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book review
New Study Casts Censure on Reforms
By Elizabeth Larsen
Elizabeth Larsen is a U.S. State Department Young Leaders Fellow for Public Service.
"The Piratization of Russia: Russian Reform Goes Awry"
By Marshall I. Goldman. Routledge Press.
289 pages. $19.95 (paperback).

Business in Russia was looking pretty peachy this spring. GDP was rising, inflation was sufficiently low, the ruble was gaining steadily, the country's balance of payments was strong, the stock market was booming.

But much of that changed this month, when prosecutors launched an inquiry into how Russia's richest man, Mikhail Khodorkovsky, acquired part of his empire. The arrest of Platon Lebedev, one of the tycoon's closest business associates, set off an anxious firestorm of debate over whether the government intended to revise privatizations dating back to the early 1990s, when state resources were snapped up by a well-positioned batch of businessmen who came to be known as the oligarchs.

Some praise these oligarchs for their capitalist instincts, which enabled them to emerge the victors in the Darwinian world of those early auctions, which many called "the sale of the century." Privatization, by definition, is messy but as a way of reducing the state's role in the economy it played an invaluable role in helping push Russia beyond its communist past.

Others, like Marshall Goldman, take the opposite approach: The government had the opportunity to divide state wealth more fairly among its citizens and, had reforms been better conceived, the oligarchs would not have been allowed to pocket swaths of state property for themselves.

Goldman's latest book, "The Piratization of Russia: Russian Reform Goes Awry," is a testament to his longtime argument that Russia could have -- and should have -- done more to see to it that ordinary people were not left behind by the hastily envisioned new market economy.

True to type as an old Cold Warrior, Goldman, a professor emeritus of economics at Wellesley College in Wellesley, Massachusetts, and assistant director of Harvard University's Davis Center for Russian and Eurasian Studies who was also an advisor to U.S. President Ronald Reagan, is the Doubting Thomas of doubters with respect to the intentions of Russian leaders. He has consistently cast doubt over President Vladimir Putin's electoral promise to establish a "dictatorship of the law" as well as his larger commitment to democracy. Given the implications of the Lebedev case, Goldman's distrust is well founded and his book, which reopens historical rights and wrongs with the very word "piratization," is well timed.

Goldman is fiercely critical of Putin's favored relationship with the oligarchs, relations which Putin had promised would be no closer than those with bakers or shoe repairmen. Having chased into exile oligarchs Vladimir Gusinsky and Boris Berezovsky, his most outspoken critics, Putin has done nothing of the sort with respect to Roman Abramovich and Oleg Deripaska, two others who have steered clear of mainstream politics. And until Yukos' Khodorkovsky began openly financing two liberal political parties, the Union of Right Forces and Yabloko, which rival Putin's pro-Kremlin United Russia bloc, Khodorkovsky also enjoyed a great deal of autonomy.

"As long as Putin is seen to be tolerating or favoring his own set of oligarchs at the expense of his critics," Goldman writes, "and where the rule of in-laws remains more important than the rule of law, there can be no true change."

And if Goldman advocates anything in "Piratization," it is change -- in law, in policy priorities, and in understanding the events of the past 10 years in Russia.

Around the time of Russia's 1998 financial crisis, critics of the administration of U.S. President Bill Clinton began to ask "Who lost Russia?" as they sought to assign blame for the country's seemingly stalled democratization.

Goldman would ask that question a bit differently. Who is responsible for Russia's losses? He wants to establish who pilfered, purloined, and pirated Russia and who is going to pay to right those wrongs.

To many, this may seem hopelessly backward-looking at a time when many are moving forward with business in Russia, letting bygones be bygones where privatization is concerned. But it is a fair question, and if the end result of the government's case against Yukos is a revisitation of the way assets were originally divvied up, this otherwise historic question suddenly skyrockets in relevance.

Steve Forbes, the editor of Forbes business magazine, was quoted by the local tabloid Argumenti i Fakty recently as saying, "In the West, business is successful when it provides services to the population. Meanwhile, in Russia businesspeople have prospered for several years by robbing the government and the population."

Goldman argues that the population has been robbed for too long: "If there is to be any change, something must be done to force those who benefited unfairly from the breakup of the state to pay a fair price for what they have acquired." It's a rhetorical proposition to which Goldman, unfortunately, adds no recommendations of his own.

Goldman lambastes the group he calls "the nomenklatura oligarchs," who are Soviet-era factory directors or senior government ministers who used their privileged posts to take ownership of the factories they ran or the mineral deposits for which they held licenses after the breakup of the Soviet Union.

U.S. robber barons, like steel magnate Andrew Carnegie and John D. Rockefeller, who built his Standard Oil into a family dynasty, have nothing in common with Russia's oligarchs, though parallels are often drawn, Goldman argues. Unlike Carnegie and Rockefeller, who created companies that added value to the economy, oligarchs created nothing and instead pocketed what was not rightfully theirs.

The two groups further differ, Goldman says, in that the robber barons did not create barriers to entry that now plague small- and medium-sized business owners in Russia, as oligarchs seek to keep their choke holds on various sectors.

Goldman is categorically critical of everybody who played a part in the privatization process -- nomenklatura oligarchs, "upstart" oligarchs, the mafia, the engineers of privatization, Western advisors, the Central Bank, Mikhail Gorbachev, even Soviet and tsarist era bureaucrats for the historical precedents they left behind.

The "upstart" oligarchs, as a rule, participated in private business activity before it was conditionally legalized by Gorbachev in 1987 and therefore enjoyed a flying start out of the gates through their underground business connections with factory managers and consumers. These are the Gusinskys, the Berezovskys, the Khodorkovskys, whose biographies former Washington Post bureau chief David Hoffman catalogued in his recent book "The Oligarchs." These men, Goldman says, are the most "interesting."

Goldman doesn't miss a chance to criticize Yegor Gaidar and Anatoly Chubais, two of the architects of the immediate transition to a market economy, known as shock therapy.

These men, together with Western advisors Jeffrey Sachs and Anders Aslund, clung to an academic principle called the Coase Theorem that suggested the way property rights were initially handed out held little importance because those rights would trade hands countless more times. The thinking was that it doesn't matter who grabs control of a given car factory or nickel mine because once a company is privatized, market rules kick in and stockholders will ultimately oust incompetent owners and directors.

In a chapter titled "Who Says There Was No Better Way?" Goldman outlines an alternative model along which Russia might have designed its reform -- along the lines of the Poland's innovative system, conceived by Privatization Minister Janusz Lewandowski.

Lewandowski's scheme called for 15 National Investment Funds (NIFs) that operated as mutual funds. Rather than distribute holdings equally across the board, Lewandowski ran an auction that allocated a 33 percent share of stock in each company being privatized to one NIF, granting each fund a 33 percent holding in each of 34 companies and a 1.9 percent holding in each of 478 companies. Fifteen percent of the remaining stock of each company went to staff and management and 25 percent to the state, which in turn invested 15 percent of its shares in social and pension funds. This structure allowed the funds to hold control over the factory director and it managed to revive small business and enable start-ups to flourish.

As a result, Poland's middle class has blossomed, while Russia's has remained a faint presence.

Goldman rues this lack of a middle class and the small entrepreneurs that account for its foundation in other countries. He reprints a diagram by Yabloko party leader Grigory Yavlinsky of the myriad bureaucratic steps necessary to open a legal business. Yavlinsky claims it takes 1,346 days to get through the maze. And it's not just small-time Russian businessmen who face these hurdles. General Motors needed 157 official certificates before it could launch a joint venture with AvtoVAZ in Tolyatti. Such an enormous quantity of red tape, Goldman stresses, must be done away with.

Small business development requires government support in providing credit, mortgages and investment capital.

Goldman credits Putin with simplifying the tax structure, making headway on land reform and initiating commercial bank reform.

But he tempers this flattery.

"There will only be an effective check on wanton oligarch and government abuse when there is a critical mass of property owners, businessmen and an independent middle class determined to protect themselves and their property from arbitrary seizure or extortion by the state, monopolistic oligarchs and criminal groups," he writes. "Laws alone, without public pressure to enforce them, will seldom be effective."

So while real change must come from the top, real pressure for change must come from the people. Examples of civic groups effectively lobbying the government, however, are rare. But perhaps that is changing.

A recent poll by the independent ROMIR agency indicates that a critical mass of Russians may side with the government, and against the long-reviled oligarchs. Nearly 80 percent of 1,500 people polled last week said that the privatization of the 1990s should be revised. Almost 90 percent said they believe all significant wealth in the country was amassed by illegal means.

Russia is not a static country; it continues to evolve, and as that happens, it falls on the entire system to learn from -- and perhaps correct -- the mistakes of recent history, as Goldman describes them, and ensure that subsequent reforms do not go awry.

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