The rise and fall of oligarchic capitalism
Russia’s political economy has undergone a switchback ride since 1985. Reformist “market
socialism” was followed by institutional collapse, and then the embrace of radical liberalization –
which led not to a competitive market but to oligarchic capitalism. That system in turn imploded
in the August 1998 crash, and after 18 months of political stalemate Putin came to power and
went on to construct a system of state corporatism.
The collapse of oligarchic capitalism was due to deep contradictions in the model, and not merely
contingent factors such as Yeltsin’s incompetence or the August 1998 financial crash. Two
contradictions stand out. First, the oligarchs were parasitic on the Russian state. They were
draining it of assets and revenues, to the point where the soaring budget deficit and profiteering
from high-interest treasury bonds helped trigger the 1998 crash. Second, the oligarchs were
deeply divided among themselves. They did not trust each other, fighting bitterly over successive
privatizations (such as the sale of the telecom holding company Svyazinvest in 1997), and over
the Yeltsin succession in 1999.
The oligarchs did not have a mechanism for resolving disputes among themselves. The only
“mechanism” they had was appeal to Boris Yeltsin. Given that Yeltsin was physically
incapacitated for most of the time, this meant they competed for the favor of the Kremlin
courtiers (the “Family”) who controlled access to the president. Yeltsin’s second and final term as
president was due to end in March 2000, and the oligarchic system did not have any procedure in
place for picking a successor.
At the end of the Yeltsin era, Russia’s evolution towards what is regarded in the West as a
“normal” market economy was stalled in midstream. Powerful leaders had a vested interest in
preserving the status quo, and there was no significant coalition of groups with a stake in further
reform. The economy had been sufficiently liberalized to enable the oligarchs to enrich
themselves, but not so much as to expose them to effective competition (from foreign companies,
for example). This situation was inefficient and morally indefensible, but it was unclear whether
or not it was politically and economically stable. Could it continue indefinitely, or would it
require a fresh round of market reform? In the end, Russia moved in a third direction – the return
of state control.
17 Stephen Fortescue, “Pravit li Rossie oligarchiya?” Polis, vol. 5, no. 8, 2002.
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