25, 1998 Return
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Johnson's Russia List
25 June 1998
[Note from David Johnson:
1. Reuters: Main points of Russian anti-crisis programme.
2. Reuters: Parliament sceptical on Russian govt's plan.
3. Reuters: Russia's Lebed sees failure of anti-crisis plan.
4. Moscow Times: Andrei Piontkovsky, SEASON OF DISCONTENT: Oligarchy
Has Ministers at Its Beck and Call.
5. Christian Science Monitor: Rep. Bernard Sanders, IMF 'Salvation' in
Russia? Fund bailout may fan flames of 'Great Depression,' not stop it.
6. Laura Belin: Reply to Jim Vail.
7. The Times (UK) editorial: RUSSIA AND FRIENDS.
8. Financial Times (UK): John Thornhill, RUSSIA: Banks tremble before
the spectre of devaluation.
9. Pravda: Interview with Sergey Rogov, director of the United States
and Canada Institute, "Sergey Rogov: 'If United States Sneezes It Could
Shatter Our Economy's Eardrums.'
10. Moscow Times: Pavel Felgenhauer, DEFENSE DOSSIER: START II Destined
Main points of Russian anti-crisis programme
MOSCOW, June 24 (Reuters) - Russia's anti-crisis programme, unveiled on
Tuesday by Prime Minister Sergei Kiriyenko, aims to bring down interest rates,
revive economic growth, boost tax collection and improve living standards.
Following are the main points of the programme outlined in a government
document obtained by Reuters on Wednesday. Some of the measures have already
been adopted, while others may need to be approved by the State Duma (lower
chamber of parliament):
Reduce interest rates to 25-30 percent by Autumn, then to 20-25 percent from
the current level of 60 percent
Adopt new tax and budget legislation
Introduce more uniform income tax scale, with lower rates for all forms of
income, including credits and insurance polices
Move towards VAT and excise taxes as means of extracting revenues from sales
at time of delivery
Introduce a single VAT rate of 20 percent, abolishing the lower rate currently
levied on a range of goods
Eliminate exemptions from VAT and from profit tax
Introduce tax on barter deals
Introduce tax on promissory note issues (0.8 percent of nominal value)
Give regions right to introduce 5-10 percent sales tax
Tighten state control over the alcohol market, introducing stiffer penalties
for illegal output and trade
Raise land tax and payment for unproductive use of land
Cut number of employees and agencies funded from budget
Cut subsidies from federal budget
Lower transport tariffs for oil and coal
Lower wholesale prices for gas and electricity provided payments are made in
Cut hard currency part of crude oil transport tariffs
Cut import tariffs on equipment and spare parts not produced in Russia
Move to international accounting standards
Strengthen independent auditing and state financial controls
Guarantee the rights of minority shareholders
Develop institutional base for private ownership of land and property
Reduce salary and pension arrears
Introduce faster, streamlined bankruptcy procedures
Increase revenues from privatisation
More effective use of state property
Develop mortgage market in Russia
Develop precious metals market in Russia
Improve production-sharing legislation
Raise import tariffs
Parliament sceptical on Russian govt's plan
By Ivan Rodin
MOSCOW, June 24 (Reuters) - The Russian government's anti-crisis measures will
probably not win approval from parliament before the legislature begins a two-
month summer break in July, a leading parliamentarian said on Wednesday.
``It's unlikely that we will immediately adopt the proposals,'' Alexander
Shokhin, leader of the Our Home is Russia parliamentary party, told reporters.
``So it's not possible to accept all the laws the president says are necessary
before the parliamentary holidays,'' he said, referring to a two-month summer
break starting on July 16.
The laws form part of package of austerity measures the government is seeking
to introduce to help fill a gaping budget gap and win a big funding package
from the International Monetary Fund (IMF) to prevent economic collapse.
President Boris Yeltsin, warning of social unrest and political instability,
issued a thinly veiled threat on Tuesday that he would dissolve the lower
house of parliament or State Duma unless it approved them soon.
``These measures have to be adopted before the start of the Duma's summer
holidays,'' Yeltsin told deputies.
Shokhin, whose party was founded as a pro-government lobby but has distanced
itself from the cabinet since its leader Viktor Chernomyrdin was removed as
prime minister in March, said he thought most of the measures would pass
But he criticised a plan to make companies pay excises on delivery rather than
on receiving payment for their goods, saying it would bankrupt them.
He also predicted the opposition Communists, who dominate the Duma, would drag
their feet on all the measures.
Communist leaders poured scorn on the anti-crisis plan on Wednesday and
demanded to see the documents on which the government's negotiations with the
IMF were based.
``We insist that the government give us the documents which the government and
central bank gave to the IMF, as well as the IMF's demands,'' party chief
Gennady Zyuganov told a news conference.
His comments suggested he wanted to be sure there was no hidden agenda in the
talks with the IMF, an organisation which the Communists mistrust, as Moscow
tries to negotiate a way out of financial crisis.
Zyuganov was speaking after Russian officials held talks with visiting IMF
managing director Stanley Fischer on the conditions for the release of the
latest $670 million tranche of an existing $9.2 billion credit package to
The government is also seeking emergency funding of $10-15 billion and on
Tuesday outlined an anti-crisis programme of austerity measures to shore up
Russia's troubled finances.
Yuri Maslyukov, Communist head of the Duma's Economic Policy Committee, said
the programme would only delay economic collapse.
``It is not a programme to overcome crisis but means to postpone the
catastrophe,'' he said. ``It changes nothing in the course which has lead us
The Communists have 138 seats in the 450-seat Duma, Our Home is Russia is the
second largest party with 65 seats.
Russia's Lebed sees failure of anti-crisis plan
By Tomasz Janovski
FRANKFURT, June 24 (Reuters) - President Boris Yeltsin's former security
adviser Alexander Lebed on Wednesday criticised the Russian government's
economic recovery programme, saying it had little chance of success.
Lebed, a retired Russian general who last month won a key election to became
governor of the vast Siberian region of Krasnoyarsk, was in Germany to receive
a prestigious German peace prize for brokering a 1996 ceasefire ending the
Lebed told a news conference in Frankfurt that neither Yeltsin or his new
government were capable of turning the Russian economy around.
``I believe the chances that either the Russian president or the government
will manage to improve anything in the current Russian situation are very
slim,'' Lebed said before a ceremony to receive the Hesse state peace prize.
``In principle I do not see anything new in the programme and it includes
several measures which cannot be implemented,'' said Lebed, a possible
contender for Russia's presidency.
Prime Minister Sergei Kiriyenko presented his anti-crisis programme on
Tuesday, including a tax make-up, spending cuts, protection for the embattled
rouble and planned halving of the key interest rate.
Lebed said the main risks Russia faced were the escalation of conflicts in the
Caucasus region into a full-scale war, and the devaluation of the rouble.
``If the rouble goes, then the poor people in Russia will get even poorer and
then we must be prepared for social unrest,'' he said.
Lebed, a popular ex-paratroop commander, is seen as a strong contender in the
next presidential polls in 2000.
He said he planned to visit the Caucasian republics on a peace mission later
this week. Tension has recently flared between old foes Armenia and Azerbaijan
as well as in Georgia.
Asked to comment on a decision by some members of the Hesse state parliament
to boycott the award ceremony because of Lebed's questionable democratic
credentials, Lebed said:
``We need at least two generations to build democracy in Russia...so I cannot
say that I have democratic credentials. There is no democracy in Russia.''
Lebed is due to receive the award at a ceremony in the state parliament in
Wiesbaden on Thursday.
Lebed also brokered a ceasefire in the former Soviet republic of Moldova
between Romanian-speaking ethnic Moldovans and ethnic Russians who wanted
their region to join the Russian federation after the collapse of the Soviet
Union in 1991.
He became kingmaker in the 1996 Russian presidential election after he won 15
percent in the first round of voting.
June 25, 1998
SEASON OF DISCONTENT: Oligarchy Has Ministers at Its Beck and Call
By Andrei Piontkovsky
Special to The Moscow Times
We hired Anatoly Chubais. We paid an enormous amount for Boris Yeltsin's
election. Now we have the right to enjoy the fruits of our victory."
Nearly two years ago, Boris Berezovsky made this declaration in the name
of seven of the country's biggest businessmen. They have since utilized
those fruits, receiving for a song new enterprises, export quotas and
licenses for their television channels, diverting hundreds of millions
of budget dollars into their private companies.
Then, Chubais and Yeltsin were bashfully quiet, apparently silently
acquiescing to the opinion of the businessman who essentially had become
the financial manager of the president's family.
When Chubais became first deputy prime minister in 1997 and tried to
change the rules of the game, when he tried to separate Money from
Power, he was quickly reminded of who hired him, for what job and for
During the subsequent media and bankers wars, we were told many
interesting things about the system of "crony capitalism" that had
developed in this country. It was this system that brought the country
into its deepest economic crisis. The president was forced to disband
the government of Prime Minister Viktor Chernomyrdin and name a new
While his Cabinet was being confirmed, Sergei Kiriyenko made many proper
statements about the government's independence from business and about
not letting business exert pressure on the government. The hope arose
that the young prime minister would be able to throw off the suffocating
stranglehold of the financial oligarchy.
But it appears that the oligarchs have managed once again to remind
those officially in power that they retain the real power in this
country. Kiriyenko has started meeting regularly with people whom he
should have driven from the corridors of power immediately if he wanted
to tackle the real roots of the crisis.
Completely emboldened by the official authorities' confusion and
helplessness, these tycoons, parasites of the federal budget who for
some reason call themselves "representatives of big business," have
announced the formation of the Council on Economic Cooperation, or CEC.
The CEC is not even a parallel shadow government, but a type of
Politburo of the Oligarchic Party of the Russian Federation. As the
oligarchs announced to us, the decisions of this omnipotent organ "will
be implemented by government decree," and "they will assume
responsibility for providing for the council's financial and
The Duma is now debating legislation on the legalization of prostitution
in this country. The creation of the CEC would outstrip these debates,
effectually legalizing political prostitution. The oligarchs no longer
need to utilize young reformers secretly, paying them with interest-free
credits and literary honoraria. Ministers and deputy prime ministers
will now be delivered to CEC meetings like call girls, ready to fulfill
the whims of their masters.
Berezovsky describes the creation of the CEC as a "consolidation of
reformist forces." But if Berezovsky, Vladimir Potanin and others like
them are "reformist forces," then God save Russia from such "reforms"
and such "reformist forces."
Christian Science Monitor
JUNE 25, 1998
IMF 'Salvation' in Russia?
Fund bailout may fan flames of 'Great Depression,' not stop it
By Bernard Sanders
•Rep. Bernard Sanders (I) of Vermont has regularly dealt with IMF reform
issues in the House.
For the seven years since the fall of communism, the IMF has been
guiding the Russian economy - to disaster. Now the IMF, with President
Clinton's blessing, is considering a proposed $10 billion bailout for
Russia. Should they be allowed to "save" Russia again?
As in Mexico, Indonesia, Korea, and Thailand, the IMF has prescribed
that Russia run its economy for the benefit of foreign investors and a
few wealthy Russians at the expense of the Russian people. The results
are clear: a few world-class billionaires, combined with economic
collapse, soaring debt, mass unemployment, grinding poverty, and unpaid
wages and pensions.
When communism fell, the IMF prescribed "shock therapy," essentially a
Russian translation of the devastating "structural adjustment" the Fund
imposed on Mexico, Africa, Southeast Asia, and much of the rest of the
third world. It insisted that Russia cut government spending, sell off
public assets, and raise interest rates to attract foreign investment.
But as early as 1992 it was clear that this was a road to disaster: Even
the World Bank, normally an IMF ally, warned that Russia's first
priority should be to revive domestic production.
The result of the IMF's shock therapy? Between 1992 and 1995, Russia's
GDP fell 42 percent and industrial production fell 46 percent - far
worse than the contraction of the US economy during the Great
The effect on the Russian people has been devastating. According to
Russian officials, real income has plummeted 40 percent since the Soviet
Union collapsed in 1991. A quarter of all Russians are living below the
subsistence level. Nearly one-third live below the poverty level.
Three-quarters barely survive on an average income of $100 per month.
The Red Cross calls conditions in Russia "a silent disaster," reporting
"We saw babies who were being fed powdered animal fodder because of lack
of baby food." The average life expectancy for men has declined by seven
years, to 59, since 1990. One- quarter of Russia's labor force receives
its wages late, in kind, or not at all.
Meanwhile, privatization has concentrated wealth in a few hands. For
example, privatization has created two energy companies, Gazprom and
United Energy System, that are largely privately owned and together
worth more than 30 percent of Russia's GNP.
What will more IMF remedies do to address the root causes of Russia's
economic collapse? Will the proposed bailout help provide baby food for
children or put people back to work? One doubts it. According to Jeffrey
D. Sachs, director of the Harvard Institute for International
Development and a former adviser to the Russian government, the reason
for such new loans is to "insure that the earlier loans are repaid and
that the ruble keeps its value long enough for speculators to get their
money out without large losses." Indeed, interest rates that recently
reached 150 percent will almost certainly be paid out of funds currently
earmarked for retired pensioners and unpaid workers.
Russia desperately needs economic reform. The goal should be rebuilding
the economy from the ground up, not bailing out foreign investors. We're
told that the crises in Asia and now Russia threaten to spread to other
countries and even to become a global economic meltdown. We are told
that we must expand the funding of the IMF to combat this and future
crises. But there is no evidence that IMF intervention does anything to
prevent economic crisis in the long run. Instead, as Mr. Sachs points
out, the IMF's track record indicates that it has become a veritable
"Typhoid Mary," spreading economic austerity and collapse to one country
If the threat of a spreading global economic collapse is real - and I
fear that it is - the evidence of the past year indicates that current
IMF policies are only helping spread the collapse. We'd better stop it.
But we need to do more than that. It's time to establish a moratorium on
happy talk about the benefits of the global economy while we take a hard
look at its problems and seriously debate what to do about them. After
all, the future of the world economy may be at stake.
Date: Wed, 24 Jun 1998
From: "Laura Belin" <email@example.com>
Subject: reply to Jim Vail
My goal is not to "slam" Russian journalists. Some excellent journalists work
for newspapers and magazines that are owned or funded by banking groups.
partly because in Russia, those publications can afford to pay salaries that
attract the best talent.
My notes to JRL concerning a couple of columns by Yulia Latynina were not
directed against her personally. I only wanted to point out that
not a disinterested party concerning the topics she discussed in those
Readers can decide for themselves whether her work is influenced by the
financial constraints of her employer, but first they need to be aware of
The Times (UK)
June 25 1998
[for personal use only]
RUSSIA AND FRIENDS
Boris has challenged the Duma; now Bill must tackle Congress
President Yeltsin's new man, Sergei Kiriyenko, has presented his
austerity plan to the Russian Duma. It contains, in itself, little that
is new. That is not important. It could even be helpful, because the
Duma cannot credibly claim to require months to study this latest
package of measures. In his cogent, firm address to this week's
extraordinary joint session of government and parliament, Mr Yeltsin
pointedly reminded his unsympathetic audience that "we have been talking
about their necessity for years". Russia's acute fiscal crisis stems not
from failures to see what has to be done, but from failures of
implementation. Much, though not all, of the blame for this rests with
the communist-led opposition in the Duma, some of whose factions would
prefer the collapse of the rouble to the success of Mr Yeltsin's latest
Capriciously as Mr Yeltsin has often seemed to change teams, he has held
to the overall goal of reform. His grave analysis of Russia's plight
admirably eschewed any populist temptation to blame international
markets. Yes, he said, Russia had been hit both by Asian turbulence and
by the fall in the price of oil, its main foreign exchange earner. But
Russia was so vulnerable because reform had been snarled in "delays,
fussing and fighting". The country was living beyond its means and
powerful lobbies were exploiting the slogan of "revitalising domestic
industry" for protectionist ends. It was a brave speech.
On the basis of the Kiriyenko plan, the International Monetary Fund will
now endorse payment of the delayed $670 million tranche of Russia's
existing standby loan. That small confidence-building step should not be
delayed; the planned cuts in state payrolls and spending, together with
a clampdown on tax evasion by the powerful utilities and tighter
controls over customs and tax authorities are in line with IMF
But Mr Kiriyenko seeks an additional $10-15 billion in order to
replenish central bank reserves, back up Russian bonds and deter
speculation against the rouble. That must be contingent on real tax
reform. Mr Yeltsin has promised "a tax system comprehensible to all,
when fairly paying taxes will be profitable". In a country where tax
evasion is an art form, reform would involve a psychological as well as
a legal revolution. But it is fundamental. Without adequate tax
revenues, fairly levied on a wider base, public services will collapse
and the social injustice of unpaid state wages will continue, destroying
popular faith in modernisation.
Mr Yeltsin insists that Duma must pass all the necessary legislation by
July 13, when it breaks for the long summer recess. Otherwise, he hinted
that he will resort to decrees. He may well have to make good that
threat. If he does, Russia's friends should show understanding. His
young Prime Minister's tense prediction that unless the state's finances
are set in order, "you can stop talking about democracy" should not be
dismissed as mere hyperbole; and Mr Yeltsin's democratic pedigree is
more convincing than those of many MPs.
While the West awaits proof of the latest Russian pudding, it should
repair a gap in the world's international financial defences. Because
the US Congress refuses to pay America's share of the IMF replenishment,
the $15 billion Russia wants would devour all the hard currency the IMF
has left, leaving nothing for emergencies elsewhere. Mr Yeltsin has
faced up to the Duma this week; Mr Clinton needs to tackle the
opposition in Congress with equal resolve.
Financial Times (UK)
25 June 1998
[for personal use only]
RUSSIA: Banks tremble before the spectre of devaluation
The sector is heavily exposed to the forward dollar market and has
almost all its assets in roubles, writes John Thornhill
It's lies, it's lies, it's all lies," says Pyotr Aven, president of Alfa
Bank, one of Russia's biggest banks. "I tell you, I was at the meeting
with the government and no conversations about a devaluation ever took
place," he adds, contradicting a spate of Russian newspaper reports that
the country's biggest energy barons had been arguing for a 50 per cent
Passions are clearly running high in Moscow about the fate of the
embattled rouble - and with good reason, given the economic and
In the words of a recent report from Brunswick Warburg, the brokerage, a
big devaluation would "ignite inflation, dent the credibility of the
central bank, devastate the banking system, and raise political
uncertainty" - although it argued, with the sunny conviction of most
stockbrokers, that it would not necessarily be negative for the equity
It is precisely because the risks are so high that the market appears to
believe devaluation can be averted - at least in the short run.
So long as the government proves it can implement its austerity
programme, additional, conditional support is likely to be forthcoming
from the International Monetary Fund to help stabilise Russia's
Yet the dangers of devaluation have highlighted the fault-lines in the
economy, suggesting Russia would suffer in different ways from stricken
Asian countries if the worst were to occur. They also illustrate what
still needs to be done to turn Russia into a functioning market economy.
Undoubtedly there would be big corporate losers in any rouble
devaluation, most notably the country's 1,700 banks. By international
standards, Russian banks are small, poorly capitalised and bear little
resemblance to their over-extended counterparts in Asia.
Only a handful of banks have attracted significant household deposits or
built up long-term industrial loan portfolios. Instead, they have
thrived on speculative profits in the currency, debt and equity markets
- which have all turned viciously against them since the first wave of
the Asian crisis struck Russia last December.
"This crisis has eaten all our profits," says Mr Aven of Alfa Bank.
"That is typical of the majority of our rivals."
But the bigger cause for concern for Russia's banks is that they have
accumulated substantial foreign borrowings over the past year and have
collectively amassed a huge exposure to the forward dollar market while
keeping almost all their assets in roubles.
According to Holger Mueller, banking analyst at Fleming UCB, the Moscow-
based investment bank, Russian banks were speculating wildly in the
currency markets last year, amassing outstanding forward contracts of
$355bn by the beginning of 1998 - more than three times the combined
assets of the entire banking system.
The banks have steadily reduced their exposure this year and hedged an
unknown portion of their contracts, but there is a danger that a 50 per
cent devaluation would wipe out almost every bank in Russia apart from
Sberbank, the state savings bank. The failure of counter-parties and the
likely run on the banks in the event of a big devaluation would probably
fuel a systemic crisis.
But Mr Mueller argues that the costs of any bail-out would be small
because of Russian banks' limited exposure to the real economy. He
estimates it would take just $7bn, equivalent to 1.5 per cent of gross
domestic product, to salvage Russia's 10 biggest banks, which account
for 50 per cent of total banking assets.
Other Russian companies, however, could be big winners from a rouble
devaluation, particularly in the extractive industries, which earn much
of their income in dollars but incur most of their costs in roubles.
Norilsk Nickel, the world's biggest nickel producer, would undoubtedly
see a surge in profitability if the rouble fell. Some of the big oil
companies with high foreign earnings, such as Lukoil, would also benefit
But the picture is complicated by the fact that many of these bigger
companies have already taken on substantial hard currency borrowings.
Gazprom, the giant gas monopoly, has $9bn of foreign debts which would
prove much more expensive to service in the event of a devaluation.
To add to the confusion, many of Russia's banks and oil companies are
meshed in sprawling financial-industrial groups. Menatep bank and the
Yukos oil company together form part of the Rosprom empire. Similarly,
Oneximbank lies at the heart of a rival, Fig, which includes Norilsk
Nickel and Sidanco, a big oil producer.
While Russia's business barons appear to be concluding it is in their
collective interest to support the government and the rouble during the
latest financial crisis, they may well favour a gradual and orderly
Rogov on Economic Crisis, US Ties
18 June 1998
[translation for personal use only]
Interview with Sergey Rogov, director of the United States and
Canada Institute, by Yuriy Glukhov; date and place not given:
"Sergey Rogov: 'If United States Sneezes It Could Shatter Our
Economy's Eardrums.' Answering Pravda's Questions, United States
and Canada Institute Director Analyzes Development of Economic
Crisis and Current State of Moscow-Washington Relations"
[Glukhov] The very acute financial and economic crisis that Russia is
undergoing has not been overcome. How realistic are the hopes that "the
West will help us"? If only out of a sense of self-preservation. Won't
our economic ills ultimately affect the health of the American economy too?
[Rogov] To my mind, the expectation that the G-7 would rush to save
Russia was clearly exaggerated. Clinton, while voicing full support for B.
Yeltsin, at the same time spoke not of U.S. aid for Russia but of
assistance from the IMF and the World Bank. But following the Korean,
Indonesian, and other rescue operations, those bodies had very little money
left, and the U.S. Senate refused to allocate the IMF $18 billion. So
there are no grounds for confidence that a massive influx of capital to
Russia will begin.
Since the Russian economy today absolutely cannot be compared to the
U.S. economy in terms of its size and strength, if we were to start
sneezing nobody in America would notice. And if we had pneumonia, America
would simply pass us by. But if, God forbid, the U.S. economy were to
sneeze, then it could shatter our eardrums -- our economy is so vulnerable
today. So the dependence is the opposite of what you suggested.
If a giant such as China were to start limping, that would be another
matter. That would cause upheavals on all world markets, and even such a
strong and self-sufficient economy as America could suffer as a result.
After all, Chinese exports to America are around $50-60 billion. That is a
fantastic figure, if you recall that total Russian exports to China come to
less than $5 billion, including via third countries.
[Glukhov] What shape is the United States itself in? Does it have
any spare cash for foreign investment?
[Rogov] You get the impression that the United States is currently
experiencing the second peak of its 20th-century development. Indeed, the
U.S. position at the moment cannot be compared to the position straight
after World War II -- and that, as is well known, was when U.S. imperialism
reached the zenith of this development. The decline began later. We have
now seen six years of crisis-free development in the United States with
stable growth rates, whereas, following the Cold War, other countries,
including Germany and Japan, have experienced major difficulties. This is
an unprecedentedly long period.
The Americans were the first to get to grips with state-of-the- art
avenues of scientific and technical progress and information technology,
and something quite unprecedented has happened -- this year the federal
budget will post a surplus. Since we have already gotten used to the
United States having a permanent deficit, and then we found out what this
means in our own country, it will probably be very hard for us to get used
to this new term. And this means that the Americans can easily cover their
budget with extra revenue and are reckoning on obtaining $400 billion in
this fashion over the next 10 years. This is seven times more than
Russia's current budgeted expenditure, and 10 times more than the Russian
Government's current revenue.
[Glukhov] If the concentration of capital in the United States is so
immense and if there are spare funds available, what is stopping them
investing in Russia? (more) 18 jun pp/marshall
[Rogov] there is currently a competition under way in the market in
the struggle for capital, and Russia is by no means the most attractive
venue for investment. Take Rosneft, for instance. The actual value of
Rosneft would be around $30 billion, if such a company were to be traded on
the U.S. market. Our government tried to sell it for a tenth of that price,
and you would have thought the greedy capitalists would have been falling
over themselves to get a tasty slice. But they didn't. And even now that
the price has been cut in half, once again there are no waiting lines
Political instability, the backwardness of our economic
infrastructure, corruption, and bureaucratic holdups are acting as a brake
on investment. Admittedly, last year there was a rather notable influx of
U.S. capital. Direct investment hit $7 billion. That is a very sizable
But, one way or another, U.S. investors now have no faith in Russia.
On the one hand, this is the result of their fear of a Communist comeback,
on the other, it comes from the sad experience of dealing with our
bureaucracy. It shows that it is very hard to work with us -- all the more
so at a time when the Russian economy has been the second most-affected
after East Asia following last year's wave of the financial crisis. We
clung on by our fingernails. The recent upheavals show that we remain on
the brink of the abyss. If the ruble is devalued the Russian market will
become even less attractive to foreign capital.
Moreover, hitherto investment has mainly gone to raw-material sectors.
And the fall in the price of oil and then gas is making such long-term
investment very doubtful -- all the more so when issues such as the
Sakhalin-1 and Sakhalin-2 projects, the development of the Timano-Pechora
Basin, and so forth have not been resolved for five or six years.
[Glukhov] Probably the reason does not lie solely with the Russian
[Rogov] No, the recent introduction of sanctions against Russian
companies and organizations trading with Iran was a very dangerous
precedent. For the first time since the end of the Cold War the United
States is once again employing the classic tools of economic confrontation.
It had seemed that over the past few years there had been talk of
repealing discriminatory barriers along the lines of the Jackson-Vanik
Amendment, and other legacies of the Cold War that had not been swept away.
Yet now new restrictions are being introduced. We have counted 27 draft
laws with various types of measures which one way or another infringe
Russia's interests. If the U.S. Government embarks even on symbolic
sanctions, business, which reacts instantly to such things, will not show
even a desire to run any risk.
[Glukhov] Against the backdrop of the upheavals in Asia the economic
horizons in the United States seem cloudless. But is that really the case?
[Rogov] Indeed, American is entering the 21st century seemingly with
a sense of confidence in the future. But there are certain doubts about
the stability of today's prosperity. Skeptics have even started using terms
like "the bubble economy." That was said last year about the South Korean,
Thai, and Indonesian economies. America's current prosperity is due mainly
to secondary factors, including stockmarket speculation that has pushed the
Dow Jones index to unprecedented heights. But sooner or later there are
"Black Fridays" and "Black Mondays" on the markets.
The second vulnerable point relates to the impact of what has happened
and is happening in East Asia. To use the jargon currently adopted in
Russia, East Asia -- which had been a kind of nineties symbol of prosperity
and a locomotive of the world economy -- has been "dropped," as it were.
Today the "Asian tigers," with the exception of Taiwan, are being
subsidized by the IMF and the World Bank. And whereas we are currently
counting on getting $670 million from the IMF, over there they are talking
about $130 billion! Yet this crisis could boomerang on the U.S. economy.
The market is shrinking and demand for U.S. goods is falling.
There could be an even more serious impact as a result of the recent
wave of "Hong Kong flu," when share prices on the Hong Kong stock market
fell sharply. This could be the beginning of the long- predicted attack on
the yuan. As is well known, the PRC currency survived last year, and China
actually found itself in a better situation than the "Asian tigers."
And, finally, we cannot ignore the cyclical nature of market
economies. The upswing may be longer than usual (at six or seven years)
but sooner or later the other phase -- the downturn -- begins.
[Glukhov] Both Bill Clinton and Boris Yeltsin are in the home
straight -- their second terms are drawing to a close. It is well known
that the Russian president and his entourage are thinking about a third
chance. Is that option possible in the United States? Utilizing the levers
of power and economic conditions that have turned out successfully for him,
Clinton could find thousands of arguments in favor of his being the best
choice for Americans.
[Rogov] Nomination for a third term is absolutely out of the
question. Even a coup d'etat would not be enough to bring that about. You
would have to bomb America into nuclear rubble and destroy the American
nation and its entire Constitution.
Although in 1993 the United States supported the adoption of the new
Russian Constitution, no American would like to see such a constitutional
set-up in their own country. I have heard many Americans -- ardent
supporters of the Russian Constitution -- admit that they would fight to
the death to prevent, God forbid, any shift in the balance of power along
the lines permitted in Russia. It would be absolutely unacceptable to them
and would run counter to the main principles of U.S. democracy. It is not
ideal, but the separation of powers is what ensures soundness and stability
in the country.
[Glukhov] If a change in the White House incumbent is inevitable,
what are the chances of the Democrats and the Republicans?
[Rogov] In principle the chances of the Democratic candidate seem
more preferable today. The U.S. economy is developing stably and there are
no signs of any crisis. And, when there is no crisis, the party in power
is almost guaranteed to win the presidential election.
But Clinton could have some serious problems. It is probably too
difficult for us to understand why the Americans have been ranting so much
about some of the liberties he has allegedly taken in his private life. In
our country certain officials have been involved in pocketing whole sectors
of industry, the interests of certain bureaucratic groups, business, and
criminal organizations are broadly intertwined, and...nothing happens. Yet
the U.S. President's morals are put under the magnifying glass. That too
is a difference between America and Russia.
I do not think things will come to the point of impeachment, but the
continuing scandal could paralyze the Clinton administration. Economic
regulation could also be paralyzed to a considerable extent. Yet the
American state plays a huge -- many would even say excessive -- role in
regulating economic life. It operates by utilizing both normative acts and
the federal budget, which swallows up twice as much GDP as in Russia. This
is how the social sphere is financed. Social spending in the United States
currently comes to around 13 percent of GDP compared with 2.5-3.5 percent
in our country. And when extreme conservatives in the United States state
that there is creeping socialism in America, that is not such a great
Thus, if the Clinton administration were paralyzed and an economic
downturn phase were to begin, a return to power by the Republicans would be
[Glukhov] How will relations between Moscow and Washington shape up
in the event of a changing of the guard at the White House? Is it possible
to forecast how they would be affected?
[Rogov] Relations with Russia today are by no means the main question
in U.S. political life -- as was the case throughout the "Cold War." I
believe that there is no fundamental difference in attitude toward our
country between the Republics and the Democrats. There are nuances. The
split -- or, rather, the dividing line -- is to be found within the parties
rather than between them.
I would highlight three groups. The first is the small but vocal
group of Cold War veterans such as Kissinger or Brzezinski. One is a
Republican and the other a Democrat. They say: "Russia is so weak that it
should be driven beyond Mozhay [possible reference to World War II] and
weakened as much as possible so as to ensure that it can never play any
serious role in the world arena that the United States would have to take
Another group, including a whole host of figures in the current
administration, does not share that view. They believe that Russia should
not be strong enough to threaten America but should be a sufficiently
serious factor to be exploited in maintaining the balance of power in the
world -- including Eurasia, where there are currently bigger factors such
as Japan, China, and India, which is now staking its claims. The
supporters of this view believe that partnership is needed with Russia, but
of the kind where it is the junior partner and the United States the senior
Finally, there is a third group -- the biggest, which, however
annoying it may be to admit it, simply could not care less about what
happens in Russia. They not longer believe the old caricature threat
depicting Communists as armed to the teeth with atom bombs. We would be of
no greater interest to them than Upper Volta, were it not for the existence
of missiles. But that is another matter.
June 25, 1998
DEFENSE DOSSIER: START II Destined for Shelf
By Pavel Felgenhauer
Special to The Moscow Times
The Russian lower house of parliament, the State Duma, may continue its
session until August to consider the anti-crisis economic program
introduced this week by the Russian government. But no matter what
support, if any, this program will receive, it can be taken for granted
that the START II nuclear disarmament treaty will not be ratified before
the parliament goes into recess.
Of course, the Kremlin and the Russian Foreign and Defense ministries
will be making attempts to lobby for ratification, or will pretend to do
something. Pro-government Duma deputies will also make reassuring
noises. For example, this week, General Roman Popkovich, chairman of the
Duma defense committee from the Our Home Is Russia faction, said the
Duma will ratify START II "for sure." The Kremlin and officials from the
Defense Ministry argue that not ratifying START II will put Russia at a
disadvantage. The Russian (former Soviet) strategic arsenal is getting
old. Even without ratification of START II, hundreds of heavy
intercontinental strategic missiles will be inevitably decommissioned
several years from now. But the United States, they say, could keep its
present strategic arsenal if START II is not implemented.
At a March 1997 summit in Helsinki, presidents Bill Clinton and Boris
Yeltsin agreed on a compromise package to make START II fully acceptable
to all factions in the Duma. The United States agreed to postpone full
implementation until the end of 2007, instead of January 2003, and
pledged to begin serious talks to finalize a follow-up START III nuclear
disarmament treaty immediately after the ratification of START II. The
idea was that START III would turn START II and its ratification into a
mere formality. Also, the five additional years would allow Russia to
destroy most of its multiple warhead intercontinental missiles only
after they had served as long as technically possible.
The Helsinki agreement was formalized in New York last September by U.S.
Secretary of State Madeleine Albright and Russian Foreign Minister
Yevgeny Primakov, who signed both a protocol to modify START II and a
letter of understanding on the principles of distinguishing "strategic"
and "tactical" anti-ballistic defense systems. For some time, it seemed
that the Helsinki compromise could in fact help ratification. Last
spring, deputies and experienced Duma staffers involved in ratification
procedures expressed optimism. Hopes for START II were especially high
during the government crisis last April, when it seemed likely that
Yeltsin would include communists and nationalists in his government,
thus forming a broad coalition that could easily push legislation
Instead, Yeltsin formed a government without genuine support in any
fraction. All incentives vanished for the communist-nationalist majority
to vote for START II. Clinton said he would not come to Moscow for a
summit with Yeltsin unless the Duma ratifies START II.
But this revival of linkage politics backfired. Few deputies in today's
Duma are ready to do Yeltsin favors that will increase his international
standing and help him get more foreign aid. On the contrary, an
increasing number of factions are instead linking START II ratification
to different, unrelated issues. Even the formerly loyal Our Home Is
Russia faction now says a NATO invasion of Kosovo will permanently block
Apparently, the majority of Duma deputies are not impressed by the
threat of Russia's nuclear armed forces' unilaterally disarming while
the status of START II is in limbo. This crisiswill probably happen only
in the next century, when a new Duma will be elected. As the Russian
financial crisis intensifies, popular protests will grow, and the
communists can reasonably hope to topple the Yeltsin regime sometime
Of course, this new Russian anti-capitalist, anti-Western and
anti-liberal revolution may fail to materialize. In any event, the
communists will not allow START II ratification before the crisis is
somehow resolved. The communists will instead reserve START II final
approval until the day they again take over the Kremlin. Such a move
could help prevent any possible Western sanctions.
A communist government will need Western financial support no less than
the present one. And there will be chips to trade: START II, START III,
other arms control agreements. Only 10 years ago, all knew the key
words: peaceful coexistence, building bridges, detente. It will be easy
to apply them once again.
Pavel Felgenhauer is defense and national security affairs editor of