Notes from a trip to Moscow in April 1992.
The Aeroflot flight from Brussels felt "normal." A carton with a VCR was wedged between the crew seat and the emergency exit. It annoyed the attendant when I asked that it be removed. "Do you plan to use that door while we're flying," he asked? "There are other emergency doors at the back of the plane." "So, do you have a habit of looking for emergency exits?" And so on. But he moved the box, we had a good talk, and the rest of the flight was fine--ending with the usual feather-like Aeroflot landing. In Moscow, passport clearance was even more rapid than last fall, though it is still only when the computer is satisfied that the door is released and you are in the country. Baggage delivery was surprisingly fast, and only one of the group's bags was briefly missing. Customs clearance consisted only of presenting currency declarations. Three different cart/porter services were proposed. Each cost $1, but three different ruble prices (which were 1/3 to 1/4 the correct exchange rate). We'd soon discover that exchange rates for the dollar could vary by 33% among exchange offices within sight of each other. And other currencies (British pound, French franc, etc.) were often 25-40% below their correct value. This, one exchange agent "explained" with a sheepish smile, was what was meant by the market. Oh, and there is a charge for making a page at the airport! Hands reach into your pocket from the moment you arrive in the country...
- Prices in xUSSR defy explanation. In the past, basic goods were subsidized, while non- essential items --including clothes, for example-- were already priced at several times their cost of production. By that logic, liberalization should have lowered some prices. Instead, this inane "reform" was let loose on a system in which much of commodity production was monopolistic, with the result that prices were arbitrarily multiplied 10-50- fold. Rather than increased earning potential stimulating production, the reverse occurred: high profits could be earned while producing very little. It's also important to note that only a small percentage of enterprises have been privatized. Most are still in the state sector, so these price increases can be better explained as planned and directive than as the result of any market forces. Since average US earnings are about $1600 monthly and average Russian earnings are now about 1600 rubles/month, some convenient comparisons can be made. A kilogram of tomatoes or meat cost 150 rubles, which would be as if they cost $150/kg in the USA--or 10% of one's monthly wages. To that you could add the $6 cup of coffee, $5 bus ride, $200-400 restaurant meal, $35 lunch in the shop cafeteria, $500 shirt, and so on. Relative values make even less sense. A chocolate bar would cost $200, but an electric iron "only" $300. I defy anyone to explain the relation between production cost and price or how this gouging and robbery can be called economic reform. The rapidity and extent of stratification in Russia resembles a social "Big Bang." Probably close to 90% of the people now have incomes below the "physiological survival" level, while an elite can afford goods and services which would be high-priced in New York or Paris. For example, a Milky Way candy bar in the Hotel Radisson costs $2.50. This is about the 2 current MONTHLY salary of a nursery school teacher. (The director of the school earns about $8/month, about half the national average.) Is this a recipe for social explosion?
A few days ago, we talked to somebody whose institute supplied many of the current Russian government's leadership, and he advises high government figures himself. Naturally he supports the economic program, claiming that it is the only possible way and that the present economic team is physically the only possible one in the entire country which is competent. His answer to why a "reform" was launched with price only liberalization and no other coherent plan, even though hyper-inflation would be inevitable, was a weak: "What else could we do?" This man had contempt for Gorbachev and managed to lump him together even with Stalinists as "hardliners." And, "there can be no democracy which includes the hardliners," he explained, in an interesting variant of democratic concepts. There was no turning back. If there is a second putsch, it will come from the dissatisfaction below, "but we intellectuals are ready to take up guns and fight." This is rather intriguing since revolt from below would involve the masses of society (who don't care all that much for the privileged intellectuals, since the intellectuals showed little signs of such bravery last August, and since they would probably be swept aside in minutes. A popular sport our host also engaged in consists of former Communists in responsible positions mutually accusing each other of being former Communists in responsible positions. This is done to prove that people with differing opinions cannot be trusted, and the contradictions don't seem to diminish the fervor of the accusations. Our speaker greatly admired Ronald Reagan who, he said, had to engage in years of massive military spending to counter the USSR's activities in Afghanistan and Nicaragua. This was astonishing news in light of the tiny fraction of military spending which went to those two countries. It was altogether a valuable insight into the minds of those who are directing Russia at this moment.
We visited Riga, Latvia and had a chance to talk to an official in the Ministry of Foreign Trade who apologized for his cold building, a consequence of the fuel shortage. Latvia was independent only 20 of the last 700 or so years, and now she is again he told us. Then he explained that experts from the World Bank came to analyze the situation and offer advice, that experts from the International Monetary Fund came to analyze the situation and offer advice, that experts from the United States came to analyze the situation and offer advice, that experts from the European Community came to analyze the situation and offer advice... In the old days, only Moscow offered advice. Some independence. Like Germany, Latvia is offering to return property to its "rightful owners." People risk losing homes they've lived in for years or decades, the ownership of shops and buildings is put in doubt and the same is true for land. In addition to the suffering and resentments that will 3 be provoked, this policy just adds to the risks and hurdles for potential investors. Latvia is about half Russian, and on May 5 the new language law went into effect. Latvian will be the official language, which will mean that people who cannot carry on their work or prove their competency in that language may lose jobs. Citizenship will also become more restrictive for people whose ascendancy in Latvia can't be traced to pre-1940. Without citizenship, residence rights, free schooling and other privileges may be lost. Many Russians of course simply refused to learn the language of the country in which they lived, but now Latvia finds itself caught between "normalizing" the situation with the (descendants of) the "occupiers" and creating conditions for bettering the economic conditions in which all will have to live.
Visited a school and nursery school in an outlying Moscow district. Since families with children have priority for new apartments, such districts instantly have overcrowded schools. The one we saw was meant for 900 students and had 1800, attending in two shifts. It was impressive to see what students and teachers had done to add interior decoration to the initial construction. The students were also engaged in several businesses: offset printing, the production and sale of toy tanks (!) and of non- military toys. Social values are inculcated in early schooling and children's stories, and I asked about possible pedagogical changes in the nursery school as a reflection of the political and economic structural changes. The question was understood, but except for saying they'd continue to give the children love, the answer was about salaries. Nursery school teachers go through higher education, but the school director's salary was only 900 rubles monthly (half the national average, and about $8), while a starting teacher receives 342R, the current minimum (scheduled to go to 750R next week. That will buy 1-2 kg of sausage. There's talk of a strike again. Nursery school fees have gone from a few kopecks daily to 171R monthly, arbitrarily set at half the minimum wage. Making this form of children's education and day care unaffordable will contribute to driving many women out of the labor force, a regressive way to soak up some of the coming unemployment which will also negatively impact on family income.
May 9 was VE Day. As usual, elderly soldiers came to Gorky Park and elsewhere seeking their former comrades-in-arms for teary and joyful reunions. Other people continue to look for former soldiers who might know where a father or other relative, whose old photo they carry aloft, might have fallen in battle and be buried. Various Communist factions demonstrated at the entry to Gorky Park. And there were people collecting money to help the families of the OMON, the squadrons in Lithuania and Latvia who were a law unto themselves and allies of the invisible "National Salvation Committees" just over a year ago. These were heroes who defended Russian interests to the bitter end, according to the placards, but the people holding these signs were obstinate that they should not be photographed. Or, like everything else these days: no photographs until you make a donation. A band was playing, and another photographer and I collided as we both spotted and made for a dancing couple in their 70s, the woman clutching a copy of a book entitled, "The Russian Character." In the afternoon, Vladimir Zhirinovsky came to the 4 entrance gates to chat and sign autographs while followers sold the "liberal democratic" party newspaper. Zhirinovsky, who took 8% in the presidential elections has a simple platform: borders. He would restore the old Soviet borders, but this time everything would be Russia. And he promises an immediate invasion and conquest of Finland. The country would again have a single party, his own. This is the nationalist fascist alternative, or the white-brown option as it is called here, the hardline Communists being known as re-brown. The encouraging thing was that only about 30 people were paying any attention to Zhirinovsky.
For now.
I am just beginning to hear the stories of the property scandals in Moscow, and want to check them with more sources. These have to do with claiming control of apartments in central districts which take on extraordinary real estate value in a "market" system, but which have often been occupied for decades by now elderly people. They also concern the selling of properties to foreigners. In one case, buildings on Leninsky Prospect in the university- institute area of the city were sold to French interests for conversion into hotels and the development of a scientific and technical complex. From what I've been able to learn so far, the city executive authorities considered themselves owners of the properties and able to sell without public consultation. The French Ambassador appeared at ceremonies to lay the first stone of this project, but found himself confronted with demonstrators angry that they would lose their homes. The Ambassador, it is said, claimed he never realized plans had gone forward without consultation, and he left the ceremony. Various forms of persuasion and force have been used to remove people from their homes. Even though new flats are offered, it must be understood that these are far away in the suburbs. Not only are uprooting, distance and this contemptuous treatment a problem, but a Russian citizen has built up a whole network of contacts in order to be supplied with everyday needs. Moving breaks this network and can be disastrous. In one building, people absolutely refused to go. So one night a fire started. People were driven from their apartments in nightclothes, and in the street they found city officials waiting to hand them vouchers for their new, distant apartments. Gavriil Popov-- Moscow's mayor, an early ally and advisor of Yeltsin and an architect of the political and democratic reform movement--is now considered by many to be one of the richest men in Russia thanks to bribes (or "commissions," as they are now known). When briefly asked about this in an interview, he couldn't see why there was a fuss about "bonuses" for services rendered. The question was not WHETHER city officials should be compensated for their help; the question was TO WHOM and HOW MUCH. Others tell me he already had a reputation while a university professor for accepting payments in relation to exams.
This is a true story... Two people,
a banking consultant and a business lawyer, in one of the American groups I
brought here met yesterday with the director of a large Moscow factory. Without
even trying to find out who the people in his office were, he got straight to
the point:
"How much are you ready to invest in this company?"
"How much do you need?"
"$270 million, and I want it by June 20."
The pair explained the credit process, that experts would have to visit the
plant to evaluate it and its production, that the books of the company would be
examined, etc.
"That's not necessary," the director said.
"Who owns this company?"
"It's being privatized."
"Where are the papers?"
"Don't worry, everything will be OK."
"What collateral will you put up?"
"No collateral."
"What terms do you seek?"
"Six years without interest before repayment begins."
The director was upset that he wasn't talking to the president of the investing
company. It was explained that presidents send experts to evaluate risk and
don't travel themselves. This dialogue of the deaf went on for over an hour.
The director kept turning away to smoke to show displeasure at having his time
used by "underlings" and because they weren't ready to accede to his
demand for an unsecured $270,000,000 loan within 30 days and without any
company information. No kidding! The assumption at low levels--by hotels, taxi
drivers, vendors, et al-- that all Westerners are rich and can be bilked for
goods and services in Russia at up to 100 times their true price has its own
set of negative consequences worth discussing. But that this same taxi driver
mentality is shared by "captains of industry," or that a rapid
transition to a new economic system can be carried out by leaders who lack even
an intuitive notion of the value of other people's money are evidence of an
abyss between the macroeconomic theoreticians and microeconomic behavior.
A number of intriguing facts resulted from a discussion of military conversion today. First, a comprehensive conversion plan signed by Ryzhkov just before he resigned as Soviet Prime Minister has been withheld from publication to this day, and although the plan prescribed a 80-100 billion (1990) ruble budget, no money was ever set aside. The plan was at the macro level. No micro- level plans were made either then or to this date. Yet, since estimates of national resources claimed by the military- industrial complex range from 50-60%, it is hard to imagine any successful economic reform without conversion. The MI complex is also a major producer of consumer goods (eg, 100% of TV sets). In 1992 it is projected that MI consumer- oriented output should rise to 80% of the total production. However, this figure is meaningless for two reasons:
- the military-consumer percentage ratio is based upon artificial
prices in which that of, say, a tank is set exceedingly low and that of a
TV set just as arbitrarily high.
- military production is being drastically reduced, and while this
raises the consumer product share of MI output, it doesn't mean that real
output increases.
There may also be an interesting paradox. While Soviet economic geography resulted in many enterprises which were monopolies in the production of a particular product, this tendency is probably less prominent in the MI complex since the military must be sure it has supply redundancy. (This would likely apply also to the military's consumer side as, so far as we've learned, every military factory had a consumer "cover" product, and there do exist, for example, multiple TV brands.) The redundancy may make the military consumer industry most ready to enter competitive market relations, but the military has a managerial monopoly which may be reluctant to relinquish control. The new political situation has also changed the economic equation of arms sales (moral issues aside). Russia's place in the market, we were told, has dropped to seventh. The thing is that now the collectible money value of arms sold is listed, whereas before the majority of total represented arms "sales" to allies who would never pay their bill. Can we assume that the economists assessing Russia's position took proper account of this in calculating foreign currency earnings?
- St. Petersburg: Maybe my memory is bad, but I don't remember the streets and buildings crumbling away as they are now. We were supposed to have a meeting with A. Nevzorov, host of "600 Seconds," the fast-paced TV program which exposed scandal and exposed viewers to the Soviet criminal scene while the blood on the close-ups of the victims was still warm. He also distinguished himself by tear- jerking sympathetic portrayals of the OMON, the black berets who did the killing in Lithuania, and became a voice for extreme Russian nationalism. We were supposed to have the meeting with him--until he decided that an hour's chat would cost $1000 (equivalent to Yeltsin's annual salary at the time). We had better things to do than subsidize fascist egos, so we passed. But many government officials have entered the game of charging the Western press for interviews, just the sort of counterproductive behavior the country needs when it is supposed to be cultivating external relations. At either side of the Hermitage was a kiosk selling refreshments: one for rubles, one for dollars. You could buy a glass of Pepsi for 7 rubles (6 cents) or one dollar, a hamburger for 30 rubles (25 cents) or $1.50. Take your choice, but faced with this absurdity the dollar kiosk was still in business. Visited a computer retail store, asked why they charged 2-4 times as much as USA prices when their business costs were so much lower. Some staff said they were obeying the demand curve, others asked how they could get hold of the lower-priced computers in the USA. We explained the value of high volume-lower margins and building long-term customer relations. "We understand that would be better, but we do it this way," was the explanation.
-- Between late May and early June: The minimum monthly wage and minimum pensions rose from 342 to 900 rubles. That brought the minimum wage to about 5R/hour. Bread prices went from 5R to 12R, milk took a big jump, the fuel price rises began and are expected to trigger a big new round of inflation. Some people have now been waiting several months for salary payments held up in part by refusal of the government to print money. Strikes in key industries are possible. Being paid, not a wage increase, is the demand. The government now plans to introduce a 5000 ruble note. Teachers struck for higher salaries and the school year was ended early. Salaries were increased several-fold. The government has decided the risk of social explosion means it must ease the belt-tightening, despite IMF demands. The mayor of Moscow, Popov, resigned for the 2nd time. This time the resignation was accepted. His replacement is rumored to be no less a bribe- taker. Communist Party archives are being opened. Journalists and others will be able to examine them--for a price, of course. The first revelations have been about the financial help funneled to fraternal parties in the West. I'm holding my breath to see of the archives which reveal the sins of those now in power are opened. With immature petulance, Boris Yeltsin gave Mr. Gorbachev a smaller car as a punishment for criticizing the government and threatened greater sanctions if Gorbachev continued to exercise free speech. 7 The government was just reorganized by bringing in several "conservatives" and promoting a number of ministers to the rank of First Deputy Prime Minister, so to keep Gaidar as first among equals he was made acting Prime Minister. The labor ministry was divided into three: labor, employment, internal migration--probably a sign of the growing social problems the government expects. Unpaid debts among enterprises is now over 1.6 trillion rubles [over 3 trillion by August] . About 37% of industrial output is thus unpaid for and even efficient enterprises are effectively bankrupt. The government's talking about throwing 200 billion R at this problem, but that's only a fraction of the need, nobody thinks enterprises would use money they receive to pay off debts, and there would be a further inflationary effect.
Prices are so much a part of everyday discussion that some details are
in order. The kiosks near metro stations which used to sell ice cream and other
local goods now sell minor foreign consumer items. We are told the kiosk
operators have to pay a high price for these little structures plus weekly fees
to the protection racketeers. Counting the US$ at 100 rubles (the rate can be
90-120), here are cigarette ruble prices at one kiosk. Camel non-filter 40
Camel 100s 110
Dunhill 150
Winston75
Winston 100s 120
Marlboro/Salem 150
L&M 60
You probably didn't know Marlboro
was worth twice as much as Winston! A 33cl can of Coke was 90, a 2 liter bottle
cost 400 Soviet champagne was 170. Vidal Sassoon shampoo with the label printed
in English & Russian (i.e., produced for the Russian market) was 350--or
more than $3. Remember the minimum monthly wage is now 900R (4-1/2 liters of
Coke). For Westerners or Russian "businessmen"/crooks who prefer
imported goods, a German hard currency supermarket (Julius Meinl) replaced the
hard currency souvenir shop in the Central Tourist House hotel. I've converted
prices to US$ at 1 DM=$.60
bananas $2.54/kg tomatoes $3.54/kg grapes $5.94/kg
onions $1.74/kg potatoes $1.14/kg 6 eggs $1.50
sausage $5.94-17.94/kg Coke 2lt $3.54
Life magazine $6.00 ($3.60 in Germany)
Most prices are far higher than those in Germany or France. Labor and other costs should be much lower in Moscow. I'm ready for the shipping argument, but: 1) Food products get to Europe and the USA from all over the world without commanding these prices. 2) The Moscow Life newsweekly, which bears the printed, "Price in Russia $1" is charged $1.20 in this store. People who can afford these prices might also go to the "Mill Valley Film Festival, where admission is US10, or take the 2-hour 20 cent boat ride on the Moscow River for US30 [sic] with buffet lunch. Maybe it's too soon to talk about colonialization, but there are now shops and entertainment spots which accept payment only by credit card, something even Russians with plenty of dollars don't have.
I have an acquaintance in St. Petersburg whom I admire greatly. He is knowledgeable but completely unpretentious, and his curiosity about even the smallest things often reveals much about the East-West differences. We were discussing travel, and I had just explained how a plane reservation in the USA can be made with a simple phone call. Fine, was the response, but with the enormous volume of phone use in your country the lines must get crossed quite often. When that happens, mightn't the person who answers pretend to be the airline company, so that at the end of the conversation you think you have a reservation, but it is only a trick? How can you be sure? My friend is well-versed in high technology, but I left aside his assumption that the phones in the USA behaved at the level of those in Russia. Nor did I confront the second assumption, that there would be such a significant effort to deceive on the part of people reached as the result of a wrong number. Look, I said, there's one peculiar difference between phone behavior in the West and in Russia, and it takes care of your worries. The Western business will answer by identifying itself--not with a mumbled, indifferent and off-putting, "yeah." This incident reminded me of several days I spent once watching the secretary of a responsible official in Moscow do nothing all day but read novels and pivot on her elbow in response to the occasional phone call for which the entire conversation was a dull, "Da." "Nyet." ["Da" = Hello. "Nyet" = He's not in.] Hang up.
One member of our group became friendly with a street T-shirt seller and was invited to his home, where he learned the basics of the trade. According to this vendor, all the sellers were obliged to buy from the same supplier at a fixed price. He had one acquaintance who did not--and had his legs broken as a lesson. They also discussed the amounts of payoffs to the police and the inconvenience of having to pay several times when a seller's day straddled over more than one policeman's shift. On other occasions, we were matter-of-factly told the rates for "protection" of street kiosks, and newspapers seemed quite up on these costs and the bribery of policemen. The economists who use ideal supply and demand and price formation curves to theorize on how the Russian market will develop should temper their advice until criminal monopolies, protection rackets, broken legs and other deviations have been factored into their equations.
The "intelligentsia" have a role and meaning in Russia which is hard to imagine in the West. It isn't just that literature is closer to people's 9 lives; the intelligentsia is a political class with claims on the right to rule. The government advisor was in an exhausted pose, head in hands, talking as much to himself as to me. "NAchat, NAchat. Can you imagine that we had to put up with that!" He was talking about Gorbachev's poor command of Russian and, in particular, the way he stressed the wrong syllable of the Russian word for "begin." There's a joke in Moscow: Gorbachev asks Bush, "How do you say NAchat in English?" And Bush replies, "To BEgin." "And Yakovlev," the advisor continued, referring to Gorbachev's leading progressive associate. "'Kazhny. Kazhny!' How could such people claim to lead the country?" The Russian word for "each" is "kazhdy." It was not the first time I heard this criticism, and it was a lesson. Behind much of the political rhetoric and conflict was the simple prejudice against the peasant (Gorbachev's rural origins) and the arrogance of the intelligentsia. And the fear that the world would notice and Russia would be embarrassed.
Fenster responds to comments he received on the original posting of these thoughts:
A response (Tom Richardson) to an earlier Note commented on the basic fact of economics that price=cost only in a state of perfect competition; otherwise, the value people place on goods dictates the accepted price. Thus I was wrong to qualify the pricefixers as crooks. A rebuttal (Andrei) insisted on the total distortion of the Russian "market." Not surprisingly, I agree with Andrei. 1) Methods are being applied in Russia which are normally used to CORRECT problems in already-functioning market economies (and they are quite controversial even in that context). There is no evidence that the same theories and assumptions will make a market economy from the unprecedented starting point of the xUSSR. There is no market to regulate or correct. 2) Deviations from perfect competition only partially explain what is happening here. Price-fixing seems to be integral to the "market," and not just any price-fixing: price-cutters risk violent consequences. It is one thing to draw graphs about how market behavior will change; it's another to risk having your teeth kicked in by obeying one of those graphs. 3) The value people place on goods may determine the price they are willing to pay when discretionary purchases are concerned. Other factors come into play when the goods are vital, like the food one needs to survive. The value of survival is extremely high, but there's a difference between willingness to pay and ability to pay. The choices people have become undernourishment, malnourishment, time wasted in food-gathering, stealing and rioting. None of these alternatives take us to loftier points on economists' curves. The evidence that Russian enterprises stubbornly refuse to lower prices even when nobody buys their output is also indicative of the failure of "normal" market behavior.