Russia is entering a difficult period which will see a further increase in conflicts and collisions, both at the top and among the people.
Looking back at the events of 1997 in an interview for NTV, I had to confirm that my worst expectations had come to pass. ‘The stunt of trying to revive the economy with Shock Therapy, Mk II, has failed. Gambling on a further round of privatization without economic recovery, without creating and developing the domestic market, without increasing effective consumer demand, is futile.’
I remembered what Academician Alexander Nekipelov had said at a Gorbachev Foundation conference in late November 1996: ‘Ultimately we can expect an overall financial crisis.’ But 1997 had brought no changes for the better. It was clear that this phase, without any clear purpose, without a meaningful policy, could not continue for long.
The storm breaks in 1998
The Russian state was in dire financial straits. Foreign debt had risen to 146.4 per cent of GDP. In the first three months of 1998 the state debt in overdue wages and salaries of public employees rose to an astronomical total of 58 billion denominated roubles, about $9 billion. In just two months the population’s income fell 7 per cent.
Attempting to find a way of servicing its growing debt, the government tried constructing a financial pyramid scheme, issuing short-term treasury bills at ever higher interest rates. Capital outflow accelerated, increasing pressure on the artificially inflated rouble exchange rate.
In an effort to delay the collapse, the government introduced a rigid restriction of the money supply, which entailed non-payment of wages and pensions, default on government contracts, etc. Economic stagnation worsened, budget revenues were insufficient to cover loan payments, social tensions increased, one strike followed another.
One might have thought it would have been obvious to anybody that a new course and new people were needed, but it was not obvious to the president. The main thing, he declared in a message to the Federal Assembly, was ‘to overcome despondency and negative attitudes’. The message abounded with wild assertions testifying to the fact that the president had finally parted company with reality.
At the start of the year I wrote in an article for Novaya Gazeta,
I was astonished the other day to hear the president suddenly say in conversation with Boris Nemtsov, ‘Press on regardless!’.
Press on with what? With trying to rob people of all they are worth through new housing maintenance and utility tariffs, through pension reform? ‘Press on regardless’ piling up domestic and foreign debt, press on with selling off for next to nothing the state assets most vital to the public interest? ‘Press on regardless’ with raising already punitive taxation to even higher levels?
I was outraged by the Russian government’s indifference to people’s welfare:
A few days ago the Constitutional Court ruled that henceforth the priority for all revenue must be payments into the state coffers. Businesses must pay their taxes first and only after that pay people’s wages.
This is just a continuation of what they have been doing, seeing their top priority as being to intensify the fiscal take. Here again is that whiff of cynicism that has pervaded all the years of shock therapy reforms. Who cares how high the price? Who cares how people live? Who cares that they are being bankrupted? Who cares about the rise in unemployment? Well, if we do not care about anything that affects human beings, what do we care about? What else matters?
The worsening situation in the country and the lack of carefully considered government policies were aggravating tensions within Yeltsin’s entourage. There were efforts to paper over the cracks, but on 23 March 1998 the dam burst: by presidential decree, Boris Yeltsin dismissed the entire Russian government of Viktor Chernomyrdin. A further decree dismissed First Deputy Prime Minister Anatoly Chubais.
‘It would seem’, I said in an interview for Moskovsky Komsomolets [Moscow Young Communist], ‘that Yeltsin and his immediate entourage think the president is losing control of the situation.’ This was a turf war between factions. Berezovsky, Yumashev and Diachenko were one gang. Nemtsov was looking for a niche (and supporters), Chubais was looking for his niche, and Chernomyrdin was yet another gang. Everything was falling apart and the president was unable to hold the ring. On top of everything, there were rumours that the president’s mental powers were failing. While in Washington, Lebed said as much to the US Congress.
The political motivation for dismissing the government was clear to me: Yeltsin wanted to show how decisive he was and how completely in control. As Chernomyrdin’s successor, Yeltsin was proposing Sergey Kirienko, an ‘energetic technocrat’, young, capable, but completely unknown and lacking sufficient experience to manage a nation.
Yeltsin’s decision could open the way to a number of political moves and scenarios very remote from democracy. In an interview for Interfax, I gave a warning about this. The Duma might not approve Kirienko’s candidacy, I said, and that might even be the president’s intention: to provide himself with a pretext for dissolving the State Duma. I warned against that, and expressed the hope that he would not attempt to go down that road. I said, ‘We are faced with another crisis typical of this regime, which is rooted in a crisis with their policies.’
Kirienko’s candidacy was rejected by the Duma, which twice refused to approve him. Yeltsin proposed the same candidate yet again and had the option, under the constitution, of dissolving the Duma in the event of a third rejection. There has probably never before in Russia been such broad agreement of political forces of every persuasion that the president was the root cause of instability in Russia. It was impossible to predict how the deputies would behave in the third vote.
At the third vote, they did, nevertheless, endorse Kirienko. The new prime minister announced that the government was proposing a new economic policy, whose main thrust would be to revitalize industrial production. It proved to be a mirage. Things could not have gone worse with the economy. The government was incapable of controlling it.
In an interview on 8 August I had to state that the government had failed. With 80 per cent of the population against it, there was nothing it could do. Kirienko had neither a strong team nor the confidence of the public.
A way out of the predicament was possible only by democratic means: ‘Let people whom the nation trusts come to power through elections. Without the asset of trust, nobody can get Russia out of her state of crisis. Yeltsin had that asset once, but has it no longer.’
The president and government did not want to admit their inadequacy. On 14 August, Yeltsin was still trying to assure the world: ‘There will be no devaluation. I am saying that clearly and firmly. I am not just fantasizing: all the sums have been done.’ Just three days later, on 17 August, the government and Central Bank announced restructuring of the national debt through government bonds, which in reality meant a technical default, and a move to a floating rouble. They had to abandon support for the rouble.
This signified a total failure of the macroeconomic policy the Russian government had been pursuing in 1992–8. The economy suffered a further heavy blow: the Russian rouble lost two-thirds of its value, and people again lost their savings in whole or in part. There was a significant fall in industrial output and living standards, and a sharp increase in inflation.