How frightened should we be?

On the matter of Russia’s future there can be no such thing as idle speculation.

Now the Russian Prime Minister, Iosif Dozhdev, launches the New Economic Programme, eventually known to history as the Dozhdev line. The time is finally right for a currency reform, which at one blow eliminates state debt and converts enterprise and farm debt at a steep rate. Subsidies ... are sharply cut back and a tough bankruptcy law is enacted. Inflation falls to a moderate 20 per cent per annum ... economic growth responds sharply. By 2003 the Russian economy begins growing at an annual 9 per cent rate, fuelled by abundant manpower, resourceful private Russian management, high and rising personal incomes, natural resources and foreign capital. Some commentators note that it is the same kind of growth rate that Russia enjoyed in its economic miracle before the First World War, as Russian excellence in electronics, material science and applied mathematics, allied with Western partners, begins to achieve breakthroughs in world markets ... it is Russia’s path to the 21st century.

  Is such a story possible by 2010 or before?

Is it? At present it seems more of a joke than a piece of serious ‘scenario planning’ on the part of Daniel Yergin and Thane Gustafson, from whose book it comes. Though it may not, at first sight, appear any less plausible than a capitalist China ruled by the Chinese Communist Party would have seemed in the Sixties or Seventies, or a Japan producing high-quality, high-cost consumer goods for the world would have done in the Fifties, when the country was synonymous with tack and cut prices. Yet it is less plausible, because Russia, unlike China, is trying to enter the lists, in the global division of labour, as an industrialised economy, while lacking the malleable wage labour which is fundamental to China’s huge annual growth rates. Not only is Russia’s workforce one of the hardest in the world to discipline and motivate, but Russian industry, heartland of the Communist experiment, was modelled according to their own youthful fantasies by two of the century’s most ruthless and insouciant planners, Lenin and Stalin.

‘Stalin,’ Simon Clarke writes in the collection of neo-Marxist essays about the whirlwind which has hit Soviet workers,

sought to overcome the economic weakness of his regime by expanding heavy industry as rapidly as possible. He sought to broaden the social base of his regime by proletarianising the Soviet population as rapidly as possible. He sought to secure his own grip on power by embracing the whole economic system within a hierarchical system of command ... the Plan was essentially an ideological and political instrument, designed to extract an ever-increasing effort, and to provide an arbitrary measure of success and failure ... the system was economically irrational because it was not designed with economic rationality in mind ... [it] did not meet the needs of the Soviet people in the Eighties, but the system had not met the needs of people in the Thirties and it was never designed to meet their needs. The system was designed to meet the political needs of the nomenklatura.

The system, ‘totalitarianism harnessed to the task of economic growth’, as Robert Campbell described it twenty-five years ago, was considered something of a success around the world until the late Seventies – mainly because of its ability to reconstruct the economy after the war, on the basis of an industrial machine that was already in place. As we all now know, thanks to Mikhail Gorbachev who has told us so time and again in order to justify his extraordinary policies, it ran out of steam in the latter part of Leonid Brezhnev’s long reign – a period of economic contentment for the Soviet people. Reformers clustering around the Prime Minister, Alexei Kosygin, had tried to get Brezhnev to adopt a degree of flexibility in the system, using shadow prices to stimulate competition and allowing some freedom to the producers. These ideas, anticipating perestroika, were wisely rejected by Brezhnev in favour of an imperial leadership, behind which slow decline was more or less adequately concealed.

Mikhail Gorbachev, the most disastrous economic and political reformer the Soviet Union has seen, and the most advantageous to the West, set out with a faith in the reformability of the system that is now said to have shaken his entourage but from which no one, apparently, could dissuade him. An unknown aide tells a story, quoted by Yergin and Gustafson, of Gorbachev arguing vigorously to a foreign business delegation that socialism was alive and curable and, when they left, continuing his argument to his aides. ‘We couldn’t figure out why he kept making his case, since the Westerners were gone. Then after five minutes, we understood – he believed what he was saying.’ This is the kind of story that insiders like to tell outsiders; it nonetheless supports the view that Gorbachev did act as though he believed that people would do voluntarily what Communism had forced them to do for decades. He believed, in other words, that there was already a Soviet being, whose nature and reflexes were inherently socialist and would continue to be so in conditions of relative political freedom. He was right that Soviet citizens had acquired many of the reflexes that could be called ‘socialist’, but he failed to understand that none of these was capable of sustaining an economy without coercion.

He did everything wrong, above all and crucially, in the economy. In an essay on the origins and workings of privatisation in Russia, Clarke recalls how Gorbachev reintroduced a series of reforms in the latter half of the Eighties, known as the Laws of Enterprises and Cooperatives, which gave managers the right to make ‘independent’ decisions, so long as they conformed to the plan, and small co-operatives the right to engage in petty business ventures that posed no challenge to state enterprise. Gorbachev went on to bring more and more incoherence to a process already riven with contradiction, by destroying the Party’s hold on economic life, restructuring the ministries and allowing the Republics to reorganise the smaller enterprises within their territory (and simulating their desire to reorganise them all). By 1991, his last year in power, Gorbachev was presiding over a full-scale crash, whose causes are well described by Richard Ericson in an essay on the contemporary Russian economy in After the Soviet Union:

Perestroika dictated the monetisation of transactions (that is, contractual buying and selling for a profit) without allowing the rouble to become real money or prices to reflect real costs or values. Economic agents received autonomy without property, or the economic responsibility and incentives that are inherent to it, and were forced to operate with a bizarre structure of prices and economic valuation, in particular of assets and operations. Thus they were forced to pursue monetary profits, and a host of non-economic objectives, in the absence of real money, real property rights, real economic valuations and real markets, as well as of the controlling and intermediating structures of the old command economy. It was a prescription for economic disaster, only mitigated by the forces of inertia and the failure of former subordinates to adapt to the new environment.

Gorbachev was famously unlucky. He had to deal with Chernobyl, the Armenian earthquake which killed many thousands more than Chernobyl, and a fall in the price of oil which turned the terms of trade in the only major Soviet commodity against him. Much of his difficulty, however, was the result of his own, and his Party’s, failure to grasp that there could be no middle way between Communism and capitalism. Communism may be qualified, as it had been in Hungary since the Sixties, by market or market-like elements, while capitalist economies run a wide gamut, from poor, semi-criminalised states like many in Latin America to Western European social democracies. At the root of the Communist system, however, is the Party’s monopoly of power and all substantial property and the fact that prices are only in part a function of costs. Capitalist relations cannot develop in the absence of a competitive price mechanism, property guarantees which are, at the very least, officially unchallenged, and a set of commercial rules accepted in principle, if not always honoured. None of these rudimentary preconditions was in place in the Soviet Union during Gorbachev’s time, even though, in his last two years, he tried to move towards them: it was on this basis that he justified his massacre of the institutions that had sustained the Soviet state.

When Yegor Gaidar, the most prominent Russian reformer, defends his record, he refers to 1991 as the year in which the Soviet state collapsed and famine threatened – a year when the queues for scarce commodities were at their longest, when GNP dived by 17 per cent and consumption of goods and services by 13 per cent, and when the budget deficit leapt to 20 per cent of GNP. Yeltsin became Russian President in mid-1991 and a few months later, on the prompting of Gennady Burbulis, he appointed Gaidar to run his economic reform programme. In October Gaidar wrote a speech for Yeltsin to deliver in the Russian Parliament which was unambiguous in its commitment to the free market. An academic himself, Gaidar chose a team of young economists, most of whom were academics, to serve as his ministers and advisers.

In November 1991 I went out to the Archangelskoye government dacha complex near Moscow, where Gaidar and his team were working on the economic programme. It was a jolly crowd. Among others, that Sunday, were Anatoly Chubais, now the deputy prime minister for privatisation, Konstantin Kagalovsky, Russia’s director on the board of the IMF, Alexei Ulukayev, economic adviser to the Russian Government, Sergei Vassiliyev, now head of the Economic Reform Centre, and Pyotr Aven, who became trade minister and resigned early last year. They sat around a table covered with papers and tea cups, in a large first-floor room, talking and arguing with great animation while they waited for Gaidar. I could hear their conversation punctuated with laughter. The programme which would destroy the Soviet system irrevocably was formulated in this dacha by clever young men who had, for the most part, run nothing more than a small academic institute and who were high on the prospect of becoming ministers and senior officials. When Gaidar appeared, he laid out a programme for the Russian economy alone – a radical proposal at a time when the Soviet economy as a whole was still the object of an official revival plan. ‘Russia,’ said Gaidar, ‘must have its own bank, its own monetary and fiscal policy. That is the reality today ... we must now move to treating all other Republics as sovereign states. Of course, we must have strong links and there will be many bilateral agreements. But we cannot continue as we did towards Eastern Europe, as a “Big Brother” supplying them with cheap oil and gas and then finding we have a deficit with them of fifteen billion dollars because of the distorted price structure.’

Gaidar’s line took two years to work its way through the system and remains an area of contention even now. For the moment Gaidar himself has retired, leaving the field to men who do not wish to treat the other Republics as sovereign states, and who are actively attempting to restore the Union by other means than Communism. Yet in the course of these two years, Gaidar destroyed the system.

On this, Ericson’s essay is excellent. Having lifted price controls in January 1992, Gaidar saw prices rise tenfold or more – he had told me at the dacha that they would probably double – because, as Ericson explains,

producers and sellers had yet to feel any significant pressure to sell; soft budget constraints, easy credit, and the lack of any interest in monetary earnings beyond wages and salaries prevented real price competition from developing ... Rouble emission continued unabated at a rate only constrained by the technical capacity of the printing process and the bank continued to issue vast amounts of credit, albeit at higher interest rates, to prevent any state enterprises or operations from ceasing to function merely from a lack of liquidity ... The chaotic monetary and price situation significantly aggravated the already near-universal rationing of necessities by local and regional authorities and growing export restrictions on intra-CIS trade by governments ... The third major trend [was] the ongoing collapse in production. The trend was further aggravated, especially in Russia and Ukraine, by Yegor Gaidar’s stabilisation programme that cut state investment by 60 per cent and state orders to military industry by almost 80 per cent ... This forced producers to begin a desperate search for alternative activities and markets [and] ... raised the spectre of massive unemployment in sectors that fail to find such markets.

Gaidar had to take the world as he found it. As Professor Jeffrey Sachs, his adviser for much of the past two years and an active proponent of what came to be known as ‘shock therapy’, observed in a recent issue of the New Republic, it was widely predicted at the time ‘that Soviet cities would succumb to hunger, if not starvation, by the winter’. At the outset Gaidar had believed that liberalisation of prices and trade, tight budgets and privatisation, and a matching IMF programme, would rapidly secure radical change: he soon discovered the sheer weight of the Soviet establishment he was undermining.

In the first instance, industrial enterprises remained tied into a planned system of supply and production which, though severely weakened, was still in existence. These enterprises, conceived of as units in a seamless web of production, were, at the same time, and much more than their capitalist equivalents, self-contained worlds. Heads of enterprises may have been divorced from decisions on price, marketing and quality, but they were intimately engaged in the role of ‘father to their workers’ – for whom they provided food, medical services, education and housing. These were feudal entities, and shocks from above didn’t make them any less so – on the contrary. ‘Authorities,’ says Ericson, ‘continued and enhanced the paternalistic role of the industry as a provider of social services and welfare. The local industrial product is marshalled as a resource to be bartered with other regional leaderships or major industrial operations for necessary supplies, both to maintain economic operations and maintain the local population.’

The leaders of these enterprises were not managers in the Western sense of the term, but part of a local or regional party/government nomenklatura – the top people, as Yeltsin’s career illustrates, shuttled between party, government and managerial posts – whose functions were never clearly separated. When, in 1991, I went with a group of US pension fund managers researching prospective investments in the big local enterprises of what was then Leningrad, I saw their reaction as it slowly dawned on them that the main preoccupation of the managing director of the huge Leninets electrical plant, employing fifty thousand workers, was not marketing his products or adopting new technologies but ensuring that supplies of food from Ukraine would continue in the face of decisions by the Ukrainian Government to curtail shipments to Russia. The pension fund did not, of course, commit a cent to that or any other company.

Western economic thinking finds itself unable to account for the fact that a huge fall in production, investment and consumption is not accompanied by a similar rise in unemployment. So far, however, this rise has not occurred. Although official unemployment figures for the Russian Federation have crept up, they have yet to reach 1 per cent. Further rises are inevitable but Clarke and Co are very good on why they have so far been avoided. Faced with a sudden collapse of support from the top, the initial response of the enterprise heads was to do the opposite of what they were ‘supposed’ to do. ‘In such a situation,’ Clarke writes,

the director had to look to the support of the labour collective, exploiting his position as the traditional paternalistic representative. It was therefore at the level of the enterprise that the disintegration and transformation of the system came up against its limits, as enterprise directors did everything in their power to preserve the existing social relations of production on which their power was based and in which their authority was embedded. The Soviet enterprise was correspondingly the rock on which the liberal programme foundered: while the disintegration of the administrative command system led to the rapid development of market relations within enterprises, enterprise directors did everything in their power to prevent the development of the market from undermining the social relations of production within the enterprise, looking for support in this project to the labour collective whose common interests they claimed to represent.

In short, the directors and the workers clung to one another from inhibition. The former were reluctant to turn themselves into a managerial middle class, the latter to develop free labour unions that could defend workers’ interests in the normal, social-democratic sense. Since Russian enterprises have been kept alive on a drip-feed of cheap credits, there is some basis for arguing that their resistance to change has not been in vain. The Russian Government’s recent turn away from radical reform suggests that they may have won a victory, if not the war itself.

The continued grip of the old structures on the economy is evidence of their enduring strength, to which Ericson pays a sour tribute: ‘the development of a market economy is ... delayed, if not obstructed, by efforts to maintain production activity and patterns of interaction that developed in the Soviet period. To a large extent these operations embody a massive waste of resources and an ongoing destruction of economic value, despite their short and perhaps intermediate-run useful role of providing employment to millions.’

Yergin and Gustafson recognise that though ‘the entire basis of the command economy has disappeared’ and ‘the political will to sustain it no longer exists’ still ‘the old economy itself is far from dead ... thousands of state enterprises continue to operate, selling to one another on credit.’ Inter-enterprise debt presently amounts to roughly eleven trillion roubles (US$7bn). It is an impossible load to continue to carry, yet there is no obvious way out except to throw millions of people, many of whom already receive regular pay, out of work and into the care of a society wholly unprepared to support them.

For Clarke and his collaborators, a militant Russian (or Soviet) working class takes the credit for curtailing liberal reform. What About the Workers? provides a valuable analytical account of conditions on Russian shop floors, tracing the evolution of hierarchy and subordination for the first time since the disintegration of the Union. At the same time, Clarke and Co argue that the socialist ideal can only be discredited to the degree that it has failed in practice. Evidently, Clarke himself feels that this failure is not definitive. Passing briefly over the bitter debates on the left about the nature of the Soviet system, he goes on to say: ‘Whatever our criticisms of the Soviet system might be, at this conjuncture the priority of the workers’ movement is to defend the achievements of socialism by supporting the “conservative” opposition to liberal reform.’

Clarke believes that socialism in the Soviet Union was betrayed by its leaders, most of all by Stalin. He argues that, in key respects, the state and the Party substituted themselves for the capitalist class and ensured the continued subordination of the working class. This argument suffers from the usual weakness of failing, or refusing, to define the terms of a workable socialism which would break the power of capitalism, as he concedes that Soviet Communism did. But Clarke has constructed a useful base from which to attack both the Soviet system and its inchoate successor in scathing terms.

However, without some account of what a ‘real’ socialism might be, and in particular what a ‘real’ socialism might have been in Russia and the Soviet Union from 1917 on, it is difficult to grasp the basis of Clarke’s critique. It assumes that a pluralistic, nonexploitative socialism, coercive only from the point of view of designated ‘exploiters’, could have developed into a stable order. In the Russia of 1917 that seems to me wholly imppossible, as does any attempt to construct ‘good’ socialism from the ruins of the past – not only because a good socialism, though often defined and envisaged, has yet to be seen, but because there is no place less suitable than present-day Russia in which to conceive the project. Clarke is sometimes prepared to admit that such an idea is out of the question, since there is neither a party nor a workers movement with the authority to see it through. And in the near future, there isn’t likely to be one.

Clarke does not try to sketch out what kind of future would be most propitious for another attempt at socialism. For those who care to do so, neo-liberalism must look like a reasonable bet. If it were to fail and lead to further chaos and immiseration, then the enterprise would fall into the Marxist category of ‘the worse the better,’ finally rousing the working class to assert their class interests. Equally, if it were to work, it would bring in its train a stronger working class on which a viable socialism depends. To oppose the Westernising liberals means, by contrast, throwing in one’s lot with those members of the Communist and nationalist parties who oppose any reformist moves.

Is there another way? The question is now being debated with some urgency in Western financial circles, and especially at the IMF and the World Bank, which have been charged with assisting the Russian reform effort and no longer know if there is such a thing. Accused of prevaricating by the Group of Seven governments, the Fund and the Bank put out a joint note earlier this year exonerating themselves on the grounds that the Russians were simply not doing the right things and that it was impossible to lend them money until they did. Ericson agrees: ‘it behoves the rest of the world to do what it can to aid such a transition and recovery’ but ‘aside from giving advice and encouragement, there is very little that can be done from the outside until appropriate policies are adopted and major institutional and legal changes are made internally.’ The G7, unwilling in the end to push the IMF and the Bank to the point where they give up and force the wealthy Western governments to use their own money, will probably wring their hands and concur.

There is, in the meantime, no shortage of frightening scenarios on which to dwell. Yergin and Gustafson’s energetic and knowledgeable book, which proposes the ‘miracle’ future quoted at the beginning of this review, is more full of the horrors of an aggressively nationalist, statist Russia, determined to recover its former (Soviet) empire and end the experiment in democracy. The worst of these scenarios predicates foods riots in 1997 in a country where the economy has continued to deteriorate and Yeltsin has been replaced, on retirement, by a weak figure who cannot command the allegiance of the Armed Forces. As civil war begins between the ‘red browns’ and troops loyal to the Government, the minister of defence, a decisive figure, takes control. His regime is not Communist, but it is authoritarian and anti-Western. Yergin and Gustafson’s imagination is scarcely running riot. Such speculation is grounded in their understanding of a confused present, whose outcome we do not know. Sachs believes we are in a position to help: the IMF and Ericson do not. All we can do is wait, as the old beast writhes in its coils.