The Free Market
Russia's Distorted Mirror
The Free Market 14, no. 8 (August 1996)
"We Russians are doomed to teach mankind," wrote philosopher Grigory Chaadayev in 1848, "some awful lesson." The lesson turns out to be more than proving socialism's brutality and futility. It is also about the unlikelihood that elections alone will resolve a deep social and economic crisis.
After the Soviet Union collapsed in 1991, the Russian political scene became highly volatile, with over 600 different parties and 22,000 political organizations competing to fill the ideological vacuum left by the Communists. It has now begun to take shape.
Four major ideological forces, represented by the major candidates, dominate Russia. Underlying each are theories of how big the state should be, where the center of government should be, and how free the market ought to be. In this way, Russia is a distorted mirror of the U.S., which is having its own difficulties with reform. The battles center on same themes and feature similar struggles.
Social Democracy. These people combine anti-communism and a strong belief in welfare and warfare. They resist total state ownership of industry and land as much as they oppose a free market and denationalized political life. They have adopted the economic priorities of the international lending agencies to which they are heavily indebted.
The social democrats are grouped around Boris Yeltsin and his government. His platform reveals the inner contradiction of social democratic politics. On the plus side, he promises to privatize all industry by the year 2000, cut inflation to 5 percent a year, make the ruble fully convertible, balance the budget, cut taxes, and abolish the draft.
On the downside, he pledges that he will make welfare payments the highest in Eastern Europe, that everyone will enjoy a "living wage," and they will be given free medical care, free transportation, high pensions, free education, and full-scholarships for professional training.
Yeltsin is the candidate of the ruling elite in action: promising obviously incompatible goals as a means to maintaining control, and hoping the public has a short memory. His constituents are post-communist bankers, oil and gas executives, traders in raw materials, and government bureaucrats.
Part of his pitch is that he is a moderate who will go slow with privatization. This is appealing for only one reason. The man on the street and Western Sovietologists believe that past privatization allowed managers of state enterprises to steal factories and become enormously wealthy at others' expense. Like many widely-held beliefs, this is false.
Swedish economist Anders Aslund has calculated that Yeltsin's privatization so far has been worth less than 1 percent of GDP. Today many of these supposed private enterprises have no market value at all. Nor is private economic crime the cause of personal wealth in Russia. The new wealth comes overwhelmingly from three other sources: subsidized credits, implicit export subsidies, and import subsidies.
Since there was no free market, these roads to riches took on enormous importance in 1991, when the Soviet economy finally collapsed. Yeltsin used them to build his new political machine. Now these tycoons have a vested interest in keeping the handouts going. They, in turn, provide the necessary financial backing to keep the government in power. The prices of most public utilities and large industrial commodities are still determined by administrative edict.
Since September 1995, Yeltsin's tycoons have been holding down the price of electricity, oil, gas, and coal, to enhance Yeltsin's grip on power. In exchange, Yeltsin has given them raw materials at subsidized prices and then encouraged malinvestment with export subsidies. Some of them made profits up to 300 percent. So it is with other privileged sectors and public-private partnerships: for example, telecommunications giant Rostelecom boasts annual profits of 147 percent.
Yeltsin's' program consists of little more than an itemized list of guaranteed handouts by a benevolent state. "I feel your pain, all the country's pain," Yeltsin said while campaigning. He should, since much of it was inflicted by his own interventionist policies camouflaged as "radical economic reform."
Popular support for Yeltsin is based on a simple fact: people remember the terror of communism and don't want to go back. He tries to persuade people that he is all that stands between them and a return of the bad old days. Yeltsin's slogan is "normal life with gradual improvements for all." This message has an appeal for people who served as guinea pigs for all kinds of social experimentation for 75 years.
Internationally, Yeltsin's most generous backers are the Clinton White House, the United Nations, and the International Monetary Fund, which bails out failing socialist economies from Mexico to Mongolia. Two months before the election, they collectively released $10.1 billion to the government.
Communism. Gennadi Zyuganov presents himself as a pro-market reformer. A former mathematics professor, his speeches sound much like those of any left-wing academic. His enemies are the "monopoly bourgeoisie" and "capitalist exploiters" while his friends are the "oppressed," "victims," "poor," and "unprivileged." The rest of time, he attempts to unlink himself from Stalin, the Gulag, collectivization, and tyranny.
His pitch is for the support of the biggest losers from the reform period: people living on fixed incomes who have seen their wealth destroyed by inflation, former apparatchiks who can't find work, and Soviet militarists who dream of a restored USSR. They are large enough to be a strong pressure group.
The communist program is to halt economic disintegration, with no coherent plan for doing so; provide a decent standard of living for one and all, with no prospect for success; and restore Russia's superpower status by reclaiming all lost territories, which would quickly bankrupt what's left of the government.
National Socialism. The leader of the Liberal Democratic Party Vladimir Zhironovsky is well known for lecherous antics. He promises to recreate of the Greater Fatherland from the Arctic to the Indian Oceans, but the real source of his support is his open hatred of the ruling elite. He calls Russia the "lavatory of Europe," while promising to restore its greatness by declaring war on Muslims and on Turkey, where he was once arrested.
His economic program is national socialist. Private property gets formal recognition, but the state, with its great leaders, will create industrial might and military superiority though heavy intervention and trade protection. The worst turn of events for him was when the establishment, which hates him, changed their tactic from denouncing him to ignoring him.
Free-Market Nationalism. The leader of this movement is Aleksandr Lebed. He combines a call for law and order with a commitment to free enterprise. His economic program is drafted by the free-market economist Vitaly Naishul, and rests on what is called "self reliance": delegating powers from the central to the local government, dramatically reducing taxes, and rejecting all foreign aid (thus the label nationalist).
"I do not promise you anything," he says. "Since my childhood I have believed that free cheese is found only in a mousetrap." This is the right spirit. But Russian politics has a tendency to chew up even the most principled person. Having joined Yeltsin's government, how long will Lebed's principles will hold up?
Let's review the choices: duplicitous and misguided social democrats, old-style communist propaganda, fatuous nationalism socialism, and the slight hope that someone, a moderate free-market nationalist, understands the problem and offers a solution, providing he too doesn't sell out his principles the closer he gets to power.
Contrary to all predictions, democracy is not curing Russia's problems. And more democracy is not likely to help either. A constellation of economic interests and a lack of public understanding of economics has kept social peace at bay. Without liberty and property, all talk about rebuilding Russia after a disastrous century of socialism is meaningless.
Cite This Article
Maltsev, Yuri N. "Russia's Distorted Mirror." The Free Market 14, no. 8 (August 1996).