Political Studies (1997), XLV, 579±596
The Transition to the Market and Corruption
in Post-socialist Russia
FEDERICO VARESE1
The end of the State Socialism in Russia was greeted with near universal
enthusiasm. The Western public and the people who had endured the economic
absurdities of the Soviet system expected economic performance to improve
dramatically and the country to turn overnight into a well-functioning and
prosperous market economy. Such optimism was loosely based on an `invisible
hand explanation': as in Adam Smith's classical example of `the butcher, the
brewer or the baker', agents pursuing their own individual interest would
produce an unintended bene®t for society as a whole.2
In practice, this idyllic picture did not quite materialize: the economic system
is under great strains and Russia is far from being a well-functioning market
economy. According to an index of `economic freedom' recently constructed by
the Heritage Foundation, Russia ranks 117 in a list of 150 countries. This index
measures how well countries score on a list of ten factors, including trade policy,
taxation policy, level of privatization, monetary policy, property rights, antitrust regulations, and the extent of the black market. Not only is Russia at the
bottom end of the list, but its position has worsened over the years. The authors
of the index point to the strong correlation between economic freedom and
development, the implication being that Russia is not likely to prosper
economically.3
This index measures how much `market economy' (or `capitalism') there is in
a country. Other indicators show that standards of living have dropped since the
beginning of the transition and economic disparities increased substantially.4
Much of the health-care system has collapsed, mortality rates have risen
alarmingly and life expectancy has fallen.5 Russia has not yet reaped the bene®ts
of capitalism but it has lost the safety nets of socialism.
1
Gerry Mackie, Cecilia Garcia-Penalosa, Mark Philp and Marc Stears have made extremely
valuable suggestions. I am also grateful to Stephanie Chester, who read a version of this paper. The
usual disclaimers apply.
2
A. Smith, The Wealth of Nations (London; Penguin [1776] 1986), p. 119.
3
Heritage Foundation, `1997 index of economic freedom', Transition, 7/11±12 (November±
December, 1996), 22±24.
4
N. V. Chernina, `Bednost' kak sotsial'nyy fenomen rossiyskogo obshchestva', Sotsiologicheskie
issledovaniya, 21/3 (1994), 54±61.
5
A US-Russian study presented in Moscow in June 1995 reported that male life expectancy has
declined from 64.9 years to 58.3 since 1987. The study also predicted that the number of suicides
and cancer cases would continue to rise and that tuberculosis cases would remain at the level they
were in developed countries 30 to 40 years ago. According to the Collegium of the Ministry of
Natural Resources, half of Russia's population drinks water that does not meet acceptable hygiene
standards, water puri®cation systems are in critical condition, and the danger of dams breaking has
increased (OMRI Daily Digest, 5 June 1995 and 6 February 1997).
# Political Studies Association 1997. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main
Street, Malden, MA 02148, USA.
580
Corruption in Post-socialist Russia
The end of socialism has generated another surprise: an extraordinary
amount of ocial corruption and Ma®a-style crime. Westerners, at least, did
not expect that lifting the iron curtain would yield such a dismal picture. Rather
than a virtuous `invisible hand' bringing about a collective optimum, Russia
appears to be su€ering a collective failure, more akin to `the tragedy of the
commons'.6 By pursuing individually rational goals, agents bring about a lessthan-optimal collective outcome.
This is a puzzling result. The Soviet regime devoted an extraordinary amount
of resources to the protection of positive, welfare-type rights, which imposed a
signi®cant burden on public ®nance. With the end of the regime, the costs of
enforcing the economic plan, supporting inecient enterprises, ®nancing
welfare provisions and repressing crimes such as speculation and pro®teering,
disappeared. The new Russia should have had at its disposal more resources to
de®ne and protect property rights, which are the cornerstone of a market
economy and less costly than positive rights. This did not occur. Here I study
why this outcome did not materialize. In particular, I focus on enterprise
managers and the e€ects of their lobbying on the de®nition of property rights
over shares. I argue that they were able to in¯uence the initial distribution of
property rights, had incentives to prevent the clear de®nition of property rights,
and lobbied the government in order to obtain protection against imports,
government subsidies, nearly free loans and tax exemptions. Once these goals
were realized, the remaining section of the private sector was exposed to a
predatory tax system and was led to bribe ocials in order to avoid paying
taxes. This occurred at a time when there was an immense rise in opportunities
to commit crimes and a parallel increase in demand for trust and protection
took place. Since the private sector was greatly involved in corrupt practices, it
had an incentive to avoid courts and state-supplied forms of protection and seek
extra-legal means to settle disputes.
Privatisation and the Building-blocks of a Market Economy
A preliminary distinction between what the expected point of arrival was
supposed to be, the often invoked well-functioning market economy, and the
privatization process is required. There can be no denying that massive
privatization has taken place in Russia. Data released by the Goskomstat show
that a substantial portion of the Russian economy is in private hands. By the
end of September 1995, 77.2 per cent of the total number of industrial ®rms were
privatized, producing 88.3 per cent of industrial production and employing
79.4 per cent of industrial personnel.7 As of November 1994, privatization was
most advanced in personal services, where 78 per cent of ®rms had already been
privatized.8 Housing stock has also been privatized at spectacular speed.9 Land
is the only sector where the privatization process is lagging behind.10 The data
6
G. Hardin, `The tragedy of the commons', Science, 162 (1968), 1243±48.
GRF/RECEP Russian Economic Trends 1995, 4/4 (London, Whurr, 1996), pp. 98±9.
8
GRF/RECEP Russian Economic Trends 1994, 3/4 (London, Whurr, 1995), p. 97.
9
R. J. Struyk and J. Daniell, `Housing privatization in urban Russia', Economics of Transition,
3/2 (1995), 197±214.
10
S. K. Wegren, `Trends in Russian agrarian reform', RFE/RL, 2/13 (26 March 1993), S. K.
Wegren, Building market institutions', Communist and Post-Communist Studies, 27/3 (1994),
195±224.
7
# Political Studies Association, 1997
FEDERICO VARESE
581
relating to property ownership thus show that the end of the virtual monopoly
over property rights by the Socialist state has produced an enormous increase in
the number of people owning assets.
Privatization per se is not, however, sucient to produce a well-functioning
market economy. The cornerstone of a market economy is the presence of
property rights. It is worth pausing a moment to consider what having a right
over a property entails. A `right' is a claim or entitlement normally enforceable
through courts or equivalent agencies. Ownership over an asset encompasses a
`bundle of nested rights', which include possession of the physical thing owned,
rights to use, derive income, exclude others and exchange the physical thing
owned.11 According to standard economic theory, well-de®ned property rights
are a determinant of economic success. When property rights are clearly
speci®ed, and the person who decides how to employ this asset bears full costs
and enjoys full bene®ts of such employment, s/he puts the asset to its most
productive use.
In all countries where there is tolerable security of property, every man of
common understanding will endeavour to employ whatever stock he can
command . . . a man must be perfectly crazy who, where there is tolerable
security [of property], does not employ all capital stock which he
commands.12
If a person owns something, say, an automobile, another private person or
government ocial cannot take it without the owner's consent. To make this
property right meaningful, it is necessary to have a registration system for
automobile titles. In addition, regulations which make the lawful use of the
goods impossible, must be absent (e.g., a predatory taxation system which
would make it unfeasible for an owner to pay registration and other duties, or
the lack of predictable rules on governmental con®scation).13 Finally, a criminal
penalty severe enough to deter theft must also exist. If crime is not deterred,
people would have no incentive to acquire property:
Not just theft, robbery, embezzling, the forging of wills, certain types of
frauds, and other familiar acquisitive crimes, but also bribing ocials,
including judges, police, and ocials in charge of registering titles to real or
personal property, must be prevented, or, more precisely, kept within
tolerable bounds.14
The de®nition of property rights, the possibility to derive income (or pleasure)
from goods owned, and an apparatus for deterring crime are three buildingblocks of a market society.
11
R. Posner, `The cost of enforcing legal rights', East European Constitutional Review, 4/3 (1995),
Summer, 71±83, p. 73; J. Getzler, `Theories of property and economic development', Journal of
Interdisciplinary History, XXVI/4 (1996), 639±69, p. 664; A. Ryan, `Property' in J. Eatwell,
M. Milgate and P. Newman (eds), New Palgrave Dictionary of Economics, 4 (London, Macmillan,
1987), 1029±31.
12
Smith, The Wealth of Nations, p. 380. A recent con®rmation of this general principle is
J. M. Ramseyer's study of Japan, Odd Markets in Japanese History (Cambridge, Cambridge
University Press, 1996).
13
`If, for instance, nobody could leave land to their children, or sell a freehold in it, or raise a
mortgage on it, we should be doubtful whether individuals could be said to ``own'' it at all'
(Ryan, `Property', p. 1029).
14
Posner, `The cost of enforcing legal rights', p. 73.
# Political Studies Association, 1997
582
Corruption in Post-socialist Russia
The above example of owning an automobile refers to a negative right. In a
very simpli®ed fashion, rights can be distinguished between positive and
negative rights. A positive right is `a right to demand a service from the
government', while a negative right is `a right not to be interfered with by the
government or, more broadly, by anyone'.15 Positive rights are usually associated with the provisions of the modern welfare state, while negative rights are
associated with classic liberal democracies.16 Positive rights are assumed to be
more of a burden on public ®nances than negative rights. The costs involved in
providing positive rights (®nancial assistance to the poor, public education,
publicly subsided health care, unemployment bene®ts) are higher than those
involved in running a minimalist state, whose main aim is to de®ne and protect
private property, national defence being the main source of spending.
The Puzzle
At this point, I may re-formulate the central puzzle explored in this paper. Until
1991, Russia was ± arguably ± a socialist democracy. Its system of law was
operating at full capacity to enforce existing laws, many of which were devoted
to the enforcement of positive rights ± such as the operation of the planned
economy, the delivery of goods and services, the avoidance of shortages ± and,
more generally, to sustain the country's welfare and military power. The transition from socialism to capitalism can be viewed as a titanic e€ort to redirect
resources towards the protection of negative rights. Such an e€ort would lead to
a retreat of this over-extended state from society.17
In the course of this transitional process, resources should be freed and could
be devoted to the protection of negative rights, which are less costly. We should
therefore expect a reduction in the cost of enforcement, since the obligation to
enforce the plan disappears. Several crimes that were in the Soviet criminal code
have also disappeared, enabling the police to concentrate on fewer areas of law
enforcement. Since the state is saving resources, the tax burden should also be
reasonable. Finally, the de®nition of property rights is rather costless: one can
copy legal de®nitions from well-functioning market economies. In fact, Rudiger
Dornbusch advised the new post-communist countries to `adopt wholesale
and without question the entire civil code, including corporate law, of a wellfunctioning legal system, say the Netherlands or Finland'.18 As will be seen, all
of the above did not take place.
15
Posner, `The cost of enforcing legal rights', p. 71.
This distinction appears to resemble that between positive and negative liberties. Posner does
in fact link the two concepts directly (Posner, `The cost of enforcing legal rights', p. 71). Such a link
however is problematic. Negative liberty is usually conceptualized as `the absence of external
obstacles to an individual's pursuit of her conception of the good'. The commitment to negative
freedom may require some positive rights. Miller for instance advocates positive rights while still
rejecting a positive de®nition of freedom. D. Miller, Market, State, and Community: Theoretical
Foundations of Market Socialism (Oxford, Clarendon, 1989), ch. 1. (I am grateful to Marc Stears for
a discussion on this point.)
17
Posner, `The cost of enforcing legal rights', p. 75.
18
R. Dornbusch, Priorities of Economic Reform in Eastern Europe and the Soviet Union (Centre
for Economic Policy Research Occasional Paper no. 5, London, 1991), p. 7.
16
# Political Studies Association, 1997
FEDERICO VARESE
583
The Real Picture
I: The Definition of Property Rights
In post-communist Russia, property rights are poorly de®ned; a predatory tax
system prevents owners from legally deriving income from the assets they own;
serious doubts surround the ability of the state apparatus e€ectively to deter
acquisitive crime and corruption. Since the Law on Co-operatives was introduced (1986), the legal situation in Russia has developed in a chaotic fashion. A
plethora of often overlapping and con¯icting laws and decrees emanates from a
variety of jurisdictions. `The same subjects are often covered by many di€erent
and mutually contradictory normative pronouncements, and it is dicult to
ascertain their ultimate validity'.19 Naishul' has shown that the weakening of
hierarchical links and the collapse of the party destroyed the former network of
administrative co-ordination. State authority has been transformed into `a
system of autonomous administrative oces with overlapping jurisdictions,
each pursuing its own rather than general state interests'.20
Among those rights which are crucial in a market economy, rights over shares
of companies feature high. As privatization is supposed to create a more
ecient ownership structure, `®rms should begin to make decisions that bene®t
wealth-maximizing shareholders, rather than politicians and entrenched
managers'.21 In order to raise capital and undertake a restructuring programme,
®rms normally issue new equity to dispersed investors. To part with their
capital, `potential investors need to have an enforceable contract with the ®rm
that assures them that their investment will not simply be expropriated by
managers and workers'.22 Information disclosure, a transparent share register
and the absence of restriction on trading stocks are preconditions for investment
in shares. In this section, I explore whether property rights over shares are
clearly de®ned and protected in Russia.
A sizable market for shares is emerging in Russia. A monthly average of
US$20.8 billion worth of shares was traded in 1995 by 200 Russian private
®rms.23 The holder of a share is entitled to dividends. First of all, however, s/he
needs to secure title of property over the share. In Western countries, shares are
registered by a stock-exchange authority and share certi®cates issued. Custody
services are provided by institutions holding securities in safekeeping for a
client. Collection of dividends is also a customary responsibility of the
custodians of shares.
In Russia, share certi®cates do not exist, preventing the emergence of a paper
traded system. Instead, the evidence of ownership is a name in a registrar's
book. For a share transaction to take place, an agent has to go physically to the
company's registrar and re-register ownership. Apart from physically inspecting
19
R. Frydman, A. Rapaczynski and J. Earle, The Privatization Process in Russia, Ukraine and
the Baltics (Budapest, Central European University Press, 1993). Quoted in F. Varese, `Is Sicily the
future of Russia? Private protection and the rise of the Russian ma®a', Archives EuropeÂennes de
Sociologie XXXV (1994), 224-58, p. 242.
20
V. Naishul, `Liberalism, customary rights and economic reforms', Communist Economies and
Economic Transformation, 5/1, (1993), quoted in Varese, `Is Sicily the future of Russia?', p. 242.
21
M. Boycko, A. Shleifer and R. Vishny, Privatizing Russia (Cambridge MA, MIT Press, 1996),
p. 128.
22
Boycko et al., Privatizing Russia, p. 133.
23
This ®gure does not include shares traded by banks (see GRF/RFCEP, Russian Economic
Trends 1995, p. 104).
# Political Studies Association, 1997
584
Corruption in Post-socialist Russia
a share register, the only evidence a purchaser has that s/he is buying shares
from their rightful owner is an extract from the ocial share register. An extract
may be obtained from the registry oce for a fee (there are about 3,000
registrars spread all over the country).24
The process of registering a transaction may involve waiting and queuing,
since a registrar is allowed to take up to three days to alter the books. It may also
be expensive: the ocial is allowed to charge a transaction tax which can be as
high as 5 per cent of the value of the deal. According to Russian law, any
enterprise with more than 500 shareholders is obliged to entrust its register to a
separate organization.25 Yet, in practice, many of the registers of Russia's
largest factories are controlled directly by the company and are often located in
the company headquarters.26
Russian bankers have complained that some businessmen, particularly in the
provinces, are involved in a steady trade of fake extracts. A western banker
interviewed by the Financial Times said: `if you are willing to pay for an extract,
you can get as many as you like. Unfortunate buyers learn that they have been
deceived only when they try to add their names to the ocial register and
discover that their vendor does not appear'.27
Careful investors avoid buying fake shares by sending their agents to
personally inspect the share register in loco. Yet they experience other diculties. Shares may disappear from the record. A registrar, in¯uenced by the
issuer, could in theory claim that an investor had just sold its shares. The
registration book could be stolen or destroyed in a ®re. `It could be an e€ort to
defraud, to lie, or just a simple error', remarked Yvonne Rogers, head of
settlement for the Chase Manhattan Bank in Moscow.28 Transworld, a
London-based company which dominates the Russian metal trade, alleges that
the share-register at the Krasnoyarsk Aluminium Smelter, one of the world's
largest aluminium producers, has been altered in an e€ort to defraud it.
Transworld claims, and the factory con®rms, that a 20 per cent stake in the
smelter (worth $300 m) controlled by Transworld proxies, was deleted from the
records by factory administrators.29 This danger can be minimized through
regular audits by the custodian of the registrar and through con®rmation of
share-holding. But that does not prevent over-issue whereby the registrar
arbitrarily creates new shares thereby diluting an existing owner's stake.
Transworld associates ®led a suit at the Court of Arbitration for restoration.
When interviewed on this matter, Mr. Mikhail Yukov, ®rst vice-president of the
Supreme Court of Arbitration, declared: `This share business is too complicated
for us. We do not understand it. We have no laws to deal with it. Our laws do
not answer these new questions. We are paralysed'.30
24
Financial Times, 4 October 1994 and 29 November 1994.
GRF/RECEP, Russian Economic Trends 1995, p. 104.
26
Financial Times, 16 November 1994.
27
Financial Times, 29 November 1994.
28
Financial Times, 29 November 1994.
29
Ocials at Krasnoyarsk smelter con®rmed that shares held by Transworld had been deleted
from the share register, but they contended that the shares had been improperly purchased in the
®rst place (Financial Times, 29 November 1994). This shows that factory directors can, and
unilaterally do, alter shareholder registers. Mr. David Reuben, president of Transworld, concluded
that `shareholders are completely at the mercy of factory managers' (Financial Times, 16 November
1994).
30
Financial Times, 1 December 1995.
25
# Political Studies Association, 1997
FEDERICO VARESE
585
The hunger of Western institutional investors for Russian shares, together
with their concern over custody, has given birth to a demand for private
providers of custodian services. CS First Boston, a leading investment bank in
Moscow, has built its dominant market position on the assurance it provides for
Western investors. Banks such as Chase Manhattan, Citybank and ING Bank
are now responding to the demand and exploring the establishment of asset
servicing units. But costs will be high. Chase Manhattan expects to hire six sta€
just to ¯y to distant corners of Russia and register shares.31
This section of the argument indicates that some aspects of property rights
are not perfectly speci®ed. It is dicult to establish whether the act of buying a
share leads to a secure title over that share. Actors do not know the attributes of
goods or services purchased and have to devote costly resources to acquire
valuable information and protect rights over the goods purchased.
II: The Tax System
The right to derive income from the use of an asset is part of the `bundle' of
property rights outlined above. The tax system regulates the amount of income
an owner may retain.
Russia does not have a tax code.32 Taxes are levied by decree. Primary taxes
are the following: value added tax (28 per cent) which is collected on sales;
corporate pro®t tax, which can be as high as 38 per cent;33 payroll taxes (39 per
cent); and import/export taxes. In addition, entrepreneurs are subject to a
multiplicity of other small taxes, each with a di€erent timetable and basis. The
most common include: hard currency tax; road use tax; advertising tax;
property tax on all assets including inventories and bank accounts; police tax;
and car tax (based on horsepower).34 Payment schedules and procedures vary
by type of tax, and entrepreneurs rely heavily on book-keepers and attorneys to
maintain compliance.35
Presidential Decree No. 2270 (22 December 1993) freed cities to levy taxes.
According to this decree, local government may establish up to eighteen local
taxes.36 It is not clear how strictly such a limit is enforced: business-people in
Moscow calculated that they were subject to a total of 51 di€erent taxes.37
Shortly after the decree was passed, the city of Moscow set the corporate pro®t
tax rate for Moscow at the highest level allowed by law, resulting in a 38 per cent
tax. It also added two new taxes (a housing support tax of 1.5 per cent of
31
Financial Times, 18 July 1995. See also Financial Times, 16 November 1994.
`An end to the long process of adopting the new tax code is still out of sight', said Deputy
Finance Minister Sergei Shatalov in March 1996 (Moscow News, 14 March 1996).
33
Corporate pro®t tax was 32 per cent until 1 January 1994 (see presidential decree No. 2270,
issued on 22 December, 1993). The tax is split between the Federal Budget (13 per cent) and local
budget (a maximum of 25 per cent). The decree also increased the maximum level of the asset tax to
2 per cent and introduced a special tax for the support of the economy of 3 per cent, to be collected
with VAT.
34
According to the latest survey or corporate taxation, there are eighteen Federal taxes in
force on the territory of the Federation. S. V. Almakaeva, `Corporate taxation in the Russian
Federation', Review of Central and East European Law, 1 (1995), 41±64, p. 41.
35
J. Charap and L. Webster, `Constraints on the development of private manufacturing in
St Petersburg', Economics of Transition, 1/3 (September 1993), 299±316, p. 305.
36
Almakaeva, `Corporate taxation in the Russian Federation', p. 41.
37
Moscow Times, 25 March 1994.
32
# Political Studies Association, 1997
586
Corruption in Post-socialist Russia
turnover, and a 1 per cent tax on payroll to support education) and increased
taxes on corporate assets from 0.5 to 1.5 per cent.38
In a survey of 99 ®rms carried out in St Petersburg by the European Bank for
Reconstruction and Development and the World Bank in November 1992,
entrepreneurs were asked to identify the three largest problems they faced in
their businesses in order of importance. The problem cited most frequently was
`excessive and frequently changing taxes'. The authors of the survey added that
the prevailing view was that `the government was robbing private entrepreneurs
through excessively high taxation'. In addition, `many (entrepreneurs) had
trouble getting accurate information about the numerous tax regulations.
Entrepreneurs complained that modi®cations in taxes commonly were enacted
retroactively, making planning and compliance dicult. The number of new
taxes was, reportedly, increasing monthly'.39
A report prepared for the President of Russian Federation noted that in
Russia:
The extremely confusing tax system that is currently in e€ect gives enterprises no incentives to increase pro®ts. For instance, M. Kabakov, director
of the Kalinin Machine Building Plant, calculated that the doubling of
pro®ts that this plant achieved through very tight economising on resources
and sta€ reductions allowed it to increase net pro®ts by only 2 per cent.40
A St Petersburg entrepreneur calculated that 80 per cent of his gross revenues
has been taken away by taxes. If one combines VAT at 28 per cent with the pro®t
based excess wage tax at 32 per cent, the marginal tax on value added is 60 per
cent, of which less than half is potentially refundable. Even the amount that is
refundable would lose most of its value in the face of high in¯ation.41
The tax structure of Russia appears to interfere with ecient resource
allocation. A system such as the current one, which taxes income saved as well as
income consumed, leads to suboptimal rates of capital accumulation, as argued
by Frank.42
A consequence of the present system is powerful incentives to evade taxes.
According to the World Bank survey of 99 ®rms in November 1992 in
St Petersburg, instances of tax evasion were `numerous'. `Entrepreneurs actively
engage in paper transactions to limit tax liabilities. For example, one pro®table
company under-priced its products, sold to a loss-making company and
repurchased them at a higher price, thereby decreasing reported pro®ts and
value-added'.43 The Filippov report also concludes that `entrepreneurs are being
forced to conceal income'.44
38
Moscow Times, 19 March 1994.
Charap and Webster, `Constraints on the development of private manufacturing', pp. 304±5.
40
P. Filippov, `Organizovannaya prestupnost' i perspektivy prikhoda k vlasti v Rossii natsionalsotsialistov', Izvestiya, 26 January (1994), 1±2.
41
Charap and Webster, `Constraints on the development of private manufacturing', p. 305.
42
A more ecient taxation system would tax positional consumption (R. F. Frank,
`A Contractarian View of Tax and Regulatory Policy', in E. F. Paul, F. D. Miller Jr and J. Paul
(eds), Liberalism and Economic Order (Cambridge, Cambridge University Press, 1993), pp. 258±81).
43
Charap and Webster, `Constraints on the development of private manufacturing', p. 305;
M. Buravoy and K. Hendley, `Between perestroika and privatization: divided strategies and political
crisis in a Soviet enterprise', Soviet Studies, 44/3 (1992), 371±402, list other examples.
44
Filippov, `Organisovannaya prestupnost', pp. 1±2.
39
# Political Studies Association, 1997
FEDERICO VARESE
587
TABLE 1. Tax Evasion 1994±96 (Reported Cases)
Reported cases of tax
evasion (total)
Cases of tax evasion of a
criminal nature
1500
4229
12,000
20
1611
3100
1994
1995
1996
Source: Kisunko, `Economic crime in Russia', p. 13.
Russian tax police in the ®rst half of 1996 uncovered about 12,000 cases of
evasion resulting in 3100 criminal cases, raising 13 trillion rubles for state
co€ers. It has been estimated that penalties related to tax evasion will bring in
another 9.3 trillion rubles.45 The high number of cases of tax evasion detected
by the police in 1996 stands in sharp contrast to the few cases uncovered in the
previous years. Rather than a sudden increase in this type of crime, this is an
indication of a more severe line taken by law-enforcing organs on the matter.46
Rigid law enforcement takes place in a context of a predatory tax system. The
fear that their unlawful tax reports will be exposed may motivate business
people, who are victims of crimes such as arson and extortion, not to report to
the police.
This section of the argument has presented evidence that points to the
existence of a predatory tax system, which in e€ect endangers the right to derive
income from assets owned. Such a system creates incentives for tax evasion,
which push business people outside the provisions of the law, making them
more vulnerable to criminal harassment. The sharp increase in cases of tax
evasion prosecuted by the police is an indication that law enforcement has not
broken down. On the contrary, it shows signs of eciency in selected areas, such
as prosecuting tax evaders. However, the e€ect of such scrupulous law
enforcement is to push legitimate entrepreneurs further to the edges of the legal
system.
III: Crime and Corruption
A variety of sources point to a generalized increase in crime since the transition
to the market has taken place. According to ocial statistics, `serious crime'
increased by 32 per cent in 1989, while, in the same year, the average Soviet
citizen was four to ®ve times more likely than a Briton, Frenchman or Japanese
to die a violent death.47 The total number of reported crimes in 1992 rose 70.5
per cent compared to 1989.48 Juvenile crime has increased by about 50 per cent
in the period 1990±95, according to ocials from the Ministry of Internal
A€airs, while the number of repeat juvenile o€enders has increased by 60 per
45
G. Kisunko, `Economic crime in Russia', Transition. A World Bank Newsletter, 7/7-8, July±
August (1996), 13±16, p. 13.
46
Kisunko, `Economic crime in Russia', p. 13. Increased severity towards tax o€enders is in line
with the growing concern over tax evasion voiced by President Yeltsin (see OMRI, 11 October
1996).
47
Izvestiya, 26 February 1990 and New Times, no. 35, 1989.
48
These data are taken from `Crime ± The Threat to Russia', documents prepared for a closed
Kremlin Conference on Organised Crime in Russia (12±13 February 1993), quoted in Nezavisimaya
Gazeta 12 February 1993, and Kommersant-Daily 16 February 1993. I am drawing here upon
# Political Studies Association, 1997
588
Corruption in Post-socialist Russia
TABLE 2. Annual Rate of Increase for Selected Crimes
O€ence
Serious robberies
Simple robberies
1987±88
Rate of increase (%)
1988±89
1989±90
42.8
44.4
70.7
23.9
16.6
2.7
A serious robbery is de®ned as constituting a danger to the life or health of the victim.
Source: G. V. Dashkov, `Quantitative and qualitative changes in crime in the USSR', British Journal
of Criminology, 32/2 (Spring, 1992), 160±66, p. 161.
cent over the past three years (data reported by Radio Rossii on 2 June 1995).49
As revealed by the Moscow Region Police Department and Moscow Region
Prosecutor's Oce at a joint meeting on 28 June 1995, one murder was
committed in the Moscow Region every ®ve hours and one gang assault took
place every six hours. The meeting addressed the crime problem and
acknowledged that the crime rate had risen beyond a `socially tolerable level'.50
About 50 per cent of recorded economic crimes are property thefts. Theft from
the workplace has decreased, while fraud increased forty-fold between 1992 and
1995. Not surprisingly, most cases of fraud in 1994 were committed in the
®nancial sector (24 per cent of the total registered economic crimes), whilst the
lowest number were committed in the agricultural sector (7 per cent).51 Sectors
that require a higher degree of trust are more exposed to swindles.
The share of crimes related to abusing position or oce for private gain was
47.7 per cent of all recorded economic crimes in 1993.52 Corruption is also
rampant. Notoriously, data on corruption are dicult to obtain. An index of
the perception of corruption for 54 countries was constructed by Transparency
International, a non-pro®t organization, and the University of GoÈttingen.
Based on a variety of polls, it aims `to assess the level at which corruption is
perceived by people working for multinational ®rms and institutions as
impacting on commercial life'.53 Although this measure is based more on
reputations than facts, its results are striking. On a scale of 10, running from 0
(most corrupt) to 10 (least corrupt), Russia ranks 47 (score 2.58), just ahead of
Venezuela (score 2.50). New Zealand is perceived as the least corrupt country
(score 9.43), while Kenya, Pakistan and Nigeria are perceived as the most
corrupt (respectively they score 2.21, 1.00, and 0.69).
Widespread corruption is acknowledged even by senior ministers. Interior
Minister Anatolii Kulikov said that when he was appointed in July 1995, he
could not have imagined `the level of corruption in state bodies, particularly the
Interior Ministry', that he found.54 Con®rming numerous previous reports of
rampant corruption in the capital's police force, 960 ocers were dismissed in
1995 for taking bribes or otherwise abusing their positions. Disciplinary action
Varese, `Is Sicily the future of Russia', p. 244.
49
OMRI Daily Digest, 7 June 1995.
50
Moskovsky komsomolets, 29 June 1995.
51
Kisunko, `Economic crime in Russia', p. 13.
52
Kisunko, `Economic crime in Russia', p. 13. Though there was a reduction in 1995 (35.6 of all
recorded crimes), the total number of economic crimes increased (from 100 to 140 thousand).
53
Transparency International (1996), `The index of corruption' http://www.GWDG.DE/
*uwvw/icr.htm.
54
ITAR-TASS, 9 November 1995.
# Political Studies Association, 1997
FEDERICO VARESE
589
TABLE 3. Total of Convicted Persons for Selected Crimes 1985±1989
Total convicted
Speculation
Theft of personal property
Hooliganism
Total acquitals
1985
1989
% change
1,269,493
20,522
178,218
161,093
2909
684,070
10,090
124,490
61,323
5022
ÿ46:2
ÿ50:9
ÿ30:1
ÿ61:9
‡72:6
This ®gure refers to all crimes.
Source: Butler, `Crime in the Soviet Union', p. 157.
was taken against another 6000 of Moscow's more than 100,000 police
ocers.55
Any discussion of crime based on ocial data must be informed by the
awareness that ocial statistics contain only reported crimes. The known
criminal population and reported crimes are only a sub-set of the total.56 The
phenomenon of `latent crime' refers to actions that are either not reported to the
police or reported but not processed (in e€ect, concealed) by the police.
Researchers at the Interior Ministry of the Russian Federation reported that
law enforcement agencies in Moscow returned to their old practice of avoiding
registration of crimes, although in this case the practice `was not due to political
aims but because of the impossibility of investigating and clearing up all
reported crimes'.57 A study carried out in 1991±93 revealed that, in general
terms, the latency level in the Russian Federation is 40±70 per cent.58 Registered
crimes in 1994 made up only one third of the crimes actually committed. Over
®ve million criminal acts were overlooked and became latent. Among latent
crime, the highest level was that of economic crimes and criminally signi®cant
acts of a minor character (these estimates are from the Research Institute of the
Russian Interior Ministry, reported in Ponomarev.59 Ocial data capture the
criminal situation of the country only partially.
Despite the increase in the number of registered crimes, the number of people
convicted in 1989 was 46.2 per cent lower than the corresponding ®gure in 1985,
before the beginning of the transition to the market (which is normally
dated from the adoption of the 1986 Law on Co-operatives). In fact, in
the period 1980±9, the peak year for the number of convictions was 1984
(N ˆ 1;288; 458).60
In this section of the argument, I have presented data that show a signi®cant
increase in crime rates as reported in ocial statistics. Moreover, crimes in
55
ITAR-TASS, 13 October 1995.
R. Hood and R. Sparks, Key Issues in Criminology (London, Weidenfeld and Nicolson, 1970),
pp. 11±12.
57
Crime and Crime Prevention in Moscow, 1994, p. 40.
58
A. Alvazzi del Frate and K. Goryainov, Latent Crime in Russia, UNICRI Issues and Reports,
1 (1994).
59
P. G. Ponomarev, `Legal measures against legalization of criminal assets as means of combating organized crime in Russia', Academy of Criminal Justice Sciences, XIV/4 (January/February,
1996), 1±3, p. 1. Aleksei Kazannik, the current Russian Federation Prosecutor General, said that
his oce is in a position to complete no more than 50 per cent of the bills of indictment in the
already investigated cases (Nezavisimaya Gazeta, 28 October 1993).
60
W. E. Butler, `Crime in the Soviet Union', British Journal of Criminology, 32/2 (1992), 144±59,
p. 156.
56
# Political Studies Association, 1997
590
Corruption in Post-socialist Russia
Russia su€er from a high degree of latency. We may therefore conclude that
reported crimes are only a sub-set of the crimes actually committed. The
increase in crime, especially acquisitive crime, fraud and corruption, has not
been matched by an increase in convictions. On the contrary, the number of
convictions in 1989 was actually lower than the equivalent ®gure for 1985.
Solving the Puzzle
I: Property Rights
The predictions associated with the transition to a market economy did not
materialize. Property rights were not clearly de®ned even though it would have
been cheap to do so, the ®scal system became predatory even though the cost of
enforcing negative rights should have freed resources, and the state found it
dicult to repress crime in the new Russia, even though it was supposed to have
more resources at its disposal. In the remainder of this chapter, I will o€er an
explanation of this unexpected outcome.
I will start by addressing the ®rst question: why was it so dicult to develop
abstract and general rules on who is entitled to own what, when it appeared such
a simple and cheap task? One explanation might be that Russians were not
capable of reading and copying a foreign code. This would amount to a cultural
answer. The cultural explanation in the Parsonsian variant would be that legal
scholars were socialized in the `wrong' legal culture and therefore were unable to
see the light. An alternative answer invokes rational behaviour, and this is the
line I will pursue hereafter.
The bene®ts of clear de®nition and e€ective enforcement of property rights,
and more generally the well-functioning of a market economy, are often di€use.
Rather than a lobby of private owners, it is much more likely that a lobby of
industrial managers, pensioners, soldiers, or factory workers will mobilize to
secure the enforcement of positive, welfare-type rights.61 At the time of the
transition, there was not a readily available lobby of property owners ± who had
a private interest in the functioning of the market and the establishment of a
secure system of property rights ± to pressure the government into providing
general and simple rules. There was no lobby of shareholders, no lobby of estate
developers, and so forth. The reason why such a lobby was not there is twofold:
size and time. Size must be taken into account in order to assess the likelihood
that a broad-based lobby of private owners emerges ± a lobby that favours an
ecient system of property rights. Larger groups are more dicult to organize
and therefore, if they emerge at all, it takes more e€ort.62
Time is also a crucial factor: before privatization, when the relevant rules and
regulations were framed, no lobbies of private owners could have exercised any
pressure, because no property owners existed. Political pressure on such rules
can occur only after privatization. Hay et al. state that `legal reforms [that foster
the optimal functioning of the economy] often are not introduced by benevolent
dictators or Parliaments, but are rather an outcome of political pressure from
property owners'.63 They then argue that a lobby of owners, who have a private
61
Posner, `The cost of enforcing legal rights', p. 75.
The size of groups in connection to collective action is a classic question explored ®rst by
Olson. M. Olson, The Logic of Collective Action (Cambridge MA, Harvard University Press, 1965).
63
J. R. Hay, A. Shleifer and R. W. Vishny, `Toward a theory of legal reform', European
Economic Review, 40 (1996), 559±567, p. 564.
62
# Political Studies Association, 1997
FEDERICO VARESE
591
interest in the functioning of the market and the establishment of a secure
system of property rights, will emerge. They quote the repeal of the 1720s
Bubbles Act in Britain, which came about after vigorous pressure from the
British business community.64 Similarly, Rae€ documents how the legal system
developed in Germany in the sevententh and eighteenth centuries, and how it
was shaped by participants in an emergent market economy.65
The ®rst instance quoted by Hay et al. refers to a century-long struggle.66 The
second refers to a process that took over two centuries. In Russia today, there is
some pressure on the Duma from business quarters, and the establishment of
associations of business people in Russia. There is, therefore, some scope for
optimism. However, it might take a long time before an e€ective lobby of
private owners will emerge.
As pointed out by Posner, it was more likely that a lobby devoted to securing
positive rights would emerge at the start of the transition to the market. I will
focus hereafter on enterprise managers. Enterprise managers had acquired
during the Soviet regime the de facto right to use, and to pro®t from, the
enterprises they were managing. They had assumed control over the operation
and use of enterprises and `could also supplement their individual wealth by
hiding pro®ts and skimming extra production'.67 They also had engaged in
covert, though highly e€ective, collective action.
There will normally be only a small number of factory managers in a given
industry or locality. Because the number involved are small, the managers
in a given industry can collude in much less time than would be required for
a large group. The restraints on independent organization in a communist
society . . . requires inconspicuous, informal, and secret collusion, and the
need to proceed covertly makes collective action emerge much more slowly
than it otherwise would. But small groups can typically collude secretly.68
Many opportunities to organize informally and covertly existed for small
groups of high ranking administrators and enterprise managers in particular
industries.69 At the time of the transition to the market, their relative political
power was all the greater because newly created ®rms had not had the time to
overcome the diculties of collective actions and were therefore disorganized.
`This meant that lobbying power in societies in transition is held disproportionately by those enterprises that need to be replaced by new or foreign ®rms'.70
With the collapse of the socialist state and the advent of democracy,
enterprise managers lobbied for a favourable initial distribution of property
rights. The ®rst privatization project, devised by Gaidar, Lipton and Sachs, was
meant to produce a separation of management from ownership. This model ±
the so-called Option One of the 1992 Privatization Programme ± was greatly
64
C. Hunt, Development of the Business Corporation in England, 1700±1867 (Cambridge MA,
Harvard University Press, 1936).
65
M. Rae€, The Well-ordered Police State: Social and Institutional Change through Law in the
Germanies and Russia, 1600±1800 (New Haven, Yale University Press, 1983).
66
Hay et al., `Toward a theory of legal reform'.
67
M. McFaul, `The allocation of property rights in Russia: the ®rst round', Communist and PostCommunist Studies, 29/3 (1996), 287±308, p. 291.
68
M. Olson, `Why the transition from communism is so dicult', Eastern Economic Journal,
21/4 (1995), 437±461, p. 452.
69
S. White®eld, Industrial Power and the Soviet State (Oxford, Clarendon Press, 1993).
70
Olson, `Why the transition from communism is so dicult', pp. 458±9.
# Political Studies Association, 1997
592
Corruption in Post-socialist Russia
resisted by enterprise directors. Eventually they managed to alter the programme and the so-called Option Two was devised, allowing directors and
workers to purchase 51 per cent of all shares. Not surprisingly, most enterprises
chose Option Two.71 Some directors were content to have ownership dispersed
among workers of the company: in most cases workers' collectives agreed not
to interfere with the management of the enterprise in exchange for job
security.72 Others acquired a controlling block of shares through a variety of
manipulative schemes against their own workers. `The most direct method was
simply to buy out workers' shares before they had any market value.'
Alternatively they `outbid workers either directly or through proxies, and often
in collaboration with director-friendly commercial banks', during the closedsubscription for shares that took place under Option Two.73 A property
transfer that was in the best interests of the most powerful lobby of the Soviet
Union took place.74 It is not surprising that the rights of ordinary shareholders
are uncertain, and that it is also hard for small share holders to disinvest from a
company.75
II: The Costs of Negative Rights and the Fiscal System
Little attention has been devoted to the costs of enforcing negative rights. The
de®nition and protection of negative rights imply the provision of a wide range
of services. For tort and criminal law to be meaningful, a public machinery that
includes `police, prosecutors, judges, and even publicly employed or subsidized
lawyers for criminal defendants who cannot a€ord to hire their own lawyer'
must be provided.76 A further cost ± which is usually underestimated ± is the
cost of learning. The Soviet Union had a highly educated population. Lawyers,
judges and state ocials had gone through many years of formal training in
order to qualify for their positions. The transition to the market led to the
introduction of new concepts, such as `shares', and entirely new legal phenomena, such as fraud. Ideally, a massive retraining programme for state employees
would have been necessary or, alternatively, a signi®cant in¯ux of young
71
By 1993, 63.7 per cent of enterprises had chosen Option Two, while only 34.5 per cent had
chosen Option One. By the end of the voucher privatization in 1994, 73 per cent selected Option
Two and 25 per cent Option One. McFaul, `The allocation of property rights', p. 293; Boycko et al.,
Privatizing Russia, p. 98.
72
McFaul, `The allocation of property rights', p. 294.
73
McFaul, `The allocation of property rights', p. 294.
74
Insider ownership leads to a number of other negative consequences, including the absence of
managerial discipline. Since owners and managers to a large extent coincide, it is hard to imagine
owners ®ring incompetent managers.
75
Enterprise directors are of course maximizing their personal pro®ts, but do not divide them
with other share owners. What they do instead is create parasitic, subsidiary companies attached to
the parent enterprise. Directors channel revenues into these small, close joint-stock companies,
where pro®ts are divided among a handful of directors, rather than thousands of small shareholders
(McFaul, `The allocation of property rights', p. 305).
76
Posner concludes that `the distinction between positive and negative liberties blurs'. For
instance, the right to abortion is a negative right for an a‚uent person, but for a poor person, who
cannot purchase an abortion, it must be a positive right, a state-supplied service, for that right to be
meaningful (Posner, `The cost of enforcing legal rights', p. 72). Although this conclusion may be
correct from a normative point of view, it clearly is not true descriptively. States such as the USA
and the UK provide individuals with negative rights without dedicating themselves to providing
them the resources necessary to exercise those rights.
# Political Studies Association, 1997
FEDERICO VARESE
593
ocials into the state apparatus. Although the e€ects of either policy may di€er,
they both imply substantial investments in `intangible' commodities.
The new Russian state was in need of resources for a further reason. The
pro®ts made by state enterprises were not reaching state co€ers any more.
However, the structure of the economy at the time of the transition was not
conducive to the enforcement of a fair system of taxation. A few giant enterprises, which exercised a monopoly power in most sectors of the economy, were
able successfully to collude with each other and pay bribes to the political
system, in order to obtain tax concessions, protectionist measures against
competitors and exemptions from duties.
Many studies suggest that corruption prospers if market competition is weak.
`A few ®rms collude more easily. Then, once ®rms have learned to collude, they
are able to more eciently bribe politicians and public ocials to avoid
antitrust enforcement, obtain favourable legislation, and rig public contracts.' 77
Not surprisingly, this is what happened. Oil and gas companies, such as
Yuganskneftegaz, Nizhnevartovskneftegas and Noyabrsknefegaz, the automobile giant AvtoVAZ, and the gas monopoly GasProm have paid hardly any
taxes in the last years.78
Let us now turn to those companies with weaker lobbying power, excluded
from tax exemptions. The predatory tax system and current legislation more
generally prescribe forms of behaviour that companies have an incentive to
avoid. No party in an economic transaction has an incentive to report to
authorities a breach of state regulations. `If ever caught in violation of the rules
those on both sides of the market have the same incentive to persuade or bribe
the policeman or government ocial not to enforce the law. Not only is the net
incentive of the private sector to evade the law ± essentially all of the private
sector incentives are on the side of undermining the rule of law, either by bribing
enforcement ocers or lobbying politicians'.79
The collective outcome is a tremendous amount of tax evasion. According to
data released by the Federation Council Chairman, Yegor Stroev, just 16 per
cent of Russian companies honour their tax obligations. Of 2.6 million ®rms,
436,000 companies pay taxes regularly and in full, whereas at least 882,000
publish no accounts and make no tax payment at all (as of 1 October 1996, tax
arrears reached 132 trillion rubles/US$24.4 billion).80
77
D. Gambetta, `Democracy and corruption', mimeo (1996), p. 4. See also e.g. OCTF [Organized
Crime Task Force] Corruption and Racketeering in the New York Construction Industry (New York,
ILR, 1988). D. Gambetta, The Sicilian Ma®a (London, Harvard University Press, 1993), pp. 214±
20. D. Gambetta and P. Reuter, `Conspiracy Among the Many: The Ma®a in Legitimate
Industries', in G. Fiorentini and S. Peltzman (eds), The Economics of Organized Crime (Cambridge,
Cambridge University Press, 1995), pp. 116±36. S. Rose-Ackerman, `The political economy of
corruption', mimeo (1996). A. Ades and R. DiTella, `The new economics of corruption. A survey
and some new results', this volume, pp. 496±515.
78
ITAR-TASS, 22 December 1996; The Economist, 8 April 1995; Business Week, 1 April 1996.
79
Olson, `Why the transition from communism is so dicult', p. 454.
80
ITAR-TASS, 12 November 1996; AFP, 12 November 1996; OMRI Daily Digest, 13 November
1996. Large enterprises are not alone in lobbying for tax breaks. Sporting organizations alone have
received import tax breaks worth as much as 1.3 trillion rubles ($300 million) since a presidential
decree (signed on 1 March 1992) relieved them from paying import duties, value-added and excise
taxes. Entire regions also try and often succeed to reduce the transfer of resources to the central
government. D. Treisman, `The politics of inter-regional transfers in post-Soviet Russia', British
Journal of Political Science, 26/3 (July, 1996), 299±335.
# Political Studies Association, 1997
594
Corruption in Post-socialist Russia
III: Crimes Increase
As there was no lobby of faceless individuals with a personal interest in the
well-functioning of the economy, so there was no lobby of faceless victims of
crime, since the bene®ts of enforcing law and order e€ectively are also di€use.
Since the state is not able to extract revenues from most of the private sector, we
cannot expect policemen to be paid a sucient amount to enforce law and
order. These two elements combined could explain the diculties the state is
®nding in repressing crime. There is, however, a further element that needs to be
mentioned.
It is harder to secure property rights in the new market economy because the
number of criminal opportunities is immense. In Russia, the end of the virtual
monopoly over property rights by the Socialist state has produced an enormous
increase in the number of people owning assets; moreover, the number of
transactions in which individual agents may engage has grown substantially.
People have had novel and numerous opportunities to cooperate and, at the
same time, to defect, to cheat and to commit crimes. The increase in property
and in economic transactions has led to an increase in the opportunities to
engage in criminal activities.
In addition, the expected cost of punishment for criminals is reduced. The
data on total acquittals may well be an indicator that the rights of defendants
have been enhanced in Russia. This is an understandable by-product of the end
of the Soviet police state. However, the increase in rights of criminal defendants
reduces the expected cost of punishment for criminals.81 Criminal o€enders may
be more inclined therefore to commit crimes, since they have a lower chance of
being convicted. As any society grounded in a liberal system of personal rights
and freedoms knows, expanding the rights of defendants makes it more costly to
protect property rights.
Demand for Trust and Protection
The increase in the incentives to bribe ocials and in the opportunities to
commit crimes takes place at a time when there is a sharp increase in the demand
for trust and protection ± for instance, protection of contracts. The reason for
this is that economic competition is a form of cooperative behaviour. Broadly
de®ned, co-operation takes place when two or more people `engage in a joint
venture for the outcome of which the actions of each are necessary'.82
It is an often-unrecognized phenomenon that the advent of private and
competitive markets should require not less but more co-operation. This is
because the opportunities for cheating are positively correlated to the
opportunities of exchange. The choice of co-operating is susceptible to the risk
related to the potential defection of others. Co-operation requires that people
81
G. S. Becker, The Economic Approach to Human Behaviour (Chicago, University of Chicago
Press, 1976), pp. 39±86. Posner, `The cost of enforcing legal rights', p. 75.
82
B. Williams, `Formal Structures and Social Realities', in D. Gambetta (ed.), Trust. Making and
Breaking Cooperative Relations (Oxford, Basil Blackwell, 1988), pp. 3±13, p. 7. Most human
undertakings, therefore, are forms of co-operation, from driving cars to play, from marriage to
international relations. `Even [economic] competition, rather than being an alternative to cooperation, rests on co-operative arrangements'. D. Gambetta, `Trust and co-operation', The
Blackwell Dictionary of Twentieth-Century Social Thought (Oxford, Blackwell, 1993), 678±80,
p. 678.
# Political Studies Association, 1997
FEDERICO VARESE
595
agree on a set of rules, a `contract', which is then observed during their joint
activities. As a result of this, a demand for trust in potential partners emerges.83
However, if trust in others is low, or reputational bonds have not yet emerged to
distinguish between trustworthy and non-trustworthy partners, transactors will
develop a subsidiary demand for protection, which is met by the state in
functioning market economies. In other words, if trust is not spontaneous or is
low, the state provides a fall-back position: to the extent that court procedures
and coercive enforcement are e€ective, state institutions function as a recourse
of last resort and thereby provide a deterrent against breach of contracts.84
Transactors in Russia have little incentive to use state institutions. `Largely
because of the existing tax structure and restricting regulations, but also because
of other illegal aspects of a transaction, such as asset-stripping and side
payments, transactors have great incentives not to disclose their activities to the
state'.85
Even in the event that the courts themselves do not question the nature of a
transaction, it is highly possible that cases will come under the scrutiny of other
state administrations, such as the procuracy. This is not an inconceivable
scenario, because the procuracy still has broad powers to oversee legal procedures, including economic cases between private parties litigated at the
Arbitrazh court; thus it is not con®ned to criminal law.86 It has, for instance, the
right to initiate a proceeding in the Arbitrazh court, may protest court rulings
that in the view of its ocials violate the law (Art. 34, Code of Arbitration
Procedure), and may initiate bankruptcy proceedings against companies (Art. 7,
Law on Insolvency, 1 March 1993). `Tax authorities are also likely to keep an
eye on any documentation revealing the volume of transactions or pro®ts of a
company'.87 This eventually may deter litigants from using legal means and
encourage the use of extra-legal settlements.
Conclusion
The transition to the market amounts to the spread of property. In this paper,
I have explored what the act of having a right of property entails. I have singled
83
Gambetta, `Trust and cooperation', pp. 678±9.
D. Charny, `Nonlegal sanctions in commercial relationships', Harvard Law Review, (1990),
104. In small, homogeneous groups where members usually engage in repeat dealings, reputations
rather than formal institutions compel parties to comply with contractual obligations (J. T. Landa,
Trust, Ethnicity and Identity (Ann Arbor, The University of Michigan Press, 1994)). Though such
mechanisms are important even in large market societies, they are not a perfect substitute for the
public legal system: either they operate in specialized markets, such as the diamond industry
(L. Bernstein, `Opting out of the legal system: extralegal contractual relations in the diamond
industry', Journal of Legal Studies, 21 (1992), 115±157) or, ultimately, rely on the legal system
(S. Shavell, `Alternative dispute resolution: an economic analysis', Journal of Legal Studies, XXIV
(1995), 1±28).
85
K. Pistor, `Supply and demand for contract enforcement in Russia: courts, arbitration and
private enforcement', Review of Central and Eastern European Law, 1 (1996), 55±87, p. 84.
86
The Arbitrazh Court system exists in addition to the system of civil courts. The jurisdiction of
the di€erent systems depends on the status of the parties involved: claims involving entrepreneurs,
private organizations, or state organs are ®led with the Arbitrazh courts. These courts have broad
jurisdiction over commercial disputes, including claims arising out of contractual breaches and
property claims, and over disputes arising out of government activities. F. Varese, `The emergence
of the Russian ma®a', D.Phil. thesis submitted to the Faculty of Social Studies, Oxford University,
(1996); see also Pistor, `Supply and demand for contract enforcement'.
84
# Political Studies Association, 1997
596
Corruption in Post-socialist Russia
out three main building blocks of an e€ective system of property rights: the
de®nition of property rights, the possibility of deriving income from the goods
owned, and the presence of an apparatus that deters crime against property. In
post-communist Russia, some aspects of property rights are poorly de®ned, a
predatory tax system prevents owners from legally deriving income from the
goods owned, and serious doubts surround the ability of the state apparatus to
deter e€ectively acquisitive crime and corruption. I have argued that a signi®cant factor that accounts for the present widespread corruption in Russia is the
presence of powerful lobbies able to win tax exemptions. Once a sizeable section
of the private sector is able to avoid paying taxes, the remaining part of the
private sector is burdened with an unbearable amount of taxation. In turn, they
are led to engage in corrupt practices in order to avoid obeying the rules. In
e€ect, the entire private sector, both the section able to win tax exemption and
the section which is not, have powerful incentives to undermine existing laws
and encourage corruption in government. Moreover, the apparatus to deter
crime has had to cope with a massive increase in the opportunities to commit
crimes. This fact, coupled with the end of the Soviet police state and the increase
in rights of criminal defendants, has led to a reduction in the state's e€ectiveness
in protecting property rights.
These shortcomings are all the more critical because, as argued in the ®nal
section of this paper, the transition to the market leads to an increase in the
demand for inter-personal trust and state protection. If e€ective protection is
not supplied by state agencies, new property owners have incentives to search
for alternative, non-state sources of protection.
# Political Studies Association, 1997