Blaming Russia First

Pity the unpopular Russians. In July, Mexico elects its first president from outside the country's ruling party; The Economist magazine labels it a "real democracy." Russia elects a president from the political opposition in 1991, then holds no fewer than five competitive, generally free, national elections in the following years; The Economist calls it a "phony democracy." Colombia has a problem with organized crime, and Washington gives its government $1.3 billion to help fight the drug lords. Russia also has a problem with organized crime, and American politicians sternly lecture Moscow not to expect any more aid until it cleans up its act. An undercover U.S. operation finds several Mexican banks laundering drug money in the United States, and Washington apologizes to the Mexicans for conducting sting operations on their territory. An American bank allegedly launders money for Russian organized criminals, and a leading senator accuses the Russian government of being "the world's most virulent kleptocracy." When the Asian crisis scares investors away from the Brazilian market and the real collapses, commentators declare it a bump in the road. When the Asian crisis scares foreign investors away from the Russian market and the ruble collapses, commentators declare the crash proof of the failure of liberal economic reform in Russia.

That many Russians these days see a double standard in Western opinion toward their country is perhaps not altogether surprising. As readers of the Western press know, there are no businessmen in Russia, only mafiosi; no democrats, only corrupt politicians; no citizens, only an impoverished, nationalistic mass. Members of the emerging Russian middle class are often discouraged to learn, upon picking up Western papers, that they do not yet exist.

It has not always been this way. As Stephen Cohen points out in his new book, the Western press was overwhelmingly supportive of Boris Yeltsin and his attempts at reform in the early 1990s. But around 1998, a sea change occurred. Without acknowledging any change of position, Western editorials switched from a guarded optimism about Russia's reforms to a withering condemnation of all associated with them. The scales fell from the editorialists' eyes.

Political and economic developments in Russia in recent years have certainly been disappointing. It is fashionable to point this out. But the current gloom about Russia is as overdone as was the optimism of the early 1990s. The obstacles blocking full democracy and well-functioning markets have always been extremely forbidding -- but never unsurmountable. Successes have always mixed with failures, the good with the bad. Perhaps Western opinion will eventually come to recognize this, but at the moment the frustrations of the naive optimists are joining up with the schadenfreude of the confirmed pessimists to produce a public discourse on Russia that is dyspeptic, often hypocritical, and almost completely lacking in comparative perspective. These three recent books, in different ways and to different degrees, illustrate this inadequacy.

A NEOCLASSICAL CRUSADE

What the optimists and the pessimists have in common is the hunger for a villain -- the urge to cast the story of Russia in the 1990s as a simple morality tale of good and evil, promise and betrayal. They tend to differ in whom they cast in the role of villain, but the structure of their arguments is similar. Cohen, a professor of Russian studies and history at New York University, has been a confirmed pessimist since before it became fashionable. His analysis of Russia in the 1990s is simple and (since he repeats it continually throughout his new book) easy to follow. The Soviet Union in 1991, he argues, was a successfully reforming state. Most of the essential social and economic institutions "were still intact." This functioning system was destroyed by an American political crusade to transform postcommunist Russia into a "replica of America." The "missionaries and evangelists" in this crusade were so-called economic "advisers," usually from Harvard or the International Monetary Fund (IMF). This invasion by Western crusaders preaching "tight-fisted monetarism" resulted in the impoverishment of the Russian population, a drastic fall in life expectancy, and the "demodernization of a twentieth-century country." By letting Jeffrey Sachs and others of his ilk "swarm" across the Russian plains, Cohen charges, the Clinton administration has done more damage to U.S. interests than did the war in Vietnam.

Some readers may enjoy this book's dramatic language and unabashed Old Testament wrath. But as an account of Russia in the 1990s, the argument has, to say the least, more than a few holes. The oddest of all is Cohen's suggestion that the Soviet Union in late 1991 was a well-functioning, reforming state. To anyone who spent time in Russia that year, this claim is completely surreal. By autumn, even privileged Muscovites were standing in line for hours to buy bread. The elite stores, as Chrystia Freeland tells us in her book, had little to offer their nomenklatura clientele other than bags of millet. Only four months' worth of grain reserves remained, and fear of famine that winter was widespread. Before Yeltsin's reformers even touched the controls, Soviet industrial output had fallen by 17 percent in 1991 alone. Even before price liberalization, inflation in Russia in 1991 was more than 160 percent. Russia's general government deficit (including import subsidies and extrabudgetary funds) was almost one-third of GDP. The central planning and supply system had been decimated by Mikhail Gorbachev's perestroika, and enterprise directors were stripping assets with abandon through the semiprivate cooperatives that Gorbachev had legalized.

Although they appeared bold, the dramatic reforms of late 1991 and early 1992 -- freeing prices, liberalizing trade, and initiating privatization -- were actually a brave face put on the central state's alarming impotence. Yeltsin's lieutenants might have tried to hold off freeing prices and privatization for another year or two, as Ukraine did. But Ukraine's subsequent inflation and asset stripping were even more severe than Russia's. There was certainly at that time an element of economic dogma in the Kremlin's policies and an unmistakable note of free-market ideology in the way they were presented. But the reformers' motivation owed at least as much to desperation.

Were these policies imposed from outside by the crusaders from Harvard and the IMF? The image of Sachs waltzing into the Kremlin to preach the true gospel of Friedrich Hayek is a romantic one. With all due respect to Sachs, however, most people who have met him would not cast him as the Pied Piper of Hamlin. He is smart and articulate enough, but there cannot be many Russian children who would follow him over a cliff, entranced by the beautiful tunes he whistles. Besides, the Russian leaders were grownups. Yegor Gaidar had read Adam Smith and Paul Samuelson long before the Harvard gang came to call. Yeltsin, although anxious for Western respectability, was first and foremost a politician; he was won over to the gospel of monetarism for little more than an afternoon. - 1

Particularly troubling in Cohen's interpretation is his apparent assumption that the Pied Pipers from Harvard brainwashed not just the Russian leadership but much of the country's population. As he points out, there were alternative economic programs -- for instance, those of the Communists. But he neglects to add that most voters repeatedly rejected candidates who espoused such programs. From April 1993 -- when 53 percent of voters said in a referendum that they supported Yeltsin's social and economic policies -- to the presidential election of March 2000, antireform politicians and their positions have been consistently defeated at the polls. Cohen rightly notes that the media is often biased and manipulative, but former Soviet citizens are used to reading between the lines. Similar pro-incumbent attacks backfired in 1993 and 1995, when the "parties of power" under Gaidar and then Prime Minister Viktor Chernomyrdin failed to get even 20 percent. And even Cohen notes that in 1996, despite minor falsification of votes, "no serious observers doubted that Yeltsin had actually won." Yet if rational, adult voters chose such candidates knowing the economic policies they favored -- and in all cases except perhaps Vladimir Putin they clearly did -- what do the snake-oil salesmen from Harvard really have to do with it? Were they mass hypnotists as well as economic missionaries? Were Russians too young and gullible to handle democracy?

There is also something vaguely undemocratic about Cohen's demand that the United States change tack and organize an international coalition to provide Russia with $500 billion in aid. (He says he got this figure from "a Russian economist admired for his moderation and good sense.") Although Western nations would be wise to invest more in preventing instability in the world's second nuclear power, the American public has made it absolutely clear in polls that it rejects anything approaching this figure. Should the Clinton administration and Congress be faulted for respecting voters' wishes?

FACING THE FACTS

The economic shock in the 1990s was undeniably severe, and industrial output has fallen sharply. But does this amount to Russia's "demodernization"? Statistics suggest a more complicated picture. In 1990 about one in six Russian families had a car; by 1998 about one in three did. In the same eight years, an additional 32,000 kilometers of road were built. Access to home telephones increased by 40 percent, and the number of international telephone calls grew by a factor of 12. The share of the population with access to three or more TV channels increased from 36 to 68 percent. Infant mortality, after rising in the early 1990s, was lower in 1998 than at the start of the decade.

Such statistics are the domain of economists, and Cohen makes clear he is neither an "economist" nor an "adviser" (although he seems to have quite a bit of advice to offer). He is a historian, and he feels that a sense of history has been missing from the discourse on Russia: "Though it is no longer fashionable to say so in the social sciences ... political, economic, and social realities are shaped by a historical process."

To Cohen, being a historian means emphasizing continuity -- "Russia cannot jump out of its skin" -- and reminding the reader of Russia's authoritarian traditions and lack of experience with private property. But it is not clear quite what he wants practical politicians to do with this knowledge. In the latter case, he seems to be saying that Western policy should support reform plans that aim at a mixed economy rather than advocating American-style liberalism. Presumably he does not mean that Western politicians should also favor traditional authoritarian institutions in Russia rather than democracy.

Cohen is good at skewering journalists who muff their facts when racing for deadlines and take their opinions from the herd. It is entertaining in a sadistic sort of way to see him give the poor hacks a good poke in the eye. (He butters them up in advance by recalling that he once turned down a job as Moscow correspondent.) Stupidities have been uttered and written by many people, including key Russian reformers and their Western advisers, and Cohen does a good job of collecting them.

But leaving aside such dubious pleasures and the excitement of overheated rhetoric, this is pretty arid stuff. The book contains almost no direct descriptions of things Cohen has seen in Russia and few conversations with individuals -- the exception is Gorbachev, who gets some direct quotes. After many allusions to "every political figure we met" and "most Russian foreign-policy specialists," one longs for a concrete name, face, or story. Nor are there anecdotes or comparisons from the country's history except a brief allusion to Russia's "time of troubles." The same cliches turn up in chapter after chapter. One winces on being told for the ninth time about Russia's "accursed" question, "Who is to blame?" The argument itself does not develop. Almost all the essential points of Cohen's condemnation of the Russian reformers and their Western supporters appear in a reprint of an article from March 1992 -- just a few months after the reformers entered office. Cohen apparently views this as evidence of prescience, but one wonders how open-mindedly he has observed events since then.

In the end, the book makes depressing reading, although not for the reasons Cohen imagines. Its author is a scholar of undeniable talent who published the best book around on the Bolshevik leader and Marxist theorist Nikolai Bukharin. For a generation of younger Russia specialists, his writings on the Brezhnev and early Gorbachev periods were an inspiration. Unlike many academics, he was able to see the change under the surface and grasp the hidden vibrancy of late-Soviet society. He is clearly sincere in his concern for Russia and the Russians. There were many ways he could have used his impressive gifts to illuminate Russia's evolution during the last ten years. They are not evident in the book he ended up writing.

FAUSTIAN BARGAIN

To characterize Freeland as a naive optimist is a little unfair -- she is much smarter than that label suggests. But she did go to Russia with high hopes, and her narrative is colored by obvious frustration at seeing them disappointed. Sale of the Century is a very different sort of book from Cohen's. Its author was the Financial Times' Moscow bureau chief from 1995 to 1998 and the Kiev correspondent before that. Her account is well written and lively, and one has to be impressed by the energy with which its author pursued and cultivated a large selection of the leading economists, politicians, and businessmen of fin-de-siècle Moscow. There are wonderful vignettes of the main "oligarchs" and a few fascinating glimpses of ordinary Russians. She memorably notes that what struck her about the "oligarchs" was not their Rolexes and the $100,000 fur coats for their wives but the fact that they all seemed to be "looking for emergency exits"; the threat of government prosecution or even assassination by rivals always lurked in the background. The vivid and colorful reporting is generally excellent, punctuated with some stories that even close Russia watchers will not have read.

On the other hand, a few sources might be more clearly provided. Some anecdotes seem to be taken directly from the embittered memoir of Yeltsin's disgraced bodyguard, Aleksandr Korzhakov, a book that Freeland herself describes as "scurrilous." One would assume she has a second, more reliable source, but this is not made clear. The occasional error also creeps in. Cohen has particular scorn for those who mix up the U.S.S.R.'s Supreme Soviet with the Russian Supreme Soviet, and Freeland appears to oblige on page 57. But these are quibbles.

The book is less successful in its analysis. Again, the desire to reduce Russian events to a simple morality tale seems to take over. In this version, the villains have changed. Instead of the snake-oil salesmen from Harvard, Freeland blames the oligarchs for Russia's misfortunes. Her book, she writes, is

the story of Russia's capitalist revolution and of how that revolution was betrayed. .... [A]t one crucial moment, the Kremlin consciously and of its own free will took a disastrously wrong turn. ... [T]hat moment came when the government made a private pact with a group of upstart capitalist entrepreneurs who became known as the oligarchs. The deal ... turned out to be a Faustian bargain, laying a corrupt, inegalitarian foundation for everything that came after it. In a way, it was Russian capitalism's original sin. Thereafter, the Russian market economy was irredeemably warped, its government unquestionably corrupt.

That deal was the"loans-for-shares" auctions in late 1995. In what can only be described as a sleazy operation, the Yeltsin administration gave tranches of shares in major state-owned corporations to selected businessmen in trust, in return for loans to the federal budget totaling around $1 billion. Later, the businessmen were allowed to sell these tranches to themselves at low prices. Careful rigging of the auctions kept competition to a minimum. As Freeland points out, there were creditable reasons why Anatoly Chubais and others went along with this -- most important, the perceived need to get the oligarchs' help in keeping inflation down and defeating the Communists in the 1996 presidential election. But the auctions were both morally dubious and disastrous for public relations.

Despite the questionable nature of the deal, however, the claim that the auctions explain Russia's economic travails -- that they created a "Frankenstein's monster" that "deformed" the economy and "impoverished" the population -- is difficult to fit with the facts. Perhaps because her argument is widely shared, Freeland does not bother to provide much evidence. On the contrary, her own reporting undercuts this story line at various points.

First, Freeland gets causation exactly backwards. As she herself convincingly demonstrates, it was not the "loans-for-shares" auctions that created the oligarchs but the oligarchs who created the auctions. They devised the scheme among themselves, lobbied the government, even wrote some of the decrees. Frankenstein's monster already existed. Oligarch-in-chief Boris Berezovsky had made his fortune years before, marketing cars from Avtovaz. Mikhail Khodorkovsky had built up his wealth speculating on high inflation and "managing" state budget funds. The question by 1995 was whether these tycoons would put some of their money back in Russia rather than in Swiss banks. Furthermore, only a few of the so-called oligarchs even participated in "loans-for-shares." Some, such as Mikhail Friedman and Vladimir Gusinsky, were excluded. Even Berezovsky only got in at the last moment. And the true behemoths of the business world were not these newcomers but the leading "red directors," such men as Rem Vyakhirev of Gazprom and Vagit Alekperov of Lukoil. It would be more accurate to say the first oligarch appeared back in May 1992, when Chernomyrdin left Gazprom to join the government. But even that is probably starting the story too late.

In an economy with massive natural resources and an inheritance of gigantic, highly concentrated companies, the emergence of "oligarchs" did not require some complicated act of betrayal by a few reformers in the government. The only question was whether Russia's business barons would continue to come exclusively from the realms of the communist aristocracy or whether some of these would be elbowed out by a few "upstarts" such as Jewish former mathematicians or theater directors. Since 1991, reformers in government had had to bargain with and outfox business leaders and the regional officials with whom the tycoons often joined forces. What changed in the mid-1990s was the identity of some of the business leaders. Once upon a time, an insider such as Chernomyrdin could "open doors in the Kremlin with his foot." By the late 1990s it was Berezovsky who was badgering presidential appointees in the shower at their sports club and the press mogul Gusinsky who was yelling at officials on his cell phone.

So how exactly did the auctions "deform" the economy and "impoverish" the country? The oligarchs were not necessarily more corrupt or rapacious than the "red directors" they sometimes replaced. Freeland herself describes old-school enterprise managers who were just as adept at stripping millions of dollars from the companies they controlled. Did the firms sold in this way operate less efficiently afterward? Some probably did, but others did not. At Norilsk Nickel, for example, productivity increased by four percent in the two years after the infamous auction, compared to a drop of four percent in the nonferrous metals sector as a whole. By January 1998, its new management had paid off all wage arrears to workers.

MONEY FOR NOTHING?

That the oligarchs underpaid the government and deprived it of vital cash is certain -- and hard to forgive. But estimating the shortfall is tricky. A Western company paid more than ten times as much for shares in one of the auctioned oil companies two years after the auction. But at the time the oligarchs put up the money, their gamble was extremely risky. The clear favorite to win the following year's presidential election was the Communist candidate, Gennady Zyuganov, who might well have canceled the deal with no compensation. One of the oligarchs tried to attract a Western partner to help bid for a major oil company -- and was rudely rejected. "They looked at us as if we were crazy," he lamented. Even several years later, the government could not attract any bidders for the oil giant Rosneft. When Oneximbank tried in November 1997 to sell its tranche in one of the "loans-for-shares" companies, North West River Shipping, it received no bids even at an opening price $1 million below the amount that Oneximbank had loaned the government. Even if one accepts an extremely high estimate of the true value of the stakes transferred -- up to $30 billion -- the whole operation hardly amounts to the "sale of the century." It is more like a medium-sized takeover on the NASDAQ.

To make the case that "loans-for-shares" and the emergence of the oligarchs undermined and distorted the Russian economy, Freeland has to paint the late 1990s in more dismal colors than the early part of the decade. This fits the evolution of Western opinion on Russia. But it does not fit well with the statistics. The heyday of the oligarchs actually coincided with a stabilization of the economy or even a slight improvement. In the three years leading up to "loans-for-shares," monthly inflation averaged 12.7 percent; in the following three years (which included the August 1998 crisis) it averaged 2.7 percent. Foreign direct investment in 1996-98 was almost three times higher than in the three preceding years ($10.9 billion versus $3.8 billion). Real GDP fell on average by 8.5 percent a year in 1993-95 but dropped by only 2.4 percent a year in 1996-98, while the poverty rate fell from an average of 26.7 percent to only 22.3 percent. Although data on income inequality are notoriously unreliable, that also appears to have narrowed since 1994. As a sign of the social crisis, Freeland notes (as does Cohen) that male life expectancy had fallen to just 58 years by 1994. But she neglects to point out that since then it has been rising, reaching 61 by 1998. The Russian economy remains in serious condition, but the deterioration occurred before the "loans-for-shares" auctions and the media's anointing of the oligarchs.

Nevertheless, Freeland is taken by the "Faustian bargain" line. There is a memorable scene of a dinner in a kitschy, imitation-tsarist restaurant, when she badgers the head of Gusinsky's NTV, Igor Malashenko, about his network's overt support for Yeltsin during the 1996 presidential campaign. With a "world-weary sigh," Malashenko tries to explain his dilemma and stumbles into a turn of phrase that Freeland takes more literally than he had intended:

"... I think, and I thought, that Zyuganov would be a catastrophe. I had to -- how shall I put it? -- sell my soul to the devil."

"Do you really think that's what you did?" I asked, amazed by his frankness.

"Of course I don't," Malashenko replied with not a little scorn. "But from the point of view of a middling Western intelligence, perhaps that is what I did."

"By that you mean my intelligence?"

"Yes, yours. You are absolutely right. I live in my own system of coordinates, that is the pure truth." And with that Malashenko and his bodyguards swept out of the restaurant.

Malashenko's gratuitous rudeness notwithstanding, there are perhaps grounds for his irritation. The blatant abuse of state television in 1996 -- and even more in 1999 and 2000 -- was indeed appalling. But there is something hypocritical about the West's scolding the Russians for such excesses, which in any case tend to backfire unless the public already supports the media's favorite. Can anyone doubt that if the U.S. Communist Party candidate were running ahead in the polls before an American presidential election, ABC, NBC, and CBS would be bending the rules to run critical reports? Are Americans really so much holier than Russians, or are U.S. elites merely less threatened?

As for press freedom in Russia, a network that reports critically on the federal government's war against Chechnya exists today only because Gusinsky was willing to lose more than $20 million a year to start it. For all their sins, it was the Russian oligarchs who put money into the newspapers and television stations that now compete with the state's media outlets. Their interference is at times crude, at times enlightened. As Freeland relates, one reporter on Gusinsky's paper Segodnya cost the magnate a deal worth $100 million, thanks to his critical reporting, and is now nicknamed by his boss the "$100 million journalist."

There was one moment in the 1990s when democracy was genuinely at risk in Russia, in March 1996. Yeltsin, trailing in the opinion polls, was being bombarded with pleas from his hard-line supporters such as Aleksandr Korzhakov to cancel the upcoming presidential election. According to Freeland, Yeltsin had already ordered his aides to prepare legal documents to do just that. If that plan had succeeded, this would have been the end -- at least temporarily -- of democracy in Russia. If it had failed, it would have meant civil war. As Freeland reports, however, three men persuaded Yeltsin to tear up the decree and take his chances at the ballot box. Who were these saviors of Russian democracy? Chubais, Chernomyrdin, and the hard-line minister of the interior, Vitaly Kulikov. Strange as it will seem, some of the most vilified political players in Russia's recent history were also the reason why democracy, for all its flaws, still exists.

DON CORLEONSKI

Paul Klebnikov, a reporter from Forbes magazine, goes one step further in reducing history to the search for a villain. In addressing Russia's troubles of the mid-1990s, Klebnikov also gravitated to the question "Who is to blame?"

I wanted to know who Russia's real bosses were. Who had brought the country to such a state? Who was the man who stood at the top of the pyramid? Who was the godfather of the godfathers?

In the autumn of 1996, I found him: Boris Berezovsky.

If one looks hard enough for a black cat in a dark room, a black cat will undoubtedly appear. Convinced that a country's poor economic performance must be the work of some malevolent "godfather of godfathers," any reporter with gumption will find someone to fit the bill. Berezovsky is a man with whom this reviewer would not like to be stuck in an elevator for too long, and after reading Klebnikov's book most readers will probably agree. But even a self-promoter like Berezovsky is not egomaniacal enough to claim credit for destroying the Russian economy single-handedly.

It is hard to know what to make of Klebnikov's reporting, since the facts are so clearly selected to fill in a predetermined picture. He seems to rely on the accounts of people with an obvious motivation to lie: for instance, he quotes liberally from the disgraced bodyguard Korzhakov and his former subordinates. In his political and economic analysis, Klebnikov's frustrations get the better of his intelligence. His arguments start out merely implausible. For example, he criticizes the Gaidar government of 1992 for not issuing government bonds backed up by foreign exchange or gold to soak up public savings prior to price liberalization -- as if Russia had foreign exchange and gold reserves. By the end of the book he sinks to ethnic slurs:

At the root of the disaster was the Russian penchant for playing the double game, for pursuing an essentially dishonest policy. Rather than consistently following a set of clearly defined principles, the Russian mentality was to say one thing and do another.

There are a few facts about Russia in the 1990s that observers should be able to agree upon. Economic output fell sharply. But there was nothing unique about this: it also fell in the other 14 former Soviet republics. Some of these attempted "shock therapy," others more gradual reforms or none at all; some were visited by numerous Western advisers and received large sums from the IMF, others did not. As of 1998, the cumulative drop in real GDP was greater in Russia than in seven of the other republics and smaller than in the other seven. In Russia, as in the other post-Soviet republics, real incomes also fell sharply. Many enterprises remain badly managed. The state is extremely corrupt, and this remains an important obstacle to economic and political development, just as in 1991.

On corruption, the sad truth is that nobody knows how to build an honest, effective state machine in a country where a dishonest, corrupt state already exists. Cohen does not know, Freeland does not know, Klebnikov does not know, The Economist does not know, the IMF does not know, and this reviewer does not know. History shows that remarkable transformations have sometimes occurred; for example, nineteenth-century Britain replaced its rotten boroughs and venal politics with party discipline and much cleaner government. Evidence suggests that democracy, economic openness, and above all, growth tend to help, although the effect can be slow. Firing a few officials in a corrupt system is about as effective as swatting a few mosquitoes in a swamp. Attempts to centralize power in a large state à la Putin will probably just replace political corruption with administrative corruption. Some changes to the tax system might help a little in Russia, but the West should stop pretending that there was a simple solution that could have worked if only Russia's leaders had not been so lazy, ideological, or corrupt.

Popular writing on Russia has taken a strange turn in recent years. A little balance and perspective would make it far easier on the reader. Perhaps all who write about the country could agree to retire some of the most distinguished clichés, to stop alluding to Gogol's "winged troika" or to the "accursed questions" and comparing Russia to the Klondike. All authors -- this reviewer included -- might try harder to question their assumptions, even when they are widely held. As for Russia in the 1990s, years will probably need to pass before the picture comes completely into focus. As Cohen would say, it is a question for the historians.

1 - The reviewer admits he was a "foot soldier" in this crusade, having served briefly in 1997 on a U.S. team advising the Russians on tax reform.