Russia's Socialist Heritage

Admittedly, the country is penalised by a number of initial structural handicaps. Culturally, it is neither fish nor fowl, being neither wholly European nor wholly Oriental on personal characteristics and traditions, suspicious of and suspected by both worlds. It extends over too large an area compared to its population, saddling both the production and the distribution of its output with heavier transport costs than countries of denser population have to bear. Perhaps most important, it has an unfriendly climate. Some historians, tongue in cheek, explain the expansionary drive of Russia over the last three centuries by the longing of its people to escape from the climate of their homeland and settle under a sunnier, less humid, healthier sky, yet still their own empire. As for cultivating the land, the saying goes that there are four natural catastrophes in Russia every year, Spring, Summer, Autumn and Winter.

All in all, however, the endowments almost certainly outweigh the handicaps. Russia, even after the secession of the Ukraine, has enough high-quality farmland. It has inexhaustible resources of timber and vast deposits of every kind of ore from iron and bauxite to gold, much of it low cost. Using these resources, there is a reasonably educated work force of mixed quality, working 1,900 hours a year that compares with about 1,500 in Western Europe. Russian workers are mostly obedient and bow to authority, they have weak unions, strikes are rare and wages are settled on the level of the enterprise rather than of the nationwide industry, an advantage the Russian labour market has over the West and that keeps unemployment at just over 5 per cent, close to the level of practically full employment. Skill from shop floor to middle management level is adequate. Far more decisive than any of these more or less commonplace advantages is Russia’s exceptional oil and gas wealth, of which more below. Taking a rough-and-ready account of both the obvious helps and hindrances, the visitor from Mars would expect Russians to be no less prosperous than Englishmen, Frenchmen or Germans. His expectation would be legitimate, but very far out.

Accepting Russian statistics at face value the per capita revenue of the population of 142 million is $17,000, though a different basis of calculation gives less than $15,000. This compares with the average in the main Western European countries of about $40,000. GDP has recently been growing at just over 4 per cent per annum and is expected to maintain this rate in the near future, assuming that the price of oil remains above $100 a barrel. With the sharp rises in the price of oil since 1998, growth in Russia was relatively easy to achieve and should not be hard to maintain, though the shape of the economy would become ever more like that of an oil sheikdom, with the non-oil sector falling further and further behind and needing state protection to subsist. The Russian government has scores of good economic advisers and is quite aware of the dangers of such dependence on oil and gas, but cannot give up the great budgetary ease that oil provides. Nor can it conjure up industrial development by wishful thinking and exhortation.

Russia is inspiring confidence by running a current account balance of payments surplus of 3 or 4 per cent of GDP. If oil and gas are excluded (and all other things remain equal, which of course they would not do), the surplus turns into a far less reassuring deficit of 10 per cent of GDP, meaning that the Russian economy produces only 90 per cent of what it absorbs—a ratio that cannot be sustained for any length of time.

The state levies a hefty export tax on oil, which is good for the budget and popular with consumers because it keeps the domestic price down. However, it also causes careless and uneconomic use of energy. Russia uses about twice as much energy to produce a unit of output of all goods and services as the best modern practice in the West. Waste of energy is the beginning of the explanation of Russia being so much poorer than it should be. Waste of everything else furnishes a bit more of the explanation.

Three generations of Russians now living have inherited some quite nasty things from socialism. One of which is a vacuum where in a non-socialist society certain incentives would direct people’s behaviour. Under socialism in Russia from 1917 to 1989, nearly everything belonged to the state, that is in practice to nobody, and very little belonged to anybody in particular. The result was the withering away of some of the habits that are formed by the incentives bred by ownership. Looking after one’s own property, respecting that of others, disapproving and discouraging senseless waste as well as theft in general and not only the theft of one’s own chattels, are some of these habits that go almost without saying in normal civilisations but that have been “bred out” of far too many modern Russians. Even after two decades of capitalist practice after 1989, the waste of time, the quantity of spoilt output and the waste of material that goes uselessly into the typical Russian industrial product, are staggering to see. Twice as much steel is used to manufacture a Russian tractor, a bicycle or a tool as in the West simply because it does not occur to producers that economising is a good thing even if they do not directly profit from it. Ceaseless sermons under socialism used to teach them that to be economical and avoid waste is good for the community, but the vacuum of incentives acted more strongly than the sermons. It is still acting fairly strongly, as a lost habit that it will take time to restore even if government policy does not frustrate the process by counter-productive tinkering.

While socialism left a vacuum where there used to be an incentive, and thus has educated people not to bother about economising anything that was not directly their own, it left another incentive to run wild. In normal civilisations, the incentive to appropriate anything valuable belonging to others is to a greater or lesser extent, and in very honest countries like Finland and New Zealand almost completely, neutralised by the threat of retaliation by the owners, by organised law enforcement and by social ostracism. Where these checks are eroded, theft, robbery, usurpation and the abuse of mandates “agency”, e.g. power delegated to the police, the judges and the officials entrusted with spending the public funds, can run rampant. In Russia, they do. The checks, deterrents and social sanctions have been weakened to the point of extinction under socialism.

The Berlin benevolent organisation Transparency International1 prepares and keeps up to date a rank order of countries according to how corrupt they are. Among the 40 OECD member countries, it ranks Russia in 40th place, i.e. as the most corrupt. The type of corruption that Transparency International seeks to measure concerns government to business, business to business and government to people relations. Some economists argue that much of this corruption is in fact useful, for it does the job of efficient allocation that competition would do if there was enough of it. The government official will award the bridge-building contract to the builder who offers him the biggest bribe, and this is as good as awarding it to the lowest bidder; the builder who can afford the highest bribe is the one who could tender the lowest price for building the bridge. Efficient allocation is ensured either way.

This reasoning does not quite hold water, but there is no place here to demonstrate why. Instead, it is instructive to look at another version of corruption where organised crime has police officials, prosecutors and judges as sleeping partners and that is thriving in post-socialist Russia.

An enterprising Russian launches a business, runs it successfully for a while and when it has taken root, two strangers visit him. They declare that henceforth the business belongs to them or to friends of them, and ask the owner kindly to give them all keys, passwords and vital documents, sign a bill of sale, and say goodbye. Resistance is mortally dangerous and appeal to the police futile. Former President Medvedev used to announce campaigns to “strengthen” the rule of law and among other practices it was this type of unchecked robbery he must have had in mind. Nothing ever came of this pious campaigns. The tight network of mainly ex-KGB officers who exercise supreme executive power always shrugged off Medvedev initiatives with a pitying condescension.

However, the precarious tenure of business property, one of the heaviest items in Russia’s socialist heritage, has turned out to be the source of a most interesting phenomenon. Russia’s businessmen, from oligarchs down to proprietors of medium and even small firms, are beating a path to the West and some of their money is going along with them. Their favourite destinations are London and the French Riviera. House property coming up for sale in Knightsbridge, Belgravia and Chelsea is likely to be snapped up by Russian buyers, as do villas from Nice to the Italian border. Agencies in London run by young women who know everybody who is worth knowing, specialise in finding property and domestic servants for Russian newcomers, as well as performing such miracles as securing admission to Eton or Harrow for little Volodya, and maybe for other little Russian boys yet to be born. Most of these Russian pilgrims do not permanently remain in London or Cannes, but want to have a hidy-hole to run to and shelter some of their fortune outside Russia if and when things there turn really nasty.

The numbers generated by this flight to safety look awesome. Russia’s current balance of payments has an annual surplus of $60 to $70 billion thanks to oil and gas. In addition, foreign direct and portfolio investment in Russia was recently running at about $90 billion (though this figure is not very reliable). Capital outflow from Russia must be the mirror image of the total of the sum of the current surplus and the inflow, or say $150 billion a year (for the balancing item, official foreign currency holdings, is not large enough to make much difference).

It is difficult to believe, but also difficult to dismiss the statistics that point to it, that capital flight from Russia has the colossal order of magnitude of $150 billion per year. What a heritage socialism has left!