Mon, May 24, 2004 - Page 9 News List

The permanent failures of Russian capitalism

Poverty and corporate corruption show that the market economy is not working in this former communist state, and the world must help

By Will Hutton  /  THE GUARDIAN , MOSCOW

ILLUSTRATION: YU SHA

AT first glance it is remarkable. Moscow has the same wide streets, exhilarating Metro and extraordinary Stalinist gothic architecture mingling with bulbous church cupolas that it had under communism. But now it is unmistakably capitalist. Luxury-car showrooms and ads for extravagant perfumes jostle for attention; rush-hour traffic jams could be in New York or Los Angeles.

This is a city of 10 million people where unemployment is negligible, property prices are ballooning, clubs are booked out and problems of the transition to capitalism seem to be receding. Moscow is leading; Russia must soon follow.

Yet scratch the surface and you start to see how deep and perhaps unmendable are the wounds from communism.

Moscow may have full employment but living standards are chronically low. For most, it is a daily struggle to survive, one Muscovite told me. The newly emerging upper middle class of executives may be doing well, but average salaries are a few hundred US dollars a month. Prices may be a third lower than in the West, but that scarcely compensates.

Alcoholism is rife. Life expectancy is falling.

Moscow has the headquarters of nearly all big Russian enterprises. It is the seat of government in a highly centralized country of 145 million. Oil revenues from what is in effect a petro-economy, with 28 percent of GDP represented by the oil and gas sector, flow through it.

The inequality between Moscow and the rest of the country is stunning, but inequality is the new fact of Russian life. If life is tough in Moscow, what it must be like in the rest of Russia -- where wages are much less -- scarcely bears thinking about.

Small wonder Mikhail Fradkov, confirmed as prime minister last week, declared that his first objective -- faithfully echoing President Vladimir Putin -- was to alleviate poverty.

Despite economic growth, largely driven by ever-higher oil revenues and high oil prices, it's hard to be sanguine. Breaking out of the cycle of endemically low productivity, low wages and an economic structure that grows less competitive by the year -- the privatized and protected Russian car industry has yet to launch a new model -- requires more investment.

That in turn requires a system of corporate organization and finance capable of lifting investment, and a business class willing to make it. That is what Russia does not have.

The new oligarchs are criticized for their wealth -- 36 new billionaires own 24 percent of Russian GDP -- but that misses the point. Their riches might be excusable if they had discharged their part of the privatization bargain: to build great businesses and accept a reciprocal obligation to the society of which they are part.

The addition to the rich list of Elena Baturina, wife of the mayor of Moscow -- thanks to her construction company Inteko -- is a case in point. Few in Moscow believe she could have achieved her wealth without her husband, although nothing can be proved.

This is where the legacy of communism, and indeed Russia's pre-communist past, hangs over the country like a pall. Authoritarian traditions run deep; there is no conception of pluralism.

In company law, and more importantly business practice, minority shareholders, for example, are powerless. In a takeover, either the victim owner or the managers simply whisk the company's assets away during the negotiations, leaving minority shareholders -- and the new owners -- with nothing but an empty shell when the transaction is complete.

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