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Mike Haynes and Pete Glatter

The Russian Catastrophe

(Winter 1998)

From International Socialism (2nd series), No.81, Winter 1998.
Copyright © International Socialism.
Downloaded with thanks from International Socialism Archive.
Marked up by Einde O’ Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

‘This is the collapse of a system.’
Svetlana Babayeva, The Inflation of Power, Izvestiya, 9 September 1998.

‘We are watching the death of the Russian state.’
Paul Goble (director of Radio Free Europe/Radio Liberty), The Baltic Times, 1-7 October 1998.

The Russian ruling class has, in the last ten years, lost two empires – the outer empire, which included the whole of Eastern Europe, and the inner empire, the Soviet Union – and it has been unable to regain a firm footing even in Russia itself. It has lost its position as a world superpower and now, enfeebled, has to concern itself instead with such matters as the danger posed by atomic submarines rusting away in their berths. Its armed forces are a byword for desperate poverty, murderous bullying, unwillingness to serve and lack of will to fight. It has abandoned the remnants of its Stalinist ideology without finding a convincing replacement. Its economy is in tatters. Much of its manufacturing industry has effectively ceased to exist. Its gamble on selling its raw materials abroad has failed, owing to the collapse in prices following the Asian crisis. Its financial system, such as it was, is a smoking ruin. It has defaulted on its external debt and its currency is an international joke. The state, with which it once identified itself, is fragmenting with at least three unsuccessful attempts at stable government in 1998 alone. It has a growing fear of revolt from below, with nightmarish memories of ragged people looting the palaces in 1917; the Yeltsin family is not the only one to be snapping up property abroad in case it has to flee. [1]

Neither Western nor Russian experts are clear about the nature and causes of this crisis. Some have had their reputations destroyed like Richard Layard, the leading British economist and adviser on the transition in Russia and joint author of The Coming Russian Boom which ‘introduces Westerners to a Russia that is far healthier and more promising than the one they have read about in the papers, and shows how the greatest political-economic challenge of the post Cold War world has become a resounding and exemplary triumph’. [2] Others have become incoherent. Introducing his survey of Russia for 1998, Donald N. Jensen, one of the top officials of Radio Free Europe/Radio Liberty, for many years a prime source of reliable information on the region (as well as a notorious mouthpiece of Western propaganda), has concluded that ‘no single description of the Russian political system seems adequate.’ [3] If such expertise, backed by considerable resources and experience, is insufficient to arrive at a clear picture of the post-Soviet regime in Russia, then ordinary people can hardly be expected to get much in the way of clarity from the press, the radio and the TV.

A lot of the confusion has to do with traditional divisions between left and right, especially during the period of the Cold War. Both right and left shared the view that the Soviet Union was in some real sense communist or socialist. The right tended to see it as a totalitarian state in which the rulers sought to control every aspect of human life, while the left found something progressive and admirable about the Soviet commitment to planning and state control. The left’s illusions in Stalinism have had little influence since the collapse of the Soviet Union, which itself contributed to much of the left’s rightward evolution. The right’s illusions in the accuracy of totalitarianism as a model of the Soviet system have had a more lasting impact. Two points about the theory are more important here. The first is that it was one of the few ‘academically respectable’ attempts to explain the Soviet system as a whole. This partly accounts for the tendency among specialists seeking to explain the decline and fall of the Soviet Union to fall back on totalitarianism theory. [4] The second point is that totalitarian theorists made a qualitative distinction between totalitarian regimes (i.e. Nazi Germany and the Soviet Union) and non-totalitarian ones, even if the latter were as unpleasantly authoritarian as Franco’s Spain or Pinochet’s Chile. If there is a qualitative difference between totalitarianism and authoritarianism, then the gulf between a democratic republic like post-Soviet Russia and the totalitarian regime which preceded it should have been unbridgeable. Yet the fact is that the Soviet Union of Stalin and his heirs evolved into Russia and the other successor states of today without a major cataclysm – certainly nothing to compare with the huge changes which accompanied Stalin’s own rise to power.

It was common ground among the theorists of totalitarianism that the way political power was organised was the fundamental feature of the Soviet system (much of the left too saw the role of the Soviet Communist Party, for example, as crucial to the progressive nature of the USSR). However, political power must always be seen in the context of the essential question: who controls the means of production, and what is the relationship between them and the actual producers? These relations of production constitute the economic base of society which underpins a particular political regime. This was the argument of those who insisted that far from being socialist the USSR under Stalin and his successors developed as a form of state capitalism. Forty years on, the same basic tools enable us to make sense of the transition from Stalinist to post-Stalinist regimes at a time when most of the left has thought it was witnessing the demoralising collapse of the ‘socialist bloc’. As Alex Callinicos puts it:

The social meaning of the East European revolutions was obscured by their most visible aspect, the collapse of the Stalinist one party states. But an economically dominant class must be distinguished from the specific political form through which it both secures its own cohesion and establishes its rule over society. The German bourgeoisie remained economically dominant throughout the twentieth century, despite a succession of changes of political regime – the quasi-absolutist Second Reich, the parliamentary Weimar Republic, the Nazi dictatorship, and finally the Bundesrepublik. [5]

The distinction between social structure and political regime is also vital to an understanding of the crisis of the ruling class in Russia today. It will be argued here that the ruling class has retained its control of the means of production since Soviet times, merely shifting its grip by means of privatisation. It has, as a result, continued to dominate the main successor state to the Soviet Union. But specific elements involved in the transition, especially the economic crisis and the loss of the Communist Party of the Soviet Union (CPSU), have disorganised and disorientated the ruling class and the state and have substantially diminished their internal cohesion with the result that Russia today is in the deepest crisis.

The Problem of the Transition from Bureaucratic State Capitalism

The essential problem of the Russian economy can be simply stated. To overcome Russia’s historic backwardness, Russia’s rulers, from Stalin onwards, drove the economy forward to compete militarily and economically with the West. The context and essential nature of this state capitalist industrialisation was well captured – despite his rejection of the theory – by Richard Sakwa:

Political competition with the West was now transformed into an economic race, but one whose standards and measure of achievement were set in the West... In the context of socialism in one country Stalinism was primarily a war machine, with emphasis on heavy industry, a way of industrialising the country to sustain its military potential. [6]

For six decades this worked well enough for the Soviet Union to be able to defeat Nazi invasion and then maintain itself for nearly half a century as a credible opponent of the world’s biggest power, the United States. But as the world economy grew more integrated in the post-war period the penalties of isolated industrialisation grew. By the 1980s the Soviet economy was clearly falling behind in this race.

In particular this centrally directed, military-industrialisation drive had important organisational and structural consequences for the Soviet economy which in the long run undermined its capacity to adjust and maintain its position. Organisationally Russia was run by the Soviet nomenklatura – the central political bureaucracy – which was to a large extent a managerial organisation. [7] From top to bottom, the CPSU, the key institution of the Soviet regime, spent more time and effort on the economy than on any other single area. A content analysis of the decrees issued by the Central Committee of the CPSU between 1966 and 1980 showed a 50 percent concentration on economic issues compared with 9 percent on foreign affairs and 8 percent on agitational work. As far as anyone can judge, this 50 percent figure is typical of the Party as a whole. ‘Party secretaries receive medals and gold stars not for the state of party work in their area, or for the political maturity of the party organisation,’ said Leningrad first secretary Gerasimov in 1988, ‘but for record harvests and new factories’. [8] It was unusual for the Party’s regional leaders (the pool from which Politburo members were drawn) not to have spent a considerable period in the management of one of their key local industries or of agriculture. This was even more the case in the huge new oil and gas regions of Western Siberia. [9]

However, the Soviet economy was not dominated by the regional Party leaderships but by upwards of 100 ministries, each of which controlled a particular branch of industry. These giant economic bureaucracies originally developed as the main mechanisms for implementing Stalin’s forced industrialisation in the 1930s. The economic ministries were inured to Stalinist motivation, priorities, methods and habits: military competition with the West; the development of heavy and military industry at the expense of infrastructure, social infrastructure and consumer goods and services; achievement of plan targets through the application of pressure and ‘storming’; and, last but not least, empire building and the defence of one’s own ‘empire’ against encroachment by other ministries. If the ruthlessness of the branch ministries mellowed somewhat over the years, then this was a change of degree, not of kind. Referring to the domination of the regional and local authorities by the ministries in 1984, the journal Kommunist revealingly commented on ‘how the ministries have practically “torn asunder” entire cities such as Bratsk, Togliatti, Miass, each building “their own” part of town at a respectable distance from “the others”.’ Regional and local officials were locked into this industrial structure: ‘Successful plan fulfilment by local factories was more important to them than a smoothly functioning regional economy’. [10] Despite much open debate and a clumsy attempt at reform the ministries retained their power until the end of the Soviet era.

Structurally, the conditions of enforced relative isolation also meant building up a parallel economy to that of the West. To achieve the same ends as the United States, Russia’s rulers had to devote roughly two to three times the relative share of resources compared to the situation in the US. To support this it was necessary to develop a more powerful industrial sector than would be normal for an economy at the levels of development achieved by the former USSR. As economies grow there appears to be a broad but systematic relationship between the production shares of agriculture, industry and services. But because global competition forced the Russian economy to support an industrial base in advance of its level of overall development the gap between the actual industrial share and what would be predicted for a more typical economy at that level of development was considerable. In 1979, 62 percent of output came from industry compared to a predicted share of 40 percent. Resources elsewhere were squeezed, accounting for infamous weaknesses in housing, community services, distribution and so on. Even in the industrial sector much development remained significantly behind the West, operating at lower levels of productivity. Too often, from a global point of view, Russia had the wrong type of industry in the wrong place; plants were too large, turning out too diversified a range of products with equipment that was less efficient than that elsewhere in the world economy. [11]

By the mid-1980s it became evident that radical surgery was needed. Initially this took the form of Gorbachev’s programme of perestroika or restructuring but as problems worsened the momentum developed to go further. When internal divisions at the top led a section of Russia’s rulers to launch an unsuccessful coup against Gorbachev in 1991 they were motivated less by opposition to shifting to a more market economy than by their determination to limit democratisation and to hold on to as much of the Soviet empire as was possible.

Reformers on the other hand believed that it was necessary to weaken the ties of empire and to have a degree of democratisation to break the blockages in the bureaucratic system. With this they believed they could ensure that as much control as possible remained with those who had traditionally held it while allowing for some rejigging of the internal balance of power and some addition of new blood which could help reinvigorate the system. Secondly, they could keep their grip on power by ensuring that any protest from below was kept within bounds and diverted into harmless channels. Thirdly, they would redraw the lines of Russia’s influence along its borders over the states that were now gaining nominal independence as well as over old neighbours using more flexible forms of informal domination.

None of these objectives have been attained successfully. Many accounts of what has gone wrong explain what actually happened as a battle between the reformers and recalcitrant forces of the old order and society at large. But, though there is some truth in this, to explain the development of Russia since 1991 solely in these terms is to accept the reformers’ self-definition of the problems and to miss the wider logic of the changes. In fact it is now much clearer that the reformers were always operating at something of a tangent to the real processes of change. One obvious manifestation of this has been ‘the revolving door’ which has led to the recycling of the same personalities as government crises have developed since 1991 even as the policies they have been associated with have stuttered or failed.

When the Soviet pattern of development came under increasing pressure in the 1980s there were, in the abstract, essentially two ways out of the situation. One was to find the resources necessary to improve the productive structure of the economy. By massive planned external investment and assistance it might have been possible to renovate the decrepit industrial structures as well as to build up the missing parts of the economy, including a decent service sector, to answer the need of the population. The alternative was to allow the market to reallocate production by eliminating ‘inefficient’ production and pulling the economy backwards toward an integration into the world economy at a lower level of development.

The resources for the first type of transformation were in the West under the control of generations of leaders and businessmen whose concern with power and profit had already denied the poor of the world this kind of assistance. There was no chance therefore that this would be forthcoming to the former Soviet bloc and Russia in particular. Moreover even a more minimal aid programme geared to the direct reconstruction of production in Russia was seen to smack too much of Keynesian state control. Under the influence of neo-market liberal ideology, however, Russia’s rulers believed, and were encouraged to believe by their Western advisers, that there was a third way. The hope was that the market could achieve the same ends of restructuring and refurbishment without a long run negative impact on Russia’s position in the international division of labour. It was recognised that output would fall but it was hoped that this would be short lived and the economy would follow a U shaped curve – down and then up. And when it moved it up it would spring forward as the dynamism of the market was unleashed.

This idea rested on the mistaken view that what was holding Russia back was firstly state property, secondly bureaucratic management and thirdly insufficiently close ties to the world market. Thus the focus of discussion was the bureaucratic nature of the Soviet system rather than the contradiction between the internal economic structures and the wider logic of the world economy. The argument was now that if property relations were privatised, the market given greater scope in the economy, then managers would seize the initiative and use the world economy to pull the economy up. As Arthur Young, an 18th century contemporary of Adam Smith had put it, the ‘magic of property’ would ‘turn sand into gold’. The writers of The Economist, never deterred by the experience of the real world, put it this way as late as 1995: ‘The main problem with Soviet industry was not that it was short of technological expertise, or even capital. The ingredient it conspicuously lacked was competitive management.’ [12] This can now be seen to have been a monumental delusion, though one that carried away the establishment, East and West.

Myths of the world economy

The potential of foreign demand to transform the Russian economy depended partly on the level of demand and partly on the capacity of the Russian economy to supply the goods demanded beyond its borders. The relatively slower growth of the world economy in the 1990s, even in its good years, has, however, limited external demand. Equally the inability of Russian producers, lacking substantial assistance, to produce the goods wanted at the price and quality required in the West has meant that demand has been weak. Even in the defence sector there have been enormous problems and Russia’s share of the global arms trade is estimated to have fallen from around 35 percent in the 1980s to 10 percent in 1997. [13]

Beyond this the only sectors of the Russian economy that have been producing goods saleable in the world economy have been oil and gas and base metals. A simple test of the link between the world economy and the rest of Russian industry is the all but non-existent face of Russian goods in the West. Even the Lada, perhaps the most visible consumer face of the old Soviet system, has largely disappeared. If we look at the European Union we find that in 1996 the whole of the former USSR only supplied 4.6 percent of its imports and the share of manufactured products from Russia was around 1.3 percent of total EU imports. [14]

The overall level of foreign trade has fallen dramatically along with the rest of the economy. Economists distinguish between the volume and value of foreign trade. If the price of a commodity like oil rises or falls then the value of trade can change without the volume of oil traded necessarily changing. Table 1 shows that the volume of oil and gas traded with the West has risen, even as output of oil has been slashed and output of gas has stagnated. The value of this trade has fluctuated with the changing price of energy, rising (especially in 1992 and 1993) and then falling in 1997 and dragging the economy down with it in 1998. Beyond the oil, gas and metals sectors, trade volumes and values have fallen across the economy so that today the Russian economy certainly has no deeper trade relations with the world economy than it had earlier. Moreover the trade level today is to an extent inflated because what appeared in 1989-1991 as internal trade of the old USSR now appears as external trade between Russia and the newly independent ex-Soviet states in the Commonwealth of Independent States (CIS).


Oil (Millions of Tonnes)











































Natural Gas (Billions of Cubic Metres)










































(including gas condensates)

One of the apparent peculiarities of this trade pattern which has confused many commentators is the way that Russia has managed to develop a considerable balance of payments surplus in its merchandise trade. Given the dire state of the economy this is the opposite of what might be expected. Imports should be being sucked in to replace the consumer and producer goods that domestic industry cannot produce. But although consumption imports have risen this surplus has grown in recent years to a considerable level. The major explanation for this appears to be that dollars earned in exporting are then taken straight out of the economy again as capital flight so that they are not available to pay for imports but only to build up the balances of Russian capitalists abroad.

This began before the collapse. It now appears, for example, that before 1991 the TASS wire service – supposedly representative of the Soviet regime – was insisting on its services in the West being paid for into a Frankfurt bank account. Then much of the Soviet gold stock appeared to ‘vanish’. The outflow immediately intensified with liberalisation. One prominent Western adviser to the Russian government suggested that ‘to judge from conversations with well informed businessmen and government officials, 10–20 percent of the oil and at least one third of the metals exported from Russia in 1992 were smuggled out of the country. Naturally, the revenues from these sales stayed in bank accounts abroad.’ [16] Since then the total scale of the movement is uncertain with a multiplicity of estimates for the years 1992–1996 ranging from some $61 billion to $89 billion. [17] In addition to this it is important to note that, as in much of the poorer parts of the world, debt repayments on official loans have continued to act as a further drain on the hard currency earnings of the Russian economy.

Capital flight is one way of putting into perspective the other great failure – the lack of foreign investment. So limited has been the level of inward foreign investment that it perhaps runs at less than 10 percent of the level of capital flight. To understand this investment failure it is important here to make two kinds of distinctions. The first is between financial aid to the Russian government and real productive investment. The second is between promised aid/investment and delivered aid/investment. Most of the huge figures talked about in the press represent financial assistance rather than investment. This is not directly invested in the productive structure of the economy but it is used to keep payments flowing around the state and financial systems and back to the West. Account then also has to be taken of the fact that much in both categories is promised rather than delivered.

The idea that foreign direct investment could transform the Russian economy was always a fallacy. The Organisation for Economic Cooperation and Development (OECD) countries undertake more than 90 percent of direct foreign investment. But 70 percent of all global foreign direct investment goes to the OECD countries. This helps explain why foreign investment has not transformed the lot of the poor of the world. It simply does not reach them. Moreover what investment does occur beyond the OECD is highly concentrated, ‘almost three quarters of private capital to developing countries in the 1990s went to only 12, mostly middle income countries’. [18] There was therefore little chance of major flows to the former Eastern bloc. In fact cumulative foreign direct investment in the whole of Eastern Europe in the years 1989-1996 was around $44 billion. This sounds large but we can put it into perspective by noting that in the shorter period 1991-1995 cumulative foreign direct investment into Britain was some $86 billion. [19] Thus the people of Eastern Europe have received around 50 percent of the investment that foreign companies have made in Britain with its 58 million population. Of this $44 billion Russia got under $6 billion – half the investment in Hungary with its population of some 10 million or the equivalent of some 7 percent of British investment in 1991-1995. The whole of Russia has received no more than a reasonably sized development area in the UK and much less than London. Or, to put it another way, less than a quarter of what India received in the same period.

The story becomes worse if the geographical location of investment is explored. After an initial surge in investment linked to energy and resource exploitation which drew some resources into the provinces it has been Moscow and the central region that has received the lion’s share of investment – more than 60 percent in 1995–1996. Even the second city, St Petersburg, has received little-less than 10 percent of the total in 1995 and less than 5 percent in 1996. Thus what foreign investment there is serves to increase the degree of uneven development in the economy as a whole. [20]

Nor do international agencies alter the picture. The European Bank for Reconstruction and Development is a source of both financial assistance and productive investment but what few of its loans have gone to production have been concentrated in gas and oil. Beyond this its flagship industrial loans include £17 million for a brewery and £29 million for a chewing gum factory! [21] For all the talk, therefore, of foreign investment the reality is that ‘all [foreign direct investment] is coming from people who really have no choice but to be here – like McDonald’s – in order to sell their products’. [22] Thus, ‘far from acting as catalyst to domestic economic recovery, the external regime with its reliance on primary goods exports heightens the susceptibility of the Russian economy to external shocks, reduces the potential for increasing competitiveness of manufacturers and entrenches sectional and regional elites’. [23]

The ‘Market’ in Russia

The failure of the world economy to bring relief to Russia intensified the internal contradictions within the Russian economy. After the failed coup of 1991 Yeltsin was able to wrest control from Gorbachev and, as the Soviet Union fractured, he had support to begin a reform programme in the Russian Federation. In October 1991 the Russian Congress voted 876 to 16 for economic reform and in November 1991 Yeltsin appointed Gaidar as finance minister to lead the economic reform. The Gaidar group self-consciously saw themselves as a ‘kamikaze cabinet’ (their term). They assumed that their polices would produce ‘creative destruction’ and therefore ‘the bigger the shock the greater the therapy’. Seeing themselves as engaged in an heroic battle for the soul of Russia they argued that it was only possible to jump over a chasm in one leap and therefore the most extreme policies were justified.

These policies had three major components – privatisation, liberalisation and macro-economic stabilisation. The problem was that these preceded any attempt to restructure Russian industry. The justification for this was that these policies themselves would force restructuring as enterprises would have to improve to survive. So long as this worked, privatisation, even if it was corrupt, would be justifiable because it would produce a new and more dynamic managerial class.

Observers inside and outside Russia therefore initially looked benignly on this process. Segei Kovalev, a usually reliable source, claims that Chubias, the man in charge of privatisation, said of what was happening, ‘they steal and steal and steal. They are stealing absolutely everything and it is impossible to stop them. But let them steal and take their property. Then they will become owners and decent administrators of this property.’ [24] In the West there was the same attitude. George Soros, the financier, argued, ‘it’s robber capitalism, it’s lawless, but at the same time very vital and viable.’ The Economist went even further arguing that in so far as the ‘Mafia’ had benefited from privatisation it was now time to legitimise it: ‘The resulting gentrification of the mafia would be neither fair not pretty. But it would be part of the necessary process of capital accumulation.’ [25]

In fact, of course, what happened was that monopolies used whatever power they had to try to hold on to their positions. Thus in January 1992 prices were freed from central control with the hope that as they rose this would in the short run absorb excess money and eliminate shortages by reducing demand (and increasing some supply), but instead they produced rapid inflation and monetary crisis. Parallel to this was the rapid development of a new banking system. At one point banks were being created at the rate of 40 a week and it seemed that anyone who had a minimal amount of capital (in 1993 $70,000 was enough) could start up a bank. The number of banks grew to over 2,500 in 1994 and then began to come down, as failures occurred and licences were withdrawn, to just over 2,000 at the end of 1996 and 1,800 by mid-1997.

These banks fell into four groups. Firstly, there were the branches of foreign banks. Secondly, there were the converted Soviet banks including the Central Bank, Sberbank (the savings banks in which what deposits the population had tended to be kept) and other parts of the old state banking system such as Mosbusiness Bank, Bank Vozrozhdenie, Promstroibank. Alongside these are a third group of ‘pocket banks’ created by large enterprises to act as their banking ‘arms’. These range in size from the banks of the Gazprom natural gas monopoly of Viktor Chernomyrdin – the bizarrely named Imperial Bank (10th in size in 1997) and the National Reserve Bank (17th) – to minor outfits associated with smaller enterprises. Then fourthly there are private banks set up by individuals and groups. Neither of the latter two categories of bank have extended structures of branches or mass deposit bases since they were essentially created to meet specific needs or for market speculation. It is not surprising then that the OECD could say with typical understatement that ‘commercial banks remain essentially inactive in the area of investment’. [26] In fact much of the banking sector depended in the first instance on foreign exchange speculation and this was soon to be supplemented by government bond dealings. They also acted as conduits by which loans coming into the country (including the huge loans from Western institutions like the World Bank and IMF) ‘disappeared’. At the same time they were also one of the mechanisms by which capital flowed out of Russia to the West. And this is to say nothing of the more ‘fully criminal’ money laundering in which many were clearly involved. In addition, to survive the top banks also began to trade in political influence which they soon found so lucrative that the boss of Menatep unguardedly boasted that ‘politics is the most profitable part of the business’. [27]

This was reinforced by the so called ‘shares for loans’ scheme which was a method of ‘privatising’ some of the jewels in the crown of Russian raw material production. In 1995 a group of Moscow banks proposed to the government that they could help finance the budget deficit if the government was prepared to back their loans with shares in the remaining state industries which included many of the ‘jewels’ controlling energy and raw materials. The Yeltsin government accepted the basic idea but insisted on an option to repay credits and, if they could not, that the enterprises should be competitively auctioned. When the government failed to find the resources to repay loans to the banks the result was high farce as the banks effectively auctioned off the enterprises to themselves. It was these shares for loans schemes that consolidated the role of the so called ‘oligarchs’, the leaders of the financial industrial groups (FIGs). One of these, Boris Berezovsky, in an interview with the Financial Times that caused ripples in Russia, claimed in 1996 that seven oligarchs now controlled more than half of the Rusian economy. [28] FIGs in their publicity handouts were likened to Chaebol in Korea and Keiretsu in Japan. In fact these FIGs would soon be exposed as weak and often parasitic structures behind which more powerful interests could operate. [29]

In the short run they appeared to thrive as an attempt was made to stabilise the financial economy after the initial inflationary surge. Inflation was forced down from some 2,600 percent in 1992 to 840 percent in 1993, 200 percent in 1994, 130 percent in 1995 and 20 percent in 1996–1997. As this happened Russia’s image in world markets began to improve and in 1996 the Russian government was able to raise its first international loan and gain a listing on the New York stock exchange. In 1997 they could proudly boast a rating as a ‘promising emerging market.’ Yet all of this was accompanied by the continued decline in production. As Yavlinsky put it in the spring of 1998, ‘We have low inflation, a low budget deficit, but we have almost no economic activity’. [30]

But this rouble stabilisation was a peculiar thing. Firstly the government borrowed enormous sums to achieve it. One part of this came from institutions like the IMF which was gradually sucked in to lending on an ever vaster scale. In July 1998 it agreed, for example, to new loans of $22 billion of which the first payment of $4 billion had been made when the economy crashed. The second source came from government issued short term loans, the treasury bills – the so called GKOs – and bonds or OFZs. These were sold to domestic and foreign investors at enormous interest rates. With the IMF giving its seal of approval larger amounts of speculative capital flowed into Russia, running for a time at levels that made real foreign investment look puny. But this state and private debt pyramid (linked in to the dubious domestic banking sector) depended on the state being able to maintain its payments.

Even without the impact of the Asian crisis this was a self-defeating process. In the first place the high interest rates acted as a further dead weight on investment. ‘Who’s going to invest in Uralmash when investors can make much higher returns on government treasury bills?’ asked Korovin, the director of the Uralmash plant in the Urals. [31] Secondly, the pressure was on to cut back state expenditure and the state itself became as guilty of withholding wages as many private firms, which further weakened the chances of any recovery.

These pressures all added to the ‘barterisation’ of part of the economy as enterprises short of cash and depending on credit and mutual relations for their continued existence all did deals with one another. Thus the attempt to create a market economy perversely created a substantial barter economy. Barter rose from 6 percent of industrial output in 1992 to 9 percent in 1993, jumping with the drive to stabilisation to 17 percent in 1994, 22 percent in 1995, 35 percent in 1996 and an estimated 41 percent in 1997. These figures are for the whole industrial sector. But in parts of the economy the barter share was much higher – 52 percent in chemicals and oil, 56 percent in metallurgy and 59 percent in building materials. [32] With this too went increasing delays in the payment of taxes. [33] At the start of 1998 only an estimated 15 percent of enterprises were paying their taxes in full and on time. Worse still from the point of view of ordinary Russians was the rising number of enterprises that delayed wage payments in whatever way they could.

On the other hand a third part of the economy, the dollar economy, remained immune from this. The size of this dollar economy remains difficult to estimate. Calculations by the state statistical agency put personal savings in dollars at the end of 1996 at over $100 billion – recalculations by other authorities put them at $11 billion – still the equivalent of 60 percent of rouble savings. [34] Most of these dollars were held by a relatively few Russians, the Manhattan elite as they are sometimes called, with access to foreign currency and the West. But where it has been possible – which is far from everywhere – ordinary citizens have also tried to convert some roubles into foreign currency as a store of value. Overall, even if we take some of the middle range estimates of the amount of dollars in circulation in Russia or stashed away somewhere, then it is quite possible that they exceeded the value of roubles in circulation even before the crash.

These problems were quickly exposed towards the end of 1997 when oil and other prices began to slide. Between July 1997 and July 1998 the price of oil fell by around a third. Income from oil and other raw materials fell to post-Soviet lows. Since oil alone accounted for some 15 percent of GDP, one quarter of government tax revenues and half the values on the Russian stock market, the implications of this were enormous. The Russian financial markets began to wobble in late 1997. The government pushed up interest rates to over 40 percent to calm nerves. In January and February the stockmarket dived again but recovered in March only to slide once more with interest rates being pushed up now to 150 percent. What was at stake here was not simply the economy. Writing in its Russian Supplement in the spring of 1998 a Financial Times journalist could describe how:

The country’s strongmen are beginning to crave political and economic stability. This small group of bankers, industrialists and regional bosses hit the jackpot during the mass redistribution of wealth that followed the collapse of communism. But now that the mass giveaway – which future generations of Russians may well condemn as the ripoff of the century – is over, Russia’s winners are desperate to fully legitimise these gains. [35]

But central to this, ideologically and politically as well as economically, was financial stability. ‘The strong rouble is for the establishment the sole achievement of seven years of reform. If it collapses, it’s a political catastrophe for the ruling class,’ Andrei Piontowski, a leading Russian commentator, told a Western journalist in the spring of 1998. [36] In March, Yeltsin, provoked in part by wanting to rid himself of a potential challenger, sacked the Chernomyrdin government to replace it with that of a young elite reformer, Kiriyenko. But Kiriyenko, perhaps suspected by those in power of doing too much, proved as unable as Chernomyrdin to hold things together, especially as the effects of the Asian crisis became more widespread. By August apparent pinpricks such as the announcement of the international financier George Soros that he had doubts about the stability of the Russian financial system could create havoc. By this point debt repayments were running at around 30 percent of the budget, but more importantly payments were coming to exceed the cash inflow of a government starved of tax payments. The crash came as August rolled on, despite desperate attempts to sell huge amounts of foreign exchange to shore up the value of the rouble. In the end it was to no avail and the rouble crashed – devalued by 40-50 percent; the state effectively defaulted on its debts; parts of the banking system collapsed and the government fell to give way to political demoralisation and short to medium term paralysis. Prices leapt for ordinary Russians who desperately grabbed what was left on the shelves of shops hoping to put their money into something of value as well as build up some stocks for the future. The whole system was now in turmoil.

How deep is the crisis?

The basic dimensions of the catastrophic declines in the real economy before the crash of the summer of 1998 are set out in Table 2. Some Western economists, dismayed at this picture, have tried to argue that these figures exaggerate the crisis because the old data inflated the levels of production while the more recent data fail to properly count all the new private production. Even if this is so, and a good case can be made that it is not, then the crisis of 1998 almost certainly wiped out a significant part of this shadow economy so that the declines indicated in this table cannot be that wide of the mark. [37]






as % of

% change
































































The scale of the fall in gross national output registered in Table 2 is quite simply all but unknown in economic history save in the exceptional circumstances of defeat in war. And even in these exceptional conditions there are relatively few parallels. During the First World War, for example, output in Russia fell by 25 percent, during the Civil War it fell by 23 percent and during the Second World War it fell by 21 percent. Yet in the years 1992–1996 alone the decline was 28 percent. [39] After several years of hope that output would finally start a painful recovery it did rise by 0.4 percent in 1997. But even before the crisis of late August 1998 the preliminary figures for the first half year of 1998 suggested that output was down on the year before – the July 1998 figures suggested a fall of 4.5 percent for GDP, 9.4 percent for industrial output and 16.7 percent for agricultural production. [40]

Within the figures of total output it is industrial production which has fallen the furthest and its scale has gone far beyond what was predicted or what can be justified by even the most fervent free market ideologist. Moreover, the contraction has been evident even in areas that should be relatively strong. Despite the prominence of the oil industry, for example, oil production has fallen between 1988 and 1997 by around 50 percent, reflecting the depletion of fields, the lack of investment and a management more concerned to plunder oil resources than develop them. Gas production has held up better but has been more or less stagnant over the period as a whole. Beyond this, old style Soviet industry has suffered, with mechanical engineering experiencing a huge contraction of some 70 percent between 1989 and 1996. But so too has light industry which might have been expected to expand, with falls greater than much of heavy industry. The OECD talks of the ‘long free fall in light industry and food processing’ – part of what used to be called group B industries. [41] As two Russian economists put it:

Though much has been said about structural ‘perestroika’ (restructuring), no real changes have occurred in the increase in the specific weight of branches of group B. On the contrary ... starting from 1992 their specific weight reduced significantly. At the same time the share of extractive industries increased from 15.5 percent in 1989 to 24.6 percent in 1996 ... the recession in manufacturing industry was bigger than in extractive ones ... in almost all branches, the reduction of progressive types of production occurred at faster rates. [42]

In fact we can go further than this and argue that what has actually happened is what has been called a ‘perverse restructuring’ of the industrial sector. This makes little long run sense because it represents an accentuation rather than a resolution of the structural problems of Russian industry and can only compound the difficulties of recovery. [43]

This is not a ‘healthy’ process of deindustrialisation. What has occurred is qualitatively different from the process of Western deindustrialisation. There, the share of industry in total output fell but the absolute value of industrial output often grew, reflecting the fact that fewer workers and machines produce more, so enabling resources to be transferred to services. In Russia the opposite process has underpinned the deindustrialisation of the economy. Absolute industrial output has collapsed because fewer workers often produce less, so forcing up the relative share of the services sector.

There is a huge crisis also in agricultural production (which is also periodically affected by erratic natural conditions with 1998 threatening to be a very bad year). The agricultural disaster is one of the great secrets of the transition. Whereas the state of the Russian harvest was once the focus of much general reporting in the West, it has receded into the background, if not disappeared completely. Perhaps this is just as well, as Table 3 shows. The area of land under cultivation has fallen. While higher value food imports have grown to feed the rich, at the bottom of society the falling standard of living has reduced meat consumption at the same time as agricultural production has also been affected by much of the confusion and inefficiency affecting the rest of economic life. Livestock herds have dramatically declined, as Table 3 shows. The obvious comparison here is with collectivisation for which comparative data is provided in the last lines of Table 3.










% Change

% Change

Grain Production (millions tons)










Potatoes (millions tons)










Eggs (billions)










Cattle (million)










Cows (million)










Hogs (million)










Sheep and goats (million)










For enthusiasts of the transition the one bright spot in this sorry tale is supposed to be the performance of the services sector. Anyone arriving in Moscow finds a city apparently bustling with life beneath a skyline of tall buildings overloaded with neon signs. This has led impressionistic commentators, including visiting economists and journalists, to speak highly of the transition. But two more sceptical commentators highlight the problem:

Assume that one of the market economies of Western Europe were suddenly to cease all industrial and infrastructure investment, and to decide instead to use its resources for the exclusive purpose of building hotels, restaurants, casinos, cathedrals and luxury villas in and around the capital. In the short run, there would most certainly be an impression of astonishing wealth, but the longer term price to be paid would be disastrous. That obviously applies to Russia as well. [45]

In fact, telling though this comment is, it nevertheless still grants too much credit to the ‘services revolution’. In reality there has been little absolute growth in the weak services sector. Employment in the credit and financial sectors expanded from 400,000 to 800,000 in 1990-1995 and in catering and retail trading it rose by 13 percent from 5.9 to 6.7 million in the same period. But employment in the rest of the services sector either remained stagnant or fell. Because overall employment declined by some 12 percent in 1990–1995 the relative stagnation of services caused its share of employment (and output) to rise but this is hardly the same as vigorous expansion. Even the small business sector – the hoped for breeding ground of a new class of entrepreneurs ‘untainted’ by the old order – has been largely stagnant. With major cuts in the level of mass consumption the capacity for sustained consumer growth is highly restricted and the accumulation of wealth in the hands of a relatively small group at the top can only provide the basis for a limited expansion for a few mainly dealing in Western goods. [46]

Table 2 shows the dire situation in respect of investment. No transition theorist has satisfactorily explained how a dynamic economy can be created by destroying investment. It should be remembered that part of the original driving force behind perestroika was the need to make more productive use of investment. But the fall in investment suggests that capital accumulation in production has all but been eliminated. This is confirmed by the figures on the age of Russia’s capital stock. The average age of plant and equipment rose from 9.5 to 10.8 years between 1980 and 1990 but between 1990 and 1995 it rose from 10.8 to 14.1 years. If, in 1980, 35.5 percent of plant and equipment had been under 5 years old, the figure in 1990 was 29.4 percent but in 1995 a mere 10 percent. As a group of OECD authors put it, ‘the ageing of plants and equipment is all the more ominous for the resumption of growth as large parts of even the relatively recent productive assets are technologically obsolete’. In the crucial oil sector, for example, half the pipelines are over 20 years old. [47]

Table 4 sets out some of the key indicators of the social impact of the economic crisis. Lack of space prevents us undertaking a full discussion of this data although we shall return to selected aspects of it later. Here, to the extent that these figures need commentary, we can simply quote UNICEF’s monitoring reports lamenting ‘the demographic implosion’, ‘appalling’ numbers of excess deaths (1995); the ‘staggering’ fall in life expectancy for males (1996) which is now lower than in India; the ‘tragic rise’ in the deaths of young people including through suicide (1998) and so on. [49] We should also note that some of these series need to be treated cumulatively. Thus between 1990 and 1997 the rise in mortality over the 1989 level has led to between 2.6 and 2.9 million excess deaths attributable to the transition. It can similarly be estimated that the cumulative fall in births has been of the order of 4.5 to 5 million in the same period. [50]




Real wages
(1989 = 100)

Birth rate
(per 1,000)

Death rate
(per 1,000)

Marriage rate
(per 1,000)


(per 1,000
live births)

Life expectancy

























































































*The Gini coefficient measures inequality on a 0 to 1 scale where 0 is perfect equality and
1 perfect inequality with 1 person having all the income

The Crisis of the Ruling Class

There is an irresistible body of evidence to indicate that the people now in charge in Russia are substantially the same as those who ran it in Soviet times. They were known collectively in Russia as the nomenklatura, and today people commonly refer to nomenklatura privatisation or to nomenklatura democracy. According to the Russian academic Olga Kryshtanovskaya, for example, members of the nomenklatura accounted in 1995 for 74.3 percent of the government and 75 percent of Yeltsin’s presidential team. [51] Among the powerful regional elites who do much of the day to day bossing about, the proportion was even higher at 82.3 percent. Even in the new business elite the figure stood at 61 percent. These studies may even understate the level of nomenklatura persistence. Kryshtanovskaya herself admitted that this was the case when it came to the so called new business elite, 39 percent of whom seemed to have no connection with the old regime. She argued that even this significant minority was largely made up of trusted and authorised agents of members of the technocratic and economic nomenklatura who wished to remain in the background.

One of the interesting things about the different elite groups covered by these studies is the extent to which they share a common background in Soviet structures as opposed to the Communist Party or the economy. This was particularly true of the presidential team (63.6 percent) and the regional elite (78.6 percent). A shift from the Party to the Soviets began under Gorbachev and accelerated when the Party lost all credibility as a result of the abortive coup against Gorbachev in August 1991. A US researcher has referred to a typical scene from the autumn of 1991 as being ‘the parade of former CPSU [Communist Party of the Soviet Union] regional leaders who “repossessed” their old office buildings in the name of the people and the soviets’. [52] Many members of the economic nomenklatura eventually chose the Soviets rather than the Party as the means for furthering their careers. Yeltsin himself comes from the construction industry in Sverdlovsk, a key region in the Urals. The Soviet background is therefore not so important in itself. But as a popular stepping stone in the careers of the upper classes it is an important indication of how the continuity between the Soviet and post-Soviet regimes was established.

Beneath these political changes privatisation, far from being the death knell of the old ruling class as free market economists would have it, actually became a crucial means for it to consolidate its economic grip. [53] Kryshtanovskaya describes a crucial example:

‘A ministry would be abolished and in its ruins a business concern would be created in the form of a joint-stock company (same building, same furniture, same personnel); the minister would resign; the controlling parcel of shares would pass into the hands of the state, the rest would be distributed among the leadership of the ministry; as a rule, the second or third figure in the abolished ministry would become the head of the concern.’

This is, in fact, a summary of the ‘privatisation’ of the giant natural gas monopoly Gazprom, one of the largest companies in the world. The privatisation of Gazprom was organised by Viktor Chernomyrdin, the last Soviet minister of gas and the longest serving prime minister of post-Soviet Russia. As it was with Gazprom and Chernomyrdin, so it has been to varying degrees with other big business interests, especially banks and the big exporters of raw materials to which they are related. Despite the important, and recently disastrous, role of banks in Russia, their function has not necessarily been one of control over the big companies with which they have been integrating their operations. There is evidence that the top management in at least three of the six largest oil producers in Russia, including Lukoil, the largest one, bought their own companies, crucially in the ‘loans for shares’ auctions through the agency of banks to which they were allied. [54] In a fourth case, Yukos, the second largest producer, was officially taken over by the Menatep banking group which controls 85 percent of its shares. However, a study of banks in the Russian oil sector concluded:

It is not strictly correct to say that the bank took over the company: rather, a mutually beneficial alliance was formed and confirmed in legal terms after a significant period of development ... A full 70 percent of the assets of the Menatep group are now linked with Yukos. Total annual sales of the enterprises under Rosprom (Menatep’s industrial investment arm) amount to somewhat more than $6 billion, of which $5 billion stem from Yukos. Yukos is a very large company and the size of the bank Menatep is not really of a comparable magnitude. [55]

These are – along with Gazprom – the largest exporters and the most important sources of hard currency earnings in Russia. They are, for what it’s worth, among the most profitable firms in the country, the most closely allied to the state and the most privileged by it. Each has their ‘curator’ in government, a practice which has also spread to the regions. Thus, Yurii Luzhkov, the mayor of Moscow, represents a cluster of building, trading and financial institutions (most notably the Most group). Yurii Neelov, the governor of Yamalo-Nenets, the West Siberian region in which most of Russia’s gas is located, sits on the board of Gazprom. [56] Leonid Polezhaev, the governor of the Omsk region, also in Western Siberia, sits on the board of Sibneft, the sixth largest oil producer in Russia. Sibneft owns the Omsk Oil Refinery, which is one of the largest petrochemicals plants in Russia, and its head offices are located in the region. [57]

A critique of research into ‘elite continuity’ by James Hughes, based on his investigation of seven regional elites, argues that the ruling social groups in Russia were even less variegated than Kryshtanovskaya and a co-worker in Britain, Stephen White, had supposed. For Hughes, the sub-national political elite, ‘broadly uniform ... in terms not only of occupational structure and status but also as regards age, gender and lack of overt party affiliation’, is composed of an increasingly interlocked or integrated group of political-administrative and economic leaders. The old Soviet nomenklatura, he argued, has not only recomposed itself but has also succeeded in dramatically eclipsing other social groups in the elected regional assemblies – professionals, women, young people, employees and workers. He concluded: ‘This is not the differentiated elite that one might have expected to emerge after a sustained period of democratisation’. [58]

It seems a matter of common sense to see continuity among the ruling orders as a stabilising factor in a time of change. Yet such continuity in post-Soviet Russia has gone hand in hand with a historically high level of conflict between different factions in the regime. The last days of the Soviet Union were preceded, indeed brought on by, an attempted coup by one part of the Russian-dominated Soviet leadership against the other (the abortive August 1991 coup against Gorbachev). Splits in the new Russian leadership soon developed and the most well known of them culminated in Yeltsin crushing the parliament by military force. Governments have swung between speeding up economic reform and slowing it down. In 1997, tension between the regional governors and the central authorities focused on an attempt to impose direct rule on the Maritime Province in Russia’s far east via the newly appointed presidential representative, Viktor Kondratenko, who also happened to be the chief of the region’s FSB (the renamed KGB). During the same year the Security Council gained and lost Boris Berezovsky, the ‘oligarch’ who fronts the Logovaz financial-industrial group (which includes Sibneft, Aeroflot and ORT, Russia’s biggest TV station), one of Yeltsin’s key backers in the 1996 presidential elections. This year two governments have fallen in a raging hurricane of financial and economic catastrophe – two and a half, if one counts Chernomyrdin’s unsuccessful bid to get his old job back. The third, under the leadership of Yevgeny Primakov, a compromise figure, remains incomplete and unstable at the time of writing.

If post-Soviet Russia is essentially ruled by the same group of people as in Soviet times, why has so much of its brief existence been dominated by infighting among them? One answer is the apparently permanent and worsening state of economic crisis, to which none of them have a convincing answer. In the absence of effective measures promoting stabilisation and recovery, powerholders are reduced to bickering amongst themselves about their share of the take from a shrinking pot. Everyone fights harder over reduced rations, as Trotsky once remarked.

But the problem goes deeper than this. As we argued earlier, Russian state capitalism was an intensively bureaucratic and pyramidal phenomenon. But the collapse of the Soviet Union went hand-in-hand with the disintegration of the old Communist Party (the CPSU) which had structured ruling class relations into a hierarchy for 60 years. At the same time, there were shifts in the balance of power between different ruling class groups. Given implacable economic decline, such power shifts plus the loss of the CPSU destabilised relationships between the very groups of people most intimately involved in the business of the new state. They are a little like an officer corps which has survived some military disaster almost intact but at the cost of a breakdown in the chain of command, ie in the very thing that made it an effective officer corps. Their cohesiveness has deteriorated and the lack of clarity about who is subordinate to whom and to what degree has stimulated competing claims and conflict. [59]

Back in 1994, the writer and historian Yurii Burtin described the mentality of the Russian upper classes which had emerged from the demise of the Soviet state:

This is the phase of the omnipotence, one could say, the autocracy of the apparat and at the same time its hitherto unprecedented personalisation and personal freedom. Whereas in Soviet times it possessed power and property only on a corporate basis, ‘as a class’, now both have been largely decentralised and given out as personal property to every leading person taken separately – be it a director of a state enterprise, a regional or municipal administrator. You are free to use both as you see fit, at your own discretion, for nobody will tell you: ‘You take not according to your rank,’ nobody will take an interest either in your income or in the sources of this income. [60]

Burtin summed this up as a situation in which the ruling elite is simultaneously ‘uncontrollable and omnipotent’ and ‘disunified...divided into parties, branches and factions,’ producing ‘leaders who are vying amongst themselves and are ready if need be to prove their supremacy by force.’ He described nomenklatura democracy as having ‘absolutely no chance of being effective and strong’:

Expressing the contradictory interest of different groups of the socially irresponsible upper stratum, it is evidently doomed to live from one coup to another and from one ‘charter of accord’ to another. At the same time, it keeps lying like a log on the path to genuine democracy, democracy for everyone.

It is the particular combination of continuity and change at the ruling class level which is important. Had the nomenklatura been able to go on ruling with its traditional mechanisms, it might have been able to cope in the short term, perhaps even in the medium term, with the ups and downs of different factions without too much in the way of internal disruption. Had the nomenklatura been overthrown, then this kind of problem simply would not have arisen. Ironically, the intra-class conflict which typifies post-Soviet Russia is largely the result of a relatively peaceful, relatively gradual process of reform which was initiated and led largely from within the political establishment.

One aspect of this inability to sustain a clear command structure has been the failure to establish a credible new political system through which (and behind which) bargains can be made. The Soviet system was always run from the top down and when Yeltsin and his reformers came to power in 1991 they continued and in some senses reinforced this. Supported by their Western advisers, they saw market reform and privatisation as a ‘revolution from above’. When this programme generated opposition which began to be expressed in the old congress or parliament Yeltsin resolved the conflict by sending in the tanks at the cost, on some estimates, of around 150 lives in 1993. Out of this debacle came a new presidentially driven constitution in which the new parliament (the Duma) and the Upper House (the Federal Council) had limited powers. Yeltsin and his group now eschewed building a party political base preferring alliances conducted inside and outside of the Duma to achieve their ends.

But it is not only a matter of the political system itself. There has been a major weakening of the Russian state machine. With the shift to the market many of the economic control mechanisms of the old state, the planning structure and many of the economic ministries, became redundant. But the so called power ministries – the ministries of the interior, defence, intelligence, special police, presidential security forces etc – remained intact as the core of the state. However, their powers effectively shrank and weakened as the crisis developed and they began to lose control of social processes in Russia. Indeed, it was not always clear what order should be imposed since the development of the market often ran ahead of legislation so that much of what outsiders imagined to be criminal in Russia (eg money laundering) is not necessarily against the law since there is only very imprecise law to cope with it. The result, as Kryshtanovskaya puts it, is that ‘the law enforcement agencies, for all practical purposes, themselves abandoned their task of safeguarding private commercial structures’. [61] The best known result of this has been the rise of the so called mafia and crony capitalism. If the term ‘mafia’ in Russia applies to illegal organisations carrying out illegal acts, then just as important has been the growing role of legal organisations carrying out illegal acts whether it be in the form of the effective murder of workers in unsafe mines or factories, the scandals over environmental crimes that are producing horrific ill health in certain communities and so on. One manifestation of this has been the way in which state enterprises have been just as reluctant to pay taxes and wages as nominally private ones:

A general observation of the Russian state’s policy in this period was that the government was unable to assert its nominal property rights over state owned assets. An evaluation from the state property committee showed that in most cases the management of government shares through the board representatives chosen had not been efficient, either for the state or for society at large. The biggest non-payers to the state and the biggest non-payers of salaries were precisely those joint-stock companies in which the state representative had responsibility for the management. Furthermore, the higher the position of the government representative, the larger the debt of the joint-stock company. [62]

The failure of the state is also reflected in the rapid growth of the private ‘state’, especially private security forces. Kryshtanovskaya argues that effectively all of these are run by former state security officials, 50 percent from the KGB, 25 percent from the Ministry of Internal Affairs and 25 percent from Intelligence and Armed Forces. But the difficulty is, of course, to separate out these structures from the illegal ones as merging can and does take place, especially in the financial sector. Leading criminals have even become deputies in the Duma where they can gain immunity from prosecution. One member of the Duma Commission for Human Rights, had, for example, previously been convicted of theft, armed robbery and rape. [63]

One of the paradoxes of bourgeois democracy is that much of its democracy has been achieved by struggles from below, primarily by workers but at times also including various middle class pressure groups and organisations. In the 1990s the buzz word for this was ‘civil society’ – what was needed in Russia was a network of independent organisations and groups that could express competing interests and both support state and government and pressure it in ‘positive ways’. Yet just because the transition was a top down process, a non-revolutionary change with limited wider participation, no dense network of organisations emerged. Nor, of course, did the reformers always want them if they were likely to block change.

Nevertheless, something does exist. We will look later at the workers’ movement and other movements which have offered opposition. In addition, there are groups that came together to oppose the Chechen war. [64] Some commentators see a wider difficulty in the fact that the middle class have also been victims of the economic decline. What was formerly known as the mass intelligentsia – teachers, doctors, workers in science and culture and so on have all found themselves victims of the maelstrom. As one Russian observer has put it:

It is especially alarming that the ‘centre’ is dissolving. It seems to me that while some are going into business and becoming rich, a large proportion is becoming impoverished. The middle class is eroding... As we know, the middle class is the bulwark of any state – this is that stable group that is engaged in production, that makes it possible to master new technology, to treat and to teach people, to secure future development. [65]

In this situation we can see all types of shifts and splits occurring within the ruling class. The two most important dimensions of these – sometimes competing, sometimes complementing one another – are between the Financial Industrial Groups as power centres and regional divisions. The FIGs have effectively developed as political-economic empires to replace the former economic ministries. But the contours of their holdings vary. While some reformers opposed them for blocking competition others believed the talk that they would provide a new stable basis for economic and political power. In these terms Yeltsin even sent his adviser Sergei Shahkari to Japan to study the possibility of ‘consolidating the ruling elite around a national revival and economic growth programme’. But as huge but weak empires they have depended on working political patronage and their links to the state.

The political patronage they have exercised has served to further weaken and destabilise the political system as client politicians and client media have vied to put the case for their ‘employers’ and stymie the plans of ‘their’ employers’ opponents. The most recent turn in the crisis, by weakening the underpinnings of the system even more appears to have only accentuated this pattern.

A second aspect of this fragmentation has been the split on a regional basis. Russia has 89 republics and regions, each of which has two representatives in the Federation Council (the leaders of the regional executives and legislative bodies). The strength of Russian regional leaders has grown over time. In 1995-1996 regional governors were elected and this gave them greater standing against the central government. Then as the federal government weakened economically and financially their effective power increased further. This was especially true of the handful of regions which concentrated raw material exports and which therefore acted as ‘donor’ regions paying into the national budget, but it also applied more widely, especially where regional forces could find some other lever against the central government. Whatever their background, regional politicians no longer saw themselves solely as agents of the same central institution but also as representatives of regional forces. The situation, which has intensified since, was well described in 1994 by one influential provincial Russian leader:

The centre, aspiring as before to the total control of the entire process of Russian existence, no longer possesses drive belts which would convey the impulses of its orders to the provinces. In the provinces, nothing at all remains of the archaic drive mechanism which existed in communist society. Rupture. Hiatus. The centre exists, the territories exist but effective connection between them is destroyed. [66]

It is this that underpins the fears that the fragmentation that has affected the old Soviet Union might affect the Russian Federation. There have been many regional threats to go it alone since the August crisis. This makes good politics in two senses. Firstly, manipulating, even inventing a ‘regional consciousness’ can help to consolidate political support. Prusak, the Niznyi Novgorod governor has said in these terms that ‘we are not reds or whites but Novgordians.’ Secondly, building up regional support can assist in putting pressure on the central government to win better conditions both for the region and the economic units based there. But to go beyond this towards a real fracturing of the state is an enormous step which at the moment is more talked about than real. Even if we leave aside the issue of the complexity of the bastard political forms and conflicts that this might bring there are two obvious difficulties. The first is that economically even the strong regions are less strong than they appear at first sight. The Tyumen oil region, for example, a major player given the concentration of so much oil wealth, has fractured internally. Although the oil interest has earned resources, it has done so on a basis of decline in production. Nizhni Novgorod has been widely advertised as a successful region. But this was a success which depended on foreign investment which, as we have seen, has been low overall. Moreover, it did not translate into the region having a markedly better system for the rest of its activity (for example, in the period where industrial production fell nationally by 55 percent, production in Nizhni Novgorod still fell by 50 percent) or in its pattern of government. This is the second crucial difficulty for regional leaders wanting to go it alone:

‘Unfortunately, even progressive regions share the problems of conservative regions. It is not possible to be prosperous alone in a country where there are problems’. [67]

It is not suprising, then, that Russia’s rulers do not know which way to turn. Even before the current crash, pessimistic commentators warned that ‘in just less than six years, the country has made the dizzying journey from a superpower to a province that exports raw material and consumes foreign goods’. Unless decline can be halted the conclusion of this analysis would be that ‘in the system of global distribution of world resources, Russia is with increasing confidence occupying the place ‘allotted’ it of a raw material appendage’. [68] At best this pessimism could be mitigated by the hope that uneven development would allow one or two areas and sectors to flourish in the midst of the remains of what was once a powerful state capitalism. In the depths of the crisis in August-September 1998 some even thought this option was not available: ‘As of the start of September there’s nothing to stabilise or reform. It’s back to square one,’ said one commentator. [69]

Every historian of revolution, whether Marxist or not, knows of Lenin’s famous definition of a revolutionary situation as one where the ruling class cannot rule in the old way and the exploited classes are not willing to go on being ruled in the old way. We have seen how the first of these components are clearly in place in Russia as a result of the intensification of the crisis. What is missing is the second.

The Crisis and the Working Class

The mass of the population have clearly been victims of the transition and it is not surprising that many look back nostalgically to the living standards that existed in what was once denounced as ‘the era of stagnation’. But this is quite different to looking at the old Soviet system as a golden age or a viable alternative and it is quite striking that opinion polls do not show the mass of people supporting this argument. It would therefore be very dangerous if the left in the West were to fall into this trap.

Firstly, the fact that workers instinctively saw through the argument that the old regime was ‘their’ regime was reflected in the fact that they did not lift a finger to defend it – indeed it was partly their protests that helped to encourage its dissolution. Secondly, as we have seen, even from the point of view of some of the more backward sections of Russia’s rulers there was no possibility of maintaining the old system as it was. To borrow an analogy – to a person on the verge of death the earlier stages of terminal illness look attractive but they are not viable places to which one can return. Thirdly, it was just this weakening of the old regime that gave Russian workers the confidence to begin to act for themselves for the first time for six decades. No longer in fear of automatic repression they have begun to reclaim a basic dignity. This was one of the reasons why the miners’ strikes of 1989 were so important. For the first time for six decades Russian workers were able to experience the simple dignity of being able to march together in columns, no longer as a ritual, but for themselves, ‘thousands of men still with coal dust under their eyes, in their pit helmets and working clothes’. [70]

This points to a fourth crucial point: the issue is not the ‘troubles’ that democracy brings but the lack of a real democracy, from the bottom up. The problem is the way in which the old rulers, with the connivance of their Western counterparts, have been able to hang onto power, however hamfistedly, and to milk the system for their own advantage. The way forward is not, therefore, back to some ‘golden age’ or in the direction of paternalistically welcoming some ‘good’ leader but to use the space that exists to build a real alternative from below. But while this is not difficult to see in abstract, in practice the difficulties are enormous both because of the legacy of ideological confusion left by the old order and the devastating impact of the worsening crisis.

A crisis on the scale of that which has wrecked Russia cannot fail to have a devastating effect on social relations. Mapping how this operates is not easy. The real incomes of those in and out of work have sharply fallen overall. The impact this has had on average consumption levels of foodstuffs is set out in Table 5.

































































However, wage differentials have also widened so that oil and gas workers now earn much more than, say, lowly paid teachers on 60-70 percent of the average wage. But even this can be misleading when workers are paid in kind or not paid at all for long periods (and then paid in money that has lost part of its value). According to one survey in early 1998, 75 percent of those interviewed had received their wages late in the previous year – 38 percent by 1 to 9 weeks; 19 percent by 9 to 12 weeks, 12 percent by 13 to 24 weeks, and 6 percent by more than 24 weeks. [72] But, however qualified, evidence of the way in which the experience of the mass of the population is permeated by the punishing impact of crisis is to be found in every statistical series. Horror stories abound of the tragedies of individual lives. This has had an enormously debilitating effect. But this has to be set alongside evidence of enormous resilience too, a resilience which is not properly reflected in the pictures shown in the Western press and on TV, of occasional demonstrations in Red Square of old fascists and Stalinists with their pictures of the Tsar and Stalin.

To try to bring some balance to this we can crudely divide popular responses into three kinds. Firstly, what we can call ‘opt out’; secondly, retreat into ‘defensive dependence’; and thirdly, and politically the most important, the guerrilla class war. These are not necessarily mutually exclusive categories. As circumstances change so people move between them and this gives rise to the possibility of greater social explosions as what Rob Ferguson has called ‘the bitter fury of broken hopes’ can turn outwards. [73]

Evidence of hopelessness that can lead people to ‘opt out’ can be found everywhere. The sense of uncertainty and lack of prospects is reflected in the collapse in the birth rate:

People are uncertain about tomorrow – the last thing they want to do is to have children, it is a function of education combined with bad living conditions. People live badly in Somalia too but they do not stop having babies. Education seems to contribute to despair and hopelessness. [74]

Perhaps more graphic still has been the increase in suicide rates across all sectors of the population, though even in the depths of hopelessnes, some attempt can be made to retain a semblance of dignity. For example, one 87 year old in the St Petersburg region, not having received her pension, wrote out a note listing how much she owed and asking forgiveness for her debts before she hanged herself. [75]

But the evidence of ‘opt out’ is there in a no less wretched a way in the resort to the bottle which has been a characteristic of the past few years and which has destroyed so many lives both directly and indirectly. Just as it was said of the poor in 19th century Manchester that their quickest way of escape was the bottle, so today throughout Russia people have turned to vodka on a massive scale. One of the perverse effects of the crisis, even as real wages fell, was to push down the relative price of vodka. In 1984 a bottle cost twice the price of a kilo of sausages – by 1994 it cost a half. Supply also expanded as small scale producers tried to enter what appeared a lucrative market. If annual per capita consumption measured in terms of pure alcohol fell from 14.2 litres in 1984 to 10.7 in 1987 (with the Gorbachev anti-alcohol campaign) then by 1993 it had risen to 14.5 litres. Soviet men on average are consuming between one fifth and one quarter of a litre of vodka a day but often in the form of more intense weekly binge sessions. The result has been a huge increase in deaths, especially amongst middle aged men, which are directly and indirectly attributable to alcohol. The resulting fall in male life expectancy has been ‘without parallel in the modern era’. Put another way, Russia now has ‘mortality rates comparable with India or Guatemala’. [76]

The second reaction, ‘defensive dependency,’ reflects the way in which the crisis has forced the mass of the population to rely on their closest family and friends to develop survival strategies. With huge levels of poverty, falling (and intermittently paid) real wages and savings destroyed by inflation it has been necessary to depend more heavily than ever on family and friendship networks. Although wages might not be paid some benefits such as food can continue to come through the workplace. Beyond this the garden plot, once notorious as a symbol of the inadequate Soviet standard of living, is now even more important than ever to providing basic foods. Some workers, especially the more skilled, find second jobs (usually at lower skill levels). Still others engage in informal economic activity from women sewing to men helping in building and so on – the kind of strategies used by the poor the world over. Those in work have to help those out of work or too old to work to eke out their lives, those paid some kind of wages have to help those whose wages are ‘delayed’. By the mid-1990s private transfers from those in work to those out of work were on one estimate taking up 40 percent of household income. [77]

Behind doors bolted against the world the family can come to seem a haven. Although the crisis has cut the marriage rate by nearly 40 percent between 1989 and 1996 it has not significantly increased the divorce rate, one of the clearest indications of this ‘defensive dependence’. Such dependence is also thought by some analysts to be apparent in other relationships: ‘It is widely believed that there has been an increasing commodification of sexual relations, with a tendency for the formation of temporary sexual relationships on the basis of a clear but implicit economic dependency of one partner on the other’. [78] But the capacity of the family to support one another is limited. A young working couple with depressed incomes can still help an aged parent, but a young working couple with several aged parents and children can mean abject conditions for all. And, of course, however much people may look to the family as a ‘haven’ the world cannot be bolted outside – it seeps in every way. UNICEF, for example, notes that in eastern Europe a similar pattern emerged but when some recovery began the divorce rate rose again suggesting, with some understatement, that ‘the tendency to preserve marriages may have been a rational response to economic hardships and not a reflection of stable and stress free family life: therefore, welfare shocks may have heightened the risk of child abuse in the family.’ To which we may add the risk of wife battering, grandparent battering and so on. [79]

At this point some observers have tried to extend this argument to suggest that this retreat into the personal has been paralleled by a retreat in the workplace where workers have gladly accepted alliances with their managers who, in trying to keep their plants afloat, appear to offer some defence against the crisis. Two US observers write that since the fall of Stalinism, the effect of greater labour market flexibility has been to increase working class dependency on management and that there still exists (although they see it as ‘highly unstable’) ‘an accommodation between workers and managers’. This, however, is a dangerously misleading argument. It builds on arguments made in the past about the former Soviet regime where some thought that management-worker links meant that there was no clear structural class antagonism in that system. Now it is implied that the same is true of the new system.

But this is false in a number of ways. In the first place unemployment is rising, and many workforces have been drastically cut, suggesting that managers are prepared to take ‘tough’ decisions. Secondly, it is important to distinguish between what we can call ‘a coincidence of interest’ and ‘dependence’ and ‘accommodation’. There is no doubt that on occasion managers and workers have tried to defend ‘their’ enterprises together, but there is nothing peculiarly Russian about this. This does not mean that structurally they have the same interests either in the long term or the short term. Were this the case it would be difficult to explain both the evidence of independent worker activity and management and local government opposition to it. It would also be difficult to explain the brutality that characterises managers’ reactions to attempts by workers to show independence. One Russian commentator likens conditions of trade union organisation in parts of the country to those in the United States before 1914, with unsympathetic local governments, local judiciaries and managements working together to sack workers and use violence and intimidation against those who persist in trying to organise. [80]

Contrary to those who emphasise dependence, there is ample evidence of widespread (and up to the time of writing) growing class conflict in Russia. More than this, it is clear that this conflict is occurring in a situation in which workers have few illusions left. Most notably the experience of Stalinism taught them that this offered no kind of life. Equally there is no evidence that workers are turning to the distorted remnants of that system in the Communist Party or its allies. Secondly, the last ten years has also taught that the market offers no solution and for the moment cannot even guarantee the most basic needs for the survival of Russian capitalism. Thirdly, the experience of transition has also ripped aside the credibility of Russia’s rulers and their institutions. This comes out in all the evidence of opinion polls as well as that of actual behaviour as Table 6 shows.







Private enterprise




Local government


Political parties




Trade unions


Privatisation funds










The actual number of recorded strikes is set out in Table 7, from which it is apparent that most strikes have been small scale and local. But they nevertheless exist, and while some of them have an edge of desperation as workers go on hunger strike for back pay others show more assertiveness. In May 1998 a wave of struggle over unpaid wages spilt over into railway blockages. This so called ‘railway war’ began on a small scale with miners taking action but soon attracted wider support in parts of Russia – including from teachers and other white collar workers. One account described these as ‘a French Revolution style grab your pitchfork and go random spasm of raw underclass anger’. But for some it was more than this – one telling poster read, ‘A hungry miner is fiercer than a Chechen’. [82]





per strike

days lost


days lost
per strike











































(first quarter)






The problem is that workers find it impossible at the moment to generalise from their struggles both in an ideological and an organisational sense. Ideologically, Stalinism broke any connection between the kind of activities that workers engage in on a day to day basis and the arguments of the socialist and revolutionary tradition about an alternative. At the same time organisationally it is proving immensely difficult for workers to sustain coherent organisation on a broad, long term basis. The larger trade union movement is part of the legacy of the state system. To survive it has had to take on some of the characteristics of more normal trade union work with its leaders oscillating like trade union bureaucrats of old. A smaller independent union movement also exists but neither organisation generates much confidence amongst workers, as is evident from the low opinion of them given to opinion poll questions. This helps to reinforce the localised and unorganised action but can also lead to it having a more explosive capacity to develop.

If building an alternative from below in Russia conceived in isolation may be a long and painful process, its progress may be accelerated by successful challenges to capitalism and the market elsewhere – challenges that can destroy the argument that socialism and Stalinism are automatically to be equated with one another. In the meantime this raises the alternative possibility that the solution to the crisis is some kind of coup.

Weimar Russia or What?

The apparent immediate future of Russia is indescribably grim. Output is falling, the value of the rouble has collapsed but yo-yos around its new lower level, inflation is likely to hit 400 to 500 percent by the end of the year, unemployment is growing, imports – including vital food imports – have been slashed, and Yeltsin is in semi-retirement after his failure to get the reappointment of the oil oligarch Chernomyrdin as prime minister. The new government instead is headed by Primakov, an old apparatchik, and Maslyukov, the former head of the Soviet central planning system, and Gerashchenko, the former head of the Soviet Central Bank, are now at the centre of economic policy. Even though they are very different people from a decade ago, it is a sign of the desperation that exists at the top that Primakov is asking for Western food aid as the threat of malnutrition becomes real for some sectors of the population.

To many commentators inside and outside Russia this raises the spectre of Weimar Germany. There too a weak democracy was hit by a catastrophic economic crisis and then overthrown as important sections of the ruling class, to save themselves, swung behind an authoritarian coup. [84] The analogy with Russia is obvious and it can be made closer. The oligarchs, for example, appear to have been distributing their favours widely in order to have a foot in all camps should they need to take refuge in one of them.

But for the moment what appears to exist in Russia is what we can call a ‘balance of weakness’, which makes such a resolution more difficult. This does not mean that individuals may not be tempted to try their luck and go it alone but it does mean that the risk of failure is high. In the first place, all of the political forces in Russia today are weak. There is no political party which has a mass base, no political movement with a coherent and organised base from which it could try to make a bid for power. [85] This throws the onus more on the army. But here too there is disarray.

Analysing the situation from afar it is difficult to judge the nature of the debate in the upper sections of the army. However, it is clear that demoralisation is rife. ‘The army is a mirror of the country as a whole,’ said one member of the Russian Committee of Soldiers’ Mothers (which tries to improve conditions of conscripts and opposed the war in Chechnya). ‘If there is no order in the country how can there be in the army?’ [86] Army numbers have been cut back from 2.8 million in 1992 to 1.7 million in 1996 and it was hoped to bring them down to 1.2 million by the end of 1998. This is a huge demobilisation. It occurs against a background of three effective defeats in the last decade – the retreat from Afghanistan, the loss of Eastern Europe and the humiliation in Chechnya. Chechnya should have been a way back for the army – a model military action in which it could demonstrate its power and that of the Russian state. ‘A couple of hours and one parachute regiment’ would be enough to bring the Chechens to heel, boasted the then defence minister, Marshall Grachev. In the event both conscript and elite forces crumbled against the Chechens and if Grozhny and other parts of Chechnya were left smoking ruins then it was still the Russian army that was humbled. Yeltsin could only extricate his forces with the assistance of a peace negotiated by his potential rival General Lebed. These humiliations were frontal attacks on army morale but it has also been drained away on a daily basis by the growing shortages of equipment, rations and housing. Discipline is often only held together by extreme brutality. Between January and September 1997 some 974 soldiers died, including 314 suicides. The draft is avoided on a mass scale – 30,000 were reported to have dodged the spring 1997 draft. Sometimes officers can act on their own. Some (perhaps most) generals embezzle funds or sell big pieces of equipment while the rank and file sell small pieces. Other officers have to take local initiatives to survive, like the 60 homeless army officersin early 1998 who stormed a new apartment block to seize accommodation for their families in Khimki near Moscow. But in general it seems as if senior commanders try to forge links with regional rulers who can help find employment for troops and keep some resources flowing to feed the rank and file when the centre fails. As the crisis intensified in the early summer of 1998 the newspaper Nezavismaya Gazeta taunted that ‘an army that gets fed dog food wouldn’t give the president a full bore rifle today to prevent any coup’. [87] But to actively assist in a coup would require confidence that someone can supply more than dog food – or at least more dog food.

Beyond this, any prospective coup leaders have to ask themselves the question – which way forward? It is not obvious that anyone at the top knows the answer to this question. The immediate thinking of some liberals is that the economic question had more or less to be abandoned in favour of a struggle to preserve a modicum of democracy until after the next presidential election when it might be possible to rework institutions with less discredited forces and to construct a recovery programme. But the economy will not wait.

The result is a paralysing confusion evident everywhere. The new government brings together changelings from the old order and newer reformers but, at the time of writing, it has neither a stable composition nor a stable programme. Its own difficulties are compounded by the confusion at the global level. The IMF, which has both a general responsibility for the crash in the sense of its encouragement of the leap to the market and a particular responsibility in the way it encouraged the development of the short term bond market built round the ill fated GKOs, continues to chant its market mantra to the extent of insisting that ‘free market’ financial stabilisation is the only way to general stability. A government presiding over a people, part of which faces starvation, is instructed to cut expenditure and to raise taxes, even if it means more unemployment and the closure of much of the rest of Russian industry. Then, it is said, the magic will work and prepare the way for the next boom. But every time this step has been tried it has hit opposition from above as well as fears from below. And the famed world economy, the agent of salvation, is clearly now not exporting growth, but crisis. Not surprisingly, other voices attack these policies. One UN economist, Robert McIntyre, a UN based economist, trenchantly argued before the crash:

Russia’s problem isn’t that it doesn’t bring in enough revenues to meet its obligations. Its problem is that it doesn’t have enough cash to deal with all its financial market obligations. That’s why the IMF has emphasised tax collection ... The IMF bailout was really a subsidy for the oligarchs, for the Russian banks, and for the investors in the financial markets. And it was undertaken in a way that only made real economic problems worse ... [The tax issue] is a false issue. Focusing on tax collection only provides an excuse to continue reneging on the responsibility to confront real problems. [88]

Since then other establishment voices have been raised arguing that Russia must ‘put bread before theory’. [89] But how to do this is equally unclear because it is one thing to introduce controls in an economy that is failing, as in Asia, and quite another in one that is as wrecked as Russia. The current oscillation in policy will undoubtedly be a swing towards the state but this is likely to be just as incoherent and problematic as the swing to the market.

Predicting how this will be resolved is difficult. Certainly financially it appears inevitable that things will get worse before they get better. If the government cannot find a way out then the chances of further instability and fragmentation are high. If the situation remains too uncertain for a coup then an alternative is further fragmentation of Russia, not so much in terms of an explicit break up, but the development of stronger and politically erratic regional leaders.

To preserve something in this situation, much will depend on ordinary Russians fighting battles to preserve their standard of living and the minimal freedoms that they have gained since the collapse of the old Soviet Union. As we have seen, these fights are mainly local at the moment. But Russian workers have a history of revolt in which they have shown that they can move very quickly from conservative positions to much more radical ones even in very difficult circumstances. It would be a mistake to believe that in the absence of an organised nucleus of people arguing for an alternative from below that cannot not happen again.


1. J. Meek, Yeltsin Ready for the Worst, The Guardian, 25 September 1998.

2. R. Layard and J. Parker, The Coming Russian Boom (New York 1996).

3. D.N. Jensen, How Russia is Ruled – 1998, 1 June 1998 (updated 28 August 1998), Radio Free Europe/Radio Liberty (Prague, Czech Republic);,,, accessed 8 September 1998. Earlier examples of expert incomprehension include this gem from a standard academic text, Richard Sakwa’s Soviet Politics: An Introduction (London and New York, 1990), p. 59: ‘Stalinism can be seen as a distinctive mutation of the Soviet system, neither inevitable nor immutable, but not necessarily avoidable either.’

4. See, for example, P. Rutland, The Politics of Economic Stagnation in the Soviet Union: The Role of Local Party Organs in Economic Management (Cambridge 1993), pp. 3–7; R. Karklins, Explaining Regime Change in the Soviet Union, Europe-Asia Studies, vol. 46 no. 1 (1994), pp. 29–32, 42–43.

5. A. Callinicos, The Revenge of History: Marxism and the East European Revolutions (Cambridge, 1992), p. 57; see also T. Cliff, Russia: A Marxist Analyis (London 1970).

6. R. Sakwa, op. cit., pp. 47, 59.

7. Ibid., p. 54.

8. P. Rutland, op. cit., pp. 25–26.

9. Ibid., pp. 197–205; T. Gustafson, Crisis Amid Plenty: The Politics of Soviet Energy Under Brezhnev and Gorbachev (Princeton 1989), pp. 305–306.

10. Quoted in P. Rutland, op. cit., p. 94.

11. See J. Winiecki, The Distorted World of Soviet-Type Economies (London 1988). This is a free market attack on the Soviet system but contains a mass of interesting information.

12. The Economist, 8 April 1995.

13. Stockholm International Peace Research Institute, Handbook 1997.

14. S. Machold, Russia and the World Economy, Centre for Russian and East European Studies Working Paper No. 5 (University of Wolverhampton 1998).

15. OECD Economic Surveys, Russian Federation 1997 (Paris 1998), p. 224.

16. A. Auslund, Systemic Change and Stabilisation in Russia (London 1993), p. 9.

17. For a detailed discussion of the estimates of the scale of the problem and the different mechanisms through which capital has flowed abroad, see V. Tikhomirov, Capital Flight from Post-Soviet Russia, Europe-Asia Studies, vol. 49 no. 4 (1997), pp. 591–615; L. Abalkin, Begstvo kapitala: priroda, formui, metodui bor’bui, Voprosy ekonomiki, no. 7, iyul’ 1998.

18. J. Stiglitz, That Elusive Blueprint for Debt Relief, The Guardian, 8 May 1998.

19. For figures for Western Europe, see R. Barrell and N. Pain, The Growth of Foreign Direct Investment in Europe, National Institute Economic Review, no. 160 (1997).

20. OECD Economic Surveys, Russian Federation 1997 (Paris 1998), pp. 126–127.

21. By 1998 the EBRD had made loans to the value of £2.78 billion to Russia but had only distributed £950 million, of which £350 million had gone to the banks and £170 to gas and oil; Sunday Business, 6 September 1998.

22. Financial Times, 9 April 1997.

23. S. Machold, op. cit.

24. Financial Times, 1 November 1996.

25. The Economist, 8 April 1995.

26. OECD, World Economic Outlook, no. 62, December 1997, p. 138.

27. Quoted in C. Mellow, Clash of the Titans, The Banker, September 1997, p. 83.

28. Moscow’s Group of Seven, Financial Times, 1 November 1996. For a brief discussion of this self-proclaimed ‘oligarchy,’ see G. Herd, Robbing Russia?, The World Today, April 1998, pp. 93–94.

29. As might be expected, some of the clearest accounts of the financial sleaze are to be found in financial magazines. See, in English, C. Mellow, Rise of the Banker Clans, The Banker, April 1997; and the same author’s Clash of the Titans, op. cit. For a more academic account, see J. Johnson, Russia’s Emerging Financial-Industrial Groups, Post-Soviet Affairs, vol. 13 no. 4 (1997), pp. 333–365.

30. Financial Times, 15 April 1998.

31. Ibid.

32. S. Aututsionek, Barter v rossiiskoi promuishlennosti, Voprosy ekonomiki, no. 2, fevral’ 1998.

33. Financial Times, 15 April 1998.

34. See Russian Economic Trends, no. 1 (1997).

35. Financial Times, 15 April 1998.

36. The Observer, 31 May 1998. Piontowski was then director of the Strategic Studies Centre, Moscow.

37. Supporters of the transition put themselves in a contradictory situation since they simultaneously want to argue that (a) the crisis is not as bad as is made out because the statistics overstate it, and (b) too many inefficient plants are being maintained and therefore more output decline is needed! Livshits, Yeltsin’s economic adviser, said that the spring 1998 Birmingham G8 meeting told him, ‘We rate your programme very highly, but we’d rate it still higher if you’d just bankrupt something for once’; The Observer, 31 May 1998. In fact arguments for proposition (a) were often based on a priori reasoning and anecdote whereas a growing amount of research into measurement problems and the transition does suggest that the quoted figures are of the right order of magnitude. See, for example, D.K. Rosati, Output Decline During the Transition from Plan to Market: a Reconsideration, The Economics of the Transition, vol. 2 no. 4, December 1994, pp. 419–441.

38. UN, Economic Bulletin for Europe, vol. 49 (1997); Wirtschaftslage und Reformprozesse in Mittel- und Osteurope, Sammelband 1998 (Berlin).

39. This comparison was first made by a Russian economist, Andrei Illarionov. We are grateful to Mr Illarionov for confirming the details of the point with us. For comparison it should be noted that the GDP fall in the US between 1929 and 1933 was 30.5 percent.

40. The Economist, 22 August 1998; B. Kagarlitsky, Dr Kagarlitsky Goes to Washington, Focus on Trade, no. 29, September 1998.

41. OECD, World Economic Outlook, no. 63, June 1998, p. 149.

42. N. Ivashchenko and I. Savchenko, Restructuring the Russian Economy: Problems and Tendencies, Centre for Economic Reform and Transformation Discussion Paper No. 97/24 (Herriot-Watt University, 1997), p. 8.

43. See M. Haynes, Eastern European Transition: Some Practical and Theoretical Problems, Economic and Political Weekly, vol. xxxi, no. 8, 24 February 1996, pp. 467–482, for an elaboration of some of these points in a the wider context of the East European transition.

44. Contemporary data: Russian Economic Trends; historical data: R. Clarke, Soviet Economic Facts 1917–1970 (London 1972). The historical data is affected by boundary changes.

45. S. Heldund and N. Sundstrom, The Russian Economy After Systemic Change, Europe-Asia Studies, vol. 48 no. 6 (1996), p. 902.

46. OECD Economic Surveys, Russian Federation 1997 (Paris 1998), pp. 136–138, 246.

47. Ibid., p. 38.

48. Data from UNICEF, Education for All? The MONEE Regional Monitoring Report, no. 5 (Florence 1998).

49. UNICEF Poverty, Children and Policy: Responses for a Brighter Future, Regional Monitoring Report, No. 3 (Florence 1995); Children at Risk in Central and Eastern Europe: Perils and Promises, No. 4 (Florence 1997); UNICEF, Education for All?, op. cit.

50. We have calculated these demographic losses by extrapolating the excess death estimate quoted by UNICEF in its 1995 report (p. 25) to the data contained in its 1998 report. The actual number of excess-deaths/reduced-births over 1989 levels is actually higher than these figures, but the estimating procedure makes allowance for the changing demographic structure that would have affected birth and death rates irrespective of the transition.

51. O. Kryshtanovskaya, Finansovaya oligarkhiya v rossii, Izvestiya, 10 January 1996; Transformation of the Old Nomenklatura into a New Russian Elite, Obshchestvehnye nauki i sovremennost’, no. 1 (1995), translated in Russian Social Science Review, no. 4 vol. 37 (July–August 1996), pp. 18–40.

52. G. Helf, All the Russias: Center, Core and Periphery in Soviet and Post-Soviet Russia (doctoral dissertation, University of California at Berkeley, 1994), p. 75.

53. This may have been the implicit intention. Formally the reformers, led by Chubias, agreed with Yeltsin that ‘we need millions of owners, not a small group of millionaires’. But the real agenda was a concentrated capitalist class, although not one necessarily made up of the old leaders. See Appel, Voucher Privatisation in Russia: Structural Consequences and Mass Response into the Second Period of Reform, Europe-Asia Studies, vol. 49 no. 8 (1997), for a discussion of the real strategy behind the rhetoric of the Chubias team.

54. V. Kryukov and A. Moe, The Changing Role of Banks in the Russian Oil Sector (London 1998), pp. 22–41.

55. Ibid., pp. 27, 31.

56. P. Glatter, Tyumen: The West Siberian Oil and Gas Province (Royal Institute of International Affairs Russia and Eurasia Programme Special Briefing, London, February 1997), p. 5.

57. V. Kryukov and A. Moe, op. cit., p. 37.

58. O. Kryshtanovskaya and S. White, From Soviet Nomenklatura to Russian Elite, Europe-Asia Studies, vol. 48 no. 5 (1996), p. 729; J. Hughes, Sub-National Elites and Post-Communist Transformation in Russia: A Reply to Kryshtanovskaya and White, Europe-Asia Studies, vol. 49 no. 6 (1997), pp. 1017–1036.

59. Among those who have drawn attention in passing to this phenomenon are P. Hanson, Regions, Local Power and Economic Change in Russia (London 1994), p. 15; and D.N. Jensen, How Russia Is Ruled – 1998 (see Note 3).

60. Y. Burtin, Emancipating the Apparat, Moscow News, 6–12 May 1998, p. 6.

61. O. Kryshtanovskaya, Illegal Structures in Russia (1995), translated in Russian Social Science Review, no. 6 vol. 37 (November–December 1996), p. 45.

62. V. Kryukov and A. Moe, The Changing Role of the Banks in the Russian Oil Sector (London 1998), pp. 42–43.

63. O. Kryshtanovskaya, Illegal Structures in Russia, op. cit..

64. Sergei Kovalev, a leading Russian human rights activist, said, ‘We turned out to be too exhausted, too broken and disillusioned, to shake Moscow with a 500,000 strong demonstration in the first days of the Chechen adventure as we did in January 1991 after events in Vilnius ... but we turned out to be sufficiently sober not to allow ourselves to be deceived by the government’, New York Review of Books, June 1997.

65. B. Silverman and M. Yanowitch, New Rich, New Poor, New Russia: Winners and Losers on the Russian Road to Capitalism (New York 1997), pp. 29, 90–91.

66. L. Polezhaev, Vpered, na medlennykh tormozakh (Moscow 1994), pp. 61–62.

67. Financial Times, 9 April 1997.

68. Y. Ryazhsky, Chernomyrdin’s Ears, Moskovsky Komsomolets, 28 May 1997, p. 2, translated in Johnson’s Russian List, 30 May 1997.

69. The Guardian, 9 September 1998.

70. R. Ferguson, Will Democracy Strike Back? Workers and Politics in the Kuzbass, European-Asia Studies, vol. 50 no. 3 (1998), pp. 445–468. The argument of this section has benefited from an opportunity to discuss the first hand research in Siberia on which this is based without implying his responsibility for the use we make of it.

71. Russian Economic Trends, no. 1 (1997), p. 81.

72. Centre for Policy Studies, University of Strathclyde, New Russian Barometer: Getting Things Done With Social Capital, vol. vii (1998). Based on 2,000 interviews, February–March 1998.

73. R. Ferguson, op. cit.

74. Quoted in the British Medical Journal, vol. 313, 17 August 1996.

75. Isvestiya, 9 September 1998.

76. M. Ryan, Alcoholism and Rising Mortality in the Russian Federation, British Medical Journal, vol. 310, 11 March 1995; US National Research Council, Premature Deaths in the New Independent States, 1997; D. Leon et al., Huge Variation in Russian Mortality Rates 1984–1994: Artefact, Alcohol or What?, Lancet, vol. 350, 9 August 1997; A Vishnevskii, Demograficheskii potentsial rossii, Voprosy ekonomiki, no. 5, mai 1998.

77. B. Silverman and M. Yanowitch, op. cit., p. 23.

78. Lancet, vol. 350, 19 July 1997, p. 213.

79. UNICEF, Children at Risk in Central and Eastern Europe: Perils and Promises, No. 4 (Florence 1997), p. 13; see also L. Verikanova, Women Are Being Beaten, translated in Russian Social Science Review, vol. 37 no. 5, September–October 1996, pp. 17–24. One indicator of this is that child abandonment has become more common and there has been a 70 percent increase in the number of children institutionalised as well as a huge rise in numbers of Russian street children.

80. L. Alekseeva, Unfree Trade Unions, Moscow News, 15–22 January 1995. For a horrific account of mining conditons which supports this, see M. Tiabbi, Life in Hell, The Moscow Exile, no. 42, 2–15 July 1998,

81. Centre for Policy Studies, University of Strathclyde, op. cit.

82. On the railway war see RFE/RL Newsline passim; The Moscow Exile, 4–18 June 1998. Readers with access to the internet should check the ‘Pay Us Our Wages’ website maintained by the International Federation of Chemical, Energy, Mine and General Workers’ Unions which maintains a list of the bigger industrial actions as well as providing much other useful information.

83. Russian Economic Trends, no. 3 (1997), p. 99; no. 2 (1998), p. 78.

84. For an academic discussion, see S.E. Hanson and J.S. Kopstein, The Weimar/Russia Comparison, Post-Soviet Affairs, vol. 13 no. 3 (1997).

85. Dave Crouch, The Crisis in Russia and the Rise of the Right, International Socialism 66 (1995).

86. Quoted in The Guardian, 28 October 1996.

87. Nezavismaya Gazeta, 11 July 1998, quoted in The Guardian, 13 July 1998.

88. Quoted in M. Taibbi, Exposing the Russian Tax Revenue Myth, The Moscow Exile, no. 45, 13–26 August 1998.

89. M. Desai, Russia Must Put Bread Before Theory, The Guardian, 21 September 1998.

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