The consequences of these political battles for macroeconomic stabilisation were profound.[75] By the summer of 1992, government transfers to state enterprises began to increase dramatically. Even more importantly, however, Gaidar and his team lost control of monetary policy. As part of this compromise with the industrialists, Viktor Gerashchenko was appointed head of the Russian Central Bank. Soon after his appointment, Gerashchenko approved the clearing of inter-enterprise debt as well as cheap credit lines for state enterprises. As a result of these changes in both fiscal and monetary policies, inflation began to soar again in the autumn of 1992, reaching 25 per cent per month by the end of the year. Central Bank credits amounted to 31 per cent of GDP.[76]
Though sequenced to begin after liberalisation and stabilisation, privatisation has been singled out as the 'driving force behind economic reform in Russia' and 'the heart of the transformation process'.[77] As defined by Yeltsin's first post-Communist government, the policy of privatisation of large state enterprises aims to create privately owned, profit-seeking corporations owned by outside shareholders that do not depend on government subsidies for survival. If enterprises must generate profits to cover expenditures and pay dividends to stockholders, then they will be compelled to rationalise assets, a process that will include downsizing, restructuring and bankruptcy.
On paper, Russian privatisation looked successful. By January 1994, 90,000 state enterprises had been privatised. The record on the actual creation of real private property rights, however, was less rosy. Privatisation of small shops and services created actual owners endowed with clearly delineated property rights. Privatisation of large state enterprises did not. Instead, by the summer of 1993, insiders had acquired majority shares in two-thirds of Russia's privatised and privatising firms, state subsidies accounted for 22 per cent of
Russia's GDP, while indicators of actual restructuring (bankruptcies, downsizing, unemployment, unbundling) were not positive.[78]
Again, the problem was politics. Well before the collapse of the Soviet regime, the Soviet institutional arrangements governing property rights allowed directors to appropriate many of the rights associated with ownership. When the Yeltsin government's privatisation programme threatened to reallocate property rights, these directors organised to defend their claims.[79]Their venue of struggle once again was the Congress of People's Deputies. While Gaidar and his privatisation tsar, Anatolii Chubais, had hoped to implement their original privatisation programme through presidential decree, industrialists in the Congress argued that such an important act had to have the force of law. After some hesitation, Yeltsin agreed to submit the privatisation programme for parliamentary approval. Over a hundred amendments were added to Chubais's original privatisation programme, including two new options for privatisation, which allowed managers to acquire control of their firms. Not surprisingly, insiders acquired the majority of enterprises privatised under this new law.
Polarisation over economic issues between the president and his government on the one hand and the Russian Congress on the other eventually provoked conflict over basic political issues. The absence of well-defined political rules of the game fuelled ambiguity, stalemate and conflict both between the federal and sub-national units of the state. Both confrontations ended in armed conflict.
October 1993
The Russian Congress ofPeople's Deputies was an odd foe for Boris Yeltsin. In i990, this body had elected Yeltsin as its chairman. After Yeltsin became president, this Congress then elected Yeltsin's deputy chairman, Ruslan Khasbulatov to become speaker. In August i99i, Yeltsin, Khasbulatov and their supporters huddled inside the Congress building - the White House - as their chief defensive strategy for thwarting the coup. In November i99i, the Congress voted overwhelmingly to give Yeltsin extraordinary powers to deal with economic reform. In December i99i, the Supreme Soviet of the Russian Congress ratified Yeltsin's agreement to dissolve the Soviet Union. Only six deputies voted against the agreement.
The portrayal, therefore, of the Congress as a hotbed of Communist conservatism is misleading. To be sure, Communist deputies controlled roughly 40 per cent of the seats in the Congress and the anti-Yeltsin coalition - which included Communists and non-Communists - grew over time.[80] Yet, the initial balance of power within the Congress did not prevent Yeltsin from being elected chairman. It should not have prevented him from reaching agreement with this Congress about the rules ofthe game that governed their interaction with each other.
Initially after the putsch attempt, the institutional ambiguity between the president and Congress did not have a direct impact on politics, as most deputies in the Congress at that time supported Yeltsin. After price liberalisation and the beginning of radical economic reform in January 1992, however, the Congress began a campaign to reassert its superiority over the president. The disagreement over economic reform in turn spawned a constitutional crisis between the parliament and president.[81] With no formal institutions to structure relations between the president and the Congress, polarisation crystallised yet again, with both sides claiming to represent Russia's highest sovereign authority. During the summer of i993, in preparing for the Tenth Congress of People's Deputies, deputies drafted a series of constitutional amendments that would have liquidated Russia's presidential office altogether. Yeltsin pre-empted their plans by dissolving the Congress in September 1993. The Congress, in turn, declared Yeltsin's decree illegal and recognised Vice President Aleksandr Rutskoi as the new interim president. In a replay of the 1991 drama, Russia suddenly had two heads of state and two governments each claiming sovereign authority over the other. The October 1993 'events' - the euphemism coined to describe the armed conflict between the president and the parliament on 3-4 October 1993 - was a national tragedy for Russia. For the second time in as many years, debates about institutional design moved beyond the realm of peaceful politics and into the arena of military confrontation. In 1991, the military stand-offtookthe lives ofthree defenders ofthe White House. In i993, several hundred people died in the fighting between warring branches of the Russian state. In addition to the loss of life, the October events ended
Russia's romantic embrace of democracy. If the end of the military stand-off in i99i triggered rapturous support for the new regime and the democratic ideals that it claimed to represent, the end of fighting in 1993 marked a nadir of support for the Russian government and the end of optimism about Russia's democratic prospects.
This tragic moment also created opportunity. After dissolving the parliament in October 1993 through the use of force, Russian President Yeltsin was free to draft the constitution as he and his aides saw fit. This new constitution spelled out a set of basic guarantees for all Russian citizens and codified a new system of government, which included the office of the president, a prime minister and the government, and a bicameral parliament, consisting of a lower house, the State Duma, and an upper house, the Federation Council. In the first election to the Duma, held in December i993, a presidential decree ruled that half the seats (225) were to be determined by a majoritarian system in newly drawn electoral districts while the other half (225) were to be allocated according to a system of proportional representation (PR). Parties had to win at least 5 per cent to win seats on the PR ballot.[82] Later codified as law, these rules for electing the Duma have remained in place ever since. Two representatives from each region of Russia - that is eighty-nine republics, krais, and oblasts of the Russian Federation - constitute the Federation Council, though the process of selecting these two representatives has changed over time.
75
See Timothy Frye, 'The Perils ofPolarization: Economic Performance in the Postcom- munist World',
76
Bridget Granville,
77
Stanley Fisher and Alan Gelb, 'The Process of Socialist Economic Transformation',
78
Joseph Blasi, Maya Kroumova and Douglas Kruse,
79
Michael McFaul, 'State Power, Institutional Change, and the Politics of Privatization in Russia',
80
Josephine Andrews,
81
See Thomas Remington,
82
See Robert Moser,