SPECIAL REPORT

Russia on the brink

FRED WEIR September 7 1998
SPECIAL REPORT

Russia on the brink

FRED WEIR September 7 1998

Russia on the brink

SPECIAL REPORT

THE CURRENCY CRISIS

Every waking hour for the past three months, Alexander Vassiliyev has removed his battered orange hard hat and, at a signal from somewhere amid a ragged group of coal miners, drummed it rhythmically on the pavement. The roar of 300 pounding helmets rolls up the granite-and-glass face of the White House, where Russia’s cabinet works, followed by the miners’ massed chant: “Resign! Resign!” Last week, the protesting miners got their wish—but it only made them angrier. Amid the deepest financial crisis in Russia’s modern history, President Boris Yeltsin had sacked the entire reformist cabinet of 36-year-old prime minister Sergei Kiriyenko and brought back a staunch old conservative war-horse, Viktor Chernomyrdin, to head the government. “Blaming someone else and changing a few officials is an old Yeltsin trick and we’re not swallowing it,” said the burly, 44year-old Vassiliyev, sucking on a cigarette and squinting in the unseasonable August drizzle. “All our troubles have been caused by one man, Boris Yeltsin. We are not ending our vigil until that bastard is gone.”

When the miners started their campaign over unpaid wages in May, their insistence on bringing Yeltsin down seemed quixotic. But by late last week, a firestorm of popular fury over the imploding economy, a crashing currency and evaporating living standards was threatening to overwhelm the 67-year-old president. As anxious Russians scrambled to pull their savings out of failing banks or convert their shrinking rubles into something solid, many spewed miner-like venom on the faltering leader. “Everything is collapsing as if it never existed, while he pretends to be czar of Russia,” said Svetlana Kiryanova, a 37-year-old graphic artist, jostling with other panic-stricken Muscovites in a downtown department store. “I only hope I can get something for my rubles before they become worthless. A refrigerator would be perfect.” Igor Svetlichny, a 27-year-old construction engineer, had a pithier comment: “Everything Yeltsin says and does is a lie. I’m sick of his face.”

Yeltsin, however, was grimly hanging on. “I want to say that I’m not going anywhere,” he told a television interviewer on Friday. “I’m not going to resign.

I will work as I’m supposed to for my constitutional term. In 2000, there will be an election for a new president and I will not run.” Yeltsin was also set to meet U.S. President Bill Clinton for a lavish two-day Kremlin summit this week. But forces were gathering, in the opposition-led parliament, and among worried tycoons and anti-Moscow regional leaders, that made Yeltsin’s long-term survival look doubtful.

“The Yeltsin era is coming to an end,” said Vyacheslav Nikonov, a political analyst and former Kremlin

researcher. The president’s increasingly shaky health and bizarre political decisions—such as bringing back Chernomyrdin just five months after firing him in favor of the Western-oriented liberal Kiriyenko—suggested Yeltsin was simply running out of rope. “The president has recognized the failure of his own personnel policy and the failure of his policy as a whole,” said Nikonov. “In naming Chernomyrdin prime minister, Yeltsin effectively appointed his own successor, and in doing so he officially became a lame duck.”

Few believe that Chernomyrdin, who was prime minister from December, 1992, until last March, will be able to stem the galloping financial crisis and rising social unrest. ‘Yeltsin has replaced a man who couldn’t do anything in five months with one who couldn’t do anything in five years,” said Boris Kagarlitsky, an expert at the Russian Institute of Comparative Political Systems. The coal miners huddled in the rain outside the White House agreed. “I haven’t seen any wages since last October— and Chernomyrdin was prime minister then,” said Valentin Drachenko, a tall, slender 49-year-old with a harsh cough that he jokes is his only reward for a lifetime toiling in an Arctic mine. “Bringing back Chernomyrdin is just an act of desperation.”

Desperate is the right word to describe Russia’s deteriorating economic condition. Over recent months, Russian and foreign investors, spooked by the crisis in Asia, have stampeded out of the country. The Moscow stock market—ranked the world’s best-performing in 1997—melted down, losing almost 90 per cent of its value since January. More seriously, investors started unloading Russian state bonds, the main instrument the government has used to finance its yawning budget deficits in recent years. As the crisis gathered in July, the International Monetary Fund stepped in with a $35billion bailout package designed to stave off the collapse of Russia’s public finances. The markets paused briefly, then nosedived again. On Aug. 17, the Kiriyenko government bowed to the inevitable and permitted the battered ruble to find its own level. It immediately tumbled—from 6.3 per U.S. dollar to as much as 14 in frenzied street trading by the end of last week.

Russia’s giant banks are now teetering on the brink of collapse. Their owners, so rich and politically influential they have been dubbed oligarchs, may have been instrumental in forcing Yeltsin to bring back their old buddy Chernomyrdin in the hope he would bail them out. “The banks are in deep trouble because they were greedy,” said Vilen Perlamotrov, an analyst at the Institute of Market Problems, a private think-tank. “Over the past couple of years, they borrowed heavily abroad in order to speculate in Russian government securities, which were offering very high yields in rubles. Now, the ruble is crashing, and the banks are stuck with huge hard-currency obligations to foreign lenders while they watch their ruble assets dwindle by the day. Most Russian banks are doomed.”

Devaluation has finally brought the crisis home to average Russians. Among the most shell-shocked are members of the country’s new middle class, a primarily youthful post-Soviet generation of professionals, small-business people and skilled workers who were just beginning to step into the world of Western-style consumerism. “The Russian middle class is the mainstay of political stability and our best hope of becoming a normal society,” said Igor Bunin, a sociologist at

THE SHADOW POWERS

THE CURRENCY CRISIS

When reformist prime minister Sergei Kiriyenko and his close ally, deputy prime minister Boris Nemtsov, were abruptly sacked by President Boris Yeltsin last week, they had few illusions about what hit them. The Kiriyenko government had been on the verge of seizing property from some of Russia’s biggest oligarchs— the handful of ultra-rich tycoons who reputedly control half the economy—in order to collect unpaid back taxes. “They understood that the end was near, that there might be serious changes in ownership and that the current oligarchy might come to an end,” Nemtsov told journalists. “Naturally, no acting elite wants to be replaced and so they decided to replace the government.” It is a staggering charge.

That a clutch of shadowy businessmen could unseat a government in a modern democracy seems incredible. But two years ago, the same group bankrolled Yeltsin’s own return to the Kremlin in the face of a tough Communist electoral challenge, and some analysts say he has been deeply obliged to them ever since.

All of them had emerged from the murk of the Soviet black market to win the high-risk, often criminal struggle for wealth in the new Russia. They include Boris Berezovsky, 51, who parlayed a car dealership into an estimated $4-billion fortune; Vladimir Potanin, 37, a former official of the Soviet ministry of foreign trade who now heads Uneximbank, a titanic financial and natural resources empire with assets of $50 billion; Vladimir Gusinsky, 45, a banker turned media mogul who has been dubbed the Rupert Murdoch of Russia; and four other top bankers and oil magnates. “Getting Yeltsin reelected demanded big money, and those who gave the most have been the closest to him ever since," says Alexander Konovalov, an analyst at the independent Institute of Strategic Assessments in Moscow. “Berezovsky has become the closest of all.” With Yeltsin safely re-elected, the oligarchs began to collect their rewards. Potanin and Berezovsky got high government posts—even as they continued to augment their

business interests. All were given privileged entry to state auctions in which the crown jewels of the former Soviet economy—oil, gold and nickel mines, telecommunications—were virtually given away. “In Russia, politics and economics have always been two sides of the same coin,” says Viktor Kuvaldin, an expert at the Gorbachev Foundation in Moscow. “Political victory for Yeltsin brought financial victory for his backers. That’s how the oligarchy was built.”

Berezovsky, the most outspoken oligarch, has made no secret of his belief in the rights of the rich. “I think that if something is advantageous to capital, it goes without saying that it’s advantageous to the nation,” he told The Washington Post last year. According to Yeltsin’s estranged former bodyguard, Alexander Korzhakov, Berezovsky has secured his position in the Kremlin by acting as Yeltsin’s personal financial adviser I and by making frequent s gifts of jewelry, cars and I high-fashion clothing to ; the president’s influential daughter, Tatiana Dyachenko.

Viktor Chernomyrdin, a former chief executive— and reputedly part owner —of the giant natural gas monopoly Gazprom, worked well with the oligarchs during his years as prime minister. But the ever-capricious Yeltsin abruptly sacked Chernomyrdin last March and brought in eager young reformer Kiriyenko. He pledged, but did little, to break the power of the oligarchs and make Russian capitalism more open and democratic.

But as Russia’s public finances spiralled out of control in midAugust, Kiriyenko maintains he moved to save the state by expropriating the oligarchs. “I didn’t pick anyone concrete, but yes, I said there would have to be bankruptcies,” he told the English-language Moscow Times last week. “I think there is a danger of Russia developing as a Latin American capitalist system.” Perhaps so, for according to Nemtsov, the oligarchs responded with a Latin-style coup.

F.W. in Moscow

How tycoons back Yeltsin

the independent Centre for Political Technologies. “Now, their dreams are unravelling, and their trust in the system is being severely tested.” Prices have shot up as the ruble’s buying power sags. In Moscow, where the new middle class is heavily concentrated, an estimated 60 per cent of groceries and consumer goods are imported and must be purchased at dollar exchange rates that have gone through the roof. “I was going to buy a car,” said Lena Krishtanova, a 32-year-

old secretary at a brokerage firm. “I had enough money saved, but then overnight I was over $2,000 short. Who knows what it will be tomorrow?” Worst of all, some of Russia’s troubled banks closed their doors or made depositors’ savings inaccessible, while the central bank stopped all U.S. dollar sales. “I put 8,000 rubles into this bank over the past year, but now they say my account is temporarily frozen,” said Georgi

Leonidov, a 42-year-old municipal worker, one of dozens of forlorn depositors who were virtually camping outside a downtown Moscow branch of Inkombank, Russia’s second-largest financial institution. “When I deposited my money, they took it gladly in cash. Why won’t they give it back the same way?” Russia’s outlook is especially bleak because this crisis comes on top of almost a decade of severe economic depression. Much of the Soviet Union’s former industrial heart is today a wasteland of rustbucket factories that produce little but do not go bankrupt. They survive on a trickle of state subsidies, by bartering with other insolvent firms and by deferring the wages of their employees. Over half of all Russian workers suffered disruptions in their incomes last year; one in four went for at least three months without seeing a paycheque. “The problem of wage arrears is a social time bomb waiting to ex-

plode,” said Galina Strela, executive secretary of the 50-million-member Russian Federation of Independent Trade Unions, which is threatening to stage a general strike over the issue this fall. “Successive Russian governments have created a semblance of a private economy and market institutions. Underneath, the picture is one of rot and ruin.” Those unwelcome chicks were all coming to roost in Boris Yeltsin’s ornate Kremlin office. “Economics are a driving force, but the real impact of this crisis is political,” said Viktor Kuvaldin, an analyst at the Gorbachev Foundation, a think-tank financed by the former Soviet leader. “Yeltsin was forced to bring back Chernomyrdin because the elite want his strong and familiar hand on the tiller. But the president has had to surrender a lot of his power and prerogatives by doing so.” Next, Yeltsin has to convince the rambunctious, Communist-led Duma— Russia’s lower house of parliament—to accept Chernomyrdin. That was the subject of heavy negotiations with the Communists late last week—which accounted for the distinctly nonreformist tone of an economic rescue package taking shape.

Chernomyrdin denied Saturday that draconian Soviet-style economic measures would be introduced, but Duma leaders said price controls, a ban on hard currency possession and nationalization of some strategic industries were under discussion. Power was also up for grabs. The Communists believe it is time to abolish the all-powerful presidency instituted by Yeltsin and set up a “government of national trust” based on the relative strengths of political parties in the Duma. If Yeltsin rejected this idea, they

threatened to turn Chernomyrdin’s parliamentary confirmation hearing— which was to begin on Aug. 31—into a long and bruising battle that could undermine any remaining semblance of stability. Yet such a formula would effectively put the Communists in power and reduce Yeltsin to little more than a figurehead. That is not likely to sit well with the man who faced down a hardline coup in

coup 1991, and summoned tanks to blow his parliamentary opponents out of the White House in 1993. Unless Yeltsin’s health suddenly gives out, he will remain a force to be reckoned with. He recently replaced the head of Russia’s secret police—the former KGB— with a man from his own Kremlin staff, and was seen meeting with military and security chiefs early last week. But his clout would be sorely tested if there is a showdown. “Autumn is historically the time for political conflicts and revolutions in Russia, usually following on the heels of a deceptively quiet and peaceful summer,” said analyst Kuvaldin. “This time, we are tumbling into autumn after a catastrophic summer.” Whatever the coming season brings, Russia is likely to emerge a very different place. FRED WEIR in Moscow