Taking Care of Business

The Khodorkovsky verdict was announced Monday.  I don’t have much to say about the verdict itself that hasn’t been said already.  What I do find interesting is the Russian response to the near-universal foreign criticism of the outcome of the “trial.”

Specifically, Foreign Minister Sergei (“The Spider”) Lavrov scuttled out to tell everybody (foreign everybodies in particular) to mind their own business.

Be careful what you ask for, Sergei, because as a result of the verdict, and the conditions that it epitomizes, foreign investors will be minding their own businesses thank you very much, and will be minding it somewhere other than in Russia–or at least not at the scale that the apparent opportunities would seem to justify.

Yes, there will be exceptions, especially in retail and consumer products (as in the Pepsi deal for Wimm-Dann).  But even there the recent decision of Walmart to abandon plans for Russia, and the ongoing IKEA saga, demonstrate the trepidations that even heavy hitters have about investing in Russian retail/consumer markets.  Similarly, just because a politically connected behemoth like GE thinks that it has the heft and the influence to navigate the treacherous shoals of Putinland don’t conclude that others less hefty and less influential will have the same confidence.  Pepsi and GE are more the newsworthy exception than the unremarkable rule.

And far more importantly, many Russians will conclude that minding a business is not worth the risks.  The Khodorkovsky prosecution, with its attendant absurdities, symbolizes quite graphically the arbitrariness of the system and the contingency of wealth and ownership in Russia.  This is a country where Putin has a call option on a business or a share of its profits; and where Putin deems a business to be unworthy of his attention, some local satrap has the call option.  And so it goes down the line, with the smaller the business, the smaller the thug (or thugs) with an option over the action.  But in the land of the raiders, every entrepreneur knows that his/her hard work–and his/her freedom or his/her life–is at risk to the depredations of some official or some mafiosi (to the extent that these are distinct classes, which too often they are not).

The low rate of entrepreneurship and business formation in Russia is well known.  The reasons for it are not hard to find.  The Khodorkovsky saga is just the most notorious, larger-than-life, epitomization of a systemic problem.

It should be recognized, though, that this systemic problem is not easily addressed, because its roots are not merely political but cultural and historical: put differently, the political system is consistent with, rather than antithetical to, the beliefs of large numbers of Russians.  If there is anything to Deirdre McCloskey’s “Bourgeois Dignity” hypothesis–and I think there is, although I am not totally convinced–Russia is not fertile soil for modernization because of the widespread hostility towards entrepreneurial–”bourgeois”–values and enterprise.

Indeed, Russia is McCloskey’s poster child for anti-bourgeois hostility and its corrosive effects on economic growth.  (McCloskey, nee Donald, I might add, was a student of Russian-born Alexander Gerschenkron at Harvard.)  This is not a new thing, but a very old thing, and hence quite difficult to change.

McCloskey points out that historically it was the outcast Old Believers that made up the bulk of the entrepreneurial class in Russia, to the extent it existed at all (and that many of the rest were Jews, also outcast).  He further points to the zero-sum mindset that is characteristically Russian (and if you have doubts about that look at Russian foreign policy which oozes this mindset).  It is (was) widely believed in Russia that if anyone makes money, he made it by theft.  (Not that such beliefs are alien elsewhere, just that they are modal in Russia.)

Sadly, there are many examples that support that belief.  (Arguably, Khodorkovsky himself for one, once upon a time.)  But that’s just a manifestation of a vicious circle, in McCloskey’s view.  To her, the cultural devaluation of bourgeois striving gives rise to a sort of Gresham’s Law, whereby the bad actors drive out the good.  If it is widely held that no respectable person goes into commerce, no respectable person will go into commerce.  Only a change in values–or the value placed on commercial activity–can make it possible to escape this fixed point.

So yes, the Khodorkovsky verdict is a bad omen.  But if McCloskey is right–and again, I think there’s a lot to what she has to say–Russia’s deeper challenges in achieving modernization would still remain even in the highly unlikely event that Medvedev were to rebel against the system that created him, realize his airy words about modernization and the ill effects of legal nihilism, and pardon Khodorkovsky tomorrow.  The Russian government and the Putin system are consonant with a set of beliefs that is deeply suspicious of people who mind their own businesses.  This set of beliefs is broadly held and long-established.  The system reinforces the beliefs and the beliefs reinforce the system.  This results in an equilibrium that will be hard to change, at least anytime soon.

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About Craig Pirrong 238 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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