As a package, however, these schemes for maintaining stabilisation were not sustainable in the long run. The GKO market grew exponentially. In 1994, the short-term bond market amounted to only $3 billion. By 1997, GKO debts outstanding totalled $64.7 billion, which ballooned to $70 billion in the summer of 1998.51 In this same summer, two related external shocks - the Asian financial crisis and falling oil prices - began to reverberate in Russia. The same people who were losing money in South Korea had money tied up in Russia.52 To provide incentives for these investors to keep their money in Russia, the Finance Ministry responded by continually raising the return rates on GKOs.53 A month before the crash, yields on these treasury bills had reached 113 per cent.54 The fall in oil prices decreased Russian export revenues, causing the Russian current account to go from a $3.9 billion surplus in 1997 to an estimated $4.5 billion deficit in 1998.55 Russian tax receipts fell dramatically, as did Central Bank reserves. In effect, the Russian government was bankrupt.
50 Joseph Kahn and Timothy L. O'Brien, 'Easy Money: A Special Report: For Russia and its U.S. Bankers, Match Wasn't Made in Heaven', New York Times, 18 Oct. 1998, p. 1.
51 Hoffman, The Oligarchs, p. 469.
52 On the worldwide crisis, see Paul Blustein, The Chastening: Inside the Crisis that Rocked the Global Financial System and Humbled the IMF (New York: Public Affairs, 2001).
53 At first, the Russian government resisted IMF advice of raising interest rates, preferring instead to spendforeign currency reserves to defend the rouble. Eventually however, they were compelled to raise interest rates. See US GAO Report to the House Committee on Banking and Financial Services, 'Foreign Assistance: International Efforts to Aid Russia's Transition Have Had Mixed Results', Nov. 2000, GAO-01-8, p. 46.
54 John Thornhill, 'IMF and Russia in a New Loan Accord', Financial Times, 8 July 1998, p. 2.
55 William H. Cooper, 'The Russian Financial Crisis: An Analysis of Trends, Causes, and Implications', Report for Congress, 18 Feb. 1999, pp. 98-578. Available online at: www.cnie.org/nle/inter-16.html
In a drastic, desperate move, the Russian government announced on 17 August 1998 a compulsory conversion of short-term GKOs into longer-term debt instruments. The Russian debt market immediately collapsed as investors refused to believe that the Russian government would ever pay back this borrowed money. On this same day, the Russian government also announced a ninety-day moratorium on payment of all hard-currency loans owed to Western commercial banks. Simultaneously, the government announced a new trading price for the rouble at 30 per cent lower than the day before. In one day, the two alleged economic achievements of the Yeltsin era - control of inflation and a stable, transferable currency - were wiped away.
These emergency measures did little to halt the economic crisis. The stock market all but disappeared, the rouble continued to fall and banks began to close. Responding desperately to a desperate situation, Yeltsin fired Kirienko and his government the next week and nominated Viktor Chernomyrdin as his candidate for prime minister. As the confirmation process for Chernomyrdin dragged on throughout September, the economy continued to collapse. The rouble continued to plummet, banks refused to allow withdrawals, prices soared and stores emptied as people started to stockpile durable goods such as cigarettes, sugar and flour.
Renewed political polarisation
The August 1998 financial meltdown jolted the regime in Russia like no other event since the October 1993 stand-off. In combination with a subsequent banking scandal, the August 1998 crisis sparked a 'who lost Russia' debate in the West.[106] At the time, Russia looked as if it had failed at making the transition from a command economy to a market system.
Russia's transition from authoritarian rule to democracy also looked less certain. In the immediate aftermath, the financial crisis changed the de facto distribution of power between political actors and institutions in the country in favour of the parliament. This shift in the distribution of power, in turn, threatened to undermine Russia's constitutional stability. The Duma demonstrated its new (if temporary) importance by dominating the selection process of a new prime minister. Unlike previous votes for a new prime minister, Duma deputies did not capitulate to Yeltsin's demands, but made it clear that they would vote down his candidate, Viktor Chernomyrdin, if the president nominated him for a third time. Yeltsin relented and nominated the Duma's preferred candidate, Evgenii Primakov. Though not obligated constitutionally to consult the Duma on ministerial appointments, Primakov (with Yeltsin's acquiescence) nonetheless co-operated with Duma leaders to form a coalition government. Taking advantage of Yeltsin's weakness, Primakov and his Communist allies in the Duma floated the idea of limiting the powers of the presidency through an extra-constitutional pact. Yeltsin worried about even more radical challenges to his authority, warning potential conspirators, 'we have enough forces in order to stop any plans for taking power'.[107] That these ideas were even circulating demonstrated that the political rules of the game established in 1993 were still vulnerable in 1998.
From August 1998 until May 1999, Russia's Communists had their best opportunity to challenge the existing economic and political order after their candidate, Primakov, became prime minister against Yeltsin's wishes in the wake of the August 1998 financial meltdown. Upon assuming office, Primakov invited a Communist Party member, Iurii Masliukov, to serve as his economic tsar. Rhetorically, Primakov and Masliukov promised to reverse radical economic reforms, raise pensions and wages, curtail the activities of Western agents of influence such as the International Monetary Fund and the World Bank, toss 1,000 bankers in jail and hinted at restoring state control over prices and property.[108] In practice, Primakov and his Communist allies in the government pursued none of these policies but instead proved to be as fiscally conservative and monetarily stringent as previous reform governments.[109] Instead of chasing the IMF out of Russia, Primakov continued to negotiate with this 'tool of imperialism' and even agreed to introduce a package of legislation recommended by the IMF. In its negotiations with the World Bank, the Primakov government actually rejected the bank's recommendation for pension payments as too high. When offered the opportunity to roll back capitalism, Russia's Communists instead adhered to the general principles of the system in place.
Another challenge to constitutional stability erupted in the spring of 1999 when the Duma opened impeachment proceedings against the president. In the week leading up to the impeachment vote, held on 15 May 1999, Yeltsin looked certain to be impeached by the Duma on at least one count - his decision to invade Chechnya in 1994. In a bold counter-attack, just days before the impeachment vote, Yeltsin fired Primakov. Yeltsin's dismissal of the popular prime minister inched Russia closer to a constitutional crisis. If the Duma had impeached Yeltsin and also rejected his nominee for prime minister, Sergei Stepashin, the Russian constitution is silent on what should have happened next. Push did not come to shove, however, as the Duma did not muster the necessary two-thirds vote to pass any of the five impeachment articles. Days later, Duma deputies overwhelmingly approved Yeltsin's nominee for prime minister. In August 1999, Yeltsin fired Stepashin and nominated Vladimir Putin as his replacement. The Duma approved Yeltsin's candidate without a fuss.
106
John Lloyd, 'Who Lost Russia? The Devolution of Russia',
107
Yeltsin, quoted in Bill Powell and Evgeniya Albats, 'Summer of Discontent',