Last year Russian President Putin called for a state monopoly on vodka, due to what many consider a serious health crisis. He estimated that around 40,000 deaths annually can be attributed to various illegal products sold as vodka. All this while the state-owned RosSpirtProm was producing as much as 60 percent of the country’s spirits. Beside the official vodka business, worth $9 billion according to some estimations, there was a $2 billion moonshine market.
The black market serves mainly the very poor with products of dubious quality. The solution proposed in the mid 2005 by Mr. Putin, and reported by Russian news agencies, was clear: “The best way for us to solve this problem is if we got from the government a decision which would practically move to a monopoly on spirits.”
So the state moved swiftly and decisively to correct this problem by cracking down on foreign products of high quality, introducing a new labeling policy. The result was a crippling of the import of expensive wines and the like, but for some reason this did not halt the moonshine market that was — according to the officials who pushed for the restrictions in the first place — hitting the poor hard.
The moonshine market, by the way, is almost entirely local, so it is difficult to see how restrictions of foreign-quality alcohol may hurt it.
Now, in late 2006, the situation is even grimmer. The local black market is alive and well. Authorities are constantly battling the illegal production of vodka, while the quality of this counterfeit product plummets ever lower. Illegal traders are putting additives in drinks to make them stronger and cheaper, but the result is often lethal. These additives may include cleaners, car-window deicers, and chemicals used for removing rust. Bootleggers turn to drugstores for cheap antiseptics that contain alcohol and chemicals that may cause hepatitis to the consumer.
Once again, politicians like house’s speaker Serghei Mirono, can’t think of any other solution than state monopoly on ethyl alcohol. He accuses the Cabinet of not acting more vigorously in this direction.
State monopoly over spirits is nothing new in Russia. The first decree to that effect dates from the time of Ivan III in 1472. Apparently, on the eve of the WWI the court’s revenue from the business was around 800 million rubels, or 30 percent of its total revenue.
Stalin learned his lesson well and reinstated the lucrative monopoly. Gorbachev’s attempt to raise the level of sobriety in the country was a disaster. It brought a severe sugar shortage, as ordinary people rushed to produce their own vodka, privately. These consumers were the lucky ones.
Taxi drivers found a lucrative black market for hooch prepared out of windscreen-wiper fluid, eau de cologne, or melted shoe polish, which they were selling from under the car seat.
Putin knows best. He just wants the monopoly back, not some unrealistic prohibition that serves no one. But will a monopoly be beneficial for the health crisis brought forth by the black market products?
The prime mover of every market is the profit motive. On the free market the profit motive is set loose and is openly for the benefit of both parties in a trade. The same profit motive, however, will have distorted effects in a market controlled by outside factors, such as the state. On the black market, the profit motive has the strangest and most dangerous effects. What makes the difference is the level of outside interference between consenting parties of a trade. The alcohol market is an excellent example.
In developed countries with a long tradition of free markets, the alcohol business worked as any other. With the passing of time it became more and more diversified with finer and finer products for more and more people. The cheap and strong alcohol consumed by the lower classes lost its appeal as the poor rose into the middle class. True, it was not only the free market of alcohol that lifted the general quality of spirits, but a generally more laissez-faire economy that made possible the merging into the middle class of the lower classes.
A state-controlled market has a general tendency to keep the level of innovation and diversification low, while the prices are kept artificially high. All this because there is no competition. So it is precisely the quality of products that suffers with the process of monopolization. And the artificially high price will create a demand for cheaper counterfeit products, giving birth to the black market. On a free market you have two options: (1) find a way to produce more cheaply but at the same quality, so that you gain a greater share of the market from your competitors; or (2) improve quality and diversify.
On a monopolized market you don’t have to do either of these to stay in business. You just have to be a good bureaucrat.
So, a state monopoly will only divert the income from the vodka market to the state and will expand the bureaucracy while creating the proper conditions for a lucrative moonshine market. It will not (and cannot) bring forth an increase in quality. It can only bring forth a health crisis like the one that we have now.
The desired improvement of the health standard for the general population can be achieved in one way only: allow laissez-faire capitalism to merge the lower classes into the middle class. That takes time, but no state intervention can do it.
And if we are talking about the general standard of living, one more thing should be said about the whole vodka affair. Alcohol is a big thing in Russia, obviously. A free market of alcohol would become a lucrative market for countless people if left in private hands. By monopolizing it, the Russian government takes bread from the mouths of average families.
