Russian fundamentals

By Anne Williamson

This is the third of a four-part series on the International Monetary
Fund, World Bank and the international financial system.

The failure to understand where Communism ended and Russia began insured that the Clinton administration’s policy towards Russia would be riddled with error and ultimately ineffective. Two mistakes are key to understanding what went wrong and why.

The first mistake was the West’s perception of the elected Russian president, Boris Yeltsin; where American triumphalists saw a great democrat determined to destroy the Communist system for freedom’s sake, Soviet history will record a usurper. A usurper’s first task is to transform a thin layer of the self-interested rabble into a constituency. Western assistance, IMF lending and the targeted division of national assets are what provided Boris Yeltsin the initial wherewithal to purchase his constituency of ex-Komsomol [Communist Youth League] bank chiefs, who were given the freedom and the mechanisms to plunder their own country in tandem with a resurgent and more economically competent criminal class. The new elite learned everything about the confiscation of wealth, but nothing about its creation. Consequently, Yeltsin’s “reform” government was doomed to sustain this parasitic political base and this reality explains the recently unsuccessful effort to return Viktor Chernomyrdin, the bankers’ standard bearer, to high office.

The second mistake lay in a profound misunderstanding of Russian culture and, in accordance with the many ironies of the Clinton regime, in the Western advisers’ disregard for the very basis of their own country’s success: property rights. It was a very grave error. Private property is not only the most effective instrument of economic organization, it is also the organizational mechanism of an independent civil society. The protection of property, both of individuals’ and that of a nation, has justified the existence of and a population’s acceptance of the modern state and its public levies. But those realities didn’t influence an administration bent on commercializing foreign policy; what interested the Clinton crowd were Russian assets, not Russian needs.

Russian property rights are tricky; property has never been distributed, but only confiscated and awarded on a cyclical basis. For the big players property exists, as it always has, only where there is power. For the common man, the property right hasn’t advanced much beyond custom which prevents the taking of any man’s shelter, clothes or tools so long as continuous usage is demonstrable. An additional, purely Slavic feature of the Russians’ concept of property is the shared belief that each has a claim upon some part of the whole.

In ancient ‘Rus, property existed for the individual as a claim to a shared asset, a votchina or “estate,” held by all the members of a particular clan. This understanding of property still informs the culture; though Westerners bemoan Moscow mayor Yury Lyuzhkov’s retention of the system of the residential permit (“propiska“) as an impediment to a flexible labor force, the policy is one of Lyuzhkov’s most popular. Muscovites are well-satisfied with a mayor who polices outsiders as they believe any proprietor of such a great estate as Moscow should.

The Russians’ failure to accept the Roman concept of private property has compelled them to suffer the coercive powers of the state so that at the very least a civil order, if not a civil society, might be established and sustained. The hackneyed idea that Russians have some special longing for tyranny is a pernicious myth. Rather, they share the common human need for predictable event undergirded by civil and state institutions and their difficult history is the result of their struggle to achieve both in the absence of private property.

Since only the Tsar or the Party had property, no individual could be sure of long-term usage of anything upon which to create wealth. In the absence of property, it was access — the opportunity to seek opportunity– and favor in which the Russians began to traffic. The connections one achieved, in turn, became the most essential tools a human being could grasp, employ and, over time, in which he might trade. Where relationships, not laws, are used to define society’s boundaries, tribute must be paid. Bribery, extortion and subterfuge have been the inevitable result. What marks the Russian condition in particular is the scale of these activities, which is colossal. Russia, then, is a negotiated culture, the opposite of the openly competitive culture productive markets require.

Ironically, the nontransferability of the votchina system’s entitlement was the very flaw shareholding culture and an equities market could have addressed successfully had Lenin’s revolutionary dictum of “Property to the people! Factories to the workers!” been realized. Instead, the “brave, young reformers” ginned-up a development theory of “Big Capitalism” based on Karl Marx’s mistaken edict that capitalism requires the “primitive accumulation of capital.” Big capitalists would appear instantly, they said, and a broadly-based market economy shortly thereafter if only the pockets of pre-selected members of their own ex-Komsomol circle were properly stuffed. Those who hankered for a public reputation were to secure the government perches from which they would pass state assets to their brethren in the nascent business community, happy in the knowledge that they too would be kicked back a significant cut of the swag. The U.S.-led West accommodated the reformers’ cockeyed theory by designing a rapid and easily manipulated voucher privatization program that was really only a transfer of title and which was funded with $325 million U.S. taxpayers’ dollars.

Voucher privatization’s conceits were compounded by a grievous insult; unregulated voucher investment funds, which the privatizers encouraged the uncertain Russian citizenry to patronize. Hundreds and hundreds of investment funds simply walked with their clients’ vouchers, reselling them to domestic criminals, Red Directors, western investment banks and international money launderers. When the 18 month-long thieves’ banquet concluded in July 1994, the program, whose very design left the controlling shareholding of any single enterprise in the hands of the state, had actually institutionalized the state as the determinant owner of all that had formerly belonged to “the people.”

Thereafter ensued a years-long highly-criminal and oftentimes murderous scramble for hands-on control of the enterprises. Directors stashed profits abroad, withheld employees’ wages and after cash famine set in, used those wages, confiscated profits and state subsidies to “buy” the workers’ shares from them. The really good stuff — oil companies, metals plants, telecoms — was distributed to essentially seven individuals, “the oligarchs”, on insider auctions whose results were agreed beforehand. Once effective control was established, directors — uncertain themselves of the durability of their claim to the newly-acquired property — chose to asset strip with impunity instead of developing their new holdings.

Unsurprisingly, the entire jerry-rigged effort has collapsed in flames. The West’s best course under the new Primakov government is to take its own advice, stop meddling, cease all subsidies and allow what few market mechanisms that do exist in Russia to work. The sooner the banking industry’s pylesos (“vacuum cleaners”) are allowed to fail, then the sooner the national property can return to market where more able and productive hands might yet grasp it.

Until Russians have resolved for themselves how property is to be held and secured their decision de jure, all the destructive economic arrangements and cultural behaviors crowding Russian history will continue. Wealth will not be created without private property; without transferable property secured legally to protect no Russian will pay taxes; without revenues no Russian government can endure without falling back upon what is every state’s final reserve; coercion.

The years-long sugarcoating of what the Clinton administration’s policies have wrought in Russia is just one more lie bequeathed Americans. More Western money will only work to insure the continued degradation of Russia, bequeathing her people a future that can be discerned in that most familiar object of Russian folk culture — the Matryoshka nesting doll — a perfect, visual metaphor of Russia’s Brechtian universe: Each figure is captive, one inside the other, and in the end the biggest doll consumes the lot.

Anne Williamson has written for the Wall Street Journal, The New
York Times, Spy magazine, Film Comment and Premiere. An expert on
Soviet-Russian affairs, she is currently working on a book, “Contagion:
How America Betrayed Russia,” a chapter of which can be read at


The Goldilocks Economy Unmasked ?? October 6, 1998

An Imperial President’s Moneybags ?? October 7, 1998