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Johnson's Russia List
18 August 1998
[Note from David Johnson:
Clinton in the background.
1. Moscow Times: David McHugh, NEWS ANALYSIS: Government Gives Up on
Ruble. President's Credibility Falls Also.
2. AP: Russians Blame Government for Woes.
3. RIA Novosti: "RIGHT THING TO DO IN CRISIS": AMERICAN ECONOMIST.
4. AP: Russia Devaluation Discourages U.S.
5. Moscow Times editorial: Learn From Indonesia, Stay Course.
6. Journal of Commerce editorial: Russia on the brink.
7. Peter D. Ekman: After the Devaluation. (Moscow Times).
8. Ray Smith: TB in Russia.
9. Journal of Commerce: William Danvers, Russia and the West.
10. Mayak Radio Network: Russian Academic Comments on Impact of
11. The Independent (UK): Norman Stone, Can Russia survive the horrors
that lie ahead?]
For more articles from The Moscow Times, check out their website at
August 18, 1998
NEWS ANALYSIS: Government Gives Up on Ruble. President's Credibility
By David McHugh
The ruble wasn't the only thing that fell Monday. President Boris
Yeltsin's credibility lost some of its value, too.
Only Friday, Yeltsin vowed during a trip to Novgorod that "there will be
no devaluation of the ruble," adding that "this is a firm and clear
decision. My statement is not just my own fantasy. ... The situationis
But by Sunday, Yeltsin was sitting down at his suburban Rus residence
with Prime Minister Sergei Kiriyenko, signing off on a plan to let the
ruble fall -- and in so doing to surrender one of his government's few
concrete economic achievements.
Yeltsin chose to let his ministers do the explaining Monday to the
Russian people, who woke up to find their wages and savings worth
significantly less in dollar terms than the week before. Television
reports showed only a few seconds of the president meeting Monday with
Kiriyenko at the Kremlin -- without sound.
The full political consequences will become known over the next few
weeks, as the impact of the ruble's fall hits home in the form of higher
prices. But several observers said that at the very least, devaluation
makes it even less likely Yeltsin could run and win a third term in
Yeltsin has given conflicting signals about his intentions in 2000. His
staff has argued that the 1993 constitution permits him to run again.
But that may be irrelevant if people are fed up over renewed inflation,
said political analyst Yury Korgunyuk of the Indem research center.
"Yeltsin and the government need some kind of visible successes in
economic life," Korgunyuk said. "And in the preliminary results for the
year, there are no successes to speak of at all. The problem now is how
not to fall into the abyss."
The ruble's fall also means the president may have to fire some of his
ministers, either to satisfy his own need to find a scapegoat and
deflect blame, or to make concessions to the opposition-dominated State
Duma, which still holds key parts of his economic program hostage.
On Monday, there were already personnel changes, with tax service head
Boris Fyodorov getting the new title of deputy prime minister and deputy
Kremlin chief of staff Alexander Livshits, a second-rank economic
adviser, offering to resign.
Finance Minister Mikhail Zadornov would make a likely scapegoat if
Yeltsin decides he needs one, said Andrei Ryabov, a political scientist
at the Moscow Carnegie Center. Unlike Central Bank chairman Sergei
Dubinin and Kiriyenko, a Zadornov replacement would not have to be
approved by a hostile Duma, which could restrain Yeltsin from dismissing
"In the coming days I think the president will face a rising wave of
criticism," Ryabov said. "Much of this will be a result of his careless
statement Friday that there would not be a devaluation."
"The president may have to carry out significant changes in the makeup
of the Kiriyenko government ... and possibly announce a shift in course
and move into new contacts with the Duma and the Federation Council," he
If Yeltsin fired Kiriyenko, the Duma, parliament's lower house, might
make him settle for someone much less oriented toward free markets and
economic reform, such as upper house chief Yegor Stroyev or Moscow Mayor
Yury Luzhkov. And Yeltsin would face another draining confirmation fight
that would paralyze the government just 3 1/2 months after pushing
Yeltsin fired Kiriyenko's predecessor Viktor Chernomyrdin on March 23,
saying the cause of economic reform needed new energy.
While growth lagged, financial markets sank and the government failed to
pay its own workers, Yeltsin and his team could always point to a stable
ruble and reasonably low inflation -- a significant achievement after
the runaway price increases of 1992 to 1994. Now they have lost even
Not even the stock market losing over half its value since the start of
the year has as much potential impact, since few Russians own stocks.
Communist leader Gennady Zyuganov was quick to seize on the president's
backtracking. "Yeltsin has turned out not only to be worthless, but
deceptive as well," Zyuganov said. "Yeltsin said there wouldn't be a
devaluation, but if he says there won't be, that means there will be."
Duma leaders agreed Monday to hold a special session Friday and on
Tuesday and Wednesday of next week to hear reports from the Cabinet and
consider emergency economic legislation aimed at raising more tax
revenue to help the government pay its debts. But the deputies have
balked at the government's efforts so far, passing only about a third of
its revenue-raising requests in June and July.
Sergei Ivanenko, deputy head of the liberal Yabloko faction, said he
held out little hope the Duma could do anything in a day or two to
salvage the situation.
He said the current mess had been building for several years, and that
Chernomyrdin was to blame for the heavy short-term borrowing and lack of
progress on reform that was plaguing Kiriyenko and his new team.
"The deputies may want to let off some steam, and that's possible," he
said. "But the Duma cannot change the actual situation. To say 'Just
pass this law and the crisis will be over' is ridiculous."
Russians Blame Government for Woes
August 17, 1998
By VLADIMIR ISACHENKOV
MOSCOW (AP) -- Yelena Bochet's eyes opened wide behind her thick glasses when
she read the figures posted at a currency exchange booth where the Russian
ruble had just plunged by a third against the dollar.
``I already can afford little more than a loaf of bread and a pack of milk on
my pension of 350 rubles a month,'' the 68-year-old said, her face overcome
with emotion. ``I don't know how I will get by now, when all the prices will
On Sunday, Bochet might have gotten about $55 for her 350 rubles. On Monday,
she could get just $36.
Russia's government announced the ruble devaluation Monday after trying to
hold off for months, fearing just the kind of reaction visible outside the
booth on Moscow's Novy Arbat street.
A small crowd gathered, gazing at the new rate posted there -- 9.5 rubles to
the dollar -- and fuming at the government and President Boris Yeltsin.
``Yeltsin promised the other day there would be no devaluation. He cheated us
again,'' Bochet said quietly.
Others were more outspoken.
``This is where Yeltsin's policy has brought us -- to complete collapse,''
said a 64-year-old pensioner Ivan Semyonovich, who identified himself
according to Russian tradition by his first and middle names.
``Yeltsin followed your American guidance and brought the country to ruin,''
The devaluation is expected to sharply raise consumer prices, especially on
imports. But there was little sign of panic buying on Monday, and price tags
in retail shops were unchanged.
``The prices will remain stable for a couple of weeks while stores are selling
their current supplies,'' said Andrei Belyayev, a 36-year-old owner of a food
import business. ``You'll see the effect next month.''
But at banks and exchange booths, business ground to a halt because virtually
nobody was willing to buy dollars at the new price. Those who wanted to sell
foreign currency also were hesitant because banks' purchase prices remained at
6.4 rubles to the dollar.
``I will wait for more a realistic rate before I sell any dollars,'' said
Dmitry Romanenkov, a 36-year-old businessman.
Since 1992, when Russia launched its chaotic free-market reforms, many
Russians have kept their savings in dollars, and banks did not report a run on
Even Ivan Semyonovich said he now keeps his savings in a dollar account. But
that didn't ease his anger.
``In Soviet times, we had the sense of confidence in the future,'' he said.
``And now Yeltsin -- and you Americans -- have stolen it from us.''
"RIGHT THING TO DO IN CRISIS": AMERICAN ECONOMIST
//AUGUST 17, 1998 /RIA NOVOSTI/--
## Today's steps taken by the Russian government and
Central Bank to get budgetary policies back to normal--in
particular, the introduction of a new currency corridor and
change of validity for short-term government bonds--were the
right things to do in a crisis, Professor Anders Aslund,
prominent US economist and senior expert on the Carnegie
Endowment, said in an exclusive Novosti interview.
The necessity for these steps became evident toward the end
of last week, offering a choice out of change of government bond
terms and a soft change of the rouble rate. The Cabinet and
Central Bank did both--a correct decision which will ease off a
tremendous burden on the currency reserves of the Central Bank
and the Finance Ministry.
Professor Aslund evaluates the Russian currency reserves at
US$16 billion plus 17 billion on international credits-- enough
to cope with the present problems. It is hard to make forecasts
in the current situation, but the interviewee thinks that there
is a way to get out of the crisis.
The State Duma must act promptly to implement the direly
necessary economic and financial measures, stressed the
interviewee. Parliament's lower house ought to act on two
directions--first, pass bills which will increase federal
revenues at the expense of regions which are the most
extravagant with collectable budget returns, spending up to a
half on local allocations; and, second, streamline taxation
patterns as soon as possible to raise VAT revenues and put an
end to arrangements based on barters and corporate debts
mutually written off, which rule out market profits. Taxation is
a parliamentary prerogative, so it is up to the Duma to issue
documents which will enable the country to implement its
reforms, Professor Aslund said emphatically.
Russia Devaluation Discourages U.S.
August 17, 1998
By MARTIN CRUTSINGER
WASHINGTON (AP) -- Russia's ruble devaluation, just a month after promises of
an additional $22.6 billion from the International Monetary Fund, dramatically
underscores the fact that the United States and its rich allies are rapidly
running out of solutions to halt a deepening global economic crisis.
U.S. officials insist the key, as always, is for the countries in trouble to
take the painful reform steps necessary to put their economies back on track.
But critics note that, so far, more than $100 billion in bailouts assembled by
the IMF for troubled Asian nations, and the additional support Russia received
last month, have not restored confidence.
Russia's economy hit more turmoil Monday when the government of President
Boris Yeltsin, after spending billions of dollars in recent months to prop up
the weak ruble, announced it was letting the currency's value drop by one-
third and would impose a 90-day moratorium on repaying some short-term debt to
ease a cash crunch.
Russia has become the latest victim of a crisis that began 13 months ago in
Thailand and has pushed a number of Asian countries, including Japan, into
severe recessions and rattled stock markets from Hong Kong to New York.
Emerging markets such as Russia have been particularly hard-hit. The spreading
troubles have prompted investors to panic and try to cash out holdings at the
first sign of new troubles. The U.S. economy has been jolted as well. The Dow
Jones industrial average is down 760 points from its July high on fears that
Asia's troubles will cut into American companies' profits.
``The Asian situation is the worst economic event the world has faced since
the 1930s,'' said Allen Sinai, chief economist at Primark Decision Economics.
``There is a risk of a global recession.''
A growing number of critics contend those unending economic troubles show that
the old-time austerity religion preached by the IMF and backed by the Clinton
administration isn't working.
``The whole purpose of an IMF program is to make up for foreign capital that
is pulled out of the country,'' said Lawrence Chimerine, economist at Economic
Strategy Institute, a Washington think tank. ``It is silly to impose higher
interest rates that make the domestic economy weaker and give you more
But the Clinton administration continues to insist the only way for countries
to restore market confidence is to tighten their belts.
``We believe it is critically important that the Russian authorities move
quickly to take actions to restore confidence,'' Treasury Secretary Robert
Rubin said in a statement Monday.
Russia's latest turmoil comes just two weeks before President Clinton is
scheduled to meet Yeltsin in Moscow. The two leaders spoke by telephone on
A senior administration official, speaking Monday on condition of anonymity,
said Russia had sought additional international support to stave off a
devaluation. But the unanimous view of G-7 officials was that the critical
element to stabilize Russia was reform inside the country -- not extra money,
the official said.
In return for the $22.6 billion IMF commitment last month, Yeltsin's
government agreed to austerity measures, including stepped-up efforts to
collect taxes. But the Russian parliament has failed to approve those
Even with the focus on Russia, the Clinton administration and private
economists continue to believe the key to resolving the Asian crisis lies with
Japan, the world's second-largest economy. It must take steps to get its
economy growing again, these officials believe.
New Prime Minister Keizo Obuchi has pledged to accelerate efforts to jump-
start Japan's economy and deal with more than $600 billion in banks' bad
loans. But so far, financial markets have remained skeptical about how fast
and how far Obuchi will go.
Until Japan halts the slide in its own currency and resumes economic growth,
its troubled Asian neighbors are not likely to stabilize, said Daniel Tarullo,
who until March coordinated the administration's response to the Asian crisis
inside the National Economic Council.
``Far and away the most important thing that can happen is a set of sustained,
forthright actions by the Japanese government,'' Tarullo said.
August 18, 1998
EDITORIAL: Learn From Indonesia, Stay Course
The Russian government's admission of defeat in its battle to prop up
the ruble and repay its debts is truly a financial watershed. But if it
is not to turn into an Indonesia-style economic catastrophe, it must not
signal a wholesale change of policy.
The potential for such an economic catastrophe is there. A massive
uncontrolled devaluation would send the price of imported goods
skyrocketing and cause widespread social unrest.
It would also destroy what is left of the banking system, which is
sinking under its hard currency debts. Average Russians could stage a
run on banks and there could be a complete collapse of confidence in the
real, that is non-financial, economy.
Such a scenario will become more likely if the uncertainty of
devaluation and a debt moratorium is combined with political confusion.
On past form, President Boris Yeltsin, who only last Friday promised
Russia there would be no devaluation, is likely to sack a bunch of
ministers as a means of dealing with political embarrassment.
The Central Bank and the government have committed their fair share of
mistakes in the past four months. It is easy to say with the benefit of
hindsight that the attempt to maintain a fixed ruble exchange rate was
doomed all along.
But the fundamentals of the Russian economy have not changed and nor
should the team which has led the country for the past four months. It
would be wrong to blame them for problems which have been five years in
The only way the government will be able to win back the confidence of
financial markets is to proceed with the anti-crisis plan it was pushing
through when its policy was derailed by the second wave of the Asian
markets crisis and the renewed fall of the world price of oil.
The government still needs to balance its budget if there is to be any
return of confidence to financial markets. This means pressing on with
the tax reform proposals that have been struggling through the State
The likely insolvency of many of Russia's banks that are laboring under
a burden of hard currency debt poses another test for the government and
the Central Bank. Now the trick will be to allow bad banks to go under
without creating wholesale panic.
While it is partly a matter of the government not changing course, the
same applies to the International Monetary Fund and the Group of Seven
industrial nations. Now, when Russia is struggling to defend its
drifting ruble, continuing Western aid is more necessary than ever.
Journal of Commerce
August 18, 1998
Russia on the brink
Russia's free fall accelerated Monday when the government effectively
devalued the ruble, a new low for a country that has tested the bottom
too many times in recent years. While the devaluation will keep Russia
from defaulting on its obligations, the country will pay a fearsome
price from a weaker currency: soaring inflation, collapsing banks and
further punishment for long-suffering Russians, who will see their
purchasing power decline.
The devaluation, which was accompanied by a moratorium on treasury bill
payments and foreign debt service, also shows the impotence of an
international bailout when the rescued government cannot carry out
needed reforms and re-establish confidence in the markets. Russia can
now go in one of two directions: It can use the devaluation as an
opportunity to restructure its finances, or it can continue to stall,
risking political turmoil and complete economic collapse.
Russian officials insisted Monday they had not devalued the ruble, but
that was purely semantics: The country's central bank said it would
permit the value of the ruble to decline from about 6.3 to the dollar to
9.5. Ultimately, the markets set the exchange rates, and while the ruble
slipped only slightly in official trading, its street value immediately
plunged to 9.5. In a depressing scene that has been repeated too many
times in Russia, average citizens were standing in long lines Monday to
dump their rubles.
What does this mean for Russia? The government has to redeem about $20
billion in government treasury bills by the end of the year, yet the
central bank has only about $17 billion in reserves and is spending
about $1 billion a week to defend the currency. That meant a real risk
of default. The devaluation and the moratorium end that possibility for
The twin moves, however, gut Russian President Boris Yeltsin's only two
economic achievements: a stable currency and low inflation. When most
wholesale and retail prices were freed in Russia on Jan. 2, 1992,
consumer prices soared more than 2,600%. By early 1998, however,
inflation had fallen to about 1% a month, a major accomplishment for a
government that could not do much else right. Now, that achievement is
The devaluation also will send shivers through the country's rickety
banking system, which was already experiencing a liquidity squeeze. The
banks were dependent on ruble assets, which now could be worth up to 50%
less if the currency falls as much as the new bands would suggest. There
is the further risk that devaluation will cause a run by depositors,
which could lead to the collapse of all but the largest banks.
A subtext to any Russian economic crisis is the possibility of political
turmoil. The current government, headed by Prime Minister Sergei
Kiriyenko, has never found its footing, and opposition politicians were
ridiculing the government Monday. Mr. Yeltsin, who has become more of a
liability than an asset to the cause of reform, seems to be sinking
fast. News reports said he appeared confused during a public appearance
last week and had trouble recognizing a top aide.
Should the United States and its allies do anything more financially to
help Russia? The answer is no. Through the International Monetary Fund,
Western governments mounted a $22.6 billion bailout package, and the
first installment already has been paid. To be fair, not all of Russia's
problems -- declining world oil prices, for example -- are of its own
making. But Russia's Parliament has been slow to approve legislation
intended to help the country's sagging finances, including simplifying
taxes and collecting payments from those who owe them. Whatever
temporary relief devaluation provides should be used to fully implement
those reforms. Indeed, the IMF suggested the next bailout payment would
hinge on this, although the fund's credibility in all matters Russian is
Longer term, Russia's devaluation pushes back even further the day when
the country will graduate from economy-in-transition to a functioning
modern economy. Low inflation and a stable currency were critical
foundations for that transition. It may now take years for Russia to get
back to where it was.
From: "Peter D. Ekman" <email@example.com>
Subject: After the Devaluation
Date: Mon, 17 Aug 1998
This piece should be coming out in tomorrow's Moscow Times. I think that I
should re-sign up for Johnson's List, even though I always spend too much
time reading it.
After the Devaluation
Let's get the terminology straight. Despite what Prime Minister Sergei
Kiriyenko said yesterday, when the government "widened the ruble corridor,"
it was a devaluation. When they "suspended payment for ninety days," to
Treasury bill, or GKO, investors, it was a default. Now that the Russian
government has both defaulted and devalued, what should we expect next? In
any possible scenario, there will be trying and chaotic times ahead for Russia.
Combining both devaluation and default, the Russian government has made the
worst of a bad situation. It will be important that debts to GKO investors
be paid, as soon as the money is found, in order to minimize the impact of
the default. The only bright spot was that they did not default on external
debt, only the domestic GKO's.
Russia's ability to borrow in the international market will be adversely
affected for five to ten years or more. The already small amount of foreign
investment in Russia will decrease. Some foreign investment will still be
available to Russia, mostly in the form of joint ventures and other direct
ownership, but only if fundamental steps are taken. These steps include
paying the government's wage and pension debts on time every month,
collecting taxes, strengthening shareholders' rights, enforcement and
strengthening of bankruptcy laws, and taking control of government finances
through an effective treasury system.
The IMF will probably be asked for more funds to support the new level of
the ruble. They may quietly refuse, trying to avoid saying that they "don't
want to throw away good money after bad." Without IMF backing the ruble
will have to float freely, with no set corridor or floor.
It is possible that the IMF could make additional loans, trying to stabilize
the situation, not just in Russia, but in all of Eastern Europe. Repeated
bailouts haven't worked before, however, and any new loans would likely have
conditions that would be unacceptable to the Duma. The IMF runs the risk
that they will be blamed for the current situation - having bailed out an
incompetent government too many times.
We should expect many commercial banks to fail, but not nearly as many as
would have failed if a devaluation had occurred a month or two ago. Bank
failures in Russia should not be the economic shock that they would be in
the rest of the world. After all, very few Russian banks actually accept
significant amounts of retail deposits or make arms-length commercial loans.
Sberbank, which holds the lion's share of Russian retail bank deposits,
should not be affected, since it has already rolled-over a large portion of
its GKO's into dollar denominated debt. SBS-Agro, which holds a large part
of the remaining retail bank deposits, has some problems, though their
extent is unclear. If need be, the government will have to bailout
SBS-Agro, or face the wrath of depositors who will consider themselves to be
the victims of a government-sponsored pyramid scheme.
It will be important that failed banks be closed quickly. "Zombie banks" -
economically dead banks that are allowed to keep some of the appearances of
life - would be a major danger for the whole economy.
Many people will expect that the finances of Russian exporters will be
improved by a devaluation. The reasoning is as follows: many of the
exporters' expenses are in rubles, so they'll be able to keep the same ruble
prices (effectively lower dollar prices) and thus be able to sell more in
international markets. Nevertheless, I don't think that Russian exporters
will benefit much by a devaluation. Most exports are commodities - which
are already priced in international markets in dollars - and many Russian
exporters are already defaulting on large amount of their ruble expenses -
wages and taxes. A one-time spurt in inflation - spread over about a year
and totaling about the same amount as the devaluation - will eventually
erode any savings on ruble expenses.
The anti-crisis program, which the Duma was to have considered in emergency
session, will probably not be pursued. In any case, the Duma would be
unlikely to pass it. This is just as well, as the anti-crisis program was a
patched-together grab-bag of any measures that might work to prevent
devaluation. A new program should be put forward which addresses the root
causes of the crisis - corruption, stifling bureaucracy, and "crony capitalism."
We should expect to see elections for the Duma soon. Devaluation eliminated
the government's major claim of economic success - the stabilization of the
ruble. Blame will be passed back and forth between the Duma, President
Yeltsin, the current government, the "financial oligarchs", and the former
Chernomyrdin government. No legislative work will be accomplished, so a
Duma election would only get the process of governance back on track sooner.
Putting the best face on the situation, the President may blame the current
Duma for the entire situation and actively campaign against the Communists
and Nationalists in the election. It is difficult to see how this strategy
would work, but it may be the only strategy available to the President to
straighten out the current political and economic mess before he leaves
office in the year 2000. Not doing anything new would likely be a worse
As usual after a disaster, there will be a round of government officials
being fired. The blame extends throughout the entire Russian government, so
it is difficult to predict who will be fired. The most likely candidates
are Prime Minister Kiriyenko, Finance Minister Mikhail Zadornov, and Central
Bank Chairman Sergei Dubinin. It will be a shame if these people are fired,
since they are probably the most competent government officials that Russia
has had since 1991.
Peter D. Ekman
Professor of Finance
American Institute of Business & Economics
Subject: TB in Russia - JRL 2305
Date: Mon, 17 Aug 98
From: firstname.lastname@example.org (Ray Smith)
It is helpful to see a Russian newspaper talking about this growing
problem, although I note that the article drew pretty much entirely on
the comments of the director of a Western assistance program. A couple
of years ago, I had a client that was marketing an ultraviolet air
disinfection system, designed particularly to reduce exposure to TB in
high risk areas such as hospitals and prisons. The system had been
tested to a 99.8 percent "kill" rate against a variety of pathogens,
including a commonly used TB surrogate. I discussed the problem and this
approach with the World Bank, which recognized the problem and added the
equipment to the list of recommendations it sent to Russia in connection
with a substantial World Bank medical equipment project. Unfortunately,
the Russian recipients did not consider this a sufficiently high priority
and took the equipment off the list.
I should add, however, that it is not only Russia that has failed to
recognize the extent of this problem. I tried to point out to the State
Department and its employee representative, the American Foreign Service
Association, that in countries with high endemic rates of TB people in
crowded consular sections, particularly the employees, had to be at
substantial risk of exposure and that my client's system could decrease
the risk. The State Department's medical bureau did acknowledge that it
had seen some TB skin test conversions, confirming exposure. No further
interest was shown in the subject either by the Department or by AFSA.
So, in Russia and in other countries with high TB rates, the employees,
both local and American, of US consulates are being exposed to TB just as
surely as the medical personnel and patients in hospitals and the guards
and inmates in prisons.
Journal of Commerce
August 18, 1998
[for personal use only
Russia and the West
BY WILLIAM C. DANVERS
William C. Danvers is a former State Department official. He is now the
Washington Representative for the OECD. The views expressed are his own.
President Clinton's upcoming summit with Russian President Boris Yeltsin
comes at a critical moment in the brief history of the modern Russian
nation. This is no time for the United States to equivocate. President
Clinton must let the Russian leader know that as long as his government
actively pursues reform, the United States will support it.
It's not that Russia is too big to fail, so much as it is too important.
We cannot allow a replay of 1917 in 1998, when Russia moved from the
democratic government of Alexander Kerensky to the Bolsheviks in a few
short months after the fall of its monarchy. This is not to say that the
Bolsheviks are waiting at the gates of history for another chance, or
that the West has not made an effort to help Russia help itself develop
democracy and a market-based economy.
It is only to say that the deteriorating economic situation in Russia
make circumstances ripe, much as they were in 1917, for radical change
that could once again find both us and the Russians with a bad situation
politically, economically and in terms of our overall security
The stakes are certainly higher than they were in 1917. Russia has
sophisticated weapons of mass destruction, as well as technical know-how
to back them up. We cannot allow these weapons and this expertise to
flow freely to enemies of America and its allies or to be used in any
way against the West. If Russia were in the throes of political and
economic chaos, or a new anti-Western government were elected in Moscow,
this could become more than an idle threat.
That is why President Clinton must stay the course with the policy he
first laid out in 1993: support for those who are committed to the
process of building democracy and the market in Russia. This may mean
that the recent $22.6 billion that the international community put
forward to support the Russian economy is not the end of the story, but
another chapter in the epic saga of the building of modern Russia.
Clearly, the first order of business is to address the acute economic
difficulties Russia is currently experiencing. The IMF has the lead in
this process, and despite some criticism to the contrary, they are the
best suited and placed to deal with the immediate crisis.
As for a long-term plan, the IMF does not have the resources to maintain
the effort to turn around the entire Russian economy. That must be done
in concert with others. A good example of how to structure such a plan
comes from the Organization for Economic Cooperation and Development
(OECD), which has been working with Russia since 1992 and has over the
past year or so stepped up its efforts to help that nation build a
market-based economy. Its program could serve as a blueprint for a
sustained effort on the part of Russian reformers to turn around the
economy of their nation.
The OECD program has three broad inter-related objectives: 1) to help
Russian officials establish a sound foundation for a market economy
through the rule of law; 2) to familiarize Russian officials with the
OECD and its commitment to economic liberalization and democratic
principles; and 3) to develop strategies to cope with common economic
The OECD believes that its program, which is derived from a policy
dialogue and peer reviews through objective high-quality analysis, has
thus far been a useful tool for promoting reform in Russia. In addition,
based on a comprehensive "Economic Survey" completed last year, OECD
experts came up with a number of specific policy recommendations to help
the Russian government with its ongoing effort to reform its economy. An
illustrative, but not inclusive, list of these recommendations includes:
Improvement in the collection and dissemination of macroeconomic data in
order to permit a more precise assessment of some of the key economic
developments in Russia.
Continued improvement in monetary control by the Russian central bank.
Tax reform, including establishing a clear, stable tax system.
A more credible and efficient budget process that will enable the
government to abide by its spending commitments.
Bringing down tariff and non-tariff barriers consistent with the
objective of joining the WTO.
Continued liberalization of capital movements and improving the climate
for foreign direct and domestic investment.
Improvements in the domestic banking system.
Continuation of the privatization process with an emphasis on
transparency and broad-based competition.
A comprehensive approach at the federal level to problems in economic
policies at the subfederal level.
A strengthening of competition law enforcement and advocacy.
Even if Russia follows the OECD program to the letter, the road to
economic recovery will not be easy. But if Russia's friends in the West
can let reformers there know that they are behind this kind of program
and will support Russian efforts to implement it even during moments of
crisis, then things could, over time, turn around for that nation.
In his upcoming meeting with President Yeltsin, President Clinton should
strongly encourage him to continue to work with the OECD, IMF, World
Bank and others institutions, governments and organizations trying to
assist the Russian reform effort. At the same time, he should assure him
that if he does, then the payoff will be not only continued Western
support, but also the promise of a more prosperous economic future. This
kind of steady, calming message is crucial to Russia during this moment
of economic crisis. It is in our interest to do whatever we can to help
Russia and ourselves avoid the mistakes of 1917.
Russian Academic Comments on Impact of Afghan Crisis
Mayak Radio Network
August 14, 1998
[translation for personal use only]
During the past few days, the Taleban have launched a large-scale
offensive in northern Afghanistan. They have captured the last stronghold
of that country's opposition forces, the town of Mazar-e Sharif. Our
commentator Konstantin Patsyuk talks about some possible consequences of
[Begin recording] [Patsyuk] The world community is deeply worried
about the sudden escalation of the military conflict in Afghanistan. After
all, the Islamic Taleban movement is not, apparently, going to stop trying
to resolve the Afghan problem by military means. Do the Taleban, who are
already on the Tajik-Afghan border, represent a threat to Russia and the
whole Commonwealth? I put that question to Aleksandr Umolov, a researcher
at the World Economy and International Relations Institute of the Russian
Academy of Sciences:
[Umolov] The Taleban are mainly Pushtuns. They lost power in
Afghanistan in the early nineties after the collapse of the Najibollah
regime. The Afghan Tajiks and Uzbeks then became, in effect, independent.
If they were to unite with the Tajiks and Uzbeks of the former Soviet
Central Asia, this would drastically weaken the position of the Pushtuns in
Afghanistan. So the Taleban have a vital interest in strengthening, rather
than demolishing, the borders of the CIS. There are no grounds, in my
view, for ascribing expansionist aspirations to them.
[Patsyuk] Will there not be a massive exodus of refugees from
Afghanistan into Tajikistan?
[Umolov] The Taleban have, of course, already for 18 months been in
control of the northwestern part of Afghanistan, which is inhabited by
Afghan Turkmen and Tajiks, and which borders on the CIS. Yet so far there
is no trace of any mass exodus from there. It would seem that, if the
Taleban take control of the whole of northern Afghanistan, it will not
happen there either, although individual detachments of their adversaries
may quite possibly try in one way or another to gain asylum in Tajikistan
[Patsyuk] Even so, the emergence of the Taleban on the borders of
Uzbekistan and Tajikistan is a destabilizing factor, is it not?
[Umolov] I think that, in itself, ending the split in Afghanistan is
undoubtedly a positive factor both for Uzbekistan and for Tajikistan. But
the Taleban's active use of Islam as a political weapon, even without any
intention on their part of interfering in the affairs of those republics,
may cause local religious extremists there to take action.
[Patsyuk] A great deal does, of course, depend on the further
development of events in Afghanistan but, at the moment, the Russian border
guards defending the southern boundaries of the CIS are adopting a number
of measures to strengthen the frontier so as to prevent possible incidents
and even provocations. [end recording]
The Independent (UK)
18 August 1998
[for personal use only]
Can Russia survive the horrors that lie ahead?
By Norman Stone
"Moscow is like Mahagonny," says a friend - jazzy nightclubs, whores who
can talk about Bulgakov, endless deals and a lot of money in suitcases.
It has become the most expensive city in the world, where the hotels
cost more than in Paris. This happens because there are not nearly
enough competing hotels; because anyone trying to open a hotel that is
sensibly priced can just be killed, or forced to pay protection money at
such a level that the prices are forced up again. The children of the
people who make this sort of money, incidentally, now attend language
schools at Oxford, to such an extent that the taxi drivers there tell me
that the foreign language they most often hear is Russian.
This is not surprising, because some Russians have made an enormous
amount of money in a short time out of the process of de-Sovietisation.
The exports of Russia may be somewhat less than those of Denmark but, if
you are in charge of an essential process along the way, you can become
quite rich, without tax, quite soon.
And then there is the Western money that goes in, for alleged
stabilisation purposes. There is quite a lot of that, and each time
interested parties in Moscow note that Japan, or South Korea, or
Thailand, gets a hand-out, their ears prick up, and they can stage a
crisis, too. That way, another $21m can be guaranteed to go in, to prop
up an allegedly convertible rouble, the future sale of which ,at a much
lower level can be organised. Moscow itself gets about three-quarters of
the money that is invested, and it is a wonderful place to be if you are
a young Western professional of some sort; it has the sinister charm of
Weimar Berlin in the Twenties. And Weimar is where Russia is now
In the Moscow traffic, you do not see it; in fact, you could pretend for
quite a number of years that Russia was only going through a sort of
Wild West capitalism, the sort that lifted America away from her
small-town New England origins in the later 19th century.
This was always to forget two essential things. In the very first place,
there were limits to the Wild West in the US; there was a sheriff, and,
in the end, there was a Wells Fargo. And, beyond the Moscow ring road,
there was a horrible life that did not make the obvious media. The
statistic that truly deserves attention is this one. The average age of
death of an adult male in Turkey is 68. In Russia it is 54 and going
down. Yet Turkey was, once upon a time, the ultimate third-world
country. Nowadays, she is host to 2 million Russians, fleeing their
The present crisis shows that the ultra-shallow roots of Moscow's
prosperity have reached the dry underground and are collapsing. Take a
casual glance at Internet reports from Russia; every day brings its
little catalogue of woes that, for a modern country full of intelligent
people, are surreal.
In the far east there has been a long strike of ambulance men. The
delays of delivery of coal to power stations is such that the coal has
gone off in quality; the power-stations cannot, therefore, operate on
existing lines, and so the power goes off. Once winter gets under way,
we may well be seeing what some of us have expected these past few years
- a black-out in Russia's cities. Which means that refrigerators will be
switched, which means that the food which people freeze and depend on
will go off.
At the moment, the mass of Russia's people depends on the things that
they grow on allotments, much as in Germany after 1945. If these things
rot, then starvation follows.
In fact, Russia's cities may be in for the sort of horrors that affected
Bucharest in the bad old days of Ceausescu. Then, whether gas came on
and off was unpredictable, and people sometimes forgot to turn off their
stoves when the gas was still at the "on" position, and were killed when
the stuff poured out again.
All of this has now affected the economy-as-seen-from-Moscow (and from
abroad). I quote from the Wall Street Journal: "The Russian stock market
has. shrunk to roughly $20m, about the size of a medium-sized S&P
company"; "On Thursday, the yield on one-month Russian government
Treasury bills jumped to an annual rate of 210 per cent. At one point,
the price of dollar-denominated Russian bank loans was only slightly
above the equivalent securities for Bosnia and Cuba, which doesn't even
pay interest on its bank debt."
We are talking, here, of a country with magnificent material resources.
What has happened?
A stock-market crash would, of course, have been par for the course, had
we been dealing with an ordinary "emerging market" - these things
happened again and again in the US, a century ago. But such crashes
occurred against a background of tremendous economic growth, burgeoning
population statistics, a flourishing of good schools, of trade. None of
these "real" things has been occurring in Russia; quite the contrary.
There, Communism had three generations in which to kill off everything,
except a capacity for withstanding misfortune, and an acceptance of
death. The horrible thing was that the kind of people who knew how to
profit from Communism were lowest-common-denominator men, intelligent
enough to "play" the West, and able to get thousands of millions of
dollars from it, by a sort of blackmail: nuclear weaponry sold abroad,
They encountered a feeble-minded generation in the West which, since the
oil-shock of 1973, had been dealing with detente, and who assumed that
if you were nice to people, they would be nice back.
What we have in Russia is a group of people who grew up with the idea
that capitalism was by its nature nasty and greedy, that short-termism
would reign, that the history of the US is just a matter of ripping off
innocent immigrant gulls, and that if Russia, allegedly turned
democratic and "capitalist", can just show what capitalism really means
- immiseration plus Mahagonny - then Lenin will have been shown to have
been right after all. These same people expected that eastern Europe
would just implode into endless little minority squabbles.
The present Russian problem is a terrible mess, and it will go on and
on. I am now deeply pessimistic about the Russian future, and am very
sorry for those many Russians whom I enormously like.
If, even after this, you wish to put money into Russia, I have a
suggestion: buy Tatarstan. Russia started in 1562, when Ivan the
Terrible captured Turkic Kazan. Turkey and Poland, the victims of
Russia's rise, are back on the map.