Russia's Tumultuous Decade

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March 2000

Russia's Tumultuous Decade

An Insider Remembers

By Jeffrey D. Sachs

Days of Defeat and Victory

By Yegor Gaidar
University of Washington Press

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Yegor Gaidar's Days of Defeat and Victory is a unique chronicle of the first five years of Russia's post-Communist Revolution. Through Gaidar, we again ride the whirlwind, experiencing the drama of the failed Communist putsch of August 1991, the collapse of the Soviet Union in December 1991, the launch of radical economic reforms in early 1992, the violent confrontation with the Supreme Soviet in the Fall of 1993, and a myriad of other pivotal events up to Yeltsin's re-election victory in 1996. We could have no better guide. Not only was Gaidar the intellectual leader of many of Russia's political and economic reforms during this period, but he was also one of the few pivotal actors.

From November 1991, Gaidar served as Yeltsin's chief economic advisor and as deputy prime minister. During the second half of 1992, until his ouster by the hostile Supreme Soviet in December, Gaidar was acting prime minister. He returned to Government briefly in late 1993. For the remaining period of these memoirs, Gaidar was a leader of democratic Russian politics, a member of the Duma, as well as a continuing key advisor to the Russian Government and President Yeltsin.

Gaidar's re-telling reminds us of his lucidity, boldness, and persistence. We are also reminded of the shameless naivete or cynicism of many of Gaidar's critics, both in Russia and the United States, who argue to this day that Russia's tumultuous decade was the result of misjudged economic reform ideas championed by Gaidar (and outside economists such as myself). Finally, we are reminded, implicitly, if we care to reflect on it, how much the United States lost by hardly lifting a finger to help Gaidar and his reform compatriots during the harrowing first years of their struggle.

This book is an instant antidote to those such as outgoing World Bank Chief Economist Joseph Stiglitz who somehow confuse Russia's revolution with an academic seminar. Stiglitz leads a group of American academics who think that Russia's reforms suffered mainly because Gaidar and other advocates of "shock therapy" somehow forgot that market economies are based on institutions and laws, and not just on textbook pictures of supply and demand. Duh! Readers of Gaidar's memoirs will quickly learn that Russia's reform struggle was not mainly about the niceties of sequencing market reforms. The real issues were elemental and urgent. Would there be bread in Moscow in the winter of 1991-92? Would private property be legal? Would Russia lurch towards a violent, revanchist politics? Would Russia have a national currency and when? Would there be civil war in Moscow in 1993? In each case, Gaidar's cool pragmatism and power of analysis helped to find a way out of a near catastrophe.

Gaidar's basic goal was unwavering: to help Russia become a democratic, market-based society. At the same time, however, his tactics, such as they were, were driven by the remarkable press of events rather than by grand theory. And in many cases, there simply were no tactics because the reform leaders had no power to carry forward their programs. Even so, the reformers received most of the public blame, not only inside Russia but remarkably even from U.S.-based critics who might have known better. Critics would do well to reflect on Gaidar's superb elaborations of the enormity of challenges inherited from the Soviet collapse: massive foreign debts combined with the exhaustion of foreign exchange reserves; a flight from the currency; a collapsing energy sector on which Russia's energy-squandered heavy industry depended; the absence of functioning political institutions; the struggle for power between the executive and the Soviet-era parliament; and the chaos of monetary, military, and economic relations among the successor states of the Soviet empire.

The greatest trauma of the first year of reforms was the high inflation that ripped through Russia, decimating savings and undermining confidence in market reforms. This was often blamed on Gaidar's decision to free prices from controls on January 2, 1990, ending decades of state price-setting. The action followed a similar tactic introduced by Poland two years earlier. In Poland the result had been a single sharp jump in prices, followed by price stability, and once-empty store shelves now filled with goods. In Russia, however, the jump in prices was even sharper; the stores never quite filled with goods (though food shortages did diminish); and the inflation kept barreling on, even nearing hyperinflation by the end of 1992.

Gaidar recounts this experience with great detail, historical sensitivity, and economic insight. (This part alone makes the book required reading for monetary specialists.) Gaidar decided to move abruptly, as in Poland, because of the real danger that price controls, combined with an explosive money printing to fund a huge budget deficit, were leading to the collapse of any trade at official prices, with all transactions taking place in a burgeoning black market. Store shelves were empty. Farmers were hoarding grain. There was real fear of hunger in the cities in the approaching winter.

But Russia's price decontrol did not work as smoothly as in Poland. While food did get to the cities (a major victory), inflation continued to soar. Divided politics kept the budget deficit high. Other post-Soviet states such as Ukraine continued to issue ruble credits, undermining Russia's attempt to end inflation. (It wasn't until mid-1992 that the various new states effectively separated their currencies.) And the Russian central bank, led by Communist-era apparatchik Viktor Gerashchenko, undermined Gaidar's anti-inflation strategy by relentlessly printing money. This cost Gaidar precious public support and definitely contributed to his ouster as prime minister by the Supreme Soviet at the end of 1992. Gaidar writes that his support for Gerashchenko's appointment in 1992 was perhaps his biggest blunder that year.

These may seem like ancient battles, but in revolutions early events can have fateful consequences. Thus, Gaidar's ouster led to the return to power of Communist-era apparatchiks such as Prime Minister Chernomyrdin, who presided over a period of stunning corruption (while being showered with U.S. affection in the Gore-Chernomyrdin get-togethers). The Russian public came to view reform as the combination of inflation and corruption. In this, as in many other things, the reformers who fought hardest against these outcomes took much of the blame.

There is a critical episode of Russian reform history on which Gaidar is disappointingly silent. Long after his second departure from power, after the fateful battles on inflation and voucher privatization, came the corrupted privatization of oil and gas enterprises, under the rubric of a bizarre "shares for loans" scheme. In essence, tens of billions of dollars worth of natural resource deposits were turned over to Yeltsin insiders, doing much to create the corrupt "oligarchy" that has so poisoned Russia's politics in the past few years. The true story of these grotesque financial manipulations is still not known. Reform leaders such as Anatoly Chubais presumably played a role, but that role is obscure and debated. Given the scale of abuse, the Russian public (and the world public for that matter) deserves an explanation.

Since this important book was first published in Russian for a Russian audience, it gives us a realistic glimpse into the internal Russian debate, not written for a Western audience. The role of the West in these events can therefore be more accurately sized up in this book, rather than it can in stump speeches given by Russians to Western audiences. The result is rather stunning. The West plays almost no role whatsoever in these pages.

In the few places that the West is mentioned, the reading is sobering, even distressing. As I myself witnessed, Gaidar's first encounters with the Bush administration came in the form of tough U.S. warnings that Russia should continue to pay its debts at all costs (specifically, that a default would be met by a stoppage of vital food aid). The result was a contribution to Russia's financial destabilization at the critical period of early 1992. The IMF is written off as a thoroughly miscast institution, not appropriate for the tasks for which it was assigned by the West. It is specifically charged with having delayed stabilization in the vital months of 1992 by its mistaken advice to the post-Soviet states to delay the introduction of national currencies. In short, the West did almost nothing to affect the outcomes for democracy and market reforms in Russia, despite all the high-minded rhetoric to the contrary. If anything, the early inaction (on aid, on monetary reform, on debt rescheduling) made things worse. The subsequent blind eye to corruption merely added to the deep skepticism of the Russian people that the U.S. and Europe actually cared about their welfare.

Advisors such as myself don't even get a bit role. This, I've always tried to explain, is how I actually felt when in Moscow. After helping to devise and introduce Poland's reforms during 1989-91, and after conveying their significance to Russian colleagues such as Gaidar in late 1991, my actual influence on events was essentially zero. This was certainly true inside Russia, but also in the U.S., where both the U.S. government and the IMF simply rejected my criticisms of their inaction (to provide vital aid and debt relief) and policy recommendations (such as to maintain the Soviet-era ruble as a shared currency).

Many of the key American advisors from the period 1991-96 are still in positions of enormous influence. Many of the Bush Administration advisors who did so little in the first year of Russia's reforms are key advisors of George W. Bush. And of course, much of the Clinton team remains in place. They would learn a great deal from this book. I earnestly hope that they have a careful look in preparation for more fruitful relations between Russian reformers and the U.S. in the coming years, when both Russia and the United States will have new presidential leadership.

Jeffrey D. Sachs is the Director of the Center for International Development at Harvard University. He advised the Russian Government from December 1991 until his resignation in January 1994.

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