WHY THE DOOMSAYERS ARE WRONG ABOUT RUSSIA

It is notable that post-Communist Russia attracts almost no rave reviews in the United States. Crime and economic decline dominate the news. Pundits predict difficulties ranging from popular uprisings, the break-up of the Russian Federation, domestic chaos, economic implosion, and starvation to military coups and expansion. There is the nagging fear that maybe Russia is not reformable.

Most Americans find President Boris Yeltsin incomprehensible. Although prominent figures in his successive governments, notably Chubais and Yegor Gaidar, stand for democracy and market economics, few voices are raised in their defense, either in Russia or the West. Foreign observers fail to appreciate that the reformers have never had free rein, but instead have operated within coalitions and faced massive resistance from an entrenched elite. Yet in spite of this, reform has made great headway. For all the drama of the last few years, Russia has actually proved surprisingly stable.

Nevertheless, a cottage industry of doom-prediction has sprung up, manned largely by Sovietologists whose intellectual capital fell with the Soviet Union. A telling example is Dimitri Simes, the widely quoted president of the Nixon Center for Peace and Freedom. He has persistently opposed the real reformers in favor of various “moderates” and “Russian patriots,” such as the gray apparatchik Yuri Skokov, already forgotten, and General Alexander Lebed, who is without credible commitment to democracy. In 1996, Simes firmly predicted that President Yeltsin would steal the presidential election. He has condemned “Russia’s experiment with democracy” as “a brief interlude born of confusion and weakness.” He foresees Russian aggression sooner or later. ” Russia’s alienation from the West,” he writes, “could easily contribute to its empire-building tendencies. It may not take too much time or effort to see Russian tanks on the Polish border again . . .” For all that he was born and raised a Russian, Simes makes pronouncements that cannot withstand scrutiny.

Another reason for the prevailing disparagement of Russia’s progress is that few remember how bereft the country was in 1991. Its crisis was total. The Soviet government had printed money freely but kept prices low, so there was nothing to buy in the stores. Since people could do little with their money, many stopped working, and production plunged. Law and order were on the verge of breakdown, and the Soviet Union defaulted on its international payments.

Today, Russian society has come together in significant ways. Inflation and the national budget are under control. More than 70 percent of GDP is produced in the private sector. Prices are set by the market, and the economy probably started growing in 1997. Military expenditures have fallen from about one quarter of GDP in Soviet days to some 3 percent today, and the debacle in Chechnya shows that Russia cannot possibly pursue an expansionist war for many years to come. Two Communist-nationalist coup attempts have been foiled, and the Communists seem to have sunk in the polls for good. The social cost of the transition has been great, but the new Russia has a market economy based on private property and an elected, if imperfect, government.

Even on the crime front, progress is being made. Crime statistics — including secret Soviet statistics, now widely published — contradict the dire view that Russia is controlled by criminals and gripped by skyrocketing lawlessness. It is true that the Russian crime rate doubled — but it did so from 1988 to 1992, primarily in the final years of communism, when the powerfull were grabbing what they could and repression no longer deterred. The crime rate was flat after 1993, then fell by 5 percent in 1996 and another 9 percent in the first nine months of 1997. With the sloppiness characteristic of so much writing about Russia, a recent report on organized crime published by the Center for Strategic and International Studies contains no crime statistics in its 90 pages, yet concludes that “the anticrime program of the Russian government has been a failure.”

Strangely, many persist in believing that the Soviet Union was a law- abiding society. But Soviet ideology opposed the rule of law on principle, as constraining the discretionary power of the Communist party. Soviet statistics show that Russia has had a very high homicide rate for a long time. In 1985, it equaled the U.S. rate of 8 per 100,000. One reason this has passed largely unnoticed is that it was not a big-city phenomenon: The murder rate was twice the Russian average in Siberia and the Far East, where deported criminals were numerous. Now, many deportees have returned to the cities, and urban dwellers and foreigners are more aware of crime. While Russia’s murder rate remains high, it dropped by 2 percent in 1995 and 7 percent last year.

As in the United States, the failing crime rate is a result of energetic government efforts. The Russian government spends ever more on law and order – – about 2 percent of GDP, more than any Western country. The number of prison inmates is rising sharply, and an impressive 88 percent of reported murders are being solved. Thus, the picture is improving, contrary to most reporting, even if the contract killings associated with high-level corruption remain a very serious problem.

One of the most frequent complaints about Russia’s reforms is that privatization has facilitated crime and the concentration of wealth. The CSIS report goes so far as to call the organized-crime syndicates “the principal beneficiaries of privatization.” Those who managed the privatization process are accused of giving away the country’s wealth to the managers of state enterprises, bankers, and criminals. But is this true?

Most privatization of large and medium-sized enterprises took place in 1993 and 1994 through a voucher process. By 1996, about 17,000 enterprises had been privatized this way. An extensive survey reported in Kremlin Capitalism by Joseph Blasi, Maya Kroumova, and Douglas Kruse shows that in 1996, enterprise managers owned 18 percent of the privatized capital. In April 1996, total market capitalization was $ 21 billion, so the voucher auctions awarded the managers of privatized enterprises capital worth barely $ 4 billion, or less than 1 percent of GDP. Contrary to popular belief, it is remarkable how little property former state-enterprise managers acquired through voucher privatization.

Much of the concern stems from the way a few unusual enterprises were privatized. Half the stock of the giant gas monopoly, Gazprom, was sold to insiders, including Chernomyrdin. And fifteen large companies were privatized in closed auctions at the end of 1995; in particular, big blocks of shares of the oil companies Sidanko, Yukos, and Sibneft were sold at low prices to new banks. Still, these privatizations were not the rule, and in several cases the stock was not sold at a discount. Chubais was forced to go along with these arrangements at a time when voucher privatization was no longer politically feasible. As a rule, Chubais fought to spread stock ownership as widely as possible and to limit the benefits flowing to insiders.

How, then, did some Russians get very rich as communism fell apart? The principal means was arbitrage: Buy something cheap at the controlled state price and resell it high on the free market. Arbitrage flourished in 1991 and 1992, when Russian raw materials could sometimes be bought for less than 1 percent of the world price. In 1992, about 30 percent of Russia’s GDP was derived from export arbitrage in oil, natural gas, and metals.

Another source of wealth was import subsidies. In the winter of 1991-92, when starvation threatened, the Russian government lacked the clout to abolish import subsidies. Importers paid only 1 percent of the official exchange rate for the hard currency needed to import essential foods. No less than 15 percent of Russian GDP went to import subsidies in 1992. They were financed with Western commodity credits, which the Russian state would eventually have to repay.

A third source of enrichment was subsidized credits, which mushroomed in 1992 and 1993. The reformers never succeeded in wresting control of the Central Bank from the Communist-dominated Supreme Soviet, and the bank fed the state enterprises” appetite for loans to such an extent that net credit expanded by 33 percent of GDP in 1992. Worse, most of these credits were heavily subsidized. Issued at interest rates of up to 25 percent a year at a time when inflation was 2,500 percent, they were virtual gifts from the state.

Incredibly, the gross benefits flowing to a well-connected few from these three sources alone amounted to some 75 percent of Russia’s GDP in 1992. None of these subsidies can be defended as a social good. Furthermore, the division of spoils entailed a great deal of violence. The fortunes made in these ways vastly exceeded the total gains managers would reap from voucher privatization in the ensuing two years.

These findings match the general public’s beliefs about who got rich in Russia’s transition. New bankers made lots of money from commodity trading and inflationary practices like subsidized credit, but benefited little from voucher privatization. The managers of the state oil, gas, and metals companies sold their commodities to their own trading companies, a form of theft. Admittedly, those who prospered also bought stocks, but that isn’t how they made their fortunes.

The period when communism was crumbling and a market economy was being born was an aberrant interlude, whose anomalies permitted the accumulation of great wealth. As the market developed, the early distortions were eliminated. Gaidar, Chubais, and another young reformer, Boris Fedorov, abolished subsidized credits in September 1993 and import subsidies by the end of that year. They dismantled export regulations piecemeal, effectively ending them in 1995. This year, Chubais and his fellow first deputy prime minister Boris Nemtsov finally halted a number of lucrative privileges enjoyed by ” authorized banks.” In every instance, the reformers had to overcome fierce resistance, not only from parliament but also from bankers, the energy lobby, commodity traders, and state-enterprise managers — all of them well represented in the halls of power. The decisive struggles occurred inside the government.

And, as we have seen, the reformers largely succeeded. They brought inflation down to about 13 percent in 1997 and saw the economy apparently edge into growth. While income differentials rose sharply in the early 1990s, they have been stable since 1995. Even worrisome health trends improved slightly after 1995. The conclusion seems obvious that Russia’s chief social and economic problems sprang not from moving too rapidly to a market economy, but from eliminating too slowly distortions of the market rooted in the old socialist system.

Why then do so many blame the top reformers for the problems of the Russian transition? Understandably enough, members of the old Communist elite see Gaidar and Chubais as the enemies who dismantled their paradise. To Grigory Yavlinsky, leader of the liberal opposition party Yabloko, Gaidar and Chubais are rivals to be held accountable for every problem. Yavlinsky accuses Chubais of bringing crony capitalism to Russia, even though such capitalism flourished in 1991, before Chubais was a minister.

In the run-up to the 1996 presidential elections, most anti-Communists apart from Yabloko — notably, the democratic Right and the new capitalists — joined forces to fight the Communists. But their coalition was short-lived. In the summer of 1997, several leading businessmen who had made money off the government came out against First Deputy Prime Ministers Chubais and Nemtsov for abolishing certain privileges for capitalists and conducting open privatization auctions.

In a recent interview, Nemtsov emphasized that the struggle in Russia is no longer between communism and capitalism but over what kind of capitalism will prevail. Moscow mayor Yuri Luzhkov stands for “nomenklatura-bureaucratic capitalism,” said Nemtsov, under which “all power, all property and money shall belong to civil servants.” Luzhkov keeps prices high in Moscow by limiting competition through the strict licensing of businesses. The second model is oligarchic crony capitalism, in which a privileged group of corporations and individuals controls most property and all power. Its main proponent is former deputy national security adviser Boris Berezovsky. The third model is the reformers’ ordinary free-market system.

The Russian public debate is colorful, and foreign observers sometimes mistake or misrepresent its hues. Writing in the Washington Post on August 24, 1997, Peter Reddaway, a professor at George Washington University, quoted Mayor Luzhkov as claiming that “Chubais’s conduct of privatization was so dubious that it required criminal investigation.” But Luzhkov is actually opposed to most privatization; he wants his city officials to hold onto their power and property. Reddaway goes on to cite approvingly Luzhkov’s propaganda sheet, Moskovsky Komsomolets, calling Chubais “a much bigger Communist than Zyuganov” and one who uses “authoritarian, purely Stalinist methods.” Needless to say, it can hardly be Communist to oppose what the Communists want or Stalinist to insist on democratic elections Luzhkov is simply angry with Chubais because his free-enterprise program threatens Luzhkov’s monopolistic regime. Reddaway sides with Luzhkov.

Equally astounding, Paul Saunders, director of the Nixon Center for Peace and Freedom, strongly supports Boris Berezovsky in a letter to the editor of the Wall Street Journal on November 13, 1997. Responding to a balanced news report of Berezovsky’s ouster from the Security Council, Saunders argues that Berezovsky’s “record of support for Yeltsin’s reform efforts . . . is nearly perfect.” In fact, Berezovsky is a shady character who made a lot of money on a car dealership that colluded with the management of Russia’s biggest auto company to buy cars at rigged low prices. He went on to become king of one of the most mafia-infested sectors of the Russian economy. As deputy national security adviser, he tried to use the powers of office to facilitate the insider privatization of the oil company Rosneft (valued at up to $ 2 billion), to his own benefit. He made virtually none of his money in legitimate business and has been publicly accused of hideous crimes. Naturally enough, he strongly opposed Nemtsov and Chubais for trying to level the playing field, while he praises Western European social democracy, whose far-reaching regulation holds the potential for insider deals. One of Berezovsky’s newspapers reprinted Reddaway’s tirade against Chubais, as did a Communist newspaper.

Journalists and Russia-watchers need to do a much better job of evaluating their sources Regrettably, the enemies of reform dominate the Russian media, and far too often, propaganda hostile to the reformers is reported as truth in the United States. Periodic reality checks help set matters straight.

At decisive moments, the Russian people have invariably opted for democracy and the market economy. Four times, in votes that amounted to referendums on the system, the forces of reform have carried the day, with majorities ranging from 54 percent to 58 percent. The electorate has been the great mainstay of Russia’s democratic-capitalist revolution.

Another pillar of the new Russia is President Yeltsin. Though his skills are denigrated in the West, he has proven himself a visionary. He has succeeded in transcending his environment and reaching out to new worlds — even as he faced down two attempted coups. A formidable democratic politician, Yeltsin knows both how to lead and when to compromise.

Finally, the third pillar of reform comprises the committed young technocrats like Gaidar and Chubais. Thanks to them, the economy is predominantly in private hands — a giant accomplishment that will go far to guarantee the survival of Russia’s political and economic freedom.

Anders Aslund is senior associate of the Carnegie Endowment for International Peace.