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Issue 31, October 1998

Russian market turmoil

THE FINANCIAL-ECONOMIC meltdown in Russia has exposed the 'virtual' quality of the new Russian capitalism. Far from being a dynamic epicentre of global growth, as many capitalist commentators claimed until very recently, the Russian economy has been reduced by the market to a barbarous jungle dominated by predatory robber barons. In the ruthless struggle to enrich themselves, the capitalist mafiya have squandered the enormous human, technological, and natural resources built up in the former Soviet Union, despite the distortions of Stalinism.

The financial collapse is the malignant symptom of the underlying sickness. The feeble economy simply could not support the mountain of debt and financial speculation that built up over recent years. After experiencing a slight improvement following the catastrophic slump which was triggered by the collapse of the old centrally planned economy after 1989, the Russian working class now faces the prospect of a catastrophic economic and social collapse.

The crisis in Russia, moreover, represents a new phase in the world economic crisis which opened with the Asian currency crisis last year. The interlocking mechanisms of global financial markets makes it certain that the turmoil in Russia will further aggravate the mounting crisis in other so-called 'emerging markets'.

The capitalist market, it was claimed, would quickly wipe out the backward economic legacy of Stalinism and bring growth and development to Russia and the CIS states. Even some former Marxists, demoralised by the collapse of Stalinism, fell for this claim.

But the parasitic, destructive character of the market has now been fully revealed. Many of the new entrepreneurs are in reality asset-strippers, in many cases reducing rather than developing the country's productive capacity. Instead of pumping capital into industry, the banks mostly siphoned it out - into the foreign bank accounts of the mafiya capitalists. Many of the Western multi-national companies who originally intended to exploit Russia's cheap labour and natural resources are now pulling out or cancelling their investment plans.

  Up until now, the US, Germany and other G7 powers have continued to back Yeltsin for political as well as economic reasons. This time, they refused to step in and support the Russian government's unviable financial policies. Faced with imminent collapse, Yeltsin announced a 35% devaluation of the rouble by the end of the year and a 90-day moratorium on the repayment of (approximately $140bn) private-sector foreign debt.

Anyone who thinks that this will resolve the crisis and stabilise the Russian economy is living in virtual reality. The flow of foreign investment and bank loans has been brought to a sudden halt. Unable to borrow its way out of crisis, the Yeltsin government will undoubtedly resort to printing more rouble notes, opening the floodgates to soaring inflation. Devaluation will also stimulate inflation. With over half the country's food supplies being imported, higher import prices will rapidly push up the cost of living.

Few, if any, Western financiers can be confident that Russia will resume its debt repayments after 90 days. A default by Russia will have massive repercussions throughout the world banking and financial system. German banks have the most to lose: about $30bn, 60% of it guaranteed by the German government, which will have to cover the losses if Russia defaults. Some commentators are trying to minimise the impact of Russia's crisis. After all, they say, Russia's GDP is less than $500bn, smaller than the Netherlands, while Russia imports about the same as Australia and exports about the same as Denmark. But this ignores the position of Russia in globalised financial markets. Its $140bn of external debts make up a big chunk of the pool of 'financial instruments' (loans, stocks, currencies, etc) traded in the network of 'emerging markets'.

Big losses for international speculators in one part of the world can trigger massive sell-offs in other regions, as they scramble to cover their losses. Moreover, if Russia defaults on its debts, fear of other defaults can undermine the entire international bond market. On 21 August, for instance, it was reported that "Venezuelan stock and bond prices plunged yesterday amid fears that the country might be forced to devalue its currency in the wake of the financial crisis in Russia" (Financial Times). A US banker commented: "The fear people (ie financiers) have is that Venezuela is another Russia".

  Up until only a year ago, the capitalists were boasting that they had laid the basis for a new era of faster world growth. One of the foundations was the Asian economic 'miracle' - now shattered. Another was the peaceful integration of the former Stalinist states into the world market of capitalism. Now this has also crumbled.

The Russian crisis will also have an impact on US capitalism, which is already moving towards a downturn. Writing under the headline 'Russia's challenge to capitalism', Jacob Schlesinger comments: "Russia's travails have introduced a new edginess to an already nervous stock market and were blamed for at least some of the Dow's descent last week. More broadly, Russia risks undermining confidence in the future of the expanding global market system and how it is managed - an optimism that has given a huge boost in recent years to American corporate investment plans and the US stock market's rise" (Wall Street Journal, 17 August).

The effects of the Russian collapse, moreover, will not be confined to the economic-financial sphere. It will provoke a far more intense political and social crisis in Russia. Workers who are already suffering from the primitive gangster-capitalism will be forced to fight for survival. Within Russia and internationally any illusions that capitalism is a progressive system will be destroyed. Among the politically conscious workers there will be an intense re-examination of history: Why did the distorted Stalinist form of the planned economy collapse? What is the route to a socialist planned economy that can provide the material foundations for a democratic socialist society run by working people?

The collapse of Stalinism promoted the illusion that capitalism is a successful system. The collapse of Russian capitalism will have an important effect in cancelling this out.

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