Winter's Bitter Wind

By Richard Hornik

A guy walks into a Moscow bar and orders a beer. "One ruble," says the bartender. "What?" the man protests. "Last week it cost only 50 kopecks!"

"Well, 50 kopecks is for the beer, and 50 kopecks is for perestroika."

When the customer hands over a ruble, the bartender gives him back 50 kopecks. Says the bartender: "We're out of beer."

The Soviet Union's farcical economy has long been the butt of its citizens' jokes. A cynical sense of humor has helped Soviet consumers endure the almost full-time occupation of waiting in queues for necessities and the utter lack of quality and variety in consumer goods. But with the winter of 1990 approaching, even the thriving joke mill may not be enough to help people forget the grinding deprivation. The accumulated ills of the Soviet economy have brought it to the brink of collapse. Foreign analysts, along with a new breed of frankly realistic Soviet economists, are ringing alarms about potential disaster.

At a minimum, Mikhail Gorbachev's dual program of glasnost and perestroika may collapse if the downward spiral is not halted by the end of 1990. At worst, the growing shortages of energy and food this winter could wreak social mayhem. "If we don't see improvement in the stores, we will soon see riots in the streets," warns a top Soviet criminal lawyer. "Anything could spark it. And the government would have to suppress it with force." Among the signals of trouble:

-- Economic restructuring has already cost millions of Soviets their jobs this year, pushing up the unemployment rate -- as high as 27% in Azerbaijan, for example.

-- An estimated 1,000 of 1,200 basic consumer products are in short supply. When Siberian coal miners went on strike last July, one of their most impassioned demands was for soap.

-- Despite a grain harvest that is expected to grow 7% this year, poor transportation and storage will render 20% of the total crop unusable.

-- From railways to power lines, the Soviet Union's infrastructure is crumbling because of lack of maintenance. In the Ukrainian city of Lvov (pop. 830,000), citizens get running water only twice a day, for a total of six hours.

-- In a Soviet poll, more than 57% of the adults surveyed said they had no confidence in the future.

The desperate situation is sparking an increasingly heated debate within the Soviet Union about the direction of perestroika. On the one hand are liberals, who think the country must move faster toward a free-market economy; on the other are conservatives, who want any changes to occur so gradually that consumers will be cushioned from price increases and unemployment. Gorbachev is caught in the middle. The measured tempo he has chosen for perestroika has caused only economic disruption and hardship, at least in the short run.

In an unprecedented conference, 1,400 Soviet economists and other leaders gathered earlier this month to talk about perestroika's future. Gorbachev's top economic deputy, Leonid Abalkin, who put forth a six-year timetable for reforming much of the state-run economy, said he was surprised at the heavy resistance to change. The most explosive issue: price reform, the phasing out of the country's heavy subsidies of consumer goods, a process that could lead to runaway inflation if carried out too rapidly. Under Abalkin's proposal, some prices would be allowed to rise to international market levels over a five-year period, while prices for basic necessities would remain under tighter control. "Highly unpopular reforms are required," said Abalkin. "That must be clearly understood. Without taking strict and unpopular measures, we will be thrown back."

In dissolving the U.S.S.R.'s East European empire, Gorbachev is not only reinforcing the values inherent in glasnost but also trying to salvage the Soviet economy by unburdening it of the costs of underwriting the satellites. Some scholars even compare the situation to the concessions made by Lenin in the 1918 Treaty of Brest-Litovsk, in which he surrendered a third of the fledgling Soviet state to Germany. Says Leon Aron, a scholar at the conservative-oriented Heritage Foundation: "Both in 1918 and 1989, courageous Soviet leaders decided to cut their losses while there was still time to save their regime."

Lenin's gamble of 1918 paid off, but Gorbachev has the handicap of seven decades of economic mistakes. The isolation and ossification of the Soviet economy, especially as information became a crucial raw material of the industrial world, have ultimately paralyzed the U.S.S.R. The crisis might have struck a decade earlier, but the Soviet Union got a free ride during the inflation-ridden 1970s from high prices for two main exports, gold and oil.

No longer. Although the rigidly centralized Stalinist system is responsible for the bulk of the U.S.S.R.'s woes, Gorbachev's economic reform measures, halfhearted by Western standards, have exacerbated matters. While perestroika has decentralized some decision making, it has so far failed to create the legal constraints or free-market competition to prevent people and businesses from taking unfair advantage of their newfound power. Case in point: the U.S.S.R.'s epic soap-and-detergent shortage this year was caused in part by factory managers who were allowed to meet their targets as measured in rubles instead of volume. The managers simply switched production to more expensive brands of soap, which increased factory profits. In a televised interview in October, Prime Minister Nikolai Ryzhkov described the overall outcome: "In the third quarter, the growth in the population's incomes amounted to 13%, but the growth in production was only 1%."

The wage increases have been financed by deficit spending even more egregious than Washington's. Some of the red ink has flowed from Gorbachev's reform program. Since vodka sales are a major component of government income, the Soviet leader's early campaign to stamp out alcoholism sent the government's budget deficit soaring. The falloff in liquor sales, coupled with the costs of such disasters as the Armenian earthquake and the Chernobyl nuclear accident, has helped produce budget deficits of about 100 billion rubles for the past two years -- equivalent to 11% of Soviet gross domestic product; the 1988 U.S. deficit was 3% of GDP. Since the Soviets have no domestic bond market, the deficit can be financed only by printing more rubles, which has created a huge backlog of inflation. As a result, the U.S.S.R. has a volatile mixture of economic forces at work:

Unspent Savings. Since prices are still firmly controlled and shortages are rampant, the rubles churned out by the government simply go into bank accounts and mattresses. Academician Oleg Bogomolov, one of Gorbachev's top advisers, estimates that private citizens have a hoard of 100 billion rubles ($165 billion at current exchange rates) that they would spend immediately if there were anything to buy. The result is an enormous amount of pent-up demand that will make it difficult for Gorbachev to decontrol prices without creating wild inflation.

Scarce Food. Reform-oriented economist Otto Latsis says that of 220 basic food groups, only 20 are now in regular supply in Soviet stores. And almost every week, another household item disappears. Tea, a drink the Soviets consume by the potful, has joined the list of scarce items. In Moscow even bread is no longer in regular supply. In the ancient Russian city of Suzdal, about 120 miles east of Moscow, the only meat in the stores is fatty sausage and pigs' heads. Says a gray-haired Moscow secretary: "The food situation has never been this bad. I don't know what we will do this winter." Although no one expects starvation this year, malnutrition is a growing danger. Predicts Alexei Kunitsin, an economist at Moscow's Institute of the U.S.A. and Canada: "There will be places where workers cannot do their jobs because their diets are deficient."

Energy Woes. Strikes in coal mines and a rash of natural-gas pipeline disasters have combined to create a shortage of fuel for urban steam-heating systems. If the fuel shortage becomes so serious that pipes freeze, it will take years to repair them, and may jeopardize the health of thousands of residents besides. To make matters worse, the U.S.S.R.'s vaunted oil industry is suffering from declining production at a time of relatively low prices.

Transportation Paralysis. To provide capital for the military and heavy industry, Moscow scrimped on investment in railroads and highways. As a result, breakdowns are the norm. Says one U.S. Government analyst: "Transport has always been one of the worst reflections of the Soviet economy, and a general malaise hits the weakest links the hardest." In his televised interview, Ryzhkov complained that in the first two weeks of October, 25,000 tons of foodstuffs and several thousand tons of washing agents were stuck in ports because of rail problems.

Labor Militancy. The biggest potential disaster on the horizon is the growing unrest among workers. In October, Gorbachev rammed through a ban on strikes in key industries like transportation, but that may not be enough to prevent crippling work stoppages. The government's promises for better living conditions, which helped settle strikes in the country's coal mines, have not been kept. New walkouts are possible any day.

Public Resistance. Gorbachev's main domestic successes have been in the political and social relaxations he has promulgated. Ironically, glasnost can make the process of economic reform even more difficult. Recently the new Soviet parliament rejected increases in the prices of beer and tobacco, measures that would have pared the deficit. The representatives were simply following the sentiments of their vocal constituents. At the same time, most consumers distrust capitalism and feel almost nostalgic for the orderly days of the Brezhnev era. In a recent poll conducted for the Committee on Economic Reform, 47% of those surveyed said the government should still set all prices; 37% said it should at least set prices for staples. Only 6% said shortages should be allowed to trigger higher prices, while 59% favored rationing.

Regional Rivalries. The economic difficulties have exacerbated the country's ethnic strife. Explains Jan Vanous, research director of PlanEcon, a Washington-based consulting firm: "The poorest Asian republics are demanding an acceleration of resource transfers at a time when those who would finance such transfers -- Russia and the Baltic republics -- are in no mood to waste resources propping up those ailing economies." Evidence of that view is rampant. The Estonian legislature is even considering a bill to establish a local currency in order to keep nonresidents from raiding the stocks of hard- to-get items in local stores. Gorbachev faces the prospect of growing ethnic unrest merging with a nascent consumer revolt.

As Lenin once asked, Chto Delat'? (What is to be done?). Even many of the most fervent reformers in the Soviet Union shrink from some of the painful but essential measures that must be taken to stanch the hemorrhaging economy:

1) Privatize industry. This ideological hot potato must be tackled quickly in spite of the heretical nature of private property in Marxian orthodoxy. Besides providing much needed incentives, the selling off of state property -- or the creation of long-term leases -- would soak up much of the cash stuffed in mattresses.

2) Cut the deficit. The Soviet government must reduce its budget deficit by cutting expenditures, primarily consumer subsidies and military outlays. The remainder of the deficit should be financed with government bonds that pay interest rates higher than inflation.

3) Reduce pent-up inflation. The government can import desirable Western consumer goods and then resell them to the Soviet people at ten or even 20 times the official ruble exchange rate. Imports of $5 billion in goods should be able to remove more than half of the 100 billion rubles in circulation.

4) Encourage cooperatives. Public resentment over the price-gouging practices of some cooperatives has given conservative bureaucrats an excuse to tax them heavily. But since the excesses of some cooperatives stem primarily from a lack of competition, the co-op system should be expanded, not constrained.

5) Phase out arbitrary prices. As long as bureaucrats set prices, the economy will experience severe distortions. Nothing short of true free-market prices will produce the efficiency and the supply response needed to stabilize the economy.

Gorbachev's time may be running out. Western economists believe, contrary to official Soviet statistics purporting to show growth, that the economy is actually shrinking. What can the West do to help? Industrial nations can offer advice and much needed economic expertise, but massive financial aid would be ill advised and probably not what the Soviets want in any case. Abalkin has already mentioned that the Soviets would like to be given the trading status of most favored nation, along with more freedom to import high-technology goods. But by and large, Soviet economists understand that they have to solve their own problems. Said Abalkin: "We have an old Russian saying, 'Drowning men must save themselves.' "

Unfortunately, simply treading water is no longer an option. The economy appears to be in a vicious downward spiral that requires radical action. The Heritage Foundation's Aron believes that in the coming months "Gorbachev will come to a sharp fork in the road. He will have to make a choice between a hard left or a hard right." Gorbachev and his reformist advisers know that a hard move to the right, toward a reassertion of police-state controls throughout society, would effectively end glasnost and perestroika.

Yet Gorbachev fears the consequences of a turn toward a free-market system. As he told a group of Soviet economists, "I know only one thing, that after two weeks such a market would bring the whole nation out on the streets and sweep out any government, even one declaring devotion to the people." But Gorbachev's great strength has been to take the Soviet system and its people to destinations unimagined only a few years ago. The time has come for Gorbachev to accept that there is no middle ground. As his Polish neighbors say these days, "You cannot cross a chasm in two steps."

With reporting by Ann Blackman/Moscow