Yeltsin on the Ropes
Jude Wanniski
April 14, 1992


The press accounts of what is happening in Moscow uniformly present the Yeltsin government as being besieged by an anti-reform, hard-line Russian Congress. This is ridiculous. I surprised an official in the Russian Embassy yesterday by advising that if I had the privilege of voting in the Russian Congress, I would vote against the government in all particulars of its reform plan. I'm not opposed to President Yeltsin, of course. I'm not opposed to his Finance Minister, Yegor Gaidar. I would like to see them succeed. But inasmuch as their economic reforms have been designed by birdbrains at the International Monetary Fund, with the help of Harvard's Jeffrey Sachs, they would wreak unprecedented economic and social chaos -- a fact the leaders of the Russian Congress see very clearly. Except for a few people at the State Department, who seem powerless to influence policy or opinion, the Bush Administration is massively misinformed on these developments and is blindly supporting the IMF reforms and denouncing the elected parliamentarians of the Russian Congress, as if they were so many secret Communists.
Here is what is going on: The people of Russia are living in miserable conditions, which have gotten progressively worse since the Gaidar-Sachs plan, a massive tax increase on almost all consumer goods disguised as "price liberalization," was introduced on January 1. The Russian Congress, from which Prime Minister Boris Yeltsin derives all of his serious powers, has been out of session during this three-month fiasco, smoldering, eager to get back into session to demand, at the very least, the head of Yegor Gaidar. Two weeks ago, in a many-sided public relations stunt, President Bush announced a $24 billion aid package to Russia on behalf of Western governments, including those, like Japan, who never agreed to this. In backstage whispers, the Administration admitted there would be a few conditions. First, the money would have to be dragged out of Congress and other reluctant legislatures around the world. Second, in order to get this money which does not exist at the moment, the Yeltsin government would be required to meet the three impossible conditions of the IMF: Balance the budget even as revenues are collapsing as one result of the January tax increases; stabilize the ruble at a greatly inflated rate, but without any increase in the money supply; increase energy prices by a factor of 30, at the same time wages, pensions and savings are held to miniscule purchasing power.

The only word for this IMF plan is "stupid." The Russian Congress, in its wisdom, has now denounced all three of the IMF conditions, with many in the Congress ridiculing the IMF as well, and has passed a series of economic measures to deal with the emergency. These include the release of R200 billion in credits to the agricultural and industrial sectors. This was absolutely essential to permit the barest functioning of the economy, yet it is being denounced by IMF and Bush Administration economists as inflationary! These are the same economists and officials who have been urging massive devaluation of the ruble in order to inflate away the value of the people's pensions, wages and savings! The Russian Congress yesterday passed a measure to index the savings of the people against inflation -- one of the measures that caused Gaidar to announce his resignation, unless the measures are repealed.

Yeltsin has been given 90 days for his government to come up with a plan palatable to the Congress, or he will resign, and a new government will be formed. Just as Mikhail Gorbachev broke his pick trying to get Western aid at the London Economic Summit in June 1991, a failure that triggered the August coup against him, Yeltsin is now on the ropes for the same reason. It is beginning to dawn on many Russians, who had placed such high hopes on an entente with the West, that they are dealing with extremely stupid people, many of whom would like nothing more than to drive Russia into the dirt for a century or more. At some tipping point, which is not far off, the ruling Establishment of Russia will realize, with anger and outrage, the games they have been playing with Washington. There is no money for them, and even if there were, they cannot meet the conditions attached to Western aid.

There is not much doubt the Russian government that would follow the present one would tend to be anti-West, anti-IMF, anti-American. The new leaders will have been staggered by the enormity of the political hoax that has been played upon it. It will move East, linking up with China, which was also badly burned by an IMF-induced currency devaluation. Instead of being forced to sell assets to the West for peanuts, Moscow would find a willing trading partner in Beijing. Once the entente with the West were behind it, Moscow would feel free to deal away to China its strategic high-tech capabilities for the resources it needs.

In these last several months, the Russians have asked us to work in parallel with the IMF on the idea of an international bond issue that would fix the ruble. That is, they could see a way to draw upon two sources of Western resources -- public funds and private bond placements. Prior to the last quarter century, when the IMF assumed its present role as international banker to distressed nations, private banking was the sole source of funds to governments in need. I've had to explain to the Russians that when they are seeking public capital and private capital, the conditions are generally incompatible. The IMF says in order to get its money Yeltsin must push his people off a cliff. Private banks would insist that Yeltsin not push his people off a cliff. There is no way for us to work together with the IMF.

What is still possible is a bond issue of the kind we have been describing for two years now, one that establishes the conditions for economic growth in Russia and the republics. Then, and only then, could the IMF bureaucrats elbow in to take credit for the success of the enterprise, and shower credits on Moscow without impossible conditions. The private bond placement must come first. In this regard, we may have something to announce shortly.