Russian Political Turmoil, August 1998

Russian Political Turmoil, August 1998

98-725 F
August 28, 1998
CRS Report for Congress
Received through the CRS Web
Russian Political Turmoil, August 1998
(name redacted)
Specialist in Russian Affairs
Foreign Affairs and National Defense Division
Summary
Russian President Yeltsin's dismissal of Premier Kirienko and his nomination of
former Premier Chernomyrdin mark an intensification of political turmoil. This was
triggered by a financial crisis and underlying economic depression. These political and
economic developments have serious implications for Russia's stability, the post-Yeltsin
succession, and U.S. interests in and policy toward Russia. This report will be updated
if warranted by developments in Russia.
The Issues1
Yeltsin's Reshuffle of the Government
On August 23, 1998, Russian President Boris Yeltsin dismissed Premier Sergei
Kirienko and his government and designated former Premier Viktor Chernomyrdin to
succeed him. The Russian Duma has one week to either confirm or reject Chernomyrdin's
nomination. Chernomyrdin is negotiating with legislators and prospective cabinet ministers.
This political turmoil, the latest in a series of unsettling developments in Russia, heightens
concerns about Russia's political, economic, and social stability and reform prospects.
Russia’s Financial Crisis
Kirienko’s dismissal was triggered by a severe financial crisis which led his
government to announce a de facto 50% devaluation of the ruble and a temporary suspension
of repayment of, and a restructuring of, commercial and government debt — which
amounted to a technical default on billions of dollars of foreign debts. The devaluation
and suspension of repayments were precipitated by the government’s inability to service
its rapidly growing domestic and foreign debt and by the immediate prospect of the collapse
of the banking system — despite a $22.6 billion IMF-led bailout loan agreement in July
1998. The causes of Russia’s financial crisis predate Kirienko’s brief tenure as head of
1 Information for this report is taken from a variety of sources, including Radio Free
Europe/Radio Liberty (RFE/RL), Reuters, Tass, and the Internet website, Johnson's Russia List.
Congressional Research Service ˜ The Library of Congress

CRS-2
government, and can be traced to Chernomyrdin’s premiership (December 1992 to March
1998) and ultimately to Yeltsin. By many accounts, the Yeltsin team fears that devaluation
of the ruble and the price inflation that is expected to follow will be seen by the public as
negating the most significant economic achievements of the regime, under whose
stewardship the GDP has contracted by about 50%, accompanied by economic distress
worse than the Great Depression of the 1930s in the United States for most of the Russian
population. To many observers, dismissing Kirienko appears to be an attempt to shift
responsibility for the financial crisis to the ex-premier. The Kirienko Government had been
hailed by the Clinton Administration as the most competent and reform-oriented Russian
government in years. Some observers expect Chernomyrdin to take a more statist approach,
possibly slowing Russia's economic transition to a functioning market system.
U.S.-Russian Summit2
In July 1998, the Clinton Administration agreed to a Clinton-Yeltsin summit meeting
in Moscow, now scheduled for September 1-3. Following Kirienko’s dismissal,
Administration spokesmen announced that the summit would be held as scheduled. Some
critics of the Administration question the wisdom of proceeding with the summit amidst
such political and economic uncertainty in Moscow. Others argue that cancellation or
postponement might be seen as a U.S. vote of no-confidence in the Russian government,
further undermining its parlous economic situation, Yeltsin's presidency, and the prospects
for reform. Economic issues will undoubtedly be high on the summit agenda.
Political Turmoil
The Yeltsin regime seems to lurch periodically from one political crisis to the next.
For example, during the 1996 presidential election campaign, Yeltsin's sudden alliance
with Gen. Aleksandr Lebed helped bring victory. Yeltsin's reelection was followed by his
prolonged illness and an open succession struggle. In October 1996, Yeltsin fired Lebed.
In March 1997, Yeltsin's appointment of the "young reformers," Anatoly Chubais and Boris
Nemstov, seemed to eclipse Chernomyrdin. In the winter of 1997-1998, Yeltsin backed
Chernomyrdin's downgrading of Chubais and Nemstov. In March 1998, Yeltsin amazed
observers by dismissing Chernomyrdin and the entire government and provoking a bitter
confrontation with the Duma by insisting on the appointment of the little-known 35-year-old
technocrat, Kirienko, as premier. Five months later, amid deepening financial and economic
crisis, Yeltsin fired Kirienko and reappointed Chernomyrdin.
In firing Chernomyrdin in March, Yeltsin cited chronic economic failure and the need
for a more dynamic team to accelerate economic reform and revival. Many, however,
believe that Yeltsin was troubled by Chernomyrdin's open assumption of the role of Yeltsin's
successor and needed a scapegoat for past economic failures.3 Yeltsin further humiliated
2 See CRS Report 98-704, U.S.-.Russia Summit, September 1-3, 1998, A Preview, August
24, 1998.
3 Kremlin spokesmen pointedly left open the option of a third term for Yeltsin, despite the
constitutional limit of two terms for the president. Yeltsin supporters argued that since his first
(continued...)

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Chernomyrdin by publicly criticizing the ex-premier’s announcement of his candidacy for
president in 2000. With no political base of his own, Kirienko was expected to be dependent
upon and obedient to Yeltsin.
Kirienko, with Yeltsin’s approval, assembled a western-oriented economic team and
pursued economic policies supported by the Clinton Administration, the G-7, and the IMF.
But economic conditions and the government's and Yeltsin's approval ratings continued
to deteriorate. Strikes and labor protests, including blocking major railway lines, grew
in frequency, as did public calls for Yeltsin's resignation. In June, the Duma began formal
impeachment proceedings against Yeltsin.4 After four months in power, Russia’s financial
crisis and the ruble devaluation and debt rescheduling — that Yeltsin approved — brought
Kirienko down. On Friday, August 14, Yeltsin assured the public in a televised statement
that the ruble would not be devalued. Devaluation, which a few days earlier he had said
would negate the regime’s most hard-won economic accomplishments, was not a possibility.
On Monday morning, August 17, de facto devaluation was announced. The parliamentary
opposition, the news media, and the public reacted with ridicule and scorn. One popular
refrain was that Yeltsin and the government had devalued not only the ruble but themselves.
Yeltsin’s public approval ratings, as low as 4 % before these events, fell to near zero.
Yeltsin said little in public for a week. Then, on August 23, he made a terse announcement
of Kirienko’s dismissal and Chernomyrdin’s nomination.
Some believe that in firing Kirienko, Yeltsin sought to shift responsibility for the
politically unpopular devaluation to the former premier. Such scapegoating has been a
common Yeltsin tactic in the past. A variation on this theme has it that Yeltsin is ill,
politically out of touch, and was manipulated or forced into dumping Kirienko by his
Kremlin coterie. Another theory is that Kirienko was brought down by banking oligarchs
who convinced Yeltsin — through his daughter and his chief of staff — to sack the premier,
who was resisting their plan for a government bailout of their endangered banks.
Some see this pattern of recurrent crises as a direct result of Yeltsin's leadership style,
distancing himself not only from day-to-day governance but from major policy decisions,
becoming personally engaged only at times of crisis. The Constitution, shaped by and for
Yeltsin, tips the political balance overwhelmingly toward the president. But Yeltsin has
repeatedly shown himself either unwilling or unable to exercise that authority on a routine
basis. He has also consistently refused to allow the emergence of a powerful subordinate
who could wield power effectively. He may view such a development as a threat to his
power. In this view, Yeltsin seems to be motivated above all by a personal will-to-power.
The result has been ineffective leadership characterized by rivalries among competing
subordinates, conflicting policies, and, sometimes, political paralysis. While some admire
Yeltsin's tactical acumen, his strategic position seems greatly eroded.
“The Great Game”
3(...continued)
term began under the old Soviet Constitution, it did not count under Russia’s new Constitution.
4 The Duma's action may be mainly symbolic. Yeltsin's Constitution makes impeaching the
president extremely difficult.

CRS-4
There is another confusing dimension to Russia’s political turmoil. What appears
on the surface to be “normal” competition among politicians and parties, factions, and
movements of varying ideological hues, is believed by some to mask a deeper underlying
contest — “The Great Game.” In this view, party politics and the purported ideological
differences among political rivals is largely a charade concealing a venal competition among
rival elites to seize ownership of vast, previously state-owned, assets. Proponents of this
interpretation see privatization as a combination of outright theft and the biggest fire sale
in history. Rival elites are seen as using political power to carve out economic empires
for themselves. The stakes are so immense that most “ordinary” political considerations,
even on national security issues, are eclipsed by “The Great Game.” Chernomyrdin, the
former head of the giant, still partly state-owned gas monopoly, Gazprom, is widely believed
to be a major player in this game. He is strongly and openly backed by one of the most
aggressive and outspoken financial oligarchs, Boris Berezovskii. Some suggest that the
replacement of the technocrat, Kirienko by the “player,” Chernomyrdin, may be partly a
manifestation of “The Great Game.”
Economic and Financial Crises
The Russian financial crisis that triggered Kirienko's dismissal has many causes. Its
underlying sources are discussed elsewhere.5 Most analysts agree that the immediate crisis
was precipitated by Russia's inability to collect sufficient tax revenue, a mountain of
commercial and government debt that became literally unsustainable, Asia's economic
troubles, and the drop in world oil prices. Many of these factors are interrelated.
Most economic analysts agree that the persistent distress in many Asian economies,
especially among prominent "emerging markets," caused investors to withdraw funds
precipitously from other emerging markets, including Russia. The Russian securities
market, which had the world's highest growth rate in 1997, has lost about 80% of its value
in 1998 as foreign and domestic capital fled. At the same time, the price of oil and gas,
Russia's main exports and hard-currency earners, has fallen sharply. Russian oil was selling
for less than $12 per barrel in August 1998. Russian extraction costs are estimated to be
about $15 per barrel. Asia's economic problems reduced world demand for oil and helped
drive down prices. Reduced oil and gas revenues in Russia, in turn, had a big negative
impact on the Russian securities market, which is relatively small and heavily weighted
toward the energy sector.
Since the collapse of the Soviet Union, Russia has been plagued by chronic shortfalls
in tax collection. Among the reasons for this are chaotic tax laws, an inefficient and corrupt
tax service, a culture of personal and corporate tax evasion, the growth of barter and debt-
swaps in commercial exchanges, and the decline in profits in the energy sector. Since the
disastrous 2,500 % inflation in 1992 when prices were decontrolled, Moscow — prodded
by the G-7 and the IMF — has generally followed a monetarist course that emphasized
stabilizing the ruble and controlling inflation, which was down to about 8% by mid-1998.
These monetarist policies, combined with continued subsidies to loss-making enterprises
5 For a detailed analysis of the Russian economic situation, see CRS Reports 97-1013,
Russian Economic Conditions and Reform, November 21, 1997; and 98-578, Russian Financial
Crisis: An Analysis of Trends, Causes, and Implications, updated July 27, 1998.

CRS-5
and inadequate tax collection, help explain Russia's habitual problem of wage and pension
arrears and made Russia highly dependent on IMF aid.
But the painful expedient of delaying wage and pension payments was not sufficient
to close the budget deficit gap. Determined to avoid inflationary currency emissions, the
government relied heavily on borrowing, especially domestic borrowing via short-term
treasury bills, called GKOs. Large budget deficits and political instability forced the
government to offer high interest rates (typically 30-50%) to attract buyers even for 90-day
GKOs. The government was able to pay off these notes with the help of funds acquired
from the sale of new treasury bills, supplemented by loans from the IMF and other foreign
governmental and commercial lenders. As long as the government continued to meet its
obligations, the GKOs were an attractive, and for many Russian bankers an irresistible,
investment. As the Asian economic crisis, falling oil prices, the Russian stock market's
decline, and continued political instability fed investors' anxiety, GKO rates shot up to
150%. The July 21 announcement of a $22.6 billion IMF-led loan package only calmed
the markets for a few weeks.6 By August, nearly 40% of budget expenditure went to debt
service. This alarming development drove interest rates still higher, resulting in an
unsustainable debt spiral that finally forced Kirienko to resort to ruble devaluation and
suspension of payment on government and commercial debts.
The financial crisis, however, is not over. Russian banks, including many large
commercial banks, borrowed heavily to invest in GKOs. A lot of this borrowing was from
foreign lenders. Now, incautious Russian banks find themselves with large hard currency
debts "secured" by devalued rubles. Most experts predict widespread bank failures — absent
a big government bailout. The Deputy Director of the Russian Central Bank said that even
some of Russia's largest commercial banks were likely to go under. Some fear a wholesale
collapse of the banking system. Averting this is one of Chernomyrdin's top priorities.
Others say the government must use its scarce resources to meet foreign debt obligations
or risk losing future foreign investment.
Implications
The political and economic turmoil in Russia has serious implications for Russia and
the United States. It is as yet unclear whether, or under what conditions, the Duma will
confirm Chernomyrdin or what the makeup and policies of a Chernomyrdin government
might be. Russian news media report that Chernomyrdin has agreed to form a coalition
government representing the main Duma factions. Communists and ultranationalists are
in the majority. This is an old Duma demand that Yeltsin has previously ignored.
Recent political and economic turmoil casts a shadow over Yeltsin’s future, the post-
Yeltsin succession, and beyond that, over Russia’s political stability. Many commentators
argue that Yeltsin is gravely wounded, has no chance of winning reelection in 2000, and
may be forced to resign or to continue as a figurhead. Others caution not to underestimate
Yeltsin's will-to-power or his ability to overcome seemingly hopeless odds. Yeltsin's
televised nomination of Chernomyrdin on August 24 referred to the necessity of "ensuring
6 The initial $4.8 billion infusion was almost entirely expended by the Russian Central Bank
in 2-3 weeks of defending the ruble.

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the succession of power in 2000." While Chernomyrdin may now be Yeltsin's chosen
successor, he is regarded as a lackluster leader and a poor campaigner who has never won
an election. Other prominent presidential aspirants are Yuri Luzhkov, the Mayor of
Moscow, Aleksandr Lebed, now Governor of the Krasnoyarsk region, and Gennady
Zyuganov, head of the Communist Party. Most observers agree that Russia's democratic
reformers have been further discredited and weakened politically.
Some critics of U.S. policy toward Russia charge that it is too closely linked to Yeltsin
and is seen by ordinary Russians as endorsing Yeltsin and the unpopular economic policies
that they blame for leading the country to ruin. Defenders of U.S. policy reply that Yeltsin
has steered Russia on an essentially correct, though painful, course. Russia's current turmoil
raises anew the question of whether it serves U.S. interests to have a weakened President
Yeltsin remain in office at least through 2000 — at the possible cost of prolonged political
and economic instability. The converse might be a stronger and more stable, though perhaps
more authoritarian and nationalist Russia, with a different hand on the helm. These are
not the only possible outcomes, but it seems useful to look at some national security
implications of these two commonly juxtaposed alternatives.
A weak and unstable Russia may be less likely to pose an aggressive military threat
to its neighbors. Russian conventional military capability, already greatly diminished, might
continue to deteriorate. On the other hand, instability probably heightens the risk of various
"loose-nuke" scenarios and increases the probability of proliferation of weapons of mass
destruction (WMD). Also, continued political and economic instability increases the risk
of some wrenching upheaval with possibly violent or radical outcomes.
A more stable, though more authoritarian and nationalistic, Russia might be more
effective in countering WMD proliferation. But it might also be inclined toward more
assertive, possibly imperialistic policies, especially toward some of the other former Soviet
states. Its ability to do so effectively, however, and to revive its armed forces, would depend
in large part on its economic status. Most experts agree that any realistic plan for rapid
Russian economic recovery requires a low defense burden. Hence, even an authoritarian
and nationalistic Russia might not be able to rapidly reconstitute its armed forces.7 A long-
term threat, of course, would be a distinct possibility.
Finally, foreign banks and governments have an immediate economic interest in what
the new government will do about debt rescheduling and repayment. On August 17,
Kirienko suspended repayment for 90 days on an estimated $40 billion in treasury bills
and bonds (of which $11 billion is held by foreigners) coming due by the end of 1999.
The new government plan, which would reduce Russia's debt and shift some of the cost
to foreign investors, calls for creditors to exchange their notes for new obligations that will
offer a longer term of repayment and/or substantially lower interest rates. This threatens
foreign investors in Russian bonds with heavy losses. German lenders are believed to be
most heavily exposed, a factor that could weigh against the reelection of Chancellor Helmut
Kohl in the German national election on September 27, 1998.
7 CRS Report 97-820, Russian Conventional Armed Forces: On the Verge of Collapse?
September 4, 1997, p. 47-48.

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