· What factors led to the 1998 economic collapse?
· Why were the long-term effects of the collapse less damaging than originally feared?
· Why did the renewed conflict in Chechnya help establish Putin as a strong leader?
· What were the results of the 1999 Duma elections?
· What factors led to Yeltsin’s surprise resignation?
In March 1998, Yeltsin dismissed long-term Prime Minister Victor Chernomyrdin, replacing him with a young reformer untainted by the previous years of scandal, Sergei Kiriyenko. The Kiriyenko government had barely begun when economic disaster struck Russia in the summer of 1998. On June 1, the Russian stock market dropped 10%, and by August shares had dropped to their lowest levels in two years, falling 79% from their October 1997 high. The value of the ruble also plummeted, dropping from an exchange rate of 6 rubles to the dollar in early August to 14:1 by early September.[1]
The causes of this sudden decline were complicated. The biggest factor was Russia’s enormous governmental debt. Russia’s debt problem began with the $150 billion in international debt inherited from the former Soviet Union but did not end there. The problem was compounded by poor tax collections, which forced the government to borrow from the international bond market in order to cover its expenses. Monthly tax collections averaged only 22 billion rubles in 1998. At the same time, domestic spending totaled 25 billion rubles while interest on the government debt added another 30 billion.[2] In 1995, the government began to sell GKOs (short-term treasury bonds pronounced geek-os) with interest rates as high as 240% in order to meet its operating expenses. Russia succeeded in attracting billions of investment dollars at these interest rates, but in order to pay off the short-term debt, it was forced to borrow even more money. The government’s hope was to eventually convert the short-term loans to longer-term debt. This debt house of cards came tumbling down on August 17, 1998 when the government was forced to call a 90-day moratorium (halt) on debt repayments. Fear of a general Russian default on its debts swept the world financial markets. Many Russian banks collapsed, closing their doors, and wiping out the deposits of many ordinary Russians.
Several international factors also contributed to Russia’s 1998 financial collapse. One of these factors was a collapse in Asian financial markets. As Far Eastern stocks declined, investors panicked and attempted to get out of all emerging market (stock markets in less developed countries) stocks. An economist quoted in London’s Financial Times summed up the situation succinctly by saying: “The global financial turmoil led to a flight to quality (safer investments) and Russia was not an obvious destination.” Another factor was a worldwide decline in oil prices. Russia is the world’s third-largest oil producing country, even though production has dropped off sharply since Soviet times. Russia boasts 5% of world oil reserves and accounts for 10% of world output; oil accounted for 60% of Russia’s exports in 1997. Prices tumbled from $21 per barrel in October 1997 to $11 in March 1998. The price drop severely cut into the profits of Russia’s oil companies, which in turn further adversely affected government revenues.
In the midst of the financial crisis, Yeltsin sacked Kiriyenko, attempting to bring back Chernomyrdin as prime minister. Many analysts saw the move as an attempt to reassure the public—and the Duma—with the return of a familiar figure, a stolid baron of Soviet industry who had strong ties to the country’s financial and industrial elite. Instead, the strategy backfired as the Duma opposition and public turned on Chernomyrdin, blaming him for much of the corruption and mismanagement that had accompanied the last seven years of Western-style economic reforms. Twice the Duma refused to confirm Chernomyrdin, and Yeltsin, who had forced the Duma to approve Kiriyenko’s nomination just four months earlier, gave in, withdrew Chernomyrdin, and instead nominated Yevgeny Primakov, a former Communist apparatchik who quickly won approval. Yeltsin was hospitalized most of the fall of 1998 with pneumonia. The Kremlin, which had long insisted that the president was simply susceptible to colds, began to acknowledge that Yeltsin suffered from “emotional stress” and the wear and tear of age. The president’s declining health left Primakov as the de facto (in fact, if not in law) president because Yeltsin’s health made it impossible for him to play a day-to-day role in running the country.
Doomsday predictions for Russia failed to materialize in the fall of 1998 and throughout 1999. The huge devaluation of the ruble, at least in the short term, even proved to be beneficial for the economy. Most foreign goods simply became too expensive to import. During the first three months of 1999, imports fell 50% from the previous year. This provided an opportunity for domestic industries to increase sales within Russia. As a result, industrial production, which had steadily declined throughout the decade, rose almost 5% during the first half of 1999. “The crash in the ruble was the best thing that ever happened to this country,” reported Eric Kraus, a Moscow-based banker. “The overvalued ruble meant that it was just much cheaper to import. There was no use restructuring industry when you could import the same goods for a quarter of the price.” Despite the dramatic plunge of the ruble during the summer of 1998, it stabilized in 1999, hovering between 20-25 rubles to the dollar. Inflation leveled off as well, with prices rising only 1.9% in June and 2.8% in July, in comparison with a one-month rise of 38% in September 1998.[3] Russia also greatly benefited from rising oil prices, as the price per barrel of world oil almost doubled in 1999. This in turn helped the government’s chronic struggle to collect tax revenue due to the fact that oil exports are one of the easiest portions of the economy for the government to monitor. The most detrimental consequence of the 1998 crash was a severe curtailment of foreign investment following the government’s default on approximately $40 billion in short-term domestic bonds (GKOs). Since the fall of communism, the IMF (International Monetary Fund) had given $22 billion in aid to Russia, and the U.S. had extended an additional $9 billion, mostly in the form of technical support and direct investment loans. By the end of 1999, foreign investment in Russia was only 10% of the amount invested in 1991, a two-thirds decline since 1997. The 1998 collapse had simply burned too many foreign investors for any talk of returning in mass to invest in Russia. “After this, Western investors would rather eat nuclear waste,” commented one banker.[4]
In May 1999, Yeltsin suddenly fired Primakov and replaced him with a virtual unknown, Sergei Stepashin, a former official in the Justice and Interior ministries.[5] Stepashin, however, only lasted three months. Apparently aware that his new prime minister lacked any hope of leading the cause for Yeltsin’s supporters in the December 1999 parliamentary elections or for being a serious contender for the presidency in 2000, Yeltsin dismissed Stepashin in August and replaced him with the more forceful Vladimir Putin, a 47-year-old former KGB spy.[6]
Upon his appointment as prime minister in August 1999, Putin moved swiftly to establish a reputation as an energetic and decisive leader. The lean, athletic prime minister was regularly shown on television practicing his hobby of judo in an unmistakable contrast to the doddering (aging and ill) Yeltsin. Similarly, Putin enhanced his reputation as a decisive man of action by renewing Russia’s war in Chechnya. Although a peace agreement had been signed in 1996, the area remained beyond Russian control. By 1999, kidnappings for ransom had become the order of the day; between 1997 and 1999 more than 1,000 people were kidnapped, including Russian soldiers, foreign aid workers and clergymen. In March, the rebels even seized General Gennady Shpigun, the Russian Interior Ministry representative in Chechnya. As a result, Putin’s predecessor, Sergei Stepashin, had planned a limited invasion of Northern Chechnya.
Just days before Putin’s appointment as prime minister, Chechen rebels invaded the neighboring province of Dagestan in hopes of fomenting a similar Islamic rebellion. In his first days in office, Putin viewed the attack as a threat to Russia’s survival: “It would have spread to Dagestan, the whole Caucasus would have been taken away, it’s clear . . . Russia as a state . . . [would] cease to exist.”[7] Working with Russian generals eager to erase the humiliation of the earlier failed campaign in Chechnya, Putin revised Stepashin’s plans into a full-scale invasion. In September a wave of bombings exploded in Moscow, killing over 300 people. Putin alleged that Chechen terrorists were behind the attacks and ordered Russian troops to invade the province. Taking care to avoid the Russian casualties that had brought about widespread protest in the previous war, Putin waged war at a distance, using planes and artillery to pound the rebel province. Although this policy resulted in horrific civilian casualties, Putin was viewed as a tough leader, willing to withstand international condemnation in dealing with Russia’s enemies. Emphasizing his toughness, he used easily recognizable prison slang in promising to pursue the Chechen rebels: “If we catch them in the toilet, we’ll rub them out right there.”[8]
The war in Chechnya soon eclipsed all other political issues as the country headed toward the election of a new Duma (the country’s third since 1991) in December 1999. Virtually unknown in August, by November Putin was the dominant political figure in the country as Russians projected upon him their hopes for a leader that could solve their country’s economic difficulties and restore some measure of civic pride. “It seems to me that Putin responds to the certain deficit that has been formed in the public mind, which is a wish to see effective power, an effective politician,” pollster Georgi Satarov commented; “Chechnya was a way to demonstrate effectiveness.”[9] In the Duma elections, Putin endorsed the previously obscure Unity Party that had been formed by a Kremlin official, Sergei Shoigu, the Minister for Emergency Situations. Despite having no political program, no grass roots organization, and no history, Putin’s endorsement was enough to make Unity a leading factor in the elections and secure it the support of the rich and powerful. In the party list voting, the Communists won 24% of the vote, Unity 23%, and the Fatherland-All Russia Party, 13%. The pro-market Union of Right Forces, headed by former prime minister Sergei Kiriyenko and including Yegor Gaidar and Anatoly Chubais, captured 9% of the vote, while Yabloko, another pro-market, western-oriented party, won 6%. The only other party to receive enough votes to qualify for party list seats was a group led by ultranationalist Vladimir Zhirinovksy, which won 6%. Although they won the most votes, the Communists were now actually confined to a small minority as most of the rest of the Duma was solidly anti-communist and could be expected to generally support the Putin government. “No one is afraid of the Communists any more and no one wants to be in opposition to Putin,” said Michael McFaul of the Moscow Center of the Carnegie Endowment for International Peace.[10]
The Duma elections placed Putin in a dominating position to succeed Yeltsin in the country’s second presidential election, which was scheduled for June 2000. His election was virtually ensured when Yeltsin suddenly resigned on December 31. The sudden resignation made Putin acting president and allowed him to call for an early presidential election in March.
For years, Yeltsin’s ill
health had raised serious questions regarding the future of Russia without its
only democratically elected leader, but his resignation produced a dull
anti-climax. As the New York Times reported, “most
Muscovites seemed simply glad to see an aging, obviously unwell leader leave
the scene.”[11] In his farewell address, Yeltsin acknowledged
the pain and disappointment of the post-communist era:
Russia must enter the new millennium with new politicians, with new faces, with new, smart, strong, energetic people.
And we who have been in power for many years already, we must go.
Seeing with what hope and faith people voted in the Duma elections for a new generation of politicians, I understood that I have completed the main thing of my life. Already, Russia will never return to the past. Now, Russia will always move only forward.
And I should not interfere with this natural march of history. To hold onto power for another half-year, when the country has a strong man who is worthy of being president and with whom practically every Russian today ties his hopes for the future. Why should I interfere with him? Why wait still another half-year? No, that’s not for me! It’s simply not in my character!
Today, on this day that is so extraordinarily important for me, I want to say just a few more personal words than usual.
I want to ask for your forgiveness.
For the fact that many of the dreams we shared did not come true. And for the fact that what seemed simple to us turned out to be tormentingly difficult. I ask forgiveness for not justifying some hopes of those people who believed that at one stroke, in one spurt, we could leap from the gray, stagnant, totalitarian past into the light, rich, civilized future. I myself believed in this, that we could overcome everything in one spurt.
I turned out to be too naive in somethings. In some places, problems seemed to be too complicated. We forced our way forward through mistakes, through failures. Many people in this hard time experienced shock.
But I want you to know. I have never said this. Today it’s important for me to tell you. The pain of each of you has called forth pain in me, in my heart. Sleepless nights, tormenting worries—about what needed to be done, so that people could live more easily and better. I did not have any more important task.[12]
Roundly criticized during his last years in office for the corruption that surrounded his regime, Yeltsin was still praised for maintaining democracy through tough times.[13] “He was an autocrat who forced himself to be a democrat,” said Edvard S. Radzinsky, a Russian historian and chronicler of the Romanov dynasty. “Even when he destroyed the Parliament at the White House and had the right to arrest many people for life, he didn’t do it. He understood that he had to set an example.”[14] “The conditions for democracy were created by Yeltsin,” said Irina Khakhamada, a leader of the liberal Union of Right Forces Party, who noted that he had put most of the economy in private hands. “There exists a legitimate parliament, there are direct presidential elections. And no matter who comes to power now, he would have to organize a total military coup, drowning the entire society in blood, because there is no other way of switching to another regime.”[15] Biographer Leon Aron believes that Yeltsin’s place in history can be summed up in one sentence: “He made irreversible the collapse of Soviet totalitarian communism, dissolved the Russian empire, ended state ownership of the economy—and held together and rebuilt his country while it coped with new reality and losses.”[16] Ordinary Russians were less charitable. “I believed in Yeltsin, and he failed to justify my faith, and all our hopes and expectations,” said Larisa Aliabyeva, a French teacher in southern Moscow.[17]
Jeffrey T. Stroebel, The
Sycamore School, 2001.
[1] With inflation appearing to stabilize at an annual rate of 12%, in January 1998 the currency was revamped. The ruble had plummeted to about one-ten thousandth of its value during the Soviet period, trading at an exchange rate of 5,974 rubles to the dollar. The redenomination adjusted its value to 6 rubles per dollar as Russians exchanged their old currency for new rubles at a rate of 1,000 old rubles to 1 new ruble.
[2] Bill Powell and Yevgenia Albats. “Summer of Discontent: The inside story of the crash that brought Russia to its knees,” Newsweek International, 18 January 1999.
[3] David Hoffman, “Russia, One Year After the Fall.” Washington Post 17 August, 1999.
[4] Freeland, Sale of the Century, p. 329.
[5] Yeltsin later claimed that Primakov had “too much red in his political palette,” and “threatened to roll back reforms, collapse the embryonic economic freedoms, and trample the democratic liberties that we had managed to nurture and preserve in these past few years.” Tyler, “How Yeltsin Nearly Scuttled Democracy in Russia.”
[6] Although the KGB has deservedly ominous connotations, liberals in the Soviet Union often viewed KGB agents as possible allies. They were well-educated, relatively uncorrupted, and aware of the realities of conditions in the USSR as well as the great discrepancy between Soviet life and living standards in other countries. Remnick, Lenin’s Tomb, p. 354.
[7] David Hoffman, “Miscalculations Paved Path to Chechen War,” Washington Post, 20 March 2000.
[8] Robert G. Kaiser, “A Look at … Russia’s Enigmatic President,” Washington Post, 15 October 2000.
[9] Daniel Williams, “Need for Authority Figure Fuels Putin’s Rise to Power,” Washington Post, 1 January 2000.
[10] David Hoffman, “Russian Voters Back New Party,” Washington Post, 20 December 1999.
[11] Allison Smale, “Most Muscovites Won’t Miss Yeltsin,” New York Times, 31 December 1999.
[12] “Text of Yeltsin’s Resignation Announcement,” Associated Press, 31 December 1999.
[13] Putin immediately granted Yeltsin full immunity from punishment for any acts he committed while president.
[14] Wines, “Yeltsin’s Big Visions, Unfulfilled.”
[15] David Hoffman, “Yeltsin Resigns: ‘I Did All I Could,’” Washington Post, 1 January 2000.
[16] Aron, Yeltsin, p. 736.
[17] Sharon LaFraniere, “Russians Caught by Surprise, Prepare for a Future Without Yeltsin,” Washington Post, 1 January 2000.