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`The Reforms Have Lost'

International Business


Russians have long been unhappy with the rampant inflation and increased crime that have accompanied the dismantling of the Soviet Union. But few outsiders understood just how disillusioned they were until the results started coming in from the Dec. 12 parliamentary elections. Voters seem to have approved Boris N. Yeltsin's new constitution, but they also blasted his reform program by giving Vladimir V. Zhirinovsky's scary, ultranationalist Liberal Democratic party more votes than any of the other 12 parties running. "The reforms have lost," says economic adviser Anders Aslund, summing up the gloom in Yeltsin's camp. "This is a big loss."

Indeed, Zhirinovsky's triumph, combined with strong showings by the Communists and the arch-conservative Agrarian Reform Party, represent a popular repudiation of the shock therapy that Yeltsin and his economic henchman, Deputy Premier Yegor T. Gaidar, have been pushing for two years. As they demonstrated with their votes, Russians blame the reform program for the 20%-per-month inflation that has eaten away their savings and made many of their salaries a joke. They also associate Yeltsin's liberalization with rampant lawlessness and profiteering.

Even though Zhirinovsky's potential legislative clout may be less than feared, there's no doubt that the new legislature spells trouble for reformers. Instead of producing a stream of progressive legislation, the body could end up being just as obstructionist as the one it replaced. Zhirinovsky is likely to push for tax laws that soak foreign companies, deny them much say in investments, and severely limit their access to natural resources. He's also likely to team up with the Communists to push for inflationary subsidies for defense industries. Moreover, he'll have an impressive new platform from which to embarrass Russia's reformers.

The rightists' victory was also a shock to leaders in the West and in neighboring countries, such as Poland and the former Soviet republics. During his campaign, Zhirinovsky called for an aggressive expansionist policy that would see Russia push out to the old Soviet borders. "If this develops into state policy, it could lead to a catastrophe," says Ukrainian President Leonid Kravchuk.

RACIST VIEWS. But it is still unknown whether Zhirinovsky can turn his impressive showing into a real power base. While his party appears likely to rack up about 25% of the vote, it may get fewer seats in the key Duma, or lower house, because of the complicated electoral system. Although the dynamics of Parliament will not be fully clear until next month, it looks as if Zhirinovsky's power will be mainly to criticize and obstruct reform legislation (table). Moreover, the new constitution gives Yeltsin vastly increased powers, making it easier for him to appoint ministers and other top officials over Parliament's objections and to dissolve the legislature if he can't work with it. "The alarm over Zhirinovsky is premature," says Alexander Rahr, an analyst at Radio Liberty. "His strength has been overestimated."

The Clinton Administration seems to agree. Conceding that the strong rightist vote was undesirable, U.S. officials are still hopeful that the reformers can put together a coalition. There is also talk about speeding up aid to Russia and providing more support for privatization and other showcase projects.

Still, despite such hopeful talk, Yeltsin's options for managing the economy are going to narrow. While movement toward a market economy is likely to proceed, it will probably go at a slower pace. In the future, Yeltsin and whomever he puts on his team will have to be much more careful about protecting living standards, jobs, and national sensitivities. That could mean Russia will be further delayed in meeting the credit and budget targets for an additional $1.5 billion in loans from the International Monetary Fund.

Moreover, Zhirinovsky will now be able to use Parliament as a choice forum for his racist, reactionary views. Long dismissed as a clown, the 47-year-old lawyer managed a skillful, well-financed campaign. His slick television ads played heavily on economic hardship, racial prejudice, and Russian nationalism. He promised to halt the conversion of Russia's vast military complex--an idea popular with thousands of workers facing layoffs. He railed against "foreigners" snatching up the riches of downtrodden Russia and hinted at purges of Jews.

Zhirinovsky's success has certainly scrambled Russia's political scene. Yeltsin's government may be in for a reshuffle after the new Parliament meets on Jan. 11. That could mean an uncertain future for Gaidar, a top Cabinet member and architect of Yeltsin's shock-therapy reforms. Gaidar's party, Russia's Choice, put in a surprisingly poor electoral showing, coming in second, with only about 14% of the vote.

Many observers think the new government will still be headed by Prime Minister Viktor Chernomyrdin, who prefers a more gradual approach toward reform. The former chief of Gazprom, the state gas monopoly, favors big roles for the massive state industries that employ millions of workers. One possibility could be their reorganization into Russian versions of Japanese keiretsu or South Korean chaebol. In early December, Yeltsin signed a decree calling for the organization of "financial-industrial groups" that would link big factories to new banks and other financial groups.

HOW FAST? Foreign executives in Moscow generally find Zhirinovsky unsavory and have been jolted by the election results. The worst-case fear: a flood of xenophobic legislation from the Liberal Democrats or antimarket proposals from the Communists. But a more realistic worry is that a split Parliament won't pass the legislation needed to improve the business climate. That would hamstring efforts to address such critical matters as taxation, tariffs, and access to oil and gas. The business community is relying on Yeltsin's strong constitutional powers to beat back legislative excesses. "It's not a good thing, what has happened," says Pratap Nambiar, director of marketing and business-advisory services at Ernst & Young's Moscow office. "But the presidential system guarantees that Yeltsin can move forward."

How fast he will go is another question. The politically astute Yeltsin did little to back his reformers in the campaign. In recent weeks, Yeltsin has taken a more centrist and conservative stance--slapping limits on foreign banks and high tariffs on imports.

And what if the presidency falls into the wrong hands? The scariest thing about the election is that it has given Zhirinovsky a great platform to run for President whenever elections are held. While Yeltsin is scheduled to stay in power until 1996, Zhirinovsky wants Yeltsin to hold an election next June 12, as he promised and then backed away from. So battles over the election's timing are inevitable. If Zhirinovsky somehow gets in, he will have a powerful weapon in the constitution.

The lesson, then, is a grim warning for Yeltsin and some of his advisers, including Harvard Professor Jeffrey Sachs, who pushed the shock-therapy experiment on the Russian people. Hiking prices while wiping out life savings in such a complicated country as Russia plays into the hands of demagogues like Zhirinovsky. Russia and the West have to find a path to reform that doesn't put people's backs to the wall.Peter Galuszka in Moscow, with Owen Ullmann in Washington

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