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CDI Library > Johnson's Russia List

Johnson's Russia List
 

 

June 11, 1998   
This Date's Issues: 2215  ē2216


Johnson's Russia List
#2215
11 June 1998
davidjohnson@erols.com

[Note from David Johnson:
1. AP: Russians Get President Ouster Bill.
2. Marshall Goldman: Alfred Kokh's Book Introduction.
("The Selling of the Soviet Empire.")

3. The eXile: Mark Ames, SPLAT! RUSSIA EXPLODES IN CRISIS.
Including: The eXile's Savage 6 Catch-22s Explaining Why Russia 
Is Fucked.

4. Moscow Times: Andrei Piontkovsky, SEASON OF DISCONTENT: 
News Media Belie Myths Of Oligarchs.

5. NTV: Lebed Closes on Zyuganov in Presidential Poll.]

********

#1
Russians Get President Ouster Bill
June 10, 1998

MOSCOW (AP) - A Russian president who failed to work full-time for more than
four months would have to undergo a medical exam under a bill given
preliminary approval Wednesday in the lower house of parliament. 

The bill could strengthen the hand of Boris Yeltsin's opponents, who have long
claimed he is unfit for office on health grounds. It needs final approval by
the State Duma, parliament's upper chamber and the president himself before it
becomes law. 

The constitution says a president who suffers a ``lasting inability to
exercise his powers'' must step down. But it does not explain the process for
removing a president on these grounds. 

The vagueness has been a source of contention since Yeltsin, 67, underwent
bypass surgery in November 1996 after suffering a heart attack. He came down
with pneumonia two months later. In December he was again hospitalized, this
time for a bad cold. 

The bill authorizes either house of parliament to ask the Supreme Court to
appoint a team of doctors to examine a president who is unable to work full
time for more than four months or whose doctors have ordered a reduced
workload. Based on their findings, parliament would then rule whether
president could remain in office. 

********

#2
Date: Wed, 10 Jun 1998 15:39:42 -0400
To: davidj@mail.cdi.org
From: goldman3@fas.harvard.edu (Marshall I. Goldman) 
Subject: Alfred Kokh's Book Introduction

Dear David:
Understandably Alfred Kokh did not want to include my introduction in his
book, "The Selling of the Soviet Empire." But I thought your readers might
nonetheless be interested in what I had prepared. It serves as a sort of
book review.

A READER'S THOUGHTS
by
Marshall I. Goldman
Kathryn W. Davis Professor of Russian Economics at Wellesley College, and
Associate Director, Davis Center for Russian Studies at Harvard University

Nothing attracts attention to a new book like the threat of a scandalous
court trial and a possible jail sentence. In the United States our trials
usually deal with alleged murders, sexual liaisons, (voluntary and
involuntary) and child molestation.

In Russia where the literary tradition is more firmly established, the
trial of the year deals with allegations having to do with, of all things,
book advances from publishers. (On second thought we shouldn't feel too
inferior to the Russians; our Speaker of the House of Representatives, Newt
Gingrich had the same problem.) Of course it turns out that those
publishers were charged with being fronts for those who were not really
publishers and those advances were said to be nothing more than covers for
bribes. As far as anyone could determine at the time, there were no books
in the works when the "advances" were provided.

The payment of such a book "advance" to Alfred Kokh, the Chairman of the
Russian Federation State Committee for the Management of State Property
came immediately after he supervised what at first glance seemed like a
praiseworthy act, the privatization of one of Russia's most valuable
telecommunication companies, Sviazinvest by means of a competitive auction.
This brought the state treasury the largest sum it had ever received in a
privatization sale, $1,875 billion. But while this was a windfall for the
state treasury, others charged that Mr. Kokh, had his own little windfall
or quid pro quo. Seemingly out of nowhere a publisher that turned out to
be owned by UNEXIMbank, (by chance the winner of the Sviazinvest auction)
offered him a $100,000 advance on a book which skeptics claim did not exist
at the time and would not be written. Nor were these cynics dissuaded when
after he quit his government post, Mr. Kokh accepted a job as the head of
Montes Auri, a Moscow investment firm which again by coincidence was also
owned by UNEXIMbank.

As if all this were not enough, in early May 1998, Mr. Kokh was charged
with having spun off 21 state owned apartments to himself, his personal
friends and fellow bureaucrats. Mr. Kokh denied these specific allegations
but did not vigorously deny the charges that he was living high at the
expense of the Russian taxpayers (admittedly a select few). As he put it,
"By getting a tiny salary, carrying a huge responsibility, living in an
aquarium, not having a dacha while making trillions of rubles for the
budget" (by selling off state property,) "I believe that I should have at
least something good- let it be an automobile" (a Mercedes) "or should I
breathe gasoline fumes in a Volga?" (The Moscow Times , May 7, 1998.)

It will be up to the Russian courts to determine just how innocent Mr. Kokh
is of the various charges lodged against him. Mr. Kokh does have one
unassailable defense - the book advance was not for naught-- there is
after all a book and this is it. That does not answer the question of
whether the book is worth the $100,000 (an almost unbelievable sum for a
book advance in Russia). This will be for the reader to judge.

There is no doubt that Mr. Kokh has provided us with some intriguing and
sometimes new revelations. We knew that in late June 1997, George Soros
extended a two week $700 million loan to the Russian government which
otherwise would have run out of foreign currency. Mr. Kokh tells us
however that it was he who solicited the loan from Mr. Soros and that Mr.
Soros provided the funds from his personal holdings, not from his
investment firm. What Mr. Kokh does not mention however, is that the
solicitation came only days before Mr. Kokh declared that the ubiquitous
UNEXIMbank consortium that included Mr. Soros, had become the winner in the
fight for control of Sviazinvest. UNEXIMbank did submit the highest bid,
but there are suspicions that the bank was provided in advance with insider
information about what the other bid would be so UNEXIMbank could top it.

Mr. Kokh also provides a graphic description of what it was like to deal
with mafia associated factory directors. Even with ten heavily armed
security guards he could not induce the head of the Krasnoyarsk aluminum
smelter to observe the government's laws. Mr. Kokh left the factory
unnerved, but at least he left without physical harm. Others fighting for
control of such smelters very often suffered a more tragic fate; almost a
dozen or so were assassinated. What Mr. Kokh omits to tell us is that what
he seems to regard as one of the victims at Krasnoyarsk was subsequently
identified by others as a victimizer and as likely to work with or join
together with the mafia as his opponents.

We also learn just how important the privatization process was for raising
state revenue. Because so few people or businesses paid their taxes, the
failure to raise enough funds from the sale of state enterprises left a big
hole in the budget and sometimes seemed to warrant more criticism and
discussion than did the failure to end state ownership. What Mr. Kokh
fails to address however, is whether or not the revenue from the sale of
productive or potentially productive state assets such as factories should
be used to fund day to day government operating expenses. Most economists
would insist that this is a misuse of funds.

In his next book (with such notoriety and inside information maybe he can
convince one of his benefactors to up the advance to $200,000), perhaps Mr.
Kokh will be willing to integrate more of what was happening economically
into his privatization narrative. (After all he notes in the book that he
has a Ph.D. in economics). For example he creates the impression that the
10,000 ruble vouchers issued to all Russians in 1992 were worth "around
$100". However given that prices rose 26 fold during the year, in a few
months time, by January 1993 that 10,000 rubles was worth only $16.

Mr. Kokh should also share more of the inside story about his most
controversial project, that sale of 25% of the shares of Sviazinvest. He
does provide, sometimes inadvertently, a peek into some of the intrigue but
there must be much more. Yet for now Mr. Kokh's narrative is probably the
best there is. His version will stand at least until some of his
associates who it turns out also accepted substantial advances, decide to
write up their stories. But whatever we may think of Mr. Kokh's
forthcomingness and candor, we should acknowledge that he is as he claims,
probably one of his country's best negotiators. Not only were his advances
larger than those his associates managed to receive, look what he produced
for $100,000.

********

#3
Date: Wed, 10 Jun 1998 15:37:31 -0400
From: "Mark Ames " <exile.editor@matrix.ru> 
Subject: SPLAT! RUSSIA EXPLODES IN CRISIS

SPLAT! RUSSIA EXPLODES IN CRISIS
June 3rd, 1998
By Mark Ames
the eXile 

Did you know that the world's most closely-watched international credit
rating agency just placed Russia's credit risk on the same level as
Lebanon's? You read that right: in the eyes of Moody's Investor Services,
Russia's sovereign debt is as bad a place to park your money as Lebanon: a
country so politically unstable and dangerous--it is occupied by two
foreign warring armies and home to the world's most notorious terrorist
organizations--that the American government, until last July, forbade its
citizens to travel there. Not that things are much better now; as the State
Department's most recent travel advisory warns, "The expiration of the
passport restriction [..] should not be in any way construed as a
determination by the State Department that it is safe for Americans to
travel to Lebanon." Lebanon: so fucked that it suffered the misfortune of
becoming the title of a Human League comeback single. 

While Hizbollah irregulars might have fired their Kalashnikovs into the air
last Friday to celebrate Moody's pairing their credit worthiness with the
largest, most resource-rich nation on earth, there is no joy in
I-invested-in-Russia-and-all-I-got-was-this-fucking-T-shirt-ville. 

The Moody's downgrade means that Russia has now officially been demoted to
the bottom tier of risk and instability in the eyes of Western investors.
Risk of every kind: of debt default, financial collapse, and worse, the
very real risk of social and political upheaval. This time, the upheaval
probably won't be confined to a band of smelly-underwear dreamers
barricaded in a bright white downtown bull's eye; this time, the entire
country could explode. 

In fact, it already is. It's been simmering at an ever-increasing
temperature for some time now. You just didn't know it--not if you've been
relying too much on the local press corps, and in particular, the Moscow
Times.

Everyone else does. Moody's knows it. The Russian press knows it--they've
been writing about the crisis for years now. The entire Russian populace
around you knows what's going on--they're getting tired of it. Foreign
investors know it: their assessment of every situation is always
quantifiable in stock market averages, government yields, and currency
values. And what they're saying is, Russia is fucked. 

Following the first Moody's downgrade in March, Moscow Times interim editor
Geoff Winestock, in an editorial entitled "Downgrade By Moody's Badly
Timed," wrote, "Credit rating agencies like Moody's Investor Services are
supposed to warn investors about risks ahead. But in its recent decision to
downgrade its appraisal of Russia, Moody's is lagging well behind the
times... Moody's has clearly failed if it sees its mission as warning
investors of storm clouds on the horizon." The editorial, incidentally, was
written on Friday the 13th. In two months' time, the market dropped almost
in half--again.

When the most recent meltdown first started, The Moscow Times pulled out
the whitewash and scrubbed away. When Yukos defaulted on a loan to foreign
investors at the end of April, the Times wrote, "Oil major Yuksi has
committed a technical default on a $500 million loan from Western
banks..." 

What is a "technical" default? Is it a better default? A kind of neutral,
technocratic, roll-up-yer-sleeves inability to pay back the loan, instead
of a the usual, catastrophic, "Er, sorry bub, I ain't got no money" excuse?

Two weeks ago, World Bank president James Wolfensohn, whose only job is to
jetset around the world and cheer-lead for hopeless economies, conceded
that Russia's situation was a full-blown financial crisis and "no laughing
matter." That quote was buried in the sixth paragraph of an MT article
headlined, "President Promises Financial Stability." Well, no shit he does.
What else is he going to promise? More corruption? A worsening debt bubble?
Bad marriages and broken television sets for all? On the day that Suharto
resigned as president of Indonesia, the Times upped the Orwellian farce by
splashing the front page with the Soviet-like poster headline, "Russia Far
>From Indonesia Scenario," joined on page 10 by a classic Winestock
editorial, "Russia Won't Follow Path of Indonesia," which included these
memorable moments: "The Russian economy may not grow hugely this year, but
neither is it likely to contract"; "Russia knows corruption, but Suharto
ran his country like a family business" [in surveys conducted by The
Economist, the EBRD and Control Risks Group, Russia ranked either first or
third in the world in corruption, while Indonesia never even made the top
10--Ed]; and "the legitimacy of the government is not in question. Both
democratically elected President Boris Yeltsin and Prime Minister Sergei
Kiriyenko, who was approved by the State Duma, have a clear popular mandate
to take the necessary measures." He concludes, even as the financial lava
sweeps outside his window, "Russia is moving on the road to stability."
Yeah, right; and monkeys might fly out of our butts... 

But the truth may be too loud to ignore. Just yesterday, in a editorial
headlined "The IMF Must Act Fast if Ruble Falls," the panicked interim
editor screeched, "What is the IMF doing?"
* * * 
When panic hits, and horror confronts us, people react irrationally. A
terminally ill patient will often take months to come to terms with his
finality. Perhaps that explains the Times' bizarre, irresponsible reporting
of late: a simple case of denial. 

And why not? Not only has Russia's credit rating has been downgraded to
Lebanon-status, but it now sits a notch below Jamaica's. That's right:
Jamaica, whose per-capita income in 1995 was $1,510, making it one of the
poorest nations on earth, is now deemed more stable and safe than Russia.

You may have thought Jamaica was just a backwater, Third World ex-slave
colony famous for irritatingly slow music and a hairstyle favored by
suburban skate rats... but according to Moody's rating service, compared to
Russia, buying Jamaica is plain good sense.

Moody's downgrade last Friday means that Russian state bonds have dropped
from Ba3 "speculative" status to B1 "investment risk"--the risk of default
is no longer merely speculative but real. Moody's catalogued Russia’s
structural problems: ``fiscal imbalances, external sector inefficiencies,
political instability, lack of policy credibility and an inhospitable
socio-juridical environment for foreign investment."

When a former superpower's sovereign debt is downgraded to sub-speculative
status and placed on the level of war-torn, occupied, third world
countries, you'd think it would be big news. It is. Maybe too big. That's
the only non-paranoiac excuse we could think of for their bizarre cover-up
of this past month's events--a "crisis" whose roots lie in the near-total
failure of the reformist government's attempts, over the past six and half
years, to create a rational, civilized economy. A cover-up, in fact, that
parallels the Western press corps' cover-up of the reformers' sins dating
back to 1992.
* * *
It is as if EVERYTHING is wrong here. 

The most recent "crisis" is, by most Russian estimates, merely a nasty
lesion on the body of a terminally ill patient.

Moscow's stock market has crashed a stunning 70% from its highs last
August, wiping out tens of billions of dollars of wealth in terms of market
capitalization. Interest rates on GKOs (short-term treasury bills), have
quintupled to more than 75% since last fall, leading to further wealth
erosion. Moreover, the Russian economy has experienced what most economists
say is the most severe depression of any major economy this century,
falling anywhere from 40 to 80 percent since 1989, depending on which
economist you believe. By last autumn, it appeared that the depression had
bottomed out, and Russia might finally be set for slow growth; now, the
best people hope for is to avoid a financial meltdown. 

"I've lost my sense of humor because the house is falling down," said Eric
Kraus, chief strategist for Regent European Securities in Moscow.

Bernie Sucher, Co-head of Sales and Trading at Troika Dialog Bank, has
worked in emerging markets before in Latin America, but he said, "I've
never seen anything like this before. [The meltdown] has been so
comprehensive. An incredible amount of wealth has been destroyed in the
equity markets, and the losses in the credit markets have been enormous.
I'm reaching for a similar example, and only Mexico and Indonesia come to
mind."

Russia and Indonesia: the comparison, whether negatively or positively, is
impossible to avoid.

"What's frustrating is that this could all have been easily avoided by the
government," he said. "And they can still pull out of it, but they'll have
to act."

When reforms started in '92, the Gaidar government opened up the domestic
markets to foreign competition, on the theory that inefficient producers
would be forced to compete or die. Most died, in part because the goods
couldn't compete, but also due to massive corruption in which newly
"privatized" companies were bled dry by upper management. Importers of
goods solidified their positions by forming tight relationships with the

right government officials. Personal bribes substituted for import taxes:
they were far cheaper, and far more effective—while the factories that
produce Russian goods were taxed and embezzled into oblivion. It became, in
other words, more profitable for those in power to strip local industry,
and import foreign goods. The result is that today, 60 percent of goods
sold in Russia are imported, leading to dollarization and reliance on
Western money for stability. 

Practically the only valuable assets remaining are Russia's raw materials.
However, even this last refuge of wealth, tightly concentrated in a few
hands, was destabilized late last year when commodity prices--particularly
oil, gas and precious metals--collapsed, falling between 20 and 40 percent
between December and March.

A massive public and private debt bubble, at last publicly recognized by
both Prime Minister Sergei Kiriyenko and Deputy Minister Boris Nemtsov last
weekend, has burst. Kiriyenko, when he was still fighting for his
confirmation in mid-April, gave a report to the Duma, quoted in full in
Novaya Gazeta, outlining the nation's problems. 

"Expenditures are growing to service the interest on the state debt," he
wrote, "and already make up over 30% of the budget expenditures. This
situation will grow worse this year and next." At the time he wrote this,
interest on GKOs were half what they are today.

In terms of a crisis time-graph, Russia appears to be about where Southeast
Asia was a year ago. A debt bubble pops when liquidity dries up. This
summer, it is estimated that billions of dollars of private and public debt
will come due. GKO rates will rise to attract investors, increasing the
state's costs and reducing the amount of money it can allocate to unpaid
workers and decaying infrastructure. Banks and companies can't pay--they
are almost totally illiquid, with banks stretched from taking aggressive
positions during the bull market bubble, and raw materials conglomerates
that feed the major banks are now sapped for cash due to the commodities
price collapse. They'll need money from one guy to pay the other guy; but
after the Asian crash, there is no "other guy" to get money from. Which is
to say, the game's up. Private foreign lenders will be reluctant to roll
over debt, let alone arrange new loans. The outcome is likely massive
defaults, which will lead to further erosion of the financial markets,
which means even less liquidity, which leads to more defaults, and so on,
and so on... 

It has often been said that Asia's problems stemmed from a combination of
endemic corruption, a lack of transparency, and a tight link between a
group of all-powerful financiers and the state. Russia, by comparison, has
consistently been ranked at the very top of surveys on corruption, leaving
the relatively squeaky-clean Southeast Asians looking like Amish school
teachers by comparison. The problem is that corruption is deeply embedded
in the present regime. According to Kiriyenko's Duma report, Russia has
added 1,200,000 new officials to the state payroll between 1992 and 1997,
or since the start of "reform." This represents a more than doubling of the
bureaucracy over the supposedly bloated Soviet bureaucracy, a statistic
which never ceases to shock foreigners. Last year alone, budget outlays to
maintain the bureaucracy increased 62%! This reflects the entrenched nature
of state corruption, which always seeks to enlarge itself as a means of
protecting itself. The more tangled the bureaucracy, the more opportunity
for corruption; the more tangled the laws and tax codes, the more
opportunity for corruption; and the larger the bureaucracy, the more
powerful it grows, which leads to back to... drum roll please!... more
corruption! 

As for oligarchs, Russia needs no introductions.

Molly McKeown, portfolio manager for Standard Bank out of London, told the
eXile, "Russia has raised the concept of 'crony capitalism' to new heights,
to levels they can't even dream of in Asia." McKeown recently divested her
fund of all Russian GKOs; previously, GKOs made up 10 percent of the
portfolio.

It's true that Russia, although acutely suffering from a similar
debt/liquidity bubble that popped in Asia, is a completely different
animal. A dead animal. Let's say, a dead bear with rotting bull horns,
whose putrid stench can no longer be ignored even by the vultures. 

Compare: Asia entered its crisis on the heels of decades of unprecedented
economic growth, massive infrastructural investments, and impressive
reductions in poverty; Russia enters the present crisis in the depths of
the century's worst depression, following a decade of infrastructural
collapse, capital flight, unprecedented corruption, a population decline,
and a re-acquaintance with the kind of mass poverty not seen here since the
1930s. Today, between a quarter and a third of Russia's population lives
below the government's own meager definition of minimal subsistence. Many
keep from starving by growing potatoes and cabbage on their tiny plots of
land. 

Now, with the banking system and national treasury teetering, and enormous
amounts of private Russian wealth wiped out, it looks like Russia,
illiquid, is returning to the familiar depression it had claimed to have
left behind last fall.

On top of it all, the country is led by a government and leader who lack
legitimacy. Besides Chubais, Yeltsin must be the most despised living man
in Russia. Scientific surveys and opinion polls repeatedly put his approval
ratings in the low single-digits. While most Westerners cannot believe that
Yeltsin is an illegitimate leader--he was elected, after all, in a
relatively free election--it helps to remember that two democratically
elected regimes were overthrown last year, a Socialist one in Bulgaria, and
a "Western-oriented" reformist president in Albania. Democracy does not
inherently bequeath legitimacy; rather, it is considered a more effective
means for creating legitimacy than passing the throne on to your drooling,
mango-faced, inbred son. In fact, it seems that the present regime uses the
trappings of democracy to create legitimacy not at home, but rather abroad,
in the West. And thus far, it seems to have worked. Westerners are, to
date, far more fooled by the Yeltsin regime than Russians.

That this regime is illegitimate is not at all shocking to Russians, but
it's heresy to Westerners. Until now. Professor Peter Reddaway, whose
anti-Chubais editorial in The Washington Post in September last year caused
a political furor, testified on May 20th before the Senate Foreign
Relations Committee in a hearing on Russia Policy. In his testimony,
Reddaway declared, "While the government is formally legitimate, because
elections have so far been held, it lacks much real legitimacy. People see
it--accurately, in my view--as being much more concerned about the
interests of a small elite than about the public interest." In fact,
Reddaway argues, those in power have little more than contempt for both
Russia and its citizens, and serve only the elite. Quoting from a book by
Igor Chubais, brother of the former First Deputy Prime Minister, the power
elite views the Russian people as "simply an annoying, tiresome nuisance,
which, moreover, for some reason has to be paid wages."

Economic disaster, social decay, a massive corrupt bureaucracy, an
illegitimate regime totally cut off from and contemptuous of its
citizens... all that's missing is the social upheaval. But wait, there has
been--IS BEEN--social upheaval, scads of it (see Matt Taibbi's article on
nationwide strikes). It just doesn't make it into the Western press. But
the protests are there, protests that would shock the leadership of any
civilized country into action or resignation.

There is only one positive development that the Yeltsin regime can point
to: taming the hyperinflation that his own reforms sparked. It hardly has
Russians dancing in the streets; after all, the price of the hyperinflation
was their savings and their standard of living; and the price of the
subsequent stabilization was delayed wages, closed factories, mass layoffs,
and a reliance on debt to service the budget-debt which, increasingly,
became a bubble, a bubble that burst, and which now, as the ripple-effects
begin to spread, will result in further hardships, if not outright
collapse. 
* * *
Another whitewash Westerners are pushing on this crisis is, "Okay, it's
happening, but it doesn't really matter." Bruce Bean, president of the
American Chamber of Commerce in Moscow, was quoted last Sunday in The
Baltimore Sun as a kind of grotesque Robocop-villain when he commented, "Do
you know any Russians who own stock? It's a media event."

Actually, most of you probably do know several Russians who not only own
stock but work for companies whose fortunes are directly or indirectly tied
to banking; Bean could probably count 50 to 100 such Russians off the top
of his head. Bean's subtext--that the Russians are savages too poor or
backwards to be affected by their own market collapse--was underlined when
he commented that McDonald's had "taught 13,000 or 14,000 Russians to
smile. And that's meaningful for Russia." Ever wonder why there's
anti-foreigner sentiment growing in this country.

The obvious truth is that the market collapse will take a toll.

"The market falls should lead to layoffs," Sucher said. "It will hurt."

Here's why. When players get burned in a market, it takes several quarters,
even years, for them to return. So the markets stay depressed. That means
companies can't raise money on the capital markets. So investment remains
paralyzed, and jobs aren't created, but rather slashed. Also, when the
market is depressed, the government has a harder time selling off state
shares in industry for a good--or for any--price. Witness the failed
Rosneft sale. That's $2.1 billion dollars that the state didn't get, money
that could have gone to miners, teachers and doctors. And that's meaningful
for Russia, Mr. Bean.

There are large numbers of emerging-middle and upper-middle class Russians
whose employment and fortunes are tied, directly or indirectly, to the fate
of the stock market. When banks collapse, brokerages close down, wealth is
eliminated, jobs get slashed, fewer goods are bought. And, as evidenced by
the Tokobank collapse, banks--even the darlings of the West--are already
going.

It's all so bleak that even we can't find anything to laugh about, even
though that's our job. That would be like laughing at road kill, and even
road kill deserves dignity.
* * *
If other bear markets and financial crises are any indicator, we are just
entering a new and dangerous phase of Russia's 9-year crisis, with lulls of
false sunshine between the downpours of fiscal napalm. Because Russia, at
least under the present regime, has, after years of cynical waste,
corruption, and nihilism, squandered everything, right down to the names
and words associated with it, leaving the country stuck in so many
Catch-22s that no matter what way it moves, it suffers. Below is a list of
the Savage 6 Catch-22s Explaining Why Russia Is Fucked. 

The eXile's Savage 6 Catch-22s Explaining Why Russia Is Fucked

THE RUBLE

Maintaining the stability of the ruble is the Russian government's stated
number one priority. However, in order to do that, interest rates have been
raised to 150%, squeezing local banks. The result is that the banking
system, already teetering, could collapse further, killing any potential
economic turnaround. 

Often, in order to stimulate an economy in recession, governments will take
the exact opposite approach and allow their currencies to DEVALUE. Locally
produced goods then become cheaper for export to healthier economies, while
locals are swayed to buy local, since imports become too expensive. America
successfully did this in the early 90s, leading to one of the greatest
periods of growth in US history; last year, Japan began to devaluate its
way out of its recession. However, there's another Catch-22 here: Russia
doesn't produce goods for exports anymore--only raw materials. And it is so
reliant on imports that any currency devaluation would ignite inflation.
Double Catch-22: With the recent collapse in commodities prices, exporters
are pushing the government to devalue the ruble in order to make their
commodities more competitive. They are suffering a liquidity squeeze. They
are also just about the only sector of the economy that is relatively
successful, so a collapse in this sector could lead to layoffs, delayed

wages, and social upheaval. However, the catch is that the ruble cannot be
devalued, because it could also lead to social upheaval. So if the ruble
collapses, the country's screwed; and if it's value is maintained, its
economy will collapse.

BORIS YELTSIN

Most Russians, even if they don't want to return to the naphthalene-scented
days of Brezhnev, will tell you that Yeltsin is the worst thing to happen
to this country since... well, actually, when they look back, they can't
point to a single leader who's ever done them good. And that's the Catch:
sure, Yeltsin has brought the country to its knees, killed off its
industry, overseen a massive increase in mortality, child suicide, and
basically everything horrible imaginable. But just think about the other
guys, and you realize... IT COULD BE WORSE. 

If America decides to abandon Yeltsin in order to rescue its credibility
with the Russian people, it risks "losing" Russia to someone far more
hostile--and, don't forget, armed to the teeth with enough MIRVs to set off
a small Quasar explosion detectable by aliens billions of light years away.
As for Russians: they voted for the democrats in '90, and lost everything.
They voted fascist in '93, and lost Chechnya. So they voted Communist in
'95, and guess what?...they STILL got robbed, as workers stopped receiving
their wages. No matter what the Russians want, they will always get it
worse, in spades. What's a po' nigga to do, Huck? The catch: Yeltsin is
killing Russia, but anyone else might kill it faster.

STABILIZATION FUND

This is a corollary to the above Catch-22, but here goes. Creditors,
whether the US government, the IMF or multinational banks, will demand
painful reforms in return for credits needed to prop up the shaky ruble.
The price for keeping the ruble strong is noted above. The catch is this:
no one, not even neo-lib Anatoly Chubais, has come close to fulfilling IMF
reform prescriptions. If they don't step in to stabilize the currency, they
risk meltdown and political upheaval, and a hostile regime. If they do come
up with the money--and Yeltsin knows he'll get it--then the Russian regime
will only carry out Potemkin reforms to keep the credits rolling, meaning
that the Day of Reckoning will merely be postponed, and more severe when it
finally happens. So it's either collapse now, or collapse later. A
corollary Catch-22 to this is that if Kiriyenko does implement IMF reforms,
then the social pain from mass layoffs could ignite an Indonesian-style
political and social meltdown. Although, of course this could also happen
if reforms are further postponed. 

A subplot to this is that Bearded lefties of color and right wing
laissez-faire loonies in the US Congress have formed an anti-IMF-funding
Entente. Which means that there is a serious worry that the IMF may not
have the liquidity to bail out Russia. Russian hard currency reserves are
less than $10 billion, while investors presently hold $70 billion in notes,
including $22 billion by foreigners--meaning, quite simply, the Central
Bank does not have enough reserves to defend against a sudden flight.
Here's the catch: Congressmen want to teach the irresponsible Russians a
lesson; but the only way they'll learn is if they're thrown out of power,
which means pizdets for everyone and all.

THE TAX CODE

Ever wonder why even super-reformers Chubais and Nemtsov were unable to
push through new tax legislation, but were able push through far more
radical legislation? His name is Vladimir Potanin, and if Russia's laws
were sane, Volodya would be fucked. Because he couldn't compete against the
foreigners, or perhaps even his own budding entrepreneurs, on an even turf.
Everyone knows that Yeltsin can push through any crazed piece of
legislation or nerdy Scientologist to run his government if he wants to. If
he wanted the official language to be Swedish, or if he wanted to name John
Travolta as the new Prime Minister, it would happen. All it takes is a few
well-placed bribes, a few threats, and a decree. For show, Chubais and
Nemtsov produced reasonable tax plans for press conferences, they
conveniently had a "hardline Communist" Duma on whom they could lay blame
for not passing the tax code, but at the end of the day, they didn't pass
it because they answer to the "small power elite" that Reddaway spoke of,
and as long as that elite needs the protection of anarchy, those "laws"
will stay. By keeping the present tax code and arbitrary laws in place,
investment and competition are stifled, corruption thrives, poorly managed
companies are milked dry by a small elite, and economic growth is killed,
leaving the population indefinitely impoverished. The catch: keep the laws,
and kill the economy; or change the laws, and kill what's left of a
massively ineffecient, mismanaged, Russian-owned industry.

WAGE ARREARS

This is a tricky one, the trickiest one of all. You've got a very limited
pool of money. And it's harder than ever now to raise more. Then you've got
people who you have to pay. Up until now, what you've done is borrow money
from one guy, use that to pay the miners, then borrow from a second guy to
pay back the first guy, borrow from a third guy to pay back the second guy,
and so on. But now the bubble's burst, and everyone wants to be paid. On
one side, you have "the people": miners, teachers, doctors, pensioners and
the like. Citizens. On the other hand, you have "the small elite," bankers,
and foreign investors. Who do you want to piss off least? "The small elite"
and "the foreign investors," naturally. Because they're the ones who keep
the debt scheme going; they're the ones who, in their own way, pay your
bills. Whereas the citizens are, to use the words of Igor Chubais, "simply
an annoying, tiresome nuisance, which, for some reason, has to be paid
wages." Actually, as Chubais found out, the nuisances don't necessarily
"have to be paid." In fact, borrowing from foreigners and not paying your
workers has the double-advantage of lowering inflation while increasing
your status in the West. 

Until just a few weeks ago, this scam worked fine. But then the workers'
strikes broke free. And it began to look like unrest, of the sort everyone
saw in Southeast Asia. Perhaps the workers really have reached their
breaking point. If so, then what is the government to do? If they pay the
workers, then they won't have enough to pay off the bankers and foreigners,
which means they won't be able to service the next round of debt, which
means... there'll be no money for anyone. But the other option, not paying
the workers, could lead to even more severe protests, which leads to a
crisis in confidence, political instability, and, well, bankers and
foreigners fleeing the markets, meaning once again there's no money for
anyone. Which means... no matter what, there'll be no money for anyone!

INVESTMENT

Investment in Russia declined yet again in the beginning of this year. In
order to attract foreign capital, the laws must be changed. But as we
discussed in Catch-22: Tax Code, the Russian elite doesn't want those
changes, and they don't want that kind of investment, because they're
afraid they can't compete, and they're afraid of laws that have to be
abided. 

In order to attract capital here, the government has had to offer high
rates on T-bills. But that saps money away from investments. But-But if the
T-bill rates weren't high, then the money wouldn't come here at all. When
T-bill rates fell last year, many banks suffered, while others switched
into the high-flying stock market. And then that crashed. If they'd
invested into the economy, they might have done better, but why invest in
the long-term when the short-term is so much more attractive? You don't.
You speculate and invest for the short-term. And if the short-term choices
dry up, then you pack up your Ben Franklins and head to Switzerland. (On
the same day that Moody's downgraded Russian sovereign debt, the Swiss
franc rose against other currencies as a safe haven for Russian capital.)
Meanwhile, even though YOU'RE not interested in investing for the long-term
in Russia, make sure no one else can either--after all, you might be
interested some day. Some day. In the meantime, other speculative
investors, like George Soros, move the market, while dedicated investors
either get burned or stay out. The catch is this: Russia needs its own
investors to invest speculatively, i.e., in government debt, because
someone's gotta buy it. This means no one's investing into Russia, which
means continued depression. And because of the depression, the budget has
holes. And when the budget has holes, people are afraid to buy GKOs. So the
rates have to rise higher to attract speculators. Meaning even LESS money
is going into investment. It's a kind of self-propelling vicious circle
that ensures only one thing: in the end, Russia is fucked. No matter what.

For now, the most likely scenario is that Russia will crawl out of this
"crisis," be declared healthy, then, unexpectedly, collapse again, even
further. If and when the arthritic back of the present regime will snap is
anyone's guess. But in the meantime, Kiriyenko has his work cut out for
him. For now, he's got to work hard to improve Russia's credibility, so
that hopefully, in the not-too-distant future, some potential investor will
look at Russian debt and say, "Jah man, ees not bad man. Ees as good as me
Jamaican sheet. An' you know, you could do wus, man. You could be buying de
Lebanon sheet. An dat sheet really bad, man."

*******

#4
Moscow Times
June 11, 1998 
SEASON OF DISCONTENT: News Media Belie Myths Of Oligarchs 
By Andrei Piontkovsky

For more than a year now the oligarchy-controlled news media have 
tirelessly provided convincing and unrefuted proof (copies of documents, 
recordings of eavesdropped conversations and so on) that tell us about 
the crimes that rival oligarchs have committed. Every Saturday evening, 
the talking head Sergei Dorenko has appeared in the homes of Russian 
citizens on millions of television screens. Shaking from noble 
indignation he would explain to us how through some intricate schemes 
Vladimir Potanin stole hundreds of millions of dollars of budget money. 
Unfortunately for Potanin, he does not own a television station. But 
then again he owns scores of national newspapers and journals. So the 
following week he would tell us about similar misappropriations by Boris 
Berezovsky, Mikhail Khodorkovsky and others. 

And now they have all signed a document called "Appeal of the 
Representatives of Russian Business," in which they announce that "the 
economic problems that have accumulated have led to a situation in which 
people do not receive the money they have earned, social tensions are 
growing and interclan fighting at the highest echelons is leading to the 
growth of political tensions." It would be interesting to know to whom 
this appeal is addressed. If it is to us, ordinary citizens, then they 
apparently consider us to be idiots. If it is to the president, then 
they consider him to be an idiot. And if they are appealing to one 
another, then they themselves are consummate idiots. But it is unlikely 
they are appealing to us, given that we simply are of no interest to 
them. It is more probable that the appeal is meant for both the 
president and themselves. 

Somehow they have managed to convince themselves and the president of 
three myths. 

Myth No. 1: Two years ago, they united "in order to promote the victory 
of democracy and prevent a return to the totalitarian past." In fact, 
the infamous letter of 13 bankers, which was agreed upon by President 
Boris Yeltsin's inner circle, was about something else entirely. They 
proposed putting off the elections, extending Yeltsin's powers, 
nominating Communist Party leader Gennady Zyuganov prime minister and in 
essence establishing an indefinite dictatorship of bankers and secret 
services. To the credit of Zyuganov and the Communist Party, they met 
this project rather coolly, and it was not carried out. 

Myth No. 2: They put huge resources into Yeltsin's election campaign. In 
fact, it was financed by state money, and thanks to the presidential 
elections, the oligarchs again got richer at the expense of the 
treasury, having received from the authorities new lucrative pieces of 
state property, export quotas and licenses for their television 
stations. 

Myth No. 3: The oligarchs are "big businessmen who through their brains, 
talent and energy have built so much in Russia." The last broadcast of 
the Itogi television news show spoke in such exalted tones. In fact, 
these are petty swindlers who failed to become effective owners of the 
state property than was given to them as a gift from the authorities, 
and were unable to earn money on their own for any single serious 
investment project. 

They themselves and their obtrusive presence in the corridors of power 
are the main reason for the economic and moral crisis that has struck 
the country, about which they lament with such self-righteous hypocrisy 
in their "Appeal to No One Knows Whom." 

*******

#5
Lebed Closes on Zyuganov in Presidential Poll 

NTV
June 7, 1998
[translation for personal use only]
>From "Itogi" newscast presented by Yevgeniy Kiselev

According to the latest poll conducted by the Public Opinion
Foundation, Aleksandr Lebed has leaped ahead dramatically. Had
presidential elections taken place today, as much as 14 percent of those
polled would have voted for him. The strengthening of Lebed's pre-election
position is especially clear when we look at the dynamics of all
presidential ratings in the last month and a half.
In mid-April Lebed's rating was 8 percent, which means that it has
practically doubled since then. Today, as of last Sunday 10 percent are
ready to give their votes to Lebed's main potential rival, Moscow Mayor
Yuriy Luzhkov. The rating of yet another of Lebed's rivals, [Yabloko
leader] Grigoriy Yavlinskiy, is today 10 percent. In mid-April it was 11
percent.
Finally, even the rating of the current leader, [Communist leader
Gennadiy] Zyuganov, remains the same as it was in mid-April. Had
presidential elections taken place today, 21 per cent would have voted for
Zyuganov, the same as in mid-April. Let me remind you that 14 per cent
would have voted for Lebed. None of the potential candidates for the
president's post has come so close behind the Communist leader.
The poll was conducted among 1,500 people in 56 urban and built- up
rural areas in 29 regions.

*******


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