Russian capitalism today

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By Stanislav Menshikov


Soviet Army captures Berlin, a high point for the popularity of the Soviet system. Despite constant allegations of inefficiency, the Soviets by 1942 outproduced Nazi Germany by a factor of 2 to 1, and by 1944, by 4 to 1.

Monthly ReviewJuly-August, 1999   

IN THIS CENTURY, capitalism has visited Russia on three different occasions. The first was under the Tsarist monarchy (when, after a long and relatively slow development, there was a short period between the first, and largely unsuccessful, bourgeois revolution of 1905-1907 and the start of the First World War), when industry boomed and capitalist rural reform was promoted by Prime Minister Pyotr Stolypin. While most of the country remained largely underdeveloped and backward (even by the global standards of the day), large monopolistic concerns and banks sprang up and began laying the foundations of a more modern capitalist state.

That particular Russian capitalism was buried by the 1917 Bolshevik Revolution which, in its initial years, adhered to almost total nationalization, at least in urban areas. With the end of the civil war in the early 1920s, Vladimir Lenin introduced a new and limited kind of capitalism which, he believed, would temporarily help economic recovery until socialism was ready to take over completely. The experiment with the New Economic Policy (NEP) lasted a few years and was discontinued by Joseph Stalin toward the end of the 1920s. Until the late 1980s, there was no legally recognized capitalism or private enterprise in any form – a lapse of well over half a century.

The Russian capitalism of the 1990s appears therefore, at least on the surface, to have no solid or discernible roots in the two previous capitalist phases of this century. Even representatives of the former capitalist classes, insofar as they could physically survive under the Communist regime, largely disappeared from the scene. The new Russian capitalism is thus, paradoxically, totally based on foundations – both objective and subjective – that were laid down under a centrally planned economy and a socialist society.(1)

Even so, there are a few traits common to the three Russian capitalisms of this century which are worth noting. First, they each possess an overwhelming tendency to exploit the spheres of intermediation rather than production. Second, each exhibited an exceptional reliance on support from the state. Thus, from the eighteenth century onward, the most successful Russian capitalists were merchants who were given special rights to start mines and factories, initially based on serf labor. Even as late as the dawn of the October Revolution, most Russian entrepreneurs retained an aversion to manufacturing (with the exception of textile mills and munitions), while most of the largest companies (in coal, steel, machinery, and metalworking) were controlled by foreign capital. In the days of NEP, capitalism mostly avoided large-scale production and concentrated on trade and exploitation of lucrative government concessions. Practically all of today’s Russian oligarchs rose in banking, financial speculation, and special privileges granted by the state.

Whether this affinity for the primordial forms of capitalism is sheer coincidence or rooted in some gene common to Russian-based entrepreneurs is unclear. What is certain is that the parasitic character of the new Russian capitalism is even more pronounced than that of its predecessors. Not a single important new plant or factory has been built in Russia in the last eight years. The economy is operating exclusively by utilizing productive capacity created under socialism.

It is clear that such an economic system cannot survive, because its physical capital is being depleted. Capital consumption allowances (depreciation) now exceed 30 percent of gross domestic product (GDP); net fixed capital investment has been negative for a number of years; and fixed capital stock is being reduced from year to year. It is difficult to find anything even remotely similar to macroeconomic suicide on such a scale in the modern world.

Russian capitalism of the early twentieth century was at least able to maintain economic growth. NEP capitalism helped the economy recover to pre-war levels. Russian capitalism of today is simply ruining the country.


As mentioned above, Russian capitalism today is largely rooted in the Communist economy of yesterday. First, its immediate predecessor was the underground, or shadow, economy which developed in the pores of the command economy. Some of the successful tycoons of today started their business careers inside that sphere of undercover activity which, by the time Mikhail Gorbachev came to power, accounted for 15 percent of Soviet GDP. (2) It is important to realize that the shadow economy under Communist rule was not only a group of speculators and underground producers operating outside the official state sector; it also included a network of state managers, functioning as private entrepreneurs from inside the official system, as well as people placed strategically in high government agencies. For all practical purposes, these groups treated state economic assets as their private property and appropriated part of surplus value, created in state-owned enterprises, for their private benefit. They were thus prepared to take over as legitimate private capitalists once the old political regime was disposed of, the formerly state-owned enterprises legally privatized, and central planning discontinued in favor of decentralized private determination of production, distribution, and prices. Market reforms came as the logical reflection of the interests of this new class in search of an open and legalized capitalist identity.(3)

Russian capitalism today

Monthly ReviewJuly-August, 1999   by Stanislav Menshikov

Second, because of their largely illegal past experience, a substantial number of the new Russian capitalists were versed in criminal and corrupt practices and did not feel any moral or legal constraints in the newly reformed system, which was immeasurably more liberal and favorable to the application of such practices. The system was thus instrumental in making corruption the general rule. Today, nobody in Russia seems surprised when a business competitor is shot dead or blown up or disposed of in some other way. Even struggles for control over some of the largest oil and aluminum companies in Russia have been settled in a most violent way. Corruption and crime are widespread in the Russian capitalist class not only because the legal infrastructure for observing contracts has not been set up, as is widely suggested by some liberal critics, but mainly because a large part of the class does not know any other means and sees criminal and corrupt ones as the most effective – at least in the short term, which is all that seems to concern them. While the criminal and corrupt part of the business establishment may well be a minority in the capitalist class, it is an extremely powerful one and sets the general tone.

Third, because of the way in which privatization in Russia was carried out, most of the former government-owned assets were transferred to their new owners at a price that was a fraction of their actual value. It is worth recalling that the basic legislation for privatization of large-scale government enterprises was approved by the old Russian parliament, mostly left-wing and anti-capitalist in composition and, mainly for that reason, dissolved by force in October 1993. That legislation was intended to retain control of enterprises by majority ownership of their employees, and to sell the remaining part of the shares for vouchers issued equally to all citizens. The guiding principles were, therefore, to create employee-managed firms with widely dispersed share ownership among the population. This is not exactly a classic capitalist idea, but closer to the concept of cooperative socialism.

In practice, under a vehemently pro-capitalist government, the plan worked out in a completely different way. A large part of the insider shares ended up either in the hands of the former management or under their control – making them, in most cases, the controlling shareholders or even majority owners. Instead of remaining dispersed, vouchers (whose real values plummeted during hyperinflation) were bought up at nominal prices. The purchasers were investment trusts belonging primarily to large-scale operators, who then used them to buy into the more profitable or promising enterprises. For instance, a Russian criminal group associated with a London trading company was able, in this way, to buy control of some of the largest aluminum smelters in Siberia. However, at this stage of the game, outside investors of any type were exceptions, and in most cases the former “red directors” became the new de facto enterprise owners.

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  • At a later stage, the government introduced a scheme under which large chunks of shares in companies exempt from privatization at the first stage (because of their strategic importance – like the big nickel concern) were exchanged for “loans” from private banks. After a year, the collateral was turned into their property due to a technical government default. The effective price of these acquisitions was significantly below their real value. In this way, the leading banks (which had hardly existed at the first stage of privatization) became centers of financial-industrial groupings and their owners became oligarchs.
  • The net result of this twofold operation was that the state received practically no revenue from the privatization of its economic assets, an overwhelming share of which was transferred to the new capitalist class – practically scot-free. Multimillion- or multibillion-dollar fortunes were accumulated by the robber barons over decades in the United States; the same process took less than five years in Russia. The destructive nature of this large-scale rip-off is that physical capital acquired at minimal cost and through minimal effort is not considered by its owners to be worth putting to good use; it carries a strong psychological inducement toward parasitic behavior and squandering.
  • Fourth, apart from the manner of privatization, the pro-capitalist government was active in permitting favored members of the capitalist class to partake systematically of the government’s revenues. This was done in many ways. Firms with close ties to top government figures were accorded the status of special exporters, under which they had the exclusive rights to sell oil and metals on terms that permitted them to avoid taxes and repatriation of hard-currency revenues. Select companies and organizations were permitted to import alcohol and tobacco duty- and tax-free and use the revenue differential for their private purposes. While most of these particular privileges have since been revoked, they served their purpose, creating the initial multimillions later put to other, more “conventional” uses.
  • By now, a lot has been said and written about one of the most publicly active and arrogant of the oligarchs – Boris Berezovsky, who is reliably reported to be the main private cashier of the Russian “First Family.”(4) The story about how he acquired his first tens of millions is worth retelling. One starting point was an arrangement with the management of AVTOVAZ, the company that produces the Russian automobiles called Ladas. Under this agreement, Berezovsky acquired distribution rights to a substantial share of the company’s output for Logovaz, his dealership, which still serves as the headquarters of his business empire. Because the retail of Ladas in Russia is organized along lines similar to those that govern the infamous Medellin cocaine cartel in Colombia, Berezovsky’s success in squeezing into that market was quite a significant accomplishment. However, unlike his cartel colleagues, he invented an even better way of getting rich fast. Acquiring the status of a special exporter, he would buy his cars at specially subsidised export prices and then sell them in the domestic market for their full price, without bothering to pay taxes.
  • He then invented a way of privatizing businesses de facto, without necessarily buying into them. By silently paying top executives of a company a second or third salary, he could gain control without acquiring a single share. The two best known cases of this are Aeroflot, the largest international Russian airline, and ORT, Russian television Channel One, which is nominally majority-controlled by the government. By putting his directors on the Aeroflot board, Berezovsky succeeded in making an arrangement under which a certain share of the company’s hard-currency revenues were transferred to a Swiss company he controlled. It is only recently that Yeltsin’s son-in-law, hand-picked by Berezovsky to manage Aeroflot, succeeded in firing the tycoon-appointed directors. Whether this means that Aeroflot will break completely with Berezovsky is yet to be seen.(5)
  • Much in the same way, Berezovsky controls ORT despite fierce opposition from parliament and the now deposed Primakov government. Despite the state’s 51 percent stake, he seems to be completely in charge with only a 16 percent share in the company.
  • The use of government money has been a principal source in the rise of the leading Russian banks controlled by some of the other oligarchs. While government deposits account for only 2 or 3 percent of total commercial bank liabilities, 90 or more percent of actual government revenues and payments are transferred through the banks. In their capacity as special agents of the government, the banks benefit from high commissions (up to 7 percent of the turnover) and the short-term use of the funds temporarily unused by the government. Banks are interested not so much in expanding their normal commercial activities, but rather in becoming exclusive agents which manage government agencies with particularly large cash flows, like Rosvooruzheniye, which controls most of Russia’s armaments exports, or the Federal Customs Agency which, until recently, transferred all its revenues to the Potanin controlled Uneximbank. Until August 1998, another lucrative source of income for the banks was Treasury bonds which, as recently as 1995-1996, yielded an average of 85-160 percent per year. This bonanza is partly over (because of default on government bonds – but also because the Ministry of Finance is creating a network of direct Treasury financing and is in the process of curtailing its dependence on private banking services).
  • To sum up, the Russian capitalism of the 1990s is largely an outgrowth of the illegal shadow economy of the Communist past, combined with a totally new system of state-monopoly capitalism. This system has expropriated the assets of the socialist state and thrived on substantial surplus value, redistributed in recent years through government channels. This rapid transformation would not have been possible without an aggressive pro-capitalist policy pursued by the Yeltsin-led reformist regime.
  • III
  • One of the foremost characteristics of Russian capitalism today is its lack of opposition from the country’s working class. Tsarist Russia had no strong independent trade unions, and those organized under Soviet rule, while effective in maintaining some of the workers’ rights granted by formally progressive labor legislation (and as practical distributors of a large number of social transfers under the welfare state), were largely non-militant organizations with no tradition of fighting for the interests of labor. After the breakdown of the Soviet regime, most of the former trade unions were demoralized or simply ceased to exist. Some of the new ones (for instance, in the coal industry) led sporadic and ineffective actions aimed primarily at concessions from the government rather than from the new capitalist class.(7) It is not surprising that real wages under new capitalism fell sharply and continuously, while the rate of exploitation increased.(8) According to official statistics, real wages in 1998 were only 49.3 percent of their 1991 level. (1991 was the last year before the Soviet Union fell apart.) The share of the population below subsistence level was 24.1 percent, again by official count. Real wages fell drastically again after the August 1998 crisis.
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  • As average real incomes plummeted, incomes of the newly rich skyrocketed and, within a matter of years, income inequality increased enormously. In 1990, the incomes of the highest decile of the Soviet population were only four times higher than those of the lowest decile. By the end of 1995, the spread increased to twenty-three times. The Gini coefficient, a standard statistical measure of inequality, leapt from .27 in the late 1980s to .48 in the mid-1990s. The latter figure is far above the same coefficient in the industrial capitalist world and is now close to some of the most unequal developing nations.
  • Underlying this gap is the classic Marxist coefficient of surplus value. Reliable statistics of this measure are hard to come by. For instance, the latest available National Accounts Statistics report the total share of wages and salaries of employees in Russia as 43.4 percent of GDP in 1995 (as compared to 48.8 percent in 1990). This represents a substantial reduction by any criteria. However, when a deduction is made from the total for what is called “hidden wages,” the share falls to only 33 percent. By comparison, the share of wages and salaries of privately employed persons in the GDP of the United States for 1996 amounted to 39.2 percent.(9) Statistical notes to the Russian source indicate that data for wages include sums that were appropriated for payment but not necessarily paid, as well as social taxes paid by employers. Official data for wage arrears are too small and do not reflect their real amounts. But even they are now shown to be more than 10 percent of the total nominal wage bill.
  • To better measure wages and surplus value,(10) I compared unpublished input-output tables for 1991 and 1995 (made available by government authorities to the CEMI, a research institute in Moscow). The tables show, as separate rows in the value-added sector, the wage bill proper for every industry, employer contributions to social security, total labor compensation, net profit (before tax deduction), and “mixed income,” which is income of small entrepreneurs, mostly in agriculture, construction, and retail trade. Because these tables are constructed from data collected at the industry level, they are closer to reality than the National Accounts figures that have gone through the further refining and polishing filter at the Goskomstat (Federal Statistical Bureau) level. (See Table 1)
  •                               1991                  1995
  •                         bln. ru.   % of GDP   bln. ru.   % of GDP
  • wage bill                609.1       47.5      358.9        21.6
  • employer contribution
  • to social security       118.0        9.2      140.0         8.5
  • total employee
  • compensation             727.1       56.7      498.9        30.1
  • net profit               369.1       28.8      392.0        23.6
  • mixed income             55.9         4.4      313.6        18.9
  • According to these calculations, the contrast between Soviet and modern capitalist times is even more drastic. The wage bill proper accounted for 47.5 percent of GDP in 1991, but for only 21.6 percent in 1995, a more than twofold fall in the direct share of labor. Employers were paying relatively less for social insurance (8.5 percent down from 9.2 percent) and the share of total employee compensation was reduced to 30.1 percent from to 56.7 percent.
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  • While the share of profits also declined (from 28.8 to 23.6 percent), which is not surprising given the deep recession in the economy, the share of “mixed income” leapt from 4.4 to 18.9 percent, reflecting the rise in the activities of small businesses. All told, non-labor incomes increased from 33.2 to 42.5 percent. Of course, most of the profits in 1991 went into the state budget, not into private coffers which makes a lot of difference – only a minor part of it was paid directly to the Soviet nomenklatura, while most of it either was invested in the economy, was distributed through the budget for social purposes, or went to the military. In 1995, by comparison, most of this income (after taxes – which, in that year, made a direct deduction from the profits of 117.4 bln rubles, i.e., an effective profit tax rate of only 29.9 percent) ended up as income of the private capitalist class. Profits in the input-output table are, of course, shown net of depreciation and indirect taxes. Total cash flow available to the new capitalist class was much larger, amounting to 59.4 percent of GDP – a proportion long unheard of in developed industrial nations. We shall come back to this phenomenon and to what it means for the dynamics of Russian capitalism.
  • To trace relative changes in the rate of surplus value, one should take the ratio of profits to wage bill proper. According to data in Table 1, this ratio went up sharply – from 60.6 percent in 1991 to 109.2 percent in 1995.(11) As I indicated in my book, Catastrophe or Catharsis, the rate of surplus value in late Soviet times was higher than in the United States, where the working class (at least in the few decades after World War One) was able to improve its relative share in national income. But after capitalism in Russia took over, labor’s position there deteriorated drastically, becoming incomparable with anything imaginable in the industrial countries of the West. Further oscillations in later years in the rate of surplus value (as measured by the ratio of profit to the wage bill in the economy) appear in Table 2.
  • 1995 marked the beginning of some stabilization in the economy. While the general slump continued, it was not as rapid as in the preceding years. Deterioration in business conditions hit overall profits and caused a mild decline in the rate of surplus value. However, 1998 was a particularly hard year. Real wages fell substantially, but profits fell as well, and the rate of surplus value was reduced to only 49.7 percent, a record low for the decade. However, despite the continuing low real wages in 1999, profits are expected to rise sharply and the surplus value rate to recover, to at least around 65 percent.
  • Table 2
  •                         1995     1996     1997     1998      1999
  • Direct Wage bill
  • (bln. ru)                375.7    569.4    663.9    786.9    1117.9
  • Net Profit (bln. ru.)    378.8    519.5    589.3    390.8     723.3
  • Rate of Surplus Value    100.8     91.2     88.8     49.7      64.7
  • Source: Our calculations based on an Input-Output Model of the
  • Russian Economy. Data for 1995 vary from Table 1 due to revisions in
  • National Account Statistics. Data for 1998 are preliminary and data
  • for 1999 are based on projections.




For various reasons, surplus value was, and still is, distributed unevenly among the different sectors of the Russian capitalist class. A disproportionate share of total profit generated in the economy is being appropriated by a few privileged sectors, including the principal mineral exporting industries (oil, natural gas, non-ferrous and partly ferrous metals), as well as banking and trade in imported goods. The dominant positions gained by the oligarchs were based on control of these sectors, and the most well-known of the large personal fortunes were accumulated there. It is also true that the output slump has been particularly severe in manufacturing, both in textiles and other light industry, but also in machinery and metalworking, which used to be the mainstay of the powerful Soviet military-industrial complex. Capitalist groups in these sectors have so far been the losers in the fight for a share in total surplus value.

However, it is necessary to put this proposition in perspective. It is correct that the sectors in question have been among the most privileged in terms of their rates of surplus value and, therefore, of profitability. These rates are compared in Table 3 for selected industries based on data calculated from the 1995 input-output table.

Table 3





                                        RSV             SIT


Electric Power                         221.4             4.7

Oil and Natural Gas                    422.0             6.4

Ferrous metals                         315.1             4.3

Non-ferrous metals                     269.5             4.1

Chemicals and Petrochemicals           301.5             5.0

Machinery and metalworking             116.5             8.5

Food                                   193.9             5.4

Industry – Total                       178.6            46.0

Construction                            32.6             4.3

Trade                                  312.1            29.1

Banking and Finance                    498.9            16.1

Economy – Total                        109.2           100.0


The conclusions are obvious: First, the four export-oriented industries mentioned above are indeed privileged, in the sense that their RSV’s are two to three times higher than the industry average and three to four times higher than the average for the economy as a whole. Second, however, is the fact that their share is only 43 percent of total surplus value created in industry and only 19.9 percent of the total profit in the whole economy. Third, trade and finance intermediation are also extremely privileged, with RSV’s hovering in the sky-high three hundred to five hundred percent range. Unlike the four industrial sectors mentioned, their share in total profit of the economy is 44.2 percent – practically equal to the share of industry and much larger than the share of the privileged industries. Fourth, the remaining underprivileged part of the economy (most of industry, agriculture, construction, and transportation) produces about 60 percent of the total value of goods and services in the economy, but accounts for only 36 percent of the total surplus value.


This analysis also shows that, while a large part of the Russian capitalist class is not in a privileged position vis a vis the industries that occupy a special position, they do enjoy a substantial share of surplus value created by Russian labor. It is particularly important to underscore the fact that the Russian capitalist class includes not just a few oligarchs and monopolists in export-oriented industries, trade, and banking, but also numerous industrial capitalists, who thrive on a regime that permits them to appropriate a hundred or more percent of surplus value.

In this respect, Russian capitalism very much resembles the capitalism of other industrial nations. Table 4 compares the distribution of profits in Russia with today’s United States and the former Soviet Union.


The principal change in the distribution of profit in Russia, as compared with the Soviet Union, is a substantial reduction in the share of manufacturing and a rise in the shares of trade and services, particularly banking. Mining and energy are only slightly larger (relatively) than they were, but they are now private or semi-private monopolies rather than state-owned as they were in the Soviet Union. While Russia has not caught up with the United States in terms of the share of profits in non-material services, it is definitely on its way.

But the shares of manufacturing industries in Russia and the United States are nearly equal, which confirms the fact that Russian capitalism today has not lost its industrial base. It is not the purely mineral-rent-dominated, corruption-infested, and speculative-oriented formation described by some authors, but a full-fledged banking-industrial capitalism striving to attain its natural position in the system of capitalist states.(13)


With such an enormous share of surplus value in national income, any capitalist economy would have a major problem selling its product inside the country. This is the famous “realization problem” discussed by Marxists at the beginning of the century. Rosa Luxemburg claimed that the problem could be solved by exporting the surplus to less-developed countries, and if that proved to be impossible, capitalism would not be able to grow. Tugan-Baranovsky believed that the problem would be solved by using a larger share of surplus value for domestic capital investment. Lenin disagreed with both of them, and suggested that the capitalists would be able to create domestic markets for their products but, in the process, would experience periodic crises of overproduction.

Over the course of the century, the industrial capitalist nations found two additional ways to dispose of the problem: first, by increasingly using the state to redistribute income and by expanding government expenditure in such a way as to compensate for inadequate investment possibilities; and, second, by expanding the service sector, which would help utilize a growing share of surplus value created in production of goods. Both methods involved substantially increasing employment in the government and service sectors, so that the overall share of hired labor in national income increased, while the share of income distributed in the form of profits was relatively reduced. This led to substantial increase in domestic markets and helped reduce cyclical swings.


But these processes took decades to accomplish, and a newborn capitalism in Russia had no time or desire to adjust. It is therefore encountering the same basic problem that was discussed by Luxemburg, Tugan, and Lenin many decades ago: it is unable to fully sell its potential product in its domestic market. The solution suggested by Tugan (high capital investment) works only if there is an expanding domestic market, created by a substantial rise in wages and other incomes of the main mass of the population. In Russia, not only is the total wage bill relatively small, it also tends to stagnate and even fall in absolute volume, precluding growth in both investment and output.

Let us again compare today’s U.S. and Russian economies from this perspective. In 1996 in the United States, compensation of employees accounted for 58 percent of GDP, while proprietors’ and rental income accounted for another 9 percent. Together these incomes are exactly two thirds of GDP – practically equal to the share of GDP that goes into personal consumption. The remaining third is the sum of corporate profits, depreciation, and indirect taxes used for capital investment, government purchases, and settling accounts with the rest of the world.

These general rules of equivalence between incomes and their use apply to any economy. Only the proportions and magnitudes are different. In 1996 and 1997, total labor income accounted for only 35-36 percent of Russian GDP (compared with 58 percent in the United States), while the share of property and entrepreneurial incomes was 17 to 18 percent (compared with 9 percent in the United States). This comparison shows how much more degraded labor’s position in Russia is compared to the United States. But let us move a step further. Together, these two categories account for only 49-50 percent of GDP in Russia (compared with 67 percent in the United States) – exactly the share of personal consumption in Russia. Only half, rather than two-thirds, of total national product finds its way to consumers, whether poor or rich. And a full half (compared to one-third in the United States) is left for capital investment and government consumption.

From these figures, one would assume that Russia has all the necessary resources to grow quickly, much faster than the United States, because it can spend a much larger part of its product on increasing its capacity to produce and provide social security for its citizens. But young Russian capitalism does not work that way. As it turns out, it is able to spend only part of its surplus value and depreciation (whose sum is referred to as “total cash flow”) for capital investment in the economy because, in the narrow domestic market, prospects for growth are dim and incentives for investment meager. Most of the remainder (after taxes) is used for “financial investment” (buying into other firms), investing into government bonds (which, until August 1998, brought 60 or more percent annual interest), or moving capital abroad, where it is considered safer in banks, securities, and real estate than in the politically and economically unstable environment of Russia.


Because of the excessively large share of surplus value and cash flow in Russia’s GDP, and despite a continuously large government budget deficit (which is a net deduction from private savings), there is a systematic surplus of domestic savings over investment. This surplus is being spent by Russian capitalism for financial speculation inside the country and for capital exports from that capital-hungry country. When measured in U.S. dollars, it is close to unofficial estimates of illegal capital flight from Russia in recent years.

The figures for domestic capital investment look large in relative terms. 20 percent is a respectable rate of investment for any fast-growing country. The figure is higher than in the United States, where it was 14.3 percent in 1996, in an economy growing at the annual rate of 3 percent. Many authors have questioned the validity of the Russian figure, which is abnormally high for a shrinking economy. Two factors have to be kept in mind. First, price indices for capital investment goods have risen faster than the average GDP deflator, helping inflate the share of capital investment in total national product. Adjustments for this factor could easily bring the share of capital investment down to 9 or 10 percent of GDP. In real terms, capital investment in 1996 was down 75 percent compared to 1990. Most of the sharply reduced new investment is in construction of residential and administrative buildings (including new headquarters of major banks and oil-gas conglomerates), while the share of producers’ durable equipment accounts for only 3.6 to 4 percent of GDP in 1995 and 1996 (compared to 7.2 to 7.4 percent in the same years in the United States). More than half of the investment in industry is in oil and gas (mainly in pipelines), not in manufacturing.


Second, even the inflated overall figures of gross capital investment are now smaller than depreciation, which means that net investment is negative to the extent of 5 to 10 percent of GDP per year, and that productive fixed capital of the country is being physically reduced at an alarming rate. Practically no new notable production plants have been built under new Russian capitalism. It has turned out to be a completely sterile creature.


Another feature of its sterility is its inability to create a money economy that functions normally. Whatever is said about the limited nature of money under Soviet socialism, it cannot be denied that money served as an instrument of exchange. State-owned enterprises were obliged to keep all their revenues from sales in their accounts with the State Bank and could effect payments largely through the bank. While inter-enterprise non-payments and arrears were possible, their total amounts were negligible, since the clearing mechanism of the State Bank allowed a fast and orderly disposal of undue congestion of mutual debts.

Under the so-called market reforms, this mechanism was largely destroyed and no adequate new mechanism was created to take its place. Private commercial banks have largely concentrated on securities and currency operations of a dubious nature, and on finance-industrial empire building – disregarding their principal macroeconomic function as centers that facilitate money payments and channel savings into investment. Suffice it to say that total ruble deposits account for only 39.1 percent of total bank liabilities, including a mere 12.5 percent in deposits belonging to businesses. Credits to the private sector are only 36.3 percent of total bank assets. Bank credits and other services are so expensive that there is a natural tendency on the part of Russian businesses to avoid the banks altogether or to rely on “in-company” banks that they can control and in which they enjoy preferential terms.(14) The abnormal activity of Russian banks was highly lucrative, and the financial sector was a leader in profitability and surplus value appropriation.

The natural result of this perversity was the progressive de-monetization of the Russian economy. Over the years, an increasing share of business transactions was being settled by barter or company promissory notes. The share of barter in sales of industrial companies rose from only 6 percent in 1992 (the first year of Yeltsin’s reforms) and 11 percent in 1993 to 18 percent in 1994, 26 percent in 1995, 40 percent in 1996, 47 percent in 1997, and 52 percent by the end of 1998.(15) And while total money supply (M2) increased from 9.5 percent of GDP in 1993 to 12.6 percent at the end of 1998, it was still much smaller than the 49.7 percent in the United States.

This tendency has caused some U.S. authors to characterize the Russian economy as a “virtual economy,” in which the absence of normal market relationships makes prices unreal and most Russian industries value-destroyers rather than value-creators. The logical conclusion of these authors is that Russian industry should be largely shut down, a conclusion that ignores the dire social consequences involved for Russian labor.(16) The discussion above has shown that contrary to what such authors claim, Russian industry continues to be not only a producer of value, but also of surplus value at a very high rate. But it is clear that the de-monetization of the economy modifies the way in which value and surplus value are distributed and affects the mode in which most Russian enterprises operate – making them different from the prevailing pattern in many other capitalist countries.

First, part of depreciation and surplus value is not necessarily monetized and while very real – in the sense of having been produced and appropriated by the capitalist class – it also exists in a form that makes it difficult for the government to extract in taxes or for others to access for capital investment. The non-monetary form also reduces the incentive to maximize profits.

The tax issue is particularly important. When forty or more percent of company revenues are not monetized, it is extremely difficult for a company to pay taxes, even if it wants to – and much easier for it to avoid paying taxes if it doesn’t want to do so. In my model calculations, I have found, for instance, that the tax on profits is de facto levied only on that part of profits that remains after deducting the share of barter. The higher the share of barter, the lower the amount of profit available for payment of the profit tax. The same applies to other taxes as well, which explains the large tax arrears and the relatively poor tax collection record of the authorities. On the scale of the macro-economy, this means that the state is not able to support the welfare state and promote economic growth (by accumulating unused company savings and infusing additional aggregate demand into the economy – a basic function that helped capitalism solve its “realization problem” in this century).

Second, de-monetization modifies the basic mode of operation of a typical Russian firm. Its main objective, wherever possible, is to maximize money revenue, rather than profit per se. Because exports bring “live money,” they are the most desirable form of business activity. A typical firm producing exportable goods will be induced to export more, even if that means reducing its position in the domestic market. Also, trading in imported consumer goods is a desirable activity because the main consumers of these goods are people in high income brackets, who are prepared to pay relatively high prices, in cash. Banking is also a desirable activity because it deals in money, not in goods that have to be sold.


However, there remains a vast majority of Russian capitalists who, for various reasons, have to work – mainly for the domestic market and in domestically produced goods. Because a very large part of their sales are in barter (up to 70 or 80 percent), their principal objectives are to achieve a certain minimum of money income that is enough to pay a substantial part of the wage bill of their employees and to retain enough cash to satisfy their own needs at a level many times higher than that of their workers. In a typical industrial enterprise, the direct wage bill is only 6.5 percent and net profit another 11.5 percent of total sales. Adding 5.5 percent for indirect taxes, one is left with an total average of 23.5 percent as the amount a company needs (as the minimum cash share of its sales) if it wants to pay its employees and taxes and yet be secure, in terms of monetized surplus value – provided that it can arrange paying all or most of its suppliers in barter or IOUs.

This is not simply an abstract theoretical model. It is an established fact that even such high-power natural monopolies as Gazprom (the gas giant) and RAO EES (the electric power concern), incidentally both semi-government owned conglomerates, receive only about 20 percent of their revenues in monetary form.(17) The largest cement concern in the country (as revealed by its top executives) is able to pay its employees’ wages on time only because it receives direct cash revenues from sugar trade “on the side.” Cement does not bring them much cash, even though it is in high demand and considered highly profitable. Many successful Russian businesses follow the same rule: if you snatch a nice cash-earning bonanza on the side, you are able to maintain your largely non-cash business without great risk and lead a comfortable capitalist life.

The natural question is: why not dump the non-cash side of the business completely? Because it is the barter part of business that makes its owner prestigious and powerful. Bartering products is a power-wielding activity if you know how to use it in your interests. Even AVTOVAZ, the leading car producer in Russia, barters most of its product to dealers who supply it with metals, rubber, glass, and electronics. One reason is that the top executives of the concern are co-owners of the dealerships, and they get their fat share of profits from that activity.


To state that Russian capitalism today is a hideously corrupt hybrid of a command economy and a ugly variation of capitalism has become a commonplace that does not give us much historical insight into the dynamics of the phenomenon. It is much more productive to explore the proposition suggested above that Russian capitalism, whatever its roots, is out of place in the modern world and does not have the internal economic mechanisms to grow. The most it can hope for is to stagnate and degrade if, of course, it remains in its current state of sterility – brought about by the anomaly of excessive appropriation of surplus value.


In its present mode, it is also destined to plunge deeper into the morass of the poor and exploited periphery of global capitalism. The leaders of today’s Russian capitalism are a unique species, sterile to the point of being uninterested in expanding its positions in the world or promoting its geopolitical interests, as any imperial capitalist country normally does and should. One could claim that Russia is no different from what a growing number of other capitalist countries are becoming – clients of a unipolar U.S. imperialism. Well, yes and no. Other countries are doing it without impoverishing their own populations and downgrading their own economic power and industrial potential. Russian capitalism is consciously selling its foundations down the river, never doubting that this is the only route to take. There is hardly any analogue of such suicidal behavior in history.


1. Even in Eastern Europe, where the socialist interval lasted only four decades, remnants of the older capitalist regime were still present at the birth of the new capitalisms of the late 1980s. (For instance, a representative of the Bata family returned to the Czech republic to reestablish his shoe production empire.) One of these remnants, Madeleine Albright, came back from across the Atlantic in the flesh – armed with the overwhelming might of the leading (now the only) capitalist superpower – to haunt her native region, politically and militarily.

2. I have laid down the theoretical grounds and methodology for calculating the share of the shadow economy in the Soviet Union and explained the various modes of its operation in Catastrophe or Catharsis? The Soviet Economy Today, Inter-Verso, 1990-1991.

3. Milovan Djilas wrote about a “new class” that was identical to the ruling Communist nomenklatura in a state-capitalist society where exploitation was effected by those who controlled state-owned means of production. But in practice the new class was not that unified, and a significant part of it eventually chose direct private ownership to indirect control via the state.

4. Berezovsky, as well as Alexander Smolensky, another oligarch, is now under criminal investigation, but given his close ties to Yeltsin, there are grave doubts that the charges against him will indeed be pressed. In fact, the General Procurator who started these proceedings has been discharged by Yeltsin on trumped-up charges. The order for Mr. Berezovsky’s arrest has been repealed and he is currently spending most of his time buying up new media companies in Moscow, well ahead of the 1999-2000 elections.

5. When the criminal investigators questioned Berezovsky about his activities in Aeroflot and other companies, his response was that he owned no shares in them and thus had no connection with their business operations.

6. Vladimir Potanin, one of the oligarchs, is a relatively young man who used his connections in the former Foreign Trade Ministry to build up one of the largest private banks in a matter of a few years. The other banker oligarchs are Vladimir Gusinsky (Most-bank), Alexander Smolensky (SBS-Agro Bank), Mikhail Khodorkovsky (Menatep Bank), Peter Aven and Mikhail Fridman (Alfa Bank). All of them used government finances as one their main sources of enrichment. At the same time, more than 70 percent of individual deposits are concentrated in the government controlled Sberbank, which has resisted all attempts to privatize it. Smolensky, like Berezovsky, is also under criminal investigation and, until recently, was living in Vienna, out of the reach of the Prosecutor’s office.

  • 7. It would be unfair to rule out labor action completely. In 1997, there were seventeen thousand strikes officially registered throughout the year and six million worker-days lost. Close to nine hundred thousand employees participated which, however, is only 1.4 percent of the total number of persons employed. Participants in hunger strikes, demonstrations to protest non-payment of wages, and other forms of mass protest are not included in these figures.

8. For lack of space, we do not deal with unemployment, which increased drastically and added to the general impoverishment of the working class and the population in general. At the end of 1998, the official unemployment rate reached 11.8 percent with perhaps another 10 percent either partially employed or considered employed but not paid. Only 2.7 percent bothered to register because actually receiving the meager unemployment benefit was too difficult to be worth the effort.

9. Data for Russia from Russian Statistical Yearbook for 1997, Chapter 8. Data for the United States is from the Economic Report of the President of the United States, 1997.

10. Calculating the true magnitude of surplus value and its rate is extremely difficult in any country because of statistical and definitional problems and also subject to substantial theoretical controversy even among Marxists. One should not therefore take the figures presented in this article as anything other than approximations that help illustrate trends and are useful for comparative purposes.

11. These percentages are the results of dividing, respectively, 369.1 by 609.1 for 1991 and 392.0 by 358.9 for 1995.

12. Calculated from National Income and Product Accounts of the United States, 1929-94: Volume 1.

13. See, for example, “Is Russia Becoming Capitalist?” by David M. Kotz. Paper Presented at the American Economic Association Annual Convention in New York, January 1999. The author argues that because of its anomalies Russian capitalism is not really capitalism but some other formation.

14. The average lending rate on credits up to one year as of July-September 1998 was 45.2 percent per annum, while the interest rate on time deposits with a maturity of one month was 16.4 percent. Excessively high rates are charged even for large money transfers. A Russian provincial businessman recently complained to the author that his local bank was demanding a 20 percent plus charge for a perfectly legal dollar transfer from one region of the country to another. Moscow banks have been known to charge up to 5 percent even for changing one hundred dollar bills into smaller denominations.

15. Russian Economic Trends, Russian Center for Economic Policy, 1998.4

16. Cf. Clifford G. Gaddy and Barry W. Ickes, “Russia’s Virtual Economy” in Foreign Affairs, September/October 1998, vol. 77, no. 5, pp. 53-67. I have posted my rebuttals to these authors on the Johnson Russia List, but Foreign Affairs refused to publish my article, which contained criticism of their ideas, “for lack of space.”

17. Incidentally, the sum of wage, profit, and indirect tax components accounts for 29.3 percent of total sales in the electric power industry and for only 12.3 percent in oil and gas. No wonder that electric power plants are reporting large wage arrears in many regions of the country, while gas and oil companies are among the foremost tax payers to the federal budget.

Stanislav Menshikov is a prominent Russian economist known for many books on the U.S. and Russian Economy, including Millionaires and Managers (1969 and 1973), a classic study on U.S. finance capital and, most recently, New Economics (1999), a textbook for Russian university students. He is currently Chief Research Associate at the Moscow Institute of Mathematical Economics (CEMI) and Co-Chair of ECAAR-Russia (Economists Allied for Arms Reduction). Menshikov is now working on a new book about Russian capitalism.

COPYRIGHT 1999 Monthly Review Foundation, Inc.

COPYRIGHT 2000 Gale Group


Bibliography for: “Russian capitalism today”

Stanislav Menshikov “Russian capitalism today“. Monthly Review. 12 Apr, 2009.

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