Streetwise Professor

A common theme in much reporting and commentary on the Russian financial crisis is that it represents the oligarchs’ comeuppance, and the opportunity for the Russian state to reverse the theft of state property in the 1990s. In this narrative, the oligarchs are thieves and rogues who stripped the state of its patrimony, and they deserve to lose everything–and worse. The state will use its funds to acquire stakes in the oligarchs’ firms, cutting them down to size, and in the end, restore a simulacrum of the old Soviet system. As Stratfor puts it, “having a system where Russian firms cannot tap foreign capital markets and are instead dependent on the state is precisely how the Soviet state maintained operational and political control. It might not be central planning per se, but it is not too far off.”

This prospect is highly satisfactory to many Russians, and not just in the corridors of power. It is quite popular throughout Russia because, quite simply, the oligarchs are very unpopular.

I will stipulate that the oligarchs are, with no exception that comes to mind, a pretty odious bunch. They indeed acquired their vast holdings by means foul and fouler. They profited while the state, and the nation, starved. They deserve no pity or sympathy.

But restoring the control of what was taken from the state to the state is hardly an improvement, and may be a step backwards. This is in part because those in the state who will benefit are not obviously less odious than the oligarchs. But even overlooking that, expanding state control will reduce Russian wealth and economic growth. More extensive and intrusive state control will feed corruption; encourage rent seeking at the expense of wealth creation; weaken incentives to innovate and invest; reduce competition; and all in all just ensure that the Russian economy remains in purgatory, at best.

One Russian government spokesman said that the state had no plans to nationalize the firms acquired, and would sell them when conditions were more favorable. This statement is not credible–it is, as Mary Poppins said, a pie crust promise, easily made and easily broken. Once in powerful hands, it will be very hard to pry them loose. And even if there is a formal “reprivatization” process, what is the likelihood that it will be transparent, equitable, or efficient? Small. What is the likelihood it will represent another opportunity to create a new set of oligarchs? Pretty high.

In Darkness at Dawn, David Satter claimed that Yeltsin’s young liberal economists were actually prisoners of their Soviet educations. They believed Marxist dogma about primitive capitalist accumulation, and that any transition to capitalism would inevitably entail the enrichment of those with the least scruples. But, in their view, the creation of a market state would eventually tame and discipline these unworthy acquirers. Regardless of the original disposition of property and property rights, efficiency would ensure that resources would soon flow to high value uses, and that the managers and owners best able to create value would end up owning and controlling them. (Thus, I guess, they simultaneously believed in Marxist dogma, and the Coase Theorem as a reasonable approximation of reality.) To them, anything was better than state ownership and control, and primitive capitalist accumulation was merely an unsavory but necessary transitional step to a modern economy.

It didn’t work out that way. Institutions matter, and Russian institutions did not–and do not–fully encourage and support wealth enhancing Coasian bargains. Instead, rent seeking, the lack of a rule of law, and weak property rights have prevented the realization of the liberals’ vision.

So, it is likely that the pendulum will swing back towards state dominance, which is perhaps better described as state oligarchism, rather than private oligarchism. This trend has been evident for almost exactly 5 years–Khodorkovsky was arrested 5 years and a couple of days ago–but the financial crisis is accelerating the process dramatically.

In essence, Russia is between the Devil of state control and the Beelzebub of oligarchic dominance. There have been steps towards a more “normal country” market system (particularly in consumer goods), but a more thoroughgoing transition of large swaths of the economy (namely the “strategic” sectors which account for a large fraction of output) is nowhere in prospect. The unjust and fantastical enrichment of a tiny minority is being reversed, but this will not contribute to a more moderate enrichment of most Russians. Indeed, given the inefficiency of state management and control, it may even have the opposite effect.