Transformation Watch #13: Russian Reform Imperiled By Yeltsin Complicity In, Mishandling Of Currency Power Play

(Washington, D.C.): The dog days of summer have apparently brought another attempted coup d’etat to Moscow. Unlike 1991, however, nearly worthless pieces of paper — the Russian ruble — rather than tanks are the catalyst for a momentous and still unfolding political crisis.

On Saturday morning, Russians awoke to learn that all ruble bills issued prior to 1993 in their possession would shortly cease to be legal tender. Under the sweeping monetary "reform" program announced without warning by Russia’s central bank, citizens would be given two days to exchange up to 35,000 "old" rubles (approximately $35 at current rates) for currency printed after 1 January 1993.

Russians were given the option of placing the balance of their holdings of pre-1993 currency into a six-month "savings" account. Of course, the low rates of interest paid on such accounts would not remotely keep pace with inflation — running at an annual rate of some 750 percent.

Firestorms at Home and Abroad

The net effect of this massive raid on the citizenry’s pocketbooks — and the treasuries of the ex-Soviet republics — has caused widespread panic and intense anger throughout the former Soviet Union. In particular, economic reformers and an already beleaguered populace appropriately feel betrayed.

For their part, the former Soviet republics had reportedly balked at Moscow’s latest, heavy-handed effort to persuade them to integrate their economies more closely with that of Russia. Several states — like Georgia, Armenia, Azerbaijan and Turkmenistan — as well as certain outlying regions within Russia were intent on joining others in adopting currencies untied to the Russian ruble.

Russia’s currency power-play violated a standing commitment to coordinate and give at least 6-months notice of any major monetary policy shifts to those former Soviet states in the so-called "ruble zone." The latter have, accordingly, viewed this move as a thinly disguised act of economic warfare — akin to Russia’s periodic energy embargoes. Ironically, Moscow’s gambit is having the exact opposite of its intended effect in this area: The other republics are accelerating their dash for the exit door on any new forms of economic and financial cooperation.

The currency initiative also threatens to undermine prospects for any meaningful private foreign investment flows to Russia. Foreign investors and businessmen now operating there face debilitating new uncertainties. If anything, these uncertainties will increase with revelations from Finance Minister Boris Fyodorov in today’s Financial Times there may be "criminal aspects" to this caper as "billions of rubles were moved to the other republics without being accounted for."

Russian President Boris Yeltsin, having failed utterly to recognize the monumental implications of this move by his government, may have permanently squandered what remains of the good-will he has enjoyed from the electorate and such support as he has cultivated in the West. Coupled with the latest round of serious difficulties that he is confronting with Russia’s parliament, it is becoming increasingly possible that the days of Yeltsin’s presidency — or at a minimum his government — are numbered.

What Did Yeltsin Know and When Did He Know It?

Among the questions being asked this week in Moscow is who is responsible for — or had "guilty knowledge" of — this political and economic fiasco. The one pedigreed reformer in the senior leadership, Russian Finance Minister Fyodorov, was in Washington at the time and was apparently taken completely by surprise.

Initially, it was thought that President Yeltsin — who was on vacation when the announcement was made — was similarly "out of the loop." In an interview with Izvestia this week, however, the chief engineer of this sordid affair, central bank chairman Viktor Gerashchenko, claimed that "the highest responsible officials of the country were informed about the issue" suggesting that at least "in general terms," Yeltsin was aware of the plan.

Interestingly, even though the central bank reports to the parliament and Gerashchenko is closely allied with Yeltsin’s nemesis — parliamentary chairman Ruslan Khasbulatov — the latter has seized opportunistically upon the currency debacle. Khasbulatov has expressed solidarity with the seething Russian masses and threatened to recall parliament for the purpose of reversing this confiscatory measure and sacking those responsible. And yet, according to the 27 July edition of the New York Times, Gerashchenko maintains that he had — as might be expected — coordinated the currency "reform" initiative with Khasbulatov.

For his part, the former Soviet Energy Minister and communist apparatchik who serves as Yeltsin’s prime minister, Viktor Chernomyrdin, has publicly endorsed the central bank’s action. It was he who announced the action to his ministers during an unusual cabinet meeting held late Friday night.

In all probability though, the invisible man behind the currency crisis may well be someone whose name has not yet surfaced — Arkady Volsky, the de facto head of the nationalist-communist consortium known as Civic Union. Volsky has emerged in recent months as the real power behind efforts to sabotage genuine and irreversible market and political reform in Russia.

Yeltsin’s Failure of Will

A potentially decisive moment came when President Yeltsin returned to Moscow over the week-end. His chief of staff, Sergei Filatov, and the acting head of the Finance Ministry — Fyodorov’s deputy, Andrei Vavilov — vigorously urged the president to rescind the central bank’s order outright. Instead, Yeltsin opted to do no more than tinker with it at the margins by: extending the deadline for ruble exchanges to the end of August; increasing the amount which can be exchanged to the ruble equivalent of $100 dollars; and exempting 10,000 ruble notes ($10) which were first printed in 1992.

It is this presidential action that will be viewed retrospectively as Yeltsin’s most serious misstep. After all, by failing to act decisively, the Russian president directly implicated himself in the execution, if not the genesis, of this disastrous monetary policy.

Political Gridlock

President Yeltsin’s free-fall in popularity at home and in terms of foreign confidence was compounded by the series of actions taken over the last ten days by the communist-dominated Parliament. If allowed to stand, these latest legislative initiatives would drastically alter the course of Russia’s reform movement; they could even threaten continued foreign aid from the West. Among the more troubling were the following:

  • On 14 July, the Parliament — with the vigorous support of the Russian Orthodox Church — voted 166 to 1 to require foreign missionaries to obtain state licenses to preach, broadcast or publish in Russia, a move viewed by many as a significant curtailment of religious freedoms.
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  • On 20 July, the Parliament suspended Yeltsin’s May decree on privatization and stripped the State Property Committee of its control over the privatization program. Parliament also submitted Yeltsin’s decree to the Constitutional Court for a ruling on its constitutionality.
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  • On 21 July, the legislature moved to assure the hard-line faction’s absolute control over its procedural mechanisms by amending its own rules of order. In the future, a mere 50 percent of the deputies will be able to constitute a quorum for voting — rather than the previously required three-quarters majority.
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  • On the same day, parliament stymied President Yeltsin’s agreement with the United States to cancel the sale of controversial cryogenic rocket engines and missile-related technology to India. Chairman Ruslan Khasbulatov called the decision to renege on the Indian contract a "national disgrace" and led the move to block the action by insisting that the Parliament must approve Russian participation in the Missile Technology Control Regime before its constraints on such transfers would become binding.
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  • On 22 July, the parliament passed a bill giving it the right to reconsider and overturn any international treaty at any time.
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  • On 22 July, the legislature also acted to restrict foreign bank activity in Russia. Banks with 50 percent or more foreign ownership will be limited to conducting business with foreign customers only over the next two years. These banks will also be required to reapply for a license with the central bank by the first of the year.
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  • In addition, the parliament on 22 July rejected the government’s budget and instead passed one for 1993 with over 400 amendments which will result in a vastly higher deficit — fully one-quarter of Russia’s GNP. This budget makes a mockery of the government’s commitment to foreign creditors and particularly to the IMF to reduce Russia’s deficit to 10 percent of GNP by the end of 1993.
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    Spending was increased by a whopping $26 billion over Yeltsin’s budget, pushing spending limits to 44.7 trillion rubles with revenues estimated at only 22.3 trillion rubles. Importantly, the new budget effectively doubles military spending.

     

  • The parliament also voted to suspend any talks with Japan over the disputed Kurile Islands.
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  • High-level corruption in Russia has prompted the establishment of competing commissions by both the president and the legislature. Last week, the parliament launched inquiries into allegations of corruption by several key Yeltsin advisors including chief of the Federal Information Center, Mikhail Poltoranin, and Deputy Prime Minister Vladimir Shumeiko.
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  • Yesterday, the parliament declared that Yeltsin’s dismissal of the Security Minister Victor Barannikov — a darling of Russia’s hard-liners — was illegal, noting that any appointments or removal from senior law enforcement positions requires parliamentary approval.

 

The Western Reaction — ‘Deafening Silence’

The growing disarray in Yeltsin’s government has undoubtedly undermined not only the confidence and trust of the Russian people but that of the Western world, as well. Remarkably, however, nary a peep has been heard from any of the G-7 leaders who just this month devoted much of their Tokyo Economic Summit to lavishing praise on and tangibly rewarding Yeltsin’s efforts toward economic reform and privatization — to the tune of $43 billion.

Now, Western governments face the real prospect that the IMF will resist even the sort of immense political pressure that has, in the past few months, induced it to adulterate its traditional lending standards so as to permit loans to flow to Moscow. Under these circumstances, it will also likely prove impossible to justify original levels of government-to-government aid for systemic reform in Russia. Similarly, multi-billion dollar privatization funds are unlikely to be able to effect genuine change under present conditions.

By the same token, those who led the recent fight in Congress to appropriate billions more in Russian foreign aid cannot be encouraged by this ugly turn of events. Central to their arguments for further, largely undisciplined and inadequately monitored taxpayer-underwritten assistance to Moscow were optimistic statements about Yeltsin’s dedication to sustaining progress toward structural reform.

Bad Reviews From the West’s Leading Editorial Pages

If official reactions have, thus far, been inaudible, a flood of critical commentary has emanated from leading Western media — even those inclined reflexively to support the powers that be in Moscow. The following examples are illustrative (emphasis added throughout):

"The signs of stability in Russia’s political and economic life that had appeared earlier this year have disappeared practically overnight." Wall Street Journal, 26 July 1993.

 

"The Russian central bank’s decision to withdraw older ruble banknotes from circulation is either inept, malicious or corrupt….Western taxpayers should not turn over their money to a government that breaks commitments to the West and steals from its citizens." New York Times, 27 July 1993.

 

"[Yeltsin] must publicly back the reformers in his cabinet, repudiate the misjudgments of recent days, sack the central bank officials responsible and allow the reformers to take control of monetary policy. Until he does so, the West should resist Moscow’s urgent plea for a further tranche of Western aid." Financial Times, 27 July 1993.

 

The Bottom Line

The Center for Security Policy concurs wholeheartedly in these editorial assessments and, in particular, endorses the Financial Times’ prescription for what needs to be done now by both Yeltsin and the West. It would be irresponsible folly to throw good U.S. taxpayer money — or grain or sensitive high technology — after bad when, in all likelihood, doing so will simply assure that corrupt or reactionary officials use the proceeds to feather their own nests and otherwise preserve an undemocratic, unaccountable government. Predictably, if and when Western aid flows are down-sized (as they should be), look for the hardliners to blame the West for yet again "defaulting on its aid commitments" and to use this claim as a justification for their own pernicious and economically disastrous actions.

The latest drama over the Russian currency also raises serious questions about the wisdom of supporting the highly authoritarian constitution Boris Yeltsin recently pushed through a constitutional convention. While Yeltsin is clearly right in seeking to eliminate the existing constitution — which was put into place during the Soviet era and which has been used since the collapse of the USSR to legitimate the last vestiges of communist power in Moscow — his behavior in this episode demonstrates the danger of a new constitutional arrangement without effective checks on executive power.

Some have been inclined heretofore to minimize the risks of such an arrangement — on the grounds that Yeltsin’s commitment to reform was unassailable. Even if that were true, the possibility that he could be succeeded by a more traditional Russian despot, one disposed to take full advantage of the new constitution as a vehicle for authoritarianism, argues for seeking important changes in the current text. In the wake, moreover, of the currency fiasco — with its alarming indications that Yeltsin is less committed to (or comprehending of) reform, more authoritarian and/or more likely to be replaced than was previously believed — Russia’s need for a constitution with real checks and balances is indisputable and indispensable.

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