Does the Russian mafia deserve the Nobel prize for economics?

Edward Luttwak

It is now conventional wisdom that mafyia extortion and official corruption of every sort are inflicting much damage on the Russian economy. In a widely cited estimate, crooked officials and plain gangsters are said to have sent as much as $100 billion into their foreign bank accounts since 1990, depriving the Russian economy of much more hard currency than the sum total of post-1990 Western aid. Countless newspaper articles have profiled the unappealing beneficiaries of the new economic order, from violent thugs with platinum-blonde molls and BMWs who do their showing off in restaurants, to sleek ex-officials in Armani suits with Vienna bank accounts, Manhattan apartments and good friends in the Kremlin, who show off in New York Times interviews.

Far more numerous are the less obviously criminal and much less glamorous ‘bizness-men’ – thousands of them – who traffick in state-owned raw materials diverted for entirely private export, who help thieving state managers transfer public property to personal ownership, who collaborate with foreign adventurers to smuggle consumer goods in and weapons out, or who simply buy and sell without bothering to pay taxes. Most visitors to Russia have encountered specimens of the type in the hotel lobbies that are their favourite places of business; some earn just enough to get by from day to day while waiting for their big hit, but quite a few have become seriously rich very quickly.

There is no doubt that the pervasive criminalisation of the Russian economy imposes real costs. The purchasing power of an impoverished population is further reduced, because mafia ‘protection’ fees increase prices. Efficient private-enterprise firms suffer from the unfair competition of less efficient rivals backed by corrupt officials. And, as anywhere else, tax evasion must ultimately be offset by inflationary money-printing, or higher taxes inimical to growth. Moreover, the intense popular resentment of both gangsters and tycoons certainly threatens Russia’s economic liberalisation very directly: at the next opportunity, a majority of the electorate may decide to vote for go-slow Communists, or even hardline Stalinists – though even they could only stop further privatisations, not reverse the process.

The political threat is real enough, but in purely economic terms the conventional wisdom is all wrong. To begin with, it overlooks the natural evolution of the capitalist animal. The fat cows that populate advanced economies – stable, highly capitalised firms which offer good employment, pay their taxes in full, invest in new plant, develop new technology and contribute to charities and culture – were not born as such. It was as lean and hungry wolves that they originally accumulated capital, by seizing profitable market opportunities – often by killing off competitors in ways that today’s anti-monopoly commissions would not tolerate – and by cutting costs in every way possible, not excluding all the tax avoidance they could get away with. But when countries and their economies undergo truly drastic transformations, as Germany, Italy and Japan did because of the destructions of World War Two, and as Russia is now doing, conditions are too harsh even for wolves. Only ruthless hyenas can survive and prosper in the chaos: by trafficking in whatever can be profitably sold, legally or otherwise; by buying up valuable real estate for pennies from desperate owners or corrupt officials; by the improvised manufacture of sub-standard products for deprived consumers; or by the simple theft of abandoned, semi-abandoned, or just poorly guarded property.

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