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Russian Social Science Review, vol. 47, no. 2, MarchApril 2006, pp. 2030. 2006 M.E. Sharpe, Inc. All rights reserved. ISSN 10611428/2006 $9.50 + 0.00

STANISLAV MENSHIKOV

Our Capitalism
Between Oligarchic and Bureaucratic
One of the reviews of my book The Anatomy of Russian Capitalism [Anatomiia rossiiskogo kapitalizma] (Moscow, 2004) noted that the book was written by a man for whom neither the word capitalism nor the word socialism was a term of abuse. Indeed, I analyze Russian capitalism as a scholarly research topic, just as socialism to me is a subject of objective analysis. The literature on the Russian oligarchs published in recent years, whether in our own country or abroad, takes the form of either outright expos and abuse or apology. Some authors are convinced that Mikhail Khodorkovsky, Roman Abramovich, Mikhail Fridman, Oleg Deripaska, and other billionaires are plotters and crooks who grabbed what was once state property through fraud and illegality and have systematically underpaid taxes on many billions of dollars. To others, they are talented organizers of production who have restored the destroyed remnants of Soviet industry and made their concerns highly efficient components of the global economy and models of transparency, in accordance with Western accounting standards. These diametrically opposite assessments have more to do with morality and ethics than with serious economic analysis. Indeed, if capitalism
English translation 2005, 2006 M.E. Sharpe, Inc., from the Russian text 2004 Svobodnaia mysl-XXI. Nash kapitalizm: mezhdu oligarkhicheskim i biurokraticheskim, Svobodnaia mysl-XXI, 2004, no. 10, pp. 2532. Translated by Larisa Galperin. Stanislav Mikhailovich Menshikov, Ph.D., is a professor of economics. Notes renumbered for this edition.Ed.
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that is, a market economy based on private propertyis being created in a country, then the emergence and the extensive spread of profitmaximizing entrepreneurs are inevitable. Inevitable, too, is the concentration of capital, which creates large private corporations and a wealthy capitalist elitemillionaires and billionaires. These are natural tendencies and should not surprise us. It is also quite natural that some members of the capitalist class reach the top as a result of speculation, while others become organizers of production or sometimes successfully combine both functions. A distinctive feature of contemporary Russian capitalism, however, is that private enterprises were created almost exclusively as a result of the privatization of state property, which was accompanied by numerous abuses on the part of both the newly emerged capitalists and the officials charged with administering that property. In addition, much of their initial capital came from the shadow economy, which had existed in the pores of state socialism. All this has left an indelible mark on our capitalism, depriving it of a significant number of positive historical traits, primarily the capacity for the rapid qualitative development of productive forces. When existing businesses are grabbed practically for free instead of being built by ones own efforts, the new owners treat them accordingly. That is subjective, something that can be overcome under favorable objective conditions: for instance, if a powerful competitive mechanism operates nonstop. So economic theory states, but Russias practical experience indicates something different. Of course, it is vitally important to understand the origins of our capitalism and its spiritual and material foundations. Privatization left most of our industrial branches in a state of disintegration, but their subsequent spontaneous concentration turned them into spheres where big concerns dominated. Quite typical is the example of the aluminum industry, where first the Chernyi brothers grabbed individual plants. Only later were these integrated into two large corporations, RUSAL and SUAL, by Oleg Deripaska and Viktor Vekselberg, who in the process became billionaires. In contrast, we have the the oil and nickel industries, where decrees issued by President [Boris] Yeltsin created concerns that were later auctioned off to Khodorkovsky; [Boris] Berezovsky and Abramovich; Fridman, Vekselberg, and [Leonard] Blavatnik; and [Vladimir] Potanin and [Mikhail] Prokhorov. Somewhat differently, but still in a centralized

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manner, Lukoil and Surgutneftegaz were set up. But in one way or another, literally within a few years, the Russian industry became dominated by big concerns/oligopolies. Thus, our capitalismunlike that in other developed countriesdid not go through a stage of free competition but was from the beginning primarily a capitalism of a few large concerns in each of the key branches of industry. Small and medium-size businesses play a disproportionately small role. Marxists would call it monopolistic capitalism, whereas Western scholars refer to it as a capitalism of oligopolies or oligarchic capitalism. In such a system, several large companies dominate each major market and leading branch of industry; they control the market, practically divide it among themselves, and set prices. That means, above all, that prices in our country are neither balanced nor competitive but high, much higher than competitive prices would be. They rise whenever there is an excuse to raise them, not only because demand has grown or expenses have increased. For instance, what is currently happening to domestic gasoline prices is typical of an oligopoly in oil extraction, refining, and sales. The situation in other branches is similar. In brief, the oligopolistic structure of the economy serves as a permanent, and at present the main, factor promoting chronic inflation. It therefore also restricts economic growth, as unjustified price increases understandably narrow the domestic market. Furthermore, according to Western economic theory, oligopoly is not a system that ensures the most effective and best economic decisions. The World Banks latest analytical report on the Russian economy (From Transition to Development, April 2004) states it precisely that way: large Russian concerns are less effective even relative to our own medium-sized businesses. Oligopoly also slows down technological progress and the qualitative development of the economy. When high profits are guaranteed no matter what, large concerns are in no hurry to modernize their production machinery and have no interest in creating and developing new technologies and processes or in exploring new deposits of natural resources. We need only ask which branches of industry top the list in our country. They are the same ones that dominated in the Soviet period (excluding, of course, the defense industry). What new branches has our

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capitalism created during its existence, which has lasted over a decade? We can mention only mobile telephone communications in this regard, but we do not make the cell phones here; foreign companies produce them abroad. Meanwhile, Russias machine building is in decline, and even Kakha Bendukidze, who has become famous as a leading oligarch in the last two years, had to sell his Integrated Machine-Building Plants to the Potanin Group, while his personal fortune ($64 million) turns out to have been significantly smaller than that of any little-known partner of the oil tycoon Khodorkovsky. Bendukidze did not even make it into the list of Russias hundred richest men (published by the Russian edition of Forbes in April 2004). One can understand why Kakha sold his business in Russia and left for Georgia. Thus, our capitalism has not created any new branches of industry. Meanwhile, qualitative growth occurs systematically in the United States. Who are the wealthiest people there? Bill Gates, the man who made the computer affordable to the masses. Sam Walton, who created Wal-Mart the largest chain of mass-merchandising stores in America. Again, here is evidence of an orientation toward mass consumers. But where are the computer manufacturers and supermarket owners in our country? The list of one hundred wealthiest men includes no computer manufacturers at all, and the owners of supermarkets occupy the bottom rungs. Over a hundred years ago, the wealthiest men in America were John D. Rockefeller (oil), John Pierpoint Morgan (iron and steel), and the Mellon family (aluminum and again oil). That is, they represented the same branches in which the wealthiest Russian billionaires operate today. So in terms of industrial structure, it turns out, we are now where the United States was in the late nineteenth and the early twentieth centurieslagging behind by a hundred years. Moreover, our billionaires did not create any of those branches; they were established by Soviet power, from which they received it all ready-made and on the cheap. Why is this happening? We will try to explain the problem here. Two vicious cycles keep our economy spinning, unable to find a way out. One vicious cycle involves the narrowness of our domestic market. In practical terms, our capitalism works for 15 percent of the population. Only that 15 percent provides consumers in the full sense of the word people who can buy all the things manufactured domestically and imported. The other 85 percent cannot do that. The market is so narrow because wages, which in any Western country form the basis of solvent demand, account for only a small part of

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the national product. Wages make up only about 40 percent of the gross domestic product (GDP); and after employers deduct social security payments, that leaves only about 30 percent. The equivalent figure for the United States is 5960 percent, almost twice as much.1 As a result, present-day American capitalism works for 90 percent of the population, rather than 15 percent as in our country. No malice is operating here. The narrow market keeps sales relatively low, which means that profits, if they are to make the transaction worthwhile, must account for a higher share of the price than the laws of competition would dictate. In the United States, industrial profits, on average, make up only 10 percent of the sales price, whereas in our country this figure is 20 percent or moretwice as high. Our capitalists have no interest in working with profits at the 10 percent level, although American capitalists prosper under such conditions. They can do this because they produce much more, as determined by the size of the domestic market. To break this vicious cycle, we must broaden the market, which would require a significant increase in wages share of the GDP. Because wages would increase at the expense of profits, our capitalist class does not want this, but keeping profits high relative to wages automatically keeps the domestic market narrow. The second vicious cycle is the current branch structure of our economy, its orientation toward raw materials and its excessive dependence on exports of oil, gas, and nonferrous and ferrous metals. Why? In part, this reflects the Soviet heritage and in part the drastic drop in demand for metals and fuel in the domestic market. Most of all, however, this structure has come about because Russian capital is almost entirely restricted to these branches, leaving next to nothing for the domestic market. Russian capital is not used for machine building or high technology. The reason is clear: profitability in the export branches is significantlytwo or three timeshigher than the average for industry as a whole. For instance, in 2003 Yukos [Oil] officially reported profits of 36 percent, although if we take hidden profits into account, the rate was significantly higher. If we compare these figures with those of the leading Western oil companiesExxon Mobil, Chevron Texaco, Royal Dutch/Shell, and British Petroleumwe find that their profits made up only 10 percent of turnover, less than Yukoss by 3.5 times. This is what happened. Naturally, it is not profitable for Russian oil tycoons to invest capital in other branches if they can invest it here. The

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same applies to nonferrous metals, where profitability is also much higher than average. By means of this second vicious cycle, our dependence on oil and metal exports is never reduced and cannot be reduced until profitability is evened out among branches. What can be done to correct the situation? I would argue that market mechanisms cannot on their own bring our economy out of these two dead ends, at least in the short and medium term. Admittedly, some authors are convinced that our capitalism will somehow adjust itself in the long run. But in the long run, as John Maynard Keynes, the famous British economist, used to say, we will all be dead. So we will have to wait for a very long time, and our country will probably find itself stuck in the position of a backward, out-of-the-way place within the global capitalist system. For this reason, the same Western theory indicates that if the market cannot correct its structural defects, it falls to the state to correct the imperfections of the market. The state can do much toward this end. It must, above all, take measures to even out the profits among the branches to eliminate the export bias. This is done by raising taxes on some branches and cutting those of others. Our government knows this, and President Putin made the suggestion in one of his annual addresses to the Federal Assembly. The tax on the extraction of mineral resources has been raised somewhat, and export customs on oil have gone up. These are cosmetic changes, fiscal in nature, aimed at pulling several million dollars a year into the budget. The authorities actions toward Yukos show that they can obtain much more without damaging the oil industry. Still, such actions are not systemic in nature; they apply to only one company and are regarded as a penalty for legal violations, rather than as a consistent and purposeful industrial policy. Why are Western oil companies satisfied with 10 percent profits, on which they pay 40 percent or more in taxes, while our companies start yelling and screaming when the government wants to curb profits of 36 percent, on which they pay 20 percent, 10 percent, or less in taxes? After all, it is not Communists who hold power in America and Western Europe, but conditions there are rather tough for oligarchs. Many Western colleagues are surprised when they learn, for example, that wealthy Russians pay only 4 percent in dividend taxes. A rank-andfile worker pays 13 percent in income tax on his wages, while Roman

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Abramovich pays only 4 percent on the billion his dividends yield. Probably no developed country provides such a paradise for billionaires. In the United States, Abramovich would have to pay no less than 4050 percentand yet the state here complains constantly that it does not have sufficient funds to cover the most basic needs. So, the first task of the state is to even out profits among branches. Its second task is to make sure that wages make up a higher share of our GDP. How can that be done? It is well known that the higher the share of wages, the lower is the share of profit. But what did old Henry Ford say in this connection? I have to pay my workers enough so they can buy my cars. If we are to pay adequate wages to workers without harming profits, we need to increase labor productivity. Ford introduced an assembly line and created a system of mass production with that goal in mind. That was how he was able to pay higher wages. Not too many capitalists did such things in those days, but it was the first step toward the revolution in American capitalism. First, the system invented mass production; then, after the 1930s narrowed demand and led to the most profound crisis in its history, it had to agree to create a society of mass consumption. The capitalists did not do this on their own; it came about in response to Franklin Roosevelts New Deal, which President Harry Truman continued. That is, the state, supported by the trade unions and by the most farsighted segment of the capitalist class, brought it into being. It made possible accelerated growth of the U.S. economy, technological advances, and significantly higher living standards for the population. This does not mean that we should turn a blind eye to the negative aspects of American capitalism. I have written quite a few books on that topic. Still, we should definitely take the positive American experience into account if we want to move forward. So, Roosevelt did that. And our authorities? Are they ready to follow that path? We see no evidence of it so far. One gets the impression that the neo-liberal policy of the moment suits oligarchic capitalism. For example, the integrated social security tax (ISST) was recently cut. That might seem to be a good step, one that will stimulate investment and bring wages out of the shade. But where are the guarantees that the entrepreneurs will use the money they save to modernize production and raise wages? There are no such guarantees. Meanwhile, the reduced ISST saves 180 billion rubles a year. So far, it has been a gift to the capitalist class, primarily to big concerns, in its pure form. Small business

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will not get much, and the problem of collecting money for the Pension Fund will be exacerbated. Another issue is monetization and the partial cancellation of nonmonetary benefits. At the moment, the government realistically spends 500 billion rubles a year to provide all these benefits, whereas the payments that replace them will cost only 170 billion rubles. That is, 330 billion rubles will be directly deducted from the incomes of our poor. In this way, our state is overseeing an even greater redistribution of profits not from the rich to the poor, as is done in developed countries, but from the poor to the rich. It is understandable that the Russian Union of Industrialists and Entrepreneurs, the headquarters of the oligarchy, made this demand. So the neo-liberal political course is an oligarchic policy. These suggestions are directed against the oligarchy. As a result, some people have criticized me for living in a dream world, because the authorities, which reflect oligarchic interests, will never agree to such measures. In the United States, though, it became possible under Roosevelt, who acted against his oligarchy. Putin could do the same if he chose. This is all the more true in that a certain amount of conflict between the oligarchy and the authorities already exists. Khodorkovsky and Platon Lebedev are still in prison. Some of the other oligarchs are sitting it out in London, while others take cover in Israel. People say that this conflict grows out of the oligarchys posing a political threat to the authorities and its political meddling, but that is only one side of the issue. The other side is a manifest tendency toward the growth of bureaucratic capitalismthat is, capitalism under state control. It seems quite likely that the authorities intend to establish control over all or most of Yukos. In the recent banking crisis, obviously instigated by the state, the desire to broaden state control of commercial banks was clearly visible. The private Guta-bank, not the smallest in size, found itself under the heel of the state-owned Vneshtorgbank in return for next to nothing. Certain mass-media outlets and neo-liberal theoreticians see these incidents as attempts by the central authorities to control the commanding heights of our economy, to introduce elements of state planning and active industrial policy. This would mean abandoning the neo-liberal noninterference in the economy, which has so far been dominant. To be more precise, it would mean giving up the policy to minimize taxes on big business and the wealthy classes. This is exactly how this group perceived a memo, approved by [Prime Minister] Mikhail Fradkov, that

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suggested that in the future the economic activity of central ministries and agencies should be more closely and purposefully coordinated and subject to certain regulatory forecaststo some type of plan indicators. The oligarchy immediately commissioned mockery of the idea in its press outlets, calling it another harmful utopia. The source of such criticism is absolutely clear. Its initiators hold strong positions in the presidential administration and in the government. Although the author of this article completely supports policies aimed at increasing state interference in the economy and considers, specifically, the issues of planning indicators and industrial policy quite timely, in reality the alignment of forces in the ruling elite is such that the development of bureaucratic capitalism will probably be limited and minimalist in nature. So far, there is little evidence that the authorities are ready to rectify, at least in part, the main frauds from the mass privatization period and extend the penalty for the underpayment of taxes to the leading oligarchs and their companies other than Khodorkovskys group and Yukos. On the contrary, it is quite obvious that, for instance, Roman Abramovich and Sibneft, which he controls, enjoy the authorities protection; and Viktor Vekselbergs group has just received significant new state financial guarantees to build an integrated bauxite plant. Even though the guillotine that fell on Yukos may be looming over all the old oligarchs, it is obvious that the Kremlin is not going to resort to mass repression. Moreover, recent decisions by the president and the government attest to their willingness to extend privatization to businesses that have remained state property. The president made a point of receiving Vagit Alekperov, the head of Lukoil, then not only confirmed his intention to sell the states remaining share in that concern to private owners but also welcomed Alekperovs plans to widen his dealings with U.S. oil companies. All this means that, regardless of conflict between the authorities and Yukos and greater state control in certain spheres, the basis of the private oligarchic economy is being preserved. The state poses no threat to it. Recognizing the contradiction, the newspaper Moscow Times, published in English in the Russian capital, likens the Kremlin to the main character from Robert Louis Stevensons well-known novel The Strange Case of Dr. Jekyll and Mr. Hyde. The character suffered from a case of split personality, occasionally turning the gentle Dr. Jekyll into the crazed killer Hyde. According to the Times, in its neo-liberal manifestations (the GrefKudrin group), the state acts like Jekyll, whereas in its attacks

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on business [siloviki] it behaves like Hyde. Thus, everything can be reduced to a struggle between political groups, while the presidents role remains unclear. It would be more accurate, however, to talk about a large-scale property redistribution, with state participation, through which a new financial-industrial group is being formed within the framework of the oligarchic economy. This can tentatively be called the Kremlin or Putin group. The absorption of Yukos and Guta-bank, with its small empire of companies, is just part of the ongoing redistribution of property. Nor is it necessary that the new group own these companies and banks. It need only control their finances, as the Putin group earlier took over Gazprom, arms exports, the diamond industry, and the profits derived from the export of diamonds. Add Yukos, and you have a sizable chunk of the economy. The forms that absorption takes are not so important. Who else the group will succeed in absorbing through property redistributionUnited Energy Systems, by wresting control from Chubais? is a question of what limits will be placed on its expansion. The important point is something else: the new bureaucratic group can be regarded as intrinsic to, and not necessarily as standing above, the system of oligarchic capitalism as a whole. One large old group will sufferKhodorkovskys. The others may escape unscathed if they accept that partial loss, and if other bureaucratic clans do not demand their share from the division of the loot. Other factors may inhibit the authorities from engaging in all-out conflict with the old oligarchy. Let us explore, for instance, the geographic factor. Where are all those natural riches that are now sources of oil and other high-profit items? For the most part, in Siberia. The old oligarchs control almost all of it, except for natural gas. This provides an objective basis for regional separatism, as can be clearly seen in CIA scenarios on the disintegration of Russia, including the secession of Siberia. The same can also be detected in the work of [Zbigniew] Brzezinski, and the United States will no doubt support it, since it would find the results extremely profitable. Just think about it: an independent Siberia controlled by oligarchs supplying oil and raw materials directly to the Western world, bypassing Moscow! In addition, a divided Russia, weakened in every way, is a cherished dream of U.S. ruling circles. Our oligarchs are already reliant on the West, already willing to sell their companies to Western corporations. If that happens, it will integrate our oligarchs with their Western counterparts in a way that will not

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be easy for Vladimir Putin to handle. That will be a more formidable force than our oligarchs, whom he is successfully smearing on the wall one by one, as Khodorkovskys example shows. In creating a financial-industrial group that it controls, however, the Kremlin is decisively weakening the potential might of the old oligarchy while taking over some of its Siberian possessions. As a strategic plan, it is a masterful long-term move. Without difficulty, it can also be seen as the establishment of a solid financial bastion for the period after 2008. As the latest studies have shown, control of corporations, even without direct ownership of their controlling interests, withdraws a not-small insider surplus for the use of the real owners.2 The appropriation of that surplus takes various forms, but all of them lead eventually to the transfer of the assets and profits of the organizations under control to the private property of a narrow group of insiders. As the experience with Gazprom revealed, this can happen at state-owned companies as well as private concerns. Moreover, depending on circumstances, the insider surplus can be distributed among a narrow elite or a broader circle of members in a given clan. Time will tell how far the development of bureaucratic capitalism will continue along this course. Notes
1. Our calculations, based on U.S. national statistics. 2. See R.S. Dzarasov and D.V. Novozhenov, Priroda rossiiskoi korporatsii i ee investitsionnoe povedenie (Moscow, 2004).

Selected by Nils Wessell Translated by Larisa Galperin

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