Is Russia bankrupt?
* Russia 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 West— ought 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 materials sectors, which are mainly geared towards export. Banks therefore inevitably placed the majority of their funds in
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 pyramıd 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
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 from 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 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
In the old days, Soviet propaganda insisted that the overall course of economic policy was correct, and that all problems were the result of individual error by 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.
Now that the Western powers and IMF control many of the levers in the Russian
In this sense, a decrease in the average economy, they make the same claim. Boris Kagarlitsky suspects that the system 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 ment of real command economy levers, mentioned the idea of establishing con- will merely cause further disruption to majority are protected by sharply reducing the semi-legal incomes of today's privileged classes. for a "red extremist" and had their views regions and the Kaliningrad area
In addition to this, harsh mobilisation labelled as ridiculous or dangerous. appears to worry the government unduly. measures may facilitate a redistribution of resources, in such a way as to concentrate rations working in Russia are saying they to be found entirely in Russians' carethem 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
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
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.
trol over capital investment, let alone nationalisation, might have been taken Now, representatives of American corpodo not intend to pull out of the market, demanding instead a radical revision of economic policy and measures that fly in the face of Western economic sermo-
"If that means instituting age and price controls, or renationalising basic industries to ensure supplies and employment, so be it," Deborah Anne Palmieri president of the Russian-American Chamber of Commerce, said in the Journal of Commerce earlier last month.
The New York Times of Sept. 15 approvingly quoted David Kotz and other radical critics of the neo-liberal policy in Russia, arguing that the time has come to recall Franklin D. Roosevelt's New Deal "as a model for helping the Russian economy recover."
Domingo Cavallo, who was brought to Russia to discuss the creation of a currency board on the basis of the Argentiissue of Forbes Global to argue that such steps are not applicable in Russia and only a speedy annulment of sham
The Russian crisis rudely demonstrated how misled the prevalent attitudes have been. The string of successive "reformist" governments led the country into such a blind alley that only extreme administrative measures could provide any hope of a way out. Foreigners who were working with portfolio investments and playing the T-bill market and those who catered to the whims of New Russians have already pulled out of the market. Those who remain have invested money into serious projects, and are here for the long term. They have no time for ideology, and are willing to support any measures that might help cor-
Meanwhile, in Russia the bureaucrats and politicians are in a far more placid mood, as the unhurried formation of the government shows. No one shies away from talk of administrative measures, only from their implementation. Proposed half-measures such as the creation of special exporters and compulsory transfer of currency earnings to the government will probably come to nothing, and rather than signal the engageexisting market mechanisms. Not even the threat of famine in the northern
But the explanation for all of this is not lessness and their tendency to hope for
The government's own inability to seize control of anything would appear to be the main cause of its apparent timidity. Tentative efforts to deal with commercial banks that are unable to settle up with their own customers ended in nothing, while the bankers themselves seem prepared to go down with the entire country rather than concede property and power to the government.
To undertake something radical yet not touch the interests of the oligarchs is impossible. Although now practically bankrupt, the 15 wealthiest men in the country still command colossal political clout, and despite their inability to effectively use the property they accrued during the plundering of the state sector, they will not surrender it - Boris Berezovsky has already warned of civil war if there is an attempt to nationalise anyWhere is the left?
In theory, the Communists should be striving toward nationalisation, but like everyone else they fear (or respect) the oligarchs even more than the representatives of the other political parties When erstwhile Prime Minister Sergei Kiriyenko raised the idea of the state seizing the property of Gazprom as the most heinous tax-dodging enterprise, it was the Communist majority in the State Duma who reacted with outrage. Nor did the Communists rush to pass legislation that would allow the nationalisation of banks. Over the past few years the leaders of the "left-patriotic" bloc in the Duma have played by the rules established by the Yeltsin regime while crushing dissent in their ranks