Publication: Prism Volume: 2 Issue: 8

Below the Surface of Russian Politics: The Struggle for State Subsidies

By Mikhail Gershaft

Boris Yeltsin is fighting for a second term as president by appropriating the positions of his opponents. The national-Communist opposition thirsted to replace individual figures in the leadership, and Boris Yeltsin parted with Andrei Kozyrev and Anatoly Chubais, the last representatives of the reformist course. The opposition demanded more decisive actions in mutinous Chechnya, and fate itself gave Boris Yeltsin a chance to demonstrate his toughness in the clumsy storm of Pervomaiskoye in January.

So what can his opponents from the Communist and nationalist camp say now? Can they propose something else, something new?

In his desire to hold onto power, the Russian president is ready to take even sharper and more decisive actions. It is possible that he will soften his policy after re-election in June 1996, but this is unlikely–the inertia of toughness will not permit him to change his hue and orientation yet again. And the replacements for the reformers in the apparatus and in the government will reinforce this line. It is also unlikely that events in Russia in the next four years will give Yeltsin a reason to re-acquire the image of a "dove" and reformer.

It is obvious that this policy of "slogan-borrowing" will be successfully continued in the remaining months before the presidential elections. After all, the Russian president still has to convince the people that the country has no other, better, choice.

It is most difficult of all to "borrow slogans" in the area of economics, even though it is the processes taking place there which precede and program all the other "metamorphoses."

Boris Yeltsin can’t, and does not want to, borrow the slogans of the Russian Communists and nationalists on de-privatization, on re-nationalization. Incidentally, this is not only impossible; the former expropriators don’t even want this themselves.

At the present time, both the Communists and the present ruling elite widely proclaim the need to nationalize enterprises which have been privatized illegally. But under Russian conditions any enterprise could fall in this category. This is also a signal to property owners that they have to cough up more bribes to the bureaucrats who have the power to decide whether the privatization of a given enterprise has been legal or illegal.

A year ago, the so-called "Cotton Case II" attracted the attention of the press. (This case was given the number "II" to distinguish it from the "Cotton Case" in Uzbekistan which caused a real shock at the end of the 1980s.) Russia’s textile mills were going through a real crisis in 1993-1994. Tens of thousands of textile industry workers were left without work. Cotton, which "under socialism" was supplied from Uzbekistan on the orders of the State Planning Committee (Gosplan) and the State Committee on Material-Technical Supply (Gossnab), now had to be purchased in the former "union" republic.

The regional administrations of the "textile" oblasts conducted an attack on the government, threatening mass strikes. The majority of textile enterprises got no cotton at all. At the same time, Russia, which is not a natural producer of cotton, exported 126,000 tons of cotton in the first six months of 1994 alone, filling the markets of Great Britain, Germany, Austria, and other countries with it, astonishing the rest of the world. And this took place even though the re-export of raw materials is prohibited by law. Specialists calculated that this much cotton would have kept 25 large textile mills in operation for a year.

The heart of the problem was that Russian textile producers could get cotton at a price one-third less than the world market price, because the rest of the price was subsidized by the state. In such a situation, the valuable raw material was sold abroad. The exporters of this cotton were dozens of small enterprises, closed private corporations, partnerships, and individual private enterprises, with which the large state enterprises are literally "overgrown." But it is obvious that re-export on such a scale is impossible without state participation, or more accurately, without the participation of state officials of various ranks.

The State Commission appointed to investigate the "Cotton Case," has not named a single guilty party.

The Special "Multi-Party System" in the Russian Economy

The given example illustrates the mechanism and the sources of the formation of private capital in Russia. Those who have not yet tasted the power of giving and distributing state subsidies lust for it. And insofar as there are never enough of these subsidies to go around, this is where the fight will be waged.

Another example only serves to confirm the mechanism of forming Russian capital and the measures taken to "camouflage" it. At the beginning of the 1990s, a noisy campaign was waged, this time, to save the wool industry, and billions of rubles were spent to buy wool in Kalmykia. The money was exchanged into convertible foreign currency and went for the purchase and sale of oil, citrus fruits, sugar, and, finally, wound up in Russia or abroad, as the startup capital for numerous firms and new capitalists. According to the press–not one bit of wool was bought with the favorable credits issued by the Central Bank.

It is easy to imagine what stands behind the demands to support the "dying" domestic aviation, defense, petroleum extracting and refining industries, the agrarian sector, or, finally, the coal industry, whose strikes are constantly shaking up the Russian political scene. Without a doubt, all these sectors are really in critical condition, but it is worth noting that the representatives of the leadership of these sectors always complain that these state subsidies do not reach them, disappear, or arrive at a sharply reduced level.

There is yet another way to enrich oneself. In the fall, Izvestiya compiled and printed a list of the fifty biggest debtors on tax payments to the federal budget. The total sum of the debt of these companies alone exceeded 12 trillion rubles. In February 1996, their number and the amount of their debt not only did not drop; it grew.

The journalist, in exposing the tax-evasion mechanism, gave the example of the Siberian Nizhnevartovskneftgaz company, which was first on the list. In this case there was money paid to third companies, often fictitious, for services, and the creation of "daughter" firms, which had nothing to do with oil extraction, and therefore, not subject to the "export" tax. Over four million dollars (!) went for business trips abroad for the company’s top managers, and another 27.4 million dollars went to build a sanatorium on the Black Sea coast. But the most remarkable thing is that part of the money from the accounts of the "daughter" companies went to pay workers’ salaries. This is how the "alliance of the working class and capital" is formed and flourishes at the expense of the state budget and financial stabilization. Obviously this recipe will be used even more widely by the Communists if they come to power.

Such stories could be told, not by the dozens, but by the hundreds, although only an insignificant number of them have been made public, and even fewer have ended with the punishment of the guilty. Although Russia’s prosecutor general speaks of "potentially big cases" of corruption in the upper echelons of government, these will be exploited for political ends.

The federal authorities are trying to shut down the channels through which money "leaks out" to enrich corrupt officials. In February, Boris Yeltsin created a special commission to oversee the movement of financial resources, headed by the prime minister. Russia’s new prosecutor general, Yuri Skuratov. When he arrived in Grozny in January, he promised to look into where the trillions of rubles thrown into the "furnace" of the war in Chechnya disappeared to, and why they did not reach their intended destination. The Russian government has even signed a 50 million-dollar contract with French firms to create an information system to detect tax evasion and non-payment.

But all this will be to no avail, because it is dangerous to touch the interests of those classes whose support the government needs in order to hold onto power. In January, Yeltsin replaced Chubais with Vladimir Kadannikov, the former director of "AvtoVaz." This automobile company was also on the list of the largest tax debtors to the federal budget, although it was only half as much in debt as Nizhnevartovskneftgaz.

More than thirty of the enterprises on that list were in the oil extraction and refining complex. Viktor Chernomyrdin is considered to be the representative of that very same complex.

Russia’s automobile industry can only exist under conditions of high import duties, which defend the internal market from imported cars, low, fixed prices for metal and other raw materials, and large scale purchases of technology and equipment in the West. There is no doubt that these conditions will be assured by the new Vice Premier Kadannikov, who was called in to calm those upset about the prolonged supremacy of the oil and gas lobby. Having a debt to the federal budget and its suppliers of 700 billion rubles and producing 20 billion rubles per year, the AvtoVaz company cannot exist without state subsidies and its former director and the state will now be one and the same.

President Yeltsin’s economic adviser Aleksandr Livshits, obviously the "Last of the Mohicans" of the reformers, once noted that 90 percent of the effort required in the area of economics was to overcome the resistance of various parties and groups. These are not parliamentary parties, but representatives of industrial and regional "lobbies." They are very rich and powerful. They are the "party" of various tax privileges, the "party" of tax evasion, the "party" interested in the fall of the ruble’s exchange rate, the widening of the "currency corridor," and weakening of export controls, the "party" interested in the distribution of state property. Nothing can be done in Russia without at least partially neutralizing these parties. As is well-known, many of them have already won substantial victories. It is possible to say confidently that their influence on the economy will not weaken, but will even grow, before the presidential elections: each of them will "sell" their support to the president, covering themselves with slogans of " defending the population and the workers."

The topsy-turvy, troubled Russian economy suits them all to a maximum degree, even though they loudly demand "the imposition of order." The regional policy of the coming period will be just as contradictory. Feeling its weakness in the so-called "social sphere," the Yeltsin regime will increase state subsidies and increase salaries in individual sectors and regions, showing those who lost out this time around an example of how it is possible to win new privileges from the government in exchange for support for the president in the upcoming elections.

The naive economist-reformers of the early nineties hoped that at the end of the "rapacious" stage of the process of primary capital accumulation, the country’s economic development would become more civilized and be more like the market economies of the West. This, as we see, has not taken place, and it looks like it will not take place for some time to come. It would be nice, of course, if these predictions would come true, but unfortunately, reality gives us no reason to hope.

One of Murphy’s axioms states that "the total amount of reason on the planet is a constant, but the population is growing…" For a variety of reasons, Russia’s population is declining. Perhaps the growth of reason "per capita" in the country will save it, and the world, from terrible upheavals.