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Russia’s Half-Capitalist System

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Russia is a regime where rules are there to be broken, explains Kirill Rogov, Senior Research Fellow at the Gaidar Institute for Economic Policy in Moscow. If you want to understand how the current political and social order operates in Russia, you first must understand the two important and complementary beliefs upon which it is founded.

The first is society’s recognition of widespread corruption at all levels of state and economic life, and a similar recognition of the extreme inadequacy of existing institutions (in the first instance judicial institutions). This particular belief is held by people of varying political affiliations and social status — shared equally by shop attendants, members of the opposition, low-ranking officials and political functionaries.

The second belief is just as widespread. It holds that for various reasons any change to the existing order is out of the question. In other words, when recognition of the sorry state of affairs of legal regulation does not lead to a corresponding demand for real improvement in law. In economics, this situation even has a name — “the institutional trap”.

Bad institutions cause considerable losses to the economy and inconvenience to people, but on the whole the masses manage to adapt to the situation. Indeed, much more than that: part of society actually manages to derive some relative benefit from the way those bad institutions function.

And another part of society doubts how competitive it will be in different, as yet unknown and hard-to-imagine conditions. Given this, the cost of reforming the institutions starts to appear too high, and the benefits insufficiently clear. This is what seals the preservation of the status quo, despite its obvious flaws.

The idea of universal rule breaking is an important element in the political organisation and political legitimisation of the order as described. The upper and lower social echelons are united in corruption (in the widest sense), rather than divided. It is a unity that framed by a single hierarchy of opportunities for corruption.

Thus endless conversations about corruption and discussions of how it is all-pervasive do not actually lead to the delegitimising of the established social hierarchy and political order. They instead strengthen it and serve to promote and legalise this order as incontrovertible fact. Legal order meanwhile starts to be considered contrived and imaginary.

This feature is peculiar to a regime of soft legal constraints and explains why Russia’s permanent “battle with corruption” is at the same time an element ensuring that it will endure. Like other systems of control, the “battle with corruption” is not aimed at eradicating it, but at keeping the system of bargaining alive.

The “battle with corruption” is in effect a regulator of sanctioned corruption, compelling the executive level to do deals with the highest (political) level over its rights to give out the rights to break the rules.

Theoretically it could be assumed that the owner of a firm would aim to increase his profits both ways – by reducing administrative overheads and supplementary costs and by increasing economic efficiency. But the special features of the Russian regime make the first route preferable … Money spent on the individual rights to break written rules is a direct investment into profit here and now.

Investing in increased economic efficiency is an investment into an asset whose main feature is that it can be taken away at any minute. This is a much riskier investment, which actually increases the risk of it being taken away. If, on the other hand, you choose to invest in rights to break the rules, you are not only increasing your current profit but also reducing the risk of the asset being taken away.

Hence the conflict between Russia’s regime of soft legal constraints and the institution of private property. Private ownership encourages investments to maximise current profit and deters investment in future profit. However, the nominal owner, increasing his profit by non-economic means (breaking the rules), is supporting a regime in which his right to ownership is by definition limited.

This system of “half-capitalism” has the distinct potential for self-propagation and viability in conditions which are not conducive to overall development. There is a danger such a “twilight” state, with low potential for development, could go on for quite a long time.

The main beneficiaries of the regime of soft legal constraints are by no means Russia’s “oligarchs”. Clearly, their ability to break the rules tops the charts, but their companies may be taken away at any moment. The main beneficiaries are instead the bureaucracy, which hands out the rights to break the rules.

The power of the bureaucracy is not so much based on the existence of various oligarchs, as the continual reproduction of the process of “making the oligarchs”. If the potential of the regime of soft legal constraints is to be realised to the full, it follows that some of oligarchs occasionally have to leave the stage.

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