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Johnson's Russia List


July 19, 1998   
This Date's Issues: 2272    


Johnson's Russia List
19 July 1998

[Note from David Johnson:
1. Reuters: Philippa Fletcher, Yeltsin fills budget holes before 
IMF meets.

2. Baltimore Sun: Kathy Lally and Will Englund, Corruption of coal 
industry infuriates Russia's miners. International aid wasted in the 
past; more pending from IMF Efforts to reform Russian coal industry 
fail miners.

3. Los Angeles Times: Peter Reddaway and Dmitri Glinski, To Really 
Bail Out Russia, West Must Deny the Loans.

4. Philadelphia Inquirer: Peter A. Rankin, Russia is a priority to 
lenders. Dire global consequences are feared if its economic woes yield 
to instability. So help is on the way. 

5. Philadelphia Inquirer: Inga Saffron, Russians say they are not hurt 
by economic woes. Polls indicate the events that precipitated the financial
crisis remain abstract to many.

6. Interfax: Zhirinovskiy Wants Communal Grave for All Russian Leaders.
7. Business Week editorial: A BAILOUT ALONE WON'T RESCUE RUSSIA.


Yeltsin fills budget holes before IMF meets
By Philippa Fletcher

MOSCOW, July 19 (Reuters) - President Boris Yeltsin stepped in at the weekend
to repair some of the damage done by parliament to an anti-crisis plan sought
by the IMF. 

The International Monetary Fund is due to decide in Washington on Monday
whether to give Russia $5.6 billion. 

Alexander Livshits, deputy head of Yeltsin's administration, said on Sunday
Yeltsin had vetoed two laws passed by parliament to lower taxes and had also
introduced new land taxes by decree. 

In doing so he risks a new confrontation with the Communist-dominated lower
house of parliament, which often accuses him of overstepping his vast
constitutional powers and kowtowing to the West at the expense of his
struggling people. 

``No-one, neither the president nor the government, is planning to stand by
and watch the budget and the pension fund collapse into ruins,'' Livshits said
in explaining Yeltsin's move. 

``The more so as the international community has met us half way for what I
think will be the last time. I mean supporting the rouble on financial
markets,'' he told a news briefing. 

The International Monetary Fund and other lenders agreed last week to provide
Russia $22.6 billion this year and next to stabilise its shaky economy
provided it keeps up market reforms. 

Miners protesting at unpaid wages and an economic crisis in their region gave
the government a breathing space on Sunday by lifting a two-week blockade of
the Trans-Siberian railway in return for promises of new steps to relieve the

The IMF board will meet in Washington on Monday to discuss the release of the
first $5.6 billion, which will go towards bolstering foreign currency
reserves, lifting pressure on the rouble and restoring foreign investor
confidence in Russia. 

An aide to Anatoly Chubais, Russia's top negotiator with international lending
organisations has said Chubais would take part in the meeting. Chubais said
last week the $5.6 billion would be provided ``as soon as the agreed actions

of the Russian government have been taken, by legislation where necessary.'' 

On Friday the Duma and the upper house Federation Council approved some
government measures, including the main outlines of a long-awaited tax code, a
cut in profit tax and tighter controls on the production and sale of alcohol. 

But the Duma, which is now in summer recess, rejected a proposed flat rate of
value-added tax and new land taxes. 

Livshits said the combination of cutting some taxes while refusing to raise
others had led to a big revenue shortfall. 

Yeltsin's decisions, taken on Saturday before he began a summer holiday in
north west Russia, filled more than half of the revenue gap, Livshits said,
adding more would follow. 

``The total cost of the decisions not accepted is 78 billion roubles and I
have talked about decisions which cover 48 billion,'' Livshits said. ``There
are at least 30 billion uncovered, and decisions will be taken in that

He said Yeltsin had vetoed the cut in profit tax and a law lowering excise
duties on oil from 55 to 25 roubles a tonne and introduced a four-fold hike in
land taxes, rejected by the Duma, via presidential decree. If the Duma passed
the extra laws, he would withdraw his decisions, Livshits said. 

The budget crisis Moscow is trying to overcome -- caused by a big shortfall in
tax collection -- has worsened long-running wage delays suffered by millions
of workers, raising the prospect of widespread industrial unrest. 

On July 3 miners took things into their own hands for a second time by
blocking freight traffic on the Trans-Siberian, the world's longest railway
and the main artery for the world's biggest country which also supplies local

Alexander Kolesnikov, spokesman for Yeltsin's representative in the Kemerovo
coal-mining region, said the miners, who also blocked the line in May, had
freed it on Sunday morning. 

``On Tuesday a government commission will arrive to start preparing a
government meeting here on the ground to deal with the problem. Until then, at
least, the line will be clear.'' 


Baltimore Sun
July 19, 1998
[for personal use only]
Corruption of coal industry infuriates Russia's miners
International aid wasted in the past; more pending from IMF Efforts to 
reform Russian coal industry fail miners 
By Kathy Lally and Will Englund 
Sun Foreign Staff 

MOSCOW -- All across Russia, coal miners are stirring. The Vorkuta 
miners are camped outside the Russian White House. In the east, miners 
are periodically blocking the Trans Siberian Railroad. In Kizel, miners 
have blocked the highway and the railroad. The week before last, they 
took the mine director hostage for a day.

While impoverished miners have waited months and even years for their 
pay, at least $240 million set aside to revitalize their industry has 
disappeared, either stolen or squandered, according to World Bank 

The coal industry has become a symbol of all that is wrong with reform 
in Russia, of the corruption, the cronyism and the lack of political 
will that have ravaged the national economy -- and contributed to the 
panic that brought Russia to its knees last week, asking the 

International Monetary Fund for a $22.6 billion loan.

Thousands of miners in the most bleak and inhospitable regions of Russia 
are struggling to stay alive, owed an estimated $500 million in back 
pay, trapped in dying towns and cities. Meanwhile, the insiders who 
profited as government money and Western aid passed through their hands 
have been enjoying their wealth, untouched by prosecution.

The World Bank has been working with Russia since 1993, trying to help 
transform the grossly ineffi-cient Soviet industry. It granted Russia a 
$500 million loan to help retrain miners, close unproductive mines and 
revamp the remaining mines. Part of the more than $1.5 billion the 
government budgeted for the coal industry in 1996, it had little effect.

"There was never proper control, and there was a serious conflict of 
interest," says Vadim Voronin, deputy director of the World Banks Moscow 
Bureau. "Unfortunately, some of the money was misused or mismanaged."

Despite growing protests and threats of social unrest from the miners, 
there has been little public discussion and no complete accounting of 
what happened to the money.

Russian officials do not dispute Voronin's assessment and confirm that 
millions of dollars have gone missing.

Igor S. Kozhukhovsky, Russia's deputy minister of fuel and energy, 
estimated that about $500 million was supposed to have been used to 
retrain miners and help them find new jobs.

"Much of the one-third intended for social protection of the miners was 
wasted and never reached them," he said. "That was where the scandal 

`Extent is unprecedented'

Eight years ago, the miners were President Boris N. Yeltsin's most 
ardent allies. They rallied loudly and enthusiastically for democracy, 
giving Yeltsin the strength he needed to overwhelm the old system.

Today, some 300 of them sit outside the White House, banging their 
helmets on the paving stones when they catch sight of an official, 
demanding Yeltsin's resignation and shouting for him to curb the 
policies that have caused them so much anguish.

Vladimir Stasyuk was among the protesting miners who set out from the 
Arctic Circle coal town of Vorkuta in early June on the 40-hour train 
journey to Moscow. He had just been paid about $660 -- his wages for 
September, 1997.

The government has largely ignored the encampment, except to prohibit 
tents and grills.

"It was awfully hard here at first," said Stasyuk, 44, "but we're 
getting used to it. The Russian people are very patient. We can work for 
years without pay, and we can take any temperature. But when we run out 
of patience, then comes the storm."

When the World Bank began consulting with Russia on the coal industry, 
everyone understood the problems were huge.

"The peculiarity of the problem is the extent of it," Voronin said. "The 
extent is unprecedented. The Soviet Union was the major producer of coal 
in the world, and it wasn't regulated by the market."

Mismanagement, corruption

Russia reached peak production in 1988, mining 425 million tons of coal 
that year. The industry was so inefficient, however, that it cost more 

to produce the coal than it was worth. By 1993 one of every three tons 
was paid for by public subsidies, Voronin said.

In the early 1990s, the coal sector employed more than 1 million people 
at 250 mines and open pits; by last January, that number had been 
slashed to 466,000 employees. Ninety-four mines have stopped production, 
but only 46 of those are officially considered closed. Sixty more are to 
be closed this year. Only 144 of the mines are considered viable -- but 
even those will have to lay off miners.

The World Bank agreed to lend Russia $500 million for the coal industry 
in 1996, disbursed directly to the national budget rather than attached 
to a specific program.

The loan was intended to help restructure the industry by determining 
which mines were viable, closing those that were not, retraining miners 
and relocating those who lived where there were no hopes of other jobs.

Money quickly began evaporating, Voronin said, as it entered the hands 
of Rosugol, a private company the government created in 1992 to manage 
the coal sector.

Rosugol ran the industry. It determined how much of a subsidy each mine 
should get, then told the government how much was needed and took 
control of the money allocated. It managed equipment and supplies and 
negotiated exports.

"Obviously, this provided a lot of space for mismanagement, and 
sometimes, I would say, corruption," Voronin said. "Obviously, Rosugol 
was not interested in restructuring. The more inefficient the industry, 
the more money would pass through it.

"Even money that did arrive at the mines was misused," Voronin said. 
"Maybe the director would invest it in equipment instead of paying the 

A network of private companies rose up around the coal industry, Voronin 
said, some selling dubious pension insurance and others acting as 
middlemen, buying coal from the mines for less than the cost to produce 
it, then selling it for high prices. The middlemen were usually 
relatives of the mine directors, Voronin said.

Miners like Vladimir Stasyuk, hunkered down outside the White House, and 
Yuri Gainulin, stranded in the dying mining city of Kizel, are left to 
pay the price.

Kizel lies nearly 1,000 miles east of Moscow, about 150 miles northeast 
of Perm on the western slope of the Ural Mountains.

The pretty pastures and forests of birch and pine come to an abrupt end 
as the road from Perm enters the Kizel coal basin.

Twelve of Kizel's 14 mines have closed in the last three years, and many 
miners believe the other two soon will follow. Fifteen thousand jobs 
have been lost since 1995. Thousands of miners are out of work, with no 
money in the mattress, no way to make any and barely any hope of being 
able to afford to move somewhere else.

Heroes of Soviet labor

"The Russian people are patient," said Gainulin, 41, who worked at the 
Severnaya Mine for 18 years, until it was shut down in January. "We're 
the children of people who survived Stalin. Probably somewhere in the 
bottom of our hearts we're afraid of something. But when we finally lose 
patience, we lose it all at once."

"Now probably someone will want to take up a knife or gun and kill 
someone," said Alexander Dolganov, head of the largely ineffective coal 
miners union in Kizel. "It could be me."

A decade ago the miners were heroes of Soviet labor; the vast 
metallurgical and chemical industries needed their coal. Now most of the 
coal is too expensive to dig because of huge transportation costs to 
remote areas and aging, inefficient equipment.

The employment center in Kizel has received no money from Moscow to 
retrain miners, despite promises of help. There aren't any jobs anyway. 
Only 393 jobs were found for the thousands of unemployed Kizel miners in 
the first six months of this year.

Moscow is still making promises, this time to begin an experimental 
program in Kizel providing housing certificates to unemployed miners. 
Recipients would be able to exchange the certificates for subsidized 
apartments elsewhere in Russia.

The miners are wary and mistrustful, fearing some sort of trick.

And there's another drawback: the government is to pay 80 percent of the 
cost of a new apartment. That leaves 20 percent for the miner. When an 
average apartment in Perm, the nearest city, costs $13,000, that means 
the would-be inhabitant has to come up with $2,600 of his own money -- 
which is far more than anyone here can afford.

The miners have little hopes of seeing any World Bank money.

"Everybody knows, even in the government, that the money the World Bank 
gave for the coal industry went somewhere -- but where?" said Dolganov, 
the union leader. "It was spent without making any effect on the 

But no one is looking for the money, he said.

Last month, Russia's senior auditor told reporters that such waste and 
corruption was typical. About a sixth of Russia's budget was misspent 
last year, said Venyamin Sokolov, head of Russia's Chamber of Accounts, 
a Communist-dominated agency which is deeply critical of the Yeltsin 

Poor spending controls have been complicated by low tax collections. In 
recent days, investor confidence has sagged.

So Russia finds itself asking for help again. And once again the West is 
faced with decisions: Pay, or give up on Russia? Abandon miners like 
Vladmir Stasyuk and Yuri Gainulin? Risk another revolution in Russia?

Tomorrow, the IMF expects to vote on whether to bail out Russia with a 
$22.6 billion loan. Yeltsin has promised tough new financial controls, 
and has been badgering the Russian parliament to fall in line behind 


Los Angeles Times
July 19, 1998 
[for personal use only]
To Really Bail Out Russia, West Must Deny the Loans 
Peter Reddaway Is a Professor of Political Science at George Washington 
University; Dmitri Glinski Is a Research Scholar There. They Are 
Co-authors of "Yeltsinism: the Tragedy of Russia's Reforms," Due out 
Early Next Year

WASHINGTON--For the sixth time in six years, the West has agreed to prop 
up the Kremlin with billions of dollars. Each time, it would have been 
wiser to refuse. That would have helped Russia by strengthening the 
government's incentive to combat corruption and focus on real, not phony 

economic reform. But each time the West has harmed Russia by ponying up. 
The Kremlin thus has been able to go on feeding the country's crony 
capitalism and neglecting the rule of law. 
Each year, the amount of money lent by the International Monetary 
Fund has been larger than the year before. Each year, bad things have 
followed the loans, in politics as well as economics. For example, three 
months after the IMF gave its second loan (of $1.5 billion) in 1993, 
President Boris N. Yeltsin used tanks to disperse the democratically 
elected Parliament that had brought him to power. Hundreds of people 
were killed. Then, in 1994, after getting another $1.5 billion, Yeltsin 
sent his tanks into Chechnya, launching a long war. 
Much of 1995's loan of $6.8 billion went to finance the continuing 
blood bath there. In 1996, a new loan of $10 billion helped fund 
Yeltsin's reelection campaign. 
Last year, the Kremlin promised repeatedly it would not ask for any 
more IMF loans. Nonetheless, it has just begged for and been promised 
not a small sum to fend off ripples from the Asian financial crisis, but 
an extra $17.1 billion, including $11.6 billion from the IMF. 
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Given this pattern, Russians are wondering what new surprise 
Yeltsin is preparing for them, apart from more financial austerity. 
Could it be some new confrontation designed to keep him in power? 
Certainly, there are signs that a crackdown may be coming, including the 
murders of two oppositionists that the authorities may have been 
involved in. 
In any case, the stakes are now far higher than before, for Russia 
and the West. If, as many analysts expect, much of the new cash is used 
for political purposes or embezzled, and the Russian economy continues 
to, at best, stagnate, then the current worldwide criticism of the IMF 
will turn into a flood. It will also affect the Clinton administration, 
which, though the Kremlin's new reform program will probably work no 
better than previous ones, effectively ordered the IMF to open its 
In Russia, meanwhile, devaluation of the ruble will probably soon 
be unavoidable, ordinary Russians will incur still more pain, and 
Yeltsin and his government may well fall from power. The only silver 
lining would be that Yeltsin's demise would at last give Russians hope 
that there might be some light at the end of the tunnel. New leaders 
would make a fresh start. This could hardly be worse for Russia, and 
would probably be better. 
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Why do we believe the new loan package will postpone a far bigger 
crisis only for a matter of months? Because the crisis is ultimately 
more political than economic. The Kremlin is locked into patterns of 
behavior it cannot change. It has lost its legitimacy in every sense 
except the most formal. Yeltsin has none, nor do the governments he 
appoints. The latter get no respect from the bureaucracy or the 
alienated Russian people. The current government might have the most 

perfect economic policies, as the IMF actually believes, but they will 
not help. The government lacks any authority to implement policies, 
perfect or imperfect, that involve painful change for the establishment. 
A recent episode illustrates the regime's weakness and isolation. 
Last fall, it decided to answer critics who contended, convincingly, 
that Russia was a privatized state guided not by the national interest, 
but by private interests. It started a campaign to do away with crony 
capitalism--the very capitalism that Yeltsin and his U.S. advisors had 
been creating since 1991. But who did the Kremlin turn to in the new 
fiscal crisis? The very crony capitalists on whom it had declared war! 
One of these, Boris A. Berezovsky, explained why: "The government has no 
other real base of support." 
So the two "have" groups in Russia, the government and the 
"financial oligarchs," have forgotten their differences and called in 
the IMF. They hope to pacify the millions of increasingly restive 
have-nots for a few more months. But the latter will hardly be 
impressed. Most of the pro-Western groups that brought Yeltsin to power 
in 1990 now criticize the West sharply, precisely because Western aid 
has played such a big role in advancing the narrow interests of the 
ruling "oligarchs" at the expense of the rest of society. Ordinary 
Russians know the new loans will do little except bail out the oligarchs 
and Western speculators. 
They are right. In the short term, at least, the following trends 
will probably continue: Russia's gross domestic product will stagnate or 
even decline (after dropping by about 50% since 1990); more illegal 
capital will flow abroad than aid money flows in; most workers will be 
paid months late; unemployment will continue to rise; pensions, social 
payments and the minimum wage will fall still further in real terms; 
investment will continue its downward path as financial markets remain 
obsessed with bond and monetary speculation; much of the economy will 
rely on barter instead of money; small and medium businesses will have 
no protection from the mafia's unrelenting extortion; corrupt and 
criminal elements will tighten their grip on political structures, 
and--on an index monitored by the World Bank--Russia will continue to 
challenge Colombia and Nigeria for the title of most corrupt country in 
the world. 
But one new wrinkle could be even more serious, at least for the 
West. The Russian people could become so alienated from the West, from 
the perverted capitalism it helped to impose on them and from the 
democracy it compromised by applauding Yeltsin's decision to destroy the 
Parliament, that it will no longer be able to reverse their alienation. 
Then Russia might start to resemble Iran in the 1970s. That was when the 
United States kept on arming and funding the widely unpopular shah 
until, one day, the majority of Iranians could bear it no longer. They 
rose up against both him and the United States. Americans are still 
paying the price. It makes no sense to risk such an outcome. Even though 
Russia is not Iran, it is unpredictable. 

The West appears, too, to have fallen again for an old trick of 
Yeltsin's. Fearing last month that the loan spigot might at last be 
turned off, he started proclaiming that Russia was in imminent danger 
from extremist forces. Whatever doubts we might have about him, we 
should rush to his support. However, having long ago tamed the 
communists, he could provide no evidence. 
If the West had avoided these mistakes and declined to throw good 
money after bad, Russian coal miners, teachers, health workers, 
scientists and other groups that have been striking and demonstrating 
would have known the West was listening. By indulging Yeltsin, however, 
it conveyed the opposite message: that it knows nothing of recent polls 
showing that the percentage of Russians prepared to support militant 
anti-Yeltsin demonstrations has grown from 30% a year ago to 44% today, 
and that Yeltsin's approval rating has fallen to a microscopic 4%, while 
his negatives have soared to 80%. 
We can only hope that the opposition will use this opportunity to 
make Yeltsin give them some real representation in the government in 
return for their cooperation in helping to avoid economic disaster. 
What would have happened if the West had denied Yeltsin his new 
loans? The West would have saved the money and not fed Russian 
corruption. It would have shown its loss of confidence in Yeltsin, thus 
pleasing ordinary Russians and helping their rulers to sober up and take 
full responsibility for their rule. The Kremlin might have devalued the 
ruble, though the recent predictions of devaluation may have primarily 
been scare tactics to get the loans. Or, instead of devaluing, it might 
have shut down the bond market and defaulted, as it may in the next 
crisis. Living standards would have fallen, but perhaps less sharply 
than they will next time. Groups of oligarchs, parliamentarians and 
organized labor would have put mounting pressure on Yeltsin to resign 
and perhaps succeeded. If so, three months later the voters would have 
elected a new president, who would have appointed a new prime minister, 
who would have had new ideas for reforms. Finally, the rising tensions 
and even hostility between Westerners and many Russians would have been 
somewhat mitigated. 
By not encouraging this course, the West has probably erred. The 
extra $17.1 billion may buy a few months of reduced chaos in Russia, but 
when the bubble of Kremlin-induced financial speculation bursts, the 
political and economic crisis will be bigger and more dangerous than it 
would have been otherwise. Since the Yeltsin regime has lost its 
legitimacy, it will use the cash mainly as a weapon against the rising 
opposition of the Russian people. 


Philadelphia Inquirer
July 19, 1998
[for personal use only]
Russia is a priority to lenders 
Dire global consequences are feared if its economic woes yield to 
instability. So help is on the way. 
By Robert A. Rankin

WASHINGTON -- The International Monetary Fund decided last week to lend 
more money to Russia -- $22.6 billion this time. 

That is a lot of money, and the loan has raised some questions: Where 
does that money go? Haven't other big loans been made with little to 
show for them? What does the United States have to gain from it?

"Well, Russia is a special case. Part of this is not economic. Part of 
this is called 6,500 nuclear weapons," said Willard Workman, vice 
president for international affairs at the U.S. Chamber of Commerce, 
referring to Moscow's still-lethal arsenal.

In other words, Russia gets big Western loans partly because, without 
them, it faces a great risk of financial breakdown and political 
instability, possibly leading to a new, hostile government with nuclear 
weapons and a return to tensions not felt since the Cold War.

Yet the loans also are intended to serve U.S. and global economic 
interests -- and the loans are repaid.

"Someday the Russian market will be a wonderful market. It's not there 
yet. But you have to start someplace. And I think we have an obligation 
to help them make the kind of tough economic reforms they need to 
transform their economy," Workman said. "The best way to do this, 
probably the only way, is to work through the IMF mechanism. We don't 
have a lot of tools for this."

President Clinton couldn't have said it better; Workman's words describe 
Clinton's policy.

The IMF was created in 1944 to help countries overcome the kinds of 
destabilizing economic problems of the 1920s and 1930s that helped 
foster the Great Depression and World War II. Over the last year, the 
same kinds of difficulties -- plummeting currencies, balance-of-payments 
crises, plunges in financial markets, and recessions -- have spread 
across Asia and beyond. No nation outside Asia has been more seriously 
affected than Russia.

Foreign investors -- who provide the money and know-how to build Russia 
and other countries into modern economies -- were alarmed by Asia's 
turmoil and cashed out of many risky emerging markets. Russia's 
stock-market valuation has plummeted by 60 percent since last fall.

Russia also depended on foreign investors to finance its deep budget 
deficits. To keep foreign cash coming in, Russia's Treasury sold bonds 
valued in rubles by paying interest up to 150 percent.

Still, as investor confidence collapsed, so many people were dumping 
rubles for dollars that Russia was depleting its scarce reserves of 
"hard," or trusted, foreign currencies in an effort to maintain the 
ruble's value. With reserves of only about $15 billion, by last weekend 
Russia was spending $1 billion a month servicing old foreign debt and up 
to another $1.5 billion a week redeeming recent high-interest bonds, the 
finance minister told the Wall Street Journal.

It couldn't go on. Russia was under great pressure to let the ruble's 
exchange value sink, but that would have soured foreign investors even 
more and sent inflation soaring, risking social upheaval.

On July 10, after warning against coups, Russian President Boris Yeltsin 
called Clinton for help, and three days later the IMF and Russian 
authorities agreed on a bailout plan.

Russia will get $22.6 billion through next year -- $17 billion in new 
loans, the rest previously approved but not yet sent -- provided the 
government meets major conditions: Russia must overhaul its tax laws and 
tax-collection systems, slash its budget deficit, and accept strict 
oversight by IMF technicians as it proceeds.

The money will go to Russia's central bank and will be used to pay off 
government debts both foreign and domestic, and to finance new trade and 

The sheer presence of the IMF money stabilizes the ruble's value by 
easing market fears that reserves will soon run out. And by restoring 
financial confidence, such IMF packages often catalyze private 
investment, leading to economic renewal.

The deal immediately restored confidence among foreign investors -- at 
least for now -- and Russia's stock market and ruble have rebounded 
strongly. Even the balky Russian parliament, the Duma, passed some of 
the austerity measures needed to satisfy IMF loan requirements, 
including a key bill imposing an additional 5 percent income tax. But 
other proposals were rejected -- prompting Prime Minister Sergei 
Kiriyenko to warn the lawmakers, before they headed off for their summer 
recess, that he was prepared to satisfy the IMF by imposing austerity by 

The IMF's action bought Yeltsin time to push reforms. His goal -- shared 
by the IMF, Clinton and the West generally -- is to transform Russia 
into a prosperous market economy with a democratic government.

Yet those have been Russia's goals since the Soviet Union collapsed in 
1991, and skepticism is rising about whether Moscow can get there even 
with the IMF's help.

Before approving last week's loan, the IMF had made five other big loans 
to Russia since 1992, totaling $24 billion, and the World Bank had 
chipped in almost $10 billion. What have they achieved?

The loans and technical aid financed reforms that helped control runaway 
inflation. More than two-thirds of the economy, directed wholly by state 
bureaucrats less than a decade ago, is now run as private enterprise. 
And after traumatic production cutbacks in the early years of 
transition, Russia's economy came close to actual growth in 1995 until 
political stalemate stalled further reforms.

But reforms urged by the West in the tax and legal codes were not made. 
Corruption, inefficiency and black-market transactions persist.

Skeptics say more IMF money will only be wasted.

"IMF loans and other government-backed capital transfers do not 
contribute to new investment so much as they contribute to sustaining 
old institutions," insisted Lt. Gen. William Odom, a former 
national-security aide to President Reagan who is now with the Hudson 
Institute, a think tank.

Much of the IMF money simply repays loans to Russia's new capitalist 
oligarchs, he told a House committee last week, while Yeltsin's 
government is too weak to impose the reforms necessary to restructure 
the economy.

"The only real beneficiaries of the IMF loans will probably be the 
western investors, who hold about 60 percent of the foreign exposure," 
Odom said.

Other experts disagree.

"I think the notion that the money is wasted is a big mistake to 
presume," said Al Fishlow, a senior fellow in international economics at 
the New York-based Council on Foreign Relations.

For one thing, all IMF loans are repaid -- with interest. U.S. dues 
cover 18.5 percent of IMF resources, but no IMF loan ever has cost 
American taxpayers a dime. Even Russia, despite its difficulties, has 
repaid about $10 billion to the IMF so far.

U.S. business interests worry that if Russia's economy collapses, 
instability could flare up and spread beyond Russia's borders, even as 
some investors are beginning to return to troubled Asian markets.

House Republicans who are skeptical about international agencies like 
the IMF now seem to hear that warning. After months of blocking 
additional U.S. donations to the IMF, a key House subcommittee approved 
initial funds Wednesday, and House Majority Leader Richard Armey (R., 
Texas) said he thinks Congress will approve the full $18 billion sought 
by the Clinton administration before adjourning this fall.

Rep. Lee Hamilton (D., Ind.) summed up the stakes for Americans at the 
House International Relations Committee hearing.

"Russia should be seen as a work in progress. Destabilization in Russia 
would have a negative impact across the world. Success is surely not 
guaranteed, even if the IMF package (goes forward).

"But I think the risks are grave if the loans do not move forward: 
devaluation, economic chaos and even a possible coup and the rise of a 
hostile government. We risk the defeat of democratic and market reforms, 
and a return to a Russia that opposes Western values. The stakes are 
simply huge, and the interests of the United States in the outcome 


Philadelphia Inquirer
19 July 1998
[for personal use only]
Russians say they are not hurt by economic woes 
Polls indicate the events that precipitated the financial crisis remain 
abstract to many. 
By Inga Saffron

MOSCOW -- The restaurants are still packed, the upscale American 
designer Donna Karan has opened two sleek boutiques, and the aisles are 
crowded at the new Turkish-built hypermarket. If Russia is in the middle 
of a financial crisis, somebody forgot to tell a lot of Russians.

Since spring, when Russia's stock market was beginning its 
record-breaking plunge and angry coal miners were blocking the 
Trans-Siberian Railroad to protest wage delays, many Russians have been 
oblivious to the looming crisis.

In a June survey, just as the situation was worsening, Russian pollster 
Yury Polatayev was surprised to find that more than half the respondents 
said they were not worried at all.

A month later, when the ruble was teetering on the brink of devaluation 
and Western governments were bracing for another Russian revolution, 
Polatayev's firm conducted another poll. The numbers had not budged.

Fifty-four percent said they didn't expect the crisis to affect their 
lives. Eleven percent said they had not even heard about the stock 
market crash. Only 27 percent said they were concerned about the future.

Russia is gripped by a financial crisis so serious that international 
lenders were forced to offer a $22.6 billion bailout package last week. 
Yet the events that precipitated it remain abstract to many people.

"It doesn't affect their everyday lives," explained Polatayev, who 
tracks the spending habits of Russia's newly acquisitive consumers. They 
see the latest market turmoil as part of the country's long economic 

A shadowy crisis

The crisis may seem unreal to Russians because of the way it started. 
Concerned about the government's inability to collect taxes and pay its 
bills, foreign investors began pulling their money out of the stock 
market around March. By June, the market had fallen by 80 percent. But 
since few ordinary Russians invest in the stock market, they hardly 
noticed the turmoil.

And unlike the troubled economies in Asia, where the bubble of success 
burst suddenly, Russians have been living with hard times for a while. 
They have learned to cope. According to market surveys, Russians appear 
poorer than they actually are because they underreport their incomes by 
half -- which is one reason the government has so much trouble 
collecting taxes.

So even as Prime Minister Sergei V. Kiriyenko was calling for drastic 
budget cuts and hefty new taxes, Russians continued to spend as if 
nothing was amiss, especially in affluent Moscow. Sales of cars, 
televisions and other pricey consumer goods have been unaffected, 
Polatayev observed.

What's more, those businesses that had adjusted to Russia's new market 
economy are thriving.

"This financial crisis hasn't affected us at all. We're planning to 
expand," gloated Nadezhda Kuzmina, a spokeswoman for Liaznozovsky Dairy, 
one of Russia's most successful food-processing firms. 

A sprawling Soviet-built white elephant on the edge of Moscow, the dairy 
went private a few years ago and retooled with state-of-the-art 
production lines. Today it operates round the clock, sells $500 million 
worth of juice and milk products a year, and has managed to obtain the 
dominant market share, despite fierce competition from Western brands.

Still, the lack of confidence in the Russian economy has forced several 
successful companies, such as the petroleum giants Gazprom and Lukoil, 
to call off plans for new share offerings. Analysts said the companies 
feared suspicious buyers would offer too little money.

Last month, the central bank's hard currency reserves fell so 
drastically that the government began talking about devaluing the ruble. 
If that had happened, the crisis might have finally hit home for 
ordinary Russians. Cutting the value of the national currency could have 
reduced people's savings to almost nothing.

If devaluation had been necessary, "the political situation could have 
easily spiraled out of control," said Marc Holtzman, president of ABN 
Amro Corporate Finance, a Dutch bank that invests heavily in Russia. 
President Boris N. Yeltsin even warned of an impending military coup if 
the West didn't come up with money to shore up the ruble.

But there were segments of Russian society that were clearly aware of 
the problem. As the situation worsened in June and wage arrears piled 
up, public protests began to increase. About 200 coal miners set up a 
tent city next to the Russian White House, the government's main office 
building, to demand that the government pay their back wages. Many of 
the miners said they had not been paid in a year.

Working three jobs

"I have to work three part-time jobs to survive," grumbled Lilia 
Pimenova, a mining engineer from the Arctic city of Vorkuta. "I have a 
higher education, but now I have to clean houses to get enough money for 
milk and bread."

The miners' protests are shown regularly on the television news. 
However, the reports rarely mention that the demonstrations are not 
spontaneous: They are organized and funded by the Working Russia party, 
an ally of the Communist Party.

Even as such protests spread, the International Monetary Fund and the 
World Bank insisted the country could sort out its problems itself. They 
had been critical of Russia for moving too slowly on economic reform and 
were reluctant to commit more loans until the government reduced its 
budget deficit. But under intense pressure from the United States and 
Germany, the banks concluded that reforms would stop altogether if there 
was massive unrest.

As Russian government officials lobbied hard for the bailout, many 
Western economic analysts were on their side. Swedish economist Anders 
Aslund, who helped introduce Russia's early shock therapy program, 
argued Russia had been unfairly targeted as an economic basket case. He 
maintained that the current situation was a short-term glitch caused by 
the sharp drop in oil prices and the fallout from the Asian financial 

Trouble with cash flow

Peter Boone, an economist at Brunswick Warburg in Moscow, agreed. 
"Russia doesn't have a solvency crisis. It has a liquidity crisis," he 
said. In other words, the country isn't bankrupt, it just has cash flow 

The cash crunch is partly the result of outside factors, but analysts 
agree Russia would not be nearly so strapped if it had pursued economic 
reforms more vigorously.

For years, plans to streamline the tax system have languished while 
Yeltsin and parliament bickered over the details. Only under intense 
pressure from the IMF did the Duma finally agree Friday to adopt a 
crucial 5 percent sales tax -- though it turned down other elements of 
Yeltsin's program. 

Daniel Wolfe, managing director of Troika-Dialogue, a Moscow investment 
bank, said the combative Duma was finally beginning to acknowledge the 
severity of the economic problems.

"One of the positive effects of this crisis is that maybe now ordinary 
Russians will also begin to take an interest, too," he said. 


Zhirinovskiy Wants Communal Grave for All Russian Leaders 

MOSCOW, July 16 (Interfax) -- A communal grave for the remains of
tsar Nicholas II and all of Russia's subsequent rulers should be built in
St. Petersburg, leader of the Liberal Democratic Party of Russia faction
Vladimir Zhirinovskiy told Interfax.

The remains of Lenin, Stalin, Khrushchev, Brezhnev, Andropov and
Chernenko must be put into this grave and space should be reserved for
subsequent leaders, he said.
Member of the Communist faction Vasiliy Shandybin said that Lenin's
body should rest in the Mausoleum forever, because Lenin was "a great man
and the leader of the world's first socialist state."
Vice-Chairman of the Yabloko faction Sergey Ivanenko told Interfax
that "by human and Christian standards," Lenin should have been buried a
long time ago. But, he said, this is not the right time to bury Lenin as
it may provoke "an outbreak of social confrontation." Lenin's body can be
buried by the next generation, he said.
Independent deputy, Vice-Chairman of the Democratic Choice of Russia
party Sergey Yushenkov told Interfax that Lenin should have been buried
five or six years ago. "Then, this could have been done easily. Now it
will be strongly opposed by a large section of the population," he said. 
He noted, however, that "as long as the corpse of the bloody butcher
(Lenin) is in the mausoleum in the center of Moscow, the country will not
be able to develop and advance in a civilized way." He explained that he
did not mean "any kind of mystical influence" exerted by Lenin's unburied
body on the nation. "This is a fact of our public mentality," he said. He
announced that representatives of the Democratic Choice of Russia faction
would attend the burial of the remains of tsar Nicholas II and members of
his family.


Business Week
July 27, 1998

Did the West have any choice in bailing out Russia once again--this time to
the tune of $22 billion? Not much. Will it force Moscow to restructure the
economy, so that it will grow as fast as, say, Poland? Not really. Does it
matter much to the world? Yes, but not in any economic sense.
The truth is, the American- and German-backed bailout by the International
Monetary Fund was essentially a political act designed to steady a country
holding thousands of loose nukes. The luckiest benefactors of this cold war
legacy are the foreign and domestic investors in Russia's $70 billion
government Treasury-bill market, who sparked the crisis in the first place.
These highfliers will now be bailed out of their mistakes: In exchange for
their ruble T-bills, foreigners will be offered long-term Eurobonds
denominated in hard currency. If Russia had not received the IMF money and
been forced to devalue, they would have faced ruin. For these folks, it's no
risk and all reward.
Economically, it might make sense to bail these investors out and preserve
the government T-bill market if the IMF loan package led to a radical
restructuring of the Russian economy. Yet even with the most pro-reform
government since 1992, odds are that the Duma will not do what is necessary to
turn Russia into a growing market economy. In fact, the austerity that the IMF
is insisting on in exchange for its loans will discourage growth. Cutting the
budget deficit and collecting more taxes are good ideas in the abstract but
will deflate the economy in the short run.

What is needed is an end to Russia's lukewarm commitment to the market
economy. Call it a kleptocracy, an oligarchy, or anything else, but the
Russian economy is hardly capitalist. Before there can be real growth, all
property, especially land, must be privatized. Contracts and the rule of law
must be enforced. Barter must be replaced by a cash economy. Small businesses
must be encouraged to generate jobs. Right now, some of the world's most
literate people, with some of the best high-tech skills anywhere, are living
poor, stagnant lives because Russia's leaders can't cut the ties to an
authoritarian past.
Better tax collection and lower deficits are important to Russia. But they
are merely necessary, not sufficient.


bill 'On additional powers of the Cabinet needed to stabilize 
financial situation in the country' offered to the State Duma 
Friday to extend Cabinet finance-stabilising competences is of
an essential importance, Prime Minister Sergei Kiriyenko
emphasised as he addressed mass media at a briefing in the
Federation Council.
The bill envisages taxation rates raised by 10%, and MPs
appear reluctant to make this and other unpopular steps, though
they are fully aware of their necessity, while the government is
"ready to shoulder the responsibility", said the Premier.
The Duma must pass the bill, he stressed. If it is
torpedoed and has to be introduced by Cabinet resolution, it
will be only temporary, explained Kiriyenko.
He thanked both parliamentary houses for their work at the
Cabinet stabilisation package. "It is a huge job and an
unheard-of instance of smooth teamwork" by the two power
branches, of which the situation demands to meet each other


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