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  •   The Reformer Out in the Cold

    By David Hoffman
    Washington Post Foreign Service
    Tuesday, September 29, 1998; Page A11

    MOSCOW—In his first weeks as a deputy prime minister, Boris Nemtsov, a "young reformer" whom President Boris Yeltsin plucked from the provinces, had a populist notion. He would force Kremlin bigwigs to trade in their sleek, imported limousines for Russian-made cars, such as the stout Volga sedan.

    Yeltsin signed a decree, and the first batch of Mercedes-Benz limos went on the auction block. But then the whole idea was forgotten.

    "The reason was Yeltsin," Nemtsov recalled. "He himself didn't switch cars. He rode in a Mercedes. And this was the main problem. If he switched, the whole country would have switched. But he didn't."

    The episode is a revealing glimpse into Nemtsov's frustrating 18 months at the cutting edge of a critical period in Russia's quest to become a free-market democracy. Nemtsov, a popular, youthful former provincial governor, was handpicked by Yeltsin to be a deputy prime minister in March 1997, and he served until after the ruble crashed last month. His time in office is often described as the most pro-reform in post-Soviet Russia's short history.

    But that reform period ended with a bang on Aug. 17 when the government devalued the ruble and Russia plunged into economic chaos that paralyzed its banking system, froze its imports and shrank the paychecks of millions of wage-earners. Yeltsin ditched the young reformers, including Nemtsov and Prime Minister Sergei Kiriyenko, and has been forced to accept the Communist Party's dictates in forming a new government, including the appointment of ministers who are veterans of the Soviet system of vast subsidies and central planning.

    Just as some of Russia's commercial bankers have watched with horror as depositors lined up outside their doors to withdraw funds, just as some of the country's powerful business tycoons have found themselves on the edge of bankruptcy, so too have the market reformers been forced to sit back in recent weeks and ask themselves: What happened?

    Nemtsov's answer is that the reformers lost their political support, abandoned by a weakened Yeltsin, and were caught up in the internecine warfare of the Russian tycoons. In an interview, Nemtsov said his ideas enjoyed a silent constituency around the country -- businesses that felt disadvantaged by the special tax breaks, low tariffs and other distortions of Russia's robber-baron capitalism. "What we couldn't do," he acknowledged, "is stop crony capitalism -- at all."

    "We had an oligarchic system in a market economy," he said, "with a very strong position of a few clans inside the country. The resistance of the oligarchs was so strong; they had the strong support of the Kremlin. . . . They were against our reforms. They were against transparency, against open privatization, they were against bankruptcy of the oligarchs' enterprises, which is understandable."

    As a governor of the region of Nizhny Novgorod, Nemtsov, 39, had made his mark as an exponent of economic reform in the early 1990s. But in March 1997, when a reelected and reinvigorated Yeltsin sent his influential daughter and political adviser, Tatyana Dyachenko, to Nizhny Novgorod to recruit him, Nemtsov recalled that he was reluctant. He sensed danger to his political career in the endless Kremlin intrigues. Moreover, Nemtsov had gathered 1 million signatures against the war Yeltsin launched in the separatist region of Chechnya. He said he thought that going to Moscow was a "kamikaze" act. But, in the end, he went.

    Once in Moscow, he championed what he called "people's capitalism," which he meant to nudge Russia's nascent and corruption-ridden market economy toward more transparency and competition. Yeltsin put Nemtsov in charge of regulating monopolies, encouraging small and medium-size businesses, and overseeing the fuel and energy sector.

    For a while, Nemtsov was a star; polls showed him to be one of the most popular politicians in Russia, and he was described frequently as a potential heir to Yeltsin, although he had no political base. He did have key allies inside the government, including Anatoly Chubais, who was also a deputy prime minister, and later Kiriyenko, a reformist banker from Nizhny Novgorod.

    The first months were heady with success. Nemtsov forced changes on Gazprom, the natural gas titan, including annulment of an extraordinarily lucrative deal for company management. He demanded top government officials fill out financial disclosure reports and sell their fancy cars. He also attacked the system of authorized banks, in which banks owned by the well-connected tycoons served as a conduit for federal cash.

    Nemtsov recalled being surprised to find so little resistance from the Russian financiers when the reformers went after their nest eggs. "We got Yeltsin's decree signed, firing the authorized banks, and they sat there and did nothing," he said.

    Nemtsov was an irrepressible font of optimism. He predicted that economic growth would soon resume. Delays in paying government pensions were being cleared up. He warned the Soviet-era factory bosses to change their ways or be forced into bankruptcy. He predicted that Russia's era of bandit capitalism was coming to an end.

    But the summer of 1997 brought the first serious trouble for the reformers. A massive new privatization initiative offered a share in Russia's telephone companies, and the reformers insisted it would go to the highest bidder. But the tycoons sought feverishly to settle the deal among themselves, in advance, and it blew up into a vicious fight, with Nemtsov and Chubais in the middle.

    "They didn't want real competition," Nemtsov said. The privatization sale "was not according to the oligarchs' rules," he said. "That's why they struggled against each other and the government."

    The tycoons used the newspapers and television stations they own to pummel Nemtsov, and his poll ratings nose-dived. In retrospect, he said, the reformers should have moved ahead quickly with yet another open privatization sale to demonstrate that they could not be cowed.

    "What was the government's mistake?" he asked -- answering that it should have announced the sale of the state-owned Rosneft oil company, "immediately, without any delay." But, he recalled, Prime Minister Viktor Chernomyrdin, who was sensitive to the demands of the tycoons, refused to budge.

    Later in the year, Yeltsin fell ill again. Chubais was hobbled by a scandal over fees for a book contract, and Nemtsov felt his support slipping away.

    "Yeltsin supported me from the beginning, in March, up to the end of the year," he said. "And after that, not much. He was very weak; he was not ready to struggle. Maybe he didn't understand that it was necessary. . . . Yeltsin is a politician, he thinks about his own power only. He has no message -- how to build 'people's capitalism.' He has no idea how to overcome the crisis. The only idea is how to be the Russian czar, no more. That is why, in 1997, he saw that support of the young reformers meant the strength of his power. After that, he didn't think so."

    This spring, Nemtsov saw further erosion in his standing as Chernomyrdin sought to dilute his duties. Nemtsov flew to see the ailing Yeltsin, who was on a vacation, recuperating. "He said, 'I was sick for some time, and now I understand that I have to support you; now we need a new phase of reforms. . . . I am ready to do it once again. You can work [in government] until the year 2000.' "

    But Nemtsov recalled that there was something artificial about Yeltsin's statement. "It was only words," he said. "It looked like a ritual."

    "There was a big ideological struggle," Nemtsov said. "We needed his daily support. He didn't understand it. He wasn't ready. He thought it was just intrigue. He always understands power as just personnel decisions. He doesn't understand; it wasn't just intrigue."

    In the spring, Yeltsin shuffled the deck of Russian politics by firing Chernomyrdin.

    "Yeltsin was afraid of [losing] his own power," Nemtsov recalled. The result, he added, was the appointment of Kiriyenko, who was "bright, strong, clever and very weakened politically."

    The Kiriyenko government was buffeted by economic shock waves from declining oil prices and the Asian contagion. Nemtsov said that some of the most far-reaching reforms were being pushed in this period of accelerating crisis, including tax reform, creation of a law on private pension funds and further efforts to reform Gazprom.

    But the sinews of the Russian economy were disintegrating despite billions of dollars in loans from the International Monetary Fund. Nemtsov said he urged Kiriyenko to devalue the ruble slowly, starting in the summer. But, he added, Kiriyenko and others rejected the advice, saying that the IMF opposed it and that devaluation would be seen as a sign of weakness.

    In August, Nemtsov said, Kiriyenko and others made a "terrible" mistake. They told Yeltsin that devaluation would not be necessary -- Yeltsin repeated this forcefully while on a trip -- and then they pulled the rug out from under him a few days later. Nemtsov said Yeltsin was aware of the devaluation plan but was furious about related decisions to default on Russia's domestic debt, which sent banks reeling, and to place a 90-day moratorium on payments to overseas creditors.

    Yeltsin fired Kiriyenko a week later, and Nemtsov followed him out of government.

    Nemtsov, who says he will now run for parliament, is scornful of the return of Soviet-era apparatchiks under the new prime minister, Yevgeny Primakov. "This government knows how to print money and no more," he said. "Who will get it? The oligarchy! This is crazy."


    © Copyright 1998 The Washington Post Company

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