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"Russia's problem is not economic and it has never been economic it is basically a moral problem and until that problem is solved, no reasonable economic system, no market economy...has a chance of taking root there," remarked David Satter, Senior Fellow, Hudson Institute, and Visiting Scholar, School for Advanced International Studies, Johns Hopkins University, at a Kennan Institute lecture on 9 November 1998. According to Satter, when the time came to create a new democratic society in Russia, the failure of both the West and Russia to understand the true nature of communism--its denial of universal morality--led instead to the rise of a criminal state.

The communist regime systematically abolished normal criteria and promoted the view that universal values did not exist, only class values, noted Satter. The idea that without legal and moral rules it is impossible to create a just society was ignored. The communists maintained that once private property was abolished and production socialized, a classless society would result. In a similar vein, Satter commented, the young reformers of the 1990s argued that once state property was put into private hands, a state based on law, as well as a democratic and prosperous society, would evolve. In Satter's view, it was this lack of legal and moral rules that prepared the way for the creation of a criminal state in Russia.

Satter said that Russia's transition from "criminal communism" to "criminal capitalism" had occurred in three stages: hyperinflation, privatization, and criminalization. Hyperinflation began on 2 January 1992, when the Gaidar government freed virtually all prices, consequently wiping out the life-savings of millions of Russians. According to Satter, this same government also chose to ignore a law passed by the Supreme Soviet calling for the indexation of savings accounts in the event of price liberalization, deeming it the responsibility of the old regime. Yet while the majority of the population was being driven into poverty by inflation, a group of well-connected insiders was becoming very rich.

Satter mentioned several ways in which people with access to the state budget and ties to state officials were able to amass wealth including: establishing and fooling the public into investing in pyramid schemes, speculating in dollars, obtaining lucrative licenses to export raw materials, and appropriating and collecting interest on state credits that were supposed to support industry. Satter asserted that by the time privatization got underway, the country was already divided into haves and have-nots.

This hyperinflation had been briefly preceded by "wild privatization," during which government and party officials began to privatize whatever they could get their hands on, noted Satter. Former government officials who had once been in charge of state resources became the new owners and proceeded to sell off these resources. In addition, an amendment to the law on cooperatives allowed factories to create cooperatives within the framework of the factory, which encouraged massive theft as factory directors were now given the means to establish cooperatives through which to write off and sell factory supplies.

However, according to Satter, the real theft of the state's most valuable enterprises began with money privatization in 1994. At "public" auctions for state property, the bidders for the most desirable enterprises were well-connected to local officials, with the results of these auctions being largely determined in advance. The loans-for-shares program, in which the government exchanged shares of enterprises for loans, greatly benefited the banks empowered by Yeltsin in 1993 to handle government accounts. These banks used government money to make short-term loans at extremely high rates of interest. Then, having made a profit using the government's money, the banks were able to loan it back to the government in exchange for valuable enterprises. This is how the much-talked-about oligarchy came into being and eventually began to dominate the political and economic scene, explained Satter.

Satter then commented on the final stage of the rise of the criminal state in Russia--criminalization. In short, the first cooperatives were established at a time when all property in the Soviet Union belonging to the state was completely unprotected. It was also illegal to have a private security service. Both of these factors made the first Russian businessmen attractive targets for criminals. As the number of independent businessmen grew, the underworld experienced phenomenal growth. With no one to protect them, Russia's new economic elite, composed largely of corrupt insiders, had no choice but to turn to criminal gangs for protection. Eventually, Russian businessmen found gangsters useful in other aspects of business, including curbing the growing epidemic of non-payment of debt.

According to Satter, as these groups became more interwoven, the entire commercial and political apparatus in Russia was poisoned. On a final note, Satter reflected that the only rule in business and political life in Russia continues to be the rule of force and that without the rule of law, Russia has no hope of resurrecting itself.

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Allison Abrams

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The Kennan Institute is the premier U.S. center for advanced research on Russia and Eurasia and the oldest and largest regional program at the Woodrow Wilson International Center for Scholars.┬áThe Kennan Institute is committed to improving American expertise and knowledge of Russia, Ukraine, and the region. Through its residential fellowship programs, public lectures, workshops, and publications, the Institute strives to attract, publicize, and integrate new research into the policy community.  Read more