Institute for War and Peace Reporting | Giving Voice, Driving Change

North Ossetia's Grim Financial Legacy

Clumsy financial management in the early Nineties is hindering North Ossetia's attempts to establish a healthy economy
By Valeri Dzutsev

An economic hangover from the days of Soviet rule is still plaguing North Ossetia as it struggles to come to terms with a modern market economy. Despite improvements since Alexander Dzasokhov became president in 1998, living standards in this Caucasian republic remain stubbornly low.


The trouble was that on gaining independence from the Soviet Union, the country could not bring itself to cast aside the shackles of a command economy. Economic rules had long been made in Moscow and officials in North Ossetia simply had to carry them out. The North Ossetian president at the time of independence, Akhsarbek Galazov, seemed unable to tackle the decisions that suddenly loomed.


He dished out huge loans to failing collective farms which still drag on in an age when they have been abolished almost everywhere else. Private sector farming plays a relatively small part in the country. Other private enterprises rushed to collect the cheap loans which were then available from the European Bank for Reconstruction and Development, EBRD, and other institutions. All too frequently the companies defaulted on repayment.


The most flagrant example was a company which borrowed 12 million US dollars to build a maize processing factory, only to find that the maize seeds it produced were no longer required by the market.


President Galazov struggled with economic problems he seemed not to understand. This lack of expertise coupled with the growth of corruption had the authorities flailing helplessly with their new found freedom. As debts mounted to 36 million US dollars, they tried to cope by constantly delaying credit repayments. It was as though officials thought Moscow might still annul their debts as it had always done before.


When President Dzasokhov took over in 1998, he immediately dismissed all top government officials. The former minister of finance was placed under investigation for embezzlement. But there was widespread belief that Galazov and Dzasokhov had reached a "gentlemen's agreement" that no high official would actually be jailed.


Only two top officials survived the purge, Interior Minister Kazbek Dzantiev and the chairman of the National Bank of North Ossetia, Viktor Dedegkaev. The survival of Dedegkaev caused some surprise since his bank was responsible for many bad loans. He explained this away by saying the loans had been sponsored by the North Ossetian government. Another line of thinking was that he might have helped Dzasokhov in his election campaign.


The Dzasokhov government set about sweeping reforms, focusing on improvements in tax collection. By 2000 there had been a significant increase in tax receipts. Debt levels dropped. Delays in payment of pensions, state employee wages, commonplace before 1998 all but disappeared. However, there were still delays in welfare payments for children. Often it was offered in kind, clothes, food, etc


None of these developments brought much improvement in North Ossetia's quality of life. The most evident sign of this was that real estate prices in dollar terms have dropped two fold on average since 1998. The great fall in the value of the rouble in August 17, 1998, intensified North Ossetia's problems.


Large profits accumulated by North Ossetian businessmen during the years of extensive vodka production and the trade in the transit of spirits were somehow hived off instead of being reinvested. But as the liquor trade declined, the government failed to redirect the profits to other more promising spheres of production. It applied all its efforts to stop illegal spirit and vodka.


One result of this was that private capital moved away to other areas with more favourable economic regimes like the neighbouring Kabardino-Balkaria, Stavropol and Krasnodar regions.


Valeri Dzutsev is a regular IWPR contributor


More IWPR's Global Voices