Publication: Prism Volume: 3 Issue: 2

The Yeltsin Era: Successes and Paradoxes

By Mikhail Gershaft

Not just Boris Yeltsin’s quintuple bypass surgery, but the "cold," the pneumonia, and the numerous disappearances of the Russian president in the last year give one reason to think that the Yeltsin period in Russian history is coming to a close.

Yeltsin is an extraordinarily ambitious person. During one of his conflicts in the former Politburo at the dawn of perestroika, Mikhail Gorbachev told Yeltsin, "I’ll never let you into politics!" And then he appointed Yeltsin chairman of the Committee on Construction. All of Yeltsin’s activities from that point on were designed to prove the opposite: that he could not only get into politics but could get to the top and achieve results.

It may be that Boris Yeltsin wants to leave the political scene after achieving at least a slight improvement in the population’s economic situation. But most likely, his faith in his own irreplaceability will not permit him to resign gracefully. During the election campaign, his daughter Tatyana [Dyachenko], noted that her father would have given up the presidential chair long ago, except for the fact that he did not see a worthy successor.

Andrei Karaulov, a very authoritative and well-informed Russian journalist, once quoted the opinion of a man who had known Yeltsin for more than twenty years, who said that Yeltsin would give up his power only in the grave.

"Say a Word About Poor Boris…" (from a Russian song)

Yeltsin’s pride, and most importantly, his desire to hang onto power, dictate that he make periodic changes to his team as a means of getting rid of people who are especially disliked by the people or the press — such as former advisers Gennady Burbulis and Mikhail Poltoranin, or his former bodyguard Aleksandr Korzhakov. But it is these aspirations and qualities which have made it possible for him to pick the best team for the given time and place.

Let’s look at the economy, where it would seem that he has had the least success and the most defeats… It would be wrong and unfair to see only the negative features in the period Russia has just endured. The Russian public, and even the Russian intelligentsia, now have an extremely negative attitude towards the Russian version of "shock therapy," although specialists understand that there was no painless, "soft," way to make this transition.

The young economists, brought up on Western economic theories, thought that the moment for a comparatively "painless" transition to a free-market economy, like that adopted by Ludwig Erhard in Germany from 1948 to 1952, was missed by Mikhail Gorbachev, and that it was no longer possible to avoid "shock therapy." They justly called themselves "the economic kamikaze team" and tried to do as much as possible in the economic sphere before a wave of popular indignation engulfed them, and Yeltsin’s political patience ran out. In approximately one year, Yeltsin "gave up" Yegor Gaidar, as he had "given up" some of his colleagues before.

But the main work had already been done — the wheel of real economic transformation had been set in motion.

In the first year, inflation went up by more than 2000 percent. The population showed great courage in these times. For the first time in six decades, it had to face hyperinflation, which wiped out savings accounts, and made the government seem hostile and helpless.

After six to seven months, wages began to catch up to the rising prices, and the inflationary spiral, known to every Western student of macroeconomics, but relatively unknown to one-sixth of the globe in 1992 was in full swing. It was a very big "shock."

Price liberalization, however, not only filled Russian store shelves; it also confirmed the fact that the formerly centrally planned Russian economy was subject to the same economic laws as everyone else. It also spurred the creation of basic market institutions: banks, exchanges, insurance companies and other finance companies, investment funds, and other structures and forms of property. Although they are incomplete, semi-nationalized, and semi-criminal, and groan under a heavy tax burden, they now exist.

There continues to be a decline in the economy (six percent in 1996) and a structural crisis. From 20 to 50 percent of business activity has a criminal or "shady" character. Collecting taxes and paying salaries and pensions continues to be a complex problem. According to the chairman of the Central Bank of Russia, Sergei Dubinin, only 38 percent of all Russian banks are stable. The number of banks dropped by 200 over the last ten months of last year, and their subsidiaries and branches, by 300-400. But the level of capitalization of the country’s banking system has substantially increased.

But the basics of a system of economic legislation, a tax system, an auditing service, and laws on bankruptcy, antimonopoly legislation, and the committees and institutions that go with them, have been created where virtually none existed before.

State property has been privatized on a scale unprecedented in world practice. Now this operation, which was carried out by, and usually linked with the name of, Yeltsin’s chief of administration Anatoly Chubais, is under fire. Its critics say that the first stage of privatization brought nothing, either to the state budget or to the investment potential of the privatized enterprises themselves. But this was not the point of privatization, when the population had neither the money, nor the desire to claim juicy pieces of state property.

Things are different now, five years later… There can be no doubt that there are massive violations of law and the public interest taking place during the privatization auctions and the sale of state property; nor can there be any doubt that they take place under conditions of corruption and Mafia involvement, but nevertheless, real economic processes stand behind them, and the state is using its packets of shares as collateral to borrow money from the banks. The mechanism is working…

At the end of November, Finance Minister Aleksandr Livshits triumphantly announced that, after an 80-year absence, Russia had returned to the European financial markets with a $1 billion bond issue. Yes, there are a number of unknown parameters when it comes to calculating the future income from this breakthrough, especially when one takes into account Russia’s political instability, the need to pay off the debt on Tsarist obligations, the decline in production, and many other things. But it is important that this first step has been made. These bonds sold out quickly. The first shares of the largest Russian enterprises (predominantly in the minerals-extraction industries) are now appearing on the world’s financial exchanges. They are cheap and attractive to foreign investors.

In the course of the last five years, a professional team has been formed. This economic team, through titanic efforts, has virtually succeeded in conquering inflation. It is expected that, in 1997, inflation will be brought down to 11.8 percent. But increasingly powerful forces exist which want to unleash inflation, which has been so difficult to bring under control. Printing more money might solve the problem of non-payment of salaries, which has lasted for many months, but the victory would be illusory: it would not solve Russia’s economic problems, only deaden them with the "narcotic" of inflation and bring to nothing the sacrifices of recent years.

At enormous stress to the economy, the budget deficit has been brought within the bounds dictated by the International Monetary Fund. It is true that during the presidential elections, it grew to 4.32-4.35 percent of GDP, but in the fall, it had been brought back down to 3.72 percent. And this was not the only economic sacrifice made on the altar of reform.

The government and the Central Bank, for almost a year and a half now, have managed to restrain the growth of the exchange rate, by means of the "currency corridor." According to Central Bank chairman Sergei Dubinin, the "currency corridor" had been kept to between 5500-6100 rubles to the dollar, and this year, it is between 5750 and 6350 rubles per dollar. It is important that the process is manageable and is similar to the financial processes of any other market economy.

Last year, the Central Bank of Russia reduced the refinancing rate four times: from 200 percent to 60 percent, and on November 29, it was announced that it would be reduced to 48 percent. This parameter is already close to what it has to be for the process of investment — which is flowing catastrophically slowly, in spite of all the optimistic prognoses — to pick up again.

Finally, another achievement of the Yeltsin years has been the creation of a class of Russian entrepreneurs, which has dispelled the myth about Russians being unable to succeed in free-market, commercial, dynamic entrepreneurial activity, a myth which, for long decades, nourished a faith in an exclusively Communist and collectivist future for Russia.

The difficult and contradictory history of the Yeltsin years will be written and rewritten more than once. It is understandable and natural that the process of forming a market economy in Russia will take decades. Now, the question is: "Who and what after Yeltsin?"

"The Mole of History Digs Slowly…"

Boris Yeltsin vanquished the Communists last summer — it seems, once and for all. In the summer elections, it was those who were "against" Yeltsin and the painful reforms who voted for the Communists, while those who did not want the Communists to return, voted "for" Yeltsin. It is unlikely that such a situation will take shape in Russia in the future. In the future Russia, it will be hard to attract a significant part of the population to the Communists’ slogans.

But now, another leader could attract sympathy and votes, precisely because he is "another," i.e., not Yeltsin; perhaps his methods will turn out better and be less painful. And moreover, he will be physically healthy, for Yeltsin’s appearance on the television screen reminds the people of the "old men of the Kremlin," Brezhnev and Chernenko.

Possibly (and even most likely) these expectations will not prove to be justified, but the Russian people would prefer a new leader to a continuation of the existing regime. (It was most likely for this reason that the Russian people greeted the October Revolution with comparative equanimity, because it expected an end to the chaos and anarchy which reigned in the country after the February Revolution.) It seems that it suits the Russian Communists now to remain in opposition; they are not averse to remaining in "permanent opposition," since it is already obvious that it will be impossible to turn back the process of forming a free-market economy, much less, to do it painlessly. And they have nothing to offer the country’s population, unless they steal other people’s slogans.

Yeltsin’s replacement will come from the other side.

It is premature to say that Yeltsin and his team have already solved all the tasks before them and have exhausted themselves. Global tasks still stand before them, which they must solve before they are replaced by others. These include, above all, forming and perfecting the tax system, liquidating unjustified tax burdens, and increasing tax collection as well as liquidating the debt in unpaid wages, which is extraordinarily dangerous, from the point of view of social stability.

This team has catastrophically little time left. In the best-case scenario — if Boris Yeltsin recovers completely — it has until the next elections. In these years, many unforeseen things could happen and, most likely, these "unforeseen things" will be directed against reform. In the worst-case scenario, they have until spring, according to Aleksandr Lebed’s frightening prognosis.

"Look Who’s Here!"

Who is that standing on the threshold, breathing down Boris Yeltsin’s neck? Without a doubt, at the present time, it is first of all, General Aleksandr Lebed. Lebed may be even more of an anti-Communist than Yeltsin, and this will attract both the anti-Yeltsin and the anti-Communist electorate.

The figure of a "Russian Pinochet," who, with his "strong hand," will overcome the resistance of those who do not agree, those who are sabotaging reforms, corrupt officials, Communists, and Mafia structures, and lead the country to a real, modern, market economy has long been popular in Russian society. Boris Yeltsin has not been able to cope with this role, but now, Russian society is ready to give this role to Gen. Lebed. In the eyes of the average Russian, he is the only one who can put an end to the "fire sale" of Russia’s national resources, who can breathe life into the moribund military-industrial complex, who can bring back the country’s lost greatness and its status as a superpower, and drive off the ruling class of financial speculators and oil barons. He is the only one who can replace the model of the market economy "forced on Russia" by the West, and introduced by young "experimenters," with the understandable and far-reaching goal of weakening Russia.

Unfortunately, the coming to power of these forces is inevitable; its time has come. It has been dictated by the entire course of the country’s economic development and the severity of the problems facing it today. But these forces will hardly be able to make any fundamental changes to what has been done in five years of Yeltsin’s reforms.

What can we really expect from Lebed and the forces standing behind him when they come to power?

In the first place, the general promises to impose order. The present government is also trying to do this, but it is clearly unable to do so. One may expect that Aleksandr Lebed’s results will also turn out to be quite modest, for the criminal situation is engendered by the specifics of the period which the country and its economy are living through. Possibly, by the time Lebed comes to power, in three or four years, the country will get over the criminal disease of capital formation, as happened in other countries in the last century, or at least, the acute form of the disease will have passed. The general will win laurels for being a good "doctor," but the result is what is important.

In this case, he would be able to come close to solving the most important problems: attracting foreign investment and getting the Russian capital which has "leaked" to the West over the last decade to return to the country. According to various estimates, about $1 billion to $1.5 billion of Russia’s money goes to foreign banks every month, and the total amount of Russian capital abroad is $100-120 billion.

The general promises to freeze prices on essential goods and energy, as the Communists and several "national" economists propose. This is popular. But it is dangerous for market reforms. This measure was part of the famous "500 Days" program.

Under the influence of economist Sergei Glazyev, the general could introduce some protectionist measures. Being a young and educated economist, Glazyev agrees with market reforms, but wants them to be implemented only after five to ten years, after taking measures to regulate the economy. Glazyev, like the economists of the perestroika, "Gorbachev" period, does not want to face up to the fact that the "road to the market" is already the market, and is strewn with the same "road hazards" as the market itself.

Above all, there is talk of imposing customs duties on the export of natural gas, of freeing prices in that sphere, and of dividing up the giant oil and gas enterprises to create a competitive, market environment in the Russian economy. Glazyev insists on regulating payment for mineral resources. It is quite probable that, after confronting economic realities, these economic leaders will moderate their nationalistic theories and ambitions, as often happens in world practice. Lebed promises to introduce guarantees of private property while also calling for the establishment of state monopolies in certain sectors of the economy. He promises to prevent the "dollarization" of the economy. The Yeltsin government itself does not have anything against these measures, but in the general’s mouth they sound different, and more persuasive.

A few months ago, the State Duma passed a production sharing law, which was obviously needed in order to attract foreign investment. The law could not go into effect without the passage of additional legislation. But the Duma, carried away by its fight with the government and by the effort to institute impeachment proceedings against Yeltsin, postponed voting on these and other laws. The law was accompanied by a list of sites of useful mineral and energy deposits, which also had to be approved by the Duma. Now, there are more than 250 such sites on the list. Sergei Glazyev proposes to reduce the number of sites which can be worked jointly with foreign investors to 10-15. This would deprive the law of any meaning. Lebed may succeed not only in getting the production sharing law passed, but in enabling other forms of foreign investment, if he succeeds in overcoming the nationalist influence. But at the present time, it is Glazyev’s evidence which is predominant; he is actively seeking support from business circles, and even trying to create his own "business party." In Russia today, as was once the case in the West, banks are being divided into "Jewish" banks (led by B. Berezovsky, A. Smolensky, and V. Gusinsky) and the "nationalist" banks (led by V. Vinogradov and others). Lebed is actively seeking and receiving the support of the "nationalist" banks. History, as we see, is repeating itself…; the situation is dangerously reminiscent of Germany in 1933.

General Lebed has publicly proposed to cut taxes and government spending simultaneously. Such promises are easily made and virtually never kept. One cannot imagine that the present government is conducting the opposite policy. The general may even succeed at first.

Here, we are not assessing Aleksandr Lebed’s potential to be Boris Yeltsin’s successor. His victory in the elections, if they take place tomorrow, is beyond doubt. Now, perhaps, only Yuri Luzhkov, the mayor of Moscow, could compete in the fight for Yeltsin’s legacy. His economic recipes clearly would be a bit more free-market, but no less nationalist and anti-Western. The dynamic development of the capital’s economic potential, the rebuilding of a national shrine, the Church of Christ the Savior, and his unexpected visit to Sevastopol, and his even more unexpected statement that it belonged to Russia are in his favor. But this is balanced by the chronic envy and hatred that the provinces feel towards the capital. The fight for the Russian throne is taking shape.

In recent weeks, the Chernomyrdin government has taken a number of measures which could have been taken by the nationalists. At the beginning of the new year, state monopolies were reestablished on the production and sale of alcoholic beverages, numerous tax exemptions, which were given to ensure loyalty to the regime at the time of the elections, were eliminated, and attempts were made to reduce the rate of return on government securities.

The taking of such measures by the government is not only evidence that the present government is trying to co-opt the proposals of the national-patriotic opposition; it is evidence that the time for such measures has come. One must admit that the government is now on the defensive; the hopes for progress in the economy and progress in foreign investment after Boris Yeltsin’s victory in the summer elections have not been justified. Economics Minister Yevgeny Yasin has admitted this. This is one more piece of evidence that Yeltsin has exhausted his potential, and not just because of his sickness…

Russian government television, and a significant part of the press, warily regards the possibility of Lebed coming to power.

Clearly, democracy, and above all, freedom of the press will be the first victim which the general will demand from Russian society. "The idea of a ‘democratic general’ is nonsense; it’s like talking about a Jewish reindeer-herder," Aleksandr Lebed admits, with his characteristic barracks humor.

Translated by Mark Eckert