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Hyperinflation Threatens Russian Reforms

By Fred Hiatt
The Washington Post


The Russian economy, 13 months into one of the riskiest transformations ever attempted, stands at a moment of great promise but also of extreme danger.

The promise lies in a privatization program now gathering steam that could irreversibly remake the nation's political and economic map. Already 46,000 enterprises have moved from state ownership into private hands, Deputy Premier Anatoly Chubais said last week, and the government has launched a program to unload big factories faster than has been accomplished anywhere else.

But the privatization program, along with every other aspect of Russia's democratic and free-market reforms, is threatened by potential hyperinflation. With food prices doubling every two months, the economy has not yet reached, but is nearing, the point where money is considered worthless and normal economic ties collapse.

While economists debate the technical definition of hyperinflation, none dispute the grave consequences. Hyperinflation can lead to dictatorship; in Russia, it could also presage the disintegration of the world's largest country into dozens of warring fiefdoms.

"Everything would fall apart," said Richard Layard, a professor at the London School of Economics and an adviser to the Russian government. "You'd get a breakdown of trading relationships between regions. ... In real hyperinflation, survival becomes a daily concern, and the only concern."

Russian economist Andrei Illarionov said: "The middle class would be eroded away, the backing for democratic reform would be eliminated and the political extremes would be strengthened." <\c>Decades of Soviet central planning left Russia with hundreds of firms that produce things no one wants, waste vast amounts of energy and employ far more people than necessary. These firms can survive and keep paying wages only by bleeding the state for huge subsidies or cheap loans.

But the state can no longer afford to support an inefficient economy. A long period of economic stagnation, beginning under Leonid Brezhnev's leadership, made it inevitable that such a time would come. Now the crisis has been hastened by political chaos: by the disintegration of economic ties across the old Soviet Union, Moscow's inability to collect taxes, and the government's helplessness to prevent new-age criminals from looting the country of billions of dollars in natural resources and foreign currency.