in the form of a wide variety of security agencies that had arisen on the basis of gangs of racketeeers; of charitable foundations that allowed the common assets of the bandits to be legalised; and also of a vast system of political donations that turned bribery into legal lobbying activity.

The norms of "political capitalism"

The corrupt practices that had taken root in the economy inevitably crossed over into the sphere of politics. In the system of "political capitalism", the position of entrepreneurs depends on their links to the authorities, and that of bureaucrats on their ability to defend and promote their friends in business. In other words, the struggle for power is perceived as one of the forms of competition. The rigging of elections has become standard practice at both the local and the federal level. In the press, this is described delicately as the use of "administrative resources".

The most widespread form of election rigging has been the inclusion in the ballot counts of "dead souls"—both voters who have died, and people who have still not voted five minutes before the close of polling. The result has been that, contrary to the situation throughout the rest of the world, accounts of Russian elections show a massive turnout of voters in the last five minutes before the polling stations close.9 The falsifying of election results has repeatedly been exposed in the newspapers Novaya Gazeta, Nezavisimaya Gazeta and Moscow Times. Significantly, not one of these articles has been disputed by the authorities in court. At the same time, the courts have refused to take up complaints by citizens accusing the authorities of rigging elections.10

Vast sums have meanwhile been invested in creating propaganda apparatuses for the various business and bureaucratic clans. All the largest oligarchic structures have secured their own newspapers and, where possible, television channels as well. The oil and gas kings (Yukos, Lukoil and Gazprom) and the banks (Oneksim and MOST-Bank) have acquired mass media organs. The influence of the well-known oligarchs Boris Berezovsky and Vladimir Gusinsky has stemmed not only from their ties to leading figures in the Kremlin, but also from the power of their media empires. Provincial governors have brought regional television studios and newspapers under their control.

Virtually all prominent Russian politicians and business entrepreneurs have illegal activities in their pasts, and are at risk of exposure. Press organs have thus been able to release selectively to the public compromising materials ("kompromat") on one or another opposing player. If a newspaper's "own" politicians and oligarchs come under such an attack, they can in turn be presented as victims of injustice: when everyone has behaved in exactly the same fashion, why should one particular individual be called to account?

Vast sums, at times exceeding investments in education and social development, have been invested in such publishing campaigns, which have received the name of "black PR". The journalistic mileu, for all the exposures it publishes, is, not surprisingly, exceptionally corrupt itself. For journalists to receive payments for publishing particular materials, or for not publishing them, became such common practice in the 1990s that in 1999 the well-known liberal weekly Argumenty I Fakty even published price lists for the services being provided to its clients. Since journalists are not public officials, such remuneration is not legally considered a bribe, and is not grounds for criminal prosecution.11 As for moral problems, the norms of behaviour in the post-Soviet elite mean that such activities are not condemned. Moralising criticism "from below" of the political, business and media elite is dismissed in these circles as the impotent jealousy of people whom the elite, in its anglicised jargon, describes as "luzery".

By the beginning of the new century, the demand for propaganda and "black PR" had declined substantially. The local elections of 2001 showed that it was far simpler to bribe electoral officials than to campaign among voters. With activism among electors steadily falling, the outcome of elections depended less and less on voters, and more and more on the officials charged with tallying the votes. In Novaya Gazeta, the prominent journalist Oleg Lurye published an account of the prices demanded in the 2001 elections for the Moscow City Duma. For a candidate to be guaranteed election cost around a million dollars.

Putin's 'dictatorship of the law'

The coming of the new century was marked by substantial changes in Russian society. Paradoxically, the crash of the rouble in 1998 had a healthy impact on the country's economy, making Russian industry more competitive both abroad and on the domestic market. Then, world prices rose for oil and gas. The economy began to grow.

Since the process involved was mainly one of restarting production that had been shut down earlier, the growth occurred with minimal capital investment. This created a sense of stability in the elite, and aroused a desire to set in place a more durable system of rule. The shift from economic depression to upturn coincided with the change of leadership in the Kremlin. Vladimir Putin, who replaced the ageing Boris Yeltsin as president, promised society a "dictatorship of the law".

It is noteworthy, however, that these declarations did not cause panic in officialdom. Putin's project never foresaw rooting out corruption or doing away with its causes. What was involved was a complex of measures aimed on the one hand at legalising "shadow practices", and on the other at punishing people who went "beyond the bounds", that is, those members of the oligarchy and bureaucracy who through their irresponsible actions violated the spontaneously established rules of the game. Measures were taken to force the return of capital that had been illegally exported. Meanwhile, it was made substantially easier for citizens to take money out of the country (at the same time, the rules were tightened for foreigners and for Russians living abroad).

Dramatic tax cuts, made possible by the flow of petrodollars to Russia, were supposed to solve the problem of corruption at the lower level. At the top level, a redistribution of property began from oligarchs disloyal to the Kremlin to entrepreneurs close to the new administration. This latter redistribution took place strictly in line with the rules of "political capitalism". Berezovsky and Gusinsky fell victim to criminal prosecutions, while their former partners Aleksandr Voloshin and Roman Abramovich, who had finished up in the new team, increased their influence. Sensational criminal cases were forever being launched or abandoned, reflecting the changing relationship of forces in the Kremlin elite. Meanwhile, not a single major corruption case actually came to trial during Putin's first two years in office.

Putin's tax reform did not yield the desired results, since oil prices started falling at precisely the time it came into force in 2001. In short, the Russian budget once again encountered the same problems as in the early 1990s. The government tried to make up for its shortage of revenue by abolishing housing and communal service subsidies, transferring the financial burden to the least well-off layers of the population. This made the tax changes, as well as the housing and communal service reforms, extremely unpopular. At the same time,the government failed totally to do away with the practice of enterprises keeping two sets of books, since this was too deeply implanted, and as before, the advantages of concealing funds exceeded the risks.

By the beginning of 2001, it can be stated, all hopes that the approach taken by the Putin administration would help solve the problem of corruption had been dashed. Since this problem has a systemic character, the only reforms that can solve it are those which change the nature of the system, including above all the return to the state of at least part of the privatised property (the basic source of income), while at the same time radically reforming and democratising the political system and the apparatus of rule. The trouble is that such reforms are incompatible with the interests of the present elites in Russia. For this very reason, the issue of overcoming "political capitalism" can be resolved only in a revolutionary manner. Until this becomes possible, corruption will remain one of the key features of Russian society, helping to determine the nature of the Russian social system.

Notes

1. See S. Cohen, Failed Crusade: America and the Tragedy of Post-Communist Russia, New York and London, W.W. Norton and Co., 2000; J. Wedel, Collision and Collusion: The Strange Case of Western Aid to Eastern Europe, 1989-1999, London, Macmillan Press, 1998; P. Reddaway and D. Glinski, The Tragedy of Russia's Reforms: Market Bolshevism against Democracy, Washington, DC, US Institute of Peace Press, 2001.

2. G. Eyal, I. Szelenyi and A. Townsley, Making Capitalism without Capitalists: Formation and Elite Struggles in Post-Communist Central Europe, London, Verso, 1998, p. 117.

3. ibid., p. 116.

4. D.E. Furman (ed.), Chechnya i Rossiya: Obshchestva i Gosudarstva, Moscow, Politinform-Talburi, 1999, p. 216.

5. R.A. Medvedev, Kapitalizm v Rossii?, Moscow, Prava Cheloveka, 1998, p. 196.

6. M.G. Delyagin, Ideologiya Vozrozhdeniya, Moscow, Forum, 2000, p. 164.

7. S. Glazyev, Ekonomika i Politika: Epizody Bor'by, Moscow, Gnozis, 1994, p. 87.

8. A. Tarasov, Provokatsiya: Postskriptum iz 1994-go, Moscow, Feniks, 1994, p. 87.

9. The first studies of electoral fraud were published in 1994 by A. Minkin (Moskovsky Komsomolets, January 11, 1994); A. Sobyanin (Vechernyaya Moskva, May 27, 1994); and A. Tarasov, op. cit. It is significant that the first two of these authors supported the general policies being enacted by the government.

10. A detailed survey of electoral fraud was also published by Yevganiya Borisova in 2000 on the site <www.themoscowtimes.com>.

11. For an analysis of corruption in the mass media, see I. Zasursky, Mass-Media Vtoroy Respubliki, Moscow, MGU, 1999.

Stalinism Russia capitalism Soviet Union Boris Kagarlitsky

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