Putin seeks a "strong state"

The same theme has been taken up in a more emphatic form by his recently appointed successor, Vladimir Putin: "To the Russian a strong state is not an anomaly. On the contrary, it is the source and guarantor of order, the initiator and the main power behind all changes."

The media in the West have interpreted Putin's emphasis on the restoration of a strong state as meaning a return to the anti-Westernism of the Cold War and earlier periods of Russian history. Russian indifference to Western criticism of its war in Chechnya is cited as an example of a reborn anti-Westernism.

But this interpretation misses the point. As the above quote from Yeltsin indicates, the emphasis on a stronger role for the state pre-dates by several years the arrival of Putin on the political scene. Moreover, the turn towards a strong state flows out of economic considerations, not the question of relations with the West.

Poverty, inequality and the "no-man's land" economy

Russia embarked on what was declared to be the transition to the "free market economy" in 1991. Although private enterprise had already begun to re-emerge before the collapse of the Soviet command economy - by the mid-1980s it accounted for some 10% of the labour force and up to a third of household incomes - only a handful of intellectuals had even a limited grasp of the nature of a market economy.

In line with the still-prevailing Thatcherite-Reaganite economic orthodoxy of the 1980s, the concept of transition to a capitalist economy was reduced to the simplistic ideas of reducing the role of the state to a minimum, and of opening up the economy to the unfettered forces of private enterprise. For millions of Russians the pursuit of such an economic strategy proved to be an unmitigated disaster.

In 1992 alone - the first full year of economic reform - real wages fell by over a third, average personal consumption dropped by over 40%, inflation reached 2,500%, and nearly a third of the population fell below the official poverty line. By the end of 1995 real wages were half of what they had been in 1990, and the state pension was 30% below the official poverty line.

Between 1991 and 1994 death rates increased by 25%, infant mortality increased by nearly 15%, suicide rates almost doubled, and life expectancy fell from 63 to 57 years. Infectious diseases, which had effectively died out in the West suddenly, reappeared and swept through Russia. The supposed economic stabilisation of the middle of the 1990s was short-lived and more apparent than real. In August of 1998 the Russian government defaulted on its debts and let the rouble go into free-fall.

Within four months the rouble had lost two-thirds of its value against the dollar. Between August of 1998 and the spring of 1999 real wages fell by 40%, recorded unemployment increased by around 30%, and the proportion of the population living below the poverty line shot up to nearly 40%.

Massive inequalities opened up in Russian society, even greater than the ones which had existed under Stalinism. Whilst nearly 40% of the population lived below the poverty line, 10% enjoyed Western European standards of living. 20% of the population enjoyed 50% of the country's money income, whilst the share going to the bottom 20% fell from a tenth to 6%.

Inequalities in Russian society quickly became as great as in third world countries such as the Philippines.

In and of itself, this explosion of poverty and inequality did not mean that the attempted transition to capitalism in the course of the 1990s had failed. Poverty and inequality are the hallmarks of a capitalist society. But in fact the economic policies of the 1990s, destroying - albeit not entirely - the structures of the Stalinist command economy, failed to replace them by a functioning capitalism. As Thane Gustafson (Capitalism Russian-Style) puts it in his comments on the crash of 1998:

"The August crash brought out in sharp relief how deformed and fragile the emerging political order and economy had proved to be when tested. It showed that Russian's transition to a money-based economy and a national market was still only partial... As the August crash showed dramatically, the economy is still a no-man's land, neither socialist [i.e. Stalinist] nor capitalist."

Privatisation

The Russian "no-man's land" economy which emerged in the course of the 1990s had, on the surface, many of the trappings of a capitalist economy but not the substance of a capitalist economy. Three examples of this are privatisation, the banking system, and the stock market.

The supposed transition to a capitalist economy was ushered in by large-scale privatisation of state industries. Between 1992 and 1996 the number of state-owned companies declined from 205,000 to 91,000. By way of comparison, Western countries carrying out privatisation programmes have sold off no more than 200 companies in a year.

In the first phase of privatisation (1992-95) companies were virtually given away: Russian citizens were issued with vouchers (worth about 30 dollars) which could be exchanged for stock in any privatised company. In the second phase (1995-98) 20,000 of the largest and most valuable state assets were sold off on the cheap to members of the new oligarchy with the right political connections.

Common to both phases of privatisation was that they failed to raise capital for investment in the newly privatised enterprises. As one Russian economist put it: "We sold off a herd of elephants at rabbit prices, and now the new class of owners is trying to feed them at the rate of a carrot a day."

The privatised enterprises and companies were, by definition, no longer required to meet production targets set by centralised state "planning". But, at the same time, few enterprise managers seriously attempted to adapt their companies to the workings of a market economy.

Joseph Blasi (Kremlin Capitalism: Privatising the Russian Economy) measured changes in privatised enterprises against a scale of 69 "restructuring activities". The average score was 20, and no company scored higher than 41. Most changes were short-term and cosmetic. The majority of managers still regarded state intervention as the solution to problems in their enterprises.

Moreover, it is the sphere of industrial production which still remains most resistant to the penetration of money. Some 70% of industrial transactions are currently settled by barter or the issue of promissory notes (vekselia). Wages are paid late, if at all, and are often paid in kind rather than in cash.

This so-called "virtual economy", operating on the basis of barter and IOUs, still accounts for some 25% of the Russian GDP. It is not part of a command economy, but neither is it functioning on a capitalist basis.

Banking

Investment in the newly privatised industries has not been forthcoming from the private banks which mushroomed in Russia during the 1990s. By 1997 there were 1,600 of them. But 60% of them each had capital of less than a million dollars, and 90% of them had capital of less than three million dollars. Not only were they smaller in size than Western banks, their economic activities were of a different nature.

Russian banks did not attempt to promote industry and economic growth through investment and corporate restructuring. A 1997 survey of Moscow-based banks revealed that just over 1% of their loans were for more than a year, and virtually none of their loans financed investment projects in industry. Instead, most Russian banks concentrated on making a quick profit.

This was not difficult in the early 1990s. Banks converted low-interest rouble deposits into dollars, lent the dollars at high interest rates to finance short-term commodity exports, converted dollars back into depreciated rubbles, and returned the largely worthless roubles to their depositors' accounts.

When inflation declined in the mid-1990s the banks turned to making a quick killing on government treasury notes. In order to finance its deficit the government issued high-interest three-month and six-month treasury notes. These combined a high return and a low risk - until the government defaulted on its debt repayments in the summer of 1998.

By the end of the 1990s, therefore, Russian banks were in the middle of the economic "no man's land". The opportunities for a quick profit had ceased to exist. But they were still incapable of fulfilling the role played by banks in Western capitalist economies.

Stock market

Just as Russian banks were - and very often still are - a pale imitation of "the real thing" in the fully capitalist West, the same holds true of the Russian stock market. It exists, but has persistently failed to attract funds and allocate them to the best uses (in capitalist terms).

Small-scale trading in Russian securities, mostly in the form of privatisation vouchers, began in 1992. The ROS Index (the first Russian stock index) started at 116 points in 1994 and reached 1,706 by September of 1994. But by January of the following year it had crashed to 600. In March of 1996 the crash bottomed out at 66 points on the RTS Index (which had replaced the ROS Index). For the following 18 months there was a steady rise, with the RTS Index reaching 571 by October of 1994. But then the stock market crashed again. By July of 1998 it stood at 134. By October, in the aftermath of the government's default and devaluation, it had slumped to 38.

The weakness of the Russian stock market throughout the 1990s was rooted in a combination of factors.

The absence of proper regulations and controls facilitated fraud. Some foreign investors found they had paid large amounts of money for non-existent company stocks. Others found that what they had bought were not stock certificates but a forward contract to buy the certificate later. The background of political and economic instability discouraged investment, especially from abroad. Potential small investors in Russia preferred to save in dollars than to risk investing in Russian securities, especially after the stock market crash of 1994. And private banks, as already described above, found more profitable activities than playing the stock market.

Economics textbooks describe a stock market as "a mobiliser of capital and a source of market signals about corporate performance". The Russian stock market fulfils neither of these functions, and the former even less so than the latter. It bears the name of a central institution of capitalism, but it does not fulfil the role of that institution.

Wealth accumulation

A small number of Russians became very rich in the course of the 1990s, especially in the early part of the decade. But the form of that accumulation of wealth did not provide a basis for ongoing capitalist development as part of a transition to a market economy.

Private wealth was accumulated in three overlapping waves, all of them rooted in the weakening of state structures and the role of the state. The first phase, pre-dating the emergence of an independent Russia, was triggered by the removal of the state monopoly on foreign trade. The monopoly was scrapped at a time when prices were still maintained at an artificially low level by state subsidies.

Anyone who could acquire commodities such as oil, metals, or precious gems at the controlled domestic prices and then sell them abroad at world market prices could become rich more or less overnight. CP bureaucrats, criminals, and anyone with an eye on making a quick killing cashed in on the bonanza. The second phase was based on financial speculation. The early years of the 1990s were a period of rocketing inflation. Between 1991 and 1995 prices increased about 10,000-fold. Anyone who could borrow money cheaply, and quickly convert it to other values could make a fortune.

Fortunes made from exports bankrolled even larger ones from banking. (As already described above, currency speculation was the major source of profit for Russian banks in the early 1990s.) Politicians also cashed in on the bonanza. They lent money from city and provincial budgets to the banks, and then creamed off the profits for themselves.

The third phase was the privatisation programme. As outlined above, state assets were given away (the "voucher privatisation" scheme) or, in later years, sold off at bargain prices.

In the former case enterprises were then bought on the cheap by buying up vouchers from their holders. In the latter case enterprises were bought on cheap direct from the state. Many of the enterprises thus bought up then fell victim to asset-stripping.

Common to all three phases was that wealth accumulation took the form of a quick killing through speculation. It did not involve investment in productive capacity, producing profits, which then provided the basis for a further round of capital valorisation.

Moreover, the three phases of wealth accumulation were essentially one-off opportunities. The abolition of state controls on domestic prices slashed profit margins on export speculation. The end of the period of hyperinflation put an end to whirlwind profits from currency speculation. And the bulk of the formerly state-run enterprises had been sold off by the close of the 1990s.

In other words, the main mechanisms of wealth accumulation in the early 1990s were largely defunct by the end of the decade, but without having laid the basis for a functioning capitalist economy.

State Weakness

The economic role of the Russian state under Yeltsin was essentially negative. It scrapped the structures of the command economy (nationalised industries, price controls, state monopolies, and Soviet-era legislation) and then looked to the "free market" to rebuild the Russian economy. But the inevitable result was mass impoverishment and a fundamentally dysfunctional and crime-ridden economy. The Russian economy certainly ceased to be a command economy. But there has been no proper transition to a capitalist economy.

Throughout the 1990s the state lacked both the will and the ability to intervene more decisively in the economy and to attempt to give some direction to the economic restructuring of the country.

Following the advice of Western free market "experts", it regarded any such intervention as contrary to the principles of a sound economy. Moreover, members of the government and their respective "clans" were themselves to the fore in cashing in on the get-rich-quick opportunities offered by "free market reforms".

Thus, there was little or no attempt at state regulation of banking and the stock market, with the consequences described above. Even where regulation was attempted, there was no mechanism of enforcement. And there was no attempt to defend state assets from the plunder of privatisation when politicians themselves were partaking of the plunder.

But the ensuing economic chaos also took its toll on the state's ability to intervene, even if it had possessed the will to do so. The state itself fell victim to a form of impoverishment which served to reinforce its overall weakness.

In 1992 44% of the GDP was collected in state revenues by the state. By 1998 the official figure had fallen to 29%. But this is not the full picture. Some 40% of the Russian GDP is produced by the unofficial economy and is therefore not recorded in the official statistics. And the official GDP itself has declined by roughly half since 1990. In absolute terms, therefore, state revenues fell by around 75% in the course of the 1990s. Tax evasion - the capitalist form of the falsification of planning and output statistics which was central to the Stalinist command economy - ran rampant throughout the 1990s. Fifty percent of registered Russian businesses pay their taxes only occasionally, while 34% pay nothing at all. Unregistered businesses (responsible for 40% of the GDP) likewise, by definition, pay nothing.

The collapse in state income over the 1990s inevitably entailed a collapse in state expenditure. The real value of pensions was allowed to lag ever further behind inflation. Wages of state employees likewise fell in real terms and were paid with increasing irregularity. From a capitalist point of view this was not necessarily a bad thing.

But other aspects of the slump in state expenditure ran counter to the proclaimed goal of building a healthy capitalist economy. Investment in industry and agriculture collapsed, while the military, the police and tax collection bureaucracy fell victim to gross underfunding.

The function of the capitalist state, as Engels put it, is to govern on behalf of the ruling classes as a whole. The Russian state of the 1990s was too weak to fulfil this role. It presided over a disintegration rather than a restructuring of the economy. It was able to bury the corpse of the command economy. But it could not revive capitalism.

Alternatives

For bourgeois economists like Thane Gustafson the failure to build a free market economy in Russia is rooted in the weakness of the post-Soviet Russian state:

"The weakness of the national state, which initially opened the way for the privatisation of wealth and the rise of the market, is also what prevents the market economy from developing on a sound basis...

"The quasi-stabilisation we see in Russia today, founded on what remains of the Soviet inheritance, is not viable over the longer run, because it cannot generate growth and prosperity...

"The experience of Russia's first post-Soviet decade has been a vivid reminder that there is no strong market economy without a strong national state. It is the strong state that creates a single market space with a single national money. It is the strong state that provides the essential protection for property rights and contracts, enforces corporate governance and maintains competition, and offsets the imperfections of the market..."

Putin and his political allies share a similar analysis: after the political and economic chaos which characterised the break-up of the command economy in the Yeltsin years, what the new Russian ruling classes need is a period of economic and political stabilisation. And the agency to deliver such stabilisation is the strong state.

Socialists are no more interested in the creation of a strong state in Russia than they are in a successful transition to capitalism by Russia. Putin's emphasis on the role of a strong state is not a reversion to Soviet-style politics (which had nothing in common with socialism anyway) but an attempt to create a stable political framework for the emergence of fully developed capitalist relations of production.

For the workers' movement in Russia, still weak after decades of Stalinist atomisation and repression, Putin is an enemy as much as Yeltsin. Every success for Putin - whether it be the war in Chechnya or economic reform in Russia - will be a setback for the workers' movement.