Yeltsin eyes the Pinochet model


By Renfrey Clarke

MOSCOW — A new and alarming strain has appeared in the rhetoric, and to some degree in the actions, of the Yeltsin regime. The goals set out in the draft for the 1995 state budget, together with extensive changes in the line-up of economic ministers, point to a shift from the failed policies of "reform" to a deliberate campaign to dismantle much of what is left of the manufacturing economy. The aim is evidently to force through a transition to a primitive, dependent, but notionally stable Third World capitalism.

With close affinities to the strategy pursued between 1973 and 1990 by Chilean dictator Augusto Pinochet, this new course would exact a catastrophic price from Russian workers.

The signals that the Yeltsin regime is contemplating a Chilean-style "solution" include a shift from proclaiming a "moderately tight" fiscal policy to promising a "radical breakthrough" to low inflation. Further evidence that Yeltsin plans a new phase of monetarist experimentation is provided by his recent moves to take personal control of economic policy, by-passing Prime Minister Viktor Chernomyrdin.

Since mid-October, all the top economic decision-making posts in the government have changed hands. The fact that most of the new ministers do not have strong monetarist credentials is less important than their history as loyal functionaries of the Soviet apparatus — people without original ideas or deeply held beliefs, used to obeying orders and carrying out instructions.

As his key deputy in implementing the policies of "radical breakthrough", Yeltsin has elevated former privatisation chief Anatoly Chubais to the new post of vice-premier, with overall responsibility for economic matters. An ideologically driven neo-liberal, Chubais won praise in world financial centres for organising the voucher scheme that was used to sell off most of Russian industry.

The eclipse of Chernomyrdin is consistent with Yeltsin's new aims and methods. A former chief of the Soviet gas industry, Chernomyrdin has made vigorous use of his contacts to persuade industrial managers to accept "moderately tight" policies that have left huge numbers of enterprises technically bankrupt. But with his links to economic sectors that are in line to be killed off, the prime minister is evidently not seen as sufficiently ruthless to put a full-scale "Pinochet option" into practice.

Lost 'stability'

Throughout the spring and summer, the pro-government media were awash with the rhetoric of "stabilisation". If industrial output had plunged to around 45% of its level at the beginning of 1990, apologists for the regime argued, the fall was at least levelling out. Inflation that in January had been in the range of 20% per month was down to around 5%, and the rouble was devaluing against the dollar at a steady, predictable rate. For perhaps a third of the population, real incomes were even increasing.

"Stabilisation", however, was an illusion. Inflation was down primarily because the government was failing to pay huge overdue debts, including the wages of many of its employees. The living standards of a minority were increasing for the paradoxical reason that investment had collapsed; the funds needed to maintain production were being spent on consumption. Sensing that further economic crash and social conflict were inevitable, most international investors were giving Russia a wide berth.

The hopes of stabilisation were finally shattered on October 11, when in a few hours the rouble lost 27% of its value against the dollar. The "radical breakthrough" plans, which Yeltsin had evidently been preparing for some time, were now moved quickly to the forefront.

On October 20 the cabinet adopted a draft budget which promised to cut inflation to 1% a month by the end of 1995. This would be achieved by renouncing the inflationary practice of funding the budget deficit through borrowing from the Central Bank. Instead, roughly half of the deficit would be financed, and excess purchasing power soaked up, through the sale of government securities to the public. The other half of the deficit would be covered through massive borrowing from world financial institutions, primarily the International Monetary Fund.

Chubais made clear that he saw his main priority as pressing ahead with the budget projections. But the response to the regime's plans was sceptical, even incredulous. The budget's arithmetic was impossibly overoptimistic. After having trouble selling interest-bearing treasury bills worth 4 trillion roubles in 1994, the government proposed selling 10 times that amount in 1995. The international borrowing target presumed that IMF member states would agree to almost a third of the fund's lending resources being lavished on Russia alone.

The budget was obviously designed to fail, even if the parliament could be bludgeoned into approving it. Observers turned to speculating on the real aims of the Yeltsin regime in presenting so improbable a document.

Yeltsin's new strategies seem to have been formed out of a mix of half-tutored illusions, bureaucratic guile and the go-for-broke ruthlessness that produced the massacres of October 1993.

Coming clash

In the president's simple vision, Russia would now be well on the way to capitalist prosperity were the path not obstructed by former Communist managers controlling outdated, subsidy-hungry industries, and possessing a political power base in the parliament. If only this layer of apparatchiks could be smashed, the president appears to reason, the "breakthrough" would allow inflation to be cut quickly to minimal levels, and growth to resume. The government's errors so far, according to this scheme, amount essentially to a lack of determination in confronting backward-thinking industrialists and shutting down loss-making enterprises.

With the president holding to these perspectives, a head-on clash with the parliament is almost inevitable. When the deputies debate the budget, probably during January, there is virtually no chance that they will accept the draft in anything like its present form. Yeltsin is then likely to try a variant of his 1993 strategy, first mobilising public opinion against the parliament, then stepping outside the constitution to implement his policies.

However these events unfold, the likelihood is high that by the spring Yeltsin will have ceased trying to reform the existing economy, and will be seeking to break through it. As he must anticipate, successes in covering the deficit from sources outside the Central Bank will be few. With revenues short, the president will have the chance to declare that he has been "forced" to impose a drastic cost-cutting program, ending subsidies to a long series of economic sectors.

Some of the most severe effects will be felt by the so-called military-industrial complex, almost the only area of Russian production that employs more or less up-to-date technology. But the impact will be devastating across a broad swathe of manufacturing industry.

Chilean example

To gain a more precise idea of how Russia is likely to fare, it is worth turning to the experience of Chile after 1973. After seizing power, the Pinochet dictatorship abolished subsidies and tariff barriers, exposing local producers to the full blast of international competition.

Chile's consumer manufacturing industries, which had been quite extensive, quickly succumbed. Unemployment rose to catastrophic levels, and real wages plummeted. After a prolonged depression, the economy was rebuilt on low-technology, export-oriented production: minerals, timber, wine and fruits.

Although low wages meant that profits were often high, Chilean society was now marked by monstrous inequalities, and political stability could be maintained only by police-state repression. The reliance on export income meant that any hiccup in world prices could send profits plunging.

The human cost of Pinochet's policies was exorbitant, and even in terms of economic data, the results over the whole period of his rule were not particularly impressive.

Of course, Chile and Russia are very different countries; similar policies will not always have comparable results. Might the Pinochet-style "open economy" prove more successful in Russia?

The evidence suggests that these policies are even less suited to Russia. The Chilean economy is relatively small. When the domestic market and manufacturing industry were largely destroyed, and national capital came to be oriented overwhelmingly toward producing raw materials and foodstuffs for export, the effect on world prices — except in the case of copper — was not pronounced.

With Russia, the situation is the exact opposite. When "reform" slashed demand for metals inside Russia, and Russian production flooded onto international markets, the quantities were so large that world prices fell precipitately. In the case of aluminium, even production within Russia became unprofitable.

For a country as large as Russia, there is no possibility of relying primarily on export markets — especially if the main export offerings are raw materials and semi-processed goods for which world markets are chronically saturated.

The Russian economy can develop only on the basis of internal consumption and of high-technology manufacturing industries. "Reform" has already gone close to destroying these industries; "breakthrough" promises to complete the rout.