System Error

System Error
Boris Kagarlitsky
Red Pepper, 25 April 2000

The banks have run out of
money and the shops have run out of goods. This time it is the Russian
elite who have lost everything and the IMF has only limited prospects of
bailing them out. Boris Kagarlitsky assesses what the future
holds

The ruble collapsed on a
Monday morning. The weather in Moscow was unusually good, not too hot and
not too cold. Thousands of residents could walk about the city observing
the fall of the national currency. Best of all was to stroll about the
currency exchange booths. First the rate fell from 6.2 rubles to the
dollar to 6.5.

By midday the American dollar
cost 7.5 rubles; by 1.30pm the price had reached 8.5. After 2pm, it was 9
or 9.5 rubles. By 3pm the banks had run out of money. The currency
exchange booths closed one after another 'for technical reasons'.
Strangest of all was what happened to the sale price of the dollar. For
people wanting to get rid of their rubles, the dollar became more and more
expensive, but those who wanted to change hard currency into rubles were
staggered to find that their dollars were still worth only 6.2
rubles.

The reason for this strange
behaviour by the banks and exchange offices was simple: the authorities
insisted on the official rate, which did not exceed 6.4 rubles to the
dollar. Citizens recalled in turn that it was possible to do without the
services of the official establishments altogether, and began changing
money with one another. The black market in hard currency was
reborn.

No one knew how much a dollar
was really worth. Since many enterprises keep their accounts in dollars,
but use the ruble for cash transactions, all commercial operations came to
a halt. Worst off were those whose wages were denominated in dollars, but
who were paid in rubles. Entrepreneurs immediately became staunch
patriots, and agreed to pay wages only at the official rate.

Only a few days earlier, the
government had assured the people that the ruble exchange rate was
stronger than ever. In Novgorod on the previous Friday, Yeltsin had
solemnly declared that there would be no devaluation (by this time people
had already begun buying up hard currency on the street, offering as much
as 7 rubles to the dollar). Asked whether he intended to cut short his
holiday and return to the Kremlin, he said: not under any circumstances;
if the president were to interrupt his holiday, people might think there
was a crisis in the country.

By Monday evening the
devaluation was a reality; the president was back in the Kremlin. State
officials appeared endlessly on the television screens, explaining that
nothing drastic had occurred. For some reason they did not utter the word
'devaluation', perferring the Orwellian 'exchange rate correction' and
'new boundaries of the ruble corridor'.

By Tuesday evening Prime
Minister Sergey Kiriyenko even had some good news for the population. Life
with the new, cheap ruble would be even better, since Russian products
would become more competitive on the domestic and world markets. People
were left wondering why, if devaluation was so positive, the authorities
had not carried it out earlier instead of waiting for the ruble to
collapse.

Not only had the ruble
collapsed. The pyramid of Russian state debt, built up on the same
principles as the private pyramids in Russia and Albania, had also
crumbled. Dumbfounded bankers learned that the government would not pay
out on its bonds. Instead of money, it would give the banks new state
securities that were supposed to be even more valuable. Payments on the
private foreign debts of Russian firms were frozen for 90 days.
Immediately, the Russian banking system also collapsed: hundreds of
thousands of people tried to get their money out but the banks simply
announced that they had no cash. SBS-Agro Bank where the Presidential
administration kept its money was among the first to go under. Its owner
disappeared after receiving $100,000,000 credit from the government to
save the bank.

The government issued an
optimistic statement, stressing that the bitter truth was better than
unrealistic promises, which, however, it would 'not repudiate'! And the
television carried one reassuring report after another.

In contrast, the commercial
press was in hysterics, speaking of national catastrophe and maintaining
that we had 'woken up in another country' (curiously, neither the shelling
of the parliament, nor the bombing of Chechnya, nor the impoverishing of
workers in Siberia had aroused such emotions in them). Unlike the bankers,
most of the population did not succumb to panic at first. On the contrary,
people on the streets did not hide their malicious joy whenever they saw a
new price appear on the boards outside the exchange offices.

Unlike earlier financial
crashes, the present crisis has particularly affected the rich. Those at
the bottom of the social ladder have already been hit so hard that they
have no money at all. They live from day to day, more often bartering than
buying. In any case their wages are not paid for months at a time. As for
the middle classes, they have long since abandoned the ruble, and keep
their savings in dollars stuffed into their biscuit jars.

Compared to 1992, when
savings that had been accumulated over decades vanished in an instant, or
1994, when 'pyramid schemes' collapsed and buried the hopes of the middle
classes for 'market success', ordinary people, while realising that the
effects for them would not be pleasant, could not help feeling pleased
that life would also now be difficult for the people driving about in fast
cars.

Neither the collapse of the
economy, nor the impoverishment of the population, nor the drawn out slide
in production have posed serious problems for the Russian elite. They have
been preoccupied with other matters. The richest resources have been
seized and divided up, and the demands of western financial institutions
have been satisfied. But in the long run, it has proved impossible to
continue down this path. The banking system is becoming ungovernable,
demonstrating the truth of the Marxist thesis that the state of production
determines the state of finances, not the other way round. Seized with
foreboding, western investors are rushing to scoop up their money and quit
the country. Yeltsin is hastily reorganising the security forces, which
are starting to bear an increasing resemblance to the Soviet KGB.
Newspapers are reporting on new tasks that have been placed before the
defenders of the constitutional order: investigating labour militants and
opposition. A federal guard is being established.

On 16 September, prime
minister Kiriyenko was sacked and Viktor Chernomyrdin reappointed. Though
the old boss was supposed to calm down the markets, the opposite happened.
The ruble collapsed once again. Unable to control the situation and
unwilling to accept the real state of things the Central Bank simply
closed the currency exchange. People started shopping hysterically,
expecting huge price increases. Once again there were queues and shortages
like those of the late Soviet years. No supplies were imported.

Most of the support for the
Yeltsin regime has been 'external', from G7 and the International Monetary
Fund (IMF). The West supported him, gave him money, and dictated his
economic policies. When Yeltsin's regime falls, will there be anyone to
pay back those debts?

The IMF, however, has only
recently given Russia new credit – in order to stave off devaluation. And
even after the crash of the ruble, it seems, the IMF will continue to hand
over money. It simply has no other choice. But the IMF first has to get
money from somewhere in order to lend it. The directors of the fund have
already passed the hat around, seeking additional contributions from donor
countries, above all the US. Meanwhile, isolationist-minded Republicans in
the American congress are threatening to block the
appropriations.

The directors of the IMF are
in the same trap as the Russian government: they are the hostages of
earlier decisions and, above all, the hostages of neoliberalism. As a
result, the IMF and the World Bank have begun to play a similar role on a
global scale to that the Central Committee of the Communist Party of the
Soviet Union once played for the 'communist bloc'. IMF and World Bank
experts decide what to do with the coal industry in Russia, how to
reorganise companies in South Korea, and how to manage enterprises in
Mexico. Regardless of the 'free market', world practice has never before
known such centralisation.

Even western governments are
forced to reckon with this parallel authority. But this approach has given
birth to spectacular problems that are inherent to any hypercentralised
system. The point is not that the neoliberal model of capitalism dooms
most of humanity to hopeless poverty, nor the dependency the countries on
the 'periphery' on those at the 'centre'. Such 'moral' and 'ideological'
issues do not disturb 'serious people'.

The trouble is that the price
of mistakes is becoming unbelievably high. The huge resources at the
disposal of the IMF make it possible to 'stabilise' the situation should
Russia collapse. But the neoliberal model of capitalism is unstable in
principle. Rejecting the criticisms of both Marx and Keynes, and
destroying the structures established under the influence of their ideas,
the new world economic order has returned us to the rules of 'classical'
capitalism – including overproduction, financial catastrophe (the downside
of 'victory' over inflation), and, ultimately, revolutions. The IMF is now
working simultaneously as an ideological centre and a 'fire brigade' –
except that the 'firefighters' themselves are dropping their cigarette
butts in the forest.

Ideologues exist in order to
ignore the real state of affairs. But how long can this continue? In most
countries where neoliberal 'reforms' have been 'successfully'conducted,
similar problems have arisen. Russia is not unique; the difference is only
in the scale and severity of the problems. This is no accident, since
monetarist programmes of such scope have not been implemented with such
enthusiasm anywhere else. The result has been predictable: the bankruptcy
of the state.

Like their Soviet
predecessors, the ideologues of neoliberalism call for an orientation
towards 'advanced experience' and 'positive examples'. As in the Soviet
Union, all problems are ascribed to errors of particular officials while
achievements are explained as the result of wise, consistent policies. A
few years back, the Czech Republic was proclaimed an example of the
consistent and successful implementation of reforms. Today that country is
in profound crisis and, of course, seeking 'rescue' credits. The
ideologues now tell us that the bureaucrats in Prague did not carry out
'genuine privatisation', that they sabotaged reforms, and so
on.

This is partly true – which
explains the relative stability the Czech Republic enjoyed in the first
half of the 1990s. Like their Soviet comrades years ago, the IMF officials
have a single set of remedies for any ailment, and these remedies are to
be applied everywhere from tropical Africa to the Russian tundra. While
saving Russia from bankruptcy (again), they are advising the Czechs to
implement measures that have already failed in our case. If similar
reforms are 'successfully' applied in South Korea, within five or six ye
ars the IMF will have to cope with a new Asian crisis, compared to which
the present one will seem like a petty inconvenience.

Neoliberalism is not
responsible for all the problems of the world economy. We inherited
inefficient industries from the Soviet system. But along with credits, the
countries undergoing hard times are offered a package of measures that not
only fail to solve the real causes of the crisis, but create new sources
of instability. The result is that the IMF, the World Bank and other
global financial institutions strengthen their control over the world
economy, but cannot overcome the inertia of their own structures or their
sole 'correct' ideology.

In sum, nothing remains but
to continue along the chosen path, trying to suppress the 'resistance of
the material'. Russia, like Mexico earlier, is being given loans not to
solve its problems, but so that it can hold on for a time without solving
these problems. Russian patriots sincerely think that the West sets out
deliberately to play foul tricks on us. There are very few 'Westernisers'
left, who think that the countries of the West want to help us.

As in the early years of the
century, Russia has again become 'the weak link of world capitalism.' The
Russian soul, mystical 'collectivism' and other national peculiarities
count for nothing here. Our country has come to occupy a particular place
in the world system, and the economic collapse here could serve as the
prelude to global shocks. The IMF set out to incorporate Russia, with its
corrupt authorities and debauched lumpen bourgeoisie, into the world
system – at any price. The international banks got what they were looking
for. As in the Brezhnev era, their key question is that of
'irreversibility'.

The directors of the IMF are
aware that the situation in Eastern Europe can be kept under control so
long as the people there believe in the prospect of 'integration' with the
western European 'centre'. But the situation for the IMF is worse in
Russia, Mexico and Brazil, which have a certain potential for independent
development and which might draw other countries along with them. Finally,
we have become not merely a source of cheap resources, but also an
important market for the industries of the 'centre'. Our crisis has the
potential to destabilise other countries. Hence the persistence with which
the IMF directors and G7 leaders continue to support corrupt authoritarian
regimes in Russia and Mexico.

A year ago the western press
was full of prophesies of success for Russia. One economist even published
a book entitled The Coming Russian Boom. Such forecasts are like aspirins:
they have no long term effect but do bring immediate pain
relief.

Perhaps defending 'weak
positions' on the periphery results in the loss of something important in
the 'centre'. Europe has its own potential for social explosion; it is
enough to look at the eastern länder of Germany. The growing difficulties
of the IMF inevitably arouse a certain malicious joy among
Russians.

But the situation will not
make things easier for us. To escape from the present dead end, we have to
recognise our position in the modern world, our possibilities and our
global responsibility. We have to learn to take decisions – even painful
ones – independently.

Democratic socialists have
put forward a political project which includes not only nationalisation of
the gas, oil and electricity companies, the metal industry, the largest
banks and producers of vodka, but also the development of a new public
sector – decentralised, owned and
controlled by provincial bodies and local communities. Indeed, this public
sector has already started to be formed spontaneously by local governments
renationalising failing private companies. Thus we may end up with a new
model of decentralised planning co-ordinated through interregional
networks, oriented not towards the orders of the central bodies but to the
needs of communities

The Communist Party (CPRF),
in contrast, is reticent about making concrete proposals. The 'old left'
not only lacks a vision for the future but also lacks the courage to fight
for measures which come from their own tradition.

Most hopeful are the groups
which have transitional positions between the 'old' and 'new' left. Most
important of them is The Youth Communist League (Russian Komsomol) which
has broken with the CP leadership, and has one deputy in the state Duma.
The Komsomol's central committee recently passed a resolution criticising
the opportunistic policies of the 'old' party and asking its members to be
prepared to go underground in case of repression.

On 4 September Viktor
Chernomyrdin presented his plan to the Duma. It included a promise to
print more rubles to pay wage and pension arrears, possible
renationalisation of failing companies, a flat 20 per cent income tax
(most workers currently pay 12 per cent). He also promised to let the
ruble float, giving up all efforts to control its rate against the dollar.
After some time, according to Chernomyrdin, the ruble will be pegged to
the rate it has reached as well as to the Central Bank's gold and currency
reserves – possibly by surrendering control of the money supply to a board
of outside experts, 'as in Argentina'. Former Argentinian finance
minister, Domingo Cavallo, was parachuted to Moscow where, after two days
of talks with executives who had already destroyed their country's
economy, he presented a salvation plan that was adopted by Chernomyrdin.
Even commentators sympathetic to the government saw the inconsistency of
this plan. TV opinion polls showed that no more then 7 per cent of the
population had confidence in the prime minister. The president's
popularity was even lower. A popular TV show asked viewers: 'What would
you like to change?' The most popular answer was 'the president'. The
second was 'If the president is going to stay, I want to move to another
country.' On 7 September Chernomyrdin tried to present his plan to the
Duma but he looked weak and tired. Before the vote there were rumors about
deputies being offered bribes to vote for the government but not many
deputies accepted the offer and even fewer carried out the promise because
it was decided that the vote should be open and its results published.
That ended up as a smashing defeat for the prime minister and a blow for
Yeltsin. The deputies knew, though, that their voters would never excuse
them for compromising with the hated regime.

The only thing we need from
the West now is for it to leave us in peace: to stop imposing ruinous
economic policies on us under the pretext of aid; and to cease prolonging
the death agony of the Yeltsin regime. The money that has been spent on
supporting Yeltsin could have been used to create jobs in Europe and
America, to help the poorest countries and to solve environmental
problems. But international bankers don't give money for these
purposes.

Even neoliberal economists in
Russia now accept that after the virtual bankruptcy of the Russian
bourgeoisie, massive nationalisations are inevitable and that there is no
way out of the financial mess without printing money. Communists are in
strategic economic ministries. Yeltsin's alliance between the oligarchs
and international capital is ending. Primakov's appointment means that for
the first time there is a possibility that economic policy will be
concerned with the welfare of the Russian people and stimulating the
domestic economy. But radical ideas are needed to form a new model of the
public sector – dynamic, decentralised and democratic.

Claims which might be
presented to the IMF following the devaluation of the ruble are nothing
compared to the accounts which Russia's own population will set before the
authorities and the oligarchic elite. The people at the top are
demoralised, and those at the bottom are embittered. Lenin described such
a situation as revolutionary. Of course the ruling elites are still
capable of using repressive forces. But we should remember the aphorism
from the time of Napoleon: you can do many things with bayonets, but you
cannot sit on them. Not for long, anyway.

Copyright 2002