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Johnson's Russia List


Auguust 3, 1998   
This Date's Issues: 2295  

Johnson's Russia List
3 August 1998

[Note from David Johnson:
1. Robert McIntyre: Armed Cats and other Virtual Realities.
2. Reuters: Russia puts military focus on small, local wars.
3. Reuters: Bureaucrats are a big force in Russia reform war.
4. Obshchaya Gazeta: Yelena Dikun,, KIRIYENKO'S CABINET MARKS ITS 

5. Steven Solnick: RE "my" Komsomol crooks (Hough/#2294).
6. Washington Post: Daniel Yergin and Thane Gustafson, Waiting for 
the Taxman.

7. Ronald Pope: What Is to Be Done?]


From: "Robert McIntyre" <>
Date: Mon, 3 Aug 1998 
Subject: Armed Cats and other Virtual Realities

Re #2293
Two objections to the John Thornhill "Magic realist economy" article 
in the Financial Times, one economic and the other cultural. 
The authors Thornhill cites (Gaddy and Ickes) are serious 
well-informed specialists, but the "virtual economy" phrase plays so 
directly to Cold War cliches about "nothing of value being produced" 
in Soviet-type economies that it will likely both to be quickly 
adopted as a pop phrase and tend to cloud the view of those trying to 
figure out what is really going on. 
Much of the output of all advanced capitalist countries is "value 
subtracting" if you wish to take the concept seriously. The question 
is whether the subsidies and other policy measures (in addition to 
transportation costs, incomplete information and distribution 
infrastructure, etc) which "distort" the market do or do not produce 
functional results for the overall system. Japanese, South Korean 
and even west european experience argues for extreme skepticism toward 
this very partial measure.
In the Russian case in particular a period of "normal respiration" 
would be required before competitive efficiency could be evaluated 
meaningfully. It would also be necessary to directly talk about the 
"national security" importance of many large issues (e.g. "keeping 
Siberia") before treating pure market outcomes as a reasonable guide 
to policy. The fact that the Yeltsin government has such a weak 
sense of Russian "national interests" makes this an even more 
time- and leader-sensitive issue. I will try to write more fully on 
this in the future. 
Second, I believe that Behemoth used a Browning automatic not a 
Mauser pistol.


Russia puts military focus on small, local wars

MOSCOW, Aug 3 (Reuters) - Russia is focusing its military efforts on training
a small, crack force ready to intervene in regional conflicts along the border
of the former Soviet Union, a top official said on Monday. 

Andrei Kokoshin, secretary of Russia's advisory security council, told
reporters the government's latest revision of its defence doctrine
concentrates on small local conflicts rather than all-out war. 

``Local conflicts of differing levels of intensity remain a subject of special
attention and are possible along the entire perimeter of Russia and the
Commonweath of Independent States,'' he said. ``They will need our decisive
and sometimes uncompromising actions.'' 

Since the collapse of communism in 1991 and the end of the Cold War, Russia
has acknowledged that the likelihood of an all-out attack from abroad is

But Moscow has fared poorly in its efforts to fight smaller, local conflicts.
It lost a war against separatist fighters in the breakway region of Chechnya
in 1994-96. 

The post-Soviet period has also seen wars in Georgia, Azerbaijan and

``We have carried out sober analysis of the situation and strict analysis of
conditions, without closing our eyes to the critical financial situation and
the very tough restrictions which this situation entails,'' Kokoshin said in
outlining the idea of a small, mobile force. 

Russian public television reported the doctrine envisioned 10 infantry
divisions which were fully equipped and in a high state of combat readiness.
The document also seeks to eliminate a number of military departments to
create greater efficiency in the armed forces. 

Russian President Boris Yeltsin has pressed for military reforms leading to a
fully professional (as opposed to conscript) army, but has been hampered by
continuing budget woes. 


FEATURE - Bureaucrats are a big force in Russia reform war
By Philippa Fletcher

KOSTROMA, Russia, Aug 3 (Reuters) - Yuri Tsikunov, one of Russia's vast army
of bureaucrats, is anxious that people recognise his importance. 

``Before you, you should know, sits the head of the emergencies committee with
colossal powers, so whatever I order, it will be carried out,'' he says in his
imposing wood-panelled office in the historic town of Kostroma. 

The reach of those powers is miniscule in Russian terms -- Tsikunov is first
deputy governor of just one of 89 regions. 

Combine the Kostroma region -- itself the size of Belgium -- with the others,
however, and Tsikunov and his like make for a formidable force, whose views
and actions shape what happens in Russia every bit as much as the central

That government, trying to show the International Monetary Fund it can plug
its leaking budget, should be encouraged therefore, by Tsikunov's frankness
about where the holes are in Kostroma, 340 km (200 miles) northeast of the


``Local factory directors think to themselves 'why should we spend all our
time trying to pay wages on time?' So they create some little companies. The
factory's production is sold through these companies and they get gigantic
sums of money,'' he said. 

``In some places the cynicism of those directors is so great that they've lost
their humanity. They end up thinking 'I've come out on top and you are my

The result is plain to see, not only among Kostroma's 800,000 population but
across Russia, where countless workers and pensioners go unpaid for months on
end while their bosses and their friends acquire luxury cars and foreign bank

Corruption does not account for all the wage delays -- reluctance to close
moribund, communist-era industries for social reasons has allowed a web of
debts to strangle even well-run firms -- but it does tell a big part of the

Which makes it all the more surprising that neither the government, nor
Tsikunov, for all his avowed powers, appears to have done much about the
graft, which has helped create conditions reminiscent of Russia's pre-
revolutionary serfdom. 

Until now that is, when financial instability and popular exasperation are
beginning to force Moscow's hand. 

Ministers have been sent on rare forays to the provinces to stop blockades of
key railway lines by miners fed up with not being paid. They have promised to
crack down on the middlemen who spirit the coal away without the miners seeing
any money. 


In Kostroma doctors and teachers are also angry, but have not resorted to such
desperate measures, confining their protests to banging pots and pans outside
Tsikunov's office in a pre-revolutionary church school for girls by the river

He said the protest was unlikely to develop since workers risked the wrath of
friends and neighbours by going on strike. 

In June, President Boris Yeltsin chose Kostroma to try to show workers that
the government was on their side. Departing from the traditional script, he
lashed out at officials who had papered over the cracks for his visit in time-
honoured fashion. 

The director of Kostroma's biggest plant, a linen factory, may have made
Yeltsin smile by getting attractive young models to show off his cloth, but he
did not escape the presidential wrath when he said he was seeking big new

``Perhaps the money will go to finance your easy life,'' Yeltsin stormed in
front of a crowd of workers nervous of discussing delays in their pay under
the eye of their boss. 

The manager of a cattle-breeding farm fared little better. 

``I always hear such phrases,'' Yeltsin snapped when the man said output was
up. ``The Bolsheviks have already said this,'' he said. ``Do you think I don't
understand anything?'' 

Yeltsin also accused Kostroma's governor of trying to blame Moscow for all the
region's wage and pension delays even though he was responsible for half. But
though he may claim to understand the problems, he did not set much of an

He brought with him 46 million roubles ($7 million) owed to pensioners,
teachers and doctors and other state workers. His spokesman said it was an
unfortunate tradition that money tended to be released in time with official


The IMF is not happy with such loose financial planning. 

The Fund's first deputy managing director Stanley Fischer said on his latest
visit to Russia it was time companies, especially big monopoly energy
companies, began paying taxes. 

``It's a very unusual belief that you don't have to pay taxes, that they're a
subject of negotiation,'' he said. ``That should not be the case.'' 

Driven by fears that without IMF cash the rouble could slide, sparking
inflation and wiping out the gains of seven years of painful reform, the
government has taken Fischer's message to heart, declaring an end to the
practice of writing off mutual debts and insisting taxes are paid in cash. 

In Kostroma, the effect of the measures has been dramatic. The town has been
one of several to have lost its hot water when the local gas company, under
pressure to pay taxes to Moscow, responded to local non-payments by simply
turning off the taps. 

Tsikunov admitted to playing a role in the tax problem, saying he lets some
local firms off their taxes because they would otherwise go under. 

Arguing ``it is harmful to give up smoking all at once,'' he predicted the
government's crackdown would not last the summer. 

``All talk about getting all taxes in real money today is groundless. It won't
happen,'' he said, adding that he had to think about the well-being of the
local population. 

For all the government's good intentions about imposing financial discipline,
local leaders in a country where the temperature drops to minus 40 degrees
Celsius (minus 40 degrees Fahrenheit) have other priorities. 

Come the winter, Tsikunov said he would use his emergency powers to keep the
hot water running, though he did not make clear whether he would target tax
dodgers or the energy firms. 

``In the winter we will behave differently. If necessary we will take them all
and put them in prison. We will not allow the pipelines to be shut off,'' he


>From RIA Novosti
Obshchaya Gazeta, No. 30
August 1998
And hopes to hold out until autumn
By Yelena DIKUN

On August 1st the Russian Cabinet of Ministers led by
Kiriyenko marked its first 100 days of work. The Russian White
House does not intend to stage grand festivities on this
occasion, but the mood of its inhabitants is quite festive.
According to them, the fact that the young government has
managed to stay in office for 100 days is a worthy occasion for
The point is that for the past three months the
influential opponents of young technocrats spoke loudly about
the helplessness of the new Cabinet of Ministers and predicted
its early fall. The confidence in the quick change of the
government was so strong that even such experienced persons as
oil barons believed it and advanced last Thursday a tough
ultimatum to the Kiriyenko team. The government is convinced:
such experienced and cautious people as Vagit Alekperov or
Mikhail Khodorkovsky would not have staged such a public
scandal for the Cabinet of Ministers, if they had not been
confident in the success of their action. 

Split in the Club of Oligarchs
Obshchaya Gazeta learnt about some details of the
appearance of the notorious address by eight heads of the oil
and gas companies to the President and the government of
Russia. On July 21, two days before the publishing of this
address, the same persons sent letters to the President and the
government. They were intended for office reading and were
written in quite a different tone than the address which
followed them. The businessmen, in a polite form, requested the
President to withdraw his veto on the amendments to the law "On
Excise Duties" reducing the rate of excise duty on crude oil
from 55 to 25 roubles per tonne. The secretariat of the Prime
Minister registered the letter as an ordinary paper and
included it in the ordinary waiting list. "The government
cannot put aside all its matters and rush to resolve the
problems of the oil sector. The government can no longer make
concessions to them," a high-placed official of the Prime
Minister explained to Obshchaya Gazeta. The government believes
that lately the government has already provided a lot of
benefits to oil companies. For instance, it struck off the
penalties accumulated for untimely payments to the budget and
this sum amounts to 25,314 million roubles. Meanwhile,
according to the government's information, the oil companies,
like Gazprom, to which tough measures were applied, have
internal resources: using their previous accumulations, they
could quite repay debts to the budget. However, the signatories
considered neglect of their essential needs as a clear
disrespect for their persons. Apart from this, their ambitions
have been strongly fuelled by some high-placed officials from
Staraya ploschad. As our source says, deputy head of the
presidential administration Alexander Livshits inspired hope
for the oil magnates to the effect that the government was
virtually on the brink of collapse and one more and decisive
blow will put an end to it. "The point is that the position of
Alexander Livshits is shaky." He was involved in the Gazprom
story when he held live telephone talks with Rem Vyakhirev. The
President never forgets or forgives such things. It has been
practically decided that after his return from vacation, Boris
Yeltsin will part with his economic adviser. 
Whatever it is, Lukoil president Vagit Alekperov and Yukos
head Mikhail Khodorkovsky decided to stake their all. On July
23 their authorised representatives made public the address of
the eight. Judging by everything, the magnates were in great
hurry and wanted to accomplish this by the meeting of Sergei
Kiriyenko with the President scheduled for Saturday. That is
why they failed to coordinate their demarche with the other
signatories of the first letter. Thus, according to information
of Obshchaya Gazeta, the reception office of RAO Gazprom board
chairman Rem Vyakhirev received the fax of the address on July
22 at about 5.30 in the evening. At that time, Vyakhirev was
paying a visit to his dentist. The Gazprom secretariat did not
pay due attention to the important correspondence and put it
aside. In their turn, the senders of the message, after failing
to receive the answer, qualified Vyakhirev's silence as his
The following day, when the scandal erupted, Vyakhirev was
furious. The company held an office investigation, during which
the ill-fated fax was found. Vyakhirev immediately demanded
that a statement should be made on his behalf to the effect
that the whole story is a complete surprise for him and that
Gazprom had not signed any addresses. 
After this, the statement was disavowed by the heads of
Sidanko, Sibneft and the Tyumen oil company. It is quite
possible that they had not received the text of the address
"Some two or three oil magnates thought that they would be
able to rock the government boat and dictate their terms. But
they miscalculated by deciding that they have the right to
speak on behalf of all heads of raw materials producers. Of
course, the members of this club have common interests but
their tactical tasks at the moment are different," our
government source summed up this story. 

Governors Reluctant to Enter the Government 
Coming through unscathed in the confrontation with oil
barons, the government, however, failed to keep its ranks
clean. It is true, though, that the appointment of Communist
Yuri Maslyukov to the Cabinet of Ministers is not considered by
it as the introduction of an alien body. On the contrary,
according to the official consulting Obshchaya Gazeta, the
Prime Minister had for long maintained close business contacts
with the chairman of the State Duma committee on economic
policy and had tried for two months to make him give his
consent to his appointment as the industry and trade minister.
However, every time Kiriyenko met with the blind wall of
misunderstanding on the part of oligarchs and the Kremlin. The
opponents gave in after realising that Boris Fedorov was
quickly gaining strength as chairman of the State Tax Service
who was introduced into the Presidium of the government. "Boris
Fedorov is moving like a bulldozer. He is clearly seeking the
post of a Vice-Premier. To halt his movement somehow, a strong
counter-balance is needed. This role can best of all be played
by an experienced Communist bureaucrat," explained our source.
The fact that in today's composition of the government Yuri
Maslyukov looks like a figure reanimated from the past does not
confuse government members. "First of all, he excellently knows
production. Otherwise he would not have been in the State
Planning Committee of the USSR. Secondly, there are few persons
wishing to enter the government." 
[DJ: rest of text missing] 


From: "Steven Solnick" <>
Subject: RE: "my" Komsomol crooks (Hough/#2294)
Date: Sun, 2 Aug 1998

In a recent posting (#2294), Jerry Hough compares the new Minister of Trade
and Industry, Yuri Masliukov, favorably to "Steve Solnick's inexperienced
young Komsomol crooks of the 1980s like Kiriyenko." This reference may have
puzzled many of your readers, and I just wanted to put it in context, and
also to take exception to one part of it.

Prof. Hough's reference is to my recent book, Stealing the State (Harvard
Univ. Press, 1998), which examines the collapse of Soviet institutions under
Gorbachev. One chapter of that book examines the disintegration of the
Komsomol, and the flow of substantial Komsomol assets into the fledgling
private sector, especially the banking system. The "Komsomol bankers"--and
Kirienko was just one of many--got their starts in business with money they
effectively stole from state and party institutions, and it's therefore fair
to call them crooks (as I do in the title of the book). It's not accurate
to call them inexperienced, however, even in comparison with a 60-year old
Communist Party luminary like Masliukov.

The Komsomol served as a combination boot camp and business school for the
post-Soviet Russian economy. Individuals like Kirienko who emerged from it
may well be the most experienced actors in Russia when it comes to playing
by the rules of bandit capitalism we now see in force. I'm not sure
Masliukov's years heading Gosplan offer him anything remotely like the same
perspective, but Prof. Hough would know his bio far better than I.
As I suggest in my book, "we would expect [the new industrialists] to have a
strong distrust for new institutions of central administration...since they
know better than most how easily authority can be debased." My sense is that
one of their own breed stands a better chance at understanding this new
dynamic and coping with it from within the government than a former central
planner would.

This assumes, of course, that Kirienko and his team genuinely seek to better
Russia and not merely to line their pockets--an assumption Prof. Hough might
well reject (judging from his comments on Boris Fedorov, at least). Here,
reporting by David Hoffman of the Washington Post is helpful. Hoffman found
that some of the profits Kirienko made on arbitrage and banking in Nizhnii
in the early 1990s were used by Boris Nemtsov to settle the oblast's pension
bill. Now, certainly Kirienko and Nemtsov had their own agendas at the
time, but it does provide at least one instance of doing good while doing

Steven L. Solnick
Asst. Professor of Political Science
Columbia University


Washington Post
August 2, 1998
[for personal use only]
A LOOK AT . . . Russia's Struggles
Waiting for the Taxman
By Daniel Yergin and Thane Gustafson
Daniel Yergin is co-author of "The Commanding Heights: the Battle 
Between Government and Market." Thane Gustafson is author of the 
forthcoming "Capitalism Russian-Style" and a professor at Georgetown 
University. They are chairman and a director, respectively, of Cambridge 
Energy Research Associates. 

Acting like the CEO of a troubled company, Russian prime minister Sergei 
Kiriyenko met last week with analysts from banks and brokerages to 
report on an extremely poor quarter and lay out what his government is 
doing to turn things around. He was compelled to act by the rapid fall 
of Moscow financial markets, as investors delivered a stunning 
no-confidence vote in the $22.6 billion assistance package put together 
by the International Monetary Fund (IMF).

There is no doubt that the country is now caught up in widespread 
economic distress that portends social and political upheaval but that 
is not the whole story. The country has made surprising progress toward 
market institutions; and until the crisis struck, was starting to grow 
again for the first time since 1991. The heart of Kiriyenko's problem is 
not the financial markets. It is a pernicious tax system. And it is the 
struggle over taxes that will, in large measure, determine how this 
Russian crisis comes out.

The IMF and other financial institutions acted to replenish central bank 
reserves sufficiently to balance out short-term government debt, win 
back the confidence of international investors, and stave off 
devaluation of the ruble by providing liquidity to the Russian central 

Devaluation would have driven out investors, demoralized the new middle 
class, and reignited virulent inflation. As Finance Minister Mikhail 
Zadornov told an unprecedented conference call with 640 foreign 
investors in July, a devaluation would mean that Russia "would lose 
everything that has been achieved on the path of reforming the economy 
during the last six years." Certainly, the prospects looked very grim. 

In the eyes of some, Russia has become the very embodiment of the "moral 
hazard" debate that has raged ever since the IMF intervened in 
collapsing Asian economies last summer. In financial markets, "moral 
hazard" is the risk that investors should bear from an imprudent 
investment. Investors should have known better, critics of the IMF 
argue, and the IMF should not be saving them from blunders. The critics 
also argue that the previous government's reform pledges have gone 
unfulfilled and that crime and corruption are endemic in Russia.

Certainly, the inequalities in the "new Russia" are all too evident. The 
glittering multi-story underground mall next to the Kremlin, near where 
the tanks used to roll during May Day parades, looks as opulent as any 
in the world. Yet only a few blocks away, coal miners have been camped 
outside the Russian White House, stripped bare to the waists, pounding 
their red and white hard hats on the ground in unison to protest that 
they have not been paid for months. They are not alone. Other miners are 
blocking major railway lines. All across the country, millions of 
doctors, teachers, defense workers, and on and on, are similarly unpaid. 
And the pay that many receive is minuscule: $50 or $100 a month.

Yet fears of impending chaos need to be put in perspective. It is now 
too easy to forget that seven years ago Russia was a communist country 
and the perilous situation that it was in when communism collapsed. 
Yegor Gaidar recalls that when he took over as finance minister in 1991, 
it was like "traveling in a jet and you go into the cockpit and you 
discover there's no one at the controls." 

A lot more has been accomplished than virtually anyone would have 
predicted. Russia has made surprising progress toward becoming a market 
society that is integrated--or at least halfway integrated--into the 
global economy, led by an almost-post-communist generation. There is a 
growing middle class in the cities. Automobile production has turned up 
sharply. Gasoline consumption is growing fast. Brick by painful brick, 
institutions of a market economy are being put in place--although there 
is much still to do in terms of law, contracts, property rights, 
corporate governance and bankruptcy.

Still, the risks of the current crisis are very high, which is why the 
West came up with the sums it did. In part, the dangers are 
geopolitical: nuclear weapons and geography. Add to that the 
deprivation, anger and humiliation. How secure is the future when a 
lieutenant colonel working in the defense ministry, who has not been 
paid for a number of months, has to take a night job as a security guard 
and then a third job as a janitor to feed his wife and baby? The effects 
of political chaos in Russia would not easily be contained within its 
new borders, nor perhaps even the old borders of the Soviet Union.

The heart of Russia's current crisis is government finances. But that in 
turn is the creation of a weak and divided government. The prime symptom 
of this paralysis has been the inability to balance the budget owing to 
inadequate revenues and insufficient tax collection.

To make up for the deficit, the government piled up short-term public 
sector debt. This contrasts with Asia, where the culprit was the 
build-up of private sector debt. But for Russia it was external shocks 
that turned a tough situation into a crisis.

The first trigger was in fact the economic woes of Asia, which have led 
to the dramatic recalibration of risk by international investors. Until 
late 1997 and early 1998, Russia thought it was immune to the spillover 
effects. It found out otherwise, as confidence evaporated and 
emerging-market investors pulled out their money. Interest rates rose 
from 10 percent to 150 percent in an effort to hold on to capital, 
creating enormous short-term repayment obligations for the government 
and potential ruin for private companies.

The second shock came from collapsing commodity prices, particularly for 
oil, which is Russia's main export. Oil prices have fallen by half since 
early 1997, dramatically cutting earnings and tax receipts.

Russia's financial system remains very vulnerable to global economic 
conditions, and both the U.S. government and the IMF are unlikely to 
arrange another bailout in the months ahead. Thus, Russia must face its 
own problems, beginning with the budget and tax reform.

In fact, the government has been moving with some dispatch to bring its 
spending (excluding debt service) into balance. It is cutting expenses 
in many ways, big and small. Military officers have even been told that 
they can show up for duty in civilian clothes so that the government can 
save money on new uniforms.

With significant cuts already made, the focus is turning to increased 
tax collection. Americans have been accustomed to income taxes for 85 
years; for Russians, this is something that started only a few years 
ago. Most Russians don't pay their taxes. The current tax system is a 
monstrosity that encourages nonpayment. It is punitive, complex, 
contradictory, and the rates are confiscatory. Those who do have the 
civic sense to pay taxes find that only turns into them a target for 
even more taxes from revenue-hungry national, regional and local 
governments. One Western company was subject to just three taxes when it 
started doing business in Russia three years ago; now it is subject to 

This tax system drives away much-needed foreign investment and currently 
is the number one reason foreign companies don't want to invest. The IMF 
deal hinges on further progress on tax reform; better tax collection is 
supposed to shrink the government's budget deficit.

But taxes are also going uncollected because money is disappearing from 
the economy. Enterprises do not pay each other and thus they do not have 
the cash to pay taxes. Instead they exchange goods and services. This is 
what Grigory Yavlinsky, leader of the Yabloko party, calls the 
"barterization of the economy." By his estimate, an extraordinary 75 
percent of the economy is based on barter. One of Russia's largest 
companies only receives 8 percent of its domestic revenues in cash. The 
rest is barter and promissory notes. 

"People could pay more taxes," Yavlinsky says, "if only they could pay 
it in shoes and trousers."

More than anything else, it is the tax system that encourages barter. 
Most companies owe large amounts of taxes. Any money that shows up in a 
bank account can, under Russian regulations, be seized. The penalties 
are Draconian. Thus, perversely, the current tax system is holding up 
the movement to a market system and encouraging managers to disappear 
with their production into the shadow economy. The solution is a tax 
system with lower rates that, at the same time, promotes much broader 

But the crisis is not just about economics. It is also about politics 
and legitimacy. The crisis highlights the poor health and erratic 
leadership of Boris Yeltsin. He abruptly fired the government of prime 
minister Viktor Chernomyrdin last March replaced it with a "government 
of 35-year-olds," led by Kiriyenko. This government, though tipped not 
to last, is regarded by many as the most competent of post-communist 
Russia. The commitment to do something about revenues and taxes seems 
stronger than it has been before. 

Kiriyenko not only broadened the base of his government, but also raised 
its average age, by asking veteran communist Yuri Maslyukov to be his 
new minister of trade and industry. Maslyukov previously headed Gosplan, 
the communist central-planning apparatus, under the old regime. Despite 
the objections of the Communist Party, Maslyukov has accepted the post. 
He would hardly be called a reformer but his presence in the government 
expands its appeal at a critical time.

An austerity budget and further reform tough enough to satisfy the IMF 
will mean a continuing battle with the Duma, which will take place 
against a backdrop of severe social distress. The IMF itself has become 
a prime target in Russian politics. This past week some of the companies 
that were among Yeltsin's biggest supporters in 1996 denounced the deal 
as an affront to Russian sovereignty.

The outcome of the struggle over the next couple of months will 
determine the degree to which confidence is restored. But this certainly 
will not be the last crisis on Russia's road to reform.


Date: Sun, 2 Aug 1998 
From: Ronald Pope <>
Subject: What Is to Be Done?

With apologies to Lenin--who ultimately got the answer to this question all
wrong anyway....

I agree with Martine Self (JRL #2280, 24 July 1998) that more emphasis--a
lot more emphasis--needs to be put on what's working in Russia, and by
implication, what can be done to help improve the situation.

Ignoring the problems would be foolish in the extreme. At the same time
focusing only on the problems undermines efforts to improve the situation
in at least three ways: 1) it encourages the view that "nothing can be
done"--so why try, 2) it minimizes dissemination of information about what
is working and what is worth trying, and 3) the constant emphasis on the
negative scares off prospective investors.

A very strong argument can be made that hope for the Russian economy lies
primarily with small and medium enterprises, not with the hold overs from
the Soviet system. The large firms, for the most part, are too stuck in
the past to be successfully "restructured." Both managers and workers want
to cling to practices that simply can't be made to work effectively in even
a semi-competitive economy. These practices include depending on state
subsidies, "top down management," the "guaranteeing of jobs" no matter how
poorly the work is done or how overstaffed the enterprise is, and lack of
attention to efficiency and quality. 

In addition, large scale projects attract the mafia and greedy
bureaucrats--which, admittedly, are frequently one and the same.

In contrast, small startup businesses have to be efficient simply to
survive. They aren't going to get government subsidies, and no one is
going to pay them for their products or services out of a sense of charity.
They either deliver the goods or they fail. If they succeed, they provide
employment, they pay wages on time (or loose their workers), and they pay
at least some taxes. (Clearly, the one thing the central government can do
is restructure the tax system to the benefit of small business.) Those
that are the best run will grow. Also, successful firms will be copied. 
Further, some employees will leave and start their own businesses. 

Small enterprises simply cannot "suck up" resources and then produce less
than they receive. They have to make a net contribution to the economy to
survive at all.

For example, in the spring of 1994 we started a remodeling business in
Vladimir. We were the first firm to install suspended ceilings and
imported wall paneling--which give the interiors of Soviet-era offices an
entirely new look. Admittedly some of the first work our crews did wasn't
the best possible quality. But, thanks to the foreman, Andrei Koretsky,
that soon changed. Andrei had spent some time in the U.S.--and he also
helped build the American Home in Vladimir which serves as a model and
where our offices are located. Andrei wanted the quality of his work to
match that in America. When one Russian builder tried to talk his way out
of redoing some work with the argument that it was "good enough for
Russia," Andrei replied that it wasn't good enough for our firm. Several
workers were let go because they weren't willing or able to meet quality
standards--and the "message" got through to those who stayed on: "Do it
right or look for another job." Providing quality work was the only way
our firm could attract clients.

Soon other firm's were copying what we were doing--because it was initially
very profitable. Now a number of firms are doing very decent work--and
profit margins are down considerably. Those that don't do decent work
can't stay in business. This is clearly to the benefit of the community as
a whole.

All the remodeling businesses in Vladimir, unfortunately, have to use
primarily imported building materials and tools. Very little is being
produced in Russia which can match the quality of the foreign products--and
none of the clients wants to pay good money for poor quality. For example,
Russian made drywall crumbles easily. 

There are a number of building products that can and should be produced in
Russia--which has the world's largest forest reserves. Start up costs for
the manufacture of many of these products would not be great.

Unfortunately, small projects generally lack "sex appeal"--for both Russian
and Western bureaucrats. Further, financial institutions and large
investors reason that it costs them just as much to check out projects
costing less than one million dollars as it does to review multimillion
dollar projects. Therefore, the larger projects are thought to be more
"cost effective." Finally, foreign investors in particular who are willing
to make small investments generally don't have the time or resources to
"get started" in Russia. (Nothing good is going to get done "overnight"
under Russian conditions of corruption, bureaucratic ineptitude, ridiculous
tax laws, etc.)

However, small investments are frequently the best way to get started. 
This is true even for large Western firms interested in the Russian market.
One of the keys to success is linking up with Russians who understand what
needs to be done--or are truly willing and able to learn--and who are
reliable. The only way to know for sure that you are dealing with such
people is to work with them for awhile. This is much easier--and less
risky--to do with small scale projects.

Once you are sure you are working with reliable and capable people--and
after you have gotten some experience in dealing with Russian culture--you
can expand your operations.

For example, everyone knows that the Russian telecommunications system is
in bad shape. In Vladimir, you can dial one number but get another, the
quality of the connection is frequently poor, and the phones often don't
work at all. Fortunately, it is possible to send and receive
e-mail--because the computer keeps re-reading the information until it gets
it right--but you can't send faxes over most phone lines. There is also a
major shortage of capacity--more people would like to have a phone than the
system can handle. This is an especially important bottleneck for many

A group of local engineers would like to set up a fixed wireless phone
system in Vladimir, starting with one station. (This is different from a
cellular phone system. Among other things, it is quite a bit less
expensive. It is also less expensive per phone than laying new cable.) 
Although it may seem strange to say so, unfortunately, startup costs will
probably be less than a half million dollars for this project. I've been
repeatedly told that this is too small for international lending programs
such as the EBRD and for most private investors--for the reasons noted
above. However, if this first step works well--and if the Russians
involved prove to be good to work with--then more base stations can be
added in Vladimir (the demand is there), and the same system can be
installed in other cities, relying on the now trained Russians to do most
of the work, including dealing with the local bureaucrats, etc. 

In other words, this initially small investment can grow into a large
investment. And the resulting improvements in the telecommunications
system will greatly benefit other businesses. They will be able to add the
extra lines they frequently badly need, and they will be able to have much
better access to international telecommunication services. Therefore, they
will be able to more easily make international calls (with decent quality
connections), and they will be able to access the Internet and send and
receive faxed documents much more easily. 

But how does a small business like this get started?

The U.S. government programs that I am familiar with which are designed to
assist small businesses are in general not effective--and sometimes they
are even counter productive. These include the Peace Corps manned American
Business Centers and the Business for Russia Program. To begin with,
neither of these programs has access to any significant investment funds. 
There is little the Business Centers can do when someone comes to them with
a good idea beyond provide "advice." Further, the Peace Corps volunteers,
for all of their truly admirable dedication, tend to either know very
little about Russian culture or very little about business, especially
business as it is conducted in Russia. By the time they learn enough to be
helpful, their two year tours are up. Finally, the Peace Corps program in
Russia seems to be much less well organized than other Peace Corps programs
around the world. On more than one occasion I have been approached by new
volunteers with a request for help in understanding Russia, including
suggested reading lists, after their requests for information from Peace
Corps headquarters have gone unanswered. Further, there seems to be little
by way of effective support once they volunteers are in country. For
example, they are not provided with lists of useful contacts--even though,
thanks to the work of private information gathering organizations, these
are readily available. (We had the only copy in Vladimir of the Center for
Civil Society International's very helpful publication, The Post-Soviet

The Business for Russia Program seems to be an excellent example of
"bureaucracy at its best." The emphasis is on "numbers served" vs.
"results achieved." Much more would be accomplished in Vladimir Oblast if
they would select 5 truly promising individuals, carefully link them with
people in the U.S. who can truly help them start or expand a small
business, and then allow them to stay in the States as long as is necessary
to learn what they need to know. Instead, this program sends groups of 50
Russians per region to the U.S. for five weeks. I do not know of a single
individual from the first group of 50 people from Vladimir who participated
in this program who benefited to the extent intended. They all learned
something--just not enough to make a real difference. Further, they all
needed more time in the U.S. to build the links with their American hosts
that could have led to some small but serious investments in joint
ventures. Unfortunately, bureaucrats tend to focus on the superficial--in
this case, "numbers served."

In contrast, over the past four years we have helped bring just six militia
officers from Vladimir to the U.S. for a 16 week program. This includes 12
weeks at the University of Illinois Police Training Institute followed by 4
weeks spent with various police departments around the state. The
participants are carefully selected and they spend enough time in the U.S.
doing the right things to make it a very productive experience. This
program has contributed to concrete changes in police training procedures
throughout Russia. 

Programs like VOCA, which provides advice to agricultural projects with the
assistance of expert volunteer advisors, seem to be more effective than
organizations run directly by government bureaucrats. But they also suffer
from a lack of access to investment capital.

All these government-sponsored programs become counterproductive when, with
their emphasis on the superficial and lack of effective follow through,
they give the impression that "capitalism doesn't work." For example, the
American Business Centers have a general reputation for being a waste of
time and resources. This doesn't help convince people that small business
development is a good idea--or that the U.S. can be relied on to provide
effective help. 

Despite the failures of most of the programs which are supposedly intended
to assist small business in Russia, many Russians are finding ways to get
things done. They raise money from friends and relatives, they invest a
great deal of "sweat equity," and they deal with the ridiculous tax
situation by simply not paying all that they owe--if they pay anything at
all. However, with the application of a little common sense, a great deal
more can be accomplished.

Specific, small, doable projects need to be identified, along with capable
people. (This means that you need to work with a small number of projects
and people at any one time.) Then advisors need to stick with these
projects and people until a "critical mass" has been achieved. Two week on
site visits with very little follow up or short trips to the U.S. (again
with no meaningful follow up) are simply not going to accomplish very much.
What is needed are genuine business incubators--which in fact work well in
the U.S. In turn, these incubators need to have access to decent amounts
of startup capital--which they can make available to even very small

For example, there is to date no commercial janitorial service in Vladimir.
It would not take much capital to get one started--but it would take a lot
of time and effort to select, train, and monitor the staff. (You would
have to make sure they didn't fall back into bad habits--like using dirty
rags to "clean" everything in sight.) You would also have to convince
prospective clients that they could trust the cleaning staff not to steal
them blind. (Staff selection and supervision will be extremely important.)

For the record, more emphasis on cleanliness should spill over into other
areas where "quality counts." 

Some observers might argue that "Russian culture" will make it "impossible"
for them to meet American standards of cleanliness. In this context, just
about everyone I talked to when we were building the American Home in 1992,
including most Russians, was convinced that Russian builders could never do
Western quality work--at least not in this century. But this quickly
proved to not be true. In one case, a joint venture partner returned for a
visit after we had remodeled the Russian plant director's office. The
foreign partner was very impressed with the new office, but assumed the
work had been done by foreigners. The director took great pleasure in
informing him that everything had been done by Russians.

Again, despite all the failures to take advantage of opportunities, a lot
is being accomplished by small businesses. (See my commentary on the
changes in Vladimir over the past 8 years: "The View from Vladimir
Oblast," JRL #2274, 21 July 1998.)

What is needed is more help for startup businesses, including providing
access to small loans on reasonable terms and providing more carefully
focused assistance (e.g., 5 instead of 50 participants in exchange
programs) with much better long term follow up. 

In addition to setting up truly functional business incubators, one other
way to do all of these things is to help foster more joint ventures. An
investor will automatically help take care of the details and is guaranteed
to provide all necessary "follow up." An American janitorial company--with
sufficient patience and a willingness to learn about Russian culture--could
accomplish a lot working with the right people in Vladimir. But how do you
persuade them to take the risk? In other words, "What is to be done?"

For a start, providing low interest loans and OPIC political risk insurance
for small projects would be a much more effective use of taxpayer dollars
than most of the current programs. Further, more needs to be done to
"advertise" the multitude of investment opportunities available in Russia,
and more emphasis needs to be placed on effective strategies for dealing
with the admittedly large number of problems that crowd the Russian
landscape--rather than focusing only on the problems and leaving the
impression that "nothing can be done." In short, what is needed is a
realistic problem solving approach that focuses on getting meaningful
results. It CAN be done!



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