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Johnson's Russia List


June 3, 1998   
This Date's Issues: 2205 

Johnson's Russia List
3 June 1998

[Note from David Johnson:
1. New York Times: Venyamin Sokolov, The Virus in Russia.
2. Interfax-Argumenty i Fakty: Vsevolod Sementsov, THE RUSSIA THAT WE LOST.
3. AP: Helping Russia Could Hurt Clinton.
4. Reuters: Why the West is so concerned about Russia.
5. Reuters: Primakov says Russia must help itself out of crisis.
6. Fred Weir on India-Pakistan.
7. Chicago Tribune editorial: RUSSIA'S TIME OF TROUBLES.

9. AP: McDonald's To Expand in Russia.
10. Reuters: Yeltsin, Tycoons Vow to Crack Economy Crisis.
11. Interfax-Argumenty i Fakty: Georgy Viren, RUSSIA TO BECOME A 
CONFEDERATION? Russian Federation May Follow the Path of Soviet Union.]


New York Times
1 June 1998
[for personal use only]
Opinion: The Virus in Russia
Venyamin Sokolov is a director of the Chamber of Accounts of the Russian
Federation, Russia's equivalent of the General Accounting Office. This was
translated from the Russian by Louise I. Shelley. 

Russia's large budget deficit has been blamed for its current economic
crisis, pushing the country's financial markets to the brink of collapse and
sending foreign investors fleeing. But the main culprit is the alliance the
Russian Government has formed with powerful business interests. This alliance
has been raiding the public treasury and depriving the Russian people of a
secure and democratic future. 
Item: The Finance Ministry lent $150 million to the Moscow Aviation
Production Combine so it could build MIG-29 fighter planes for sale to India.
An audit by the Chamber of Accounts (Russia's equivalent of the General
Accounting Office) found that not one cent of the loan reached the enterprise.
At the time of the "loan," the MIG's were already finished and ready for sale
outside the plant. 
Item: The Russian Parliament appropriated $150 million for the
reconstruction of the Chechen economy after the war there ended. The total
bill came to $3 billion. An intensive review by the Chamber of Accounts found
documentation for only $2 billion, and less than $150 million reached
Chechnya. What happened to the remaining billion? No one knows. 
Tax revenue is collected only to be stolen. Losses on the federal and
regional levels are huge. The Finance Ministry compounds the problem because
it has no accounting system that keeps track of revenue and spending. 
The Russian people are paying the price. When the World Bank lent Russia
million, the first third of it was set aside to compensate victims of bank
frauds and pyramid schemes. Several years later, audits showed that not one
victim had received the money. 
Meanwhile, the sweeping privatization undertaken by President Boris Yeltsin
has produced few benefits. For example, when Norilsk Nickel, the vast mining
complex in Siberia, was privatized, it was sold at fire-sale prices, and the
Government received little revenue. 
In addition, few privatized companies have become more efficient or
profitable. The country as a whole is starved for capital. Thus when the

Russian oil giant, Rosneft, was put up for sale last week, no bidders came
forward. The rights of the ordinary shareholder are not respected. The veneer
of capitalism has been achieved, but it is only skin deep. 
All this has created the debt that is strangling the economy. Forty-five
percent of state revenue is now used to service that debt. Little is left over
to provide services, a situation worsened by the 30 percent budget cut Mr.
Yeltsin made in April and an additional 12 percent cut last week. 
This means no money is left to pay workers or to support education, public
health or scientific research. No wonder unrest is mounting. Scientists unpaid
for months have blocked railroads, and miners have gone on strike. This year,
the Russian stock market has suffered the steepest decline of any market in
the world, and its precipitous fall last week may herald much worse to come. 
The situation is not yet irreversible. To the Government's credit,
is beginning to work in Russia. Independent auditors are allowed to
investigate. Courts are weighing complaints about illegal privatization
brought by the Chamber of Accounts. 
That is a start. But there is more to be done. 
Violators must be prosecuted, and those who enforce the law must have
Government support in punishing the guilty. Shareholders, too, need the tools
to clean house. 
Beyond this, the international community, especially the International
Monetary Fund, which promotes the transformation of the Russian economy, must
help bring the country back from the abyss by demanding greater accountability
on its loans. Otherwise Western economic prescriptions will continue to fail.
Effective reform must stem the stealing of the Russian state.


>From RIA Novosti
Interfax-Argumenty i Fakty, No. 22
May 1998

Moscow hosted an annual all-Russian conference entitled
"An Assessment of Russia's National Wealth" May 27-29. That
conference's results will, doubtless, be summed up in the near
However, it's crystal clear even today that various facts
and statistics, which were cited by some conference delegates,
are really sensational.
D. Lvov, academic secretary of the Russian Academy of
Sciences' economics department and M. Masarsky in charge of the
Federal Assessment Fund, delivered initial conference reports.
According to academicians V. Lisichkin and V. Simchera,
the seven-year-long Russian reforms have affected this
country's macro-economic image in an extremely negative way.
The so-called "creative" activities of all Russian
governments over the 1991-1997 period have entailed tremendous
losses of Russia's national wealth to the tune of $1.2
trillion. Incidentally, the Soviet economy had sustained three
times less losses (totalling about $420 billion) throughout the
Second World War.
In real life, all those seven-year efforts aimed at saving
the "perishing" Soviet economy have virtually depleted its
vitality. The "patient's" health continues to deteriorate at a
disastrously quick pace.

The Russian GDP has plunged by 83 percent between 1991 and
1997, totalling $426 billion last year. Industrial output has
dwindled by 81 percent, what with agricultural output
nosediving by 63 percent. At the same time, capital-investment
volumes have plummeted by 92 percent.
44 percent less housing was commissioned last year (on
1990 levels), with the retail trade turnover falling by 36
percent, the services-market turnover declining by 46 percent.
Russia now owes more than $125 billion to other countries
of the world. At the same time, this country is so far unable
to obtain $146 billion from its foreign debtors.
More than 70,000 factories and plants were shut down all
over Russia during the seven years of "reforms". Their list
includes 5,000 huge and big-time entities. Apart from that,
Russia has stopped using 60 percent of all arable farmlands.
Specific materials-consumption levels have soared by 200
percent, with labor-input levels skyrocketing by an impressive
300 percent. On the other hand, production efficiency has
declined five-fold.
Real-life prices have soared by 350 percent. However,
consumer-goods production has plunged by 81 percent. Production
in the "non-foods" category has plummeted by 85 percent.
Incidentally, the people of Russia have managed to consume only
17 percent of domestically produced vodka and wines in 1997 (on
1990 levels). However, the number of alcoholics has not
dwindled, increasing by 200 percent.
The Russian population has shrunk by 3.8 million,
totalling 147.2 million throughout 1997. And the respective
1990 population was 151 million.
About 13 million Russians are now jobless at a time when
this country has just 2.7 million officially registered
unemployed people.
The number of jobless people has swelled 10-fold since the
times of Mikhail Gorbachev. Meanwhile the number of researchers
has declined by two-thirds. This country now has one-third
fewer college and university students and those studying at
specialized secondary educational establishments.
There were 38 doctors, as well as 112 hospital beds, per
every 10,000 of the Russian population last year, with the
respective 1985 ratio being 45 doctors and 135 hospital beds
per every 10,000 people.
Approximately 800,000 highly skilled professionals have
left Russia over this period.
Real-life average monthly wages and pensions have declined
by 78 percent and 67 percent, respectively. Per-capita incomes
have fallen by 58 percent.
The Russian economy has now found itself in the red. The
parameters of this balance sheet are really sensational. But no
one has had any special illusions about the overall state of
Our paper will provide detailed coverage of this
conference in its next issues.


Helping Russia Could Hurt Clinton
June 3, 1998 

WASHINGTON (AP) - President Clinton's assertion that the United States might
support bigger IMF loans for Russia was an attempt to try to steady Russian
markets and soothe jittery investors. But it's a high-risk strategy that could
work against him in Congress. 

The administration was having a hard enough time getting Congress to approve
its $18.3 billion request to help the little-loved International Monetary Fund
replenish accounts strained by the Asian economical crisis. 
Bringing Russia into the equation, even indirectly, could make the process
that much more difficult, according to those involved with the legislation. 
``If we want to get the IMF money, we've got to treat Russia separately,''
said Sen. Ted Stevens, R-Alaska, chairman of the Senate Appropriations
Committee. ``The Russian situation has harmed the case for getting the IMF
money to help Southeast Asia.'' 
Russia's financial crisis contains an element of danger not relevant to most
nations that the IMF assists: It has a massive nuclear arsenal. 
U.S. policy-makers are concerned about anything that might create greater
instability in Russia and undermine President Boris Yeltsin's democratic and
economic reforms, perhaps giving an opportunity to extremist elements. 
Those are issues that were not part of the IMF debate until now. 
The IMF has few fans in the GOP-run Congress. In the House, Speaker Newt
Gingrich hasn't even said when he'll schedule a vote on the $18.3 billion
request. The Senate passed the legislation, but with strings attached on how
the IMF makes its loans. 
Senate Majority Leader Trent Lott called for the dismissal of IMF Director
Michel Camdessus earlier this year, accusing the French banker of advocating
``socialist'' policies. 
The Mississippi Republican, like many conservatives, accuses the IMF of
advocating economic policies that are too austere, including demanding higher
taxes and interest rates in distressed countries that receive IMF loans. 
Lott said this week that he's willing to work with the administration on
breaking free the IMF funds, ``but I don't know what their thinking is on it.
They're not really pressing the point.... I haven't heard from the president
or anybody in his administration about IMF in probably a month.'' 
As to Russia's predicament, Lott said, ``I think there are (already)
sufficient funds there to provide the assistance that would be needed for
He said it was important to be ready to support Russia, although not
necessarily in the context of more IMF funds. 
Administration economic officials spent Tuesday consulting with their
counterparts in other major industrialized countries, members of Yeltsin's
government and the IMF, preparing for an emergency meeting next Tuesday in
Clinton said Sunday that the United States would support ``as necessary''
bigger IMF loans for Russia beyond a three-year, $9 billion financial package
already in place, but he provided no details or figures. 
Some analysts suggested that Clinton was mainly using rhetoric to try to
the situation and wasn't prepared to support a specific new aid package. 
``It is a reminder, we hope, to the United States Congress of the importance
of replenishing the resources that the IMF has available,'' suggested White
House spokesman Mike McCurry. 
As to getting Congress to act on the earlier IMF money, ``We think we've

a very strong and persuasive case,'' McCurry said. He suggested that Russia's
plight would help build support for approving the IMF money. 
Sen. Dick Lugar, R-Ind., long a respected voice on foreign policy, said he
can't fault Clinton for ``sounding an alert,'' but said Russia's problems
could complicate the IMF debate in Congress. 
``People will come back again and again to talk about all the ways the
Russians have spent the money,'' he said. 
``On the one side, the (administration) argument will be, Russia is the
unintended victim of the Asian meltdown,'' said Lugar. ``But so are many other
IMF critics - and there are no shortage of them in Congress - already
that the international lending institution's policies help rich investors and
bankers avoid losses on risky investments. 
Still, Lugar said, ``The IMF is the only safety net'' for governments
suffering financial crises, ``and you need to have one.'' 

ANALYSIS-Why the West is so concerned about Russia
By Diane Craft 

LONDON, June 2 (Reuters) - There is an old saying in business. If you owe the
bank $10 million, the bank owns you. If you owe the bank $10 billion, you own
the bank. 
Russia, these days it seems, owes the bank a lot and that bank is the
West. As
Russia's markets deteriorate and its politicians hold one crisis meeting after
another, there has been an intense, behind-the-scenes effort to ensure that
Russia does not fail. 
Every Group of Seven (G7) country, the International Monetary Fund and top
bankers around the world have been scurrying to make sure. Russian tycoons
have also rallied round the Kremlin to offer support. 
The financial reasons are obvious. According to a Morgan Stanley Dean Witter
report, European commercial banks are owed more than $40 billion by Russia and
U.S. banks are owed another $7 billion. 
But there are bigger things to worry about than money. 
Eric Fine, a Morgan Stanley analyst in London, said you could sum it up in
three words: "Nukes, geography and dominoes." 
Fine, responsible for Russian and Eastern Europe debt strategy at the
U.S.-based bank, said the nuclear angle would hardly be missed in the light of
recent events in India and Pakistan. 
"One has to be concerned about any political implications of a rapidly
depreciating rouble, especially in the context of what is happening with other
would-be nuclear powers in the region," he said. 
The political ramifications of an outright collapse of the Russian economy
would be grave because it could directly threaten the political system so
painfully carved out since the end of the Cold War. 
Analysts said a collapse in the economy would put Russia's reformers, so
revered by the West, on a direct collision course with hardline extremists. 
Last week speculators sold the rouble aggressively, authorities jacked up
interest rates to 150 percent and influential credit agency Moody's Investors
Service downgraded the country's credit rating. 
But by the end of the week, some bankers were voicing cautious optimism. 
The West, they said, would likely come up with a concerted bailout package,

put fresh pressure on the IMF or make sure the international banking community
was ready to step in and give Russia the funds it needed to avoid any
political fallout. 
"The reformers have achieved a stable currency and low inflation and a
blow to
them puts Russia on a path where extremists, whether it be left or right, can
come back in," David McWilliams, emerging debt strategist at Banque Nationale
de Paris, said last Friday as events started to turn in Russia's favour. 
"I don't think the West will risk that because the Pakistan/India thing
that the end-game for extremists tends to be violent, and I think we can live
more happily with a Russia that is struggling than a Russia that is
Analysts said economic instability resulting in political instability would
have direct implications for Germany, given its proximity to Russia. 
"Geography is very very important. Russia is geopolitically or strategically
an extremely important country," said Fine. "This highlights the breath of
Russia's sponsorship." 
Then there is the idea of the domino effect. 
Were Russia to collapse, the echoes would reverberate around the globe at a
time when the world economy still is struggling to overcome the effects of the
Asian crisis. 
U.S. Deputy Treasury Secretary Lawrence Summers said as much on Monday.
"Russia's problem has the potential to become in turn central Europe's and the
world's," he said in Vienna. 
Summers' warning is by no means falling on deaf ears. 
"Given the volatility and fragility of world confidence a country as
large and
as important as Russia would have profound implications for other countries
whose currencies are viewed as vulnerable," said Fine of Morgan Stanley. 
Certainly, G7 economies such as Germany and the United States as well as the
smaller emerging markets would feel the pinch if Russia did not get the
financial backing to help its cash-starved economy. 
In addition, Western banks heavily exposed to Russia would take a huge hit. 
"Obviously there are geopolitical implications, there are trade links with
Russia, and there is financial exposure that goes into global markets," said
Oliver Fratzscher, chief economist emerging markets at Dutch bank ABN AMRO in
"I think most relevant exposure is financial exposure, and particularly
Germany," he said. 
For the time being, bankers are understandably trying to push the onus onto
The chief executive of Deutsche Bank, Germany's largest commercial bank,
on Tuesday governments and international institutions, rather than banks,
should be helping Russia in the first instance. 
"In present circumstances, governments and international institutions
like the
International Monetary Fund are called upon to help, and that is the right
thing to do," said Rolf Breuer, head of the German bank giant. 
Even in this area, though, there are signs that banks are willing to do
London-based loan specialists said on Tuesday that commercial banks have been
holding talks on raising a loan facility for Russia which could total $5

Such funds would not come cheap in the current environment, and would be
as a short-term remedy. Estimates on Russia's total short-term cash needs
range between $5 and $15 billion, but Fine said that in a "scorched earth"
scenario more than $40 billion would be needed. 
So the ball is back in the court of Western governments. 
According to French Finance Minister Dominique Strauss-Kahn, France and the
other six G7 countries will be holding telephone talks later on Tuesday over
Russia's economic crisis. 
Whether that translates into hard cash is yet to be seen. But until it is,
bankers say markets are unlikely to let Russia off the hook. 


Primakov says Russia must help itself out of crisis

WINTERTHUR, Switzerland, June 2 (Reuters) - Russian foreign minister Yevgeny
Primakov said on Tuesday that his country was grateful for international
assistance in its financial crisis, but it was mainly up to Russia to help
Asked by a reporter whether Russia would agree to some sort of conditions in
foreign policy matters if the U.S. were to offer it emergency funding,
Primakov said: "I don't think so. Russia will look to itself, and search for
inner possibilties in order to get over the financial difficulties." 
"At the same time, we naturally need international support, and we are very
grateful for that. But that is not the main source," he said. 
Primakov was speaking to reporters after a tour of this city's art
museum, and
before a speaking engagement here. 
Primakov is expected to travel to Geneva to attend a meeting of foreign
ministers of the five permanent U.N. Security Council members on Thursday. 
The meeting was called to discuss nuclear tests last month conducted by
Pakistan and India, according to a U.N. spokeswoman. 
The foreign ministers of the five permanent Security Council members
besides Primakov, U.S. Secretary of State Madeleine Albright, China's Tang
Jiaxuan, Britain's Robin Cook, and France's Hubert Vedrine. 


Date: Wed, 03 Jun 1998 13:37:53 (MSK)
For the Hindustan Times
From: Fred Weir in Moscow

MOSCOW (HT June 3) -- Russia will urge the UN Security
Council to try and persuade India and Pakistan to sign the
Nuclear Non-Proliferation Treaty as conventional powers at a top-
level meeting Thursday, but will not agree to economic sanctions
against the two atomic renegades, according to a Foreign Ministry
"Russia is forming its official position in the course of
events," says Valery Nesterushkin, the Foreign Ministry
spokesman. "Nobody was well prepared for the events of the past
India and Pakistan have surprised the world and deeply
challenged the international security system over the past month
by testing their own atomic weapons and asking to be recognized
as nuclear weapons' states.
Foreign Ministers of the five permanent members of the
Security Council -- who also comprise the world's five permitted
nuclear weapons' powers -- will meet in Geneva Thursday to
discuss the situation in South Asia after the tests.
"In principle we do not regard India and Pakistan as having

the status of nuclear weapons powers, and we call upon them to
join the Nuclear Non-Proliferation Treaty," says Mr.
But in Geneva Thursday Russian Foreign Minister Yevgeny
Primakov will press other Security Council members to avoid
crippling sanctions and step up diplomatic moves to bring India
and Pakistan into the global non-proliferation movement, he says.
"In the present situation such a powerful weapon as sanction
is not the best thing to use. It doesn't take into account the
real state of affairs in either India and Pakistan, not does it
consider the mood of the population in these countries."
The United States has already imposed tough bilateral
penalties against both countries, and is expected to urge other
members of the Security Council to join a general sanctions
regime in order to discourage other countries from making the
nuclear leap.
"If the global community takes harsh steps against India and
Pakistan, the population will suffer and there could be a
political backlash that might lead to new unpredictable steps. We
do not want to see any escalation of tension between Delhi and
Islamabad as a result of this," says Mr. Nesterushkin.
"The only possible resolution is to work toward bringing
these countries into the non-proliferation movement through
dialogue, and dialogue accompanied by threats is not a very
useful way to persuade someone," he says. 
"Russia has profound doubts about the usefulness of any sort
of sanctions in this instance."


Chicago Tribune
3 June 1998

Russia's crisis of confidence clearly is far from over. The country's stock
market fell another 10 percent Monday before rebounding Tuesday, and trading
on its futures market was suspended.
So far, the U.S. has offered up only soothing--and deliberately
vague--words from President Clinton about endorsing "additional conditional
financial support . . . as necessary, to promote stability and structural
reform in Russia."
It is critical that Washington back up those words with action.
Specifically, the House of Representatives must follow the Senate's lead and
vote to approve the additional $18 billion in borrowing authority for the
International Monetary Fund sought by the administration. Russia is in crisis,
and that makes these additional IMF funds essential.
Congressional critics may question America's strategic interest in backing
IMF bailouts to Thailand or Indonesia. But our strategic interest in promoting
stability in Russia, with its still-huge nuclear arsenal, surely must be
The government of President Boris Yeltsin and Prime Minister Sergei
Kiriyenko has gone to extraordinary lengths to maintain the value of Russia's
currency--tripling short-term interest rates last week and spending an
estimated $1 billion in precious reserves over the last month to support it.
So far, the ruble has remained more or less stable, but the U.S. and its
allies must stand ready to help if outside assistance is needed to keep it
that way. Devaluation of the ruble would boost the price of goods for ordinary

Russians, which would certainly cause further unrest in that country and could
destabilize the government.
Yeltsin and Kiriyenko also have an obligation to force structural change on
their country, because no amount of outside financial aid will solve its
fundamental problems. Russia needs to overhaul its confiscatory tax system,
which leads to widespread tax avoidance, cut government spending, establish
and enforce bankruptcy laws and protect investor rights.
Deputy Treasury Secretary Lawrence Summers bluntly stated the obvious: that
Russia's troubles have the "potential to become Central Europe's and the
world's." Recent world attention has been focused on the danger posed by two
nascent nuclear powers: India and Pakistan, neither of which has yet to
translate its ability to detonate a bomb into hostile weapons of mass
destruction. Russia, in contrast, still bristles with nuclear warheads. Its
stability is crucial.


New York Post
May 31, 1998
[for personal use only]
IMAGINE, if you will, a huge company that's out in the debt markets 
trying to raise, oh, say, $670 million. 
At the same time, the company's auditor goes on a road show to discuss 
how management has stolen billions of dollars. 
He publicly recommends that the company's lead lender not put up any 
more money without a complete change of management. He says that the 
company's chief financial officer has no system to track expenditures, 
and that for one $3-billion project, he could find only about $1.5 
billion of receipts. The rest was just gone. 
Since this is the Russian Federation we're talking about, they got the 
$670 million they were seeking from the International Monetary Fund on 
Friday, of course. 
Because ... well, because. The "project" was the 1995 budget for the war 
in Chechnya, which you may not have known you were paying for. And the 
auditor, who was in New York last week, is Veniamin Sokolov, an 
astrophysicist who has a second career attempting to be Russia's chief 
controller for the use and disposal of federal property. "Attempting" 
because the Russian state has become a pinata for insiders. 
Sokolov is a former Communist Party official, and worked on military 
projects in "closed" cities that designed and made nuclear weapons. He 
quit the party at the end of the Soviet era and says he now supports 
market economics. But, as he says through a translator, "What we have in 
Russia is not capitalism, but Potemkin capitalism," using a Russian term 
for fraudulent showcase projects. 
"There is a complete disconnect between the government finances, the 
central bank and the ruble, and the real economy." 
This is something that American policy makers should keep in mind. 
According to the Accounts Chamber, the ruble accounts for around 10 
percent of the Russian money supply. Most of the country's money supply 
is in the form of intercompany IOUs, of which there are more than 30 
At least 20 percent of Russia's money supply is in U.S. currency. The 
sanctity of the ruble-dollar exchange rate is very important to 

hedge-fund managers who have speculated on GKO's or "Gekkos" (sic) which 
are Russian T-bills. The 90-day ones now yield 75 percent. 
It matters a lot less to Russian industry (such as it is) or to the 
Russian public. 
All this, we're told is an inevitable part of a "transition economy," 
which to me sounds like the old idea that Asians don't value human life 
like we do. Speaking of "transitions," the World Bank was persuaded by 
Anatoly Chubais, a "young reformer" and now ex-finance minister, to lend 
$800 million to finance the restructuring of the Russian coal industry. 
Of that money, $6 million appears to have been spent on the intended 
purpose. The other $794 million disappeared - a high commission even by 
the standards of emerging market finance. 
As for that $670 million from the IMF, the announcement of the loan led 
to a big rally in the GKO market on Friday. But not so fast. 
The Russians have a $550 million interest payment due on international 
debt on Tuesday. So much for that money. Word is that Treasury Secretary 
Robert Rubin is actually beginning to wonder whether the United States 
and the international agencies should continue pouring money into the 
pockets of a kleptocracy. I think they're almost on the right track. 


McDonald's To Expand in Russia
June 2, 1998

MOSCOW (AP) - McDonald's plans to open seven new restaurants in Moscow by the
end of the year, brining the total number in the city to 28, says the man who
brought the fast-food chain to Russia.
``Moscow is still the best market for the company,'' said George Cohon,
chairman of the board of the Canadian-Russian company that operates the
Cohon started the first McDonald's in Moscow in 1990. Today, the chain
6,000 and operates 33 restaurant in Russia.
Cohon said McDonald's plans to invest $25 million in Moscow in 1998 to
restaurants and increase the capacity of its food processing plant.
Cohon received a medal Tuesday from Mayor Yuri Luzhkov marking Moscow's
anniversary, the Interfax news agency reported.


Yeltsin, Tycoons Vow to Crack Economy Crisis 
2 June 1998

MOSCOW -- (Reuters) President Boris Yeltsin won support from influential
Russian tycoons on Tuesday and announced he would present an anti-crisis
plan at the end of the month to shore up the creaking economy. 
Behind-the-scenes activity showed leaders and banks around the world
were already gearing up to help Russia even before that. 
In response to all this, Russian shares closed sharply up to cover
Monday's 10-percent losses and most government securities rose as traders
hunted bargains and Western clients returned. 
In the Kremlin, Yeltsin sought to rally the troops. 
"We don't meet often -- when it becomes unavoidable, when the state is
in difficulties, the economy starts creaking, when foreign investors start
fleeing," he told the Russian bankers. 
Afterwards, presidential spokesman Sergei Yastrzhembsky told reporters
Yeltsin would invite parliamentarians from both chambers to discuss
Russia's economic plight. 
"It is expected that on June 30 in the Marble Hall of the Kremlin there
will be a big discussion on this theme," he said. "The president is
expected to deliver an anti-crisis program." 

Earlier, Yeltsin adopted a schoolmasterly tone as he welcomed the 10
bankers and industrialists, Kremlin officials and Prime Minister Sergei
Kiriyenko -- who announced his own austerity plan last week to slash
spending and boost revenues. 
A budgetary squeeze caused by poor tax collection and lower oil prices
as well as Asian financial woes has sapped foreign investor confidence in
Russian economic and political stability. 
But major Western powers and international financial institutions have
kept faith. 
The United States said it was working with other Group of Seven (G7) top
industrial nations on providing financial aid. An international monetary
source said in Tokyo that G7 officials would meet in Paris next week. 
The G7 comprises Britain, Canada, France, Germany, Italy, Japan and the
United States. 
The head of Deutsche Bank AG, Rolf Breuer, said commercial banks should
play a secondary role. 
The deputy head of Russia's central bank, which has vowed to protect the
ruble at all costs, told reporters he hoped the International Monetary Fund
would serve up the next $670 million slice of an existing
multi-billion-dollar loan by mid-June. 
Deputy Finance Minister Mikhail Kasyanov said his ministry was
discussing with 10 leading foreign banks ways to support the ailing
treasury bill market in Russia. But he said an unspecified bond was more
likely than a credit from the West. 
Kiriyenko, who flies to Paris on Wednesday for a trip arranged before
the crisis broke, was upbeat, although in London rating agency executives
said they were still monitoring events. 
Yeltsin, who wants to guarantee his place in history as the man who
transformed Russia, has backed Kiriyenko to the hilt. Yastrzhembsky said
Yeltsin and the businessmen had praised the 35-year-old prime minister's
new Cabinet and the central bank. 
The tycoons at Tuesday's meeting were from Rosprom-YUKOS, Most Group,
Interros, Alfa Group, SBS-Agro Bank, Rossiisky Kredit Bank, Gazprom natural
gas monopoly, EES electricity company, LUKoil and Surgutneftegaz oil
Yastrzhembsky said the businessmen made several proposals which would
soon be reflected in presidential decrees on tax and wage arrears as well
as on energy and railway tariffs -- all of major importance to budget
revenues and areas under IMF scrutiny. 
Some of the bosses attending helped bankroll Yeltsin's re-election in
1996 but he has criticized them since for trying to exert too much
influence in politics.


>From RIA Novosti
Interfax-Argumenty i Fakty, No. 21
May 1998
Russian Federation May Follow the Path of Soviet Union
By Georgy VIREN

Alexander Lebed's victory in Krasnoyarsk is generally
evaluated from the viewpoint of the general's chances in the
2000 presidential election. I think, however, that the question
of what is to become of Russia is no less important than who
will become its president in 2000.

Ever More Powerful Russian Regional 
Leaders May Break Up the Federation 
In the last two or three years a number of Russian

regional leaders have risen to political prominence nationwide.
Energetic and influential figures such as Luzhkov, Shaimiyev,
Rakhimov, Nikolayev, Rossel, Nazdratenko, Aushev, Kokov,
Ayatskov, Titov, Tuleyev and Fedorov seem to be destined to do
good to this country, even though they may be incalcitrant and
restive sometimes. However, they will be good for this country
only if the principle "a strong centre and strong regions" is
in force. When the centre is weak, the growing influence of
regional leaders will sooner or later put in question the
constitutional structure of the Russian Federation. In other
words, it will encourage separatist tendencies and the
conversion of the federation into a confederation, that is the
emergence of several fairly independent states on the territory
of Russia.
This means that in 1999-2000 the situation of 1991 when
leaders of the Soviet republics created the Commonwealth of
Independent States and made the President of the USSR "a
marshal without an army" may be repeated. Yeltsin may find
himself in the same position if several regional leaders meet
and decide to turn the Russian Federation into a Russian
Confederation or a Commonwealth of Russian Regions or whatever.
Finding a new name won't be difficult. 
How realistic is this scenario?

Federal Government: the Arrogance of Impotence
What are the main tasks assigned to the Kiriyenko Cabinet?
To pay debts to servicemen and other public-sector workers. To
collect taxes. Such are the immediate priorities, the rest can
wait. However, the previous leaders failed to cope with these
tasks even though they had years to do so. And no sensible
person would call Chernomyrdin, Chubais, Nemtsov and Livshits
feeble-minded incompetents. It is not that Kiriyenko will have
to grope in the dark and try to do what "experienced managers"
and "prominent financiers" had failed to do. The kernel of the
matter is that the nature of these tasks (patching holes and
feverishly raising money) does not give the new premier any
chance to strengthen the state and cement its unity, because
the only way to national unity and cohesion is sustained
economic growth. You can't win a long-distance race if keeping
your pants on is the only thing that bothers you.
As for the President, the inability of his governments to
work out and implement a long-term economic strategy during
seven years has become obvious for all. Now that a new
presidential election is round the corner, economic strategy is
the last thing anyone cares about.
The impotence of the federal government in relations with
the regions is manifest almost in every conflict, from the war
with breakaway Chechnya to the row with the unruly Nazdratenko.
Even if the harmless ex-Governor of Krasnoyarsk, Zubov, dared
threaten the Kremlin with his small shaking fist (and got some
money as a result), what is there to say about the tough
regional lords?

Who Stands to Gain?
Who will profit by replacing the federation with a
Will the leaders of the subsidised regions benefit by it?
Absolutely. They won't have to pay taxes to the centre and then

wait for months for transfers. Will the heads of self-financed
regions stand to gain? Even more than the heads of the
subsidised regions, because they will have all their money to
themselves and won't have to give anything away to the centre.
You can't have too much money, as you know.
The most important factor, however, is that the creation
of a confederation would lead to a new re-carving of property,
such as Gazprom, Unified Energy Systems, oil, railways and many
other expensive things. And all these things may be divided
among the new sovereign republics.
The situation may become the mirror reflection of the
situation in 1991. It was clear to all then that the breakup of
the USSR would lead at least to the severance of production
ties and, consequently, economic degradation and a fall in 
living standards (not to mention such "trifles" as the
appearance of borders and countless barriers for trade,
cultural and people-to-people ties, a rise in nationalism,
Did that stop the organisers of the breakup? Not at all.
Now it may so happen that regional elites will do everything to
wrest from the weakening centre full control over the local
resources and actively use any pretext for inciting anger with
Moscow and turning it into confrontation. There are enough
pretexts even now. In addition, many Governors know that they
may count on the support of local financiers and other business
people, who are also waiting for their share of the pie.
The growing power of the regional leaders is so obvious 
against the background of the federal authorities'
powerlessness that there is reason to believe that scenarios of
possible developments are being written and even carried out
somewhere now. Little is needed for the tendency to become a
process: agreement between a group of leaders. In this sense
Lebed's victory is significant. It is Lebed who can (with his
energy, push, arrogance and popularity) initiate the actual
movement towards a restructuring of the state under the banner
of the struggle against the "evil empire", that is go the way
Yeltsin came in 1989-1991. Incidentally, Lebed's (equivocal)
statement that he won't run for the presidency in 2000 may
prove to be true. It is simply not ruled out that by that time
Russia will not exist as a single state.
It is not that the country will instantly break into
dozens of regions. At first the largest regions may unite to
form a confederation: the Maritime Territory (there was the Far
Eastern Republic in the 1920s), Yakutia, East Siberia
(Krasnoyarsk and the Republic of Khakassia), the Urals,
Bashkiria, Tatarstan, the Volga Region and the Northern
Caucasus. Then smaller regions will begin to join in. They will
have no other alternative. A dozen of suzerains are already
there and vassals, who will also have broad powers within their
territories, will group around them.
It is clear that this process will lead to Russia's
undoing and the situation may develop in such a way that even
the most sincere advocates of a strong state won't be able to
resist. One of them, Moscow's Mayor Yuri Luzhkov, may find
himself in a hopeless position. What will he do when the

princes controlling the lands to the east of the Volga present
him with the ultimatum: "Either you join us with your Moscovy
(from Murmansk to Stavropol and from Smolensk to Ivanovo) or
you stay where you are and we shall quit the Kremlin anyway".
He will have to join, no matter how much he may resent it.
As for the ideology of etatism, there is no doubt that
even Yeltsin embraces it with all his heart. However, the logic
of political struggle and financial group interests has led him
in the opposite direction. It may eventually so happen that
Lebed, also a statist and former Yeltsin's supporter turned
critic, may go even farther along this way and become for
Yeltsin what Yeltsin once became for Gorbachev.
I think that Lebed is the man who may become the leader of
the movement that will eventually lead to the country's

Who Is Against?
A natural obstacle to such a course would be the real
consolidation of the state system, that is the first
manifestations of an economic recovery and a rise in living
standards in the next 18 months, which everyone or at least a
majority of people will feel. It is clear that all this is one
of the fairy-tales we have been told since 1991.
Consequently, the only possible solution is the use of
force. What is there for the Kremlin to count on? A humiliated
and demoralised army? A dismantled and weakened FSB? Corrupt
police? Or the interior ministry forces, which Kulikov built up
and Stepashin is purging now? All these are unlikely
The more so since in our scenario the situation may prove
(militarily) far more complex than it was in August 1991 or in
October 1993. This time the country's future will be decided
not in front of the Government Building, but in a dozen of
provincial cities simultaneously and there the local OMON 
forces, FSB officers and army units are heavily dependent on
the local authorities and will hardly fight against them.
Will the financial moguls who did so much for Yeltsin's
victory in 1996 and are now preoccupied with "continuity of
power" rise in defence of the Kremlin? It should be recalled
that a possible transition from the federation to a
confederation means a new redistribution of property, which
will involve large companies rather than small plots of land
owned and used by most Russians to grow vegetables and fruit.
When such amounts of money are involved, our Rockefellers will
sell their own mother. Who will care for any politicians? The
rich always become hostage to their money and their likes and
dislikes and obligations have no importance whatsoever.
Now we have come to the population, that is the
electorate. If residents of Krasnoyarsk or Vladivostok are
promised freedom from Moscow (which "saps all our juices") and
a better life, they will hardly protest against division of the
country. In any case, no one will build barricades. It is only
when their life gets even worse, they will stage protest
actions and hunger strikes. But that will happen later. As the
Bible says, peoples are often prepared to change a wooden yoke
for an iron one. What's the use of protesting? Nothing will

change in real life at once. There was a time when Muscovites
lived in Russia, now they live in Moscovy. So what? Maybe
things will get better. Once again we have the mirror
reflection of the 1991 situation.
A hopeless picture: it seems that there is nothing to stop
the centrifugal tendencies in Russia's internal policy. Except,
perhaps, an almost farcical factor: the possible creators of a
Russian confederation may start fighting with one another. To
organise a confederation, a high degree of agreement of its
members is needed: they must decide from the start the
geographical borders of their new "principalities" and set up
a co-ordinating body and agree on its powers and establish the
principles of dividing property. But our leaders have always
been known for their inability to come to terms with one
another. Paradoxical though it may seem, this time this
inability may be good for Russia.
There are external factors too. We are not alone in this

Foreigners Will Help. Whom?
Such fundamental changes in the state structure of Russia
would not leave indifferent either West or East.
In principle, the civilised world is interested in a
stable Russia: no one wants unrest in a nuclear-weapon country,
no one needs millions of refugees and no one wants to waste the
money invested in Russia. At the same time, neither the
industrialised West nor the rapidly developing East wants to
see Russia become a strong and competitive nation and the idea
of a confederation would suit both nicely. A new division of
the country would undoubtedly weaken it considerably and a
redistribution of property would give foreign companies a good
chance to make profit. As for stability and control, this
question may be decided and on conditions that will benefit the
As I have already said, if it comes to creating a
confederation, a co-ordinating body will have to be set up. It
will be a government of sorts, something like the CIS
Secretariat. It will be created and charged with, among other
things, ensuring control over nuclear weapons (who else will do
that?). It is clear that it is impossible to trust a matter of
global importance to bureaucrats-co-ordinators. Thus the idea
of joint control of the Russian nuclear weapons by the West and
the newly created confederation may come up. It will certainly
be supported by all international organisations, from the
United Nations to Greenpeace. UN peace-keeping forces will be
ordered to guard Russia's nuclear facilities and NATO
representatives (along with the Executive Committee and heads
of the confederation member-states) will receive control over
the nuclear button. It should be noted that in that case the
Russian army will be divided between the new states and will no
longer exist as a single whole. 
Such a scenario would suit the West and almost the whole
world in the best possible way: the Russian nuclear and
military might would be finally destroyed and Russia would
never re-emerge as an economically strong country. At the same
time, the minerals-rich eighth part of the world's dry land
would be open for use.

So, the West and the East would welcome the idea of
creating a confederation in Russia and would help its
realisation in every possible way. It is not ruled out that
such an idea is being secretly discussed.

An Undreamable Dream
A fantastic scenario? Yes. However, it is the kind of
fiction that may become reality one day. "The lust of
leadership" (the term coined by St. Thomas Aquinas) and greed
have no limits and never give away of their own free will. We
know of many historical examples that bear this out.
Without going too far away into history, let us recall
that no one in 1989 foresaw the finale of 1991 and any
prediction of the collapse of the USSR seemed fantastic at that
time. Did our ancestors foresee in early 1914 how 1917 would
end? Would not they have dismissed such a scenario as a bad


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