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Johnson's Russia List


August 25, 1998   
This Date's Issues: 2325  2326

Johnson's Russia List
25 August 1998

[Note from David Johnson:
1. Reuters: Chubais warns of severe Russia economic woes.
2. Reuters: Nemtsov leaves government, expresses doubts.
3. Moscow Times: Alan Russo, Now, a Political Crisis.

5. Journal of Commerce: John Helmer, Yeltsin's moves may signal 
own departure.

6. International Herald Tribune: Charles Wyplosz, Formula for Russia: 
Pay Your Dues or Go to Jail.

7. Timothy Thompson: The Quiet Coup.
8. Paul Backer: Re 2322 and Legal Trivia.
9. Victor Kalashnikov: events.
10. Andrew Frankel: A Plan For Russia.
11. Jerry Hough: Chernomyrdin.]


Chubais warns of severe Russia economic woes
By Adam Tanner

MOSCOW, Aug 24 (Reuters) - Russia's top international debt negotiator Anatoly
Chubais warned on Monday of unprecedented economic dangers to Russia and said
the coming weeks would be more difficult than ever. 
``The fate of the country rests on whether or not the new Russian government
is able to resist these dangers,'' Chubais said in a statement made available
to Reuters. 
Chubais played a leading economic policy-making role under the government of
Sergei Kiriyenko, which was dismissed by President Boris Yeltsin on Sunday. 
Top aide Andrei Trapeznikov said he did not know if Chubais would have a role
in the new government headed by acting Prime Minister Viktor Chernomyrdin. 
Chubais called the economic challenges ahead ``absolutely new and dangerous
without precedent'' and called the next two or three weeks especially grave. 
``We have already witnessed the huge losses which the country suffered after
the 23rd of March when there was virtually no government for a month and a
half. Now the situation is many times more difficult and each day of delay
will cost us very dearly,'' he said. 
Yeltsin on March 23 this year fired Chernomyrdin after more than five years in
power and it took weeks for Kiriyenko to win approval from parliament and then
to form his new team. 
Chubais has been the leading economic policymaker since 1991 as Russia has
charted its difficult path from a planned ecomony to the free market, and has
become perhaps the most hated figure for the Communist-dominated opposition. 
He headed the country's privatisation drive and served in several key posts,
including as Yeltsin's chief of staff, and has worked closely with
Chernomyrdin when he served as prime minister from 1992 to earlier this year. 
Kiriyenko had assembled the most pro-reform government in post-Soviet history
and gave Chubais a key role charting a path out of the country's protracted
economic woes. 
Chubais praised Kiriyenko's government, which lasted only four months and fell
after effectively devaluing the rouble and defaulting on some foreign debt
last week. 
``It should be judged not only by stock market reports, but also comparing
today's situation, which is undeniably extremely difficult, with the truly
global catastrophe that would have happened had Kiriyenko been less firm and
responsible,'' Chubais said. ``Many difficulties also await the new
In the statement, Chubais appeared sensitive about the lack of public
appreciation for his work, which included winning Russia $22.6 billion in new
International Monetary Fund and other credits last month. 
``Over seven years of government work I have more than once had to make
decisions which influenced the lives of millions of people,'' he said. 
``I do not need anyone to remind me of my responsibility in what I have done.
Unfortunately, there are hundreds of times more people ready to criticise and
accuse than those who are ready to act and take on responsibility."


Nemtsov leaves government, expresses doubts
By Adam Tanner

MOSCOW, Aug 24 (Reuters) - One of the stars of the Russian government
flickered out on Monday when prominent reformer Boris Nemtsov said he would
not join the new cabinet being formed by acting Prime Minister Viktor
The curly-haired, telegenic deputy prime minister said he was leaving because
he thought Chernomyrdin would be unlikely to solve the country's severe
economic problems. 
``All the serious problems -- first of all bringing order to the economy,
normalising the situation with financial-industrial or so-called oligarchs'
groups -- all these issues are unlikely to find a solution from the
Chernomyrdin government,'' Nemtsov, 38, told Russian Television. ``In this
situation there is no sense for me to be a part of it.'' 
Earlier he said he had already told President Boris Yeltsin. 
``I decided to resign today. I appealed to the president with this request,''
he told a press conference. 
Yeltsin abruptly sacked Prime Minister Sergei Kiriyenko and his entire
government on Sunday and put Chernomyrdin, whom he had dismissed in March for
not doing enough for reform, back at the helm. 
``It is all too difficult to carry out any the conditions of such
an ugly market, where competition is non-existent, monopolies are rampant,
where rules are few,'' Nemtsov said. His leaving would also help give
Chernomyrdin a chance to form a government ``of his own,'' he said. 
Yeltsin summoned Nemtsov in March 1997 from the Nizhny Novgorod region, where
he was governor. They seemed to forge a close relationship, almost like father
and son, and some analysts saw Nemtsov as a possible presidential successor. 
But Nemtsov, once dubbed the ``golden boy of Russian reform,'' saw his star
lose some of its shine of late. At one point he lost the title of first deputy
premier, and later he was stripped of the important energy portfolio. 
Bowing out of the scene now may prove politically shrewd in the long term
however. Chernomyrdin is unlikely to assemble a government as pro-reform --
and thus as in tune with Nemtsov's own beliefs -- as the one led by Nemtsov's
close friend and former protege Kiriyenko. 
Kiriyenko also came to Moscow from Nizhny Novgorod and was for a time
subordinate to Nemtsov at the energy ministry. On Sunday night, after the
announcement of their sacking, the two friends stepped out of the government
headquarters together to chat with striking coal miners. 
Nemtsov said on Monday he would not oppose Yeltsin. 
``The president is in a very difficult situation and it would be the height of
cowardliness and impoliteness if people who were with him since 1990 turned
their backs on him at this difficult time,'' he said. 
But he said he though the Kiriyenko government had been treated unfairly
harshly. ``To judge a government that was in power for less than a year is
``There is a great Byzantine element left in Russian politics. There is
intrigue there. But I cannot judge how big an intrigue it is. I never took
part in it,'' he said. 
Nemtsov said he did not know what he would do next. 


Moscow Times
August 25, 1998 
Now, a Political Crisis 
By Alan Rousso
Alan Rousso is director of the Carnegie Moscow Center. He contributed 
this comment to The Moscow Times. 

The talk in Russia and among experts who follow events here is that 
President Boris Yeltsin's abrupt decision to sack his government and 
bring back former Prime Minister Viktor Chernomyrdin to head a new 
government adds a measure of stability to Russian politics that has been 
lacking until now. 
Nonsense. At a time of severe financial crisis, the Russian Federation 
is in the hands of an unsettled government; the president has taken an 
already desperate economic situation and turned it into a full-blown 
political crisis. Moreover, any country which experiences three 
governments in five months cannot by definition be considered "stable." 
The message this sends to the international community, and the Russian 
people, is that the situation is out of control and the president 
doesn't have a clue how to manage it. State leaders do not gain currency 
among their foreign counterparts by whimsically changing governments 
without consultation of the leaders of other elected bodies, and 
citizens who have been systematically lied to by their government and 
deprived of basic rights do not suddenly grow tame at the prospects of 
seeing a stalwart of the old guard (and a stalking horse for the 
so-called "oligarchs") return to power. 
In what ways could this be said to represent stability for Russia? 
For one thing, it places a layer of insulation between the president and 
the policies that have brought the country to the brink of ruin -- so 
Yeltsin, notwithstanding his medical infirmities, can be said to have 
enhanced the stability of his rule. The Russian parliament will busy 
itself with the tasks of approving Chernomyrdin's candidacy and then 
negotiating the composition of his government and thus, for the time 
being, can be expected to lay off the president. However, extending 
Yeltsin's rule at this point is a mixed blessing at best from the point 
of view of the country's stability: the Russian president has not 
demonstrated tremendous skill in the face of this crisis, and his 
credibility with the Russian people has plummeted as a result of the 
government's decision to effectively devalue the ruble. A country with 
such a president, who rules the country by decree, does not suggest 
This latest move also promises to smooth over some of the difficulties 
Sergei Kiriyenko's team had in its relations with the State Duma. 
Admittedly, this was one of the root causes of the previous government's 
failure in economic, political and social terms -- and Chernomyrdin 
cannot but help to improve the situation. However, the key audience of 
this particular drama, foreign investors, has already left the theater. 
It's too little too late from the point of view of Western banks and 
international financial institutions, which have been given the shaft 
over the past week by Yeltsin. It will probably take years before 
investors start to drift back to Russia after suffering the losses 
inflicted upon them by domestic debt restructuring, devaluation of the 
ruble, and (potentially) wide-scale default on dollar-denominated debt. 
And the G7 and IMF will find further loans to Russia, even if they were 
inclined to consider them, a very tough sell at home and to their 
respective governing boards. 
Similarly, it has been argued that restoring to the post of prime 
minister a known figure who has the stature and gravitas to assume the 
domestic and international responsibilities incumbent upon him adds 
stability to Russia. 
But one must ask: What is Chernomyrdin known for? As for his past, the 
former Soviet-era Gazprom chief is known for policies that led to the 
country's stagnation, and for his unnaturally close ties to the 
Financial-Industrial Groups that were at the root of Russia's corrupt 
system of "crony capitalism." As for how he might lead the country to 
prosperity in the future, we can only speculate since his harsh 
criticism of the Kiriyenko team last week was noticeably devoid of an 
alternative program or even a single policy proposal. How will Mr. 
Chernomyrdin manage the vexing problems of insufficient tax collection, 
the payment of back wages and pensions, a radical decline in Russia's 
domestic production, wasteful domestic subsidies, de-monetization of the 
economy, wide-spread corruption, eroding domestic infrastructure, an 
expensive and ineffective social welfare system and a serious health and 
environmental crisis enveloping the country? 
Using history as our guide, and assuming that the president's inner 
court will insist on some kind of "balance" in the new government, we 
should expect that Chernomyrdin redux will suffer from the same internal 
contradictions -- and will evince the same halting attitude toward 
reform -- that brought Russia to this point in the first place. 
Finally, some have expressed hope that Chernomyrdin will calm rising 
social tensions in Russia and lead the country back from the brink of an 
Indonesia-like cataclysm. However, most reports from the field have 
emphasized the decidedly mild reaction to the most recent crisis in both 
the major cities and the hinterlands. Most economists, who predicted a 
major run on the ruble, a chain-reaction of bank failures, and the 
ultimate fall of Yeltsin, were once again forced to reconsider their 
explanatory models based on "rational expectations" and accept 
(grudgingly) that Russia is highly resistant to such neat formulations. 
The ruble fell, but only by 10 percent by the end of the week -- and 
markets quavered, as expected -- but the de-politicized masses did not 
march in the streets mouthing revolutionary slogans. Of course, tensions 
could still flare here, albeit at a more gradual pace and less 
breathtaking scale, but placing Mr. Chernomyrdin at the helm is hardly 
the answer to Russia's economic and social problems. 
Mr. Yeltsin may have temporarily set aside the troubling issue of 
political succession, but by introducing new elements of instability 
into the already volatile mix, he has taken a bad situation and made it 


New York Post
August 23, 1998
[for personal use only]

A TRADING friend commented last week: "If people didn't know these 
people were criminals before, they found out Monday." 
And feelings are certainly running high among investors in Russian paper 
these days. Up to now, the more restrained Wall Streeters thought I was 
being alarmist in my views of the Russian government. 
But I was if anything understated about the criminal nature of the 
country's "leaders." 
Last Monday's devaluation and debt moratorium was drawn up the previous 
weekend in a meeting of Russian oligarchs in Nice, on the French 
Riviera. (Somerset Maugham called it "a sunny place for shady people.") 
Then the gangster/bankers handed it over to Boris Yeltsin on Sunday, who 
signed it without understanding it. 
I know he didn't understand it, because even if Yeltsin was in one of 
his sober moments, the document is completely incoherent. For the hourly 
price equal to that of one of their better French prostitutes, the 
oligarchs could have had a good lawyer from one of the New York or 
London firms to iron out some of the ambiguities over what would be paid 
and what wouldn't. 
But then this way, there's no longer any excuse for people to kid 
themselves about the nature of the beast. 
I have in front of me a couple of pieces of investment banking research 
on Russia. One, from Renaissance Capital, a top Moscow-based firm whose 
research director is a former senior analyst from Salomon Brothers, is 
dated May 29 and titled, "A Strong Ruble, GKO (T-bill) Yields at Under 
30%: The Dawn of a New Era?" 
It was full of talk about a "virtuous cycle" leading to big profits. 
The other, from J.P. Morgan, is at least written by people who are 
sincere in trying to protect investors. But it leaves out one key fact: 
the banking system is just a criminal conspiracy. 
The Russian banks are not banks in the sense of the word we know. They 
are conduits for gangsters to siphon money out of companies they control 
in what is left of the real Russian economy. Then the oligarchs either 
spend it on buying more influence or ship it out of the country. If they 
can make a little money on the side by signing their names to worthless 
guarantees and derivatives, fine. 
The country needs to start over. Soon I believe it will. The present set 
of oligarch/gangsters are now more likely to lose their empires, thanks 
to their inability to control their greed. The privatizations under 
which they took control of their banks and companies could be undone in 
the next act. Who needs these "banks," if they can't act as reliable 
So here's a tip you won't read anywhere else: buy the 8 percent Russian 
Federation Eurobond of 2005. It has sold off to a price between the high 
20s and low 30s, thanks to panic and margin calls. Even a Russian 
government controlled by the opposition will pay the Eurobonds, which 
represent a useful market that the Federation will be able to re-enter 
Don't underestimate the Russians. There are better people over there. 
And they may get a chance to clean these guys out. 


Journal of Commerce
August 25, 1998
[for personal use only]
Yeltsin's moves may signal own departure 
Cabinet shake-up believed engineered by country's major banks, and by 
its oil, gas and metals exporters, which are bank-controlled. 

MOSCOW -- If Russian politics run like an ocean liner, President Boris 
Yeltsin's move to replace his government, reinstating Viktor 
Chernomyrdin as prime minister, looks as good as a change of deck chairs 
on the Titanic. 
In fact, most Russian politicians and industrialists now believe, just 
one deck chair is going overboard, and that's Mr. Yeltsin's.
The reaction of the parliamentary opposition, including everyone but Mr. 
Chernomyrdin's own party, has been to warn that the ship will still sink 
unless there are major policy changes affecting the economy.
The opposition is demanding a coalition cabinet including communists, 
and excluding reformers like Anatoly Chubais, Russia's foreign debt 
negotiator, and First Deputy Prime Minister Boris Nemtsov.
"The president can't have brought Chernomyrdin back of his own volition. 
His arm has been twisted," said a Western political observer.
In a televised speech Monday, Mr. Yeltsin praised Mr. Chernomyrdin's 
experience and suggested Mr. Chernomyrdin might be the best candidate to 
succeed him when his presidential term expires in 2000.
"We need to assure an orderly succession," he said.
The departure of former Prime Minister Sergei Kiriyenko and the 
seemingly inevitable departure of Mr. Yeltsin are widely viewed in 
Russia's business community as having been engineered by the country's 
major banks, and by its oil, gas and metals exporters, which are 
controlled by banks.
"Today we need those whom we call heavyweights. I consider 
Chernomyrdin's experience and weight essential," Mr. Yeltsin said.
The banks say they need a prime minister who will save them from 
bankruptcy by allowing infusions of foreign equity capital and by 
devaluing the ruble enough to stimulate export income. Much of the 
latest financial crisis reflects world economic problems and the drop in 
Russia's vital oil sales, forcing Moscow to back down on promises not to 
devalue the currency.
In the press that is controlled by Russia's leading financiers, the 
dismissal of Mr. Kiriyenko was promoted late last week as a precondition 
for Mr. Yeltsin's resignation, preferably sooner rather than later.
Among Russia's big commercial banks last week, officials admitted that 
saving themselves was even more urgent than removing the Mr. Kiriyenko.
"On Friday, it looked as if the government would let several banks go 
bankrupt," said an executive of a leading Moscow bank. "Now with the new 
government, those banks will be saved."
Two rumored candidates to head the Finance Ministry and Russia's Central 
Bank would be well-received in the West.
Pyotr Aven, a former minister of trade and head of Moscow's Alfa Bank, 
may take the finance ministry and replace Mr. Chubais as Russia's 
foreign debt negotiator. Mr. Aven is a Western-educated reform 
At the Central Bank, it is now believed that Sergei Dubinin will be 
replaced as chairman by Dmitri Tulin. Mr. Tulin, another young reformer, 
studied economics at the University of Wisconsin.
A Moscow banker says he believes that a group of leading financiers 
forced the return of Mr. Chernomyrdin when it appeared last week that 
Mr. Kiriyenko and Mr. Dubinin would not save several of the top Russian 
banks from collapse.
The banks, which defaulted on large margin calls and have had to sell 
off all of the Russian Treasury Bill holdings, were Menatep, Inkombank, 
Rossiisky Kredit, SBS-Agro and Imperial. American bankers said they are 
encouraged by word that the Chernomyrdin government will lift the 15% 
cap on foreign ownership of Russian banks.
Meanwhile, analysis of the impact of last week's devaluation by the 
Uneximbank Group shows that cash flow for Russia's oil, gas and metals 
exports will rise significantly, helping to revive the banks that own 
and finance those exports.
But the banks that control these oil, gas and metals resources believe a 
bigger devaluation is needed. 
Maxim Basov, the Uneximbank metals analyst, said a 50% devaluation would 
cut steel production costs by 30%; raise sales; and increase pretax 
profits for major steelmakers by more than 500%.
"There are also good prospects for copper and nickel sales, though not 
quite as great for the aluminum industry," Mr. Basov said.
Although the government announced last week that it would let the ruble 
fall 34% to a level of 9.5 rubles to the U.S. dollar, the currency has 
stabilized at 7.15 rubles to the dollar, a drop so far of just 16%.
This is not as damaging for Russia's importers as they have been 
expecting. They too support Mr. Chernomyrdin, as they believe he will 
make increased tax collection a lower priority than his predecessor.
The presidential contender most hurt by devaluation, but most likely to 
benefit from Mr. Yeltsin's fall, has been Yuri Luzhkov, the mayor of 
Moscow. The capital city imports more than 60% of its food and is the 
hub of Russia's import distribution network.
On the stock market, top Russian shares managed slight gains Monday, 
climbing back from lower levels, as the country's battered stock market 
shrugged off news of the recall of Mr. Chernomyrdin. From Wire Reports 


International Herald Tribune
August 25, 1998
[for personal use only]
Formula for Russia: Pay Your Dues or Go to Jail
By Charles Wyplosz
The writer is professor of economics at the Graduate Institute of 
International Studies, University of Geneva, and senior expert at the 
Russian European Centre for Economic Policy, in Moscow. He contributed 
this comment to the International Herald Tribune.

TAULIGNAN, France - Yet another huge IMF-sponsored rescue package has 
promptly fizzled out. Billions of dollars have been spent to no avail. 
Disasters of this magnitude occur far too often these days.
Behind the Russian meltdown is a tale of bad economic and political 
judgment, in the West and in the East.
There was nothing deeply wrong with the ruble. True, the fall in oil 
prices has hurt Russia badly, and a moderate depreciation could have 
helped. But the problem is elsewhere, and everybody knows it: The 
federal government is increasingly unable to collect taxes, which have 
fallen from 20 percent of GDP in 1992 to 8 percent this year.
Russian authorities have managed to contain the budget deficit, but they 
have done it the wrong way, by not paying what they owe. In today's 
Russia nobody feels that dues must be paid, not the government and not 
the taxpayers. Why pay if there is no sanction?
From headquarters just as lavish as those in New York or London, Russian 
banks and corporations engage in big commercial deals, make their top 
executives immensely rich, they claim that they cannot pay taxes. When 
the tax collector gets angry, a deal is arranged, they cough up a few 
kopecks and carry on. If tax collection goes on declining, there is no 
way the government can service its debt. This is what triggered the 
Domestic and foreign investors alike scrambled to the exit door. Pundits 
certified that the ruble was not overvalued, but there were no takers. 
Self-interested financiers convinced the authorities to buy those 
rubles, and when the stock of dollars dried out in July, the IMF 
provided a new pile which just went down the same tube.
On paper, the IMF conditions for the loan could have solved the problem. 
But half of the required measures had to be approved by the 
Communist-controlled Duma, which has never passed any legislation 
without crippling it.
To meet the other half, the government would have had to get tough with 
bad taxpayers, but these are all the president's friends, and the prime 
minister (now replaced) was patently weak. The IMF conditions never had 
a fighting chance. That was mistake No. 1.
Mistake No. 2 was not to request that the embattled ruble be allowed to 
float. Same mistake as in Mexico, as in Asia, and soon in Brazil and 
The IMF's main shareholder, the United States, committed mistake No. 3. 
It decided that Boris Yeltsin's political fate was vital to the U.S. 
national interest, and ordered the IMF to undertake yet another 
expensive and predictably doomed rescue.
Anyway, here we are. Basic principles of economics have defeated the 
might of top guns in Washington. Mr. Yeltsin and his friends have sunk 
with the ruble, and the bottom has not been reached. What can be done?
Wisely, the Russian authorities have suspended servicing their debt. 
They had to pay enormous interest, which can only be explained by the 
expectation of a forthcoming default.
Investors who now complain about debt suspension are less than candid. 
Even if they end up with half of what they were promised, it will still 
turn out to be the best deal of the year, courtesy of millions of 
impoverished Russians.
The authorities must also stop fixing the exchange rate. Their stubborn 
defense of the ruble was really a guarantee offered to Russian banks 
which had borrowed heavily in dollars. The price tag is in the billions 
of dollars.
If banks fail, this will only be fair. Failed banks can be sold, and 
there will be plenty of takers from the West if they are not kept out by 
powerful lobbies and if the price is right. At last Russia will have 
banks which resemble those that you find elsewhere.
Finally comes the essential part: collection of taxes. Until this is 
done, Russia will go on from crisis to crisis, gradually imploding in 
the way Latin America did in the 1980s.
There is only one way: Apply the law. But this requires cutting the link 
between politics, business and finance. Mr. Yeltsin has shown over and 
over again that he will not do that. He backed Prime Minister Sergei 
Kiriyenko on many tough decisions but he did not let him touch big 
He has now brought back Viktor Chernomyrdin, whose main political asset 
is immobilism. Too bad. Someone else will have to do the job of 
establishing a market economy, one where either you pay your dues or you 
go to jail. It's as simple as that. All the rest is pie in the sky.


Date: Mon, 24 Aug 1998 
From: Timothy Thompson <> 
Subject: The Quiet Coup

Dear Capitalist Running Dogs:
It appears today that what looked like a change of Prime Ministers
yesterday is really a change of Presidents.
Gennady Seleznyov's announcement today that the Duma will conclude an
agreement with Yeltsin "not to meddle" in government affairs effectively
removes Mr. Yeltsin from executive power. Mr. Yeltsin's televised
speech, naming Mr. Chernomyrdin as heir apparent in 2000, resembles an
abdication. Many Russians remember what happened the last time a tired
tsar was forced to abdicate. 
The summit next week begs comparisons between the positions of Mr.
Clinton and Mr. Yeltsin. 
Many Republicans here do not want to impeach Mr. Clinton just quite
yet, preferring instead to display a weak, immoral, embattled Democrat
President to the voters at election time. Mr. Clinton stays in power
and takes all the blame, the Republican Congress strengthens its
majority and puts forth its own legislative agenda. 
The Duma does not want to impeach an elected President (the Duma likes
to make a lot of noise about impeachment, though), but the deputies
definitely want a change of government. The solution to this dilemma: 
Boris Yeltsin retains the title of President while the real power passes
to Victor Chernomyrdin. Boris Berezovskiy enters the government as
Deputy Prime Minister, to look out for the interest of the oligarchs,
the Duma puts forward another Deputy Prime Minister to safeguard its
interests. Perhaps the Federation Council will contribute yet another
Deputy Prime Minister, as a reward for Alexander and Alexei Lebed's
public support for Mr. Chernomyrdin. Boris Nemtsov has already resigned
to free up a DPM slot, maybe Anatoly Chubais and Boris Fyodorov will
also take the hint. 
There seems a bit of a scramble to name the New Triumvirate before
President Clinton's arrival next week. 
Just what exactly will transpire at this summit is unclear. The
Russians want money. Mr. Clinton has none to give. The Americans want
Russian approval for American foreign policy. Mssrs. Yeltsin and
Chernomyrdin have none to give. Whatever agreements are made, it seems
unlikely that the either the Congress or Duma will ratify them. Perhaps
the Russians and Americans can agree on a condemnation of Nazism and
issue a strongly-worded joint statement accordingly. 
What the White House is busy ignoring, the investment bankers are busy
noticing: the Russian government has changed and foreign investment in
Russia is in big, big trouble. Even the traditional apologists for
Russia and fans of Victor Chernomyrdin, such as Bruce Bean, the lawyer
at the helm of the American Chamber of Commerce in Moscow, are finding
it hard to say anything positive about the new government. 
Every eye in the international banking community is on the Russian
government's debt restructuring plan to be announced very shortly. 
Defacto default will confirm the worst fears. 
When all is said and done, the reality still remains that Russia is
packed with the potential of its vast natural resources and
highly-educated population. The problem was, is and will be how can
American business develop this potential in spite of the Russians. 
The men who solve this problem are going to be very, very rich. 
M r. Kiriyenko has announced plans to go scuba diving in Sukhomi. As
the Russian economy joins the former Prime minister in heading under
water, the questions remains about that $250B of ex-patriate Russian
capital. What will it do? What will it buy? Do its masters want
investments in the West or actual control of certain strategic companies
and industries? Will these investments be purely in lawful activities
or will the flight capital also find its way into organized crime? 
Next week is going to be very interesting.


Date: Mon, 24 Aug 1998 
From: "Paul Backer, Esq." <>
Subject: Re: 2322 and Legal Trivia

on the lighter side of the crisis of the week.

RF legal trivia question, 

"Why was the firing of the RF government illegal?" (actually 2 reasons)

1. they were fired on Sunday, the RF Labor Code prohibits firings on a
holiday. (seriously)
2. the RF Constitution makes NO provision for i.o. Prime Minister (however
that was fixed today when Yeltsin formally proposed Chernomyrdin for p.m.).

paul backer

ps. it is estimated that the leading officials fired were making in the
region of 12,000 denominated rubles a month (Minister, V-Prime Minister
level) and are eligible to receive roughly 3 months as severance. that
should make the adjustment (hopefully) less painful.

pps. sadly, after they pay their taxes, at the current exchange rate, that
will only come to $1,000 a month in take-home pay.


Date: Tue, 25 Aug 1998 
From: (Victor Kalashnikov)
Subject: events

Why Chernomyrdin? Because he is the only one who could 
save Yeltzin and his family from persecution after Yeltzin 
Does it often happen in the US that fire breaks out at 
political rivals' strongholds just hours ahead of decisive 
strike? (big fires last week at Chubais' HQ and at Moscow 
refinery, part of Luzhkov's imperium; both - 
Chernomyrdin's arch-enemies).
I'm also surprised by silence about recent US-Russia rocket 
exchange. The 'Tomahawk' shots were immediately 
followed by a Russian SLBM launch, symbolically executed 
by Supreme Commander himself. Where are we now after 
this, in fact?


Date: Mon, 24 Aug 1998 
From: "
I would like to share with you and your readers some ideas to address
Russia's current economic crisis.

I think all of us want to see a Russia that is truly integrated into the
international economic system, one that embraces the democratic values that
characterize the industrialized countries. Whatever any one of us might say
about the last seven years (and there has been a lot of debate on that very
subject here), progress did not come to this part of the world as quickly as
most of us had expected and hoped for. There are a lot of reasons why. Some
of the reason is misguided policy. Some is the lack of a Russian domestic
consensus on the way to move forward.

I do not want to get into a lengthy discussion of why w should care about
Russia. The bottom line is that it is in our strategic, economic, and
humanitarian interest to do so. Rather, I would like to put forward three
proposals to get Russia back on track...maybe for the first time on the
right track.

Before doing so, I would like to make a few quick points.

First, putting Russia back on track is not just about sound policy; it's
also about money. And the amount of money will be substantial. The policy
has to have a financial bite. What I mean here is that money has to be found
to pay striking miners, pensioners, the military and others. Then, once that
has been done, rewriting the social contract that exists between these
groups and the government can begin, not as caveat, but in cooperation.

Second, the money Russia needs has to come from international financial
institutions -- the IMF and World Bank. Only these organizations have the
credibility -- even it isn't much credibility -- to speak impartially on
behalf of the international system that wants to welcome Russia as a member.
The problem is that these organizations are nearly broke. These
organizations need to be funded and the burden rests squarely on the United
States, Japan and Germany. Global leadership is about stepping up to the
plate, digging into one’s pockets, and doing what's right; it's right to
help Russia through this crisis.

Third, Russia should not be given a blank check. No more giving Russia money
that is either lost, diverted, stolen, or whatever euphemism you prefer. If
it requires that an IMF bureaucrat personally writes a check to every unpaid
miner or that an account be opened at Citibank or Deutsche Bank in every
miner's name, so be it.

Finally, we need to be clear about what we mean when we say that Russia
needs to "restore investor confidence." Let's be frank, Russia restoring
confidence really means that Russian leaders need to talk like us, not
necessarily in English, but most certainly in accepted discourse on these
matters. It also requires that they actually mean what they say and deliver.
It means transparency, accurate and timely market data, etc.

What then are my proposals?

(1) LOANS FOR COLLATERAL. Russia should offer shares in companies not yet
privatized as collateral against new IMF loans, with voting rights vested
with the IMF. In return, the IMF should value these collateralized assets at
above market prices ­ that is, prices that prevailed before the current

market meltdown. Moscow and the IMF could agree on a valuation date that
falls somewhere between last October’s market high and today’s dramatic low.

5 January 1998 represents an ideal valuation date. The Russian Trading
System (RTS) index reached its zenith on 6 October 1997, after which it
plummeted until mid November. In mid November the index stabilized and
recovered partially. This partial recovery peaked on 5 January 1998, before
taking another precipitous decline. By selecting 5 January, the IMF would
give Russia a 491-percent premium, the difference between the market’s value
on 5 January and today. For instance, the Russian government’s 5% stake in
Gazprom -- which the Kremlin said it would sell, then later cancelled due to
poor market conditions -- valued on 5 January, would net more than the
government has established as a minimum bid and significantly more than if
priced at today’s level.

By offering shares in LUKoil, Svyazinvest telecommunications company,
Rosneft oil company, Gazprom and other companies in which the government has
a stake, and valuing these shares on 5 January, Russia restores investor
confidence and succeeds in raising sufficient money for its needs.

This plan has six advantages.

First, requiring that Russia put shares of its most attractive companies up
as collateral might well persuade a wary US Congress to provide additional
funding to the IMF.

Second, the plan profoundly commits Russia to reform in a way investors
appreciate. If government reforms fail, the Kremlin forfeits shares in some
of Russia’s most attractive companies. This Sword of Damocles gives the
Kremlin an overwhelming incentive to keep its word and produce results.

Third, this plan raises billions of dollars of new capital for Russia. In
the absence of such a structure, the assets would be sold at a fraction of
their value at the beginning of the year, or possibly not at all. The IMF
has never before required collateral of Russia. In fact, requiring
collateral of any country seeking IMF support would require amending the
IMF's charter. Once the principle is established, the IMF can lend
significantly greater sums with the support of member countries than it
could in a non-collateralized loan because collateral cushions the IMF's

The Kremlin could divert some of the money raised to the companies whose
shares are offered as collateral so as not to delay direct investment in
these companies -- one of the benefits of privatization. Moscow could also
earmark some of the money to reform the banking sector, whose irresponsible
actions have contributed to its ill health, by encouraging banking
consolidation, structural reform, and depositor protection.

Fourth, the plan demonstrates that Russia is serious about privatization. By
placing voting rights in the hands of someone other than the government,
control of these enterprises is temporarily removed from the state. And, in
the event of default, the IMF would auction off these assets in a manner
that would be above charges of insider dealing.

Fifth, the plan challenges the IMF to rethink its role in economic bailouts.
Because the IMF exercises voting rights in the shares it holds as

collateral, the IMF become an active participant in the corporate governance
of Russia’s foremost companies. A huge multilateral institution like the IMF
would enjoy the clout necessary to uphold Western-style transparency and to
mount a proper defense of shareholder rights.

Sixth, by offering a loan against government shares valued at pre-market
correction prices, the plan immediately boosts the equity markets by
increasing the implied value of several major stocks accordingly.
Furthermore, the plan encourages the Russian government to pursue policies
that increase the equity values, so that Moscow may later buy these
companies back at a discount to market value.

Finally, on the whole, this plan may be easier for the Kremlin to sell to
the Duma since the government will not be selling shares at today’s
depressed market prices. Additionally, the plan insulates the U.S.
administration from congressional criticism that the IMF is doling out money
for nothing: here the IMF would receive real collateral in exchange for its
loans, and it would assume real risk.

Critics may ask why the IMF, rather than private banks, should loan money to
Russia. For one thing, Russian banks lack sufficient money, and in any case,
their involvement would evoke analogies to the 1995, corrupt
loans-for-shares program. Likewise, foreign bank lending would inflame
communists and nationalists who charge that foreign bankers put their
interests ahead of Russia’s.

The IMF, as a multilateral institution, can plausibly claim to transcend
both domestic favoritism and petty national-interest calculus. The IMF
provides Russia camouflage against outcries of foreign manipulation, as
Moscow gets the money it badly needs.

(2) WESTERNER AS CENTRAL BANK CHAIRMAN. Russia should appoint a former
Western central banker of the high stature -- better yet, it should speak
with Paul Volcker and convince him to accept this assignment -- as head of
the Central Bank of Russia. On the face of it, this may seem like a crazy
idea. But, it's fundamentally no different than Russia opting to establish a
currency board. In both cases, Russia’s monetary policy is set by someone
who is not Russian. The advantage of appointing someone of Mr. Volcker's
stature to this position is that Russia does not also surrender the
discretionary policy that comes with managing a country’s monetary supply.
The only reason that currency boards exist is that monetary policy is
difficult to manage, if not impossible, and countries either choose to
anchor themselves to a trading partner (if they are smart) or they,
metaphorically, lock the pantry with all those tempting sweets.

Sergei Dubinin is definitely no Paul Volcker. While Mr. Dubinin may have
*done* the right things, he never quite understood that a central banker is
also required to *say* the right things. Too often, when the market moved
against him, he turned to rhetoric that made him sound like a Soviet
ideologue, rather than a central banker. One too many times he put the blame
for Russia's problems on the behavior of Western fund managers or bankers
who were protecting the interests of their investors.

(3) PRIVATIZE LAND NOW...or do what it takes to make it a reality. Russia
needs immediately to privatize all land and to allow land sales. Whether one
believes this to be the defining feature of capitalism or not, it makes
great financial and economic sense. Land ownership can be taxed. Land sales
can be taxed. Private ownership of land encourages land development, adding
economic value and, in the process, growing the tax base. Instead, Russia
taxes its natural resource base and encourages its irreparable depletion. I
am not saying that Russia should stop its raw material exports. But, doesn’t
it make sense for Russia tax a base that cannot be moved before it tries to
tax one that can?

We had a similar debate in the United States in the mid-1980s over the sale
of Rockefeller Center. Were the Japanese going to take it with them? Why
would they buy it and then replace it (never an issue in this case), unless
it was to build something in its place that had an even greater economic
value (and tax base)?

These measures are a bitter pill for Russia. They require that Russia
partially relinquish her sovereignty. But, isn't sovereignty protecting the
option to do what's in the national best interest, despite the forces that
may have led her there? If the national best interest in being pursued, it
shouldn’t matter, for example, that Mr. Volcker manages Russia’s monetary
policy. In the end, the decision must rest with Russia’s elected leaders,
acting in the best interest of all Russians.


Date: Mon, 24 Aug 1998 
From: "Jerry F. Hough" <>
Subject: Chernomyrdin

There is much hand-wringing about Chernomyrdin, and Yeltsin's 
compulsion to be seen to be in charge and his propensity to seek 
scapegoats make prediction very difficult. There are, however, several 
points on which it is necessary to be clear.
1) If one rereads the press of early 1998, it is absolutely 
clear that Yeltsin saw the need for a scapegoat and saw it as 
Chernomyrdin. He feared for his own removal and wanted a premier who no 
one would see as a successor. The return of Chernomyrdin sugggests that 
Yeltsin now knows just how desperate his situation is. If he does not 
follow the French model of focussing on foreign policy and cohabiting 
with the Duma now, I think the only question is whether he is gone in 
weeks or months. He must understand this, and maybe Chernomyrdin will 
be given a free hand in forming a cabinet. Let us hope so. The bad 
balancing of incompatibles is what would lead most quickly to Yeltsin's 
2) The talk about Chernomyrdin being bad for investment is 
nonsense. The IMF created false optimism about the Russian economy, 
lured in Western investors, and then demanded "tax collection" from 
the oil and gas companies in which investors invested. Since these 
companies were already being squeezed to the wall with demands for free 
deliveries of product and had no money at all for investment, squeezing 
them further was certain to lead to a collapse of their stock prices, as 
occurred. Chernomyrdin could not possibly be worse for investment than 
the Ponzi game with a Western cover saying that Russia had its best 
government in years in Kiriyenko and had hopes. Investment will not and 
should not return until it is clear that a new pyramid is not being
3) The only way to get more taxation is to get growth. 
Chernomyrdin promised an industrial policy when he was appointed in 
December 1992. Yeltsin then appointed Fedorov as Finance Minister and 
Fedorov was utterly scornful of Chernomyrdin as he overrode Chernomyrdin's 
policy with Yeltsin's support. If Chernomyrdin goes back to his 1992 
policy, there is real hope. A government industrial policy is not the 
best in the best of all worlds, but rule of law, a sound banking system, 
trust, a regulated and open stock market takes decades. In the interim 
there must be crony capitalism, for only friends will trust each other in 
long-term deal But the incentives must lead the cronies to invest at 
home in real production. Government must be an engine of growth, until the 
banks and stock markets are strong enough. Domestic investment must 
almost always precede foreign investment, and it was the attempt to 
reverse this process that led to the fleecing of foreign investors as the 
IMF tried desperately to save the situation. 
4) If Yeltsin goes, there will be an immediate election or the end of 
democracy. Chernomyrdin surely cannot win at the moment, and any 
alternative is worst. The West should abandon ideology and let 
Chernomyrdin do what he wants if he dismisses all the incompetent young 
economists we have glorified. To be frank, we should quietly encourage 
him to do so. The US needs a stable Russian foreign policy. A Yeltsin who
reigns and a Chernomyrdin who focuses on growth and agricultural reform and
appoints the appropriate experienced officials is the ideal from our point
of view in the present mess.



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