#40 - Russia - a long slide into economic, social and political chaos.

Oct 1998


According to press reports, hundreds of thousands of people took part in strikes, meetings and demonstrations across Russia on October 7th, in protest against unpaid wages and pensions. And although the western media stressed what they called the "passivity" of Russian workers, the fact is that this was one of the largest protests, if not the largest, since capitalist market mechanisms were grafted on soviet society, less than a decade ago. But only the future will tell whether such protests can develop into a real challenge to the plundering of the Russian economy by the privileged layers.

In the meantime, however, reading through the papers here it would be hard to guess that the almost 150 million-strong population of Russia is currently going through the worst social catastrophe seen in peace time since the Great Depression of the 1920s. When British commentators think at all about the Russians' plight, it is only to marvel, as The Economist did in its October 3rd issue, at «the Russian art of survival» - in other words, at the way in which the Russians make do without wages, pensions and basic food supplies. But the social and human cost of this is none of The Economist's concern - their sympathies are reserved for the western banks' potential losses.

The short-sightedness - and short memories - of these so-called economic experts is just amazing. Day-in and day-out they tell the world how it should conduct itself in accordance with the sacrosanct rules of the capitalist market. But when market forces begin to cause havoc, it takes a full-blown crisis for them to even take notice. In the case of Russia, it took the collapse of the Russian ruble at the end of August and, more importantly, the subsequent fits of panic of western stock markets and banks, for these experts to admit that, maybe, somehow, something had been going wrong in Russia. They did not even ponder for one minute over the fact that things had indeed been going very wrong for nearly a decade - something that even the bias of the British media was never able to really conceal. But then, one should not be too surprised by this short-sightedness since these are the same experts who keep repeating ad nauseum that the capitalist system is fundamentally healthy, despite the obvious increasing damage caused by today's on-going financial crisis!

Since August, commentators have been writing endlessly, with the greatest disbelief, about what they consider as the "abnormalities" of Russian society - from the barter system which dominates its so-called "market" to the growing mountain of unpaid wages and pensions, and the chronic impotence of the central government to get anything done in the country. But then these same commentators have been hailing what they called Russia's "emerging market" for all these years - only to end up "discovering" that after all, there is not really a "market" in the capitalist sense in Russia. Yet you will find no explanation of this in their articles. What you will find, on the other hand, are pages and pages of speculation about the possibility of the Russian leaders going back to their past economic "sins", or as the media say, about a possible "return to communism".

For the time being, we will leave the so-called "experts" to their anxieties in order to return to the real world. The reality is obvious enough, though: while the West was hailing the "end of communism" and the "triumph of capitalism", Russian society was sliding fast into a social and economic black hole. How and why this happened is what we intend to discuss in this forum.

The collapse of the ruble

So what exactly happened this August 17th? After having denied, only three days before, that his government had any plans to devaluate the ruble, Yeltsin suddenly signed a decree which, effectively allowed the ruble to lose 34% of its value against the dollar before the Central Bank would intervene to stop a further slide. In all but name, this was a devaluation.

Of course, this is not the first time that the ruble has plummeted against the dollar. Since 1991 and the breakup of the Soviet Union, the Russian economy has been through many spells of hyper-inflation. Over this period, the ruble was revamped twice, supposedly in order to make it more stable.

The first time, in July 1993, all the bank notes issued up to the end of the previous year ceased to have any value overnight. People were only allowed to exchange old notes for a value more or less equivalent to what was then a month's wages. At the same time, all bank accounts were frozen for six months. Their owners were promised interest on their deposits at 120% a year, but inflation in the first quarter alone was 500%. So that people lost most of what they had managed to save from the galloping inflation, whether they kept their savings at home or in the bank. Only a small minority did not lose out - those who were rich and well-connected enough to have converted their money into dollars.

The second time was on January 1st this year, when a "new" ruble was introduced, worth 1000 "old" rubles. This time, the change was much smoother, but it was just papering over the hyper-inflation of the previous years by dropping three zeros from the end of price tags. It changed nothing to the fact that in between these two dates, the ruble had already lost 83% of its official value against the dollar.

In and of itself, therefore, the 17 August devaluation would not have been such a shattering event, were it not for another factor - a massive wave of financial speculation built up over the previous period. This build-up began back in 1994, during the early days of the Moscow stock market. The central government, which was then deep into a costly war in Chechnya, was desperate for fresh cash. So, no doubt under the expensive guidance of some Western firm of financial consultants (they had all set up offices in Moscow by that time) the Russian government turned to a gimmick often used as a last resort in the capitalist world: they issued short-term debt certificates in dollars, known as GKOs, in a bid to entice capital owners into lending their funds to the Russian state. Shortly after this, cash-strapped municipal and regional authorities were allowed to resort to the same trick, with another type of short-term bond known as MKOs. And, of course, given the then galloping inflation, all these bonds carried a very high interest rate.

Initially these bonds were only offered to Russian residents who were not allowed to sell them, nor claim a refund, before six months at least. When foreigners were eventually allowed to bid for them, in early 1996, they were subjected to the same restrictions. But with growing deficits, central, regional and local governments required always more cash. The numbers of bonds on sale at auctions increased much faster than the number of lenders who were prepared to bid for them. This ensured that interest rates paid on these bonds remained at inflationary levels - over 90% a year was not unusual - long after the hyper-inflation had ceased in 1997. By May 1998, the situation had deteriorated to the point where, as former prime minister Kiriyenko recalled in a recent newspaper interview, «each week we were paying 6 to 7 billion rubles in short-term state bonds, or 35 billion a month, but our entire budget receipts in May were only 20-21 billion.». The bankruptcy of the state was becoming an increasingly real threat.

By that time, speculators - both Western banks and mutual funds, which had been attracted to Russia by the GKOs' high return, and Russian players who were seeking to take their share of the bounty - had already assessed that the government would not be able to keep the ruble at its current rate of 6 rubles to a dollar. They started to gamble on a fall of the ruble, buying dollars as quickly as they could, and borrowing from every possible source in order to buy even more. For the government, short of stopping abruptly all this speculative madness, there were only two possible courses: either the Russian Central Bank poured onto the market an apparently inexhaustible flood of dollars, or the government capitulated and opted for a devaluation of the ruble.

For a while, Russia became a speculator's paradise: speculators used their rubles to buy massive amounts of dollars from the Central Bank which, they immediately lent back to the state by buying GKOs with a fantastic interest rate into the bargain. Then they used the GKOs as collateral to borrow more rubles and buy more dollars from the Central Bank, etc... This vicious cycle amounted to a direct subsidy from the state to speculators, while getting nothing in return. Eventually, the Central Bank's foreign currency reserves threatened to dry up, which precipitated Yeltsin's decree on August 17th. And since the only way to ease the pressure on the ruble was to put an end to this vicious cycle, the same decree suspended all trade (and repayment) of GKOs and introduced a 90-day moratorium on all payments overseas.

Yet this still did not stop entirely the speculative attacks against the ruble from foreign speculators who, this time tried to get rid of the rubles they still had in anticipation of a drastic fall. But so too did the Russian banks - including most of those still partly controlled by state institutions - who rushed to change their rubles into dollars without keeping the minimum necessary to face the needs of their account holders.

Faced with an even more dangerous slide which this time was threatening the entire Russian banking system, Yeltsin took another even more drastic measure on August 27th, by suspending the trading of dollars against rubles. At the same time, the fate of short-term lenders was sealed: they would have to accept the conversion of their GKOs into 3 to 5-year bonds in rubles with a much lower interest rate or else be content with a partial reimbursement of their loans in cash and dollar bonds.

Eventually the speculative frenzy was stopped in its tracks, but too late and at a very high cost! For Yeltsin's two decrees amounted to the Russian state effectively defaulting on part of its debt - temporarily at least. All of a sudden, it became impossible for the state, or any Russian institution or company for that matter, to borrow from foreign banks. Worse, even, since GKOs were now to be reconverted into long-term low-interest ruble bonds, they became unsaleable. Yet these GKOs made up the bulk of the Russian banks' assets and the only guarantee they had used to secure loans at home and abroad. To all intents and purposes the Russian banking system was now virtually bankrupt.

The consequences in the real economy

The long queues outside the banks, which were widely shown on television here, only reflect one aspect of the reality. The bankruptcy of the banking system meant indeed that bank accounts were de facto frozen - including those in dollars. The only exception was Sberbank, the state savings bank, where 80% of the population have an account, which is still making some limited payments in rubles, but for how long?

For the majority of people, however, the banks' failure is probably not such a big deal as it would be here, as they have no savings and no cash on their accounts anyway. Ironically it is the small urban middle-class of the large western towns - traditionally the most fervent supporters of the so-called "free" market - which is most affected. Having got used to the comfort of cash machines and credit cards over the past years, they are now faced with cash machines which won't give them any money and they can no longer pay anything with their useless Russian credit cards. By contrast, of course, the small minority of really privileged have always been cautious enough to keep lots of dollars at hand while having accounts with foreign banks which are much less affected by the shortage of cash.

The banking crisis has some other serious consequences. Credit has virtually disappeared. As inter-bank settlements have stopped, payments are no longer cleared. So the large number of tiny businesses, small restaurants and shops which were operating often on a shoestring and mostly on credit went bust almost instantly. Due to the credit squeeze importers can no longer find loans to pay for imported goods. According to a St Petersburg paper, already by the last week of August, the volume of products imported from western Europe via Finland had halved, and that of imported food had fallen by 55%. In St Petersburg's port, operators stopped the unloading of ships because there was no-one who could pay for their cargoes.

In Moscow, St Petersburg and the large western towns where most of the wealth is concentrated, 60 to 70% of all the food consumed and an even larger proportion of the consumers' products sold, had been imported before the crash. In these towns, due to the combined effect of the fall of the ruble and reduced imports, prices rocketed. So that by early September they were 40 to 60% higher than a month before, at a time when most customers had hardly any money left anyway, let alone money for increased prices. In some cases the price increases reached enormous proportions: such was the case, according to the French daily Le Monde, in Kaliningrad on the Baltic sea, where a state of emergency was declared at the beginning of September, following an average 200% price rise on imported food. However imported goods were not the only ones affected. The credit squeeze also reduced food transport across Russia, giving speculators a field-day selling over-priced goods. On September 8th, a St Petersburg paper remarked that chicken now cost 90 rubles a kilo - which should be compared to Russia's minimum wage, which is 84 rubles a month.

Beyond this, the impact of the crisis on the conditions of the working class, particularly on jobs and wages, is much more difficult to measure - if only because, as a rule, news reports tend to ignore the fate of working people completely.

However, a report by a representative of the International Labour Organisation in Moscow explained, for instance, that by the end of August, many companies were putting part or all of their workforce on compulsory unpaid indefinite holidays, while the Unilever factory in St Petersburg had stopped production completely, laying off its entire workforce. By September 8th, the leader of the Russian Federation Communist Party, Zuganov, was reported as saying that in Moscow alone, 300,000 workers had lost their jobs since the collapse of the ruble. The same paper reported the announcement by the St Petersburg's police chief that 10% of his 75,000-strong force was to be made redundant in the coming weeks. If even the police was cutting jobs, one can easily imagine what was happening in the working class.

As to wages and pensions, the only figures available are estimates given before the collapse of the ruble. According to these estimates, in June the sum total of unpaid wage arrears was somewhere between 60 and 80 billion rubles - that is approximately the equivalent of the value of Russia's total exports in the first quarter of this year. But today, with the banking crisis providing a wonderful excuse for company managers, wages are probably no longer paid at all in many workplaces. In any case, probably the best indication of the extent of the problem was the number of marchers in the streets on 7th October.

A special type of crisis

The collapse of the Russian ruble proved extremely embarrassing for the armies of Western "experts" who had been monitoring the "progress" of capitalism in Russia, for so long and with such enthusiasm. It was all the more embarrassing as, to add insult to injury, the Russian meltdown appeared to be upsetting the balance of the world financial system in a spectacular way. So the West was quick to explain the whole problem away by claiming that this was just another instance of last year's financial crisis in south-east Asia. And just as they had done last year, they proceeded to blame the crisis in Russia, as well as its impact on the rest of the world, on the "remaining rigidities" of the Russian economy.

Of course, in and of itself, the crisis in Russia could not have upset the balance of the world financial system - at least not any more than benign indigestion can upset the health of a patient with generalised cancer. After all the sum total of Russia's trade with the rest of the world is less than that of, say, Austria. Its stock and bond market is smaller than that of the smallest European country. Its largest banks would not even have enough assets to compete with the smaller US regional banks. As to its annual production, its value in dollars was just 6% of that of the USA last year - hardly a heavyweight in world financial terms and certainly not one with the potential to destabilise the world financial balance!

Equating the Russian crisis to the crisis in south-east Asia is simply perpetuating the convenient idea that Russia's problems are merely unfortunate hiccups in an otherwise "successful capitalist development". We will go back later to what really is behind this so-called capitalist development. But as to the experts' claim that this last decade has been a success for Russia, their own figures are there to disprove it. Between 1991, the year of the break up of the USSR, and 1997, the value of Russia's annual production declined by between 55 and 83%, depending on whose estimate one believes. Total investment fell by 90%, the production of consumer goods by 81%, the average wage by 78% and the average pension by 67%. In the meantime, male life expectancy dropped from 69 years to 58 while the number of tuberculosis cases doubled to 100,000 a year. If these figures mean anything, it is a catastrophic turning back of the clock, involving an enormous destruction of production facilities, at a dramatic cost for the population as a whole. What a success story!

Of course there is something in common between the south-east Asian and Russian crisis - the destabilising role played by international speculative capital, which precipitated the monetary crisis in both cases. But, whereas in south-east Asia, the background to this crisis was a very modest, but not negligible, economic growth, in Russia, it was that of an on-going economic implosion. If speculative funds were attracted to south-east Asia like wasps are attracted to a pot of jam in the sun, in Russia they were attracted like flies to a decaying corpse. For Western speculators, of course, this did not make an inch of difference - profits are just profits and always worth taking, no matter how much they stink.

In any case, financial speculation on its own - which only started on a real scale in Russia in 1996, and even then still with all sorts of constraints - cannot account for the long slide of the real economy in this country. This slide began long before this and developed on a scale totally out of proportion to the small Russian financial system. Its origins must be sought elsewhere, in the specificity of Russian society and, ultimately, in the impotence of capitalist property relations to bring any kind of progress to this society.

The political build up to the present crisis

The present crisis cannot either be blamed only on what Western commentators, like those of The Economist for instance, call politely, Russia's «crony capitalism» - meaning that the Russian leaders failed to stick to the "rules" in introducing market mechanisms. No, the roots of the present situation go much deeper into the social make-up of Russian society, as it was shaped first by the 1917 proletarian revolution and then by its hijacking by a parasitic layer, the soviet bureaucracy, which ran the USSR for over three-quarters of a century.

It must be recalled how the turn to the market of the early 1990s in Russia, emerged out of a long struggle for power, dating back to the death of the last strong man of the Stalinist era, Brezhnev, in 1982. By then, the 20 million people or so who made up the soviet bureaucracy were already divided into rival cliques, organised from the top down, within the various apparatuses of the state (like the judiciary, the army, etc..), the economy (like the planning administration, electricity, oil, railways, etc..), as well as on a regional basis (that is, the autonomous republics and regions, municipalities, etc..). Each one of these cliques sought to maximise its looting of the economy by using the apparatus which it controlled, while trying to protect it from the influence of the rival cliques. These cliques had become so powerful that even Brezhnev, despite the authority he had, was forced to seek the support of the strongest among them, thereby encouraging their aspirations to gain more autonomy from the ruling spheres of the state.

The Soviet bureaucracy has never been motivated by any particular ideology - unless the fight to preserve their patch and their fragment of power at all costs, against their rival bureaucrats, can be called an "ideology". The outlook of the average bureaucrat was like that of a small shopkeeper, whose world stops at the end of his own shelves. However, there were two major causes of discomfort in a bureaucrat's life. One was the lack of job security due to the regular purges and the normal system of promotions, which was designed to keep everyone under the control of the ruling circles. The other was the need to resort to subterfuge in order to hide their looting of the economy, instead of being able to enjoy their affluence openly.

When Trotsky described the Soviet bureaucracy in the 1930s, these causes of discomfort already existed within the ranks of the bureaucracy, resulting in the emergence of what Trotsky called at the time a "bourgeois party". By this he did not mean a real party, but a current within the bureaucracy which aspired to the legal restoration of private property rights as a means to legitimise the bureaucrats' looting of the economy and allow them to pass the fruits of their theft on to their sons and daughters.

It was precisely the support of this "bourgeois party" that Gorbachev sought to win during the power struggle of the mid-1980s. Not because Gorbachev was necessarily himself in favour of capitalist restoration, but because it was a current that spanned across the entire bureaucracy and could potentially form a stronger power basis than the existing cliques. As a result, once in power, Gorbachev's reforms were primarily aimed at meeting the aspirations of that current. But in the process, by relaxing the central state's grip over society he also increased the determination of all the cliques to obtain more independence for themselves. Thus the company laws passed in 1987 gave more autonomy to the cliques controlling the large industrial complexes, to those controlling the military, to the regional cliques based in the autonomous parts of the USSR and at each level of the bureaucratic machine, regional and municipal. The net effect of this was to weaken the power of the planning ministries of the central state.

But long before Gorbachev's so-called "Perestroika", at least two-thirds of economic activity already took place outside of the direct control of the central planning ministries. Manufacture and supply was largely run through horizontal relations between the different industries - which allowed the diversion of a proportion of the resources by the bureaucrats in charge, of course, usually directly into their own pockets and often into bank accounts in Switzerland. So what Gorbachev did just legalised and broadened the existing practices.

Nevertheless, Gorbachev proceeded with caution. Thus, when he passed his first so-called "Perestroika" laws, authorising the emergence of the private sector, it was still limited to so-called co-operative or individual companies. While this amounted to little more than a demagogic gesture, by August 1991, at least one faction within the central bureaucracy had decided that this was going too far, as the decentralising forces which were unleashed began to threaten the existence of the USSR as a single entity. So they staged the August 1991 coup attempt. Where Gorbachev himself stood is still questionable. But at the time he did not immediately denounce the coup. And it was this that allowed Yeltsin to emerge as the champion of those in favour of the reforms going even further.

Yeltsin sows the seeds of his own demise

Having seized this initiative - from the top of a tank during he suppression of the coup - it can be said that Yeltsin took on the role of direct representative of this so-called "bourgeois party" in the bureaucracy.

To facilitate his manoeuvres, however, Yelsin had been canvassing support from the regional bureaucracies against his rival Gorbachev. He had called for the republics, regions and localities to «take as much sovereignty as they could».

The bureaucrats controlling the soviet republics and the regions did not need encouragement. Long before the coup launched Yeltsin into power, he had already made an agreement on the autonomy of South Ossetia. In late August, Latvian independence was declared, followed in September by the other two Baltic states. Chechnya also made an independence declaration, though in this case Yeltsin contested it given its position in the centre of Russia, close to major oil fields. At the beginning of December 1991, a referendum in the Ukraine gave a majority in favour of independence. And one week later, on the 8 December 1991, just six months after the failed coup, Yeltsin formally dissolved the Soviet Union and replaced it with a loose confederation, called the Commonwealth of Independent States, or CIS. It involved at that stage only three countries - Russia, Ukraine and Belarus - out of the 15 soviet republics which had formed the Soviet Union.

But Russia was itself a federation in which many regional factions were all too eager to follow the example set by the former soviet republics. As a result, Yeltsin was immediately faced with the need to rebuild the authority of the Russian federal state, having himself laid the basis for it to be undermined.

Initially, the Russian Federation began its existence with 21 autonomous republics. But as the contagion spread further afield, it soon reached 89 territorial entities, called "subjects of federation", enjoying various degrees of autonomy, while Tatarstan and Chechnya persisted in their claims to independence. Of course, the bureaucrats in charge of the local state in these territories knew their regions were unviable from an economic point of view. But they were quick to demand political autonomy from the central state - as for them, this autonomy meant primarily that they would not have to share the looting of their regions with the rest of the bureaucracy, including that of the federal state.

Having precipitated this decentralising wave, Yeltsin was obliged, for his own survival, to try to bring it under control. Hence his eventual bloody intervention in Chechnya, where the civil war lasted six years causing the death of tens of thousands.

But at the same time, Yeltsin faced a challenge to his rule within the Russian parliament itself, where the main cliques of the bureaucracy were represented. It is conveniently forgotten today in the West how he hung onto power in October 1993, by using a division of paratroopers and a task force from the Ministry of the Interior to blast away the opposition of his own vice-president Ruskoi, and speaker of parliament, Khasbulatov, holed up in the so-called White House, leaving over 170 dead. At the time, all that Western commentators said about it was that it had «somewhat tarnished his image as a democrat».

Free market or free-fall?

When Yeltsin became president of the Russian Federation at the end of 1991, he portrayed himself as the herald of a new era of blossoming free market capitalism for the region. And of course he was hailed as such by the entire imperialist West. It was the "end of history". Capitalism had ultimately triumphed. At the time it was speculated that there would be a rapid privatisation of the state-run economy just as had happened with state-owned companies in Britain, under Margaret Thatcher. Opportunities would abound for Western companies in this huge new market. Bright, young Soviet economists produced plan after plan on how to privatise in 500 days, two years, three years etc. and aspiring businessmen flocked to Western universities to learn all about banking, business and finance. Things could only get better - or so it was claimed.

Yet, seven years later, even before the collapse of the ruble, the whole region was sinking fast to the level of a poor Third World economy. The combination of the break-up of the Soviet Union and the increased, now legal, looting of the economy by the same crooked bureaucrats had pushed the region into political and economic anarchy. It is hard to believe that once the USSR was the 2nd largest industrial economy in the world, which successfully maintained its side against the mighty USA in a Cold War which lasted over forty years and was the first country to send a man into space, in the 1960s.

The decline in the economy has been a steady one. Already under Gorbachev, the increased confidence of the bureaucrats had allowed them to reach new heights in their diversion of wealth away from production and away from the country. This disappearance of wealth from Russia, which is estimated today at anything between $60 and $100 billion, has contributed significantly to this steady decline.

The fact that industrial production had already fallen by 40-50% between 1989 and 1993 may have seemed alarming, and it certainly did to the Western business journalists, who decided that this had nothing to do with Yeltsin's so-called reforms but to inherent flaws in the old system of central economic planning. But what one should really be asking is how it even maintained this level.

Indeed, there was already an enormous increase in the scale of bureaucratic plunder, both legal and illegal. In 1992 it was estimated that 10% of the value of Russia's annual production disappeared because so-called "exporters" deposited the proceeds of their concealed sales in foreign banks.

Then, parallel to this scaled-up theft, there was the break-up of the USSR's huge territory, with its previously integrated industrial production, into numerous semi-autonomous or autonomous entities and independent republics - many of which closed their borders to Russian trade. If one considers that 40% of the former Soviet Union's industrial output was accounted for by single suppliers and that the suppliers were scattered all over the huge region, then most production should have come to a halt, through lack of parts, raw materials and the cutting of distribution lines.

In fact if something similar happened in a country like Britain, it most certainly would come to a halt. What capitalist company would be able to maintain production if it was cut off from half of its own plants, component suppliers and distribution network? How could a Ford or Rover car plant produce complete cars if its body, assembly and engine plants were not supplying each other any more? But in fact half of Russia's productive machinery did indeed manage to continue to function. And this despite the extensive plundering, selling off of assets and sabotage by the bureaucrats in control. This was not thanks to the slow emergence of capitalist property, which was only adding to the general chaos, but in fact thanks to the remnants of the old planned economy which, crippled as it was, still provided the basis for adaptation to the new circumstances where suppliers were lost and whole industries split up.

Sharing the spoils of privatisation

In June 1992, Yeltsin's prime minister Yegor Gaidar issued a series of decrees ordering all medium and large companies to turn themselves into share-holding companies. This was the beginning of a series of measures to promote privatisation. At first, there were two main mechanisms through which privatisation was meant to take place. One was the setting up of joint-stock companies owned by the workforce - this was the first form of privatisation and applied mainly to small companies in the service sector and shops. Then there was the distribution of millions of vouchers by which all Russian citizens were meant to become shareholders - only the value of these vouchers turned out to be less that of the unpaid wages owed to many workers at the time!

The idea was that workers would readily sell their vouchers for cash, making it possible for aspirant businessmen to accrue significant numbers of vouchers, thus allowing them to take sizeable stakes in privatised companies. But workers whose factories were not yet privatised held on to their vouchers, to have the possibility of selling them in the future in order to buy up more shares in their own factories.

The Chelyabinsk metallurgical complex in the Urals, which was among the few large companies privatised at the end of 1992 provides a good example of what the first wave of Russian privatisation was really about. It was one of the biggest industrial complexes in its region, employing 40,000 workers. 51% of the shares were distributed amongst the employees who formed a combined joint stock company called Mechel, while 49% remained in the hands of the Regional Property Fund to be sold later at auctions. At the same time, 86 senior and middle managers formed their own company, Tomyet, with the aim to accumulate shares in Mechel, in order to take control of it. Later, it turned out that a Moscow bank, and several Moscow-based firms had transferred a large sum of money to Tomyet to buy shares in Mechel. Meanwhile Tomyet had tricked Mechel into giving it 150,000 tons of steel at only 12% of its value to sell commercially. They also managed to ship out all the high grades of metal which had once filled the factory stockrooms from floor to ceiling, and to this day, nobody knows what happened to them...

In the end, with the help of the Regional Property Fund - that is the regional bureaucracy - Tomyet bid for the overall control of the complex. Eventually the Chelyabinsk workers discovered what was happening and instigated an investigation. But it was found that Tomyet had done nothing criminal and the only consequence was the resignation of the director. In other words, the capital of the Chelyabinsk complex was never put on the open market as a result of its privatisation. Control over the factory was simply shared between the regional bureaucracy and the same old managers who had been stealing from it before. And these sharks were not the mafia, but just "normal" bureaucrats taking care of their own interests.

After this initial stage, cash privatisation was launched in July 1994, and then, when this did not seem to be working, in 1996, came a "third way" known as the "loans for shares scheme". This was to encourage the loaning of capital to companies. Potential lenders were offered shares in exchange for loans. Foreigners were excluded, as were many Russian banks. As a result and this was no doubt the aim, only a small number of groups which were closely linked to bureaucratic cliques were able to grab at the bargains - and these really were bargains, since in exchange for total loans amounting to a mere $1bn, they got very sizeable stakes in some of the best industrial groups.

As to the parasitism that developed around the privatised companies, it is well illustrated by the example of the mines, as it was described recently by a trade union activist to a commission of the US House of Representatives. This is what she explained: «Consider a few sobering facts that only came to light after the miners blocked several railroads in May. In Kemerovo oblast alone, there are 300 intermediaries and 100 foreign-trade companies for 74 mines and 24 open-pit mines. About a third of the founders and directors of the intermediaries are family members of mine management. A large number of intermediaries are "under the patronage" of local authorities. More than half of coal extraction and sales is controlled by criminal groups. Budget subsidies continue to be misspent. Often it is impossible to say even where the money goes. For instance, in Tula oblast - the most depressed of all mining regions - out of 42 million rubles provided for creation of new production areas and re-training of miners, only 13 million were accounted for. Unbelievably, the 13 million rubles were used to "remodel" a kindergarten into a "retraining centre for miners". In reality, this centre turned out to be a 5-star hotel with luxury suites, a sauna and a gym. The rest of the money remains unaccounted for. As a result of the restructuring in Tula, 11,500 workers were laid off; only 116 have been re-trained and 660 have found new employment.»

Corruption on a grand scale

Corruption is the other main feature of the privatisation process. In 1997, privatisation for cash was re-introduced. Yet, by the end of the year, only $2bn had come in to the state coffers, including the sale of 25% of shares in the telephone and finance company, Svyazinvest. The way in which the Svyazinvest sale was carried out went a long way towards explaining the low receipts. The sale was organised by Uneximbank, a private business bank owned by Vladimir Potanin, an oil magnate close to Yeltsin's clan. The winning bidder was Mustcom, a Cyprus-based company, which just "happened" to have the same Uneximbank among its founding shareholders. Of course, Mustcom was merely a Russian off-shore front, and Potanin had been allowed by his friend and partner Yeltsin, to organise the sale to... himself. That way, the spoils remained in the "family", with the added benefit of escaping the scrutiny of the taxman!

In fact, this example is not exceptional. The corruption surrounding the privatised companies goes right to the top. When Aeroflot, for instance, was privatised it was broken up into 400 privatised companies by the various regional and industrial cliques. In 1997, when it was revealed that the hard currency proceeds of Aeroflot had been embezzled through a Swiss front company the trail led to the company chief, who just happened to be Yeltsin's own son-in-law. At this point the investigation was inexplicably stopped...

As for the plethora of banks which emerged at the beginning of the 1990s, these were mostly created from the head offices of those ministries which were in control of the main sectors of the economy, with their own autonomous budgets. Trusted representatives were appointed by the bureaucratic cliques to take charge of commercial activities in these sectors. It is through these banks that almost all large privatised companies have cross share-holdings with state companies. For instance, in 1997, the then first deputy prime minister in charge of finance, Andrei Vavilov, was noted to have stakes in at least 10 banks. The old system of privileges doled out by the Soviet regime - where members of the bureaucracy would get cars, dachas, luxury goods and access to special services - was therefore still there in the form of access to commercial activities through which it was possible to make a quick fortune.

To make sure that privatisation in no way interfered with their monopoly of the best opportunities to accumulate wealth, the leading circles of the bureaucracy in the central state and in the regions, designed and controlled things in such a way as to keep the most important companies within their own spheres, if not directly, then through proxies. They had their ways and means of excluding the few foreign businessmen who got involved in Russian industry, in order to prevent them from interfering in their long established wheelings and dealings.

So, for example, in 1996, when the US businessman, Boris Jordan bought 44% of Novolipetsk Metals Co., which runs a 7m tons a year steel mill in the south of Moscow, he immediately ran into a brick wall. Jordan had plans to restructure the mill's operations, which would have involved streamlining production and cutting the workforce. The mill's general manager did not like the idea. When he heard about it, he merely got in touch with a contact of his in the government. On his following trip abroad Jordan found that his return visa had been blocked. When he eventually got back into Russia, after a seven-week wait, he found he was unable to get the general manager out of his office and he had to give up his plans.

So what is the balance sheet, after the first five years of privatisation? Up to mid-1997, only 1.8% of all registered enterprises were classified as wholly private. Most of these were in trade, services, catering, small industry, construction and agriculture. The different levels of the state still had a controlling interest in 3,000 of the large and medium joint stock companies. And since then, the growing indebtedness of the state and the growing number of high-interest GKOs on offer has diverted the interest of potential buyers away from buying shares in state-owned companies. The whole process can therefore be summed up as a privatisation of the state, by the state and for the state, if by "state" we understand the bureaucracy.

The rise of the Russian robber barons

The case of Yeltsin's son-in-law, which was mentioned earlier, brings us to one of the most blatant examples of empire-building by serving Russian politicians. This dodgy character owed his position at the head of Aeroflot to its new owner, another close associate of the Yeltsin clan called Boris Berezovsky, who was recently described by the US business magazine, Forbes as one of the godfathers of the Russian mafia.

Berezovsky began his career by selling Lada cars on credit, before taking control of the company Logovaz - the official Lada sales network. When he tied his fate to that of the Yeltsin clan is not known. But very soon he began building an empire which turned him into a prominent banker and the owner of Russia's largest oil group, Yuksi Oil, which he bought for $100m - which is pretty cheap given that shortly afterwards he sold a 5% share to the French oil company Elf for $118m! He also took control of the main public TV channel, ORT, a large share of the biggest private channel, NTV, plus the Ogoniok monthly and the daily Nezavissimaia Gazeta. And as if that was not enough, he developed a close alliance with the leading bureaucrats who run Rosneft, the last state-run oil company.

Berezovsky also has a keen interest in politics. For a year, in 1996-97, he was a cabinet minister. And more recently, in April, he was appointed by his friend Yeltsin as executive secretary of the leading body of the Commonwealth of Independent States. Berezovsky is said to aim at transforming the CIS into a free-trade zone dominated by Russia. No doubt his interest in the CIS has something to do with the fact that the large Caspian sea oil fields are controlled by non-Russian members of the CIS. As to his credentials as a mafia godfather, they are common knowledge. But the clearest evidence of it, is the fact that he is said to maintain a permanent force of 150 private guards for his own security.

Of course there is a hall of fame of such godfathers, who have one foot in business and the other in politics. Whether they are connected or not with the mafia is arguable as the dividing line between the mafia and "respectable" politicians and businessmen is rather blurred. The list includes ex-prime minister Chernomyrdin, ex-deputy prime minister Chubais (the so-called "father of privatisation"), Moscow's mayor Luzkhov, ex-deputy prime minister Boris Nemtsov, etc... All of these "strong men" owe their influence to clientele mechanisms, or plain nepotism, and are connected with their own clans of bureaucrats at various levels on local and regional machineries who have their own networks of traffickers and therefore have an interest in supporting them in their political campaigns.

Chernomyrdin, for instance, runs the state-owned gas company Gazprom as his own private fiefdom. And it is not a small one. Gazprom is the largest company in Russia, accounting for 6% of its total production, 17% of its exports and 26% of the federal government's tax revenue. It has a joint venture in gas distribution in Germany with a subsidiary of BASF, and another one in Italy. All in all, Gazprom has at least two dozen marketing joint ventures in Europe. Further east, it has taken big stakes in distribution companies in Poland, Belarus, Moldova, Lithuania, Latvia, Estonia and Finland. More to the south, Gazprom has signed a $13.5 billion long-term contract to provide gas to Turkey through a proposed pipeline under the Black Sea, and it is negotiating a similar contract with Israel using the same pipeline. That Gazprom has become a state within the state is illustrated by what happened in 1997, when the then deputy prime minister Chubais threatened to force Gazprom to pay taxes. Gazprom simply bribed local authorities by offering them the possibility of buying into its capital - taxes were never collected nor demanded as a result.

Elusive foreign investment

While the West celebrated "the end of communism", in the late eighties, both Soviet and Western politicians assured the USSR's population that soon, thanks to massive foreign investment, their country would be transformed into a booming capitalist wonderland, with all the glitter, wealth and piles of luxurious consumer goods that had caused Russian visitors to Parisian department stores to fall into dead faints. Instead they got "kiosk capitalism" and MacDonalds. Of course they can still visit Paris, that is provided they can afford it.

Certainly there has been a small amount of foreign investment in sectors which are more or less guaranteed to bring some profits, like oil and gas. In 1996, the Los Angeles-based Arco bought an 8% stake in Lukoil for $340m and won a share in Caspian Sea oil developments. In 1997, BP bought a 10% stake in Sidanco for $600m in return for a share of a Siberian gas field. Shell has signed an agreement with Gazprom, promising to buy $1bn worth of its convertible bonds which amounts to a 2% stake. And then there is Elf's 5% stake in Berezovky's Yuksi oil.

This September, the former trade minister Oleg Davidov, in an interview with Forbes magazine summed up the situation of foreign investment in Russia in rather bitter terms: «We privatised all the biggest companies, all the most profitable, the biggest exporters. The government thought it would get strategic investors from the West. Instead, we got some kind of offshore companies [really owned by Russians]. Look at the aluminium industry. Not one strategic investor appeared. Not Alcoa. Not Pechiney. Instead we got the Chernyi brothers [shady metals traders]. They gained control of aluminium exports at a time when aluminium could be bought at $500 per ton inside Russia. All the producers became deeply indebted to the brothers, who made deals with plant directors to acquire aluminium at the Russian price - which they then sold at the world price.»

And given the fact that, like all Russian big businessmen and bureaucrats, these Chernyi brothers probably put most of their gains in some capitalist tax-havens like Cyprus, this means that instead of developing a flourishing export industry thanks to foreign capital - as had been promised to the Russian population - the natural resources of Russia are being plundered for the sole benefit of the privileged layers, without any of it filtering back into Russia.

Of course, there have been some foreign investments aimed at grabbing a share of the Russian consumer market. But these companies soon discovered that they had to make allowances for the greed of the municipal bureaucrats who forced them into joint ventures that they actually control, by bringing in all sorts of local rulings about their tenure. This was the case with MacDonalds and Pizza Hut in Moscow where Luzhkov's municipality owns a controlling stake. Besides, when Paul Tatum, an American businessman whose interests came into conflict with Luzkhov was killed in Moscow, the international press suddenly discovered the criminal practices of Russia's pro-capitalist bureaucrats and this must have given some food for thought to potential investors - at least those who are not used to operating outside the relatively well-policed world of the rich countries. One of the biggest sharks of the financial world, George Soros, said after this that he would not risk a single dollar in the former Soviet Union, where "gangster capitalism" prevails. No doubt that was why he had no scruples when it came to speculating on the ruble, thereby pushing the gangster state and gangster banks into near bankruptcy...

In any case, hardly any foreign investments have resulted in new factories being built or new production starting up. And despite the bargain basement offers for a share of existing companies, not many foreign investors have proved prepared to put their money into long-term investment in risky Russia, when there were so many easier ways to make money, with the exponential growth of the world financial market - including with Russia's own high-interest state bonds.

In August 1997, the French daily Le Monde estimated that Western investment in the Russian real economy was still more or less at the same level as investment in tiny Hungary - about $7-$8 billion. And according to the Russian government, the financial crisis in the Far East may have scared off up to $5bn of this amount.

Of course, there have been other types of foreign "investment". According to the Financial Times, the outstanding total was $208bn at the end of August, all told, including the various packages put together by the IMF and other international institutions. But out of this, $91bn date back to the days of the Soviet Union, and 95% of the total was invested in the form of loans or debt bonds, almost entirely to state or para-statal institutions. This means that despite all the excited noise made about the Russian share market, total foreign investment in shares is at most $9 billion, which puts the total investment in the production sphere at $11 billion. If these figures are correct, this is very far indeed from the $400 billion that Gorbachev said would be necessary, in 1990, to allow Russia "to make a new start"!

Far from helping with the development of the Russian economy, foreign capital has merely helped the bureaucracy to paper over its own growing deficits - that is primarily to finance its own looting.

Non-market economy and classless capitalists

Incidentally, the low level of foreign investment in Russian shares also points to the fact that there is no real capital market in Russia. There has never been enough circulating capital available for such a market to exist, since all the existing capital is either stashed away in some foreign tax haven or stuck in the hands of one section of the bureaucracy or another, who cling on to it because it is its only guarantee to retain its social status.

A former advisor to Gorbachev, Andrei Grachev, gave a graphic description of the so-called capitalist market in Russia in 1997, which remains as valid as ever today, in a book entitled "The Russian Exception - is Stalin dead?": «The economy is still in free-fall. (..) The fall in production and the destruction of whole branches of production have been accompanied by a sudden flight of capital which is obtained from the "sale of the century" (..) The fruits of the plundering of the country's wealth are placed by the state bureaucracy and the wheeler-dealers of the shadow economy on numbered tax accounts and invested in real estate in Western countries. This is also where "laundered" capital of the mafia gangs and the billions of IMF loan state credits end up (...) And in the meantime, the Russian economy is going through a catastrophic crisis of investment.»

An economy which has been going down for all these years at such a rate and where all wealth or capital disappears in a black hole, is not emerging, it is sinking. A market where the only movements of capital are outward, is not a capitalist market but an abyss. This is why all the talk about Russia being an "emerging market" has always been ludicrous.

As to the "emerging Russian capitalists", who are they? Half-bureaucrats and half-mafia? Parasites whose existence and profits depend entirely on the ability of the bureaucratic cliques, to which they are connected, to retain their position in the state machinery, their control over the economy and their possibilities of plundering it? As to being capitalists, at best they are only proxies acting on behalf of the bureaucratic cliques and for the best of these cliques' interests.

No, so far, there may be some capitalists, but there is no sign of the emergence of a capitalist class - that is a social layer of owners of the means of production, with enough self-confidence and consciousness of their specific interests to resist the plundering of the economy by the bureaucracy which is a major obstacle to any form of capitalist accumulation and development. Such a class, if it existed, would have enough sense of responsibility, based on its own interests, to try to impose certain norms and rules in the economy, without which there can be no commercial or financial contract for instance. Instead, the "new" Russian capitalists seem happy to adapt slavishly to the crooked practices of the bureaucracy and its gangsterism - but as long as they do, they certainly can have no future as a class.

The political crisis goes on

The past two months have shown once again the fragility of Yeltsin's authority. In August, following the devaluation of the ruble, Yeltsin faced an uproar from the Russian Parliament. On the part of the parliamentary opposition, of course, this was pure hypocrisy and demagogy. But they would never have missed such a splendid opportunity to make Yeltsin carry the can for the economic meltdown - even though the opposition MPs themselves, as representatives of the warring bureaucratic cliques, had at least as much responsibility in it as Yeltsin himself.

So, less than a week after the devaluation of the ruble, Yeltsin had to sacrifice his prime minister, Sergei Kiriyenko, after only four months in office, due to the pressure of the Russian Parliament. Yeltsin then announced that Chernomyrdin would be called back as prime minister. This attracted a storm of protest from the Parliament, together with threats to initiate a kind of impeachment procedure against Yeltsin himself. The fact that this charade was taking place right in the middle of a major economic crisis which had already brought part of the economy to a halt did not seem to weaken the rival factions' enthusiasm for gesture politics.

Eventually, after another two weeks of manoeuvres and gestures, a new name emerged out of conjurer Yeltsin's hat - that of Evgeny Primakov. Primakov's main quality seemed to be his ability to allay the fears of all camps. As a former candidate member of the CPSU PolitBuro (a rank only slightly below that of Yeltsin himself in the former soviet hierarchy) he was acceptable to the largest parliamentary faction, that led by Zuganov's Russian Federation Communist Party. As the former head of counter-intelligence under Gorbachev and Yeltsin, he was acceptable to the military establishment. As a long-standing foreign office minister in Yeltsin's governments, who survived every reshuffle since his first appointment, he must have been acceptable to Yeltsin's own inner circle. And above all, Primakov had no obvious links with any of the rival factions - an ideal compromise.

As the names of Primakov's ministers were announced one after the other, as if each one of them had been the result of painful negotiations, his government turned out to be a complex patchwork of the various rival factions. Thus one of the two first deputy prime ministers is a leading figure of the Communist Party - although not a newcomer to government, having held posts before - while the other is a regional strongman and a vocal spokesman in the parliament's upper house. Among the ordinary deputy prime ministers, one is linked to the telecommunications industrial apparatus, while another is a leading member of the Agrarian Party - a parliamentary ally of the Communist Party. As to the lesser ministers, they include a sprinkling of many different factions: Chernomyrdin's clan has at least four posts; Zhirinovsky's far-right anti-semitic Liberal Democratic Party has the labour ministry, thereby taking its first government seat; then various other economic and regional cliques are represented, as well as, of course, Yeltsin's own personal clan.

In reality, this government is more a symbol of the problems faced by Yeltsin and the federal state than an executive body capable of implementing any policy, let alone of imposing one on the warring factions.

The regional cliques and the crisis

In every past crisis, the regional cliques have taken advantage of the temporary weakening of the central state to gain a bit more independence for themselves. The present crisis is not an exception.

As soon as the collapse of the ruble started to be felt, regional authorities took measures aimed supposedly at "protecting" their regions or towns from the impact of the crisis, but really at increasing their own authority at the expense of the federal government.

Thus many regions introduced controls over the circulation of goods at their "borders", setting up police roadblocks for this purpose. The president of Tatarstan went so far as to introduce "import tariffs" on certain goods from other regions. Since many vital companies were paralysed by the shortage of cash, some regional strong men decided this was a good enough reason to take them over. In the southern Siberian Bouriat region, for instance, the regional president ordered the local subsidiaries of Russian banks to sever their links with their Moscow headquarters and take their orders only from him. In Voronezh, the governor went one step further by seizing privatised companies and returning them to state ownership - care of the regional bureaucracy, not the federal state, of course. So did the president of the northern Yakutia republic, but only with the region's mostly state-owned gold mines, with the open intention to limit transfers and sales of gold to Moscow.

Meanwhile in the Siberian region of Krasnoiarsk, which became general Lebed's private stronghold last May when he was elected governor, "state management of the economy" has been introduced. What this really means is anybody's guess - apart from the fact that this is a way for Lebed to advertise his intention to impose his decisions on all companies operating in "his" territory. For the time being this has mainly resulted in a general price freeze - a demagogic gesture which, in the absence of any organised supply of food by the authorities, has only increased food shortages.

There are many other ways in which the regional bureaucracies are trying to increase or assert their independence from the federal government. Several regions, like those of Samara, Sverdlovsk and even Moscow, have taken steps to establish an independent regional banking system, supposedly to shield their regions from the "general chaos". In Samara and Saratov, the local bureaucracy have gone one step further by considering the introduction of a local currency, which would not be tied to the ruble - something which may not sound very realistic, but could in fact become a powerful bargaining chip for a small region with large stocks of natural resources.

In other cases, the regional bureaucracies have simply been trying to alter, to their advantage, their existing financial relations with the federal government. Thus Lebed's younger brother, who is the head of the Siberian republic of Kakhassia, announced that his region would no longer pay taxes to Moscow. Meanwhile the governor of the central Siberian Kemerovo region threatened to block the Trans-Siberian railway unless Moscow paid up the full amount of the wages and pensions backlog owed in the region (including what is owed by the regional authorities themselves!).

The power struggle with the regions

Many of the measures taken by the regional cliques are obviously merely gestures designed to improve their bargaining positions in future negotiations with Moscow. Some of these measures may also have more to do with the regional leaders' political ambitions in view of the coming power struggle to replace Yeltsin - which is probably the case for Lebed, for instance.

But some of the regional bureaucracies, particularly those which control large natural or industrial resources, or even those in the richest parts of western European Russia, may also think they have enough leverage to dictate to Moscow, or even to go it alone - even if they do not look forward paying the price that others who have taken that road before them have had to pay, like Chechnya in particular.

In any case, such risks were clearly on Primakov's mind when he warned a meeting of regional leaders, on 27 September, not to go down the path of «dangerous separatism». He added that the centre would not tolerate «illegal and unconstitutional» moves by regional leaders who «display the mentality of feudal princelings» - obviously, Primakov knows the mentality of his regional foes very well. At that meeting, however, Primakov was confronted with a very practical and immediate problem - the fact that the September tax receipts were only half of what had been expected, due, in particular, to the failure or refusal of regional authorities to pass on to Moscow the taxes they had collected themselves.

In an attempt to bring the regional bureaucracies into line, Yeltsin is adopting a two-prong policy - combining the carrot and the stick. The carrot involves integrating some regional leaders more closely into the working of the federal government. Hence the appointment of one of these leaders, Vadim Gustov, the governor of the region surrounding St Petersburg, as first deputy prime minister. Hence also, the proposal to include a number of regional leaders in the Russian Presidium - a sort of supreme executive body overseeing the activity of the government, which, for the time being, includes only the major ministers and the chair of the federal tax service.

As to the stick, it is a controversial bill currently under discussion by the Russian parliament, which would allow the president to suspend and bring to trial regional governors who are suspected of criminal activities. Indeed, up to two years ago, regional governors were appointed by Yeltsin himself and there were relatively few rebels among them. But since they have been directly elected by their regions, the number of open opponents to Yeltsin's authority has increased. In some cases also, like that of Klimentiev in Nizhny Novgorod, politicians who were prominently associated with the mafia have been elected. So Yeltsin is trying to use the existence of governors like Klimentiev in order to weaken all those who oppose his authority. But his problem is that all governors belong automatically to the Federation Council, the upper chamber of the Russian parliament, giving them immunity from criminal prosecution. And, up to now, their immunity can only be removed by the Federation Council itself, which is very unlikely to yield to such a demand coming from the federal government.

Whether this bill will actually be endorsed by the Russian parliament is an open question. If not, Yeltsin will resort to yet another presidential decree. But this is not his first attempt to go down that road. And so far, the balance of forces has never allowed him to clamp down on governors' illegal doings, let alone on their gestures of defiance. And there is no reason to think that he will be more successful this time.

The resilience of the Russian economy

Given this background of tensions and permanent factional fights between the federal government and the regional governments on the one hand, and within the federal government structures themselves on the other, what is amazing is that the Russian economy still manages to produce anything at all. Indeed, despite the looting by the bureaucratic cliques, the additional chaos introduced by market mechanisms, the plundering by the "new capitalists" and the mafia, and the bottlenecks generated by the factions' power struggle, the Russian economy has managed so far to produce more or less enough food, clothes and basic amenities for a 150-million strong population - even though the quality is bad and getting worse and the quantity is often below needs.

If the Russian economy only followed "capitalist" rules, that is if it only produced goods for which there were buyers with the cash to pay for them, the system would have been paralysed by the shortage of money in circulation, long before the present crisis. If it did carry on operating regardless, it is simply because a large part of its activity went through channels in which money plays no part - channels which are mostly based on barter.

Almost by definition, it is practically impossible to measure the extent of the barter economy in Russia, precisely because it escapes the only measure of economic activity known to capitalist economists - the circulation of money. The estimates available vary wildly between 50 and 75% of all domestic trade. Gazprom, the state-owned gas giant, was said to be doing 95% of its domestic business on the basis of straight barter or a more sophisticated form of barter, that of debt certificates - that is customers gave Gazprom a certificate equivalent to a certain amount of money which Gazprom could then exchange against the products of some other company belonging to the same "network".

But beyond these rather abstract figures, a few examples can give a clearer idea of what really happens. Last March, a newspaper quoted the example of the industrial town of Chelyabinsk, in the southern Urals, where construction companies offered to repay their debts to the local government by building an underground system for the town, provided the federal state was prepared to cancel their debts to it as a subsidy for the new metro - which it did. So Chelyabinsk may have its underground. Whether it is a matter of urgency, is another question, of course, but without this type of barter system, there probably would not have been one.

Another example given in September by the US daily Washington Post shows how barter operates on a smaller scale. «The Narfomsholk fabric factory, 50 miles southwest of Moscow», reported the Washington Post, «was a year behind on its electric bill and had no cash on hand. The electricity company agreed to accept concrete utility poles instead». So, «first, the factory shipped fabric 200 miles to a sewing factory in Nizhny Novgorod. In exchange for the fabric, that factory sewed shirts for the security guards who work at a nearby automobile manufacturer. In exchange for the shirts, the auto factory shipped a car and truck to a concrete plant. In exchange for the vehicles, the concrete plant delivered the poles to the electricity company». Likewise, added the newspaper, «the factory paid down its telephone bill with a load of pay phones, its local tax bill with military guard shacks. The water bill was a tough one: the water department insisted on a light blue truck - the colour of water, they explained - and the fabric factory could only track down a white one.»

This is something that completely baffles our Western "experts" who keep complaining about the fact that barter breaks the free-market rules and makes it impossible to apply to Russia their own ready-made economic models. For instance, the Washington Post, which is not the most short-sighted among the capitalist commentators on the Russian situation, moaned in its 3rd September issue: «Barter is poisoning the development of capitalism in Russia because it consumes huge amounts of time that would be better spent producing goods. It cloaks the real financial condition of Russia's industry. And it starves the government of tax revenue because it is hard to extract payments from cashless businesses» However, admitted the author of this article, «barter is the backbone of Russian industry, and to give it up would mean facing the rigors of a real market economy. Many factories would be forced to shut their doors. Unemployment would rise.»

Indeed, in the context of a poor country like Russia, where credit and capital are so scarce, domestic trade and industry would be unable to keep operating on such a scale on a purely capitalist basis. Part of the industry would have to disappear, resulting not just in unemployment but also more generally, into an even more drastic reduction of the population's standard of living.

But there is also another conclusion that can be drawn from the extent of this barter system. It may be true that, as so many Western experts argue, the main reasons for the development of the barter economy in Russia were tax evasion, avoidance of monetary risks and making it easier for the bureaucratic cliques involved to take their cut discreetly. But these reasons do not account for the fact that the barter economy actually worked.

Imagine for one moment British managers having to operate such a system. But what are they taught by business schools and by their own experience? Competition, profit charts, returns on investment, labour unit costs, and all these profit-related abstractions which are based on the idea that only immediate profit matters. Beneath the thin veil of social conformism lies the law of the jungle in an almost bare form - everyone is on his own, except for short-term interest-driven alliances. If there is no profit to be made, or not enough, just turn down the deal or wind down the business and put your money somewhere else. What matters is the money for itself, not the social role or status attached to operating a factory.

For the barter system to work, on the other hand, it requires another kind of mentality and also another kind of social relations, at least within the layer of the population which runs the industry on the ground - social relations which are based a lot more on a will to cooperate in order to survive than on a will to compete, pick the profits and run. In terms of greed there is certainly nothing to choose between the Russian privileged and British capitalists - the former are possibly more brutal and crude, while the latter are more hypocritical and devious. But in terms of the way they manage the economy at factory level there is still a world of difference which can only be accounted for by Russia's past. That is the fact that for over half-a-century the Russian economy learnt to develop and survive thanks to social relations created by the October revolution and maintained by the mechanisms of central economic planning, despite the looting of the soviet bureaucracy.

Capitalism's bankruptcy and Russia's future

This is not to say that today's barter system in Russia should be in any way idealised. It is primarily an expression of the country's poverty and cannot offer a way forward for the Russian economy, nor even a way to avoid yet more tragic economic catastrophes in the future. All that can be said about it, is that this system, which was made possible by the fading remnants of the social relations created by the proletarian revolution, probably prevented Russian society from sinking much faster and more dramatically. When the Washington Post points to the barter system as one of the factors which have contributed to the resistance of Russian society to the development of capitalism, they are right from their own point of view. What they forget to say, or fail to see however, is that being the existence of the barter system are deep social reasons.

The fact is that with all its huge resources world capitalism has proved impotent in its bid to integrate Russia - or the rest of the former Soviet Union, for that matter - into its fold. Contrary to what the Western experts claimed, simply restoring capitalist property relations in law was not enough to produce a capitalist class independent from the old soviet bureaucracy and its state. Nor was it enough to produce a capitalist market.

Such a development might just have been conceivable if the Russian economy was flooded with fresh capital, made available for long-term local development, so that a layer of the bureaucracy could find an advantage in giving up its entrenched position in and around the state machinery. At the same time, however, it would have been necessary to increase significantly the standard of living of the population in order to guarantee a real market for the new industries. But world capitalism has become much too stingy and incapable of taking a long-term view to embark on such a risky adventure - assuming it has ever been really capable of doing it on such a scale.

This is just another illustration of the impotence of today's decaying and crisis-ridden capitalism to expand beyond its existing sphere of activity by contributing to the progress of society. Instead, it has only succeeded in facilitating the emergence of a monster, which threatens to drive the world's largest country into an abyss of reaction and deprivation.

We do not know what the consequences of the present economic catastrophe in Russia will be. But ultimately, the future of Russia will probably not be decided by the speed of its economic slide. It is more likely to be decided by political factors which feed on the increasing poverty of the population. Over the past ten years, the rivalries between bureaucratic cliques have added a lot more explosive material to the powder-keg that the soviet bureaucracy had already stoked up through several decades of its brutal rule. As the central government loses more authority and weakens its control over the regional bureaucratic cliques, the latter have less to lose and more to gain from separation. And they may go down that road all the more easily if, in addition, deteriorating economic conditions allow them to use populist demagogy in order to mobilise support among the more desperate layers of their populations.

Ultimately, the final funeral of what was left of the state built by the proletarian revolution, may take the form not of a "triumphant return of capitalism", as Western leaders promised, but of an implosion of Russia, possibly a violent one - and a slide into barbarism for most if not all of its former constituent parts. Already today, this barbarism exists in some regions. Like in the almost totally destroyed Chechnya which is now ruled by the dictatorship of armed gangs. Or the regimes of some of the poorest republics of the former Soviet Union, where self-styled Stalins rule like monarchs.

All hope is not lost, however. The Russian working class still remains a potentially powerful unifying factor in Russian society. Moreover it can offer to the Russian population a way out of the threatening social and economic catastrophe - something that no other social forces can offer.

Of course, the perspective that the Russian working class could offer would have nothing to do with the threat of the "return to communism" which Western commentators see today in Russia. In fact these commentators are crying wolf out of pure hypocrisy - and maybe also because they are desperately trying to salvage their own past fairy tales about Russia's prosperous future.

But neither Zuganov and his fellow Communist Party politicians, nor any other political current among the Russian ruling circles, wants to abandon the extended privileges which they have won through the legalisation of capitalist property relations. At most they might use the resources of the state to try to reduce the limitations to their own looting due to the crisis. This could involve protectionist measures, re-nationalisations to bail out bankrupt companies and banks, a turn of the screw against foreign capital, etc.. But such measures would not amount to more than those that many poor countries were forced to take following past monetary crises. Nor would it amount to anything comparable to the scale of the Japanese state's intervention to bail out its banking system and kick-start private consumption over the past few months. Besides, judging from what is being discussed today in the financial press, a lot of respectable politicians in well-established capitalist countries seem now to consider that such measures may be on the agenda in the near future... for their own countries.

No. It is not a return to the past that the Russian working class would have to offer. There is very little left to return to anyway. But contrary to what the West argue, there are nevertheless many things that the Russian working class will be able to use from its past: the tradition and the ideas of 1917 and the experience of a society without capitalist relations and organised by central economic planning.

Armed with this heritage, the Russian working class would have to open the road toward a new future, free of exploitation and bureaucratic parasitism - to a communist future which was never on the agenda in the impoverished Russia of the post-1917 years, and will only be on the agenda through overthrowing capitalism on a world scale.

To begin with, however, the Russian working class would have to offer the means to wage a determined fight against all privileges, those of the "new capitalists" and their mafia stooges as well as those of the bureaucracy. It would have to offer a set of concrete objectives to impose on the privileged layers in order to stop the present social slide and save what can be saved by making the most of the existing wealth for the benefit of all. To develop such a plan and to lead the struggle for it, the working class will need a party of its own. Unfortunately, the fledging mobilisation of workers which was seen on October 7th, which took place behind dubious politicians seeking to improve their political future, does not point to the emergence of such a proletarian party - for the time being in any case. Fortunately these things can change and they can change very fast.

Russian society is engaged in a race for time. It is a race between, on the one hand, the most conscious elements of the working class and intellectuals who are seriously seeking a way out of the present catastrophe, and, on the other hand, explosive reactionary forces which may precipitate, sooner or later, the implosion of Russian society. In this race the world capitalist system is not on the side of progress but, once again, on the side of reaction. However this race has still to be run.