Russia:
Crises in the Former Soviet Union

Aug 28, 1998

At the end of August, Russia’s president, Boris Yeltsin, removed Sergei Kiriyenko from the post of prime minister, replacing Kiriyenko with his predecessor, Viktor Chernomyrdin. While Yeltsin once again seemed ready to dismiss an ally in order to distance himself from responsibility for the growing economic disaster, this shuffle must also have been devised to calm fears in international financial circles about the crisis in Russia’s private and public financial system.

The precipitating blow to Kiriyenko was the defacto devaluation of the ruble, which he had presided over starting just the week before. But this devaluation, which has now led to what the business press is calling the beginning of a free fall for the ruble is only the latest episode in the serious crisis now hitting Russia.

This crisis burst out at the end of May, when the Moscow stock exchange collapsed, sending a wave of panic through leading financial and political circles, and not only in Russia. While Russia’s new stock exchange index lost half of its value in the space of a few days, the prospect grew of a severe devaluation of the ruble. Tens of billions of dollars poured out of the country. The Russian state, which for years has been unable to raise taxes, counted on this money to provide for its everyday expenditures. The stock exchange collapse was transformed into a political- financial crisis playing out against a background of public finance bankruptcy.

An Expected Crisis

This crisis was not a surprise. In April, then newly appointed Prime Minister, Kiriyenko, had seemed to predict it. In his program speech, he announced measures against the biggest tax debtors, adding that for want of being able to finance itself though taxation, the state was trapped in a spiral of debt, the burden of which was soon liable to absorb 70% of the country’s resources, which would create an unmanageable situation.

It has become commonplace to hear Russian leaders alternate complaints with threats against large companies which refuse to pay taxes, without, however, taking any action. This is part of a ritual, just like the reprimands coming from the International Monetary Fund (IMF), the World Bank and the main imperialist states. The imperialist bankers, who assumed the role of funding the Russian state out of fear of what its collapse would lead to, kept providing the Russian budget with fresh funds. So long as they did, its bankruptcy seemed to be kept at bay. But Russia will have to pay back these stopgap loans one day.

Last winter, when a debt repayment of 18 billion dollars came due with 17 billion more due during the year, this far exceeded the Central Bank’s available cash, which stood at only 15 billion dollars. The Russian stock market began to fall. Admittedly, the role of the Russian stock market in the economy is far more marginal than that in Europe, Japan or North America. But its collapse demonstrated the Russian wheeler-dealers’ lack of confidence in their own system.

The Russians and foreigners—who had taken advantage of the chronic cash shortage of the Russian state, buying Russian treasury bonds, or GKO’s, at an interest rate of 40% over 3 months—ceased to cover new issues. In May, the Central Bank had to raise its short-term interest rate to 60%, and then to 150%! In vain. Worse, those who had been described as investors ready to help the Russian economy take off began to massively withdraw their capital, moving it to somewhere less risky.

At the end of May, the Russian state was no longer able to make any repayment. It could not even count on the expected two billion dollars from the sale of the Rosneft oil group: for want of purchasers, the privatization of Rosneft had to be canceled the day before the stock exchange collapse. And yet the operation was the first of its kind, with the state at last authorizing foreign companies to take a majority share in a company described as a "gem of the Russian economy." In refusing the price demanded for Rosneft, the different consortiums combining Shell, BP or Elf with giants of the local economy all seemed to indicate that they too considered the Kremlin as a debtor who had lost all credit.

The "Beggar State" at the Table of the G7

At the beginning of June, Yeltsin sent emissaries to Clinton, who assured him publicly of his support. The stock market nevertheless continued to fall. The world’s financial circles, as the Financial Times put it, were "no longer content with declarations of intent, they wanted concrete results." The telephone calls from Yeltsin to Clinton and Kohl, asserting that "investing in Russia is risk- free" were not enough to convince western investors. Still less could they bring back those who had just left Russia with billions of dollars in their pockets.

Going to Germany with hat in hand, Yeltsin may have got Kohl’s moral support, but nothing more. Nor did Kiriyenko, who met with business circles such as the French CBI in Paris, persuade anyone to risk their money in Russia. Kiriyenko must have brought smiles to more than one face when he started explaining that capitalism means taking initiatives and one should not always expect to receive everything from the state. In fact, Yeltsin and Kiriyenko, despite their chic and expensively-tailored suits, are just hopeful suppliants, if not plain beggars in the eyes of the Western bourgeoisie, the representatives of a state living off charity, even if those giving to the charity are extremely self-interested.

The IMF finally decided, in July, to release the loan which it had previously decided to freeze until the Russian state had put its tax situation in order. The situation had not improved, but it had become a matter of emergency. The U.S. deputy secretary of the Treasury sounded the alarm, insisting: "Russia’s problem has the potential to become Central Europe’s and the world’s." The American state, main underwriters of the IMF, insisted that the IMF make this gesture. Immediately afterward, the club of the seven richest countries in the world, the G7, decided to consider emergency help to Moscow. Russia was of course represented, but there was no talk of a G8, even though Yeltsin is mighty proud to be part of the "club of the big eight."

Having been the world’s second greatest power less than ten years ago, this state is now reduced to begging for enough to survive on.

Crisis, "Integration" and Disintegration

There was not much time before the crisis rebounded and aggravated itself. By the middle of August, the Moscow stock exchange had fallen another 50% since the May events (and by 80% since January). The interest rates paid on the GKO were rachetting upward again, while rumors about a possible devaluation of the ruble became more persistent. In an interview in the Financial Times, the international raider, George Soros, demanded that the ruble be devalued by 15 to 25%. Many banks closed. Yeltsin, who had to make a statement, declared, as usual, that everything was under control and that no devaluation would occur.

On Thursday, August 17, Russian authorities revealed that they had just authorized the ruble to fluctuate 50% below its rate in relationship to the dollar, although, according to these gentlemen, the word, "devaluation" was not appropriate! In the wake of this de facto devaluation, Russian authorities decided to suspend for several months all reimbursements of internal and external debts. Russia and its state were unable to meet their debts. The ruble continues to fall drastically and all currency exchange was suspended.

Will this devaluation provoke a series of striking failures among the banks, as some people say? One thing is sure: it will drastically decrease the standard of living of the population. And its effects will come in addition to the "very powerful" austerity package already announced in June by Kiriyenko (beginning with the layoff of 200,000 state employees).

Nobody can forecast the way this crisis can develop, even in the short run. Indeed, in June, when there was the first big alarm, some people thought they could predict that the danger was overcome. We have seen the result.

Why this crisis? What does it reveal?

The first observation is the most obvious one: it reflects the integration of Russia into the world financial system. At the same time, the origin of the crisis and the course it has taken show the limits of this integration.

Of course, it is now possible to invest money in Russia and withdraw it just as easily, something which would have been unthinkable in the Soviet era. But who are the people who do this, and for what purpose?

First of all there are the nouveaux riches. These are the people who plunder the economy and the state and who export, legally or otherwise, everything they can lay their hands on: raw materials, industrial and agricultural products, gold, diamonds, hard currency and art treasures. The money obtained from what they sell abroad is known to have been a boon to certain tax havens and to businesses dealing in luxury properties, from the French Riviera to Florida. This plundering of Russia is estimated at no less than 100 billion dollars since the collapse of the Soviet Union.

However, this "export plundering" is just one aspect of a more general and much greater internal plundering of the state and the economy. This plundering is carried out by the top-level bureaucrats, who were already, in the days of the Soviet Union (or who have since placed themselves there) at the head of the big industrial corporations and financial conglomerates which constitute the bulk of the country’s economic power. These bureaucrats have laid their hands on sources of economic wealth formerly or still belonging to the state. Whether they privatized these companies or left them still belonging to the state does not make any difference, for the problem is a social one and not a legal one. While these top bureaucrats/businessmen are at the head of enterprises which are supposed to help support the state, they are the first to default on taxes and thus to financially throttle the state, that is, their state. Ironically, those ministers or regional governors who lament the insolvency of a state whose public finances have been bled dry are the same people (or their friends or relatives) who plunder the state budget by refusing to pay their taxes and exonerating their companies from export taxes and duties. Chernomyrdin himself provided an extreme example of such behavior. In his earlier stint as Prime Minister, he spent six years condemning tax debtors, including Gazprom, the world’s biggest gas company—which he had run and still runs through one of his men.

Obviously, unable to declare itself bankrupt nor to keep the bureaucrats’ hands out of its coffers, the Russian state had no choice: it had to obtain funds by other means. Outside the country, as we know, it begs from the IMF, the World Bank and anyone else who can help it out. Within Russia itself, the state has also found the means to escape from its financial impasse, at least on a day-to-day basis. It does so first by doing what all states do in such circumstances: by selling off its gold reserves and printing money as fast as possible, issuing government bonds, GKO’s and other types of treasury bonds. The privatization of a number of companies has less to do with ideological or "reformist" considerations (that is, to drive a capitalist transformation of society) than with the state’s need to find fresh money as quickly as possible, even by selling off its companies at "fire- sale" prices.

The results were immediately visible: galloping inflation with, as always in such cases, the resulting impoverishment of the working population and rapid enrichment of those closest to the treasury’s printing presses.

To obtain takers for its much-vaunted GKO’s, even for only three months, the state had to offer astronomical interest rates even before the crisis broke out. To attract lenders, local or otherwise, who might otherwise invest their funds in western Europe or America, the Russian state had to compensate for its lack of credibility by the promise of colossal and almost immediate gains. This meant entering a vicious cycle: in borrowing at ever more prohibitive rates from the very people who were bleeding it dry, the state could only increase its deficit and itself accelerate the plundering of public finances.

The specifically internal factors fuelling speculation were exacerbated by those referred to as "western investors."

It must be noted that estimates of foreign investment in Russia, and more generally in the states of the former Soviet Union, tend to vary considerably. One of the reasons for this is the volatility of most of these investments. But then the credits of international organizations and exclusively financial investments are also frequently mixed in with those concerning production. While official statistics rarely make the distinction, only a very small percentage of foreign capital entering Russia is intended for productive investment. And even on the rare occasions where investment is intended in productive enterprises, the Western capitalists’ aim is almost always to buy up existing companies with very little modernization with the aim of using them to win a share of the local market. There is no certainty, moreover, that such productive investment will last. In many countries in the Third World, western corporations have done the same thing and then allowed companies which became unprofitable to rot: it did not cost them much to abandon something which had not cost them very much to buy but which had given them handsome profits while it lasted.

It is true that the gas, oil and mineral sectors attract western investors. But this is limited, as the postponed sale of Rosneft indicates. As the price of raw materials falls, their plunder becomes less profitable, especially given the heavy investment in equipment, which may take years to pay off. With the GKO’s, on the other hand, it only takes three months to get the initial investment inflated by at least 40%. To invest in production, it is also necessary to have confidence in the growth of a solvent market for those goods. The West obviously does not have confidence in Russia. The capitalists need a minimum degree of confidence in the state’s ability to guarantee institutional stability and a legal framework for investment, in short, the "rule of law" as western journalists say. Then there are those regions where disorder or even war discourage even the boldest among them.

Thus the bulk of capital goes into speculative investment. In the speculators’ panoply, the GKO’s play roughly the same role as "junk bonds" in the West, which, as every one knows, are an accurate description of what they are. Investing capital in junk "financial products" is obviously less risky in the United States than in Russia. But it is also less profitable. Hence the brief popularity, in these circles, of the Moscow stock exchange... shortly before its collapse.

When this collapse began, commentators drew a parallel with what had just happened in the Asian financial markets, a take-off followed by a crash. The same scenario took place in Moscow on a smaller scale, but also more quickly. In 1997, after the Asian crisis had broken out, some of the mass of speculative capital which moves from one country to another in search of quick profits, was transferred to Russia. It was attracted by the highest yields on state bonds in the world. Obviously, the risk was proportional to the expected profit. And, as soon as the first cracks appeared, the speculators fled immediately. The billions, which had been "invested," merely speculative capital, disappeared in no time! Within a few months, capital flight emptied the state’s coffers, and almost plunged the country into bankruptcy.

Russia’s integration in a world dominated by imperialism has brought essentially only the plundering of the state and the economy.

The Destruction of the Economy

The financial crisis occurred mainly in Moscow, the center of the Russian economic-financial pyramid, and a few isolated places in the country. The rest of the Russian economy—or rather what is left of it after production has fallen 50% in six or seven years—functions in a different way.

In the days of Soviet planning, despite the serious distortions and waste due to bureaucratic management, companies formed close links with each other, sometimes over decades. But then the Soviet Union disintegrated. The political leadership of the bureaucracy suppressed planning, along with the central body in charge of planning. This only confirmed—and accelerated—a de facto situation in which the local bureaucratic clans controlled particular enterprises or complexes.

But the links between the enterprises did not disappear everywhere overnight, because the enterprises needed to trade with someone. There was no local market. And potential Western trading partners refused to do business with them because the Western press and government bodies described them as "insolvent." Quite naturally, the former Soviet companies sought to consolidate existing links, and restore former links that had been destroyed. They relied on a kind of barter economy, a holdover from the old system of bureaucratic planning, with all the scheming and misappropriation, so characteristic of the Brezhnev period. This is not at all marginal or limited to a few enterprises. It applies to the whole country and to what is left of an economy which does not yet function according to the market.

In an article entitled "It is Now Possible to Pay Only in Exchange Vouchers," the March 13th issue of the newspaper Izvestia devoted its front page to a description of how companies practice barter among themselves: "Since the beginning of the nineties, exchange vouchers have become solidly anchored in the lives of the country’s production companies as a remedy for insolvency. In conditions of total absence of any means of payment, recognition of a debt providing for deferred payment in goods or services acts as a mode of payment and a substitute for money." The newspaper went on to report that "specialists believe that 45 to 60% of payments in the country are made in a non-monetary form." This is even more important than it seems since, in Moscow, where the country’s wealth and foreign investment are concentrated, payments usually are made in money.

Obviously, western press correspondents make little or no mention of this—whether because of conformity or ignorance, or maybe because they can’t imagine how most people live since they stay in Moscow.

In the capital and big regional cities there are probably more banking agencies than anywhere else in the world. But the banking system does little to serve the real economy and finance production. However, banks do serve the bureaucrats and the nouveaux riches, who can be seen gathering at all hours of the day in front of the panels displaying hard currency prices. And this is probably why there are so many "monetary exchanges." This system is even more useful for bureaucrats discretely to wire overseas the wealth they have plundered at home. And as we saw at the time of the crash, foreign capital coming into Russia is mostly volatile speculative investment.

Seven years after the disintegration of the Soviet Union, the free movement of capital into and out of the country is not leading to the building up of production, but rather to its destruction.

An Old Problem

Only a few days after the crash in May, it was revealed that a sixth of the 1997 budget had disappeared. The chairman of the Russian Audit Commission revealed that in 1997 the equivalent of 20 billion dollars had disappeared through corruption and "bad management."

This inability to master public finances and the economy is nothing new. Its fundamental cause is the weakness of the Russian state toward its own bureaucratic caste. Even though the ex-USSR is on its way toward a bourgeois society, the bureaucracy, that is, the social layer that owes its own privileges to ties to the state, is still the principal plunderer. And the state can do little about it. In the view of imperialism, this weakness is Russia’s major problem, because it can do little to prevent the country from sinking into generalized anarchy. As a result, foreign capitalists refuse to invest there. Of course, this does not prevent the imperialist states from subsidizing the Russian state. They pay in the hope that this money might help prevent generalized and uncontrollable anarchy in the largest country in the world.

Over the past 10 years, the decomposition of the Soviet and then the Russian state apparatus was brought about by the different clans inside the bureaucracy who wanted to obtain an increasingly large share for themselves in the plundering of the country. Therefore they wanted to do away with any control by a central authority.

This process of decomposition was legally ratified at certain stages, starting with the dissolution of the Soviet Union and the formation of the Commonwealth of Independent States (CIS) in December 1991. This process continued. In 1993 Russia extended autonomy for the "89 subjects of the Russian Federation." Several of these supposedly autonomous republics inside Russia, including Sakha in 1992, Tatarstan, Bachkortostan, Kabards and the Balkars in 1994, North Ossetia in 1995, then imposed "bilateral treaties" on the central government.

In Chechnya and other republics in the Caucasus, this decomposition has accelerated. The leaders of armed bands, who use terror to impose their rule on their populations, contest the authority of the local government from all sides.

This disintegration can be halted only when the local government is strong enough to impose its authority on the whole bureaucracy and all its cliques in a region. But at the same time, this local bureaucracy and its leader can also then force the central government to abandon all control (fiscal, legislative, institutional, financial, economic, and sometimes even diplomatic) over it.

In an article entitled "Bachkortostan, a Small Business with a Tyrannical Boss," the French daily, Libération, recently described such an example in the former Bashkiria, where the former president of the local Supreme Soviet in the days of the Soviet Union, named Rakhimov, has become president of this republic in the Urals. He now goes by the name, "Father of the Bashkir nation."

In this oil republic, says the French daily, Libération, "the key petrochemical sector is entirely under his control," as is nearly the rest of the economy. "In order to keep control of financial resources, Rakhimov has prohibited the entry of the big Moscow banks .... Privatization had hardly begun. The big companies have been converted into shareholding companies, but no capital has been invested. The result is that the ‘privatized’ companies are on the brink of bankruptcy and the state is talking of re- nationalizing them."

From Moscow, Rakhimov obtained the right for his republic (and here the word "his" is to be taken literally, since Bachkortostan is the property of his family and his clan) to be the exclusive owner of its natural resources and to renegotiate each year what it does or does not pay into the federal budget. Rakhimov obtained this by presenting himself as the guarantor of stability and order. The opposition press is effectively banned. Opponents can be jailed for "insulting the president." According to the constitution, the district heads, are supposed to be elected. But instead Rakhimov appoints them. He then relies on these people to hold the country and the population under his sway. According to the same daily, Rakhimov "has posed as a protector of the people threatened by the ‘uncontrolled transition’[the privatizations] being conducted in Moscow."

In exchange for Yeltsin’s concessions to him, Rakhimov supports Yeltsin in national elections. Rakhimov ignored decisions taken by the Russian Supreme Court ordering him to accept, as candidates in the local presidential election, three known dissidents that Rakhimov’s government has disqualified. But the Kremlin says nothing because "it is grateful to him for the stability of the republic."

Getting support at one point from Moscow and at another point from the population, the Bashkir Bonaparte firmly holds onto his republic and the economic sources of the privileges of the local bureaucracy. Having found a token opponent among his ministers for this election, he has managed to have himself re-elected as president with "only" 70% of the vote. Like any self-respecting dictator, Rakhimov knows that there is no better opposition than a gagged one.

Rakhimov is not the only person in this situation. "Mini-kings" of the Russian regional bureaucracy, who came out of the nomenklatura, are now discovering the charms of "democracy."

Given the chaos which reigns in Russia and the weakness of the Russian central government, someone like Rakhimov might seem like the ideal solution for those in Moscow who periodically call for a "strong government" headed by an uncompromising leader. But while Rakhimov has imposed his power, free of all control from the population, he is also outside all control from Moscow. So, if Moscow cannot even collect taxes on Bashkir oil, how will Moscow be able to reinforce the "center" over Russia as a whole?

In the course of its political, economic, stock market and military crises, the former Soviet Union is constantly sinking into ever deeper chaos. Above all the laboring classes pay the price. Even before the stock market crash revealed the insolvency of the state, this insolvency was no mystery for the country’s workers. For years they have been receiving their wages several months late. This often leaves them with no alternative but to go on strike and block the country’s lines of communication—as the miners have been doing for several months—until they obtain part of what is owed to them.

The disintegrating bureaucracy is leading the country into an impasse, from which there doesn’t seem to be an escape. All the promises of economic "modernization" and the effort to restore capitalism, have only led to a wholesale collapse of the economy and the whole of society. Even the most ardent optimists, for example, the IMF, no longer seem to believe that they can do much about it. If this collapse continues, the only things awaiting Russia and the whole of the former Soviet Union will be increasing poverty, plunder and chaos.

Only the working class can lead the former Soviet Union out of this dramatic impasse, out of what has already turned into a hell for the whole population, even before the completion of the counter-revolution that was initiated a few years ago.

Will the working class be able to pick up this challenge? Can it find within its ranks the men and women who will enable it to offer the only possible way out of these multiple crises brought on by the bureaucrats on their way toward the restoration of capitalism? Only time will tell.

Once again, however, this is the only possible way out for the workers and, behind them, the entire former Soviet society.