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#18 - JRL 7250
National Post (Canada)
July 11, 2003
Russia's economy: all shock and no therapy
By Thomas S. Axworthy

The terrible suicide bombing by two young women at a Moscow rock concert on the weekend reaffirms Peter the Great's remark that "Russia is a place where things that can't happen happen." With 15 killed and 60 injured, the latest outrage by suspected Chechen terrorists calls into question President Vladimir Putin's plan to elect a new president of Chechnya next fall, and is another setback in Russia's quest to become a normal European nation. I have just returned from an extended visit to Russia, where the decade-long transformation from the communist, authoritarian empire of the Soviet Union into a shrunken,

capitalist, fragile Russian democracy fighting a civil war is one of the greatest events of our time. And the process is far from over.

First, the good news: Russia has made remarkable political progress, and the next presidential election in 2004 may finally signal that the democratic corner has been irrevocably turned. In 1996, former president Boris Yeltsin came within a hair's breadth of cancelling the election because his prospects looked dim, but President Putin's popularity has held up well and by 2004, Russia will have had four democratic elections in a row.

The switch from the shambolic Yeltsin to the disciplined Putin is also a

change for the better. Yeltsin showed his bravery by opposing the August, 1991, communist coup attempt, but as time passed he became sick and erratic. As everyone knows, Yeltsin loves to party, and one of his favourite tricks in the midst of singing traditional Russian drinking songs was to demand: "Bring spoons." Showing his virtuosity, Yeltsin would play knick-knack-paddy-whack with his spoons on the heads of his aides, and even once on the skull of the president of one of the former Soviet states. In an expos, his former bodyguard wrote: "He could torture one to death with this musical instrument." Putin, on the other hand, does not drink and has an exceptional head for detail. I watched on Russian television the highlights of a two-hour press conference where the President answered questions on everything from Russia's policy toward Iran to the price of milk in outlying provinces.

But if Russia's democratic advance is real, its economic decline has been calamitous. In Russia, it has been all shock and no therapy. President Yeltsin accepted the advice of the International Monetary Fund and the Clinton administration on immediately raising prices, liberating capital markets and privatizing state assets. The result has been economic and social calamity. There is no question that most Russians lived better materially under communism than

today's capitalism. Russian expert Stephen F. Cohen writes that Clinton's policy toward Russia was "the worst American foreign policy disaster since Vietnam, and its consequences were long-term and perilous."

The secret to both political democracy and economic progress is to create a large middle class. The IMF-inspired shock therapy for Russia has done the reverse; it has turned the middle class into paupers. Freeing prices in 1992 allowed inflation to soar, destroying savings. Then in 1998, the 45% devolution of the ruble destroyed what middle class savings remained after the shocks of 1992. Meanwhile, pushed to privatize quickly, Yeltsin sold off state assets for a song, making a small group of oligarchs into billionaires.

The Russian Institute of the World Economy and International Relations has documented the results of a decade's worth of shock therapy: In 2002, Russia's GNP was only 70% of its 1990 level -- similar to the Great Depression of the 1930s in Canada, where we, too, endured a 25% reduction in output. The Great Depression of Russia has meant the average salary in 2001 stood at 60% of the 1990 figure, while the average pension was less than half the 1990 size. Over the years of the great Russian privatization sell-off, the aggregate income of the 10% of wealthiest Russians increased by 50%, while 80% of the population had a real decline of 25% on average.

In St. Petersburg, for example, while tourists flocked to the Alexander Nevsky Monastery to view the grave of Fyodor Dostoevsky, one of Russia's greatest writers, his descendants made a public appeal for funds because they could not survive on their pensions of $80 a month.

Having endured 70 years of communist ideology, Russians have been equally plagued by 10 years of the market ideologues of the IMF. If there is a lesson to take from Russia, it is that economic transformation needs proper sequencing; institutions must be available to make market systems work; and a middle class should be enhanced, not destroyed.

Dostoevsky, in Crime and Punishment, wrote movingly about the poor of St. Petersburg. One of his six living descendants, when interviewed about her appeal for funds, said: "All over Russia there are people living in the same poverty described by my great-grandfather -- and nobody cares." To care and to apply common sense -- that is the lesson we must take from Russia.

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