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