Mafia Capitalism or Red Legacy?

January 7, 1998 • Commentary

Russia’s Ministry of Internal Affairs recently pegged the number of criminal organizations operating in that country at 9,000. One prominent Moscow think tank now figures that four of five Russian businesses pay protection money. An estimated 8,000 Russians have mysteriously vanished from their homes, which have become lucrative pieces of real estate since the collapse of communism.

News reports on Russia’s crime problem, however, continue to erroneously suggest that organized crime there is a form of extreme capitalism. Journalist Adrian Kreye, for example, says Russia is experiencing a “mafia capitalism” that is based on “the dollar and the law of the fist,” and Reuters reports that “threats and murders have become commonplace in the wild atmosphere of post‐​Soviet capitalism.” More subtly, the Washington Post blurs the distinction between legitimate business and organized crime with talk of criminal “conglomerates” and “mergers.”

But Russian organized crime is not a form of capitalism. It is a direct legacy of years of all‐​pervasive bureaucratic control and an economy that was forced underground. The presence of government everywhere in Soviet life provided the original opportunity for the institutionalization of widespread bribery and extortion. Indeed, Soviet bureaucrats could, and did, demand payment or favors for everything from drivers’ licenses and consumer goods to medical care and higher education.

It is not an accident that many members of today’s criminal class are former Soviet officials. The 1960s saw forged in Russia crime networks based on the ability of the criminal underground to provide Soviet officials with consumer goods and services unavailable under the communist regime. The criminal underworld and state bureaucracies became increasingly intertwined. After the collapse of communism, many Soviet police and intelligence agents joined the Russian mafia, and recently uncovered government documents reveal that organized crime was and remains tied to Russian officials. As one frustrated former Moscow prosecutor summarizes Russia’s organized crime problem: “The main way the mafia penetrates into the economy is via the bureaucrats. They are our main enemy. The mafiosi are only the second enemy.”

The underground markets that emerged under communism are another source of Russia’s organized crime problem. Shortages of consumer and producer goods in the Soviet era provided the opportunity for additional income at all stages of commerce. Goods arriving at retail stores were often set aside for preferred customers who paid extra. Those who controlled the distribution of goods, housing, and so forth were often in a position to extract additional payments from consumers. “Illegal private economic activities,” reports Berkeley economist Gregory Grossman, were “a major and extremely widespread phenomenon” and, for a large part of the Russian population, “a regular, almost daily, experience.”

Instead of a form of capitalism, Russian organized crime is a direct threat to capitalist reform. Rampant theft, fraud and extortion have rendered property rights meaningless to many Russians, and without credible property rights, ownership does not facilitate investment and economic efficiency. Adam Smith made that point more than 200 years ago. Owners, he said, have strong incentives to eliminate waste and maximize the value of their property, naturally seeking “the most advantageous application of every inch of ground upon [their] estate.” Insecure property rights not only remove the incentives to improve one’s property, they also discourage the purchase of new property. As political scientist David Weimer clearly explains in his new book, The Political Economy of Property Rights, “The greater the perceived risk of losing existing property rights, the less likely the holders of those rights will be to forgo current consumption to accumulate property.”

Unfortunately, widespread violence and crime in Russia have also generated nostalgia for authoritarian rule. Flagrant lawlessness has resulted in a resurgence of politicians who promise to re‐​establish order and fairness using the brute force of government. Indeed, increased criminal activities fueled the backlash that contributed to ultranationalist Vladimir Zhirinovsky’s electoral success in 1993. Zhirinovsky’s platform included on‐​the‐​spot executions of criminal gang leaders by firing squads and the wholesale seizure of assets thought to belong to criminals.

What Russia needs, however, is not “more government” or “less capitalism” but a greater commitment to fulfilling the core tasks of liberal governance: the prevention of harm and the protection of property rights. Continuing failure in those areas will jeopardize the long‐​term viability of Russia’s capitalist reforms and expose it to financial crisis.

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