What Went Wrong in Russia? The Roots of the Economic Crisis

The long-brewing financial crisis that finally erupted in August 1998 is now seen by Russians as the gravest cataclysm to hit their country since the end of the Soviet era. What the Russian press calls the “decisions of August 17” included the devaluation of the ruble, the effective default on Russia’s ruble-denominated debt, the restoration of controls on capital flows, and an officially imposed 90-day moratorium on the repayment of foreign debt held by Russian private entities.

These decisions had immediate consequences. The economic consequences included heavy losses to private investors who had lent money to the Russian government; the temporary paralysis of the country’s already malfunctioning payments and settlement system; the near-complete refusal of foreign entities to give credits to Russia’s government or its companies; the Russian government’s default on the Soviet Union’s foreign debt later in 1998; an accelerated decline in real output in the autumn of 1998; a significant slowing of activity in the most dynamic and market-oriented sectors of the economy (banking, media, publishing, advertising, and trade); and a sharp drop in real income, living standards, and employment, especially among the most skilled, energetic, and enterprising segments of the Russian population. The severity of these consequences has made itself felt in public opinion, which now divides contemporary Russian history into “pre-crisis” and “post-crisis” periods.

The most serious ideological consequence of the crisis was a powerful shift in public opinion. The words “democracy,” “reforms,” and “liberal” and the concepts and people associated with them have been discredited. The ideas of the market economy, liberalism, and friendship with the West have been seriously undermined. The Russian population at large has become much more receptive to vigorous government intervention in economic and social life, theories of a Western conspiracy against Russia, and the idea of a unique “Russian way.” The crisis seems, at first glance, to have justified and reinforced the argument that “liberal market reforms” and the stringent recommendations of the International Monetary Fund (IMF) were the major causes of Russia’s economic collapse.

The political results were also quickly felt. The five-month-old government of Sergei Kirienko was replaced with a cabinet formed by the old communist apparatchik and spymaster Yevgeny Primakov. Viktor Gerashchenko, who, after the October 1994 crash of the ruble, was described by the Economist as “the worst central banker in the world,” triumphantly returned to head the Central Bank of Russia. The “new” government has announced a change in priorities, goals, and policy instruments. Moreover, as later events have clearly shown, it has already begun, step by step, to restore the ancien régime. Within just a few months, Russian society has found itself increasingly in information isolation. Restrictions on the media are being stepped up. The government is surprisingly tolerant of antisemites and fascists, while promising “to open the doors of the jails” to fill them with those whom the government calls “economic criminals.” In the international arena, the government sees the “unipolar world” (that is, the United States) as its main enemy, and Saddam Hussein, Muammar Qadhafi, and Slobodan Milo(check)eviæ as its closest friends and allies. The reunification of Russia and Belarus (the latter headed by the autocratic Alyaksandr Lukashenka, who has designs on the Russian presidency) has become the new government’s most important foreign policy objective.

Russia has lost almost ten years as a result of the political consequences of the crisis. One can hardly avoid the painful conclusion that the repeated attempts to create a stable democratic society with an effective market economy in Russia have failed. Russia is again emerging as an unpredictable power, whose feared might and probable weakness pose dangers both to the outside world and to its own citizens.

The crisis buried the widespread hopes inside and outside the country for a future “Russian miracle” or a “coming Russian boom.” It came as a particular shock because economic and political developments in Russia had been the center of extraordinary public attention for most of the 1990s, and had been scrupulously monitored by...