To Really Bail Out Russia, West Must Deny the Loans

For the sixth time in six years, the West has agreed to prop up the Kremlin with billions of dollars. Each time, it would have been wiser to refuse. That would have helped Russia by strengthening the government’s incentive to combat corruption and focus on real, not phony economic reform. But each time the West has harmed Russia by ponying up. The Kremlin thus has been able to go on feeding the country’s crony capitalism and neglecting the rule of law.

Each year, the amount of money lent by the International Monetary Fund has been larger than the year before. Each year, bad things have followed the loans, in politics as well as economics. For example, three months after the IMF gave its second loan (of $1.5 billion) in 1993, President Boris N. Yeltsin used tanks to disperse the democratically elected Parliament that had brought him to power. Hundreds of people were killed. Then, in 1994, after getting another $1.5 billion, Yeltsin sent his tanks into Chechnya, launching a long war.

Much of 1995’s loan of $6.8 billion went to finance the continuing blood bath there. In 1996, a new loan of $10 billion helped fund Yeltsin’s reelection campaign.

Last year, the Kremlin promised repeatedly it would not ask for any more IMF loans. Nonetheless, it has just begged for and been promised not a small sum to fend off ripples from the Asian financial crisis, but an extra $17.1 billion, including $11.6 billion from the IMF.

Given this pattern, Russians are wondering what new surprise Yeltsin is preparing for them, apart from more financial austerity. Could it be some new confrontation designed to keep him in power? Certainly, there are signs that a crackdown may be coming, including the murders of two oppositionists that the authorities may have been involved in.

In any case, the stakes are now far higher than before, for Russia and the West. If, as many analysts expect, much of the new cash is used for political purposes or embezzled, and the Russian economy continues to, at best, stagnate, then the current worldwide criticism of the IMF will turn into a flood. It will also affect the Clinton administration, which, though the Kremlin’s new reform program will probably work no better than previous ones, effectively ordered the IMF to open its purse.

In Russia, meanwhile, devaluation of the ruble will probably soon be unavoidable, ordinary Russians will incur still more pain, and Yeltsin and his government may well fall from power. The only silver lining would be that Yeltsin’s demise would at last give Russians hope that there might be some light at the end of the tunnel. New leaders would make a fresh start. This could hardly be worse for Russia, and would probably be better.

Why do we believe the new loan package will postpone a far bigger crisis only for a matter of months? Because the crisis is ultimately more political than economic. The Kremlin is locked into patterns of behavior it cannot change. It has lost its legitimacy in every sense except the most formal. Yeltsin has none, nor do the governments he appoints. The latter get no respect from the bureaucracy or the alienated Russian people. The current government might have the most perfect economic policies, as the IMF actually believes, but they will not help. The government lacks any authority to implement policies, perfect or imperfect, that involve painful change for the establishment.

A recent episode illustrates the regime’s weakness and isolation. Last fall, it decided to answer critics who contended, convincingly, that Russia was a privatized state guided not by the national interest, but by private interests. It started a campaign to do away with crony capitalism--the very capitalism that Yeltsin and his U.S. advisors had been creating since 1991. But who did the Kremlin turn to in the new fiscal crisis? The very crony capitalists on whom it had declared war! One of these, Boris A. Berezovsky, explained why: “The government has no other real base of support.”

So the two “have” groups in Russia, the government and the “financial oligarchs,” have forgotten their differences and called in the IMF. They hope to pacify the millions of increasingly restive have-nots for a few more months. But the latter will hardly be impressed. Most of the pro-Western groups that brought Yeltsin to power in 1990 now criticize the West sharply, precisely because Western aid has played such a big role in advancing the narrow interests of the ruling “oligarchs” at the expense of the rest of society. Ordinary Russians know the new loans will do little except bail out the oligarchs and Western speculators.

They are right. In the short term, at least, the following trends will probably continue: Russia’s gross domestic product will stagnate or even decline (after dropping by about 50% since 1990); more illegal capital will flow abroad than aid money flows in; most workers will be paid months late; unemployment will continue to rise; pensions, social payments and the minimum wage will fall still further in real terms; investment will continue its downward path as financial markets remain obsessed with bond and monetary speculation; much of the economy will rely on barter instead of money; small and medium businesses will have no protection from the mafia’s unrelenting extortion; corrupt and criminal elements will tighten their grip on political structures, and--on an index monitored by the World Bank--Russia will continue to challenge Colombia and Nigeria for the title of most corrupt country in the world.

But one new wrinkle could be even more serious, at least for the West. The Russian people could become so alienated from the West, from the perverted capitalism it helped to impose on them and from the democracy it compromised by applauding Yeltsin’s decision to destroy the Parliament, that it will no longer be able to reverse their alienation. Then Russia might start to resemble Iran in the 1970s. That was when the United States kept on arming and funding the widely unpopular shah until, one day, the majority of Iranians could bear it no longer. They rose up against both him and the United States. Americans are still paying the price. It makes no sense to risk such an outcome. Even though Russia is not Iran, it is unpredictable.

The West appears, too, to have fallen again for an old trick of Yeltsin’s. Fearing last month that the loan spigot might at last be turned off, he started proclaiming that Russia was in imminent danger from extremist forces. Whatever doubts we might have about him, we should rush to his support. However, having long ago tamed the communists, he could provide no evidence.

If the West had avoided these mistakes and declined to throw good money after bad, Russian coal miners, teachers, health workers, scientists and other groups that have been striking and demonstrating would have known the West was listening. By indulging Yeltsin, however, it conveyed the opposite message: that it knows nothing of recent polls showing that the percentage of Russians prepared to support militant anti-Yeltsin demonstrations has grown from 30% a year ago to 44% today, and that Yeltsin’s approval rating has fallen to a microscopic 4%, while his negatives have soared to 80%.

We can only hope that the opposition will use this opportunity to make Yeltsin give them some real representation in the government in return for their cooperation in helping to avoid economic disaster.

What would have happened if the West had denied Yeltsin his new loans? The West would have saved the money and not fed Russian corruption. It would have shown its loss of confidence in Yeltsin, thus pleasing ordinary Russians and helping their rulers to sober up and take full responsibility for their rule. The Kremlin might have devalued the ruble, though the recent predictions of devaluation may have primarily been scare tactics to get the loans. Or, instead of devaluing, it might have shut down the bond market and defaulted, as it may in the next crisis. Living standards would have fallen, but perhaps less sharply than they will next time. Groups of oligarchs, parliamentarians and organized labor would have put mounting pressure on Yeltsin to resign and perhaps succeeded. If so, three months later the voters would have elected a new president, who would have appointed a new prime minister, who would have had new ideas for reforms. Finally, the rising tensions and even hostility between Westerners and many Russians would have been somewhat mitigated.

By not encouraging this course, the West has probably erred. The extra $17.1 billion may buy a few months of reduced chaos in Russia, but when the bubble of Kremlin-induced financial speculation bursts, the political and economic crisis will be bigger and more dangerous than it would have been otherwise. Since the Yeltsin regime has lost its legitimacy, it will use the cash mainly as a weapon against the rising opposition of the Russian people.