A Tax that Frees

KIEV: It used to be said that "What's good for General Motors is good for America." Over the past few years, Russia appears to have been governed by a similar creed: "What's good for Gazprom is good for Russia." Indeed, until his abrupt dismissal this spring, Viktor Chernomyrdin, one of that gas company's communist era managers, was Russia's prime minister. Now, at long last, Gazprom may be brought to heel. A deadline for Gazprom to pay billions of dollars in overdue taxes has been set for next week. Is cutting Gazprom down to size a good omen for Russia?

The history of the postcommunist transition has been a struggle between reformers who tried to build a market economy and ruthless businessmen, like Gazprom's managers, who thrive on only partly liberated markets, subsidized credits, import subsidies, export rents, and non-payment of taxes. They bought commodities whose domestic prices were kept low by state regulation and resold them abroad shielded by export regulations. They skirted privatization because they made more money off the state.

These distortions of the transition were far greater in the countries of the former Soviet Union than in Central Europe. That is a major reason why the costs of the transformation have been so much higher in the former Soviet Union than in Central Europe in terms of a larger decline in production, larger income differentials, and greater poverty.

Nonetheless, a year ago, Western investors poured billions of dollars into Russia's stock market, which appeared sound, and Russian shares sky-rocketed in 1996 and 1997. Alas, companies started robbing minority shareholders by all means possible. By manipulating product prices, they transferred profits to enterprises with no minority shareholders. They issued stocks far below market prices to themselves, and transferred assets from one company to another without payment, stealing from the owners of the first company. Rather than being punished, these crooks emerged as model "capitalists." As a result, Russian stock prices fell by no less than 75% from October 1997 till July 1998.