Publication: Prism Volume: 4 Issue: 12

Russia’s fledgling economy was rocked by its third crisis in eight months. On May 27, the Central Bank hiked interest rates to a dizzying 150 percent to defend the ruble from forced devaluation. This was the worst crisis the economy had so far endured and there was no guarantee it would be the last. Nor was there any consensus about why it happened.

Everyone agreed that contagion from last fall’s Asian turmoil was the catalyst. Falling oil prices drained Russia’s income, as did poor tax collection. A move by Russia’s Communist-dominated State Duma to restrict foreign ownership in the electricity monopoly, United Energy Systems, jolted investor confidence, as did President Boris Yeltsin’s apparently capricious decision to sack the entire government. The new prime minister, Sergei Kirienko, inspired sympathy but not confidence. Some suspected the crisis was being deliberately provoked by tycoons such as Boris Berezovsky, keen to destroy Kirienko’s government and make a killing on speculation against the ruble.

International financial institutions and the Russian government insisted there was no cause for panic. The fundamentals of Russia’s economy had not changed, they said, since last year, when market confidence was high and investors fell over themselves to get their hands on Russian stocks. The crisis, according to this analysis, was one of confidence only.

Not so, others objected. The fact that nothing fundamental had changed in Russia in the past year was precisely the problem. Nothing had been done to clean up corporate governance, simplify the tax code, pay workers’ wage arrears or root out corruption. Russia remained in thrall to crony-capitalism and there was no sign of any improvement. Instead, high interest rates were choking off investment. Next year will bring parliamentary elections; the year after that a potentially bruising presidential campaign. Russia has little hope of seeing economic recovery or efficient government before the next century.