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Johnson's Russia List


August 23, 1998   
This Date's Issues: 2322   

Johnson's Russia List
23 August 1998

[Note from David Johnson:
1. AP: Yeltsin Fires PM, Entire Government.
2. Reuters: Clinton to go to Russia despite sacking.
3. Reuters: Russia's Chernomyrdin again proves unsinkable.
4. Los Angeles Times: Carol Williams, Russia Copes With Crisis in

5. Reuters: Russia problems tax government, aid donors.
6. Boston Globe: Lynnley Browning, Russia ills shake faith in market

7. The Independent (UK): The battered bear could yet turn nasty. 
Russia's latest currency catastrophe may unleash dangerous anti-Western 
forces, argues Phil Reeves.

8. Reuters: Russia reform doubts as Chernomyrdin back.]


Yeltsin Fires PM, Entire Government
Aujgust 23, 1998

MOSCOW (AP) -- Boris Yeltsin fired Prime Minister Sergei Kiriyenko and the
rest of his government on Sunday and said he was reappointing former Prime
Minister Viktor Chernomyrdin.

The surprise announcement came as Kiriyenko and the government were struggling
to overcome one of Russia's worst economic crises since the Soviet collapse.

The Russian president had fired Chernomyrdin and appointed the 35-year-old
Kiriyenko in March, saying Russia needed new ideas and fresh leadership.
Kiriyenko had barely been approved by parliament when Russia's economy went
into a tailspin, a victim of plunging world oil prices and the Asian economic

Si*nce then, the young prime minister had been waging a losing battle to shore
up the economy, defend the national currency and push reform measures through
a hostile parliament dominated by communists and their allies.

Chernomyrdin, a Soviet-style bureaucrat who once headed the national gas
monopoly, Gazprom, has busied himself since being fired by laying the
groundwork for a presidential campaign in 2000.

Few political analysts think Chernomyrdin -- a relatively bland and
conservative figure strongly associated with an unpopular administration --
could win, although he could probably count on some support from the business
and banking establishment.

Kiriyenko had been busy holding meetings Sunday to work out measures to save
Russia's banking system from default.

Yeltsin delivered the news in a terse announcement from his press service. He
did not give any reason for the shift, but he has been under increasing
pressure from parliament to replace the government.

The lower house of parliament, the State Duma, called Friday for Yeltsin's
resignation, and all factions in parliament had also demanded that Kiriyenko
step down or be fired.

``We can't afford the luxury of being a popular government,'' Kiriyenko told
the Duma on Friday as he outlined the government's new austerity package. His
comments drew a chorus of boos and jeers.



Clinton to go to Russia despite sacking

EDGARTOWN, Mass., Aug 23 (Reuters) - President Bill Clinton's planned trip to
Russia next month will go ahead as scheduled despite Russian President Boris
Yeltsin's decision to sack his entire government, the White House said on

White House spokesman P.J. Crowley said the United States would continue to
work with Russia to advance economic reforms and said it was crucial that the
new government there implement the reforms. 

Crowley said by telephone to reporters accompanying Clinton on his vacation on
Martha's Vineyard, Massachusetts. 

``We will obviously be watching the situation carefully, and will continue to
work with the Russian government to advance its reform agenda,'' he said. 

``It's most important for acting Prime Minister (Viktor) Chernomyrdin to take
effective steps to deal with the economic issues confronting the Russian
government, and we hope that he will work closely with the federal assembly,
international financial institutions, leading sectors within the Russian
economy and private investors to improve the economic situation in Russia and
restore investor confidence,'' Crowley said. 

Asked about Clinton's planned visit to Russia Sept. 1-2 for a summit with
Yeltsin, Crowley said, ``The trip will go forward as scheduled. The president
was invited by President Yeltsin and we have a wide range of bilateral issues
to address in their meetings.'' 


Russia's Chernomyrdin again proves unsinkable
By Oleg Shchedrov

MOSCOW, Aug 23 (Reuters) - Viktor Chernomyrdin again proved his reputation of
being ``unsinkable'' on Sunday when President Boris Yeltsin put him back in
charge of Russia's government, exactly five months after sacking him as prime

Yeltsin removed Sergei Kiriyenko, who had in effect devalued the rouble and
defaulted on some Russian debt as prime minister, and named Chernomyrdin, 60,
as acting premier. 

``We have no government today,'' Chernomyrdin said last week as he held a
flurry of secret consultations with other political leaders. 

``Measures that should be taken are not being taken or even proposed. All that
is being proposed is all muddled. Nothing is being done.'' 

In 1992 Yeltsin made Chernomyrdin his prime minister to replace the reformist
Yegor Gaidar, launching the stocky, low-profile former chief of the powerful
Gazprom natural gas monopoly into high-profile public politics. 

Chernomyrdin loyally stood by Yeltsin through political and economic turmoil,
outlasting many of his allies and foes. 

``Loyalty to Yeltsin is his shield and his insurance,'' one Kremlin official
said about Chernomyrdin's ability to survive. 

In November 1996, Yeltsin handed Chernomyrdin the reins of power for one day
when he had heart surgery in a sign of trust in the prime minister. 

Loyalty to Yeltsin helped Chernomyrdin survive several major government
reshuffles, including after a brief but dramatic crash in the rouble's value
in October 1994 which forced out several cabinet colleagues. 

Chernomyrdin's time seemed to be running out in March 1997 when Yeltsin named
young reformers Boris Nemtsov and Anatoly Chubais as first deputy prime
ministers to oversee reforms. 

But Chernomyrdin bore the humiliation calmy and waited. By early 1998,
Chernomyrdin was again as powerful as ever. 

When Russia's economy started to wobble in late 1997 under the pressure of a
global crisis sparked by turmoil in Asian financial markets, Chernomyrdin
again rode the storm. 

But his traditional unsinkability seemed to have failed him a few months

On March 23 Yeltsin sacked him without explanation, replacing him with

Yeltsin later said the sacking was due to Chernomyrdin's lack of reformist
stamina. But some Kremlin sources said the growing political weight of the
premier was the real reason. Yeltsin, they said, feared Chernomyrdin had
become too powerful. 

Chernomyrdin, abandoned by the Kremlin chief, announced plans to run for
president in 2000, revealing an ambition he had long denied he harboured. 

Many commentators predicted that Chernomyrdin, who has little charisma and
often mumbles when speaking in public, had almost no chance of winnming an
election without the support of the Kremlin. Some sentenced him to political

Chernomyrdin announced plans to run for a place in the lower house of
parliament to occupy him until 2000, representing the centrist party Our Home
is Russia movement which he heads. It has about 10 percent of seats in the
lower house. 

By calling back Chernomyrdin, Yeltsin has acknowledged the usefulness of his
veteran ally, who is widely expected to remain as permanent prime minister and
is likely to seek more independence than Kiriyenko had. 

Ekho Moskvy radio station quoted sources in Chernomyrdin's entourage as saying
the condition for his comeback was full control over hiring and firing
ministers. It said he also wanted Yeltsin to have no involvement in day-to-day
management of the government. The report could not immediately be confirmed. 


Los Angeles Times
August 23, 1998 
[for personal use only]
Russia Copes With Crisis in Agriculture 
Conflict: Farmers fear Land Code will put property in private hands. 
By CAROL J. WILLIAMS, Times Staff Writer

OYARKOVO, Russia--In the slothful days of the Soviet Union, when state 
farms were the domain of drunks and dunces, Russia could never feed 
itself despite its vast expanses of chocolaty soil and a millennium-old 
agrarian tradition. 
     What was missing, mused the scholars and scribes who watched this 
country stagger under central planning, was that capitalist notion of 
individual incentive. Without the promise of personal profit, Ivan just 
couldn't be bothered to tend those cows or nurture those crops. 
     But more than a decade into the new economic order that encourages 
Russians to get richer by working harder, agriculture is in its sorriest 
state since the starvation and chaos of the 1930s inflicted by dictator 
Josef Stalin's brutal collectivization. 
     To an even greater degree than in Soviet times, Russians must grow 
their own produce on the tiny private gardening plots they lease from 
their towns and cities if they want to be sure of getting enough to eat. 
     And the outlook for better output from the decaying network of 
state farms and struggling private farming cooperatives is bleak because 
of the unresolved conflict between Kremlin reformers and their Communist 
opponents over whether individuals should be allowed to own land. 
     Growing Produce as Means of Survival 
     In what may be the last bastion of the Bolsheviks who sought to 
secure power by controlling the country's food source, Communists have 
succeeded in fostering widespread fears of a private land market among 
today's rural residents whose lives have only become more spartan in the 
capitalist era. 
    Russia's draft Land Code has languished for more than three years in 
the Communist-controlled Duma, the lower house of parliament--hostage to 
fears that many who now making their living as farmers will lose their 
jobs if the land they work falls into private hands. 
     Those fiercely loyal to Communist doctrine are now a minority in 
Russia, but they retain a stranglehold on the countryside and are loath 
to give way to the market forces now driving most other aspects of the 
national economy. 
     Despite stunning growth in most consumer and service industries, 
food production is still in the clumsy hands of Communist ideologues and 
loses more ground each year to higher-quality imports and the output of 
private plots. 
     "People don't feed themselves with what is sold in stores. These 
shops are only for that 1% of the country made up of rich New Russians," 
says Yuri Chernichenko, president of the Peasants' Party of Russia, 
which is author and primary advocate of the pending land reform. 
"Everyone grows his own food in this country. If they didn't, they would 
     Weekend gardeners who tend small plots attached to their dachas in 
the countryside grow 91% of the potatoes consumed in Russia, 77% of all 
vegetables, 56% of meat and 47% of dairy products, notes Alexander 
Serkov, deputy director of the All-Russian Agriculture Research 
     In the Soviet era, Western critics often pointed to the greater 
output from private plots as evidence that incentive was what was 
lacking on the state farms, as the individual gardens then produced 
about 25% of Russia's food while occupying less than 3% of its 
cultivated territory. 
  Today, agriculture officials contend reliable statistics are hard to 
come by but estimate that as much as 50% of the country's food needs are 
supplied by the individual gardens that now cover 10% of the 
agricultural land. 
     Imported goods account for an additional 35% to 40% of food 
consumption in the country, says Vladimir Loginov, director of the 
Agriculture Ministry's food market regulatory agency. 
     That means the surviving state farms and fledgling private 
agricultural co-ops are producing no more than 10% to 15% of the 
country's food needs--a factor that worries those responsible for 
national security because it leaves Russia dependent on foreign 
suppliers for its most vital commodity: food. 
     Collapse of Collective Farms 
     At the Iskra state dairy farm in this village an hour's drive from 
thriving Moscow, the disparity between shrinking collective output and 
the abundance from each family's private plot is a convincing example. 
     "Everything my family eats comes from my kitchen garden," says 
Lyudmila Khirova, the 38-year-old mother of four who runs one of Iskra's 
five dairy barns. "We grow or raise everything ourselves, except 
     By contrast, the farm's production has dropped every year since 
1990, and the tough competition posed by imported milk products means 
Iskra must continue to divest land and assets to make ends meet. While 
average pay for the farmers is only about $240 a month, employees say 
they are often paid in commodities, such as meat and fodder, instead of 
     Since its conversion to a workers' collective in 1993, Iskra has 
shed a third of its territory to the regional government, which in turn 
has leased it out to wealthy Muscovites wanting sites for dachas far 
from the noise and pollution of the capital. The farm also has lost 
two-thirds of its original 1,500 milk cows, and jobs have dropped from 
600 a decade ago to 230 today. 
     More than 50 million Russian citizens, or a third of this country's 
population, live in rural communities where the only source of income is 
farming. While the vast majority worked on large state and collective 
farms in the Soviet era, the virtual collapse of those ill-managed and 
overstaffed enterprises compelled most of the agricultural work force to 
retreat to their homes and eke out an existence growing their own 
produce and tending a few head of cattle. 
     High Tariffs Inflate Price of Food 
     Disappearing jobs and prevalent barter trade have severely eroded 
Russians' buying power and led to significant drops in food purchases in 
stores and supermarkets in recent years, says Stanislav Anisimov, 
president of the Roskontrakt food procurement and distribution service. 
His capitalist-style joint-stock company, built on the ruins of the 
Gossnab state supply monopoly of the Soviet era, focuses on securing 
sugar beets, sunflowers and grain for processing at Russian factories to 
boost self-reliance on the vital commodities that individual gardeners 
cannot make for themselves: sugar, cooking oil and flour. 
    Russia's heavy dependence on imports also has allowed the 
cash-strapped government to slap on higher and higher duties to fill the 
treasury's empty coffers. But those tariffs are criticized by consumers 
as a chief cause of rising food prices and by analysts as protectionism 
that encourages inefficiency in the domestic food industries. As of Aug. 
1, a 3% surcharge has been added to all imports to generate revenue for 
the government. 
     "This latest increase in import duties will only raise the cost of 
food for consumers and reduce their ability to afford a proper diet," 
grouses Vladimir Karnaukhov, commercial director of the successful 
Seventh Continent grocery store chain in the Moscow area. 
     Land Ownership Root of Problem 
     Like other entrepreneurs struggling to operate in Russia, 
Karnaukhov says he doubts that any recovery in Russian agriculture is 
possible before the country's general finances are put in order. 
     Most pressing, however, observers say, is adoption of the Land Code 
and the establishment of clear property rights, including the right of 
banks to repossess farmland in the case of defaulted loans. 
     "The biggest problem we have in agriculture today is the lack of 
any guarantees for credit. No one owns property, and land is the only 
asset that can be mortgaged," Anisimov says. "Until the issue of land 
ownership is resolved, the crisis in agriculture will continue." 
    Farmers also face stiff competition for credit from the Russian 
government, whose strangling debt crisis forces the Kremlin to borrow 
heavily at high interest rates to pay off maturing short-term loans. 
*Despite a $22.6-billion bailout promised by international lenders over 
the next 18 months, no one in Moscow is predicting the kind of financial 
stabilization needed to free resources for farming. 
     "Without land to use as collateral, a farmer can't get the credit 
he needs to buy seeds, fertilizer or equipment," says Anatoly Altukhov, 
an analyst at the agriculture research institute. 
     While the paralyzation of the Land Code is widely blamed for the 
crisis in Russia's food production, those tilling the soil have been 
successfully convinced by their former Communist directors that private 
property will cost them their jobs. 
     "We are against this. A land law will only worsen conditions," 
Iskra director Ivan Yanchukov prompts the farm's equipment manager, 
Valentina Surova, when she is asked whether owning land that could be 
used as loan collateral might allow investment to upgrade their 
antiquated milking devices. 
     "Our Russian people wouldn't know how to handle private property. 
They live only for today and would just sell their land rather than 
invest for the future," Yanchukov interjects. 
     Although Soviet-era farms like Iskra have shrunk to mere remnants 
of their former size, directors still wield absolute power over the 
rural work force. Russians have no right, even in today's market 
economy, to move out of the communities in which they are registered to 
seek job opportunities elsewhere, condemning those fired for crossing 
omnipotent bosses in one-industry backwaters like Poyarkovo to 
   'Easing the Fears of Private Property' 
     Chernichenko, the Peasants' Party leader, says he believes the 
vital private land market will eventually develop in Russia but that 
several more years will be necessary to break down popular resistance 
inspired by Communists struggling to hold on to their last sphere of 
     "The Duma is like 'Jurassic Park.' All these reptiles are stomping 
around scaring everyone," says the agrarian advocate. "But sooner or 
later, wisdom will prevail and people will realize they have nothing to 
fear from a land law." 
     Some regional leaders have taken matters into their own hands and 
announced that land in their provinces is for sale to private farmers. 
The first to bolt from the federal logjam was the reformist governor of 
the Volga River region of Saratov, Dmitri Ayatskov, and 40 other 
provincial leaders have followed suit over the last year. 
     Proponents of private land ownership predict eventual adoption of 
the Land Code, but even the most optimistic forecasts see the reform no 
sooner than 2000, when Russia will have a new--and potentially more 
progressive--Duma and a successor to President Boris N. Yeltsin. 
     "Everyone knows the absence of property rights is impeding 
agricultural production, but the mentality of the country's food growers 
changes much more slowly than do the political forces in the 
legislature," says Loginov of the Agriculture Ministry. "It will likely 
take another decade to ease the fears of private property that have been 
spread in the countryside." 


ANALYSIS-Russia problems tax government, aid donors
By Janet Guttsman

WASHINGTON, Aug 23 (Reuters) - Russia's economic woes sent shock waves through
jittery world financial markets last week, and analysts said solving the
problems would strain the abilities of both the government and its financial
backers in the West. 

Russia, which stunned markets a week ago by effectively devaluing the rouble
and defaulting on some foreign debt, must balance demands of foreign investors
with strident pleas from Russian workers who have not been paid for months. 

Donors must decide whether to stick to their decision last week to not add
more funds to a month-old $23 billion international rescue deal, and whether
to stand by President Boris Yeltsin, who holds a summit meeting with U.S.
President Bill Clinton next month. 

``This was the first time that Clinton failed to come to Yeltsin's aid,''
George Washington University professor James Millar told a news briefing on
Friday, referring to the decision to deny Russia's request for more help. 

``In my opinion, Yeltsin is the problem. He is not the solution and he has not
been the solution for a long time,'' Millar added. 

The desire to prevent political turmoil in Russia was a key factor behind the
approval of the $23 billion July deal, which comprises money from the
International Monetary Fund, the World Bank and from Japan. 

But the deal unravelled faster than anyone had expected -- Russia spent its
initial $4.8 billion injection of IMF cash in a matter of weeks in a futile
attempt to defend the rouble -- and Prime Minister Sergei Kiriyenko said the
crisis had only begun. 

``We have just entered a serious financial crisis... We cannot allow ourselves
the luxury of being a popular government,'' he said on Friday. 

But Millar said Kiriyenko's government, hailed by many in Washington as the
most reformist team Russia has ever had, would not be able to solve problems
like dismal tax collection if it was not a popular administration. 

``They have got themselves into a really tight situation,'' he said. ``I think
until a government exists in Russia that has the support of a substantial part
of the population they are not going to be able to collect a significant
amount of taxes.'' 

Russia's financial problems hit currencies and markets around the world on
Friday, contributing to a 0.9 percent fall in U.S. shares. 

Venezuela allowed the bolivar currency to trade more freely within a currency
band and the Mexican peso closed at a new low of 9.72/78 to the dollar,
battered by fear that crises in Asia and Russia were spreading to Latin

But U.S. officials said there was no need to change plans for the summit,
called before Russia's crisis deepened and before Yeltsin lashed out at U.S.
strikes on what Washington says were terrorist targets in Sudan and

``We have an enormous degree of common business...and the fact that there is a
disagreement on this particular issue will not, I think, affect the summit at
all,'' National Security Adviser Sandy Berger told a news conference on

Analysts said the debt default would only buy Russia a limited amount of time
and had alienated foreign investors, who now want just to keep losses as low
as possible. 

Workers were crying out for long-delayed pay packets and patience had worn out
at the State Duma lower house of parliament, which called on Yeltsin to

``They are in a debt trap -- not just formal debts to banks but also debts to
their own citizens,'' said Clifford Gaddy, analyst at the Brookings
Institution in Washington, adding that Russian governments had lost
credibility by repeatedly failing to live up to their promises on reform. 

``I am amazed that anyone still puts any faith in verbal commitments being
made by the Russian government,'' he said. 

But Anders Aslund, a former adviser to the Russian government who now works at
the Carnegie Endowment for International Peace, said the crisis could provide
Russia with the impetus it needs to bring the budget deficit down. 

``Crisis means you can get something done,'' he said, adding that Moscow
needed to clarify its exchange rate policy, work out how to refinance GKO
Treasury bills and resolve a banking crisis, guaranteeing funds of savers, but
not of bank owners. 

``If they get this right, I think the situation looks reasonably good,'' he
said. ``Russia has reasonable reserves and $17 billion of international
finance is already committed.'' 


Boston Globe
23 August 1998
[for personal use only]
Russia ills shake faith in market cure-alls 
By Lynnley Browning

Moscow's recent financial upheaval has jolted its leaders and people and 
sent tremors through global markets. It has also exposed troubling 
questions about the extent to which Russia has made any economic 
progress since the Soviet Union fell apart in 1991. 

Only a year ago, many economists and policy makers thought Russia was 
well on its way to becoming a market economy, if not already there. Some 
still do. But for others, Russia's latest debacle has sparked a crisis 
of faith in how to repair troubled economies. From a belief in the 
transformative power of Western aid to certainty that market laws can 
work as well in Novosibirsk as in New York, a slew of cherished 
assumptions has come under fire. 

These days, some economists increasingly see Russia's reforms as 
illusory. And a new generation of analysts is confounded by what it sees 
as a rift between iron-clad market laws and the reality of a country 
that often seems to defy those laws. 

Last week Russia effectively devalued the ruble by 34 percent, raising 
the specter of political and social instability in the former Communist 
giant. The tempest came after Asia's storm passed over Moscow in 
October, pressuring the ruble, which had been largely stable for four 
years, and scaring Asian and Western investors out of the government 
debt market, a key source of state funding. Moscow, strapped for cash, 
declared a temporary moratorium on some debt payments. 

The moves threaten to undermine years of positive changes. This time 
last year, more than 80 percent of state property had been privatized, 
and Moscow seemed willing to let market forces, not insider business 
cliques, dominate sales. Foreigners poured into the stock market in 1996 
and 1997 and bagged triple-digit gains. Inflation, an official 1,353 
percent in 1992, was tamed to 14 percent in 1997. And last year Russia 
saw growth, albeit slight, for the first time in eight years. Growth 
would more than double to 1 percent this year, and top 5.9 percent in 
1999, according to International Monetary Fund forecasts. 

A `virtual' mess 

The results, the conventional wisdom went, showed that giant leaps 
forward had been taken over seven years and that the West should keep 
pouring money and advice into Russia. 

Sure, ugly problems remained. Corruption, the inability of most 
enterprises and the state to pay workers and suppliers, weak tax 
collection, and an opposition-dominated parliament unwilling to pass 
laws all hampered progress. But the hurdles were not seen as 
insurmountable. Tax reform, currency support, and government fiscal 
austerity - all standard IMF prescriptions - would lead to functioning 
companies and markets. Economists and international lending institutions 
focused on fiscal policy as the key to getting Russia back on its feet. 

``There are serious distortions, but I would still call Russia a market 
economy,'' said Anders Aslund, a senior associate at the Carnegie 
Endowment for International Peace, whose views echo the conventional 
wisdom of US policy makers and international lenders. ``There's an 
understanding that radical, fast, simple reforms are the best.'' 

Now, those assessments are under attack. 

In a new thesis that challenges sacred Western notions of what the 
former Cold War foe needs to become a democratic market economy, two 
American scholars call Russia a sickly and spectral ``virtual economy,'' 
neither capitalist nor planned, that the West has unwittingly helped 

In a research paper that first appeared in June, Clifford G. Gaddy, a 
Brookings Institution fellow, and Barry W. Ickes, an economics professor 
at Penn State University, say tax reforms and fiscal austerity measures 
will do little to aid the ailing enterprises they see as the root of 
Russia's problems. 

In fact, they say, Russia is nothing like a market economy, and is 
instead a shell game, in which barter, not cash, drives the system, 
workers are not paid on time, and taxes cannot be collected from 
producers because customers, including the state, do not pay on time, if 
ever. Scores of overstaffed factories still produce goods at a loss. Any 
profits made are whisked to offshore accounts. Most banks, insolvent, 
have invested in high-returning state debt rather than domestic 
companies with world-class oil and metals reserves. 

The exception: Russia

Few dispute that description. But many economists see the problems as 
imperfections - admittedly serious - rather than fatal flaws. For most 
of this decade, economists working on Russia have gone on the assumption 
that enacting tax reforms and laws requiring companies to pay in cash 
will produce market-oriented enterprises. 

That is a mistake, according to Gaddy and Ickes. ``It has almost been an 
iron law that if you get the macro-economic side right, you'll get 
positive results,'' said Gaddy. ``But there's this one little exception 
called Russia.''

As the latest entry in a burgeoning debate over Russia's chances for 
revitalization, the ``virtual economy'' assessment highlights a growing 
lack of consensus on why Russia has bounced from one crisis to another 
this decade. 

The paper, a version of which will be published in the September issue 
of Foreign Affairs, began circulating last month in halls ranging from 
the Central Intelligence Agency and Defense Department to the Russian 
Central Bank and Moscow brokerages, just as the IMF approved another 
$11.2 billion loan to Russia. 

Already it has raised hackles and alar ms. 

James R. Millar, an economics professor at George Washington University, 
takes odds with Gaddy's and Ickes dead-end view that loss-making 
enterprises have no value and must be shut down - a move the government 
is unlikely to make. 

``By that logic, New York should have ceased to exist long ago,'' Millar 
said, referring to the city's debt crisis in the 1970s. 

Most economists stress the need for Russia to resolve its structural 
problems. Unlike Gaddy and Ickes, who focus on Russia's corporate 
crisis, most finger Moscow's fiscal crisis, the Asian flu, and low world 
oil prices that have slashed Moscow's hard currency earnings as the main 

Global lenders' roles

Russia's crisis has also reignited debate over the role of international 
lending institutions in curing ailing economies. 

Against the IMF's failure to predict Asia's economic turmoil and to 
stave off Russia's quandary, economists are once again questioning the 
efficacy of Western aid. 

``The IMF is an incompetent institution that hasn't ever known what it's 
doing in Russia,'' said Jeffrey D. Sachs, a Harvard economist who 
advised the Yeltsin government in the early 1990s but quit in disgust at 
what he saw as a lack of progress. 

While Russia's crisis does not challenge the classical economic tenets, 
Sachs said, successful reforms were not guaranteed. The reason, he said, 
was that Russia's fate had as much to do with things the West can 
control, such as timely international aid, as with things it can't, such 
as Russia's sprawling land mass and centuries-old history of 
authoritarian rule without private property. 

Can the West influence a fourth factor key to reform - Russia's own 
policies? One assumption behind the $31.2 billion committed by the IMF 
to Russia since 1992 is that it can, and the IMF now makes passage of 
key policy measures by the Russian parliament a condition of receiving 

Gaddy and Ickes assert that policies do not automatically create markets 
and that foreign aid is a wishful conceit. Their solution is for the 
West to throw in the towel, cut funding, and accept that Russia cannot 
restructure inefficient enterprises and lay off legions of workers 
without bringing the house to collapse. 

``The West should accept that radical economic reform in Russia is 
incompatible with social stability,'' Gaddy said. 

With an economy no larger than Canada's, Russia does not yet affect 
world markets as Asia does - temblors in global debt markets and anxiety 
among big-lending German banks excepted. The Russian stock market, down 
79 percent so far this year and now with a capitalization no bigger than 
that of a decent-sized US company, has played a lesser role. Russian 
citizens, who prefer cash to shares, could not care less, and the effect 
on US stocks has been slight. 

A twist in the tenets

The Russian rumblings raise other questions. 

Burton G. Malkiel, an economics professor at Princeton University, 
wonders if Russia's latest crisis might be evidence that flows of 
capital, ranging from international loans to capital flight, make life 
tougher for struggling economies with little leeway for maneuver, 
especially when debt payments come due. ``It's clearly a downside to the 
free-market model and may imply a kind of inherent instability in the 
free-market system that makes it difficult for countries to cope,'' he 

Many Western economists and policy makers assumed successful reforms in 
Eastern Europe in the post-Communist period could be grafted onto 
Russia. Instead, Moscow's straits may suggest that troubled and 
transitional economies are increasingly willing to take riskier, 
iconclastic steps to try to save themselves. 

In seeking to restructure $40 billion in short-term debt, much of it 
owned by foreigners, Russia crossed a line that could lock it out of 
international capital markets for years. Moscow's opting to delay debt 
payments, on the heels of Hong Kong's shock suggestion last month that 
capital flows in the Asian free-market mecca be controlled to stave off 
financial collapse, has shown that sick economies are more willing to 
implement less conventional measures, said Morris Goldstein of the 
Institute for International Economics in Washington, D.C. 

For years, the West has been telling Russia what to do. Now, a new 
generation of economists suspects Russia might be telling the West a 
thing or two. 

``This is the end of an era of believing that markets would lead to 
capitalism would lead to wealth,'' said Alastair P. M. Breach, a junior 
economist at the Russian-European Center for Economic Research in 
Moscow. ``Suddenly, you realize that with Russia, you're dealing with 
something completely different.''


The Independent (UK)
23 August 1998
[for personal use only]
The battered bear could yet turn nasty 
Russia's latest currency catastrophe may unleash dangerous anti-Western 
forces, argues Phil Reeves 

LIKE SO many of her countrymen and women, Yekaterina Melnikova, a 
Siberian entrepreneur, is minded to turn to turn to drink. 

Until this week, she was on the verge of bagging a $5m (£3.1m) German 
loan to set up a food processing plant. Prosperity, security, success 
beckoned. No more. Russia's decision to devalue the rouble - combined 
with a de facto debt default, marking the failure of a $22.6bn 
IMF-supervised plan to save the currency - has sent her scheme up in 
smoke. "It is time to drink vodka," she said, and, coining a saying, 
declared herself "as likely to see the credit as I am my ears". 

Hers was one of a multitude of stories to filter out of Russia's vast 
landscape with the fall-out of its latest financial crisis last week. 
Unpaid workers saw the value of their wage arrears reduced in value by 
hundreds of dollars and for a while banks stopped selling hard currency. 
Wealthier people went on a shopping spree, keen to spend roubles before 
the inevitable price rises, and merchants - as ever, penning their 
painstakingly neat labels by hand - began to chalk up the prices, 
notably on electronic goods. 

Yet there were no riots, no tanks rolling through Moscow. By the end of 
the week, exchange rates on the street - where the rouble had plunged to 
10 to the dollar - were moving closer to the official rate of around 
seven, a drop of 10 per cent on the old rate. 

Russians seemed to be taking their latest setback with weary 
resignation, as yet another blow on a very bruised chin. Yet the absence 
of any louder protest does not mean that no serious damage was done. It 
was. There has been a critical loss of faith on several fronts - in the 
rouble, in the country as a borrower, and in Western remedies. 
Commitment to these three concepts was always shaky, but now it is on 
the point of total collapse. 

The reasons for the sullen, stoic calm that now prevails in Russia are 
plentiful. Critically, there is no real rallying point for popular 
protest. Moscow is an island of prosperity, as different from the rest 
of the country as St John's Wood is from London's East End. Though full 
of thunderous rhetoric, the political opposition, including the dominant 
but feebly-led Communists, shows few convincing signs of wanting to 
wield power. Friday's demand for President Boris Yeltsin's resignation 
was symbolic, a way of letting off steam in front of the voter. The 
trade unions are compromised by a traditionally cosy relationship with 
the ruling elite. The media, though often noisy, is corrupt and widely 
shackled by oligarchic ownership. 

In fact, Russians are insulated from some of the nastier immediate side 
effects of economic crises by their own poverty, although inflation - 
combined with low wages - will eventually bring pain. Cash and personal 
credit play a far smaller role than in the West. The average Russian 
buys just over half his food, and either grows the rest or receives it 
as gift or barter. Nine out of 10 do not have a car and most pay small, 
heavily subsidised, power and rent bills for their usually tiny and 
run-down apartments. Russian statisticians say that 77 per cent of the 
147 million population have no savings. (Only about $25bn worth of 
roubles was on deposit in Russia before last week - roughly the same as 
the capital that annually flees the country.) The majority have a 
miserable existence, but after a century which brought collectivisation, 
famine, war, terror and the collapse of the entire political system, 
they have learnt how to survive. 

The destruction of trust among foreign investors is possibly even more 
important than the rouble's devaluation. The government has acknowledged 
that its decision to, in effect, default on some loans means that it 
stands no chance of raising significant funds on the international 
capital markets for the next 18 months. It is talking of trying to raise 
money, using its gold reserves as collateral, but the odds are Russia 
will have to run a budget surplus - a tall order in a country in which 
most of the population can't or won't pay tax. 

What looms is a period of economic isolation, just as so often in the 
past. Given the shaky financial environment and penniless consumers, 
direct foreign investment, which briefly gathered pace last year, can be 
expected to slump back to miserly levels. To make matters worse in this 
regard, the popular enthusiasm for the West that emerged after the end 
of the Soviet Union has been replaced by widespread suspicion and 
sometimes antipathy. 

Russians have heard the mantra of market economics - the "reforms" - for 
years, but have not seen the profits. Few, beyond a rich cosmopolitan 
minority, understand its fundamentals - privatisation, competition, 
choice, the right to buy and sell land. What they understand is what 
they have experienced: multiple-digit inflation, crooked investment 
schemes, worthless privatisation vouchers, massive job losses, 
plummeting living standards, crime and corruption, the collapse of 
welfare and education. 

Western promises and ideology are viewed with cynicism, as are most 
political remedies. Russians these days tend to define their politics 
less by what they believe in than by whom they hate most. The result is 
a perilous vacuum. The lack of a democratic political tradition, such as 
meaningful party structures and voter loyalties, exposes the electorate 
to the risk of effective manipulation. It can be herded into the desired 
direction by cunning campaigning - as Mr Yeltsin's team demonstrated in 
the 1996 presidential election. 

This is not a country that expects to like its leaders. The public is 
open to ideas which capture the despair of the moment, no matter how 
ugly. This has happened before: in the 1993 parliamentary election, the 
party run by the madcap ultra-nationalist, Vladimir Zhirinovsky, the 
clown of Russian politics, led the field with 23 per cent. Happily, he 
now looks like a spent force. So far the other likely contenders for the 
Kremlin look relatively benign, although the mayor of Moscow, Yuri 
Luzhkov, has an alarming autocratic streak and the usually moderate 
reserve paratrooper general, Alexander Lebed (who once called Mormons 
"scum") has his mad moments. 

But at a time of economic hardship, a new and dangerous force could 
rapidly emerge - possibly of an anti-Western and heavily nationalistic 
tendency. That is what the West should now be worrying about. 


ANALYSIS-Russia reform doubts as Chernomyrdin back
By Christina Ling

MOSCOW, Aug 23 (Reuters) - The return of Viktor Chernomyrdin to the post of
Russia's prime minister raises questions for economic reforms despite improved
prospects for greater political calm, economists said on Sunday. 

"One has to seriously wonder about the future direction in Russia when they
bring back the prime minister under whom so little was done to make
fundamental change during a six-year period," said Donaldson, Lufkin and
Jenrette's chief emerging markets economist in London Charles Blitzer. 

"What remains to be seen is what positive effect can be brought forth from a
period of political quiet and a return to Chernomyrdin's style of government."

President Boris Yeltsin, back from a month-long vacation and clearly concerned
at the downward spiral of Russia's economic and political situation over the
past few weeks, fired his entire government for the second time this year on

Yeltsin appointed Chernomyrdin in place of the 36-year-old Kiriyenko, who
during his four months in office was both hailed for putting together Russia's
most reformist government since reforms started and shrugged off as a
political light-weight. 

Chernomyrdin, 60, developed relatively smooth relationships with big business,
or so-called oligarchs, and a fractious parliament during his previous five-
year stewardship, building a record as a solid if unspectacular reformer. 

But while his political savvy and gravitas will be welcomed in political as in
investment circles, economists said, Yeltsin's characteristically surprise
decision has injected fresh uncertainty into an already unstable situation. 

"It has to be uncertain because whenever you have a new person come in, even
if its Chernomyrdin who'd been there before, he's obviously going to have a
different take on what's happened through the week and we don't know what that
is exactly yet," said one Moscow-based analyst. 

Russia shocked markets last week by effectively devaluing the rouble and
declaring a 90-day moratorium on some foreign debt. It was also planning to
announce on Monday a plan to restructure $40 billion worth of domestic debt. 

The restructuring was to have involved swapping short-term GKO t-bills and OFZ
bonds with maturities to the end of 1999, which are expensive for the
government to service, with cheaper longer-term paper. 

Now, economists said, the situation was murkier. 

A spokesman for Deputy Prime Minister Boris Fyodorov said on Sunday the
announcement was still planned for 0700 GMT. 

But the Moscow analyst said it was unclear what new faces Chernomyrdin could
bring into the government who would be familiar with the intricate details of
the moratorium and debt restructuring. 

"I presume Chernomyrdin's going to want to have a careful look at what's
happening to take his own view on things -- it's just hard to see how you can
have this kind of upheaval and smoothly continue for the next couple of days,"
he said. 

But while the political situation hung in the balance, markets would be torn
between the hope of political stability and the threat of a return to
Chernomyrdin's more ponderous approach to badly needed economic reforms,
economists said. 

"We couldn't have it much worse than we've had it through the week, so we'll
look on the bright side," the Moscow analyst said. But Blitzer was less

"It's hard to see how reaction will be positive given Chernomyrdin's strong
support from the conservative Duma (lower house of parliament) as well as the
oligarchs," Blitzer said. 

"Cutting against that will be (the fact that) a festering blister has been
burst -- the government could not hang on much longer. On balance I think this
is short-run stabilising and probably long-run negative." 



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