Kleptocracy in Yeltsin’s Russia

Kleptocracy in the former Soviet Union

This article by Professor Grigori Kotovsky of the Russian Academy of Science is based on a lecture given in Oxford University on the 31st of January [1992]. It takes a different line from other articles that have appeared in L&TUR, which have generally supported Yeltsin. But we are glad to give space to a different point of view – one that the official media is now suppressing.

[It was to prove tragically accurate.  The economy shrank, while corrupt business people gained enormous wealth.]

It is perhaps not so surprising that both the Western and the Soviet media have been concentrating on the tactics of individuals in their attempt to make sense of the accelerating sequence of events leading to the collapse of the Soviet Union. After all, the General Secretary of the CPSU has always been an unconstitutional monarch, and Gorbachev was no exception, But instead of concentrating on the role of political leaders alone, I wish to examine the class forces behind these events.

Perestroika can be seen as the natural historical outcome of a general social, economic and political crisis which was already entrenched by the mid sixties. The transition to a new economic system based on markets, to political and ideological pluralism, the restoration of human rights and the development of civil society based on parliamentary democracy were all unavoidable compulsions for the then Soviet society. And no-one will contest the historic role of Gorbachev and his close followers who grasped the necessity for changes and who set perestroika in motion. The means by which these transformations are being achieved, however, leaves no room to doubt that their principle objective has been to safeguard the interests of the Soviet ruling class.

It has to be recognised that, despite the egalitarian ideology, Soviet communism had long allowed the development of class society. It controlled both political power and the means of production in the public sector. It consisted of the upper structures of the communist party, the military and the civil service. It went down to embrace directors of industrial enterprises and chairmen of collective and state farms. Perestroika was initiated by this very class, in its own interest, and not by a constituency from below.

Itis well known that Perestroika started with basic changes in Soviet foreign policy. Change had to happen, for two kinds of reason. First, the economy could no longer support the costs of nuclear defences and the arms race. Second and related to the first, Soviet society as a whole had lost faith in the legitimacy of this race. As a result, there emerged a consensus among the ruling class about the new trends in foreign policy.

To secure the support of the major part of the Soviet establishment, Gorbachev initiated at the early stages of perestroika a substantial increase in the salaries of the higher echelons of the administration, of party apparatchiks and the trade union elite. These were unambiguous signals that the reforms were in their basic interest. But the rapid shift to political and ideological pluralism resulted, inter alia, in mounting and open criticism of the party, its ideology and past performance. The decisive success of the opposition forces under open anti-Communist banners in the Baltic Republics combined with substantial challenges elsewhere and added uncertainties for the administration and the party apparatus to bring about a series of unforeseen splits in the ruling class.

In the early stages of perestroika, 1985 to 1988, the Soviet establishment, seeking to consolidate its power, split into two groups. On the one hand there was a conservative group desiring reforms with safeguards that the basic economic and social structures of Soviet society would remain intact. Secondly there was Gorbachev’s entourage, who stood for pluralistic democracy, decentralisation of power and decision making, and markets.

By the end of 1988, when it had become obvious that no political and economic structures would escape change, two further types of split occurred. On the one hand, the old Soviet ruling class, both in Russia and in the republics inside and outside Russia, with neither the imagination nor the material interest to envisage or push through alternatives to the old communist structures, fomented and battened on to extreme nationalism, ethnic nationalism and sectarianism as a means of saving their skins. Look at the Baltic States, Armenia, Georgia, Moldavia, even the Ukraine. They are now being ruled not so much by anti-Communists as by opportunist ex-communists, with a new political base.

On the other hand a new ‘entrepreneurial’ class has emerged from the nomenclatura, and united in a shotgun marriage with commercial speculative elements of the society. As the mismatch between supplies and effective demand has intensified, the public sector itself has successfully nurtured a powerful mafia, if not a class, of black marketeers, hoarders and speculators.

This pseudo middle class is rapidly enriching itself in three main ways. One is through so-called co-operatives. Early reforms encouraged co-operatives both in production and in circulation in order, on the face of it, to increase efficiency. The results couldn’t have been more different. By about October 1991 there were over 2,500 co-ops. Only 20% were in production, The rest are in pure commerce, I must emphasise, in pure buy and sell operations. Furthermore these co-ops are actually small joint stock enterprises. And who accumulated the capital to invest this way and to accumulate further at unprecedented rates? These people are mainly ex high party officials, top level administrators, underground speculators and even real criminals. Many production and service co-operatives have been set up as extensions of factories and institutes of applied technology. They are selling exactly the same goods and services as are produced by the parent organisations, but at exorbitant prices!

The second means of enrichment is via the import-export sector. Since 1987 exports have been entirely liberalised. Whereas before 1987 foreign trade was in the charge of the state monopoly, and factory and farm managers had no direct links with overseas markets, since that date any unit of production can sell its goods abroad. And does. Following the example of the large trading companies, tens of thousands of individual , small scale traders are speculating in import-export operations. Their consumer goods are exported abroad at lower than world market prices, In return, goods of Petticoat land standards are brought to Moscow and other big cities and sold at sky high prices in small boutiques.

The third route to nouveau riche is through joint enterprises with foreign capital. By the end of 1991 about 80% of them were in commerce, not in production.

All these new forms of ‘entrepreneurship’ are real steps towards the market economy. What was their impact on the economy? Over the last three years, we have watched a steady decline in flows of goods and services between domestic enterprises, a growing famine of raw materials, components and parts, and a steadily growing scarcity of a wide spectrum of consumer goods and foodstuffs.

Why is there currently such awful economic chaos? The breaking of the state monopoly in foreign trade has at least three main consequences. First, it has not only reduced the state to bankruptcy, forcing it to crawl on all fours to the G7 countries for aid, it has also led to a massive decentralisation of foreign exchange holdings into the very linings of the pockets of the directors of enterprises and ministry officials ( especially those with power over licences). Instead of being concentrated and used in some kind of planned way in either the public sector or the emerging private one for purposes of investment, hard currency is now privatised, scattered to the four winds and used for consumption or hoarded abroad.

Second, literally thousands of enterprises now export instead of delivering produce to their old partners inside the country. The consequences? The old linkages between enterprises within the domestic economy have been deprived not only of foreign exchange but also of consumer goods.

Third, unregulated exports led to the disappearance from the shops of goods in which the country was previously self sufficient. One example is of TV sets, the production of which has been on a slow but steady expansion path. On the domestic market, TV sets are now to all intents and purposes unavailable. They are all destined for foreign climes, South East Asia for instance, where they are being sold at discount prices. Another more serious deficit has been in bottles for wine and mineral water in Moscow and elsewhere. It was recently discovered that a group of young new entrepreneurs had cornered the market, broken these bottles and exported glass to the west as a raw material! Even some essential foodstuffs are being exported!

A further body blow to production has taken the form of the rapidly expanding sector of commodity exchanges, currently far surpassing their parent organisations in the West in terms of numbers. They have replaced the state wholesale and distributive organisations, (gossnab). State enterprises, deprived of commercial information, have to use these firms as intermediaries and are robbed by them both as buyers and sellers. Commercial managers and brokers are making millions from thin air. The President of the most important commodity exchange in the Russian Federation, ex Marxist economist Mr Borovoy, is heading the list of new Soviet multimillionaires, who have made their fortunes in the last two or three years. These commercial empires have been signal contributors to our inflation.

In short, the main cause of the deepening scarcity of consumer goods, and of the decay of Soviet industry, is to be found in the economic processes initiated and supported by the state. Its objective can be nothing other than the formation of a new comprador bourgeoisie by means of this accelerated process of primary accumulation of capital. The picture is completed with the rupture of economic relations with eastern Europe, the shutting of basic chemical industries under pressure from ‘greens’ and the disruptive fall-out of the miners’ strikes.

Neither the Gorbachev-Ryzhkov-Pavlov combine nor Yeltsin’s political group has ever tried to regulate or check these processes, though they appear to be ruinous to the economy in transition. On the contrary, public scandals involving in 1989-90 the so-called ANT state co-operative which exported strategic materials and armaments under false licences; and in 1990-91 ‘the affair of the 140 billion roubles’, an import-export operation in which a member of the Russian Government Mr Yeltsin was implicated, both reveal direct connections between top Soviet politicians and these import-export concerns. Both judicial cases were shelved!

Neither the official representatives nor the ideologues of political groups holding power have been able to present convincing analyses of economic development after about 1985. Their explanations for the economic chaos have the virtue of simplicity: ‘results of the past Communist regime’, “the inevitable phase of transition’, ‘the result of inaction by the Centre’ (this from the Yeltsin group). To the extent that such explanations have been taken seriously at home and abroad, they have merely succeeded in exploiting a widespread credulity.

Of one thing we can be sure. We will now see the fractured elite competing for survival with different strategies of primitive accumulation, often basted in honeyed language welcome to audiences abroad. Meanwhile the mass of people is growing aware of the tragedy of perestroika: namely that the reforms they originally supported (because of the obvious appeal and legitimacy of the declared goals of the reformers: glasnost, human rights, parliamentary democracy, improvements in consumption) are being constrained and limited by the original proponents of reform: by the ruling class itself.

The coup d’etat of August 1991 struck Soviet intellectuals as suspiciously idiotic. It smacked of theatre. After all the putschists had formidable means of oppression in their hands. Yet they were unable to overcome a Russian resistance that was far better publicised than it was organised. Whoever or whatever was behind this coup, it had the effect of consolidating the fighting factions of the ruling class.

The economic basis of this consolidation is the prospective privatisation of public property by the Yeltsin government. Such plans open up enormous possibilities to grab public resources both for the private sector nouveau riches and for top bureaucrats including directors of enterprises. Already we hear of cases of so-called ‘wild privatisation’. The nationalisation and redistribution of CPSU properties has also shown how the law can be violated on a mass scale. At the All-Russian conference of directors of public enterprises and private entrepreneurs, held in Moscow on January 1992, a demand was advanced to issue free of cost 5 % of shares of privatised public units to their directors. The tendency is obvious.

Yeltsin came to power overwhelmingly on a negative vote, a vote against the CPSU. What kind of economy and society was to replace the old one was shrouded in question marks. Only after his election did he clarify that he would go for a fully-fledged market economy of the Western type. For this a bourgeoisie has to be created, or, as Yakovlev and other formerly official CPSU ideologues have coyly euphemised, a ‘middle class’. However, this ‘middle class’ is already creating itself at the speed of light. Semi-criminal and criminal elements and erstwhile high party members and foreign investors are being aided and abetted by a plethora of legal acts facilitating privatisation. A struggle will intensify between these people on the one hand and’ those on the other who favour the creation of markets but the reform of enterprise ownership by means of distribution of shares among those who work in them.

The watershed between Gorbachev and Yeltsin turns essentially on concepts of nationhood, between those who desire confederation and those who want the full disintegration of the USSR. We should be careful to note that the interests served by disintegration, ironically, are those of semi communist Russian chauvinism. For it is by means of full disintegration rather than by confederation that Russia will best be able to dominate other republics. The republics meanwhile are trapped between the interests of their own elites, often former communist party careerists exploiting subnationalisms, and Yeltsin’s elite which expands its control over the levers of so much of the economic space on which the republics have been developed to depend. For the time being, the army is loyal to Yeltsin, though splits are starting to become evident

The socio-political situation in the CIS in the first post perestroika period (since August 1991) grows increasingly complex. Three political camps have now emerged inside the Russian Federation. Firstly, there are conservatives, led by ex-party apparatchiks and bureaucrats marginalised in the process of enrichment. Though these people have no mass support, they are numerically strong and rather active in the republics and at local levels. Secondly there are political forces supporting the Yeltsin group, which directly represents the interests of both the nouveau riches and a substantial segment of the old dominant class ready and waiting to transform itself into a new comprador bourgeoisie. Thirdly there is the new left, led by intellectuals, trade unionists and to some extent junior members of the ex-CPSU apparatus.

In my view this third group represents the interests of the majority of the population. It supports the transition to a market economy, but one mainly based on decentralised and collective forms of ownership of the means of production, restricting private property to services and retail trades. At present I am calling this political and economic strategy a ‘contained managerial capitalism’. This group stands for a reinstallation of some kind of federal structure in the CIS.

It is not surprising that the West has rendered full support to Yeltsin’ s political group. The massive deliveries of food to save Gaidir’s economic reforms speak for themselves. But we need to take note of three factors. First, it is doubtful that the Soviet nouveau riche have material interests in economic stability. Quite the reverse. Russian plans to create markets for land and for immovable property will attract accumulated capital into non-productive investments. In the current conditions, markets in the CIS will be attractive only provided the rouble becomes fully convertible. But this demands a speedy reversal of current economic trends and the sustained growth of GNP.

Second, further disintegration of the former Soviet Union will create colossal obstacles to economic recovery in the CIS states. The choice is clear: either accept President Nazarbayev ‘s recent model of a CIS along the lines of the European Community or accept the full economic disintegration of the Asian Republics from Russia and their reintegration into a Middle Eastern economic organisation – a ‘Caspian Common Market’ and so on.

Third, large masses of our population, attracted by Western levels of living, support plans for transition to some kind of capitalism, sold to them as a ‘market economy’. But most have naively believed that such a transition could be implemented without mass impoverishment and unemployment, safeguarding all the achievements of socialism in the social and cultural spheres. They were not braced for massive inequality of incomes between small elites and the majority of the workforce.

Now citizens of the CIS, especially of Russia, are absorbed in the struggle for day to day survival. And this included the greater part of the intelligentsia. For the time being they have lost the sense of national self-dignity. But tomorrow they will discover that their ex great power has been converted, with Western connivance, into a second rate country of the so-called Third World. There will be no chance of recovery as the ‘brain drain’, which has already nearly destroyed Soviet fundamental science, will be joined by a ‘brawn drain’, if plans for the selective outmigration of skilled man-power actually materialises. Their beloved armed forces are being converted into the police forces guarding the interests of the North in the inevitable confrontation with the South in the 21st century. They will become fiercely anti-western.  And a new nationalist upsurge on such a basis will not be propitious for global stability.

Tragically and ironically, it will be the West rather than the peoples of the CIS which will soon have to decide which path makes more sense, the ‘wild capitalism’ of the so called Russian democrats, or the ‘contained managerial capitalism’ of the new left.

[By 1997, Yeltsin had made such a mess that the re-election of the refounded Russian Communists looked very possible.

[After fighting dirty to prevent this. Yeltsin put Putin into power.  Putin stopped the rot, while accepting that the existing rich would be safe if they paid their taxes.  And by degrees, he re-asserted Russian interests in the world.

[The West retains an utterly false notion of what happened.  Gives massive attention to the pathetic remnant of the Westernisers who did such damage under Yeltsin.  They get less than 5%, mostly split between the actual offenders and their rivals Yabloko, who had the same ideas but no power in.  Apart from a brief surge by the right-wing nationalist ‘Liberal Democratic Party of Russia’ in 1993, the Russian Communists remain the main opposition.]

This article appeared in July 1992, in Issue 30 of Labour and Trade Union Review, now Labour Affairs.  You can find more from the era at https://labouraffairsmagazine.com/very-old-issues-images/.