Honesty is the Best Policy in Russia
CAMBRIDGE: If opinion polls are right, Russia's people are poised to deliver Russia's government a stinging rebuke in December's Duma elections. Russians are reacting not merely to the strains of economic crisis and social change, but to staggering government corruption. Because the real progress of economic reform was compromised by mass corruption, it is no surprise that public support for it is tenuous.
Price liberalization, stabilization, and privatization were pursued since 1992 with varying degrees of commitment. These policies, even if implemented incoherently, reshaped the economy. Value-subtracting heavy industries shrunk, services expanded to over 50% of GDP, and the private sector produces almost 60% of Russian output.
Although transition was bound to be painful, Russia's epidemic of corruption caused more political damage than the economic side effects of reform. Government tolerance of bribery and racketeering enabled opponents to say the "mafia" was grabbing the gains of economic change. The government, and thus economic reform, will pay for this neglect at the polls. Corruption blights reform throughout the ex-communist world. When civil society -- the press, private business, religious and community groups -- is weak, corruption can go unchecked. Russian corruption goes beyond levels experienced elsewhere, and for three reasons:
The Communist Party, where many leaders began their careers, was a breeding ground for corruption in the form of privileges (dachas, private hospitals, restaurants, vacation homes, scarce consumer goods) reserved for communist leaders. Mafia-style kickbacks that permeated the command economy also contributed. As communism disintegrated, senior apparatchiks ingeniously converted their waning power into financial stakes in the emerging market economy.
Unlike most of Central and Eastern Europe, Russia boasts vast deposits of oil, gas, diamonds, and precious metals that are marketable abroad and easy to steal. At the start of reforms, natural resources were nominally owned by the state, and therefore by no one in particular. So-called "spontaneous privatizations" allowed insiders and well placed officials to plunder them. Legal privatizations, mainly through the voucher program, were skillful and amazingly free of corruption. Natural resources should not have been privatized until these valuable sectors could be handled honestly, fairly, and transparently.
Western governments and international institutions were complacent in the face of Russian corruption. The greatest chance for influence was missed in 1992, when the West failed to provide financial backing for the young and inexperienced but largely honest reformers led by Yegor Gaidar. Delivered at this decisive moment, aid could have strengthened honest reformers. But it arrived too late.
Partly a result of the lack of outside support, but also to harsh economic conditions, the Faustian bargain between Yeltsin and Russia's old guard was made. Gaidar and most young reformers were ousted; older apparatchiks reclaimed the "commanding heights" -- first the Central Bank and then the government itself. Western leaders put on a brave face, believing that moderate crooks were better than motley extremists.
No precise accounting of this vast corruption is possible. The biggest grab was in the oil and gas industries, amounting to tens of billions of dollars. Much of the vast earnings that the Soviet state collected from energy sales, particularly exports, now flows into a few private pockets. (To this day, nobody really knows who owns Gazprom, the partly privatized gas giant, worth perhaps over $100 billion. Rumors abound that the family of Prime Minister Chernomyrdin, its former chairman, has a large stake, a claim the prime minister vigorously denies.) Budget shortfalls caused by this theft helped stoke the explosive inflation Russia experienced in subsequent years.
Foreign trade was a fertile area of corruption, too. Until 1995 oil exports required a license. These licenses, sometimes worth half the world market value of the oil being exported, were distributed free to powerful insiders at a cost to the Russian budget of several billion dollars per year. Special import privileges, say, for the right to import foodstuffs into Moscow without paying duties, were reportedly given to members of Yeltsin's entourage. Russia's treasury lost billions of dollars in this way.
Another channel of corruption involved cheap loans from Russia's central bank to new private banks. Loans were made in rubles which banks converted into dollars on the black market and stashed abroad in massive capital flight. Loans were repaid in heavily depreciated rubles at a fraction of their value. Some offshore money made this way is returning to Russia as banks try to buy up privatized enterprises.
This year, many Russian officials turned from dividing the riches to defending their new property. Having stolen all worth stealing, cynics suggest, the robber barons may give way to a more stable and honest society in the coming generation. As Russia's economy recovers, which it shows signs of doing, this may happen. Many societies survive periods of systemic corruption without a social explosion; to do so they need a growing economy to mute public grievances.
The risk in Russia is that calm economic growth will not come before a demagogic alliance of red and brown extremists stalls the advance of Russia's infant market democracy. If history is a guide, new extremists will be more violent, and no less corrupt, than today's politicians. Corrupt, demoralized, unstable: such a Russia poses a risk to itself and to the world.
In light of this danger, the overwhelming interest of Russian democrats and Western policy makers is to support Russia's honest, democratic reformers. Given public disgust at the way Russia's rulers besmirched reform, this may seem futile. Such pessimism is unwarranted. The constituency created by reform is not limited to dissidents and democrats. Numerous honest owners of privatized firms and new private businesses are included.
This constituency could grow dramatically if democrats and economic reformers focused renewed energy on the need for honesty and fairness in government; on an enhanced social safety net financed by higher taxation of natural resource enterprises; and on further market reforms aimed at separating the economy from the grasping hands of politicians and bureaucrats. Such actions remain the best hope for consolidating Russia's democratic and market reforms.