title image Prospect
October 1998
There is nothing unusual about Russia's flawed transition, it repeats the experience of many other weak states plundered by their own corrupt elites. Utopian capitalist ideologues, inside and outside Russia, have made things worse by justifying corruption in the name of the greater free market good

chinese communist diplomat once told me: "I always read the Financial Times, because capitalists cannot afford to lie." If the ambassador later had the mischance to invest in Russian bonds, he may be feeling a bit less complimentary now. It is not that western reporters or commentators have lied about Russia's liberal capitalist revolution. It is not even that they have believed Russian lies, although many have. The most striking and depressing aspect of much optimistic western analysis over the past seven years is that many commentators have seen and reported the evil of what was happening and yet have been prepared to justify it in terms of the onward march of free market ideology.

In some cases, their narrow dogmatism and moral ruthlessness has echoed the spirit of the communism they hate. Above all, the American press in general, and The Economist and Wall Street Journal in particular (with occasional lapses by the Financial Times), have suffered from an underlying teleology which has coloured everything they have written: either the development of a successful western-style free market economy or "reversion to communism." This simplistic view has led them to ignore the reality not only of the greater part of the world today, but of the pattern of liberal capitalism's frequent failures over the past 200 years, a history into which contemporary Russia fits all too well.

Thus, a foolish book by John Parker ( The Economist's former correspondent in Russia) and Richard Layard (former economic adviser to the Russian government) entitled The Coming Russian Boom, asks whether "Russian history" means that contemporary Russian reform and democracy are doomed. They reply: "The short answer is that `history is bunk,' that the historical record provides no real guide to present behaviour and that historically-formed cultural characteristics do not necessarily stand in the way of a country's ability to change."

The boot is on the other foot. It is for the free market optimists to explain what special Russian characteristics prevent Russia from becoming some version of Mexico (if lucky) or Nigeria (if not). In the words of US economist Jim Millar: "The default mode in today's world is not a market economy. It is stagnation, corruption and great inequalities of income."

The flaws of doctrinaire free market reporting and analysis of Russia have closely resembled the old flaws of Marxist-Leninist analysis: a monolinear view of the development of human societies; an attitude to history which combines indifference, simplification and demonisation; a tendency to speak in slogans and clichés ("Russia's Bold Young Reformers"); a concentration on decisions, programmes and laws at the expense of the realities of political power; a romanticisation of ideologically sympathetic leaders (one leading western adviser to the Russian government said to me, in tones of deep emotion, "I simply cannot believe that Anatoly Chubais could take a bribe"); a willingness to take the success of particular economic showcases (such as Moscow with its international hotels and western businesses) as representative of the economy as a whole; a contempt for ordinary people lacking in the characteristics required by the new order; and an indifference to human behaviour outside the confines of the ideological paradigm.

I would add: an indifference to morality; but here there is a key difference between communism and doctrinaire capitalism. Communism was indeed a "new religion" in that many of its early adherents believed that they were introducing a new and universal morality. This helps to explain their extraordinary capacity for ruthlessness and pure-minded evil. Doctrinaire liberal capitalism, by contrast, believes that a "self-regulating" market can do without morality altogether. In the process it loses sight both of the importance of public legitimacy for any state or government which is forced to call for sacrifice or restraint; and of the need for some individual morality on the part of state servants, in order to carry out their duties honestly. Thus the free marketeers' darling, Chubais, is reported to have said in 1995 of the new Russian magnates (or "oligarchs," although the term exaggerates their unity): "They steal and steal. They are stealing absolutely everything and it is impossible to stop them. But let them steal and take their property. They will then become owners and decent administrators of this property."

This belief has also informed much of western analysis. But even if the hopeful expectation of their future "decency" were justified--which it is not--it misses the effect of such an example on ordinary people. With men such as Chernomyrdin and Kiriyenko as prime ministers, with Potanin and Berezovsky holding enormous power, to go to an ordinary Russian official and tell him that it is wrong to steal from the state would be morally grotesque. A situation has been created akin to that of Pakistan and other countries where official corruption is so pervasive that for an official not to steal and take bribes is pointless and irrational--like chastity at the Court of Naples. Corruption and theft are the economically rational model, and now will be for all forseeable time.

This is particularly true of the tax collection apparatus, the collapse of which underlies the present financial and economic crisis. The dangers, pressures and temptations for tax collectors are enormous: 26 were killed and 74 wounded in 1996 alone. Moreover, while some of these were honourable servants of the state, many were killed because they had become embroiled in private feuds. As a Chechen mafia leader in Moscow told me: "Much of the tax apparatus here works for us. We tell them who to tax. That means we can protect our business friends, and it also means that we can hit our enemies, quite legally. We also make sure that our friends in the tax inspectorate are safe from any kind of bureaucratic discipline..."

The "oligarchs"--most of whom are linked to the criminal groups--behave in the same way. In these circumstances, an honest Russian tax collector would require qualities more commonly associated with heroic soldiers in a bloody war: great courage, moral and physical; a real, not rhetorical, patriotism; a remarkable capacity to renounce easy wealth; a deep sense of conscience and pride of service.

The moral and historical cretinism of the blind free market approach reaches its climax in the oft-quoted comparison between Russia's oligarchs of today and the "robber barons" of the late 19th century US, the implication being that the state of Russia today is simply a phase on the path to a "civilised market," a prosperous population and a stable democracy. Like all successful ideological formulas, this has passed into wider use. I have heard it quoted by western businessmen, diplomats and even soldiers, who would otherwise not have heard of the old "robber barons." It is therefore worth demolishing in some detail.

First, why US robber barons of the 1880s and not Brazilian robber barons of the 1880s? Or Burmese robber barons of today? Second, the US "robber barons," for all their faults, opened up the wilderness, dug the mines and oil wells, laid the railroads and telegraph lines. They made huge fortunes and spent lavishly, but many of them also reinvested in their industries. What valid economic comparison can be made between their role and that of the Russian magnates, who have simply seized on existing Soviet plants and have re-invested almost nothing in it (a partial exception is Vladimir Potanin). Their huge profits have come from extracting and exporting raw materials, and have gone straight into foreign property and foreign bank accounts. They are an old-style Latin American comprador elite in the worst sense of the term.

People such as Rockefeller and JP Morgan were ruthless men and certainly used gunmen, but they would not have tried to have Andrew Carnegie or any other business rival assassinated. They respected certain rules and restraints. In any case, the robber barons never fully dominated US politics, let alone culture or morality; the country had old and strong representative and legal institutions and religious and moral traditions which combined to cut robber barons down to size. Americans also possessed the memory of figures who could serve as genuine examples of patriotism. To make the American "robber baron" analogy stick for today's Russia, you would have to imagine that George Washington was a sottish oaf who repeatedly disgraced his country in public, evaded moral responsibility for his administration's actions--including an unnecessary and disastrous war--and helped his friends to import liquor free of tariffs, thereby contributing to the decline of public health; that Abraham Lincoln made a personal fortune from his leadership of a monopoly controlling the export of a key raw material; and that Andrew Jackson prepared for the battle of New Orleans by selling his troops' boots and ammunition. With all their faults, the American leaders commanded respect; they have remained an inspiration to their people. There have indeed been other countries whose founding fathers did do such things, but none of them have become successful free market democracies. If the US really had been like this, it, too, would today be in the condition of Mexico or Colombia.

doctrinaire free market ideology, open theft and the collapse of state power came together in the Russian privatisation process. Here, journals such as The Economist mostly saw and reported what was going on, but found excuses for it and justified the process as a whole with arguments which resembled official propaganda. The emphasis was on the quantity of businesses privatised, rather than the legality of the process or the effect on productivity and efficiency. The empty grant of "shares" to the population represented only a fraction of the enterprises' worth; it led to no shareholder control, no real sense of property and certainly no dividends. None the less, it was referred to in terms intended to suggest a (entirely absent) parallel to the privatisation process in Thatcherite Britain. Thus The Economist in 1995 wrote of "murky and gerrymandered deals" but also: "A programme of mass privatisation has made Russians legal owners of property for the first time in generations and has reduced the state-owned sector to a size which accounts for a smaller percentage of GDP than does Italy's state-owned sector." And, a little later, "Mr Chubais's record is quantifiable. Made head of the state privatisation committee in November 1991, he was responsible for organising the biggest transfer of property to private hands in history. In organising this vast sell-off against entrenched opposition, Mr Chubais proved himself almost unique in the Russian government in harnessing the ramshackle ex-Soviet administration to a new end."

The seizure of state assets by the new financial elite was justified by the argument that the most important thing was to weaken the power of the state over the economy--despite the fact that the state was crumbling away. Western free marketeers, like communist ideologists, have been unable to admit that politics took precedence over the ideological plan. Thus from an early date they recognised the destructive nature of the "loans-for-shares" deal in 1995 which passed control of the main extraction industries to the financial and media magnates for a tiny fraction of their worth, thereby consolidating the "oligarchy" and depriving the state of tens of billions of dollars in revenue. However, to this day they resist admitting that this deal was brokered by Chubais himself and had a political motive: to buy their support for Yeltsin (rather than some other anti-communist candidate) in the presidential elections the following year.

Another example of free market propaganda is an article by George Melloan in the Wall Street Journal in November 1996. It was pegged to the visit of Vladimir Potanin to the US after he became deputy prime minister. Describing Potanin as "Russia's Bill Gates," Melloan speaks of Potanin's "former" bank, Unexim, as having taken over Norilsk Nickel under the loans-for-shares deal--as if on taking over as deputy prime minister with responsibility for the economy, Potanin had dutifully surrendered all interest in his bank. Finally the article mentions the corrupt aspects of the loans-for-shares deal and Potanin's immense profits in one dismissive sentence ("What regional politicians and `red directors' claim is a bank rip-off"). The political aspect of loans for shares is ignored; it is presented as a process of economic reform intended to produce "viable companies" led by the "free market champion," Chubais.

The free market doctrinaires have, in the spirit of true revolutionaries, believed that what they were witnessing was something "unprecedented in human history." In fact, Russian privatisation fits neatly into a process which goes back more than 450 years: the enclosure and seizure of the lands of the Catholic church and the common lands of the peasantry. While some examples have been at least economically successful, in most countries they have been bad, both for ordinary people and for economic efficiency.

the "land reforms" which in Italy, Spain, Mexico and elsewhere redistributed the lands of the church, of the village communes, and of some of the great feudal landowners, have a familiar ring to anyone who knows Russian privatisation. According to liberal ideology, these were supposed to lead to the creation of a class of small but efficient capitalist peasant farmers, to break the power of the church and other anti-liberal forces, and to help the peasants escape from the twin traps--as seen by the urban liberals--of traditional peasant culture and agriculture. This is what was supposed to happen--and in a few places it did happen. In England, the dissolution of the monasteries and the enclosure of common land (much older processes than the 19th century liberal land reforms) contributed to the eventual development of efficient modern agriculture, although they were socially deeply unjust, destructive of ancient traditions, destructive of the environment and hated by the poorer peasantry.

What happened elsewhere can be summed up in a few examples. In Mexico, an initial limit of 2,500 hectares was supposed to prevent the accumulation of huge new haciendas (great estates), but this was ignored from the start. As a result, the 1880s and 1890s witnessed a land grab of unprecedented proportions. By 1910 more than half of rural Mexicans lived on haciendas. Local magnates, political bosses or military men used the law to seize the land of the peasants, declaring that they were baldio, or lacking private title. Where the Indios and peasants resisted, they were shot down and driven off by the army, the police or privately hired pistoleros. A million acres of Yaqi Indian land went to the Torres family alone.

In most cases the improvement in economic efficiency was limited and did not begin to offset the misery caused to large sections of the peasantry and especially the indigenous Indian population. Moreover, because of the weakness and corruption of the Mexican state, the state treasury received only a tiny proportion of what the privatised land was worth. In Benito Juárez's sale of "vacant lands" in the 1860s, for example, the state received about $100,000 for 4.5m acres, or about two and a half cents per acre. Under Porfirio Diaz, a fifth of the country was given away for three and a half cents an acre, compared to a market price which averaged two dollars.

The social, political and economic consequences remain, in Chiapas and other regions. As in Russia today, reformers and their foreign backers turned their eyes from the reality of what was happening, and justified privatisation as an absolute good in itself. This was coupled with an obsession with the stability of the currency and the government's credit rating--Mexico under Diaz was, in fact, judged a very good bet by international financiers, as was Russia in 1997 and even up to the first half of this year, when highly intelligent journalists wrote as if the enthusiasm of western investors for Russian bonds said something serious about the state of the Russian economy.

In southern Italy, where the regimes of Joseph Bonaparte and Joachim Murat introduced legislation to end feudalism and break up the great latifundias, the result was the same. Most of the peasantry was excluded from participation by legal chicanery and high registration fees; it was also stripped of the common village land which it had held under the great estates. The result was that the bulk of the land was acquired by a small number of magnates, whether the old feudatories themselves or new bourgeois proprietors--often civil servants of the Bonapartist government, such as the two greatest owners in Calabria, who between them gained control of almost half the province. Once again, this did nothing to improve agricultural efficiency, let alone the well-being of the population.

There is nothing new about the way in which Russian public property was grabbed in the course of "privatisation." It is what has always happened--and what is bound to happen, when a ruthless liberal capitalist ideology which is prepared to justify almost anything in the name of "progress" combines with a corrupt bureaucracy, a weak legal order and new elites with no restraints on their greed. To this can be added contempt for ordinary people's behaviour and culture, as in the attitude of 19th century Italian liberals (and 20th century communists) towards the peasantry.

Western free-marketeer journalists--some of whom, as with some diplomats, have become businessmen or bankers in Moscow--are usually at pains to hide, even from themselves, the full depth of their indifference to the well-being of ordinary people. Sometimes, however, the mask slips, as in this remark from The Economist: "The second big difference [from most developing countries] is that whereas in other emerging markets poor people are generally left to fend for themselves, Russia inherited from communism a universal system of welfare. This system is an asset as long as it helps to ensure that the poor continue to support reform..." Pensions and healthcare are no longer meant to help old people live out their last years in dignity, or to protect poor people from ill health. No, they must be adequate enough to persuade them not to revolt against the Plan, the goal of which is now lost from sight altogether. The bolshevisation of capitalist revolutionary discourse could hardly go much further.

to say this is by no means to argue either that the old Soviet Communist system--any more than the traditional economy of the Yaqi Indians--was viable or morally admirable, or that the goals of free market reform and democracy are bad. On the contrary: everyone can see that those countries with stable, effective free markets, working democracies and more or less independent judiciaries are better off than the rest. It is not even to argue that different Russian government policies would have made a big difference to Russia's progress and prosperity. On the contrary: the most important aspect of Russian history in the 1990s has been that the collapse of the Russian state. Its colonisation and hollowing out by parasitical private interests, has left Russian governments incapable of putting most of their decisions--reformist or otherwise--into effect. In the circumstances, a large part of the seizure of state property by the old or new elites could not have been avoided--witness the way Gazprom was privatised from within.

The point is that, given the country's communist legacy, there may in fact be no "solutions" to Russia's problems; none, at least, that in any foreseeable future will allow Russia to achieve the kind of society, democracy and standard of life which approximates to that of western Europe and North America in the 1990s. The key error of the doctrinaire reformers has been to believe, in the much-mocked words of a French revolutionary of 1848, that "the existing order is bad. Something better must take its place."

History sees no such necessity, whether the "something better" is communism or capitalism. Russia in the 1990s has repeated the experience of many other weak states under the lash of the free market: they have not reformed but crumbled; and the collapse of the traditional order has led neither to democracy nor economic progress, but to the rule of corrupt elites whose effect has been precisely to stifle both real democracy and economic efficiency.

In their analysis of Russia, the doctrinaire free marketeers even misinterpret their own prophet, Adam Smith, in ignoring his insistence that while the state should be no more than a nightwatchman, it must also be no less than that if the market is to have a chance. As Robert Skidelsky puts it: "State repair is the main condition of market-based prosperity, on which depends our ability to tame the `post-communist' problems of nations, races and borders. Russia has been less a laboratory for shock therapy than a testing ground for the theories of Hobbes." Smith himself, coming from an 18th century background imbued with principles of religion and duty, was probably incapable of imagining an atmosphere of such cynicism and ruthlessness as now prevails in Russia.

Unfortunately, it now seems that the decline of the state has gone so far that little repair may be possible, certainly not from a regime so closely tied to the magnates. Western demands for further "reform" miss the point. Anything now done in Russia will be not so much reform or anti-reform as desperate crisis management in extremely adverse circumstances.

the gap between reality and some western reporting has been so wide that on occasions it has suggested not so much arrogance as anxiety. The reason for this is clear enough. At heart many of the free-market dogmatists seriously believe that the universal application of a set of relatively simple economic and political formulas will in effect suspend time; that humanity will achieve a permanent "virtuous circle," a gently revolving nirvana of stability and prosperity, with only the occasional mild financial crisis to save us from terminal boredom. Russia challenges this faith. Failure of the liberal capitalist revolution in Russia would not only deprive the free marketeers of the greatest trophy on their wall--the head of their former greatest enemy--it would raise questions about the future of liberal capitalism in general. If it turns out that this system is unlikely to work well across most of the globe, and that in many countries it creates a new problem for every old one it solves, then this has grave implications not only for belief in liberal capitalism as a universal model, but also for the future of the developed capitalist democracies as well. How long can we insulate our economies and societies from a world in which most economies and societies resemble that of Russia much more closely than they do those of the west? And even if we do recognise, in time, the threat from the failure of capitalism and democracy along our borders, might not the effort to deal with the resulting dangers bring our own era of unprecedented personal comfort and freedom to an end?

Anatol Lieven is the author of " Chechnya: Tombstone of Russian Power." It was published by Yale University Press in June and will appear in paperback next year

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