Michael Rothschild

This article appeared in Upside Magazine (June 1996).

Almost from the moment the Berlin Wall collapsed, historians began warning Western leaders to do everything in their power to avoid recreating the economically disastrous conditions of post-World War I Germany in post-Cold War Russia. With the former Soviet Union knee-deep in tactical and strategic nuclear weapons, not to mention chemical and biological agents, the potential for calamity was obvious. Almost six years later, despite history's clear warnings, the West has unwittingly helped drive Russia far down the path to chaos.

In Yeltsin's Russia as in the Weimar Republic of 1920's Germany—a humiliated people of a once vast empire yearn for a return to glory. Instead, their daily lives have been smashed by bouts of hyperinflation and the collapse of the war-time economy. Even Russia's middle classes have lost hope for a better future. With prices having risen 1500-fold and most families subsisting on $100 a month, once proud scientists and professionals spend their days on the streets, hawking old bits of clothing and housewares as they struggle to feed their families.

Even the notorious Moscow club scene stirs memories of Berlin in the Twenties. "The gangsters and tarts to be seen in the capital's seedier nightclubs are straight out of Brecht and Weill's Threepenny Opera, even if the cabaret is rarely in the Liza Minelli league," reports the Times of London.

Hundreds of thousands of unpaid, homeless Russian veterans back from the Iron Curtain roam the country. Like the defeated German soldiers seven decades ago, many rally to the nationalist rantings of vicious anti-Semites. In the midst of the post-war turmoil, bandits and gangsters rule much of the countryside.

As in Germany, a few years after Russia's first free election, the government was forced to put down a coup attempt. But the plotters were soon freed from prison and spent the next several years scheming to takeover the government by winning a national election. In Germany, that election was the last of the Weimar era. No one knows whether June's election will be Russia's last. But the intentions of the Communist Party on this subject are all too plain.

Despite years of posturing by Western governments, the simple, terrible truth is that the policies pursued by the United States and the other Western nations have nearly destroyed Russian political forces committed to free markets and real democracy.

Back in 1990, the rich G7 nations talked about a bold, "Marshall Plan for Russia." But at the crucial moment, the Iraq War diverted the West's attention from the main game. Besides, no one in public life had the vision or the stature of Secretary of State George Marshall, America's top military leader in World War II.

In the six years since the Berlin Wall came down, the G7 countries have only managed scrape together about $30 billion in loans to Russia—or about 0.03% of the G7's cumulative $100 trillion GDP. By comparison, the Marshall Plan was thirty times larger, roughly 1% of America's GDP in the relevant period. Put another way, since the end of the Cold War, we have spent 100 times more maintaining our anti-Soviet military machine than we have attempting to rescue the pathetic remnants of the USSR from unmitigated chaos. So much for investing in strategic national security priorities.

But the worst of it is not that we were such near-sighted misers when it was in our own best interest to be generous visionaries. The real tragedy is in the way we disbursed that lousy $30 billion. Lenin himself couldn't have hatched a scheme more corrosive to the prospects for a true market economy and enduring democracy.

The International Monetary Fund, playing the role of the G7's loan officer, demanded currency stabilization as the prime precondition for funding the loans. Since government subsidies to Russia's hopelessly inefficient state factories were paid with freshly printed rubles, the IMF demanded severe cuts in the subsidies that keep the state factories afloat and their workers paid and off the streets.

But when Yeltsin's pro-market economic ministers, Gaidar and Chubais, did the G7's bidding and tried to choke off the subsidies, the entire Soviet-era power structure and the millions of workers who depend on these shabby state industries fought back. Both Gaidar and Chubais were forced out. In the overfed West even the hint of an entitlements cut provokes screams of anguish, but somehow the IMF thought it could force massive cuts from the world's most entrenched entitlements class.

Even as the IMF pounded away, demanding currency stabilization through subsidy cuts, it virtually ignored the most important obstacle to the emergence of a genuine market economy in Russia. Capitalism grows organically wherever it's allowed to take root. But in Russia, like everywhere else, taking root requires one absolutely essential political precondition—government protection of private property rights. Unless each citizen has the legally enforceable right to own, buy, sell, trade, mortgage, and invest in private property there can be no normal market economy.

Indeed, each time the Russian parliament considered establishing clear property rights, something prevented the big change. Perhaps, it was 70 years of Marxist indoctrination that convinced all but radical free-marketeers that owning property is the root of all evil. Don't forget that for three generations, the prime tenet of Marxism, taught in every classroom every day in every school, was the crime of owning property. Indeed, it was only weeks ago that Yeltsin finally decreed a still somewhat unclear right to own land.

Without legal protection for whatever wealth they might acquire, Russians with enough power or smarts to grab some wealth immediately exported their hard cash to banks in Cyprus and Zurich. Without clear property rights, Western investors have largely avoided investments that couldn't be recouped almost instantly. Consequently, few Russians have seen any practical evidence of the job opportunities and growth that normal capitalism creates.

Without clear property rights for everyone, only those Russians with heavy political connections were able to rig the privatization game and take "ownership" of the big state factories. And when these folks weren't busy looting firms they had not built, they were siphoning cash from IMF loans. In short, our policies pumped hard cash into a decadent Communist hierarchy that had long been rife with bribery, corruption, and larceny. The biggest winners in this "new and improved" protection racket are precisely the same apparatchiks who ran the economy in Soviet times. Instead of free markets, job-creating long-term investment, widespread hope, and gradual recovery, the U.S. and the other Western governments have used the IMF to reinforce the power and wealth of a Marcos-style kleptocracy.

Could it have been different? Sure. Back in 1990, if the same $30 billion had been used to insure private investments against political risks, and if the program had been turned on only after clear property rights were locked into Russian law, an entirely different dynamic would have been established. Private players looking for long-term growth would be pouring capital into a country overbrimming with unmet needs. Instead of forcing genuine market champions like Chubais and Gaidar to walk the plank for the IMF's criminally insane program, we could have even funded a few years of gradually declining subsidies, buying off the old Soviet power elite for a few crucial years while markets and business confidence grew.

By now, it's too late. Russia's "market reformers" have been thoroughly discredited. Struggling to get back in the election race, Yeltsin has abandoned his pro-market rhetoric. Like most Westerners, he still doesn't realize that Russia never tried market economics. The Communist Zyuganov, who leads Yeltsin in the polls, calls the West's imposition of "market reforms" a scheme to defraud the Russian people of their common wealth while burdening the nation with foreign debt. Sounds accurate to me—except that such claims assume that U.S. and its allies actually know what they're doing.

In 1990, after three generations of revolution, civil war, Stalin's liquidations, Hitler's atrocities, the Gulags, and the collapse of an empire, it looked like the Russian people might finally get a chance at peace and prosperity. But instead of offering a neighborly helping hand, we sent them international government banking bureaucrats. Instead of cultivating a new market economy, we eliminated any chance it might have had of sprouting on its own.

One factory worker neatly summed up Russia's politics by saying, "When the Communists were in power, we got paid on time, never more than a day overdue. I knew there would always be work. But now, we've all been deceived, so I'm going to vote for the Communists." The Russian people aren't the only ones who were deceived by so-called "market reforms." And they won't be the only ones to pay the consequences.