By 1996 Russia had in place a political system that no longer seemed on the verge of collapse or overthrow. The i996 vote reaffirmed that elections were the only legitimate means for obtaining political power. At one critical moment in the spring campaign, Yeltsin seemed ready to postpone the vote, ban the Communist Party and rule by decree.[97] But he did not. In survivingthis important milestone, Russia's constitution also seemed to be strengthening. Moreover, those elected under the guise of this new law also seemed to be acquiescing to the new political rules. Though the Duma had been dominated by anti-Yeltsin forces between i994 and i996, the relationship between the new parliament and president survived new elections for the parliament in 1993 and 1995, votes of no confidence in the government during the summer of 1995, a presidential election in 1996 and the subsequent legislative approval of the prime minister soon thereafter. Co-operation between these two branches was becoming routinised and rules-based.
A return of the Communists also faded as a threat after the 1996 vote. Whether President Ziuganov actually would have tried to resurrect a command economy is a hypothetical question. That he would not have the chance to try ever again seemed certain after the 1996 vote. Instead, prospects for deepening market reforms seemed better than ever. The following year, Russian government officials as well as several Western financial institutions predicted positive growth rates for the first time since the collapse of the Soviet Union. In 1997, Yeltsin also reorganised his government to empower a group of young reformers.[98] He made an even bolder reconfiguration of the government in the spring of 1998 when he dismissed Prime Minister Viktor Chernomyrdin and appointed an even younger, and more reformist government headed by Sergei Kirienko. Called a reformer's 'dream team' by many Russian and Western commentators, the new government came into office with an express desire to finally truly reform Russia's ailing economy.
There was some good economic news. Annual inflation dropped to 22 per cent in 1996 and 11 per cent in 1997, while the exchange rate on the rouble remained relatively stable. In 1997, Russia finally did record positive growth - albeit very small growth - for the first time in the decade.[99] That same year, Russia's new stock market boomed, helping in part to fuel upbeat forecasts about Russia's economic future.[100]
Beneath the surface, however, the Russian polity and economy still had many ills. On the political side, it was actual illness - Yeltsin's illness - that crippled the president's second term from the outset. Yeltsin spent the first months of his second term recovering from multiple-bypass heart surgery. After a brief appearance in the Kremlin in December, Yeltsin finally returned to active duty as president in the spring of 1997. Throughout his entire second term, however, Yeltsin never seemed fully engaged. As a result, a small group of Yeltsin confidants - called the Yeltsin 'family' - seemed to rule Russia from inside the Kremlin. This family - which included Yeltsin's daughter - wielded power by working closely with Russia's oligarchs, and one - Boris Berezovsky - in particular.[101]
The August 1998 financial crisis
In addition to a crisis in leadership, the negative consequences of Russia's partial economic reform were beginning to accumulate in the second half of the 1990s. Shock therapy in Russia failed because it was never attempted. Instead, throughout most of the 1990s, Yeltsin allowed Chernomyrdin and his government to creep along with partial reforms - reforms that included big budget deficits, insider privatisation and partial price and trade liberalisation, which in turn combined to create amazing opportunities for corruption and spawned a decade of oligarchic capitalism. The nadir of this period was loans-for-shares, a scheme under which Yeltsin and his government gave away Russia's most valuable companies to these oligarchs for a song.
After the ratification of the constitution in 1993, the Russian government did acquire control over Russia's Central Bank and thereafter pursued a more stringent monetary policy. But budget deficits persisted throughout the 1990s, as the government continued to fail to pass balanced budgets through the parliament.[102] Last-minute deals needed to pass the budget, particularly with the Agrarian Party, consistently resulted in the proliferation of financial obligations that the government could never meet, which in turn necessitated the constant sequestering of expenditures. Persistently poor tax collection also undermined sound fiscal policy. Russia's oligarchs were particularly notorious for not paying taxes, creating real revenue-raising problems for the government. In 1998, the deficit was still 150 billion roubles ($25 billion) - more than 5 per cent of GDP.
In the early part of the decade, the Central Bank simply printed new money and issued new credits to compensate for the deficit, a policy that fuelled inflation and undermined the stability of the exchange rate. In the latter half of the decade, after the enactment of the constitution gave the executive branch control over the Central Bank, the government deployed a new set of non-inflationary methods to deal with the deficit.
First, the Central Bank stopped printing money. The lack of liquidity in the economy also stimulated the use of barter, a highly inefficient method of transaction.[103] By 1998, experts estimated that over half of all industry transactions took place through barter. In addition, tight monetary policy exacerbated the accumulation of debt between enterprises. According to one estimate, inter- enterprise debts increased from 33.9 per cent of GDP in 1993 to 54.2 per cent of GDP by the end of 1997.[104]
A second method was simply not to pay money owed to state employees. This strategy resulted in an explosion of wage and pension arrears. Because workers and pensioners were not organised collectively to protest against the state's nefarious behaviour, the Russian government could get away with this method of 'macroeconomic stabilisation'.[105]
Third, in addition to their debts with the International Monetary Fund (IMF) and the World Bank, the Russian government began borrowing money from international markets. The Eurobond was the instrument of choice. By the summer of 1998, the Russian government had borrowed $4.3 billion through such medium and long-term instruments.50
As a fourth new method for raising revenue, the Russian Finance Ministry introduced new debt instruments in 1995, the short-term bond or gosudarstven- nye kratkosrochnye obligatsii or GKO and the medium-term bond known by its acronym, OFZ. GKOs matured after three or six months, making them especially attractive to those investors looking for quick turnaround on their money. Many celebrated the GKOs as a particularly useful innovation since it brought money into the Russian state coffers in a non-inflationary way, while at the same time gave investors an incentive for maintaining low inflation rates and a stable currency.
97
Lilia Shevtsova,'El'tsin ostanetsya, dazhe esli proigraet',
98
Yeltsin appointed Chubais deputy prime minister in charge ofthe economy, including the Finance Ministry, and named Boris Nemtsov, a young reformist from Nizhnii Novgorod and a darling of Western aid programmes, as another deputy prime minister.
99
Daniel Treisman, 'Fighting Inflation in a Transitional Regime: Russia's Anomalous Stabilization',
100
See most famously, Richard Layard and John Parker,
101
On this period, see David Hoffman,
103
See David Woodruff,
105
See DebraJaveline,