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Johnson's Russia List


September 8, 1998   

This Date's Issues: 2355  

Johnson's Russia List
8 September 1998

[Note from David Johnson:
1. Reuters: Peter Graff, Tears of despair flow in Russian countryside.
2. Reuters: Yeltsin due to nominate PM for third and last time.
3. Moscow Times EDITORIAL: If Duma Is Childish, So Is Yeltsin.
4. Skelly Martin: Submission request.
5. AmCham News: Scott Blacklin, The Crossroads of Russian Public Authority
Make-Believe vs National Vision.

6. Moscow Times: Katy Daigle and Matt Bivens, The Way Out.
7. Janine Wedel: America's Impact on Russia TV program.
8. Reuters: Excerpts from Russian PM's confirmation hearing.]


FEATURE-Tears of despair flow in Russian countryside
By Peter Graff

OBNINSKOYE, Russia, Sept 8 (Reuters) - You do not live to be 79 in Russia by
being quick to cry. Fyodor Kozachuk survived Stalin, World War Two, the
darkest days of Soviet communism and the last decade of traumatic economic
Now, with Russia's rouble in sudden freefall and shops running out of basic
suppplies, Kozachuk is forced to look away and wipe his eyes. 
``Two heart attacks and an ulcer,'' he says. ``I don't have enough money for
His wife whispers: ``Don't cry.'' He rises proudly to his feet. Using a wooden
kitchen chair as a walker, he makes his way into the next room to blow his
``People have been buying up sugar and flour for the winter. What are we to
buy it with?'' 
The pain comes down to money, of course. Russia's sudden economic jolt has
seen the rouble lose two-thirds of its value in two weeks and shows no sign of
slowing down. 
For a few years now, in small Russian towns and villages like this one 100 km
(60 miles) southwest of Moscow, paper money has not quite been an everyday
part of life. 
Kozachuk and his wife, Alexandra, 69, live mainly off the cabbage and potatoes
grown on their plot, a tenth of a hectare (one quarter of an acre), where they
built a three-room wooden house 40 years ago. 
They are too frail to dig up the potatoes themselves, so they hire the
neighbours to do it for barter: dig for an hour or two, take a bucket of
potatoes home. 
Their combined monthly pensions total about 650 roubles. For the past several
years, until just last month, that was worth about $100, enough for the few
extra staples they need to survive. ``Bread and milk, that's all,'' Kozachuk
But now it is worth about $30 and falling by the hour. Acting Prime Minister
Viktor Chernomyrdin and his chief economic guru, Boris Fyodorov, have admitted
that their embryonic crisis plan calls for more sharp inflation in the coming
Just how bad it will get is still anybody's guess. But with winter coming up,
millions of Russians who have already been brought to the edge of subsistence
are fearing the kind of rare, historical shock that can reduce a man like
Kozachuk to tears. 


Russia's government officially estimates that prices went up 15 percent in
August. But like many Russian statistics, it does not require much effort to
prove this is only partly the truth. 
In the towns and villages along the Moscow-Kaluga highway prices of many goods
in markets and shops have already tripled, quadrupled, quintupled. The prices
of many staples have stayed the same, of course. But try to find them. 
In Kievsky Village, a cluster of crumbling whitewashed apartment blocks built
in the middle of a forest to house workers on the Moscow-Kiev railway, the
grocery shop ran out of sugar last Thursday. The flour shelf has nothing but
pancake mix. Vegetable oil sold out over the weekend. 
At a stall in the outdoor market across the street a woman was selling her two
last bottles of corn oil for 30 roubles, nearly four times the grocery shop's
price from last week. 
People are spending what they have. At the market in Aprelevko, a small town
not far from Moscow, a woman was looking at boots a bit too large for her
young granddaughter, who could grow into them next season. 
``Most of our prices have gone up four or five times,'' says a man in an army
jacket behind a stall, nearly empty but for a few packages of spaghetti, some
bananas and tea. He gives his name as Ivan Vasiliyevich, 55, a scientist who
quit his job at a Moscow research institute to sell food in the town bazaar. 
``We used to buy spaghetti for 2.70, now we buy it for 10 roubles, and we can
only get small shipments. There hasn't been (vegetable) oil anywhere for
Aprelevka's bakery sold out of bread two hours after it opened on Sunday. 
The grocery store in Obninsk, a town of about 200,000 people near Kozachuk's
village, still had bread for the old price: 2.70 roubles a loaf. But nobody
believes that can last when the same store sells flour for 20 roubles a kilo. 
If inflation continues, the raw flour may be the better bargain. Unlike baked
bread, it can be kept for several months. 


The end of communism brought with it a collapse in Russia's inefficient
agricultural sector, and the government now estimates at least one third of
the food and 70 percent of the medicine consumed in the country is imported. 
Since the middle of August, those imports have almost ceased as failing banks
can no longer offer local importers the letters of credit they use to secure
deliveries from foreign suppliers. 
Nobody is yet predicting a broad famine like the one that has afflicted North
Korea these past few years. But it now seems clear there will be much less
food to eat in Russia this winter than in the already difficult winters of the
past several years. 
The hardship will be unevenly spread. Muscovites, protected by the capital's
financial clout, will probably be spared the brunt of the shortages. So will
villagers and those town dwellers who have grown enough staples in their
garden plots. 
It is the apartment dwellers in far-flung towns, who grow little of their own
food and are most dependent on what their roubles can buy, who will be hardest
In these places, the rouble's collapse seems almost unreal, as if the despair
that has already brought the life expectancy of the average Russian male as
low as 56 years could not possibly get worse. 
``Nobody here expected this,'' said one woman doctor in Obninsk who asked that
her name not be used. ``How could we?'' 


Yeltsin due to nominate PM for third and last time
By Philippa Fletcher

MOSCOW, Sept 8 (Reuters) - President Boris Yeltsin is expected on Tuesday to
nominate a prime minister to parliament for a third and last time, hoping to
break a political deadlock which is driving the economy to ruin. 
Whether Yeltsin will stick to his original choice, Viktor Chernomyrdin, who
was rejected by the Communist-led State Duma lower house for a second time on
Monday, appeared open to question as night fell. 
When the Duma threw out Chernomyrdin's candidacy the first time a week ago
Yeltsin renominated him almost immediately. 
After a second, if less resounding, rejection, the Kremlin, which has a week
to present a new nomination, has paused. 
A third rejection would trigger the dissolution of the Duma and an early
parliamentary election -- something Russia can scarcely afford amid a plunge
in the rouble and soaring prices which the enfeebled authorities have been
unable to stop. 
Parliamentary sources initially said Yeltsin had already signed a letter
resubmitting Chernomyrdin, a veteran former prime minister whom he recalled on
August 23 after sacking the previous government for failing to shore up
Russia's finances. 
But a senior parliamentary source said later that a nomination letter was not
expected from the Kremlin until Tuesday morning. 
``There will be no letter from Yeltsin tonight, but it should come in by noon
tomorrow,'' the source told Reuters. 
``Most likely it is going to be Chernomyrdin, but there is a chance that
another candidate may be presented -- there is some kind of a game going on
A correspondent for NTV commercial television, reporting from parliament, took
a similar line on the evening news. 
``The fact there has been a delay probably means a discussion is going on over
what name to put on that letter,'' he said. 
Duma chairman Gennady Seleznyov said the chamber had given Yeltsin ``time to
think about the situation'' and made clear it expected him to change his mind.
``We have a candidate who enjoys no trust, no matter what programme he might
come up with,'' he said. 
Communist Party leader Gennady Zyuganov told reporters Yeltsin had suggested
discussing ``new candidates'' for prime minister with political leaders on
Zyuganov on Sunday named five possible alternatives. 
They were: Yegor Stroyev, head of the upper house of parliament; leading
Communist Yuri Maslyukov; Moscow's ambitious mayor Yuri Luzhkov; acting
foreign minister Yevgeny Primakov and former central bank governor Viktor
But in public at least, the Kremlin has shown no signs of backing down and
Alexander Shokhin, from the Our Home is Russia party allied to Chernomyrdin,
said the acting prime minister had no plans to withdraw his candidacy. 
Chernomyrdin accused Duma deputies after Monday's vote of not being interested
in the crisis. 
He told reporters shortly after the vote: ``The country is in an extremely
serious situation and yet at the same time there is all this political
The ``serious situation'' has seen the rouble slide 60 percent in three weeks.
Its official rate for for Tuesday was set at 18.90 to the dollar, from just
over six to the dollar since the fall began on August 17. 
Russians have formed queues outside banks to try to withdraw their money and
have begun hoarding food to try to insure themselves against further price
Despite fears, there has not been widespread industrial unrest, although union
leaders in the nuclear industry told Interfax news agency that workers had
begun a series of protests which would continue on Tuesday with a picket in
Analysts say the economic crisis means that the Communists stand to gain from
an early election as a whole although the same candidates might not be
One sign the Communist deputies are keen to avoid an early poll has come with
their attempt to launch impeachment procedings against Yeltsin, for which they
need 300 votes in the 450-seat Duma -- a tall order. 
They and their allies currently command 212 votes. 
If they could muster the 300 votes within the week which they will have to
consider any new nomination for prime minister, Yeltsin would be unable to
disolve the Duma even if it threw out his candidate. 
Russia would then find itself in a constitutional dead-end. 


Moscow Times
September 8, 1998 
EDITORIAL: If Duma Is Childish, So Is Yeltsin 

With Russia desperately in need of a government, the State Duma's refusal
Monday to confirm Viktor Chernomyrdin as prime minister looks like another in
a long series of irresponsible actions from the lower house of parliament. 
But while it is fair to blame the Duma for exacerbating the political and
economic crisis that is crippling Russia, the buck cannot stop on the floor of
If the Duma is a recalcitrant and embittered group of characters, President
Boris Yeltsin has himself partly to thank. It is Yeltsin who from the very
beginning of his rein insisted on an adversarial relationship with the
national parliament -- and particularly in the post-October 1993 era, one in
which the president stacked the deck, driving through a constitution that
makes him all-but invincible. 
Nor has the president ever attempted to find any common ground with the
parliament. Instead, he and his governments have slapped draft laws down with
a take-it-or-leave-it finality, rarely deigning to acknowledge that the Duma
-- whose members have, after all, been lifted into office by millions of
freely cast votes -- might merit a say in running the country. 
This lack of power for the Duma has inevitably led to a corresponding lack of
responsibility. Because of the Constitution and of Yeltsin's behavior, the
Duma knows that only now does it have a chance to influence events. 
And Duma deputies no doubt feel justified in challenging Yeltsin's rule when
the best option he can come up to try to cope with a post-Chernomyrdin
financial crisis is ... Chernomyrdin. 
So the Duma exacerbates the crisis so as to force Yeltsin to listen to them --
but Yeltsin encourages them to do so by ignoring them the rest of the time.
What is more, Yeltsin's notorious duplicity means that Russia's
parliamentarians are well aware of the need to have concrete measures in place
before they approve Chernomyrdin. To do otherwise would be to allow the
president to cheat them again. 
If Yeltsin had been willing to be democratic, to compromise with the people's
elected representatives, the route out of the crisis would be so much simpler.
Calling on the Duma to pull together with him for the good of the nation,
Yeltsin could have negotiated a credible prime minister and a decisive course
of action. 
But in the political system that Yeltsin has created, the knife-edge
confrontation of a third-round confirmation vote was always inevitable -- as
is the economic chaos that will grip Russia for at least another week. 


From: Skelly Martin <>
Subject: Submission request
Date: Mon, 7 Sep 1998 14:41:13 +0400 

Dear JRL

As a "Harvard-trained" economist ('89 w/o honors but with a state teaching
certificate in Social Studies) working with a "Moscow-based" brokerage
house, I would like to offer the following observations: 

1. Those interested in crafting solutions for the current Russian crisis
would be well-served if commentators relied on the word "worthless" less
often. No one would argue that the ruble is not worth less than it was
yesterday, but anyone in Moscow who has 315 rubles can go to the Novy Arbat
grocery store and get a nice sized jar of Caviar. The $ cost has gone from
about $50 to
$19, a bargain at either price for those who can afford it and
a definite indicator that the ruble is still worth something as a currency.
I hope that I am not judged as out of touch for using caviar as a piggish
form of currency, but caviar appeals to westerners who like to have a few
simple images of Russia. Caviar also may be a helpful reminder for those
thinking of investing in Russia:) 
2. If a miner is laid off, then strikes for "unpaid wages", does he/she
count towards the Russian government reform towards ending subsidies or does
he/she count as a symbol of unacceptable chaos and government blundering?
Or both? (please note use of jobless in JRL 2348 #11 by Russian press)
3. It would be amusing to see the calculations on how great a deal the
"loans for shares scam" would be if based solely on today's equity prices.
(I would bet that the equities would be as poor a collateral on the loan as
GKOs are now.) It would be useful to know the total # of $ that those who
swapped "loans for control" have sent out of Russia. It would be valuable
if such analysis helped the government create a system that encouraged (or
forced) these "robber baron" scammers to re-invest revenues rather than
sending them abroad.
4. Many investors (including myself) became so irrational after receiving
high returns on equities and GKOs for just a few years that we forgot that
there was a "risk premium" associated with every basis point offered above
US Treasuries. Now that we are left to ponder our losses, we should be fair
in how we divide our anger between ourselves, the Russian government and our
financial advisors for our taking part in what should have been identified
as an unsustainable cycle of borrowing $ to fund government projects AND
combat the most vile boogeyman--inflation. For those who recognized that it
was unsustainable but who bet they would "get out" in time or be "bailed
out" by the IMF or others, the anger should be minimal, the self-pity
fleeting and the desire to play a new game of Russian Roulette intoxicating.


From: "Carolyn Marks" <CMarks@AmCham.RU>
Subject: Submission from AmCham-Russia
Date: Mon, 7 Sep 1998 

I would like to submit the following article to the
Johnson List. It is Scott Blacklin's upcoming piece in AmCham News.
Scott is the President of the American Chamber of Commerce in Russia.

The Crossroads of Russian Public Authority
Make-Believe vs National Vision 
By Scott Blacklin (SBlacklin@AmCham.RU)

When I was seven years old, I had a crush on a nice little girl in my
second-grade class. I was determined to win her affections, and spent a
great deal of time pondering the best method to attract her attention
and admiration. I realized that I had to do no less than to emulate the
"masculine ideal" - which in my mind was a football player (American
please). Try as I might, however, I was never able to persuade my
mother to allow me to wear shoulder pads to school. So I did the next
best thing. Whenever I would see the young lady in the schoolyard, I
would scrunch up my shoulders to ear level and lumber around after her.
When it finally became clear that this method was for some reason
failing, I resolved to check out my image in the mirror, certain that
there were only a few finishing touches needed to achieve maximum
attractiveness. The mirror portrayed the horrible truth - just a
misshapen little twerp who more resembled a hanging gone wrong than any
magnet of female attraction. (I suffered only acute embarrassment from
this exercise, and can only hope that no permanent damage occurred to
the little girl's worldview or sexual orientation.)

I did draw some lessons from this, however. First, there is a
tremendous potential for the imagination to drive (and distort) reality.
Second, one's make-believe can have an effect on others. Third, you
always need a mirror.

These lessons have been lost here in Russia, or perhaps they were never
grasped here in the first place. Make-believe has gotten a little out
of hand in this country, and foreigners, as well as Russians, have been
intoxicated by it. Today's crisis is the mirror, and the reflection is

Some of the make-believe going around has included the following:

1. The creation of democratic structures in Russia will logically
and inexorably lead the inculcation of democratic practice (foreign
political leaders)
2. Russian economic reforms are beginning to take root, and are
fundamentally irreversible (foreign community in general)
3. Corruption is basically an economic and business problem, and we
can deal with it (foreign business community)
4. Russia's financial and industrial chieftains, though an unsavory
bunch, can be counted on to defend and extend the capitalist system
which gave them birth, and time and enlightened self-interest will make
them more and more civilized and responsible. (foreign business
5. Russia has weathered many crises in its history, and will
somehow get through this one (The Yeltsin government, and much of the
foreign business community) 
6. If we chant the mantras of reform often enough, somehow it will
happen and we will stay rich and powerful (The Yeltsin Government;
financial/industrial clans) 
7. Reaching out to, or even communicating with, the people is
unnecessary and has no political utility (The Yeltsin Government) 
8. We bear no responsibility for Russia's predicament (The Duma,
particularly the KPRF)
9. Foreigners, and particularly the United States, like to see
Russia weakened and in chaos (KPRF; LDPR, significant segment of the
Russian people)
10. The patience (and stupidity) of the Russian people are infinite
(The Yeltsin Government; the financial/industrial clans; Duma)
This current crisis has, or should have, laid bare these myths. But
there's one more which is becoming fashionable amongst the
unimaginative, or just the plain exhausted, both in Russia and beyond -
THIS PLACE IS HOPELESS. This notion has currency with a large swath of
the Russian people, and a small cadre of professional pessimists in the
political science world.
My quarrel with the professional pessimists is not that they are not
occasionally right (even a broken clock is right twice a day), but that
the not-so-implicit message of the pessimists is, "don't waste your time
engaging Russia, it is immutable".
This is not yet true, and it is the duty of right-minded Russians and
the world community to spare no effort to avert the possible cataclysm.
Russia will become hopeless only if the country turns away from further
integration into the advanced pluralistic world, and fails to assume all
the opportunities and consequences associated with this revolutionary
set of connections. 
On the economic side of the equation, the specifics of the necessary
systemic integration (e.g. the creation of a rational taxation system;
implementation of the Production Sharing Law; institutionalized
protection of investments and share-holder rights) have been well laid
out and require no elaboration here. 
What is different with this crisis is that no one, in Russia or beyond,
any longer believes that Russia is capable of exercising the public
authority necessary to implement these other essential systemic changes.
Herein lies the real crisis. It is political, not economic in nature,
and accordingly will require political solutions. Russia's public
authority is not responsible because the Russian government does not
have the power its purports to have. In other words, the real power
structure of the country lies largely outside the control of the
constitutionally mandated power structures, i.e. the Duma and the
President's Government.
There are other, even deeper, philosophical obstacles to the creation of
an empowered and responsible Russian state. Russia's powerful, be they
Viking, Tartars, Tsars or General Secretaries, have never been under
rule of law, nor accountable to society in any meaningful way. Since
1991, the Russian government has paid only lip service to the concept of
rule of law, while the privately powerful have not even maintained this
pretense, and continue to regard the Russian people as fodder. 
The people, for their part, have always been excluded from playing a
role, except when demanded to serve the state or cough up their meager
resources. Such a one-sided inclusion into an exploitative system
propels rational beings to escape or work outside the system. This
notion that survival depends on working outside the system has
thoroughly permeated the emotional and intellectual aspects of Russian
life. Russia's pattern of governance, therefore, has been subverted
from both above and below, for purposes of exploitation by the powerful,
and for survival by the rest of society. This has yielded a cynical
and sullen public environment in which to solve the current crisis. It
is a zero sum game, where the spirit of cooperation and compromise is
possessed only by the weak.
The harsh truth of today's situation is that only with cooperation and
compromise can a truly strong and stable Russia emerge, and these
ingredients are in very short supply. 
Fifty seven years ago, Russia was threatened with destruction, and the
Russian people responded with their greatest success, and sacrifice, in
the country's history. Every Russian, even today's generation, knows
the famous poster bearing image of Mother Russia calling forth the
prodigious energy of the people, Rodina Mat' Zovyet. ("The Motherland is
Calling You"). 
Well, she's calling again, and the new government, whatever its final
composition, must amplify the call. More than just a PR trick, the new
government must assemble a national vision. To do this requires two
things alien to Russian governments: 1) the willingness to include the
people; and 2) the determination to communicate, over and over again, a
national vision to the people, and to hold themselves accountable for
the realization of the goals which flow from the vision. 
What would be the nature of this national vision? The national vision
must feature a Russia which is inclusive domestically and engaged
internationally, with the goal of a Russia fully integrated with the
world community. The vision must explicitly call for an end to enormous
systemic corruption which has characterized the last six years. (No
witch hunt - just a compromise allowing the clans to retain most of
their ill-gotten gains, while they cease opposing real reform and
anti-monopoly measures.) The vision must include finalizing the new body
of law, and realizing its rigorous implementation to ensure that the
powerful are accountable and the weak protected.
No other vision offers an answer. The Communists and their nationalist
authoritarian cousins would only further distance Russia from the
integration process, and both groups have a history of economic idiocy
which requires no elaboration. 
Creating and implementing a national vision is political heavy lifting.
But nothing short of a significant improvement in Russian political
behavior can earn the support of the Russian people and world community,
two new players in the Russian political calculus. Any government which
emerges from the muck of back-room wheeling and dealing, without
recourse to the people, will carry the inevitable whiff of the bordello,
and will be recognized as sterile by the Russian people and
international community alike. The foreigners, for their part must
intensify their efforts to engage Russia and help foster a national
consensus. A Russian government, fortified with a truly national
vision, not make-believe, is Russia's last best hope.


Moscow Times
September 8, 1998 
The Way Out 
By Katy Daigle and Matt Bivens
Staff Writers

Western governments were deeply involved in helping to design economic
policies for Boris Yeltsin's Kremlin. Now, as the house Yeltsin and USAID
built collapses, reassessments are in order. Katy Daigle and Matt Bivens chart
what happened to Russia -- and lay out some alternative economic visions. 

Over the weekend, the foreign ministers for the 15 European Union countries
met in Salzburg to take the first tentative Western steps to divorce their
nations from the fiasco that is Russia. 

Russia should have paid more attention to its ordinary people, the ministers
proclaimed in a joint statement. Future economic reforms must have more
"social cohesion." It is time now to establish "a social market economy." The
prescriptions of the International Monetary Fund, the World Bank and other
radical free marketeers must be reviewed. 

"We don't want more Harvard boys with their laptop computers," said Wolfgang
Schussel, the Austrian foreign minister who presided over the meeting. 

That was a veiled reference to Anatoly Chubais, the architect of Russian
privatization, and to the Harvard Institute for International Development, a
group funded by the U.S. Agency for International Development and tasked with
helping Chubais draft economic policies. 

Across the Atlantic, meanwhile, the Republican Party was already crowing over
Russia's collapse and jockeying to use it against the Democrats and U.S.
President Bill Clinton. 

"It is time for a Congressional investigation that might well be titled: Who
Lost Russia?" wrote right-wing commentator Pat Buchanan, a leading voice in
forming Republican foreign policy. "Its focus should be on who got -- and who
stole -- the billions of dollars in Western loans sunk into Russia since 1991,
because it surely was not the people of Russia." 

In October 1991, President Boris Yeltsin, in a landmark address to the nation,
explicitly asked the International Monetary Fund, the World Bank and Western
governments for economic advice and help. Calling for emergency powers to run
the country by decree for a year, Yeltsin promised to pursue bold reforms
designed by young, English-speaking pro-Western economists like Chubais and
Yegor Gaidar. It was a historic moment: No Russian leader had ever reached out
so openly to the West. 

Together the Western advisers and the so-called "young economic reformers"
began to draft a radical economic program, using as a blueprint the
immodestly-named "Washington consensus." 

The Washington consensus is a package of policies prescribed by the IMF, the
World Bank and the U.S. government for sick countries around the world. The
consensus emphasizes free international trade and a freely exchanged currency;
deep cuts in government spending, particularly for domestic social programs;
and rapid privatization. 

Another key element of the program is the creation of capital markets, which
let capital freely seek its best uses. The hope was that newly privatized
industries could borrow cheaply at capital markets and rebuild. 

But this never took root. Billions of dollars were raised rapidly on the
capital markets -- only to be whisked just as rapidly back out of the economy,
either by fickle foreign investors or by corruption. 

And suddenly, seven years later, Russia is in some ways back where it started
in 1991. Now, as then, there are practically no working banks and no
functioning capital markets. Now, as then, savings are evaporating as the
ruble slips into a dangerously inflationary period. Now, as then, the country
is unsure where it is headed, and frightened by the specter of food shortages
and political extremism. 

Now Russia is again headed into uncharted economic territory. Economists are
being forced to rethink their theories and models, in search of new ways to
lift Russia out of its crisis. What happened? And what is to be done now? 

There is no unanimity. 

But then, there never has been. One of the leading myths of the Yeltsin era
was that there was some sort of consensus that radical free-market policies
associated with Ronald Reagan and Margaret Thatcher were Russia's best and
only hope. 

Tokyo, for one, has been skeptical from the outset. The same month of
Yeltsin's landmark speech, October 1991, the Japanese government for the first
time offered a public dissent to the Washington consensus. 

At the World Bank's annual meeting, Japan argued that the market will never
develop the industries a country needs to sustain its economy in the 21st
century without government protection or subsidies. Japan also argued that
political stability and economic health both also depend on equitable wealth
sharing among citizens. A country where a few hundred thousand in the capital
are rich, while tens of millions of others are poor, makes for a lousy market.

Despite Japan's serious economic troubles today, its recipe did work. Tokyo
somehow transformed its small war-wrecked Pacific island with no natural
resources into the world's second-largest economy -- and the World Bank's
second-largest donor -- in a matter of about 40 years. 

Now the EU -- or at least its foreign ministers, who tend to take a softer
line on such matters than other European leaders and institutions -- sounds
suspiciously close to holding sympathy for Tokyo's arguments. 

The EU foreign ministers' statement argued that income must be shared more
equitably. It also reflected a change in thinking in the West, where policy-
makers are beginning to recognize that the state has a strong stabilizing role
to play in a country's economy. 

In fact, Russia has for years been toying with the Asian model -- particularly
the Tokyo-style emphasis on a government that protects and supports industries
it judges to be strategic. A Kremlin that was favorable to a few select
industries would have obvious attractions for the financiers known as the
oligarchy, who, thanks to a corrupt privatization process, now hold most of
the choice industries in Russia. 

Leading oligarchs like Bank Menatep's Mikhail Khodorokovsky have called for
the establishment of an Industrial Policy Board along the lines of Japan's
MITI, the Ministry for International Trade and Industry. The Kremlin has
obliged by meeting regularly with the oligarchs, and also by establishing the
industry and trade ministry and installing a former Gosplan chief and a top
Communist Party member, Yury Maslyukov. 

Acting Prime Minister Viktor Chernomyrdin has also obliged, promising to
install an "economic dictatorship" in January, under which industries could

All of this suggests Russia is in the process of making "a significant swing
away from free markets to a statist economy," according to Martin Malia,
professor emeritus of Russian history at the University of California at
Berkley. Writing in The New York Times, Malia added, "This new course will
last a long time, perhaps a matter of years." 

But would Russia's understanding of the so-called Asian model simply mean
elevating the oligarchy to official status? That is the nightmare scenario for
those who believe Russia's real problem is not economic policy but simple

Russia has long wrestled with corruption -- and liberals like Gaidar and
Chubais clearly did not put enough emphasis on stamping out graft and theft
and insisting on the rule of law. 

Privatization, for example, was seen as an economic good whether it was
carried out justly or not. And so the state was able in 1995, under Chubais's
guidance, to hand over the oil companies, metals companies and other export
giants to a handful of financiers -- the future oligarchs. 

These barons were the beneficiaries of Chubais-led reforms -- as planned. They
were supposed to be aggressive businessmen who would lead the nation's
economic restructuring and growth. But instead of 

investing in their newly acquired industries, they either took their cash to
foreign bank accounts, or used it to buy more state influence, or put it into
the highly lucrative equity and debt markets. 

Instead of becoming markets where industries went to raise capital, the
Russian capital markets became gambling houses for domestic and international
investors. Fortunes were made, and the stock market itself became a Russian
success story. But soaring stock prices were divorced from the reality of
Russia's sagging industrial sector. 

"People think economic success is a healthy capital market. That is not the
case," said Paul Reynolds, director of the international division of the Adam
Smith Institute. "There is a real world out there that's gone wrong, and
that's what the government should be focusing on." 

The oligarchs have also been able to dictate government policy. Their most
infamous representative, financier Boris Berezovsky, by some reports even pays
Yeltsin and his family in cash each month. Former Prime Minister Sergei
Kiriyenko and his deputy, Boris Nemtsov, have both argued that their firing
last month was brought about by Berezovsky and other oligarchs, as punishment
for advocating bankrupting some banks. 

If that is true, it raises fundamental questions about Russia's commitment to
a free market system. 

"The West should stop talking about market reform and admit it never
happened," said Alexander Kennaway, an economist at the Conflict Studies
Research Center in Great Britain. "None of the key elements leading to social
and economic stability and progress exist in Russia today, nor is there any
sign that they will appear in the foreseeable future." 

Kennaway argues that Russia should reappropriate privatized assets from the
oligarchs. "It is essential. Drive the fat cats out to Bermuda. Until they
stop this top level corruption, [the government is] not going to get
anywhere," he said. 

But in the financial rubble that is Russia, there is something for every
economist and every economic theory. Some point to the collapse and advocate
even quicker Washington consensus reforms -- more privatization, deeper budget
cuts, more free trade. "Russia went wrong because it was stubborn in making
some necessary reforms to further facilitate a free trade economy," argues
Brigitte Granville, an economist with the Moscow-based International 

College of Economics and Finance. "Confiscating and controlling [privatized]
assets will just give another guy the excuse to steal even more." 

As to trying to find money for industry and for ordinary people, that might
well involve printing money -- which would feed already blazing inflation.
Moreover, Russia has tried this before. When in 1994 the government couldn't
balance its books, Chernomyrdin's solution was to print more money. The result
was a free-fall in the ruble rate, inflation and immediate widespread loss of
personal savings. Westerners cringed, and recommended that the government
instead temporarily plug budget holes by borrowing cash by issuing treasury

The debt just grew, as the government refused to make difficult decisions
about budget balancing. The IMF helped out by approving billions of dollars in
loans -- most recently a $17.1 emergency bailout package. But the debt grew
ever more, right up until an Aug. 17 freeze on the T-bill market. 

The trick now is to stabilize the ruble, and government officials are again
flirting with the same sort of harsh austerity that bailed them out following
Black Tuesday in 1994 -- tougher tax collection and a clamp-down on the number
of rubles in circulation. 

There is a problem with this approach as well, however. One is that it could
be politically untenable. The political demise of Kiriyenko and Nemtsov shows
what happens when the oligarchs are threatened by tougher tax collection and a
refusal to bail out their banks by printing rubles. And we still don't know
how much longer workers who were owed $10 billion in back wages will show

The other, more subtle, problem is that the simple monetarist blueprint for
fighting inflation -- shrink the amount of rubles chasing goods -- does not
correspond to reality. In August, as the Central Bank sold dollars for rubles,
it ended up shrinking the ruble money supply by 0.8 percent -- yet inflation
continues to soar. This suggests that inflation is a far more complex
phenomenon than is recognized by Russian monetarism. Perhaps some far more
innovative economic thinking is in order. 

One of the most striking things about the Russian economy is the extent to
which barter rules. Last year, 50 percent of all Russian business was
conducted in barter, and 40 percent of federal taxes were paid in barter. U.S.
economists Barry Ickes and Clifford Gaddy have a model to explain this. They
say Russia has created a completely new economic system, what they call the
"virtual economy." 

They say that a barter system allows the creation of goods worth less than the
cost of making them, the result of which is a catastrophic loss of value in
the country that no one will admit exists. But society and government continue
to tax, spend and price goods as if they were worth more -- while the West,
with both its financial support and advice, is propping up this strange system
and allowing it to flourish. 

The virtual economy offers rewards for all participants, says Ickes: When no
one pays anyone, no one has to admit there is no money. That means no
bankruptcies, so workers stay inside their factories instead of storming the
Kremlin walls. It also means the government can pretend it has lots of money
-- instead of lots of IOUs -- to support a million-man army, a Mir space
station and other superpower trappings. 

"Russia has to swallow its pride and admit it is poor. Admit that the 

factories are not kept open because they are valuable, but because they are
socially beneficial in keeping people employed," said Gaddy. 

Correct or not, the virtual economy model has generated much Western media
coverage -- and has touched a nerve in Russian circles. Konstantin
Voitsekhovich, Kiriyenko's press secretary, said in an interview that
Kiriyenko had gotten upset upon reading an account of the virtual economy
theory published in late July in the New York Times. 

"[Kiriyenko] said, 'This is a very good example of how people see us, of what
we look like,'" Voitsekhovich said. "Although he did not agree with the
analysis in the [virtual economy] model, he said that it drove home a very
central point [about the lack of bankruptcies in Russia]." 

Voitsekhovich said Kiriyenko had copies of the New York Times article made and
shown to underlings, and began talking animatedly about the need for more
bankruptcies. "I don't know if it was by coincidence or not, but [the
government soon after] submitted to the Duma a draft law on simplifying
bankruptcy procedures." 

And there are even more radical proposals afloat these days. Boris Fyodorov,
the deputy prime minister, has kicked off discussion of unusual theories by
suggesting Russia simply accept the U.S. dollar as the legal tender here.
(There's no word yet what the U.S. Treasury thinks of that.) 

An opinion piece in The (London) Independent put forward another novel idea:
Russia could sell Siberia and the Far East to the United States, and
subcontract out the administration of its government and its economy to
Western managers. The (London) Times, not to be outdone, ran an opinion piece
suggesting that it was time to consider whether Russia should even be a
democracy; perhaps a dictatorship would have better luck turning the nation

Meanwhile, as the economists dither, the economy is more decisive. It is
collapsing. There is still no government. Once one is finally chosen, it will
face the near-impossible task of paying Russia's enormous foreign debt. Andrei
Illarionov, director of the Institute of Economic Analysis in Moscow, told
Interfax that he calculates Russia owes the world about $6 billion before the
end of the year, while its total budgeted revenue is $4.5 billion. Cranking up
the ruble printing presses will be no help -- the debt is dollar-denominated.
Moreover, come 1999, the country will be obliged to start paying interest on
the debt it froze in August. 

There is always some hope of receiving another multi-billion-dollar Western
grant. But that hope is dwindling, too, as both European and American
politicians backpedal furiously from Yeltsin's disaster. 

So what economic vision will be next pursued in Russia -- the world's largest
nuclear arsenal, with a credit rating equal to that of the war-torn Republic
of Congo? And who will decide? That remains anybody's guess. 


Date: Mon, 7 Sep 1998 
From: Janine Wedel <>
Subject: America's Impact on Russia

To JRL readers:

I just watched "America's Impact on Russia,"
broadcast on a Washington, D.C.-area TV station.
The program is an episode of the Defense Monitor produced 
by our own....David Johnson. I was impressed with
the composition and professional quality of the show
so decided to contribute this little advert to JRL.
The half-hour program features scenes from Russian life
and livelihoods; Russian reactions to American products,
symbols, and experts; and interviews with Russia experts
and scholars (Peter Reddaway, Blair Ruble, 
Susan Eisenhower, Anne Williamson, and others). 
The program should help people understand something 
about the turmoil in Russia and how U.S. policies 
and U.S.-Russia relations figure into it. 
Made some months ago, the program is prescient and 
should find a timely place in discussion about Russia. 

I recommend the program (available from Dave Johnson) 
for use in the classroom and in lectures and
forums on Russia. One idea would be to show the film
for background, bring people up-to-date with current 
crash, then lead Q&A and discussion. 


Excerpts from Russian PM's confirmation hearing

MOSCOW, Sept 7 (Reuters) - Following are brief excerpts from comments made in
Russia's State Duma on Monday during debate on confirmation of Acting Prime
Minister Viktor Chernomyrdin. 
Chernomyrdin was defeated by a vote of 273 to 138. 


FROM HIS OPENING REMARKS: Today we are faced with a political choice. The
question is essentially one of confidence. Not so much confidence in
Chernomyrdin, in me personally, as confidence in the authorities, in all the
branches of power, the question of whether power in Russia will survive and
whether Russia will survive. 

Clearly, things will not improve in two days or in two months. The main thing
is to prevent things from getting still worse. Let us not fool the people, let
us not promise what we cannot do immediately. But it is still possible to keep
the country from collapse and prevent irreversible consequences. There is
still time. 

FROM HIS CLOSING REMARKS: Only in Indonesia did they reach the point where
they burned down the entire country. They burned down the whole country. That
is where we are headed. That is what you are appealing for. That is where you
want us to go. 

FROM REMARKS TO REPORTERS AFTER THE VOTE: Deputies are not interested in the
crisis... The country is in an extremely difficult situation and yet at the
same time there is all this political bargaining. 


COMMUNIST PARTY CHIEF GENNADY ZYUGANOV: Almost everybody was in agreement that
the situation had come to complete catastrophe and collapse. Everybody agreed
that the government that Chernomyrdin led for five years did not cope with the
situation and is not coping now. Everybody openly said that that government
had no plan or platform, and not a single budget that was passed here (in the
Duma) was implemented... 

Today we have come directly to the collapse of the Russian Federation. We
believe the situation today is reminiscent of January 1917, when there was
hatred toward the Tsar and his entourage, led by Rasputin -- today that
opinion is held toward Yeltsin, Chernomyrdin, (influential tycoon Boris)
Berezovsky and the other puppet masters... 

A government can run the country if it has trust, resources and authority.
Viktor Stepanovich, your approval rating is six percent. With such an approval
rating, even if you have a clever plan, nobody will carry it out: they do not
believe what you say... 

As for your abilities, Viktor Stepanovich: I heard your speech in the
Federation Council, and, excuse me, to talk about free markets, continuing the
present course and at the same time having an ``economic dictatorship,'' that
is all scrambled eggs. 

YABLOKO PARTY LEADER GRIGORY YAVLINSKY: If there is not enough confidence and
not enough intelligence, then nobody will give any money. Today, despite all
the present difficulties, our population is holding not less than $30 billion
dollars. We have to set up the kind of government that people would be willing
to lend that money to for the general needs of the state... 

We are asking, who in Russia can we appoint that we won't have to sack in
three months? And what traits should that person have? It should be a person
who is not a member of any party, who has enough political authority so that
the armed forces will obey him. It should be a person who is not planning to
run for president. It should be a person the Duma can support the first time.
Fortunately, there is such a person in Russia. That is (Acting Foreign
Minister) Yevgeny Maximovich Primakov. 


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