I am abbreviating the text's length so it can go out. (This doesn't deal with Summers specifically, but with the US-Russia relationship during the abominably corrupt 90s, when both countires were governed by moral cripples). If anybody wants it, contact me.
Chris Doss The Russia Journal ------------------
Excerpt from The Tragedy of Russia's Reforms: Market Bolshevism Against Democracy by Peter Reddaway and Dmitri Glinski United States Institute of Peace Press [www.usip.org]
The West’s Promotion of Shock Therapy [footnotes not here]
The degree of the West’s involvement in the tragic failure of the Russian reform effort is a sore point in debates on both sides of the Atlantic. In Russia, the exaggerated hopes of the ruling elite that massive Western subsidies would ensure its own political survival have been replaced on occasion by its demonization of the West. This sentiment reflects not so much the growth of national self-awareness among the nomenklatura’s ranks as its desire to shift the lion’s share of the moral responsibility for what has happened onto foreigners. On the other hand, in the United States, the increasingly numerous critics of Yeltsin’s regime have sometimes dodged the issue of U.S. involvement in the shaping and execution of shock therapy. Surprisingly, some of those who manage to give an objective assessment of the criminal and inhuman features of today’s Russian capitalism suggest that the required medicine is an even harsher application of the basic tenets of the Washington Consensus.
On January 9, 1997, in his address to leading Russian and American businessmen and Russian government officials at a conference held at Harvard, Deputy Secretary of the Treasury Lawrence Summers was the first high-level Western official to make some forthright criticisms of the sluggishness of Russian reforms. Having correctly pointed out that “successful transition does not end with the creation of markets,” Summers called on the Russian government to do more to create a favorable investment climate--primarily through a revamping of the tax system to ensure fiscal support for the budget--and to combat crime and corruption with greater determination. If, as we assume, these calls were made in good faith, they reflect a lack of understanding of the direct links between corruption, crime, and mass tax evasion, on the one hand, and the path of economic transformation chosen in 1991 by the Yeltsin regime with Western approval on the other. This lack of understanding is typical of many Western economists, but is regrettable in a high government official who decides to offer advice to Russian leaders. Ironically, one of the Russian listeners whom Summers urged to escalate the fight against crime and corruption was Boris Berezovsky--the man alleged by leading Russian and Western media to be closely linked to the criminal world and whose membership in Yeltsin’s conclave of Russian oligarchs was undoubtedly a major obstacle to any serious fight against economic crime.
A full analysis of the Western role in the Russian tragedy would require many volumes of research. In this book, we limit ourselves to some brief observations. In chapter 4, we examined why the G-7 leaders, notably President Bush and Chancellor Kohl, in 1991 rejected both Gorbachev’s conservative reform package and the radical “Grand Bargain” of Allison and Yavlinsky. The key reasons were that the United States was mired in a deep economic recession and a vulnerable Bush was approaching the 1992 presidential election with a second liability: the charge that his excessive concentration on foreign policy was preventing him from seriously addressing the domestic economy. Also significant was the fact that West Germany had compensated the USSR very handsomely in cash for allowing Germany to be reunited, and the cash had been embezzled. As the Russian deputy finance minister admitted in 1991, “A gigantic sum was received... from Germany--64 billion Deutsche marks [about $30 billion]--and it all slipped through our fingers.” Seemingly ignorant of the domestic constraints on his Western partners, Yeltsin still thought in April 1992 that “the only hope was the promises of the Group of Seven quickly to grant us large sums of financial aid.”
This quote reveals the thinking of a regional secretary whose traditional role was squeezing subsidies out of Communist Party headquarters in Moscow, using the real or imagined threat of social and political disorder as blackmail. Both Gorbachev and Yeltsin became national leaders after many years as regional Party secretaries, and as each got in trouble he turned instinctively to the only available patron, which was now the leaders of the West. Janine Wedel arrived at a similar conclusion when she wrote in a well-received book that for the architects of Russian economic reform, “The communist concept of a planned economy was simply replaced by a capitalist one, in which the Western donor filled the gap left by the Communist Party.”
We should note here in passing that one of the leading industrial powers, Japan, was constrained by intellectual objections as well as domestic politics. It therefore had a markedly cautious attitude toward Russian reforms. Although in Russia, Japan’s stance was usually seen as narrowly linked to the issue of the Kurile Islands, in reality the views of Japanese experts suggest a serious effort to make an objective critique of Russia’s reform program. Shock therapy was so diametrically opposed to the principles on which the postwar Japanese economic miracle was founded (principles discussed earlier in this chapter, such as a high degree of government protectionism, administrative coordination, social responsibility of the elite, and solidarity among different strata of society) that it found little credibility with the Japanese. They found their own postwar model more suitable for economic recovery.
The United States, although content that the G-7 passed the responsibility for stabilizing the Soviet economy (and post-Soviet economies) to the IMF, eventually developed a bilateral aid program for Russia, based on the Freedom Support Act of 1992. Characteristic of this program was the U.S. fixation on specific Russian politicians and elite groups (rather than appealing to broad layers of the population and relying on social solidarity and democratic development). In particular, the partisan U.S. support for the clique of Anatoly Chubais had results that were deeply detrimental to long-term understanding between the United States and Russia. The antidemocratic nature of this support is persuasively demonstrated by Wedel in her book. One of the results is that Chubais, the most tenacious survivor among the various members of Gaidar’s team, earned the hatred of the expropriated Soviet middle class, which resented his style and methods. His cold-blooded mode of operation recalled Baltic Germans, such as Biron and Nesselrode, who were brought into the government by the Russian tsars and tsarinas from the mid-eighteenth century onward and became deeply unpopular for their brutal imposition of foreign ways.
Of all the nomenklatura intellectuals who advanced to high government posts, Chubais is the least burdened by any illusions about the democratic character of Russia’s reforms. His ostentatious elitism and contempt for what he calls the “lumpens” (subproletarians) and “marginals” who populate Russia are the hallmark of his political style. Given the existing rules of the game, which make lack of moral scruples the key to success, his aggressive self-promotion and outspoken scorn for the weak have endowed him with the aura of someone who will always land on his feet. In 1997, he threatened the Duma with dissolution if it failed to do what he wanted, and he repeatedly declared that the government would pursue its own economic policy, no matter what the Duma said.
The IMF Behind the Scenes
>From the outset, Yeltsin’s economic strategy included an explicit
acceptance of the conditions imposed by the International Monetary Fund in
exchange for financing. In his October 1991 speech, Yeltsin proclaimed, “We
turn officially to the IMF, the World Bank, and the European Bank for
Reconstruction and Development, and invite them to elaborate detailed plans
for cooperation and participation in the economic reforms.” By the end of
1991, the USSR was an international economic derelict. In December, it
defaulted on its international debt payments, and all foreign credit was
cut off. Comecon had formally disbanded on July 1, 1991 and, partly as a
result, Russian imports fell by almost half in 1991 from 1990, as
traditional trade flows in Eastern Europe declined sharply.
As for the IMF conditionalities, their implications tended to be
politically undemocratic and economically counterproductive. The first
detailed statement of Russian economic policy issued by the Yeltsin-Gaidar
government was addressed not to the Russian people but to the IMF in
Washington. This was the “Economic Policy Memorandum” of February 27, 1992.
>From that point on, Russia was bound by IMF conditions and by the
encroachments on national sovereignty that they implied. With this
document, as Nelson and Kuzes say, “the Russian government was
acknowledging the West’s leading role as a participant in Russian reform
planning. The Western approach had prevailed in the Kremlin.” Because the
IMF was recommending fast-track privatizations, the Russian memorandum
stressed that the privatization process would be “considerably speeded up.”
Gaidar’s priority was clearly to obtain foreign financial support, not
domestic political backing. But even this task was not successfully
fulfilled, since what Russia got in early 1992 was IMF conditions in
exchange for (at least initially) no money.
The leitmotifs of IMF interventions from 1992 to 1998 were austerity, budget cuts, and deflation, with little regard for the social consequences. If Keynes proposed inflation as a cure for depression, the IMF seemed to prescribe Keynes in reverse, with depression favored as the final cure for inflation. Despite their later criticism of the IMF, Aslund and Sachs shared these priorities. According to Aslund, apart from freeing many prices, Gaidar’s chief short-term goal in January 1992 was the “balancing of the consolidated state budget,” a singular priority in such a chaotic situation. The Yeltsin government had been enticed by tantalizing promises of IMF largesse that were issued by the Group of Seven. In April 1992, Bush and Kohl promised $24 billion in loans; later, even larger sums were mentioned.
Russia was formally inducted into the IMF on April 27, 1992, but many months would pass before the country had anything to show for it. Membership gave the right to apply for an IMF standby loan, and after difficult negotiations the IMF granted one for $4 billion in early July. However, only a first tranche of $1 billion could be disbursed immediately. Moreover, Russia was forbidden to spend the money, which had to be kept in virtual escrow as a reserve fund. (The World Bank also lent Russia about $600 million.) The IMF position was now a circular one: Russia had to achieve currency stabilization before a stabilization fund (designed to shore up the currency) could be created.
There was a further complication. Russia received $12.5 billion in commodity credits during 1992, even though many experts denied that these were needed. They had to be used to buy farm products from various Western countries, which wanted to sell off their farm surpluses to Russia. The IMF, which had encouraged the credits, now declared that Russia had disqualified itself from receiving a stabilization credit because it already had such large food credits. The IMF also complained that because of the food credits, Russia was running an “enlarged fiscal deficit” equal to 25.3 percent of GDP during the first quarter of 1992, even though the government claimed that it was running a surplus.
There is also some question about what finally happened to the foreign loans Russia received during the second half of 1992. A Russian observer has concluded that “their scale, as well as the total absence of any form of public control over their granting, objectively strengthens the point of view, according to which the reasons for seeking this loan were political and even criminal. It was precisely during this period of unlimited credit expansion that the financial foundations for many of the large Russian banks were laid.” Nevertheless, in May 1993, the IMF created a Systemic Transformation Facility for Russia, with the promise that loans could now be given under conditions more lenient than those of a standby agreement.
The IMF also gave support to Yeltsin’s autumn 1993 offensive against the Russian parliament. In August, the fund sponsored a conference in Moscow at which IMF officials criticized the budget bill that enjoyed wide support in the Russian parliament because it included a higher budget deficit than the IMF wanted. The officials made it clear that IMF aid for Russia would cease if Yeltsin were to approve deficit spending. In mid-September, the organization warned the Russian government that it would not disburse a promised loan tranche until Russia “returned to the path of economic reform.” In other words, the IMF and its closest U.S. associates saw the actions of the Russian parliament as an obstacle to their priorities and policies that had to be circumvented.
In early September, then-Under Secretary of the Treasury Summers told the Senate Foreign Relations Committee, “The battle for economic reform in Russia has now entered a new and critical phase in which many of Russia’s accomplishments on the economic front are being put at risk. The momentum for Russian reform must be reinvigorated and intensified to ensure sustained multilateral support.” The Russian government got the message. On September 16, Yeltsin brought Gaidar back as first deputy prime minister responsible for the economy. Within a few days, the IMF made clear that, because of the high inflation rate and the allegedly slow pace of overall reform, talks on a new $1.5 billion loan to Russia could not go forward. Speaking off the record, an IMF official stated that his organization “was unhappy with Russia’s backtracking on reforms during the summer.” On the day after these remarks were printed, Yeltsin went on television to announce that he was dissolving the parliament.
The $1.5 billion IMF loan remained in doubt through the spring of 1994. In mid-April the Chernomyrdin government, acting in the spirit of Prince Potemkin, secured passage through the Duma of a smoke-and-mirrors budget that included a deficit low enough to placate the IMF. Partly because Zhirinovsky had shocked the West by his party’s triumph in the December 1993 elections, the IMF was now ready to turn over this modest sum in exchange for Russian promises of lower inflation and reduced budget deficits. By early autumn 1994, the IMF was once again demanding lower inflation, this time pressing the government to set a target of 1 percent per month to be attained by the beginning of 1996. At the IMF annual meeting in Madrid in October 1994, Russia’s request for an increased borrowing limit was turned down. But in 1995, in the wake of the $50 billion bailout of Mexico, the IMF became willing to grant somewhat larger loans.
The Yeltsin government, fighting a savage and expensive war in its southern republic of Chechnya, was eager to borrow. The IMF, seemingly indifferent to the inevitable perception that it was financing a major war that ended up with some one hundred thousand people dead, granted a standby loan of $6.8 billion, with repayment at 7 percent and a three-year grace period. The conditions accepted by the Russian government were again deflationary, and they included its promises to reduce inflation to 1 percent per month during the second half of 1995; to bar any Central Bank lending to the government; to liberalize foreign trade and investment in the petroleum industry; and, a secret promise, to have economic policy run by Chubais in 1995. Although the inflation and tariff targets were not attained, the IMF put pressure on the Kremlin by disbursing the loan in a series of monthly tranches, the last coming in February 1996.
However, increased lending brought the opposite of the stability the IMF desired. Earlier, the “Black Tuesday” crisis of October 1994 in the Moscow interbank market brought the country’s entire banking system close to a meltdown. Now, in January 1996, the Central Bank spent $1.7 billion of its hard currency reserves in a futile defense of the ruble, which had come under heavy speculative attack. Over the next three months, the ruble lost about a quarter of its value. At this point, the IMF offered yet another loan, this time with the transparent political goal of saving Yeltsin from looming defeat in the presidential elections. On March 26, 1996, the IMF Executive Board approved an Extended Fund Facility of $10.1 billion to be paid out over three years. Now the conditions included the reduction of the budget deficit to 3.85 percent of GDP during 1996, the reduction of inflation to 1 percent per month by the end of 1996, more privatization, more rigorous tax collection, the abolition of export tariffs on gas and oil, and the abolition of Gazprom’s tax-free stabilization fund.
Reportedly, there were also secret conditions on the new loan, one of which was the return of Chubais to the administration soon after the June presidential election. Yeltsin brought Chubais back, but on July 22, 1996, the IMF claimed that important data on the economy were being withheld from its team in Moscow and announced that the scheduled July disbursement of $330 million would be delayed accordingly. The IMF said it was willing to live with a budget deficit of 5.25 percent of GDP, but still delayed the August, October, November, and December tranches, citing low revenue receipts, the persistence of protective tariffs, and restrictions on Treasury bill purchases by foreign investors.
During 1997, disbursements returned to the normal schedule for a time, but by autumn the IMF once again resorted to withholding, this time delaying a $700 million installment with the demand that Russian authorities stop accepting tax payments in kind and accept only cash. By this time, Russia was thoroughly addicted to loans and was groaning under its debt service payments.
Despite the attempts of Chubais, Chernomyrdin, and Western managers of Russian mutual funds in fall 1997 to popularize the notion that Russia had turned the corner, the country’s prospects remained grim. In addition to the domestic problems, there were now the uncertainties deriving from the volatility of global financial markets, to which the country was now fully exposed. After the Russian stock market had risen 150 percent during the first nine months of 1997, Asian financial turbulence reached a crescendo with the Hong Kong crisis of October 1997, which gave world stock markets their biggest shock in many years. The Asian jitters helped undermine prices for Russian shares: The Russian Trading System index peaked on October 6 with a close of 571.6, but by mid-November it had declined by about a third. If a crisis in Hong Kong could cause a fall of this magnitude, what might be the fallout from possible negative events in South Korea, Brazil, or Japan? The best Chubais could manage was a lame pledge: “I think that we will be able to survive November and December, which are going to be difficult months.” Here was the pathos of a hand-to-mouth existence.
Because of the limited cash the U.S. government intended to commit to supporting Russian reforms, Washington generally treated aid for Russia as a multilateral task to be shared by the G-7, the Organization for Economic Cooperation and Development, the IMF, and the World Bank. Thus the United States could minimize both its financial outlays for Russia and its responsibility for the impact of the reforms. However, this policy was punctuated by fitful interludes of intense preoccupation with Russian events, triggered by sudden deteriorations in economic and, above all, political conditions. In March 1993, the Clinton administration was suddenly alarmed that Yeltsin might lose power as a result of the spring referendum on serious political and economic issues. Secretary of the Treasury Lloyd Bentsen warned the IMF that it was not feasible to treat Russia like a banana republic. But this brief anxiety apparently did not influence the IMF and did not lead to a change of policy. In December 1993, the sudden ascendancy of Zhirinovsky after the elections for the State Duma once again attracted Washington’s concern. Clinton’s friend and adviser on Russian affairs, Strobe Talbott, number two at the State Department, announced that the United States wanted “less shock and more therapy for the Russian people.” But soon Washington’s worries quieted down, and the IMF continued on its implacable course.