The neoliberal shock therapy that hit Russia in the 1990's nearly destroyed the country. This article by Swedish journalist Dan Josefsson tells the dark tale of what took place.
Shock Therapy: The Art of Ruining a Country
(With some professional help from Sweden)
An artikel by Dan Josefsson
Research by Stefan Lindgren
Translated from the Swedish original
Moscow in 1998, a warm day in late summer. Outside the Russian Parliament, the Duma, a small group of demonstrators walk forth and back, carrying placards. A policeman is standing at their side, meticulously noting the placard texts in his notebook.
"Yeltsin and Tjernomyrdin: Russia has had enough! Resign!"
"Are the Yankees the rulers of this country?"
"Stop experimenting with the Russian People!"
This last placard is carried by a sturdy lady with a headscarf.
The image of the woman pleading not to be treated as a guinea pig keeps haunting me during my week in Russia. What this woman calls "experiment" is sometimes called "reform work" and sometimes "the big bang", but more often "shock therapy". What we have here is the biggest privatization project in modern history. It was meant to transform the whole Russian society into a US-style market economy in just two or three years. Thus the term "shock therapy".
The experiment began in 1991. Today, seven years later, statistics show that it turned into far more of a shock than of therapy. The fact is that the therapy has nearly killed the patient.
Let's take a look at some figures.
Between 1991 and 1997, Russian GNP – i.e. the value of all goods and services that Russia produces – went down 83%. Agrarian production decreased 63%. Investment decreased 92%. 70,000 factories were closed down. This led to Russia producing 88% fewer tractors, 76% fewer washing machines, 77% less cotton fabric, 78% fewer TV-sets – the list is endless.
In a country without unemployment, 13 million people lost their jobs. Those who still have work have had their wages cut in half. The average life span for men has been shortened by six years. Six years!
Such a change normally occurs only when a country is hit by a massive war, an epidemic or famine. None of this has happened in Russia. Still, the average life span decreased, in just a few years, to the same level as in India, Egypt and Bolivia.
The experiment that the lady with the placard wants put an end to is literally killing her countrymen.
No wonder she is demonstrating.
Did the Russian people wish to be subjected to this shock therapy? According to the prevalent picture of what has happened in Russia during the nineties, the answer strangely enough is “yes”.
This picture looks something like this: When Michail Gorbachev took power in 1985, he realized that the Russian economy was on the brink of falling apart. He then started a reform program that came to be called Perestroika. Through reforms, he wanted to transform the undemocratic Soviet Union into a socialist democracy. The press monopoly of the Communist Party was to be abolished, and freedom of speech declared and implemented. The Soviet Union was to become a democratic country.
Simultaneously, the economy was to be reformed, from centralized communism to reformed socialism. The opposition against Gorbachev was led by Boris Yeltsin. Contrary to Gorbachev, he didn't want any kind of democratized socialism at all. He wanted to change over to capitalism.
According to the prevalent picture, the old Soviet elite – the upper echelons of the Communist Party and the many top bureaucrats – were opposed to Yeltsin's plans for capitalism. They were scared of losing all of their privileges.
Jeltsin's success was supposed to be founded on support from the Russian people, who were fed up with the Soviet Union and therefore demanded far more thorough reforms than the democratic socialism that Gorbachev aspired to and worked for.
Thus: the people demanded capitalism. And the Soviet elite were forced to yield, reluctantly.
But was this what really happened?
The Russian sociologist Tatiana Zaslavskaya has shown that this popular version of history is false.
According to her, the very influential elite may have been opposed to radical changes for a couple of years after 1985. But once having realized that privatization would benefit mainly those who already were at the top of society, they rapidly changed their tune. According to Zaslavskaya, Yeltsin could never have come to power without the support of the leading old party hacks, a theory supported by the fact that it was the old Soviet elite who in fact took over the nation's assets after privatization.
THE WORLD'S ELITE CLUB
One late evening in Moscow I meet the sociologist Boris Kagarlitsky, researcher at the Institute of Comparative Studies at the Russian Academy of Sciences, and a heavy critic of the current regime. His criticism of shock therapy is particularly validated by the fact that he was arrested by the KGB in 1982, for collaborating with a socialist group that criticized the Soviet regime at the time.
In one of the little cafés in the Rossija Hotel, Boris Kagarlitsky describes how the Russian elite is well underway to destroying his country.
“You must realize that the key aim of the Russian elite was to become equal members of the world's elite”, he says. “Whatever it took. If they had to tear their own country to shreds in order to be accepted into that club – then they'd tear the country to shreds.”
Boris describes how immensely privileged the top echelon of Soviet society was in comparison to the rest of the population. But compared to top politicians and industrial leaders in the West, they were still poor. Not even members of the politburo were dressed in anything but Russian-made clothes and shoes, and when they went on vacation, they had to make do with the party villas by the Black Sea. They were infinitely better than the simple dachas of the ordinary Soviet citizen, but hardly the exclusive spas in Monaco or the Caribbean Islands frequented by the world's elite.
That door was closed to the top dogs of the biggest nation on earth.
But when Gorbachev started to reform Soviet society, the younger members of the elite got a whiff of more heavenly climes.
“An interesting phenomenon”, says Boris, “is that those who became the foremost representatives and functionaries of neoliberalism in Russia, often are children of the top bureaucrats of the Soviet era. They are second generation top dogs. Through their fathers, they have good contacts in the former party hierarchy, they are often educated in the West, and they very much wish to be accepted as part of the world's elite.”
Yeltsin was elected president in 1991, and shortly thereafter Russia became an independent nation itself. The Russian economists around him at that time were extremely market oriented. A survey indicated that they even believed more in the ability of the market to single-handedly solve the economical problems of a nation than their colleagues did in the West.
Yeltsin appointed the economist Jegor Gajdar, 36 years old at the time, as his Minister of Finance. Jegors paternal grandfather had been a war hero in the Red Army, and his father a foreign correspondent for Pravda. As a child, Jegor Gajdar therefore lived in Cuba and Yugoslavia with his father. During the Gorbachev period, Jegor Gajdar worked as economics editor at the journal Kommunist, and as a columnist for Pravda.
In short, Jegor Gajdar was a typical example of how the second or even third generation of the Soviet elite changed over from communism to extremely market-oriented neoliberalism in the course of just a few years.
Professor Jeffrey Sachs of Harvard was called in as economic advisor to Yeltsin's cabinet. In the mid 80's, Jeffrey Sachs had constructed an economic policy for the government of Bolivia, and in 1989, he advocated the same policy when engaged as a consultant by the Polish government.
The technique was nicknamed “shock therapy”. After Poland had been subjected to shock therapy, economists thought that this was the best method of transforming a socialist country into a market economy.
One member of Jeffrey Sachs's team was the Swedish economist Anders Åslund. Until 1984, Åslund had been working at the Swedish embassy in Moscow, during which time he became the personal friend of many of those who later on would implement shock therapy in Russia.
Gajdar as well as Yeltsin were for shock therapy, and the foreign advisors were given the task of planning a cure-all for Russia.
It would turn into one of the most ruthless experiments in neoliberalist politics ever performed.
“Shock therapy” was based on the view that society in its “natural” state functions as a market economy. Only by regulating and limiting the free market in an “unnatural” way, could a non-market-oriented system be created – which was what had been done in the Soviet Union of old.
The only thing needed to reinstate the natural order, strictly speaking, was to take the restricting regulations away. The natural balance of society thus would be restored by itself. The driving force would be the concept of self-interest – the ambition of each single individual to make as much money as possible. Or, as expressed by Anders Åslund in Sweden's biggest morning paper:
“The miraculous incentives or temptations of capitalism conquer more or less anything.” (Dagens Nyheter 30-05-1992)
The recipe that would let loose “the miraculous incentives of capitalism” was simple: State-owned companies would be privatized, regulated prices set free, currency trade deregulated.
The advocates of shock therapy did not deny that this process would be painful for the Russian people. During the Soviet era, the State had subsidized all merchandise, making almost everything very cheap. You paid nearly no rent at all, and price increases were an unknown phenomenon to the Russians. The shock therapists warned that prices would go up when price regulations were abolished, but only during a transition period. Soon, the urge to earn a profit would make private companies produce more of the products most in demand, and consequently prices would go down and stabilize. After that, Russia would become a better place to live in. Everything according to sound, market-oriented economic principles.
The start of the speedy transformation of Russia was due to be winter 1992. In the autumn, Yeltsin even publicly declared the exact date for implementing free pricing. This proved to be a huge blunder, as Russian businessmen immediately stopped selling any products while awaiting deregulation, which would provide greater profits. In the autumn of 1991, the supply of products hadn't been scarcer than usual in the shops of Moscow, but after Yeltsin's disclosure, shelves suddenly stood bare. This dismal start to shock therapy would prove symbolic.
Prices were deregulated on January 2nd 1992. Price increases were horrendous.
A few years before, the first McDonald's had opened in Moscow and became very popular. Just a few weeks after deregulation, the restaurant stood empty, the price of a hamburger having risen from 38 roubles to a 100.
The average salary was still 500-800 roubles a month.
In fact, the inhabitants of Moscow almost totally stopped eating meat, as the price per kilo had become absurdly high. And this was just the beginning.
In 1995, four years after deregulation, the products in the shops had become 3,668 times more expensive than in 1990. A journey on the underground, which cost 5 kopeks before, now suddenly cost 400 roubles, 8,000 times more. A kilo of meat that had cost 2 roubles now cost over 3,000. Etcetera.
In order to compensate for inflation, worker's wages were increased, but not enough. By 1995, real wages in Russia had been halved.
The Russian people, who hadn't experienced any price increases for 30 years, now no longer could afford to buy food. None of this seemed to bother those Swedish and American economists who had planned the whole process. In January 1993, when runaway inflation was strangling the Russian population, Anders Åslund said the following in an article:
“I breathe more freely when I come to Eastern Europe – Prague, Warsaw or Budapest, but Moscow as well – escaping the small-mindedness of Western Europe. During each visit I am gladdened by the great future, and the new triumphs of capitalism.” (Dagens Nyheter 22-01-1993)
A month or so later he commented on starvation among the poor as follows:
“The problem is the pensioners. But that's a social problem, not a political one – because pensioners are not revolutionaries.” (Expressen 17-02-1993)
Simultaneously, step two of the shock therapy got under way – the speedy privatization of state-owned companies. Almost no one really had time to understand what actually happened. Journalist Julia Kalinina, who works at one of the biggest dailies in Moscow, tells me about the way the publishing company was privatized. All ownership was concentrated into one single share certificate, which the editor in chief laid his hands upon. No protests from the journalists were heard.
“None of us quite understood what a share certificate was”, Julia explains.
The story is interesting. If the journalists at one of the biggest dailies in Moscow didn't understand what privatization amounted to – then how could other citizens understand it?
The gap between the knowledge amongst the elite about what privatization amounted to, and the ignorance of the common man, became obvious when the State started issuing so-called vouchers, or privatization coupons.
The privatization coupons was an idea that was supposed to solve one of the shock therapists' greatest problems: how to go about privatizing thousands of State-owned companies in one fell swoop.
In the Western world we're used to a small class of owners controlling the main part of our countries' resources. In Sweden, for instance, the Wallenberg family controls half of the Swedish trade and industry. This fact is either accepted or totally ignored by the Swedes. But what would happen if somebody suggested that we should privatize the national railways and the national phone company, by simply turning them over to the Wallenberg family? Something like that could hardly happen without debate, the injustice being far too obvious.
But what the shock therapists planned to do in Russia was precisely to create a few new Wallenberg families by selling off national resources dirt cheap. An astonished reporter from Dagens Nyheter asked Anders Åslund whether Russia really intended to more or less give national companies away. “Yes”, Åslund replied, “in order to rapidly create a class of owners”. (Dagens Nyheter 16-02-1992)
An owner class was to be created. But just as the Swedes would not be inclined to make a gift of their national resources to Mr Wallenberg and his sons, neither would the Russians want to see their country handed over for a token sum to some arbitrarily chosen robber baron.
In his Swedish book “Därför behöver Östeuropa chockterapi" (SNS 1993) (i.e "Why Eastern Europe needs Shock Therapy"), Anders Åslund presented a solution to this problem. Privatization should be made “politically acceptable” by distributing small blocks of shares to a lot of Russians. Thus, nobody would perceive the privatization process as some Russian version of the Wallenbergs grabbing the people's property.
And so this was done. All Russians were given a voucher, worth about a month's wages in roubles. This coupon was meant to be used to acquire company shares.
Boris Kagarlitsky tells me that he and his wife refused to accept their voucher.
“We thought that it felt like partaking in the robbery”, he says. “But 80% of the population accepted”.
This, however, did not lead to any distribution of ownership. On the contrary. Boris recounts that each voucher was worth about a month's wages when privatization started. But a few months later, when people were about to exchange their vouchers, runaway inflation had consumed nearly all their value. A voucher was worth no more than a bottle of vodka.
It so happened that at this very time, a bunch of businessmen suddenly turned up, willing to exchange people's apparently worthless vouchers for – yes, vodka bottles. What people didn't know was that a voucher lost nothing of its value if used to acquire company shares. The value of the companies had not been adjusted by inflation.
“Most people swapped their vouchers for vodka”, says Boris Kagarlitsky.
Thus, people with contacts could collect a couple of thousand vouchers, enough to buy a whole company for 2,000 bottles of vodka. The buyers were the same elite who had been at the top during the Soviet era, and who had helped Yeltsin implement the shock therapy.
COMPANIES FOR FREE
Someone with real fancy contacts, however, didn't even have to pay with vodka. This is how a take-over for free could take place:
The CEO of a State-owned company started a non-operational private company. The State-owned Company then lent the new little private company 50,000 dollars. In practice, the CEO thus granted himself a government loan.
Before the planned privatization, the value of the State-owned company was appraised in roubles. The enormous inflation, however, continually diminished its value in dollars. When the State-owned company was worth only 50,000 dollars, the CEO took action: the small private company bought the State-owned company in its entirety, with the money he had borrowed from it.
Finally, the two companies were merged, and thereby, the 50,000 dollar debt never had to be paid off. The CEO had become the legal owner of a former State-owned company, without having to pay a single kopek for it.
In this way, the Russian elite took over everything from car factories to oil wells. Millionaires were made overnight.
Thus a new class of owners had been created, although in a horribly unjust way. According to the plans of the shock therapists, the new owners now would automatically run their industries with an efficacy new to Russia. State-owned companies, which had produced things nobody wanted before, would go bankrupt or reorganize production. And the driving force behind it all was supposed to be what Åslund almost poetically had named “the miraculous incentive of capitalism”.
But things didn't quite turn out the way Åslund had expected. The new owners didn't produce what people wanted. Instead they started plundering their companies.
According to Boris Kagarlitsky, they had no real choice.
“Put your self in their position,” he says. “There you are, the owner of a company, wondering what to do with it. You have neither the capital nor the money to invest in production. You lack funds to replace old equipment. You have no money to invest in research and development. If you're unlucky just once, not getting paid for a delivery, you have no reserve funds to pay your workers from.”
“This means that the only thing these new company owners could do was to exploit the company as a resource in its own right. If for instance an aluminium mine had been privatized, the owner extracted as much aluminium as possible without investing any money. He run the machines until they fell apart, and then he threw it all away as scrap. By plundering companies, big money fell into the hands of a small, extremely wealthy upper class. To them it became something of a hobby to spend loads of money.”
One evening I visited the Prague, a luxurious restaurant in the middle of Moscow, where probably sizeable chunks of the plundered companies have been converted into food and drink. One dinner here costs as much as a Russian low-income earner makes in six months. On the menu, the price is marked in dollars. The most interesting thing however was the entrance, which is so well guarded it could be an Israeli airport. In order to enter the premises, you yourself as well as any hand baggage you may have must pass through metal detectors.
The process is supervised by a bunch of hefty security guards with mikes in their ears. These control measures are necessary, as assassination attempts on the nouveaux riches are pretty commonplace. Often it's a matter of internal disputes within the new upper class.
As an ever-increasing number of grotesquely rich Russians turned up in the shopping capitals of Europe, whilst the Russian industry rusted away, it became more and more obvious that the shock therapy hadn't worked.
“Suddenly”, Boris Kagarlitsky says, “you realized that the new Russian elite were extremely rich in terms of personal wealth, but in terms of working capital, they were all poor. If you have, say, 5 million dollars in your pocket, good for you, but for an industry that's nothing. What you can do is speculate in real estate. There, 5 million dollars is OK. Or sometimes, the money went into buying such luxury products as Mercedes Benzes and the like. Also, a lot of the money went directly into accounts in foreign banks.”
According to Kagarlitsky, it was a fatal mistake to believe that Western economists were experts in creating a market economy, just because they were experts in managing one. Neither Jeffrey Sachs nor Anders Åslund has been involved in the creation of Western capitalism.
“Åslund and the others never read Max Weber”, Boris Kagarlitsky says. “Max Weber showed in an extremely lucid and distinct way that a class of owners is created by its history, its culture, and its internal development, but not through the owning of property. Private property existed long before capitalism, without developing into capitalism. Thus, the existence of private ownership means precious little. It means that there are private owners, but not necessarily a class of entrepreneurs”.
The results of the plunder can be seen in statistics. Between 1991 and 1997, GNP decreased 83%. The shock therapy simply shut the colossal Russian industry down. The Western media, which had been inundated with visions of the fantastic future awaiting Russia, were all very careful when reporting on the horrible consequences of shock therapy. One of few exceptions in Swedish media was the TV-reporter and foreign correspondent Peter Löfgren, who described the winding food queues along Moscow streets. Anders Åslund was so irritated that this reverse side of shock therapy was brought before the Swedish people that he wrote the following in an article
“The few longer queues still to be found in Russia are a result of the fact that the prices of a few products are still being regulated (even if this is hard to believe, looking at Peter Löfgren's militant socialist reports on TV2)”. (Dagens Nyheter 920530)
A journalist in Moscow who points his camera at poor people thus suddenly becomes a “militant socialist”. This was neither the first nor the last time that Anders Åslund dismissed his critics as communists or militant socialists.
However, most journalists in no way ran the risk of attracting the wrath of Anders Åslund in the Swedish press. The typical attitude to the suffering of the Russians was that shock therapy was the correct medicine, but that its effect hadn't been felt “yet”. A typical example:
“Much seems to indicate that Gajdar is doing a great job; but the man in the street doesn't yet perceive the positive effects of the recently implemented "shock therapy.” (News article in Dagens Nyheter 920419)
The banks also helped to spread the picture of a rapidly growing market-oriented Russia. As late as December 1997, the Swedish company Banco Fonder advertised its new Russia Fund. In the prospect, interested speculators could read about the fantastic developments in Russia:
“In an amazingly short time, Russia has changed and become a democracy on its way to a Western-style market economy.”
“With a population of 150 million people, who slowly but surely are experiencing improved purchasing power, there are good reasons to expect continuing growth and development.”
It's hard to understand how these words could adequately describe a country where capital investment has decreased 80%, and where the earnings of 75% of the population have tumbled to subsistence level or less.
BARTERING IS BACK
As regards the state finances of Russia, the shock therapy became a catastrophe of a magnitude never seen before.
A giant nation, whose industry just a few years ago was functioning reasonably well, has been forced to return to bartering. Runaway inflation has meant that there simply isn't enough money in circulation. Even wages are paid in products. At the end of his working day, a worker thus may be forced to stand by the road trying to hawk the products that he has produced during the day. He gets no other wages.
There's only one single institution that has money in Russia today, namely the private banks, often owned by the small elite that has become millionaires as a result of shock therapy. The Russian government has been forced to borrow money from these banks, in order to pay its own bills. The banks obliged by demanding extortionate interest rates.
The chief of the Russian Revision Chamber is Venjamin Sokolov. If you want to see him, you have to take a clattering elevator ten floors up in one of the enormous office buildings in Moscow. Solokov apologizes for his nearly empty office. The Revision Chamber is changing premises, and he is the last one to move to the new offices.
The 50-year-old man in a suit sitting on the other side of the desk looks somewhat modest and unobtrusive. But when he starts to describe what the Western economic advisers and the old Soviet elite have done to Russia, you get a hint of why Venjamin Sokolov is a hated man these days among the propagandists for shock therapy.
“Since the economy functions by barter, without any money, you can't tax people”, Sokolov says. “The effect is that the budget keeps shrinking. Since the banks have money, and the government budget has not, we issue bonds running at between 3 and 6 months, with an interest rate of 100%”.
This figure is unbelievable. The Russian government has to pay 100% interest on a 3 months loan.
This means that the Russian government borrows about three times as expensively as the loans that a company like Finax infamously tries to trick poor private individuals into in Sweden.
And the Russian government doesn't borrow money for a new washing machine. It borrows in order to pay off the bills of an entire nation, to pay interest on loans abroad, and to pay government employees their wages.
It borrows in order to enable the Russian State to continue being a State.
Under Sokolov's leadership, the Revision Chamber has disclosed that government officials have invented a new way to make money themselves on the enormous borrowing needs of the government. They simply extract commissions from the banks who have the privilege of lending the government money.
“Suppose that a defence industry delivers its product to the government and wants its money”, Sokolov recounts. “The government official says that the government does not have the money to pay, but that the industry can go to a bank and get credit that the government guarantees. The bank extracts up to 200% interest. After 6 months, the government has borrowed enough money to pay back its debt to the defense industry. But then at least half the sum goes to the bank, which in turn pays off the government official who arranged the loan.”
According to Sokolov, this kind of corruption reaches high up in the political hierarchy.
“A former Minister of Finance has been arrested for transactions of this kind”, he says, “and with the facts we have at our disposal, all the leading figures of the Ministry of Finance could be arrested.”
INTEREST ATE IT ALL
Of course, no nation can keep paying interest rates of 100 to 200 per cent. Finally, the whole borrowing spree falls apart.
“The more bonds you issue, the greater your debt“, Sokolov says. “And finally you get to a point where you no longer get any of the borrowed money from the banks, since you are paying them all of it net.” This is the situation Russia has got itself into.
All the money the State received went directly into paying the exorbitant interest rates of the private banks.
In order to save the rouble from total collapse, the IMF stepped in with emergency loans.
In August 1993, Russia received a loan of 1.1 billion dollars.
In July 1993, 2.9 billion.
In April 1995, 6.8 billion.
In July 1998, the IMF granted another 14.1 billion dollars, not yet disbursed.
In all, the IMF has provided 18 billion dollars in loans to the Russian government. But the loans are not free. The IMF craves something in return. Russia must promise to follow through slavishly exactly the same shock therapy that has created its desperate situation. Privatizations and deregulationary measures must continue, or no money will be delivered.
You might think that the IMF leadership is mad, granting billions upon billions in loans to an economy that obviously doesn't function. This of course isn't the case. The IMF has very good reasons for doing its utmost to prevent Russia either going bankrupt or throwing shock therapy onto the garbage heap. There is an abundance of foreign banks and investment companies who also have financial interests in Russia. All in all, more than 200 billion dollars from abroad are at stake in Russia, in the form of loans and investments. If Russia goes formally bankrupt or abandons the “reform policy”, these 200 billion may be lost.
Then several Austrian banks with large interests in Russia would go bankrupt. The same would happen to big banks in Switzerland, Germany and the Netherlands. In the US, Chase Manhattan, Citicorp and a string of other banks would go bust. And so on.
SAVE WESTERN BANKS
The money lent by the IMF is taxpayers' money. Sweden and almost 200 other countries are contributing to the fund. What the IMF in practice is doing is using taxpayers' money to save a number of very rich Western companies from bankruptcy. That this is really true is being stated openly more and more often.
On September 10 1998, an important hearing was held by an American congressional committee. The subject for discussion was the crisis in Russia and the role of the IMF as saviour.
One of the invited speakers was the financier Jim Rogers, founder of the investment company Roger Holdings. His message was crystal clear:
“The activities of the organization is gussied up in sanctimonious prose about aiding the poor and raising the living standards of the third world. Don't be fooled. These bailouts are really about protecting interests of Chase Manhattan, J.P. Morgan, and Fidelity Investments. Of course, if Chase went directly to Congress and asked for taxpayer help to cover a bad loan it had made to Korea, it's not hard to imagine the response Chase would get. But under the cover of the IMF, it can do this regularly without so much as a peep of criticism.”
However, the gigantic loans haven't helped Russia one iota. While 200 billion dollars have been poured into the country, 350 billion dollars have been illegally exported from the country, according to an estimate by the Minister of the Interior. The final destination has been bank accounts of the elite in Switzerland or real estate speculations in the West. Today, Russians are the largest group of property owners in London. Simultaneously, a terrible winter awaits the nearly 150 million Russians who have made no profits from shock therapy.
After 1994, Anders Åslund quit his job as adviser to Yeltsin and moved to the US. Since then, he has been the most stubborn defender of every single part of the grandiose shock therapy project, no matter what the current situation in Russia might have been at the time. Already in 1995, he wrote a book with the astonishing title “How Russia Became a Market Economy” (Brookings, 1995). He was so sure of his success that he claimed victory in advance.
As the years went by, fewer and fewer people remained who unconditionally applauded the shock therapy advocated by Åslund.
Jeffrey Sachs, the economist who led the team that included Åslund, has begun to change tack. These days, he suggests increased regulations in order to reduce worldwide speculation. In a debating article, Anders Åslund dismissed this point of view uttered by Jeffrey Sachs – Harvard professor and the creator of shock therapy – as “leftist criticism”.
In the same article, Joseph Stiglitz, chief economist of the World Bank, was also deported to the leftist camp, as well as MIT professor Alice Amsden and financier George Soros.
In September 1998, Anders Åslund finally admitted for the first time in Swedish media that Russia isn't heading for a glorious future. In an interview he said that Russia is on it's way toward “the biggest single national bankruptcy the world has seen”.
However, he refuses to acknowledge that any responsibility for the current situation lies with him and the other shock therapists who steered Russia towards the abyss. When the conservative Swedish morning paper Svenska Dagbladet's reporter asked him why everything had gone to pot in Russia, he answered instead as follows:
“Corruption, corruption and corruption (...) in the vast State bureaucracy under (former prime minister) Chernomyrdin, among local governors, in parliament and among businessmen. All these four groups lack the instinct of self-preservation. They only look after their own interests. No one in Russia is strong enough to look after the interests of society as a whole.” (Svenska Dagbladet 1998-09-27)
Let's hear the last part once more:
“They only look after their own interests. No one in Russia is strong enough to look after the interests of society as a whole.”
That answer is a revelatory one. But also very sad.
Before us, we see one of the most convinced partisans of neoliberalism. His macro-economic theories have never been tested on real people before in the history of the world. Until now. In Russia, Anders Åslund got his chance to bring about a society that according to the neoliberal course literature would be the perfect one. A society where self-interest "conquers just about anything". A society where starving pensioners “are not a political problem”.
A society where a new “class of owners” was encouraged to help themselves to what before was owned collectively.
He was allowed to bring it all about, and then, when it all became a disaster, he sat there whining that nobody “looks after the interests of society”.
That's how shallow the neoliberal analysis was.
Outside the White House in Moscow, 300 miners have pitched camp in home-made plastic tents. They promise to stay until the politicians abandon the policies that are killing their compatriots. They have no money. They still stay put.
Every day, a small group of very poor pensioners come by to give the protesting miners food.
HOW TO MAKE IT IN RUSSIA 1
Lesson One: How to barter 2,000 bottles of vodka and get an industrial company in return.
- Make sure you're born into a family belonging to the top elite of the old Soviet State.
- When the shock therapists start distributing "privatization vouchers" to the people, get your own coupon and bide your time.
- When after some time, hysterical inflation (also created by the shock therapy) has made the coupons nominally worth no more than a bottle of vodka, then you go out and buy 2,000 bottles of vodka. Try to get a quantity discount.
- Let everyone know that you're willing to exchange coupons for vodka bottles.
- Through your good contacts among the elite, you know that the price of the companies that can be bought for the vouchers hasn't changed with inflation. Since hardly anybody else knows this, most people gladly relinquish their coupons for a liquor bottle. Collect 2,000 coupons through bartering.
- Helped by your contacts among the elite, find a suitable company and buy it for your coupons.
That's it! You now own a company. Of course you have no capital to make it run, but you can always strip it of all its resources and send the money to your Swiss bank account.
HOW TO MAKE IT IN RUSSIA 2
Lesson Two: How to become the owner of a company without paying a single kopek.
- Make sure you're born into a family belonging to the old Soviet elite.
- Arrange to be named CEO of a State-owned company.
- Start a small private company discreetly on the side. If you have guilt feelings, you can make your wife or brother the nominal head of the company, but this isn't necessary.
- Get the State-owned company to make a loan of 50,000 dollars to the little private company. It's easily done, you being the CEO of both.
- Shock therapy is in full swing, and the State-owned company is to be sold to a private buyer. Check its value in roubles.
- With the help of your contacts, see to it that the State-owned company isn't revalued, despite the horrendous inflation.
- Wait until the value of the rouble has deteriorated to the point where the State-owned company would cost exactly 50,000 dollars. Then make your move, letting the small private company buy the State-owned one for the money you borrowed.
- Merge the two companies. Now you won't have to pay back the 50,000 dollars that the small company owes the big one.
That's it! You're now the owner of a former State-owned company, which has cost you nothing.
SHOCK THERAPY FACTS
- During the Great Depression in the US 1929-1933, production dropped by 30%. In Russia, with shock therapy underway, it dropped by 83%.
- During the first 3 months of 1992, Russian government expenditure was reduced by 40%.
- Even in deregulated USA, the public sector accounts for 1/4 of the economy. In Russia today, the corresponding figure is 1/8.
- The law on privatization that was passed in the Russian Duma in 1992 prescribed that already the very same year, half of the State-owned Russian companies should be privatized, and 20% more before 1995.
- The proceeds of the whole gigantic privatization plan during the years 1992-96 amounted to only 0.15% of State revenues. The whole of Russia was auctioned off for a few billion dollars.
- 324 factories were sold for less than 4 million dollars apiece, among these industrial giants like Uralmasj and the Chelyabinsk Metallurgy Combine. While international telephone companies bought networks in Hungary for 2,083 dollars per subscriber, they got the Russian network for 117 dollars per subscriber. Tractor factories were sold for the price of a bakery or a sausage factory in Switzerland, according to the privatization report of the Duma.
- An energy company with the capacity of UES would have cost 49 billion dollars in the US. In Russia, it was sold for 200 million.
- The oil companies cost 4 cents per barrel produced yearly in annual capacity. In the US, the corresponding figure is over 7 dollars.
- Money is so scarce in Russia that bartering is back on a grand scale. Gas giant Gazprom, for instance, gets only 10-17% of its income in money, the rest in the form of products. A 1998 investigation indicates that 73% of all transactions between big companies are made by exchanging debts or products.
- 70,000 factories have been shut down during the Russian "reform period".
- Industrial production has decreased 81%.
BEFORE AND AFTER
- Already in Soviet times, there were vast differences between classes, definitely greater than in Sweden. And yet, the new Russian elite have made those gaps widen dramatically.
In 1995, the difference between the richest and poorest 10% was already as large as in the US.
Eventually the Latin American level was reached, where the richest 10% of the population make 16 times as much money as the poorest 10%.
- At the end of the 1980's, the seven richest men in Russia today owned at most a summer cottage and an old Lada. Today, five of them are on the Forbes list of the richest men in the world.
- Real wages have diminished by 78%, pensions by 67%.
- 13 million Russians are unemployed.
- 800,000 Russians with a higher education have left the country.
- The Russian population has been shrinking for some years by about half a million a year. The current figure is 147 million, 4 million less than in 1990.
- The shorter life-span in Russia is a result of, among other things, the return of cholera, diphtheria, syphilis and tuberculosis.
- In Stalin's Russia, political adversaries risked execution. In today's Russia, the death penalty is no longer needed. 20% of prisoners in Russian jails have contracted tuberculosis, largely of an incurable variety. In all, 2 million Russians are infected with tuberculosis a figure increasing by 80,000-150,000 people a year.
- Causes of death that are increasing the most in Russia are: heart and vascular disorders (particularly heart attacks and strokes), murder, suicide and alcoholic poisoning.
- Russian murder statistics definitely have surpassed those in the US. Russia is approaching the extreme level of violence prevalent in countries like South Africa and Colombia.
ABOUT THE AUTHOR
Dan Josefsson is a freelance journalist based in Stockholm, Sweden. He produces documentaries for the Swedish Broadcast Corporation, SVT and writes articles for a number of newspapers and magazines. Dan Josefsson has received several awards for his reporting.
This article was originally published in the english edition of ETC’s special issue on Russia (ETC english edition No 1, 1999)
In 2007 the article was cited in Naomi Klein's book "The Chock Doctrine".
More articles by Dan Josefsson can be found at: http://josefsson.net.