The old state-capitalist "socialism" was rotten while today

Market-capitalism ravages

the Russian economy

by Mark, Detroit
(from Communist Voice #19, Dec. 8, 1998)


Privatization of state enterprises
Lifting price controls
Free trade and capital flows
Yeltsin's dictatorial rule
The sad balance sheet of shock therapy
The partial retreat from neo-liberalism
What sort of trend do the Russian workers need?
Illusions in Gorbachevism
Rebuilding a revolutionary workers' movement

. According to Yeltsin and the world bourgeoisie, free-market "shock therapy" was supposed to be the magic elixir that would revive the stagnating economy of the former Soviet Union. No doubt the old state-capitalism, falsely called "socialism," was rotting alive and its economy gripped in malaise. But the "shock therapy" begun in 1992 has put the sick patient into a prolonged coma. The market reforms have left the Russian economy a shadow of its former self. The industrial base of the economy has been rapidly disappearing and what's left of it barely crawls along on the basis of barter. Agricultural collapse has resulted in reliance on massive food imports and in ever-threatening food shortages. Like many an impoverished country in the Third World, today's Russian economy lives a precarious existence based on the funds provided by the export of a few raw materials whose prices are prone to sudden drops on the world market.

. This August, the latest economic crisis struck Russia. Again it is the working masses who are bearing the brunt of this disaster. For the last seven years, their living standards have been in a free-fall. Workers go months and years without wages and are reduced to growing food in their own little gardens and trying to barter goods produced in their workplace to acquire basic necessities. But it is a different story for the Russian elite. This new elite includes a section of former state-capitalist bureaucrats who have made fortunes by taking over privatized enterprises, capitalists who were not part of the old hierarchy but were fostered under the old system, and criminal gangs who began to amass wealth and power as kingpins of the black market. These groups live like royalty amidst the economic ruin. They are the new masters of Russia: they are the highest products of market-capitalism there.

. While the market has been killing the Russian workers for seven years, the August crisis also brought a blow to the profits of the foreign capitalist investors as the Russian government defaulted on securities they sold them. This event, coming on the heels of the crisis in Asia and the economic woes in Latin America, set off a plunge in stock markets around the world.Suddenly the economic mess in Russia became front-page news in the capitalist press.

. In this situation, the Russian government is moving toward somewhat more state intervention in the economy. Despite the hysterical stories in the bourgeois media, these moves don't mark a return to the old, so-called "communist" system. Indeed, there was no such system to return to as the old order was state-capitalism parading itself under socialist labels. Rather they are an attempt by Yeltsin and the main parties of the Russian legislative Duma, including Zyuganov's phony "Communist" Party, to save the market economy from complete collapse by undertaking some minor reforms.

. The Russian crisis shows that the market is no answer to state capitalism. In fact, things have gotten so bad that even defenders of the market economy like the Yeltsin government are themselves temporarily backing away from some of the more extreme neo-liberal prescriptions. Likewise, various circles in Western capitalism itself are challenging the neo-liberal economic formulas that have been pushed by the IMF in Russia and have dominated Western capitalist economics for more than a decade. (The IMF itself has recently backed away from some of the dogmas it imposed in Asia in light of the continuing crisis there. Now, for example, they consider it OK if some Asian governments run deficits in order to stimulate their economies.) But capitalism with more state oversight will not turn the exploiters into lambs. Rather this policy aims to bail out the exploiters from the mess they have made. Thus, the minor tinkering being proposed by the Yeltsin and the Russian rulers will hardly make a dent in the suffering of the masses. Nor would a return to the old Soviet revisionist state-capitalist system solve the workers' problems. The workers must press their own demands and develop their own independent outlook by rejecting both the old phony socialism and the present market system. Only if the old rot is discarded can the rebuilding of genuine anti-revisionist communism begin to light the way forward for the rebuilding of a revolutionary workers' trend.


. The August economic crisis resulted in the Russian government defaulting on its debt obligations to domestic and foreign financiers. It also led to a dramatic drop in the value of the ruble against other currencies. Faced with growing budget deficits, the Russian government had for several years been issuing short-term bonds and treasury bills. Given the shaky nature of the Russian economy however, the government had to offer super-high rates of return to attract investors. In this they succeeded. But meeting these debt obligations actually made the budget crisis worse, leading the government to issue still more bonds. More and more of the budget just went into meeting the debt payments, leading to cuts in education, social services, and the wages of state workers among other things. The snowballing debt obligations had consumed 30% of the budget by mid-1998 and were projected to engulf a whopping 60% by the year 2000 if trends had remained unchanged.

. In addition, the high rates of return on short-term government securities tended to further dry up direct investment in industry, which, like investment in government debt, was risky but also required waiting a long time for relatively low rates of return. This only added to the overall economic crisis that led to the budget deficits in the first place. At the same time, failure to pay wages helped dry up the domestic demand for goods which contributed to the decline of industrial production and the inability to collect tax revenues upon which the state budget depended.

. The IMF reached agreement in July 1998 on a $22.6 billion bail-out package to try and stave off the looming financial disaster and soon the Russian government received the first installment of some $3.8 billion. As part of the deal, Yeltsin guaranteed the IMF that the money would pay off the foreign bondholders and that he would not devalue the ruble. The IMF installment wound up in the pockets of the financiers but it could not stave off the financial collapse. The government debt problem had reached the point of no return. Then-Prime Minister Kirienko, who was sacked by Yeltsin in August, pointed out that in May 1998, the government was paying out over $1 billion per week in short-term debt obligations, a sum greater than the entire budget receipts that month! (1) As investors saw the handwriting on the wall, it became hard for the Russian government to find any takers for its new debt issues no matter how high a rate of return it promised. Having reached this impasse, in August the government in essence declared a default on its short-term debt. Payments to Russian banks were stopped and the government announced it would issue new securities to these banks as a substitute. A 90-day moratorium on debt payments to foreign bondholders was declared and it is expected that much of this debt will never be repaid.

. The default has helped push a number of Russian banks into crisis. With the crumbling of Russian industry, a number of banks tied to particular industrial sectors have sought to offset the decline in funds from the industrial enterprises by selling their government bond holdings or using them as collateral for loans. Now that source of revenue is dead and a number of banks are even closer to collapse. Recently it was announced that about half of Russia's 1,500 banks will be forced to fold. Estimates of the loss to foreign investors because of the default on short-term debt are between $30-50 billion. German banks have been among the main investors who will lose, along with the well-publicized U.S. "hedge fund" investors, Long-Term Capital Management, who had to be bailed out by a banking consortium brought together by the U.S. Federal Reserve.

. The IMF "rescue" package was no more successful in avoiding devaluation of the ruble. The stabilization of the ruble after the hyperinflation of the early 90s in Russia was hailed by the neo-liberal crusade as portending the revival of the Russian economy. They boasted that inflation had been reduced to a "mere" 14%. But the general economy remained a shambles. In May 1998 the Russian stock market crashed and by late August it had lost 84% of its value compared to its peak in its preceding short-lived "boom." In recent months, the Russian government tried to bolster the ruble by purchasing rubles with its foreign currency reserves and gold. But these efforts would have bankrupted these reserves in a few months. Thus, the government had to let the ruble "float." The ruble sank like a stone, losing over two-thirds of its value against the dollar at one point.

. The devaluation of the dollar has meant new suffering for the Russian masses. The present Russian economy has grown dependent on imports for not only luxury goods, but basic necessities like food. Moscow, for instance, imports 60% of its food. The bragging about controlling inflation has been replaced by government reports predicting prices to rise 2 or 3 times in the next year.


. The series of economic crises that have ravaged the Russian economy is the product of the program of market reform "shock therapy" that began in 1992. This program not only meant doing away with the old state-capitalist structures, but doing so very rapidly. Allegedly, a speedy transition to the market would involve the least pain and rapidly lead to prosperity. At the beginning of this plan, Yeltsin boasted the there would be only a brief six-month period of sacrifice for the masses which would be followed by dramatic improvements in living standards.Instead this program has devastated the masses and destroyed the economy, which many economists think may take decades to revive.

Privatization of state enterprises

. One of the major changes brought about under market reform was privatization of state property. Under the old system, although industry was state-owned there was actually nothing socialist about it. Placing the means of production in the hands of the state is a necessary part of the workers efforts to place the economy under their control and make the transition to socialism.But under the phony socialism that existed in the Soviet Union, a relative handful of state and party bureaucrats controlled the enterprises and the workers remained an exploited class. While there was a central plan for the economy, in fact private interests ruled and competition was rampant between enterprises, between enterprises and the ministries, and between ministries. Anarchy of production continued to reign through the state economy. Despite state ownership the social system was not really socialist but capitalist in nature. Thus, Yeltsin's privatization was not the beginning of private interest control over production, but capped off the process and legalized it. Yesterday's minister, factory manager or higher party functionary has, in many cases, become today's private owner of state property.

. At first, there was a good amount of opposition to Yeltsin's privatization from among the state bureaucracy. But this had little to do with opposition to moving toward the free market in general. The better-positioned bureaucrats mainly wanted to make sure that privatization was carried out in such a way that they would have the inside track on taking over the state property. The first big wave of privatization involved issuing vouchers to the population that could be used toward acquiring shares in privatized companies. But an insignificant share in a company with a dubious future offered nothing to ordinary Russians, who sold off the vouchers to the wealthy. Later, in the mid-90s, the cash-strapped government held closed auctions where select banks used their ties to government agencies to acquire important state enterprises at bargain basement prices in return for lending the government money.

. Once enough of the former state economic lords were convinced they could retain their privileged position in the new market system, privatization moved ahead rapidly The proportion of the workforce employed in non-state firms grew from 13% in late 1991 to 70% at the end of 1994, accounting for 78.5% of industrial output. By January 1997, only 9% of officially registered enterprises were entirely state-owned. (2)

Lifting price controls

. Along with the expropriation of state property by private owners, the old system of state control of prices was abolished. In January 1992, state controls were removed from 80% of wholesale and 90% of retail prices. In the old Soviet system, shortages of consumer goods were a chronic problem. According to the proponents of shock therapy, ending price controls would provide stimulation for production and insure that production matched consumers' needs.

. But the free market cure was worse than the disease. Skyrocketing prices killed the ability of the masses to purchase consumer goods. In 1992, prices rose 2,500% and real wages dropped 28%.Over the next several years, inflation slowed from this torrid pace but remained high. Real wages continued to decline. This decline in purchasing power naturally led to a decline in industrial output. Runaway inflation not only destroyed the value of the ruble, but led to a situation where the money supply of enterprises was depleted, and payment in wages was replaced by payment in goods produced by the enterprise. The Russian economy was reduced to the barter system. Workers bartered goods they received as payment from their enterprises to get their necessities. Companies bartered among each other. In April 1992, barter made up about 5% of industrial sales. Five years later, barter accounted for 45% of these sales. (3)

. Faced with economic chaos inside Russia, the owners of the newly-privatized enterprises did what any self-respecting profiteer would do. They converted rubles into foreign currency and stashed them in the Western banks, often illegally. Countless billions of dollars of capital left Russia in this way. As well, the Russian capitalists couldn't resist trying to make money from the inflationary climate by speculating in foreign currencies, minerals and real estate. Meanwhile, investment in plant and equipment rapidly dried up. Thus, far from price liberalization leading to a new surge of production and consumer goods, production fell into the abyss.

Free trade and capital flows

, Another major feature of the market transition has been a marked decline in restrictions on trade and capital flows. As noted above, Russian capital freely left the country (albeit sometimes illegally). But despite the easing of restrictions, there has been relatively little direct foreign investment to compensate, and there has been a net flow of capital leaving Russia. Of course, there was the splurge of short-term foreign investment in Russian debt. We have already seen the wonderful results of that in bankrupting the national budget and precipitating the latest economic slump.

. According to the OECD, an organization of the stronger capitalist countries, Russia followed "a fairly liberal trade policy" in line with its efforts to join the World Trade Organization. (4) Neo-liberal dogma would hold that this should provide optimal conditions for national prosperity. But, as is well-known, much of Russian industry lagged behind world standards in quality and efficiency. Inevitably, the free trade policy meant that foreign multinationals shoved out domestic producers in a number of fields. Many of the imported consumer goods are beyond the reach of the workers, but the new Russian yuppies gobble them up.

. With the collapse in Russian agriculture, imported food is filling the void. Indeed, in the wake of this August's crisis, the Russian government has further liberalized it food import laws and has also been begging for food contributions from the big capitalist powers so as to avoid mass starvation.

. It should also be pointed out that while the capitalist powers assure Russia that foreign access to Russian markets is bound to bolster the economy, in fact there is hardly a capitalist country that hasn't at some point in its history used protectionism to bolster their weaker industries.

Yeltsin's dictatorial rule

. According to U.S. officials and the mainstream media, the transition to market economy has brought with it a transition to democracy. It's true the old Soviet party-state bureaucracy, which stifled the masses and was despised by them, is gone. But what has taken its place is far from democratic. The new political structure has all the trappings of bourgeois democracy -- rival political parties, elections, a parliament, etc. But from the start, president Yeltsin has had the power to rule by decree.

. When Yeltsin felt his policies and power being challenged by the parliament in 1993, he had loyal troops bomb the parliament building, ordered a reign of terror against opposition groups, and had his powers enshrined in a new constitution. Some major media outlets are little more than Yeltsin cheerleading squads and he has sent thugs to intimidate rival capitalist media outlets. Yeltsin has even created a special 25,000-man "praetorian guard" to carry out his dirty work.(5) Yeltsin's dictatorial powers were also on display in the dirty war to suppress the independence movement in Chechnya. He mobilized several army divisions without approval of any government bodies and without even notifying his defense minister. Given the extent of Yeltsin's rule by decree, the legislative Duma's powers are quite limited.

. Yeltsin's rule by decree has not brought any stability to the political system however. Nor has the system been solidified by the fact that the amount of government bureaucrats today in "privatized" Russia is considerably larger than in Soviet times.(6) Instead, rival groups of capitalist "oligarchs" ruthlessly compete to influence the new political system, shape its structures to their liking, and set up their own private power structures, which often rival the government power. Bribery is rampant and any number of key government officials are themselves big industrialists or bankers who don't even bother to formally break their ties with the businesses when they enter office.

. Of course, even in "model" bourgeois democracies like the U.S. and Western Europe, government policy is determined by the needs of big capital. But in Russia, the process is particularly naked. It is widely reported that Yeltsin's 1996 election, for instance, was brought and paid for by a consortium of big financiers and oil moguls led by media and oil titan, Boris Berezovsky. Moreover, in Russia the competing groups have not yet reconciled themselves to a general system in which to mitigate their disputes. So alongside Yeltsin's dictate, local fiefdom's arise. For instance, the mayor of Moscow, Luzhkov, has turned the city government into his own personal kingdom where he has a finger in all the businesses and runs the city like a Mafia don.In fact, it is reported that Luzhkov, international financier George Soros, and other private capitalists have personally been financing sectors of the armed forces which otherwise would have collapsed due to the government's perpetual budget crises.(7) Along with this, there are strong criminal gangs that create their own authority and sometimes become integrated into the normal police and military forces.

. While the big capitalists claw each other for influence over the state, they share common interests in seeing the workers exploited and kept in their place. In turn, the workers despise the government. Although Yeltsin had considerable support from the population when he first came to power, today he's universally despised and the government is rightfully seen as a corrupt cesspool.

The sad balance sheet of shock therapy

. What then was the economic balance sheet of shock therapy?

. First of all, there was a dramatic decline in economic output. Between 1991 and 1995, GDP fell by 42% and industrial production by 46%. Even if we take into account estimates of the economy which try to add in unofficial economic activity, the GDP declined by "only" a third in the first half of the 1990s.(8) There was a very tiny blip up in 1997, which had the free-market advocates predicting the corner had been turned. But new crises have led to further economic decline. The amount of capital investment in 1996 was only a quarter of what it was in 1990, meaning plants and machinery are rapidly decaying. The only booming sector of the economy is financial swindling and bureaucratic parasitism, otherwise known as banking, insurance, trade and public administration. Meanwhile, production of food staples like cooking oil declined by over 40% from 1991-1995. Since the August ruble devaluation, the cost of imported food has doubled, and the role of food imports has been rising with the decline in domestic agriculture. Likewise, production of consumer goods like refrigerators declined by 53% and TVs by 78% in the same time period. In basic industrial goods, the picture is also gloomy. For example, from 1991-95, steel production fell by 33% and petroleum declined by 34%.(9) In the old system, store shelves often lacked consumer goods. But thanks to the market, sometimes store shelves are well-stocked -- not because production has increased, but because no one can afford the goods. This is also why in 1992 huge inventories of unsold goods began to pile up in warehouses.

. The economic collapse has fallen like a ton of bricks on workers, those on pension, and the less fortunate sections of the middle strata. Overall, unemployment rose to over 9% by 1996. But this doesn't tell the full story. In the industrial sector, fully one-third of the workforce was on forced leave or involuntarily working part-time. Employment in industry dropped by 25% in the first half of the 90s.(10) Wages have been decimated. Real monthly pay in 1995 had dropped to about half of 1990 levels. Similar figures hold for the fate of the average pension, while smaller pensions have fallen even more rapidly.

. The toll of social ills has grown in proportion to the economic depression. Health care budgets have been slashed at a time when need is greater than ever. Outbreaks of diseases like cholera and diphtheria have occurred. A sudden and dramatic decline in birth rates has been accompanied by an equally rapid rise in the death rate. Life expectancy for males has fallen from 65.5 years in 1990 to 57.5 years in 1994, giving Russia a lower life span than such chronically poor countries as India. Educational institutions have lost much of their funding. Meanwhile, scientists and technicians have been fleeing the country and function as a cheap pool of talent for the U.S. and other capitalist powers.


. If the economy has been in such dire straits, why did the Yeltsin government and the IMF insist on sticking to the "shock therapy" prescriptions? This is explained by the fact that Yeltsin had support from the strongest sections of the new private bourgeoisie. Various big Russian capitalists disagree with this or that policy. But overall, they were allowed to ravage the former state assets for their own profit, and salt the money away overseas. The Yeltsin regime has allowed them to get away with not paying their legally-mandated taxes and has participated gleefully in the corruption which has benefited big business. Billions of dollars in the state budget and IMF loans quietly "disappear" into the pockets of the capitalists.

. While much of industry and agriculture has suffered, there are some super-wealthy "winners" amidst the carnage who have used their resources to keep Yeltsin around despite the fact that he has no support among the masses. Key banking-industrial groups, for instance, certain raw materials producers that rely on exports, have gotten fat off Yeltsin's policies. We have already mentioned the consortium of financiers and industrialists who bankrolled Yeltsin's 1996 presidential campaign.

. In particular, the Russian government has been banking on oil and gas exports to save the economy. Exports of oil and gas from Russia to countries outside the CIS (Confederation of Independent States) have risen steadily, and so long as prices for these commodities in the world market were high, this helped produce a favorable balance of trade. These exports have been Russia's main source of foreign currency and thus are essential in paying off the country's growing foreign debt. The positive balance of trade gave the sick economy a veneer of well-being and made it convenient to ignore that the neo-liberal policy was strangling the economy as a whole. But the policy of staking everything on the fluctuations of the world oil markets was bound to come back and haunt Yeltsin. Sure enough, one of the immediate causes of the August 1998 crisis was a glut on world oil markets which drove the price of that commodity down.

. It is also notable that the prime minister for most of Yeltsin's reign has been Victor Chernomyrdin, who formerly oversaw the giant Gazprom oil/gas monopoly as a minister in the old Soviet Union and later made a fortune through his holdings in that company when it became privatized. While the economic problems in Russia have taken their toll on the domestic oil capitalists too, the oil capitalists see a big future in exporting to the world market and support Yeltsin because they see him as someone opposed to re-nationalizing the industry.(11)

. Yeltsin could also count on the support of the IMF and the major imperialist countries who saw in Yeltsin their best chance to impose policies that would be most beneficial to the imperialist multinationals and financial sharks. In return for IMF loans, the Russian government followed the IMF plans that would allegedly alleviate inflation. The instability of the ruble has been a major concern to foreign investors who fear devaluations destroying the value of their investments. According to the IMF, the key to avoid inflation was cutting the budget at all costs. This was done with a vengeance. Subsidies, social welfare and government-paid wages were slashed, helping destroy living standards and drying up domestic demand. At the same time, the government's ability to funnel funds or credit to industry shriveled. Inflation was temporarily contained to some extent, but at the cost of ruining the economy. The IMF also insisted that the solution to the budget deficit problem was the issuing of short-term debt. This was a great way for foreign investors to make a fast buck. Moreover, the IMF also dangled the carrot of profiteering from financing the deficit in front of the Russian banks who previously had reaped profits from funneling state funds to industry, a practice the IMF wanted to stop. So on the one hand the IMF policy shrunk the economy while on the other, the rapidly increasing government debt payments incited further government deficits. This August, the chickens came home to roost as the whole plan collapsed, the government defaulted on its debt payments and the ruble's value plummeted.

The partial retreat from neo-liberalism

. Faced with the August disaster, and faced with growing discontent among the workers, Yeltsin was forced to swing a bit away from the neo-liberal dogmas. He scapegoated his prime minister, Kirienko, for Yeltsin's own policies. Only a few months earlier, Kirienko had replaced Chernomyrdin, who was forced out in disgrace. In August, Chernomyrdin was resurrected by Yeltsin and installed as acting prime minister. But the Duma refused to go along with Chernomyrdin, and so on September 11, Yevgeny Primakov took over as a compromise between Yeltsin and the Duma. The capitalist press raved that the replacement of Kirienko and some ministers signaled the demise of market reform and the return of the old Soviet system. Baloney. Chernomyrdin has gone along with the Yeltsin program for years. And Primakov has not suggested any radical change, either. As for the "communist" appointed to a top economic planning post, the CPRF's Yuri Maslyukov has done nothing to challenge the government's basic course but instead in the past served as a trade and industry minister under Yeltsin.(12)Nevertheless, certain policies are being considered although they are meant to save the new system, not return to the old. Despite their mild nature, some of these policies differ from the present policy of the likes of the IMF and the Clinton administration, who issue stern warnings about the dire consequences of the new course while ignoring the pathetic results of their own brilliant ideas.

. Primakov has taken several measures which contradict the current IMF "wisdom." In order to dampen down mass protest, he has paid a portion of the wages that were in arrears. There are also reports that the government will provide some aid to relieve the enormous indebtedness of Russian companies, although it seems this aid will only cover 20% of the debt. In order to meet such needs, the government plans to print more money. The IMF curses this as inciting inflation, which it well may, but of course ignores the ruinous effects of its own policy. There is talk of more strict controls over investment capital and requirements that foreign "hard" currency earnings of companies must be transferred to the government. Upon coming to power the Primakov government denied that they were going to nationalize any companies.(13) But nationalization of a few companies might not be out of the question. As we go to press there is legislation being proposed in the Duma that would allow for nationalization of certain enterprises. As well, it appears that some failing banks may be put under government administration.

. Actually, even the devaluation and default on the debt, carried out by Kirienko just before his firing, contradicted the wishes of the IMF. However, to somewhat soothe the wounds of the foreign financial barons it appears that foreign investment in Russian banks will no longer be limited to 15%, but can reach 100%. This has been hailed by both Russian and foreign financiers.

. Thus, although some measures of the new government might irk certain neo-liberals, they hardly challenge the position of private capital in Russia. Even less are there any dramatic measures to improve the plight of the masses. In fact, during Yeltsin's reign there have previously been a number of similar adjustments when the results of shock therapy were too severe.


. To say the present market system in Russia has failed to deliver on its promises would be the height of understatement. But this is no reason to believe that all would be well if only the old state-capitalist order was restored. The old system was despised by the masses who rightfully saw the ruling bureaucrats as their oppressors. The change that took place in the former Soviet Union was not a change from socialism to capitalism. Rather, what happened was that the decay of the old state-capitalist system gave rise to the present reign of free-market economics. In large part, private capitalism was born from the private interests that had grown up among the state/party elite under a fraudulent "socialist" label. The old bureaucrat-capitalists had already established defacto ownership of the means of production. This is why a whole section of former state/party officials became advocates of the market and the bureaucrats that wanted to maintain the old system were unable to sustain their resistance.

. Part of today's private capitalist class is composed of a section of the old bureaucratic elite. Another section consists of those who were not part of the top officialdom under the old system but were fostered by the institutions of the old system. Another section of the ruling class is made up of entrepreneurs who developed independently of the old state-capitalist institutions. Some individuals in this last category began their business careers in the spaces allowed for private enterprise under the former system or in the black market.

. The rot that had consumed the old Soviet order can be seen in the various ways in which the former state-bureaucracy bred the new class of private entrepreneurs. Even under Gorbachev, some top bureaucrats had appropriated some of the state property for themselves, and there was official encouragement of a private capitalist sector. As well, it was during Gorbachev's reign that what was left of the centralized economic apparatus was largely abolished, including Gosplan, the top economic coordinating body, and Gossnab, which oversaw how supplies were allocated among enterprises.

. Among the studies of the transformation from state economy into private capitalism is that done by Virginie Coulloudon as research for the Davis Center for Russian Studies at Harvard University.(14) Among other things, she traces the connections between the old and new banking systems. This study notes that under the old system, different banks became linked with particular industrial sectors. These banks had channeled central funds to the enterprises. A number of these bank-industry groups remained in privatized form. According to another study, in the first few years of privatization, these banks greatly profited from their role in distributing state funds.(15) They received a margin of 3% for handling the state funds, a handsome sum in 1992 for instance when these directed credits to the enterprises amounted to 15.5% of GDP.Moreover, these banks profiteered by using funds collected from household and enterprise depositors to speculate in the currency and commodities markets.

. Coulloudon also traces how some of the biggest private banks developed from the Central Committee of the CPSU, its youth organization (Komsomol), and even the KGB. Each of these institutions had substantial foreign connections and accumulations of hard currency which could be used to create new banks. Among the banks created in this way was the OneksimBank, founded in 1993. The Russian government gave control of its foreign accounts to this bank, and it became the personal bank of top executives of the foreign trade ministry. As well, it administered federal budgets and other federal programs, including the reconstruction of war-ravaged Chechnya. OneksimBank then took advantage of the previously-mentioned "shares for loans" auctions to acquire a majority holding of Russia's biggest nickel producer and a giant telecommunications company.

. Besides the transformation of some former top bureaucrats into private capitalists, Soviet officials directly encouraged a new crop of private business entrepreneurs. The Komsomol itself was a veritable breeding ground for future capitalists. With the backing of the CPSU, it set up entrepreneurship training centers, provided the participants with a modest amount of cash, and encouraged them to turn a profit. In part, the CPSU and Komsomol financed themselves this way. But it was also the start for some lucrative personal careers. An example of a major Russian capitalist who got his start in Komsomol is Konstantin Borovoi. After his Komsomol training, he set up his own business under Gorbachev, and later founded Russia's first commodity exchange.Recently-deposed prime minister Kirienko is another member of the present elite who comes out of the Komsomol entrepreneurship circles.

. Besides those elements of the new capitalist class who were part of the old elite or had been fostered by the former state-capitalist structures, there is another section of the new Russian elite which developed outside the old structures. Some, like oil and media magnate Boris Berezovsky, chafe at the insider advantages enjoyed by those of the old elite who are now private capitalists. But at the same time, the elite from the old establishment and the "outsiders" like Berezovsky see mutual advantages from reaching deals with each other. Thus, even as Berezovsky campaigned against a government minister who froze him out of sweet deals, he merged with a former member of the old power structure, Khodorkovsky, to create the giant Yuksi oil company. This merger gave Berezovsky the financial clout to go acquire another major oil company, Rosneft.

. The transition from the old bureaucracy to the new elite also involves the political sphere. Obviously Yeltsin comes out of the old ruling structure. But he is not some rare exception. According to a 1994 survey of the Russian Academy of Sciences, members of the old apparatus made up 75% of Yeltsin's closest allies, 60% of the parliament, and 74% of government officials.

. The transformation of a section of the old bureaucrats into today's business tycoons and top political players is evidence that the former state-capitalism itself gave rise to powerful private interests among the bureaucratic hierarchy. The former bureaucrat-capitalists ran the economy for their own benefit, not those of the workers. Far from the old state-capitalism being the antidote to private property, it fostered its own version of it.

What sort of trend do the Russian workers need?

. Today, when the workers are being ground up by the free-market policy, various forces in Russian claim to speak in the name of the workers and socialism. Unfortunately, the dominant perspective among them sees a more state-capitalist policy as the cure for the market. They don't see the need for building a trend opposed to both, or have a perspective of establishing an economy that is really directed by the workers as genuine communism stands for.

. The biggest trend of this type is Gennady Zyuganov's Communist Party of the Russian Federation (CPRF). This party came on the scene in 1993, reorganized from the remnants of the old Communist Party of the Soviet Union which was banned by Yeltsin following the abortive coup against Gorbachev in 1991. Despite its pretensions, this party has nothing to do with genuine communism. Indeed, it gained notoriety for forming political blocs with the ultra-nationalist reactionary, Vladimir Zhirinovsky.(16) Its idea of socialism is little more than creating a larger role for the state sector of the economy and some more social programs. Of course more social welfare would be of assistance to the workers. But the CPRF has shown no willingness to challenge the power of the capitalist oligarchs and so they settle for the most miserly crumbs. Instead the CPRF has allowed itself to be co-opted into the ministries of the Primakov government. It trembles before the big private capitalists, which is why it has backed down on various nationalization proposals in the past. It should also be kept in mind that nationalization in itself does not mean socialism. Socialism also requires that the economy is in the hands of the workers and, despite its "communist" pretensions, the CPRF's only alternative to the market is merely extending the state sector, not an economy run by the workers. All told, the CPRF is basically a meek, reformist parliamentary opposition.(17)

. The Federation of Independent Trade Unions of Russia (FNPR) is far and away the dominant trade union trend. Its membership tops 40 million. But it follows a policy of class-conciliation and thus dissipates the potential power of the workers in its ranks. This is not surprising considering its roots in the official trade unions of the old Soviet Union which were servile tools of the state-capitalist economic establishment. The FNPR leadership expressed their distress over privatization, but overall they have gone along with the market reforms. While they have now and again called strikes or protests, they have no perspective of building a militant class movement. Typical of their acquiescence to the powers-that-be was their leadership's call for moderation in the face of mass anger at Yeltsin's 1993 bombing of the parliament.

. There are several much smaller groups that also purport to be communist but condemn the CPRF leaders for selling out to the free-market forces. However, they hearken back to the days of Stalin for their model. They do not recognize that the system that developed under Stalin was state-capitalist and gave rise to a new type of class rule of the bureaucratic elite over the masses.

Illusions in Gorbachevism

. The idea of seeking salvation in the old system also pervades the thought of the left around the world. One variant of this is romanticism about Gorbachev-style reforms. The book Revolution from above by David M. Kotz and Fred Weir is an example of this approach. They praise the Stalinist system as "socialist" despite admitting that it had various "flaws," such as the fact that the workers had no power and society was run by a brutal and corrupt elite. But they contend that if only Gorbachev had had more time to tinker with reforming the old system, it could have been salvaged.

. But did Gorbachevism mean the workers were assuming control of society? Not at all. Democratization may have created certain openings for the workers to organize outside the old official structures, but it did not transfer power to them or change the basic class structure. What Gorbachev was really concerned with was not helping the workers to organize, but breaking down the centralized control over the economy so as to allow a fuller blooming of private capitalist interests. His main disagreement with Yeltsin and his "shock therapy" was over the pace of market reform. In fact, while eliminating price controls is usually identified with Yeltsin's "shock therapy," in 1990 Gorbachev began to dismantle price controls. This led to prices jumping by over 1,000% in a few months, pushed many incomes below subsistence levels and caused whatever credibility he may have had among the masses to disappear.

. This was the reality under Gorbachev which even Kotz and Weir don't deny. But Kotz and Weir fantasize that if Gorbachev had handled things just a little differently, then some more kindly type of socialism might well have come into being instead of the disaster that they themselves admit actually took place. But Gorbachev's measures had nothing to do with undermining capitalist relations. They merely facilitated moving them from one type to another. Given Gorbachev's orientation, eliminating the former central controls could only mean strengthening the claim of those who were in control of the economy to the state assets. Likewise, Gorbachev's general orientation to expand the market sector of the economy could only foster new private capitalists developing from outside the old bureaucracy. What Revolution from above cannot come to grips with is that no set of reforms could have transformed the former state-capitalist oppression into something wonderful. Work to bring about a society run by the workers doesn't mean tinkering with the old system, but helping create a revolutionary workers trend that rejects capitalist society in the old and new forms.

. In short, the problem is not that there were flaws in the carrying out of Gorbachev's general plan, but that Gorbachev's attempt to fix the crumbling state-capitalist system with market reforms could never have resulted in anything but the advance of private capitalism. And with private capitalist forces increasingly dominating society, Kotz and Weir's "socialism" could never amount to more than hoping for a government that tries to reign in some of the "excesses" of capitalism.

. Thus, it is not surprising that Kotz and Weir think of socialism as some kind of government regulation of market forces. This is shown by their description of the ideal society of the future. Kotz and Weir say that their conception of "democratic socialism" involves "some elements of both public regulation and market forces."(18) They laud "market socialism" as a possible solution to achieve their democratic socialism. They describe this system as one in which "profit-seeking enterprises would compete with one another in markets" but also have "significant state intervention" to "reduce inequalities" and provide a social safety net. While Kotz and Weir have their own particular schemes that would allegedly prevent the power of capital from manifesting itself, their underlying idea is no different than that promoted by social-democratic or revisionist governments around the world. They too claim their "socialist" government is compatible with a capitalist economy. In reality though, these governments show time and again that they defend the interests of capital. When the interests of capital are threatened, they too break strikes and impose austerity measures. Kotz and Weir's refined Gorbachevism amounts to another version of a society in the hands of the exploiters but masquerading as socialist.

Rebuilding a revolutionary workers' movement

. If the Russian workers are to rebuild a revolutionary class trend, they must reject the views that dominate the left today. Neither those that collaborate with Yeltsin's free-market policy, nor those who romanticize the departed state-capitalist system offer the workers a perspective for their liberation. Today, the Russian workers are beginning to stir. The strikes and protests of the miners and events like the millions-strong protest in early October against the Yeltsin government are signs of brewing discontent. But the protests also show the severe weaknesses of the workers' movement. Forces like the FNPR and the CPRF, which dominated leadership of the protests, offer no perspective that can inspire the workers even though they are suffering greatly.

. This does not mean that there is no point to mass action now, but that there is a need to build a new revolutionary trend. To the extent that this happens, the stronger will be the mass actions aimed at getting some relief from the devastation of the economic crisis. As well, the more the mass motion develops, the better the conditions will be to discuss what orientation serves the cause of the workers. It is significant that there are reports of small organizations of workers who voice their hatred for both the present system and the old phony socialism. These groups don't necessarily have a clear understanding of the problem with the old system nor what tasks must be taken up to effectively fight the present set-up. But their rejection of both the old and new systems is an encouraging sign. The groups that are the tattered remnants of the phony "communism" of the past either make common cause with Yeltsin or try to foist on the masses the very system they were glad to rid themselves of a few years ago. No matter the size of these groups, they will lead the workers into a dead end. A new revolutionary workers' movement will arise not by resurrecting the dead state-capitalist oppression from the grave. It will be established by those who reject both the state-capitalist tyranny and the present free-market hell.


(1) Kirienko is quoted in a statement by Dr. Boris Kagarlitsky to the U.S. Congress Banking Subcommittee on Sept. 10, 1998. Kagarlitsky is an adviser to the Russian Duma and a Senior Research Fellow of the Institute for Comparative Political Studies of the Russian Academy of Sciences. (Return to text)

(2) Some statistics in this paragraph are from The economics and politics of transition to an open market economy: Russia; p.11. This is a 1998 report prepared by Andrei Schleifer and Daniel Treisman for the OECD. Other statistics are from Kotz and Weir's Revolution from above: the demise of the Soviet system; p.172; published by Routledge; London; 1997. (Text)

(3) OECD Economic Surveys (1997-1998): Russian Federation; pp.115-116. (Text)

(4) Ibid.; p.67. (Text)

(5) Blank, Stephen; "Russian democracy: from the future to the past"; p. 570. This article is contained in the journal Demokratizatsiya: the journal of post-Soviet democratization; vol.6, no.3, Summer 1998; Heldref Publications. (Text)

(6) Ibid.; p.568, The size of the bureaucracy increased from one million in 1989 to 1.7 million in 1994. (Text)

(7) Ibid.; p.554. (Text)

(8) OECD Economic Surveys (1997-1998): Russian Federation; p.30. Based on World Bank and Soviet government estimates. (Text)

(9) Sector figures are from Kotz and Weir; Revolution from above; p.178. (Text)

(10) Statistics in this paragraph are from OECD Economic Surveys (1997-1998): Russian Federation; p.38. (Text)

(11) Gazprom, like the other oil giants, is among the biggest tax-dodgers in the country. But the government tolerates this. In return for this favor, Gazprom has agreed to keep supplying Russian industry and individual consumers who can't afford their product, sometimes accepting barter payments as a substitute. This part of Gazprom's business may not be a profit machine, but the owners of the company are willing to bear this for now because they see there is a fortune to be made as an international oil giant. (Text)

(12) The fact that there is no intention of going back to the old system can be seen by the fact that even moderate proposals for nationalization are shot down even when they come from free-market types such as Kirienko. One of the reasons Kirienko was bounced as prime minister was that he had threatened to have the government administer certain banks as well as companies that failed to meet their tax payments, such as Gazprom. So it appears that if there is any re-nationalization under Primakov, it will be quite limited and done with reluctance. (Text)

(13) There was a report that during Chernomyrdin's recent brief stay as prime minister, the SBS Agro Bank might be put under government control to insure that its 25 million small depositors didn't lose their savings. Recently the Primakov government decided to nationalize this bank.(Text)

(14) Virginie Coulloudon's study, entitled "Elite groups in Russia," can be found in the journal Demokratizatsiya; vol.6, no.3, Summer 1998, pp.535-539. (Text)

(15) Schleifer and Treisman; "The economics and politics of transition to an open market economy: Russia"; pp.37-38; OECD; 1998. (Text)

(16) The affinity between the CPRF and the attitudes of the ultra-reactionary Zhirinovsky recently revealed itself in an outburst of anti-Semitism by a CPRF legislator, Albert Makashov. Makashov blamed Russia's problems on the "yids," a derogatory term for Jews. Compounding the atrocity was the refusal of the CPRF Duma members to censure Makashov. This in turn opened the door for other capitalist politicians to seek a ban the CPRF. Interestingly, in the midst of this debate, Zhirinovsky did the CPRF a good turn, declaring that anti-Semitism wasn't really a problem in Russia and that the furor was much ado about nothing. (Text)

(17) The Agrarian Party essentially functions as the rural wing of the CPRF. (Text)

(18) Kotz and Weir; p.232. (Text)

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