Better than Sunshine? Why Russian Economy Needs Blockchain

Better than Sunshine? Why Russian Economy Needs Blockchain

By Dimitri Elkin

The head of the Russian Central Bank Elvira Nabiullina receptly poured cold water on the proposal to treat cryptocurrencies like Bitcoin in the same manner as Dollars and Euros.

The Central Bank skepticism is understandable: Nabiullina said that Bitcoin looks like a pyramid scheme, and she has a point.  But wholesale rejection the cryptocurrency revolution is counterproductive because it would make Russia it will miss out a great opportunity with deep political and economic consequences.

It is OK if Russia bans Bitcoin, but the Russian government should embrace the blockchain technology.  And not only because blockchain can help Russia improve its financial infrastructure, attract capital, and take advantage of Russia as a low-cost producer of energy. The potential benefit of blockchain goes much deeper, and touches at the very core of the Russian government economic policy.

Russia needs to return to economic growth, unless it wants to fall further and further behind China. The biggest task of the Russian government is to overcome the chaotic legacy on the 1990s that still mars Russia’s image, hampers Russia’s economic development and keeps international capital away from Russia.

Russia has recovered economically since the 1990s, but many Russian businessmen still behave in the way as if they live in 1999.  Salaries are handed out in envelopes, taxes are not paid, contracts are ignored, kickbacks are offered and accepted. If all else fails, they are ready to jump on the plane and leave Russia, as the owners of VIM-Avia did recently.

Russian economic scandals differ in details, but the root cause all of bank failures or travel angeny bankruptcies is the same.  It is because owners and managers of Russian companies can break laws with impunity, and often pursue personal gains at the expense of other stakeholders.

Every country has cheats. But Russia stands out among other developed economies, because in Russia swindlers almost always get away. Once cash disappears into some offshore heaven, equity recourse becomes impossible. This is the time-honored tradition in the new Russia that goes all the way to Sergei Mavrodi and his MMM pyramid scheme.

The Legacy of the 1990s

It has been said many times that to jumpstart its economic growth, Russia needs to improve the rule of law.

What has been called “Russia’s legal nihilism” stems directly from the shock of the 1990s, when after the decades of central planning and protective government oversight, Russian citizens were plunged into a laissez-faire economy, where, to quote a popular phrase of those times “everything is allowed unless it is explicitely forbidden.”

Many Russian citizens, and certainly many bureaucrats in the Russian government have a negative view of those years of wild capitalism.  Many Duma Deputies would prefer to legislate excessive economic freedom out of existence.

But the tricky point is that, despite all its flaws, the period of the 1990s was a very dynamic era that transformed the Russian economy. Cramping down on Russia’s economic freedom in order to reduce corruption would be a grave mistake.

Russia needs more economic freedom, not less.  It is true that corruption needs to restrainted.  But do you really want to eliminate the virus by killing the patient?  Imposing too many rules and regulations would certainly reduce graft, but it would reduce economic activity as well.

Russia’s relationship with economic freedom is complex, and the analysis of this issue is beyond the scope of this article.  If you are interested to learn more, you can look up my book Russia Turns the Page: Historic Sketches of the End of the Post Soviet Period , that deals with the post-Soviet period.

In the book I argued that in the immediate aftermath of the Soviet collapse, corruption had a very positive effect on the Russian economy.  The greed of businessmen and bureaucrats imbued the Russian economy with the much needed entrepernerial spark.  Overtime, the downsides of economic misconduct outweighed the benefits.  But the enterprenerial spirit that was unleashed in the 1990s is something that Russia should strive to preserve.

Blockchain Reaction

By now you are probably wondering what blockchain has to do with any of this?

You see, there are two ways to make people do the right thing.  First, to set up very clear rules, and force people follow them.  Second, to establish general principles of justice and equity, and make scoundrels face the consequences.

The current system in Russia is based on Civil Code that spells out detail rules.  The problem is that Russian businessmen are too clever, and can always find a way around.  If a crooked bank owner wants to get the money out to his offshore company, and leave his depositors in the cold, he will find a way.

The second alternative is based on the fear of consequences. This is the English common law system, that is based on the notion of equity, that is, ensuring that nobody gets away with crime.  It does not matter if the rules were followed on the surface: English courts look at the substance.

The vibrant economic development in places like Hong Kong show that the English legal system is beneficial for productive business activity.  Russia could probably benefit from English law, but establishing a common law system in Russia is impossible, both for political and practical reasons.

This is where blockchain comes it. If Russian business adopt contracts based on blockchain, everyone would have exact detailed record of every financial transaction.

Blockchain, in effect, can perform the same function as courts perform in England, where any legal decision is preceeded by the process of discovery, during which all relevant records and information are produced. Imaging how much less corruption and abuse would be in the Russian economy, if every person who wants to commit fraud knew that it can be discovered?

To paraphrase the famous American lawyer Louis Brandeis, when it comes to corruption, blockchain could be the best disinfectant.