Gorbachev tried to preempt Yeltsin, proposing change after change that would give more power to the republics. But again he was too late: Yeltsin created parallel structures in the Russian republic that effectively ripped the heart out of the Soviet Union. After all, what was the Soviet Union without Russia at its core?
Desperate to hang on to a coherent Soviet state, Gorbachev sponsored a referendum in March 1991 on the question of unity. And though large majorities voted to preserve the Soviet Union, six republics (Armenia, Georgia, Moldavia, Lithuania, Latvia, and Estonia) boycotted. And more critically, Russian voters backed an empowered Russian presidency. When Yeltsin was elected president of Russia in June 1991 he had an institutional base from which to demand independence for the republics. Soon there was nothing left of Soviet power.
Lifting the Iron Curtain
Internal reforms for a great power do not take place in isolation. Foreign policy had to be altered too. And the change in the Soviet Union was a dramatic one.
The Soviet state emerged in 1922 from the remains of the Russian Empire, fueled by the fiery ideology and rhetoric of class conflict and the epic struggle between communism and capitalism. The belief that both could not survive was perhaps best captured in Nikita Khrushchev’s threat to “bury” the West, and his ill-advised timeline of a couple of decades until the triumph of socialism.
Though the passion about and belief in socialism’s triumph waned over the years, giving way to peaceful coexistence and ultimately détente with the West, the notion of two systems in competition with one another remained a defining characteristic of the international system throughout the Cold War. In everything from the space race to Olympic hockey, a victory for the Soviet Union was taken as a victory for socialism. As a child I remember our shock and dismay when the Soviet Union launched the first man into space in 1961. On the other hand, Americans were heartened when U.S. chess prodigy Bobby Fischer defeated Boris Spassky to become the world grandmaster, and when Van Cliburn became the first non-Russian to win the international Tchaikovsky piano competition in 1958. This little girl studying piano wanted to be Van Cliburn. In 1980 the defeat of the Big Red Machine (as the Soviet hockey team was nicknamed in the West) by a collection of young American amateurs at the Olympics in Lake Placid was seen as a stinging loss for communism and a victory for capitalism and democracy. That was the zero-sum nature of the relationship between East and West.
Gorbachev rejected that view. He went in search of a foreign policy that was sustainable—no longer requiring the overreach of wars like Afghanistan and a defense budget that consumed more than 25 percent of the GDP—and he abandoned “class struggle” as an organizing principle.7 Within a coterie of the Soviet establishment, led by intellectuals such as Alexander Yakovlev, a future adviser of Gorbachev, the argument emerged that the modern world required cooperation, not conflict. The international equivalent of the “normal” domestic politics of the new Soviet Union became the “Common European Home.” In this context, Gorbachev’s view that the Soviet Union would simply take its place on the continuum of European political forces made perfect sense.
Though we were skeptical in the White House at first, it became clear that Gorbachev meant what he said. The Soviet Union ended its war in Afghanistan and its forces went home. Eastern Europe was freed to go its own way and Soviet troop strength was cut back dramatically on the continent.
On the economic side, Gorbachev sought to be welcomed into the international capitalist system. Soviet economists were regular visitors to Washington, London, and Paris to learn about how those economies worked. As these inquiries increased, it was easy to forget that central planning and communism had once been hailed as a viable, even preferable alternative to capitalism in Asia, Latin America, Africa, and, of course, Eastern Europe. Now its failure was obvious and the Soviets were fully prepared to admit it, though their understanding of capitalism was flawed at best.
At one of the sessions with his counterparts, my colleague Mike Boskin, chairman of the Council of Economic Advisers for President George H. W. Bush, gave a little lecture on markets. At the end of his talk, the Soviet finance minister raised his hand. “Thank you, Dr. Boskin,” he began. “But there is one thing I don’t understand. Who sets the prices?”
The desire of the Soviet reformers to be accepted into the fold was incredibly strong—a pull that would fade as time went on. In one sad episode, Gorbachev sent a letter to the meeting of the G-7 taking place in Paris in 1990. He essentially asked to be invited. The startled leaders didn’t welcome him that year, but, fearful that his reforms were losing ground, they did invite him to the G-7 in July 1991, one month before the coup attempt against him and five months before the Soviet Union collapsed altogether. That is how the G-7 became the G-8.
Gorbachev had managed to secure a place for the Soviet Union in his “Common European Home.” But it had come at a cost. As one exasperated East German intellectual put it, “If there is not class conflict, what is the argument for two Germanys?” Pretty soon that would be answered too and Germany would unify completely and fully on Western terms.
On a visit to Moscow in February 1990 as Soviet influence in Germany was waning, I met with Gorbachev’s adviser on the United States. It was already dark at half past four in the afternoon and snowing outside as I waited in the Kremlin anteroom. Finally, Vadim Zagladin appeared. He was an hour late. “I am sorry,” he said. “But every day we come to work to see what disaster has befallen us now.”
I delivered my points about how the unification of Germany would benefit everyone. There would be no losers in ending the Cold War. “Stop,” Zagladin said. “There used to be two Germanys—one was yours and one was ours. Now there will be one and it will be yours. That, Professor Rice, is a strategic defeat.” I couldn’t say much, because he was right.
Gorbachev insisted on signing away the Soviet Union’s “Four Power Rights and Responsibilities” and returning Germany to full and complete sovereignty, not in the Kremlin but in a Moscow hotel.8 That is how forty-five years of Soviet dominance in Eastern Europe ended—in the lobby of a hotel. The Soviet Union’s military alliance, the Warsaw Pact, dissolved a few months later, and NATO did not. Gorbachev had gone too far, and as Soviet power collapsed across Europe, the Cold War ended and Moscow suffered a humiliating “strategic defeat.”
Hard-liners finally rallied and launched a coup against Gorbachev in August 1991. But it was too late. The army was split, some supporting Yeltsin and the reformers and others holding views even more conservative than those of Gorbachev. The KGB was split and no one could fully count on its loyalty. Boris Yeltsin and Russian institutions had emerged as an alternative to Gorbachev and the Soviet Union—a challenge from the radical side. Gorbachev reportedly asked his defense minister whether the army would stand by him if he tried to resist Yeltsin’s demands. The defense minister said he was not sure.
In short order Yeltsin engineered the creation of the Commonwealth of Independent States to replace the Soviet Union. Gorbachev did not resist. And on December 25, 1991, the Hammer and Sickle, the flag of a superpower with thirty thousand nuclear weapons and four million men under arms, was lowered from above the Kremlin for the last time. More than seventy years of communism ended quietly and was buried with few mourners and little fanfare. But the demise of the Soviet Union left a mark on the emerging new Russian state and tainted the critical and chaotic first years of its attempted transition to democracy. Perhaps it also sealed its failure.
The Second Opening: The New Russian State Is Born
Political choices do not take place on a blank canvas: What has gone before matters. Gorbachev’s effort to make the Soviet Union a “normal” nation introduced important democratizing reforms, essentially for the first time in the country’s history. The only other episode had been tragically brief. Alexander Kerensky established an independent parliament, a freer press, and rule of law when he took power after the abdication of the tsar in March 1917. The victory of
the Bolsheviks eight months later put an end to that experiment. And thanks to the telling of history in Soviet times, few Russians knew that story.
The Gorbachev reforms were thus pathbreaking: the creation of a quasi-independent parliament; a presidency divorced from the Communist Party structure; careful but palpable freeing of the press; and the first civil society institutions that advocated on behalf of non-political causes.9 Unfortunately, these fledgling institutions would soon be overrun by the chaos engulfing the country.
In the wild days immediately after the end of the Soviet Union there was unbridled joy and optimism in the West that capitalism and democracy would take hold in Russia and in the Baltic states. Observers were less sanguine about the newly independent Ukraine, Belarus, Central Asia, and the Caucasus. Most of their new leaders did little to encourage hope, falling almost immediately into corruption and infighting or simply transferring power to authoritarian communists who now called themselves nationalist democrats.
But Russia seemed different. The country enjoyed a high level of economic development, a population that was almost 100 percent literate, and relative ethnic homogeneity.
Obviously, Russia’s totalitarian history would be a concern. Yet Gorbachev had in seven years loosened the constraints without mass violence and handed the reins peacefully to Boris Yeltsin. Yeltsin, in turn, proved a popular leader, made even more legitimate by his valiant defense of the people and the nation in front of the Russian White House in the summer of 1991. The image of Yeltsin facing down the coup plotters from the top of a tank and turning the army against them gave the country a rallying point. The Russian people had reason to believe that they were finally about to erase hundreds of years of revolution, oppression, and political turmoil. Now, with the collapse of the Soviet Union, Russia could become a normal country.
And the West wanted desperately to help. It is true that Russia was not offered a Marshall Plan, comparable to what had been done to support European reconstruction after World War II. But the circumstances were different. Russia was not without resources given its vast oil wealth, a well-educated population, and high levels of industrialization. The question seemed to be how best to unleash the forces that had been held back by Soviet communism. The raw clay for a successful democratic transition was present and abundant.
This explains in large part the path adopted by the United States and Europe to assist the Russian democratic transition. Large numbers of experts, both governmental and private, deployed to Moscow to help establish capitalism and provide advice on how to develop democracy. While a few voices suggested that too much was being expected too soon, proponents of radical surgery prevailed.
The Soviet economy needed to be transformed. That much was clear. But in retrospect, those who advised the Russians, not to mention the Russians themselves, had no earthly idea how to break up and reconstitute the deeply dysfunctional economy. The recent successes in transforming the Polish economy gave a false sense of certitude to the effort. But Poland was, as we will explore, very different, with nascent institutions of democracy and capitalism that proved essential in its success.
In Russia, the speed of change clearly outpaced the development of rules of the game and institutions to contain the new forces. Events quickly overwhelmed what was left of Gorbachev’s reforms and raced ahead of what Yeltsin’s government could achieve.
We have seen that America’s Founding Fathers worried about creating a state that would be too strong and thus a threat to democratic values. But they understood that the state had to be strong enough to carry out certain functions: protecting the country from foreign enemies; the establishment of a national currency; the maintenance of civil order; the ability to tax its citizens fairly; and the confidence that the states would carry out federal laws. Somewhere between chaos and authoritarianism lay democracy.
Russia did not find that sweet spot. Rather, the period was characterized by wild schemes to privatize the economy rapidly, creating massively rich new elites while real income plummeted and poverty levels soared for the general population. Organized crime emerged as a potent force, offering protection to companies and individuals (for a fee) that the state could not provide. Regional and local authorities simply ignored the policies of the central government. The Russian citizen experienced daily life as one of humiliation, deprivation, and chaos.
The economic collapse of the country was at the core of the despair. “Shock therapy,” a term given to rapid reform of an economy, didn’t capture the earthquake that Russia experienced. In 1988, 96 percent of the Russian labor force was dependent on the state for employment and almost all of the population’s income came either from this source or from direct transfers from the state (pensions, child benefits, and so on).10 By 1994, the non-state sector accounted for more than half (55.3 percent) of total employment, and 70 percent of all state assets had been privatized.11 Over the same time frame the number of people living in poverty went from 2 percent of the population to 50 percent.12 That meant that nearly seventy-four million people saw their income and earning power plunge in that period as they joined the ranks of the officially poor. From 1991 to 1998, Russia’s GDP contracted by roughly 30 percent, wiping out many Russians’ savings and precipitating a capital flight from the country of nearly $150 billion from 1992 to 1999.13
The numbers are staggering, but, if anything, they understate the impact that one could see on the streets. On a visit to Moscow in 1993, I again walked along the Old Arbat. But where in 1988 the atmosphere crackled with the energy and excitement of perestroika, this time the scene was very sad indeed. Old ladies were trying to sell broken teacups and pottery for whatever they could; men begged passersby for bread; and recently discharged soldiers—withdrawn from Eastern Europe with no place to live at home—exchanged Red Army greatcoats for a few dollars.
Who Is to Blame?
Russia’s first privatization program was passed by the Supreme Soviet and signed into law by Yeltsin in 1992. It allowed managers and employees of enterprises to acquire shares in newly private companies through vouchers. Shares were also set aside for private citizens, who could buy them through banks.
To be fair, Russia faced the daunting task of privatizing 225,000 enterprises and doing so rapidly. Two well-regarded economists, Yegor Gaidar and Anatoly Chubais, with the help of foreign advisers devised a voucher scheme. It was based on a successful but much smaller effort in the Czech Republic.
The terms were extremely favorable for the insiders, who could buy up to 51 percent of the company at a discount and use the enterprise’s money rather than their own. Eighty percent of firms adopted this program, which resulted in the privatization of roughly half of the companies, including three hundred of the nation’s largest. The effect was immediate. When one visited these enterprises, as I did on several occasions, it was not surprising to be handed a business card. “Plant Manager” had been crossed out and the holder of the card was now the “CEO.”
A particular subset of these privatizations tried to convert the Russian defense industry to civilian use. The Soviet Union’s military had commanded the best resources and technology, employed the best workers and scientists, and produced the country’s only globally competitive goods—military equipment. Why not use these industries as a leading edge to rebuild the economy?
Together with my Stanford colleagues, former secretary of defense William Perry and David Holloway, one of the West’s leading experts on the Soviet military, I visited two of these conversion projects in 1992. The first CEO that day was explaining that his plant was adept at making really hard materials. He kept emphasizing really hard. It wasn’t long before we understood exactly what he was saying. These workers had perfected the materials that were used to harden Soviet nuclear missile silos. Now they were trying to figure out what commercial value this could possibly have. Later that afternoon, we visited another plant where the CEO proudly displayed baby carriages and a giant food processor—made of the titanium that ha
d been used to produce military equipment. It was surreal.
The second privatization program, though, would ultimately shift the landscape more dramatically. This program was initiated by presidential decree and not by legislation. By 1995, there were still many state-owned enterprises that needed to be privatized. Moreover, the Russian government was running out of money due to capital flight and a rapidly devaluing currency. Moscow needed a way to fund its budget. A number of individuals who had become quite wealthy in the first privatizations of banks provided loans to the government with the proviso that they would receive a stake in various companies if the money was not repaid. It was a good bet. The corrupt and secretive bidding process handed some of the country’s biggest assets to these men. Boris Berezovsky and Roman Abramovich acquired oil giant Sibneft in a sweetheart deal; Vladimir Potanin bought Norilsk Nickel for $170 million, though its annual profits were $400 million, and he was named deputy prime minister; and Mikhail Khodorkovsky would acquire a controlling share of Yukos, the large oil company, for $309 million. Within a few years his personal fortune would reach as high as $15 billion.
This is how these oligarchs and many like them came to be. Arguably, the state received the loans it needed and many of the companies were reorganized, given new management, and brought to profitability by those who acquired them. But the fire sale of Russian state assets lives on today in the consciousness of ordinary citizens and Russia’s rulers, who use it to intimidate, cow, and extort loyalty from the very rich.
It is said that Vladimir Putin (a wealthy man in his own right) told the oligarchs that he had a deal for them. He would not challenge their ill-gotten gains if they stayed out of politics. Most followed the script, and when Mikhail Khodorkovsky did not, the Kremlin made an example of him, breaking up his company and jailing him for ten years. Popular jealousy of the oligarchs has been one of Putin’s most potent weapons against those who are wealthy and influential enough to challenge him. In other words, it was easy to find an answer to the question “Who is to blame?”
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