The Commanding Heights (Part 2): The Agony of Reform (Chapters 15-21)

Chapter 15: Soviet Free Fall [4:52]

Onscreen title: Moscow, Soviet Union

NARRATOR: In August 1991, diehard Communists staged a coup. Boris Yeltsin became the voice of democratic resistance. The coup collapsed. Gorbachev survived the plot, but his prestige was destroyed, and the Soviet Union's days were numbered.

DANIEL YERGIN: The end of December 1991, Mikhail Gorbachev went on Soviet television. He told his viewers that the Soviet Union would within a few days cease to exist legally. After seven decades, the Soviet Union was over, it was finished, fade to black.

NARRATOR: The president of Russia was Boris Yeltsin. Unlike Gorbachev, Yeltsin wanted to move fast. He chose the young reformer Yegor Gaidar as the man to turn Russia into a market economy.

DANIEL YERGIN: For Gaidar it was a shock. There was no money in the treasury; there was no gold; there was not even enough grain to get through the winter. It was unclear who was even in charge of the nuclear weapons. Gaidar later said that it was like flying in an airplane and going into the cockpit and finding no one at the controls.

YEGOR GAIDAR: It was clear to me that the country was not functioning, the economy was not working, and that if nothing were done and if everyone feared that nothing would be done, it would end in catastrophe, even a famine.

NARRATOR: Gorbachev's halfway reforms had left the economy in a tailspin. Every essential was in short supply.

LILIA SHEVTSOVA: We have been queuing every day to get something --sugar, matches, salt. The stakes really were very high. Economic situation was absolute disaster. Inflation was about 20 percent a month. The shelves stood empty. The prices were skyrocketing. Everyday life was the search for survival. Gaidar had to move very fast.

NARRATOR: Gaidar was now in charge of the entire Russian economy. And he was still only 35. He assembled a team of youthful free-market reformers, among them his fellow dissenter, 36-year-old Anatoly Chubais. Communist hard-liners nicknamed them the "little boys in pink shorts."

Jeffrey Sachs now 36, was called on to advise on economic reform.

JEFFREY SACHS: I of course had the Poland experience in mind. Russia turned out to be something quite different.

NARRATOR: The Parliament was dominated by Communists and other parties who opposed reform.

JEFFREY SACHS: Gaidar was under remarkable political attack from the first moment. It wasn't seven days after the start of reform that the head of the Parliament called for the resignation of the government, for example.

YEGOR GAIDAR: It is a pseudo market utopia.

The only thing I want to ask is understanding the gravity of the situation.

NARRATOR: Gaidar and his team wanted to use economic reform as a political weapon to smash the old communist system before it destroyed them.

BORIS JORDAN: It was more a survival tactic -- how can we destroy the communist, centrally controlled economy? Let's destroy the army, let's destroy the KGB, and let's destroy centrally controlled planning, rather than how are we going to build an economy?

Chapter 16: Reform Goes Awry [4:26]

NARRATOR: New Year's Eve, 1991. Next morning prices would be freed. Gaidar's reform would directly affect the man and woman in the street. It would also mean the end of everything the Communists had stood for.

Next, Gaidar abolished the Soviet law that made private enterprise a criminal activity. Gaidar believed that an effectively free market would put an end to shortages. He didn't have long to wait.

YEGOR GAIDAR: I was driving to my office on Old Square, past Detsky Mir, the children's shop, and I saw a huge crowd of people. I sent my aides to find out what was going on, and they saw hundreds of people with various kinds of goods. They were holding a copy of the decree on the freedom of trade while trying to buy or sell stuff. So that's when I understood that in 75 years it had not been possible to extinguish this entrepreneurial spirit. That was one of the pivotal points. Starting from then, there were no more shortages in Russia. I felt that we were right and that market forces worked, even in this tortured economy.

NARRATOR: The market may have been reborn, but for ordinary Russians reform meant higher prices.

LILIA SHEVTSOVA: I hurried to a department store to look at the faces of Muscovites, whether they would revolt, looking, you know, at all these skyrocketing prices, because Gaidar felt that they would increase twofold. They increased twelvefold.

NARRATOR: Prices kept rising. The hard-liners who controlled the Central Bank made it much worse. Their policies fueled inflation.

In Norilsk, factory workers like Yuri Khamutov were cleaned out.

YURI KHAMUTOV: Chubais talked about reform, but with him and with Gaidar, nothing improved. We lived worse and worse and worse. So much for Gaidar's reforms. Many came north to earn the money to buy a house, a flat, a car, to save a pension. And then in one day you were left with nothing. It was so sudden, some people committed suicide.

GRIGORY YAVLINSKY: Inflation came 500 percent, 600 percent, 700 percent. The monies simply went to the ashes, simply to nothing. The population was simply smashed by that hyperinflation, and that undermined all kind of belief in the economic changes.

Chapter 17: India Escapes Collapse [3:16]

Onscreen title: New Delhi, India

NARRATOR: The collapse of the Soviet Union reverberated round the world. For India, it was the end of a role model, the ideal of central planning shattered.

MANMOHAN SINGH: This was telling proof that a command type of economy was not as secure as we had thought. Therefore, the collapse of the Soviet Union was a major factor which influenced thinking on economic reforms in our country, as in other countries.

NARRATOR: Planned by bureaucrats and cut off from the world trade, India's economy had grown stagnant, inefficient, and indebted. In 1991 India stared bankruptcy in the face.

P. CHIDAMBARAM: We were borrowing heavily. We had to mortgage our gold deposits. Our growth rate had come to virtually zero. All this added to our very enormous crisis.

NARRATOR: In the midst of the crisis, the economist Manmohan Singh received an urgent call from the new prime minister. He found himself appointed finance minister.

MANMOHAN SINGH: Well, I said to him that we are on the verge of a collapse. Our foreign exchange reserves when I took over were no more than a billion dollars -- that is roughly equal to two weeks' imports. The argument was quite simple: We were in the midst of an unprecedented crisis; it was time to think big.

NARRATOR: To the horror of his own political party, the prime minister gave the green light for free-market reform.

P. CHIDAMBARAM: Well, the rank and file of the party were simply bewildered. They did resist the kind of changes that we brought about. But we presented them the hard facts that unless all this was done, the economy would simply collapse.

NARRATOR: India's Permit Raj was ended, state control reduced. Government subsidies were cut, tariffs and trade barriers reduced, and regulatory licenses eliminated.

MANMOHAN SINGH: We got government off the backs of the people of India, particularly off the backs of India's entrepreneurs. We introduced more competition to release the innovative spirits, which were always there in India. The economy turned around much sooner and much more deeply than I had anticipated. Indian industry boomed. We created a record number of jobs, we were able to control inflation, and the economy was growing at the rate of 7 percent per annum, so our critics were completely silenced.

Chapter 18: Russia Tries to Privatize [5:33]

Onscreen title: Moscow, Russia

NARRATOR: In Russia, the commanding heights of the economy were still in the hands of the state. In a great idealistic move, the young reformers set out to democratize state industries by simply giving them away. In charge of this program of privatization was Anatoly Chubais. The 70-year communist monopoly was about to be overturned. Russian citizens were given vouchers which they could use to buy shares in privatized companies.

BORIS YELTSIN, President, Russia, 1991-1999: We need millions of property owners, not just a few millionaires. All Russian citizens, workers, pensioners, and small children will be given privatization vouchers worth 10,000 rubles.

NARRATOR: There was a problem: Not one company was ready to be privatized.

BORIS JORDAN, President, The Sputnik Group: They had distributed 144 million vouchers to the people, but had no practical idea on how to get companies through the privatization process and actually into public hands, away from the state.

NARRATOR: The young reformers asked Boris Jordan, one of the first foreign bankers to set up shop in Moscow, to find a company to privatize. But they had to move fast.

BORIS JORDAN: They knew that if they didn't at least launch the program by December 9, 1992, when the Congress of People's Deputies was getting together, the Communists were going to kill privatization.

NARRATOR: The young reformers were in a race against time.

BORIS JORDAN: It was very tight. If there wasn't going to be privatization, there was going to be no market economy.

NARRATOR: They narrowed the search down to a business on the edge of Moscow. It is not exactly what Lenin would have called the commanding heights, but the Bolshevik Biscuit Factory did bake Russia's favorite cookie.

BORIS JORDAN: We had to, I wouldn't say bribe -- we had to incentivize them. We gave managers of their factories and the employees of the factories about 50 percent of the stock in the company. The balance of the equity would be sold in the public markets through these vouchers. We opened up the first official auction of a Russian company to the public on December 8, 1992.

NARRATOR: On the day of the auction, fury at the economic reforms boiled over in Parliament. Communist hard-liners forced a vote of confidence in Gaidar.

BORIS JORDAN: I remember it very well. We'd already opened the auction, and I was sitting in the auction center. I was watching the television, and I watched Gaidar get removed.

NARRATOR: Communist opposition had forced Yeltsin to sacrifice Gaidar. His replacement, Viktor Chernomyrdin, was a product of the old Soviet central planning system.

JEFFREY SACHS: There was no doubt that after Gaidar was thrown out of the prime ministership at the end of 1992 that the level of corruption rose tremendously.

NARRATOR: State companies were sold off, and the trade in vouchers led to a fledgling stock exchange. A market economy was taking hold, but it was getting off to a shaky start.

In Moscow, speculation was rampant in what some called the "Wild East."

JEFFREY SACHS: A lot of societies have corruption, but Russia had an elite that had grown up in such an amoral environment under the Soviet system that they really did believe that property is theft. "Okay, now we're in a private-property system; we'll steal it." And Russia had a lot to steal. You had the oil, the gas, the nickel, the chromium, the diamonds, the gold -- this extraordinary combination of huge natural resource reserves, and they were in state hands.

Chapter 19: Property Becomes Theft [6:18]

NARRATOR: The biggest companies, the major industries were still controlled by their all-powerful managers, former Soviet "apparatchiks" known as the Red Directors. They were utterly opposed to the young reformers and privatization. The only way to privatize the commanding heights of the Russian economy was to wrest control away from the Red Directors.

GRIGORY YAVLINSKY: In Eastern Europe, the real democratic revolution happened. it was a real replacement of the political elite. In Russia, the same people changed their jackets and changed the portraits in the rooms, and instead of saying "communism" and "Lenin" and "Five-Year Plan" started to say "market," "democracy," "freedom."

ANATOLY CHUBAIS: I do remember one of the first meetings with the directors, which was very tough, very tough. They hate the language we speak; they hate the face we have. They hate everything which was connected with us. These guys were the real owners of the country. I was fighting for the real commanding heights in terms of who runs the economy. Who runs the economy, market or the Soviet directors?

NARRATOR: The vast factory complex at Norilsk was to become a major battleground between the Red Directors and a new kind of Russian. Vladimir Potanin was a buccaneering businessman who quit his job in the foreign ministry and within a few years built a small trading company into one of Russia's leading banks.

VLADIMIR POTANIN, President, Interros Holding Company: I decided to become a businessman at the moment when I understood that it is possible. I grew in a country where it was not possible, and there existed even a special article in a penal court of the Soviet Union which banished entrepreneuring activity.

NARRATOR: Potanin's next venture would lead some to see him as an inspired entrepreneur, others as a robber baron. In 1995 he decided to make a play for Norilsk Nickel, but to take over Norilsk meant going up against one of the most powerful of the old Red Directors, Anatoly Filatov.

BORIS JORDAN: Filatov of Norilsk, the hardest guy, one of the most powerful men in Russia. Potanin, who was at that time a relatively unknown person in this country, went up against this guy. Norilsk Nickel was the test case.

NARRATOR: Potanin needed allies. These were the richest of the new entrepreneurs. They came to be known and hated as "the oligarchs."

VLADIMIR POTANIN: By 1995, we had new business elite who in my opinion were efficient owners and qualified managers, but they had no property in their hands. That's why it was the struggle between old Red Directors and new managers who gained their money let's say themselves.

NARRATOR: To break the power of the Red Directors, the oligarchs needed political support.

VLADIMIR POTANIN: It was politically very difficult to withdraw this power from the Red Directors. Even the government and even Chubais were not strong enough to win easily this struggle.

NARRATOR: It looked as if the Communists were going to win the upcoming 1996 presidential elections. Yeltsin and the reformers had to find a way to stop them.

LILIA SHEVTSOVA: In the beginning of 1996, Yeltsin enjoyed only 5 percent of popularity. He definitely needed financial assistance, financial resources from the rich people, the oligarchs.

NARRATOR: The government and the oligarchs needed each other, and they needed to move fast. The government feared a Communist comeback; the oligarchs feared the loss of their fortunes. The oligarchs hammered out a secret deal that would enable them to acquire key industries at a knockdown price.

BORIS JORDAN: Potanin proposed a privatization program which today is still used. It's exceptionally controversial, a loans-for-shares program, and that program entailed Russian business giving the government loans in return for taking the shares of strategic assets as collateral. In fact, what ended up happening is most of these companies ended up getting sold back to the guy that actually provided the loan.

NARRATOR: The oligarchs' money would help Yeltsin fight the presidential election. In exchange, they wanted the commanding heights.

Chapter 20: Closing the Deal [3:50]

ANATOLY CHUBAIS: The dilemma was not should we choose this way of privatization or another way which is more transparent, more open, more public. The idea was, should we choose this way or nothing.

YEGOR GAIDAR: The point of the loans-for-shares deal was aimed at creating a critical mass of powerful and influential businessmen whose primary interest would be to prevent the Communists from coming back.

NARRATOR: With their media companies and wealth, the oligarchs backed Yeltsin's reelection campaign. Singing and dancing endlessly across Russia, Yeltsin surged ahead in the polls and to victory.

Potanin entered Yeltsin's Cabinet, the oligarchs' direct voice in the Kremlin. Potanin had won Norilsk Nickel, and with it, a third of the world's nickel. For a company with annual sales of $2.5 billion, Potanin paid $170 million.

VLADIMIR POTANIN: I felt a great feeling of victory. Several years before, it was even difficult to think about struggling with Red Directors. The struggle was won by us, by those who came who are younger, who are more active and more prepared for competition. Many years later came feeling of a great responsibly for this, because when you win, you become responsible for everything that is going on. but it came a little bit later.

NARRATOR: To many, the loans-for-shares deal was more than a scandal; it was the theft of the century. But it was a price Yeltsin was willing to pay to keep the Communists out.

GRIGORY YAVLINSKY: The task was not to distribute the property between 10 personal friends; there were no need for that. The task was to give the property to millions of people.

VLADIMIR POTANIN: We can say that it was artificially yes. It was cheap, relatively cheap. It was not transparent. Yes. But I think that it was difficult to avoid. Maybe it was the only way.

GRIGORY YAVLINSKY: The goals are justifying the means. That's how the Bolsheviks made the revolution in Russia, and that is why it's disaster. Always when you are using the formula that the goals are justifying the means, you are destroying the goals.

NARRATOR: In Yeltsin's Russia, crony capitalism thrived. For many, reform came to mean corruption, inflation, and inequality. Then in 1998, Russia defaulted on its debts, and the stock market crashed. The Yeltsin era ended with his abrupt resignation on New Year's Day 2000.

Chapter 21: A Decade of Radical Change [7:38]

Onscreen title: The New Century

NARRATOR: By the start of the new millennium, the decade of radical change was over. A world that not so long ago had looked to socialism, central planning, and protectionism now looked to the market.

DANIEL YERGIN: It's breathtaking what's happened in the last 20 years or less. It's as though the whole world has changed its mind. Everywhere -- in India, China, Asia, Latin America, Europe, North America, and above all in the communist world -- governments have retreated from the commanding heights of the economy.

NARRATOR: Having thrown off communism, the countries of Eastern Europe continued to embrace free markets. Poland has flourished. What's driving Poland are two million small businesses, almost all started after economic reform.

DANIEL YERGIN: Of all the cases of shock therapy around the world, that in Poland worked just about the best. It really got the economy going.

NARRATOR: Businesses like Zofia Bielzyck's gym now employ over half of the country's workforce and produce close to 75 percent of its total output.

ZOFIA BIELZYCK, Gym Owner: After 1990, many companies and foreign firms appeared in Poland. The forecasts were very good, and I think they have come true. But we Poles need time for everything to fall into place.

NARRATOR: In Latin America, the result of reform has been mixed. Chile continues to set the pace. A democracy, it follows free-market policies and is one of the world's seven fastest growing economies.

DOMINGO CAVALLO: The first democratic president after Pinochet maintained the reforms and also tried to improve on them.

RICARDO LAGOS: It is not something of the right-wing parties nor the left-wing parties. It's simply sound economic policies. To learn that took some time.

NARRATOR: Bolivia is still poor, but it has been growing.

GONZALO SANCHEZ DE LOZADA: Many people would say we're still poor, and I would say to them Bolivia before we stabilized the economy was a poor country with hyperinflation. Bolivia after we stabilized the economy is a poor country with stability.

CLIVE CROOK: I think there is some disillusionment in Latin America. They have had problems despite the reforms. Getting to a steady high rate of growth is a difficult thing, and it certainly requires more than sorting out your inflation problem, and now we see a sort of financial collapse in Argentina.

DANIEL YERGIN: For several years, Argentina looked like the poster boy for economic reform. It turned out that the reforms were quite incomplete. The country ran up huge international debts, and in 2002 it had an economic meltdown.

CLIVE CROOK: At the end of the day, the strains were too much. And now we see a great deal of political turmoil, raising all kinds of questions for the future.

NARRATOR: In India, Narayana Murthy no longer needs 50 trips to Delhi for permission to import one computer. Instead he has built one of the world's biggest software companies. India's economy has loosened up, and it is growing.

JAIRAM RAMESH: Well, it did work. I think certainly it did work. And what is interesting is that all the parties that criticized the party that introduce reforms are now taking forward those reforms. So I think, you know, '91 to 2000 has shown that the economic liberalization was started out of compulsion has ended up being a process that has been driven by conviction.

P. CHIDAMBARAM: This has brought about a sea change. In fact, nobody in India today would question the correctness of the decision to open up India's economy. Even the Communists grudgingly can see that this is the right path now.

NARRATOR: In Russia, ironically, the 1998 stock market crash and the default on debts may have been a turning point, a second chance for Russia's still-new market economy. Under President Putin, the institutions of a market economy strengthened, and the oligarchs were reined in.

DANIEL YERGIN: Russia has changed a lot since the loans-for-shares deal of the mid-90s. It's had strong economic growth over the last several years. Companies have modernized, and a lot of their reform legislation that should have been done five or six or seven years ago has finally been enacted.

JEFFREY SACHS: I remain cautiously optimistic. But even if Russia gets out of this mess, even if democracy survives, even if all of market reforms take root and all of that is possible, the 1990s was so costly unnecessarily that I'll never be able to look at it and feel that gee, it all ended up well in the end.

DANIEL YERGIN: The problems are still there -- the problems of inadequate health care all the way to corruption. But it's a society that's changing. Putin sees Russia's future as being part of the world economy.

LILIA SHEVTSOVA: I'm looking at my son who is 19 years old, and I'm looking at other people, and I am amazed. They are ready to live in this global environment. These are the people absolutely free of any old stereotypes. They don't remember communism. My son is coming home and asking me, "Mum, can you tell me what Marxism is?" We spent only 10 years after collapse of communism, and my son doesn't know what communism and Marxism is.

NARRATOR: The world had indeed changed its mind. Capitalism was now the rule almost everywhere. The stage was set for a single global market woven together by trade technology and investment.

Globalization had begun.