The investigation by police in several countries into alleged money-laundering by Russian organised crime through the Bank of New York (BoNY) and other big western banks has illuminated some important issues and obscured others.
Firstly, the scandal has highlighted the desperation with which the grandest of the established western banks sought to lend money into Russia. The New York Times described how the BoNY "aggressively pursued relationships with Russia's largest banks", and came to dominate the "highly competitive market" in setting up cash and securities accounts for Russian banks in the US. [2] In other words the impetus for the growth of Russian debt came not from Russia but from the heart of capitalism; it was a phenomenon intrinsic to capitalism, not an aberration.
Secondly, the scandal has underlined just how direct was the connection between the high priests of US capitalism and the Russian financial oligarchy. For example Natasha Gurfinkel, who resigned as head of the BoNY's Eastern European department, was appointed specifically because of her access to the Russian financial oligarchs, chiefly the empires of Mikhail Khodorkovsky (the now-collapsing Menatep bank group) and Vladimir Vinogradov (the Inkombank group, which collapsed last year). The fact that not only banks but also international financial institutions were attendant on the oligarchy's birth is emphasised by the biography of Gurfinkel's husband Konstantin Kogalovsky. In 1991 he was Russia's representative to the International Monetary Fund, and a member of the "St Petersburg clan" headed by Anatoly Chubais, on whom the monetarist gurus of Harvard university relied to impose "shock therapy" on Russia. In 1993 he left the government and joined Khodorkovsky's Menatep, the most parasitic of Russia's parasite banks; when Menatep acquired control of Yukos, Russia's second largest oil company, Kogalovsky became Yukos's vice chairman. [3] Kogalovsky "has been widely portrayed as a reformer who sold out his ideals to make his fortune". [4]
Actually the making of fortunes by the oligarchy was very much in line with the "ideals" of "shock therapy" imparted to the "reformers" by Harvard. Those "ideals" well express the immorality and inhumanism of late 20th century capitalism; the way that the oligarchy made its fortunes - by playing tricks with money looted from the state, and leeching on Russia's wealth of natural resources - is not an especially Russian phenomenon but one typical of capitalism at its present stage.
Of the issues obscured by the money laundering scandal, the most important is this: the specific criminal activity of money laundering is just one part of capital flight, which is a central aspect of the reintegration of the Russian economy into world capitalism. [5] Capital flight, i.e. the flight of capital into assets denominated in foreign currencies and usually held abroad, is variously estimated at between $150 billion and $200 billion for the period since the collapse of the USSR in 1991. This is much more money than came into Russia in loans, for example, as John Odling-Smee, the senior IMF official in charge of Russia and eastern Europe, admitted recently. [6]
The aim of this paper is to draw attention to some of the important tendencies in the relationship of world capitalism, and particularly the international financial institutions, to Russia. We will touch on the following points:
(1) The role of the "shock therapy" enthusiasts, and the international financial institutions, in the formation of Russia's particular version of parasitic capitalism.
(2) The support given to Yeltsin by the international financial institutions and the role of the treasury bond market.
(3) Capital flight and the tendencies towards dependency in the Russian economy.
(4) The importance of the Russian market as a repository for some of the vast quantities of excess money capital generated in recent "booms".
(5) Some conclusions.
Looking back, eight years later, at "shock therapy" of 1991-92, it could be argued that the real "achievement" of the "reformers" was that they brought into being the Russian oligarchy and made possible the initial, and largest, surge of capital flight in 1992-93 (see also below, section 3). Their attempts to make the ruble convertible unleashed hyperinflation, wiped out personal savings at a stroke and earned them the hatred of millions of Russians; that, together with the undermining of health, education and other services is probably what they are best remembered for in ordinary Russians' homes. But equally significant was their conduct of the privatisation programme, especially up to 1996, which made it possible for the oligarchs to turn their flimsy banks that had no capital into financial-industrial empires that took control of hard-currency proceeds from raw materials exports and kept them abroad.
Western institutions guided this process. A key part was played by the Harvard Project, under which the Harvard Institute for International Development (HIID), a centre of Harvard University headed by the monetarist economist Jeffrey Sachs, was empowered to distribute hundreds of millions' of dollars worth of US government aid. This aid was channelled to the Russian Privatisation Centre (RPC) and other bodies controlled by Chubais' "St Petersburg clan" (including Chubais, former deputy prime minister and now chairman of United Energy Systems; Gaidar; Kogalovsky; Maksim Boycko, former head of the RPC; Dmitry Vasiliev, chairman of the Federal Commission for the Securities Market, Russia's market regulatory body; Alfred Kokh, a former RPC official, and others). In the years 1992-97 the HIID received $57.7 million in direct US government aid, all but $40.4 million of which it did not have to bid for in the usual manner. The HIID also helped to administer the entire $300 million "technical assistance" programme of the US Agency for International Development. The American academic Janine Wedel and the journalist Anne Williamson have written extensively on the complete control exerted over the expenditure of this aid by the "St Petersburg clan" in conjunction with a small number of Sachs' associates.[7] Wedel writes:
"Working with HIID, the Chubais clan leveraged US support and served as the gatekeeper for hundreds of millions of dollars in G-7 taxpayer aid, subsidised loans and rescheduled debt. The Clan came to control, directly and indirectly, millions of dollars in aid through a variety of organisations that were set up to bring about privatisation and other economic reforms. Through these organisations, two clan members alone became the gatekeepers for about one-third of a billion dollars in aid money and millions of dollars in loans from international financial institutions." [8]
One result of this process was possible personal gain by members of the clan and those near to them. Apart from the well-known "book payments" scandal which led to Boycko's sacking and Chubais being publicly denounced by Yeltsin, Wedel points to a five-year unsecured interest-free loan of $2.9 million from US funds to Chubais' Foundation for the Protection of Private Property, to the unorthodox activities of the Institute for a Law Based Economy, and to the favouritism shown by Vasiliev's Securities Commission to Pallada Asset Management, an investment company owned set up by Elizabeth Hebert, and the possible resulting advantages [9]. Hebert is the girlfriend of Jonathan Hay, director of the Harvard Project. Hay was sacked from Harvard following allegations that he had been involved in insider trading (which is not illegal in Russia); Andrei Shleifer, another Harvard economist, was dismissed from the project but remains at Harvard. US federal investigators are carrying out an inquiry into both Hay and Shleifer [10].
All this would be so much of a storm in a tea-cup if it were not for the high moral tone adopted by the "reformers" against the corruption - both real and exaggerated - of "red directors" and everyone else who got in the way of their activities. Their arguments for high-speed privatisation were justified not only by Sachs' economic orthodoxies but by appeals to the moral duty to resist "corrupt communist cliques" etc. The scale and persistence of the accusations of corruption surrounding the Harvard Project - some of which were acknowledged by USAid, which cut its funding as a result - are a reminder that personal greed is a motive for the ideologists of capitalism just as much as for some "red directors".
As for the results of Russian privatisation, the "reformers" and those within international institutions who supported them do not today deny that it resulted in wealth, power and control over Russia's most valuable assets passing into the hands of the oligarchs. There is, however, an attempt to rewrite history as the struggle between the oligarchs and "liberal reform". For example the Swedish economist Anders Aslund, a key economic adviser to the Gaidar government and former member of the RPC board, said at a World Bank conference earlier this year: "Russia's key problem has been that a few people got very rich on the partial reforms, and they have bought a large part of Russia's politics - politicians and officials. To preserve their rents, the newly-rich use their economic power to prevent liberal economic reforms ... Russia's post-communist period has been characterised by a struggle between reform and rent-seeking. Unfortunately, the reformers mostly lost." [11] What Aslund does not acknowledge is that "a few people got very rich" so quickly because privatisation was rushed through before, and without provision for, demonopolisation, and without even a rudimentary regulatory framework for the market. Russian economists warned of this before, during and after the privatisation programme and were ignored [12].
Those who work in the international financial institutions are perfectly well aware of the extent to which Russia's most valuable assets were sold off at a small fraction of their market value. For Gazprom, Russia's biggest and richest company, IMF documents refer to a 1996 calculation that "60% of gas sector assets (all in Gazprom) valued at $119 billion, were privatised with total budgetary receipts of less than $20 million" (i.e. for one-sixtieth of one per cent of its value). For the oil industry, the IMF and World Bank staff estimate that 17 major Russian companies with an estimated market value of $17 billion were privatised with budgetary receipts of less than $1.4 billion [13].
As for the Loans for Shares scheme of November 1995 - under which majority shareholdings in some of the most valuable Russian companies were given to the oligarchs in return for loans, in fixed, unfair auctions - two World Bank employees presented a devastating expose of the corruption involved and the losses to the state to a conference in March 1996 [14]. The most startling story they told was of how Menatep, headed by Khodorkovsky and the erstwhile Russian representative to the IMF Kogalovsky, took control of Yukos oil company in the face of fierce allegations that the bid meant Menatep increased its exposure to ten times its capital, and that as both agent for the sale and bidder it was being afforded unfair protection by the Ministry of Finance. The two economists concluded: "The latest phase of privatisation was a lose-lose proposition for all of the stakeholders in Russia. The government has sacrificed revenue and quality [...] Any of the large Russian companies [...] properly prepared for privatisation would have yielded the government more revenue than all of the present transactions combined." Shortly after the two economists delivered their dire warnings that, on a "non level playing field" the Russian government had "simply [...] transferred its controlling stakes in various companies to banks", the IMF stepped up its lending programme to Russia: in 1996 it added $3.2 billion to the $5 billion agreed in 1995.
The reason that IMF lending to Russia reached such a peak in early 1996 is well known: the IMF, together with the US and German governments, were desperately afraid that Yeltsin would not be re-elected. At the beginning of the year he had seemed to be unelectable. Wages and pensions arrears and the general fall in most people's standard of living had made him very unpopular and the "reformers" were considering other possible presidential candidates, e.g. Viktor Chernomyrdin.
As is also well known, the seven most powerful financial oligarchs were brought together at the World Economic Forum at Davos, Switzerland in January 1996 by Boris Berezovsky, in order to sink their differences and unite behind Yeltsin. The oligarchs publicly expressed their position in the "Appeal of the 13" and subsequent documents [15].
Possibly as a direct result of this meeting, and certainly immediately following it, the Central Bank began to place funds, including much of the money Russia had been loaned by the IMF, in the accounts of its offshore subsidiaries Fimaco and Evrobank. This money was then recycled back in to the Russian financial markets to buy short-term treasury bonds (gosudarstvennyie kratkosrochnye obligatsiy or GKOs). This pump-priming with money from Fimaco and Evrobank helped to inflate the GKO market; western banks and investors then got in on the act, taking a bet on the outcome of the election. The Central Bank fixed the ruble exchange rate, interest rates rose and the yields on the GKOs increased to insane levels - nearly 200% by the time of the election. The result was that the state was able to use the proceeds from the sale of the GKOs to pay off pensions and wages arrears shortly before the election; it also let private employers know that they should pay off wages arrears rather than pay their taxes. This, together with completely fictitious promises that (for example) army conscription would be abolished, enabled Yeltsin to be re-elected. The votes were bought with IMF money that had been recycled through the GKO market to give it added value.
The Russian state mortgaged its future financial solvency to pay for Yeltsin's popularity. As debt analyst David Riley put it: "the government came out of the election with a budget deficit and very, very expensive debt. All this was part of the build up to the Russian financial crash in August 1998." The reporting of these manoeuvres in the western press has often obscured the political aspect of the GKO scam. Much has been written about the possible diversion of Central Bank funds deposited with Fimaco and Evrobank to criminals or oligarchs; nothing of substance has yet been proven about that. What is not in doubt, however - but has received less attention - is that the funds were used to boost the GKO market and the Russian state finances, a process that directly benefited Yeltsin [16].
The IMF has claimed both that "no misuse of funds has been proven", and that there was wrongdoing by the Central Bank but that the IMF had been kept ignorant of that [17]. These assertions have been strongly challenged. The Russian Duma deputy and member of the budget committee, Nikolai Gonchar, says it is "hard to believe" IMF officials had no knowledge of an audit of the Central Bank for 1994, which complained about offshore investments; in response, the IMF admitted its officials knew about offshore investments and did not deny having seen the report. Gonchar also points out that the IMF paid close attention to the opening-up of the GKO market to non-residents, in which the Central Bank's recycling action played an important role.
Whether or not the IMF actually knew about the GKO scam in detail may never be known; the real point is that it did not want to know. Many of the Fund's critics say that basic understanding of economics should have been enough to set alarm bells ringing as the market ballooned in the months prior to the election - but that, at the least, the IMF turned a blind eye, because of the western establishment's policy of backing Yeltsin at all costs. The IMF knew very well that the GKO market could become a pyramid scheme; one of its own working papers, written in 1994 by Ernesto Hernandez-Cata, deputy director of the European II department, draws attention to the "risk in going too far and too fast" with Russian treasury bond issuance. As Pavoleta Shtereva, market strategist at MFK Renaissance in Moscow, said, it was "obvious" that the GKO market was unsustainable; "all those guys at the IMF with economics PhDs knew that you could not have such high interest rates when you are running a fixed exchange rate policy. They could have, and should have, said 'tighten fiscal policy'. But they didn't, because of the election." [18]
The IMF, then, turned a blind eye to the GKO scam even if it did not know the details. This took place in a wider context: support for, indeed insistence upon, the opening-up of the Russian GKO market was in line with the general policy adopted by the IMF and the US Treasury from the mid-1980s of liberalising government debt markets. Warnings such as that by Ernesto Hernandez-Cata mentioned above were ignored not only because of the political imperative of supporting Yeltsin, but because of the macro-economic imperative of liberalising government debt markets. After the Russian treasury bond market finally collapsed in August 1998, bringing the ruble and most of the Russian banking system down with it - a collapse for which the 1996 ballooning of the market helped pave the way - critics of the IMF within the United Nations wrote that "mismanagement of a major fiscal imbalance and of the market for government debt was the proximate cause of the present Russian financial crisis". [19]
Yilmaz Akyuz, head of macroeconomic and development policies at the UN Conference on Trade And Development said: "Orthodox policies since the mid-1980s have pushed governments into excessive indebtedness, not only in many emerging markets, but even in Africa, where financing through treasury bills on private market terms replaced money printing. The belief was that this would promote greater fiscal discipline. Instead we have ended up with huge stocks of domestic debt. The internationalisation of budget deficit financing also began in the 1980s with increased government indebtedness, notably in the US, which was restricted in the amount of bonds it could issue domestically. This could be OK for countries that have fiscal discipline and that are able to issue debt in their own currencies. But clearly this was not the case in Russia." [20]
The aim of the IMF's liberalisation policy, apart from such short-term political considerations as getting presidents re-elected, is clear: to improve conditions for speculative finance capital to operate. When, in the aftermath of the August 1998 meltdown, the Financial Times suggested that the IMF should stop lending to support currencies (e.g. the ruble) at unsustainable levels, the economist Harry Shutt acutely observed that such a suggestion "indicates a failure [by the Financial Times writer] to grasp that such support [from the IMF] is driven by a desire to give priority help to foreign short-term speculators investing [...] emerging markets at the expense of the real economy". This gets to the essential purpose of the IMF's economic policy.
Shutt continued: "Combined with the absence of exchange controls (also insisted on by the Fund), it [IMF support for currencies at unsustainable levels] ensures that domestic interest rates are kept at astronomic levels in order to defend the overvalued parity. This in turn ensures that, as long as the exchange rate is kept more or less stable (with the aid of judicious IMF-funded intervention in the market), holders of government treasury bills at interest rates ranging from 40% to 100% make superprofits while local enterprise is strangled, government debt is pushed to ever more unfundable levels, public servants and pensioners go unpaid and millions more are subjected to destitution and
premature death." [21]
The "shock therapy" gurus and the international financial institutions not only helped to bring the oligarchy into being but also hastened capital flight. In his fierce attack on the "achievements" of reform in Russia, Joseph Stiglitz, the chief economist of the World Bank, presents capital flight as "not an accident, but a predictable consequence of the manner in which privatisation occurred", i.e. privatisation without the simultaneous introduction of capitalist competition.
The Russian oligarchs, Stiglitz argues, may well have settled on a two-fold strategy: "on the one hand, to use their financial power to gain sufficient political influence [to reduce the likelihood of their ill-gotten gains being taken back by the state, and] to use the other hand to take at least a significant part of their wealth out of the country to a safe haven. Indeed [NB] the 'reform' advisors facilitated this process by encouraging - in some cases even insisting - on the opening of capital accounts." [22]
Although capital flight is by its nature hard to quantify, most estimates agree that after an initial surge of $50-$80 billion exiting Russia in 1992-93, capital flight has run at about $20 billion a year. One of the principal Russian investment companies estimated that capital flight was running at $200 per year per economically active Russian, or nearly four times the average annual pay of $58 (a state statistics office figure that excludes second and unofficial incomes) [23].
The idea that capital flight is an entirely criminal activity is a misunderstanding. The predominant form of capital flight is the export of natural resources and the holding of profits from their sale offshore; the beneficiaries are not only the oil and metals companies that own the resources but also financial institutions that leech on them and western traders that do business with them.
One analysis pinpoints four particular routes for capital flight: (i) manipulation of insurance and transport costs incurred on the export of oil and other high-earning commodities; (ii) the violation of capital control requirements by banks that are (a) frequently controlled by the big exporters and (b) in the process of being bankrupted; (iii) the creation of trading partners in other CIS countries, the export to them of ruble-denominated Russian goods, which are subsequently re-exported for payment in dollars; and (iv) bad debt. The conclusion is that: "Many people are convinced that capital flight occurs mainly in the form of 'men in black' smuggling large suitcases stuffed with dollars. In fact the main sources of flight appear to be non-repatriated export proceeds and prepayments on fake import contracts."
Not only did western institutions encourage capital flight by opening the way for capital accounts to be set up, as Stiglitz argued. They also helped Russia's raw materials exporters, and thereby their oligarch owners, to parry attempts by the Russian state to compel the exporters to repatriate their hard currency earnings. An example is provided by the US Ex-im bank, the export credit guarantee agency, which guaranteed $500 million worth of loans to Russian oil exporters borrowing from western banks to buy from US companies, on condition that the oil companies' hard currency earnings were exempt from regulations that they be compulsorily repatriated and a fixed proportion of them changed to rubles [24].
Another aspect of capital flight is the accumulation of dollar savings by Russian citizens who have lost faith both in the banking system and the ruble, and by buying dollars have effectively lent money to the US. The Russian economist Leonid Abalkin has defined these savings - which according to one estimate amount to $50 billion - as "internal capital flight". [25]
There appear to be two opposed views in the western establishment about capital flight. The first, as expressed by The Economist, is that "it is [...] largely futile to try to stop capital flight from Russia, just as it was from Latin America in the 1980s". The second, from the liberal critics of the "Washington consensus", is that capital controls could have and should have been imposed along the lines that they were in China; for example Stiglitz and Yingi Qian contrast the Russian case to that of China, where Qian argues that closed capital accounts were critical to the country's economic performance. [26]
We argued above that the impetus for the growth of Russian debt, for the surge of capital flight and for the genesis of the Russian oligarchy came from world capitalism. In this section we offer some arguments about the ideals and goals of the west towards Russia, hopefully to shed light on the reasons that the Russian economy has developed in the way that it has over the last decade.
The main reason given by the west for encouraging Russia to move towards the market was to destroy once and for all any vestiges of Communism and the centrally planned economy, which many believed had resulted in the low standards of living experienced by the average Soviet citizens. The western argument ran that with the advance of the market in former Soviet Union, the economy as a whole would be improved, by letting the market to dictate the shape of the economy and that the lot of the individual would improve as the national economy did.
From this it would appear that the west's overriding motives in assisting Russia were largely benevolent, the priority being the improvement of the Russian economy for the benefit of her citizens. Optimistic observers viewed the situation as one of possible mutual benefit for the west, Russia and other countries of the former Soviet Union. Sceptics were quick to point out that the west's policies were determined by its own geopolitical and economic interests.
It is useful to assess more generally the effects of capitalism in the early stages of a country's development, and the subsequent results of adopting such a system - especially when the proponents and advisers are representatives of the developed capitalist nations. Throughout the whole history of capitalism the main purpose of its export to "developing" nations has been to subordinate and in effect to colonise those countries the will and control of the developed nations that are encouraging the adoption of capitalism. In this century we have seen examples in South America, Africa and the far East, and are now seeing more in eastern Europe and the former Soviet Union. The pattern usually proceeds as follows. Western advisers, supported by western governments, financial institutions and businesses, advise the developing country on restructuring. The country in question is informed that, providing certain ideals and recommendations are adhered to, then financial assistance will be provided. This is precisely what happened in Russia.
At first sight this may appear to be a solution benefiting to both parties. The developing country restructures at the same time as creating new markets for the developed nation to operate in. In the long term however it is this attitude of viewing the developing nation as nothing more than a market that leads to its subordination. In the former Soviet Union we would argue that the development of debt, capital flight and the formation of the oligarchy amounts to an attempt at
economic colonisation by the west.
In Russia, the overriding issue for the west is continued support for its usurious system of credit. This necessarily requires new markets to corner in order to reschedule the debts of the superpowers. In the same way that USSR in its time exhausted the resources of its territories to finance its massive arms programmes and the debts that this incurred, so now the US seeks the means to reschedule it enormous international debt burden (in 1997 this was estimated to be in excess of $700billion.) Generally this debt had been serviced amongst other things by various investors purchasing US government bonds (any parallels to SDRs) but as any layman could see this pattern trend could not continue indefinitely; there had to be more diversification in the rescheduling of debt. The solution lay in the exploitation of the emerging economies. As the economist Michael Hudson pointed out: "The US has gotten rich because liquid resources have flowed into it from Russia, China and Japan. So it has not had to finance the growth of its own government debt for the last ten years - and that in turn has left it free to buy assets at knock-down prices in those countries.
Economists call it circular flow." [27]
As long as the west can claim that the former Soviet Union owes billions, this debt can be recorded as an asset on western balance sheets. Hudson put to Russian parliamentary deputies the argument that, taking into account capital flight and the flawed basis of the western institutions' loans, Russia should renounce repayment of the debts and regard itself as a creditor nation. [28]
The colonisation of Russia by the West not only acts as a means of restructuring western liabilities/obligations but also serves to further emphasise the West's victory in the Cold War. Crucial to the success of this attempted colonisation is the creation of the right institutions within Russia, and these institutions in turn being staffed by appropriate personnel. This process was evident even prior to the collapse of the USSR. The western institutions were busy in the late 1980s, meeting and assessing potential recruits to their cause in the event of Russia's move toward capitalism. The HIID, in its capacity of talent spotter of likely candidates, was working in conjunction with many western institutions. The ideal qualities of the required personnel, as in other cases of colonisation, was for them to be in positions of power and influence in order to do the bidding of the IMF/World Bank in order to secure the funding offered.
Many at the time thought that these requirements insisted on by the west - such as Russia reducing its budget deficit to within 5% of GDP to secure loans - would ultimately benefit Russia, and enable it to maximise the benefit of the loans granted. In truth the requirements served more to ensure that the west received from its loans to Russia the maximum return. At the time it was assumed that were the stipulations laid down by the western institutions not met, then western funding would cease, but in reality, notwithstanding the continued flouting of agreements and recommendations by the Russian government, the flow of loans to Russia continued.
The HIID and western institutions did not find it difficult to find people to work with. In any country facing colonisation there has never been any shortage of people willing to do the bidding of foreign financiers. The common denominator is a leadership neglecting the basic needs of its own people in order to placate Western capitalism, whether this be in the growing of cash crops rather than food to repay loans to the West, or the creation of wholly fraudulent schemes of privatisation in order for a country's assets to be exploited. All these, too, have been features of the Russian case.
The IMF's first defence of its actions in Russia is to insist that they were the only alternative to a collapse of the Russian economy and consequent political and social chaos. IMF director general Camdessus wrote that the strategy had been "preferable to Russia's bankruptcy and economic isolation, with all that such a development could bring". [29] The defence of "shock therapy" in 1991-93 and of the decision to use loans and other means to support Yeltsin at all costs is still more cynical.
A good example is that of a recent IMF Working Paper that uses sociological categories to argue that corruption is one of the sources of the formation of states and indeed of civilisation. The paper defines four forms of rent-seeking - competitive corruption, monopolistic corruption, "true" corruption and political corruption - which correspond, respectively, to "warlordism/weak dictatorship", "strong dictatorship", "benevolent monarchy" and "weak democracy", all of which are steps up from anarchy to the dizzy heights of "functioning democracy". The authors describe the formation of "predatory teams" in proto-democracies; they present a "weak democracy" as one in which "political rent-seeking" may taken the form of "the use of corruption proceeds to maximise re-election chances, rather than the pursuit of rents solely for private consumption". This manifestation of "weak democracy" - although the authors do not spell it out - was of course very much in evidence in Russia in 1996. [30]
Against the attempts to rationalise and justify first shock therapy and then the IMF pro-Yeltsin lending programme, the "post-Washington consensus" of which Stiglitz is the most vocal spokesman argues that reform should have been gradual and should have involved local organisations. Stiglitz says that "decentralised socialism" such as that promoted in Yugoslavia in the early 1950s could have been a step on the way; he refers to missed opportunities for "stakeholder (local) privatisation" as part of "a natural evolutionary process"; he argues that the development of leasehold enterprises, of which there were 10,000 in Russia in 1992, was cut short by the voucher privatisation and the loans-for-shares sales that followed it, and that they could have been part of a "bottom-up approach to transformation" that emphasised "inclusion, popular participation and involvement". [31]
The following points could be considered in developing a socialist attitude to these issues.
First: Stiglitz condemns the attempts by the "Washington consensus" to destroy old institutions "root and branch" and install new ones; he writes that, rather than "shock therapy", these actions "might more aptly be called a 'blitzkreig' approach". He suggests that continuing old institutions would have been better than this attempt to destroy and replace them. But this argument ignores the extent to which Russia's new, capitalist institutions are direct continuators of the institutions of the Soviet state, and that the new elite, whose growth the "shock therapists" did so much to encourage, is a direct successor to sections - although certainly not all of - the old Soviet elite.
Second: it is significant that Stiglitz talks about "inclusion, popular participation, and involvement", and argues that "societal transformation inevitably entails collective action". But these words can mean different things to different people. "Popular participation" and "involvement" in changes aimed at strengthening capitalist market relations - as is specifically proposed by Stiglitz - can ultimately only strengthen capitalism globally, of which, we have argued, the new Russian elite is a natural-born son.
Socialists understand collective action and popular participation differently to Stiglitz. For us, these are the means by which the working class and those forces in society that fight alongside it may advance struggles against capitalism. The development of the socialist programme entails putting collective action back at the centre where it belongs, counterposing it to those false "socialist" arguments that emphasise the nationalisation of property and make collective action secondary to it. The history of the Soviet Union and eastern Europe has clearly demonstrated the bankruptcy of these arguments. In the face of capitalism in the period of so-called "globalisation", whose character can be seen clearly in Russia, the development of a socialist programme based on collective action and popular participation, a programme that returns the working class to its centre as the motive force for change, is a prerequisite for socialism to go forward.
Simon
Pirani
Simon Pirani is observer correspondence in Moscow.
1. This paper is based on one prepared for an international academic conference on The World Crisis of Capitalism and the Post-Soviet States, held in Moscow on 30 October-1 November 1999.
2. New York Times, 20 August 1999.
3. New York Times, 15 August and 27 August 1999
4. New York Times, 28 August 1999
5. The Economist, 28 August 1999, treated the money-laundering scandal as evidence of the pervasiveness of criminality in Russian capitalism, which is one way of looking at it. However subsequently (The Economist, 11 September 1999, p. 113) it drew the important distinction between money laundering in particular and capital flight in general.
6. John Odling-Smee, "Why the IMF has resumed lending in Russia", IMF Survey, 30 August 1999. He states that the loans from the IMF "were small compared to total capital flight and to Russia's other sources of foreign exchange, especially export earnings." Capital flight, he claims was caused "not by the loans themselves, but by the failure to establish economic and political stability and to create a favourable climate for investment."
7. Janine R. Wedel, Collision and Collusion: the strange case of Western Aid to Eastern Europe 1989-1998, especially chapter 4; Anne Williamson, How America Created the New Russian Oligarchy (forthcoming), chapter 8 (internet publication).
8. Collision and Collusion, p.122.
9. Collision and Collusion, p.146.
10. Collision and Collusion, pp.146, 151-156; The Guardian, 16 January 1999; Financial Times 18 January 1999; information from Harvard University press office.
11. Anders Aslund, Why Has Russia's Economic Transformation Been So Arduous? (paper for World Bank conference on development economics, April 1999), p.3.
12. Roy Medvedev and Leonid Abalkin have written extensively on this.
13. Dale F. Gray (IMF Fiscal Affairs department), "Evaluation of Taxes and Revenues from the Energy Sector in the Baltics, Russia and Other Former Soviet Union Countries", March 1998, p.7.
14. Ira Lieberman and Rogi Veimetra, "The Rush for State Shares in the "Klondyke" of Wild East Capitalism: Loans-For-Shares Transactions in Russia", George Washington Journal of International Law and Economics, vol 29 no.3 1996.
15. See letters by Berezovsky and others, Nezavismaya Gazeta 27 April 1996 and Izvestiya 11 June 1996. Also Aleksei Zudin, "Biznes i politika v prezidentskoy kampaniy 1996 goda", Pro et Contra no.1 1996, pp. 46-60.
16. Much of the extended press coverage of these issues concentrated on the possible diversion of Central Bank funds to criminals or oligarchs. Articles that dealt with the broader political issues and the GKO scam's impact on the election include, firstly, "Chernaya kassa strany", Kommersant-daily, 21 April 1999; also "Follow the Money", Newsweek, 29 March 1999; "Russia: Bank's Offshore Use Still Unsettled With IMF", RFE-RL 9 March 1999; "Comment la Russie detournait l'argent du FMI", Le Monde 6 August 1999; and "Yeltsin's Personal Debt to the IMF", the Observer, 17 October 1999. Riley quoted in the latter.
17. Letters by Michel Camdessus, IMF secretary general, to Le Monde, published on IMF's web site, August 1999; Price Waterhouse Coopers reports published on IMF web site, August 1999.
18. "Yeltsin's Personal Debt to the IMF", the Observer, 17 October 1999; "Russia and the IMF: the political economy of macro-stabilisation", IMF Policy Analysis and Assessment Paper, September 1994, by E. Hernandez-Cata.
19. "The Russian Crisis", paper by the UNCTAD and the UN Economic Commission for Europe, October 1998.
20. Telephone interview with Yilmaz Akyuz, October 1999.
21. "The real cost of supporting speculators in emerging markets", Letters, Financial Times, 31 December 1998.
22. Stiglitz, Joseph, "Whither Reform? Ten Years of the Transition", keynote address to the World Bank conference on development economics, 28-30 April 1999, Washington.
23. Institut Ekonomiki RAN/University of Western Ontario, "Problema Begstva Kapitala iz Rossii"; L. Abalkin, "Begstvo kapitala: priroda, formy, metody borby", Voprosy ekonomiki no.7 1998; Troika Dialog Market Weekly, 5-11 April 1999; "$150bn capital flight ravages Russia", The Observer 16 May 1999. "Problema Begstva Kapitala iz Rossii", pp. 6-7, estimates that capital flight in 1992-93 was much greater than in succeeding years, i.e. between $57 billion and $70 billion in total.
24. Definition of capital flight from Troika Dialog Research, Russia: Fixed Income, April 1999. Information on the US Ex-im bank from the bank; the loans referred to were made under the Oil and Gas Framework Agreement; at November 1999 there was $500 million outstanding, and US Ex-im bank were negotiating a further possible $480 million in loans to Tyumen Oil Company.
25. "$150bn capital flight ravages Russia", The Observer 16 May 1999; L. Abalkin, "Begstvo kapitala: priroda, formy, metody borby", Voprosy ekonomiki no.7 1998; estimate of $50 billion in savings given by the economist Michael Hudson at a seminar organised by the Centre for Land Policy Studies at the state Duma, 4 November 1999.
26. The Economist, 11 September 1999, p. 113; Stiglitz, "Whither Reform?" p.5; "The Institutional Foundations of China's Market Transition", paper for World Bank conference on Development Economics, April 1999.
27. Hudson at Centre for Land Policy Studies seminar, 4 November 1999.
28. Hudson, ibid.
29. Camdessus, letter to Le Monde, 18 August 1999; see also John Odling-Smee, IMF Survey 30 August 1999.
30. Joshua Charap and Christian Harm, "Institutionalised Corruption and the Kleptocratic State", IMF Working Paper July 1999.
31. Stiglitz, "Whither Reform"; also most issues of Transition, the World Bank's discussion journal, for 1999 and 1998, which contain debates between the "Washington consensus" economists and their opponents.