The economy of blat, or Russia's 20-year transition

Gregg Robins, head of UBS Wealth Management in Russia and a Marchmont Advisory Board member, is presenting in his blog his article first published in Spear’s Magazine, #5 (19), 2012.  

I can remember in the late eighties / early nineties when “Transition Economics” was a growth business, with new university courses, books, consultants, and so on. Indeed, I was a beneficiary of it, having written a book on the subject. Today we no longer speak of transition economies any more than we do of centrally planned ones. If I look at the last two decades in Russia, there are three major areas that have fascinated me, none of which has anything to do with the macro transition to a market economy. Where transition economics featured debates between advocates of “shock therapy” or “gradualism,” the central issues and developments since the advent of perestroika have been elsewhere.

First, capitalism itself has faced major crises over the past decades, during which we have seen the rise of the BRICs and Emerging Markets more generally. It was not foreseen – especially under the so-called “Washington consensus” - that these countries would not only become the engine of world growth, but more that they would also become far better models of fiscal management than their long-time capitalist neighbors in the West.

And as Emerging Markets have ascended, many developed countries have experienced severe economic shocks emanating from a deep-seated financial crisis. All along, the world has become flatter and flatter – to use Tom Friedman’s term – and people, information, and money have become infinitely more mobile, and more rapid in their mobility. The past decades in Russia’s transition did not happen in isolation. The trends I mention have especially affected the younger generation in Russia in terms of life choices and opportunity.

““TRANSITION ECONOMICS” IS MORE SUITED TO THE HISTORY BOOKS THAN TO THE CURRENT SITUATION. BUT IT HAS BEEN REPLACED BY FASCINATING DEVELOPMENTS AND CHALLENGES IN INSTITUTIONAL CHANGE, AND GENERATIONAL DYNAMICS”

Returning to Russia, then, the second major observation is the importance of institutional economics. By this I mean that the macro economic situation was always manageable through policy shifts, but the institutional fabric of the country was far more difficult to transform. Let me be more specific. “Formal” institutional changes, such as new laws and regulations, are relatively easy and quick to put in place, and it is not difficult to copy best practices from elsewhere. What is far more difficult is to make them work properly.

It is clear that the long-desired, law-governed state (pravovoe gosudarsto) is still evolving, and is dependent upon people, courts, and outside influences far more than the laws themselves. A stock market is not difficult to create, but it is a long-term process to effect acceptable levels of corporate governance, including proper insider trading laws, for instance. On the latter point, Russia is making real progress today, and this will help its stated goal of becoming a more important financial center.

And then there are the “informal” institutional changes required. These are also slow in the making, as heavy dependence on personal relationships and other behaviors persist. Corruption – in Soviet times known as blat - has remained an endemic issue and one that, repeatedly, was not especially addressed in the earlier days of transition economics.

Further, there is the high differentiation that has developed between generations in Russia, along with the expectations they bring. What was once seen as a shift to a market economy that would carry all along with its prosperity has come to mean very different things to different groups. For large segments of the older generation, the new Russia is foreign to them, with many being quite lost. They were brought up to understand that there existed a right to work, to healthcare, to culture, and more, and this is clearly not what they have found. It is too late for many to reinvent themselves, so they get by as best as possible. For the generation in the middle, the transition to the market has brought greater wealth, for some dramatically so, and new careers and opportunities. They have benefitted from their understanding of and connections in the old system at the same time as they have adapted to the new one.

The younger generation is quite different: many have been educated, indeed raised, abroad, and are not entirely in touch with the new Russia. Research has shown that in Russia there are low levels of succession planning in family businesses on the part of the current-generation owners, not to mention the numerous young people that have other plans for their future in any case. As the world has become flatter, and Emerging Markets such as Russia have prospered, high numbers in the younger generation have studied and worked abroad, and continue to do so. They are the future and have much to bring back and share for the good of the country, should they chose to do so.

As institutions continue to develop, and as we recognize the generational dynamics in the country, we see the importance of the development of a true middle class that is able to fuel the domestic economy. With a middle class we see the development of civil society, something that has varied a great deal in speed and degree across the so-called transition economies.

As I mentioned at the outset, “transition economics” is more suited to the history books than to the current situation. But it has been replaced by fascinating developments and challenges in institutional change, and generational dynamics, all within the context of a dramatically changed global economic environment. To me these have been surprisingly central themes that didn’t find their way into the early debates on the pace and degree of economic reform. It would be interesting to speculate what the issues of the day will be in twenty years time, but that is for another forum.