Russia. A History

Fiscal crisis and neoliberal ideology combined to force the government to make sharp reductions in social services and cultural needs. In education, for example, state penury—amidst inflation—shrank teacher salaries to nominal sums (when indeed they were paid) and made teachers a salient part of strike movements. Students suffered as well: despite the constitutional guarantee of free education, schools and universities—especially élite institutions—increasingly expected students to pay fees and bribes. Similar woes beset the public health system: universal medical coverage gave way to fee-based services that were beyond the means of 95 per cent of the population. Budget ‘austerity’ also took its toll on culture: the institutions of the fine arts—museums, cinema, theatres, and concert halls—suffered a sharp decline in revenues, not only from state subsidies, but also from an impoverished public (theatre ticket sales, for example, fell by 50 per cent between 1990 and 1997). Cinema fared no better: Mosfilm studios—which had earlier produced 60 feature films a year—produced one or two. Russian film-makers could still produce prize-winning artistic successes (for example, Nikita Mikhailkov’s Burnt by the Sun and Sergei Bodrov’s

Prisoner of the Mountains), but the Russian film industry had all but collapsed.

To compensate for its dwindling revenues, the central government resorted to desperate financial measures. The most notorious was the ‘shares-for-loans’ programme in 1996–8, which used state assets (including oil and mineral companies) as collateral for loans from the leading banks. Although the government could theoretically redeem the property, its virtual bankruptcy meant that the loan was tantamount to sale. And at bargain-basement prices: with the ‘auctions’ rigged and competitors excluded, creditor banks organized the auctions and—predictably—emerged with the winning ‘tender’ and at a fraction of the real market value. For example, Mikhail Khodorkovskii’s bank Menatep acquired Yukos oil (valued at 7 to 10 billion dollars) for a mere 159 million dollars, paving the way for Khodorkovskii to amass fabulous wealth and become the richest man in Russia. All sixteen ‘auctions’ followed the same insider pattern. Yeltsin’s government portrayed the transactions as legitimate ‘privatization’ (privatizatsiia

), but observers aptly described it as ‘grabization’ (prikhvatizatsiia). The giveaways enriched the insider but not the state; this ‘fire sale of the century’ failed to generate the vast revenues that it had anticipated.

The government continued to seek foreign and domestic loans, but found it exceedingly difficult to attract foreign capital, chiefly because Yeltsin’s government was in ill repute and had failed to comply with prior commitments. Not that compliance was easy: the West made loans and credits contingent—with ‘conditionalities’ that dictated a tight money policy and fiscal austerity. That monetary policy reflected fiscal reality, specifically, the imperative need to service public foreign debt, which forced the government to divert revenues from governance, defence, law enforcement, and essential social programmes. The government also had to cut subsidies to unprofitable enterprises (exposing them to bankruptcy and the workers to unemployment) and to reduce social services in such vital areas as education and public health. A desperate Kremlin also resorted to three-month treasury notes to cover gaps in current cash flows. Although that strategy brought short-term relief, it was tantamount to a financial pyramid, whereby the state—with interest rates rising and tax revenues falling—had to borrow more and more just to cover its spiralling debt.

In August 1998 that pyramid collapsed. Admittedly, the Yeltsin government was not solely responsible; it was also a victim of a sudden 39 per cent plunge in oil prices (from 18 dollars a barrel in 1997 to 11 dollars in 1998) and the East Asian financial crisis (which frightened off investors from developing markets). But the fundamental problem was a ballooning deficit covered by short-term, high-interest treasury bills. As revenues fell and interest mounted, even a last-minute World Bank loan could not stave off insolvency: on ‘Black Monday’, 17 August 1998, the government defaulted on treasury bills worth 40 billion dollars and offered no clear prescription for extracting itself from the crisis. Yeltsin thundered that the value of the rouble would not fall; it was solid as a rock, and plummeted accordingly. The default pushed Russia’s credit rating to the lowest levels, caused the Russian stock market to lose 88 per cent of its value, ruined five of the ten largest banks, wiped out a third of small and medium businesses, and cut real wages by two-thirds. Not surprisingly, Yeltsin’s approval rating dropped to a mere 2 per cent.

‘Catastroika’