“Pink” economy

At the top of this newly-formed market there are the new owners. For convenience let us define the top layer as the ''pink'' market. Its participants can do pretty much anything. It’s as if there is some sort of a VIP area whose members all receive special preferences and advantages for making transactions.

The major feature of the pink market is easy, regular capital outflow. The most dramatic effec —sending money to foreign offshore companies—radically dilutes the investment base of Russia's economy.

This market also protects the activities of firms authorized by bodies of government. These outfits, vested with such a higher status, get the added advantages of cheap loans; work with liquid goods, etc.

Unreachable for others, this pink market allows the privileged few to do everything from purchasing millions tons of oil below the market price (and then paying the bill using regional clearing notes) and processing or exporting it at the world market price to getting prime city center land for almost for nothing to build elite housing, etc.

The pink market operates both at the federal and regional levels. A significant part of the market is completely in the shadows.

A wondrous “zebra”

The second layer is the ''white'' market, the market of accountability. The market where transactions are officially recorded, balance sheets and tax reports prepared and paid, etc. This is the legal market whose participants act in compliance with all regulations and rules and are completely transparent.

The latter is especially significant for Russia to enter the global market, which, in turn, is the most essential factor to lure entrepreneurs away from the pink or shadow markets into the white market.

The third layer is the ''gray'' market of semi-licit operations--like siphoning off capital abroad, partial revenue collection, shuttle trade with unaccounted operations, city merchandise markets without revenue collection, businessmen's extortion by local officials to hold festivals or to replenish region's extra-budgetary funds.

The fourth layer is classified as the ''black'' market. Operations performed in this market are criminal and illegal. It is a place where leaders of criminal groups define the rules for regulating production factors.

This market comprises operations and transactions using unrecorded money turnover; shadow production of goods and services by enterprises which are not registered in tax and other governmental bodies; production of unaccounted goods and services by firms that observe the law as a mere formality; etc.

It also includes bribes, trafficking, prostitution, racketeering, drug trafficking and activities concealed from taxation authorities, like illegal tutoring, doctor and training services and ''shadow banks''.

The fifth layer is the non-market sphere of barter transactions. Bartering has continued to thrive in all sectors of the economy. In the consumer sector, it’s an informal institution of shadow barter (back scratching), which was chronic during the long periods of deficit conditions in Soviet times.

“I am Alpha and Omega”

The peculiarity of this multi-level (multi-color) market is the redistribution of financial flows and material resources in favor of the economy’s new owners—the so-called oligarchs.

The main reason the market has become so layered is that it is sustained by authoritarian and autocratic authority. Ms, Kirdina, a market analyst, points out that in this environment ''... the primary concept is not competition for resources that are very difficult to use for an individual manufacturer but coordination of social groups in order to involve them in economic circulation. The fact, that setting borders of private property is inefficient, results in creation of undivided eminent domain.”

The institutions that function in this multi-layered system operate under unwritten informal rules of economic behavior and relatively stable institutional connections, which were formed during the period of Russia's economic modernization that started from formation of the centralized state in the middle of the 16th century.

Government actively participated in formation of Russia's economy as the supreme economic agent. Eventually this process caused a conflict of forces: at the top, the elite fought to hold on to power and its private interests and at the bottom, the rest of us fought for freedom and our private interests.

Today the economic concept of “private interest” prevails only because of the shadow structures involved in production, distribution; exchange and consumption of deficit resources defy the country’s laws, officials and tax collectors.

In every region of Russia, companies, businessmen and workers try to keep their gains away from the government. As for the pink market, it keeps its gains offshore.

These are the reasons for the constant contradictions between the public and private economic law in Russia's economy.

On one hand, laws, regulations and normative standards set and passed by the government are “audited” and “amended” by private persons. On the other, private interests in capital accumulation are implemented mostly through informal institutions and rules of economic behavior.

In essence, we are the inheritors of a 500-year process of economic transformation that resembles a pendulum's motion: strengthening the dictatorship and centralization; swinging back to temporary ''thaw'' periods followed by decentralization and an increase in liberal trends, and inexorably backwards.

Ildar Ablayev holds a Doctor of Science (Economics) and is a Professor at Kazan State University and the Rector of Tatarstan Management Academy in Kazan, Russian Federation

The opinions and sentiments expressed herein are those of the author only and not necessarily those of Marchmont Capital Partners or any other person. This excerpt is republished by permission of the author.