Shock Thearpy

1999 > Russia

One way to get rid of 70 years of communism

Johnson’s Russia List 15 March 1999

This article was originally published in the english edition of ETC’s special
issue on Russia (ETC english edition No 1, 1999). To order copies of ETC
magazine, please write to

The Art of Running a Country with Some Professional Help form Sweden

An article by Dan Josefsson, Research by Stefan Lindgren

Moscow in 1998, a warm day in late summer. Outside the Russian Parliament,
the Duma, a small group of demonstrators walk forth and back, carrying placards.
A policeman is standing at their side, meticulously noting the placard texts
in his notebook.

He writes: “Yeltsin and Tjernomyrdin: Russia has had enough! Resign!” and
“Are the Yankees the rulers of this country?” and “Stop experimenting with
the Russian People!” This last placard is carried by a sturdy lady with a

The image of the woman pleading not to be treated as a guinea pig keeps haunting
me during my week in Russia. What this woman calls “experiment” is sometimes
called “reform work” and sometimes “the big bang”, but more often “shock
therapy”. What we have here is the biggest privatization project in modern
history. It was meant to transform the whole Russian society into a US-style
market economy. The whole transformation was supposed to be implemented in
2 or 3 years. Thus the term “shock therapy”.

The experiment began in 1991. Today, seven years later, statistics show that
it turned into far more of a shock than of therapy. The fact is that the
therapy has nearly killed the patient. Let’s take a look at some figures.

  • Between 1991 and 1997, Russian GNP – i.e. the value of all goods and services
    that Russia produces – went down 83%.

  • Agrarian production decreased 63%.

  • Investment decreased 92%.

  • 70,000 factories were closed down. This led to Russia producing 88% fewer
    tractors, 76% fewer washing machines, 77% less cotton fabric, 78% fewer TV-sets
    – the list is endless.

  • In a country without unemployment, 13 million people lost their jobs.

  • Those who still have work have had their wages cut in half.

  • The average life span for men has been shortened by six years.

Six years! Such a change normally occurs only when a country is hit by a
massive war, an epidemic or famine. None of this has happened in Russia.
Still, the average life span decreased, in just a few years, to the same
level as in India, Egypt and Bolivia. The experiment that the lady with the
placard wants put an end to is literally killing her countrymen. No wonder
she is demonstrating.

Did the Russian people wish to be subjected to this shock therapy?

According to the prevalent picture of what has happened in Russia during
the nineties, the answer strangely enough is “yes”. This picture looks something
like this: when Michail Gorbachev took power in 1985, he realized that the
Russian economy was on the brink of falling apart. He then started a reform
program that came to be called Perestroika.

Through reforms, he wanted to transform the undemocratic Soviet Union into
a socialist democracy. The press monopoly of the Communist Party was to be
abolished, and freedom of speech declared and implemented. The Soviet Union
was to become a democratic country. Simultaneously, the economy was to be
reformed, from centralized communism to reformed socialism.

The opposition against Gorbachev was led by Boris Yeltsin. Contrary to Gorbachev,
he didn’t want some kind of democratized socialism at all. He wanted to change
over to capitalism. According to the prevalent picture, the old Soviet elite
– the upper echelons of the Communist Party and the many top bureaucrats
– were opposed to Yeltsin’s plans for capitalism. They were scared of losing
all of their privileges.

Yeltin’s success was supposed to be founded on support from the Russian people,
who were fed up with the Soviet Union and therefore demanded far more thorough
reforms than the democratic socialism that Gorbachev aspired to and worked
for. Thus: the people demanded capitalism. The Soviet elite was forced to
yield, reluctantly.

But was this what really happened?

The Russian sociologist Tatiana Zaslavskaya has shown that this popular version
of history is false. According to her, the very influential elite may have
been opposed to radical changes for a couple of years after 1985. But once
having realized that privatization would benefit mainly those who already
were at the top of society, they rapidly changed their tune. According to
Zaslavskaya, Yeltsin could never have come to power without the support of
the leading old party hacks, a theory supported by the fact that it was the
old Soviet elite who took over the nation’s assets after privatization.


One late evening in Moscow I meet the sociologist Boris Kagarlitsky, researcher
at the Institute of Comparative Studies at the Russian Academy of Sciences,
and a heavy critic of the current regime. His criticism of shock therapy
is particularly validated by the fact that he was arrested by the KGB in
1982, for collaborating with a socialist group that criticized the Soviet
regime at the time.

In one of the little cafes in the Rossija Hotel, Boris Kagarlitsky describes
how the Russian elite is well underway to destroying his country. “You must
realize that the key aim of the Russian elite was to become equal members
of the world’s elite, he says. Whatever it took. If they had to tear their
own country to shreds in order to be accepted into that club – then they’d
tear the country to shreds.”

Boris describes how immensely privileged the top echelon of Soviet society
was in comparison to the rest of the population. But compared to top politicians
and industrial leaders in the West, they were still poor. Not even members
of the politburo were dressed in anything else but Russian-made clothes and
shoes, and when they went on vacation, they had to make do with the party
villas by the Black Sea. They were infinitely better than the simple dachas
of the ordinary Soviet citizen, but hardly the exclusive spas in Monaco or
the Caribbean Islands frequented by the world’s elite. That door was closed
to the top dogs of the biggest nation on earth.

But when Gorbachev started to reform Soviet society, the younger members
of the elite got a whiff of more heavenly climes. “An interesting phenomenon”,
says Boris, “is that those who became the foremost representatives and
functionaries of neoliberalism in Russia, often are children of the top
bureaucrats of the Soviet era. They are second generation top dogs. Through
their fathers, they have good contacts in the former party hierarchy, they
are often educated in the West, and they very much wish to be accepted as
part of the world’s elite.”

Yeltsin was elected president in 1991, and shortly thereafter Russia became
an independent nation itself. The Russian economists around him at that time
were extremely market oriented. A survey indicated that they even believed
more in the ability of the market to single-handedly solve the economical
problems of a nation than their colleagues did in the West.

Yeltsin appointed the economist Jegor Gajdar, 36 years old at the time, as
his Minister of Finance. Jegors paternal grandfather had been a war hero
in the Red Army, and his father a foreign correspondent for Pravda. As a
child, Jegor Gajdar therefore lived in Cuba and Yugoslavia with his father.
During the Gorbachev period, Jegor Gajdar worked as economics editor at the
journal Kommunist, and as a columnist for Pravda. In short, Jegor Gajdar
was a typical example of how the second or even third generation of the Soviet
elite changed over from communism to extremely market-oriented neo-liberalism
in the course of just a few years.

Professor Jeffrey Sachs of Harvard was called in as economic advisor to Yeltsin’s
cabinet. In the mid 80’s, Jeffrey Sachs had constructed an economic policy
for the government of Bolivia, and in 1989, he advocated the same policy
when engaged as a consultant by the Polish government. The technique was
nicknamed “shock therapy”. After Poland had been subjected to shock therapy,
economists thought that this was the best method of transforming a socialist
country into a market economy.

One member of Jeffrey Sachs’s team was the Swedish economist Anders Aslund.
Until 1984, Aslund had been working at the Swedish embassy in Moscow, during
which time he became the personal friend of many of those who later on would
implement shock therapy in Russia.

Gajdar as well as Yeltsin were for shock therapy, and the foreign advisors
were given the task of planning a cure-all for Russia. It would turn into
one of the most ruthless experiments in neo-liberalist politics ever performed.
“Shock therapy” was based on the view that society in it’s “natural” state
functions as a market economy.

Only by regulating and limiting the free market in an “unnatural” way, could
a non-market-oriented system be created – which was what had been done in
the Soviet Union of old. The only thing needed to reinstate the natural order,
strictly speaking, was to take the restricting regulations away. The natural
balance of society thus would be restored by itself. The driving force would
be the concept of self-interest – the ambition of each single individual
to make as much money as possible. Or, as expressed by Anders Aslund in Dagens
Nyheter in May 1992: “The miraculous incentives or temptations of capitalism
conquer more or less anything.”

The recipe that would let loose “the miraculous incentives of capitalism”
was simple: State-owned companies would be privatized, regulated prices set
free, currency trade deregulated.

The advocates of shock therapy did not deny that this process would be painful
for the Russian people. During the Soviet era, the State had subsidized all
merchandise, making almost everything very cheap. You paid nearly no rent
at all, and price increases were an unknown phenomenon to the Russians. The
shock therapists warned that prices would go up when price regulations were
abolished, but only during a transition period. Soon, the urge to earn a
profit would make private companies produce more of the products most in
demand, and consequently prices would go down and stabilize. After that,
Russia would become a better place to live in. Everything according to sound,
market-oriented economic principles.

The start of the speedy transformation of Russia was due to be winter 1992.
In the autumn, Yeltsin even publicly declared the exact date for implementing
free pricing. This proved to be a huge blunder, as Russian businessmen
immediately stopped selling any products while awaiting deregulation, which
would provide greater profits. In the autumn of 1991, the supply of products
hadn’t been scarcer than usual in the shops of Moscow, but after Yeltsin’s
disclosure, shelves suddenly stood bare. This dismal start to shock therapy
would prove very symbolic.

Prices were deregulated on January 2nd 1992. Price increases were horrendous.
A few years before, the first McDonald’s had opened in Moscow and became
very popular. Just a few weeks after deregulation, the restaurant stood empty,
the price of a hamburger having risen from 38 roubles to a 100. The average
salary was still 500-800 roubles a month. In fact, the inhabitants of Moscow
almost totally stopped eating meat, as the price per kilo had become absurdly

And this was just the beginning. In 1995, four years after deregulation,
the products in the shops had become 3,668 times more expensive than in 1990.
A journey on the underground, which cost 5 kopeks before, now suddenly cost
400 roubles, 8,000 times more. A kilo of meat that had cost 2 roubles now
cost over 3,000. Etcetera.

In order to compensate for inflation, worker’s wages were increased, but
not enough. By 1995, real wages in Russia had been halved. The Russian people,
who hadn’t experienced any price increases for 30 years, now no longer could
afford to buy food.

None of this seemed to bother those Swedish and American economists who had
planned the whole process. In January 1993, when runaway inflation was strangling
the Russian population, Anders Aslund said the following in Dagens Nyheter:
“I breathe more freely when I come to Eastern Europe – Prague, Warsaw or
Budapest, but Moscow as well – escaping the small-mindedness of Western Europe.
During each visit I am gladdened by the great future, and the new triumphs
of capitalism.” A month or so later he commented on starvation among the
poor as follows: “The problem is the pensioners. But that’s a social problem,
not a political one – because pensioners are not revolutionaries.” (Expressen

Simultaneously, step two of the shock therapy got under way – the speedy
privatization of State-owned companies. Almost no one really had time to
understand what actually happened. Journalist Julia Kalinina, who works at
one of the biggest dailies in Moscow, tells me about the way the publishing
company was privatized. All ownership was concentrated into one single share
certificate, which the editor in chief laid his hands upon. No protests from
the journalists were heard. “None of us quite understood what a share certificate
was”, Julia explains. The story is interesting. If the journalists at one
of the biggest dailies in Moscow didn’t understand what privatization amounted
to – then how could other citizens understand it?


The gap between the knowledge amongst the elite about what privatization
amounted to, and the ignorance of the common man, became obvious when the
State started issuing so-called vouchers, or privatization coupons.

The privatization coupons was an idea that was supposed to solve one of the
shock therapists’ greatest problems: how to go about privatizing thousands
of State-owned companies in one fell swoop? In the Western world we’re used
to a small class of owners controlling the main part of our countries’ resources.
In Sweden, for instance, the Wallenberg family controls half of the Swedish
trade and industry.

This fact is either accepted or totally ignored by the Swedes. But what would
happen if somebody suggested that we should privatize the national railways
and Telia, the national phone company, by simply turning them over to Peter
Wallenberg? Something like that could hardly happen without debate, the injustice
being far too obvious. But what the shock therapists planned to do in Russia
was precisely to create a few new Wallenberg families by selling off national
resources dirt cheap.

An astonished reporter from Dagens Nyheter asked Anders Aslund whether Russia
really intended to more or less give national companies away. “Yes”, Aslund
replied, “in order to rapidly create a class of owners.” (Dagens Nyheter
920216) An owner class was to be created. But just as the Swedes would not
be inclined to make a gift of their national resources to Mr Wallenberg,
neither would the Russians want to see their country handed over for a token
sum to some arbitrarily chosen robber baron.

In his book “Why Eastern Europe needs a Shock Therapy” (1992), Anders Aslund
presented a solution to this problem. Privatization should be made “politically
acceptable” by distributing small blocks of shares to a lot of Russians.
Thus, nobody would perceive the privatization process as some Russian version
of Peter Wallenberg grabbing the people’s property.

And so this was done. All Russians were given a voucher, worth about a month’s
wages in roubles. This coupon was meant to be used to acquire company shares.
Boris Kagarlitsky tells me that he and his wife refused to accept their voucher.
“We thought that it felt like partaking in the robbery”, he says. But 80%
of the population accepted. This, however, did not lead to any distribution
of ownership. On the contrary.

Boris recounts that each voucher was worth about a month’s wages when
privatization started. But a few months later, when people were about to
exchange their vouchers, runaway inflation had consumed nearly all their
value. A voucher was worth no more than a bottle of vodka.

It so happened that at this very time, a bunch of businessmen suddenly turned
up, willing to exchange people’s apparently worthless vouchers for – yes,
vodka bottles. What people didn’t know was that a voucher loses nothing of
its value if used to acquire company shares. The value of the companies had
not been adjusted by inflation.

“Most people swapped their vouchers for vodka”, says Boris Kagarlitsky. Thus,
people with contacts could collect a couple of thousand vouchers, enough
to buy a whole company for 2,000 bottles of vodka. The buyers were the same
elite who had been at the top during the Soviet era, and who had helped Yeltsin
implement the shock therapy.


Someone with real fancy contacts, however, didn’t even have to pay with vodka.
This is how a take-over for free could take place: The CEO of a State-owned
company started a non-operational private company. The State-owned Company
then lent the new little private company 50,000 dollars. In practice, the
CEO thus granted himself a government loan. Before the planned privatization,
the value of the State-owned company was appraised in roubles. The enormous
inflation, however, continually diminished its value in dollars. When the
State-owned company was worth only 50,000 dollars, the CEO took action: the
small private company bought the State-owned company in it’s entirety, with
the money he had borrowed from it.

Finally, the two companies were merged, and thereby, the 50,000 dollar debt
never had to be paid off. The CEO had become the legal owner of a former
State-owned company, without having to pay a single kopek for it. In this
way, the Russian elite took over everything from car factories to oil wells.
Millionaires were made overnight.

Thus a new class of owners had been created, although in a horribly unjust

According to the plans of the shock therapists, the new owners now would
automatically run their industries with an efficacy new to Russia. State-owned
companies, which had produced things nobody wanted before, would go bankrupt
or reorganize production. And the driving force behind it all was supposed
to be what Aslund almost poetically had named “the miraculous incentive of

But things didn’t quite turn out the way Aslund had expected. The new owners
didn’t produce what people wanted. Instead they started plundering their
companies. According to Boris Kagarlitsky, they had no real choice. “Put
yourself in their position,” he says. “There you are, the owner of a company,
wondering what to do with it. You have neither the capital nor the money
to invest in production. You lack funds to replace old equipment.

You have no money to invest in research and development. If you’re unlucky
just once, not getting paid for a delivery, you have no reserve funds to
pay your workers from.” “This means that the only thing these new company
owners could do was to exploit the company as a resource in its own right.
If for instance an aluminium mine had been privatized, the owner extracted
as much aluminium as possible without investing any money. He run the machines
until they fell apart, and then he threw it all away as scrap.

By plundering companies, big companies fell into the hands of a small, extremely
wealthy upper class. To them it became something of a hobby to spend loads
of money.” One evening I visited the Prague, a luxurious restaurant in the
middle of Moscow, where probably sizeable chunks of the plundered companies
have been converted into food and drink. One dinner here costs as much as
a Russian low-income earner makes in six months. On the menu, the price is
marked in dollars.

The most interesting thing however was the entrance, which is so well guarded
it could be an Israeli airport. In order to enter the premises, you yourself
as well as any hand baggage you may have must pass through metal detectors.
The process is supervised by a bunch of hefty security guards with mikes
in their ears. These control measures are necessary, as assassination attempts
on the nouveaux riches are pretty commonplace. Often it’s a matter of internal
disputes within the new upper class.


As an ever-increasing number of grotesquely rich Russians turned up in the
shopping capitals of Europe, whilst the Russian industry rusted away, it
became more and more obvious that the shock therapy hadn’t worked.

“Suddenly”, Boris Kagarlitsky says, “you realized that the new Russian elite
were extremely rich in terms of personal wealth, but in terms of working
capital, they were all poor. If you have, say, 5 million dollars in your
pocket, good for you, but for an industry that’s nothing. What you can do
is speculate in real estate. There, 5 million dollars is OK. Or sometimes,
the money went into buying such luxury products as Mercedes Benzes and the
like. Also, a lot of the money went directly into accounts in foreign banks.”

According to Kagarlitsky, it was a fatal mistake to believe that Western
economists were experts in creating a market economy, just because they were
experts in managing one. Neither Anders Aslund nor Jeffrey Sachs have been
involved in the creation of Western capitalism.

Aslund and the others never read Max Weber, Boris Kagarlitsky says. Max Weber
showed in an extremely lucid and distinct way that a class of owners is created
by its history, it’s culture, and it’s internal development, but not through
the owning of property. Private property existed long before capitalism,
without developing into capitalism. Thus, the existence of private ownership
means precious little. It means that there are private owners, but not
necessarily a class of entrepreneurs. The results of the plunder can be seen
in statistics. Between 1991 and 1997, GNP decreased 83%. The shock therapy
simply shut the colossal Russian industry down.

The Western media, which had been inundated with visions of the fantastic
future awaiting Russia, were all very careful when reporting on the horrible
consequences of shock therapy. One of few exceptions was Swedish TV-reporter
Peter Lofgren, who described the winding food queues along Moscow streets.
Anders Aslund was so irritated that this reverse side of shock therapy was
brought before the Swedish people that he wrote the following in an article
on the debating page of Dagens Nyheter: “The few longer queues still to be
found in Russia are a result of the fact that the prices of a few products
are still being regulated (even if this is hard to believe, looking at Peter
Lofgren’s militant socialist reports on TV2).”

A journalist in Moscow who points his camera at poor people thus suddenly
becomes a “militant socialist”. This was neither the first nor the last time
that Anders Aslund dismissed his critics as communists or militant socialists.

However, most journalists in no way ran the risk of attracting the wrath
of Anders Aslund in the press. The typical attitude to the suffering of the
Russians was that shock therapy was the correct medicine, but that its effect
hadn’t been felt “yet”. A typical example: “Much seems to indicate that Gajdar
is doing a great job; but the man in the street doesn’t yet perceive the
positive effects of the recently implemented “shock therapy.” (Dagens Nyheter
920419) Four years later the Russians are still waiting for the “positive
effects” mentioned in Dagens Nyheter. The only difference is that they are
even poorer now.

The banks also helped to spread the picture of a rapidly growing market-oriented
Russia. As late as December 1997, the company Banco Fonder advertised it’s
new Russia Fund. In the prospect, interested speculators could read about
the fantastic developments in Russia: “In an amazingly short time, Russia
has changed and become a democracy on it’s way to a Western-style market
economy.” And: “With a population of 150 million people, who slowly but surely
are experiencing improved purchasing power, there are good reasons to expect
continuing growth and development.” It’s hard to understand how these words
could adequately describe a country where capital investment has decreased
80%, and where the earnings of 75% of the population have tumbled to subsistence
level or less.


As regards the state finances of Russia, the shock therapy became a catastrophe
of a magnitude never seen before. A giant nation, whose industry just a few
years ago was functioning reasonably well, has been forced to return to
bartering. Runaway inflation has meant that there simply isn’t enough money
in circulation. Even wages are paid in products. At the end of his working
day, a worker thus may be forced to stand by the road trying to hawk the
products that he has produced during the day. He gets no other wages.

There’s only one single institution that has money in Russia today, namely
the private banks, often owned by the small elite that has become millionaires
as a result of shock therapy. The Russian government has been forced to borrow
money from these banks, in order to pay its own bills. The banks obliged
by demanding extortionate interest rates.

The chief of the Russian Revision Chamber is Venjamin Sokolov. If you want
to see him, you have to take suspectly clattering elevator ten floors up
in one of the enormous office buildings in Moscow. Solokov apologizes for
his nearly empty office. The Revision Chamber is changing premises, and he
is the last one to move to the new offices. The 50-year-old man in a suit
sitting on the other side of the desk looks somewhat modest and unobtrusive.
But when he starts to describe what the Western economic advisers and the
old Soviet elite have done to Russia, you get a hint of why Venjamin Sokolov
is a hated man these days among the propagandists for shock therapy.

“Since the economy functions by barter, without any money, you can’t tax
people”, Sokolov says. The effect is that the budget keeps shrinking. Since
the banks have money, and the government budget has not, we issue bonds running
at between 3 and 6 months, with an interest rate of 100%. This figure is
unbelievable. The Russian government thus has to pay 100% interest on a 3
months loan. This means that the Russian government borrows about three times
as expensively as the loans that Finax infamously tries to trick poor private
individuals into in Sweden.

And the Russian government doesn’t borrow money for a new washing machine.
It borrows in order to pay off the bills of an entire nation, to pay interest
on loans abroad, and to pay government employees their wages. It borrows
in order to enable the Russian State to continue being a State.

Under Sokolov’s leadership, the Revision Chamber has disclosed that government
officials have invented a new way to make money themselves on the enormous
borrowing needs of the government. They simply extract commissions from the
banks who have the privilege of lending the government money.

“Suppose that a defense industry delivers its product to the government and
wants its money, Sokolov recounts. The government official says that the
government does not have the money to pay, but that the industry can go to
a bank and get credit that the government guarantees. The bank extracts up
to 200% interest. After 6 months, the government has borrowed enough money
to pay back its debt to the defense industry. But then at least half the
sum goes to the bank, which in turn pays off the government official who
arranged the loan.”

According to Sokolov, this kind of corruption reaches high up in the political
hierarchy. “A former Minister of Finance has been arrested for transactions
of this kind”, he says, “and with the facts we have at our disposal, all
the leading figures of the Ministry of Finance could be arrested.”


Of course, no nation can keep paying interest rates of 100 to 200 per cent.
Finally, the whole borrowing spree falls apart. “The more bonds you issue,
the greater your debt, ” Sokolov says. “And finally you get to a point where
you no longer get any of the borrowed money from the banks, since you are
paying them all of it net.” This is the situation Russia has got itself into.

All the money the State received went directly into paying the exorbitant
interest rates of the private banks. In order to save the rouble from total
collapse, the IMF stepped in with emergency loans. In August 1993, Russia
received a loan of 1.1 billion dollars. In July 1993, 2.9 billion. In April
1995, 6.8 billion. In July 1998, the IMF granted another 14.1 billion dollars,
not yet disbursed.

In all, the IMF has provided 18 billion dollars in loans to the Russian
government. But the loans are not free. The IMF craves something in return.
Russia must promise to follow through slavishly exactly the same shock therapy
that has created its desperate situation. Privatizations and deregulationary
measures must continue, or no money will be delivered.

You might think that the IMF leadership is mad, granting billions upon billions
in loans to an economy that obviously doesn’t function. This of course isn’t
the case. The IMF has very good reasons for doing its utmost to prevent Russia
either going bankrupt or throwing shock therapy onto the garbage heap.

There is an abundance of foreign banks and investment companies who also
have financial interests in Russia. All in all, more than 200 billion dollars
from abroad are at stake in Russia, in the form of loans and investments.
If Russia goes formally bankrupt or abandons the “reform policy”, these 200
billion may be lost.

Then several Austrian banks with large interests in Russia would go bankrupt.
The same would happen to big banks in Switzerland, Germany and the Netherlands.
In the US, Chase Manhattan, Citicorp and a string of other banks would go
bust. And so on.


The money lent by the IMF is taxpayers’ money. Sweden and almost 200 other
countries are contributing to the fund. What the IMF in practice is doing
is using taxpayers’ money to save a number of very rich Western companies
from bankruptcy. That this is really true is being stated openly more and
more often.

On September 10 1998, an important hearing was held by an American congressional
committee. The subject for discussion was the crisis in Russia and the role
of the IMF as saviour. One of the invited speakers was the financier Jim
Rogers, founder of the investment company Roger Holdings. His message was
crystal clear:

“The activities of the organization is gussied up in sanctimonious prose
about aiding the poor and raising the living standards of the third world.
Don’t be fooled. These bailouts are really about protecting interests of
Chase Manhattan, J.P. Morgan, and Fidelity Investments. Of course, if Chase
went directly to Congress and asked for taxpayer help to cover a bad loan
it had made to Korea, it’s not hard to imagine the response Chase would get.
But under the cover of the IMF, it can do this regularly without so much
as a peep of criticism.”

However, the gigantic loans haven’t helped Russia one iota. While 200 billion
dollars have been poured into the country, 350 billion dollars have been
illegally exported from the country, according to an estimate by the Minister
of the Interior.

The final destination has been bank accounts of the elite in Switzerland
or real estate speculations in the West. Today, Russians are the largest
group of property owners in London. Simultaneously, a terrible winter awaits
the nearly 150 million Russians who have made no profits from shock therapy.

After 1994, Anders Aslund quit his job as adviser to Yeltsin and moved to
the US. Since then, he has been the most stubborn defender of every single
part of the grandiose shock therapy project, no matter what the current situation
in Russia might have been at the time. Already in 1995, he wrote a book with
the astonishing title “How Russia Became a Market Economy”. He was so sure
of his success that he claimed victory in advance. As the years went by,
fewer and fewer people remained who unconditionally applauded the shock therapy
advocated by Aslund.

Jeffrey Sachs, the economist who led the team that included Aslund, has begun
to change tack. These days, he suggests increased regulations in order to
reduce worldwide speculation, and more than once has said that inflation
is far better than depression. In a debating article, Anders Aslund dismissed
this point of view uttered by Jeffrey Sachs – Harvard professor and the creator
of shock therapy – as “leftist criticism”.

In the same article, Joseph Stiglitz, chief economist of the World Bank,
was also deported to the leftist camp, as well as MITprofessor Alice Amsden
and financier George Soros.


In September 1998, Anders Aslund finally admitted for the first time in Swedish
media that Russia isn’t heading for a glorious future. In an interview he
says that Russia is on it’s way toward “the biggest single national bankruptcy
the world has seen”.

However, he refuses to acknowledge that any responsibility for the current
situation lies with him and the other shock therapists who steered Russia
towards the abyss. When Svenska Dagbladet’s reporter asked him why everything
had gone to pot in Russia, he answered instead as follows:

“Corruption, corruption and corruption – – – in the vast State bureaucracy
under (former prime minister) Chernomyrdin, among local governors, in parliament
and among businessmen. All these four groups lack the instinct of
self-preservation. They only look after their own interests. No one in Russia
is strong enough to look after the interests of society as a whole.”

Let’s hear the last part once more: “They only look after their own interests.
No one in Russia is strong enough to look after the interests of society
as a whole.” The answer is a revelatory one. But also very sad. Before us,
we see one of the most convinced partisans of neo-liberalism.

His macro-economic theories have never been tested on real people before
in the history of the world. Until now. In Russia, Anders Aslund got his
chance to bring about a society that according to the neoliberal course
literature would be the perfect one. A society where self-interest “conquers
just about anything”. A society where starving pensioners “are not a political
problem”. A society where a new “class of owners” was encouraged to help
themselves to what before was owned collectively.

He was allowed to bring it all about, and then, when it all became a disaster,
he sat there whining that nobody “looks after the interests of society”.
That’s how shallow the neoliberal analysis was.

Outside the White House in Moscow, 300 miners have pitched camp in home-made
plastic tents. They promise to stay until the politicians abandon the policies
that are killing their compatriots. They have no money. They still stay put.
Every day, a small group of very poor pensioners come by to give the protesting
miners food.

Dan Josefsson


Lesson One: How to barter 2,000 bottles of vodka and get an industrial company
in return.

1. Make sure you’re born into a family belonging to the top elite
of the old Soviet State.

2. When the shock therapists start distributing “privatization vouchers”
to the people, get your own coupon and bide your time.

3. When after some time, hysterical inflation (also created by the
shock therapy) has made the coupons nominally worth no more than a bottle
of vodka, then you go out and buy 2,000 bottles of vodka. Try to get a quantity

4. Let everyone know that you’re willing to exchange coupons for vodka

5. Through your good contacts among the elite, you know that the price
of the companies that can be bought for the vouchers hasn’t changed with
inflation. Since hardly anybody else knows this, most people gladly relinquish
their coupons for a liquor bottle. Collect 2,000 coupons through bartering.

6. Helped by your contacts among the elite, find a suitable company
and buy it for your coupons. That’s it! You now own a company. Of course
you have no capital to make it run, but you can always strip it of all its
resources and send the money to your Swiss bank account.


Lesson Two: How to become the owner of a company without paying a
single kopek.

1. Make sure you’re born into a family belonging to the old Soviet

2. Arrange to be named CEO of a State-owned company.

3. Start a small private company discreetly on the side. If you have
guilt feelings, you can make your wife or brother the nominal head of the
company, but this isn’t necessary.

4. Get the State-owned company to make a loan of 50,000 dollars to
the little private company. It’s easily done, you being the CEO of both.

5. Shock therapy is in full swing, and the State-owned company is
to be sold to a private buyer. Check it’s value in roubles.

6. With the help of your contacts, see to it that the State-owned
company isn’t revalued, despite the horrendous inflation.

7. Wait until the value of the rouble has deteriorated to the point
where the State-owned company would cost exactly 50,000 dollars. Then make
your move, letting the small private company buy the State-owned one for
the money you borrowed.

8. Merge the two companies. Now you won’t have to pay back the 50,000
dollars that the small company owes the big one. That’s it! You’re now the
owner of a former State-owned company, which has cost you nothing.


  • During the Great Depression in the US 1929-1933, production dropped by 30%.
    In Russia, with shock therapy underway, it dropped by 83%.

  • During the first 3 months of 1992, Russian government expenditure was reduced
    by 40%.

  • Even in deregulated USA, the public sector accounts for 1/4 of the economy.
    In Russia today, the corresponding figure is 1/8.

  • The law on privatization that was passed in the Russian Duma in 1992 prescribed
    that already the very same year, half of the State-owned Russian companies
    should be privatized, and 20% more before 1995.

  • The proceeds of the whole gigantic privatization plan during the years 1992-96
    amounted to only 0.15% of State revenues. The whole of Russia was auctioned
    off for a few billion dollars.

  • 324 factories were sold for less than 4 million dollars apiece, among these
    industrial giants like Uralmasj and the Chelyabinsk Metallurgy Combine. While
    international telephone companies bought networks in Hungary for 2,083 dollars
    per subscriber, they got the Russian network for 117 dollars per subscriber.
    Tractor factories were sold for the price of a bakery or a sausage factory
    in Switzerland, according to the privatization report of the Duma.

  • An energy company with the capacity of UES would have cost 49 billion dollars
    in the US. In Russia, it was sold for 200 million.

  • The oil companies cost 4 cents per barrel produced in yearly in annual capacity.
    In the US, the corresponding figure is over 7 dollars.

  • Money is so scarce in Russia that bartering is back on a grand scale. Gas
    giant Gazprom, for instance, gets only 10-17% of its income in money, the
    rest in the form of products. A 1998 investigation indicates that 73% of
    all transactions between big companies are made by exchanging debts or products.

  • 70,000 factories have been shut down during the Russian “reform period”.

  • Industrial production has decreased 81%.


Already in Soviet times, there were vast differences between classes, definitely
greater than in Sweden. And yet, the new Russian elite has made those gaps
widen dramatically. In 1995, the difference between the richest and poorest
10% was already as large as in the US. Eventually the Latin American level
was reached, where the richest 10% of the population make 16 times as much
money as the poorest 10%.

At the end of the 1980’s, the seven richest men in Russia today owned at
most a summer cottage and an old Lada. Today, five of them are on the Forbes
list of the richest men in the world.

  • Real wages have diminished by 78%, pensions by 67%.

  • 13 million Russians are unemployed.

  • 800,000 Russians with a higher education have left the country.

  • The Russian population has been shrinking for some years by about half a
    million a year. The current figure is 147 million, 4 million less than in

  • The shorter life-span in Russia is a result of, among other things, the return
    of cholera, diphtheria, syphilis and tuberculosis.

In Stalin’s Russia, political adversaries risked execution. In today’s Russia,
the death penalty is no longer needed. 20% of prisoners in Russian jails
have contracted tuberculosis, largely of an incurable variety. In all, 2
million Russians are infected with tuberculosis a figure increasing by
80,000-150,000 people a year.

Causes of death that are increasing the most in Russia are: heart and vascular
disorders (particularly heart attacks and strokes), murder, suicide and alcoholic

Russian murder statistics definitely have surpassed those in the US. Russia
is approaching the extreme level of violence prevalent in countries like
South Africa and Colombia.