Russian Organized Crime--James Ruth

Since the late 1980’s the Russian people have experienced one of the most drastic transitions seen in the world to date, a transition from an attempt at communism to a workable capitalist system. As one would expect, this transition has not been painless and has been the impetus of many distressing problems for the Russian people. One such problem is organized crime. This paper will explore how organized crime during Soviet rule and the Russian Federation has created obstacles in this transition to a functioning market economy. It will illustrate how organized crime has done this by analyzing its transition from the USSR to the Russian Federation, the reasons behind its existence today, and how its operation impairs Russia’s attempts at a market economy. It will also provide some possible solutions for the crises organized crime has created, which currently plague the Russian people. Organized crime has worked its way through openings provided by the transition economy to become a setback to the Russian society and economy. Its existence disables successful economic reform by influencing important issues such as competition, entrepreneurship, capital flight, the shadow economy, and violence.

Basis in Soviet Union

In order to understand organized crime in Russia today and its affect on the Russian economy, one must examine its roots in the Soviet Union. Although many acknowledge the existence of crime syndicates in the USSR, few are aware of their extent during the 70’s, 80’s, and early 90’s. As early as the 1970’s, the Russian mafia had advanced to the status of primary protectors and beneficiaries in the robust Soviet shadow economy (Anderson, 1995, 341). By 1991, organized crime had expanded to form over 700 gangs in the Russian republic alone (Anderson, 1995, 353). This expansion was aided by perestroika’s opening up of market opportunities. In Leningrad, as much as 90% of the cooperatives produced by the liberal policies of perestroika were deeply involved with organized crime (Anderson, 1995, 352). The extensiveness of organized crime in the USSR is quite apparent when one examines such numbers, but the more important question is what was inherent in the USSR that facilitated such crime and how this later affected organized crime in the Russian Federation.

Two characteristics of the USSR were integral in the development of a powerful organized crime syndicate. These were an “excessive bureaucratic power” and the presence of illegal markets (Anderson, 1995, 347). This excessive bureaucratic power facilitated organized crime by providing a “basis for corruption, bribery, shakedowns, and extortion” (Anderson, 1995, 346). These were no small problems either. According to the All-Union Research Institute of the Soviet Interior Ministry in 1991, about half of the income of the average government employee consisted of bribes (Sterling, 1994, 93). However, the presence of illegal markets was even more essential to the existence of a mafia in the USSR. Everyone is aware that illegal markets such as alcohol during the prohibition period or drugs today elicit organized crime, yet this association was unique in the USSR. In the USSR, every form of economic transaction that did not involve the government concerned an illegal market. This created a situation ripe for criminals in the Soviet Union. In addition, everything and anything was in high demand due to the government’s inability to provide basic products. Organized crime’s status as a provider made it a dominate player in Soviet society. However, this did not mean that once the Russian people made their transition to a market economy organized crime lost its basis for existence.

Russian organized crime made a rather seamless transition to the semi-market economy initiated after the break-up of the USSR, and this can be attributed to two factors. First, for decades the Soviet People had been indoctrinated with the idea that private property had an illegal connotation. For this reason, many Russians viewed private property as somehow illegitimate even after the fall of the USSR, so no one thought it particularly important to stop its infiltration by organized crime (Anderson, 1995, 352). Second, the black market that existed during the USSR created a social stratum of organized criminals whose connections and elevated economic status remained in post-Soviet Russia (Williams, 1997, 10). Their distinction in status allowed them to get a head start in the new opportunities afforded by the freer markets of post-Soviet Russia, and this differentiation was one of the many reasons behind the subsequent growth of organized crime in post-Soviet Russia.

Reasons for Organized Crime in Russia

In the transition years after the disintegration of the USSR, Russia underwent a boom in organized crime. There was an initial average increase in the number of organized crime activities by 7% each year (Shelley, 2003, 105). Many of the opportunities for the growth of organized crime in Russia after 1991 can be attributed solely to the government’s feeble transition to a market economy. In this period, the government failed to make any structural changes to policies concerning transparency, accountability, and shareholders’ rights, leaving a vague line between legal and illegal (Webster, 2000, 32). The absence of transparency in business operations allowed organized crime to veil their illegal actions from prosecution. The lack of accountability made it so that when something was found questionable, nobody was held responsible for it. The nonexistence of shareholders’ rights produced a situation in which shareholders had their interests “watered down by shares issued without their knowledge or consent” and were “denied even the basic rights of ownership” through violence and intimidation (Webster, 2000, 38). With these methods, organized crime grew in power and graft. In addition, the constitutional and criminal code concerning privatization and taxation were left vague (Webster, 2000, 44). This allowed the Russian mafia to infiltrate the new financial opportunities afforded to them by private markets, and a lack of concrete and clear taxation practices allowed to them to engage in questionable policies without fear of government actions like audits exposing their illegal activities.

The existence of such an overpowering organized crime syndicate in Russia can also be attributed to the Russian government’s inability to prevent and punish the crimes committed by the Russian mafia. This problem is associated with the appalling state of the Russian law enforcement, which is due to a couple factors. First, Russian law enforcement is disabled by a “paucity of basic equipment such as cars, telecommunications, and computers” and a lack of experience with crimes in a market economy (Williams, 1997, 9). These deficiencies make for a highly unorganized and extremely inefficient law enforcement. In addition, the low pay of law enforcement leads to them taking bribes necessary to keep above the poverty line (Grib, 2001, 150). These bribes help organized crime to act without fear of retribution and grow without restraint. Corruption is even worse in the more remote regions in which government officials are not closely monitored by the central government (Webster, 2000, 15). Due to this fact, organized crime grows at a fevered pace in the outlying regions of Russia, and this growth intensifies the already sorry state of these regions.

Organized crime can also attribute its prosperity to inadequacies in the judicial system. Lawyers are still deeply connected with out-of-date practices of law inherited from the Soviet Union (Grib, 2001, 148). Their lack of experience and inefficiency with the new system leads to an inability to prosecute defendants well, especially those in organized crime. In addition, Russian prosecutors have trouble targeting those who really facilitate organized crime. Defendants rarely come from the upper echelon of organized crime. For example, “of the 1.7 million offenders charged with crimes in 1999, 56 percent were persons with no steady income” (Shelley, 2003, 106). This tendency of the Russian judicial system is very beneficial to organized crime. Small-stature criminals are easily replaced, while higher officials are left to improve. Even if a high-ranking criminal is found guilty for their market crimes, the government’s ability to enforce this decision has been extremely poor. In April 1995, the minister of justice claimed only 50% percent of all court decisions concerning property disputes were enforced (Volkov, 2002, 47). This is a very alarming statistic considering the purpose of a judicial system is lost if those who perpetrate crimes are not reprimanded for their actions.

The transition to a market economy has produced a myriad of new problems for the Russian people. For this reason, many are having difficultly coping with their dismal circumstances. The miserable situation is illustrated by the fact that 28% of law students at Moscow State University felt “that surviving in the current situation in the country without breaking the law is virtually impossible” (Grib, 2001, 152). Two evils that created these conditions are a lack of full employment and hyperinflation due to price liberalization (Williams, 1997, 9). People’s life savings were wiped out by hyperinflation, and few employment opportunities existed to counteract these losses. Many turned to alternative means of survival, which in many cases, involved an association with organized crime. The fact that “every third crime was committed by an unemployed person during the first half of 1993” underlines this important connection between unemployment and crime (Handelman, 1995, 334). For many, the affluence associated with organized crime was clear when the only people that were not visibly shaken by the early 1990’s were those deeply involved in organized crime. Mafia men were visibly better off financially (Williams, 1997, 10). For this reason, many flocked to the opportunities afforded by organized crime, and this contributed to organized crime becoming an even more formidable force in Russian society. This growth in power is reflected in its adverse affects on healthy market reform in Russia.

Ways in Which Organized Crime Disables Market Reform

The most detrimental side effect of the presence of organized crime has undoubtedly been its impediment of successful market reforms. This disabling of market reform can be seen in many instances. One such instance involves organized crime’s work with regional governments. Organized crime is interested in keeping competition and especially foreign competition as negligible as possible. Due to the collusion of organized crime and regional governments, the desires of organized crime affect the way some regional governments interact with foreign investors. Since organized crime has no interest in satisfying foreign investors, the regional governments conversely have no stake in accommodating them either (Webster, 2000, 38). For example, regional governments dissuade investors by discouraging their inspections of regional enterprises (Webster, 2000, 38). This makes investment extremely unattractive to foreign investors, which subsequently hurts the Russian market economy by eliminating business opportunities.

Another facet of organized crime that troubles the market economy concerns its more traditional means of operation, particularly, the use of violence as a means of intimidation. It grossly deters foreign investment (Williams, 1997, 25). Businesspersons from countries where such practices are not common are not willing to put their lives or health on the line for such ventures, and the threat is real. From 1990 to the mid 1990’s, contract killings doubled each year (Sergeyev, 2001, 165). As for those who do enter the Russian business world, according to Joel Campanella, “everyone…from Fortune 500 companies to adventurous entrepreneurs, ‘has to play the game to survive’” (Friedman, 2000, 201). This game includes paying unofficial taxes to organized crime syndicates (Anderson, 1995, 354). This is detrimental to the economy in that it involves and exposes otherwise legitimate businesspersons to illegitimate practices and such taxes make a substantial cut in their revenues. Lower profit margins are then reflected in higher prices for consumer goods (Williams, 1997, 25). Higher prices end up punishing consumers who already experience desperate circumstances due to the transition economy. This and other side effects have a negative influence on the emergence of entrepreneurship in the market economy as well.

One of the most important elements of completing a successful transition to a market economy is the development of entrepreneurships. However, as one might expect, organized crime plays a part in deterring this progress. In Russia, there are limited means for procuring legitimate funds to facilitate an entrepreneurship, and many entrepreneurs find themselves turning to organized crime in order to obtain funding (Shelley, 2003, 108). However, organized crime syndicates are unregulated and loan at extremely usurious rates (Shelley, 2003, 108). This makes endeavors more costly for entrepreneurs and, therefore, hinders their overall success. In addition, this once again involves legitimate businesspersons in illegitimate practices and their more dangerous and violent aspects. This facet of Russian business deters many prospective entrepreneurs from entering the business community, which leads to an additional problem of limited competition.

Competition among businesses is a characteristic of any prosperous market economy. However, Russian organized crime thrives on keeping this competition nonexistent. Organized crime has done this in a couple ways. The first and most formidable way is by influencing the privatization of formerly government-operated sectors of the economy. Crime syndicates do this by “consolidating their wealth [and] privatizing the huge resources of the state to themselves and their associates” (Shelley, 1997, 132). In effect, what they are doing is simply using their disproportionate amount of financial resources to buy up newly privatized sectors of the economy to the point of monopolization. Competition is usually absent, because it is inconceivable for any Russian with even a sizable income to buyout a former government enterprise. The best an average Russian can hope for is a small share of a company. However, this option is not free of criminal practices either, because the still vague laws concerning stockholders’ rights mentioned earlier allow organized crime to use questionable methods in this arena as well.

Connections are integral to the success of organized crime in controlling competition. Russian organized crime uses its connections in the government to influence the issuance of business permits (Anderson, 1995, 361). This allows organized crime to select those who are able to enter the market. In addition, the method of enforcing detailed regulations has been used to limit the number of players in a market sector (Anderson, 1995, 361). This enables organized crime to circumscribe and control the actions of competitors in the market, making them unable to achieve their full economic potential. Finally, crime syndicates can further eliminate competition by demanding excessive bribes (Anderson, 1995, 361). If a business is not wanted, mob henchmen simply raise their demands to an unattainable price. These methods of control have severely disabled competition in the market and, in turn, the attainment of the goals set forth by economic reform.

The goals of market reform have been further dampened by Russian crime’s interaction with international crime syndicates. There has been a recent trend in which Russian organized crime has dramatically increased contact with outside crime groups (Webster, 2000, 23). This has had three major effects. First, with increased cooperation, organized crime has been able to tighten its stranglehold on the Russian economy (Webster, 2000, 23). Increased cooperation allows them to operate schemes that involve trade and other transnational actions with greater ease due to the existence of partners on the other side of transactions. In addition, the protection provided by democratic states to their citizens is jeopardized by this interaction (Shelly, 1997, 128). This could lead to some countries viewing trade with Russia as too risky. Such skepticism could lead to severe problems for the Russian government when trying to facilitate the exportation of Russian goods. A further problem is recognized when the possibility of what could happen if these international groups do not cooperate with Russian gangs is considered. According to the Center for Strategic and International Studies, the problem of violence among warring groups is already a formidable dilemma (Webster, 2000, 23). This violence further deters healthy economic growth by pulling the Russian economy into a lawless and ruthless domain that disables reliable and healthy economic activity. However, foreign organized crime is not the only international problem facing Russian market reform.

The concepts of capital flight and its detrimental effects are notions in which Russian economists are well versed. Capital flight is simply the transfer of money outside of a country’s economy, and it is a daunting source of worry for many nations. Russian organized crime has done its part to contribute to this very unfavorable phenomenon. One significant reason for the flight of investment money out of Russia is distrust of the Russian banking system, especially after the financial crisis it experienced in August of 1998. A large part of this distrust is due to the banking system’s involvement with Russian organized crime. It is estimated that 80% of banks in Russia are deeply involved with or controlled by organized crime (Webster, 2000, 37). This association involves banks in practices such as the questionable movement of funds throughout the globe and money laundering. This is good reason for any businessperson to transfer funds out of the country’s banking system. However, organized crime does not promote capital flight merely through its influence on the banking system. Acts such as smuggling and the deflation of income statements through double-tiered accounting have also aided capital flight (Webster, 2000, 36). The practices of smuggling and underreporting income statements hurt Russia through lost tax revenue. It is estimated that from January to March of 1992, $10-50 billion worth of exports had been illegally moved out of Russia (Sergeyev, 1998, 117). For each ruble of these unreported exports, the government lost tax revenue. This problem was exacerbated when financial crisis struck the country in 1998, resulting in decreased spending on such areas as border security and tax inspection nearly four times in some regions (Alexseev, 2002, 325). These cuts gutted the very institutions that could help curb illegal smuggling and exporting, costing the government more in the long run. In addition, this loss of revenue does not only jeopardize the operation of a sound economy but the functioning capabilities of the government. Capital flight also has the effect of deterring foreign investors (Webster, 2000, 36). It is not in the interest of any investor to put money into a country when it is simply going to be transferred out. This fact along with the others discussed underline the gravity of capital flight and the need for solutions to this problem and the many others facing successful economic reform in Russia.

Thoughts on Solutions

An integral part of any discussion concerning Russian organized crime is what should be done to end it. However, a sizable number of Americans and Russians believe that organized crime “is simply an ‘early stage’ of capitalism, implying that conditions in Russia today are like those in earlier eras in the United States,” and it will so fade away (Anderson, 1995, 356). This assumption appears somewhat plausible. The U.S. had some notable problems concerning organized crime as it traversed the economic threshold into the financial superpower it is today. Many believe that as the Russian government becomes more comfortable with regulations concerning organized crime, organized crime will subsequently have fewer opportunities to operate due to the slow filtering of new laws into the system (Williams, 1997, 24-26). In addition to this, some practices of organized crime are counterproductive. For example, those criminal organizations that demand protection payments jeopardize their future profits, because their usurious protection rates run so many businesses into bankruptcy (Varese, 2001, 190). It appears some Russians might be correct in these theories when one consults the graph to the right. However, there are a disproportionate number of explanations for why the comprehensive elimination of Russian organized crime might not be so simple.

The belief that Russian organized crime is simply a growing pain soon to fade out is a treacherous idea. There exist many examples and reasons for why this problem shows no signs of simply fading away into Russia’s collective memory. First, the relationships and norms that have been established by Russian organized crime have helped to facilitate a continual helplessness and submission of the state in fighting criminal activities (Williams, 1997, 24). How can one expect there to be any change in the system when crime has so tightly wrapped its hands around the neck of the Russian government and market? In addition, organized crime’s use of violence and intimidation has worked to impede the legislative aspirations of many politicians hoping to combat organized crime (Webster, 2000, 45). Furthermore, for those officials who are symbiotically connected to organized crime, there exists no reason to combat it. It is also naïve to think that Russian organized crime is not cunning enough to change with the times and work its way around a marginally improved Russian government. The American mob quickly changed to cope with the end of prohibition, and the Sicilian mafia made parallel changes after the establishment of a stable Italian government capable of contract enforcement (Williams, 1997, 24). However, even though the outlook is bleak when one considers these ideas, the Russian government has made some sound steps to combat organized crime and its effect on economic reform.

Since the break up of the USSR, there has been a slow movement to more appropriate laws and regulations for a market economy, which have helped to curb organized crime. The state Duma has further defined the civil, criminal, family, tax, arbitration, and procedural codes since 1994 (Grib, 2001, 146). The improvement of the Tax Code has made it harder for organized crime to hide its illegal business practices and has helped with the recovery of tax revenue lost to a helpless tax structure. The government has further improved tax collection through the creation of tax police (Grib, 2001, 150). These improvements in tax policy are a necessity in the Russian government’s attempts to combat organized crime. In addition, changes in the Criminal Code help to resolve the ambiguities surrounding many of the business practices of the market economy. To compliment these laws, the number of legal professionals has been significantly increased, and this acts to improve “the quality of overall performance and facilitates changing the guiding administrative principles inherited from the Soviet era” (Grib, 2001, 150). Legal professionals have been improved by independent organizations as well. The MSIu RF has been established with the goal of promoting practices of law that are consistent with democratic judicial procedures through the use of pro-bono legal consultations and the development of legal journals in Russia (Grib, 2001, 156). Such organizations provide a much-needed supplemental assistance to the government in its attempts to promote the successful prosecution of organized crime.

Proposals for the Future

Although the Russian government has made some steps toward the elimination of organized crime, many problems remain. However, they cannot do all the work on their own. Russia must open itself to help provided by Western democratic states. Many Russians feel an intense need for closer relations between Western law schools, law firms, and law associations and their Russian equivalents (Grib, 2001, 159). This will expedite the transition from the inane judiciary inherited from the USSR by promoting ideas and practices that have been proven in the West. In addition, Russian law enforcement could also be improved with the help of Western democracies, and in particular, the United States. The FBI is a great example of law enforcement at its best. It is an institution well versed in the illegal activities associated with a market economy. Allowing Russian law enforcement to work with the FBI will expose them to the most up-to-date and effective policing tactics in the world (Webster, 2000, 56). However, Western democracies cannot be the sole sources of aid in the fight against organized crime.

Russia must look within itself to solve this vast problem of organized crime, and some solutions are quite simple. For example, the requirement of businesses to apply for operation licenses could be replaced with requiring them to register, which would lessen the power and discretion of government officials (Anderson, 1995, 362). Consequentially, this would make it less feasible for government officials to work with organized crime to deny businesses entrance into the business community thereby reducing competition. Taxation is yet another topic that arises in the discussion of eliminating organized crime. In order to fight this problem the government could create a reduced tax structure that would lower the incentive to bribe tax officials (Anderson, 1995, 362). This could help redirect the negotiated tax culture that has prevailed in Russia and lead to increased tax revenue that could be spent on such areas as law enforcement. In addition, Russia must make further moves to establish concrete legal parameters surrounding those areas that are so important to a market economy and so often perverted by organized crime such as property rights, privatization procedures, and stockholders’ rights.

As for more broad solutions, one can look to the role of the central government in combating organized crime. Currently, there exists a lack of control by the central government over the regional governments. As stated earlier, this has led to the collusion of regional governments and organized crime. Some believe that this problem could be resolved with a more authoritarian government, and this consideration has been visible in Putin’s attempts to construct a more authoritarian government in the last half decade. However, the Russian people and the rest of the world affected by organized crime are waiting to see just how extensive and effective all of these policies will be in making a world safe from the unfair and dangerous practices of organized crime.

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