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Grigory Yavlinsky


Economic Gains

The past few years have been relatively favourable for the Russian economy. Production increased visibly after seven years of recession from 1991 to 1998. In 2000 and 2001 real GDP increased by about 14% and, in view of the anticipated 4% rise in 2002, GDP growth will amount to 19% over three years. People's real incomes and consumer demand increased after a nosedive during the 1998 crisis. The past two years have also been marked by greater investor optimism regarding the export sector and some of the processing industries that compete with imports on the domestic market. For the second year running exports exceeded USD100 billion, yielding a significant trade and balance of payments surplus, which normalized repayment of the foreign debt and ensured a relatively stable national exchange rate.

Economists and politicians usually ascribe the substantial improvement in the economy to the devaluation of the rouble and the high oil prices. In principle, this is true: the impact of events at the time may be described as extraordinary - a rapid devaluation of the rouble at the end of 1998 and in early 1999 (three- to four-fold within a few months) and a nearly three-fold leap in world oil prices in 1999 and 2000. Not to mention the undeniably positive changes in the Russian economy over the past few years.

Increasing investments in the export-oriented raw materials sector, which were stimulated by a rise in revenues resulting from rocketing raw materials prices internationally, have gradually been transferred to a number of sectors primarily in the domestic market. An increasingly important role is being played by expansion of domestic demand, buttressed by people's growing incomes and investments in the real sector. Furthermore, the growth in personal consumption has today become a chief factor in increasing production.

The banking infrastructure that was almost totally crippled by the "August" crisis has partly recovered over the past three years. The principal cost indices, namely, shareholder capital, debt volumes, including those of the population, and crediting of the real sector of the economy, are growing steadily. The dependence of the banking sector on state finances has decreased, while its role in servicing financial flows in the private sector has been growing. Various forms of non-cash settlements, above all barter, have contracted in volume. Meanwhile legal financial transactions have expanded.

At the same time, we are witnessing the emergence of new market players that comply more with the meet the requirements of today's market economy. The largest Russian companies are not only rapidly increasing sales and profits: they are also starting to transform themselves into international companies through the nature of their operations and variety of their partners. Firms that today claim to be "the face of Russian capitalism," are beginning to devote more and more attention to their public image. They not only engage in primitive forms of company advertising and the establishment of contacts with the mass media. They also strive to circumvent the more odious forms of relations that were typical of so-called "wild capitalism" and participate in charitable activities. They seek to create a positive image with their foreign partners and local public. In this drive to establish a positive image for "new Russian capital" and in their attempts to build a democratic market economy, these companies are, whether consciously or not, imposing certain restraints on their practices, and are thereby beginning to work in accordance with the norms and methods that are common in advanced countries.

Economic Problems

As I see it, however, these successes and positive changes simultaneously demonstrated and still do demonstrate the fundamental limitations of the economic system created in Yeltsin's time that has become even more engrained over the past few years. (Naturally, the President's criticism of the government we heard a while ago regarding the relatively low rate of economic growth amounts in essence to a political admission - conscious or not - that the system has exhausted its potential.) To all intents and appearances, this growth does not within the framework of the prevailing economic system and probably cannot enable the country to resolve fundamental problems without qualitative changes in the overall picture. I am referring above all to the gap between Russia and countries with highly and relatively developed economies and also to the increasing problems in our country.

Rates and nature of growth

This concerns first and foremost the numeric growth indices. The rate of growth of production and incomes, considering the low initial level and extremely favourable foreign situation, may at best be described as moderate, but in no way as high . As this favourable situation deteriorates, as may well happen, annual GDP growth will contract to 3 or 4 per cent, which is wholly insufficient to secure any long-term qualitative gains in the economy and society. Even if we take the optimistic scenarios of the Ministry of Economic Development and Trade and forecast medium-term economic trends (up to 6% annual growth), this means, in effect, that the gap separating Russia from advanced countries will not shrink to any substantial degree, at least not for the foreseeable future. Consequently, we cannot expect a radical improvement in the situation at the present growth rates in such vitally important fields for our country as a high standard of full employment consistent with the level of accumulated human capital, comfortable living standards for most citizens, stabilization of the demographic situation, the requisite security of our borders, and so on.

Even this modest rate of growth is fragile and unstable owing to the underlying mechanism, which is not attributable to the exceedingly high level of dependence of the Russian economy on oil and gas exports, and consequently on their price on world markets. This dependence definitely exists and constitutes a serious problem; however, another factor is far more serious for a number of reasons, some of which are referred to below. The Russian market is in prevailing conditions highly segmented, and an individual economic player has a very limited opportunity to gain a niche in new segments, as they are already divided and rigidly protected. As a result, the country lacks the requisite conditions to organize a really modern industry required to gain access to the big markets. This is the reason why the boost in raw materials exports failed, despite the expectations of optimists, to generate any mechanism to mutually stimulate rapid growth in the main industries. Growth in export incomes has had an insignificant impact on incomes in other sectors, and the growth in domestic demand is not becoming a truly powerful engine for a self-perpetuating spiral of growth.

Investments and reproduction

The rate of accumulation in the Russian economy has dropped several-fold against the 1980s: even compared to 2000 and 2001 this rise amounted to something like 20%, which in no way meets the modernization requirements of production assets in the real sector of the economy.

In view of the decline in real GDP, it may be estimated that capital input decreased in absolute terms four-fold. The financing of over two-thirds of investments in industry by companies' internal resources by the end of the decade and their failure to attract external resources speaks less of their financial power and rather of the modest size of their investment programmes.

The decline in the volume and change in the structure of investments in fixed assets is no compensating factor: over half the capital input in the relatively favourable period of 2000-2001 was produced by the mineral industry, primarily companies with an export focus that aimed solely to meet their own needs. No institution of financial intermediaries appeared, that could have transferred capital from industries with surplus current incomes (for their own needs in production investments) into objectively promising sectors. The forms resulting from the dearth of such an institution (similar to the Korean "chaebols") - where companies specializing in one industry buy companies in other industries, i.e., purchase of enterprises in other sectors by companies related to raw materials - offer a highly dubious road in terms of efficiency and stability.

Structural distortions in the economy

It is becoming more and more evident that the growth over the past few years offers no panacea to the obvious (and in a certain sense threatening) structural distortions in the economy towards the raw materials industries. Although raw materials account for a relatively moderate proportion of Russian GDP , this sector, which is heavily dependent for objective reasons on global fluctuations, accounts for the bulk of the financial resources available to Russian companies, cash flows and investments in production.

This sector has accounted and still accounts for a visibly larger proportion of cumulative production investments all these years than the manufacturing industry. In industry electricity companies and companies in the export-oriented fuels and raw materials sector account for almost 80% of all capital investments , while the share of investments in the processing industries - mechanical engineering, and the light and food industries - amounted to no more than 15%. In other words over the past three years the raw materials industries could be described as the engine of industrial growth, creating the lion's share of investment demand for Russia's machine-building and metalworking.

This sector of the Russian economy is tied most to the world economy. Output of fuels and raw materials (in the broad sense, including lightly processed industrial goods) accounts for 70% of total exports and may increase. Crude oil and natural gas account for over 50% of all exports . These industries guarantee the balance of foreign trade surplus: without this surplus it would have been impossible to service the large foreign debt accumulated over the past few decades.

The raw materials sector is the main generator of people's cash incomes. In addition to the considerable number of people directly employed in the extraction, transportation, and processing of raw materials, the sector is also a source of livelihood for the workforce of a fairly far-flung infrastructure - a large number of labour-intensive fields, where the raw materials export sector is the main or critically important consumer. The decline of incomes in the fuel and raw materials sector is increasingly resulting in a sales cut in a large number of sectors that could cumulatively have a decisive impact on the state of the domestic economy.

A relatively small number of key companies that are mainly active in the raw materials industry have begun to directly or indirectly control an even greater share of the servicing sectors, even those fields with enhanced profitability that are in no way technologically connected with the main line of business of these companies . The sphere controlled by these companies absorbs in one way or another not only the cash flows directly related to the extraction and export of natural resources, but also those of contiguous or aggregate financial flows.

Lastly, this sector is critically important for the state of the government's finances, as it accounts for over 50% of indirect taxes (including payments for use of the sub-soil). These taxes account for more than half the cumulative budget revenues and constitute an extremely important source of federal revenues. Moreover, as mentioned earlier, this sector of the economy helps maintain the foreign exchange flows into the country required to service foreign debts.

Naturally the conspicuous role of the raw materials sector has no less conspicuous negative implications for the country's economy. The sustained predominant role played by the fuel and raw materials complex in aggregate production investments means that it will consume for the foreseeable future the bulk of resources invested in expanding and retooling the production sector. In addition, the efficiency of investments in the extractive industries will for objective reasons (higher prospecting and extraction costs) inevitably decline. As these industries account for a significant share of total output, this development will lead to a drop of the effectiveness in the efficiency of production investments and the Russian economy as a whole.

The high percentage of fuel and raw materials in exports imposes stringent constraints on possible growth and also engenders instability owing to sharp price fluctuations for these products. Not to mention the impact of such a form of exchange with the outside world: the country's human and intellectual potential will not be fully mobilised and the national resources will not be fully exploited.

Lastly, economic growth and efficiency faces an even greater threat owing to the domination of the economy by large raw materials corporations. As a result the country's economic health is excessively dependent on the decisions and sentiments of a close-knit group of top managers at these companies. As soon as Gazprom, the oil companies and United Energy Systems curtail investment projects owing to doubts over the prospects on world energy markets or even internal personnel problems, recession strikes the economy and production activity in most industries, above all machine-building and petrochemicals, metallurgy, and building materials. This is followed by a noticeable decline in consumer demand. As a result the mechanism of economic growth is out of sync for a long period. At the same time, excessive capital accumulates in energy and above all oil sectors, finds no outlet in other sectors, and more often than not flows out of Russia, either legally or illegally, asthe raw materials companies prefer to do business in an area they know abroad, instead of trying to engage in new and unfamiliar spheres of activity inside the country.

This also holds true for state finances - budget revenues are severely destabilized owing to price fluctuations, primarily crude oil prices and the prices of its derivatives, both indirectly (through the decline in revenue from corresponding export duties and the profits tax of the producers), and, to a still greater extent, indirectly - through a general deterioration in the economic situation and slower growth in investments and consumption.

Employment, income and the social structure of society

The economic growth we observed over the past two years did not resolve, nor could it have resolved, the problem of unemployment. We should not be deceived by the relatively low indicators for unemployment in the country: the bulk of the active labour force have neither normal or properly paid jobs, and have no chance to find such employment before the end of their working lives. The raw materials industry requires only a small fraction of the human resources available, while demand for skilled labour is generally insignificant for a country with a population like Russia. Consequently the system abandons at least half of Russians today to an existence akin to poverty in conditions of stagnant unemployment and medieval subsistence farming on small plots allotted to every citizen, while the other half predominantly eke out an existence as employees with no need for special training and are consequently low paid and bereft of any social benefits.

As a result, after nearly four years of economic growth, the indicators for social prosperity have remained at a very low level. Russia's per capita GDP is about the same as that of average developing countries, and is, to put it bluntly, below average compared to the group of developed countries. Official statistics indicate that the ratio of average earnings and pensions to the subsistence minimum has not changed perceptibly, and the average pension is approximately 25% lower than the corresponding subsistence minimum.

Meanwhile, incomes differentiate significantly. The income gap between the top and bottom 10% of the population is fourteen-fold and has remained virtually unchanged throughout the past ten years. At least 30% of the population live in absolute poverty, in other words people who find it hard to meet their basic needs.

Russia's socio-economic structure has evolved accordingly. The five per cent of the population who seized control of the country's raw materials and financial flows, have incomes that enable them to feel, if not omnipotent, then in any case like people who have forgotten entirely what material needs mean. Another 15-20% of the population represent our middle class who owe their relative prosperity to the present system and who are, accordingly, their chief social buttress and defender. However, the middle class in this system does not consist of engineers, officers, physicians, teachers, researchers and middle-range entrepreneurs, highly-skilled workers or farmers, but instead people from the service sector, entertainers, officials, and individuals living on dividends from their property holdings or investments. The remaining 70-75% of the population are "old" and "new" poor people who, in keeping with the Marxist theory of capitalism, live at the level of simple reproduction of working power or even lower. This is demonstrated most clearly by the low birth rate and high mortality rate in most Russian regions.

The biggest problem here is that the existing system does not have any in-built-mechanisms to redistribute income on a national scale. Domestically produced goods and services account at best for 25% of consumption by the well-off: moreover, these are mainly food products and the triple "restaurant-taxi-girls" formula. In these circumstances, hopes that a large domestic market will be the chief mechanism ensuring the development of extensive economic growth are wholly unfounded under the prevailing system.

Reduction in state expenditures and mini-budget

In our opinion, the optimism expressed over the improvement in state finances is unfounded. Despite all the talk about a deficit-free budget, regulation of the state debt problem, and the state's improved financial health, we must not disregard the fact that this "recovery" was secured by foregoing vital expenditure on a civilized level of education, the financing of R&D, social security, and public health. Indeed, expenditure on the wages of public servants, maintenance of the army and the law and enforcement agencies are nothing short is humiliatingly low. Moreover, in view of the existing system, the country is doomed to the same balanced out "mini-budget", where revenues will always fall dismally short of offering even a reasonable wage to workers and decent salary for civil servants, to say nothing of the investments required to ensure future economic growth, namely, expenditures on infrastructure, general and vocational education, R&D financing, etc. With such a budget, the country will have neither modern armed forces nor an independent judiciary system, nor honest and professional law and enforcement agencies, while the arbitrary application of a depraved system of "informal" justice will never be curtailed, even with the most sincere political will.

Science and education represent other key areas sacrificed to financial "recovery". Our estimates, which are based on official Russian statistics, indicate that over the past eight or nine years social outlays on education in factual terms fell on average by 55%, while the increase in private expenses have only slightly compensated for the reduction in federal and local budget expenditures. State outlays on science have been reduced even more. The prestige of professional scientific and science-intensive production has dropped sharply. As a result, the quality of education and standard of training of school-leavers and university graduates have plummeted. The lack of unofficial contributions to schooling is hindering school access for needy segments of the population. As a result almost 10% of school-age children have stopped going to school.

This inflicts enormous damage on the country's human (labour and intellectual) resources. The workforce has visibly decreased in number and, more importantly, in quality. A drop in employment in production and the few high technology sectors of the former Soviet economy, coupled with degradation of the system of state research institutions (and the almost complete absence of private research centres) have compelled a large number of highly skilled specialists to change their jobs. According to some polls, no more than 10% of those who were dismissed or were compelled to stop working in Russia's scientific institutions have found a niche in large private companies or credit institutions. The remaining 90% work for small and very small businesses, or official structures where their intellectual capacity is not needed, and their accumulated knowledge and experience are gradually going to waste. At least a million people have emigrated from Russia (Russian companies professionally involved in migration estimate that the exodus from Russia amounts on average to 100,000 people annually), A considerable number of emigrants are educated people who had until departure performed intellectual work or were about to obtain a higher education degree.

Lastly, the chronic under-financing of the maintenance and development of the social infrastructure during this period has visibly affected the functioning of public works, decreased their safety, and increased the risk of technogenous and environmental disasters.

Political economy

Russia does not have a democratic market economy. The economy in Russia today is a mixed economy, not in the sense used in economic theory, but in a different, specific sense: it is an economy with a mixed logic of economic behaviour. It is quasi capitalism, but not quite capitalism, and in a way not capitalism at all. It is in no sense a rule-of-law democracy, but neither is it anarchy or rule of the criminal mafia as it may sometimes appear. It is a society in which there is a little of everything: rule of law, rule of custom, political abuse, and crime. Society abides by "understandings", that is, rules which cannot be aligned into a clear logical system, and which are still in a state of continuous change.

Many relations and institutions incompatible with present-day notions of an efficient market economy, relations and institutions that have existed in Russia since

Soviet and in some cases since pre-Soviet times, are less relics of the past and more full-scale components of a functioning economic system. In fact, the symbiosis of corrupt officialdom and opaque business practices is to this day a factor governing usage of a very considerable share of national resources. The country's budget, even though it has an incomparably more reliable foundation than in the period preceding the 1998 financial crisis, is still dangerously dependent on the financial standing and negotiating positions of a dozen or so large raw-material and infrastructure companies that have virtually shaken loose from public control and are exploiting national resources. The apparent prosperity in banking is attributable in many ways to the devious methods and criteria underlying financial accounting and control. At micro-economic level, economic activity in Russia does not demonstrate a consistent transition from the administrative economy of the totalitarian Soviet state to a modern (normal) Western society, but rather an odd mish-mash of different types and levels of institutions and relations: modern and traditional, market and pre-market, legal and illegal, civilized civic, outright violence, etc.

Ask any Russian businessman about the rules he follows, lives and works by. If he is frank, he will be unable to give a clear answer, first of all, as there are no unified rules whereby a businessman (and, for that matter, any socially active citizen) in Russia can guarantee his chances of success and relative security. In some matters he acts in accordance with official law, in others he relies on the strength of the authorities, on the inertia of relations, and now and then simply instinctively gropes for a form of behaviour that is liable to yield success.

In other words, if Russia has managed to escape economic collapse and achieve a degree of social and economic stabilization, this does not mean that the long-term development of the Russian economy and society is merely a question of resources and time. A stagnant social corporate-criminal system with an extremely ineffective segmented market and without any mechanism for long-term reproduction and increase in economic resources is, unfortunately, the most realistic outlook for Russia today. We will not have a law-based state with an open dynamic economy and a responsible political and economic elite.

Despite its eclectic nature and apparent lack of logic, the system has intrinsic stability, is capable reproducing itself and achieving moderate progress. This is evidenced in the successes of the past three years. The system has consolidated with the emergence of a considerable segment of influential people and groups that are extracting no small personal profit in one way or another. Moreover, it is not much of an exaggeration to state that virtually the entire Russian elite today is intimately tied to the exiting state of affairs and cannot tear it down without sustaining direct or indirect crippling damage.

This concerns both the upper layer of state officials or the notorious old and new "oligarchs." The interest groups, whose collaboration shapes the real conditions in the economy, are only partly connected to official governmental structures at various levels. Real control over economic resources is the main criterion that allows various groups to participate in organizing economic affairs, irrespective of whether they are economic territories, infrastructure, manpower or money. The groups may be organized along different lines, particularly on territorial, industrial, corporal and clan principles, and may have different degrees of intrinsic integration. The specific forms of organization of the groups also differ - they may be official administrative authorities, semi-official structures, including public monopolies at different levels, large private enterprises, and diverse financial structures with or without a varying degree of state participation.

Despite the diversity of forms, all these structures are united by two main factors - first, real control over the main economic resources and, second, a predominantly supra-economic administrative nature of this control. Control over resources is reflected in their physical ability to promote or hinder use of the resources for profit. The right of control is not so much a legal right of ownership and much more an opportunity for constraint regarding other parties that do not recognize the rights of the respective group to exercise control. Compulsion may be direct or indirect, legal or illegal, but in the end amounts to use of economic pressure or downright violence.

Another specific feature of these structures is that their members rarely derive profit by immediately exploiting economic resources. In most cases they transfer the right to use these resources to other organizations and receive rental income (in the shape of various royalties, bribes, dues, regular and irregular extortion, etc.). This does not mean, of course, that all high-ranking officials take bribes, simply embezzle or steal funds. The system is so constructed that it also enables them to use the administrative resource in more subtle, non-criminal ways. Naturally, this does not alter the substance of the matter: profit is not extracted on the basis of productive activity, but rather by belonging to various corporate communities.

During the final years of the Yeltsin period, the economic system gained some muscle and even stability, which made it possible to define its basic sociopolitical features.

1. The large if not predominant role of informal, officially unregistered relations: a colossal gap between existing legislation and economic reality.

The game followed rules that had evolved over the previous ten years - rules that were more or less adhered to by all players of the economy under threat of "spontaneous sanctions". The norms of officially existing economic law operated within the limits and to a degree in which they did not obstruct the spontaneously impregnated rules of economic behaviour. The aggregate of these rules, and the economic activity they govern, accounting for about half the GNP in Russia, are quite precisely reflected by the term, "informal economy" (the more widespread term, "shadow economy", is somewhat more narrow, as it mainly implies accounting fraud and tax evasion).

2. Unofficial coercion plays a special role.

The informal economy inevitably requires an "informal" system of power to function. Both the economy, society and the state begin to live in accordance with unwritten rules, where citizens (especially the socially active) and even official authorities breach the law or other legal acts and proceed on the basis of personal relations, precedents, the ability to enforce their will, etc. However, when this issue concerns major economic interests, the individual's or group's ability to enforce his or their decision in confrontation with conflicting interests is often the only effective factor. (They may or not appear to comply with legislation.) The means of coercion may involve recourse to administrative methods, control over the market or its members, or outright violence (crime), but in all these cases it is based on informal "rights" (the "right of the strong").

3. The state does not and moreover cannot act as impartial arbiter in economic disputes or be a guarantor of contracts. The business parties are compelled to assume this function, relying exclusively on their own resources and those of their owners.

4. Trust between economic parties is at an extremely low level.

As the state machine is not the guarantor of obligations, and the economic agents have to rely on their own power and ability, we face a systemic dearth of trust. Owners and entrepreneurs do not trust the state, while the state authorities do not trust business. The banks do not trust their clients, the clients do not trust the banks, and enterprises do not trust their creditors and partners. The public trusts no one at all and is deeply convinced that if someone failed to cheat them today, this is because they were deceived the day before and are about to be deceived tomorrow.

5. The need to independently ensure fulfillment of obligations and reliance on informal "rights" are bound to generate an oligarchic economic structure, when at least 70% of the gross product is controlled one way or another by two or three dozen business structures, where decisions are taken by a few hundred people consisting of Russia's business and administrative elite.

6. In such a system the rights of ownership and private property are not unconditional. Neither compliance with the law, any relatively conscientious behaviour in business, or even observance of the unwritten "rules of the game," can guarantee property against a "redistribution" or appropriation by an economically, politically or administratively stronger player. Controlling a territory, industry, infrastructure and the like, interest groups seize possession of the rights of another owner with relative ease, using the authority of bought or controlled arbitration courts, false bankruptcies, sabotage by the administrative authorities or the "workforce", etc. The noisy conflicts that are covered extensively in the press from time to time on particular enterprises are no more than the tip of the iceberg of a permanent process of property redistribution for reasons unrelated to economic management of the property in question.


Any student knows that a situation can only be improved, if you have a system of purposeful legal and law and enforcement agencies, control over compliance with economic legislation, and rigid prosecution of any violations. You also need control over distribution and proper use of public resources, and a transparent system of taxation and financial control, and many other levers.

From this standpoint, no necessary measures were taken during the Yeltsin period to construct and ensure efficient functioning of these basic institutions; on the contrary, we have witnessed their obvious degradation. The law enforcement and judicial systems were partly privatized or corrupt, and partly simply not up to the mark. The financial control agencies were transformed into an instrument of pressure on business and citizens or semi-feudal extortion of official and unofficial duties, with the amount fixed less by law and rather by arbitrary decisions and bargaining. The state structures were not subject to public control, and their officials were, in effect, permitted to use their position above all to line their own pockets.

The new President was brought to power by a specific political and corporate economic group on condition of his responsibility to them and solidarity.

The active political and law-abiding rhetoric changed nothing. The main concern of the new-old administration, as before, is to combat its opponents, and to devise and implement various political scenarios to appease the population, the central and regional executive authorities, with the sole purpose of preserving and perpetuating their economic predominance.

The most important achievement of the past two years was to put an end to public politics and political pluralism on the pretext of "ensuring a second term" and, in actual fact, to protect its absolutely exclusive economic position.

The years since the autumn 1998 financial crisis, and especially since the transfer of leadership in the Kremlin, demonstrated that the aforementioned system was stable and no personality who had been its public embodiment in the preceding period could manipulate this system. Similarly the physical liquidation of key members of the Bolshevik nomenclature did not change the substance of nomenclature power as a corporation in the 1930s and led to its degradation and wastage. The financial and banking crisis has substantially undermined those major businesses, whose influence was based exclusively on diverting financial flows through banks under their control. The change of guards in the Kremlin pushed out the "oligarchs", whose prosperity was too closely dependent on the favourable and interested actions by figures in the government and presidential administration, who were compelled owing to reshuffles compelled to take a back seat. New forms of " organization" of major business sprang up. At the same time the system itself, where crucial decisions are taken on the basis of political power and various pressure mechanisms (or, as they say in the milieu, "on the basis of notions and understandings") has not only survived but, on the whole, gathered muscle. The uneven conditions for companies and groups operating in one and the same business remain the same in terms of taxation and access to various attractive resources, despite the proclaimed principle of "equidistance" in their relation to the authorities, so that the larger and more influential a group happens to be, the greater its opportunities to deviate from the principle of universality in the business climate and fair competition.

In this context it is not in the least surprising that the phrase "dictatorship of law" slogan was stillborn: it was not demanded by any influential group. Moreover, they are not interested in such a situation, as they could lose a considerable amount. Regarding any backing from the "firm and tough power" as supreme arbiter in private disputes, such backing is highly conditional and, moreover, leaves room for influencing this "firm and tough power." In addition to other factors, it is based on an understanding that official power is unlikely to have for the foreseeable future the requisite resources to play the role of individual and independent arbiter. During the last few years of Yeltsin's rule, the official power under the new President relies less on its own strength and much more on using one set of groups in the struggle against another, which cannot be achieved without mutual concessions and compromises. The declared intention, voiced two years ago, to eliminate the control of narrow corporate groups over the main financial flows and other resources in the country and place them under the control of society was not implemented, while the so-called anti-oligarchic campaign was reduced to persecution of politically disloyal leaders of the media business. Moreover, signs appeared that a new stage of struggle was building up between corporate clans for a redistribution of spheres of influence, above all in export fields.

In these circumstances, political will is hardly able to approve a radical tax reform that would officially align taxation with the sums really paid into the budget, and a radical revision of the system of currency controls that would at least help by partially legalizing the export of capital and thereby establishing a more rigid control over exporter finances and put an end to the concealment and laundrying of illegally accumulated and criminal income.

Power for the sake of power is one thing, and power for the economy is another. In the first case it is above all a matter of one's own security, that is, survival and succession, outward legitimacy and indisputability, an ability to cut short any demonstrative disloyalty and insubordination. The content of power (i.e. politics as such and the ability to pursue this goal) is also, of course, important, but in conditions where time, strength, and the means of power are limited, pride of place is accorded to resolving one's own problems and distributing what is left over.

The opposite is true for the economy, however: the personal stability of power, the solid nature of its external attributes, is a secondary matter. The main issue concerns the substance of the law established by the authorities and the relation between this law and real life, existing economic and judicial relations. However, this is where the authorities today are weak and impotent - they cannot control the aforementioned relations and their own apparatus, which follows its own laws and ideas that are often independent of the will of the people at the top of the administrative pyramid.


In my opinion the spring polemic between the President and the government concerning rates of economic growth was highly revealing. The prime minister was right and wrong in his impertinent rebuttal of the President who demanded more ambition in competition with Portugal. He was right, as in the existing economic system any attempt to abruptly raise the rates of growth would lead to nothing but eye-wash at best, and would at worst undermine relative stability. He was wrong, as his government personifies all the fundamental faults of the system which doom Russia to lag behind other countries.

Russia does not need figures. In the final analysis, we are interested in creating economic opportunities to overcome this backwardness, in other words, to ensure the country's survival and the survival of Russian statehood and sovereignty. To understand this, we need only glance at the map and see that Russia has the longest borders with the most dangerous and unpredictable regions in the world, and must urgently estimate the expenditures that need to be made over the next ten to twelve years on the armed forces, on the housing and public utilities infrastructure, health, education, on rectifying the demographic crisis, modern development of Siberia, and consolidating our economic sovereignty in the Russian Far East.

Analyzing the results of our economic development from this angle, we must accept that the gap between Russia and developed countries is increasing, and the state of the aforementioned sectors is becoming more and more critical, and irreversibly so for some key components.

We should also note that the economy in the West has for a number of years been in a serious recession. Sooner or later the situation will change and it will start growing again. Then our comparative backwardness will be simply staggering.

In Russia we have created a variant of a market economy which will in principle be incapable now and forever (unless it is radically altered) to reduce the scale of our backwardness, compared to advanced countries. The gap will increase, owing to the economic system we have created.

Asking our government to reduce this gap by raising growth rates is akin to expecting an old dilapidated car to run at the same speed as a Mercedes (even if the latter's engine snarls up from time to time).

This old car has structural features, which means that it cannot run at a faster speed than 100 m.p.h., however hard you step on the gas, change the petrol or driver or confer with experts - but nothing will change and the top speed will remain unchanged.

We face the same situation with our economy. It is constructed to provide an acceptable standard of living for approximately 25% of Russia's population. Moscow and another one or two large Russian cities can possibly resemble big up-to-date European cities.

The material for the system's sociopolitical stability will amount to 25% of the population; they will provide its reproduction, provided that world oil and gas prices remain at the peak.

The "market economy" built in Russia can do nothing for the majority of people.

The economic potential of Russia's market system is in principle incapable of preserving the existing national educational system, science, health, armed forces, and the house and public utility infrastructures, let alone create a new and better one.

Dangerous processes are beginning to occur in society, leading to its profound demodernization.

Conclusion: Can Anything Be Changed?

The aforementioned is in substance a wide-ranging attempt to define the current Russian socio-economic system. The definition is hindered by the poverty of the traditional political economy lexicon, based on notions such as capitalism and socialism. Contemporary Russian, Chinese and Japanese society, Stalin's Soviet system, and the Korean Chaebol system until the 1997 crisis, is a far from complete list of different structures, which each had or have their own intrinsic logic and something we might call local stability. These structures have appeared in various traditional societies as a response to the challenges of modernization, in other words, the spiralling technical and information overload created by mankind. As a rule, at some stages they manage (although the price they pay is another question) to resolve some aspects of modernization. (Even Stalin's system resolved, by applying its tried and tested method of heinous crimes, the task of Russia's protracted transition from agrarian to industrial society).

Korean corporate capitalism resolved the same challenge in the 1970s to 1990s by establishing a system referred to as Chaebol.

However, all these systems proved impotent when the countries in question faced the challenge of switching to a post-industrial society. Their contradictions, and certainly not the "plotting by that bad man" Soros, were the fundamental causes of the crisis in Southeast Asia in 1997.

That is why the on-going process of "chaebolization" under way in the Russian economy appears a strange anachronism.

The current Russian system resulted from the crisis in the Soviet model, which was unable to make the leap to the post-industrial stage. I think that certain historical circumstances of the crisis (the aggressive embezzlements by the communist party and KGB bosses, who converted their absolute collective political power into enormous power for individual members, and the unscrupulousness of the new "democratic" bosses) fostered a locally stable freak socio-economic system objectively aimed at "demodernizing" Russian society.

This evolution creates a terrible risk of society's irreversible degradation. First of all demodernization tends to wipe out the creatively active segment of the nation capable of considering the country's direction and opposing such a direction. Secondly, irrespective of subjective wishes, this structure of power and society leads inevitably to the evolution of a police state, combined with a political superstructure, with a monopoly on information, that is, a system where any dispute about the chosen path of the country's development will in be principle ruled out. Both these processes are making headway before our very eyes.

I noted earlier that the entire Russian elite is involved somehow or other in the existing order and cannot destroy this system without sustaining serious damage. Owing to the surviving democratic exterior is maintained for a number of considerations (including foreign-political factors), the system has it to appoint a chief executive for the regime every four years capable of ensuring the preservation of the existing structure.

Despite the painstaking and regulated process of selecting and appointing a "successor", he still poses a potential threat tothe elite and its regime.

The President of the Russian Federation with his seat in the Kremlin is bound to begin understanding what is happening in the country, and start understanding his role as a statesman - that is the specific feature of the Kremlin walls and this position. As a result, a bearer of all state interests and values may emerge, who may the first such case in the entire governing elite. However, he will understand that he is being controlled by the people who brought him to power, and realize that he was not expected to become a statesman. If he is courageous, he may act with resolution: revive freedom of speech, ensure the independence of the judiciaries, organize a round-table mechanism, involving the public forces who stand "outside the corporation", and enlist their aid in stopping the country's slide to the backyard of world civilization.

This is possibly one of the last chances for something still to be done.

Is this hope for a "kind tsar" another attempt to "obtain a good president with bad boyars and generals?"

To a certain extent, it is. This is due to the specific kind of power in Russia.

What is this hope?

Hope that "the tsar will not abide by a tsar's discipline and, furthermore, will turn out to be clever."

Are there grounds for such hopes?

I do not know. I am not sure. However, about 15 years ago something similar happened and had unexpected consequences: the totalitarian system disappeared.

Are there other variants?

Judge for yourself. Only citizens, who do not behave like Soviets (I do mean behave, and not simply speak), can be a positive alternative to a "kind tsar."

What does that mean?

This implies loyalty to our morality, responsibility, and, lastly, faith in human values.

If we as a people believe that everything today is right or that we cannot change anything and if we are still prepared to vote at referendums to immortalize the memory of executioners like Dzerzhinsky; to keep silent or, what is worse, approve the extermination of towns and villages in the Northern Caucasus, hold auctions for shares and voucher privatizations, reconcile ourselves with explicit corruption, daily lies at state level, accept the incipient fascism and seeds of a personality cult, the lack of justice, and progressive poverty...

Then there can be no real alternative to a "kind tsar", and a few hundred of the most influential people in the country can always be convinced that they have "popular support" and that all of us, all the millions of us, are no different and would simply like to change places with them.

This means that society is asleep and everything will remain as it is.

However, I am convinced that it will awaken.

Hopefully, not too late.

April - November, 2002

See also:
Understanding Russia

Grigory Yavlinsky

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