By Scott Gehlbach *

In response to the ongoing Yukos crisis, representatives of Russian business and civil society recently suggested the contours of a new "social contract" to regulate business-state relations. In return for a guarantee by the state that privatization would not be revisited, business would fulfill various obligations, most notably paying taxes in full and financing social programs. For those concerned the Yukos affair could mushroom into a much broader crisis, this sounds like a very good deal. Both sides get something that they want, while the country gets political stability and renewed investment.

Yet there is reason to doubt that such a social contract could be enforced in practice. The fundamental problem with any agreement to which the state is a signatory is that there is no third party to enforce the deal. Thus, promises by the state to uphold the results of privatization or not to increase tax rates ring hollow. Businessmen understand this, even if their representatives do not, which is why a large percentage of the economy remains in the shadows despite continued attempts at tax reform. Of course, state officials have less incentive to provide a supportive business environment when firms operate in the shadows, but in the absence of a credible commitment by the state not to expropriate through nationalization or excessive taxation, operating transparently is risky, to say the least.

What is needed, then, is a mechanism to make the state's promises credible. In other contexts, the fear of electoral backlash or civil unrest restrains the state. However, when 77 percent of the population supports revisiting privatization, it is clear that a solution must be found elsewhere. One possibility is for the state to invest in its reputation, much as central banks do, by foregoing opportunistic behavior for long enough that its promises begin to sound credible. The Yukos affair is not exactly what the doctor ordered on this account. Alternatively, state institutions can be altered to make it harder for the state to seize anything it sees lying on the table. Disbanding the Tax Police may have been a good first step in this direction, but it is not enough.

Perhaps the best hope lies in tying Russia's institutions to international norms, much as countries tie their currencies to the dollar to rein in inflation. Unfortunately, the anchor that has worked well for many East European countries -- EU accession, with its associated harmonization of laws and behavior -- will likely be unavailable to Russia for many years to come. WTO accession is less effective, but more achievable. Supporting the sale of Russian firms to strategic foreign investors may also help, as for now at least it is politically riskier to expropriate foreigners than oligarchs. Whatever the solution, it will be a while coming. In the meantime, one can expect that state and business will continue to engage in regrettably self-destructive behavior.

About the Author: Scott Gehlbach, assistant professor of political science at the University of Wisconsin-Madison and a research associate at CEFIR, contributed this comment to The Moscow Times.

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.