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Johnson's Russia List


June 17, 1998   
This Date's Issues: 2224  2225

Johnson's Russia List
17 June 1998

[Note from David Johnson:
1. Reuters: Russia raises spectre of US arms violations.
2. Reuters: Chubais may become Russia envoy to Western lenders.
3. First Web-discussion in Russia on arms control issues.
4. William Wolf: Re Limonov in the eXile.
5. MoJo Wire: Russia's Fiscal Whistleblower. Chief auditor Venyamin
Sokolov says Western loans are hijacked by the corrupt Yeltsin 
government. Interview by Anne Williamson.

6. Nezavisimaya Gazeta: Marshall Pomer, A CALL FOR RATIONAL 

7. Interfax: Patriotic Union Gives Conditions For START II 

8. RFE/RL: Michael Lelyveld, Caucasus: Deadline Nears On Oil 
Transit Routes.]


Russia raises spectre of US arms violations
By Martin Nesirky 

MOSCOW, June 16 (Reuters) - Russia raised the spectre of U.S. nuclear arms
treaty violations on Tuesday in a move that looked uncommonly like a
diplomatic pre-emptive strike because of Russian parliamentary delays to a
follow-on atomic pact. 

Interfax news agency said a Russian defence official had expressed concern on
Tuesday that Washington was breaking a whole series of provisions in the
START-1 strategic arms accord and could delay Russia's ratification of the
START-2 deal. 

Russia's chief of staff, General Anatoly Kvashnin, told Reuters Television
Washington had been told the Kremlin was keen to ensure both sides kept their
part of the START-1 bargain. 

``The most important thing is that we and they fulfil all the demands of the
treaty to the letter, particularly on inspection trips,'' he said. ``That's

The U.S. embassy in Moscow said there were bound to be differences of

The Soviet Union and United States agreed the START-1 pact in 1991 and it went
into effect three years later with the aim of cutting long-range nuclear
forces by up to 40 percent. START-1 provides for inspections by both sides at
about 120 sites, including 33 in the United States. 

In 1993, Moscow and Washington agreed a START-2 accord on even deeper warhead
cuts which the United States has ratified but the opposition-dominated Russian
State Duma lower house of parliament has not. 

``In Russia there remain concerns in connection with the United States not
observing a number of important parts of the START-1 treaty,'' Interfax quoted
a senior Russian military official as saying. It did not name the official. 

Kvashnin, Russia's chief of staff, said visiting U.S. General Henry Shelton
had been told Russia was keen to ensure both sides fulfilled all the
provisions of START-1. 

Responding to the Interfax report, the U.S. embassy in Moscow told Reuters:
``We consider START-1 to be a significant arms control success. In any
agreement as complex as this there are bound to be issues and questions of

It said this was why a special joint commission met regularly in Geneva to
discuss the treaty. 

Shelton, who is chairman of the U.S. Joint Chiefs of Staff, told a news
conference on Monday he had discussed Russia's long-delayed ratification of
the START-2 treaty. This accord would reduce U.S. and Russian deployed nuclear
warheads from about 6,000 each to no more than 3,500 each by the year 2007. 

Shelton, who did not refer to Russia's START-1 worries, said Defence Minister
Igor Sergeyev had told him the Duma was likely to ratify the follow-on treaty
in the autumn, opening the way for negotiations on further arms cuts. 

Russian officials are aware the Duma, dominated by Communist and nationalist
deputies who are at almost permanent loggerheads with President Boris Yeltsin,
are virtually certain to put up a struggle even after its summer recess. 

The Kremlin said Yeltsin confirmed his commitment to ratification of Start-2
in a telephone conversation on Monday with U.S. President Bill Clinton. 

By pointing to U.S. violations, Russia can deflect criticism over delays to
ratifying START-2 and point the finger elsewhere if the treaty gets stuck in
the Duma indefinitely. 

``In his opinion, this (the violations) could negatively influence the
prospects for Duma deputies ratifying the START-2 treaty,'' Interfax said,
referring to its unnamed source. 

The agency quoted the source as listing a whole series of specific violations
which have surfaced before. They included the charge that the United States
was testing ballistic missiles on Trident submarines that could be equipped
with more warheads than allowed under START-1. 


Chubais may become Russia envoy to Western lenders
By Gareth Jones 

MOSCOW, June 16 (Reuters) - Anatoly Chubais, a key architect of Russia's
market reforms and head of the electricity monopoly UES, may shortly become
the Kremlin's chief negotiator with global lending institutions, Russian media
said on Tuesday. 

Leading bankers and industrialists, alarmed by the crisis in Russia's
financial markets, proposed that Chubais be given the new post after holding a
meeting with Prime Minister Sergei Kiriyenko, Itar-Tass news agency said. 

They also proposed that Chubais be awarded the rank of deputy prime minister,
Tass said. He would keep his job as chief executive of UES. 

A government spokesman confirmed the financiers had met Kiriyenko at the
Volynskoye government residence near Moscow and that they had discussed
Russia's economic crisis. 

He declined to comment on the reports about Chubais, who lost his job as first
deputy prime minister in March, rejoining President Boris Yeltsin's team. 

``Today's meeting took place within the framework of a previously announced
course of constructive dialogue between those parties interested in the
country's economic process,'' the spokesman said. 

Tass said Kiriyenko would ask Yeltsin ``in the near future'' to appoint
Chubais as his personal representative to international creditors like the
International Monetary Fund (IMF) and the World Bank. 

Western nations and international lenders have praised Kiriyenko's anti-crisis
measures aimed at restoring investors' confidence and protecting the rouble.
An IMF mission is expected in Moscow next week to discuss extra financial

Banking sources said Tuesday's meeting was further evidence that Russia's
crisis had forced its wealthy financiers and industrialists to call a truce in
their often very public battle for political and economic influence. 

In the past Yeltsin has often criticised the powerful financial groups for
sniping at his governments. 

NTV commercial television said powerful magnate and politician Boris
Berezovsky, who has clashed with Chubais in the past over privatisation
policy, had proposed Tuesday's meeting between the financiers and the

Earlier this month Russia's top bankers and industrialists issued an
unprecedented statement pledging full support for Kiriyenko's government as it
battles a crisis of investor confidence that has thrown market reforms into

Yeltsin invited the tycoons to the Kremlin and urged them to help overcome
Russia's financial crisis by investing more actively in the domestic economy. 

The banking sources said Tuesday's meeting was part of newly instituted,
regular consultations between the government and the leaders of Russia's
young, post-communist private sector. 

They said the participants in the meeting were the same as those invited to
the Kremlin talks on June 2. They included Chubais, media magnate Vladimir
Gusinsky, gas monopoly Gazprom chief Rem Vyakhirev and banker-industrialists
Vladimir Potanin and Mikhail Khodorkovsky. 

Chubais is the darling of Western investors who see him as a guarantee of
reform, but he is hated by many ordinary Russians and the Communist opposition
who accuse him of corruption and of selling off state assets too cheaply. 

Despite losing his government post, Chubais has remained an influential figure
and is widely respected in the West. Yeltsin is also known to regard him as a
clever, gifted administrator who can be trusted to get things done. 

When Russia's economic woes, sparked partly by domestic ills like tax dodging
and partly by Asia's financial crisis, began spiralling out of control last
month, Chubais went to Washington for talks with senior U.S., World Bank and
IMF officials. 


Date: Tue, 16 Jun 1998 
From: "VG" <> 
Subject: message for JRL

Dear Mr. Johnson,

If you or some of your colleagues will be able to take part in the
following action, I think, it could be interesting. This is the
first Web-discussion in Russia on arms control issues and it is open
for the wide audience. 

Please, can you forward the message to those who might be interested?

> Welcome to join a Web-discussion of the START II treaty and problems
> of its ratification. The two most respected Russian Parliamentary
> experts 

> Prof. Alexei G. Arbatov, MP, Deputy Chair of the State Duma Defense
> Committee (Yabloko faction) and

> Anton V.Surikov, counsellor to Yuri.D.Maslyukov, Chair of the State
> Duma Committee on Economical Policy

> have posted their articles and will answer to your questions.
> Discussion is hosted by Rossia i Zagraniza (Russia and the Outer
> World) forum of "Russki Zhurnal" ("Russian Magazine"). Russian is 
> advised as it's the working language of the discussion. 

> Discussion area is located at
> Sincerely yours,
> Georgi Engelgardt
> The Moderator


Date: Tue, 16 Jun 1998
From: "William K. Wolf" <> 
Subject: Re Limonov in the eXile

Dear Mr. Johnson,

In my opinion, the article below, recently published in your Russia
List, is of deplorably low quality and unworthy of inclusion in your list.
It contains obscene language and makes sweeping judgements that are
insulting, not to mention racist. Furthermore, the level of analysis is
very low. In short, it is GARBAGE. This is the kind of thing one reads on
the Russian "culture" listserves, where idiots and facists freely vent their
anger and hatred. By all means please do allow alternative points of view
to be expressed in your list, but why not require that ALL submissions meet
at least minimal levels of civility and and intellectual rigor? I would
like to encourage you to exercise your perogative as editor more vigorously. 
Thank you for continuing to provide your superb information service
on Russia. I enjoy it vey much.

Best regards,
Bill Wolf
Center for Slavic and East European Studies
Ohio State University

the eXile
June 4-18, 1998
The Limonov X-Files
We Will Eat You, Westerners, Dearest Yankees, And Arrogant Europeans
By Edward Limonov....


Date: Tue, 16 Jun 1998 
From: Anne Williamson <>
Subject: Interview with Russia's Fiscal Whistleblower
June 16 - 22, 1998
on the MoJo Wire:
Russia's Fiscal Whistleblower
Chief auditor Venyamin Sokolov says Western loans are hijacked by the
corrupt Yeltsin government
Interview by Anne Williamson

June 16, 1998

Facing financial meltdown at the end of May, Russian Federation
President Boris Yeltsin sent a high-level delegation to Washington in
hopes of arranging a pre-collapse bailout from the West. Russia's former 
economic policy chief and privatization honcho Anatoly Chubais and
senior Kremlin aide Sergei Vasilyev proposed that the International
Monetary Fund and the Group of Seven nations put up a new $10 billion
fund to back the shaky ruble. As a short-term fix, the IMF promised to 
disburse $670 million under its existing $10 billion loan by the end of 
this month, and President Clinton said the U.S. would support additional 
emergency bailout loans if necessary to buttress the ruble.

But not everyone in Russia thinks that's a good idea. Coinciding with
the Yeltsin team's visit was that of another official, Venyamin Sokolov. 
An astrophysicist by training and rector of the Krasnoyarsk State
University, in 1995 Sokolov was elected chief of the Chamber of
Accounts, the only state body independent from the president and his
government; its watchdog role is often compared to that of the U.S.
General Accounting Office. As head auditor, Sokolov is now Russia's
chief controller of the use and disposal of federal property; and an
outspoken critic of the Yeltsin government and Western lending.

Mother Jones spoke with Sokolov in Washington on May 31. While his
compatriots put on a happy face for the West, Russia's fiscal watchdog 
blew the whistle on how Western loans are squandered on speculation and 
siphoned off by American profiteers, how Russia's cash-flush
"oligarchical" economy masks runaway inflation in its cash-starved
national economy, and how the corruption of the Yeltsin government is
killing the hopes of ordinary Russians in a country where jet planes are 
bartered for butter.

Q: What is the most significant aspect of the financial meltdown now
occurring in Russia?

A: Under the guise of establishing a market in Russia, the authorities 
have created an economic monstrosity that has nothing to do with a
market system. First of all, in the Russian market there is no money,
without which it is impossible to buy or sell. Consequently, the owners 
and directors of firms, instead of selling what they produce and buying 
what they need, are forced to exchange what they produce for something 
they need. Our present barter system is much the same as that which
existed in primitive societies when people exchanged stone axes for
mammoth skins. Only today our producers of jet planes, a product unknown 
to primitive societies, are forced to exchange aircraft not only for
fuel, but for eggs, butter and sugar as well.

What this means for average Russians can be seen alongside the roads
outside of Moscow, which are lined with mounds of goods; frying pans,
tires, brass piping and fixtures, whatever. The people guarding these
mounds received the products as payment for their labor, and they are
compelled to sell the product or barter it for something closer to what 
they really need. By the way, one especially debilitating feature of
this huge barter system is that no taxes whatsoever are paid.

While a significant part of the population receives their wages in the 
form of goods, millions of people don't receive any wages in any form
for many months, years even. These workers - teachers, scientists, miners -
are demanding the government's resignation. The miners were the first to 
raise the question of impeaching the president, and that left the
Communists with no choice but to adopt the same stance in response.

Q: It is extraordinary to Americans that Russian workers continue to
report for duty in such conditions. Why do they?

A: This is explained by certain peculiarities of our people and our
country. First of all, a significant part of these people had believed 
wage arrears were a temporary condition and would soon pass. Second, in 
our country a job has never been just a source of income; consequently 
the average person reasons in the following way: "Well, there's no work, 
so what else am I to do?"

Q: What do you mean when you say "in our country a job has never been
just a source of income"?

A: Much of the Russian workforce is in the position of serfs; they
receive a few benefits - substandard housing, modest medical services, and
their children have access to a deteriorating school system - in return 
for their labor, and nothing more, just like under the tsars.

The situation of nonpayment of wages throughout Russia has led to
individuals reasoning, "Why go to the expense of moving, only to end up 
in the same situation? Unlike the Great Depression in the U.S. when the 
unemployed rode the rails chasing seasonal work, there is no illusion
amongst Russians that if you move you might find work elsewhere. They
know they won't.

Q: What is today denying the Russian people a means of exchange?

A: First, it was a state policy that led to a lack of currency, and I
mean specifically monetarism as conducted by the IMF. The official
economy about which you read in your newspapers has absolutely nothing 
to do with our national economy. When Americans read that Russia has an 
inflation rate of 14 percent, that figure refers only to the
oligarchical economy and hides an 80 percent inflation in the national 
economy. But since the national economy is cash-starved and lives now by 
negative barter, meaning I'll give you this and you give me that but
neither one of us will pay the other, nearly our only product is debt. 
Our enterprises have finally used up all their reserves and this is why 
we are in crisis.

Q: Are you agreeing then with statistics that indicate the IMF insisted 
Russia pursue tight money policies so aggressively that the end result 
is a supply of rubles which is only a sixth of what an economy the size 
of Russia's needs to operate?

A: I think a sixth of what is needed is a generous estimate. For
instance, the United Energy System, which is a monopoly provider of
electricity, only has an eighth of the capital it needs to operate. One
of our better known firms, Gazprom, has 12 percent of working capital it 
needs to function. All firms are saddled with debts to one another and 
to the government which itself is in arrears. On January 1 of this year, 
Gazprom had a significant ruble debt to the government even though it
was owed a larger amount by those it supplies. By May 1, Gazprom's debt 
to the government had grown to 5 billion at the same time it was owed 15 
billion, an increase of five times the previous January's debt.

Q: Is it true that the elite, say the top 5 percent of the Russian
population, have successfully socialized what money there is amongst
themselves? In other words, the remaining 95 percent of the population 
have no money at all?

A: Exactly. Today even Communists joke that we need to nationalize our 
money supply, since all the money that does exist is concentrated in the 
hands of the banks and the trade sector. For instance, the Accounts
Chamber has a copy of a letter written to Central Bank chairman Sergei 
Dubinin in which a certain Mr. [Yusuke] Horaguchi of the IMF gives a
defined schedule regarding Russia's ruble supply. Additionally, Mr.
Horaguchi felt himself free to give specific instructions regarding bank 
credits, the state budget, energy policy, price levels, trade tariffs, 
agricultural policies, and so on, and the instructions were quite
harshly worded, I might add. There is even an instruction that acts of 
the Duma regarding these matters will be vetoed [by Yeltsin], and so
they are. In other words, we have a government that doesn't follow the 
nation's laws, but instead the dictates of the IMF.

Second, the present government is completely unaccountable. For
instance, upon finishing our audit of the Central Bank, we were unable 
to certify their financial report. It was the same in the Finance
Ministry where we had a team of 150 auditors working for six months. On 
just one line of their report, "Reconstruction of Chechnya," they had
recorded an expenditure of 14 trillion rubles, a sum 15 times larger
than what was allotted according to the budget. Worse, of that only 8
trillion was accounted for, and that mostly improperly. In one instance, 
we were handed an unsigned paper which instructed the transfer of 500
billion rubles to a single individual, and by the way we received many 
such papers during the audit. The remaining 6 trillion allotted for
Chechnya's reconstruction had no supporting documentation whatsoever
regarding how those funds were spent. In the end, we determined that the 
Ministry had no system for recording simple inputs and outputs, and
what, in fact, they were attempting to devise was a system to conceal
rather than to reveal the truth.

Third, the Yeltsin government is immoral and deeply dishonest. Most of 
the funds which are available are embezzled by government officials. Not 
only by government officials but by a huge percentage of the burgeoning 
number of speculative firms acting as intermediaries in the barter
chain. To exchange an airplane for butter is not so simple; the system 
requires specialists.

Q: And what is the fate of the billions in grants and loans Western
institutions and governments have made to Russia?

A: All loans made to Russia go to speculative financial markets and have 
no effect whatsoever on the national economy.

Q: Are you saying that that the government is the beneficiary of all the 
domestic and foreign capital Russia is capable of attracting?

A: You are correct, but with one minor difference concerning our current 
government, in which all resources support not so much the state as they 
do state officials and select foreigners. For instance, one $90 million 
loan for the development of the equities market proved to have no
positive economic result. The audit turned up payments as high as
$200,000 to individual American citizens "for services rendered," but
which were undefined. Seven million dollars of the same loan created an 
institute with 11 staff people who were to manage a $31 million fund
sequestered for satisfying the claims of Russian citizens who were
swindled by pyramid schemes. Not a single claim was paid, and all that 
this institute achieved was the spending of the $7 million on the
satisfaction of their own needs, and the realization of an opportunity 
to speculate in our bond market with the money meant for deceived
Russian citizens. Another $400 million loan we audited turned up a
$479,000 payment to a certain American, again "for services rendered"
which were not spelled out.

Q: And yet those loans are the obligation of the Russian people to

A: Yes, that's right.

Q: What pressure does the Accounts Chamber experience?

A: Mostly it is psychological pressure. We are subject to disparaging
remarks by officials in the Yeltsin government and attacks in the press. 
We often read accusations stating that the Accounts Chamber is
"incompetent" or that it is "working outside their mandate" or that our 
"conclusions are too politicized." Sometimes the media reports that the 
courts have ruled against our findings, which is simply untrue. In every 
case in which we were subjected to a court challenge, the court has
upheld our findings.

I myself have been accused of a broad range of villainy; everything from 
being "a diehard Communist" though I belong to no political party and
was elected to my position by the Federation Council [Russia's upper
house] on a secret ballot for a term of six years. [Privatizer and
former director of the Federal Bankruptcy Agency] Pyotr Mostovoi, an
ally of Anatoly Chubais and Harvard University, said that since the
findings of the Accounts Chamber had led the Procurator to open a case 
against him, a minister of the Russian government, it could only mean
that I am an American spy.

Q: Well, then, if you are an American spy you must report. What is your 
estimation of the Americans' newest panacea, tax reform?

A: Our system of taxation is irrational and the rates are simply
ludicrous, but it was the IMF who insisted upon high taxes and is doing 
so again. But the main problem in Russia has nothing to do with the
collection of taxes. You can tie our businessmen up, you can imprison
them and beat them to near unconsciousness and still they will pay no
tax, because they have no - and I repeat - no money. The enterprises are 
incapable of satisfying the government's insatiable appetite. For
instance, at one factory there is 10 million Deutschemarks worth of new 
equipment sitting outside the factory in its original packing crates.
The enterprise cannot utilize the equipment, cannot so much as open the 
crates since it is incapable of paying Russian customs the high tariff 
due on the equipment. The penalties are growing, yet the firm can
neither use the equipment nor return the credits used to order it. In
other words, the entire business is a complete dead end. There are many 
such instances.

Q: And what about the planned decrease in government spending?

A: Certainly the government is too large, but not a single bureaucrat
will suffer. Instead the plan is to let go 200,000 medical workers and 
teachers, which will only work to increase social unrest. As is, the
average Russian is living worse and worse and they are losing any faith 
in even the possibility of any improvement. Our situation is absolutely 
unprecedented. Recently our new prime minister, Sergei Kiriyenko,
delivered a government order to cut the budget by 30 percent, but the
only budgetary item to actually enjoy an increase is the amount of funds 
going to service our national debt, which now eats up 45 percent of the 
government's income. As a result, the Ministry of Education's budget for 
the whole of Russia is not equal to that of Harvard University.

Q: Will further lending by the IMF and the World Bank be helpful?

A: No, of course not. Giving more loans to the Yeltsin government is
comparable to giving a drug addict a fresh supply of narcotics. Any new 
loans will only go to the realm of financial speculation and to prop up 
support for Boris Yeltsin. Russia does not need any further such
lending. Russia needs loans only for the purchase of new equipment or
the restructuring of enterprises, and such funds can be attained from
the private sector.

Russia has a powerful potential - natural resources in abundance, a high 
level of intellectual capital, an infrastructure, and a willing
workforce - we truly have all that we need to develop economically if we 
can but achieve an accountable government willing to implement and
execute rational policies. Western loans only undermine any attempt to 
attain the latter conditions, and we are left with a Boris Yeltsin who 
stays in place through inertia and the lack of a mechanism to remove
him, thanks to his self-authored constitution.

The West has essentially three alternatives as I see it. First, you may 
continue the same policies. This will lead to a collapse of the economy 
and possibly of the Russian state itself. In that case, the West must
prepare itself for a repeat of the events of 1917, with a nationalist
and not a Communist-inspired ideology. Or the West can execute a calm
and quiet exit. Or finally, the West can begin talking to people besides 
Anatoly Chubais, Yegor Gaidar, and their American cronies, in order to 
devise a new policy towards Russia. It would even be possible for your 
specialists and ours to collaborate on a mechanism to monitor assistance 
money so that it is used in an economically literate manner.

If these policies are not changed, I fear they will have a result that 
is very bad not only for Russia, but for the U.S. as well. But more IMF 
lending under present policies and conditions is but another noose
around the neck of the Russian economy.

I have an anecdote that illuminates perfectly the effect of the IMF's
Russian program. Many decades ago when the Soviet Union was attempting 
to develop the hydrogen bomb, the man responsible for the project was
KGB chief Lavrenty Beria. The chief physicist on the project was a man 
by the name of Igor Kurchatov. When Kurchatov was able to report to
Beria that the project was working, that neutrons were forming, Beria
shouted back over the telephone wire that he was coming immediately, "I 
want you to show me how the neutrons are forming!"

Of course, it is impossible to show anyone neutrons forming, but
Lavrenty Beria was a man of such a reputation that no sane individual
would admit to that fact, and so Kurchatov devised a plan, which though 
risky he managed to pull off. A dummy instrument board was set up on a 
table in an otherwise empty room. Kurchatov instructed one of his
graduate students, who is the man who told me the story many years
later, to sit at the control board, and when he escorted Beria into the 
room, he was to frantically turn the knobs and dials so that needles on 
indicator gauges would jump wildly, lights would flash, and so on and so 
forth. The then-young student did as instructed and after Beria
witnessed the demonstration he raced to a telephone in order to shout
triumphantly to the Central Committee the news: "I have seen it, I have 
seen the neutrons forming! The experiment is a great success!"

Yet, of course, Beria had witnessed exactly nothing but some improvised 
theater. You see, this story outlines perfectly the truth of Western
lending to Boris Yeltsin's government.

Anne Williamson has published widely on Soviet and Russian affairs. A
selection from her new book, How America Built The New Russian Oligarchy,
is posted at


Date: Tue, 16 Jun 1998 
From: Marshall Pomer <>
Subject: Industrial Policy

Dear David,

Here is a piece that appeared today in Nezavisimaya Gazeta. 
It criticizes the IMF's opposition to industrial policy.
I would welcome the reactions of your readers.

Best regards,
Marshall Pomer
American Coordinator 
Economic Transition Group

Nezavisimaya Gazeta
June 16, 1998
By Marshall Pomer

Industrial policy is a critical though badly neglected
ingredient for the long-run success of the Russian economy. Yet
the IMF and the World Bank, and most Western advisors, adamantly
dismiss it.


Defined in a rather ideological manner, industrial policy is
government interference with the market allocation of resources. 
Or, in the lingo of "globalization," it is the creation of
impediments to the international flow of goods and services and the
global transfer of capital.
But to come to terms with the needs of the Russian economy, it
is important to be realistic and pragmatic. Industrial policy is
better defined as government support for the development of
specific industrial sectors. Integral to industrial policy are
performance requirements on recipients of such support. Tariffs,
subsidies, and government contracts are obvious instruments. Also,
agreements with foreign and domestic entities must be fashioned and
implemented to foster domestic production and encourage transfer of
Industrial policies provide protection and resources to
specific industries in the short run so that they can become
internationally competitive in the long run. The goal is to create
a widely shared prosperity that is founded not on the exporting of
natural resources but on the production of goods and services
incorporating modern technology. Given Russia's natural resources
and its educated labor force, a high standard of living for the
Russian people should be attainable.
"The road to hell is paved with good intentions." Industrial
policy can foster rent-seeking and stifle innovation, and it can
lead to isolation from the rest of the world. It is all too easy
for industrial policy to serve as the garb to soften budget
constraints for enterprises which have political clout. Unless
circumscribed and wisely targeted, industrial policy would obstruct
the introduction of market forces and market discipline.
In Russia today, with so much attention being given to IMF
conditionality and the sensibilities of holders of Russian
government debt, to even talk about industrial policy is regarded
as a threat to Russia's future. In this atmosphere it is very
difficult indeed to develop rational policies. But, for better or
worse, industrial policy is here to stay. A popularly elected
parliament will demand support for industry, rational or otherwise.


The aircraft industry provides an urgent example of the need
for effective industrial policy. Vital to Russia's technological
potential, this industry could provide large numbers of well-paid
jobs for skilled workers and engineers. Recovery would stimulate
the economy because of linkages with suppliers and the effects on
domestic purchasing power. Failure to redevelop this industry
could drain foreign exchange as a result of a high volume of
By some measures of productive capacity, Russia still has the
largest aircraft industry in the world. Production, however, has
virtually collapsed. In 1997 the Ministry of Economy reported
that, despite a capacity to produce 650 planes, only five Russian-
made aircraft were delivered to Russian airlines.
The Soviet Union invested heavily in aviation technology and
was the first to use jet aircraft for passenger service. However,
industry was oriented toward the military, and now manufacturers
must reorient toward a consumer driven economy and compete against
the likes of Boeing and Airbus. In particular, Russian aircraft
engines were far less efficient than Western ones.
Although air transport dropped dramatically beginning in 1992,
there has been a recent upward trend. Cargo transport rose about
10% in 1996 and 1997, and the Ministry of Economy predicts a 5%
growth in passenger transport for 1998. Even without further recovery
in the volume of air transport, the aging of the fuel-inefficient
fleet, the need to reduce maintenance costs, and the priority of
flight safety are projected to create significant demand for new
planes. Russian government sources, factoring in favorable
estimates of air traffic growth, have forecasted that several
hundred new medium and long-haul aircraft will be needed by Russian
airlines by the year 2001.
While potential demand is there, the two major obstacles are
engine technology and buyer finance. United Technology Corporation
and the Ilyushin Aviation Complex joined forces to design a 350-
seat widebody jetliner using American made engines (Il-96M/T). In
1995 the U.S. Export-Import Bank agreed to lend Aeroflot $1 billion
to finance the engines and American made avionics aboard an initial
fleet of 20 planes. Thus, the problems of engine technology and
finance were addressed, but the price was the reduction in domestic
content of Russian aircraft.
Boeing objected, fearing that the Russian planes with American
engines could win customers not only in Russia but also world-wide. 
Boeing put strong pressure on the U.S. Congress and the Clinton
Administration to cancel the Export-Import loan. A rather stunning
compromise was achieved whereby the Clinton Administration forced
the Russian government to suspend, at last temporarily, its 30%
tariff on imported planes. In addition, the Export-Import Bank
agreed that this would be the last time it financed the use of
American engines on Russian planes.
In April of 1997, a contract was finalized for the sale to
Aeroflot International of ten Boeing 737-400 twinjets. The
financing is being provided by an American bank closely associated
with Boeing. As one of the concessions previously agreed upon to
secure the Export-Import loan discussed above, Russia guaranteed
the Western lender that it would be able to repossess the Boeings
in the event that Aeroflot defaulted. Suggestive of a "voluntarily
colonial role" for Russia, in the same month Boeing signed a
contract to purchase 2.4 thousand tons of titanium ingots for use
in the manufacturing of its planes.


An effective industrial strategy for the aircraft industry
would include tariff protection and other measures. To make it
possible for Russian airlines to finance acquisition of planes from
Russian manufacturers, the government must ensure an appropriate
legal framework for the creation of leasing structure, either
private or public. Also, it could temporarily subsidize interest
payments on leases of Russian aircraft. Export credits could be
used to promote foreign sales of Russian aircraft, a mechanism
widely used elsewhere but unheard of in Russia. Government should
foster cooperation with foreign companies to develop better engines
so long as there are mechanisms to transfer technology to
production on Russian soil. 
In the current transitioning context, without active
government encouragement, major joint ventures are not likely to
occur. At the same time, it should be recognized that it is
generally in the interest of the foreign partner, if not its
primary intent, to use a joint venture agreement to expand the
profitable sale of imported goods. These profits are often
shielded from taxation because of concessions or creative transfer
pricing. In short, transparency and government vigilance are
critical to successful industrial policy and to ensure that
national interests are not compromised. 


Is the industrial collapse in Russia reversible? Continuing
de-industrialization has ominous implications. It is fast becoming
Russia's place in the world economy to provide raw materials to the
developed economies and to serve as a profitable market for
foreign-made goods. Industrial policy is hazardous but without it
de facto colonization will continue.
Government has a role to play in the development of Russian
industry -- a role that goes beyond stabilization, liberalization,
privatization and the creation of market infrastructure. With the
right industrial policy, there is no doubt, for example, that a
large viable aircraft industry would emerge. The short-run
material interests of the West and laissez faire ideology should
not be allowed to stand in the way.
When Sergei Kiriyenko went before the Duma to win support for
his nomination as Prime Minister, he promised a vigorous industrial
policy that included supporting exports and protecting domestic
manufacturers. The question is whether the new Prime Minister is
committed to an industrial policy based on economic rather than
political considerations. Of course, there is also the issue of
whether the IMF would allow it.


Patriotic Union Gives Conditions For START II Ratification 

Moscow, Jun 11 (Interfax) -- The START II strategic arms reduction
treaty can be ratified only after the Russian government has met a number
of conditions, the Spiritual Inheritance movement, part of the opposition
People's Patriotic Union of Russia, has said.
The movement said in a statement signed by its leader, State Duma
deputy Aleksey Podberyozkin, and several members of the movement, including
retired generals, that it plans to consider the issue at its regular
congress on June 16.
First, before the Duma starts to consider ratification of START II,
President Boris Yeltsin should submit to the parliament a draft law on
guarantees on stable financing of Russia's strategic nuclear forces for the
period from 1999 to 2009, the statement reads.
Second, the president should step up efforts for concluding a START
III treaty taking into account that arms reduced in line with disarmament
agreements should be destroyed rather than stockpiled as it is possible
under START II, the statement says.
Third, Russia should receive guarantees that the United States will
fully comply with the indefinite Russian-U.S. ABM treaty on limitation of
anti-ballistic missile systems of 1972, the statement says.
The proposals were summed up in a draft law which Podberyozkin has
already distributed among his colleagues in the Duma.
Despite all economic and financial difficulties, the financing of
Russia's military budget for 1998 and 1999 should be ensured by a special
law as a priority, the Spiritual Inheritance Movement said.
The movement said at the same time that refusal to ratify START II may
spawn "serious negative repercussions" for both Russian-U.S. relations and
the rest of the world.


Caucasus: Deadline Nears On Oil Transit Routes
By Michael Lelyveld

Boston, 16 June 1998 (RFE/RL) -- As the deadline approaches for a decision
on Caspian transit routes, governments are preparing to spend huge sums on
strategic projects that may make little economic sense.

The goal of the United States is to promote an east-west pipeline route
that can join Azerbaijan and Central Asia with Georgia and Turkey, avoiding
Russia and Iran, no matter what the cost. With U.S. encouragement,
Azerbaijan has set an Oct. 1 deadline for deciding on the main export
pipeline route.

But the Western oil companies involved in Caspian offshore projects have
proved so reluctant to support the east-west plan that a top Azerbaijani
oil official became openly critical last week. Ilham Aliyev, vice president
of the State Oil Company of the Azerbaijani Republic, known as SOCAR, said
that members of the country's largest consortium are trying to stall
construction of a pipeline from Baku to the Turkish port of Ceyhan.

The unwillingness of the companies over many months has compelled the
concerned governments to take extraordinary steps. Earlier this month,
Turkish Energy Minister Cumhur Ersumer said that his country is ready to
finance construction of the Baku-Ceyhan pipeline, if necessary.

At a conference in Istanbul, U.S. officials said that the Export-Import
Bank and other agencies are prepared to invest $6 billion in Caspian
projects. Azerbaijan officials believe that the US government funding will
be made available for the pipeline plan.

The offers represent a major change in U.S. policy. Six months ago,
government officials insisted that the pipeline would have to be
commercially feasible and funded by the private sector. They all but ruled
out a role for government finance. But the high cost of the project has
made commercial success unlikely at a time when oil prices are low and the
volume of Caspian production seems uncertain.

Although Azerbaijan has signed nearly $30 billion worth of deals, oil
companies are disappointed with the returns so far. Some wells drilled in
the Caspian have come up with gas rather than oil, while others have turned
out to be small or even dry. Despite the enormous attention given to the
Caspian and its long-term strategic value, oil company officials say that
the volumes produced so far would not justify the cost of Baku-Ceyhan line.

Officials say that a well to be drilled at Azerbaijan's Shah Deniz offshore
oilfield in the next two weeks may determine whether the West's high hopes
for the Caspian have been warranted. Ironically, this is the same field
that Iran has obtained an interest in to compensate it for being excluded
from the Azerbaijan International Operating Company.

Another big problem for the companies is skepticism about the cost
estimates being used by governments for Baku-Ceyhan. Most government
officials have been using a $2.3 billion estimate, while the companies
believe that $4.5 billion is closer to the truth. Several billion may be
added for the cost of building a trans-Caspian line from Baku to
Turkmenistan. Central Asian volumes are seen as essential to justifying the
entire east-west scheme.

As commercial interests have wavered, governments have jumped into action,
trying to defend against a strategic loss. Washington is particularly
worried that Iran may offer the cheapest alternate route. The United States
may only be able to make up the difference in commercial viability with
political will.

The U.S. effort to put politics over economics already seems to be evinced
by the Export-Import Bank's announcement last month of a $96 million
project to upgrade Turkmenistan's gas pipelines. The work is being
undertaken on the pipelines leading to Russia at a time when no gas has
been exported through the lines since March 1997.

Bank officials say the work is needed because the Soviet-installed lines
are old and likely to leak, although they concede that no gas has been
flowing for over a year. They also note that the bank's part in the plan is
only a loan guarantee with repayment assured by the Turkmenistan government.
But the more obvious reason for the U.S. financing is to promote
Washington's political interests with Turkmenistan, showing that there will
be rewards for participating in the east-west pipeline plan. The
Export-Import Bank is likely to be the major vehicle for U.S. government
financing of the pipeline project, because it requires no budgetary funds
or congressional approval. Such funding can take place whether the
Baku-Ceyhan line makes any economic sense or not.

In 1993, the bank played a similar role in providing $2 billion in
financing for Russia under a program known as the "oil and gas framework
agreement." The guarantees for equipment sales to rehabilitate old Russian
oil wells took years to negotiate and required an unprecedented exemption
from the World Bank's liens on Russia's resources. At the time, Moscow was
defaulting on other loans, and there were similar objections that the oil
program could not be justified as a sound business decision.

But the U.S. showed its overwhelming political will in pushing the program
despite all obstacles. In the end, the agreements were signed but the
credits went virtually unused for years.

There may now be a similar scheme by governments for the Baku-Ceyhan
pipeline. Political momentum seems likely to replace oil production as the
project's driving force. 


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