Corruption in Russia: A tale of two privatisations

The web of corruption that runs through Russia is thick, multi-layered and connects all pillars of society

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"Pelorus", belonging to Roman Abramovich, docked in St. Petersburg
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Benjamin Mueller
On 20 December 2011 12:38

A 2010 report from Transparency International rated the world’s largest economies on a scale of 1 to 10, 1 being the most and 10 the least corrupt. With a score of 9.3, Denmark came out on top; the UK was rated 20th with a score of 7.6, while Russia came out 154th with a rating of 2.3, behind such bastions of good governance as Pakistan, Zimbabwe and Italy.

The web of corruption that runs through Russia is thick, multi-layered and connects all pillars of society: the government, the judiciary, the security apparatus, the civil service and the business community.

Former CIA director James Woolsey put it thus:

“If you should chance to strike up a conversation with an articulate, English-speaking Russian in, say, the restaurant of one of the luxury hotels along Lake Geneva, and he is wearing a $3,000 suit and a pair of Gucci loafers, and he tells you that he is an executive of a Russian trading company and wants to talk to you about a joint venture, then there are four possibilities. He may be what he says he is. He may be a Russian intelligence officer working under commercial cover. He may be part of a Russian organized crime group. But the really interesting possibility is that he may be all three and that none of those three institutions have any problem with the arrangement."

In the run-up to the 2014 Olympic Winter Games, corruption has reached ever more excessive proportions: The Russian edition of Esquire has calculated that the cost of one particular road in Sochi is so high relative to the market rate that it could have been covered in nine inches of foie gras instead of tarmac. Alas, it is covered in tarmac, whilst said foie gras is being gobbled by the recipients of the bribes.

The root cause of Russia’s kleptocracy is easy to pinpoint: a botched programme of privatisation.

Since the collapse of the Keynesian consensus in the Seventies - symbolised by the fall of the Bretton Woods arrangements in 1972 - a major tenet of Western governance has emerged: all things considered, the private sector delivers goods and services more efficiently than governments.

The intellectual brainchild of Milton Friedman and his Chicago Boys, supply-side reforms geared at unleashing the productive and innovative potential of the free market found their main champions in Margaret Thatcher and Ronald Reagan in the 1980s.

Today, the financial deregulation that accompanied Reaganomics is blamed for the financial crisis. However, not only is it far too simplistic to assume monocausality when analysing the most severe economic crisis since the Great Depression, but such ex post facto attacks on the economic reforms of the Eighties are mistaken.

From air travel through to energy supplies to telecommunications, entire industries have undergone hugely successful privatisations in the West. Whether we hop on a low-cost flight to visit loved ones or make long-distance calls at a fraction of the cost they used to incur, the benefits of privatisation are real and experienced by you and I on a daily basis.

It comes as no surprise, then, that privatisation is advocated as a development strategy for poorer economies trying to generate growth. The theory behind this is straightforward enough: assets held in the hands of inefficient bureaucracies are poorly managed, insensitive to price signals from the market, suffer from inadequately planned and executed investments, and act as a drain on the growth potential of a country. Privatisation provides the remedy: the productive power of capital can make formerly state-owned enterprises deliver value, quality and innovation for customers. Market competition provides the necessary impulses.

But, as is so often the case, theory can sharply diverge from practice. The experience of Russia post-1990 shows that a botched privatisation programme can negatively impact not only on the standard of living of a country’s citizenry but can also create lasting damage to its entire political-economic structure.

In October of 1991, Boris Yeltsin announced the rapid transition of the USSR’s command economy into a market economy. Three months later, the Soviet empire had unexpectedly disintegrated into its constituent republics. Amid the economic mayhem and confusion, with inflation reaching four-digit figures, the Russian government embarked on an immediate programme of mass privatisation, commencing what amounted to a firesale of what was once the crown jewel of the Soviet Union: its collectivised, state-owned economy.

Contrary to conventional wisdom, Russia was not in a state of abject, desperate poverty in 1991. When it collapsed, the USSR was still the world's second largest economy, with a GDP about half the size of the United States.

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