Yeltsin's Desperate Gamble

By Bruce W. Nelan

The Russian people have been lied to for centuries. Generations of Czars spun visions of a world that eventually proved to be an illusion. The communists, their ideology and the Soviet state turned out to be illegitimate as well. Little wonder that today's citizens are confused and distrustful, wondering what, if anything, they can believe in. For the most part, they do not trust their government, and the administration of President Boris Yeltsin is not helping. It talks reform but hasn't been able to deliver fully. It bills its economy as a free-market system when it actually is a hybrid between robber-baron capitalism and state control. And now it is snatching away the greatest accomplishments of the painful Yeltsin years: a stable ruble and low inflation. On one sticky afternoon, Yeltsin vows that he will not devalue the ruble and won't even break off his vacation to return to Moscow. Three days later, he does both. Russians view it as a betrayal.

Yeltsin's decisions to let the ruble float down as much as 34% and to put a moratorium on corporate- and bank-debt repayments are desperate measures, steps the U.S. and the International Monetary Fund advised against. If they are followed by real reforms of the tax and banking systems, the program might restore some confidence in the economy and bring investors back. But by itself, the floating ruble will slash the savings of some Russians and increase the cost of living for many, especially those who live in the cities, where more than half the food in the shops is imported. Those are cruel blows to a nation that is already suffering, and could trigger enough political backlash and social unrest to threaten Yeltsin and raise questions about who or what will follow him.

In some ways, Yeltsin is already gone. He still holds office, but his mental and physical staying power is fading. He is out of touch, sometimes simply out of it. On Friday, Aug. 14, he seemed unaware that his chief ministers were preparing the devaluation just as he was assuring the nation it would not happen. He signed off on the move when he got back to town, but when the announcement was finally made, he said nothing. He didn't even seem tempted to fire his Prime Minister--his usual style of crisis leadership--possibly because he would then have to try to get a new one approved by a hostile parliament. "He's clearly getting really close to the wall," says a senior U.S. State Department official. "He's running out of options."

The devaluation had been anticipated, even after the IMF in mid-July put together a $22.6 billion bailout package. The deal didn't reassure investors, however, who continued to pull their money, in dollars, out of Russia. The central bank's efforts to maintain the ruble's value sapped its hard-currency reserves, now down to $17 billion. That is a significant figure: it's all that's left to help keep the ruble from falling through the floor of the new trading range: 9.5 to the dollar. Some currency exchanges on Moscow's streets are already asking 10 for a dollar.

Muscovites seemed perplexed. When they got the news, some rushed to buy big-ticket items and food before prices went up. Some stood in lines to buy dollars and deutsche marks even at the higher rate. Some banks closed, some strictly limited withdrawals, and some seemed unfazed and conducted business as usual. "Most people don't know how to react," says an exchange-office teller. "They don't know whether they should sell their dollars or their rubles. I'm confused myself."

This crisis ultimately is not about exchange rates, though. The IMF has been pumping billions into Russia on the proviso that much needed reforms will be rammed through. Moscow asked for even more money a few days before devaluing, but the IMF finally said no. Russia now must figure out how to collect taxes more aggressively from corporations, banks and individuals. The government cannot survive by taking in less revenue than it expects and trying to balance the budget by slashing spending. If it follows that course, millions of unpaid teachers, soldiers and government employees will never get the months of back salary owed them. In addition, Moscow needs to impose honest privatization on the subsidized industries that, for now, make almost nothing consumers want. It must regulate the banking system into some semblance of honest bookkeeping and provide legal protection for investors and private-property owners. In other words, Russia's economy needs an almost complete overhaul.

Unfortunately, it is not likely to get one at the hands of a parliament dominated by communists and nationalists who despise Yeltsin and his youthful reformist ministers. The government was to try again to pass a long-delayed reform package at week's end in a special session of the Duma. Prime Minister Sergei Kiriyenko has had no more luck than his predecessors in budging the Duma, but now he can plead that this is a genuine crisis.

Whether or not Yeltsin's economic package succeeds, the sharpest backlash may be political. Yeltsin will surely find it more difficult stitching together a coalition of politicians and financiers to back him in a run for a third term two years from now. In fact, if the emergency measures begin to work, the big winner may turn out to be Anatoli Chubais, the former First Deputy Prime Minister who has been handling Russia's international-debt negotiations. His boosters will cheer him as the man who pulled Russia back from the brink--while Yeltsin fiddled.

If the devaluation and debt moratorium flop, the result is likely to be not only another financial panic, but also a discredited political establishment. Russia's leaders have proclaimed too often that they have found the way to lead the country out of its penury--only to falter. In this case, the currency reserves would run out, and so would the Kremlin's kredit doveriya--its fund of public trust.

Then what? There are plenty of dire predictions. Moscow is muttering that Yeltsin might declare a state of emergency, a move that would probably be seen as a retreat from democracy. Some are worried that Yeltsin might form a government of national unity that would take in communists and fascists and bring reform to a halt or put it into reverse.

Russians are long-suffering, but they have been suffering too long to remain passive. If the anguish drags on until the 2000 election, they might not take to the barricades, but they are apt to protest with their votes. Western experts are concerned that Russians could reject what has been peddled to them as democracy and capitalism and toss it all overboard. The leading candidates to succeed Yeltsin already include Moscow Mayor Yuri Luzhkov and retired General Alexander Lebed, the Governor of Krasnoyarsk province. Luzhkov cultivates the air of a strongman and is no fan of reform. Lebed's political views are hard to discern, but he, like Luzhkov, is a firm nationalist. If either were elected President, he would probably arrive in the Kremlin with colleagues even more extreme.

It is an outcome the West wants fervently to avoid. Although they disapproved of the devaluation, the Clinton Administration and the IMF say they will work with Moscow to get through the crisis and pursue broader reforms. When Bill Clinton arrives in Moscow on Sept. 1 for a two-day summit, he intends to tell Yeltsin that. But because democracy has begun to take hold in Russia, the country's wary voters will ultimately decide its course.

--Reported by Paul Quinn-Judge/Moscow and Douglas Waller/Washington

With reporting by Paul Quinn-Judge/Moscow and Douglas Waller/Washington