'Stabilisation' in Russia: reality or rhetoric?


By Renfrey Clarke

MOSCOW — "There is a general feeling — at least among those inclined to be bullish on the subject — that a post-reform Russian economy has dawned, and we are now moving out across the gently rising pastures on the further side of a Rubicon of potential economic disaster."

That was the English-language Moscow Tribune on July 16, reassuring its readers that after years of political turmoil and threatened economic collapse, stabilisation for Russia was finally in sight.

If that wasn't enough, articles in the Wall Street Journal and the London Times had shortly before spoken of the prospect of a Russian "economic miracle".

Privatisation chief Anatoly Chubais and Economy Minister Aleksandr Shokhin suggested that foreign investment would jump dramatically this year to levels of $6 to $10 billion. Prime Minister Viktor Chernomyrdin, addressing industrialists and regional leaders on July 15, argued that a steep decline in industrial production was beginning to level out, inflation was falling and conditions were ripening for a "favourable investment climate". Deputy Prime Minister Oleg Soskovets, in a report to the parliament, announced that radical reform had worked; the Russian economy was "emerging onto a plateau".

The speeches and press articles during this period were not all euphoric. Replying to Chernomyrdin on July 15, Vladislav Zotin, president of the small Volga region republic of Mari El, objected that in his republic the budget coffers were empty, and 40% of factories were at a standstill. Then, with the force of a cold shower, came an Itar-Tass report from the textile centre of Ivanovo, stating that almost all the textile plants in the region were shut and 120,000 workers were idle.

"Real unemployment is more than 25%", the report quoted a local administrator as saying. "Living standards have fallen below critical levels, and society is on the verge of a social explosion."

To argue that prospects in Russia are anywhere near as bright as Chernomyrdin and Soskovets claim takes a real leap of the imagination. First it is necessary to explain away figures from Goskomstat, the Russian State Statistical Committee, indicating that the value of industrial output in the first half of 1994 was down by 26% from the figure in the corresponding period of last year, and in June by no less than 28%.

The Wall Street Journal countered this by arguing that Goskomstat's figures were simply wrong. The statistical agency was said to have underestimated the scale of the new market economy, many of whose businesses — for whatever reason — do not forward data on their activities. Other press sources as well argued that the Russian economy was much more vigorous than earlier believed; one estimate put the size of the "black economy" at 20% of GDP, and argued that personal incomes had risen since mid-1993 by an average 20%.

However, Goskomstat's figures cannot be dismissed so easily. Whatever the difficulties of calculating the worth to the population of the "black economy", Goskomstat is quite able to count the number of lathes and forge presses produced in Russia, and its figures show that output in the vital machinery and equipment industry in the first half of 1994 was 45% below the figures for the same period last year.

Goskomstat's figures for light industry, where the corresponding fall in output was put at 41%, are also evidently quite sound. Market relations and privatisation in Russia have brought little in the way of new small-scale manufacturing operations; light industry remains concentrated in large plants with established links to the statistical authorities.

At the same time as industrial output has crashed, total consumption by the population during 1993 and 1994 has almost certainly increased. This has not saved light industry, because consumer demand is now concentrated in narrow elite sectors that demand sophisticated high-quality goods — almost invariably imported.

Consumption in Russia fell to abysmal levels during 1992 in the wake of price liberalisation, so a partial recovery is hardly the same thing as a return to prosperity. Nevertheless, the rise in consumption is one of the paradoxes of today's Russian economy, and is the source of many of the myths about stabilisation.

So why has consumption risen, at the same time as production has clearly plunged?

Two phenomena can serve as pointers here. One is the rise in oil exports, and the other is a continuing, severe fall in investments.

Oil extraction in Russia has fallen off steeply in recent years, as a result of lessened rates of exploration and worn-out equipment. Nevertheless, sagging demand in the Russian economy has meant that the quantities of oil available for export have risen impressively. Revenues have increased as well.

Investment in Russian industry this year has reportedly been running at about 15% below 1993 levels, after far more massive declines in past years. But the actual fall this year may well be much greater, since there is little demand for the Russian machinery industry's depleted offering, and machinery imports in the first six months were down by a reported 27%.

Through exporting more, and largely ceasing to invest, the Russian elites have been able to spend big while topping up capital holdings in the West that now total an estimated US$40 billion. Turning money from state or corporate funds into personal income has not been difficult for a layer as practised in embezzlement and money-laundering as Russia's rulers.

The result has been to create many of the trappings of prosperity — in particular, a market for luxury sports cars and expensive restaurants. But the idea that this conspicuous consumption by the new rich is a sign of stabilisation is monstrous.

The bulk of Russia's industrial plant is close to worn out; huge new investments are needed simply to maintain existing output levels. In preferring to squander or export their capital, Russia's new elites are showing that their perspectives consist of getting rich and getting out, leaving a junkyard behind.

Foreign investors will need more to attract them to Russia than faith in the powers of the market. Foreign capitalists will take a hard look at the prospects for the Russian economy, both medium and long-term, before they make substantial investments.

These prospects are not encouraging. As has been suggested, Russia's oil exports have been central to preventing a much more rapid and complete collapse. But these exports are under threat. Oil output is declining fast, while the fall in domestic consumption is expected before long to be reversed. The newspaper Business World Weekly forecast in June that oil exports could cease as early as the year 2000.

If Russian industry is to be saved, the investment funds will have to come from domestic sources. But Russian entrepreneurs — or rather, the small minority who are prepared to contemplate investing in production — will need reasonable prospects in the next few years if they are to commit their money. Despite the optimism of the Wall Street Journal, these prospects are lacking.

By general admission, the key problem of Russian producers today is the weakness of demand from a largely impoverished population. Meanwhile, the next stage of "reform" is to include forcing widespread bankruptcies. This "restructuring" will dramatically increase levels of unemployment. The consuming power of the broad population — the people who purchase cheap Russian manufactures rather than imports — will contract still further. With profits in industry even harder to come by, Russia's elites will continue to shun investment in favour of speculation and luxury consumption, or will send their money to the West.

"Stability", of course, is not only an economic category; it also has social and political aspects which potential investors — foreign investors in particular — examine carefully before they commit their money. Would-be investors are not usually troubled by widespread poverty or falling living standards, but when these are accompanied by a rapid and fiercely resented increase in social inequality, alarm signals start to flash.

Among the findings of research by the All-Russian Centre for the Study of Living Standards, is that the buying power of the least well-off Russians has declined. The proportion of the population receiving less than the "minimum survival income" rose from 29.4% in the last quarter of 1993 to 38.5% in the second quarter of 1994.

It would be wrong to suggest that the monetarist "shock therapy" model of reform being applied in Russia cannot eventually lead to stabilisation. Under the present model, stabilisation will be achieved when Russia has a de-industrialised, raw materials-based economy thoroughly dependent on the West.

There will be stability. But it will be the archaic stagnation of the Fourth World — the stability of the graveyard.

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