The Shock Doctrine: The Rise of Disaster Capitalism

by Naomi Klein

  What happened was that the day after the IMF leak, Yeltsin, confident that he had the West’s support, took his first irreversible step toward what was now being openly referred to as the “Pinochet option”: he issued decree 1400, announcing that the constitution was abolished and parliament dissolved. Two days later, a special session of parliament voted 636–2 to impeach Yeltsin for this outrageous act (the equivalent of the U.S. president unilaterally dissolving Congress). Vice President Aleksandr Rutskoi announced that Russia had already “paid a dear price for the political adventurism” of Yeltsin and the reformers.40

  Some kind of armed conflict between Yeltsin and the parliament was now inevitable. Despite the fact that Russia’s Constitutional Court once again ruled Yeltsin’s behavior unconstitutional, Clinton continued to back him, and Congress voted to give Yeltsin $2.5 billion in aid. Emboldened, Yeltsin sent in troops to surround the parliament and got the city to cut off power, heat and phone lines to the White House parliament building. Boris Kagarlitsky, director of the Institute of Globalization Studies in Moscow, told me that supporters of Russian democracy “were coming in by the thousands trying to break the blockade. There were two weeks of peaceful demonstrations confronting the troops and police forces, which led to partial unblocking of the parliament building, with people able to bring food and water inside. Peaceful resistance was growing more popular and gaining broader support every day.”

  With each side becoming more entrenched, the only compromise that could have resolved the standoff would have been for both sides to agree to early elections, putting everybody’s job up for public review. Many were urging this outcome, but just as Yeltsin was weighing his options, and reportedly leaning toward elections, news came from Poland that voters had rained down their decisive punishment on Solidarity, the party that had betrayed them with shock therapy.

  After they witnessed Solidarity get pounded at the polls, it was obvious to Yeltsin and his Western advisers that early elections were far too risky. In Russia, too much wealth hung in the balance: huge oil fields, about 30 percent of the world’s natural gas reserves, 20 percent of its nickel, not to mention weapons factories and the state media apparatus with which the Communist Party had controlled the vast population.

  Yeltsin abandoned negotiations and moved into war posture. Having just doubled military salaries, he had most of the army on his side, and he “surrounded the parliament with thousands of Interior Ministry troops, barbed wire and water cannons and refused to let anyone pass,” according to The Washington Post.41 Vice President Rutskoi, Yeltsin’s main rival in parliament, had by this point armed his guards and welcomed proto-fascist nationalists into his camp. He urged his supporters to “not give a moment of peace” to Yeltsin’s “dictatorship.”42 Kagarlitsky, who participated in the protests and wrote a book about the episode, told me that on October 3, crowds of supporters of the parliament “marched to the Ostankino TV center to demand that news be announced. Some people in the crowd were armed, but most were not. There were children in the crowd. It was met by Yeltsin’s troops and machine-gunned.” About one hundred demonstrators, and one member of the military, were killed. Yeltsin’s next move was to dissolve all city and regional councils in the country. Russia’s young democracy was being destroyed piece by piece.

  There is no doubt that some parliamentarians showed antipathy for a peaceful settlement by egging on the crowds, but as even the former U.S. State Department official Leslie Gelb wrote, the parliament was “not dominated by a bunch of right-wing crazies.”43 It was Yeltsin’s illegal dissolution of parliament and his defiance of the country’s highest court that precipitated the crisis—moves that were bound to be met by desperate measures in a country that had little desire to give up the democracy it had just won.*

  A clear signal from Washington or the EU could have forced Yeltsin to engage in serious negotiations with the parliamentarians, but he received only encouragement. Finally, on the morning of October 4, 1993, Yeltsin fulfilled his long-prescribed destiny and became Russia’s very own Pinochet, unleashing a series of violent events with unmistakable echoes of the coup in Chile exactly twenty years earlier. In what was the third traumatic shock inflicted by Yeltsin on the Russian people, he ordered a reluctant army to storm the Russian White House, setting it on fire and leaving charred the very building he had built his reputation defending just two years earlier. Communism may have collapsed without the firing of a single shot, but Chicago-style capitalism, it turned out, required a great deal of gunfire to defend itself: Yeltsin called in five thousand soldiers, dozens of tanks and armored personnel carriers, helicopters and elite shock troops armed with automatic machine guns—all to defend Russia’s new capitalist economy from the grave threat of democracy.

  This is how The Boston Globe reported on Yeltsin’s parliamentary siege: “For 10 hours yesterday, about 30 Russian army tanks and armored personnel carriers encircled the parliament building in downtown Moscow, known as the White House, and pelted it with explosive rounds, while infantry troops sprayed machine-gun fire. At 4:15 p.m., about 300 guards, congressional deputies and staff workers marched single-file out of the building with their hands up.”44

  By the end of the day, the all-out military assault had taken the lives of approximately five hundred people and wounded almost a thousand, the most violence Moscow had seen since 1917.45 Peter Reddaway and Dmitri Glinski, who wrote the definitive account of the Yeltsin years (The Tragedy of Russia’s Reforms: Market Bolshevism against Democracy), point out that “during the mopping-up operation in and around the White House, 1,700 persons had been arrested, and 11 weapons seized. Some of the arrested were interned in a sports stadium, recalling the procedures used by Pinochet after the 1973 coup in Chile.”46 Many were taken to police stations, where they were severely beaten. Kagarlitsky recalls that while he was being struck on the head, an officer shouted, “You wanted democracy, you sons of bitches? We’ll show you democracy!”47

  But Russia wasn’t a repeat of Chile—it was Chile in reverse order: Pinochet staged a coup, dissolved the institutions of democracy and then imposed shock therapy; Yeltsin imposed shock therapy in a democracy, then could defend it only by dissolving democracy and staging a coup. Both scenarios earned enthusiastic support from the West.

  “Yeltsin Receives Widespread Backing for Assault,” read a headline in The Washington Post the day after the coup, “Victory Seen for Democracy.” The Boston Globe went with “Russia Escapes a Return to the Dungeon of Its Past.” The U.S. secretary of state, Warren Christopher, traveled to Moscow to stand with Yeltsin and Gaidar and declared, “The United States does not easily support the suspension of parliaments. But these are extraordinary times.”48

  The events looked different in Russia. Yeltsin, the man who had risen to power by defending the parliament, had now literally set it on fire, leaving it so badly charred that it was nicknamed the black house. A middle-age Muscovite told a foreign camera crew in horror, “People supported [Yeltsin] because he promised us democracy, but he shot up that democracy. Not only did he violate it, but he shot it up.”49 Vitaly Neiman, who had stood guard at the entrance of the White House during the 1991 coup, put the betrayal this way: “What we got was entirely the opposite of what we dreamed of. We went to the barricades for them, laid our lives on the line, but they didn’t keep their promises.”50

  Jeffrey Sachs, lauded for proving that radical free-market reforms could be compatible with democracy, continued to publicly support Yeltsin after his assault on the parliament, dismissing his opponents as “a group of former communists intoxicated by power.”51 In his book The End of Poverty, in which he gives his definitive account of his involvement in Russia, Sachs completely glosses over this dramatic episode, not mentioning it once, just as he left out the state of siege and attacks on labor leaders that accompanied his shock program in Bolivia.52

  Following the coup, Russia was under unchecked dictatorial rule: its elected bodies were dissolved, the Constitutional Cour
t was suspended, as was the constitution; tanks patrolled the streets, a curfew was in effect, and the press faced pervasive censorship, though civil liberties were soon restored.

  So what did the Chicago Boys and their Western advisers do at this critical moment? The same thing they did when Santiago smoldered, and the same thing they would do when Baghdad burned: liberated from the meddling of democracy, they went on a law-making binge. Three days after the coup, Sachs observed that up to this point “there was no shock therapy” because the plan was “only incoherently and fitfully put into practice. Now there is a chance to do something,” he said.53

  And do something they did. “These days, Yeltsin’s liberal economic team is on a roll,” reported Newsweek. “The day after the Russian president dissolved Parliament, the word came down to the market reformers: start writing decrees.” The magazine quoted a “jubilant Western economist working closely with the government” who made it absolutely clear that in Russia, democracy was always a hindrance to the market plan: “With Parliament out of the way, this is a great time for reform…. The economists around here were pretty depressed. Now we’re working day and night.” Indeed, there seems to be nothing quite as cheering as a coup, as Charles Blitzer, the World Bank’s chief economist for Russia, told The Wall Street Journal. “I’ve never had so much fun in my life.”54

  The fun was just beginning. With the country reeling from the attack, Yeltsin’s own Chicago Boys rammed through the most contentious measures in their program: huge budget cuts, the removal of price controls on basic food items, including bread, and even more and faster privatizations—the standard policies that cause so much instant misery that they seem to require a police state to stave off rebellion.

  After Yeltsin’s coup, Stanley Fischer, first deputy managing director of the IMF (and a 1970s Chicago Boy), advocated “moving as fast as possible on all fronts.”55 So did Lawrence Summers, who was helping to shape Russia policy in the Clinton administration. The “three ‘-ations,’” as he called them—“privatization, stabilization and liberalization—must all be completed as soon as possible.”56

  Change was so rapid that it was impossible for Russians to keep up. Workers often did not even know that their factories and mines had been sold—let alone how they had been sold or to whom (a profound confusion I would witness a decade later in the state-owned factories of Iraq). In theory, all this wheeling and dealing was supposed to create the economic boom that would lift Russia out of desperation; in practice, the Communist state was simply replaced with a corporatist one: the beneficiaries of the boom were confined to a small club of Russians, many of them former Communist Party apparatchiks, and a handful of Western mutual fund managers who made dizzying returns investing in newly privatized Russian companies. A clique of nouveaux billionaires, many of whom were to become part of the group universally known as “the oligarchs” for their imperial levels of wealth and power, teamed up with Yeltsin’s Chicago Boys and stripped the country of nearly everything of value, moving the enormous profits offshore at a rate of $2 billion a month. Before shock therapy, Russia had no millionaires; by 2003, the number of Russian billionaires had risen to seventeen, according to the Forbes list.57

  That is partly because, in a rare departure from Chicago School orthodoxy, Yeltsin and his team did not allow foreign multinationals to buy up Russia’s assets directly; they kept the prizes for Russians, then opened up the newly privatized companies, owned by so-called oligarchs, to foreign shareholders. The returns were still astronomical. “Looking for an investment that could gain 2,000 per cent in three years?” The Wall Street Journal asked. “Only one stock market offers that hope…Russia.”58 Many investment banks, including Credit Suisse First Boston, as well as a few deep-pocketed financiers, quickly set up dedicated Russian mutual funds.

  For the country’s oligarchs and foreign investors, only one cloud loomed on the horizon: Yeltsin’s plummeting popularity. The effects of the economic program were so brutal for the average Russian, and the process was so self-evidently corrupt, that his approval ratings fell to the single digits. If Yeltsin was pushed from office, whoever replaced him would likely put a halt to Russia’s adventure in extreme capitalism. Even more worrying for the oligarchs and the “reformers,” there would be a strong case for renationalizing many of the assets that had been handed out under such unconstitutional political circumstances.

  In December 1994, Yeltsin did what so many desperate leaders have done throughout history to hold on to power: he started a war. His national security chief, Oleg Lobov, had confided to a legislator, “We need a small, victorious war to raise the president’s ratings,” and the defense minister predicted that his army could defeat the forces in the breakaway republic of Chechnya in a matter of hours—a cakewalk.59

  For a while at least, the plan seemed to work. In its first phase, the Chechen independence movement was partially suppressed, and Russian troops took over the already abandoned presidential palace in Grozny, allowing Yeltsin to declare glorious victory. It would prove to be a short-term triumph, both in Chechnya and in Moscow. When Yeltsin faced reelection in 1996, he was still so unpopular and his defeat looked so certain that his advisers toyed with canceling the vote altogether; a letter signed by a group of Russian bankers published in all the Russian national newspapers strongly hinted at this possibility.60 Yeltsin’s privatization minister, Anatoly Chubais (whom Sachs once described as “a freedom fighter”), became one of the most outspoken proponents of the Pinochet option.61 “In order to have a democracy in society there must be a dictatorship in power,” he pronounced.62 It was a direct echo of both the excuses made for Pinochet by Chile’s Chicago Boys and Deng Xiaoping’s philosophy of Friedmanism without the freedom.

  In the end, the election went ahead and Yeltsin won, thanks to an estimated $100 million in financing from oligarchs (thirty-three times the legal amount) as well as eight hundred times more coverage on oligarch-controlled TV stations than his rivals.63 With the threat of a sudden change in government removed, the knockoff Chicago Boys were able to move to the most contentious, and most lucrative, part of their program: selling off what Lenin had once called “the commanding heights.”

  Forty percent of an oil company comparable in size to France’s Total was sold for $88 million (Total’s sales in 2006 were $193 billion). Norilsk Nickel, which produced a fifth of the world’s nickel, was sold for $170 million—even though its profits alone soon reached $1.5 billion annually. The massive oil company Yukos, which controls more oil than Kuwait, was sold for $309 million; it now earns more than $3 billion in revenue a year. Fifty-one percent of the oil giant Sidanko went for $130 million; just two years later that stake would be valued on the international market at $2.8 billion. A huge weapons factory sold for $3 million, the price of a vacation home in Aspen.64

  The scandal wasn’t just that Russia’s public riches were auctioned off for a fraction of their worth—it was also that, in true corporatist style, they were purchased with public money. As the Moscow Times journalists Matt Bivens and Jonas Bernstein put it, “a few hand-picked men took over Russia’s state-developed oil fields for free, as part of a giant shell game in which one arm of government paid another arm.” In a bold act of cooperation between the politicians selling the public companies and the businessmen buying them, several of Yeltsin’s ministers transferred large sums of public money, which should have gone into the national bank or treasury, into private banks that had been hastily incorporated by oligarchs.* The state then contracted with the same banks to run the privatization auctions for the oil fields and mines. The banks ran the auctions, but they also bid in them—and sure enough, the oligarch-owned banks decided to make themselves the proud new owners of the previously public assets. The money that they put up to buy the shares in these public companies was likely the same public money that Yeltsin’s ministers had deposited with them earlier.65 In other words, the Russian people fronted the money for the looting of their own country.


  As one of Russia’s “young reformers” put it, when Russia’s Communists decided to break up the Soviet Union, they made an “exchange [of] power for property.”66 Just like his mentor Pinochet’s, Yeltsin’s own family grew exceedingly rich, his children and several of their spouses appointed to top posts at large privatized firms.

  With oligarchs firmly in control of the key assets of the Russian state, they opened up their new companies to blue-chip multinationals, who snapped up large portions. In 1997, Royal Dutch/Shell and BP entered into partnerships with two key Russian oil giants, Gazprom and Sidanko.67 These were highly profitable investments, but the principal share of the wealth in Russia was in the hands of Russian players, not their foreign partners. It is an oversight that the IMF and the U.S. Treasury would successfully rectify in future privatization auctions in Bolivia and Argentina. And in Iraq after the invasion, the U.S. would go even further, attempting to cut the local elite out of lucrative privatization deals entirely.

  Wayne Merry, the chief political analyst at the U.S. embassy in Moscow during the key years of 1990 to 1994, has admitted that the choice between democracy and market interests in Russia was a stark one. “The U.S. government chose the economic over the political. We chose the freeing of prices, privatization of industry, and the creation of a really unfettered, unregulated capitalism, and essentially hoped that rule of law, civil society, and representative democracy would develop somehow automatically as a result of that…. Unfortunately, the choice was to ignore popular will and to press on with the policy.”68