Statecraft. Margaret Thatcher

of a decade ago or that real incomes have fallen sharply, it is worth recalling that economic statistics under the Soviet Union were hardly more reliable than any other official statements. Moreover, a country that produces what no one wants to buy, and whose workers receive wages that they cannot use to buy goods they want, is hardly in the best of economic health. Comparisons between living standards in the last years of the Soviet system and living standards now suggest that measured by the most important criterion – what people are actually able to spend – there has been some improvement. *

      Yet it has been very uneven, and there have been terrible moments. The harshest pressures, as public expenditure controls were imposed, were upon people dependent on the state for their living. There were large arrears in payments of wages and pensions and sharp falls in their value, as inflation soared. Probably the worst blow has been against savings. Nothing does more to undermine a society than when savers are impoverished, as the history of Germany’s Weimar Republic shows.

      But perhaps the most telling indices of misery are not economic but social – for Russia is sick, and at present it is really no exaggeration to say that it is dying. As one expert has remarked: ‘No industrialised country has ever before suffered such a severe and prolonged deterioration [of public health] during peacetime.’† Death rates in Russia are nearly 30 per cent higher than at the end of the Soviet Union – and public health was already bad in Soviet times. Deaths are now exceeding births by well over half, some seven hundred thousand a year. Life expectancy for Russian men today is about sixty-one – worse than Egypt, Indonesia or Paraguay. The main causes are extraordinarily high rates of heart disease and injuries, in which the common factor is apparently alcohol abuse. Life is simply so bad that the bottle offers the only refuge.

      What makes so many ordinary Russians this depressed is, one suspects, not just frustration at their own prospects, but also anger at the way in which a minority flaunts huge wealth acquired from successful speculations, insider trading, cartels and gangsterism. The root of the trouble was that in Russia in the early 1990s, when reform was under way, there was no middle class in the European sense. Tsarist Russia never developed a substantial middle class anyway, but what there was fled or were impoverished or killed by the Bolsheviks.

      Under communism no such class could emerge and ‘bourgeois’ values were, naturally, deplored. There were ‘managers’ of course. But these were just political bureaucrats, not entrepreneurs and owners. Consequently, those who found themselves with the knowledge, means and position to flourish in the early years of reform were the class of apparatchiks.

      The prospering of this elite renders in the eyes of many Russians the mere notion of ‘reform’ suspect and its proponents odious. And though they are wrong, who can blame them?

      Beneath the formalities of memoranda, declarations of intent, statistical projections and neatly typed balance sheets, a series of struggles for power have been conducted. Among the most important players have been: the bureaucracy; the armed forces, whose frustration at their penury has on occasion threatened the security of the state; the magnates, in control (directly or indirectly) of Russia’s vast natural resources, particularly oil, which they bought cheaply and then obtained licences to sell at much higher international prices; and banks, which performed none of the functions of normal Western banks, but rather bought up in rigged auctions the shares of privatised companies.

      In fact, a kind of economic theatre of the absurd was functioning well before the 1998 crash. Industries, which because of their inefficiency were incapable of making a profit, were kept afloat because their bosses used influence and connections to escape paying taxes to the government, gave worthless promissory notes to their creditors and often remunerated their workers in barter. The absurdities of the Soviet system were being recreated. As the joke ran in those times (referring to the fact that both industrial products and industrial wages were effectively worthless): ‘We pretend to work – they pretend to pay us.’ But now, as often as not, no one was paid. Such are the circumstances in which – in spite of the fact that 70 per cent of industry is notionally in private hands, that consumer prices have been deregulated and that a return to socialism is probably impossible – we have to conclude that economic reform has so far largely failed.

      One of the most crushing verdicts on what has occurred is that of the economist and current adviser to President Putin, Andrei Ilarionov:

      … [S]ince the summer of 1992, with few exceptions, the political struggle has not been over whether the government should implement more liberal or more interventionist economic policy. The real struggle has been over a different issue: who or whose team (group, gang, family) would control the state institutions and instruments that control the distribution and redistribution of economic resources … The only distinction among the groups participating in the Russian transformation was their ability to camouflage their deeds to make them suitable for public consumption in Russia and abroad.*

      The West cannot behave as if this were not the case. We have to learn from our mistakes. We have to face up to their consequences. And we have to do better.

      Developments since the crash of 1998 have provided Russia and the West with a breathing space. As one would expect after a dramatic fall in the currency, Russian goods are now cheaper and exports have soared. The economy has been growing again (by 5.4 per cent in 1999 and 8.3 per cent in 2000). The trebling of oil prices has also benefited Russia, one of the world’s major oil producers, and the government is now raising US$5.5 billion annually from the energy sector.

      These favourable conditions offer a new opportunity to tackle the fundamental obstacles to prosperity. As a basis for future action to shift Russia back on course towards becoming a ‘normal country’ I suggest the following:

       There must be no more self-deception. If the people and policies dominant in Russia at any time are opposed to real reform there should be no financial cushion provided by the West or the IMF. Such aid is worse than useless – it’s doubly damaging, because it associates the cause of reform with failure

       We must keep the long-term goal in view, which is to create a real free-enterprise economy based on sound money, low taxes, limited government and above all a rule of law. Barely a start has been made on achieving these things. And while the foundations are rotten, so will be the economic edifice

       While connections, corruption, crime and cartels form the basis of the Russian system there can be no true freedom and no genuine democracy. The West must speak the truth about this openly to the Russian people

       We have to stop regarding the only people who matter as being the political and bureaucratic elite in Moscow. Russia is naturally extremely rich – with major deposits of coal, oil, gas, timber and strategic minerals. But its greatest potential wealth lies in the millions of young would-be Russian entrepreneurs. They must be helped to understand what capitalism is about – and what it is not about. Above all, perhaps, we have to be patient. Today’s Russians face the Herculean task of undoing the harm done, not just by seventy years of Soviet communism but by previous centuries of autocracy. And ultimately only the Russians themselves can perform that task.

      RUSSIA AS A MILITARY POWER

      If almost a decade down the track from the end of Soviet communism we were now dealing in Russia with a ‘normal country’, that is a stable democracy with a functioning market economy, the West could afford to take a relaxed view of Russian military power, strategic interests and political intentions. Of course, even in those happy circumstances, the operation of the balance of power in Europe and possibly Asia would mean rivalries and tensions between Russia and the United States and its allies. But such problems would be more manageable and the reactions of Russia more predictable.

      The worst error, as always in dealing with Russia, is naïveté. The Clinton administration initially sought to treat Russia as a ‘strategic partner’. But, however important Russia remained in its own backyard, the Russians had neither the will nor the means to enter into any global partnership with