Why Russians Still Don't Hate Communism

October 23, 2013 Topic: HistorySociety Region: RussiaEurasia

Why Russians Still Don't Hate Communism

The legacy of neoliberal "shock therapy" made space for nostalgia.

Last week Russia’s Public Opinion Foundation released the results of a survey in which the respondents were asked to share their views of life in the former Soviet Union. Almost two-thirds of those interviewed viewed communism in a favorable light. For just 7 percent of those surveyed the word ‘communism’ had negative connotations, while 5 percent dismissed communism as a mere ‘fairytale.’ A resounding 69 percent of respondents over the age of sixty viewed life under the old Soviet system in a positive light, as did nearly 50 percent of those polled between the ages of eighteen and thirty.

What to make of this? One possible explanation is that despite steady approval ratings of over 60 percent, there remain large swaths of the Russian population that remain discontent with the state of affairs under Vladimir Putin. A more pertinent lesson Western policymakers should take away from this poll is that the consequences of the economic policies put in place in Russia during the 1990’s are still very much with us.

These policies, generally referred to as the Washington Consensus, are a set of neoliberal economic policies that were strenuously advocated for the developing world by the US and international financial institutions such as the IMF and World Bank. They are policies animated by the classical liberal idea that a combination of free markets, deregulation, privatization, balanced budgets and floating exchange rates produce more efficient markets and higher rates of economic growth. These policies were pursued with a vengeance during the Clinton administration, and the results were little short of disastrous for the Russian people.

In and around 1992-93, two camps of economic reformers emerged in Russia: those who urged a cautious ‘gradualist’ approach and those who favored ‘shock therapy.’ The ‘gradualists’ believed that if reform took place in the absence of institutional reform such as enforceable property rights, an effective and legitimate tax system, or a legal framework that set parameters for competition, then a rush to privatization would only result in asset stripping and corruption on a mass scale. This view proved prescient. Those who favored the ‘shock therapy’ approach believed that time was of the essence; in order to avoid a reversion to communism, a class with a vested interest in capitalism had to be created. This view was backed by a retinue of young ‘reformers’ around President Yeltsin, such as Anatoly Chubais, as well as high officials in the Clinton-era Treasury Department.

Three policies were central to the concept of ‘Shock therapy’: price liberalization, monetary stabilization, and privatization. The Russian government pursued a policy of instantaneous price liberalization at the beginning of 1992. The resulting rates of hyperinflation saw the consumer price index in Russia hit levels of over 800 percent in 1993, 400 percent in 1994, and 200 percent in 1995. The savings of lower- and middle-class Russians was the first casualty of ‘shock therapy.’ In order to fight the rampant inflation, Russia was urged to tighten monetary policy by raising interest rates and maintaining the ruble at overvalued rates of exchange. This resulted in interest rates of around 70 percent in 1995 and 1996, followed fast by double digit rates of unemployment. The concluding round of ‘shock therapy’ saw a rush to privatization, which, as the ‘gradualist’ camp feared, resulted in state industries being sold off at a pittance while creating not so much a broad based class invested in the success of democratic capitalism but a small clique of oligarchs who promptly went ahead and invested their wealth abroad. A study conducted by Zbigniew Brzezinski concluded that 65 percent of funds and loans provided by the West were siphoned off into offshore accounts. Capital flight has been estimated to have run as high as $18 billion a year by the late 1990s, totaling more than $100 billion by March 2000.

The consequences for the Russian people were dramatic. Between 1990 and 1999 the Russian economy contracted by over 50 percent and industrial production fell by nearly two-thirds. Poverty rates soared from around 2 percent in 1989 to nearly 50 percent a decade later. The economic contraction fed a demographic one: in the 1990s the suicide rate rose by 60 percent and male life expectancy fell by four years. By 1996 there were 240 abortions for every 100 live births. The demographic trends were helped along by an epidemic of drug use, addiction and HIV infection.

The abject failure of neoliberal economic reform in Russia during the 1990s remains relevant for a few reasons. First, it is yet another reason to rethink the desirably of the kind of world the policies of the Washington Consensus leave in its wake. The eminent political economist Robert Skidelsky has compared the economic performance of what he terms the Bretton Woods age (1951-1973) and the period of the Washington Consensus (1980-2009) and has found that the former period not only had higher rates of growth (4.8 percent as opposed to 3.2 percent), it recorded no global recessions, nor a single year with less than 3 percent growth. Skidelsky notes, ‘…had the world economy grown at 4.8 percent rather than at 3.2 percent from 1980 until today, it would have been more than 50 percent larger.’ Rates of unemployment, exchange rate volatility and inequality (as measured by both the Gini coefficient and the Theil index) were all found to be higher during the Washington Consensus period.

Second, the U.S. Treasury and the IMF’s approach toward Russia shows very clearly the limits of economism, or, the reduction of all social facts to their economic dimensions. This has become an ingrained habit of Western policymakers over the past 30 years, particularly in the US and UK. A startling example of this mindset comes courtesy of Strobe Talbott. In his memoir The Russia Hand, he recalls a contentious conversation in September 1993 between Prime Minister Victor Chernomyrdin and Lawrence Summers over IMF loan conditions:

Larry persisted. The rules that governed IMF lending weren’t arbitrary or intrusive - they were a reflection of the immutable principles of economics, which operated in a way similar to the rules of physics.[italics mine]

No, they weren’t and no, they don’t. If this vignette is anything to go by, Summers, like his counterparts at the IMF, viewed economics as akin to a natural or physical science, rather than – as Adam Smith and John Maynard Keynes were at pains to point out - a profoundly moral one. As we have seen, for the ordinary Russian, the 'glorious future' promised by communism and the one promised by capitalism amounted to pretty much the same thing; conditions on the ground were deteriorated to shameful levels all the while Russian bureaucrats were receiving lectures on the overriding importance of IMF loan conditionality.

And so the record of those years should induce a sense of humility in Western policymakers when they undertake to lecture Russia and other developing nations on the conduct of their domestic affairs. The track record of the Washington Consensus leaves much to be desired and - if 60 percent of Russians are anything to go by - hasn’t been forgotten.

James W. Carden served as an advisor to the US-Russia Bilateral Presidential Commission at the State Department from 2011-2012.