YELTSIN ROLLS THE DICE
Even by Russian standards, the sense of foreboding is extreme. In apartment parking lots, retirees living on $5 a month pick through garbage bins for scraps of food. Fear of crime has increased so much in Moscow and St. Petersburg that sales of a Russian version of Mace, the anti-assailant aerosol, are booming. When the value of the ruble fell 50% on Dec. 3, Muscovites thronged exchange windows and hustled black marketeers in a mad scramble for dollars, increasingly the currency of choice. The next day, Soviet financial officials announced they were suspending principal payments on their foreign debt.
Against such a grim backdrop, Russian President Boris N. Yeltsin is finally preparing to take the radical steps toward a market economy that Mikhail Gorbachev dithered over for six years. Russia is adamant about going it alone, especially after Ukraine, the next-most-powerful former Soviet republic, voted to become independent on Dec. 1. That has dashed fast-fading Gorbachev's remaining hopes of holding together the Soviet Union. Faced also with an acute budget crisis, Gorbachev may resign soon, an anticlimactic end to his astonishing career.
As leader of Russia, Yeltsin is pushing ahead with 42 emergency decrees that will reshape the economy in ways the West has long urged. In coming weeks, most wholesale and retail prices will be freed for the first time in nearly seven decades. Yeltsin vows that mushrooming government spending will be slashed and printing presses churning out nearly worthless currency will be shut down. The ruble will be allowed to float against the dollar, finally allowing its partial convertibility.
It is, essentially, the same shock therapy that Poland undertook in January, 1990. But this time it will be tried on a vaster scale, and even the Western economists who helped draw up the blueprints are biting their nails. Notes Anders Aslund, a prominent Swedish economist advising Yeltsin: "This is a complete powder keg."
'READY TO STRIKE.' For Yeltsin, it's an extraordinary gamble. His tough program will dramatically boost inflation just as major food shortages are expected in large urban centers such as Moscow in the winter months ahead. Prices of various goods will leap anywhere from 3 to 15 times. Fears of riots are running high, since more than half of Russia's 150 million citizens already live on poverty-level incomes of 350 rubles a month or less and are used to cheap prices buttressed by vast government subsidies. "Almost the entire country is ready to strike," says Nikolai Akritov, an official of the Russian Federation of Independent Trade Unions. If disorder becomes rampant, young army officers or hard-line nationalists might stage a coup. While a dictatorship wouldn't solve Russia's economic problems either, exhausted citizens might support colonels promising them food.
Can Yeltsin's plan work? His backers say that goods will soon start filling the stores. Prices may soar, and inflation may hit triple digits. But within a few months, enough of such staples as cabbage and kolbasa, a Russian sausage, would be hitting the market to spur competition and price equilibrium. Even a modest flow of food and other goods might be enough to persuade Russians to stick with the tough reform program.
Yeltsin's team of young economists in their late 30s and early 40s are betting that, despite some fundamental differences, Russia will take to shock therapy the same way Poland did last year. During the first month of the Polish experience, prices rose as much as 400%. But within six months, inflation was down to levels of 4% per year. The Polish zloty actually gained value after a bumpy plummet that lasted several months.
Already, Yeltsin's decrees are sending tremors through the Russian economy. Down on the farm, hoarding has been rampant in anticipation of Yeltsin's freeing prices. But now that the measure is imminent, a flood of farm products, from potatoes to grain and carrots, could begin moving toward stores and markets. In the fertile Saratov region of central Russia, for example, collective and private farmers have been saving up millions of tons of grain and vegetables such as onions and garlic, says Anatoli Musikhin, president of a regional farmers' association. An estimated 130 million tons of grain have been stowed away on farms throughout the country -- almost three-fourths of the harvest. But he predicts the goods will move soon. "Farmers will sell," Musikhin predicts. "The only reason they keep the products is because prices are too low and it's unprofitable."
In the big cities, state shopkeepers are eager to see prices freed up. At a sparsely stocked neighborhood grocery near Moscow State University, for example, store director Nadezhda I. Frolova believes that free prices will allow her to boost the store's supplies of beef, chicken, and eggs by 10 times. Up until now, the store has received supplies only through a state-monopoly distributor that supplies 60 stores in Moscow. But now, says Frolova, several new distributors have been in contact about supplying her shop. After Yeltsin frees prices, she says, "I'll go directly to the supplier. We already have many offers from middlemen. There are suppliers promising us an avalanche of food."
Soviet managers also are uneasy about the transition. Even efficient Russian factories will be badly squeezed by sprialing prices. In Russia's frozen Western Siberian petroleum fields, Vladimir Yudin, director of a thriving oil refinery, the Tobolsk Oil Processing Kombinat, figures that if he raises his prices for gas products by 10 times, he should be able to keep his operation solvent. "It will be difficult to brake inflation," he worries.
Perhaps the Yeltsin measure with the biggest long-term impact will be his plan to abolish fixed exchange rates, which have resulted in money values far out of whack with reality. On Jan. 1, the currency's market rate will be set by auctions held by banks. The strategy: The ruble will find its true market valueand stabilize -- even if it plunges to anastounding 300 rubles to the dollar, more than three times the current black-market rate.
In theory, that's a boon for foreign investors. Under the current system, they have to jump through bureaucratic hoops and invent elaborate schemes to repatriate their ruble profits in hard currency. After Jan. 1, that will change. They'll just go to a Russian bank, exchange the rubles, and send the dollars home. For that matter, individual Russians will be allowed to have dollar accounts in commercial banks for the first time. "It's the first serious program for radical reform," says Arthur L. George, a lawyer with the Moscow office of Chicago-based Baker & McKenzie, whose client list includes Walt Disney Co. and Shell Oil Co.
RAW DEALS. What's more, Yeltsin is lifting most licensing requirements on foreign trade and canceling current taxes and tariffs on imports. That, ultimately, could draw more Western consumer goods into the Russian market. It also may prompt a quick increase in Russian exports of raw materials such as metals and timber. These items should become bargains on the world market because the Soviet bureaucracy has inflated their export prices.
Meanwhile, Yeltsin will ban the sale of goods and services for dollars on Russian territory, starting as early as Jan. 1. That will toss cold water on many of the service joint ventures that flocked in during the perestroika years to take advantage of dollar-paying tourists and the expatriate community. Managers at Stockmann's, a Finnish department store with two outlets selling goods for hard currency in Moscow, are worried. "All our imports must be paid in hard currency. We can't operate if we can't convert," says Ilkka T. Arvola, manager of one of the Stockmann's.
Big changes are also afoot at the posh Savoy Hotel in downtown Moscow that features a wood-paneled bar and a casino. Converted from a dowdy Intourist hotel two years ago, the Savoy charges its guests premium rates in dollars. But now, INFA-HOTEL, the Finnish-Soviet company that runs the Savoy, says it will be forced to post dollar-denominated prices and have customers come up with the rubles to match. The ruble exchange rate for a room may vary widely day to day, giving accountants migraines.
For foreign business and Yeltsin alike, the shortage of hard currency is a huge problem. Yeltsin needs dollars to keep servicing the Soviet Union's $84 billion debt load. To get them, he plans to tax Russian businesses half of their dollar earnings. Foreign businesses worry that there won't be enough dollars to service the hard-currency auctions where they can exchange their rubles. "You can't talk convertibility unless you havesomething to convert to," says James H. Giffen, president of Mercator Corp., a New York trading firm that is trying to help five blue-chip American companies set up joint ventures in the former Soviet Union.
Yeltsin also could get sandbagged by newly independent republics, such as Ukraine, that are likely to introduce their own currencies. If that happens, a tidal wave of unwanted rubles will wash through Russia, further depressing the currency's value. Such a scenario was foreshadowed on Dec. 3, when the state foreign-trade bank increased the exchange rate of rubles for tourists from 47 to 90, touching off a frenzy of dollar buying. In the shadow of Yeltsin's "White House" headquarters, one youthful money changer offered to trade dollars at a rate two rubles better than the new tourist one. "There'll always be a black market," he said. "A lot of ru-bles will be coming from Ukraine or Byelorussia."
Such a steady flow could rip apart Yeltsin's blueprint. If the ruble free-fall can't be checked, farmers and manufacturers will continue to hold on to their goods and wait for higher prices, once again emptying stores and frustrating the citizenry.
To prevent that from happening, Yeltsin will have to hang tough. He must cut the 150 billion-ruble Russian budget deficit and keep a tight rein on the money supply. One scheme would slash the state budget by up to 25% and boost revenues via a punitive 28% value-added tax. The Russian government already has taken over control of central finances, including the money-printing presses, from Gorbachev. But Yeltsin still will be under enormous pressure to cover state wages and maintain subsidies. And if the ruble overhang becomes uncontrollable, Yeltsin could well be forced to create a new currency. With Russian citizens walking around with their pockets stuffed with rubles, rumors abound that a new 1,000 ruble note is about to be issued.
Even flawlessly executed economic policy, however, won't do much to solve the more basic problems. Many Russians still have no understanding of a market economy. Take farming. Poland had a relatively easy time making its transition to a market economy because its farms were almost entirely privately owned before economic reforms. Russia boasts about 30,000 private homesteads, while more than two-thirds of all agricultural output comes from state and collective farms. And most collective farm presidents in Russia staunchly oppose any changes because reforms such as allowing private ownership of land would erode their political power bases.
INEXPERIENCED HANDS. State agencies still control inefficient distribution and transportation outlets. Until Russia pushes through a broad privatization program, chronic problems of food distribution will likely remain. Some state store managers have little idea of how to set competitive prices. Says Roland Gotz-Conenberg of the Federal Institute of Soviet & East European Studies in Cologne: "The key danger to these decrees is that Russia doesn't have enough professional managers, bankers, accountants, and administrators who can put them into practice."
And Yeltsin may again have to square off against the Red Army. Morale has plummeted since last August's attempted coup, which failed when army officers refused to obey plotters' orders. Now, young officers themselves are threatening to seize control to restore order. "If the situation does not improve soon, officers will unite and take power into their own hands," warns Lieutenant Colonel Stanislav Terekhov. He is a member of the organizing committee of the newly formed Union of Communists, which claims 70,000 supporters and promises to return the country to Sovi-et power.
So Yeltsin's gamble has little time, and the odds are against him. Given Russia's history -- and Yeltsin's political career -- almost anything can happen. "The expectations should be kept very low," counsels Swedish economist Aslund. "Anything that is less than complete chaos must be considered a success." But even that low hurdle may be too hard to overcome. Yeltsin may discover his plunge into a free market is coming too late.Rose Brady and Deborah Stead in Moscow, with Igor Reichlin in Bonn, Patricia Kranz in Washington, and Peter Galuszka in New York