Yeltsin's 'reforms' end with a whimper


By Renfrey Clarke

MOSCOW — On January 13 Russian President Boris Yeltsin assured his US counterpart, Bill Clinton, then on a visit to Moscow, that economic "reform" in Russia would continue, and that in some areas it would even be accelerated.

But by the evening of January 21, only one prominent supporter of Yeltsin-style "reform" still held a confirmed place in the Russian cabinet. The Russian government, for two years an unhappy coalition of monetarist ideologues and industrial managers, had passed firmly into the hands of the industrialists.

The president's radical right-wing economic advisers, US professor Jeffrey Sachs and his Swedish colleague Anders Aslund, had resigned. At the first meeting of the new cabinet, Prime Minister Viktor Chernomyrdin had promised close collaboration with the recently elected parliament, which is dominated by critics of Yeltsin's policies.

Government leaders were acknowledging that inflation would not be cut to the levels demanded by the International Monetary Fund. On the money markets, the "strong rouble" nurtured by monetarist finance minister Boris Fyodorov lost 25% of its value in a few days.

The collapse of Yeltsin's economic program, a patent fact at least since November, had finally burst onto the political scene.

Failed program

The long slide of Russian industrial output that has accompanied the "reforms" quickened disastrously during the autumn. Then in December a further wave of factory shutdowns hit industry.

The monetarist formulas were not working as promised. Yeltsin at the beginning of 1992 had predicted an intense but relatively brief depression, followed by stabilisation and a return to growth within less than a year. Instead, the depression had already lasted two years, and production was falling at ever steeper rates.

A process of long-term de-industrialisation had set in. Unemployment, concealed for the moment as enterprise managements preferred to put workers on short time rather than sack them, was set to assume massive proportions. The prospect was looming of political upheavals that would rule out any kind of stabilisation for years.

In the December 12 elections, the dismal showing of the Russia's Choice bloc disproved Yeltsin's claim that his policies enjoyed mass support. The defeat sapped the president's determination to press ahead with his tight-money strategies, and in late December he made important concessions.

A major increase was authorised in the planned budget deficit for the first quarter of 1994. Cheap credits were promised to the agricultural equipment industry, whose collapse threatened to devastate farm output. Further loans were decreed for the oil industry and to support defence factories converting to civilian production.

Nevertheless, Yeltsin had by no means renounced his monetarist views. The inevitable showdown between the president and cash-strapped industrialists — now emboldened by their gains in the elections — finally took place after the Clinton visit, when a cabinet reshuffle was due.

On January 16 the original architect of the "reforms", first deputy prime minister Yegor Gaidar, unexpectedly resigned. Gaidar cited his impotence to prevent government decisions that clashed with his own tight-money perspectives.

Lost battle

Yeltsin's hopes of maintaining the overall monetarist cast of economic policy now rested with Boris Fyodorov. Over many months, Fyodorov had fought continuous battles with other ministers and with Central Bank chairperson Viktor Gerashchenko in order to limit the flow of cash and credits into the economy. Often, Fyodorov had imposed "fiscal restraint" by delaying the transfer of funds desperately needed by government bodies in order to pay wages.

Offered the chance to continue as finance minister, Fyodorov refused unless a series of tough conditions were met. He would need to be named a deputy prime minister, with the authority to countermand spending decisions by lesser members of the cabinet. Gerashchenko would have to be sacked, as would deputy prime minister and agricultural lobbyist Alexander Zaveryukha.

The final battle over the fate of monetarist "reform" was lengthy — Fyodorov resigned as finance minister only on January 26 — and often obscure; one journalist likened it to "bulldogs fighting under a blanket". It is clear, however, that Yeltsin made strenuous efforts to persuade Fyodorov to remain.

Why did Yeltsin not simply invoke his sweeping powers to choose the ministers and impose the policies he wanted? The reason, almost certainly, was repeated blunt insistences from Prime Minister Chernomyrdin that the monetarist game was up. Fyodorov's strategies were threatening industry with paralysis, and the country with social explosion. The armed forces, which had voted heavily for ultra-nationalist candidates on December 12, were unlikely to support Yeltsin again as they had done in October.

Chernomyrdin's influence has mounted enormously since December 12, and it is now the prime minister, rather than the president, who is in a position to dictate economic strategy. During the final week of January, Chernomyrdin began putting forward the elements of a relatively orthodox capitalist anti-crisis program, contrasting with the Thatcherite eccentricities of Gaidar and Fyodorov.


Chernomyrdin has by no means abandoned the fight against inflation, which he described on January 20 as the "main problem" facing the government. However, his targets for reducing inflation are more modest than those set by Fyodorov, and undoubtedly more realistic. Chernomyrdin also differs from Fyodorov in arguing — in perfectly orthodox fashion — that the battle against inflation cannot succeed if it is limited to a one-sided reliance on manipulating the money supply. According to the prime minister, overcoming inflation requires a wide variety of instruments, including some that involve direct state intervention in the economy.

Members of the new cabinet have indicated that a central role in the fight against inflation will continue to be played by fiscal restraint. New economy minister Alexander Shokhin on January 24 pledged that the government would not hand out low-interest credits indiscriminately, but would target promising investment projects, while ensuring that loans were paid back. Chernomyrdin earlier indicated that loss-making state enterprises would be shut down.

The budget deficit will be limited through a much stricter enforcement of tax laws, to increase revenues. Shokhin cited a recent survey suggesting that no more than a third of Russian enterprises were currently paying taxes.

A sharp difference between the approach of Chernomyrdin and Shokhin and the strategies of the monetarists is the stress which the former have placed on price controls. Fyodorov and his fellow monetarists, with their quasi-religious faith in the "free market", have opposed all calls for the state to limit price rises, despite the fact that such controls are a common feature of anti-inflation programs in the West.

The monetarists have persistently ignored the fact, pointed out by Gerashchenko among others, that the Russian market is anything but "free". The country's industry is extraordinarily monopolised, with little competition between enterprises in many important sectors. Monopoly price-fixing has kept inflation on the boil whether the money supply has been squeezed or not. Price controls on monopoly producers, at least of basic industrial goods, are therefore essential.

So far, Chernomyrdin has avoided mounting a frontal attack on monopoly price-gougers, instead phrasing his proposals in the language of "social partnership". At a press conference on January 20, the prime minister spoke out in favour of "such classical forms of combating inflation as general agreements between the government, the trade unions and producers".

On the surface, there is nothing in these plans to alarm Western governments, and a good deal they could be expected to welcome. But commentators are asking whether Chernomyrdin and his ministers have the will to put such perspectives into effect.

Fight for subsidies

The confidence of observers has not been boosted by such actions as Chernomyrdin's endorsement late last year of an extravagant plan to spend US$500 million to build a new parliamentary complex — a proposal subsequently rejected by the parliament itself.

At a meeting of regional leaders in late January, deputy prime minister Zaveryukha called for pumping the sum of 40 trillion roubles (US$26 billion) in subsidies into agriculture by the year 2000. As the Moscow daily Segodnya observed, this sum almost equals the entire income of the Russian government for 1993.

Instead of the application of a thought-out economic strategy, the present year could well see government degenerate into a chaotic battle between sectoral lobbies for subsidies and credits, while output continues to decline and inflation spirals upward. For the mass of Russians, that would not be better than the swift collapse of industry and agriculture offered by Fyodorov — only more drawn-out.

Even if Chernomyrdin's ideas were consistently implemented, the results would not be enormously different. Large numbers of enterprises would still shut down, unemployment would reach Third World dimensions, and the wages of tens of millions of workers would remain at near-starvation levels.

Both Chernomyrdin and Fyodorov are proposing to complete the shift to capitalism in an epoch when the system can offer Russia only the status of a dependent, semi-industrialised periphery, a source of cheap raw materials and labour.

For all the disputes in Russia about ways of proceeding to "the market", that destination is by no means the paradise it is supposed to be.

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