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Oligarchic Capitalism and Russia’s Global Resurgence Essay

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Introduction

In the last few years, a clique of Russian businessmen who are generally referred to as oligarchs collectively control the Russian economic streamlines of mineral deposits. Oligarchic capitalism is an economic system that is nominally capitalistic with special protectionist laws and government policy designed to protect the interests of the minority affluent owners in a political entity. Oligarchs mainly constitute political cronies, family members and friends and generally receive protection and favouritism from the government in return for their political and economic loyalty (Baumol, Litan & Schramm, 2007, p.71). According to Baumol et al. (2007), oligarchy is mostly practised in the developing economies, particularly in Latin America, Asia, Africa, states in the former Soviet Union. This essay will argue that the rise of oligarchy in Russia will not lead to its resurgence in the global market.

The governments in many oligarchic societies are mainly focused on protecting and perpetuating the interests of the oligarchs while neglecting the economic growth and development that is vital in the prosperity of the country masses. According to Menshikov (2005), Russia embraced oligarchic capitalism that resulted in a new era in the economic circles where monopoly and concentration occurred in the basic Russian industries. This monopolistic nature led to underdevelopment in the banking industry and inadequate government involvement in the economic system. This led to skyrocketing inequalities in incomes, with the companies recording massive profit margins. Poverty and instability in the domestic markets due to erratic cash flows brought by a lack of reinvestments in other sectors of the economy were also witnessed. The minority affluent enjoyed not only monetary but also non-monetary privileges that were out of reach for the common citizens (Bouma et al., 2007, p. 170).

Russia economy came under heavy pressure in the 1990s due to structural weaknesses brought by the central economic planning and the massive expenditures during the cold war. The resultant disintegration of the Soviet Union was a necessity for the survival of Russia economy. The adoption of oligarchic capitalism to spur growth proved a gamble for the country resulting in the 1998 financial crisis (World-savvy monitor, 2009). Russia recovered from the economic turmoil under the leadership of Putin, who implemented far reaching economic policies that resulted in six-fold growth in gross domestic product. The poverty levels plummeted by half while Russia economy regained its position among the largest economies category. Although Putin was able to achieve a lot of successes, actually the surge in prices of oil and gas provided the much-needed resources to propel the economy. Putin cemented his position at the top by ensuring power was taken from the regional leaders, oligarchs and other organs. There was a considerable increase in government control of the economy, thereby resulting in the birth of a new system of economic system that was distinct from capitalism and socialism (World Savvy Monitor, 2009, para. 4-7)

Why the oligarch societies will not lead to a resurgence of the Russian economy

The oligarch economic system does not signify the resurgence of Russia in the global economy due to various reasons: the stagnant progress in capital and technical investments, inadequate long term capital modernization, lack of product differentiation, negative impacts on the macroeconomic dynamics, oligarchic modelled financial industry, weak regulatory policies and decreased competition (Menshikov, 2005, pp.69).

The inefficiency associated with large oligarch controlled companies leads to a constellation of management factors that work against the profitability of the business units. The fact that the firms involved in diversified lines of business with different logistical considerations make the overall expenditure on running the business high compared to similar units in western countries. According to Gariev and Rachinsky (2005), the increased expenditure finds its way back to the end consumer who is charged exorbitant prices for the commodities. The desire for higher profits translates into increased prices in the market. Scharfstein and Steiden (2000) noted that oligarch-controlled firms are more likely to face multilayered agency constraints that render the company ineffective. The ineffective and skewed capital redistribution in the economy leads to stagnation in other sectors of the economy, thus curtailing the overall economic development (pp.2538).

Political favouritism, particularly in the award of contracts and mineral deposits, makes the oligarch concern themselves with pleasing their masters rather than concentrating on satisfying market demands. It was therefore not uncommon to find little improvements in firms’ performance and productivity. Unfairness in awarding of contracts led to substandard works, which had a grave impact on the overall development of the economy. It may kill competition by denying the small players the business lifeline. Unfair competition fuelled by political correctness undermines the level playing ground in the economy, making the small players become more susceptible, leading to their bankruptcy (Guriev and Rachinsky, 2005, p.142). The weak banking industry was overshadowed by the bullish financial-industrial groups’ complicated matters for small players since they could not easily access credit facilities. The big players ensured they had the grip of the banking industry by controlling most of the government reserves and foreign exchanges. The second phase in the development of oligarch was instrumental in the banking sector. The entry of prominent businesses in financial business and their subsequent involvement in pyramid schemes and speculation in rubble dollar resulted in the rise of several oligarchies. The hoarding of money in anticipation of time value gains exemplified the unfair and unorthodox practices that symbolized the oligarchies. The inaccessibility of finances to the small firms meant skewed growth that favoured the large established firms. This serves to support the argument that oligarchic capitalism could not result in the resurgence of Russia as a global economic giant. This is partly due to unfairness in access to financial resources that are pivotal in business planning and expansion. The withholding of government funds derailed the implementation of infrastructural projects. The end result was the creation of billionaires out of legal loopholes in the governance and financial markets regulation (Tsygankov & Tsygankov, 2002, pp.56).

Menshikov (2005) noted that the rise of oligarchic controlled companies and monopoly in the markets was responsible for businesses focused on maximizing profits buoyed by skyrocketing margins (pp. 67). This trend was contrary to market dynamics that dictate that increasing output is directly proportional to profits. The profits were inordinately high compared to other western countries. The disparities in profit margins in the different sectors of the economy were blamed for triggering the increases. The capital generating sectors such as non-ferrous metals and oil had margins of 50 per cent compared to the 20 per cent enjoyed in the manufacturing sector. Oligopoly perpetuated declining output ranges and high inflation. In this case, oligopoly has proved ineffective in stabilizing the economy and increasing production capacity and output. This is better illustrated when competitors fail to capitalize on the weaknesses of the other players in order to get a niche of the market (Menshikov, 2005, p.69).

Poverty and inequalities were evident in early 1990 after the collapse of the Soviet Union. According to Bouma et al. (2007), income and wealth inequalities can impede the growth and development of the economy through distortions in the cost of capital across various social grouping by influential and wealthy persons. Opportunities are lost due to improper allocation and wastefulness of resources. This also affects economic growth through the institution of unfair leadership practices and rules meant to give an edge to the affluent. In such an environment that tends to suggest inequality as the norm, the resurgence of the Russian economy cannot be guaranteed since the majority of the population is comprised of low and middle-income earners. Workers in the manufacturing and natural resources sector in Russia receive meagre salaries compared to the billions of dollars pocketed by the few billionaires. An extremely high discrepancy in salaries between senior managers and junior workers de-motivates the latter. The disproportionate high share of gross profit in gross domestic product and the inequality in incomes and wealth is detrimental to the success of the country. Therefore, oligopoly is not the best option in the promotion of economic growth since it concentrates resources around a few individuals leaving millions as dependants and peasants. The transfer of profits for reinvestments outside Russia is another setback associated with oligopoly (Pryde, 2003, pp.168).

Yavlinsky (1998) asserted Russia was on the brink of being run by oligarchs due to the influence and the wealth they held. The dominant nature of the oligarchs had started raising eyebrows, particularly in the west and within Russia, due to their activities and investments in all sectors of the economy, including the media. In 1994, the groups joined hands to form private clubs that would enhance more acquisitions and power to influence politics. The private clubs devised ‘’ loans for shares program, export control manipulation and culminated in the Davos pact that helped to re-elect Yeltsin.’’ (Kirsis, 2002, para. 5). This culminated in the acquisition of the state television by Berezovsky while NTV was established by Gusinsky. The crime and corruption fuelled by business interests’ amongst the barons had threatened to bring down the governance structures in Russia. The lack of independence of the media, unfairness in electoral processes and imperial presidency backed by a few oligarchs was a situation many western powers couldn’t contend with. Millions of the country population were also distressed by the limited economic opportunities and rising levels of inequality; thus, change looked inevitable. Oligarchy brings a lot of distress and unhappiness to the population. A system that fails to motivate people into nation building cannot help Russia improve its global economic image. Oligarchy is thus an impediment to the overall development of Russia that cannot help in the resurgence of Russia in the economy.

The close fusion between the government structures and the business class (Lane, 2001, pp.486) were also impacting negatively economic development. The association at the central, sectoral, regional and local levels meant conflicting roles and interests in carrying out business activities (Menshikov, 2005, p.73). The domination of some sectors and levels by oligarchic groups rendered it difficult to influence or regulate their activities. This, coupled with a well connected with some official sin, the government allowed cementation of bureaucracy in many economic activities. Transparency in economic regulation is paramount in order to gain the confidence of the process from the business people (Menshikov, 2005, p.73). The inaction of the government against business malpractices and officials involved aided in the perpetuation of corruption and organized corruption. Far-reaching changes were implemented and enforced by Putin with the aim of curtailing the influence the oligarchic groups had on the economic system. The relationship between the previous regime and the business community was an impediment to economic recovery, thus justifying why the oligarchic approach is a failure in the achievement of economic prosperity. For instance, countries in Latin America that employed oligarchy shifted to nationalization after 20 years due to the limitations and challenges associated with it. Chile, Venezuela, Brazil and Argentina abandoned the approach, thus allowing competition governed by market dynamics. Informal activity characterized by high criminal acts was a common characteristic in Latin America before they opened their doors to foreigners. Oligarchic economies predispose people to social evils that undermine the social fabric leading to unhealthy and stressful lives Bouma et al., 2007, p.74). Under the leadership of Putin, similar measures were put in place to enhance business based on fair play and systematic economic regulations.

The political influence of the oligarchic groups in Russia helped in instituting and blocking economic reforms. Their economic and political power came to the fore when acquiring the Russian Union of Industrial and Entrepreneurs (RSSP) from small and medium enterprises. The groups were vocal in lobbying for reforms that favoured them. However, some decisions were made to the detriment of the small players. Russia accession to the world trade organization was derailed by the group due to their desire to acquire small firms and protectionist laws toward some sectors of the economy. This was against the wishes of the government and the small and medium enterprises, who anticipated gains from increased market activity. This supports the argument because partisan interests denied the government and the small firms an opportunity to improve and expand their businesses. The government also lost on tax from increased imports and foreign investments in the country. This scenario encouraged Vladimir Putin to campaign on a platform of change that would enhance equality of all market players and separation of the state and businesses (Guriev &Rachinsky, 2005, p. 145).

Kirsis (2002) asserts that the negative impact of the oligarchic approach on economic development was evident by the failure of establishing proper economic laws and regulations. This era predisposed the economy to external influence and gave the few independent actors the economic and political power to push changes in the government. The end result of this approach was the removal of property from the government to private ownership comprising a few individuals. Unfair distribution of state property through the loan for shares program played a big role in perpetuating the wealth inequalities. Poverty levels of more than 25 per cent were recorded during this period while the middle and low-income groups lost ground in their economic life (Kirsis, 2002). The worst scenario happened when billions of dollars were transferred to offshore accounts. Malpractices in the privatization of state properties at throw ay prices were not uncommon. For instance, Yuko Oil Company was dished to Khodorkovsky for around $300 million in what was termed as a rigged auction. Rigging and blocking of fellow billionaires occurred in many instances, particularly in the sale of loans for share programs. There were instances when the auctioneers and bidders were similar, leading to fraudulent dealings meant to benefit Yeltsin friends and family members (Hashim, 2005). The malpractices such as rigging and favouritism were a step backwards from what Stalin had championed when he led the Kremlin. His belief for justice was assumed by the Gorbachev and Yeltsin regime, thus bringing turmoil to Russia economy. Taking into account these malpractices, the oligarchic approach was dismally affected, thus bringing catastrophic consequences to Russia. This did not signify the rise of Russia, since it was a cash cow meant to help some individuals to accumulate wealth.

Despite the fact that the oligarchic approach proved disastrous for Russia, it still had some positive implications for the economy and society at large. According to Kirsis (2002), the loans for the share program were effective in the removal of corrupt and dormant directors in the management structures of the acquired companies. This resulted in the launch of business plans that enhanced the profitability of the companies. The companies that reported profit were in the oil and mineral resources category. The acquisition and launch of new media outlets were instrumental in reviving the collapsing media industry and also provided much-needed variety in media content. Access to quality is pivotal in economic development. The introduction of pluralism in the governance and the distribution of power and wealth may serve as a guarantee that Russia will never directly get involved in large scale wars due to limitations in financial resources (Kirsis, 2002).

Conclusion

The breakup of the Soviet Union ushered in an era of economic turmoil that resulted in the re-establishment of Russia as a global economic power. Russia introduced an oligarchic approach in order to bolster the capacity of its economy. The governments in many oligarchic societies are mainly focused on protecting and perpetuating the interests of the oligarchs while neglecting the economic growth and development that is vital in the prosperity of the country masses. The oligarch economic system does not signify the resurgence of Russia in the global economy due to various reasons: the stagnant progress in capital and technical investments, inadequate long term capital modernization, lack of product differentiation, negative impacts on the macroeconomic dynamics, oligarchic modelled financial industry, weak regulatory policies and decreased competition (Menshikov, 2005, pp.86). The oligarchic approach was poorly executed, thus ended creating a handful of billionaires and millions of citizens who fell into the poverty trap. However, positive impacts such as effective and proper management of companies, variety in media and pluralism in governance were achieved. Despite the setbacks, the oligarchic approach may indirectly contribute to the revival of Russia economy to some extent. The Russian government should introduce taxes on capital gains to enable it to recover some money from the investors. Regulations of income through heavy taxation on high salaried workers will address the income inequalities, thus increasing the morale of low-income workers. Structural adjustments that encourage middle-income earners to invest would go a long way in bridging the wealth inequalities and providing jobs, thus reducing poverty levels.

Reference

Baumol, W., Litan, R., & Schramm, C., 2007, Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity. New Haven, Connecticut: Yale University Press.

Guriev, S & Rachinsky, A., 2005, The Role of Oligarchs in Russian Capitalism Journal of Economic Perspectives. Vol. 19, No. 1, pp. 131–150.

Hashim, M., 2005, Putin’s Etatization project and limits to democratic reforms in Russia. Communist and Post-Communist Studies, Vol. 38, No. 1, pp. 25-48.

Kirsis, K. 2002, Oligarchic Capitalism in Russia: The Past, Present and Future.Web.

Lane, D., 2001. What kind of capitalism for Russia? A comparative analysis. Communist and Post-Communist Studies, Vol. 33, No. 1, pp. 485–504.

Menshikov, S., 2005, The Anatomy of Russian Capitalism Challenge. Vol. 48, No. 2, pp. 67-89.

Pryde, I., 2003, The Russian Conundrum. Cambridge Review of International Affairs, Vol.16, No. 1, pp. 165 – 180. Web.

Scharfstein, D., & Stein, J. 2000. The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment. Journal of Finance, Vol. 55, No. 6, pp. 2537–564

Tsygankov, P. & Tsygankov, A. 2002. Dilemmas and promises of Russian liberalism. Communist and Post-Communist Studies, Vol. 37, No. 1, pp. 53-70.

World Savvy Monitor, 2009, Russia on the world Stage in 2008. Web.

Yavlinsky, G., 1998 Russia’s Phony Capitalism Council on Foreign Relations. Web.

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