What I did in Russia

(in cache)

Jeffrey Sachs

March 14, 2012

Exerpts 

with emphases, some reformating using bullets, and [text] added by J. Gruber


" ... In the spring of 1991, I worked on a Harvard-based project, led by Graham Allison ]Wikipedia] of the Harvard Kennedy School of Government [Wikipedia] and Grigory Yavlinsky [Wikipedia], to design a package of Soviet and U.S. actions to facilitate democratization and economic reform, backed by a large-scale infusion of Western financial and technical assistance.  The project took on the nickname of the “Grand Bargain” [18] and a short book [19] was published by the team in the summer of 1991. My estimate, which became somewhat notorious at the time, was that the Soviet Union (and later the successor republics) would need an infusion of Western aid (envisioned as grants and highly concessional loans) of around $30 billion per year[20] over five years, or $150 billion in total. That is still a number that I would endorse.  Alas, nothing like that ever materialized.


Mikhail Gorbachev was in contact with Yavlinsky while the latter was at Harvard, hopeful that a grand bargain could indeed be assembled.  Gorbachev actually traveled to the G7 Summit in Houston in search of aid.[21]  He was famously rebuffed by the G7 [22]. This denial of financial support would continue even after the fall of the Soviet Union.  Gorbachev’s failure to win backing from the G7 raised the ante [meaning] in Moscow, and likely contributed to the timing of the attempted putsch[23] against Gorbachev in August 1991.

... In October 1991 I received a call from Moscow, telling me that Yegor Gaidar [24] was likely to become the head of Yeltsin’s economic team, and that Russia would launch radical market reforms with or without the rest of the Soviet Union.

... I was asked by Gaidar to come to Moscow to help with the planning of economic reforms. 

... In the meetings with Yeltsin, I laid out the reform challenges as I understood them (and as per agreement with the broader external advisory group).  The main themes [25] were:


This basic approach was summarized in the Economist article of December 1991.[27]


Russia’s economic realities and starting conditions in 1992

I fully understand from the start that the reform task would be vastly more difficult and complex than in Poland. There were several critical and quite obvious reasons for this concern:


Here is how I put it at the end of 1991 in an article for the Economist Magazine in December 1991, “Goodwill is Not Enough”:


Russia and the other republics bear the deep economic cancer of seven decades of communism: 


Now, on top of systemic disease, the republics face a financial crisis . . .  


The old administrative structures have collapsed . . . 

A deeper need for industrial retrenchment and restructuring will last for years, even decades, as the former Soviet Union scale back its old heavy industry…


Indeed, a constant theme[28] of mine was that the transformation was going to be so difficult and harrowing that the Soviet Union (and later Russia) would need vast Western aid for success.  Far from preaching a miracle cure, I was trying to preach realism to the United States – that market reforms could not, by themselves, solve deep structural and societal problems, and that large-scale help would be needed from the West.

Gaidar’s reforms started in a tumultuous and calamitous economic situation, one so precarious and destabilizing that it had already led to the collapse of the world’s second superpower.  Many of the terrible dislocations that were to befall Russia in the early 1990s were the result of powerful forces that predated the reforms, and that would destabilize Russia right through the reform period. Nonetheless, the reforms were often blamed for the hardships, something like blaming the emergency-room doctor for the poor condition of the patient just arriving by ambulance.  Yet outsiders and armchair critics did just that.

Probably the least appreciated but most dramatic reality of the Russian reforms is that Russian oil production and earnings were in a state of sharp decline.  The quantity of oil production was plummeting as old oil fields were depleted and new ones were not being developed.  At the same time, the world price of oil collapsed in the mid-1980s, putting the Soviet Union, and then Russia, into a terrible fiscal vice.  The Soviet Union faced that squeeze initially by borrowing from abroad, but its access to foreign credits dried up during 1990-91.  The ensuing balance of payments crisis played a huge role in the Soviet collapse and the ensuing hardships in Russia.

The combination of falling oil earning, balance of payments crisis, and soaring budget deficit, led to a combination of intense shortages, soaring black market prices, and a collapsing value of the ruble in the black market.  The economy, in short, was spinning out of control, into high inflation, mass shortages, and a breakdown of production.  Moreover, with the collapse of Soviet power, the forced allocation of resources by central planning was dead.

This set of considerations led Yegor Gaidar, the acting Prime Minister and head of the economic team, to adopt a decisive end to price controls at the start of 1992. Prices were decontrolled on January 2, 1992.  Gaidar rightly feared that with the collapse of central planning and the lack of incentives for delivery of food supplies from rural to urban areas, the cities might even be without food unless price controls were quickly lifted.  There was not an option to move gradually.  Either the economy would move to markets based on supply and demand, or it would face devastating shortages of food and other critical goods, with massive black markets and corruption.  With or without development aid, Gaidar insisted, it was necessary to end pervasive price controls.

The debate over reform strategies

Let me summarize the main issues in the Russian reform debate, the position that I took, and the outcome.  This will help to clarify what I actually believed and recommended, and to compare that with what actually happened.

My area of responsibility for advising was macroeconomics, not privatization.  I had no responsibility for the corrupt privatization, though I was often blamed wrongly for it.  I actually opposed it strenuously, but was no longer even an advisor to the Russian Government when it occurred (especially 1994-1996).

The three main areas where my direct advice went unheeded were the following:  

  1. the need for large-scale financial assistance[29] for Russia, which I deemed (and still deem) to have been essential to molding a political consensus around reforms, and to bolstering the financial situation enough to achieve a modicum of success in the fight against hyperinflation; 
  2. the need for strong monetary and fiscal policy to achieve a rapid end to inflation[30]; and 
  3. the urgency of establishing a social safety net[31], especially in health care and pensions, to ensure an adequate social and political base for societal transformation and democratization. This safety net can be financed through foreign assistance, a standstill on debt servicing, or other emergency means.


The lack of Western assistance

The lack of Western assistance was grim and was my greatest frustration[32] during late 1991 and 1992.  The early days were inauspicious to say the least.  When the G-7 deputies came to Moscow in late November 1991, just a few days after Gaidar had come to power as head of Yeltsin’s economic team, the main focus of the G-7 message was the urgency that the Soviet Union should continue to service the external debts at any cost.  There was no discussion of the upcoming economic reforms, and no realism among the G-7 deputies about the extreme desperation of the economic scene.  Gaidar was warned by the assembled powers that day that any suspension of debt payments would result in the immediate suspension of urgent food aid, and that ships nearly arrived at the Black Sea ports would turn around.  Russia in fact continued to service the debts for a few more weeks before completely running out of cash by February 1992.

In December 1991 I had continuing discussions with the IMF about Western assistance for Russia.  The IMF’s point man, Mr. John Odling Smee, who lasted for a decade as the head of the IMF’s efforts, was busy telling the G-7 that Russia needed no aid, that the “balance of payments gap” as calculated by the IMF was essentially zero.  I believe that the IMF was simply parroting the political decisions already decided by the United States, rather than making an independent assessment.  This is just a conjecture, but I make it because of the very low quality of IMF analysis and deliberations.  They seemed to be driving towards conclusions irrespective of the evidence. The IMF’s approach was in any event just what the rich countries wanted to hear.  The technical methodology was primitive beyond belief.

To summarize a long saga succinctly, Russia never received much in grant aid, stabilization support,[33] or debt relief. What little did come was far too late to save the collapsing initial momentum of reforms, as most of the reformers were long gone from the scene or at least from the center of power.  

... For inexplicable reasons, the IMF championed the continuation of the Soviet ruble zone, rather than a system of 15 national currencies with flexible exchange rates between them.  I argued strenuously[36] with the IMF over this point, and as always, lost the argument.  The IMF contributed to more than a one-year delay in the introduction of national currencies, and thereby to a significant delay in achieving stabilization[37].

The other great macroeconomics debate[38] in the second half of 1992 was with the Central Bank.  Mr. Viktor Gerashchenko, former Chairman of Gosbank (Central Bank) in the Soviet days, somehow returned to power as the new Chairman of the Russian Central Bank.  Gerashchenko’s return was basically mandated by the Duma ... I somewhat famously referred[39] to Mr. Gerashchenko as “the world’s worst Central Bank governor” at the time.  What he accomplished was to fuel a high inflation[40], and to bring Russia to the brink of outright hyperinflation.  As usual, the reformers in power received most of the blame for this wrong-headed policy, since Gaidar was the visible leader of the reform.  The critics claimed that the high inflation resulted from the fact that we had unleashed uncontrollable monopoly power on society. In fact, it resulted from the failings of monetary policy.

... I received [a phone call] while on Christmas vacation at the end of 1992. Boris Federov, a very tough-minded reformer from Yavlinsky days, had suddenly been appointed Finance Minister in the new Chernomyrdin Government. Federov called me to ask for my support. This was a ray of light in an otherwise dark panorama. I agreed to meet with Federov in Washington in the first days of January 1993. When we met, he declared his intention to fight the Russian Central Bank with all vigor, and to insist on a rational macroeconomic policy within the cabinet. He asked me to stay on as an adviser to him, and indeed to open an analytical center in the Ministry of Finance that became known as the Macroeconomics and Finance Unit (MFU), which I co-directed with my friend and colleague Anders Aslund. I also harbored hopes that the incoming Clinton Administration would be different from the outgoing Bush Administration with regard to assistance and to formulating a broad policy of Western engagement.


My hopes were soon dashed. The year 1993 was even more dreadful than 1992. When the incoming Clinton Administration declared “It’s the Economy, Stupid,” they meant it. Foreign policy issues were

remarkably low on the radar screen. There was absolutely no interest in a significant assistance plan for Russia, nor did key officials on Russian policy have any knowledge of economics. At that point the Treasury Secretary was Lloyd Bentsen, and neither he nor his deputy Roger Altman had any interest or knowledge of this issue. Larry Summers, who might have, was just getting started as an Undersecretary of Treasury. Key foreign policy campaign adviser Michael Mandelbaum refused to join the Administration in part because he realized that Clinton indeed would not support a major Western assistance effort to Russia.


I traveled to Moscow about a half-dozen times during 1993 to meet with Federov and to lead the MFU. I tried, and failed, to get the World Bank to focus on the growing social crisis, especially health. It was quite obvious that there was a critical shortage of drugs, medical equipment, and other basic health needs, and that this would spill over into a public health crisis. Indeed, various epidemics (diphtheria, multi-drug resistant TB) broke out, without any Western attention or help. The World Bank did not deliver a loan to relieve the growing crisis. I met with the head of the “health mission,” but discovered that the World Bank planned to take its time to get help to Russia, since there was apparently a need for the Bank to study the situation for some years first. In the meantime, the MFU staff of young Russian and Western economists continued to churn out detailed and highly competent analyses of Russian inflation, monetary and budget policy, and structural issues relating especially to international trade, but to little avail. Federov’s hold on power and influence in the Chernomyrdin Government was tenuous. Federov very rarely saw or spoke with Yeltsin, who was even further removed from economic policy, and I had no chance during the entire year to speak directly with President Yeltsin. All my advice in 1993 went through the Finance Minister.


Russia came to blows in October 1993, when the Duma leaders led an attempted putsch against President Yeltsin. War raged in the streets. Power struggle and political turmoil utterly consumed the scene until the end of the year. In the December 1993 elections, the reformers did badly. ...


Throughout 1992 I warned everybody that I could that the reform process was dangerously blocked, that the IMF was making one mistake after another, and that Western assistance was vital.[41]  I worked with the U.S. Ambassador, Robert Strauss, in trying to mobilize greater conditional assistance, but the efforts were in vain.  ... When Gaidar lost his position in December 1992, I also planned to leave immediately my own role as adviser.  I had learned sadly during 1992 that I could contribute little or nothing to turn the tide 


------------------------------------

[17] G. Yavlinsky, B. Fedoro, S. Shatalin, N. Petrakov, and S. Alekashenko, 500 Days: Transition to Market (St Martins Press, October 1991).

[18] Robert D. Blackwill and Graham Allison, “On With the Grand Bargain,” Washington Post, August 17, 1992.

[19] Graham Allison, Window of Opportunity: The Grand Bargain for Democracy in the Soviet Union (Pantheon, 1991).

[20] “Soviet Reform and the West,” Financial Times, May 28, 1991. 

[21] David Hoffman, “Gorbachev’s Appeals for Aid Show Increased Urgency,” Washington Post, July 14,

1990. 

[22] R. W. Apple Jr. “The Houston Summit; A New Balance of Power,” New York Times, July 12, 1990 (in cache).

[23] Serge Schmemann, “After the Coup; Gorbachev Back as Coup Fails, But Yeltsin Gains New Power, New York Times, August 22, 1991.

[24] Andrei Ostalski, “Yegor Gaidar: The price to pay,” BBC News, December 16, 2009. 

[25] David Lipton and Jeffrey D. Sachs, “Prospects for Russia’s Economic Reforms,” Brookings Papers

on Economic Activity, Issue 2, 1992.

[26] Peter Passell, “Dr. Jeffrey Sachs, Shock Therapist,” New York Times Magazine, June 27, 1993.

[27] Jeffrey Sachs, “Goodwill is not enough,” The Economist, December 1991.

[28] John Lloyd, “Russia’s adviser seeks to bolster aid,” Financial Times, December 14, 1992.

[29] Jeffrey Sachs, “Strengthening Western Support for Russia,” International Economic Insights, Volume IV Number 1, January/February 1993.

[30] Peter Passell, “Dr. Jeffrey Sachs, Shock Therapist,” New York Times Magazine, June 27, 1993. [31] Peter Passell, “Dr. Jeffrey Sachs, Shock Therapist,” New York Times Magazine, June 27, 1993.

[32] Jeffrey Sachs, “Strengthening Western Support for Russia,” International Economic Insights, Volume IV Number 1, January/February 1993.

[33] Jeffrey Sachs, “Russia’s Struggle with Stabilization: Conceptual Issues and Evidence,” presented at Annual World Bank Conference on Development Economics, April 28, 1994.

[34] Jeffrey Sachs, “Russia: IMF Gives Too Little, Too Late,” Financial Times [35] John Odling-Smee and Gonzalo Pastor, “The IMF and the Ruble Area, 1991-1993,” IMF Working

Paper WP/01/101, August 2001.

[36] Jeffrey D. Sachs and Charles Wyplosz, “How the west should help Russian reform” Financial Times, January 11, 1994.

[37] Jeffrey Sachs, “Why Russia Failed to Stabilize,” in Russian Economic Reform at Risk, edited by Anders Aslund (London: Pinter, 1995).

[38] Jeffrey D. Sachs, “The Road to the Market; If Yeltsin Can Stay the Course on Economic Reform, Russia Will Prosper,” Washington Post, March 28, 1993.

[39] Quoted in Liam Halligan, Craig Mellow, Brian Caplen, and Rachel Katz, “Russia Comes in from the Cold,” Euromoney, No. 317, September 1995.

[40] Jeffrey Sachs and David Lipton, “Russia on the Brink,” Financial Times, October 16, 1992.

[41] Jeffrey D. Sachs, “Saving a Prostrate Russia; Is the West Withholding Help Until Total Disaster Has Struck?” Washington Post, November 24, 1991; Jeffrey Sachs, “Buying Time for Democracy,” European Brief, April/May 1994; Jeffrey Sachs, “Strengthening Western Support for Russia,” in International Economic Insights, Vol. 4 No 1, January/February 1993.

[42] Steven Erlanger, “2 Western Economists Quit Russia Posts,” New York Times, January 22, 1994.

[43] Jeffrey D. Sachs, “Privatization in Russia: Some Lessons from Eastern Europe,” American Economic Review, Vol. 82 No 2, May 1992: 43-48.


http://jeffsachs.org/2012/03/what-i-did-in-russia/ Page 19 of 23


[see also: Deutsche Rußlandpolitik und das Baltikum: 1990-98, Dissertation zur Erlangung des Doktorgrades der Philosophischen Fakultät der Christian-Albrechts-Universität zu Kiel, vorgelegt von Gunnar Garbe, Kiel 2002, (im Cache) - Auszüge von J. Gruber]

"Die wirtschaftliche Unterstützung Deutschlands für Rußland hat bereits schwindelerregende Höhen erreicht, kein anderes Land hat so viel Geld und Sachleistungen in den russischen Reformprozeß eingebracht und sich so stark für die Vergabe von Krediten an Rußland eingesetzt. Deutschland erbrachte allein bis 1994 humanitäre Hilfe und Kreditleistungen von 40 Milliarden Mark.


Dabei wurde selten die genaue Verwendung der Gelder überprüft. Oftmals sind zweckgebundene Finanzhilfen und Gelder für Kredite in der von der Presse als „Kleptokratie“ oder „Parasitokratie” bezeichneten russischen Gesellschaft einfach verschwunden. Es gibt Schätzungen, nach denen 65 Prozent aller westlichen Hilfe nun auf privaten Bankkonten im Ausland lagern.4 Allein die vom russischen Rechnungshof in drei Jahren aufgedeckten Gesetzesverstöße umfassen 33 Milliarden Mark.5 Nur wenige Skandale, wie zum Beispiel der um die Unterschlagung von 10 Milliarden Dollar aus Krediten des IWF, die über New Yorker Banken gewaschen worden sein sollen, wurden im Westen bekannt. In diese Affäre sollen angeblich Jelzins Tochter Tatjana Djatschenko und der frühere stellvertretende Ministerpräsident Antolij Tschubajs verwickelt gewesen sein.6 Andere Fälle, wie der Verbleib der ersten Kredittranche der Weltbank für die Umstrukturierung der russischen Kohleindustrie von 500 Millionen Dollar verblieben im Dunkeln."



Version: 24 July 2016

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