Home Economic Trends Russia’s Degradation: How Archaic Institutions Hamper Development – Paul Tolmachev

Russia’s Degradation: How Archaic Institutions Hamper Development – Paul Tolmachev

Ludvig14, CC BY-SA 3.0 , via Wikimedia Commons

The rational behavior of the direct beneficiaries of any political regime, who control state power, is aimed at avoiding borderline states of public mood. In the paradigm of competitive democracy, the ruling elites are interested in maximizing the satisfaction of social demands in order to be re-elected to the next term. In soft autocracies, dominant elites and their affiliates aim at the loyalty of dominant social strata and their stable social mood, as moderate mercantilist autocracies rely on social support as an important factor in the continuity of their enrichment and political longevity. Even tyrannical dictatorships prefer to control both the hysteria of total approval, which is usually mixed with fear, and, of course, to curb any protest activity.  

There is every reason to conclude that the Russian authoritarian regime has not completely lost its competitive skills and, despite a host of damaging existential and systemic mistakes, it has chosen a political strategy that is optimal for its position in economic terms, which is, of course, essentially a tactic. Its basis is to keep the consumer capacity and capabilities of the root electorate, or more precisely, of loyal social groups, at a level slightly displaced from previous and customary consumer preferences and capabilities. As usual, the domain and its vassals staked on sound economic policy and trusted the decisions of a “competent economic and financial division” of government.

Why have I defined these decisions as tactical rather than strategic? The answer is obvious: stabilization and keeping afloat is the prime discourse of power decisions, which has nothing to do with development and growth. This is logical: given the change, or rather tightening, of the ideological narrative and the decisions to launch an aggressive militarist foreign expansion, the country’s global economic and other positions are sharply deteriorating, and the directions of domestic policy are determined accordingly. 

The market, as a paradigm of economic processes, i.e. the production and exchange of goods, has been and remains for the regime a way of alleviating poverty and enabling the population to have a minimum or higher level of wealth, which allows the regime to count on the protest passivity of the target social groups and to neutralize the demands for more intensive growth of prosperity. 

Therefore, with the beginning of the aggression against Ukraine, the regime and its functional managers in charge of economic policy began to act in the “proposed circumstances,” began to do so skillfully and more or less successfully, as can be judged from the results of 2022. The main effort was obviously directed toward keeping consumer opportunities from collapsing and dangerously regressing. To this end, state economic managers relied on regular liberalization and expansion of market freedom, as well as generous subsidies to the poorest social groups and formations. 

Depressed social strata are flooded with money, successful strata are not hindered and the regulatory burden is eased.

In fact, the regime wants to conclude a new social contact with the population: we do not tolerate disloyalty and increase political unfreedom, but we release economic pressure and increase your income, including sharing the budget rents with you. At the same time, we control all export industries as a source of rent, and we strictly guard against encroachments to participate in revenue redistribution decisions. All significant rent-seeking, large-scale industrial and technological enterprises are a zone of monopoly interests and control of the regime’s power and its vested interests. Anything deeper in economic volume and further down the economic spiral is a market and horizontal redistribution. In return, we want political loyalty, civic passivity and the human resource for war. 

The successes of this two-track domestic policy in general have, at first glance, positive results for both the government and the population. Transfers to budgetary social groups and subsidized regions – donors of human masses for the regime’s mobilization aggressive policy – have grown considerably in comparison with the past decade. Reorientation, primarily the chineseization of imports, is successfully increasing, especially in consumer goods. 

At the same time, the drop in quality and assortment has had virtually no effect on the consumer sentiments of the root electorate. This electorate is 75 percent of the population living in cities with a population of less than 500,000. The consumer preferences of this majority of the population before 2022 were not highly diversified and of high quality for obvious reasons, the first of which is low income. Such consumer preferences can well be met and made up for by recanalization of commodity flows from Asia. 

Social groups grouped in the general category of the “middle class,” which were based in large agglomerations and had significant income and more sophisticated consumption preferences, certainly and expectedly received a significant discount in quality and habitual lifestyles. However, the decline even in their consumption capabilities is not yet dramatic, and adaptability in an environment where reality turns out to be better than expectations of the early ’22, forms loyalty, or at least political passivity.

Groups that openly and actively express their discontent with the status quo and constitute the main hotbed of protest, generating triggers of instability, are neutralized by the authorities directly through tougher repression and expulsion from the country. 

Thus, the regime’s policy of keeping most of the population in the zone of habitual unsophisticated consumption, with a decrease in quality and assortment, insignificant for this population, and a simultaneous stiffening of the political regime toward repressive enforcement of the authorities’ will, has had its positive effect for the regime and for the population. The regime maintains the stability and loyalty of the root population, the population does not feel a significant sag in the quality of life, though, given the effect of not too high a base. 

I have said many times that the model of contemporary Russian autocracy, despite the shift to a totalitarian dictatorship, is still fueled by social loyalty. This is rational and legitimate: horizontal market exchange implies the most effective satisfaction of consumer demands of the population in accordance with low incomes, as well as greater economic stability, adaptability and bears lower transaction costs in economic policy in contrast to the centralized socialist redistribution. Combined with prudent and high-quality macroeconomic policies that avoid large budget deficits and inflation, the consumer economy can stay afloat for a very long period and removes a crucial threat of social discontent for the authorities. 

The lowering of regulatory barriers for small and medium-sized businesses since the beginning of ’22 has certainly been an important and sensible decision to stabilize consumption and better enable entrepreneurs to meet consumer demand. 

However, a detailed examination of the processes reveals very significant transaction costs that cannot be avoided in the current regime of the sociopolitical order. These externalities will steadily and consistently corrode any effectiveness of liberalization for one simple reason: liberalization and authoritarian tightening can only correlate for a short time, because these are inherently opposite phenomena, and their further divergence is inevitable. 

The structure of quasi-feudal Russian authoritarianism implies that liberalization and reduced regulatory burden entails the need to replace corrupt sources of enrichment of the bureaucracy to maintain its loyalty. This requires increasing direct funding of the budgetary sphere and compensating the bureaucracy’s benefits through the expansion of a variety of budgetary projects suitable for mobilization narratives.

At the same time, regulatory hurdles, as a natural source of corrupt enrichment, are facilitated and reduced. However, the unallocated profits from these vanishing sources are picked up by new beneficiaries – law enforcement agencies. In a situation where the political regime is tightening and the powers of law enforcement agencies are expanding against a background of reductions in the capacity of the bureaucracy, law enforcement agencies are filling the fallen out zones of influence of the bureaucracy. The canonical “hungry groups” effect emerges, when settled and looted bandits, seeking to streamline, preserve and multiply their loot through the development of inclusive law and institutions, are replaced by new, not yet enriched bandits, for whom the optimal strategy is intensive looting and primary accumulation through violence and archaic power domination.  

The transfer of the bureaucracy’s corrupt benefits to the power agencies, on the one hand, means a real relief for some time of the transaction costs for business – both qualitatively and quantitatively. However, it also means greater business risks, because in the case of conflict, the “second”, dominant, side not only does not give way to business, but carries a direct threat to the life and freedom of the entrepreneur. 

The main problem with this “redistribution of power” against the background of ideological mobilization narratives is that the increasing economic influence of security agencies in the corrupt redistribution of benefits transforms established institutions that somehow replicate the normal rules of doing business in a market economy. Such imitative institutions are characteristic of soft-autocracy, where the authorities and their affiliates try to retain the loyalty of key social groups and strata, and ensure positive expectations of economic agents through the procedural imitation of liberal and legal institutions characteristic of liberal democracies. This is an important stage in liberalization and democratization because, as I mentioned earlier, settled thugs want stability and security, which implies the presence and development of law and institutions, however flawed or imitative. 

As the influence of the siloviki proliferates, these imitative institutions become completely decorative and lose their, even if minimal, significance. 

How does this manifest itself?

First and foremost, this is the ultimate profanation of any judicial decision and the complete atrophy of the power and influence of the judiciary. In a social system where inclusive law has almost completely disappeared, and in its place has emerged subsocial law, that is, law in the interests of the members of the justified subsociety – the power vertical with all its branches – there is a gravity in which each individual seeks integration with the individual who is more close to the superior in the power vertical. 

When the power part of the system begins to dominate the bureaucratic part, this structure of relations acquires more linear and unambiguous forms and manifestations. As a result, normative and constitutional law lose their practical power and are replaced by the right of the stronger, or rather, more significant in the system of belonging to the power block of the vertical of power. This leads to inevitable erosions and distortions in social behavior and the values on which it is based: everyone strives to get as close as possible to the “new power” as a competitive social advantage. Hence new motivations, traditions and ethics emerge; social relations are verticalized even further on the basis of an archaic and almost literal – physical – understanding of strength and weakness. 

Further, the real possibilities of individual expression are greatly curtailed, from various forms and modes of self-expression to demands on the state as the ultimate guarantor of rights. The source of the rights themselves is changing, which means that the rights and the procedures for their exercise are also changing. The old civilizational ethical and moral norms in social and individual behavior are no longer relevant, or their relevance turns into conventionality.

The greatest weight and dominant force is acquired by conformity to indoctrinated ideological narratives, attitudes, and dogmas. This spreads and spreads across the entire spectrum of the nuances of public and individual life, up to and including the personal space necessarily hidden from public view (the denunciation of a passenger who watched something “forbidden” on his phone on public transport). Differentiated individuality becomes an unacceptable expression of otherness in relation to glued and totalizing social values, and thus subject to aggressive rejection, both at the socio-residential and system-state levels. 

Finally, the biological desire of the social individual for maximum security, as the most powerful factor for a better personal genetic future, dictates a constant choice between active participation and non-participation in the new “power” system of social order. 

Non-participation carries with it the benefits of “invisibility”: one can follow the new accepted norms without “activism in loyalism” and still ensure minimal interference in one’s private life. But this position limits individuals’ social success: they will have to settle for a place in the lowest, least influential, least protected in terms of the new “right,” and least well-off social strata. 

Participation means inevitable competition with other individuals, each trying to gain the most advantageous position in the vertical system. Benefits and competitiveness in such a frame of reference are classified as proximity to the more influential member of the vertical, as I mentioned above. Weakening competitiveness or losing in competition can mean not just the loss of material benefits or social status, but also physical costs, up to and including imprisonment or loss of life. 

This paradigm of social competition atavifies social values and the behavior they define. Humanization inevitably declines, the normalization of violence increases, and entrepreneurialism is channeled into the pursuit of forceful resource dominance.

Is the existence of economic exchanges in the capitalist system of coordinates and the continuation of market relations in such a sociopolitical and institutional environment possible? Undoubtedly, yes, but the point of application of the efforts of economic agents will be different, ethical standards and institutional conditions will change, and, therefore, economic goal-setting. Rent-orientation will worsen, import substitution with products of Asian producers will become the main focus of activity of small private businesses seeking to expand and scale, small entrepreneurship will expand, but take more and more archaic procedural forms. 

The market economy is neither a Christian dogma nor a promise of heaven on earth, nor is it a panacea for tyranny and dictatorship. It is merely a way of economic organization, production and exchange of goods that is most effective for social sustainability, but which allows for the archaic and violent nature of this very sociality. 

Another matter is that the primary norms and institutions that make the market function inevitably change – they are humanized and liberalized – both with the development and increasing complexity of production and with the greater distribution of goods and their inclusive utility. 

In Russia, we are obviously witnessing the reverse institutional process, which will inevitably determine the level and pace of economic movement. And this movement cannot be called development or progress with all the efforts of the economic division of the government.

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Paul Tolmachev is an Investment Manager, Economist and Political Analyst. Having more than 20 years’ experience in the financial markets, Paul held management positions in leading international investment and wealth management firms. Paul is serving as a Portfolio Manager for BlackRock with more than $500 million in personally managed assets. He also is a visiting scholar at the Stanford Institute for Economic Policy Research, where he researches institutional and political economy, decision science and social behavior, specializing in the analysis of macroeconomics, politics, and social processes. Paul is a columnist and contributor to a number of international think tanks and publications, including Duke University, Mises Institute, Eurasia Review, WallStreetWindow, The Epoch Times, Investing.com, etc.