Chapter 1 Preface

When Russia emerged from the collapse of the Soviet Union and communism in 1991, many people predicted a bright future for the nation. Instead, the Russian people have endured numerous hardships as the nation has attempted to transform itself from a dictatorship into a democracy and from a command economy to a market economy. Russia’s gross domestic product (GDP) contracted by almost 50 percent during the 1990s. The savings of many people were wiped out by inflation and currency troubles, including a monetary crisis and devaluation of the ruble in August 1998. Sixty million people—about half the population—live below the official poverty line. Many workers have gone without a paycheck for months. The life expectancy in Russia has declined to levels comparable with some developing nations. Corruption within the government is widespread, and organized crime became an endemic and serious problem. Billions of dollars of capital have been taken from the country.

Many observers, both in and outside of Russia, have blamed reforms encouraged by the United States for Russia’s economic and social difficulties. With U.S. support and assistance, the Russian government under President Boris Yeltsin removed government controls on the prices of goods, made the ruble convertible to foreign currency, and placed state-owned companies and assets into private ownership. These so-called “shock therapy” reforms have been controversial. Critics charge that they have provided more shock than therapy and have enabled an oligarchy of businesspeople, former communist officials, and organized crime figures to cheaply obtain public assets and gain a stranglehold on Russia’s economy and government. Defenders of shock therapy, such as Harvard economist Jeffrey Sachs, argue that similar reforms have worked as intended in Poland and other countries, but that in Russia these reforms have not been implemented correctly or completely and have not been fully supported by other nations. The authors of the following viewpoints provide several perspectives on the origins of Russia’s social and economic troubles.

Capitalist Reforms Created Russia’s Economic Crisis

Russian scientists were once famous for launching the world’s first space satellite. Their counterparts today survive by growing vegetables in their small yards. These are not retirees enjoying some well-deserved leisure-time gardening, but prime age workers—miners and teachers as well as scientists— trying to meet basic needs in the face of economic collapse. People go to work every day and do whatever their employer asks, yet weeks and months pass without a single paycheck. They stay on the job because at least it provides some fringe benefits, and no alternative paying job exists.

This has been the meaning of Western-inspired “reform” to a majority of public and private sector workers in Russia. But the media began calling it a crisis only in August of [1998], when Russia stopped making timely payments to Western bankers and other investors who had taken a chance on Russian bonds.

The IMF Program
After imposing years of suffering on ordinary Russians, Russia’s Western-inspired “neoliberal” program for rapidly building capitalism appears to have finally collapsed under its own weight. This program was devised [in 1991] by top economic advisors to Russian President Boris Yeltsin’s government, working closely with specialists from the International Monetary Fund (IMF).

Any visitor to Russia can see the effects of the IMF program. The nation’s economic output has fallen by half and its investment by three-fourths since 1991, with no recovery in sight. Money is so scarce that half of economic transactions are conducted through barter. A small group of influential insiders has been handed ownership of the former Soviet Union’s most valuable properties, while the majority has been plunged into poverty and hopelessness. The economic and social collapse has caused more than two million premature deaths since 1991, due to sharp increases in alcoholism, murder and suicide, infectious diseases, and stress-related ailments.

Despite the unprecedented economic depression, until recently Russian bankers kept getting richer and the stock market soared, buoyed by the lucrative trade in Russia’s valuable oil, gas, and metals. Western banks helped to finance the speculative binge that drove up Russian stock prices, making it one of the world’s best-performing stock markets in 1997. Then in the late spring of [1998], Russia’s stock market began to fall and investors started to pull their money out of the country.

The Clinton administration, fearing that Yeltsin’s government would not survive a looming financial crisis, pressed a reluctant IMF to approve a $22.6 billion emergency loan on July 13. This bailout proved unsuccessful. Four weeks later the financial crisis resumed as investors fled and Russia’s government had to pay as much as 300% interest to attract buyers for its bonds.

After Washington rejected Yeltsin’s desperate plea for still more money, Russia did the unthinkable: it was forced to suspend payment on its foreign debt for 90 days, restructure its entire debt, and devalue the ruble. Panic followed, as Russia’s high-flying banks teetered on the edge of collapse, depositors were unable to withdraw their money, and store shelves were rapidly emptied of goods. The financial collapse produced a political crisis, as President Yeltsin, his domestic support evaporating, had to contend with an emboldened opposition in the parliament.

What Caused the Financial Crisis?
Two immediate developments turned Russia’s euphoria into financial crisis. One was the growing realization that the IMF had failed to resolve the Asian financial crisis, despite huge loans and the imposition of severe economic measures (known as “structural adjustment programs”) upon the suffering Asian countries. This created a ripple effect in the late spring of 1998, spreading fear of the world’s “emerging markets” among international investors. Equally important was the sharp drop in oil and other raw material prices during 1998. This caused the value of Russia’s oil exports, its main source of foreign currency earnings, to fall by almost half in the first six months of 1998 compared to the same period of 1997. Together, these two developments led investors to begin removing their funds from Russia.

Russia...

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Capitalist Reforms Did Not Create Russia’s Economic Crisis

Bill Clinton had hundreds of affairs early in his marriage, he told Monica Lewinsky, but after he turned 40 he resolved to be faithful to his wife. He cut back on his sexual adventures. Yet Clinton still committed adultery, and he still got in trouble. [Editor’s note: President Bill Clinton was impeached in 1998 by the House of Representatives for offenses related to an affair he had with Lewinsky, a government intern. He was acquitted by the Senate in 1999.]

The conclusion is obvious: Fidelity is a crock, a “utopian religion,” “the great illusion of our era.” If it weren’t for his blinkered devotion to the foolish ideology of fidelity, Clinton wouldn’t be facing the possibility of impeachment.

Not even the fiercest Clinton defender would make such a ludicrous argument. No one in his right mind would claim that Clinton’s reckless sexual behavior and its consequences stem from a zealous dedication to marital fidelity. And no one who offered such a patently ridiculous line would be respectfully interviewed on PBS news shows or published in the Washington Post.

But if you’re talking about Russia, a different standard applies. It’s conventional wisdom that fidelity leads to adultery.

Too Much Capitalism?
From experts both inside and outside Russia, we hear that the country’s economy is falling apart because of unregulated free markets and too much reform. Leftists are ecstatic. Ever since the collapse of the Soviet Union they’ve been looking for a club with which to beat back the idea that markets lead to progress and prosperity. What could be better than economic turmoil in Russia? It’s even the same country that made socialism look so bad.

Economics columnist Robert Kuttner puts it most rhetorically, calling the “Russian implosion” a casualty “of the great illusion of our era—the utopian worship of free markets . . . an almost lunatic credulity in pure markets and a messianic urge to spread them worldwide. . . . With serious aid, we could have helped true reformers build an effective democratic state and a modern mixed economy. Instead, the Russians got laissez-faire gangster capitalism.”

Markets equal the mafia.

New York University professor Stephen Cohen, a former Sovietologist and [former Soviet Union leader Mikhail] Gorbachev devotee, is more measured, as befits a man whose talking head appears regularly on PBS. But, like Kuttner, he blames Russia’s troubles on an “American crusade to transform Russia into a replica of American democratic capitalism,” a model he doesn’t like much anyway. He says, “We have to drop this dogma about the notion that there’s only one way to reform the country. Russia’s changing course. . . . The state is coming back to try to save the nation.” In this morality tale, the Russian state apparently withered away in 1991, taking with it all business regulations and social spending; it is only now reviving.

Now that Russia is done with its foolish experiment in free market capitalism, goes this line of argument, the country’s economic policies can be pragmatic and humane. “Now there is hope for a more realistic policy,” former Gorbachev economics adviser Oleg Bogomolov told the New York Times after the ascension of Prime Minister Yevgeny Primakov brought communists back into economic-policy positions. “Now it is not just one side that can express their ideas, like our liberal radical economists. We are all in favor of reforms, but not reforms for their own sake, but reforms which serve people.”

From these accounts, and less tendentious ones as well, you might well think that Russia has been following some sort of laissez-faire model for the past seven years: that Moscow had become the new Hong Kong. Like Bill Clinton’s ventures in fidelity, however, Russia’s experiment with “free markets” combined a small change in behavior with a lot of good-sounding talk. In truth, Russia no more adopted a market economy—even in a mixed, social-democratic European way—than Clinton stayed...

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Russia’s Crime Problem Stems from Its Failure to Replace the Soviet State

Alexei Yablokov was driving down a dark country road one night, headed for his weekend cottage with his treasured white Opel jammed full of food and books, when suddenly car thieves tried to run him off the road.

They rammed his car and shouted, but Yablokov sped faster. After a harrowing chase—at one point the thieves jumped onto his hood—the white-bearded environmentalist made it safely to the cottage and called police.

But even a career spent challenging Russian authorities on nuclear-waste policy and other such issues had not prepared Yablokov for what happened next. When he went to press charges, he recalls, “It was explained to us that one of the attackers is the ‘little son’ of one of the...

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Russia’s Crime Problem Is a Direct Legacy of the Soviet State

Russia is experiencing an organized crime epidemic. Its Interior Ministry says there are more than 9,000 criminal organizations operating inside the country, employing nearly 100,000 people, or about the same number as the U.S. Internal Revenue Service. The Analytical Center for Social and Economic Policies, a government-sponsored think tank that reports directly to President Boris Yeltsin, estimates that four of five Russian businesses pay protection money. They also indicate that more than 8,000 Russians mysteriously have vanished from their homes, which have become lucrative pieces of real estate since the collapse of communism.

American news accounts of Russia’s organized crime epidemic continue to suggest...

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An Environmental Crisis Underlies Russia’s Problems

During nearly two years as a journalist in Russia, I craved, more than anything, fresh, clean air—that and water that I could drink straight from the tap. And more than anything among the manifold blessings of life in America, it is these that I savor now that I am home.

Certainly I had had other complaints in Moscow. A little sunlight in that perpetually bleak and cloud-covered city would have been nice. And I missed good vegetables, such as tomatoes that I didn’t suspect could power a small nuclear reactor. But most of all, I longed for clean air and water.

In the former Soviet Union, where for decades the government promoted production at all costs, one of the costs the nation paid was in the purity...

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A Public Health Crisis Underlies Russia’s Problems

Health in Russia is even worse than most Russian and foreign commentary would indicate, and the consequences for Russian society, the Russian economy, and the Russian military will be enormous.

Environmental issues lurk behind much of the publichealth problem. Radioactive contamination is rife. Chemical contamination, such as by dioxin, is largely to blame for the fact that life expectancy for both men and women in the town of Dzerzhinsk, in the region of Nizhegorodskaya, is no better than fifty years. At least until 1995 [the pesticide] DDT continued to be used, despite an announcement by the Soviet government almost three decades ago of a ban on its production and use. Bad water nationwide has led to high rates not...

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