Russia: an Oprichnik economy

Owning a business in Russia today is a hazardous affair: each year thousands of companies close after their owners are accused of ‘economic crimes’ and face either prison or protection payments to government officials. Andrey Zaostrovtsev describes a system reminiscent of an equally lawless period in Russia’s past (photo: RIA Novosti Agency).

Writing in 2011, The former judge Sergei Pashin characterised today’s Russian economy as ‘an Oprichnik mode of production’. The Oprichniki, Ivan the Terrible’s (1530-1584) personal bodyguards, bring up a horrifying image in the Russian consciousness. Subject to the Tsar alone, the Oprichniki obeyed no laws, and in the course of their criminal activities they were known to lay waste to whole regions of Russia.

But what exactly did Pashin mean by his phrase, and laws are actually operating in Russia’s economy today?

A licence to rob

Clearly, Putin’s attempts to build ‘power vertical’ has culminated in a fully formed authoritarian regime. This has been recognised by all international classifications. The Freedom House organisation, for example, in its annual Nations in Transit report has since 2008 described Russia as a ‘consolidated authoritarian regime’. The country was also categorised for the first time as an authoritarian regime by the Economist’s Intelligence Unit in its 2011Democracy Index.

Yet international ratings and general definitions of authoritarian regimes are an inadequate guide to the specific characteristics of Russian society as it has evolved in the first decade of the 21st century. In fact, it is a society made up of various socio-economic classes, each with its own rights, and privileges, including the right to dispose of economic assets. It is not a society of equal citizens: it is a society of elites.

Putin is the Tsar of the bureaucracy. He guarantees its privileges; it provides him with support for his rule and a channel for his will. The Russian bureaucracy is however too large and too heterogeneous. It is divided into a number of social groups, some with a greater, and some with a lesser degree of power. But it is always less a question of official prerogatives than of informal opportunities for using legal rights for illegal purposes. Naturally, the people with the greatest opportunities are the so-called ‘Siloviki’, literally, the ‘men of force’ – powerful members of Putin’s circle, many of whom have, like Putin himself, a background in the security services. The Siloviki are known for using their official coercive rights for their own personal ends, and get rich thanks to illicit ‘taxation’ of business and the transfer of property and assets to ‘crony firms’.

Russia is a predatory state, dedicated to screwing private business.  The Silovik bureaucracy, which includes not just the FSB, MVD (Interior Ministry), Federal Public Prosecutor’s Department, Investigative Committee and State Drugs Control Agency, but also the courts, the FSIN (Federal Service for Execution of Punishment, which controls prisons) and the tax authorities, is constantly engaged in this. And it is very unlikely that there is a single owner of a private company who has not been the object of the Silovik protection racket.    

'The Siloviki are known for using their official coercive rights for their own personal ends, and get rich thanks to illicit ‘taxation’ of business and the transfer of property and assets to ‘crony firms’. 

This model of relations between government and business has its roots in the fact that Russia has exchanged one kind of lawlessness for another. Organs of repression are always happy to carry out any political directive from the ruling clique in exchange for a licence to appropriate people’s money and other assets. And a mechanism for doing this is furnished by the legal and official powers granted to them by the state.

The criminal-judicial management of the economy

The Siloviki have a wide variety of means at their disposal to part business owners from their income and assets, but they all have something in common. Everything starts with a false criminal charge based on one of the so-called Economic  Articles of the Criminal Code. The alleged offender is then presented with three options: he or she can buy a way out for a substantial sum, make regular payments to a nominated middleman or sell their business at a knockdown price to a company with informal links to the Siloviki.

The victim often receives a prison sentence for their alleged crime, which simplifies the appropriation of their business immensely. He or she may also pay for a lighter penalty, a suspended sentence for example. But any business owner who actively resists this process is certain to end up behind bars. In fact, some people convicted of economic crimes get longer sentences than murderers.

'The alleged offender is presented with three options: buy a way out for a substantial sum, make regular payments to a nominated middleman or sell their business at a knockdown price to a company with informal links to the Siloviki.'

The wonderfully precise definition, ‘the criminal-judicial management of the economy’ belongs to Dr Yelena Novikova, Director of Moscow’s Centre for Legal and Economic Studies. It will be obvious that such a system implies the collaboration of a whole range of people: investigators, public prosecutors, judges, jailers, and often also tax inspectors and various expert witnesses prepared to lie in court. In this context the Russian government acts like a gang of robber barons, indulging in theft on a grand scale under cover of the law. And the scale is very grand indeed. A number of recent studies in Russia have revealed, among other things, the true magnitude of this problem. The most striking of these, entitled ‘Criminal Politics in the Economic Sphere: Expert Opinions’ was published in 2011 by the Moscow NGO ‘Liberal Mission Foundation’. It states that ‘in 2000-2010, over 15% of the total number of Russian economic entities (commercial organisations, individual businesspeople and farmers) were subjected to unfounded criminal proceedings in connection with their business activities. According to experts, the number of persons convicted and imprisoned in connection with business activities is more than 100,000. While at least 15-20% of those convicted of economic crimes are in detention without sufficient grounds.’

The report notes that such consolidated repression of a specific group of Russian business owners was last practised by the Soviet government in the late1920s and early 1930s, the time of collectivization (when the victims were the Kulaks, the richer peasants) and the end of the liberal ‘New Economic Policy’ initiated by Lenin in the early 1920s to kick start the Soviet economy. Today history is repeating itself, not (as Marx would have it) as farce, but as a new tragedy.

The effect on Russia’s economy

The scale of Russia’s state run racket is clear from a study carried out by the Institute for the Rule of Law at St. Petersburg’s European University. According to this study, only 10-15% of criminal cases brought by the police in connection with alleged economic crimes ever end in a conviction. And even if we assume that all these convictions are justified, this implies that for each conviction, 6-10 business owners have faced charges. The remaining 85-90% of cases were lost either through police incompetence, or because the accused bought their way out or agreed to hand over protection money or some form of payment in kind.  

'17% of business owners are seriously considering emigrating, giving as their main reason the vulnerability of private property and general lack of protection from the law, as well as fear of arrest and officials’ abuse of power.'

I think we have to assume that it is the last option that is the most common.  Of course it is a very good thing that so few cases come to court and end in conviction. The point frequently made in these studies, however, is that the very fact of a case being opened usually means that the company in question can no longer continue its commercial activity and will eventually fail. And terrible human tragedies often lurk behind these dry phrases.

The ‘Criminal Politics in the Economic Sphere’ report records the fact that between 2006 and 2010 the number of companies that ceased trading increased year by year, and in 2010 made up over 80% of the total number of registered businesses.  Seventeen percent of business owners are seriously considering emigrating in the next five years, giving as their main reason the vulnerability of private property and general lack of protection from the law, as well as fear of arrest and officials’ abuse of their power.

What conclusions can we draw? Simply, that a disregard for citizens’ legal rights in Russia’s economic life has led to the disappearance each year of companies collectively contributing an average of 1.82% to Russia’s GDP (in other words, an overall 12.75% in the years 2004-2010). Or to put it another way, the best means of  insuring an increase in the country’s growth rate would be to get rid of the Siloviki. This, however, is more easily said than done: an Oprichnik has taken over the Russian economy and has no intention of handing it back.

About the author

Andrei Zaostrovtsev is lecturer at the M-Centre at the European University, St. Petersburg and professor of the Higher School of Economics

Read On

The World Bank in Russia, Russian Economic Report, moderating risks, bolstering growth, April 2012

Ease of Doing Business in Russian Federation, 2013, International Finance Corporation, World Bank

Clifford G. Gaddy, Barry W. Ickes, Russia's Virtual Economy, Brookings Institution Press, 2002, 306 pages

Anders Åslund, Sergei. M. Guriev, Andrew C. Kuchins, Russia After The Global Economic Crisis, Peterson Institute, 2010, 287 pages

Chrystia Freeland, Sale of the century:  Russia's wild ride from communism to capitalism, Crown Business, 2000, 389 pages

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Siloviki take reins in post-oligarchy era, Victor Yasmann for Radio Free Europe/Radio Liberty (RFE/RL), re-published by International Relations and Security Network, ETH, Zurich, 2007

Malls Blossom in Russia, With a Middle Class, By Andrew E. Kramer, Tne New York Times, Jan. 1st, 2013