Russia: The death agony of a workers state 1997

Russia: The death agony of a workers state
July 1997
In March this year Russian President, Boris Yeltsin, formed a new government after a major shake-up of his cabinet. Keith Harvey reports.

The existing Prime Minster, Victor Chernomyrdin, was pushed to the background while two new first deputy Prime Ministers were appointed – Anatoly Chubais and Boris Nemtsov.

This was no mere cosmetic change of face at the Kremlin. It represented a watershed in the post-1991 history of Russia. For the last five years Yeltsin has tried to balance the competing factions within the post-Stalinist ruling elite while destroying all vestiges of the bureaucratic planned economy.

But putting a capitalist restorationist in the Kremlin has proved easier than carrying out capitalist restoration in Russia.

Yeltsin began with a state machine determined to restore capitalism. His main aim has been to create a viable and functional capitalist class to underpin the efforts of that state machine. However, the state machine itself has – for much of the last five years – been the site of battles waged by the factions of a disintegrating bureaucracy and a rising entrepreneurial elite. On occasions the conflict within Yeltsin’s executive threatened to engulf him.

Despite crushing the Communist Party in 1992, despite taming Parliament in 1993 and mass privatisation during 1993-94 – and despite re-election in 1996 – Yeltsin’s appointed governments have failed to push his social counter-revolution to the point of restoring capitalism. The many far-reaching changes in ownership rights have failed to complete the decisive shift in the social relations of production and exchange.

The appointment of the latest Cabinet now signals a determination to do just this. As one major western adviser noted recently, “What we are seeing now is a really massive reform offensive”1

Chubais and Nemtsov have purged “conservative” opponents and set out a programme that aims to overcome all the remaining structural barriers to capitalist domination of the Russian economy. Their aim is to end the long transition period, which opened in 1992, during which the country has endured the protracted death agony of a workers’ state.

Key elements of the new programme include:

• the break up of the monopolies,
• the “war on corruption”,
• restoring stable government finance,
• the imposition of laws to allow new owners to push through key changes in the enterprises.

Will they succeed? Yeltsin and his governments have survived because the scale of the suffering of the Russian working class has, so far, not been matched by the necessary level of conscious and co-ordinated political resistance. If the acute and persistent crisis of leadership within the Russian workers’ movement is not overcome very shortly and the workers remain passive in the face of the coming attacks on welfare and employment, then Chubais and Nemtsov will probably succeed.

The Rubicon is in sight. But the Russian workers still have it in their power to prevent Yeltsin and his army of restorationists from crossing it.

Two scenarios for capitalist restoration

In 1936 Leon Trotsky outlined two possible roads back to capitalism for the USSR. First:

“If . . . a bourgeois party were to overthrow the ruling Soviet caste, it would find no small number of ready servants among the present bureaucrats, administrators, technicians, directors, party secretaries and privileged upper circles in general. A purgation of the state apparatus would, of course, be necessary in this case too. But a bourgeois restoration would probably have to clean out fewer people than a revolutionary party. The chief task of the new power would be to restore private property in the means of production. First of all, it would be necessary to create the conditions for the development of strong farmers from the weak collective farms, and for converting the strong collectives into producers’ co-operatives of the bourgeois type – into agricultural stock companies. In the sphere of industry, denationalisation would begin with the light industries and those producing food. The planning principle would be converted for the transitional period into a series of compromises between the state power and individual “corporations” – potential proprietors, that is, among the Soviet captains of industry, the émigré former proprietors and foreign capitalists. Notwithstanding that the Soviet bureaucracy has gone far toward preparing a bourgeois restoration, the new regime would have to introduce in the matter of forms of property and methods of industry not a reform, but a social revolution.”

Trotsky then outlines a second scenario which assumes that neither a revolutionary overthrow, nor a counter-revolutionary overthrow from outside the bureaucracy occurs:

“The bureaucracy continues at the head of the state. Even under these conditions social relations will not jell . . . it must inevitably in future stages seek supports for itself in property relations. One may argue that the big bureaucrat cares little what are the prevailing forms of property provided only that they guarantee him the necessary income. This argument ignores not only the instability of the bureaucrat’s own rights, but also the question of his descendants. The new cult of the family has not fallen out of the clouds. Privileges only have half their worth, if they cannot be transmitted to one’s children. But the right of testament is inseparable from the right of property. It is not enough to be director of a trust; it is necessary to be a stockholder. The victory of the bureaucracy in this decisive sphere would mean its conversion into a new possessing class.”2

Trotsky, understandably, foresaw that either the ruling bureaucracy would convert itself into a ruling class, or this bureaucracy would be overthrown from within by an open bourgeois party.

During the actual restoration process, more than fifty years after Trotsky wrote, these alternatives occurred in a modified but combined form.

On the one hand, the counter-revolutionary party emerged as a faction within the Stalinist bureaucracy and, under Yeltsin’s leadership, broke with the leading nomenklatura. They destroyed and purged the political core of the bureaucracy – the CPSU – together with the personnel of the key economic ministries of the state planning system. On the other hand, the industrial directors and upper managers of the old state enterprises and many officials within local, regional and city government are undergoing the “conversion into a new possessing class”.

The bureaucracy did not “continue at the head of state” as Trotsky foresaw. Indeed, Yeltsin called upon representatives of imperialism from outside the old ruling caste in order to staff his executive. Nevertheless, the thinness of this layer meant that they had to rely upon the conversion of many bureaucrats into free-market evangelists who would subsequently work under their direction.

If we combine the two variants we can see that the purgation of the state apparatus, the conversion of the planning principle for a transitional period, the denationalisation of light industry and above all, the social counter-revolution in property forms, have – as Trotsky predicted – been central to the experience of Russia over the last six years.

Naturally, elements of Trotsky’s prediction have not been borne out. The collective farms have not been the first to suffer privatisation. Land in general, for industrial or agricultural use, has not been turned into private property in Russia to date.3

In addition, and most important, we have to deepen Trotsky’s insight that “the chief task of the new power would be to restore private property in the means of production.” When Trotsky envisaged this within his second hypothesis (the victory of a counter-revolutionary party from outside the bureaucracy) he clearly believed that such a victory would effect the transformation of the economy quickly.

As it has turned out the social counter-revolutions “in the matter of forms of property and methods of industry” have not been synonymous. The former was achieved rapidly in Russia – within two years (1993-94) the mass of industry was denationalised and handed over to new private owners. But as we will show the transformation in “the methods of industry” (and of trade and finance) did not follow automatically.

On the contrary, the specific feature of the Russian transition has been the enormous contradiction between the form of property ownership and the content of the social relations of production and exchange that lay behind the legal form. This was due to the combined, and hence compromised, character of the transition process. The process has relied on an uneasy compromise between the forces of bourgeois counter-revolution representing interests outside the ruling Stalinist strata4 and those within it who are seeking to convert themselves into an important section of the new capitalist class.

Constructing the bourgeois state apparatus in Yeltsin’s Russia, 1991-97

In the process of capitalist restoration the state is the dynamo of transition. The state has to destroy the old apparatus of economic administration and create the legal and political framework within which capitalist social relations of production emerge. This framework has to define relations between the working class and the new exploiting class and impose the costs of restoration upon the workers. This is the first and most fundamental task of the state machine during the restoration of capitalism.

At the same time the new administration has to establish the ground rules for inter-capitalist competition. The state must act as a general executive of the capitalist class, raising itself above and over the competing capitalists. It has to enforce the general logic of capitalist accumulation against individual capitalists and against blocs of capital owned by the state itself. This second, specifically capitalist, function of the state apparatus generally takes longer to become fully operative.

Neither of these aspects of the state machine emerged fully formed. Like the changes in the economy, the political change is a process: one that started with Yeltsin’s victory over the Stalinist nomenklatura in August 1991. This gave Yeltsin possession of the executive of the state machine and with it the loyalty of the bulk of the high command of the armed forces.

With Yeltsin’s victory in 1991 and the subsequent dissolution of the Soviet Union, Russia was transformed into a moribund workers’ state5. This can be defined as a degenerate workers’ state in which a bourgeois restorationist government has come to power committed to the restoration of capitalism. The immediate objective is the destruction of those institutions of command planning which had been left untouched by “market socialist” reforms; above all, the break up of the ruling Communist Party apparatus within the state machine and inside the factories. By destroying the “directing brain” of the planned economy the first steps are taken in the “de-politicisation” of the economy. Other early measures included the adoption of a series of laws that recognised the right to own means of production and the unrestricted right to enjoy profits by exploiting labour.

Of the two aspects of the emerging post-Stalinist state machine, the task of imposing the domination of the new embryonic ruling class over the workers is the most immediate. Yeltsin set about this task immediately with the implementation of the economic shock therapy in January 1992.

The big bang; all shock, no therapy

Under Gorbachev’s rule (1985-91) the CPSU had loosened the reins of command planning and direct physical resource allocation. Adopting and adapting various reforms implemented in most East European countries after 1968, perestroika edged Russia towards a system of indirect planning in which the enterprises operated with considerable autonomy from ministerial directives. This was achieved through the national supervision of a set of closely connected monetary and fiscal mechanisms – direct subsidies, controlled prices, investment credits and negative interest rates.

Nevertheless, indirect planning was still central planning, in which the planning agencies set definite targets for the pace and content of economic development. In early 1992 Yeltsin’s new government quickly ended even this degree of direction, destroying the centralised planning and supply structure.

The effect of this, in the absence of a new capitalist class and an alternative motor of accumulation, was to ensure a fall in material production and investment:

“The European Bank for Reconstruction and Development (EBRD) estimated that real GDP fell by 19% in 1992, 12% in 1993 and 15% in 1994 . . . an awesome decline, which no architect of the economic policies, or adviser or institution pressing for them, had forecast.”6

The new government saw to it that the burden of this historically unprecedented collapse fell on to the shoulders of the Russian working class. It used inflation to impoverish both wage earners and pensioners, by obliterating the real value of their incomes and benefits. With inflation running at 2,300% in 1992 and more than 800% in 1993, wages fell by two-thirds during 1992-94, by which time Yeltsin conceded that half of all Russians were living below the official poverty line.7

This fall was engineered by the government so that the value of wages would more accurately reflect the real nature of value added to products by Russian labour when compared to prevailing international levels of labour productivity. This was a precondition for attracting foreign investment and making Russian goods competitive in international markets.

Unemployment increased dramatically, despite the absurdly low figures for official unemployment in Russia – around 2% in 1994. The low official level is explained by a combination of factors, the most important being the low level of benefits, lack of entitlement to them, the difficulty of registering, the stigma and the low possibility of finding another job.8 Real open unemployment was more in the region of five times the registered rate. 9

The big bang also included the liberalisation of most prices and trade. This important restorationist measure had the effect of converting money from a passive instrument of accounting, as it was under the degenerated workers’ state, into an active agent capable of signalling relative productivity performances of the different uses of labour.

These immediate “stabilisation” policies were, for the new restorationist government, critical preconditions for the transition to capitalism; without them it would have been impossible to measure “progress” reliably. But they were only preconditions. Without far-reaching changes in property rights and, beyond that, a fundamental counter-revolution in the social relations of production, it would be impossible to pass from a destructive phase of transition to a new period of accumulation.

The contradictory nature of the privatisation process

“A collapse of the Soviet regime would lead inevitably to the collapse of the planned economy, and thus to the abolition of state property. The bond of compulsion between the trusts and the factories within them would fall away. The more successful enterprises would succeed on coming out on the road of independence. They might convert themselves into joint stock companies, or they might find some other transitional form of property – one for example, in which the workers should participate in the profits.”10

Trotsky’s remarks turned out be to be remarkably prescient. The collapse of the planned economy led to the swift abolition of most state property. A “transitional form” of property did emerge in which the Russian workers became shareholders.

One of the tasks to be undertaken by the government of Russia’s moribund workers’ state is to create a capitalist class to undertake the transition to capitalism and, eventually, help transform the character of the state machine itself into a fully fledged capitalist one.

The process of denationalisation undertaken by the Russian government after 1992 was phenomenal in its scope and speed. Between October 1992 and June 1994 more than 15,000 medium and large state enterprises were privatised. By 1996 nearly 18,000 were in private hands, accounting for 80% of the industrial workforce and 88% of industrial production.

The privatisation scheme was devised by a team led by Alexander Chubais, appointed Minister of Privatisation in November 1991, (later Yeltsin’s Chief of Staff and now first deputy Prime Minister). Having secured control of the executive after the failed coup by Stalinist hardliners in August 1991, the new bourgeois government under Yeltsin moved quickly to “de-politicise” the economy for several reasons.

In the first place, the state had quickly divested itself of the legal responsibility for organising the demand for products and providing investment funds, but no new owners existed who could be responsible either. There was only de facto possession of the enterprise and a general inertia in production and distribution. In the slump conditions that prevailed during 1992 each factory just struggled to keep going. As one report put it:

“State-owned enterprises had no clear owners and managers were left with no incentives to invest . . . Managers yielded to wage pressures and used most income flows, or even sold off machinery, to pay for higher wages.”11

The bourgeois government had to try and create a class of bourgeois owners in order to root the new bourgeois state in a new capitalist system. Privatisation also aimed to create competition between different blocs of capital. The new joint stock companies under state ownership would be one such bloc of capital. Competition for market share and investment funds is essential under capitalism if innovation and efficiency are to improve. Breaking up the huge monopolies was part of this process of creating competition. Finally, privatisation was recognised as essential in most industries if the enterprise was to get access to international capital markets for investment.

All this was the beginning of wisdom. The hard part was to devise a form of privatisation that was politically acceptable. Should the enterprises be sold for cash after being painstakingly valued, as in the west? Should foreign companies and banks be allowed to bid?

The legislation was adopted in June 199212 after a struggle between the Presidential executive, local administration and the enterprise managers who had a strong voice in a Parliament still made up of unelected deputies from the Gorbachev era.

The power of the ministries was first diluted by making all state enterprises self-governing joint stock companies under the control of a board of directors, prior to being privatised.13 The programme was also devised so that permission for privatisation did not rest with the Ministries but could be initiated from below by the enterprises.

The critical question was, who would the new owners be? In the wake of Yeltsin’s victory over the Stalinist hardliners in August 1991 all those who backed him in his counter-coup were united in following this victory through with a form of privatisation that would further weaken the power of the old economic ministries, where support for the now outlawed CPSU was strongest. As one account put it:

“The present and former bureaucrats in the ministries traditionally responsible for certain industries also entered the property battle. They wanted the enterprises in their former areas of responsibility to be organised into production associations with . . . large ownership stakes and a good deal of control over these huge conglomerates of companies. Sometimes they envisioned the state retaining ownership of the enterprises while they ran them.”14

In the spring and summer of 1992 the Minister of Industry, Alexander Titkin, gained some support for this in the Cabinet. Despite opposing this the Yeltsin camp was not agreed on its own alternative. One faction of the restorationists led by Boris Fedorov (former Finance Minister) and Grigory Yavlinsky wanted to sell the enterprises off to the highest bidders as this would attract capital investment. This would inevitably have led to extensive foreign ownership by western multinationals, which would have caused a storm of protest, and so was rejected by Chubais.

On the other hand, the idea that the “working class owned the economy”, even if they did not control it, was widespread, an ideological leftover from the degenerated workers’ state. Moreover, Gorbachev’s reforms strengthened this outlook when they gave the enterprise workers the power to elect their directors in the factories in 1987. As Trotsky predicted, some “transitional form of property – one for example, in which the workers should participate in the profits” – was inevitably backed by many.

At the same time if “insider ownership” was to happen, it had to appeal to the enterprise managers, especially since, “The top managers . . . were virtually in complete control of their factories after Gorbachev removed the power of the cabinet ministries to fire them . . .”15

During 1992 and 1993 the managers pressed the Yeltsin government hard for the companies to be handed entirely over to them as “closed joint stock companies”. They failed but they did ensure that they would gain greatly from the privatisation through “insider ownership”.

While the managers did not favour employee ownership, the fact that the trade unions were effectively in the pocket of management led the directors to believe they would dominate any “partnership” in the privatised firm. Given the atomised character of working class consciousness and organisation the managers feared potential outside investors far more than they did their own workers.

In Parliament the managers controlled a powerful force in the shape of Arkady Volsky’s Civic Union. In this climate, and given the pressure for speedy change, Chubais had to devise a plan that would embody massive inducements to managers.

The managers would have preferred the firms to be handed over to the workers and managers as a closed partnership. But Chubais resisted this since it would have made the firms immune to outside market pressure and ownership.

In the end Chubais had to compromise and allow managers and workers to buy 51% of voting shares at a nominal price of 1.7 times the book value of assets. The book value was based on the original cost of the buildings, equipment and assets of the enterprises in Russia. This was designed to prevent individually drawn-up, firm-by-firm valuations.

Russia, as a degenerated workers’ state, simply did not have the range of information, mechanisms and institutions necessary to make a scientific valuation of the “worth” of assets, based on international comparisons.16 Privatisation in the west took place in an established market, whereas in Russia privatisation was the mechanism by which to create the market.

The effect of the administrative valuation was to massively undervalue assets (minimally by 40 times and as much as 1,000 times)17 and make them cheap to buy, especially in the light of prevailing inflation.

Managers and workers could pay for their shares in cash, with vouchers or retained earnings from the firm. Chubais claimed one important victory: he ensured that workers were free to sell their shares which held out the prospect of significant outside ownership in the future.

This scheme of “insider control” was a compromise between the Yeltsin neo-liberals and the enterprises. In order to outmanoeuvre the economic bureaucracy Chubais sought to gain support from the mass of the Russian population for his scheme, not just the 17 million enterprise workers, by giving away a minimum 29% of the remaining shares in each company, free of charge, to all of the 149 million Russian citizens through a system of vouchers.18

Between October 1992 and February 1993 144 million Russians (98% of those entitled) claimed a voucher worth 10,000 roubles. They could sell it, hand it over to a fund to invest or personally buy shares at a share auction of any company in the country.

This move broke the back of resistance to privatisation within the old Stalinist milieu since they did not want to be seen as advocating the confiscation of the people’s assets.19 Chernomyrdin, an advocate of the financial-industrial groups solution, denounced the scheme on becoming Prime Minister in December 1992. But he dropped opposition to it a month later. From that point on the anti-Yeltsinites among the dispossessed bureaucrats in Parliament only argued that the vouchers should be used to purchase health care and education.

The first auction took place in November 1992 and by the summer of 1994 most industry was in “private hands”. The result was to create, in terms of ownership, a class of capitalists forged out of the top managers of the former state enterprises.20

The new bourgeoisie took to its task with relish, using every legal and illegal means to concentrate ownership in its hands. This involved a dual process of buying up the shares of their own workers and diluting the weight of shares held by outside owners.

During the privatisation process itself (1992-4) the managers weakened the influence of the outside owners by a number of means. They set up subsidiary companies to buy shares, they issued new shares, with little or no notice to outsiders that they were being offered, and then bought them out of “loans” issued to themselves from the firms’ revenues.

By the end of 1994 nine out of ten privatised companies were majority owned by a combination of managers and workers. On average, “outsiders” owned 20% and the state around 10% of the shares.21

Over the next 18 months the manager-capitalists increased their number of “insider” shares to around a third of all insider shares; but they failed to prevent an increase in the proportion of shares held by outside investors. In 1996 only six out of ten firms were majority insider-owned.

Average outside ownership rose to 32% in 1994-95 as employees started to sell their shares to outsiders when the price of shares rose. Already workers have sold a quarter of the shares they bought in 1993-94.

But outside ownership is not as strong as it might appear. Some of these outsiders were front companies set up by managers. Also, outside ownership is quite concentrated where it exists; one tenth of companies have no outside ownership and a quarter have less than 20%. Finally, during 1995/1996 – as Yeltsin’s position weakened and Zhuganov’s KPRF and the Nationalists gained a majority in the new Parliament – plans to privatise government shares to outsiders were shelved.

The rise in the votes for Zhuganov in the December 1993 Duma elections reflected growing disillusionment with the results of “reform” thus far. Further closures and mass sackings that would result from a push to increase the power of outside investors over the enterprises seemed politically impossible to Yeltsin during the whole of 1996, a year plagued by illness and the need for Yeltsin to secure enough popular support to win a second Presidential term.

As the chief economist at the World Bank said on a visit to Moscow in 1997: “I think structural reform had well and truly stalled last year.”22

The new Yeltsin cabinet appointed in March 1997 has already gone onto the offensive. A new law has been drafted to strengthen the rights of outside investors. Sergei Vasilev, head of the Russian Federal Securities Commission, noted that:

“Outside shareholders have already won control of one quarter of Russian enterprises and that a fierce battle is raging between insiders and outsiders at the remaining companies.”23

The outcome of that battle will be critical in shaping Russia’s new capitalist class and the enemy facing Russian workers.

The problem of agency; legal form versus social relations.

Privatisation created a class of private owners of industrial assets. But the behaviour of the new owners and the government over the two years after privatisation was substantially completed indicated that the change in the form of ownership in itself does not resolve the problem of how the enterprises will be run.24

There was a contradiction between the legal form and the social content of the new relationships between the state, the managers and the working class. This contradiction has pervaded the whole of the moribund workers’ state phase in Russia. To hand over control and ownership of productive assets is one thing; to make the owners act as agents of capital and force the workers to submit to being a surplus-value producing exploited class is quite another.

Transforming the relationship between the new owners of capital has proved just as difficult. So has changing the relationship between the government and the newly privatised firms.

The essential task of the transition process is to make owners act like capitalists: to take systematic decisions regarding investment, production and sales that act to maximise the long run return on investments and/or maximise the stock market value of the company.

As Marx insisted:

“The creation of surplus value is . . . the determining, dominating and overriding purpose of the capitalist; it is the absolute motive and content of his activity.”25

In Russia after 1992, a number of firms started to make operating profits, whereby sales revenue was greater than the costs incurred in production. But it is important to understand the short term one-off causes of this and distinguish it from the profit maximisation that flows from the normal pattern of capital accumulation.

In the first place, wage costs were savaged by holding wages below the very high rate of inflation (2,300% in 1992). This high inflation also eroded the value of enterprise debt, which itself had to be serviced and was thus a cost to the firm.

In some of the larger firms in the energy sector, operating profits were an outcome of the monopoly they held in the domestic market which allowed high prices to be charged. Finally, privatisation resulted in a massive mark-down in the value of all company assets. Since the rate of return on investment is conventionally measured by sales as a percentage of assets, profits could rise initially.

Thus, early on in the transition, rates of profit reflected monopoly, one-off adjustment factors and the effects of inflation. All of these diminished with time. More and more firms became loss-making as the restoration process dragged on. To have a determining effect on the investment process (i.e. the overall accumulation of capital in Russia) profits have to be, in essence, an indication of the underlying productivity of a firm. For this, action in restructuring the labour process and the use of investment funds are the decisive indicators of the rational actions of the “agents of capital” in the production process.

By contrast, many firms in the old USSR were value-destroying: many more operated at a loss. Surplus labour was hoarded by enterprise managers for possible future “storming of the plan targets”; the productive capacity of the firm was often hidden from ministry officials.

The EBRD summed up the inheritance and the task facing the enterprises in 1995 as follows:

“Many of these enterprises are saddled with a product range for which there is little or no demand, obsolete equipment, an oversized workforce with an inappropriate mix of skills for a market economy, a set of expensive social responsibilities to their workforce and large debts.”26

Restructuring a firm has a twofold aim during the restoration process. On the one hand, it involves a purely technical change in what Marx called the “use-value” character of the labour process. The pattern of production in the old USSR was broken up; established markets in Eastern Europe were destroyed, the preponderant weight of the defence sector in the life of many firms had to change. Consequently, many enterprises had to change their product lines and find new markets.

But the most important change concerns the transformation of the labour process into a “valorisation process”; that is, the new products manufactured had to become at the same time exchange values which embody a surplus value over and above that necessary to replace the cost of raw materials and machinery and to reproduce the labour force.

This entails shedding labour, attracting capital for new plant and equipment in competition with other firms. It also means introducing parts of the valorisation process entirely absent in the old USSR, such as sales and marketing divisions, to ensure that the surplus embodied in the new products is actually realised through sales.

But acting as an agent of capital inside the firm is not “natural” human behaviour – contrary to what the ideologues of the free market may like us to believe; it is socially learned behaviour. The workers and most managers in the degenerate workers states did not learn it and had to be taught it. The average age of an enterprise director in Russia in 1993 was 54, with thirty years of training in the bureaucratic command economy.27

One key aspect of social reality for worker and manager under the degenerate workers’ state was the notion of the “labour collective” in the enterprise:

“The essence of this phenomenon consists in the fact that everybody who works in the enterprise has the same status as a hired labourer. The contradiction between the interests of the worker and those of the administration, while they are very significant, nevertheless take second place to the contradiction between the labour collective of the enterprise and the external administration, and now even the market environment.”28

In other words, despite the shock of the economic big bang and the privatisation programme, the process of class differentiation within the independent enterprises has been slow. The capital-labour relation has not fully emerged from the chrysalis of the “labour collective”.

It is not surprising that under these conditions the restructuring of the enterprises, even after privatisation, has been slow and hesitant. Ruthless, profit-maximising behaviour in the labour process would demand mass sackings, attracting investment for new equipment. But as the EBRD ruefully noted in its 1995 report, in factories where worker-ownership predominated the primary objective “is likely to be first to preserve employment and then to maximise wages, subject to the firm remaining solvent.”29

When it came to using enterprise savings during the 1991-93 period, rather than use them for investment, “The savings of enterprises were in many instances financing an accumulation of inventories in the form of unsellable goods. ”.30

As regards the pattern of investment in general the EBRD claimed:

“The high reliance on internal finance by state enterprises or those that have been privatised to dispersed outside shareholders or to insiders resembles the pattern of enterprise finance from the previous regime, in terms of management and decision-making process and the aggregate flow of funds.”31

Perhaps the most stark illustration of the suppressed character of the capital-wage labour relationship in the Russian moribund workers’ state is to be found in the nature of Russian unemployment. Reference has already been made to the low registered and even lower level of open unemployment: 9.3% by the ILO’s definition in 1996.

But this figure is no guide to the total surplus labour in the enterprises. While sackings did occur it was nothing like on the scale that would be implied by the collapse of output. In reality a number of surveys have shown that “the concealed unemployment index” was, by 1994, around 33% of all workers in Russia.32 How could the huge gap be explained?

Without sacking them managers did lay off workers for varying lengths of time; 5% of all Russian workers were on unpaid leave in 1992/93. In July 1994, 5,000 factories were not working at all and one estimate suggested that 7% of the working year was not worked due to partial or total shutdowns in 1994.

But all these “surplus” workers officially stayed on the firms’ books as employees. This allowed managers to avoid having to pay severance money and the workers were still entitled to their share of firm-based benefits: food, household goods, holiday trips, hospital costs, day care centres, nurseries and subsidised housing. Although all these were harder to come by they were important given the low wages.

The bottom line was simply that managers did not feel compelled to turn concealed into open unemployment:

“There has been excessive wage flexibility, excessive in the sense that it has been easy for managements to avoid or reduce wage costs, and therefore they have been under little pressure to remove surplus labour.”33

But this phenomenon of the Russian transition is – from the standpoint of the transition to capitalism – one of the more backward features. It accounts in part for the fact that the Russian moribund workers’ state phase has been so protracted. While surplus labour was legally freed from its attachment to the enterprises by Yeltsin it has been more difficult in practice to create the mobile reserve army of labour that is essential to a capitalist economy.

The total transformation of Russian labour power into a commodity has still not been completed. While wage differentials have emerged within and between industries, the commodification of labour power has stalled since non-wage goods and services from the enterprises can account for more than actual wages themselves.

The consequence for the privatised enterprises is clear; it prevents them from becoming profit centres:

“It has been estimated that 20% of total compensation paid by Russian industrial firms is accounted for by social services”.34

One manager noted:

“The expenses for the plant’s day-care centres, apartment houses, medical centre, and farm take up a good part of our total sales for a month!”35

And another:

“Payroll accounts for 22% of our costs. But we have social programmes for employees that account for about 25% of our costs.”36

A key task of the restoration process, then, is to devolve responsibility for non-wage benefits away from the firm and onto national and local government so that the costs of production in each enterprise can be brought below the surplus generated by the workforce itself. At the same time, wages would then have to rise to a level which more accurately represents the cost of reproducing labour power without systematic recourse to goods and services which themselves are distributed to the workforce in a non-commodity form.

In mid-1996 it was estimated that workers’ wages only account for 40% of household income – down from 60% two years earlier – with the rest coming from petty trading, dividend income from shares etc. Once again, these figures reflect the protracted and difficult process of crystallising out a fully formed proletariat dependent on the sale of its labour power alone.

Moreover, the phenomenon of non-payment of wages only serves to reinforce this view. Many workers do not sell their labour-power, they give it away. In a situation of high inflation, a serious delay in the payment of wages also amounts to non-payment.

In 1996 the government estimated that unpaid wages amounted to $4.5 billion. The amount had doubled in the first eight months of 1995. But even this is a gross underestimate. During the March 1997 protest strikes against non-payment of wages the Russian media reported the total to be nearer $500 billion!37

Around one-third of all firms in late 1995 owed wages to their workers.38 This amounted to an average of 7% of sales revenue.

Thus, non-payment probably made the crucial difference between profit and loss for a firm.

Under capitalism surplus value is indeed drawn from the unpaid labour of the workers, but this is not direct robbery since, in value terms, the workers receive the value of their labour power in the form of wages. Under capitalism exploitation is a function of the immense productive power of labour which generates more value than it itself contains when it is applied to production.

But in the Russian moribund workers’ state, while pockets of capitalism seek to push their way through, the economy is completely disfigured by a labour process in which surplus value is at the expense of wages, in which the working class is indeed robbed but in which it gets partial compensation by receiving charitable handouts from the firm in the form of non-wage goods.

It is not the case that restructuring is entirely absent in the Russian moribund workers’ state, but it has been of a generally passive character. Generally speaking, productivity falls during this phase since demand slumps faster than jobs.

But productivity improvements in most firms where they have begun, take place on the old technical foundation inside the firm. That is, they result from sackings and using existing equipment more intensively, rather than on the basis of new investment.

Even this level of restructuring does not disguise the fact that decisions are generally taken in a moribund workers’ state to preserve the enterprise as much as possible from the effect of the operation of the law of value. As the World Bank ruefully noted:

“The bottom line is that management-employee buyouts can lead to managerial and worker entrenchment that blocks further reform.”39

Relations between enterprises

Matters stand no further advanced in the moribund workers’ state when it comes to relations between the independent enterprises. Capital has to differentiate itself not only from wage labour but also from itself. It was hoped that once they were free from the directives of the ministries the prospective capitalist-managers would engage in open, unchecked competition with each other for a greater share of social surplus value. But once again the record of the first five years of transition in Russia indicates that these relationships have acted to impede the spread of the law of value to the state and the privatised firms.

More than 60 years ago Trotsky had already predicted that with the abolition of the planning agencies “the bond of compulsion between the trusts and the factories within them would fall away”. But what would replace it?

Here we must turn to explore the significance of Trotsky’s brief remark that under a new bourgeois regime, “the planning principle would be converted for the transitional period into a series of compromises between the state power and individual ‘corporations’ – potential proprietors, that is, among the Soviet captains of industry.”

In effect in Russia, during 1992-94 the “bonds of compulsion” were replaced by what we might call “the bonds of custom and practice”. Having lost the organising centre of the branch ministries which had issued the state orders, the majority of enterprise directors established a series of bilateral ties and with it a chain of orders that either continued the line of supply and demand of the old regime or set up new ones to compensate for the loss of markets in Eastern Europe.

Many firms in the new moribund workers’ state adjusted to the loss of state orders by, as far as possible, seeking to reproduce through a series of bilateral relations the proportions of the old command system. Although the “planned economy”, like the Cheshire Cat, faded from view its smile, or rather its grimace, persists during the phase of the moribund workers’ state.

The common response was to continue as far as possible in maintaining the flow of materials from established suppliers and selling goods to established customers. Yet because state subsidies had been cut, and prices liberalised, more and more firms were unable to pay for the goods they received. They were neither paid by their customers nor did they pay their bills to suppliers. A vicious spiral of inter-enterprise debt (IED) began. By mid-1994, according to official Russian government figures, 39,000 enterprises were in serious debt:

“Only 11.7% of all firms had no debts to banks or other enterprises . . . 56.3% of firms stated that they owed more than was owed to them.”40

By August 1994 the government estimated total IED to be US$40 billion.41 By the end of 1995 enterprises’ liquid assets covered less than 25% of debts due compared to 51% in 1993.

In turn the accumulation of debts was little more than an accumulation of losses. The number of loss-making firms continued to grow after privatisation. In 1995 25% of all industrial enterprises were reported to be loss-making compared to 10% in 1993.42

A comprehensive study of Russian industry in 1995-96 summarised its results by categorising firms in one of four groups: “clear winners” who will survive and finance investment from their own profits; “potential winners” which are profitable but need new capital to prosper; “uncertain” firms which are sliding towards bankruptcy; and “losers” which “need to go bankrupt because it is impossible to operate them successfully”.43

The authors reported that, as of June 1996:

“No more than a quarter of Russian companies are clear winners . . . The bad news is that three-quarters of Russian corporations are in need of radical and far-reaching restructuring. At least a quarter of those firms should be bankrupt.”44

Government intervention in the moribund workers’ state

A crucial factor in our understanding of the “moribund workers’ state” is that the government – despite its impeccable pro-IMF credentials – was a grudging but active participant in this series of compromises. It underwrote – on an extending scale – non-commercial economic behaviour.

During 1992-94, this included the Finance Ministry and Central Bank themselves issuing budget subsidies to ailing firms. For much of this period control of the money supply and credit was in the hands of Parliament, which in turn was dominated by anti-Yeltsinites. Similarly, bankruptcy legislation, formally adopted in 1993, was not enforced. On the contrary, typically for a moribund workers’ state, bankruptcy legislation was used by those in debt to protect themselves from the claims of creditors; that is, to prevent the enforcement of the law of value upon ailing or failing firms.

While this does not seem rational from the point of view of the capitalist goal, it is explicable from two angles.

First, just as the political balance of forces in 1992-93 had demanded a compromise between Chubais and Parliament in drawing up of privatisation proposals, so Yeltsin was balancing between neo-liberal hardliners and forces that favoured heavy state support for Russian industry. In many Russian cities, dominated by nationalist and KPRF local administrations and heavily dependent for employment on one or two major enterprises, the pressure to preserve many firms from the market was immense.

Secondly, even the most fanatical restorationist recognised that at least until privatisation and the breaking up of huge monopolies took place there was a case for preserving bankrupt industry to see if they could be “turned around” under changed ownership.

It is important to understand that this paradox is not the result of insufficient determination on the part of the restorationists but rather constitutes an acknowledgement by them of an objective difficulty at the heart of the process.

The bulk of material production in the moribund workers’ state can become surplus-value generating production only on condition that its present unprofitable character is sustained and reproduced for some time in the transformation process. A generalised and immediate imposition of the law of value on the labour process in the bulk of Russian factories would have destroyed the possibility of future surplus value creation.

It is typical behaviour of the state, in this phase, to actively underwrite the extension of loss-making production. While capitalism can tolerate and approve of the partial negation of the law of value implied in selective state subsidies, it is hardly capitalism when a majority of firms owe more than their assets are worth and these losses are absorbed into the state through the medium of the government’s budget deficit.

The government also had conjunctural reasons for extending support to loss-making firms; without it mass privatisation would have been politically impossible. If tens of millions of Russians found themselves, overnight, in possession of shares of privatised firms that had gone out of business there would have been major repercussions.

As a result of all this, during privatisation throughout 1992-94:

“Firms continued to receive most of their credits through the central bank, and often paid interest on these credits out of government subsidies they received from the national budget. Loans were repaid with proceeds from new loans. In 1992, government subsidies and central bank credits together added up to over 40 percent of the GDP.”45

This politically directed indiscriminate support for enterprises was checked in late 1993, after the grip of the “anti-reformers” in Parliament over the Central Bank was broken by Yeltsin’s October 1993 coup against Parliament, followed by new elections to it.

This had the effect of controlling the money supply and hence capped inflation. Real interest rates were also made positive for the first time in 1994. Inflation fell from 20% a month in 1993 to around 5% a month in August 1994. But far from forcing the ailing firms to act like capitalist units all this succeeded in doing was to shift the burden of propping up industry elsewhere.

Non-commercial loans from the private banks continued for a while and local government has extended credit to local firms.46 But the main basis of support to firms, and a key factor in easing their financial crisis, has been rolling over the huge amounts of IED and the toleration of generalised non-payment of enterprise taxes to the government. The result has been the proliferation of loss-making production by means other than Central Bank credits or government subsidies.

To date the Russian government has chosen, as happened in all other moribund workers’ states, to use bankruptcy laws to protect rather than destroy failed enterprises.47 The laws that were drafted in 1992-93 do not empower creditors to enforce the bankruptcy of a debtor but rather leave the initiative with the government. It has steadfastly chosen not to use this power.48

Bankruptcy has the function of releasing capital locked up in failed firms so it can be redistributed to profitable concerns; it is the supreme negative moment during which the law of value is enforced. But in Russia, since 1992, it has not been enforced. On the contrary, the number of firms protected by the government against closure has multiplied with each passing year of the transition. As of June 1996, “Oleg Soskevets, former first deputy prime minister, said that 35% of industrial enterprises were technically bankrupt.”49

A tale of two hundred cities

In many of Russia’s one-industry cities the whole community is drawn ever deeper into the vicious circle of inter-enterprise debt and non-payment of wages. The result is barter between local industry and suppliers and ad hoc local “currencies” being used to trade goods and services within the towns.

An example of what this means for millions of Russians is Zlatoust.

In Zlatoust (1,320 km south-east of Moscow) the steel factory is the main or only source of employment for the 200,000 inhabitants. It is badly in debt and the enterprise director said:

“In Russia we have a crisis of payments – money just doesn’t work any more, so we mostly live on barter.”50

Since late 1995 the factory has issued its own cheques as currency. The workers only receive $30 of their monthly wages in cash. The other $115 is in factory cheques, “to buy a Soviet-style selection of foods and consumer goods from the factory stores, pay for rent and local utilities and even purchase bus tickets.”51

The local government allows the factory to pay off its tax debts in these cheques, which in turn are used to pay for child allowance and pensions.

This experience was replicated across the country during 1995-96. From the vantage point of the restoration process it represents a massive breakdown in the circulation of “capital” in Russia. This latter process demands that money becomes more and more “abstract”, that is, disinterested in its origin and capable of being transformed into all and any concrete use-values, accumulated in savings accounts and be capable of being invested in myriad profit centres. Only in this way can money serve as capital, as “self-expanding value”.

But in Russia, in 1995-96, the rouble, far from being the “universal equivalent” acting as a servant of capital accumulation, was being discarded in favour of local currencies which serve only as an acceptable means of payment in many disconnected patches of Russian territory.

“A crisis of the state”

Towards the end of 1996 the Russian restoration process was in crisis, and not for the first time. The paralysis of the state was symbolised by Yeltsin’s prolonged illness and recuperation after heart surgery. The Russian state was consumed by the failures of the push for capitalism and seemed incapable of rising to its mission as architect of the transition.

Michael Camdessus, managing director of the IMF, claimed at the end of last year that Russia was suffering from a “crisis of the state”. By this he meant not simply a run of the mill conflict within the government of the day, or between the administration and the opposition. He was referring to something altogether more fundamental: a crisis of existence. What was at stake was the very ability of the state to function as the “general executive committee of the ruling class”, to use Engels’ phrase.

The state had proven its anti-working class credentials in driving through the momentous lowering of wages, pensions and state benefits and increasing unemployment. But it was faltering in its ability to raise itself above the squabbles of the emerging Russian bourgeoisie, to adjudicate the rival claims of the different factions, to draft and enforce the most basic laws that determine “the rules of the game” by which all capitalists have to play: the respect for rules that govern inter-capitalist competition.

In the early years of transition (1993-95) the most powerful symptom of this crisis was the inability of the state to enforce “the rule of law” over the Mafia-capitalists. It could not root out the many bought and paid for bureaucrats and politicians within the state apparatus that protected the Mafia.

But the problem went deeper than the issue of criminality. It is a structural problem, the most obvious evidence of which is the fiscal crisis of the state. Any class state has to be able to draw off a part of the social surplus generated in production, through general taxation, in order to sustain its apparatus of administration and coercion. But the Russian moribund workers’ state has proven incapable of raising, or collecting, the taxes it needs to carry out its basic functions. As Chubais noted in April this year:

“Russia is experiencing a monstrous state budget crisis, whose parameters, if the truth be told, call into question the ability of the state to perform its functions.”52

The problem originated in 1992-94. By rejecting cash sales of state assets the Russian privatisation programme deprived the government of valuable revenue with which to finance the budget deficit. This deficit mushroomed during 1994-95 because of growing unemployment and a collapse in tax revenue during the slump. Further tax concessions were made to enterprises so as not to push them to the wall.

But this problem led to another: many officials of the state bureaucracy (police and tax collectors) were as much victims of the widespread non-payment of wages and salaries as teachers and other state employees. As one report put it:

“Russia’s guardians of law and order – police and tax inspectors – are forced to live off bribes rather than their unpaid salaries.”53

Time and again over the last few years the government has insisted that the taxes must be paid to fund the transfer of social benefits from the enterprises to federal and local government. Time and again the enterprises refuse to pay the taxes in the belief that the government will use the revenue for other purposes. It is a powerful symptom of the inability of the aspiring capitalist state in Russia to command the loyalty and obedience of the emerging capitalist class which it strives to serve.

The same phenomenon is revealed by the battles waged between the rival owners of capital for control of the privatised enterprises. The state has proven worse than useless as an instrument for regulating the conflict between “insiders” and “outsiders” for control over share capital, a key issue in the fight to impose the “logic of capital” over the behaviour of the enterprise directors. All kinds of breaches of law have taken place by “insiders” to thwart the ability of shareholders to exert their power over restructuring. Dmityr Vasilev, the Chairman of the Federal Securities Commission, which regulates Russia’s capital markets noted in April this year:

“At the moment I have insufficient enforcement powers. I cannot fine directors or put them in jail.”54

Of course, weak or corrupt states can be found in many fully developed capitalist countries, especially in semi-colonies. But in Russia these structural deficiencies are not simply disfiguring the process of capital accumulation and the running of the state machine, but are impeding the very emergence of capitalism and the law of value as the governing set of social relations.

Yeltsin’s new government, appointed in March, has made the solution of this problem its key task. On corruption, laws have been tabled to end the established relationship between the state and “authorised” banks which handle the federal government money. A public tender system has been introduced to oversee government contracts; officials of the state will be obliged to declare the source of their income and their families.

To regulate inter-capitalist competition the government is drafting legislation to increase shareholder power over the directors.

As for public finances, the government appointed by Yeltsin in August 1996, just after his re-election, had already abolished all the tax breaks and privileges announced by Yeltsin during his campaign. But the reshuffle in March this year has signalled major new reforms. Chubais plans to break the power of the Russian monopolies. Gazprom alone generates 8% of Russia’s GDP. The prices it sets for the rest of industry is part of the reason for the widespread arrears and debt problems. By breaking up this and other monopolies, and lowering prices, the state aims to ease the restructuring of capital and get in the tax arrears.

If the new government implements its plans successfully the Russian state machine will undergo a major transformation. It will gain all the attributes of an embryonic bourgeois state, determined to shed Russia of the final characteristics of a moribund workers’ state by overseeing the necessary restructuring measures over the key industries.

Russian Finance Capital?

What will be the fate of a future Russian capitalism? Is it destined to be a semi-colonial ruin, dominated by European Union and US multinationals, eventually falling submissively into imperialism’s diplomatic and military alliances?

Or, as an ex-”superpower”, can it fend off the encroachments of imperialist capital and, behind a wall of protectionist measures, build its own sectors of monopoly finance capital capable of first dominating the Russian economy and later the CIS and further abroad?

Without the fairly swift concentration and centralisation of capital in Russian industry and finance the latter development is unlikely to occur. On the other hand, opening up Russian companies indiscriminately to the kind of investment most need in order to restructure them along capitalist lines threatens to hand over control to “outsiders”, foreign multinationals

Thu 14, September 2006 @ 12:11