#5515 #5516
[Third Issue of the Day]
From: "Anna Vinegrad" <Anna.Vinegrad@pearsoned-ema.com>
Subject: Bandits Gangsters and the Mafia by Martin
McCauley
Date: Tue, 30 Oct 2001
Dear Mr Johnson
Martin McCauley has asked me to forward to you a press release for Bandits Gangsters and the Mafia and I attach it below. As indicated on the release, the book may be purchased on-line at www.history-minds.com.
Please don't hesitate to contact me if you require any further details.
With very best wishes
Anna
Anna Vinegrad
Product Manager, Humanities
Pearson Education
128 Long Acre
London WC2E 9AN
Tel: 020 7 447 2013
Fax: 020 7 379 2656
Buy Longman History books online at www.history-minds.com
A Pearson Education book
BANDITS, GANGSTERS AND THE MAFIA
Russia, the Baltic States and the CIS
Martin McCauley
ISBN 0582-35764-0
Price £25.00
Imprint Longman
Publication date 19 November 2001
BEGINS
Every businessman is a roving bandit. He is always on the lookout for something to steal. During the 1990s the roving bandits, big business or the oligarchs stole Russia. They gained influence over President Yeltsin and his government and gradually shaped policy in their own interests.
Bandits, Gangsters and the Mafia is about the extraordinary decade which saw Russia move from communism to capitalism in one huge leap. The result was misery for most of the people but immense riches for a few.
The hero and villain of this book is Boris Yeltsin. Riding the tide of popular acclaim in 1991 he presided over the gradual collapse of the Russian state. He thought of himself as Tsar and held court. Those nearest the Tsar enriched themselves the most. He did not mind, providing they were loyal to him personally. He took to booze and his health declined. He became an international joke.
BBC World Affairs Editor, John Simpson, writes: "Martin McCauley is one of the few authorities writing in English who understands the shocking scale and range of the cancer of post-Soviet crime. His book is both important and frightening. He shows in masterful fashion how violence and corruption have become as important to the Russian system as the politics from which they are not always distinguishable."
The 1990s are examined through the prism of government: the President's shadow government, the military, police, security and intelligence services, the relations between Moscow and the regions, industry, agriculture, social policy and foreign policy. So much for Russia. Have the other former Soviet republics followed the same path? The Baltic States have not, but the others have to varying degrees.
As the new regime of Putin takes hold, Martin McCauley presents the only full explanation of why Russia took the course it did in the preceding decade. McCauley argues that Russia's decline should have come as no surprise. Given the opportunity, gangsters will take over any state. The only thing stopping them seizing power in the civilised world is the strength of core institutions, namely parliament and the legal system. Weaken these, and gangsters strike. The lesson of Russia is a lesson for the civilised world.
ENDS
Editors Notes
· McCauley is a specialist on Eastern Europe. He has written more than 20 books on the subject, he frequently appears on radio and television in the UK and the US and he acts as an investment consultant for companies considering investment in Russia, Eastern Europe and the Baltic States.
Buy this book at good bookshops or on-line at www.history-minds.com
For further information contact Anna Vinegrad on 0207 447 2013 or anna.vinegrad@pearson-ema.com
*******
From: "Martin McCauley" <andermccauley@hotmail.com>
Subject: Re: Bandits, Gangsters and the Mafia
Date: Tue, 30 Oct 2001
Dear David
I have chopped the chapter down to size. Anna will have sent you the press release and the details about purchase. Many thanks. Martin
Bandits, Gangsters and the Mafia:
Russia, the Baltic States and the CIS since
1992
(Longman, November 2001)
CHAPTER 1: HOW AND WHY DID IT HAPPEN?
There are six main explanations why Russia took the course it did after 1991:
1. The roving bandit and the stationary bandit
2. The hedgehog and the fox
3. Khalyava
4. Power and property
5. Property rights
6. The Marxist-Leninist Legacy
Every businessman is a roving bandit. He is always on the look out for something to steal. Seize everything which is not nailed down and why not try to take it as well? With apologies to Karl Heinrich Marx, he engages in primitive theft accumulation. He only thinks about himself and has no concern about the impact of his activities on the rest of the population. The roving bandit needs to keep the state weak in order to flourish. The simplest way to achieve this is to steal the great offices of state, the office of Prime Minister, the ministry of finance, the ministry of foreign trade and so on. When roving bandits take over the government or state they have to amass wealth very quickly because this will create social tension. If there is unrest it could lead to the roving bandits losing much of their wealth. This is the moment they think of becoming stationary bandits. They acquire an interest in law and order because it can guarantee them security of tenure. They need a stronger state, one which can deliver public goods to the population, health, education, law and order and defence. This means they have to begin paying more and more tax. However it is highly unlikely that all roving bandits will simultaneously decide that it is opportune to become stationary bandits. The result is the roving bandits go to war. Gradually the stationary bandits take over and over time one becomes dominant. They become the state.
1. There are four main reasons why Russia fell prey to roving bandits (Nagy 2000: 4).
· The manner in which the Soviet state dissolved in 1991
· The type of economic reform which was chosen
· The accumulation of power by the President and the manner in which he wielded it
· The chaotic and state-threatening process of decentralisation within Russia
Boris Yeltsin set out to destroy Gorbachev's Soviet Union from within by challenging all Soviet institutions. He ordered Russian banks to withhold tax payments made by enterprises to the Union budget. He also encouraged regional administrations to ignore revenue-sharing arrangements by not transferring their share of taxes to the Union budget. In order to wean Russian regions away from the Union he exempted them from paying taxes to the centre. Regions were being given the opportunity to reduce their dependency on the centre and to learn how to haggle with Yeltsin in order to benefit themselves. Yeltsin was in the business of granting tax concessions for political favours. The other tactic was to challenge the centre for the ownership of enterprises and farms on the territory of the Russian Federation. In the chaotic days of 1991 they could choose under whose aegis they wished to be. Ownership of Russian enterprises (Russia produced about 75 per cent of the Soviet GDP) was absolutely crucial in the political struggle between Gorbachev and Yeltsin. The level of taxation and the amount of state social benefits which were distributed through the enterprises depended on whether the enterprise was Soviet or Russian. Yeltsin began to outbid the Union authorities, promising lower taxation and higher social benefits. This was unashamed bribery but it was highly successful. Yeltsin revealed his talent for populism.
However dishing Gorbachev was a two-edged sword. It taught enterprise managers that fiscal favours could be the reward for political support. Yeltsin, without meaning to do so, was laying down the fiscal rules of the new Russia. Managers were stronger as a consequence of perestroika and were learning quickly that they could also become political actors. Enterprise directors were to prove the most powerful political interest group in the new Russia. Regional authorities also soon learned to take advantage of the situation in Moscow. Fiscal advantages could be gained by astute bargaining. Yeltsin was creating a rod for his own back when it came to dealing with authorities in the new Russia.
When Yeltsin took over in Russia in December 1991 a strong state was out of the question. The threat of shortages of food leading to a situation reminiscent of February 1917 was real. Yeltsin had banned the communist party which had been the glue which kept the Soviet Union together. However he had no similar institution to take its place but did not think a presidential party was necessary in the new Russia. No attention was paid to state institutions when shock therapy or wham-bang-thank-you-maam economics was introduced in January 1992.
When it all began to go wrong in the spring of 1992 an attempt was made to strengthen the state but Moscow found that its words were not heeded. Yeltsin attempted to strengthen the state, mainly through presidential decrees because parliament was not amenable, until he gave up in frustration in the summer of 1993. The conflict between the President and parliament was resolved by force. No consensus was sought when introducing shock therapy and no consensus could be achieved in resolving the conflict this policy produced.
The bloodletting of October 1993 revealed how weak the President really was and in the December 1993 Duma elections this was clear to all and sundry. The majority of voters had voted against economic reform mainly because there was no gain only pain. A major belief of the young reformers was that the privatisation of state enterprises was absolutely essential if a market economy were to get off the ground in Russia. Rapid privatisation was embarked upon and the motto was bad privatisation is better than no privatisation. Bad privatisation meant dirty privatisation when crooks acquired state assets. The situation became desperate in early 1996 when opinion polls revealed that President Yeltsin's chances of reelection in June 1996 were slim. The President did a deal with some businessmen which resulted in his reelection. The price he paid was huge. The businessmen became politically very influential and had a major say in the way the government was run.
The bankers and businessmen entered the government and influenced the management of the state in their own interests. They did this in various ways (Nagy 2000: 91):
· the privatisation process had all the hallmarks of being designed to benefit insiders most.
· many tax concessions were granted after the reelection reflecting rewards for political favours.
· since the government did not have the budgetary means to meet all its obligations it had to decide who took priority when payment was due. The businessmen ensured that they were top of the list.
· State revenues were channeled through private banks and the banks paid no interest on this money. The banks were lax in paying it back to the government. In the meanwhile, among other things, they bought GKOs and other government bonds. In reality, they were lending the government its own money and being paid handsomely for the privilege. In return, they facilitated the government system of off-budget subsidies.
· Necessary economic reforms were delayed so that insiders could continue to benefit from their transactions. Large companies sometimes had their energy bills cancelled. Duty free imports could be arranged.
· An increasing amount of tax could be paid in non-cash form, either by goods (at inflated prices) or by a reduction in budgetary transfers.
· Companies which had contributed to the President's reelection fund received tax breaks, exemption from VAT payments and other financial rewards.
Gorbachev's reforms had unleashed a lot of economic energy but not in the direction he had hoped. Almost all the leading roving bandits of the 1990s were ready for the off in 1991. They became household names very quickly: Boris Berezovsky, Mikhail Fridman, Mikhail Khodorkovsky, Vladimir Potanin, Vladimir Gusinsky, Aleksandr Smolensky and Vladimir Vinogradov. They possessed special talents. They linked up with members of the government and the presidential administration and this resulted in their mutual enrichment.
The largest group of roving bandits are enterprise directors. They emerged over the years 1992-4 because of the weakness of the state and the means chosen to privatise state assets. Until privatisation the industrialists were a managerial pressure group, albeit a powerful one. They became roving bandits step by step. In 1992, they realised that the absence of state authority permitted them much leeway for theft. Then privatisation handed them their enterprises. By 1994 they owned about 60 per cent of Russia's industrial assets. Not every enterprise director is a roving bandit but the vast majority are.
After President Yeltsin was reelected in July 1996 some of the roving bandits realised that the state was too weak and was not delivering the public goods the population expected (Nagy 2000: 97-100). First and foremost was Anatoly Chubais. He and others entered the government. He held an auction for Svyazinvest, the telecommunications holding company. The result was that Vladimir Potanin won and Boris Berezovsky and Vladimir Gusinsky lost. Such was their anger that they unleashed the banking war which tore Russia apart. Chubais's bid to turn the roving bandits into stationary bandits (his most implacable roving bandit opponent was always Boris Berezovsky) had spectacularly failed and threatened the integrity of the Russian state. In 1997-8 another attempt was made to force the roving bandits to pay substantially more tax and fund the necessary public services. The East Asia crisis in the summer of 1998 engulfed a weak Russia. The crisis revealed that Russian government decision making was negatively influenced by roving bandits who were pursuing their own personal gain and ignoring the long term interests of the Russian state.
The roving bandits during the period 1992-6 pursued short-term interests which consisted of maximising their theft and robbery of state assets. They were managers and bankers in the main. They became immensely rich very quickly because of the once in a lifetime opportunity of privatising state assets at a fraction of their real value and sometimes free of charge. Due to the uncertainty about how long the window of opportunity would stay open, the roving bandits hoovered up voraciously every asset they could. They immediately engaged in asset stripping and transferred the money to offshore accounts.
In this book those who end up as roving bandits start off as small time entrepreneurs, gravitate into clan chiefs, then roving bandits and oligarchs. All oligarchs are roving bandits but not all roving bandits are oligarchs. To qualify as a clan chief one needs to be a dollar millionaire. To become an oligarch a billion dollars is the signing on fee.
A remarkable fact about the most successful roving bandits, the oligarchs, is that they are almost all Russian Jews. Indeed if one lists the top seven oligarchs six are Jews, the odd man out being Vladimir Potanin. But he is of Old Believer stock. Before 1917 many of the most successful merchants were Old Believers. Anatoly Chubais, is of Baltic German-Jewish-Latvian stock. The dominance of Jews is astonishing in a country such as Russia with its anti-Semitic tradition. These Jews seldom acted in unison. Indeed the norm was for them to fight one another. A case in point is the rivalry between Boris Berezovsky and Vladimir Gusinsky who represent the two traditions in Moscow Jewry. Hence their is no Jewish conspiracy to take over Russia.
Does it follow that the roving bandits are all criminals? Are they all master thieves who should be locked up for the good of society? No, they are all acting rationally from an economic point of view. Given that the state is weak and that there are assets to be acquired at knock down prices and also free of charge a rational economic actor accumulates as much as he can. The political uncertainty means that he has to work very fast and possibly get out very fast. This means he engages in asset stripping and then moves the money offshore. Only when a roving bandit concludes that the time of the quick theft is over will he start thinking about the long term. Then he will be willing to pay more tax in order to secure his wealth. He will start investing in Russia. No sentiment is involved about helping Mother Russia, again it is a rational economic decision. The roving bandit is homo economicus and homo politicus personified. Thomas Hobbes and Niccolò Machiavelli would have no difficulty in understanding contemporary Russia.
All those involved in organised crime are roving bandits. A striking fact is that the mafia is dominated by Jews. The tactics employed in building up a business empire are employed to build up a criminal empire. Again the secret is asset stripping and then the transfer of wealth offshore. The only difference is that the businessmen asset strip the state whereas the mafiosi asset strip the businessmen. The mafiosi are a necessary part of the economic system. The state is weak and ready for plucking. However officials are still in charge of state assets and need an organisation to help them collect bribes, enforce deals and so on. The mafia performs this role.
What then were the prospects for democracy in Russia? Democracy can only develop when roving bandits become stationary bandits. Eventually one becomes dominant and he takes over the state. He acquires the right to impose taxes (which, after all, is legalised theft) in return for providing security and law and order. In order to facilitate and legitimise the collection of taxes, the state needs to promote representative institutions, first and foremost parliament. In this way democracy develops. However there is always tension between capitalism - the market economy - and democracy. The battle between those who wish to enrich themselves and those who wish to force them to share their wealth is constant.
Democracy needs a pluralistic dispersion of power. The state should be strong enough to prevent mini-autocrats reemerging. The number of political parties should be small enough to allow them to act in concert against the emergence of a mini-autocrat. In order for this to happen there has to be a minimal level of harmony within society and also an acceptable standard of living. A society in economic crisis may choose an autocrat as an escape from its misery. For a democracy to function in the long term there has to be independent institutions which can mediate conflicts among the power-sharing elites. The powers of each elite have to be clearly and transparently articulated and regulated. Fundamental to successful democracies is a legal system which regulates property and enforces contracts. Representative institutions, first and foremost parliament, have to establish bodies which develop and protect the human rights of all and those of market participants in particular. A democratic state which provides the above also delivers basic public goods, such as law and order, health and education and defence and thereby is viewed as legitimate by its subjects. Judged by the above criteria, Russia is only beginning its journey to democracy.
Where does all this leave Boris Nikolaevich Yeltsin? Is he the roving bandit of all roving bandits? Boris made his career in the communist party and knew a lot about the construction business. He also knew a lot about how to climb the political ladder and cut deals. In so doing he developed a talent for being ruthless and deadly. He was also a risk taker. He cared nothing about economics but believed he had picked a winner in Egor Gaidar, after all he came from an illustrious lineage, and so shock therapy was launched on an unsuspecting population. Boris did not heed advice that he should adopt a new constitution, strengthen the state, call parliamentary elections, streamline the legal system and set up a presidential political party. He knew better. He did not want to be restricted by law and party politics. He was the father of the Russian people. In a short while he would start thinking of himself as a latter day Tsar. When things began to go awry, Egor Gaidar kept on telling him that things would soon work out. If economic certainty had been an Olympic sport, Egor would have been groaning under the weight of his gold medals. But Boris had not got to the top by being bemused by clever young things, like Egor Gaidar. He went behind Egor's back and cut deals with his arch-enemies, the communists.
As the economic situation worsened Boris was guided by only one principle, how to maintain his power. If enterprise directors became too clamorous, he made concessions to them. If the communists in parliament, many of the red directors were deputies, he made concessions to them. The young reformers were livid but Boris lived in the real world. He set up a slush fund to dip into when he had extra-budgetary expenses. He was under such pressure that he turned a blind eye to theft by his associates. His rule was that if an official was loyal to him he could steal. There was a lot to steal. Since the government was only partially loyal to him he set up his own shadow government - the presidential administration. He needed his own personal guard which could be trusted. Aleksandr Korzhakov, who became known as Sasha the Knife, became its head and quickly established his own empire.
The 1993 constitution made the President a Super-President. He was allowed to issue decrees with the force of law but there were certain areas where this could not be done.
Privatisation offered riches to insiders. There was a quota system for the export of oil, timber and other commodities. A licence was a passport to riches. All that was needed was Boris's signature on a decree. His tennis coach hit on the idea that if he could import goods duty free he could become rich. Boris liked him so he agreed. The Orthodox Church was short of cash as most of its parishioners were poor. Why not give it a concession to import cigarettes and alcohol duty free? Done. Very quickly everyone realised that the nearer one got to Boris the nearer one got to riches. Boris needed favourites and to be known as being generous. He was quite rational in his relations with people. He had two faces. In public affairs he could be hard, uncompromising, a ruthless exploiter of human beings. In private he was considerate, polite and a good friend. However power was his mistress and he loved wheeling and dealing.
The roving bandits surrounded him like a pack of wolves. Many of the young reformers had become roving bandits as the lure of lucre became too strong. Boris was in command of the situation until late 1996 then his health went. Constantly in pain he took drugs and chased them down with vodka. Tsar Boris the Bruiser died in late 1996. He was succeeded by Tsar Boris the Boozer. When coherent he would roar at subordinates: 'obey the Tsar's command'. He cut a rather pathetic figure on the domestic and world stage. All the while Boris's family had been increasing in influence, especially his daughter Tatyana. The family's main financial adviser was Boris Berezovsky. Family members were promoted, money moved offshore and villas bought abroad, including one in Bavaria. Those in his personal apparatus followed suit. Sergei Yastrzhembsky once expressed the opinion that officials should not fill one pocket but both pockets: 'Nado brat v obe zhmeni'. The last word is Polish Yiddish for hands. In other words, help yourself while you can. The financial crisis in August 1998 sent the family into a panic and they came up with a desperate solution. Another war in Chechnya was needed and the man to head the government was Vladimir Putin. On 31 December 1999 Tsar Boris handed over the reins of power to Vladimir Putin. The roving bandits could manipulate the media so as to ensure his election as President in March 2000.
A neat way of summing up Yeltsin as President of Russia would be to regard him as a master Bolshevik. His main concern was to amass and retain power. In order to do this successfully he needed to wheel and deal endlessly. Sometimes he was as sweet as honey, on other occasions as deadly as a viper. He was in his element in dealing with other Bolsheviks. He understood them and preferred their company. Young reformers and democrats made him uneasy. There is always only one concern: what does one do to come out on top. This is Lenin's question: who does whom (kto-kogo)? One does not have political friends, only colleagues. When they have served their purpose, dump them. Yeltsin had a great talent for populism. He was a natural when it came to pressing flesh and giving the impression that the person he was addressing was the only intelligent being, next to the President, on the planet. He had no ideology apart from the ideology of power. He understood that the exercise of power involves the use of force. He was willing to spill blood when necessary. As a master Bolshevik, he was the wrong man to guide Russia towards a liberal market economy and democracy. Chubais, his most influential economic aide, was a market Bolshevik. Impose fundamental economic change from above, untrammeled by law or morality. Yeltsin lacked the moral dimension which made Gorbachev so attractive to westerners. The latter could not bring himself to spill blood to stay in power. Yeltsin chose Putin as his successor, someone who was schooled in the Bolshevik tradition. Putin looks back with nostalgia at the Soviet era. Yeltsin does not. He hates the communists who ended his party career. He likes those who came over to his side. He ruled Russia with them, deploying the political skills honed in the communist party. A major objective for Boris was to prevent a democratic revolution in Russia. There was a real possibility at the end of the Gorbachev era and the beginning of the Yeltsin era that democrats could come to power and redistribute state assets among the population. Yeltsin categorically opposed this and wished to redistribute state wealth among his supporters. An important factor in nipping any democratic revolution in the bud was the dissolution of local soviets. They were full of newly elected deputies who wanted to kick out the communist nomenklatura and redistribute state wealth. A key centre was Moscow. Yeltsin seized the opportunity offered him by the attempted coup of October 1993 to disband the Moscow city and Moscow oblast soviets. He worked closely with Gavriil Popov, the mayor, to take control in the interests, not of the local population, but of the new nomenklatura.
2. The Hedgehog and the Fox
This metaphor comes from Sir Isaiah Berlin's masterful analysis of Tolstoy's view of history. Those who rule Russia can be divided into two groups: the hedgehogs and the foxes. They vie for supremacy and so far the hedgehogs are in the ascendancy. They are fascinated by everything they see around them and are not concerned about the national interest, only their own. They work on the principle that if there is anything to steal, steal it and steal it quickly. The nature of the state, the political system, political philosophy and other intellectual pursuits do not interest them. The are driven men, (there are no successful female hedgehogs), driven by money. It buys political privilege and economic concessions. They engage in conspicuous consumption although they do not enjoy a high reputation among madams. Their energies are not channeled into sex but into business.
Foxes, on the other hand, are more concerned with the future of Russia than the future of their offshore accounts. Indeed they may not even have any. They prefer a centralised system since it permits more control. They believe that their prescriptions will restore Russia to its great power status. They are patient and are willing to make short term concessions so as to achieve long term goals. The hedgehogs think short term, the foxes long term. Everything comes to him who only stands and waits, is their motto. The foxes need an all embracing programme, a vision for the future. Their view of human beings is misanthropic. Without firm guidance a person's potential cannot be realised. The best way to achieve the objective of making Russia great again is to concentrate the nation's energies on certain tasks. A consensus is needed to achieve this and once arrived at should be enforced. Dissent weakens the national resolve.
Hedgehogs easily dominated the 1990s. The foxes were overwhelmed. Some were in the democratic movement and sought to create in Russia a liberal democratic political order and market economy, all regulated by the rule of law. The more visionary they were the easier it was for the hedgehogs to defeat them. Then there were the communist foxes masquerading under the guise of nationalists. Many of them found that being hedgehogs was more profitable. Cutting deals with the hedgehog President turned out to be a lucrative business. There were communist foxes who remained foxes, the unreconstructed marxist-leninists, but they were so small in number that the hedgehogs lost no sleep over them. Zhirinovsky's nationalists, in a crisis, would always turn into hedgehogs. Under no circumstances did they want a fox in the Kremlin. General Aleksandr Lebed, for a time, threatened to become a fox but the hedgehogs soon got together and framed him.
An unkind critic has likened Vladimir Putin to a frog. He is not a frog but a fox. He gives the impression of being afraid of some of the hedgehogs but his media adviser, Gleb Pavlovsky, is quoted as saying that the surest way to improve the President's approval ratings is for him to engage in hedgehog-bashing. The public is suspicious of both hedgehogs and foxes as it has grow weary of promises for a better tomorrow. Many in the police, security and military are looking to fox Putin to become their champion. If the foxes win the hedgehogs will have to roll themselves up into tight balls and wait for better times. However they have accumulated great wealth at home and abroad and the foxes may invite them to enjoy their ill-gotten gains abroad.
3. Khalyava
This slang term has five meanings: a cheap railway station prostitute; to satisfy one's wants at someone's else expense; a female thief; a floozy, whore; something which is easily done. Mikhail Bulgakov, in Master and Margarita, uses the word to describe a visit to the theatre without paying. This is the meaning which is adopted here. Some regard it as a modern instinct which is depriving Russia of a bright future. It may be driven by the Russian desire for egalitarianism. Only when Russia has overcome its communist past will khalyava be overcome. There is a common view today that it appeared first under communism. It arose out of envy because others had more than one's self. Some would claim that the popularity of Gennady Zyuganov's communists in today's Russia is based on this instinct. However it is a universal trait, according to other Russians. They would point to the experience of western advisers in Russia who under the guise of advice were lining their own pockets. Khalyava is something for nothing and this makes it sweeter. The less one pays for something the greater the profit. There are those who delight in seeking out opportunities to eat and drink well at someone else's expense. Some have special suits, the jackets of which have many deep pockets in which they can slip litres of vodka and kilograms of delicacies. This is free-loading with a vengeance but some Muscovites have turned it into an art form. They can usually be recognised by their chubby cheeks and extended waistlines.
In communist times, the family of the leaders lived well at the public's expense. Brezhnev ate strawberries in January and his family enjoyed trips abroad, without paying a kopek, of course. In the Brezhnev era officials expected bribes. An official visiting a farm came away with a chicken or some other meat. The ruling class, the nomenklatura, had special shops where they obtained everything they needed at nominal prices. On official occasions, vodka flowed and food was abundant. All free for the chosen few, it goes without saying. Long vacations were the right of the ruling class. Payment was never mentioned. There were special rest homes where there were always many beautiful young ladies who appeared to have nothing else to do but to be accommodating to the wishes of the guests. The local big boss rewarded his subordinates with a weekend of pleasure.
When the Soviet state collapsed it was a natural that the nomenklatura would help themselves to the assets which they had been enjoying. Now the chance to own them was irresistible. Best off were those involved in the military-industrial complex. The Soviet state stockpiled large quantities of strategic goods in case of war. The country was divided up into zones with each zone capable of carrying on if others were wiped out. The young reformers in Moscow did not know how much was piled away and where it all was. The local bosses had no intention of telling them. Gradually they discovered that they could steal these reserves, sell them and put the money in offshore accounts. Everyone involved in khalyava learnt a new term, offshorny schet, offshore account. The first thing they asked when they arrived in the west was how to set up their own offshorny schet. If the nomenklatura could do this others were not far behind. Some, like Boris Berezovsky, were astute enough to promise to make members of the ruling class fabulously rich. Their ingenuity knew no bounds. One scam was to produce 35,000 cars with the same number plate and declare that only one had been manufactured. The rest could be sold off at 100 per cent profit. If the state inspector became suspicious he could be cut in on the deal.
Khalyava was much more democratic than communism. Previously there was a strictly observed hierarchy with the big boss getting the most, the middle boss getting less and the little boss getting the least. In public, conspicuous consumption was banned, it could only be enjoyed in private. In reality, the nomenklatura was building a communist system for themselves where they could have everything they desired. The more they consumed the less the people consumed. An astute move by Khrushchev and Brezhnev was to wage a campaign against the theft of public property from time to time. This permitted them to confiscate whatever they liked from whomever they liked. The nomenklatura thus appropriated, or rather, misappropriated, this property as their own.
The hierarchical system disappeared under Gorbachev when he introduced perestroika. This permitted the emergence of private bankers, businessmen, enterprise owners and capitalists. Those who had been restricted previously to the black market could now go legitimate. The skills they had learned in the black economy could now deployed in full in the legal economy. Since there had been no wholesale market inputs had had to be stolen from factories. Workers made goods in the factory on the side by stealing inputs and time. Almost everything had a price. No one thought that stealing from the state was wrong, only stealing from one's friend was wrong.
Khalyava led to managers privatising their factories overnight and then engaging in asset stripping. The same applied to the armed forces where soldiers could sell their equipment and uniforms. Officers sold guns, aircraft, indeed anything anyone would buy. The Chechens bought much of the matériel which they used against the Russian army from the Russian army. Whereas the communist party had its property confiscated in Moscow, the Komsomol, the young communist league, retained its property. All its buildings, theatres, sports facilities, gymnasia, hotels, medical facilities and the like throughout Russia were privatised by Komsomol leaders. This was khalyava on a grand scale.
Pyramid schemes became enormously popular in the early and mid-1990s because Russians believed that one could get something for nothing. Companies were founded and offered huge dividends in return for vouchers. A few received huge rewards but most lost their investment as the companies were quickly dissolved. The owners could then use the vouchers to acquire state property. The most notorious pyramid scheme was the MMM, run by Sergei Mavrodi. He became a Duma deputy to escape criminal prosecution but he was stripped of his immunity by his fellow deputies. However the belief that one can become rich overnight without any effort is not restricted to Russia. Lotteries are very popular in rich countries. Khalyava can lead to accidents. Russians have been known to steal railway lines to sell as scrap metal. They are not concerned about the inevitable derailment of a train. A powerful factor behind khalyava is the impoverishment of the people. If it is a choice between stealing and starving, stealing wins every time.
4. Power and Property
The struggle between power and property began in 1991 and is still going on.
The struggle has gone through four phases so far:
· 1991-3: The young reformers concentrated on parcelling out political power among themselves while others concentrated on acquiring property. These included the red directors, the clan chiefs and aspiring oligarchs.
· 1994-6: Those who had acquired power gradually realised that they had given away much of the state's property. They began to think about acquiring property for themselves but found that the most valuable pieces had already been snapped up.
· 1996: Power holders began to panic in the light of the December 1995 Duma election results and the upcoming presidential elections. The authorities put together a plan to declare a state of emergency and to cancel the presidential elections. In stepped the property holders who were more self-confident but also had more to lose and proposed a plan which could keep the authorities in power (the Davos pact). The proposal was that the elections would go ahead and appear democratic but the property holders' control of the media would ensure that public opinion could be endlessly manipulated.
· 1996-2000: The men of property developed an appetite for power. Through their use of the mass media they had resurrected the careers of those in power. The owners of the mass media realised how powerful a weapon the media could be in acquiring and retaining power. Had the mass media barons not intervened the people would have got what they wanted, the communists back in power. Yeltsin's physical frailty led to Chubais coming back as head of the presidential administration and Potanin as deputy Prime Minister, responsible for the economy. The property owners understood how to manage enterprises and those who work in them but not the Russian state. The route to managing the nation was through the media and the media barons set about this task with gusto. Those property owners who had no media outlets were at a grave disadvantage.
Again elections were on the horizon, the Duma elections of December 1999 and the presidential elections of June 2000. The men of property busied themselves with founding political parties and movements, seeking election to the Duma and hunting for a presidential candidate who would win and leave them with their property. Chubais, realising that the state was the largest property owner of all, moved to the United Energy Systems of Russia, the power monopoly. It afforded him property and power. Founding political parties and movements is not the route to manipulating public opinion and becoming influential. The only route for a new party or movement is through the mass media. There were two main groups, NTV, controlled by Vladimir Gusinsky, and ORT, by Boris Berezovsky. They gave air time to their chosen politicians, governors and opinion makers. In so doing these luminaries became more popular with the public. The Gusinsky clan or party was more conservative and chose Evgeny Primakov. The alternative was Yury Luzhkov and the Moscow mayor was seen as too ambitious and not to be trusted. Berezovsky had always competed with Gusinsky and could not choose Luzhkov as Primakov and Luzhkov were joint leaders of the OVR coalition. Berezovsky and his party looked hard and long and eventually found their man, Vladimir Putin. The latter was a brilliant choice. He met one of the most important criteria, loyalty to Yeltsin, even more, personal loyalty to the President.
The Berezovsky media had to transform Putin into a real, Russian hero. There were two routes: cleaning up corruption and cleaning up Chechnya. However Putin was in a hurry and needed instant appeal. Cleaning up corruption cannot be done in a few months. An even more important consideration was that this would have involved cleaning up Berezovsky. Boris had certainly not chosen Vladimir to do that. It had to be Chechnya and it had to be a successful, short war. The second Chechen war was reported in two fundamentally different ways, the ORT and the NTV versions. Berezovsky's ORT was less concerned about human rights violations in Chechnya than in making Putin look a great leader. NTV did not want Putin in the Kremlin and therefore reported human rights violations, the suffering of Russian soldiers and how terrible and unnecessary the war was.
And so Putin was elected President. The Berezovsky camp thought that he would complete building the edifice that Yeltsin had begun. This would have made Boris an even greater man of property. They were in for a big surprise. But that is another story.
The key to the story is that Berezovsky and his clan believed they had selected Vladimir Putin as the incoming President. In reality it was Evgeny Primakov and others in the military and intelligence communities who had selected Putin. The beginning of the saga was the sacking of Primakov as Prime Minister. Sergei Stepashin became Prime Minister and the police did not hide their delight at his elevation. They thought that they were on the road to dominating Russia. Yeltsin (Yeltsin 2000) claims that he thought of Putin as Prime Minister but put in Stepashin as a stopgap. One interpretation of this revelation would be that he is putting a gloss on his defeat. Berezovsky believed that by using his media to boost Putin he was benefiting himself in the long term.
President Putin is at the centre of a new interest group, the military-intelligence community or clan, which is now attempting to dominate Russia. Berezovsky and Gusinsky have lost, for the present but possibly for ever. Neither has been in intelligence and this is a serious drawback when attempting to second guess and outmanoeuvre the Putin clan.
5. Property rights
Karl Marx was fascinated by capital. How was it created? The problem was that it was invisible. He thought one had to go beyond physics to find the 'hen that laid the golden eggs'. Adam Smith wrote that one had to 'create a wagon-way through the air' to get to the hen. But where does the hen live? What then is capital, how does one produce it and how is it related to money? Why is only a small proportion of the population able to create it while the vast majority fails to do so? Capital is not the same as money which is an expression of the value of capital. Capital is the ability to create money out of thin air (de Soto 2000: 10).
There are twenty five rich capitalist countries in the world and over two hundred poor capitalist countries. What distinguishes the rich from the poor? A functioning legal system which confirms who owns property. In all rich countries it is easy to discover who owns what and to buy and sell that property. There is a central land register and when property changes hands it is recorded in the register. The major advantage of this is that those who own property can go to a bank and obtain credit using their property as collateral. It is quite simple to demonstrate that one has legal title. In this way capital is created. The more property one has the more credit one can obtain. The credit may be used to buy other property and in this way greater wealth is created. Hence the state's recognition of legal title to property is the route to wealth creation.
In poor capitalist countries this is not so. There may be hundreds of central and local government offices which register the legal title to property. Getting registered may take from two to twenty years as there are many steps to go through. Each step requires payment to some official and also payment for the registration. In almost all poor countries the process of the registration of title may cost more than the property is actually worth. Not surprisingly, the owner gives up. The disadvantages of non-registration are severe. The owner cannot use the property as collateral to obtain a loan from a bank and has to save money if he wishes to expand his activities. Since he is already poor this takes a long time. If he does not have legal title he is outside the law or extralegal. As such he is at the mercy of the tax collector, policeman, bureaucrat and every other servant of the state who grasps the opportunity to extract a bribe to leave him alone. Then there is organised crime. The mafiosi offer to give him protection from the law if he pays up to 20 per cent of his turnover to them. Hence the extralegal economy spawns corruption and organised crime. The state's servants and the mafia benefit most when the extralegal sector expands as this provides them with additional revenue. The imposition of the rule of law is against their interests.
The complexities of becoming legal mean that the vast majority of new Russian businesses remain extralegal. About half the economy may now be extralegal. Some businesses are located behind doors on which there is no indication that a business is operating there. Business cards routinely have no address, only a name. They avoid paying taxes but have to pay bribes. The greatest drawback of the extralegal economy is lack of credit. Those operating there cannot use their property as collateral for a bank loan.
According to this analysis, Russia needs to effect a legal revolution before it will take off economically. There is no point leaving the revolution to the lawyers, they are mainly concerned with the status quo. There has to be political will from the centre because the goal is to ensure that a uniform legal system comes into being. A central land register has to be set up. Has the centre the power at present to do this, even if it so desired? The advantage for the centre is that if hundreds of thousands of businesses were brought into the legal sector, tax revenue would increase dramatically. Taxes could also be collected on legally owned property.
6. The Marxist-Leninist Legacy
It is possible to be an ardent capitalist and democrat but also continue to be influenced by the world view imbibed in one's youth. Take the young reformers, for instance. They believed they could effect an economic revolution from above but introducing the market economy by fiat. Economic reform from above is very Marxist. Change the economic base by fiat and the superstructure (politics, etc.) follows suit. It could also be called Bolshevik capitalism or capitalist Bolshevism. The new capitalists, the oligarchs, were taught, in their Marxist-Leninist classes, that capitalists become rich by theft, coercion, murder and corruption of the state. An honest capitalist is an oxymoron. How do capitalists accumulate capital? By exploiting workers, paying them starvation wages. In order to get away with this, they need to have at their command the instruments of coercion of the state, the police and the military. In other words, they have to take over the state and run it in their own interests. The goal of every capitalist is to become a monopolist because if he corners the market he holds everyone else to ransom. Violence between and among big bosses is natural. How else is one to become a monopolist?
The above scenario is natural when capitalism is being established. It is the way it developed in the United States. This is primitive capitalism. When big business has taken over and agreed on a mutually beneficial distribution of the spoils, the country can then move towards civilised or advanced capitalism. In the United States it took almost a century. Russia is still at the stage of primitive capitalism. The language of the oligarchs is instructive. Berezovsky is fond of the expression, primitive capital accumulation. This is Marx's term. His view of U.S. capitalism, in its formative years, is from Marx's interpretation of history. The same is true of Chubais. From a Marxist perspective, the new bourgeoisie runs the state in its own interests. The young reformers shared Marx's view that the state plays no useful role in a capitalist economy. However the young reformers did not take on board Marx's insight that in a capitalist system illegal and corrupt activities are rational if they are profitable. In many successful capitalist countries high levels of corruption fuelled rapid economic growth during the early and middle stages of capitalist expansion (England in the eighteenth century, the United States during the 1850s). The reason why Russia is different is that the government permitted the flow of corruptly acquired wealth abroad. Another aspect, which may go back to Marx, was the young reformers neglect of small business. They concentrated on medium and large scale enterprises and did not create the incentives for small entrants to the market. New commercial banks to provide capital for small businesses were not encouraged to emerge. The lack of understanding of the importance of secure property rights appears to flow from the young reformers' formative Marxist years.
This view sees Russia’s move to capitalism as a replay of Marx’s analysis. Even though Berezovsky, the oligarchs, Chubais and the young reformers thought they had repudiated Marx and Marxism, in reality, Marx was exacting his revenge on them. The subliminal influence of Marx has been very pervasive. The new ruling class in Russia has a Marxist view of capitalism. Accepting a western view of capitalism, will be a slow process. Tony Blair’s capitalism and the capitalism flayed by Charles Dickens are about a century and a half apart. A civilised capitalist Rome cannot be built in a day.
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