3 The Liberal Market Reform Program

Sergei Sinelnikov-Murylev and Alexei Uluykaev

Тheye is а substantial difference between abstract (and exclusively political) analysis targeted toward either enlightening the population оу resolving certain political problems and а program that сап Ье realized Ьу implementing practical economic policies. ТЬе 500 Days program mentioned in Chapter 2 represented а set

of necessary and salutary reforms, but it completely failed to take into account the fiscal, technical, social, and other such constraints in the implementation of reforms. Who would undertake them? What would the appropriate legal and executive mechanisms Ье? Were the necessary financial resources available? Would the reforms тее! serious opposition, and if БО, what would Ьауе to Ье done? None of these questions was even raised, let alone answered.

Program-91-the program of economic reforms developed а! the Institute of Economic Policy under Yegor Gaidar with the participa­tion of а number of future тетЬеУБ of the reform government-was extremely specific, answering not only the questions what and why, but also how, and how much would it cost. Thus, even in form it was уеуу different from the other prograrns presented beforehand. It was по! а single seamless text, intended as it were for publication аБ а booklet and for contemplation. Rather, the program was а collec­tion of separate documents (the тОБ! important of which was А Strategy for Russia in the Transition Period), draft laws, orders,icalcu­lations, and appended explanatory notes. ТЬе contents of thi~ рто­gram remain the subject of bitter dispute еуеп today.

3.1. ТЬе Range of Opposing Views

Opinions оп market reform сап Ье divided into Беуетаl categories. Some completely rejected the need for the radical market reform of

46 Chapter 3

the Russian economy. Тhis group be1ieved in the need to preserve the fundamentals of the former economic system with some mod­ernization and stimulation. Тhis view сап Ье found in the books of left-wing politicians such as Gennady Zyuganov, Nikolay Ryzhkov, and Yegor Ligachev, and in articles published Ьу socialist econo­mists such as А. Buzgalin and А. Kolganov.

There were also econornists and politicians who declared that market reforms were in principle necessary but should Ье less abrupt and radical. Тhis group asserted that greater state participation in the economy, greater control оует state property, and protectionist measures to defend domestic producers were necessary. In general, proponents of this reform path subscribed to the idea of "а special Russian way!f of есопошiс modernization. Such а view was pro­moted in the works оЕ econornists Leonid Abalkin, Stanislav Shatalin,. Dmitry Lvov, о. Bogomolov, У. Yaremenko, and Nikolai Shmelev, and was also voiced Ьу so-ca1led "statist politicians," such as Sergei Glazev, Уиту Skokov, Arkady Volsky, Sergei Fedorov, and Ушу Luzhkov. They believed that mass privatization, 1iberalization of foreign trade, currency convertibility, and price liberalization mеа­sures should not have been implemented. Instead, they supported the creation of powerful financial-industrial groups, selective state assistance to industry, and the provision of additional, mainly state, orders Еor domestica1ly produced goods.

In а third and final group were those politicians and econornists with so1id reforrnist leanings. Тhis group advocated various reform programs but was harshly critical of the reforms actua1ly imple­mented. In their opinion, the reforms were either not correctly con­ceived от executed, and the sequence of reforms initiated was simply wrong. This group reasoned that privatization, demonopolization, and the formation оЕ market structures should have been undertaken first, and only then should financial stabilization measures and есо­nornic liberalization have been introduced. Very high inflation was not considered а serious danger Ьу this group. Gregory Yavlinsky, Nikolai Petrakov, А. Melnikov, and А. Mikhailov are among those who ЕаН into this category.

3.2. Debates оп How to Achieve Financial Stabilization

Beginning in 1992, economists and politicians advanced the most diverse ideas for achieving macroeconomic stabilization in Russia. It

The Liberal Market Reform Program 47

is worth pointing ои! that Program-91 in тanу respects suggested the ideas and recommendations ри! forward Ьу various academics in upcoming years. Program-91 drew оп the accumu!ated experiences of the previous successes and failures with reforms. Others' views regarding stabi!ization did change with time. Yav!insky, for ехат­р!е, abandoned his theory that there was а "natura!" !eve! of infla­tion in Russia-approximate!y 10%-12% per month-and that this !eve! shou!d Ье accounted for when determining the size of the bud­get deficit. As inflation feJl in 1995-1996, Yav!insky, particu!ar!y in his campaign speeches as а presidentia! candidate in 1996, graduaJly !owered his estimate of the "natura!" !eve! of inflation. А number of economists, inc!uding foreign economists, have

advanced similar ideas, Ьи! generaJly formu!ated in stronger argu­ments. Rudiger Dornbusch, for ехатр!е, not convinced that the Russian executive branch possessed the politica! will to achieve financia! stabilization, spoke in favor of indexation in line with in­flation. Не exp!ained this in terms of the need to reduce economic uncertainty for economic agents, which would !ead to increased in­centives for saving and investment.1

Clear!y, protracted high !eve!s of inflation exert а negative influ­епсе оп economic development and enterprise management. In par­ticular, the management of uncertain macroeconomic variables, such as the relative prices of goods and services, interest rates, the ех­change rate, and so оп, was impeded. In this regard, the generaJly positive experience of Brazil, where comprehensive price indexation was introduced in order to stabilize re!ative prices, is а!БО weJl­known2 However, comprehensive indexation in itself significantly

1. See Rudiger Dornbusch, "Уа investiroval v Rossiyu, chtoby imet' kusok её

budushchego uspekha" (interview), Koтmersant по. 48 (110), 20 December 1994. 2. See in particular Riidiger Dornbusch and S. Edwards, eds., The Macroeconomics о! Popu1ism in Latin America (Chicago: University of Chicago Press, 1991); "Amerique Latine: Vers des зотНез de crise Neo-Liberales," Problemes Econoтiques 2 (1990): 169; С. Himmelfarb, Liberalisтe et hyper-inflation еn Argentine (Institute d'Etudes politiqVes de Grenoble, 1994); Cahiers des Ameriques Latines 14 (Paris, 1992); Е. Phelps, "Inflatj,on in the Theory of Public Finance," The Swedish Journal о! Economics 75 (1973); Stanley Fischer and Olivier В1anchard, Lectures оп Macroeconomics (Cambridge, МаББ.: МIT РтеББ, 1990); "Dereglements monetaires et course аих innovations financiers еп Атет­ique Latine/' Probleтes Economiques 2 (1990): 200; Р. Salama and J. Valier, "Les Chem­ins еБсатрез de lа миззе des prix еп Amerique Latine," Revue Тiers Monde 129 (1992); Р. Salama and J. Valier, "Politiques liberales et fin des ртосеББиз hурегiпflаtiоtшistеs en Amerique Latine," Problemes d'Amerique Latine 5 (1992); idem, "The Difficu1t Road of Rising and FаШпg Inf1ation in Latin America/, Canadian Journal о! Development Studies 2 (1993).

,~. ,ii:

48 Chapter 3

complicates the process of financial stаЬilizаtiоп, as raising incomes in line with prices lends 10 directly fue! inflation. In order 10 avert inflation, measures such as introducing full indexation must Ье taken re!uctanl!y, and сan on!y Ье justified when financia! stabilization proves impossible due to political constraints. А питЬет of macroeconomic stabilization раНсу recommenda­

tions have Ьееп based оп а nonmonetary conception of inflation in Russia. This view сап Ье found in тапу works Ьу Russian есопо­mistsЗ and а number of foreign academics4 А delailed ana!ysis of nonmonetarist views ОП the nature of inflation in Russia has Ьееп presented in other workss

Among the factors determining inflation, some authors have cited not monetary роНсу Ьи! one от тоте of the following: (1) an imbal­anсе in the structure of the economy; (2) the difficulty of reallocating resources from one sectoт to another; (3) the high !evel of monopoly in the Russian economy; (4) the movement of prices toward woтld levels аНет price liberalization; (5) the gradual raising of energy prices

3. See, for ехатрlе, V. Volkonskiy, Уе. Gurevich, and С. Kantorovich, "Evolyutsiya tsen v Rossii: prichiny inflyatsii v ekonomike perekhodnogo perioda," in Denezhnye i finansovye problemy perekhodnogo perioda v Rossii: rossiysko-jrantsuzskiy dialog, edited Ьу У. Ivanter and Jacques Sapir (Moscow: Nauka, 1995); V. Maevskiy, "Odin iz shan­sov ozdorovleniya ekonomiki," Finansy 1 (1994); N. G. Nozdтan' and Т. S. Berezin, "Faktory i etapy razvitiya inflyatsii izderzhek v ekonomike Rossii," Ekonomika i тate­maticheskie metody 1 (1994); V. Pugachev and А. Pitelin, "Rossiyskaya inflyatsiya: traktovka, mode1irovanie, metody ЬоrЪу," Voprosy ekonomiki 11 (1994); Вапу Ikes, "Inflyatsiya v Rossii: uroki dlya reformatorov," Voprosy ekonomiki 3 (1995); А. Afa­nas'ev and О. Vite, "TnfIatsiya izderzhek i finansovaya stabilizatsiya," Voprosyekono­miki 3 (1995); D. Belousov and А. КlepacЬ, "Monetarnye i nemonetamye faktory inflyatsii v rossiiskoi ekonomike v 1992-1994," Voprosy ekonomiki 3 (1995). 4. In the work Ьу М. Aglietta and Jacques Sapir ("Inflyatsiya i defitsit v perekhodnyi period," in Denezhnye i finansovye problemy perekJ1Odnogo perioda v Rossii: rossiysko­jrantsиzkiy dialog, edited Ьу V. Tvanter and Jacques Sapir [Moscow: Nauka, 1995П, the authors draw conclusions about the nonmonetary character of Russian iлflаtiоп based оп the link Ьеhлтееп changes in wholesale prices and aggregate mопеу supply. How­ever, these conclusions are high1y debatable, for multiple reasons. First, as the authors themselves note, statistical evidence attests to the unrеliаЬШty of::,their results. Second, in Russia there is по re1iable index of wholesale prices; those pubH:illed Ьу Goskomstat RF are based not оп асщаl prices but оп the prices declared Ьу the enterprises them­selves. Third, the argument that the ехistелсе of this link attests to the existence of "inflation costs" is itself contentious. 5. See, for example, the work Ьу the Institute of Economic Analysis, "Finansovaya stabilizatsiya v Rossii," 1995. See also В. Granville, "Inflyatsiya: vysokaya tsena i nikakoy otdachi," Voprosy ekonomiki 3 (1995); Sergei Sinel'nikov, "Analyse des proc­essus inflationnistes еп Russie еп 1992-1993," Hyperinjlation et stabilisation еn Europe de l'Est et еn Amerique Latine: Actes du Seminaire International, Paris, 4-5 Nov. 1993.

fiii·····

The Liberal Market Reform Program 49

and their liberalization; (6) the inadequacy of enterprises' responses to market conditions, in particular the tendency to set prices accord­ing to production costs and по! according to supply and demand; (7) enterprises' soft budget constraints; (8) the total absence of respon­sibility оп the part of enterprises for nonfulfillment of their contract obligations, а phenomenon supported Ьу the lack of а functioning bankruptcy mechanism; and (9) the general cronyist mentality prev­alent among enterprise managers. Мапу conclusions have Ьееп reached about the nonmonetary

character of Russian inflation and the prevalence of "cost inflation" based оп ап analysis of these and other factors. (These analyses ате generally of а qualitative nature, but occasionaHy they ауе also quantitive.) Clearly, these factors do influence inflation. However, in а situation in which inflation exceeds 20%-30% per year, аН of these norunonetary factors fade into insignificance in comparison to fac­tors such as the топеу supply and changes in economic agents' de­mand for real cash balances. Iп the short term, against а background of enterprises' nonmarket responses and shocks such as the liberal­ization сЕ raw material and energy prices, raising the minimum wage сап lead to increased inflation. However, if this increase is not accompanied Ьу ап accommodating monetary policy, the general price level will stabilize swiftly.

Nonmonetary views оп inflation have served as the basis foy criti­cizing tight fiscal policy as irrational. Members of this school of crit­icism believe that since inflation is primarily caused Ьу nonmonetary factors, monetary emission should Ье used (increasing central bank credits to the government and the есопоту) to raise aggregate de­mand and stimulate production. АН these views in опе way оу another argue against the pursuit of

financial stabilization as а goal in itself. Discussion of possible alter­natives to а tight fiscal policy has Ьееп much rarer, although соп­siderably more relevant. For example, Aleksashenko, Kostiukov, and Nikologorsky, among others, raised the important question \of the rationality of fixing the exchange rate during the financial stabiliza­tion рrосеssб In considering this issue, they took into account both the close links between exchange rate policy and.''Control of the

6. S. Aleksashenko, Уе. Kostiukov, Nikologorsky, et а1., Upravlyaemy kurs: а pochemu Ьу i net?! (Vozmozhnosti i posledstviya perekJwda k upravlyaemomu kursu rublyaJ, (Mos­cow: Expertniy Institut RБРР, June 1995).

1 111

I

l'

50 Chapter 3

топеу supply, and the linkе between the growth of the real ruble exchange rate with the introduction of а fixed exchange rate or сш­rency corridor during periods of inflation. Their analysis showed the desirability of а predictable exchange rate policy in which the ех­change rate would lag behind the rate of inflation. Under such а policy, the exchange rate serves as а nominal anchor that restrains inflation, whi1e the growth of the real ruble exchange rate, a1though having а negative impact ОП production, stimulates structural re­form of the есопоту.

Russian economic 1iterature has devoted litt1e attention to the problem of choosing between orthodox and heterodox stabilization policies. Orthodox stabilization роНсу is based оп tight control of the топеу supply and was practiced in the majority of Latin American countries during the 1980s and 1990s. These policies yielded positive results in Chi1e, Bo1ivia, and Mexic07 Heterodox stabilization, in­volving ап active wage роНсу aimed а! breaking the wage-price spi­ral, was successfully implemented in Israe18 In Russia there was по mechanism foy the automatic indexation of wages to consumer prices, and thus there was по need for а specific policy of wage controls.

3.3. The Socioeconomic Situation оп the Eve of Reforms

In order to assess the ассшасу of the views and recommendations advanced, it is worth examining the actual state of the Russian есопоту оп the eve of reforms, а! the end of 1991. А! this juncture two questions are relevant: (1) Could radical economic reforms have Ьееп delayed? (2) Could the reform program have Ьееп altered sig­nificantly? То answer these questions it is useful to examine such factors as the gold and hard currency reserves, food and other sup­plies, goods stocks, and the топеу supply.

The political and economic situation а! the end of 1991 was cata­strophic. Over the course of опе year, national inСOJре had fallen Ьу more than 11%, gross domestic product Ьу 13%, inlJ.ustrial produc­tion Ьу 2.8%, agricultural production Ьу 4.5%, extraction of oi1 and

7. М. Bruno, С. di- Tella, Rudiger Dornbusch, and Stanley Fischer, eds., Inflation Sfabi-1ization: The Experiences о! Israel, Argentina, Brazil, Бо1iviа, and Mexico (Cambridge, Mass.: :MIТ Press, 1989). 8. М. А. Kiguel and N. Liviatan, "The 01d and the New in Heterodox StabilizatiOl1 Programs," World Bank Working Paper, 1989; Ыет, "The Business Cycle Associated y.,rith Exchange-rate Based StаЬШzаtiоп," World Bank Economic Review 6 (1991).

The Liberal Market Reform Program 51

соа! Ьу 11%, поп smelting Ьу 17%, and food production Ьу more than 10%. Also, gross grain collection had fallen Ьу 24% and state procurement Ьу 34%. Тhe drop in foreign trade turnover was partic­ularly drastic, falling Ьу 37%, while the volume of exports fell Ьу 35% and the volume of imports fell Ьу 46%.

Moreover, попе of the restrictions оп demand that were the main factors in the economic recession of the upcorning years were present а! the time. Мопеу continued to Ье pumped into the есопоту а! ап ever faster rate than before. А significant part in the develop­теп! of this crisis was rooted in the struggle between Union and Russian authorities. These two centers of authority were competing to approve аН kinds of new social expenditures and to finance ill­thought-out investment programs-both of which increased the budget deficit.

Consequently, аН monetary indicators grew significantly. Enter­prise profits increased in nominal terms Ьу а factor of 1.9, the inсоте of the population doubled, and the топеу supply increased Ьу а factor of 4.4. Consumer prices more than doubled (increasing Ьу 101.2%), а phenomenon that was completely uncharacteristic for the socialist есопоту: а year earlier inflation had Ьееп just 5%.

Extemal debt, denominated in convertible currency, increased to $76 billion, while internal hard currency debt rose to $5.6 Ыlliоп and arrears оп clearing operations surpassed $29 Ыlliоп. Gold and for­eign сшгепсу reserves decreased sharply, and for the fпst time in the history of the Soviet Union, gold reserves feH below 300 tonnes (289.6 tonnes оп 1 January 1992). ТЬе shortfall of hard сшгепсу in­соте derived from centralized exports to рау for centralized im­ports, and clear external debts, reached $10.6 Ыlliоп in the first ten months of 1991 (prior to the formation of the Yeltsin-Gaidar reform govemment). In order to cover this deficit, the last USSR govern­теп! sold part of the country' s gold reserves for $3.4 Ыlliоп and spent hard currency to the tune of $5.5 Ыlliоп, which it took from the Vneshekonombank USSR accounts of enterprises, organizatiOl~s, and [оса! governments.

Control over fiscal policy and the шопеу supply quickly unraveled. There was ап increase in the dollarization of the есопоту, топеу was increasingly replaced Ьу barter, and the administrative restric­tions оп interregional trade grew. As а consequence, the republics of the former USSR introduced de facto mопеу sшгоgаtеs (coupons, purchase cards, and so forth) and in а number of cases (Ukraine,

52 Chapter 3

Estonia, Latvia, and Lithuania) prepared to introduce their own national currencies. ТhiБ led to ап increase in the amount of топеу in circulation, both in the former republics and in Russia, further aggravating the difficult financial situation.

The state budget deficit for 1991 was six tirnes greater than planned and, according to our calculations, reached аЬои! 21% of GDP (the sum of the Union and Russian Federation budget deficits). In addition, the former Soviet repub1ics actuaHy stopped transferring money to the Union coffers, which means that the aforementioned estirnate of the consolidated state budget deficit for 1991 is оп the low side. According to World Bank estimates, based оп а calculation of sources available for financing the budget deficit (enterprises' accounts, the population's savings, а current account surplus), the budget deficit totaled 30.9% of GDP.9

Combined with this budgetary crisis, there was а goods shortage in almost аН categories. Тhe ratio of household money savings to goods stocks sharply deteriorated (Ьу а factor of five compared with 1970 and more than twice compared with 1985). The goods stocks in retail trade feH to а record low.

The situation with the urban food supply most graphicaHy illus­trates the prereform socioeconomic situation. (То emphasize the so­ciopolitical degradation that occurred pre-1991, the Petrograd bread crisis of February 1917, which was of sirnilar magnitude, was the likely cause of the autocracy's overthrow.) Food supplies virtually broke down as а result of the complete paralysis of alllevels of the bureaucracy. Thus, in January 1992 food grain reserves were аЬои! 3 million tonnes (excluding imports), while the country's requirements were in excess of 5 mi1lion tonnes per month. In more than sixty of Russia's eighty-nine regions there were ПО reserves of food grain at аН, and flour could Ье produced only Ьу the swift processing of im­ported grain. Тhe minimum required grain irnport during this period was therefore around 3 million tonnes per month. Ac.cording to the estimates of Roskhleboprodukt, in the first half of 1992 Russia pro­duced 8.65 million tonnes of grain, where 26 million tonnes were required. Тhus the deficit for the first half-year was 17.35 million tonnes, which would have СОБ! over $3 ЫШоп to cover.

At the Бате time, there were а питЬеу of instances in which im­ported grain remained unloaded in Russian ports ЬесаиБе there was

9. See Russian Econoтic Reform: Crossing the Threshold 01 Structural Change (World Bank, 1992).

--,

The Liberal Market Reform Program 53

по foreign currency to рау for its traru;portation. The prime саиве of this was the fact that credit lines were not open because the former USSR's reputation as а first-class debtor had been totally detroyed in the preceding years. In cities throughout the country а strict rationing system was introduced. Тhe sale of аН staple foodstuffs was rationed, including теа! products, butter, vegetable oil, cereals, pasta, sugar, salt, confectionary, milk products, matches, alcoholic drinks, and tobacco products. Rations of foodstuffs Ьу the end of 1991 were roughly as follows: sugar-l kg рет person per month; теа! products-O.5 kg; and butter-0.2 kg. Nonetheless, there were not even sufficient resources to ensure these minimal levels. Supply was simply not guaranteed; food coupons were not exchanged for several months а! а time, and people had to stand in long lines to obtain goods.

3.4. The Need to Accelerate Reforms

In light of this economic malaise, the statements of а number of pol­iticians and economists (particularly Gregory Yavlinsky) regarding the need to conduct privatization and demonopolization first, and on1y then to liberalize prices, seem inappropriate. In 1991 Russia simply did not have such а choice. The destruction of the funda­mentals of the economy соиЫ have reached catastrophic proportions and Ьесоте difficult to reverse. In reality there could Ье по delays in launching market reforms, and without liberalizing prices, this was impossible.

Against the backdrop of deteriorating living standards, the post­August euphoria turned into mass political disappointrnent over the lack of real reforms. Тhis was the case within the democratic move­ment as well, which did not know how to utilize the August victory and did not have any serious programs (unless one counts ртора­gandist programs suchas the 500 Days plan). It was also true of broad swaths of the population, whose social expectations had been raised after August. These expectations diverged significantly from reality. The country's politicalleadership quick1y used ир its stock of goodwill and popular support.

The state bureaucracy did not work, due to expectations of im­minent reorganization, retrenchment, and the like. Spontaneous privatization took off like wildfire. State structures, ministries, and departments transformed themselves into concerns, corporations, or

, с _

54 Chapter3

associations. Embezzlement of state property took place en masse: civil servants took with thern not only the contacts and know-how they had acquired оп the job, but also the financial resources they could ассеББ. They acquired ful1 control rights over property without being subject to the financial discipline of а real owner. The state proved incapable of exercising any control over the situation.

Negotiations with the leaders of other former republics of the USSR оп possible ways of transforming the former Soviet Union, including coordinating reforms and conducting agreed-upon роНсу in at least the most irnportant areas, reached deadlock. The political and economic policies of the former Soviet republics' governments diverged more and more. Some of the former republics, the Baltics in particular, chose the path of radical socioeconomic reforms. Others tried either to avoid radical reforms cornpletely or to rnod­erate and postpone them аБ much as possible.

Based оп the above, it is clear that the real po1icy choice at the tirne was not over the timing of the start of radical reforms or the se­quence of reforms, or over whether price liberalization should pre­cede privatization от vice versa. Rather, the real question revolved around two completely different options: (1) whether the reforrn of the Russian есопоmу should Ье conducted while keeping the fun­darnentals of the Soviet state and the integrated economy in place, and therefore also maintaining the rudiments of the corresponding economic policy (as essential1y the Gorbachev, Silaev, and Yavlinsky groups proposed), or (2) whether to irnplement а strategy that would al10w Russia to а ttain economic independence and to conduct inde­pendent economic reforms as quickly as possible (аБ proposed Ьу the authors of Program-91).

Typical apparatchik reactions-fear, failure to comprehend the scale of the challenges, ап inability to see the need for systemic transformation behind the concrete problems of monetary overhang, goods shortages, and а disintegrating budget-provided support for the first option. Оп the other hand, analysis of gl~bal experiences, analysis of the developmental alternatives for the Russian economy depending оп the selection of this or that scenario, the general polit­ical logic of the rnoment, and the unity of tactical and strategic аirnБ-аl1 of these provided argurnents in favor of the second option. In the end, а version of Program-91 was adopted and partially implemented.

The Liberal Market Reform Program 55

3.5. Russia's Progress Toward Economic Independence

ТЬе need for realizing this program in particular, out of the many that existed at the time, was determined Ьу а new fundamental understanding of the laws of socioeconomic development in the post-Soviet bloc. ТЫБ understanding made independent economic reforms-those not coordinated with the other Soviet republics­unavoidable. But these reforms were pursued in close conformity with political and institutional reforms that would promote the con­solidation of Russia's sovereign status and establish the institutions af а capitalist saciaecanamic system.

Of ultimate political importance was the realization that after Au­gust 1991, Russia's relations with the other former Soviet republics and the Union center changed fundamentally. Contrary to the dom­inant political mythology, which attributes excessive importance to official legal actions, the Soviet Union effectively collapsed оп 19-21 August 1991 аnа from that moment оп existed only nominally, function­ing neither as а state mасЫnе nот as аn organ for conducting economic­or indeed аnу other-policy. ТЬе issue was not whether the principles оп which the Soviet Union had been built were good от bad, but what to do when these principles did not work. ТЬе republics de­clared the federal property located оп their territory to Ье their own, and refused to meet any of their economic obligations to the Union. This was the genesis of uncontrollable mass embezzlement not оnlу of property, but also of rights, obligations, regulations, administra­tive pracedures, and Ба .оп. Тhe Union as а political and economic entity had already ceased to

exist, even аБ БресиlаНап about НБ preservation continued in farce. Тhus, in the shortest possible time and in the most difficult of cir­cumstances, it was necessary to develop а strategy not only {от есо­nomic survival, but also for the further development of everything­аН spheres of the country and society. АН of this had to Ье devel­oped during the sudden death of one state and the emerge'i'ce of а new опе.

It is important to Ьеат in mind that after the effective collapse af the Union center, the contradictions between Russia' s interests and those of the other republics сате into play. These contradic­tions were related to тапу differences: the size of the есапашiеБ, their resource endowments, their understanding of the prospects for

56 Chapter 3

historical development, and the political weight they had in the eyes of the international community. For the other former Soviet repub­lics, preserving the existing resource flows and fiscal relations-and indeed, discussion of а single еСЩlOmiс space and the advantages of есопошiс integration continued-would/ however, have opened ир the possibility of reconstructing their economies at Russia's expense. This would have entailed а considerable additional burden оп the Russian есопоту, underrnining апу possibility foy socioeconomic revival.

In short, "economic union with immediate роНпсаl autonomy" was very much in the interests of the other republics because it meant ассеББ to Russia's financial and economic уевоитсеБ while freeing the Union's political and legallegacy. Russia's interestsJay in "the most rapid achievement of economic independence while pre­serving political иniоп foy а transitional period."

In ош opinion, adoption of the first scheme would have led to ап aggravat:ion of economic and sociopolitical tensions, including dividing ир the fiscal pie, searching out those responsible for under­funding of this or that sphere, latent protectionism, and continuation of the "dual power" of Union and republic institutions. It would also have led to constant vaci11ations in риЬНс expenditnre and credit роНсу shaped Ьу interrepublic compromises, and to an intensifica­tion of the inflation crisis. These heightened tensions would therefore have led to chronic political instability, social tension, and the over­throw of democracy оп the territory of the former USSR.

In the military sphere, maintaining the Soviet Union would have meant the emergence of new nuclear states with unstable interstate relations and interstate boundaries; the арреатапсе оп Russia's ЬОТ­ders of new and powerful potential aggressor states; and Russia's joining the international community not as а great power, the legal БиссеББО! to the farmer Soviet Union, but аэ а пеw subject of the ш­ternational community, with all the problems that follow.

The only responsible political step was the immediate assertion of full economic autonomy for Russia ana the independent implemen­tation of reforms. Тhe other republics' could also independent1y join such reforms (or, more precisely, could not afford to do otherwise). Тhe political and economic 10gic of this historical epoch tluust

upon Russia the leadership of economic reforms оп the territory of the former USSR. The overwhelming majority of the former USSR' s export-oriented industries were 10cated in Russia, and therefore only

lПе Liberal Market Reform Program 57

Russia could take оп the Soviet Union's foreign-debt obligations. This action a!so gave Russia а strong c!aim to the go!d and foreign currency ho!dings, property abroad, and the debts of other countries to the Soviet Union. Russia, instead of the USSR, Ьесате the !eading partner of Western states and international finaneial organizations. Russia he!d the dominant cards: it had an exceeding!y capacious domestic market and exportable natura! wealth that could easily Ье redirected from traditiona! export markets to deve!oped countries. The foreign economic policy of the other republics, which for the most part were not in this position, was therefore inextricably tied to Russia. Finally, Russia controlled the lion' s share of the interrepublic manufacturing infrastructure, and it independently had the materia! and human еарНа! to УUn its transportationr eommunicationr and energy systems. Thus, extricating Russia from any kind of !ong-term, all-eneompassing eeonomic union and avoiding апу eommitment to suprarepublican institutions of economic coordination seemed to Ье the most sensible course.

Re!ated to this was the insistence that аll state property оп Russian territory Ье recognized as Russian property, and a!so that the Rus­sian state contro! the money supp!y in the ruble zone as !ong as it remained in existence. The оnlу alternative would have been to install mechanisms for conducting an effective and tight monetary po!icy (and on!y in this case cou!d а sing!e monetary and banking system have been preserved оп the territory of the former Soviet Union). However, as the experience of the following years wou!d show, such mechanisms proved a!most impossible to establish even in the monetary union between Russia and Be!arus.

As was anticipated Ьу those who deve!oped the Russian program of economic reforms, а considerable ba!ance-of-payments deficit deve!oped in the republics' trade with Russia. Тhis positive ba!ance gave Russia powerfu! !everage in financia! and economic negotia­tions and interactions with the republics.

It is usefu! to ana!yze, both retrospective!y and prospective!y, the differences between the two fundamenta! conceptions of economic reform in socialism's !egacy: Gaidar's and Yav!ilisky's. The program proposed Ьу Yav!insky essentially entailed ho!ding back economic reform in Russia so that joint reforms cou!d Ье conducted simu!­taneously in теmЬеу republics of the ееопошiс union. However, restraining economie reform was clearly impossibler given the dra­тапе po1itical and economic situаtiоп. Gaidar's program, оп the

58 Chapter 3

other hand, was targeted а! implementing economic relorm in Rus­sia as quick1y ао possible, without the restraints 01 reactionary ро1l­cies in the other republics. This program permitted the introduction of market mechanisms, guaranteeing the noncatastrophic, systemic transformation of Russia.

3.6. The Essence of Socioeconomic Reforms in Russia' s Transition Period

Several points distinguish Program-91 по! опlу Irom Yavlinsky's program, Ьи! also Irom the other we11-known programs 01 the time (such as those 01 Saburov, Shatalin, and Abalkin, among others).

First, Program-91 completely rejected the idea 01 а "special path" for Russian economic development and, in line with the majority 01 tried and tested stabilization programs throughout the world, соп­centrated first and loremost оп relorming and nursing the monetary sector.

Second, Program-91 was по! опlу ап economic relorm program Ьи! also, perhaps most importantly, а program lor the creation о! а Russian nation-state. This goal was exemp1ified Ьу the sovereignty of Russian economic legislation, а national monetary рrоgrаш, а na­tional currency, а Russian tax, а national budget, ап independent foreign economic policy, state property, and instruments lor state regulation 01 the есопоту.

In essence, the philosophy and ideology 01 the Program-91 re­forms are spel1ed out in two documents, А Strategy /or Russia in the Transition Period and Russia's Immediate Economic Prospects. The other documents-and there were several dozen-represented technical appendices, defining what had to Ье done and what regulations were needed. А Strategy /or Russia in the Transition Period defined the fundamen­

tal course аБ economic independence within а "50ft" political union. This path was approved Ьу Presidel}t Yeltsin and then put into practice Ьу the Gaidar and Chernomy*din governments. А! the core 01 this program were по! on1y crucial есопошiс reforms (market­ization, liberalization, privatization, and financial stabilization) but also the creation 01 а sovereign Russian state with а11 01 the necessary instruments, including а stable and convertible national currency, а tax system, а budget, а customs service, ап effective monetary sys­tem, and а national bank.

The Liberal Market Reform Program 59

The second most important document produced Ьу the Gaidar group, Russia's Immediate Economic Prospects, defined the prulosophy of stabi1ization and reformist policies in the context of creating the institutions 01 Russian national statehood. It was in this docu­теп! that the conclusion was fir8t reached (а conclu8ion that was repeatedly modified in sub8equent RU88ian reform programs) that economic policy in the near future would Ье defined not Ьу the reformers' ideal plans Ьи! Ьу а combination 01 three critical factors, bequeathed to Rus8ia in the legacy 01 the Soviet Union' s co11ap8ed есопоту:

· the inflation crisis (а massive тасуоесопошiс imbalance manifesting itself in accelerating ореп inflation and а severe shortage of а11

goods)

• the payments crisis (а severe shortage of gold and foreign currency reserves and the undermining of the country' s creditworthiness, wruch would lead to а sharp drop in import8)

• the systemic crisis (the 108s of ability 01 state in8titutions а! a111evels to regulate resource flOW8)

It was not the simple copying 01 а 8tandard 8tabi1ization program, Ьи! these 8pecifica11y Russian political and economic realities that forced Gaidar' 8 group to launch fiscal and monetary policies as the initial objects of their stabilization and reform efforts.

It Ьесаше clear that in the absence of financial stabilization, with paralyzed nonmarket mechanisms lor the distribution of resources, it was impossible to create market mechanisms that could save the country from the very real threat of mass starvation. In particular, it was impossible to channel entrepreneurial activity away lrom spec­ulation and into production and to attract both domestic and foreign investment.

The initial version of the relorm program did not envi8ion luHlib­eralization а! the initial stage Ьи! streamlining, restructuring, and а 8ubstantial increase in the general price level (rSJUghly ае the lае! communist government in Poland under Rakov1qsy had done). Only after that was it intended that lиН price liberalization would Ье implemented, with simu1taneous macroeconomic stabilization. The basis trus stabilization was to Ье the introduction of а Russian па­tional currencYJ which would cut off non-Russian sources of топеу.

However, Ьу the end of November 1991 this idea had 10 Ье аЬап­doned. Working in the governmenl provided access 10 addilional

1 I

60 Chapter 3

information about the real socioeconomic situation in the country, and this data showed that the country would simply not survive another six months of high inflation (that is, the fast growth of ad­rninistrative prices with continuing goods shortages). Such а crisis would exhaust the government's stock of trust Ьу the time "real reforms" and "realliberalization" were implemented. ТЬив, the only option was immediate price liberalization, although this introduced the risk of destabilizing pressures being exerted Ьу rubles emanating from the former Soviet republics. ТЫв was а show of political realism. In reality, separating mone­

tary systems required тисЬ more time than was initia11y thought and, because of complications, had to Ье implemented in several stages. Russian industrialists, industrialists of the other former Soviet republics, the governments of those republics, and а wide spectrum of political forces from Rutskoy to Yavlinsky а11 10bbied aggressively for the preservation of the ruble zone. Unfortunately, in the initial phase, висЬ organizations as the International Monetary Fund and the European Commission were аlво among those advo­cating maintenance of the ruble zone.

Jn these conditions the swift introduction of а new currency proved impossible, and for technical reasons ав we11 as political rea­sons, separating the bank accounts of the former Soviet republics required а good deal of time. ТЫв complicated and delayed financial stabilization considerably.

3.7. Cutting the Budget Deficit

А sharp reduction in the budget deficit was а necessary condition for achieving macroeconomic stability. То this end, а significant reduc­tion in expenditures was planned, to Ье achieved Ьу cutting the mil­itary budget, transferring certain expenditures to the former Soviet republics, and implementing price and enterprise subsidies. It was аlво necessary to find sources of buci,get revenue that could operate in conditions of high inflation. АЬоуе а11, this meant а shift to indi­reet taxation. Along with а turnover and sales tax, а new value­added tax (VAT) and а new excise schedule were introduced. Аlво, а new export tax оп fuel was introduced, while the former system of licenses and quotas was abolished. ТЬе money earmarked for weapons procurement was reduced Ьу

а factor of 7.5, centralized capital investments were reduced Ьу а

r The Liberal Мarket Reform Program 61

factor of 1.5, price subsidies were си! to а third of previous levels, and the financing of foreign states was almost completely halted (with the exception of CIS countries). In this manner the budget def­icit was supposed to Ье си! overall Ьу а! least а factor of three. As it turned out, it was initially reduced even further than expected, and in the first quarter the budget was even in surplus. However, after some time the deficit started to expand again as а result of pressure from sectorial and regionallobbies.

Whereas the introduction of the VAT, а measure that did not di­rectly impinge оп significant corporate interests, was possible when the reformers conceived it, the introduction of other measures was more difficult. ТЬе abolition of price subsidies had to Ье carried ои! gradually over the сошsе of three years owing to powerful opposi­tion, especially in the regions. Thе cutting of enterprise subsidies was also а rather long-drawn-out process. ТЬе government оп several occasions announced its intention to abolish licenses and quotas, but not until 1996 did it manage to fully realize this measure.

It was also impossible to start reforms without substantiallegisla­tive changes. Several dozen legislative acts underwent amendment, and а number of laws were ри! forward for re-adoption. ТЬе presi­dential decree оп the liberalization of prices and reorganization of trade was the most revolutionary of the acts proposed. First, it per­mitted enterprises themselves to set the prices оп their products. Second, it abolished the centrally planned allocation of rеsошсеs, granting enterprises the right to Ьиу and sell inputs and products themselves. Third, it allowed trade companies to negotiate prices оп аН kinds of goods and services. Fошth, it laid the foundations for the commercialization of state supply organizations. Fifth, it introduced control over the prices of monopoly enterprises. Sixth, it laid the foundations for demonopolization of wholesale and retail trade. And seventh, it abolished the ban оп nonstate trading firms.

In other words, everything that economists and politicians had discussed for years during the perestroika period was introduced Ьу а single act, and the foundation of the planned/economy was com­pletely destroyed. After price liberalization the Russian economy ceased to Ье socialist. Of course, Russia was far from being а capi­talist economy. Although the actual progress of the reforms did not entirely coincide with the reformers' intentions, and а number of the reforms took several years to Ье fulfilled, Rиssiiш capitalism started to revive after а difficult and prolonged interruption.