The Russia Conundrum

When I stood on the barricades in those dramatic August days, I was 28 and a successful businessman. Since earlier that year, I had been an adviser to the prime minister of the Soviet Union, Ivan Silayev. I had a personal stake in the economy and in the reformist policies of Gorbachev and his team. I went to defend the Russian White House because Silayev was there and because it was my duty to stand up for the liberal policies we had been promoting, policies that the coup plotters were seeking to destroy. Perhaps I didn’t fully realise the significance of what was happening, but I went with passions running high. The August events confirmed my commitment to democracy and the market economy.

August 1991 changed everything for Russia, and for me. The heroism of the Russian people and the collapse of the coup secured the way for a free-market democracy. In a few turbulent months between August and December 1991, the USSR was dissolved and Boris Yeltsin, president of a newly independent Russia, inherited power. Mikhail Gorbachev had started the move towards a market economy, but his measures were limited and tentative. He wanted to strengthen the communist system by encouraging a minimal amount of economic enterprise; the last thing he wanted was to bring communism crashing down. But that was exactly what happened.

People stand on a barricade in front of the Russian White House in Moscow, 21 August 1991

The unexpected turn of history thrust Boris Yeltsin into a role that I don’t think he had fully anticipated. In opposition, he had espoused radical economic reforms, including an end to the old centralised Soviet command system, but now he had to implement them. In the exhilaration of his victory over the hardline communists, Yeltsin committed himself to the programme of ‘economic shock therapy’ propounded to him by Western economists. These were the so-called ‘Chicago Boys’, young technocrats led by Harvard University’s Jeffrey Sachs, who came flooding into Russia at the behest of the US leadership, aiming to transform Russia from a stagnant communist central command system into a rejuvenated market economy where private enterprise would breathe new vigour into the state. Their ideas were enthusiastically backed by economic liberals in Yeltsin’s Reform Cabinet, most notably Prime Minister Yegor Gaidar and the privatisation guru Anatoly Chubais. The Chicago Boys convinced Yeltsin that he had no time to lose, that delay would increase the scale of the task, and that the transformation had to be completed before the communists could regroup and turn back the clock. Only by creating a new business elite and a middle class with a stake in the system, they argued, could they be sure the communists would never regain power; leaving the economy full of nationalised industries would make it easy for communism to return. The Chicago Boys had previously had some success in post-Jaruzelski Poland, and even more so in Augusto Pinochet’s Chile – but these were countries with a living memory of capitalist traditions, while Russia, a country that had no such history, was totally unprepared for the radical changes they were proposing.

The reformers accepted that the speed of the change would cause short-term pain, but believed the long-term gain would make it worthwhile. Yeltsin’s first step in late 1992, masterminded by the Chicago Boys and implemented by Gaidar and Chubais, was a voucher scheme that aimed to transfer ownership of Russia’s state industries to the Russian people. Every citizen was sent a voucher worth 10,000 roubles (approximately $60), each one representing a very small stake in the country’s economy. It was an attempt to create a shareholding middle class, but it was destined to fail.

As an adviser to Yeltsin’s Reform Cabinet, I followed the process from the inside. I was never particularly close to Yeltsin himself, but in 1992 I was appointed chairman of the Investment Promotion Fund, with the rank of deputy minister of fuel and energy. I saw at first-hand the mistakes that were being made and I raised the alarm about the pitfalls that awaited us. Many of the problems were down to the Chicago Boys. Much has been written about their role, but I saw with my own eyes how systematically they took apart the country’s national economy and dismantled structures that had taken decades to build up, breaking things that should never have been broken. I don’t know exactly what authority these American consultants had been given – or who gave it to them – but our Russian politicians deferred to them and, when disputes arose, it was the Americans who got their way.