2 9 6 Anders Åslund Comparative Oligarchy: Russia, Ukraine and the United States W a r s a w , Ap r i l 2 0 0 5 Studies & Analyses No. 296 – Anders Åslund – Comparative Oligarchy: Russia, Ukraine and the United States Materials published here have a working paper character. They can be subject to further publication. The views and opinions expressed here reflect the author(s) point of view and not necessarily those of the CASE. The paper was prepared for the international conference "Europe after the Enlargement", organized by CASE – Center for Social and Economic Research in Warsaw on April 8-9, 2005. The publication was financed under the Matra Small Embassy Projects Programme of the Netherlands Ministry of Foreign Affairs. Keywords: Oligarchy, Russia, Ukraine, economic system, politics, property rights, legal reform, corruption © CASE – Center for Social and Economic Research, Warsaw 2005 Graphic Design: Agnieszka Natalia Bury DTP: CeDeWu Sp. z o.o. ISSN 1506-1701, ISBN: 83-7178-370-1 Publisher: CASE – Center for Social and Economic Research 12 Sienkiewicza, 00-944 Warsaw, Poland tel.: (48 22) 622 66 27, 828 61 33, fax: (48 22) 828 60 69 e-mail: [email protected] http://www.case.com.pl/ 2 Studies & Analyses No. 296 – Anders Åslund – Comparative Oligarchy: Russia, Ukraine and the United States Contents Abstract . 5 1. What Is an Oligarch? . 6 2. The Economics of Oligarchy . 6 3. The Politics of Oligarchy. 7 4. A Matter of Ideology. 11 5. Current Trends in Russia and Ukraine . 12 6. What Should Be Done? . 13 7. Conclusions: Make a Deal with the Oligarchs and Preach Capitalism. 15 References . 16 3 Studies & Analyses No. 296 – Anders Åslund – Comparative Oligarchy: Russia, Ukraine and the United States Anders Åslund Anders Åslund graduated from the Stockholm School of Economics and the University of Stockholm, and earned his doctorate at the University of Oxford. He is director of the Russian and Eurasian Program at the Carnegie Endowment for International Peace and since 1994 a senior associate at the Carnegie Endowment for International Peace.Anders. He is also an adjunct professor at Georgetown University. He is examining the transformation of formerly socialist economies to market-based economies. While the central area of his studies is Russia, he also focuses on Ukraine and Kyrgyzstan and on the broader implications of the economic transition. He co-directs the Carnegie Moscow Center's project on Economies of the Post-Soviet States. Dr. Åslund has served as an economic advisor to the governments of Russia and Ukraine. He has been a professor at the Stockholm School of Economics and Director of the Stockholm Institute of East European Economics. He has worked as a Swedish diplomat in Kuwait, Poland, Geneva, and Moscow. Dr. Åslund is a member of the Russian Academy of Natural Sciences and an honorary professor of the Kyrgyz National University. He is chairman of the Economics Education and Research Consortium and chairman of the Advisory Council of the Center for Social and Economic Research (CASE), Warsaw. He is also a non-executive director of Vostok Nafta Ltd. 4 Studies & Analyses No. 296 – Anders Åslund – Comparative Oligarchy: Russia, Ukraine and the United States Abstract The incidence of oligarchs is one of the most significant political problems after communism. An appropriate policy towards them has become a pressing issue for both Russia and Ukraine and addressing this matter will greatly influence the future economic systems of these countries. The paper examines the nature of oligarchs and the reasons for their emergence. Similarities with the great new businessmen in America of the 1850s, the so called "robber barons", are drawn. The paper also discusses common reactions to oligarchs and the ways to treat the oligarch problem. Finally, it reviews a number of policy and political options; and promotes making oligarchs pay a compensation for benefits they have enjoyed, in return guaranteeing them their property rights. 5 Studies & Analyses No. 296 – Anders Åslund – Comparative Oligarchy: Russia, Ukraine and the United States Oligarchs have become one of the big political problems after communism, and one of the big policy questions in both Russia and Ukraine is what to do with the oligarchs. No doubt, this question will greatly influence the future economic systems of these countries. In order to design a suitable policy for oligarchs, we need to examine what oligarchs actually are, why they have arisen, and what people react against. 1. What Is an Oligarch? “Oligarch” is an old and popular concept. It arose as a label for contemporaneous businessmen simultaneously in Russia and Ukraine around 1994, and the main features of oligarchs in the two countries were very similar1. The popular meaning of an “oligarch” is a very wealthy and politically well-connected businessman, a billionaire, or nearly so, who is the main owner of a conglomerate and has close ties with the President. In traditional parlance, an “oligarchy” implies the rule of a limited group of people. It might be more appropriate to call the oligarchs plutocrats, because their power is focused on money. Joel Hellman (1998) has coined the phrase “state capture” to characterize the relationship between big businessmen and the state in a country such as Ukraine, because the big businessmen influenced the state by all kinds of means. Oligarchs are by no means anything unique to Russia and Ukraine. Andrei Shleifer (2005) has rightly pointed out that oligarchs are typical of most middle-income countries. Much of the discussion about economic populism in Latin America circles around the entrenched power of oligarchs (Dornbusch and Edwards, 1991). People talk about oligarchs also in other countries in the former Soviet Union, notably in Kazakhstan and Georgia, but hardly in the very poor countries Kyrgyzstan and Tajikistan, and not at all in lingering socialist economies, that is, Turkmenistan, Belarus and Uzbekistan. The historically most prominent example is the “robber barons” in the United States. The New York Times referred to the new big businessmen in America as “robber barons” in the 1850s, alluding to the knights who lived in castles along the Rhine and extorted fees for passage, who were the original oligarchs. This label stuck. The robber barons were identified as the men who built great industrial and transportation empires in the late 19th century in the U.S. (Steele Gordon, 2004, pp. 211-2). In fact, the oligarchs in Russia and Ukraine have displayed much greater similarities with the American robber barons than is usually understood, because time has healed and beautified in America. The argument of this paper is that we can better understand the Russian and Ukrainian oligarchs, if we compare them with the American robber barons. In all these countries, big businessmen have responded rationally to a peculiar set of economic, legal and political conditions that were in place in all three countries in the relevant period. 2. The Economics of Oligarchy The outstanding economic characteristic of the oligarchs or robber barons is great wealth, and their number is limited. Bradford de Long (2002, p.179) suggests that a present-day billionaire would be a good proxy for a “robber baron.” John Steele Gordon (2004, p. 207) aptly quotes US President Herbert Hoover: “The trouble with capitalism is capitalists. They’re too damn greedy.” 1 See two excellent studies of the Russian oligarchs, Chrystia Freeland, Sale of the Century: Russia's Wild Ride from Communism to Capitalism, New York: Crown Business, 2000; David Hoffman, The Oligarchs, New York: Public Affairs, 2002. 6 Studies & Analyses No. 296 – Anders Åslund – Comparative Oligarchy: Russia, Ukraine and the United States One fundamental cause of this generation and concentration of wealth was the sudden achievement of great economies of scale in certain industries, especially metals, oil and railways. The super-rich emerge in countries with large markets and rapid structural change, notably in the US during industrialization after the Civil War and in Russia and Ukraine after communism. An additional economic characteristic is the presence of rent, which is often difficult to distinguish from economies of scale. Most of the original US robber barons made their money in railways, which easily generate monopoly rents. Other robber barons focused on the natural rents of resource industries, John D. Rockefeller on oil and Andrew Carnegie on steel2. Today, the Russian oligarchs are typically preoccupied with oil and metals3, while six of the biggest Ukrainian oligarchic groups concentrate on steel4. Free distribution of state assets, notably land around the railways, was also an important cause of enrichment in the U.S., and that was of course true of Russia and Ukraine. The nature of oligarchs is also determined by the prevailing legal conditions. Well-functioning legal systems are a recent invention, and even within the West legal systems are subject to many flaws. Without strong corporate legislation and a strong judicial system, partners find it difficult to agree or to solve conflicts. Nor can principals (owners) control their agents (executives), so they are compelled to manage their companies themselves. Joint stock companies emerged in the 19th Century, but many western countries have adopted insider legislation only in the last two decades. As multiple scandals illustrate, corporate governance remains poor in the West. John Steele Gordon (2004, (pp. 207-8) has eloquently captured the state of law in the United States in the 1860s, which saw the rise of the robber barons. Nowhere was…corruption more pervasive than in New York, and especially on Wall Street…. In 1868 the New York State Legislature actually passed a law the effect of which was to legalize bribery…. In 1868 the popular English Fraser’s Magazine wrote that “in New York there is a custom among litigants as peculiar to that city, it is to be hoped, as it is supreme within it, of retaining a judge as well as a lawyer.” Thus, the current legal practices in Russia and Ukraine appear just about normal for this stage of legal development.