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Andrei Kolganov 1. Are the debts the reason for the crisis?
Some experts say that Russia's level of indebtedness is not critical, and that many states have had much higher debts, without falling into a similar crisis. The internal debt of Russia represented about 40% of GDP during the 1980s, while the current external debt is less than 50% of GDP.
The problem is the interest and service payments. In 1997 Russia owed $US124 billion, with annual service payments of $6 billion. In 1998 foreign debt increased to $141 billion, the debt service required already $15 billion.
Russia is unable to regain financial stability under these conditions. The main problem is the unreliability of the income side of the state budget, including the hard currency earnings which are used to cover the foreign debt. The federal budget alone cannot meet the regular payments on the state debt. Its income is not based on any reliable tax base, but deep dependencies on short-term loans, through the issue of short6 International Viewpoint #310 April 1999 term bonds (GKO).
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 could only be maintained if the state could ensure the stability of federal budget income, which would allow the holders of state securities to be paid a reasonable yield. However, budget earnings fell, and at the same time the government, in desperate need of money, was forced to borrow at totally unreasonable rates.
The root of the problem lies, therefore, in the general economic situation. In almost eight years of reforms, Boris Yeltsin's team has not only failed to revive the national economy. It has also been unable to stop the economic decline, which has been accompanied by the redistribution of most sources of income into the pockets of the "new Russians" who have never paid tax before, do not pay tax now and eXI are not planning to pay tax on the bulk of COL their income. the
Despite the obvious existence of a jus layer of rich and super-rich people, tax als from individual incomes forms less than COl 10% of the state's revenue. The rest is U. S raised from taxes on enterprise profits, sec and value-added (sales) tax. is
The problem is that Russia's deep dol economic crisis has forced enterprises into unorthodox strategies for survival. fin The rapid depreciation of the rouble in Toc 1992-1993 provoked a sharp reduction in Op cash circulation and declared profits, in up favour of non-cash transactions. 40
More than 2/3 of the exchange of sec goods and services in Russia today is not of mediated by money, but in the form of tod barter, or through a growth in mutual indebtedness, or by using a range of fin substitutes for money. wa
As a result, profits in money form are very small. The average Russian enter- dis prise has insufficient money profits to pay taxes and salaries simultaneously. As 2. a result, enterprises not only owe more fin and more money to each other, but also to their workers, and to the state. ba
Even where enterprises are doing well, the "non-cash" system suits them very well, as a conscious strategy for hiding real profits and evading taxation. The inevitable consequence is a steady reduction of the tax base and a contraction in the income of the state budget.
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, which has long been evident.
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 their industrial holdings - 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 money to be made through buying and trading GKOs.
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 GO pyramid is not just a collapse of the state's finances, but also of corporate finances. Freely convertible currency, particularly the U.S. 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.
Until 17 August 1998, only 18% of financial transactions were in dollars. Today, the proportion is closer to 86%. Operations with inter-bank credits make up only 11% of transactions, down from 40% before the crisis. Trade in state securities has mushroomed - from 3% of transactions before the crisis, to 39% today.
No-one considered the Russian financial market of early 1998 as in any way "normal." But it stands in shining contrast to the current decay and disintegration. 2. Who benefits from Russia's financial crisis?
By early 1998, all the country's bankers and financial speculators expected some sort of financial crisis.
But each bank was determined to extract the maximum short term profits from the market, without constraints or safeguards. To buy more and more of the state bonds with their high interest payments, the banks offered high interest to those citizens with money to deposit, and any foreigners who were still willing to lend.
The private foreign debt of many Russian banks is unrecoverable, because when the crisis erupted, many banks stole their own assets (transferring them to holding companies, sometimes offshore). Many ordinary Russians were lured into depositing their life savings in these same banks, which offered very high interest rates. Those citizens have probably lost their money for ever.
The Chernomyrdin and Kirienko governments tenaciously defended the overvalued ruble. A majority of independent economists now believe that a gradual devaluation of the ruble in the first half of 1998, would have reduced the size of the inevitable financial crisis.
So why did the government persist?
The overvalued ruble, combined with significant external and internal borrowing, created a superficial impression of financial stabilisation, and the success of the Yeltsin administration's economic policy. The elite knew that this was an illusion. But no-one wanted to be the first to shout that "the emperor has no clothes."
The second reason for resisting devaluation was the government's extreme dependence on the financial oligarchy. Not only the personal dependencies of members of Cabinet, Ministers and officials on one or another banker (though such dependency clearly exists). But because many high governmental officials themselves participated in financial tricks on the market of state bonds, closely cooperating with different banks and financial companies.
The Russian media have identified deputy ministers (including one deputyminister of Finance and vice-chairman of Central bank) who were engaged in such practices. So it is no surprise that governments, including the present government of Eugeny Primakov, have shown such consistent favour to the top lending banks, even as they embezzled or stole the money of their own customers, including the assets of the state budget.
We shouldn't forget that every single Yeltsin government has benefited from the strong support of international financial organisations. The Russian media has published volumes of correspondence between government ministers and top IMF officials, in which the international institution gave clear instructions on economic policy, which was faithfully adopted by the successive governments.
It is surprising difficult to say how much of the credit extended by the IMF and World Bank was actually consumed Goskomimuschestvo (the State Committee on Property, now the Ministry of Property) never received the legal documents which accompany foreignfinanced investments. The Accounting Chamber of the Russia Federation has identified masses of irregularities, but, despite partial publication of these scandals, legal action has not been taken.
Cancellation of debts - including the debt of the former USSR, which Russia assumed in full, could vastly relieve the burden on the Russian people. But so far, there have been only tentative negotiations, relating to $60-70bn of Soviet foreign debt. While any cancellation of this debt would be a positive step, it would only be a first step towards the conditions needed to revive the Russian economy.
More important than cancelling the debt would be ceasing the policies, supported by international financial organisations, which will inevitably lead to the reappearance of debts..
But it is difficult to believe that international financial capital would, in a demonstration of pure altruism, renounce the debt which has given them such a powerful tool of influence on Russia. And difficult to believe that they would abandon economic policies which caused the flow of of hundreds of billions of dollars from Russia on the West. 3. Who is damaged by the crisis?
The crisis has brought significant price increases, and a fall in real incomes. In dollar terms many prices have fallen 20-30% since the crisis. But salaries have fallen 75%, in dollar terms. In 1998, consumer prices rose 91% in rouble terms. Wages grew only 5-6%.
These averages contain some extreme price increases. A new apartment in Moscow probably costs three times as much as before the crisis. Apartments cost about 15 years of total family salary. Not surprisingly, nearly 1m m' of new housing in the capital is empty, for lack of a buyer.
The situation in the provinces is even worse. The small growth of production in the last quarter of 1998 did not compensate for the fall in AprilSeptember, and over the year as a whole, GDP decreased 6%. This has brought about further worsening of the financial state of enterprises.
In spite of all efforts of government, enterprises are retaining huge amounts of money by late or non-payment of wages. Almost 1.3 million lawsuits concerning late payment of wages have been initiated
Most of the workforce have seen their situation deteriorate dramatically due to the sharp rise in prices and the absence of index-linked salaries. Nonpayment of pensions and salaries has been exacerbated. Unemployment has risen
International Viewpoint #310 April 1999 7
* Russia noticeably. There have even been mass redundancies in the highly paid banking, insurance and advertising sectors. This is one of the main components in the general sharp fall in "middle class" living standards.
But the crisis beats down hardest on the low-paid layers of the population. The government has even revised, downward, its price index of food necessities. The 1992-93 "basket" of necessities for survival included 115 grams of meat and 9.4g of sausages per day (similar to the norms for the Tsarist penal colonies in 1913). But the new basket of necessities is based on only 23 grams of meat and 2.2 grams of sausage per person per day. The consumption of animal proteins in this notional food basket is 24% lower than before the crisis. Fat consumption is 30% lower.
Even this starvation diet is too expensive for many people. In January 1999 in Moscow, the minimum basket of goods cost 572 rubles/month - which is higher than the overwhelming majority of pensions, and represent almost half the average wage in the capital. In the country as a whole, the proportion of people living below the poverty line has increased from 23% before the crisis, to about 32% today.
Many of the informal retail jobs in the shadow economy have disappeared because of the crisis, which means that many people have lost the additional income which allowed them to somehow survive.
This fall has been most keenly felt by the "shuttle traders" (who make up nearly 10% of those in employment), who lived from the import and resale of cheap Chinese, Polish and Turkish goods. The collapse of the rouble, which has lost 3/4 of its buying power against the US dollar, makes it impossible to import these goods at prices the population can afford.
The main blow to the top third of Russians has been the loss of their bank savings. Even the elite nouveaux riches—the financial oligarchies—have suffered from the crisis and are becoming more and more critical of the authorities. The panic among the population may have subsided towards the middle of October, but the crisis is at its height. 4. The people remain silent
In 1997, the number of protests and strikes rose significantly, compared to the previous year. In 1996, strikes lasting more than one shift were recorded at 8,278 enterprises, involving about 660,000 people. In 1997 strikes took place at 17,000 enterprises, with more than 880,000 people participating. Nevertheless, the total number of strikers remains relatively insignificant considering the scale of the crisis.
If things are so bad, why is it so quiet? Why is there such a contrast between the statistics of rapid decline in 8 International Viewpoint #310 April 1999 the quality of life, and the insignificant statistical evidence of strike or protest behaviour?
The scale of the demonstrations of October 7-when the Federation of Independent Trade Unions of Russia (FNPR), in conjunction with the Communist Party and other opposition groups, held an all-Russia day of action-was not as massive as the opposition had hoped. The authorities put the total number of those who took part in street demonstrations at between 0.7 and 1.0 million, the trade unions and opposition at 2-3 million. Both sides reported a total of 600-700 towns and centres where demonstrations and other protest actions took place.
But this is very little, considering the depth of the crisis. western Europe or North America, surely there would be a revolution if the bosses stopped paying salaries for six months, and the bankers lost everyone's savings through speculation. But this is Russia. Things are different here. Passivity...
The passivity of the majority is the result of a range of factors. Russia is a civilisation with a strong tradition of state paternalism (faith in a "good tsar"). This tradition intensified during the Soviet period and is far from eliminated now. Most people's thoughts and actions are geared towards a charismatic personality rather than the political structures of civil society.
Communality and collectivism also exist as one of the traditional social forms, but they apply more to the organisation of labour than to political lite.
Alongside this, the deep crisis of the economy, of authority, institutions and spiritual values, and the demolition of the very foundations of life, have given rise to a fear among the masses in the face of any further change. Finding a strategy for survival has become the priority for most Russians.
In addition, the development of market mechanisms, competition, the crime wave and the lack of clear rules for market activities has created a "Wild West" mentality. "Everyone for himself!" is the order of the day.
Traditions of collective struggle, in creating powerful trade unions from below, for example, have not yet been created. This is hardly surprising. In the USA, for instance, strong mass trade unions only appeared after 100-150 years of capitalist development.
In Russia large but ineffective trade unions, with a formal membership of about 50 percent of those in employment, remain from Soviet times, amalgamated into the FNPR
Until recently the leaders of this organisation adopted positions of de facto support for the authorities. They only switched allegiance on October 7 from the current president to a possible future one-Moscow Mayor Yuri Luzhkov. As for new trade unions formed from below, these are as yet very few and far between.
Employees in today's Russia, from workers to professors, have been forced to spend all their time fighting for the survival of their families, holding down two or three different jobs. They are terrified of redundancy as a threat not just to their status but to life itself. In these conditions, people are afraid to take part in protests, or cannot afford to stop working for long enough to participate.
Last, but not least, the citizens of Russia, especially the lower classes, have lost faith in their ability to change anything. ...up to a point
Yet this passivity is only relative. Although the number of participants in the protest movement remains insignificant, some 1.5 percent of the total number of people in employment, the substance and inflammatory nature of their actions is growing.
And, although the number of people participating in demonstrations, protest meetings and strikes under the aegis of radical neo-Stalinist organisations has fallen sharply, the general radicalisation of the protests is clear.
In almost every town, almost all the October 7 marchers came onto the streets with the most radical slogans heard since such protests began, the central one being the call for the president's resignation.
No less important is the fact that the mood of the workers is closer and closer to breaking point. This is confirmed in most recent opinion polls. Despite the traditions of long-suffering, the fear of change and the absence of strong and effective forms of self-organisation, the majority of Russian citizens suffering from the perpetual crisis are beginning to think more and more that things cannot go on like this.
A mood similar to that which led to the radical shift in August 1991 and brought down Gorbachev is gradually becoming predominant. Back then people had grown tired of the paralysis of authority of the CPS and Gorbachev. Now they are tired of the paralysis of authority of the "reformers" and Yeltsin.
But, for the moment, workers no longer believe that a strike can improve their living conditions. The number of strikes fell sharply in 1998.
The only exception to the trend was the movement of the most active groups of professionally organised workers -miners and teachers - towards the end of the year. Activists from a number of branches of the economy tried to organise an All-Russian Action Committee. But they were unable to overcome the discords between coalminers, who claimed the leading role and workers from other branches.
The question remains: What will happen tomorrow? 5. The end of the crisis...
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? This will entail going against the interests of those groups of businessmen -and the bureaucracy upon which the government has depended: groups connected mainly with the financial markets and the export of raw materials and natural resources.
The escalation of 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. The far-right on the rise
Unfortunately, growing social tension reinforcing thenfluence of nationalistic and right-radical groups. Nationalistic moods are increasingly visible within the KPRF, the country's largest opposition party. Few in the party oppose and denounce these tendencies. There is also a growing right radical (semi-fascist) nationalistic movement, with groups like Russian National Unity, which is attempting to implement the tactic of open disobedience to authorities, particularly targeting the mayor of Moscow Yuri Luzhkov. Though Luzhkov himself is no innocent. He was the patron who supported the persecutions of "southerners" (non-Russian ethnic groups) at the end of 1993 and during the war in Chechnya. He has also be an outspoken supporter of Russian revanchist claims to parts of the Ukraine.
In this atmosphere of rising marginalisation, much of the population longs for a "strong hand" to deal with the rising criminality. The sermon of national uniqueness seems a miraculous medicine for the country's sharp social problems. The alternative which the left has to offer is perceived as a total dream. Outside the KPRF and its allies, no left groups, from the anarchists to the recently-formed social-democratic organisations, present a real political force.