Russia and Ukraine: what is the Russian economic system and why is it accused of being “crony capitalism”

And in 2021, Forbes magazine ranked it fifth in countries with the most billionaires.

Russia is a capitalist country, but several experts agree that after the fall of the USSR, Russia’s leaders, first Boris Yeltsin and then Vladimir Putin, nurtured an economic model that favored a few close to the government.

“crony capitalism”Some analysts call it, like Anders Åslund, author of the book “Russia’s crony capitalism: the path from the market economy to kleptocracy” (for its literal translation into Spanish).

How does the Russian economy work and why do its critics associate it with the creation of oligarchs and corruption?

According to Sieglel, to understand the Russian economy today, you have to go back to the collapse of the Soviet Union.

The companies that previously belonged to the State were going to be privatized.

“The question was how to privatize them,” says the expert.

What happened, the analyst says, was that many of the larger companies that were privatized were left in the hands of former government officials or people who were well connectedtoyes

This group of people, who by being close to the government achieved privileges to take over the companies, today are known as the oligarchs.

“They are ultra-rich business elites with a disproportionate political power“, as described by Stanislav Markus, Professor of International Business at the University of South Carolina, in an article in The Conversation.

According to Markus, the oligarchs emerged in two waves.

The first was from 1990, when during the government of Boris Yeltsin, large state-owned companies were sold at a low price to a select group of tycoons. in exchange for benefits.

The second wave was promoted by Putin through contracts with the stateMarkus explains.

The model was that private infrastructure, defense and health care companies sold their services to the government at a price much higher than the marketin exchange for bribes to the officials who made the transaction possible.

“Thus, Putin enriched a new legion of oligarchs who owed him their enormous fortunes,” says Markus.

This collusion it is what some refer to as “crony capitalism”.

“Russia is a country with crony capitalism, it is very similar to what you would have in fascist economieswhere the state and some industries collaborated with each other,” says Siegliel.

“In this case they collaborate through mechanisms of corruption.”

Eszter Wirth, Professor of International Economics at Comillas Pontifical University, describes Russia as a “apparently capitalist systemto”.

“Where most of the wealth is generated in sectors characterized by rent-seeking, nepotism and buying favors,” Wirth told BBC Mundo.

Wirth explains that Putin implemented a system based on the Soviet model, characterized by large state-owned companies, and combined it with Yeltsin’s oligarchist system.

“These state corporations control 55% of the Russian economy (SMEs 20.6%), reminiscent of the socialist era,” says the expert.

That mechanism, experts say, is based on the fact that the oligarchs they don’t get involved in political matters, and the Kremlin does not meddle in the business of these tycoons.

“The oligarchs have helped Putin stay in power through their political immobility and financial support for internal Kremlin initiatives,” says Markus.

The NGO Transparency International describes Russia as having a “kleptocratic system”.

“The great wealth that Russian kleptocrats have amassed, and continue to enjoy, has helped President Putin to tighten your control about power…” the organization maintains in a March 4 article.

the weekly The Economist ranks Russia first in its Crony Capitalism Index.

The index measures the number of billionaires whose fortunes may be linked to their closeness to the government, especially through businesses such as banks, casinos, defense, extractive industries and construction.

The publication maintains that in Russia there are 120 billionaires, of which 70% meet the characteristics of a “crony capitalist”.

“28% of the Russian GDP corresponds to the wealth of Russian billionaires (oligarchs) who operate in rentier sectors (of the State),” says Wirth.

Siegel maintains that this corrupt mechanism also affects the progress of the industry Russian.

“Normally these companies would have to compete with each other, that competition would lead them to be more efficientto hire the right staff,” says the professor.

“But what happened was that the government, and this also happens in other countries, protected many of these individuals from direct competition.”

“As a result, what you have in Russia are a number of companies that they are not that efficient in terms of production, because they have been isolated from the competition.

Globally, Russia is the second largest exporter oil, after Saudi Arabia; and the third largest producer of oil, behind the United States and Saudi Arabia, according to the IEA.

It has the second largest coal reserves, after the US.

40% of the natural gas that Europe consumes comes from Russia, produced by the state monopoly Gazprom.

In addition, the country is rich in rare earths and agricultural products such as wheat, corn, and sunflower oil.

That natural wealth, especially gas and oil, have helped it overcome various crises and economic ups and downs in recent decades.

When Putin came to power, the country had been closing a decade of hyperinflationin which GDP had fallen and inequality had increased.

On an economic level, the 1990s in Russia were “a lost decade”as described by Wirth in an article in The Conversation.

But Putin’s arrival in power gave him a New way to the country.

During the first 8 years of Putin’s rule, Russia had an upturn that according to Wirth is attributed to the global rise of the prices of hydrocarbons, the main Russian export product.

The crisis of 2008 and 2009 stopped that growth, but in 2013 a new rise in crude oil prices helped them to recover.

Then, in 2014 and 2015, prices fell again, the ruble lost value and inflation increased.

“Overreliance on oil and natural gas exports during the Putin era took its toll on the Russian economy,” Wirth writes.

“Russia is still a country with large trade surpluses when the prices of raw materials are high, and could invest them in the modernization of obsolete machinery and infrastructure”, says the analyst.

“But, as exports are concentrated in the hands of a few oligarchs, they prefer to invest funds abroad, which is why Russia has been going through a process of capital flight to tax havens, Switzerland or London”.

Siegel agrees that the Russian economy is not very diversified, adding that “they don’t have a incentive to innovate”.

“Despite the resources, they don’t have the right institutions to innovate in terms of new products or technology,” he says.

The professor also indicates that, unlike other capitalist countries, in Russia There is not antitrust laws and there is no legal environment that emphasizes competition.

During the last three years Russia has had moderate economic growth.

In Russia the impact of the pandemic was less than in other countries, according to the World Bank.

According to the bank, this may have been due to its policy of tax aid by the State, as well as having a relatively small service sector and a large public sector that cushioned unemployment.

Still, Professor Wirth describes “disappointing” Russia’s economic growth rates for being one of the BRIC countries (Brazil, Russia, India, China, South Africa).

Furthermore, since Putin invaded Crimea in 2014 Russia has faced sanctions that have increasingly more isolatedor from western markets.

And the country now faces a sanctions package stronger international forces in response to their invasion of Ukraine.

These measures include the biggest Russian banks being kicked out of SWIFT, the international payments network, thereby it is difficult for them to process transactions that come from abroad.

Putin has already offered state aid to the sanctioned banks.

Also they have been frozen hundreds of billions of euros from the Russian central bank reserve.

Near 300 marks have suspended their operations in Russia.

and have also been applied individual sanctions to dozens of billionaires that the US, UK and Europe consider oligarchs close to Putin.

In the last month, the ruble has lost more than 40% of its value against the dollar.

Based on these sanctions, the investment bank Goldman Sacks calculates that this year Russia’s GDP could drop 7%.

The market analysis firm Oxford Economics calculates that the pressure on Russian financial markets could have a 6% impact in GDP, compared to the forecasts they had made before the crisis.

The bet of the West is that those sanctions isolate and drown the Russian economy, as a measure of pressure so that Putin suspends the attacks.

Wirth, however, shows skeptical about effectiveness of these sanctions.

“In authoritarian regimes, economic sanctions have been ineffective, neither in Iran nor in North Korea have they generated political changes,” he says. “Putin doesn’t seem to want to listen to anyone that it wasn’t himself.”

And meanwhile, Ukraine remains under relentless Russian fire.

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