A wild ride of Russia

Published : Aug 18, 2001 00:00 IST

GOVIND TALWALKAR

Post Soviet Russia by Roy Medvedev; Columbia University Press; pages 394, $37.50.

WHEN Boris Yeltsin became the President of the Russian Federation in September 1991 after the dissolution of the Soviet Union he and his aides were convinced that the privatisation of Russian industry was the only course open to them. They were in a hurry to usher in this 'revolution' which proved to be a wild ride. They described what they were resorting to as shock therapy. It proved, however, to be only a shock and no therapy.

Roy Medvedev, the Russian historian and publicist, has now come out with a book describing in detail how, in the course of 10 years, Yeltsin and his colleagues brought Russia to the verge of bankruptcy. He has substantiated his arguments with a great deal of statistics. His sources are Russian.

Medvedev says that too much centralisation and state ownership had brought Russia to a dead end, which necessitated a drastic change of policy. This change had to be gradual and well-thought-out. Instead, Yeltsin accepted the advice of people like Gennady Burbulis and Yegor Gaider to go in for a market economy and privatisation. Yeltsin discarded able persons from his own circle and appointed to key posts persons who had no experience in industry or administration. Medvedev gives thumbnail sketches of various personalities, which are helpful in understanding the situation in Russia. Yeltsin and others were pressured by the International Monetry Fund (IMF), the World Bank and some western economists to go on a fast track.

Burbulis was Yeltsin's chief of staff. Yeltsin was keen to preserve his power, and so was Burbulis. Yeltsin therefore appointed Gaider, a mediocre, bookish economist, Prime Minister. When others said that it would take at least four years for Russia to liberalise the economy, Gaider was insistent that one year was sufficient. Prices began to rise immediately and Moscow became a gigantic venue for the biggest sale of the century.

In the first quarter of 1992 prices rose by 800 to 900 per cent. The price of salt rose from 9 kopeck to 9 rubles a kilogram. Prices continued to increase through the year. One estimate is that the average increase was by 250 times. This greatly increased the need for currency, which was in short supply. People then had no other course but to resort to barter and pay wages in kind. Because of the rising inflation and currency famine, substantial foreign currency earnings remained hidden and found their way to foreign countries. According to one estimate, this kind of outflow amounted to $1 billion a month. Sensing danger, Yeltsin replaced his team. He did this on several occasions during the course of the nine years of his rule. It was not that all the disgraced persons went into oblivion. Some returned to power again and again.

Yeltsin opened up the market and thought that competition would improve quality and make Russian industry efficient. But there was no competitive climate. With no government protection, the industries found themselves at the receiving end. Besides, they were faced with competition from imported goods. Russian industries then had to reduce production. Many went bankrupt and many others had to lay off workers. Although the consumer industries in the Soviet Union were in poor shape, military industries were successfully competing with the West. Medvedev asserts that the former had potential, and had the political leadership been wise it could have gradually transformed and privatised a part of this sector. This could have provided a modern and efficient industrial base to Russia.

Even Hungary and Poland, which had started privatising their economies ten years earlier, were facing numerous problems. East Germany was in a better position even under Communist rule compared to other East European countries. After the unification of East and West Germany, the Eastern part received a massive dose of capital from the Western part. Even then many factories had to be closed down, giving rise to unemployment. Russia received no such investment. Gaider and others were confident that with their policy of liberalisation, Western capital would start flowing in. They also thought that the sale of state-owned industries would fetch billions of dollars to the state's coffers.

Yeltsin's government came out with the novel idea that as state property belonged to the people, everybody should get something from the sale of state industries and properties. A committee was appointed to transact this business. But there was no unanimity about methods and principles in the committee or among the officials in different parts of the Russian Federation. The committee computed that the productive capacity of the Russian Federation was 1.2605 trillion rubles. Dividing this by the number of citizens, everybody was to get 8,467 rubles. This amount was to be given in the form of vouchers. These vouchers, however, were not backed by a government guarantee. Nor were they given to individual citizens in their names. They were allowed to be bought and sold or could be used as collateral for loans. The privatised industries were not bound to accept them against shares. In no time inflation brought down the value of these vouchers, and they became worthless.

The management committee could not scientifically assess the net worth of any enterprise or property. It sold most of these for a song. Medvedev gives some examples. A shipyard in St. Petersburg sold for 150 million rubles, while a children's store brought in 701 million rubles. A gigantic auto plant of ZIL in Moscow was sold for 800,000 rubles. The Machinery Manufacturing Plant was the largest in the Soviet Union and is still the largest in Russia. It employed 100,000 persons. But to the committee the plant was worth only 1. 8 billion rubles, that is, just $2 million at the then prevailing exchange rate.

Who could buy such enterprises? Those who were in charge of industrial plants and the managers of various government properties were able to bid. Most of all, those, who had held offices in Komsomol, the Communist youth organisation in the Soviet Union, were in an advantageous position. They easily got permits and credits from the banks. Komsomol businessmen dominated the show business, also tourism and gambling. The profit from international trade also passed through their hands. Komsomol had been dissolved earlier, but this did not affect the influence of its office bearers.

When it came to selling raw materials like oil, metals, chemicals and petroleum products in foreign markets, it was Russians who dominated, as they could get the necessary licences. However,the profits did not go towards building industries and other productive enterprises. Huge amounts were spent on palatial houses with all sorts of gadgets and luxuries. These new Russians are criticised for their moral nihilism. Much larger amounts were spent on purchases of real estate in Switzerland, Germany, the United States, Portugal, France and so on. In 1994 these new Russians spent $7 billion on travel alone, which is more than the loan that the IMF gave Russia. In this atmosphere it is but natural that a shadow economy played a dominant role. Also, billions of dollars were deposited in countries known to be tax havens.

Research and investigation found that 40 per cent of these millionaires admitted that they were previously involved in illegal activities, and 25 per cent still had connections with organised crime. All over Russia, crimes of every description have gone up considerably.

It is no wonder that the foreign debt of Russia has mounted in the last 10 years. In 1993 it was $82 billion, while in 1996 it was $150 billion. In 1997 Russia's foreign debt was $900 per capita. So a substantial portion of gross domestic product (GDP) is spent on debt servicing.

The Government was terribly ignorant about the import of capital goods from the West, and it spent large amounts on plants that were not necessary. The Chinese, on the other hand, purchased outdated plants from Western countries and thus saved on costs. These plants were quite useful to the not-so-developed countries. The Russians could have followed the Chinese example.

At the same time, thousands of thriving small businesses employed hundreds of thousands of people. But this sector did not receive much attention from the government.

All this created popular unrest and a political crisis, which also resulted in a confrontation between Yeltsin and various political parties in the Duma. Ultimately, when there was a stand-off, Yeltsin went to the extent of ordering the bombardment of the parliamentary building. Medvedev gives a blow-by-blow account of the stand-off.

All these events led to an election Yeltsin won, but his base had been eroded. According to Medvedev, Yevgeny Primakov, who was appointed Prime Minister for some time, was the right person to stem the rot. But Yeltsin did not want a powerful Prime Minister. Primakov found that the political crisis was much deeper than he had imagined and that corruption was all-pervading. Yeltsin would not have a person who wanted to handle this problem, for that could have got him into trouble.

This chaotic political situation gave some strength to the communists; but they could not wrest power as they could not muster enough popular support in the elections. Medvedev writes a full chapter explaining the views of Gennady Zyuganov, the communist leader, and his programme. Zyuganov's views seem to be an amalgam of Marxism, aggressive nationalism, faith in the Orthodox Church and also visions of a special destiny for Russia.

Yeltsin became politically and physically weak and he thought it better to step down when he could strike a political deal. Thus, Vladimir Putin came in. Putin, it seems, is tackling the problems to the best of his abilities, but he faces a very daunting situation.

This account of the wild ride of Russia can serve as a warning to the Indian government, which has launched on a course of liberalisation. This course is not easy and must be undertaken with great care. A fast pace may bring in chaos, as it did in Russia.

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