MacKenzie on Russia, Part I

Les Schaffer schaffer at
Wed Dec 13 15:47:44 MST 2000

[bounced from unsubbed Jess MacKenzie <mackenzie.tate at>,
reformatted, Part I]

Hello Louis,

This is a piece I wrote for a discussion inspired by an article by
Barry Shepherd.  I thought you would like to see it.

It was nice meeting you in New York.

Best wishes,
Ernie Tate


What Happened In Russia?
a contribution to a discussion, December 11, 2000

by Ernest Tate

I'm sure I was not alone among socialists during the period of Gorbachev
and the final days of "peroistroika", thinking that this was perhaps the
opening phase of the "political revolution" and that the Russian working
class would not permit the bureaucracy to dismantle the gains of the
Russian Revolution.  The idea of "political revolution", the need for
the working class to mobilize around a program of "workers control" to
allow it to realize its full creative possibility to overcome the crisis
of stagnation resulting from bureaucratic control, was an essential
feature of the analysis of the USSR developed by Leon Trotsky.  This
program for political revolution, to which supporters of the
"degenerated workers state" theory subscribed, encompassed some of the
demands of the bourgeois democratic revolution such as freedom of speech
and association, the right to strike, demands for workers control around
which the working class would mobilize through workers councils, and wh!
ich would pose the question of "political power".

There is little evidence of political revolution in the processes of
change in Russia and Eastern Europe since the collapse.  Rather , the
drive for change, especially political change, has tended to come from
those layers in society who are outside the organized working class.

Looking at some of the changes in Russia, especially in the decades
before Gorbachev, we can understand why.  From Kruschev in the early
1960s, social and economic changes under the bureaucracy began to cause
its disintegration.  Despite Kruschev's claims that they would bypass
the standard of living of the capitalist countries, by the early 1970s
targets of the central plan for economic growth and labour productivity
were not met.  Before 1960 rates of growth under the two five year plans
were 14% and 11% a year, respectively, remarkably high when compared to
Western capitalist economies.  Projecting this growth rate into the
future, Kruschev could, with some justification say the USSR would
bypass capitalism.  But the reality was something else.  During the 70s
and 80s, the Russian growth rate fell to under 4%, says David Lane in
his book, The Rise and Fall of State Socialism. (1) At the same time,
important demographic shifts in the population began to undermine the
regime.  Two thirds had become urban -- from 22,000,000 in 1922 to
186,800 in 1989. (2)

In 1950, the number of employees categorized as "non-productive", that
is non-manual employees, in such sectors as science, education, culture,
health, insurance and tourism, totalled 6,260,000.  In the space of 17
years, that figure had jumped almost four times to 23,812,000. (3) It
was this demographic group that had the most important impact on the
history of the last twenty years.  There was the rapid growth of
television and other means of communication.  David Lane writes that ,
"The population's expectations rose: a consumer mentality matured as did
the bourgeoisification of aspirations."(4)

"This led to a more wide-spread receptivity to alternate conceptions of
socialism at the same time as there was a pervasiveness of illegal as
well as private economic activity."  Among petty -bourgeois layers in
the society there was an increase in the belief that they would
capitalize their special skills in a market relationship.  "It was a
mechanism to realize intellectual capital in monetary terms." Lane

In general, there had been a deterioration in the standard of living of
these layers, compared to the pre-war period.  There is a lot of
anecdotal evidence of truck drivers earning much more that highly
trained medical specialists.  Loyalty and solidarity with the regime
began to break down, especially among professionals, who had become
disenchanted with their status: they were in turn cultivated by the
leadership.  Lane gives data on the sociological shift in the membership
of the Communist Party from the late Breznev period to Gorbachev,
towards non-manual and professional layers and the influx of these
layers into the top leadership and a simultaneous decline in the number
of individuals from working-class backgrounds.

"The implication here," he says, "is that a dual class structure was
developing in which 'intellectuals' and professionals had much
potentially to gain from a market-type system.  They had marketable
skills and were not dependent on a 'nomenklatura' system."(6)

"It is undoubtedly the case," Lane says, "that the reform leadership of
Gorbachev shifted its political fulcrum of support away from the manual
working class and the traditional party and state bureaucracy to an
alliance with the more technologically inclined and modernizing forces
of the intelligentsia..."(7)

To deal with the crisis of the economy, two sets of solutions were
argued within the regime: the development of markets in Russia and "a
reform of the economic mechanism."  Gorbachev could have chosen to stay
with the central plan and rely on the working class to make the changes
necessary to overcome the crises, but instead he opted for the market
solution which only accelerated the crises.

In a discussion of the various theories about the nature of the Soviet
state and the reason for the crises, Lane examines in detail the views
of the Trotskyists.  He looks to see which theory more correctly
explained the crisis of the regime.  He also deals with reactionary and
pro-capitalist theories of some Western academics (which he says were
mainly wrong about Russia).

Lane, who pays tribute to Ernest Mandel's work, states that Hilel
Ticktin, who Mandel debated many times, "must go down as one of the few
specialists...who correctly analysed the weakness and potential
disintegration of Soviet type society."(8) Tictin's magazine Critique,
is published in Glasgow.

In Tictin's view," writes Lane, "the dynamic of Soviet type formations
has been the 'enormous levels of useless productive consumption or waste
that result from the instability of the system...The central economic
feature of the USSR...(was) its economic wastefulness.'"  A major
contradiction in the 'the system' is in the labour process: control is
only partially achieved by "the elite" (Tictin's characterization)
through the atomization (which originated under Stalin) of the
workforce.  This leaves the workers with control over the work process
but causes underproduction and the production of "defective use values".
Lane continues: "...a major cause of the disintegration of the system
was the incapacity of 'the elite' to extract surplus, promote growth to
meet needs.  Also the 'elite' had no legitimate right to ownership and
inheritance of property..."

"In a nutshell, politically astute sections of the Soviet elite sought
to introduce the market to preserve their position.  If established, the
market and its associated institutions of private property and exchange
of labour value -- and (one might add) civil society and a bourgeois
ideology -- will legitimate a new ruling class."(9)

The proponents of deepening market reform became the major tendency in
the government by the time Gorbachev came to power, with strong support
from the administrative wing of the state apparatus from those running
the large state enterprises.

There seems to have been a uniform view in government circles over many
years that believed the central problem in the economy was the
stultifying effects the bureaucracy.  It was immense, with its tentacles
reaching into all aspects of the economy and life as it grew to build
"socialism in one country" and as it attempted to reproduce the world
division of labour within the USSR.  Its authoritarian practices had
their roots in the feudal relations the Bolsheviks inherited from
Tsarism.  It was the social basis of Stalinism, and even the Stalinists
had difficulty reforming it.  It grew, according to Lane, from 6,200,000
in 1922 to 118,000,000 in 1985.(10) Within the state and party apparatus
various reform strategies developed which questioned the relevance of
state planning to deal with the bureaucracy's suffocating weight on
economic planning and its failures.

These reforms challenged the central plan and gave legitimacy to the
notion of "market socialism" as opposed to the capitalist market
economy.  The invasion of Czechoslovakia under the Breznev doctrine, put
the ideas of "market socialism", on the sidelines, as the Russian
leadership saw political changes there which challenged the Communist
Party for political control.

The planned economies, except for Yugoslavia, had been excluded by
imperialism from the world economy and the world division of labour
since their beginning, and starting with the 1960s were unable to
compete with the capitalist economies based upon a sort of hand-me-down
technology.(11) Technological change, or the lack of it was one of the
main problems that Gorbachev attempted to solve.

The crisis ran throughout society with shortages and a lack of consumer
goods at a time when the Western capitalist societies were going through
a massive growth of consumer products and technological expansion.
Those around Gorbachev strove to break down the imperialist barriers to
the USSR's entrance into the world economic and financial system.  Their
hope was to borrow from imperialism whatever was needed to close the
technology gap.  This was accompanied by an increase in the cultural
influences from the capitalist countries through television and other
modern means of communication, sources of "cultural contamination" where
the intellectual elite and others aspiring to a middle class existence
could see a market in operation that gave huge advantages to those who
had the required skills.  The "consumption effects" of capitalism were a
constant reminder to this social layer of "communism's" backwardness and
weakness.(12) Subjective evaluation of the benefits of Western!
societies became the basis for a push by these forces on the regime to
make concessions to their interests.

Around the same time, imperialism under the leadership of Ronald Reagan
and Thatcher made a switch in its cold-war policy of "containment" to a
more confrontational policy of pushing for greater military superiority
and militant anti-communism.  All the numerous agencies of western
imperialism were mobilized in a campaign for "democracy".  Defense
expenditures, a huge burden on Soviet society, would only increase under
the threat of Star Wars, the Strategic Defense Initiative (SDI) of the

Lane quotes Richard Pipes, an advisor to Ronald Reagan, who points out
that "'the systematic policy of subverting the Soviet Union, largely
through the use of the CIA' made a decisive contribution to the collapse
of communism.'  He argues further ," Lane says, "that SDI 'accelerated
the decline' of the USSR and that CIA policy succeeded in persuading
Saudia Arabia to lower oil prices, which severely affected Soviet
foreign currency earnings..."(14)

According to Lane, the group around Gorbachev, although they supported
the idea of market reform, had no clear idea of what model was required
for the economy -- they saw only a "Russian" way.  But the fundamental
feature of "perestroika". and the policy of liberalization associated
with it, was the introduction of market reforms.  Instead of bringing an
end to the economic crisis, this policy deepened it, ending in total
failure by 1990, with mass unemployment, declining rates of economic
growth and raging inflation as high as 300% a month.

As Gorbachev turned to imperialism to allow the Soviet Union to enter
the world market and attain membership in its financial agencies,
imperialism began to raise the price of admission.  Helmut Kohl demanded
that East Germany be allowed to "unite" with West Germany.  Thatcher
demanded competitive elections in the USSR and a multi-party system.(15)

Gorbachev capitulated to these demands.  In foreign policy he gave
assurances that the USSR would not intervene in Poland or the other
countries of Eastern Europe if they should decide to leave Comecon or
the Warsaw Pact, giving up what he considered to be a liability in the
Soviet Union's scramble for an accord with imperialism.  He agreed to
reduce aid to Nicaragua.  At about the same time, the USSR's trade
agreements with Cuba were broken.

There were deep divisions in the Gorbachev team about the way forward to
deal with the economic crisis gripping the country.  In the past these
differences would have been settled by firing squad and murder, but
under the new policy of "glasnost", this was unthinkable.  Lane provides
some unique data on the lack of a unified outlook in the thinking of
those at the centre of power.

"On the basis of interviews with 116 members of the Gorbachev elite,"
Lane says, "I distinguished between those seeking fundamental change of
the regime and those who wanted reform.  Of the political elite, 41 per
cent regarded the Soviet system as 'fundamentally sound requiring
reforms,' 40 per cent believed that it was 'basically flawed, though
significant reforms could have been achieved' and , most important of
all, 19 per cent thought the system was 'basically unsound and should
have been completely replaced.'  Within system reform, as contemplated
by Gorbachev, could never have succeeded concurrently with political
stability because the political elites were divided about the
fundamental nature of the Soviet system."(16)

These disagreements were finally resolved during the attempted coup by a
wing of the bureaucracy who had become increasingly nervous about
Gorbachev's course, resulting in the victory of Yeltsin who openly
opposed the central plan, and who favoured "the organizing principles of
capitalism", competitive political parties, private property and a
market led economy.

As part of his economic and administrative reforms, Gorbachev around
1988, had introduced measures that enhanced market forces in the
economy.  His policy gave support to market transactions, increased
private and cooperative trade(17), and in a measure to overcome the
alienation of the workers and draw private savings into capitalizing
state enterprises, gave the workers the right to buy equity.  At the
same time he weakened the power of the central ministries, reducing
staff by a third to just over half a million.

This unleashed powerful forces that challenged the foundations of the
society.  The government issued on a mass scale, certificates to give
the workers the right to buy shares.  Individual directors of
enterprises and consortia of wealthy individuals gained control of the
most profitable state-owned enterprises.  (We shall see later how these
individuals obtained their wealth.)

With the assistance and advice of Western financial institutions, market
reformers at the centre of power oversaw the dismantling of state
enterprises and their mass privatization at ridiculously low prices or
through outright theft.  In her book, Sale of the Century, Russia's wild
ride from Communism to Capitalism, Christia Freeland, an editor of the
Toronto Globe and Mail , who was the London Financial Times
correspondent in Moscow during the period of the collapse and after,
describes the privatization process once Yeltsin replaced Gorbachev.
Operating under a philosophy that it was preferable for state assets to
be stolen rather than remain under public ownership, and a sense that
time would not always be on their side she says the "reformers" at the
centre of power hurriedly dismantled key sectors of the economy.  She
says that by 1996, "more than 80% of Russian industry was at least
partially in private hands, a higher proportion than in parts of Western
Europe." (18) "By 1999, " she says, "the top 10% of the population owned
half of the nation's wealth, while the bottom 40% owned less than a
fifth.  Between 30 to 40 million people lived below the poverty line,
defined as a miserly $30 a month." (19) (She does not give any source
for this data.)

To overcome resistance to the privatization, workers and managers of the
targetted enterprises were given "up to 40% shares in these firms." (20)
A second wave of privatization allowed workers and managers to buy 51%
of the voting shares at a nominal price.  Freeland says that this
effectively made the Soviet-era factory directors the "capitalist elite"
for the new Russia.  This was followed by "voucher privatization" in
1992 whereby everyone was given 10,000 rubles (then about $25) by which
workers could pay the nominal fee to buy their reserve shares in their
enterprises.  "Street kiosks, " Freeland reports, "whose briskest
business was in vodka and cigarettes began a robust trade in vouchers as
well.  Young hustlers went from door-to-door, buying up spare vouchers."
(21) From this emerged wealthy individuals who had amassed their riches
from exploiting openings in the economy provided to them under previous
reforms, even under Breznev.  Often in partnership with foreign
financial institutions they consolidated their control over the more
lucrative sectors of the economy.

Most often from outside the bureaucracy -- but in active and mutual
beneficial collaboration with it -- individuals who often had Party and
/ or Komonsol credentials, who had become wealthy in the "shadow
economy" or from earlier market liberalization schemes, or who
functioned in the quasi-private sector, positioned themselves to exploit
the new changes.

Thane Gustafson, in his book, Capitalism, Russian Style, examines how
important private wealth can originate in a planned economy as a result
of scarcity and the functioning of the "unofficial" market.  In Russia
this process had been underway especially since the time of Stalin, and
perhaps even under the Bolsheviks, operating illegally but often in a
corrupt relationship with the bureaucracy.  There are two "informal"
economies in Russia today, Gustafson says, "...The 'shadow' economy is
the world of underground business, unregistered and unreported.  The
'virtual' economy is the world of Soviet-era manufacturing which has
attempted to shelter itself from the market pressures by retreating from
it.  The 'shadow economy' is at the opposite pole from the 'virtual
economy' .  The basis of the shadow economy is strictly cash while that
of the virtual economy is barter and IOUs.  The shadow economy lives by
its wits; the virtual economy by subsidies (in the hidden form of unpai!
d taxes and wages).  The shadow economy produces services for which
there is a market: the virtual economy produces physical goods for which
there is none -- at least at Soviet-era cost plus pricing.  The shadow
economy, until the crash of August 1998, accounted for perhaps 40% of
Russian GDP, the virtual economy -- essentially manufacturing and the
defense- industrial rump -- barely 25%." (22) The "shadow" economy
blossomed after Kruschev.

Freeland describes the rise of Mikhael Khodorkovsky, in her series of
biographical sketches of some of the "oligarchs" who had amassed vast
wealth during this time.  Khodorkovsky had risen within the Komonsol,
the Communist Party youth organization, within which he and his group
started a computer importing business, which "became a cooperative, then
a bank as the laws governing private business developed."(23) The
company became Menatap, until recently one of the largest private banks
in the country.  Another large bank, belonging to the Most group had
similar origins, beginning with capital that came from Komonsol.

It is worth quoting Freeland at length, because her book describes so
well how a new wealthy class grew up in the midst of the planned economy
and how it increased its power as the crisis unfolded.  "Their business
started with factories that were having a hard time extracting credits
or payments from the collapsing Russian state.  Like a cheque-cashing
company, Menatep gave the enterprises their money up-front and then
collected the payment they were owed from the central government, taking
a hefty cut in the process.  Before long Menetep began to perform the
same service for regional governments waiting for rubles from Moscow.
>From there it was a short step to the real klondike -- handling the
federal government's own finances, through a plethora of schemes ranging
from servicing fat bank accounts of government departments to becoming a
conduit for money which needed to travel from one branch of the federal
government to the other."  Aside from making money, his business b!  y
its very nature put this oligarch into intimate contact with key
individuals in the bureaucracy. (24)

The Komonsol had vast holdings in entertainment, travel, holiday camps
and even provided high-tech consulting to industry.  It actively
promoted the market reform process.  Freeland quotes a Khodorkovsky
associate: "To a certain extent Khodorkovsky was sent by the Komonsol
and the party (into the private sector)."  The party establishment
protected and supported him with the ostensible objective to break the
grip of the state ministries over the economy.  Surrounded by a
"hostile, inefficient and endemically corrupt" apparatus, according to
Freeland, the "reformers" in the government turned over the former
functions of the bureaucracy to "the nation's plucky new band of
capitalists, young men who belonged to their generation and shared their
mindset." (25)

Menatep moved to gain control of some of Russia's largest factories that
were put on the auction block in a mass privatization scheme to help
remedy earlier "voucher" privatization failures by providing funds to
companies desperate for capitalization.  They gained ownership of the
enterprises at bargain basement prices, but often reneged on their
re-capitalization promises.

Then there was the infamous "loans for shares" program, designed by a
consortium of the most powerful "oligarchs" to facilitate the transfer
of some of the major resource industries into private hands in exchange
for loans to the government.  These capitalists met in a cartel to plan
their attack and "quickly agreed on a rough and ready division of
Russia's most valuable companies... We reached an agreement on who would
take what, " one of the participants told Freeland.  "We agreed not to
get in each others way."

It took a number of months for the program to work its way to success
when the number of targetted companies was reduced to twelve.  The
Yeltsin administration carried out the transfer in two stages, first
turning the companies over to this group of capitalists "in trust" in
early 1995 and finally giving a transfer of ownership in 1997, after the
Presidential election.  The cartel had actively campaigned for him.

Norilsk Nickel, for example, one of the largest nickel producers in the
world, if not the largest, was transferred out of public ownership
through the fiction of allowing Vladimir Potanin, one of the wealthiest
men in Russia to manage the state stake in this enterprise in exchange
for loans to a government desperate for funds.  Yukos Oil, a large
Siberian oil company met a similar fate as did Unified Energy Systems,
the national power company.  Smaller enterprises went to more junior
players.(26) The stated motivation of the government in agreeing to this
process was the need to defeat the "red directors", who effectively
controlled the enterprises, and to raise "non-inflationary" revenues to
overcome its financial crisis resulting from budgetary short-falls.  For
roughly $2.25 billion, the deal was completed.  As Freeland says,
Russia's crown jewels were given away for kopeks.(27)

"It was the act of a desperately enfeebled state, so anaemic it was
unable to perform basic functions such as collecting taxes or
maintaining its monopoly over coercive force.  Although this shadow
state formally 'owned' the companies which were ultimately sold off, the
Kremlin had little political or economic control over them.

"This meant that the 'loan-for-shares' was not quite a straightforward
giveaway.  Instead the Kremlin basically gave the future oligarchs a
federal mandate to try and wrest control of some choice assets away from
the red directors who were effectively the owners...".

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