It is difficult to countenance today that once upon a time people actually believed that communism would deliver equality and welfare. When neither welfare nor freedom materialized, Marxism-Leninism perished, but slowly. Repression eased after the death of Joseph Stalin in 1953, and from the 1960s economic growth started to decline. Eastern Europe saw a series of popular uprisings against communist rule: in East Berlin in 1953, in Poland and Hungary in 1956, in Czechoslovakia in 1968, and in Poland in 1980–1981. The Soviet squashing of the Prague Spring of 1968 put an end to the belief that communism could be reformed. The formation of the anticommunist trade union Solidarity in 1980, and its crushing by the Polish military in December 1981, reconfirmed that Soviet communism was no viable ideology.8
After the ideology had died, the Soviet regime preached the benefits of stability, just as Putin does today. The long reign of Leonid Brezhnev, secretary general of CPSU from 1964 to 1982, became later known as the period of stagnation (zastoi). The overcentralized economic and political institutions could not handle the challenges of information technology. Price distortions and industrial structure grew worse over time, leading to greater shortages and poorer quality with minimal technological progress. Yet thanks to enormous new oil and gas fields in Western Siberia and a global oil price boom from 1973, the Soviet Union sailed through the 1970s without reforms.
The demise of communism was as protracted as its collapse was sudden. As Ernest Hemingway put it in his novel The Sun Also Rises, “How did you go bankrupt? Two ways. Gradually, then suddenly.” During the second half of the 1980s, the Soviet Union experienced a perfect storm. All but the oil price decline was homemade.9
From 1981, the price of oil started falling, and in 1987–1988 Soviet oil production peaked out. The declining oil revenues posed a major challenge to the Soviet economic system. Russian reform leader Yegor Gaidar argued that the oil boom had made the Soviet leadership so arrogant and ignorant that the slumping oil price unleashed the collapse of the USSR. Observing the oil boom in the 2000s, Gaidar expected the Putin regime to go through a similar development.10
By the mid-1980s, the collapse of communism was overdetermined and long overdue, but Mikhail Gorbachev unleashed it by trying to reform the system. In March 1985, he became secretary general of the gerontocratic CPSU. His starting point was: “We cannot go on living like this any longer.” His three early slogans were glasnost’ (more openness), perestroika (economic reform), and new thinking (in foreign policy). In January 1987, he added the revolutionary term democratization. But as the Polish philosopher Leszek Kolakowski told a seminar I attended at the University of Oxford: “Reformed communism is like a baked snowball.” The more Gorbachev reformed the system, the more inconsistent it became, and the worse the economic outcome.11
Today it is difficult to countenance that in the late 1980s the Soviet leaders still harbored illusions about keeping up with the United States in an arms race. Until 1988, the USSR steadily increased its defense expenditures, which probably reached one-quarter of GDP, while the United States spent only 6 percent of its GDP on defense. President Ronald Reagan’s Strategic Defense Initiative, popularly dubbed Star Wars, might not have been realistic, but it scared the Soviets, exposing their technological and economic weakness.12
Initially, Gorbachev justified his perestroika with the arms race: “Only an intensive, highly developed economy can safeguard a reinforcement of [our] country’s position on the international stage and allow it to enter the next millennium with dignity as a great and flourishing power.” But the Soviet economy was unable to stand up to this challenge, lacking both economic and technological strength. The information revolution was in its infancy, and the Soviet system could hardly have survived the Internet. Its secret police demanded complete public control and secrecy, even prohibiting photocopying. Nor could the Soviet hierarchical command structure handle small enterprises, entrepreneurship, or creative destruction.13
The outer Soviet empire went first. Gorbachev did not seem interested in maintaining it. He disliked the stultified dictatorships in Eastern Europe that the Soviet Union subsidized. At the Soviet-led invasion of Czechoslovakia in 1968, the Soviet Union had initiated the “Brezhnev doctrine,” claiming its right to intervene to “defend socialism” in any part of the socialist commonwealth. In December 1988, Gorbachev declared the contrary at the United Nations: “For us the necessity of the principle of freedom of choice is clear. Denying that right of peoples, no matter what the pretext for doing so, no matter what words are used to conceal it, means infringing even that unstable balance that it has been possible to achieve. Freedom of choice is a universal principle and there should be no exceptions.”14
This speech ended the Brezhnev doctrine, and one year later all the communist regimes in Eastern Europe (East Germany, Poland, Czechoslovakia, Hungary, Bulgaria, and Romania) were gone. In 2000, Vladimir Putin expressed his regrets: “We would have avoided a lot of problems if the Soviets had not made such a hasty exit from Eastern Europe.”15
Gorbachev’s greatest political weakness was that unlike previous Soviet leaders he had little understanding of nationalism. In his book Perestroika, Gorbachev stated: “If the nationality question had not been solved in principle, the Soviet Union would never have had the social, cultural, economic and defense potential it has now. Our state would not have survived if the republics had not formed a community based on brotherhood and cooperation, respect and mutual assistance.” Gorbachev allowed forbidden questions about national repression to be raised, but he had no good answers. In 1990 and 1991, a “war of laws” erupted between the Soviet Union and the republics, and the republican laws were perceived as more legitimate than the union laws, because key republics were more democratic. Seven out of fifteen Soviet republics wanted to leave: the three Baltic republics, the three Caucasian ones, and Moldova. If Ukraine were to join, they would form a majority.16
Gorbachev’s fatal mistake was never to contest a democratic vote, depriving himself and the Soviet presidency of democratic legitimacy. Boris Yeltsin understood this, and as an outstanding political campaigner he fought for direct democratic elections of a Russian president. On June 12, 1991, he won that contest as an outsider with 57 percent of the votes against a former communist, Prime Minister Nikolai Ryzhkov.
In 1991, the Soviet Union faced a horrendous economic and financial crisis with all conceivable causes: large budget deficits, uncontrolled wage hikes, shortages, inflation, large foreign debt, ballooning public expenditures, collapsing public revenues and uncontrolled credit issue. From 1990, the republican parliaments legislated huge, populist social expenditures but refused to send their tax revenues to Moscow, starving the Soviet treasury. Meanwhile the USSR lost control over nominal wage increases. The Soviet budget deficit ballooned to probably 34 percent of GDP by the end of 1991, guaranteeing hyperinflation. The economy was in free fall. At the end of 1991, the Soviet international reserves were depleted, and GDP fell by about 10 percent in 1991. Presumably, these catastrophic events taught Putin the importance of macroeconomic stability.17
The end of an empire is usually accompanied with major bloodshed, but in this regard the collapse of the Soviet Union shines. World War I finished off the Austro-Hungarian, German, Russian, and Ottoman Empires. France pursued bloody colonial wars in Vietnam and Algeria. As the British departed from India, more than one million died in bloodletting when Pakistan and India partitioned. The breakup of Yugoslavia in the 1990s led to long wars, costing some two hundred thousand lives. By comparison, the end of the Soviet Empire was remarkably peaceful.18
In 1991, Russia was in a revolutionary situation. Russian scholar Leon Aron observed: “The political ‘centre’ . . . disappeared. This was a revolution, and in revolutions there is no centre.” The old institutions no longer functioned, and people no longer wanted to be ruled by their old rulers, who often abandoned their offices. The economic and financial crisis was profound with massive shortages, triple-digit inflation,
plummeting output, and a large public debt. Strangely, the situation was perfectly peaceful. At this time, I spent much of my time in Moscow, which was kinder than ever before.19
Putin observed the Soviet collapse from Dresden with dread: “‘Moscow is silent’—I got the feeling then that the country no longer existed. That it had disappeared. It was clear that the Union was ailing. And it had a terminal disease without cure—a paralysis of power.”20
While petrified, the old communist institutions had not disappeared. They were dormant and would come back with a vengeance. Russia had a constitution from 1978 that had only been amended. It had an unwieldy unrepresentative parliament elected in semidemocratic elections in March 1990. President Yeltsin, who had just been elected in fully democratic elections, was the only truly legitimate institution.
Boris Yeltsin’s two presidential terms, 1991–1999, left a complex legacy that will likely be subject to multiple reevaluations. Russia was never as free, open, and colorful as in the 1990s. Everything was possible, but it was also a time of economic misery. The introductory words of Charles Dickens’s classic novel A Tale of Two Cities fit this time perfectly: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair.”21
For Russian liberals, it was the best of times. Russia enjoyed more freedom than ever. For a newspaper reader, Moscow was a Mecca, with a score of daily newspapers representing all conceivable political views. A handful of outstanding television channels, spearheaded by Vladimir Gusinsky’s NTV, quickly raised the level of television to a global top level.
For Russian statists and imperialists, it was the worst of times. In Putin’s Russia, the 1990s are called “the damned nineties.” Opinion polls show that Russians are confused. In 2016, 55 percent of the Russians regretted the collapse of the Soviet Union in 1991, but 50 percent acknowledged its inevitability. This tension between regret and sense of inevitability also reflects the Russian attitude to the 1990s. This decade left many legacies, both good and bad.22
After the three-day failed coup of August 1991, Russian president Boris Yeltsin was the unquestioned leader, and he was the most impressive man I ever saw. When he entered a room, he filled it with his large, warm, and loud personality. As a truly great leader, he was at his best in extreme crisis. When the situation was impossible, he stood up and did what he had to do, but most of the time he did far too little. Yeltsin focused strategically on three tasks: securing his power, peacefully dissolving the Soviet Union, and resolving the rampant economic crisis.23
Yeltsin prohibited the antidemocratic CPSU and transferred its assets to the state, but he did not opt for major political reform, such as an adoption of a new constitution or the dissolution of the old parliament. He did not abolish the repressive KGB, though he split it into five agencies, reducing its staff by about half. It went through name changes, and since 1995 the bulk of it has been the FSB.24
As a history buff, Yeltsin was acutely aware of the chaos that had arisen after the Russian revolution in February 1917, when the provisional government had dissolved the tsarist imperial service. Therefore, he did not want to carry out any major reform of the state service. He argued: “It would have been disastrous to destroy the government administration of such an enormous state. Where it was possible to put in experienced ‘old’ staff, we did. And sometimes we made mistakes.”25
The most daring step Yeltsin took was to abolish the Soviet Union. He understood that it was unsustainable. In his memoirs, he wrote: “I was convinced that Russia needed to rid itself of its imperial mission.” But he had to do so in a way that was politically acceptable to Russians. On December 1, 1991, such an opportunity arrived. In a Ukrainian referendum 90 percent of its inhabitants voted for independence. Yeltsin acted instantly. Together with Ukraine’s newly elected president, Leonid Kravchuk, and the reformist speaker of the Belarusian parliament, Stanislav Shushkevich, he met secretly one week later at a desolate Belarusian hunting lodge (Beloveshskaya Pushcha).26
These three heads of the states that had created the Soviet Union dissolved it. As a replacement, they set up the loose Commonwealth of Independent States (CIS), inspired by the British Commonwealth. Yeltsin made no claims on territories of other former Soviet republics. All borders were to remain as they were, and all union property would belong to the republic where it was located. The three Baltic countries, Estonia, Latvia, and Lithuania, had departed after the aborted Moscow coup in August 1991 and stayed aloof, insisting that they had never belonged to the Soviet Union.
In the fall of 1991, the overriding concern was the rampant economic crisis. Soviet shops were empty, and even so Russia had triple-digit inflation. It needed to stop inflation and build a market economy. In November 1991, Yeltsin appointed a new government with Russia’s best and brightest young economists, led by Deputy Prime Minister Yegor Gaidar and Minister of Privatization Anatoly Chubais, who were the ideological leaders of the market economic reforms. In his great reform speech to the Russian parliament on October 28, 1991, Yeltsin clarified that the two central economic tasks were to establish economic freedom and financial stabilization: “We have a unique opportunity to stabilize the economy within several months and start the process of recovery. We have defended political freedom. Now we have to give the people economic [freedom], remove all barriers to the freedom of enterprises and entrepreneurship, offer the people possibilities to work and receive as much as they earn, after having relieved them of bureaucratic pressures.”27
The most important reform was the deregulation of prices in January 1992. Gaidar explained why it was necessary: “There were no reserves to ease the hardships that would be caused by setting the economic mechanism in motion. Putting off liberalization of the economy until slow structural reforms could be enacted was impossible. Two or three more months of such passivity and we would have economic and political catastrophe, total collapse, and a civil war.” Imports, too, were liberalized immediately, which was popular as all kinds of goods quickly became available in the shops.28
The other major reform was privatization. From 1988, state enterprise managers had gradually been taking ownership of the enterprises they were supposed to manage. Yeltsin concluded: “For impermissibly long, we have discussed whether private property is necessary. In the meantime, the party-state elite has actively engaged in their personal privatization. The scale, the enterprises, and the hypocrisy are staggering. The privatization in Russia has gone on, but spontaneously, and often on a criminal basis. Today it is necessary to grasp the initiative, and we are intent on doing so.”29
In August 1992, Yeltsin announced a program for voucher privatization that was quickly implemented. Until the summer of 1994, 16,500 enterprises with more than 1,000 workers were privatized. A critical mass of private enterprise had been built. In 1995, Russia claimed 920,000 private enterprises. This was the biggest privatization the world ever saw.30
But many things did not work out, because the liberal forces lacked the necessary political strength. As early as in November 1991, the not very reformist parliament appointed a chairman of the Central Bank of Russia, Georgy Matiukhin, who favored large monetary emissions. Nor could the reformers break up the ruble zone or liberalize energy prices and energy exports. As a consequence, rent seeking became the name of the game. In 1991, a skillful operator could buy oil in Russia at an official price of one dollar per ton and sell it abroad at one hundred dollars per ton. The early big fortunes were being made at the expense of the state.
The budget deficit lingered at 8 percent to 9 percent of GDP from 1993 to 1998. Only the financial crash of August 1998 convinced the Russian polity of the need for fiscal restraint. In this way the financial stabilization failed. Russia suffered inflation of 2,500 percent in 1992. Russia’s GDP plummeted precipitously until 1998, officia
lly by about half, but in fact perhaps by half as much, but we shall never learn the truth because of many statistical complications. Registered income inequality rose sharply from 1989 to 1994 from a low European level almost to the US level.31
Whatever Yeltsin’s true intentions, he had no good grasp on political institutions, though he persistently defended the freedom of the media. Initially, he tried to rule by decree, which resulted in haphazard and contradictory rulings with a brief shelf life. After the parliament had declared war on him, Yeltsin called for a referendum on its dissolution on April 25, 1993. He won it hands down, but he failed to exploit this opportunity. Waiting for too long, in September 1993 he was compelled to dissolve by decree the predemocratic parliament, which responded by instigating a military revolt that Yeltsin quashed with great bloodshed on October 3–4. Yeltsin promoted a new constitution with strong presidential powers that was adopted in a December 1993 referendum, but he and the reformers failed to gain a majority in the new State Duma in the 1990s.32
The darkest stain on Yeltsin’s rule was the war in Chechnya that the Kremlin’s “party of war” started in December 1994. It was both bloody and unsuccessful, ending in the summer of 1996 with Chechnya becoming an autonomous but lawless zone.33
To ordinary Russians, the worst transition shock was the explosion of violent crime starting in 1989, as the old order broke down. Protection rackets asked budding entrepreneurs to pay for protection, or krysha (“roof”), in return for a share of their turnover. The eminent St. Petersburg political scientist Vadim Volkov noticed: “Since the actions of the state bureaucracy and of law enforcement remain arbitrary and the services provided by the state tend to have higher costs, private enforcers (read: the mafia) outcompete the state and firmly establish themselves in its stead.” St. Petersburg was named Russia’s crime capital and was compared with Al Capone’s Chicago during Prohibition.34
Russia's Crony Capitalism Page 3
