BORIS’S LAST CHANCE

Although the post-Communist societies of Eastern and Central Europe also have been engaged in the unprecedented task of simultaneously constructing capitalism and democracy, Russia’s inheritance has set it apart and made the transition especially hard. The economy it inherited from the Soviet Union was almost completely militarized. The military-industrial complex consumed (directly and under various guises and subterfuges) at least half of the country’s gross domestic product and supported a third of the population. Russia’s agriculture was ruined by murderous collectivization, followed by almost 60 years of serfdom. The country had no living memory of private economic activity unstigmatized by state prosecution and unmarred by criminality. Its industrial nomenklatura was vast, powerful, and mostly left intact by the “velvet revolution” and allowed to continue to manage the economy.

Policy mistakes, corruption, incompetence, ignorance, and bureaucratic inertia aside, no market — no matter how vibrant — could have righted, in less than seven years, an economy so distorted that entire sectors became bankrupt overnight once prices were freed in January 1992. No market could have retrained and absorbed such multitudes of workers. The regime slashed defense procurement 90 percent, reduced military spending to under 5 percent of GDP, divested itself of 70 percent of the economy through the largest privatization effort in history, and created over 10 million private-sector jobs (and millions more underground jobs for cash or barter). Still, the federal government — not the new owners or local authorities — remained responsible for workers’ salaries.

In addition, Moscow was saddled with the impoverished but vast Soviet welfare system: pensions owed to all women over 55 and all men over 60, free medical care, free higher education — and subsidies for housing that alone cost more than the entire defense budget. (The average urban Russian family pays no more than 3 percent of the real cost of its housing.)

The problem of obsolete industries and surplus labor has been central to the transition from pre-modern society to capitalism. Merry old England showed the way when, in the space of 30 years at the end of 18th and beginning of the 19th century, it forced off the land eight out of ten farmers and starved to death, branded, hanged, or shipped to overseas colonies tens of thousands of peasants and urban poor. Until the last decade, the South Asian economic tigers kept their surplus workers in check by authoritarian controls — as does China still, gratifying foreign investors by sparing them (so far) the complications of free union organizing and democracy and forcing workers to labor for meager wages in substandard conditions.

By contrast, the Russian government has just settled several coal miners’ strikes by agreeing to pay $ 4 billion in back wages — nearly 5 percent of the entire 1998 budget. (Much of the money transferred by Moscow earlier to pay miners was stolen by mine managers and owners.) An ossified relic of 19th-century industrialization, mining is a classic surplus industry. It drains state treasuries everywhere — in Britain, Germany, Poland. But again, in Russia the burden is especially heavy.

Russia has rejected Asian-style “authoritarian modernization.” Instead, it is a democracy, complete with free speech, a fiercely partisan press free from government censorship, a vocal political opposition, and multi-candidate elections. Representing its “surplus” population — the millions of dispossessed, the unemployed, the nominally employed, the lost, and the angry — is the hard-line Communist party of the Russian federation (KPRF), which still reverse Stalin. Free to organize, the party quickly rebuilt a national organization reaching down to the village level and reclaimed over 150 newspapers and magazines. Its card-carrying membership is above 500,000, at least 10 times the membership of all the other parties combined. Its candidates compete in local, regional, and national elections — and win, serving as mayors, governors, and deputies. In the 1995 national legislative elections, the Communist party and its allies garnered 22 million votes (of the 69 million cast) and secured a solid plurality in the Duma. In the 1996 presidential election, the Communist candidate, party chairman Gennady Zyuganov, garnered 30 million of the 74 million votes cast.

Following the tried and true Leninist maxim, “The worse for the regime, the better for the party,” the Communist-led “popular-patriotic” plurality in the Duma has consistently resisted measures that could make the state solvent: a new tax code, a land code permitting the buying, selling, and mortgaging of land, and foreign participation in the economy. (It was a Duma-initiated law — vetoed by Yeltsin and then passed over his veto — that restricted foreign ownership of the government-controlled electricity monopoly, United Energy Systems, touching off the precipitous fall of the Russian stock market this spring.)

For four and a half years, the Communists — correctly fearing the emergence of “petty bourgeois” land owners, the Bolsheviks’ worst enemy — have managed to sustain the prohibition on buying and selling land. The costs to Russia have been staggering. When last February the governor and legislature of the Saratov region, 450 miles southeast of Moscow, ignored the Duma and passed a law allowing the sale of land, the very first auction, in a small town, netted the local authorities $ 80,000 in a day. One can only imagine what untold billions would have poured into the federal treasury from the sale of millions of acres of state-owned land, and from the taxes on such transactions, had free commerce in land been permitted from the time of Yeltsin’s first land-privatization decree in October 1993.

Meanwhile, tens of thousands of enterprises continued to lose money. An estimated 25 percent to 40 percent of the economy was underground to avoid crushing taxes, and much of the rest effectively escaped taxes by resorting to barter. In 1997, less than 5 percent of the population filed income-tax returns. Minister of the economy Yakov Urinson called the state’s support of bankrupt industries and the ensuing budget deficits “the price of social peace.” Rightly considering low inflation and a stable ruble its greatest achievements, the government stoically refused to cover the shortfalls by printing money. Instead, it financed the deficit with short-term, high-yield government bonds known as GKOs. When payments fell due, they were covered by the sale of more debt. This pyramid scheme proved increasingly costly: This year, a third of the Russian budget was allocated to servicing domestic debt. An even steeper price was paid in the stifling of economic recovery. Investors, both Russian and foreign, saw little incentive for direct productive investment, when they could get a return as high as 40 percent simply by lending money to the government for half a year. This spring, investor flight from emerging markets in the wake of the “Asian flu,” along with the drop in oil prices, finally toppled the pyramid.

When GKO yields leapt above 100 percent and the Russian Trading System index of stock prices plunged 187 points (from 571 points in October 1997), both indicators ended up almost exactly where they had been two years before, during the Yeltsin-Zyuganov presidential race. In responding identically to the two phenomena, the markets were precisely right. In 1996, before Russia’s first free election of a head of state, the question was, Can a non-authoritarian Russia govern itself? Now the question is, Can a non-authoritarian Russia support itself? In both instances, a negative answer would mean not just a change of regimes, but the possible collapse of the entire political and economic edifice erected since 1991.

This is a qualitatively new crisis, the likes of which Boris Yeltsin and his regime have not faced before. At its heart is a chasm between civil society, hardened and embittered by decades of totalitarian dictatorship and by the chaos and pain of the free-market transition, on the one hand, and a weak, often corrupt state saddled with the back-breaking burden of the Soviet economy and welfare system on the other. Is the regime capable of narrowing the gap enough at least to keep itself and its currency viable? Does it have time?

To take the second question first, the equity melt-down is not a political problem. The stock market accounts for only a small part of the country’s economy. Hundreds of middle-sized and small companies, which represent Russian capitalism at its best, are not traded, and very few ordinary Russians own stock directly or through the handful of fledgling mutual funds. A serious weakening of the ruble, on the other hand, will have a potentially devastating effect in a country dependent on imports for much of its food, cigarettes, and liquor, as well as most of its office and household gadgetry. The recent 34 percent devaluation of the ruble (from 17 cents to the ruble to 11 cents) may turn out to be an orderly retreat to a defensible standard — or it may be the beginning of an unstoppable downward spiral quickly leading to panic buying, hyperinflation, and a near-worthless currency. As always in such cases, which of the two scenarios prevails will be determined in the interplay of economics, politics, and psychology.

The initial shock may be softened by the mounds of hard currency that Russians have hoarded: an estimated $ 40 billion, or $ 267 (more than two months’ average salary) for each of the country’s 150 million men, women, and children. (Last February alone, Russians bought almost $ 3 billion.) It is precisely in the politically critical big cities that people keep most of their savings at home in dollars. These savings, which virtually every urban family has, may slow down the run on the dollar and buy the Kremlin some crucial time.

Whether the regime will use its reprieve wisely is uncertain. First, the government will have to continue to prove the seriousness of its intentions by going after some of the most conspicuous tax evaders. Reformer Boris Fedorov, recently appointed deputy prime minister, made a sound beginning when he pledged to begin investigating the 1,000 richest Russians who “flaunt their wealth in the eyes of the nation but don’t file their taxes.” In July the government forced the largest company in the world’s emerging markets, the natural-gas monopoly Gazprom, to pay back taxes by dispatching dozens of tax collectors to the company’s headquarters, where they threatened to seize senior executives’ dachas, limousines, and hunting lodges. The Kremlin will have to demonstrate its resolve by seizing and selling for nonpayment enterprises owned by the largest financial-industrial groups.

The most critical task, however, is political. State revenues, especially tax receipts, reflect the society’s allegiance to the state. They go to the heart of the social contract and cannot be redressed by presidential decree. They require popular consensus and legitimation. With the Duma stubbornly obstructionist, the only way for the regime to gain the confidence of the country (and of investors) is to assemble a package of radical revenue-enhancing and budget-cutting measures and put it to an up-or-down popular vote. These measures would include the right to buy and sell land; a comprehensive and transparent tax code with fewer and far lower rates, along with harsh, enforceable penalties for evasion; the gradual phasing out of housing subsidies and state-guaranteed loans to enterprises; the lifting of restrictions on foreign banks (which currently account for only 4 percent of banking capital); and firm guarantees for foreigners who invest in Russian companies.

The regime could take its case to the people in either of two ways, under the constitution. Borrowing a page from de Gaulle, Yeltsin could call a referendum. Alternatively, Prime Minister Kiriyenko could submit the package to the Duma and request a vote of confidence in the government. If confidence were confirmed, the legislature would have to pass the measures as well. If, as is far more likely, the Duma rebuffed the government, Yeltsin could dissolve the Duma and schedule new elections.

Will Yeltsin roll the dice? Can he summon again the will that swayed the country in 1991, 1993, and 1996, when his leadership was instrumental in thwarting attempts at a Communist restoration? Of late, the president has been surprisingly engaged, focused, and spirited in his work on behalf of his young government. Although rapidly aging, tired, and occasionally incoherent, he is in better shape than at any time since the spring of 1996.

Will he succeed? Like every successful politician, Yeltsin has been lucky in his enemies. If, as on those previous occasions, the Russians judge the danger to be immediate, and if they see the president and his government as the only force capable of preventing chaos or stopping the “red wheel” of Communist restoration, then the regime — even saddled as it is with very high public-opinion “negatives” — might succeed.

These are two huge “ifs.” Yet the Communists may have already made a serious political mistake when they refused to call the Duma back from vacation to consider the less sweeping emergency measures the government did propose. Gennady Zyuganov compounded the blunder by promising an open-ended national strike in October. Undoubtedly noticed by the public, both acts of reckless truculence make it easier for Yeltsin to appeal to the people — and win.

By definition, plebiscites are risky business. If he loses a referendum or a legislative election, Yeltsin will have to be prepared to consider a “government of national unity,” a Russian version of the French cohabitation, in which a right-of-center president shares power with leftist, “popular patriotic” ministers. Like the French president, the Russian president enjoys sufficient constitutional powers (notably, control of the national-security agencies) to preclude a Communist takeover. By splitting the moderates and the radicals within the “popular patriotic” opposition, Yeltsin could probably defang the campaign of civil disobedience planned by the Left for this fall. And the Left, once part of a government of national unity, would at last be forced to share responsibility for the country and to show the people what the opposition can do besides obstruct. The country’s learning experience might prove costly — but less dangerous than a potential leftist uprising amid the chaos of a crumbling regime.

Twice before when Russia’s free-market transition hung in the balance did the reformers go to the people. On April 25, 1993 — a year and four months after prices had been freed, when monthly inflation was in double digits — a majority of voters expressed confidence in Yeltsin and approved the regime’s socio-economic policies. And again on July 3, 1996 — after three years of radical demilitarization and privatization — the Russians voted against a return to communism when they gave Yeltsin his victory over Gennady Zyuganov.

For a century and a half, Russia has been wrestling with what have come to be called the “accursed questions”: Kto vinovat?, Who is to blame?, and Chto delat’?, What is to be done? Both in the posing and in the answering of these questions, there has been an unsettling division of labor among political intellectuals: While progressive, Westernized liberals, from Alexander Hertzen on, obsessively addressed the former inquiry, the radical Left, following Nikolai Chernyshevsky, busily tackled the latter. Much of the tragedy of this century is traceable to this division.

The successive governments over which Boris Yeltsin has presided have been the first from Russia’s liberal tradition since the great reforms of Alexander II to break the old pattern of recriminations and advance a program of change. Seventy-five years of communism may yet prove too heavy a burden and interrupt the monumental experiment in capitalism and democracy that Yeltsin has led. But the next few weeks promise to be as fateful an occasion as any in Russian history for the reformers to prove that they know what is to be done.

Leon Aron is a resident scholar at the American Enterprise Institute. His biography of Boris Yeltsin will be published next year.