If Kiriyenko had some of the properties of the right man to reform the reforms, the timing was wrong and it would be all he could do to tranquilize a volatile situation. The deus ex machina was a downturn in the overheated economies of southeast and east Asia, hit in 1997 by falling commodity prices and runs on the local currencies. Contagion from the “Asian flu” gave Russia financial sniffles in October–November. Government intervention to shore up the ruble did not restore full confidence, as is demonstrated by the slide in the RTS stock index from its high of 572 points on October 6 to 397 points on December 31.18 Economic uncertainty played into Yeltsin’s agonizing over Chernomyrdin: He was unhappy with the prime minister’s inability to answer pointed questions about finances, and conveyed this to insiders.19 By March, observers were beginning to see an Asianstyle crisis as in the making. In the second week of May, as the world price of crude oil fell to $12 a barrel (it had been $26 in January 1997) and the RTS average careened toward 200 points, the press predicted an imminent devaluation of the ruble. Yeltsin, with Kiriyenko and Dubinin, could have acted then to give in to the inevitable and cushion the effects. But the new cabinet was “terrified” by the prospect and of its political consequences.20 When no one acted, speculation reached a fever pitch. Defense of the ruble cost an estimated $4 billion per month in reserves that summer, bringing hard-currency and gold reserves down to less than $15 billion.
The pain would have been less were it not for a domestic background factor—the fiscal overexposure of the government. Yeltsin stated later that he had shone a flashlight on the problem at a meeting of the Council of Ministers in December 1997. “I said [to Chernomyrdin and the ministers], ‘You always explain everything in terms of the world financial crisis. Sure, the financial hurricane has not spared Russia and it did not originate in Moscow. But there is another aspect to the problem: the deplorable state of the Russian budget. And here you have no one to blame but yourselves.’”21 What Yeltsin did not say was that the red ink in the budget was something for which he
The condition was chronic and dated back to the macroeconomic stabilization program of 1992 to 1995. Soviet-era social guarantees having been liquidated, Yeltsin did not want to antagonize the population further by cutting back on social allowances and services, or to alienate public-sector workers by doing away with their jobs or not paying their wages. As Aleksandr Livshits, his assistant for economics, put it, the president “felt there were limits to ordinary people’s patience” and “was afraid of a social explosion” if living standards deteriorated without relief.22 An attempt in May 1997 to sequester unfunded items in the federal budget was dropped after several months, and then revived without lasting success in 1998. On the revenue side, the weak post-communist state struggled to collect taxes, often accepting nonpayment, promissory notes, or goods in kind in lieu of money. Anxious not to drive firms into layoffs or bankruptcy, it instructed Gazprom and the electric grid to follow its lead and did not force them to honor their debts to the government. The 1996 election campaign engendered a new round of promises for bailouts and special projects and more unwillingness to squeeze out additional revenues. Post-election endeavors to increase tax yields cut little ice, as we saw in Chapter 15. A federal deficit that was reduced from 10 percent of GDP in 1994 to 5 percent in 1995 was back to 8 percent in 1997, only 1 percent less than tax revenues in total—meaning that the government of Russia was spending almost two rubles for every one it took in. As a noninflationary tool to finance the deficit, it relied on treasury bills known as GKOs (the acronym for State Short-Term Obligations), distinguished by their ultrahigh yields and fast maturity. The GKOs were purchased by domestic banks and by nonresident portfolio investors, who in 1996 acquired the right to convert their earnings to hard currency at will. The public borrowing required to float the GKOs produced a major overvaluation of the currency.23
