February 14th, 2012

Putin’s “privatization tax,” or blackmailing the private sector

Alexei Kudrin

Former Finance Minister Alexei Kudrin and other prominent economists are rejecting calls from Prime Minister Vladimir Putin to levy a one-time tax on Russian business leaders who participated in the privatization deals in the 1990s.

Should the government implement this tax, Kudrin writes, “The legal and economic environment would deteriorate. If the privatization deals struck 17 years ago are encumbered, this would undermine new privatization and ownership rights as a whole.”

University of Houston business professor Craig Pirrong says there’s no reason to believe that extracting fines from those who profited during the rush to privatization would be a one-time thing. As Pirrong writes on Seeking Alpha, “As any victim of blackmail or a protection racket knows, the demands for payment never stop.”

He continues:

There is no dispute that there was a massive transfer of wealth from the public domain into private hands in the 1990s. […] But sunk costs are sunk. […] What Putin should be concerned about is the future, and this proposal […] will damage Russia’s future prospects. For it emphasizes the principle […] that property is held at the sufferance of the state, and is subject to the whim and caprice of the strongman.

Craig Pirrong

Economists say the privatization tax may suppress investment and encourage further capital flight.

And given how the rush to privatization has allegedly enriched Putin and his inner circle (more than almost anyone else), it’s not as if he and his cronies would to pay a fine themselves.

Instead, Pirrong concludes, Russia needs “more institutions, a real rule of law [that] constrains government fiat, and less unconstrained discretion in the hands of Putin and his ilk.”

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