Commentary on Jade McGlynn’s book Putin’s War (2023), Part 4 of 5: Lasting effects of Russia’s difficult 1990s

One of the most informative parts of McGlynn’s analysis of Russian attitudes toward the Ukraine War is that she stresses the ways in which most Russians experienced the aftermath of the end of the Soviet Union as a very difficult, disturbing experience in their own lives and as a humiliation for the country.

One of the most informative parts of McGlynn’s analysis of Russian attitudes toward the Ukraine War is that she stresses the ways in which most Russians experienced the aftermath of the end of the Soviet Union as a very difficult, disturbing experience in their own lives and as a humiliation for the country.

Putin's 2005 remark that the collapse of the USSR was a catastrophe struck a chord with the many people in Russia who lost out from 1991, people who had wanted things to be better but lost spirit when they quickly turned out like always, as Chernomyrdin dourly quipped. lt is perhaps unsurprising that while polls demonstrated majority support for the dismantlement of the USSR before 1991, following the difficult transition from Communism, by 1995 people were already expressing a marked nostalgia for the Soviet era. Putin has drawn strength from this disappointment, successfully positioning himself as the antidote to the 'wild 1990s'. A good deal of Putin's popularity derives from the fact that under his rule, there had been marked improvements in Russia's international status, ability to pay its debts, and GDP. There is a genuine popular gratitude for these advances, which does not appear to lessen with time, perhaps because the popular view of the 1990s also appears to get worse over time. (p. 106) [my emphasis]

The prevailing sentiment in Europe and especially the US after the end of the USSR has an intensely celebratory one. And a downright triumphalist one for American policy makers. As Nelson Lichtenstein wrote in 2004:

A triumphalism of the free market is today the single greatest legacy of the end of the Cold War. The idea that capitalist markets are essential to, even define, the democratic idea has always been present in the West, but the idea achieved a majoritarian weight in the 1970s, and a near hegemonic power after the fall of the Berlin Wall. "Let us celebrate an American triumph," thundered Mort Zuckerman in US News late in the 1990s, "a triumph" based on the rock of an unfettered capitalism: "privatize, deregulate, and do not interfere with the market." [my emphasis] (1)

The general Russian public did not experience it that way!

Economist Joe Stiglitz wrote in 2003:

The move from communism to capitalism in Russia after 1991 was supposed to bring unprecedented prosperity. It did not. By the time of the rouble crisis of August 1998, output had fallen by almost half and poverty had increased from 2% of the population to over 40%.

Russia's performance since then has been impressive, yet its gross domestic product remains almost 30% below what it was in 1990. At 4% growth per annum, it will take Russia's economy another decade to get back to where it was when communism collapsed. (2)

But, hey, the Russian oligarchs were doing fine. So why didn’t the rest of you Russian losers just suck it up and work harder, amirite?

But that grumpy old Keynesian Stiglitz had a different take:

IMF-style neo-liberals are now trotting out an interpretation that amounts to a belated declaration of victory. The pre-1998 period of economic decline, on their view, reflected a stalled transition process, whereas the rouble crisis finally jolted the authorities into action, with recovery following implementation of far-reaching reforms.

But the real explanation lies elsewhere - and is much simpler. Until 1998, the rouble was overvalued, making it impossible for domestic producers to compete with imports. The IMF did not want Russia to devalue, and it provided billions of dollars to prop up the exchange rate. The IMF and the US Treasury worried that any change would restart inflation, because there was little or no excess productive capacity.

This was a remarkable confession: these officials evidently believed that their policies had wrecked nearly half of Russia's economic capacity in the space of just a few years.

Of course, for the devotees of neoliberalism, their doctrine can’t fail- It can only be failed for the actual human beings implementing it. But even in an essay supposedly refuting the “myth” that “Liberal market reform in the 1990s was bad for Russia,” Philip Hanson writes:

The greatest attention, however, has been paid to the shortcomings of privatization. Here the political situation forced the reformers into damaging compromises. For the bulk of large-scale enterprises, the plan had been to follow the Czechoslovak model of mass privatization where citizens were issued with vouchers that could be used to purchase shares in any enterprise. Meanwhile, Russian managers were grabbing control of enterprises and wanted the official privatization process to allow this to continue. Anatoli Chubais, who was in charge of mass privatization, was forced to allow an option whereby the workforce of an enterprise could vote to use its vouchers on its own workplace. This was popular. It mostly resulted in the Soviet-era bosses controlling the factories.

As a transitional arrangement, this might not have been too bad. What really destroyed the reputation of the Russian privatization process was the loans-for-shares auctions of a handful of giant oil and metals companies – the big earners of the economy (the gas ministry, spanning the whole gas industry, had turned itself into Gazprom). In rigged auctions with predetermined results, the likes of Yukos Oil and Norilsk Nickel were sold to the new banks for sums that seemed in retrospect tiny. [my emphasis] (3)

This background is important for understanding Russian popular attitudes that regard Western intentions toward their country with skepticism. And it is also a big part of how the leadership views the goals of the West toward their country. It should also be obvious that not every citizen or every member of the government will draw the same conclusions from that past experience. But the experience does form a real historical background that is all too rarely mentioned in Western mainstream discussions of Russia and its foreign policies.

The economist Jeffrey Sachs was part of the US team of advisers on the transition from the socialist to the “market,” i.e., liberal-capitalist economic organization in the early 1990s. He resigned that role at the end of 1993, believing that the Western policies including those of the International Monetary Fund (IMF) would have disastrous effects on the Russian economy.

In his 2005 book The End of Poverty, Sachs argues that the George H.W. Bush Administration saw Russia after the transition from the USSR is a very different way than it saw eastern European countries like Poland. He notes that two of the grimmest figures in the history of American foreign policy, Dick Cheney and Paul Wolfowitz, were highly influential in Old Man Bush’s Administration, as they would later be even more so in Shrub Bush’s government. Sachs note that the were especially emphatic in their emphasis that the US goal should be “to ensure long-term U.S. military dominance over all rivals, including Russia.”

They viewed former Warsaw Pact countries including Poland as allies in containing Russia and as potential future members of NATO, and so were more inclined to actively assist those countries in their economic transition. But in the case of Russia, Sachs faulted the Bush 1 Administration for neglecting the urgent need for a ruble currency stabilization fund, debt relief for Russia, and what he envisioned as a “new aid program for transformation, focusing on the most vulnerable social sectors of the Russian economy.”

But those didn’t happen on the scale he thought was necessary. The stabilization fund was essentially stillborn by mid-1992. The ruble became highly unstable. Initially, the former Soviet ruble continued to be used by the post-Soviet republics including Russia, a situation that the International Monetary Fund (IMF) was not in a rush to change. The collapse of a currency, which happened in Russia, is a traumatic and disruptive event. In some areas, local economies operated on a barter basis for a time.

The refusal of the G7 governments to allow Russia to suspend debt payments has also extremely consequential. Sachs writes:

Worse still, the G7 negotiated a special ''.joint and several obligation" clause with the successor states, in which each pledged to make good, if necessary, on the overall Soviet-era debt. That led to a thicket of political and financial problems that took years to unravel. The G7 insistence on debt repayments was reckless and shortsighted. Lt simply guaranteed that Russia would be utterly drained of foreign exchange reserves by early 1992, which is exactly what happened by February 1992. (p. 130)

Any notion of the West promoting a Russian economy still based on large-scale state ownership of enterprises was basically not on the menu of options that Bush Administration would have considered. But the goal of establishing a liberal democracy, with or without wide-ranging state ownership of enterprises, was never the first priority in practice.

As bad as those initial problems proved to be, Sachs considered the nature of the massive privatization wave:

The worst occurred in 1995 and 1996... During those two years, Russian privatization became a shameless and criminal activity. Essentially, a corrupt group of so-called businessmen, who later became known collectively as Russia's new oligarchs, were able to get their hands on tens of billions of dollars of natural resource wealth, mainly the oil and gas holdings of the Russian state. The best estimates are that about $100 billion dollars of oil, gas, and other valuable commodities were transferred to private hands in return for perhaps no more than $1 billion of privatization receipts taken in by the treasury. Billionaires were created overnight, the proud (and newly rich) owners of Russia's oil and gas industry.

When the phony privatization process was announced, under a disreputable shares-for-loans scheme in which insiders would get access to company shares in return for making loans to the government, I tried to warn the U.S. government, the IMF, the Organization for Economic Cooperation and Development (OECD), and other G7 governments. I told them that I knew the players in this affair, and that the process was utterly disreputable. In the end, valuable state-owned resources would be plundered, and the Russian treasury would suffer greatly. Rather than using oil and gas income to support pensioners, for example, the energy-sector proceeds would now go straight into private pockets.

The West let this happen without a murmur. Many in the Clinton administration reportedly thought that shares for loans represented a clever deal: Yeltsin would give away the state's assets, and the cronies - the new oligarchs - would help finance Yeltsin 's 1996 reelection. What a disastrously inefficient way to finance a reelection campaign! Probably tens of billions of dollars in value went out of the government's coffers, and a few hundred million dollars came back for the Yeltsin campaign.

From the view of the imagined Free Market of the neoliberals, this was an ideal outcome. The oligarchs made out like bandits. And on the American side, the disaster was bipartisan! And another win for TINA (There Is No Alternative)!

Nome of this implies that we should let Putin and the Russian oligarchs off the hook for their bad acts over the decades.

But it does mean that there are solid, reality-based reasons for Russians to remember the 1990s as a bad time in which the West was not motivated exclusively by goodwill toward them and their country. And that it is not entirely delusional for them to think that Putin’s own performance and his intentions toward them may be preferable to what the US leadership and that of other Western nations may want for them.

Next: Was NATO membership for Ukraine really the motivation for their invasion?

Notes:

(1) Lichtenstein, Nelson (2004): Market Triumphalism and the Wishful Liberals. In: Schricker, Ellen, ed., 103-125. Cold War Triumphalism: The Misuse of History After the Fall of Communism. London: New Press.

(2) Stiglitz, Josepb (2003): The ruin of Russia. Guardian 2024-21-08). <https://www.theguardian.com/world/2003/apr/09/russia.artsandhumanities> (Accessed: 2024-21-08).

(3) Hanson, Philip (2021): Myth 13: ‘Liberal market reform in the 1990s was bad for Russia’. In: Myths and misconceptions in the debate on Russia, 83-84. Chatham House Report May 2021. <https://www.chathamhouse.org/2021/05/myths-and-misconceptions-debate-russia/myth-13-liberal-market-reform-1990s-was-bad-russia> (Accessed; 2024-21-08).

(4) Sachs, Jeffrey D. (2005): The End of Poverty: Economic Possibilities for Our Time. New York: Penguin Books.