A Normal CountryRussia After Communism

Andrei Shleifer and Daniel Treisman

D uring the 1990s Russia underwent extraordinary transformations Itchanged from a communist dictatorship into a multiparty democracy inwhich officials are chosen in regular elections Its centrally planned

economy was reshaped into a capitalist order based on markets and private prop-erty Its army withdrew peacefully from eastern Europe and the former Sovietrepublics allowing the latter to become independent countries Twenty years agoonly the most naıve idealist could have imagined such a metamorphosis

Yet the mood among Western observers has been anything but celebratory Bythe turn of the century Russia had come to be viewed as a disastrous failure and the1990s as a decade of catastrophe for its people Journalists politicians and academicexperts typically describe Russia not as a middle-income country struggling toovercome its communist past and find its place in the world but as a collapsed andcriminal state

In Washington both left and right have converged on this view To DickArmey then Republican House majority leader Russia had by 1999 become ldquoalooted and bankrupt zone of nuclearized anarchyrdquo (Schmitt 1999) To his col-league Banking Committee Chairman James Leach (1999a b) Russia was ldquotheworldrsquos most virulent kleptocracyrdquo more corrupt than even Mobutursquos Zaire Ber-nard Sanders (1998) the socialist congressman from Vermont described Russiarsquoseconomic performance in the 1990s as a ldquotragedy of historic proportionsrdquo liberalreforms had produced only ldquoeconomic collapserdquo ldquomass unemploymentrdquo andldquogrinding povertyrdquo

More recently a glimmer of optimism returned President Bush in late 2003praised President Putinrsquos efforts to make Russia into a ldquocountry in which democracy

y Andrei Shleifer is Whipple V N Jones Professor of Economics Harvard UniversityCambridge Massachusetts Daniel Treisman is Associate Professor of Political ScienceUniversity of California at Los Angeles Los Angeles California

Journal of Economic PerspectivesmdashVolume 19 Number 1mdashWinter 2005mdashPages 151ndash174

and freedom and the rule of law thriverdquo (US Department of State 2003) But thehappy talk did not last long When Russian prosecutors arrested the oil tycoonMikhail Khodorkovsky in October 2003 New York Times columnist William Safire(2003b) reported that Russia was now ruled by a ldquopower-hungry mafiardquo of formerKGB and military officers who had grabbed ldquothe nation by the throatrdquo When thepro-Putin United Russia Party was announced to have won more than 37 percent ofthe vote in the December 2003 parliamentary election Safire (2003a) lamented thereturn of ldquoone-party rule to Russiardquo and declared the countryrsquos experiment withdemocracy ldquoall but deadrdquo

Are conditions in contemporary Russia as bad as the critics contend In thisarticle we examine the countryrsquos recent economic and political performance usinga variety of data on growth macroeconomic stability income inequality and com-pany finances as well as reports of election monitors and surveys of business peopleand crime victims We find a large gap between the common perception and thefacts After reviewing the evidence the widespread image of Russia as a uniquelymenacing disaster zone comes to seem like the reflection in a distorting mirrormdashthe features are recognizable but stretched and twisted out of all proportion

In fact although Russiarsquos transition has been painful in many ways and itseconomic and political systems remain far from perfect the country has maderemarkable economic and social progress Russiarsquos remaining defects are typical ofcountries at its level of economic development Both in 1990 and 2003 Russia wasa middle-income country with GDP per capita around $8000 at purchasing powerparity according to the UN International Comparison Project a level comparableto that of Argentina in 1991 and Mexico in 1999 Countries in this income rangehave democracies that are rough around the edges if they are democratic at allTheir governments suffer from corruption and their press is almost never entirelyfree Most also have high income inequality concentrated corporate ownershipand turbulent macroeconomic performance In all these regards Russia is quitenormal1 Nor are the common flaws of middle-income capitalist democraciesincompatible with further economic and political progress

To say that Russia has become a ldquonormalrdquo middle-income country is not tooverlook the messiness of its politics and economics or to excuse the failures of itsleaders Most middle-income countries are not secure or socially just places to liveNor are all middle-income countries alike None of the others has Russiarsquos nucleararms or its pivotal role in international affairs Yet other countries around Russiarsquoslevel of incomemdashfrom Mexico and Brazil to Malaysia and Croatiamdashface a commonset of economic problems and political challenges from similarly precarious van-tage points Russiarsquos struggles to meet such challenges closely resemble those of itspeers In the next section we provide a brief review of key events in Russiarsquostransition before plunging into a more detailed examination of the facts

1 We are not the first to call Russia ldquonormalrdquo Boris Yeltsin used this term in 1994 in his memoir TheStruggle for Russiamdasha little earlier than we would have Mary Dejevsky ldquoThe Prophets of Doom WereWrong About Russiardquo The Independent December 26 2001 also used this language

152 Journal of Economic Perspectives

Russia After Communism

In June 1991 Boris Yeltsin became Russiarsquos first elected president In Decem-ber following a failed putsch by communist hardliners that August Yeltsin agreedwith the leaders of Ukraine and Belarus to dissolve the Soviet Union leaving Russiaindependent Yeltsinrsquos elevation followed several years of partial reform under thelast Soviet leader Mikhail Gorbachev The previous two years had seen declines inoutput worsening shortages and fears of a complete economic and politicalcollapse In 1989 the average citizen spent 40ndash68 hours a month standing in lineBy April 1991 fewer than one in eight respondents to an opinion poll said they hadrecently seen meat in state stores and fewer than one in 12 had seen butter (Aron2002) In fall 1991 CNN predicted starvation that winter

Once in power Yeltsin introduced radical economic reforms In January 1992most prices were liberalized Queues disappeared and goods reappeared in storesA mass privatization program implemented during 1993ndash1994 transferred sharesin most firms from the government to their managers workers and the public Bymid-1994 almost 70 percent of the Russian economy was in private hands In 1995with the help of the International Monetary Fund Russia stabilized the rubleEnacting these reforms proved extremely difficult The parliament the unre-formed and well-organized Communist Party and entrenched industrial interestsresisted almost every measure

In 1995 Yeltsin tried to broaden his support ahead of the 1996 presidentialelection which the Communist Party leader Gennady Zyuganov was expected towin As part of this political campaign and in an attempt to balance the budgetYeltsin agreed to a ldquoloans-for-sharesrdquo program whereby some valuable naturalresource enterprises were turned over to major businessmen in exchange for loansto the government This highly controversial program accelerated the consolida-tion of a few large financial groups led by so-called ldquooligarchsrdquo who enjoyed greatpolitical and economic influence The oligarchs helped Yeltsin with sympatheticcoverage on the television networks and in the newspapers they owned

Despite suffering a heart attack which was concealed from the voters Yeltsinwon a second presidential term He accomplished the goal of his life to preventcommunists from regaining power in Russia But he was a sick man lackingpolitical and popular support and much of his focus was on finding a successorPolitical gridlock made it hard for the government to collect taxes As oil pricescollapsed in 1997ndash1998 so did the federal budget and the financial turmoil thathad started in east Asia spread to Russia The crisis led to a Russian debt default anda sharp depreciation of the ruble yet contrary to the expectations of most punditsit was followed by a rapid economic recovery

Yeltsinrsquos foreign and military policies during this period were equally radicalHe reduced defense procurement by an estimated 90 percent pursued drasticnuclear arms reduction in co-operation with the United States accepted theexpansion of NATO and participated in UN-led efforts to stop civil war in theformer Yugoslavia But Russia also started a war in Chechnya that led to tens ofthousands of casualties

Andrei Shleifer and Daniel Treisman 153

Yeltsin ultimately found a successor Vladimir Putin whom he appointedPrime Minister in 1999 On January 1 2000 Yeltsin resigned and Putin becameActing President subsequently winning the presidential election in March of thatyear Over the following four years Russiarsquos economy grew rapidly helped byincreases in oil prices and the continuing benefits of exchange rate depreciationBy 2003 the Russian government was borrowing money in world markets long termat an interest rate of around 7 percent indicating significant investor confidenceMost forecasts for Russiarsquos economic growth had turned highly optimistic

Economic Cataclysm

The Output ldquoCollapserdquoRussia started its transition in the early 1990s as a middle-income country The

United Nations International Comparison Project which calculates cross-nationallycomparable income figures estimates that Russiarsquos per capita GDP as of 1989 was$8210mdasharound the level of Ukraine Argentina Latvia and South Africa (By 1991when Gorbachev left office it had fallen to $7780) This level was higher thanMexico and Brazil but only about 65ndash75 percent of that in poorer west Europeancountries such as Portugal Greece and Spain less than half the level of France orItaly and just over one-third that of the United States

That Russiarsquos output contracted catastrophically in the 1990s has become acliche According to official Goskomstat statistics Russian GDP per capita fell about39 percent in real terms between 1991 when Gorbachev left office and 1998 whenthe economic recovery started2

Yet there are three reasons to think that Russiarsquos economic performance in the1990s was actually far better First official statistics greatly exaggerate the true valueof Russiarsquos output at the beginning of the decade Much of recorded GDP underthe Soviet Union consisted of military goods unfinished construction projects andshoddy consumer products for which there was no demand In the early 1990smilitary procurement dropped sharply With the introduction of markets firms alsostopped making consumer goods they could not sell Cutting such productionreduces reported economic output but does not leave consumers any worse offMoreover much of reported output under the Soviet system was simply fictitiousTo obtain bonuses managers routinely inflated their production figures With theend of central planning managers now wished to underreport output so as toreduce their tax bill Consequently Russiarsquos economic decline was probably smallerthan officially reported (Aslund 2002)3

2 We use the change in real GDP figures from Rossiiskiy Statisticheskiy Yezhegodnik 2001 for 1990ndash1995 andthen newer updated figures for subsequent years from Goskomstatrsquos website at httpwwwgksruscriptsfree1cexeXXXX19F21000040R We adjusted for change in population using figures fromRossiiskiy Statisticheskiy Yezhegodnik 2001 and Rossia v Tsifrakh 20023 Some researchers argue that the Russian consumer price index has been measured with significant biasduring the transition period leading to major overestimation of the transitional drop in living standardsThe Russian official Consumer Price Index is a fixed-weight (Laspeyres) index which does not take into

154 Journal of Economic Perspectives

and freedom and the rule of law thriverdquo (US Department of State 2003) But thehappy talk did not last long When Russian prosecutors arrested the oil tycoonMikhail Khodorkovsky in October 2003 New York Times columnist William Safire(2003b) reported that Russia was now ruled by a ldquopower-hungry mafiardquo of formerKGB and military officers who had grabbed ldquothe nation by the throatrdquo When thepro-Putin United Russia Party was announced to have won more than 37 percent ofthe vote in the December 2003 parliamentary election Safire (2003a) lamented thereturn of ldquoone-party rule to Russiardquo and declared the countryrsquos experiment withdemocracy ldquoall but deadrdquo

Are conditions in contemporary Russia as bad as the critics contend In thisarticle we examine the countryrsquos recent economic and political performance usinga variety of data on growth macroeconomic stability income inequality and com-pany finances as well as reports of election monitors and surveys of business peopleand crime victims We find a large gap between the common perception and thefacts After reviewing the evidence the widespread image of Russia as a uniquelymenacing disaster zone comes to seem like the reflection in a distorting mirrormdashthe features are recognizable but stretched and twisted out of all proportion

In fact although Russiarsquos transition has been painful in many ways and itseconomic and political systems remain far from perfect the country has maderemarkable economic and social progress Russiarsquos remaining defects are typical ofcountries at its level of economic development Both in 1990 and 2003 Russia wasa middle-income country with GDP per capita around $8000 at purchasing powerparity according to the UN International Comparison Project a level comparableto that of Argentina in 1991 and Mexico in 1999 Countries in this income rangehave democracies that are rough around the edges if they are democratic at allTheir governments suffer from corruption and their press is almost never entirelyfree Most also have high income inequality concentrated corporate ownershipand turbulent macroeconomic performance In all these regards Russia is quitenormal1 Nor are the common flaws of middle-income capitalist democraciesincompatible with further economic and political progress

To say that Russia has become a ldquonormalrdquo middle-income country is not tooverlook the messiness of its politics and economics or to excuse the failures of itsleaders Most middle-income countries are not secure or socially just places to liveNor are all middle-income countries alike None of the others has Russiarsquos nucleararms or its pivotal role in international affairs Yet other countries around Russiarsquoslevel of incomemdashfrom Mexico and Brazil to Malaysia and Croatiamdashface a commonset of economic problems and political challenges from similarly precarious van-tage points Russiarsquos struggles to meet such challenges closely resemble those of itspeers In the next section we provide a brief review of key events in Russiarsquostransition before plunging into a more detailed examination of the facts

1 We are not the first to call Russia ldquonormalrdquo Boris Yeltsin used this term in 1994 in his memoir TheStruggle for Russiamdasha little earlier than we would have Mary Dejevsky ldquoThe Prophets of Doom WereWrong About Russiardquo The Independent December 26 2001 also used this language

152 Journal of Economic Perspectives

Russia After Communism

In June 1991 Boris Yeltsin became Russiarsquos first elected president In Decem-ber following a failed putsch by communist hardliners that August Yeltsin agreedwith the leaders of Ukraine and Belarus to dissolve the Soviet Union leaving Russiaindependent Yeltsinrsquos elevation followed several years of partial reform under thelast Soviet leader Mikhail Gorbachev The previous two years had seen declines inoutput worsening shortages and fears of a complete economic and politicalcollapse In 1989 the average citizen spent 40ndash68 hours a month standing in lineBy April 1991 fewer than one in eight respondents to an opinion poll said they hadrecently seen meat in state stores and fewer than one in 12 had seen butter (Aron2002) In fall 1991 CNN predicted starvation that winter

Once in power Yeltsin introduced radical economic reforms In January 1992most prices were liberalized Queues disappeared and goods reappeared in storesA mass privatization program implemented during 1993ndash1994 transferred sharesin most firms from the government to their managers workers and the public Bymid-1994 almost 70 percent of the Russian economy was in private hands In 1995with the help of the International Monetary Fund Russia stabilized the rubleEnacting these reforms proved extremely difficult The parliament the unre-formed and well-organized Communist Party and entrenched industrial interestsresisted almost every measure

In 1995 Yeltsin tried to broaden his support ahead of the 1996 presidentialelection which the Communist Party leader Gennady Zyuganov was expected towin As part of this political campaign and in an attempt to balance the budgetYeltsin agreed to a ldquoloans-for-sharesrdquo program whereby some valuable naturalresource enterprises were turned over to major businessmen in exchange for loansto the government This highly controversial program accelerated the consolida-tion of a few large financial groups led by so-called ldquooligarchsrdquo who enjoyed greatpolitical and economic influence The oligarchs helped Yeltsin with sympatheticcoverage on the television networks and in the newspapers they owned

Despite suffering a heart attack which was concealed from the voters Yeltsinwon a second presidential term He accomplished the goal of his life to preventcommunists from regaining power in Russia But he was a sick man lackingpolitical and popular support and much of his focus was on finding a successorPolitical gridlock made it hard for the government to collect taxes As oil pricescollapsed in 1997ndash1998 so did the federal budget and the financial turmoil thathad started in east Asia spread to Russia The crisis led to a Russian debt default anda sharp depreciation of the ruble yet contrary to the expectations of most punditsit was followed by a rapid economic recovery

Yeltsinrsquos foreign and military policies during this period were equally radicalHe reduced defense procurement by an estimated 90 percent pursued drasticnuclear arms reduction in co-operation with the United States accepted theexpansion of NATO and participated in UN-led efforts to stop civil war in theformer Yugoslavia But Russia also started a war in Chechnya that led to tens ofthousands of casualties

Andrei Shleifer and Daniel Treisman 153

Yeltsin ultimately found a successor Vladimir Putin whom he appointedPrime Minister in 1999 On January 1 2000 Yeltsin resigned and Putin becameActing President subsequently winning the presidential election in March of thatyear Over the following four years Russiarsquos economy grew rapidly helped byincreases in oil prices and the continuing benefits of exchange rate depreciationBy 2003 the Russian government was borrowing money in world markets long termat an interest rate of around 7 percent indicating significant investor confidenceMost forecasts for Russiarsquos economic growth had turned highly optimistic

Economic Cataclysm

The Output ldquoCollapserdquoRussia started its transition in the early 1990s as a middle-income country The

United Nations International Comparison Project which calculates cross-nationallycomparable income figures estimates that Russiarsquos per capita GDP as of 1989 was$8210mdasharound the level of Ukraine Argentina Latvia and South Africa (By 1991when Gorbachev left office it had fallen to $7780) This level was higher thanMexico and Brazil but only about 65ndash75 percent of that in poorer west Europeancountries such as Portugal Greece and Spain less than half the level of France orItaly and just over one-third that of the United States

That Russiarsquos output contracted catastrophically in the 1990s has become acliche According to official Goskomstat statistics Russian GDP per capita fell about39 percent in real terms between 1991 when Gorbachev left office and 1998 whenthe economic recovery started2

Yet there are three reasons to think that Russiarsquos economic performance in the1990s was actually far better First official statistics greatly exaggerate the true valueof Russiarsquos output at the beginning of the decade Much of recorded GDP underthe Soviet Union consisted of military goods unfinished construction projects andshoddy consumer products for which there was no demand In the early 1990smilitary procurement dropped sharply With the introduction of markets firms alsostopped making consumer goods they could not sell Cutting such productionreduces reported economic output but does not leave consumers any worse offMoreover much of reported output under the Soviet system was simply fictitiousTo obtain bonuses managers routinely inflated their production figures With theend of central planning managers now wished to underreport output so as toreduce their tax bill Consequently Russiarsquos economic decline was probably smallerthan officially reported (Aslund 2002)3

2 We use the change in real GDP figures from Rossiiskiy Statisticheskiy Yezhegodnik 2001 for 1990ndash1995 andthen newer updated figures for subsequent years from Goskomstatrsquos website at httpwwwgksruscriptsfree1cexeXXXX19F21000040R We adjusted for change in population using figures fromRossiiskiy Statisticheskiy Yezhegodnik 2001 and Rossia v Tsifrakh 20023 Some researchers argue that the Russian consumer price index has been measured with significant biasduring the transition period leading to major overestimation of the transitional drop in living standardsThe Russian official Consumer Price Index is a fixed-weight (Laspeyres) index which does not take into

154 Journal of Economic Perspectives

Russia After Communism

In June 1991 Boris Yeltsin became Russiarsquos first elected president In Decem-ber following a failed putsch by communist hardliners that August Yeltsin agreedwith the leaders of Ukraine and Belarus to dissolve the Soviet Union leaving Russiaindependent Yeltsinrsquos elevation followed several years of partial reform under thelast Soviet leader Mikhail Gorbachev The previous two years had seen declines inoutput worsening shortages and fears of a complete economic and politicalcollapse In 1989 the average citizen spent 40ndash68 hours a month standing in lineBy April 1991 fewer than one in eight respondents to an opinion poll said they hadrecently seen meat in state stores and fewer than one in 12 had seen butter (Aron2002) In fall 1991 CNN predicted starvation that winter

Once in power Yeltsin introduced radical economic reforms In January 1992most prices were liberalized Queues disappeared and goods reappeared in storesA mass privatization program implemented during 1993ndash1994 transferred sharesin most firms from the government to their managers workers and the public Bymid-1994 almost 70 percent of the Russian economy was in private hands In 1995with the help of the International Monetary Fund Russia stabilized the rubleEnacting these reforms proved extremely difficult The parliament the unre-formed and well-organized Communist Party and entrenched industrial interestsresisted almost every measure

In 1995 Yeltsin tried to broaden his support ahead of the 1996 presidentialelection which the Communist Party leader Gennady Zyuganov was expected towin As part of this political campaign and in an attempt to balance the budgetYeltsin agreed to a ldquoloans-for-sharesrdquo program whereby some valuable naturalresource enterprises were turned over to major businessmen in exchange for loansto the government This highly controversial program accelerated the consolida-tion of a few large financial groups led by so-called ldquooligarchsrdquo who enjoyed greatpolitical and economic influence The oligarchs helped Yeltsin with sympatheticcoverage on the television networks and in the newspapers they owned

Despite suffering a heart attack which was concealed from the voters Yeltsinwon a second presidential term He accomplished the goal of his life to preventcommunists from regaining power in Russia But he was a sick man lackingpolitical and popular support and much of his focus was on finding a successorPolitical gridlock made it hard for the government to collect taxes As oil pricescollapsed in 1997ndash1998 so did the federal budget and the financial turmoil thathad started in east Asia spread to Russia The crisis led to a Russian debt default anda sharp depreciation of the ruble yet contrary to the expectations of most punditsit was followed by a rapid economic recovery

Yeltsinrsquos foreign and military policies during this period were equally radicalHe reduced defense procurement by an estimated 90 percent pursued drasticnuclear arms reduction in co-operation with the United States accepted theexpansion of NATO and participated in UN-led efforts to stop civil war in theformer Yugoslavia But Russia also started a war in Chechnya that led to tens ofthousands of casualties

Andrei Shleifer and Daniel Treisman 153

Yeltsin ultimately found a successor Vladimir Putin whom he appointedPrime Minister in 1999 On January 1 2000 Yeltsin resigned and Putin becameActing President subsequently winning the presidential election in March of thatyear Over the following four years Russiarsquos economy grew rapidly helped byincreases in oil prices and the continuing benefits of exchange rate depreciationBy 2003 the Russian government was borrowing money in world markets long termat an interest rate of around 7 percent indicating significant investor confidenceMost forecasts for Russiarsquos economic growth had turned highly optimistic

Economic Cataclysm

The Output ldquoCollapserdquoRussia started its transition in the early 1990s as a middle-income country The

United Nations International Comparison Project which calculates cross-nationallycomparable income figures estimates that Russiarsquos per capita GDP as of 1989 was$8210mdasharound the level of Ukraine Argentina Latvia and South Africa (By 1991when Gorbachev left office it had fallen to $7780) This level was higher thanMexico and Brazil but only about 65ndash75 percent of that in poorer west Europeancountries such as Portugal Greece and Spain less than half the level of France orItaly and just over one-third that of the United States

That Russiarsquos output contracted catastrophically in the 1990s has become acliche According to official Goskomstat statistics Russian GDP per capita fell about39 percent in real terms between 1991 when Gorbachev left office and 1998 whenthe economic recovery started2

Yet there are three reasons to think that Russiarsquos economic performance in the1990s was actually far better First official statistics greatly exaggerate the true valueof Russiarsquos output at the beginning of the decade Much of recorded GDP underthe Soviet Union consisted of military goods unfinished construction projects andshoddy consumer products for which there was no demand In the early 1990smilitary procurement dropped sharply With the introduction of markets firms alsostopped making consumer goods they could not sell Cutting such productionreduces reported economic output but does not leave consumers any worse offMoreover much of reported output under the Soviet system was simply fictitiousTo obtain bonuses managers routinely inflated their production figures With theend of central planning managers now wished to underreport output so as toreduce their tax bill Consequently Russiarsquos economic decline was probably smallerthan officially reported (Aslund 2002)3

2 We use the change in real GDP figures from Rossiiskiy Statisticheskiy Yezhegodnik 2001 for 1990ndash1995 andthen newer updated figures for subsequent years from Goskomstatrsquos website at httpwwwgksruscriptsfree1cexeXXXX19F21000040R We adjusted for change in population using figures fromRossiiskiy Statisticheskiy Yezhegodnik 2001 and Rossia v Tsifrakh 20023 Some researchers argue that the Russian consumer price index has been measured with significant biasduring the transition period leading to major overestimation of the transitional drop in living standardsThe Russian official Consumer Price Index is a fixed-weight (Laspeyres) index which does not take into

154 Journal of Economic Perspectives

Yeltsin ultimately found a successor Vladimir Putin whom he appointedPrime Minister in 1999 On January 1 2000 Yeltsin resigned and Putin becameActing President subsequently winning the presidential election in March of thatyear Over the following four years Russiarsquos economy grew rapidly helped byincreases in oil prices and the continuing benefits of exchange rate depreciationBy 2003 the Russian government was borrowing money in world markets long termat an interest rate of around 7 percent indicating significant investor confidenceMost forecasts for Russiarsquos economic growth had turned highly optimistic

Economic Cataclysm

The Output ldquoCollapserdquoRussia started its transition in the early 1990s as a middle-income country The

United Nations International Comparison Project which calculates cross-nationallycomparable income figures estimates that Russiarsquos per capita GDP as of 1989 was$8210mdasharound the level of Ukraine Argentina Latvia and South Africa (By 1991when Gorbachev left office it had fallen to $7780) This level was higher thanMexico and Brazil but only about 65ndash75 percent of that in poorer west Europeancountries such as Portugal Greece and Spain less than half the level of France orItaly and just over one-third that of the United States

That Russiarsquos output contracted catastrophically in the 1990s has become acliche According to official Goskomstat statistics Russian GDP per capita fell about39 percent in real terms between 1991 when Gorbachev left office and 1998 whenthe economic recovery started2

Yet there are three reasons to think that Russiarsquos economic performance in the1990s was actually far better First official statistics greatly exaggerate the true valueof Russiarsquos output at the beginning of the decade Much of recorded GDP underthe Soviet Union consisted of military goods unfinished construction projects andshoddy consumer products for which there was no demand In the early 1990smilitary procurement dropped sharply With the introduction of markets firms alsostopped making consumer goods they could not sell Cutting such productionreduces reported economic output but does not leave consumers any worse offMoreover much of reported output under the Soviet system was simply fictitiousTo obtain bonuses managers routinely inflated their production figures With theend of central planning managers now wished to underreport output so as toreduce their tax bill Consequently Russiarsquos economic decline was probably smallerthan officially reported (Aslund 2002)3

2 We use the change in real GDP figures from Rossiiskiy Statisticheskiy Yezhegodnik 2001 for 1990ndash1995 andthen newer updated figures for subsequent years from Goskomstatrsquos website at httpwwwgksruscriptsfree1cexeXXXX19F21000040R We adjusted for change in population using figures fromRossiiskiy Statisticheskiy Yezhegodnik 2001 and Rossia v Tsifrakh 20023 Some researchers argue that the Russian consumer price index has been measured with significant biasduring the transition period leading to major overestimation of the transitional drop in living standardsThe Russian official Consumer Price Index is a fixed-weight (Laspeyres) index which does not take into

154 Journal of Economic Perspectives

Second Russiarsquos unofficial economy grew rapidly in the 1990s Estimatingunofficial activity is difficult But one common technique for measuring the growthof the whole economymdashboth official and unofficialmdashis to use electricity consump-tion on the theory that even underground firms must use electricity (JohnsonKaufmann and Shleifer 1997) Figure 1 shows the trend in reported GDP deflatedfor price rises between 1990 and 2002 alongside figures for electricity consump-tion While official GDP fell 26 percent in this period electricity consumption fellonly 18 percent This suggests that Russiarsquos output decline in the 1990s was not assharp as the official statistics indicate Since under market conditions firms arelikely to use electricity more rationally even the observed decline in electricityconsumption may overstate the output drop4

Third other statistics suggest that average living standards fell little during thedecade and in some important respects improved Retail trade (in constantprices) rose 16 percent between 1990 and 2002 as shown in Figure 1 Goskomstatrsquosfigures for final consumption of households (in constant prices) rose by about3 percent during 1990ndash2002 Average living space increased from 16 square metersper person in 1990 to 19 in 2000 and the share of this living space owned bycitizens doubled during the decade from 26 to 58 percent (Goskomstat 2001p 200) The number of Russians going abroad as tourists rose from 16 million in1993 to 43 million in 2000 The shares of households with radios televisions taperecorders refrigerators washing machines and electric vacuum cleaners all in-creased between 1991 and 2000 Private ownership of cars doubled rising from14 cars per 100 households in 1991 to 27 in 2000 with large increases occurring inalmost all regions (Goskomstat 2001 pp 193ndash194) At the same time howeverconsumption of some previously state-provided or state-subsidized servicesmdashtrips tothe movies theaters museums and state-subsidized summer camps for childrenmdashfell

Russia has without doubt experienced an increase in inequality (as we discussbelow) But some indicators suggest improvement also toward the bottom of thesocial pyramid Since 1993 (when comprehensive figures begin) the proportion ofRussiarsquos housing with running water has increased from 66 to 73 percent the sharewith hot water grew from 51 to 59 percent and the percentage with central heatingrose from 64 to 73 percent Since 1990 the proportion of apartments with tele-phones has increased from 30 to 49 percent (Goskomstat 2001 pp 201 468)

One indicator often taken as evidence of a catastrophic decline in livingstandards is the sharp drop in Russian life expectancy in the 1990s Between 1990and 2000 average life expectancy fell by about four years from 692 to 653

account consumer substitution away from higher-priced goods and therefore overstates the effect ofrising prices on living standards whenmdashas occurred in Russiamdashthe prices of different goods rise at verydifferent rates See Gibson Stillman and Le (2004)4 If electricity consumption by households and the government itself fell less than that by producers thetotal drop in electricity consumption might understate the drop in economic output However roughcalculations suggest the share of households was very lowmdashmaybe on the order of 4ndash6 percent of thetotal Our guess is that use by the government was even lower

A Normal Country Russia After Communism 155

However as Cutler and Brainerd show in their contribution to this symposium thisdoes not seem to be related to increased poverty malnutrition or poorer access tohealth care If poverty were to blame one might expect the death rate to rise mostamong the most economically vulnerable groups In the early 1990s the povertyrate was highest among children aged 7 to 15 among adults it was higher amongwomen than men But there was practically no increase in mortality among chil-dren of any age and the death rate jumped much more for men than for women(Goskomstat 2001 p 126) Higher mortality is also hard to link to malnutrition In1992ndash1993 as the death rate jumped sharply the Russian Longitudinal MonitoringSurvey found no evidence of serious malnutrition in Russia In fact the proportionof people whose body weight increased during these years exceeded the share thatlost weight (Shkolnikov Cornia Leon and Mesle 1998) As for access to healthcare the percentage of adults getting required checkups fell slightly from89 percent in 1990 to 86 percent in 1992 before rising to 91 percent in 2000(Goskomstat 2001 p 246) The statersquos fiscal crisis did reduce resources of thehealth system in some ways But in other ways resources increased The number ofdoctors per capita already one of the highest in the world rose still higher in the1990s (Goskomstat 2001 p 242) Infant mortalitymdashone indicator of the effective-ness of basic health caremdashalthough rising a little initially fell during the decadefrom 174 per 1000 live births in 1990 to 153 in 2000 (Goskomstat 2001 p 127)

Most specialists agree that the rise in mortality in the early 1990s concentratedas it was among middle-aged men had much to do with increasing alcohol abuse(Shkolnikov Cornia Leon and Mesle 1998 DaVanzo and Grammich 2001) Thismay have been stimulated by a sharp drop in the relative price of vodka in theseyears For the average monthly income Russians could buy 10 liters of vodka in

Figure 1Measuring Economic Change in Russia 1990ndash2002

50

60

70

80

90

100

110

120

1990 1991 1992

Official GDP (constant prices)Electricity consumptionFinal consumption of householdsReal retail trade turnover

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source Goskomstat Rossii Rossiiskiy Statisticheskiy Yezhegodnik 2001 2003 Rossia v Tsifrakh 2002Goskomstat updates

156 Journal of Economic Perspectives

1990 but 47 in 19945 Several causes of death that increased dramatically have beenassociated with binge drinking (Shkolnikov Cornia Leon and Mesle 1998) Stressinduced by the economic transition may also have contributed as Brainerd andCutler argue in this journal Either way there is little sign the increased death ratewas caused by falling income As per capita GDP rose by about 30 percent between1998 and 2002 life expectancy again dropped by 22 years

A close look at Figure 1 also casts doubt on the popular theory that Russiarsquoseconomic decline was caused by misguided government policies pursued in the1990s especially Yeltsinrsquos privatization program and his ldquoloans-for-sharesrdquo scheme(Goldman 2003) As Figure 1 makes clear most of the fall in both Russiarsquos officialGDP and electricity consumption occurred prior to 1994 before the significantpart of the mass privatization program was completed and before the ldquoloans-for-sharesrdquo program was even contemplated

Comparing Russiarsquos economic performance in the 1990s to that of otherpostcommunist countries suggests two additional points illustrated in Figure 2First officially measured output fell in all the postcommunist economies of easternEurope and the former Soviet Union with no exceptions It declined in newdemocracies such as Russia and Poland and in continuing dictatorships such asBelarus and Tajikistan in rapid reformers such as the Czech Republic and Hun-gary and in very slow reformers such as Ukraine and Uzbekistan The universalityof the contraction suggests common causes One possibility is a universal decreasein military and economically useless activities that were previously counted asoutput A second is the temporary dislocation that all countries experienced astheir planning systems disintegrated (Murphy Shleifer and Vishny 1992 Blan-chard and Kremer 1997) Consistent with both these explanations officially mea-sured output began to recover after a few years almost everywhere Second thedepth of the measured contraction was greater in some countries than in othersGenerally it was smaller in eastern Europe and the Baltic states than in the rest ofthe former Soviet Union Russiarsquos official output fell slightly less than average forthe 14 former Soviet republics for which figures are available6

The patterns of decline in the postcommunist countries challenge anothercommon theory about the output contraction Some argue that excessive speed ofreform exacerbated the decline and compare the ldquogradualismrdquo of Chinarsquos eco-nomic policies favorably to the ldquoshock therapyrdquo of Russiarsquos In fact among the eastEuropean and former Soviet countries there is no obvious relationship betweenspeed of reform and change in official output Comparisons across these countriesmust be tentative since the quality of statistics varies and the uneven impact of civildisorder and war complicates drawing connections between economic policy andperformance However among the countries that contracted least according to the

5 Calculated from Russian Economic Trends database and Goskomstat (1994 p 288) Goskomstat(2001 p 588)6 One might have expected that the shift to world market prices in trade among the former communistcountries would have disproportionately benefited Russia which had been exporting subsidized energyto other eastern bloc countries

Andrei Shleifer and Daniel Treisman 157

official figures are both rapid reformers (Estonia Poland Czech Republic) andslow or nonreformers (Belarus Uzbekistan) Those with the largest declines alsoinclude both nonreformers (Tajikistan Turkmenistan) and some that tried toreform (Moldova) A comparison of Russia with Ukraine is particularly instructive(see Figure 2) Ukraine had a large population (about 52 million) an industrialeconomy significant natural resources and a ldquoculturerdquo similar to Russiarsquos prior totransition Unlike Russia it retained the old communist leadership albeit renamedand pursued more cautious reforms keeping a much larger share of the economyin state hands Yet Ukrainersquos official drop in per capita GDP of 45 percent between1991 and 2001 was almost twice as large as Russiarsquos

In comparison with other nations of eastern Europe and the former SovietUnion Russiarsquos economy performed roughly as one might have expected Our bestestimate is that its genuine output drop between 1990 and 2001 was small andprobably completely reversed by 2003 (Aslund 2003) Considering the distorteddemand inflated accounting and uselessness of much of the prereform outputRussians today are probably on average better off than they were in 1990

Financial CrisesThe 1990s was a decade of extreme macroeconomic turbulence for Russia

Between December 1991 and December 2001 the rublersquos value dropped by more

Figure 2Official GDP Per Capita in Postcommunist Countries First 10 Years of Transition(at constant prices)

0

20

40

60

80

100

120

0 1 2

Former Soviet UnionEastern EuropeUkraineRussia

3 4 5 6 7 8 9 10

Years since start of transition (ldquo0rdquo 1989 for EE 1991 for FSU)

Source Calculated from World Bank World Development Indicators 2003 and EBRD Transition Report1997 Eastern Europe unweighted average of Albania Bulgaria Hungary Poland Romania SlovakiaSlovenia Former Soviet Union unweighted average of Armenia Belarus Estonia GeorgiaKazakhstan Kyrgyzstan Latvia Lithuania Moldova Russia Tajikistan Turkmenistan UkraineUzbekistan Data unavailable for Azerbaijan

158 Journal of Economic Perspectives

than 99 percent against the dollar Three years after the authorities managed tostabilize inflation in 1995 a financial crisis led to a devaluation of the ruble and agovernment moratorium on foreign debt payments

But such financial crises are common among emerging market economiesBad as the 99 percent drop in the rublersquos value sounds an examination of the IMFrsquosInternational Financial Statistics (April 2002) shows that eleven other countriesmdashincluding Brazil Turkey Ukraine and Belarusmdashsuffered even larger currencydeclines during the 1990s In the 1980s depreciations this large were even morefrequent with larger ones recorded by Peru Argentina Bolivia Brazil UruguayNicaragua Vietnam Lebanon and even Poland later seen as the greatest successstory of transition from socialism

During Russiarsquos 1998 crisis the ruble fell 61 percent in the two months ofAugust and September But during the decade from January 1992 to December2001 two-month currency collapses at least this large occurred 34 times in a totalof 20 countries Russiarsquos crash in 1998 was not an isolated phenomenon it came inthe middle of a wave of similar currency crises that stretched from Thailand andIndonesia to Brazil and Turkey Moreover the consequences of Russiarsquos 1998financial crisis were far less dire than claimed at the time The devaluation wasfollowed by a multiyear spurt of rapid growth and a reinvigorated drive towardliberal economic reform

Economic InequalityRussiarsquos economic reforms are said to have exacerbated economic inequality

with privatization often fingered as the primary culprit The European Bank forReconstruction and Development (1999 p 110) wrote ldquo[U]nder the lsquoshares-for-loansrsquo scheme implemented in 1995 many of the key resource-based companies fellinto the hands of a small group of financiers the so-called lsquooligarchsrsquo This has ledto very sharp increases in wealth and income inequalitymdashby 1997 the Gini coeffi-cient for income in Russia was around 05rdquo7

Inequality has increased sharply in Russia since the fall of communism Thereis some question about the precise numbers but no dispute about the trendRussiarsquos official statistical agency Goskomstat (2001 p187) shows the Gini coef-ficient for money incomes rising from 26 in 1991 to 41 in 1994 after which itstabilized at about 40 through the end of the decade8 The World Bank in variousissues of the annual World Development Reports and World Development Indicators gives

7 The Gini coefficient ranges from 0 to 1 where 0 means perfect equality (everyone has the sameincome) and 1 means perfect inequality (one person has all the income) To calculate the Ginicoefficient plot a ldquoLorenz curverdquo where the horizontal axis is the cumulative percentage of householdsranging up to 100 percent and the vertical axis is the cumulative percentage of income held by thosehouseholds also ranging up to 100 percent A straight line going up at a 45-degree angle will showperfect equality of income If the area between the line of perfect equality and actual Lorenz curve is Aand the area underneath the line that shows perfect equality of income is B the Gini coefficient is AB8 On the other hand relative equality of incomes in the shortage economy of late socialism existedalongside highly unequal access to consumer goods

A Normal Country Russia After Communism 159

figures for Russiarsquos Gini for expenditure of 496 in 1993 480 in 1996 487 in 1998and 460 in 2000 For comparison the Goskomstat figure of 41 is almost exactly thesame as that for the United States (408 in 1997) The higher World Bank estimateof 496 is about that of Malaysia (492) or the Philippines (462) but below that ofHong Kong (522) Mexico (531) South Africa (593) or Brazil (607)

The trouble with the claim that privatization caused inequality is that inequal-ity came first Russiarsquos Gini coefficient rose sharply between 1991 and 1993 andpeaked in 1994 before any effects of privatization could possibly materialize Noris unemployment responsible In 1992ndash1993 unemployment remained below6 percent It was in 1994ndash1998 that it grew to 132 percent while inequality declinedslightly (Goskomstat 2001 p 133) The growth of entrepreneurial income also playedat most a limited role Branko Milanovic (1998 p 22) of the World Bank finds that77 percent of the inequality increase can be attributed to growing dispersion of wageincomes While some Russians worked in successful firms that rapidly benefited fromfree prices and open trade others remained in declining firms and in the state sectorUnfortunate as the growth of inequality has been it is largely the result of the upheavalsassociated with rationalizing economic activity

Oligarchical CapitalismRussiarsquos economic reforms are often said to have fueled the rise of a small class

of ldquooligarchsrdquo who stand accused of stripping assets from the companies theyacquired This in turn is said to have depressed investment and economic growth(Stiglitz 2002 Hoff and Stiglitz 2002)

Russiarsquos big business is certainly dominated by a few tycoons as Guriev andRachinsky argue in their contribution to this symposium However in this Russia isquite typical In almost all developing capitalist economies and even in mostdeveloped countries the largest firms are either state or family controlled with afew dominant families often controlling a large share of national productionthrough financial and industrial groups (La Porta Lopez-de-Silanes and Shleifer1999 Claessens Djankov and Lang 1999) This is overwhelmingly true of middle-income countries such as Mexico Brazil South Korea Malaysia or South Africabut it also applies to developed countries such as Italy Singapore and Sweden Thebig business families are inevitably politically connected sometimes receiving loansand subsidies from the government (as in South Korea and Italy) often activelyparticipating in privatization (as in Mexico and Brazil) and quite regularly holdinghigh government offices while retaining a connection to their firms (as in Italy andMalaysia) (Faccio 2003) Following the Asian financial crisis of 1998 this system ofpolitical ownership and control has been pejoratively rechristened ldquocrony capital-ismrdquo even though it has been associated with some of the most rapid growth everseen as well as a remarkable recovery from crisis in Malaysia and South Korea Suchpatterns of ownership have also emerged in transition economies from Latvia to thecentral Asian states

Have Russiarsquos oligarchs depressed economic performance Russiarsquos tycoonslike those elsewhere in the developing world (not to mention Americarsquos robber

160 Journal of Economic Perspectives

barons of the nineteenth century) grew rich in part through deals with thegovernment But the claim that this accounts for poor growth in Russia makes littlesense Russiarsquos sharp decline in official output came beforemdashnot aftermdashthe oli-garchs emerged on the scene in 1995ndash1996 A few years of stagnation followed andthen rapid growth Oligarch-controlled companies have performed extremely welland far better than many comparable companies that remained controlled by thestate or by their Soviet-era managers They are responsible for much of thedramatic increase in output in recent years as well as the amazing stock marketboom

Consider three of the most notorious cases In ldquoloans-for-sharesrdquo MikhailKhodorkovsky (now in jail) obtained a major stake in the oil company Yukos BorisBerezovsky (now in exile) won control of the oil company Sibneft along with histhen-partner Roman Abramovich Vladimir Potanin acquired the nickel producerNorilsk Nickel Between 1996 and 2001 the reported pretax profits of YukosSibneft and Norilsk Nickel rose in real terms by 36 10 and 5 times respectively9

Their stock market valuations also soared (those of Yukos and Sibneft rising bymore than 30 times in real terms) This performance is markedly better than thatof the gas monopoly Gazprom or the electricity utility UES which stayed understate control or of major private companies such as Lukoil that remained con-trolled by preprivatization management (Boone and Rodionov 2001)

Have the oligarchs stripped assets from the companies they acquired inprivatization The audited financial statements of these companies suggest theyactually invested especially since 1998 Yukosrsquo assets rose from $53 billion in 1998to $144 billion in 2002 although this might reflect in part higher world oil prices(see Table 1) Norilsk Nickelrsquos assets rose from $66 billion in 1999 to $97 billionin 2002 Sibneftrsquos assets did fall from 1996 to 1999 in part due to an accountingchange (which might reflect asset stripping) But since 1999 they have increasedfrom $43 billion to $75 billion in 2002 Recently the major oligarchs have beeninvesting hundreds of millions of dollars annually in their companies In 2002Yukos invested $126 billion in property plant and equipment and Sibneft madecapital expenditures of $959 million Guriev and Rachinsky (2004) in a systematicstudy of the performance of oligarch-controlled companies in 2001 found thatsuch companies invested significantly more that year than firms controlled by otherRussian owners

In contrast the greatest asset stripping scandals have concerned companiesthat remained under state control Gazpromrsquos former management has beenaccused of stealing assets via complicated networks of trading companies Thestate-owned airline Aeroflotrsquos reported assets dropped between 1998 and 2001 Byand large the companies privatized to the oligarchs performed far better thanthose left under state control That the leading oligarch-controlled oil companiesgenerally outperformed other oil firms such as Lukoil which remained under

9 Calculated from figures in Ekspert database deflating by the Consumer Price Index

Andrei Shleifer and Daniel Treisman 161

Soviet-era management suggests that their success was due to better managementand not only to rising oil prices

None of this is to say the oligarchs are public spirited politically naıve orprotective of their minority shareholders They benefited from sweetheart dealswith the government and massively diluted the value of minority shares in order toconsolidate their control Investor protection and corporate governance in Russiaremain weak But here again Russia is typical of middle-income developing coun-tries where expropriation of minority shareholders is nearly universal (Johnson LaPorta Lopez-de-Silanes and Shleifer 2000)

In fact the claim that the oligarchs privatized companies in order to strip theirassets and are impeding economic growth has it precisely backward The oligarchsstripped assets from state-controlled companies in order to buy others in privatiza-tion Indeed the concern with such theft from state firms was one of the reasons toaccelerate privatization in 1992 The oligarchs also tried to buy assets in privatiza-tion at the lowest possible prices often offering politicians various deals Once incontrol they attempted to increase their ownership stakes both legally and ille-gally But once oligarchs became full owners they acted as economic theorypredicts they invested to improve their companiesrsquo performance This is whatoligarchs have done in every other countrymdashfrom JP Morgan and John DRockefeller to Silvio Berlusconi and the owners of Korean chaebol

In sum Russiarsquos economy is not a model of capitalism that one finds inintroductory textbooks Like other middle-income countries Russia suffers frominequality financial crises and a large unofficial sector Economic and politicalpower are intimately intertwined Nonetheless Russia started the 1990s a disinte-grating centrally planned economy and ended it a market system in a burst of rapidgrowth

Table 1Total Assets and Investment of Three Leading Russian Companies

1996 1997 1998 1999 2000 2001 2002

YukosTotal assets bn US $ 47 52 53 60 103 105e 144e

Investmenta mn US $ 226 589e 954e 1263e

SibneftTotal assets bn US $ 76 56d 50 43 46 57 75Investmentb mn US $ 154 129 231 619 959

Norilsk NickelTotal assets bn US $ 66 72 109c 97Investmentb mn US $ 168 638 510c 351

aAdditions to property plant and equipmentbCapital expenditurescRestated in 2002 Annual ReportdAssets reduced by $13 bn because of accounting changeeAs in 2002 Annual ReportSources Audited financial statements and annual reports

162 Journal of Economic Perspectives

Autocratic Kleptocracy

DemocracyWestern evaluations of Russiarsquos political institutions in the last ten years have

often been scathing Even before Putinrsquos recent consolidation of power The Econ-omist magazine declared the countryrsquos democracy to be ldquophonyrdquo (June 24 2000p 20) The advocacy group Freedom House which rates countriesrsquo institutions hassince 2000 given Russia a ldquo5rdquo for political freedom and a ldquo5rdquo for civil liberties on aseven-point scale that ranges from ldquo1rdquo (highest) to ldquo7rdquo (lowest) This puts Russiarsquospolitical regime below Brazilrsquos military junta of the late 1970s and its civil libertiesbelow those of Nigeria in 1991 under the dictatorship of Major General IbrahimBabangida According to Freedom Housersquos own report in Nigeria at this timemilitary tribunals were charged with trying cases of sedition and the regime hadmade a practice of incarcerating ldquoinnocent relatives of suspected political offendersto draw the suspects out of hidingrdquo (Gastil 1992 p 353) Even Kuwait a hereditaryemirate where political parties are illegal women cannot vote in legislative elec-tions and criticism of the emir is punishable by imprisonment gets a better ratingfor political freedom than Russia

Critics of Russiarsquos democracy focus on several points Those in power areaccused of manipulating elections through control of the state media harassmentor censorship of the independent press and use of judicial and administrative leversto intimidate or incapacitate rivals Voters are portrayed as apathetic and gullibleAt the same time big business is seen as subverting the democratic process throughfinancial support of favored candidates The combination of voter apathy andofficial manipulation means in the grim but quite representative view of one NewYork Times reporter that in Russia during the last decade ldquothere has been no trulydemocratic choice of new leadersrdquo (Myers 2003)

Just how bad is Russiarsquos democracy Russiarsquos political institutions and civicfreedoms are certainly imperfect in many ways Relative to that under Yeltsin thesituation under President Putin has deteriorated considerably and could deterio-rate further However Western condemnations of Russiarsquos institutions in the last10 years have been grossly overblown Russiarsquos politics have been among the mostdemocratic in the region The defects of the countryrsquos democracy resemble thosefound in many other middle-income countries

Eight national ballotsmdashfour parliamentary and four presidentialmdashtook placein Russia between 1991 and 2004 A variety of candidates ran in each representingall parts of the political spectrum With few exceptions parties and electoral blocswere free to organize and a large number managed to register Internationalobservers although critical of imbalance in media coverage and episodic impro-prieties have generally given these elections high marks The Organization forSecurity and Cooperation in Europe (OSCE) a regional security organizationheadquartered in Austria with 55 member nations regularly monitors elections inRussia and other countries Its report on the 1999 Russian Duma election forinstance praised the countryrsquos electoral laws for providing ldquoa sound basis for theconduct of orderly pluralistic and accountable electionsrdquo and the vote-counting

A Normal Country Russia After Communism 163

procedures for ldquotransparency accountability and accuracy that fully met acceptedinternational standardsrdquo The OSCErsquos predecessor organization the Conferencefor Security and Cooperation in Europe reported after the 1993 election thatvoters had been able to ldquoexpress their political will freely and fairlyrdquo and called the1995 election ldquofree and fairrdquo10

Does such language merely reflect a reluctance to criticize Such fears arebelied by the OSCErsquos blunt condemnations of elections in other nearby countriessuch as Azerbaijan in 2000 (ldquoprimitive falsificationrdquo) Georgia in 2000 (ldquoballotstuffing and protocol tamperingrdquo that ldquohas discredited Georgiarsquos democratizationrdquo)and Ukraine in 1999 (ldquoflagrant violations of voting proceduresrdquo and a ldquowidespreadsystematic and co-ordinated campaign by state institutions at all levels to undulyinfluence votersrdquo) The OSCE expressed stronger reservations about Russiarsquos 2003parliamentary and its 2004 presidential elections complaining of bias in thestate-controlled media and abuses by some local officials although it still praisedthe Central Election Commission for its ldquoprofessionalrdquo organization of theelections

As for voter apathy turnout in Russian elections since 1991 never dippedbelow about 54 percent and rose as high as 75 percent in 1991mdashcompared to about50ndash51 percent of the voting age population in recent US national elections In allRussian national elections since 1993 voters had the option to vote ldquoagainst allrdquocandidates The number doing so has never exceeded 5 percent

In a phony democracy one expects reported election results to match thedesires of incumbents But in Russia at least before Putinrsquos presidency the resultsoften shocked political elites In 1991 an outsider candidate Boris Yeltsin beat thefavorites of Gorbachev and the Soviet Communist leadership to win the Russianpresidency with 57 percent of the vote In 1993 elites were horrified by the highshowing of Vladimir Zhirinovsky and his clownish ultranationalists In 1995 theCommunist Party surprised observers by coming first in the party list vote with22 percent a feat it repeated in 1999 when it won 24 percent The main partyassociated with the incumbent regime won only about 15 percent in 1993 and10 percent in 1995

Some falsification and improprieties have definitely occurred In regionalelections Russian officials have used technicalities to disqualify candidates andincumbents at all levels have misused state resources to campaign for reelectionLimits on campaign spending have been breached However such problems do notappear to go beyond the violations common in middle-income democracies likeMexico or Brazil where stories of coercion intimidation and vote buying alsoabound11

10 For the OSCE reports on Russian elections see httpwwwosceorgodihrindexphppageelectionsampdivreportsampcountryru To compare with election reports on other countries see httpwwwosceorgodihrindexphppageelectionsampdivreports For the CSCE reports mentioned in thetext see httpwwwcscegovreportscfm11 For instance in Mexico international election observers from the human rights group GlobalExchange reported after the 2000 presidential election that in ldquomost of the communities [where itsobservers were stationed] voting day was marred by often flagrant violations of the electoral code In the

164 Journal of Economic Perspectives

However as Cutler and Brainerd show in their contribution to this symposium thisdoes not seem to be related to increased poverty malnutrition or poorer access tohealth care If poverty were to blame one might expect the death rate to rise mostamong the most economically vulnerable groups In the early 1990s the povertyrate was highest among children aged 7 to 15 among adults it was higher amongwomen than men But there was practically no increase in mortality among chil-dren of any age and the death rate jumped much more for men than for women(Goskomstat 2001 p 126) Higher mortality is also hard to link to malnutrition In1992ndash1993 as the death rate jumped sharply the Russian Longitudinal MonitoringSurvey found no evidence of serious malnutrition in Russia In fact the proportionof people whose body weight increased during these years exceeded the share thatlost weight (Shkolnikov Cornia Leon and Mesle 1998) As for access to healthcare the percentage of adults getting required checkups fell slightly from89 percent in 1990 to 86 percent in 1992 before rising to 91 percent in 2000(Goskomstat 2001 p 246) The statersquos fiscal crisis did reduce resources of thehealth system in some ways But in other ways resources increased The number ofdoctors per capita already one of the highest in the world rose still higher in the1990s (Goskomstat 2001 p 242) Infant mortalitymdashone indicator of the effective-ness of basic health caremdashalthough rising a little initially fell during the decadefrom 174 per 1000 live births in 1990 to 153 in 2000 (Goskomstat 2001 p 127)

Most specialists agree that the rise in mortality in the early 1990s concentratedas it was among middle-aged men had much to do with increasing alcohol abuse(Shkolnikov Cornia Leon and Mesle 1998 DaVanzo and Grammich 2001) Thismay have been stimulated by a sharp drop in the relative price of vodka in theseyears For the average monthly income Russians could buy 10 liters of vodka in

Figure 1Measuring Economic Change in Russia 1990ndash2002

50

60

70

80

90

100

110

120

1990 1991 1992

Official GDP (constant prices)Electricity consumptionFinal consumption of householdsReal retail trade turnover

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source Goskomstat Rossii Rossiiskiy Statisticheskiy Yezhegodnik 2001 2003 Rossia v Tsifrakh 2002Goskomstat updates

156 Journal of Economic Perspectives

1990 but 47 in 19945 Several causes of death that increased dramatically have beenassociated with binge drinking (Shkolnikov Cornia Leon and Mesle 1998) Stressinduced by the economic transition may also have contributed as Brainerd andCutler argue in this journal Either way there is little sign the increased death ratewas caused by falling income As per capita GDP rose by about 30 percent between1998 and 2002 life expectancy again dropped by 22 years

A close look at Figure 1 also casts doubt on the popular theory that Russiarsquoseconomic decline was caused by misguided government policies pursued in the1990s especially Yeltsinrsquos privatization program and his ldquoloans-for-sharesrdquo scheme(Goldman 2003) As Figure 1 makes clear most of the fall in both Russiarsquos officialGDP and electricity consumption occurred prior to 1994 before the significantpart of the mass privatization program was completed and before the ldquoloans-for-sharesrdquo program was even contemplated

Comparing Russiarsquos economic performance in the 1990s to that of otherpostcommunist countries suggests two additional points illustrated in Figure 2First officially measured output fell in all the postcommunist economies of easternEurope and the former Soviet Union with no exceptions It declined in newdemocracies such as Russia and Poland and in continuing dictatorships such asBelarus and Tajikistan in rapid reformers such as the Czech Republic and Hun-gary and in very slow reformers such as Ukraine and Uzbekistan The universalityof the contraction suggests common causes One possibility is a universal decreasein military and economically useless activities that were previously counted asoutput A second is the temporary dislocation that all countries experienced astheir planning systems disintegrated (Murphy Shleifer and Vishny 1992 Blan-chard and Kremer 1997) Consistent with both these explanations officially mea-sured output began to recover after a few years almost everywhere Second thedepth of the measured contraction was greater in some countries than in othersGenerally it was smaller in eastern Europe and the Baltic states than in the rest ofthe former Soviet Union Russiarsquos official output fell slightly less than average forthe 14 former Soviet republics for which figures are available6

The patterns of decline in the postcommunist countries challenge anothercommon theory about the output contraction Some argue that excessive speed ofreform exacerbated the decline and compare the ldquogradualismrdquo of Chinarsquos eco-nomic policies favorably to the ldquoshock therapyrdquo of Russiarsquos In fact among the eastEuropean and former Soviet countries there is no obvious relationship betweenspeed of reform and change in official output Comparisons across these countriesmust be tentative since the quality of statistics varies and the uneven impact of civildisorder and war complicates drawing connections between economic policy andperformance However among the countries that contracted least according to the

5 Calculated from Russian Economic Trends database and Goskomstat (1994 p 288) Goskomstat(2001 p 588)6 One might have expected that the shift to world market prices in trade among the former communistcountries would have disproportionately benefited Russia which had been exporting subsidized energyto other eastern bloc countries

Andrei Shleifer and Daniel Treisman 157

official figures are both rapid reformers (Estonia Poland Czech Republic) andslow or nonreformers (Belarus Uzbekistan) Those with the largest declines alsoinclude both nonreformers (Tajikistan Turkmenistan) and some that tried toreform (Moldova) A comparison of Russia with Ukraine is particularly instructive(see Figure 2) Ukraine had a large population (about 52 million) an industrialeconomy significant natural resources and a ldquoculturerdquo similar to Russiarsquos prior totransition Unlike Russia it retained the old communist leadership albeit renamedand pursued more cautious reforms keeping a much larger share of the economyin state hands Yet Ukrainersquos official drop in per capita GDP of 45 percent between1991 and 2001 was almost twice as large as Russiarsquos

In comparison with other nations of eastern Europe and the former SovietUnion Russiarsquos economy performed roughly as one might have expected Our bestestimate is that its genuine output drop between 1990 and 2001 was small andprobably completely reversed by 2003 (Aslund 2003) Considering the distorteddemand inflated accounting and uselessness of much of the prereform outputRussians today are probably on average better off than they were in 1990

Financial CrisesThe 1990s was a decade of extreme macroeconomic turbulence for Russia

Between December 1991 and December 2001 the rublersquos value dropped by more

Figure 2Official GDP Per Capita in Postcommunist Countries First 10 Years of Transition(at constant prices)

0

20

40

60

80

100

120

0 1 2

Former Soviet UnionEastern EuropeUkraineRussia

3 4 5 6 7 8 9 10

Years since start of transition (ldquo0rdquo 1989 for EE 1991 for FSU)

Source Calculated from World Bank World Development Indicators 2003 and EBRD Transition Report1997 Eastern Europe unweighted average of Albania Bulgaria Hungary Poland Romania SlovakiaSlovenia Former Soviet Union unweighted average of Armenia Belarus Estonia GeorgiaKazakhstan Kyrgyzstan Latvia Lithuania Moldova Russia Tajikistan Turkmenistan UkraineUzbekistan Data unavailable for Azerbaijan

158 Journal of Economic Perspectives

than 99 percent against the dollar Three years after the authorities managed tostabilize inflation in 1995 a financial crisis led to a devaluation of the ruble and agovernment moratorium on foreign debt payments

But such financial crises are common among emerging market economiesBad as the 99 percent drop in the rublersquos value sounds an examination of the IMFrsquosInternational Financial Statistics (April 2002) shows that eleven other countriesmdashincluding Brazil Turkey Ukraine and Belarusmdashsuffered even larger currencydeclines during the 1990s In the 1980s depreciations this large were even morefrequent with larger ones recorded by Peru Argentina Bolivia Brazil UruguayNicaragua Vietnam Lebanon and even Poland later seen as the greatest successstory of transition from socialism

During Russiarsquos 1998 crisis the ruble fell 61 percent in the two months ofAugust and September But during the decade from January 1992 to December2001 two-month currency collapses at least this large occurred 34 times in a totalof 20 countries Russiarsquos crash in 1998 was not an isolated phenomenon it came inthe middle of a wave of similar currency crises that stretched from Thailand andIndonesia to Brazil and Turkey Moreover the consequences of Russiarsquos 1998financial crisis were far less dire than claimed at the time The devaluation wasfollowed by a multiyear spurt of rapid growth and a reinvigorated drive towardliberal economic reform

Economic InequalityRussiarsquos economic reforms are said to have exacerbated economic inequality

with privatization often fingered as the primary culprit The European Bank forReconstruction and Development (1999 p 110) wrote ldquo[U]nder the lsquoshares-for-loansrsquo scheme implemented in 1995 many of the key resource-based companies fellinto the hands of a small group of financiers the so-called lsquooligarchsrsquo This has ledto very sharp increases in wealth and income inequalitymdashby 1997 the Gini coeffi-cient for income in Russia was around 05rdquo7

Inequality has increased sharply in Russia since the fall of communism Thereis some question about the precise numbers but no dispute about the trendRussiarsquos official statistical agency Goskomstat (2001 p187) shows the Gini coef-ficient for money incomes rising from 26 in 1991 to 41 in 1994 after which itstabilized at about 40 through the end of the decade8 The World Bank in variousissues of the annual World Development Reports and World Development Indicators gives

7 The Gini coefficient ranges from 0 to 1 where 0 means perfect equality (everyone has the sameincome) and 1 means perfect inequality (one person has all the income) To calculate the Ginicoefficient plot a ldquoLorenz curverdquo where the horizontal axis is the cumulative percentage of householdsranging up to 100 percent and the vertical axis is the cumulative percentage of income held by thosehouseholds also ranging up to 100 percent A straight line going up at a 45-degree angle will showperfect equality of income If the area between the line of perfect equality and actual Lorenz curve is Aand the area underneath the line that shows perfect equality of income is B the Gini coefficient is AB8 On the other hand relative equality of incomes in the shortage economy of late socialism existedalongside highly unequal access to consumer goods

A Normal Country Russia After Communism 159

figures for Russiarsquos Gini for expenditure of 496 in 1993 480 in 1996 487 in 1998and 460 in 2000 For comparison the Goskomstat figure of 41 is almost exactly thesame as that for the United States (408 in 1997) The higher World Bank estimateof 496 is about that of Malaysia (492) or the Philippines (462) but below that ofHong Kong (522) Mexico (531) South Africa (593) or Brazil (607)

The trouble with the claim that privatization caused inequality is that inequal-ity came first Russiarsquos Gini coefficient rose sharply between 1991 and 1993 andpeaked in 1994 before any effects of privatization could possibly materialize Noris unemployment responsible In 1992ndash1993 unemployment remained below6 percent It was in 1994ndash1998 that it grew to 132 percent while inequality declinedslightly (Goskomstat 2001 p 133) The growth of entrepreneurial income also playedat most a limited role Branko Milanovic (1998 p 22) of the World Bank finds that77 percent of the inequality increase can be attributed to growing dispersion of wageincomes While some Russians worked in successful firms that rapidly benefited fromfree prices and open trade others remained in declining firms and in the state sectorUnfortunate as the growth of inequality has been it is largely the result of the upheavalsassociated with rationalizing economic activity

Oligarchical CapitalismRussiarsquos economic reforms are often said to have fueled the rise of a small class

of ldquooligarchsrdquo who stand accused of stripping assets from the companies theyacquired This in turn is said to have depressed investment and economic growth(Stiglitz 2002 Hoff and Stiglitz 2002)

Russiarsquos big business is certainly dominated by a few tycoons as Guriev andRachinsky argue in their contribution to this symposium However in this Russia isquite typical In almost all developing capitalist economies and even in mostdeveloped countries the largest firms are either state or family controlled with afew dominant families often controlling a large share of national productionthrough financial and industrial groups (La Porta Lopez-de-Silanes and Shleifer1999 Claessens Djankov and Lang 1999) This is overwhelmingly true of middle-income countries such as Mexico Brazil South Korea Malaysia or South Africabut it also applies to developed countries such as Italy Singapore and Sweden Thebig business families are inevitably politically connected sometimes receiving loansand subsidies from the government (as in South Korea and Italy) often activelyparticipating in privatization (as in Mexico and Brazil) and quite regularly holdinghigh government offices while retaining a connection to their firms (as in Italy andMalaysia) (Faccio 2003) Following the Asian financial crisis of 1998 this system ofpolitical ownership and control has been pejoratively rechristened ldquocrony capital-ismrdquo even though it has been associated with some of the most rapid growth everseen as well as a remarkable recovery from crisis in Malaysia and South Korea Suchpatterns of ownership have also emerged in transition economies from Latvia to thecentral Asian states

Have Russiarsquos oligarchs depressed economic performance Russiarsquos tycoonslike those elsewhere in the developing world (not to mention Americarsquos robber

160 Journal of Economic Perspectives

barons of the nineteenth century) grew rich in part through deals with thegovernment But the claim that this accounts for poor growth in Russia makes littlesense Russiarsquos sharp decline in official output came beforemdashnot aftermdashthe oli-garchs emerged on the scene in 1995ndash1996 A few years of stagnation followed andthen rapid growth Oligarch-controlled companies have performed extremely welland far better than many comparable companies that remained controlled by thestate or by their Soviet-era managers They are responsible for much of thedramatic increase in output in recent years as well as the amazing stock marketboom

Consider three of the most notorious cases In ldquoloans-for-sharesrdquo MikhailKhodorkovsky (now in jail) obtained a major stake in the oil company Yukos BorisBerezovsky (now in exile) won control of the oil company Sibneft along with histhen-partner Roman Abramovich Vladimir Potanin acquired the nickel producerNorilsk Nickel Between 1996 and 2001 the reported pretax profits of YukosSibneft and Norilsk Nickel rose in real terms by 36 10 and 5 times respectively9

Their stock market valuations also soared (those of Yukos and Sibneft rising bymore than 30 times in real terms) This performance is markedly better than thatof the gas monopoly Gazprom or the electricity utility UES which stayed understate control or of major private companies such as Lukoil that remained con-trolled by preprivatization management (Boone and Rodionov 2001)

Have the oligarchs stripped assets from the companies they acquired inprivatization The audited financial statements of these companies suggest theyactually invested especially since 1998 Yukosrsquo assets rose from $53 billion in 1998to $144 billion in 2002 although this might reflect in part higher world oil prices(see Table 1) Norilsk Nickelrsquos assets rose from $66 billion in 1999 to $97 billionin 2002 Sibneftrsquos assets did fall from 1996 to 1999 in part due to an accountingchange (which might reflect asset stripping) But since 1999 they have increasedfrom $43 billion to $75 billion in 2002 Recently the major oligarchs have beeninvesting hundreds of millions of dollars annually in their companies In 2002Yukos invested $126 billion in property plant and equipment and Sibneft madecapital expenditures of $959 million Guriev and Rachinsky (2004) in a systematicstudy of the performance of oligarch-controlled companies in 2001 found thatsuch companies invested significantly more that year than firms controlled by otherRussian owners

In contrast the greatest asset stripping scandals have concerned companiesthat remained under state control Gazpromrsquos former management has beenaccused of stealing assets via complicated networks of trading companies Thestate-owned airline Aeroflotrsquos reported assets dropped between 1998 and 2001 Byand large the companies privatized to the oligarchs performed far better thanthose left under state control That the leading oligarch-controlled oil companiesgenerally outperformed other oil firms such as Lukoil which remained under

9 Calculated from figures in Ekspert database deflating by the Consumer Price Index

Andrei Shleifer and Daniel Treisman 161

Soviet-era management suggests that their success was due to better managementand not only to rising oil prices

None of this is to say the oligarchs are public spirited politically naıve orprotective of their minority shareholders They benefited from sweetheart dealswith the government and massively diluted the value of minority shares in order toconsolidate their control Investor protection and corporate governance in Russiaremain weak But here again Russia is typical of middle-income developing coun-tries where expropriation of minority shareholders is nearly universal (Johnson LaPorta Lopez-de-Silanes and Shleifer 2000)

In fact the claim that the oligarchs privatized companies in order to strip theirassets and are impeding economic growth has it precisely backward The oligarchsstripped assets from state-controlled companies in order to buy others in privatiza-tion Indeed the concern with such theft from state firms was one of the reasons toaccelerate privatization in 1992 The oligarchs also tried to buy assets in privatiza-tion at the lowest possible prices often offering politicians various deals Once incontrol they attempted to increase their ownership stakes both legally and ille-gally But once oligarchs became full owners they acted as economic theorypredicts they invested to improve their companiesrsquo performance This is whatoligarchs have done in every other countrymdashfrom JP Morgan and John DRockefeller to Silvio Berlusconi and the owners of Korean chaebol

In sum Russiarsquos economy is not a model of capitalism that one finds inintroductory textbooks Like other middle-income countries Russia suffers frominequality financial crises and a large unofficial sector Economic and politicalpower are intimately intertwined Nonetheless Russia started the 1990s a disinte-grating centrally planned economy and ended it a market system in a burst of rapidgrowth

Table 1Total Assets and Investment of Three Leading Russian Companies

1996 1997 1998 1999 2000 2001 2002

YukosTotal assets bn US $ 47 52 53 60 103 105e 144e

Investmenta mn US $ 226 589e 954e 1263e

SibneftTotal assets bn US $ 76 56d 50 43 46 57 75Investmentb mn US $ 154 129 231 619 959

Norilsk NickelTotal assets bn US $ 66 72 109c 97Investmentb mn US $ 168 638 510c 351

aAdditions to property plant and equipmentbCapital expenditurescRestated in 2002 Annual ReportdAssets reduced by $13 bn because of accounting changeeAs in 2002 Annual ReportSources Audited financial statements and annual reports

162 Journal of Economic Perspectives

Autocratic Kleptocracy

DemocracyWestern evaluations of Russiarsquos political institutions in the last ten years have

often been scathing Even before Putinrsquos recent consolidation of power The Econ-omist magazine declared the countryrsquos democracy to be ldquophonyrdquo (June 24 2000p 20) The advocacy group Freedom House which rates countriesrsquo institutions hassince 2000 given Russia a ldquo5rdquo for political freedom and a ldquo5rdquo for civil liberties on aseven-point scale that ranges from ldquo1rdquo (highest) to ldquo7rdquo (lowest) This puts Russiarsquospolitical regime below Brazilrsquos military junta of the late 1970s and its civil libertiesbelow those of Nigeria in 1991 under the dictatorship of Major General IbrahimBabangida According to Freedom Housersquos own report in Nigeria at this timemilitary tribunals were charged with trying cases of sedition and the regime hadmade a practice of incarcerating ldquoinnocent relatives of suspected political offendersto draw the suspects out of hidingrdquo (Gastil 1992 p 353) Even Kuwait a hereditaryemirate where political parties are illegal women cannot vote in legislative elec-tions and criticism of the emir is punishable by imprisonment gets a better ratingfor political freedom than Russia

Critics of Russiarsquos democracy focus on several points Those in power areaccused of manipulating elections through control of the state media harassmentor censorship of the independent press and use of judicial and administrative leversto intimidate or incapacitate rivals Voters are portrayed as apathetic and gullibleAt the same time big business is seen as subverting the democratic process throughfinancial support of favored candidates The combination of voter apathy andofficial manipulation means in the grim but quite representative view of one NewYork Times reporter that in Russia during the last decade ldquothere has been no trulydemocratic choice of new leadersrdquo (Myers 2003)

Just how bad is Russiarsquos democracy Russiarsquos political institutions and civicfreedoms are certainly imperfect in many ways Relative to that under Yeltsin thesituation under President Putin has deteriorated considerably and could deterio-rate further However Western condemnations of Russiarsquos institutions in the last10 years have been grossly overblown Russiarsquos politics have been among the mostdemocratic in the region The defects of the countryrsquos democracy resemble thosefound in many other middle-income countries

Eight national ballotsmdashfour parliamentary and four presidentialmdashtook placein Russia between 1991 and 2004 A variety of candidates ran in each representingall parts of the political spectrum With few exceptions parties and electoral blocswere free to organize and a large number managed to register Internationalobservers although critical of imbalance in media coverage and episodic impro-prieties have generally given these elections high marks The Organization forSecurity and Cooperation in Europe (OSCE) a regional security organizationheadquartered in Austria with 55 member nations regularly monitors elections inRussia and other countries Its report on the 1999 Russian Duma election forinstance praised the countryrsquos electoral laws for providing ldquoa sound basis for theconduct of orderly pluralistic and accountable electionsrdquo and the vote-counting

A Normal Country Russia After Communism 163

procedures for ldquotransparency accountability and accuracy that fully met acceptedinternational standardsrdquo The OSCErsquos predecessor organization the Conferencefor Security and Cooperation in Europe reported after the 1993 election thatvoters had been able to ldquoexpress their political will freely and fairlyrdquo and called the1995 election ldquofree and fairrdquo10

Does such language merely reflect a reluctance to criticize Such fears arebelied by the OSCErsquos blunt condemnations of elections in other nearby countriessuch as Azerbaijan in 2000 (ldquoprimitive falsificationrdquo) Georgia in 2000 (ldquoballotstuffing and protocol tamperingrdquo that ldquohas discredited Georgiarsquos democratizationrdquo)and Ukraine in 1999 (ldquoflagrant violations of voting proceduresrdquo and a ldquowidespreadsystematic and co-ordinated campaign by state institutions at all levels to undulyinfluence votersrdquo) The OSCE expressed stronger reservations about Russiarsquos 2003parliamentary and its 2004 presidential elections complaining of bias in thestate-controlled media and abuses by some local officials although it still praisedthe Central Election Commission for its ldquoprofessionalrdquo organization of theelections

As for voter apathy turnout in Russian elections since 1991 never dippedbelow about 54 percent and rose as high as 75 percent in 1991mdashcompared to about50ndash51 percent of the voting age population in recent US national elections In allRussian national elections since 1993 voters had the option to vote ldquoagainst allrdquocandidates The number doing so has never exceeded 5 percent

In a phony democracy one expects reported election results to match thedesires of incumbents But in Russia at least before Putinrsquos presidency the resultsoften shocked political elites In 1991 an outsider candidate Boris Yeltsin beat thefavorites of Gorbachev and the Soviet Communist leadership to win the Russianpresidency with 57 percent of the vote In 1993 elites were horrified by the highshowing of Vladimir Zhirinovsky and his clownish ultranationalists In 1995 theCommunist Party surprised observers by coming first in the party list vote with22 percent a feat it repeated in 1999 when it won 24 percent The main partyassociated with the incumbent regime won only about 15 percent in 1993 and10 percent in 1995

Some falsification and improprieties have definitely occurred In regionalelections Russian officials have used technicalities to disqualify candidates andincumbents at all levels have misused state resources to campaign for reelectionLimits on campaign spending have been breached However such problems do notappear to go beyond the violations common in middle-income democracies likeMexico or Brazil where stories of coercion intimidation and vote buying alsoabound11

10 For the OSCE reports on Russian elections see httpwwwosceorgodihrindexphppageelectionsampdivreportsampcountryru To compare with election reports on other countries see httpwwwosceorgodihrindexphppageelectionsampdivreports For the CSCE reports mentioned in thetext see httpwwwcscegovreportscfm11 For instance in Mexico international election observers from the human rights group GlobalExchange reported after the 2000 presidential election that in ldquomost of the communities [where itsobservers were stationed] voting day was marred by often flagrant violations of the electoral code In the

164 Journal of Economic Perspectives

1990 but 47 in 19945 Several causes of death that increased dramatically have beenassociated with binge drinking (Shkolnikov Cornia Leon and Mesle 1998) Stressinduced by the economic transition may also have contributed as Brainerd andCutler argue in this journal Either way there is little sign the increased death ratewas caused by falling income As per capita GDP rose by about 30 percent between1998 and 2002 life expectancy again dropped by 22 years

A close look at Figure 1 also casts doubt on the popular theory that Russiarsquoseconomic decline was caused by misguided government policies pursued in the1990s especially Yeltsinrsquos privatization program and his ldquoloans-for-sharesrdquo scheme(Goldman 2003) As Figure 1 makes clear most of the fall in both Russiarsquos officialGDP and electricity consumption occurred prior to 1994 before the significantpart of the mass privatization program was completed and before the ldquoloans-for-sharesrdquo program was even contemplated

Comparing Russiarsquos economic performance in the 1990s to that of otherpostcommunist countries suggests two additional points illustrated in Figure 2First officially measured output fell in all the postcommunist economies of easternEurope and the former Soviet Union with no exceptions It declined in newdemocracies such as Russia and Poland and in continuing dictatorships such asBelarus and Tajikistan in rapid reformers such as the Czech Republic and Hun-gary and in very slow reformers such as Ukraine and Uzbekistan The universalityof the contraction suggests common causes One possibility is a universal decreasein military and economically useless activities that were previously counted asoutput A second is the temporary dislocation that all countries experienced astheir planning systems disintegrated (Murphy Shleifer and Vishny 1992 Blan-chard and Kremer 1997) Consistent with both these explanations officially mea-sured output began to recover after a few years almost everywhere Second thedepth of the measured contraction was greater in some countries than in othersGenerally it was smaller in eastern Europe and the Baltic states than in the rest ofthe former Soviet Union Russiarsquos official output fell slightly less than average forthe 14 former Soviet republics for which figures are available6

The patterns of decline in the postcommunist countries challenge anothercommon theory about the output contraction Some argue that excessive speed ofreform exacerbated the decline and compare the ldquogradualismrdquo of Chinarsquos eco-nomic policies favorably to the ldquoshock therapyrdquo of Russiarsquos In fact among the eastEuropean and former Soviet countries there is no obvious relationship betweenspeed of reform and change in official output Comparisons across these countriesmust be tentative since the quality of statistics varies and the uneven impact of civildisorder and war complicates drawing connections between economic policy andperformance However among the countries that contracted least according to the

5 Calculated from Russian Economic Trends database and Goskomstat (1994 p 288) Goskomstat(2001 p 588)6 One might have expected that the shift to world market prices in trade among the former communistcountries would have disproportionately benefited Russia which had been exporting subsidized energyto other eastern bloc countries

Andrei Shleifer and Daniel Treisman 157

official figures are both rapid reformers (Estonia Poland Czech Republic) andslow or nonreformers (Belarus Uzbekistan) Those with the largest declines alsoinclude both nonreformers (Tajikistan Turkmenistan) and some that tried toreform (Moldova) A comparison of Russia with Ukraine is particularly instructive(see Figure 2) Ukraine had a large population (about 52 million) an industrialeconomy significant natural resources and a ldquoculturerdquo similar to Russiarsquos prior totransition Unlike Russia it retained the old communist leadership albeit renamedand pursued more cautious reforms keeping a much larger share of the economyin state hands Yet Ukrainersquos official drop in per capita GDP of 45 percent between1991 and 2001 was almost twice as large as Russiarsquos

In comparison with other nations of eastern Europe and the former SovietUnion Russiarsquos economy performed roughly as one might have expected Our bestestimate is that its genuine output drop between 1990 and 2001 was small andprobably completely reversed by 2003 (Aslund 2003) Considering the distorteddemand inflated accounting and uselessness of much of the prereform outputRussians today are probably on average better off than they were in 1990

Financial CrisesThe 1990s was a decade of extreme macroeconomic turbulence for Russia

Between December 1991 and December 2001 the rublersquos value dropped by more

Figure 2Official GDP Per Capita in Postcommunist Countries First 10 Years of Transition(at constant prices)

0

20

40

60

80

100

120

0 1 2

Former Soviet UnionEastern EuropeUkraineRussia

3 4 5 6 7 8 9 10

Years since start of transition (ldquo0rdquo 1989 for EE 1991 for FSU)

Source Calculated from World Bank World Development Indicators 2003 and EBRD Transition Report1997 Eastern Europe unweighted average of Albania Bulgaria Hungary Poland Romania SlovakiaSlovenia Former Soviet Union unweighted average of Armenia Belarus Estonia GeorgiaKazakhstan Kyrgyzstan Latvia Lithuania Moldova Russia Tajikistan Turkmenistan UkraineUzbekistan Data unavailable for Azerbaijan

158 Journal of Economic Perspectives

than 99 percent against the dollar Three years after the authorities managed tostabilize inflation in 1995 a financial crisis led to a devaluation of the ruble and agovernment moratorium on foreign debt payments

But such financial crises are common among emerging market economiesBad as the 99 percent drop in the rublersquos value sounds an examination of the IMFrsquosInternational Financial Statistics (April 2002) shows that eleven other countriesmdashincluding Brazil Turkey Ukraine and Belarusmdashsuffered even larger currencydeclines during the 1990s In the 1980s depreciations this large were even morefrequent with larger ones recorded by Peru Argentina Bolivia Brazil UruguayNicaragua Vietnam Lebanon and even Poland later seen as the greatest successstory of transition from socialism

During Russiarsquos 1998 crisis the ruble fell 61 percent in the two months ofAugust and September But during the decade from January 1992 to December2001 two-month currency collapses at least this large occurred 34 times in a totalof 20 countries Russiarsquos crash in 1998 was not an isolated phenomenon it came inthe middle of a wave of similar currency crises that stretched from Thailand andIndonesia to Brazil and Turkey Moreover the consequences of Russiarsquos 1998financial crisis were far less dire than claimed at the time The devaluation wasfollowed by a multiyear spurt of rapid growth and a reinvigorated drive towardliberal economic reform

Economic InequalityRussiarsquos economic reforms are said to have exacerbated economic inequality

with privatization often fingered as the primary culprit The European Bank forReconstruction and Development (1999 p 110) wrote ldquo[U]nder the lsquoshares-for-loansrsquo scheme implemented in 1995 many of the key resource-based companies fellinto the hands of a small group of financiers the so-called lsquooligarchsrsquo This has ledto very sharp increases in wealth and income inequalitymdashby 1997 the Gini coeffi-cient for income in Russia was around 05rdquo7

Inequality has increased sharply in Russia since the fall of communism Thereis some question about the precise numbers but no dispute about the trendRussiarsquos official statistical agency Goskomstat (2001 p187) shows the Gini coef-ficient for money incomes rising from 26 in 1991 to 41 in 1994 after which itstabilized at about 40 through the end of the decade8 The World Bank in variousissues of the annual World Development Reports and World Development Indicators gives

7 The Gini coefficient ranges from 0 to 1 where 0 means perfect equality (everyone has the sameincome) and 1 means perfect inequality (one person has all the income) To calculate the Ginicoefficient plot a ldquoLorenz curverdquo where the horizontal axis is the cumulative percentage of householdsranging up to 100 percent and the vertical axis is the cumulative percentage of income held by thosehouseholds also ranging up to 100 percent A straight line going up at a 45-degree angle will showperfect equality of income If the area between the line of perfect equality and actual Lorenz curve is Aand the area underneath the line that shows perfect equality of income is B the Gini coefficient is AB8 On the other hand relative equality of incomes in the shortage economy of late socialism existedalongside highly unequal access to consumer goods

A Normal Country Russia After Communism 159

figures for Russiarsquos Gini for expenditure of 496 in 1993 480 in 1996 487 in 1998and 460 in 2000 For comparison the Goskomstat figure of 41 is almost exactly thesame as that for the United States (408 in 1997) The higher World Bank estimateof 496 is about that of Malaysia (492) or the Philippines (462) but below that ofHong Kong (522) Mexico (531) South Africa (593) or Brazil (607)

The trouble with the claim that privatization caused inequality is that inequal-ity came first Russiarsquos Gini coefficient rose sharply between 1991 and 1993 andpeaked in 1994 before any effects of privatization could possibly materialize Noris unemployment responsible In 1992ndash1993 unemployment remained below6 percent It was in 1994ndash1998 that it grew to 132 percent while inequality declinedslightly (Goskomstat 2001 p 133) The growth of entrepreneurial income also playedat most a limited role Branko Milanovic (1998 p 22) of the World Bank finds that77 percent of the inequality increase can be attributed to growing dispersion of wageincomes While some Russians worked in successful firms that rapidly benefited fromfree prices and open trade others remained in declining firms and in the state sectorUnfortunate as the growth of inequality has been it is largely the result of the upheavalsassociated with rationalizing economic activity

Oligarchical CapitalismRussiarsquos economic reforms are often said to have fueled the rise of a small class

of ldquooligarchsrdquo who stand accused of stripping assets from the companies theyacquired This in turn is said to have depressed investment and economic growth(Stiglitz 2002 Hoff and Stiglitz 2002)

Russiarsquos big business is certainly dominated by a few tycoons as Guriev andRachinsky argue in their contribution to this symposium However in this Russia isquite typical In almost all developing capitalist economies and even in mostdeveloped countries the largest firms are either state or family controlled with afew dominant families often controlling a large share of national productionthrough financial and industrial groups (La Porta Lopez-de-Silanes and Shleifer1999 Claessens Djankov and Lang 1999) This is overwhelmingly true of middle-income countries such as Mexico Brazil South Korea Malaysia or South Africabut it also applies to developed countries such as Italy Singapore and Sweden Thebig business families are inevitably politically connected sometimes receiving loansand subsidies from the government (as in South Korea and Italy) often activelyparticipating in privatization (as in Mexico and Brazil) and quite regularly holdinghigh government offices while retaining a connection to their firms (as in Italy andMalaysia) (Faccio 2003) Following the Asian financial crisis of 1998 this system ofpolitical ownership and control has been pejoratively rechristened ldquocrony capital-ismrdquo even though it has been associated with some of the most rapid growth everseen as well as a remarkable recovery from crisis in Malaysia and South Korea Suchpatterns of ownership have also emerged in transition economies from Latvia to thecentral Asian states

Have Russiarsquos oligarchs depressed economic performance Russiarsquos tycoonslike those elsewhere in the developing world (not to mention Americarsquos robber

160 Journal of Economic Perspectives

barons of the nineteenth century) grew rich in part through deals with thegovernment But the claim that this accounts for poor growth in Russia makes littlesense Russiarsquos sharp decline in official output came beforemdashnot aftermdashthe oli-garchs emerged on the scene in 1995ndash1996 A few years of stagnation followed andthen rapid growth Oligarch-controlled companies have performed extremely welland far better than many comparable companies that remained controlled by thestate or by their Soviet-era managers They are responsible for much of thedramatic increase in output in recent years as well as the amazing stock marketboom

Consider three of the most notorious cases In ldquoloans-for-sharesrdquo MikhailKhodorkovsky (now in jail) obtained a major stake in the oil company Yukos BorisBerezovsky (now in exile) won control of the oil company Sibneft along with histhen-partner Roman Abramovich Vladimir Potanin acquired the nickel producerNorilsk Nickel Between 1996 and 2001 the reported pretax profits of YukosSibneft and Norilsk Nickel rose in real terms by 36 10 and 5 times respectively9

Their stock market valuations also soared (those of Yukos and Sibneft rising bymore than 30 times in real terms) This performance is markedly better than thatof the gas monopoly Gazprom or the electricity utility UES which stayed understate control or of major private companies such as Lukoil that remained con-trolled by preprivatization management (Boone and Rodionov 2001)

Have the oligarchs stripped assets from the companies they acquired inprivatization The audited financial statements of these companies suggest theyactually invested especially since 1998 Yukosrsquo assets rose from $53 billion in 1998to $144 billion in 2002 although this might reflect in part higher world oil prices(see Table 1) Norilsk Nickelrsquos assets rose from $66 billion in 1999 to $97 billionin 2002 Sibneftrsquos assets did fall from 1996 to 1999 in part due to an accountingchange (which might reflect asset stripping) But since 1999 they have increasedfrom $43 billion to $75 billion in 2002 Recently the major oligarchs have beeninvesting hundreds of millions of dollars annually in their companies In 2002Yukos invested $126 billion in property plant and equipment and Sibneft madecapital expenditures of $959 million Guriev and Rachinsky (2004) in a systematicstudy of the performance of oligarch-controlled companies in 2001 found thatsuch companies invested significantly more that year than firms controlled by otherRussian owners

In contrast the greatest asset stripping scandals have concerned companiesthat remained under state control Gazpromrsquos former management has beenaccused of stealing assets via complicated networks of trading companies Thestate-owned airline Aeroflotrsquos reported assets dropped between 1998 and 2001 Byand large the companies privatized to the oligarchs performed far better thanthose left under state control That the leading oligarch-controlled oil companiesgenerally outperformed other oil firms such as Lukoil which remained under

9 Calculated from figures in Ekspert database deflating by the Consumer Price Index

Andrei Shleifer and Daniel Treisman 161

Soviet-era management suggests that their success was due to better managementand not only to rising oil prices

None of this is to say the oligarchs are public spirited politically naıve orprotective of their minority shareholders They benefited from sweetheart dealswith the government and massively diluted the value of minority shares in order toconsolidate their control Investor protection and corporate governance in Russiaremain weak But here again Russia is typical of middle-income developing coun-tries where expropriation of minority shareholders is nearly universal (Johnson LaPorta Lopez-de-Silanes and Shleifer 2000)

In fact the claim that the oligarchs privatized companies in order to strip theirassets and are impeding economic growth has it precisely backward The oligarchsstripped assets from state-controlled companies in order to buy others in privatiza-tion Indeed the concern with such theft from state firms was one of the reasons toaccelerate privatization in 1992 The oligarchs also tried to buy assets in privatiza-tion at the lowest possible prices often offering politicians various deals Once incontrol they attempted to increase their ownership stakes both legally and ille-gally But once oligarchs became full owners they acted as economic theorypredicts they invested to improve their companiesrsquo performance This is whatoligarchs have done in every other countrymdashfrom JP Morgan and John DRockefeller to Silvio Berlusconi and the owners of Korean chaebol

In sum Russiarsquos economy is not a model of capitalism that one finds inintroductory textbooks Like other middle-income countries Russia suffers frominequality financial crises and a large unofficial sector Economic and politicalpower are intimately intertwined Nonetheless Russia started the 1990s a disinte-grating centrally planned economy and ended it a market system in a burst of rapidgrowth

Table 1Total Assets and Investment of Three Leading Russian Companies

1996 1997 1998 1999 2000 2001 2002

YukosTotal assets bn US $ 47 52 53 60 103 105e 144e

Investmenta mn US $ 226 589e 954e 1263e

SibneftTotal assets bn US $ 76 56d 50 43 46 57 75Investmentb mn US $ 154 129 231 619 959

Norilsk NickelTotal assets bn US $ 66 72 109c 97Investmentb mn US $ 168 638 510c 351

aAdditions to property plant and equipmentbCapital expenditurescRestated in 2002 Annual ReportdAssets reduced by $13 bn because of accounting changeeAs in 2002 Annual ReportSources Audited financial statements and annual reports

162 Journal of Economic Perspectives

Autocratic Kleptocracy

DemocracyWestern evaluations of Russiarsquos political institutions in the last ten years have

often been scathing Even before Putinrsquos recent consolidation of power The Econ-omist magazine declared the countryrsquos democracy to be ldquophonyrdquo (June 24 2000p 20) The advocacy group Freedom House which rates countriesrsquo institutions hassince 2000 given Russia a ldquo5rdquo for political freedom and a ldquo5rdquo for civil liberties on aseven-point scale that ranges from ldquo1rdquo (highest) to ldquo7rdquo (lowest) This puts Russiarsquospolitical regime below Brazilrsquos military junta of the late 1970s and its civil libertiesbelow those of Nigeria in 1991 under the dictatorship of Major General IbrahimBabangida According to Freedom Housersquos own report in Nigeria at this timemilitary tribunals were charged with trying cases of sedition and the regime hadmade a practice of incarcerating ldquoinnocent relatives of suspected political offendersto draw the suspects out of hidingrdquo (Gastil 1992 p 353) Even Kuwait a hereditaryemirate where political parties are illegal women cannot vote in legislative elec-tions and criticism of the emir is punishable by imprisonment gets a better ratingfor political freedom than Russia

Critics of Russiarsquos democracy focus on several points Those in power areaccused of manipulating elections through control of the state media harassmentor censorship of the independent press and use of judicial and administrative leversto intimidate or incapacitate rivals Voters are portrayed as apathetic and gullibleAt the same time big business is seen as subverting the democratic process throughfinancial support of favored candidates The combination of voter apathy andofficial manipulation means in the grim but quite representative view of one NewYork Times reporter that in Russia during the last decade ldquothere has been no trulydemocratic choice of new leadersrdquo (Myers 2003)

Just how bad is Russiarsquos democracy Russiarsquos political institutions and civicfreedoms are certainly imperfect in many ways Relative to that under Yeltsin thesituation under President Putin has deteriorated considerably and could deterio-rate further However Western condemnations of Russiarsquos institutions in the last10 years have been grossly overblown Russiarsquos politics have been among the mostdemocratic in the region The defects of the countryrsquos democracy resemble thosefound in many other middle-income countries

Eight national ballotsmdashfour parliamentary and four presidentialmdashtook placein Russia between 1991 and 2004 A variety of candidates ran in each representingall parts of the political spectrum With few exceptions parties and electoral blocswere free to organize and a large number managed to register Internationalobservers although critical of imbalance in media coverage and episodic impro-prieties have generally given these elections high marks The Organization forSecurity and Cooperation in Europe (OSCE) a regional security organizationheadquartered in Austria with 55 member nations regularly monitors elections inRussia and other countries Its report on the 1999 Russian Duma election forinstance praised the countryrsquos electoral laws for providing ldquoa sound basis for theconduct of orderly pluralistic and accountable electionsrdquo and the vote-counting

A Normal Country Russia After Communism 163

procedures for ldquotransparency accountability and accuracy that fully met acceptedinternational standardsrdquo The OSCErsquos predecessor organization the Conferencefor Security and Cooperation in Europe reported after the 1993 election thatvoters had been able to ldquoexpress their political will freely and fairlyrdquo and called the1995 election ldquofree and fairrdquo10

Does such language merely reflect a reluctance to criticize Such fears arebelied by the OSCErsquos blunt condemnations of elections in other nearby countriessuch as Azerbaijan in 2000 (ldquoprimitive falsificationrdquo) Georgia in 2000 (ldquoballotstuffing and protocol tamperingrdquo that ldquohas discredited Georgiarsquos democratizationrdquo)and Ukraine in 1999 (ldquoflagrant violations of voting proceduresrdquo and a ldquowidespreadsystematic and co-ordinated campaign by state institutions at all levels to undulyinfluence votersrdquo) The OSCE expressed stronger reservations about Russiarsquos 2003parliamentary and its 2004 presidential elections complaining of bias in thestate-controlled media and abuses by some local officials although it still praisedthe Central Election Commission for its ldquoprofessionalrdquo organization of theelections

As for voter apathy turnout in Russian elections since 1991 never dippedbelow about 54 percent and rose as high as 75 percent in 1991mdashcompared to about50ndash51 percent of the voting age population in recent US national elections In allRussian national elections since 1993 voters had the option to vote ldquoagainst allrdquocandidates The number doing so has never exceeded 5 percent

In a phony democracy one expects reported election results to match thedesires of incumbents But in Russia at least before Putinrsquos presidency the resultsoften shocked political elites In 1991 an outsider candidate Boris Yeltsin beat thefavorites of Gorbachev and the Soviet Communist leadership to win the Russianpresidency with 57 percent of the vote In 1993 elites were horrified by the highshowing of Vladimir Zhirinovsky and his clownish ultranationalists In 1995 theCommunist Party surprised observers by coming first in the party list vote with22 percent a feat it repeated in 1999 when it won 24 percent The main partyassociated with the incumbent regime won only about 15 percent in 1993 and10 percent in 1995

Some falsification and improprieties have definitely occurred In regionalelections Russian officials have used technicalities to disqualify candidates andincumbents at all levels have misused state resources to campaign for reelectionLimits on campaign spending have been breached However such problems do notappear to go beyond the violations common in middle-income democracies likeMexico or Brazil where stories of coercion intimidation and vote buying alsoabound11

10 For the OSCE reports on Russian elections see httpwwwosceorgodihrindexphppageelectionsampdivreportsampcountryru To compare with election reports on other countries see httpwwwosceorgodihrindexphppageelectionsampdivreports For the CSCE reports mentioned in thetext see httpwwwcscegovreportscfm11 For instance in Mexico international election observers from the human rights group GlobalExchange reported after the 2000 presidential election that in ldquomost of the communities [where itsobservers were stationed] voting day was marred by often flagrant violations of the electoral code In the

164 Journal of Economic Perspectives

official figures are both rapid reformers (Estonia Poland Czech Republic) andslow or nonreformers (Belarus Uzbekistan) Those with the largest declines alsoinclude both nonreformers (Tajikistan Turkmenistan) and some that tried toreform (Moldova) A comparison of Russia with Ukraine is particularly instructive(see Figure 2) Ukraine had a large population (about 52 million) an industrialeconomy significant natural resources and a ldquoculturerdquo similar to Russiarsquos prior totransition Unlike Russia it retained the old communist leadership albeit renamedand pursued more cautious reforms keeping a much larger share of the economyin state hands Yet Ukrainersquos official drop in per capita GDP of 45 percent between1991 and 2001 was almost twice as large as Russiarsquos

In comparison with other nations of eastern Europe and the former SovietUnion Russiarsquos economy performed roughly as one might have expected Our bestestimate is that its genuine output drop between 1990 and 2001 was small andprobably completely reversed by 2003 (Aslund 2003) Considering the distorteddemand inflated accounting and uselessness of much of the prereform outputRussians today are probably on average better off than they were in 1990

Financial CrisesThe 1990s was a decade of extreme macroeconomic turbulence for Russia

Between December 1991 and December 2001 the rublersquos value dropped by more

Figure 2Official GDP Per Capita in Postcommunist Countries First 10 Years of Transition(at constant prices)

0

20

40

60

80

100

120

0 1 2

Former Soviet UnionEastern EuropeUkraineRussia

3 4 5 6 7 8 9 10

Years since start of transition (ldquo0rdquo 1989 for EE 1991 for FSU)

Source Calculated from World Bank World Development Indicators 2003 and EBRD Transition Report1997 Eastern Europe unweighted average of Albania Bulgaria Hungary Poland Romania SlovakiaSlovenia Former Soviet Union unweighted average of Armenia Belarus Estonia GeorgiaKazakhstan Kyrgyzstan Latvia Lithuania Moldova Russia Tajikistan Turkmenistan UkraineUzbekistan Data unavailable for Azerbaijan

158 Journal of Economic Perspectives

than 99 percent against the dollar Three years after the authorities managed tostabilize inflation in 1995 a financial crisis led to a devaluation of the ruble and agovernment moratorium on foreign debt payments

But such financial crises are common among emerging market economiesBad as the 99 percent drop in the rublersquos value sounds an examination of the IMFrsquosInternational Financial Statistics (April 2002) shows that eleven other countriesmdashincluding Brazil Turkey Ukraine and Belarusmdashsuffered even larger currencydeclines during the 1990s In the 1980s depreciations this large were even morefrequent with larger ones recorded by Peru Argentina Bolivia Brazil UruguayNicaragua Vietnam Lebanon and even Poland later seen as the greatest successstory of transition from socialism

During Russiarsquos 1998 crisis the ruble fell 61 percent in the two months ofAugust and September But during the decade from January 1992 to December2001 two-month currency collapses at least this large occurred 34 times in a totalof 20 countries Russiarsquos crash in 1998 was not an isolated phenomenon it came inthe middle of a wave of similar currency crises that stretched from Thailand andIndonesia to Brazil and Turkey Moreover the consequences of Russiarsquos 1998financial crisis were far less dire than claimed at the time The devaluation wasfollowed by a multiyear spurt of rapid growth and a reinvigorated drive towardliberal economic reform

Economic InequalityRussiarsquos economic reforms are said to have exacerbated economic inequality

with privatization often fingered as the primary culprit The European Bank forReconstruction and Development (1999 p 110) wrote ldquo[U]nder the lsquoshares-for-loansrsquo scheme implemented in 1995 many of the key resource-based companies fellinto the hands of a small group of financiers the so-called lsquooligarchsrsquo This has ledto very sharp increases in wealth and income inequalitymdashby 1997 the Gini coeffi-cient for income in Russia was around 05rdquo7

Inequality has increased sharply in Russia since the fall of communism Thereis some question about the precise numbers but no dispute about the trendRussiarsquos official statistical agency Goskomstat (2001 p187) shows the Gini coef-ficient for money incomes rising from 26 in 1991 to 41 in 1994 after which itstabilized at about 40 through the end of the decade8 The World Bank in variousissues of the annual World Development Reports and World Development Indicators gives

7 The Gini coefficient ranges from 0 to 1 where 0 means perfect equality (everyone has the sameincome) and 1 means perfect inequality (one person has all the income) To calculate the Ginicoefficient plot a ldquoLorenz curverdquo where the horizontal axis is the cumulative percentage of householdsranging up to 100 percent and the vertical axis is the cumulative percentage of income held by thosehouseholds also ranging up to 100 percent A straight line going up at a 45-degree angle will showperfect equality of income If the area between the line of perfect equality and actual Lorenz curve is Aand the area underneath the line that shows perfect equality of income is B the Gini coefficient is AB8 On the other hand relative equality of incomes in the shortage economy of late socialism existedalongside highly unequal access to consumer goods

A Normal Country Russia After Communism 159

figures for Russiarsquos Gini for expenditure of 496 in 1993 480 in 1996 487 in 1998and 460 in 2000 For comparison the Goskomstat figure of 41 is almost exactly thesame as that for the United States (408 in 1997) The higher World Bank estimateof 496 is about that of Malaysia (492) or the Philippines (462) but below that ofHong Kong (522) Mexico (531) South Africa (593) or Brazil (607)

The trouble with the claim that privatization caused inequality is that inequal-ity came first Russiarsquos Gini coefficient rose sharply between 1991 and 1993 andpeaked in 1994 before any effects of privatization could possibly materialize Noris unemployment responsible In 1992ndash1993 unemployment remained below6 percent It was in 1994ndash1998 that it grew to 132 percent while inequality declinedslightly (Goskomstat 2001 p 133) The growth of entrepreneurial income also playedat most a limited role Branko Milanovic (1998 p 22) of the World Bank finds that77 percent of the inequality increase can be attributed to growing dispersion of wageincomes While some Russians worked in successful firms that rapidly benefited fromfree prices and open trade others remained in declining firms and in the state sectorUnfortunate as the growth of inequality has been it is largely the result of the upheavalsassociated with rationalizing economic activity

Oligarchical CapitalismRussiarsquos economic reforms are often said to have fueled the rise of a small class

of ldquooligarchsrdquo who stand accused of stripping assets from the companies theyacquired This in turn is said to have depressed investment and economic growth(Stiglitz 2002 Hoff and Stiglitz 2002)

Russiarsquos big business is certainly dominated by a few tycoons as Guriev andRachinsky argue in their contribution to this symposium However in this Russia isquite typical In almost all developing capitalist economies and even in mostdeveloped countries the largest firms are either state or family controlled with afew dominant families often controlling a large share of national productionthrough financial and industrial groups (La Porta Lopez-de-Silanes and Shleifer1999 Claessens Djankov and Lang 1999) This is overwhelmingly true of middle-income countries such as Mexico Brazil South Korea Malaysia or South Africabut it also applies to developed countries such as Italy Singapore and Sweden Thebig business families are inevitably politically connected sometimes receiving loansand subsidies from the government (as in South Korea and Italy) often activelyparticipating in privatization (as in Mexico and Brazil) and quite regularly holdinghigh government offices while retaining a connection to their firms (as in Italy andMalaysia) (Faccio 2003) Following the Asian financial crisis of 1998 this system ofpolitical ownership and control has been pejoratively rechristened ldquocrony capital-ismrdquo even though it has been associated with some of the most rapid growth everseen as well as a remarkable recovery from crisis in Malaysia and South Korea Suchpatterns of ownership have also emerged in transition economies from Latvia to thecentral Asian states

Have Russiarsquos oligarchs depressed economic performance Russiarsquos tycoonslike those elsewhere in the developing world (not to mention Americarsquos robber

160 Journal of Economic Perspectives

barons of the nineteenth century) grew rich in part through deals with thegovernment But the claim that this accounts for poor growth in Russia makes littlesense Russiarsquos sharp decline in official output came beforemdashnot aftermdashthe oli-garchs emerged on the scene in 1995ndash1996 A few years of stagnation followed andthen rapid growth Oligarch-controlled companies have performed extremely welland far better than many comparable companies that remained controlled by thestate or by their Soviet-era managers They are responsible for much of thedramatic increase in output in recent years as well as the amazing stock marketboom

Consider three of the most notorious cases In ldquoloans-for-sharesrdquo MikhailKhodorkovsky (now in jail) obtained a major stake in the oil company Yukos BorisBerezovsky (now in exile) won control of the oil company Sibneft along with histhen-partner Roman Abramovich Vladimir Potanin acquired the nickel producerNorilsk Nickel Between 1996 and 2001 the reported pretax profits of YukosSibneft and Norilsk Nickel rose in real terms by 36 10 and 5 times respectively9

Their stock market valuations also soared (those of Yukos and Sibneft rising bymore than 30 times in real terms) This performance is markedly better than thatof the gas monopoly Gazprom or the electricity utility UES which stayed understate control or of major private companies such as Lukoil that remained con-trolled by preprivatization management (Boone and Rodionov 2001)

Have the oligarchs stripped assets from the companies they acquired inprivatization The audited financial statements of these companies suggest theyactually invested especially since 1998 Yukosrsquo assets rose from $53 billion in 1998to $144 billion in 2002 although this might reflect in part higher world oil prices(see Table 1) Norilsk Nickelrsquos assets rose from $66 billion in 1999 to $97 billionin 2002 Sibneftrsquos assets did fall from 1996 to 1999 in part due to an accountingchange (which might reflect asset stripping) But since 1999 they have increasedfrom $43 billion to $75 billion in 2002 Recently the major oligarchs have beeninvesting hundreds of millions of dollars annually in their companies In 2002Yukos invested $126 billion in property plant and equipment and Sibneft madecapital expenditures of $959 million Guriev and Rachinsky (2004) in a systematicstudy of the performance of oligarch-controlled companies in 2001 found thatsuch companies invested significantly more that year than firms controlled by otherRussian owners

In contrast the greatest asset stripping scandals have concerned companiesthat remained under state control Gazpromrsquos former management has beenaccused of stealing assets via complicated networks of trading companies Thestate-owned airline Aeroflotrsquos reported assets dropped between 1998 and 2001 Byand large the companies privatized to the oligarchs performed far better thanthose left under state control That the leading oligarch-controlled oil companiesgenerally outperformed other oil firms such as Lukoil which remained under

9 Calculated from figures in Ekspert database deflating by the Consumer Price Index

Andrei Shleifer and Daniel Treisman 161

Soviet-era management suggests that their success was due to better managementand not only to rising oil prices

None of this is to say the oligarchs are public spirited politically naıve orprotective of their minority shareholders They benefited from sweetheart dealswith the government and massively diluted the value of minority shares in order toconsolidate their control Investor protection and corporate governance in Russiaremain weak But here again Russia is typical of middle-income developing coun-tries where expropriation of minority shareholders is nearly universal (Johnson LaPorta Lopez-de-Silanes and Shleifer 2000)

In fact the claim that the oligarchs privatized companies in order to strip theirassets and are impeding economic growth has it precisely backward The oligarchsstripped assets from state-controlled companies in order to buy others in privatiza-tion Indeed the concern with such theft from state firms was one of the reasons toaccelerate privatization in 1992 The oligarchs also tried to buy assets in privatiza-tion at the lowest possible prices often offering politicians various deals Once incontrol they attempted to increase their ownership stakes both legally and ille-gally But once oligarchs became full owners they acted as economic theorypredicts they invested to improve their companiesrsquo performance This is whatoligarchs have done in every other countrymdashfrom JP Morgan and John DRockefeller to Silvio Berlusconi and the owners of Korean chaebol

In sum Russiarsquos economy is not a model of capitalism that one finds inintroductory textbooks Like other middle-income countries Russia suffers frominequality financial crises and a large unofficial sector Economic and politicalpower are intimately intertwined Nonetheless Russia started the 1990s a disinte-grating centrally planned economy and ended it a market system in a burst of rapidgrowth

Table 1Total Assets and Investment of Three Leading Russian Companies

1996 1997 1998 1999 2000 2001 2002

YukosTotal assets bn US $ 47 52 53 60 103 105e 144e

Investmenta mn US $ 226 589e 954e 1263e

SibneftTotal assets bn US $ 76 56d 50 43 46 57 75Investmentb mn US $ 154 129 231 619 959

Norilsk NickelTotal assets bn US $ 66 72 109c 97Investmentb mn US $ 168 638 510c 351

aAdditions to property plant and equipmentbCapital expenditurescRestated in 2002 Annual ReportdAssets reduced by $13 bn because of accounting changeeAs in 2002 Annual ReportSources Audited financial statements and annual reports

162 Journal of Economic Perspectives

Autocratic Kleptocracy

DemocracyWestern evaluations of Russiarsquos political institutions in the last ten years have

often been scathing Even before Putinrsquos recent consolidation of power The Econ-omist magazine declared the countryrsquos democracy to be ldquophonyrdquo (June 24 2000p 20) The advocacy group Freedom House which rates countriesrsquo institutions hassince 2000 given Russia a ldquo5rdquo for political freedom and a ldquo5rdquo for civil liberties on aseven-point scale that ranges from ldquo1rdquo (highest) to ldquo7rdquo (lowest) This puts Russiarsquospolitical regime below Brazilrsquos military junta of the late 1970s and its civil libertiesbelow those of Nigeria in 1991 under the dictatorship of Major General IbrahimBabangida According to Freedom Housersquos own report in Nigeria at this timemilitary tribunals were charged with trying cases of sedition and the regime hadmade a practice of incarcerating ldquoinnocent relatives of suspected political offendersto draw the suspects out of hidingrdquo (Gastil 1992 p 353) Even Kuwait a hereditaryemirate where political parties are illegal women cannot vote in legislative elec-tions and criticism of the emir is punishable by imprisonment gets a better ratingfor political freedom than Russia

Critics of Russiarsquos democracy focus on several points Those in power areaccused of manipulating elections through control of the state media harassmentor censorship of the independent press and use of judicial and administrative leversto intimidate or incapacitate rivals Voters are portrayed as apathetic and gullibleAt the same time big business is seen as subverting the democratic process throughfinancial support of favored candidates The combination of voter apathy andofficial manipulation means in the grim but quite representative view of one NewYork Times reporter that in Russia during the last decade ldquothere has been no trulydemocratic choice of new leadersrdquo (Myers 2003)

Just how bad is Russiarsquos democracy Russiarsquos political institutions and civicfreedoms are certainly imperfect in many ways Relative to that under Yeltsin thesituation under President Putin has deteriorated considerably and could deterio-rate further However Western condemnations of Russiarsquos institutions in the last10 years have been grossly overblown Russiarsquos politics have been among the mostdemocratic in the region The defects of the countryrsquos democracy resemble thosefound in many other middle-income countries

Eight national ballotsmdashfour parliamentary and four presidentialmdashtook placein Russia between 1991 and 2004 A variety of candidates ran in each representingall parts of the political spectrum With few exceptions parties and electoral blocswere free to organize and a large number managed to register Internationalobservers although critical of imbalance in media coverage and episodic impro-prieties have generally given these elections high marks The Organization forSecurity and Cooperation in Europe (OSCE) a regional security organizationheadquartered in Austria with 55 member nations regularly monitors elections inRussia and other countries Its report on the 1999 Russian Duma election forinstance praised the countryrsquos electoral laws for providing ldquoa sound basis for theconduct of orderly pluralistic and accountable electionsrdquo and the vote-counting

A Normal Country Russia After Communism 163

procedures for ldquotransparency accountability and accuracy that fully met acceptedinternational standardsrdquo The OSCErsquos predecessor organization the Conferencefor Security and Cooperation in Europe reported after the 1993 election thatvoters had been able to ldquoexpress their political will freely and fairlyrdquo and called the1995 election ldquofree and fairrdquo10

Does such language merely reflect a reluctance to criticize Such fears arebelied by the OSCErsquos blunt condemnations of elections in other nearby countriessuch as Azerbaijan in 2000 (ldquoprimitive falsificationrdquo) Georgia in 2000 (ldquoballotstuffing and protocol tamperingrdquo that ldquohas discredited Georgiarsquos democratizationrdquo)and Ukraine in 1999 (ldquoflagrant violations of voting proceduresrdquo and a ldquowidespreadsystematic and co-ordinated campaign by state institutions at all levels to undulyinfluence votersrdquo) The OSCE expressed stronger reservations about Russiarsquos 2003parliamentary and its 2004 presidential elections complaining of bias in thestate-controlled media and abuses by some local officials although it still praisedthe Central Election Commission for its ldquoprofessionalrdquo organization of theelections

As for voter apathy turnout in Russian elections since 1991 never dippedbelow about 54 percent and rose as high as 75 percent in 1991mdashcompared to about50ndash51 percent of the voting age population in recent US national elections In allRussian national elections since 1993 voters had the option to vote ldquoagainst allrdquocandidates The number doing so has never exceeded 5 percent

In a phony democracy one expects reported election results to match thedesires of incumbents But in Russia at least before Putinrsquos presidency the resultsoften shocked political elites In 1991 an outsider candidate Boris Yeltsin beat thefavorites of Gorbachev and the Soviet Communist leadership to win the Russianpresidency with 57 percent of the vote In 1993 elites were horrified by the highshowing of Vladimir Zhirinovsky and his clownish ultranationalists In 1995 theCommunist Party surprised observers by coming first in the party list vote with22 percent a feat it repeated in 1999 when it won 24 percent The main partyassociated with the incumbent regime won only about 15 percent in 1993 and10 percent in 1995

Some falsification and improprieties have definitely occurred In regionalelections Russian officials have used technicalities to disqualify candidates andincumbents at all levels have misused state resources to campaign for reelectionLimits on campaign spending have been breached However such problems do notappear to go beyond the violations common in middle-income democracies likeMexico or Brazil where stories of coercion intimidation and vote buying alsoabound11

10 For the OSCE reports on Russian elections see httpwwwosceorgodihrindexphppageelectionsampdivreportsampcountryru To compare with election reports on other countries see httpwwwosceorgodihrindexphppageelectionsampdivreports For the CSCE reports mentioned in thetext see httpwwwcscegovreportscfm11 For instance in Mexico international election observers from the human rights group GlobalExchange reported after the 2000 presidential election that in ldquomost of the communities [where itsobservers were stationed] voting day was marred by often flagrant violations of the electoral code In the

164 Journal of Economic Perspectives

than 99 percent against the dollar Three years after the authorities managed tostabilize inflation in 1995 a financial crisis led to a devaluation of the ruble and agovernment moratorium on foreign debt payments

But such financial crises are common among emerging market economiesBad as the 99 percent drop in the rublersquos value sounds an examination of the IMFrsquosInternational Financial Statistics (April 2002) shows that eleven other countriesmdashincluding Brazil Turkey Ukraine and Belarusmdashsuffered even larger currencydeclines during the 1990s In the 1980s depreciations this large were even morefrequent with larger ones recorded by Peru Argentina Bolivia Brazil UruguayNicaragua Vietnam Lebanon and even Poland later seen as the greatest successstory of transition from socialism

During Russiarsquos 1998 crisis the ruble fell 61 percent in the two months ofAugust and September But during the decade from January 1992 to December2001 two-month currency collapses at least this large occurred 34 times in a totalof 20 countries Russiarsquos crash in 1998 was not an isolated phenomenon it came inthe middle of a wave of similar currency crises that stretched from Thailand andIndonesia to Brazil and Turkey Moreover the consequences of Russiarsquos 1998financial crisis were far less dire than claimed at the time The devaluation wasfollowed by a multiyear spurt of rapid growth and a reinvigorated drive towardliberal economic reform

Economic InequalityRussiarsquos economic reforms are said to have exacerbated economic inequality

with privatization often fingered as the primary culprit The European Bank forReconstruction and Development (1999 p 110) wrote ldquo[U]nder the lsquoshares-for-loansrsquo scheme implemented in 1995 many of the key resource-based companies fellinto the hands of a small group of financiers the so-called lsquooligarchsrsquo This has ledto very sharp increases in wealth and income inequalitymdashby 1997 the Gini coeffi-cient for income in Russia was around 05rdquo7

Inequality has increased sharply in Russia since the fall of communism Thereis some question about the precise numbers but no dispute about the trendRussiarsquos official statistical agency Goskomstat (2001 p187) shows the Gini coef-ficient for money incomes rising from 26 in 1991 to 41 in 1994 after which itstabilized at about 40 through the end of the decade8 The World Bank in variousissues of the annual World Development Reports and World Development Indicators gives

7 The Gini coefficient ranges from 0 to 1 where 0 means perfect equality (everyone has the sameincome) and 1 means perfect inequality (one person has all the income) To calculate the Ginicoefficient plot a ldquoLorenz curverdquo where the horizontal axis is the cumulative percentage of householdsranging up to 100 percent and the vertical axis is the cumulative percentage of income held by thosehouseholds also ranging up to 100 percent A straight line going up at a 45-degree angle will showperfect equality of income If the area between the line of perfect equality and actual Lorenz curve is Aand the area underneath the line that shows perfect equality of income is B the Gini coefficient is AB8 On the other hand relative equality of incomes in the shortage economy of late socialism existedalongside highly unequal access to consumer goods

A Normal Country Russia After Communism 159

figures for Russiarsquos Gini for expenditure of 496 in 1993 480 in 1996 487 in 1998and 460 in 2000 For comparison the Goskomstat figure of 41 is almost exactly thesame as that for the United States (408 in 1997) The higher World Bank estimateof 496 is about that of Malaysia (492) or the Philippines (462) but below that ofHong Kong (522) Mexico (531) South Africa (593) or Brazil (607)

The trouble with the claim that privatization caused inequality is that inequal-ity came first Russiarsquos Gini coefficient rose sharply between 1991 and 1993 andpeaked in 1994 before any effects of privatization could possibly materialize Noris unemployment responsible In 1992ndash1993 unemployment remained below6 percent It was in 1994ndash1998 that it grew to 132 percent while inequality declinedslightly (Goskomstat 2001 p 133) The growth of entrepreneurial income also playedat most a limited role Branko Milanovic (1998 p 22) of the World Bank finds that77 percent of the inequality increase can be attributed to growing dispersion of wageincomes While some Russians worked in successful firms that rapidly benefited fromfree prices and open trade others remained in declining firms and in the state sectorUnfortunate as the growth of inequality has been it is largely the result of the upheavalsassociated with rationalizing economic activity

Oligarchical CapitalismRussiarsquos economic reforms are often said to have fueled the rise of a small class

of ldquooligarchsrdquo who stand accused of stripping assets from the companies theyacquired This in turn is said to have depressed investment and economic growth(Stiglitz 2002 Hoff and Stiglitz 2002)

Russiarsquos big business is certainly dominated by a few tycoons as Guriev andRachinsky argue in their contribution to this symposium However in this Russia isquite typical In almost all developing capitalist economies and even in mostdeveloped countries the largest firms are either state or family controlled with afew dominant families often controlling a large share of national productionthrough financial and industrial groups (La Porta Lopez-de-Silanes and Shleifer1999 Claessens Djankov and Lang 1999) This is overwhelmingly true of middle-income countries such as Mexico Brazil South Korea Malaysia or South Africabut it also applies to developed countries such as Italy Singapore and Sweden Thebig business families are inevitably politically connected sometimes receiving loansand subsidies from the government (as in South Korea and Italy) often activelyparticipating in privatization (as in Mexico and Brazil) and quite regularly holdinghigh government offices while retaining a connection to their firms (as in Italy andMalaysia) (Faccio 2003) Following the Asian financial crisis of 1998 this system ofpolitical ownership and control has been pejoratively rechristened ldquocrony capital-ismrdquo even though it has been associated with some of the most rapid growth everseen as well as a remarkable recovery from crisis in Malaysia and South Korea Suchpatterns of ownership have also emerged in transition economies from Latvia to thecentral Asian states

Have Russiarsquos oligarchs depressed economic performance Russiarsquos tycoonslike those elsewhere in the developing world (not to mention Americarsquos robber

160 Journal of Economic Perspectives

barons of the nineteenth century) grew rich in part through deals with thegovernment But the claim that this accounts for poor growth in Russia makes littlesense Russiarsquos sharp decline in official output came beforemdashnot aftermdashthe oli-garchs emerged on the scene in 1995ndash1996 A few years of stagnation followed andthen rapid growth Oligarch-controlled companies have performed extremely welland far better than many comparable companies that remained controlled by thestate or by their Soviet-era managers They are responsible for much of thedramatic increase in output in recent years as well as the amazing stock marketboom

Consider three of the most notorious cases In ldquoloans-for-sharesrdquo MikhailKhodorkovsky (now in jail) obtained a major stake in the oil company Yukos BorisBerezovsky (now in exile) won control of the oil company Sibneft along with histhen-partner Roman Abramovich Vladimir Potanin acquired the nickel producerNorilsk Nickel Between 1996 and 2001 the reported pretax profits of YukosSibneft and Norilsk Nickel rose in real terms by 36 10 and 5 times respectively9

Their stock market valuations also soared (those of Yukos and Sibneft rising bymore than 30 times in real terms) This performance is markedly better than thatof the gas monopoly Gazprom or the electricity utility UES which stayed understate control or of major private companies such as Lukoil that remained con-trolled by preprivatization management (Boone and Rodionov 2001)

Have the oligarchs stripped assets from the companies they acquired inprivatization The audited financial statements of these companies suggest theyactually invested especially since 1998 Yukosrsquo assets rose from $53 billion in 1998to $144 billion in 2002 although this might reflect in part higher world oil prices(see Table 1) Norilsk Nickelrsquos assets rose from $66 billion in 1999 to $97 billionin 2002 Sibneftrsquos assets did fall from 1996 to 1999 in part due to an accountingchange (which might reflect asset stripping) But since 1999 they have increasedfrom $43 billion to $75 billion in 2002 Recently the major oligarchs have beeninvesting hundreds of millions of dollars annually in their companies In 2002Yukos invested $126 billion in property plant and equipment and Sibneft madecapital expenditures of $959 million Guriev and Rachinsky (2004) in a systematicstudy of the performance of oligarch-controlled companies in 2001 found thatsuch companies invested significantly more that year than firms controlled by otherRussian owners

In contrast the greatest asset stripping scandals have concerned companiesthat remained under state control Gazpromrsquos former management has beenaccused of stealing assets via complicated networks of trading companies Thestate-owned airline Aeroflotrsquos reported assets dropped between 1998 and 2001 Byand large the companies privatized to the oligarchs performed far better thanthose left under state control That the leading oligarch-controlled oil companiesgenerally outperformed other oil firms such as Lukoil which remained under

9 Calculated from figures in Ekspert database deflating by the Consumer Price Index

Andrei Shleifer and Daniel Treisman 161

Soviet-era management suggests that their success was due to better managementand not only to rising oil prices

None of this is to say the oligarchs are public spirited politically naıve orprotective of their minority shareholders They benefited from sweetheart dealswith the government and massively diluted the value of minority shares in order toconsolidate their control Investor protection and corporate governance in Russiaremain weak But here again Russia is typical of middle-income developing coun-tries where expropriation of minority shareholders is nearly universal (Johnson LaPorta Lopez-de-Silanes and Shleifer 2000)

In fact the claim that the oligarchs privatized companies in order to strip theirassets and are impeding economic growth has it precisely backward The oligarchsstripped assets from state-controlled companies in order to buy others in privatiza-tion Indeed the concern with such theft from state firms was one of the reasons toaccelerate privatization in 1992 The oligarchs also tried to buy assets in privatiza-tion at the lowest possible prices often offering politicians various deals Once incontrol they attempted to increase their ownership stakes both legally and ille-gally But once oligarchs became full owners they acted as economic theorypredicts they invested to improve their companiesrsquo performance This is whatoligarchs have done in every other countrymdashfrom JP Morgan and John DRockefeller to Silvio Berlusconi and the owners of Korean chaebol

In sum Russiarsquos economy is not a model of capitalism that one finds inintroductory textbooks Like other middle-income countries Russia suffers frominequality financial crises and a large unofficial sector Economic and politicalpower are intimately intertwined Nonetheless Russia started the 1990s a disinte-grating centrally planned economy and ended it a market system in a burst of rapidgrowth

Table 1Total Assets and Investment of Three Leading Russian Companies

1996 1997 1998 1999 2000 2001 2002

YukosTotal assets bn US $ 47 52 53 60 103 105e 144e

Investmenta mn US $ 226 589e 954e 1263e

SibneftTotal assets bn US $ 76 56d 50 43 46 57 75Investmentb mn US $ 154 129 231 619 959

Norilsk NickelTotal assets bn US $ 66 72 109c 97Investmentb mn US $ 168 638 510c 351

aAdditions to property plant and equipmentbCapital expenditurescRestated in 2002 Annual ReportdAssets reduced by $13 bn because of accounting changeeAs in 2002 Annual ReportSources Audited financial statements and annual reports

162 Journal of Economic Perspectives

Autocratic Kleptocracy

DemocracyWestern evaluations of Russiarsquos political institutions in the last ten years have

often been scathing Even before Putinrsquos recent consolidation of power The Econ-omist magazine declared the countryrsquos democracy to be ldquophonyrdquo (June 24 2000p 20) The advocacy group Freedom House which rates countriesrsquo institutions hassince 2000 given Russia a ldquo5rdquo for political freedom and a ldquo5rdquo for civil liberties on aseven-point scale that ranges from ldquo1rdquo (highest) to ldquo7rdquo (lowest) This puts Russiarsquospolitical regime below Brazilrsquos military junta of the late 1970s and its civil libertiesbelow those of Nigeria in 1991 under the dictatorship of Major General IbrahimBabangida According to Freedom Housersquos own report in Nigeria at this timemilitary tribunals were charged with trying cases of sedition and the regime hadmade a practice of incarcerating ldquoinnocent relatives of suspected political offendersto draw the suspects out of hidingrdquo (Gastil 1992 p 353) Even Kuwait a hereditaryemirate where political parties are illegal women cannot vote in legislative elec-tions and criticism of the emir is punishable by imprisonment gets a better ratingfor political freedom than Russia

Critics of Russiarsquos democracy focus on several points Those in power areaccused of manipulating elections through control of the state media harassmentor censorship of the independent press and use of judicial and administrative leversto intimidate or incapacitate rivals Voters are portrayed as apathetic and gullibleAt the same time big business is seen as subverting the democratic process throughfinancial support of favored candidates The combination of voter apathy andofficial manipulation means in the grim but quite representative view of one NewYork Times reporter that in Russia during the last decade ldquothere has been no trulydemocratic choice of new leadersrdquo (Myers 2003)

Just how bad is Russiarsquos democracy Russiarsquos political institutions and civicfreedoms are certainly imperfect in many ways Relative to that under Yeltsin thesituation under President Putin has deteriorated considerably and could deterio-rate further However Western condemnations of Russiarsquos institutions in the last10 years have been grossly overblown Russiarsquos politics have been among the mostdemocratic in the region The defects of the countryrsquos democracy resemble thosefound in many other middle-income countries

Eight national ballotsmdashfour parliamentary and four presidentialmdashtook placein Russia between 1991 and 2004 A variety of candidates ran in each representingall parts of the political spectrum With few exceptions parties and electoral blocswere free to organize and a large number managed to register Internationalobservers although critical of imbalance in media coverage and episodic impro-prieties have generally given these elections high marks The Organization forSecurity and Cooperation in Europe (OSCE) a regional security organizationheadquartered in Austria with 55 member nations regularly monitors elections inRussia and other countries Its report on the 1999 Russian Duma election forinstance praised the countryrsquos electoral laws for providing ldquoa sound basis for theconduct of orderly pluralistic and accountable electionsrdquo and the vote-counting

A Normal Country Russia After Communism 163

procedures for ldquotransparency accountability and accuracy that fully met acceptedinternational standardsrdquo The OSCErsquos predecessor organization the Conferencefor Security and Cooperation in Europe reported after the 1993 election thatvoters had been able to ldquoexpress their political will freely and fairlyrdquo and called the1995 election ldquofree and fairrdquo10

Does such language merely reflect a reluctance to criticize Such fears arebelied by the OSCErsquos blunt condemnations of elections in other nearby countriessuch as Azerbaijan in 2000 (ldquoprimitive falsificationrdquo) Georgia in 2000 (ldquoballotstuffing and protocol tamperingrdquo that ldquohas discredited Georgiarsquos democratizationrdquo)and Ukraine in 1999 (ldquoflagrant violations of voting proceduresrdquo and a ldquowidespreadsystematic and co-ordinated campaign by state institutions at all levels to undulyinfluence votersrdquo) The OSCE expressed stronger reservations about Russiarsquos 2003parliamentary and its 2004 presidential elections complaining of bias in thestate-controlled media and abuses by some local officials although it still praisedthe Central Election Commission for its ldquoprofessionalrdquo organization of theelections

As for voter apathy turnout in Russian elections since 1991 never dippedbelow about 54 percent and rose as high as 75 percent in 1991mdashcompared to about50ndash51 percent of the voting age population in recent US national elections In allRussian national elections since 1993 voters had the option to vote ldquoagainst allrdquocandidates The number doing so has never exceeded 5 percent

In a phony democracy one expects reported election results to match thedesires of incumbents But in Russia at least before Putinrsquos presidency the resultsoften shocked political elites In 1991 an outsider candidate Boris Yeltsin beat thefavorites of Gorbachev and the Soviet Communist leadership to win the Russianpresidency with 57 percent of the vote In 1993 elites were horrified by the highshowing of Vladimir Zhirinovsky and his clownish ultranationalists In 1995 theCommunist Party surprised observers by coming first in the party list vote with22 percent a feat it repeated in 1999 when it won 24 percent The main partyassociated with the incumbent regime won only about 15 percent in 1993 and10 percent in 1995

Some falsification and improprieties have definitely occurred In regionalelections Russian officials have used technicalities to disqualify candidates andincumbents at all levels have misused state resources to campaign for reelectionLimits on campaign spending have been breached However such problems do notappear to go beyond the violations common in middle-income democracies likeMexico or Brazil where stories of coercion intimidation and vote buying alsoabound11

10 For the OSCE reports on Russian elections see httpwwwosceorgodihrindexphppageelectionsampdivreportsampcountryru To compare with election reports on other countries see httpwwwosceorgodihrindexphppageelectionsampdivreports For the CSCE reports mentioned in thetext see httpwwwcscegovreportscfm11 For instance in Mexico international election observers from the human rights group GlobalExchange reported after the 2000 presidential election that in ldquomost of the communities [where itsobservers were stationed] voting day was marred by often flagrant violations of the electoral code In the

164 Journal of Economic Perspectives

figures for Russiarsquos Gini for expenditure of 496 in 1993 480 in 1996 487 in 1998and 460 in 2000 For comparison the Goskomstat figure of 41 is almost exactly thesame as that for the United States (408 in 1997) The higher World Bank estimateof 496 is about that of Malaysia (492) or the Philippines (462) but below that ofHong Kong (522) Mexico (531) South Africa (593) or Brazil (607)

The trouble with the claim that privatization caused inequality is that inequal-ity came first Russiarsquos Gini coefficient rose sharply between 1991 and 1993 andpeaked in 1994 before any effects of privatization could possibly materialize Noris unemployment responsible In 1992ndash1993 unemployment remained below6 percent It was in 1994ndash1998 that it grew to 132 percent while inequality declinedslightly (Goskomstat 2001 p 133) The growth of entrepreneurial income also playedat most a limited role Branko Milanovic (1998 p 22) of the World Bank finds that77 percent of the inequality increase can be attributed to growing dispersion of wageincomes While some Russians worked in successful firms that rapidly benefited fromfree prices and open trade others remained in declining firms and in the state sectorUnfortunate as the growth of inequality has been it is largely the result of the upheavalsassociated with rationalizing economic activity

Oligarchical CapitalismRussiarsquos economic reforms are often said to have fueled the rise of a small class

of ldquooligarchsrdquo who stand accused of stripping assets from the companies theyacquired This in turn is said to have depressed investment and economic growth(Stiglitz 2002 Hoff and Stiglitz 2002)

Russiarsquos big business is certainly dominated by a few tycoons as Guriev andRachinsky argue in their contribution to this symposium However in this Russia isquite typical In almost all developing capitalist economies and even in mostdeveloped countries the largest firms are either state or family controlled with afew dominant families often controlling a large share of national productionthrough financial and industrial groups (La Porta Lopez-de-Silanes and Shleifer1999 Claessens Djankov and Lang 1999) This is overwhelmingly true of middle-income countries such as Mexico Brazil South Korea Malaysia or South Africabut it also applies to developed countries such as Italy Singapore and Sweden Thebig business families are inevitably politically connected sometimes receiving loansand subsidies from the government (as in South Korea and Italy) often activelyparticipating in privatization (as in Mexico and Brazil) and quite regularly holdinghigh government offices while retaining a connection to their firms (as in Italy andMalaysia) (Faccio 2003) Following the Asian financial crisis of 1998 this system ofpolitical ownership and control has been pejoratively rechristened ldquocrony capital-ismrdquo even though it has been associated with some of the most rapid growth everseen as well as a remarkable recovery from crisis in Malaysia and South Korea Suchpatterns of ownership have also emerged in transition economies from Latvia to thecentral Asian states

Have Russiarsquos oligarchs depressed economic performance Russiarsquos tycoonslike those elsewhere in the developing world (not to mention Americarsquos robber

160 Journal of Economic Perspectives

barons of the nineteenth century) grew rich in part through deals with thegovernment But the claim that this accounts for poor growth in Russia makes littlesense Russiarsquos sharp decline in official output came beforemdashnot aftermdashthe oli-garchs emerged on the scene in 1995ndash1996 A few years of stagnation followed andthen rapid growth Oligarch-controlled companies have performed extremely welland far better than many comparable companies that remained controlled by thestate or by their Soviet-era managers They are responsible for much of thedramatic increase in output in recent years as well as the amazing stock marketboom

Consider three of the most notorious cases In ldquoloans-for-sharesrdquo MikhailKhodorkovsky (now in jail) obtained a major stake in the oil company Yukos BorisBerezovsky (now in exile) won control of the oil company Sibneft along with histhen-partner Roman Abramovich Vladimir Potanin acquired the nickel producerNorilsk Nickel Between 1996 and 2001 the reported pretax profits of YukosSibneft and Norilsk Nickel rose in real terms by 36 10 and 5 times respectively9

Their stock market valuations also soared (those of Yukos and Sibneft rising bymore than 30 times in real terms) This performance is markedly better than thatof the gas monopoly Gazprom or the electricity utility UES which stayed understate control or of major private companies such as Lukoil that remained con-trolled by preprivatization management (Boone and Rodionov 2001)

Have the oligarchs stripped assets from the companies they acquired inprivatization The audited financial statements of these companies suggest theyactually invested especially since 1998 Yukosrsquo assets rose from $53 billion in 1998to $144 billion in 2002 although this might reflect in part higher world oil prices(see Table 1) Norilsk Nickelrsquos assets rose from $66 billion in 1999 to $97 billionin 2002 Sibneftrsquos assets did fall from 1996 to 1999 in part due to an accountingchange (which might reflect asset stripping) But since 1999 they have increasedfrom $43 billion to $75 billion in 2002 Recently the major oligarchs have beeninvesting hundreds of millions of dollars annually in their companies In 2002Yukos invested $126 billion in property plant and equipment and Sibneft madecapital expenditures of $959 million Guriev and Rachinsky (2004) in a systematicstudy of the performance of oligarch-controlled companies in 2001 found thatsuch companies invested significantly more that year than firms controlled by otherRussian owners

In contrast the greatest asset stripping scandals have concerned companiesthat remained under state control Gazpromrsquos former management has beenaccused of stealing assets via complicated networks of trading companies Thestate-owned airline Aeroflotrsquos reported assets dropped between 1998 and 2001 Byand large the companies privatized to the oligarchs performed far better thanthose left under state control That the leading oligarch-controlled oil companiesgenerally outperformed other oil firms such as Lukoil which remained under

9 Calculated from figures in Ekspert database deflating by the Consumer Price Index

Andrei Shleifer and Daniel Treisman 161

Soviet-era management suggests that their success was due to better managementand not only to rising oil prices

None of this is to say the oligarchs are public spirited politically naıve orprotective of their minority shareholders They benefited from sweetheart dealswith the government and massively diluted the value of minority shares in order toconsolidate their control Investor protection and corporate governance in Russiaremain weak But here again Russia is typical of middle-income developing coun-tries where expropriation of minority shareholders is nearly universal (Johnson LaPorta Lopez-de-Silanes and Shleifer 2000)

In fact the claim that the oligarchs privatized companies in order to strip theirassets and are impeding economic growth has it precisely backward The oligarchsstripped assets from state-controlled companies in order to buy others in privatiza-tion Indeed the concern with such theft from state firms was one of the reasons toaccelerate privatization in 1992 The oligarchs also tried to buy assets in privatiza-tion at the lowest possible prices often offering politicians various deals Once incontrol they attempted to increase their ownership stakes both legally and ille-gally But once oligarchs became full owners they acted as economic theorypredicts they invested to improve their companiesrsquo performance This is whatoligarchs have done in every other countrymdashfrom JP Morgan and John DRockefeller to Silvio Berlusconi and the owners of Korean chaebol

In sum Russiarsquos economy is not a model of capitalism that one finds inintroductory textbooks Like other middle-income countries Russia suffers frominequality financial crises and a large unofficial sector Economic and politicalpower are intimately intertwined Nonetheless Russia started the 1990s a disinte-grating centrally planned economy and ended it a market system in a burst of rapidgrowth

Table 1Total Assets and Investment of Three Leading Russian Companies

1996 1997 1998 1999 2000 2001 2002

YukosTotal assets bn US $ 47 52 53 60 103 105e 144e

Investmenta mn US $ 226 589e 954e 1263e

SibneftTotal assets bn US $ 76 56d 50 43 46 57 75Investmentb mn US $ 154 129 231 619 959

Norilsk NickelTotal assets bn US $ 66 72 109c 97Investmentb mn US $ 168 638 510c 351

aAdditions to property plant and equipmentbCapital expenditurescRestated in 2002 Annual ReportdAssets reduced by $13 bn because of accounting changeeAs in 2002 Annual ReportSources Audited financial statements and annual reports

162 Journal of Economic Perspectives

Autocratic Kleptocracy

DemocracyWestern evaluations of Russiarsquos political institutions in the last ten years have

often been scathing Even before Putinrsquos recent consolidation of power The Econ-omist magazine declared the countryrsquos democracy to be ldquophonyrdquo (June 24 2000p 20) The advocacy group Freedom House which rates countriesrsquo institutions hassince 2000 given Russia a ldquo5rdquo for political freedom and a ldquo5rdquo for civil liberties on aseven-point scale that ranges from ldquo1rdquo (highest) to ldquo7rdquo (lowest) This puts Russiarsquospolitical regime below Brazilrsquos military junta of the late 1970s and its civil libertiesbelow those of Nigeria in 1991 under the dictatorship of Major General IbrahimBabangida According to Freedom Housersquos own report in Nigeria at this timemilitary tribunals were charged with trying cases of sedition and the regime hadmade a practice of incarcerating ldquoinnocent relatives of suspected political offendersto draw the suspects out of hidingrdquo (Gastil 1992 p 353) Even Kuwait a hereditaryemirate where political parties are illegal women cannot vote in legislative elec-tions and criticism of the emir is punishable by imprisonment gets a better ratingfor political freedom than Russia

Critics of Russiarsquos democracy focus on several points Those in power areaccused of manipulating elections through control of the state media harassmentor censorship of the independent press and use of judicial and administrative leversto intimidate or incapacitate rivals Voters are portrayed as apathetic and gullibleAt the same time big business is seen as subverting the democratic process throughfinancial support of favored candidates The combination of voter apathy andofficial manipulation means in the grim but quite representative view of one NewYork Times reporter that in Russia during the last decade ldquothere has been no trulydemocratic choice of new leadersrdquo (Myers 2003)

Just how bad is Russiarsquos democracy Russiarsquos political institutions and civicfreedoms are certainly imperfect in many ways Relative to that under Yeltsin thesituation under President Putin has deteriorated considerably and could deterio-rate further However Western condemnations of Russiarsquos institutions in the last10 years have been grossly overblown Russiarsquos politics have been among the mostdemocratic in the region The defects of the countryrsquos democracy resemble thosefound in many other middle-income countries

Eight national ballotsmdashfour parliamentary and four presidentialmdashtook placein Russia between 1991 and 2004 A variety of candidates ran in each representingall parts of the political spectrum With few exceptions parties and electoral blocswere free to organize and a large number managed to register Internationalobservers although critical of imbalance in media coverage and episodic impro-prieties have generally given these elections high marks The Organization forSecurity and Cooperation in Europe (OSCE) a regional security organizationheadquartered in Austria with 55 member nations regularly monitors elections inRussia and other countries Its report on the 1999 Russian Duma election forinstance praised the countryrsquos electoral laws for providing ldquoa sound basis for theconduct of orderly pluralistic and accountable electionsrdquo and the vote-counting

A Normal Country Russia After Communism 163

procedures for ldquotransparency accountability and accuracy that fully met acceptedinternational standardsrdquo The OSCErsquos predecessor organization the Conferencefor Security and Cooperation in Europe reported after the 1993 election thatvoters had been able to ldquoexpress their political will freely and fairlyrdquo and called the1995 election ldquofree and fairrdquo10

Does such language merely reflect a reluctance to criticize Such fears arebelied by the OSCErsquos blunt condemnations of elections in other nearby countriessuch as Azerbaijan in 2000 (ldquoprimitive falsificationrdquo) Georgia in 2000 (ldquoballotstuffing and protocol tamperingrdquo that ldquohas discredited Georgiarsquos democratizationrdquo)and Ukraine in 1999 (ldquoflagrant violations of voting proceduresrdquo and a ldquowidespreadsystematic and co-ordinated campaign by state institutions at all levels to undulyinfluence votersrdquo) The OSCE expressed stronger reservations about Russiarsquos 2003parliamentary and its 2004 presidential elections complaining of bias in thestate-controlled media and abuses by some local officials although it still praisedthe Central Election Commission for its ldquoprofessionalrdquo organization of theelections

As for voter apathy turnout in Russian elections since 1991 never dippedbelow about 54 percent and rose as high as 75 percent in 1991mdashcompared to about50ndash51 percent of the voting age population in recent US national elections In allRussian national elections since 1993 voters had the option to vote ldquoagainst allrdquocandidates The number doing so has never exceeded 5 percent

In a phony democracy one expects reported election results to match thedesires of incumbents But in Russia at least before Putinrsquos presidency the resultsoften shocked political elites In 1991 an outsider candidate Boris Yeltsin beat thefavorites of Gorbachev and the Soviet Communist leadership to win the Russianpresidency with 57 percent of the vote In 1993 elites were horrified by the highshowing of Vladimir Zhirinovsky and his clownish ultranationalists In 1995 theCommunist Party surprised observers by coming first in the party list vote with22 percent a feat it repeated in 1999 when it won 24 percent The main partyassociated with the incumbent regime won only about 15 percent in 1993 and10 percent in 1995

Some falsification and improprieties have definitely occurred In regionalelections Russian officials have used technicalities to disqualify candidates andincumbents at all levels have misused state resources to campaign for reelectionLimits on campaign spending have been breached However such problems do notappear to go beyond the violations common in middle-income democracies likeMexico or Brazil where stories of coercion intimidation and vote buying alsoabound11

10 For the OSCE reports on Russian elections see httpwwwosceorgodihrindexphppageelectionsampdivreportsampcountryru To compare with election reports on other countries see httpwwwosceorgodihrindexphppageelectionsampdivreports For the CSCE reports mentioned in thetext see httpwwwcscegovreportscfm11 For instance in Mexico international election observers from the human rights group GlobalExchange reported after the 2000 presidential election that in ldquomost of the communities [where itsobservers were stationed] voting day was marred by often flagrant violations of the electoral code In the

164 Journal of Economic Perspectives

barons of the nineteenth century) grew rich in part through deals with thegovernment But the claim that this accounts for poor growth in Russia makes littlesense Russiarsquos sharp decline in official output came beforemdashnot aftermdashthe oli-garchs emerged on the scene in 1995ndash1996 A few years of stagnation followed andthen rapid growth Oligarch-controlled companies have performed extremely welland far better than many comparable companies that remained controlled by thestate or by their Soviet-era managers They are responsible for much of thedramatic increase in output in recent years as well as the amazing stock marketboom

Consider three of the most notorious cases In ldquoloans-for-sharesrdquo MikhailKhodorkovsky (now in jail) obtained a major stake in the oil company Yukos BorisBerezovsky (now in exile) won control of the oil company Sibneft along with histhen-partner Roman Abramovich Vladimir Potanin acquired the nickel producerNorilsk Nickel Between 1996 and 2001 the reported pretax profits of YukosSibneft and Norilsk Nickel rose in real terms by 36 10 and 5 times respectively9

Their stock market valuations also soared (those of Yukos and Sibneft rising bymore than 30 times in real terms) This performance is markedly better than thatof the gas monopoly Gazprom or the electricity utility UES which stayed understate control or of major private companies such as Lukoil that remained con-trolled by preprivatization management (Boone and Rodionov 2001)

Have the oligarchs stripped assets from the companies they acquired inprivatization The audited financial statements of these companies suggest theyactually invested especially since 1998 Yukosrsquo assets rose from $53 billion in 1998to $144 billion in 2002 although this might reflect in part higher world oil prices(see Table 1) Norilsk Nickelrsquos assets rose from $66 billion in 1999 to $97 billionin 2002 Sibneftrsquos assets did fall from 1996 to 1999 in part due to an accountingchange (which might reflect asset stripping) But since 1999 they have increasedfrom $43 billion to $75 billion in 2002 Recently the major oligarchs have beeninvesting hundreds of millions of dollars annually in their companies In 2002Yukos invested $126 billion in property plant and equipment and Sibneft madecapital expenditures of $959 million Guriev and Rachinsky (2004) in a systematicstudy of the performance of oligarch-controlled companies in 2001 found thatsuch companies invested significantly more that year than firms controlled by otherRussian owners

In contrast the greatest asset stripping scandals have concerned companiesthat remained under state control Gazpromrsquos former management has beenaccused of stealing assets via complicated networks of trading companies Thestate-owned airline Aeroflotrsquos reported assets dropped between 1998 and 2001 Byand large the companies privatized to the oligarchs performed far better thanthose left under state control That the leading oligarch-controlled oil companiesgenerally outperformed other oil firms such as Lukoil which remained under

9 Calculated from figures in Ekspert database deflating by the Consumer Price Index

Andrei Shleifer and Daniel Treisman 161

Soviet-era management suggests that their success was due to better managementand not only to rising oil prices

None of this is to say the oligarchs are public spirited politically naıve orprotective of their minority shareholders They benefited from sweetheart dealswith the government and massively diluted the value of minority shares in order toconsolidate their control Investor protection and corporate governance in Russiaremain weak But here again Russia is typical of middle-income developing coun-tries where expropriation of minority shareholders is nearly universal (Johnson LaPorta Lopez-de-Silanes and Shleifer 2000)

In fact the claim that the oligarchs privatized companies in order to strip theirassets and are impeding economic growth has it precisely backward The oligarchsstripped assets from state-controlled companies in order to buy others in privatiza-tion Indeed the concern with such theft from state firms was one of the reasons toaccelerate privatization in 1992 The oligarchs also tried to buy assets in privatiza-tion at the lowest possible prices often offering politicians various deals Once incontrol they attempted to increase their ownership stakes both legally and ille-gally But once oligarchs became full owners they acted as economic theorypredicts they invested to improve their companiesrsquo performance This is whatoligarchs have done in every other countrymdashfrom JP Morgan and John DRockefeller to Silvio Berlusconi and the owners of Korean chaebol

In sum Russiarsquos economy is not a model of capitalism that one finds inintroductory textbooks Like other middle-income countries Russia suffers frominequality financial crises and a large unofficial sector Economic and politicalpower are intimately intertwined Nonetheless Russia started the 1990s a disinte-grating centrally planned economy and ended it a market system in a burst of rapidgrowth

Table 1Total Assets and Investment of Three Leading Russian Companies

1996 1997 1998 1999 2000 2001 2002

YukosTotal assets bn US $ 47 52 53 60 103 105e 144e

Investmenta mn US $ 226 589e 954e 1263e

SibneftTotal assets bn US $ 76 56d 50 43 46 57 75Investmentb mn US $ 154 129 231 619 959

Norilsk NickelTotal assets bn US $ 66 72 109c 97Investmentb mn US $ 168 638 510c 351

aAdditions to property plant and equipmentbCapital expenditurescRestated in 2002 Annual ReportdAssets reduced by $13 bn because of accounting changeeAs in 2002 Annual ReportSources Audited financial statements and annual reports

162 Journal of Economic Perspectives

Autocratic Kleptocracy

DemocracyWestern evaluations of Russiarsquos political institutions in the last ten years have

often been scathing Even before Putinrsquos recent consolidation of power The Econ-omist magazine declared the countryrsquos democracy to be ldquophonyrdquo (June 24 2000p 20) The advocacy group Freedom House which rates countriesrsquo institutions hassince 2000 given Russia a ldquo5rdquo for political freedom and a ldquo5rdquo for civil liberties on aseven-point scale that ranges from ldquo1rdquo (highest) to ldquo7rdquo (lowest) This puts Russiarsquospolitical regime below Brazilrsquos military junta of the late 1970s and its civil libertiesbelow those of Nigeria in 1991 under the dictatorship of Major General IbrahimBabangida According to Freedom Housersquos own report in Nigeria at this timemilitary tribunals were charged with trying cases of sedition and the regime hadmade a practice of incarcerating ldquoinnocent relatives of suspected political offendersto draw the suspects out of hidingrdquo (Gastil 1992 p 353) Even Kuwait a hereditaryemirate where political parties are illegal women cannot vote in legislative elec-tions and criticism of the emir is punishable by imprisonment gets a better ratingfor political freedom than Russia

Critics of Russiarsquos democracy focus on several points Those in power areaccused of manipulating elections through control of the state media harassmentor censorship of the independent press and use of judicial and administrative leversto intimidate or incapacitate rivals Voters are portrayed as apathetic and gullibleAt the same time big business is seen as subverting the democratic process throughfinancial support of favored candidates The combination of voter apathy andofficial manipulation means in the grim but quite representative view of one NewYork Times reporter that in Russia during the last decade ldquothere has been no trulydemocratic choice of new leadersrdquo (Myers 2003)

Just how bad is Russiarsquos democracy Russiarsquos political institutions and civicfreedoms are certainly imperfect in many ways Relative to that under Yeltsin thesituation under President Putin has deteriorated considerably and could deterio-rate further However Western condemnations of Russiarsquos institutions in the last10 years have been grossly overblown Russiarsquos politics have been among the mostdemocratic in the region The defects of the countryrsquos democracy resemble thosefound in many other middle-income countries

Eight national ballotsmdashfour parliamentary and four presidentialmdashtook placein Russia between 1991 and 2004 A variety of candidates ran in each representingall parts of the political spectrum With few exceptions parties and electoral blocswere free to organize and a large number managed to register Internationalobservers although critical of imbalance in media coverage and episodic impro-prieties have generally given these elections high marks The Organization forSecurity and Cooperation in Europe (OSCE) a regional security organizationheadquartered in Austria with 55 member nations regularly monitors elections inRussia and other countries Its report on the 1999 Russian Duma election forinstance praised the countryrsquos electoral laws for providing ldquoa sound basis for theconduct of orderly pluralistic and accountable electionsrdquo and the vote-counting

A Normal Country Russia After Communism 163

procedures for ldquotransparency accountability and accuracy that fully met acceptedinternational standardsrdquo The OSCErsquos predecessor organization the Conferencefor Security and Cooperation in Europe reported after the 1993 election thatvoters had been able to ldquoexpress their political will freely and fairlyrdquo and called the1995 election ldquofree and fairrdquo10

Does such language merely reflect a reluctance to criticize Such fears arebelied by the OSCErsquos blunt condemnations of elections in other nearby countriessuch as Azerbaijan in 2000 (ldquoprimitive falsificationrdquo) Georgia in 2000 (ldquoballotstuffing and protocol tamperingrdquo that ldquohas discredited Georgiarsquos democratizationrdquo)and Ukraine in 1999 (ldquoflagrant violations of voting proceduresrdquo and a ldquowidespreadsystematic and co-ordinated campaign by state institutions at all levels to undulyinfluence votersrdquo) The OSCE expressed stronger reservations about Russiarsquos 2003parliamentary and its 2004 presidential elections complaining of bias in thestate-controlled media and abuses by some local officials although it still praisedthe Central Election Commission for its ldquoprofessionalrdquo organization of theelections

As for voter apathy turnout in Russian elections since 1991 never dippedbelow about 54 percent and rose as high as 75 percent in 1991mdashcompared to about50ndash51 percent of the voting age population in recent US national elections In allRussian national elections since 1993 voters had the option to vote ldquoagainst allrdquocandidates The number doing so has never exceeded 5 percent

In a phony democracy one expects reported election results to match thedesires of incumbents But in Russia at least before Putinrsquos presidency the resultsoften shocked political elites In 1991 an outsider candidate Boris Yeltsin beat thefavorites of Gorbachev and the Soviet Communist leadership to win the Russianpresidency with 57 percent of the vote In 1993 elites were horrified by the highshowing of Vladimir Zhirinovsky and his clownish ultranationalists In 1995 theCommunist Party surprised observers by coming first in the party list vote with22 percent a feat it repeated in 1999 when it won 24 percent The main partyassociated with the incumbent regime won only about 15 percent in 1993 and10 percent in 1995

Some falsification and improprieties have definitely occurred In regionalelections Russian officials have used technicalities to disqualify candidates andincumbents at all levels have misused state resources to campaign for reelectionLimits on campaign spending have been breached However such problems do notappear to go beyond the violations common in middle-income democracies likeMexico or Brazil where stories of coercion intimidation and vote buying alsoabound11

10 For the OSCE reports on Russian elections see httpwwwosceorgodihrindexphppageelectionsampdivreportsampcountryru To compare with election reports on other countries see httpwwwosceorgodihrindexphppageelectionsampdivreports For the CSCE reports mentioned in thetext see httpwwwcscegovreportscfm11 For instance in Mexico international election observers from the human rights group GlobalExchange reported after the 2000 presidential election that in ldquomost of the communities [where itsobservers were stationed] voting day was marred by often flagrant violations of the electoral code In the

164 Journal of Economic Perspectives

Soviet-era management suggests that their success was due to better managementand not only to rising oil prices

None of this is to say the oligarchs are public spirited politically naıve orprotective of their minority shareholders They benefited from sweetheart dealswith the government and massively diluted the value of minority shares in order toconsolidate their control Investor protection and corporate governance in Russiaremain weak But here again Russia is typical of middle-income developing coun-tries where expropriation of minority shareholders is nearly universal (Johnson LaPorta Lopez-de-Silanes and Shleifer 2000)

In fact the claim that the oligarchs privatized companies in order to strip theirassets and are impeding economic growth has it precisely backward The oligarchsstripped assets from state-controlled companies in order to buy others in privatiza-tion Indeed the concern with such theft from state firms was one of the reasons toaccelerate privatization in 1992 The oligarchs also tried to buy assets in privatiza-tion at the lowest possible prices often offering politicians various deals Once incontrol they attempted to increase their ownership stakes both legally and ille-gally But once oligarchs became full owners they acted as economic theorypredicts they invested to improve their companiesrsquo performance This is whatoligarchs have done in every other countrymdashfrom JP Morgan and John DRockefeller to Silvio Berlusconi and the owners of Korean chaebol

In sum Russiarsquos economy is not a model of capitalism that one finds inintroductory textbooks Like other middle-income countries Russia suffers frominequality financial crises and a large unofficial sector Economic and politicalpower are intimately intertwined Nonetheless Russia started the 1990s a disinte-grating centrally planned economy and ended it a market system in a burst of rapidgrowth

Table 1Total Assets and Investment of Three Leading Russian Companies

1996 1997 1998 1999 2000 2001 2002

YukosTotal assets bn US $ 47 52 53 60 103 105e 144e

Investmenta mn US $ 226 589e 954e 1263e

SibneftTotal assets bn US $ 76 56d 50 43 46 57 75Investmentb mn US $ 154 129 231 619 959

Norilsk NickelTotal assets bn US $ 66 72 109c 97Investmentb mn US $ 168 638 510c 351

aAdditions to property plant and equipmentbCapital expenditurescRestated in 2002 Annual ReportdAssets reduced by $13 bn because of accounting changeeAs in 2002 Annual ReportSources Audited financial statements and annual reports

162 Journal of Economic Perspectives

Autocratic Kleptocracy

DemocracyWestern evaluations of Russiarsquos political institutions in the last ten years have

often been scathing Even before Putinrsquos recent consolidation of power The Econ-omist magazine declared the countryrsquos democracy to be ldquophonyrdquo (June 24 2000p 20) The advocacy group Freedom House which rates countriesrsquo institutions hassince 2000 given Russia a ldquo5rdquo for political freedom and a ldquo5rdquo for civil liberties on aseven-point scale that ranges from ldquo1rdquo (highest) to ldquo7rdquo (lowest) This puts Russiarsquospolitical regime below Brazilrsquos military junta of the late 1970s and its civil libertiesbelow those of Nigeria in 1991 under the dictatorship of Major General IbrahimBabangida According to Freedom Housersquos own report in Nigeria at this timemilitary tribunals were charged with trying cases of sedition and the regime hadmade a practice of incarcerating ldquoinnocent relatives of suspected political offendersto draw the suspects out of hidingrdquo (Gastil 1992 p 353) Even Kuwait a hereditaryemirate where political parties are illegal women cannot vote in legislative elec-tions and criticism of the emir is punishable by imprisonment gets a better ratingfor political freedom than Russia

Critics of Russiarsquos democracy focus on several points Those in power areaccused of manipulating elections through control of the state media harassmentor censorship of the independent press and use of judicial and administrative leversto intimidate or incapacitate rivals Voters are portrayed as apathetic and gullibleAt the same time big business is seen as subverting the democratic process throughfinancial support of favored candidates The combination of voter apathy andofficial manipulation means in the grim but quite representative view of one NewYork Times reporter that in Russia during the last decade ldquothere has been no trulydemocratic choice of new leadersrdquo (Myers 2003)

Just how bad is Russiarsquos democracy Russiarsquos political institutions and civicfreedoms are certainly imperfect in many ways Relative to that under Yeltsin thesituation under President Putin has deteriorated considerably and could deterio-rate further However Western condemnations of Russiarsquos institutions in the last10 years have been grossly overblown Russiarsquos politics have been among the mostdemocratic in the region The defects of the countryrsquos democracy resemble thosefound in many other middle-income countries

Eight national ballotsmdashfour parliamentary and four presidentialmdashtook placein Russia between 1991 and 2004 A variety of candidates ran in each representingall parts of the political spectrum With few exceptions parties and electoral blocswere free to organize and a large number managed to register Internationalobservers although critical of imbalance in media coverage and episodic impro-prieties have generally given these elections high marks The Organization forSecurity and Cooperation in Europe (OSCE) a regional security organizationheadquartered in Austria with 55 member nations regularly monitors elections inRussia and other countries Its report on the 1999 Russian Duma election forinstance praised the countryrsquos electoral laws for providing ldquoa sound basis for theconduct of orderly pluralistic and accountable electionsrdquo and the vote-counting

A Normal Country Russia After Communism 163

procedures for ldquotransparency accountability and accuracy that fully met acceptedinternational standardsrdquo The OSCErsquos predecessor organization the Conferencefor Security and Cooperation in Europe reported after the 1993 election thatvoters had been able to ldquoexpress their political will freely and fairlyrdquo and called the1995 election ldquofree and fairrdquo10

Does such language merely reflect a reluctance to criticize Such fears arebelied by the OSCErsquos blunt condemnations of elections in other nearby countriessuch as Azerbaijan in 2000 (ldquoprimitive falsificationrdquo) Georgia in 2000 (ldquoballotstuffing and protocol tamperingrdquo that ldquohas discredited Georgiarsquos democratizationrdquo)and Ukraine in 1999 (ldquoflagrant violations of voting proceduresrdquo and a ldquowidespreadsystematic and co-ordinated campaign by state institutions at all levels to undulyinfluence votersrdquo) The OSCE expressed stronger reservations about Russiarsquos 2003parliamentary and its 2004 presidential elections complaining of bias in thestate-controlled media and abuses by some local officials although it still praisedthe Central Election Commission for its ldquoprofessionalrdquo organization of theelections

As for voter apathy turnout in Russian elections since 1991 never dippedbelow about 54 percent and rose as high as 75 percent in 1991mdashcompared to about50ndash51 percent of the voting age population in recent US national elections In allRussian national elections since 1993 voters had the option to vote ldquoagainst allrdquocandidates The number doing so has never exceeded 5 percent

In a phony democracy one expects reported election results to match thedesires of incumbents But in Russia at least before Putinrsquos presidency the resultsoften shocked political elites In 1991 an outsider candidate Boris Yeltsin beat thefavorites of Gorbachev and the Soviet Communist leadership to win the Russianpresidency with 57 percent of the vote In 1993 elites were horrified by the highshowing of Vladimir Zhirinovsky and his clownish ultranationalists In 1995 theCommunist Party surprised observers by coming first in the party list vote with22 percent a feat it repeated in 1999 when it won 24 percent The main partyassociated with the incumbent regime won only about 15 percent in 1993 and10 percent in 1995

Some falsification and improprieties have definitely occurred In regionalelections Russian officials have used technicalities to disqualify candidates andincumbents at all levels have misused state resources to campaign for reelectionLimits on campaign spending have been breached However such problems do notappear to go beyond the violations common in middle-income democracies likeMexico or Brazil where stories of coercion intimidation and vote buying alsoabound11

10 For the OSCE reports on Russian elections see httpwwwosceorgodihrindexphppageelectionsampdivreportsampcountryru To compare with election reports on other countries see httpwwwosceorgodihrindexphppageelectionsampdivreports For the CSCE reports mentioned in thetext see httpwwwcscegovreportscfm11 For instance in Mexico international election observers from the human rights group GlobalExchange reported after the 2000 presidential election that in ldquomost of the communities [where itsobservers were stationed] voting day was marred by often flagrant violations of the electoral code In the

164 Journal of Economic Perspectives

Autocratic Kleptocracy

DemocracyWestern evaluations of Russiarsquos political institutions in the last ten years have

often been scathing Even before Putinrsquos recent consolidation of power The Econ-omist magazine declared the countryrsquos democracy to be ldquophonyrdquo (June 24 2000p 20) The advocacy group Freedom House which rates countriesrsquo institutions hassince 2000 given Russia a ldquo5rdquo for political freedom and a ldquo5rdquo for civil liberties on aseven-point scale that ranges from ldquo1rdquo (highest) to ldquo7rdquo (lowest) This puts Russiarsquospolitical regime below Brazilrsquos military junta of the late 1970s and its civil libertiesbelow those of Nigeria in 1991 under the dictatorship of Major General IbrahimBabangida According to Freedom Housersquos own report in Nigeria at this timemilitary tribunals were charged with trying cases of sedition and the regime hadmade a practice of incarcerating ldquoinnocent relatives of suspected political offendersto draw the suspects out of hidingrdquo (Gastil 1992 p 353) Even Kuwait a hereditaryemirate where political parties are illegal women cannot vote in legislative elec-tions and criticism of the emir is punishable by imprisonment gets a better ratingfor political freedom than Russia

Critics of Russiarsquos democracy focus on several points Those in power areaccused of manipulating elections through control of the state media harassmentor censorship of the independent press and use of judicial and administrative leversto intimidate or incapacitate rivals Voters are portrayed as apathetic and gullibleAt the same time big business is seen as subverting the democratic process throughfinancial support of favored candidates The combination of voter apathy andofficial manipulation means in the grim but quite representative view of one NewYork Times reporter that in Russia during the last decade ldquothere has been no trulydemocratic choice of new leadersrdquo (Myers 2003)

Just how bad is Russiarsquos democracy Russiarsquos political institutions and civicfreedoms are certainly imperfect in many ways Relative to that under Yeltsin thesituation under President Putin has deteriorated considerably and could deterio-rate further However Western condemnations of Russiarsquos institutions in the last10 years have been grossly overblown Russiarsquos politics have been among the mostdemocratic in the region The defects of the countryrsquos democracy resemble thosefound in many other middle-income countries

Eight national ballotsmdashfour parliamentary and four presidentialmdashtook placein Russia between 1991 and 2004 A variety of candidates ran in each representingall parts of the political spectrum With few exceptions parties and electoral blocswere free to organize and a large number managed to register Internationalobservers although critical of imbalance in media coverage and episodic impro-prieties have generally given these elections high marks The Organization forSecurity and Cooperation in Europe (OSCE) a regional security organizationheadquartered in Austria with 55 member nations regularly monitors elections inRussia and other countries Its report on the 1999 Russian Duma election forinstance praised the countryrsquos electoral laws for providing ldquoa sound basis for theconduct of orderly pluralistic and accountable electionsrdquo and the vote-counting

A Normal Country Russia After Communism 163

procedures for ldquotransparency accountability and accuracy that fully met acceptedinternational standardsrdquo The OSCErsquos predecessor organization the Conferencefor Security and Cooperation in Europe reported after the 1993 election thatvoters had been able to ldquoexpress their political will freely and fairlyrdquo and called the1995 election ldquofree and fairrdquo10

Does such language merely reflect a reluctance to criticize Such fears arebelied by the OSCErsquos blunt condemnations of elections in other nearby countriessuch as Azerbaijan in 2000 (ldquoprimitive falsificationrdquo) Georgia in 2000 (ldquoballotstuffing and protocol tamperingrdquo that ldquohas discredited Georgiarsquos democratizationrdquo)and Ukraine in 1999 (ldquoflagrant violations of voting proceduresrdquo and a ldquowidespreadsystematic and co-ordinated campaign by state institutions at all levels to undulyinfluence votersrdquo) The OSCE expressed stronger reservations about Russiarsquos 2003parliamentary and its 2004 presidential elections complaining of bias in thestate-controlled media and abuses by some local officials although it still praisedthe Central Election Commission for its ldquoprofessionalrdquo organization of theelections

As for voter apathy turnout in Russian elections since 1991 never dippedbelow about 54 percent and rose as high as 75 percent in 1991mdashcompared to about50ndash51 percent of the voting age population in recent US national elections In allRussian national elections since 1993 voters had the option to vote ldquoagainst allrdquocandidates The number doing so has never exceeded 5 percent

In a phony democracy one expects reported election results to match thedesires of incumbents But in Russia at least before Putinrsquos presidency the resultsoften shocked political elites In 1991 an outsider candidate Boris Yeltsin beat thefavorites of Gorbachev and the Soviet Communist leadership to win the Russianpresidency with 57 percent of the vote In 1993 elites were horrified by the highshowing of Vladimir Zhirinovsky and his clownish ultranationalists In 1995 theCommunist Party surprised observers by coming first in the party list vote with22 percent a feat it repeated in 1999 when it won 24 percent The main partyassociated with the incumbent regime won only about 15 percent in 1993 and10 percent in 1995

Some falsification and improprieties have definitely occurred In regionalelections Russian officials have used technicalities to disqualify candidates andincumbents at all levels have misused state resources to campaign for reelectionLimits on campaign spending have been breached However such problems do notappear to go beyond the violations common in middle-income democracies likeMexico or Brazil where stories of coercion intimidation and vote buying alsoabound11

10 For the OSCE reports on Russian elections see httpwwwosceorgodihrindexphppageelectionsampdivreportsampcountryru To compare with election reports on other countries see httpwwwosceorgodihrindexphppageelectionsampdivreports For the CSCE reports mentioned in thetext see httpwwwcscegovreportscfm11 For instance in Mexico international election observers from the human rights group GlobalExchange reported after the 2000 presidential election that in ldquomost of the communities [where itsobservers were stationed] voting day was marred by often flagrant violations of the electoral code In the

164 Journal of Economic Perspectives

procedures for ldquotransparency accountability and accuracy that fully met acceptedinternational standardsrdquo The OSCErsquos predecessor organization the Conferencefor Security and Cooperation in Europe reported after the 1993 election thatvoters had been able to ldquoexpress their political will freely and fairlyrdquo and called the1995 election ldquofree and fairrdquo10

Does such language merely reflect a reluctance to criticize Such fears arebelied by the OSCErsquos blunt condemnations of elections in other nearby countriessuch as Azerbaijan in 2000 (ldquoprimitive falsificationrdquo) Georgia in 2000 (ldquoballotstuffing and protocol tamperingrdquo that ldquohas discredited Georgiarsquos democratizationrdquo)and Ukraine in 1999 (ldquoflagrant violations of voting proceduresrdquo and a ldquowidespreadsystematic and co-ordinated campaign by state institutions at all levels to undulyinfluence votersrdquo) The OSCE expressed stronger reservations about Russiarsquos 2003parliamentary and its 2004 presidential elections complaining of bias in thestate-controlled media and abuses by some local officials although it still praisedthe Central Election Commission for its ldquoprofessionalrdquo organization of theelections

As for voter apathy turnout in Russian elections since 1991 never dippedbelow about 54 percent and rose as high as 75 percent in 1991mdashcompared to about50ndash51 percent of the voting age population in recent US national elections In allRussian national elections since 1993 voters had the option to vote ldquoagainst allrdquocandidates The number doing so has never exceeded 5 percent

In a phony democracy one expects reported election results to match thedesires of incumbents But in Russia at least before Putinrsquos presidency the resultsoften shocked political elites In 1991 an outsider candidate Boris Yeltsin beat thefavorites of Gorbachev and the Soviet Communist leadership to win the Russianpresidency with 57 percent of the vote In 1993 elites were horrified by the highshowing of Vladimir Zhirinovsky and his clownish ultranationalists In 1995 theCommunist Party surprised observers by coming first in the party list vote with22 percent a feat it repeated in 1999 when it won 24 percent The main partyassociated with the incumbent regime won only about 15 percent in 1993 and10 percent in 1995

Some falsification and improprieties have definitely occurred In regionalelections Russian officials have used technicalities to disqualify candidates andincumbents at all levels have misused state resources to campaign for reelectionLimits on campaign spending have been breached However such problems do notappear to go beyond the violations common in middle-income democracies likeMexico or Brazil where stories of coercion intimidation and vote buying alsoabound11

10 For the OSCE reports on Russian elections see httpwwwosceorgodihrindexphppageelectionsampdivreportsampcountryru To compare with election reports on other countries see httpwwwosceorgodihrindexphppageelectionsampdivreports For the CSCE reports mentioned in thetext see httpwwwcscegovreportscfm11 For instance in Mexico international election observers from the human rights group GlobalExchange reported after the 2000 presidential election that in ldquomost of the communities [where itsobservers were stationed] voting day was marred by often flagrant violations of the electoral code In the

164 Journal of Economic Perspectives

Many have attacked Russiarsquos ldquosuper-presidentialistrdquo constitution which wasdrafted by presidential appointees and endorsed by a 1993 referendum in whichthe turnout figures have been questioned While this constitution clearly tilts thebalance of power in favor of the executive it hardly renders Russiarsquos systemundemocratic For example the Russian constitution allows the president to issuedecrees on matters on which the laws are silent But these decrees can be overruledby the Duma (albeit with a two-thirds majority) or ruled unconstitutional by theConstitutional Court In this regard Russia is not very different from the presiden-tial democracies of Argentina and Brazil

In the last few years President Putin has stepped up efforts to scare offpotential political rivals The arrest of Mikhail Khodorkovsky was widely believed tobe designed to punish the oil tycoon for funding liberal political parties TheOctober 2003 and August 2004 presidential elections in Chechnya both of whichbrought to power the Kremlinrsquos current favorite had all the credibility of ballotsheld in the shadow of a tank The December 2003 parliamentary election clearlysaw official pressures on the media biased coverage and harassment of rivalcampaigns though at rates comparable to those in previous Russian elections andin other middle-income democracies That these practices swayed the voters morethan in previous elections seems unlikely Some viewed the high reported voteshare for the pro-Putin United Russia party as prima facie evidence of falsificationIn fact the vote share for this party 37 percent was almost exactly the total won in1999 by the two blocsmdashUnity and Fatherland-All Russiamdashthat had later joinedtogether to form United Russia Although ballot-stuffing in some regions may haveshaded the vote by a few percentage points the official results were mostly close tothose found by independent exit polls Given that real incomes of the populationhad grown by an average 10 percent a year since Putin took over it would besurprising if pro-Putin parties were not popular

From Malaysia to Venezuela to Argentina political rivals of incumbent politi-cians in middle-income countries have ended up in jail in recent years victims ofdubious or at least selective prosecutions In Mexico such rivals have been assas-sinated In disputed territories from Chiapas to eastern Turkey and Mindanaoelections have been held under the alert watch of the military Russiarsquos record ondemocratic practices is unenviable and has shifted recently toward the illiberal endof the spectrum but it is not unusual

Freedom of the PressRussiarsquos press has come in for particularly harsh scrutiny Freedom House rates

the level of ldquopolitical pressures controls and violencerdquo against the media in

days immediately preceding the vote episodes of vote-buying coercion and intimidation were com-monplace The delegation heard numerous testimonies from opposition supporters of harass-ment and intimidation particularly in the marginalized and poor communitiesrdquo See httpwwwglobalexchangeorgcountriesmexicodemgx070400html In Brazil according to one observerldquobuying votes is common practice and spawns armies of voters ready to sell their votes for a dish ofbeansrdquo (Whitaker 2000) Such observations are anecdotal of course but so are the ones used to criticizeRussia

Andrei Shleifer and Daniel Treisman 165

countries around the world In its 2002 ratings Russia scored a 30 on a scale thatruns from 0 (best) to 40 (worst) putting it below Iran (Sussman and Karlekar 2002pp 43 32) Iran as the report itself pointed out had imprisoned more journaliststhan any other country It had banned 40 newspapers since April 2000 and hadsentenced journalists to long prison terms along with floggings of 30ndash50 lashes andprohibitions from practicing journalism for years

Critics of Russiarsquos press environment make two points In the 1990s somecomplained that major television stations and newspapers were controlled byoligarchs who used them to further favored political or business goals Morerecently critics have focused on the statersquos efforts to harass and intimidate inde-pendent journalists and to close down oligarch-owned media often on financialpretexts While the criticisms are not altogether consistent they both have somevalidity However in these regards Russia again fits the norm for developingmdashandsome developedmdashstates Djankov McLiesh Nenova and Shleifer (2003) surveyedmedia ownership in 97 countries They found that 92 percent of the largesttelevision radio stations and newspapers in these countries were owned by eitherfamilies or the state This pattern was common to just about every country studiedmdashfrom Brazil Mexico Argentina and South Korea to Italy Singapore and AustraliaOn average families controlled 57 percent of newspapers and 34 percent oftelevision stations By this standard Russiamdashalong with its postcommunist peersmdashstands out among middle-income democracies for the relatively large share oftelevision stations and major newspapers owned by the government

Press barons throughout the developing world slant the political coverage ontheir networks to help favored candidates In many middle-income countries likeArgentina and Colombia (Waisbord 2000) or South Korea (Park Kim Sohn2000) journalists and their bosses are accused of biasing their reports in return forbribes of cash ldquoentertainmentrdquo and favors in the privatization of media outlets InMexico payoffs to political reporters often equal to about three months salary goby the name of chayotes ldquoafter a small and tasty squash that fits in the palm of thehandrdquo (Weiner 2000) Even in rich countries like Italy and the United Statesjournalists shape their broadcasts to further the political agendas of media tycoonssuch as Silvio Berlusconi and Rupert Murdoch12

What about state harassment of the press A single case of repression is alreadyone too many But state interference with news organizations ismdashsadlymdashalmostuniversal among middle-income countries and occurs even in some highly devel-

12 On Rupert Murdochrsquos Fox television network see Neil Hickey ldquoIs Fox News Fairrdquo Columbia JournalismReview MarchApril 1998 which quotes several former employees of the network complaining ofldquolsquomanagement sticking their fingersrsquo in the writing and editing of stories and of attempting to cook thefacts to make a story more palatable to right-of-center tastesrdquo On Italian television news under SilvioBerlusconi see for instance Philip Willan ldquoOpposition lsquokept off Berlusconi-run TVrsquordquo The GuardianAugust 8 2002 which cites a University of Pavia study that found a sharp reduction in the amount ofnews time devoted to the opposition to Berlusconi after Berlusconirsquos appointees took over at the RAInetwork

166 Journal of Economic Perspectives

oped ones The International Press Institute in Vienna collects figures on variouskinds of state interference with journalism in the countries of the OSCE and haspublished these for the 1999ndash2000 period Of the 48 countries monitored 26 hadat least one incident in which media were censored or journalists were imprisonedor sentenced to ldquoexcessiverdquo fines In comparing the severity of such repressionacross countries one possibility is to compare the total number of incidents indifferent countries Within the OSCE the total ranged from zero (for manycountries) to 121 (for Turkey) On this measure Russia looks relatively badcoming in second place with 30 incidents during the two years

However to compare the absolute number of newspaper closures in a countrywith hundreds of daily newspapers (like Russia) to the number in a country withjust three newspapers (like Macedonia) seems questionable An alternative ap-proach is to deflate the number of incidents of state interference by the number ofmedia outlets We could not find cross-national data on the number of televisionand radio stations but UNESCO publishes estimates of the number of dailynewspapers in countries around the world Russia as of the mid-1990s had 285(plus about 4600 nondaily newspapers) Table 2 shows the number of cases of statecensorship imprisonment of journalists and suppression of journalists ldquoby lawrdquo perdaily newspaper in the OSCE countries13 Of course these measures are imperfectIf journalists are effectively intimidated then a repressive state may not need tointervene to silence criticism and its interventions may go unreported if it doesDividing by the number of newspapers is a rough-and-ready adjustmentmdashalthoughlikely to be less misleading than the raw numbers By the deflated number Russiarsquosrecord of state interference with press freedom is only a little worse than averageFifteen OSCE countries had poorer records in these years including UkraineBelarus Turkey Cyprus and even Austria

Russiarsquos problems with press freedom although more widely reported in theWest are not very different from those in various other middle-income countriesIn 2000ndash2001 Putinrsquos government hounded the tycoons Berezovsky and Gusinskyout of the media business At the same time a strikingly similar campaign wasunfolding in South Korea In what was widely perceived as a politicized effort byPresident Kim Dae-jung to punish newspapers critical of his government theKorean National Tax Service and Fair Trade Commission investigated 23 mediacompanies and assessed them with multimillion-dollar fines Prosecutors arrestedexecutives from the three conservative newspapers most critical of President Kimand held them in solitary confinement Kimrsquos aide Roh Moo-hyun who laterreplaced him as president reportedly said that the newspapers were ldquono differentfrom organized crimerdquo and told reporters he planned to nationalize them

Since Putinrsquos rise to power criticism of the president on Russian nationaltelevision has been effectively suppressed This contrasts with major daily newspa-pers such as Izvestia Kommersant and Nezavisimaya Gazeta in which criticism of Putin

13 ldquoSuppression by lawrdquo covers cases in which journalists were sentenced to prison or excessive finesincluding libel suits aimed at impeding the journalistrsquos right to report freely the introduction ofrestrictive legislation and official denial or suspension of credentials

A Normal Country Russia After Communism 167

remains frequent and bitter (Skeptics often note that these newspapers haverelatively small readerships but this is like saying the US press is not free becauseonly a fraction of citizens choose to subscribe to the Washington Post or the New YorkTimes) Despite national televisionrsquos timid approach to political commentary tocompare such stations to their Soviet era counterpartsmdashas some now domdashis todistort reality In fact they provide far more information to viewers and fewer

Table 2Cases of State Censorship ldquoSuppression by Lawrdquo and Imprisonment ofJournalists in OSCE Countries 1999ndash2000

Absolute number Per daily newspaper

Turkey 121 Uzbekistan 333Russian Federation 30 Azerbaijan 233Azerbaijan 14 Turkey 212Kazakhstan 10 Bosnia 200Uzbekistan 10 Kyrgyzstan 167Belarus 9 Belarus 113Ukraine 8 Cyprus 067Hungary 7 Macedonia TFYR 033Bosnia 6 Armenia 027Cyprus 6 Croatia 020Kyrgyzstan 5 Ukraine 018United Kingdom 5 Austria 018Armenia 3 Hungary 018Austria 3 Estonia 013Greece 3 Lithuania 011Croatia 2 Russian Federation 011Czech Republic 2 Czech Republic 010Estonia 2 Slovakia 005Italy 2 United Kingdom 005Lithuania 2 Netherlands 003Germany 1 Italy 003Macedonia TFYR 1 Greece 002Netherlands 1Slovakia 1Turkmenistan 1United States 123 countries with zeroAlbania Belgium Bulgaria

Canada DenmarkFinland France GeorgiaIceland Ireland LatviaLuxembourg MaltaMoldova Norway PolandPortugal RomaniaSlovenia Spain SwedenSwitzerland Tajikistan

24 countries with zeroGermany United States

Albania BelgiumBulgaria CanadaDenmark FinlandFrance Iceland IrelandLatvia LuxembourgMalta Moldova NorwayPoland PortugalRomania SloveniaSpain SwedenSwitzerland Tajikistan

Source Data from International Press Institute and UNESCO

168 Journal of Economic Perspectives

ideologically motivated lies The difference is vividly apparent in the coverage ofnational tragedies In 2002 the NTV channel provoked the Kremlinrsquos fury forrunning live footage as Russian troops stormed a Moscow theater that had beenseized by Chechen terrorists This did not stop NTV from broadcasting almostround-the-clock when in 2004 terrorists captured a school in Beslan NorthOssetia All three national channels showed harrowing pictures of children emerg-ing shell-shocked and wounded from the school and being ferried to hospital incivilian cars because of the shortage of ambulances standing by It is inconceivablethat such scenes would have been televised 20 years ago

CorruptionIn the late 1990s the then Chairman of the US House Banking Committee

James Leach (1999a b) wrote that he had made a study of the worldrsquos most corruptregimes including the Philippines under Marcos Zaire under Mobutu and Indo-nesia under Suharto Bad as these were each was outdone by the ldquopervasiveness ofpolitically tolerated corruptionrdquo in postcommunist Russia Other perceptions ofcorruption in Russia are equally grim The anticorruption advocacy group Trans-parency International (TI) compiles annual ratings of countriesrsquo ldquoperceived cor-ruptionrdquo based on a range of business surveys The World Bank has compiled asimilar composite rating Both of these make use predominantly though notentirely of surveys of business people or ratings by business consultancies basedoutside the relevant countries In both ratings Russia scores toward the bottom Forinstance in the 2001 version of the World Bankrsquos ldquograftrdquo index Russia was 142 outof 160 countries In TIrsquos 2002 corruption perceptions index Russia ranked 71 outof 102 countries

But what about sources less dependent on the perception of outsiders Insummer 1999 the World Bank and the European Bank for Reconstruction andDevelopment (EBRD) conducted a survey of business managers in 22 postcommu-nist countries They asked respondents to estimate the share of annual revenuesthat ldquofirms like yoursrdquo typically devoted to unofficial payments to public officials ldquoinorder to get things donerdquo Such payments might be made the questionnaire addedto facilitate connection to public utilities to obtain licenses or permits to improverelations with tax collectors or in relation to customs or imports They also askedrespondents to what extent the sale of parliamentary laws presidential decreescourt decisions and such had directly affected their business in the hope ofmeasuring the extent to which policymakers were co-opted by business interests(Hellman Jones Kaufmann and Schankerman 2000)

Comparing Russian business managers to their peers in other postcommunistcountries Russia falls in the middle on both the ldquoburden of briberyrdquo and ldquostatecapturerdquo dimensions If one graphs per capita GDP on the horizontal axis and thesemeasures of corruption on the vertical axis Russia is almost exactly on the ordinaryleast squares regression line in both cases Administrative corruption is very high inthe really poor countries such as Uzbekistan Armenia and Azerbaijan lower in

Andrei Shleifer and Daniel Treisman 169

Russia Bulgaria and Lithuania and lower still in the relatively rich Hungary andSlovenia as shown in Figure 314

How does corruption in Russia affect individuals The United Nations con-ducts a cross-national survey of crime victims In 1996ndash2000 it asked urban respon-dents in a number of countries the following question ldquoIn some countries there isa problem of corruption among government or public officials Duringmdashlastyearmdashhas any government official for instance a customs officer a police officer orinspector in your country asked you or expected you to pay a bribe for his servicerdquoThe proportion of respondents saying they had experienced demands for orexpectations of bribes in the last year in Russia (166 percent) was lower than thatin Argentina Brazil Romania or Lithuania as shown in Table 3 Again a simpleregression shows that the rate for Russia is almost exactly what one would expectgiven its per capita GDP (Del Frate and van Kesteren 2003 also United Nations2003 Table 21)

Looking at crime in general the reported victimization rate in Russia is notparticularly high Only 26 percent of Moscow respondents said in 2000 that theyhad been victimized the previous year by property crimes robbery sexual assaultassault or briberymdashcompared to 34 percent in Prague 41 percent in Tallin(Estonia) 44 percent in Rio de Janeiro and 61 percent in Buenos Aires Moscowrsquos

14 The World Bank and EBRD repeated the survey in 2002 In almost all countries the average percentof revenues paid in bribes droppedmdashit fell in Russia during these three years from 28 to 14 percentBut the cross-national pattern was almost the same Again Russiarsquos level of administrative corruption wasslightly lower than would be predicted from its income And by 2003 it had become less corrupt on theadministrative corruption scale than Bulgaria and Belarus

Figure 3Administrative Corruption in Postcommunist Countries EBRD Survey of BusinessManagers 1999 (BEEPS)

0

1

2

3

4

5

6

7

0 2000 4000 6000 8000

GDP per capita 1999 ppp WDI 2003

10000 12000 14000

SLN

CZESLK

CROBEL

LAT

BUL

LITRUS

KAZ

MOL

ARM

GEOUZB

ROM

UKR

AZE

KYR

ALB

HUNPOL

EST

16000

Adm

inis

trat

ive

corr

upti

on

Source EBRDNote ldquoAdministrative corruptionrdquo percentage of revenues paid in bribes by ldquofirms like yoursrdquo

170 Journal of Economic Perspectives

rate was almost exactly that reported by urban respondents in Finland(266 percent) and lower than that for England and Wales (344 percent) (DelFrate and van Kesteren 2003)

Conclusion

Russiarsquos economy is no longer the shortage-ridden militarized collapsingbureaucracy of 1990 It has metamorphosed into a marketplace of mostly privatefirms producing goods and services to please consumers instead of planners Theeconomy has been growing at an impressive pace The countryrsquos political ordertoo has changed beyond recognition A few business magnates control much of thecountryrsquos immense raw materials reserves and troubled banking system and lobbyhard behind the scenes for favored policies Small businesses are burdened bycorruption and regulation Still the dictatorship of the party has given way toelectoral democracy Russiarsquos once all-powerful Communist Party no longer pene-trates all aspects of social life nor sentences dissidents to Arctic labor campsInstead it campaigns for seats in parliament The press although struggling againstheavy-handed political interventions is still far more professional and independent

Table 3Percentage of Respondents Who Had Been Victimized by AdministrativeBribery 1996ndash2000 Major Cities

Albania 591 Slovak Republic 135Argentina 302 Paraguay 133Indonesia 299 Hungary 98Bolivia 244 Croatia 95India (Mumbai) 229 Estonia 93Lithuania 229 Costa Rica 92Mongolia 213 Macedonia FYR 74India (New Delhi) 210 South Africa 69Azerbaijan 208 Czech Republic 57Belarus 206 Philippines 43Colombia 195 Botswana 28Uganda 195 Netherlands 09Kyrgyz Republic 193 Northern Ireland 08Romania 192 Denmark 05Brazil 171 Scotland 05Russian Federation 166 Finland 04Georgia 166 England and Wales 03Bulgaria 164 Sweden 02Ukraine 162 Spain (Barcelona) 0Latvia 143

Source UN International Crime Victims Surveys UN Human Development Report 2002 Table 21 andAlvazzi del Frate and J van Kesteren ldquoSome Preliminary Tables from the International Crime VictimsSurveysrdquo Criminal Victimisation in Urban Europe UNICRI Turin 2003

A Normal Country Russia After Communism 171

than the stilted propaganda machine of the mid-1980s In slightly over a decadeRussia has become a typical middle-income capitalist democracy

So why the darkmdashat times almost paranoidmdashview Why the hyperbole aboutkleptocracy economic cataclysm and KGB takeovers Why are Russian conditionsoften portrayed as comparable to those in Zaire or Iran rather than to the far moresimilar realities of Argentina or Turkey

Although many factors may have been involved we believe that the exagger-ated despair over Russia was fueled by a fundamental and widespread misconcep-tion15 Many Western observers thought that as of the early 1990s Russia was ahighly developed if not wealthy country With its brilliant physicists and chessplayers its space program and its global military influence Russia did not look likeArgentina or South Korea Thinking that Russia started off highly developed theseobservers saw its convergence to the norm for middle-income countries as adisastrous aberration The same misconception informed some academic analysesOne recent paper for example makes the remarkable observation that althoughinstitutions to support the rule of law are imperfect in all countries ldquobetweenRussia and most other developed capitalist societies there was a qualitative differ-encerdquo (Hoff and Stiglitz 2002) Indeed there was a qualitative difference Russiawas never a ldquodeveloped capitalist societyrdquo

Such misconceptions have important consequences for western policy towardRussia They predispose decision makers to overreact to the inevitable volatility ofRussian economic and political life The result is extreme mood swings in theWestrsquos approach to Russia When things go ldquowellrdquo markets and political leadersrespond with enthusiastic rhetoric ratcheting expectations up to ever more unre-alistic levels When things go ldquobadlyrdquo western Russia-watchers are prone to panic ordenunciations and too ready to consider changing course completely The dis-course changes in a matter of days from one of partnership to one of isolation andcontainment Such exaggerated swings are not helpful to either Russia or the West

What does the future hold for Russia Some see the sudden spurt of growthover the last five years as an indicator of more to come and expect Russia soon tojoin Hungary and Poland in the community of poor developed countries leavingbehind the middle-income developing ones They emphasize the countryrsquos ad-vanced human capital its reformed tax system and its mostly open economyOthers see a serious barrier to growth in the bureaucratic regulations and politi-cized interventions In politics optimists anticipate continuing expansion of dem-ocratic competition and the emergence of a more vigorous civil society Pessimistssee an accelerating slide toward an authoritarian regime that will be managed bysecurity service professionals under the fig-leaf of formal democratic procedures

None of these predictions can be ruled out However thinking about Russia as

15 Contributing factors may have included unreflective but sincere sympathy on the part of Westernpublics for Russians dislocated by the transition sensationalism in the press schadenfreude on the part ofleft-wing intellectuals for whom turmoil in Russia proved the foolishness of liberal market reforms andpresidential politics in the United States where Republicans sought to discredit Clinton and Gore whohad consistently supported Yeltsin

172 Journal of Economic Perspectives

a normal middle-income country suggests the implausibility of extreme forecastsMiddle-income countries rarely revert from democracy to full-fledged authoritari-anism although they often renegotiate the boundary between the two Theirdemocracies are incomplete unpredictable and subject to temporary reversalsWhen they grow at all middle-income countries tend to grow in spurts that areoften interrupted by financial crises Russia has probably destroyed enough of thevestiges of central planning to stay a market economy albeit one with flawedinstitutions and much counterproductive state intervention Its bureaucracy willremain corrupt although it will become less corrupt as the country grows richer

That Russia is only a normal middle-income democracy is of course a disap-pointment to those who had hoped for or expected more But that Russia today haslargely broken free of its past that it is no longer ldquothe evil empirerdquo threateningboth its own people and the rest of the world is an amazing and admirableachievement

y We thank Anders Aslund Olivier Blanchard David Cutler Lev Freinkman MiriamGolden Stephen Hanson Arnold Harberger James Hines Jack Hirshleifer Simon JohnsonDavid Laibson Ed Leamer Dwight Perkins Lawrence Summers Timothy Taylor JudithThornton Michael Waldman and participants at seminars at the University of WashingtonUC Irvine UC San Diego and the 2004 AEA meetings for comments A shorter version ofthis article appeared in Foreign Affairs MarchApril 2004

References

Aron Leon 2002 ldquoStructure and Context inthe Study of Post-Soviet Russia Several Empiri-cal Generalizations in Search of a TheoryrdquoWorking paper American Enterprise Institute

Aslund Anders 2002 Building CapitalismCambridge Cambridge University Press

Aslund Anders 2003 ldquoMoscow ThrivesrdquoMemorandum

Blanchard Olivier and Michael Kremer 1997ldquoDisorganizationrdquo Quarterly Journal of Economics1124 pp 1091ndash126

Boone Peter and Denis Rodionov 2001ldquoRent Seeking in Russia and the CISrdquo Paperpresented at the tenth anniversary conference ofthe EBRD London December

Claessens Stijn Simeon Djankov and LarryLang 1999 ldquoThe Separation of Ownership andControl in East Asian Corporationsrdquo Journal ofFinancial Economics 581-2 pp 81ndash112

DaVanzo Julie and Clifford Grammich 2001Russiarsquos Mortality Crisis Drinking Disease andDeteriorating Health Care Santa Monica RandCorporation

Del Frate Alvazzi and J van Kesteren 2003ldquoSome Preliminary Tables From the Interna-tional Crime Victim Surveysrdquo in Criminal Victimi-sation in Urban Europe Turin United NationsInterregional Crime and Justice Research Insti-tute forthcoming

Djankov Simeon Caralee McLiesh TatianaNenova and Andrei Shleifer 2003 ldquoWho Ownsthe Mediardquo Journal of Law and Economics 462pp 341ndash82

European Bank for Reconstruction and Devel-opment 1999 Transition Report 1999 Ten Years ofTransition London EBRD

Faccio Mara 2003 ldquoPolitically-ConnectedFirmsrdquo Mimeo Vanderbilt University

Andrei Shleifer and Daniel Treisman 173

oped ones The International Press Institute in Vienna collects figures on variouskinds of state interference with journalism in the countries of the OSCE and haspublished these for the 1999ndash2000 period Of the 48 countries monitored 26 hadat least one incident in which media were censored or journalists were imprisonedor sentenced to ldquoexcessiverdquo fines In comparing the severity of such repressionacross countries one possibility is to compare the total number of incidents indifferent countries Within the OSCE the total ranged from zero (for manycountries) to 121 (for Turkey) On this measure Russia looks relatively badcoming in second place with 30 incidents during the two years

However to compare the absolute number of newspaper closures in a countrywith hundreds of daily newspapers (like Russia) to the number in a country withjust three newspapers (like Macedonia) seems questionable An alternative ap-proach is to deflate the number of incidents of state interference by the number ofmedia outlets We could not find cross-national data on the number of televisionand radio stations but UNESCO publishes estimates of the number of dailynewspapers in countries around the world Russia as of the mid-1990s had 285(plus about 4600 nondaily newspapers) Table 2 shows the number of cases of statecensorship imprisonment of journalists and suppression of journalists ldquoby lawrdquo perdaily newspaper in the OSCE countries13 Of course these measures are imperfectIf journalists are effectively intimidated then a repressive state may not need tointervene to silence criticism and its interventions may go unreported if it doesDividing by the number of newspapers is a rough-and-ready adjustmentmdashalthoughlikely to be less misleading than the raw numbers By the deflated number Russiarsquosrecord of state interference with press freedom is only a little worse than averageFifteen OSCE countries had poorer records in these years including UkraineBelarus Turkey Cyprus and even Austria

Russiarsquos problems with press freedom although more widely reported in theWest are not very different from those in various other middle-income countriesIn 2000ndash2001 Putinrsquos government hounded the tycoons Berezovsky and Gusinskyout of the media business At the same time a strikingly similar campaign wasunfolding in South Korea In what was widely perceived as a politicized effort byPresident Kim Dae-jung to punish newspapers critical of his government theKorean National Tax Service and Fair Trade Commission investigated 23 mediacompanies and assessed them with multimillion-dollar fines Prosecutors arrestedexecutives from the three conservative newspapers most critical of President Kimand held them in solitary confinement Kimrsquos aide Roh Moo-hyun who laterreplaced him as president reportedly said that the newspapers were ldquono differentfrom organized crimerdquo and told reporters he planned to nationalize them

Since Putinrsquos rise to power criticism of the president on Russian nationaltelevision has been effectively suppressed This contrasts with major daily newspa-pers such as Izvestia Kommersant and Nezavisimaya Gazeta in which criticism of Putin

13 ldquoSuppression by lawrdquo covers cases in which journalists were sentenced to prison or excessive finesincluding libel suits aimed at impeding the journalistrsquos right to report freely the introduction ofrestrictive legislation and official denial or suspension of credentials

A Normal Country Russia After Communism 167

remains frequent and bitter (Skeptics often note that these newspapers haverelatively small readerships but this is like saying the US press is not free becauseonly a fraction of citizens choose to subscribe to the Washington Post or the New YorkTimes) Despite national televisionrsquos timid approach to political commentary tocompare such stations to their Soviet era counterpartsmdashas some now domdashis todistort reality In fact they provide far more information to viewers and fewer

Table 2Cases of State Censorship ldquoSuppression by Lawrdquo and Imprisonment ofJournalists in OSCE Countries 1999ndash2000

Absolute number Per daily newspaper

Turkey 121 Uzbekistan 333Russian Federation 30 Azerbaijan 233Azerbaijan 14 Turkey 212Kazakhstan 10 Bosnia 200Uzbekistan 10 Kyrgyzstan 167Belarus 9 Belarus 113Ukraine 8 Cyprus 067Hungary 7 Macedonia TFYR 033Bosnia 6 Armenia 027Cyprus 6 Croatia 020Kyrgyzstan 5 Ukraine 018United Kingdom 5 Austria 018Armenia 3 Hungary 018Austria 3 Estonia 013Greece 3 Lithuania 011Croatia 2 Russian Federation 011Czech Republic 2 Czech Republic 010Estonia 2 Slovakia 005Italy 2 United Kingdom 005Lithuania 2 Netherlands 003Germany 1 Italy 003Macedonia TFYR 1 Greece 002Netherlands 1Slovakia 1Turkmenistan 1United States 123 countries with zeroAlbania Belgium Bulgaria

Canada DenmarkFinland France GeorgiaIceland Ireland LatviaLuxembourg MaltaMoldova Norway PolandPortugal RomaniaSlovenia Spain SwedenSwitzerland Tajikistan

24 countries with zeroGermany United States

Albania BelgiumBulgaria CanadaDenmark FinlandFrance Iceland IrelandLatvia LuxembourgMalta Moldova NorwayPoland PortugalRomania SloveniaSpain SwedenSwitzerland Tajikistan

Source Data from International Press Institute and UNESCO

168 Journal of Economic Perspectives

ideologically motivated lies The difference is vividly apparent in the coverage ofnational tragedies In 2002 the NTV channel provoked the Kremlinrsquos fury forrunning live footage as Russian troops stormed a Moscow theater that had beenseized by Chechen terrorists This did not stop NTV from broadcasting almostround-the-clock when in 2004 terrorists captured a school in Beslan NorthOssetia All three national channels showed harrowing pictures of children emerg-ing shell-shocked and wounded from the school and being ferried to hospital incivilian cars because of the shortage of ambulances standing by It is inconceivablethat such scenes would have been televised 20 years ago

CorruptionIn the late 1990s the then Chairman of the US House Banking Committee

James Leach (1999a b) wrote that he had made a study of the worldrsquos most corruptregimes including the Philippines under Marcos Zaire under Mobutu and Indo-nesia under Suharto Bad as these were each was outdone by the ldquopervasiveness ofpolitically tolerated corruptionrdquo in postcommunist Russia Other perceptions ofcorruption in Russia are equally grim The anticorruption advocacy group Trans-parency International (TI) compiles annual ratings of countriesrsquo ldquoperceived cor-ruptionrdquo based on a range of business surveys The World Bank has compiled asimilar composite rating Both of these make use predominantly though notentirely of surveys of business people or ratings by business consultancies basedoutside the relevant countries In both ratings Russia scores toward the bottom Forinstance in the 2001 version of the World Bankrsquos ldquograftrdquo index Russia was 142 outof 160 countries In TIrsquos 2002 corruption perceptions index Russia ranked 71 outof 102 countries

But what about sources less dependent on the perception of outsiders Insummer 1999 the World Bank and the European Bank for Reconstruction andDevelopment (EBRD) conducted a survey of business managers in 22 postcommu-nist countries They asked respondents to estimate the share of annual revenuesthat ldquofirms like yoursrdquo typically devoted to unofficial payments to public officials ldquoinorder to get things donerdquo Such payments might be made the questionnaire addedto facilitate connection to public utilities to obtain licenses or permits to improverelations with tax collectors or in relation to customs or imports They also askedrespondents to what extent the sale of parliamentary laws presidential decreescourt decisions and such had directly affected their business in the hope ofmeasuring the extent to which policymakers were co-opted by business interests(Hellman Jones Kaufmann and Schankerman 2000)

Comparing Russian business managers to their peers in other postcommunistcountries Russia falls in the middle on both the ldquoburden of briberyrdquo and ldquostatecapturerdquo dimensions If one graphs per capita GDP on the horizontal axis and thesemeasures of corruption on the vertical axis Russia is almost exactly on the ordinaryleast squares regression line in both cases Administrative corruption is very high inthe really poor countries such as Uzbekistan Armenia and Azerbaijan lower in

Andrei Shleifer and Daniel Treisman 169

Russia Bulgaria and Lithuania and lower still in the relatively rich Hungary andSlovenia as shown in Figure 314

How does corruption in Russia affect individuals The United Nations con-ducts a cross-national survey of crime victims In 1996ndash2000 it asked urban respon-dents in a number of countries the following question ldquoIn some countries there isa problem of corruption among government or public officials Duringmdashlastyearmdashhas any government official for instance a customs officer a police officer orinspector in your country asked you or expected you to pay a bribe for his servicerdquoThe proportion of respondents saying they had experienced demands for orexpectations of bribes in the last year in Russia (166 percent) was lower than thatin Argentina Brazil Romania or Lithuania as shown in Table 3 Again a simpleregression shows that the rate for Russia is almost exactly what one would expectgiven its per capita GDP (Del Frate and van Kesteren 2003 also United Nations2003 Table 21)

Looking at crime in general the reported victimization rate in Russia is notparticularly high Only 26 percent of Moscow respondents said in 2000 that theyhad been victimized the previous year by property crimes robbery sexual assaultassault or briberymdashcompared to 34 percent in Prague 41 percent in Tallin(Estonia) 44 percent in Rio de Janeiro and 61 percent in Buenos Aires Moscowrsquos

14 The World Bank and EBRD repeated the survey in 2002 In almost all countries the average percentof revenues paid in bribes droppedmdashit fell in Russia during these three years from 28 to 14 percentBut the cross-national pattern was almost the same Again Russiarsquos level of administrative corruption wasslightly lower than would be predicted from its income And by 2003 it had become less corrupt on theadministrative corruption scale than Bulgaria and Belarus

Figure 3Administrative Corruption in Postcommunist Countries EBRD Survey of BusinessManagers 1999 (BEEPS)

0

1

2

3

4

5

6

7

0 2000 4000 6000 8000

GDP per capita 1999 ppp WDI 2003

10000 12000 14000

SLN

CZESLK

CROBEL

LAT

BUL

LITRUS

KAZ

MOL

ARM

GEOUZB

ROM

UKR

AZE

KYR

ALB

HUNPOL

EST

16000

Adm

inis

trat

ive

corr

upti

on

Source EBRDNote ldquoAdministrative corruptionrdquo percentage of revenues paid in bribes by ldquofirms like yoursrdquo

170 Journal of Economic Perspectives

rate was almost exactly that reported by urban respondents in Finland(266 percent) and lower than that for England and Wales (344 percent) (DelFrate and van Kesteren 2003)

Conclusion

Russiarsquos economy is no longer the shortage-ridden militarized collapsingbureaucracy of 1990 It has metamorphosed into a marketplace of mostly privatefirms producing goods and services to please consumers instead of planners Theeconomy has been growing at an impressive pace The countryrsquos political ordertoo has changed beyond recognition A few business magnates control much of thecountryrsquos immense raw materials reserves and troubled banking system and lobbyhard behind the scenes for favored policies Small businesses are burdened bycorruption and regulation Still the dictatorship of the party has given way toelectoral democracy Russiarsquos once all-powerful Communist Party no longer pene-trates all aspects of social life nor sentences dissidents to Arctic labor campsInstead it campaigns for seats in parliament The press although struggling againstheavy-handed political interventions is still far more professional and independent

Table 3Percentage of Respondents Who Had Been Victimized by AdministrativeBribery 1996ndash2000 Major Cities

Albania 591 Slovak Republic 135Argentina 302 Paraguay 133Indonesia 299 Hungary 98Bolivia 244 Croatia 95India (Mumbai) 229 Estonia 93Lithuania 229 Costa Rica 92Mongolia 213 Macedonia FYR 74India (New Delhi) 210 South Africa 69Azerbaijan 208 Czech Republic 57Belarus 206 Philippines 43Colombia 195 Botswana 28Uganda 195 Netherlands 09Kyrgyz Republic 193 Northern Ireland 08Romania 192 Denmark 05Brazil 171 Scotland 05Russian Federation 166 Finland 04Georgia 166 England and Wales 03Bulgaria 164 Sweden 02Ukraine 162 Spain (Barcelona) 0Latvia 143

Source UN International Crime Victims Surveys UN Human Development Report 2002 Table 21 andAlvazzi del Frate and J van Kesteren ldquoSome Preliminary Tables from the International Crime VictimsSurveysrdquo Criminal Victimisation in Urban Europe UNICRI Turin 2003

A Normal Country Russia After Communism 171

than the stilted propaganda machine of the mid-1980s In slightly over a decadeRussia has become a typical middle-income capitalist democracy

So why the darkmdashat times almost paranoidmdashview Why the hyperbole aboutkleptocracy economic cataclysm and KGB takeovers Why are Russian conditionsoften portrayed as comparable to those in Zaire or Iran rather than to the far moresimilar realities of Argentina or Turkey

Although many factors may have been involved we believe that the exagger-ated despair over Russia was fueled by a fundamental and widespread misconcep-tion15 Many Western observers thought that as of the early 1990s Russia was ahighly developed if not wealthy country With its brilliant physicists and chessplayers its space program and its global military influence Russia did not look likeArgentina or South Korea Thinking that Russia started off highly developed theseobservers saw its convergence to the norm for middle-income countries as adisastrous aberration The same misconception informed some academic analysesOne recent paper for example makes the remarkable observation that althoughinstitutions to support the rule of law are imperfect in all countries ldquobetweenRussia and most other developed capitalist societies there was a qualitative differ-encerdquo (Hoff and Stiglitz 2002) Indeed there was a qualitative difference Russiawas never a ldquodeveloped capitalist societyrdquo

Such misconceptions have important consequences for western policy towardRussia They predispose decision makers to overreact to the inevitable volatility ofRussian economic and political life The result is extreme mood swings in theWestrsquos approach to Russia When things go ldquowellrdquo markets and political leadersrespond with enthusiastic rhetoric ratcheting expectations up to ever more unre-alistic levels When things go ldquobadlyrdquo western Russia-watchers are prone to panic ordenunciations and too ready to consider changing course completely The dis-course changes in a matter of days from one of partnership to one of isolation andcontainment Such exaggerated swings are not helpful to either Russia or the West

What does the future hold for Russia Some see the sudden spurt of growthover the last five years as an indicator of more to come and expect Russia soon tojoin Hungary and Poland in the community of poor developed countries leavingbehind the middle-income developing ones They emphasize the countryrsquos ad-vanced human capital its reformed tax system and its mostly open economyOthers see a serious barrier to growth in the bureaucratic regulations and politi-cized interventions In politics optimists anticipate continuing expansion of dem-ocratic competition and the emergence of a more vigorous civil society Pessimistssee an accelerating slide toward an authoritarian regime that will be managed bysecurity service professionals under the fig-leaf of formal democratic procedures

None of these predictions can be ruled out However thinking about Russia as

15 Contributing factors may have included unreflective but sincere sympathy on the part of Westernpublics for Russians dislocated by the transition sensationalism in the press schadenfreude on the part ofleft-wing intellectuals for whom turmoil in Russia proved the foolishness of liberal market reforms andpresidential politics in the United States where Republicans sought to discredit Clinton and Gore whohad consistently supported Yeltsin

172 Journal of Economic Perspectives

a normal middle-income country suggests the implausibility of extreme forecastsMiddle-income countries rarely revert from democracy to full-fledged authoritari-anism although they often renegotiate the boundary between the two Theirdemocracies are incomplete unpredictable and subject to temporary reversalsWhen they grow at all middle-income countries tend to grow in spurts that areoften interrupted by financial crises Russia has probably destroyed enough of thevestiges of central planning to stay a market economy albeit one with flawedinstitutions and much counterproductive state intervention Its bureaucracy willremain corrupt although it will become less corrupt as the country grows richer

That Russia is only a normal middle-income democracy is of course a disap-pointment to those who had hoped for or expected more But that Russia today haslargely broken free of its past that it is no longer ldquothe evil empirerdquo threateningboth its own people and the rest of the world is an amazing and admirableachievement

y We thank Anders Aslund Olivier Blanchard David Cutler Lev Freinkman MiriamGolden Stephen Hanson Arnold Harberger James Hines Jack Hirshleifer Simon JohnsonDavid Laibson Ed Leamer Dwight Perkins Lawrence Summers Timothy Taylor JudithThornton Michael Waldman and participants at seminars at the University of WashingtonUC Irvine UC San Diego and the 2004 AEA meetings for comments A shorter version ofthis article appeared in Foreign Affairs MarchApril 2004

References

Aron Leon 2002 ldquoStructure and Context inthe Study of Post-Soviet Russia Several Empiri-cal Generalizations in Search of a TheoryrdquoWorking paper American Enterprise Institute

Aslund Anders 2002 Building CapitalismCambridge Cambridge University Press

Aslund Anders 2003 ldquoMoscow ThrivesrdquoMemorandum

Blanchard Olivier and Michael Kremer 1997ldquoDisorganizationrdquo Quarterly Journal of Economics1124 pp 1091ndash126

Boone Peter and Denis Rodionov 2001ldquoRent Seeking in Russia and the CISrdquo Paperpresented at the tenth anniversary conference ofthe EBRD London December

Claessens Stijn Simeon Djankov and LarryLang 1999 ldquoThe Separation of Ownership andControl in East Asian Corporationsrdquo Journal ofFinancial Economics 581-2 pp 81ndash112

DaVanzo Julie and Clifford Grammich 2001Russiarsquos Mortality Crisis Drinking Disease andDeteriorating Health Care Santa Monica RandCorporation

Del Frate Alvazzi and J van Kesteren 2003ldquoSome Preliminary Tables From the Interna-tional Crime Victim Surveysrdquo in Criminal Victimi-sation in Urban Europe Turin United NationsInterregional Crime and Justice Research Insti-tute forthcoming

Djankov Simeon Caralee McLiesh TatianaNenova and Andrei Shleifer 2003 ldquoWho Ownsthe Mediardquo Journal of Law and Economics 462pp 341ndash82

European Bank for Reconstruction and Devel-opment 1999 Transition Report 1999 Ten Years ofTransition London EBRD

Faccio Mara 2003 ldquoPolitically-ConnectedFirmsrdquo Mimeo Vanderbilt University

Andrei Shleifer and Daniel Treisman 173

remains frequent and bitter (Skeptics often note that these newspapers haverelatively small readerships but this is like saying the US press is not free becauseonly a fraction of citizens choose to subscribe to the Washington Post or the New YorkTimes) Despite national televisionrsquos timid approach to political commentary tocompare such stations to their Soviet era counterpartsmdashas some now domdashis todistort reality In fact they provide far more information to viewers and fewer

Table 2Cases of State Censorship ldquoSuppression by Lawrdquo and Imprisonment ofJournalists in OSCE Countries 1999ndash2000

Absolute number Per daily newspaper

Turkey 121 Uzbekistan 333Russian Federation 30 Azerbaijan 233Azerbaijan 14 Turkey 212Kazakhstan 10 Bosnia 200Uzbekistan 10 Kyrgyzstan 167Belarus 9 Belarus 113Ukraine 8 Cyprus 067Hungary 7 Macedonia TFYR 033Bosnia 6 Armenia 027Cyprus 6 Croatia 020Kyrgyzstan 5 Ukraine 018United Kingdom 5 Austria 018Armenia 3 Hungary 018Austria 3 Estonia 013Greece 3 Lithuania 011Croatia 2 Russian Federation 011Czech Republic 2 Czech Republic 010Estonia 2 Slovakia 005Italy 2 United Kingdom 005Lithuania 2 Netherlands 003Germany 1 Italy 003Macedonia TFYR 1 Greece 002Netherlands 1Slovakia 1Turkmenistan 1United States 123 countries with zeroAlbania Belgium Bulgaria

Canada DenmarkFinland France GeorgiaIceland Ireland LatviaLuxembourg MaltaMoldova Norway PolandPortugal RomaniaSlovenia Spain SwedenSwitzerland Tajikistan

24 countries with zeroGermany United States

Albania BelgiumBulgaria CanadaDenmark FinlandFrance Iceland IrelandLatvia LuxembourgMalta Moldova NorwayPoland PortugalRomania SloveniaSpain SwedenSwitzerland Tajikistan

Source Data from International Press Institute and UNESCO

168 Journal of Economic Perspectives

ideologically motivated lies The difference is vividly apparent in the coverage ofnational tragedies In 2002 the NTV channel provoked the Kremlinrsquos fury forrunning live footage as Russian troops stormed a Moscow theater that had beenseized by Chechen terrorists This did not stop NTV from broadcasting almostround-the-clock when in 2004 terrorists captured a school in Beslan NorthOssetia All three national channels showed harrowing pictures of children emerg-ing shell-shocked and wounded from the school and being ferried to hospital incivilian cars because of the shortage of ambulances standing by It is inconceivablethat such scenes would have been televised 20 years ago

CorruptionIn the late 1990s the then Chairman of the US House Banking Committee

James Leach (1999a b) wrote that he had made a study of the worldrsquos most corruptregimes including the Philippines under Marcos Zaire under Mobutu and Indo-nesia under Suharto Bad as these were each was outdone by the ldquopervasiveness ofpolitically tolerated corruptionrdquo in postcommunist Russia Other perceptions ofcorruption in Russia are equally grim The anticorruption advocacy group Trans-parency International (TI) compiles annual ratings of countriesrsquo ldquoperceived cor-ruptionrdquo based on a range of business surveys The World Bank has compiled asimilar composite rating Both of these make use predominantly though notentirely of surveys of business people or ratings by business consultancies basedoutside the relevant countries In both ratings Russia scores toward the bottom Forinstance in the 2001 version of the World Bankrsquos ldquograftrdquo index Russia was 142 outof 160 countries In TIrsquos 2002 corruption perceptions index Russia ranked 71 outof 102 countries

But what about sources less dependent on the perception of outsiders Insummer 1999 the World Bank and the European Bank for Reconstruction andDevelopment (EBRD) conducted a survey of business managers in 22 postcommu-nist countries They asked respondents to estimate the share of annual revenuesthat ldquofirms like yoursrdquo typically devoted to unofficial payments to public officials ldquoinorder to get things donerdquo Such payments might be made the questionnaire addedto facilitate connection to public utilities to obtain licenses or permits to improverelations with tax collectors or in relation to customs or imports They also askedrespondents to what extent the sale of parliamentary laws presidential decreescourt decisions and such had directly affected their business in the hope ofmeasuring the extent to which policymakers were co-opted by business interests(Hellman Jones Kaufmann and Schankerman 2000)

Comparing Russian business managers to their peers in other postcommunistcountries Russia falls in the middle on both the ldquoburden of briberyrdquo and ldquostatecapturerdquo dimensions If one graphs per capita GDP on the horizontal axis and thesemeasures of corruption on the vertical axis Russia is almost exactly on the ordinaryleast squares regression line in both cases Administrative corruption is very high inthe really poor countries such as Uzbekistan Armenia and Azerbaijan lower in

Andrei Shleifer and Daniel Treisman 169

Russia Bulgaria and Lithuania and lower still in the relatively rich Hungary andSlovenia as shown in Figure 314

How does corruption in Russia affect individuals The United Nations con-ducts a cross-national survey of crime victims In 1996ndash2000 it asked urban respon-dents in a number of countries the following question ldquoIn some countries there isa problem of corruption among government or public officials Duringmdashlastyearmdashhas any government official for instance a customs officer a police officer orinspector in your country asked you or expected you to pay a bribe for his servicerdquoThe proportion of respondents saying they had experienced demands for orexpectations of bribes in the last year in Russia (166 percent) was lower than thatin Argentina Brazil Romania or Lithuania as shown in Table 3 Again a simpleregression shows that the rate for Russia is almost exactly what one would expectgiven its per capita GDP (Del Frate and van Kesteren 2003 also United Nations2003 Table 21)

Looking at crime in general the reported victimization rate in Russia is notparticularly high Only 26 percent of Moscow respondents said in 2000 that theyhad been victimized the previous year by property crimes robbery sexual assaultassault or briberymdashcompared to 34 percent in Prague 41 percent in Tallin(Estonia) 44 percent in Rio de Janeiro and 61 percent in Buenos Aires Moscowrsquos

14 The World Bank and EBRD repeated the survey in 2002 In almost all countries the average percentof revenues paid in bribes droppedmdashit fell in Russia during these three years from 28 to 14 percentBut the cross-national pattern was almost the same Again Russiarsquos level of administrative corruption wasslightly lower than would be predicted from its income And by 2003 it had become less corrupt on theadministrative corruption scale than Bulgaria and Belarus

Figure 3Administrative Corruption in Postcommunist Countries EBRD Survey of BusinessManagers 1999 (BEEPS)

0

1

2

3

4

5

6

7

0 2000 4000 6000 8000

GDP per capita 1999 ppp WDI 2003

10000 12000 14000

SLN

CZESLK

CROBEL

LAT

BUL

LITRUS

KAZ

MOL

ARM

GEOUZB

ROM

UKR

AZE

KYR

ALB

HUNPOL

EST

16000

Adm

inis

trat

ive

corr

upti

on

Source EBRDNote ldquoAdministrative corruptionrdquo percentage of revenues paid in bribes by ldquofirms like yoursrdquo

170 Journal of Economic Perspectives

rate was almost exactly that reported by urban respondents in Finland(266 percent) and lower than that for England and Wales (344 percent) (DelFrate and van Kesteren 2003)

Conclusion

Russiarsquos economy is no longer the shortage-ridden militarized collapsingbureaucracy of 1990 It has metamorphosed into a marketplace of mostly privatefirms producing goods and services to please consumers instead of planners Theeconomy has been growing at an impressive pace The countryrsquos political ordertoo has changed beyond recognition A few business magnates control much of thecountryrsquos immense raw materials reserves and troubled banking system and lobbyhard behind the scenes for favored policies Small businesses are burdened bycorruption and regulation Still the dictatorship of the party has given way toelectoral democracy Russiarsquos once all-powerful Communist Party no longer pene-trates all aspects of social life nor sentences dissidents to Arctic labor campsInstead it campaigns for seats in parliament The press although struggling againstheavy-handed political interventions is still far more professional and independent

Table 3Percentage of Respondents Who Had Been Victimized by AdministrativeBribery 1996ndash2000 Major Cities

Albania 591 Slovak Republic 135Argentina 302 Paraguay 133Indonesia 299 Hungary 98Bolivia 244 Croatia 95India (Mumbai) 229 Estonia 93Lithuania 229 Costa Rica 92Mongolia 213 Macedonia FYR 74India (New Delhi) 210 South Africa 69Azerbaijan 208 Czech Republic 57Belarus 206 Philippines 43Colombia 195 Botswana 28Uganda 195 Netherlands 09Kyrgyz Republic 193 Northern Ireland 08Romania 192 Denmark 05Brazil 171 Scotland 05Russian Federation 166 Finland 04Georgia 166 England and Wales 03Bulgaria 164 Sweden 02Ukraine 162 Spain (Barcelona) 0Latvia 143

Source UN International Crime Victims Surveys UN Human Development Report 2002 Table 21 andAlvazzi del Frate and J van Kesteren ldquoSome Preliminary Tables from the International Crime VictimsSurveysrdquo Criminal Victimisation in Urban Europe UNICRI Turin 2003

A Normal Country Russia After Communism 171

than the stilted propaganda machine of the mid-1980s In slightly over a decadeRussia has become a typical middle-income capitalist democracy

So why the darkmdashat times almost paranoidmdashview Why the hyperbole aboutkleptocracy economic cataclysm and KGB takeovers Why are Russian conditionsoften portrayed as comparable to those in Zaire or Iran rather than to the far moresimilar realities of Argentina or Turkey

Although many factors may have been involved we believe that the exagger-ated despair over Russia was fueled by a fundamental and widespread misconcep-tion15 Many Western observers thought that as of the early 1990s Russia was ahighly developed if not wealthy country With its brilliant physicists and chessplayers its space program and its global military influence Russia did not look likeArgentina or South Korea Thinking that Russia started off highly developed theseobservers saw its convergence to the norm for middle-income countries as adisastrous aberration The same misconception informed some academic analysesOne recent paper for example makes the remarkable observation that althoughinstitutions to support the rule of law are imperfect in all countries ldquobetweenRussia and most other developed capitalist societies there was a qualitative differ-encerdquo (Hoff and Stiglitz 2002) Indeed there was a qualitative difference Russiawas never a ldquodeveloped capitalist societyrdquo

Such misconceptions have important consequences for western policy towardRussia They predispose decision makers to overreact to the inevitable volatility ofRussian economic and political life The result is extreme mood swings in theWestrsquos approach to Russia When things go ldquowellrdquo markets and political leadersrespond with enthusiastic rhetoric ratcheting expectations up to ever more unre-alistic levels When things go ldquobadlyrdquo western Russia-watchers are prone to panic ordenunciations and too ready to consider changing course completely The dis-course changes in a matter of days from one of partnership to one of isolation andcontainment Such exaggerated swings are not helpful to either Russia or the West

What does the future hold for Russia Some see the sudden spurt of growthover the last five years as an indicator of more to come and expect Russia soon tojoin Hungary and Poland in the community of poor developed countries leavingbehind the middle-income developing ones They emphasize the countryrsquos ad-vanced human capital its reformed tax system and its mostly open economyOthers see a serious barrier to growth in the bureaucratic regulations and politi-cized interventions In politics optimists anticipate continuing expansion of dem-ocratic competition and the emergence of a more vigorous civil society Pessimistssee an accelerating slide toward an authoritarian regime that will be managed bysecurity service professionals under the fig-leaf of formal democratic procedures

None of these predictions can be ruled out However thinking about Russia as

15 Contributing factors may have included unreflective but sincere sympathy on the part of Westernpublics for Russians dislocated by the transition sensationalism in the press schadenfreude on the part ofleft-wing intellectuals for whom turmoil in Russia proved the foolishness of liberal market reforms andpresidential politics in the United States where Republicans sought to discredit Clinton and Gore whohad consistently supported Yeltsin

172 Journal of Economic Perspectives

a normal middle-income country suggests the implausibility of extreme forecastsMiddle-income countries rarely revert from democracy to full-fledged authoritari-anism although they often renegotiate the boundary between the two Theirdemocracies are incomplete unpredictable and subject to temporary reversalsWhen they grow at all middle-income countries tend to grow in spurts that areoften interrupted by financial crises Russia has probably destroyed enough of thevestiges of central planning to stay a market economy albeit one with flawedinstitutions and much counterproductive state intervention Its bureaucracy willremain corrupt although it will become less corrupt as the country grows richer

That Russia is only a normal middle-income democracy is of course a disap-pointment to those who had hoped for or expected more But that Russia today haslargely broken free of its past that it is no longer ldquothe evil empirerdquo threateningboth its own people and the rest of the world is an amazing and admirableachievement

y We thank Anders Aslund Olivier Blanchard David Cutler Lev Freinkman MiriamGolden Stephen Hanson Arnold Harberger James Hines Jack Hirshleifer Simon JohnsonDavid Laibson Ed Leamer Dwight Perkins Lawrence Summers Timothy Taylor JudithThornton Michael Waldman and participants at seminars at the University of WashingtonUC Irvine UC San Diego and the 2004 AEA meetings for comments A shorter version ofthis article appeared in Foreign Affairs MarchApril 2004

References

Aron Leon 2002 ldquoStructure and Context inthe Study of Post-Soviet Russia Several Empiri-cal Generalizations in Search of a TheoryrdquoWorking paper American Enterprise Institute

Aslund Anders 2002 Building CapitalismCambridge Cambridge University Press

Aslund Anders 2003 ldquoMoscow ThrivesrdquoMemorandum

Blanchard Olivier and Michael Kremer 1997ldquoDisorganizationrdquo Quarterly Journal of Economics1124 pp 1091ndash126

Boone Peter and Denis Rodionov 2001ldquoRent Seeking in Russia and the CISrdquo Paperpresented at the tenth anniversary conference ofthe EBRD London December

Claessens Stijn Simeon Djankov and LarryLang 1999 ldquoThe Separation of Ownership andControl in East Asian Corporationsrdquo Journal ofFinancial Economics 581-2 pp 81ndash112

DaVanzo Julie and Clifford Grammich 2001Russiarsquos Mortality Crisis Drinking Disease andDeteriorating Health Care Santa Monica RandCorporation

Del Frate Alvazzi and J van Kesteren 2003ldquoSome Preliminary Tables From the Interna-tional Crime Victim Surveysrdquo in Criminal Victimi-sation in Urban Europe Turin United NationsInterregional Crime and Justice Research Insti-tute forthcoming

Djankov Simeon Caralee McLiesh TatianaNenova and Andrei Shleifer 2003 ldquoWho Ownsthe Mediardquo Journal of Law and Economics 462pp 341ndash82

European Bank for Reconstruction and Devel-opment 1999 Transition Report 1999 Ten Years ofTransition London EBRD

Faccio Mara 2003 ldquoPolitically-ConnectedFirmsrdquo Mimeo Vanderbilt University

Andrei Shleifer and Daniel Treisman 173

ideologically motivated lies The difference is vividly apparent in the coverage ofnational tragedies In 2002 the NTV channel provoked the Kremlinrsquos fury forrunning live footage as Russian troops stormed a Moscow theater that had beenseized by Chechen terrorists This did not stop NTV from broadcasting almostround-the-clock when in 2004 terrorists captured a school in Beslan NorthOssetia All three national channels showed harrowing pictures of children emerg-ing shell-shocked and wounded from the school and being ferried to hospital incivilian cars because of the shortage of ambulances standing by It is inconceivablethat such scenes would have been televised 20 years ago

CorruptionIn the late 1990s the then Chairman of the US House Banking Committee

James Leach (1999a b) wrote that he had made a study of the worldrsquos most corruptregimes including the Philippines under Marcos Zaire under Mobutu and Indo-nesia under Suharto Bad as these were each was outdone by the ldquopervasiveness ofpolitically tolerated corruptionrdquo in postcommunist Russia Other perceptions ofcorruption in Russia are equally grim The anticorruption advocacy group Trans-parency International (TI) compiles annual ratings of countriesrsquo ldquoperceived cor-ruptionrdquo based on a range of business surveys The World Bank has compiled asimilar composite rating Both of these make use predominantly though notentirely of surveys of business people or ratings by business consultancies basedoutside the relevant countries In both ratings Russia scores toward the bottom Forinstance in the 2001 version of the World Bankrsquos ldquograftrdquo index Russia was 142 outof 160 countries In TIrsquos 2002 corruption perceptions index Russia ranked 71 outof 102 countries

But what about sources less dependent on the perception of outsiders Insummer 1999 the World Bank and the European Bank for Reconstruction andDevelopment (EBRD) conducted a survey of business managers in 22 postcommu-nist countries They asked respondents to estimate the share of annual revenuesthat ldquofirms like yoursrdquo typically devoted to unofficial payments to public officials ldquoinorder to get things donerdquo Such payments might be made the questionnaire addedto facilitate connection to public utilities to obtain licenses or permits to improverelations with tax collectors or in relation to customs or imports They also askedrespondents to what extent the sale of parliamentary laws presidential decreescourt decisions and such had directly affected their business in the hope ofmeasuring the extent to which policymakers were co-opted by business interests(Hellman Jones Kaufmann and Schankerman 2000)

Comparing Russian business managers to their peers in other postcommunistcountries Russia falls in the middle on both the ldquoburden of briberyrdquo and ldquostatecapturerdquo dimensions If one graphs per capita GDP on the horizontal axis and thesemeasures of corruption on the vertical axis Russia is almost exactly on the ordinaryleast squares regression line in both cases Administrative corruption is very high inthe really poor countries such as Uzbekistan Armenia and Azerbaijan lower in

Andrei Shleifer and Daniel Treisman 169

Russia Bulgaria and Lithuania and lower still in the relatively rich Hungary andSlovenia as shown in Figure 314

How does corruption in Russia affect individuals The United Nations con-ducts a cross-national survey of crime victims In 1996ndash2000 it asked urban respon-dents in a number of countries the following question ldquoIn some countries there isa problem of corruption among government or public officials Duringmdashlastyearmdashhas any government official for instance a customs officer a police officer orinspector in your country asked you or expected you to pay a bribe for his servicerdquoThe proportion of respondents saying they had experienced demands for orexpectations of bribes in the last year in Russia (166 percent) was lower than thatin Argentina Brazil Romania or Lithuania as shown in Table 3 Again a simpleregression shows that the rate for Russia is almost exactly what one would expectgiven its per capita GDP (Del Frate and van Kesteren 2003 also United Nations2003 Table 21)

Looking at crime in general the reported victimization rate in Russia is notparticularly high Only 26 percent of Moscow respondents said in 2000 that theyhad been victimized the previous year by property crimes robbery sexual assaultassault or briberymdashcompared to 34 percent in Prague 41 percent in Tallin(Estonia) 44 percent in Rio de Janeiro and 61 percent in Buenos Aires Moscowrsquos

14 The World Bank and EBRD repeated the survey in 2002 In almost all countries the average percentof revenues paid in bribes droppedmdashit fell in Russia during these three years from 28 to 14 percentBut the cross-national pattern was almost the same Again Russiarsquos level of administrative corruption wasslightly lower than would be predicted from its income And by 2003 it had become less corrupt on theadministrative corruption scale than Bulgaria and Belarus

Figure 3Administrative Corruption in Postcommunist Countries EBRD Survey of BusinessManagers 1999 (BEEPS)

0

1

2

3

4

5

6

7

0 2000 4000 6000 8000

GDP per capita 1999 ppp WDI 2003

10000 12000 14000

SLN

CZESLK

CROBEL

LAT

BUL

LITRUS

KAZ

MOL

ARM

GEOUZB

ROM

UKR

AZE

KYR

ALB

HUNPOL

EST

16000

Adm

inis

trat

ive

corr

upti

on

Source EBRDNote ldquoAdministrative corruptionrdquo percentage of revenues paid in bribes by ldquofirms like yoursrdquo

170 Journal of Economic Perspectives

rate was almost exactly that reported by urban respondents in Finland(266 percent) and lower than that for England and Wales (344 percent) (DelFrate and van Kesteren 2003)

Conclusion

Russiarsquos economy is no longer the shortage-ridden militarized collapsingbureaucracy of 1990 It has metamorphosed into a marketplace of mostly privatefirms producing goods and services to please consumers instead of planners Theeconomy has been growing at an impressive pace The countryrsquos political ordertoo has changed beyond recognition A few business magnates control much of thecountryrsquos immense raw materials reserves and troubled banking system and lobbyhard behind the scenes for favored policies Small businesses are burdened bycorruption and regulation Still the dictatorship of the party has given way toelectoral democracy Russiarsquos once all-powerful Communist Party no longer pene-trates all aspects of social life nor sentences dissidents to Arctic labor campsInstead it campaigns for seats in parliament The press although struggling againstheavy-handed political interventions is still far more professional and independent

Table 3Percentage of Respondents Who Had Been Victimized by AdministrativeBribery 1996ndash2000 Major Cities

Albania 591 Slovak Republic 135Argentina 302 Paraguay 133Indonesia 299 Hungary 98Bolivia 244 Croatia 95India (Mumbai) 229 Estonia 93Lithuania 229 Costa Rica 92Mongolia 213 Macedonia FYR 74India (New Delhi) 210 South Africa 69Azerbaijan 208 Czech Republic 57Belarus 206 Philippines 43Colombia 195 Botswana 28Uganda 195 Netherlands 09Kyrgyz Republic 193 Northern Ireland 08Romania 192 Denmark 05Brazil 171 Scotland 05Russian Federation 166 Finland 04Georgia 166 England and Wales 03Bulgaria 164 Sweden 02Ukraine 162 Spain (Barcelona) 0Latvia 143

Source UN International Crime Victims Surveys UN Human Development Report 2002 Table 21 andAlvazzi del Frate and J van Kesteren ldquoSome Preliminary Tables from the International Crime VictimsSurveysrdquo Criminal Victimisation in Urban Europe UNICRI Turin 2003

A Normal Country Russia After Communism 171

than the stilted propaganda machine of the mid-1980s In slightly over a decadeRussia has become a typical middle-income capitalist democracy

So why the darkmdashat times almost paranoidmdashview Why the hyperbole aboutkleptocracy economic cataclysm and KGB takeovers Why are Russian conditionsoften portrayed as comparable to those in Zaire or Iran rather than to the far moresimilar realities of Argentina or Turkey

Although many factors may have been involved we believe that the exagger-ated despair over Russia was fueled by a fundamental and widespread misconcep-tion15 Many Western observers thought that as of the early 1990s Russia was ahighly developed if not wealthy country With its brilliant physicists and chessplayers its space program and its global military influence Russia did not look likeArgentina or South Korea Thinking that Russia started off highly developed theseobservers saw its convergence to the norm for middle-income countries as adisastrous aberration The same misconception informed some academic analysesOne recent paper for example makes the remarkable observation that althoughinstitutions to support the rule of law are imperfect in all countries ldquobetweenRussia and most other developed capitalist societies there was a qualitative differ-encerdquo (Hoff and Stiglitz 2002) Indeed there was a qualitative difference Russiawas never a ldquodeveloped capitalist societyrdquo

Such misconceptions have important consequences for western policy towardRussia They predispose decision makers to overreact to the inevitable volatility ofRussian economic and political life The result is extreme mood swings in theWestrsquos approach to Russia When things go ldquowellrdquo markets and political leadersrespond with enthusiastic rhetoric ratcheting expectations up to ever more unre-alistic levels When things go ldquobadlyrdquo western Russia-watchers are prone to panic ordenunciations and too ready to consider changing course completely The dis-course changes in a matter of days from one of partnership to one of isolation andcontainment Such exaggerated swings are not helpful to either Russia or the West

What does the future hold for Russia Some see the sudden spurt of growthover the last five years as an indicator of more to come and expect Russia soon tojoin Hungary and Poland in the community of poor developed countries leavingbehind the middle-income developing ones They emphasize the countryrsquos ad-vanced human capital its reformed tax system and its mostly open economyOthers see a serious barrier to growth in the bureaucratic regulations and politi-cized interventions In politics optimists anticipate continuing expansion of dem-ocratic competition and the emergence of a more vigorous civil society Pessimistssee an accelerating slide toward an authoritarian regime that will be managed bysecurity service professionals under the fig-leaf of formal democratic procedures

None of these predictions can be ruled out However thinking about Russia as

15 Contributing factors may have included unreflective but sincere sympathy on the part of Westernpublics for Russians dislocated by the transition sensationalism in the press schadenfreude on the part ofleft-wing intellectuals for whom turmoil in Russia proved the foolishness of liberal market reforms andpresidential politics in the United States where Republicans sought to discredit Clinton and Gore whohad consistently supported Yeltsin

172 Journal of Economic Perspectives

a normal middle-income country suggests the implausibility of extreme forecastsMiddle-income countries rarely revert from democracy to full-fledged authoritari-anism although they often renegotiate the boundary between the two Theirdemocracies are incomplete unpredictable and subject to temporary reversalsWhen they grow at all middle-income countries tend to grow in spurts that areoften interrupted by financial crises Russia has probably destroyed enough of thevestiges of central planning to stay a market economy albeit one with flawedinstitutions and much counterproductive state intervention Its bureaucracy willremain corrupt although it will become less corrupt as the country grows richer

That Russia is only a normal middle-income democracy is of course a disap-pointment to those who had hoped for or expected more But that Russia today haslargely broken free of its past that it is no longer ldquothe evil empirerdquo threateningboth its own people and the rest of the world is an amazing and admirableachievement

y We thank Anders Aslund Olivier Blanchard David Cutler Lev Freinkman MiriamGolden Stephen Hanson Arnold Harberger James Hines Jack Hirshleifer Simon JohnsonDavid Laibson Ed Leamer Dwight Perkins Lawrence Summers Timothy Taylor JudithThornton Michael Waldman and participants at seminars at the University of WashingtonUC Irvine UC San Diego and the 2004 AEA meetings for comments A shorter version ofthis article appeared in Foreign Affairs MarchApril 2004

References

Aron Leon 2002 ldquoStructure and Context inthe Study of Post-Soviet Russia Several Empiri-cal Generalizations in Search of a TheoryrdquoWorking paper American Enterprise Institute

Aslund Anders 2002 Building CapitalismCambridge Cambridge University Press

Aslund Anders 2003 ldquoMoscow ThrivesrdquoMemorandum

Blanchard Olivier and Michael Kremer 1997ldquoDisorganizationrdquo Quarterly Journal of Economics1124 pp 1091ndash126

Boone Peter and Denis Rodionov 2001ldquoRent Seeking in Russia and the CISrdquo Paperpresented at the tenth anniversary conference ofthe EBRD London December

Claessens Stijn Simeon Djankov and LarryLang 1999 ldquoThe Separation of Ownership andControl in East Asian Corporationsrdquo Journal ofFinancial Economics 581-2 pp 81ndash112

DaVanzo Julie and Clifford Grammich 2001Russiarsquos Mortality Crisis Drinking Disease andDeteriorating Health Care Santa Monica RandCorporation

Del Frate Alvazzi and J van Kesteren 2003ldquoSome Preliminary Tables From the Interna-tional Crime Victim Surveysrdquo in Criminal Victimi-sation in Urban Europe Turin United NationsInterregional Crime and Justice Research Insti-tute forthcoming

Djankov Simeon Caralee McLiesh TatianaNenova and Andrei Shleifer 2003 ldquoWho Ownsthe Mediardquo Journal of Law and Economics 462pp 341ndash82

European Bank for Reconstruction and Devel-opment 1999 Transition Report 1999 Ten Years ofTransition London EBRD

Faccio Mara 2003 ldquoPolitically-ConnectedFirmsrdquo Mimeo Vanderbilt University

Andrei Shleifer and Daniel Treisman 173

Russia Bulgaria and Lithuania and lower still in the relatively rich Hungary andSlovenia as shown in Figure 314

How does corruption in Russia affect individuals The United Nations con-ducts a cross-national survey of crime victims In 1996ndash2000 it asked urban respon-dents in a number of countries the following question ldquoIn some countries there isa problem of corruption among government or public officials Duringmdashlastyearmdashhas any government official for instance a customs officer a police officer orinspector in your country asked you or expected you to pay a bribe for his servicerdquoThe proportion of respondents saying they had experienced demands for orexpectations of bribes in the last year in Russia (166 percent) was lower than thatin Argentina Brazil Romania or Lithuania as shown in Table 3 Again a simpleregression shows that the rate for Russia is almost exactly what one would expectgiven its per capita GDP (Del Frate and van Kesteren 2003 also United Nations2003 Table 21)

Looking at crime in general the reported victimization rate in Russia is notparticularly high Only 26 percent of Moscow respondents said in 2000 that theyhad been victimized the previous year by property crimes robbery sexual assaultassault or briberymdashcompared to 34 percent in Prague 41 percent in Tallin(Estonia) 44 percent in Rio de Janeiro and 61 percent in Buenos Aires Moscowrsquos

14 The World Bank and EBRD repeated the survey in 2002 In almost all countries the average percentof revenues paid in bribes droppedmdashit fell in Russia during these three years from 28 to 14 percentBut the cross-national pattern was almost the same Again Russiarsquos level of administrative corruption wasslightly lower than would be predicted from its income And by 2003 it had become less corrupt on theadministrative corruption scale than Bulgaria and Belarus

Figure 3Administrative Corruption in Postcommunist Countries EBRD Survey of BusinessManagers 1999 (BEEPS)

0

1

2

3

4

5

6

7

0 2000 4000 6000 8000

GDP per capita 1999 ppp WDI 2003

10000 12000 14000

SLN

CZESLK

CROBEL

LAT

BUL

LITRUS

KAZ

MOL

ARM

GEOUZB

ROM

UKR

AZE

KYR

ALB

HUNPOL

EST

16000

Adm

inis

trat

ive

corr

upti

on

Source EBRDNote ldquoAdministrative corruptionrdquo percentage of revenues paid in bribes by ldquofirms like yoursrdquo

170 Journal of Economic Perspectives

rate was almost exactly that reported by urban respondents in Finland(266 percent) and lower than that for England and Wales (344 percent) (DelFrate and van Kesteren 2003)

Conclusion

Russiarsquos economy is no longer the shortage-ridden militarized collapsingbureaucracy of 1990 It has metamorphosed into a marketplace of mostly privatefirms producing goods and services to please consumers instead of planners Theeconomy has been growing at an impressive pace The countryrsquos political ordertoo has changed beyond recognition A few business magnates control much of thecountryrsquos immense raw materials reserves and troubled banking system and lobbyhard behind the scenes for favored policies Small businesses are burdened bycorruption and regulation Still the dictatorship of the party has given way toelectoral democracy Russiarsquos once all-powerful Communist Party no longer pene-trates all aspects of social life nor sentences dissidents to Arctic labor campsInstead it campaigns for seats in parliament The press although struggling againstheavy-handed political interventions is still far more professional and independent

Table 3Percentage of Respondents Who Had Been Victimized by AdministrativeBribery 1996ndash2000 Major Cities

Albania 591 Slovak Republic 135Argentina 302 Paraguay 133Indonesia 299 Hungary 98Bolivia 244 Croatia 95India (Mumbai) 229 Estonia 93Lithuania 229 Costa Rica 92Mongolia 213 Macedonia FYR 74India (New Delhi) 210 South Africa 69Azerbaijan 208 Czech Republic 57Belarus 206 Philippines 43Colombia 195 Botswana 28Uganda 195 Netherlands 09Kyrgyz Republic 193 Northern Ireland 08Romania 192 Denmark 05Brazil 171 Scotland 05Russian Federation 166 Finland 04Georgia 166 England and Wales 03Bulgaria 164 Sweden 02Ukraine 162 Spain (Barcelona) 0Latvia 143

Source UN International Crime Victims Surveys UN Human Development Report 2002 Table 21 andAlvazzi del Frate and J van Kesteren ldquoSome Preliminary Tables from the International Crime VictimsSurveysrdquo Criminal Victimisation in Urban Europe UNICRI Turin 2003

A Normal Country Russia After Communism 171

than the stilted propaganda machine of the mid-1980s In slightly over a decadeRussia has become a typical middle-income capitalist democracy

So why the darkmdashat times almost paranoidmdashview Why the hyperbole aboutkleptocracy economic cataclysm and KGB takeovers Why are Russian conditionsoften portrayed as comparable to those in Zaire or Iran rather than to the far moresimilar realities of Argentina or Turkey

Although many factors may have been involved we believe that the exagger-ated despair over Russia was fueled by a fundamental and widespread misconcep-tion15 Many Western observers thought that as of the early 1990s Russia was ahighly developed if not wealthy country With its brilliant physicists and chessplayers its space program and its global military influence Russia did not look likeArgentina or South Korea Thinking that Russia started off highly developed theseobservers saw its convergence to the norm for middle-income countries as adisastrous aberration The same misconception informed some academic analysesOne recent paper for example makes the remarkable observation that althoughinstitutions to support the rule of law are imperfect in all countries ldquobetweenRussia and most other developed capitalist societies there was a qualitative differ-encerdquo (Hoff and Stiglitz 2002) Indeed there was a qualitative difference Russiawas never a ldquodeveloped capitalist societyrdquo

Such misconceptions have important consequences for western policy towardRussia They predispose decision makers to overreact to the inevitable volatility ofRussian economic and political life The result is extreme mood swings in theWestrsquos approach to Russia When things go ldquowellrdquo markets and political leadersrespond with enthusiastic rhetoric ratcheting expectations up to ever more unre-alistic levels When things go ldquobadlyrdquo western Russia-watchers are prone to panic ordenunciations and too ready to consider changing course completely The dis-course changes in a matter of days from one of partnership to one of isolation andcontainment Such exaggerated swings are not helpful to either Russia or the West

What does the future hold for Russia Some see the sudden spurt of growthover the last five years as an indicator of more to come and expect Russia soon tojoin Hungary and Poland in the community of poor developed countries leavingbehind the middle-income developing ones They emphasize the countryrsquos ad-vanced human capital its reformed tax system and its mostly open economyOthers see a serious barrier to growth in the bureaucratic regulations and politi-cized interventions In politics optimists anticipate continuing expansion of dem-ocratic competition and the emergence of a more vigorous civil society Pessimistssee an accelerating slide toward an authoritarian regime that will be managed bysecurity service professionals under the fig-leaf of formal democratic procedures

None of these predictions can be ruled out However thinking about Russia as

15 Contributing factors may have included unreflective but sincere sympathy on the part of Westernpublics for Russians dislocated by the transition sensationalism in the press schadenfreude on the part ofleft-wing intellectuals for whom turmoil in Russia proved the foolishness of liberal market reforms andpresidential politics in the United States where Republicans sought to discredit Clinton and Gore whohad consistently supported Yeltsin

172 Journal of Economic Perspectives

a normal middle-income country suggests the implausibility of extreme forecastsMiddle-income countries rarely revert from democracy to full-fledged authoritari-anism although they often renegotiate the boundary between the two Theirdemocracies are incomplete unpredictable and subject to temporary reversalsWhen they grow at all middle-income countries tend to grow in spurts that areoften interrupted by financial crises Russia has probably destroyed enough of thevestiges of central planning to stay a market economy albeit one with flawedinstitutions and much counterproductive state intervention Its bureaucracy willremain corrupt although it will become less corrupt as the country grows richer

That Russia is only a normal middle-income democracy is of course a disap-pointment to those who had hoped for or expected more But that Russia today haslargely broken free of its past that it is no longer ldquothe evil empirerdquo threateningboth its own people and the rest of the world is an amazing and admirableachievement

y We thank Anders Aslund Olivier Blanchard David Cutler Lev Freinkman MiriamGolden Stephen Hanson Arnold Harberger James Hines Jack Hirshleifer Simon JohnsonDavid Laibson Ed Leamer Dwight Perkins Lawrence Summers Timothy Taylor JudithThornton Michael Waldman and participants at seminars at the University of WashingtonUC Irvine UC San Diego and the 2004 AEA meetings for comments A shorter version ofthis article appeared in Foreign Affairs MarchApril 2004

References

Aron Leon 2002 ldquoStructure and Context inthe Study of Post-Soviet Russia Several Empiri-cal Generalizations in Search of a TheoryrdquoWorking paper American Enterprise Institute

Aslund Anders 2002 Building CapitalismCambridge Cambridge University Press

Aslund Anders 2003 ldquoMoscow ThrivesrdquoMemorandum

Blanchard Olivier and Michael Kremer 1997ldquoDisorganizationrdquo Quarterly Journal of Economics1124 pp 1091ndash126

Boone Peter and Denis Rodionov 2001ldquoRent Seeking in Russia and the CISrdquo Paperpresented at the tenth anniversary conference ofthe EBRD London December

Claessens Stijn Simeon Djankov and LarryLang 1999 ldquoThe Separation of Ownership andControl in East Asian Corporationsrdquo Journal ofFinancial Economics 581-2 pp 81ndash112

DaVanzo Julie and Clifford Grammich 2001Russiarsquos Mortality Crisis Drinking Disease andDeteriorating Health Care Santa Monica RandCorporation

Del Frate Alvazzi and J van Kesteren 2003ldquoSome Preliminary Tables From the Interna-tional Crime Victim Surveysrdquo in Criminal Victimi-sation in Urban Europe Turin United NationsInterregional Crime and Justice Research Insti-tute forthcoming

Djankov Simeon Caralee McLiesh TatianaNenova and Andrei Shleifer 2003 ldquoWho Ownsthe Mediardquo Journal of Law and Economics 462pp 341ndash82

European Bank for Reconstruction and Devel-opment 1999 Transition Report 1999 Ten Years ofTransition London EBRD

Faccio Mara 2003 ldquoPolitically-ConnectedFirmsrdquo Mimeo Vanderbilt University

Andrei Shleifer and Daniel Treisman 173

rate was almost exactly that reported by urban respondents in Finland(266 percent) and lower than that for England and Wales (344 percent) (DelFrate and van Kesteren 2003)

Conclusion

Russiarsquos economy is no longer the shortage-ridden militarized collapsingbureaucracy of 1990 It has metamorphosed into a marketplace of mostly privatefirms producing goods and services to please consumers instead of planners Theeconomy has been growing at an impressive pace The countryrsquos political ordertoo has changed beyond recognition A few business magnates control much of thecountryrsquos immense raw materials reserves and troubled banking system and lobbyhard behind the scenes for favored policies Small businesses are burdened bycorruption and regulation Still the dictatorship of the party has given way toelectoral democracy Russiarsquos once all-powerful Communist Party no longer pene-trates all aspects of social life nor sentences dissidents to Arctic labor campsInstead it campaigns for seats in parliament The press although struggling againstheavy-handed political interventions is still far more professional and independent

Table 3Percentage of Respondents Who Had Been Victimized by AdministrativeBribery 1996ndash2000 Major Cities

Albania 591 Slovak Republic 135Argentina 302 Paraguay 133Indonesia 299 Hungary 98Bolivia 244 Croatia 95India (Mumbai) 229 Estonia 93Lithuania 229 Costa Rica 92Mongolia 213 Macedonia FYR 74India (New Delhi) 210 South Africa 69Azerbaijan 208 Czech Republic 57Belarus 206 Philippines 43Colombia 195 Botswana 28Uganda 195 Netherlands 09Kyrgyz Republic 193 Northern Ireland 08Romania 192 Denmark 05Brazil 171 Scotland 05Russian Federation 166 Finland 04Georgia 166 England and Wales 03Bulgaria 164 Sweden 02Ukraine 162 Spain (Barcelona) 0Latvia 143

Source UN International Crime Victims Surveys UN Human Development Report 2002 Table 21 andAlvazzi del Frate and J van Kesteren ldquoSome Preliminary Tables from the International Crime VictimsSurveysrdquo Criminal Victimisation in Urban Europe UNICRI Turin 2003

A Normal Country Russia After Communism 171

than the stilted propaganda machine of the mid-1980s In slightly over a decadeRussia has become a typical middle-income capitalist democracy

So why the darkmdashat times almost paranoidmdashview Why the hyperbole aboutkleptocracy economic cataclysm and KGB takeovers Why are Russian conditionsoften portrayed as comparable to those in Zaire or Iran rather than to the far moresimilar realities of Argentina or Turkey

Although many factors may have been involved we believe that the exagger-ated despair over Russia was fueled by a fundamental and widespread misconcep-tion15 Many Western observers thought that as of the early 1990s Russia was ahighly developed if not wealthy country With its brilliant physicists and chessplayers its space program and its global military influence Russia did not look likeArgentina or South Korea Thinking that Russia started off highly developed theseobservers saw its convergence to the norm for middle-income countries as adisastrous aberration The same misconception informed some academic analysesOne recent paper for example makes the remarkable observation that althoughinstitutions to support the rule of law are imperfect in all countries ldquobetweenRussia and most other developed capitalist societies there was a qualitative differ-encerdquo (Hoff and Stiglitz 2002) Indeed there was a qualitative difference Russiawas never a ldquodeveloped capitalist societyrdquo

Such misconceptions have important consequences for western policy towardRussia They predispose decision makers to overreact to the inevitable volatility ofRussian economic and political life The result is extreme mood swings in theWestrsquos approach to Russia When things go ldquowellrdquo markets and political leadersrespond with enthusiastic rhetoric ratcheting expectations up to ever more unre-alistic levels When things go ldquobadlyrdquo western Russia-watchers are prone to panic ordenunciations and too ready to consider changing course completely The dis-course changes in a matter of days from one of partnership to one of isolation andcontainment Such exaggerated swings are not helpful to either Russia or the West

What does the future hold for Russia Some see the sudden spurt of growthover the last five years as an indicator of more to come and expect Russia soon tojoin Hungary and Poland in the community of poor developed countries leavingbehind the middle-income developing ones They emphasize the countryrsquos ad-vanced human capital its reformed tax system and its mostly open economyOthers see a serious barrier to growth in the bureaucratic regulations and politi-cized interventions In politics optimists anticipate continuing expansion of dem-ocratic competition and the emergence of a more vigorous civil society Pessimistssee an accelerating slide toward an authoritarian regime that will be managed bysecurity service professionals under the fig-leaf of formal democratic procedures

None of these predictions can be ruled out However thinking about Russia as

15 Contributing factors may have included unreflective but sincere sympathy on the part of Westernpublics for Russians dislocated by the transition sensationalism in the press schadenfreude on the part ofleft-wing intellectuals for whom turmoil in Russia proved the foolishness of liberal market reforms andpresidential politics in the United States where Republicans sought to discredit Clinton and Gore whohad consistently supported Yeltsin

172 Journal of Economic Perspectives

a normal middle-income country suggests the implausibility of extreme forecastsMiddle-income countries rarely revert from democracy to full-fledged authoritari-anism although they often renegotiate the boundary between the two Theirdemocracies are incomplete unpredictable and subject to temporary reversalsWhen they grow at all middle-income countries tend to grow in spurts that areoften interrupted by financial crises Russia has probably destroyed enough of thevestiges of central planning to stay a market economy albeit one with flawedinstitutions and much counterproductive state intervention Its bureaucracy willremain corrupt although it will become less corrupt as the country grows richer

That Russia is only a normal middle-income democracy is of course a disap-pointment to those who had hoped for or expected more But that Russia today haslargely broken free of its past that it is no longer ldquothe evil empirerdquo threateningboth its own people and the rest of the world is an amazing and admirableachievement

y We thank Anders Aslund Olivier Blanchard David Cutler Lev Freinkman MiriamGolden Stephen Hanson Arnold Harberger James Hines Jack Hirshleifer Simon JohnsonDavid Laibson Ed Leamer Dwight Perkins Lawrence Summers Timothy Taylor JudithThornton Michael Waldman and participants at seminars at the University of WashingtonUC Irvine UC San Diego and the 2004 AEA meetings for comments A shorter version ofthis article appeared in Foreign Affairs MarchApril 2004

References

Aron Leon 2002 ldquoStructure and Context inthe Study of Post-Soviet Russia Several Empiri-cal Generalizations in Search of a TheoryrdquoWorking paper American Enterprise Institute

Aslund Anders 2002 Building CapitalismCambridge Cambridge University Press

Aslund Anders 2003 ldquoMoscow ThrivesrdquoMemorandum

Blanchard Olivier and Michael Kremer 1997ldquoDisorganizationrdquo Quarterly Journal of Economics1124 pp 1091ndash126

Boone Peter and Denis Rodionov 2001ldquoRent Seeking in Russia and the CISrdquo Paperpresented at the tenth anniversary conference ofthe EBRD London December

Claessens Stijn Simeon Djankov and LarryLang 1999 ldquoThe Separation of Ownership andControl in East Asian Corporationsrdquo Journal ofFinancial Economics 581-2 pp 81ndash112

DaVanzo Julie and Clifford Grammich 2001Russiarsquos Mortality Crisis Drinking Disease andDeteriorating Health Care Santa Monica RandCorporation

Del Frate Alvazzi and J van Kesteren 2003ldquoSome Preliminary Tables From the Interna-tional Crime Victim Surveysrdquo in Criminal Victimi-sation in Urban Europe Turin United NationsInterregional Crime and Justice Research Insti-tute forthcoming

Djankov Simeon Caralee McLiesh TatianaNenova and Andrei Shleifer 2003 ldquoWho Ownsthe Mediardquo Journal of Law and Economics 462pp 341ndash82

European Bank for Reconstruction and Devel-opment 1999 Transition Report 1999 Ten Years ofTransition London EBRD

Faccio Mara 2003 ldquoPolitically-ConnectedFirmsrdquo Mimeo Vanderbilt University

Andrei Shleifer and Daniel Treisman 173

than the stilted propaganda machine of the mid-1980s In slightly over a decadeRussia has become a typical middle-income capitalist democracy

So why the darkmdashat times almost paranoidmdashview Why the hyperbole aboutkleptocracy economic cataclysm and KGB takeovers Why are Russian conditionsoften portrayed as comparable to those in Zaire or Iran rather than to the far moresimilar realities of Argentina or Turkey

Although many factors may have been involved we believe that the exagger-ated despair over Russia was fueled by a fundamental and widespread misconcep-tion15 Many Western observers thought that as of the early 1990s Russia was ahighly developed if not wealthy country With its brilliant physicists and chessplayers its space program and its global military influence Russia did not look likeArgentina or South Korea Thinking that Russia started off highly developed theseobservers saw its convergence to the norm for middle-income countries as adisastrous aberration The same misconception informed some academic analysesOne recent paper for example makes the remarkable observation that althoughinstitutions to support the rule of law are imperfect in all countries ldquobetweenRussia and most other developed capitalist societies there was a qualitative differ-encerdquo (Hoff and Stiglitz 2002) Indeed there was a qualitative difference Russiawas never a ldquodeveloped capitalist societyrdquo

Such misconceptions have important consequences for western policy towardRussia They predispose decision makers to overreact to the inevitable volatility ofRussian economic and political life The result is extreme mood swings in theWestrsquos approach to Russia When things go ldquowellrdquo markets and political leadersrespond with enthusiastic rhetoric ratcheting expectations up to ever more unre-alistic levels When things go ldquobadlyrdquo western Russia-watchers are prone to panic ordenunciations and too ready to consider changing course completely The dis-course changes in a matter of days from one of partnership to one of isolation andcontainment Such exaggerated swings are not helpful to either Russia or the West

What does the future hold for Russia Some see the sudden spurt of growthover the last five years as an indicator of more to come and expect Russia soon tojoin Hungary and Poland in the community of poor developed countries leavingbehind the middle-income developing ones They emphasize the countryrsquos ad-vanced human capital its reformed tax system and its mostly open economyOthers see a serious barrier to growth in the bureaucratic regulations and politi-cized interventions In politics optimists anticipate continuing expansion of dem-ocratic competition and the emergence of a more vigorous civil society Pessimistssee an accelerating slide toward an authoritarian regime that will be managed bysecurity service professionals under the fig-leaf of formal democratic procedures

None of these predictions can be ruled out However thinking about Russia as

15 Contributing factors may have included unreflective but sincere sympathy on the part of Westernpublics for Russians dislocated by the transition sensationalism in the press schadenfreude on the part ofleft-wing intellectuals for whom turmoil in Russia proved the foolishness of liberal market reforms andpresidential politics in the United States where Republicans sought to discredit Clinton and Gore whohad consistently supported Yeltsin

172 Journal of Economic Perspectives

a normal middle-income country suggests the implausibility of extreme forecastsMiddle-income countries rarely revert from democracy to full-fledged authoritari-anism although they often renegotiate the boundary between the two Theirdemocracies are incomplete unpredictable and subject to temporary reversalsWhen they grow at all middle-income countries tend to grow in spurts that areoften interrupted by financial crises Russia has probably destroyed enough of thevestiges of central planning to stay a market economy albeit one with flawedinstitutions and much counterproductive state intervention Its bureaucracy willremain corrupt although it will become less corrupt as the country grows richer

That Russia is only a normal middle-income democracy is of course a disap-pointment to those who had hoped for or expected more But that Russia today haslargely broken free of its past that it is no longer ldquothe evil empirerdquo threateningboth its own people and the rest of the world is an amazing and admirableachievement

y We thank Anders Aslund Olivier Blanchard David Cutler Lev Freinkman MiriamGolden Stephen Hanson Arnold Harberger James Hines Jack Hirshleifer Simon JohnsonDavid Laibson Ed Leamer Dwight Perkins Lawrence Summers Timothy Taylor JudithThornton Michael Waldman and participants at seminars at the University of WashingtonUC Irvine UC San Diego and the 2004 AEA meetings for comments A shorter version ofthis article appeared in Foreign Affairs MarchApril 2004

References

Aron Leon 2002 ldquoStructure and Context inthe Study of Post-Soviet Russia Several Empiri-cal Generalizations in Search of a TheoryrdquoWorking paper American Enterprise Institute

Aslund Anders 2002 Building CapitalismCambridge Cambridge University Press

Aslund Anders 2003 ldquoMoscow ThrivesrdquoMemorandum

Blanchard Olivier and Michael Kremer 1997ldquoDisorganizationrdquo Quarterly Journal of Economics1124 pp 1091ndash126

Boone Peter and Denis Rodionov 2001ldquoRent Seeking in Russia and the CISrdquo Paperpresented at the tenth anniversary conference ofthe EBRD London December

Claessens Stijn Simeon Djankov and LarryLang 1999 ldquoThe Separation of Ownership andControl in East Asian Corporationsrdquo Journal ofFinancial Economics 581-2 pp 81ndash112

DaVanzo Julie and Clifford Grammich 2001Russiarsquos Mortality Crisis Drinking Disease andDeteriorating Health Care Santa Monica RandCorporation

Del Frate Alvazzi and J van Kesteren 2003ldquoSome Preliminary Tables From the Interna-tional Crime Victim Surveysrdquo in Criminal Victimi-sation in Urban Europe Turin United NationsInterregional Crime and Justice Research Insti-tute forthcoming

Djankov Simeon Caralee McLiesh TatianaNenova and Andrei Shleifer 2003 ldquoWho Ownsthe Mediardquo Journal of Law and Economics 462pp 341ndash82

European Bank for Reconstruction and Devel-opment 1999 Transition Report 1999 Ten Years ofTransition London EBRD

Faccio Mara 2003 ldquoPolitically-ConnectedFirmsrdquo Mimeo Vanderbilt University

Andrei Shleifer and Daniel Treisman 173

a normal middle-income country suggests the implausibility of extreme forecastsMiddle-income countries rarely revert from democracy to full-fledged authoritari-anism although they often renegotiate the boundary between the two Theirdemocracies are incomplete unpredictable and subject to temporary reversalsWhen they grow at all middle-income countries tend to grow in spurts that areoften interrupted by financial crises Russia has probably destroyed enough of thevestiges of central planning to stay a market economy albeit one with flawedinstitutions and much counterproductive state intervention Its bureaucracy willremain corrupt although it will become less corrupt as the country grows richer

That Russia is only a normal middle-income democracy is of course a disap-pointment to those who had hoped for or expected more But that Russia today haslargely broken free of its past that it is no longer ldquothe evil empirerdquo threateningboth its own people and the rest of the world is an amazing and admirableachievement

y We thank Anders Aslund Olivier Blanchard David Cutler Lev Freinkman MiriamGolden Stephen Hanson Arnold Harberger James Hines Jack Hirshleifer Simon JohnsonDavid Laibson Ed Leamer Dwight Perkins Lawrence Summers Timothy Taylor JudithThornton Michael Waldman and participants at seminars at the University of WashingtonUC Irvine UC San Diego and the 2004 AEA meetings for comments A shorter version ofthis article appeared in Foreign Affairs MarchApril 2004

References

Aron Leon 2002 ldquoStructure and Context inthe Study of Post-Soviet Russia Several Empiri-cal Generalizations in Search of a TheoryrdquoWorking paper American Enterprise Institute

Aslund Anders 2002 Building CapitalismCambridge Cambridge University Press

Aslund Anders 2003 ldquoMoscow ThrivesrdquoMemorandum

Blanchard Olivier and Michael Kremer 1997ldquoDisorganizationrdquo Quarterly Journal of Economics1124 pp 1091ndash126

Boone Peter and Denis Rodionov 2001ldquoRent Seeking in Russia and the CISrdquo Paperpresented at the tenth anniversary conference ofthe EBRD London December

Claessens Stijn Simeon Djankov and LarryLang 1999 ldquoThe Separation of Ownership andControl in East Asian Corporationsrdquo Journal ofFinancial Economics 581-2 pp 81ndash112

DaVanzo Julie and Clifford Grammich 2001Russiarsquos Mortality Crisis Drinking Disease andDeteriorating Health Care Santa Monica RandCorporation

Del Frate Alvazzi and J van Kesteren 2003ldquoSome Preliminary Tables From the Interna-tional Crime Victim Surveysrdquo in Criminal Victimi-sation in Urban Europe Turin United NationsInterregional Crime and Justice Research Insti-tute forthcoming

Djankov Simeon Caralee McLiesh TatianaNenova and Andrei Shleifer 2003 ldquoWho Ownsthe Mediardquo Journal of Law and Economics 462pp 341ndash82

European Bank for Reconstruction and Devel-opment 1999 Transition Report 1999 Ten Years ofTransition London EBRD

Faccio Mara 2003 ldquoPolitically-ConnectedFirmsrdquo Mimeo Vanderbilt University

Andrei Shleifer and Daniel Treisman 173

Gastil Raymond 1992 Freedom in the World1991ndash1992 Washington Freedom House

Gibson John Steven Stillman and Trinh Le2004 ldquoCPI Bias and Real Living Standards inRussia During the Transitionrdquo Unpublished pa-per Wellington New Zealand

Goldman Marshall 2003 The Piratization ofRussia Russian Reform Goes Awry New YorkRoutledge

Goskomstat Rossii 1994 Rossiiskiy Statis-ticheskiy Yezhegodnik 1994 Moscow Russia Gos-komstat Rossii

Goskomstat Rossii 2001 Rossiiskiy Statis-ticheskiy Yezhegodnik 2001 Moscow Russia Gos-komstat Rossii

Guriev Sergei and Andrei Rachinsky 2004Ownership Concentration in Russian IndustryWashington DC World Bank

Hellman Joel Geraint Jones Daniel Kauf-mann and Mark Schankerman 2000 MeasuringGovernance Corruption and State Capture HowFirms and Bureaucrats Shape the Business Environ-ment in Transition Economies London and Wash-ington EBRD and World Bank

Hickey Neil 1998 ldquoIs Fox News Fairrdquo Colum-bia Journalism Review MarchApril Available athttparchivescjrorgyear982foxasp

Hoff Karla and Joseph Stiglitz 2002 ldquoAfterthe Big Bang Obstacles to the Emergence of theRule of Law in Post-Communist SocietiesrdquoNBER Working Paper No 9282

International Monetary Fund 2002 Interna-tional Financial Statistics Washington DC IMF

Johnson Simon Daniel Kaufmann and AndreiShleifer 1997 ldquoThe Unofficial Economy in Tran-sitionrdquo Brookings Papers on Economic Activity 2pp 159ndash221

Johnson Simon Rafael La Porta FlorencioLopez-de-Silanes and Andrei Shleifer 2000ldquoTunnelingrdquo American Economic Review 902pp 22ndash27

La Porta Rafael Florencio Lopez-de-Silanesand Andrei Shleifer 1999 ldquoCorporate Owner-ship around the Worldrdquo Journal of Finance 542pp 471ndash517

Leach James 1999a ldquoThe New Russian Men-acerdquo New York Times September 10 p A25

Leach James 1999b ldquoOpening Statement ofRepresentative James A Leachrdquo in ldquoHearing onRussian Money Launderingrdquo US House of Rep-resentatives Committee on Banking and Finan-cial Services September 21 Available at httpfinancialserviceshousegovbanking92199leahtm

Milanovic Branko 1998 Explaining the Growthin Inequality During the Transition WashingtonWorld Bank

Murphy Kevin Andrei Shleifer and Robert

Vishny 1992 ldquoThe Transition to a Market Econ-omy Pitfalls of Partial Reformrdquo Quarterly Journalof Economics 1073 pp 889ndash906

Myers Steven Lee 2003 ldquoIn Russia ApathyDims Democracy rdquo New York Times Novem-ber 9 Section 4 pp 1 5

New York Times 2000 October 29 p 12Park Myung-Jin Chang-Nam Kim and Byung-

Woo Sohn 2000 ldquoModernization Globalizationand the Powerful State The Korean Mediardquo inDe-Westernizing Media Studies James Curran andMyung-Jin Park eds New York Routledge chap-ter 8

Safire William 2003a ldquoThe Russian Rever-sionrdquo New York Times December 10

Safire William 2003b ldquoSiloviki versus Oligar-chyrdquo New York Times November 5

Sanders Bernard 1998 ldquoSanders AmericanTaxpayers Shouldnrsquot Fund IMFrsquos Russian Fail-urerdquo September 10 Available at httpwwwhousegovberniepress199809-10-98html

Schmitt Eric 1999 ldquoRepublicans Step Up At-tack on Clintonrsquos Russia Policyrdquo New York TimesSeptember 15 p A12

Shkolnikov Vladimir Giovanni Cornia DavidLeon and France Mesle 1998 ldquoCauses of theRussian Mortality Crisis Evidence and Inter-pretationsrdquo World Development Report 2611pp 1995ndash2011

Stiglitz Joseph 2002 Globalization and Its Dis-contents New York W W Norton

Sussman Leonard and Karin Karlekar eds2002 The Annual Survey of Press Freedom 2002New York Freedom House

US Department of State 2003 ldquoPresidentBush Meets with Russian President Putin at CampDavidrdquo September 27 Available at httpwwwstategovpeurrlsrm200324608htm

United Nations 2003 Human Development Re-port 2002 New York United Nations

Waisbord Silvio 2000 ldquoMedia in South Amer-ica Between the Rock of State and the HardPlace of the Marketrdquo in De-Westernizing MediaStudies James Curran and Myung-Jin Park edsNew York Routledge chapter 4

Weiner Tim 2000 ldquoMexico Ending CozinessFor Press and Powerfulrdquo New York Times Octo-ber 29 p 12

Whitaker Chico 2000 ldquoBrazilrsquos Free Elec-tionsrdquo Le Monde Diplomatique September Avail-able at httpmondediplocom20000915brazil

World Bank 2000 World Development ReportWashington The World Bank

Willan Philip 2002 ldquoOpposition lsquoKept OffBerlusconi-Run TVrsquordquo The Guardian August 8Available at httpwwwguardiancoukitalystory01257682414900html

174 Journal of Economic Perspectives