July 12, 1998  
This Date's Issues: 2259  •2260

|Johnson's Russia List
#2260
12 July 1998
davidjohnson@erols.com

[Note from David Johnson:
1. Rory MacFarquhar: Re: 2258-Williams/Huge Debt.
2. Sunday Times (UK): Mark Franchetti, Intrigue grips Kremlin as 
aides write off Yeltsin.
3. Bloomberg: Russia Says IMF Ready to Lend $11 Billion, N.Y. Times 
Reports.
4. Bloomberg: Russia Hurries to Conclude Loan Talks With IMF Before
Monday.
5. Washington Post: Fred Hiatt, As Russia Limps Along.
6. Irish Times: Investors at odds over dangers of Russian roulette.
7. Washington Post: Anders Aslund, If the Ruble Goes Under, So Could
the Region.
8. The Independent (UK): Phil Reeves, Joy and regrets of the man who 
found the Tsar.
9. Sovetskaya Rossiya: Ilyukhin Remarks on Army Support Movement.]

*******

#1
Date: Sat, 11 Jul 1998 
From: Rory MacFarquhar <ramacfar@fas.harvard.edu>
Subject: Re: 2258-Williams/Huge Debt

Dear David,

The article by Carol J. Williams on Russia's debt (JRL 2258) is one of the
most shoddy piece of journalism on the Russian economy that I have ever
seen, starting with the title.

>Russia Reveals Grim Extent of Debt 
>Economy: Arrears equal 44% of country's net worth, prime minister says. 

First, a government debt to gross domestic product (GDP) ratio of 44% is
not "grim" - it's not even high by international standards. The ratio in
Germany is over 60%, and in Italy it's over 120% of GDP. In many
developing countries, government debt is several hundred percent of GDP.
That is grim. Second, gross domestic product is not "net worth", as the
headline suggests: it is one year's national income. There's a huge
difference. 

>     Only a month ago, the prime minister put the debt at less than 
>one-third of the GDP. The percentage of debt has risen sharply in part 
>because Russia has had to borrow at higher and higher interest rates to 
>retire maturing treasury bills. 

Wrong. A month ago the Prime Minister announced that debt service costs
were a third of total federal government spending. The debt to GDP ratio
has not been 33% of GDP for many, many years. By some estimates, the ratio
has actually fallen in recent years, as the rouble has appreciated in real
terms against the dollar (in which roughly half the debt is denominated).
If the article's claim were true, Russia would have to have borrowed $50 bn
more than it repaid in the last month - beyond the wildest dreams of the
government.

>     Russia has relied on sales of its abundant oil to fill government 
>coffers and make up for its chronic failure to collect taxes. 

Wrong. The Russian government itself does not derive any direct revenue
from oil sales; it TAXES oil sales by privatized and state-owned oil
companies. It is exactly these oil companies that have been running up
large tax arrears. So oil sales in no sense "make up for [the government's]
chronic failure to collect taxes".

>     Panicked Russian and foreign investors have been scurrying to pull 
>their rubles out of tumbling markets and trade them for more stable 
>dollars, which has drained Russia's hard-currency reserves to $11 
>billion from $24 billion only two months ago. 

Wrong. Where does she get these numbers from? According to the Central
Bank of Russia (http://www.cbr.ru/dp/statistics.html - the only source of
information on hard currency reserves), on June 1, 1998, reserves
(including gold) were $14.6 bn. Granted, they may have fallen since then.
But two months ago, on May 1, reserves were only $16 bn. They peaked at
$24.5 bn last July, but fell below $24 bn in August, 1997 (11 months ago,
by my count), and have been falling steadily since. The biggest drop in
reserves came in the last quarter of 1997, as Russian households (not
foreign investors) sold roubles ahead of the January 1 redenomination.

>     The economic news has been so overwhelmingly negative in recent 
>days...

Russia has enough genuine financial problems without Western journalists
adding to the panic through bad reporting. 

*******

#2
Sunday Times (UK)
July 12 1998
[for personal use only]
Intrigue grips Kremlin as aides write off Yeltsin 
by Mark Franchetti 
Moscow 

AS A shrewd and loyal aide to the Russian president, Igor Shabdurasulov 
is well acquainted with the most important rule in the complex world of 
Kremlin power politics: never criticise Boris Yeltsin in public. 
Moscow was astonished, therefore, when Shabdurasulov, the deputy chief 
of the presidential administration, told a Russian newspaper last week 
that Yeltsin's health was failing and that he should not seek a third 
term in elections in 2000. 

Coming from so deep inside the Kremlin at a time when Russia has been 
plunged into a profound economic and political crisis, his remarks 
caused a sensation. 

"All these years have exacted a price," said Shabdurasulov. "One cannot 
say that Yeltsin's physical condition is the best; that he is full of 
strength and activity for round-the-clock work. I think he has built up 
a burden of weariness - physical and psychological - that can outweigh 
the eternal striving of any politician for power." 

The Kremlin reacted swiftly, emphasising that its man had been 
expressing a personal opinion. Viktor Khristenko, a deputy prime 
minister, said such loose comments were irresponsible because they could 
further upset Russia's turbulent financial markets. 

Shabdurasulov's assessment may reveal more about the rising climate of 
unease in the Kremlin than about Yeltsin's health. Only a few days 
earlier, Sergei Shakhrai, another experienced aide, had declared his 
support for Yuri Luzhkov, the mayor of Moscow and an ambitious contender 
for the presidential crown. Shakhrai was sacked within hours. 

Yeltsin has not yet made up his mind whether to run again in 2000, amid 
a constitutional wrangle on the legality of a third term. But most 
erstwhile supporters doubt he could survive an election campaign, let 
alone win it. 

As uncertainty increases about Yeltsin's future, a growing number of 
Kremlin insiders are pondering whether they should leave soon enough to 
secure re-entry to the corridors of power under the next president. "The 
rats are leaving the sinking ship," said Yevgeny Volk, a political 
analyst. 

Yeltsin, 67, had little to celebrate as he marked the anniversary of 
seven years in power recently. Two years into his second term, he has 
never been so unpopular. Only 4% of those questioned in a nationwide 
poll last month said they would vote for him if an election were held 
now, and 51% said he should resign before the next election. 

The stock market has crashed by more than 60% this year, and with the 
rouble on the edge of a precipice, short-term interest rates have risen 
to 80% - nearly four times their level last autumn. Acknowledging the 
seriousness of the crisis, Yeltsin postponed his summer holiday last 
week, even though his doctors had ordered four weeks of rest. He 
telephoned Helmut Kohl, the German chancellor, Jacques Chirac, the 
French president, and Tony Blair to seek support for his attempt to 
persuade the International Monetary Fund (IMF) to shore up the rouble 
with a $15 billion loan. 

President Bill Clinton showed his solidarity by agreeing to visit Moscow 
in September. Although talks with the IMF were continuing yesterday, the 
indications were that Russia would get its way. 

Yeltsin has added to the sense of foreboding, however, by raising the 
spectre of a political coup against him. "We are strong enough to curb 
all plans for seizing power and other extremist plans," he said in a 
speech to senior military commanders in the Kremlin. "They will fail. 
Russia needs strong authority rather than a strong hand." 

Coming only hours after he promoted three key generals and promised yet 
again to speed up desperately needed military reform, the warning was 
seen as a sign that he is uncertain of the army's loyalty. 

Moscow was swept by frenzied speculation. A leading newspaper controlled 
by Boris Berezovsky, a tycoon and master of Kremlin intrigue, had 
claimed several days earlier that a putsch was being prepared by 
security forces. 

Activities by extremist groups are on the increase, with repeated 
attacks on foreigners, synagogues and Jewish cemeteries, and in a series 
of initiatives to exploit seething national discontent, a growing number 
of extremists are entering politics. They include the ultra-nationalist 
Russian National Unity paramilitary organisation, which plans to run in 
next year's parliamentary elections. 

"Fascist ideology is offering simple recipes for dealing with difficult 
problems and is making up bogus enemies as an outlet for the negative 
energy accumulated in society," said the country's presidential 
commission on human rights in a statement. 

While evidence of an impending coup is scant, there is no shortage of 
people calling for Yeltsin to step down. Last week, hundreds of miners 
who have not been paid for nearly a year went on strike, blocking the 
Trans-Siberian railway from Moscow to the Pacific. Their protests are 
spreading to doctors, teachers and defence workers. 

"It was the miners who brought Yeltsin up in 1991 and it will be the 
miners who will bring him down in 1998," warned Alexander Sergeyev, 
chairman of the 50,000-strong coal miners' trade union. 

The scale of anti-government feeling was evident at the funeral of 
General Lev Rokhlin, a war hero turned opposition politician who was 
murdered in his sleep last weekend - allegedly by his wife, who has been 
charged with shooting him. 

Although no evidence has emerged that he was killed for political 
reasons, conspiracy theories are multiplying. His funeral became a 
vociferous anti-Yeltsin demonstration of more than 10,000 people. No 
government representative attended. 

Significantly, Luzhkov did. Like Alexander Lebed, the gruff former 
paratrooper general and Kremlin security chief who has made a political 
comeback as governor of the Krasnoyarsk region of Siberia, Luzhkov has 
set his sights on the Kremlin. Populist, strong-armed and supremely 
confident, they are the two politicians who stand to benefit the most 
from the mood of popular frustration. 

It is the economy, however, that lies at the heart of Yeltsin's 
problems. The effects of an earlier crisis that plunged Russian 
financial markets into free-fall in March had little initial effect on 
ordinary Russians waiting for months to receive their salaries or to be 
paid risible pensions. 

This could change, however, if the government is forced to devalue the 
rouble. The move would almost certainly be followed by a sharp rise in 
inflation, which is currently around 10%. 

Sergei Kiriyenko, 35, the prime minister appointed three months ago 
after Yeltsin sacked his entire government, vowed again last week to 
defend the currency. But his assessment of the country's economic health 
as he prepared to push a crisis package of spending cuts through the 
duma - the lower house of parliament - was dire. "The financial market 
has practically ceased to exist," he said. 

Despite positive signals from the IMF, economists said the hoped-for $15 
billion loan - to boost depleted foreign currency reserves and protect 
the rouble from devaluation - would be only a temporary measure. 

*******

#3
Russia Says IMF Ready to Lend $11 Billion, N.Y. Times Reports

Washington, July 12 (Bloomberg) -- The International Monetary Fund is ready to
provide Russia with $11 billion in new loans, The New York Times reported,
citing unnamed Russian officials. About half the new funding will be made
available immediately and the rest by the end of the year to stave off the
government's cash shortage, the Times reported. The IMF wanted to lend Russia
$5.6 billion but came under pressure from the U.S. to provide more, the report
said. 

Russia has to make payments of $1.5 billion on maturing debt this week, and
the IMF and Moscow are striving to reach agreement before the Russian bond and
stock markets open Monday morning. 

*******

#4
Russia Hurries to Conclude Loan Talks With IMF Before Monday

Moscow, July 12 (Bloomberg) -- Russian Prime Minister Sergei Kiriyenko met
International Monetary Fund officials as Russia hurries to conclude talks on a
loan of as much as $15 billion to bolster Russian reserves and avoid a
devaluation. 

Facing debt payments of $1.5 billion this week as reserves dwindle, the
government needs an agreement with the IMF this weekend to avoid a further
sell-off of Russian stocks and bonds when markets open Monday, analysts said. 

The markets have positioned themselves for a major IMF- led bailout package
this weekend,'' said Eric Kraus, chief strategist at Regent European
Securities in Moscow. ``If no agreement comes through, a black hole is going
to open up under our feet. It would appear that the system can only hold for a
few more days in the absence of some turn in capital flows.'' 

Anatoly Chubais, Russia's envoy to the IMF, has been in negotiations for the
past two days with John Odling-Smee, director of the IMF's second European
department. Yesterday, a ``number of concrete agreements'' were reached,
Chubais' spokesman said, and today Kiriyenko and other government officials
joined the talks. Today's talks are ``the final stage of negotiations,'' said
Andrei Trapeznikov, Chubais' spokesman. 

Later today, Kiriyenko and Central Bank of Russia Chairman Sergei Dubinin will
travel to Japan. Dubinin will attended a meeting of Bank for International
Settlements and Kiriyenko will meet with Japanese leaders. 

In recent days, pressure on the IMF to reach an agreement has increased as
Western leaders have called for a quick conclusion to the talks. During a trip
to Africa, U.S. Treasury Secretary Robert Rubin said, ``We've been working
very energetically in support of an IMF program and appropriate support for
Russia. They are obviously experiencing some substantial difficulty right now
and I think it is critically important that a program be put in place.'' 

Russian Markets 

Russian stocks and bonds gained on Friday on expectations that an agreement
with the IMF is imminent. The Russian Trading System stock index rose 5.8
percent, its biggest one-day gain since June 17. Russia's 9 1/4 percent
Eurobond maturing in 2001 posted its biggest one-day gain since Dec. 5,
pushing the yield down 1.02 percentage points to 16.07 percents. 

The IMF insists that a loan be tied to significant fiscal reforms by the
Russian government, which is heavily dependent on expensive short-term
borrowing to finance its operations. The government is trying to push an
austerity program comprising new tax laws and spending cuts through the
parliament. 

At current rates above 120 percent, selling ruble- denominated Treasury bills
and bonds may no longer be an option for the government. It's also struggling
to sell state-owned companies, and on Friday delayed the sale of a 75 percent
stake in oil company RAO Rosneft after the main bidders, including Royal
Dutch/Shell Group and British Petroleum Plc, said they wouldn't participate in
the tender. 

Debt Payments Due 

At the same time, the government faces more than $30 billion in debt payments
this year and central bank reserves have fallen to about $15 billion,
including more than $5 billion in gold. This month, Russian commercial banks
must repay about $565 million syndicated loans, according to United Financial
Group in Moscow. 

The banks also hold about $450 million in dollar forward contracts that expire
July 15. If the ruble loses value before then, the banks would be forced to
sell their holdings of Treasury bills and bonds at a loss to cover the
contracts. 

On Friday, President Boris Yeltsin spoke to U.S. President Bill Clinton and
other Western leaders by telephone. White House spokesman Mike McCurry said
that Russia has ``done a lot of work to satisfy some of the concerns that have
been raised by IMF officials who are in Moscow.'' 

It's time,'' McCurry said, ``for these negotiations to come to closure.'' 

Concern about the precarious state of government finances has pushed the RTS
stock index down 25 percent since June 1, and more than 63 percent since the
first of the year. The yield on the 9 1/4 percent Eurobond has risen more than
5 percentage points since the first of the year. 

*******

#5
Washington Post
July 12, 1998
[for personal use only]
As Russia Limps Along
By Fred Hiatt
The writer is a member of the editorial page staff. 

Last week Russian space officials announced they'd be launching the next 
Mir space station crew 10 days late because the space program had failed 
to pay its electricity bill. Few in the West paid much attention to this 
latest humiliation, nor to more serious setbacks such as the endangered 
ruble, protesting defense workers or coal miners blockading the 
trans-Siberian railroad: just another day in post-Soviet Russia.

For a long time after the Soviet Union collapsed, many people imagined 
that the next phase of Russian history would follow a well-defined plot 
-- and that we would have some sense, soon, of whether it would end 
happily or not. The story had opened with such drama back in 1991, when 
Boris Yeltsin rallied his citizens from atop that famous tank, that it 
seemed only natural to expect a brisk denouement.

Yeltsin himself encouraged that expectation when, at the very start of 
Russia's radical economic reforms, he warned his people they were facing 
six months of hard times. That was 6 1/2 years ago.

Most economists agreed that Russia could not survive without radical 
change. Through decades of Soviet decline, they said, gold and oil 
exports had kept alive a giant military and industrial complex that 
literally subtracted value, producing things worth less than the raw 
materials that went into them. But the gold reserves had run out and the 
oil wells were rusting; something had to give.

So there were two scenarios. Radical reform would take hold, the economy 
-- after an initial swoon -- would begin to recover in a new, healthy 
form and, by the year 2000, Russians would feel hopeful enough to elect 
a pro-democracy, pro-market president to replace Yeltsin. Plot summary: 
Everyone lives happily ever after.

Alternatively, reforms would fail and catastrophe would ensue: mass 
starvation, a splintering of the country, vengeful mobs on the street, 
Communists or fascists at the helm.

Six and half years later, anything remains possible. No one ever got too 
far in the Russia-watching business by betting heavily against disaster.

But as Russia has limped from one crisis to another, another scenario 
has emerged: that Russia might struggle through years or even -- painful 
as it is to contemplate -- decades of muddle, always hanging on but 
never getting well. As in post-independence India, some regions would 
outperform others, some people would prosper while others failed, but 
Russia itself would remain perpetually on the edge of the abyss, never 
quite tumbling in.

An intriguing new analysis by Clifford G. Gaddy of the Brookings 
Institution and Barry W. Ickes of Pennsylvania State University suggests 
how this might work economically.

More than half of all transactions among Russian industrial enterprises 
today are conducted in barter, not with money, they say; large 
enterprises pay only 8 percent of their taxes in cash. This matters, not 
because barter itself is necessarily evil but because it allows the 
country to operate with an entire system of phony accounting. 
Enterprises overestimate the value of the products (shoes, cheese, 
construction services) that they use for barter; they then can claim to 
produce more value than they do, the government pretends to collect more 
taxes than it does, and so forth.

What this means, in turn, is that the system that kept Brezhnev's Soviet 
Union afloat has changed much less than at first glance it appears. A 
small value-producing segment of the economy -- led by the 
natural-gas-exporting giant Gazprom -- continues to subsidize an 
industrial sector that subtracts value with every operation. Instead of 
the Party openly channeling subsidies to state-owned enterprises, the 
new government disguises its subsidies to nominally privatized firms 
through phony barter accounting. Rusting oil wells (and falling oil 
prices) as predicted produce dwindling revenues; but because of ruthless 
cutting of the military sector, especially from 1991 to 1994, the 
value-subtracting sector has gotten much smaller, too. Meanwhile, new 
economic freedoms -- to grow vegetables, to travel to Turkey or China 
with suitcases of goods to trade, to start small businesses -- lubricate 
the system enough to allow almost everyone to survive above starvation 
level.

This model may underestimate the level of new, private enterprise that 
creates jobs but stays hidden to avoid paying taxes. But it offers one 
view of how Russia might limp along for a long time with neither real 
reform nor total collapse.

Those who expected and even wanted Russia to fail see in the postponed 
happy ending a vindication. They are wrong. Russia in many ways remains 
even today a remarkable success story -- freer, more democratic, more 
peaceful toward its neighbors than at virtually any time in history.

Those who expected the happy ending now show signs of getting bored, 
giving up and turning toward something more exciting (China, say). 
That's wrong, too, of course. The dangers that first attracted U.S. 
attention -- beginning with loose nukes -- remain as worthy of attention 
in 1998 and, perhaps, 2008 as they were in 1991. The mere possibility of 
prolonged muddle is no excuse for complacency, because catastrophe 
certainly can't be ruled out.

The potential rewards of engagement remain, too -- the vision of a 
peaceful, prospering Russia integrated into the West. That such a vision 
may be a generation rather than a year or two away doesn't lessen the 
importance of working toward the goal. It just requires more staying 
power and a longer attention span. Neither of those is a Washington 
specialty these days.

*******

#6
Irish Times
July 10, 1998
[for personal use only]
Investors at odds over dangers of Russian roulette 

Russia and its problems may seem remote to most of us why, it is not 
even playing in the soccer World Cup, but as it tries to tie up 
emergency funding with the IMF, its crisis could be more important for 
the rest of Europe, and for investment markets, than we think. It 
depends, though, on whom you believe.

"No, Russia is not Europe's Thailand," declares Mr Brian Mullaney, at 
HSBC Securities. Russian contagion will definitely not prove as virulent 
as the Asian phenomenon.

But Mr Martin Armstrong, at Princeton Economics, warns that an imminent 
Russian economic collapse is a bigger threat to the rest of Europe than 
the Asian slump. "The real crisis is in Russia," he insists.

Or is it? Mr Francois LangladeDemoyen, at Credit Suisse First Boston, 
even manages to find an optimistic angle. He says Russian turmoil and 
the associated capital flight "may well prove to be positive for 
European equity markets".

Certainly, the main continental European stock markets have flourished 
in recent months, even taking over the bull market's baton from Wall 
Street. With the first half of 1998 over, the Europe ex-UK index is up 
30 per cent, compared with 16 per cent for the US. The Pacific Basin 
index has fallen a further 12 per cent during the six months.

Indonesia ranks as the weakest stock market in dollar terms this year, 
but Russia's index decline of 59 per cent is scarcely better. Russia has 
escaped an Asian-style banking collapse, but it shares problems of 
rampant corruption and dependence on a shaky currency peg to the dollar. 
The latter has exposed Russia to the ill-effects of a collapse in the 
oil price (which might better be viewed as a rise in the dollar), and 
the country's oil barons are said to want a big devaluation to restore 
profitability.

Devaluation is ruled out officially, though, because it would frighten 
the foreigners who provide almost a third of the government's $60 
billion (£43 billion) of short-term finance. Although overall 
indebtedness is not high, its average term is very short and the 
government has to roll over an average of 8 billion roubles each week 
which is why it hoisted interest rates temporarily to an annualised 150 
per cent, at one stage last month.

A devaluation, incidentally, would also ruin the financial institutions 
which live dangerously off the speculative spread between dollar rates 
of 6 per cent and rouble rates roughly 10 times as high. But the rouble 
seems doomed, anyway.

Right now, Russian consumer price inflation is only about 7.5 per cent, 
but there is a recent history of hyperinflation and the rouble might go 
into free fall if confidence collapsed. Although the International 
Monetary Fund agreed to release another $670 million in short-term 
support on Thursday, a mooted $15 billion package remains stalled; the 
IMF does not want to finance another round of capital flight, which has 
been running at $20 billion a year although flowing more probably into 
dollar cash and bonds than European stocks.

Such a shaky financial set-up can perhaps be held together in favourable 
times, when global investors have made money on some good bets and are 
willing to punt their winnings in other high risk areas. Easy come, easy 
go; but stock market investors have faced the problem that while 
corporate Russia may have to wait years before they lose their third 
world characteristics the stock market fell 39 per cent in May alone.

Is Europe threatened? The trade impact of a Russian meltdown would be 
serious for some east European countries for which Russia, on average, 
accounts for a tenth of exports. Western Europe's involvement is fairly 
negligible, however, except for Germany where Russia represents about 
5.5 per cent of overall trade. Germany also is the most heavily involved 
financially, with some $30 billion lent to Russia. 

These economic and financial hazards look containable. Regardless, 
Germany's DAX index has been hitting all-time highs this week. The 
political risks are more worrying, though: it could turn out that we are 
only a Boris Yeltsin heartbeat away from the collapse of the economic 
reform process.

The Americans are busy with trouble spots elsewhere. Having 
diplomatically lost at soccer to Iran, they are now wooing China and 
addressing the problems in Asia, which is so much more important to them 
than Russia.

Within the past week or so, it has appeared that safe-haven flows into 
the dollar have strengthened, helping to send Wall Street sharply higher 
despite the imminence of a poor second-quarter corporate reporting 
season.

Europe's bull market is intact, but it has very much depended on flows 
from the US, with American investors convinced that sluggish Europe 
might somehow embrace US-style restructuring. If more Americans come to 
perceive, like Mr Armstrong, that western Europe is threatened on its 
doorstep by a kind of Indonesia bristling with nuclear weapons, they 
might take their money home, or perhaps send it back to a restabilised 
Asia.

Those suitcases stuffed with Russian mafia dollars are unlikely to 
provide an adequate substitute, bulging though they are reliably said to 
be. - Financial Times Service 

*******

#7
Washington Post
July 12, 1998
[for personal use only]
If the Ruble Goes Under, So Could the Region
By Anders Aslund
Anders Aslund is a senior associate at the Carnegie Endowment for
International Peace. He served as an economic adviser to the Russian
government from 1991 to 1994. 

Russia is in a rampant financial crisis. Interest rates of short-term
treasury bills have jumped to 120 percent a year, the stock exchange has
fallen by over 75 percent from its peak last October, and the Central Bank
is losing several hundred million dollars of hard currency reserves every day.

In light of these developments, there are growing fears that the ruble will
succumb, possibly with catastrophic consequences. An involuntary devaluation
would devastate remaining confidence in the currency, sending panicky
individuals and businesses in Russia to sell rubles for dollars, further
reducing its value. With popular reluctance to hold on to a depreciating
currency, spending would rapidly increase and inflation would surge. The
cost of servicing the foreign debt would also soar. With large debts in hard
currency, Russian banks are overexposed, so that even a limited devaluation
would drive most big banks into bankruptcy.

Bulgaria faced a similar disaster two years ago. Its budget deficit was
excessive, the government failed to service the state debt, most big banks
failed, and there was a run on the currency. Within a year the Bulgarian lev
was worth only 2 percent of its previous value. Inflation rose to 600
percent in 1997, and GDP fell by about 10 percent in both 1996 and 1997.
Impoverished, people took to the streets by the tens of thousands, forcing
early elections. The post-communist government which had led Bulgaria into
deep trouble was ousted, and a liberal reform government took power.

Russia's present economic policy is better than Bulgaria's was, but if the
ruble collapses, panic, economic ruin and widespread suffering are likely. A
devaluation of 80 percent to 90 percent is possible, at which point
inflation would be measured in the hundreds of percent, and output would
plummet. Politically, forces of populism and nationalism would predominate,
as people demanded punishment of the culprits.

Nor would the crisis stop in Russia. Ukraine, which faces similar problems,
is so closely integrated with Russia that it would be compelled within days
to devalue its currency. In spite of better economic policies, Kazakhstan
and some of the other former Soviet states would probably follow suit. A
large part of the former Soviet Union could be involved in an economic
meltdown with consequent political and social chaos. In some places,
reformers might gain the upper hand, as they did in Bulgaria, but in Russia
it is the reformers who would all too likely be blamed.

Almost everyone would suffer from such a devaluation, except for the Russian
tycoons who control the large companies that produce oil, gas and metals.
These firms would benefit as wages and other domestic production costs fell,
while they exported much of their output. With their earnings, the tycoons
could rapidly buy up cheap assets in Russia and other countries hit by the
spreading chaos.

It is no wonder that several Russian oil and gas barons have demanded
devaluation. Tellingly, Nezavisimaya Gazeta, the newspaper owned by the
billionaire tycoon Boris Berezovsky, is urging devaluation as it calls for
the ouster of President Boris Yeltsin, his cabinet and Central Bank Chairman
Sergei Dubinin. The newspaper proposes that former prime minister Viktor
Chernomyrdin replace Yeltsin as Russia's new leader. Chernomyrdin has never
challenged the interests of big businessmen, least of all those of
Berezovsky, who has huge holdings in energy, the media and automobiles, and
is casting about for new acquisitions.

Berezovsky and some of the other Russian tycoons are no friends of a free
market or an open society. On foreign policy, his newspapers and television
stations have become virulently anti-American. It would be a tragedy if
Berezovsky and his kind win out, since their Russia is likely to resemble
the Serbia of Slobodan Milosevic or the Belarus of Alexander
Lukashenko--corrupt, chauvinistic, anti-Western, isolationist and not very
democratic.

Thus, the discussion about devaluation in Russia ultimately concerns the
future of democracy, the market economy, the rule of law, and an open
society in the whole region. That is why the International Monetary Fund
(IMF), the World Bank and the West should do their utmost to help Russia out
of its quandary.

No international support can be effective, however, if the Russian
government does not help itself by getting the budget deficit under control
and curbing the lawlessness of its bureaucrats and big businessmen. The IMF
is right to insist on firm conditions, but it must be able to mobilize
sufficient financing in a timely way. Many of the current reforms in Russia,
such as the strengthening of property rights, fall under the purview of the
World Bank, which is concerned with structural changes. The bank should play
a much more prominent role both in setting conditions for this package and
in financing it. But it tends to be less focused and act more slowly than
the IMF.

The outside world can provide only a limited lifeline of liquidity, but such
help may be critical for the future of Russia. Time is short, and the more
of it spent on preparing a financial support package, the more financing
will be needed to save Russia.

Many argue that the ruble is grossly overvalued, but there are signs of
underlying strength. In each of the last four years, Russia has had a
substantial trade surplus--about $20 billion. Falling prices of the major
Russian export commodities--oil and metals--will reduce the surplus this
year, but it will nonetheless remain significant. The balance of payments is
slipping, but even so it was roughly in equilibrium last year, compared to
most post-communist economies which have deficits of 5 percent to 20 percent
of GDP. Because of declining export prices, Russia might have a
current-account deficit of 2 percent to 3 percent of GDP this year, a level
normally not cause for concern.

Countrywide price inflation is down to 7.5 percent a year and the total
government debt burden is manageable at about 45 percent of GDP, which is
modest compared to Western Europe. However, short-term debt in treasury
bills of about $70 billion is an immediate concern, because of their
extraordinarily high interest rates, which reflect declining investor
confidence in Russia. Two thirds of these treasury bills are held by Russian
state banks, which will keep them. The problem is $25 billion in treasury
bills owned by wary Russian commercial banks and foreign investors. To
restore confidence, many economists have proposed that Russia get some kind
of stabilization credit of $10 billion to $15 billion to replenish
international reserves to a level of $20 billion to $25 billion.

In the very short term, there are only three possible sources of financing:
the IMF, the World Bank and Eurobonds. The Russian government initially
asked for a Supplementary Reserve Facility (SRF) of $10 billion to $15
billion from the IMF, but the IMF is reluctant. The SRF is meant to provide
short-term financing, while what Russia needs is medium-term support,
covering a period of three to five years. Since the IMF is too short of
funds to provide the whole credit, a more realistic solution would be a
mixed package of $15 billion to $20 billion to compensate for declining
reserves.

The IMF could expand its current medium-term loan, the Extended Fund
Facility (EFF), with an additional $8 billion to $10 billion. The World Bank
could add some $3 billion in so-called adjustment loans on condition of
serious reforms. In addition, Russia could possibly raise a few billion
dollars in bilateral loans from Japan, from the EU and through the European
bond markets. Such a package would be sufficient to reinforce Russia's
international reserves and salvage the ruble exchange rate. An IMF agreement
and a first IMF disbursement could be concluded within a month.

The underlying problem must first be solved, however: Russia must correct
the large budget deficit it has maintained for too long. Both in 1996 and
1997, it had a consolidated government budget deficit of about 8 percent of
GDP. This year, the government has undertaken heroic cuts, but the sins of
the fathers fall upon the sons, and the federal deficit can hardly be
reduced to less than 5 percent of GDP because of the large debt service. For
the next year, however, the Russian government and the IMF have agreed that
the deficit should be reduced to a maximum of 2.5 percent of GDP.

With a significant IMF-World Bank package in place, Russia could raise a lot
of private investments within the next six months. The current crisis is a
good reason to speed up remaining privatizations, and quite a few have been
prepared. A large number of foreign investments could be forthcoming in
industries such as food processing and car manufacturing, which are booming.
Russia received foreign direct investments of $6 billion in 1997, and that
was only a beginning; its financial market could attract substantial
portfolio investments again.

The causes of the Russian crisis are not all financial. During the last
year, most foreign investors have been frightened off by outrageous abuses
against minority owners in both small and large enterprises. By numerous
means, several of the new big businessmen have unlawfully deprived Russian
and foreign minority shareholders of their property in public joint stock
companies. To date, the Russian state has been unable to stop this theft,
which has proliferated. Until the Russian state can show some ability to
defend private property rights, few dare invest in Russia.

*******

#8
The Independent (UK)
12 July 1998
[for personal use only]
Joy and regrets of the man who found the Tsar 
>From Phil Reeves in Moscow 

DOWNGRADED by the church, boycotted by part of the family, and 
downplayed by the state, this week's reburial of the remains of Russia's 
last tsar, Nicholas II, seems doomed to be a damp squib. What, though, 
of the man who started it all - the Russian who, working amid intense 
secrecy, tracked down the royal remains? 

Alexander Avdonin has spent the best part of his life investigating the 
whereabouts of the Romanovs, who were shot by a Bolshevik firing squad 
in 1918. The executions happened in his home town, the Urals city of 
Yekaterinburg, which for years afterwards was awash with rumours that 
the skeletons of the royal family had been dumped somewhere in the area. 
Fascinated to the point of obsession, Mr Avdonin, a geologist by 
training, decided to find them. 

That quest finally came to an end when scientists from several 
countries, including Britain, confirmed through DNA tests that a 
collection of acid-charred bones, exhumed in July 1991, were indeed 
those of the tsar, his wife Alexandra, three of their four daughters, 
their doctor and three servants. 

Yet, far from closing a terrible chapter in Russian history, the 
recovery of the bones has reopened the wounds that have lingered for the 
entire century. As the issue has soured steadily - last week one branch 
of the Romanovs condemned the royal burial as "an insult" to the tsar's 
memory - Mr Avdonin has been looking on with mounting despair. 

"I used to think this would unite the divided Russian nation, that it 
would help reconcile us and that it would heal the rift within the 
Church," he told me. He has, however, now amended that "naive" view. 
True, he takes satisfaction from the fact that the Russian government 
both acknowledges that these are the remains of the Romanovs, and that 
they were murdered - a crime never recognised by the Soviets. 

But the Russian Orthodox Church, anxious to appease elements within it 
which refuse to accept the authenticity of the bones (notably the 
Orthodox Church Abroad), has withheld its support. The patriarch, Alexy 
II, confirmed as much last week, saying the Church could not recognise 
the tsar's remains, as "the Church, society and scientists are split on 
the issue". The question is further complicated by the possibility that 
the tsar and his family may be canonised. "Following canonisation the 
remains of the saint become a revered relic," the patriarch told Profil 
magazine, in his clearest explanation to date of the controversy. 

"It would be inadmissible if some part of the Church called the remains 
a fake while the other part of the Church revered them." The ruling 
synod has therefore decreed that no senior clerics will be taking part 
in Friday's ceremony in St Petersburg. 

"I felt it was important for the Patriarch to recognise it, " says a 
disappointed Mr Avdonin. "It would have meant reconciliation, that we 
repent of this crime, and are moving towards a society of the people who 
are morally clean. It would have meant that we are pulling these 
splinters, these abscesses out of our body. It is said wars aren't over 
until the last dead soldier is buried. We are burying now the first 
victim of the civil war, but the situation reveals that civil war isn't 
over yet." 

He continues: "The Moscow Patriarch's office has excommunicated the 
Church from science. This is the second time this has occurred. They 
didn't like Copernicus' notion that the Earth revolved around the Sun 
and not vice versa, so they excommunicated him. Many years later the 
Church had to rehabilitate him. Now they face other scientific facts 
which are just as firm." 

Mr Avdonin has every right to feel both sad and indignant, given the 
risk and effort that he endured in the search for the bones. Working in 
extreme secrecy to avoid attracting the interest of the KGB and certain 
punishment, he and a colleague - the Soviet film-maker, Geli Ryabov - 
located the shallow grave about 12 miles from Yekaterinburg in the 
1970s. In 1979, they dug into the pit and exhumed several skulls, but 
replaced them the following year, vowing to keep silent about their 
discovery until the political situation in Russia changed. 

"That was a remarkable time," says Mr Avdonin, now in his sixties. 
"People did not want to talk about the subject, because it was 
dangerous. To get information from them, one had to approach them very 
cautiously. It was impossible to ask questions on the phone, because 
nobody would ever answer any. It was impossible to record people, 
because there were no tape-recorders. It wasn't even possible to write 
anything down with a pen or pencil." 

They keep everything they discovered in their heads, storing it away as 
oral history which - had the repressive Soviet state survived - they 
intended to pass down to the next generation by word of mouth. Mr 
Avdonin's eldest son was chosen for the task. 

But in 1989, in the midst of Mikhail Gorbachev's perestroika, his 
partner, Mr Ryabov, let the cat out of the bag during a newspaper 
interview. Mr Avdonin was furious - and he remains opposed to the 
decision. 

"I did not believe - and everyone can see it now - that we were ready 
for this. Our country is not ready, and possibly the world is not ready 
either. It was Ryabov's initiative. I begged him not to reveal it, but 
he went ahead. It wasn't my fault. I was right. He himself can see that 
now." 

*******

#9
Ilyukhin Remarks on Army Support Movement 

Sovetskaya Rossiya 
July 9, 1998
Report by ITAR-TASS correspondent Lyudmila Aleksandrova: "New
DPA Leader"

Moscow, 8 Jul -- Today's extraordinary congress of the All-Russia
Movement in Support of the Army, the Defense Industry, and Military Science
[DPA], which was made necessary by the death of its leader Lev Rokhlin,
fully confirmed the political course being pursued by the DPA. This was
stated during a news conference at the end of the congress, which took
place behind closed doors, by Viktor Ilyukhin, the DPA's new chairman and
chairman of the Duma Security Committee.
He also announced that congress participants had elected the
movement's three deputy chairmen -- General Albert Makashov, Don Cossack
Host leader Nikolay Kozitsin, and Duma Deputy Igor Bratishchev.
According to V. Ilyukhin, the congress adopted a number of
resolutions, which reaffirmed the movement's political line, as pursued by
the former DPA leader. Delegates adopted several appeals -- to the State
Duma, the general prosecutor, along with an appeal to all DPA members.
In its statement to the Duma the congress asked deputies to set up a
special commission to monitor the investigation into Lev Rokhlin's death. 
The appeal to the general prosecutor voiced the view that a number of
prosecutors made statements prematurely without any conclusions from expert
establishments regarding the involvement of Rokhlin's wife Tamara in the
murder. In the appeal to DPA members congress delegates urged them to
strengthen discipline within the movement.
Ilyukhin gave assurances that the movement would continue to seek
an end to the policy "that is leading the country to its ruin." "We will
not allow Russia to be further disarmed," he said, adding that all legal
methods will be employed to this end.
When asked by journalists about the reason for his election as leader
of the DPA, Viktor Ilyukhin noted that, as head of the Security Committee,
like Lev Rokhlin in his time as chairman of the Defense Committee, he has
examined questions "which coincide in essence and content." Thus,
continuity of leadership is ensured, he believes.
Igor Bratishchev said that "by the roughest estimates," there are now
over 150,000 DPA members, including members of 40 sociopolitical
organizations, which have joined the movement as collective members.

*******