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CIAO DATE: 8/01
Social Sciences
Vol. 32, No. 1/2001
The Formation of Bureaucratic Capitalism in Russia (1992-1998)
By Nodari Simonia
*
Today's russia is still in an early stage of acquiring statehood and is facing the choice of values, which will determine its subsequent evolution. Inside and outside the country, the adherents of the "Western" and the "Asian" orientation are engaged in heated discussions. It is true that some public figures stand up for a "special" Russian path of development (I would rather call it a synthesis of some elements of Western and Asian development patterns in Russian soil) but they are few and their voices dwindle away in the noisy chorus of the followers of the extreme points of view.
In recent years, I had an impression that not only the world community (especially its Western part) but also many of our fellow countrymen could not give a sufficiently profound meaning to the new Russian reality. We should confess, however, that it is not an easy task. The changes Russia is undergoing—not only in the political but also in the socioeconomic sphere —are so rapid that even well informed analysts are unable to keep pace with them. It is even more difficult to trace the relationship between these internal changes and the external policy zigzags. Yet this relationship does exist.
The author will confine this article to a brief analysis of the most important socioeconomic and political alterations in Russia before the August 1998 financial crisis, i.e., in the first stage of primary accumulation and the formation of bureaucratic capitalism in this country.
The Nature of Political Power in Russia
There exists a myth that democracy was established in Russia after the August 1991 abortive putsch. This perdurable myth rests on the simplistic point of view that such attributes as regular parliamentary and presidential elections, multifold press and other media is precisely what should be called democracy. The shape, however, may not in the least reflect adequately the content. There were, and are, dozens of countries in the world that borrowed "democratic garments" from the West to put them on their "traditionalist bodies". In order to ensure that these "garments" do not burst at the seams they have sewn them down with strong authoritarian thread. In Russia, the situation is the same.
To tell the truth, in 1990-91 the young democratic movement was in the vanguard of the struggle for the transformation of the USSR. But the government had neither social nor economic basis to establish a democratic regime; on the other hand, there was no adequate historical tradition, mass psychology, or sufficiently developed civil society. This was the reason why, objectively, Russian democracy (as a political movement) failed to attain its own goals but cleared the way to power for quite a different social force—economic nomenklatura, — not for itself. Until then, all power in the country had been in the hands of the ideological nomenklatura, which dominated all society, the economic nomenklatura included. The August 1991 events swept it away for good. After V. Chernomyrdin had been appointed prime-minister the economic nomenklatura began a purposeful consolidation of its positions at the federal level (1993-95). In the regions, the definitive establishment of the economic nomenklatura rule took more time and only could be concluded at the time of the local elections in 1996-97, which in most cases were won by pragmatically minded economic "top brass" irrespective of their political views.
But Russia's specificity and misfortune, however, was that power—democratic in shape and autocratic in essence—was not strong. From the outset, power in Russia was flabby and unconsolidated. Neither social nor political consensus existed in society, which was evident not only in the struggle between parties but also in the higher echelons of power (between the legislative and the executive branches, between different groupings (factions) inside the executive power. President Yeltsin himself, despite the image of a "strong leader" or even a new Russian "czar", was not in a position to overcome this despite the image of a "strong leader" or even a new Russian "czar", was not in a position to overcome this "disunity of powers" and of the political elite of Russian society. Instead, he used all kinds of maneuvering, trying to set different forces against each other. As a result, in the inner presidential circle a curious phenomenon appeared—better to say, reappeared insofar as it had existed in pre-1917 Russia during the reign of Nicholas II; to be more precise, it was a court clique, or a "shadow cabinet", often more powerful than the official government. The composition of that shadow cabinet changed from time to time; some figures were moved to the background and others were brought to the forefront. In 1997-98, the most influential figures in the presidential entourage were T. Dyachenko, president's daughter, V. Iumashev, the chief of Presidential Administration, and his deputies S. Iastrjembsky, A. Voloshin, and some other figures. Owing to their closeness to the president, some people gained temporary significance incommensurable with their real standing, while the mood, the whims, and health of the head of the state were an important factor in Russian external and internal policies.
The initial euphoria with the "victory of democracy" and the announcement of radical economic and political reforms testified that the radical democrats and liberals in Russia and their supporters in the West failed to understand the Russian reality and completely overlooked a wide spectrum of social forces and economic interests. No wonder that in that situation a minority was striving to impose its will on the inert or passively resisting majority. This approach was duly reflected in the Russian external policy. From that time on the prevailing course was to immediately "include" Russia into the community of the Western democratic countries, to establish relations of equality and partnership between Russia and the "big seven" (G-7), etc. The direct lop-sided orientation to the West has led Russia to neglecting the vitally important cooperation with Asian countries. The emphasis was laid on Western financial support—government aid and private investments. Official aid, however, proved ridiculously small. The West shifted off the function of the financial support to Russia on international financial organizations (IMF, IBRD, and EBRD), whose aid is by far different from the official aid given by Western governments on easy terms. No wonder that Russia's foreign debt kept soaring.
Formation of Bureaucratic Capitalism
Bureaucratic capital is a specific form of the genesis of capitalism in the context of the "catch-up" development. In fact, it is a specific variant of "primary accumulation" done with an active participation of, and initiated by, state bureaucracy. It is especially characteristic of the countries known for their long-standing tradition of bureaucratic government. In the USSR, the first elements of bureaucratic capitalism became apparent in the end of the Gorbachev era. But massive, practically unchecked, formation of bureaucratic capitalism in all its manifestations—private bureaucratic capital, bureaucratic state capitalism and, in the long run, bureaucratic and state monopoly capitalism received an impetus when E. Gaidar announced a liberalization program. He and his followers simply did not take into account one obvious fact of the real (not virtual) life in Russia: in the absence of a somewhat significant entrepreneur stratum, the opportunities offered in the framework of a policy of unrestrained liberalism (on top of all that, it was classical liberalism long ago abandoned and forgotten all over the world, and not the modern neoliberalism) could be grasped by only two social groupings. The more important of the two was the economic nomenklatura fully furnished with all necessary connections and the relevant know-how. The second was the illegal business, the "shadow economy", already plentiful in the Brezhnev era.
An important feature of the formation of this type of capitalism in Russia was the absence of consolidated and strong state power, which gave bureaucracy the complete freedom of action and exempted it from the supreme power control; on the other hand, it led to the fragmentation of bureaucratic capital. The bitter confrontation between different factions of bureaucratic capital was, in fact, the main feature of the internal political struggle in 1994-98, which was reflected in changes and zigzags of Russia's external policy. It is symptomatic that the presidential apparatus, the government, and the media (pro-governmental ones and the majority of those belonging to the opposition) did their best to camouflage this fact (whatever the reasons they may have had), over-emphasizing the confrontation along the "democracy vs. communism" line. In the meanwhile, the serious observers made it clear for themselves that the process of commercialization of Russian society, including a bigger part of the leftist opposition, went far enough to become practically irreversible, and that the real alternative was reduced to some particular variant of capitalist development.
Objectively, this type of socioeconomic development caused to appear prerequisites for the reinforcement of authoritarian trends at the political and state level; for the increase of pro-strong-state feelings in society; and for the rejection of the romantic image of the West in foreign policy and the search for a "strategic partnership" in Asia and other parts of the world. In virtue of the factional nature of the bureaucratic bourgeoisie and its internal conflicts, however, these processes operated irregularly and with no definite winner.
Initially, the factions were formed along the sectorial lines. Here, three major factions can be pointed out, one dealing with production and export of raw materials, another with finances and trading, and the third—the industrial sector. The grouping engaged in production and export of raw materials was the most "wealthy" and influential; it was made up of representatives of oil and gas industries and some mining companies. Oil and gas exports gave the country about a half of its hard currency revenues and 40 per cent of the budget income. This sector had a powerful representation in the executive branch (the most prominent example is the then prime-minister Chernomyrdin) and owned commercial banks set up on the basis of respective Soviet ministries and departments, (as well as these corporations themselves).
The finance and trading faction was the most motley and not so consolidated group of commercial banks and big trading corporations. Initially, it included commercial banks not engaged in financing the industrial sector (its revival, restructuring, and development). Their links with the industrial sphere only existed when they bought up cheaply (with the help of state officials) some of the most profitable or promising enterprises to maximize profits for themselves or to resell them later, mainly to foreign investors. Political economy defines this function as "comprador". The dominant role in this faction is played by the "authorized banks" which enrich themselves mainly through speculations with budget or extra-budget money belonging to state organizations (for example, the hard currency receipts of Rosvooruzheniye, the biggest Russian arms exporter, and other companies of the industrial-military complex that export their products). Here, the decisive factor was that these banks maintained special relationships with highly placed state officials. At the same time, this faction incorporates quite a number of middle-sized and small commercial banks that make money "out of the air", by way of financial speculations. Initially, there were as many as 2500 of them but then this number dropped by several hundred (as a result of bankruptcies or because the Central Bank withdrew their licenses). It is curious that some of the "economic" ministers appointed by E. Gaidar that had set up financial institutions of their own joined in the overall stream of financial bureaucratic capitalism and accepted the rules of the game to keep afloat. This faction of bureaucratic capitalism is the most ardent supporter of cooperation with the West. It is second in wealth and influence but while the first faction got rich but shared its profits with the state, the second one—at least, until quite recently—practically did nothing better than to wrench money out of the state and society. Nevertheless, it was precisely these two groupings that in fact ruled Russia, at least until August 1998, and backed President Yeltsin financially at the 1996 elections; he acted as their de facto proxy and gave them privileges and advantages issuing respective decrees and orders.
No wonder that the industrial faction was one of the most cachetic. Its nucleus was the industrial-military complex and it was exactly this sphere—including the industries producing non-military output—that suffered the biggest losses in the course of the radical reform. It is clear, however, that its management did not live from hand to mouth. The process of accumulation of bureaucratic capital took place there too, although at a smaller scale, owing mostly to the notorious "voucher privatization" a la Chubais, which gave the management an opportunity to get a controlling interest of their respective enterprises. 1
The Struggle between the Factions of Bureaucratic Capital
The first stage (1992—June 1996) was dominated by the raw materials producing and exporting faction, and the finance and trading faction. Their representatives predominated in the government since 1993. They formed a very peculiar "alliance-confrontation" tandem and were united by their fear of the opposition and by misgivings that a new powerful and patriotically minded national leader could deprive both factions of their autonomy and impose such a mechanism of the redistribution of income and profits that would work for the growth and development of national industries. It did not mean that these two groupings did not have contradictions, in fact they did, and their clashes sometimes were quite hard-edged. In 1993-94, for example, they bitterly fought for a restructuring of the oil industry. The pro-raw-materials-producers' lobby headed by V. Chernomyrdin preached the establishment of a small number of vertically integrated companies competitive in the international markets. The State Committee for Property and the State Anti-Monopoly Committee controlled by the Gaidar-Chubais group insisted that the oil sector be divided into a large number of small companies, some of them along the production lines (some companies would extract oil, others would be engaged in oil processing, and some others, in oil transportation and sale). These measures were proposed to stimulate their competitiveness but, objectively, it meant that such weak and disunited companies would be subordinated to the Westerns transnational companies. Of these two groupings, the former won. There was another show off between them in Autumn and in Winter 1995, when the so called "lien auctions" were held to divide the most fat slices of the state "pie", in particular, raw material producing sectors (oil and nickel among others)
In general, the trend to gradually "crowd out" the representatives of the financing and trading faction from their leading positions in the government initially increased. The elections to the State Duma in late 1993 demonstrated how narrow was the social basis of the radical democrats and liberals, in fact putting an end to the short era of "liberal romanticism".
Under the impression from the October 1993 events, the President ordered the forming of a special task force to protect himself, and special communications units. The new 1993 Constitution also meant a formal reinforcement of the authoritarian tendencies in Russia's political regime. Against the background of the weakening of the financing and trading faction and reinforcement of the positions of the raw materials producers and the representatives of the Armed Forces, Police and Federal Security—the so-called siloviki —the growth of the pro-strong-state mentality began taking shape in Russia. In fact, the adherents of the strong state (objectively) acted as political spokesmen of the interests of the economic nomenklatura deeply rooted at the federal level. At the same time, this drive for a strong statehood support became more notable in the foreign policy.
In 1994, some steps were taken to enlarge CIS (Azerbaijan, Georgia and Moldova joined in). The interests of the siloviki and the raw materials producers nearly converged on this point for the former were interested in some political-military control over the territory of the former USSR (to keep most of the military infrastructure and uphold Russia's security), while the latter (especially, oil and gas producers) wanted to have an access to the markets of these republics and sought opportunities to invest into oil and gas production and into the respective infrastructure (storage facilities, ports, processing plants, etc.), to ensure oil and gas transportation through Russian territory, to establish joint ventures, etc. It should be noted that the oil and gas grouping sometimes not only acted on its own but also against the policy conducted by the Ministry for Foreign Affairs, as was the case of the "Caspian knot". In an effort to block the establishment by Azerbaijan, Kazakhstan and other countries of an international consortium to develop oil deposits on the Caspian shelf, the Ministry for Foreign Affairs proposed its own conception of the status of the Caspian sea. However, the pragmatic Russian oil lobby decided, not without a reason, that it was better to have interest in the emergent consortium than to wait for many long years while the foreign ministers of the respective countries were indulged in debates passing over the initiative to foreign transnational companies.
Theturn to CIS was also advantageous for a considerable part of the industrial faction since many elements of the formerly unique economic complex had been torn apart, which was by far one of the main reasons of the fall in industrial production in Russia as well as in many CIS republics.
So, the historical phase we are examining here is characterized, on the one hand, by the appearance of new and relatively autonomous subjects of the foreign policy and, on the other, by the growing public support to the idea of a stronger state as a reaction to sometimes messy confrontation between different socioeconomic groupings and to the fragmentation of the state and political structures. The autonomy of the oil and gas complex was relative because it had not completely detached itself from the state, from the financial and juridical points of view, and greatly depended on the benevolence of the state officials (first of all, the prime-minister himself) and on various privileges and exemptions (customs, taxes, etc.). One important reason for the appearance of this autonomy was the absence of clear-cut rules of the game; it did not always fit into the general state strategy for it simply did not exist at the time (essentially, owing to the weakness of the presidential power in Russia). When a new Minister for Foreign Affairs came to replace the former one in 1995 first steps were taken to overcome this fragmentation and the lack of coordination of different aspects of the Russian foreign policy. From that moment onwards, it has been progressively concentrated on the protection of Russia's state interests. It is a gigantic, almost titanic task that has to be pursued against a background of the continued struggle between different factions of bureaucratic capital and groupings of the political elite, including in the highest echelons of power. From the same moment the Russian foreign policy began a slow turn to Asia.
The second stage (June 1996—March 1997) of the confrontation between the opposing factions of bureaucratic capital and the respective political groupings in Russia began between the first and the second rounds of the presidential elections (June-July 1996). It was precisely at that moment that an important regrouping of the opposing forces took place. President Yeltsin made a very peculiar "queen's side castling": A. Chubais was brought in the administration while the trio Soskovets-Korzhakov-Barsukov was ousted from the presidential "Olympus". The prime-minister used this opportunity to make his own small "castling" in the cabinet: the active opponents from the industrial faction headed by Soskovets were dismissed and more friendly and loyal ministers (A.Bolshakov, V.Kadannikov) were appointed. 2 Then there came the "punishment" of the commercial banks which, during the election campaign, had supported the Communist Party or general Lebed, or had maintained too close links with Soskovets. (Tveruniversalbank lost its license; Unicombank, Incombank and Credobank had difficult times.)
So, the "raw materials producers" and the "financiers" regrouped their ranks and took up the initial positions for the ensuing fight. But they had to address one important common task first: to oust from their ranks an alien and dangerous element as General Lebed was, the general who in fact ensured the vote in favor of Yeltsin in the second round and was appointed for that Secretary of the Security Council. This operation was successfully carried out in October 1996. In the meanwhile, in the entrails of the government the two de facto governing factions of the Russian bureaucratic capital went on with their muffled tug of war until Spring 1997, when their see-saw fight ended with a big reshuffle of the government structures. But before we pass over to the next stage of this struggle we must point out a new and very important phenomenon in the structure of bureaucratic capitalism that fully developed later. What we have in mind is the then emergent erosion of the clear-cut dividing lines between the factions, the first signs of the restructuring of bureaucratic capital along the clan and group lines. Primarily, this phenomenon was related to two new circumstances. First, the sharing out of the state property entered a new stage, the most valuable portions of it were auctioned or distributed in tenders thus contributing to the process of diversification of the investment activity of the big commercial banks, some of which acquired interests in oil and other raw materials industries. For their turn, many raw materials companies became owners or joint owners of industrial enterprises and commercial banks. Second, the process of formation of financial and industrial groups was initiated "from the top", that is, these groups were established by governmental decrees. This process, however, often went on also spontaneously or even semi-legally, when such groups were formed by some of the factions of bureaucratic capital. At first, the commercial banks bought up either profitable enterprises (to maximize profits) or just to have them at hand (to resell them later with a good margin of profit). Anyway, it was done with no serious intention to invest in restructuring or to step up production. Rather, it was a manifestation of the "free-seizure" phase of "primary accumulation", when the traditional owner was driven out of his ownership and the property passed into other hands. The positive and constructive function was not here yet. In fact, genuinely modern, vertically integrated corporations were emerging only in the oil and gas sector of the Russian economy.
The third stage (March 1997—March 1998) was marked with an important victory of the "financiers" (to be more precise, their grouping headed by Chubais). As the result of a cabinet reshuffle A. Chubais again entered the government as the first vice-premier and, at the same time, as the finance minister bringing with him his followers from St. Petersburg. The appointment of B. Nemtsov to the post of yet another first vice-premier and, simultaneously, to the post of minister for energy and fuel industry gave the reason to talk of a strong "anti-raw materials" team of young reformers. The industrial branch ministries were liquidated, as well as the positions of the industrial faction in the government.
The new group of reformers came out under the slogan of the struggle against the "natural monopolies". To have a clearer idea of the enormity of the task they were pursuing we can recall that even in the context of a permanent crisis in Russia these "natural monopolies" provided up to 70 per cent of budget receipts. Anyway, they thought they had a wider task aiming to struggle against the "nomenklatura capitalism". A. Chubais maintained that he was willing to break the "union" between the "privatized bureaucracy" and the "bureaucratized capital". To speak the truth, he was the last man to set such a goal. He himself was one of those with whom he intended to fight (naturally, it was a lip-service only). In reality, it was the matter to secure the victory of one faction over the other. The balance of forces seemed to be so strongly in favor of the "young reformers" that many newspapers began speculating that it was a one-party government and that V. Chernomyrdin would soon step down. It all proved to be much more complex, though. Among the priority targets of the anti-monopoly struggle was Gazprom. According to Nemtsov and Chubais, this monopoly ought to be fragmented into several smaller companies. But this time, the nut was too hard to crack. In spite of all his efforts, B. Nemtsov's only success was a government decree on Gazprom (May 1997) emphasizing the necessity of "the reinforcement of the role of the Government in the management" of the company.
The presumptuousness of the "young reformers" made them an ill turn. Their courageous but rash actions caused the formation of a broad union of a variety of social and political forces—from the "raw materials producers" and the industrial faction to the representatives of the Armed Forces, Police and Federal Security (the siloviki). Besides, Chubais (evidently, being sure of his strong position and "indispensability" of his services, and of the support of the president) failed to secure his political function of a "common" factional representative. Before and soon after the presidential elections he made public statements that everyone who had contributed to Eltsin's victory would be accordingly rewarded, but after that he in fact cooperated exclusively and closely with the grouping ONEXIM-Bank—International Finance Corporation, thus antagonizing against himself all the others, including his former allies in the faction. From that moment, the struggle was waged not only along the lines of inter-branch contradictions. The next time the internal struggle came to a head (fatally for Chubais) was in August 1997, when Sviazinvest (communications company) was bought at an auction by Onexim-Bank with the help of Chubais and with the financial participation of the financier George Soros. Thus, this stage saw not only the disappearance of the distinctions between the factions in their struggle for state property but also a new feature—from that moment on, this struggle was waged with the direct participation of foreign capital, as it soon became clear during the preparation of the public sale of the last big state-owned company Rosneft still not privatized. Chubais went to Britain and prepared the ground for an agreement between ONEXIM-Bank and British Petroleum to join their efforts in view of the auction. In response, Gazprom and Shell concluded a similar agreement.
In the meantime, several Russian financiers (B.Berezovsky, V.Gusinsky and others), using the mass media under their control, declared, in fact, a war against Chubais. One of the most scandalous cases, seen by many as an ultimatum for Chubais, was the "Koch affair" (A. Koch, one of Chubais' closest "comrades-in-arms", received a big sum for a book that he never wrote and that was never published from a very doubtful source, and all the tracks led from that source to Chubais and to his colleagues from the finance institution Montes Auri). In response, Chubais dealt a severe blow on one of his staunchest adversaries, B. Berezovsky, who was dismissed from his post of deputy-secretary of the Security Council on November 4, 1997.
The prime-minister furthered the successes of the anti-Chubais coalition without fanfares but efficiently. In late December 1997—early 1998, he "redistributed" the functions inside the government leaving Chubais and Nemtsov as vice-premiers but depriving them of their "armies", that is, dismissing these two figures from the key ministries (for Finance and Energy and Fuel Industry). Chubais also lost control of the mass media. Chernomyrdin took under his direct control the industrial military complex and Rosvooruzhenie (we'll give the details below). Hence, the influence of the Chubais group weakened dramatically.
Thus the third stage clearly marked the main trend of the socioeconomic development of Russia which significantly determined the internal situation and the external policy course of the country. We have in mind the formation of Russian monopolies.
The Army, the Military Industrial Complex, and Bureaucratic Capital
The destruction of the former mechanisms of the management of the state institutions predetermined the relative temporary autonomy of the Armed Forces and MIC in Russia. It should be noted, at the same time, that the overall liberalization and commercialization also affected to some extent the military sphere, promoting unprecedented corruption and, consequently, the formation of the military faction of the bureaucratic capital. The universal euphoria of the "honey moon" period in the relationship between Russian democrats and liberals and the West had a negative aspect—the Russian government's complete neglect of the matters concerned with the military reform and the restructuring and conversion of MIC. To say the truth, slogans and projects were plentiful, unlike practical results. Besides, the "top brass" plunged into the all-out money-grubbing.
One of the most important breeding-grounds of corruption and misappropriation of state property was the Western Grouping of the Armed Forces. Mass media in Russia and abroad carried numerous publications on scandalous cases of black-marketing big consignment of cigarettes, alcoholic drinks, and other goods; sales of all kinds of Army property, equipment and even arms and military secrets; illegal use of the Army transport facilities to carry the individual property of the "top brass" to Russia. For about eight years the press has been reporting the abuses of the "top brass", the use of the servicemen as free workforce to build luxurious mansions for the generals, the systematic speculative operations with cash allowance meant for army personnel, etc. Another important source of enrichment for army moneygrubbers appeared when, after the disintegration of the USSR, the CIS countries began dividing the army property, arms and equipment. Illegal bargains were often made and big consignments of arms and munitions were handed over illegally; the situation got especially piquant when arms were supplied to both sides in regional or local armed conflicts.
It should be noted that the "autonomous" actions of the army chiefs in the CIS countries were largely made possible in virtue of the fact that the Gaidar government and especially the Ministry for Foreign Affairs did not have any reasonable strategy in the "near abroad" and simply ignored these matters. So the initiative was, as it were, overtaken by the Armed Forces. They used the real problems in the relationships between Russia and other CIS countries and the conflicts inside those countries to assume the role of a de facto independent factor of Russian policy abroad. There were, of course, some legal grounds for this role, such as the need to safeguard the new Russian borders, to form a system of regional security, to preserve the old military bases and tracking stations and to get new ones, etc. The involvement of the Army in Russia's external policy vis-à-vis the CIS countries could be explained by the fact that initially many of the foreign policy problems in this region had an important military background. What should have been done is that all these problems had to be solved in the framework and on the basis of the state external policy strategy and not by the generals acting on their own.
And the last but not the least of enrichment were the sales of arms and munitions inside Russia. In recent years, they have become widespread and originated a new and strange but quite explainable phenomenon—regular powerful explosions of the Army depots. As a rule, there used to be no casualties, which indicated that these were carefully planned actions aiming to conceal thefts. In the Far-Eastern Military District such explosions have practically become a kind of a traditional annual event. In mid-February 1998, however, military depots were exploded in the Volgograd and Saratov regions. The internal arms trade flourishes because of the overall criminogenic situation in the country, which public opinion qualifies as outrageous lawlessness. An enormous contribution to this was made by the conflict situation in Chechnya, where from December 1994 the initial conflict turned into protracted hostilities. Unlike the Russian troops, the local commandos never suffered from shortages of Russian-made modern small arms or antitank weapons. Judging by press reports, the war and reconstruction programs in Chechnya enabled some highly placed military and civil officials to make big fortunes.
As they say, fish begins to stink at the head. Here, the role played by the ex-Defense Minister P. Grachov is unparallelled. From the very beginning of his impetuous career in Moscow he was strongly disposed towards commerce. In February 1992, Grachov, at that time president of the State Committee for Problems of Defense and the first deputy of the commander in chief of the United Armed Forces of CIS, belonged to a group of generals who founded the Aviation Company 'Aviakoninfo', a private closed joint-stock corporation that tried to do business with construction materials, timber, fast food, restaurants, etc. but did not go far because of the restrictions imposed "from the top". Soon, however, Grachov was appointed Minister of Defense and in October 1992 founded the state company Voentekh that dealt with sales of enormous quantities of superfluous arms, military equipment and other army property. In 1993, he authorized the use of Air Force airplanes for transporting commercial cargoes "on solitary extraordinary occasions". Air Force cargo aircraft made hundreds of commercial flights a year. Only one example can give an idea of the scale of this business: the Air Force had a net profit of 300,000 dollars from only three commercial flights to Vietnam. 3 By all accounts, the misuse of funds in the Navy (when discarding ships, atomic submarines, etc.) is also enormous.
The main role in the genesis of the military bureaucratic capital seems to have been played by the official sales of arms and military equipment in the framework of the programs of military and technical cooperation with foreign countries. In 1992, twelve specialized exporters were busily engaged in this activity with little or no efficiency and breaking the law and the rules more often than not. Sometimes, as many as thirty intermediaries were involved in fulfilling a single contract. The decision was taken to reorganize the whole system. The state company Rosvooruzhenie was founded. Only one specialized exporter survived the reorganization—the military industrial association MAPO. From that moment begins the tempestuous history of the expansion of Russian arms sales (first of all, in Asian markets). And at the same time an equally breathtaking enrichment odyssey of the people involved in them took place. In fact, Rosvooruzhenie monopolized arms sales (up to 90 per cent of the total). 4
The Rosvooruzhenie management often boasted that it kept afloat the military industrial complex. In March 1997, for example, it alleged that the company invested in MIC the total of 600 million dollars in 1996. This allegation triggered off a series of unmasking reports in the press refuting this information. In the opinion of experts, Rosvooruzhenie was not in the least a charitable institution for the benefit of the military industrial complex but used the latter as a source of its own enrichment. V. Trofimov, a well-known authority in these matters, thinks that the management of the company took the easiest of the roads: it paid a high commission (up to 20 or 25 percent) to foreign agencies and another ten per cent to a monopolistic transport company (in fact, to itself) and yet another seven to ten per cent directly to itself as its own commission. This scheme placed a heavy burden on the manufacturers. However, the narrow circle of the "lucky beggars" did not grumble since even the small sums they received constituted the only real money they could use to uphold production and research and development. Today, eighty per cent of the military output goes for export (instead of twenty in the past).
Rosvooruzhenie could mooch on MIC only because of the disastrous situation in which this sector remained for several years. The government cut drastically military spending (in 70 per cent) and neglected the problems MIC was facing at the time, plunging it into a deep crisis. In the beginning of the 1990s, everyone kept repeating the magical word "conversion". Scientists and statesmen paid lip service to the public assuring that the conversion could help enterprises preserve their high technological potential and production lines. To all appearances, they could not imagine the real problems and difficulties associated with the conversion. No wonder that with very few exceptions the expectations and conversion projects proved to be pure and simple myths. Soon it became clear that the goods from the converted enterprises were two or three time more labor-consuming and five to six time more expensive than similar products manufactured at the civil enterprises. In the beginning of 1996, two thirds of such enterprises suffered financial losses. The government turned its back to the conversion, which is evidenced by the following figures showing the federal budget allotment for conversion (billion rubles, prices of the respective year). In 1993, the government promised 55 and gave 5.1 billion; 1994: 120 and 10; 1995: 102.2 and 0; 1996: 54.4 and 0; 1997: 127.3 and 0.5. As a result, after two or three years of fruitless conversion efforts the majority of the enterprises went back on the way of de-conversion. Anyway, it could not bring them much benefit since the production facilities, which continued to work for the country's military needs, did not receive enough financing either. Again some figures: the federal budget arrears of the payments for the fulfillment of the state orders were 7 billion rubles in 1992; 920 billion in 1993; 4.2 trillion in 1994; 7.7 trillion in 1995; 19.9 trillion in 1997. 6
A peculiar kind of the division of labor was introduced: the president signed the respective decrees and authorized projects concerning MIC while the government ignored them and withheld financing. No wonder, the government was composed mainly of the members of the raw materials and energy lobby, and the relationship between the fuel and energy sector and MIC had suffered a fundamental change. In the past, MIC was at the top of the pyramid, the fuel and energy sector being its foundation; this sector supplied MIC with cheap power (without any rational or reasonable bases) and hard currency. Now the situation changed. Fuel and energy producers became relatively autonomous and kept for themselves a more substantial share of receipts, giving to the government only what was essentially necessary and only under pressure. The former centralized mechanism of management had been abolished turning MIC into a chaotic mixture of different branches, open and closed joint-stock companies, autonomous enterprises, design offices and organizations; some elite companies and organizations soon succeeded in finding a niche in the world market and stood apart from their less fortunate counterparts. This elite group can be divided into two categories; the first consolidated its positions through cooperation with Western corporations (for example, some aerospace enterprises and design offices) and the second, through military and technical cooperation with foreign countries. Both groups improved their positions owing to the external factor but the first did it by working together with Western companies and the second, competing with them. It is precisely in the latter category that the climate was especially favorable to the formation of bureaucratic capital. The bulk of non-elite companies dragged out a miserable existence but some of them were claimed (with different intentions and objectives) by various factions of bureaucratic capital and big Western corporations. 7
1997 was a turning year in the struggle of different factions of bureaucratic capital for the "fattest" slices of MIC. The financial and trading faction that dominated the government since March 1997 dealt an astounding blow upon MIC by disbanding the Ministry for Defense Industry. In summer, however, the "raw materials" lobby began gaining the upper hand. In the end of July, the president signed a decree placing Rosvooruzhenie directly under the prime-minister's control. Next month saw a number of new decrees completely remodeling the military and technical cooperation with foreign countries. Rosvooruzhenie became a state-owned unitary company and two new intermediary organizations were created: Promexport, entrusted with the sale of superfluous arms belonging to the Defense Ministry, and Russian Technologies, responsible for contracts in the sphere of war technologies (MIC). 8 Besides, Chernomyrdin acted here as a defender of the interests of MIC and the Defense Ministry (which received a good "slice" each, and he himself was not forgotten), having laid the foundation of an alliance with the representatives of the Armed Forces, Police and Federal Security against the "financiers". From late 1997 to the beginning of 1998, the government made yet another attempt to solve the problems of MIC. The vice-premier and minister of economy Urinson, who supervised the reform in MIC, announced a government program of substantial reduction and restructuring of MIC.
The main difficulty this program soon had to deal with was not to raise the necessary financing but rather to carry out the restructuring within the existing nucleus of MIC. This restructuring was to answer several questions. Who and how would control the funds allotted to pay for the state orders; who would stay and who would be dismissed in the process of the formation of vertically integrated corporations; how the taxes would be shared between the Center and the regions; how to solve the problem of big enterprises the inhabitants of entire towns depend upon, etc. So it is natural that the struggle around the formation of the new corporations was launched again in late 1998. The fight for the Sukhoy or MiG aircraft design offices and plants was especially remarkable. At that time, the press reported profusely the old and new contradictions between the design offices and the manufacturers and between the manufacturers themselves for the leadership in the future corporation; between the manufacturers and the Moscow commercial banks, as well as between the banks proper (between Oneximbank and Incombank, to give an example); between the legislative and the executive branches of power (in December 1997, the Federation Council and the State Duma made a joint appeal to the president defending MIC and denouncing the economy minister Urinson); between the Center and the regional authorities for their share in the future corporations.
1998: The Crisis of the Pseudo-Liberal Model
IN MARCH 1998, the Presidential Administration dissatisfied with the rapid rise of Chernomyrdin and his increasing autonomy convinced the president to dismiss the prime-minister. As a matter of fact, his resignation marked a turning point in the evolution of Russia; from that time onwards the overall semi-latent structural crisis reached an open phase. Four or five months later it became utterly evident that the model of development that had taken shape in the preceding years entered an impasse. The favorite president's tactics of "balancing and counterbalancing" lost its effectiveness in the socio-political sphere. The illusory relative stability was upset even at the top level of the executive power. Division and demoralization shook the apparatus of the presidential administration and even the President's most close lieutenants. Despite the attempts of B. Berezovsky to the contrary, V. Yumashev forced through his candidate to premiership, S. Kirienko. What suited the President most was that S. Kirienko was young, had little political experience and no roots in Moscow (he came from a province), and could not possibly claim presidency. Yeltsin named Kirienko on March 23 as his candidate to premiership; one month later the State Duma gave its approval on the third vote.
But the most important circumstance was that in Spring-Summer 1998 the socioeconomic model objectively formed as a result of the activity of the preceding governments with the active support of the IMF proved to be completely exhausted. One of the fundamental components of this model was the macroeconomic stabilization understood as the struggle against inflation at any price. So a very strange "market economy" emerged in which a bigger part of industrial output was left without cash and functioned in the "shadow" (even according to the most optimistic estimates, barter accounted for much more than a half of the turnover, not to mention the surrogate money). The credit system was cut off from the real economic sector and instead of its basic function—financing this sector—served (together with the hard currency exchange mechanisms) as a means to channel abroad a considerable part of the value created in domestic production. Such were the results of the functioning of the ultra-liberal model of the organization of the Russian foreign exchange market set up with the help of Western experts. This situation automatically left the government incapable of collecting taxes and, consequently, with a growing budget deficit. Beginning in 1995, the government covered up this deficit exclusively with foreign loans since the instructions of the IMF it obediently followed banned the money emission as a means to cover the budget deficit. This gave way to the building up of the gigantic pyramid of state bonds ("GKO") which from an instrument of patching up the "holes" in the budget turned into a powerful "pump" to "milk" the budget (including the money received from international financing organizations). Another factor that propped up the growth of the pyramid was the decision of the Russian Central Bank to open the GKO market in 1996-97 to foreign investors, who earlier operated through Russian dummies.
Kirienko became prime-minister exactly at the moment when the net profit from GKO was nil; from that moment on the net outflow of financial resources went on unstopped, unlike in 1997, increasing by 5 billion rubles a month. On the eve of the financial collapse in August 17, 1998, the treasury paid out a thousand billion dollars each week on the old GKO bonds and no new bonds were issued. Apart from this, oil prices were going down, another reason why the country came near the verge of a complete bankruptcy.
The impression was that initially Kirienko could not grasp the extent of the predicament. He proudly called his cabinet "technocratic" and tried to be an umpire over the disputing factions of the bureaucratic bourgeoisie; he was speaking about an industrial policy and initiated the creation of the Ministry for Industry and Trade, and even proposed that the communist Yu. Masliukov should head it.
At that time, however, Russia was plunged deeply into a crisis, which aggravated to the extreme the contradictions between the main political and social forces of society. A new regrouping of forces took place. The representatives of the big bureaucratic business divided into two camps according to their vision of what actions were to be taken to overcome the crisis. One group (we may conventionally call it "anti-western") was made up of those clans of bureaucratic bourgeoisie which objected to the dominant role of the IMF and Western transnational companies in working out a way to take Russia out of the crisis and in determining the strategy of the subsequent economic development. It was a big if motley grouping. Among its members were the "oligarchs", unable to live and prosper without the privileged "hotbed" conditions the previous governments had created for them and/or without the special corruption-based contacts and relationships with highly placed officials; and corporations (such as Gazprom and Lukoil) that had strong positions and sufficient experience of cooperation with Western companies but wished to preserve their leading positions—also in their partnership with foreign capital—and to obtain new privileges from the state.
It is evident that this group could not be either solid or united. The exporters of raw materials were interested in the devaluation of the ruble because it could guarantee them substantial profits even if the prices of raw materials in the world markets went down whereas for big financiers devaluation was a mortal danger because it could undermine their ability to meet the foreign loan obligations assumed during their active involvement in the GKO (state bonds) pyramids. At that historical moment, however, they were united precisely by their aspiration to prevent the march of events envisaged in the "Western scenario". B. Berezovsky was the informal and temporary leader of this amorphous grouping.
The second ("pro-Western") grouping was made up of those who considered it necessary to observe the recommendations of the IMF and was ready to be a junior partner of the Western transnational companies and to sacrifice the interests of the first grouping. The indisputable leader of this grouping was A. Chubais.
Although S. Kirienko alleged his neutrality to all factions of bureaucratic capital he was in fact more inclined to work together with the second group to the undisguised discontent of the first. There even was a kind of open mutiny: July 22, 1998, the chiefs of six oil companies (with a notable exception of Sidanko, controlled by ONEXIM-bank) strongly denounced the conditions under which the IMF loan had been obtained. They qualified as "unreasonable and irresponsible" the economic policy of the international financial institutions that were leading, among other things, to a strong fiscal pressure on the real economy sectors. One newspaper owned by Berezovsky did not stop short of threats to "to get rid of the Kirienko cabinet". 9
As the crisis was coming to a head Kirienko openly "made for the West". The final decision on how to overcome the crisis, announced on August 17, 1998, was taken with the direct participation of Chubais (before that, consultations were held with the participation of Gaidar, George Soros, and the managers of the US finance organizations). 10 At first sight, the decision to simultaneously announce default and the devaluation of the ruble (although officially it was the broadening of the "currency corridor") was meant to satisfy the exporters and the commercial banks alike, who thus got an opportunity to withhold payments on their foreign debts. In reality, the situation was worse and much more complex. First, the default was to take effect for only three months. During this period the banks could not solve the problem of debt and so for the majority of them the bankruptcy was imminent at the end of this period. Second (which is essential): Kirienko and Chubais worked out a pro-Western program of restructuring (readjustments and bankruptcies) directly affecting the commercial banks and the raw materials tycoons. On the eve of the default Chubais appealed to foreign banks to take part in restructuring the Russian banking sector. 11 Soon after that B. Nemtsov told The Financial Times that Kirienko was going to pass a package of harsh radical reforms on which the Western leaders were insisting, including the bankruptcy of politically influential but economically weak commercial banks and oil companies. These measures envisaged that stronger companies, including Western investors, could take over the weaker ones. 12
The leaders of the opposing faction soon got the wind of these plans. Berezovsky carried out one more "coup": he succeeded in dismissing Kirienko by the hands of the presidential administration. But just as in March 1998, it was only a partial success because the Duma frustrated his efforts to return Chernomyrdin to power. In an effort to preserve his position and to reach a compromise Yeltsin proposed E. Primakov to premiership as a last resort.
The approval of Primakov by the Duma had an immediate stabilizing effect on society. It was the first government in all these years that not only had the support of the President and his administration but also of the State Duma and the Federation Council; it also won the sympathy of rather broad masses of population (it was many times confirmed by the results of public opinion polls that showed his exceptionally high rating). The main reason for this seems to be that the executive branch was for the first time headed by a public figure that had nothing to do with any of the factions of bureaucratic capital and consistently stood up for a stronger state. Thus, the appointment of Primakov would have been a turning point in the further evolution of Russia if history had given him enough time to make his new strategic course irreversible.
In spite of what the mass media frequently alleged the outline of this new course took quite a definite shape. It envisaged that the present neocolonialist and comprador model would be gradually dismantled; the economic policy would concentrate on addressing the problems of the real economy; the banking system and the raw materials producing sector would be restructured in the interest of the general economic development (and not self-sufficing, as before); the economic reform would continue with an aim to improve the living conditions of people. To implement this strategy on a wide scale the Primakov government first had to solve the most difficult problem of internal and external debt. The most difficult part of it was that this problem had to be solved simultaneously with the implementation of some elements of the new strategy. Nevertheless, even with the heritage left to Primakov, he did sufficiently well. Let us point out the substantial results of his eight months in office.
On the whole, the government strategy featured the determined rejection of the all-out liberalization and, at the same time, a not lesser determination not to go back to the centralized administration. As to the style of the government, it most likely was the state-capitalist regulation, the commercialization of the remnants of the public sector, and the stimulation of the activity of the private sector in the real economy, and all that against the background of the formation of a market socially orientated economy with a human face.
All these plans, however, were not fated to come true. The president's entourage initiated another cabinet reshuffle. In a short period of time, two more prime-ministers were appointed and dismissed, and President Yeltsin himself stepped down ahead of time in favor of V. Putin. What will be the path of the future development of Russia? We will see it shortly.
Endnotes
Note 1: For a detailed description of this process see J.R.Blasi, M.Kroumova, D.Kruse. Kremlin Capitalism: Privatizing the Russian Economy. Ithaca—London, 1997. Back.
Note 2: It does not mean that O. Soskovets lost his influence in the industrial faction. In January 1996 he promoted the setting up of the Russia Association of Financial and Industrial Groups made up of over 60 banks and 642 big industrial enterprises. After he lost his post in the cabinet he became president of this Association. Back.
Note 3: Kommersant-Vlast, No 2, Jan. 27, 1998, p. 25. Back.
Note 4: According to A.Kotelkin, the sales by Rosvooruzhenie went up from 1.7 billion dollars in 1994 to 2.8 billion in 1995 (out of the total sales of 3.05 billion) and to 3.4 billion in 1996 (out of the total of 3.5 billion) (see Vek, No 27, June 1997). According to the research Services Division of the US Library of Congress, Russia made arms sales contracts totaling 1.94 billion dollars in 1992, 2.4 billion in 1993, 3.77 billion in 1994, and 9.1 billion in 1995 (Delovyie Liudi, No 75, March 1997, p. 132). Back.
Note 5: Finansovyie Izvestia, Dec. 30, 1997. Back.
Note 6: Moscow News, Feb. 1-8, 1998. Back.
Note 7: A good example of the intensity of such struggle in the course of the second round of privatization (the state sold its interest in the companies that had already been privatized) is the case of the Perm Motors (beginning in 1992) and Rybinsk Motors (beginning in 1994). Involved in this struggle were municipal and regional authorities, courts of arbitration of all levels, the Supreme Court of the RF, the government, and the President. This peripeteia could constitute a base for a thick book. Back.
Note 8: Financial Times, Aug. 22, 1997. Se also Ekspert, No 3, Jan. 26, 1998, p. 6. Back.
Note 9: Nezavisimaya Gazeta, July 23, 1998. Back.
Note 10: See the interview of S. Kirienko to Ekspert and the extracts from the book The Crisis of Global Capitalism by G.Soros (Ekspert, No 1-2, Jan. 18, 1998, pp. 8 and 10). Back.
Note 11: Moskovski komsomolets, Aug. 26, 1998. Back.
Note 12: See extracts from B. Nemtsov's interview and respective comments in Russkii Telegraf, Aug. 27, 1998. Back.
Note 13: Finansovyie Izvestia, Dec. 22, 1998; Moscow News, Nov. 22-29, 1998. Back.
Note 14: Nezavisimaya Gazeta, Dec. 30, 1998; Segodnia, Jan/ 27, 1999. Back.
*: N. Simonia, Academic-Secretary of the Department of International Relations of RAS. This is an abridged version of the article. For the full-text version in Russian see Svobodnaia Mysl, No 3 and 4, 2000. Back.