WHAT WAS WRONG: ASIAN FLU OR RUSSIAN PNEUMONIA?

By Andrei Piontkovsky

[This paper was presented at a conference–“Russia: What Went Wrong? Which Way Now?”–held by the Jamestown Foundation on June 9-10 in Washington, DC. More information about the conference is available on the Jamestown Foundation’s web site (https://www.jamestown.org), which will feature all conference papers and the proceedings in both English and Russian.]

I. INTRODUCTION

The aim of this conference, at least as indicated on my official invitation, is a “discussion of Western policies toward Russia since 1991, looking at what was right, what was wrong, and what could have been done differently.”

However, it seems to me that if we concentrate our attention on a discussion of concrete policies adopted by the United States or the West as a whole with regard to Russia, we will get no closer to the core of the problem–an understanding of the nature of the social and political system which has established itself in Russia during the last ten years. And if we are discussing the West’s mistakes, we should be talking not of individual misguided decisions, but of a failure to understand the nature of the Yeltsin regime and of the attempt to present the political processes going on in Russia through simplistic concepts: democrats versus communists, transition from a command economy to a market economy and so on.

This failure of understanding was entirely natural and forgivable, because the social system being created in Russia was not described in any political or economic textbooks and required a new conceptual language to interpret it–a language which is only appearing now. In the time allotted to me for my presentation, therefore, I should like to concentrate on what I feel to be most important: an attempt to interpret what actually happened in Russia over the last ten years and what the West’s main misperceptions of Russian reality were.

II. WHAT HAPPENED IN RUSSIA

The 20th century was supposed to be Russia’s century. At the turn of the century, Russia went through an unprecedented cultural boom known as the Northern Renaissance. In mid-century, Russia secured the most brilliant military victory in its history. But at the end of the century, Russia may find that the door into the next millennium closes in its face.

Chances for reform were wasted in 1911, 1927, 1945, 1956, 1965… Every time this cost the country very dear and claimed many victims. The last chance came in 1991. Hundreds of thousands of people gathered at rallies in Moscow, St. Petersburg, Kemerovo. I remember their faces. These were honest people, full of dignity and hope. They could no longer endure the lies, hypocrisy, torpor and ineptitude of the totalitarian regime. They were inspired. Now they are sad and tired.

But it was completely different people who clambered to power on their backs. People from the same old nomenklatura, slightly diluted by its new appointees.

There are no self-made men among Russia’s oligarchs. At the beginning of their careers, behind every one of them there stood either an accomplice from the nomenklatura (Kadannikov, in the case of Boris Berezovsky) or party capital which had been entrusted to them (as in the case of M. Khodorovsky).

A system was established in the country whereby power and money combined in a cynically barefaced manner. By the collective admission of leading businessmen, “the only highly profitable business is politics, and it will always be thus in Russia.”

The lists of leading politicians, leading businessmen and the richest people in the country are almost identical.

The classic triad of political economics, “Money-Product-Money,” has lost its central link and has been transformed into the formula “Money-Power-Money.”

The term “nomenklatura privatization,” coined in the analysis of Eastern European experiences of the late 1980s and early 1990s, does not fully reflect the essence of what happened in Russia. Nomenklatura privatization in Poland, or to a lesser extent in the Czech Republic, meant that former party functionaries became, as a rule, the owners of the property which they already controlled one way or another; in other words, an “injustice” was present in the starting conditions for the economic transformation to capitalism. This injustice was relative, given that, first, justice is not an economic category, and second, the market environment was competently structured, ensuring that the process was ergodic–that is, independent of the starting conditions. The new proprietors who functioned efficiently multiplied their “ill-gotten gains,” while the inept ones lost theirs, in both cases contributing to the efficiency of the economy as a whole, which in turn led to the overall success of liberal reform in Eastern Europe.

What happened in Russia was fundamentally different. “Injustice” was not limited to the starting point of the process, but continually reproduced itself–and continues to reproduce itself–throughout the development process. The former heads of enterprises, directorates, ministries, and trade departments of the Central Committee became the private owners of huge slices of state property through the protean mechanisms of joint stock companies, affiliated small businesses, small businesses and so on. They are private owners in the sense of their private appropriation of income from the property under their control. But at the same time they are entirely free of the responsibilities of private owners. Their enterprises will not fold or go bankrupt, however high the level of private consumption by their owners, and however low the level of management: Their enterprises are subsidized by the budget and supported by the taxpayer. They go on privatizing us again and again, establishing private control over budget funds. This is the situation in the more important branches of former state property–the oil and gas, metallurgy and engineering industries. Again, the continual nature of this privatization is alarming not because of some abstract “injustice,” but above all because of the inefficiency of such a system of ownership, its totally nonmarket nature.

We can judge the scale of this continual nomenklatura privatization by a number of indirect macroeconomic and social indicators: The annual growth in private Russian deposits in foreign banks, and the scale and speed with which new capitalists get rich, which shocks foreign observers. Such growth is only possible by the ceaseless and repeated appropriation of budget funds and state property. To paraphrase Winston Churchill’s famous phrase, one could say that “Never in the field of human conflict have so many been robbed of so much by so few.” The psychology and behavior of the new proprietors has a significant bearing not just on the economic situation, but also on Russia’s political development. The existing fragmentary groups of professional politicians presumptuously calling themselves parties lack both a specific social base and any identifying ideology. Most of them openly offer themselves as professional operators to some or other group of new proprietors. The interaction of these nonclassical proprietors, who have privatized not just state property but the state itself, creates a new structure unknown in the history of social formations–a mutant of historical evolution.

I mentioned above the need for a new conceptual language to describe Russian reality. For example, what is happening in Russia does not fit the classic definition of corruption.

Corruption requires two parties–a businessman and a government official for him to bribe. But what happened in Russia was beyond corruption. Berezovsky, Potanin and their ilk got fed up with spending money and time on top state officials and decided to become top state officials themselves, entering the government in order to be able to issue themselves licenses, privileges, quotas and so on, as they openly and loudly announced to the world. Thus the cynical collusion of power and money reached its logical conclusion.

In October 1996 the ‘Financial Times’ published a famous interview with Boris Berezovsky–an undisguised manifesto of the Russian financial oligarchy: “We hired Anatoly Chubais. We invested huge amounts of money in the election campaign. We secured Yeltsin’s election victory. Now we have the right to assume posts in the government and enjoy the fruits of our victory.”

And so they joined the government. For six months, Vladimir Potanin–the owner of Oneksimbank–held the post of deputy prime minister responsible for the economy. What new reforming ideas capable of saving our decaying economy did this preoccupied and saturnine young man bestow on us? What was his proposed strategy for tackling the problem of nonpayment, for example? Nobody knows, including Mr. Potanin himself. Meanwhile Oneksimbank, with which deputy prime minister Potanin naturally had no connection whatsoever, secured several lucrative contracts to service government liabilities, and participated in a number of appetizing privatization projects.

But perhaps what is good for Oneksimbank and Mr. Potanin is also good for Russia? This is doubtful. For three years now Oneksimbank has controlled Norilsk Nickel, which it received for peanuts after a sham tender. Norilsk Nickel did not get an effective owner, its productivity continues to decline, and its workers are not paid their salaries and are going hungry; meanwhile, Oneksimbank got the chance to use these salaries and the export proceeds to speculate on the lucrative state securities market, and also managed to buy gold notes.

The adage “What’s good for Rockefeller is good for America” cannot be applied to Russia’s Potanins and Berezovskys. Rockefeller did not speculate on Ford cars and bring the Ford factory to its knees, did not issue false shares, and did not secure ownership rights to a national television channel in the sauna of the president’s head of security. I have in my hands a recent issue of Expert magazine, and am studying two rows of color photographs: the ten most influential politicians and ten most influential businessmen in Russia. A long time ago–in what seems now like prehistoric times–I remember holding a copy of Pravda, with ten other somber men staring out of the page at me: members of the Politburo.

It is commonly accepted that after forty years you can read a person by their face. So what do these faces tell us? Can physiognomic observations help us to understand why those ten men relinquished power so easily to these twenty?

Well in the first place, it is not twenty, but ten–and that explains a lot. The first discovery we make, without running to Dr. Lambrozo for help, is that the two lists–of politicians and businessmen–are almost identical. The only major exception is Boris Yeltsin, who does not appear in the list of businessmen. But this is probably due to a flaw in the methodology of those who compiled the list. In the West, where similar lists have been produced for decades, families may be included as well as individual names–the “Mars family,” for example. The “Yeltsin family” could easily claim a place of honor in the list of leading businessmen. The term “The family” is heard frequently in the political and business lexicon of the establishment in only two capital cities–Djakarta and Moscow. It would therefore be fair to speak of one combined list of ten businessmen-politicians, a sort of latter-day politburo of the ruling oligarch party.

Let us therefore return to our comparison of the two galleries of Russia’s power brokers of the mid-1980s and late 1990s. Today’s faces show much less plain ignorance and lazy satisfaction, and much more toughness, determination, energy and fervor.

The old faces–the last generation of communist leaders–relinquished power so easily because after decades of negative selection of mediocrities they were not overly intelligent, and they did not really understand what they were supposed to be defending: An obsolete ideology which neither they nor their subjects believed in? Their pitiful “privileges,” which were attacked so vehemently by a populist rebel named Yeltsin?

The members of today’s “politburo” know full well what they will be defending if their power-base is attacked. They all figure in the third top-10 list–the richest people in Russia.

I remember one of the lesser businessmen-politicians, former Defense Minister Pavel Grachev, at some press conference, facing journalists who were accusing the ministry’s bosses of spending too much money on building dachas for the generals. Suddenly, in the midst of his usually tortured and ungrammatical Russian, I heard a supple melody with a dynamic lilt which was familiar to me: “We shall defend our dachas, whatever the cost may be,” cried the general.

My goodness! He was borrowing–unwittingly of course–the rhythm and style of Winston Churchill’s famous speech: “We shall fight on the beaches, we shall fight on the landing grounds… we shall defend our island, whatever the cost may be.” In this rare moment of inspired eloquence, “Dachas” were no less emotionally significant for Grachev than Great Britain was for Churchill in 1940.

Our top ten will defend their islands of enormous wealth whatever the cost may be. They will never surrender.

III. CHUBAIS AND OTHER REFORMERS

What was the role of the young reformers in all this, particularly Anatoly Chubais? Who was he: The architect of reform or a highly paid manager of the financial oligarchy? To my mind, he was a tragic figure. Chubais, like many other reformers, thought it unimportant how the property was distributed; the important thing was to create proprietors who, once they had done their embezzling, would start efficiently developing production. But they did not. What happened in Russia was not so much the privatization of property, but the privatization of control of financial flows–particularly budget financial flows.

The reformers created a Frankenstein’s monster which, once it had tasted fabulous wealth, like a drug addict would never give up the needle of budget money.

Unfortunately, Chubais realized this too late. Having created a system of corporate capitalism, and having personally appointed the super-rich who feathered their nests at the expense of the state budget, he naively assumed that at some point he would be able to introduce a new system with honest and transparent rules.

In one of his interviews before his dismissal, Chubais told ‘Izvestia’: “As a matter of fact, he [Berezovsky] fully revealed himself only once. This was when he said that seven banks had received half the country and now they would rule it all. After that interview, there was a burst of nonacceptance of Berezovsky both in Russia and throughout the world. This was very shameful. No civilized power has ever allowed itself to be turned into a servant of big business.”

These are golden words. Chubais’ fatal error was that he did not say them on November 2, 1996, the day after Berezovsky’s truly shameful interview. Chubais’ silence meant that Berezovsky was largely right when he said: “We hired Chubais. We secured Yeltsin’s election victory. Now it is time to enjoy the fruits of our victory.”

The lamb-like silence of the authorities signaled that they accepted the rules that were imposed on them by the oligarchs. We can thus understand the sincerity and depth of indignation that Berezovsky and his colleagues felt last summer when Chubais suddenly refused to play by these implicit rules.

Having received the oil company Sibneft for a song, without any competition, Berezovsky was unable to repeat this performance with the telecommunications giant Svyazinvest. “There will be no more freebies,” said Chubais then.

The words were an admission that until that moment the distribution of property had been practically free–something which wholly suited the oligarchs.

Having entered into a tactical alliance with the bankers and providing them with privileged access to financial flows from the state budget, Chubais’ team created a monster that slipped out of the control of its creators.

The oligarchs’ revenge was swift. All the media in their possession came down on Chubais like a ton of bricks, bent on his moral destruction. Unfortunately for Chubais, they had no difficulty in exposing a number of instances when Chubais had received significant sums of money for which he could be accused of at least a “conflict of interest” (an interest-free credit in 1996, and his prolific “literary” activity in 1997-98).

This excessive preoccupation with their own personal enrichment was, alas, characteristic of many other “young reformers.” For the last eighty years the promise of a happy future was the basis of the authorities’ political dialog with their obedient and trusting people. For seventy years the authorities promised to lead the country to the glittering heights of communism, and then for the next ten years the new authorities (for some reason consisting of exactly the same people) promised to deliver the country to the Promised Land of the market economy.

And then at last, on May 5, 1998, the authorities split with this age-old paradigm for dialog with the people. The very young reformer, former oblast Komsomol secretary and newly appointed Prime Minister Sergei Kirienko uttered the historic words: “We must tell people honestly that Russia is quite a poor country.”

The modern mind is cinematically driven, and in accordance with Eisenstein’s laws of editing another image immediately shot into my mind–the same Sergei Kirienko a few days previously answering a television interviewer’s question with ill-disguised smugness: “Well, I’m fairly well off.”

So one reason Russia may be “quite a poor country” is that thousands of Kirienkos moved smoothly from their jobs as oblast Komsomol secretaries into jobs as presidents of banks and oil companies, becoming instantaneously “fairly well off.”

I have no objection to as many of my fellow citizens as possible becoming fairly well off or even very rich. My objection is that it is only people who are in authority, close to the authorities or appointed by the authorities who have achieved this.

I object to the fact that in Russia–as we were informed by another former oblast Komsomol secretary M. Khodorovsky–“the only real business is politics, and it will always be thus.” If this is indeed the case, then Kirienko is right, and Russia will always be a poor country. But a country cannot be intrinsically poor, or poor by definition. What does poor mean? Poor in what? Resources, territory, a qualified workforce? A country can only be poor for two reasons: either it has an idle and inept population, or it has an incompetent and thievish political class made up of “fairly well-off” people.

This political class has understood that it is no longer possible to lie about a bright future, and it is apparently prepared to make a radical change in its method for holding on to power. The future is to be canceled; there will be only an eternal present in which the country is doomed to poverty.

This is hospice philosophy. The sick never get well. They know that they are doomed. But more to the point, it never occurs to them to reelect the head doctor or to change the staff, which is made up of “fairly healthy” people.

IV. THE WEST’S PERCEPTIONS As I mentioned above, generally I do not see that the blame for what happened in Russia lies with anyone on the other side of the Atlantic. Russia is a huge continent with its own dramatic history which unfolds according to its own laws. And those responsible for Russia’s ills are all here–figures from our history and today’s mediocre, arrogant and greedy Russian “elite.”

Outside influence on the course of events, even the influence of a global power such as the United States, is I believe rather limited.

But if we wish to take a look at that influence, I know of no more succinct analysis of all the failings and errors in America’s Russian policy than the words of one of its most active ideologists, if not creators.

Leon Goure, reputed to be one of the leading American experts on Russia, wrote about two years ago: “Moscow cannot afford to wage confrontational policies with United States or NATO. There are powerful influential forces, in particular the business and banking oligarchy which controls 50 percent or more of Russia’s economy and is directly represented in the Russian government, which strongly oppose any real break in Russia’s relations with the West. The primary motivation of these influential elements is making money, which is obtained largely from foreign commercial relations. NATO’s enlargement is less likely to threaten the interests of these elements than Moscow’s overreaction to it, which may lead to Russia’s isolation.” (1)

Well, the author has certainly confirmed his reputation as an expert on Russia. He knew that the financial oligarchy controlled about 50 percent of financial budget sources and channeled them into their private companies. He knew that this was possible for the famous Moscow Band of Seven precisely because they were “directly represented in the Russian government.”

The distinguished expert also had no illusions about the “primary motivation,” about the basic instinct of these new rulers: Exporting oil and other natural resources they privatized for a song.

Yet he supposed that precisely these people were the best defenders of Western interests and Western values in Russia.

I fully understand the logic and the healthy cynicism of this judgment. But it saddens me a little. Once the West put its moral authority behind a different sort of people, with different motivations, such as Andrei Sakharov and Aleksandr Solzhenitsyn. We, the liberals in Russia, used to think we shared some common values with our colleagues in the West: human rights, social market economy, human dignity. But it turns out that for West there were no common values; there were only primary motivations and basic instincts. This was a shortsighted and counterproductive policy, even from the Western perspective. Above all from the Western perspective.

The dangers of this sort of approach only began to be acknowledged by Washington and international financial institutions (the IMF and the World Bank) in spring of last year, because of the growing crisis in the Russian economy.

The negative phenomena on the Russian stock and corporate markets were mainly explained by external factors–the exodus of investors from all emerging markets, including Russia, as a result of the South-East Asian crisis. But almost nothing was said of the fundamental lessons of these crises, which had a very direct bearing on realities in Russia.

Curiously, the first to speak of these lessons, at the beginning of April 1998, were IMF director Michel Camdessus, who warned President Yeltsin of “dangerousness similarities between the chaebols (Korean closely-held family conglomerates) and the prevailing relations among oligarchy members in Russia,” and then U.S. Deputy Treasury Secretary Lawrence Summers who said that “one of the real dangers Russia now faces is the same kind of crony capitalism that helped cause the Asian financial crisis.” “These dangers,” Summers continued, “can only increase when a country lacks, as in the case of Russia, most of the universal fundamentals that the Asian economics enjoyed for so long.”

Neither Mr. Camdessus nor Mr. Summers belong to the Russian intelligentsia “whose culture known for gloom and doom” was once blamed by Dr. Michel McFaul from the Carnegie Foundation for Russia’s poor image. Russia’s fundamental problem is not its image in the West but its oligarchic system of incestuous collusion between Money and Power. This system presents more dangers than Korean chaebols or Indonesian chuko.

Before the inefficiency of the chaebol system for the future development of the Korean economy became apparent, chaebols created modern industries which secured a place on the world’s markets: Automobile production, electronics, ship-building. And before the rapacious appetite of the chuko caused universal concern, Indonesia had experienced economic growth for three decades. But what were the achievements of the chaebol of the car speculator Boris Berezovsky, or the chaebol of Vladimir Potanin, “the private banker with the state budget sucker mentality”? Where are the industries and technologies they created, or the roads and science cities they built (like Taejon and Kwangju in Korea)? The economic leaders of Korea and Indonesia were not without their faults, but they created a modern economy in their countries out of nothing. Our oligarchs only turned out to be capable of lining their pockets with the riches of the former superpower.

If we wanted to be cured, it was high time to make a proper diagnosis. What we were suffering from was not Asian flu. It was Russian pneumonia.

But the Clinton administration had already invested too much political capital in Boris Yeltsin to retreat. By refusing to support Yeltsin’s government they would be admitting that their entire Russian policy had been wrong. The Board of Directors of the International Monetary Fund decided in June 1998 to grant Russia a new large credit package. This was further confirmation of the fact that the decision to offer financial aid to Russia was a purely political one, taken under tremendous pressure from the United States. One month later Russia’s financial system collapsed.

V. CONCLUSION

The corporate, semi-criminal nature of power-money relations also defined the nature of post-communist Russia’s economic model: A raw-material development model, a pipeline economic model. Power provided access to the pipeline. The pipeline meant money. And money brought even more power. This model was fundamentally flawed from the outset.

The heavy fall in world oil prices finally discredited this model and divested it even of short-term prospects. Paradoxically, in the long term the fall in energy prices is to Russia’s advantage, because it will be essential to give up the addictive dependence on the export of raw materials, and a new development model will be required. Yevgeny Primakov’s government, which came to power after the August crisis, liked to criticize its predecessors, talking of the “ruinous nature of the policies of the last few years, the inadequacy of the policy for macro-stabilization and a decline in the real economy.” Liberal critics also shared the view that the government policy had changed. They warned grimly of a communist revenge, the end of liberal reform in Russia and a return to a socialist economy. In fact, Primakov’s government and its predecessors of the last decade–starting with Nikolai Ryzhkov’s Soviet government–only really differ from each other in the rhetoric they use.

In fact they all stand helplessly by while the virtual economy inherited from the Soviet Union continues to collapse and its last real elements are plundered.

The communist regime and the Soviet Union collapsed not as a result of a CIA conspiracy and not because the “traitor Mikhail Gorbachev” connived his way to the pinnacle of power. They collapsed due to a number of objective reasons, which included the absolutely ineffective structure of the Soviet economy at the end of the 1980s: a structure in which most enterprises supposedly produced goods but actually destroyed value.

These enterprises have survived years of reform, and not one government–however reformist their rhetoric–has dared tackle this crucial problem. Furthermore, transferring control of all these enterprises, including the few thriving and promising ones, to their former directors only aggravated the situation. The problem of ineffectual proprietors was added to that of an ineffective economic structure. The ineffectual proprietor–your typical “red director”–is not interested in the efficiency of his enterprises. His goal is not profit but cash flows which can be channeled into his private accounts.

This populous category of economic parasites was created under Nikolai Ryzhkov’s government. Since then all subsequent governments have grappled with the insoluble problem of increasing tax collection from the ever-shrinking area of the real economy. The traditional export of raw materials is not enough to save the state budget. Ryzhkov’s creation of bandit capitalism in Russia was effectively developed and perfected by Anatoly Chubais, who dished out primary-industry companies for a song to his political cronies, turning them into oligarchs.

Despite its ideological preferences and intentions, Yevgeny Primakov’s government was doomed to reinforce this virtual economy system. Which it did until the last day of its existence. The slogan of supporting domestic businesses meant in practice further budget subsidies for inefficient industries and their ineffectual owners. Talk of strengthening the role of the state ended up as tax concessions to the oil oligarchs and Gazprom.

In reality, only statist rhetoric was strengthened. Just as General de Gaulle liked to talk of the “grandeur de France,” so Primakov often spoke of the grandeur of Russia. But General de Gaulle never had to appeal for humanitarian aid.

The task of bringing society out of crisis will not find a solution exclusively in the field of macroeconomics and state management. It requires a fundamental change in power-money relations, and an admission of the moral nature of the crisis we are living through. Unfortunately the Russian political class has for the umpteenth time demonstrated itself to be incapable of responding adequately to the challenge of history and has revealed its moral and intellectual bankruptcy.

1. From Madrid to Brussels: Perspectives on NATO Enlargement, edited by Stephen J. Blank. 1997, pp. 55-56.

Andrei Piontkovsky heads the Center for Strategic Studies, a Moscow-based think-tank.