Mafianomics: how did mob entrepreneurs infiltrate and dominate the Russian economy?

Author:Tomass, Mark

Following Thomas Schelling's [1966] pioneering paper on organized crime (OC), attempts to define it have focused on determining either the characteristics of organized crime activities (OCAs) or those of the groups (OCGs) committing them.(1) These definitions of OC vacillate between seeing it as a firm or a government. OC is seen as a firm when the internal structure of an organization is under investigation; it is seen as a government when its relationships with rival groups are to be investigated.(2) When attributes such as corruption, violence, sophistication, continuity, structure, discipline, multiple enterprises, legitimate business, and bonding are examined as indicators of OC, different combinations of them are judged to be appropriate to describe the activities of only certain kinds of OCG, thus recognizing the need for a general definition [Maltz 1985, 33-34].

In response to this need, this paper suggests the following definition that describes key characteristics of the activities and the groups carrying them out: OCGs are hierarchically structured resource-sharing groups that enforce informal rules and use informal means to achieve their informal ends without the voluntary consent of outsiders.(3) Considering this definition, the paper presents a case study of OCA in post-Soviet states where OCGs came to dominate its economy, polity, and mass media. By tracing the conditions that led to the emergence of OCAs and outlining OCG structures, this paper offers an account of the incentives that induced them, the constraints they faced, and draws lessons from which countries experiencing similar processes of transition may learn.

Formal Failure and the Emergence of Organized Crime (1917-1986)

The formation of a criminal underworld in the Soviet era began in 1917 as an expression of a political rejection of Bolshevik victory. Criminal activity took the form of counter-revolutionary banditry carried out by associations of former capitalists and aristocrats, White sympathizers, and disillusioned revolutionaries who operated outside the new formal hierarchies (FH).(4) Their criminal activities were described in the formal system of rules of 1928 as attacks on public enterprises and individuals. In the 1930s, the first informal set of rules governing the underground appeared among individuals calling themselves thieves bound by rules.(5) Their ideological principle was the total rejection of the formal Soviet socioeconomic system. However, up until World War II, they neither threatened the status quo nor were of any potential benefits to the FH. Therefore, the FH had no incentive to commit resources for theft elimination nor to engage with them in any compromise.(6)

The subsequent Nazi invasion of the Soviet Union induced some thieves to accept an offer from Stalin to be sent to the front in exchange for theft freedom once the war ended. However, vengeful for their defiance of the socialist system, Stalin sent the cooperative thieves back to the prisons at the end of the war, hoping that they would eliminate each other. The ensuing "War of the Bitches" between those who violated the thieves' informal rules and the faithful reduced their numbers at a time when a new class of postwar criminals started to emerge. Unlike the ideologically committed anti-state thieves, the postwar ones were the product of a devastated economy who turned to crime for economic opportunity and pure material gain. The consequence of the latter-day thieves' abandonment of their predecessors' anti-state ideology was the opening up of new frontiers for gain via cooperation with the FH. Their illegal activities ranged from theft, burglary, drug trafficking, and bank fraud to prostitution [Handelman 1994, 29-32]. At this stage of the development of OC, the relationship between the FH and OCGs was restricted to bribes offered to low-ranking levels of the FH. Such a relationship is similar to the one at present in the United States between OCGs and the FH. The FH's power was independent of OCG and could have eliminated it had it threatened the status quo.

A second important development in Stalin's era was the emergence of an informal system of management whereby managers turned entrepreneurs. When the formal channels through which inputs were to be converted into output failed to deliver products on time to meet the strict quotas of the central planners, channels of delivery had to be opened through informal arrangements that included reciprocal payoffs. Members of FH who managed state enterprises developed entrepreneurial skills and established informal networks to ensure the provision of supplies from other state-owned enterprises [Berliner 1952].

Moreover, incentives for the FH to cooperate with the postwar breed of OCGs lay at the core of the distribution system. Administrative rationings of non-tradable commodities, along with administratively set prices for tradable ones, were in place at times of relative scarcity. The resulting divergence between market values and administrative ones led to the development of an underground economy...

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