Streetwise Professor

August 24, 2010

The Mafia Economy

Filed under: Commodities,Economics,Politics,Russia — The Professor @ 12:59 pm

In recent months, the owners of large pieces of Norilsk Nickel, Oleg Deripaska and Vladimir Potanin have gone to the mattresses for control of the company.  In response, Don Putin has felt compelled to fly to Norilsk in what is seen as part of a move to resolve the dispute. (And given what an ecological hellhole Norilsk is, you can be sure he isn’t going for the sights or the fresh air and waters.)

Although control contests are not unknown in the US or Europe, it is unheard of to see the head of government involved in resolving them.  That’s the role of the markets and the courts.

And it is the very absence of active markets and reliable courts that mean that Putin is needed to arbitrate and resolve these kinds of disputes.   Putin effectively recognizes this:

Commenting in 2008 on a shareholder conflict in the Russian subsidiary of the British oil major BP (BP.L) TNK-BP, where BP and a trio of Russian-born billionaires held 50 percent stakes, Putin said equal ownership did not work.

“I told them: ‘Don’t do it. Agree to one of you having a controlling stake,'” Putin said at the time.

In the absence of a controlling shareholder, in Russia business disputes resemble scenes from the Godfather or the Sopranos more than the kinds of business conflict you see here in the states.  And the institutional response in Russia is exactly analogous to the one that mafioso have evolved in Sicily and the US: to appoint a capo di tutti capi to knock heads when the capi fight over turf.  His job is essentially to ensure that rents and power are distributed in a way that mitigates the potential for conflict, and to crush those who threaten to destabilize the system.

This is part of the reason why Russia is doomed to economic stasis, at best.  This kind of system cannot readily deal with change that upsets the balance of rents and factions.  So dynamic forces have to be suppressed.  In a system like Russia’s, creative destruction is impossible.  There’s only destructive destruction.

And that’s the best case.  Worse cases are not improbable, and really bad.  In particular, if for any reason–death, incapacity, or just declining capacity–the capo di tutti capi can no longer function effectively, everyone goes to the mattresses in a war of all against all.  So stasis–Putin’s economic purgatory–is preferable to the most likely alternative.  Internecine warfare is the most likely alternative because the more civil, humane, and productive alternative–the creation of institutions that support markets and the constructive resolution of disputes–is devilishly hard, especially so since those who would have to lead (or at least consent to) the creation of these institutions would lose wealth and power as a result.  I think that the widespread recognition of these conditions also explains popular support for Putin, or at least a good deal of it.  If you take for granted that the system is essentially mafia-like, you want a good capo that can maintain equilibrium.  And whatever you might say about him, Putin plays the role quite well.

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  1. Norilsk has nothing on Chelyabinsk!

    Putin, of course, has vast experience running and owning large corporations, so his advice is soundly based and to be regarded with the utmost respect. Not.

    Russia’s economy is nothing but a gambling casino, for the amusement of those with money burning a hole in their pockets. But at least an ordinary casino does not use the profits out of which it has bilked its customers to buy nuclear weapons and invade small neighboring countries. Russia is a country that aspires to be a reputable casino one day, before it once again collapses into rubble.

    Comment by La Russophobe — August 24, 2010 @ 5:22 pm

  2. @LR–There is indeed a vigorous competition for the biggest ecological disaster in Russia. There’s the Aral Sea, for instance. And God only knows what festers in the various secret cities and military plants.

    The ProfessorComment by The Professor — August 24, 2010 @ 6:37 pm

  3. Trivia question: given that prosecutor general’s office is a prominent center of corruption in Russia, what could be a prominent source of counterfeit gold? The central bank, of course!

    Comment by Ivan — August 25, 2010 @ 12:58 am

  4. Ivan,

    The source of that news is German Sterligov. He’s some kind of orthodox fundamentalist kook. While I respect his procreative achievements (5 kids by a white guy in Russia is to be commended), LaRouche is the only kook I trust, (sorry LaR).

    Comment by So? — August 25, 2010 @ 4:43 am

  5. […] Russia's economy is basically a Mafia environment in stasis…for now.  (StreetwiseProfessor) […]

    Pingback by Hot Links: Contained Depression & the Facebook Executions The Reformed Broker — August 25, 2010 @ 6:29 am

  6. A war of all against all. That’s a very good description of the Russian economy after the Harvard Boys got through implementing the Washington Consensus.

    It’s highly likely that what the Russians have now works better than what they would have after getting off your bed, Procrustes.

    Comment by rkka — August 25, 2010 @ 10:03 am

  7. Yeah. Blame it on Harvard. Not that I like Harvard, being a Chicago guy, but puh-effing-lease.

    Schleifer et al behaved scandalously, but to blame them for what went on in Russia is ludicrous. Beyond ludicrous. They were a sideshow to the sideshow.

    FYI, the war of all against all had broken out as the USSR was collapsing. The thievery was well underway. This is common knowledge. The events immediately after the collapse of the USSR are well-documented. For the most part, the western economists were bystanders.

    Typical response from you and your like. Oh no. All too many Russians and their acolytes can never take ownership of their own failure. Always somebody else’s fault. No, not just SOMEBODY–a particular somebody. Evil Americans.

    Whatever. When you want to get serious, we can talk. Until then have fun playing with yourself in Fantasyland.

    The ProfessorComment by The Professor — August 25, 2010 @ 3:09 pm

  8. Photographic proof of Russia’s mafia economy:

    Comment by La Russophobe — August 26, 2010 @ 9:35 am

  9. Another one was the funding of Chubais, to help him win turf battles against “opponents of reform”

    There is no indication that things in Russia would be improved if, say Putin and Khordorkovsky switched places. My bet would be on worse.

    Comment by rkka — August 26, 2010 @ 6:41 pm

  10. RKKA:

    No indication? Are you MAD? Khodorkovsky has not been allowed to hold power for ONE SECOND, how dare you suggest there is some basis to believe he’d make the same mistakes as Putin? Even if Khodorkovsky did nothing more than to do for Russia what he did for YUKOS, that is impose Western standards of transparency, Russia would be far ahead of the game. Read McFaul’s analysis of where Russia might be without Putin, then think about how ludicrously unfair your comment is.

    Comment by La Russophobe — August 29, 2010 @ 7:05 pm

  11. Talk about mafia!

    Now Putin is openly talking about cracking the skulls of peaceful protesters simply because the exercise their right to assemble without a permit, regardless of whether they are obeying police instructions!

    And Boris Nemtsov, former first deputy prime minister, arrested a THIRD time just for distributing copies of his book.

    Comment by La Russophobe — August 31, 2010 @ 7:10 pm

  12. […] have been two articles recently that have inspired an idea.  SWP had an entry that called Putin a “capo di tutti capi”.  Essentially, his whole job is to keep peace […]

    Pingback by Clan Wars « Putinania — September 14, 2010 @ 1:46 pm

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