Armageddon Averted: The Soviet Collapse, 1970-2000 (17 page)

In 1991 the budget deficit would exceed 20 per cent of 118

survival and cannibalism in the rust belt estimated GDP, and 1992 threatened to be worse (it was).

Soviet gold reserves and foreign currency accounts had disappeared, never to be found. Soviet foreign debt had ballooned to $56.5 billion, and creditors were demanding that the successor states assume full responsibility. Only Russia did so—the price extracted for the Soviet seat on the UN Security Council—assuming a formidable burden at a time when the rouble was undergoing steep devaluation.
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Russian industry was in free fall, caught between plan and market and politically severed from suppliers and customers in Eastern Europe as well as the other Union republics. The officially measured economy declined 6 per cent in 1990 and an annualized 17 per cent through the first three-quarters of 1991. (In the worst year of the Great Depression in the US, 1929–30, the drop was 9 per cent.) Inflation at the end of 1991 was estimated at 250 per cent—per month. Enterprises refused payments in roubles, insisting instead on foodstuffs, vodka, or televi-sions, especially of foreign origin, which could be distributed to workers in lieu of money wages. Shops were emptier than at any time since the famine years immediately after the Second World War. Before Gaidar had lifted a finger, Russia was utterly broke and in chaos.

He and his team—a mix of arrogant Young Turk ‘economists’, mediocre political operatives from Yeltsin’s hometown, and old-hand former Soviet ministers—hoped to impose monetary stabilization through fiscal discipline, while also crushing the remnants of the planning system and clearing a path for market behaviour. The Russian 119

survival and cannibalism in the rust belt programme was advertised as ‘shock therapy’, on the example of 1990 Poland and 1970s Chile, by the International Monetary Fund, which was unhurriedly negotiating a large dollar loan to support Russia’s ‘transition’, and by a handful of self-promoting foreign advisers. But the idea of de-statization and painful belt tightening as the path from socialism to the market derived not from foreign models but from Russia’s dire circumstances and Soviet-era conceptions about the market being the opposite of the planned economy. Gaidar, in any case, violated shock therapy, conceding that some prices, such as those for bread and milk, would remain regulated, to protect the population. Others in government insisted that liberalization of energy and fuel prices be ‘delayed’, to ‘protect’ Russian industry and enable the country to survive the winter, and Gaidar acceded to the pressure.

On 2 January 1992 Russia ended most but far from all Soviet-era administered prices in what was dubbed ‘a single leap across the abyss’. Overnight, private trade ceased to be the crime of ‘speculation’, and the country was soon transformed into a bustling bazaar of buyers and sellers on street corners. People who bought what turned out to be unusable goods had no recourse, but shop queues disappeared and the goods famine was overcome. Monetary stabilization, however, proved elusive. President Yeltsin toured the country with hundreds of millions of roubles in cash, which he magnanimously distributed to the folk like the tsars of old.
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Even worse, the Soviet State Bank was replaced by fifteen republic Central Banks, but the 120

survival and cannibalism in the rust belt currency—the rouble—was retained, under the mistaken view among some Russian officials and the IMF that a single ‘rouble zone’ would promote economic reintegration. Only Russia’s Central Bank, having inherited all Soviet printing presses, could issue paper roubles, but crazily, all republic banks could issue credits in roubles.

‘In effect,’ wrote one journalist for
Rolling Stone
, ‘Russia had fourteen ex-wives, each with a duplicate of the Kremlin Visa card’.
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Fiscal pressure also emanated from Soviet-era industry.

Inter-enterprise debts soared to 800 billion roubles by March 1992, and by July reached 3.2 trillion roubles—a quarter of Russian GDP. It was as if firms were issuing money (credits) to each other, appropriating the powers of the central authorities. Gaidar, who had written his Ph.D. on the benefits expected from granting autonomy to firms, now watched as autonomous firms awarded themselves free money. Their unilateral debt expansion, moreover, became a powerful lobbying tool for extracting the government subsidies that he had denied them.

Trapped, Gaidar caved in to new outlays, and between July and September credits to industry blew giant holes in his tight money policy. Inflation, which, despite the CIS banking fiasco and Yeltsin’s largesse, had been reduced to around 7–9 per cent per month in July 1992, jumped by the autumn to 25 per cent a month. So much for implementing dogmatic monetarism!

At the same time that Gaidar struggled to impose fiscal discipline, the entire Soviet epoch, no longer shielded 121

survival and cannibalism in the rust belt by autarky, was being brutally re-evaluated by the world market. Life savings in roubles that had had a certain value in the Soviet era were, in the new circumstances, wiped out. Rouble pensions for millions of people who had worked all their lives became almost worthless. The salaries of highly educated professionals—physicians, scholars—became microscopic. Amid this impoverishment, opponents of ‘reform’ proved far better at framing public debate than proponents, who exhibited a we-know-best distain for public explanation and naïvety about the power of cynical exploitation of public relations. In a great irony, it was not the Soviet past but ‘reform’ that was compelled to stand trial. And, even before the IMF fiscal stabilization loans came through, belatedly, in July—despite Russia’s failure to meet the conditions set down—critics bitter about the fall of the Union accused Washington of a second ‘global plot’, this one to strangle Russian industry.

Hounded in the press and parliament, Gaidar barely survived an attempt to sack him in April 1992, but in December he was forced out.

Some analysts were quick to defend shock therapy, arguing that it had not been implemented strictly. That was true. But of what utility was an economic programme said to work only in pure form when even its advocates warn of real-world obstacles during implementation? The theorists, anticipating strikes, called for the introduction of a social safety net; this was not done, yet there were few strikes. Instead, the social pressures came from managerial elites. Bosses of the tens of thousands of large 122

survival and cannibalism in the rust belt enterprises built in the Soviet period, explains one Gaidar associate, ‘possessing material, labour, and financial resources, and being better organized than anyone else’, emerged as a dominant political force in policymaking.
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Gaidar had galvanized them, first by setting managers free from the remaining controls of the planning bureaucracy, then by seeking to cut them off from state credits. When they fought back, the would-be shock therapist sought to co-opt them with inflationary credits, but they turned against him anyway. After leaving government, Gaidar admitted having acquired in office ‘an infinitely better idea of how real power works’.
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The era of ‘radical reform’ was pronounced over.

Russia’s new head of government, the Soviet-era gas minister Viktor Chernomyrdin, stoked Western doomsday prophecies by bemoaning the steep decline of industry.

But Chernomyrdin ended up, despite vacillations and occasional reversals, implementing a more vigorous anti-inflationary course than Gaidar had. This apparent mys-tery is readily explained. First, in July 1993, Russia finally managed to achieve what Gaidar had demanded: it cut the other former Soviet republics off from issuing rouble credits, and replaced the Soviet rouble with a new Russian rouble. Secondly, Chernomyrdin hit a brick wall. Myriad opponents of shock therapy who claimed that Gaidar should have tried a gradual reform approach, directing credits to priority industries, overlooked the fact that his successor attempted to do just that—and failed.

Chernmyrdin discovered that neither the government nor 123

survival and cannibalism in the rust belt the Central Bank had sufficient authority to enforce investment priorities at the level of enterprises. He also came to understand that free-flowing state credits—‘the opiate of industry’—caused harmful inflation. And so, with the assistance of the finance minister, the personifica-tion of the industrial lobbies embraced a policy of tighter credits and fiscal stabilization.
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Russia achieved a gradual monetary stabilization. Inflation declined from 2,250 per cent in 1992, to 840 per cent in 1993, to 224 per cent in 1994, and by September 1996

to an annualized rate near zero, thereafter for the most part remaining low. Just as Gaidar had come to understand basic politics, Chernomyrdin had come to understand basic economics. One of his successors as prime minister, Yevgeny Primakov (1998–9), using an even more ‘patriotic’ rhetoric about reviving industry, sponsored an even tighter budget and credit policy. There was little else that the central government could effectively do.
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For Russia, which struggled just to gain full control over its money supply, carrying out comprehensive economic ‘reform’ was an illusion. And therefore, Western advice, whether misguided or sensible, was largely inconse-quential. Russia’s was not, and could not have been, an engineered transition to the market. It was a chaotic, insider, mass plundering of the Soviet era, with substantial roots prior to 1991, and ramifications stretching far into the future.

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survival and cannibalism in the rust belt
. . . and the realities of marketeering

In the 1970s, the USSR, through oil exports and grain imports, became more involved in the world economy, but it still accounted for a minuscule 1.5 per cent of world trade into the 1980s. Under the planned economy, there were gaping differentials between domestic fixed prices and world market prices—oil, for example, was priced domestically at less than 1 per cent of the world price— but, since foreign trade in the Soviet Union was a state monopoly, the windfall revenues went to the state budget.

Already in 1986, however, a number of ministries besides the Ministry of Foreign Economic Relations had successfully lobbied for permission to engage in foreign trade, and soon this privilege was extended to select enterprises and even individuals, usually with the proviso that they would use export revenues to import goods in short supply.
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Exporters failed to live up to their contracts to overcome consumer shortages. Instead, they accumulated fortunes that were hidden abroad by using mechanisms that the KGB had developed to pay for industrial espionage: channelling funds through shell companies as well as banks in offshore locations. In other words, well before 1991, a pattern had been set.

Russia was even more desperate to overcome still worse shortages, including those of sugar and soap, and it further ‘liberalized’ foreign trade. But domestic energy prices remained under government fiat. In the summer of 1993 Russian prices for natural gas were still only 10 per 125

survival and cannibalism in the rust belt cent of the world price (rising to 20 per cent by December 1993), while as late as 1994 domestic oil prices were still less than half world price. This meant, ironically, that, pursuing trade ‘liberalization’, the Russian government became even more involved in the intrigue of granting exclusive export licences. Predictably, the country rarely saw the promised medicines or children’s clothes. ‘There were’, Gaidar wrote, ‘always colossal numbers of opportunists buzzing around the government, proposing what seemed, at first glance, attractive projects’. He added, pro-tectively, that his close friend, Russia’s minister of foreign economic relations, who signed the export licences, ‘had never held a government post, and the only thing he’d ever supervised was his own desk’.
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Cluelessness was not the main problem (and anyway, Gaidar’s team was soon out). The main problem was that Russian officials used their positions of public power to pursue their private interests.
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For official documents, bureaucrats ‘practically have a price list hanging on the office wall’, in the words of a Soviet-era convict who was handed assets to form one of Russia’s biggest ‘banks’.
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Often state officials themselves set up the private companies. And just try to fight it! Firms denied export licences simply exported restricted, price-controlled goods by invoicing them as children’s toys or teapots and ‘coming to terms’ with customs inspectors.

Goods that Gaidar had crossed off the price-control list in draft documents reappeared in final versions to be signed by the president. In 1994 Chernomyrdin ‘limited’

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survival and cannibalism in the rust belt price-controlled exports to petroleum products, natural gas, non-ferrous metals, timber, and fish—commodities that accounted for 70 per cent of exports. Amid this marketeering, vastly greater sums of capital fled Russia than the IMF ever loaned to it. Most large-scale exporters violated Russia’s currency repatriation laws, but more nimble ones took advantage of the tax treaty that the Soviet Union had signed with Cyprus—again as a means for the KGB to channel clandestine funds—which no one had repealed.
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Among the new loopholes created was an ‘offshore’

zone inside Russia, in the North Caucasus republic of Ingushetia, ostensibly to encourage investment. Companies registered in Ingushetia had to pay ‘fees’ to the Ingush authorities and their Moscow partners, but then legally thumbed their noses at Russia’s tax authorities.

Perhaps the biggest con involved the National Sports Foundation (NSF), set up by President Yeltsin’s tennis coach for ‘destitute Olympic athletes’ and allowed to import sports equipment, then alcohol and cigarettes, duty free. The NSF accounted for 95 per cent of imported tobacco and spirits, and raked in more than $1.8 billion in a few years. Athletes saw none of these profits. As other ‘charities’ scrambled to ape the NSF example, the definition of charity was stretched when the gas monopoly, formerly run by Prime Minister Chernomyrdin, was granted tax exemptions worth $4 billion in 1993 alone.