Russia at the End of
Yel’tsin’s Presidency1
George Breslauer, Josef Brada, Clifford G. Gaddy, Richard
Ericson, Carol Saivetz, and Victor Winston (moderator)2
EVALUATING YEL’TSIN AS LEADER3
oris Yel’tsin’s sudden resignation as president of Russia on December
31, 1999 provides a fitting moment to look back on his performance
and legacy as a leader. Such an evaluation must, at minimum, distinguish
two stages: 1987–1991 and 1991–1999.
During 1987–1991, Boris Yel’tsin established himself as the hero of the
anti-communist opposition to Soviet rule. After his overwhelming electoral victories of March 1989 and June 1991, followed by his facing down
of the coup plotters in August 1991, his authority at home and abroad had
become legendary. He had evolved into a charismatic leader of almost
mythic proportions, especially among those who had assumed that the
Soviet and communist control structures were unassailable. Thus, as an
oppositional leader, Yel’tsin is likely to go down in history as a uniquely
courageous and effective figure who managed to prevail against seemingly
overwhelming odds. His “resurrection” after being purged by the communist party apparatus in 1987 was a product of extraordinary political will,
intuition, and an uncanny ability to sense and shape the mood of the
masses. Moreover, his success during 1990–1991 in decoupling the concept
B
1
Based on presentations at a panel discussion (“Eight Years Since the End of the USSR”) held
at the annual convention of the American Association for the Advancement of Slavic Studies,
St. Louis, Missouri, November 20, 1999. The panel was organized to honor the memory of Ed
Hewett, founding editor of this journal, who served under President George Bush as Special
Advisor to the President on Soviet and East European Affairs in the National Security Council
from January 1989 until Hewett’s untimely death in January 1993. Presentations were
updated at the end of 1999.
2
Respectively, Professor of Political Science, University of California at Berkeley; Professor of
Economics, Arizona State University; Senior Fellow, The Brookings Institution; Professor of
Economics, Columbia University; Research Associate, The Davis Center for Russian Studies,
Harvard University, and Executive Director, AAASS; and Member, Board of Directors:
AAASS and PlanEcon, Inc.
3
By George Breslauer.
1
Post-Soviet Affairs, 2000, 16, 1, pp. 1–32.
Copyright  2000 by V. H. Winston & Son, Inc. All rights reserved.
2
BRESLAUER ET AL.
of “Russian” from that of “Soviet” was both intellectually and politically
inspired, as was his insistence in March 1991 that Russia choose a president
by popular election for the first time in its thousand-year history. Yel’tsin
was a revolutionary hero who achieved what he did through his extraordinary personal traits. Nothing that has happened since then is likely to
alter this evaluation. Controversy is likely to be based largely on normative
grounds, with those who approve of Yel’tsin’s role in destroying the
communist and Soviet systems acclaiming his leadership and those who
disapprove of these ends censuring him accordingly. But neither side
would contest the observation, which is value-neutral, that Yel’tsin was an
“event-making man.”
Yel’tsin’s enfeebled and erratic performance during 1997–1999, coupled with the Russian financial collapse of August–September 1998, threatens both to dilute the memory of his heroic leadership of 1987–1991 and to
saddle his presidency of Russia with a negative evaluation of his effectiveness as leader.4 This would be a premature conclusion. If leadership
evaluation were based principally on performance near or at the end of
their years in office, both Winston Churchill and Charles DeGaulle would
have gone down in history as failures. Evaluation of Yel’tsin’s leadership
as president of Russia, it seems to me, must encompass the full range of his
contributions and shortcomings during those years. To be sure, the endpoint is significant. If the endpoint reflects or portends a reversal of the
major projects initiated by the leader during his years in power, then his
leadership may be treated as a failure, for he failed to create the conditions
for sustaining progress, as he defined it, over the longer term. But if the
projects he sponsored survive the later travails (as did, for example,
DeGaulle’s Fifth French Republic), and project-survival can plausibly be
shown to have been a product of conditions created by the leader in
question, then a positive evaluation of his leadership effectiveness, measured according to the goals he was trying to achieve, can survive the
travails of his last years in office.
In the case of Yel’tsin, this means, first of all, that his oppositional role
of the 1980s—like Churchill’s wartime leadership of Great Britain—can be
judged independently of later events. It is an accomplished feat, capable of
being assessed on its own terms. With respect to Yel’tsin’s presidency,
however, it is too early to render the general verdict, for we do not know
whether the current travails will destroy or reverse the major projects of
his presidency. Leadership evaluation usually requires a measure of historical perspective on the longevity, survivability, and opportunity costs of
projects. As Dean Acheson put it: “Sometimes it is only in retrospect and
in the light of how things work out that you can distinguish stubbornness
4
I distinguish between desirability and effectiveness and here emphasize the latter, which is
non-normative. One may hate what Yel’tsin has tried to do, but still give him high marks for
effectiveness in accomplishing his goals. Or one may endorse his goals but give him low
marks for effectiveness. (There are, of course, two more possible combinations in this 2x2
matrix.)
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
3
from determination.”5 Only extremely progressive or reactionary outcomes in the relatively near term would allow us to make the strong case
for a positive or negative evaluation of Yel’tsin’s effectiveness as leader. For
example, if, within that time frame, the country dissolves into anarchy, civil
war, military coup, or fascist reaction, the historical evaluation of Yel’tsin’s
presidency will be an incontrovertibly negative one—except among those
who argue on faith that he was in an impossible situation, and that nothing
he did could have averted the eventual outcome.
Or, if we posit another extreme, but this time opposite, outcome, we
encounter the same methodology for leadership evaluation. Thus, if Russian policymakers manage to transcend the current crisis, and succeed in
stabilizing the country and in maintaining the commitment to build some
some form of capitalist democracy in the coming decade, the historical
evaluation of Yel’tsin may be a positive one. He might be credited with
having pursued policies that, whatever their costs and imperfections: (1)
prevented communist restoration, social anarchy, fascist reaction, or territorial disintegration of the Russian Federation during his years in power;
(2) founded a new political and economic order, based on liberal nationalism, civil liberties, electoralism, and some form of capitalism; and (3)
assisted the integration of Russia into Western international organizations.
Since we know that Yel’tsin’s policies of 1992–1999 were driven largely by
these goals, were this outcome to be attained within the next ten years it
would be hard to dissociate it from the policies intentionally pursued by
Yel’tsin. Given the timing of the outcome, it would also be hard to make
the case that it was attained in spite of Yel’tsin: that Yel’tsin made a mess
of the situation, that his successors righted the course, and that Boris
Nikolaevich deserves no credit for the historic accomplishment. Nor would
the opposite argument be plausible: that Yel’tsin deserved no credit for the
outcome because it was inevitable regardless of the policies pursued during
1992–1999. The conditions in Russia in 1991 were fluid, but they were
hardly propitious for the easy construction of either a market economy or
a stable democracy. More plausible would be the counterfactual claim that
Yel’tsin could have achieved what he did at much lower cost, a conclusion
that seems almost self-evident in the wake of the financial collapse of 1998
and in light of the long shadow cast by the wars in Chechnya.
But what if, as seems more probable than the “happy” outcome, in 10
years the verdict is not yet clear and neither of the extreme outcomes is
within sight? What if Russia continues to stumble along, neither stable nor
in revolution, neither a consolidating democracy nor a repressive authoritarianism, neither a market economy nor a command economy? What if it
continues down the path of slow, steady decay, sometimes called “Ottomanization” or “feudalization,” but without secession, civil war, or systemic breakdown? Under such circumstances, the continuity between
Yel’tsin’s apparent legacy and the observable “outcome” (such as it is) will
5
Quoted by Marshall D. Shulman in The New York Times Book Review (June 17, 1990, p. 5).
4
BRESLAUER ET AL.
be stark, and will justify the claim that Yel’tsin is causally responsible for
the consequences. And then, the difference between the outcome and the
goals Yel’tsin was pursuing during his presidency will warrant the conclusion that his presidency was less than successful.
This approach to the question of historical causality treats the current
situation as a product of contingent policy choices made by Boris Yel’tsin
and his governments during 1991–1998. Without denying the reality of
manifold constraints facing Yel’tsin (cultural, economic, administrative,
political, social, and international), this argument claims that the constraints were not determinant of the outcome. That is, opportunities were
missed to relieve some of these constraints and to alter the trajectory of
Russian development. I endorse this perspective, both because I see the
Ottomanization scenario as the most likely and because I see the current
state of affairs as having been avoidable to some extent.
Thus, according to this argument, a corrupt, “weak” state might have
been difficult to avoid, given the initial conditions. But the scope and depth
of political corruption, administrative fragmentation and criminalization,
and the present-day “virtual economy” (Gaddy and Ickes, 1998) were
products of policy choices made in 1992–1995. These included the particular strategy of macroeconomic stabilization; the privatization programs
of 1992 and 1994; the “loans for shares” program of 1995; and the growing
encouragement or toleration over time of large-scale embezzlement of state
assets. Similarly, the fragility of democratic institutions might have been a
product of the “dual power” built into the constitution in force in 1991,
exacerbated by the disorientation and political conflict engendered by
Russia’s loss of her empire and global role. But the political meltdown of
1998–1999 was a product of choices about party-building and state-building made in fall 1991 (and reaffirmed in 1993) and choices about constitutional design made in 1993–1994, both of which derived from Yel’tsin’s
strong preference for avoiding institutionalized constraints on his power.
Limited adherence to “rule of law,” and spotty protection of the population
from physical insecurity, might have been inherent in the early stages of
any transition following the collapse of a state, but the minuscule progress
in building legal and judicial institutions, and the extent of police withdrawal from law-enforcement, were products of decisions made in 1992
and of a continuous lack of priority given to legal-institutional development. Civil society might have been weak in any case, but policy choices
intentionally deprived society of the resources needed for self-organization.
Pushing further with this line of argumentation: persistent defiance of
central authority by the government of Chechnya might have been the bane
of any Kremlin leader. But the costs and consequences of the wars against
Chechen secession were products of policy choices made by Yel’tsin in
1994–1995 and again in 1999. Dependence on international assistance
would have been a condition faced by any Russian government. But the
willingness to accept the prescriptions of the International Monetary Fund
was a decision made by Yel’tsin and his cabinet, and their corrupt use of
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
5
those funds was a product of internal circumstances over which they had
some control. Moreover, given the fears in Western capitals of “losing
Russia,” it is implausible to claim that the rich democracies would have
abandoned Russia to her fate had Moscow adopted a different strategy of
economic stabilization, marketization, and privatization. In all, according
to these arguments, given the legacy bequeathed to her, Russia might have
been in difficult circumstances regardless of the policies chosen during
1992–1999. But with different policies, she might not have been in such dire
straits, and her prospects for recovery would have been stronger.
Had Yel’tsin done things differently in many realms of policy, we
would have been better positioned to assess the resilience or malleability
of cultural, institutional, circumstantial, and international constraints on
change. But, typically, many of Yel’tsin’s initiatives acquiesced in or exacerbated the situation he inherited. Hence, we cannot say with confidence
just how much would have been different had Yel’tsin acted differently. But
it seems safe to argue that many of his general goals could have been
advanced at a lower cost—in some cases, perhaps a much lower cost. Put
differently, Yel’tsin was not simply a victim of circumstances; he had
opportunities to do things differently. He missed them.
Indeed, it was Yel’tsin himself who rendered precisely this verdict on
his leadership of Russia. Announcing his resignation on December 31, 1999,
he averred:
I want to ask you for forgiveness, because many of our hopes have
not come true, because what we thought would be easy turned out
to be painfully difficult. I ask you to forgive me for not fulfilling
some hopes of those people who believed that we would be able
to jump from the grey, stagnating, totalitarian past into a bright,
rich, and civilised future in one go.
I myself believed in this. But it could not be done in one fell
swoop. In some respects I was too naive. Some of the problems
were too complex. We struggled on through mistakes and failures
(BBC and Reuters, December 31, 1999).
The man who had helped to destroy Gorbachev politically by accusing him
of “half-measures,” and of trying to “leap across a chasm in two steps,” left
office admitting that one could not bridge that chasm “in one fell swoop.”
While Yel’tsin destroyed the communist and imperial systems, and
perhaps prevented their restoration now or in the future, the alternative
system that he created is very far from the ideal of market democracy that
he touted in his speeches. Indeed, Yel’tsin destroyed Leninism but then
went on to discredit in the eyes of Russian voters the practice of “real
existing liberalism.” Having helped to destroy Leninist institutions and
“socialist” ideology, but having helped, willy-nilly, to discredit liberalism,
Yel’tsin may have opened the door to an alternative ideology of reaction:
nationalism. The first speeches of Acting President Vladimir Putin seem to
6
BRESLAUER ET AL.
indicate as much, though we should bear in mind that “reaction” is not the
same as “restoration.”
In sum, Yel’tsin was a brilliant revolutionary leader in 1987–1991.
Thereafter, he was successful in some policy areas, unsuccessful in others.
He squandered his accumulated authority, but proved to be intuitively
exceptional in keeping would-be opponents off-balance and maintaining
his grip on power. If things improve in Russia, he may yet be credited with
greater accomplishment than he is currently credited with, though he
would not likely be voted “Man of the Decade.”6 If things go haywire,
however, he is likely to be condemned for having created a fragile, unsustainable system at exorbitant cost.
THE RUSSIAN ECONOMY THROUGH
THE LENS OF FOREIGN TRADE7
In Medieval times, people believed that the eyes were a window on
the soul and that a person’s true character could be discerned by looking
into them. In many ways, a country’s foreign economic relations are also a
way of seeing into the workings of the domestic economy that may be truer
or more revealing than the view that can be obtained from focusing on the
domestic economy. Here I try to draw some insights about the progress of
transition in Russia by examining Russian foreign economic relations.
That such an approach to understanding Russia’s economy is worth
attempting some ten years after the fall of communism is both revealing
and ironic. It is revealing in that it immediately demonstrates that the
workings and performance of Russia’s economy are hardly transparent. It
is ironic in that most observers expected that one of the consequences of
the demise of the communist regime would be the end to the secrecy that
had shrouded Soviet economic performance and the workings of the Soviet
economy. In fact, much the opposite has occurred. During the Soviet
period, Western scholars and government analysts devoted considerable
effort to recalculating Soviet output, government budgets, and military
expenditures, largely by means of painstaking and sophisticated adjustments to Soviet price indices and by corrections for various index number
biases inherent in Soviet statistical practice. Now the Russian statistical
authorities routinely adjust measured GDP by as much as 20 percent to
account for unobserved output, and no one even takes notice. Other
statistics on the domestic economy and the government budget are equally
suspect, yet neither Western scholars nor government analysts seem to care
much about this.
Much the same can be said about the workings of the economy. In
Soviet times, considerable effort went into discovering how economic
plans were constructed, how policy was set, and how ministries and
6
7
This is the accolade bestowed on him by whoever wrote the title for Aron (2000, pp. 13–15).
By Josef C. Brada.
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
7
enterprise managers worked together or against each other to translate
these plans into economic outcomes. Now the workings of the economy
are much less penetrable. How the informal economy functions is only
episodically understood. Nor do we understand very well the objectives
and power of the oligarchs who own much of Russia’s industry and natural
resources. While government pronouncements regarding the economy do
garner attention among Western analysts, the real influence of the government on the economy, if any, is unclear. Indeed, one popular view of the
Russian economy envisions a ”virtual economy” whose key parameters
are “illusory” and that is based on unnatural collusion among households,
the government, and firms (Gaddy and Ickes, 1998).
Commodity Trade
Commodity trade is relatively easy to track, and it can provide considerable insight into domestic demand, incomes, and production as well as
into a country’s international competitiveness.8 During the 1990s, Russia’s
exports to non-CIS countries grew from $47 billion in 1991 to $71 billion in
1996 and then slumped to $58 billion in 1998. The devaluation of the ruble
was of little help and the slide continued in 1999, further evidence of the
unresponsiveness of Russian firms to profit opportunities abroad (United
Nations, 1999, pp. 218–220). Admittedly, part of the decline in export
earnings was due to the fall in the world prices of oil and raw materials in
the late 1990s, and the reversal of this deflationary trend should boost
Russian export earnings in the future. The slow growth of Russian exports
should also be viewed in light of the fact that neither the long-term
contracts for selling natural gas and other energy carriers nor the infrastructure for bringing them to market provided much room for maneuver.
This said, when compared to the performance of the East European
transition economies, whose exports increased from $57 billion to $117
billion over the same period, Russia’s export growth of 3 percent per year
in the 1990s reflects a very significant failure on the part of the Russian
economy to develop some competitive advantage in sectors other than
energy and raw materials. Indeed, as Table 1 shows, the dependence of the
Russian economy on exports of fuels and raw materials actually increased
over the decade. Significantly, this growing dependence was evident even
in the second half of the decade, when energy prices were falling. Poor
export performance by Russian manufacturing firms in the early 1990s
might have been consistent with the effects of supply disruptions caused
by the collapse of the CMEA and the move from plan to market. However,
the continued decline of manufacturing as a share of exports, coupled with
8
Due to space limitations, I will not deal with intra-CIS trade. Suffice it to say that this trade
has fallen considerably in the 1990s, more so in the case of Russian imports than of exports,
and that the subsidy element that was such a large part of inter-regional trade in the USSR
has been reduced over time (Krasnov and Brada, 1997) . For a survey of intra-CIS trade, see
Michalopoulos and Tarr (1994).
8
BRESLAUER ET AL.
Table 1. Commodity Composition of Russian Non-CIS
Imports and Exports (percent)a
Imports
Commodity
1994
Exports
1998
1994
1998
Agricultural products
13.4
13.7
1.2
1.1
Food, beverages, tobacco
17.0
14.5
0.6
0.2
43.2
Mineral products
2.9
2.4
41.5
Chemical/allied products
8.8
12.2
7.3
7.7
Textiles/textile articles
5.3
2.3
1.8
1.0
Precious metals/stones
0.1
0.0
12.7
3.2
Base metals & articles
3.9
4.3
20.8
26.5
Machinery & equipment
27.6
23.1
2.9
3.6
Vehicles, transport equip.
4.7
10.8
3.3
4.8
Precision/optical equip.
5.4
4.3
0.2
0.6
Arms & ammunition
0.0
0.0
0.9
0.3
10.8
12.0
6.6
7.7
NES
a
From United Nations (1999, p. 157).
the stagnation of total exports, indicates quite clearly that Russian producers have not changed the quality and technical level of their products in a
way that would make them competitive on world markets; nor has the
majority of them come to see exporting as a viable way of generating the
revenues they need to survive. In sum, Russia’s export performance paints
a picture of an economy plagued by inadequate reform and restructuring of industry and of firms that are only weakly if at all connected to the
world market.
In part, Russia’s poor export performance may be due to a form of
Dutch disease in that its huge exports of fuels and raw materials have led
to an overvalued ruble, thus rendering Russia’s manufactures uncompetitive on world markets.9 Perhaps a more pernicious consequence of Russia’s vast natural wealth is that Russia’s leaders felt no sense of urgency
about restructuring industry to meet the challenge of the world market. As
a result of this complacency, Russia’s export performance has been much
worse than that of the resource-poor economies of East Europe. Moreover,
9
This possibility is difficult to evaluate because of the inflation and the swings in the ruble’s
nominal exchange rate. Nevertheless, the ruble’s real appreciation in the 1990s does not seem
appreciably different from that of the exchange rates of other economies (Desai, 1998). Of
course, the real issue is the level of the exchange rate and not movements in it, and this is a
difficult issue. The use of purchasing power parity measures may be inappropriate and
subject to serious hazards.
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
9
such an attitude on the part of the Russian leadership is a great mistake
because, as Hewett and Gaddy (1992, pp. 2–3) observed, “even for an
economy as large and richly endowed as the USSR, integration into the
world economy must serve as a vital catalyst for reform.” Because Russia’s
GDP has fallen much more than has its trade, Russia today is a more
globalized economy, at least in quantitative terms, than it was at the
beginning of the decade, but this globalization has not served as a catalyst
for reform.
The import side of the ledger is no more encouraging about the health
of the Russian economy. The volume of non-CIS exports has stagnated
throughout the decade, and it has been badly hit by Russia’s financial crisis
and ruble devaluation. Certainly the decline confirms the decade-long
drop in incomes and economic activity in Russia. The commodity composition of imports reported in Table 1 is also revealing. The category of
machinery and equipment was the single biggest loser in import share.
This reflects the collapse of investment in the country, and it augurs badly
for the likelihood that Russian industry can develop a significant export
capacity. Also noteworthy is that the biggest gainer in share of imports is
the category of vehicles and transportation equipment. This development
doubtless reflects the enthusiasm of Russia’s new elite for Western luxury
cars, and it is stark evidence of growing income disparities.
In sum, Russia’s trade performance reflects an economy that is increasingly reliant on exports of fuel and raw materials and whose lack of
competitiveness in global markets is reflected in both its export performance and in the changes in its import composition away from investment
goods and in favor of current consumption. That Russia is virtually the
only transition economy to have a trade surplus is also a negative sign, as
I discuss next.
Capital Flows and International Finance
While Russia’s trade figures suggest economic regress and lack of
restructuring, the information regarding capital and financial flows clearly
demonstrates the diminution of the rational functioning of the state and
the dashed expectations of Western observers and policymakers. From the
earliest days of perestroyka, both Russian and Western experts expected that
successful reform in Russia would require a convertible ruble and effective
links to world capital markets.
Ruble convertibility was seen as the key to successful economic reform
for three reasons. The first was that a convertible ruble would link Russian
prices to those prevailing on the world market, thus improving the efficiency with which resources were utilized in the Russian economy. What
proponents of this view failed to realize was that large gaps between
domestic and world market prices would be quite persistent, even in the
smaller transition economies and even more so in Russia’s large and
relatively self-sufficient one. The second reason for pursuing ruble convertibility was that fiscal and monetary discipline were seen as prerequisites
10
BRESLAUER ET AL.
for the convertibility of the ruble; thus, making the ruble convertible
presupposed that the ruble overhang would be eliminated and that the
government would maintain fiscal and monetary discipline.10 These expectations, too, have been turned on their head. The ruble was, indeed, made
convertible, first through the auction mechanism and then de jure, but its
convertibility has encouraged rather than restrained fiscal and monetary
profligacy and recklessness. Finally, it was thought that ruble convertibility
would facilitate the inflow of foreign capital. This was seen as an important
objective because the “successful reform of the Soviet economy would
require a significant and sustained inflow of capital” (Hewett and Gaddy,
1992, p. 44). In reality, the convertible ruble has drained vast amounts of
capital out of Russia. These negative consequences of ruble convertibility
are largely the result of the emphasis by Russian reformers and by Western
advisors on achieving ends without much concern for the means needed
to achieve them or for ensuring that the underlying institutions and policies
needed to sustain these ends were in place.
Table 1 already presages what Table 2 confirms. Russia has sustained
a large trade and current-account surplus throughout the 1990s. It is the
only transition economy to have done so. Thus, while the other transition
economies have been recipients of net resource inflows, Russia has had a
net resource outflow that has been used to finance massive capital flight.
In Russia’s case, this capital flight reveals itself in the recorded acquisition
of foreign assets by Russian residents and in the unrecorded outflow of
money from Russia that shows up as errors and omissions in the balance
of payments accounts. These errors and omissions have been running at
about $10 billion per year since the middle 1990s, and the total volume of
capital flight over that period is likely to be in the neighborhood of $50–70
billion. In the meantime, very little of the current account surplus has gone
to building up Russia’s foreign-exchange reserves, and the government’s
international debt has increased by an amount that is of the same order of
magnitude as the capital flight that has taken place in the same period
of time.
While capital flight is an important manifestation of Russian citizens’
distrust of the economic policies of their government, just as the ruble crisis
of 1998 was a manifestation of foreigners’ rather belated understanding of
these same policies, domestic inflation and ruble devaluation are only part
of the explanation for this massive capital flight. Russia’s export earnings
pass through the hands of a relatively small number of firms and banks
and of the oligarchs who run them, and it is these oligarchs who have the
connections and expertise to move their hard-currency earnings overseas
undetected.
10
See Holzman (1991) for an example of such a linkage between convertibility of the ruble and
the underpinnings of fiscal and monetary discipline.
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
11
Table 2. Russia’s Financial Situation in the 1990s (in $billions)
Year
Current account
Foreign direct
investment
Reserves
1991
2.5
1992
–5.7
1.678
0.1
1993
2.7
1.626
1994
9.284
0.82
1995
7.938
2.365
14.265
1996
12.096
3.096
11.276
1997
3.335
7.128
13.018
1998
–5.625
2.939
7.801
Source: United Nations (1999, pp. 170, 171, 177, 220, 221).
But neither the domination of the Russian economy by a small number
of large firms nor the ownership of these firms by oligarchs is sufficient to
explain capital flight. The United States had a similar concentration of large
firms controlled by “robber barons” such as Rockefeller and Carnegie in
the late 19th and early 20th centuries. Yet these American “robber barons”
never dreamed of having secret Swiss bank accounts as they funneled
profits back into their industrial empires. Why then do their Russian
counterparts do exactly the opposite, bleeding their firms of funds in order
to build up accounts overseas? The answer is that America’s “robber
barons” were secure in their ownership rights. John D. Rockefeller did not
have to live with the expectation that the government would seize his
property, but Russia’s oligarchs do. The oligarchs control great wealth, but
their property rights are tenuous and uncertain because their control over
these large firms is seen neither as legitimate nor as irreversible, and, in
Russia’s volatile political environment, renationalization or seizure of
these firms is a real possibility. Such uncertain property rights encourage
the rich and powerful to move capital out of Russia rather than investing
it domestically and also encourage them to intervene in domestic politics
in the most direct and, in the short run, most effective way by corrupting
politicians.
In sum, when viewed through the lens of its economic relations with
the rest of the world, it is evident that the Russian economy has changed
very little, and what change has occurred is largely for the worse. Russia
displays the classic signs of an economy in disarray. Its trade flows suggest
deindustrialization, declining competitiveness, and an import structure
that less and less serves the needs of a vast majority of its citizens. The
monetary side of Russia’s international economic relations reveals corrup-
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BRESLAUER ET AL.
tion, financial mismanagement, and a loss of faith in the government’s
ability to pursue an effective economic policy.
RUSSIA’S POST-DEVALUATION
RECOVERY: REAL OR VIRTUAL?11
There is a new conventional wisdom about the Russian economy. The
August 1998 financial crisis was not the disaster some had predicted; rather,
it turned out to be a good thing. The view was summarized well in a July
1999 report by Goldman Sachs (Breach, 1999):
Eleven months after the August 1998 crash the dust is beginning
to settle. Contrary to expectations the economy is notably
improved after the collapse.…The economy is beginning to grow
quite swiftly. Output is growing, firms are increasingly profitable,
wage arrears are falling, payments are being increasingly settled
in cash rather than barter, and tax revenues are markedly improving. The economy is being revitalised.
I disagree with this rosy picture of post-devaluation Russia. I question
not simply, as some others have done, whether the recovery is sustainable.
I will go further and argue that in important respects, there has been no
recovery. That is, it is an illusory, or “virtual,” recovery.
Before I am accused of being overly negative toward Russia, let me
note that one’s judgment of the current Russian economy may have unexpected policy implications. For instance, Morgan Guaranty Trust (1999) is
another investment bank with a highly optimistic outlook on Russia’s
economy. But it uses its positive assessment to bolster a hard-line position
on Russian debt restructuring. Its message is essentially: “The economy is
really quite good; therefore, it would be a mistake to give the Russians too
much debt relief.”
Meanwhile, inside Russia, the alleged success during the post-devaluation year is regarded as a vindication of the argument, advanced by a
wide range of policymakers, that radical reform failed and needs to be
abandoned once and for all.12 After all, the adherents of this position argue,
the 1999 post-devaluation recovery was one that not only required no
reform, it happened without foreign investment and no major foreign
assistance. The obvious conclusion is that Russia needs neither reform nor
foreign capital to prosper.
In the following, I will critically examine the optimistic portrayals of
the post-devaluation Russian economy in three steps. First, I will begin by
11
By Clifford G. Gaddy. The ideas expressed here have been developed in the course of
ongoing collaboration with Barry Ickes in our joint project on Russia’s virtual economy.
12
In an article a year ago, Barry Ickes and I (Gaddy and Ickes, 1999) referred to such arguments
as the new “Moscow Consensus.”
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
13
showing that some apparent “facts” about the economy are considerably
more complex than the investment banks and others are saying. Second,
I will further illustrate the deceptive nature of statistics by giving a more
detailed picture of one Russian region—Sakha (Yakutiya). Third, I will
present a simple accounting exercise to show that reported economic
growth and increased monetization of the Russian economy do not necessarily indicate anything at all about behavioral changes—restructuring—
in the economy.
What Do the “Facts” Really Mean?
Among the many facts that have been cited to illustrate the positive
trends in the recent Russian economy are the following three: (1) increased
enterprise profitability; (2) improved fiscal performance; and (3) a reduction of wage arrears.
Profits. It has been pointed out that relatively more of Russia’s enterprises were profitable after the August 1998 crisis than before. The aggregate profits of the profit-makers increased from first-half 1998 to first-half
1999. This is misleading. The first clue to understanding the complete
profits picture is to note that on average for all of Russia, the rate of increase
in nominal profits (4.3) was very close to the rate of increase in value of the
dollar against the ruble during the same period (3.95). In an economy
whose truly profitable firms are predominantly those engaged in dollardenominated exports, this is not surprising. Viewed by region, the picture
is quite consistent. The oblasts where nominal profits rose by 4–6 times are
all the ones that have one big exporter: Vologda, Lipetsk, Tyumen, Sakha,
and so on. In the others, profits tended to rise by considerably less than a
factor of 4. Second, we also need to look at the loss-makers. Although there
were fewer enterprises that reported losses, their aggregate losses are
considerably bigger than last year’s, even after correcting for inflation. If
we use the consumer price index (CPI) as a deflator, this year’s (first half)
losses were up 27 percent. In other words, while some enterprises pulled
out of the red, total losses in the economy were bigger.
Budget performance. Tax revenues are said to be running ahead of
target. But the explanation for some of the increase is simple: inflation in
1999 was higher than anticipated in the budget. Since most taxes are a
percentage of sales, profits, and so on, they are in effect indexed to nominal
economic activity. If nominal prices rise faster than expected, so will tax
receipts. But more important is the fact that measured by the purchasing
power of the rubles collected, government revenues are actually down
rather substantially. If deflated by the CPI, first-half 1999 consolidated
(federal plus regional) budget revenues were down 22.1 percent compared
to first-half 1998. The situation was especially bad for the regions: their
revenues were down 27.8 percent in real terms.
Wage Arrears. Wage arrears, it is argued, have been reduced. Between
October 1, 1998 and October 1, 1999, wage arrears were reduced by 33.5
billion rubles, or 38 percent. Again, the real story is somewhat different.
14
BRESLAUER ET AL.
These reductions need to be put in the context of another, very negative,
development: the decline in real incomes. Real wages plummeted after the
August 17 devaluation. Compared to the level of July 1998, the average
wage in the economy in September 1999, over a year later, was still more
than 35 percent lower in real terms than it had been before the crisis. We
can get a better picture of this with the following exercise. The actual
nominal wage in September of this year was 1,704 rubles a month. To keep
pace with inflation, it would have to have been 2,624.
In absolute terms, from October 1, 1998 to October 1, 1999, the cumulative difference between the actual wage and a hypothetical cost-of-living
adjusted wage for the entire economy was 661 billion rubles. As a percentage of GDP, this “real wage cut” amounted to just about 18 percent over
these 12 months. Pensions have suffered even more than wages. In
September 1999, the average pension was only 49 percent in real terms
of what it had been in July 1998. The only increase in pensions this entire
year was a 50 ruble ($2) per month hike in May 1999. The net decrease in
real incomes of course shows up in the poverty indices. On average in
January–September 1999, 49.9 million Russians (34.1 percent of the population) had incomes below the subsistence minimum of 896 rubles ($36)/
month. In 1998, only 22.5 percent of the population were below the subsistence minimum. In other words, the number of poor was up by almost
50 percent.
How, then, does the positive development—reduction of wage
arrears—stack up against these negative trends in personal incomes? The
answer is that the amount finally repaid to workers over the year (33.5
billion rubles) was only 5 percent of what they lost in the real wage cut
(661 billion rubles).
Sakha: A Regional Case Study of Appearance and Reality
The foregoing remarks on the ambiguity of statistics can be illustrated
in a case study of one (admittedly extreme but not unique) region: the
Republic of Sakha (Yakutiya). Here are some of the region’s statistics for
the first half of 1999 (comparisons to the first half of 1998):13
•
•
•
•
13
Industrial output was up 80 percent in constant prices (160 percent in
current prices).
Fixed capital investment was up 30 percent in constant prices.
Corporate profits were up 1400 percent!
Budget revenues were 21 percent over target, while spending was 38
percent below target.
Statistics on Sakha are from Interfax Statistical Report, 8, 33 (August 7–13, 1999).
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
•
15
Tax revenues were up 120 percent. Cash revenues were up 300 percent.
Cash now makes up 85 percent of budget revenues, as compared to 48
percent last year.
Is this then a regional example of the post-devaluation Russian economy that Goldman Sachs et al. claim is so successful, one that is growing,
monetized, modernizing, and beginning to show a healthy budget? Perhaps not. Consider also these facts: the percentage of loss-making companies rose from 57 percent to 63 percent. Only 14 percent of enterprises are
technically solvent. The nonpayment problems are getting worse.
How can this be reconciled? One word: “diamonds.” The region’s
biggest enterprise, without comparison, is ALROSA. It accounts for 69
percent of all industrial output. So when we learn that the region’s industrial output, measured in rubles, was up 80 percent, we also need to notice
that the physical volume of output barely increased at all. The reason is
that ALROSA, which exports nearly all of its diamonds for dollars, makes
four times as many rubles on the same volume of exports as before. Putting
ALROSA into the corporate profits picture tells the story there, too. Aggregate net profits in the republic in the first half of 1999 were 5.4 billion.
ALROSA’s net profits were 5.6 billion rubles. This means that taken
together, the region’s other 19,300 corporate entities had a net loss of 0.2
billion rubles. So it is the increased ruble value of ALROSA’s diamond
exports alone that explains the region’s higher profits, increased industrial
output, and improved fiscal performance. There is little to indicate that
anything else changed in the region.
One Way to Explain Growth and Remonetization:
A Simple Accounting Exercise
Russia’s industrial output is up. Barter has declined as a percentage of
sales. Like the figures on more profits and fewer loss-makers, these are
“facts.” The question is, what do they mean? Many people assume that
especially the increasing monetization reflects a shift away from the “virtual economy.”14 Not necessarily.
I can illustrate this point with a stylized accounting model. Imagine
an economy that is half barter, half monetized (in terms of the recorded
value of output/sales). Assume further that the monetized sector is itself
composed of two equal parts: one part is based on exports for dollars; the
other is sold domestically for rubles. The barter sector is exclusively domestic. Say that the total economy produces for 100 rubles. This means that the
breakdown among the sectors is as follows:
14
This is explicit in the Goldman Sachs report cited earlier. It writes of “a positive reversal in
all the indicators of the so-called ‘virtual’ economy” and predicts that these “measures
associated with the ‘virtual’ economy—barter, non-payments, quasi-moneys, etc.—will continue to decline over the coming months and years.”
16
BRESLAUER ET AL.
Table 1. The Pre-August Economy
Cash sector
Barter
sector
Domestic cash
Export cash
Total cash
Total
economy
Rubles
50
25
25
50
100
Percentage
50
25
25
50
100
Let us now subject this economy to an “August 17–like” event. That
is, we devalue the ruble against the dollar by a factor of four and let
domestic prices double. This means that the cash export sector’s output is
now worth 100 rubles instead of 25, the domestic cash sector’s sales are
valued at 50 rubles instead of 25, and the barter sector ’s recorded sales are
100 rubles instead of 50 (Table 2).
Table 2. The Post-August Economy, Nominal
Barter
sector
Cash sector
Domestic cash
Export cash
Total cash
Total
economy
Rubles
100
50
100
150
250
Percentage
40
20
40
60
100
Finally, let us deflate these values to account for inflation (the deflator
is 2.00). That is, the barter sector’s inflation-adjusted output is 50 rubles,
the domestic cash sector’s is 25, and the export cash sector’s is 50. Table 3
presents the post-devaluation outcome in pre-devaluation rubles (or “Table
1 rubles”).
Table 3. The Post-August Economy, Inflation Adjusted
Cash sector
Barter
sector
Domestic cash
Export cash
Total cash
Total
economy
Rubles
50
25
50
75
125
Percentage
40
20
40
60
100
Comparing Table 3 with Table 1, we see two positive effects. (1) There
was 25 percent real (inflation-adjusted) growth; total output grew from 100
to 125. (2) The share of barter in the economy dropped from 50 percent to
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
17
40 percent.15 But the important point is that in this example both positive
effects—the growth in sales (output) and the growth in the cash sector—
come solely from the increased real value of exports. Both growth and
remonetization in this stylized economy involved no change in behavior
of the enterprises. All the enterprises in all of the sectors continue to
produce exactly what they did before, in the same amounts—absolutely
and relatively—and sell it to the same customers as before. They use (and
perhaps waste) the same physical amounts of inputs as before: gas, electricity, steel, labor, and so on.
In fact, it is easy to see that the positive effect of increased value of
exports could even offset (but hide) negative developments elsewhere. For
instance, the barter sector could grow in size and/or the domestic cash
sector could actually shrink, but if the growth of the export sector—thanks
exclusively to the devaluation—were large enough, the overall figures
could still show net growth and net remonetization.16
If nothing else, this exercise should remind us that barter is not the
essence of the virtual economy. The essence of the virtual economy is enterprise behavior that exploits what Barry Ickes and I have called relational
capital to protect and maintain value-destroying activity—soft goods production.17 Barter is important because it facilitates that behavior. The real
question for the actual Russian economy is: what happened to enterprise
behavior as a result of a positive cash shock and a shift in relative prices
between hard and soft goods production? This stylized example tells us
that simply looking at figures on the percentage of barter in the economy
tells us nothing about behavior.
Conclusion
In sum, the positive effects of the past year were almost guaranteed by
the devaluation. They have also been substantially helped by the oil price
rise. But there is no persuasive evidence that the devaluation has led to, or
been used for, reforming the Russian economy and improving its prospects
in the longer term.
15
Note that the positive results reported here are actually understated because they do not
take into account any “virtual component” of the officially reported figures. In the virtual
economy, barter prices are typically overstated. If we assume they are overpriced by a factor
of 3, then the true relative percentages of the sectors in the pre-devaluation economy would
be 25 percent barter and 75 percent cash. Post-devaluation, that would change to 18.2 percent
barter and 81.8 percent cash. The true total output of such an economy would have grown
from 662/3 to 912/3, or a growth rate of 37.5 percent.
16
Of course, the argument that growth and demonetization can theoretically be accounted for
by the export sector alone does not rule out actual positive developments in parts of Russian
domestic industry. In particular, none of the arguments presented are intended to deny that
there has been some import substitution. But here, too, the conventional wisdom can be, and
has been, challenged. See, for instance, Chebotareva (1999) for a refutation of the “myth of a
rebirth of the food industry” after the August 1998 crisis.
17
Relational capital and soft goods are concepts first developed in Gaddy and Ickes (1998a).
18
BRESLAUER ET AL.
The devaluation of August 1998 was first and foremost a pure windfall
for Russia’s raw-materials exporters. They did nothing different, but their
earnings were worth twice as much in the Russian economy as before. It
was a strong positive cash shock for these enterprises and for local economies based on them. The devaluation also provided modest benefits to a
rather small sector of the economy that gained a price advantage relative
to foreign imports. But all these gains carried a heavy cost. Household
incomes are drastically down. The poverty rate rose by nearly 50 percent.
In the end, the squeeze on households may prove to have been the
most important effect. In a virtual-economy environment, more pressure
pushes all its participants—households, enterprises, and governments—
away from the market. The virtual economy is a protective mechanism.
When it prevails, further hardship merely tightens the cocoon of protection
against the market.
IS RUSSIA IN TRANSITION
TO A MARKET ECONOMY?18
Clifford Gaddy has just raised serious questions about the reality of
the apparent Russian economic revival in 1999. In the same spirit, I would
like to question the assumption of “transition” as an appropriate characterization of the turbulent processes under way there. For, eight years into
it, Russia seems nowhere near completing its transition to a modern market
economy. Indeed, in terms of systemic change, little positive has occurred
since the end of 1995, and the EBRD “Transition Report 1999” notes
significant regression in Russia, as well as in Kazakhstan, Kyrgizstan,
Uzbekistan, and recidivist Belarus (St. Petersburg Times, November 16,
1999). Further, the performance improvements in 1997 were more “virtual”
than real, while those in 1999, as Gaddy has so clearly indicated, may also
be largely a statistical illusion. Indeed, what real 1999 increment in production, in monetization, and in fiscal balance has occurred is the result of
massive devaluation coupled with a very fortuitous rise in energy and
resource prices, and is unsustainable without massive investment and
structural change.19 So despite some indications of a market-like response
to changes in the world economy in 1999, the Russian economy still seems
far from a properly functioning market system.
This situation warrants, I believe, raising some questions. Is Russia in
a “transition”? Do we have our teleology right? Is it moving toward a
market economy, or is another kind of system emerging from this “great
transformation”?
Increasingly it appears that economic institutions and interactions
have settled into mutually consistent, self-reproducing expectations and
patterns of behavior that are far from those consistent with a market
18
19
By Richard E. Ericson.
Structural barriers and investment needs are discussed in Ericson (2000).
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
19
economy. These patterns of expectations, understandings, and behavior
have been adopted, or inherited, by “those who matter,” by the elites who
make the political and economic decisions that “mold institutions” and
“move economic activity.” These patterns indeed are inimical to the proper
functioning of markets as a system—to the systematic generation of normal
market outcomes—even as they make use of, exploit, and extract rents from
operating markets.
This suggests to me the possibility that the Russian transformation is
not a “market transition,” despite destroying the foundations and pillars of
the Soviet command economy.20 The transformation, however, has built on
their ruins, borrowing heavily from that Soviet legacy. Elites, institutional
structures, patterns of economic interaction, attitudes, understandings, and
behaviors have all largely continued into the post-Soviet economy. Hence
the transformation has developed a new systemic framework for economic
activity that little resembles that of a modern market economy. Rather, it is
a system whose structural characteristics remind one of a feudal-like economic system, albeit one built on a mid-20th-century industrial, rather than
an agricultural, base. Such a system I call an “Industrial Feudalism,” drawing an (imprecise) analogy whose foundations lie in a structural parallelism
with the socioeconomic and political system that predominated in Western
Europe in the early part of the second millennium of our era.
Just what are these structural characteristics? Time prevents going into
detail, but let me outline several key characteristics of a “feudal economic
system” in terms that resonate with what I see in post-Soviet Russia.21
A “feudal” economic system is part of an integrated political, economic, and social order. It is hierarchically structured, with members of a
well-defined decision-making elite (the “nobility”) standing at the head of
each structure. The bulk of the population (the “laboring masses”) is
socially, politically, and economically subordinate and dependent, and
there is only a weak and thin middle layer of specialists. Yet the system is
substantially decentralized, with a weak center and strong local authorities, each with near-complete power over various limited domains. It is a
system with no clear separation of political, economic, and social roles
and/or powers, and hence without separation of public and private capacities and roles. The system is built on semi-autarchic socioeconomic units
(“manors,” aka Soviet “enterprises and associations”) politically delimited
as domains of personal authority. Indeed, in such a system all authority
and discretion are personalized, as are all relations between domains,
despite frequent appeal to a higher “law” (the Church and God’s, or Laws
and Presidential Decrees, and Instructions). This generates a system composed of multiple, decentralized hierarchical structures of information and
20
On those foundations and pillars see Ericson (1991); for a systematic, if early, account of their
destruction, see Åslund (1995).
21
This argument is elaborated in my paper, “The Post-Soviet Russian Economic System: An
Industrial Feudalism?” available from my web site at: <http://www.columbia.edu/-ree3/>.
The sources for the following characterization of feudaliam are discussed there.
20
BRESLAUER ET AL.
authority, including police and juridical (the interpretation and enforcement of “laws”), with conflicting domains of influence and effect: a “parcelization of sovereignty,” in the felicitous phrase of Anderson, 1974).
In the more specifically economic sphere, it is important to note that
such a system is characterized by:
•
•
•
•
interaction based on traditional (inherited) patterns of coordination
and control, implemented and enforced through overlapping
networks of obligation;
factor markets that are either degenerate or absent;
ill-defined, diffuse, and traditionally circumscribed property rights,
with multiple stakeholders and enforcement of such rights dependent
largely on the power of the stakeholder;
the predominance of non-economic motivations, with wealth
acquired, largely through transfer and seizure, for the power it gives
over people.
In light of this, we might look to some of the key systemic characteristics of “transformational” Russia. Four seem critical for accepting a
“non-market” characterization of the system:
•
•
•
•
The conflation of economic and political actors and agents;
The dis-integration of the state;
A fragmentary market structure;
The market non-viability of many economic and industrial structures.
The conflation of economic and political actors appears in the symbiosis of business and government, particularly at the local and regional
levels. Indeed, the business and political roles of almost all leaders are
closely intertwined, with these leaders often orchestrating personalized
networks integrating business activities.22 There is a continuing and indeed
growing political “management” of the local economy, protecting it from
disruption through competitive challenge. This involves political control
over privatizations, in particular over the allocation and management of
real estate; local protectionism through restricting regional imports and
exports and through licensing, inspections, and regulatory oversight; and
both direct and indirect financial support through subsidies, barter, the
acceptance of local scrip, and negotiated taxes (offsets).23 It is also reflected
in the recent wave of local “renationalizations” through the manipulation
of bankruptcy and tax offsets, and the political support of efforts to limit
22
Åslund (1998, p. 319) has called this “a negotiated economy with ample privilege for large
and powerful enterprises regardless of their economic efficiency.”
23
The origins of the process are nicely laid out in Woodruff (1999). For example, in December
1998, Krasnoyarsk and Kemerovo regions joined Tatarstan, Altay, and the Volgograd region
in introducing new restrictions on food trade and grain transportation (Moscow Times, December 12, 1998); on earlier actions, see S. Krayukhin and T. Zil’ber, in Izvestiya (September 12,
1998).
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
21
outside ownership and reverse acquisition of shares by inconvenient
outsiders.24
The lack of distinction between political and economic roles and agents
is further reflected in the struggles among political units over business
outcomes as well as policy. These include conflicts over land and property
rights, the use and mobility of labor, and most particularly over tax collection and revenue sharing.25 The latter often involves protecting local economies and the power and position of their elites through cutting off
economic challenge by effectively demonetizing—turning to local scrip
and barter systems, and the creative manipulation of offsets and arrears to
exclude payment to outsiders, including the federal government.26
This latter pattern sets the stage for the next general “feudal” characteristic, the progressive dis-integration of the state. It begins with the
insolvent federal fisc, leading to devolution of responsibilities to local elites
who then control the content and provision of social services and financial
transfers, and to the growing practice of “tax farming” (Åslund, 1995, p.
321). This in turn supports negotiated, depending on status and power,
social and tax obligations, making taxation severely regressive and penalizing, in particular, any independent (of political connections) economic
agents. And it goes hand in hand with the increasing localization and
“privatization” of the provision of law, order, and justice, reflecting the lack
of separation of “the public” and “the private”—the essence of corruption,
which is naturally rampant in all areas of governance, both public and
private.27 The natural consequence is the substitution of political for economic objectives in decisionmaking, and the use of property and wealth
24
Recent, high-profile examples include Tyumen Oil’s manipulation, together with the governor and his appointed judge, of the Sidanko bankruptcy to acquire Chernogorneft,
Sidanko’s most valuable asset, the dilution of shares by Yukos, and the “renationalization” of
Lomonosov Porcelain in St. Petersburg (see Wall Street Journal, November 26, July 23, and
October 12, 1999, respectively). But there have been dozens other examples over the last two
years: Belgorod has taken over its iron ore combine, Sverdlovsk has taken a stake in Alkar
Aluminum, Krasnoyarsk has bought into the Krasnoyarskiy Metallurgicheskiy Zavod, Kursk has
taken equity in Mikhailovskiy Iron Works, Tatariya has bought into KamAz and Tatneft Oil,
and Samara into AvtoVaz (Izvestiya, October 17, 1997). More recently, the Moscow Times has
reported that St. Petersburg and Sverdlovsk, among other regions, are taking controlling
interests in their leading regional banks, and Sverdlovsk is planning to take a 25 percent share
in Nizhnyy Tagil Metal in exchange for restructuring the company’s tax and wage arrears
(RFE/RL Newsline, November 4, 1998). The EWI Regional Report, Vol. 4, has noted further
takeovers in 1999 in Ul’yanovsk (#3), Krasnoyarsk (#4), Voronezh (#10), Moscow (#11, #14),
Primor ’ye (#13), Sverdlovsk (#14), and Chel’yabinsk (#15).
25
Examples are ubiquitous in the Russian press. For a Western reflection, see P. Kranz, in
Business Week (February 15, 1999).
26
One can again see this in Woodruff (1999) and in Gaddy and Ickes (forthcoming); the point
is also clearly made in Ickes, Murrrell, and Ryterman (1997).
27
There is a nice early discussion of this in Shlapentokh (1996). The extent to which the use of
force and nonjudicial dispute resolution in business has become institutionalized is emphasized in Radayev (1998).
22
BRESLAUER ET AL.
for power over people, with government as a vehicle for rent extraction
enhancing the leaders’ property and wealth.
Third, we see a market structure that is fragmentary, fractured along
political/administrative boundaries. Realms of interaction are limited by
the withdrawal of local economies, supported by the political and economic decisions of their elites, from general monetized exchange. Rather
localized quasi-monies, barter networks, and politically driven allocation
and offset policies preserve incommensurate patterns of economic activity
from competitive challenge. Thus the market structure reflects inherited
patterns of interaction more than market opportunities. Only where there
were no prior Soviet institutions—e.g., secondary financial markets; or
where the market involves retailing simple products to final consumers; or
where “strong outsiders” such as Western firms and trading concerns must
be dealt with; do we see more normally functioning markets, and even here
they are often subject to considerable political manipulation and fraud. 28
Most intermediate product and interindustry transactions still involve
traditional, non-market, exchange relations among pre-existing entities
and/or their offspring in networks that are largely inherited from the Soviet
past.29 This is particularly true with regard to critical industrial inputs such
as energy, transportation, and basic materials, but is also the case for much
of asset “privatizations” and property transfers. This situation is supported
not only by political action, as indicated above, but also by the growing
re-demonetization of transactions (outside of retailing, finance, and foreign
trade) from lack of legal protections, the weakness of banking, the rapacious
nature of taxation, and tax collection through banks.30
The fragmented nature of the market structure is also reflected in the
absence, or degeneracy, of effective factor markets. There is no market for
productive land or real estate—production uses are tightly politically
controlled, and the highly regulated urban real estate “market” is a primary
source of rents for local political powers.31 Capital “markets” are extremely
thin and shallow, operating largely as a channel for financing governmental
deficits and speculation by the elite. The banking system is also largely a
mechanism of state finance through tax collection and the placement of
government debt, and investment capital is generally unavailable.32
Indeed, the budget is effectively bankrupt, firms are unwilling to give up
28
Indeed, the recent financial scandals and the collapse of many of the relatively “modern”
markets following the devaluation and default of August 17, 1998, show how fragile and
conditional these markets were.
29
Some 60–70 percent of all inter-industry transactions, and over half of all tax payments,
involve barter or quasi-monies, and a substantial portion of remaining non-governmental
payments is “dollarized” (Karpov, 1997; Gaddy and Ickes, forthcoming).
30
See the studies of industrial barter by Aukutsionek (1998); Commander and Mumssen
(1998); Guriev and Ickes (1999).
31
This point is made well in Shleifer (1997).
32
See, for example, the discussion of the banking system in RECEP’s Russian Economic Trends
(November 11, 1998).
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
23
significant equity and control for outside investment, and bosses engage
in rent extraction for consumption and capital export purposes. Finally, the
labor market is severely segmented and localized. Labor demand is
restricted by the obsolete inherited Soviet industrial structure, and labor
supply is restricted by production-based social services including housing,
wage arrears and the lack of credit, and passport controls, tying workers
to their inherited location.
A final critical structural characteristic undergirding the feudal nature
of economic interaction is the market non-viability of much of the inherited
Soviet industrial structure.33 The Russian economy has preserved, albeit in
increasingly dilapidated state, a large part of the distorted structure of
capital, production, and interaction built over 60 years of economically
irrational Soviet investment and development policies. This structure is
only viable in a command economy, under arbitrary Soviet-type pricing
that is unrelated to economic value or opportunity cost. Then necessary
activity to maintain the structure is planned, commanded, and enforced,
regardless of the costs and benefits to the agents involved.
When subject to uniform market valuations, many production operations, and much of the interaction within the structure as a whole, cease
to be economically viable, to be able to cover the costs of even simple
reproduction. Fundamental restructuring of technology, factor use, and
market relations is necessary for market viability, requiring substantial
investment and a radical change in management practices and personnel.34
This would be seriously disruptive, indeed destructive, of inherited social
and political relations, and hence is fought by the elite. Thus the structure
is preserved in a “virtual economy” where non-commensurate, idiosyncratic pricing—through the use of barter, quasi-monies, and tax offsets—
creates a Soviet-like valuation environment, one politically protected in
locally networked “substantive economies.” This provides the industrial
economic base for the feudal structure of power and interaction.
Thus we might draw a number of suggestive parallels between the
contemporary Russian and a Medieval European system. In Russia we
clearly see the “parcelization of sovereignty” among the multiple, decentralized hierarchical structures exercising political, economic, and juridical
authority over their own domains. The “manors” and “principalities” of
the post-Soviet economy are its largely self-contained social-political and
production entities. They include large industrial, agricultural, and construction enterprises, whether “privatized” or not, new Financial-Industrial Groups and politically connected commercial structures (“oligarchs”
and “mafias”), and regional and local governments. The elite is largely
inherited, albeit not yet hereditary, deriving from the Soviet nomenklatura.
33
This parallels the low productivity, generally only sufficient for simple reproduction, of the
Medieval manor (Pryor, 1980).
34
See, for example, the discussion In the McKinsey Global Institute Report on Russian
Economic Performance, covering nine core Russian industries. It can be found at the McKinsey web site: <http://mckinsey.com/mgi.html>.
24
BRESLAUER ET AL.
They exercise personalized power through overlapping networks of personal ties and obligations.
The modern “manors” maintain themselves through barter and network exchange in a virtual economy, through autarchic primitive production of food and primary products, and through the “protection” provided
by superior and outside entities in return for “rents.” Competition is
politically controlled, and property and contract rights are diffuse, encumbered, and often unenforceable through legal means. Thus traditional
patterns of interaction naturally prevail.
Finally, we might view the Russian Presidency as a weak “crown”
with power exercised largely by “the court”—advisors and “the family.”
The Federation Council can be seen as a Chamber of Lords, protecting
regional privilege and prerogative, and fighting to extract as much as
possible from the royal fisc, while the Duma appears as a chamber reflecting
various elite special (corporate) interests. Finally, large integrative economic structures, such as UES, the railroads, Transneft and Gazprom, and
perhaps some regions with “reformist” policies (e.g., Veliki-Novgorod), fill
the roles in a feudal structure of intermediaries and financial sources, much
like Medieval towns and their ruling merchants and bankers, with personalized ties to the “lords and nobles” of the System.35
Most of these characteristics stand in substantial opposition to essential aspects of a properly functioning market economic system. Although
substantially decentralized and self-organizing, a market system is
non-hierarchical and functions within an established political and legal
framework providing “rules of the game” constraining behavior regardless
of the political or social position of the agent. In a market economy,
“sovereignty” resides in an autonomous state outside, and in some respects
above, the market system, rather than being “parcelized” among various
political and economic actors. There is a clear separation of political and
economic roles, of the public and private spheres, with rules and limits
applicable equally to all regardless of rank or status. Similarly, property
and contractual rights in a market system are clearly defined and socially
protected, regardless of the status of the agent.
Interaction and networks in a market economy are thus primarily
based on the perception of opportunity and mutual benefit from cooperation and/or exchange, and are perpetually changing in pursuit of new
opportunity and/or cost avoidance. Ties are contractual, specific, and subject to voluntary renegotiation and third-party enforcement, rather than
traditional, general, and based on personal commitment and obligation.
And incentives derive from the rewards to meeting the needs and desires
of other market participants, to creating new products, services, and wealth.
35
Indicative is the struggle of the “family” to place “its people” at the head of these “cash
cows.” See G. Peach in Moscow Times (November 23, 1999). The seven cash cows referred to
are Gazprom, UES, the Railways Ministry, Sberbank, Transneft, Svyazinvest, and Rosvooruzheniye.
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
25
Hence, investment in the pursuit of opportunity, and of the wealth to
develop further opportunities, is a primary reflection of market economic
motivation. In a market economy, economic power is clearly differentiated
from political power and/or political/moral authority, and is based on
success on markets rather than social or political legitimacy and power.
These “modern” characteristics of a market system stand in sharp
contrast to those of the coalescing Russian system outlined above. And they
lie behind the growth of active, complex systems of factor, product, service,
and financial markets, operating independently of direct political/social
controls that are at the heart of a market economic system and provide the
basis for investment and economic growth. In Russia, however, we see
neither the deep structural characteristics of a modern market economy nor
the functioning of an integrated system of complex markets fostering investment and growth. Rather, “feudal” characteristics seem to be developing,
without the foundation in agriculture and the restraining influence of a
Church and its moral code, in the post-Soviet Russian industrial economy.
Despite dramatic differences in technologies and capabilities for communication, for information processing, and for control of economic activity, a
feudal “parcelization of sovereignty,” a devolution of economic activity to
quasi-autarchic networks, a fragmentation of markets, and a personalization of rule and interregional interaction seem to have taken hold.
The key question, and the one on which a true answer to the question
posed at the beginning of this presentation hangs, is: “How stable is this
configuration of institutions and behaviors?” How long can the Russian
economy remain stuck, as it seems to be, in a dimension outside of that
containing the transition from “plan to market”? Perhaps this configuration is only a brief phase, a perturbation, on the path followed by Europe
to a real market economy. Once the current power struggles are resolved,
and the state reasserts itself across all domains of political and economic
activity, the rule of law may be established and stable market institutions
allowed to form. And then we might see progress in transition toward a
true market-based and market-driven economic system.
But how likely is that in the next generation? If the present system
succeeds in maintaining stability in the face of the challenges of forgone
outside economic opportunity for several generations, then we will be
justified in considering it as much an alternative to a modern market
economy as was its predecessor, the Soviet command economy.
RUSSIAN FOREIGN POLICY FREE-LANCING:
THE CASES OF LUKOIL, GAZPROM, AND
ROSVOORUZHENIYE36
One of the more puzzling and interesting factors in contemporary
Russian foreign policy has been the proliferation of quasi-governmental
36
By Carol R. Saivetz.
26
BRESLAUER ET AL.
and independent actors who have been crafting foreign policy on their
own. To put it another way, Russia’s internal weaknesses have led to a
fragmentation of the foreign policy process and this, in turn, has created a
situation conducive to foreign policy free-lancing. The independence of
actors such as LUKoil, Gazprom, and Rosvooruzheniye has been enhanced
additionally by the pervasive corruption in Russian society. As an expert
on Russian corruption put it recently, “The state is just one more form of
organized crime” (Graham, 1999). This corruption and political fragmentation have clear foreign policy implications.
Let me offer some observations about the foreign policy activities of
LUKoil, Gazprom, and Rosvooruzheniye. It is worth noting that the state
is the largest shareholder in both LUKoil and Gazprom, while Rosvooruzheniye is part of the old Soviet military-industrial complex. Moreover, all three organizations have clear policy positions. LUKoil has sought
to maximize its role in the development of Caspian and Central Asian oil
reserves. Gazprom has moved to protect its financial stake within the
Commonwealth of Independent States (CIS) and its access to European and
Turkish markets. Rosvooruzheniye has, since the collapse of the Soviet
Union, been seeking to regain its market share in the world arms trade.
What is unique about these three is the degree to which they have a role in
policies outside of Russia and the extent to which each has access to the
state bodies supposedly making policy.
LUKoil’s Interests
LUKoil became visible as a foreign policy actor in late 1993. Then, in
conjunction with the Ministry of Fuel, the oil company signed an agreement with Azerbaijan to take part in Baku’s energy exploration in its sector
of the Caspian. LUKoil’s involvement in the Azerbaijani “contract of the
century” was unalterably opposed by the Ministry of Foreign Affairs
(MID). The ministry not only questioned LUKoil’s participation, but
declared the deal itself illegal. According to MID officials, the Caspian was
an inland lake, which meant that any exploration had to be agreed upon
by all five littoral states. By 1998, Russia’s declarative policy had changed:
in July, Russia and Kazakhstan agreed to demarcate the Caspian seabed,
but not to divide the waters. Russia is currently urging the other Caspian
states to make similar arrangements.
Reports in the media made it very clear that LUKoil used its access to
Viktor Chernomyrdin, then prime minister, to force the shift in policy. In
interviews with the author in Cambridge, Massachusetts, both Boris
Nemtsov and Sergey Kiriyenko claimed that this alteration made good
economic sense, while Andrey Kozyrev argued that LUKoil had forced
Russia to sacrifice her national security interests. Vagit Alekperov, the head
of LUKoil, when asked about his influence in Russia, responded: “I head
the largest economic structure in our country today. We are the second
largest taxpayer in Russia. Do you really think we can stand aloof from all
the events taking place in our country?” In the same interview, Alekperov
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
27
was equally emphatic that LUKoil had influenced the policies of the several
consortia in Russia’s favor, and would continue to do so (Makarov and
Morzharetto, 1997).
Gazprom’s Interests
Gazprom’s immediate interests are clear: to be paid for the gas it
provides both domestically and to other former Soviet states.37 This
becomes a foreign policy issue in those instances in which Gazprom
demands equity in return for outstanding debt. In countries such as Moldova, this has provided Gazprom with major holdings in the economic
infrastructure of the debtor state. As in the case of LUKoil, Gazprom’s
chairman, Rem Vyakhirev, sees himself and the company as protectors of
Russia’s interests. In a June 1998 statement, Vyakhirev argued that Gazprom could not be “soft” on Ukraine or Moldova; he warned that “Russia’s
position in the CIS energy markets [is] at stake. If Russia leaves these
markets, more patient suppliers will take its place” (Jamestown Monitor,
June 24, 1998).
Gazprom views Turkmenistan—a major gas producer—as a competitor in the natural gas market. Vyakhirev has basically refused to allow that
country to use Gazprom pipelines to supply the lucrative East European
markets. Instead, Gazprom has limited Turkmenistan to the CIS market,
where many of the CIS states, like Ukraine, have been unable to pay. In
defiance of Gazprom, Turkmen president Niyazov turned off the spigot.
Were Turkmenistan to secure alternative export routes, it would emerge as
a significant rival to Gazprom, perhaps first and foremost in the lucrative
Turkish market. Russia’s awareness of this potential was made clear when
Victor Chernomyrdin, then prime minister and former head of Gazprom,
traveled to the Turkmen capital, Ashgabat, in January 1998. The prime
minister refused to make any concessions to Turkmenistan, despite the fact
that President Niyazov assured Chernomyrdin that Gazprom would be
guaranteed 10 percent of two new projects.
The situation began to change at the end of 1999 when Gazprom signed
a new export agreement with Turkmenistan. Under the terms of the new
deal, Ashgabat has agreed to sell Moscow 20 billion cubic meters of gas at
a price of $36 per 1000 cubic meters. Forty percent of the revenue must be
in cash, with the rest in barter (Lelyveld, 2000). Although this arrangement
seemed to signal an end to the impasse between Gazprom and Turkmenistan, negotiations over future purchases broke off without any
agreements.
Rosvooruzheniye’s Interests
Since the collapse of the Soviet Union, Rosvooruzheniye has been
subjected to many reorganizations; sometimes it has been designated as
37
I will not deal with the issue of domestic arrears.
28
BRESLAUER ET AL.
the major clearing house for arms exports, sometimes several other agencies have been given the right to export. During summer 1999, the state
strengthened arms export controls to enforce pricing. Rosvooruzheniye has
thus far abided by international agreements regarding arms sales and by
United Nations sanctions against Iraq. Yet the temptations of expanding
Rosvooruzheniye’s markets are great. Grigoriy Rapota, former head of
Rosvooruzheniye, stated in a January 1999 interview: “As for Rosvooruzheniye and purely commercial interests, of course we would have
been only too happy if our hands were untied with regard to Iran, Libya,
and Iraq.…”38
To add to the complexity of the picture, the political vacuum at the
center facilitates free-lancing, not only by Rosvooruzheniye, but by individual military commanders and scientists. Allegations have appeared in
the press that corrupt military officials sell their surplus to intermediaries
and then declare the equipment lost or destroyed. Estimates of the extent
of the theft run to 50 percent of arms export revenues (Versiya, May 25–31,
1999, p. 8, using ISI Emerging Markets database). In another example, a
recent exposé in the newspaper Segodnya detailed the presence of new
Russian military equipment and scientists in Iraq. A military designer
quoted in the article stated: “The Russian government doesn’t pay us, and
therefore we have to go to Baghdad to earn our living” (Felgengauer, in
Segodnya, February 17, 1999). Lastly, in January 1999, Yuriy Maslyukov
admitted that the US was right to be concerned about technology transfers
to Iran (Moscow Times, January 22, 1999).
The Elections and Political Pressure
In the run-up to the parliamentary and presidential elections of 1999–
2000, both Gazprom and Rosvooruzheniye have been subjected to extreme
political pressure. The state has tried—thus far unsuccessfully—to oust
Rem Vyakhirev from Gazprom. It has had more success with Rosvooruzheniye, the new head of which is reported to be a good friend of
Tat’yana Dyachenko, Yel’tsin’s daughter (Bulavinov in Kommersant Daily,
May 27, 1999).
The administration’s pressure on Gazprom is apparently due to the
gas monopoly’s financial support for Vladimir Gusinskiy’s Media-Most.
Gusinskiy, who owns Segodnya and NTV, has been backing Moscow mayor
Yuriy Luzhkov and his “Fatherland—All Russia” party in the parliamentary elections and mayoral race (Ulyanov in Nezavisimaya gazeta, August 4,
1999). And Vyahirev declared that he might not support “Our Home Is
Russia” in the Duma elections. According to both Western and Russian
sources, Media-Most received a 330 million dollar credit from Gazprom in
38
In the interview, Rapota stated: “We are going to sell military hardware to the countries
that want it and that confirm that they are solid financially. Still, we will always act within
the framework of the limitations and restrictions imposed on Russia by its international
obligations” (Bulavyov and Safronov, in Kommersant-vlast’, January 26, 1999, pp. 28–29).
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
29
return for a twenty-five percent stake in the media group in July 1999. But
the government has found ways to apply pressure. Chernomyrdin
returned to chair the board of Gazprom, and in August 1999, the government fought successfully to increase its representation on the board from
four to five. Additionally, Boris Berezovskiy criticized Gazprom’s support
for what he called the anti-Kremlin media and denounced Vyakhirev
(Financial Times, August 26 and 27, 1999). In the most recent skirmishing,
the government initiated an audit of Gazprom. This was another warning
to Gazprom from the Kremlin “family” to sever its connections with
Luzhkov and Media-Most. Speculation in Moscow continued all Fall that
Yel’tsin’s inner circle was searching for a successor to Vyakhirev—one who
would make Gazprom’s coffers available to the Kremlin’s preferred
candidates. With Yel’tsin’s resignation on December 31, 1999, Vyakhirev’s
calculations apparently changed. Gazprom and LUKoil have both signed
letters backing Acting President Vladimir Putin’s presidential bid.
Rosvooruzheniye has suffered a similar fate. When Yevgeniy Primakov was appointed prime minister in fall 1998, his nominee, Grigoriy
Rapota, became head of the arms export agency. During his tenure, arms
sales grew, but the increased revenue did not protect him from dismissal
once Primakov was ousted. In the words of a Segodnya correspondent at
the time, revenues from arms trade have been used regularly in election
campaigns. He added: “There can be no doubt that this money will now
no longer slip out of [Prime Minister] Stepashin’s hands and into those of
either criminal elements or radical politicians” (Segodnya, May 20, 1999, p.
4). Immediately after assuming control, Aleksey Ogaryov was quoted as
saying: “Russia should build up its trade in all kinds of weapons on all
markets” (Nezavisimaya gazeta, August 14, 1999, italics added). Statements
such as these raise the specter of widening arms sales—driven by the need
for electoral funds—without regard to sanctions regimes or other international agreements.
Looking Forward
The future of Russia is unpredictable. But two of the more probable
scenarios are a continuation of the current crisis or the ascendancy of a
nationalistic and authoritarian leader. What would be the impact of each
scenario on the foreign policy roles of the three organizations we have been
discussing?
LUKoil. In the first scenario, LUKoil, in particular, gains wide-ranging
freedom of maneuver. For example, LUKoil was slated to participate in the
Kyapaz project in what Azerbaijan claimed was its sector of the Caspian.
Because ownership of the site was disputed by Turkmenistan, President
Yel’tsin forced LUKoil to withdraw from the deal. One can easily speculate
that in a situation of even weaker central control, LUKoil would rejoin the
consortium. Under the same scenario, a second possibility is even more
intriguing. LUKoil sees its role as extending Russian influence, and specifically as lobbying for Azerbaijani oil to be piped via Chechnya to
30
BRESLAUER ET AL.
Novorossiysk. Yet Russia even now cannot control either Chechnya or
Dagestan, and with perpetual weakness in Moscow, this situation will only
deteriorate. LUKoil could ultimately decide that its interests lie solely in
getting Baku’s oil to market. This might mean supporting the proposed
Baku-Ceyhan pipeline. Indeed, Turkey has already offered LUKoil a piece
of the action.
In scenario number two, the prospects for LUKoil free-lancing become
far more problematic. The ascendancy of an authoritarian and nationalistic
leader in Moscow could conceivably lead to the renationalization of
LUKoil. This act might well call into question several of the Caspian oil
deals in which LUKoil is a participant. It is easy to see that a governmentowned LUKoil could threaten to pull out of any number of consortia unless
the Russian pipeline route was used for export. This would certainly
threaten Georgian interests and would undermine the hard-fought political independence of Azerbaijan. Disruption of the several deals would also,
of course, threaten the investments of US companies already involved in
the region.
An authoritarian and nationalistic leader who has reasserted state
control over LUKoil (and Gazprom as well) would in all likelihood use it
to further partnerships with Iran and ultimately to revitalize ties to Baghdad. LUKoil has already signed agreements with Iraq to help prospect the
Qurna-2 oil field. Thus far, the work has not violated the UN sanctions
regime. In addition, LUKoil has been a purchaser of Iraqi oil sold under
the oil-for-food program.
In the latter part of 1999, Iraq pressured LUKoil and other Russian
companies to abrogate the UN sanctions. In particular, Iraq issued LUKoil
an ultimatum: either further work is completed on the Qurna-2 site or
LUKoil can pull out. In response to the Iraqi pressure, LUKoil went to the
Russian foreign ministry to ask it to seek UN permission to prospect in Iraq.
Whether or not LUKoil ultimately abrogates sanctions would seem to be a
function of how hardline the new leadership in Moscow proves to be and
how far US–Russian relations will have deteriorated.
Gazprom. Under the first scenario (i.e., continuity), it seems unlikely
that Gazprom’s current role would change appreciably. The gas monopoly
would continue to press for repayment of the debt owed by other CIS states
and would probably move aggressively to acquire equity in those countries. Gazprom would also pursue overseas investment possibilities. It
would likely expand its investment in Iranian natural-gas production, a
policy that parallels Moscow’s cultivation of Teheran. It would also probably push for the implementation of “Blue Stream,” the proposed gas link
to Turkey under the Black Sea.
Under the second scenario, Gazprom would probably drive even
harder bargains with the debtor CIS states and would press to take over
larger segments of their infrastructure. Both sets of policies could lead to
the infringement of the sovereignty and independence of states with which
NATO has “Partnership for Peace” agreements.
RUSSIA AT THE END OF YEL’TSIN’S PRESIDENCY
31
Rosvooruzheniye. In scenario number one, we would, in all probability, see more of the same. Whichever clique gains control of the levers of
power, their interest in controlling the coffers of the arms-export agency
will dictate a growing desire to expand Rosvooruzheniye’s share of the
world’s arms market. Moreover, even now, there is the risk that some of
the sales completed by Rosvooruzheniye could alter the balance of power
in regions vital to the US. One need only think about the proposed sale of
anti-tank weapons to Syria.
In scenario number two, these trends would intensify in two distinct
ways. First, an authoritarian leader, in his efforts to recentralize authority,
would undoubtedly move to establish full control over Rosvooruzheniye;
and in a parallel action, he would end the free-lancing of local commanders.
Thus, if the above estimate of lost revenues is accurate, the state would
realize, at a minimum, double the $2.3 billion currently earned through
arms sales—a significant addition to state coffers. At the same time, it
would seem safe to assume that a nationalist leader would look to break
out of the US-imposed limitations on the arms markets. It would be a
question of Russian pride as well as financial gain. How hard the new
nationalistic regime would push might well be a function of how desperate
the economic situation becomes.
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