How Russia Really Works

The Informal Practices That Shaped Post-Soviet Politics and Business

Alena V. Ledeneva

• Publisher: Cornell University Press
• Year: 2014
• ISBN:
  9780801470059
• Topic: Politics & International Relations
• Subtopic: Political Corruption & Misconduct
• Index: Politics & International Relations

During the Soviet era, blat —the use of personal networks for obtaining goods and services in short supply and for circumventing formal procedures—was necessary to compensate for the inefficiencies of socialism. The collapse of the Soviet Union produced a new generation of informal practices. In How Russia Really Works, Alena V. Ledeneva explores practices in politics, business, media, and the legal sphere in Russia in the 1990s—from the hiring of firms to create negative publicity about one's competitors, to inventing novel schemes of tax evasion and engaging in "alternative" techniques of contract and law enforcement.

Ledeneva discovers ingenuity, wit, and vigor in these activities and argues that they simultaneously support and subvert formal institutions. They enable corporations, the media, politicians, and businessmen to operate in the post-Soviet labyrinth of legal and practical constraints but consistently undermine the spirit, if not the letter, of the law. The "know-how" Ledeneva describes in this book continues to operate today and is crucial to understanding contemporary Russia.

Chapter One

Why Are Informal Practices Still Prevalent in Russia?

Is Russia Transparent?

There is a certain mythology that Russia is a land of irregularities and paradoxes, to a large extent impenetrable to outsiders. At the level of cliche, the “Russian soul” and “Russian chaos” claim some implicit explanatory power. References to Russian history (“traumatic past”), geography (“size matters” and the “natural resource curse”), and the national psyche (“kleptomania”) frequently appear in this type of discussion. A common assumption behind these ideas is that Russia is somehow different from other, more transparent economies. A similar conclusion could be drawn from post-1998 analyses of the macroeconomic reforms—also known as “too much shock, too little therapy”—introduced in Russia during the 1990s. These analyses suggest that reforms did not work as expected, owing to Russia’s lack of transparency resulting both from defects in the institutional framework and from agencies that emerged to compensate for these defects.1 Corruption has often been identified as a major, self-perpetuating source of problems. It seems impossible to combat corruption in a society where, supposedly, no agency or institution is free from it. As a result, it has become an accepted view that Russia’s economy is nontransparent—that is, it is an economy in which the rules of the game are not easily recognized or understood.

Many reforms have been launched to address issues of taxation, corporate governance, land ownership, banking, the judiciary, and civil service.2 Putin’s first term was associated with positive trends in Russia’s GDP growth, capital flight, and levels of foreign investment.3 Russia was finally removed from the blacklist of the Financial Action Task Force on Money Laundering (FATF) in 2002, a sign that it has made a positive impact in curbing money laundering abuses.4 In the same year, the European Union (EU) announced its intention to recognize Russia as a market economy and to pass legislation allowing it to benefit from associated trade advantages, particularly those regarding antidumping procedures. The EU also restated its support for Russia’s early accession to the World Trade Organization and welcomed the determination shown by Russia’s leaders to continue pursuing the economic reforms that have been initiated.5 Yet certain features of Russia’s economic and political life still impede international business, foreign investment, and the country’s integration into the world community.

Although organized crime seems to be on the retreat, poor corporate governance, selective law enforcement, and corruption pose serious obstacles to democratization and economic development.6 Most Central and East European countries have achieved progress in these areas, particularly in the context of the EU accession process, but Russia and other former Soviet countries are still struggling with a range of challenges. These include corruption (Karklins 2005; Rose-Ackerman 1999; Komai and Rose-Ackerman 2004), state capture (Hellman and Kaufman 2001), the pervasiveness of the shadow economy (Schneider and Enste 2005), and an underdeveloped private sector and incomplete institutional transformation (Gaddy and Ickes 2002). The words of former prime minister Viktor Chernomyrdin—“We hoped for the best, but it turned out as it always does” (khoteli kak luchshe, a poluchilos’ kak vsegda)—neatly sum up the problem of reforms initiated but not implemented, or implemented with unintended outcomes.7 Chernomyrdin’s statement refers to Russia’s entrapment in its own ways and conveys a sense of irony. It has become something of an aphorism, not only because it makes sense for the country as a whole but also because it alludes to routine practices of the elites—from local bosses to transnational networks—that continue to benefit from such an order of things (Gel’man, Ryzhekov, and Brie 2000, 16-60, 146-180; Wedel 1998).

The examples in this book—from PR practices to alternative enforcement—demonstrate that informal practices are important because of their ability to compensate for defects in the formal order while simultaneously undermining it. This seeming contradiction serves to explain why things in Russia are never quite as bad or as good as they seem. Thus, reducing or evading taxes through the common practice of “double accountancy” may at first appear detrimental to the economy, but it must also be noted that “hidden” profits or “saved” taxes were one of the rare sources of enterprise investment at the beginning of the post-Soviet period (Ledeneva and Seabright 2000). Any attempt to assess the real impact of informal practices on the economy is faced with such nuances. It may be suggested, for instance, that capital flight during the 1990s also functioned as an avenue for foreign investment. The dual role of Cyprus as the most popular offshore zone for Russian business and one of the country’s top five foreign investors—matching the levels of France and the United Kingdom—would seem to sustain this assumption.8

Russia’s political landscape also provided abundant examples of informal practices throughout the 1990s. The state’s role in these years as an active shareholder in many large corporations is a key starting point. The extent to which insider deals prevailed at privatization auctions and were used by the state as a means for asset disposal is well documented (Freeland 2000; Hoffman 2002). The hostile corporate takeovers that proliferated on the economic and political scene during that decade and the use of selective state capacity in settling such conflicts have been well detailed (Volkov 2004). The “information wars” of the 1990s, waged daily on the pages of the Russian press, employed kompromat in character assassination, blackmail, and the manipulation of public opinion (Mukhin 2000). During the same period, the electoral bids of local, regional, and federal candidates were advanced through the skilled use of “political technologies” and black PR.

This is not to say that there is no place for legal procedures or that the requisite components of the rule of law are absent in Russia—there are courts, legislation, and enforcement mechanisms. Rather, the ability of the rule of law to function coherently has been subverted by a powerful set of practices that have evolved organically into the post-Soviet milieu. The persistence of such practices should not reinforce stereotypes about Russians’ innate inability to submit to law. Instead, the continuation of informal practices in the face of efforts to root them out is a challenge to reconsider how these practices really operate and the way they interact with the formal order.

Each agent active in the battles of the 1990s exhibited some expertise in the unwritten rules and ability to capitalize on a certain know-how. Arguably, this kind of expertise is behind the so-called nontransparency of the rules of the game in the Russian economy. The reproduction cycle of this nontransparency is organized in the following way.

• The rules of the game are nontransparent and frequently change because the existing legal framework does not function coherently. Some of the key building blocks of a transparent market system such as a land code, anticorruption legislation, and a functioning banking system are not in place, and basic market institutions do not work as they should—there are limits to open competition, protection of property rights, and transparency of corporate governance. The incoherence of formal rules compels almost all Russians, willingly or unwillingly, to violate them and to play by rules introduced and negotiated outside formal institutions.
• Anybody can be framed and found guilty of some violation of the formal rules because the economy operates in such a way that everyone is bound to disregard at least some of these rules. For example, nearly everybody is compelled to earn in the informal economy in order to survive—a practice that is punishable, or could be made so. Businesses are taxed at a rate that forces them to evade taxes in order to do well. Practices such as embezzlement of state property or tax evasion become pervasive. The fairly ubiquitous character of such practices makes it impossible to punish everyone.9 Thus punishment becomes a resource in short supply.
• Because of the pervasiveness of rule violation, punishment is bound to occur selectively on the basis of criteria developed outside the legal domain. While everybody is under the threat of punishment, the actual punishment is “suspended” but can be enforced at any time. The principle of “suspended punishment,” whereby a certain freedom and flexibility did exist but could be restricted at any moment, worked well in the Soviet system. It became routine practice for the authorities to switch to the written code only “when necessary.” A similar tendency became evident in the 1990s, notably for the same reasons: the formal rules were impossible to follow and it was not feasible to prosecute everyone.
• “Unwritten rules” compensate for defects in the rules of the game and form the basis for selective punishment. The violation of unwritten rules can result in the enforcement of written ones, which paradoxically makes it just as, if not more, important to observe the unwritten rules as the written ones.10 This perpetuates the reliance of the Russian economy on the nontransparent rules of the game.

Given the dependence of the Russian economy on unwritten rules, even the best attempts to restructure the rules of the game by changing the formal rules can have only a limited effect. This is partly because efforts from the top are difficult to sustain, and partly because any change in the formal rules introduces, and is perceived as, yet another constraint to be dealt with informally. This often results in readjustment and reconfiguration of informal practices around the new constraints, rather than a decline in significance of unwritten rules as a source of nontransparency.

In the 1990s, the burden of reforms was shouldered by those players who had mastered the unwritten rules by developing both expertise in the rules of the game and the ability to break them with impunity. I argue that without understanding how deeply such skills and knowledge are embedded in the formal rules, legal loopholes, and social norms contradicting formal rules, it is impossible to prevent an endless string of frustrations over the course of reforms in Russia. I also argue that in order to understand this pervasiveness, it is insufficient to analyze formal and informal constraints. One must have adequate conceptual tools in order to tackle the unwritten rules and to identify the gray areas associated with them. Before I present my empirical findings, let me introduce the concept of informal practices and explain its origins.

From Unwritten Rules to Informal Practices

This project started with an effort to identify some of the know-how that replaced blat in the 1990s and to conceptualize them as “unwritten rules” (Ledeneva 2001b). The difficulties in the use of this common Russian idiomatic expression standing for rules of breaking the rules, however, led me to think that “informal practices” is in fact the best category to address the elusive domain of political and economic know-how, even when compared with other available options such as informal institutions or informal networks.11

Although unwritten rules sounded like an informal institution of a kind, it turned out to be a trap conceptually and a dead end empirically.12 One reason is the ambiguity of the word “rule.” Pierre Bourdieu suggests that people have in mind at least one of two meanings:

It’s impossible to tell exactly whether what is understood by rules is a principle of the judicial or quasi-juridical kind, more or less consciously produced and mastered by agents, or a set of objective regularities imposed on all those who join a game. When people talk of a rule of the game, it’s one or other of these two meanings they have in mind. But they may also be thinking of a third meaning, that of the model or principle constructed by the scientist to explain the game. (1990, 60)

Following Bourdieu, who spoke of “strategies,” or of the “social uses” of kinship, rather than of “rules” of kinship, I refrain from the terminology of rules.

In Wittgenstein’s terms, the third meaning in Bourdieu’s quote can be expressed in a mathematical formula that most people do not need to know in order to continue the sequence of numbers: 2, 4, 6, 8. He distinguishes between the rule and “rule following,” or “ability to go on,” whereby participants may follow the rule without being able to articulate it. Although participants do not doubt the existence of unwritten rules, what they refer to as unwritten rules might not follow any of the categories of rules acknowledged from the observer’s point of view (quasi-judicial rule, regularity, model).13 “Unwritten rules” prescribe not so much patterns of rule following as patterns of rule breaking. They are patterns of navigating between the rules or playing one set of norms against another. They are strategies driven by what Bourdieu calls the practical sense (sens practique), the “feel for the game, as the practical mastery of the logic or the immanent necessity of a game—a mastery acquired by experience of the game, and one which works outside conscious control and discourse” (1990, 61). Besides, unwritten rules are impossible to pin down because they are a moving target: they change as soon as too many players learn them in order to sustain their exclusive nature.

The closest one can get to defining them is by illustrating their workings through identifying strategies or regular patterns of “navigating” between formal rules and informal norms. For example, take practices of false reporting that are fairly universal around the world, both historically and geographically. In the planned economy, the practical sense of managers determined the extent of their false reporting. They kept the authorities satisfied but the plan targets low in order to secure bonuses for employees for overfulfilling production plans. Today the comparable practice o...