Russian Bureaucratic Capitalism: Speransky's Legacy

Alexander Volkov, Senior Partner of the Minfin group of companies, believes that Russia can escape the trap of bureaucratic capitalism by taking advantage of the coming change in regional political elites

Alexander Mekhanik

Everyone who takes a careful look at Russia's social life will reach a sad conclusion: bureaucrats are the only social group that has recognized its interests and become an institution. The bourgeoisie doesn't exist as a class, although more than 10 years have passed since the start of privatization. What is preventing a class of capitalists from developing in Russia and occupying a significant position in society?

Following the logic of Western theorists of capitalism, the loan is the main connecting link for the bourgeoisie. Loans tie entrepreneurs together with invisible threads of mutual interest and solidarity. However, in Russia, capitalism emerged not as a result of the development of credit institutions but as a result of bureaucratic decision, and it is still dependent on the bureaucracy. The very opportunity of taking a loan often depends on whether or not the bureaucratic machine favors a particular entrepreneur. Today, not only an individual loan but also the development of the financial system itself depends first and foremost on the will of bureaucrats. And the bureaucrat a priori lacks the entrepreneur's energy and ability to take risks. He therefore stifles Russia's economic development.

- I'd certainly agree that the bureaucracy in Russia is the most clearly formed social group. However, if we speak about the reasons why the bourgeoisie doesn't exist as a group and why it is insufficiently institutionalized, my hypothesis is that there is virtually no free market in Russia, and hence, there are no grounds for the rise of the bourgeoisie. For this reason, I would conclude that the bourgeoisie in Russia will be institutionalized in a different way. Since the entrepreneur as such doesn't exist in Russia either, if we take an entrepreneur to be a person who makes business decisions freely. In my view, in Russia entrepreneurs as a group in society service officials' business schemes, because without the okay of the bureaucracy, business in Russia is not possible at any level. And as a matter of fact, agreement is very rapidly evolving into well-established arrangements embedded in the business of officialdom.

- In other words, business across the board is subject to the schemes cooked up by bureaucrats, isn't it?

Exactly. Moreover, it is so evident now that people simply come to an official and say, "I have these assets - take them and take me." They do this, because it is vital to the very existence of the business. And the official draws up his own scheme where he acts as an administrator of either financial flows (state funds) or other resources. Very often people universally considered entrepreneurs who are consumers of state funds are directly and very closely linked to officials' business schemes. Furthermore, the matter is not limited to them: they, in turn, propagate officials' influence on those entrepreneurs who don't directly rely on public funds. What does this mean? It means that lending between dependent people doesn't add credibility to their relations, because each of them and their business depends on the extent to which officials approve of them. There is no credibility in the sense meant by Franklin.

While Benjamin Franklin wrote that for the bourgeois integrity determines his creditworthiness, in our case it doesn't matter, because it's an official's warranty rather than personal integrity that serves as a guarantee. Am I right?

Yes. And just see what happens. If we look at a regional business whose chief has ties to the gubernatorial administration, the entrepreneur's creditworthiness depends neither on how successful his business is at present nor on his plans and integrity. It depends on the stability of the governor. If tomorrow a public prosecutor of some province suddenly opens a criminal case against the governor and he quits, the entire business pyramid that rests upon his administration will collapse or be heavily shaken. We have to root out the evil of the bureaucracy business.

Is this feasible? As far as I understand, this scheme reproduces itself. In other words, entrepreneurs are part of it, too, and perhaps many of them can't imagine their lives any other way. Who will be able to destroy it then?

If officials are given this task, as has been the case over the last two years, there will be no way out of this situation because the resources supporting this system aren't out in the open. However, I think these resources can overcome any presidential decree as well as any pressure and countermeasures from the authorities simply because they are incommensurable with them. These informal structures formed in Russia long ago, or more specifically, after Mikhail Speransky's administrative reform in the early 19th century. Properly speaking, "the first rule of Russian officialdom" has been in existence ever since. I'd put it like this: regulations should be created so that they cannot be executed without the involvement of officials. I am convinced that in the early 19th century this was absolutely right. Moreover, Speransky's reform cemented Russia via officials, and that enabled the country to develop. But now, such a rigid scheme impedes Russia's development. Therefore, in my view, it is necessary to fight it. In doing so, it is necessary to eliminate or, more specifically, replace norms that enable an official to directly influence someone else's assets. They should be replaced with automatic norms, where possible, or with distributive norms that would act under certain mechanisms with pre-set criteria. I distinguish between extortion and white-collar corruption. Extortion results from the fact that an official has one norm he, like a traffic policeman, exploits by trading in his conscience. This is extortion, and by nature, no doubt, differs from the corruption involved in fish quotas or construction in Moscow. How? First and foremost, as far as white-collar corruption is concerned, an official has an array of norms from one or several laws that gives him the opportunity to build his own business scheme. You cannot build a business scheme based on one norm.

Let's return to the loan issue. If access to financial resources were free, would it be possible for independent entrepreneurship to arise, at least, in areas where special permits from officials are not required? Or there are no such areas? Say, a small tailor…

You have picked a good example, because it is not linked with the budget. In this case, other mechanisms work. I break down business into small, mid-sized, and large but not as is common in legislation, by number of employees or by production output. I do it by judging what kind of official is able to close down this business. A fireman or a policeman can shut down a small business, a small enterprise or franchise. A deputy governor can shut down a mid-sized business. The deputy governor is not able to close down a large business but, as we see today, others can. This classification applies to any business, including tailors. Let's assume that I as governor have already built my own pyramids and everything is going well in all other sectors. Yet, for example, the tailoring business is of interest to me, because, say, its profitability has suddenly become quite high. I would put your tailor in a bind: either he joins my structure and gives me some stock, or I close him down.

So, what's the way out? It turns out that businessmen themselves are in no way able to solve this problem, since they are divided, competing for access to officials.

This structure can be destroyed only by the Duma. Only lawmakers will be able to accomplish this task. Proposals our company has formulated for Delovaya Rossiya insist that the business community has to generate an anti-corruption bill itself. This bill should be in the form of a table made up of two columns: the left column represents the effective norm enabling an official to dispose of someone else's assets directly, and the right column represents an alternative automatic mechanism of exercising the same function without the official making a substantial decision. If this table were drawn up for all categories of corporate law, it could become a driving force for change, provided that businessmen got behind it, simply due to its existence and due to its non-formal perception by the business community.

To ensure that this project becomes dear to the hearts of the business community, we have to create and promote it on our own, because neither lawmakers nor officials - nobody else - will do this for businessmen. And they realize perfectly that, as one of Delovaya Rossiya's co-chairmen put it, "who else could draft this bill? Who else knows when, how much, and on what occasion we give money to officials?" It will take 4-5 years to ensure that the resources behind such a law are commensurable with the resources currently able to oppose to it. Because in 4-5 years' time, a radical replacement of old gubernatorial administrations with new ones will take place. I'm confident that the date when the old power expires will be a start of a possible way out of the corruption trap.

Perhaps, all these advances are possible only if the change of the political power as a whole takes place in Russia? The opposition will come to power and break this chain?

I would disagree. The problem is not in the center. If we imagine that the current team in office totally agrees with the proposals I've just described out (and sometimes, it seems to me that they do), I'm still convinced they would fail for the same reasons I have already mentioned. The resources opposing them could be defeated only if the comparable supporting economic resources exist. They don't at the moment. Therefore, the center's political power will be not enough.

It seems to me that the scenario we've just outlined is somewhat monarchic in character. We are waiting for some personality to appear at the top who will conceive our ideas and implement necessary changes. It doesn't look like a democratic scenario with the implementation of ideas through civil society.

No, it doesn't, regrettably.

Do you think the following democratic approach is feasible: establishment of a political organization that in 5-6 years will unite under this banner?

The scenario I've set out seems realistic. However, I'm ready to be a romantic for a second and think that a draft bill will appear by itself and its text will be placed in Internet, as once was the case with the report of the Club of Rome, and the text will have a revolutionary effect on society. In principle, it is possible and, of course, I would prefer this option.

Yet, there are no real signs that this will happen by itself, without the central authorities' involvement. I've outlined the "realistic" scenario only because I see no internal contradictions in it. In any case, I think we have 5 years at our disposal to start crawling of the trap of bureaucratic capitalism we are in at the moment. This time can be spent meaningfully by drafting a Russian version of a real anti-corruption law.