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Moscow grapples with political and economic crises:Implications for foreign policyJyotsna Bakshi aa Research Fellow at IDSAPublished online: 25 Apr 2008.

To cite this article: Jyotsna Bakshi (1999) Moscow grapples with political and economic crises: Implications for foreign policy,Strategic Analysis, 23:2, 313-323, DOI: 10.1080/09700169908455049

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Moscow Grapples with Politicaland Economic Crises:

Implications for Foreign PolicyJyotsna Bakshi

Physical geographical features remain unchanged, but geo-politicalperceptions, compulsions and objectives change in the changed historicalcontext, given a new constellation of internal and external factors. Thisis very true of Russia today, which is passing through.the painfulprocess of coming to grips with the changed geo-political reality andaccordingly readjusting and reshaping its foreign policy objectives andframework. Moscow was the imperial capital of the vast Eurasianlandmass under Tsarist Russia and the Soviet Union. Peacefuldisintegration of the Soviet Union in the last days of December 1991 didnot change overnight the old mentality and thinking patterns and thecomparative weight of Moscow in the former Soviet space. However,belying the initial hopes and expectations of early and smooth systemicchange and speedy economic recovery, the endemic crises and malaisein the Russian body politik continues. It is adversely affecting thecountry's foreign policy effort also.

The policy of 'economic shock therapy' introduced by Russia'sneophyte liberals under the influence of Western advisers failed toproduce the desired results. Russia's GDP declined almost by half; pricessky-rocketed; the value of the. rouble nose-dived by thousands of timesin relation to the dollar and other currencies. Unemployment soaredand a large number of people were pushed below the poverty line.Russia's nouveau riche and criminal gangs are believed to have takenaway more than.$100 billion outside the country, mostly to the West,thereby contributing to the Western economies, • while the Russianeconomy desperately needed liquidity and investments. Russia incurredhuge domestic and foreign debts in addition to the nearly $100 billionformer Soviet debt it inherited. It is estimated that Russia's foreign debtamounts to about $150. billion including the old Soviet debt of $100billion.1 Large urban centres of the country became heavily dependent

Dr. Jyotsna Bakshi is a Research Fellow at IDSA

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314 Strategic Analysis/May 1999

on imported consumer goods. Russia's own production units could notwithstand the foreign competition and declined. In the absence ofpublic trust in the banks and financial institutions of the country and thevery government bodies, the,flight of billions of dollars every year toforeign countries continues. People also keep huge amounts of dollarshidden in mattresses, thus blocking their much-needed circulation inthe economy.. It is widely believed that the capitalism that has replacedthe pld totalitarian system in Russia is criminal capitalism or "robberbaron capitalism." A narrow circle of oligarchs has come to wieldimmense political and economic clout in the country. A really free-market economy based on open competition did not develop in thecountry. • ' • • . . . ; "

In view of the utter failure of the "economic shock therapy," PresidentYeltsin was forced to replace acting Prime Minister Yegor Gaidar by themoderate reformer Viktor Chernomyrdin, the chief of the Russian gasmonopoly, Gazprom, by late 1992. . ,

Viktor Chernomyrdin tried to build bridges with different sectionsof opinion across the broad political spectrum and continued economicreforms albeit at a slower pace. He succeeded in bringing about macro-economic stabilisation. The steep decline in the GDP to the tune of 40to 50 percent was arrested and in 1997 the government claimed to haveachieved a miniscule growth of around 0.2 percent in the country'sGDP. However, the adverse impact of the Asian currency crisis and thefall in world oil prices hit the economy very hard. The bulk of Russia'sexport earnings came from oil and gas and other primary products. Itseemed that behind the apparent facade of macro-economic stabilisation,many problems were piling up. The tax collection was woefully smalland the government lived on borrowed money. Unpaid wage andpension arrears piled up; housing and social sectors were neglected,creating a potentially volcanic situation. It is widely agreed that Russia'smassive privatisation programme benefitted a few people who got holdof the huge state assets at throwaway prices. It did not lead to theimprovement in the production and efficient economic management.Investments went largely in speculative activity rather than in theproductive sectors of the economy.

On March 23,1998, President Yeltsin suddenly sacked Prime MinisterViktor Chernomyrdin and appointed in his place the young andinexperienced, Sergei Kiriyenko, who was just 35-years-old, as thecountry's prime minister. The motive behind President Yeltsin's suddenand impulsive action may be attributed to (a) his desire to clip thewings of Chernomyrdinremore, whom he suspected to have developed

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• Moscow Grapples with Political and Economic Crises 315

presidential ambitions; and (b) his dissatisfaction with the .failure ofChernomyrdin government in the social sphere.2

August 1998 Political and Financial Crises

The government of the young reformer, Sergei Kiriyenko, however,failed to prevent the financial and currency crisis that was both theconsequence of the accumulated economic problems of the. past, thegovernment's failure to collect taxes as well as the impact of the Asianfinancial crisis and the fall in oil prices.

Although the Western powers were shocked and surprised atPresident Yeltsin's sudden and impulsive move in appointing thegreenhorn Kiriyenko as the country's prime minister, by and large, theWest welcomed his appointment. Kiriyenko came to be regarded in theWest as a serious and professional economic reformer. In contrast toChernomyrdin, who was regarded as a friend of the oligarchs, Kiriyenkowas seen as a person who tried to curb the latter's enormous politicaland economic clout.3 In July 1998, the International Monetary Fund(IMF) offered Russia a huge $22.5 billion loan package to avert theimpending economic crisis. The IMF loan was negotiated by AnatolyChubais on President Yeltsin's orders. Chubais as the architect of thecountry's privatisation programme is a rather controversial figure inRussian politics and has created many critics and enemies. The IMFloan package, which was to be released through several tranches,however, failed to avert the financial crisis of August 17, 1998. Thegovernment failed to honour its domestic debt on that date which resultedin crisis of confidence, a mad rush to withdraw bank deposits, failureof the banks to honour commitments, a steep decline in the exchangevalue of the rouble and the flight of capital from the country, and a fallin the country's credit rating. The fall in the exchange value of therouble was accompanied by growing inflationary pressure. On the eveof the economic crisis, the redenominated rouble stood at 6.43 to adollar,4 but today its value has. gone down to around 21 roubles to adollar which amounts to more than'70 percent devaluation of the Russiancurrency. It is estimated that at the end of 1996, around 18 percent ofRussians were living below the poverty line, but as a result of theAugust crisis, 30 per cent were pushed below the poverty line.5

. The economic crisis was further aggravated by the accompanyingpolitical crisis. On August 23, President Yeltsin sacked Prime MinisterKiriyenko' and re-appointed in his place the very same ViktorChernomyrdin, whom he had sacked six months earlier. Changing ofhorses in mid-stream proved to be disastrous for the country. The

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316 Strategic Analysis/May 1999 - • •

Communist dominated State Duma (the Lower House of the Parliament)refused to ratify the appointment of Chernomyrdin. They held theeconomic course pursued by Chernomyrdin for more than five years asbasically responsible for the current crisis. President Yeltsin renominatedChernomyrdin, and the Duma rejected him again for the second time.This resulted in further uncertainty. At a time of grave economic crisis,the -country did not have a stable and effective government that couldinstill confidence among the people. President Yeltsin's own power andinfluence and popular standing were greatly eroded. In a T.V. interviewoh August 28, he denied the rumours of his resignation but made itclear that he would not be contesting for another term. In view of thedetermined Duma opposition to Chernomyrdin, he relented andnominated Yevgeny Primakov, the country's widely respected foreignminister, as his nominee before the final third vote in the Duma. TheDuma endorsed the appointment of Primakov by a big majority of 317votes as against the required 226.

The financial crisis highlighted Russia's vulnerabilities and limitationsas a major player in the international arena as the chief successor of theformer superpower. The contrast in the comparative economic clout ofRussia and the USA, for instance, became all too glaring. Thus, on theeve of the August crisis, it was estimated that Russia's GDP was just$460 billion in contrast to the US GDP.of around $8 trillion." With themore than 70 per cent devaluation in the value of the rouble in comparisonto the dollar following the crisis, Russia's economic standing vis-a-visthe USA becomes even more fragile. No wonder, Sergei Rogov, thedirector of the Institute of the USA and Canada in Moscow, was reportedto have remarked that in view of the present financial crisis and itslikely consequences, Russia should shelve the dream of the revival of itsgreat power status at least till the year 2020/

Primakov Brings in Stability

Unlike his predecessors, Yevgeny Primakov is more acceptable tothe Communists-dominated Duma. He heads a government of nationalcompromise and coalition. The first deputy prime minister in his Cabinetis Yuri Maslyukov, who is a card-holder of the Communist Party andwho was in the Soviet era the chief of the mighty Cosplan (state planningbody). The present chairman of the Russian Central Bank, Viktor

. Gerashchenko (appointed after the financial crisis), was earlier thechairman of the Central Bank during the Soviet period.

Despite political differences that are inevitable in any coalition, thePrimakov government has been able to agree on, and chalk out, a common

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Moscow Grapples with Political and Economic Crises 317

programme. The prime minister and other -members of his team haverepeatedly stressed that there would be no going back to the old Soviet-style command economy. Market reforms would continue. Russiawould continue the policy of integration with the global economy. Therewould not be any de-privatisation: And the country would honour itsdebts: The Primakov government is earnestly seeking foreign investment.It has got laws on production sharing and foreign investment passed bythe Duma, providing protection to foreign investors regarding the safetyof investment and allowing for repatriation of profits. At the same time,Primakov Cabinet insists that the economic policy of Russia mustrecognise its unique circumstances and special requirements. It isopposed to reckless privatisation of the type that took place in the past.The government is emphasising the need of the growth of the "realsector" of the economy rather than mere "speculative activities." It isstressing the need to improve the working of the state enterprises andpay back pension and wage arrears to the people. The new catchwordis "socially-oriented market reforms." The economic programme of thePrimakov government is often likened to President Roosevelt's "newdeal" policy evolved in the wake of the great economic depression ofthe decade of the Thirties. '

The present government is working on the understanding that itmust provide political and economic stability to the country till the year2000 when the next presidential election is scheduled to take place. Itis clear now that President Yeltsin will hot contest the next election. Thecountry's Constitutional Court has also ruled out a third term for him.Due to the ill-health of the president, the task of running the governmentis increasingly shifting to the prime minister. But President Yeltsin stillcontrols the power structures. The country's nuclear button is also in hishands. He retains the right of dismissing the prime minister, but hisprime ministerial nominee must be approved by the State Duma.Primakov's recent move for an accord between different branches ofpower, whereby the president would agree to the curtailment of someof his enormous powers in return for removal of impeachmentproceedings against him in the Duma, has not succeeded. It has beenrebuffed by the president. Nonetheless, even those who do not fullyagree with Primakov's programme, have conceded that he has been ableto bring in much-needed stability in the country8 and instill a degree ofconfidence among the people> that had become completely eroded in theaftermath of the financial crisis. Although Primakov has repeatedlydenied presidential ambition, it is widely agreed that if he were tocontest, he would win the race for presidency..

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318 Strategic Amlysis/May 1999 •

Dependence on IMF Bailout

The Primakov government has inherited an extremely difficulteconomic situation.. The Russian government is expected to pay awhopping $17.5 billion amount in servicing its debt obligations for theyear 1999, while the entire revenue collection in the budget this year isestimated at $21 billion. The budget envisages an expenditure of $25

. billion."' Thus more than 80 per cent of the budget revenues would goin the servicing of the country's debt. The country is earnestly seekingrestructuring of its foreign debt. Russia would very much like the oldSoviet debt to be written off by the creditors.10 It is hoping to honourits debt servicing commitments of this year by getting half of the debtre-scheduled and paying just $9.5 billion, that too by borrowing $4.5billion from the IMF." Thus, the country is crucially dependent on theIMF bailout if it is to honour its debt servicing commitments for thisyear. The alternatives to the IMF bailout may be extremely painful anddestabilising for the country and its fragile economy. Default in thepayment of debts may precipitate another financial crisis. Unlimitedemission of paper money or clamping down of old-type controls mayresult in run-away inflation and mass dissatisfaction and protests.

An agreement has not yet been reached with the IMF (at the timeof this article going to the Press), despite several rounds of talks betweenthe two. The IMF is seeking to impose its own conditionalities in returnfor releasing loans to the Russian government. The IMF is reported tobe insisting on cuts in expenditure, including defence expenditure, andcutting government subsidies to the state enterprises. The Russiangovernment feels that any further cuts in the expenditure at the expenseof the already neglected social sector would only evoke social unrest.The . IMF is. reported to be opposed to the cuts in taxes and exportduties aimed at encouraging domestic producers and exporters. Thereare serious.differences between the Russian government and the IMf onthese issues.12 However, the Primakov government has no alternativebut to bend over backwards to solicit the IMF bailout.

At the same time, Primakov and other members of his Cabinet arerepeatedly emphasising that Russia needs the IMF and World Bankloans mainly tp.be able to repay the debts incurred by their predecessors.It is being pointed out that the very same IMF and the World Bankhave given billions of dollars of loans to Russia under previous ministrieswith much greater ease without insisting on financial stringency regardiiigrepayment or mode of utilisation.

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Moscozv Grapples with Political and Economic Crises 319

US Pressure

The USA has "a dominant say in the governing bodice of multilateralinternational finance institutions like the IMF and the World Bank. Inthe circumstahces, Russia simply cannot afford to ignore or counter theUSA, which remains the most important foreign policy partner andinterlocutor for Russia.

During the recent months, the Russian media has beui full of reportsthat the'USA is making use of the current economic crisis in Russia toput pressure on it on a-number of foreign and defence policy issues, itis argued that the ultimate objective of the USA is' to consolidate itsposition as the sole surviving superpower in the world. It is trying toimpose on Russia a "victor's peace" for its alleged victory in the ColdWar with the former Soviet Union. Russia, on the other hand, is officially

' committed to a "multipolar" world with itself as one of the recognised..great powers. But it is admitted in the National Security Concept of the.Russian Federation that transition to a multipolar world may not be.easy and smooth. It may take "a lot of time for the multipolar worldto assert itself" and there may be repeated attempts to create aninternational system based on "unilateral solution of key internationalproblems".13

The feeling is growing in the Russian strategic community andpolitical class—including the traditionally pro-West sections—that makinguse of the current economic and political crises in the country, the USAis pressing ahead to promote its larger geo-political goals and designsin the region and the world at large to make a unipolar world a faitaccompli, which would be very difficult to challenge for a long time tocome.

There is growing concern in Russia over the US tendency to bypassthe UN Security Council and resort to unilateral actions, as the recentbombing of Iraq and the threatened North Atlantic Treaty Organisation(NATO) military action against Yugoslavia on the issue of Kosovo,demonstrate. As one of the five permanent members of the UN SecurityCouncil with veto power, Moscow would like these issues to be decidedby the Security Council.

It appears that in negotiating with the USA from a considerablyweaker position, Russia is particularly emphasising the need to abide bythe rules of certain legal and structural norms that have come to begenerally accepted. Thus, Russia is opposing the use of force againstsovereign countries bypassing the UN Security Council under whateverpretext, be it human rights, preventing the proliferation of weapons of

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320 Strategic Amlysis/Mayl999 '

mass destruction or. the fight against international terrorism. Russia isalso insisting on a general agreement ruling out the use of force in thesettlement of international disputes. . '

•Russians apprehend that the USA is not .only promoting eastwardenlargement of NATO to the detriment of Russian security interests, butis also seeking to bring about a basic change in the strategic doctrineof NATO. NATO's strategic doctrine is expected to be reviewed andrevised at the time of its 50th anniversary celebrations scheduled to takeplace in Washington in April 1999. The Russians fear that attempts arebeing made to convert NATO into the general instrument of security ofthe Western world and its area of operation is sought to be furtherenlarged so that it does hot remain confined to the territorial defence'ofWestern Europe and North America. '

Within the former Soviet space, the USA is seen as promoting theindependence of the new republics against the former metropolis.Moscow strongly suspects that the USA wants to further reduce Russianinfluence in the former Soviet republics situated all along its southernand western borders, and create a belt of markedly pro-West and pro-US states there. US-backed oil and gas pipeline projects from CentralAsia and the Caspian Sea region to the West, like the Baku-Ceyhan andBaku-Supsa pipelines bypassing Russia and Iran, are seen as aimed atfurther marginalising Russia from the geo-politics and the oil businessof the region.

There has been a strong reaction in Russia to the imposition ofsanctions by the USA on 10 of its institutions for alleged delivery ofnuclear and missile technology to Iran. It has asked the USA to produceevidence in support of the allegations. Russians insist that Russia is aparty to the non-proliferation regime and is equally interested in ensuringthat weapons of mass destruction do not fall into the hands of countriesclose to its own borders. The US pressure on the Iranian issue is seenas being motivated by the US commercial interests to deny Russia aplace in the market of high technology. Russia is building a nuclearpower plant in Bushehr in Iran under full-scope International AtomicEnergy Agency (IAEA) safeguards.

Russia has viewed with particular concern the US moves to revisethe 1972 Anti-Ballistic Missile (ABM) treaty and create a national ABMsystem that would change the very basis of the nuclear-strategic balanceand understanding between the two largest nuclear powers. It is seenas the resurrection of Reagan's "Star Wars" programme that cuts intothe very base of the nuclear deterrent principle, which has beeninstrumental in maintaining peace in the world in the post-World WarII period.

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Moscow Grapples with Political and Economic Crises 321

Russia's Response

Russia's response to'the extremely difficult foreign policy challengesfaced at a time of acute.economic difficulties and political uncertaintiesarising from the on-going process of systemic change and adjustment,is to first of all protect its core interests comprising its very survival. Itis in search of a breathing space.in order to tide over the present crisis.

* It is seeking adjustments and compromises all the way to avoid frontalconfrontation with any country—large or small. Above all, Moscow iskeen to avoid confrontation with the USA, on whose goodwill and goodoffices it depends for getting the. crucial IMF loans; although it is theUSA which is seen as the greatest challenger and threat to Russia'straditional geo-political interests in Eurasia. At the same time, Russiafavours enhanced cooperation with all other major international playersin order to strengthen its negotiating positions with Washington andopen up possibilities—even if they are small and not immediate—of theemergence of a multi-polar world.

The strong point in Russia's bargaining position—despite its currenteconomic woes and travails—happens to be" its position as the secondbiggest nuclear power, which still has the capacity to physically destroythe USA and the world and whom probably the USA would not like todrive to the utmost limit of desperation and isolation. Thus, theopinion has been expressed that the fear of 'loose nukes' may promptthe West to open its purse strings yet again. Jessica Stern of the Councilon Foreign Relations and a former National Security Council staffer, isreported to have remarked, "The economic collapse of Russia is thesingle greatest threat to US national security around right now".14

It seems that the IMF and Washington are dragging their feet till thelast moment in order to extract maximum concessions from Russia.Russians have come to believe that the US pressure on Moscow isinvariably linked to some bait in order to make it more palatable for thfformer. It appears the Russians are prepared to play this ball gam .and make the necessary adjustments and compromises, although tfeRussian prime minister has repeatedly said that the country would ptsuccumb to pressure. The Foreign Minister Igor Ivanov recently remaredthat although the country is pursuing an economic policy of ma<et-oriented reforms, its foreign policy is not a market foreign policyit isbased on the national interests of Russia. Nonetheless, the jointiewsconference addressed by Ivanov and the US Secretary of State Ma^eineAlbright on January 26, at the end of her talks in Moscow, amp] bearsout Russia's determination to continue constructive engagemrf withthe USA on all important issues in a spirit of adjustment, android a

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322 Strategic Analysis/May 1999 -

deadlock. It was pointed out that even on the issues of Iraq and Kosovo,the two agreed on the basic objectives. Both are against the proliferationof weapons of mass destruction in the context' of Iraq, and favourautonomy for Kosovo Albanians while maintaining the unity andterritorial integrity of Yugoslavia. On the ABM issue also Russia iswilling to enter into a sustained dialogue with the USA. Albright haspointed out that any deployment under the ABM system would not bepossible until the year 2005.15 In fact, an opinion exists among the pro-West circles in Russia that would favour the development of a joint anti-missile defence system with the West.16 Russia has denied the allegationsof supply of nuclear and missile technology to Iran, but has shownreadiness to tighten its own nuclear and missile control regime.

Russia is opposed to NATO extension, but it has preferred to evolvea formal mechanism of continued dialogue with it by signing the Russia-NATO Foundation Act (May 27, 1997) in order to minimise the threatto its security rather than enter into a frontal confrontation. Earlier, inJuly 1994, Russia along with other former Soviet states, joined NATO'SPartnership for Peace Programme (PfP). Multinational military exerciseswith the participation of the US troops under NATO's PfP on the territoryof the new republics aroused deep consternation in Moscow, that sawin it an infringement of its traditional sphere of influence. Still, Moscowacquiesced in the move by itself participating in the exercises.

Along with seeking compromise and adjustment with the USA,Moscow is also strengthening its ties with other major powers likeChina, India, the West European countries, Japan, etc. Primakov's"informal" proposal of a "strategic triangle" among India, China andRussia mooted at the time of his New Delhi visit in December 1998 hasbeen aimed at facilitating the move towards a "multi-polar" world.Recently, reports have come of China and Russia holding consultationsto work out a joint strategy against US plans to deploy a theatre missiledefence (TMD) system in Asia, with the participation of Japan, SouthKorea and Taiwan.16- .

By way of conclusion, it may be said that while the long-term aimof Russian policy remains the creation of a multipolar world whereRussia is one of the recognised great powers, still, in the short-term,Russia is prepared to make compromises with the sole survivingsuperpower because of its economic compulsions.

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Moscow Grapples with Political and Economic Crises 323

NOTES1. Vitaly Golovachev "Debt Noose", Trud, March 16, 1999.2. Jyotsna Bakshi, "The Year 2000 Elections: President Yeltsin Fires the First Salvo",

Strategic Analysis, July 1998, pp. 575-578.3. Financial Times, August 26, 1998.4. The Statesman, August 29, 1998.5. International Herald Tribune, February 17, 1999.6. New Times, October 1998, p. 54.7. Ibid.8. SWB, SU/3441 BIZ, January 25, 1999.9. International Herald Tribune, February 6-7, 1999.

10. Segodnya, January 21, 1999.11. Finansovye Izvestia, January 21, 1999.12. Nezavisimaya Gazeta, February 2, 1999; Daily Review, February 10, 1999.13. National Security Concept of the Russian Federation (December 17, 1997). Text

provided by the Information Department of the Russian Embassy in New Delhi.14. Bill Powell, They'll Get the Money", Newsweek, February 1, 1999.15. SWB, SU/3444 B/10, January 28, 1999. ' •16. The Statesman, March 17, 1999.

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