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Free Fall

As Russia's economy melts, Yeltsin vows he will stay on. But to do what?

By Bruce W. Nelan

TIME magazine

(TIME, Sept. 7) -- When the Soviet Union was disintegrating during the late autumn of 1991, a band of disillusioned demonstrators gathered in Red Square. Bobbing along in their midst, under the shelter of the Kremlin's looming brick walls, was a placard that read 70 YEARS ON THE ROAD TO NOWHERE. The accusation was an angry and poignant truth. But then Russia was reborn under the old tricolor flag and set a new course toward not just reform but total transformation. And now, with the collapse of the economy and the paralysis of the government, that hopeful path has also run into a dead end. For Russians it has been seven more years on a road that has again led nowhere.

In many countries, the pitch of chaos Russia reached last week would have produced panic, fury, demonstrations, even riots. The street value of the ruble halved. Banks are tottering and closing, and the Moscow stock market has all but evaporated. The crash has shaken investors and governments around the world. But in Russia, home of the stolid and the depoliticized, the streets are calm and there is no sign of unrest. Russians are nervous and ask one another what is going to happen, but the only visible reaction is at the banks, where the relatively few citizens who trusted other people with their money have formed slow-moving and sometimes unruly lines. For the most part, ordinary people seem not merely restrained but numb.

In fact, the foreign reaction is more appropriate. What is happening in Russia is a disaster, a frightening one that threatens the world with prolonged instability at best, and the rise of an increasingly isolated and hostile state--armed with about 22,000 nuclear warheads--at worst. The Western countries have pumped tens of billions of dollars into the Russian economy to support reforms that were not carried through, and now are unlikely to give more. Russia is on its own.

Moscow has had no functioning government since Aug. 23, when President Boris Yeltsin dismissed his young Prime Minister Sergei Kiriyenko. His successor, acting Prime Minister Viktor Chernomyrdin, is under heavy pressure from the communist-dominated Duma. Parliamentarians are pushing aggressively for a greater say in running the country. Yelstin had kept them from real power but seemed prepared last weekend to surrender many of his presidential prerogatives. The communists have called for currency controls, re-nationalization and printing more rubles. On the weekend, however, Chernomyrdin went on TV to reassure Russia--and probably the West as well--that there would be no retreat from market economics. "We have already joined the world economy, and there will be no return to the past," he declared. The future, though, remains deeply uncertain.

Into this seething mess steps President Bill Clinton, whose two-day summit meeting with Yeltsin is scheduled to begin Tuesday. Neither President stood to gain much presidential luster from the meeting, since Yeltsin is politically moribund and Clinton is scandal-scarred and unable to offer the Russians serious assistance. U.S. officials fretted about the meeting until the last moment, wondering whether Yeltsin would still be in office when they arrived at the Kremlin, or whether he might quit as soon as they left.

Last Friday morning, Deputy Secretary of State Strobe Talbott had a tense, 20-minute session with Yeltsin at the Kremlin. Talbott, speaking in Russian, said, "We need to know what your intentions are and what you are going to do." An aide interjected, "Mr. President, Mr. Talbott wants to know if you plan to resign." In a conference call with Clinton and other top American foreign policy officials later, Talbott reported that Yeltsin slammed his fist onto the conference table and replied, "I intend to serve out my term!" That clinched the summit.

Probably the only thing worse than going through with the summit would have been canceling it. If Clinton had backed out, he would have allowed Moscow's growing anti-American forces to charge that Clinton first had pushed Yeltsin into failed reforms, and now was abandoning his faithful friend Boris.

The White House admitted Clinton would not be taking the wherewithal for a new bailout with him, but insisted there were other topics that needed to be discussed: the stalled START II treaty, terrorism, nonproliferation, Kosovo, Iraq. The trouble with those subjects is that positions on both sides are already fixed; they don't offer much for an upbeat communique. Perhaps the biggest achievement Clinton could hope for was to reassure Russians by his presence in Moscow that the U.S. and the West are still concerned about the country and still engaged with it. "Imagine us not going," says a Clinton aide. It would send the message that "Russia's most important foreign partner basically throws up its hands and says, 'You sort it out.'" Clinton was rewriting a speech he planned to deliver in Moscow in which he would stress again the reforms Russia must put in place. What Clinton hopes to hear, says the aide, is "that they get it, and that they'll talk about what they plan to do."

It is doubtful whether reform is even listed on the Russian agenda right now; its time may have passed. Yeltsin is a spent force and shows no sign that he understands what the problem is. Chernomyrdin and the people he brings in with him think the problem is too much reform, and they intend to reverse it. When the country was first breaking out of the Soviet system, its initial step was to free prices. Now, with the ruble devalued and inflation inevitable, the communists are calling for price controls, and Chernomyrdin is listening.

Privatization was the next great reform effort--getting the economy out of government direction and into private hands. Those hands proved, however, to belong to well-connected operators who bought state properties at bargain rates and stripped their assets, becoming in the process notorious oligarchs who own the big banks, newspapers, television and more. It wasn't real privatization at all but a set of sweetheart deals that made the bankers partners with their cronies in government, focusing on exports, imports, loans and currency speculation.

Nor was it real capitalism, which is not solely about mergers and acquisitions but about production as well. And the simple fact is that Russia does not produce. The old rust belt--defense-oriented enterprises employing tens of thousands each--are still lurching along, turning out things so costly and so shoddy that no one wants to buy them. In Soviet times, workers joked that they pretended to work and the state pretended to pay them. Now the line could be that the workers pretend to make things and the factories pretend to sell them. The plants can't pay their taxes or their workers, and instead barter some of the stuff coming off the production lines in return for official blindness to their tax delinquency. That's why the streets are lined with people trying to peddle items like pots and pans, towels and toilet paper.

The result is an almost cashless society where business is transacted mostly by trading goods and services. Since most firms and citizens have no money, they can't pay their taxes. That means the government is always short of funds and the deficit keeps growing. It's even worse than that, says Brookings Institution fellow Clifford Gaddy. The basic problem, he says, is Russia's "virtual economy." Stuck with the unreformed Soviet industrial sector, the country turns out goods that are worth less than the value of the labor and raw materials that go into them. "This is eating the core out of the Russian economy," says Gaddy, "and everyone is ignoring it."

Chernomyrdin, the former boss of a Soviet-era gas enterprise, is an improbable candidate to fix something so fundamental. The government he is putting together is likely to go the other way, back to the U.S.S.R., at least partway. If he brings communists into the Cabinet in what he calls a "government of accord," he could produce no more than stalemate. But if he acts on the compromise program he approved last week, things will get worse fast. When Chernomyrdin last served as Prime Minister, he took a crucial step: he stopped financing the government's budget deficit by printing rubles, and switched to paying for it with loans from the International Monetary Fund and banks abroad. This halted Russia's hyperinflation--but created the pyramid of debt on which Moscow has now defaulted.

There are no more loans in Russia's near future. Even the next IMF payment, due Sept. 15, is in doubt because the fund is demanding a balanced budget. So Chernomyrdin and the communists who run parliament intend to go back to the printing press and turn out rubles. That will bring back hyperinflation and pauperize the nation. The world will have to worry how even the docile Russians will accept such treatment, and what their political response will be. All indications are that Russians have tried communism and don't want to go back to it. But now they feel they have tried reform and have been rewarded with misery. What will they vote for next?

Or will they have a chance to vote? Some experts believe a state of emergency could be the government's last resort if the economy stops functioning. With or without ballots, the outcome could be an increasingly desperate, belligerent Russian state, simmering in its resentment. It might be poor, but it would still have all those nuclear weapons, which are enough to make everyone pay attention. Most U.S. experts believe the nukes are under tight control so far, yet there are doubters. While it's unlikely that a military commander would see any benefit in launching one, there are other possibilities. A rogue general might try some nuclear blackmail for a big payoff. Or a nuclear unit, unpaid for months, might decide to quietly sell off something for a profit. It wouldn't have to be one of the closely guarded strategic weapons either. There are thousands of small ones and tons of fissile material lying around. Such nightmares alone would encourage Clinton and the West to stay engaged. But the Russians are the only people who can repair Russia--and they don't know how.

--Reported by Mark Thompson and Douglas Waller/Washington

In TIME This Week

Cover Date: September 7, 1998

Free Fall
Stormy Weather
Starr's Report To Congress: Author! Author!
A Pair Of Quick Arrests
Essay: Go, And Spin No More
Notebook: Giving Newt A Hand

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