Is Rent-Seeking a Major Problem for the Russian Economy?

Rent-seeking is still a major problem for the Russian economy. Since the 1990s there has been a marked shift from rent-seeking borne out of institutional weakness and chaos to rent-seeking being embedded by authoritarianism and order under by the leadership of Vladimir Putin.

What is Rent-Seeking?

Rent-seeking is the use of access to a source of monopoly power, be that the government or a dominant firm in an industry, to advance one’s interests – often materially. In the words of Anders Aslund rent-seeking becomes an economic “pathology”; propagating itself and appropriating from others.

Rent-seeking in Russia has manifested itself in many crevices of Russian life, and to varying degrees. The USSR was riddled with rent-seeking both in the practices that were essential in maintaining the industrial structure (Berliner, J. 1968) but also riddled with outright unchecked corruption from top-down.

Birth of the Russian Federation: The 1990s

The 1990s were a harsh and chaotic time in Russia. Unlike its old Soviet republic neighbours, Russia had been born in the death of empire rather than the embers of national independence. The Russian state was bitterly polarised between Parliament and President; these boiling tensions ultimately culminated in the October Crisis of 1993 (Brown, A. 1993). The state – weak and otherwise occupied – left a great void in Russia. The ensuing chaos was a force to be reckoned with.

In the Yeltsin era racketeering was rife – orchestrated by organized gangs. Racketeering; the use of force to extort money was a major form of rent-seeking. Lenient estimates suggest that racketeering constituted 3% of Russia’s GDP in 1992 (Aslund, 1996). Most private businesses relied on their ‘representative’ racketeer to negotiate with another ‘representative’ racketeer as a means of brokering inter-business relations. It was not uncommon for freight to disappear. It is agreed that much of this has subsided; however, it is perhaps more appropriate to regard it as having been transferred to certain government officials and authorities. Evidence from the ‘Risk and Compliance Portal’ suggests that the Russian police, local government officials and courts engage in regular bouts of bribery and extortion. These arbitrary and unjust ‘taxations’ on the economic resources of individuals and businesses can only mean a distortion of economic allocation in Russia. It is not clear how the current levels of corruption compare with the 1990s but it is fair to say that the endemic prevalence of such corruption facilitates an inhospitable environment for conducting honest business. Such rent-seeking has been a hit in Russia for an age now.

The Industrial “Complex”

Russian industry – including heavy manufacturing, fuel procurement and freight transport - is still predicated on a Soviet-style rent-seeking structure. Incumbent firms are protected from competition by one another and less directly by the state – such that they have a fixed monopoly position. Long-term contracts mandate the price of outputs/inputs, quantity of outputs/inputs supplied and the clientele whom that firms can serve (Gaddy & Ikes, 2010). These contracts suffocate economic competition and allocation. Gaddy & Ikes posit that this structure feeds a rent ‘addiction’ whereby success/survivability is determined by the ability to feed an ever-greater “tolerance” of rents. This economic model leads to repeated and compounding misallocations of resources and chokes any hope of genuine improvements in well-being across the population at large. This rent system has been ‘viable’ due to the prevalence of oil in Russia. The oil price boom of the 2000s induced a marked improvement in the economic conditions of Russia and its people – in large part this well-being was transferred through the rent system. Such increases in oil prices, and by extension the rent-streams associated with oil, did not last forever. Throughout the last decade the Russian economy, unable to reallocate resources through a natural incentive mechanism, suffered several years of deep recession (World Bank Annual Reports).

Putin’s aim to dominate ‘strategic sectors’ in order to form a strong state has relied on ‘reverse nomenklatura privatisation’. State owned enterprises (SOE’s) have launched forced mergers and acquisitions of firms in strategic sectors – oil, gas and manufacturing. The owners have not had a choice as to whether their company is bought or sold and are often forced to flee Russia (Hanson & Teague, 2010) – the Yukos affair being the most famous example. These acquisitions are an example of rent-seeking; the beneficiaries of these takeovers are Putin and his cronies amassing personal fortunes and deeper control of Russia using the state as a tool. It has been claimed that Putin has amassed a personal fortune worth billions of US dollars, meanwhile one of Putin’s close allies currently serves as the chief executive of Rosneft (one of the SOE’s involved in the acquisition of Yukos’ assets). Some may argue that most of these mergers are reversing the Yeltsin era rent-seeking and as such are serving to rectify old ills of rent-seeking in the Russian economic system. For example, Yukos was acquired by Mikhail Khodorkovksy through the loans for shares auctions system - which were often rigged by corrupt officials in the 1990s (Treisman, 2010). Khodorkovksy was himself benefiting from rent-seeking, however, simply transferring the rent-seeking to Putin’s allies is not dealing with the fundamental problem, it is supplanting its beneficiaries.

Playing the devil’s advocate, one may suggest that rent-seeking is no longer a problem to the Russian economy because the major facilitating factors have since subsided. This is a naïve view. While the loans for shares auctions, subsidised credits, mass racketeering, import/export subsidies and price controls have gone, rent seeking has not gone. Rent seeking forms the fabric of major elements of the Russian economic story. It may be fair to say that rent no longer makes up 80% of GDP, as it is estimated in 1992 (Aslund, 1996), but it is still significant. Gaddy & Ikes posit that the net revenue from the sale of oil/natural gas takeaway the cost of extraction is the best measure of current levels of aggregate rent in Russia. Given that oil revenues alone constitute almost one third of Russia’s GDP one could assume that rent is still quantitatively significant. Their industrial sector is dominated by rent seeking which is arguably rooted in the kleptocratic legacy of the Soviet era. Such rent seeking has and will continue to distort the allocation of resources in Russia and as such constrain improvements in long-term economic growth and well-being. The primary theme of rent seeking in Russia has been the transition from chaotic opportunist rent seeking (from daring and willing private individuals) to ordered and pernicious rent seeking conducted by the Kremlin and its allies – all in the name of creating a strong state. The rent seekers may have changed but rent seeking still prevails in Russia.

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