Yeltsin: crash through or crash?

Wednesday, December 11, 1991

By Renfrey Clarke

MOSCOW — In the space of a few weeks from mid-December, the Russian Federation is to make a crash transition to an open, deregulated market economy. This shift will crown the Russian government's program of economic "reforms", prefigured in October and rammed through in a series of presidential decrees from mid-November.

The remaining elements of the former state monopoly of foreign trade are being dismantled. All enterprises are to have the right to deal with foreign firms without special registration. The list of goods subject to export and import licences and quotas is being drastically reduced. All citizens are to have the right to buy and sell hard currency.

Price controls will be removed from all but a handful of basic foods, medicines and energy sources.

Supporters of these moves admit that a painful adjustment period, probably accompanied by high inflation, will ensue. But this period of turmoil, they argue, will pass relatively quickly. Probably as soon as the spring of 1992, they maintain, prices and wages will balance out at their "natural" market levels, goods will return to the shops, and investment and growth will resume.

The real picture is nowhere near so hopeful. The course the Russian leaders have embarked upon ignores how market economies really operate.

What is being implemented is not a program of rational reforms. It would be more accurate to say that a group of ignorant and desperate politicians have decided to blow up the Russian economy, in the faint hope that as the bits descend they will reassemble themselves into some kind of working order.

Supply and demand

Free price formation, the key mechanism on which Russian President Boris Yeltsin and his colleagues have pinned their hopes, can be a means of balancing supply and demand and achieving stabilisation within a market economy. But it is not enough simply to drop price controls; a series of other conditions have to apply.

Perhaps most importantly, there has to be competition between suppliers. In conditions of monopoly or near-monopoly, suppliers will respond to price liberalisation simply by raising prices. They are also likely to restrict output in order to create artificial shortages and drive prices still higher.

Secondly, the market infrastructure has to be in working order. This infrastructure includes commodity exchanges, wholesale trading firms and commercial banks —

Thirdly, the money supply has to be under some

sort of control. Otherwise, price rises will not curb demand, and ending price controls will stimulate inflation.

One baneful inheritance from the command-administer economy in Russia is a degree of monopolisation that is astonishing even by the standards of the west. It is not unusual for a single Russian enterprise to account for the bulk — or even the totality — of national output of a product.

Russian leaders declaim frequently on the need for "de-monopolisation". But so far, initiatives in this direction have affected mainly the petty retail and services sectors. De-monopolisation of industry will be a complex process extending over many years.

Also, the political nature of Russia's government makes it most unlikely to launch vigorous attacks on monopolies or the distortions they introduce. A vital base for Yeltsin and his ministers is the new "liberal-bureaucratic oligarchy": the old party and economic apparatchiks with new jobs as executives of state-owned, independently managed "concerns". In charge of monopolistic enterprises and benefiting directly from monopoly practices, these people will struggle fiercely against any attempt to encourage competition.

The decision in November to drop most import controls was an attempt to subject Russian producers to competition from abroad. However, foreign sellers demand payment in something better than roubles, and supplies of hard currencies in Russia are acutely short.

Meanwhile, the development of a market infrastructure has proceeded with disconcerting slowness. Commodity exchanges have been set up, amid much fanfare from the liberal media. But while the state supply system is being steadily dismantled, nothing has arisen which even remotely resembles the complex system of specialised wholesale trading firms which in the west mediate between suppliers and commercial customers.

The "transition to the market" is being proclaimed at a time when many of the mechanisms which the market requires do not exist.

Money supply

The picture with the money supply is perhaps the least encouraging of all for Yeltsin and his colleagues. While Russians feel themselves to be quickly getting poorer, their country is awash with roubles, and its leaders have no serious strategy for turning off the tap.

According to the Auditing Office of the USSR, the internal debt of the Union government is likely to rise from 550 roubles in the course of 1991. The main reason for the swelling Union deficit is the refusal of the

republics, above all of Russia, to make their agreed contributions to the Union budget. The Union government responds by issuing additional credits in roubles.The result is that inflation in Russia is already running at annual rates of more than 200%.

Price liberalisation under these conditions cannot possibly bring supply and demand into equilibrium even in the medium term. A reasonable prediction for next year would be rocketing inflation, a drying-up of investment, massive capital flight and the collapse of much of the limited production that continues in Russia.

Even commentators close to the Yeltsin government now admit freely that a more or less prolonged period of hyperinflation — price rises not of the current 12% per month but of 50 or even 100% — is inevitable.

Does Yeltsin think his "reforms" can work? He is certainly hedging his bets. His strategy does not seem to be aimed at preventing hyperinflation, but at allowing him to ride it out and emerge with his popularity intact. This is shown by two decrees which he signed in mid-November.

One of these granted pay rises of 90% to large numbers of state employees. The other abolished the system under which enterprises were penalised heavily if they raised wages without government permission. In formal terms, workers are now free to bargain for as much as they can get.

These moves may for a time prop up Yeltsin's populist appeal. But they represent a strange contradiction in his anti-worker capitalist stabilisation program. They contrast oddly with the consistent capitalist austerity implemented in Poland in the winter of 1989-1990.

The Polish government pegged wages strictly to 60% of price rises. In the space of a few months, most of the working class was put on the breadline. With a tight credit squeeze in place, consumer demand collapsed, and hyperinflation came to an end.

Without such measures to bring about the rapid impoverishment of the workers, hyperinflation is likely to take far longer, perhaps as much as a year, to destroy mass purchasing power and to lose its virulence.

For the embryonic Russian capitalist class, the prospect of prolonged economic mayhem is fraught with the danger that the workers will build a new, independent political leadership and will fight for stabilisation of the economy on a quite different social basis.

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