Russia's Crisis, America's Complicity

Russia's Crisis, America's Complicity

Mini Teaser: The appointment of the Primakov government in September reflects profound changes in Russian politics, some of which have serious implications for the United States.

by Author(s): Dimitri K. Simes

Chaos and Collapse

Russia's financial collapse was a logical result of the policies of
the Chernomyrdin and especially the Kiriyenko governments, which had
relied heavily upon foreign borrowing to sustain federal budget
expenditures. As oil prices continued to fall and Western investors
simultaneously began to pull money out of Russia to cover their
losses in the Asian financial crisis of 1997, the Russian government
was forced into greater borrowing at escalating interest rates. GKOs
were offered at such high rates of interest--up to 150 percent when
inflation was still at a relatively low level--that there was little
incentive for Russia's banks, or investors in general, to put money
into production. Without that investment, however, there could be no
growth in income to allow for the repayment of Russia's mounting
debts. At the same time, it became increasingly expensive for the
government to support the overvalued ruble. The result was a typical
pyramid scheme. When the Kiriyenko government was finally forced to
devalue the ruble, it found that it--and Russia's banks--could no
longer meet their international obligations.

Key radical reformers, including Chubais, have admitted to
understanding what was happening and what the likely consequences of
Russia's economic policy manipulations would be. Nevertheless, in the
best Russian tradition, they hoped against hope that somehow,
something would happen to resolve the crisis--or that the Clinton
administration and the IMF would again step in to offer a way out.
But it was too late. The resulting chaos and collapse of the ruble
led quickly to the further decline of Russia's GDP, a new wave of
inflation, consumer hoarding and shortages, unemployment, and
accelerated capital flight. The fact that a reformist government that
enjoyed particular confidence in the West took such drastic measures
and produced such dire results compounded the damage to Russia's
international credibility. Chubais' admission that he and the Russian
cabinet deliberately deceived the IMF and foreign investors alike
about the weakness of the Russian economy delivered a further blow.

Chubais later maintained that while he and his colleagues in the
Kiriyenko government misled foreign investors, they did not
deliberately lie to the IMF. This Clintonesque denial is not without
a certain element of credibility. IMF and particularly World Bank
officials in Moscow were quite skeptical of Russian assurances. After
having my own conversations with then Central Bank Chairman Sergey
Dubinin and Deputy Prime Minister Boris Nemtsov, I was convinced that
devaluation was inevitable and that only Russians' traditional faith
in miracles gave the Kiriyenko government hope that it could be
avoided. It appeared that senior Russian officials felt that they had
no alternative but to delay devaluation until after the announcement
of the July IMF credit package in order to fulfill the expectations
of the Clinton administration's top decisionmakers on Russia policy,
Deputy Secretary of State Strobe Talbott and Deputy Secretary of the
Treasury Larry Summers, who were eager to maintain the façade of
Russian economic progress. This was more a mutually agreed pretense
(undertaken to avoid alarming the U.S. Congress) than it was a
unilateral deception.

The bubble predictably burst, but not until the first $4.8 of the
$22.6 billion IMF-led bailout announced in July had been wasted
supporting the value of the ruble and protecting Russia's top banks,
which were controlled by the country's new oligarchy. There was much
finger-pointing; many, including the IMF and President Yeltsin,
claimed to be "shocked, shocked" at the collapse.

When Kiriyenko was fired, most in Moscow seemed to assume that the
candidacy of Victor Chernomyrdin would sail through the Duma.
Chernomyrdin had the support of most of Russia's oligarchs--including
Boris Berezovsky, who took public credit for the appointment--and, in
addition to being on fairly good terms with Communist leader Gennady
Zyuganov, he was generally acceptable to the country's regional
leaders. Two regional governors with presidential ambitions of their
own--Moscow Mayor Yuri Luzhkov and Krasnoyarsk Governor Alexander
Lebed--also offered important early support.

According to Moscow political analysts, another strength of the
former prime minister's candidacy was that despite having been fired
by Yeltsin, he could be counted on to protect the president's
interests. This triggered speculation that Yeltsin's declining
physical and mental health might lead him to cede some power to the
prime minister and possibly even to the parliament. Yeltsin's
entourage signaled as much in preliminary discussions with Duma
officials. Soon, however, the Russian president demonstrated--as he
had many times before--that unless pushed into a corner he would not
compromise his personal power, and that no redistribution of
authority could take place until he stepped down or was
incapacitated. The Duma was thus being asked to confirm Chernomyrdin
in a situation in which--given his strong presidentialambitions--he
could first protect Yeltsin and then inherit his broad powers. Not
surprisingly, the Communists and a number of other factions quickly
backed away from supporting Chernomyrdin on those terms, and his
prospects for confirmation collapsed.

Yevgeny Primakov's appointment as prime minister after the Duma's
rejection of Chernomyrdin avoided a new sharp confrontation between
the president and the parliament. Had Chernomyrdin been rejected a
third time, Yeltsin would have been bound by the constitution to
dissolve the Duma. However, because the Duma was planning to initiate
impeachment proceedings against Yeltsin--which, according to the
constitution, would prevent its dissolution--the situation could have
resulted in a constitutional crisis. Such a crisis would have been
much worse than that of October 1993, as no one would have been sure
what the demoralized, divided, and underpaid Russian military--or
Russia's increasingly assertive regional governors--would have done
during such a standoff. Moreover, Yeltsin's options were severely
limited by his unprecedented unpopularity after the August financial

This was a part of the rationale for the suggestion of Primakov as a
compromise candidate by pro-reform economist and Yabloko faction
leader Grigory Yavlinsky. He and others in the Duma were also
delighted to demonstrate that the legislature could no longer be
ignored. But Yavlinsky refused to join in the government once it
became clear that it would be an eclectic coalition representing a
variety of approaches. Included in it were Gorbachev-era officials
such as Yuri Maslyukov, a former head of the Soviet planning agency
Gosplan, and Victor Gerashchenko, a former Soviet banking official
who served as the first chairman of Russia's Central Bank.
Embarrassingly, two members of the pro-Chernomyrdin Our Home is
Russia party also refused to serve after being appointed publicly by
Yeltsin: Duma Deputy Speaker Vladimir Ryzhkov and the faction's
leader in the Duma, Alexander Shokhin, who joined the government only
to resign after a few days. This made it more difficult to assume
that the Primakov government could rely upon the support of reformers
in the parliament.

Since Primakov came into office without a program or a background in
practical economics, his disjointed cabinet has had considerable
difficulty developing a coherent economic package while the Russian
economy continues to decline. The good news, though, is that since
Primakov was appointed through a compromise, there has been no
immediate strong opposition to him. Fearing a further unraveling of
the situation, most major political figures, including Mayor Luzhkov
and Governor Lebed, have offered the new prime minister their
support. At the same time, the Duma's role in Primakov's selection
has given the new prime minister greater freedom from Yeltsin's
destabilizing meddling than any of his predecessors enjoyed.

Simultaneously, the Russian people--tired, confused, and preoccupied
with their own survival--appear to be in no mood to start a new
revolutionary uprising. But Russian revolutions have often started in
spontaneous and unpredictable revolts. In a nation with a
constitutionally powerful but personally weak president and a
disaffected, disillusioned population, even a fairly limited
rebellion could start a chain reaction, especially if the fragmented
Primakov government cannot find a way to halt skyrocketing inflation
and limit shortages.

To their credit, no important Russian political party--including the
Communist Party and Vladimir Zhirinovsky's Liberal Democratic
Party--has adopted the Bolshevik slogan of 1916-17, "the worse, the
better", and bet on victory through social upheaval. Curiously, the
radical reformers have come the closest to adopting this position,
through Chubais' apparently calculated admission of hoodwinking the
IMF and Boris Fyodorov's call for no further IMF assistance to Russia
immediately after the failure of his own attempt to remain in the

In many countries, certainly most democratic countries, a crisis of
the magnitude of the August-September 1998 events in Russia would
have resulted in a comprehensive change of leadership. But in Russia,
where Yeltsin is a declining czar rather than a hands-on chief
executive, a change of government may do if Primakov and his aides
are able to avoid completely alienating foreign investors and cutting
off Russia from most international assistance. It is also possible if
the situation continues to deteriorate that Primakov may be able to
reshuffle the government and include responsible reformers in key

The good news about the Primakov cabinet, as Secretary of State
Madeleine Albright has observed, is that "Russia now has a government
with a mandate from both the parliament and the president." While the
inclusion of ministers associated with the Communist and Agrarian
factions in the government makes it more difficult for the cabinet to
develop a coherent pro-reform program, to the extent that it is
possible to do so such a program may garner more support in the Duma
than any previous government initiative. At the same time, because
the Duma can no longer excuse its obstructionism by pointing to the
contempt with which the executive treats it, it finds itself under
pressure to cooperate constructively with the cabinet. This creates
an opening for economic change to be implemented through legislation
rather than less credible presidential and government decrees--if the
Primakov team manages to get its act together.

Essay Types: Essay