By Renfrey Clarke
MOSCOW — During August, industrial output in Russia declined at an annual rate of 34%, the sharpest drop since the grim days of the Nazi blitzkrieg. In September the situation grew still worse: according to seasonally adjusted figures published on November 5 in the weekly Finansovye Izvestiya, industrial production slumped at an annual rate of 43%.
By the end of September, the volume of industrial output stood at a level 43.7% below that of January 1990. The fall registered since the launching of President Boris Yeltsin's "reforms" in January 1992 was more than 30%.
In almost any other country, a peacetime catastrophe of this magnitude would have senior economic advisers looking for new jobs. Politicians identified with the government's strategies would be considered unelectable. The economic policies responsible for the crash would evoke general scorn.
Russia is different. Instead of being jettisoned, the policies behind the crash are being retained and intensified.
On November 4, finance minister Boris Fyodorov announced that the government had agreed on a tight anti-inflationary budget centred on moves to cancel subsidies, phase out export quotas and end cheap government credits. Diplomats quoted in the English-language Moscow Times predicted that once the December 12 elections for a new parliament were out of the way, further elements would be set in place: a hike in value-added taxes and excise taxes on energy sources.
International monetary officials were quoted in the Moscow press as saying that Fyodorov's package closely followed recommendations of the International Monetary Fund. According to the Moscow Times, the IMF urged these steps as a means of "righting Russia's economy through steep cuts in inflation and the budget deficit". The IMF has reportedly linked a US$1.5 billion loan to a "more responsible" economic performance, including bringing inflation down from recent monthly levels of 20-30% to no more than 10%.
At first glance, the IMF's urgings might seem like sober good sense. Russia's budget deficit earlier this year was reportedly running at an alarming level of around 10%. With the aim of reducing the gap to about 5% by the end of next year, the IMF has called on the government to introduce sharp curbs on its spending. As the growth in the money supply is curtailed, the IMF maintains, inflation will drift downward.
Further slowdown
It is possible, however, to look at the IMF's recommendations from a quite different angle. At a time when demand in the Russian economy is virtually comatose, and production is collapsing, Fyodorov and his colleagues are being urged to force a drastic additional contraction.
Will the cuts in government outlays for subsidies and cheap credits have the desired effect of reducing the budget deficit? The question is by no means simple, since the size of the deficit is determined by revenues as well as spending. Harsh contractionary policies will reduce the general level of economic activity and drive many enterprises into bankruptcy. Less production means reduced tax payments.
Will slowing the growth of the money supply reduce inflation? The way the IMF and Fyodorov are going about it, this is not a foregone conclusion either. As economic output hurtles downward, there are fewer goods for the population to purchase. Competition for this reduced supply can create substantial inflationary pressures.
Recent experience offers little reason to believe in the success of the IMF/Fyodorov strategy.
Yeltsin's "reforms" are now almost two years old, and the effort to put the clamps on the money supply, even if not totally consistent, has been perfectly serious. Key elements of the government strategy have been put in place. In particular, the real purchasing power of the population has been devastated. According to the newspaper Trud on November 5, rises in the average wage between January 1992 and October 1993 totalled only 44% of the increase in consumer prices. A survey in July showed that 43% of urban residents were having great difficulty purchasing even basic clothing and footwear.
Nevertheless, the budget deficit has not fallen. The finance ministry reported on November 11 that this year's shortfall would not be the 10% threatened earlier, but a still more dangerous 14%. Inflation has not fallen either; on the contrary, prices have risen during recent months at almost twice the rate during the corresponding period in 1992. Price rises have accelerated despite the worst depression in Russia's history.
Money and prices
The government is continuing to frame its policies on the basis of the standard monetarist explanation for price rises: too much purchasing power in the hands of the population. But is there some other vital reason behind Russia's near hyper-inflation, a factor which monetarist officials are refusing to take into account?
In the conventional monetarist schema, the money supply is viewed as the critical factor influencing the rate of price rises.
This is only partly true in the case of Western capitalist economies, and in Russia it is not true at all. Here, money supply does not determine prices. Instead, prices determine money supply.
Russia's economy is monopolised to an astonishing degree. When price controls are lifted, as has now been done in Russia for almost all products, monopolists react by cutting output and raising prices. Enterprises that do not face competition are also in the agreeable position of being able to pass on increases in the costs of the supplies they purchase. There is now ample statistical evidence to show that monopoly enterprises in Russia are well ahead of other firms both in the scale of their price increases and in their profits.
Eventually, however, the train of monopoly price increases slams into a point in the productive process where enterprises face real competition, or into final consumers who have no money. A chain reaction of unpaid debts then travels back up the line. Russian industry is currently gripped by just such a crisis of inter- enterprise debts, estimated to total US$11.7 billion.
At a certain point in the debt crisis, enterprises begin refusing to deliver goods they know cannot be paid for. In most cases, alternative customers and suppliers do not exist. If a whole sector of industry is not to shut down, the state authorities are compelled to issue emergency credits. Arbitrary price rises have thus led to unplanned increases in the money supply.
The way to short-circuit this process is to impose price controls on monopoly producers, especially producers of basic industrial inputs. But the IMF and Yeltsin's economic ministers — who are nothing if not dogmatic — reject this as a violation of the principles of the free market. The "solution" now chosen by the monetarists is to tighten the fiscal regime and let debtor firms go under.
Destruction of industry
If the government persists in this course — and no-one should doubt the ruthlessness of people like Fyodorov — the disappearance of whole sectors of Russian industry will become an accomplished fact.
The IMF will be gratified, because Russian raw materials and energy supplies will be freed for export, expediting payments on Russia's foreign debt and lowering the costs borne by Western corporations. But Russia will have ceased to possess an integrated industrial base, and will have taken a huge step toward a new status as part of the Third World.
It should not be assumed that today's ruling elite in Russia — or at least, its more literate members — fail to understand where the government's economic strategies are taking them. As early as the spring of 1992, left-wing economists in Moscow had developed detailed criticisms of government policies, and these criticisms were propagandised with some energy in circles close to the trade unions, industrial managers and the old Russian parliament. People like Fyodorov and first deputy premier Yegor Gaidar can scarcely be ignorant of these writings.
But that does not mean that they will permit a change of course. These people are not scared of being citizens of the Third World. In countries such as Brazil and Nigeria, Russia's new commercial elite have observed, business leaders live in far better style than members of the old Soviet nomenklatura used to — even if millions of people in those countries are starving.
The ruling circles are determined to establish and consolidate capitalist property relations at breakneck pace and at any cost. In a country whose political development is still highly unpredictable, speed is essential. The fear that a serious anti-capitalist opposition would arise was one of the central reasons why the elite rejected the perspectives of the old parliament, which aimed to implant capitalism over a longer period and with fewer losses.
However, the members of the new Russian elite are deluding themselves when they look forward to lives as millionaires in a repressive Third World capitalist state, economically backward but politically stable.
Even as a Third World country, Russia will be different. It will possess exceptionally large strata of relatively educated people who have been shut out of Western-style patterns of consumption, and who remember a society that, for all its faults, was wealthier and far more socially just. When that occurs, mass revolt will not be far off.