Who will Pay Russia’s Debts?

1. Are the Debts the Cause of the Crisis?

Some experts have argued that Russia’s existing level of indebtedness is not critical - that many countries have higher levels, but have not fall

en into crisis. In mid-1998 Russia’s internal debt stood at about 40 per cent of GDP, and its foreign debt at less than 50 per cent of GDP. In absolute figures, the foreign debt in 1997 amounted to $124 billion, and the cost of servicing it came to $6 billion. In 1998 the foreign debt grew to $141 billion, and servicing it now required $15 billion.

Russia, however, proved unable to maintain its financial stability while bearing such a load of indebtedness. The main problem was the uncertain revenues of the state budget as a whole, and of the hard currency component (needed to cover the foreign debt) in particular. The federal budget was unable to ensure the normal servicing of the state debt. The government’s income did not rest on a reliable tax base, but was profoundly dependent on the sale, in growing volumes, of state short-term bonds (GKOs).

If we are looking at long-term forecasts, people began talking of the threat of collapse of the GKO pyramid back in 1996, when the need to finance Boris Yeltsin’s election campaign forced the government to borrow money domestically at colossal interest rates. Even without the election campaign, however, the system of financing the state budget deficit through domestic and foreign borrowing could only be maintained if the state could ensure the stability of federal budget income, which would allow the holders of state securities to be paid a reasonable yield. However, budget earnings fell, and at the same time the government, in desperate need of money, was forced to borrow at totally unreasonable rates.

The root of the problem lies, therefore, in the general economic situation. In almost eight years of reforms, Boris Yeltsin’s team has not only failed to revive the national economy. It has also been unable to stop the economic decline, which has been accompanied by the redistribution of the main income into the pockets of "new Russians" who have never paid tax before, do not pay tax now and are not planning to pay tax on the bulk of their income.

Despite the presence of a notable layer of rich and super-rich people, personal income taxes make up only a minor part of budget revenues (less than 10 per cent). The remaining revenues come principally from the tax on enterprise profits and from value added tax. The profound economic crisis in Russia, however, has led to a unique form of adaptation by enterprises to the harsh financial strictures. The survival of enterprises during the period of galloping inflation of 1992-93, when their circulating capital was being rapidly devalued, was ensured only at the cost of a sharp fall in the movement of money and in visible money incomes.

More than two-thirds of the turnover of goods and services in Russia today is not mediated by money, but occurs in the form of barter, through a mutual increase in indebtedness (as a rule, this indebtedness is not even put on record in the form of promissory notes), or through the use of various money surrogates. As a result, the money incomes of enterprises are extremely small. The average Russian enterprise does not even have sufficient money income to pay taxes and wages at the same time. The indebtedness of enterprises to one another, to their workers, and to the budget is growing constantly. The methods through which enterprises survive without adequate money capital have taken on a permanent character, and are now used consciously in order to conceal real incomes and evade tax payments. In Russia, a sort of "debt economy" has become established.

In such a situation a constant reduction of the tax base and a contraction in the income of the state budget are an inevitable reality. The efforts of the government to maintain an appearance of relative social well-being, financed by unsecured debts, was always going to lead — sooner or later — to state bankruptcy. This bankruptcy is only a formal confirmation of the bankruptcy of the entire social and economic policy of the Yeltsin administration, which has long been evident.

In such an economic situation the banking system cannot be stable. The real sector of the economy — the only reliable basis for the well-being of the monetary credit system — is in depression. The banks are hardly investing any money in production, and are certainly not drawing any income from it — about half of industry is making a loss, and the few profitable enterprises have not been able to provide the bankers with incomes even comparable to the GKO operations income. The corporate securities market has until now amounted to a share market of a few large companies from the energy and raw materials sectors, which are mainly geared towards export. Banks therefore inevitably placed the majority of their funds in GKOs.

A vicious circle was created: The state had no income apart from borrowing from banks by selling them GKOs. In their turn, the banks’ very existence depended on the income they could generate from GKO operations. So the collapse of the GKO pyramid is not just a collapse of the state’s finances, but also of corporate finances. Freely convertible currency, particularly the U.S. dollar, is practically the only reliable security left on the Russian market. This is why there is continual demand for dollars and the ruble continues to fall.

Prior to 17 August 1998, transactions in dollars amounted to only 18.3 per cent of the overall volume of financial operations. Now, the share of the turnover on the financial market represented by the sale and purchase of freely convertible currency amounts to 85.6 per cent. Operations with inter-bank credits account for only 10.6 per cent (before the crisis, the corresponding figure was 40.4 per cent). The share represented by state securities is 3 per cent (before the crisis, 39 per cent), while corporate securities account for 0.8 per cent (down from 2.4 per cent). Before the crisis, the condition of Russia’s financial market could never have been described as normal, but the market is now simply in a state of collapse.

2. Who Benefits from the Financial Crisis in Russia?

Faced with an inevitable financial crisis, whose approach was already obvious to virtually all the bankers and financial speculators by the early months of 1998, the banks tried at any cost to extract the maximum possible income from the financial market. They began trying to attract funds from the population at interest rates they knew were impossibly high, and quickly increased their foreign indebtedness. There was never any hope of the private foreign debts of various Russian banks being paid off, since on the eve of the financial crisis these banks were plundering their own assets - that is, concealing them in numerous subsidiary firms, in fake shell companies, and in offshore companies beyond Russia’s borders. Russian citizens who had put their money into these banks, enticed by the promise of extremely favourable returns, lost almost all their savings.

The Russian governments first of Chernomyrdin, and then of Kiriyenko, supported the inflated exchange rate of the ruble with fanatical stubbornness, categorically denying any possibility of a devaluation. Most independent economists consider that a gradual devaluation of the ruble, carried out in the spring or even the early summer of 1998, would have made it possible to ride out the inevitable crisis with far smaller losses. Why was the government so obstinate? There are two reasons. One of them is ideological, while the other is linked to real economic interests.

The government defended the inflated ruble exchange rate and the apparent financial stabilization (created with the help of substantial foreign and domestic borrowing) as visible signs that the Yeltsin administration’s economic policy was a success. A default on extensive borrowings and a devaluation of the ruble would have shown immediately that this stabilization was a myth. None of the government leaders wanted to be the first per son to reveal the actual state of affairs.

The second cause of the government’s obduracy was the significant degree to which the authorities depended on the financial oligarchs. What was involved here was not just the personal dependency of cabinet ministers or officials of the presidential administration on one or another banker, Berezovsky, Gusinsky or Potanin, although such dependency certainly existed. The point is that many senior government officials were themselves involved in financial machinations on the market for state securities, working closely with various banks and financial companies. The names of a number of people with the rank of deputy minister have been cited in this connection in documents of law enforcement organs published by the Russian press; these people include a deputy finance minister and a deputy chairperson of the Central Bank. Russian governments, including that of Yevgeny Primakov, have therefore shown a thoroughly understandable benevolence to the banking hierarchs, propping up banks that have squandered or stolen their clients’ money - including funds from the state budget.

It should not be forgotten that international financial organizations have given staunch support to the domestic economic policies of all the governments that have held office under the Yeltsin administration. The question of precisely what decisions the Russian government should take in the field of economic policy has been discussed directly in numerous letters exchanged between government ministers and senior officials of the IMF; repeated scandals have erupted following the publication of such letters. The Russian authorities, it has emerged, have taken precisely the decisions the IMF has dictated.

The credits bestowed by the IMF and the World Bank have been spent in thoroughly inept fashion. In many cases, it is difficult to say exactly where this money has gone. In the State Property Committee, for example, no accounting documents whatever have been provided in relation to many projects financed using Western credits. The Accounting Chamber of the Russian Federation has discovered a whole mass of such violations, but no legal action has followed, even though part of this information has been made public.

Annulling the debts - including the debt of the former USSR, for which Russia in 1992 accepted sole responsibility - would of course significantly lighten the burden which Russian citizens are bearing. Negotiations on writing off $60-70 billion of the state foreign debt of the former USSR are still in their early stages, and predicting the results is impossible.

A positive resolution of this question could only be welcomed, but in itself, the annulling of the debts would only be the first step toward creating favorable conditions for reviving the economy. Much more vital is the need to end the policies which the international financial organizations are supporting, and which would lead inevitably to a renewed growth of the debts, even if in one happy moment they were annulled completely.

It is difficult to believe, however, that international finance capital will show such pure altruism as to renounce the use of the debt as a powerful lever for pressuring Russia. Nor is international capital likely to cease supporting the economic policies that have caused hundreds of billions of dollars to flow out of Russia to the West.

3. Who has Suffered from the Crisis?

The crisis has led to a significant rise in prices and to a fall in the real incomes of the population. Although in terms of their dollar equivalents many prices have shrunk considerably (by 20-30 per cent), the wages of Russian citizens have fallen in dollar terms to about a quarter of their previous level. Inflation in the consumer market, expressed in rubles, amounted to 91 per cent in 1998, while wages rose by only 5-6 per cent. The prices of various categories of products rose by significantly more than prices in general. The cost of average-standard housing in Moscow, for example, approximately tripled. The ratio between annual family income and the cost of an apartment stood at 1:15. About 1 million square meters of new housing in Moscow remains unsold. Late in 1998 the Moscow City government twice reviewed the charges for various municipal services, raising them by 30 to 50 per cent.

The situation in the provinces, however, is even worse. A small rise in output in the final quarter of 1998 did not make up for falls in the second and third quarters, and as a result GDP for the year as a whole contracted by about 6 per cent. This led to a further deterioration in the financial position of enterprises. Despite all the efforts of the government, an enormous wage debt remains. To this moment near 1.3 million lawsuits concerning the delays of wages are gone to courts.

Most of the workforce have seen their situation deteriorate dramatically due to the sharp rise in prices and the absence of index-linked salaries just mentioned. Nonpayment of pensions and salaries has been exacerbated. Unemployment has risen noticeably. A new trend is mass redundancies in the more highly paid banking, insurance and advertising sectors and the general sharp fall in living standards of the so-called "middle class".

However, the crisis is having its most devastating impact on the lower-paid sectors of the population.

It should be noted that the minimum food basket of 25 food products (meant to ensure only physical survival) is smaller than the one which was used in 1992-93, and which included a selection of 18 products. If the old food basket envisaged 115 grams of meat and 9.4 grams of sausage a day (roughly equal to the norms of consumption for a prisoner sentenced to forced labour under the Tsarist regime in 1913), the present basket contains only 23 grams of meat and 2.2 grams of sausage. Overall, the consumption of animal protein in the present minimum food basket is down by 24 per cent and that of fats by 30 per cent. However, even these hunger rations are becoming harder and harder to afford. In Moscow in January 1999, the minimum consumer basket of 25 food products cost 572 rubles, which was more than the great majority of pensions and represented about half of the average wage in Moscow. Throughout the country as a whole, 23 per cent of the population were living below the poverty line before the crisis. Now, the proportion represented by the poor is about a third.

Since the crisis, employment of various types in the shadow economy (mainly in retail trade) has contracted sharply, and many people have lost the sources of additional income which once allowed them, at least after a fashion, to keep body and soul together.

This fall has been most keenly felt by the "shuttle traders" (and they make up nearly 10 percent of those in employment), who have lost the opportunity for profiteering on Chinese, Polish and Turkish goods because of the sharp depreciation, now of almost four times, in the value of the ruble in relation to the dollar.

The main blow to the top third of Russians has been the loss of their bank savings. Even the elite of the nouveaux riches—the financial oligarchs—have suffered from the crisis and are becoming more and more critical of the authorities. The panic among the population may have subsided towards the middle of October, but the crisis is at its height.

4. Crisis attacks, folk keeps silent

But if it is all so bad, why is it all so quiet?

At the height of the financial crisis, one of my friends spoke at a large international symposium in Paris, where almost all the participants, more than 150 people, expressed sympathetic puzzlement at the contrast between these figures on the decline in the quality of life and the insignificance and weakness of the strike and protest movement. One respectable professor said without hesitation: "We would have a revolution if the bosses didn’t pay our salaries for six months at a time and the bankers lost all our savings."

But that is France. What about Russia?

Let us look at the facts again. In 1997, the number of protests and strikes rose significantly from the previous year. In 1996, strikes which lasted for more than one shift were recorded at 8,278 enterprises. Some 660,000 people took part in them. In 1997 strikes took place at 17,000 enterprises, with more than 880,000 people participating. But the total number of strikers remains relatively insignificant considering the scale of the crisis.

The scale of the demonstrations of October 7—when the Federation of Independent Trade Unions of Russia (FNPR), in conjunction with the Communist Party and other opposition groups, held an all-Russia day of action—was not as massive as the opposition had hoped. It is unlikely that we will ever obtain exact figures, but the authorities put the total number of those who took part in street demonstrations at between 700,000 and 1 million, the trade unions and opposition at between 2 and 3 million. In addition, to be fair, all sides speak of 600-700 towns and centers where demonstrations and other protest actions took place.

So what is the problem? Why are the overwhelming majority of people so passive, if not entirely silent?

There are many reasons, and they are all worthy not just of a mention, but of systematic presentation. However, there are some which are more significant. Chronologically these could be put like this.

First, Russia is a country (or perhaps it could even be called a civilization), where the people have very strong historical traditions, and one of these traditions is that of state paternalism (put simply, faith in a "good tsar"), which intensified during the Soviet period and is far from eliminated now. Communality and collectivism also exist as one of the traditional social forms, but they apply more to the organization of labor than to political life.

Second, the years of "reform", accompanied, as just mentioned, by a deep crisis—not just of the economy but also of authority, institutions and spiritual values—and the demolition of the very foundations of life, have given rise to a fear among the masses of any sort of change. Finding a strategy for survival has become the priority for most Russians.

Third, the development of market principles and competition-particularly tough competition as a result of the crime wave and the lack of clear rules and regulations for market activities—has made the slogan from the period of colonization of the Wild West very popular: "Everyone for himself." Traditions of collective struggle, in creating powerful trade unions from below, for example, have not yet been created. They did not appear immediately in the West either. In the USA, for instance, strong mass trade unions only appeared after 100-150 years of capitalist development.

In Russia large but ineffective trade unions, with a formal membership of about 50 percent of those in employment, remain from Soviet times, amalgamated into the FNPR. Until recently the leaders of this organization adopted positions of de facto support for the authorities. They only switched allegiance on October 7 from the current president to a possible future one—Moscow Mayor Yuri Luzhkov. As for new trade unions formed from below, these are as yet very few and far between.

Fourth, employees in today’s Russia, from workers to professors, have been forced to spend all their time fighting for the survival of their families, holding down two or three different jobs, and terrified of redundancy as a threat not just to their status but to life itself. In these conditions, people are afraid to take part in protests, or if they are not afraid to, they are physically unable to in the face of the threat of losing their last means for survival.

Last, but not least, the citizens of Russia, especially the lower classes, have lost faith in their ability to change anything, even if their actions could help bring one of today’s political leaders to power, even from the ranks of the opposition (and in Russia, let us remember, most people’s thoughts and actions are geared towards a charismatic personality rather than the political structures of civil society).

These are just the most important of the host of reasons for the relative passivity of the Russian people.

Yet this passivity is indeed only relative. Although the number of participants in the protest movement remains insignificant, some 1.5 percent of the total number of people in employment, the substance and inflammatory nature of their actions is growing. One fact is particularly worthy of attention. Although the number of people participating in demonstrations, protest meetings and strikes under the aegis of radical neo-Stalinist organizations has fallen sharply—in Moscow on October 7 only some 100 pensioners gathered under Anpilov’s banner—the general radicalization of the protests is clear. In almost every town, almost all the October 7 marchers came onto the streets with the most radical slogans heard since such protests began, the central one being the call for the president’s resignation.

No less important is the fact that the mood of the workers is closer and closer to breaking point. The results of most opinion polls show this. Despite the traditions of long-suffering, the fear of change and the absence of strong and effective forms of self-organization, the majority of Russian citizens suffering from the perpetual crisis are beginning to think more and more that things cannot go on like this. A mood similar to that which led to the radical shift in August 1991 and brought down Gorbachev is gradually becoming predominant. Back then people had grown tired of the paralysis of authority of the CPSU and Gorbachev. Now they are tired of the paralysis of authority of the "reformers" and Yeltsin.

Workers are gradually losing faith in the ability of strikes to change their conditions of life for the better. During the first nine months of 1998, the number of strikes fell significantly compared with the same period of 1997. It is true that in recent months the most active groups of organized workers - miners and teachers - have confronted the authorities with the threat of new all-Russian protest actions. Trade union activists in a number of sectors and enterprises are now trying to organize an all-Russian action committee. The process of setting it up, however, has not seen decisive progress toward overcoming disagreements between coal industry workers, who have laid claim to a leadership role, and workers in other sectors.

The question remains: what will happen tomorrow?

5. Prospects for Overcoming the Crisis

Will the government have the will to carry out the measures necessary not just to postpone economic collapse for another few months, but to really break through the destructive economic tendencies which have set in over many years (some of the roots of which date back to the Soviet period)? To do this, however, will entail going against the interests of those groups of businessmen — and the bureaucracy related to them — upon which the government has been depending up until now: groups connected mainly with the financial markets and the export of raw materials and natural resources.

Thus, it is no coincidence that the escalation of the economic crisis has led to an exacerbation of the political situation. A change of the authorities may be an essential prerequisite for finding a way out of the crisis. But Russia’s constitution, which was designed to keep Boris Yeltsin in power, hampers any political change. This is why a smooth transfer of power is difficult, and the risk of serious political upheaval increases.

The reluctance and inability of Russia’s elite to serve the interests of the majority of their own population has not as yet led to large-scale civil protest. The people are exhausted after the political upheaval of 1991-93, having absorbed the lesson that any political change is for the worse. But another blow to the standard of living of Russia’s citizens could be enough to test the limits of their long-suffering.

Unfortunately, the growth of social tensions in Russia is being accompanied by a strengthening of the influence of nationalist and radical right-wing groups. Among the members of the main opposition party, the KPRF, nationalist moods have taken a strong hold, and are not being condemned. Meanwhile, the activity of radical right-wing (if not fascist) nationalist groups such as Russian National Unity is growing. The latter group is trying to shift to a tactic of directly defying the authorities, throwing down a challenge to Moscow Mayor Yury Luzhkov. But Luzhkov is not without sin either. Under his protection, a campaign of ethnic persecution has been waged in Moscow (in late 1993 and during the war in Chechnya), and Luzhkov himself has repeatedly come out with territorial claims on Ukraine.

In an atmosphere marked by the growing lumpenization of a significant part of the Russisan population, with criminal capitalism flowering and with politicians of various stripes actively exploiting nationalist prejudices, the call for the "heavy hand" and the preaching of national exclusiveness seem to many people to be a remedy for acute social problems. For the present, the alternative urged by the left remains in the realm of dreams. The KPRF and its allies cannot be called left parties in the precise sense of the word, and other left grouplets, from anarchists to the multitude of social democratic organizations that have appeared in recent times, do not represent real political forces.

This situation cannot be explained purely on the basis of left-wing political activists mistakes. More than likely, the social conditions of present-day Russia guarantee that the road to the formation of a strong left movement will be long and difficult.