A visit from the Russian mafia

Kato writes*

The collapse of the Soviet Union was followed by major economic transformations in the dawn of 1990s Russia. Rapid privatisation of the market and liberalization of economic policies gave rise to many private businesses. Since the collapse of SU left many soldiers, and Soviet team sportsmen unemployed, they came together to form racketeering groups specializing in exploiting the profits the private sector made. Extorting, or “appropriating someone’s property under threat of violence or damage to that subject’s prop­erty” (Volkov, Vadim. Violent Entrepreneurs : The Use of Force in the Making of Russian Capitalism, p.3) was their business model, and given the lack of rule of law, this model proved to be a major success. Since this period coincided with the gradual restoration of Russian central authority, structure of all formal institutions of Russia came came to be shaped by gangsters. Now, in such conditions, paying a bribe was a given, and an economy characterized with corruption started to grow and influence its neighbouring country: Ukraine.

Everything was up for grabs, and therefore ‘Aluminium Wars’ took off. Aluminium Wars were waged by gangsters for the influence on Russian Aluminium production. Violence soared, and those who came out as winners, formed into the network of oligarchs, who practiced huge control over Russian resources. Why these above-mentioned processes had a great impact on Ukrainian economics has an origin in a great political and economic proximity of the two countries.

It has to be noted that Russian ethnic population in Ukraine is substantial, amounting to 17%; therefore, so is proportion of the pro-Russian electorate [pdf, p.5.] In addition to that, Ukraine is dependent on most of its oil and gas from Russia, and this dependency is exacerbated given Ukraine has special discounted prices for these resources [ibid, p.7]. Another indicator to the dependency of Ukraine on Russia is how over time, Russia has always been a significant market for Ukrainian exports. For instance, looking at Ukrainian exports of 1996, 38.7% of total exports is owed to Russia [ibid, p.8]. Lastly, Ukraine is, and was in the 90s, a major receiver of Russia FDI, that’s why in the resource sector “out of the six Ukrainian oil-refining plants (ORPs), four are owned by Russian companies.” [ibid, p.10].

Given the above mentioned, it is reasonable to conclude that the economic phenomenon present in Russia had a great potential of impacting that of Ukraine. Importantly, the clear link is to be made between the roaming banditry and Russian economics at first, before discussing its implications on Ukrainian economy.

The interconnectedness of gangsters and economics ran deep. Russian entrepreneurship was based on engaging in criminal activity such as extortion, bribery, and even murder – “During that time, murder was a depressingly common way of resolving business disputes.” Violent entrepreneurship soared with the increased availability of valuable natural resources. According to CNN, out of the Russian oil, gas, timber and aluminum industries, rose a small number of individuals, and among those small group of people, were not only Russian, but also Ukrainian individuals.

Bottom Line: Russia’s and Ukraine’s strong economic interconnectedness is essentially predisposed by their geographic and cultural proximity. Therefore, Ukrainian economics was greatly influenced by the violent entrepreneurship that took off in post-soviet Russia.

* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

2 thoughts on “A visit from the Russian mafia”

  1. Really excited to see someone writing about this! As I commented somewhere earlier, I am looking forward to see how you will apply things learnt in the Politics and Development course to this particular case.

    You probably know the things I am about to say already, but, nevertheless. First, I think you should spend some time introducing quite some nuances of the topic and the setting for the reader. The theme is quite unique so more in depth explanations are not going to be just ‘waste of words’. Things like how exactly the racketeering groups form can sometimes be crucial to explain.

    Another thing to mention has to do with where you get information from. Or, more like, the publication dates of your sources. I see that quite some of them date back 10 years or more. Both political and economic landscapes have changed drastically in Ukraine since 2013. So that, it is important not to assume the longevity of what you find in a source from 2008.

    Great post!

    1. Hi Dyma! Thank you for your feedback.
      Your first comment is definitely on point for I was debating whether more detailed introduction of the concept of violent entrepreneurship is necessary. I will definitely try to incorporate more nuances for the reader, especially because I discovered throughout this research that many of these nuances greatly affect the discourse about economics.
      As for your second comment, I did incorporate few old sources, like the one on research of Ukrainian exports from 90s. There are two reasons I have that: I am essentially investigating the past with this paper , and therefore, I am more interested in what was happening then, rather than now. Secondly, it has come to my attention that there is a lack of research about this topic in general, and finding relevant sources around my topic has proven to be challenging.
      Thank you for your comments!

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