Hercules Cleaned Out

On March 11th the Russian Duma approved the resignation of Central Bank chief Viktor Gerashchenko. This act doesn’t only mark the departure of one of the few larger-than-life characters remaining in Russian politics and a man who has played a — if not the — dominant role in the banking sector for the best of part of the past decade. It also means the departure of the last openly Keynesian central banker in Europe. Or, maybe, in the world.

Gerashenko was always the hate figure for Neo-liberals. They made him resign already two times before. Each time a major financial disaster followed his removal. First time when the USSR was still in place and he was seen as an obstacle for economic liberalization.

Once the “traditionalist” head of what was then called the State Bank was removed, hyperinflation followed. Gerashenko was called back and stabilized the ruble but soon was again declared an “enemy of reform”. Russian and international financial capital saw him as an “inflation-loving banker”. In fact no banker loves inflation but Gerashenko simply retained a strange and unpopular idea that people are more important than money. That meant that each time when the choice was between lower inflation rate and social needs her preferred serving social needs. In 1994 he was removed again and replaced by a monetarist team, which again led us to hyperinflation and default in 1998. The same Gerashenko was called back again and stabilized the currency simultaneously creating conditions for a massive payment of wage arrears which accumulated throughout the period of neo-liberal management (their policy was: no money – no inflation).

Gerashenko was also famous for being THE ONLY PERSONALLY HONEST PERSON in the Russian elite. He was never involved in scandals with money. He simply printed it.
All that led to Gerashenko being known among the population as Hercules (which in Russian is  pronounced as Gerakl, very similar to the name of the banker). For many years his job was to clean the Augeus’ stables left by neo-liberal economic measures. This time, however, Hercules himself was cleaned out.

International commentators praised Russian authorities’ decision as giving the green light to reform. The financial markets reacted positively. The population, on the contrary, was almost in panic. Everybody knows: when Gerashenko exits the trouble begins.

The irony of the situation is that a few days before Gerashenko removal the government for the first time appointed a Keynesian economist to the job of a top adviser. This was Mikhail Delyagin. The appointment is strange, to say the least, if we take into account the make-up of the government and the policies it has been pursuing. Over the past two years Delyagin has been one of the government’s most principled critics, so for him to be given such a job, something obviously must be wrong.
Either with the government, or with Delyagin.

Delyagin’s appointment might be interpreted as an acknowledgement by the regime that its entire course in recent times has been leading nowhere. In such a case, however, the logical step would not be a change of advisers, but for the government to resign. Or, we can surmise that this is not a case of the government preparing to review its positions, but of an opposition economist renouncing his principles. In actual fact, it is neither. Delyagin’s motives in taking up the offer are perfectly understandable. In Roman Catholicism there is no salvation outside of the church, and in Russia there is no constructive activity outside of the government. Hence any oppositionist, if offered a post within the regime, calmly accepts it, without giving any thought to the fundamental contradictions and without regarding the move as a renunciation of his or her views. On the contrary, it represents a chance to do some constructive work. How could you refuse? Would you rather wait for a change of regime? The regime is not about to change itself, and will not allow anyone to replace it.

Such is the reasoning of our honest oppositionist who becomes a government bureaucrat. And what is the reasoning of the bureaucrat (not necessarily altogether honest) who invites an oppositionist to join him or her as an adviser?

Here things are somewhat more complex. Some say that the appointing of Delyagin is a sign of the political ambitions of Premier Kasyanov. Others see it as the result of an internal struggle within the government. It may be that in inviting Delyagin on board, the cabinet was indirectly admitting its mistakes. No-one, however, is about to punish the culprits. Economic minister German Gref, Delyagin’s main antagonist, is not about to resign. How will the neo-liberal, pro-Western Gref get along with the Keynesian and “patriot” Delyagin? While Illarionov has argued with Gref, these exchanges have merely amounted to  discussions within the framework of what has fundamentally been a common approach. Both Illarionov and Gref are Westernisers, both are market-oriented, and both support privatisation and free trade. But if Delyagin enters the picture, discussion loses any point; now it is no longer a matter of arguing over tactics, but of choosing a strategy. 

When Yeltsin replaced Gaidar with Chernomyrdin, Moscow wits said that the new prime minister had been given the task of pursuing a new course without changing the old one. This is exactly how the recruiting of Delyagin should be regarded. Meanwhile, why did the government want a change of course? If we are to judge from its own statements, from the official statistical indices and even from such “objective” criteria as prices on the stock market, things could not be better. Unfortunately, statistics do not tell the whole story. There is also another reality, conveyed to us by our own perceptions….

The New York economist Doug Henwood is inclined to assess the state of the US economy not so much on the basis of the statistical reports, as according to the frequency with which the words “crisis” and “recession” are repeated in the press. I have an even simpler way: asking people if they have any money to spare. Not long ago my wife was in the situation of having to do just this. She had to collect money to buy gifts for the women working in a child care centre on the occasion of International Women’s Day on March 8. This is a custom dating from Soviet times. The particular child care centre, moreover, is a fee-paying establishment, and the people who bring their children to it are typical members of the Moscow middle class. They are well dressed, and almost half of them bring their children by car. In past years there were no problems with collecting money. But this time, for some reason, everyone was in a bad way financially. The gifts that were finally given were worth half as much as last year.

Several days later I talked to a senior official of the “alternative” trade unions. Over the ten or twelve years since their inception, many of these “alternative” organisations have acquired their own premises and financial resources. In short, they no longer suffer from a lack of funds. Unexpectedly, however, the official started lamenting how things were going. “It’s strange,” he said. “Usually we’re all right for money. But lately, we’ve had constant problems.”

The next person I talked to was a businessman, the manager of a large textile concern. Not long before, he had told me that his company had completely made up all the losses it had suffered during the financial crisis of 1998. But placing a glass of expensive whisky before me, my old acquaintance began this conversation by saying: “There’s something bad going on. Formally, you’d think everything was OK. But before, there was always spare money in the company. Now there isn’t.”

Something of the kind is evidently being felt in the government apparatus too. Funds have not dried up, but they have come to be chronically in short supply. Despite rising stock market prices and respectable-looking statistics, officials at various levels are complaining of a lack of ready money. Provincial governors are explaining that they are short of funds. The centre is demanding that they raise the pay of budget-sector workers, but itself provides nothing. Meanwhile, the wicked Chubais is constantly reaching for the cut-off switch. This year we will be saved by the fact that the cold weather will end before the money does.

Meanwhile, the press has been saturated with figures from “confidential” surveys, according to which Putin’s popularity is falling rapidly. In sociological terms, we have been living for a long time now with a sort of dual exchange rate. The president’s fixed rating remains around 70 per cent, while the “floating” rate is falling below 20 per cent. Concealing such a gap has now become impossible. But Putin remains the only politician in the country.
The popularity of the government is not making up for the declining confidence in the president. This is simply because the cabinet of ministers does not have its own political face. The old questions, that were thought to have been successfully resolved, are having to be revisited. Perhaps the government is making urgent efforts to acquire a political face? Moreover, one which differentiates it from the image of the president? With big problems in the offing, this is by no means an unnecessary precaution. For the government, however, the desire to take its distance from the Kremlin could have dire consequences. The government could inadvertently repeat the experience of Yevgeny Primakov’s cabinet, to which the very same Delyagin was a consultant. When they engage in politics, prime ministers in Russia risk losing their posts even if the economy is recording successes.
At any rate, the issues cannot be reduced to questions of personnel. By no means everything depends on who holds which job. Even before journalists learnt of Delyagin’s new post, information had been leaked to the press from government circles about a forthcoming review of the tax regulations. If the newspapers are to be believed, the government is about to revoke the income tax rates, “the lowest in Europe”, of which it has boasted on television.

In one form or another, a progressive tax will be reimposed, and at the same time a review will be conducted of the way in which the combined social tax is collected.
The reason for these strange developments should be seen outside the government and even outside Russia.

Capitalism, so free trade during the years of expansion, always becomes protectionist during recessions. Even more so in the United States. Now Russian steel industry is facing American protectionist measures and unfair accusation of dumping. Russians, though crying about American injustice, themselves are starting similar unfair measures against the Ukrainian steel and banning US poultry from being imported to our country. Free trade is replaced by trade wars and people like Delyagin are necessary to work out new ideological justification.

Delyagin has still to put forward proposals to answer the need that is now urgent both in the regions and within the ruling apparatus – the need to do something to ensure that there is once again money in the budget. But even if John Maynard Keynes himself were in Delyagin’s position, that would not change a thing. And he even doesn’t have the charisma and experience of Gerashenko. It is not a question of whether Delyagin has the talent; it is simply that he does not have the power. An effective change of course does not require a change of advisers, but a change of government. The Russian elites have long since come to resemble a loss-making brothel where the beds are shifted round instead of the girls being changed. Though on the other hand, there is no-one else to change them for.

The regime cannot admit that it is running the country on false principles, and as a result, it is becoming more and more enmeshed in its errors. It is angering the very middle class on which it proposed to base itself, but it cannot make new friends. No appointments of new officials will solve its problems. A change of course is something far more dramatic, occurring on a much greater scale.

In earlier times Delyagin fought Gref on the pages of newspapers; now he is to do it in meetings of the government. I am sincerely glad for him. Watching Gref will now be more interesting; before, he could ignore his critics, but now he will somehow have to come up with answers. The plot is thickening; there is intrigue, food for the journalists who throw light on the doings of the government. This is a plus.

On the other hand, we shall most likely be deprived for a time of Delyagin’s press articles laying bare the complete incompetence of the government functionaries. This is a minus.

In any case, there will be no extra money in the treasury. Even if the tax system is adjusted yet again, and if various suggestions from the new adviser are considered. Some time back the government could very well have drafted into the treasury a certain quantity of “excess” money, that was roaming about the country being spent in the most extravagant fashion. It might even be suggested that the government could have spent these additional sums on something useful, such as paying teachers’ wages. Unfortunately, the time of “excess” money has come to an end.

This is not a crisis. It is simply a disgrace.

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