Strategic Analysis

Strategic Analysis:
A Monthly Journal of the IDSA

May 1999 (Vol. XXIII No. 2)

Moscow Grapples with Political and Economic Crises: Implications for Foreign Policy
By Jyotsna Bakshi *


Physical geographical features remain unchanged, but geo-political perceptions, compulsions and objectives change in the changed historical context, given a new constellation of internal and external factors. This is very true of Russia today, which is passing through the painful process of coming to grips with the changed geo-political reality and accordingly readjusting and reshaping its foreign policy objectives and framework. Moscow was the imperial capital of the vast Eurasian landmass under Tsarist Russia and the Soviet Union. Peaceful disintegration of the Soviet Union in the last days of December 1991 did not change overnight the old mentality and thinking patterns and the comparative weight of Moscow in the former Soviet space. However, belying the initial hopes and expectations of early and smooth systemic change and speedy economic recovery, the endemic crises and malaise in the Russian body politik continues. It is adversely affecting the country's foreign policy effort also.

The policy of 'economic shock therapy' introduced by Russia's neophyte liberals under the influence of Western advisers failed to produce the desired results. Russia's GDP declined almost by half; prices sky-rocketed; the value of the rouble nose-dived by thousands of times in relation to the dollar and other currencies. Unemployment soared and a large number of people were pushed below the poverty line. Russia's nouveau riche and criminal gangs are believed to have taken away more than $100 billion outside the country, mostly to the West, thereby contributing to the Western economies, while the Russian economy desperately needed liquidity and investments. Russia incurred huge domestic and foreign debts in addition to the nearly $100 billion former Soviet debt it inherited. It is estimated that Russia's foreign debt amounts to about $150 billion including the old Soviet debt of $100 billion. 1 Large urban centres of the country became heavily dependent on imported consumer goods. Russia's own production units could not withstand the foreign competition and declined. In the absence of public trust in the banks and financial institutions of the country and the very government bodies, the flight of billions of dollars every year to foreign countries continues. People also keep huge amounts of dollars hidden in mattresses, thus blocking their much-needed circulation in the economy. It is widely believed that the capitalism that has replaced the old totalitarian system in Russia is criminal capitalism or "robber baron capitalism." A narrow circle of oligarchs has come to wield immense political and economic clout in the country. A really free-market economy based on open competition did not develop in the country.

In view of the utter failure of the "economic shock therapy," President Yeltsin was forced to replace acting Prime Minister Yegor Gaidar by the moderate reformer Viktor Chernomyrdin, the chief of the Russian gas monopoly, Gazprom, by late 1992.

Viktor Chernomyrdin tried to build bridges with different sections of opinion across the broad political spectrum and continued economic reforms albeit at a slower pace. He succeeded in bringing about macro-economic stabilisation. The steep decline in the GDP to the tune of 40 to 50 percent was arrested and in 1997 the government claimed to have achieved a miniscule growth of around 0.2 percent in the country's GDP. However, the adverse impact of the Asian currency crisis and the fall in world oil prices hit the economy very hard. The bulk of Russia's export earnings came from oil and gas and other primary products. It seemed that behind the apparent facade of macro-economic stabilisation, many problems were piling up. The tax collection was woefully small and the government lived on borrowed money. Unpaid wage and pension arrears piled up; housing and social sectors were neglected, creating a potentially volcanic situation. It is widely agreed that Russia's massive privatisation programme benefitted a few people who got hold of the huge state assets at throwaway prices. It did not lead to the improvement in the production and efficient economic management. Investments went largely in speculative activity rather than in the productive sectors of the economy.

On March 23, 1998, President Yeltsin suddenly sacked Prime Minister Viktor Chernomyrdin and appointed in his place the young and inexperienced, Sergei Kiriyenko, who was just 35-years-old, as the country's prime minister. The motive behind President Yeltsin's sudden and impulsive action may be attributed to (a) his desire to clip the wings of Chernomyrdinremore, whom he suspected to have developed presidential ambitions; and (b) his dissatisfaction with the failure of Chernomyrdin government in the social sphere. 2


August 1998 Political and Financial Crises

The government of the young reformer, Sergei Kiriyenko, however, failed to prevent the financial and currency crisis that was both the consequence of the accumulated economic problems of the past, the government's failure to collect taxes as well as the impact of the Asian financial crisis and the fall in oil prices.

Although the Western powers were shocked and surprised at President Yeltsin's sudden and impulsive move in appointing the greenhorn Kiriyenko as the country's prime minister, by and large, the West welcomed his appointment. Kiriyenko came to be regarded in the West as a serious and professional economic reformer. In contrast to Chernomyrdin, who was regarded as a friend of the oligarchs, Kiriyenko was seen as a person who tried to curb the latter's enormous political and economic clout. 3 In July 1998, the International Monetary Fund (IMF) offered Russia a huge $22.5 billion loan package to avert the impending economic crisis. The IMF loan was negotiated by Anatoly Chubais on President Yeltsin's orders. Chubais as the architect of the country's privatisation programme is a rather controversial figure in Russian politics and has created many critics and enemies. The IMF loan package, which was to be released through several tranches, however, failed to avert the financial crisis of August 17, 1998. The government failed to honour its domestic debt on that date which resulted in crisis of confidence, a mad rush to withdraw bank deposits, failure of the banks to honour commitments, a steep decline in the exchange value of the rouble and the flight of capital from the country, and a fall in the country's credit rating. The fall in the exchange value of the rouble was accompanied by growing inflationary pressure. On the eve of the economic crisis, the redenominated rouble stood at 6.43 to a dollar, 4 but today its value has gone down to around 21 roubles to a dollar which amounts to more than 70 percent devaluation of the Russian currency. It is estimated that at the end of 1996, around 18 percent of Russians were living below the poverty line, but as a result of the August crisis, 30 per cent were pushed below the poverty line. 5

The economic crisis was further aggravated by the accompanying political crisis. On August 23, President Yeltsin sacked Prime Minister Kiriyenko and re-appointed in his place the very same Viktor Chernomyrdin, whom he had sacked six months earlier. Changing of horses in mid-stream proved to be disastrous for the country. The Communist dominated State Duma (the Lower House of the Parliament) refused to ratify the appointment of Chernomyrdin. They held the economic course pursued by Chernomyrdin for more than five years as basically responsible for the current crisis. President Yeltsin renominated Chernomyrdin, and the Duma rejected him again for the second time. This resulted in further uncertainty. At a time of grave economic crisis, the country did not have a stable and effective government that could instill confidence among the people. President Yeltsin's own power and influence and popular standing were greatly eroded. In a T.V. interview on August 28, he denied the rumours of his resignation but made it clear that he would not be contesting for another term. In view of the determined Duma opposition to Chernomyrdin, he relented and nominated Yevgeny Primakov, the country's widely respected foreign minister, as his nominee before the final third vote in the Duma. The Duma endorsed the appointment of Primakov by a big majority of 317 votes as against the required 226.

The financial crisis highlighted Russia's vulnerabilities and limitations as a major player in the international arena as the chief successor of the former superpower. The contrast in the comparative economic clout of Russia and the USA, for instance, became all too glaring. Thus, on the eve of the August crisis, it was estimated that Russia's GDP was just $460 billion in contrast to the US GDP of around $8 trillion. 6 With the more than 70 per cent devaluation in the value of the rouble in comparison to the dollar following the crisis, Russia's economic standing vis-a-vis the USA becomes even more fragile. No wonder, Sergei Rogov, the director of the Institute of the USA and Canada in Moscow, was reported to have remarked that in view of the present financial crisis and its likely consequences, Russia should shelve the dream of the revival of its great power status at least till the year 2020. 7


Primakov Brings in Stability

Unlike his predecessors, Yevgeny Primakov is more acceptable to the Communists-dominated Duma. He heads a government of national compromise and coalition. The first deputy prime minister in his Cabinet is Yuri Maslyukov, who is a card-holder of the Communist Party and who was in the Soviet era the chief of the mighty Gosplan (state planning body). The present chairman of the Russian Central Bank, Viktor Gerashchenko (appointed after the financial crisis), was earlier the chairman of the Central Bank during the Soviet period.

Despite political differences that are inevitable in any coalition, the Primakov government has been able to agree on, and chalk out, a common programme. The prime minister and other members of his team have repeatedly stressed that there would be no going back to the old Soviet-style command economy. Market reforms would continue. Russia would continue the policy of integration with the global economy. There would not be any de-privatisation. And the country would honour its debts. The Primakov government is earnestly seeking foreign investment. It has got laws on production sharing and foreign investment passed by the Duma, providing protection to foreign investors regarding the safety of investment and allowing for repatriation of profits. At the same time, Primakov Cabinet insists that the economic policy of Russia must recognise its unique circumstances and special requirements. It is opposed to reckless privatisation of the type that took place in the past. The government is emphasising the need of the growth of the "real sector" of the economy rather than mere "speculative activities." It is stressing the need to improve the working of the state enterprises and pay back pension and wage arrears to the people. The new catchword is "socially-oriented market reforms." The economic programme of the Primakov government is often likened to President Roosevelt's "new deal" policy evolved in the wake of the great economic depression of the decade of the Thirties.

The present government is working on the understanding that it must provide political and economic stability to the country till the year 2000 when the next presidential election is scheduled to take place. It is clear now that President Yeltsin will not contest the next election. The country's Constitutional Court has also ruled out a third term for him. Due to the ill-health of the president, the task of running the government is increasingly shifting to the prime minister. But President Yeltsin still controls the power structures. The country's nuclear button is also in his hands. He retains the right of dismissing the prime minister, but his prime ministerial nominee must be approved by the State Duma. Primakov's recent move for an accord between different branches of power, whereby the president would agree to the curtailment of some of his enormous powers in return for removal of impeachment proceedings against him in the Duma, has not succeeded. It has been rebuffed by the president. Nonetheless, even those who do not fully agree with Primakov's programme, have conceded that he has been able to bring in much-needed stability in the country 8 and instill a degree of confidence among the people, that had become completely eroded in the aftermath of the financial crisis. Although Primakov has repeatedly denied presidential ambition, it is widely agreed that if he were to contest, he would win the race for presidency.


Dependence on IMF Bailout

The Primakov government has inherited an extremely difficult economic situation. The Russian government is expected to pay a whopping $17.5 billion amount in servicing its debt obligations for the year 1999, while the entire revenue collection in the budget this year is estimated at $21 billion. The budget envisages an expenditure of $25 billion. 9 Thus more than 80 per cent of the budget revenues would go in the servicing of the country's debt. The country is earnestly seeking restructuring of its foreign debt. Russia would very much like the old Soviet debt to be written off by the creditors. 10 It is hoping to honour its debt servicing commitments of this year by getting half of the debt re-scheduled and paying just $9.5 billion, that too by borrowing $4.5 billion from the IMF. 11 Thus, the country is crucially dependent on the IMF bailout if it is to honour its debt servicing commitments for this year. The alternatives to the IMF bailout may be extremely painful and destabilising for the country and its fragile economy. Default in the payment of debts may precipitate another financial crisis. Unlimited emission of paper money or clamping down of old-type controls may result in run-away inflation and mass dissatisfaction and protests.

An agreement has not yet been reached with the IMF (at the time of this article going to the Press), despite several rounds of talks between the two. The IMF is seeking to impose its own conditionalities in return for releasing loans to the Russian government. The IMF is reported to be insisting on cuts in expenditure, including defence expenditure, and cutting government subsidies to the state enterprises. The Russian government feels that any further cuts in the expenditure at the expense of the already neglected social sector would only evoke social unrest. The IMF is reported to be opposed to the cuts in taxes and export duties aimed at encouraging domestic producers and exporters. There are serious differences between the Russian government and the IMf on these issues. 12 However, the Primakov government has no alternative but to bend over backwards to solicit the IMF bailout.

At the same time, Primakov and other members of his Cabinet are repeatedly emphasising that Russia needs the IMF and World Bank loans mainly to be able to repay the debts incurred by their predecessors. It is being pointed out that the very same IMF and the World Bank have given billions of dollars of loans to Russia under previous ministries with much greater ease without insisting on financial stringency regarding repayment or mode of utilisation.


US Pressure

The USA has a dominant say in the governing bodies of multilateral international finance institutions like the IMF and the World Bank. In the circumstances, Russia simply cannot afford to ignore or counter the USA, which remains the most important foreign policy partner and interlocutor for Russia.

During the recent months, the Russian media has been full of reports that the USA is making use of the current economic crisis in Russia to put pressure on it on a number of foreign and defence policy issues. It is argued that the ultimate objective of the USA is to consolidate its position as the sole surviving superpower in the world. It is trying to impose on Russia a "victor's peace" for its alleged victory in the Cold War with the former Soviet Union. Russia, on the other hand, is officially committed to a "multipolar" world with itself as one of the recognised great powers. But it is admitted in the National Security Concept of the Russian Federation that transition to a multipolar world may not be easy and smooth. It may take "a lot of time for the multipolar world to assert itself" and there may be repeated attempts to create an international system based on "unilateral solution of key international problems". 13

The feeling is growing in the Russian strategic community and political class—including the traditionally pro-West sections—that making use of the current economic and political crises in the country, the USA is pressing ahead to promote its larger geo-political goals and designs in the region and the world at large to make a unipolar world a fait accompli, which would be very difficult to challenge for a long time to come.

There is growing concern in Russia over the US tendency to bypass the UN Security Council and resort to unilateral actions, as the recent bombing of Iraq and the threatened North Atlantic Treaty Organisation (NATO) military action against Yugoslavia on the issue of Kosovo, demonstrate. As one of the five permanent members of the UN Security Council with veto power, Moscow would like these issues to be decided by the Security Council.

It appears that in negotiating with the USA from a considerably weaker position, Russia is particularly emphasising the need to abide by the rules of certain legal and structural norms that have come to be generally accepted. Thus, Russia is opposing the use of force against sovereign countries bypassing the UN Security Council under whatever pretext, be it human rights, preventing the proliferation of weapons of mass destruction or the fight against international terrorism. Russia is also insisting on a general agreement ruling out the use of force in the settlement of international disputes.

Russians apprehend that the USA is not only promoting eastward enlargement of NATO to the detriment of Russian security interests, but is also seeking to bring about a basic change in the strategic doctrine of NATO. NATO's strategic doctrine is expected to be reviewed and revised at the time of its 50th anniversary celebrations scheduled to take place in Washington in April 1999. The Russians fear that attempts are being made to convert NATO into the general instrument of security of the Western world and its area of operation is sought to be further enlarged so that it does not remain confined to the territorial defence of Western Europe and North America.

Within the former Soviet space, the USA is seen as promoting the independence of the new republics against the former metropolis. Moscow strongly suspects that the USA wants to further reduce Russian influence in the former Soviet republics situated all along its southern and western borders, and create a belt of markedly pro-West and pro-US states there. US-backed oil and gas pipeline projects from Central Asia and the Caspian Sea region to the West, like the Baku-Ceyhan and Baku-Supsa pipelines bypassing Russia and Iran, are seen as aimed at further marginalising Russia from the geo-politics and the oil business of the region.

There has been a strong reaction in Russia to the imposition of sanctions by the USA on 10 of its institutions for alleged delivery of nuclear and missile technology to Iran. It has asked the USA to produce evidence in support of the allegations. Russians insist that Russia is a party to the non-proliferation regime and is equally interested in ensuring that weapons of mass destruction do not fall into the hands of countries close to its own borders. The US pressure on the Iranian issue is seen as being motivated by the US commercial interests to deny Russia a place in the market of high technology. Russia is building a nuclear power plant in Bushehr in Iran under full-scope International Atomic Energy Agency (IAEA) safeguards.

Russia has viewed with particular concern the US moves to revise the 1972 Anti-Ballistic Missile (ABM) treaty and create a national ABM system that would change the very basis of the nuclear-strategic balance and understanding between the two largest nuclear powers. It is seen as the resurrection of Reagan's "Star Wars" programme that cuts into the very base of the nuclear deterrent principle, which has been instrumental in maintaining peace in the world in the post-World War II period.


Russia's Response

Russia's response to the extremely difficult foreign policy challenges faced at a time of acute economic difficulties and political uncertainties arising from the on-going process of systemic change and adjustment, is to first of all protect its core interests comprising its very survival. It is in search of a breathing space in order to tide over the present crisis. It is seeking adjustments and compromises all the way to avoid frontal confrontation with any country—large or small. Above all, Moscow is keen to avoid confrontation with the USA, on whose goodwill and good offices it depends for getting the crucial IMF loans, although it is the USA which is seen as the greatest challenger and threat to Russia's traditional geo-political interests in Eurasia. At the same time, Russia favours enhanced cooperation with all other major international players in order to strengthen its negotiating positions with Washington and open up possibilities—even if they are small and not immediate—of the emergence of a multi-polar world.

The strong point in Russia's bargaining position—despite its current economic woes and travails—happens to be its position as the second biggest nuclear power, which still has the capacity to physically destroy the USA and the world and whom probably the USA would not like to drive to the utmost limit of desperation and isolation. Thus, the opinion has been expressed that the fear of 'loose nukes' may prompt the West to open its purse strings yet again. Jessica Stern of the Council on Foreign Relations and a former National Security Council staffer, is reported to have remarked, "The economic collapse of Russia is the single greatest threat to US national security around right now". 14

It seems that the IMF and Washington are dragging their feet till the last moment in order to extract maximum concessions from Russia. Russians have come to believe that the US pressure on Moscow is invariably linked to some bait in order to make it more palatable for the former. It appears the Russians are prepared to play this ball game and make the necessary adjustments and compromises, although the Russian prime minister has repeatedly said that the country would not succumb to pressure. The Foreign Minister Igor Ivanov recently remarked that although the country is pursuing an economic policy of market-oriented reforms, its foreign policy is not a market foreign policy; it is based on the national interests of Russia. Nonetheless, the joint news conference addressed by Ivanov and the US Secretary of State Madeleine Albright on January 26, at the end of her talks in Moscow, amply bears out Russia's determination to continue constructive engagement with the USA on all important issues in a spirit of adjustment, and avoid a deadlock. It was pointed out that even on the issues of Iraq and Kosovo, the two agreed on the basic objectives. Both are against the proliferation of weapons of mass destruction in the context of Iraq, and favour autonomy for Kosovo Albanians while maintaining the unity and territorial integrity of Yugoslavia. On the ABM issue also Russia is willing to enter into a sustained dialogue with the USA. Albright has pointed out that any deployment under the ABM system would not be possible until the year 2005. 15 In fact, an opinion exists among the pro-West circles in Russia that would favour the development of a joint anti-missile defence system with the West. 16 Russia has denied the allegations of supply of nuclear and missile technology to Iran, but has shown readiness to tighten its own nuclear and missile control regime.

Russia is opposed to NATO extension, but it has preferred to evolve a formal mechanism of continued dialogue with it by signing the Russia-NATO Foundation Act (May 27, 1997) in order to minimise the threat to its security rather than enter into a frontal confrontation. Earlier, in July 1994, Russia along with other former Soviet states, joined NATO'S Partnership for Peace Programme (PfP). Multinational military exercises with the participation of the US troops under NATO's PfP on the territory of the new republics aroused deep consternation in Moscow, that saw in it an infringement of its traditional sphere of influence. Still, Moscow acquiesced in the move by itself participating in the exercises.

Along with seeking compromise and adjustment with the USA, Moscow is also strengthening its ties with other major powers like China, India, the West European countries, Japan, etc. Primakov's "informal" proposal of a "strategic triangle" among India, China and Russia mooted at the time of his New Delhi visit in December 1998 has been aimed at facilitating the move towards a "multi-polar" world. Recently, reports have come of China and Russia holding consultations to work out a joint strategy against US plans to deploy a theatre missile defence (TMD) system in Asia, with the participation of Japan, South Korea and Taiwan.16

By way of conclusion, it may be said that while the long-term aim of Russian policy remains the creation of a multipolar world where Russia is one of the recognised great powers, still, in the short-term, Russia is prepared to make compromises with the sole surviving superpower because of its economic compulsions.



*: Research Fellow, The Institute for Defence Studies and Analyses.  Back.

Note 1: Vitaly Golovachev,"Debt Noose", Trud, March 16, 1999.  Back.

Note 2: Jyotsna Bakshi, "The Year 2000 Elections: President Yeltsin Fires the First Salvo", Strategic Analysis, July 1998, pp. 575-578.  Back.

Note 3: Financial Times, August 26, 1998.  Back.

Note 4: The Statesman, August 29, 1998.  Back.

Note 5: International Herald Tribune, February 17, 1999.  Back.

Note 6: New Times, October 1998, p. 54.  Back.

Note 7: Ibid.  Back.

Note 8: SWB, SU/3441 B/3, January 25, 1999.  Back.

Note 9: International Herald Tribune, February 6-7, 1999.  Back.

Note 10: Segodnya, January 21, 1999.  Back.

Note 11: Finansovye Izvestia, January 21, 1999.  Back.

Note 12: Nezavisimaya Gazeta, February 2, 1999; Daily Review, February 10, 1999.  Back.

Note 13: National Security Concept of the Russian Federation (December 17, 1997). Text provided by the Information Department of the Russian Embassy in New Delhi.  Back.

Note 14: Bill Powell, They'll Get the Money", Newsweek, February 1, 1999.  Back.

Note 15: SWB, SU/3444 B/10, January 28, 1999.  Back.

Note 16: The Statesman, March 17, 1999.  Back.