Russia has to re-establish trust, even if it means price controls

We must stop demanding of Russians what we would never tolerate ourselves

MOST OF the comment of the last week or two on the Russian crisis has focused on the radical free-market reforms introduced from 1992 onwards, as if its roots were to be found there.

I believe we must look much further back. In essence we are still dealing with a semi-Soviet economic system, whose real nature is disguised by all the hype about privatisation. In Soviet days, everything was run by the nomenclature elite, a vast patronage network under the control of the Communist Party. By the final decades, the so-called "planned economy" was not really planned at all: enterprise managers treated the resources of their factory or collective farm as if they owned it. They would commandeer its transport for private outings, use its tools for domestic order its workers to repairs, build dachas for them. There were occasional sensational crackdowns, but most people had patrons who would them at the top if things got sticky.

With the reforms of Gorbachev and Yeltsin bosses were able to transform de facto ownership into real ownership. Even though the workers were guaranteed a share, the managers were usually able to buy them out. So the old nomenclature bosses were soon firmly in the driving seat at shareholder's meetings.

To portray them completely cynically would be unfair. They wanted to line their own pockets, certainly, but most also felt a responsibility for their employees, who depended on them not just for benefits too: housing, child care, sports facilities, sometimes medical treatment as well.

But in the brave new world of market economics they were terribly vulnerable. Decades of state protection, under-investment and outmoded technology had left them unable to produce goods that any customer outside a siege economy would want to buy.

So most of these industrial dinosaurs continued to look to the state, either as customer or as provider subsidies and cheap credit. They managed to continue trading with each other by the simple device of not paying for goods. Barter and accumulated debt became the normal method of doing business. As for the workers, if they were laid off or were unpaid, they did not quit "their" enterprise, since it still provided them with social benefits which local authorities were often too poor to take over. They simply spent more time moonlighting or working on their allotments. After all, this was merely a new version of the old Soviet informal social contract: "They pretend to pay us and we pretend to work".

Not surprisingly, no one was very keen to invest in enterprises of this kind. Foreign businessmen who made the pilgrimage to Russia often found that their counterparts there regarded investment not as an opportunity to restructure their firms, but as a new kind of subsidy to enable them to continue shouldering their social responsibilities. Rich Russians avoided investing in their own country, for the same reason, and instead put their funds in foreign banks or bought speed boats and luxury country houses.

Enterprises of this kind are impossible to tax, since cash is not the unit of accounting they adopt. To cover the resulting deficit on its budget, the government got into the habit of issuing treasury bonds left, right and centre. What is surprising is that they found plenty of takers among international banks. It is the default on those bonds which has precipitated the current crisis and caused substantial losses to bankers around the world.

So the crisis is a logical result of the structure of the Russian economy both in the late Soviet era and subsequently. The same can be said about politics. Yeltsin's greatest failing as President has been that he has scarcely made any serious attempt to cultivate... co-operative relations with the Duma. Any US President has to spend much of his time on the phone to deputies on Capitol Hill, but when Yeltsin invites the heads of the main Duma parties to a cup of tea in the Kremlin, the news is a sensation. Instead he has dealt with them through clients in his own entourage, just as a Soviet boss would have treated his underlings. The result is that he has had to rule much of the time by decree, instead of getting the co-operation of regional elites.

The nature of post-Soviet politics should have made it easy for him. Most deputies value their seats in the Duma because through them they gain access to benefits which greatly ease life in the difficult post- Soviet environment: cars, good health care, a flat in Moscow. Even Communists appreciate these things, and if Yeltsin had humoured and cajoled them a little more, they would probably have offered more support over crucial matters such as land privatisation, commercial law and tax reform. As it is, Yeltsin and his governments have often been in a state of "cold war" with the Duma.

Fundamentally, the issue is a matter of trust among the population rather than the international bankers. People do not trust the financial and political elites to back the rule of law or to take care of the public welfare. They suspect that government ministers, duma deputies and especially the newly rich bankers and industrialists are out to make money quickly at everyone else's expense. In those circumstances, no one relies on contract or the law courts to protect them against illegalities: everyone tries to acquire their own patron, someone powerful who can provide a "roof" (as the Russians call it) under which they can make a bit of money. Those who cannot end up in those pathetic lines of people selling old clothes, kittens and matchboxes outside Metro stations.

Whatever else the new government does, it needs to start generating this sense of trust. this may require measures which do not conform fully to most people's idea of the free market. Currency controls may be needed to protect the rouble - but then we ourselves tolerated them for more than 30 years after the war. Price freezes may be required to give consumers a little more confidence in the market - again, we have them in this country well within living memory.

We must stop demanding of the Russians what we would never tolerate ourselves. They have made considerable progress towards the market, and they will certainly not now return to a command economy. But probably the new government will adopt measures to renew the productive capacity the country still has. Let us hope that it takes steps to transform ailing industries and retain workers for new production skills.

The farms need to be restructured and provided with cheap credit, so they can grow the kind of produce people want to but in the shops, at a price they can afford. Medical care and education desperately need an investment and an appropriate level of state support. This may mean some economic planning and a measure of protection, and the result will be an economy with a higher level of state intervention than is currently fashionable in more developed economies.

But again, we have been through all this ourselves.

The immediate fallout of the crisis will be highly unpleasant not only for international bankers but above all for Russians themselves, who in the coming winter will probably have to endure a failing public transport system and unheated flats with lifts that do not work. But in the long run this has been an inevitable reckoning with the heritage of the Soviet system.

The writer is Professor of Russian History at the School of Slavonic & East European Studies, University of London