A March Toward the Abyss

Alex Alexiev, an international business consultant, is a former Rand scholar in Russian studies

Seven years after the dramatic events of August 1991, which led to the demise of Soviet communism and the birth of democratic Russia, the country is plunging headlong into an economic and political chaos that threatens to make the nuclear superpower ungovernable. This is no exaggeration. With its currency stripped of value, inflation running at 50% or more a month, a banking system near collapse and authorities unable to pay salaries and pensions to tens of millions, a social explosion seems only a matter of time. Yet, the political establishment is so paralyzed and polarized that a part of it hopes to profit from the coming troubles.

How did seven years of seemingly successful reforms and a functioning, if imperfect, democracy produce such a monstrosity? Truth is, trouble has been brewing for some time. Its root cause has been the incomplete, often contradictory nature of the transition from the ancien regime. A market system of sorts was established, but not the underpinning legal system that alone can guarantee its smooth operation. Coincidentally, a democracy was superimposed on a country that essentially lacked a civil society. Sectors of the economy were reformed, but much of its obsolete industrial and agricultural structures, including powerful monopolies, remained untouched.

Perhaps worst of all, President Boris N. Yeltsin's reformers, in their zeal to break the socialist economic mold through privatization, created a semicriminal economic elite that became super-rich through government giveaways, graft and corruption. These "oligarchs" grew progressively richer and more powerful as they cornered the country's banking system, commodity exports and increasingly its media. Their political clout increased correspondingly. After helping elect Yeltsin in 1996, they saw themselves, and were perceived by others, as the true masters of the country.

Cracks in this smoothly running scheme appeared in late 1997, when the Asian economic crisis began to affect Russia's fragile economy and its banking system. Plummeting world commodity prices, especially oil and metals, seriously damaged the oligarchs' interests.

Then in March, Yeltsin unexpectedly fired Prime Minister Viktor S. Chernomyrdin and appointed a government of determined reformers under Sergei V. Kiriyenko to deal with the gathering crisis. For the first time since Yeltsin's coming to power, long-overdue radical reforms were under consideration that, if successful, would have forced the oligarchs to pay taxes and loosen their stranglehold on the economy. They would have none of it.

The crisis reached its boiling point early last month. The reformers were able to secure a new loan pledge from the International Monetary Fund to stave off immediate financial threats and pay for the reform program. At the same time, the oligarch-controlled banks, highly indebted to foreign creditors and sitting on a mountain of devalued government securities, teetered on the brink of insolvency. As always, the tycoons looked to the government to bail them out of their self-created mess. Kiriyenko's government responded by devaluing the ruble, in effect, and declaring a moratorium on paying ruble-denominated debt. Why an otherwise sensible government made such disastrous and ill-timed decisions remains unclear.

In any case, the oligarchs used the shock created by the devaluation and default to get rid of the reformist government altogether and install leaders more to their liking. The most powerful and odious of the oligarchs, Boris A. Berezovsky, said to be close to Yeltsin's daughter, Tatiana, and his head of administration, Valentin Yumashev, evidently prevailed on a physically and mentally deteriorating president to fire Kiriyenko and appoint Chernomyrdin as acting prime minister. The foundation of this astounding political coup included major concessions to the Communist majority in the Duma, a scaling down of economic reform, curtailment of the president's constitutional powers and a power-sharing arrangement, all in return for a quick approval of Chernomyrdin's candidacy.

The Communists eagerly embraced the scheme but had no intention of dancing to Berezovsky's tune. Instead, they regarded the crisis as a once-in-a-lifetime opportunity to do away with Yeltsin and his reformers and take power through the back door. Contrary to the oligarchs' belief, the Communists had not become politically domesticated. Indeed, the party has grown progressively radicalized. The catalyst was the recent election of Alexander I. Lebed in Krasnoyarsk, along with the realization that the party could lose its core support if its opposition to Yeltsin was perceived as less than staunch. In Krasnoyarsk, the Communist-sympathetic electorate and the local party leadership, openly defying explicit instructions from Moscow, voted for Lebed en masse, securing his victory.

The Communists' price for cooperating with Yeltsin was near-extortion. It included a return to a quasi-socialist economic model and the effective political emasculation of the president, de facto control of the Communist-dominated Duma over ministerial appointments and dismissals, and increased "public control" of the media. It was astounding that Chernomyrdin and Yeltsin's representatives signed this "political agreement" and even more astounding that Gennady A. Zyuganov, the Communist leader, could not get his party to honor its own proposals, simply because Yeltsin had refused to step down immediately. Chernomyrdin's rejection by the Duma clearly shows that, failing to get one of their handpicked candidates nominated, the Communists are behaving in accordance with the Leninist dictum "the worse, the better." Apparently, they believe a new proletarian revolution will soon sweep them to power.

It is a huge miscalculation, as is the oligarchs' belief that they can control and steer Russia's turbulent political undercurrents at will. The logic of the gathering storm is such that, unless stopped soon, it will inevitably lead to violence, anarchy, separatism and the likely emergence of a rabidly nationalistic, neofascist dictatorship that will sweep from the scene oligarchs, Communists and democrats alike.

Is there an alternative to this nightmare? Ironically, as Russia is unraveling, a glimmer of hope has appeared. Much like a patient who is unwilling to consider radical surgery until there is no other hope, Russia is in such desperate straits that it may be willing to try a truly radical cure for its economic and political ills: the creation of a currency board and the wholesale transformation of monetary and economic policies that it requires.

A currency board is simply a mechanism that pegs a country's money to a reserve currency and secures its complete convertibility by maintaining sufficient amounts of the latter to cover all money in circulation. It has a dramatic effect on policy in that it ties the hands of both the central bank and the politicians and makes it impossible for them to use monetary policy to play politics. It leads inevitably to budgetary and monetary policies based on market considerations, rather than politics, and results in a stable currency and low inflation in a remarkably short period.

In Russia, the currency board would have the additional effects of ending the oligarchs' free ride at public expense and putting the strained relations between the center and the regions on a sound monetary basis. If the board is instituted simultaneously with a firm government promise to meet all its outstanding debt obligations and negotiate a new debt restructuring to that end, foreign investors may again return to Russia.

How likely is this radical therapy? It's a long shot, to be sure, but at least in the past few days it has been talked about at high levels of government. Chernomyrdin seems to have blessed the idea of a currency board last Friday. Still, the proposal will be resisted stridently by the opposition and the oligarchs; accordingly, its implementation will probably require that Yeltsin dismiss the Duma or declare emergency rule. It will also require strong support from the West and likely new resources to guarantee sufficient funds at the outset.

It behooves the West and the IMF, whose policies toward Russia have been an abject failure, to respond promptly and positively. The choice is between a Russia that gets a realistic chance to stave off economic ruination and remain democratic and anarchy in a country with 20,000 nuclear weapons.

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