Back from Moscow
Jude Wanniski
May 19, 1992


David Goldman and I spent the last week in Moscow exploring with the government our idea of entering the international capital markets as a means of establishing a convertible ruble. We had several meetings with officials of the Finance Ministry, an extraordinary 40-minute visit with Secretary of State Gennadi Burbulis -- President Boris Yeltsin's chief political strategist -- and an hour with Ambassador Bob Strauss at his Embassy residence. We did not meet with Finance Minister Yegor Gaidar on this trip, but he arranged the Ministry meetings, which were either chaired by Andrey P. Vavilov, first deputy minister of finance, age 31, or Andrei V. Vorovsky, head of the ministry's "Section for Securities and Financial Markets," who also appears to be in his early 30s. The core economic team in Moscow is clearly even younger than the youthful team in Mexico City. This is a most positive, salient characteristic of the reform efforts in both countries. The members are not only capable of working brutal hours, but are also flexible in their attitudes to new ideas. Among the brightest economists we met was Sergei Vassiliev, 35, who is head of the long-term planning team, who seems to have the confidence of both Burbulis and Gaidar. During the week, we spent about 10 hours with Vassiliev, including two long dinners, chiefly discussing the theoretical underpinnings of our strategy for the economy. Vassiliev, trained in St. Petersburg at an economic school that focused on probabilities rather than mathematical certainties, is as close to a "supply-sider" as we have found in Russia. Burbulis, who appointed him to his position and asked him to work with us, told me that "It is not only important that you have a man who can understand; he must also want to understand."

Our basic point, which Vassiliev and Vavilov clearly understand, is that Russia is never going to be a superpower in the world financial markets unless private investors in New York, London, Tokyo and Frankfurt, who are betting their own money, are willing to hold large amounts of ruble assets in their portfolios. Even more to the point, I told them I could not recommend purchase of Russian bonds in the West unless I was willing to be first in line, to buy at least $100,000 for the pension fund of my employes. This means Russia must not follow recommendations that will weaken the economy, which then inevitably weakens the government's support among the people. If the International Monetary Fund, which is betting taxpayers' money, sets conditions that I believe will weaken the economy, I assured them other private investors would see it the same way. At one time they might have been able to get bank loans in New York, when banks believed they would be bailed out of any bad investments by the U.S. government. This is no longer true. The bond market is a different story, though. It will invest in Russia if it believes the economic reform plan will produce economic growth. We asserted, by the same logic, that if Russia can successfully place $500 million in bonds, it could see a clear path to securitizing all of its Western bank debt, of perhaps $60 billion.

This, of course, is what Mexico has accomplished in the last three years. We hammered home the point that now that Russia is a member of the IMF, it can no longer be pushed around by IMF bureaucrats. It can stand up to them just as Mexico did in 1989, when the Salinas government wished to avoid the peso devaluation the IMF was urging upon it. I advised the Russians: "Your people have permitted the government to make all its decisions for the last 75 years and now have rejected that course. Why should you now turn the fate of your people over to foreign governments, which are no better at assessing the practicality of investments than are you." This, after all, is what it means to enter the market economy. If the market buys Russian securities that have not been thoroughly collateralized or securitized, it essentially means it is "voting" its approval of the direction of government economic policies. This takes care of political risk, for if the people are happy with the direction of the economy, they will be happy with the government.

As President Yeltsin announced the day after Russia's admission to the IMF that Moscow will not necessarily take its advice on policy matters, it is clear his government is thinking along the lines we suggested: Do what is best for your own people and foreign investors will come flocking to the boom that will surely follow. Mr. Burbulis, as Yeltsin's chief political strategist, said he, of course, found this idea very attractive and that the ideas would be seriously pondered. He is quite an exceptional man, not at all what I expected in a political strategist -- the man said to have outmaneuvered Mikhail Gorbachev. He's slender and handsome, in his mid-40s, with light, clear skin and placid, but deep, dark penetrating eyes. After the meeting I mentioned to another in the group that I expected a politician and found a philosopher. I was crisply informed that Burbulis had been a professor of classical philosophy. For example: When I told Burbulis I had been invited to Moscow seven times by the government in the last three years, he said with a smile, through an interpreter, "Your patience stimulates me." We were told elsewhere that one of the chief aims of Burbulis is to have the people of Russia become comfortable with thinking and acting along democratic lines, after many centuries of submission to autocracies. David Goldman said he would buy ruble bonds simply knowing that a man of Burbulis' intelligence was at the center of policymaking. He could have been a chief counsel to Peter the Great, David thinks. 

We had met earlier with Bob Strauss, who is clearly enjoying his work in Moscow, to the point where he joked that "Maybe President Perot would keep him on." Strauss is also impressed with the Yeltsin team, practically astonished that the government is so popular given the hardships the people are enduring. He thought it would be difficult for me to get the government to alter its economic policy direction. I offered the opinion that the government had already swerved from the direction in which it was headed three months ago, and that this is the reason Yeltsin's popularity has soared. Caught between the IMF's Austerity Program and a Russian Congress opposed to an even tighter squeeze on the people, President Yeltsin retreated on every point, in a way that permitted the Western press to report that the Russian Congress had backed down. I would not be surprised to find that it was all a charade to satisfy the IMF, which knows its conditions have not been met, but wants it to appear that there has been no retreat. Then again, the government announced it was thinking of doing horrible, painful things, like freeing energy prices to world levels, which meant a forty-fold increase. Then they put them up only five-fold, which seemed a relief. Strauss absolutely agreed with the government's retreat on the energy increase, advising that it would not have lasted 48 hours if it had gone ahead. This I found extremely encouraging, along with the sense that he has finally begun to understand the reasoning behind our economic proposals.

The conditions at the grass roots are still at the edge. Wages, prices and the exchange rates are still about where they were when David Goldman visited in February. We're told families have enough income to buy only food, with nothing left over for clothing. The government is keeping the old state enterprise system afloat with trade credits, and the system is creating trade credits on its own in lieu of central bank money creation. The good news, though, is that the government hasn't done anything that would make the strategy we have proposed impossible. Or we wouldn't be there and the government would not be listening to us.

This is about all I can report, a small part of what we were doing in Moscow. We agreed with Strauss as well as the Finance Ministry that while everyone is chewing over our recommendations, the details should be kept quiet. I'm not quite sure anything will come of the current round of discussions. Perhaps things will have to get worse yet before they can get better. But as long as the government finds my patience stimulating, I can be patient. If something breaks, you will be the first to know.

P.S. On my return from Moscow, I learned that the Washington Bureau of The Wall Street Journal had been up to its old tricks, taking shots at me in its "Washington Wire" column of Friday, 5-16, to make me look like a dope. It reported I was running around "bragging" that I was "educating" Ross Perot, but that on checking with a top Perot aide, found I'd only met with him once, that Perot is not a supply-sider, and that he couldn't even pronounce my name accurately. The item developed from a Manhattan cocktail party I attended May 7 to celebrate publication of the new book, The Seven Fat Years, by Bob Bartley, editor of the WSJ. I knew practically everyone in the room, many of whom knew that Perot had invited me to Dallas a week earlier to talk economics and wanted to hear about him. Alan Murray of the Washington Bureau was there and heard me "bragging." Boo.