Economic transition and the rise of alternative institutions: Political connections in Putin's Russia

The economic transition from socialism in Russia has not resulted in the emergence of impersonal, rule-based institutions. Instead, the natural demand for institutions that protect property rights has led to the emergence of alternative, inefficient institutions such as that of cronyism - the practice of appointing personal acquaintances of the political leader to key positions. A political leader not constrained by institutions appoints cronies, as competent subordinates are more prone to switching allegiance to a potential challenger. As competence makes a bigger difference in a rule-based environment, such a leader has no interest in any institutional development. In a simple empirical exercise, using a dataset that covers the richest Russians, we find a positive and significant effect of direct connections to the personal circle of President Putin on the wealth of businessmen. The magnitude of the effect varies at different levels of rents available for redistribution and network centrality of a businessman': it is higher during the years of high oil prices, but is attenuated by the prominence of the businessman in the network.