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NATIONAL RESEASRCH UNIVERSITY - HIGHER SCHOOL OF ECONOMICS

UNIVERSITY COLLEGE LONDON

Russian “sistema” and its potential reform: modernization versus evolution

Master Dissertation by

Irina Korotkova

Student Number: 16130400

Master Programme `International Relations in Eurasia'

Field of Study 41.04.05 International Relations

Supervisor: Elena A. Panfilova

Word count: 23,919

Moscow, Russia 2018

Table of Contents

INTRODUCTION

1. SISTEMA AS A PHENOMENON OF POLITICAL AND INSTITUTIONAL DESIGN

1.1 METHODOLOGY

1.2 REVIEW OF THE LITERATURE

1.2.1 Defining Institutions

1.2.2 Different Perspectives on Institutional Change

1.3 DEFINITIONS

1.3.1 Political System

1.3.2 Political Regime

1.3.3 Sistema

2. MODERNIZING SISTEMA

2.1 INTERNAL MODIFICATIONS

2.2 EXTERNAL MANAGEMENT

2.3 the material base of voluntary insiders for modernizing sistema

2.3.1 Acts of Individual Greed or a System?

2.3.1 Corruption in Numbers

2.3.2 “Gaps” in the Law

2.4 THE OBSTACLES TO MODERNIZING SISTEMA

2.4.1 The Durability of Compliance

2.4.2 The Durability of External Management

3. coalition as an instrument for evolution

3.1 EVOLUTION OF RUSSIAN FORMAL AND INFORMAL POLITICAL SYSTEMS

3.2 FROM OBEDIENCE TO DISOBEDIENCE: A MATHEMATICAL ANALYSIS

3.3 GAME THEORY AND THE POTENTIAL OF COOPERATION

CONCLUSION

BIBLIOGRAHY

INTRODUCTION

Sistema is an `open secret' in Russia, which represents an informal political system of governance, marked by network-based governance patterns, that operates within the boundaries of the formal one (Ledeneva, 2013, p.1). It possesses such features, as the predominance of private, group and corporate interests over the recognized public ones, self-regulation with the use of non-legal social norms, and the creation of alternative informal ways of solving issues (Tihomirova, 2005, p.81). Filling the vacuum, created by the weakness of formal institutions, it is the main social glue that ensures stability of the political system and of the society in general, and which “smooths out” conflicts between different forces, clans, and groups that compete with each other for power and resources (Easter, 2000). Sistema, at least temporarily, corrects the essential shortcomings of socio-political institutions, allowing a number of them to work relatively efficiently (Helmke and Levitsky, 2004). While it does play an important role in helping formal institutions function, it also poses a major obstacle to their development and change.

Such informality facilitates corruption and other abuses of power, creates economic inefficiencies and inequities, limits investment and growth, and eventually leads to a more and more ineffective government (Rose-Ackerman, 1999; Suharenko, 2013). Thus, although it accommodates the formal institutions in the short-run, in the long term it leads to weak and arbitrary state structures that feed informal practices, undermining the performance of formal democratic, market, and state institutions (Ledeneva, 1998, 2006, 2013). The use of informal power networks and practices, including corruption, clientelism, and patrimonialism, even when driven by best intentions, only enhances sistema's presence and ensures its reproduction by catching the `users' in the web of power networks (Wilson, 2005, p.185). It dilutes the system of checks and balances, as well as the trust between the society and the state (Williamson, 2009). Consequently, there arises inefficiency of the command rule, marked by deteriorating living conditions, institutions' credibility and efficiency, as well as by limited and `selective' individual rights (Rose, 2001; Rose-Ackerman, 2002).

The significance of the study of the problem of sistema's reform is heightened by the fact that Russia is going through a transition period (Morris and Polese, 2015). While the state retains a certain level of legitimacy, the Russian political system is characterized by a combination of relative stability and relative instability (March, 2009, p.505). The presence of a large number of competing informal institutions and practices, and the lack of growth of the effectiveness of formal ones, are serious factors that can lead to a destabilization (Eggertsson, 2005). Moreover, once emerged, informal institutions remain a rational strategy for actors, as people prefer to act in the already usual and proven ways, which is reflected in the political culture of the society (Abramov, 2013). Subsequently, the institutional vacuum facilitates the extension of legal nihilism, which is enshrined in political culture, to the level of institutions, i.e. leads to a negative perception of their legitimacy (Zhuravleva, 2013, p.50). And this not only affects the effectiveness of the state apparatus but also seriously changes the structure of the distribution of power (ibid.). Hence, in conditions of political instability, underdevelopment and imperfection of legislation, ineffective work of government bodies, weakness of civil society institutions, undeveloped political culture of citizens, and the lack of strong democratic traditions, the question of what can trigger the `real' change of the informal institutions and practices becomes acute (Baranov, 2002; Afanasiev, 2009). Therefore, a comprehensive study of the nature of sistema, the means and causes of its sustainable reproduction, the manifestation of its practices in modern Russian society, which serve as a material base for social forces that resist its `real' change, and the analysis of measures that can lead to its reform, represent an important contribution for social and humanitarian knowledge.

The subject of the research is sistema, and its potential reform, i.e. modernization, which is the preservation of the content and a change of outlook, and evolution, which is the `real' transformation of internal components, mechanisms, norms, and practices. The purpose of the thesis is to analyse what are the factors that can lead to an internal bottom-up evolution of Russian informal system of governance. The achievement of the set goal is facilitated by the formulation and the answering of the following research question: how sistema's persistence and reproduction in contemporary Russia are ensured? What is the material base of forces pushing against its `real' change? And what is required for its internal bottom-up evolution? This work focuses on endogenous factors that can foster institutional change. While the classical theory predicts a top-down change arising within an institution (Greif, 2004), the thesis explores conditions that are necessary for a bottom-up institutional change, arising within sistema. It argues that it requires a formation and a collective action of the coalition of the `unwilling', comprising involuntary and voluntary-frustrated insiders, and analyses what factors can facilitate that process.

The first chapter begins with an introduction of research methods that are used in the paper, providing an explanation behind their choice. It proceeds with a literature review, which focuses on exogenous and endogenous perspectives on institutions and their change. Thirdly, the chapter differentiates between formal and informal political systems, and political regime, thus, setting clear boundaries to the subject of the analysis. It adopts the definitions of a political system and regime proposed by Komarov (1997), according to which the latter is an integral part of the former.

The second chapter analyses the phenomenon of the modernization of sistema, which aims at preserving its content while making to it some cosmetic changes. Firstly, the chapter looks at internal measures that are directed to ensure internal subordination and control, i.e. a closed type of recruitment, and a system of rewards and punishment, and analyses measures that aim to create an illusion of sistema's change, thus preventing any external opposition and resistance. Such measures include the creation of political myths, pseudo-oppositional political figures and parties, as well as the use of judiciary in order to sustain external obedience and to prevent any riots and other acts of protest. The second part of the chapter examines why the ruling elites prefer to create an illusion of the system's change, instead of making any `real' reforms. It conducts a micro-level analysis of sistema, focusing on the sphere of public procurement, and shows how voluntary insiders use it in order to achieve their private interests, which serves them as the driver and a motivation for its preservation. Additionally, the paper shows that corruption there is not a product of acts of individual greed, but a system, which operates and functions as a well-coordinated mechanism (Makarin, 2008, p.35). The third part of the chapter analyses the obstacles of modernizing the system. It uses the game-theoretic approach in examining the reasons why both voluntary and involuntary insiders maintain sistema and reinforce its continuation, and analyses the differences in their incentives, which lead to their same behaviour - obedience. It points out to the emerging risk of a potential disobedience within the system that can undermine the effectiveness of its modernization, which is expanded in the third chapter, and highlights the external challenges of its preservation.

The final chapter maintains that the bottom-up endogenous evolution of sistema requires a formation of a collation of the involuntary and voluntary-frustrated insiders, and analyses how and why it can be formed and sustained. It begins with the definition of `evolution', analysing the phenomenon in Russian formal and informal political systems, which occurred after the dissolution of the Soviet Union and with Vladimir Putin's coming to the presidency. Then it proceeds with a mathematical analysis of costs and benefits of obedience and disobedience of sistema, and examines how they change over time. The findings suggest that there is the tendency for initial rise of compliance, which then, however, decreases, leading to the emergence of a new type of sistema insiders, i.e. voluntary-frustrated. Finally, using the concept of cooperative games in the repeated prisoner's dilemma, the chapter analyses the precise conditions, which can encourage the emergence of the coalition between involuntary and voluntary-frustrated insiders, and how it can lead to the evolution of Russian informal system of governance. The paper considers the development of their cooperation a crucial step towards the formation of their coalition, and examines how it can arise from instances of mutually altruistic acts, and develop into a pattern of mutual cooperation among forces that push for the change of the system. The paper focuses on insiders' cost-benefit analysis, their ability to recognize each other and to remember previous interactions, to minimize information gap, as well as to punish each other in case of defection.

1. SISTEMA AS A PHENOMENON OF POLITICAL AND INSTITUTIONAL DESIGN

1.1 Methodology

The discussion about the need of changing Russia top-down, i.e. fostering a top-down endogenous change of sistema by modifying informal rules, norms, and practices, has been prominent among the ruling elites of the country (Petrov, et.al., 2010, p.79). However, although there are several internal and external factors that motivate the leadership to make changes to it, which are analysed in the second chapter, the discussion has not transformed into actions that could modify informal rules and norms that govern their own behaviour. The question then arises as to what are the reasons behind it.

Although there is a high degree of personification of power in Russia (Henig and Makovicky, 2016, p.75), which is explored in the third chapter, it is important not to overemphasize the degree, to which Putin controls sistema. The scope of his actions is limited, as he also uses informal networks and tools in order to settle issues concerning different spheres of life in the country (Ledeneva, 2013). The more he attempts to manage and control the vertical of power, which presupposes a hierarchically constructed system of management and control over the vital activity of the state, the more he relies on sistema (Morris and Polese, 2015b, p.17). The progressive use of informal means of execution of power, marked by decision-making that occurs outside of the formal sphere, raises his own dependence on the system, tying him up with other sistema insiders (Ledeneva, 2013). This, in turn, encourages the further perpetuation of Putin's system of governance, leading to a vicious cycle of a growing use of informal networks and an increasing dependence on them. Thus, even though he can weaken some insiders of sistema and punish them for their actions, he cannot in a fundamental way change his own dependence on the informal system of governance (ibid., p.227). Moreover, such a dependence plays an important role in ensuring and supporting the functioning of the government, including central, regional, and local, and the functioning of the society. The use and reliance upon sistema promotes and enhances the effectiveness of the leadership, as Putin's power is not personal per se, but rather is rooted in informal power networks (ibid., p.228). The attempts to change, ignore or replace such networks, on the other hand, may not only limit but also weaken the capacity of the leader (ibid., p.228). Indeed, Putin has to operate within the framework of informal norms and rules that are exogenously imposed on sistema insiders, including the leader, in order to maintain his power. In other words, the leader of the informal system of governance is also `locked' into the informal power networks, which significantly undermines the possibility of the top-down endogenous change. Moreover, even though Putin is a `hostage' like other insiders, his is not eternal. Hence, the questions of the extent to which the regime is stable, and what would happen to it after Putin would leave the presidential post, become acute.

In this context, the focus of the study is the analysis of the possibility and the requirements for a bottom-up endogenous change of Putin's sistema. Unlike the former approach, it requires a collaboration of forces that obey it involuntarily, and their subsequent joint action that aims to produce the change of the system. As opposed to the leader, who himself is trapped by the system, internal forces, which occupy the space in the bottom of Putin's vertical of power, face a lot fewer costs of pushing forward sistema's evolution. Moreover, the scale of such internal forces can be a vital source of its profound change. The resulting struggle of the ruling elites, marked by the opposition of forces, which aim at protecting and transforming the informal system of governance, can lead to a political instability of the country, pressuring the leader to make certain reforms to the informal power networks. Additionally, it can affect the mobilization capacity of the society. Thus, internal pressure for the change of the informal system of governance can be supported externally by the people, and have more chances of being successful.

The methodological basis of the research is: general scientific methods of cognition, including analysis, synthesis, and generalization, micro-level analysis of sistema, as well as game theory and a mathematical modelling in the examination of the insiders' behaviour.

Game theory is a branch of applied mathematics, with which scientists, primarily economists and political scientists, model the behaviour of several subjects, where each player's decision-making depends on the decisions taken by others (Rasmusen, 1989). In this paper, it enables to examine how individual members of Russian informal system of governance, through their interaction with each other, gain motivation to obey or disobey its rules and norms (Hall and Taylor, 1996: p. 950). It creates a simplified formalized model of a real situation, within which voluntary and involuntary insiders make their decisions, which have a potential to both enhance sistema and to undermine it. Game theoretical models, like neoclassical models, are based on the assumption of players strive to maximize their personal gain (Fudenberg and Levin, 1998: 5). Showing a cost-benefit analysis of each individual actor's behaviour, the game-theoretic approach provides an insight into whether their behaviour is Pareto-optimal, and if not, what can be done to change it (Hurwicz, 1996, p.115). It shows that the aim of the voluntary insiders, i.e. those who actually hold the power, is to preserve sistema in order to continue using it in their own best interests, which may go beyond the allowed formal limits and contradict the public ones. Being in a zero-sum game, they face a competition for the resources and their distribution, i.e. a `piece of a pie' gained by one insider becomes unavailable for others. Hence, they obey in order to get the most for themselves. The involuntary insiders, on the other hand, disagree with the nature and the functioning of the informal system of governance, and what role it plays in the governing of the country. They are in the prisoner's dilemma situation, and obey due to their reluctance to be punished for a `misbehaviour' by sistema, given their uncertainty about other involuntary insiders' actions. In other words, their compliance, which also supports sistema continuation, is a manifestation of their survival strategy, i.e. self-preservation and protection, rather than self-enrichment.

Informal institutions and practices dilute the effectiveness and weaken the formal ones, which allows for their easier control and manipulation, creating more opportunities for resource collection (Acemoglu and Robinson, 2000, 2001, 2003). Therefore, ruling elites, who aim at achieving their personal goals, have vested interests in preserving sistema, and maintaining their power and position in it. Micro-level analysis of the informal system of governance helps to identify and examine the material base of forces that push for its preservation and perpetuation. This paper focuses on public procurement, as it is one of the most corrupt spheres in Russia (Anchishkina et.al., 2017). Corruption in public procurement becomes a means of illegal redistribution of property and capital, stimulates the development of the criminal environment, and facilitates its penetration into state structures (Inozemtsev, 2012). Moreover, it is one of the acutest social problems facing governments around the world. According to the Transparency International, at least 400 billion dollars are lost annually as a result of bribery and corruption in public procurement around the world, which increases government spending by 20-25% (Campos and Pradhan, 2007, p.370). As noted by the Asian Development Bank, in a number of Asian countries, corrupt government procurement has led to an increase in the cost of goods and services from 20% to 100% (ibid., p.371). Moreover, the focus on this subsystem highlights not only the systemic nature of corruption and the problem of the effectiveness of managing the public procurement process in particular, but also the lack of efficiency of the public sector in general. Thus, by looking at the example of public procurement, i.e. how official customers and bidders, who also belong to sistema, achieve their personal interests, the thesis examines the functioning of the whole informal system of governance. It focuses on the opportunity for engaging in corruption, which is provided by the weakness of formal institutions, “gaps” in the law, the inefficiency of the controlling bodies, e.g. the Federal Antimonopoly Service, and the lack of competence of the specialists working in the sphere. Furthermore, it highlights the ability to minimize or even avoid the punishment, which is also a product of the above-mentioned features.

This work provides an economic approach to the analysis of individual's choice of whether to obey sistema or not, thus filling the gap in the field of research, where most of the works analysing Russian informal system of governance are empirical in nature and are focused on the analysis of secondary data, for instance, information obtained from the press or the Internet, since obtaining primary data in the strength of its shadow nature is extremely difficult (Ledeneva, 1997, 2004). The mathematical modelling of the internal obedience, which has been inspired by the economic approach to the analysis of prostitution of Levin and Pokatovich (2015), serves as a basis for examining each insiders' choice between voluntary and involuntary compliance, which can either promote or put under a question the subsequent continuation of sistema. It allows to break down the costs and benefits of obedience and disobedience into a number components, e.g. informal profit, and emotional and moral costs of compliance, thus, enabling to conduct an in-depth analysis of the drivers and constraints of insiders' behaviour. Furthermore, the mathematical modelling shows how these costs and benefits change over time, and how this change affects their behaviour, contributing to the game theoretical analysis. In particular, it indicates that in the beginning the benefits of obeying exceed the costs, which encourages them to turn into voluntary members. However, with the time their cost-benefit analysis changes, leading to their transformation from voluntary to voluntary-frustrated insiders. This, in turn, creates the niche for a potential reform of the informal system of governance.

1.2 Review of the Literature

1.2.1 Defining Institutions

In the economic, political, and sociological literature, the concept of "institution" has many interpretations. Indeed, there is no agreement among economists, political scientists, and sociologists on what constitutes an institution, what forces influence their preservation and change, and how it is possible to influence institutional development (Mahoney and Thelen, 2009). However, the main division in the institutional analysis is between those, who adopt the functionalist point of view, i.e. exogenous, and those, who adhere to the structural point of view, i.e. endogenous.

Functionalist, or exogenous, perspective puts the individual making decisions in the centre of an analysis, assuming that institutions reflect the goals of individuals who create them. Economics is "the study of how individual economic agents pursuing their own selfish interests create institutions to achieve these interests" (Schotter 1981, p.5). Thus, according to the exogenous perspective on institutions, they are products of individuals who organized them in order to achieve their goals. Institutions are "human-made constraints that structure political, economic, and social interactions", and which are devised “to shape human interaction” (North 1991, p.97), i.e. they are the framework, within which people interact with each other. They include: formal institutions, i.e. written restrictions in the form of rules and regulations, for example, the constitution, contracts, and decrees; procedures for the detection and suppression of behaviour that deviates from the established rules; and informal institutions, i.e. unwritten codes of conduct, customs, and habits that limit the scope of formal rules and procedures (North, 1990). Moreover, customs and traditions can serve as their effective substitutions (Hurwicz, 1996; Williamson, 2000). In a shorter formulation: institutions are "structural forms of human interactions, a combination of rules and mechanisms that ensure their observance, and norms of behaviour" (North 1991, p.97). Thus, even though they are created by people, they affect their behaviour by imposing limitations on their choice. Consequently, both formal and informal rules set the structure of incentives for human interaction, whether it is a political, social, or economic sphere (Gibbard, 1973).

There are many scholars who study institutions from the structural point of view, i.e. endogenous, which emphasizes the fact that institutions form, but do not necessarily reflect the needs and opportunities of those, whose behaviour they affect (Hodgson 1998). In other words, according to endogenous perspective, they structure human relationships, form individuals and constitute social and cultural worlds, in which they interact (Hayek, 1976; Schotter, 1981). Consequently, institutions are entities, which were shaped endogenously and spontaneously, and sustained by the repeated operational plays by individuals, hence, surpassing individual situations that once led to their emergence (Greif, 1997, 2006; Aoki, 2001; Young, 1998; Calvert, 1995; Dixit 2004). Thus, institutions are “salient, self-sustaining features of social interactions, held as the common knowledge of all the agents about ways in which they are to act/not act (contingent on the evolving state)”, which can be regarded as rules of the game, endogenously constructed and self-sustaining (Aoki, 2001, p.10). Reacting to institutional elements, presupposed by the actual and expected behaviour of other people, each individual behaves in a way that promotes motivation, direction, and the opportunity for behaviour for others, leading to institutional elements, from which everything began (Greif, 2006). Such an analysis does not rely on the assumption that institutions are determined by their function or forces of the environment. On the contrary, it already proceeds from the recognition that the structure - the institutional elements, accepted by everyone as a given - provides, motivates and directs the individual to take actions that contribute to the creation of this very structure (ibid., p.39).

However, considering different definitions of institutions as mutually exclusive is highly unproductive, as it hampers the development of institutional analysis (Greif, 2012, p.455). Each of the assumptions reflects different, albeit important aspects of reality, which complement each other. Indeed, institutions should not be perceived strictly from either one of the prisms, as they incorporate both endogenous and exogenous characteristics (Berger and Luckmann,1967; Greif, 2012). When established, they are viewed as an exogenous constraint on individual behaviour, which affects individual choices of actions. Yet, in order to sustain and to perpetuate any of the established institutions, “corresponding beliefs need to be continually reconfirmed and reproduced through relevant strategic games of the players” (Aoki, 2006, p.9). Thus, institutions are endogenous in nature, and at the same time are an exogenous constraint to the agents within a society (Berger and Luckmann,1967; Aoki, 2006). There are numerous advantages of grasping the dual nature of institutions. For instance, it allows to develop a single apparatus for studying endogenous change, institutional stability, and the impact of institutions on institutional development (Greif, 2006, 2012). This work uses both the structural and functionalist points of view, thus recognizing the dual structure of sistema as both man-made and exogenous for each individual, whose behaviour it influences.

greed system corruption institutional

1.2.2 Different Perspectives on Institutional Change

Institutional changes affect the functioning of economic systems and determine how societies evolve over time, and thus are the key to understanding historical change (Hall, 2010, p.385). However, similarly to the variety of interpretations of “institutions”, there are many perspectives regarding the causes of their change. Indeed, analysing, understanding, and explaining institutional changes still remains a challenge (Piersen, 2004; Thelen, 2004; Streeck and Thelen, 2005; Mahoney and Thelen, 2009; March and Olsen, 2010; Hall, 2010; Fligstein and McAdam, 2012). The literature review focuses on two approaches to analysing causes and origins of institutional changes: exogenous and endogenous.

According to the exogenous approach, institutional changes are a product of external factors, i.e. exogenous shift in the knowledge, preferences, or interests of political actors, who in turn look for a Pareto-superior equilibrium, i.e. an equilibrium that leaves at least one participant better-off without hurting others (Williamson, 1975, 1985; Weingast 1996; Mahoney and Thelen, 2009, 2010). It studies institutional dynamics and changes mainly through two perspectives: either stability and inertia, or radical change in response to exogenous shocks (Mahoney and Thelen, 2009, p.25). The former one, which focuses on stability and inertia, often hinges on issues of reproduction and path-dependence. The phenomenon of path-dependence (North, 1990; David, 1994; Pierson, 2000, 2004) is caused by a "dynamic of increasing returns", where positive feedback encourages a particular path for development of institutions and institutional activities that with the time become more difficult to change (Beunen and Patterson, 2017, p.3). It implies that existing events and features are products of past accidents that affect their trajectory of change and development. Although institutions are resistant to change, they are also able to set developments of their change (Olsen, 1997). However, high political costs, which include the "intrinsic complexity and opacity" of political systems (Pierson, 2004, p.257), the challenges of building collective action to reach a change (Olson, 1965), and the interdependence of members of the institutions, make the initiation of the process of institutional change difficult. This, in turn, shifts the attention to the significance of temporality, e.g. critical junctures (Pierson, 2004; Capoccia and Kelemen, 2007). Critical junctures are the periods, marked by a momentary relaxation of structural factors' influence, in which uncertainty about the future of institutional arrangements creates space for political agency that may transform into a new path-dependent dynamic (Goldstone,1998; Mahoney, 2000; Capoccia and Kelemen 2007).

The latter perspective on studying institutional dynamics and transformation centres on a rapid change, caused by exogenous shocks or pressures, including crisis events, natural disasters, wars, and revolutions (Head, 2014; Douglass, 2016). Major institutional changes, e.g. innovation and reform, can be top-down led, arising in order to address the urgent governance problems (Rhodes, 1995; Ioris, 2009; Rockstrцm et al., 2014; Kresl, 2015), or may be bottom-up generated. For instance, in a crisis, previously disorganized workers are able to unite and have the strength to change the existing regime (Acemoglu and Robinson 2000). Yet, the ability of social groups to organize and mobilize is partly determined by the existing institutions. For instance, dictatorships tend to repress collective actions of those, who may destabilize the regime, while democracies provide a mechanism for all social groups to express their interests, e.g. elections and referendums (Greif, 2012, p.457). However, even though the significance of exogenous shocks in the generation of institutional change is clear, their ability to explain all instances of such phenomenon has been questioned (Thelen, 2004; Streeck and Thelen, 2005; Mahoney and Thelen, 2010; Van Assche et al., 2014; Kresl, 2015; Termeer et al., 2016).

According to the endogenous approach, on the other hand, the basis of institutional change are internal factors, i.e. factors located within the political system. The classical game theory has been widely used in the analysis of institutional changes and endogenous motivations behind them (Lewis, 1969; Schotter, 1981; Greif, 1998, 2012; Aoki, 2001, 2006). It looks at situations that are strategic, i.e. where the optimal behaviour of one player depends on the behaviour of others, and allows to analyse ways of endogenous generation of the behaviour of individuals, as opposed to a simple assumption that they follow the rules. Endogenous institutional change may be related to self-demising or self-enhancing institutional dynamics (Greif and Laitin, 2004), e.g. the development of new preferences, resulting from the performance of existing institutions (Shepsle, 2001, 2006). Alternatively, institutional changes of this type can occur due to the rise of new organizational forms and institutional innovations, which spread via “bottom-up social dynamics”, being an emergent rather than a planned phenomenon (Clemens, 1993; Gould, 1995; Holm, 1995; Powell et al., 1996; Rao et al., 2003). Such “bottom-up” changes, including the rise and diffusion of new industry standards and practices, have been widely analysed by such scholars as Holm (1995), and Carroll and Swaminathan (2000).

Considering institutions as common knowledge, Aoki (2006) maintains that their change, i.e. large changes in agents' knowledge, occurs when there is a substantial equilibrium shift. Yet, institutions may remain inertial and robust despite a certain change of individual players' choices. Thus, in order to avoid gradual equilibrium change, there need to be aspects of the agents' bounded rationality (ibid., p.8). Shared behavioural beliefs become destabilized when deviations from existing patterns of playing occur beyond a certain threshold (ibid., p.9). In such a situation, individual perceptions about how they act and should act become problematic, which signals the emerging institutional crisis. Consequently, there arises a competition between forces that try to preserve the existing state of things, and forces, searching for new types and patterns of playing. Thus, in order to restore institutional and political stability, institutions of shared behavioural beliefs need to be changed (Rao, 1998; Shepsle, 2001). Shared beliefs as social constructs may be created spontaneously, or in a decentralized manner, but often with a guide of a `focal point' (Schelling, 1960), which helps to understand how “institutionally-embedded cultural expectations can play a decisive role in coordinating every actor on one among several equilibria” (Svolik, 2014, p.2). However, the process of any belief turning into a focal point for the convergence of behavioural expectations is highly complex, as it depends on how “learning, emulation, adaptation, reinforcement, resistance, and inertia interact across economic, political, organizational and social exchange domains” (Aoki, 2006, p.23).

Nevertheless, as pointed out by Parsons (1951), the sources of change can be both endogenous and exogenous, i.e. internal and external factors, at the same time. Among the exogenous factors, the most important are the cultural influences, including cultural change, and the change in value orientations and personality, i.e. all sorts of innovative human activities. Endogenous changes in social institutions, on the other hand, are mainly due to the fact that a certain institution ceases to effectively serve the goals and interests of certain social groups. For example, the disintegration of a social institution, e.g. a family, may be due to a change in the role of the spouses, e.g. the betrayal of one of them, or due to conflicts that have arisen in the family because of their parents' interference in their family relations. Although the thesis recognizes that the change of sistema can be provoked by exogenous shocks or their combination with various endogenous factors, it focuses on and analyses the possibility and the requirements for a bottom-up endogenous institutional change.

1.3 Definitions

It is important to differentiate between political regime, political system, and informal political system, to understand how they interact and influence each other. There are many perspectives about what they comprise and how they relate to each other, with some arguing that political regime is, in fact, a political system and others - that the former operates within the boundaries of the latter (Kashanina, 1999). Subsequently, the place and role of the informal political system becomes ambiguous, i.e. whether it operates within a political regime or a system.

This part of the chapter introduces a variety of interpretations of `political system' and `political regime' respectively, and adopts the definitions proposed by Komarov (1997). From the author's point of view, the political system is a set of political institutions and relations, within which power is exercised and its stability is ensured, and the political regime is a way of functioning of the political system of a society, determining the nature of political life in the country. It reflects the level of political freedom and the attitude of the authorities towards the legal foundations of their activities (ibid.). Building upon the literature review, this part of the chapter defines the informal political system of Russia, highlighting its dual nature, role, significance, and place within Russia.

1.3.1 Political System

There are various subjects that take part in the social management of a society: the state, political movements and parties, public associations, and so on (Kashina, 1999). All of them, having an active influence on its political life, unite in a political system. It can be defined as the aggregate of state and non-state institutions, through which political power and public administration are exercised (Komarov, 1997, p.78).

The concept of “political system” is very diverse, and any single of its connotations cannot be generalised and applied to all of the states around the world. Indeed, it is necessary to have a set of definitions, given the different internal factors of countries. Thus, there is a large number of meanings of the "political system" cited in the literature. Burlatsky (1978, p.14) defines it as "a relatively closed system that ensures the integration of all elements of a society and the very existence of it as a single centrally controlled political body, the core of which is the state, expressing the interests of economically dominant classes”. According to Chirkin (1994, p.5), a political system is “a universal governing system of a society, whose components are linked by secondary political relations, and which ultimately regulates the production and distribution of social goods on the basis of the use of state power by large social communities". American political scientist Easton (1953, p.130) considers it as a mechanism for transforming social impulses coming from society into political decisions and actions. Duverger (1951, p.2) believes that: "political structures are related to the economic structure, the level of development, an ideology, a system of values, and cultural traditions. This summation forms the political system of each country”. Thus, while some scholars identify the political system with the political organization of society, others believe that it is a broader concept, including not only organizations but also political norms, culture, practices, and so on (Chetvernin, 1997).

In a more general sense, a political system is a set of all the features of institutions, participating in political relations, which includes political processes, institutions, norms, and so on, that are the main vector of the political life of a particular state (Komarov, 1997). It is an ordered set of norms, institutions, organizations, ideas, as well as relations and interactions between them, through which political power is realized. They are ordered and interrelated in a certain way, forming some integral unity, possessing relative independence, sustainability, and functional autonomy (Komarov, 1997; Kashina, 1999).

The concept of a political system is more `capacious' than the concept of public administration, since it encompasses all individuals and institutions, participating in the political process, as well as informal and non-governmental factors, which affect the mechanism of identifying and raising problems, and the development and implementation of solutions in the sphere of state-power relations (Komarov, 1997, p.30). In the broadest interpretation, the term "political system" includes everything that has to do with politics.

There are typically distinguished the following components, or subsystems, of a political system (ibid., p.35):

1. Organizational, which includes political institutions, e.g. a state and political parties;

2. Regulatory, i.e. political, legal, and moral norms and traditions;

3. Communicative, i.e. the relations within a political system, and between it and a society;

4. Cultural, which encompasses political ideas and culture;

1.3.2 Political Regime

The political regime is a system of methods and means of exercising political power (Komarov, 1997). Any changes that take place in a state's regime, in turn, affect the form of its government and governance (Nazarenko, 2013). The categories "political system" and "political regime" are closely related. The first shows the whole complex of institutions, participating in the political life of society and in the exercise of political power, and the second - how this power is exercised, and how these institutions operate, e.g. democratically or undemocratically (Komarov, 1997). In other words, the political regime is a dynamic, functional characteristic of the political system. Hence, according to Komarov (ibid., p.67), a political regime is an integral feature of a political system (figure 1). It is characterized by a system of methods for exercising state power, the extent to which democratic rights and individual freedoms are realized, the relationship of state power to the legal foundations of one's own activity, and the correlation of formal constitutional and legal forms with real political life.

(figure 1: based on Komarov's (1997) interpretation of a political system and regime)

The most common classification of regimes within political systems is their division into democratic and authoritarian ones. Yet, Russia is widely considered as a hybrid regime, having both democratic and authoritarian characteristics (March, 2009, p.509). Indeed, this type of regime has a unique combination of democratic features, e.g. the existence of a variety of political parties and elections, which, however, instead of serving their prescribed purposes, are masking and excusing a high degree of state centralization (ibid.). Thus, they create an illusion of democratic practices without challenging and endangering the position and power of the incumbent leader and the ruling elite (Petrov, Lipman, Hale, 2010). There are several other states that have similar regime type to Russia. These include Singapore, which has an authoritarian regime with “manual control”, and Turkey, which is going through the process of institutionalization of regime marked by a military and religious dictatorship (Stelgias, 2015).

1.3.3 Sistema

While the formal sphere encompasses all written rules and norms, i.e. laws that fix the relationship between the subjects of power, informal institutions and practices do not have a clear definition, and their significance and classification depend largely on the scientific and ideological positions of the researcher (Miller, Grodeland and Koshechkina, 2001, p.3). Traditional informal institutions represent a complex social phenomenon, embracing virtually all spheres of life of the state and society.

Sistema is the informal political system of Russia. It is based on the network-based governance patterns, which are used to operate the political system of the country, e.g. to mobilize cadres, and to control and redistribute resources (Ledeneva, 2013, p.2). The characteristics that fundamentally distinguish it from formal institutions and practices are: the predominance of private, group and corporate interests over the recognized public interest; self-regulation with the use of non-legal social norms; creation of alternative informal ways of solving issues; quasi-legal behaviour when using permitted institutions; and misconduct (Tihomirova, 2005, p.81). Traditional sistema practices include "telephone justice", collective responsibility, nepotism, `clientism', and so on (Afanasiev, 1997, p.37).

The vertical of power, which presupposes a hierarchically constructed system of management and control over the vital activity of the state, is the central concept of the modern system of Russian power and governance (Morris and Polese, 2015b, p.17). It implies that the supreme power does not belong to the people and their elected representatives, but to the president. Yet, the Russian government is a conglomeration of clans and groups that compete with each other for power and resources, and the role of the president, who is also `locked' into the informal power networks, in this sense is to find the balance between the competing forces (Ledeneva, 2013). The opposition between "siloviki" and "liberals" has become evident from the beginning of Putin's first tenure, at the beginning of the last decade (Afanasiev, 2009). Today we can claim that such an assessment is very simplified, since the struggle is being waged not only between these two groups. Today, the main "groups" of elites of Putin's system of power include: private-state oligarchy, e.g. Sechin, Rotenberg, Kovalchuk, Shamalov, Kostin, Usmanov, power corporations, e.g. FSB, FSO, and civilian bureaucracy, e.g. technocrats-managers (Morris, J. and Polese, 2015b, p. 112). The balance of influence and cooperation of these three pillars can ensure the stability of the regime, yet, they compete with each other in terms of raising up in the vertical of power, which provides one with more power and opportunities for resource extraction. Sistema can be divided into subsystems, which operate within all branches of power and institutions. Each subsystem has its own vertical of power and obedience, as well as informal norms and practices. They exist at all levels of governance, i.e. local, regional, federal, and at the same time comprise a part of the well-functioning self-reinforcing organism, which is controlled and governed by the top leadership of the Kremlin.

The informal system of governance of Russia is a man-made institution that was formed in order to reflect the interests of its `creators'. At the same time, it is sustained by repeated use of informal means of execution of power, which reaffirm its unwritten rules and norms, surpassing individual situations that once led to their emergence. Thus, sistema possesses a dual nature, being both man-made and at the same time exogenous for each individual, influencing their behaviour. Different institutional elements of sistema, i.e. rules, beliefs, norms and organizations, play different roles in generating the required behaviour of its members, which fosters its perpetuation. Internally prescribed and common rules of the informal system of governance create common models of cognition, providing information, coordinating behaviour, thus, pointing to internally “appropriate” and acceptable actions (Greif, 2012, p.42). Beliefs and norms motivate insiders to follow the imposed informal rules of the system. For example, the belief that reward or punishment follows from a particular action motivates him to take or to abstain from it. Organizations, whether they are formal or informal, play three interrelated roles: they produce and disseminate rules, support beliefs and norms, and also affect the totality of executable behavioural beliefs (ibid., p. 43). Together, these factors lead to the behaviour of insiders, which corresponds to the needs and preferences of sistema, and which strengthens and reinforces its institutions and practices (Figure 2).

Filling the vacuum created by the weakness of formal institutions, sistema as a whole is one of the attributes of an authoritarian regime, but at the same time some of its features, if successfully combined with formal ones, can contribute to their work (Matveev, 2011). Indeed, it may be a “second best” strategy for actors who cannot achieve the desired outcome via formal institutions, as it corrects the essential shortcomings of socio-political institutions, allowing a number of them to work relatively adequately on the functional side. Thus, sistema, on the one hand, “is a link between the unforeseen conditions of functioning of political-bureaucratic institutions and formal principles, i.e. the principles of organizational activity”, and on the other - “the reaction to formal rules and procedures and to special circumstances that are not provided by common rules, but which require an individual approach" (Makarin, 2008, p.35). Furthermore, in the opinion of Daugavet (2003, p.28), informal “rules of the game” hold the actors of the political process within certain limits: "the unprecedented discrepancy between formal norms and informal practices is not a manifestation of antagonism between a legitimate management system and abnormal deviations from it, but an inalienable feature of a single, stably functioning body of power, the very essence of which is the routinization of a violation of formality ". Thus, sistema, being a deviation from the `norm', is simultaneously a way of controlling different interest groups and power clans within it, as well as of "smoothing" conflicts between them.

Nevertheless, although it is an important mechanism and tool in regulating and governing the Russian state, such an informality poses the biggest obstacle to the `real' modernization of the country (Ledeneva, 2013). The informal system of governance of Russia perpetuates the gap between the way things get done, are officially declared to be, and the way they actually are (ibdi.). It dilutes the system of checks and balances, as well as the trust between the society and the state. Consequently, there arises inefficiency of the command rule, marked by deteriorating living conditions, institutions' credibility and effectiveness, as well as by limited and `selective' individual rights (Rose, 2001; Rose-Ackerman, 2002). Informal institutions and practices, including corruption, clientelism, and patrimonialism, undermine the performance of formal democratic, market, and state institutions and threaten to replace them. And even when the use of sistema's potential is driven by best intentions, it only enhances its presence and ensures its perpetuation by catching the `users' in the web of power networks (Wilson, 2005, p.185). Furthermore, the system of power, which has been built and centred around the president, incorporates various groups of strategic elite, admitted to making key decisions. Such groups, which included those whom the president personally brought to power and personally trusted, are `uninstitutionalized' and are not subject to control (Makarin, 2008, p.34). And, despite the fact that the entire ruling class is rallying around the president, it is not liberated from conflicts, as different factions constantly compete among themselves in the struggle for influence, which further undermines the efficiency of the formal institutions (Shevtsova, 2003).