The rout of Russian industry

Issue 

By Renfrey Clarke

MOSCOW — How was Russian Prime Minister Viktor Chernomyrdin able to force a sharp change of economic strategy on an obviously reluctant President Yeltsin?

The basic explanation is that the strategies of economic monetarism failed in the hands of Yeltsin's ministers even more spectacularly than when applied by the governments of Thatcher and Reagan.

This, however, is hardly news. Industry in Russia had already suffered an alarming crash by the autumn of 1993, without inflation abating to any marked extent. Yeltsin nevertheless continued to swear by the potions of his neo-liberal advisers. What was it that finally pierced his credulity?

The answer is that when the overthrow of the former parliament in October allowed monetarist strictures on the economy to be significantly tightened, the collapse of production accelerated to the point where a total debacle was plainly no more than a few months off.

The economics weekly Finansovye Izvestiya admitted as much in a small article published in the paper's December 30 edition. This reported that the decline of industrial output had quickened in November. Over the months from July through November, industrial production had fallen at an annual rate of no less than 33.1%. In December, adjusted monthly output was likely to fall below 50% of the level recorded in January 1990.

During the first weeks of January, pro-"reform" journalists tried to reassure public opinion by arguing that the decline in output was concentrated in military production and in goods that no-one needed.

But the facts showed differently. The above-cited report in Finansovye Izvestiya noted that declines of nearly 60% had occurred since January 1990 in light industry — which includes the manufacture of consumer goods that in past years would have been eagerly snapped up — and in machine-building. The output of the latter sector is sorely needed for renewing Russia's largely worn-out industrial plant.

By January, it was clear that the fall registered in November was only the beginning of a cataract of non-payments, non-deliveries, stand-downs and plant closures. Deepening depression, combined with higher real interest rates on loan funds, was forcing a series of the most vulnerable industries to the wall.

Perhaps the worst stricken was the agricultural machinery industry. On December 22 the newspaper Trud quoted a trade union spokesperson as saying that 22 tractor and agricultural machinery factories were fully shut down, and a further 38 were on short time.

It is hard to argue that Russia does not need agricultural machinery. The country currently has 6 harvesting combines and 11 tractors per thousand hectares of sown land, compared with figures of 19 and 25 for the US. Moreover, the bulk of Russia's agricultural machinery is close to the end of its useful life. Grain sowings in the autumn of 1993 were 10% down on those of the previous year, largely for lack of equipment.

The oil refining and petrochemicals sector is also in desperate straits. The republic of Bashkortostan in the southern Urals has until now been responsible for about a third of Russian petrochemical products. In December, the petrochemical industry in Bashkortostan was operating at only about a third of capacity, with some installations shut down entirely. Customers, mainly state-owned enterprises, were failing to pay the refineries and chemical plants, which in turn were unable to pay for oil supplies. As a result, these supplies had ceased coming.

On January 17 Siberia's largest defence sector plant, the Sibpribormash complex in the city of Biysk, shut down after the local power station cut off electricity supplies for lack of payment. The following day a Defence Ministry spokesperson was quoted as saying that 70% of the capacity at Russia's 2000 defence sector plants was idle because of unpaid debts.

These shutdowns do not simply mean that orders for armaments are going unmet. The "military-industrial complex" in Russia has long accounted for a large part of consumer durables manufacturing, and this orientation to the civilian market has grown dramatically in recent years. In 1993 only 16% of these enterprises produced more than half their output for the military. The crisis in the defence sector is essentially a crisis of consumer manufacturers competing for the largely non-existent buying power of an impoverished population.

Serious problems are also now afflicting steel production, formerly among the more buoyant sectors of Russian industry. On January 5 the huge Magnitogorsk steel complex stood down all non-production and support services workers for a week, and foreshadowed as many as 7000 sackings.

For most Russians, however, the depth of the crisis in industry has been demonstrated by the shutting down during December and January of large areas of vehicle production. The Russian vehicle industry, an important export earner, has until now seemed relatively invulnerable.

During December two of the country's largest truck manufacturers, GaZ and ZiL, were working at only half capacity. Nevertheless, more than 10,000 unsold trucks were gathering snow in factory yards. Since January 10 half the ZiL work force has been sent on holiday or stood down until March.

On December 20 AvtoVAZ, Russia's largest passenger car producer, announced that it could not meet its wage bill, and sent 10,000 employees on unpaid leave. On January 5 the firm announced that the work suspensions would be extended until February 1. Then on January 14 AZLK, the country's second-largest car manufacturer, stood down 25,000 workers until February 1. AZLK had reportedly run out of components and working capital.

As the wave of stand-downs in December and January spread through broad areas of industry, it threatened to cause a further massive contraction of demand and sales. Ahead was a still worse crisis of non-payments, in a downward spiral that promised to leave an absolute majority of industrial workers without jobs or, at least, pay packets. By late December Yeltsin was profoundly alarmed, breaking with his monetarist faith to the extent of authorising cheap loans to some of the worst-hit sectors.

To judge from his statements while US President Clinton was in Russia, Yeltsin in mid-January still endorsed the core strategies of monetarism. But during the days after Clinton left and Yegor Gaidar resigned as economy minister, Chernomyrdin clearly plied the Russian president with a series of blunt warnings of what would occur unless these strategies were dumped. By this time, it seems, Yeltsin had nothing to answer with.

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