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The Country at a Crossroads, Grigory Yavlinsky's Lecture to the Nobel Institute On the Future of Russia and Its Economy

Obschaya Gazeta, December 28, 2000, No 52

Oslo, May 30, 2000


It is hard to dwell upon Russias future. However, it is also hard to speculate about current developments in Russia today and even about past events. I think that the joke that Russia is a country with an unpredictable past rings very close to the truth

It is extremely difficult to cover all the main problems and developments in Russia in one lecture. Therefore all my comments below merely represent theses, each of which deserve protracted and detailed discussion.

However, I would like to focus on a few very important points: the decade of Russia reforms after Gorbachev; the present state of Russias economy and the steps that should be taken to improve the situation; security issues; the policy of other countries towards Russia and Eastern Europe during the past decade and about European politicians; and finally, about the future of


Are we seeing once again reforms from the top?

We can only understand developments in Russia over the past decade if we can answer the key question: why are Poland, the Czech Republic, Hungary and some other countries of Eastern Europe successful and why is Russia unsuccessful?

My answer goes as follows: in 1989-1991 these countries experienced a democratic revolution, accompanied by a complete change to the state system and also the ruling elite. In Russia all this happened in a completely different way: an apparent coup detat was carried out by the nomenclatura in Russia the same people from the Politburo of the Communist Party, its Central Committee, security services, came to power. They came out on top. They simply changed their suits an instead of talking about Lenin, communism and socialism, began talking about reforms, democracy and a market economy

It goes without saying that the international community, which had eagerly awaited democratic transformations in Russia became concerned. To conceal the real picture, the nomenclatura hired a large group of young and talented specialists who were considered by the Western political elite and Western community to be democrats and reformers. Presenting this decoration to the West, the Russian old-new: nomenclatura managed to obtain about 50 billion US dollars in loans and credits from the West.

What did we get for these ten years? Against the background of only some elements of a market economy, the Russian nomenclatura was transformed into a criminal oligarchy.

An absolutely opaque regime was created in Russia: it enabled a small group of people with the power at their disposal to redistribute property by means of protectionism and dishonest competition, and obtain even more power with the help of the property that they had amassed in this way. This reminds me of Karl Marx and his formula money - goods more money. However, in Russia the formula was different power property more power. This is what we had received in Russia by the end of Yeltsins reign.

The changes in Russia over the past ten years taught the world a very important lesson. This lesson is that capitalism which is not restricted by civil society institutions, capitalism which is

not constrained by a legal system, the rule of law, an independent judiciary, the culture and traditions of this country, the trade unions, political parties and social activities - such capitalism turns out to be a wild animal. In Karl Popper's book "The Open Society and Its Enemies", he pinpointed two major enemies to an open society: fascism and communism. Incidentally Russia's experience revealed that there is one more enemy the absence of a civil society, law and belief (everybody knows that very few people in Russia have any particular religious belief).

Consequently, the developments in Russia over the past ten years cannot be characterised as a resolution but rather as "perestroika", as Mikhail Gorbachev used to say. By changing the rules of the game, the old people restored the old order, and the root of evil remained intact. This happened not because the people at the top wished to leave everything as it was. The reason goes much deeper: both Gorbachev and Yeltsin with his young reformers were sincere in their attempts to change the country for the better. The problem is that their life experience and mentality, their approach to solutions and vision of the problems were derived from the Soviet past. That is why every complicated problem they faced yielded the wrong solution. And day by day, year by year all these mistakes accumulated

Why did everything turn out this way? Let me provide an example. The reforms of Peter the Great to transform Russia into a European country only really started in 1861, after several centuries. Something of the kind happened to Gorbachevs perestroika and Yeltsins transformations: they also represented reforms from the top. And I realise that all the reforms in

Russia have always been carried out like this: that is why transformation in Russia will be long, difficult and painful.

Why did the elections of the President of Russia happen as you perceived them and why was Vladimir Putin elected? Quite simply, because over the past ten years we have had two wars, one shooting on Parliament, two defaults (and one of them was very large) and one case of hyperinflation in 1992 (2,500 percent). And all this happened on behalf of a democratic power and a democratically-elected President. Should we now be surprised that it has become virtually impossible to address people with democratic slogans and ideas? We cannot expect the people to analyse developments deeply and understand that eight prime ministers, who were formerly top official of the communist party or representatives of the KGB (except for one prime minister who was a former Komsomol leader), were replaced in the country during this period. Although people do not want to think about this fact. they feel extremely humiliated after ten such years. It is very difficult to explain to them that our political elite is to blame for this, rather than the United States, NATO or international Zionism .

Five Specific Features of Russias Economy.

At the moment we are witnessing economic growth, which is easy to explain. The indices are slightly better (although it would be more accurate to say that they are not as bad as we could have expected), but not because have started working more efficiently. They are attributable to high oil prices, combined with a four-fold devaluation of the national currency after the default and import substitution within the country. Such economic growth cannot last for a long period and be sustainable. This is attributable not only to the sporadic rise and fall of oil prices, but above all to the fundamental aspects of the Russian economy that have developed over the past five years.

What are these aspects?

First of all, a very large gap between official legislation, judicial rulings and reality. By the way this gap is so large that no one even tries to connect these two realities together.

Secondly, the government, regional and local authorities and business people are widely using criminal tools in their relationships with each other. For example, the use of brute force often in the form of a law enforcement cudgel , administrative methods and even purely criminal pressure is often used more widely to resolve economic problems than law and competition.

Thirdly , the major financial flows and resources are controlled by small groups, which have their own interests known as oligarchic, rather than by society.

Fourthly, a very low level of trust in business (if not total mistrust).

And fifthly, the absence of strategic planning: people prefer not to make any plans for the future and do not even think a year ahead.

But the major problems in Russia's economy are obviously created by the shadow economy and corruption. Let me mention only one figure: according to official data, the shadow economy in Russia accounts for about 40% of the total. As this figure is issued by people who are themselves part of the shadow economy, we can assume that the real figure is much higher. And this fact renders senseless all talk about GDP growth and a rise in industrial production, the inflation level, etc, if almost half the economy is undeclared - what do you know then about such economy? By the way, I am always asked about corruption when I make speeches abroad: on each occasion I have to state that the Russian oligarchs do not keep their money in North Korea, Iraq or Cuba. They keep their money in New York, Paris, Switzerland and so on, and

everyone knows about these accounts. So I propose that Westerners start investigating this issue from both sides

By way of conclusion, I would like to say that there are two types of countries. There are countries that use their labour resources as their major force of development, such as South Korea and many European countries. And there is another type of country, like Russia, whose economy is based entirely on virtually inexhaustible natural resources. And these countries should have different strategies for their economic transition.

The major task of the first type of country involves austere monetary policy and macroeconomic stabilisation: this provides them with very strong incentives for the people and yields positive results.

The second type of country, with virtually unlimited resources, should focus above all on institutional reform. Why? Because these counties have extremely favourable conditions for corruption. These countries may have governments which are not interested in any transformation: why do they need any change, if they can virtually take the resources lying under the ground? Unlimited raw material resources make such governments lazy: they do not want to do anything, they make money virtually out of thin air, and it is extremely difficult to reject such a strong drug. Russia is like this: instead of basing our economy on the use and development of the labour potential, human rights and freedoms, science and technology (which is required by the new millennium), we base our economy on the primitive oil and gas trade.

From this point of view, our approach to economic policy should be radically changed. The main goals for Russia involve profound, irreversible institutional reforms, the creation of small and medium-sized businesses, real protection for private property and honest competition. And fiscal and monetary policies should stimulate these transformations, instead of doing the opposite. How can we talk about such monetary and fiscal policy, when 25% of the population are not paid their wages? Naturally with such a policy inflation will be very low no wages, no inflation. In such a situation it is impossible to conduct land reform or any other kind of reform. And the main error of Russian government can be summed up as follows: instead of approaching the IMF with their own programme of action for our country, they always asked the IMF what they should do in order to obtain another cash loan. In response the IMF bureaucrats provided them a list of measures that they usually provide for third world countries

Market economy and human rights.

What I say below is rarely used in economic analysis. However, the experience accumulated in Russia should be transmitted to the world: in order to have a working market economy, the construction of a civil society is one of the first institutional transformations.

A successful market economy cannot exist in a country where policies are not based on human rights. A simple market economy is possible in such a country, but it will not be successful. This is demonstrated by the fact that many countries have market economies, but only a few of them are actually prospering. Therefore, the right to private property, the corner stone of any economic reform and a fundamental principle for a market economy is a key human right.

I am not talking here about the property right of a few specific individuals called oligarchs in Russia, I am talking about a common approach to everybody living in Russia. Property rights, rights to social security and education all these human rights should be accessible to everyone.

An effective market economy needs guidance from the society, some kind of feedback from the population, civil resistance if necessary, if something goes wrong, society should allow for certain victims, if it is ready for such developments. This must involve dialogue, interaction between the citizens, the government and business: otherwise the economy will work to the detriment of the material interests of the people and deterioration of their living standards. For example, you can reduce wages, you may even not pay wages at all, you may stop paying pensions But in such circumstances it is impossible to create an effective market economy, as a very important component of the market economy the labour force - is not used as an economic factor. We can state this fact in another way: the lack of real rights for the population, the lack of any chance for society to express itself means that it is impossible to create an effective market economy.

What can be done?

What can be done to improve significantly the economic situation in Russia in the medium term?

First of all, this concerns tax policy, which should be changed radically. What is the main task of tax reform today? A civil deal between the authority and the shadow economy: on the one hand, low taxes and on the other hand legalisation of incomes. This does not simply involve reduction in taxes: many people who do not pay high taxes today will not pay low taxes tomorrow. There are, however, special methods which will bring the shadow economy to light, if I may put it like this. And Yabloko has many definite proposals on this issue, which have been submitted to the State Duma and the President.

A second proposal: protection of private property rights, especially shareholder rights. People should feel that the fruits of their labour are protected and that no one will take them away.

Thirdly, changes in the banking system. For what we call a "bank" in Russia today is not a bank. In the West a bank is an institution that takes money from the people and invests the money in production. A bank in Russia is an institution that takes money from the budget and sends this money to Cyprus.

Fourthly, land reform: without land reform as a component of civil society, we will not make any progress at all. This is due to the fact that today no one making deals with land can be sure that this is serious and for long. Without the privatisation of land any other privatisation is senseless.

Fifthly, the institution of bankruptcy proceedings is the only way to both restructure industry and also improve the results of the voucher privatisation. We cannot use administrative methods to revise the results of privatisation which was simply counter-productive, we cannot conduct nationalisation, but we can use economic mechanisms. I would ask the reader to think about such a phenomenon: over ten years the industrial recession reached 60% and GDP declined by about 50% and yet there was not one single bankruptcy!

Sixthly, we urgently need a functioning and independent judiciary.

Seventh, the country urgently needs real policies to protect investor rights, introduce a system of social security for citizens and prevent capital outflows abroad.

And now the most important. There is no secret about what needs to be done in our country. Almost every child knows. The problem is different who can and wants to do what needs to be done: who has the political will to interfere in the interests of the most influential groups? It is not an intellectual or professional question about what needs to be done, it is a political task how and who will implement these reforms?

On the security of Russia.

This issue, together with the economy, is the key to both the present and future of Russia. For Russia is the country with the longest borders and the most unstable regions in the world, the largest countries with the poorest populations. Now only one of Russias borders is secure border, that is the Western border; whereas the borders in the South and South-East are extremely unstable.

Where does the threat come from? The answer is simple: terrorism. Here I am approaching a very painful issue, the war in Chechnya: in one aspect it affects not only Russia, but the whole world. In 1996-1999 military groupings were created in Chechnya: I would term them "militarised criminal groupings. These troops were specially trained to hold war on order, and they virtually created a new, so to say a new service on demand in the world market of corresponding services. And considering the political and economic situation in Central Asia, Tadjikistan, Kirgizstan and Uzbekistan where poverty is combined with a lack of prospects, a large amount of weapons and the presence of the forces that inflame and transmit extremist moods it becomes obvious that there is a real demand for the aforementioned goods. These regions present a real threat of the spread of extremism in its wildest forms. And as Russia borders these countries, it will face the first blow.

Another side of the Chechen problem concerns the methods used by our government in its attempts to eliminate the danger of terrorism. I opposed the start of a full-scale war in the

Chechen Republic, I criticised and will criticise this war and I still think that the policies conducted by the federal authority in Chechnya are leading to a deadlock and are criminal and I continue to insist that we should have employed absolutely different approaches to resolve the Chechen problem. I said this during the election campaign of 1999: my statement had an extremely negative impact on the results of Yablokos campaign in a situation of military hysteria, which took place last autumn. However, at present many people admit that we were right and share our point of view

These two aspects of the Chechen problem will accompany us for a long time. The solution of this conflict is a special topic. But Europe needs to understand that the fight with terrorism is a common headache. And that Russia does not have experience in this difficult matter. However, in spite of all the justified outcries against us, no one Russian society have ever heard any useful proposals from European countries to help us, for example, in our fight with terrorism.

Another important security issue concerns discussions today about a revision of the Anti-ballistic Missile Treaty between the Soviet Union and the United States (1972). There are several approaches to resolve the problem of a possible revision of the ABM Treaty. Yes, the United States should construct an umbrella to protect their security from terrorist missiles. However, Russia is in the same position. My proposal, which I have discussed with President Yeltsin and President Putin and the State Secretary of the US Madeleine Albright is different: let us make two umbrellas.

Today no system is capable of stopping the "rainfall" of nuclear warheads, but it is possible to create a system which would protect the country from several dozen missiles launched by terrorists. Europe needs it as much as Russia. Let us make two anti-missile defence systems: for the US and Europe together with Russia; whereas the second system will be based on Russias military hi-tech. Experts know that the Russian missile complexes S300 and S400 are better than "Patriot": by the way the Americans also acknowledge this fact. Then we would really have mutual cooperation and help, rather than idle talk.

Such a project would really integrate Russia into a common international security system. If we are going to make projects of such a scope, it will be much easier to speak about Russia's future. If we again limit the security issue to simply shaking hands, when another US President visits Russia or vice-versa, this will not add optimism here. All this is not simply words: for five years specialists of the Russian General Headquarters and the Americans have been working on a solution to this problem. Now we have to move the public opinion in Europe, in Russia and the USA. Despite the importance of the problem, everything happens as in the past: when you discuss this approach with top officials, they all say that it is perfect and super. But all of this ends here too

How the West Could Help Russia?

The most simple answer to this question is as follows: the West must put its own policies in order, not only towards Russia, but in general. For we see that Western policies have at least two principal approaches - one based on human rights, while the other is the so-called "realpolitik", a pragmatic approach. And these two approaches are parallel. For example, there is a vote at the European Parliamentary Assembly (PACE) on violation of human rights in Chechnya and there is a directly opposite vote on the same issue by European Union ministers. Another example the bombings of Kosovo last year, when some people were killed for the sake of protecting other people, and instead of Albanian refugees we got Serbian refugees. However, there was a different solution, and it was well known: instead of making a notorious TV show in the Rambouillet, the Western leaders had to come to Moscow (which they only did in May 1999) and make the Russian government stop supporting Miloshevic. In this case there would have been no need for the bombing. That was a big diplomatic failure. When NATO realised that they had come to an abyss, they came to Moscow and talked Yeltsin into sending Chernomyrdin there, to channel the process along the right route. But this happened only because they got scared, whereas all of this could have been done from the very beginning.

And finally, another example: it has become extremely difficult for Russian citizens to obtain a visa to Europe. For example, one needs to collect three certificates: that he paid his taxes, that his company paid taxes and that this person is on holiday. And before that one should spend three days in a queue to the embassy I do not know how the mafia people obtain their visas, but I can assure you that none of them has ever stood in any queue. And when a person who was told that Russia may become a part of Europe wants to come for two or three days to Europe to see how people live there, he will have to face this perspective. If he comes, say, from Novosibirsk, he will spends three or four days in a train for a trip to Moscow, then he spends several days in a queue, then he spends several days to get a fax back from his company confirming that it paid all his taxes. After all this time, his holiday is finished, and it will be very difficult to explain to this person that he should live like this in the future

The Russian people do not need miracles any more. We need to understand the future that we are moving towards. If we are invited to Europe for dinner (and we have been invited for fifty years already), it is very important for the hosts not to forget to open the door to let the guests in. In reality the opposite happens.

Another problem is television. Today one can watch European news in all languages even outside Europe, but one cannot watch or listen to such news in Russian. It is nonsense, because the audience for such news in Russian amounts to 300 mln people, because all the former Soviet republics speak Russian. I realise that not all people in Russia and the CIS countries are interested in absolutely all developments in Europe. But I know for sure that these people should have an opportunity to obtain information about life in Europe. They should see the difference between Russian and European television, to see that there are different approaches to show the events and make the news, and then they themselves will be able to differentiate the truth from lies. The USA and Europe have been educating each other during the whole of the 20th century, while Russia was in isolation, and in this sense it is still in isolation. While almost all we have that comes to us from the West are the films about James Bond

And now I am approaching the most important aspect of Western policies. The Western political elite. The Russian people as a nation does not understand democracy, market economy and the rule of law: that is why they need a strong leader in the Kremlin. Western leaders will make friends with him, go to the sauna together, have informal meetings , say thee to each other and say that he has a strong handshake and sometimes give him some money: for this he will keep his crazy and unpredictable population under strong rule.

The most recent articles in the Washington Post make these very assertions: we must not interfere, the missiles targeted at us are the only thing that matters to us. This is absolutely the wrong approach: if the Western political elite regards Russians as a second class people, if the most important thing for the West is to keep friends in the leadership of Russia and protect themselves from Russias nuclear weapons, this will lead to great problems and deadlocks, and we feel this all too well.

We know that the attitude of the Western elite to Russia does not have anything in common with the attitude of the ordinary citizens of these countries who honestly want to help Russia. However, the Western politicians do not understand developments in Russia and try to do the easiest things, so that not to assume any responsibility. At the same time they intensively demonstrate their activity and concern. All this took place during Yeltsins reign the West spoke only to him ,and the Western policies towards Russia focused on Yeltsin.

Russia and Europe, Russia and the USA have different histories. But we are a single civilisation. And the next 21st century will be the century of civilisations rather than histories. One civilisation means that in the near future our interests will coincide. Yes, the communist nomenclatura still remains in power in Russia, but a lot of Western politicians who were very strong during the cold war are still in office. Consequently, policies are still being made in the same way

What is Russias Future?

A lot of people have been trying to speculate about Russias future: whether it will become a liberal, social-democratic or conservative country. There is no answer to this question yet.

There is a well-known fairy tale in Russia about a knight who, after travelling for a long time, comes across a stone on the road, on which it is written: "if you go to the right you will lose your horse; if you go to the left, you will lose your head; if you go straight ahead We are trying to guess which route will be Russias choice. But the knight named Russia facing this stone cannot move either right or left, he cannot move at all after being paralysed for 80 years.

My task is not to teach or issue prescriptions. My task is to help my nation obtain its voice to enable it to speak loudly and clearly expressing its will, which means to obtain a free press. My task is to help my people have the ability to freely make its future with their own hands, so that they can do what they want and can do, it means to obtain private property and an effective economy. My task is to help my country obtain stability, so that it can firmly stand on its own two feet. This means to ensure the supremacy of law and the belief that the law can work. My task is to help my country to obtain a head to understand that the life of every Russian citizen is extremely important, as the main task of every Russian politician is to protect the life of every Russian citizen.

If my generation is able to give all this to our nation, Russia will be able to decide where it should move and will obtain a worthy future. I hope that my country will make the right choice.

Obschaya Gazeta, December 28, 2000, No 52