The transformation of the Russian economy was supposed to have been one of the great success stories of the 1990s. Instead, there is pervasive doubt about Russia's future.
It's hard to remember that just eighteen months ago things looked quite different. Then, two "radical reformers" and darlings of the West, First Deputy Prime Ministers Anatoly Chubais and Boris Nemtsov, were spearheading the reform effort under the stolid leadership of Prime Minister Viktor Chernomyrdin. Inflation had been tamed; the ruble was stable. The Russian stock market was the best performing emerging market in the world. The economy was experiencing its first growth since the collapse of the Soviet Union, and the government was predicting more rapid growth in 1998. In August 1997, Deputy Secretary of State Strobe Talbott declared that Russia was at "the end of the beginning" of its journey toward becoming a "normal, modern state. . . . It may be on the brink of a breakthrough." And sure enough it was -- just not the kind Talbott had in mind.
Rose Brady must feel as bad as Talbott does today. Kapitalizm, her new account of the effort to transform Russia into a liberal market economy, takes the story up through the end of 1997. Though she mentions the gathering East-Asian financial crisis, Brady ends on a positive note: Russia had chosen capitalism over communism by reelecting Yeltsin president in 1996, and Chubais and Nemtsov were making a determined push toward liberal capitalism, as opposed to the crony variant. But the financial crisis of August 1998 profoundly shook that optimism. In a short postscript that the crisis made obligatory, Brady concludes on the more tentative -- and trite -- note that the future is uncertain.
So what went wrong? Those looking for clues won't find them in Kapitalizm. Although Brady writes about the political and social obstacles confronting the reformers and how reality imposed compromises on their plans, her description of six years' reform offers no hint that last August's momentous setback was even possible. That financial collapse demonstrated that the choice Russia faces is much broader than the one Brady posits between liberal and crony capitalism; it includes state capitalism and a barter economy, among other possibilities. In fact, the events of August devastated both Brady's proponents of liberalism, the Chubaises and the Nemtsovs, and her exemplars of cronyism, the so-called oligarchs, a small group of well-connected big businessmen. Brady's inability to explain this suggests she missed something essential about what was taking place in Russia.
This is not surprising, for Brady is not interested in analyzing the reform effort or the opposition to it. Rather, she strings together, with a few transitional paragraphs, interviews she conducted with reformers, businessmen, politicians, Western investors, and average Russians during her stint as Moscow bureau chief for Business Week from 1989 to 1993 and on trips back after 1994. She does this because, as she notes, she believes it impossible for a Westerner to be objective about Russia. The interview approach lets the Russians tell their own tales and leaves judgment to the reader. Such an approach can work if the interviews are selected with care, if they elucidate key episodes, and if the interviewer is apt in drawing from her subjects compelling analysis or, at least, a good story.
Unfortunately, Brady fails on all counts. Her interviews are loaded in favor of the liberal reformers, a consequence of both Brady's own sympathies and the reformers' accessibility. (From the earliest days, they believed the West's support was critical to their survival and success, and they rarely missed an opportunity to try to shape Western views of what was happening in Russia.) Brady does interview some new Russians, including several oligarchs. She slights, however, many of the key actors -- including the maligned "red directors" who managed much of Russian industry, Communist and nationalist leaders who derided reform as a criminal rip-off of society, and regional leaders who had a ground-level view of the way reality distorted the reform process. The story from 1992 to 1997 is simply incomplete without them, and the August crisis has increased their importance.
Similarly, Brady skips much too quickly over episodes that would tell volumes about the reformers' policies. She devotes, for example, only a few pages to the notorious "loans-for-shares" scheme of 1995, which was critical to the emergence of the oligarchs and revealed the cozy relation between the liberal reformers in government and a small circle of influential financiers. Under this scheme, the government would borrow money by auctioning off shares in strategic industries as collateral. The winners would then manage those shares in trust with the right to sell them off and retain thirty percent of the profit should the government fail to pay back the loans (a sure bet given the state of Russia's finances). In the event, a handful of banks both conducted and won the auctions and then a year later sold the shares to themselves at cut-rate prices.
Brady deals with this episode through a short interview with Oneximbank chairman Vladimir Potanin, who helped devise the scheme and was one of its principal beneficiaries. After discussing the rationale behind the plot -- to break the red directors' hold on key enterprises -- Brady finally gets Potanin to concede that the way auctions were managed was "really bad." Brady then plays down this concession by noting that Potanin had a good point about the red directors. But, three years later, the oligarchs' claim to be more efficient managers is open to question: Potanin himself is considering selling back to the state some of the enterprises he gained under loans-for-shares, in part because he can't manage them profitably.
In her failings, Brady is not alone. She doesn't differ from numerous Western observers (including many in the Clinton administration) who wanted to believe liberal economic reform was taking hold in Russia. Like Brady, they were looking for success stories rather than a balanced assessment of economic developments. Like Brady, they played down the darker side of reform, while giving the reformers the benefit of the doubt, particularly with regard to their links to the shadier side of Russian business. And like Brady, they were caught off guard by the financial meltdown of last August and the ensuing political and economic turmoil.
The Russian financial turmoil marks the end of a period of liberal economic reform. The next person writing on Russia's economy won't be caught off guard and may thus be able to deliver a more balanced, penetrating analysis. It certainly won't be an account of the greatest success story of the 1990s.
Thomas Graham is a senior associate at the Carnegie Endowment for International Peace.