Ruslan Dzarasov
PhD, Senior Research Fellow,
Central Economics and Mathematics Institute,
Russian Academy of Sciences, Moscow
EICHNERIAN THEORY OF THE BUSINESS
ENTERPRISE IN THE CASE OF RUSSIAN
CORPORATIONS
Buffalo State College
Heterodox Microeconomics Workshop
02 March 2012
Contents
1. The Conundrum of Russian Capitalism ...........................................................................2
2. The Eichnerian Megacorp .....................................................................................................3
3. Russian Model of Corporate Governance .......................................................................6
4. Insider Rent and Investment Behaviour...................................................................... 13
5. Insider Rent and Conditions of Growth ....................................................................... 16
6. The War of Big Insiders: a Case-Study.......................................................................... 19
7. Russian Capitalism as a Social System.......................................................................... 28
REFERENCES................................................................................................................................ 34
Dear colleagues,
The paper submitted to your consideration offers an alternative vision of
the modern Russian capitalism from standpoint of corporate governance and
investment behaviour of its big business. Significance of this topic can be seen
from the fact that even in the 2000s despite the unprecedentedly favorable
external conditions for economic development of Russia, investments of her
companies appeared insufficient in scale and inferior in quality to secure
modernization of the country’s productive apparatus, overcome the raw
extracting bias of industrial structure, achieve sound international
competitiveness and reasonable living standards. This determined the main
aim of the paper – to identify the internal, institutional obstacles impeding
sustainable, innovative growth of the national economy.
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Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
1. The Conundrum of Russian Capitalism
The independent experts do not share rather optimistic picture of the
robust growth of investments in Russia, provided by the official statistics. In
2007, at the very eve of the world crisis, the scrapped capital stock in Russia
exceeded the gross investment as a proportion of total capital stock by a
factor of 2.24 (Khanin and Fomin, 2007, p. 46). Annual residual value of the
fixed capital stock measured in prices of renovation declined in the pre-crisis
2000s by 2.75% (ibid.). Some surveys of the enterprises’ managers testify that
at the beginning of 2010 42% of respondents did not carry out any
investments at all (Kuvalin and Moiseyev, 2010b, p. 131). Qualitative indices
of investments are of no less importance. In the middle of 2009 only 20% of
the surveyed enterprises did not need modernization of their productive
capacities. The rest were in need of partial or full-scale renovation of their
fixed assets. In the same period only 6% of the enterprises in question
undertook investments allowing them to achieve sound modernization
(Kuvalin and Moiseyev, 2010a, p. 151). The majority of Russian enterprises
(63%) purchase new and many (15%) – second-hand equipment produced in
Russia, both of which managers consider being of low quality in comparison
with the imported counterparts (Kuvalin and Moiseyev, 2010b, p. 129-30).
Kornev provides a clue to this problem demonstrating that engineering
has adjusted to decline of demand for its production simplifying the produced
equipment, moving to more primitive technologies, supplying cheaper but
less productive machines and so forth. Such strategy allows Russian firms to
diminish their investment costs (Kornev, 2005, p. 68). According to some
studies the ‘cheap’ variants demand two-three times less expenditures per
unit of investment funds, than the strategies assuming new construction and
expansion of productive capacities of Russian enterprises (Gladyshevsky A. et
al., 2002, p. 16). In result of the inferior investment strategies of Russian
companies the country’s fixed capital stock arrived at a miserable state.
According to Kornev and Lavrenev (2011, p. 67) the average longevity
length of machines and equipment of industrial assets amounts to 21 year,
while in 1990 (in the last, but not the best year of the Soviet Union) it was
only 10.8 years. (Normative period of equipment renovation in the USSR was
12 years.) The share of equipment with life longevity less than 5 years in the
production apparatus of the machine-tool construction is 3.5% of the total
stock and in engineering as a whole – 14.5%, while the share of equipment of
less than 10 years longevity – 5.2% and 18.5% accordingly (Borisov and
Pochukayeva, 2011, p. 59).
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Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
Thus, it is an empirical fact that in twenty years of market reforms
investments of Russian companies are insufficient neither to arrest the shrinking
of the fixed capital stock, nor to stop its technological degeneration. The main
conundrum of Russian capitalism is the following: why it prefers inferior
investments to the detriment of innovations and modernization of the
national economy?
2. The Eichnerian Megacorp
One of possible ways to find an answer to this question is comparative
analysis of the institutional nature and investment behavior of Russian and
US-American big business. From my standpoint the Megacorp model of USAmerican Post-Keynesian Alfred Eichner (1938-1988) has a great heuristic
potential for such a study.
Eichnerian Megacorp is the typical, representative corporation of US
manufacturing sector in the so-called “Golden age of capitalism” (the late
1940s – early 1970s). Its defining features are: (a) separation of ownership
and control the latter function residing with the managers; (b) fixed
coefficients of production; and (c) oligopolistic industry structure. Eichner
believed that separation of ownership from management extends the
Megacorp’s time horizon in the long run, making her prime objective
maximization of long-term growth rather than short-term profit. This
happens, because welfare of managers depends not on the size of dividends,
but on long-term market position of a firm, determining salaries and nonpecuniary privileges. As a result investment strategy starts underlying
Megacorp’s pricing. Let us consider Fig. 1.1
R, i, r
DI
SI
i0
F0
ΔF/p
Fig. 1. The demand for and the supply of investment funds of a Megacorp.
1 It is a simplified version of the figure in Eichner (1991, p. 385).
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Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
The vertical axis measures the implicit (internal) interest rate (R), external (bank)
interest rate (i) and expected investment profitability (r). The horizontal axis – additional,
internally generated funds accumulated in the pricing (planned) period (ΔF/p). The curve
SI reflects the supply of investment funds function. Its ascending part corresponds to
internal generation of funds in result of price increase, while the straight part – to external
borrowing. The curve DI reflects the demand for investment funds.
This model establishes the link between investments and pricing in the
corporate sector. Price increase incurs some losses of expected profit due to
market limitations on price increase (customers can move to substitutes,
competitors may enter the market, the state may intervene). Implicit interest
rate (R) reflects the discounted value of these expected losses of profit per
unit of additional funds obtained due to price increase. The supply of
investment funds function (SI) grows with price increase and the
corresponding implicit interest rate (R) increase. When the latter equals
explicit interest rate (i), the Megacorp stops internal generation of funds and
starts external borrowing. The demand for investment funds (DI) is an
investment projects portfolio ordered according to diminishing expected
profitability (r). One of the most important characteristics of Eichnerian
model is that according to it wage rate, investment and pricing are determined
simultaneously.
As was said above, Eichnerian model reflected the realities of the postWorld War II “Golden Age of Capitalism.” In last three decades (the 1980s2000s) financialization had led to significant changes in the fundamental
processes which determine development of capitalism. Arrighi (2010) defined
financialization as a particular type of accumulation of capital when profit is
increasingly appropriated through investing money at financial markets,
rather than in productive capacities. This can be seen at the corporate level.
Lazonick and O’Sullivan (2000) show that while in the 1970s US corporations
tended to reinvest profits in firms’ growth (Eichnerian Megacorp), in the next
two decades they increasingly started downsizing their labor and distributing
the retained earnings to shareholders. Krippner (2005) finds that the share of
profits accruing to FIRE (finance, insurance and real estate) surpassed the
share of manufacturing profits. Even more important is the fact, that nonfinancial corporations themselves had sharply increased their investment in
financial assets in this period. This is consistent with the results of Milberg
and Winkler (2010) presented at the Fig. 2.
As can be seen from the figure, combined net dividends and share
buybacks as percentage of internally generated funds in the US non-farm nonfinancial corporate business oscillated below 30% until 1980s, then suddenly
going through the roof and nearly reaching absurd 160% in 2007. This
4
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
undoubtedly reflects the radical change in the distribution of the relative
stakeholder power from managers to shareholders. In correspondence with
this Zorn (2004) acknowledges ascendancy of the Chief Financial Officer
among the corporate top-managers in USA. According to the “inflation of the
capital assets” approach (Toporowski, 2005, see especially ‘Introduction’) an
inflow of speculative financial resources at securities markets put such a
powerful upward pressure on share prices, that they had completely broke
away from corporate profits and the real assets value. This affected corporate
governance drastically deteriorating its quality. As a result managerial fraud
became widespread as the cases of Enron, WorldCom and the like testify.
Fig. 2. Net dividends plus share buybacks as percentage of internal funds in
the US non-farm non-financial corporate business, 1960–2008.
Source: Milberg and Winkler, 2010, p. 288.
All this is consistent with Veblenian treatment of the capitalist firm as a
dual phenomenon, contradictory unity of pecuniary and technical business
logic (Veblen, 1978). Veblenian approach assumes, that if the two sides of a
business enterprise are in balance, then a firm is a long-term growth
maximizer (like the Eichnerian Megacorp), but if it is otherwise – a financier
overwhelms an engineer. Such a perspective is very consistent with duality of
labor approach to accumulation of capital expounded in Marxian Das Kapital.
Indeed, it assumes that the prime aim of the capitalist production is value, use
value being only a means to obtain the former (monetary production economy
in Keynes’ parlance). From this and the idea of ‘commodity fetishism’ the
theory of fictitious capital is derived. The latter represented by ‘paper wealth’
is only a shadow of the real (productive) capital, which can temporarily
5
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
exceed its source creating a fetishist illusion. Thus, Marx anticipates
financialization with its bubbles, tracing it to the very foundations of the
capitalist economy. To be sure, Arrighi (2010) demonstrates that this
phenomenon is a recurring event in the history of the world capitalism.
In the perspective of the above results, the Eichnerian notion of
Megacorp-long term growth maximizer needs updating. While that may be
true, I believe that the model in question is still appropriate for analyzing the
institutional obstacles for growth in Russia, because it corresponds to realities
of a growing corporate economy.
3. Russian Model of Corporate Governance
The roots of the current Russian model of corporate governance can be
traced to the Soviet system, which was formed by Stalinist degeneration of the
Russian revolution. Trotsky considered the Soviet regime as only a
transitional, i.e. preparatory for a transition from capitalism to socialism, and
in this sense being neither the former, nor the latter. The bureaucracy being
the prime distributer of material commodities is by definition a privileged
stratum of such a society. Departing from the transitional nature of the USSR,
being neither capitalism, nor socialism, but including elements of both in a
contradictory blend, Trotsky hypothesized that in the absence of a new tide of
workers revolution bureaucracy itself can overthrow the Soviet system to
restore capitalism. In a masterstroke of historical materialism he had written:
“Privileges have only half their worth, if they cannot be transmitted to one’s
children. But the right of testament is inseparable from the right of property.
It is not enough to be the director of a trust; it is necessary to be a stockholder.
The victory of the bureaucracy in this decisive sphere would mean its
conversion into a new possessing class. … In reality a backslide to capitalism is
wholly possible” (Trotsky, 2004 (1936), pp. 191-192).
The rapid economic growth and cultural development of the Soviet Union
in the 20th century produced radical changes in the social structure of society,
making it more complex and potentially unstable, since it gave rise to diverse
and often contradictory social interests. Lane (2011, p. 38) identifies two
broad social groups which were destined to become the driving forces of the
move from central planning to capitalism. The first is comprised of state
functionaries controlling over economy, cultural life, law enforcement
agencies and military apparatus. This he calls ‘administrative class.’ It is
complemented by ‘acquisition class’ formed by individuals from intelligentsia
with personal skills which can be profitably realized through markets. Large
fractions of the both big social groups were increasingly dissatisfied with the
6
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
egalitarian practices which prevailed in the Soviet society. One should note
that behind the ostensibly monolithic façade of the USSR the private
appropriation of incomes on the bases of state property was gradually
increasing. It was carried out in forms of privileges and informal control over
resources. Eventually, in course of Gorbachev’s reforms a powerful block of
pro-capitalist social forces was formed, led by bureaucracy, which was
destined to overthrow the Soviet system and change it to capitalism (Kotz and
Weir, 2007, pp. 107-111).
After collapse of the Soviet system at the beginning of the 1990s this
tendency stemming from rotting of Stalinist bureaucracy was greatly
encouraged and supported by Western influence in general and by USAmerican advisors of the reformist Yeltsin’s government in particular.
Eventually informal control over the assets exercised by bureaucracy and
‘acquisition’ class was entrenched and legalized by privatization.2 The
rationale was provided by the notorious principles of Washington consensus
which underlay Russian reforms. Originally it was devised to promote
neoliberal agenda of economic reforms – cutting state expenditures,
deregulation of the capital markets, price liberalization, privatization – for
Latin American countries. Scholars of the Washington consensus see it more
as a vehicle of globalization than as a way to achieve sustainable growth and
development (Serra, Spiegel, and Stiglitz 2008, p. 6). They note that the
consensus “called for opening of countries to the outside world. As a result,
the fortunes of developing countries have increasingly depended on what
happens outside their boundaries” (ibid.). Russian ‘shock therapy’ was only a
slavish replica of the abovementioned principles. Privatization was a pivotal
element of reforms.
Privileges of bureaucracy and its informal control over resources, being
strengthened by Gorbachev’s and legalized by Yeltsin’s reforms, became the
prime preconditions of the Russian model of corporate governance.
Literature on corporate governance in modern Russia widely
acknowledges that in this country it is impossible to implement the formal
property rights if they are not backed by informal control over assets (Papper,
2002a, 2002b; Dolgopyatova, 2005; Ustyuzhanina et al., 2010). Ownership can
generate revenue only if it gives “control over the cash-flows of an enterprise”
(Dolgopyatova, 2005, p. 4). Studies of the internal control in Russian
corporations show that ownership concentration became the salient feature
of the Russian model of corporate governance, since the dominant
shareholder either himself occupies the top-managerial position, or strictly
2
See the account of Russian privatization in Freeland (2011).
7
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
monitors activities of the latter (Abe et al., 2007). Individuals who influence
corporate governance are often referred to in literature as ‘insiders.’ I call ‘big
insiders’ such stakeholders who control the key decision-making, especially
concerning the firm’s finance, and outsiders – those, who are deprived of
contributing to these decisions. Introduction of the new term is conditioned
by the fact that members of a dominant group in a Russian corporation
formally may not be its owners, if it is a state enterprise or if they exercise
their control through proxies.
The defining feature of the Russian model of corporate governance is the
reliance of big insiders on the infrastructure of control over enterprises. The
former is a set of sometimes formal, but predominantly informal institutions
securing personal control of the dominant group (big insiders) over the assets.
One may distinguish between its external and internal elements (Fig. 3).
External Elements of Control
Chain of ownership
(Cloud of offshore
companies)
Links to state officials
(Lobbyists within state
structures)
External defence of
property rights
Organs of
law
enforcement
Private
security
firms
Criminal protection rackets
Large insiders (Dominant
owners/top managers)
Centralisation of decisionmaking
Monitoring and auditing
bodies
Internal security services
Productive assets (enterprises)
Internal elements of control
Fig. 3. Infrastructure of Insider Control over Assets
Source: Ruslan Dzarasov, Insider Control and Investment Behaviour of Russian
Corporations. PhD Thesis in Economics, Stoke-on-Trent, UK, 2007, p. 78.
The external elements embrace: the sophisticated scheme of assets
ownership through chains of offshore firms (‘offshore cloud’ in Papper’s
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Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
parlance); connections with corrupted state functionaries and so-called ‘roofs’
or informal protection provided by the law enforcement agencies, private
security agencies and criminal structures. The prime objective of the external
elements of infrastructure of control – protection of the dominant position of
big insiders from trespasses of their rivals. The internal elements of
infrastructure of control are comprised of: high centralization of the
managerial decision-making process greatly exceeding the standards of the
developed countries; inflated controlling and monitoring departments;
internal security departments. The prime objective of these institutions is to
suppress opportunism of the hired labor and workers protest; and to secure a
solid control of big insiders over the firms’ financial flows.
Infrastructure of control of big insiders reflects specifics of the Russian
model of corporate governance characterized by inseparability or fusion of
ownership and control (contrary to Eichnerian Megacorp). Infrastructure of
control is a kit of tools securing subsumption of hired labor under capital by
force. Hence, Russian big business is characterized by reliance on extraeconomic coercion.
Primarily informal character of control over assets in Russia engenders
fundamental instability of the dominant position of big insiders. To be sure,
informal ‘property rights’ cannot be legalized and bequeathed to inheritors,
but they always can be challenged. Waves of redistribution of the ‘property
rights’ regularly sweep over the Russian economy. Their prime instrument is
hostile takeovers, including wide application of raiding or qwasinationalisation (according to Ustyuzhanina’s expression). The great majority
of these takeovers are hostile in nature, and are carried out with the help of
coercion from state organs or involve criminal violence. From the 1990s,
corporate raiding became a distinct sector of the national economy, with its
own market for services and an enormous annual capital turnover.3 Those
who are threatened by hostile takeovers are above all big insiders who have
not created an infrastructure of control powerful enough to defend their
dominant positions. This means that ownership and control in Russian
business are fundamentally unstable. Instability of the big insiders’ position
conditions short-termism of their time horizon.
This short-termism, in turn, determines the dominant type of income
most common in Russian business. It can be defined as insider rent, i.e. an
income appropriated by big insiders due to their control over the firm’s financial
3 To be fair, it should be pointed out that the rate at which property is being redistributed has diminished,
though the process itself continues. During the 1990s it was virtually uninterrupted. Now, redistribution occurs in
connection with changes of political leadership at the federal and regional levels. This testifies to the critical
importance of the external infrastructure of control. Property redistribution is especially marked when leaders who
have been in office for long periods, and have built up extensive ties with business, are replaced. Examples include
the ousting of Moscow Mayor Luzhkov, of Bashkir President Rakhimov, of Tatar President Shaymiev, and of a
number of provincial governors.
9
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
flows. Insider rent can thus be measured as Free Cash Flow (FCF), minus
various forms of interest payments on loans and also dividends paid to noncontrolling shareholders. As a rule, the mechanism for obtaining rent involves
figure-head trading companies registered in offshore sites. Big insiders sell
the products of the companies they control to the trading houses, which they
also control, at less than market prices. The proceeds from the subsequent
resale of goods under market conditions finish up in private accounts which
the large insiders hold in the offshore sites. Another, no less popular method
of extracting rent has the big insiders setting up their own firms for the
supplying of raw materials. In this case, shipments to businesses under the
insiders’ control are made at elevated prices. Or, fly-by-night firms may be
used to provide expensive fictitious services, rental of premises or equipment,
and so forth.
Insider rent should be distinguished from the profit of the Eichnerian
Megacorp which depends on the excess of proceeds over outlays. By contrast,
big insiders in Russia derive income from their control over the financial flows
of enterprises. Insider rent can be extracted at the expense both of the sources
of profit and of some articles of costs. It can be augmented through cutting of
the wages of workers and salaries of managers, reducing investments,
appropriating depreciation fund, abstaining from paying for deliveries,
squandering loans and so on. A firm may run at a loss, but continue to enrich
the dominant group. Obviously, insider rent is appropriation of the results of
unpaid labor and, hence, expresses the relations of exploitation of hired labor.
Insider rent must also be distinguished from the concept of rent as
employed by the neoclassical mainstream. According to the latter, rent is the
excess income which the owner of a factor of production obtains over and
above its “opportunity cost”; that is, it is consequent on the profitability of the
mode of application of the given factor (Ikeda, 2003). Marxism views rent
under feudalism as the surplus product of serf peasants, appropriated by
feudal landowners who employ extra-economic coercion on the peasants who
are personally dependent on them. Under capitalism, rent is a portion of the
surplus value created by hired agricultural workers; capitalist farmers pay
this portion to the owners of the land for its leasehold. Insider rent, in the
sense in which it is discussed in this work, differs from neoclassical rent in
that it is extracted through a reliance on extra-economic coercion (the
infrastructure of control), just like the feudal rent of the Marxists. At the same
time insider rent has a synthetic nature, possessing certain characteristics of
an entrepreneurial income, since the typical big insider still makes some
investments. Insider rent is understood by the author of this article as a
specific form of surplus value, reflecting the particular nature of modern
Russian capitalism.4 Its synthetic nature reflects the dual origins of the
4
For a more detailed treatment, see (R. Dzarasov, 2009).
10
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
modern Russian social system resulting from the marriage of rotting Soviet
bureaucracy and the formative influence of global capitalism.
In today’s Russia the concept is popular of a so-called “natural rent”
(Kuzyk et al., 2004), referring to the excess income of the export-oriented raw
materials sector of the national economy – oil, gas, metallurgy and a few other
categories. The present author does not subscribe to this concept, since it
presupposes that rent is created by nature. In the author’s view nature plays a
role in all production, but does not create value. The latter is created solely
through labour; in particular, rental income is created through the
uncompensated labour of hired workers.5
The above does not mean that the state completely gave up its role in
distribution of the financial flows. The “YUKOS affair”6 resulted in the state
recovering its tax revenues from exporters of raw materials. The effect was to
restrict the use of transfer price-fixing as a means of extracting rent. This
particular case, however, was merely a specific instance in a larger-scale trend
for the state bureaucracy to strengthen its activity in the milieu of the large
insiders, and to redistribute insider rent to its benefit. It should also be noted
that the increase in taxation since the turn of the century has coincided with
an unprecedented rise in world energy prices. Consequently, the large
insiders have shared with the state only a portion of their income, which has
increased overall. In any case, they have access to numerous other means for
appropriating rent apart from transfer price-fixing (see above). Meanwhile, it
has been much less usual for enterprises operating on the domestic market to
experience a reduction in the share of their overall financial flows going to
rent.
The notion of insider rent in the above sense is increasingly used in
literature (Dorefeyev 2001; Novojenov 2003a, 2003b; Rozmainsky and
Skorobogatov, 2006). The current paper treats this type of income as a variety
of surplus value peculiar to the modern Russian capitalism at the current
stage of its historical development (Dzarasov, 2009). This approach follows
Marxian methodology of analyzing capitalism as a social system, as it was
formulated by Tsagolov (MSU).7 According to the latter any mode of
production is characterized by its main relationship, which reflects its main
objective and determines all other, derived economic relations. For capitalism
the law of surplus value is the main relationship which determines all its other
economic processes including accumulation of capital, price structure, income
5
In a private correspondence Dr. Kotz (University of Massachusetts, Amherst) made a good point that the rent
appropriated by the owners of the Russian oil and gas companies is a product of labor outside Russia.
6 In the YUKOS affair, between 2003 and 2005, a criminal prosecution was brought against the major owners of
the Russian oil company YUKOS M. Khodorkovskiy and P. Lebedev, along with a number of employees of
YUKOS and of organisations affiliated with it. Bankruptcy procedures were also brought against YUKOS as a result
of a substantial additional sum in taxes levied against it for the preceding period. (See Sixsmith, 2010, for
details.)
7 Nicolas Tsagolov (1904-1985) was a professor and chair of political economy in MSU. See comparison of
his methodology with critical realism in S. Dzarasov, 2009.
11
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
distribution, reproduction. Being a concrete form of surplus value, insider rent
expresses the main objective of Russian big business, determines the laborcapital relations, investment strategies, price structure in the economy,
technological structure of Russian economy, economic growth. As a result, the
modern Russian capitalism can be represented as a holistic economic system,
as a particular mode of production characterized by internal logic and
cohesion.
Insider rent withdrawal violates interests of all the stakeholders do not
belonging to the dominant group. The majority of Russian enterprises do not
pay any dividends to its shareholders at all (Dolgopyatova, 2003, p. 9). The
diverse other forms of violation of rights of minority shareholders in Russia
long ago became widespread. Appropriation of rent undermined the position
of labor engendering: decline of real wages, increase of egalitarianism in
compensation, elimination of the social services provided by enterprises and
so forth (Timofeyev, 2003). Cutting the managerial salaries is a problem of no
less importance for Russian enterprises. Besides, the career prospects of
Russian managers depend not as much on their professional training and
business qualities as on their belonging to the dominant group (ibid.). As a
result, the opposition arises of the interests of rank-and-file managers and the
dominant groups. From these conflicts at the enterprise level a deep split
emanates between the different social groups in Russian society.
Insider rent withdrawal engenders the whole system of social conflicts at
Russian enterprises. In response to numerous violations of the minority
shareholders’ rights, securities market systematically underestimates equities
of Russian companies. According to Dorofeyev (2001) financial investors tend
simply to subtract the value of insider rent (calculated according to their
approximate expectations) from share prices. Conflict of workers with the
dominant owners in some cases leads to open protest (Rudyk et al., 2000), but
more often is manifested in theft, slacking off at work, using the firm’s
equipment for private purposes and so forth (Timofeyev, op. cit.). Managers
seek to increase their welfare stealing the enterprise’s products or raw
materials; bribing partners for singing contracts on conditions favorable to
the former and detrimental to the companies; promoting investment projects
unprofitable for enterprises but beneficial for the managers; embezzling the
firm’s financial flows (Novojenov, 2003a). Often managers establish their own
figure-head firms to tunnel assets from their enterprises.
The opportunistic strategies of workers and managers comprise different
forms of appropriating incomes through control over some parts of
enterprises’ financial flows. Essentially it is the same type of income as
exerted by big insiders, albeit in a smaller scale. Thus, one may treat managers
12
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
and workers-opportunists as ‘small (or in some cases medium) insiders’
trying to withdraw ‘their’ part of insider rent at the expense of the dominant
group.
It can be derived from the above that modern Russian capitalist ‘elite’ has
predatory nature enriching itself largely through violence, fraud and
embezzlement,
rather
than
through
Schumpeterian
innovative
entrepreneurship, Weberian ethics of thrift, or Marxian development of
productive capacities. Neoliberals reduce the problem to the legacy of
“Communism.” As we demonstrated above it is only half true – infrastructure
of control was anticipated by growing privileges and informal control of
bureaucracy over economic resources. However, these relations were
suppressed by the egalitarian nature of the Soviet system, but were freed,
expanded and legalized by transition to capitalism. One should bear in mind
that this transition was carried out under the decisive influence of the West in
Yeltsin’s times. Infamous Russian oligarchy bears the joint imprint of the
rotting of the Soviet bureaucracy and of the ‘predatory,’ financialized
capitalism. As Samir Amin succinctly put it: “Oligarchy is not restricted to
Russia, as we are led to believe. It is no less real in the United States, Europe
and Japan” (Amin, 2011, p. 160). In fact, the modern financialized capitalism
looks pretty much as Predator capitalism described by Thorstein Veblen
(Henry, 2012). Just as insider rent is extracted to the detriment of an
enterprise (which is attested by the poor condition of the Russian fixed capital
stock), the world financial and business elite engage in speculation to the
detriment of productive capacities.8 Russian business elite siphons out from
the country billions of dollars to save them in the West, and Russian industrial
structure became distorted in favor of exporting extracting industries. Taking
this into account and following Andre Gunder Frank (1974) one may call
Russian capitalist class a true “lumpen-bourgeoisie”.
4. Insider Rent and Investment Behaviour
Insider rent is a short-term type of income, appropriated to the detriment
of the long-term interests of a company. However, short-termism has
gradations. The absolutely myopic big insider will tend to withdraw all the
available financial flows from an enterprise. His middle-term oriented
colleague will do the same on a lesser scale, still undertaking some
8 “The current global economic crisis is a good time to reflect on these narratives of organized crime, in
particular that which we call the Russian Mafia, to reassess the relationship between criminal and legal
enterprise, to look more critically at the question of harm, to reconsider how issues of responsibility and
morality are constructed and understood in a socio-economic context. Manichean narratives of good and evil,
heroes and villains, ‘us’ and ‘them’. ‘our’ way of life and ‘their’ desire to destroy it appear less convincing
when faced with the exploits of hedge fund managers and bank CEOs” (Rawlinson, 2010, p. 1).
13
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
investments. To grasp this difference one needs developing further the notion
of insider rent.
As was defined above, it is a short-term income of the dominant group
appropriated due to control over the firm’s financial flows. Even when an
enterprise is unprofitable, but still creates some financial flows, it can enrich
its owner. (It may sound absurd, but the reader should remember from the
above that Russian businessmen obtained their assets for prices many times
below their market levels through privatization and criminal raiding.) An
extremely short-term big insider will invest in her or his controlled business
nothing, just milking it and, eventually, leveling it to the ground. On the other
hand, a medium-term oriented big insider will invest in maintaining and
partial renovation of equipment securing not only current, but some future
profits as well. This latter dominant individual (or their group) will be closer
to the Eichnerian Megacorp maximizing long-term growth. Still she or he will
be a big insider, because she or he needs investing in infrastructure of control
which is costly and which undermines her or his investment in productive
capacities and limits her or his time horizon. In fact, only creating a
sophisticated means of informal control over enterprises – and thus securing
domination over them – it is possible to move from a short to medium-term
strategy under Russian conditions. Obviously it is necessary to distinguish
between the two types of rent pertinent to different investment strategies and
time horizons. The first (short-term) type of rent only presupposes control
over the assets and not the investment; whereas the second (medium-term) –
investment maintaining and partially developing productive capacities. The
former type of income is close to Marxian notion of absolute surplus value,
based on exploitation without productivity growth (without technical
progress). The latter type of income is close to the Marxian relative surplus
value, assuming productivity growth.9 In the previous work (Dzarasov and
Novojenov ch. 3), I referred to the two types of insider rent as to the absolute
and the differential ones following Ricardian-Marxian treatment of
agricultural rent under capitalism (distinguishing further between the
differential insider rents I and II, the former being acquired in profitable
industries without investment on the part of big insiders and the latter – as a
result of the investments). Since the two types of income in question are based
on two types of surplus value, it may be more consistent to call them absolute
and relative insider rent.
9 One may object to the above on the grounds that insider rent is treated as a semi-feudal phenomenon
assuming extra-economic coercion, which contradicts Marxian assumption of the personal judicial freedom of
the workforce under capitalism. However, here the methodology of ascent from abstract to concrete comes
into play. In Das Capital Marx analyses capitalism in its abstract form, while nowhere in the real world such
pure capitalism exists. Any empirically given capitalism contains some non-capitalist elements,
predetermined by its individual history, culture and geography. This fact gives rise to varieties of capitalism.
Since insider rent is a concrete form of income it not only can, but it should diverge in some respects from its
abstract essence. Insider rent and surplus value are related as the form and the essence. (See more on this in:
Dzarasov 2012).
14
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
In any case, now we have a range of concrete forms of surplus value
going from absolutely short-term type on the one polar to the long-term
entrepreneurial profit on the other (where rent disappears). The majority of
the real, as opposed to theoretical, big insiders fall somewhere in between of
these extremes. Distinguishing between the different types of income, we are
in a position to move from a static to a dynamic model of modern Russian
capitalism, thus grasping its historical development. This enables us to deal
with the complex issues raised in this paper.
The conflict because of distribution of firms’ income allows one to trace the
influence of insider rent on prices and investments of Russian corporations.
Naturally, reduction of the firm’s financial flows directly undermines supply of
investment funds. Decisive role here is played by the time horizon of big
insiders. The shorter is it, the greater portion of finances is withdrawn from
enterprise right until completely stopping any investments (Dzarasov and
Novojenov, 2005, pp. 342-347). Expenditures on infrastructure of control also
represent a powerful limitation of accumulation of the corresponding funds.
The more acute intra-firm conflicts are, the more funds should be directed to
strengthening mechanisms of suppression of the social groups challenging big
insiders. It is a direct deduction of finances from investment fund. Insider rent
withdrawal undermines the demand for investment funds as well. The shorter
the time horizon of the dominant group, the
a)
R
b)
R, r
c)
R, i, r
SF’
SF
R0
DI’
DIR
0
FIR
DF
DI
∆FIR/p
∆FI/p
FI
FF
FI’
∆F/p
Fig. 4. Supply of and demand for funds on the part of a medium-term
oriented big insider and of the Eichnerian Megacorp
Source: Dzarasov, 2011, p. 209.
The vertical axis measures the implicit interest rate (R), the external interest rate (i),
and the expected rate of return of investment projects (r). The horizontal axis at the fig. (a)
and (b) measures insider rent (∆FIR/p) and investment funds (∆FI/p), while at fig. (c) – the
total value of funds (∆F/p). The fig. (a) depicts the demand for insider rent of a medium15
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
term oriented big insider (DIR); while the fig. (b) – his demand for investment funds (DI);
and the fig. (c) – the total value of the demand for funds (DF) and of the supply of funds (SF)
on the part of the Russian firm and of the Eichnerian Megacorp.
the smaller are the standards of the pay-back periods of investment projects,
and stronger limitations of their costs and expected returns (Dzarasov and
Novojenov, 2005, pp. 348-67). It means that a significant part of potentially
profitable for the company investment projects is rejected. This happens
because these projects can yield the expected profits only beyond the time
horizons of the incumbent big insiders. Undermining of both the supply of and
the demand for investment funds functions means, that their intersection,
determining the size and nature of accumulation of capital, happens at the
level much lower than potentially feasible. Apart from that, the quality of
investments undertaken also declines in result of a choice being made in
favour of cheaper and more short-term projects. Let us consider Fig. 4 above.
It reflects the fact that other conditions being equal investments of Russian
corporation are much lower than investments of the Eichnerian Megacorp.
Hence, long-term growth of a company is traded-off for the short-term rent of
big insiders.
5. Insider Rent and Conditions of Growth
The role of appropriating of the surplus value as the main economic
relationship of capitalism can be seen, in particular, in the fact that economic
growth of this society is directed by profit. Its distribution between industries
is explained by Marxian theory of transformation of labour costs into prices of
production. Crucial to this process is transformation of surplus value into
profit. One of the main arguments against Marxism is the difference between
labour value of commodities and their prices of production. Meanwhile this
provides one of the major insights into the mechanism by which capitalism
operates. As it is known the difference appears because the surplus value is
produced according to labour, but distributed according to capital. Surplus
value is greater in industries, having lower organic composition of capital
(capital/labour ratio), but profit is greater in industries with higher organic
composition of capital. In order to preserve the assumption of the uniform
rate of profit in all industries (which is the result of competition and interindustrial capital flows) part of the value created in the former sector of
economy should be transferred to the latter. This function is performed by the
prices of production. The latter depend on two key factors: technologies
(organic composition of capital) and social relations (distribution of value
between capital and labour and between the different capitalist groups).
16
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
The same mechanism operates in the corporate economy with
corresponding modifications reflecting more concrete stage of analysis.
Eichner (1991, pp. 338-359) suggested the value condition of growth which is
a set of prices covering both current costs of production and costs of
expansion of economy (investment) at the level of full employment. These
prices are determined by technological conditions reflected in Leontief’s
matrix of technical coefficients and by distribution of the national income
between wages and profits. In a corporate economy the distribution of profits
between industries depends on distribution of mark-ups on unit costs
(Eichner, op. cit., ch. 6). It is easy to see that Eichnerian value condition of
growth is essentially the Marxian prices of production adjusted to the
conditions of a corporate economy. To apply Echner’s model to the modern
Russian economy one should introduce the concept of insider rent in it. We
have seen above that the latter became an important, sometimes the major
part of the mark-up on costs of the Russian corporations (Fig. 4). Now we
should take into account the differences in the amount of rent appropriated by
big insiders in the different industries of Russian economy.
One of important factors of this difference is connected with
technological structure of the Russian economy. In Soviet times the major part
of high quality resources – equipment, labour and raw materials – was
concentrated in military production (Yaremenko 1997). For this reason the
civil industries had to rely on using low quality resources. Growth in this
sector depended on increasing deliveries of unskilled labour, mineral
resources and unsophisticated equipment. Given the labour-intensive
technologies of the civil industries, these factors of production could secure
growth only if they were provided at relatively cheap prices. Certain
industries in the Soviet economy – energy production, civil engineering,
transport and some others – played an important role in delivering resources
for civil manufacturing on favourable conditions (ibid.). The costs of
production in these industries were lower than on average in the world
because of cheap labour, availability of easily extractable mineral resources
and economies of scale effects (Andrianov 1999). These industries can be
referred to as the ‘maintenance’ industries (Yaremenko). The first two sources
of growth based on labour-intensive technologies were largely exhausted by
the beginning of the 1980s (Yaremenko, 1997).
The second major factor which determines the relative distribution of
insider rent between industries has institutional nature. The infrastructure of
big insiders’ control over their firms (see above) strengthens market power of
the Russian enterprises as well. Indeed, its external elements secure for the
firms favourable legislation, taxation, restraints on rivals entering markets
and so on; while the internal elements of infrastructure help to control
employees. Another important factor enhancing the market power of Russian
firms is unique to those in the export-oriented industries. Since currently
there is no foreign competition in their domestic market, firms belonging to
17
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
this sector are able to increase their foreign deliveries thus limiting domestic
supply of their products and putting upward pressure on domestic prices
(Uzyakov 2000, pp. 103-104).
Data show that Russian industries can be divided into two unequal
groups: with prices growing relatively quicker or slower than the average
(Rosstat, 2011a, p. 695). The first embraces: the fuel-energy complex, ferrous
and non-ferrous metallurgy, foodstuff production and transport, the second
includes all the others. The first group of industries belongs to those which
fulfilled maintenance functions under the planning system. Due to the
advantages mentioned above they enjoy relatively lower costs than their
competitors in the world market. Using their cost advantages, the fuel
producing complex, ferrous and non-ferrous metallurgy, part of
transportation, some chemical enterprises and some other companies started
benefiting from exporting their products. Since their prices in the domestic
market did not reach the world level, big insiders of these enterprises
obtained an additional advantage. For instance on average in 2003-2008
prices of energy resources and of transportation tariffs in Russia grew
annually 7-8% quicker than prices of manufacturing and agriculture (Rosstat
2009b, pp. 461, 477, 478, 481). The situation in engineering is particularly
revealing, since it determines the technological level of the whole national
economy and its competitiveness at the world market.
Without any significant changes in the technological structure of the
Russian economy, price increases in the maintenance sector have led to costs
increasing in manufacturing: “In the majority of industries of Russian
manufacturing in the mid 1990s the unit costs of production were higher
than: in Japan by 2.8 times, in USA by 2.7 times, in France, Germany and Italy
by 2.3 times, in UK by 2 times. In comparison with the advanced countries,
manufacturing in Russia is more material and labour intensive” (Andrianov
1999, p. 273). This evidence can be interpreted as suggesting that relative
differences in the rate of change of prices are a major determinant of
differences in industrial profits.
Data show that fuel-energy production, ferrous and non-ferrous
metallurgy are the most profitable sectors.10 As identified above, these sectors
enjoyed favourable changes in their relative prices. It should be noted that
before liberalization the differences in profitability among these industries
were not very large. For instance in 1992 in the industrial, agriculture and
construction sectors the rate of profit was 38.3, 37.5 and 20% respectively
(Goskomstat 2001, p. 551). Many enterprises encountered conditions where
their new level of costs exceeded the selling prices of their products leading
10 Rosstat (2004, pp. 336-338). Until the mid-2000s profitability is given by industries, while from that
time – by the kinds of economic activities, which makes the data incomparable directly. Still the same
tendency can be observed today (see further). For instance, in 2010 the profitability of assets in
manufacturing machinery and equipment was only 2.8%, while in mining and quarrying of energy producing
materials amounted to 14.1% (Rosstat, 2011b, pp. 450-1).
18
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
overall to losses. In 1998, 53.2% of enterprises made losses. In that period the
share of enterprises suffering losses amounted to 47.2% in engineering, 61%
in the light industry and 84% in agriculture (Rosstat 2004, p. 333). With the
beginning of the economic recovery the situation improved: in 2003-2008 the
share of enterprises making losses in Russian economy declined from 43% to
25.2% (Rosstat 2009b, p. 396). Still it is a very high figure. In 2010
profitability of assets in mining and quarrying of energy producing materials
amounted to 14.1%, which is more than twice higher than the average 6.8%
for the whole national economy, while in manufacturing machinery and
equipment was only 2.8% and in agriculture, hunting and forestry – 3.4%
(Rosstat, 2011b, pp. 449-51).
Thus the price disparity in Russian economy means overt violation both
of the value and technological (technological structure) conditions of growth.
The pivotal role in formation of the current Russian price structure belongs to
the relative power of big insiders’ groups dominating over the different
sectors of the Russian economy. This relative power determined the different
size of mark-ups on costs and the different types of insider rent (see above)
extracted in the different industries. The former maintenance (the current
exporting) sector of economy enjoys the privileged position in price disparity.
Due to this its big insiders appropriate not only the surplus value created by
“their” workers, but also a part of unpaid labour of the rest of the economy
(mainly manufacturing and agriculture). One may conclude that the dominant
groups of the privileged, exporting sector appropriate both the absolute and
the relative (or differential) insider rent, while their other counterparts are
compelled to “limit” themselves with only the former. Thus, the notion of
insider rent as a concrete form of surplus value enables us to understand the
mechanism of lopsided economic growth in modern Russia.
6. The War of Big Insiders: a Case-Study
All the elements of our modified Eichnerian model can be seen at the
example of Volgograd JSC “Chimprom”.11 It reflects a particularly acute
struggle for an enterprise focused on establishing informal control over the
top-managerial position. This strife as effectively prevented any possibility of
separation of ownership from control at the JSC.
The chemical industry only became the subject of conflict between Russian
big insiders in recent years. According to Lemeshko (2006), this was due to
the previously low profitability in this sector. Indeed on average fixed capital
stock has depreciated by 58.8% and more than 60% of its output is
This case-study gives a concise exposition of a chapter from an unpublished manuscript: Dzarasov R.,
Novojenov D., 2012, Empiritcheski Analyz Nakopleniya Kapitala v Sovremennoi Rossii (Empirical Analysis of
the Capital Formation in Modern Russia).
11
19
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
uncompetitive in the world market (ibid.). Between 2002-2006 events in the
world market became favourable for Russian chemical enterprises due to
higher prices of energy in comparison with Russia, and price increase on some
chemical materials produced by Russian firms as a result of demand shifting
from Western European producers (Krjuchkova, 2005). One of the major
consequences of this new situation facing the industry was an intensification
of the struggle for control over the enterprises on the part of competing
groups of big insiders (Seregin, 2005). The struggle for control over
Chimprom is summarised in Fig. 5.
Big insiders. The major peculiarity of the Chimprom ownership structure was
that 51% of its shares were in state ownership (represented by
Mingosymuschestvo12), while the rest of shares were traded in the open
market (Andronova, 2005; Anisimov, 2006; Bitsev, 2004). As we show below,
rival groups of big insiders struggled to obtain a blocking holding and control
over the top-managerial positions. Functionaries from Mingosimuschestvo
successfully played on the conflicts between the big insiders. From the Soviet
times until April 2003 the general executive of VJSC “Chimprom” was Leonid
Kutyanin. According to Snigirev (2004) the functionaries from
Mingosymushestvo were eager to get rid of him, but this was difficult because
Kutyanin was backed by an influential Moscow businessman Valery Khaykin.
The latter was the president of the insurance company “Jiva” and a counsellor
to the Ministry of Industry and Science (Minpromnauka) where he had
widespread connections with important functionaries. His business methods
are based on hostile takeovers of enterprises followed by asset-stripping
(ibid.). The cases described by Snigirev (ibid.) are typical examples of rent
extraction by very short-term oriented dominant groups.
The same functionaries from Minpromnauka who helped Khaykin in his
takeovers, were the state representatives on Chimprom’s Board of Directors.
Every time the question to remove Kutyanin from his position was raised
these state representatives prevented this from happening (ibid.). At the
beginning of 2000s Khaykin declared his aim to create a state pharmaceutical
holding under the aegis of Minpromnauka (Lemeshko, 2003). Apart from
other big chemical enterprises the holding was to include Chimprom. In 2002
Khaykin managed to buy 5.09% of the total amount of shares belonging to the
company’s trade union (Snigirev, 2004). He paid only 25 roubles for a share
(less than one dollar at that time), while its market value was 800 roubles
(nearly 30 dollars) (ibid.). The new owner of the shareholding was
“Biopharmthechnologia” Ltd., controlled by Khaykin (Svyatoslavskaya, 2004).
The Khaykin-Kutyanin group tried not to lose their chances to enrich
themselves, as later prosecution of Kutyanin indicated (Vershinina and
Samoilenko, 2004). Abuses of power were revealed in various forms,
12
Ministry of State Property
20
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
Years
20012002
Insiders
State officials
V. Khaykin
State officials
2003
O. Savchenko
Organizations and
their shareholdings
Mingosymuschestvo
51%
The enterprise’ top-managers
L. Kutyanin
Biopharmtechnologiya
Ltd.
10%
Mingosymuschestvo
51%
Deerfield Universal
Inc., Maitland Ventures
LLC и Forena Ltd.
E. Kisyl
34 %
Мингосимущество
51%
Biopharmtechnologiya
V. Khaykin
State officials
2004
O. Savchenko
O. Savchenko
Ltd.
5%
Mingosymuschestvo
51%
Biopharmtechnologiya
Ltd.
A. Kozlov
5%
Deerfield Universal
Inc., Maitland Ventures
LLC и Forena Ltd.
34 %
End of
D. Mazepin
20042005
Мингосимущество
51%
Linton Capital Ltd. и
Rafford Investment
Ltd.
D. Osypov
34 %
N. Levitsky
State officials
Мингосимущество
51%
Mingosymuschestvo
S. Losev
51%
F. Dzapshba
Ch. Botsiyev
Fig. 5. Struggle of Big Insiders for Control of Volgograd JSC Chimprom
Source: Drawn from the publications referred to in this section
21
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
including theft of finances provided from the federal budget for conversion
from military to civilian production at Chimprom (ibid.). In the course of the
interregnum following the removal of Kutyanin, a rival group of big insiders
joined the struggle.
In 2001 a new group of companies started buying Chimprom shares. They
were under the control of Oleg Savchenko, owner of the JSC “Evropeyskaya
Podshipnikovaya Corporatsiya” (European Ball-Bearing Corporation) and a
member of the State Duma of RF (Bitsev, 2004). It was reported in the mass
media that he became a big businessman after being at the head of “Chukotka
Economy Foundation” in 1990s, from which he had withdrawn $35 mil.
(ibid.).The structures controlled by this businessman then took over a few
ball-bearing enterprises, whose fixed assets were immediately stripped and
parts of their land holdings sold (ibid.). In 2003 Savchenko declared that he
intended to create a chemical holding (Kolesnikov, 2003). That year he
became an owner of 30% of Chimprom’s shares (Svyatoslavskaya, 2004). In
the spring of the same year as a result of court action, the sale of the trade
union’s shares to Khaykin was abrogated, and businesses controlled by
Savchenko obtained this holding for 10 mil. roubles (about $ 342 thousand at
the time) (ibid.). The new big insider appointed to the position of the
Chimprom commercial director was Alexander Mitrofanov, to represent
Savchenko’s interests (Bitsev, 2004). The latter was under legal prosecution
for illegally bankrupting another chemical enterprise, where previously he
was a financial director (ibid.). One can infer from this information that
Savchenko and Mitrofanov are experienced big insiders, specialising in hostile
takeovers with a tendency to strip the assets of their controlled enterprises.
Their activities at Chimprom support this conclusion.
As is mentioned in the press, “As a first step the new shareholders
established their control over the current management of the enterprise”
(Bitsev, 2004, translated by me – R.Dzarasov). Kutyanin was temporarily left
in his position of general executive, but the real control shifted to the
commercial director Mitrofanov (ibid.). Also in 2003, after entrenching his
positions at the enterprise, Savchenko started his struggle against Kutyanin
(Lemeshko, 2003). Auditing revealed significant abuses of power by the
executives (see below) and Kutyanin was displaced with his functions
transferred to Evgeny Kysil associated with Savchenko (Kolesnikov, 2003).
Meanwhile Khaykin was backed in his struggle against Savshenko’s
grouping by external powerful forces. They were formed by all those whose
incomes were jeopardized by the impending change in ownership:
functionaries, who had previously benefited from bribes, bankers involved in
investing “conversion” money, intermediaries helping to transfer finances,
‘roofs’ covering the participants (see 3.2), and even the governor of
Volgogradskaya Oblast (Volgograd Region) Maksyuta (Vershinia and
Samoylenko, 2004). The most important support was provided by
governmental functionaries at the highest level. Under Prime-Minister
22
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
Kasyanov this role was played by: the deputy head of the federal government
machinery (apparatus) Kopeykin; the former first deputy of the minister of
Minpromnauka Svinarenko; the head of the department of the financial
markets and property relations of the federal government machinery
Milovidov (ibid.); head of the department of industrial and innovation policy
in chemical industry of Minpromnauka Ivanov (Snigirev, 2004). These
powerful functionaries recommended that Prime-Minister Kasyanov replace
the Chimprom general director (Vershinia and Samoylenko, 2004). Their
candidate was Aleksey Kozlov who had never worked in the industry and had
no experience of production management at all, but represented the interests
of Khaykin’s group (ibid.). To weaken their rivals, Khaykin group initiated a
criminal prosecution of the former executives and Kysil was sued for inflicting
damage on Chimprom amounting to 600 mil. roubles (about $ 20.1 mil. in the
end of 2003), and was eventually sentenced to three years of imprisonment
suspended (Osyka, 2005).
This was a serious blow for Savchenko, but further events have shown that
he also had powerful allies in state structures (Bitsev, 2004). The appointment
of Kozlov was opposed by: the Deputy Minister of Property Relations, Gusev;
adviser to the same minister and the Chairman of the Chimprom’s Board of
Directors Borodin; the former first deputy of the same minister Medvedev
(ibid.). Despite their high position in the governmental hierarchy they failed to
protect Savchenko, and in March 2004 Kozlov became the general executive of
Chimprom (Snigirev, 2004). The new head of the enterprise immediately
instigated court actions against the offshore companies, representing
Savchenko among the shareholders (Savyatoslavskaya, 2004) and their shares
were suspended (Lemeshko, 2003). The struggle of the Khaykin and
Savchenko groups for control over Chimprom demonstrates the importance of
an external infrastructure of control which plays a crucial role in securing
control over the enterprises in Russia. The nature of these institutions reflects
their informal character.
Meanwhile the triumph of the Khaykin group was only short-lived. In
November 2004 the disputed shares of Savchenko were bought by another
pair of offshore companies: Linton Capital Limited and Rafford Investment
Limited, controlled by a famous businessman and a former state functionary,
Dmytri Mazepin (Kommersant, 2005). In the 1990s the latter occupied a
number of top-managerial positions in big companies and successively was:
an advisor, a deputy, and the first deputy of the Chairman of the Russian
foundation of the federal property (Andronova, 2005). In 2004 being a
director of “Construction Bureau” Ltd., he announced his plan to create a
holding in the chemical industry and started buying big shareholdings in the
enterprises in this sector (Gileva, 2005). Chimprom was interesting for
Mazepin because it was a supplier to the enterprises already bought by him
(Seregin, 2005). Kozlov in the same November 2004 retired from his position
of Chimprop General Director and became a member of the Board of Directors
23
Dzarasov R. Eichnerian theory of the business enterprise in the case of Russian corporations
in one of Mazepin’s other companies (Regnum, 2005), which meant that he
left Khaykin for a more promising employer. In any case Khaykin was
crowded out of Chimprom. Despite this achievement, imposing his own
control over the enterprise proved to be a much more difficult task for
Mazepin. He was promoting both candidates suggested for this position of
General Director, Osipov and Dzapshba, and the first was appointed only
temporarily (Kommertcheskaya Nedvijimost, 2006). The reason was that
Mazepin’s control over Chimprom was challenged by new strong rivals.
These rivals were led by a young, but ambitious businessman, Nikolay
Levitsky. His rapid rise in Russian big business was connected with classical
hostile takeovers in the 1990s with wide usage of law enforcing agencies in
organizing pressure on shareholders reluctant to give up their property rights
(Komrakov and Stolyarov, 2005; Efimova, 2005). In 2004 Levitsky established
a chemical company Synntech Group together with a famous Russian oligarch,
Victor Vekselberg. The latter belongs to the list of the ten richest people in
Russia, and has business interests in oil, non-ferrous metallurgy, banking and
some other industries (NEWSru.com, 2004). The two partners started
creating their own group of chemical companies using the same method of
pressurising shareholders and managers (Efimova, 2005). The interests of
Mazepin and the Levitsky-Vekselberg groups clashed in a number of chemical
enterprises (Malkova, 2005; Anisimov, 2006; Komrakov and Stolyarov, 2005;
Efimova, 2005) as is shown at Fig. 6.9 below. This struggle with powerful
rivals complicated Mazepin’s obtaining control over Chimprom. In June 2005
his protégé Osipov was forced to retire and a new figure was appointed as a
temporary General Director – Losev (Vestnik Chimproma, 2005). He is
considered as representing the interests of the Levitsky-Vekselberg group
(Osyka, 2005).
The complicated situation at Chimprom exemplifies modern Russian
business. The Mazepin group possesses a blocking shareholding, while
Letitsky-Vekselberg has seized control over the management. This means that
neither of the two groups is entrenched at the enterprise. All these rival
groups of big insiders managed to establish control over Chimprom only for a
brief period of time. This inevitably led to a short-term orientation and
induced them to withdraw as much finance as they could.
Rent withdrawal by big insiders. Although the methods and size of rent
withdrawals are disguised by big insiders, some information about it came
into the public domain due to revelations instigated by rivals. It appears that
the Khaykin-Kutyanin group specialised in theft of state finances provided for
conducting conversion from military to civilian production (Vershinia and
Samoylenko, 2004). Of two to five million dollars provided for this aim
annually in 1999-2002, not more than 50% was spent on conversion. Their
claimed expenditures on these aims were greater than the real costs of these
works by 4 times and theft amounted to millions of dollars (ibid.). Auditors in
24
Mazepin
Vekselberg
Blavatnik
75%
25%
“Renova” Group
JSC “KCHKHK”
JSC “Tollyattiazot”
№1
Levitsky
60%
JSC “Galogen”
34%
№2
49%
50,8%
“Construction
Bureau” Ltd.
10%
Synntech Group
JSC “Chimprom”
100%
JSC
“Minudobrenya”
JSC “Azot”
JSC “NZSP”
Fig. 6. Struggle of Mazepin and Levitsky-Vekselberg Groups of Big Insiders for Control of the Chemical Industry
Source: Drawn basing on publications referred to in this section.
JSC “KCHKHK” – JSC “Kirovo-Chepetsky Chimitchesky Combinat after B. Konstantinov”
JSC “NZSP” – JSC “Novocherkassky Zavod Syntetitcheskykh Productov”
The figure is based on the following sources: Malkova, 2005; Anisimov, 2006; Komrakov and Stolyarov, 2005; Efimova, 2005.
Percents above the arrows show the share holdings of the two rival groups in the corresponding companies.
25
2002 found that obviously ruinous bond schemes were financed, prices
manipulated and the profitability of the enterprise that year dropped from
16.48% to 0.52% (Kolesnikov, 2003).
The Savchenko-Kisyl group was no better. It appropriated part of the
finances provided for some target programmes, for instance, a part of $ 63 mil.
issued by the US government for eliminating the chemical weapons stored at
Chimprom (Bitsev, 2004). In 2003 the strategic stock of coke disappeared
(about $ 369 thousand); 30 mil. roubles (about $ 1 mil.) of the Russian
government, provided for eliminating the chemical weapons, were
withdrawn; the building of the enterprise’s central office was sold for 6 mil.
roubles without authority (about $ 201 thousand) and so on (Trofimov,
2004). According to the new General Director Kozlov (2004), the enterprise
was prepared for a feigned bankruptcy, stopping paying taxes and wages. The
major channel for extracting rent from Chimprom by the Savchenko-Kisyl
group was “Chimpromtrading” Ltd. (ibid.). Ostensibly this trading company
was established to sell Chimprom products for a very modest remuneration
(ibid.). However the real role of this firm was very different (Trofimov, 2004).
Both functions of purchases and sales were passed to Chimprontrading.
Manipulations with prices ensued. Says the new General Director: “Prices
were significantly either overvalued or undervalued in favour of the trading
house” (Kozlov, 2004, translated by me – R.Dzarasov). According to Kozlov
(2004) as a result by March 2004 the recurring finance of the enterprise were
reduced to 20% of their norm. This means that the Savchenko group was
preparing Chimprom for bankruptcy in order to buy it for a negligible price
later (ibid.).
Under General Director Losev the situation has not changed radically. The
enterprise’s products were still sold to intermediaries at undervalued prices
(Osyka, 2005). As a result of six months of his tenure, Losev reduced
Chimprom to a nearly bankrupt state. According to the member of State Duma
Gubkin this was “premeditated decrease of the assets value prior to
privatization (of the state shareholding) in the interests of the particular
individuals desiring to obtain Chimprom at a cheap price” (ibid., translated by
me – R.Dzarasov). By ‘particular individuals’ he meant the LevitskyVekselberg group (ibid.). How extraction of rent by big insiders affected
Chimprom’s financial flows can be seen from the following table 1 below.
The data show a persistent decline of return and profit of the enterprise in
the last 5 years. In this period the chemicals producing industry experienced
recovery along with the economy as a whole. Meanwhile, net profit turned
into losses at Chimprom over this period. Due to this profitability of the own
capital declined from 12.9% in 2001 to -8.2% in 2004, and both profitability
of fixed assets and sales became negative; in 2003 Chimprom’s losses per one
share amounted to $ 8.7, and in 2004 - $ 6.0 (Chimprom, 2005, pp. 22-23). At
the same time, it should be noted that in 2004 return on sales had grown by
26
Lumpen-Bourgeoisie and Capitalism in Russia
Table 1. Profits and Losses of Chimprom
Variable
2000
Gross
Revenue,
2 302 776
thousands of roubles
Gross Profit, thousands of
555 421
roubles
Net Profit after taxes
(residual profit, loss),
thousands of roubles
74 057
1 q. of
2005
2001
2002
2003
2004
2 760 515
2 781 522
2 636 495
3 158 967 859 173
721 840
416 637
342 010
516 885
82 652
153 990
4 554
-178 107
-115 662
-25 352
Source: Chimprom, 2005, pp. 22-23.
19.8% compared with the previous year, and production price at the same
period increased by 18.3% (ibid.). Hence, even the increase in the company’s
income was more than offset by extractions and tax payments.
Small insiders. A number of intra-firm conflicts ensued leading to
opportunistic behaviour of managers and employees, who created a unique
four-level system of theft at “Chimprom”. The lowest level of theft was
organised by rank and file workers trying to compensate for their low wages
by carrying away from enterprise tools, construction materials and products,
which had a market value. The second level was created by the foremen and
heads of shops. Using the gaps in the accounting system, they overvalued
expenditure on materials in the production process, appropriating the
excessive materials. Later they produced additional products from these
materials, using the enterprise’s own workforce and equipment, and sold
them. The next level of theft appeared when opportunists from the production
departments established connections with their colleagues in the central
office especially from its purchasing department. The latter ordered raw
materials which were allegedly used in production in the shops of their
partners. In reality no materials were bought, the money was shared among
the group of small insiders, and fictitiously included in costs of production.
The next level was created by medium insiders from the company’s central
office. They established their own firms, providing raw materials to or/and
purchasing products of Chimprom. Their method of extracting rent, through
manipulating prices, was essentially the same as applied by big insiders, the
difference was only in the size of these activities.
27
Lumpen-Bourgeoisie and Capitalism in Russia
Fixed capital stock and investments. The main indicator of the time horizon
and investment strategy of the big insiders, who have dominated Chimprom,
is the condition of its productive capacity. Chimprom’s accounts (Chimprom,
2005, p. 21) show that the level of wear and tear of the company’s fixed assets
is very high – they lost more than 60% of its original value. Note that
machinery, tools and equipment are very heavily worn out, down by more
than 70% of their original value. These figures do not show the full picture,
since old fixed assets are generally undervalued in Russia, while new assets
are valued at current prices. As a result the value of fixed assets is artificially
lowered, which helps to reduce property taxes. Probably, this undervaluation
of assets is the reason why at the meeting of the Chimprom Board of Directors
it was announced that the wear and tear of fixed assets in whole in 2005
amounted to 80% (Sokolova, 2005). This figure itself indicates short-termism
and a deeply flawed investment strategy. Says the shop head Knyazev: “At our
enterprise the major productive equipment is overwhelmingly obsolete. Due
to various reasons it often breaks down. Meanwhile almost no funds were
provided in recent years to purchase any new equipment. The approach to the
provision of raw materials was similar – they were purchasing what was
cheapest” (Maximova, 2004, translated by me – R.Dzarasov).
Conclusions. The struggle for informal control over Chimprom was focused
on its top-management positions, which suggest that it precluded the
separation of ownership and control. In this case the informal control of big
insiders was particularly unstable. This led to a short-term time horizon and
intensive rent extraction from the company’s financial flows. Withdrawal of
funds by big insiders, under relatively weak internal infrastructure of control,
induced a four-tier system of rent extraction by small insiders, thus,
demonstrating an increase in intra-firm conflicts. This short-term time
orientation and a large scale rent extraction caused a deficient investment
strategy. Chimprom’s big insiders chose in favour of cheap investment
projects of inferior quality with relatively short pay-back periods.
7. Russian Capitalism as a Social System
The extraction of insider rent determines how national income is
distributed in our society, which is marked by rapidly growing social
inequality (see below). The results of this situation include a reduction in the
volume of the domestic market, since in modern society the basis for this
market is provided by demand exercised by hired workers. This means that if
Russian capitalism were to shift from maximising insider rent to maximising
entrepreneurial income, the demand for good-quality labour power would
induce capitalists to raise wages, and the volume of the internal market would
increase. To this, one might object that during the decade from the year 2000
an influx of petrodollars into Russia brought increased incomes to the whole
28
Lumpen-Bourgeoisie and Capitalism in Russia
of the country’s population. Official figures, however, show that the share of
overall money income received by 80 per cent (!) of the Russian population
steadily declined between 2002 and 2009. Only for the richest one-fifth did it
increase (Rosstat, 2008, p. 132; Rosstat, 2010b, p. 131). Consequently, the
average figures for living standards mask growing social inequality. Research
confirms this conclusion. In the fourth quarter of 2010 the Russian
government set the monthly subsistence minimum income at a Russia-wide
figure of 5,902 rubles per head of population. For the employable population
the figure was 6,367 rubles (US$210-215 – R.D.); for pensioners 4,683 rubles;
and for children 5,709 rubles. As experts from the economic research centre
RIA-Analitika noted, “Two wages are barely enough to cover the essential four
subsistence minimums. In thirty-six regions the sum per family does not
exceed 10,000 rubles (US$330-350 – R.D.). This is despite the fact that the
subsistence minimum in our country is a paltry amount that only by a great
stretch of the imagination corresponds to the biological requirements for
survival.”13 The sales volumes of Russian companies decline accordingly, as
do their profits, limiting accumulation and undermining the incentive to
invest. This means that if social inequality were less the internal market
would be larger, and accordingly, profits would increase as well.
As was discussed in section 5, insider rent has been the main factor
shaping the price structures and determining the financial flows between
sectors in the Russian economy. The strongest aggregations of capital have
been those in the export-oriented energy and raw materials sector, and this
has created a disparity of prices in their favour and to the disadvantage of
manufacturing industry (Dzarasov and Novojenov, 2005, pp. 124-146). As a
result of the orientation of large-scale Russian business to the extraction of
short-term rent, companies have pursued harmful investment strategies
(Dzarasov, 2011; 2007, ch. 6), and it is this which explains the woeful
condition of the country’s basic capital stock. The systematic extraction of
insider rent from enterprises, followed by its accumulation abroad, is bringing
about a situation in which tax stimuli and monetary policy lose their
effectiveness.14 In practice, the amounts saved due to lower taxes will be
appropriated by the dominant groups in the form of rent, while production
fails to grow.
Meanwhile, the practice of systematically diverting part of the financial
flows from enterprises leads to banks charging high premiums for risk, while
sharply limiting the possibility of attracting credits, lessening the effect of the
banking multiplier, and reducing the money supply. During the decade from
13
Cited in RIA-Analitika, 2011.
The effects of the outflow of insider rent from Russian enterprises resemble in some ways the role of debt
payments by Japanese companies. After the prices of shares and property in Japan collapsed in 1990, the capital
holdings of enterprises contracted sharply, and their indebtedness increased relative to finances in the proper sense.
Firms began to spend their receipts on debt repayments instead of investment, which led to prolonged stagnation of
the national economy. Under the conditions of “balance sheet recession” the stimulatory effect of tax concessions
and increases in the money supply declined dramatically. (Koo, 2008).
14
29
Lumpen-Bourgeoisie and Capitalism in Russia
the year 2000, the high export incomes of a number of Russian companies
brought a substantial inflow of financial resources to the country from the
world market for loan capital. This led to a decline in the interest rates on
banking capital used for commercial credits. The average interest on
commercial loans of less than one year’s duration made out to non-financial
organisations declined from 24.43% in 2000 to 10.03% in 2007. During these
years the corresponding figures in Great Britain were 3.69-5.98%; in France
less than 7%; in the US between 4 and 9%; and in Japan around 2% (Rosstat,
2010a, pp. 308-309). In February 2011 the interest charged on credits in
Russia stood at 8.7% (Tsentral’nyy bank RF, 2011), while in March 2011 the
prime rates charged by US banks amounted to only 3.25% (Bank of Canada,
2011). Hence in even the most propitious circumstances (beneath a shower of
petrodollars), and amid conditions of crisis, bank interest rates in Russia have
been markedly higher than in oil-importing Western countries. A case study of
a Russian company financing its investment program through credits showed
that the interest rates payable were formulated on the principle: LIBOR plus
4.4% (Dzarasov, 2007, p. 188). This surcharge also reflects a specific
premium for risk, paid by Russian companies to the banks.
In addition, the monetary policy pursued by the Russian authorities is
aimed at maintaining an exchange rate favourable to oil exporters. Money is
printed in response to the need to purchase the “excess” portion of the dollars,
threatening to bring about a fall in the ruble rate and to devalue export
earnings that are changed into the national currency.15 During the first decade
of the new century, in the view of Sulakshin, a total of $2.0-2.6 trillion was
taken out of financial circulation in the country (Sulakshin, 2007, pp. 79-80).
The flight of foreign capital and the export of Russian capital increased
dramatically in the last quarter of 2008. During the same period energy prices
fell on world markets. While the supply of foreign currency declined, the
demand for it rose substantially. As a result, a serious blow was dealt to the
Russian economy. With the excess of hard currency supply over demand no
longer present, monetary emission might have provided a source of financing
for domestic demand and production, softening the consequences of the
economic crisis. The government, however, did not take this step. Unwilling to
buy additional hard currency, it refused to resort to emission, and tightened
the money supply (Manevich, 2009, pp. 3-4). As a result, the crisis saw
15
Hence in 2007-2008 most of the active balance of the current operations account (that is, most of the income
from foreign trade) was immobilised by the state in the stabilisation funds. The result was that the cost of exporting
capital was financed mainly by importing capital to the country. It should be noted that in 2007 exports of capital
(and imports of goods) came to a sum ($136.2 billion) that was substantially less than the supply of foreign currency
as a whole ($217.4 billion). The remainder ($81.2 billion) was bought by the Central Bank to top up the foreign
currency reserves. The situation in 2008 was the direct opposite. At $231.7 billion, exports of capital (and imports of
goods) substantially exceeded the total supply of foreign currency ($118.0 billion). The difference was made up by
selling part of the foreign currency reserves of the Central Bank ($113.7 billion). The sale and purchase of foreign
currency by the Central Bank is thus a balancing item that allows the state to maintain a set rate for the ruble that is
to the advantage mainly of exporters (Manevich, 2009, p. 1).
30
Lumpen-Bourgeoisie and Capitalism in Russia
Russia’s GDP shrink by 7.9 per cent in 2009 (Rosstat, 2010c, p. 38), a figure
higher than in many other countries. It was only in the final quarter of 2008
that the Central Bank of the Russian Federation threw unprecedentedly large
resources into supporting the banking system, limiting the depth of the crisis.
Early in 2009, however, the Central Bank returned to its earlier policy
(Manevich, 2010, p. 22). Meanwhile, experts warned that paying off the
credits that had been granted would delay an exit from the crisis.16 Another
important factor was the tendency of monetary policy to raise bank interest
rates, on top of the premium for risk. In the mid-1990s the rate of refunding of
the Russian Central Bank had reached the absurd figure of more than 200 per
cent. Subsequently, it declined to 10-13 per cent in the years from 2004 to
2007. In the same period, central bank interest rates in the West were far
lower: in Germany 3-5 per cent, in the US 3.15-4.83 per cent, and in Canada
2.75-4.50 per cent (Rosstat, 2010a, pp. 308-309). During the crisis period the
refinancing rate of the Russian Central Bank declined still further, to a level of
8 per cent in 2011 (Bankirsha.com, 2011). But this was much higher than, for
instance, in the US, where the Federal Funds Rate was set at a level of 0.25 per
cent.17 On the whole, experts regard the “financial targeting” policy of the
Russian monetary authorities as a brake on economic growth (Var’yash,
2010).
The policy of the Central Bank is thus dictated by the interests of the
dominant big-business groups, first of all exporters, instead of by the need to
ensure sufficient aggregate demand for the growth of the domestic market.
It follows from the above, that in terms of their access to the world market,
position in the domestic price structure and as the main beneficiaries of the
Central Bank monetary policy, the most privileged elite of the Russian big
business is the group of exporters of oil, natural gas and metals. It is only
natural, that they have the greatest profitability of assets. Hence, big insiders
of this privileged sector of Russian economy control the greater share of
insider rent. This income was defined in section five as differentiated or
relative insider rent. The very fact that it accrues to the dominant groups of
exporting raw extracting industries to the detriment of manufacturing
testifies that Russia shifts to the semi-peripheral position in the capitalist
world-system.
The unviability of Russian capitalism is especially clear from the fact that
our country has emerged from beneath the flood of petrodollars that poured
onto it throughout most of the decade after 2000 with its productive plant
worn-out and obsolete, with its economic structure distorted in favour of the
energy and resource sector, and with its population massively impoverished.
16
“In such a situation the Russian economy will encounter an extreme credit shortage, which will act as a brake
on the economic upturn” (Aleksashenko, 2009, p. 20). This is reminiscent of the situation in which the Japanese
companies found themselves (see earlier note).
17 Bankrate.com, 2011. The federal funds rate is the main instrument through which the US Federal Reserve
System influences bank interest rates.
31
Lumpen-Bourgeoisie and Capitalism in Russia
Transformed into a supplier of raw materials and an export market for the
manufacturing industry of developed countries, Russia is becoming a typical
country of the capitalist world periphery. Let us now examine Figure 2:
The diagram shows in generalised form the impact made by the
transition to peripheral (or semi-peripheral) capitalism on the social and
economic development of Russia compared with other states. In terms of both
Human Development Index18 rankings and rankings for per capita GDP, all of
the former Soviet republics without exception lag behind the USSR.19 Under
the present social system, this gap cannot be overcome.
Fig. 7. Relationship between international rankings according to the Human
Development Index and per capita GDP of the USSR (1987) and the former
Soviet republics (2007). Rankings are placed in descending order (the first
place is the best)
Calculated on the basis of : Human Development Report 1990, New York and Oxford, Oxford
University Press, 1990, p. 119; Human Development Report 2009, Basingstoke and New
York, Palgrave Macmillan, 2009, pp. 171-173.
18
In the literature many shortcomings of the Human Development Index are noted. In particular, the HDI
indicates nothing about the scale of poverty and its dynamic; it does not characterise the level of development of the
country as a whole; it is a relative index that depends on the maxima and minima achieved globally; and so forth. As
a result other statistical indices, which characterise the development of countries more fully, have been proposed.
The HDI, however, has the advantage of being based on data that are relatively accessible in all countries, whether
their statistical services are highly developed or not. (Krasil’shchikov, 2010).
19
In Soviet statistics GDP was understood as “net production”, that is, as the newly created value of material
production without taking services into account. This is close to the modern index “production of the real sector”,
which does not take account of a whole series of elements that are now highly significant, such as speculative
operations.
32
Lumpen-Bourgeoisie and Capitalism in Russia
As if imprinted in its genetic code, all the above features of today’s
Russian economy – which is turning into a variant of peripheral capitalism –
are revealed by the concept of insider rent, representing a specific form of
surplus value. This allows us to present the modern Russian economy in
Marxist fashion, not as a chaotic agglomeration of facts and tendencies, but as
a consistent social and economic system with its own internal logic and unity.
Equipped with an integral picture of the Russian economy, we are able to
explain its special vulnerability to crises and shocks of the world scale. With
its manufacturing industry collapsing, and with its domestic market sharply
reduced, the Russian economy is critically dependent on world prices for
energy sources. This is why the onset of the world economic crisis, which
most Russians did not expect and which led to a fall in demand for oil, dealt us
such painful blows. Another important way in which the crisis has affected
our economy has been the flight from our so-called developing market of
Russian and foreign speculative capital; this is something which takes effect at
the slightest sign of an unfavourable world conjuncture. The reasons why the
world crisis has brought about a greater decline in our economy than in the
developed countries can thus be traced to the institutional nature of Russian
business, reflecting the place occupied by our country in the capitalist world
system.
Х Х Х
Summing up, one may say that the fusion of ownership and control at the
Russian companies in the form of informal control of big insiders over assets
is an institutional feature of the Russian big business. Essentially,
infrastructure of control means reliance of the Russian capitalists on violence
as the very foundation of their power over enterprises, and, first of all, over
the hired labor. Genetically this institutional nature of private property in
Russia succeeds to the arbitrary power of the Soviet bureaucracy, entrenched
by privatization under the influence of global capitalism. Heavily relying on
violence and never severing itself from the state the modern Russian
proprietor class is only another version of Frank’s “lumpen-bourgeoisie”. This
is reflected in the notion of insider rent, which is only loosely related to the
excess of revenues over costs, and which reflects semi-feudal nature of the
modern Russian capitalism. Treating insider rent as a concrete form of
Marxian surplus value enables one to present the modern Russian capitalism
as a holistic social system without artificial split on micro- and macrospheres. To be sure, insider rent underlies accumulation of capital by Russian
corporations and this determines the main features of the country’s economic
growth.
33
Lumpen-Bourgeoisie and Capitalism in Russia
As this paper attempted to demonstrate, the illusion of economic growth is
created in Russia only due to proceeds from high oil prices at the world
market. To achieve a genuine development Russia should move beyond
insider rent capitalism. Given the semi-feudal nature of the latter, it seems
that Russia again faces the need of a “bourgeois-democratic Revolution” just
as hundred years ago. And just as then, Russian capitalist class is too
reactionary and too dependent on the state (and on the West, to that matter)
to lead such a movement. This means that once again bourgeois-democratic
changes without bourgeoisie are thinkable only if accompanied by certain
socialist changes. Eichnerian type indicative planning based on joint
determination of wages, prices and investments and reconsidered in the
perspective of the Soviet experience seems a sound alternative to insider rent
capitalism. However, an important new element should be introduced –
workers’ collective ownership of big enterprises as an alternative both to
bureaucratic and capitalist control over the corporations.20
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