Putin's Russia: Lustration Of The Oligarchs

by: Craig Pirrong

Vladimir Putin announced his desire that those who profited from the “dishonest privatization[s]“ pay a “one-time levy” to expatiate their sins. This, Putin claims, will assure “the legitimacy of private property.” No doubt Putin will demand that the guilty oligarchs also pay public penance, and ask Pope Putin for absolution of their past sins.

There is no dispute that there was a massive transfer of wealth from the public domain into private hands in the 1990s. It was a dirty– and in some cases, like aluminum, bloody– process. But sunk costs are sunk. That is the past. What Putin should be concerned about is the future, and this proposal, which may just be more populist babushka bait, will damage Russia’s future prospects. For it emphasizes the principle, if it can be called by such an elevated name, that property is held at the sufferance of the state, and is subject to the whim and caprice of the strongman in the highly personalized, a-institutional Russian state. Given that business in Russia is hardly clean now, and that even the most squeaky clean of enterprises is likely to transgress the law sometime, for the foreseeable future every executive will be at risk of expropriation in the future at the hands of some demagogue unconstrained by legal process and legal rights. This prospect will suppress investment, and divert what investment does occur into the kinds of assets that can be moved quickly, or which depreciate quickly. It will spur even more capital flight. It is, in fact, inimical to Russia’s future growth prospects.

Putin apparently tried to calm such fears with his promise that this would be a one time thing. But this promise is completely incredible. Completely. Putin (or some future successor) can always play Roseanne Roseannadanna, and claim that there’s always something that needs redress.

Indeed, the Khodorkovsky case provides a perfect example of the potential for multiple jeopardy in Russia. He was tried for the same charges twice, and convicted twice. In Putin’s Russian, you can never be sure that your debt to society has been put paid. As any victim of blackmail or a protection racket knows, the demands for payment never stop.

There’s another interesting aspect to this Lustration of the Oligarchs. They are being called to account for their actions going back nearly two decades. But there has never even been a hint of lustration of Soviet government or party or security service officials for their actions only a few years prior; certainly not from Putin and his ilk. Even though these actions were often far more horrific, and were the direct cause of Russia’s agonies of the 90s. But that would contravene the entire Putin narrative that the death of the Soviet Union was the greatest tragedy of the 20th century, wouldn’t it?

Putin didn’t stop there. He also called for a luxury tax:

It should become the universally accepted payment for refusing to invest in economic growth in favour of hyper-consumption and vanity. I’d like to call your attention to the following fact. Many of you sitting here have known me for years, and they know what I’m about to say. People in so-called developed economies, whose capitals pass from generation to generation and might be 100, or even 200 years old, don’t look any different from the rest of the crowd. Unfortunately, this is not always the case in Russia... I’d like to say that this tax on wealth is not fiscal in nature. No one is going to overstate its fiscal importance. The fiscal component of this measure is insignificant. This is sooner a moral standard and I’d like the business community to understand this. It’s also obvious that this tax should not be levied on the middle class.

Sounds like he’s channeling his inner Obama. Or is it the other way around?

But note again: “I’d like to say that this tax on wealth is not fiscal in nature... This is sooner a moral standard.” In other words, the “moral” judgment of those in power will determine the incidence of the tax. Given the, uhm, situational and plastic nature of such “moral” judgments by such people, the potential for mischief here is immense. Again, it makes the possession of property and wealth conditional on the whims of those at the helm of the state.

More of exactly what Russia most decidedly does not need. It needs more institutions, a real rule of law which constrains government fiat, and less unconstrained discretion in the hands of Putin and his ilk.

Putin was not done. He also advocated the creation of an ombudsman who would protect businesses against the predations of officials.

That’s the plan, but just think how it’s likely to work in practice in Russia. It actually sounds like a great corruption opportunity. Just think of the boodle an ombudsman could rake in! From both sides!

But don’t worry, asserts Putin’s campaign chief, Stanislav Govorukhin. Putin has “civilized” corruption:

"Today we have returned to ‘normal’, ‘civilised’ corruption which, alas, there is in China though they shoot them there and in Italy and in America,” he said. “We are dragging ourselves out of the thieving outrage.”

Which, as Yelena Panfilova of Transparency International (an eeevvviiilll western NGO that is part of vast Amerikanski plot to subvert Mother Russia) says, basically means that the bribes are no longer collected by guys in track suits.

But that’s not really the point. The relevant issue is the scale of corruption, not who collects. The costs it imposes on business–and ordinary living. Efficiency in corruption is not conducive to economic growth. It just means that the sheep get shorn on schedule, and much closer to the skin. Indeed, in a way it is even more dispiriting and more corrosive that corruption is the province of those who are, in theory, there to enforce the law than if it is dominated by mouth breathers with prison tattoos. You can’t fight city hall, and if those who are supposed to be the protectors are actually those you need protection from, what can you possibly do? Yes, the body count is smaller today, and that’s a good thing. But the deadweight loss of corruption is undoubtedly higher now, given how systematic and pervasive it has become.

I think it was Eugene McCarthy who said that the only thing that saves us from the bureaucracy is its inefficiency. I suggest a corollary: The more efficient the (bureaucratic) criminals, the greater the deadweight costs. These deadweight costs are economic, but they are more than that. They are also paid in apathy, cynicism, and despair, which are hardly conducive to the flourishing of a truly civilized society. Put differently: Civilizing corruption further corrupts civil society.