Russia (49 page)

Since the 1960s the Soviet economy had been unable to compete with capitalism. Its inefficiencies had been recognized in Brezhnev’s time, but cautious efforts to improve the system had met with little success. The entrenched interests of the Soviet managerial class, the
apparatchiki,
obstructed systemic reform. The difficulties attending this option led Gorbachev repeatedly to avoid it and address political reform instead. Yet the people had become disillusioned with democracy even before Gorbachev lost power. Communist China engineered a better solution in the light of his experience. It adopted a mixed economy, part planned, part free, and gave priority to economic, rather than political, reform. That prescription might well have worked in Russia too.

As it was, the attempts to decentralize decision-taking, encouraging regional officialdom and managers to take more power into their hands, drove the system towards a precipice. After some initial confusion, managers and officials began to take Gorbachev at his word. In doing so they undermined the authority of the central institutions on which the leadership depended for the execution of its policies. Furthermore Yeltsin’s assault on the Communist Party removed Gorbachev’s most effective lever of government. But, perhaps Gorbachev was the architect of his own failure. As he admitted in retrospect, he had certainly been remiss in failing to keep the money supply in check. As a result, inflation gathered speed, destroying savings and creating increasing distress. Communist Russia was an essentially makeshift contraption. Born of war and revolution, it had been shaped by necessity and hardened by time into a fixed, rigid and ultimately brittle system.

Gorbachev deserves credit for positive achievements.
²⁴
He, more than anyone else, was responsible for changing Russia’s political configuration — albeit in a way he had neither foreseen nor intended. He also did great harm, though without intending to. Unlucky and incautious, he was soon overwhelmed by the rush of events and by successive crises. Having bravely begun the dangerous process of radical reform, he suddenly found the machine careering onward and downward out of his control. In the end, then, the verdict must be death by misadventure.

The rejoicing over the collapse was great. Yet the advent of democracy was to solve no problems, and many who rejoiced at the time were to regret the Soviet Union’s demise. Most of the good things which both the dissidents and Western politicians and ideologues forecast would emerge from the collapse of Communism did not materialize. Indeed, most Russians
were to find the first fruits of the freedom they had been promised very sour indeed. It is on this aftermath - the condition of Russia in the post-Communist era — that we must now focus, for that is the soil in which any future expansion will be rooted.

W
HEN THE SOVIET
Union collapsed, crowds swarmed out on to the streets of central Moscow and St Petersburg to greet the new order. They were mostly younger people and their expectations matched their excitement. Russia was free. The stern face of authority was fast fading away; political correctness and restrictions were things of the past. Untrammelled now by empire, Russians would no longer be isolated from the world. They would be ruled by democracy instead of tsars and commissars, and join the global economy Western statesmen and economists had forecast that investment would flow in from Wall Street, the London Stock Exchange and all the other bourses of the free world. A vibrant free economy would rise up in place of the moribund, now crumbing, bureaucratic economy People would have opportunity and choice instead of dull predictability.

A handful of Russians were soon to become wealthy beyond dreams, as in a fairy tale, though a few were to perish at the hands of contract killers, and one or two even ended up in jail for fraud. Shops in city centres were filled with an amazing variety
of
expensive goods. Mercedes limousines, Cardin dresses, blue jeans and Macdonald hamburgers proclaimed the coming of the new age. But for most people the euphoria was momentary, the aftertaste bitter.

More and more old ladies stood patiently in lines outside metro stations hoping to sell a treasured possession, a cigarette or two, or a wilting posy of wild flowers to buy some food. Infants died of malnutrition; young women and children were recruited for the prostitution and pornography industries, and not a few of them exported. The use of drugs increased, forgotten diseases like typhus returned and new ones like AIDS, virtually unknown in the Soviet era, began to spread. The welfare system that had for so long sheltered the population steadily deteriorated. The birth rate rapidly declined; the death rate soared.

As in the Time of Troubles four centuries earlier (See Chapter 6), disaster struck six years out of seven, in the form not of unusual weather and crop failure this time, but of precipitous industrial decline. By 1998 the
country’s gross national product was less than half what it had been in 1990. Young scientists emigrated, and capital, desperately needed for investment, flowed out to foreign bank accounts. One of the brighter spots in the new, dark world, was shone by schoolteachers who continued to turn up in their classrooms even though some had not been paid for months.

What was the source of the disaster? Was it the inevitable consequence of an inevitable transition? Was it due to Communism and the bad habits it encouraged; or, as many Russians believed, the work of the United States? Washington certainly wished former Communist states to join the free-trade system and, as Bismarck had noticed a century and a half earlier, free trade favours robust economies, not vulnerable ones like Russia’s. Could it have been the fault of Russia’s own corrupt elite, the so-called
nomenklatura,
many of whom had also occupied important positions under Communism? Or were misconceived policies of the new men led by Boris Yeltsin and their advisers to blame?

The decline had begun under Gorbachev but little had been done to stop it. Inflation continued to spiral upward, reaching an annual rate of over 2,000 per cent before it eventually abated. The social impact of this factor alone was immense. Savings were wiped out; investment ceased. The International Monetary Fund advanced loans with conditions attached and some of the richer countries pitched in, notably Germany, which advanced Russia the equivalent of over $24 billion between 1989 and 1993,
¹
but most of these loans fell into the wrong hands and eventually disappeared into numbered Swiss bank accounts and American stocks.
²
All that accumulated for Russians in Russia was foreign debt, which had hardly existed in the Soviet era. On the other hand Russia was no longer burdened by empire. It had shrunk almost to the frontiers of 1700 in Asia and of 1600 in Europe, and its population was now no more than 150 million. This was a manageable size for an economy, and Boris Yeltsin now proceeded to dismantle and rebuild according to a new model.

Yeltsin’s understanding of economics was limited, but he followed the advice urged upon him by the West and set young Russian economists to the task. American free-market theory provided the framework, and shock therapy was favoured over gradualism. The ideas of the Harvard economist Jeremy Sachs, which had recently accomplished an apparent miracle in Poland, were particularly influential, and the revolution was implemented in a hurry. It seemed that this would make the transition painful but short, but according to Anatolii Chubais, one of those chiefly responsible for the
manner in which the transformation was undertaken, there was another, political, motive. Yeltsin was anxious to destroy the base for any Communist revival in the future.
³
So was Washington. Together they succeeded.

On 2 January 1992, the day after Russia began its separate existence, most prices were freed from state controls — though those for oil and other natural resources were kept so low that vast quantities were sold on abroad for profit. To make the new, higher, prices in the shops more affordable wages were raised, which meant further increases in the money supply. So did the huge subsidies doled out to public utilities. Together they led to a further spurt in inflation. This was eventually curbed by high interest rates, but investment dried up as a result. Furthermore, it suddenly became apparent that the lack of adequate financial institutions was a serious impediment. As the chief IMF economist remarked, the government had ‘tried to take a short cut to capitalism, creating a market economy without the underlying institutions, and institutions without the underlying institutional infrastructures’.
⁴

Capitalism cannot work its miracles without capital, and with foreigners reluctant to invest and newly rich Russians spiriting their assets away to foreign banks, no miracle was possible. Before long about $2 billion was leaving the country each month — more than all the aid, loans, credit and investment that were coming in.
⁵
So far things had gone very badly wrong. It seemed that the only way to create the elusive economic miracle was to stimulate appetites and let greed off the leash.

This was soon done. In August 1992 Yeltsin signed a decree disposing of state property to raise money. Vouchers were issued entitling every adult in the country to 10,000 rubles-worth of shares in the enterprise or institution with which they were associated. Alternatively they could sell their vouchers. Voucher auctions would be arranged. The randomness of the method met with the approval of Western economic theorists. Most people might have no idea of value, they said, but the vouchers would surely end up in the hands of people who did. And so it turned out. Most Russians, bemused by the process, sold their vouchers — many of them to touts who offered ready money for them on the street. Managers and new businessmen, who had a better understanding of values than the general public, made killings and manoeuvred themselves into positions to make more. The proceeds, intended to reduce the state’s massive deficit, turned out to be disappointing, however, because during the interval that passed before they reached the treasury their value had been savaged by inflation. On the other hand gigantic windfall profits went to a handful of sharp-eyed and unscrupulous operators who exploited the reformers’ mistakes.

The beneficiaries were mainly young men in the know. Since there were so few of them, and the industries they came to control dominated the Russian economy, they were soon wielding political power as well as financial clout. Aside from Viktor Chernomyrdin, a government functionary who was no longer young, the first generation of multimillionaires included Mikhail Khodorkovskii, Vladimir Gusinskii, Petr Aven, Roman Abramovich and Boris Berezovskii. Able youngish, civil servants, city functionaries, economic advisers, scientific researchers, they turned themselves into
biznesmeny
and swiftly graduated to become tycoons dominating important industries — aluminium, natural gas, air transport, banks, the media, and oil. Several of them came to be closely connected with organized crime as well as with government, for the atmosphere, in Moscow particularly, closely resembled that of Chicago during prohibition and they needed protection, whether from former KGB operatives or from the Chechen and other organized mobs.
⁶

While the plutocrats counted their assets, the masses counted the costs of the transition. At least a third, and probably over half, the population had been forced below the poverty line, and the health statistics of the first years of post-communist freedom told their own story. Between January 1992, when the switch from a planned to a market economy began, and June 1994 the death rate in Russia rose by over 30 per cent, to a level unknown in any country that was not at war or suffering from famine. The rise in mortality among males of working age was particularly steep. They died from heart attacks, strokes, alcohol poisoning, suicide and murder. A UNICEF study attributed the sharp increase in adult deaths to stress arising from fear of unemployment, although despair at the collapse of a familiar world seems also to have played a part. A dramatic increase in infant mortality, which more than doubled in the period 1991-3, was no less alarming. Child health had been improving steadily until 1990.
⁷
Now, suddenly, health-care services and education were in danger of collapse. They would have done so had conscientious teachers, doctors and nurses not continued to work even when their modest salaries were unpaid. And unpaid workers isolated amid the vast wastes of the north also worked on for lengthy periods without reward simply because they and their families could not afford the costs entailed in moving and starting a new life elsewhere.

In December 1993 President Yeltsin approved a new coat of arms for Russia. It took the form of a Byzantine eagle with two heads surmounted by three crowns.
⁸
It might seem odd that Yeltsin, who had played a key role
in stripping Russia of empire, should have adopted this imperial symbolism for the new, truncated Russia, but it was not the only irony. A former Communist
apparatchik,
he was now the scourge of Communism. This and his pious commitment to the cause of democracy, which he paraded as religiously as any seventeenth-century tsar paraded his commitment to Christ and all the saints, commended him to Washington and London, despite the fact that only two months before adopting the imperial insignia he had ordered troops to launch a bloody attack on parliament and shut it down.

A clash between the democratically elected President and the democratically elected parliament was, perhaps, inevitable. The social cost of transition had been causing great distress and alienating people from economic reform. Many Russians who had believed the promises that market reforms would conjure up an economic miracle were now disenchanted; nostalgia was growing fast for the past that had been lost, and the change in mood was reflected by parliament. The truth was that, given Russia’s circumstances, democracy was incompatible with a market economy.

It made for a fraught political scene. Accusations of corruption had been flying; an attempt was launched to impeach President Yeltsin. Despite the frantic efforts of his political staff, he received only a narrow endorsement in a national referendum, which had also rejected his proposal to dissolve parliament. At this point one of his staunchest supporters, the former air-force general Aleksandr Rutskoi, suddenly joined the opposition. Appointed by Yeltsin to chair a commission on corruption in government, he had found evidence of unlawful dealings leading straight to the door of the President’s office and implicating several of his associates. Rutskoi denounced him on television, and was himself accused in his turn. So the President’s stand-off with parliament continued.

Negotiations on the constitution made some progress, but on 21 September Yeltsin announced that he was dissolving parliament. The Supreme Court declared this to be illegal, and demonstrators, some of them armed, gathered in the parliament building. Security troops then surrounded the building and cut off all services to it. An ultimatum was delivered: the parliament building must be cleared by Monday 4 October. On 3 October crowds marched to the television tower and the parliament building. There were exchanges of fire, and at least 100 casualties. Yeltsin had won. It has been suggested that the parliament and its defenders were partly to blame for the bloodshed. However, Roy Medvedev has found evidence of Yeltsin’s intent to abolish parliament, if necessary by force, whether it was defended or not.
⁹
So the people’s defenders were defeated, and a constitution which increased Yeltsin’s powers as president was
imposed. In the words of a leading Western historian of the post-communist period, Yeltsin had got his way only by the use of ‘methods involving electoral fraud. The birth of the new Russia was induced by anti-constitutionality, violence and corruption.’
¹⁰
Despite this, the United States issued no protest. As the leading proponent of both market economies and democracy, it regarded the former as much the more important.

By now Yeltsin was hardly popular among Russians, but the media were supportive of him, as were most Western governments. No challenger of any political stature was visible, and he did not yet have to seek re-endorsement. So he continued to preside over Russia’s transformation and its decline both at home and abroad. Auctions of state enterprises now took place. However, which huge enterprises would go to whom and at what prices was to a great extent determined by a small group of officials and businessmen in advance of the auctions, and the auction process itself was fraudulent. Competitors were bought off or threatened, and sometimes the successful bid was the only one.
¹¹
Then the government introduced a new scheme to raise money: offering the new industrial oligarchs shares in lucrative industries as security against loans. If the government was unable to repay the loans, as seemed likely, then the lenders were entitled to take possession of the shares.