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Friday, October 20, 2006

It is becoming obvious that the risks involved in doing business with Russia or in Russia cannot be assessed rationally

That's quite a statement, isn't it? Let La Russophobe repeat it: "It is becoming obvious that the risks involved in doing business with Russia or in Russia cannot be assessed rationally."

Care to guess who said that? Think it might have been some crazed, drooling "russophobe" concluding that Russia has become an uncivilized nation, just like Richard Lourie explained in the piece above?

Well it wasn't. It was
Anton Oleinik, a senior research fellow at the Russian Academy of Science's Institute of International Economic and Political Studies and an associate professor of sociology at Memorial University in St. John's, Newfoundland. Not exactly fire-breather credentials, now are they? Oleinick said so in an op-ed column for the Moscow Times. Here's the rest of it, signaling the beginning of the end for foreign investment, and indeed international trust or relations of any kind, where Russia is concerned. Here's his full analysis:

Reaching new levels of technological development offers obvious advantages to any society, but there is also a downside. Sociologist Ulrich Beck has labeled modern-day societies "risk societies" because they are susceptible to technological catastrophes as well as those of a non-technological nature caused, nevertheless, by the development of industry and technology (for example, global warming). Judged exclusively in terms of technological development, Russia is a modern society and subject to these risks. No risk society is immune to having large buildings fall down or airplanes crash. At first glance, there seems to be no point in looking for any kind of national character to risks in Russia, unless we mean the relative frequency of unforeseen events and catastrophes.

Yet a closer examination of even these events provides some food for thought. For example, all states regulate the aviation industry to a greater or lesser degree. In Russia, the political component of this sector is particularly prominent: The state exerts influence by means of prohibitively high import duties on new aircraft and components and also decides who will supply new planes to the national carrier. These decisions are based, at least to some degree, on political considerations. The human factor investigated in recent Russian air disasters does not simply come down to pilot error or unscrupulous ground crews. It also includes miscalculations made by state officials when establishing the general operating rules in the aviation sector and controlling how these rules are applied.

Modern Russian history offers a wealth of examples in which the actions of state officials have become a source of both local and systemic risks. The "oligarchs," whom the state has committed so many resources to combat since the end of the 1990s, are, on closer examination, products of actions by officials of that same state. The overwhelming majority of oligarchs became rich through the auction of state assets organized at the initiative of the government. The government was thereby able to deal with a number of short-term tasks like covering part of the budget deficit ahead of presidential elections, but at the price of creating serious medium- and long-term systemic problems, with which it would subsequently be forced to deal.

The banking crisis of 1998 is also only partly explained in terms of the influence of global financial markets, particularly speculative capital flight from emerging markets. The state bond market, in particular for short-term bonds, which was one of the factors behind the development of the crisis, had been introduced by state officials in 1993 and 1994 to deal with a number of budget problems. Moreover, Central Bank officials must bear responsibility for lax oversight and control of the banking system on the eve of the crisis, as they were unable to react quickly enough to the sharp increase in state short-term bonds held by commercial banks and to the increasing tendency for commercial banks to speculate on this market using borrowed funds rather than their own.

There can be many different reasons why state officials tend to act in ways that create systemic risks, from the organic rationality of those involved in the decision-making process to short-term group and individual priorities -- apres moi le deluge. But of much greater importance is the policy of centralizing decision-making as the state has ramped up its regulatory role in most areas -- "strengthening the power vertical" in official speak -- which has led to every mistake becoming potentially much more expensive in terms of the viability of the socio-economic system as a whole.

In a complex society in which functional subsystems are characteristically autonomous, risks in any of them -- the market, science, technology or politics -- arise independently of one another. The likelihood of systemic risk -- a risk that affects the system as a whole -- is then the same as the product of the probabilities of local adverse events. Therefore, it is less than the probability of each of those events. In a centralized society in which subsystems are weakly differentiated, the probability of systemic risk is the same as the probability of a wrong decision, so it is higher by some orders of magnitude. Any such wrong decision affects not just one sphere -- politics, for example -- but a number of them. The probability that a scientist developing a new technology, a manager making decisions on its commercial use and an environmental group monitoring its ecological safety will all make mistakes is quite low. But if all three stages are controlled by one bureaucrat, then a mistake is much more likely.

The usual suggestion for reducing the cost of mistakes by state officials is to keep their role to a minimum, reducing them to the role of a caretaker. But if a country is trying to play catch-up modernization, the state is expected to play an active role rather than a passive one. In particular, today's political, social and economic actors in Russia expect that the state will take a more active, leading role. It would be more appropriate to juxtapose not an active and a passive state, but various areas of activity for an active state. Instead of offsetting and administering risks (these complex activities cannot be done by a caretaker -- just look at the Soviet Union, where these positions were often occupied by reflective intellectuals), state officials today are unifying them. Instead of drawing lines between spheres and creating preconditions for self-regulation, they are trying to administer everything. The inevitable result is that they are making mistakes -- mistakes that could end up having extremely high costs for everyone, including the officials themselves.

The latest example of such a mistake that could potentially be systemic in nature is that of relations with Georgia. From the political arena, the conflict originally spread (not of its own accord, but as a result of decisions by state officials) to the economic sphere, when the Federal Consumer Protection Service was used as a lever to exert pressure by banning imports of Georgian wine and mineral water. Now the conflict is crossing over -- again with active support from very high-ranking state officials -- into the social sphere and taking on the aspect of a witch hunt against anyone with a Georgian-sounding surname. A problem that is local in all regards is taking on a systemic character.

Solving short-term problems -- exerting pressure on Georgia's political leadership while mobilizing Russia's population -- could become part of a systemic crisis in the medium or long term. First, it is becoming obvious that the risks involved in doing business with Russia or in Russia cannot be assessed rationally. The flow of foreign direct investment will, if it does not shrink, continue to focus on sectors where super-profits can cover the political risks. Second, after the Georgian witch hunt, how can we talk about a successful immigration policy, recently changed in a bid to stave off a looming demographic crisis? Third, having let the genie of inter-ethnic hatred out of the bottle, it is difficult to get it back in. The authorities were unable to avoid mass rioting targeting natives of the Caucasus in Kondopoga. The list of new dimensions of what was originally a local risk can and should be extended.

Should we really be surprised when Russian businessmen, as demonstrated by the contents of many contracts, see government actions as a force majeure -- as unforeseen circumstances created by an irresistible force, just like floods and war?

So Russia no longer has society or government, it has untamed forces of nature, force majeure, that nobody can deal with or anticipate. The actions of the Russian "state," which is essentially just a barbaric tribe, can only be accomodated in the same way a typhoon, tornado or earthquake can be.

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