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“The New Russian Model Looks to Latin America” by Dean LeBaron [Draft of my chapter for a book on Russia: After Ten Years compiled by the Stockholm Institute for Transition Economics and Russian European Centre for Economic Policy. The book is expected to be published in Sweden this fall.] Draft Dated August 30, 2000 My first contact with the Soviet Union was in 1989 at a meeting in Cambridge*, Massachusetts for leaders of that country's military industrial complex to explore how to bring Western capital and Western capitalist practices to enterprises in the Soviet Union. The Soviets sent their first team and the US fielded a class-three farm team. Clearly the Soviets were disappointed and talk among themselves rudely displayed their disinterest in "not serious" discussions. I was a speaker and seemed to say something that resonated with them…I talked about opportunity to use their world-class technical skills in Western markets. They visited my home; for many, that was the first chance they had to see how Westerners, outside of movies, lived their everyday lives. And they came to my office where, at their request, each wanted a one-to-one consultation on their individual problems. Usually these were something on the order of "I have 250,000 people employed in my tank factory but only enough work for 5,000. Who will fund us until we figure what else we can do?" The plan was clear to the Soviets. Reduce military spending on both sides. After all, if there was no Cold War threat, why continue to arm against one another? Instead, take the hundred of billions in dollar equivalents and spend it on joint investments. It seemed so simple to them and attractive. At the invitation of the Gorbachev government, I went to Moscow to see for myself. This visit was arranged within a few days of the invitation since Batterymarch's private plane gave me rather more flexibility of scheduling than would normally be possible. And I found the problem to be greater than I had imagined. Soviet factories reminded me of scenes from nineteenth century English sweatshops. But managers were resourceful in facing problems that would cripple their plants every day and then in solving them. Meanwhile, research facilities, without resources, produced advanced ideas, often without practical application. I could see that splitting factories into parts would produce smaller units that could be nurtured. Nominally the partnership was between my firm, Batterymarch Financial Management, which was an adviser to major US institutional investors and which had no government affiliation whatsoever, and the Military Industrial Commission (the "State Commission") whose first deputy chairman, Vladimir Koblov, was our direct liaison. I went to work for about two and a half years with a team of a dozen US and Russian specialists and personally spent about one week every month in residence. A committee of ministers from the eight ministries that reported to the State Commission was created to guide this joint effort and, most importantly, to learn what we were doing. In the course of our work together, we developed respect for each other and close friendships. The 5,000 military enterprises under the State Commission controlled about 25% of the national economy and certainly its most technologically advanced portion. Otherwise how could it have engendered fear for fifty years in the developed Western economies? Or so the logic went. Together with Russians from the State Commission, we staffed an office in Moscow across the street from the USA-Canada Institute, a well-regarded think tank that some said had KGB roots. Our American staff was elegantly housed in a government dacha in Lenin Hills, normally reserved as a guesthouse for official delegations. The residence functioned like the small luxury hotels which have become popular in major cities, although ours might have had special electronics equipment for audio output to receivers in locked rooms in the basement. Russian guests would rarely hold conferences inside, preferring walks in the adjacent and private park grounds. Although never stated, it was the impression of the Western staff that the privileges we were accorded-access to communications, food from the Kremlin, crack drivers with traffic-stopping rights, and free access in and out of country in our private plane-indicated that the intelligence services were partners too. And there was a directive by President Gorbachev to give us what we needed. We were on a fast track because the Soviets wanted to partner with the West and quickly. They had to get their private economy going because, no matter what, the public economy was imploding. Extraordinary people staffed the hundreds of enterprises we saw. With few resources but their own wits, they produced ingenious solutions to problems that we in the West would have solved by buying our way out of with more hardware, more factories, more R&D, or more something. These were luxuries not open to the Soviet firms. The directors of enterprises were resourceful. Each day presented new issues to them which could wipe out their companies. And they survived. Their systems were dysfunctional but their leaders developed methods to cope. A combination of Western systems and Russian talent would produce dramatic results. But the odds of finding good enterprises to benefit from new investment were not attractive. The Soviet companies were huge and cash starved…desperate for cash. This epoch was legendary for its lack of consumer goods and lines waiting for anything. Light bulbs would be cycled forward from fixtures where visitors had been toward ones in their new destination. Soap would be put in washrooms just before visitors came and removed very quickly when they left. Food would be hoarded to put on a hospitable spread for guests. Every enterprise had a conversion program, trying to find a way to make a living in a non-military, consumer-oriented world. Nobel-prize-class scientists were designing plastic toy pianos for an unknown commercial market. Tank firms talked about car designs and joint ventures. Now a new effort was made. Politics opened; the press opened; and young reformers were visible in the front ranks of policymakers. The West opened everything except enough money, and not soon enough. Admittedly, more money came through, but it was often in the form of expensive Western infrastructure consulting and not directly to the Soviets. Very little of the giveaway-the privatization-of Russian enterprises went to ordinary people but, curiously, often benefited a new class of entrepreneurs, the oligarchs, who got very rich on the spoils. And this money made in these gray, if not black, markets moved out of Russia in amounts that may have been between $25 billion to $50 billion. But the West balked at every opportunity to join hands. Perhaps the best effort was the Grand Bargain offered to the G-7 in London in July 1991. President Gorbachev presented a paper jointly authored by Graham Allison, dean of Harvard's Kennedy School, and Gregory Yavlinsky, a highly respected economic reformer. The title, "Windows of Opportunity: Joint Program for Western Cooperation in the Soviet Transformation to Democracy and the Market Economy," tied specific measures of performance to investment levels. However, attitudes attributed to US President Bush and the Japanese government rejected the idea in its entirety. When this offer became the "Grand Bust," the Soviet government lost credibility, and its authority to impose taxes was challenged. If the first phase of the political/economic transformation was Gorbachev's attempt to consumerize the Soviet economy within the structure of the Soviet Union, the second started in August 1991, with a failed coup attempt and the ultimate dissolution of the Soviet Union in December 1991. The role of Boris Yeltsin, already President of Russia, became much more significant as leader of the largest and strongest state of the former Soviet Union. He was given the mandate. And just as the West had humiliated Mikhail Gorbachev, Yeltsin also humiliated him. My mandate came from the Soviet government, specifically its president, Mikhail Gorbachev. So when the August 1991 coup took place, the message was clear: a new government team would take over. Six months later we packed up and left. A period of confusion, looting of assets, and emergence of an openly expressive society became evident in the next eight years. Gross Domestic Product, as best one can determine from figures, steadily declined. The term "bandit capitalism" seemed to fit. Economics were modeled more after that on the docks of Hoboken, New Jersey than on mid-American free enterprise. Security meant paying for protection. And still, no one tried to do anything for the people on the street, who would stay on the street. We know the result of the bandit capitalism. It is estimated that hundreds of billions of dollars worth of state assets have moved into a few private hands, with the acquiescence of Western officials. For Russia, capital flight has been a dominant feature of the last decade, perhaps in the tens of billions of dollars each year. One can assume that almost none of it was entirely legally obtained…money laundering, false accounting statements, and tax evasion are rarely prosecuted as crimes in the Russian systems. Curiously the present atmosphere of stability seems accompanied by a continuation of money outflow, perhaps even an increase. But foreign investments are a counterbalancing inflow. The Russian public, normally passive and tolerant, and especially the free press could not reconcile this bandit capitalism-and the speeding private limousines, the bodyguards in chase vehicles, the contract killings-with the poverty on the streets. After nearly a decade of free politics and free economics, this second phase of Russian transformation was over. A quest for a strong hand and pride in one's country set the stage for a turn to General Pinochet…excuse me, I mean Colonel Putin. We have just entered a new phase…one without origin on Russian soil. Now there is an elected government, rumored to have been selected by some of the oligarchs, which appears determined to reinstate pride in central control. The young reformers are still present with their economic plans, but press critique of the government is curbed. The military is offered more support. And the oligarchs who may have helped select President Vladimir Putin may get a little slap on the wrist. In other words, the new scheme will run the country on tight politics and easy economics. There seems to be little doubt that Putin was placed in the offices of prime minister and later as president to forestall something that would be worse for the "family"…a military coup that was not of their initiation. His charge might have been, like Pinochet's in Chile, to restore national pride and leave the economy free to function on global rules under the direction of the leading business forces already in place. While Russia plunges toward an autocratic, single-theme model-restore pride in the central state-Western governments look for active dissent as a requisite for signs that democratic leanings have not been stifled. It would be consistent with the multi-strategy Russian mind to provide evidence of some dissent but in a carefully controlled manner. So it is possible to detect the move of a seemingly non-government party under the direction of Boris Berezovsky, who might be principally responsible for appointing Putin to the leadership in the first place. Thus, evidence of dissent could be found but orchestrated behind the scenes. And real dissent in the form of press freedoms would continue to be curbed. If it sounds like Chile under General Pinochet, it is. Exactly. General Pinochet was selected, it is rumored, by the oligarchs of Chile to correct the communist policies of his predecessor. They wanted secure politics and freedom to develop markets without government interference. One of the first sectors they chose to develop was the management of private savings by, not surprisingly, private financial firms, the very ones who supported Pinochet. And Chile was the better for it. The country knew where it was going. It was not just a level playing field; it was a carefully mapped one. My experience in Chile began in the late 1980s following the founding by my firm, in 1987, of the first institutional equity fund to invest in Brazil. In one of the first meetings with officials in Santiago, I visited the Finance Ministry for lunch. A group of senior, gray-suited officials hosted an early afternoon meeting covering the usual topics of monetary export controls, currency conversions, market restrictions for foreigners, and the like. Any of the participants could have been the finance minister, whom I did not expect to be present. Shortly, a California "beachboy-like" person arrived wearing, I noticed, open sandals; he sat on the floor. I thought he could have been a translator, but I guessed wrong. This was Hernan Buchci, the reform-minded finance minister. Free market reform combined with cattle-prod politics was the rule. Of course Chile is not the only recent historical case blending tight politics and easy economics. South Korea, Singapore, Malaysia, and Taiwan come to mind, among others. In each situation there was a ruling elite in a position to exploit the climate of privatization for themselves in close partnership with government. And the economies flourished. It is a model of some success and even parallels the practice of Russia's new partner, China. (Leaders of the Soviet Union once derided the Chinese to me as "our little yellow Communist cousins." They now mimic and respect the Chinese.) Today, looking at Putin's Russia, I think of Pinochet's Chile. If the parallel holds, the prospect for the future, economically at least, is quite attractive. Chile has been a model for investment success in Latin America since that time. *The chronicle of my work in the former Soviet Union and China is on my web site www.deanlebaron.com as Climbing Falling Walls and will appear in print as Marx to Markets by iUniverse Press.
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