Development of a stable market
economy
22. Economic reform in Russia has been traumatic
and the results to date have been disappointing. Annual inflation
exceeded 100 per cent in every year from 1992 to 1995, hitting
a peak of over 2000 per cent in 1992. According to official data,
1998 GDP was roughly 56 per cent of the level of 1989 in real
terms. As we discuss below[43],
real household incomes have fallen dramatically. While official
data should be handled with caution, there is no doubt that output,
employment and living standards have fallen sharply, while income
disparities have increased dramatically, both across households
and, as Professor Hanson noted, across Russian regions.[44]
As we note below,[45]
one of the consequences of economic decline has been a fall in
life expectancy, particularly for men. In addition, the economic
transformation has been associated in the minds of ordinary Russians
with crime and corruption, the inability of the Russian state
to perform even its most basic functions, and the emergence of
a number of other problems, including the de-industrialisation
of the country,[46]
the widespread de-monetisation of economic exchange,[47]
rising unemployment,[48]
and pervasive wage arrears.[49]
23. Within Russia there is resentment of what is
seen as the West's role in this. Western governments and multilateral
institutions are associated with what are now seen to be failed
policies and "radical reformers".[50]
Indeed, polls suggest that much of the population believes the
West to have acted deliberately to weaken Russia through interference
in its economic policiesa belief reinforced by the West's
apparent willingness to use multilateral funds to prop up favoured
Russian politicians, to turn a blind eye to evidence of corruption
on the part of its favourite reformers and to the increasingly
evident failure of their policies.[51]
The West stands accused, by many of our witnesses as well as by
large numbers of Russians, of having facilitatedwhether
deliberately or notthe emergence of crony capitalism in
Russia.[52]
24. Ironically, it is not clear to what extent Russia
has actually experienced radical economic reform: the gap between
the rhetoric and the actions of Russian governments since 1992
has been pronounced, partly because, as we discussed above[53],
the Russian state has lacked the authority to introduce reforms.
The "reformist" governments of 1992-98 pursued monetary
and fiscal policies designed to please the IMF and contain inflation
while shying away from micro-level structural reforms for fear
of their social and political consequences.[54]
The crisis of August 1998 was above all the consequence of this
contradiction: the macroeconomic stabilisation achieved during
1995-98 was not underpinned by the micro-level structural changes
needed to make it sustainable without considerable external financial
support. Stabilisation was based on monetary measures (mainly
exchange-rate management) and was not accompanied by sufficient
fiscal adjustment.[55]
The government's inability to put its budget in order was, in
turn, largely a product of the failure of structural reform.[56]
Nevertheless, the "post-reform" governments of 1998-99
have, despite a marked change in rhetoric, followed in their predecessors'
footsteps, maintaining a fair degree of macroeconomic discipline
while avoiding structural reform.
11 Ev. p. 51. Back
12 See para 2 above. Back
13 Q136. Back
14 Ev. p. 169, Appendix 9. Back
15 Ev. p. 162,
Appendix 5 (Dr Roy Allison). Back
16 Ev. p. 53. Back
17 Ev. p. 162,
Appendix 5. Back
18 Mr Yavlinsky
was referring here to the Soviet-era Communist Party, not to the
Communist Party of the Russian Federation, which has not supplied
any prime ministers. Back
19 Q135, Q136. Back
20 Q136. Back
21 Natsional'nyi
sostav naseleniya SSSR published in Moscow, 1991. Back
22 Ev. p. 116. Back
23 Ev. p. 54. Back
24 Q216. Back
25 Ev. p. 114. Back
26 Ev. p. 164,
Appendix 5. Back
27 UNHCR estimates
that there are around 150,000-180,000 refugees in Ingushetia,
with around 12,000 in Dagestan. See www.unhcr.ch/refworld/.
On 11 January, Nikolai Koshman, Russia's chief emissary to Chechnya,
was quoted by AP as claiming that of the 250,000 people who fled
Chechnya for Ingushetia, more than 80,000 have returned home. Back
28 Sixth Report,
Session 1998-99, HC 349, paras 15 and 16, available on the Committee
website: www.publications.parliament.uk/pa/cm199899/cmselect/cmfaff/cmfaff.htm Back
29 Q247. Back
30 Ev. p. 177,
Appendix 16. Back
31 Q133. Back
32 Q295. Back
33 See paras 82
to 85 below. Back
34 Q247. Back
35 Q248. Back
36 Q250. Back
37 Q254. Back
38 Q270. We discuss
below the measures taken by the EU. See para 72. Back
39 Q284. Back
40 Q242. Back
41 HC Deb 21 December
1999, col 498w. Back
42 See, for example,
Norman Davies's article The Bear is Still Red in Tooth and
Claw, Spectator, 13 November 1999. Back
43 See para 31. Back
44 Q130. The
Russian Statistical Agency estimates that the aggregate income
of the top 10 per cent of the population in 1999 was 14.2 times
that of the bottom 10 per cent, up from a differential of about
3.5 times in the Soviet era. Back
45 See para 31. Back
46 According to
the Russian Statistical Agency, industrial production dropped
by just over 54 per cent during 1990-98 inclusive. Back
47 According to
surveys of Russian enterprises, roughly 50 per cent of industrial
turnover in 1998 was settled by non-monetary means; Russian
Economic Barometer 8:3 (Summer 1999), p. 6. Back
48 Open unemployment,
virtually unknown in the Soviet period, rose to over 14 per cent
in early 1999; moreover, there is much hidden unemployment, expressed
in short shifts and mandatory unpaid leave. Back
49 At the end
of the third quarter of 1999, Russian enterprises and the state
budget owed their employees a total of Rb53.7bn (around £1.34bn)
in overdue wages. Arrears of six months and more are not uncommon
in some sectors. Back
50 Ev. p. 162,
Appendix 5; Ev. p. 176, Appendix 16; Ev. p. 182, Appendix 21. Back
51 Ev. p. 176,
Appendix 16. Back
52 Ev. p. 176,
Appendix 16; QQ143-145. Back
53 See para 11. Back
54 QQ208, 215,
223, 226. Back
55 On IMF definitions,
the general government deficit during 1992-98 fluctuated between
5 and 10 per cent of GDP, with little or no evidence of a sustained
downward trend. Back
56 Mr Riley of
Fitch-IBCA drew attention to the lack of infrastructure for expenditure
control and management (Q215). Back