Who Is Really to Blame?

It has finally happened. The collapse of MMM, predicted for months, has come to pass. Millions of conversations, hundreds of newspaper articles, a special session of the government -- all of this led to a single conclusion: MMM president Sergei Mavrodi is a scoundrel who used advertising to deceive millions of people. Nonethless, "the Russian national game" continues: There is no way to keep people from such groundless speculation.


Everyone -- especially professionals -- knew that MMM would collapse. Why then did the authorities not stop things earlier?


The general explanation is that there was no legal basis on which to act. Even if this were true, they could have undertaken a campaign to explain the situation. They could have prevented the uproar by enlightening the citizens who -- though they may know little about financial technicalities -- are not, after all, idiots.


Why is it that, even after several years of market reform, there still is no adequate legislation for these companies and for securities transactions?


During the past year, a number of normative acts to protect shareholders have been accepted. Where is the list of MMM's shareholders? How many shareholders are there? Obviously, there is no such list, despite the fact that legally all shares must be registered to individuals.


There are many organizations that are supposed to be controlling the securities market. MMM registered its plan to issue shares with the Finance Ministry. Why, then, does no one know how many MMM shares have been issued?


Why has the Commission on Securities and Stock Funds been so inactive? It is made up of extremely highly qualified people: Why have they at least not come forward with public warnings? If they are too busy to handle this task, why not find others who are less busy?


Issues of shares beyond the registered amounts are illegal. Did MMM exceed the registered scope of their issues? Most likely, yes. Why has the Finance Ministry not acted?


Companies trading in securities are required to be licensed, but MMM and the majority -- if not all -- of its affiliated companies have no licenses. Where was the Finance Ministry and the Public Prosecutor's Office?


Even a cursory look convinces one that MMM violated the tax laws. Did the offices where shares were bought and sold have cash registers? Did they pay the tax on securities operations? Has even a single person paid any taxes on profits earned from MMM shares? Where were the tax inspectors and the tax police?


Huge floods of cash passed through MMM's offices every day. Was this money deposited somewhere? If not, then that is a serious violation for which various enforcement agencies strictly punish kiosk owners. If yes, then which banks processed these billions of rubles everyday? They most likely did not have legal grounds for this. Why did the strict controls of the Central Bank fail in this case?


These are not the only questions that could be posed to the authorities. The main question is: Was the government unable or was it unwilling to stop this deception? And the last question, which readers have probably already posed: Do we really need such a government at all?


Let us take a different approach and consider the idea of "economics and morality." It is obvious that the two do not always go hand in hand.


As a result of MMM's trickery, a lot of people lost their savings. And a few made a huge profit. All the while, everyone -- or nearly everyone -- understood that the profits promised by MMM were completely unrealistic and that what was going on was a sham of enormous proportions. The huge profits of the early investors were based on the losses of those who came after. In other words, everyone playing the MMM game was hoping to get rich by getting out in time, and no one bothered to think what that would mean for other investors. It turns out that all MMM's shareholders -- many without thinking about it, of course -- really just wanted to rob the others. So why is it that only Mavrodi is now being called a thief?


Leaving morals aside, how does the scandal look from the purely economic point of view? What happened was basically just the redistribution of wealth. It was rapid, and therefore painful. For now it is difficult to tell what the real scale of that redistribution was, but several cautious estimates put the figure at hundreds of millions of dollars. Two points spring from this. First, unquestionably, there was a huge concentration of capital, characterized by the fact that many late investors ended up financing a few early ones. The second point, which seems de facto to be true but has yet to be proven, is that the money has now passed to more savvy investors, those who turned out to be more decisive, attentive and efficient.


What will the consequences be? For one thing, millions of people have learned an important lesson: If you are going to invest, do it responsibly. The banal truth that the higher the profit, the greater the risk has now been clearly illustrated in a way that people are not soon going to forget.


It is also clear that now is not the best time for small investors in Russia. The economy needs real managers, not millions of petty owners and farmers. The latest MMM commercial featuring Lyonya Golubkov shows him returning from America no longer wishing to buy a house in Paris, but instead planning to open a business in Russia. It seems unlikely that this -- albeit unfairly acquired -- capital will leave Russia. Instead, it will most likely be invested here, since there are many very attractive opportunities in Russia. One can hope that it will be invested more effectively by its new owners. Is that a good or a bad thing?





Maxim Kvasha is a senior staffer at the Center for Economic Reform. He contributed this comment to The Moscow Times.