Soviet Shadow Capitalism's Growing Power

By , Evgueny Novikov was a member of the international department of the Central Committee of the Communist Party in the USSR until his defection in 1988.

AFTER reviewing the data concerning the agony of the Soviet Union's centralized industry, agriculture, and trade, many analysts believe that the Soviet economy is on the edge of collapse. Gorbachev supporters who seek Western help for the Soviet state economy have made Western governments aware that lack of assistance would force Mr. Gorbachev to resign. Upon his resignation, this scenario goes, Gorbachev would be replaced by a conservative politician who would revitalize Soviet aggressive policy. Discussions of the potential collapse of the Soviet economy, however, generally neglect an important sector of that economy - what the Soviets call the ``shadow economy.'' The ``shadow economy'' is the private sector of the Soviet economy engaged in industry, agriculture, and trade. Though it existed long before perestroika, the sector developed rapidly after receiving legal status and help from Gorbachev's reforms. Conservative evaluations by Soviet economists show the annual turnover in this sector exceeds 100 billion rubles. Economists estimate that one of three rubles in the Soviet market belongs to the shadow economy.

From the shadow economy emerged the shadow capitalists: state officials responsible for state trade of food and consumer goods, and the state ministry officials involved in distribution of short-supply commodities between state and cooperative enterprises. Since demand for their materials and services in the internal market always exceeded the supply from the state sector, the shadow capitalists entered private business. They became rivals to the state officials who made their living from the consumer goods and services deficit and tried to use Soviet law against the private sector. As protection from party apparatchiks was needed, the shadow capitalists paid two-thirds of their profits to the party elite to receive such protection. In exchange for the payments, the party elite granted ``cooperative'' status to the shadow capitalists, which gave them more freedom from state executives.

With ``cooperative'' status and rights for legal economic activities, shadow capitalists rushed into the profitable area of converting state enterprise ``dead'' money into ``alive'' money.

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Suppose a cooperative development company approaches a state factory that was given 5 million rubles by the state to build a new shop. The factory has no right to spend this money for any purpose other than the construction of the new shop. A state development company contracting to build the shop would be allowed to use only 10 to 15 percent of the rubles for its workers' salaries. The cooperative development company, though, may use the money as it wishes, even if that means paying bribes to factory officials or using all of the money for salary. Thereby ``dead'' - restricted - money becomes ``alive.''

Deep reasons for the present USSR inflation lie in the activities of the big shadow businesses and in the payment for protection to the party elite. Even under glasnost, this payment for protection is a top secret theme. Gorbachev has continuously suppressed investigations into shadow capital.

With the party elite holding control of the mass media, the activities of the big shadow business were hardly seen. Taxes for the Soviet people were increased at a time when ``productive'' cooperatives of the shadow capital had their taxes reduced. The cooperatives of the shadow capital developed rapidly, and their influence over the corrupted party elite, which still holds political power in the country, was used to obtain further economic steps in their favor.

After reviewing the activities of the shadow capital, I believe that it needs to convert the ``alive'' money received into consumer goods. If this were done, then Gorbachev would no longer have to buy consumer goods abroad. Granting cooperative status to the shadow capital had been planned as a measure to limit the power of the party's rival, the state bureaucracy. Ironically, this grant may make possible the future appearance of a sector independent from the state and later from the party, based on private initiative, that will demand political power and bring dramatic changes in the Soviet political system.

I strongly believe that if Western powers want real changes in the Soviet totalitarian system and want to promote such development, they should not give money to the Soviet state. Without doubt, any loans to the state will go at least partly to the military. Western loans to the Soviets should go directly to the cooperatives and should be strictly available for the sole purpose of buying equipment for consumer-goods production or services. Such measures may help the true reform that in the future can bring an end to the communist rule over the Soviet Union.

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