[Deb Palmieri on Russia Table of Contents]
The following article was published in the Russian Commerce News, July-August 1998. The Russian Commerce News is the official publication of The Russian-American Chamber of Commerce®. |
Profound Russian Crisis Begs for Unorthodox Resolution Strategies
The proportions of Russia's deepening financial crisis, now spilling over into all realms of the society, polity and economy, are snowballing faster than the mind can assimilate. We've seen the much touted bailout decision, a $22.6 billion rescue package from the IMF come and go, but Russia still can't shrug off the malaise of plunging stock markets, deepening debt and a steady stream of bad news bouncing from Tokyo to Wall Street, and right down Tverskaya Street. Bad news, like the statement by George Soros, prior to the August 17 devaluation, that blitzed across newswires and jolting an already jittery Russian equity market like an 8.1 on the Richter scale: "The meltdown in Russian financial markets has reached the terminal phase." Said one market trader "If you had to sum up the mood of investors in one word it would be despair. Investors have completely lost faith in the government." Said another broker, "It's all going horribly wrong." Then on a Friday, Yeltsin said: "There will be no devaluation of the ruble. This is a firm and clear decision." That next Monday morning, government ministers announced to a disbelieving Russian public that the decision to devalue the ruble has been made. Exactly one week later, (as we go to press) Yeltsin dismissed Kiriyenko, his cabinet, and reinstated Viktor Chernomyrdin as acting prime minister.
Other destabilizing news. . .what seemed unthinkable before has happened now. . .Options explored to default on debt? $135 bn in foreign currency obligations to be paid how and when? Falling hard currency reserves to bottom out when? More rating downgrades from Moody's and other international agencies. And other just downright depressing findings. In a recent rating of world banks, Russia stood right at the bottom of 73 countries, much worse off than countries like Puerto Rico, Estonia, Panama, Kuwait, Malta, Croatia and Slovakia, and only slightly a notch above Kazakhstan, Tunisia, Thailand and Pakistan.
The problem of wage arrears is so severe in the military and the prospects so dim for payment any time soon that the Defense Ministry has advised soldiers to fish, hunt and gather mushrooms until the Government can make payments. So meanwhile, trips for food collection are being organized so military families can engage in hunting and gathering missions. Said one ministry official, "People really need this to survive somehow."
So, before our very eyes, what we are witnessing is a mounting financial and economic crisis that could eventually culminate in the collapse of the Yeltsin presidency. His teetering fledgling democracy, that tried so hard to overcome 76 years of communist legacy and fought for survival since 1991, virtually pleading for assistance from the West, and receiving very little, except for a lot of bad advice from Harvard intellectuals and some of our government policymakers, is now more in danger than at any moment in the seven short years (or long, depending on how you look at it) of its existence. It's reminiscent of the fate of the Kerensky government or the short-lived Weimar Republic. The IMF rescue, too little, too late, could not even begin to deal with the panoply of deeply embedded Russian problems.
With all the flurry and buzzing around at the upper echelons of the Russian politick, Russia's people are showing a mixed response. On the one hand, some just seemed to take it in stride, at least for now. Said one retiree, "There's no reason to panic. I've been vaccinated against all financial crisis; I've got nothing to lose." Another sighed, "Crises in Russia are permanent. They only change qualifiers - political, governmental, market, financial, economic." On the other hand, there are some signs of panic. Some people are experiencing difficulties withdrawing money from banks or converting currency from rubles to dollars. Others are anxiously buying up what food they can afford, fearful of higher prices and maybe shortages.
For all of the debate and intellectual capital that has been sunk into a search for a solution, why has Russia made so little progress? Why haven't the economic and political gurus inside and outside of Russia found a way out of the mess?
Because they've all lost sight of common sense thinking. All of them - the Western and Russian economic reformers, the policy makers in Moscow guided by advice from Washington and the Kennedy School crowd - have tried to solve Russia's woes from the top down, using Western economic formulas that have little bearing on Russia's specific needs and conditions. Worst of all, they all left behind in the dust and sometimes just callously disregarded the basic needs and interests of the Russian people. Reforms and privatization so far have benefited only a small stratum of the population with little trickle-down effect to the bulk of the population. The failure of Russian economic recovery and lack of growth of its industry and productivity is a powerful indictment against dogmas, formulas and approaches that just don't fit Russian realities.
Common sense tells us a couple of basic things. The first thing is that the absolute highest priority for the Russian government now is the maintenance of social stability - incentivize people to avoid resort to rebellion and revolution by vesting them in the system. First, off, pay their wages. Direct every penny of revenue, rather than to service debt payments, to pay off wage arrears and augment social services, like health care. Debts can be rescheduled, postponed or restructured. But once the society erupts in anger and violence - and forces of chaos and social and political disintegration are unleashed, containment is difficult. Remember that Mother Goose nursery rhyme - "Humpty Dumpty sat on a wall, Humpty Dumpty had a great fall; All the King's horses, and all the King's men couldn't put Humpty together again." Its imagery is perfectly applicable to the prospect of the collapse of the Russian reform movement and the disintegration of order in Russian society. Once it's gone, getting it back is no easy job. And when heads start to roll, there's no telling where the dice will stop. Just ask Mr. Hashimoto or Mr. Suharto as recent causalities of their own financial crises.
Next, there is the need for a Russian version of a 'New Deal.' This plan must be focused on the stimulation of industry and the creation of jobs. Right now, all the talk is about how to pay off debt. But you need a healthy economy to pay off debt. Russia's debt spiral can't continue forever. Virtually no one is focusing on the real critical questions. These include: What type of policies will be most effective to create a foundation of industry and modern technological growth to guarantee a sustainable future for Russia? How can we build local economies that are both self sufficient and producers for the global economy? What sectors of the economy have the greatest potential to drive economic recovery and how can we most sensibly manage them? How can we bring back the $40 bn+ of capital flight and wealth siphoned out of Russia and put it to work in the interests of Russia? Have the oligarchs rightfully acquired their wealth and what role should they play in the future of Russia? These are the types of questions that require more public debate and attention.
Americans need to understand the high stakes game involved in our policy towards Russia now. If we default our obligation to provide the right kind of assistance, we create direct and indirect threats to our national security. What are we risking? Eurasian continental destabilization. A post-Yeltsin regime hostile and unfriendly towards America. Nuclear weapons falling into the hands of hostile splinter military or political factions. A future arms race when an unfriendly Russia finally develops its economy and has resources to pour into great power competition or a new prosperity fueled by the development of a militarized economy (arms sales already are a major source of hard currency revenue for Russia). These risks and stakes are awfully high. Great enough for us to pause and think very carefully.
How, then, should America respond to the Russian crisis? We should not funnel more aid through the IMF for debt servicing. It's a colossal waste of resources. Instead, we need to focus on humanitarian aid, for example supporting bilateral programs that funnel assistance where it's needed most - people-to-people help. Help is needed to feed people and provide them with medical and hygienic supplies. Let's get this going now before the effects of the harsh winter threaten lives and livelihoods. American generosity needs to be felt in Russia now, providing much-needed commodities people cannot themselves afford, because they are not receiving their wages. We also need to help the Russians, on a local and regional level, create and implement industrial recovery programs. No more crazy privatization schemes inspired by Western economists that only end up lining the pockets of a handful of oligarchs or rich Russians.
Just like we developed a team solidarity during the last World War to defeat the Nazi's, we need a comprehensive effort all across the Russian Federation to go into cities and factories, work with the locals, come up with workable and feasible "rejuvenation of industry" plans - on a city-by-city; industry-by-industry and factory-by-factory basis. The reforms have failed so far because well-intended, but out-of-touch decisionmakers have tried to implement "top-down" edicts from the center or have created policies to benefit only the oligarch. All this must change. The very life and vitality of the Russian Federation is at stake. We need "bottom-up" strategies that involve regions and local governments. And in the long-run, our national security is at stake. Let's engage in the necessary soul searching and draw on the inner courage necessary to set forth a bold new plan for Russia's survival and betterment now.
What does all this imply for corporate investors? Right now its too early to tell. Most everyone is "sitting tight" and observing developments as they happen. There are no easy solutions to the current difficult dilemmas.
Deborah Anne Palmieri
Russian Commerce News, July-August 1998
Copyright 1999 The Russian-American Chamber of Commerce®
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