Yeltsin’s Excellent Adventure

Russia’s statistical office recently released figures showing that shoe production in 1997 had fallen twelvefold since 1991, to less than one-fifth of a pair per person. To make matters worse, shoe imports also declined by more than 50% last year. In a normal country, this would mean a lot of barefoot people. Not so in Russia, where shoe sales last year grew a whopping 34%, according to the same statistical office. How to explain this oddity.

In Russia, factories dramatically underreport production to avoid paying taxes, while legions of “shuttle traders” smuggle tens of millions of shoes from Istanbul and elsewhere past bribed customs officials. A cozy little arrangement in which all participants profit handsomely--except the Russian state and the people who depend on it for their salaries and pensions.

The tale of the missing shoes could well be a metaphor for today’s Russia as a whole. It is a country vastly improved from yesteryear, yet still seemingly stuck far from the market-driven, rule-of-law system that alone can guarantee an opportunity for a decent life for all its citizens. It was awareness of this predicament and a desire to rectify it that pushed Russian President Boris N. Yeltsin to fire his entire Cabinet last week.

Judging from the cacophony coming from the pundits inside and outside Russia, this is much too simple a motive for dismissing Prime Minister Viktor S. Chernomyrdin and his government. Yeltsin, one major U.S. daily opined, may have done it “out of confusion” or perhaps because he was getting jealous of his prime minister. Conversely, it was said that he wanted to give Chernomyrdin a head start for the 2000 presidential race. Or perhaps he was simply a pawn in a scheme by business tycoon Boris A. Berezovsky to get rid of arch-enemy Anatoly B. Chubais, the brains behind economic reform.

But the truth is, Yeltsin’s move was neither political gamesmanship nor a routine Cabinet reshuffle. Rather, it was a conscious and forceful attempt by the president to reinvigorate Russia’s flagging reform efforts. When the analytical smoke clears, it will become clear that what Yeltsin has done is simply fire the old guard and replace them with a new team made up almost entirely of young and energetic reformers, people who are Russia’s future just as Chernomyrdin is its past. Whether Sergei V. Kiriyenko, Boris Y. Nemtsov or somebody else ends up as prime minister matters less than they all believe in faster and bolder reforms as the right medicine for the country.

Why now? The immediate reason is probably Yeltsin’s mounting anger and impatience at the inability of the government to collect taxes and pay pensions and salaries on time. Pension and wage arrears grew again in February and March and promise to get worse in the future. There also were the matters of increasing political bickering inside the government, the failure to break up and privatize the Soviet-style monopolies and a legislative agenda that had become hostage to Communist obstructionism in the Duma. Finally, Yeltsin must have concluded that Chernomyrdin’s political approach of seeking compromise rather than confrontation with the Communists had become counterproductive and a new, more assertive stance is needed.

Although perhaps not obvious to many, the country is doing well economically. Indeed, 1997 may come to be seen as the year when Russia emerged from its severe post-Soviet economic slump. Its currency is stable. Inflation is under control. Many regions and key sectors of the economy are growing again--as are people’s incomes. It almost certainly will get better this year. Russia’s prospects improve if one factors in small business and the underground economy, which are booming but are not reflected in any statistics. Investment, foreign and domestic, is on the rise again. Foreign trade registered a healthy $20-billion surplus in 1997.

Yet, perhaps Russia’s most notable achievement is that its economy has not been mortally wounded by the Asian financial crisis. When the extent of Asia’s woes became known last year, panic seized Moscow’s financial markets and foreign capital took flight. For a while, Russia’s fragile financial system tottered. But it did not topple. With the worst now over, confidence is returning.

Russia’s economic evolution bodes well for its political future. By and large, politics is moving away from ideological confrontations toward more pragmatic, market-based policies. This trend is especially evident the farther away from Moscow and its cantankerous politics you travel. In region after region, recent legislative elections have brought to power pragmatic, results-oriented technocrats and managers. The political clout of Communist and anti-reform elements has correspondingly weakened.

Even where conservatives still prevail, they must respect the new market conditions if they want to stay in power. For example, the severe drop in federal transfers to the regions has compelled many conservatives to consider market alternatives, including the international bond market, for financing. This, in turn, has forced even troglodyte Communist bosses to pay attention to heretofore alien concepts such as budget deficits, credit worthiness, foreign investment, rating agencies, etc.

In other cases, the provinces are starting to carry the ball on reform. Frustrated by the government’s inability to overcome Communist resistance and enact a land-reform law in the Duma, Saratov recently passed its own law liberalizing the sale of land and held the first land auction in Russia since the Bolshevik Revolution. Aware that land reform is the key to reviving Russia’s nonperforming agricultural sector, 30 other regions are reported to be preparing similar legislation.

Accordingly, it is increasingly doubtful that Communists and opponents of reform ever again will be able to muster as dominant a legislative presence in the Duma as they now enjoy. The last thing they want are new elections. They will gripe about Yeltsin’s latest moves but will approve the new government.

Will Russia continue its historic effort to reform itself? Predicting anything in Russia is notoriously risky, but there are reasons to be optimistic. The near-hysterical reaction of reform opponents to Yeltsin’s “coup” is one; the positive response by the markets is another. And markets, after all, are more important in Russia than ideology.