Still more striking was the decline in national defence: the budget dropped to one-seventh of Soviet levels, with devastating consequences for the military-industrial complex and the armed forces themselves. The government channelled its few resources into maintaining the strategic nuclear forces in a state of readiness, but had to make drastic cuts in research and development, suspend the acquisition of new weapons, delay payment of paltry wages, and reduce operational funds (to the point where ships stayed in dock and warplanes on the ground). By the end of the 1990s, Russia’s air force and navy were perilously under-maintained and obsolescent; the fleet of nuclear submarines, for example, shrank from 247 to 67 (some of which were not in service). Penury bred corruption and theft, most sensationally in the disappearance of fissionable materials—including, as the chief of the Security Council admitted in 1996, over half of the country’s ‘portable nuclear devices’. Morale plummeted; dearth and dedovshchina (the brutal maltreatment of conscripts by superiors) led to desertion, suicide, and multiple homicides. Not surprisingly, conscription ceased to function properly, as a majority of recruits paid bribes for exemption or simply ignored the draft notices.
Fiscal crisis and neoliberal ideology combined to force the government to make sharp reductions in social services and cultural needs. In education, for example, state penury—amidst inflation—shrank teacher salaries to nominal sums (when indeed they were paid) and made teachers a salient part of strike movements. Students suffered as welclass="underline" despite the constitutional guarantee of free education, schools and universities—especially élite institutions—increasingly expected students to pay fees and bribes. Similar woes beset the public health system: universal medical coverage gave way to fee-based services that were beyond the means of 95 per cent of the population. Budget ‘austerity’ also took its toll on culture: the institutions of the fine arts—museums, cinema, theatres, and concert halls—suffered a sharp decline in revenues, not only from state subsidies, but also from an impoverished public (theatre ticket sales, for example, fell by 50 per cent between 1990 and 1997). Cinema fared no better: Mosfilm studios—which had earlier produced 60 feature films a year—produced one or two. Russian film-makers could still produce prize-winning artistic successes (for example, Nikita Mikhailkov’s Burnt by the Sun and Sergei Bodrov’s Prisoner of the Mountains), but the Russian film industry had all but collapsed.
To compensate for its dwindling revenues, the central government resorted to desperate financial measures. The most notorious was the ‘shares-for-loans’ programme in 1996–8, which used state assets (including oil and mineral companies) as collateral for loans from the leading banks. Although the government could theoretically redeem the property, its virtual bankruptcy meant that the loan was tantamount to sale. And at bargain-basement prices: with the ‘auctions’ rigged and competitors excluded, creditor banks organized the auctions and—predictably—emerged with the winning ‘tender’ and at a fraction of the real market value. For example, Mikhail Khodorkovskii’s bank Menatep acquired Yukos oil (valued at 7 to 10 billion dollars) for a mere 159 million dollars, paving the way for Khodorkovskii to amass fabulous wealth and become the richest man in Russia. All sixteen ‘auctions’ followed the same insider pattern. Yeltsin’s government portrayed the transactions as legitimate ‘privatization’ (privatizatsiia), but observers aptly described it as ‘grabization’ (prikhvatizatsiia). The giveaways enriched the insider but not the state; this ‘fire sale of the century’ failed to generate the vast revenues that it had anticipated.
The government continued to seek foreign and domestic loans, but found it exceedingly difficult to attract foreign capital, chiefly because Yeltsin’s government was in ill repute and had failed to comply with prior commitments. Not that compliance was easy: the West made loans and credits contingent—with ‘conditionalities’ that dictated a tight money policy and fiscal austerity. That monetary policy reflected fiscal reality, specifically, the imperative need to service public foreign debt, which forced the government to divert revenues from governance, defence, law enforcement, and essential social programmes. The government also had to cut subsidies to unprofitable enterprises (exposing them to bankruptcy and the workers to unemployment) and to reduce social services in such vital areas as education and public health. A desperate Kremlin also resorted to three-month treasury notes to cover gaps in current cash flows. Although that strategy brought short-term relief, it was tantamount to a financial pyramid, whereby the state—with interest rates rising and tax revenues falling—had to borrow more and more just to cover its spiralling debt.
In August 1998 that pyramid collapsed. Admittedly, the Yeltsin government was not solely responsible; it was also a victim of a sudden 39 per cent plunge in oil prices (from 18 dollars a barrel in 1997 to 11 dollars in 1998) and the East Asian financial crisis (which frightened off investors from developing markets). But the fundamental problem was a ballooning deficit covered by short-term, high-interest treasury bills. As revenues fell and interest mounted, even a last-minute World Bank loan could not stave off insolvency: on ‘Black Monday’, 17 August 1998, the government defaulted on treasury bills worth 40 billion dollars and offered no clear prescription for extracting itself from the crisis. Yeltsin thundered that the value of the rouble would not fall; it was solid as a rock, and plummeted accordingly. The default pushed Russia’s credit rating to the lowest levels, caused the Russian stock market to lose 88 per cent of its value, ruined five of the ten largest banks, wiped out a third of small and medium businesses, and cut real wages by two-thirds. Not surprisingly, Yeltsin’s approval rating dropped to a mere 2 per cent.
‘Catastroika’
The financial crisis of August 1998 was but the culmination of an unparalleled economic decline precipitated by the disastrous ‘shock therapy’ of Yeltsin’s first term. Although the government retreated from that original strategy, it still adhered to the neoliberal strategy of macroeconomic stabilization, market liberalization, and privatization of state assets. Under pressure from the International Monetary Fund (IMF) and the World Bank, the government eventually brought inflation under control (from 2,609 per cent in 1992 to 11 per cent in 1997), liberalized most sectors, slashed subsidies and social expenditures, and by 1996 had privatized approximately 70 per cent of all state enterprises. The government could boast that it had not only halted the massive decrease in GDP but, for the first time since 1991, had even briefly achieved slight economic growth (in the third quarter of 1997), along with a 600 per cent boom on the Russian stock market.
By 1998, however, the net result was eight years of catastrophic decline on an unprecedented scale. The GDP dropped a staggering 43 per cent from 1991 to 1997; to put that into perspective, the Great Depression in the United States entailed only a 32 per cent decline; even the colossal devastation of the Second World War reduced the Soviet GDP by just 24 per cent. As Russia hurtled downwards, developed countries enjoyed unprecedented economic prosperity, widened the gap between themselves and Russia, and even threatened to reduce Russia to the rank of a third-world state. The decline was staggering; in 1980 the per capita GDP of Russia was 38 per cent of the United States, but that had dropped to just 4 per cent by 1999. Even when adjusted for purchasing power parity (to offset distortions in exchange rates), Russia’s per capita GDP in 1999 was only 4,200 dollars—slightly more than Botswana (3,900 dollars), but less than Namibia (4,300 dollars) and Peru (4,400 dollars). The post-Soviet depression affected not only industrial production but also agriculture, where gross output contracted by a third and an even greater decrease in the country’s livestock (by approximately a half).