Forget bailouts—only fundamental reforms can clean up this mess.
Only six years after embarking on the path of democratic transformation, Russia faces the possibility of plunging headlong into an economic abyss.
The crisis threatening Russia has been provoked by the sharp drop in world oil and gas prices and weakness in the gold market. Together, these commodities account for some 70 to 75 percent of Russia’s total hard-currency income. The fall in prices, particularly for oil, has left the Russian economy short some $30 billion in projected income.
The economic turmoil in Russia, however, is not simply the result of a fall in world commodity prices. The problem is that for nearly six years, Russia has been pillaged by the persons who pretended to reform her. Even before the latest economic bad news, both the Russian government and recently privatized firms were failing to pay their workers, and 40 percent of the Russian population was compelled to grow its own food simply to survive.
The reform process was based on the notion that if a class of wealthy, private owners were created in Russia, they would reorganize industry and a prosperous economy and law-based state would arise automatically. This view was apparently sincerely held by Yegor Gaidar, the leader of the first reform government, and the "young reformers" around him, but it was actually Marxist in its faith in economic determinism and implicit disrespect for the rule of law.
When it was put into practice, it led not to democracy, the rule of law, and free markets but to monopolization, criminalization, and an economy based not on hard work and legitimate profit but on theft.
Widespread Bribery and Theft
There were three processes that led to the present grave crisis—each of them was the fruit of the mistaken notion that the exigencies of economic transformation should take priority over considerations of morality and the rule of law. They were universal bribery, the illegal appropriation of state property, and the creation of a parasitical criminal business oligarchy.
Russia was certainly corrupt under the Soviet regime, but bribery became an inevitable and accepted part of nearly all business dealings in Russia only after the beginning of reform.
The reason for this was that the transition from public to private ownership posed the question of which individuals would benefit from the transformation. It was this latter question—and not any lingering nostalgia for socialism—which began to obsess the members of the former nomenklatura (political class) and gave rise to bribery as a way of life.
Approximately twenty-thousand crimes connected with official corruption are recorded in Russia every year, but this is probably less than 1 percent of the real total. A recent poll of Moscow businessmen revealed that several-thousand bribes are given and taken in the capital every day. Russian businessmen use bribes to gain access to low-interest credits, licenses to export raw materials, and lucrative tax exemptions, some of which are worth billions of dollars.
Because gaining access to licenses and pillaging the state budget is vastly more lucrative than organizing production on one’s own, commercial organizations spend between 30 and 50 percent of their profits on ensuring "cooperative" relationships with government officials, instead of investing in the real economy. The culture of bribery in Russia is so ingrained that Russian regional-government leaders even have to pay bribes to receive the federal-government transfer payments assigned them to pay teachers, doctors, policemen, and other state employees. The result of this corruption is that nothing done by the Russian government is achieved at its real cost, and the price paid by Russian society is the loss of resources worth hundreds of billions of dollars.
Russia today is classified in some international surveys as the most corrupt country in the world, after Nigeria.
Another factor contributing to the present economic crisis in Russia was the theft of property under the guise of privatization. It has often been noted in the West that nearly 70 percent of the state property in Russia was privatized in two years. What is less often commented upon is the fact that the process was animated by a combination of deception and threats and the results were of little benefit to the government or the population.
Part of the privatization process consisted of unofficial or "wild" privatization, in which officials took over their agencies and organized them as private enterprises. What was remarkable about this process was that, from the very beginning, during the perestroika period when party and government officials were given permission to go into business, it took the form of uncontrolled stealing. The same tendency to appropriate wealth was then demonstrated in the "purchase" of state property after the beginning of official privatization.
The purchase of state enterprises was supposed to be based on competitive bidding. Many of the auctions for major Russian enterprises, however, took place only on paper. When true competitive bidding did occur, any bidder who was not able to muster official and criminal backing for his "bid" often received a warning to withdraw from the competition and persisted only at the risk of his life.
In the end, giant industrial enterprises were sold for prices that were nothing short of incredible. The ZIL automobile works, with one billion dollars in assets, went for $4 million; Gazprom, with roughly a third of the world’s natural gas, was valued at $230 million; and the national electric company sold for $650 million.
The economic policy committee of the Russian State Duma concluded that privatization in Russia, in the words of the committee’s chairman, Vladimir Lisichkin, "was equivalent to economic sabotage which almost completely destroyed the Russian economy." The Duma is dominated by communists and nationalists, but the committee’s preliminary analysis, released in April 1997, is consistent with other assessments such as those by the Russian Accounting Chamber and the Institute of International Economic and Political Studies.
On the basis of aggregate figures from criminal investigations and other sources, the committee concluded that the social and economic losses from privatization exceeded 9.5 quadrillion rubles in 1995. This was twenty times greater than the revenue for the Russian state budget for 1996. At the same time, the income from privatization from 1992 to 1996 was only 0.15 percent of total budget receipts. The actual amount of money collected by the government from privatization in Russia therefore was less than half what was raised in Hungary, which is the size of a small Russian oblast (county).
The third process that contributed to the present crisis was the rise of a criminal business oligarchy.
Organized crime began to expand rapidly in Russia during perestroika, when the first private businessmen appeared and gangs were organized to extort money from them. As well-connected former party officials began to use their connections to win lucrative licenses and concessions from the government, these gangs began to terrorize the new "businessmen" before eventually making common cause with them and beginning to collect their debts and intimidate and kill their real and potential competitors.
Ultimately, these newly formed criminal business alliances, which had gained wealth on the strength of their brutality and connections rather than their skill or entrepreneurship, began to organize banks.
In late 1993, in the aftermath of the forcible dispersal of the Russian parliament, Yeltsin put the Russian revenue system under the president’s control, and twelve banks were "empowered" to handle government accounts, receiving the government’s income and making disbursements. These banks began delaying payments on government obligations and lending the government’s money as short-term interbank credits at interest rates of 300 to 400 percent, reaping huge profits on the state’s money.
Soon, they were joined by regionally empowered banks that engaged in the same practices, and nonpayment of salaries became a permanent feature of Russian life.
The manipulation of budgetary funds has become so profitable that it has allowed favored banks to become creditors of the government which enriched them, and, by setting the terms of later privatization—in which they gave loans in return for shares in the most important state enterprises, under the terms of the "loans for shares" program—to take over most of the economy of the country.
The money the criminal business oligarchs earned through their "informal" ties to the government, in turn, is not invested in Russia. Instead of being invested at home, the profits of Russia’s criminal business class are being taken out of the country either in suitcases or in the form of transfers abroad to firms controlled by the sender.
The Ministry of Internal Affairs estimates that, in recent years, $350 billion has been illegally taken out of the country.
Need for Rule of Law
The combination of massive bribery, corrupt privatization, and the fostering of a criminal business oligarchy has driven Russia to its present state of destitution. As Russia drifts toward severe crisis—with its hard currency reserves believed to have fallen to some $14 billion (of which roughly a third is held in less-liquid gold holdings)—many analysts, including U.S. Treasury Secretary Robert Rubin, are calling on international financial institutions to bail the nation out with a major rescue effort.
The problem, however, is that no rescue effort will reverse the rot eating away at the Russian economy, a decay that stems from the reform process’s basic amorality As always in Russia, the question of the country’s future is neither economic nor social but preeminently a moral one.
The alternative to a major effort to reverse the criminalization of Russian society and establish the rule of law is an economic catastrophe that no amount of Western aid will be able to prevent, with possibly grave consequences for the whole of humanity.