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Issue 32, November 1998

Who Lost Russia?

    The Word's Bond, Short Term Bond
    Chicago Boys Move to Moscow
    1991: The Turning Point
    The Consolidation Of Control
    Is There A Way Out?

When the right-wing US republican, Pat Buchanan, demanded an enquiry into 'Who lost Russia?' he expressed the anxiety felt by many Western leaders. ROB JONES, in Moscow, looks into the reasons and possible results of Russia's economic implosion which is threatening to tip the world into depression.

AT THE BEGINNING of the 1990s, the international bourgeoisie were crowing about the 'death of socialism' and the victory of capitalism. Now one ironic comment is that the new capitalist Russia has achieved in just eight years what the Soviet Union failed to do in 70 - threaten to bring down the whole capitalist system.

This may be exaggerated. But it is difficult to see how the economic situation can get much worse. Within three weeks, the value of the rouble fell from six to the dollar to 20. This drop was almost as large as that experienced by the Indonesian currency - except that took over a year. At one stage, rates were falling so fast that someone standing at the end of a queue would not know what the price would be by the time they got to the front.

The consequences of this fall have been dramatic. Prices of imported goods immediately jumped. Shops frequently shut so that prices can be rewritten. This is having a devastating effect on families with low incomes. In Moscow, for example, over 80% of foodstuffs are now imported as are almost three-quarters of Russia's medicines. The prices of home-produced goods are also steadily increasing as the costs of petrol and packaging seep through. And although the rouble may stabilise around 12 to the dollar, there is no sign that the initial huge price increases will be eased.

There has been an element of panic buying. Even in Moscow, soap, sugar and other basic items have disappeared from the shelves. City authorities here and in St Petersburg banned the transport of foodstuffs out of the city. While these shortages cause discomfort in Moscow, they threaten devastating consequences elsewhere. Kaliningrad is a Russian city cut off from the rest of Russia by the Baltic States. The regional governor there, fearing that the huge naval base is running out of food, has declared a state of emergency. Even the local police have been on strike. The mining city of Vorkuta in the polar circle has only four days' food supplies left. Soon winter will set in, making the transporting of supplies very difficult.

  Most notable has been how this crisis has hit the so-called middle class. A layer of mainly younger people in Moscow and a few other big cities have found themselves comfortable niches working in banks, estate agencies and western firms. These Russian 'yuppies' earned three or four times as much as a normal worker and have provided a certain social base for Yeltsin and the pro-marketeers. Now, the gravy train has stopped. Recruitment agencies report that the number of applicants for these jobs has doubled every week since the middle of August. Sergei Yegorov, President of the Association of Russian Banks, has predicted that 150,000 bank jobs will be lost as a result of this crisis. One long queue this week stood out from others - people wearing designer dresses and pin-stripe suits, waiting to hand back mobile telephones they can no longer afford.

But the banking crisis has effects far wider than this. Anyone who has managed to save even a few hundred dollars is likely to have lost them as the banks have refused to pay out money and devalued accounts by up to two-thirds. Students going back to college on 1 September were supposed to get their grants (those that will get them) from the cash point machines now found in every college only to find the machines were not able to dispense cash.

Industry too has suffered directly. The crisis is reflected in a dramatic increase in the non-payment of wages and by actual lay-offs. Western companies have been withdrawing investment while Boeing and NASA are back-tracking from their commitments to a joint space programme. Any company that relies on imported materials faces dramatically increased costs. Wages have not been indexed. Miners who have spent three months picketing the White House in Moscow believe that companies may try and pay off some debt arrears now as the devaluation of the rouble has halved the real value of the debts. But this also means that taxes owed by companies have been devalued. This is particularly the case for exporters, such as in oil and gas, who sell their product for dollars but pay wages in roubles. They have seen their profits rocket in the last month. About the only measure the interim government took to tackle the crisis was to announce that tax debts would be calculated in dollars to avoid a further huge drop in budget revenues.

  top     The Word's Bond, Short Term Bond

WESTERN CAPITALISTS HAVE tried to calm themselves by arguing that the Russian economy was now so small it would not seriously effect the world situation. Typically, they have said that Moscow's stock market capitalisation is smaller than Sainsbury's or the Yahoo internet company. This is a crazy comparison - Russia is the world's biggest producer of natural gas, aluminium, nickel, platinum and a number of other metals. It is amongst the biggest producers of oil, gold and diamonds.

Leaving aside the psychological effects of the failure of capitalism in Russia, the crisis is already having a huge effect on the world economy. It is estimated that western banks and financiers stand to lose up to $100bn from this crisis - six times greater than the losses caused by the Mexican crisis of 1990. The peso crisis nearly forced the US banking system into bankruptcy, although the losses were borne by a relatively small number of large US banks. The losses from Russia are spread across a much wider spectrum of banks - Barclays, First Boston, Dresdner, Dutch Amro amongst them. A number of US hedge funds have already gone into bankruptcy.

The collapse in Russia was sparked by the continuing Asian crisis. But the depth of the crisis can be explained in three letters - GKO (short term government bonds).

The restoration of capitalism in Russia has led to a fall in industrial production of over 50%. The new rich have not paid taxes or invested in industry, preferring to fritter their wealth in casinos, on big cars or stashing it abroad. Workers who have not received wages for months cannot pay taxes either. As a result, the government has been unable to finance its expenditure. To cover the shortfall, in 1993 the Finance Ministry, undoubtedly with the support of the IMF, set up the GKO market. Since then, economic policy has become almost surreal. Anatolii Chubais, the driving force in the Russian government behind the implementation of IMF policies, even argued that the only thing that mattered in the Russian economy was the health of the GKO market. Recent events suggest he may have been right, but not in the way he intended.

In fact the government was building a huge pyramid. Every time it met a shortfall in income, more bonds were issued. If workers demanded their wages, the government borrowed. Millions more were borrowed to pay for Yeltsin's election campaign. They borrowed on the internal market at high interest rates to pay the interest on international debts. In 1996, this debt grew by 210%, in 1997 by another 61%. By January of this year, the government owed $64bn and was having to find $1bn a week to redeem GKOs due for payment.

  This mountain of debt far exceeded the sums that were invested in the notorious pyramid schemes that collapsed in 1993-5. And the difference was that this pyramid was built not by individual swindlers but by the government.

The knock-on effects from the Asian crisis and in particular the fall in world oil, gas and metal prices over the last six months led to further severe drops in government income. By August, the government was not even able to pay the interest on GKOs and the pyramid crashed, threatening to bring the whole banking system down with it.

Western capitalism is now withdrawing money from Russia. This is partly the 'fleeing to quality' that is affecting all 'developing markets' and partly because they have lost faith in the future of reforms in Russia. In doing so, they hypocritically wring their hands, saying that Chubais and other liberals did not do enough to stamp out graft and corruption, that privatisation was wrongly implemented so that the 'conglomerates took over'.

  top     Chicago Boys Move to Moscow

THERE CAN BE no doubt that the economy is criminalised. Last month, the Ukrainian police arrested 47 'thieves in law' (underworld bosses) who were having a conference in the Crimea on how they could recoup the losses they had suffered as a result of the GKO collapse. This level of criminalisation, however, is a direct consequence of the restoration of capitalism. Corruption was widespread under the planned economy. Indeed, state ownership and the planned economy, which proved its superiority to the market during the dark years of the Great Depression and the immediate post-war years, were eventually destroyed by the parasitism and mismanagement of the bureaucratic elite that had wrested political control from the workers after 1924.

However, the scale and nature of the corruption were different - and at least technically illegal - and the right to own private property was limited. The ruling elite lived like millionaires with access to huge holiday mansions, luxury cars and special shops but they couldn't sell a factory or let out a block of flats and pocket the takings. Moreover, to justify their existence, the ruling elite had to ensure that the working class had regular wages, a minimum level of housing, pensions and the possibility of putting enough money aside to buy a car or make retirement a little easier.

By the mid-1980s, the system was in deep crisis. What was required was for the soviet working class to organise to overthrow the corrupt bureaucratic elite, to take control of the planned economy and to clear it of corruption and mismanagement. But it had neither real trade unions nor a political party it could use to do this.

Instead, the bureaucracy was allowed to take the initiative. A growing section of the ruling elite was drawn to the idea of restoring capitalism, in which they would form the capitalist class. With the victory of the counter-revolution in 1991, the final restrictions on private ownership were lifted, opening the door to the legalisation of a layer of super-rich.

  This in itself was not enough. In the early days of capitalism in England and elsewhere, to obtain the large sums of money necessary to develop industry, the emerging capitalists needed to accumulate as much of society's wealth as possible in their own hands. Russia's new bourgeoisie openly call this, using Marx's term, the "primitive accumulation of capital".

They have been using many different techniques to do this. In 1992, prices were liberalised, causing hyper-inflation. The high prices left workers with no savings, their money ending up in the pockets of those who sold the goods. A whole number of pyramid schemes were established to entice workers and the poor to part with the remainder of their savings. Firms stopped paying wages to workers on time. Directors used the delay to use the wages money for speculation on financial markets.

Needless to say, these new rich did not like people getting in their way. A whole army of security and body guards has been established to protect them. Contract killings reached such a level that people compared modern Moscow to 1930s Chicago. This was very apt, as many of these plans were worked out by the 'Chicago boys', American free-market advisors, who had earlier tested their experiments most notoriously in Pinochet's Chile.

Western institutions chose to work with people such as Chubais, who have been heavily implicated in the very criminal actions they now complain about. In the most notorious episode, two of his assistants were caught taking $100,000 in used notes out of the Parliament building in a cardboard box.

  top     1991: The Turning Point

AT THE SAME time, former state property, a huge industrial complex, was transferred into private hands. Gorbachev's perestroika eased control of the central ministries over enterprises, giving factory directors more direct control over their factories. A process of 'spontaneous' privatisation begun. In one Moscow factory, for example, under the cover of state ownership, the management set up over 50 companies which were not subject to state control but used materials and equipment supplied by the state and paid profit to private individuals, i.e. to the factory director and his cronies.

Until August 1991, however, the nationalised planned economy, however mismanaged and corrupted by the bureaucracy, was still in place. The existence of cooperatives, joint ventures and 'spontaneous' privatisation did not change the fundamental character of the economy. Large factories still relied on state orders, their profits were not legally usurped by individuals.

The defeat of the attempted coup in 1991 changed this position, bringing to power for the first time a pro-capitalist government. It immediately started to physically dismantle the planned economy. A key component of the planned economy, the existence of the Soviet Union with all its industrial and trading links, disappeared. From then on, factories could no longer rely on state orders or subsidies and, even if not yet privatised, had to rely more and more on market forces for survival. The central planning body - located in a huge granite building in Moscow - was closed down and its premises handed over to the new Parliament. Sections of the state apparatus were purged and the remainder set to the task of introducing private property relations.

Although the plan had been abolished and a pro-capitalist government put into place, clearly a capitalist economy had not yet been established. Nevertheless, 1991 was a qualitative turning point, after which any workers' movement fighting for a new, genuinely socialist society faced new tasks, additional to those of overthrowing the bureaucracy.

By the end of 1995, there were 917,937 private and privatised enterprises, including 17,937 large and mid-sized enterprises. 77% of large industrial enterprises accounting for 88% of total industrial output were no longer in state ownership. Out of the total workforce of 67 million, 27 million work in private or privatised firms, 10 million in agriculture, where privatisation has completely flopped, and maybe another 5 million in enterprises still to be privatised. The remainder work in schools, hospitals, transport, etc.

  Although the establishment of a healthy and thriving capitalist society in Russia was never a possibility, at the beginning of the 1990s supporters of the Committee for a Workers International working in Russia were swimming against the stream when they warned that a capitalist Russia, whose industry would be uncompetitive on world markets, would end up more like Latin America, dependent for its livelihood on the sales of its natural resources.

This proved to be true. From 1991 to 1995, the proportion of the GDP dependant on industrial production dropped from 67% to 43%. By the mid-nineties, over 70% of investment went to the energy-fuels sector. Now Russia is suffering from a 40% drop in energy prices.

  top     The Consolidation Of Control

THE ARGUMENTS OF the neo-liberals that privatisation was blocked by the 'Red Directors', are groundless. A study by one of the American architects of the economic programme pointed out that, by the end of 1992 almost three-quarters of the population were either indifferent to or against privatisation, whereas the vast majority of factory directors wanted to push ahead.

Once the Yeltsin government legalised privatisation, these directors grasped their opportunity. They wanted ownership concentrated in their hands, opposing outsiders coming in to take over. They therefore encouraged the workforce to vote for the privatisation option, which gave the majority of the shares to the workforce, reasoning correctly that they could buy the shares from the workers later.

In 1995 alone, over one-third of workers sold their shares, and from 1994 to 1996 the proportion of enterprises in which the workforce owned a majority of the shares fell from 90 to 65%. In this period, outsider shareholders (such as banks or other companies) also began to make inroads, increasing their proportion of shares on average from 21% to 32%.

Factories were not only privatised but deprived of state support. In 1992 subsidies from the central budget to industry were equivalent to 32% of GNP, by 1994 they had dropped to only 5% (of a diminished GNP). In 1994 only 10% of enterprises actually received subsidies and over 50% of the subsidies went to just 2% of companies. Two-thirds of enterprises relied on sales of their products to customers to survive rather than government subsidies.

The romantic ideals of the neo-liberals that somehow capitalism in Russia would be 'healthy' were by now destroyed. Russia was already a highly industrialised and monopolised economy. It was not possible to write everything off and grow from scratch. The nature of the new Russian capitalism would be strongly influenced by the systems and methods of the past. Chubais now admits that they consciously used the former state and industrial bureaucracy as raw material for the development of the capitalist class. By doing so, he argues, they won this layer to the capitalist counter-revolution and avoided the need for a violent confrontation with them. Even Pavlov, who headed the 1991 coup attempt and is now one of Russia's richest bankers, admits that his biggest mistake was to waste time participating in the emergency committee.

A further step in concentrating capital was taken in 1994 when the government established 38 Financial-Industrial Groups, which were intended to consolidate the capitalisation process and lay the basis for the 'conglomerates'. Banks and industrial enterprises combined their resources, leading to a cartelised economy similar to that of Japan's Kieretsu or South Korea's Chaebols.

Now these conglomerates hold huge shareholdings. Oneksimbank, for example, owns 38% of Norilsk nickel, the world's biggest platinum and nickel producer, 26% of the jet engine manufacturer, Perm Motors, and large shareholdings in over 20 other major companies. As a result of the current crisis, it has merged with two other big groups.

The new Russian bourgeoises have no doubt that capitalism has been established. Berezovskii, one of Russia's richest and most corrupt capitalists, now boasts that just six private banks (including his own) control over 50% of the economy. Indeed these bankers are strong enough to dictate terms to the government. They demanded the sacking of Chernomyrdin as Premier at the beginning of this year, just as they wanted his return in September.

  top     Is There A Way Out?

THOSE EUROPEAN LEADERS who argue that a different route to restoring capitalism was needed have no real answers. The clock cannot be turned back and, even if it could be, a capitalist class and capital had to be created somehow. Now they appear to be coming to terms with increased state intervention in the Russian economy. Even spokesmen at the merchant bank, Merrill Lynch, utter phrases such as, "Maybe some sort of protectionism makes sense for Russia"!

This is not a rejection of capitalist solutions, but an acceptance of the arguments of the Japanese government, who, at the World Bank summit in 1991 and since, have argued that government protection and subsidies are required to sustain the Russian economy and that a more equitable distribution of wealth is needed.

The proposal by the Central Bank to nationalise Russia's second largest bank, SBS-Agro, which is on the verge of bankruptcy, fully fits this scheme. It is argued that nationalisation is the only way the assets of the bank can be seized to pay off its debts. This is because the head of the bank, Alexander Smolensky, one of the 'oligarchs' who three years ago personally donated 50 kilograms of gold to gild Moscow's new cathedral, has ensured that his bank's assets are well hidden in various holding companies. The nationalision has now been dropped because the communist-dominated Duma never got round to ratifying the proposal.

With the Russian economy no longer state-owned, state-financed or planned but largely private and operating on market mechanisms, those companies that do remain in state hands or are re-nationalised will be 'state capitalist' in the classic sense of the word: that is, state-owned companies operating not as part of a planned economy but as part of a capitalist economy.

The new government will do nothing to fundamentally change the nature of capitalism in Russia. Nor, for that matter, would a government that could be formed by the communists after the next election. Calls to increase state intervention made by the new Premier, Primakov, and supported by communist leader, Gennadi Zyuganov, will not restore the soviet system. To do that a planned economy and social ownership would have to be restored. Instead, they are aimed at supporting and protecting Russian industry from the ravages of the world market.

  The latest political crisis has shown, once again, that workers in Russia do not have a party that represents their interests or that argues for a genuinely socialist programme. Supporters of the Committee for a Workers International in Russia are campaigning for the establishment of such a party. This would fight for wage arrears and debts to be cleared, wages and pensions to be indexed to compensate for the current inflation, and for the government to annul its debts to the World Bank and IMF. It would call for the banks and industry to be nationalised and for workers to have control over the means of production, so that a democratic planned economy can be established. Western businesses and IMF/World Bank advisors may not find such a programme to their liking. But it is the only way that the problems facing the Russian working class can begin to be solved.

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