Streetwise Professor

February 11, 2012

Lustration of the Oligarchs

Filed under: Politics,Russia — The Professor @ 4:03 pm

Vladimir Putin announced his desire that those who profited from the “dishonest privatization[s]” pay a “one-time levy” to expatiate their sins.  This, Putin claims, will assure “the legitimacy of private property.” No doubt Putin will demand that the guilty oligarchs also pay public penance, and ask Pope Putin for absolution of their past sins.

There is no dispute that there was a massive transfer of wealth from the public domain into private hands in the 1990s.  It was a dirty–and in some cases, like aluminum, bloody–process.  But sunk costs are sunk.  That is the past.  What Putin should be concerned about is the future, and this proposal–which may just be more populist babushka bait–will damage Russia’s future prospects.  For it emphasizes the principle, if it can be called by such an elevated name, that property is held at the sufferance of the state, and is subject to the whim and caprice of the strongman in the highly personalized, a-institutional Russian state.  Given that business in Russia is hardly clean now, and that even the most squeaky clean of enterprises is likely to transgress the law sometime, for the foreseeable future every executive will be at risk of expropriation in the future at the hands of some demagogue unconstrained by legal process and legal rights.  This prospect will suppress investment, and divert what investment does occur into the kinds of assets that can be moved quickly, or which depreciate quickly.  It will spur even more capital flight.  It is, in fact, inimical to Russia’s future growth prospects.

Putin apparently tried to calm such fears with his promise that this would be a one-time thing.  But this promise is completely incredible. Completely.  Putin–or some future successor–can always play Roseanne Roseannadanna, and claim that there’s always something that needs redress.

Indeed, the Khodorkovsky case provides a perfect example of the potential for multiple jeopardy in Russia.  He was tried for the same charges twice, and convicted twice.  In Putin’s Russian, you can never be sure that your debt to society has been put paid. As any victim of blackmail or a protection racket knows, the demands for payment never stop.

There’s another interesting aspect to this Lustration of the Oligarchs.  They are being called to account for their actions going back nearly two decades.  But there has never even been a hint of lustration of Soviet government or party or security service officials for their actions only a few years prior–certainly not from Putin and his ilk.  Even though these actions were often far more horrific, and were the direct cause of Russia’s agonies of the 90s.  But that would contravene the entire Putin narrative that the death of the Soviet Union was the greatest tragedy of the 20th century, wouldn’t it?

Putin didn’t stop there.  He also called for a luxury tax:

It should become the universally accepted payment for refusing to invest in economic growth in favour of hyper-consumption and vanity. I’d like to call your attention to the following fact. Many of you sitting here have known me for years, and they know what I’m about to say. People in so-called developed economies, whose capitals pass from generation to generation and might be 100, or even 200 years old, don’t look any different from the rest of the crowd. Unfortunately, this is not always the case in Russia . . . I’d like to say that this tax on wealth is not fiscal in nature. No one is going to overstate its fiscal importance. The fiscal component of this measure is insignificant. This is sooner a moral standard and I’d like the business community to understand this. It’s also obvious that this tax should not be levied on the middle class.

Sounds like he’s channeling his inner Obama.  Or is it the other way around?

But note again: “I’d like to say that this tax on wealth is not fiscal in nature. . . . This is sooner a moral standard.”  In other words, the “moral” judgment of those in power will determine the incidence of the tax.  Given the, uhm, situational and plastic nature of such “moral” judgments by such people, the potential for mischief here is immense.  Again, it makes the possession of property and wealth conditional on the whims of those at the helm of the state.

More of exactly what Russia most decidedly does not need.  It needs more institutions, a real rule of law which constrains government fiat, and less unconstrained discretion in the hands of Putin and his ilk.

Putin was not done.  He also advocated the creation of an ombudsman who would protect businesses against the predations of officials.

That’s the plan, but just think how it’s likely to work in practice in Russia.  It actually sounds like a great corruption opportunity.  Just think of the boodle an ombudsman could rake in! From both sides!

But don’t worry, asserts Putin’s campaign chief, Stanislav Govorukhin. Putin has “civilized” corruption:

“Today we have returned to ‘normal’, ‘civilised’ corruption which, alas, there is in China though they shoot them there and in Italy and in America,” he said. “We are dragging ourselves out of the thieving outrage.”

Which, as Yelena Panfilova of Transparency International (an eeevvviiilll western NGO that is part of vast Amerikanski plot to subvert Mother Russia) says, basically means that the bribes are no longer collected by guys in track suits.

But that’s not really the point.  The relevant issue is the scale of corruption, not who collects.  The costs it imposes on business–and ordinary living.  Efficiency in corruption is not conducive to economic growth.  It just means that the sheep get shorn on schedule, and much closer to the skin.  Indeed, in a way it is even more dispiriting and more corrosive that corruption is the province of those who are, in theory, there to enforce the law than if it is dominated by mouth breathers with prison tattoos.  You can’t fight city hall, and if those who are supposed to be the protectors are actually those you need protection from, what can you possibly do?  Yes, the body count is smaller today, and that’s a good thing.  But the deadweight loss of corruption is undoubtedly higher now given how systematic and pervasive it has become.

I think it was Eugene McCarthy who said that the only thing that saves us from the bureaucracy is its inefficiency.  I suggest a corollary: the more efficient the (bureaucratic) criminals, the greater the deadweight costs.  These deadweight costs are economic, but they are more than that.  They are also paid in apathy, cynicism, and despair, which are hardly conducive to the flourishing of a truly civilized society.  Put differently: civilizing corruption further corrupts civil society.

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  1. “Civilized corruption”, “sovereign democracy”-Russia is truly “special”.

    Comment by voroBey — February 11, 2012 @ 4:26 pm

  2. Now if only Putin were to come out in support of repealing the flat tax (as all major opposition parties want to) his economic policies would be perfect as far as I’m concerned.

    Comment by Sublime Oblivion — February 11, 2012 @ 6:03 pm

  3. > his economic policies would be perfect as far as I’m concerned.

    Which is not very far, of course, given that you are staying safely far away from their impact. But hey, you might even like Putin’s economic policies while living in Russia. Bill Browder sure did at one time. Not sure whether Magnitsky did.

    Comment by Ivan — February 12, 2012 @ 2:45 am

  4. Ivan – -parasites living in California as the Putin -mafias propagandist have the liberty to bend the truth .

    Comment by Anders — February 12, 2012 @ 5:39 am

  5. First Lustration, then Proscription? Prof, I think you are right, though a tad optimistic.

    Comment by sotos — February 12, 2012 @ 12:12 pm

  6. I guess this will be like a quit claim given by Putin on behalf of his beloved Russian people.

    This luxury tax sounds like a biig help to the London real estate market.

    I guess they will reappraise the mansions around Moscow. It is hard to see how their current appraised property tax values could qualify for a luxury tax. Their appraised values are closer to a shanty down on the bayou than a luxury mansion.

    Comment by pahoben — February 12, 2012 @ 1:32 pm

  7. @pahoben-except I think they’ll never quit. It is truly like being into a blackmailer or a loan shark or a protection racket. There’s never a last payment as long as you live.

    The ProfessorComment by The Professor — February 12, 2012 @ 2:17 pm

  8. @pahoben-it’s all very feudal. Property is contingent on service, as defined by the monarch.

    The ProfessorComment by The Professor — February 12, 2012 @ 2:20 pm

  9. Pre feudal is more like it – by the time of Feudalism, contract law was well established (say 10th century England and France), and enforced if somewhat unevenly. The kind of abrogation that a Putin can and does exercise could only normally occur in cases of conquest (de novo), of Treason, of oath breaking or being declared and outlaw. This parallel is an insult to our unwashed ancestors!

    Comment by sotos — February 12, 2012 @ 4:00 pm

  10. @sotos-But it is like Russian feudalism, which differed from classical western Euro feudalism, in that the service principle (i.e., no permanent property rights; claims to the product of land being contingent on service to the Tsar) persisted until the time of Catherine the Great. I should have been more precise.

    The ProfessorComment by The Professor — February 12, 2012 @ 4:08 pm

  11. The body count may be less but the victims are more virtuous. The shootouts in the old days didn’t result in much of a loss for the world. The assassinations now are of admired and well liked productive people who try to shine a light in the dark places.

    Comment by pahoben — February 12, 2012 @ 7:05 pm

  12. True – but the interesting thing is that the pre Petrine Boyars owed service, but were hereditary and had inherited lands and serfs that could not legally be alienated. Also there was a very large free peasant population outside of the traditional territory of the Duchy of Muscovy. It took Peter the Great to create true service feudalism, and Catherine (a German) who put the nail in whatever freedom could have existed. Russian Feudalism in its purest service form developed very late.

    Feudalism itself may not be the correct term. Instead elements of feudalism were morphed into a sort of bizarre state seizure of power -and in one light can be viewed as the precursor of the centralized state of the USSR. Catherine did mostly separate DIRECT service from property in estates, in line with “Enlightenment” thought concerning efficient use of property. In part she was able to do this because of the tremendous increase in Russia during her reign( more goodies to spread around). Nobility and rank from service, however, and the ultimate autocratic control of property including creation of military colonies, etc. continued under her and her successors. Indeed in new areas such as the Crimea she imposed serfdom where it had not existed. This continued to the end on Nicholas I reign, when the loss of the Crimean war showed that their model of how to run a society was a disaster, and Nicholas and Alexander II knew it.

    Comment by sotos — February 12, 2012 @ 7:22 pm

  13. Much like the collapse of the USSR came when its failures were too manifest to ignore.

    Comment by sotos — February 12, 2012 @ 7:24 pm

  14. Rephrasing-

    Deaths from the pre-Putin corruption shoot outs were generally a net positive for society while the “civilized corruption” assassination deaths now are a net loss. Earlier deaths resulted in a net increase in societal virtue while those now result in a net decrease.

    I have a friend that worked with Magnitsky some time in the past who has nothing but good reports about his ethics and his value as a co-worker and person as an example.

    Comment by pahoben — February 13, 2012 @ 7:24 am

  15. There are of course all the unnamed victims who built a business or bought a piece of property only to lose it to strong arm methods (planting drugs with arrest has been popular as has the classic violation of regulations). They are unanmed because they know far worse will happen if they fight. Civilized corruption is You Can’t Fight City Hall on steroids (in this case because they have far more Kalashnikov’s and have access to many people completely unfettered by ethics or morality).

    Comment by pahoben — February 13, 2012 @ 7:51 am

  16. That is one motivation why small Russian business owners cheat on their taxes. Reporting substantial profits to the tax authorities is like sending an invitation to government thugs to take over your business.

    Comment by pahoben — February 13, 2012 @ 7:58 am

  17. Civilized corruption is like a pact between the powerful to only victimize those without power.

    Comment by pahoben — February 13, 2012 @ 8:29 am

  18. That’s a slippery slope there. So when Berezovsky or Khodorkovsky had someone capped, it was mostly for the better? This is fodder for the Putinoids.

    Anyway, Russians love Marvin.

    Comment by So? — February 13, 2012 @ 10:43 pm

  19. There are some gains from “efficient corruption” if you can pay with cash rather than your corpse. I would rather live in the civilized corruption of Putin than the corruption under Stalin. But then again, Russians may still have been better off with the Czars. SWP, excellent writing – thanks.

    Comment by scott — February 15, 2012 @ 6:44 pm

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