Vladimir Putin's Russia a KGB State: What Does it Mean?

The Russian economy is dependent upon the world markets for oil & gas. As long as world oil & gas prices are high, the Russian economy will do well, and the Russian government will be able to buy the grudging obedience of its people.

Why cannot Russia grow a prosperous economy that is more independent of its massive oil & gas reserves, and mineral resources? The answer to that question rests in the way Putin's government controls Russian industry and resources: like a KGB state.

Under Putin's direction, a "state mafia" has replaced the street mafias of the chaotic Yeltsin years. At the bottom of this mafia's pecking order, armies of corrupt tax, fire and health inspectors have taken the place of the brawny young street thugs and racketeers of the Yeltsin era. They can ruin any small or medium-sized business that does not cooperate with them. At higher levels, municipal and regional officials allocate contracts, receive bribes from local businesses, wipe out fines or indictments, and look the other way in the case of unsafe cruise ships. At the top of the ladder, ministers and deputy prime ministers have replaced private oligarchs as heads of gigantic energy and mineral concerns. They deal with their victims politely in fancy hotels and modern offices, but the result is a classic shakedown worthy of the New Jersey mafia. _econlib

In other words, companies do not prosper on the basis of good products, services, and customer relations. Rather, companies in Russia prosper on the basis of whose palm is greased, and whose political interests are not being threatened.

The KGB state has created a thug economy. Its directors use businesses as personal wealth-generating machines; they quash potential competitors and take over legitimate businesses once they become big enough to attract their interest. The directors of the KGB economy have accumulated incredible wealth. Putin himself is said to be the richest of the bunch, with a fortune likely in excess of $30 billion.5 There are more Russian than American billionaires on the Forbes lists, although private wealth in Russia is a tiny fraction of that in the United States.

Many praise China's state capitalism and use high Chinese growth rates to justify its one-party state and political repression. Can we make similar claims about Russia's KGB economy? Does it yield returns that somehow justify its negative aspects?

The directors of the KGB state praise their economy as an example of state capitalism that nurtures "national champions" (a term Putin introduced in 1997) like Gazprom, Rosneft, and Aeroflot. They remind the public of the "wild capitalism" of the Yeltsin years, when pensions were not paid and inflation was rampant. They point to the crises of the United States and Greece. They claim that wise leaders like Putin and Medvedev, as well as their ministers and civic-minded oligarchs, protect and promote the economic interests of society.

The KGB state controls the commanding heights (Lenin's term) of energy, commerce, minerals, media, and transportation. Small and medium-sized businesses can operate if they keep their noses clean and heads down and buy off the lower levels of the state mafia. _Paul Gregory_econlib

By controlling the upper echelons of important Russian industries, Putin's Russia prevents significant improvements in management, technology, and services, from upsetting the carefully balanced apple cart. Such control also assures a quasi-permanent dependency on world commodities markets, and an exquisite vulnerability to outside technology breakthroughs or resource discoveries.

By preventing the growth of a healthy private sector, Russia's KGB state maintains solid control over a permanently stunted economy. Better to rule in hell than to serve in paradise, as the head demons tend to say.

This cozy little cesspool is doomed, of course. Demographic decline at both ends of the lifespan insure an ever-shrinking population. The abysmal state of Russian medicine and public health continues to worsen. Massive quantities of capital are being rushed out of the country every week. And anyone with any talent or appeal to outside interests is pushing her case for foreign employment, marriage, or just plain emigration out of the doomed KGB state that Putin has built.

Again, we have to ask the question: Will a country with such a massive stockpile of nuclear weapons go quietly into the dark night of failed states, when the time comes to exit the stage? Not likely. Expect Russia to resurrect the role of global troublemaker which it performed so well when the USSR had its KGB state.