Source: Carnegie
World Link, July/August 1999, pp. 36-40.
After the financial crash last August and multiple government crises the popular
perception of Russia is at a low. Anything is being said about Russia that is
sufficiently pessimistic. Some describe President Yeltsin as a dictator. A new
discussion has started about Russia as a failed state like African countries
such as Somalia, Congo and Liberia. Talk of possible social explosions never
die. No article is written about Russia without emphasizing organized crime.
Inded, Russia's gross domestic product this year in current dollars is likely
to equal the GDP of Sweden, although its population is sixteen times larger.
The situation is certainly bad, but the image has become overly pessimistic.
The most important question is whether Russia's decline is likely to continue
or whether we have reasons to look for a turnaround. Russia excites and worries
us. In Soviet times, the economic and military strength of the country was overstated,
and now the same is true of its weakness. My view is that Russia is far more
normal than is generally thought, and that it is likely to have come out of
its nadir, although it is still early to tell.
Vintage Yeltsin
President Boris Yeltsin's sacking of Prime Minister Yevgeny Primakov on May
12 was generally perceived as a political vagary, showing how unstable Russia
really is, but let us look more closely at these intriguing events. From January
1999, Yeltsin had shown his disapproval of Primakov. It started with Primakov
making a proposal securing his post till the next elections, which would undermine
the President's constitutional powers. From March, Yeltsin and his advisors
had undertaken lots of preparatory steps. Yeltsin sacked his cheif of staff,
who was a Primakov loyalist. He reorganized the former KGB to oust 150 Primakov
top people in early April. His loyal Minister of Interior Sergei Stepashin was
promoted to first deputy prime minister. Former Prime Minister Viktor Chernomyrdin
was appointed the President's special envoy to Yugoslavia to take the key foreign
policy issue away from Primakov. The sacking of Primakov was thus well prepared,
widely expected and fully in line with the constitution.
The problem with Primakov was not only that he was very popular, but that he
ruled in an alliance with communists, and Yeltsin was elected for standing up
against the communists. The chief worry in the President's camp was that Primakov
was becoming the inevitable next president, and that he and the communists would
use the government apparatus and financing for the parliamentary elections next
December and the presidential elections in June 2000. As Primakov had no political
organization but the government, he has effectively been excluded from the presidential
race through his ouster despite lingering high popularity. On their own, the
communists are no longer a serious threat. The timing was important. Earlier,
the communists were too strong. Later on, Yeltsin advisors feared that Primakov
would be too well entrenched.
For about a year, the communists have threatened President Yeltsin with impeachment
on largely absurd grounds, such as genocide of the Russian people because of
market economic reforms. The communists have shrewdly delayed the impeachment
time and again to maintain their intimidation. By ousting Primakov, Yeltsin
forced them to unleash their action and thus called their bluff. They could
not muster the necessary two thirds majority of 300 votes in the State Duma
but got only 283 votes on the best of five counts. This dismissal of the impeachment
was a serious loss of face for the communists.
President Yeltsin swiftly nominated Stepashin as Prime Minister, and the State
Duma realized that he was the best man they could hope for. Within a week the
Duma confirmed him with no less than 301 votes. By May 31, Stepashin had completed
the formation of his government.
In sum, this was a vintage Yeltsin performance. With impeccable timing, he got
rid of both Primakov and impeachment, weakening the communists. Acting completely
in line with the constitution, he reinforced the constitutional and democratic
order in Russia. The whole process was peaceful. The communists only managed
to mobilize some 500 of their most faithful for a street demonstration in Moscow.
If Yeltsin and his advisors are capable of carrying out such an elegant constitutional
procedure, Russia's democracy is in better shape than generally perceived. Clearly,
Russia's constitutional order and electoral democracy are firmly established,
while the political struggle is somewhat tougher than is considered appropriate
in liberal democracies.
The Shady Side
While these were the dominant features, the subtext is less beautiful. At the
same time as Yeltsin made Stepashin Prime Minister, he appointed the Railway
Minister Nikolai Aksenenko First Deputy Prime Minister, as a counterbalance
and alternative to Stepashin. Aksenenko belongs to a series of big, loud state
managers who have won Yeltsin's sympathy. The most conspicuous of them was Oleg
Soskovets, who was First Deputy Prime Minister from 1993 to 1996. He is famous
in the Russian administration for always having asked two questions: "How
much is my share?" and "On what account?" Aksenenko is reportedly
a co-owner of the company Eurosib, which is registered in Switzerland and sells
transportation on the Russian railroads internationally. From his position as
railway minister, Aksenenko could make sure that the Russian railways sold transportation
cheaply to his own company, which is considered to have made him a great fortune
even by Russian standards. Aksenenko is thus a prime example of the confusion
between government, enterprise and personal interests which is the chief shortcoming
of post-Soviet states. His appointment is a disgrace for President Yeltsin,
as this is a man who is used to make money on the state rather than serving
it.
Aksenenko's partner in Eurosib is reportedly a young secretive businessman Roman
Abramovich, who has never given an interview to a journalist and the media cannot
find his photo. The same Abramovich is also reported to be the chief owner of
the big Russian oil company Sibneft, in which the odious Russian tycoon Boris
Berezovsky is a partner. Yeltsin's former chief bodyguard Alexander Korzhakov
has alleged that Abramovich is in charge of the finances of the presidential
family. Primakov's ouster might have been politically well motivated, but Berezovsky
was an important part of the coalition that helped to remove him, because he
had tried to arrest Berezovsky on seemingly sound grounds. Yet, as is mostly
the case, Primakov only fighting the corruption of political enemies.
The real scare came during Stepashin's formation of his government. The influence
of the alliance Abramovich-Aksensenko-Berezovsky on the President's decision
making became obvious. Aksenenko publicly demanded about as wide powers as Stepashin,
and Yeltsin did not rebuke him. The exemplary Minister of Finance Mikhail Zadornov
was forced out to give way for two first deputies with a less than stellar reputation.
The new first deputy prime minister for macroeconomic policy, Viktor Khristenko,
had the same position last summer, but he proved ineffective. The new minister
of finance, Mikhail Kasyanov, has not been much appreciated as foregin debt
negotiator in the West. The most worrisome aspect is that the inner Yeltsin
circle appears most interested in government posts on which money can be made.
Apart from the Minister of Finance they have taken special interest in the Minister
of Fuel and Energy, the Tax Service, and the Customs Service, who have all been
changed. Yeltsin missed this last opportunity to do anything about his reputation
as criminally negligent of corruption, but he ignored it.
The new government is neither left nor right, and it looks like a weak centrist
caretaker government. The presidential circle has not given Prime Minister Stepashin
a credible political mandate. Apparently, this group is thinking of Stepashin
and Aksenenko as two alternative prime ministers and presidential candidates
for June 2000. However, this group has so narrow a political base that it should
realize that it must focus on one single candidate if it were to have any chance
whatsoever to influence the presidential election. Moreover, a state manager
such as Aksenenko seems to have as little possibility as Soskovets or Chernomyrdin
to gain any popularity. Sensibly, Russians do not like people who blatantly
make money on the state. Strangely, the electoral strategy of the presidential
group appears worse than amateurish but that is their rather than Russia's problem.
Oligarchs in Decline
Does the government formation mean that the so-called oligarchs have more or
less taken power? Hardly, the opposite seems more plausible. The last year has
seen an extraordinary decline in the fortunes of most Russian tycoons, who made
their money on government subsidies and government regulations rather than on
the market. Almost all of the banks owned by oligarchs are bankrupt with a negative
capital of more than 100 percent. Vladimir Vinogradov of Inkombank and Alexander
Smolensky of SBS-Agro are virtually gone. One of the greatest, Vladimir Potanin,
has seen Oneximbank turn bankrupt, and he has effectively lost control over
Sidanko, while he tries to hold on to the metallurgical company Norilsk Nickel.
Primakov's offensive against Boris Berezovsky deprived him of control over the
airlines Aeroflot and Transaero, and he has undoubtedly lost a great deal of
money. Mikhail Khodorkovsky's bank Menatep has been closed down. He is struggling
to transfer the assets of his oil company to unknown off-shore companies, but
as his practices got too outrageous and he himself too close to Primakov and
communist ministers, Khodorkovsky is considered to be on his well-deserved way
down and out. Similarly, Gazprom nurtured close links with Primakov and is likely
to be forced to pay higher taxes for some time under the new government. Only
media tycoon Vladimir Gusinsky has managed to keep in the good books of most
politicians, but he and Berezovsky are currently fighting each other. The lesser
tycoons of the Alfa Group are surviving, but they are less wealthy and with
better reputation. They even pay substantial personal taxes.
Aksenenko and Abramovich have now risen as newly-exposed oligarchs, but their
wealth is not new, and media exposure is no benefit. The Russian establishment
is not very law-abiding, but it has its rules. If you get too strong - like
Primakov, or if you become too outrageous - like Khodorkovsky, the establishment
gangs up against you to take you down to earth. Presumably, the new troika Abramovich-Aksenenko-Berezovsky
have already gone too far in their open meddling in the formation of the government
and we can expect their punishment.
Politically, everybody is now ganging up on Moscow Mayor Yuri Luzhkov who is
front-runner as presidential candidate after the demise of Primakov. The presidential
race is opening up to new candidates, but nobody but a centrist is likely to
win. The communists can hardly repeat their dream performance of 40 percent
in the presidential run-off in 1996, and the much feared Russian nationalists
have failed to take off.
Economic Effects of the Financial Crash
The financial crash of August 17 last year brought a tremendous shock to Russian
society. The GDP fell by 4.6 percent last year and the real exchange rate has
fallen by half. The standard of living dropped by some 30 percent - presumably
more than in the prior post-Soviet period, and poverty has doubled. Some argue
that Primakov's greatest achievement was to make Russians accept this increased
poverty without significant protests.
Those who suffered the most were the young, new middle class in urban services,
such as finance and trade. Before August 1998, the ten percent wealthiest part
of the population earned 14 times more than the ten percent poorest. Today,
this rate is only 10.5 times greater. Russia's extreme income inequality has
vanished. Only in Moscow, 200,000 bank employees have lost their jobs. While
most of the oligarchs were in favor of policies prompting the crash, it undermined
their wealth and power. Their banks were exposed to unsound risks that were
punished by the crash. If you prove to be such a bad businessman, you also lose
public authority.
Last September, industrial output fell by 15 percent over September 1997, but
in recent months industrial production has risen by a few percent over the corresponding
month in 1998. The main reason is the devaluation, which roughly led to a halving
of imports, while exports have stayed at almost the prior level. As a consequence
a lot of import-substituting production has taken off, both semi-manufactured
and manufactured goods. Before the devaluation, Moscow largely lived on imports,
providing 80 percent of shop supplies. Today, even Moscow shops are flooded
with Russian goods, and they are better than your prejudices would advise you.
You can find many fine Russian products that have not been seen in public since
the 1960s. While many products are not of top quality, they are far better than
lousy Soviet goods, and there are all reasons to expect a further rise in quality.
The top producers can no longer focus on the fabulously-wealthy new Russians,
and they have to opt for the real middle class. All of a sudden, Moscow displays
a large number of new nice low-priced restaurants, whose absence I long saw
as an unfortunate market failure. The financial crash seems to have raised the
demand barrier that has forced enterprises in other countries to adjust to the
market.
The IMF has long urged Russia to collect more tax reveneus, but total state
revenues have steadily hovered around 32 percent of GDP, that is, the US level.
As the Russian government is far more corrupt and its GDP per capita less than
a tenth of the American level, state revenues should be much less, not more.
The financial crisis and the new strict attitude of the IMF have forced the
Russian government to cut its budget defitic by reducing its excessive and misdirected
expenditures, which also force enterprises to face a hard budget constraint.
The number of bankruptcies has already quadrupled, and even if most bankruptcies
are characterized by fraud, they do put an end to wasteful enterprises living
on subsidies. This year, Russia is likely to get a moderate budget deficit of
only 3 percent of GDP after an average budget deficit of 9 percent of GDP from
1992 to 1998. In effect, the average tax pressure is falling, and enterprises
can no longer live on the state in the old way. Not surprisingly, the share
of barter in inter-enterprise trade has fallen signficantly after the financial
crash, as enterprises must get hard cash to avoid bankruptcy. Yet, it is still
early to say whether Russian enterprises finally have to face hard budget constraints.
Constant Economic Policy
Curiously, the most constant factor in Russia seems to be pronounced economic
policy. Initially, the Primakov government made wild communist noises in opposition
to the prior reformist Kirienko government. It promised massive emission of
money, price regulation and the regulation of foreign trade, waving nationalization
as a potential threat. In the end, it did nothing. Reality and passivity have
surrounded the Russian government. The only economic program the Primakov government
actually adopted was the IMF stand-by agreement of April 28, which was almost
identical with the Kirienko government program.
The new Stepashin government has declared that it pursues the same economic
policy, and we have no reason to doubt that, as all other recent Russian governments
have done so. No major reforms are on the policy agenda. The IMF demands a few
minor tax laws, but they are completely marginal for state revenues. The only
real issue in economic policy for the next year is bank restructuring, and it
boils down to the question whether the Central Bank will close six of the worst
big bankrupt banks or not. Even if this is a caretaker government awaiting parliamentary
and presidential elections, it is difficult to imagine less controversy in economic
policy.
The only significant worry is that Russia will not receive the IMF money and
therefore default on not only the Soviet foreign debt and the domestic treasury
bills but also on the Russian foreign debt. However, this is a distant worry.
First, the IMF is satisfied with the Russian budget performance this year. Second,
for seasonal reasons and a rebounding economy it is bound to improve, rendering
it awkward for the IMF to refuse Russia funds. Third, the ruble exchange rate
is so low that the Central Bank easily purchases substantial reserves. Fourth,
the rising oil price grants Russia additional hard currency incomes. Russia
will get a huge trade surplus of about $25 billion this year. Thus, even if
IMF funds would not be forthcoming, Russia would hardly default and reserves,
which would at a maximum decline to $9 billion.
Russia Has Probably Passed Its Nadir
In the end, Russia does not look as bad as its reputation. There might be some
reason for the doubling of the Russian stock prices this year. Its constitution
seems to be respected and work. There is little doubt that parliamentary and
presidential elections will be held in constitutional order. Russian politics
are characterized by an amazing openness and formidable checks and balances.
The next parliament is likely to be more fragmented but dominated by the political
center, and the next president is likely to be a centrist. Then, economic policy
is also likely to be centrist, and it appears highly predictable until the end
of this year. The oligarchs seem to have lost their way, and a new group of
actual businessmen rather than court favorites are making headway in the real
economy.
It is unfortunate that Russia is not more reformist, and that no radical cleansing
of crime is to be expected. Yet, the market is increasingly making its presence
felt as state intervention in the economy dwindles by attrition and default,
and the main source of economic crime is undoubtedly the Russian government.
After all, Russia is an old historical nation, which is far more of a society
that people now seem to realize. In terms of education, Russian holds a high
European level. Popular unrest has failed to materialize, and Russia is certainly
nowhere close to be a failed state of African type. Its problem has all along
been a small nasty elite that was left without any reins after communism. Gradually,
ordinary checks and balances arise, and there is too little left to steal from
the Russian state so that wealth-maximizing businessmen increasingly feel tempted
to make their money on the market rather than on the state, as their colleagues
in Poland and the Baltics have long done. Hopefully, the financial crash marked
the low and a turning point for Russia's fortunes, and many signs suggest that
is the case.