Russia: A Bureaucracy That Can’t Die

Kit Adam Wainer

BORIS YELTSIN’S OCTOBER putsch is but one more episode in a major battle whose roots are quite deep and whose end is nowhere in sight.

The ruling layers in Russia, like their counterparts in Yugoslavia and many former Soviet bloc republics, are agonizing over their own disintegration. No internal faction is capable of scoring a decisive victory, and no outside force is yet able to destroy them.

The old guard has demonstrated its eagerness to sell out, if only there were buyers! Thus the would-be quitters of the deposed Communist bureaucracy frantically reorganize, subdivide and reassert authority. They are less concerned with preserving their system of rule than they are with their power and privileges. To maintain both, however, is a difficult trick-—especially in an economy in ruins, and in a global climate that hardly favors the development of new Russian businesses.

Thus the power elite, which two years ago proclaimed itself dead, retains its grip on society by familiar mean-—power struggles, purges, arrests. The bureucratic deja vu is little more than the political reflection of a deeper social reality. Underneath the surface, little has changed in Russia’s economy. “Shock therap” has failed, and the old aparatchlki at the enterprise level go about business as usual, but with scarcer resources and muchgreater anxiety.

In Russia this process has led to decentralization of political and economic authority without de-bureaucratization. In Yugoslavia and many former-Soviet republics, similar pressures have led to civil wars. In a time of economic malaise, inner-bureaucratic competition has grown deadly as sectors of the old elite carve up a shrinking pie. The smaller it shrinks, the more chaotic and violent is the internecine struggle. Thus bureaucratic decay has unleashed centrifugal forces which threaten to tear Russia and eastern Europe apart.

Bureaucratic Disintegration

The August 1991 coup attempt accelerated trends that were long underway in the Soviet Union. Since then the economy has decentralized and the union has shattered. Regional and national competition now endanger the Commonwealth of Independent States. The centrifugal dynamic has already generated many news headlines: Russia battles Ukraine over the ex-Soviet arsenal; Armenians fight Azeris over Nagorno-Karabakh Abkhazia declares independence from Georgia.

The conflicts grow from wars of words to mass slaughters. The level of violence would lead one to believe that these societies have been fundamentally transformed. Yet it is the same bureaucrats who once rose to power in the old Communist order who now command the contending forces in Yugoslavia and the ex-Soviet bloc.

A glimpse at the personalities at the top reveals the resilience of the old apanitchiki. Russia’s President, Boris Yellsin, was for decades a career official in the Russian Communist Party. The same can be said for most of his opponents in parliament. In the Ukraine Leonid Kravchuk, a former Moscow loyalist in the republican Communist hierarchy, now commands the pro-independence Ukrainian government which no longer calls itself ‘Communist” Vitaly Korotich explains the perseverance of the Ukrainian bureaucracy:

“Only this group understands the nuts and bolts of managing the country. Thus, as the Ukraine emerges from the shadows of Soviet rule, it is likely to be dominated by familiar figures: former Communists.” (Korotich 1991-92:75)

Similarly, Georgia’s President Eduard Shevardnadze once served Mikhail Gorbachev in foreign relations. And Azerbaijan is now run by the former head of the local KGB.

The rule of Slobodan Milosevic in Serbia is also telling. Milosevic was a Titoist throughout the 1970s and early ’80s. As such he was decidedly federalist, and therefore anti-nationalist. Today the former Communist leader commands the Serbian Socialist Party and the Serbian government. Through his republican authority he now governs the rump Yugoslavia.

In each case the ideological facade has changed. But the fact remains: the nomenklatura is still in charge.

Nowhere is the carry-over from the old order better seen than in the military forces of Russia and Yugoslavia. The general staff of the Russian military, like its counterpart in the Yugoslav Federal Army, climbed to its current height under the system it now denounces.

The ruling elite, however, is in a painful process of decay. Trapped in an economy which no longer sustains vast privileges, groups of bureaucrats band together to hold on to whatever remains. But in a shrinking system some of the fat must be cut. Some officials must lose their jobs. Today the political aim of each functionary is to guarantee that the someone is someone else.

In Russia such bureaucratic competition renders the government dysfunctional. Yeltsin continuously vetoed parliamentary maneuvers designed to undermine him. Meanwhile battles rage over who controls the money supply, plant managers or free-market ideologues. Journalists often identify this conflicts’ key protaonists as “conservatives” and “liberals.” Thus they jam the dynamic into a narrow framework and obscure its essence. The principal economic quarrels pit against each other contending bureaucrats who can agree on neither the pace of privatization nor on who should be victimized by it.

The example of the tragi-comic bungling of the privatization of Russia’s offshore oil deposits off the Sakhalin islands is most instructive. Sovietologist Viktor Winston writes:

“A feasibility study in 1988 prompted the Soviets to solicit bids from Western oil companies in early 1991. After the August coup, however, the local Sakhalin authorities voided the Soviet tender and awarded the off-shore drilling contract to Amoco. A few days later they decided to shift the contract to Exxon and eventually to a consortium comprising Mitsui, Marathon Oil, and McDermott (the 3-Ms). Then Yeltsin’s government in Moscow voided the local award, an act which the Sakhalin authorities refused to recognize. Instead of joining forces with the 3-Ms, the locals organized a brand new tender which Yeltsin’s people simply ignored. Meanwhile, a third player, the Russian Ministry of Geology, proceeded to divide the entire area so that each bidder would receive a share. But when Moscow changed its mind and ruled against its own ministry, another new tender was organized by the Ministry of Ecology and Natural Resources, which was to supersede any and all other tenders. That very last one, however, became so contentious that it had to be scaled down to a new feasibility study, at long last awarded to the 3-Ms an February 1992.

“But this was not the end, for the locals retaliated byblocking the 3-Ms’ efforts to proceed. To strengthen their hand, the 3-MS invited Mitsubishi and Shell Oil to join their consortium. Around the same time, however, the Japanese government approached Moscow on behalf of Sodeco, the Japanese consortium which had initially explored the Sakhalin Shelf in the 1970a, and joined forces with Exxon to frustrate the 3-Ms. The bottom line is that no work is in progress, no money is invested in offshore rigs, and, incredibly, a new tender is to be distributed to bidders some time in 1993.” (Winston, printed in Breslauer et. al., 1993:311-2).

Not a note of irony need be injected into this sorry saga. The events speak for themselves. Each wing of the bureaucracy exerts its authority. But the competitive pressures from different bureaucrats paralyze the government.

In Yugoslavia the process of devolution has transcended paralysis and plunged the country into civil war. Slobodan Milosevic, erstwhile Titoist and federalist, transformed the League of Communists of Serbia into a nationalist front for the conquest of Yugoslavia. Soon after Milosevic seized control over the Yuoslav Federal Army, Croatia and Slovenia declared independence. Zagreb and Ljubana feared the Serb domination that would inevitably develop had they remained Yugoslav republics.

Even Croat and Slovene separatism, however, corresponded to the agendas of bureaucratic regionalism. Slovenia and Croatia are the most economically developed republics of the former Yugoslavia. For two decades they have resented the transfer of their surpluses to development funds for the rest of the federation. Like middle-class Americans, angry over the taxes they pay to finance welfare, the Zagreb and Ljublana regimes have fought to keep their own incomes. By declaring independence Croatia and Slovenia have protected themselves from Serbian expansionism. In the process they have won the right to keep all proceeds from their vast economies.

The Serb bureaucracy clearly has the most extravagant aspirations for settling its crisis on the backs of others. Milosevic has revoked the autonomy which the provinces of Kosovo and Vojvodina once enjoyed. Kosovars now live under threat of a Seth invasion. The provincial rulers are suffocating under the pressure. Afraid of provoking Belgrade they curb their anti-Seth sentiments. But, in fear of the majority-Albanian masses, they also advocate greater autonomy.

After Kosovo, Milosevic’s next target may be the former Yugoslav republic of Macedonia. Once again Belgrade’s ambitions cause other republican rulers to quiver. The leadership in Skopje (capital of the Macedonian republic) is now pressed by Serbia to the north, Greece to the south, Bulgaria to the east and Albania to the west.

The Failure of Capitalism.

Let’s look at the Russian case. Key to the bureaucracy’s survival has been the inability of a bourgeoisie to dislodge it. None of the “shock therapy,” privatization or monetary reform programs have generated a capitalist development strong enough to challenge the bureaucratic order. Many of these measures have actually strengthened the ex-Communist functionaries. Far from clearing the ground for the “capitalist accumulation of capital,” recent transformations have reshaped rather than replaced the administrative-command system.

In a pointed essay Boris Kagarlitsky asks,

“What sort of privatization can we talk about in the absence of a functioning market economy, in a country where laws do not operate; were there is no developed system of commercial law; and, most important, where there is no civilized and responsible bourgeoisie? Who intends to buy what?” (Kagarlitsky, 1992:89)

Thus Kagarlitsky sums up the dilemma of Russia’s free-marketeers. They want to privatize, without relinquishing the privileges they enjoyed under the old system.

The formal demise of centralized planning has left administrators on their own. Now in competition over national resources they do what is necessary to keep production in their enterprises at maximum capacity. Although decentralization was designed to replace planning directives with market incentives, enterprise directors seem to function the way they always have. While they are now more concerned with income derived from trade, they are not compelled to be more efficient.

In a situation of unlimited credit, managers still employ as many workers as possible. The ability of enterprises to maintain liquidity depends on their volume of trade. This, in turn, requires that workers produce a lot. It does not force enterprise directors to organize production efficiently. Nor does it drive them to press workers for concessions. In fact, directors are now more dependent on the good will of their employees than ever before. As many observers have noted, employees in many firms seem to have greater bargaining power in the areas of wages and work schedules than they did before “privatization.”

This should come as no surprise. While the low level functionaries still administer the points of production, they can rely less on centralized authority to back them up. The secret police is a less credible threat. Thus employers often have to compromise with rather than coerce their employees. As long as enterprises do not depend on efficiency they are not ruled by a profit system. They therefore have no compulsion to pressure their employees to speed up, nor are they driven to cut costs anywhere else. “While economic transactions are increasingly governed by the pursuit of profit through trade, they leave production more or less unchanged.” (Burawoy and Krotov, 1993:52)

For capitalism to develop it is not enough to decentralize planning and declare former party officials to be “private owners.” Capitalists produce for the market That is where they realize their profits. But to generate those profits they must sell commodities at a price which is higher than what they paid to produce them. They must, therefore, keep labor costs down and purchase only that machinery which is essential. If not, they lose money and go bankrupt.

One capitalist can compel others to cut costs even further. By investing in new technology firm A may reduce its overhead and/or labor costs. Thus it can sell its product at a lower price and still make a profit. Its competitors must also reduce their prices in order to compete with firm A. If not, they are undersold and go bankrupt. In order to unload their commodities at firm A’s prices and still make a profit, these competitors must be as efficient as firm A. Most likely they will make similar improvements in technology to match firm A’s productivity rates. Thus capitalism compels its beneficiaries to organize the most profitable arrangement possible.

Marxists refer to that systematic pressure as the workings of “the law of value.” Kagarlitsky adds,

“a market can not be created by simply privatizing property, as the new private monopolies retain a non-market structure and a link with the state bureaucracy, and they have inherited all the flaws of the failed economic system—those very features that generated the current crisis.” (Kagar litaky, 1992:89)

To the extent that firms make productivity decisions without regard to production costs or competitiveness, the law of value does not rule.

Why do enterprise directors take only a passing interest in efficiency? They are not compelled to do otherwise. Their privileges do not depend upon their profits. As long as they produce and sell—-regardless of whether they are in the black or the red—-they can continue to receive financing. They can pay wages, buy new equipment and spend fortunes on themselves. In a capitalist economy this is more difficult. Banks will not loan to firms in the red. Such loans are too risky. Thus, for a capitalist, the well can run dry. For the ex-Stalinist bureaucrat, however, there is always new liquidity. (Clarke, 1992)

Good Rubles After Bad

Why do Russia’s banks loan to unprofitable enterprises? They are not compelled to do otherwise. In fact, requiring that loan applicants demonstrate credit-worthiness could sink the entire economy. Losses and growing debts are as integral to the Russian economy now as they were under the Soviet system. Although decentralized, and even privatized, the current Russian banking system still reflects the designs of the Soviet-era planners.

In the Soviet model, Gosbank (state bank of the USSR) entrolled the nation’s investment capital. Firms that neeeded credit applied to Gosbank. Firms which showed debts at the end of a period received rubles from Gosbank to straighten account. Enterprises operating at a loss could always count on Gosbank.

To isolate the Russian economy even further from the law of value, Moscow divided the currency into two types of rubles. Cash rubles could be used to pay wages or buy articles of consumption. An enterprise having to meet a payroll simply applied for help from the central wage fund. The wage fund would oblige with cash rubles. However, for enterprises to purchase means of production or repay debts, they used credit rubles. Credit rubles could not be used as cash but they were essential to the bookkeeping of every enterprise, if a firm owed money at the end of a period, Gosbank transferred credit rubles into its account.

Key to the transition to capitalism in Russia was to be the privatization of banking. Gosbank has been broken up. In its place is a Central Bank, which regulates the money supply. Orbiting around the Central Bank are numerous local privatized banks which once belonged to Gosbank. In addition new private banks have emerged, which also depend on the Central Bank. On the surface, the freemarketeers have adopted a Western banking system designed to feed a capitalist economy. But that is only on the surface. Underneath, the spirit of Gosbank lives.

The new banks still supply unlimited credit to enterprises. The Central Bank still issues separate rubles for cash and credits. Thus banking decentralization has not given birth to a capitalist economy. There is still little relationship between the amount a firm pays in wages and how much it can spend on machinery. They don’t even come out of the same fund! An enterprise director may produce 100,000 items and sell none without laying off a single employee.

The Russian banking crisis of July 1993 revealed the difficulties of privatizing banking and the consequent obstacles to the law of value. The failure of the attempted transition to capitalism has generated friction within the old bureaucracy and speaked an enormous wave of inter-elite explosion.

Within ine month after the discsolution of the USSR, Moscow appeared determined to exercise the Russian banks of Gosbank’s ghost. Boris Yelsin, his prime inister and key economic advisor Yegor Gaidar and Central Bank dicrection Georgiy Matyukhin let loose a tidal wave of reforms to wash the bureaucracy out of the monetary system. As 1992 opened, Gaidar outlined the first transitional steps. The government decontrolled prices, allowing them to rise to world market levels. Matyukhin limited the money supply in order to slow inflation. Most importantly, Matyukhin decreed that enterprises must prove credit-worthiness to qualify for bank loans.

Never before had this been a requirement. Firms could always count on loans to bring them out of the red. Loans never really had to be repaid. But as of 1992, Russian enterprises had to list assets and liabilities on credit applications. Those that looked like bad risks were to be cut off. Moscow’s objective was to allow the stronger enterprises to continue while the weaker ones perished. When the clearing process was complete, Russia’s economy would be transformed by monetarist magic. (Ickes and Ryterman, 1992)

The Yeltsin-Gaidar program was doomed from the start. Its architects hoped to impose capitalism from above but were unable to debureaucratize the economy. Russian banks were under orders to assess the health of any enterprise applying for a loan. But how can health be measured in a non-market economy? The banks tried tojudge applicants by their assets. However, enterprises often own the local schools and urban infrastructure. These generate no income but can be listed as assets on a loan application. Thus unprofitable firms continued to borrow as long as they could show assets. (Clarke, 1992)

The monetarist measures ultimately failed because firms with no ability to list even questionable assets continued toreceive loans, if a weak enterprise was turneddown byabank, it turned for help to another enterprise. During the first half of 1992 a flurry of inter-enterprise lending broke out. Unlike the banks, other enterprises never concerned themselves with creditworthiness. Such generous enterprise directors had little reason to worry about being aid back.

After all, if a firm is owed money it may list debts to it as assets on its next loan application. It can, therefore, get further loans to cover the money it has loaned to other firms! Thus a few healthy enterprise directors were able to accumulate endless credits and bankroll all of their fellow bureaucrats. Between January and July 1992, inter-enterprise arrears increased eighty fold. But June 1992, inter-enterprise borrowing equalled 70% of GDP. (Ickes and Ryterman, 1992:331-2)

By the summer of 1992 it was clear that the monetarist program had failed. Losing firms were still in business. Nothing had fundamentally changed. The growth of inter-enterprise arrears tangled the economy into a mess as every firm became both a creditor and a borrower. The banks, although loaning to fewer applicants, now pumped out as much money as before January 1992. It was now impossible to judge which enterprises were creditworthy because their worth was hidden behind a credit system gone wild.

Industrial managers formed a bloc that summer to stop the monetarist madness. Gaidar and Matyukbin fell and the old credit system returned. Yeltsin suffered a major defeat He had hoped to save the economy by selectively exterminating bureaucrats. In the capitalist West, after all, this method is routine. Businesses that cannot attract loans go bankrupt. Only the strong survive. The weak need not consent to their own demise, for capitalist competition murders them. Unfortunately for Yeltsin, the bureaucratic economy does not produce efficient weapons of destruction. Consequently, the Russian president could only ask his bureaucrats to swallow poison. Not surprisingly, they spit it back at him.

Monetarism did not heal the Russian economy. But neither has anything else. When Gaidar fell, so fell all monetary restrictions. The money supply surged and inflation skyrocketed. The ruble plummeted and indebtedness continued to mount. In July 1993 Matyukhin’s successor, Viktor Geraschenko, desperately sought more magic. Monetarist measures having failed, Geraschenko announced a nationalist solution. During the summer, pre-1993 rubles were declared void and new ones were to be issued. Many countries have reissued currencies to curb inflation. But this time the old, invalidated rubles could only be exchanged on Russian soil.

Geraschenko’s motives were primadly nationalist The majority of former Soviet republics still participate in a ruble zone. Many non-Russian nations maintain large supplies of rubles for inner-zone trade. Ceraschenko’s decree effectively invalidated rubles outside Russia, thus threatening the other members of the C.I.S. with bankruptcy.

Eighteen months earlier Matyukhin had tried to shrink the money supply by restricting credit. Such monetarist logic was supposed to weed out inefficient firms. In July 1993 Geraschenko also tried to restrict the money supply. He also wants to trim the bureaucracy. But his program uses as its criterion not creditworthiness but nationality. Capitalist measures have failed to clean up the ex-Soviet economy and now the Russian bureaucracy wants to save itself at the expense of non-Russian bureaucrats.

The inability to transform the administrative-command system into market capitalism has made Western investors increasingly nervous. Much of the bourgeois euphoria over the new markets peaked at the end of the last decade and is now all but gone. The pattern of foreign investment in the C.I.S. republics reveals little Western confidence in market reforms. Quite the contrary. Foreign investment reached its highest point in 1989—-the year that Gorbachev re-yoked Article Six of the Soviet Constitution which had banned political parties and any potential opposition to centralized planning. In other words, foreign investment peaked the year that Stalin-lam was finally dismantled.

Yet after that, foreign capital lost interest! Ironically, the most precipitous drop in foreign investment came during the fall of 1991, after the defeat of the coup plotters. By 1992 foreign investment in the C.I.S. republics had plummeted to roughly zero. Viktor Winston identifies the cause as the lack of confidence among Western capitals in Russia’s transition. He cites a survey of major foreign investors, listing the principal reason for capitalist disinterest, “political uncertainty lack of legal protection for private property, inability to repatriate earnings, bureaucratic complication” (Winston, op. cit.:310) These objections far outweighed any concern that the ex-Soviet economies were too backward to be profitable. In the same survey, corporate magnates listed “unproductive labor force” as the least important factor. (ibid.)

Lacking foreign partners or an indigenous capitalist class, largely against its will but with no alternative in sight, the old bureaucracy continues to rule the ex-Stalinist bloc.


Breslauer, George, et. al. “One Year After the Collapse of the U.S.S.R.: A Panel of Specialists,” Post-Soviet Affairs, October-December 1992.

Burawoy, Michael and Xmtov, Pavel, “The Economic Basis of Russia’s Political Crisis,” New Left Review, No. 192, 1992.

Clarke, Simon, “Privatization and the Development of Capitalism in Russia,” New Left Review, No. 196, 1992.

Ickes, Barry W. and Ryterman, Randi, “The Inter-enterprise arrears Crisis in Russia,” Post-Soviet Affairs, October-December 1992.

Kagarlistky, Boris, “The Forces of Resistance,” New Left Review, No. 192, 1992.

King. Charles, “Moldova and the New Bessarabian Questions,” The World Today, July 1993.

Korutich, Vitaly, “The Ukraine Rising,” Foreign Policy, Winter 1991-92.

Peng Yali, “Privatization in Eastern European Countries,” East European Quarterly, January 1993.

November-December 1993, ATC 47