#46 | August 27 - September 10, 1998  

by Mark Ames

In former Prime Minister Sergei Kiriyenko's final speech to the Duma last Friday, he warned parliamentarians, "This financial crisis had only just begun."

Just how bad can it get?

Over and over, the Indonesia scenario has been mentioned by Russia watchers. Even The Moscow Times, which for months ran editorials scoffing at the very suggestion and blaming "Western television reports" for creating the false analogy, this week conceded, "Similarities to the last days of the Suharto regime in Indonesia are growing." Actually, as you'll see below, we may have to pass through some pretty ugly times that will make August look like a holiday in comparison.

While citing historical analogies (Weimar, 1917, the Wild West, etc.) is pretty much an academic circle jerk, present-tense events are often reliable narratives in helping to prepare for the near future.

If the West had not agonized these past seven years over the "Weimar scenario" in Russia, it might have had the balls to risk prodding the post-Soviet Russian regime into creating lasting democratic institutions and a civilized relationship between state and citizen, ensuring decades of peace between them. Even if they would have failed, at least the best ideals the West represents would not have been ruined by association, as they are now. What's left is an oppressive nihilism, from the top down, and the consequences are just beginning to be felt.

The Indonesia scenario is often raised here because of the scary number of similarities in how the events unfolded: from denial to despair, from financial to social to political upheaval, and ending god knows when.

Both countries' crises were initially blamed on regional market ills and foreign speculators. In Indonesia's case, the first tremors took place in May of last year, when foreign speculators attacked the Thai baht and, to their surprise, sank it. At the time, according to a BBC report last week, the World Bank had repeatedly praised Indonesia as a model of development and poverty reduction. It had experienced three decades of almost uninterrupted growth and low inflation, and boasted strong foreign reserves. It seemed, in other words, fundamentally sound.

In July 1997, speculators attacked currencies in the Philippines and Malaysia, sinking the former and bruising the latter, while the Indonesian rupiah came under threat. As the financial apocalypse gathered fire, Indonesian government officials, along with economists and local Western correspondents, blamed attacks on the rupiah on "external factors" and the budding "Asian contagion." According to Gerry van Klinken, editor of Inside Indonesia, economists and government officials insisted that the "fundamentals" were strong, citing various statistics.

Starting to sound familiar?

Eventually, the Indonesian Central Bank couldn't hold out. On August 14, the government abandoned the rupiah band, and the currency slipped from 2,400 to 2,640. In the coming weeks, the currency floated, falling to 2,800. At the time, that 14-percent drop was seen as a devastating event. The Suharto regime opened up a dialogue with the IMF, which had just "rescued" Thailand and the Philippines.

Suddenly, the "experts" began to take a closer look at Indonesia's solvency. According to van Klinken, "More critical observers began to ask what these Ôfundamentals' really amounted to. Perhaps the speculators were not creating a new problem from the outside, but feeding, like vultures, on something rotten within."

The rot was created by a massive foreign debt, estimated to be up to $200 billion, much of it short-term. Fifty individual oligarchs were presumed to be responsible for $80 billion of that debt.

Now, investors focused on deeper "fundamentals": Indonesia's deep-rooted corruption and its unpopular, ailing autocrat, President Suharto, who held court over the tight-knit group of oligarchs.

So far, you can pretty much substitute "Yeltsin" and "Russia" for "Suharto" and Indonesia." On October 31, 1997, the IMF announced for Indonesia the world's largest-ever bailout: $23 billion from the IMF and $20 billion from a consortium of various sources (foreign governments, banks, etc.). In return, Indonesia was expected to take drastic (and to us, familiar) economic measures: force a budget surplus, break up the monopolies, liquidate bad banks, etc. On the day the package was announced, the rupiah plunged to 3,680 to the dollar, a 35-percent drop. The next day, when the government moved to close 16 banks on IMF orders, panic ensued, leading to a mass run on banks. Later, the IMF issued an official "Oops!" for that little gaffe. But confidence was already shattered, the damage done.

By now, foreign correspondents, who just a few months earlier were cheerleading the Indonesian miracle, had turned sour, focusing on the bad news. The mood grew gloomier and gloomier, feeding upon itself.

The image of Indonesia as a deeply corrupt nation getting its just dues began to spread. One economist, Hartoyo Wignyowiyoto, dubbed it "mafia capitalism." As he said, "Indonesia has a mafia economy. I have observed mafia systems all over the world. The only way they end is when the godfather disappears."

If this sounds downright creepy, keep in mind that in spite of Indonesia's newly acquired reputation as a nation burdened by "crony capitalism," in surveys conducted by the EBRD, Control Risk Group, The Economist, and others, Indonesia was a little leaguer, a jive-assed purse-snatcher, compared to Russia, where "mafia capitalism" has literally been redefined.

It is probably around this point on the "Indonesia scenario" time-graph that Russia stands today. Experts have given up talking about Russia's "fundamentals," such as its account trade surplus or debt as a percentage of GDP, and admitted that the big problem is an unserviceable debt within the paradigm of a totally corrupt, illegitimate regime. Well no duh.

In December, the ailing Suharto fell ill and disappeared, and the rupiah dropped. When he returned, it dropped. When he announced a financial plan, it dropped. International public opinion turned against the doddering old strongman. Meanwhile, his finance minister flew to Washington begging to arrange a debt rollover, but was rebuffed. Suharto's oligarchs, who were threatened not only by the financial crisis, but also by the IMF's prescriptions, quietly arranged to have some of their recently cancelled "super projects" re-started with government funds. By the end of 1997, the rupiah had fallen to 6,000 to the dollar, a 60-percent drop from July.

The focus shifted now from budget surpluses to the need to replace a rotten political system.

It wasn't really until January of this year that, looking back, the shit really hit the fan. Which is pretty frightening, considering where Russia is on the time-graph. Things first went bad when Suharto appeared to back away from the IMF program (see "Chernomyrdin, Victor Stepanovich: Adjustments in Policy Will Be Made"). The rupiah went into a freefall, reaching 10,000 to the dollar. Companies that owed dollar loans to foreigners dumped their rupiahs for dollars, feeding on the currency collapse. By January 11, only 22 of 286 companies listed on the Jakarta Stock Exchange were technically solvent.

President Clinton held several strong-arm telephone conversations with President Suharto to force him to comply with the IMF demands. On January 15, a newer, even harsher IMF plan was signed by a humiliated Suharto, while Oberfuhrer Camdessus looked on. Under the new plan, subsidies were to be slashed, in spite of the obvious danger that it might cause a social explosion. The next day, the IMF publicly announced its strong support for Indonesia's plan, and Camedessus personally predicted recovery in two years.

It didn't work. On January 21, the rupiah crashed to 12,000, and the next day-to 17,000, before massive intervention propped it back up. The country was essentially insolvent. A few days later Suharto announced a debt payment moratorium.

The next event is particularly interesting. In early February, Suharto announced that he was creating a currency board to regulate the rupiah, as per the advice of a pair of anti-IMF American academics. The result of the announcement was that the rupiah rebounded to 7,600 to the dollar. However, both Clinton and the IMF quickly stomped on the idea, threatening a complete cutoff of aid if Suharto even dared. The idea was dumped, and the currency collapsed again by one-half.

Now we enter the second stage of the financial crisis: the social explosion, a stage that, in spite of scattered workers' strikes, Russia has not even begun to enter.

The combination of collapsed banks, rampant inflation, unaffordable imported foodstuffs, and political disaffection sparked the first food riots, and shops were looted in the provinces: Java, distant islands, places far from the once-booming, glass-skyscrapered capital city Jakarta.

Suharto strengthened his position with the military and appointed a big-spending insider, B.J. Habibie [insert V.S. Chernomyrdin], as his Vice President. Famine and poverty spread; disaffection grew. On February 9, the first student protests in Jakarta against price rises and corruption led to 100 arrests. In March, provincial riots and student protests grew. By May, things were spinning out of control. While Suharto was on a trip abroad, allegedly to boost his international prestige, Jakarta began to erupt in flames. According to a BBC report, the Jakarta riots were sparked by the implementation of the IMF program. Students were killed. Troops were mobilized. Then the entire country exploded in anarchy. Fires, deaths, destruction, wide-scale rape... Foreigners evacuated en masse, filling the airport and scrambling desperately to escape the carnage.

This led to stage three, the political meltdown. Suharto was left with no choice but to step down. "My fellow countrymen," he announced, "... In view of this situation, I find it difficult to carry out my duties as the country's ruler and to push ahead with the nation's development." His anointed successor, H.I. Habibie, took over as president, and has since, according to many analysts, talked the IMF talk, but hardly walked the walk.

In a way, it doesn't matter anymore. With the economy expected to contract at least 10 percent this year, and inflation hitting over 80 percent, Indonesia is screwed for years to come.

So what does this say about Russia? If the Indonesia scenario really does apply-and the number of similarities are too numerous to deny-then the fun has just begun. All it will take is one martyr from Vorkuta or Chelyabinsk or Primoriye, and stage two, the one that we all fear the most, begins.