The battered bear could yet turn nasty

Russia's latest currency catastrophe may unleash dangerous anti- Western forces, argues Phil Reeves
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The Independent Online
LIKE SO many of her countrymen and women, Yekaterina Melnikova, a Siberian entrepreneur, is minded to turn to turn to drink.

Until this week, she was on the verge of bagging a $5m (pounds 3.1m) German loan to set up a food processing plant. Prosperity, security, success beckoned. No more. Russia's decision to devalue the rouble - combined with a de facto debt default, marking the failure of a $22.6bn IMF-supervised plan to save the currency - has sent her scheme up in smoke. "It is time to drink vodka," she said, and, coining a saying, declared herself "as likely to see the credit as I am my ears".

Hers was one of a multitude of stories to filter out of Russia's vast landscape with the fall-out of its latest financial crisis last week. Unpaid workers saw the value of their wage arrears reduced in value by hundreds of dollars and for a while banks stopped selling hard currency. Wealthier people went on a shopping spree, keen to spend roubles before the inevitable price rises, and merchants - as ever, penning their painstakingly neat labels by hand - began to chalk up the prices, notably on electronic goods.

Yet there were no riots, no tanks rolling through Moscow. By the end of the week, exchange rates on the street - where the rouble had plunged to 10 to the dollar - were moving closer to the official rate of around seven, a drop of 10 per cent on the old rate.

Russians seemed to be taking their latest setback with weary resignation, as yet another blow on a very bruised chin. Yet the absence of any louder protest does not mean that no serious damage was done. It was. There has been a critical loss of faith on several fronts - in the rouble, in the country as a borrower, and in Western remedies. Commitment to these three concepts was always shaky, but now it is on the point of total collapse.

The reasons for the sullen, stoic calm that now prevails in Russia are plentiful. Critically, there is no real rallying point for popular protest. Moscow is an island of prosperity, as different from the rest of the country as St John's Wood is from London's East End. Though full of thunderous rhetoric, the political opposition, including the dominant but feebly- led Communists, shows few convincing signs of wanting to wield power. Friday's demand for President Boris Yeltsin's resignation was symbolic, a way of letting off steam in front of the voter. The trade unions are compromised by a traditionally cosy relationship with the ruling elite. The media, though often noisy, is corrupt and widely shackled by oligarchic ownership.

In fact, Russians are insulated from some of the nastier immediate side effects of economic crises by their own poverty, although inflation - combined with low wages - will eventually bring pain. Cash and personal credit play a far smaller role than in the West. The average Russian buys just over half his food, and either grows the rest or receives it as gift or barter. Nine out of 10 do not have a car and most pay small, heavily subsidised, power and rent bills for their usually tiny and run-down apartments. Russian statisticians say that 77 per cent of the 147 million population have no savings. (Only about $25bn worth of roubles was on deposit in Russia before last week - roughly the same as the capital that annually flees the country.) The majority have a miserable existence, but after a century which brought collectivisation, famine, war, terror and the collapse of the entire political system, they have learnt how to survive.

The destruction of trust among foreign investors is possibly even more important than the rouble's devaluation. The government has acknowledged that its decision to, in effect, default on some loans means that it stands no chance of raising significant funds on the international capital markets for the next 18 months. It is talking of trying to raise money, using its gold reserves as collateral, but the odds are Russia will have to run a budget surplus - a tall order in a country in which most of the population can't or won't pay tax.

What looms is a period of economic isolation, just as so often in the past. Given the shaky financial environment and penniless consumers, direct foreign investment, which briefly gathered pace last year, can be expected to slump back to miserly levels. To make matters worse in this regard, the popular enthusiasm for the West that emerged after the end of the Soviet Union has been replaced by widespread suspicion and sometimes antipathy.

Russians have heard the mantra of market economics - the "reforms" - for years, but have not seen the profits. Few, beyond a rich cosmopolitan minority, understand its fundamentals - privatisation, competition, choice, the right to buy and sell land. What they understand is what they have experienced: multiple-digit inflation, crooked investment schemes, worthless privatisation vouchers, massive job losses, plummeting living standards, crime and corruption, the collapse of welfare and education.

Western promises and ideology are viewed with cynicism, as are most political remedies. Russians these days tend to define their politics less by what they believe in than by whom they hate most. The result is a perilous vacuum. The lack of a democratic political tradition, such as meaningful party structures and voter loyalties, exposes the electorate to the risk of effective manipulation. It can be herded into the desired direction by cunning campaigning - as Mr Yeltsin's team demonstrated in the 1996 presidential election.

This is not a country that expects to like its leaders. The public is open to ideas which capture the despair of the moment, no matter how ugly. This has happened before: in the 1993 parliamentary election, the party run by the madcap ultra-nationalist, Vladimir Zhirinovsky, the clown of Russian politics, led the field with 23 per cent. Happily, he now looks like a spent force. So far the other likely contenders for the Kremlin look relatively benign, although the mayor of Moscow, Yuri Luzhkov, has an alarming autocratic streak and the usually moderate reserve paratrooper general, Alexander Lebed (who once called Mormons "scum") has his mad moments.

But at a time of economic hardship, a new and dangerous force could rapidly emerge - possibly of an anti-Western and heavily nationalistic tendency. That is what the West should now be worrying about.

Business analysis, Section Two, page 26