Accessibility links

Breaking News

1997 in Review: Russian Reforms Suffer a Setback as Year Ends

Moscow, 29 December 1997 (RFE/RL) -- When international investors fled emerging markets -- including Russia -- after the October global market crash triggered by the Asian crisis, the Russian stock market lost more than 40 percent of its value.

But, according to financial analysts, the value of stocks on the Russia market measured against January figures is still more than 94 percent higher. But markets are still in turmoil and analysts' forecasts differ.

The unpredictable situation of the financial markets could serve as a metaphor for most other Russian developments of 1997, particularly political ones.

Expectations started growing after president Boris Yeltsin, who had spent the last quarter of his re-election year incapacitated by heart problems and multiple bypass surgery, returned to the political stage in March, installing a new government.

Two newly appointed First Deputy Prime Ministers, Anatoly Chubais and Boris Nemtsov, vowed to start a second wave of reform. Its key points were the government's commitment to end previous controversial insider deals in the privatization of major state assets, bring under government control the activities of so-called "natural monopolies" and crack down on corporate tax evaders.

As implementation of the pledged measures started, foreign investors, impressed with the level of economic stability the government had achieved, and counting on economic growth in 1998, actively bought Russian stocks, which are among the cheapest in the world. As a consequence, the stock market rose dramatically and Russia was regarded as one of the leading emerging markets in 1997.

But, in the summer, the Chubais-led team became involved in what observers have labeled the "bankers' war," among the financial magnates, who in 1996, had bankrolled Yeltsin's successful re-election campaign.

The antagonism among the well-connected businessmen, who in the last years had gained control over key stakes of state property in insider deals, grew into a bitter power struggle in July, after the sale of a 25 percent stake of the telecommunications monopoly Svyazinvest.

An international consortium led by Vladimir Potanin's Uneximbank won the tender. Financial tycoon Boris Berezovsky and media-and-banking magnate Vladimir Gusinsky lost, and accused Chubais and members of his team of rigging the tender in favor of Uneximbank.

The fight, evolved first into a media war. It later developed into a struggle between what Nemtsov characterized as those in favor of "robber capitalism" and those supporting a "people's capitalism" backed by a "strong state." It involved top officials in government and the Kremlin.

Yeltsin, sticking to his image of 'Czar,' tried to stop the battle on the eve of key privatizations that should have helped pay billions of rubles in back wages to state-sector workers. But he proved unable to calm and discipline the fighting business barons.

Analysts say this situation, coupled with the economic crisis and the government's consistent failure to collect taxes, casts a serious doubt over the prospect of economic growth, and has inflicted tremendous damage to the image of political stability the Kremlin was so anxious to convey this year.

Andrey Piontkowsky, who heads the Moscow Center for Strategic Studies, told RFE/RL that in the last six months, "all the party in power has been busy with has been committing public suicide." And, using a term borrowed from the nuclear strategy vocabulary, he adds that Russian politicians and business tycoons have been engaged in a "war of mutual assured destruction."

Piontkovky, who has been one of Chubais' main critics, says the weakened Chubais and what is left of his team "after scandals and public humiliations," have little choice but to leave the cabinet even if Yeltsin decides to keep them around for the time being.

However, he adds, "their departure would deprive the cabinet of sound economic experts, who are nowhere to be seen among [Prime Minister Viktor] Chernomyrdin's men." Piontkovsky concluded that "the window of opportunity for reform that appeared in March has not been exploited."

Other analysts, despite saying that prospects of growth look indeed "fragile" as the year ends, are more optimistic and less dismissive of the work performed by the government in the course of 1997.

They point to economic indicators, saying the government was able to conduct an overall coherent economic policy, managing to get inflation down to 11 percent from 131 percent two years ago and increasing, for the first time after six years of decline, the country's Gross Domestic Product (GDP).

In a report this month, the Organization for Economic Cooperation and Development (OECD), predicted a GDP growth of 0.5 percent by the end of the year, rising to three percent in 1998.

Minister Without Portfolio Yevgeny Yasin says Russia's economy, despite its ups and downs, is "healthier than it had been forecast at the beginning of the year and industrial output has risen by around two percent."

Rory MacFarquhar of the Russian-European Center for Economic Policy agrees that "substantial progress was achieved on a lot of fronts," but says that "strong resistance to sound market reform remains."

All observers say the goal remains to secure tax collection and impose tax discipline, particularly among corporate tax evaders.

As the World Bank last week announced that its board of directors had approved restructuring loans totaling $1.6 billion dollars for Russia, the influential rating agency Standard and Poor said it was downgrading Russia's credit rating outlook from "stable" to "negative."

The agency said in a statement that "the change in outlook reflects worsening fiscal pressures, heightening Russia's vulnerability to changes in investors' confidence in deteriorating global capital markets."

Yeltsin, whose bad health this month has been another source of instability for the markets, was back to his Kremlin office by year's end after recovering from a cold and a viral infection that kept him in a sanatorium outside Moscow since December 10.

Yeltsin said he is ready to tackle economic and social issues before the end of the year, and scheduled a meeting of the Round Table that includes, apart from himself and Chernomyrdin, the Chairmen of the two parliamentary chambers and leaders of parliamentary factions.

However, Piontkovsky says Yeltsin's "state of mind is a source of concern lately, as much as the state of his health."

During a recent state visit to Sweden, observers noted that Yeltsin, who enjoys revealing new international initiatives during his trips abroad, was out of synchrony with issues.

Piontkovsky describes Yeltsin's behavior as "increasingly incoherent." He expresses the concern that Yeltsin's apparent shift of preferences, from the strong backing of Chubais and Nemtsov that he showed until summer, to a more recent, conciliatory tone towards his Communist opposition, may be a sign of the President's "growing intellectual fatigue."

Nemtsov said during a recent RFE/RL program that the alleged influence of the President's court and family "always exists, of course, no matter whether the head of state is called president or czar."

In the case of Yeltsin, Nemtsov said that "the court takes decisions and makes mistakes, like any other court does." However, he added, "the President's entourage can hardly influence his decisions to a large degree." And, in an apparent reference to businessman Berezovsky, Nemtsov went on to say that "those claiming to have influence upon Yeltsin's family simply engage in wishful thinking."

As tensions among top cabinet members increased, the relationship between Yeltsin and his parliamentary foes, notably in the Communist and nationalist-dominated Duma, was getting more and more friendly, at least on the surface. In the name of political stability, Yeltsin showed a new ability to establish a dialogue with Communist leaders.

This compares to the harsh methods he used in his fight against the rebel Supreme Soviet in 1993. A unnamed Duma official tells RFE/RL that "both Yeltsin and the Communist learned a lesson in 1993, and now they understand that negotiating is always more profitable than creating standoffs."

Deputies seemed, on several occasions this year, to be relatively easy to persuade to follow Yeltsin's lead. However, many important items of legislation are still awaiting debate as Communist leaders seem to understand the advantage waiting and hoping for a better bargain.

The Duma has also failed to ratify the START-II Treaty, ratified by the U.S. Senate in January 1996.

Duma Chairman Gennady Seleznyov warned: "If he [U.S. President Bill Clinton] puts pressure on the Duma for a deadline to consider START-II, it will never be fixed."

Clinton, who was expected to hold a summit with Yeltsin in Moscow in early 1998, has said he would prefer to wait until the Duma ratifies the treaty. Clinton said he and Yeltsin had agreed it would be better to wait until then, in order to be able to start working on a new arms-control treaty START-III.

At the beginning of December, Yeltsin went personally to the Duma to ask deputies to approve the 1998 budget on first reading. But, three more readings are required, followed by a debate in the Federation Council. Observers say it could be months before a budget is approved.

In a move that observers see as an attempt to influence deputies further, Yeltsin recently signed the law on the government which would strengthen parliamentary oversight of the cabinet.

Presidential Spokesman Sergei Yastrzhembsky, who described Yeltsin's decision as "unusual," said executive legislative authorities have already agreed on a set of amendments to that law.

The Duma has yet to approve the amendments but Yastrzhembsky said Seleznyov has promised Yeltsin that the amendments will be adopted shortly.

The State Duma has rejected the government's draft tax code, but last week deputies adopted nine new tax bills. Duma officials said the bills are aimed at bolstering the budget as a stopgap measure, following the draft's rejection.

Among other measures, deputies approved a law that would force regional branches of corporations to pay property taxes in the regions where they operate, rather than where company headquarters are located.

In a speech to the upper house of parliament, the Federation Council, early in the year, Yeltsin had said he supported the measure, welcomed by the majority of regional governors, but opposed by the powerful Moscow Mayor Yuri Luzhkov.

After gubernatorial elections in a number of regions this year, all governors are now elected instead of being appointed by the President.

Observers say that, contrary to expectations, relationships between the President and the governors are good. That includes the regional leaders who were formerly actively opposing Yeltsin.

Federation Council Chairman Yegor Stroyev, a former Communist, was re-elected with over 90 percent of the vote in the Orel region this year, and Yeltsin has repeatedly praised him, choosing Orel and its governor as an example of successful relations between Moscow and the regions. Even former vice-president Aleksandr Rutskoi, one of the leaders of the 1993 anti-government revolt, is on good terms with Yeltsin and the government after his election as governor of the Kursk region.

According to Russian observers, the majority of Russia's 89 regions are still financially heavily dependent on Moscow's subsidies for their budgets. At the same time, State Tax-Service head Aleksandr Pochinok, has said representatives of the 13 regions, which are contributing to the national budget, are still not an organized faction in parliament. Victor Khristenko, Deputy Finance Minister, says that regional leaders who discuss budget questions with the Finance ministry "do not integrate their demands in a coordinated policy, but just pile them up." Khristenko says that donors may become a real faction next year when the 1999 budget will be discussed.

A year which started with a President incapacitated for health reasons, nearly ended the same way. Following the economic and political developments of the last months, it is clear that economic growth and reforms vowed earlier by the government have been set back for at least several months.

In an interview published this year by the Russian weekly Expert, Swedish economist Anders Aslund, who is also a top associate of the Carnegie Endowment for International Peace, said: "Reformers in Russia should bear in mind that, in the last six years, reforms have come in waves lasting usually for six months. Then something always happens and reformers have to retreat until the next time."