THE ECONOMIC CRISIS in Russia is a trigger for the world-wide decline in stock markets and currencies rather than its cause. Russia has been in a sharp economic crisis for a decade, since Gorbachev passed the Law on the State Enterprise, which first introduced market disciplines to the USSR. On the other side, the world is in a supply glut with too many products and not enough buyers. The Russian debt default looks like the first of a number to come.
But the Russian default has its own unique antecedents. In 1992 Yeltsin removed price controls and started a policy of rapid denationalization. Privatization has gone farther in Russia than either Poland or the Czech Republic. Yet both Poland and the Czech Republic appear to have made a limited transition to capitalism, while Russia and the Ukraine have largely failed. [1]
Production has fallen to less than half its 1990 levels, and 1990 was not a good year. Overall investment is one fifth of 1990 levels; in the metal and engineering industries, it is 5% of the 1990 level. The standard of living has dropped catastrophically. Estimates of the drop range from 20–50% of Soviet levels but figures cannot be regarded as reliable.
Workers are often not paid for months or years, and what they receive is a pittance—about $50–100 per month, now made worse by devaluation. Three quarters of the population has been pushed to or below the official subsistence level.
While non-payment of wages has been the norm in both the public and the private sector, pensioners and the intelligentsia are in an appalling position. Unpaid pensions raise the prospect of the elderly dying from starvation, cold and neglect. Women have often lost their jobs. Daycare centers and nursery schools have closed down or now charge more than people can pay.
Teachers and doctors have been on strike for the simple payment of salary. Research workers have lost their jobs, emigrated or been reduced to penury because of poor or non-existent pay. The Defense Ministry has advised soldiers—officers included—to take their families foraging in the forest for mushrooms and berries, so they can eat, and presumably spend “quality time” together. Miners have occupied railroads to press for payment of back wages.
Few societies have suffered such a massive decline so quickly, in the absence of war. Life expectancy has declined seven years (from 64 to 57) in just seven years. Most of the world has marveled at the expanding Russian limits of patience. The wonder is that there hasn’t been an insurrection.
Russians have muddled through by foraging, or by growing food at their allotments or in their gardens or in pots in their apartment windows. The majority of Russians feed themselves in this way, only having to purchase tea, bread, milk and salt. Like Russian industries that now conduct 75% of their business in barter, individuals also engage in barter to procure what they can’t buy.
The worsening economic crisis has been accompanied by a political crisis, and a constitutional crisis was barely averted when Yeltsin conceded to the DUMA (Russian parliament) and withdrew his nomination of Viktor Chernomyrdin as prime minister.
This solution avoided the specter of either Yeltsin dissolving the parliament, or the parliament beginning impeachment proceedings against Yeltsin. This is a significant victory for the DUMA, which has little actual constitutional power but is constantly assuming more and more de facto power.
The new Prime Minister, Yevgeny Primakov, has been Foreign Minister since 1996. He is the perfect compromise candidate, supported by the Communist Party of the Russian Federation (KPRF) and the government alike, even receiving favorable remarks from Mikhail Gorbachev.
Primakov was brought in to rescue the economy and there has been much talk of a Russian “New Deal,” practically wishing Primakov could morph into Roosevelt. While he has spoken of Keynesian crisis programs, it is difficult to speak of Keynesianism in a society that hasn’t got capitalism.
The choice of Primakov is indicative of the decline of finance capital and the West in Russia. Primakov is Jewish, born and raised in Tbilisi, Georgia. His family name was Finkelstein. Nonetheless, the anti-Semitic KPRF supported him because he represents the interests of the industrial and old political elite. [2]
He has been in intelligence for almost forty years but it was foreign intelligence (the SVR foreign intelligence service) not domestic spying, as far as we know. Primakov is an Arabist, or Middle East Specialist, and while he ran Russia’s external spying service for years, he also headed the Institute of Oriental Studies from 1977–85.
He also directed the very prestigious Institute of World Economics and International Affairs, which had some thousand researchers and its own skyscraper when he was in charge. At that time it advised the Central Committee of the CPSU.
Primakov thus has been a major political figure for a long time. While most of the Western press portrayed Primakov as a man of no economic background, he clearly has some understanding of capitalism. Whether his appointment can prevent the continuing disintegrative spiral—with regions fending for themselves and threatening to jump ship—remains to be seen.
There continues to be talk of civil war, social explosion, the end of patience. The society is highly unstable and the future is unpredictable. This has been brewing since 1992, when the USSR came to an end. Yet the West seems to be in denial, asking Russia to “stay the course,” following the same disastrous policies.
The situation is now dangerously similar to 1993 when Yeltsin ordered the military to firebomb the Parliament. Commanders have been ordered to prepare themselves for “extraordinary situations.”
What has changed is that Yeltsin had mass support then, but today he is universally hated. Back then Yeltsin won the support of the striking miners because he was the Communist who criticized privilege and was then attacked within the party. They saw him leading the fight against the managerial elite in the Communist Party. Back then workers thought the market would get rid of privilege and bring about equality; miners spoke of capitalism eliminating the exploitation of man by man!
In 1992 Yeltsin promised that the standard of living would rise in six months and when that failed he asked for another six months. Yeltsin has delivered the opposite of what he promised, and has no popular support. Indeed millions now demonstrate demanding his resignation! [3]
Since Yeltsin was the main instrument for the “reforms” or the introduction of capitalism, capitalism itself is now in question.
Russia’s massive inflation, caused by the removal of price controls, was controlled after 1995 when the printing of money was limited. Without money, enterprises went over to a system of barter, frequently not paying wages.
The government, anxious to meet the IMF’s budget-balancing targets, also failed to pay wages. Two-thirds of enterprises work on a system of barter, with money occupying from 2–20% of turnover. The result is that taxes are either not paid or paid in kind. It is indeed a strange capitalism that neither pays wages nor collects taxes!
The crisis in state coffers was further exacerbated by Yeltsin’s privatization of vodka production in 1991. The tax on vodka had generated 5% of state revenue for the Tsars, and 13% of revenues under Brezhnev.
One of Primakov’s stated intentions is to reintroduce the state monopoly of vodka, which could once again generate revenues for the state as well as regulate the quality of vodka being sold.
In fact, one of the factors in the decrease in life expectancy is directly related to vodka production. Since the state let go of its vodka monopoly the quality has degenerated, as vodka was diluted and in some cases poisoned.
As more poor quality vodka hit the streets, consumption went up, and so did accidents-more automobile accidents, more people wandering into the streets drunk and getting run over, more cases of people coming into contact with live electrical lines, more people dying in street brawls.
Starved of cash, the budget is in a massive deficit financed by the issuance of government bonds bought by Russian and foreign institutions. The default of payment on these bonds was inevitable given that tax collection did not increase. Yet the tax take could not rise as long as the barter economy continued.
Up to half the budget is now devoted to the payment of interest, further exacerbating the problem.
Furthermore, the criminalization of the economy made tax collection a dangerous enterprise-forty-one tax inspectors were killed in 1996. Taxation of the ordinary worker, who is either unpaid or paid a pittance, made little sense.
The government turned to the big companies like Gazprom, Chernomyrdin’s company. But Gazprom too wasn’t paid by many of its customers, like the Ukraine, and could provide only limited relief before turning against the government itself.
Russia had a surplus on its balance of trade until gas and oil prices fell recently. No longer. It is estimated that some twenty billion dollars leave the country illegally each year. Russia has been financing the West, rather than the reverse. Inflows have been very limited until the last two to three years, when substantial sums were received from the International Monetary Fund, bond issues and privatization.
IBM and Phillips have withdrawn from production inside Russia, indicating that direct investment in industry was highly constrained. In effect, the elite used the inflow of capital into Russia to place money in Western banks or buy property in London, San Francisco and elsewhere.
Under these circumstances, why would sane investors put money into Russia? The answer lies in the vast surplus of funds sloshing around the world looking for higher returns than those obtainable on the Western bond markets.
At some point, the Russian merry-go-round had to come to an end, whether because the Russian state could not pay the interest or because it lacked the foreign currency to pay foreign creditors.
Are there any solutions for Russia? Does Primakov’s policy point to a solution? The only short-term solution to avoid social crisis is to print money. It could lead to inflation but if the economy expands with state investment or state-encouraged investment, it may work. Idle factories could once again produce.
But printing rubles will interrupt the attempt to impose monetary discipline and the profit motive, and that is why the West is opposed to such a solution. The transition itself is now at stake.
To get to the market or capitalism, money had to be introduced as money, i.e., the economy must be “monetized.” The removal of price controls in 1992, the control over monetary emissions from April 1995 and the balancing of the budget were supposed to achieve that object.
Under the old Soviet system, the ruble did not function as money. Contacts, the place in the queue, the position in the social hierarchy were all more important than the ruble for the acquisition of goods.
The enterprise, in turn, obtained goods on an organized basis, which was sanctified through the central plan. The ruble played little role for the enterprise. Profits were unimportant and any enterprise could obtain more rubles by requesting them from the bank, particularly to pay wages.
President Clinton, Michel Camdessus of the IMF and many economists have now argued that the transition failed because it did not go far enough. They insist that expenditure be cut, welfare payments reduced, subsidies removed and bankruptcies forced. Enterprises would then have to pay off their debts with money or face bankruptcy.
Mass unemployment under conditions of exceptional austerity would herald the introduction of money. Profitable enterprises would then emerge and the economy take off. It is as if monetarist dogma has replaced simple reason.
If Clinton and Camdessus’ advice is heeded, the result would be the opposite of what is intended. Whether what emerges is civil chaos or civil war, a coup or an insurrection, or the breakup of Russia (Dagestan has already declared its intention to secede from Russia and form an Islamic territory), is unknown.
Russian chauvinism, anti-Semitism, pogroms and wars are all made more likely by these measures, which amount to mass humiliation. It is also certain that anticapitalist forces will grow very quickly under these conditions.
The Russian elite understands that the Clinton-IMF approach is the most dangerous possible. They are not taking the advice. But sections of the financial elite are in trouble and need a lifeline. So they have joined forces with the industrial elite to produce a Keynesian/protectionist alternative.
If the currency is subject to exchange controls as in China or Malaysia and money is printed, there will be no transition to capitalism but the economy will revive. It will be inefficient, technologically backward and won’t compete in the world market, but it will provide employment, goods and food for the population for a few years.
This solution won’t end the Russian economic crisis, but will provide some stability. It is likely to lead to increased worker militancy, but it is the only viable option for the Russian elite. They always have the option of decamping to the West if things get out of hand.
In this context, Primakov’s economic prescriptions, which focus on attempting to resuscitate the industrial economy, offer something of a reprieve. Primakov’s laser focus is on preventing a social explosion.
The Primakov “plan” involves “controlled emission” of money by the central bank. This means that the central bank will issue sufficient money to pay arrears owed by the central government to permit investment to be made in industry. However, little can be achieved unless the leak of some twenty billion dollars from the country is stopped and so controls over capital movement abroad are also proposed.
The rationale of this policy is not stupid. It would end the present socio-economic crisis through payment of wages and salaries and revive employment through attempting to restore industry to a less moribund level.
The problem with the policy is that industry and agriculture are now so run down that it will not be enough to supply rubles or dollars. It will also require detailed reorganization, perhaps even limited “central planning” for the program to be successful.
Primakov’s policy in any case is the only hedge against an impending social catastrophe. The only alternative—given the absence of a strong left—would be mass unemployment accompanied by mass starvation.
The banking crisis is secondary to the internal failure of the so-called transition. To make sense of the banking crisis one must first understand that banks in the “land of the Wild East” are nothing like banks in the West, which take deposits and lend to businesses.
Russian banks are largely a conduit of state money to promote the interests of the owners of the banks. There is little regulation, and lots of bribes. Much of the money engaged in arbitrage trading, or was speculated on the foreign exchange market, losses on which have left the banks virtually insolvent.
Of the seven major groups, SBS-Agro has gone under and is being merged with the state bank. Three others are merging among themselves. Other less important banks are in trouble but may be of less concern.
These groups must be understood as political-economic groupings with a bank at the center. Banks have functioned to facilitate the dealings of the groups, and dollars have largely been made through the export of raw materials or various forms of financial deals ultimately based on this trade.
When the system changed the upwardly mobile and the more nimble apparatchiki realized that the best way to become capitalists was through finance, whereas industry required a relationship with workers and would therefore take a long time to convert to capitalism.
Hence the various state/party organizations could easily deposit their funds in an institution and call it a bank. Thus former party secretaries could become bankers.
Once the banks were established they had their own trajectories. In particular, they made huge sums out of the state itself. One method was through buying treasury bills (called GKOs) paying huge levels of interest.
In turn these banks then borrowed money from the West on the strength of their ruble surpluses. These dollars were then used to speculate on the Western exchanges, and one assumes that some proportion was expropriated by the bank owners and deposited abroad.
It should be noted that the ruble was convertible in this period. Clearly once the ruble was devalued these banks were in trouble because they could no longer obtain sufficient rubles to pay their dollar debts. The “new Russians” have been wiped out in the process. The seven oligarchs have been shown to be seven dwarfs, but that is another story.
Hillel Ticktin is the editor of Critique, an advisory editor of Against the Current, and is the Reader in Russian and East European Studies at the University of Glasgow.
Susan Weissman serves on the editorial boards of Against the Current and Critique, is Associate Professor of Politics at St. Mary’s College of California, and a producer and host of Beneath the Surface on KPFK, Pacifica Radio Los Angeles.
ATC 77, November–December 1998