Is Russia bankrupt?
The Russian state has often been accused of moral or ideological bankruptcy. Our Moscow correspondents Aleksandr Buzgalin and Andrei Kolganov explain why, this time, the country is bankrupt in the literal, economic sense. The Russian government has refused to meet its financial responsibilities to domestic and foreign creditors. Moscow says it will repay foreign debt over a much longer period than agreed, and at a lower interest rate.
But the biggest shock concerned state bonds issued to cover short-term finance requirements. It now seems that these GKO bonds will not be redeemed when they mature. Instead, GKO holders will receive new state securities, about which few details are known. But everybody expects that it will only be possible to redeem (cash) these new bonds gradually, according to a timetable that has not yet been announced.
After categorically denying any plans to devalue the ruble, the government was forced to do so. But they were unable even to maintain the upper limit of the new hard currency corridor (9.5 rubles to the dollar) and the ruble continues to fall. Perhaps it will stabilise around the 12-13 ruble level. But perhaps the panic on the money markets will drive it even lower. What happened?
One would have thought that the efforts of the government led by the young ambitious technocrat Kirienko - backed by rather large credits from the Westought to have at least postponed the collapse of the very unhealthy Russian financial credit system. Many analysts thought that the crisis had been averted, at least until the end of the year, "providing that the government manages to overcome the difficulties in the autumn." Yet the collapse came even before autumn set in.
In fact, people began talking of the threat of collapse of the GKO pyramid back in 1996, when the need to finance Boris Yeltsin's election campaign forced the government to borrow money domestically at colossal interest rates. Even without the election campaign, however, the system of financing the state budget deficit through domestic and foreign borrowing required that the state ensure the stability of federal budget income, so as to meet the heavy interest payments. In fact, budget earnings fell, and at the same time the government, in desperate need of money, was forced to borrow even more, 12 Interational Viewpoint #304 and at totally unreasonable rates.
The root of the problem lies in the general economic situation. In almost eight years of reforms, Boris Yeltsin's team has failed to revive the national economy. It has also been unable to stop the economic decline, which has been accompanied by the redistribution of the main income into the pockets of "new Russians" who have never paid tax before, do not pay tax now and are not planning to pay tax on the bulk of their income.
A constant reduction of the tax base and a contraction in the income of the state budget are an inevitable reality. The efforts of the government to maintain an appearance of relative social well-being, financed by unsecured debts, was always going to lead - sooner or later - to state bankruptcy. This bankruptcy is only a formal confirmation of the bankruptcy of the entire social and economic policy of the Yeltsin administration.
In such an economic situation the banking system cannot be stable. The real sector of the economy — the only reliable basis for the well-being of the monetary credit system - is in depression. The banks are hardly investing any money in production, and are certainly not drawing any income from it. About half of industry is making a loss, and the few profitable enterprises have not been able to provide the bankers with incomes even comparable to the GKO operations income. The corporate securities market has until now amounted to a share market of a few large companies from the energy and raw materials sectors, which are mainly geared towards export. Banks therefore inevitably placed the majority of their funds in GKOs.
A vicious circle was created: The state had no income apart from borrowing from banks by selling them GKOs. In their turn, the banks very existence depended on the income they could generate from GKO operations. So the collapse of the GKO pyramid is not just a collapse of the state's finances, but also of corporate finances. Freely convertible currency, particularly the US dollar, is practically the only reliable security left on the Russian market. This is why there is continual demand for dollars and the ruble continues to fall.
The immediate consequences of this crisis are already evident. Lending to trade and industry has decreased dramatically. Contracts are being torn up or not being honoured. The uncertainty in the exchange rates is forcing traders to cease making deals.
For consumers, prices began to rise quickly: In Moscow they had almost doubled by September 2nd, even on some domestically-produced food products. Throughout the country, trade in imported goods is being sharply curtailed (and Russia is currently more than 50% reliant on imported foodstuffs). In industry, the majority of long-term projects are under threat. The incomes of workers (particularly in the budget sectors) and pensioners are rapidly losing their value.
In its attempts to overcome this crisis, the government has begun borrowing Slogans trom the opposition. Phrases about nationalising the banks and price control are being bandied about. Some officials are resorting to covert and sometimes open threats about introducing repressive measures against businessmen who do not follow the recommendations of the central or local authorities. Such loud words, however, are powerless to influence the situation. Tough measures are needed...
It will be impossible to overcome the crisis without some package of harsh mobilisation measures. The question is whether the current administration has the will and competence to design and implement such a set of measures.
The problem cannot be reduced simply to whether the government and the Central Bank will resort to printing money. If one limits oneself in this situation to choosing between soft and harsh monetary policies, then either choice will be wrong.
By holding back from printing money, the state can expect the ruble to stabilise after a while — at a significantly lower rate. But this will mean averting the crisis at the cost of a dramatic reduction in the living standard of Russian citizens and a significant contraction of the domestic market, which will mean that the speed of industrial decline will quickly increase.
On the other hand, by printing money, the state can revive the domestic market to some extent, but at the price of a long, inflationary price spiral, which will also lead
to a fall in production and living standards. ...but there is a choice
Of course, other policies are possible. The reality is that no government can fulfil its social obligations at their current levels. In this sense, a decrease in the average standard of living of the Russian population is inevitable. With progressive taxation and other measures, however, it is possible to ensure that the incomes of the majority are protected by sharply reducing the semi-legal incomes of today's privileged classes.
In addition to this, harsh mobilisation measures may facilitate a redistribution of resources, in such a way as to concentrate them on resolving the urgent (and subsequently also the long-term) tasks of modernising domestic production. (Analogies can be drawn with the post-war recovery policies of Japan and South Korea. If the competitiveness of industry were increased, it would in turn lead to economic revival and a growth in real incomes. It will at the same time provide the state with real resources for re-establishing social spending.
Whether such policies are undertaken depends first on resolving the question of whose interests the Russian state is serving. Will the government have the will to carry out the measures necessary? Not just to postpone economic collapse for another few months, but to really break through the destructive economic tendencies which have set in over many years (with roots stretching back to the Soviet period)?
To do this will entail going against the interests of those groups of businessmen - and the bureaucracy related to them — upon which the government has been depending up until now: groups connected mainly with the financial markets and the export of raw materials and natural resources.
Not surprisingly, the economic crisis has led to an exacerbation of the political situation. A change of the authorities may be an essential prerequisite for finding a way out of the crisis. But Russia's constitution, which was designed to keep Boris Yeltsin in power, hampers any political change. This is why a smooth transfer of power is difficult, and the risk of serious political upheaval increases.
The reluctance and inability of Russia's elite to serve the interests of the majority of their own population has not as yet led to large-scale civil protest. The people are exhausted after the political upheaval of 1991-93, having absorbed the lesson that any political change is for the worse. But another blow to the standard of living of Russia's citizens could be enough to test the limits of their long suffering and patience. * * The authors work at Moscow State University. In the perestroika period, Aleksandr Buzgalin was a leading member of the reform wing of the CPSU. He is one of the leaders of the Democratic Socialist Movement in Russia, (a small radical left group). This article translated by Paul and Katya Tann.