Russia - Part 1.................
Chernomyrdin-Kiriyenko-Chernomyrdin
by Keith Bush
From March through August 1998, the economic and political situation in Russia was marked by severe reversals. A growing impasse between President Yeltsin's government and the Communist-dominated Duma over reform combined with an accelerating crisis in the ability of the Russian government to meet its financial obligations. The result was a collapse of Russian equity markets, a de facto devaluation of the ruble, the sudden firing of Prime Minister Kiriyenko, and a tense political standoff between Yeltsin and the Communist leadership of the Duma.
Economic Situation
On August 17, after a massive loss of domestic and foreign investor confidence in the Russian government's ability to meet its obligations, a looming threat to hundreds of Russia's commercial banks, and growing pressure on the ruble, the Kiriyenko government announced a new multiple-part rescue package. Its principal features included the following elements:
a raising of the upper limit of the exchange rate of the ruble from 7.13 to 9.50 rubles to the dollar tantamount to a devaluation of 34 percent; a forced restructuring of the short-term ruble-denominated state debt (GKO) into longer-term ruble and dollar debt-in essence, a partial default; a 90-day moratorium on the repayment of principal of foreign loans, margin calls on repurchase transactions, and settlements on foreign currency forwards a pooling of resources among a few major banks, permission for these to access their reserve deposits, other support from the Central Bank, and a guarantee of individual deposits; renewed measures to prevent capital flight.
The de facto devaluation of the ruble is a major political defeat for Yeltsin. After more than six years of hardship borne patiently by the Russian people, until now the president could at least claim a stable currency and bringing inflation down from 2,500 percent in 1992 to 11 percent in 1997 and to single-digits during the first half of 1998. These two cardinal accomplishments are now out of the window. The upper limit of the exchange rate has already approached the 9.50 level, and year-on-year inflation is expected to rise to at least 20-30 percent by December.
Political Situation
The economic crisis and its political repercussions led Yeltsin to dismiss the Kiriyenko government and to reappoint Victor Chernomyrdin as prime minister. On March 23, Yeltsin had fired Chernomyrdin because "the government has clearly been lacking dynamism and initiative, new views, fresh approaches and ideas." On August 23, Yeltsin fired Kiriyenko, citing the need for stability and continuity of power in the year 2000, when the next presidential election is due. For months, the leadership of the Communist-dominated Duma had urged this step. Yeltsin's formulation, which was identical to arguments used by the financial oligarch, Boris Berezovsky, in a media campaign to oust Kiriyenko and bring back Chernomyrdin, appeared to be a capitulation to the unholy anti-reform alliance between the left and the oligarchs.
What happened in the last five months to explain Yeltsin's sudden reversal of course and reappointment of Chernomyrdin? The short answer is that Yeltsin has grown weaker in both physical and political terms. Even during his short public appearances, he has often seemed disconnected and confused, leaving his aides to clear up misstatements. It has become evident to all, including the president's family and close associates, that he cannot run for office again in July 2000 and, indeed, may have to step down before that date. Thus, the time may have come to nominate his chosen heir, someone who would guarantee a dignified retirement for Yeltsin and his family.
Politically, the presidency has become noticeably weaker in its position vis-a-vis the Duma, while the influence of the financial oligarchs has grown. Although Kiriyenko impressed Western diplomats and financial officials, he lacked either the power or authority to move the Duma to approve reform legislation, with the leadership of the Duma steadily becoming more assertive and even brazen in challenging the prime minister and the president. At the same time, the oligarchs, who control a large share of the economy through their financial-industrial groups and influence the population through their media empires, had become more and more apprehensive as the Kiriyenko administration cracked down on tax evasion, began to challenge monopolies, and prepared a radical package of budget cuts and revenue enhancements. Perhaps the last straws were the de facto devaluation of the ruble, the compulsory restructuring of the $32 billion ruble-denominated short-term debt into longer-term ruble- and dollar-denominated bonds, and government plans to move against insolvent banks. While those oligarchs with holdings in the fuel and energy sectors stood to gain from devaluation-operating costs are in rubles while export earnings are in dollars-all or most of their commercial banks were threatened with insolvency by a weaker ruble and by the compulsory debt swap.
What can be expected politically in the short term? First, the horse-trading negotiations between Yeltsin-Chernomyrdin and the Duma leadership-which appeared to reach an agreement on August 30 before both sides backed away from its terms-will likely be contentious and will certainly extend beyond the conclusion of any specific agreement. The Duma leadership is holding hostage its approval of Chernomyrdin as prime minister in order to extract from Yeltsin concessions on power, appointments, and policy. They will seek to reduce the powers of the presidency, which have enabled Yeltsin to act by fiat in many instances but which also have been a principal factor that allowed Yeltsin to press forward with reforms: for instance, the entire privatization program has been pushed through by presidential decree and never approved by the Duma. The Communists will play hardball in demanding appointments to lead key ministries in a coalition government. They will also try to prevent further reform and to rollback previous reforms. It should be recalled that, even in recent months, the Duma leadership had inflated the budget deficit with spending measures, undermined and stymied tax reform legislation, passed legislation (vetoed by Yeltsin) to prohibit the sale of land, and undertaken impeachment procedures against the president on political grounds. On August 30, an agreement appeared to exist between Yeltsin-Chernomyrdin and both houses of the legislature. It would involve reductions in presidential powers, confirmation of more ministerial appointments by the Duma, appointment of an unspecified number of Communists to ministerial positions, and a commitment by Yeltsin not to dismiss the parliament for at least 18 months. The Duma, in turn, would confirm Chernomyrdin as prime minister and end the impeachment inquiry against Yeltsin. On August 31, Yeltsin hedged about ceding constitutional powers, and CPRF leader Gennady Zyuganov declared his opposition to the agreement, arguing that Yeltsin could not be relied upon to meet its terms. Thus, an unpredictable contest over policy and power will continue and will likely intensify, both before and after the conclusion of any power-sharing agreement.
Second, Chernomyrdin's compromising and accommodating style promises little forward movement toward the market. In his first period in office, scant progress was recorded in corporate governance, tax reform, meaningful application of bankruptcy laws, the reduction of subsidies, demonopolization, recovery of investment, attraction of foreign direct investment (Russia attracts less than one percent of global FDI), and the introduction of new production-sharing agreements (only three PSAs are in effect and none of them has yet produced any oil). Unlike his previous administration, which included key reformers at many levels, his new government will be staffed at least partly with Communists and/or nationalists, and he will be in a much weaker position in his negotiations with the Duma.
Third, it is difficult to find reason for optimism about the short-term outcome over the policy struggle. The possibility cannot be totally discounted that Yeltsin-Chernomyrdin, backed by IMF conditionality, could extract reform measures from the Duma. However, this would require to some extent that the Communist leadership of the Duma will suddenly become enlightened about economic policy, an unlikely prospect. More likely, crisis legislation will either bog down or be severely weakened by the emboldened Duma. In addition, the Duma leadership will probably press for disastrous increases in government spending and the money supply. If the Duma leadership succeeds in imposing its irresponsible policy preferences, market forces will in turn administer a painful lesson, with inflation returning to destabilizing levels. At that point, Russia will reach a crossroads. On the one hand, it is possible that the Duma leadership will learn the lesson and move toward needed reforms on the grounds that it will suffer the political consequences of continued economic crisis. On the other hand, because of its utter ignorance of economics, the Communist leadership could press for increasingly interventionist and anti-reform actions.
Are there any counterbalancing positive factors in the short term? Only a few. First, while the principal reformers in Yeltsin's government have been dismissed, the likelihood is that some will survive in positions of some influence: for instance, Boris Fedorov has been charged with leading reform efforts and nominated as point man with international financial organization. Second, given his record during his previous period in office, Chernomyrdin at least understands the constraint that market forces place on policies. Third, based on reports about meetings between Yeltsin and Chernomyrdin and members of the upper house of parliament, pro-reform governors appear to be weighing in as a counterbalance to the anti-reform Duma. The upper house, which is composed of all the regional governors, has taken a back seat in federal politics until now. If the Duma threatens to take actions that will destroy nascent economic growth in many regions, pro-reform governors may organize themselves into a more effective political force in Moscow. Fourth, recent statements by IMF officials indicate that the next tranche ($4.3 billion) of the $22.6 billion loan package will be strictly conditioned on progress toward reform, thus placing an additional constraint on the Duma.
In sum, Russia in the short term will likely be mired in the political struggle over a response to the economic crisis. Because the most probable outcomes all involve some enhancement of the power of the Duma's leadership, immediate prospects for reform are quite bleak. However, the Duma leadership will be constrained by market forces, as well as Yeltsin's rearguard action and the conditionality of support from the IMF. The key questions, unanswerable at present, are whether, how quickly, and at what cost the Duma leadership will learn the futility of responses based on a reflexive resort to statist ideology andpolicies.
In the longer term, the picture is less bleak. The five strongest candidates to succeed Yeltsin-Victor Chernomyrdin, Alexander Lebed, Yurii Luzhkov, Grigori Yavlinski, and Gennadi Zyuganov-run the gamut in terms of policy. Only one, Zyuganov, is an unreconstructed opponent of reform, and his electoral strength appears to hit a ceiling at about 25 percent. Because communist voters are concentrated in older age groups, Communist voting strength will erode over time. Yavlinsky is the only forceful proponent of the market among the contenders, but he may lack the political savvy to mount a strong run for the presidency. The three remaining candidates, Chernomyrdin, Lebed, and Luzhkov, are not natural supporters of market-oriented reform but are sufficiently pragmatic to accept the need for reform. In elections and polling before the current crisis, it appears that 30-35 percent supports market reform, 25-30 percent opposes such reforms, and the position of the remainder fluctuates. While a reformist majority does not yet exist, a substantial electoral base exists for pro-reform candidates, particularly among younger age cohorts. And the current crisis appears to be forcing reformers, who have been badly divided in previous elections, to coordinate their efforts and unify politically. Thus, unless the current crisis causes a radical shift toward the left or right, a political base and political vehicles exist for Russia to return-albeit haltingly and gradually-to the course of reform.
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