Margaret Thatcher - Statecraft

What is clear from this sketch of the tangled events of the period between the proclamation of reform at the start of Yeltsin’s presidency and its effective abandonment some time before the end is that the IMF lacked the knowledge and the means to effect the major changes required to bring free-market capitalism to Russia. All they could be expected to do – and what they should have tried to do – was to support positive moves from within Russia and refrain from supporting negative ones. Having lost the only real opportunity to achieve transformation of the Russian economy by those who believed in the project, Westerners consistently overrated the prospects of half-baked reform at the hands of halfhearted reformers. The idea that a government run by Viktor Chernomyrdin, let alone by Yevgeny Primakov, could be relied upon to pursue the same objectives as Western economic liberals was laughable. Yet the rhetoric was always the same: ‘reform’ could only be achieved by more Western money and still greater Western forbearance.

The errors of wishful thinking were compounded by a failure to understand that the Russian economy depended upon Russian power structures. If the power structures remained inimical to reform, reform would simply not occur.

Without a proper rule of law, honest administration, sound banks and secure private property, it is not possible to create a free-market economy. President Yeltsin is often criticised for giving in to political pressures and slowing down or sidestepping the necessary appointments and measures. Perhaps someone with a less mercurial personality would indeed have made a difference. But politicians have to find backing if they are to make changes. If Yeltsin could not gain the support he needed among an increasingly disillusioned electorate he had to find it from the powerful figures that have come to be known as the ‘oligarchs’. With no previous experience of patience being rewarded, the Russian people became increasingly unwilling to go on making sacrifices.

The conditions in which most Russians live are hard indeed. They deserve better. But some of the statistics bandied about are somewhat misleading. When we hear (as we sometimes do) that the country’s economic output is about half the level of a decade ago or that real incomes have fallen sharply, it is worth recalling that economic statistics under the Soviet Union were hardly more reliable than any other official statements. Moreover, a country that produces what no one wants to buy, and whose workers receive wages that they cannot use to buy goods they want, is hardly in the best of economic health. Comparisons between living standards in the last years of the Soviet system and living standards now suggest that measured by the most important criterion – what people are actually able to spend – there has been some improvement. *

Yet it has been very uneven, and there have been terrible moments. The harshest pressures, as public expenditure controls were imposed, were upon people dependent on the state for their living. There were large arrears in payments of wages and pensions and sharp falls in their value, as inflation soared. Probably the worst blow has been against savings. Nothing does more to undermine a society than when savers are impoverished, as the history of Germany’s Weimar Republic shows.

But perhaps the most telling indices of misery are not economic but social – for Russia is sick, and at present it is really no exaggeration to say that it is dying. As one expert has remarked: ‘No industrialised country has ever before suffered such a severe and prolonged deterioration [of public health] during peacetime.’ †Death rates in Russia are nearly 30 per cent higher than at the end of the Soviet Union – and public health was already bad in Soviet times. Deaths are now exceeding births by well over half, some seven hundred thousand a year. Life expectancy for Russian men today is about sixty-one – worse than Egypt, Indonesia or Paraguay. The main causes are extraordinarily high rates of heart disease and injuries, in which the common factor is apparently alcohol abuse. Life is simply so bad that the bottle offers the only refuge.

What makes so many ordinary Russians this depressed is, one suspects, not just frustration at their own prospects, but also anger at the way in which a minority flaunts huge wealth acquired from successful speculations, insider trading, cartels and gangsterism. The root of the trouble was that in Russia in the early 1990s, when reform was under way, there was no middle class in the European sense. Tsarist Russia never developed a substantial middle class anyway, but what there was fled or were impoverished or killed by the Bolsheviks.

Under communism no such class could emerge and ‘bourgeois’ values were, naturally, deplored. There were ‘managers’ of course. But these were just political bureaucrats, not entrepreneurs and owners. Consequently, those who found themselves with the knowledge, means and position to flourish in the early years of reform were the class of apparatchiks.

The prospering of this elite renders in the eyes of many Russians the mere notion of ‘reform’ suspect and its proponents odious. And though they are wrong, who can blame them?

Beneath the formalities of memoranda, declarations of intent, statistical projections and neatly typed balance sheets, a series of struggles for power have been conducted. Among the most important players have been: the bureaucracy; the armed forces, whose frustration at their penury has on occasion threatened the security of the state; the magnates, in control (directly or indirectly) of Russia’s vast natural resources, particularly oil, which they bought cheaply and then obtained licences to sell at much higher international prices; and banks, which performed none of the functions of normal Western banks, but rather bought up in rigged auctions the shares of privatised companies.

In fact, a kind of economic theatre of the absurd was functioning well before the 1998 crash. Industries, which because of their inefficiency were incapable of making a profit, were kept afloat because their bosses used influence and connections to escape paying taxes to the government, gave worthless promissory notes to their creditors and often remunerated their workers in barter. The absurdities of the Soviet system were being recreated. As the joke ran in those times (referring to the fact that both industrial products and industrial wages were effectively worthless): ‘We pretend to work – they pretend to pay us.’ But now, as often as not, no one was paid. Such are the circumstances in which – in spite of the fact that 70 per cent of industry is notionally in private hands, that consumer prices have been deregulated and that a return to socialism is probably impossible – we have to conclude that economic reform has so far largely failed.

One of the most crushing verdicts on what has occurred is that of the economist and current adviser to President Putin, Andrei Ilarionov:

… [S]ince the summer of 1992, with few exceptions, the political struggle has not been over whether the government should implement more liberal or more interventionist economic policy. The real struggle has been over a different issue: who or whose team (group, gang, family) would control the state institutions and instruments that control the distribution and redistribution of economic resources … The only distinction among the groups participating in the Russian transformation was their ability to camouflage their deeds to make them suitable for public consumption in Russia and abroad. *

The West cannot behave as if this were not the case. We have to learn from our mistakes. We have to face up to their consequences. And we have to do better.