Streetwise Professor

August 28, 2007

Who is Guarding What From Whom?

Filed under: Energy,Russia — The Professor @ 11:54 am

Recently it was disclosed that Gazprom and Rosneft were given permission to form their own armed security forces. Does this mean that the companies believe that the state is unable to protect them from security threats? Or is it perhaps that they are most worried about threats from within the state? In a country where the state is the biggest threat to property rights, and many disputes are settled with violence or threats of violence, vertical integration into security (and the potential for violence) is individually rational. That is, for a company like Gazprom it makes sense to provide its own “roof.”

Although this is rational for a company in Russia, this decentralization of violence potential is symptomatic of an unhealthy state. In a state where the capacity for violence is subject to the rule of law, and those who control this capacity are constrained from using it for economic or political advantage, large and profitable companies have no need for their own paramilitaries. Such forces are much more valuable when those conditions are not met. The creation of Gazprom and Rosneft militias speaks volumes about the security of property rights and the reliability/trustworthiness of state security forces in Russia.

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