A Free Market Economy in Russian Society?

By: Leroy A. Binns Ph.D.

 

The disintegration of the Union of Soviet Socialist Republics and successful engineered coup d’etat against President Mikhail Gorbachev in 1991 gave rise to the creation of the state of Russia and the emergence of America’s point man ex-Russian premier Boris Yeltsin. This change of climate in anticipation of a paradigm shift also produced reformers, western economists, business consultants and investors and elections.

Once in charge Yeltsin publicly denounced glasnost and perestroika as envisioned by his predecessor and endorsed a plan of action to radically transform Russia into a democratic and market economy. In the words of the new leader, “Gorbachev’s main mistake was his failure to take the Yavlinsky-Allison plan to London. We have to return to this program… to discuss it so that we can implement it with our joint efforts. Russia will strongly support this program.”

The aforementioned initiative of architects Graham Allison, the director of the Strengthening Democratic Institutions Project at John F. Kennedy School of Government, Harvard University and his counterpart a former first deputy Prime Minister of the Russian Federation and head of the Center of Political and Economic Research, USSR Grigory Yavlinsky along with a joint working group of Russian and American consultants addressed the rehabilitation of Russian society on different fronts in varied stages. From a systematic perspective the creation of a legal and economic framework entailing relevant issues such as institution building, macroeconomic stabilization and market reform, consolidation of stabilization, large scale privatization and the beginning of structural reforms was proposed. The study also advanced the intensification of structural reform with concentration on the development of a consumer economy and social programs required by a market economy – both of which were primarily dependent on financial and technical assistance from the IMF and the World Bank.

If adopted there was wide speculation that initially Russian laws would be modified and upheld, privatization and liberalization would commence and a reduction of enterprise subsidies and the elimination of price controls introduced thus enhancing a stable currency and balanced budget while enticing foreign investments. Moreover sustained success should include a liberalized and competitive environment conducive to increased productivity, low inflation and unemployment rates and fiscal responsibility under the control of an efficient command system.

Unsurprisingly despite external default, a decline in state revenue and foreign trade, a change of government and access to over $26 billion in credits by the IMF from 1992 – 1998 Moscow lacks the ability to rid itself of the legacies of the pass and confront a future of active engagement. Yeltsin’s macroeconomic policies while addressing elements of price liberalization and privatization (18,000 large and medium sized enterprises changed ownership in 1994 – 1995) neglected modes of conduct (e.g., control of the Central Bank, the local currency and import subsidies or 66% of GDP) necessary to create a modern market economy. The administration likewise failed miserably in retooling its legal system and was therefore unable to enforce contracts.

With loopholes namely rents (e.g., loans for shares and voucher privatization incentives) undermining productive investments and tax revenues the apparatchik comprised of state enterprise managers, government officials, politicians and commodity traders forged oligarchic capitalism by becoming the beneficiaries of enormous wealth (approximately $24 billion in 1992 or 30% of the country’s GDP and an overall sum of $125 - $140 billion between 1991 – 1997) which in short order accumulated overseas. In addition foreign investors resorted to safe havens elsewhere as organized crime openly flourished unabated.

Exacerbating the crisis and elevating the cause for waste and corruption the regime continues to subsidize an unproductive security force and bureaucracy. The International Institute of Strategic Studies confirms that military spending is estimated at 27% of the federal budget or 7% of GDP meanwhile the central civilian administration has doubled since 1991 to a pre-Russian level of 2.1 million ignoring a decrease in population by 50% following the dismantling of the Soviet federation. To accentuate a downward spiral an IMF provision of $22.5 billion in July 1998 was too late in preventing fiscal woes attributed to ill-advised short term financing via sales of government securities most notably an inflated debt burden and ultimately a default and devaluation in August 1998.

In his annual address to the federal assembly on March 30, 1999 President Yeltsin who is noted for assigning blame and terminating prime ministers for inadequacies admitted his fallacies by saying, “We have gotten stuck halfway in our transition from the planned and command economy to a normal economy. We have created…a hybrid of the two systems.” In essence Russia exalted a few with the spoils of partial reform who in turn sabotaged meaningful economic modifications at the privilege of wages or pensions in a timely fashion.

With expediency the Bush administration capitalized on a fragile economic atmosphere prevalent in Soviet society by aiding in the genesis of a power vacuum but was unprepared for its aftermath. Washington misconstrued the reluctance of the old vanguard to welcome change, inadequately investigated the characteristics of the country’s emerging elite and its state of affairs, unequivocally buttressed an unimaginative, zealous figure in the form of Yeltsin (a politician who offered lucrative inducements to wealthy entrepreneurs in return for his re-election) to sponsor genuine leadership and therefore sought to implement a free market economy under inhospitable conditions with limited regard to overriding distinctions.

In a country with a declining GDP of over 40% within the past decade, unemployment exceeding 12%, inflation at 140% and a weak ruble responsible for the importation of an estimated 60% of its total food supply drastic measures are overdue. President Vladimar Putin must seize the reins of power by introducing a window of opportunity with commitment to debt rescheduling, commercial and central bank rebuilding, budget regulating and foreign investments.

Faced with the implausible task of servicing beyond 50% of the $17.5 billion debt for 1999 from a projected annual revenue of $22 billion critical negotiations are in order to charter new measures debt reduction and revised repayment schedules amicable to all parties. A transparent and accountable banking system is paramount to savings and investments that may encompass the involvement of a currency board to police banking operations and control monetary policy while mechanisms must be re-enforced to ensure the collection of central, state and regional revenues and by doing so eradicate unproductive agencies in an attempt to balance the budget.

A trend towards the accomplishment of the outlined criteria will kindle an infusion of vital foreign direct investment far beyond its 0.8% of GDP in 1997 to advance the private sector and enlarge the state’s treasury. Deviation from the recommended prescription could render this $161.6 billion debt ridden nation to a state of anarchy.