Russian Elections
Jude Wanniski
July 1, 1996


There certainly would be a sell-off of financial assets in Moscow if Gennadi Zyuganov and the Communists defeat Boris Yeltsin in the runoff elections this week. To be honest, we would not be alarmed if this happened, although we agree with the general expectation that Yeltsin will win narrowly in a small turnout. As we have been advising our clients for at least 15 years, there really are no serious "communists" left in Russia the term really only applies to those who once believed the central government could outperform market mechanisms in allocating capital and setting wages and prices. In trying to get from a command economy to "market socialism," the ruling class has essentially divided into two factions. Yeltsin and the so-called "reformers" represent a top-down evolution consistent with the "shock therapy" advice it got from the West, while Zyuganov and the Communists represent the kind of bottom-up evolution that has characterized China's development. If Zyuganov were a more effective candidate, he would be drawing these distinctions himself and would have a better chance of victory. As it is, his hesitancy to articulate how government might function in his hands has allowed Yeltsin to paint dire pictures of what a Zyuganov victory could produce.

The fact that U.S. political leaders in both parties publicly are rooting for Yeltsin is largely a residue of the Cold War. Can you imagine either Bob Dole or President Clinton even suggesting that a Communist victory might not be so bad? I've only half-joked that the Russian Communist Party continues to call itself that only because it has a giant oversupply of old letterheads that it does not want to waste. Zyuganov would get more sympathy in the West if the name were changed to, say, the Progressive Socialist Party, or even, simply, the Democratic Party. The same is true in China, by the way, where there are no "communists" who reject market mechanisms. In a very real way, the forces that Zyuganov represents essentially parallel those that President Clinton represents here at home the people associated with the old order and central planning, whether Five Year Plans or New Deal industrial plans.-These are the pensioners, the state employees, that fraction of the work force trapped in enterprises that can no longer compete, those who cannot survive without government social services.

Yeltsin and Prime Minister Viktor Chernomyrdin, who is the real power in Moscow, represent the forces that not only are able to cope with change, but can control and capitalize on it. This is a jungle, which indeed places the highest premiums on individual creativity, initiative and entrepreneurial capitalism. But along with that, there is an astonishing amount of corruption, as the entrepreneurs cannot survive without paying off government regulators and tax collectors. I tend to believe rumors that Chernomyrdin, who has long been atop the heap in controlling state oil and gas exports, has become a very rich man. Russia today is the Mafia of the Godfather combined with the Robber Barons of 19th century America. A foundation is being laid for a modern capitalist industrial state, but it is not pretty. The human costs of transition are higher by orders of magnitude compared to the transition methods chosen by the Chinese. It is laughable for our government to be smiling on Yeltsin while denouncing the Chinese on issues of human rights. One reason is that our corporate commercial interests find it far easier to deal with the corruption in Moscow than the relative integrity of the regime in Beijing.

The players who are making a killing under Yeltsin and Chernomyrdin have absolutely no interest at this point in the kind of economic reforms that might produce a general economic expansion, in which everyone would receive the benefits. The federal tax codes are so ridiculously progressive and confiscatory that at latest count Moscow is collecting the equivalent of only 3% of GDP in revenues. The June 28 Financial Times carried a dispatch from Moscow on how desperate the central government has become in collecting the national taxes necessary to pay its bills. It has now resorted to the equivalent of tax farming which the later Roman Emperors employed during the decline and fall. It amounts to the government Mafia hiring enforcers, paying thugs 50 cents on the dollar to collect confiscatory taxes from citizens trying to eke out an existence against marginal tax rates that exceed 100% at pitifully low levels of income.

The one thing that we can be sure would occur in a Zyuganov presidency would be a severing of Moscow's manipulation by the International Monetary Fund. The New York Times lists this as a negative for the Russian people, predicting the IMF would withdraw its offer of a $2 billion loan if Yeltsin does not win. Quite the contrary, this is the one reason I would contemplate voting for Zyuganov if I were a Russian elector. In fact, Zyuganov has promised to cut taxes if elected, which in itself would bring down the displeasure of the IMF. The Times glibly suggests that a Communist victory would be bad for the ruble, because Zyuganov would favor an easier monetary policy. This is nonsense. In fact, when Yeltsin came to power, the ruble was roughly exchanging at a rate of 10 to the dollar. It is now at 5000 to the dollar, because of policies designed by Ivy League economists - including Treasury Undersecretary Larry Summers, who at the time of Yeltsin's ascendancy was chief economist at the World Bank. The ruble is far likelier to stabilize under Zyuganov, especially if he lowers tax rates.

The best we might hope for out of the elections would be a narrow Yeltsin victory one that forces him to share sufficient power with Zyuganov and the Communist Party. This would reduce IMF influence and bring about a shift in tax and monetary policy toward the Chinese model. My guess is that Beijing would undertake a more active role assisting Moscow in bringing this about. Instead of the current pathetic stance of our own ruling class and government, the United States should be taking the lead in helping Yeltsin shift toward a bottom-up transition to a market economy. The fact that it will not do so reflects the dominant influence of corporate capitalism on both Democratic and Republican parties; the Big Guys simply want people in charge in Moscow with whom they can cut deals. This is typically short-sighted, but we should not expect any change in either a second Clinton administration or in a Dole administration.

Whatever the outcome of the Wednesday runoff, we should be encouraged that Russia is at least stumbling toward democratic institutions that will serve its people in the long run. There are two distinct political parties trying to form closer to the center than at the extremes. The Times yesterday reported concerns in Moscow about how power might be transferred in the unlikely event of a Zyuganov victory. It is instructive that the Communists are those who have been trying to establish an orderly procedure for power transfer, while it is Yeltsin's team that is creating doubts about its willingness to leave gracefully. It also has been clear that it is the Yeltsin team, not the Communists, that has been manipulating the state-controlled news media and the government pork barrel in its determination to hold onto power. Our own Establishment media tends to excuse Yeltsin's outbursts of behavior that normally would be characterized as fascist on the grounds that at least he is not a "Commie." Yeltsin's coalition ally, General Alexander Lebed, is clearly a minor Mussolini. The reason we should prefer the kind of scenario described above, with a narrow Yeltsin victory, is that it minimizes the possibility that our military-industrial complex will have an excuse to crank up spending and plot a new containment strategy to deal with a Moscow/Beijing Axis. Otherwise, I would clearly favor giving the "Communists" a turn at the helm, at which they could gain respect for the efficiency of both economic and political markets.