4/08/2009

CAPITALISM IN RUSSIA 1991-1998



 Neil Burnett (epidemiologist), “The Russian mortality crisis of 1990-95 represents the greatest drop in life-expectancy ever registered in the absence of war, famine or serious epidemic’’.

Socialism is not a thing but a process; it is a heterogeneous road, zigzagging and contradictory at times, given that the participants are heterogeneous.  If many revolutionaries have nothing to lose, others are conservatives fighting to preserve the rights that capitalism is trying to snatch from them (the Welfare State, ecologists, conservationists). Rosa Luxemburg warned that we are trying to construct the future using the materials of the past, including ourselves.  Socialist paths can degenerate into monstrous bureaucratic systems on the brink of collapse which return meekly to the capitalist fold.  History is not a flat, straight path from the past to the present, but a winding process, full of potholes and ups and downs, given the great complexity of human relations.

Aleksandr Solzhenitsyn: The destiny of the country is decided by an oligarchy of 150 to 200 individuals, made up of the most astute of the first and second rank of the old communist system and a few new rich.  Our real leaders have not shown themselves to be morally superior to the communists who preceded them, no serious crime has been prosecuted and no serious public trial has taken place in this respect.”

Catherine Austin Fitts (2001): The destiny of the country is decided by an oligarchy of 150 to 200 individuals, made up of the most astute of the first and second rank of the old communist system and a few new rich.  Our real leaders have not shown themselves to be morally superior to the communists who preceded them, no serious crime has been prosecuted and no serious public trial has taken place in this respect.


Russia has become the new frontier for Wall Street.  An enormous territory has been opened up to the insatiable jaws of financial globalisation.  Russia could be converted into the macro-bubble dreamed of by the  financial Knights of the Round Table.A veritable Holy Grail of finance that would give new youth to capitalism along with astronomical profits for those well-positioned for the final shoot-out.

During the Soviet era, economic activity, although inefficient, was at least fairly predictable and provided work for the majority of the population. Although living-standards were low, extreme poverty was almost non-existent and the population remained stable. Its GDP was 5 times greater than that of China.  There was no illiteracy and the proportion of students in higher education and of scientists was the highest in the world.

Today Russia is a country without law and businesses function at a similar, certainly worse, level than in the Chicago of the days of Al Capone. There is no legal system to ensure the correct functioning of the industrial, commercial, insurance, stock–exchange etc. systems. The existing laws are neither consistently nor impartially applied.  Russians live in a world where illegality is more rewarded than punished and in which organised crime has taken over the functions of control and government of society.

R. M. Gates, the previous director of the CIA, estimated that in 2001, two-thirds of business, 80% of banking, and a good part of the stock exchange were controlled by organised crime. 40% of the GDP was in the hands of the mafia and business and corruption were in collusion.

The result of this has been the greatest, almost instantaneous, mass-pauperisation ever seen in history. Today 60% of the Russian population subsists in poverty, without heating in an extreme climate, in abject shanty towns which recall the  siege of Leningrad. The population is diminishing at the rate of one million a year, hard drugs, AIDS, tuberculosis, suicides now beat records in a country where they were once almost unknown.

What happened over these ten years of transition?

The Soviet macro-corporations and the military-industrial complex


In 1918 the Russian economy was destroyed after World War I and the country was embroiled in civil war.  The Bolsheviks opted to impose a system modelled on German 'war socialism' (‘war capitalism would have been closer to the mark) which meant government control of almost all branches of industry. The German state fixed prices, appropriated the means of production and introduced food rationing. The state replaced market mechanisms with central planning and favoured the creation of industrial monopolies.

Using a similar model, the Bolsheviks tried to advance towards socialism by controlling the direction of the government and the state. As in the Germany of World War I, the whole country was converted into a macro-corporation with centralised management.

In contrast to Germany, the USSR of the 1920’s was a predominantly agricultural country and was poorly developed.  Nearly 80% of the population was rural and agricultural produce made up nearly two thirds of the total income.

The survival of the new regime, from the moment it adopted the option of co-existence with capitalism and renounced world revolution, required a race against the clock for the industrialisation of the country.

The nationalisation of land, industry, transport, banking and commerce and a strict control of the economy will enable the accumulation of the necessary means to renew and develop heavy industry”. (Stalin).

There were two complementary objectives: heavy industry and armaments.  Stalin created with blood and fire a powerful military-industrial complex to which all available manpower and resources were sacrificed.

The victory over Hitler and the territories occupied after the Yalta and Potsdam Conferences were the highpoint of the sinister Stalinist model, but they also marked the beginning of the end. In the atomic age the military-industrial complex became obsolete and in fact useless. It became a heavy burden on the country, absorbing its best resources and offering little or nothing in return.

Light industry remained underdeveloped and agriculture limped behind because of the suffocating submission to forced industrialisation. The Soviet economy was divided into some 200 000 public companies. 600 of them were gigantic and were responsible for 47% of non-military production. They were a malign parasite which eventually killed its host.

The Soviet welfare state 1960-1980


In the post-Stalinist state this contradiction was not resolved.  The military-industrial straight-jacket remained fixed to the economic system and nullified any possible reform or advance, bringing the USSR to the brink of stagnation.

After the death of Stalin the regime was forced loosen absolute control over the population and protests against the exploitation of workers broke out . The rebellions in the Gulag, the Novocherkassk strike, the Ukrainian miners strike in the Donbas Basin, were brutally suppressed but ended up forcing a relaxation and improvement of working conditions. Wages and pensions were increased, the age of retirement was lowered, housing construction was speeded up, the working week was reduced from 48 to 43 hours a week, Saturday became part of the weekend and paid holidays were introduced. Thousands were freed from the Gulags and re-housed.

Las ventajas para los trabajadores de esta versión "soviética" del estado del bienestar implicaba un trasvase de recursos en detrimento de los emolumentos que la nomenklatura se había reservado hasta entonces.


Cars ceased to be luxuries within the reach of the few and the availability of white goods and televisions grew as community housing (with shared kitchens) began to be replaced with family housing.

Western products, previously reserved for the nomenklatura, became available to a growing sector of the population.  The black market in foreign currency and goods developed rapidly during these years, driven by organised crime in collusion with a corrupt administration.

The relative drop in the incomes of the nomenclature led to a breakdown in the solidarity of the privileged class and squabbles broke out over how the rapidly diminishing cake would be divided.  Factions emerged in what had once been a monolithic entity. Ministries, regional powers, economic sectors, administrative and regional agencies began to compete for access to funds and resources in a complex web of relations, alliances, pacts and client groups.

Soviet macro-corporations remained viable between 1960 and 1980 thanks to the continuing growth in exports of strategic primary materials. Petrol, gas, diamonds and gold supplied the resources to make up for the growing food deficit and the permanent deficit of consumer goods.  The hike in fuel prices during the 1970’s allowed the regime a certain stability but the subsequent drop in prices in the 1980’s ended up destabilising it completely. 

The scaffolding was deteriorating and resisted only by the massive inflow of dollars from the export of oil and gas accounted for around 60% of exports. The rise in fuel prices during the 1970s allowed some stabilization of the regime. But the subsequent fall in prices in the 1980s would eventually destabilize it completely. 

The crisis in the system




In the 1980’s the inequalities increased and led to ruptures between distinct groups, particularly between the regional elites and the central bureaucracy. The succession of Brezhnev (who fell ill in 1979 , and died in 1982) and was followed by Andropov and Chernenko, who both died shortly after coming to power, resulted in a period of uncertainty, marked by a seemingly endless procession of state funerals. Gorbachev came to power in the spring of 1985, opening the way to reform.  Once installed as Secretary General he managed to consolidate his position by placing a number of his supporters in the Politburo to begin his daring reforms. The catchwords to describe the new policies were Glasnost (openness and relaxation of censorship) and Perestroika (institutional and economic reform). These threatened the position of sectors of the nomenclature. 

Battle lines were drawn up between groups. On one hand were those who benefited from the military-industrial complex, the ‘conservatives’ who were dependent on funding from the Soviet Union, and on the other, were the ‘liberals’ who were outside the complex and drawn especially from the export sector. 

The conservatives supported the continuation of the status quo although allowing certain reforms, whilst the liberals wanted radical changes in the political and economic order so as to rid the country of its dependence on heavy industry and the welfare state. 

Under pressure from the liberals, the conservatives took the initiative by launching Perestroika with the intention of implementing structural changes in the organisation of the economy.  Those groups with an interest in maintaining the Soviet system tried to introduce reforms to reorganise the economy and clean up corruption so as to gain the support of the population.

The Chernobyl disaster in the summer of 1986 gave a definitive push to Glasnost (opening up of information).  Suddenly an avalanche of bad news engulfed Russian society.  Corruption, disinformation, manipulation, collusion between the ‘Brezhnev Mafia’ and organised crime, Stalinist crimes. Andrei Sakharov returned to Moscow. All possibilities seemed to be open.

The law of State Companies, passed by the Soviet Supreme Court in July of 1987, was the first step in dismantling the planned economy.  State companies would produce according to demand of the consumers or other companies, prices would be negotiated with the suppliers and this would enable them to balance their accounts.  Gosplan (central planning) would be reduced to a guiding role. The new law fought for the democratisation of industry but lacked the mechanisms to implement it.  The bureaucratic cabals sabotaged and impeded any intervention of the workers in the decision making process.

The functioning of the planned economy (more than 60 000 products had fixed prices under Gosplan), depended on the ability of the Party to supervise and compel the companies to provide their products in the quantities and at the prices fixed by the central administration. The implementation of the new law metamorphosed into a monstrous mess when the managers simply stopped producing according to the plan and sold their produce to those who could afford it. The collapse of the centralised allocation mechanism brought absolute chaos to exchanges particularly at an inter-regional level.

The economic chaos brought with it a drop in revenue collected by the state.  The state was seen to be incapable of collecting taxes from companies and the republics and gave in to the temptation to print roubles on a huge scale to cover its expenditure. The inflationary spiral and the galloping external commercial deficit led to uncontrolled foreign debt (it doubled in only 5 years) which pushed the Soviet state to the brink of bankruptcy in 1989.

Meanwhile the corrupt nomenklatura acted swiftly in its own defence. Although some of the highest–ranking Brezhnevists were dislodged from Moscow, corruption became entrenched at a local and regional level.

The nomenclature quickly substituted the communist line for the most recalcitrant nationalism in order to resist the reforms. Regional directors cornered the resources and income from the territories they administered, leaving the Soviet state bankrupt. The intelligentsia further undermined the central Soviet state by providing the nationalist and patriotic propaganda that the oligarchs needed to divide up the cake.

Supporters of the destabilisation made it possible to dynamite Perestroika. A good part of the nomenclature did not intend to give up more ground to the welfare state. Sabotage strengthened their position and they did not hesitate to divert popular discontent against the state by encouraging mobilisations and strikes.

A powerful social mobilisation emerged, the miners’ strike of 1989-90 and the appearance of civil mobilisation committees of self-management could easily be manipulated and channelled by sectors of the nomenclature bent on destroying the system. 

Lack of resources

The regional bureaucracies denied the central government revenue and Gorbachev began to depend more and more on foreign loans to continue functioning (in fact from 1986 the government of the USSR was already dependent on international credit to finance its running).  International creditors, the IMF and the US Treasury took the opportunity which arose from their position as creditors to support the destabilising sector and contributed considerably to sinking the system.

In 1991, the last year of the USSR, the central government deficit was 20% of GNP. 

The fall of the Soviet system




Nationalism and budget problems




Gorbachev tried to reform the USSR along the lines of a federation with a certain similarity to the European Union or the Commonwealth but retaining the pre-eminence of central power and administration.

Yeltsin, however, from his accession as Russian president actively encouraged the leaders of the other 14 republics (take as much sovereignty as you can manage) and promoted a co-ordinated action of harassment and destruction of the Soviet Union.

At the beginning of 1991, encouraged by Yeltsin, the principal republics refused to contribute to the budget of the USSR.  The leaders of the popular fronts had taken control of the legislatures from the Baltic States in the north to the trans-Caucasian states of the south.

There were nationalist risings and on January 13 police special forces brutally charged against Lithuanian demonstrators in Vilna, killing 15 people, Bloody Monday -which only served to exacerbate the resentment against the system.  Perestroika deflated by the day. 

In the face of the generalised diversion of revenue which should have been collected and intending to strike a blow to win over the conservatives, Gorbachev passed a decree, on January 26, to increase the powers of the KGB to investigate the economic sabotage which was draining the Union. The decree fell on barren ground given the advanced state of corruption in the police force.

On 10 February the Lithuanian people voted massively in favour of a pro-independence and anti-Soviet movement. In March the striking coal miners demonstrated in Moscow, Leningrad and other cities throughout Russia.

Gorbachev tried to stave off the financial collapse of the central government of the Union by levying a new tax, the ‘presidential rate’, a 5% addition to consumer taxes. This gave fresh ammunition to those who wanted the system destroyed, who took advantage of popular discontent to call for the withdrawal of the tax.

The struggle for control of extractive incomes


The income from the extractive industries (mining, oil) remained in the hands of the central government of the Union. Yeltsin and other nationalist leaders wanted to get their hands on these revenues and encouraged protest movements, strikes and sabotage, taking advantage of and stirring up discontent amongst the workers.

The strikes and sabotage in the oil fields led to a sharp fall in production at a time when the miners’ strikes reduced coal production. All this made it difficult to provide the energy requirements for heavy industry and for the cities. Shortages led to discontent amongst the population. In addition the financial problems of the central government were aggravated by the fall in income from oil exports. 

Yeltsin made a deal with Gorbachev to end the miners’ strikes  if the income from the mines went to the Russian regional administration. 

On May 1 Gorbachev gave in and a month later the strikes let up. The central government’s monopoly control of natural resources had been broken.  Oil would follow.

On 9 April Georgia ‘formally’ declared independence from the USSR.

The failed coup d’etat and the end of the USSR




On 19 August there was an attempted coup d’etat led by high-ranking collaborators of Gorbachev (the Vice-President, the Prime Minister, the Minister of the Interior, the Minister of Defence, the director of the KGB, the spokesman of the Soviet Parliament and heads of the party apparatus).

In reality it was an attempted coup by the central government minus Gorbachev. Tanks came out onto the streets and surrounded the White House, the seat of Parliament in Moscow. Yeltsin rallied the people in his defence and a human shield was formed between the tanks and the building. In the end, after an attempt to storm the Parliament had led to a number of civilian deaths, the soldiers refused to carry out a massacre. After three days the coup d’etat had failed.





A month after the coup, 11 of the 15 republics which formed the Union declared independence.  On 8 December 1991 the leaders of the newly independent states signed a declaration which put an end to the Soviet Union and formed a new ‘Community of Independent States’ without any central government.

The transition to neoliberal capitalism




1992 was the year of the Russian Spring.  It was an exit from the tunnel of totalitarianism. At last people were able to breathe the air of democracy. The number of political, civic, cultural and religious groups boomed.  More than 300 political organisations operated without hindrance and demonstrations took place almost routinely without harassment. There was religious freedom, total freedom of movement and the right to leave the country.

Whilst the populace enthusiastically breathed in the long awaited air of democracy, the nomenklatura, Washington and organised crime plotted the future of the country in the shadows.

In 1992, the first year of reform, industrial production fell 26%.  Between 1992 and 1996 the GDP fell 42% whilst per capita income fell 40%.  The bankrupt Russian state stopped paying teachers and civil servants.

Privatisation


The privatisation of the entire wealth of an enormous area was completed in record time. Two systems were used.

Privatisation through vouchers

After October 1992 the privatisation programme through vouchers provided every Russian citizen with a voucher worth 10 000 roubles, with which they could acquire shares in state industries. (10 000 roubles was the equivalent in 1992 of $ 32, the average salary of one and a half months). From communism to a society of owners.

The cake comprised 200 000 businesses, of which 600 industrial complexes alone were responsible for 47% of non-military production. In the first stage 5000 companies were privatised. In the end 70% of all the small businesses and 7000 large firms had been privatised.

The scheme was devised by A Chubais (a minister of Yeltsin’s) and USAID (US Agency for International Development) and worked in the following way:

  1. Insiders in the government, the administration and the directors of the companies appropriated huge quantities of vouchers which they reserved for themselves.
  2. The valuation of the vouchers for industrial shares was manipulated to the benefit of the same insiders. The value for the vouchers of each industry was determined by those with connections to the government in such a way that many of the shares were acquired at a significantly lower price than their real price.
  3. At no time was it envisaged that they were privatising national monopolies which, once in private hands, could abuse their monopoly position. Privatised monopolies continued operating in a non-competitive framework and therefore in a pseudo-economy within the market. State monopolies were transformed into private monopolies with the approval and help of the US Democrat administration.
  4. Million of dollars of taxpayers’ money which was channelled directly by USAID and indirectly by Chubais would end up in the hands of the insiders who would use it to acquire shares. All of those who received funds - the corrupt nomenclature, organised crime - were able to accumulate sufficient vouchers to control the majority of the privatised companies.
  5. he liberation of prices in January 1992 set off an enormous inflation which eroded the savings deposited in the banks by 99% leaving a large part of the population in poverty. The majority were forced to sell their vouchers to the few who had ready money, the nomenclature and organised crime.
The lightening strategy followed in the Polish transition would serve as a reference for the transition in other countries, including Russia. In Russia the ‘Wunderkinder’ of Harvard, A. Schrieffer, L. Summers and J. Sachs advised the corrupt Yeltsin group on a ‘variant’ of the traditional shock therapy - drastic anti-inflationary measures - which turned out to be just the opposite. Inflation was deliberately provoked so as to dilute the savings of the people thus forcing them to sell their shares for virtually nothing and concentrating capital in a few private hands.

The shock was brutal. In January 1992 price controls were lifted on 90% of products and in 1994 three-quarters of the companies had passed into the ‘private hands’ of corrupt officials and gangsters.


b) Privatisation according to the ‘loans for shares’ scheme

In 1995 Russia was under pressure from its creditors (the IMF and the US Treasury) to increase its income. Boris Yeltsin had brought public indebtedness to a paroxysm. The Russian government desperately needed money and was finding it difficult to raise new loans.

In this situation and with the approval of Washington, Potanin, Chubais and their colleagues designed a plan in the spring and summer of 1995 by which the Russian government would obtain loans from the Bank of Russia guaranteed by shares in the principal strategic energy industries which were yet to be privatised - the jewels in the Soviet crown - oil, energy, gold, diamonds, nickel…a total of 12 of the most profitable state companies in the country.

In the case of the government’s failure to pay, the banks would have the right to auction the shares of the companies.

The scheme was designed:

1.      To provide the government with some money thus relaxing the pressure from its creditors.

2.       To privatise, for the exclusive benefit of the conspirators of the plot, the best of Soviet industry, circumventing the approval of the Russian parliament.

3.      Given that the banks participating in the plan were ‘authorised banks’, that is to say bankers to the government which had accounts in the same banks for their running operations, a good part of the money used in the loans for shares plans was in reality government money.

The ‘authorised banks’ were the recipients of Russian taxes and of the government loans from the IMF and the US Treasury. Whilst this money remained in the bank before making the corresponding payments, the bank could use the funds for lightening speculative operations in the currency markets or other speculative operations, keeping the profits.

Once the cake was divided up there came into being a privileged group of oligarchs with enormous resources to support the continuity of the political line laid down by Yeltsin.

The loans for shares plan has been described as the largest robbery in history. From the beginning it was a planned operation of the theft of shares organised by and for a group of future oligarchs drawn from a small circle of corrupt officials in collusion with organised crime. As was foreseen from the very beginning, the Russian government was unable to repay the loans by the set date. They were placed on auction where those participating were individuals or companies controlled by the same banks. In all cases the share packages were picked up for a small sum above the derisory starting price.

Onexim Bank, controlled by V. Potanin, one of designers of the plan, picked up 34% of Norilsk Nickel (producer of a fifth of the nickel and two-fifths of the platinum in the world) for $170,1 million (the 0,1 represented the additional sum which was paid on top of the starting price of the auction. In 2003 its price was estimated at $53 000 million.

 Other companies auctioned were Sibneft (oil) acquired for $100, 3 million, Sidanko (oil) for $130 million, Yukos, (one of the biggest oil producers in the world) which was acquired by the bank Menatep, owned by Mijail Khodorkovski, for $159 million ...

After the division of the spoils seven ‘bankers’ had obtained control of 50% of the Russian economy.

The principal beneficiaries of the privatisation were the crime syndicates. According to the Analytic Centre of the Russian Academy of Sciences, “55% of the capital and 80% of the voting rights were transferred into the hands of domestic and international organised crime”.

So much corruption at such a high level could have no other consequence than to create a perfect symbiotic relationship between the official administration and organised crime. The result was a vicious circle of crime and economic disorder.

Meanwhile the Russian economy was in complete bankruptcy. Wages and pensions went unpaid and popular anger at the reforms grew. 

 The beneficiaries of the fraud, however, supported Yeltsin’s re-election, with A. Chubais at the head leading his electoral campaign. 

Thanks to his support, the oligarchic control of the principal communication media and the renewed loans from the IMF and the USA used illegally in the electoral campaign, Yeltsin, the puppet of organised crime and creator of oligarchs would be in power for another four years.

By the mid-90’s the new ‘red bourgeoisie’ which governed the destinies of a continent, had accumulated more than $150 000 million in foreign accounts and residential properties. The 1992 dream of ‘popular capitalism’ crumbled before the most savage unstoppable advance of poverty, organised crime and corruption.

The enthusiastic role of the US administration 


Washington was always aware of what was going on. The standard bearer of the whole operation was the ‘Russian Privatization Center’ which had strong links to Harvard. 

The centre received funding and loans from the US Treasury, the IMF, the World Bank, the European Bank of Reconstruction and Development, the EU, Germany and Japan which exceeded $4 000 million.

Clinton allowed the Wall Street financiers to direct US policy with respect to the transition to capitalism of the old Soviet bloc.

Russia became the new frontier for Wall Street. An enormous virgin territory was opened up to the voracious jaws of financial globalisation. Russia could be converted into the macro-bubble dreamed of by the new financial knights of Camelot. The Holy Grail of finance which would bring new youth to capitalism and huge profits to those who were well-situated for the final shoot out.

From the very beginning all of the forces were directed towards creating a huge pyramid bubble as quickly as possible.

Create a stock market. Privatise rapidly to ensure a good store of securities. Direct the flow of speculative capital toward Russia to generate a huge bubble. Stay in the eye of the bubble with all the privileged information necessary to take advantage of all the juicy opportunities which arise and then escape in time with a sack of loot over your shoulder. 

The knights who led the capitalist crusade in Russia were the same paladins of the successive financial bubbles which had led the world into depression. R. Rubin Treasury Secretary of the Clinton administration, Lawrence Summers,Treasury Under-Secretary, Strobe Talbot with the help of Harvard University and the special collaboration of the ‘shock therapist’ Jeffrey Sachs. It is these same knights who to a greater or lesser extent directed or defended the drainage of public money to prop up the losses of their speculator cronies..

The Clinton and Gore administration did not hesitate to hush up the scandals, criminal conspiracies, frauds, robberies and money laundering in their own back yard- the Bank of New York was used to launder money for Russian organised crime- ignoring CIA information which reported the situation, alleging the fear of a communist opposition to Yeltsin.


 All the information of corruption, fraud and penetration of organised crime was disregarded and the IMF and the US Treasury continued supporting and enriching the new Russian ‘capitalists’, that is to say the mafia, and large-scale corruption continued with the increasing bubble. Those principally responsible for American policy towards the transition were Vice-President Al Gore and the then Treasury functionary and now high economic advisor to Obama and inventor of the "Bad Bank", Lawrence Summers, These two referred to the notorious and corrupt oligarchs Boris Nemtsov and A. Chubais (their intimate personal friends) unblushingly as the "económic dream team" of Russia. (Boris Nemtsov declared with an admirable cynicism that, “Russia has to choose between criminal-capitalism and capitalism with a human face.”) 
The previsions and wishes of the Harvard ‘shock therapist’ were carried out. A new capitalist class had been born in Russia. A little rough to be sure, but as with the American robber barons, this is necessary at times.

The origin of the 1997 bubble


The USA is the only country in the world with the right to veto in the IMF. By abusing its influence it turned the IMF into the agent and lever at the service of the bubble creating policies of the Wall Street financiers.

IMF loans to Russia

1992  $1 000 million
1993  $1 500 million
1994  $1 500 million
1995  $6 800 million
1996  March $ 10 200 million (the largest loan in the history of the IMF.)

Inter-governmental loans (USA, Germany, Japan) 1992-1996  $30 000 million.

During 1997, Russia requested $36 000 millionThe objective was to inflate the Russian financial bubble. In 1997 the bubble reached its maximum size and the speculators were making stratospheric profits on their investments. 
The real economy, however, was on its knees. The majority of the companies were in such bad financial straights that not only were they unable to pay taxes but they also had to retain the wages of the workers ($8 800 million were retained in March 1997) which were used to finance their businesses. Unpaid taxes reached $35 000 million that year.

The Russian administration was funding its growing foreign borrowing expenses. Foreign investors acquired Russian debt in exchange for high interest rates.

Solely to be able to pay the interest on these, the Russian government began to ask for loans in the form of short-term bonds (GKO’s). To be able to attract nervous investors they had to put the interest higher and higher. In May 1997 they paid interest rates of over 150% per year.


After the re-election of Yeltsin the government allowed the purchase of GKO’s by foreigners. Chase Manhattan, US, Credit Suisse, First Boston, Republic Bank… threw themselves into the hunt for GKO’s.

 In order to repay the matured bonds the government issued further GKO’s. It was a typical Ponzi pyramid scheme. The new loans paid the interest on the previous ones.

The foreign and Russian participants in the GKO Casino made fortunes whilst the orgy lasted.
The GKO’s were so lucrative that the Russian banks themselves invested in them instead of making commercial loans.

On October 6 1997 the principal Russian stock exchange index reached its historic maximum (571 points, a year later it would fall to 37 points) making it the strongest emergent financial market on the planet. But the Russian dream lasted only a short time. With the hangover of the Asian financial crisis of 1997 the investors began to withdraw silently, converting their rouble shares into dollars. 

Nevertheless, in spite of the warning signs the markets believed that Russia was too ‘nuclear’ to fail.
Bank of America, Credit Suisse, First Boston Corp., Lehman Brothers, Merrill Lynch, Goldman Sachs and Citibank had lent huge sums to the speculators.

In May 1998 L. Summers convinced Clinton to obtain an extraordinary contribution of $10 000 million from Congress to the IMF to ‘save capitalism in Russia’. In spite of this Goldman Sachs took out a new subscription of Russian eurobonds to a value of $1,025 million which were entirely invested.

The rats abandon ship in IMF lifeboats


On 16 July 1998, the IMF, together with the World Bank and Japan, agreed to the terms of a macro-loan of $17 000 million to the Russian government in a package which added in other loans and came to $22 600 million.

Fue la oportunidad de oro que precisaban los insiders bien conectados para convertir rápidamente sus activos en rublos a dólares. De esta manera el FMI libró a tiempo a una selección de especuladores sin escrúpulos, tanto rusos como no rusos, del descalabro general, poniendo a salvo sus capitales y sus enormes ganancias.

La euforia volvió momentáneamente a la bolsa de Moscú con una subida récord del 17% tras meses en caída libre. Pero a finales de julio la bolsa retomó la senda del descalabro.

Pero la huida masiva del rublo dejó al gobierno con unas reservas de tan solo 12.000 millones de $,totalmente insuficientes para aguantar la moneda.

En agosto la bolsa de Moscú tuvo que cerrar varias veces al producirse caídas diarias de más del 10%. La liquidez desapareció del mercado.


The crash of 1998


On 17 August 1998 a cataclysm similar to the 1929 crash sunk the Russian capitalist economy. The Russian government declared itself bankrupt, announced a unilateral suspension of payments of the GKO’s and let the rouble float.

In less than 24 hours the sudden fall of the rouble made prices rise by 30%. 

Bank deposits were frozen by decree for two months and debit cards ceased to function. Dozens of banks closed and disappeared (only a handful of banks controlled by the mafia and the oligarchs were rescued by the Russian Central Bank). In a few days the savings of the Russian citizens evaporated. Unable to withdraw their savings the citizens could only watch helplessly as their value diminished with the rouble.

Those that had not lost their jobs found that they could not receive their wages. When they were finally paid, their wages had lost two-thirds of their value (the average fall was between $160 and $55 per month) and the number of Russians living below the official poverty line passed 40%.

GNP in 1997 had been $422.000 million. In 1998 it scarcely reached $132 000 million, a fall of 74%.

Share prices fell 90% in a year. The rouble fell 75%. Inflation shot up. Confronted with monetary and financial collapse the country returned to barter. The teachers in Voronezh were paid their salaries in tomb stones. 

 In the 90’s the big milestone of globalisation directed by the IMF-World Bank tandem led to the conversion of the Second World (the old Soviet bloc) to the Third World, with the greatest and fastest increase in poverty registered in history, from 14 million to 170 million in less than four years.

This was an instant mass-pauperisation without historical precedent. Today 60% of the Russian population subsist in poverty and without heating in an extreme climate in slum conditions which hearken back to the siege of Leningrad.

And along comes Putin 


 When he became president in 2000 Putin came to an agreement with the Russian oligarchs. The oligarchs accepted clear rules of behaviour inside and out of Russia and in exchange Putin guaranteed them protection against state expropriation and above all ‘protection’ from each other. When he became president the oligarchs were on the edge of an intersene war in which financial information was the key weapon. The oligarchs possessed the means of communication and used them as weapons of attack against each other. Putin ensured himself of a monopoly of financial information and thus created peace.



Malthus in Russia


During Yeltsin’s fist presidency the Russian population declined by 3.4 million (during the civil war of 1917-23 the population declined by 2.8 million). In Russia the population is diminishing at a chilling rate of a million a year. Life expectancy for males has fallen to 58, below that of the Czarist era. Shock therapy has generated an unprecedented abandonment of children which has led to sexual exploitation and a lucrative trade in baby and organ trafficking. In 1998 there were 8 million orphans (more than at the end of WWII) but only 650 000 lived in orphanages, the rest were homeless on the streets. In a country which had for years trained more scientists and engineers than the US, 10 million children went without education.


The infant mortality rate is 23 per 1000 births. Drug addiction and AIDS increase exponentially with the expansion of crime. More than 4 million Russians are addicts of hard drugs and more than 10% of the population is HIV positive (between 1997 and 1999 the infected population literally doubled.1.000.000 cases were declared in 1995.) Alcohol killed 35 000 Russians in 2000 (300 a year in USA). Tuberculosis has advanced at pandemic proportions showing the effects of the destruction of the social security network (150 000 new cases each year).

Murray Feisbach the leading expert in Russian demography has projected that the Russian population may fall to between 80 and 75 million by 2050 (the present population is 135 million) if social problems are not solved.

An enormous arsenal of chemical, biological and nuclear weapons in the hands of criminal capitalism

Nuclear


1 200 tonnes of uranium
200 tonnes of plutonium
2 500 under-employed or unemployed high grade nuclear scientists together with tens of thousands of specialists and collaborators in the same or worse situation.

Chemical

Hundreds of chemical weapons laboratories previously employing thousands of scientists and technicians who had developed the most advanced chemical warfare production in the world.
40 000 tonnes of chemical agents spread over various plants and depots throughout the country.

Biological

The Soviet biological weapons programme inherited by Russia employed 65 000 people. There were four laboratories for the production of biological weapons for military use. In addition investigation into lethal biological agents was carried out by a complex of 50 pharmaceutical plants known as Biopreparat.      

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