Democracy. Russia. CIS.

Sympathy for the devil?

Posted by democratist on October 17, 2010

October 17th 2010,

Was the West and the so-called “Washington consensus” responsible for the socio-economic problems that blighted Russia in the 1990’s? This question is rarely discussed in Europe or the US these days, but it reflects a widely held opinion in contemporary Russia, and moreover an intellectual position that for many years has provided one of the Putin regime’s principle ideational mainstays.

Indeed, the fear of a repeat of the chaos of the 1990’s is surely one reason why, as Vladislav Inozemtsev noted in the Moscow Times on October 15th, so few Russians are motivated by Dimitry Medvedev’s calls for modernization, and subsequently why Russia remains, “Deeply mired in the complacency of ‘stability””

But is it really the case that Western advisors, and institutions such as the IMF and the World Bank were responsible for the chaos that engulfed Russia throughout much of its first post-communist decade?

In order to examine the other side of this story, Democratist has recently been re-reading Anders Aslund’s How Capitalism was built: The Transformation of Central And Eastern Europe, Russia and Central Asia. (Cambridge University Press, 2007).

Aslund begins by noting that most countries entered the transition process amid a serious economic crisis inherited as a result of communist mismanagement, “A whole new system had to be built, and knowledge of how to do so was limited.” In such a situation, transition was always likely to be a difficult and lengthy process, even if the advice provided was of good quality.

However, the main reason that economic chaos endured for so long in Russia was not that the government followed “bad” western advice, but rather that it was slow to implement much of it, because it was politically in thrall to a group of people who had a vested interest in dragging out transition for as long as possible; these were “rent-seekers” (prominent members of the old and new elite, the most successful of which would eventually become known as the “oligarchs”) who had a vested interest in making fortunes out of the distortions of the emerging market economies. 

As Aslund notes, “Rent-seekers were cold-blooded, rational businessmen. They had no ideology but convenience. They engaged in politics mainly to secure their rents. Confusingly, they were reformist and progressive as long as communism lasted, because their profits derived from the market, however distorted, and they wanted to escape the old communist control system. As soon as communism was over, however, the threat to rent-seekers came from a truly free market. Logically, they tried to slow down market reforms to preserve market distortions that generated rents while invoking many fine social causes.” 

As such, it was not western advice which was defective, but rather the slow pace of its implementation as a result of political interference.

And indeed in the Russian case Aslund suggests that the market economy was in place to a considerable degree by the late 1990’s; “The Russian financial crash turned out to be the catharsis Russia needed to accomplish a full-fledged market economy, with a critical mass of markets, macroeconomic stability and private enterprises.”

This leads him to make the provocative suggestion (partly based on a historical comparison with the United States’ nineteenth-century “robber barons”) that, with the eventual advent of the free market, the attention of the oligarchs had shifted from rent-seeking (no longer possible under free market conditions) to the securing of their economic position through support for the rule of law. As he says; “Later on, many wealthy businessmen became interested in securing their property rights against capricious rulers, which rendered them more liberal again. Now they stood up for the principles of a free society.”

So, from this perspective,  not only is it questionable to suggest that “westerners” were responsible for Russia’s problems in the 1990’s, but it would also appear that by the end of this period, the oligarchs, who had borne a considerable degree of responsibility for the enduring problems of transition were (by following their evolving self-interest)  slowly emerging as a central support for the consolidation of Russian democracy.

But whereas the financial crisis of 1998 put Russia on a path to economic stability and high growth that might well have eventually resulted in a lasting transition to democracy, it also had the effect of forcing President Yeltsin to appoint a government with Yevgeny Primakov as Prime Minister, followed in 1999 by Vladimir Putin, thereby eventually allowing former members of the secret police to take over both power and some wealth from the oligarchs, while also benefitting for a number of years from a combination of the post-1998 reforms and higher oil prices.

By the time of the arrest of Mikhail Khordokovsky in 2003, it became apparent that the oligarchs were unable to safeguard their property rights, or resist large-scale renationalisation and political suppression by the resurgent Putin-led espiocracy, and they were subsumed into the new system.

Subsequently, the hallmarks of Putin’s second term (2004-2008) were a degree of renationalization, the enrichment of officials, rapidly growing corruption, and the fading of industrial growth; all of which was (superfically and temporarily) masked by high raw materials prices.

However, the global financial crisis has done much to reveal the growing severity of these problems, especially in relation to Russia’s reliance on raw materials. Additionally, the last few years have also demonstrated how Russia’s industrial, technological and scientific capabilities are slowly suffocating in a the predictable resultant morass of corruption, and (of special concern to some elements within the nomenklatura) how this is degrading Russia’s military capabilities. 

And yet for all the talk of political and economic modernization that we have seen over the past two years, the regime’s response to these issues has so far been muted, precisely because of its unwillingness to countenance potentially “destabilizing” political change: For all the President’s talk of reform, there has been little indication that Medvedev would be willing to allow the remaining (and evidently much weakened) oligarchs any increased political leeway, as part of a broader political liberalization.

While it may seem counterintuitive, if Aslund’s thesis is correct, the oligarchs, impediments to reform that they might have been in the 1990’s, may well today be exactly the people Medvedev should be talking to if he genuinely wishes to move beyond the political strictures and economic malaise of “sovereign democracy,” to remove the remaining market distortions, and provide Russia with the kind of innovative economy that most people seem to agree she requires.

One Response to “Sympathy for the devil?”

  1. […] bureaucracy, and grappling with ruling a “virtual mafia state” dominated by corrupt businessmen and the security forces, and the Russian government is, ”…an oligarchy run by the […]

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