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After The Soviet Union


Cover Story

AFTER THE SOVIET UNION

The superpower that helped vanquish Hitler, launched Sputnik, and vowed to "bury" the U.S. under an avalanche of pig iron and refrigerators is falling apart at stunning speed. For more than 40 years, its dour Communist leaders set the agenda for U.S. security policy. Now, they're gone--dead, fired, or arrested after a botched three-day coup. In their place is a confused collection of radical economists, national chauvinists, and democratic politicians. Grasping for power, they're splitting up the Soviet Union.

Never before in history has such a huge empire come unglued so fast. For the Ottoman Empire, the end came after six centuries. The Spanish Empire lasted four, the British, three. The Soviet monolith fell apart before it turned 75. Its collapse started in earnest in May, 1989, with the country's first free elections, and after a neo-Stalinist coup fizzled on Aug. 21, its death throes took a mere week. In that brief time, a tidal wave of change has swept away the Soviet Communist Party and the very cohesion of the Soviet Union.

Gone is the entire central government, which failed miserably in its effort to dictate economic choices to a land of 300 million people, so vast it spans 11 time zones. Nearly gone, too, is the authority of President Mikhail S. Gorbachev, who for six years had dazzled the West with his charm and visionary ideas of change. Gorbachev says he will resign if the union falls apart. But his countrymen meet his threats with a shrug. Commanding the agenda is Russian President Boris N. Yeltsin, a rough-hewn Siberian whose gutsy stand against coup plotters won him hero status worldwide.

Like so much else in Russia now, that image may change overnight. Yeltsin is acting less like a democrat and more like an autocrat grabbing power by decree. His Rodina--"Russian Motherland"--political stance has sown alarm throughout the country's other, extraordinarily diverse republics. They see Yeltsin as yet one more in a long line of Russian imperialists. Says Oleksander Savchenko, chief economist of Rukh, the Ukrainian independence movement: "The biggest danger today is a renaissance of the Russian empire." In a spasm of protective reaction, seven of the country's 15 republics now claim independence (map).

WHO'S GOT THE BUTTON? At worst, the breakup could turn grisly. Russia alone has some 70 unresolved external and intrarepublic border disputes. Unless checked, the conflicts promise to touch off a painful redrawing of national borders and ethnic battles, threatening European stability far more than the current conflict in Yugoslavia (page 59).

For Americans still exulting over the collapse of their old archenemy, here's another chilling thought: The disintegrating Soviet Union has at least 25,000 nuclear warheads. Pentagon officials froze at news that during the attempted coup, control of Soviet strategic forces temporarily fell into the hands of the hardliners. Now, according to Russian Vice-President Alexander Rutskoi, Yeltsin wants his finger on the nuclear button alongside Gorbachev's. Few Western security experts worry about Soviet long-range weapons, but as long as political instability remains, the short-range, tactical missiles scattered around the republics will bedevil the Soviet Union's neighbors.

Yet for the Soviet people, charting a new economic future promises to be an invigorating task. The incredible events of late August lend hope for a resurgent economy that could harness the country's vast natural wealth and top-flight technical talent. The destruction of the Stalinist command economy will unleash a host of grass-roots free-market initiatives. At the same time, national and local elections will weed out leftover Communist hard-liners opposed to change. "With the freedom of local elections, marketization and privatization at the local level in the Soviet Union will explode," says the Brookings Institution's Clifford G. Gaddy, an expert on the Soviet economy.

The risks no doubt are great, but the rewards are commensurate, says Alexander Romanovski, deputy general director of Crosna, a privately owned Moscow startup. The company, which makes satellite dishes and communications networks, expects to boost dramatically last year's sales of about $30,000 by setting up links between some of the Soviet Union's 3,000 new commercial banks and several dozen fledgling stock exchanges.

'NOW'S THE TIME.' Western executives are expressing more tempered optimism. In the past two years, many deals and investments have languished as republics and the Kremlin warred over tax rates, foreign investment rules, and privatization. Now, says George Reese, managing partner of Ernst & Young in Moscow, "even if the union pulls back, the republics will maintain control over foreign investment in their areas. That's a positive."

Coca-Cola Co., for one, seems undaunted. It announced on Aug. 28 that it would open a new office in Kiev and transfer management of its Baltic operations to its Nordic division, based in Oslo. "It seems that now's the time to make a move in the various republics," says Coke President Donald R. Keough.

Others say investing in the Soviet Union will remain a gamble until its political, geographic, and economic shape becomes clearer. Says Michael Adams, chief executive of the advertising and consulting joint venture Young & Rubicam/Sovero in Moscow: "It's like going to the races twice a year. You take 50 bucks, put it in your pocket, and be prepared to lose it." The messy work of determining which republics will have their own currencies, who will assume responsibility for paying the Soviet Union's $64 billion in foreign debt, and who controls the natural resources and transportation is just beginning. All that spells uncertainty.

The biggest imponderable is political. Some of the Soviet republics, such as the Ukraine, are declaring independence. But after a period during which they sort out their national identities and gain self-confidence, they could seek future links in some kind of loose commonwealth or confederation with Russia and other republics. Or, the Baltics and the Ukraine could remain forever free. That would leave a slimmed-down, tightly knit core of Russia and perhaps some poor Central Asian republics clinging to it.

FRESH START. The newly empowered republics won't necessarily make all the right economic decisions. Eastern Europe's behavior after the Berlin Wall came down stands as a sobering object lesson. When the wall fell, Moscow's former satellites opted for economic self-sufficiency instead of pushing trade among themselves. They rejected calls for an Eastern European common market as a dead-end system of poor countries trading with poor countries. To their long-term economic detriment, they preferred new links to wealthier Western fations. Bush Administration specialists expect that Soviet republics will fall into the same pattern. Only after a long and painful period of shock will they make the necessary economic corrections.

For foreign business, the unraveling also means lots of unexpected work. Many deals that Soviet ministries negotiated with Westerners, from supply agreements to joint ventures, will now have to be reconfirmed with republican authorities. In the Ukrainian capital of Kiev, one foreign company facing big changes is Wisconsin-based household-products maker S. C. Johnson & Son. Its joint venture, S. C. Johnson Kiev Corp., has relied on a series of barter deals with other republics for most of its supplies. Now, says general manager James Shepherd, "we don't know whether we will need export licenses from the Ukraine or whether we can continue to barter with other republics." Another new worry: "We don't know which currency we will have to pay for our supplies," he says.

Likewise, foreign business will have to grapple with the managerial chaos trailing in the coup's wake. The shrinking of the central government will put thousands of bureaucrats out of work across the country. Enterprises that relied on central supply systems, especially in the military-industrial complex, will be forced to seek other sources of raw material. A network of new exchanges trading oil, construction materials, and other supplies, now numbering 300 nationwide, is sure to grow but may not be sufficient to meet the needs of industry.

SHIFTING SANDS. In short, the situation is so unpredictable that it's premature to indulge fantasies of a free market stretching from Dublin to Vladivostok. That means it'll be nigh-on impossible for the Europeans, Americans, and Japanese to forge a common response to the new Soviet Union, much less to the shock waves rattling through Eastern Europe and the Balkans (page 32).

The rapid flight of Soviet republics from the center highlights the power of nationalist sentiment, long held in check by brute Communist rule. If central authority dissolves, severe social disorder and ethnic strife could result. Minorities throughout the union, once protected by central control, will be vulnerable to backlash, particularly in the Central Asian republics. Muslim ethnic roots in Azerbaijan, for example, reach toward Tehran, not Moscow. The shifts, and their geopolitical fallout, could be dramatic.

Managing the transition to some form of republican independence will in any case be difficult. The task will grow even greater if the biggest and richest republics--Russia, the Ukraine, and Kazakhstan--reject any form of union treaty and end up competing among themselves for Western investment. Also at risk is a pre-coup agreement reached among the republics, including the independence-destined Baltic States, to divvy up and pay off the foreign debt. The Ukraine already is saying it will not pay its share of any foreign debt incurred after Aug. 24. Should a foreign debt repayment scheme fall apart, Western banks will be loath to extend credit to any newly independent republic.

One crucial factor in coming weeks will be the mercurial relationship between Yeltsin and Gorbachev. Yeltsin wasted no time muscling Gorbachev aside after his rescue from his Crimean dacha. The Russian President seized control over all the property, enterprises, ministries, and services on Russian territory. He browbeat Gorbachev into accepting nearly all his governmental appointments, such as the liberal Vadim Bakatin as KGB chief, and feinted at taking over all foreign-exchange transactions. He also raised fears in republics such as the Ukraine and Kazakhstan that Russia might seize land holding large ethnic Russian populations.

Yet at the same time, Yeltsin is working with Gorbachev to transfer much of the old Soviet central control into Russia's hands. Key decisions may be made at a Sept. 2 meeting of the Congress of People's Deputies. Both Gorbachev and Yeltsin are urging that the republics agree to sign an "economic convention" establishing their commitment to common financial and banking policies. A new economic committee, with republican representatives, will try to set quotas for a monetary supply in each republic, says Nikolai Petrakov, a former Gorbachev economic adviser.

By next June, the Russian government aims to make the ruble convertible on Russian territory and across the Soviet Union, according to economist Gennady Filshin, a Yeltsin aide. To support that effort, the Russians will ask the West to help establish a fund of at least $10 billion to $15 billion.

BUILT-IN BRAKES. Even if Gorbachev and Yeltsin cooperate, newly emboldened republics could thwart them. Republics from the Baltics to the Ukraine are adamant about creating their own money. Fed up with Moscow's interference in its own economy, the Ukraine is planning to establish its own internally convertible currency within six months, backed by a $1 billion reserve fund. Three factories have already been tapped to print the new grivna, named for the medieval Ukrainian monetary unit.

Despite such bold moves, there are some natural brakes on just how far economic decentralization can go. State-created monopolies produce more than three-quarters of the major investment and consumer goods in the Soviet Union. A factory in the Azerbaijani capital of Baku, for example, builds all of the sucker-rod pumps essential for oil wells from the Caspian Sea to the frozen tundra of Western Siberia's oil fields. All of the nation's deep-freezers are made either in Moldavia or Siberia. If the republics become independent, they may find themselves expending precious hard currency for a scarce item that central planning used to assure them.

Over time, it's likely that these monopolies will be broken up or sold as individual republics move toward a market economy. Both Russia and Kazakhstan have already passed laws on privatization and are working on foreign investment. Russia is expected to rewrite its law on property ownership to rid it of Marxist cobwebs prohibiting citizens from holding full rights over their land.

Such moves form the foundation of a market economy that's already taking shape in Russia and other republics. Commercial banks and commodities exchanges are sprouting like mushrooms in a Russian forest. Altogether, more than 11 million people--8% of the labor force--now work in private stores or factories.

Even in spots such as Perm, a drab Urals military factory town of 1.5 million, a form of grass-roots capitalism is springing up. For three years now, Permkombank, a commercial bank, has been loaning money and helping businesses, such as a local TV station, buy new equipment. Now it's working on issuing credit cards and installing Western-style automatic teller machines for the use of 8,000 workers at a local oil refinery.

USER FEES. In Kiev, freedom-minded government officials think the Ukraine can survive on its own precisely because other republics need its output, raising hopes that former Soviet states may learn to trade with each other. The Ukraine can more than feed itself and exports milk, meat, and grain to the rest of the Soviet Union. Since Soviet oil pipelines and transportation networks cross Ukrainian territory to major ports such as Odessa, the government aims to earn hard currency by charging rent and user fees.

With all this, the political and economic life of millions of erstwhile Soviet citizens has spun out of Moscow's control. The Soviets have traveled an extraordinary path in the past two years. An even more tumultuous era is dawning for the once-mighty superpower's 15 republics. It is conceivable that they could spiral toward total disintegration. But don't bet on it: The broad current running through Soviet life has been toward vastly expanded freedoms. The world now may be witnessing the start of a remarkable economic turnaround.Rose Brady in Moscow and Peter Galuszka in New York, with Patricia Kranz in Kiev, Bill Javetski in Washington, and Igor Reichlin in Bonn


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