Copyright © 1992 by Eric Fenster
"It's an emergency exit."
"So, do you have a habit of looking for emergency exits? In that case, we have others at the back of the plane." And so on. But he moved the box, we had a good chat, and the rest of the flight was fine.
In Moscow, passport clearance was even more rapid than last fall, though it is still only when the computer, not the immigration officer, is satisfied that the door is released and you are truly in the country. Baggage delivery was surprisingly fast and just 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 with 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. 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 a new charge had been invented for making a page at the airport, as we learned when trying to locate a member of the group who was coming on another flight not even posted on the arrivals board. The paging fee was consistent with inculcating the new ideology that in a market economy everything has a price. The concept of service was, I suppose, put off to a future stage of reform, so I had to occupy the office from which pages were made and stop it from functioning until somebody was called who was civil enough to ascertain the problem and inform us that the flight our passenger was on had landed at a different airport.
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 costs 150 rubles, which would be as if they cost $150/kg in the USA--or 10% of one's monthly wages. To that, 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* [to footnote] 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 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?
This man's contempt for Gorbachev led him to lump him together, even with Stalinists, as "hardliners." "There can be no democracy that 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 with little love for the privileged intellectuals, since the intellectuals showed little signs of such bravery last August [1991, the attempted coup d'état against Gorbachev] and since their likely skills in armed struggle would probably mean their being swept aside in minutes.
A popular sport, in which our host also engaged during the session, 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 contradiction doesn'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 that went to those two countries.
It was altogether a valuable insight into the minds of those who are directing Russia at this moment.
Then he explained with satisfaction that experts from the World Bank came to analyze Latvia's situation and offer advice, that experts from the International Monetary Fund came to analyze Latvia's situation and offer advice, that experts from the United States came to analyze Latvia's situation and offer advice, that experts from the European Community came to analyze Latvia's situation and offer advice... In the old days, only Moscow offered advice. Some independence.
Like Germany, Latvia is proposing to return nationalized 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 be provoked, this policy just adds to the risks and hurdles for potential investors and could block necessary economic reform.
Half the Latvians are of Russian origin, and on May 5 the new language law went into effect. Latvian will be the official language, meaning 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 to improve the economic conditions to which everybody will be subjected.
Social values are inculcated in early schooling and children's stories, so at the nursery school I asked the director and teachers whether the political and economic structural changes was having effects on their pedagogy . 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, about $8), while a starting teacher receives 342R, the current minimum (scheduled to go to 750R the next week). That will buy 1-2 kg of sausage. There's talk of another strike. 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.
A band was playing, and another photographer and I collided as we both spotted and made for a couple in their 70s, absolutely archetypal, dancing staunchly, the woman clutching a copy of a book entitled, "The Russian Character." [Photos]
In the afternoon, Vladimir Zhirinovsky came to the 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 within them would be Russia; no more "republics." He also promises an immediate invasion and conquest of Finland. Russia 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 hard-line Communists being known as red-brown. The encouraging thing was that only about 30 people were paying any attention to Zhirinovsky. For now.
Various forms of persuasion and force have been used to remove people from their homes. Even though new flats are offered, they are in distant suburbs. Besides the problems of uprooting, distance and this contemptuous treatment, Russians build 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, somehow, 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 known). When briefly asked about this practice during 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, but to whom and how much. Others tell me he already had a reputation while a university professor for accepting payments to give satisfactory exam grades.
Two people, a banking consultant and a business lawyer, in one of the American groups I brought here met 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?"
"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 and blowing smokein the air 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 information or payback plan.
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. 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 macroeconomic theoreticians and microeconomic behavior.
The MI complex is also a major producer of consumer goods (eg, 100% of TV sets), and it is projected that MI consumer-oriented output should rise to 80% of the total production in 1992. However, this figure is meaningless for two reasons:
1) The military/consumer 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.
2) 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 that 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 that 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 most of the 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?
We were supposed to have a meeting with A. Nevzorov, host of "600 Seconds," the fast-paced TV program that not only exposed scandal but exposed viewers to the Soviet criminal scene while the blood on the close-ups of murder 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 thus 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 art museum was a kiosk selling refreshments: one for rubles, one for dollars. You could buy the same glass of Pepsi for 7 rubles (6 cents) at the first or for a dollar at the second, 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!...
During a visit to a computer retail store, I 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 simply obeying the supply-demand curve, others asked how they could get hold of the those 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 response.
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. To be paid, not a wage increase, is the demand. The government now plans to introduce a 5000 ruble note.
Teachers struck for higher salaries, so 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.
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. Will the archives that reveal the sins of those now in power be opened? I'm not holding my breath.
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.
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 first among equals, he was made acting Prime Minister. The labor ministry was divided into three pieces: 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 rubles at this problem. 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.
The kiosks near metro stations that 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 dollar at 100 rubles (the rate can be 90-120), here are cigarette ruble prices at one kiosk.
Camel non-filter 40R
Camel 100s 110R
Winston 100s 120R
You probably didn't know Marlboro was worth twice as much as Winston!
A 33cl can of Coke was 90R, a 2 liter bottle cost 400R. Soviet champagne was 170R. Vidal Sassoon shampoo with the label printed in English & Russian (ie, produced for the Russian market) was 350R--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:
($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. There's 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 news weekly, 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 US$10, or take the 2-hour 20 cent boat ride on the Moscow River for US$30 [sic] with buffet lunch.
Maybe it's too soon to talk about colonialization, but there are now shops and entertainment spots that accept payment only by credit card, something even Russians with plenty of dollars don't have yet. A "Keep Out" sign?
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 his 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 as he assumed. Nor did I confront the second assumption, that there would be such a significant temptation 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 the phone by identifying itself--like, "Radiant Airlines"--not with a mumbled, indifferent and off-putting, "Yeah."
This conversation reminded me of several days I once spent 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.
The economists who use ideal supply and demand and price formation curves to theorize 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 government advisor (discussed above) was in an exhausted pose during a break in our discussion, 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?" 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), the arrogance
of the intelligentsia and the fear that the world would notice and Russia
would be embarrassed.
*WHEN these notes were first distributed on the Internet in 1992, an American professor commented on the basic fact of economics that price reflects 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 price-fixers as crooks.
A rebuttal from a Russian disagreed and emphasized the total distortion of the Russian "market."
Not surprisingly, I agreed with the latter:
1) Methods were being applied in Russia that are normally used to correct problems in already-functioning market economies (and they are quite controversial even in that context). There was no evidence that the same theories and assumptions would make a market economy out of the unprecedented starting point of the xUSSR. There was no market to regulate or correct.
2) Deviations from perfect competition only partially explained what is happening in Russia. Price-fixing seemed to be integral to the "market," and not just any price-fixing: price-cutters risked 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 because you acted in concert with 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. People's choices have became undernourishment, malnourishment, time wasted in food-gathering, stealing and rioting. None of those alternatives lead to loftier points on economists' curves. The evidence that Russian enterprises stubbornly refused to lower prices even when nobody bought their output was also indicative of the failure of "normal" market behavior. [Return to text]