Russia: A Capitalist Dystopia

Politics & Economics of Counterrevolution

February 2002

The decade since Boris Yeltsin’s August 1991 victory over the remnants of the Stalinist bureaucracy in Moscow has been one of unrelieved misery and hopelessness for the vast majority of former Soviet citizens. The only people to experience the “prosperity” glibly promised by capitalist ideologues are those who managed to grab chunks of state property. Today the once-despised queues of the Stalinist era are remembered fondly by millions of impoverished Russians too poor to afford the bare essentials of life.

In introducing “shock therapy” in 1992, Yeltsin promised that the pain would be over in a few months. Four years later, in 1996, after winning his second presidential term, he assured Russians: “Now I am certain that in 2000 Russia will be a rich, democratic country.” But today, even the capitalist media acknowledge that the introduction of the free market in the former Soviet Union has resulted in a social catastrophe.

Crime is rampant, corruption endemic and the rich and well-connected do as they please with little regard for the law. The restoration of capitalist rule in Russia has produced the most severe depression ever recorded in an industrialized economy.

“Russia’s economy has shrunk almost every year....Output has fallen by about 53% in ten years, according to official (and notoriously dodgy) statistics....The physical infrastructure is decaying: hospitals, roads, prisons, schools and railways, with the exception of a few prestige projects in Moscow...are in a shamefully bad state. Russians are badly fed, badly dressed, badly housed, badly treated.

“The clearest sign of decay is that Russians die young and have so few babies. The population is now smaller by 6m people than it was a decade ago.”
Economist, 30 Mar 2000

The Soviet Accomplishment

The Soviet Union was the product of the first, and so far only, successful workers’ revolution in history. Led by V.I.Lenin and Leon Trotsky, the young Russian workers’ state defeated the White armies and their imperialist allies in a protracted civil war. The early Bolshevik regime laid the basis for a planned economy by expropriating foreign and domestic capital and imposing a monopoly of foreign trade. The ascendency in the mid-1920s of an anti-working class caste headed by Joseph Stalin grotesquely distorted the operation of the economy. Nonetheless, the institutions of collectivized property proved dynamic enough to transform the USSR from a predominantly peasant country into a modern industrial state.

Cold War ideologues who used to portray the USSR as a sinister, totalitarian dynamo threatening to overwhelm the “free world,” now claim that, for 70 years, the Soviet Union teetered on the brink of collapse. The truth is that despite the bureaucratic deformations, the Soviet economy grew rapidly for a considerable historical period. Between 1928 and 1938, while the imperialist countries were gripped by the Great Depression, manufacturing output expanded 600 percent in the USSR (The Rise and Fall of the Great Powers, Paul Kennedy).

Contrary to Hollywood, the decisive battles of World War II were fought on the Eastern Front, where Hitler’s best divisions were ground up by the Red Army and pushed all the way back to Berlin. After recovering from the massive devastation of the war, the USSR resumed its rapid economic growth. The successful launch of Sputnik in 1957, the world’s first satellite, alarmed the imperialist general staffs. One of the themes of John F. Kennedy’s 1960 presidential campaign was the need to catch up with Soviet growth rates. Through the 1950s and early 1960s, the Soviet model was one that many “third-world” rulers sought to emulate.

While various demoralized leftists and bourgeois political science hacks claimed that Stalin’s Russia represented some new sort of class society, Trotsky recognized that the rule of the bureaucracy was a historically transitory phenomenon:

“either the bureaucracy, becoming ever more the organ of the world bourgeoisie in the workers’ state, will overthrow the new forms of property and plunge the country back to capitalism; or the working class will crush the bureaucracy and open the way to socialism.”
Transitional Program

Trotsky regarded the Stalinist oligarchy as an obstacle to the survival of the workers’ state which must be removed. He explicitly linked his defense of the degenerated Soviet workers’ state against capitalist restoration to the call for workers’ political revolution to oust the bureaucrats and restore the direct, democratic rule of the working class. Only in this manner could the road to genuinely socialist development be opened.

For seven decades the degenerated Soviet workers’ state posed a global counterweight to the hegemony of Western imperialism. Despite the Soviet bureaucracy’s futile search for “peaceful coexistence” with imperialism, the USSR provided important material support for the deformed workers’ states that resulted from insurrectionary movements in China, Cuba and Vietnam.

Trotsky asserted that the restoration of capitalism in the USSR would be the most serious defeat ever suffered by the international workers’ movement, just as the overthrow of capitalism in the former Czarist empire had been its greatest victory. The social disaster that has befallen the peoples of the former Soviet Union has amply confirmed this view.


By the early 1960s Soviet growth had markedly decelerated, as the necessity for quality inputs increasingly conflicted with the attempts of the bureaucratic regime to control every aspect of social and political life. Trotsky had predicted this development in The Revolution Betrayed, his brilliant study of the fate of the Russian Revolution, written at the height of the Soviet industrialization drive in the 1930s. Trotsky pointed out that bureaucratic commandism “destroys the creative initiative and the feeling of responsibility without which there is not, and cannot be, qualitative progress.” Thus:

“It is possible to build gigantic factories according to a ready-made Western pattern by bureaucratic command—although, to be sure, at triple the normal cost. But the farther you go, the more the economy runs into the problem of quality, which slips out of the hands of a bureaucracy like a shadow. The Soviet products are as though branded with the gray label of indifference. Under a nationalized economy, quality demands a democracy of producers and consumers, freedom of criticism and initiative—conditions incompatible with a totalitarian regime of fear, lies and flattery.”

The rate of growth of the Soviet economy fell steadily through the 1960s and 70s and, by the early 1980s, approached zero. During the Brezhnev years, the nomenklatura became profoundly pessimistic about the future and deeply cynical about its officially socialist ideology. A substantial “shadow economy” had arisen that provided goods and services not readily available under bureaucratized planning.

Leonid Brezhnev’s successor, Yuri Andropov, a former head of the KGB (Soviet secret police), attempted to turn things around by tightening labor discipline. Andropov’s efforts, and a few years of good agricultural harvests, produced a brief upturn in growth through the mid-1980s, but the systemic problems of the bureaucratized command economy could not be transcended by simply increasing the level of administrative pressure.

In 1985 Mikhail Gorbachev took over as General Secretary of the ruling Communist Party of the Soviet Union (CPSU). His policy of perestroika was advertised as a means to increase efficiency, improve quality and stimulate economic production through market-oriented “reform” of the planned economy. Gorbachev’s struggle to overcome the resistance of conservative elements in the nomenklatura, particularly in the central planning ministries, provided a medium for the accelerated growth of openly pro-capitalist elements, as we noted at the time:

“The extreme reliance on market mechanisms which Gorbachev proposes and a qualitative reduction in the role of the state planning authorities is not capitalist restoration per se. But the ‘reforms’ threaten to undermine the remaining strength of an economy already severely weakened by decades of bureaucratic misrule. As such they move Soviet society closer to the danger of a convulsive social counter-revolution....”
1917 No. 4, Autumn 1987

Gorbachev’s first major “reform” was the 1986 legalization of private “cooperatives,” which immediately began to appropriate state resources for private use. The next year Gorbachev decreed that factory directors, previously appointed by the apparatus, were to be elected by the employees in each enterprise. This gave managers considerable independence from their nominal superiors in the bureaucratic hierarchy, and many immediately took advantage of their new freedom by privatizing enterprise assets. In many cases they sold raw materials, or finished products, at deep discounts to friendly co-ops. The co-ops, usually run by relatives or friends, then resold the goods to the highest bidders, preferably for hard currency, and split the proceeds with the enterprise directors.

A desire to curb the power of the central bureaucracy led Gorbachev to expand the authority of regional governments in the fields of agriculture, housing and production of consumer goods. This was followed, in 1988, by an announcement that local party units were no longer responsible for enforcing the directives of the center:

“The party committees at enterprise, district and regional level had played a key role in the traditional model, enforcing the priorities of the centre. Once they withdrew from the economy, enterprises were free to follow their own interests, (e.g. to reduce their output and raise their prices). The newly powerful republican and municipal authorities began defending the interests of their territory by the simple expedient of reducing deliveries to ‘foreign’ regions.”
The Disintegration of the Soviet Economic System, M. Ellman and V. Kontorovich

The decision to free the enterprises from centralized control, and simultaneously relax the monopoly of foreign trade, resulted in an immediate decline in national income. In the fourth quarter of 1990, Goskomstat (the USSR State Committee on Statistics) reported that national income had fallen 8.5 percent compared to a year earlier. In the first quarter of 1991 it plunged another ten percent (G. Khanin, “The Soviet Economy—from Crisis to Catastrophe,” in The Post-Soviet Economy, Anders Aslund, ed.) This was the period in which the first major wave of “privatizations” was taking place:

“Russia in 1988-1992 was in a no-man’s-land between two systems. State controls over trade and exports were disintegrating, but domestic prices remain controlled, frequently at absurdly low levels. Anyone who could acquire oil, diamonds, or metals for rubles at controlled domestic prices, and then sell them abroad for dollars, was rich overnight. This required the connivance of state officials, who issued the necessary licenses and smoothed the way to the borders.”
Capitalism Russian-Style, Thane Gustafson

The massive transfer of income to offshore accounts produced a rapid fall in export revenues and a soaring foreign debt which quickly consumed Soviet gold and currency reserves. In an attempt to stem the hemorrhaging, the regime cut imports 45 percent from 1990 to 1991, but the resulting shortages further disrupted production and contributed to a growing sense that everything was spinning out of control.

The collapse of the authority of the central ministries made it impossible for the center to supply the inputs required by the enterprises, compelling them to reorient toward production of goods for barter. Factory managers began accepting IOUs from customers and issuing them to suppliers. Inter-enterprise credits “nearly quadrupled to 15.6 billion” rubles in 1988 alone (Economist, 20 October 1990).

As pressure increased to legalize a chaotic privatization drive already completely out of control, Boris Yeltsin and Mikhail Gorbachev jointly endorsed Stanislav Shatalin’s “500 Day” program for a rapid transition to a market economy. Looking back on events, Yevgenii Yasin, one of the more prominent pro-capitalist “radical” economists at the time, recalled:

“In September 1990, the program was considered by the parliaments of the USSR and Russia. The latter, under Yeltsin’s pressure, approved it in a week. In the former, the program got tied up by...the entire old Party-government establishment. They realized that things were coming to a head politically: either they, or the ‘500 Days’ program and real reform, would prevail.”
The Destruction of the Soviet Economic System, M. Ellman and V. Kontorovich

At this point Gorbachev was forced to retreat under pressure from the Stalinist conservatives, while Yeltsin pushed ahead and announced that Russia would cut its contribution to the federal budget by two-thirds, while doubling its own expenditures. Other republics quickly followed, and, as Yasin observed:

“With the failure of the ‘500 Days’ program, Gorbachev the reformer missed his last chance. He lost the strategic initiative, which could now end up either with the Communist center, which had quashed Gorbachev as a real leader, or with Yeltsin. The struggle for power between them became the key event of 1991.”

August 1991: The Last Barricade

Yeltsin’s victory over the demoralized Stalinist “hardliners” in August 1991 was the critical moment in the triumph of capitalist counterrevolution. In 1933 Leon Trotsky had observed:

“Every political tendency that waves its hand hopelessly at the Soviet Union, under the pretext of its ‘non­proletarian’ character, runs the risk of becoming the passive instrument of imperialism. And from our standpoint, of course, the tragic possibility is not excluded that the first workers’ state, weakened by its bureaucracy, will fall under the joint blows of its internal and external enemies. But in the event of this worst possible variant, a tremendous significance for the subsequent course of the revolutionary struggle will be borne by the question: where are those guilty for the catastrophe? Not the slightest taint of guilt must fall upon the revolutionary internationalists. In the hour of mortal danger, they must remain on the last barricade.”
—”The Class Nature of the Soviet State”

Following Trotsky’s injunction, the International Bolshevik Tendency took a position of military support to the demoralized Stalinist remnants against the Yeltsinites in the August 1991 coup, which proved to be the “last barricade.” This position sharply differentiated us from every other international “Trotskyist” tendency at the time. Some, like James Robertson’s Spartacist League, adopted a position of neutrality in this decisive showdown. Others, including the British Workers Power group, Ernest Mandel’s United Secretariat and Tony Cliff’s International Socialist Tendency, openly sided with Yeltsin’s counterrevolutionary rabble on the grounds that it was more “democratic” than the Stalinists. The various Communist parties, which for decades had slavishly followed every twist and turn of the CPSU, refused to defend their “Socialist Motherland” when it counted. Trotsky had predicted as much in 1933 after they had failed to resist the seizure of power by the Nazis:

“In the hour of crisis, the Barbussized Comintern will be capable of offering no greater support to the Soviet Union than the opposition it had offered to Hitler.”

Trotsky was absolutely unambiguous about the duty of revolutionaries in the face of counterrevolution:

“The new International will offer the Stalinist bureaucracy a united front against the common foe. And if our International represents a force, the bureaucracy will be unable to evade the united front in the moment of danger. What then will remain of the many years’ encrustation of lies and slander?”

Tragically, the forces of authentic Bolshevism did not “represent a force” in the USSR, so there was no “united front” against the Yeltsinites.

In their valuable book on the fall of the USSR, Ellman and Kontorovich assert that:

“Popular opposition to the regime, clearly demonstrated at the ballot box, in the media, and on the streets in the late 1980s, was a result, not the cause of its disintegration. Hence the causes of the collapse have to be sought in elite actions and not in the discontent of the masses.”
The Destruction of the Soviet Economic System

The fact that the relaxation of political repression under Gorbachev immediately produced widespread expressions of popular discontent, which further weakened the regime, suggests that, in fact, opposition to the rule of the CPSU pre-dated perestroika.  Moreover, the “elite actions” were themselves a product of the regime’s inability to command the active loyalty of the producers, which alone could overcome the “gray label of indifference” described by Trotsky half a century earlier.

Decades of lies and political repression by the Stalinist autocrats have all but eradicated the proud revolutionary tradition of the Russian proletariat. The manifest corruption of the Stalinist autocrats, with their special shops and privileged lifestyles, turned the officially egalitarian ideology into a bitter joke. By identifying socialism with its own rule, the cynical CPSU bureaucrats politically disarmed the Soviet working class. The repeated betrayal of revolutionary opportunities internationally in pursuit of “peaceful coexistence” with imperialism, and the reactionary chimera of “socialism in one country,” isolated and undermined the USSR. By atomizing and depoliticizing the Soviet working class, and actively seeking to demobilize revolutionary upsurges abroad, the Stalinists ultimately undermined the foundations of their rule—the recognition by the masses of working people that they had a vital stake in the defense of collectivized property.

The incapacity of the “hardliners” in August 1991, the passive acquiescence of the CPSU to its own dissolution, and the scramble by many former apparatchiks to use their connections to transform themselves into “entrepreneurs,” all reflected the pervasive cynicism of the Stalinist ruling caste and its indifference to any sort of “socialism.” This is confirmed by the alacrity with which the reconstituted Communist Party of the Russian Federation (CPRF) entered into the infamous “Red-Brown” coalition with open fascists.

‘Robbery of the Commons’

Events in Russia in the 1990s closely paralleled the “primitive accumulation” of capital at the “rosy dawn” of the bourgeois era:

“The spoilation of the Church’s property, the fraudulent alienation of the state domains, the theft of the common lands, the usurpation of feudal and clan property and its transformation into modern private property under circumstances of ruthless terrorism, all these things were just so many idyllic methods of primitive accumulation.”
—Marx, Capital v. 1

The transition to capitalism requires the transformation of formerly collective assets into the property of individual capitalists—capital. For a few years, from 1988 to 1995, the door was open in Russia for the brazen and well-connected to seize state property worth hundreds of billions of dollars. This rapidly transformed the Russian economy into one that business school textbooks recognize as “normal,” with a tiny, enormously wealthy elite at the top and a vast mass of desperately poor, marginally employed workers at the bottom.

The “robbery of the commons” never took place so rapidly, so publicly or on such a scale as in the former USSR. Traditional capitalist folklore about how a smart, frugal and industrious minority gradually floats to the top of society through a combination of hard work and foresight in order to provide leadership and employment for their indigent fellows is not well received in contemporary Russia.

The first stage in the primitive accumulation process occurred with the relaxation of state controls over foreign trade. The second stage, a massive wave of financial speculation beginning about 1990, was prepared by Gorbachev’s 1987 decision to break the monopoly of the USSR State Bank as part of his campaign to loosen the grip of the central planners. By 1991 some 1,600 private banks had sprung up. For a brief period anyone who could borrow money cheaply, and quickly turn it into real property, could make a killing:

“Traditionally, a Soviet enterprise was automatically paid for its output as soon as it left the factory gate, by a simple transfer of funds from the account of the buyer to that of the producer. As this system shattered in 1990-91, enterprises needed to find new sources of funds to maintain liquidity. One of the main defensive functions of the new private banks was to funnel state credits to cash-starved enterprises.

“But the private banks also enabled their founders to get around the remaining restrictions of the Soviet system and to mobilize short-term capital to take advantage of the new opportunities opening up, mainly in foreign trade. The banks bankrolled commodity trading and import-export operations, or participated directly as players; they helped their clients convert their state-controlled assets into cash; they conducted illegal foreign-currency exchange; they transferred profits abroad....”
—Gustafson op cit

The private bankers converted low-interest ruble deposits from state-owned enterprises and municipal authorities into hard currency which they used to provide short-term financing for export deals. The banks made money at both ends of the transaction—first by charging high interest on the dollar loans, and then again when the dollars were converted back into depreciated rubles, and returned to the accounts of their depositors. After the abolition of price controls in 1992, the annualized rate of inflation hit 2500 percent. In this climate, slowing down financial transfers for even a few days produced huge windfalls. The bureaucrats who provided the low-interest ruble loans to the bankers in the first place were, of course, cut in for a piece of the action.

In 1992, Yeltsin initiated the third stage of the primitive capital accumulation process with the mass privatization of state enterprises. The initial fortunes acquired through commodity trading and banking were used by the emerging “oligarchs” to gain control of most of the privatized assets.

The privatization program was deeply corrupt from the beginning. This was seen by the advocates of the free market as a necessary, if unfortunate, overhead for dismantling the planned economy. After all, you can’t have capitalism without capitalists.

The architect of Yeltsin’s decollectivization program was Egor Gaidar, who had been appointed as economics editor of Kommunist, the CPSU’s leading ideological journal under Gorbachev. Gaidar had used his position to promote the notion of a wholesale transition to a market economy. Chrystia Freeland suggests that appointing Gaidar as the Central Committee’s leading authority on economics:

“was like asking a crusading atheist to write a new catechism for the Vatican. If anyone still needed a sign that the Soviet nomenklatura no longer believed its own rhetoric, Gaidar’s appointment offered precisely that.”
Sale of the Century

The reason Gaidar’s appointment was not resisted by the conservative wing of the apparatchiks was not so much because he enjoyed Gorbachev’s patronage, but rather because of his impeccable family pedigree. Freeland describes his grandfather, a Red Army officer who later wrote popular children’s stories, as a “Soviet cross between Paul Revere and Dr. Seuss.” Che Guevara was a frequent visitor in the Gaidar household while young Egor was growing up in Cuba in the early 1960s, where his father was posted as a journalist.

The Gaidar team’s privatization program was one of shock therapy —massive privatizations and an immediate end to price controls. The fact that this resulted in astronomical inflation that wiped out savings, and impoverished pensioners and others on fixed incomes, was of no concern to these capitalist true believers:

“Unemployment wasn’t a problem, it was a welcome sign of structural change. The same went for bankruptcy and sharply curtailed social services. Even the hard-hearted number-crunchers at the IMF admitted to me that occasionally they were stunned by the young reformers’ ability to dismiss their country’s current suffering as the unavoidable price of future prosperity.”

Politics & Economics of Counterrevolution

A 1999 United Nations Development Programme (UNDP) report summarized the “reforms” as follows:

“The most widely advocated reform strategy at the time of the collapse of the Soviet Union was known as ‘shock therapy’ or the ‘big bang’....It was recognized that a certain amount of ‘pain’ would be suffered, but it was believed that the duration of pain would be brief and the subsequent gains would be considerable....

“The big bang strategy thus was reduced to three components. First, state owned enterprises should be privatized, and, in effect, a capitalist class should be created without the prior necessity of the private accumulation of capital. Second, all prices should be completely that price signals could be used to allocate resources and increase economic efficiency. Third, foreign capital should be used to ease the pain caused by falling output and incomes.”
—“Human Development Report For Central and Eastern Europe and the CIS,” emphasis added

The ideologues of the “free market” insisted that the transition to a market economy must proceed as rapidly as possible and talked grandly about how opening the Russian economy to global competition would produce a major restructuring, particularly in manufacturing, as Adam Smith’s “invisible hand” compelled entrepreneurs to find sectors where Russia enjoyed a “comparative advantage.” The emergence of such a “natural” economy was supposed to unleash the creative energies of a population finally free of the tyranny of collectivism. This was the theory, but in the real world things turned out rather differently.

Yeltsin and his imperialist backers regarded the destruction of the centralized economic system and the drastic reduction of the state sector as the essential objectives of the “big bang.” This was necessary both to make the restoration of some sort of central planning difficult and to create a layer of powerful owners prepared to fight to defend the capitalist counterrevolution:

“For the reformers in 1992 the primary goal was to break the traditional dominance of politicians and bureaucrats in the central government. Their experience had taught them that the greatest enemy was the ministries, and they were determined to cut them out. In contrast, the industrial managers and the local politicians had gained a great deal of influence over the previous decade....

“In 1991-92 the reformers believed they had only a brief window of opportunity, and that they had to use it to make private property legitimate and irreversible.”
—Gustafson, op cit

The “big bang” resulted in a dramatic collapse of production and widespread poverty and social dislocation. However, the nascent Russian bourgeoisie, and its international backers, viewed it as a qualified success.

The original plan called for offering employees of firms targeted for privatization 40 percent of the shares in their enterprises, but:

“It was soon clear to the reformers that only foreigners and underground entrepreneurs had the capital to bid for assets in a sell-off. Both of these were politically unacceptable, especially since the assets were undervalued and would have been acquired for very little the end most enterprises were virtually given away, mostly to their workers and managers. About 20% of the assets of the state enterprises were handed out in the form of ‘vouchers,’ distributed free to every Russian citizen.”

The voucher system that was supposed to transform every Russian worker into a “stakeholder” turned out to be another mechanism for well-connected insiders and Soviet-era factory managers to enrich themselves. Vouchers could only be converted into shares at special auctions that were deliberately organized to make it difficult for ordinary citizens to participate. Most people ended up selling their vouchers, at a substantial discount, to middlemen. The “red directors” who rigged the auctions undervalued their firms’ assets and extorted shares from their employees. Roughly two-thirds of the medium and large-scale enterprises ended up under their control.

The privatization drive was supposed to create a new generation of dynamic entrepreneurs who, by shrewdly forging strategic partnerships with foreign investors, would obtain the investment and technical inputs necessary to make Russian industry competitive internationally. But the chaotic looting of the planned economy produced an entirely different result:

“Before long most Russian businessmen, including the oligarchs, would realise that the surest way to build fortunes was not to waste time and energy on the back-breakingly difficult job of changing the way factories were run. The real money-spinner was to grab a piece of Russia’s vast mineral wealth....”
—Freeland, op cit

The biggest winners in the privatization sweepstakes were the oil and gas executives of the Soviet era (the neftyankiki and gazoviki). Unlike the industrial managers, who had to worry not only about production but also marketing, shipping and raw materials, the former bureaucrats who grabbed chunks of the Soviet oil and natural gas industry had ready-made markets and established transportation networks. Their control of Russia’s fuel supplies, and the profits they made in export markets, gave them substantial domestic political clout.

The “oligarchs” are not particularly interested in the fate of Russian industry:

“Where ‘privatization’ has occurred, it has occasioned massive asset stripping by a new, politically powerful class of national and regional ‘oligarchs’. Most of these had no interest in or aptitude for industrial management and made no serious attempt at industrial investment or restructuring. Instead they siphoned cash from their enterprises...for transfer abroad. Estimates of capital flight vary from $80 billion to $300 billion.”
—East West Institute, 2 November 1998

While the oligarchs would be happy to see Russia transformed into a provider of petrochemicals, minerals and other raw materials for the economies of the imperialist West, the “red directors” of former Soviet industrial enterprises, advocate a more “patriotic” (i.e., protectionist) trade policy in order to generate capital to upgrade their obsolete and disintegrating plants.

‘Sale of the Century’

The initial round of privatization had not included many of the most valuable and strategically important firms (e.g., Noilsk Nickel, the world’s biggest nickel producer). These were put up for sale in 1995 in what came to be known as “loans for shares”:

“the government had distributed chunks of huge state-owned firms to its favourites, mainly private banking groups, by means of rigged auctions. The shares were classed as security for ‘loans’, destined never to be repaid.”
Economist, 10 July 1997

In exchange for the “loans” of roughly $1 billion, Yeltsin handed over assets worth many times as much. The oligarchs “devised the scheme among themselves, lobbied the government, even wrote some of the decrees” (Foreign Affairs, November-December 2000). Foreign companies were barred from participation. The giveaway took place in the run-up to the 1996 presidential election at a point when it appeared that Yeltsin might be defeated by Gennady Zygunov, leader of the anti-Semitic CPRF, the largest product of the decomposition  of Stalinism:

“Loans-for-shares bought Yeltsin the political, financial and strategic support of the future oligarchs in the upcoming presidential elections. It meant pawning Russia’s crown jewels, but if that was the price of keeping the communists out of the Kremlin, the young reformers were willing to pay up.

“‘I understood the loans-for-shares programme perfectly well,’ Gaidar told me on a rainy afternoon in his office three years later. ‘The loans-for-shares created a political pact. They helped ensure that Zyuganov did not come to the Kremlin. It was a necessary pact.’”
—Freeland, op cit

This is how the “free market” operates in Russia: behind a barrage of talk about democracy, transparency and competition, the entire process has been rigged from the beginning. This does not mean there is not intense rivalry at the top. The financial “oligarchs” managed to grab most of the goodies in the “loans-for-shares” boondoggle, but in some cases, like the reserve-rich Lukoil and Surgutneftegaz oil companies, the “red directors” came out on top:

“They were not shy about using every inch of their local control to ensure that they won: on the day of the Surgutneftegaz auction, the nearest airport was mysteriously shut down and road-blocks manned by armed guards materialised on the main land routes into the remote Siberian city of Surgut, where the sale was held, thus physically preventing one outside bidder from competing.”

By the late 1990s Russia’s ersatz bourgeoisie had evolved into a dozen clans identified with particular oligarchs that competed among themselves for control of the state and its resources, including foreign “development” loans. The Economist, a leading organ of British finance capital, recently disingenuously inquired:

“what actually happened to the money that was lent to the Soviet Union and Russia? In all, it amounted to more than $150 billion. In theory, it all went to pay for food imports and industrial modernisation, and to prop up public finances. But there is amazingly little to show for the huge sums involved. ‘It was stolen,’ says one experienced Moscow investment banker.”
Economist, 11 January 2001

The “loans” provided by Western financiers pushed Russia’s foreign debt to 30 percent of its GDP by 1998. Appropriated by a few dozen well-connected parasites at the top, they remain on the books to be repaid (with interest) by tens of millions of Russia’s impoverished working people.

An Ersatz Bourgeois State

The bourgeois state apparatus cobbled together from the personnel inherited from the Soviet Union was sufficient for privatizing formerly collectivized property, but it lacked both the capacity and authority to perform many of the normal functions of a capitalist state. Each oligarch had to rely on his own thugs to enforce contracts, collect debts and provide physical security. This opened the door for the “Don Korleonskis” of the Russian Mafiya who soon became an important factor in the fledgling capitalist economy. The 30 January 1994 issue of the New York Times reported that few companies, particularly big ones, paid taxes, but 70 to 80 percent paid protection money to gangsters:

“Organized gangs know whom to shake down and how much to demand, because an army of police officers, bank officials, and undercover agents serve as tipsters. Traffic police stopping cars at checkpoints radio ahead to gang accomplices when they discover something valuable in the trunk....

“Extortion is tough to fight because nearly everyone has something to hide. Victims will not report crimes to the police, for fear of revealing their incomes to the tax inspectors....One Russian source estimates that 80% of robberies and 90% of frauds are never reported.”
—Gustafson, op cit

Yet Gustafson reports that most businessmen regard the complicated and often conflicting array of regulations and licensing requirements and corrupt officials as the main impediments to commerce: “Crime they say they can handle themselves.” Under Yeltsin most big firms found it easier to negotiate pay-offs and bribes to individual officials than to pay for permits and licenses. Many enterprises refused to pay taxes, while others “paid” with unsold goods or IOUs:

“According to the State Tax Service, only 16% of all registered businesses pay their taxes in full and on time; some 50% comply occasionally; while 34% ignore the tax collector altogether.”

Tens of thousands of companies evaded taxes by never registering with the government in the first place. Some “entrepreneurs” countered attempts at law enforcement by burning down tax offices to destroy their records, or even hiring contract killers to eliminate particularly troublesome inspectors.

From Nomenklatura to Bourgeoisie

Former members of the nomenklatura are much more prominent in the nascent Russian bourgeoisie than in Poland and other East European countries where they comprise an insignificant minority. Gustafson cites a study by Olga Kryshtanovskaia, a Moscow sociologist, which found that roughly two-thirds of Russia’s capitalist elite originated in the Soviet nomenklatura:

“the richest and most successful of the lot were backed from the beginning by state interests. The founders of the powerful commercial banks of the Nineties...were little more than the ‘authorized representatives’ (in Russian, ‘upolnomochennye‘) of powerful forces inside the state....

“In short, the upolnomochennye were not a true business class; they were the agents of a new financial-political oligarchy that bound state and private interests together.”

Yet, with the exception of a few oil and gas barons, most oligarchs did not obtain their positions simply as a result of their rank within the CPSU hierarchy. For example, under the old regime, Vladimir Gusinsky of the Most Group was a theatre director, Boris Berezovsky was a mathematician, and Mikhail Friedman of the Alpha Group was a physicist. Connections within the Stalinist ruling apparatus were a necessary, but entirely insufficient, condition for success in the chaotic and unscripted privatization scramble.

Under Leonid Brezhnev, the Komsomol, the CPSU’s youth group, became something of a refuge for the disenchanted, but with the introduction of perestroika, it turned into an incubator for fledgling entrepreneurs. The Komsomol owned its own tourist agencies, construction brigades, stadiums, sports clubs, newspapers and even software companies. Its cadres overwhelmingly sided with Yeltsin in the August 1991 showdown and, as a result, in the aftermath, when the CPSU was outlawed, the Komsomol was not touched:

“Today the alumni of the Komsomol are the most important single group within the Russian business elite. To that extent there is indeed some basis for the charge that today’s businessmen are drawn from the nomenklatura and benefited from Komsomol connections. But the Komsomol connection provided mainly a means to get started. The rest was a matter of individual talent and energy.”

Some leftists grossly exaggerate the continuity between the old nomenklatura and the new bourgeoisie. For example, the British Socialist Workers Party (SWP/B), founded by the late Tony Cliff, which long maintained that the USSR became “state capitalist” in 1928, characterized the victory of the Yeltsinites as simply “a shift from one form of capitalism to another.” In one of his last books, Cliff asserted:

“If a counter-revolution had taken place, if a restoration of capitalism had taken place, there should have been a wholesale replacement of one ruling class with another. Instead we witnessed the continuity of the same personnel at the top of society; the members of the nomenklatura who ran the economy, society and state under ‘socialism’ now do the same under the ‘market.’”
Trotskyism After Trotsky

There is a grain of truth to Cliff’s claim, but only a grain. Yeltsin, for example, the historic leader of capitalist counterrevolution, was of course a former CPSU bureaucrat. It is no more surprising that many Soviet-era managers, economists, engineers and others should have found places in the capitalist new order than it was that thousands of former Czarist officials, administrators, technicians and even military officers, were employed by the early Bolshevik regime.

Most of the upper layers of the nomenklatura, particularly those involved in running the central economic ministries, the ideologists, and the CPSU apparatchiks, were simply dismissed. Ellman and Kontorovich flatly reject claims that those who ran “the economy, society and state” in the USSR continued to exercise power after Yeltsin’s ascension:

“We found no evidence to support the fashionable theory that the Soviet system was toppled by the Party and state officials in order to turn their power into private wealth. Just as these officials, though loathing Gorbachev, were incapable of collective action to defend the system, they were equally incapable of consciously hastening its demise. If they landed on their feet after the system had crashed, it was due to their individual survival skills, rather than some grand design.”

Poisoned Fruits of Counterrevolution

The glib assertion that Russian society has merely “moved sideways” since 1991 overlooks the disastrous impact of capitalist restoration on the lives of working people. The UNDP’s 1999 study observed:

“Before the 1990s, countries of Central and Eastern Europe and the CIS were notable for providing their populations with a high degree of basic security....People’s right to full, lifetime employment was guaranteed. Although cash incomes were low, they were stable and secure. Many basic consumption goods and services were subsidized and regularly supplied. People had food security and were adequately clothed and housed. They had free guaranteed access to education and health. They were assured pensions when they retired and regularly benefited from many other forms of social protection.”

Mikhail Friedman, an “oligarch” described by Freeland as “one of the biggest winners in the capitalist casino,” certainly recognizes the qualitative change since 1991, and even evinces a certain nostalgia for the old days:

“’My life was very carefree, just as life was for everyone in the Soviet Union....Materially, of course, people did not live very well, but no one had to worry about anything. The main thing, what was really intense, was friends, spiritual interests, books. The relations between people were far more open. People did not compete. There was not the same disproportion or envy. People today are far more stressed.”
—Freeland, op cit

Under capitalism life is both nastier and shorter. Between 1991 and 1995 life expectancy for Russian males dropped precipitously—from 63 to 58 years. The rate of population growth fell from 2.4 percent in 1990 to negative 5.4 percent by 1996. (This figure does not reflect the millions of skilled young people who emigrated in this period.)

The near collapse of public healthcare (currently budgeted at a meagre one percent of GDP, a level found only in the poorest neo-colonies) has led to a resurgence of tuberculosis and other communicable diseases that had previously been brought under control:

“Many of the diseases that are re-emerging could be contained by standard immunization programs. For example, polio cases, now rare in industrialized western countries, have begun to re-appear....”
—UNDP, op cit

Between 1989 and 1995, the number of AIDS cases soared, while syphilis rates went up 40-fold:

“Many of these problems could be solved, or at least contained, by a well-functioning public health system, including the implementation of standard immunization and reproductive health programs. The seriousness of the problem signals, however, that primary health interventions have been significantly weakened during the transition period.”

The destruction of the planned economy deprived millions of working people of the ability to feed themselves and their families. This led to an increase in every sort of social pathology from drug abuse to wife beating. Between 1991 and 1995, the number of suicides almost doubled and homicide rates increased dramatically:

“Under-employed young men took to advertising their eagerness to become assassins in the classified ads, using the blunt code phrase ‘willing to take on any dangerous work for a high fee’. Petty criminals began to murder for pathetically small trophies: real-estate shysters killed gullible pensioners in order to inherit their apartments; one crime ring, posing as a car-repair shop, killed and dismembered owners just to steal their vehicles.”
—Freeland, op cit

The impact of Russia’s social counterrevolution hit the disabled, pensioners, children and women particularly hard. The ideological bias of the authors of the UNDP report are evident in their apparent amazement that:

“the advent of more democratic [i.e., capitalist] regimes has led paradoxically to lower percentages of women in [positions of authority]. Women have found themselves progressively pushed out of public life. Simultaneously, their access to paid employment has declined and their total work burden both within the household and outside it has increased....

“Violence against women has been on the rise with physical abuse from spouses...and a rising number of women becoming victims of crime. Also, many women who have been desperate to find employment and a better life have found themselves forced into organized crime networks.”

Freeland cites an infamous survey from the early 1990s which reported that “hard currency prostitute” was the top career choice for female students at Moscow State University, Russia’s equivalent of Harvard or Oxford.

Capitalist restoration is estimated to have created more Russian orphans than World War II. According to a 1 June 2001 BBC News Report, in Russia today: “More than 2.5 million children live on the streets—many of them abandoned by parents who can no longer afford to bring them up.” The BBC also mentioned that:

“Nearly all Russian children suffer from one or more chronic diseases by the time they leave school and many are on the way to alcoholism, according to a report published by Russia’s Ministry of Health.

“Only one child in 10, it says, can be considered healthy by the age of 17.”

The UNDP report provides the following summary of the results of capitalist restoration:

“There is no longer any secure entitlement to a decent education, a healthy life or adequate nutrition. With rising mortality rates and new and potentially devastating epidemics on the horizon, life itself is increasingly at risk.”

“The ‘transition’ in most of the countries in the former Soviet a euphemistic term for what in reality has been a Great Depression. The extent of the collapse in output and the skyrocketing nature of inflation have been historically unprecedented. The consequences for human security have been calamitous. By conservative estimates, over 100 million people have been thrown into poverty, and considerably more hover precariously just above subsistence.”

‘Democracy’ & Counterrevolution

Various ostensibly Soviet defensist “Trotskyist” organizations (including Ernest Mandel’s United Secretariat and the British Workers Power group), which backed Yeltsin in August 1991, alibied their betrayal with claims that the capitalist restorationists’ “democracy” was worth more than the preservation of collectivized property. Their arguments echoed Karl Kautsky’s early polemics against the Bolshevik regime under Lenin and Trotsky, which have been recycled by social democrats and anti-communists ever since.

The “democratic rights” provided by the counterrevolution are worth little to the tens of millions crushed under poverty, homelessness, hunger and disease. At bottom, Russia’s “democracy” is only a mechanism for holding down overheads for the squabbling bourgeois clans. It can be dispensed with at any moment, as Yeltsin reveals in the third volume of his memoirs where he recounts how close he came to cancelling the 1996 presidential elections and outlawing the CPRF when it looked like Zygunov might win:

“There is no point in hiding it: I had always been inclined toward simple, effective decisions. It had always seemed to me that chopping through the Gordian knot was easier than spending years untying it....

“Korzhakov [Yeltsin’s security chief] was also still searching for his election strategy. ‘It is senseless to struggle when you have a 3-percent approval rating, Boris Nikolayevich,’ he said to me. ‘If we lose time with all these electoral games, then what?’

“I had to take a radical step. I told my staff to prepare the documents. Decrees were written to ban the Communist Party, dissolve the Duma, and postpone the presidential elections. These formulations contained the verdict: I had not been able to manage the crisis within the framework of the current constitution. But this is how I saw the situation at the time: By outlawing the Communist Party, true, I would pay a very heavy price in credibility for going beyond the constitution’s limits. But I would fix one of the main problems I’d had since the beginning of my presidential term. After the ban, the Communist Party would be finished forever in Russia.”
Midnight Diaries

Yeltsin was eventually persuaded by his daughter and various members of his inner circle that “fixing” his problems in this manner could touch off a civil war. But it was a close call.

The Economist, which aptly characterized Russia’s last round of parliamentary elections as a “grubby spectacle,” observed:

“Mr. Yeltsin and his friends are helped by the state’s control of television, which enables the Kremlin to promote allies through fawning coverage and to destroy opponents by defaming them.”
Economist, 16 December 1999

Life can be difficult for those who dare oppose the ruling clique:

“Governors who back anti-Kremlin candidates risk finding that their local oil company suddenly gets knocked out of the state-controlled pipeline system. If they switch to the Kremlin’s side, their reward can be the jailing or dismissal of a troublesome local opponent, or a lucrative tax break for local industry.”

The popular illegitimacy and insecurity of the new ruling elite is a source of considerable concern:

“even the lucky few who made it really big and became oligarchs always felt at risk: maybe the communists would storm back into power....Perhaps a political enemy would take over the Kremlin and arrange for the arrest—and perhaps a jail-cell heart attack?—of an oligarch he hated. Or maybe a rival businessman would have better luck with that car bomb....No amount of money and no number of musclemen were ever enough to make them feel safe.”
—Freeland, op cit

In the imperialist “democracies,” where string-pulling and influence-peddling are more mediated, the stability of the bourgeoisie and the relative autonomy of the political process lends credibility to the institutions of the state. In Russia, where every fortune was recently acquired through the theft of public property via political connections, everything is more transparent:

“Taxes paid by the oligarchs’ companies keep the government afloat; their backhanders provide a comfortable life and a secure retirement for those with power and influence. In return, they expect the state and its servants to protect their interests—for example, by keeping foreigners out, loopholes open and competition down.”
Economist, 30 March 2000

Contrary to the rosy prognostications of free-market utopians, Russia’s parvenu bourgeoisie has shown remarkably little interest in retooling, introducing new efficiencies or expanding production:

“The only people prospering in the New Russia seemed to be a narrow layer of the super-rich....Its fortunes were not based on new technologies, more efficient services or more productive factories. Instead, they were built by capturing pieces of the collapsing Soviet state: the country’s oilfields and nickel mines, its television channels and export permits and even the government’s bank accounts. And once Russia’s home-grown capitalist conquistadors had secured their loot, they whisked it away to safer havens abroad as quickly as they could. Between 1991 and 1999, experts estimated that between $100bn and $150bn in flight capital left Russia.

“Russia had created a market economy, but of a distorted kind. With its ten-year economic depression, dying and increasingly deprived underclass and extravagant and parasitic elite, Russia had become a kind of capitalist dystopia, a Soviet ideologue’s lurid fantasy of life in what used to be called the ‘rotting West’.”
—Freeland, op cit

A healthy bottom line, brand-name recognition and growing market share is supposed to give a company an advantage over its rivals, but in Russia:

“Size and success attract the attention of gangsters and corrupt bureaucrats, especially local ones. If you try to put a competitor out of business, instead of enjoying a bigger market share you risk a visit from his political or criminal cronies: at best a raid from the arbitrary and rapacious tax police, at worst a car bomb or bullet. That makes the need for political protection, with the costs and compromises it brings, all but irresistible even for the most able managers.”
Economist, 30 March 2000

Putin’s Project

Even Boris Yeltsin, the historic leader of the counterrevolution, needed guarantees of political protection for himself and his family before handing the reins over to Vladimir Putin. Putin, who cut his teeth in the KGB, was supported by the enterprise managers, the state repressive apparatus and the “patriotic” bourgeoisie as someone who could “normalize” Russian capitalism and restore their country’s international position.

Putin has moved to reassert the Kremlin’s authority over the regions, increase tax compliance and curb the oligarchs. To attract overseas investment to help rebuild Russia’s once formidable industrial capacity, he has ensured that foreign debt payments are made regularly. He has further squeezed subsidies on housing, public transportation and other social services, and pushed through a business-friendly “reform” of labor legislation. Putin has aggressively pursued Moscow’s reactionary war against Chechnya, while reasserting Moscow’s influence in the “near abroad” (the Caucasus,  Ukraine and other former Soviet republics).

Russia’s GDP expanded in both 1999 and 2000 after a decade of decline. This was partially attributable to a surge in commodity prices (particularly oil), but chiefly resulted from the 75 percent devaluation of the ruble that followed the financial crisis of 1998. The cheaper ruble made Russia’s exports more competitive internationally, while increasing demand for domestically produced consumer goods like foodstuffs, automobiles, textiles and electronics. In recent years some of the bigger Russian companies have made some modest domestic investments, while also acquiring factories in Ukraine and elsewhere in the former USSR.

Since the 1998 devaluation, cash has replaced barter in transactions between Russian companies, tax revenues have increased, and the government has posted a series of budgetary surpluses. But the overall picture remains bleak. Wages are only half what they were before the devaluation and the human resources inherited from the Soviet Union are rapidly eroding. Funding for education has been slashed and spending on research and development is barely a third of what it was under Gorbachev. Besides raw materials and some basic chemicals, Russia is internationally competitive in only a few areas: armaments, nuclear power plants and space technology, and even here it is slowly losing ground. This is hardly surprising, as the average age of machinery in Russian plants is triple that of the imperialist economies of the OECD.

Russia’s roads, bridges, powerlines, water and sewage systems are disintegrating rapidly. During the past ten years, Russia’s “entrepreneurs” have run down the capital stock they seized without replacing or upgrading it:

“As fast as the Russian economy has declined, investment has dropped even faster. Overall, gross fixed investment declined from 45% of GDP in 1989 to 21% in 1996. Since GDP itself declined by over 40% during the same period, capital spending in absolute terms dropped by over three-quarters.

“....Net fixed investment has been negative since 1995; in other words, Russia’s entire capital base has been shrinking. By 1997 net fixed investment was minus 10% of GDP, and has continued to decline since then.”
—Gustafson, op cit

Updating Russia’s technology and rebuilding its infrastructure will require hundreds of billions of dollars; yet roughly half of the estimated $60 billion trade surplus earned in 2000 is thought to have been siphoned off into offshore accounts by the oligarchs. Even in the oil and natural gas sector, the chief source of foreign earnings, the failure to reinvest has led to a fall in production. The oil pipelines constructed during the Soviet period have almost all exceeded their projected life expectancy, and every year an estimated 20 million tons of oil leaks out to pollute Russia’s forests, fields and rivers.

For A New October!

Russia today has attributes of both a great power and a semi-colony, just as it did under the Czar. But there is no political formation that even roughly approximates a revolutionary leadership for working people. Instead of Lenin and the Bolsheviks, Putin’s left flank is covered by the anti-Semitic, pro-capitalist chauvinists of the CPRF.

The social weight of the Russian working class today is immensely greater than it was in 1917, and its bitter experience with capitalist privatization has dispelled all illusions in the magic of the market:

“Language itself had been turned on its head. ‘Reform’ and ‘market’ had gone from being part of the vocabulary of triumph and hope to being, in the ears of many Russians, almost four-letter words. The noun kapitalizm came increasingly to be modified with the adjective dikyi (savage). Accordingly, the ‘West’ went from being an object of emulation to a target of resentment. In the meantime, another word, ‘left’, has come back into fashion.”
Economist, 19 November 1998

In attempting to arrest the rate of Russia’s decline, Putin has already chipped away at the democratic facade under which the counterrevolution has proceeded to date. In their drive to compete internationally, Russia’s capitalists will inevitably launch further assaults on political and trade-union rights in the future. The Russian working class has suffered enormously from a decade of capitalist restoration, but it remains a potentially powerful political factor in the world today. A revolutionary organization combining hard class-struggle tactics with political intransigence toward those who would seek to reconcile the oppressed to their tormentors could grow exponentially in the present circumstances.

Despite immense natural wealth and a substantial cadre of skilled workers, scientists and engineers, thus far the re-integration of the former Soviet republics into the capitalist world market has produced mass impoverishment and the destruction of much of the pre-existing educational infrastructure and industrial capacity. Nigeria provides a closer model for Russia’s future under capitalism than Sweden or Germany.

The only way forward for Russia’s working people lies through the wholesale expropriation of the capitalist parasites and the creation of a planned economy directly controlled by the associated producers. The key task of revolutionaries in this period must be to struggle to cohere the nucleus of a new Bolshevik party based on the political heritage of Lenin and Trotsky and committed to fight for leadership of Russia’s powerful workers’ movement.

Only through a new October Revolution can Russian workers escape the backwardness and destitution to which the global imperialist order has condemned them. A resurgent Russian proletariat would not seek to restore the hated Stalinist regime, nor would it pursue the autarkic fantasy of building socialism in a single country, but rather it would act as a catalyst for a renewed wave of world socialist revolution.