Russia gets the IMF Third World cure

America,’ Brzezinski stated in his book The Grand Chessboard. He added, ‘Mackinder pioneered the discussion early in this century with his successive concepts of the Eurasian “pivot areas.”’

This policy involved identifying any potential power able to upset the balance of power, and as Brzezinski put it, ‘to formulate specifi c U.S. policies to offset, co-opt and or control the above.’ Eurasia, as he drew the map, included the oil wealth of the Middle East, the central Asian region, the industrial potentials of Europe and Japan, the resources of China, India and Russia. He warned, ‘control over Eurasia would almost automatically entail Africa’s subordination, rendering the Western Hemisphere and Oceania geographically peripheral to the world’s central continent.’

Just how Washington acted on this imperative was not at fi rst clear to the rest of the world as the cold war came to an end. It was clear, however, to Russian strategic thinkers in and around the Soviet Academy of Sciences. They had carefully studied Mackinder and Anglo-Saxon theories of geopolitics. In the collapse of the Soviet Union, however, their voices were drowned out. The market economy and the prospect of fabulous wealth had momentarily diverted the energies of Russia’s elite.3

From the side of Washington, the strategy for reshaping its cold war adversary into a tool of American hegemony was clear from the outset—albeit not without risk, given the remaining Soviet nuclear arsenal. The Russian bear may have been economically bankrupt in 1990, but she still had a few nuclear teeth. The process of restructuring had to be done carefully.

RUSSIA GETS THE IMF THIRD WORLD CURE

In July 1990, at a meeting of the G-7 industrial nations in Houston, Texas, U.S. Secretary of State James Baker played the key policy role regarding the future of the Soviet Union. Baker, the man who fi ve years earlier as Treasury secretary had brought Japan to the Plaza accord, told his G-7 allies that the United States wanted the central role in the economic reform of the Soviet economy to be carried out by the IMF. The fi nal G-7 communiqué stated, ‘We welcome the efforts underway in the Soviet Union to liberalize and to create a more open, democratic and pluralistic Soviet society, and to move toward a market-oriented economy.’ The declaration added, ‘We have agreed to ask the IMF … to undertake a detailed study of the Soviet economy … to make recommendations for its reform.’

The aim of Washington’s IMF ‘market reforms’ in the former Soviet Union was brutally simple: destroy the economic ties that bound Moscow to each part of the Soviet Union, from Uzbekistan to Kazakhstan, from Georgia to Azerbaijan, from Estonia to Poland, Bulgaria or Hungary. Though it was never stated, IMF shock therapy was intended to create weak, unstable economies on the periphery of Russia, dependent on Western capital and on dollar infl ows for their survival—a form of neocolonialism.

By placing the U.S.-dominated IMF in the key economic policy role, James Baker and the Bush administration had ensured that any and all Western economic investment in or support for the Soviet economy would fi rst have to pass a Washington veto. The Russians were to get the standard Third World treatment, much as an African former colony or a banana republic—IMF conditionalities and a plunge into poverty for the population. A tiny elite were allowed to become fabulously rich in dollar terms, and manipulable by Wall Street bankers and investors.

Harvard economists, such as Jeffrey Sachs, armed with their theories of ‘shock therapy,’ were fl own to Moscow to assist in the destruction of the old central state apparatus. IMF technocrats demanded that Russian oil and gas, aluminum, manganese and other raw materials be sold at world market prices, that state subsidies for food, health and other essentials be ended, and that the Russian industry be ‘privatized.’

In 1992 the IMF demanded a free fl oat of the Russian ruble as part of its ‘market-oriented’ reform. The ruble float led within a year to an increase in consumer prices of 9,900 per cent, and a collapse in real wages of 84 per cent. For the fi rst time since 1917, at least during peacetime, the majority of Russians were plunged into existential poverty. That was but the start of IMF-style capitalism for the Russians.

Under IMF direction, Washington could in effect dictate which sector of Russian industry would survive, which not. The ‘world market,’ was defi ned by Washington and IMF technocrats, trained in the ways of Milton Friedman’s free market. Neither Russian national priority nor the general welfare of the population would be the criterion.

The dictates of the IMF ‘global market’ were to replace the Stalinera dictatorship of the proletariat for the peoples of Russia and the former Soviet region. Never mind that the level of economic freedom in the United States, ostensibly the model, was a complex product

of an evolution of more than 350 years, in some cases reaching back to the English Civil War. Under the IMF, countries like Russia and Ukraine were told to immediately adopt the U.S. version of market economy, with no adequate preparation. The results were predictable and well planned. The goal was not a stable, prosperous Russia.

As most Russians soon realized, the effects of the IMF reform were catastrophic. Instead of the hoped-for American-style prosperity, twocars-in-every-garage capitalism, ordinary Russians were driven into economic misery. Industrial production fell to half its earlier level as infl ation passed levels of 200 per cent. Average life expectancy for men dropped to 57 years by 1994, the level of Bangladesh or Egypt.

The West, above all the United States, clearly wanted a deindustrialized Russia, to permanently break up the economic structure of the old Soviet Union. A major area of the global economy, which had been largely closed to the dollar domain for more than seven decades, was to be brought under its control. Behind the nice rhetoric of market-oriented reform, the region was being carved up in much the manner the European powers had colonized and divided Africa 100 years before.

For Washington’s Clinton administration, it mattered little that the Russian privatization of key state industrial assets was controlled by a Russian elite, the so-called oligarchs. The prime point was that Russian industry was tied for the fi rst time since Lenin to the future of the dollar. The new oligarchs were ‘dollar oligarchs,’ and most of their new wealth came from the export of oil and gas.

The partner for the United States and the point man for the IMF during the Yeltsin era was Anatoly Chubais, minister for privatization. The IMF granted Russia a $6 billion loan in 1996, on the condition that Chubais be put in charge of economic policy. In 1997, George Washington University Professor Peter Reddaway wrote in the Washington Post that Chubais had been accused in Russia of ‘censoring the media, undermining democracy, engaging in dubious personal dealings, taking orders from Washington and building a criminalized form of capitalism.’ This was apparently enough to win the backing of the deputy Treasury secretary, Lawrence Summers. Summers, who also funneled millions of taxpayer dollars into U.S. support for Harvard ‘shock therapy’ economist and Russia adviser, Jeffrey Sachs, hailed Yeltsin’s 1997 naming of Chubais as fi rst deputy prime minister. Making Chubais responsible for the economy, Summers argued, created ‘a re-energized presidency and an economic dream team.’ For most Russians, the dream was a nightmare.

Ukraine, which had been a major industrial, military and grainproducing center of the USSR, was put through the same brutal process as Russia. There, after IMF ‘reforms’ began in October 1994, the collapse was equally dramatic. The IMF ordered an end to state foreign exchange controls and the currency collapsed. The IMF then demanded state subsidies be ended. The price of bread shot up by 300 per cent, electricity by 600 per cent, and public transportation by 900 per cent. The population was now forced to buy local goods in prices set in dollar terms, a result of the IMF demands. With sky-high electricity costs and no bank credit, state industries were forced into bankruptcy. Foreign speculators were free to pick the jewels among the rubble at dirt-cheap prices. Ukranian agriculture was deregulated on IMF and World Bank demands. The result was that Ukraine, once the breadbasket of Europe, was forced to beg food aid from the U.S., which dumped its grain surpluses on Ukraine, further destroying local food self-suffi ciency.

Russia and the states of the former Soviet Union were being treated like the Congo or Nigeria, as sources of cheap raw materials, perhaps the largest sources in the world. With the collapse of the Warsaw Pact, those mineral riches were now within the reach of Western multinationals for the fi rst time since 1917. Above all, the oil and gas riches of the former Soviet Union came into view of the large U.S. and British oil multinationals. In the eyes of the Washington planners, a modern, thriving Russian industrial economy would only be a hindrance to such plundering of its raw material wealth.

In the early 1990s, the Clinton administration held out to Moscow the term, ‘the mature strategic partnership.’ Many Russians naively assumed this would mean that U.S. aid and capital would fl ow into Russia to restructure a vibrant economy, that Russia would be treated as an equal partner in some form of ‘global condominium’ with the United States, and that its historical hegemony over the states of the former Soviet Union would be respected by Washington. But by the time it had become brutally clear in Moscow that the ‘partnership’ was a hollow slogan, designed to deceive, it was too late. The Russian industrial complex had been largely dismembered. Its population was enmiserated by IMF reforms, and its ability to infl uence events on its perimeter was severely diminished. That suited Washington just fi ne.

The IMF shock treatment for Russia after 1991 not only reduced the former superpower to a Third World economy. It also opened up the potential for American and allied oil companies to control

what had been the world’s largest oil and natural gas producer. That process was to take a while, however.

Under the controlled and manipulated privatizations of the Chubais era, Russia’s prized oil and gas interests were given away for a song to select Yeltsin and Chubais cronies. An IMF report in 1998 estimated that 17 Russian oil and gas companies, with a fair market value of at least $17 billion, had been sold by Chubais for a total of $1.4 billion. Moreover, 60 per cent of the state gas monopoly, Gazprom, the world’s largest gas producer, was sold to private Russian groups for some $20 million. The market value was about $119 billion. Companies such as Lukoil, Yukos, Sibneft and Sidanko were created. Oligarchs such as Mikhail Khodorkovsky, Boris Berezovsky and Viktor Chernomyrdin dominated the Russian economy as no communist-era bureaucrat ever had. In a November 1996 interview, Berezovsky, as deputy secretary of the Russian Security Council as well as an oil oligarch, boasted that seven men controlled 50 per cent of the country’s vast natural resources. Their hard currency profi ts were all dollar denominated, he might have added.

By summer of 1998, the dollarization of Russia had almost got out of hand. In August, the IMF extended an emergency loan of $23 billion to support the ruble and protect the speculative investments of Western banks, which had made millions investing in Russian state bonds. The IMF bailout of the banks came too late.

On August 15, Russia announced that it would default on its dollar loans. For New York and other major banks, the unthinkable had taken place. A major debtor, despite IMF aid, had decided to default. For a few nervous weeks, the entire dollar edifi ce shook at the foundations. LTCM, the world’s largest hedge fund, had bet heavily on the Russian market as well as on most of the world bond markets. Its directors included a former Federal Reserve deputy governor, David Mullins, leading Wall Street investors and Nobel Prize economists. The sudden default threatened the fund with bankruptcy and a chain-reaction collapse of trillions of dollars in fi nancial derivatives contracts, and ultimately a chain of bankruptcies which could bring down the entire global fi nancial house of cards. The Federal Reserve called an extraordinary closed-door meeting with 15 of the world’s most powerful bankers and arm-twisted a rescue operation. Russia, far too valuable strategically, was quietly forgiven its default and soon the dollarization resumed, if at a less fevered pace.4