Poor used to stop Russian economic collapse


By Renfrey Clarke

MOSCOW — When Russia's new rich are called upon to invest, produce, pay their taxes and help save the country from economic oblivion, it is only to be expected that they will want a bribe.

The anti-crisis economic program tabled on June 23 by Prime Minister Sergei Kiriyenko made it clear they are to receive it. In its urgency to shore up the positions of native capitalists and foreign investors, Kiriyenko's plan sacrifices the interests of the great majority of Russians.

To help secure an 8% cut in federal budget spending, the public sector work force will be culled by 20%. Spending on higher education will be reduced. Indexation of welfare payments and budget sector salaries is to be less, and the government is reportedly seeking to freeze indexation of pensions until arrears on pension payments are made up.

Subsidies to agriculture are to suffer further cuts.

To help secure budget revenue increases of about 4%, the tax system will be revamped. Extra imposts for business in some areas (such as a new tax on barter deals) are offset by generous new concessions, but for ordinary Russians, the news is almost all bad.

At present, most goods are subject to a value-added tax of 20%, but various products attract a lower rate or are exempt. Kiriyenko's program will extend the 20% tax virtually across the board. As well, oil taxes will be reoriented away from producers and toward consumers.


This is not the first time the government has forced ordinary Russians to pay for "reform" that has benefited only a few per cent of the population.

To launch Russian capitalism in 1992, the masses had to sacrifice their bank savings — wiped out in the hyperinflation that followed the dropping of price controls. After the initial "shock therapy" came "stabilisation": working people were again forced to bear the costs, through receiving their wages months late.

This "stabilisation", deemed to have been achieved in mid-1997, is very rickety. The government has sought to control inflation through drastic demonetisation of the economy — reflected in the wage debts — and through keeping the rouble over-valued.

Implemented by pegging the currency loosely to the US dollar, the latter ploy has both economic and political functions.

Favouring imports, the strong rouble acts as a deterrent to Russian producers who want to raise prices. For those who receive their wages, the artificial exchange rate has meant increased access to western consumer goods, creating an illusion of prosperity and providing the government with a narrow but real popular base.

By undermining the competitiveness of Russian producers, however, the strong rouble has reduced profits and cut into the government's tax revenues. Along with massive tax evasion, it has helped ensure problems with the state budget deficit.

The government has opted to meet this deficit by borrowing — initially from Russian banks and then abroad — rather than by putting additional roubles into circulation.

For a government in financial strife, borrowing to cover deficits is a gamble: unless the economy "takes off", servicing a growing debt itself becomes highly destabilising.

In Russia, the economy has stayed grounded. Local entrepreneurs have found lending to the state far safer and more profitable than investing in production, and most foreign investors have preferred their chances elsewhere.

By wiping out around 40% of industrial production, "shock therapy" created a Third World-type economy centred on the export of energy sources and raw materials, and highly vulnerable to any dip in their prices.

Sent plummeting by the Asian economic crisis, Russia's income from oil exports has almost halved since last year, smashing through the government's financial structures like a wrecker's ball (tax receipts in the first quarter of 1998, were down 14% on last year).

Sensing that the government has lost its gamble, Russian and foreign capitalists have scrambled to get their money out of the country. In May alone, the stock market lost 40% of its value. Financiers have thought soberly about the risks of lending to the state, and in many cases have decided against. The interest rates the government has to pay have ballooned.

At some 42% of GDP, Russia's public debt is still low by world standards. But with the government paying interest rates around 10 times those in the US, the debt-service cuckoo will soon grow to the point where it threatens to tip everything else out of the state-budget nest. Debt servicing already accounts for 35% of total budget spending.


Since international oil prices began their steep slide late last year, the view has spread that the strong rouble is not long for this world.

For Russia today, a devaluation would have important advantages. Interest rates could be brought down to the point where investing in production ceased to be irrational, and the cost of servicing the state debt would become more bearable. The government would no longer have to run down its sparse reserves of gold and dollars to fight off speculators gambling on a currency collapse.

The competitiveness of Russian producers on both domestic and foreign markets would be improved, raising profits, increasing tax revenues and helping to limit the budget deficit. The problem of wage non-payments would abate.

So why do Kiriyenko and his ministers dismiss the idea? The classic objection is that devaluations spur inflation by making imports more expensive. In Russia, where "reform" has largely destroyed the old diversified industrial base, there are now countless products that can no longer be had from local sources.

If the exchange rate of the rouble were set free, a sharp burst of inflation would certainly follow. This would not greatly affect the tens of millions of Russians who live mostly outside the money economy, but it would dramatically cramp the styles of the "middle layers" in large cities — the Yeltsin regime's political base.

More crucially, devaluation would devastate the banking industry, which has been central to keeping Yeltsin in office.

Almost all the "oligarchs" have key interests in the financial sector, and many have borrowed heavily abroad to invest in the state bond market. Their assets are in roubles, but their repayment obligations are in western currencies.

"There is a danger", the London Financial Times noted on June 25, "that a 50% devaluation would wipe out almost every bank in Russia apart from Sberbank, the state savings bank".

Enmeshed in these calculations are the signals which Kiriyenko's government has been receiving from the IMF. Seeing the minimisation of inflation as crucial, it has backed the "strong rouble" strategy. Its agenda also stresses blanket privatisation, unfettered access for world capital to the Russian market and tight limits to welfare programs.

On June 25, a US$670 million tranche of an existing IMF loan was released only after repeated delays and hints that the reforming zeal of the Kiriyenko government did not measure up.

The focus has now shifted to an effort by the government to persuade international lenders to advance US$10-15 billion, as a reserve against attacks on the rouble by international speculators.

On June 24, the news service RFE/RL reported, Communist Party head Gennady Zyuganov demanded the release of all documents that the government had sent to the IMF as part of this bid. Zyuganov, the report continued, claimed that the IMF had "made a possible $10-15 billion loan conditional on Russia agreeing to break up its natural monopolies, raise the pension age by five years and push through legislation on land sales and the ratification of the START-2 arms control treaty".

Political showdown

For Kiriyenko's program to be implemented, it is supposed to be adopted by the parliament. The self-described opposition forces that hold a majority there will lose all credibility if they allow the scheme's more objectionable provisions to pass unhindered. Yeltsin has threatened that if the measures are not voted into law by July 16 he will push them through "by other means".

Yeltsin is by no means guaranteed of coming out ahead in a political showdown around Kiriyenko's program. The authorities are now extraordinarily unpopular. In a June poll reported by the agency Interfax, 51% of respondents said they would be glad if the president resigned before the end of his term, while only 10% said they would be unhappy at this.

Hundreds of unpaid miners have mounted a permanent picket outside government offices in Moscow, demanding that Yeltsin quit. Wage arrears have risen steeply in recent months, and in provincial centres angry miners have been joined by teachers, health workers and many others. Mass mobilisations against Kiriyenko's program could make it impossible to implement.

The likely consequences if Kiriyenko's plan is blocked — "spontaneous" devaluation accompanied by a run on the banks, the collapse of the financial system, and the paralysis of wide areas of production and trade — will not be pleasant for workers either.

Capitalism did not hold the answer to Russia's problems at the beginning of the 1990s. The system's internal contradictions had taken on too much force to allow capital to do more than strip most of the country of assets and leave it to rot. The only solutions to the crisis are those that direct the country onto a fundamentally different track.