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Johnson's Russia List


August 14, 1998   
This Date's Issues: 2307 2308 

Johnson's Russia List
14 August 1998

[Note from David Johnson:
1. Journal of Commerce: Jonathan Steele, Russia's abnormal economy.
2. Moscow Times editorial: Devaluation Of Ruble Premature.
3. Reuters: Russian economist agrees with Soros on devaluation.
4. Financial Times (UK) editorial: Russia's options.
5. Reuters: Confidence crisis heart of Russia turmoil. 


8. Los Angeles Times: Jason Takenouchi, Russian Asks County for Views
on Home Violence.

9. Jerry Hough: Harvest.

11. Moody's: Russia produces more headlines than products.
12. Moscow Times: Simon Saradzhyan, Army Tells Soldiers To Forage For

13. Reuters: Soros has strange love affair with Russia.]


Journal of Commerce
14 August 1998
[for personal use only]
Guest Opinion
Russia's abnormal economy
Jonathan Steele writes for The Guardian newspaper. This article was 
distributed by Scripps Howard News Service. 

As Soviet communism went into its death throes, Western advisers arrived 
in Moscow promising Russians a "normal" economy.

Instead of lines, shops would have goods and consumers could go in with 
money to buy them. It was heady, attractive stuff after a period of 
rationing in which Russian families even started to rely on food aid 
from the European Union.

Seven years later, "normality" certainly seems to pervade Moscow. The 
first wave of mafia capitalism, with its armor-plated Mercedes, 
grotesque nightclubs and a handful of supposedly Western-style 
restaurants charging ludicrously high prices, has long gone.

With close to a million people earning comfortable salaries in the head 
offices of joint ventures, banks, the media and foreign law firms or 
living off lucrative privatization deals, a substantial service sector 
has sprung up to cater for them. Along with the supermarkets on the main 
boulevards, side streets have well-stocked shops that weren't there two 
years ago.

You no longer have to trek miles to the nearest cafe. Medium-sized 
family cars, imported and unostentatious, throng the roads. In the 
subway, where Soviet commuters used to read newspapers or books, 
Russians now leaf through previously unknown glossy magazines on home 
improvement, fitness and fashion.

But don't pop the champagne corks yet. Moscow always was the exception 
in the Russian economy. Soviet leaders kept it better supplied with 
goods to deceive foreign visitors, and even though that kind of command 
economy is over, the unusual volume of new money in Moscow is bound to 
produce a trickle-down effect.

Some four-fifths of Russia's cash and liquid assets -- that part which 
is not sent abroad -- is estimated to be held in Moscow banks. The 
executives of the oil and gas sector live in the capital city, although 
the source of their wealth is thousands of miles away in Siberia.

Another reason for postponing celebration is the amount of "abnormality" 
the Russian economy still has. Take barter. According to Grigory 
Yavlinsky, a leading pro-Western advocate of the market system, 
three-quarters of the country's domestically produced goods are traded 
by barter. This is little different from the Soviet system, which was 
almost entirely non-monetary at the wholesale level. The state ordered 
enterprises what to produce, fixed prices -- and nominated customers.

In one way, the Russia of today is less dependent on money than it was a 
10 years ago. Soviet wages were paid in cash. In much of Russia, that is 
no longer the case. Except in the country's fledgling small and medium 
enterprise sector, staff often get paid with products, which they 
convert to cash by selling.

In a healthy market economy, people save. But because of the erratic 
nature of wage payments, the spread of poverty and the unexpected 
experience of hyper-inflation after price controls were first lifted in 
1992, Russians are less inclined to save than they were in the Soviet 

Life has become unstable and unpredictable. You quickly spend what you 
have. If necessary, you borrow. In the Soviet period, people regularly 
took loans from their friends and family in emergencies that their 
savings could not cover.

This culture of private solidarity has survived. A sociologist friend in 
Moscow who earns 2,000 rubles a month (about $330) reported that she has 
this amount outstanding in loans to half a dozen less well-off friends. 
How many people in Britain are lending the equivalent of a month's 

In the Soviet Union there was a second form of networking to beat the 
problem of scarcity. It was called "blat." In a fascinating new study, 
"Russia's Economy of Favors" (published in Britain by Cambridge 
University Press), Alena Ledeneva argues that by softening its 
rigidities, "blat subverted the Soviet system at the same time as it 
sustained it."

People would get their meat "under the counter" from a neighbor who was 
a butcher. Friends would help you to jump the line for a ticket to a 
vacation resort or to gain access to a university course.

This was not bribery, since money did not change hands and there was no 
expectation of an immediate favor in return. As Ms. Ledeneva puts it, 
"the ethics of blat -- obligation to help, orientation to the future, 
gratitude and modesty in demands -- were grounded in Soviet realities 
and seem incongruous in post-Soviet conditions."

In practice, blat has survived the end of communism, which is why she 
puts quotation marks around her description of New Russia's "market" 

While blat is no longer needed to obtain goods, it is used to get jobs 
and services. Businessmen turn to it to obtain valuable access to state 
information, inside knowledge of rivals' plans and bank loans on 
privileged conditions.

In many cases, blat has been given a price tag. People pay high prices 
in cash for favors that used to be done free or for small presents.

The moral is not that Russia has no market or that nothing has changed 
beneath the surface veneer of capitalist transformation. Russia is 
indeed undergoing a profound transition, but its real economy will 
remain a hybrid for a long time to come.

The attempt to impose a Protestant ethic of competitive individualism 
and a new psychology of market attitudes is diluted by old practices of 
informal networking, solidarity among friends and distrust of 


Moscow Times
August 14, 1998 
EDITORIAL: Devaluation Of Ruble Premature 

The question of whether Russia should devalue the ruble to solve the 
financial crisis has been posed from two crucial directions in the past 
two days. First, billionaire financier George Soros said Russia's 
situation was "terminal" and suggested a devaluation of 15 percent to 
sort things out. 

More worryingly, the Central Bank resorted to methods for restraining 
speculation against the ruble that were scarcely consistent with a 
market for a freely convertible currency -- imposing administrative 
restrictions on certain banks to stop them from buying dollars for 
speculative purposes. The measures themselves have apparently already 
been eased, but their use certainly created an atmosphere of crisis. 

Despite the panic, it is worth remembering that Russia is not in any 
imminent danger of aforced devaluation or a debt default. The Central 
Bank still has more than $17 billion in reserves to defend the ruble by 
more conventional means. This is certainly enough to last until the end 
of the year. 

The Russian government may be having trouble borrowing money to 
refinance its debts, but with International Monetary Fund and Central 
Bank help, it too can last for a couple of months. 

This gives Russia time to consider policy options and hope for an 
improvement -- and there is hope for an improvement. 

The current panic has been caused by a combination of ugly factors. 
Investors are reluctant to buy Russian treasury bills or hold rubles 
largely because of the fall in world oil prices, on which Russia 
depends, and also because of the bad news from Japan and Wall Street. 
All of these things could change for the better. 

And investor sentiment about Russia will also improve if the government 
continues to make progress toward improving its finances and manages to 
push its austerity package through parliament. 

Later in the year it may be possible to raise more money on commercial 
markets, albeit at high prices. Privatizations could also be used to 
raise cash. 

On the other hand, no one should be fooled into thinking devaluation is 
a costless panacea. It will not of itself solve the government's fiscal 
problems. Even Soros admits that it will terrify markets and can only 
work if the International Monetary Fund and the Group of Seven chip in 
another $30 billion to steady nerves. And of course, devaluation will 
cost ordinary Russians a lot in terms of higher inflation. 

If things do not improve, the doomsayers could be proved right. But the 
country still has a good chance of riding out the crisis without 
resorting to the Russian roulette of a ruble devaluation. 


Russian economist agrees with Soros on devaluation
By Julie Tolkacheva

MOSCOW, Aug 13 (Reuters) - Russia's most outspoken critic of the central
bank's monetary policies presented the case on Thursday for a devaluation,
saying it would prevent an Indonesian-style crisis. 

Andrei Illarionov, who has been feuding with the central bank for months over
devaluation, told a news conference that he agreed with a proposal by
international financier George Soros to devalue the rouble and peg it to the
dollar or euro. 

"If unprecedented measures are not taken in the very near future, there are
serious grounds to expect the course of events we saw in our recent history
and in the recent history of a southeast Asian country," Illarionov said
referring to the collapse of the Soviet Union and social unrest in Indonesia. 

The central bank on Thursday reiterated its official position that a rouble
devaluation would not solve any of Russia's problems and would only further
destabilise markets. 

But Illarionov did not agree. "Devaluation will bring rouble liabilities and
hard currency reserves into equilibrium. The quicker the authorities carry out
a devaluation, the quicker the markets will stabilise." 

Soros, in a letter to Thursday's Financial Times newspaper, said the best
solution for Russia would be a "modest" 15-25 percent devaluation and the
subsequent introduction of a currency board, pegging the rouble to the dollar
or euro. 

"Any man of common sense, not only an economist...would propose a rouble
devaluation to make it a strong currency," Illarionov remarked. 

He blamed Russia's current financial crisis on unbacked rouble issuance by the
central bank. 

"The lack of currency reserves of the country is caused first of all by
mistakes in the central bank's monetary and hard currency policy in the past
year and a half," Illarionov said. 

Central Bank Chairman Sergei Dubinin has dismissed Illarionov's accusations as

Illarionov, director of Russia's Institute for Economic Analysis, said
foreigners had invested $19 billion in local government paper in 1997, but the
central bank had bought only $1.8 billion. 

At the same time the central bank issued roubles and rouble-denominated
instruments in volumes exceeding dollar investment in the country, he said,
adding that devaluation was the only economic way out of the present crisis. 

He believed the government had only about two weeks to carry out a relatively
painless devaluation. 

Russian officials say devaluation would lead to a collapse in the banking
system and trigger inflation. The rouble's stability and low inflation are
seen as the two main achievements of years of painful reforms. 

The banking system is already suffering as a result of liquidity problems and
a crisis of confidence, with some banks failing to meet obligations to each
other and to the central bank. 

Russian shares fell sharply on Thursday and short-dated treasury bill yields
soared as banks scrambled for roubles. 

The central bank stood firm by the national currency, prohibiting banks' from
buying dollars for their own needs and expanding their access to overnight

But Illarionov said the measures meant the central bank was returning to
Soviet-style methods of managing the economy. 

"This is a return to the command-administrative, bureaucratic Soviet economy,"
he said. 


Financial Times (UK)
14 August 1998
Russia's options

Russia's IMF agreement last month raised hopes that its troubles might 
finally be over. This week, these hopes were in tatters, along with 
Russia's financial markets. George Soros, in a letter published in this 
newspaper on Thursday, said that it has no choice but to devalue and 
introduce a currency board. Has Russia really run out of options?

The root of the crisis is a lack of confidence in the exchange rate and 
in government's ability to honour its debt. This is despite the support 
provided by the IMF deal, and despite the government's admirable actions 
to improve the budget balance.

The financial markets are being crushed. Short-term bond yields rocketed 
to over 200 per cent yesterday, as liquidity in the interbank market 
dried up and Russia's banks scrambled to sell bonds to meet their 
liabilities. The central bank has been pouring its reserves into 
supporting the currency, prompting it on Thursday to impose limits on 
banks' purchases of foreign currency.

Yet a full-scale financial crisis is not as imminent as Mr Soros fears. 
With its reserves boosted by the IMF package, the Russian government can 
meet its debt-servicing requirements until mid-September or so, even 
assuming that it fails to issue any new debt. Both it and the west do 
therefore have some time to consider the next move.

One option is devaluation. However it hardly needs saying that this 
would be extremely risky. With markets as turbulent as Russia's, there 
can be no such thing as a "controlled" devaluation. Such a move would 
most likely spark a panic reaction, sending the rouble into a tailspin. 
This would risk all the government's achievements of the past few years, 
and could even end in the collapse of both the government and the 

The urgent challenge is to restore confidence to financial markets. What 
the IMF must do at once is announce its intention to shift more of the 
money intended for supporting the rouble towards direct finance of the 
budget. By making it easier for the government to roll over debt, this 
should help restore the confidence now sadly lacking.

Yet this tactic is only a stop gap. In the longer term, it is essential 
for the government to restructure its debt and strengthen the public 
finances. Total domestic government debt is not excessive, but its 
maturity structure, even after last month's restructuring package, is 
heavily skewed toward the short-term. The last restructuring deal 
involved converting domestic bonds into dollar-denominated securities. 
But it left the Russian dollar bond market saturated and unstable. A way 
needs to be found to lengthen the maturity of rouble-denominated bonds.

In addition to restructuring debt, the Russian government must continue 
to devote its efforts to implementing its fiscal reform programme. 
Provided it does so, the west should in turn provide the funds Russia 
needs both to meet its short term financing requirements and to 
stabilise the rouble. The confidence crisis has indeed turned out to be 
far more severe than was initially supposed, in large part because of 
events elsewhere. Yet so long as the government is pursuing a sensible 
reform programme, the west has no sane alternative but to continue to 
support it.


ANALYSIS-Confidence crisis heart of Russia turmoil
By Patrick Lannin

MOSCOW, Aug 13 (Reuters) - The latest turmoil in Russia's markets is due to
one central fact -- most investors are not convinced Prime Minister Sergei
Kiriyenko can pull the country back from financial collapse, analysts said on

"Basically there is no the Russian government being able to
pursue and push very hard its anti-crisis measures," said Caren Gaboutchian,
an economist at ING Barings. 

Analysts said Kiriyenko was doing the right thing with his package of anti-
crisis measures and determination to squeeze out more taxes. But panicky
markets meant he had little margin for error and little time to convince
investors there would be no devaluation or default on government debt. 

Recommendations for Kiriyenko at this time of crisis range through just
sitting tight and hoping the storm will pass, opting for a straight
devaluation, or forming a currency board to keep the rouble, and maybe the
government, in place. 

Kiriyenko and Boris Fyodorov, the head of the State Tax Service, together have
the onerous task of plugging Russia's leaking finances, with the country
needing some $20 billion to meet its commitments to the end of the year. 

But difficulties that Kiriyenko's anti-crisis measures have met in the
Communist-dominated Duma, and the fact that some key parts of the package had
to be passed by presidential decree, undermined confidence in the
sustainability of the package, analysts said. 

They said Kiriyenko seemed to have few options apart from keeping his fingers
crossed in the hope that domestic markets would calm down and that other
emerging markets, where turmoil has knocked Russia, also stabilised. 

They said he should keep on the right track of boosting tax collection,
reforming the tax system and privatising more. 

"What you need is a consistent period of reform and then people will start
believing that things are here to stay and that things are really improving on
the fiscal side," said John Orford, eastern Europe economist at Robert

But the government is finding time in short supply as overseas markets shudder
and the domestic interbank market reels. 

A severe shortage of roubles and high interest rates have forced some banks to
stop making repayments in the interbank loan market, sparking fears of a wider
banking crisis. 

"At the moment the only issue is if there is going to be a devaluation or
not," said Thierry Malleret, chief economist at Alfa Capital. 

He said the crisis in the interbank market could spread panic to the
population at large and a run on the banks, which would inevitably force a

He also said there were few options open to the government apart from holding
tight, trying to weather the current crisis and issue reassuring statements to
the markets. 

"They are doing reasonably well, that is the sad thing...they are working hard
to boost revenues, it is a very reformist government," Malleret said. 

Others said the government should accept the inevitable in order to build
confidence over the longer term. 

"If Russia devalues and the devaluation is a success then this could be the
beginning of an end to the crisis," said Sergei Sinegubko, an economist at
Brunswick Warburg. 

Professor Steve Hanke, professor of economics at Jonh Hopkins University, said
the only way stability and confidence would return was via a currency board, a
system of pegging currencies of which he is a well-known advocate. 

"I think it is the only thing that will stabilise the situation and keep the
Yeltsin government in the saddle," Hanke told Reuters Television. 

Under a currency board, a central bank guarantees to cover every unit of local
currency in circulation with foreign currency at the peg level. 

When local currency supply falls or expands, the central bank's reserves
automatically fall or expand in line. It is seen as a crude but effective way
to keep a currency steady and removes the currency from political influence. 

Dirk Damrau, head of research at Moscow's MFK Renaissance, said crises were
sometimes good for policy-makers. 

"Things are very bad but in some ways that can be turned to good because
radical solutions, whether it be the currency board or much more importantly
accelerating structural reforms and a dramatic fiscal adjustment come right
back on the agenda," he told Reuters Television. 

"Crises like this are also focusing a lot of attention here in Moscow and I
think that is a good thing," he said. 


>From RIA Novosti
Nezavisimaya Gazeta
August 13, 1998
The Russian army will have ten constant readiness units

Despite persistent rumours about the possible resignation
of Defence Minister Igor Sergeyev, the marshal looked spry,
alert and confident during yesterday's press conference. He
gave a detailed explanation of the Concept of State Policy on
Military Development Until 2005, recently signed by Boris
Yeltsin, and answered questions. 
Marshal Sergeyev said that the approval of the document
presupposes the creation of a normative legal basis, measures
to ensure all-round logistics, a review of the development
plans and their implementation designed to create, by a
coordinated deadline, an effective military organisation of a
rational composition, optimal structure and strength, ready to
ensure national defence and security. 
By January 1, 1999, the Russian army should have ten
constant readiness units (three all-arms divisions, three
airborne divisions, and four all-arms brigades), which would be
able to join hostilities without any preliminaries or
reinforcement. These units will have 80% of personnel by
wartime yardstick and a complete set of weapons and military
hardware, and their technical readiness factor will be brought
up to match the figures stipulated in the Defence Ministry
In view of the recent military successes of the Taliban
close to the CIS border, the situation in Afghanistan will be
discussed at the September 2 meeting of the defence ministers
of Kyrgyzstan, Kazakhstan, Belarus and Russia, Igor Sergeyev
said. The 201st Division of the Russian Armed Forces deployed
in Tajikistan is ready to repel potential provocations on the
Afghan-Tajik border.
According to our sources in the General Staff, in case of
the escalation of the conflict and a breakthrough of the strike
Taliban units into the CIS territory, Moscow might use assault
planes and bombers for their destruction. Corresponding
operational plans are being analysed now. In addition, it has
been decided to use the equipment of the Space Reconnaissance
Centre of the GRU (Military Intelligence) to monitor the
military actions of the Taliban in the north of Afghanistan.
Igor Sergeyev stressed that Russia still advocates a
peaceful settlement of the Kosovo problem, and said that "we
will take part in the planned NATO exercises in Albania and
Macedonia only if we have no doubts with regard to the goals
and the programme of these exercises." The minister called for
improving the work of the Staff for Coordinating the Military
Cooperation of the CIS States, and criticised the leaders of
the Central Army Sports Club, where "many disgraceful things"
were exposed. The inspection of the club will be continued, the
marshal said.
He also called for developing civilian control over the
army as yet another means of ensuring national security. The
Minister believes that "civilian control is a way of ensuring
an effective collaboration of society and its military
organisation. In this sense, civilian control should become the
main method of public involvement in the military reform, and a
guarantor of its openness to each citizen of Russia."


//AUGUST 13, 1998 /RIA NOVOSTI/--
##Experts say 60 percent of cash turnover can be attributed
to shadow business evading taxation, reports the State Tax
Service. The volume of shadow economic activity has topped 40
percent of the gross national product (GNP), with the volume of
illegal retail turnover of commodities and services reaching up
to 58 percent of their legitimate circulation on the consumer
market. Up to 40 percent of booze products on the domestic
market are manufactured in the secret, entailing a
5-billion-rouble loss in excises. According to the State Tax
Service, the food market alone, selling milk, bread, meat and
vegetables and tending to embrace unauthorised populous places
(underground passages, metro stations and terminals and
spontaneous street outlets) builds up the black coffers with $30
to $60 million a day. The State Tax Service cites a similar
plight in the market of tobaccos and oil products, retail and
petty wholesale trade, the public catering system and the
services. Gambling (casino, lotteries and totalizators), show
business and tourist companies, entertainment and sports
activities are another but equally vast sphere of cash
circulation, says the State Tax Service. (kol/var) 


Los Angeles Times
August 12, 1998
[for personal use only]
Russian Asks County for Views on Home Violence 
By JASON TAKENOUCHI, Special to The Times

A Russian activist is hoping that information and ideas from the
Ventura County district attorney's office will help her change the way
Russians look at domestic violence. 
Marina Pisklakova, who founded the Moscow Women's Crisis Center, one of
Russia's first nonprofit organizations for abused women, on Tuesday met
with prosecutors who handle domestic violence cases for Dist. Atty. Michael
D. Bradbury. 
"I think the domestic violence unit in the prosecutor's office will be a
very important thing to have in Russia," she said, speaking in the calm,
measured tones of the abuse counselors she now helps train. 
Pisklakova said her review of the U.S. justice system emphasizes the need
to make domestic violence a crime, which has yet to occur in Russia. 
"In Russia, everything depends on the victim," she said, explaining that
abusive men are only prosecuted if women press charges. "Here, they took
the responsibility off the victim's shoulders. It's easier to work with
that and it also shows that it's a societal problem." 
Those changes could be slow in coming, warned Deputy Dist. Atty. Lisa De
Sanctis, who began working on domestic violence issues five years ago. 
Ventura County's mixture of support services and aggressive prosecution of
abusers took a long time to develop, she said. 
"Things have really changed here [in the U.S.] so recently, in terms of law
and attitudes," she said. "Certainly here you didn't have a situation where
it wasn't illegal, but you had a situation where it wasn't prosecuted
aggressively until the last 10 or 15 years." 
Pisklakova and her supporters face a difficult task shifting public
attitudes in Russia. 
Already threatened by a tradition that condones spousal abuse--an old
Russian saying suggests: "If he beats you, that means he loves you"--and
Soviet-era mores that keep family matters private, Russian women are
finding that the end of Soviet rule has been a blessing and a curse. 
The blessing, Pisklakova said, is that there is a gradual shift away from
being silent about the problem. 
"In the Soviet time this wouldn't be possible," she said. "I don't think
women would talk about domestic violence during the Soviet time." 
The curse is the growing frustration, and resulting violence and abuse,
wrought by the nation's transition to capitalism. 
Pisklakova, who attended a recent conference in Minnesota as part of her
U.S. tour, said that in some ways her work has already changed her nation's
political landscape. 
Originally trained as an aeronautical engineer, Pisklakova said she
discovered the problem after a domestic violence research project brought
her into contact with women who had suffered for decades in silence. That
work inspired her to start a one-woman hotline for victims in 1993. 
The project, one of the first of its kind in Russia, has expanded to
include individual counseling, support groups and legal advocacy. The
center also helped launch a nationwide educational campaign called "There
Is No Excuse for Domestic Violence." 
But such programs won't solve the problem, Pisklakova said, adding that
Russian women need to gain legal and political support against domestic
"Domestic violence is considered to be a private matter, not a societal
problem," Pisklakova said. "Often women who come to the police or
prosecutors' office, they are accused of provoking violence." 
Education about the problem and how different governments address it is the
first step to getting legislation passed, she said. 
"I've seen these models in different countries," she explained. "I'm trying
to pick up pieces and bring it to my country to try to make it work there." 


Date: Thu, 13 Aug 1998
From: "Jerry F. Hough" <>
Subject: Harvest

Dear David:

Over the last month I have read several little pieces suggesting 
that the harvest would be really bad. With Russia foolishly blowing its 
reserves on defending a ruble that cannot be defended, the devaluation will
raise the price of imported food at precisely the time the bank has less
resources to buy it and the government little money to subsidize it. Should 
the US be thinking about the problem of large-scale food aid, or is this not
a problem? I think that any readers who really understand the state of 
the harvest and the food situation would do all of us a great service by 
writing you a little memo.


>From RIA Novosti
By Alexei YASHIN

A month and a half ago our "young reformers" produced, at
their third attempt, a new brain-child - the anti-crisis
programme which was at once loftily renamed into the
stabilisation programme. The subsequent actions by the
authorities for its implementation show that the domestic
producer is prescribed, as before, to continue its existence
according to the principle of self-survival. 
The impression is that from the very beginning of economic
reform and up to this day, domestic producers and the state
have been existing as if in parallel worlds, on their own. 
The government is keen in building speculative-financial
pyramids and squeeze with all available means taxes out of
producers and the population to support the pace of this
construction. In their turn, producers deal a "retaliatory
blow" on the state trying by all possible and impossible means
to evade the payment of snow-balling taxes: fortunately, the
effective legislation gives certain room for such exercises. As
a result, a considerable part of production has been put into
the "shadow" under the keen supervision of organised crime
while the budget chronically loses tax receipts. 
The newly-baked stabilisation programme will hardly make
the state and producers friends. The economic thought of its
creators, formed under the diktat of recommendations by the
International Monetary Fund and materialised in the package of
new tax laws, does not give any grounds for such hopes. Some
traditional and ritual phrases about the need to develop
domestic production which do not oblige the government in any
way cannot conceal the true essence of the programme - to knock
out taxes here, now and at any price, without taking into
account at this the realities which we are living in. 
The alleviation of the tax burden declared by the
government is not so considerable to make the producer give up
its perfectly refined methods of "optimising taxation." 
The tax pressure is only part of the problem of the
Russian production. Its effective functioning is simply
impossible unless the government carries out a purposeful state
policy oriented towards the support and stimulation of
production, especially in capital and science-intensive
sectors. On the threshold of the third millennium, these
sectors are the visit card of any state. Foreign experience
shows that their intensive development is possible only with
its active participation. In Russia, however, the government
displays tireless activity only in collecting taxes.
Given the high degree of criminalisation of the domestic
economy, the question of providing security for entrepreneurial
activity remains open. Thus, up to this day, the domestic
entrepreneur virtually does not have access to the sources of
getting the most important information - information on the
financial solvency and personalities of potential business
partners, their credit and payments history. 
There is also another problem. It has become a normal
practice not to fulfil court decisions. This compels many
entrepreneurs to turn "for justice" at best to private security
agencies and in the worse case - to criminal structures. So,
the Russian producer, which has been initially put by the state
in extreme conditions, can only count on itself. Apart from
this, the active process of issuing laws and decrees which
results in the constant change of the rules of the game clearly
does not add confidence in tomorrow. 
Without plunging into further criticism of the "new"
economic policy, a conclusion can be made that the government
has long stopped considering domestic production as an
important source of federal budget revenues. Judging by
everything, the place of the Russian domestic producer has been
taken up, for long and seriously, in the minds of our state
functionaries by the "good uncle" IMF. It will be possible to
speak about the consequences or, as S. Kiriyenko called it,
"the price of the question," with regard for economic security
of Russia very soon. 

Results of Russia's economic development in 1998
June'98 In % to June'97 1st half of 1998 
in % to first 
half of 1997 
Gross domestic 
product, bln. rbls. 203.2 98.4 99.5 
Industrial output
bln. rbls. 117 97.5 100.1
Investments in 
fixed capital 
bln. rbls. 28.3 92.8 93.7 
Foreign trade 
turnover, $bn. 12.3 102.6 95.3 
exports 6.3 96.1 86.1 
imports 6.0 110.3 107.1 
Consumer price
index 106.4 104.1 


Russia produces more headlines than products-Mdy's

MOODY'S MARKET WRAP-UP - NEW YORK, Aug 13 - In terms of US dollars, Russia's
GDP for 1998 was projected to be $470 billion according to one respected
source outside of Moody's. 

The 1998 projections show Russian GDP approximating 5.5% of US GDP. In 1997,
the $3.4 billion of US exports to Russia comprised 0.5% of total US exports.
In terms of GDP, Russia does not even make the list containing the world's top
20 economies. 

With respect to the world at large, Russia's current travails may carry more
weight politically than economically. To a degree, Russia's difficulties can
be ascribed to an untrustworthy system of laws that discouraged long-term

In addition to the ambiguity surrounding property rights, Russia's economic
development may have been thwarted by an environment that was not especially
supportive of foreign direct investment. 

One aspect of the multifaceted process of exchange rate determination suggests
that the value of a country's currency will vary directly with the price of a
country's exports relative to the price of its imports. 

A country's terms of trade are said to improve as the price of its exports
rises compared to the price of its imports. Recent year-to-year price setbacks
of 21% for agricultural commodities, 37% for crude oil and of 23% for Moody's
industrial metals price index underscore the deterioration of the terms of
trade, which is equivalent to an erosion of exchange rate fundamentals, for
those countries whose exports are weighted toward commodities. 

All else the same, as a country's terms of trade fall, the trade deficit will
widen. Given how Russian exports are skewed towards crude oil and industrial
metals, Russia has incurred a drop in its terms of trade that signals a lower
exchange rate. 

Coincidentally, Moody's industrial metals price index set a new 50-month low
on Tuesday. Slumping industrial material prices practically render it absurd
to forecast a federal funds rate hike at next week's Federal Open Market
Committee meeting. 


Moscow Times
August 14, 1998 
Army Tells Soldiers To Forage For Food 
By Simon Saradzhyan
Staff Writer

The Defense Ministry has suggested that its servicemen fish, hunt and 
gather mushrooms to survive until the federal government accumulates 
enough cash to pay military wage arrears, officials said. 

General Nikolai Byrbyga of the ministry's department for discipline and 
morale said Wednesday that "collective trips of military servicemen and 
their family members will be organized" to allow them to gather 
mushrooms and berries. 

The general said his directorate had issued a directive last week 
"advising" all deputy commanders of the military units in charge of 
discipline and morale to organize such trips. 

The general stressed that the directive was "not an order, but just a 
piece of advice" that should be acted upon only in a serviceman's free 
time, after he had fulfilled his daily duties. 

"People really need this to survive somehow ... we are trying to help," 
Byrbyga said, noting that most Defense Ministry servicemen have already 
gone for four months without pay. 

Moreover, most Russian officers have not received their food 
compensations -- which account for some 20 percent of their overall 
salary packages -- for more than a year. 

The directive also advised officers and their families to can their own 
vegetables and fruits, according to Moskovsky Komsomolets. It was not 
clear how they would go about doing so, since, unlike many civilians, 
servicemen generally do not have their own garden plots or dachas to 
work from. 

Officers at two military units reached by phone Wednesday said they had 
heard about the directive but not yet seen it. 

The chief of discipline and morale at an air force unit near the Moscow 
region town of Chkalovsky said he would not be likely to take his 
brothers-in-arms mushroom hunting and fishing unless officially ordered 
by Byrbyga's directorate. 

"Just tell me who is going to pay" for the trips, demanded the officer, 
who asked not to be named. 

He said there was barely enough gasoline at his cash-strapped unit to 
have commanders driven around on official business, much less for buses 
to take officers mushroom-hunting in their free time. 

The officer said that the very idea of organizing such trips was "not 
bad," but had come too late. 

Wives of Russian officers have for years planted vegetables on land 
plots their husbands rent at token prices from depressed collective 

Unlike officers, however, rank-and-file soldiers do not have much choice 
and have to eat whatever their cash-strapped unit can afford. 

In one infamous case earlier this summer, news broke that hundreds of 
kilograms of low-quality canned meat containing recognizable animal 
tails had been bought by a military unit based in the Moscow region town 
of Monino. 

Luckily for the soldiers, the meat -- which was of such poor quality 
that it could have been legally defined as pet food -- was intercepted 
by the chief military prosecutor's office before making it to their 

Military prosecutors forced the unit's command to exchange the meat for 
a batch of better quality. 


Soros has strange love affair with Russia
By Andrew Priest

LONDON, August 13 (Reuters) - A call by international financier George Soros
for Russia to devalue the rouble marks the latest twist in the Wall Street
wizard's 10-year philanthropic and commercial involvement in Russia's affairs.

Since the break up of the Soviet Union in 1991, the Hungarian-born hedge fund
manager has spun a web of interests in Russia and Eastern Europe ranging from
social and educational projects to commercially motivated investments. 

But his latest pronouncements, which fuelled a further wave of selling on
Russia's markets, have raised a few eyebrows given his oft-stated policy of
only making comments which benefit his financial interests, Russian experts
said on Thursday. 

"It's very difficult to understand how this can serve his commercial
interests," said Brian Henry, professor of economics at the London Business

Multi-billionaire Soros turned up the heat on Russia's ailing financial
markets on Thursday by stating in a letter to Britain's Financial Times that
the "best solution" to the present banking liquidity crisis would be to
introduce a currency board after a "modest" rouble devaluation of 15 to 25

"The meltdown in Russian financial markets has reached the terminal phase,"
Soros wrote, adding that any delay would result in default or hyper-inflation.

In the past Soros has freely admitted his willingness to talk up his own book
to defend his vested interests, analysts noted. 

In an article in the Times of London in 1993 he said, "I expect the mark to
fall against all major currencies, including even sterling," adding, "for the
sake of full disclosure, I am talking my book." 

The financier still has plenty riding on the success of Russia's economic
reforms despite speculation he has been reducing his commercial interests in
recent months, analysts said. 

Soros, who studied philosophy at the London School of Economics, said last
October he had some $2.0 billion invested in Russia including a stake in
Svyazinvest, the state telecoms holding company. 

In March, he told journalists in Moscow he had turned down a request by the
Russian government for financial help last December, but had loaned it several
hundred million dollars to close a short-term funding hole in June 1997. 

"They were stuck. Payment was due on a Thursday and they needed the payment on
the previous Thursday," he said at the time. 

But despite his financial interests in Russia, analysts said Soros, whose
speculation helped send the British pound spinning out of the European
Exchange Rate Mechanism in September 1992, also has an emotional attachment to
the country. 

Soros has invested millions of dollars of his personal fortune in his Open
Society foundation, a collection of social and educational projects set up to
promote democracy in Russia and Eastern Europe after the Soviet Union's demise
in 1991. 

"Soros has been active as an investor as well as a supporter of the reform
process in Russia on the philanthropic side - I suspect he was trying to be
helpful (in the letter) and call it as he sees it," said Charles Blitzer,
chief emerging markets economist at Dolaldson, Lufkin and Jenrette. 

The financier is no stranger to criticism of his involvement in Russian

Following his purchase of the stake in Svyazinvest, he acknowledged he had
stirred up resentment among Russia's industrial and financial barons. 

"By participating in the Svyazinvest auction, I interrupted the division of
spoils and unleashed a ferocious battle," he said on a visit to Moscow in

Soros has spoken out about his concerns about policy making in Russia on
previous occasions, most recently on the way foreign shareholders were treated
by some Russian corporations and the failure of the local supervisory
authorities to act. 

London-based institutional investors were largely ambivalent about Soros's

"He has as much right as you or I or anybody else to make pronouncements.
Whether people choose to listen to him is another matter," said Mark Cooke who
manages around $250 million in Russia at Brunswick Capital in London. 



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