Banner1
Russia and Ukraine: what is the Russian economic system and why is it accused of being "crony capitalism" - Fintech Morning

Russia and Ukraine: what is the Russian economic system and why is it accused of being “crony capitalism”

banner2

The collapse of the powerful Soviet Union in 1991 marked the end of a communist era. And it was also the entry of Russia, the main state of the union, into what was its greatest enemy: the capitalist system.

Russia has a banking system, it recognizes private property , there is access to the capital market… “everything that we would normally attribute to a capitalist country,” Carlos Sieglel, professor in the Division of Economics and Global Affairs at the University, tells BBC Mundo. Rutgers.

It is the largest country in the world, and earns large revenues from oil and gas exports.

The International Energy Agency (IEA) maintains that Russia “plays an outsized role in world oil markets.”

And in 2021, Forbes magazine ranked it fifth in the countries with the most billionaires.

Gazprom
Russia has a powerful gas industry.

Russia is a capitalist country, but several experts agree that after the fall of the USSR, Russia’s leaders, first Boris Yeltsin and then Vladimir Putin, nurtured an economic model that favored a few close to the government.

“crony capitalism” , some analysts call it like Anders Åslund, author of the book “Russia’s crony capitalism: the path from the market economy to kleptocracy” (for its literal translation into Spanish).

How does Russia’s economy work and why do its critics associate it with the creation of oligarchs and corruption?

 

system change

According to Sieglel, to understand the Russian economy today, you have to go back to the collapse of the Soviet Union.

Alexei Mordashov's yacht
The yacht confiscated from Alexei Mordashov, accused of being an oligarch close to Putin.

The companies that previously belonged to the State were going to be privatized.

“The question was how to privatize them,” says the expert.

What happened, the analyst says, was that many of the larger companies that were privatized were left in the hands of former government officials or well-connected people .

This group of people, who by being close to the government achieved privileges to take over the companies, today are known as the oligarchs.

“They are ultra-rich business elites with disproportionate political power ,” as Stanislav Markus, a professor of international business at the University of South Carolina, describes them in an article in The Conversation.

Oleg Deripaska with Vladimir Putin in 2017
Vladimir Putin with Oleg Deripaska, one of the so-called “oligarchs” who are close to him (2017).

According to Markus, the oligarchs emerged in two waves.

The first was from 1990, when during the government of Boris Yeltsin, large state-owned companies were sold at a low price to a select group of tycoons in exchange for profits.

The second wave was promoted by Putin through contracts with the state , explains Markus.

The model was that private infrastructure, defense and health care companies sold their services to the government at a price much higher than the market price , in exchange for bribes to the officials who made the transaction possible.

“Thus, Putin enriched a new legion of oligarchs who owed him their enormous fortunes,” says Markus.

Putin y Yeltsin.
Putin and Yeltsin.

That collusion is what some refer to as “crony capitalism.”

“Russia is a country with crony capitalism, it’s very similar to what you would have in fascist economies , where the state and some industries collaborated with each other,” says Siegliel.

“In this case they collaborate through mechanisms of corruption.”

Eszter Wirth, Professor of International Economics at Comillas Pontifical University, describes Russia as an ” apparently capitalist system “.

“Where most of the wealth is generated in sectors characterized by rent-seeking, nepotism and the purchase of favors,” Wirth tells BBC Mundo.

Wirth explains that Putin implemented a system based on the Soviet model, characterized by large state-owned companies , and combined it with Yeltsin’s oligarchist system.

“These state corporations control 55% of the Russian economy (SMEs 20.6%), reminiscent of the socialist era,” says the expert.

“Kleptocratic System”

This mechanism, experts say, is based on the fact that the oligarchs do not get involved in political affairs, and the Kremlin does not get involved in the business of these tycoons.

“The oligarchs have helped Putin stay in power through their political immobility and financial support for internal Kremlin initiatives,” says Markus.

The NGO Transparency International describes Russia as having a “kleptocratic system”.

“The great wealth that Russian kleptocrats have amassed, and continue to enjoy, has helped President Putin tighten his grip on power…” the organization said in a March 4 article.

The Economist weekly ranks Russia first in its Crony Capitalism Index.

Roman Abramovich
Roman Abramovich is one of the Russian tycoons noted to be an oligarch.

The index measures the number of billionaires whose fortunes may be linked to their closeness to the government, especially through businesses such as banking, casinos, defense, extractive industries and construction.

The publication maintains that in Russia there are 120 billionaires, of which 70% meet the characteristics of a “crony capitalist”.

“28% of Russian GDP corresponds to the wealth of Russian billionaires (oligarchs) who operate in rentier sectors (of the State),” says Wirth.

no competition

Sieggle maintains that this corrupt mechanism also affects the advancement of Russian industry.

“Normally these companies would have to compete with each other, that competition would lead them to be more efficient , to hire the right personnel,” says the professor.

banner4

“But what happened was that the government, and this also happens in other countries, protected many of these individuals from direct competition.”

“As a result, what you have in Russia are a number of companies that are not as efficient in terms of production, because they have been isolated from the competition.”

El Kremlin.
The Kremlin.

Roller coaster

Globally, Russia is the second largest oil exporter , after Saudi Arabia; and the third largest oil producer, behind the United States and Saudi Arabia, according to the IEA.

It has the second largest coal reserves, after the US.

40% of the natural gas that Europe consumes comes from Russia, produced by the state monopoly Gazprom.

In addition, the country is rich in rare earths and agricultural products such as wheat, corn, and sunflower oil.

That natural wealth, especially gas and oil, have helped it overcome various crises and economic ups and downs in recent decades.

When Putin came to power, the country had been ending a decade of hyperinflation , in which GDP had fallen and inequality had increased.

Economically, the 1990s in Russia were “a lost decade ,” as Wirth describes it in an article in The Conversation.

But the arrival of Putin to power gave the country a new direction .

Rusia.
Russia faced an economic crisis in the 1990s.

During the first 8 years of Putin’s government, Russia had a rebound that according to Wirth is attributed to the global rise in the prices of hydrocarbons, the main Russian export product.

The crisis of 2008 and 2009 stopped that growth, but in 2013 a new rise in crude oil prices helped them to recover.

Then, in 2014 and 2015, prices fell again, the ruble lost value and inflation increased.

“Overreliance on oil and natural gas exports during the Putin era took its toll on the Russian economy,” Wirth writes.

“Russia remains a country with large trade surpluses when commodity prices are high, and it could invest them in upgrading outdated machinery and infrastructure,” the analyst says.

“But, as exports are concentrated in the hands of a few oligarchs, they prefer to invest funds abroad, which is why Russia has been going through a process of capital flight for years to tax havens, Switzerland or London.”

Sieggle agrees that the Russian economy is not very diversified, adding that “they don’t have an incentive to innovate.”

“Despite the resources, they don’t have the right institutions to innovate in terms of new products or technology,” he says.

The professor also indicates that, unlike other capitalist countries, in Russia there are no antitrust laws and there is no legal environment that emphasizes competition.

Planta de gas ruso
Russia is largely dependent on the oil and gas industry.

sanctions

During the last three years Russia has had moderate economic growth.

In Russia the impact of the pandemic was less than in other countries, according to the World Bank.

According to the bank, this could be due to its policy of fiscal aid from the State, as well as the fact that it has a relatively small service sector and a large public sector that cushioned unemployment.

Still, Professor Wirth calls Russia’s economic growth rates “disappointing” for one of the BRIC countries (Brazil, Russia, India, China, South Africa).

Furthermore, since Putin invaded Crimea in 2014, Russia has faced sanctions that have increasingly cut it off from Western markets.

And the country is now facing an even stronger international sanctions package in response to its invasion of Ukraine.

These measures include the fact that the largest Russian banks have been expelled from SWIFT, the international payment network, making it difficult for them to process transactions that come from abroad.

Putin has already offered state aid to the sanctioned banks.

Hundreds of billions of euros of Russian central bank reserves have also been frozen .

McDonald's in Russia
Several brands announced that they will stop operating in Russia.

About 300 brands have suspended their operations in Russia.

And individual sanctions have also been applied to dozens of billionaires that the US, UK and Europe consider to be oligarchs close to Putin.

In the last month, the ruble has lost more than 40% of its value against the dollar.

Based on these sanctions, the investment bank Goldman Sacks estimates that Russia’s GDP could fall 7% this year .

The market analysis firm Oxford Economics calculates that the pressure on Russian financial markets could have an impact of 6% on GDP, compared to the forecasts they had made before the crisis.

The bet of the West is that these sanctions isolate and suffocate the Russian economy, as a measure of pressure so that Putin suspends the attacks.

Wirth, however, is skeptical about the effectiveness of these sanctions.

“In authoritarian regimes, economic sanctions have been ineffective, neither in Iran nor in North Korea have they generated political changes,” he says. “Putin also doesn’t seem to want to listen to anyone other than himself.”

And meanwhile, Ukraine remains under relentless Russian fire.

Link: https://www.bbc.com/mundo/noticias-60774779

Author:

  • Carlos Serrano (@carliserrano)
  • BBC News World
Author avatar
Edinson Love
https://fintechmorning.com

Post a comment

Your email address will not be published. Required fields are marked *