Russian Organized Crime

An Impetus or Impediment to Political and Economic Progress?

By
St Basil's Cathedral, Red Square
Russian Organized Crime : An Impetus or Impediment to Political and Economic Progress? - Robert Heilman

Introduction

One of the most salient features of Russia's progress toward a market-based economy and democratic political system is the extent to which crime and lawlessness has become part of the transitional process. Along with hopes and expectations, the break up of the Soviet Union gave rise to a dramatic increase in crime and the formation of large, well-organized criminal groups. The Western press quickly picked up on this theme; the "Russian mafia" soon became a catch phrase for most criminal activity in post-Soviet Russia. But the popularity of Russian organized crime has not been limited to the media. Both academics and professionals have given the matter much attention during the past few years. Economists, criminologists, historians and sociologists have all taken up the issue. A central debate circulating throughout these different appraisals questions the overall impact of organized crime on Russia's political and economic development.

Although this paper focuses on Russia's internal situation, Russian organized crime is in fact a transnational issue. One of the greatest potential risks from organized crime is its implication in smuggling nuclear materials out of Russia for sale to pariah states or terrorist organizations. The extent of organized crime involvement in this trade is highly contested, but the seriousness of the threat demands that the West take note. The operations of Russian organized crime extend beyond national boundaries into the countries of the former Soviet Union, Europe and North America. In fact, wherever Soviet hegemony existed, the influence of Russian organized crime is present. The pervasiveness is due in part to organized crime's connection with the Soviet ruling elite, a major theme of this study. As the institutions of the West, such as the European Union and NATO, expand eastwards, Russian organized crime will become an even more apparent menace.

Some experts describe Russia's present situation in catastrophic terms, calling today's woes the worst crime wave since the "Time of Troubles"1 when Tsar Ivan the Terrible's untimely death at the end of the sixteenth century led to a succession crisis marked by chaos and bloodshed. Their argument follows that organized crime is the primary menace, undermining reform, sparking violence and posing a serious threat to democracy in Russia. These experts regard Russian organized crime as a savage and potent foe which is destroying Russia's fragile economy. Stephen Handelman calls the Russian "mafiya"1: "hydra-headed phenomenon that feeds on the emerging market economy."2 Claire Sterling is another ardent supporter of this view. She likens Russian organized crime to a "predatory shark" in the following words: "insatiable and seemingly invulnerable, it swallows factories, co-ops, private enterprises, real estate, raw materials, currency and gold..."3 Not only does this "mafiya" jeopardize the private sector, but its powerful influence has penetrated the government at all levels. One expert even claims that Russian organized crime has replaced the Soviet state as a new type of authoritarianism.4

On the other hand, there are those who believe that the West tends to overstate the extent of crime in Russia, especially in comparison to the Soviet era.5 Likewise, these scholars feel that organized criminal groups provide a net impact which is beneficial. While there are certain negative costs associated with mafia-type groups, they do provide certain duties, such as contract enforcement, which are necessary for a market economy to function. Ordinarily these tasks would be performed by the state. But when the state is weak, as in the case of Russia, other groups fulfill the role.6 In addition, advocates of this view claim that the phenomenon of organized crime is simply a phase in Russia which will run its course as reform continues and the state grows stronger. Under these assumptions, those who made their riches through illegal means will eventually turn legitimate, investing their wealth in legal enterprises and soliciting a strengthened state for protection against the next generation of ruthless criminals. Thus, leaders in Russia's criminal underworld are likened to the robber barons (Carnegies, Vanderbilts, Morgans) of late nineteenth century America, who amassed huge amounts of capital through dubious means yet reinvested the money such that society ultimately profited.

While both the best and worst case assessments of Russian organized crime have unique strengths and weaknesses, the former argument has been losing ground in recent years. Despite continuous attempts at reform, organized crime persists in Russia and challenges the authority of the state. However, before discussing both cases in detail there are several other questions which must be answered. First of all, the term organized crime needs to be elaborated. There are some key assumptions from an economic approach which are very helpful in determining what defines a criminal group as organized crime. Much of the best case scenario argument is based on these assumptions. Once the basic guidelines for an organized criminal group are established, the next pressing question is in what form does organized crime presently exist in Russia. Despite the extensive coverage of organized crime in both scholarly and general publications, there seems to be a range of subjects to which the term applies. For example, it is very difficult to assess organized crime in Russia without simultaneously addressing the issue of state corruption. The lines become blurred when attempting to distinguish between criminal overlords and the corrupt political elite. Reasons for this overlapping are found in the history of the criminal underworld and its relationship with the state since the end of the Tsarist era. The crux of the worst case analysis stems from this historical connection. By examining organized crime using economic theory and historical analysis, we can then evaluate the best case and worse case assessments for Russia and determine why the optimistic appraisal has proved false.

What is organized crime?

Economists generally describe organized crime using two models: a profit-seeking firm and a government. An organized criminal group acts as a firm by providing goods and services to other unorganized, small scale criminals. What sets the organized criminal group apart from the other criminals is the attainment of market power.7 An organized crime firm dominates the market of a particular criminal activity by acting as a monopoly, selling products above the competitive price, or as a monopsony, buying illegal factors below the market price. As a monopolist an organized crime group might sell a good, such as illicit drugs to a drug dealer, at a monopoly price. The dealer in tum sells the drugs to the public. Thus, the organized crime firm obtains monopoly rent, while also shifting most of the risk of being caught onto the unorganized criminal. An organized crime firm is a monopsonist in a market where it can impose an artificially low price as the only buyer, such as for stolen goods. Again, the profit goes to the organized crime group buying illicit goods at low prices, as the risk is largely assumed by the small-scale hoodlums committing the robberies.

The monopolist and monopsonist economic models help explain why organized criminal groups behave the way they do.8 For example, if a mafia-type group operates in a market which is relatively competitive, such as prostitution rackets, they might invest in weapons and hit-men to discourage new entrants to the market. In the same way, a legitimate firm might invest in research and development or advertising to protect its market share. Physical violence, or the threat of it, is the principle market tool used by organized criminal groups to optimize a market share. For example, if there is instability in the market, as when a rival gang attempts to enter, violence is the result.9

The second paradigm characterizes organized crime as a government. Under this model, a crime syndicate works on a large scale, enjoying exclusive jurisdiction over legal and illegal businesses of a given geographical or operational area. An organized crime group acts as a government by setting the rules for certain activities to take place, with ultimate recourse to coercion if necessary. Like a government, this type of organized crime has a monopoly over the use of force. The organized crime government charges legitimate or illegitimate businesses a tax or tariff in the form of extortion payments, or bribes, for permission to undertake particular projects. Thus, the organized crime government is a sort of redistributive agency, raising funds from some citizens and dispersing them to others.

What is organized crime in Russia?

These models of the firm and government are not mutually exclusive. Organized crime often exhibits both features. For example, a gang may, as a firm, specialize in the drug trade, while just like a government, demand a percentage of profits from the drug dealers who work in their territory. In Russia organized crime may function both as a firm and a government. Statistics show a continued growth in the number of organized criminal groups, from an estimated 3,000 in 1992 to around 8,000 in late 1995/early 1996.10 Organized crime in Russia is active in a wide range of illegal undertakings, such as gambling, prostitution, drug trafficking and arms dealing, where they act as profit-seeking firms. Moreover, criminal groups have infiltrated many raw materials industries. Speaking in November 1996, then Russian Interior Minister, Anatoly Kulikov lamented the "almost complete criminalization" of the gold and diamond mining industries and admitted that criminal gangs "were waging open war" for control of the energy industry.11 Again, criminal groups fit the firm model by dominating markets and vying for monopoly rights.

In May 1996 the Moscow paper Finansovye lzvestiya stated that organized criminal groups have controlling influence in more than 40,000 Russian businesses in disparate sectors of the economy.12 In exerting its power, organized crime assumes the role of government. For instance, the same source reported that nearly 70 percent of commercial firms pay some type of bribe to organized criminal groups. In this way crime groups impose a kind of tax. Organized crime also wields very heavy influence in the banking sector, which provides criminal groups with a source of preferential loans and a convenient method for money laundering. In other words, organized crime regulates the banking sector just as a government does, ensuring that banks operate under certain guidelines. Contract killings - used to settle debts, establish territorial rights, and eliminate whistle-blowers - have become a so-called growth industry in Russia.13 The number of contract murders is small in proportion to overall murders. However, the victims are usually prominent public figures, such as bankers and journalists and these cases are rarely solved. These murders are a grim example of organized crime functioning as a government which may resort to violence to enforce its rule.

Who comprises organized crime in Russia?

It is clear that the activities listed above constitute organized crime as they fit into the firm and government archetypes. Yet the Russian perception of who is part of organized crime is not so clear cut. During the Soviet era, the mafiya referred to anyone with money or connections.14 Today, it is often the case that the public does not distinguish between organized and unorganized crime. The breakdown of the Soviet system created many opportunities for crime in general to increase. However, much of what should be recognized as unorganized crime, such as theft, burglary, holdups, drug dealing, is equated with organized crime.15 Therefore many small scale criminals are mislabeled as members of organized crime. Another element which muddles the notion of what is organized crime is a holdover of Soviet thinking. Presently, various economic middleman activities, which are perfectly legitimate according to Western market values, are still considered to be criminal in the eyes of many older Russian citizens. One of the most ideologically loaded economic crimes under Soviet law was called "speculation," the buying up of goods and reselling them at a profit. This law remained on the books until 1991.16 But the rationale behind it has remained, adding to the misconceptions surrounding organized crime.

There have been some attempts to delineate whom Russians refer to when speaking of organized crime. One such profile describes four categories.17 The first, and of least importance, is the small businessman, who is most likely a victim of gangs rather than a member. Nonetheless, regular contact makes him guilty by association. Next up in importance are the neanderthals, or thugs, who collect extortion payments, control the prostitutes, and peddle drugs and arms. Above them are the businessmen whose members could be described as a cross between Al Capone and early American robber barons. This group made their money by bribing the largest and most insidious group, the state mafia. This last category is seen as the worst component of organized crime - the corrupt governing apparatus.

James Millar's explanation of Russian organized crime corresponds with this last category of a state mafia. Applying the economic model, Millar includes in his definition of Russian organized crime the "ability of strategically-placed individuals in government or state enterprise positions to claim, transfer, and otherwise appropriate state assets for private gain."18 Others also conclusively link the government with organized crime.19 This connection is not coincidental. The foundations of the present day state mafia date back to the age of the Russian Empire. In fact, simply using the economic models which the best case scenario rely upon is inadequate in determining who comprises organized crime in Russia today. Instead, we must take an historical approach to the subject as well. This method, which is the primary analytical tool of the worst case assessment, will explain why so many now refer to a corrupt government when identifying the components of organized crime.

History of Russian organized crime and its relationship with the State

A criminal underworld has existed in Russia for centuries. Under the Tsars, bands of outlaws and rebellious peasants lived in defiance of the law. Outlaws did more than simply reject authority. These criminal societies also demanded that their members withdrawal from conventional society and renounce any allegiance to the state or excessive materialism. In the twentieth century, when the newly formed Communist Party replaced the Tsarist autocracy, the ideology of the regime changed, but the oppression did not. Traditional outlaws were just as reluctant to acquiesce to Soviet authority as they were to Tsarist rule.

In the first years of Soviet rule, criminal societies crystallized into what became known as the vorovskoi mir, or thieves world. Led by a criminal elite called vory-v-zakone, literally thieves-in-the-law,20 members of the vorovskoi mir continued to abstain from all aspects of conventional, in this case Soviet life. The worst violation of the vorovskoi mir was to cooperate with the authorities. In fact, collusion with the government in fighting the Germans during World War II is what led to a schism within the vorovskoi mir, which subsequently transformed its relationship with the state.

During this schism a fratricidal battle ensued in the late 1940s and 1950s, through which the power structure of vorovskoi mir was dramatically altered. From the afteramth a different breed of criminals appeared, ostracized from the traditional group and indifferent to the old-school vary values and restraints. There was greater cooperation among the prison authorities and prisoners as some of the latter turned into informants. Other rules changed as well. Amassing wealth was no longer taboo for the new ilk of criminals. Soviet authorities eventually took advantage of these changes in the rules of the game.

The inherent inefficiencies in the planned economy system became more apparent in the decades following World War II. As the state determined supply failed to keep up with consumer demand, the Soviet leadership looked to other means in order to ameliorate the growing scarcity. A budding relationship with a new criminal class which exhibited some entrepreneurial spirit suited the needs of the state. From the 1960s until the demise of the Soviet Union, a second economy prospered which filled the gaps left by the state planning mechanism. Black market trade and underground factories collaborated with state enterprises in order to fill quotas for production. Very influential positions emerged: tsekhoviki, the underground factory owners and tolkachi, the unofficial though well-connected supply officers of state firms. The new type of criminals which grew out of the split in the vorovskoi mir became these black marketeers. In this manner, they attained wealth and political influence which was unheard of by their predecessors.

The shadow economy developed rapidly in the 1970s under Brezhnev, as the need for its services increased. As William Clark expressed in his study of Soviet officialdom during the years 1965 to 1990: "Informal practices that tended to produce better outcomes than those of the formal system overcame formal Soviet procedures and acquired something close to the status of an informal regime supported, if only implicitly, by the Soviet leadership."21 These informal practices grew so much that by the 1980s it was estimated that 83 percent of the Soviet population employed the shadow economy to obtain necessary goods and services. State corruption had become institutionalized in the wake of bribes and mutual favors, which were the driving force behind the system. However, official corruption did not only reflect the abuse of power by the political elite for personal gain. There were social benefits as well. Bending the rules was a method of "system maintenance."22 Soviet leaders, at least until Gorbachev, favored supporting the system through functional corruption rather than reform. As a result, government officials came into ever increasing contact with post-vary criminal elements.

When the Soviet leadership did attempt to preserve the system through active reform (perestroika) instead of passive acceptance of corruption, the nature of the Soviet elite changed correspondingly. By the 1980s the ruling political elite, or nomenklatura, had well established itself as a privileged class. However, they were not rich in the conventional sense. The nomenklatura enjoyed a higher standard of living, which was supported by an entire system of indirect payments and benefits: exclusive housing rights; distribution of high-quality foodstuffs; special polyclinics, stores, etc. As the transition under Gorbachev made political positions less certain, the emphasis for privileges shifted from power to private property.23 Members of the nomenklatura were the first, and arguably biggest, beneficiaries of economic reform.

One of the most effective ways they secured their advantages was through the so-called "Komsomol"24 economy of the late 1980s. A series of initiatives beginning in 1986 gave Komsomol officials exclusive rights in setting up the first commercial structures in the Soviet Union. What started as a network of scientific and technical centers founded to provide services to other enterprises, by 1990 gave birth to a Komsomol commercial bank, an import-export center, a chain of fashion shops, and over 17,000 cooperatives with a staff of about one million. The privileges awarded the nomenklatura during the late Gorbachev period were of an increasingly economic nature, including: establishment of joint ventures with foreign enterprises; conversion of assets into cash; advantageous credits from the state; property dealings; privileged import-export operations; and "privatization of the state by the state."25 Thus, the outlook of the elite assumed a more monetary character, and so did the corruption associated with it. Reform triggered what has been called the "monetisation" of corruption.26

By the end of the Soviet era, the foundations of today's organized crime were in place. The criminal underworld which existed for centuries had transformed from outlaw groups in opposition to the state to more profit motivated organizations colluding with the authorities. Likewise, the nature of the political elite evolved during the Soviet period. Soviet leaders used corruption as a means to maintain the state system and their hold on power. As the need for corruption increased, government officials developed closer ties with the new breed of the criminal world. When the economic reform of the late Soviet era allowed the political elite to acquire more monetary privileges, connections with organized criminal elements became stronger. What occurred was not only an increase in interaction between the two, but a shift in the balance of power from the state to organized crime.

Patricia Rawlinson, in her doctoral work at the London School of Economics, offers an insightful assessment of the relationship between organized crime and the state in Russia. "The history of organized crime in Russia," she writes," ... has been a history of responses by legitimate structures to the presence of the former."27 By legitimate structures she refers to the political, economic and criminal justice system - in short, the state. Her interpretation makes the legitimate structures the initially dominant partner, since it is their responses to organized crime which determine, up to a certain point, organized crime's development. Rawlinson explains her analysis within the framework of an intriguing model called the Chameleon Syndrome, which traces the ability of organized crime, through interactions with the legitimate structures, to merge with and eventually play a proactive role in the Russian state.28 Organized crime was able to assert itself because the legitimate structures increasingly relied on the former's services for survival. Looking at the history of Russian organized crime and its relationship with the state through the Chameleon Syndrome allows us to appreciate why the Russian perception of organized crime is synonymous with the state mafia.

Best and worst case scenario: a critical evaluation

Having gained a deeper understanding of organized crime, both through economic theory and historical analysis, we may now evaluate the two main schools of thought regarding the impact of Russian organized crime. First let us take the best case scenario. Supporters of this view claim that many in the West exaggerate the negative effects of organized crime as it exists in Russia. Instead, these critics see many favorable aspects of organized crime. They usually adopt an economic standpoint in analyzing organized crime, using both the firm and government models. This approach is more objective, which is one merit of the best case argument. By conducting a rational analysis of organized crime, and avoiding the myth surrounding it, we can recognize its strengths and weaknesses and be better equipped to confront its challenges. For instance, their argument maintains that organized crime, acting as a government, fills the power vacuum left by a weakened state, providing services such as property right protection and contract enforcement, which are the rudimentary elements allowing the market economy to function. While there are certainly drawbacks from receiving these services from organized crime, such as violence and monopoly prices, primitive enforcement of property rights is better than none at all. As long as there exists a public demand for these basic services, which the state cannot perform, organized criminal groups will remain.

Facilitating business, albeit crudely, is not the only way in which organized crime in Russia establishes its dominance. As mentioned earlier, organized crime is in a sense a redistributor of wealth, extracting funds from one segment of society and allocating them to another. Usually the money raised remains in the hands of organized crime, but sometimes wealth is transferred to other sections of society in the form of charities or other public services. For example, it is not uncommon for Russian criminal groups to sponsor sports and recreation centers for the local youth. In this way, crime bosses improve their popularity, appearing as Robin Hood-type figures. Since Russia is a country with a nascent civil society and whose government is often unable to pay for basic social services, such generosity is that much more significant. At the same time, these sports centers usually offer martial arts training, which provide organized criminal groups with their labor supply for bodyguards and henchmen.

Recognizing organized crime in terms of monopoly and monopsony enterprises, which market illegal goods and services, explains another reason for its persistence. As with any monopoly, organized crime results in a lower output of its product at a higher cost to the consumer. For example, when organized crime monopolizes the prostitution trade in an area, it may limit the overall amount of prostitutes available while selling their services at a higher price. As a result, consumption by the public decreases. Therefore, there is a temptation for police to work in tacit agreement with organized criminal groups, since the crime statistics tend to decline. For Russia in particular, a police force which is understaffed and underpaid makes cooperation that much more enticing for police officials.

The methodology underlying the best case argument is its main strength. However, most of the conclusions reached by its supporters have been losing their credibility with time. The optimistic critics believe that with continued economic reform, organized crime's sphere of influence would "dwindle to 'normal' Western levels."29 The legions of gangsters, having acquired their illegal fortunes, would invest the money back into Russia and become legitimate businessmen. They would therefore render another valuable service to society, capital accumulation, which is so critical in the early stages of economic development.

Unfortunately, this does not appear to be the case. Examples of criminals turning into honest businessmen seeking protection for their property rights from the government are uncommon. It is more often the case that a thief will advance from "primitive" crimes (e.g., stolen cars) to more sophisticated ones in the "legit" areas of the economy (e.g. bank fraud), which usually involve the compliance of a corrupt government official.30 While organized crime no doubt accumulates capital, it does not reinvest it on a large scale in Russia. Capital flight remains a major problem, for lawbreakers will always need a stash abroad in case of a quick getaway. In addition, as long as Russia is a risky environment for investments, organized criminal groups will continue to invest out-of-country. As Millar notes, "getting organized crime to invest in Russia is essentially the same as getting Western firms to invest in Russia."31

What the best case scenario fails to address is that the symbiotic relationship between organized crime and the state will not just fade away on its own accord. This is also the strongest point of the worst case assessment. As the previous section demonstrates, organized crime has to a certain degree usurped the authority of the state. Proactive organized crime is the biggest threat to democratic progress. With time society will take the impotence of the state for granted. Economist Petr Filippov, commissioned by President Yeltsin in 1993 to report on organized crime, warned that this is already occurring: "An entire generation is growing up for whom this situation is normal and who in such circumstances will not tum to official authorities, but to unofficial ones. These people are more likely to hire a murderer to punish a guilty or even an unpleasant partner than to go to court or arbitration."32 Those who insist on the best case outcome fail to give this warning the attention it deserves.

The problem with the worst case scenario lies more within the way it is presented than in the prognoses. The tendency towards sensationalism in analyzing organized crime can lead to over-simplification which limits the search for viable solutions. While the worst case scenario loses some credibility by demonizing the subject matter, ultimately its verdict rings more true. As the discussion above reveals, the degree of organized crime's influence in most levels of government, in the national media, and in the private sector shows that it is more a permanent feature of Russian society than a transitory one.

There are no easy answers to this problem. The best case scenario, although its conclusions fall short, is correct in stating that organized crime exists because it fills the vacuum left by a weak state. But the worst case scenario demonstrates that this power vacuum did not materialize all of a sudden with the fall of the Soviet Union, or that this is a temporary phenomenon. The challenge is how to battle organized crime which is in many aspects interwoven with and indistinguishable from the state structure. Legal experts have proposed concrete measures, such as more effective Russian legislation against official corruption and increasingly more sophisticated economic crimes. Western law enforcement agencies have already begun to coordinate efforts with their Russian counterparts against transnational crimes. But the strongest points of both assessments show that organized crime is highly ingrained in society, possibly beyond the scope of such measures. Therefore any feasible solutions would have to involve much broader action. Changes must occur within society, so that the next generation does not grow up according to Fillipov's prediction.

Notes

Robert Heilman, from Arlington, Virginia, is a student at The Johns Hopkins University School of Advanced International Studies, where he is concentrating in International Economics and Russian Area and East European Studies. He has a BA in History from Saint Mary's College of Maryland.