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Russia: The end of a world power
What lies behind the domestic crisis?
By Patrick Richter
30 April 1999
The arrogant attitude of Washington towards the Russian government during
the bombardment of Serbia marks a turn in relations with Russia and gives
cause to assess the real character of the liberal reforms which have been
carried out there since 1991.
These policies were aimed at completely destroying the Russian economy as a
potential competitor and turning the country into a market and source for
cheap raw materials. With the many big collective corporations bought by
Western businesses--above all in the food, chemical and pharmaceutical
industries--productive plants were closed while the retail networks were
retained as an outlet for Western products.
Following the financial crisis last summer, apart from the chocolate factory
"Red October", no larger profit-making "Russian" factories have survived.
Coal and steel companies are subsidised by the government and the contracts
for the arms industry have dropped dramatically. Only the raw materials
industry is able to yield a profit.
The type of future perspectives regarding foreign investment, in which so
much hope is still invested by the Central European countries, has been
summed up by the American banker and industrialist Thomas Wainwright: "Where
should they [the foreign investors] go with their money? Who would they
produce for? The international market is in a depression and foreign
competitors would reject products manufactured in Russia with all sorts of
protectionist measures." Steel and aluminium are already now being
threatened by such anti-dumping measures.
Last August's financial crisis burst the bubble of the overblown Russian
credit market, which on the one hand expressed the boundless and naive
illusions in a capitalist upturn but which was also consciously inflated in
order to increase Russia's dependence on the West.
The credit policies of the IMF since 1991 served the purpose of
strengthening particular layers in Russia whose job was to carry out such a
policy. Its chief supporters were chosen amongst the most corrupt and
ruthless economic and political climbers who, under the leadership of
President Boris Yeltsin, could bring the most profitable parts of the
economy under their control--the finance and oil sector--and then build up
very influential media empires.
At the height of their power these men were reputed to control over 90
percent of the economy and were known as the so-called oligarchs: Boris
Berezovsky (who built his empire with LogoWAS, the Lada distribution
network; owns newspapers, television stations and shares in oil companies
and the Russian airline Aeroflot), Vladimir Potanin (of Oneximbank; one of
the richest men in Russia, according to Forbes, with $1.6 billion),
Alexander Smolensky (SBS-Agrobank), Vladimir Gussinsky (Mostbank group),
Vladimir Vinogradov (Inkombank), Vagit Alekperov (Lukoil) and Michael
Chodorovsky (Yukos-Oil), to name just a few of the most important ones.
Their elevation came relatively easily. During perestroika the mathematics
graduates and young members of the Communist Party's youth organisation
founded private banks with party money, or just took over privatised parts
of the national banking system. In the unstable situation in the first years
after 1991 they were given cheap state credits which they could use to
speculate during a period of hyperinflation. On this basis they were able to
rack up their first millions of dollars. In the following period, the
oligarchs gradually acquired shares in industry through their banks--nearly
always at underrated market value--above all in the raw materials sector.
In 1995 the head of privatisation at the time, Anatoli Chubais, enabled them
to carry out their biggest coup with the help of the so-called "shares
against credit" privatisation program, which privatised the most profitable
key industries. In the name of a few of the oligarchs, Oneximbank head
Potanin organised a loan of $2 billion in exchange for shares of the
Berezovsky company due to be privatised. This is how Berezovsky and
Smolensky gained the majority of shares of Russia's seventh biggest oil
company, Sibneft. After the privatisation program had been carried out, this
handful of super-rich controlled the lion's share in the companies.
They continued to receive help from the state right up to the financial
crisis. The short-term government loans with which the state financially met
the demands of its private national and foreign creditors came onto the
market through the above mentioned banks. Up until the crisis, state
provision and free loans constituted the bank's main source of income and
strengthened the position of the oligarchs.
In a study dealing with the lives and intentions of this layer, Maxim Boyko,
Andrei Shleifer and Robert Vishny established that they "have absolutely no
entrepreneurial abilities, are unusually keen on wealth and are absolutely
not interested in becoming rich through hard work" ( Privatising Russia, MIT
Press, 1995: Cambridge).
The fine sounding words of IMF economists like Jeffrey Sachs, or politicians
like Clinton and Kohl--who declared that doing away with the sprawling
corruption had to be seen as the most pressing task in order to overcome the
economic problems--stood in sharp contradiction to the fact that these
politicians and bankers worked hand in hand with the oligarchs. This was
particularly clear at the time of the presidential elections in 1996.
At that time the oligarchs and the IMF, and the American and German
governments jointly supported Yeltsin's election campaign. It was only
thanks to their concerted help that he was narrowly re-elected. In his book
So long, Russia ( Pros'hai, Rossija, Moscow: 1997) the Italian journalist
Giulietto Chiesa describes how the American government not only supported
Yeltsin's election campaign but also directly organised it.
For this purpose four American election campaign experts were brought over
to Moscow four months before the election campaign. One of them, Richard
Dresner, basing himself on the work that he had done with opinion polls,
explained that: (a) Yeltsin would be beaten by five candidates in all
ranking lists, (b) the current president could only count on 6 percent of
Russians supporting him, and (c) he (Yeltsin) is considered by even fewer
Russians to be a "competent leader". "If we were in the USA, I would advise
a guy under such conditions to change his job" (ibid, page 18).
For finances, Chiesa then writes, the IMF temporarily "passed over to the
Soviet system of 'unlimited budgets for particular projects' and announced
the allocation of over $10.3 billion on the eve of the elections" (ibid,
page 17). Helmut Kohl awarded 3 billion DMs so that Yeltsin had enough means
to quieten the opposition in the press.
The oligarchs gained direct entrance into politics due to their massive
financial support and their collaboration with the West. Vladimir Potanin
was temporarily named vice-prime minister and Berezovsky vice-security
advisor.
Boris Berezovsky--who supported the election of General Lebed as governor of
the Krasnoyarsk region in 1998, and is described as the modern Rasputin
because of his direct influence upon Yeltsin's policies--already held
several posts, serving until March as general secretary of the Community of
Independent States (CIS).
President Yeltsin's declarations of his resolve to clip the wings of the
oligarchs with the help of the liberals remained empty words as the latter
revealed themselves meanwhile to be hungry for power and intent on carrying
out "real reforms at long last". The growing protest movement of the working
class prevented Yeltsin from implementing additional social cutbacks, whilst
the oligarchs asserted their influence through their media empire. Boris
Nemtzov and Anatoli Chubais, who had been appointed to the government, did
not last longer than 15 months. And the Kiriyenko government, appointed a
year later in March, did not even survive until the end of August.
The breakdown of the status quo of the past years, due to the lack of
further foreign financial help, fundamentally changed the relations of power
in domestic policy. The communists and nationalists, with a majority of
representatives in the national Duma, have up to now expressed their
opposition to the government in radical words only, but have consistently
supported Yeltsin's policies and in turn have benefited from generous
privileges. Since August they have increasingly attempted to push through
the interests of their clientele.
Those behind these parties are the directors and owners of the industrial
sector who came off short during the enrichment orgy of the "reform period",
and had to just stand and watch while foreign producers disputed their right
to a share of the market. Amongst them are, above all, the arms and steel
industry. The defence industry was particularly badly hit because its main
customer, the state, had to drastically reduce its budget for armaments. In
addition, Russia's traditional markets in Eastern Europe have nearly all
completely collapsed as a result of NATO's East European expansion.
After Kiriyenko's dismissal in August, Yeltsin initially proposed Victor
Chernomyrdin as new prime minister for a "stabilisation period" for the
Russian economy--someone regarded as the main enemy by the nationalists and
communists. A compromise was reached and the Primakov government was
founded. Yuri Masliukov, who led the national planning body Gosplan in the
80s and is a member of the CP of the Russian Federation, was named
vice-prime minister. This government clearly is clearly of a transitional
character and has the task of manoeuvring between the interests of foreign
capital and the oligarchs on the one hand and the interests of the
nationalists on the other.
The impeachment proceedings against Yeltsin and the recent incident
concerning Boris Berezovsky and the chief public prosecutor Yuri Skuratov
have to be viewed against this backdrop, which has been further fuelled by
the outbreak of the war in Kosovo.
In typical manner, police chief Skuratov was sacked by Yeltsin at the
beginning of February following revelations of various corruption scandals.
These involved Yeltsin's daughter Tatiana Diachenko, ex-premier Victor
Chernomyrdin and Boris Berezovsky embezzling an IMF credit instalment
amounting to $4.8 billion last August. However Skuratov pursued his work,
with the support of the national Duma, until a video was made public at the
beginning of March showing Skuratov in bed with two prostitutes.
The outbreak of war seemed to further strengthen the nationalists.
Accompanied by the media, they demanded direct military support for
Milosevic, and some even demanded the use of atomic weapons against NATO. An
arrest warrant was issued against Berezovsky and Smolensky on April 7, and
impeachment proceedings against Yeltsin took an increasingly concrete shape.
But then came a rapid about-turn. "More objective" reports about the war
began to appear in the media, the arrest warrant against Berezovsky and
Smolensky was dropped and the impeachment procedure was adjourned until
mid-May.
Commentaries spoke of a renewed strengthening of Yeltsin, to whom the World
Bank held out the prospect of a credit of $3 billion, while Victor
Chernomyrdin was appointed delegate for Yugoslavia to lead peace talks.
The background to the turnaround is above all Europe's and particularly
Germany's efforts to make sure that Russia can save face regarding the war
in Kosovo. The United States is openly trampling on Russia's interests in
foreign policy, and the spreading of the conflict to Russia is rapidly
becoming a tangible possibility. In this vein Israeli Defence Minister Moshe
Arens declared recently, with respect to the alleged Russian transfer of
nuclear technology to Iran, "The USA are the only ones who can stop Russia."
The European governments are very well aware that Russia's weaknesses will
become an increasing problem for all of Europe. The European standpoint was
summed up in a comment by the prominent German journalist and expert on
Russia, Gerd Ruge: "Russia is not the Titanic, Russia is the iceberg."
See Also:
Russia and the Balkan war
NATO's bombing of Belgrade changes the political balance of forces in Moscow
[13 April 1999]
Eight years after capitalist reforms--a social crisis in Russia "without
parallel"
[2 February 1999]
Red Cross and Red Crescent issue report:
Warnings of famine and starvation in the former Soviet Union
[7 October 1999]
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