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The Ethnic Conflict Research Digest

2005, Vol. 5 No. 1 .

Russia?s Virtual Economy
Clifford G. Gaddy and Barry W. Ickes

Washington, D.C.: Brookings Institution Press, 2002,
306 pp PB $19.95. ISBN 0-8157-3111-6.

In 1996, Boris Yeltsin had just been reelected and inflation was under control. The economy, by all accepted indicators, seemed to be booming. However, the large proportion of unprofitable enterprises that survived despite economic restructuring suggested something was amiss in Russia?s transition to a market economy. Indeed, in August 1998, the Russian economy descended into crisis.

In Russia?s Virtual Economy, Clifford G. Gaddy and Barry W. Ickes offer a new model to explain Russia?s economic morass since the fall of the Soviet Union. The ?virtual economy? refers to a complex system of nonmonetary payment schemes?including bartering of goods and services?that allows enterprises to survive despite losing money. The virtual economy results from three interrelated initial conditions: the illusory nature of value in the manufacturing sector, the social importance of major industrial enterprises and the Russian economy?s continuing reliance on resource industries.

After explaining the economic paradoxes that appeared in 1996 and 1997, Gaddy and Ickes detail how the virtual economy is rooted in the centrally planned Soviet economic system. The authors use ?Igor? as an example of an enterprise director, whose underlying mantra is, ?Whatever you do, don?t make a profit! The government takes it all in taxes.? (p. 66) Subsequent chapters compare Russia?s economic ?shock therapy? to biological mutation; illustrate how a simplified four-sector virtual economy works; and explain the future implications of the virtual economy if allowed to continue unchecked.

Whether reforms were implemented properly is not what Gaddy and Ickes care to argue: enterprises used their Soviet instincts to adapt to reform policies with survival?not profitability?in mind. Further, the social importance of industrial giants, which provided jobs, health care and child care for much of the surrounding community, made it impermissible to shut them down. Although these social services became the responsibility of local government, paltry tax revenues meant these services could not be maintained, and enterprises remained the de facto administrators of such services.

The ?Roots of the Virtual Economy? chapter, in which the authors explain their framework for understanding the behavior of Russian enterprises, is especially thought-provoking. Not only do enterprises operate at a certain distance from market viability, but they are also endowed with ?relational capital,? which refers to an enterprise?s ability, by virtue of connections to other enterprises or the government, to ?get away with? barters, tax offsets or delayed payments: ?informal activity that can aid the operation of an enterprise.? (p. 56) According to the model, the greater an enterprise?s relational capital, the longer it can survive without turning a profit.

Russia remains an important geopolitical player, and its stability has implications for ethnic conflict and peace studies, especially in the context of global terrorism, although Gaddy and Ickes tend to focus on its economic situation. Russia?s ethnic diversity is both a blessing and a curse, as recent conflicts in Chechnya and Ossetia have shown.

Russia?s Virtual Economy, written in 2002, is slightly outdated, and the authors have a tendency to use complex formulas to illustrate their ideas, which can be off-putting to readers with only a rudimentary knowledge of economics. But for those interested in Russia or in Russia?s place in the global economy, Gaddy and Ickes provide a satisfying explanation of how decades of central Soviet planning continue to affect Russian enterprises and why average Russians are worse off even though economic indicators seem to show progress.

Michael J. Harrison, Associate Editor, InterMedia Survey Institute, Washington, D.C.

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