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Government and Business in search of a new balance

The Kremlin wants to change its relations with the business elites. While one part of the ‘government vertical’ hopes to maintain the status-quo of the mid-2000s, another one trying to broaden the social base of government to include medium-sized businesses. But if the bureaucrats want to win support and improve the investment climate in Russia, representatives of other elites need to be drawn into the discussion

At a special event organized by the Banking Institute and the HSE’s Institute for Industrial and Market Studies (IIMS) for businessmen from Singapore, considering investment in Russia, the Director of IIMS Andrei Yakovlev raised a question “Is there a new deal in state-business relations in Russia?”

Government turnaround

In February 2012, Vladimir Putin presented his programme of ‘100 steps’ to raise Russia from 120th to 20th place in the World Bank ratings ‘Doing Business’. An ombudsman to protect the rights of entrepreneurs was also introduced in 2012 and changes were made in the system of evaluating the effectiveness of regional government, regarding conditions for investment. Andrei Yakovlev turned to reasons for this turn and as well why it didn’t happen earlier.

Analyzing the reasons, Yakovlev using a concept presented in ‘Violence and Social Orders’ by Douglas North, John Wallis and Barry Weingast. They suggest that well- functioning markets and developed democracy are ideal, but most modern societies live in the framework of imperfect institutions. In those circumstances, the state is made up of a coalition of influential social groups, each of which has its own ‘power potential’. This potential can be used to extract resources from less powerful groups. But ‘war with everyone’, as Andrei Yakovlev points out, kills stimuli to productivity and reduces incomes. So the elites are trying to make a deal not to attack each other. It’s true that these kinds of agreements hold as long as the influential groups are satisfied with the compensation or ‘rents’ they receive for observing the ‘truce’.

So, in most modern societies, the creation and distribution of these rents is a key mechanism to support social and political stability, without which steady economic growth is not possible. Sharply reducing the rents could either prepare the ground to review the previous agreements or for a new ‘war on all sides’.

The model for state capitalism collapses

One of the most intriguing periods of relations between the Russian state and business was the late 1990s – early 2000s when associations of businessmen like the Russian Union of Industrialists and Entrepreneurs (RUIE) and Opora Russia and Business Russia, were reorganised or set up. At the beginning of the noughties, Andrei Yakovlev says, there was a tendency for constructive dialogue between business and the state in keeping with North, Wallis and Weingast’s concept. However, with the Yukos affair, that trend took a sharp turn in the other direction. So why did that happen?

When they received a guarantee that there would be no interference in the results of privatisation, the oligarchs took it that they had the right to take 100% of the income from their business, but the bureaucracy saw things differently, says Yakovlev. The Yukos affair showed that the balance of power had changed and that big business was not free from government control. The situation that developed where bureaucrats began to control big business by force had the silent approval of the majority. This happened because the government, simultaneously provided the citizens with a basic selection of social benefits which had been completely absent in the 1990s, and ordinary business took advantage of the high demand on the domestic market brought about by the increase in incomes and oil exports.

But the crisis of 2008-2009, when Russia, not having a significant foreign debt, budget deficit or high inflation, suddenly lost 8% of GDP changed the situation radically. Not only business but the state too, couldn’t fail to see that the model of state capitalism which they had tried to build in the 2000s was not working.

They have to take a broader view of the elites

This shift in society’s mood, and the protests in 2011-12 that happened as a result, forced the government to look for new ways to making a deal with the business elites. This explains the efforts to improve the investment climate, the appointment of a business ombudsman, the declaration of an amnesty for imprisoned businessmen. These days, a part of the state elite is focussing on medium business, hoping to integrate it into the social base for the regime. There are grounds for this, as medium business actually plays a significant role in the Russian economy.

However, it is too early to talk about a real improvement in the climate for entrepreneurs as within the framework of the power vertical, there are powerful groups who have an interest in sticking to the old way of doing things. An example that illustrates the internal conflict within the ‘ruling coalition’ is the discussion of an amnesty for businessmen – this proposal met strong opposition from the law-enforcement structures, and then was adopted in a largely reduced measure.

Effective opposition to these business interest groups can only happen through cooperation with other groups in the elite who want progress. Russian society is heterogeneous and these groups can be found in regional elites and among the leaders of organisations in the government funded sector. If we follow Douglas North’s logic, broadening access to devising and taking decisions for representatives of active social groups could enable dialogue between elites about forming some reasonable ‘rules of the game’ and for Russian society to make the transition to a different stage of development.

 

Author: Marina Selina, August 19, 2013