Soft oil prices, capital managers’ aversion to country risk, fear of a global recession, and the ensuing hike in interest rates made the mountain of state debt untenable. In Ponzi fashion, the Ministry of Finance begat ever more GKOs to cover the shortfall and boosted the annual yield from 18 percent in July 1997 to 65 percent in June 1998 and 170 percent in mid-August. Russia went further out on a limb by issuing several billion dollars in Eurobonds and making cash loans that would have to be repaid in dollars. Interest payments on the debt, which were 17 percent of the budget in January 1998, gobbled up 34 percent by July of 1998.24 The RTS stock index went down in tandem to 135 points in early July, on its way to a low of 38 points on October 2, 1998—seven cents on the dollar for those who bought in at the high one year before.
Yeltsin’s infant government had limited options. Kiriyenko got Boris Nemtsov to meet with coal miners who were on strike over unpaid wages and blockading the Trans-Siberian Railroad; the pledge to redress their grievances added to the government’s obligations. Dubinin and the Central Bank of Russia pressed what monetary buttons they had. With Anatolii Chubais as head negotiator, Russia talked with the IMF about disbursement of a tranche from earlier loans and about new credits. The $5 billion of a $14.8 billion rescue package to make it to Moscow in August disappeared without a trace.25 Boris Fëdorov proposed a cut in tax rates tied to a crackdown on tax debtors, targeting the 1,000 wealthiest Russians. In July, as an olive branch to the communists in parliament, Yeltsin appointed Yurii Maslyukov, a defense industrialist, former Politburo member, and KPRF lawmaker, as minister of industry and trade. But efforts to get the Duma to pass an austerity program fell flat. Refusing to trim spending, reduce subsidies, or introduce a sales tax and other new charges, legislators adjourned for a summer recess.
Yeltsin issued pronouncement after pronouncement about budget discipline, but did not swear off using the power of the purse, albeit a nearly empty purse, to please constituents. In late June he passed a day in Kostroma, on the Volga River two provinces northeast of Moscow, with local managers, students, and peasants:
Yeltsin was in good cheer and a curious mood. At the Karayevo State Breeding Farm—the enterprise is famous for its thoroughbred cows and has forty Heroes of Socialist Labor on its staff—the president tortured the director with questions about forage, calving, and cleaning out manure. At a certain moment, Yeltsin even got angry: “You are not answering me concretely! What is it, do you think the president understands something about politics but nothing about cows?” Then Yeltsin fell head over heels for the Russian flax [grown and processed in the region]. After comely young Kostroma women showed him the newest fashions at a linen mill, the president took out his fountain pen and, right there on a wall poster, labeled “Government Support for Russian Flax,” he wrote, “There is going to be a decree! Yeltsin.”26
As part of the consultations, Yeltsin had his fourth meeting with the oligarchs, ten of them, on June 2. Bankers Mikhail Fridman, Vladimir Gusinskii, Mikhail Khodorkovskii, Vladimir Potanin, and Aleksandr Smolenskii had been at previous gatherings; Vitalii Malkin of the Russian Credit Bank joined them; and four industrialists were added—Chubais, wearing his hat as head of electricity wholesaler YeES (the position he was given when he left the cabinet in March), Vagit Alekperov of Lukoil, Vladimir Bogdanov of the Surgutneftegaz oil and gas company, and Rem Vyakhirev of Gazprom. Kiriyenko sat in, unlike Chernomyrdin, who had not been present at the meetings in 1995, 1996, and 1997. Yeltsin described the state of affairs as ominous and enjoined the moguls to pay their taxes, keep their money in Russia, and keep faith in his government. He asked what they most needed from him; Fridman replied that it was stability. Perhaps, Yeltsin volunteered, I will make an announcement that Kiriyenko will chair the Council of Ministers until 2000.27 No such announcement came forth, which was not lost on Kiriyenko. The prime minister met separately on June 16 and 18 with most of the June 2 participants, and his spokesmen said leading capitalists and state officials would form a joint Council for Mutual Economic Assistance. But Yeltsin did not express an opinion. The attempt to give business-government cooperation a formal cast died on the drawing board.
