Russians Ask: What Reform?

Runs on banks, food lines bring memories of communist era. Will recent progress stick?

By , Staff writer of The Christian Science Monitor

In recent days, Muscovites have noticed the comeback of a certain feminine accessory - the avoska. Loosely translated as "maybe" or "just in case," it is a plastic or net bag easily crumpled into a coat pocket.

The avoska was an indispensable item for women waiting in food lines in Soviet times. Shoppers carried a bag wherever they went in case they stumbled upon an egg or an odd bag of potatoes. Now, seven years after free-market reforms were introduced, Russia is on the verge of bankruptcy - and the avoska is back.

Seeing runs on banks and stockpiling of food, ordinary people and economists are wondering how far Russia has come since the collapse of communism.

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The verdict, by most accounts, is not positive.

"Russia failed to create a market economy. What we have now could hardly be called a civilized market," says Vyacheslav Nikonov, director of the Politika Foundation in Moscow.

"There has been no real reform for years. The situation today is worse than in 1991."

Russia has declined into an ailing Third World economy, not the thriving free market that President Boris Yeltsin tried to promote under the West's tutelage.

More than half of the economy is based on barter, making it hard to collect taxes. Agricultural and industrial production have shrunk. Millions of workers have been unpaid for months. Hundreds of billions of dollars have evaporated in capital flight or corruption. The country is suffocating under a heap of debt.

Russia's formal gross domestic product (GDP) has shrunk nearly 40 percent since 1991 to an estimated $480 billion. The fall is the biggest any industrialized country has seen in peacetime.

The most visible reforms were the creation of a capitalist-minded middle class, a stock exchange, and a commercial banking system. Inflation was brought down from 2,500 percent in 1992 to 11 percent a few months ago. Price and currency restrictions were lifted.

All of these changes are endangered today.

The government can no longer protect the ruble, which has halved in value over the past two weeks. It has defaulted on debts. Foreign investors have fled the stock market.

Who to blame

Analysts place much of the blame on a shortsighted government that enforced changes only halfheartedly. Since the end of the Soviet Union in 1991, when Yeltsin announced radical liberal reforms, he has been vulnerable to grass-roots opposition.

His chief reformers have been sacrificial lambs at crucial ventures. Notable victims were Yegor Gaidar, Yeltsin's first prime minister, Boris Nemtsov, Mr. Chubais, and Sergei Kiriyenko, who lasted as prime minister for only five months until Aug. 23.

The only stability came from Yeltsin's prime minister of five years - Viktor Chernomyrdin - whom Yeltsin is now trying to reinstate as premier. But instead of generating more productivity, Mr. Chernomyrdin built up a pyramid of loans and encouraged a fraternity of tycoons who snatched up state resources.

"The new economy did not manage to foster influential persons who could protect reforms," says Nikolai Petrov of the Carnegie Moscow Center.

Some of the blame, analysts believe, must be shared by foreign creditors who were blind to lurking dangers. Wanting to believe statements that Russian authorities were committed to reform, they continued to give out loans even without seeing results.

Analysts say the current crisis exposed Russia's dependence on investor confidence and on the world prices of its vital export, oil, which had declined. It also showed how vulnerable most sectors of the economy are.

"I think we'll see a reverse process toward more state control," says Elena Vigdorchik, of the Expert Institute, a think tank in Moscow.

Immediate reforms

Urgent action is needed in nearly every area of the economy.

The prospects for industry are particularly bleak. Production has halved since 1991, partly because direct state subsidies to factories dried up - as did indirect ones for products. Defense, which once accounted for as much as 80 percent of industrial output, was a major victim of the cold war's end. And the opening up of borders meant that local producers often could not compete against cheap imports flooding in.

Agriculture hasn't fared much better. Privatization reforms, which affected banks and businesses, didn't reach farmers. Those agrarians with entrepreneurial ambitions find credits hard to come by. Compounding the problem are obstacles posed by the Communist opposition for buying and selling agricultural land.

Many of Russia's 26,000 farms are collectives, as they have been for six decades. Subsidies have dried up and equipment is grossly outdated. The agrarian sector is several billion dollars in debt to the state. An estimated 80 percent of farms are in the red, and Russia imports half its food.

The picture isn't much rosier for the financial sector, where there is a serious lack of liquidity. With the current crisis, up to half of the country's 1,500 banks may fail. The bigger ones are being propelled toward nationalization or mergers to survive.

The government has guaranteed the savings of small depositors, ordering ailing banks to transfer the accounts to a solvent one.

But it still has to address wages arrears owed to millions of workers. To keep spending down to comply with International Monetary Fund (IMF) demands, the state stopped paying salaries. Economists estimate the debt in unpaid wages amounts to a staggering 25 percent of GDP.

Equally burned were foreign investors who bought up GKOs, or short-term state bonds, which were first issued in the spring of 1993. When the government effectively defaulted on this debt instrument by rescheduling it earlier this month, investors found they had lost $30 billion.

Future prospects

Some analysts believe it will harder now to remain on the reform path.

Foreign investors are loath to come back. Further support is unlikely from a West that is wary of doling out money without signs of promised reforms. The IMF assembled a $22.6 billion rescue package in July. But the first installment of $4.8 billion vanished in support of the ruble.

The financial chaos has given ammunition to the Communist opposition, which is taking advantage of the political vacuum to push for more state control. Whether this will be implemented depends on how much longer Yeltsin remains in power or if the Communists win their bid for a power-sharing agreement giving parliament more say.

Some analysts see a new economic isolationism developing.

"There is a growing feeling that all our hopes of financial aid are in the past and that we must do things ourselves," says Mr. Petrov. "It is a feeling that we will not play games with the IMF and should instead close our borders."

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