Capitalism's ‘Jurassic Park’

By Aleksandr Buzgalin, 29 July 1998

Aleksandr Buzgalin is a Doctor of Economics and a professor at Moscow State University. In the perestroika period, he was a leading member of the reform wing of the CPSU. He is now one of the leaders of the Democratic Socialist Movement in Russia.

Today, it has become almost a cliche to say that the Russian economy, and Russian society in general, are the place where the largest financial-industrial groups collide. Their fusion with the state apparatus, and the corruption of the latter have become just as much of a cliche. Likewise, the oligarchic character of the country's government (the so-called “semiboyarshchina”) can hardly be in doubt.

But there has been little analysis of the nature and role of these formations (from now on, I will use the term “clan-corporate groups”) in society.

CAPITALISM'S “JURASSIC PARK”

In order to understand the nature of the power of these groups, one must examine the socio-economic system in Russia today, understand who its master is, (above all, in the economic sphere), who benefits from the model of transition as it exists in practice, and how the mechanism of their “competition” has been set up.

It is possible to understand this system, if one goes a step beyond the traditional analysis of economists (plan or market? private or public property?) and political scientists (right or left? pro-presidential, regional and other elites). One needs, at a bare minimum, to analyze what I have called “capitalism's Jurassic Park.” I am referring to the state-corporate model of capitalism which has taken shape in Russia, full of the “relics” of Soviet society, with its authoritarian political system, paternalist bureaucracy; its passive population, accustomed to social dependence; a narrow stratum of entrepreneurs, concentrated in the “shadow economy”; its “deficit economy” with limited resources, dominated, not by the mythical central planning of 20,000,000 different forms of production “down to the last nail,” but by “planning deals,”—the semi-legal horse-trading between bureaucrats and enterprise directors over prices, resources, etc., etc., etc…

The key social link of this economic system is the clan-corporate group. The author calls these structures capitalism's “dinosaurs.” Today, two types of dinosaurs dominate the landscape. Some—the “herbivores”—are gigantic, unwieldy structures: the former state enterprises. Others—the “predators”—are much smaller, but much more active: the mean and hungry private corporations, who actively “gnaw away” at the former state structures.

A TYPICAL CLAN

To understand these “dinosaurs,” let's look at the structure of a typical clan-corporate group. At the bottom, there are several enterprises (which, in most cases, have gone through nomenklatura privatization), and together with them, one or two banks and several private marketing (or simply “parasitic”) firms, and over them, a “superstructure,” in the form of an organization which lobbies for them in government structures. Real ownership rights in this system belong to a narrow circle of persons, concentrated in the administration of former state enterprises, the leadership of banks and lobbying structures and the real owners of the private “daughter firms.”

Again, I stress: we are talking about real ownership rights, about economic power, and not simply of percentages of shares (although this is also important).

What are the sources of power for the real owners of such structures? The most important one is the ownership of shares. To exert real control over a clan, it is enough to own 10 to 15 percent of its shares, as long as: 1) the rest of the shares are scattered among many small shareholders, who are unable to coordinate their actions; 2) the owners of the 10 to 15 percent, on the contrary, are united in their business activity (i.e., they make up a “clan); and 3) these owners hold in their hands the other threads of economic power and control.

Who, today, has such a consolidated packet of shares in most former state enterprises in Russia? According to the estimates of experts, the typical picture is as follows. The state owns 10 to 15 percent of the shares. About 40 percent of the shares are in the hands of the workers, and thus, are not consolidated. Moreover, most workers in Russian enterprises continue to be passive, are not united in associations (the labor unions are either fictional or refrain from addressing the issue of property), and are incapable of acting together even as property owners, much less as entrepreneurs. In the overwhelming majority of cases, they place too much trust in the ownership rights of the administration of the enterprises in which they work.

The enterprise's administration, on the other hand, is a consolidated structure, tied together by decades of working and living together as members of the same “caste”: the low-level nomenklatura. By 1995, these people had up to 15 percent of the shares in their enterprise and were actively continuing to buy up more shares.

Moreover, a significant number of shares (up to 30 percent) belongs to “external investors” (Russian and foreign private firms), who, as a rule, have close personal ties to the enterprise's administration. A significant number of these shares could be controlled (through intermediaries) by the bank (or banks) which have become part of the informal clan. In total, the elite controls from 30 to 50 percent of the shares, i.e., substantially more than the minimum necessary for control over an enterprise if the aforementioned three conditions are present.

Administrative power is the elite's second important channel of control over the clan. In Russia, with its age-old tradition of submission to the authorities, the administrative power of top management plays one of the key roles in forming stable clan structures. This power is combined with the administration's control over housing, social infrastructure and other areas, such as kindergartens and clinics.

THE CHAIN OF DEPENDENCE

Under these conditions, a chain of financial dependence has been developed. At the very bottom of this chain is the worker, who can either be paid or not paid (this depends on the administration). Salaries are delayed from one to five months, and quitting doesn’t solve the problem: over the reform years, unemployment has grown sevenfold.

Then there is the administration's dependence on the banks. The bank may or may not give the enterprise credits, and if it does, then on what conditions? The administration can also use its services (usually, through dummy firms) to divert, for two to three months, and sometimes, for up to half a year, money intended for the payment of salaries and contractors, often doubling the original amount through short-term currency, commercial, and other transactions, most of them speculative. Some of this additional money goes to the enterprise, but a large share of it goes, through the bank, to the bosses of the clan.

Above that, there is the dependence on government—all the way from the low-level bureaucrat in a regional administration to the president and parliament. At all these levels, government resources are distributed and redistributed. Add here the active influence of the State Property Commission on the privatization process, that of the agencies concerned with foreign trade on the conditions for export-import deals, that of the presidential administration on tax loopholes, and that of the parliament on the budget… and we get a complicated system of mutual financial ties between enterprises, banks, and various federal, republican and regional government bodies.

And we must not forget another channel of economic power—personal connections. This crowns the whole pyramid of dependence, welding together (like wolves joining together into a herd) the elite of enterprises, banks, commercial structures and government agencies. These personal ties are all the stronger, since the overwhelming majority of clan elites originally came from the same groups of the former nomenklatura.

UNDERWORLD CONNECTIONS

And finally—what gives these clans such solidity is their close ties to underworld structures. One must keep in mind that the criminal economy of the past (and until the end of the 1980s, almost every private business in the USSR was illegal, and hence, closely tied with criminal elements) was one of the main sources for the birth of private business. Today, private firms are always attached to state or former state enterprises, so that the corporation's money may be conveniently be diverted into the pockets of their real owners. In view of this, one must realize that most corporate structures have at least some ties to the criminal economy. Moreover, lobbying, in and of itself, in a country with shaky legislation, constantly changing governments, and a high degree of corruption at the top, has the character of a semi-legal, or directly illegal, activity.

As a result, all structures are mutually drawn into activity which is more or less dubious, from a legal point of view. This doesn’t have to be racketeering, contract murders, blackmail, extortion, or bribe-taking (although there is more than enough of that in Russia). It could “just” be delaying the payment of salaries and “diverting” them through commercial organizations, giving credits on favorable terms in exchange for the company's support in an election campaign, or other steps which link the clan elites by making them share the responsibility for some illegal action.

THE CLANS AND POLITICS

These clan-corporate structures form the basis, not just for economic power, but for political power as well. Here, the link isn’t so simple. Most clans support several blocs and parties simultaneously, and most parties have the support of more than one clan. Thus, a complex intersection of interests arises, which is relatively remote (but not absolutely cut off) from the parties' ideologies or programs.

FOUR TYPES OF CLANS

These clan-corporate structures may be divided into four types. (Here, the author will be using information from the master's thesis of P. Demeshchik of the economics department of Moscow State University, “Problems in the

Redistribution of Rights of Ownership in Contemporary Russia's Transition Economy.”)

First, there are the clans which are based on a single sector of the economy. Contrary to popular opinion, there are several such clans, which compete fiercely against each other. As an example, let us look at a gigantic structure such as Gazprom (which has a monopoly over 95 percent of natural gas extraction, 100 percent of natural gas transportation, etc.). Although 40 percent of the shares in this enterprise belong to the state, in reality, this gigantic corporation has, as it were, “privatized itself,” since most of the shares (distributed among the administration and the workers of its enterprises, regional elites, etc.) are under the control of its bosses.

Several banks fall within this corporation's orbit, including Gazprombank, Natsionalny rezervny bank, Imperial, and others.

Gazprom plays a very significant role in political life, having become, for example, in the last parliamentary elections, one of the biggest (according to some figures—the biggest) sponsors of the “Russia is Our Home” movement, which supported, and continues to support, President Yeltsin. The regional governments of a number of northern territories are virtually completely dependent on Gazprom.

There are other “sector-based” clan organizations—both in the raw materials sectors and in the defense industry, the agro-industrial complex and many other sectors of the economy.

The second type of clan is the regional clan. These clans are built, as a rule, around a powerful regional leader (the governor of a region or the mayor of a large city). One example of such a formation is the group of firms surrounding the Moscow city government. Among the main regional Moscow banking structures closely linked in strategic partnership and mutual dependence are the Bank of Moscow, Mosbiznesbank, GUTA-Bank, and others.

The third type of clan structure is a departmental-functional organization. For example, Russian federal and local governments, over the course of the last five years, have fulfilled, and continue to fulfill, the function of redistributing state property on a massive scale. This function was, and is, carried out by a single agency—Russia's State Property Committee and is personified by one of Russia's leading politicians—Anatoly Chubais, the adept of “shock therapy.”

The fourth type of clan structure—arises on the basis of private commercial enterprises, by means of the accelerated primary accumulation of capital. In just seven or eight years, financial-commercial (in Russia, private business is only rarely involved in production) structures have been formed with very modest amounts of capital, in comparison to the largest corporations in Japan or the U.S., although still gigantic by Russian standards—on the order of US$100-300 million.

Most of these structures have made it down a long road, beginning with legalized “shadow capital,” money from the defunct political and party structures (the CPSU, the Komsomol, and many others), and only rarely — from private persons (in this case, we are not looking at banks and firms which arose on the basis of former state enterprises or institutions). After that, there was a period of massive speculation in currency, real estate, vouchers, imported gods, accompanied with the large-scale use of non-economic methods (racketeering, corruption, etc.), mergers, and, finally, the formation of more or less “clean” structures, which have changed their image three to five times and, at least formally, have no ties with organized crime or corrupt officialdom.

So how do these groups interact?

It would be a gross oversimplification to see Russian socio-economic life as strict market competition (within a carefully-defined framework and rules) between these supercorporations. The Russian economy is transitional, in the full sense of the word, and this means the following.

First, the clan-corporate structures themselves are still evolving. Their borders are amorphous and mobile. Firms, banks, bureaucrats, and even entire agencies (and sometimes, even the top people in the government) change their orientation, sympathies and antipathies, move from one clan to another, or try to join a number of clan structures. Moreover, most clans are unformed organizationally and un-institutionalized. Gazprom is the exception here; as a rule, it is almost impossible to come up with a definitive definition or a formal description of a clan's structure.

Second, the clan-corporate structures, in most cases, are characterized by mutual diffusion and flow into one another; this is their distinctive feature, which is specific to transitional societies.

Third, clan-corporate structures compete in various ways, non-economic as well as economic. The most important form of struggle between them is informal, non-economic interaction. Forms of the latter may include personal connections, deals, agreements to divide markets and spheres of influence, “rules” of competition, etc., as well as racketeering, bribery, blackmail and the like.

Market competition has only just emerged. It is not simply imperfect (in the sense of the word used in economics textbooks); it is deformed, mutant from birth. It is not so much an interplay of elemental forces, where the one who has lower costs, higher quality, etc., prevails, but a battle between forces which are trying to regulate the market. Each clan tries to regulate the market in its own favor. These clans clash, and the strongest clan—not the most competitive product—prevails. It's like a sack race—where it isn’t the fastest runner who wins, but the person who can run best inside a sack.

Finally, the modified mechanism of “plan deals” (where the object is no longer directives on planned output, but tax and credit privileges) also plays a substantial role.

Fourth, in a transitional economy, the redistribution of the rights and objects of ownership, and together with that, of economic power, takes place very quickly and on a large scale. Hundreds of billions of dollars have been redistributed in the privatization process, and this redistribution makes up the most important form of interaction of clan-corporate structures in Russia.

As a result of this interaction, an economy like the Russian economy is formed, where price liberalization has led to inflation and a decline in production, where this decline in production and institutional chaos creates the most favorable environment for the accelerated concentration of money and property, and therefore, economic power, into the hands of a limited circle of clan-corporations, while most workers have lost one-third of their incomes, and virtually all of their savings, social protection, law and order, and stability.

This paper's rather pessimistic conclusions should not be seen as evidence that our economy has reached an absolute dead-end.

First of all, in a few years, as the redistribution of property and power is completed, the largest clan-corporate structures will still have to modernize production, and will find the money (quite limited by Russian standards, barely US$10 billion) for it. But this money will go, not to modernize the economy as a whole, but only to certain spheres, for the most part (if one proceeds from the “clans'” present structure), in the raw-materials sectors. As for such areas as science, education, high technology, etc., hopes that the “clans” will pay for their modernization will remain unrealized.

Second, one can hope that the power of the clan-corporate groups in Russia will be overcome through a qualitative change in property relations and the political system—a transition to a real democracy as a new form of economic and political power—which could serve as the prerequisite for implementing a strategy for recovery. But this is already another subject.