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. Last Updated: 07/27/2016

Potemkinism at Davos

The Russian government, taking time off from the largest headache in world governance at the World Economic Forum in Davos, displayed itself in radical dress. Viktor Chernomyrdin, on show in his first international appearance as Russia's prime minister, talked of not just continuing radical reform but of both deepening and broadening it. This cheered the participants.


There had been, of course, very good grounds for thinking that the government's economic reform would change: They were articulated by the new prime minister when he took office in December and spoke from the old script which dictated that production had to be safeguarded, or in this case stopped from falling. This was then compounded by the Mistake about Price Control, when Chernomyrdin's vaguely expressed desire to do something about the price rises was ambushed by the trap-like minds of the price committee bureaucrats who rushed out a decree on profit control that Boris Fyodorov, the new deputy premier for the economy and finances, had much pleasure in denouncing, thus showing who was boss in the counting house.


Since then, however, orthodoxy has reimposed itself and the reforms are once more on track for radical (deeper, broader) reform. There can be little doubt that the economic team in the cabinet means what it collectively says; but its members know they are faced, like a prince in a fable, with seven great tests (more like seven times seven, but seven will now do) before radical reform can mesh with Russian reality.


First, it is likely that hyperinflation is already here -- or will be reached this month. Hyperinflation, or 50 percent plus a month, is so defined because round about that figure money becomes "hot", passing rapidly from pockets that can daily feel its depreciation: It loses its intrinsic quality, that of being a store of value. This does not dictate revolt but it does dictate harsh -- in this context, terribly harsh -- measures if revolt is to be avoided. Second, the political process has yet another event before which it is transfixed. The April referendum, plus possible elections, dictate wars of position on all sides; on the government's, it is likely to mean an inhibition on those acts which demonstrably make a bad situation worse.


Third, radical reform of the kind the government announced last month depends as critically as ever on the cooperation of the Russian Central Bank. While it continues to provide a regime of soft budget constraints through strongly negative interest rates and easily available credits, there can be no restructuring setting quarterly credit ceilings; but the bank remains unanswerable to the president and government and no agreement yet appears to have been reached.


This may be because, fourth, everyone is reluctant to court the consequences of hard budget constraints, which would be very high unemployment through the forced shedding of labor or closure through bankruptcy. As far as one can tell, the Central Bank and the government have, in the past year, been equally chary of following through on the logic of tight credit, and thus have kept it loose. No wonder: More than any other industrial society, the Soviet one created a productive structure in which the company, not the local or state authorities and certainly not the market, was the provider of a range of services as well as of work. To be "freed" from that is a little like being "freed" from feudal serfdom: a passage from bondage to atomization.


Privatization, in the fifth place, could or is anyway designed to assist the replacement of feudal industrialization with functioning free standing companies. It remains the centerpiece of the government's strategy and there are real signs that it may pick up momentum over the next month; but the citizens remain skeptical, the voucher prices on the secondary market low and the giants of Soviet industry are as yet untouched.


Sixth, the International Monetary Fund, the cutting edge of the West's intervention in the post-Soviet societies, is stymied and puzzled. Arkady Volsky of the Union of Industrialists and Entrepreneurs revealed last month in Nezavisimaya Gazeta that he had had talks with an IMF executive director, Jacques de Groot, about alternative paths to reform; though these were misrepresented as being reflective of an IMF position, they were signs of internal IMF dissent and even desperation. The success of IMF strategies elsewhere -- as in parts of Latin America -- has not yet been duplicated here. and the West's "assistance" remains, like the $24 billion package presented last summer, more an illusion than solid matter.


Finally, the major foreign states are uncertain, fearful or (in the case of Japan and others in the East) contemptuous. Chernomyrdin's pitch in Davos was in part aimed at attracting Western investors, particularly to the energy sector. But the trend, appears to be toward awarding major deals to Russian companies, which is probably inevitable. The major states remain, for one reason or another, unable to mount anything more than band-aid operations, and it would be surprising (though not impossible) if President Bill Clinton's advertised rethink of priorities toward the former Soviet states had anything more tangible to it than President Bush's unmasterly inactivity -- the "Have a nice day! " strategy.


We are witness to an attempt to create a civic society and a civil economy on barren ground for both. Those who "wield" the ambiguous commodity of post-Soviet power must, ineluctably, grope about in a murk that statistics cannot illuminate and precedents cannot guide. Davos was Potemkinism for the nervous foreigners. Back east, behind the facades, the societies undergo barely comprehensible convulsions in pursuit of a little comprehended new order.


John Lloyd is Moscow bureau chief for The Financial Times.