Author Archives: Eric Hontz

Russia’s Rent-Seeking Downward Spiral

It is clear that if we do not start taking action today, including by carrying out structural reforms, we could end up going into a lengthy period of economic stagnation tomorrow. Our economy is still based primarily on natural resources rather than on manufacturing. Our economic system has changed little in essence. Where does most of our money come from? From oil, gas, metals and other raw materials.

– Vladimir Putin, Annual Address to the Federal Assembly, April 3, 2001

Fifteen years later, the Russian economy envisioned by that progressive speech by Putin in April 2001 seems to be a distant memory. Russia’s economy, and budget, are still largely dependent upon the sale of oil and the majority of Russian industry is still based on extractive industries. The modern vision of Russia in that speech, one deeply embedded into the international system, where property rights are protected by the undiscriminating rule of law, has been replaced by a cynical “managed” system of crony capitalism where profits are skimmed off by insiders while Russia has isolated itself by its actions on the international stage.

Since 2001, record-setting commodity prices have supported increased social benefits, military spending, and infrastructure investments, each of which has supported corruption schemes where insiders profit off of the state’s largess (see the cost of the Sochi Olympics as Exhibit A). High commodity prices also allowed the Russian government to slowly smother individual rights and free speech at home and, largely through key investments in media, buy the country a larger voice in affairs abroad.

Rather than pulling away from a resource-based economy, Russia’s entire economy appears to now be moving in near perfect correlation with energy prices (see chart below).

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Ukraine Needs to Privatize its State-Owned Companies — But Rushing It Would Repeat the Mistakes of the Past

Storied aviation company Antonov, makers of the world's largest cargo plane, is in no position to be privatized.

Storied aviation company Antonov, makers of the world’s largest cargo plane, is in no position to be privatized.

 

The stakes for reforming Ukraine’s state-owned companies are high: these companies are the lifeblood of a corrupt, sclerotic crony capitalist system that scares away potential investors, drives off international donors, and robs the Ukrainian government of legitimacy. But  privatizing them as quickly as possible is not the solution.

Even after mass privatization in Ukraine in the 1990s, the government still owns a large portfolio of companies in a variety of sectors – from heavy industry to banking — that employ over 900,000 employees, far more than any private firm.  Reforming these state-owned enterprises (SOEs) has been a slow process and remains incomplete due to weak corporate governance, unmotivated management, and a near-total lack of transparency. None of these problems will be solved by simply speeding up the process.

The demand for rapid privatization is a familiar tune. Western “expert” advice in the early 1990s led to a huge transfer of wealth from the former Soviet Union to a handful of connected insiders, particularly in Russia: first through voucher privatization and later through the disastrously corrupt loans-for-shares schemes in the run-up to Russia’s 1996 election.

To get an idea of the scale involved, a 1993 paper by several Western economists who worked directly on the voucher privatization program estimated that most of the Russian Federation’s civilian industrial base – nearly every plant, factory, and mine in the country – was effectively sold off to insiders for between $5 and $10 billion, less than it would have cost to buy a single mid-sized Fortune 500 company (and roughly equal to the market capitalization of Whole Foods today). Still, at the time they regarded this program as a great success.

Unfortunately, the corrupt and predatory “oligarch” elite, created practically overnight, proved to be more interested in asset-stripping than in transforming their new firms into firms that could compete on world markets. What followed was the largest peacetime economic collapse of any country in recorded history. The sheer volume of banditry surrounding state assets during the 1990s led many average citizens in post-Soviet countries to believe that lower standards of living and a complete lack of justice were a natural part of living under democracy.

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Building Sustainable Feedback into Ukraine’s Economic Reform Efforts

Expert Discussion of SURE Draft_April, 2015

(Photo: CIPE)

This past year has been filled with both positive and negative news regarding ongoing reforms in the Ukrainian economy. Ukraine entered into a historic free trade agreement with the European Union that went into effect on January 1, 2016, which was met with the predictable implementation of retaliatory tariffs on Ukrainian goods by Russia.

Additionally, and in spite of raucous parliamentary sessions and infighting among the parties, the Rada (Ukraine’s legislature) has adopted various pieces of pro-reform legislation, some of which were proposed by CIPE’s partners under a recently completed USAID-funded program Supporting Urgent Reforms to Better Ukraine’s Business Environment (SURE).

The support of USAID allowed CIPE and partners to build a sustainable institutional framework for business associations representing SMEs to have direct input into legislation that effects SME operations specifically, and to improve the environment for doing business in Ukraine more broadly.

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Russia’s Plan for Economic Recovery: Demolish Small Businesses

With shocking disregard for property rights, due process and the rule of law, overnight on February 9 the Moscow city government set out around city to raze hundreds of small businesses. The demolition took place in spite of the fact that many of these businesses had the proper paperwork to operate a business in that location, and in some cases court orders staying any proposed demolition. While the Moscow city government can rely on revenue from other sources, these kiosks and mini-malls supported hundreds of small shops that provided employment for over 2,000 Moscow residents according to the city’s own estimates.

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Celebrate entrepreneurship and small business with a holiday classic

The holiday season is once again upon us. Ever since my childhood the season has been marked by several classic films. Once I began to travel I understood that it is common around the world to spend some of the holidays with old classic holiday favorites. In the United States, perhaps the most famous holiday film is It’s A Wonderful Life. The film offers food for thought on morality, faith, community, and small business.

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International Business Ethics: Managing for the Long Term

In April the UK parliament passed the UK Bribery Act, which significantly enhances the penalties for giving and receiving bribes and extends the reach of the UK government in pursuing allegations of corruption that occur abroad.  The action in the UK coupled with the U.S. government significantly increasing its investigations in to violations of the Foreign Corrupt Practices Act has many businesses reexamining their internal controls and redoubling efforts in compliance.

Ethics and morals are things that are typically associated with an individual’s cultural background, so are ethics an issue when doing business across cultures, or is there some basic underlying ethical principles that we all follow?  Recently we had the opportunity to sit down and talk with one of the world’s preeminent scholars of business ethics, Dr. Norman Bowie.  You can find the interview here in our latest Economic Reform Feature Service article.

Article at a glance

  • Business ethics is a relatively new field of study, which grew out of the general field of philosophy in the 1970s.
  • Broad-based ethical standards like transparency and personal respect apply regardless of company size or sector.
  • Cultural norms differ, but there are some universal ethical principles – like the illegality of bribery – that are widely accepted across cultures.

World Movement for Democracy: Dealing with Corruption

Anticorruption mural in Jakarta

Anticorruption mural in Jakarta. Translation: "If we are like this, how can we fight corruption?" (Photo: Eric Hontz/CIPE)

At the Sixth biennial assembly of the World Movement for Democracy, this year held in Jakarta, Indonesia, I heard a recurring theme in many of the workshops and conversations in between sessions – corruption is a large and growing problem for democracies around the world. Corruption effects established and emerging democracies in strikingly similar ways; it decreases the legitimacy of existing institutions and creates a high level of cynicism among voters.  Perhaps the issue was always there, but advances in information technology and greater access to a multitude of channels of communication has brought the issue out of the shadows.

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