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August 31, 2003
David Warsh, Proprietor


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Five Years Later

The Russian economy is booming again. It was just five years ago this month that its first frenzied post-communist expansion ended in a debt default that brought the world currency system to the brink of disaster. But its second, more orderly expansion has turned Russia into one of the few bright spots in the global picture for the past few years. The economy is expected to grow 7 percent this year alone — stimulated by $30 per barrel oil.

Russia now rivals Saudi Arabia as the world’s biggest petroleum producer. A third of all Muscovites earn the average European wage. Shopping centers are springing up on the outskirts of the city. (Don’t ask about the provinces!)

Three and a half years after he was elected president, Vladimir Putin has brought a sense of stability to Russia, say Peter Baker and Susan Glasser, Washington Post bureau chiefs in Moscow, writing in the New Republic last month.

Now Putin is running for re-election next year — promising to double GDP by 2010, campaigning against the richest of the oligarchs, Mikhail Khodorkovsky, of Yukos Oil Co.

So did Russia’s transition from a central plan to a market economy turn out all right after all?

Not according to Marshall Goldman, professor emeritus of economics at Wellesley College and long-time associate director of Harvard’s Russian Research Center. Towards the end of his new book, The Piratization of Russia: Russian Reform Goes Awry, Goldman provides the following useful typology of the various scams worked in “the wild and wooly East” since 1991, complete with illustrations.

  • Asset stripping (Gazprom is the most blatant but by no means unique example);
  • Share dilution of minority shareholders (Yukos, Sherbank, Norilsk Nickel);
  • Abuse of bankruptcy procedures (Tyumen Oil, Kondpetroleum, Chernogorneft);
  • Shell games with public bank deposits (Menatep, SBS/Agr);
  • Mafia ejection of legal owners by force, threat or murder (Subway Sandwich franchise in St. Petersburg, Norex Petroleum in Siberia, Sawyer Research Products in Vladimir, the aluminum industry in — Krasnoyarsk Aluminum Smelters);
  • Official intimidation, ejection or threat of imprisonment by senior government officials (Far Eastern Shipping Co., Media-Most, TV-6);
  • Arbitrary seizure of mobile telephone frequencies (MSS Saratov);
  • Hiding assets from the IMF (the Russian Central Bank);
  • Rigged bids (LUKoil, Severnaia Neft, Loans for Shares program).

Truly, that is a remarkable menu of juicy business stories — more than enough to put the Enron and WorldCom scandals in perspective, and render potential investors in the Russian economy lingeringly cautious. (Russian securities have yet to be declared investment grade.) “Thus far the reform process in Russia can be considered at best only a partial success,” writes Goldman.

Then again, what ambitious policy undertaking is ever a complete success — especially on the scale of unwinding the failed experiment that was the Soviet Union? Seventy-five years is a long time to evolve forms of under-the-table behavior, where private enterprise on the up-and-up was completely forbidden. Long before Russia was exporting oil, she was sending crooks abroad — to New York City, for example, where they quickly raised the forgery of cab medallions to a minor art form.

Goldman has a long history of well-deserved skepticism where Russian developments are concerned. In five books over twenty years, he has provided an unparalleled baseline narrative of the political and economic outlook in the collection of fifteen diverse republics that were the Soviet Union when he started — and he has done it in real time, as it happened. Consider:

  1. In 1983, his “USSR in Crisis: The Failure of an Economic System” was exactly on target. The world’s largest exporter of grain had become its largest importer, he wrote; the Soviets were rapidly falling behind the West in computer technology. Yet its leaders were desperately afraid of reform. If the Chinese were having difficulty breaking away from a system that was only thirty years old, it would be far more difficult for the same model after 65 years in the Soviet Union. Then Mikhail Gorbachev replaced Konstantin Chernenko.

  2. In 1987 in “Gorbachev’s Challenge: Economic Reform in the Age of High Technology,” Goldman correctly predicted that Gorbachev would not be able to rise to the challenge of “growing out of the plan” by pursuing massive investment in heavy industry and military power. Instead he held out the Chinese model as an alternative — encouraging small-scale private enterprise while retaining political control.

  3. He followed up in 1991 with “What Went Wrong with Perestroika?” — just in time for the failed attempt to return Mikhail Gorbachev to power. Goldman explained the rise of Boris Yeltsin this way: “For those of us living outside the Soviet Union, it is hard to appreciate just how disorienting have been the Gorbachev years, with all their course reversals in industry, agriculture, administration and legislative and economic advisers.” Thus despite having withdrawn from Afghanistan and ended Russia’s domination of Eastern Europe, Gorbachev was also the man who in early 1991sent paratroops into Lithuania and six other republics in a vain attempt to keep the Soviet Union from falling apart; and who, meanwhile, turned a mild recession in the West into an outright Russian depression — a 15 percent decline in output brought on by an unprecedented breakdown of trust among factories, farms and ministries. It cost Gorbachev his job, and some part of his place in history.

  4. Then in 1994, it was Goldman’s turn to fall behind the curve. In “Lost Opportunity: Why Economic Reforms in Russia Have Not Worked,” he argued against the enthusiasm for “shock therapy” that had been embraced by Boris Yeltsin — at the very moment that it was rushing ahead. He compared the gradualism of the Hungarian reforms with the “green-fieldization” of Poland (the creation of new businesses) with the privatization of state-owned businesses that was taking place in Russia. In a nation like Russia, where the evils of capitalism had been preached for 70 years, it was especially important to be seen to proceed fairly, he wrote. But privatization swept ahead anyway, aided by a corps of Western economists advising Yeltsin, who argued that speed was of the essence. If the entire productive apparatus were not privatized immediately, they reasoned, the communists might regain power. And so it was — with the result that a relative handful of decisive Russian individuals came to control an enormous fraction of the country’s natural resources, its banks and its media. These fifteen or twenty men quickly became known as “oligarchs.” They engineered the re-election of Boris Yeltsin in 1996, and reaped further windfall gains in return. Only after the 1998 fiscal crisis did Yeltsin appoint Putin prime minister — with the clear intent that he should succeed to the presidency in 2000.

  5. Now Goldman is back. In “The Piratization of Russia” he argues that rapid privatization chosen by the Russian leadership and pushed by the Americans was the “wrong advice at the wrong time.” Russia has fared “much worse” than other European transition economies, he says; only Belarus and Ukraine have done worse. Its economy has shrunk to about half of what it had been in Gorbachev’s time. A third of the population lives below the poverty line. With so few rich and so many poor, cynicism has only grown. “Accusations that two of the main U.S. consultants to the privatization officials were actively lining their pockets… did nothing to enhance the effort to lessen corruption and curb political influence.” A US government case against Harvard University and Andrei Shleifer and Jonathan Hay, the leaders of its State Department-sponsored mission to Moscow, is pending decision by a Federal judge.

This difference of opinion about Russia’s a transition will be a long time straightening out. There is no point in expecting the parties to the debate — the policy economists on the one hand, the “Sovietologists” and their numerous allies on the other — to do anything more than state their case. And this Goldman has done, clearly and simply. At 72, he is an irreplaceable grand old man. So who among the next generation will decide? The Europeans, with their several centers for generating knowledge for and about transition economies, will strive to narrow the debate. Then there is Russia’s own fledgling Center for Economic and Financial Research. And a new generation of models of looting behavior eventually will be brought to bear to weigh competing claims — they were developed originally to describe the US savings and loan scandal. (In “The Chastening,” Paul Blustein reports that IMF bankers in Russia grew really alarmed when the heard Ukraine described by knowledgeable lenders as “the next moral hazard play.”) Nor is the transition debate simply an argument about the past. Perhaps the most important wholesale transition left is Cuba. But the details of institutional engineering and mechanism design are at issue today in every country in the world.

In the meantime, there is Russia, five years out from having nearly crashed the global financial system. There may have been a better way to deal with the development of Texas, too. But Texas today is what we have today. Edna Ferber wrote the novel “Giant” in the 1950s to explain Texas culture to the world (it made a pretty good movie, too). And of course there was the 1980s television series “Dallas.” Similarly, there is nothing quite like a first-rate novel to supply powerful images of present-day Russia, William Gibson’s recent “Pattern Recognition” being a good case in point. But mostly we make do with journalism — see the precis of the series of ten articles in the Financial Times during August (subscription required for full text) for a sterling example. Those Russian oligarchs are going to be a major presence on the scene — and, often enough, a headache — for a long time to come.

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