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Kick over the statues. But does anyone mourn the passing of communism?

IT IS COMMONLY believed that the collapse of Lehman Brothers and the emergence of complicated financial instruments poisoned with unreliable debt is unprecedented, but we’ve been here before – almost.

In 1998, Long-Term Capital Management, a Connecticut-based hedge fund run by some of the finest economic minds in the world (including two Nobel Prize winners) and trading in some of the most exotic paper ever devised, tanked spectacularly. Once it became apparent to the Federal Reserve Bank of New York that all of the big names on Wall Street had done business with LTCM, and were therefore dangerously exposed, it organised a bailout by those leading financial institutions – including, ironically, Lehman Brothers, which would not be saved some 14 years later – arguing that it was too risky (too ‘big’?) to the economy to fail.

The fund had lost $4.6bn in four months – eye-watering still, even after the huge losses sustained by banks in the past two years. How had this happened? LTCM had employed incredibly involved mathematical models and highly-leveraged positions in predominantly arbitrage, and while problems were evident prior to fund’s downturn, it was events in the former Soviet Union that nailed the coffin shut.

The Russian economy was in a parlous state. The country had spent $5.5bn it could ill afford to lose fighting the first Chechen war. Then the Asian financial crisis, which began with the collapse of the Thai baht, hit exports hard. Since the fall of the Wall, Russia had built valuable foreign markets for its raw materials, with oil, gas, metals and timber accounting for 80% of what it sold abroad. In addition, an artificially-high exchange rate and political turmoil after Boris Yeltsin sacked his entire cabinet (and shortly afterwards brought his successor Vladimir Putin into office), caused investors to desert in droves.

Several measures, including an IMF bailout and a central bank commitment to keep the ruble-dollar exchange rate within a certain range, promising it would meet any devaluation, were not enough. When the central bank was forced into doing just that, spending $27bn in a bid to ease investors’ jitters, it has the opposite effect and the bank experienced a run. On August 13, Russia’s stock, bond and currency markets fell off a cliff. Forced to close for 35 minutes as prices nosedived, the stock market opened 65% down. By the end of the crisis, it lost three quarters of its value.

At least three main banks collapsed as inflation hit 84%. Food prices rocketed and there was panic buying. Exports were hit by a wave of strikes as wages went unpaid. It came close to widespread civil unrest. Outside of Russia, investors reacted to the government defaulting on its bonds by jettisoning European and Japanese bonds in favour of those issued by the US Treasury. Suddenly,the price convergence upon which LTCM had bet so much was headed the wrong way. The model had done everything right, except predict a crisis, and now the fund was in deep trouble.

This set of events provides one reason why Russia still casts a long pall over the economies of Eastern Europe. There are the more obvious episodes, further reminders of the long-standing enmity between the country and its former vassal states. It was once joked, somewhat bitterly, that the Polish cow was always milked in Russia. Now it is energy provision that is held like a gun to the heads of the leaders of former Warsaw Pact countries. Don’t pay our prices, don’t get our gas, and to Hell with who else it affects. Crude, but effective. Direct and to the point. Very Russian.

Other former communist economies have fared relatively well. Averaging some 6% growth before the recession, Poland’s economy still grew by 5% last year. But, while such figures always look better when a country starts from a lower base, Poland took its medicine early, adopting the Balcerowicz Plan, economic shock therapy that quickly ended central planning by removing price controls and industry subsidies. It’s not all capitalist nirvana. Despite having attracted $50bn of inward investment since 1990, companies grumble of government involvement in certain sectors, like telecommunications, and agriculture remains mired in inefficiency, over-production and inefficiency. Nevertheless, Poland now has the 21st largest economy in the world by GDP.

Russia is some way ahead of that – either eighth or ninth – but then it has over three-and-a-half times the number of people living there. It too has enjoyed a share of outside investment. It finally put the dark years of the 1990s behind it in 2007, following a number of years of laudable growth that followed on as a consequence of Putin economic reforms.

Putin, despite his iron man reputation in the West, remains the father of modern Russia. While an increase in investments of 125% took place during his time in office, industry, construction and agricultural production grew considerably. The middle class grew from eight million people to 55 million, with the average salary increasing from $80 to $640, although inflation continues to rise. And the number of people living below the poverty line has fallen from 30% in 2000 to 14% last year.

But it remains a country of stark contrasts. While nearly 20 million people live in abject deprivation, Moscow has the highest concentration of billionaires anywhere on Earth – some 33 to New York’s 31, according to Forbes magazine. That same survey found that a quarter of all the country’s wealth is concentrated in the hands of just 100 people. It’s as if communism never happened, particularly when remembering that Tsar Nicholas II is still considered the third richest man of all time, believed to be worth $290bn at the time of his death. Interestingly, he was also the world’s wealthiest saint.

It has been enough to draw protesters out into the street once again, and red flags have reappeared. This time, though, there has been no storming of the Winter Palace, only tears for Lenin and his forgotten legacy (although a large number of demonstrators were probably weeping for their empty bellies). But harking back to the Tsar is significant. Once state control was ended, the country simply reverted to its old system of haves and have-nots. The latter came from the same background that they always have, while the former came from a new class of technocrat and they came to be known as the oligarchs. They are the modern face of Russia, but their origins remain lost in the mists of time.