“It is hard to believe that any sound-thinking businessman would want to launch a business that would work at 4% to 5% of its real capacity,” acknowledged mayor general of the tax police, Viktor Khvorostyan. “This means that the bulk of the work is being done at nighttime, when no one should be working. Can you imagine how huge a potential for illegal production of alcohol this creates?”33
The sheer size of the black market in vodka was impossible to mask. Official Russian statistical data (figure 20.2) showed a dramatic—and growing—difference between the amount of vodka officially sold and the amount that was officially produced and taxed. By 1996, upwards of two-thirds of sales were untaxed, constituting around $8 billion in potential tax revenue that the treasury lost in those five years alone—on top of the $9 billion from Yeltsin’s “charitable” exemptions.
This potentially dangerous black market vodka was everywhere. By 1997—according to Russian ministry of trade statistics—forty-six percent of all vodka sold was of “unacceptable” quality.34 When combined with the astronomical consumption of vodka, this diminishing quality had horrific consequences. In the United States—with a population double that of Russia—roughly three hundred people die per year from alcohol poisoning. In 1994, in Russia there were fifty-five thousand such deaths, prompting Russia’s foremost alcohol researcher, Dr. Aleksandr Nemtsov, to claim that “history’s gift of freedom was partly paid for with death at the vodka stall.”35
Figure 20.2 TAXED AND UNTAXED VODKA SALES IN RUSSIA, 1993–1997. Sources: Goskomstat Rossii, Russia in Numbers: Concise Statistical Handbook (Moscow: Goskomstat, 1999), 197, 272. Taxed production statistics are from T. Kosmarskaya, “Problemy gosudarstvennogo regulirovaniya rynka alkogol’noi produktsii,” Voprosi ekonomiki (1998): 141. See also “Shadow of a Doubt,” Business in Russia/Deolvye lyudi no. 82 (1997): 34.
Against the backdrop of economic suffering and widespread drunkenness, such horrific statistics were difficult to ignore—as was the traditional temptation for the state to rein in the alcohol trade and again make it the centerpiece of Russian statecraft. “The government should use all means to prevent people from poisoning themselves,” Yeltsin himself declared in a special radio address in September 1997. “But if people spend money on vodka, their money should go to the budget, rather than the pockets of all sorts of crooks. Then we will be able to use it to pay pensions to the elderly and wages to servicemen, doctors and teachers, and to heal our economy.”36 Yet it was the oligarchic “winners” of the transition to capitalism who benefited most from continued economic distortions and used their political clout to undercut further market reforms that threatened their fortunes.37
It wasn’t just the Kremlin that was tempted by vodka revenues—resource-starved governors across Russia’s regions also were also stalking the cash cow, since legally alcohol excises were to be split fifty-fifty between the federal government and the region of origin.38 Consider the Pskov region—which borders on Estonia, Latvia, and Belarus. There, governor Evgeny Mikhailov decreed a regional distribution monopoly (Pskovalko) to control the retail market—giving him control over prices and the lucrative excises while keeping illicit and foreign products out. While such protections allowed legitimate start-ups to flourish, it was not to last. The governor used his political muscle (what Russians call “administrative resources”) to seize a hopelessly indebted food-processing facility and retool it as a distillery. The regional government subsidized the raw materials for its new vodka factory, lowering their production costs and allowing them to sell at below-market prices. Unable to compete, all legitimate manufacturers went under, leaving the governor with a veritable production monopoly that generated even more revenue. In this way, by the end of the 1990s more than thirty of Russia’s regional governments had built their own local vodka monopolies.39
“In all sensible regions the authorities fight fiercely for their producer,” governor Mikhailov explained after leaving office, “especially when the producer pays a lot of taxes.”40 His replacement as governor was a businessman and advocate of greater market liberalization in Pskov—but once in office, he confronted the unpleasant reality that Mikhailov’s vodka system was the largest contributor to the region’s budget, and replacements were virtually nonexistent. Economists call this outcome a “revenue trap,” but really it is the reproduction of Russia’s traditional vodka politics at the regional level: politicians rely on vodka for tax revenue while vodka producers rely on their political patrons to maintain market dominance. As throughout Russia’s autocratic past (and as in other lucrative sectors in the post-Soviet economy), there is little incentive to upset this “trap” that benefits both the government and the well-connected producer and sacrifices market competition and social welfare: even as the local Pskov economy suffered through the 1990s, the region’s alcohol production skyrocketed, to the obvious detriment of drinker health.41
Repeated time and again across Russia’s eleven time zones, “each region in the Russian Federation currently maintains what can effectively be described as a regional vodka monopoly,” claimed economist and pro-market politician Grigory Yavlinsky. “In many cases, the interests of those monopolies are vested with regional governments and protected by informal enforcing agencies, including criminal gangs.” In such a situation, Yeltsin’s Kremlin was “powerless to break such monopolies, with the result that high prices and inefficiencies persist in many regions, even if adjacent regions offer better-quality products at lower prices.”42
The siphoning off of tax revenues—vodka and otherwise—from the federal government to regional governors and corrupt oligarchs was a primary cause of Russia’s most debilitating economic problem: the massive deficit that forced the country into bankruptcy in 1998. Ironically, the leaching of the state’s coffers was facilitated by an expansion in barter transactions: just as Russian citizens switched their economic transactions from the worthless ruble to the more “liquid” alternative of vodka (both fiscally and physically), so too did Russian manufacturers.43
According to economists, theoretically, free market competition would push the inefficient and outmoded “dinosaurs” of the old Soviet system into bankruptcy, leaving their employees out on the street. Instead, such abstract economic predictions (once again) failed miserably in the context of Russia: many uncompetitive, loss-making firms continued to produce shoddy products—not to be sold for cash but to be exchanged in massive barter networks constituting Russia’s so-called virtual economy.
This may be hard to visualize without an example, so consider the case of the NIIRP rubber products factory in Sergeyev Posad, northeast of Moscow. Located near the spiritual capital of the Russian Orthodox Church, NIIRP was half owned by the state and maintained a large workforce. The rubber transmission belts they produced were of decent quality but were so overpriced that few Russian companies would spend cash on them. Even so, NIIRP was expected to pay both its tax bill and its employees’ wages in cash, leaving little money for its suppliers. In such a catch-22, the managers instructed their supply department to never use money to buy the necessary raw materials but instead barter those raw materials for the belts they produced. This was a tall order, even for the most well-connected tolkach… that is, until NIIRP found a way to sweeten the pot: “the factory has started up a new vodka sector, which makes the Roma (Gypsy) Brand. To get industrial soot used in making rubber from a factory in Komi province, it has to pay in vodka as well as belts.”44 Yet it wasn’t just suppliers that had to be bought off with vodka; the government did, too. To soothe relations with high-level officials, many firms employed “government relations” specialists who became known as pechenochniki—literally “those with liver problems”—based on the copious amounts of vodka they had to drink to secure favorable relations with the bureaucracy.45
If the pechenochniki were successful, they could even persuade the government to accept vodka as payment for their tax bill. The Russian ministry of agriculture even used vodka received as in-kind tax
payments to pay its subsidies to collective farms in Buryatia, on the eastern shore of Lake Baikal. Initially this delighted the farmers—until unregulated, poisonous concoctions began appearing, so the experiment was ended.46 In 1998 teachers in the mountainous Altai Republic were given fifteen bottles of vodka in lieu of pay. Since they had not seen a paycheck in half a year, “teachers reckon it is better to get the vodka—which can be sold in local markets—than nothing at all.” According to a BBC report, the “attempt to pay them in toilet paper and funeral accessories provoked indignation.”47
Thanks to the unquenchable demand for their products, alcohol producers became the hubs of vast webs of barter transactions—and therefore crucial to Russia’s virtual economy. If a clothing manufacturer needed wool, they simply went to a distiller or wholesaler willing to trade vodka for coats and then traded that vodka to the wool supplier.48 Directors of state farms—who traditionally had organized banquets, weddings, wakes, and other rites of passage—traded grain for the celebratory vodka, which strengthened the solidarity between workers and managers.49 Even Mikhail Khodorkovsky—the Yeltsin-era multi-billionaire oligarch-turned-dissident—got his start by using alcohol to simplify the unwieldy barter chains for his upstart computer-importation business. During the free-for-all of the 1990s, Khodorkovsky branched out into importing stonewashed jeans, fake Napoleon brandy, and counterfeit Swiss vodka bottled in Poland. “Okay,” one of Khodorkovsky’s partners later admitted. “We financed the cognac. No one, ultimately, was poisoned by it.”50
In these ways, the same vodka that was the lifeblood of the tsarist and Soviet empires became a primary lubricant of a bizarre virtual economy of premodern barter transactions. Such widespread barter further weakened the federal government while strengthening and integrating firms and governments at the regional level. The apparent irrationality of this system has perplexed economists, who usually focus on the long barter chains and offsets used by Russia’s influential oil and natural gas companies.51 Yet if they really want to understand Russia’s post-Soviet demodernization, they should instead look at the vodka sector.
In 1996 the government commissioned Pyotr A. Karpov to examine the books of Russia’s top companies to find out why taxes weren’t being paid in cash. Karpov found that only twenty-seven percent of all enterprise earnings in Russia were in cash. Strangely, the only ones flush with cash were Russia’s alcohol producers, with sixty-three percent of transactions in cash.52 This is just further evidence of alcohol’s unique role in Russia’s post-Soviet demodernization. On the one hand, the de facto regional vodka monopolies dramatically expanded output under the political cover of their governors, earning “outstanding taxpayer” awards along the way.53 On the other hand, the alcohol sector—both legal and illicit—helped a half-reformed economy stagger along until finally crashing in 1998. Even that crash was largely a consequence of the way this bizarre system starved the Kremlin of tax revenue, coupled with the tremendous debts Yeltsin’s government had to cover just so corrupt traders and favored “charities” could maintain their lucrative alcohol-import loopholes. All the while, the sheer quantity of vodka needed to lubricate this economic Rube Goldberg machine utterly decimated the Russian population, thoroughly demodernizing a once-mighty superpower.
For generations, Russia’s autocratic vodka politics encouraged the alcoholization of society to keep the treasury flush and the people unsteady. Yet although Russia was now nominally a democracy, the alcoholic traditions endured by using vodka as a medium of exchange and stalling the economic “transition.” Indeed, it was such legacies of vodka politics that transformed an arduous economic depression into full-scale societal demodernization.
From One Swede To Another
If there is one singular authority on post-communist transitions it is the Swedish economist Anders Åslund. In the late 1980s, Åslund highlighted the economic contradictions of perestroika; in the 1990s, as an advisor to the Russian government, he advocated rapid “shock therapy” measures. Even today he is a thoughtful commentator on developments throughout the former Soviet space. A general theme of his work holds that Russia’s transition to capitalism has not been as dire as many accounts (likely including this one) suggest: not that there weren’t hardships but, rather, that Soviet statistics that provided the point of departure were so wildly inflated that the resulting “fall” was not as dramatic as it might seem.54
The social consequences, according to Åslund, have been similarly exaggerated. Sure, “poverty soared shockingly in the early transition,” but thankfully, “most of it is relatively shallow, with many people living just below the poverty line.” The healthcare system may have deteriorated, but as a share of the shrinking GDP, health expenditures actually increased.55 For all of his optimism, Åslund’s international survey of post-communist transitions still had to confront the “shocking” decline in male life expectancy, especially in Russia, Ukraine, Belarus, Moldova, and the Baltic republics: “Russia experienced the greatest decline—seven years—from 1989 to 1994, when male life expectancy at birth reached the deplorable nadir of 57.6 years, 14 years less than for Russian women, the greatest gender disparity in the world. Disturbingly, it has stayed very low, around 59 years.”56
As Åslund wades through the morass of macroeconomic and macrosocial indicators for all of the post-communist countries, from the Czech Republic to Kyrgyzstan, you can almost sense his frustration over being unable to explain why some economic depressions were coupled with social demodernization while others were not: “In Central Europe, male life expectancy rose by 3.6 years from 1989 to 2004, and in Southeast Europe by one year. Strangely, the war-ridden countries in the Caucasus did not suffer; neither did the destitute Central Asian states.” It couldn’t just be about poverty: the poorest former Soviet Republics—like Kyrgyzstan or Armenia—did not regress in terms of health. Neither did the poorest regions of Russia, like Ingushetia or Dagestan. Throwing up his hands, Åslund is forced to conclude: “The countries concerned do not form any clear economic pattern.”57
With no clear economic pattern, and hence no rationale for the health collapse, Åslund trades his economic rigor for vague cultural explanations: “The problem was not starvation or abject poverty. Nor was it deteriorating health care,” he declares. “Instead the dilemma was that East Slavic and Baltic men were typical company men with little ability to handle change. Their cultural response to transition was to start drinking even more heavily than usual, which reduced their life expectancy.”58
Yet when viewed through the lens of vodka politics, the pattern of demodernization could not be more clear. Returning to the two-dimensional, health-and-wealth diagrams of Åslund’s Swedish compatriot Hans Rosling, we can quickly identify distinct patterns of post-communist transitions from 1980 to 2000 (figure 20.3). Poland and the Czech Republic represent the primarily beer- and wine-drinking Visegrad countries of Eastern Europe, which paused only briefly before continuing toward the healthy-wealthy corner. Other countries from the war-ridden Caucasus to the economically isolated and unreformed autocracies of Central Asia suffered economic contraction but little corresponding deterioration in health—due partly to the lack of a strong vodka-drinking culture in those states. The only countries that show a similar “demodernization” trajectory toward the lower left are Russia and Ukraine (shown), as well as Moldova, Belarus, and the Baltics.
Figure 20.3 POST-COMMUNIST “TRANSITIONS” COMPARED, 1980–2000. Sources: Life expectancy figures derived from the Human Mortality Database, mortality.org. For notes on Gapminder data collection and standardization of GDP per capita statistics see http://www.gapminder.org/documentation/documentation/gapdoc001_v9.pdf. For income per person for Poland, the Russian Federation, and Ukraine see Angus Maddison, “Historical Statistics for the World Economy: 1–2006 AD” (2008), www.ggdc.net/maddison/. For income per person for the Czech Republic see Maddison (2008) supplemented by UNSTAT II (2008 adjusted), http://unstats.un.org/unsd/snaama/dnllist.asp.
Wh
at explains this demodernization? First, these are all countries with a well-entrenched vodka-drinking culture, cultivated through years of subservience not only within the Soviet empire but also the Russian empire that preceded it—both of which encouraged vodka consumption as the cornerstone of autocratic statecraft.59 Second, with the exception of the Baltic states, the economic reforms in these “demoderinizing” countries were similarly haphazard and halting. As a consequence, when researchers investigated barter transactions and the Russian-style “virtual economy” of the 1990s, they found the practice most prevalent in the same region: from Moldova and Ukraine to Russia, Belarus, and (to a lesser extent) the Baltics.60 Since the Baltic states made a cleaner break with the economics and the politics of the past in their effort to gain entry to the European Union, the duration of their demodernization was dramatically shorter than their similarly heavy-drinking neighbors to the south and east.
Åslund’s explanation for the social demodernization is based on unseen ethnic traits: “East Slavic and Baltic men are company men who found it exceedingly hard to adapt to the transition and instead fell for the temptation of heavy drinking, causing many to die young.”61 This misses the point—it is not ethnicity or genetics at work; it is a complex, centuries-old historical legacy of vodka-politics statecraft, which has been embedded into cultural and economic patterns.
Vodka Politics: Alcohol, Autocracy, and the Secret History of the Russian State Page 46