Publication: Prism Volume: 1 Issue: 15

Russian-style privatization has achieved “state capitalism”

by Mikhail Gershaft

Privatization undoubtedly is the most positive achievement ofthe first years of the reformation of the Russian economy. Despiteall the internal inconsistencies of this process, privatizationRussian-style provides a platform from which one can look intoits own future, into the future of the Russian economy, and henceinto the future of Russia itself.

Typically, analysts in the West give the reformers credit forprivatization [and]but even use the level of privatization asan indicator of the success of all reforms in one region or another. Such conclusions are at best premature and more often simplywrong. In fact, what has taken place in Russia so far is actuallyfalse privatization, a phenomenon which as yet gives little basisfor concluding that the normal laws of the market economy areoperating in Russia.

Especially dangerous in such analyses is the confusion over whatprivatization is designed to achieve. Most often people speakabout the "rise in the level of consumption" or an "increasein productivity," even though neither of these has been theresult of the process we see so far. In fact, such suggestionsborrow all too much from the slogans of the socialist past. Andto the extent that privatization Russian-style fails to producewhat is promised, more and more Russians blame it rather thanthe specific defects of its Russian variant.

Obviously, the chief link of the current transition period isthe creation of a market in the country with all its institutions,mechanisms, rules of the game, and mentality. The Russian economyof today must be transformed into one where the normal rules applyand where the government can and does intervene as governmentscan and do in other normal economies. In politics, this meansthat things must become predictable and based on civilized compromisesrather than on the willful behaviors of one group or another.

The current situation in Russia provides a useful illustrationof what I have in mind. Two years ago, it was absolutely impossibleto regulate inflation with the levers most Western countries normallyuse- interventions by the central bank, bonds, the money supply,and other similar devices: At that time, such devices had virtuallyno impact at all. Now, these same devices have quite a largeimpact highlighting both how far the Russian economy has comeand how far it has to go.

Russian privatization, even though its first stage has been completed,has not laid the foundations for the resolution of this global,complex but absolutely necessary task. It has been not only traditionallyformal but also by its methods, content and form incapable offulfilling the functions expected of it. One can speak of thiswith sincere regret because the extent and speed of privatizationin Russia have been unprecedented- but not, I fear, its results.

A market economy of a Western type is based on private and variousforms of non-governmental property. Consequently, if Russia isto have a Western-style market economy, it must have this formof property. Unfortunately, it doesn’t because Russian "privatization"has not been based on that idea.

To a large extent, the current situation in Russia recalls the"reforms" introduced by Peter the Great. Having convincedhimself of the superiority of Western businesses, the Tsar orderedthe translation of Western corporate charters into Russian andordered Russian merchants to live according to their dictates. By doing this and even creating a stock exchange, Peter was certainthat he had guaranteed the success of entrepreneurship in Russia. But in practice the workers remained serfs, and after Peter’sdeath, only a few of the new companies continued to operate.

One recalls the poet’s suggestion about Peter that having openeda "window on Europe," he ought to have opened a dooras well, allowing private property and freeing the economy fromthe stultifying embrace of the state.

However, it is probably true that both then and now, it couldnot have been different in Russia. And this is not because therewere and are not many who are willing to follow Western recipesbut rather because privatization as it has been carried out upsetsthe balance of interests and powers within the state itself. As a result, what has happened is precisely the only thing thatcould have happened.

Instructional here is the fact that Russian privatization hasnot pleased any of the groups involved. Neither the workers,nor the state bureaucracy, nor the directors can consider thateverything is as it should be. That would be a positive factexcept that now the state is moving back in because of it.

This conclusion holds for both voucher privatization and cash-basisprivatization. However, the existing possibility for each ofthe participants actually winning out is shot through with negativeconsequences.

In the first instance, this relates to the negative and "inherited"preservation of the role of the state both in privatized propertyand in the functioning of post-privatized property. Even leavingaside the appetites of the state apparatus for part of the profitsof the new private firms, the continuing role of the state byvirtue of its large share of the economy guarantees the misallocationof resources. State money will flow to those enterprises thatdirectly or indirectly support the state. In short, Russia hasnow achieved Lenin’s "dream" of state capitalism, wherethe owners profit but the state decides which ones will and howmuch.

Another element of Russian-style privatization that differentiatesit from the Western model is the continuing large fraction ofall property held collectively. This factor must without doubtreflect socialist thinking and behavior. To challenge collectiveownership in agriculture and thus undermine the expectations ofmillions of Russian farm workers would be to set off a socialand political explosion- or at the very least , to produce a radicalredistribution of the ownership of land much as has happened inthe rest of the economy. And that only puts off the explosion;it does not avoid it.

Compounding these problems of voucher privatization in both thecities and the countryside- problems that were predictable onthe basis of experience with economic reforms elsewhere- are thestill unstudied problems that are likely to arise when differentregions of Russia adopt radically different strategies and hencehave radically different levels of privatized economic activity. Such variations will inevitably have political consequences,but it is difficult to say just what they will be.

To take but one example: in Tartarstan, privatization by vouchertook two years whereas elsewhere in Russia, it took only 18 months. As a result, the firms in Tatarstan were seldom able to selltheir shares, and the government retained a larger portion ofthem and hence of control. In other regions where privatizationtook place even more slowly, the role of the state was proportionallygreater. And these regional differences are already sparkingserious conflicts among the regions.

A year or two ago, it would have seemed unreal to talk aboutthe possibility of a new businessman taking control of a stateenterprise. But now that is an everyday occurrence. Indeed,it is so common that many have concluded that a market economyalready exists and is self-sustaining.

Unfortunately, that has not yet happened. Instead, this formof privatization has been accompanied by, indeed given birth by,the corruption of the state apparatus, the rise of organized crime,and the intermingling of the state bureaucracy and the criminalworld. To be sure, the birth of capitalism has never been a prettysight, but we must evaluate Russia according to the standardsof the end of the twentieth century.

This analysis of privatization – and any analysis of Russia’sfuture must take this process into account – does not give theWest the basis for concluding that with the fall of communism,the disintegration of the Soviet Union and the end of the ColdWar, its chief antagonist has become more flexible and willingto compromise. The sharpness of the conflict is not going tobe removed by the weakness or defeat of one of the two competingsides. Rather the reverse will be true.

At the present time, many analysts in Russia in the West seethe Russian economy moving toward a Latin American variant: Formany years, Latin American countries saw centralized, rationalizedand state-controlled enterprises as the foundation of state independence. The results of such attitudes are well-known: backwardness andsevere social stresses between the top and bottom of society ,the dominance of the military-industrial complex, and frequentchanges in governments as various groups tried to improve theirown situations. And to justify their authoritarianism, thesegroups identified a variety of foreign and domestic enemies whocould be attacked.

As with any analogy, this one suffers from a one-sided approach. Nevertheless, it does contain a portion of the truth. It isinappropriate in this context to predict the political behaviorsand the consequences of a Latin American variant in Russia. Butthat such a development will have consequences – and negativeones at that – is beyond dispute.

Now certain of the former Soviet republics are attempting toapply the method of neoliberal economies – privatization, financialstabilization, and so on. The countries that have gone the furthestin this direction have achieved the most, and those that havefailed to privatize in a thoroughgoing way have done the worstof all.

Consequently, it is vital for Russia to privatize correctly notonly as to speed but as to content. If it fails to do so, ifit continues along the road of quasi-privatization, it will notonly hurt itself today but inject a kind of genetic defect thatwill make future economic reforms even more difficult if not impossible.

Mikhail Gershaft is a former professor of the University ofKazan.