"Good Tsar" as a Risk Factor

Grigory Yavlinsky

This article was finished several days before the Nord-Ost tragedy. The hostage stand-off and everything that happened around it shook society. Yet, in less than a week the requiem gave way to political bravura. The country was swept by a wave of flag-waving and even militarist hysteria that drowned any calls for a sober analysis of the political situation. Meanwhile, far from disappearing, the need for such analysis has become even more pressing.

Unofficial Economy

Russia has yet to put in place an economic mechanism representative of a democratic market economy. Russia's economy today is a mixed economy - not, however, in the sense in which this term is used in economics, but in a rather specific meaning: an economy wherein the very logic of economic behavior is mixed. It is capitalism and not quite capitalism or, in a way, not capitalism at all. It is not a rule-of-law democracy nor is it the criminal free-for-all as it might appear at times. It is a society that has a little bit of everything - the force of law, the force of custom, political arbitrariness, and crime. Society lives according to some time-serving notions - that is to say, an array of rules that defy common logic and are in a state of flux.

Many relations and institutions, incompatible with the modern ideas of an effective market economy, that have existed in Russia since Soviet or even pre-Soviet times, are not so much a relic of the past as a full-fledged element of the current economic system. A symbiosis of corrupt bureaucracy and opaque business practices is still the determining factor in the use of a substantial part of national resources. The country's budget, even if now placed on a far sounder foundation than before the 1998 crisis, remains dangerously predicated on the financial status and bargaining positions of one or two dozen companies in the raw-materials and infrastructure sector exploiting the nation's natural resources and at the same time being virtually outside public control. Meanwhile, the ostensible well-being in the banking sector hinges to a very large extent on disingenuous methods of financial accountability and control.

Bureaucracy is unofficially supported with large chunks of the "shadow budget" formed by oligarchic structures that in return obtain executive decisions which bring them incomes hundreds of times as large.

On the micro-level, economic activity in Russia is not a consistent transition from a totalitarian-state command economy to a "normal" Western society, but rather an odd mixture of diverse types of institutions and relationships - modern and traditional, market and pre-market, legal and illegal, civilized and based on outright violence, and so forth.

Ask any Russian businessman what laws he lives and operates by, and, if he is sincere, he will not be able to formulate a clearcut answer - first of all, because there are no uniform rules in Russia whose observance would enable a businessman (or, for that matter, any socially active citizen) to count on success and a relative measure of security. In some areas he acts on the basis of official law, in some he relies on force, in some he trades on the inertia of accustomed relationships, and in some he simply gropes for a form of conduct adequate to the circumstances by the seat of his pants.

A stagnant social system of a corporate-criminal type with an extremely inefficient segmented market and without a mechanism for long-term reproduction and augmentation of economic resources is becoming for present-day Russia a more realistic prospect than its alternative - a state based on the rule of law with an open, dynamic economy and a responsible political and economic elite.

Furthermore, this system has intrinsic stability: It is capable not only of self-reproduction but also of a measure of development, as evidenced by the relative success stories of the past three years. Formation of a substantial stratum of influential people and groups with vested interests deriving considerable personal benefit from it has greatly consolidated the system. Virtually the entire Russian elite is, in one way or another, beholden to the existing setup and cannot destroy it without direct or indirect damage to itself.

This concerns not only the top level of state and government officials or the so-called oligarchs - old or new. Groups of interests whose interaction is a key factor in the current patterns of economic activity are only partially linked with official power structures on different levels. The main prerequisite enabling this or that group to participate in shaping economic practices is effective control over particular resources - economic territories, elements of infrastructure, able-bodied population, and monetary resources.

Interest groups can be based on different principles - territorial, industrial, corporate, clannish, etc. They can have different degrees of internal integration and various forms of specific organization. These can be official power bodies or semiofficial structures, including public monopolies on different levels, or large private enterprises or various financial structures with a specific share of participation by the state or criminal gangs.

For all the diversity of their forms, these structures have two basic things in common: effective control over the principal economic resources and the predominantly extra-economic character of this control. The key element of this control is the physical ability to facilitate or impede the use of resources to derive income. Importantly, this control is based not so much on legally acquired property rights as on the possibility to coerce those who do not recognize the group's right to control a particular area.

Another distinguishing feature of such structures is that their members very rarely derive income directly from the use of economic resources. They typically confine themselves to delegating the right to use these resources to other organizations, and are content to receive rental income (in the form of various contributions, bribes, fees, regular or irregular tributes, and so forth). This is not to say, of course, that all top level officials without exception accept bribes or embezzle public funds. The system is so built as to allow administrative resources to be used in more ingenious, non-criminal ways. True, this does not alter the essence of the phenomenon, which consists in deriving income not from productive activity but through affiliation with a particular corporate community.

In recent years, the economic system which evolved in the Yeltsin era has not only consolidated but also acquired a stability, which makes it possible to formulate its basic socio-political characteristics.

1. A substantial, if not predominant, role of informal relationships: a colossal gap between existing laws and economic reality.

The economic "game" follows its own rules that have evolved in the past decade and are more or less faithfully obeyed, on pain of "spontaneous sanctions," by all players. That said, the norms of official economic law apply insofar as they do not come into conflict with the unofficial norms of economic behavior. The aggregate of these rules plus economic activity based on these rules is fairly accurately reflected by the term "unofficial economy," which accounts for approximately one-half of Russia's GDP (the more common term "shadow economy" is somewhat narrower since it mainly points to evasion of official registration procedures, accountability, and taxation).

2. A special place assigned to the system of unofficial coercion.

The unofficial economy requires an unofficial system of enforcement. Not only the economy, but also society and the state begin to live according to some unwritten rules, when citizens (especially the socially active part of society) and even official power agencies act not by law or other legal enactments but on the basis of personal relationships, precedent, coercion, and other suchlike things. As far as major economic interests are concerned, an entity's ability to push through a particular decision or action amid confrontation with some opposing interests is oftentimes the only factor that counts (a semblance of legality may or may not be ensured). Coercion in this case can come in the form of administrative resources or control over the market or over its players or outright violence (criminality), but in any event it is based on the unofficial "right" of superior power: Might makes right.

4. Trust between economic entities is at a minimum level.

Because fulfillment of obligations is guaranteed not by the state machinery but by the economic players' own capabilities, the system is affected by a chronic lack of trust. Property owners and businessmen do not trust the state while state power bodies do not trust business. Banks do not trust clients, while clients do not trust banks and enterprises do not trust their creditors and partners. The population at large does not trust anybody at all and is deeply convinced that if has not been cheated today, this is only because it was cheated yesterday or is going to be cheated in a big way tomorrow.

6. In the context of this system, property rights in general and private property rights in particular are not absolute. Neither law abidance nor even compliance with unwritten rules can guarantee property against "re-division" or seizure by an economically, politically, or administratively stronger entity. With real control over a given territory, branch of industry, infrastructure, etc., particular interest groups easily appropriate property rights with regard to particular assets, using, among other things, submissive arbitration courts, false bankruptcies, subversion on the part of administrative agencies or "employees collectives," and so forth.

Informal Power

Any student knows that to rectify the situation the following is needed: an effective judicial and law-enforcement system; supervision over compliance with laws regulating the economic sphere, and tough action to stop any violations of these laws; efficient control over the distribution of public resources, making sure that they are used for their intended purposes; a transparent and clearcut tax and financial control system, and many other things.

From this perspective, in the Yeltsin era, not only nothing was done to ensure the effectiveness of these basic institutions but, quite the contrary, they were allowed to degrade. The judicial and the law-enforcement system became partly corrupt or privatized, partly ineffectual. Financial control agencies ended up as an instrument of pressure on business entities and individuals, who were subject to a semi-feudal system of official or unofficial taxes. State structures wound up outside public oversight, their officials effectively allowed to trade on their position for personal gain.

The new president was brought into office as a representative of a certain political and economic corporate group, conditional on his responsibility to and solidarity with it.

High-profile statist and rule-of-law rhetoric does not change anything. The main concern of the new/old administration is still the struggle against its adversaries as well as the development and realization of various political scenarios to impact on the population and central and regional authorities with the sole aim of reproducing itself in power and preserving its economic status.

Its major "achievement" in the past two years has been the elimination of public politics and political diversity - ostensibly to "ensure a second term" [for the president] but in fact only to protect its exclusive economic status.

It is the aforementioned system, not the specific characters who have at various times personified it, that has stability. The financial and banking crisis considerably weakened the clout of those business players whose influence was predicated exclusively on the handling of financial flows through their affiliated banks. Personnel changes in the Kremlin sidelined also those "oligarchs" whose wellbeing hinged on the favor and amenability of those figures in the government and the presidential staff who eventually fell by the wayside. New forms of big business "self-organization" emerged. At the same time the system wherein key decisions are made through political force and various methods of pressure (or, as the in-people say, based on certain informal notions and verbal agreements), was not only preserved but in fact solidified. Despite the proclaimed principle of their "equidistance" from the ruling authorities, there are still unequal conditions for companies and groups operating in the same business sector in terms of taxation and access to particular assets and resources.

Not surprisingly, the Dictatorship of the Law motto remained largely on paper: Not a single group that counts has ever demanded this in the past or is demanding it now; moreover, they are not in any way interested in this since they thus risk losing a great deal. As to support for the "tough and firm ruling authority" as the supreme arbiter in private disputes, this support is predicated on certain conditions; besides, it presupposes the possibility of influence on this "tough and firm authority." The underlying assumption, apart from other things, is the awareness that the official ruling authority does not have, and will not in the foreseeable future be likely to have, the necessary amount of resources to play the role of an independent arbiter. Even under the new president, the official ruling authority relies not so much on its own power as on using some groups in the struggle against others, which is impossible without give and take. The declared intent to place the main financial and resource flows in the country outside the control of narrowly circumscribed corporate groups and under public oversight has yet to be translated into reality. Meanwhile, the so-called anti-oligarchic campaign boiled down to a persecution of politically disloyal media-business leaders. What is more, there are signs of a new stage emerging in the struggle for a re-division of spheres of influence between corporate clans, above all in the export-related sectors.

There is no way, in this situation, that political will could emerge for a truly radical tax reform that would enable official taxation to be brought in line with the sums that are actually paid to the budget and "outside the budget," or to drastically revise the currency control system, which would help, through partial legalization of the export of capital, put in place tougher control over exporters' finances and stop them from hiding and laundering ill-gotten gains.

Power for power's sake and power for the sake of the economy are two very different things. In the first case, it is primarily the problem of its own security - that is to say, the survival and continuity of power, its outward legitimacy, incontestability, and the ability to stop any instances of pointed disloyalty and insubordination. The substantive part (that is to say, policies as such and their viability) is also important, but in a situation where the ruling authority's time, assets, and resources are rather limited, absolute priority is given to ensuring its own survival, everything else being attended to on the so-called left-over principle - in other words, given a very low priority.

As far as the economy is concerned, the situation is exactly the opposite: The personal stability of the ruling authority and the ostentation of its trappings are but a secondary matter. The main thing is the content of laws established by the ruling authority and their relation to reality - de-facto economic and legal relations that exist in society. In this respect, however, the ruling authority is weak and helpless today: It is not in a position to effectively regulate not only the aforementioned relationships but even its own apparatus, which lives according to its own laws and ideas, which oftentimes do not have anything to do with the will of those at the apex of the power pyramid.

De-modernization

I believe that the president's polemics with the government over the rate of economic growth is extremely suggestive. The prime minister was both right and wrong in his sharp rebuff of the president's demand to show more ambition in the historic competition with Portugal. He is right because within the framework of the existing economic system any attempts to boost growth rates will not lead to anything but eyewash at best and destruction of the present relative stability at worst. He is wrong because his government displays all of those principal flaws of the system that in fact doom the country to stagnation.

The country can do without statistics. When all is said and done, we are interested in provision of economic opportunities to close the gap or, in other words, to ensure the country's survival and preserve statehood and sovereignty. To understand this, it is enough to look at the map and see that Russia has the longest borders with the most unpredictable regions, and in this context to evaluate the scale of spending in the next 10 to 12 years for the armed forces, housing and utilities infrastructure, health care, education, demographic crisis management, development of Siberia, and strengthening of our economic sovereignty in the Far East.

Analysis of our economic performance from this perspective shows that we are increasingly lagging behind the developed countries while the status of the aforementioned spheres is becoming more and more critical - irreversible in some key elements.

Russia has created a freakish market economy that is in principle unable - now or ever - (unless it is drastically changed) to reduce the rate of our lagging behind developed countries. Owing to the economic system that has been established here, this lag will continue to grow.

To demand that our government, in the circumstances, minimize the lag by boosting growth rates is the same as to expect the Zaporozhets [the notorious lemon of all Russian-made cars] to go as fast as the Mercedes.

The Zaporozhets is so designed that it cannot in principle go faster than, say, 100 kilometers per hour. You can step on the gas, change the fuel or the driver or hold production conferences, but this will not change anything: Its maximum speed will remain the same.

So too our economy. It is so organized that it can ensure acceptable living standards for approximately one-fourth of Russia's population. Moscow plus one or two large Russian cities at the most could probably look like modern megalopolices.

The socio-political stability of this system has been based, and will continue to be based, on a mere 25 percent of the population, who will also be ensuring its reproduction. That is to say, of course, if world oil and gas prices are high enough.

For the absolute majority of the population, however, the "market economy" that has been built in Russia will not be able to do anything.

The economic capacity of the Russian market system is intrinsically unable to preserve the existing system of education, science, health care, armed forces, or housing and utilities infrastructure, let alone put in place a new one.

Society is witnessing an onset of dangerous developments, leading to its profound de-modernization.

Outlook

All of the above is in effect an attempt to define Russia's present-day socioeconomic system. This definition is impeded by the scarcity of the traditional politico-economic vocabulary that operates with such concepts as "capitalism" and "socialism." Modern Russian, Chinese, and Japanese societies; the Stalin-era Soviet system; the Korean chaebol system prior to the 1997 crisis - that is a far from complete list of various structures, each of which had or has its own internal logic and what can be described as local stability. These structures evolve in different traditional societies in response to the challenges of modernization - i.e., the ever growing technological and informational sophistication and complexity of the global village. As a rule, at certain stages they manage to carry out limited modernization programs (it is another matter at the expense of what or at whose expense).

Yet these systems showed their inadequacy the moment a particular country was confronted with the challenge of advancing to post-industrial society.

The present-day Russian system also emerged as a result of a crisis of the Soviet model. I believe that certain historical circumstances of that crisis (the predatory nature of the Party/KGB nomenklatura that converted its absolute collective political power into the vast economic power of its individual members; and the unscrupulousness of the "democratic" nomenklatura) brought about a locally stable socioeconomic freak system, objectively designed to de-modernize society.

This evolution poses a great danger of irreversible degradation of society. First, de-modernization effectively eliminates the creatively active stratum of the nation that is capable of analyzing the country's vector of movement and of standing up to it. Second, regardless of anybody's subjective wishes, this power and society structure inevitably leads to the formation of its political supra-structure as a police state with a monopoly on information - i.e., a system wherein any dispute about ways of the country's development will be impossible in principle.

As mentioned earlier, Russia's entire political elite, in one way or another, has a vested interest in the status quo and cannot destroy it without damage to itself. The democratic facade, which has been preserved for a number of reasons (including foreign-policy considerations), requires that, every four years, this elite appoint the regime's CEO, who can guarantee the preservation of the existing structure.

Despite the strict regimentation of the process of selecting a "successor," it does not, however, pose a potential threat for the elite or its regime.

The RF president, working out of the Kremlin, inevitably begins, first, to understand what is going on in the country, and second, to see himself as a statesman - this comes with these [Kremlin] walls and with this office. As a result, we have a proponent of nationwide interests and values - probably the only one in the entire ruling elite. Nonetheless, he realizes that his scope is limited by all those who have brought him to power. If he is courageous enough, he can act decisively: restore freedom of expression, ensure the independence of the courts, recruit decent people for positions of authority, form a government not beholden to corporate clans, and organize a roundtable mechanism with the participation of those members of the elite who are ready to rise above their selfish interests to prevent the country from slipping into the backyard of world civilization.

***

Are we again pinning our hopes on a "good tsar," making yet another attempt to "struggle with the bad boyars and generals for a good president"?

We are, up to a point. This is predetermined by the specifics of the power setup in Russia. What can we hope for?

For a "tsar who will not enforce tsarist discipline and, in addition, will turn out to be an intelligent person." Are there any grounds for such hope?

I do not know, I am not sure, but some 15 years ago we had a similar situation, which brought about the impossible - the downfall of the Soviet totalitarian system.

April-October 2002

(An unabridged text of the article is available at www.yavlinsky.ru)

“Moscow News”, 2002, #45, 46
http://www.mn.ru/english/issue.php?2002-45-5
http://www.mn.ru/english/issue.php?2002-46-8