USSR 2.0: A possibility?

Saving the country by ditching the Communist project was a project that the Soviet reformers ran aground. Putin had great success in turning Russia the way they tried to change the USSR.

Soviet Communism has compromised itself to the degree that even hard-boiled Stalinists find it necessary to recreate it with a serious upgrade. A multi-ethnic empire without the Communists is a different matter, though.

President Putin has been recreating on the territory of Russia something we could for simplicity call a sort of a Soviet-Union-with-shopping-malls-instead-of-Communism for some time now. Looking back, we discern parallels between today’s Russia and long-term visions of Andropovites. They were technocrats and intellectuals in the service of the KGB in the 1960s-80s who prepared a kind of China-like transition to Capitalism in “Socialist” clothes.

President Putin has achieved a considerable success where the Andropovites failed. This proves that some form of the “old USSR” in 1990s was salvageable.

Three big caveats, though:

  1. Ethnic nationalism in the colonies around the southern and western rim. This is what brought down the USSR in 1991. China didn’t have to grapple with that. Ukraine and Belarus could have been retained, but hardly the rest.
  2. Oil prices. Everyone is blaming Yeltsin and his dodgy American counselors for the chaos in the 1990s. The question is how someone like Putin would have made it with his state pockets empty back then. Putin’s approach to every problem has always ample money in it. I seriously question Putin’s ability to manage serious challenges on a shoestring.
  3. If Communists and radical nationalists (“the Red-Browns” of Khasbulatov, Rutskoy, or Ziuganov variation) had reclaimed power in 1992, 1993 or 1996, the USSR 2.0 wouldn’t have a chance by now. Imagine everything what Yeltsin is now blamed for, plastered all over the Soviet old-timers. Russia would have been in NATO and EU by now.

Three beasts that killed the USSR

There were three basic factors that brought down the USSR:

  1. The system exhausted sources for the economic growth. From the late 1970s onward, the economic inputs in the Soviet Union started to surpass the economic outputs. With the drop in oil prices in the 1980s, we ran out of reserves to compensate for the inefficiencies inherent to our centrally-planned model (see the graph below).
  2. Sharp rise of ethnic nationalism, starting with the Jeltoqsan riots in 1986.
  3. Military setbacks amid the dramatic escalation of arms race: the Afghan war, Operation Mole Cricket 19, the impossibility to match the increasing technology gap in the latest military technologies. This created an enormous pressure to close the gap, which made the top elite start casting around for new approaches. That’s how the Perestroika and Glasnost weren’t shot down right from the outset.

Why did post-communist economies in the former Soviet state shrink?

The dramatic drop in Russia’s GDP in the early 1990s was essentially military industry dying and dragging down the rest of economy along with it.

In Communist economies, the allocation of resources is dictated not for maximization of profits, but by the wisdom of the ruling Communist elite. It is called planned economy.

Once the Communist rule was overthrown in 1991, the logic of market forces claimed its right. As a result, many production units found themselves superfluous. No one wanted their products.

Hardest hit was the military production. In the Soviet Union, for example, up to 40% of all production capacity was fully or partly included into the military-industrial logistics. For several years, the new independent states hardly had money for paying their men in uniform and maintaining the weaponry at hand. Buying new was out out question. The military-industrial complex had to drastically tighten their belt.

Hence the massive scaling-down, or shutting down the production lines altogether. Even if the industrial plant knew how to convert its military capacity into civil production, the process of finding new markets, revising the product lineup and fine-tuning the logistics took several years. Many went bankrupt in the process.

In the dramatic dip in the Russian GDP in the 1990s, what you see the is military production shutting down. It was rippling throughout all their logistical chain with all the infrastructure, management structures and maintenance collapsing along with it. Conversely, the rebound that the survivors experienced during the early Putinist era, happened when they regained their footing when extraction sector took up the slack on the back of rising commodity prices. This rippled into the service and retail sectors, as well as some investments pumped up by the state into the infrastructure and the military.

Mikhail Ivanovich: the great genius of Russia’s state machine

Mikhail Ivanovich is a moniker attributed to Vladimir Putin since his days as a fixer for St. Petersburg’s liberal mayor Sobchak.

It is a generic male name and patronym across the entire country, intentionally anonymous, not much unlike John Doe. Nowadays, it allegedly denotes the grand system of Putin’s private asset management. Expression éto dlyá Mikhaíla Ivánovicha (“this is for Mikhail Ivanovich”) harks back to the centuries-old Russian tradition of kormlenye (“tributary taxation”).

The system

Czars used to appoint their trusted people to manage the top levels of the state administration. These managers would appoint their own people to the level below. It all cascaded to the lowest local level.

All these people were tasked with assuring a smooth running of state matters, most important of all being taxation for the crown. But they had also implicit permission to collect taxes personally to themselves, in parallel. This would be the manager’s remuneration.


The manager in question could use his own discretion to decide whom, and how to tax. A part of these proceeds would then be sent as a tribute to his immediate boss. How much? Again, up to the sender. The more you share with your boss, the more loyal you are. At the next job appraisal, your boss would know exactly how valuable are you for him.

The tributary funds cascaded all the way upwards, to the top managers in the state. Czars themselves were exempt from this system. The entire country was their property anyway. All they required from the management was to fill the state budget to the sovereign’s satisfaction.

Communist shock

The Communist revolution of 1917 dealt a devastating blow to the foundation of tributary taxation. The centrally planned economy didn’t leave much wealth to be appropriated at the lower rungs on the government ladder. In addition, Stalinism established a HR management policy where vetting of most trusted functionaries happened high above the heads of regional and local bosses.

However, the system survived. Toward the end of Soviet rule, the former patron-client arrangements became ubiquitous in the distribution of food and consumer products, as well as in the police and among state attorneys.

No “stealing”

When you read in the press about “stealing” as the source of Putin’s wealth (or anyone else’s on the very top of the Russian state), it’s a very crude, oversimplified translation of the kormlénye concept.

Not many of them directly steal anything. They don’t even touch the money. The tributary taxation requires that the taxed bureaucrats themselves devise the safest system for fund transfers upwards. Clumsy transfers that expose recipients, or otherwise make it possible to later indict their bosses on corruption charges, are almost as bad as disloyalty and may be an ultimate career stopper.

Below, a scene from a hugely popular Soviet comedy “The Diamond Arm” where the moniker most probably originated from. To the right, Michail Ivanovich, an undercover police operative to the right who works on busting a gang of smugglers.

Mikhail Ivanovich helps people solve problems
Photo: a scene from the comedy “The Diamond Arm” where secret operative Mikhail Ivanovich helps a hapless Soviet commoner disentangle himself from machinations of international smuggling ring.

Tributary taxation

The deciding feature of Putinist rule, tributary taxation is a funnel of wealth generation for the top tier of state bureaucracy. It’s a powerful tool for upholding political cohesion and fighting regionalism in Russia.

Tributary taxation consists of constant cash streams cascading upwards through the hierarchy of state employees, in parallel with regular taxation. The state that allows tributary taxation gives to its servants implicit permission to live off the “administrative rent” as a part of their remuneration.


Ivan who holds a small business gives the police operative Petr $100 a month is a brown envelope. Petr gives his police boss Alex $20 of these. Alex gives the regional internal ministry executive Maxim $10 of these. Maxim sends his boss in Moscow Oleg $5 of these. Oleg sends $3 of these to Mikhail Ivanovich, or someone else who can give him a helping hand if he suddenly gets some work-related problems.

It’s totally up to all these people if they want to pay, how often, to who, and how much. The point is to prove to the person higher up in the chain that they are better off keeping them in office, and not to opt for someone else at the next job appraisal. They can also send money simultaneously through some other chains of tributary taxation if their living depends on their support.

This scheme explains why the Western profit margins seem laughable to Russian entrepreneurs. The margin south of 5% simply cannot support the tributary taxation. As they say in Moscow, “No one gets off their behind here for less than 30%”.

Is it corruption?

Only partly. It’s not a straightforward bribe. It’s not contingent on any particular favor. Such favors often require additional payments. It’s more of a stakeholder dividend: Mi casa es tu casa.

Tributary taxation is a powerful tool for controlling bureaucracy from top to bottom. Ineffectual or disloyal officers lose access to this rent. It also forestalls local separatism and independent civil society, as the distribution of wealth and resources is pinned around the machine of state administration.

Why does it persist?

In Russia, this has a very particular origin. It’s the distinctive colonial character of the Russian economy.

Ever since the time of the Varangians, the main source of wealth for men in power was not taxation of their subjects’ incomes, but rather access to high-value, low-volume natural resources—as well as skimming off the North-South transit trade. Up to the 18th century, the Russian state lived off the trade in slaves, furs, honey, and some other colonial products. Just like now it thrives on exporting oil, gas, fish, timber.

In such an economy, the local population is only a pool of recruitment for troops that protect the perimeter and acquire new prospective territories. Locals provide as well the manpower for extracting colonial resources. As to the subsistence economy of the aborigines themselves, it’s too low-margin to be of interest to the rulers.

What is needed to get rid of the tributary taxation?

During Catherine the Great’s rule, Imperial Russia conquered vast fertile Cumanian prairies in Ukraine, southern Russia and along the Volga river. Large-scale commercial grain farming started there. During the XIX century, along with industrialization, it created a type of economy where more and more state income was generated by the subjects’ work, and not simply from sales of extracted natural resources.

This new pattern created the same political effect as in Europe and America. The middle class emerged. The mercantile estate began gaining influence. The requirement “no taxation without representation” started taking hold in Russia. Elements of local self-rule were introduced under Czar Alexander II, and Czar Nicholas II allowed the first Russian parliament in 1905.

Normally, such development leads to democratic rotation of elites and accountability of those in power. Tributary taxation dies off, as taxpayers claim political control over the bureaucracy. However, the middle class in Russia was destroyed after the revolution of 1917.

How did it survive the Communist rule?

Normally, tributary taxation needs private property. A surplus of wealth is needed to cascade a steady stream of cash through the private pockets of bureaucrats. Impoverished Soviet citizens could afford only one-on, one-off bribes, at best.

It took several decades for the standards of living to go up enough to recover some of it. The commodity-trading communities in Transcaucasia (fruits, drugs, and flowers) and Central Asia (cotton and drugs) pioneered it, and then it transplanted itself to many other segments of the state bureaucracy, primarily distribution of food and consumer products.

Why did it return?

The triumph of oligarchical Capitalism under Yeltsin, and especially Putin, led to a renaissance of tributary taxation. The spectacular rise of global commodity prices, combined with relative poverty of most Russians re-created the old pattern.

With a flat 13% income tax, Putin’s bureaucracy declared itself independent—and therefore unaccountable—before the mass of taxpayers. It depends on the volume and price of colonial commodities, primarily gas and oil, for its wealth and survival. Hence, the focus on defense, police and pipelines, railways and custom services as the pillars of the extraction economy.

The independence of state employees from taxpayers leads to a perpetuation of unaccountability of our rulers before the nation. As long as it stays so, the tributary taxation will persist as the preferred tool of state administration. It’s non-ideological, it’s simple, it’s cohesive, and it fits nicely into the existing system of oligarchical clans. This is the explanation of Putin’s relaxed view of the whole problem of corruption in the country: he sees it as a powerful tool of political control.

Will it disappear?

Not for some time.

It’s not about Putin. To get rid of it, Russia needs a strong, politically active middle class that can enforce accountability on our rulers, and by extension, on our bureaucracy. Right now, civil society exists only in tiny pockets in large cities, and at best can realistically count on support from 15–20% of the population. The country needs at least one more generation in peace and stability before our nation becomes strong enough to take control of its own state.

The graph below shows the share of small and middle-sized companies in Russia’s national economy. Left to right: China, USA, Germany, Russia. Blue means “share of employment”, red share of GDP”. The insignificance of SMEs in Russia comes from the dominance of large enterprises clustered around the extraction sector as well as state-centered enterprises in the infrastructure and military sector.

Share of small and middle-sized companies in Russia
Graph: Share of small and middle-sized companies.

How did oligarchical power emerge in Russia?

Russia has produced a unique blend of Statism and oligarchical rule deeply rooted in national history

In Russia, tradition requires co-location, or at least proximity, of economic and political power. The notions of “justice” and “state interest” have always prevailed above the rule of law and protection of property rights. Therefore, rich Russians don’t stay rich for very long if they do not get access to political decision-making. Conversely, people who have political power, easily convert it into economic assets that assure their financial muscle in confrontations with political opponents.


There is also a strong tradition of statist modernization. Our elites are conditioned to think that economic success in the country can be assured only through conglomerations of industrial and financial groups, supported by the state, as it happened after WWII in Japan, South Korea, and Taiwan.

Add to that an institutionalized corruption through tributary taxation(kormlénye) in the police, tax authorities and many other segments of state administration, and you have all components of oligarchical rule ready to appear. No wonder that already in the middle of 1990s, a group of bankers offered Yeltsin a deal that secured his re-election for rigged privatization of state assets: the “shares for loans” scheme.

President as guarantor

Yeltsin’s entourage picked Vladimir Putin as his successor in order to guarantee the oligarchical assets against possible re-nationalization, which was a popular political slogan in the late 1990s. Some oligarchs who tried to politically challenge Putin, like Khodorkovsky, Berezovsky, and Gusinky, subsequently fell by the wayside. Most, however, retained and multiplied their riches. In the 2000s, the ranks of Russian billionaires also included several personal friends of Putin.

Wealth controlled by the top 10 per cent 2015 stats from Credit Suisse

Graph: Wealth controlled by the top 10%, 2015 stats from Credit Suisse

Can the US bankrupt Russia?

The US wield an enormous global power through sanctions. Ronald Reagan allegedly won the Cold War by bankrupting the USSR with depressed oil prices. Can America do the trick again?

Raw commodities make the bulk of Russia’s exports and budget proceeds. Theoretically, the US can mess up our state finances by suppressing their prices.

Disparity in the economic size also provides a possibility to ruin Russia’s economy in an arms race. President Trump’s 2019 budget provides more than $6.3 billion for the Pentagon’s European Deterrence Initiative (EDI) in order “to better counter Russian coercion and deter Russian aggression .” This reminds of the American Strategic Defense Initiative from the 1980s that forces the USSR to overspend on military programs.

However, they are very unlikely to do that, for several reasons:

  • Bankrupting Russia won’t solve any of American most pressing problems, such as the budget deficit, trade deficit, social inequality and suchlike.
  • Taking down Putin would destabilize Russia, bringing forth the problem of nuclear proliferation and nuclear threat to the US, which would far outweigh any annoyance Putin currently may be causing.
  • Bankrupting Russia could lead to fracturing the country into smaller segments, where China is likely to be a dominating force (Siberia, Far East, the Ural region). Such a strengthening of China’s hand is not in America’s interest.
  • In a longer term, Russia could provide to the US a useful counterweight against the growing Chinese influence in the world—much like China was a counterweight to the USSR in the 1970s and 1980s. No sense in dumping this card.
  • Bankrupting such a large country with such a vast war chest (edging toward $500 billion) is a costly project, and is worth it only if Russia is deemed a clear and present threat to the US. Which the modern oligarchical Russia is seemingly not.

Soviet “Deng reform” that died in infancy

Soviet rulers made a half-hearted attempt to reform the economy in the mid-1960s. It could have resulted in a kind of a SOE-based market economy, not unlike the Chinese in the 1980s.

Already in the 1960s some individuals in the Soviet elite started to look for an alternative to the Stalinist model of economic growth. Before, everything had been about maximizing inputs. The 6,500 industrial plants confiscated from Europe and Chinese Manchuria at the end of WWII gave a powerful modernization push. But in the early 1960s, it started to wane.

Exhausted sources of workforce

The main problem was, the demographics lagged. The concept of Socialist industrialization is pinned on (1) squeezing private consumption, (2) channeling whatever it is of available funds into building and buying new industrial capacity, (3) pumping the workforce from a low-productive country side into the new industries.

Runaway urbanization meant that less and less people were available as an additional workforce to fill new jobs. The economy increasingly became too big and complicated to be planned by one central body.

Technocratic solution

Enter Kosygin’s reforms. These were a technocratic initiative at the tail end of Khrushchev’s era, partially implemented after his removal from power. They were effectively discarded in the early 1970s after the Siberian oil discovery brought the Soviet rulers a windfall of export incomes that carried our ailing economy well into the 1980s.

The fork

There were two competing approaches to solving the problem of higher economic efficiency.

  • One, which ultimately won out, proposed to take into use the nascent information technologies for making Gosplan, the “superbrain” of Soviet economy, an all-seeing, number-crunching, decisions-spewing machine of effective centralization.
  • The other, proposed by Kosygin and his men, wanted to cascade a large part of decision-making down to the enterprise level.

Elements of Chinese approach

Kosygin’s idea had some parallels to the Deng Xiaoping’s approach adopted by PRC at the end of the 1970s. Local decision-makers would get plan objectives from Moscow, but become free to decide how to deliver the figures. More leeway was also in the cards for how they would find suppliers and users for their products. The core of the idea was sharing with the local management and employees some of the savings achieved through this “industrial democratization”.

No private property

The whole arrangement was still within the Communist concept. No “Chinese” Capitalist changes in ownership were allowed. The enterprises were not permitted to compete with each other. Kosygin didn’t want any “market” to decide over prices or the structure of output. It was a late bastard of the economic romanticism from the days of classic Marxism that didn’t have much chance from the outset and was quickly strangled in its infancy.

Oil substituted the reforms

However, the Kosygin’s reforms met a lot of resistance. The top decision-makers saw in it a dangerous decentralization of economic power. At the same time, the discovery of vast oil and gas fields in Western Siberia in the 1960s opened a new abundant source of income for the nation. The Communists lost the initial incentive to experiment with stagnating economy. The windfall from oil and gas exports to the West— especially after the quadrupling of the prices in 1973 — reignited the Soviet appetite for confrontation with the US and NATO, and carried us along for another two decades.

Poster below is from the Gorbachev’s era. Gorbachev gave a second lease of life to the concept of transferring the weight of economic decisions down to the enterprise level . Just like the first time around, without changes to ownership and with no horizontal interplay of economic actors through market communication, it became an epic fiasco.

Poster The policy of the Party is our policy

Text: “The policy of the Party is our policy!”

How Siberia became Russian, and not Chinese?

Unlike China, Russia in the 17th century had a singular focus on pelt trade.

Siberia was conquered by Russian-Turkic cossack gangs for a singular, purely economic reason: furs.

For Russia, the fur exports in the 17th century played about the same role as petroleum now. By the start of the 18th century, they gave requisite cash flow for Peter the Great’s wars against Swedes and Crimean Tatars that resulted in the rise of the Russian Empire.

For the Chinese, furs had no particular value compared to other colonial wares. There was little else that could motivate them to spend precious resources on controlling these vast, barren expanses to the north. This is why they preferred to let locals harvest the territories for pelts without imposing military control or a dedicated arrangements for taxation

Besides, the Chinese didn’t possess the military technology for penetrating these territories. Cossacks, on the contrary, were made for the task. They operated as small, autonomous, highly mobile troops with firearms. They knew how to quickly construct ad hoc river vessels for traveling longer distances on the water (thank you, Varangians!). They combined this with traversing the wilderness between watercourses on foot—the task seemingly impossible for the massive, cavalry-based Manchu troops.

When Cossacks imposed control over Siberia and the northern part of the Far East, they took over much of the deliveries to China. For them, this was a high-volume and mostly low-margin business that included large deliveries of squirrels and hares. Mink, sable, bever, sea otters were typically dispatched to Muskovy, where they fetched a better price. Later, when permanent logistics were established along the Pacific coasts of northern Asia and Alaska, they added sea otters to this lineup.

Cossacks collect fur taxes from Siberian tribe.
Picture: a XIX-century watercolor by an anonymous artist visualizing Cossacks who collect fur taxes from a Siberian tribe.

Medieval Russia compared to the rest of Europe

The Russian heartland could sustain limited population because of too little arable land and harsh climate.

Russia is situated on the edge of the climatic zone where traditional European agriculture such as grain production, can be practiced. During the continental warming in the late-Middle Ages, bumper crops happened more often. Still, harvests failures because of weather were a much more serious factor than in territories further west and south.

Most of Russian peasants up to the Imperial times practiced migrational single-field agriculture. It could give up to 10x the input the first year, only to drop to a fraction of that the second year. Which defined the precarious nature of living in the Russian woods.

In the East Slav territories in the time of Varangians and Kievan Rus (IX-XIII centuries), there was another major challenge: no roads. Almost all transportation required access to rivers. This made delivery of excess produce to other areas very problematic. Russia got permanent markets, and the mercantile class in the cities several centuries later than the countries to the west. (The Hanseatic enclaves in Novgorod and Pskov, later destroyed by Moscovy dukes, were the few exceptions). No wonder the Russian word yármarka (seasonal market) came from German, torgóvlya (trade) from Scandinavian, bazár (local market), déngi (money) and tavár (goods) from Turkic.

Russian dukes and their gangs lived primarily from taxing the cargo passing between the Black, Caspian and Baltic Seas—before the XIII century a very lucrative trade—as well as from occasional conquests.

To sum it up, the elites lived much like now, in habitual opulence, often surpassing the luxury of the Western aristocracy, yet punctuated by occasional blows of misfortune. The rest of the population had to struggle against harsher realities of East European nature and weather.

It required the spread of two-field and three-field agriculture brought to us by German settlers, as well as the annexation of fertile steppe lands in the south in the XVIII century, to create the economic base for larger swathes of population comparable with more benign areas in the Central and Western Europe.

arable land former European part of USSR
The map shows how little arable land there was in the Russian heartland north of the Cumanian prairies. The subsistence farming was a serious constraint for the population growth until the Russian Empire managed to conquer the fertile areas in Ukraine and southern Russia.