Private Sector Under Attack

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The current Kremlin team exemplifies an American saying: They were born on third base but believe they hit a triple. After a decade of record oil prices, Russian leaders became convinced that their enlightened policies turned Russia into a robust economic power on par with the Group of Seven. They came to believe that oil and gas give Russia enormous political and economic leverage.

Having touted Russia as a safe haven in the global financial crisis, they were caught off guard when the crisis hit home. As they frantically search for a solution, they may exacerbate the damage and, in a worst-case scenario, destroy Russia's private sector.

Few people recall that while the United States enjoyed the Roaring Twenties, Soviet Russia went through a modest consumer boom of its own. The New Economic Policy, or NEP, introduced in 1921 permitted small-scale free enterprise, especially in the consumer sector and agriculture. By 1928, Russia overcame the economic devastation of the Revolution and attained pre-World War I levels of industrial and agricultural output.

The NEP was ended by Stalin in 1929 and replaced with forced industrialization and collectivization. Russia would not attain similar prosperity and economic freedom for another seven decades.

The current financial crisis has been called the worst in U.S. history since the Depression -- which was ushered in by the stock market crash of 1929. For Russia, this may prove to be an ominous coincidence. Sure, Russia is very different now from the 1920s, but there are troubling similarities.

Even though the NEP was legal, entrepreneurs, or NEP-men as they were known, were harassed by the expanding Soviet bureaucracy, loaded with onerous taxes and harangued by the press. When NEP-men were shut down and expropriated, which was followed by the mass dispossession of prosperous peasants on the countryside, the Soviet public was only too glad to see them get their due.

Today, Russia's private sector lives in constant fear of the government. Small and medium-sized businesses are throttled by rules and regulations whose sole purpose is to make it easier for officials to collect bribes. Well-connected bureaucrats set up businesses that unfairly compete with genuine entrepreneurs and confiscate companies from legitimate owners. Rich businessmen, such as Igor Zyuzin, the billionaire owner of the metals and coal conglomerate Mechel, quiver like schoolboys before Kremlin despots.

Even though private enterprise creates jobs and fills previously empty store shelves with consumer goods, entrepreneurs are odious figures for many Russians, portrayed by the media as the bloodsuckers of the 1990s brought to heel by Vladimir Putin.

In the 1920s, the government retained what it called the "commanding heights" of the economy, including industrial enterprises, banks and transportation. Today, the government once more owns Russia's most important assets, such as energy companies and the largest financial institutions.

When Russia defaulted on its debt and devalued the ruble in 1998, the crisis didn't result in any structural changes in the economy. At the time, the government was weak, while the oligarchs, identified by Boris Berezovsky as the Seven Bankers, held the political and economic reins. Moreover, nationalization was out of the question because the nightmare of the Soviet economy was still fresh in national memory.

Now, many Russians are too young to remember much about the Soviet Union, whereas older people reminisce fondly about free sausage distributed by their factories at New Year's and conveniently forget the dreariness of the Soviet way of life. Suddenly, a Communist path no longer seems so awful to a large portion of Russia's population.

Finally, there is the xenophobia. Anti-Western and anti-American sentiment ran high during the conflict with Georgia, which was when the current financial crisis began. Russian government officials at the highest level accuse Washington of purposefully crashing the Russian stock market or at least exporting its crisis to Russia.

This kind of rhetoric is familiar, and financial controls could follow. In 1998, Malaysia imposed stringent capital controls to combat the Asian financial crisis. Venezuela, Russia's newest friend and economic partner, maintains a peg for its bolivar, as well as restrictions on the movement of capital. It is very likely that if financial turmoil endures, Russia will slap controls on financial flows in and out of the country.

There is more. Even before the advent of the current crisis, the Russian government showed that it prefers to fight inflation with Soviet-style administrative fiat rather than with economic means. Now, state aid to the financial system is being channeled through state-owned banks. The banking system will be reshaped by this crisis -- in part out of necessity, but also because state-owned behemoths will jump on this opportunity. Previous crises, such as the run on Guta Bank in 2004, tended to expand the reach of state-owned banking at the expense of private institutions.

Similarly, when private companies experience difficulties repaying their debts or obtaining new loans, they will get state help by putting up their shares as collateral. If the bad debt crisis worsens, as seems likely, the state will end up with equity stakes in a large number of previously independent enterprises.

This doesn't necessarily mean the demise of the private sector. However, if financial troubles persist, the government may take over entire industries, ranging from agribusiness to construction and retail. After a prolonged crisis, the private sector in Russia may turn into a collection of small-scale cooperatives reminiscent of Mikhail Gorabachev's perestroika. No wonder the last Soviet leader recently returned to politics and even founded a new party.

In the early 1990s, I used to send packages of frozen chicken drumsticks, known derisively as nozhki Busha, or Bush's legs, to my Moscow friends. Many of them have since become well-off and own prosperous private companies. Well, before long I may find myself scouring the back alleys of Brooklyn once more, looking for fly-by-night outfits offering to send Bush's legs to Moscow.

Alexei Bayer, a native Muscovite, is a New York-based economist.