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Johnson's Russia List


September 19, 1998   

This Date's Issues: 2382 23832384

Johnson's Russia List
19 September 1998

[Note from David Johnson:
1. Reuters: Russian army daily says forces close to collapse.
2. AP: Russia to Print More Rubles.
3. The Nation: Mikhail Gorbachev, Russia Needs a Change.
4. Barry Ickes: Hough on TsEMI.
5. John Danzer: The structure of a confederation of Russian States.
6. Toronto Sun: Matthew Fisher, The good times roll to a stop.
7. AFP: Primakov's new cabinet loses social affairs chief. 
(Vladimir Ryzhkov).

8. Moscow Times: Geoff Winestock, NEWS ANALYSIS: Central Bank's Big 

9. Jonathan Weiler: inflation.
10. Dimitri Simes' testimony on the situation in Russia and its 
implications for the United States.

11. Los Angeles Times: Richard Paddock, Russia to Reverse Decision to 
Freeze Foreign Debt Payments, Official Says.]


Russian army daily says forces close to collapse
By Martin Nesirky

MOSCOW, Sept 18 (Reuters) - Russia's austere armed forces newspaper lashed out
with uncharacteristic venom against the government on Friday, saying the
military was now so hard up it could soon lose its ability to defend the
``What fascist troops failed to do 50 or so years ago, a little group of
modest accountants has managed quite easily,'' said Krasnaya Zvezda, or ``Red
``The 'undefeatable and legendary' (armed forces) are months or maybe even
weeks away from utter collapse.'' 
Krasnaya Zvezda left no doubt the hard-hitting remarks were sanctioned on high
by making the article by commentator Yuri Gladkevich the main front-page story
in the defence ministry's official daily. 
Even more surprising, the commentary followed a pledge from President Boris
Yeltsin on Thursday to clear half of the government's wage arrears to soldiers
this month. 
Gladkevich painted a grim picture. Some serving personnel and those made
redundant had committed suicide. Professional officers were giving blood or
working at night as taxi drivers or car park attendants to raise cash to feed
their families. 
Western and Russian defence specialists have long pointed to underfunding as a
source of low morale, although they tend to caution against alarmism. 
But they agree military stability in the world's second nuclear power is a
prime reason for the West to help Russia avoid total economic meltdown. 
The article said the armed forces -- more than one million men serving from
the Baltic to the Pacific -- had received only a third of the 65.8 billion
roubles it had been allotted in this year's budget. 
That is $4.5 billion at Friday's official exchange rate but was worth more
than $10 billion before the rouble crashed last month. Armed forces personnel
are owed 16 billion roubles in wage arrears and officers are receiving food
parcels, including bread handouts, instead of cash food allowances. 
``It is possible the Russian armed forces will soon cease to exist as a
combat-capable organism,'' Gladkevich wrote, saying this was more important
than talk of whether the armed forces would remain loyal or not. 
``The financial policy of previous governments and above all of the finance
ministry is leading with increased pace to the point at which the army and
navy will completely lose their ability to fulfil their destiny of being a
guarantor of the state's external security.'' 
The article said underfunding meant thousands of tanks were out of action,
hundreds of aircraft entombed in hangars and navy vessels in bad shape. 
Krasnaya Zvezda's commentary appeared to be the latest round in a funding feud
between the defence and finance ministries. 
The finance ministry issued a statement earlier in the week saying it was not
grossly behind with its payments. That followed comments from the defence
ministry's press office that money to pay food suppliers had been cut off. 
With Defence Minister Igor Sergeyev reconfirmed in office in Prime Minister
Yevgeny Primakov's embryonic government, security experts say there is a clear
pitch to try to secure a sympathetic finance minister in the team and to
ensure the state coughs up overdue funds soon. 


Russia to Print More Rubles 
By Anna Dolgov
September 18, 1998

MOSCOW (AP) -- The Central Bank's plan to print more money to revive the
ailing Russian economy prompted warnings Friday of hyperinflation and a
return to Soviet-style restrictions. 
The government wants to infuse the economy with enough rubles to ensure
the nation's debt-ridden banking system does not fail and to pay off many
months of back wages owed state workers and pensioners. 
But economists said the government will have to introduce price controls,
establish an artificial exchange rate and impose tight controls over export
revenues to prevent hyperinflation. 
``Once you start printing money, you have to do many other horrible
things, and then it's very difficult to stop it,'' said Pavrolata Shtereva,
fixed-income strategist at MFK Renaissance Bank in Moscow. 
Already the government plans to tighten controls over foreign-currency
transactions, Prime Minister Yevgeny Primakov said, speaking on Russian
He did not say just how much government regulation there would be but
insisted the government still hopes to restore economic stability through
``economic'' rather than ``administrative'' measures. 
While seeking to assure foreign investors that Moscow will meet its
obligations, Primakov also urged Western lenders to fulfill their promises
of aid to Russia. 
The International Monetary Fund, which put together a $22.6 billion aid
package to Russia this summer, said the next payment would be postponed
until the government resumes market reforms. 
President Boris Yeltsin's efforts to open up the market were put on hold
when he fired the government of Prime Minister Sergei Kiriyenko in August. 
The new government is still trying to get its feet on the ground and has
yet to reveal a comprehensive economic strategy, though it has tried to
improve tax collections. 
Tax collections for August added up to 11.2 billion rubles -- 1 billion
rubles less than in July, and 2 billion rubles less than planned, the
Interfax news agency reported on Friday. 
Tax service chief Boris Fyodorov said many companies were not paying
because they could not get their money out of idled banks. The economic
crisis has caused bank activities such as money transfers to come to a
virtual standstill. 
Other companies were simply stalling with their tax payments, as
political uncertainty prompts speculation that the tax service will relax
its efforts, Fyodorov said. 
Primakov said that the government plans to introduce a monopoly on the
alcohol and tobacco markets, in order to secure revenues for the federal
budget. He pledged the government ``will get rid of corruption and bribery
once and for all.'' 
The Central Bank announced it would lower reserve requirements for banks
in a relatively sound financial position. That means the banks wouldn't have
to keep as much money on hand, and could settle debts, improving the overall
liquidity in the financial markets. 
The Central Bank also plans to redeem treasury bills with maturities
through Dec. 31, 1998, from selected Russian banks. Those treasuries had
been frozen by the Central Bank last month. 
Andrei Kozlov, the Central Bank first deputy chairman, said the bank
would print money to pay for some treasury bills. Kozlov wouldn't say how
much money would be printed, but stressed it would be strictly limited. 
Fears of inflation caused the ruble to drop again Friday, from the
official rate of 14.60 rubles to the dollar announced by the Central Bank on
Thursday night to 16.38 on Friday night. It fell even further in trading
between banks, reaching about 18.5 rubles to the dollar on Friday. 
Russian stocks sank in thin trading Friday, with investors unwilling to
take part in trading while the new Cabinet's economic policies remain
unclear. The Russian Trading System Index fell 5.1 percent from Thursday's
Russia's industrial output is also shrinking. After showing signs of
modest growth at the end of last year, it was 11.5 percent lower this August
than during the same period last year -- the sharpest drop since 1994, the
State Statistics Committee said, according to Interfax. 


The Nation
October 5, 1998
Russia Needs a Change
By Mikhail Gorbachev

The unfolding Russian crisis is not just a "bump on the road" of the
democratic, free-market reforms that are supposed to have been under way in
Russia since 1991. The crisis goes to the very heart of the policy course
chosen by Boris Yeltsin seven years ago. In fact, it marks the total failure
of that course. 
It is true that the situation in the country seven years ago was very
difficult. The mistakes my government made in economic policy during the
years of perestroika, coupled with deliberate efforts by perestroika's
opponents to shatter the country's financial system, had brought about the
collapse of the consumer market. The attempt by the reactionaries to turn
back the clock, in the failed August 1991 coup, triggered a sharp backlash,
with the other Soviet republics running away from the Union center. Still,
there was a clear choice--either to move forward firmly but prudently, step
by step, reforming both the economy and the Soviet Union, or to plunge into
a reckless political and economic adventure. 
Yeltsin wanted the latter course, not only because he always preferred
"strong medicine" but also because irresponsible radicalism, or what others
would call extremism, was his shortcut to power and one-man rule. For that,
he was prepared to go a long way, even to the point of breaking up the
country. Prosperity was right around the corner, Yeltsin told the people:
Once Russia got rid of the burden of other republics and reformed the
economy via "shock therapy," it would take just two or three years to become
one of the world's most prosperous countries. And the sad truth is that
people believed and supported him. 
Yet it was this decision to break up the Union and subject the economy to
shock therapy that predetermined Yeltsin's failure. The root cause of the
current collapse lies there rather than in the "intrigues of the opposition"
or the consequences of the Asian economic crisis. 
Yeltsin's policies abruptly broke the production and market integration
that linked Russia and other former Soviet republics much more closely than
even the European Union. As the republics pursued uncoordinated financial
and economic policies, their ability to reform successfully was undermined.
Precipitate decontrol of prices led to a sharp decline in real incomes and
made people's savings, including those of the large middle class, worthless.
Opening up the markets to imported products at a time when most Russian
producers were not competitive destroyed the chances of many industries to
restructure and "marketize" themselves. As for privatization, it quickly
degenerated into a gigantic scheme to grab and steal what had been built
during the previous decades. 
Yeltsin insisted on pushing through his ultra-radical policies, whatever
the cost to the country. He was, increasingly, in confrontation with large
sections of Russian society and in defiance of Russian culture, which
rejected such an approach to reform. Violence was, therefore, inherent in
Yeltsin's policies, and it was inevitable that blood would be shed. The
shelling of the elected Russian Parliament in October 1993 and the bloodbath
in Chechnya will remain an indelible stain on Yeltsin's record. They have
also stained the West, which in effect endorsed those atrocities. 
Today, Yeltsin is trying to cling to power. Once again, the West seems
ready to throw him a lifeline of moral and political support. Visiting
Moscow, Bill Clinton repeated the mantra about the need to stay the course
of reforms--the "reforms" that have impoverished millions of Russians and
have imposed a second-rate status on Russia in international politics. Many
in Russia are wondering if this is indeed what the West wants. Is the hidden
agenda behind US policy to weaken Russia and then use its weakness for its
own purposes? 
Surely it would be much better to let Russia work things out according to
its own traditions and possibilities without tying the future of reforms to
an authoritarian regime and its leader, as well as to Western dogmas and
conditions. Russia has the strength and the resources to overcome this
crisis. We must, as part of any new plan, guarantee private deposits in
failing Russian banks, a move that would restore trust in the banking
system. If creditor countries and international institutions would join with
our banks in developing methods of backing such guarantees, that effort
would also build trust in the West's intentions. 
But Russia can end the crisis only if the ruling regime is replaced. For
now, there is still a chance to make it happen by constitutional means.
Today Boris Yeltsin is the main obstacle to ending the crisis. The difficult
and painful decisions that are now necessary will be supported by Russian
society only if it trusts the authorities. But neither the president nor the
Duma has such trust now. Hence the need for early elections of both
president and Parliament. The confirmation of Yevgeny Primakov as the new
Prime Minister has created favorable conditions for holding them. Primakov
is capable of keeping the situation from exploding during the period needed
for preparing and holding the elections. The new, credible leadership that
will emerge from the elections will certainly have to deal with a terrible
legacy. The dangers that we are facing are many, but Russia will not go back
to the totalitarian past. 
Eventually, it will find its own way--quite different from the road to
which it was pushed by the power-hungry politician Boris Yeltsin, and which
was supported uncritically by the West. 


Date: Fri, 18 Sep 1998 
From: "Barry W. Ickes" <>
Subject: Hough on TsEMI

Regarding Jerry Hough's latest (JRL 2380) I have to comment. Leaving aside
the diagnosis that Russia's problems are due to a failed ideology, I have
to take issue with Hough's characterization of TsEMI. While it is true that
some economists from TsEMI joined Gaidar's government, they were not all
radical reformers. Sergei Glaziev, for example, joined the government but
is hardly thought of as an advocate of the Washington consensus. Most of
the radical reformers are from St Petersburg, not TsEMI. Petrakov has been
critical of Gaidar and his successors. The people at TsEMI, like Makarov
and Lvov, are hardly supporters of the Washington consensus. Throughout the
period since 1991 you would be hardpressed to find people in TsEMI who
supported Gaidar. I have tried.
If you view the fundamental problem with the course of reform in Russia to
be the nature and inadequacy of privatization, the failure to create real
owners and the lack of corporate governance and bankruptcy, these are not
TsEMI ideas.


Date: Fri, 18 Sep 1998
From: (John Danzer)
Subject: Question?

I have a question about the structure of a confederation of Russian
There has been a lot of discussion about power shifting from Moscow
to the Regions. Some sort of confederacy is anticipated as a way
of coordinating the military and economic concerns of the various
regions. The number of these regions is frequently listed at 89. 
This would be quite an unwieldy group to coordinate. Some of the
regions couldn't exists as independent governments. Even the 50
states in the US tend to form voting blocks because of common
interests due to geography.
Brezinsky speaks of 3 or four regions which would be convenient for
United States diplomacy but too simple for the reality. Generally
for organization purposes groups of 10 to 14 are preferred. I would
like to hear from some Russian experts on how they think the 89
regions would likely group themselves if they were limited to
around a dozen territories. 


Toronto Sun
September 18, 1998 
[for personal use only]
The good times roll to a stop
Sun's Columnist at Large

MOSCOW -- No word in English or Russian quite captures the perverse
delight many of us take at the misfortunes of others as that uniquely
German word, Schadenfreude. 
Despite their own miseries, or perhaps because of them, many good,
ordinary Russians are quietly indulging in more than a little Schadenfreude
these days at the problems now suddenly confronting so-called New Russians. 
Sure, these parasites - who are almost all connected in some way to the
top end of the old Soviet power structure, and who have always exhibited
utter contempt for the plight of their impoverished compatriots - still
drive flashy limos and monster sport-utility vehicles and still own opulent
"cottages" which are much bigger than most mansions in Toronto's Rosedale
or Ottawa's Rockcliffe. 
Their designer clothes still look ultra cool. Their kids are still
enrolled in private schools here or in Britain. And they still bore each
other, and anyone else who will listen, with their tales of chartered jets,
casinos, night clubs, yachts and shopping expeditions to the south of
France, London and New York. 
But for all that, most of Russia's bandit class, which is heavily
concentrated within a couple of kilometres of the Kremlin, has been hit
hard by the yo-yoing ruble and the end of ill-considered western loans
which they routinely siphoned off for their personal use. 
Convinced the good times would never end, New Russians spent like crazy in
a transparent attempt to forget or deny their shabby roots as Homo
Sovieticus. Few were prudent enough to put aside much of what they
plundered for the rainy day that washed up here like a typhoon in late
Despite their expensive duds, palaces and wheels, many Noviye Ruskiye are
dead broke, or close to it. Recently packed restaurants where foreign chefs
prepared $300 and $400 meals which were washed down with $1,000 bottles of
wine and champagne are now almost deserted. So are designer label boutiques
and shops with $15,000 fur coats. 
What were the world's busiest Mercedes dealerships now go hours without
seeing a prospective customer and days without making a sale. Half of
Moscow's travel agencies are believed to have gone belly up. A third of the
city's cell phones have been switched off since mid-August. 
This true story is typical. A couple with a top-of-the-line GMC Yukon owe
$42,000 on their new apartment and have no money to buy diapers for their
baby because the bank where the husband works is bankrupt. 
Suffering is always a relative term. But folks who have not been paid a
ruble in months can take a certain grim satisfaction from the reality that
many New Russians are as terrified as they are about the country's future.
New Russians may, in fact, have more to worry about than the majority who
have nothing. The new prime minister, Evgeni Primakov, could at any time
try to clean up this mess by demanding that New Russians account for what
they own. 
There is a recent parallel development which is as profound, but perhaps
not as obvious. It is the sudden flight of thousands of mostly young
westerners who came to Russia after Boris Yeltsin took power 61/2 years ago. 
Every bit as greedy as New Russians, these westerners, who worked for
international investment banks, accountancy houses and law firms, were
attracted by an almost entirely lawless environment in which fortunes could
be made overnight. 
Only six weeks ago a banker with a big American firm boasted to his
secretary that his bonus for arranging emergency loans to Russia would be
as much as $300,000 this year and that he soon expected to be made a vice
president. Today the same fellow is not only without any bonus, but praying
he will be allowed to keep his job. 
When told such stories, ordinary Russians invariably react with quiet,
malicious glee. Schadenfreude may be one of the few pleasures left for the
masses in Russia this winter. 


Primakov's new cabinet loses social affairs chief

MOSCOW, Sept 18 (AFP) - Prime Minister Yevgeny Primakov's efforts to mold a
new cabinet hit bumpy ground Friday when a centrist lawmaker said he could
hardly help Russia in its current predicament and pulled out of government.
Vladimir Ryzhkov, 32, a rising star in parliament and a popular member of his
Our Home Is Russia (NDR) faction, resigned from the post of deputy premier in
charge of social affairs three days after winning the post.
Ryzhkov said he took the job but then began agonizing over his assignment
before conceding that only a better politician than he could help resolve a
crisis surrounding the prompt payments of wages and pensions.
"I did not sleep. I lost my appetite," said Ryzhkov of his reaction to
learning that Primakov wanted him to untie the messy Russian social knot.
"I cannot take on such a responsibility," he added sombrely after a session
with Primakov in which the newly appointed prime minister tried to convince
Ryzhkov to change his mind.
Primakov, a career diplomat and former foreign minister, conceded that
crafting a coalition government at a time of economic crisis is a messy
"Finding the right candidates is not an easy job. We often face big problems,"
Primakov said. "Some of these problems involve parties that support me as
prime minister but then refuse to participate in the government."
Primakov is pressed for time and Ryzhkov's resignation is a blow to his
inaugural efforts to solve Russia's troubles.
The left opposition, led by the resurgent Communist Party, last week voted in
favor of Primakov under condition that he enlist opposition lawmakers in his
cabinet and turn the economy around before the winter.
Primakov has already fulfilled one demand -- Communists occupy the top two
posts in his new cabinet, while a Soviet-era banker with a penchant for
printing money is now in charge of the Central Bank.
Ruble printing presses will go into motion imminently to help pay back wage
arrears and recharge the nation's sinking banking sector, new bank chief
Viktor Gerashchenko has promised.
The Communists however have not cancelled their national strikes, scheduled
for October 7. They plan to march under slogans for President Boris Yeltsin to
resign, but Primakov is well aware that the government could also face similar
calls if it fails to impress.
The liberal opposition however has not rallied to the coalition cause, Yabloko
leader Grigory Yavlinsky turning down an offer to take on Russia's delicate
social brief.
NDR faction leader Alexander Shokhin also turned down a first deputy prime
minister post this week that involved a heavy load of social issues. He took
the lesser assignment of deputy premier, where he will oversee work done by
the finance ministry.
Finding a person willing to first wring money from the shrinking state budget
for social expenses and then certify that the money is not pilfered by corrupt
banks and governors as it is travels across Russia has turned into a headache
for Primakov.
He had been sailing smoothly on his first week on the job, with most lawmakers
both praising and agreeing with his selections for cabinet posts.
Filling out the top layer of government late Thursday, Primakov named a
Communist governor of Russia's northwestern Leningrad district as a first
deputy premier overseeing Moscow's relations with the regions and ethnic
Vadim Gustov, governor of the district surrounding Russia's second city of St.
Petersburg, joins Communist Yury Maslyukov, a fellow first deputy prime
minister who last week was put in charge of the economy.
Gustov was elected governor of the Leningrad region in September 1996. He
became prominent in St. Petersburg politics in the early 1990s, where he
bitterly disputed the neighbouring Baltic republic of Estonia's claims on some
Russian territories in the Leningrad district.
Gustov also fought against shock-therapy economic reforms advocated by Russian
monetarists in the first years of post-Soviet reform.


Moscow Times
September 19, 1998 
NEWS ANALYSIS: Central Bank's Big Gamble 
By Geoff Winestock
Staff Writer

Few people would sense it, but in financial terms Friday was the equivalent of
an earthquake. 
The Central Bank released tens of billions of rubles into the economy to try
to clear out the gridlock of debts that has brought the Russian banking system
to a dead halt. 
Transactions worth billions of dollars covering banks' debts to the budget, to
their clients and to each other are being carried out in a crazy rush. 
Basically, the Central Bank is lending all the banks enough money to clear all
of their debts and allowing them to repay the money by selling their worthless
state treasury bills. 
The process by which this occurred is almost impossibly complex, and the
Central Bank either does not know or is unwilling to release many of the
But a few things are clear and a few crucial questions are raised. 
Above all, it was clear that something had to be done to restart the Russian
banking system, which had all but stopped. Without action, Moscow would soon
have started to look like Jakarta. 
Friday's massive debt swap should shock the financial system out of paralysis.
The billions of rubles in debts in the system will be wiped out and some banks
will receive the working capital they need to start processing transactions. 
But fundamental questions remain unanswered. First, just how inflationary
be the effects of a procedure that will release billions of rubles into the
And is the process fair to all parties in Russia's financial mess? 
The answer to the inflation question depends on the details of what happened
It seems likely that the Central Bank will have printed billions of rubles to
cover debts that banks could not repay. This will quickly generate inflation
as this money works into the real economy. 
If it turns out total net indebtedness in the Russian banking system was huge,
the cost in terms of inflation will also be high. 
The inflationary effects will also depend on what happens in the coming weeks.
Part of the idea is that this debt swap will leave some banks bankrupt.
Institutions with large net debts and few T-bills will be in debt to the
Central Bank. 
The Central Bank will then have to decide whether to close these banks down
and face the ire of banking oligarchs or else to find ways of issuing them
with still more credits.The Central Bank is already worried that in the
chaotic mutual swap Friday some banks avoided immediate bankruptcy by
concealing their debts. 
The Central Bank has warned that it will deal harshly with banks that used
these tricks, but it remains to be seen whether Central Bank Chairman Viktor
Gerashchenko has the guts or the desire to crack down on banks that lied about
their debts Friday. 
Another crucial question for the days ahead is what banks do with the
liquidity that Friday's debt swap will generate for them. Most will buy
dollars, driving down the ruble. 
The Central Bank will then be faced with the task of forcing them kicking and
screaming to pay back depositors. There will be pressure from the banks for
more ruble emissions to meet debts to depositors, but this of course would be
The question of fairness in the process of refinancing the banking industry is
also crucial. 
The basic principle has been to compensate those banks that were burnt by the
collapse of the state T-bill market but were in other respects basically
Banks have been allowed to use their T-bills at nominal value as repayment of
debts to the Central Bank. This is in one sense fair because banks that
trusted the government deserve to be bailed out. 
Yet anyone not part of this happy arrangement, in particular the foreigners
who hold a third of T-bills, will ask why they are not allowed to turn their
now useless bonds into rubles on the same terms as Russian banks. 
Foreigners who are owed debts by Russian banks will also ask why no money is
being made available by the Central Bank to bail them out. 
The Central Bank, however, has made no secret of its commitment to favoring
local banks over foreign investors. It has already allowed a small group of
banks to swap their worthless T-bills for short-term bonds, called OBRs, which
will have a real market value. 
This favoritism may make patriotic sense but it will almost certainly destroy
any hope of getting credits from the International Monetary Fund. Bitten once,
the fund does not want to see its money used to bail out favored insiders. 
Yet Prime Minister Yevgeny Primakov was still counting on foreign aid. 
We have every reason to count on IMF support. However, we will not accept
ultimatums from international organizations and we will follow the path that
we regard as best," he said. 
Curiously, the process of a massive debt swap is not unique. In late 1992,
Gerashchenko, in his first stint as Russia's top banker, conducted a similar
operation to end a mutual debt crisis. The result of that was a bout of
Friday's debt swap showed Russia is once again a laboratory experiment in
economics where prediction is almost impossible. 


Date: Fri, 18 Sep 1998 
From: Jonathan Weiler <>
Subject: inflation

In light of the recent economic turmoil in Russia, a number of
contributors have offered assessments of the pace of reform in 1992,
especially with regard to the then and now head of the Central Bank
Gerashchenko. Some have held him responsible for inducing hyperinflation
by excessive printing of money in '92. Others have more generally
suggested that the printing of money in 1992 represented a fundamental
break with "shock therapy." 
As to the first point, isn't it true that prices took off in
January of 1992, with the institution of widespread price release by the
yeltsin government? Doesn't this chronologically predate the transmission
of new monies by the Central Bank which started in the spring and summer?
As to the second point, Kotz and Weir, in their 1997 book write that,
"While consumer prices rose by 520% during the first three months of 1992,
the money supply was allowed to rise by only 32%....During the second half
of 1992, money grew faster than prices...[but] for all of 1992 consumer
prices rose at an average monthly rate of 31.2%, while the money
supply rose at only 17.7% per month....In the conditions of rapid
inflation that Russia experienced, this is the best indicator that
monetary policy was tight, as the shock therapy program demanded."
(Revolution from Above, p. 171)
I am not an economist, and I would be genuinely interested to hear
informed reactions to the above comments. Do they add to the
reconsideration of economic policy that is now underway? 


Date: Fri, 18 Sep 1998 
From: Dimitri Simes <> )
Subject: Simes' Testimony: the situation in Russia and its implications 
for the United State 

Testimony Before the Committee on Banking and Financial Services,
U.S. House of Representatives
by Dimitri K. Simes,
President, The Nixon Center
September 14, 1998

Mr. Chairman, distinguished members of the Committee, I am grateful for
the opportunity to express my views on the situation in Russia and its
implications for the United States. The situation is indeed grave and has
considerable potential to affect important American interests.
What we are witnessing in Russia today is more than merely a financial
and economic crisis. It is also more than a political crisis of the inept,
corrupt, and semi-authoritarian Yeltsin regime. Unfortunately, we are
confronted with nothing less than a full-scale systemic crisis which
threatens all the fundamental institutions of society established since the
collapse of the Soviet Union.
While still far from inevitable, chaos, anarchy, and civil war in a
nation with thousands of nuclear weapons must be considered a distinct
possibility for the first time since Boris Yeltsin's conflict with the
former Supreme Soviet in 1993. Another distinct possibility is that Russia's
sour experiences with reform may lead to prolonged disillusionment with
democracy and markets and alienation from the West -- and particularly the
United States.
While today's Russia is economically insignificant -- its GNP is roughly
comparable to that of the Netherlands -- and too weak militarily to
undertake major armed aggression against its neighbors, its surrender to
neo-imperialism could have a major impact, especially on Russia's borders,
where even weaker states in turmoil and are highly vulnerable to outside
pressure. A significant turn in Russian foreign policy would also be felt by
the U.S. and its allies, who could at a minimum find it much more difficult
to act internationally under the umbrella of the United Nations. Further,
support from even a troubled Russia could encourage rogue nations around the
world from Serbia to Iraq to North Korea.
In addition to these short-term dangers, we must also consider the
longer-term prospect that if Russia is able to avoid the worst and muddle
through its current predicament, it may one day become simultaneously
stronger, less dependent upon the goodwill of the West, and more hostile to
the United States. While it is in practical terms impossible for Russia to
regain its superpower status for many decades, it could become a major
player in the international system within a decade or less once it has
turned the corner. Although Russia's present pitiful state certainly
discourages such speculation, it is important to remember that one of the
least reliable means to predict the future during times of great transition
is through extrapolation from present circumstances. Russia still has
enormous natural resources, a well-educated and relatively inexpensive labor
force, and a population which, in its still short experience with reform,
has demonstrated considerable entrepreneurial spirit and ingenuity (even if
not always within the law).
With the stakes so high, it is important for the United States to make
the right decisions in dealing with Russia's crisis. We should start by
realizing that while Russia's transition from communism to democratic
capitalism was bound to be difficult and painful even under the best of
circumstances, the current Russian debacle is to a large extent the product
of fundamentally flawed policies undertaken by the Yeltsin government with
strong support, and even encouragement, from the Clinton Administration and
international financial institutions.
Russia's crisis did not just happen because of the Asian flu or sliding
oil prices. It was very much a result of an economic bubble created by the
Yeltsin regime which had to burst sooner or later. Despite its professed
commitment to market reform, the Yeltsin regime had in fact merely
redistributed the Soviet economic pie among a privileged few. It was
capitalism without investment, the market without regulation, and democracy
without respect for the law or separation of powers.
The so-called radical reformers and their supporters in the Clinton
Administration and the International Monetary Fund claimed as their greatest
accomplishment the reduction of inflation to the low double-digits. But the
2500% hyperinflation of 1992 was an inevitable product of their economic
policy, in which prices were liberalized without breaking monopolies,
guaranteeing property rights, or creating opportunities for investment.
Moreover, inflation was finally brought under control by draconian monetary
policies resulting in the demonetarization of the Russian economy -- in
which barter accounts for 75% of turnover -- and billions of dollars in wage
and pension arrears.
Such reforms could not be introduced by democratic means. They would
never be tolerated by Americans or any other free people. So, with the full
knowledge and approval of the Clinton Administration and the IMF, the
Yeltsin regime opted to conduct economic reform through decrees of
questionable legality.
The Yeltsin government's excuse was that the Communist-dominated Duma was
not a suitable partner. But the Communist Party controls only 29% of the
votes in the Duma. Together with their allies in the Agrarian Party, the
Communists hold only 38% of the seats. Vladimir Zhirinovsky's nationalist
Liberal Democratic Party controls 11% of the seats, but it has lost much of
its fever -- and public support -- and has supported Yeltsin on most crucial
issues. The most consistent opposition to Yeltsin's policies in the Duma has
come not from the Communists or nationalists but the pro-reform,
pro-democracy Yabloko faction. Further, although the Speaker of the Duma is
a Communist, the chairs of the budget, defense, and international affairs
committees belong to either Yabloko or the pro-government party Our Home Is
The Russian Duma is by no means an ideal body from the standpoint of
democratic and market-based reforms and Yeltsin's combination of
contemptuous dismissal and attempts at petty bribery through perks for its
members has only made the parliament more irresponsible. But there was an
alternative to rule by decree. That alternative was rejected by President
Yeltsin and his Western supporters.
The undemocratic practices of the Yeltsin regime had two important
implications. First, in the absence of reliable legislation, foreign
investors were unprepared to make a strategic commitment to Russia. Second,
Yeltsin's government created and empowered Russia's oligarchy. Like the
today's financial crisis, the Russian oligarchy did not just happen. Russian
radical reformers including former Acting Prime Minister Yegor Gaidar and
former First Deputy Prime Minister Anatoly Chubais are on the record
explaining that the lack of public support for their reform efforts led them
to decide to create as quickly as possible a new social base for reform
among the major beneficiaries of Russia's unsavory privatization process.
But like Frankenstein's monster, the oligarchy soon turned against its
creators. Knowing that their purchase of companies they did not know how to
manage at bargain prices could be challenged by any government not beholden
to them, the tycoons made ever-increasing demands for power and added a new
oligarchic dimension to Yeltsin's semi-authoritarian regime.
The Kiriyenko government had a reputation in the West for being genuinely
pro-reform and willing to challenge the oligarchs. In fact, however, it was
close to one group of oligarchs, led by Oneksimbank head Vladimir Potanin
and Anatoly Chubais, who by then led Russia's electricity monopoly, United
Energy Systems. Imposed on a reluctant Duma, Kiriyenko had little
opportunity for meaningful dialogue with the legislature and, by the end of
his term, came quite close to risking civil war by recommending to Yeltsin
an unconstitutional decree granting the President the power to remove from
office Russia's popularly elected regional governors.
The new government of Yevgeny Primakov is the result of a compromise
between a vulnerable president and a newly defiant but still
constitutionally weak parliament. While we do not yet know its composition,
initial appointments of individuals associated with Gorbachev's failed
policies at the end of the Soviet Union and the uncontrolled ruble emissions
of 1992-94 are cause for concern. Likewise, Yabloko leader Grigory
Yavlinsky's statements that these appointments make it impossible for him to
participate in government are discouraging.
If Russia were not such an important country, one could make a legitimate
case that the U.S. should not throw good money after bad and should let
Russia sort out its own problems. As a practical matter, we may eventually
have to make this decision if Primakov's government decides to use the
printing presses as the principal instrument of its monetary policy, moves
toward a major renationalization, refuses to restructure Russia's foreign
debt in a manner acceptable to investors, fails to pass genuine (even if
less than optimal) reform legislation, or uses Primakov's "new deal" as
camouflage for a return to the past. We cannot help Russia if Russia does
not help itself.
But because of Russia's importance -- and because the Clinton
Administration's misguided policies contributed to Russia's current
predicament -- it is appropriate for the United States to give Russia
another chance. This does not mean yet another bailout; rather, it may
involve changing the criteria for the release of future tranches of existing
credits, avoiding micromanagement of the Russian economy, and letting Russia
make its own decisions -- including a new emphasis on growth and social
protection -- so long as they do not lead it fundamentally away from reform.
In my view, this new approach should also involve major changes at the
IMF, including changes in personnel. This is one area where the U.S.
Congress can play an important role. Despite its numerous and serious
mistakes, the IMF remains an important institution, a fire brigade of sorts
for today's worldwide financial turmoil. Yet, the IMF's leadership often
tends to act not as a lender of last resort, but as a global financial and
even social manager, a mission which its unelected financiers are not
qualified to perform. Worse, from Indonesia to Russia the IMF has not put
out fires, but started them. We should not allow arsonists to remain in
charge of a fire brigade.
These are trying times which do not allow simple or perfect solutions.
There will have to be a correction, a new understanding of Russia's
inevitable zig-zags, and an unhappy appreciation of the fact that despite
our best efforts, events could take the wrong turn. But after the Clinton
Administration's high-profile and often ill-conceived engagement in Russia,
for the United States to turn its back on the country now could create a
strong impulse among many -- not only nationalists and Communists -- to
blame their problems on the outside world, especially the U.S., and to feel
misled and then abandoned in their time of greatest need.
Whether these perceptions would be fair or justified is irrelevant --
what matters is that we cannot dismiss them without cost, including possibly
lasting damage to important U.S. interests. That is why, as someone who
argued against July's $22.6 billion IMF bailout, I have reluctantly
concluded that in foreign policy, decisions have consequences and that what
is done often cannot be easily undone. Accordingly, together with our allies
and international financial institutions, the United States should make one
last attempt to salvage Russia.


Los Angeles Times
September 18, 1998 
[for personal use only]
Russia to Reverse Decision to Freeze Foreign Debt Payments, Official Says 
Economy: Move is key to restoring nation's credibility--and to obtaining
more aid. 
By RICHARD C. PADDOCK, Times Staff Writer

MOSCOW--A top official in Russia's new government said Thursday that the
country will reverse its decision to freeze foreign debt payments and is
ready to negotiate a new payment plan with international lenders. 
"Russia is ready for a dialogue, and in this connection the government
would not like foreign partners to take tough measures against us," said
Deputy Prime Minister Alexander N. Shokhin. "We call on banks to refrain
from seizing Russian banks' assets abroad." 
Shokhin's conciliatory remarks came exactly a month after former Prime
Minister Sergei V. Kiriyenko announced that Russia would devalue the ruble
and impose a 90-day moratorium on paying foreign debts. The move sent the
ruble plummeting and brought down Kiriyenko's government. 
The new prime minister, Yevgeny M. Primakov, took over a week ago and
continued to assemble his Cabinet and formulate an economic recovery plan
Thursday. But the Russian economy kept on reeling. 
The ruble fell to 14.6 to the dollar at the official rate. And the
shattered stock market fell 12.16% to hit an all-time low of 51.7 on the
Russian Trading System index. The index peaked at more than 570 in October. 
Some foreign companies doing business here have laid off as many as 75%
of their employees in the past month. Some firms are likely to pull out
altogether, said an official of the American Chamber of Commerce in Russia. 
"In some ways, the [American] business community feels like it was hit
by a neutron bomb and we've all been irradiated, which means that in 30
days, 60 days, 90 days, some of us are going to die," chamber President
Scott Blacklin told a news conference. "And the rest of us will recover but
will have to lay around and throw up for a while." 
President Boris N. Yeltsin, who has kept a low profile during much of
the crisis, briefly appeared before television cameras and said it will take
another week to fill the remaining vacancies in the 30-member Cabinet. One
key post that is still empty is the minister of finance. 
Apparently trying to counter persistent rumors that he is ill, Yeltsin
got out of his limousine on the way from the Kremlin to his country estate
and visited a store on a busy commercial street. 
The president spent about 15 minutes inside talking to customers and
clerks about the variety of goods and about prices. He was apparently
satisfied on both counts, although the same could not be said for regular
"The shelves here are visual aids for a pensioner studying virtual
nutrition," an elderly woman at the store told NTV television later in the
day. "There is nothing affordable here, even to many of those who have jobs." 
The government's decision to try to repay foreigners who invested in
government bonds, known as GKOs, is an important step in restoring Russia's
international credibility--and in potentially obtaining more foreign aid. 
"The method Russia used in mid-August to try to solve its financial
problems does not conform to international practice," Shokhin said.
"However, a return to the situation as it was before Aug. 17 will not be on
the agenda." 
While officials hope to negotiate a payment plan and undo some of the
damage done by the debt moratorium, plans to solve the government's fiscal
problems by printing more rubles is likely to send the currency plunging
A newly appointed Central Bank official said the government will soon
print enough rubles to purchase GKOs from domestic banks. He did not
indicate how much the government would pay for the bonds, which are now
virtually worthless on the open market. 
Some economists worry that printing more currency will bring on
hyper-inflation and make it even more difficult to pull out of the slump. 
Andrei Illarionov, director of the Institute of Economic Analysis and
frequent government critic, estimated that the true value of the ruble is
more than 20 to the dollar--and that is before the printing presses are
turned on. 
He charged that the Central Bank manipulated the ruble price during the
past week to give Russian banks a favorable rate as they prepared to meet
Tuesday's deadline for making major payments to foreigners. Now that the
deadline has passed, the ruble is falling again, he said. 


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