The emerging conventional wisdom that the West must bail out Russia's collapsing financial system to stave off fascism has it exactly backward. The current banking crisis presents Russia with its best--and perhaps last--opportunity to check the power of the parasitic financial-industrial oligarchy that has persistently retarded Russia's political and economic development.
During the 1996 presidential race, Western pundits dubbed the influential financiers who bankrolled Boris Yeltsin's election campaign Russia's "robber barons." This attribution is catastrophically misleading. The largest Russian banks have not made their money by investing in rebuilding Russian industry. Despite the then-stable ruble, in 1997 fewer than 10% of all bank loans to enterprises in Russia were long-term. Rather, the bankers became wealthy by engaging in speculative financial machinations and exploiting their close ties to the government. The collapse of the Russian treasury bill and stock markets, precipitated by the Asian financial crisis and the drop in oil world prices, laid bare this glaring structural weakness. Russia's banks do not act like banks.
Why should we now let the banks suffer the consequences of their Icarus-like search for financial glory? Because it will not hurt Russia's sinking economy and may save Russia's fragile democracy.
Russian citizens would be little affected by the collapse of Russia's top commercial banks. Fully 77% of Russians have no bank savings at all, and of those who do, about three-quarters keep their money in the state-owned savings bank Sberbank. Unlike Western investors, average Russians long ago voted no confidence in their country's commercial banking system.
Russian industry, too, would remain almost unscathed. Most transactions among enterprises already take place outside of the banking system. In fact, according to economist Grigory Yavlinksky, 75% of the economy operates on a barter basis. A banking crisis would not cut growth by restricting the availability of credit to enterprises, because the banks never granted significant loans to enterprises in the first place.
Neither would future foreign investment in Russia be significantly affected by a banking collapse. While this was previously a compelling argument for supporting the banking sector, Russia's devaluation and subsequent 90-day moratorium on foreign debt servicing for favored banks will quash any remaining foreign investor interest in Russia for many months.
Finally, the fall of the biggest Russian banks would have few long-term repercussions on international financial markets. Although the bankers are economic powerhouses in Russia, they are relatively tiny on the world scale. The assets of the entire Russian banking system (excluding Sberbank) are about 80 times smaller than that of the United States. Some current foreign investors will inevitably take a hit--Russia's banks hold about $19.2 billion in foreign debt--but that is hardly reason to throw good money after bad by continuing to support a fatally flawed banking system in Russia.
How would it benefit Russia's future as a democracy? The bankers have, astutely, used their connections and relative wealth to amass ever-greater political power in Russia. They now control many of the largest media outlets, regularly serve in high government positions, provide much of the financing for Russia's political campaigns and periodically threaten its elected leaders by publicly predicting dire authoritarian consequences if the state does not look after the bankers' interests. Russia's banks have used the political system to ensure a continued flow of state resources into their coffers, while the government has amassed a massive debt burden with no economic progress to show for it, and ordinary Russians suffer perpetual wage arrears. Russia's democracy, in short, is hollow. Although letting the banks fail would have uncertain political consequences, supporting them would undoubtedly perpetuate this gradual evisceration of democratic practice in Russia.
Unfortunately, Yeltsin and his government are unlikely to abandon the bankers. Yeltsin's reappointment of old standby Viktor S. Chernomyrdin as acting prime minister indicates that the state and the leading financial-industrial groups are already too politically and economically intertwined for the state to break free. Yet the West should not make matters worse by financially supporting this twisted relationship. The IMF's recent ill-considered loan has already been wasted. When Clinton goes to Moscow this week, he should refuse further aid to help Russia "weather" the financial crisis. Russia's banks aren't worth bailing out.