Free Fall

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Nor was it real capitalism, which is not solely about mergers and acquisitions but about production as well. And the simple fact is that Russia does not produce. The old rust belt--defense-oriented enterprises employing tens of thousands each--are still lurching along, turning out things so costly and so shoddy that no one wants to buy them. In Soviet times, workers joked that they pretended to work and the state pretended to pay them. Now the line could be that the workers pretend to make things and the factories pretend to sell them. The plants can't pay their taxes or their workers, and instead barter some of the stuff coming off the production lines in return for official blindness to their tax delinquency. That's why the streets are lined with people trying to peddle items like pots and pans, towels and toilet paper.

The result is an almost cashless society where business is transacted mostly by trading goods and services. Since most firms and citizens have no money, they can't pay their taxes. That means the government is always short of funds and the deficit keeps growing. It's even worse than that, says Brookings Institution fellow Clifford Gaddy. The basic problem, he says, is Russia's "virtual economy." Stuck with the unreformed Soviet industrial sector, the country turns out goods that are worth less than the value of the labor and raw materials that go into them. "This is eating the core out of the Russian economy," says Gaddy, "and everyone is ignoring it."

Chernomyrdin, the former boss of a Soviet-era gas enterprise, is an improbable candidate to fix something so fundamental. The government he is putting together is likely to go the other way, back to the U.S.S.R., at least partway. If he brings communists into the Cabinet in what he calls a "government of accord," he could produce no more than stalemate. But if he acts on the compromise program he approved last week, things will get worse fast. When Chernomyrdin last served as Prime Minister, he took a crucial step: he stopped financing the government's budget deficit by printing rubles, and switched to paying for it with loans from the International Monetary Fund and banks abroad. This halted Russia's hyperinflation--but created the pyramid of debt on which Moscow has now defaulted.

There are no more loans in Russia's near future. Even the next IMF payment, due Sept. 15, is in doubt because the fund is demanding a balanced budget. So Chernomyrdin and the communists who run parliament intend to go back to the printing press and turn out rubles. That will bring back hyperinflation and pauperize the nation. The world will have to worry how even the docile Russians will accept such treatment, and what their political response will be. All indications are that Russians have tried communism and don't want to go back to it. But now they feel they have tried reform and have been rewarded with misery. What will they vote for next?