The Duma knuckled under on April 24. When the division bells rang, 251 deputies voted to confirm Kiriyenko as head of government.14 Yeltsin showed him around his new office in the Russian White House. For them both, it was all downhill from here.
Yeltsin could not resist the temptation to make a few balancing ministerial changes, notably the removal of Chubais and of Anatolii Kulikov, the relatively conservative interior minister, and to insist that his ex-favorite Boris Nemtsov be retained as a deputy prime minister. That done, he gave Kiriyenko as much latitude in selecting cabinet members and defining program initiatives as Gaidar and Gennadii Burbulis had enjoyed in 1991–92. Passionately wanting him to succeed, Yeltsin conferred with Kiriyenko in the Kremlin or at Gorki-9 two or three days a week until his summer break.15 Vigorous young ministers took over finance (Mikhail Zadornov),16 economic coordination (Viktor Khristenko), tax collection (Boris Fëdorov), and labor (Oksana Dmitriyeva). Draft bills on economic liberalization were submitted to the Duma. In May Kiriyenko and Yeltsin’s chief of staff, Valentin Yumashev, seconded by Tatyana Dyachenko, asked Yeltsin to dismiss Pavel Borodin and get to the bottom of allegations of corruption in the Kremlin business directorate, and they had him almost sold on the idea. After a heart-to-heart with Borodin, the president ordered him to institute competitive bidding for future contracts but kept him in the job.17
If Kiriyenko had some of the properties of the right man to reform the reforms, the timing was wrong and it would be all he could do to tranquilize a volatile situation. The deus ex machina was a downturn in the overheated economies of southeast and east Asia, hit in 1997 by falling commodity prices and runs on the local currencies. Contagion from the “Asian flu” gave Russia financial sniffles in October–November. Government intervention to shore up the ruble did not restore full confidence, as is demonstrated by the slide in the RTS stock index from its high of 572 points on October 6 to 397 points on December 31.18 Economic uncertainty played into Yeltsin’s agonizing over Chernomyrdin: He was unhappy with the prime minister’s inability to answer pointed questions about finances, and conveyed this to insiders.19 By March, observers were beginning to see an Asianstyle crisis as in the making. In the second week of May, as the world price of crude oil fell to $12 a barrel (it had been $26 in January 1997) and the RTS average careened toward 200 points, the press predicted an imminent devaluation of the ruble. Yeltsin, with Kiriyenko and Dubinin, could have acted then to give in to the inevitable and cushion the effects. But the new cabinet was “terrified” by the prospect and of its political consequences.20 When no one acted, speculation reached a fever pitch. Defense of the ruble cost an estimated $4 billion per month in reserves that summer, bringing hard-currency and gold reserves down to less than $15 billion.
The pain would have been less were it not for a domestic background factor—the fiscal overexposure of the government. Yeltsin stated later that he had shone a flashlight on the problem at a meeting of the Council of Ministers in December 1997. “I said [to Chernomyrdin and the ministers], ‘You always explain everything in terms of the world financial crisis. Sure, the financial hurricane has not spared Russia and it did not originate in Moscow. But there is another aspect to the problem: the deplorable state of the Russian budget. And here you have no one to blame but yourselves.’”21 What Yeltsin did not say was that the red ink in the budget was something for which he himself had no small part of the responsibility.
The condition was chronic and dated back to the macroeconomic stabilization program of 1992 to 1995. Soviet-era social guarantees having been liquidated, Yeltsin did not want to antagonize the population further by cutting back on social allowances and services, or to alienate public-sector workers by doing away with their jobs or not paying their wages. As Aleksandr Livshits, his assistant for economics, put it, the president “felt there were limits to ordinary people’s patience” and “was afraid of a social explosion” if living standards deteriorated without relief.22 An attempt in May 1997 to sequester unfunded items in the federal budget was dropped after several months, and then revived without lasting success in 1998. On the revenue side, the weak post-communist state struggled to collect taxes, often accepting nonpayment, promissory notes, or goods in kind in lieu of money. Anxious not to drive firms into layoffs or bankruptcy, it instructed Gazprom and the electric grid to follow its lead and did not force them to honor their debts to the government. The 1996 election campaign engendered a new round of promises for bailouts and special projects and more unwillingness to squeeze out additional revenues. Post-election endeavors to increase tax yields cut little ice, as we saw in Chapter 15. A federal deficit that was reduced from 10 percent of GDP in 1994 to 5 percent in 1995 was back to 8 percent in 1997, only 1 percent less than tax revenues in total—meaning that the government of Russia was spending almost two rubles for every one it took in. As a noninflationary tool to finance the deficit, it relied on treasury bills known as GKOs (the acronym for State Short-Term Obligations), distinguished by their ultrahigh yields and fast maturity. The GKOs were purchased by domestic banks and by nonresident portfolio investors, who in 1996 acquired the right to convert their earnings to hard currency at will. The public borrowing required to float the GKOs produced a major overvaluation of the currency.23
Soft oil prices, capital managers’ aversion to country risk, fear of a global recession, and the ensuing hike in interest rates made the mountain of state debt untenable. In Ponzi fashion, the Ministry of Finance begat ever more GKOs to cover the shortfall and boosted the annual yield from 18 percent in July 1997 to 65 percent in June 1998 and 170 percent in mid-August. Russia went further out on a limb by issuing several billion dollars in Eurobonds and making cash loans that would have to be repaid in dollars. Interest payments on the debt, which were 17 percent of the budget in January 1998, gobbled up 34 percent by July of 1998.24 The RTS stock index went down in tandem to 135 points in early July, on its way to a low of 38 points on October 2, 1998—seven cents on the dollar for those who bought in at the high one year before.