The West is urging Russia to ?carry on with the free market reforms?. But there is only a robber capitalism in Russia. The people have been the losers, because the necessary legal and ethical framework was never there. Anatol Lieven tells a parable of the fat years and the lean (see leading article, p. 1139). WESTERN leaders have been urging the Russian Government ? if such a thing really exists ? to return to the path of reform, and threatening that otherwise Western assistance will be cut off. To put it mildly, this advice misses the point.

In the first place, with the world economic downturn gathering pace, assistance from Western states and the International Monetary Fund will in any case be limited, while private investment has been killed off for the foreseeable future by Russia?s default on its international debts.

Secondly, for the foreseeable future, any Russian Government will be engaged not in reformist or anti-reformist measures, but in desperate attempts at crisis management. Reforms intended to stimulate foreign direct investment should have been introduced two years ago, after Yeltsin?s last election victory, when they would have been immensely helpful. Then, oil prices were high ? and Russian oil companies therefore attractive ? international funds for investment were rich, investors confident and the Russian government relatively strong. It is too late now. The Yeltsin administration and the parasitical, mindlessly greedy ?lites which support it have squandered the fat years. The lean years are now upon them, and they are likely to last a very long time.

But most important of all, the whole presentation of the transformation of Russia under Yeltsin as a process of reform, implemented by the state according to some kind of plan, is profoundly mistaken. What has happened rather is the collapse of state power as a result of its hollowing out by corrupt private interests, partly by sections of the old Communist ?lites, partly by new financial interests. This process of the leaching away of state power has now gone so far that it is very questionable whether any Russian government, whatever its ideology, would be able to get a serious grip on the state machinery or the economy.

The crisis of the Russian state has three closely interlinked aspects: social, economic and moral. Underlying them all is the fact that the institutions of Russian civil society, always underdeveloped by Western European standards, were dissolved and atomised under Lenin and Stalin to a far greater extent than in any non-Communist country, or indeed most Communist ones. The substitutes offered for the social institutions and traditions of Russia were the Communist Party and the Soviet state. When the Communist Party and the Soviet state collapsed, Russian society was too weak to generate effective democratic political parties as a check on the government and the ?lites, or civil institutions and organisations capable of generating a new social ethic to oppose to the limitless greed and appalling cruelty and vulgarity of the new Russians.

Corruption, crime and disobedience are not simply aspects of the new Russian state, as the analysis of some Western economists suggests ? they lie at its heart. For traditional morality had also been supplanted by Communist morality under Soviet rule. When this collapsed, only moral anarchy was left. As a result, there is no reason truly enshrined in established social, cultural or state tradition, let alone in the behaviour of the rulers, why Russians today should not steal or take bribes.

A key aspect was the collapse of revenue collection, both from taxes and tariffs. In 1992, revenue amounted to 44.2 per cent of gross domestic product, but by 1996 the figure was only 29 per cent. According to the State Revenue Service, one third of Russian businesses paid no taxes in 1996, another 49 per cent only sporadically. Tax inspectors who did try to do their jobs could be in mortal danger: 26 were killed and 74 wounded in 1996 alone. Moreover, while some of these were honourable and indeed heroic servants of the state, others were killed because they had become embroiled in private feuds. The situation was improving somewhat over the past year due to government pressure ? at long last ? on the magnates and the gas export monopoly Gazprom (the acting prime minister Viktor Chernomyrdin?s protectorate) to pay some of its immense backlog of taxes. Now, however, government chaos and the economic downturn are going to hit revenues still further.

In 1996 only 2.8 million people even filed their tax forms, out of an adult population of around 100 million. Russia in 1997 had no computerised database of taxpayers, and indeed many tax offices lacked computers altogether. Even more important, Russia?s 35,000 junior tax inspectors are officially paid less than an equivalent of $100 a month. In these circumstances, it is hopeless to expect that many taxes will be collected from people who have the wealth to bribe their way out of them. Instead, the tax inspectors are reduced to the ancient habit of taxing not those who can pay, but those who have no defences ? in Russia?s case, salaried workers and above all foreigners. And even then, much of the money collected never reaches the Treasury.

Meanwhile, a new oligarchy composed of businessmen and managers of banks has become by far the single most powerful factor in Russian politics ? more so than the presidency, much more so than the parliament. These men, and the officials who are their clients and allies, are overwhelmingly dependent for their wealth on the export of raw materials, and only to an extremely limited extent on manufacturing, or on adding value in some way to Russia?s products.

The shift of the ?lites, the state and the economy to dependence on commodity exports is perhaps inevitable, given the intense wastefulness and incompetence of Soviet industry, many of whose sectors, as is now notorious, were actually value-reducing ? that is to say that the raw materials would have earned more if sold on international markets than the shoddy and useless finished product. None the less, dependence on the export of raw materials has proved a trap for Russia, of a kind that has closed around many other countries in the past. It allows many Russian big businessmen and officials to become fantastically wealthy simply by using existing Soviet equipment to extract various substances from the ground, without having to reinvest a kopek in the new kinds of production and plant that the country will desperately need in the longer term.

Further, a business world concentrated on the struggle for control of strategic raw materials will tend to resist or ignore the new mentalities, business practices and legal norms so crucial to true economic progress. By their nature, oil and minerals can also be controlled by a small number of people or of big corporations ? which can create the political domination of a narrow, corrupt and unproductive oligarchy.

This is one key difference from the American robber barons of the nineteenth century, or indeed the pioneering Russian capitalists of the same period, the Morozovs and Putilovs. These were true pioneers, who built from scratch. With extremely rare exceptions, the contemporary Russians of the early and mid-1990s exploited existing Soviet plant.

Equally important, the gains made by the great American magnates were mostly ploughed straight back into American production, or were at least spent at home. They were not sent out of America on a massive scale to Swiss or other bank accounts. In Russia, by contrast, capital flight was estimated by Western experts to have reached a total of between $60 billion and $73 billion between 1992 and 1996, though by 1997 there were signs that some was returning.

Moreover, with rare exceptions, the new Russian business ?lite, up to mid 1997 at least, was deeply hostile to outside strategic investment ? for after all, what could Western control of companies bring but extra competition? This hostility has been especially clear and overt in the case of the banks, but in a more muted way it is true of the extraction industries as well. For example, most Russian owners in this field supported the rule which bars non-Russian companies from owning more than 15 per cent of oil companies: the privatisation process could then be rigged so that the blocks of shares auctioned at any one time were more than 15 per cent, thereby excluding Western participation altogether.

Russia?s dependence on the export of raw materials is clear from the official figures, which are likely to be if anything a severe understatement of the real position, given the obvious interest of Russian companies in under-reporting the amounts that they are exporting. Thus according to the World Bank?s figures for 1995, Russian exports of all kinds totalled $79.8 billion. Of this figure, by far the largest share was provided by non-metallic mineral products (principally oil and natural gas), which accounted for $33.3 billion. Next in importance came base metals, with $15.5 billion. Precious stones accounted for $5.3 billion; wood and paper products (but mainly raw timber, plywood and pulp), $4.1 billion. Altogether, then, raw materials amounted to $58.2 billion, or 73 per cent of total exports. As against this, the much vaunted Russian armaments industry, together with exports of civilian planes and vehicles, amounted to only $4.7 billion, chemical products (including unprocessed ones), $6.2 billion, and machinery $3.8 billion.

As of 1993, Russia was the world?s largest producer of natural gas, with 27 per cent of world output, and of nickel; the second largest producer of diamonds, aluminium and platinum; the third largest of oil; and the fourth largest of gold, copper, steel, coal and cereals. No other country produces such a range of commodities on such a scale.

Two years ago, I wrote that Russia?s abundance of raw materials also enabled the Russian state to support basic services, maintain basic economic stability and buy off significant parts of the population without having to conduct truly deep reforms. That, however, was before the steep drop in world oil prices, which has exposed Russia?s weakness and dependence in a way reminiscent of what happened to West African states when the price of coffee fell.

The squandering of the profits from Russia?s natural resources is the greatest scandal of the Yeltsin era. After all, under Soviet rule these profits went to support the world?s largest military establishment, the second-greatest space programme and the economies of a dozen socialist allies. With all these commitments ended or greatly reduced, these resources should have been entirely adequate ? if used for the benefit of Russian economic development and social welfare ? to lay a firm foundation for the new Russian state and economy. Instead, control of these raw materials has passed into the hands of a tiny number of great magnates ? including Chernomyrdin himself in his capacity as former director and political patron of Gazprom.

Much of this seizure of assets may have been beyond the power of the state to control. That was not true, however, of the infamous loans for shares deal in 1995, whereby control of several of Russia?s largest oil companies, plus the Norilsk nickel consortium (the largest nickel exporter in the world), were passed to the great financial and media magnates for a tiny fraction of their true worth, in return for their promise to support Boris Yeltsin in the 1996 presidential elections. This act consolidated the new oligarchs in their control of the commanding heights of the economy and therefore of politics, and helped cripple state finances. It was an act of pure political corruption, and perhaps indeed the greatest and most destructive such act in the course of the twentieth century.

Loans for shares was only the worst aspect of a privatisation process which was a farce from the very start. The privatisation programme introduced by the Russian government in 1992 allowed for the purchase of state property by the Russian people by means of vouchers worth 10,000 roubles each, one of which was given to every member of the population. This amounted to only a small fraction of the total value of the Russian state economy (and also only a tiny fraction of the savings of ordinary Russian people in savings banks, which were wiped out by inflation). In other words, an element of fraud was present from the start.

According to official figures, around 39 per cent of Russians simply sold or gave away their vouchers; 8 per cent said that they used their vouchers to buy shares in the enterprises where they worked; and 9 per cent bought shares in other enterprises, mostly famous national or local ones. Another 30 per cent put their vouchers into investment funds, which often simply stole them, passed them on, and then vanished into thin air. As for the people who bought shares in companies, very few have seen any dividends, while shareholder control remains almost completely absent. Workers? shares generally became a means of consolidating management control, in an implicit deal whereby the workers allowed the management to run the companies as their own property in return for the managers guaranteeing the workers their jobs ? albeit frequently without paying them. The argument of Anatoly Chubais, the leading Russian free market reformer, in defence of what has happened, has been taken up and parroted by his Western allies. The theory has been summed up and criticised by Andrei Piontkovsky, head of the Moscow Centre for Strategic Studies (not, it must be emphasised, a reactionary or left-leaning figure, and a great admirer of another reformer, Boris Nemtsov):

Like many reformers, Chubais believes that it is not important how property is distributed, as long as property owners are created. After they have had their share of thievery, so the argument goes, they will start to turn their efforts to raising productivity. But Russia has experienced not so much the privatisation of control over property as the privatisation of control over the state, over financial flows and budget resources. The reformers have created a Frankenstein reform, and those who have got a taste of this fabulous means of enrichment are like addicts who will never get off the needle of budget money.

As a result of all this, Russia is in an economic trap with no solution whatsoever in sight. Western investment has collapsed and will not revive in the foreseeable future, both because of the Russian default and because of the gathering world economic downturn. With the Government in crisis and GDP falling again, internal sources of state financing and revenue collection are also in decline. Meanwhile, the pressure from the great magnates to bail out their banks, and from an increasingly angry population for the wages they are due, is bound to grow. In these circumstances, the only way out seems to print money, with hyperinflation, and ultimately perhaps food rationing, as the inevitable result. No doubt sooner or later Russia?s huge resources, and a new, stronger, more honest and patriotic administration will end the present crisis and restore some kind of economic growth. Nonetheless, Russia, like so many countries around the world, now looks doomed to remain an economically dependent Nebenland.

? Anatol Lieven, a previous Times correspondent in Moscow, is editor of Strategic Comments at the International Institute for Strategic Studies. The views expressed in this article are entirely his own. His latest book, Chechnya, Tombstone of Russian Power, on which this article is based, was published by Yale University Press in June.

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