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There is no government in Russia any more. The 17th of August has been transformed into a habit
By Alexey Mikhailov
Nezavisimaya Gazeta
August 18 1999

On the third day after the resignation of Sergei Stepashin's government, this topic was replaced in the news bulletins by a Spartak victory (Ed. a famous Russian football team), the solar eclipse and the war in Daghestan. The country has got used to living without a government. No one bothers to memorise the name of another prime minister any more. For the past 18 months there have been no gun shots or serious political shocks, as everyone, even the State Duma that is always in opposition, has come to accept that the government in Russia has merely been transformed into a strong department of the Presidential Administration. How did this happen?

In spring 1998, when the young prime minister Sergei Kiriyenko was appointed, the country was already doomed to crisis. This was primarily attributable to the economic policy of curbing inflation through abrupt growth in the domestic and foreign debt; this pyramid inevitably had to collapse, in view of a weak Russian economy. It was simply a matter of time. There were two obvious reasons for the "ripening" of the crisis in spring 1998: the disappearance of the country's trade surplus (owing to the rouble's over-evaluation and a decline in world prices for Russia's main export items) and the outflow of foreign capital from the domestic state securities market (due to the crisis in South-East Asia).

What had to be done? Either immediately or in spring 1998 a default on state bonds and their "elegant" restructurisation into long-term securities without robbing investors. And devaluation could be postponed for a year or dragged out for a year. In the event of three-fold or four-fold devaluation, the rouble state debt would also depreciate and the government would find it easy to service this debt. Naturally devaluation is unpleasant, but this is a market and you have to pay for past mistakes. But there was one more element - a three month default on the private debts of Russian companies. The combination of these three elements in one crisis simply implied panic in the Russian economic leadership and the captain's command to "run for your life" and his immediate evacuation into a life-boat.

Default on private debt is unprecedented: the state allows Russian private companies not to pay their debts to foreign investors. How did this idea appear? It has transpired that it emerged absolutely logically. Sergei Kiriyenko (voluntarily or involuntarily) conducted an important experiment on Russia's economy - partnership between state and large-scale corporations; while the government declared itself an "equal" partner rather than "superior".

The experiment failed. Firstly, the government could not handle the constant lobbying by big business and was simply transformed into a tool that catered for its needs. Secondly, Russia's big business did not pass the exam for maturity; it failed to pool economic interests. Throughout the whole summer of 1998 Russia's biggest banks were selling their state bonds and buying dollars. If the most prominent banks had restrained their appetite, the crisis could have been postponed for at least a year (owing to the IMF loan). However, everyone was too afraid of inevitable devaluation and bought dollars... This case was very well described in "Economics" by P. Samuelson: if one person in a crowd stands on tip-toe, he will have a better view. But what happens if everybody stands on tiptoe?

Nevertheless, Sergei Kiriyenko and Sergei Dubinin allowed the banks to transfer their state bonds assets into dollars throughout the summer, and then granted them another three months (default on private debts) to finally withdraw liquid assets from bankrupt banks. The former oligarchs had a soft pillow in the crisis of August 17. You cannot say the same for believers in the Russian government, the stability of the rouble and reliability of state securities, for all those people who kept their money in banks and moreover in rouble deposits...

It only took five years since 1992 (Ed. the beginning of the reforms) to witness the emergence of a strata of businessmen and employees in Russia, whose interests were totally connected with Russia, people who supported their families and paid taxes, and who officially earned good salaries and knew the value of their labour on the labour market and had bank deposits. The 17th of August constituted for these people a loss of all life's values. Yesterday they had work, ran their own businesses and made plans for the future. After the 17th of August all their achievements were wiped out.

Consequently the right forces intimated everyone, including the IMF, became confused themselves and failed to escape the most serious crisis of their economic policy. A new government headed by Evgeni Primakov was formed. It functioned for only nine months, but beat many political records in Russia.

It was the most "left-wing? government for the whole reform period. But, at the same time, the left-wing government of Evgeni Primakov was the most market-oriented government for the period. The state merely did nothing with the economy. Even the most self-proclaimed liberals in the world don't behave like this during a crisis. This is typically Russian: if anything could have been done, then it was not done.

When nothing is done, everything is predictable. And everything is calm, as you are liable for anything. Why print money? It is dangerous, so it is best to be idle. It is safer not to index the population's incomes, or regulate the rouble/dollar rate, or write programmes for the IMF, but also not pay debts, etc. It is better to rely on a bit of luck.

And what about communist solutions for saving the economy? Why did Maslukov, Kulik and Co. make no attempt to pilot a communist economic programme? Maybe they don't have any programme. Maybe the communists simply don't know what to do with the economy and are afraid to touch anything there - what if something explodes? Minor concerns, where something is unattended that is where investigations are required. Primakov's government faced the most ruthless accusations over corruption for the whole period of reforms.

But what was happening in the economy? However strange this may seem - everything was all right! Luck saved Primakov's government here.

The rouble/dollar rate reached its nadir and then stabilised. This was an achievement. But could it be attributable to Primakov?

Inflation "was stifled" without money (an achievement?!) and brought about an abrupt contraction in final demand in the economy: a drop in the population's real incomes, a fall in investments and a decrease in exports (this is a mysterious country and a mysterious policy: a devaluation in the national currency does not boost exports, but instead leads to their decline. This contradicts all textbook theory.). But Russia's economy turned out to be surprisingly resourceful and tenacious! It demonstrated economic growth that was unprecedented for the past eight years! It is attributable to the replacement of imports by domestic products. An over-valued rouble is a terrible burden for an economy. Now it has been rectified - domestic goods have replaced imports. This is good news. But there is also bad news: growth in a contracting Russian market will inevitably lead to price restrictions on demand and come to nothing. Russian goods win against the competition only on price and production facilities running at maximum capacity. No one has thought about investments the engine of economic growth - either in the real or the financial sector. There has been no sensible state policy on the transformation of ?structural? growth into ?qualitative? growth. Moreover, this policy will not appear.

And let us turn to another achievement: Primakov's government began paying outstanding wage debt. The electorate saluted this move with a storm of applause. Not surprisingly, poor people failed to understand that this was achieved through inflationary revenues and price growth that directly affected them; by failing to raising salaries in line with price growth. But it transpires that nobody knows the names of the culprits for price growth not even Kiriyenko, Yeltsin or Chernomyrdin. And Primakov is a benefactor.

And another achievement: we stopped paying Russia's debts, both domestic and foreign. And what happened? Who protested? Foreigners say that 2.5 cents a dollar invested in state securities is little all right, ?the greedy will get nothing? - Viktor Geraschenko's (Ed. Chairman of the Central Bank of Russia) humour is sometimes unrivaled. And now you have agreed to 2.5 cents? Ok, don't relax, we have told you that we won't be able to redeem it all at once, as our Ministry of Finance has not finished drafting a resolution on this issue (which it has been working on for almost a year). But if you grant us IMF credits, then we will return this money to the IMF. But we shall bargain with everybody else.

But there is one obvious personal achievement of Evgeni Primakov: amendments to the laws that ensure the normal functioning of production sharing agreements during the extraction of raw materials were passed by the Duma with Primakov's personal assistance. Now Yabloko's law ?On Production Sharing Agreements? is fully operational. Large-scale foreign and joint investments can be attracted to the real sector now instead of loans to the government, and the seeds for economic growth can be planted. It should be noted however that oil prices had dropped by this time and the enthusiasm for working under the PSA regime had waned sharply. No new agreements emerged, whereas the old ones began to slide.

In general we can state: Russian luck and Russian shameless behaviour have disgraced its critics. We are still strong!

The mistakes of Kirienko's government in the eyes of the President are obvious someone had to take the blame for the 17th of August. The mistakes of Primakov's government were based on reliance on the communists and the opposition parliament. Clearly, this was a source of immense irritation to the Kremlin.

Sergei Stepashin was appointed. They did not allow him to work even the sacred 100 days. He did not have time to make any mistakes. But he made one obvious achievement he secured an agreement with the IMF and the Paris Club of Creditors. Some newspapers hastily announced that the crisis of mistrust in Russia had been overcome. At the very least, the first necessary step on this road had really been taken. And the next day, without any explanation Sergei Stepashin was discharged. What was his mistake?

Obviously, he took his work in the government too seriously. The parliament unexpectedly voted for his candidacy. He received almost 300 votes from all the factions. It was a problem. Sergei Stepashin decided in accordance with the Constitution to propose ministerial candidates himself. This was also a problem. Within a week of his appointment, Sergei Stepashin had started to become a ?stranger? for the Kremlin. And, finally, Stepashin's rating demonstrated stable growth and rose rather high from the bottom. It was already a big problem. Ok, let us allow him to finish the negotiations with the IMF and get the money. And that's it!

What conclusions can a new prime minister derive from such a situation? His first task is to make sure that he does not obtain more than 250 votes from the parliament. When this article will be published, we will see if he managed this task. The second task will be to organise the work of the government as a Kremlin department, while at the same time demonstrating to the public how cool they are. The third task is to prevent premature growth in his rating, but at the same time raise his popularity (otherwise he will not be able to stand at presidential elections). Certainly this third task is the most difficult.

What conclusions should the State Duma derive in this situation? Kiriyenko's government showed that even a student may rule the state in Russia. Primakov's government demonstrated that the government may not rule at all. Sergei Stepashin and Vladimir Putin put a full stop here it transpired that there may not be a government at all. And we should not take the governments too seriously the government may be discharged in several days. For what sins? To change the political configuration.

But let us return to the topic. In terms of its volume the crisis of the 17th of August is a second version of the shock therapy reforms. Unfortunately, it has been executed in the same improvised manner. In 1992 this made us think about the professionalism of its players, and in 1998 about the actual beneficiaries. In this sense the market won.

The ?shock? of 1992 suffocated under total payment deferrals and ended in a ?retreat? in autumn 1992. A gradual toughening of the budgetary and monetary restrictions of 1993-1994 provoked a new wave of economic recession and the ?black Tuesday? of 1994. The version of the ?debt economy? of 1995-1998 was blown up by the crisis of August 17, 1998.

The economic policy of 1998-1999 (irrespective of whether this was done conscientiously or not) curbed the population's incomes through a four-fold depreciation of the rouble and a doubling of domestic prices ?for the sake of economic revival?. But the potential of this revival will soon be exhausted. This means that in autumn-winter 1999 Russia is entering another period of economic and political instability (due to elections).

ei Stepashin on Grigory Yavlinsky's proposals