Russia and the IMF: A sordid tale of moral hazard

The factor that transformed both of these potentially manageable situations into a full-scale disaster again was Boris Yeltsin. On 21 August, the Duma called for the resignation of both Yeltsin and Kiriyenko. In a characteristic response, refusing to accept any blame whatsoever, the president simply dismissed the Kiriyenko government and launched yet another chicken game with the Duma.

The president's first choice for new prime minister was Viktor Chernomyrdin, the very same Chernomyrdin who had been let go six months previously for having mishandled the economy. Arguing that a reappointment of Chernomyrdin would mean a return to the problems of crony capitalism that had caused the crisis, the Duma turned him down. Yeltsin immediately renominated his candidate, and the Duma again defeated him.

So far the stage appeared to be set for a repetition of the confrontation that had been played out in March, but in the third and final round the Duma members were in a different mood altogether. They were now bent on staying the course. By defeating Chernomyrdin they would force the president to dissolve parliament and call new elections. The Communists in particular likely expected that their position would be greatly strengthened in a new Duma.

What went on in Yeltsin's mind is, as usual, subject to speculation. The fact that leave had been canceled at several vital military formations prompted rumors of an intended rerun of October 1993, that is, a forcible dissolution of the Duma and a return to presidential rule by decree. In the end, however, it was Yeltsin who flinched. By choosing in the third round to nominate Yevgeny Primakov, who had been one of several candidates proposed by the Duma, he narrowly avoided a showdown. The price that would have to be paid for this latest round of playing chicken, however, was nothing short of terrible.

In the absence of a functioning government, there was nobody to prevent the ruble from entering a free fall, in which the Central Bank repeatedly had to invalidate trading on the currency exchange and go back to fixing yesterday's exchange rate. By the end of the year the rate had dropped not to the lower band of 9.5 to the dollar, but to below 20, representing a devaluation of around three-fourths.

The collapse of the ruble, moreover, represented not only an immediate economic loss. There are even tougher long-term implications of thus destroying the confidence in the national currency that had been so painfully built over the previous couple of years. The collapse of the banking system represented a setback of perhaps decades before Russians will again trust domestic banks to handle their money.

Accepting that Yeltsin's decision to dismiss his government was one of the most devastating actions taken in those days, we must also ponder the role of the West. On all previous occasions when Yeltsin had undertaken similar ploys, he had received applause from the West. From his point of view, dropping Kiriyenko thus was a logical move. This time, however, the impact on the economy was akin to the dropping of a neutron bomb.