Streetwise Professor

March 9, 2019

The Laundromat That Reveals Just How Dirty–and Doomed–Russia Is

Filed under: Economics,Politics,Russia — cpirrong @ 7:10 pm

The Troika Laundromat–a massive money laundering operation organized by the eponymous Russian investment bank–has been much in the news of late. Most of the coverage has focused on the western banks–including several in supposedly squeaky clean Nordic countries–that were the conduits for the money. But what is far more interesting to me about the story is what it says about Russia, and in particular how it illustrates with particular force what started me writing about Russia 12+ years ago.

Specifically, as a lower middle income country, with an educated populace and abundant natural resources, Russia should be a magnet for capital. Instead, it is one of the world’s all time greatest capital repellants. They say what happens in Vegas stays in Vegas: obviously, what is made in Moscow (and elsewhere in Russia) doesn’t stay, but gets out any way that it can.

So what overwhelms the forces that would otherwise draw capital to Russia?: the state, and the culture that supports it, and which it sustains. The predatory nature of the state, the predators the state protects, and the lack of basic legal protections make money vastly safer outside of Russia than in it. Put differently, although Russia is rich in human capital and resource capital, it is tragically poor in social capital. It is a low trust society, and one in which formal institutions do not compensate for the lack of trust, but exacerbate it.

Putinism has done nothing to encourage investment in social capital–the opposite is true. Yes, it arguably tamed the greatest excesses of the 90s, but this was essentially a matter of replacing roving bandits with a stationary bandit. An improvement, but hardly a launchpad for social and economic development.

This is a major reason why I consider all of the hyperventilating about the threat posed by Putin and Russia to be vastly exaggerated. It can raise Cain in its neighborhood, but beyond that the country suffers from debilitating weaknesses which are unlikely to change anytime soon. For all Putin’s strutting domestically, and on the world stage, to say that he (and Russia) have feet of clay is an extreme understatement. This is a country that is already far behind, and is doomed to fall even further behind with every passing year.

All the laundromats in the world cannot wash away that reality. Indeed, they are symptomatic of how filthy that reality is.

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  1. And as much a demographic basket case as can be found. There is a breathtaking ignorance of risk. Alcoholism, abortions, AIDS and bleak future prospects are devastating the ethnic Russian population. Yes, Europe is somewhere in that basket, and China is usually overlooked. But Russia might vanish altogether by the time someone born this year graduates from college.

    Comment by Richard Whitney — March 9, 2019 @ 10:18 pm

  2. It’s quite all-powerful enough to serve as the bogeyman of the Democrats’ imagination. Next thing you know it will attempt an airborne invasion of Lichtenstein. Or Andorra. Or San Marino.

    How about its armaments industry: does it churn out enough effective stuff to be the armourer of serious mischief anywhere?

    Comment by dearieme — March 10, 2019 @ 8:38 am

  3. Richard Whitney,

    “Russia might vanish altogether by the time someone born this year graduates from college”

    Unfortunately, that’s not very likely. Just the capture of the new slaves in Crimea alone will give it another decade or two at current depopulation rate. And there is still an almost unannexed Belarus. Who said the Golden Horde needed ethnic Russians, if there ever was such a thing?

    It’s also absurd to think Russia needs to be economically comparable to the West to pose a threat. It was very far behind during Caribbean crisis, too, was it not?

    Last but not least: will there be that proverbial college to graduate from for that someone? Pronoun studies, perhaps?

    Comment by Ivan — March 10, 2019 @ 11:19 am

  4. To be honest, it’s very sad. Individual Russians are great people, and some of the smartest I’ve known, but their ruling caste are, and have always been, convinced that fear is the main motivator. Is it the sheer size of the country? Or fear of what could happen if they loosened the reins?

    Comment by Recusant — March 10, 2019 @ 12:47 pm

  5. @Richard–Yes, the demographic issue is huge, and IMO exacerbates the low trust problem. Trust is supported by the prospect of repeated future interaction. If you believe you are in the end game, why not act opportunistically today: the future consequences are minimal.

    When I started to write about Russia in 2006-2007, I called Putin a Man in a Hurry, and attributed that to his belief that he had to accomplish things quickly because of Russia’s looming demographic demise. I now think he’s a man who doesn’t give a damn about the future, and very short-sighted, because he figures what’s the point? There is no future.

    Comment by cpirrong — March 10, 2019 @ 8:38 pm

  6. @Recusant–I agree. Some of the nicest people I’ve ever met (and the smartest) are Russian.

    My econ history prof at Chicago, the late Arcadius Kahan (whom I liked very, very much as a person, as well as a professor) wrote a book about the 18th century Russian economy called “The Plough, the Hammer, and the Knout,” the knout (кнут) being the whip with which serfs were beaten. The point of including this in the title was to emphasize the centrality of violent oppression in the Russian system from time immemorial. Old habits die hard, and sometimes they don’t die at all.

    Comment by cpirrong — March 10, 2019 @ 8:44 pm

  7. As a matter of interest, is there a country that has historically been as corrupt as Russia now is that has recovered from it?

    The only example I can really think of is Nazi Germany, although it was never really about the money so it’s not a great analogy. Mediaeval Italy was grossly corrupt and in many respects still is. Is there anywhere that has been that bad and climbed out to get back to, say, Canadian levels of graft?

    Comment by Green as Grass — March 11, 2019 @ 3:15 am

  8. @Recusant – If I remember my college history correctly, Russia was a series of city states in the Medieval times (dominated by Kiev). They shared the same loosely Germanic culture valuing family and the individual and were on the same development path as Western Europe. When the Mongols conquered the area in the 13th century, they ruled with Asian institutions that were extremely hierarchical and considered the commoners to be virtual slaves of the aristocracy. After the Mongols were kicked out a few centuries later, the Russian culture had been completely transformed into the brutal world of the Tsars. They have never recovered.

    Comment by Pacy — March 12, 2019 @ 7:03 am

  9. @Green As Grass – You raise an interesting point, as there aren’t that many examples.

    One example might be France, after the Revolution. Bourbon France was profoundly corrupt, contributing to its demise. The Revolution failed in many ways, especially as it led to Napoleon’s dictatorship, but over the next century the nation was able to transform itself into one governed, more or less, by the rule of law.

    It helped that the nation had a vibrant heritage in the ideas of the Enlightenment, and perhaps that’s a prerequisite for a national transformation: some kind of essential guiding principles that manage to have universal meaning.

    Communist countries tried to pass off socialist ideas as having a transcendent universality, but as the essence of socialism is about class struggle, dividing society into an “us versus them” duality, it could never succeed in establishing a lasting rule of law, free from corruption.

    Comment by I.M. Pembroke — March 12, 2019 @ 8:27 pm

  10. As an addendum to my post, I would also cite the preponderant legacy of the Lutheran Church in shaping the guiding principles of governance in the Nordic countries. Northern Europe’s embrace of Lutheranism was a direct consequence of the disgust felt at the corruption of the Catholic Church. The new Protestant faith provided the moral foundation for the shaping of the principles of governance.

    It might come as a surprise to a lot people that the primacy of the Lutheran Church as the state church is confirmed by the constitutions of each of the Nordic states, even today.

    That would also imply, by extension, that if young American socialists would take Nordic welfare states as their model, they should first consider adopting Lutheranism. For those ideal welfare states could not have been formed without an initial 500 years of Lutheran indoctrination.

    Catholic countries of Southern Europe never saw such similar success, resulting in their inherent instability, profligate spending, and corruption.

    We could also cite Japanese Shinto principles of ancestor and emperor worship as being crucial in overcoming the corruption endemic in antebellum Japanese armed forces, who often assassinated their own government officials before the war. It was these principles that assured the successful transition of Japan into a nation of viable laws, even if their present constitution had been imposed on them.

    Comment by I.M. Pembroke — March 13, 2019 @ 2:11 am

  11. Mrs Bill Clinton had a string of laundromats-you’ll see soon.

    Comment by Joe Walker — March 13, 2019 @ 4:09 pm

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