Russia in Crisis:
A Free Market Nightmare

Revolutionary Worker #974, September 20, 1998

In the last two months Russia has been in the eye of an economic and political hurricane. The financial crisis sweeping Asia hit Russia hard. The Yeltsin government announced it couldn't meet its payments to international creditors. Foreign investors began to stampede out of the country. And Wall Street itself was rocked by the developing crisis. The Yeltsin government wobbled and even threatened to fall. And in the midst of all this, Clinton went to Russia for a two-day summit.

Russia is facing a serious and deepening economic, political and social crisis. But what it is going through is not a transition from socialism to capitalism. It is the transition from one form of capitalism that masqueraded as socialism to another form of capitalism.

In 1956 socialism was overthrown in the Soviet Union and capitalism was restored. The revisionist, phony communist rulers of the Soviet Union continued to call themselves communist and said that the country was still socialist. But this was a lie--the Soviet Union became a state-monopoly capitalist/imperialist world power. By the late 1980s the country faced a deep economic and political crisis which contributed to the Soviet Union's collapse in 1991.

Free Market Nightmare
for the Masses

Since the fall of the Soviet Union, the Russian government has implemented a full-steam-ahead program to develop free market capitalism and integrate itself more fully into the imperialist world economy.

When the Yeltsin government came to power, the masses of Russian people were facing extreme hardship and suffering. They were told that free market capitalism would bring prosperity and freedom. They were told they should look to the United States as a model of economic development. They were told that if Russia got more into the international global market that the country's economic problems would be solved. But this was and is a lie. Free market capitalism is a living nightmare for the masses of Russian people. And now, this nightmare is intensifying.

In some of Russia's most remote areas, coal miners have been on strike for months. They've gone on hunger strikes, blocked rail lines and a delegation of striking miners has been camped outside the Russian government building for several months protesting unpaid wages. Miners in the Sakhalin Islands say they are owed pay totaling more than $16 million. Miners in the city of Partizansh say they are owed wages dating back to November.

And the miners aren't the only people that aren't getting paid in Russia. Submarine-builders in the far eastern part of the country have not been paid for over 16 months. Soldiers, scientists, doctors, teachers and most factory workers aren't being paid. Many families are having to try and survive on vegetables and chickens in their yards and selling handmade goods.

Food markets and hard-goods stores are running out of consumer goods, from rice to TVs. Things like toothpaste, butter, toilet paper and soap powder have become hard to find. Retailers are finding it increasingly hard to replenish their inventories and the potential for far worse shortages exists. It has been reported that grain harvests are running 30 percent behind last year and that meat and cooking oil supplies are dwindling.

The masses of working people, especially those in more remote areas, are being hit hardest. But even the middle class--many of whom have became quite wealthy--are being crunched. For example, in Moscow a small but visible middle class arose on the city's boom, working for banks, real estate and advertising agencies, start-up companies and Western firms. Until recently this professional elite had been insulated from the economic crisis. Their salaries remained high and they were able to maintain an extravagant lifestyle, from expensive restaurants to designer clothes. Now all this has changed, with pay cuts, layoffs, skyrocketing prices and shortages of imported goods. One Moscow recruiting agency estimated that about 60,000 professionals in Moscow have either been laid off, sent home on temporary, unpaid leave, or seen their salaries cut by as much as one-third.

Outside Moscow, things are even worse. In the Siberian city of Omsk, the price of kielbasa sausage doubled in two weeks. In Novgorod, 300 miles northwest of Moscow, the cost of medicine has soared.

The private banking system that has developed in Russia has virtually collapsed. The Russian stock market has fallen sharply. The economy has practically ground to a halt, with the economy starved for investment capital.

The current economic crisis shines a light on what has been going on for years in Russia: shortages of food, an extremely unstable economy where much of the economy works on a barter basis with goods or services exchanged instead of money, and people are losing their life savings because of the unstable Russian currency.

Post Cold War Designs

Throughout the 1970s and '80s, the Soviet Union was the main imperialist superpower rival to U.S. imperialism. But today, after losing the "cold war" and discarding its disguise of phony communism, Russia is a relatively weak imperialist power--but one that still has considerable military capabilities and continues to exert influence in the world.

After winning the Cold War the U.S. has treated Russia like a defeated rival. The "reform" of the former Soviet economy pushed by the West has been conditioned by strategic aims: to limit Russia's ability to reemerge as a significant capitalist rival (both politically and economically) and to influence the political role of Russia in the region and the world; and to make Russia as "investor-friendly" to Western capital as possible.

For the last seven years, the U.S. and other Western imperialist powers have encouraged, backed, and supported the Yeltsin government in its rush to privatize much of the formerly state-owned sectors of the economy (state-owned oil and gas companies were transferred to private holders at fire-sale prices), eliminate state controls and give free rein to the development of free market capitalism. These economic measures resulted in a boom of new private enterprises. But they also contributed to the unleashing of certain forms of capitalist activity like the looting of state property, the emergence of mafia-type economic empires and capital flight (vast sums of money being shipped out of the country).

The restructuring of the Russian economy pushed by the U.S. emphasized breaking up the old state sector enterprise system and "opening" and more fully integrating the Russian economy into the world market, with an emphasis on imports of consumer goods, export of raw materials, and collaboration with Western capital.

Western loans amounting to tens of billions of dollars were granted to Russia in order to support this restructuring and facilitate access, entry, and influence over key sectors of a reconfigured Russian economy. IMF policies in Russia promoted the rapid privatization and sell-off of state assets, deregulation of prices, and a savage assault on the living standards of the masses. By 1993, more than 50 percent of Russia's industrial plants were bankrupt. Society was being ever more polarized, with large sections of the population driven to destitution.

The U.S. supported and counted on Yeltsin to carrying out this restructuring. And in turn, Yeltsin counted on the U.S. and other Western imperialist powers to provide economic aid and capital in order to revive Russia's imperial strength. But this aid didn't materialize on the scale expected and required and this greatly contributed to Russia's deepening economic crisis.

The U.S. and other powers like Japan and Germany had their own economic limitations which influenced how much aid they were willing and able to give to Russia. At the same time, aid to Russia--mainly in the form of loans that have to be paid back with interest--has also been tied to specific policies that the U.S./Western imperialism want Russia to carry out. This is especially true in terms of money from the International Monetary Fund (IMF). Funds have been canceled or delayed when Russia hasn't carried out such policies fast or thoroughly enough. Back in May Russian officials found themselves visiting IMF and U.S. officials, begging for the release of funds. And as negotiations dragged on, the Russian economy got worse.

The flow of funds to Russia has also been tempered by a certain cautiousness towards Russia--stemming from a concern that Russia not be allowed to develop as a major economic, political and military rival. In 1993, the U.S. decided to expand NATO eastward (admitting the Czech Republic, Poland, and Hungary) to strengthen its influence in a newly integrated Europe and to thwart future Russian imperial ambitions.

Deepening Crisis

The financial crisis in Asia which began in July 1997 in Thailand has been spreading throughout the world economy. Reaching Russia, it interacted with the particularities of capitalist development and the economic crisis already going on there and has been having devastating effects.

The Asian crisis has affected the Russian economy in two major ways. First, it has caused international investors to look for safer and more profitable places to invest capital. So a lot of money that was going into Russia and other lucrative but volatile "emerging markets" was pulled out and put into other more stable investments.

Secondly, the economic slowdown in Asia, with factories cutting back and shutting down, has resulted in lower demand for industrial raw materials like oil. And this has caused the global prices for these materials to fall. Russia's oil and natural gas export earnings have dropped drastically. And in order to try and get out of crisis, Asian countries have lowered the price of their exports of manufactured goods, trying to increase their share of world markets. And this has caused Russian exports of manufactured goods to become less competitive.

Meanwhile, huge debt has plagued Russia. (And a good portion of this debt has been carried over from the 1980s Soviet Union.) Investors grew more nervous as the Asian crisis continued to spread and interest rates as high as 100 to 200 percent were required to entice investors. In Russia, investors required a very high rate of return if they were going to purchase government bonds--which raised the payments the government had to make on the debts. This increased the possibility of default--Russia not being able to pay debts at all--which only made investors more nervous about putting capital into Russia.

For the past three years, and under the guidance of the U.S. and IMF, the Russian government had been borrowing huge amounts of money at high interest rates from private capital markets in order to finance its budget deficits. In recent years, the Russian government has had to use 45 percent of its state revenue to pay off its debts.

In the last five months, the Russian government has moved to try and prevent financial collapse with a series of drastic measures. This included delaying payments for 90 days on foreign debt owed most banks, restructuring government bonds, and allowing the ruble, Russia's currency, to plunge in value.

Exporters in Russia like the oil industry hoped to gain from this policy since devaluation of the ruble makes exports cheaper and more competitive. But devaluation also meant a rise in the price of imports into Russia and more hardship for the Russian people. In Russia, some 50 percent of consumer goods and services are imported and in Moscow, where dollars are an unofficial second currency, as much as 80 percent of consumer products are imported.

International investors who had been engaged in short-term and speculative investments in Russia decided the situation was too dangerous--and worried about growing labor unrest. They pulled out large amounts of capital, which only exacerbated the deepening crisis.

Russian banks had been central players in the speculative whirlwind that had spread as the free market was touted as the answer to economic hardship. Many banks took the money deposited by the Russian people and put it into risky securities or used it to help finance the takeover of failing industrial companies. When the economy collapsed, these kind of investments went bankrupt, taking the banks and the savings of average Russian people down with them.

The price of consumer goods in Russia has continued to go up. At one store, the price of canned peas rose from 6 to 8.1 rubles in two days, a kilo of nectarines from 17 to 33 rubles and cauliflower from 17.1 to 20.7 rubles. Prices have been changing so quickly many merchants don't even list their prices. The State Statistics Committee reported Wednesday night that prices rose by 36 percent during the first week of September.

Clinton's Trip:
U.S. Concerns and Intervention

U.S. President Clinton went to Russia for a two-day summit in the midst of a deepening economic turmoil and a growing leadership crisis. His message to the Russian government was blunt and bleak. He basically told the Yeltsin government that it would only get support from the U.S. and other Western imperialist powers if it stuck to the policies promoted by the U.S.--of privatization and unregulated development of free market capitalism. Clinton told the Russian government, "America must maintain a leadership role of active involvement in trying to build an economic system that rewards people who do the right thing."

In response to the current crisis, the U.S. wants Russia to commit itself to staying on the road of unbridled free market capitalism. And Clinton made it clear that the U.S. would not support Russia if it embarked on some of the policies being talked about by various forces, including the Communist Party forces (the old revisionist phony communist party) in the Russian parliament--like printing money to meet wage payments and expand the supply of credit, a return to state control of important industries, more government intervention and control over economic development, and the bailing out of failing banks.

Russia's economy is relatively small. But the U.S. recognizes that a collapse of the Russian economy could have a profound negative impact on the world economy. There has already been a lot of worry about how the current Russian crisis is setting off economic instability in Latin America.

The U.S. is also concerned about the potentially destabilizing effects of economic and social turmoil in Russia on Europe. And it does not want Russia to go in the direction of a more aggressive and anti-Western Russian government and the reemergence of state-monopoly capitalism, like what existed in the Soviet Union.

The U.S. is also worried about the effect that the economic crisis in Russia could have on price stability and earnings in the world market. Desperate for cash, Russia could flood world commodity markets with its natural resources, which would most likely result in a fall in global prices. This would especially hurt other economies that are also dependent on resource exports--and some of these countries are important markets for U.S. exports and investment.

Clinton spoke to U.S. concerns about the overall political and military role of Russia in the region and world when he stated that it was in America's interest to help the Russians for two reasons: Because a strong Russia can play a role in resolving regional conflicts and because of Russia's nuclear arsenal.

The U.S. has considered Yeltsin "its man" in Russia. But it's become clear that Yeltsin's days are numbered and one purpose of Clinton's trip was to establish closer ties with a new generation of pro-U.S., "reform-minded" leaders in Russia. An important part of the trip, from the U.S. standpoint, was a speech by Clinton to students and young community and business leaders at the Moscow Institute of International Relations--in which he laid out in detail what kinds of policies the U.S. wants Russia to carry out.

The economic crisis in Russia has provided an opportunity for the revisionist communist forces who dominate Russia's Parliament (the Duma) to try and gain more power, especially by trying to portray themselves as the champion of the suffering masses.

The revisionist communist forces in the Duma want to undermine Yeltsin's political power and they are promoting a different economic program for Russia. But they are not calling for a halt to the development of free market capitalism in Russia or for the country to disengage itself from the imperialist world economy.

When Yeltsin named Chernomyrdin on August 23 to take back his old job as prime minister, this set off an intense power struggle in the Duma. The revisionists refused to approved Yeltsin's nomination unless their demands were met, and Chernomyrdin was rejected two times. Yeltsin threatened to dissolve the Duma and his opponents threatened to impeach him.

After Clinton left Russia, Chernomyrdin put forward an economic plan that included policies the U.S. has explicitly said they would not support, and a senior Clinton administration official openly expressed frustration with this proposal. Soon after this, Yeltsin announced he was retracting Chernomyrdin's nomination for Prime Minister. And Yevgeny Primakov, who is seen as a compromise figure--and whom the U.S. says they have a "good working relationship with--was nominated instead and easily accepted by the Duma.

The political situation in Russia remains shaky. But for now, Yeltsin seems to have averted a serious leadership crisis. However, this does not change the fact that Russia is still engulfed in a deepening economic crisis.


The economic and political turmoil in Russia is a monumental failure of free market capitalism.

The fairy tale version of imperialist globalization is that as Western-style, free market capitalism spreads through the world, new markets and billions of new consumers are tapped--leading to economic growth, dynamic economies and prosperity for all.

But the reality of imperialist globalization is that Third World countries and other "emerging markets" like Russia are constantly subjected to the anarchy of capitalism--in which investment capital can appear and disappear with the ring of a stock trader's cellular phone. And the world market in money means that a currency crisis in Asia can set off dangerous devaluations around the world.

In Russia, increasing sections of the people are suffering and there is massive discontent. People were told that western-style, free market capitalism would make their lives much better. But they are still waiting. Some people are saying that things were better under the old Soviet regime. Many are expressing anger and hatred toward the U.S. as the architect of the free market nightmare they are experiencing.

A recent nationwide poll showed a marked increase--from 50 percent in March to 65 percent in mid-August--in the percentage of people who said the Yeltsin government could "no longer count on the people's patience." Twelve percent said they were ready to join a strike and 11 percent said they supported an armed uprising against the government--both figures roughly doubled in six months.

In 1991, when the Soviet Union fell, the Revolutionary Internationalist Movement issued a statement titled, "Cast Away Illusions! Revolution All the Way!" which said, "The West is not rich because it is democratic, it is democratic because it is rich and it is democracy for the rich; the secret of its riches, and hence of its democracy, lies in its empire built on bloody conquest and maintained through savage wars... If you want to know what Western democracy is really about, turn off Radio Free Europe and find the way to ask South Africa's blacks, or Palestinians in the Gaza strip, ask Arab dustmen in Paris or Turks in Hamburg, ask England's coal miners or Chicago's ghetto inhabitants--get them to tell you about the "marvels" of Western democracy. Or you can just wait to find out for yourselves..."

This article is posted in English and Spanish on Revolutionary Worker Online
Write: Box 3486, Merchandise Mart, Chicago, IL 60654
Phone: 773-227-4066 Fax: 773-227-4497
(The RW Online does not currently communicate via email.)