September 19, 1998   

This Date's Issues: 2382• 2383•2384•

Johnson's Russia List
#2384
19 September 1998
davidjohnson@erols.com

[Note from David Johnson:
1. Elena Sokova: What's Behind That Curve? (Report from
Moscow).
2. Boris Kagarlitsky: Testimony to US House of Representatives
Banking Committee on Russia and the IMF.
3. Wall Street Journal Europe: A. Craig Copetas, Battle Fatigue: 
Fed Up and Fearful, Western Executives Bail Out of Russia.]

*******

#!
Date: Fri, 18 Sep 1998 
From: cres@miis.edu (CRES)
Subject: Elena Sokova--What's Behind That Curve?

"What's Behind That Curve?"
By Elena Sokova, Senior Research Associate and formerlibrarian 
of the Center for Russian and Eurasian Studies at the Monterey 
Institute, recently returned to her native Russia. She prepared 
these notes on the current situation there on September 15, 1998.

It may sound like a joke, but every joke has some truth to it. 
You can laugh at this one, or you can use it to forecast 
political developments in Russia. I firmly believe that political 
tension in our country depends on the weather. Muscovites didnÆt 
see the sun from August 17 until September 5. It was cold, rainy 
and gloomy the entire time. Only on Friday, September 5, when the 
Duma decided to postpone its vote on Chernomyrdin and accepted 
Yeltsin's offer to hold consultations, did the weather began to 
change, slowly improving as everybody began to hope that there 
might be a way to solve the current political crisis without
the collapse of the political system. The longer Yeltsin 
contemplated who should be proposed to the Duma for the third vote for
prime minister, the more hopeful people became. When PrimakovÆs 
name was announced, a big sigh of relief could be heard
across the country. By the time the Duma voted for Primakov, 
Muscovites were enjoying the sun and the most beautiful Indian
summer one can imagine. They started to smile again and rushed
to McDonalds. The value of the ruble grew. Life was going
on. 

The sun is still shining, but meteorologists say that next week 
will bring showers and cold Arctic winds. And, indeed, after a
few days of relief, Muscovites began to worry again: what will this 
political compromise bring? Is it only a delay in the final collapse
of the existing political system? A return to the Soviet system? 
Or, maybe, to everybodyÆs surprise, could it be the first step
in a slow transition toward greater professionalism in policymaking? 
No one can answer these questions at this point. PrimakovÆs
appointment brought reliefùthe situation eased, but there is no 
excitement. Russia still needs a charismatic leader, energetic
and associated neither with the old regime nor with the first wave
of theorizing democrats.

No crisis is a blessing; it always hurts. The more it hurts, the 
more you learn. Despite the uncertain situation and the continuing
economic crisis, there are some positive lessons our society has 
learned this time. First of all, it learned that the worst political
crises can be solved by constitutional methods. It learned that 
the authorities finally understood that when people do not
want tosacrifice their lives for the political ambitions of the 
government, theyùthe authoritiesùhave to display greater 
ingenuity than sending tanks to the streets. 

Another barometer of political life in Russia, besides the 
weather, is jokes. The more jokes people tell, the harder the 
times are.
The financial crisis provided a lot of material for jokes. Here 
is one I especially like: A person walks into a bank in Russia
and says, "I want to open a bank account. Who can I talk to?" "A 
psychiatrist." Only the laziest people made no attempt to get 
their money back from banks. Some were luckier than others. They were 
able to transfer their money from bank accounts into
stockings (the nylon ones, of courseùthey stretch). The smartest 
ones immediately spent their money on real estate, cars and
other expensive things. 

Unfortunately, many were unable to get their money back from the 
banks. Some people lost more than money. They lost their
jobs. A large group among them is the emerging new Russian
middle class. Before the reforms, the Soviet analogue to the
middle class consisted primarily of intellectuals; by the 
mid-1990s, they were bank employees, stock brokers, small
business owners, etc. They do not suffer from hunger yet. They will 
probably not join the miners in their strikes, but instead will 
try hard to restore what theyÆve lost or will start all over. But the
thin layer of the middle class in Russia is getting thinner every day.
Their feelings are hurt, their hopes have been dashed.

Here is a true story. A young lawyer from a Russian-American
bank saved his salary for a year to buy an apartment. He took a
two-week vacation with his family at the end of August. When he 
came back to work on September 7, he had already been
laid off and bank had stopped all transactions with individual 
accounts, even for its own employees. The chances that he will
ever get his money back are almost zero. His prospects for 
finding a new job quickly are bleak. Recruitment agencies report
that the amount of highly skilled persons looking for jobs
almost tripled in the last two to three weeks. The companies who
survived the crisis are in no hurry to hire new personnel; just 
the opposite, many businesses have withdrawn their requests for
new employees since they either donÆt have money to expand 
further or they are simply waiting for better times. 

By the way, in the past two weeks, many Moscow stores have hung 
signs on their doors that say "Closed until better times."

It is not true that all businesses sustained losses in the 
crisis. Some managed not only to survive, but even to profit enormously
during the panic and wild ruble swings. It is difficult to tell 
with certainty, but McDonaldÆs is probably one of them. The
prices have doubled, but they are still crowded. What's more, they 
opened a new restaurant at the very peak of the crisis, right 
before the second vote on Chernomyrdin. In contrast, all expensive 
restaurants and clubs have been empty for the last two weeks, for
both lunch and dinner. FridayÆs vote brought some of their 
customers back, but in lower numbers.

During the crisis, people not only stayed away from restaurants, 
but according to some newspapers, Russians were drinking
much less than usual! It was a real surprise that the value of 
Russia's second hard currency after the dollar, vodka, did not
change and was the least popular merchandise to buy. Only when 
everything else had disappeared from the shelves did people
start to spend their money on alcohol, and then only as a 
currency substitute, not as the traditional Russian remedy for
all problems. 

When the dollar went down and the shortage of dollars replaced 
the shortage of rubles, food and other commodities returned
to the shelves. ItÆll take time to restore the variety and the 
prices after the ruble stabilizes. The question is when and 
whether it
will stabilize. No one believes that the latest ruble rise will 
last long. Its recent rise has been affected by two major factors
besides the political compromise. First, September 15 was the 
deadline for commercial banks to pay back some foreign
credits, and they needed reasonably cheap dollars to do that.
The second reason (widely considered to be the real one) is that
the powers that be wanted to convince people to transfer their 
hard currency accounts at commercial banks into ruble accounts
in the state-controlled Sberbank (Savings Bank). Individuals are 
supposed to decide whether they want to make such a transfer
before September 26. This date is expected to signal the ruble's 
next sharp fall. Russians do not trust their government and
think it will once again try to solve its problems by robbing
its own citizens.

One positive event was almost overlooked among the other recent 
hot topics. Small and medium-sized business realized at last
that they need to organize and unite if they want not only to 
survive, but to lobby their interests in the parliament and the
government. A new political movement to support small and 
medium-sized business held its first conference in Moscow on
September 12. Duma Deputy Ivan Grachev was elected its chairman. 
Moscow Mayor Yuriy Luzhkov addressed the
conference in person and emphasized the importance of supporting 
small businesses. He claimed that in Moscow, small
businesses provide half of the city budget. The new movement 
plans to be active in political life and to get at least 20-30 seats
in the next Duma elections. This is not the first time political 
leaders have talked about small business, but, hopefully, this 
time small business owners really mean business. Political business, 
that is.

By the end of the day, the ruble fell a little bit. It was still 
warm, but very windy in Moscow yesterday. What will this gusty 
wind bring?

*******

#2
Testimony Before the Committee on Banking and Financial Services
United States House of Representatives
Hearing to Examine the Russian Economic Crisis and the International 
Monetary Fund
September 10, 1998
Dr. Boris Kagarlitsky
Advisor to the Russian Duma and Senior Research Fellow, 
Institute for Comparative Political Studies, Russian Academy of Sciences

Boris Kagarlitsky

First of all I want to stress that it would be highly inappropriate to
characterize IMF credits to Russia as "aid". These are credits for which
Russia has to pay. Though these credits seem cheaper than those taken on
the financial markets Russian government has to accept the conditions
formulated by IMF ideologues and policy makers.

So far Russia has in general followed the instructions of the IMF and other
international financial institutions. There have been minor disagreements,
but basically the IMF has accepted and supported economic policies of the
Russian government, while the Russian government has accepted the basic
principles and advice of the IMF decision-makers. These decisions resulted
in the current chaos which has not only led to the total collapse of the
Russian economy, something unprecedented in peace time, but also is
bringing the whole world economy closer to recession.

The collapse of the debt market in the first half of August came even
though the International Monetary Fund had just begun payments to Russia
from one of the largest economic ``rescue'' packages in history. Along with
the devaluation that followed, the crash marked the definitive failure of
the key strategies that the IMF and major world governments had urged on
Moscow throughout much of the 1990s.

The Russian government never discussed its economic programs with its own
people or parliament. It was always the IMF to which all the basic
documents were addressed. It was the IMF that systematically worked with
the Russian elites, advised them and publicly supported them. The leaders
of the Russian Central Bank who are personally responsible for the
financial catastrophe in today's Russia have always enjoyed political
support from the IMF experts who have stressed "professionalism" of their
Russian colleagues.

The policies of the IMF were based on the assumption that a stronger
currency automatically leads to a stronger economy. The currency should be
strengthened at whatever price including the decline of production, the
impoverishment of the population and even the disappearance of most basic
services in the spheres of healthcare, education and social security. 

The IMF ideologues were sure that the emission of paper money by the
national government was the only source of inflation. At the same time they
did not see government borrowing as a potential source of inflation. The
Russian government even registered borrowed money in 1997 as "budget
revenues". The IMF theorists also insisted that privatization would lead
automatically to better management of industries and lower government
spending.

As early as 1992-93 these measures had disastrous consequences. As was
recognized in a report issued in 1994 by former privatization agency head
Viktor Polivanov, the quality of management in practice either remained the
same or declined. No big company had shown any visible improvement in
performance. At the same time the government lost the revenues from
profitable public companies, which had earlier been the main source of its
income. The new owners were incompetent, often lacked capital for necessary
investment, and turned the companies into semi-feudal personal domains. In
many cases the old Soviet bureaucracy remained in charge, but the old
Soviet system of external control disappeared. Of course there were also
success stories, but mainly in small companies that were not
capital-intensive. 

While the performance of privatized companies generally deteriorated, the
state faced a permanent budget crisis. Totally in agreement with IMF
instructions, the government saw taxes as the only legitimate source of
income, but the taxes never came. In order to cover the budget deficit, the
government had to cut services and increase taxes. That inevitably led to
an even greater decline of business activity. The purchasing power of the
population remained low, private investment was almost non-existent, and
public investment constantly declined. The paradox however is that given
the lack of private investment, the state, no matter how it reduced its
spending, remained the main investor in the economy.

In the years between 1994 and 1998, however, the government managed to
stabilize the ruble. The methods used were government borrowing on the
international and domestic financial markets, and non-payment of wages. By
August 1, 1998 there were 75.84 billion rubles unpaid wages in the country
(that is approximately $12.5 billion). Today the administration in Russia
pretends that enterprise managers are the only ones to blame for the wage
arrears. While it is clear that the non-payment of wages played a decisive
role in the supposedly successful fight against inflation, it is simply not
true that the blame for non-payments lies exclusively with the managers of
private companies; 19,6% of this money should have come from the budget.

The non-payment of wages lowered the purchasing power of the population and
reduced the quantity of money in circulation. That helped to stabilize
prices. Even if we abstain from discussing the moral side of these
practices it is clear that they also led to the gradual disintegration of
the internal market and to a further decline in production (the data
concerning wage arrears in Russia are provided as a supplement to this
text). Though the Russian government and international financial
institutions proclaimed the beginning of economic growth in 1997, the
reality was quite different. The growth last year was supposed to have been
0.5%, but the government statisticians themselves admitted that their
figures were only accurate to within plus or minus 2%! The best
interpretation you could put on things was that during 1997 decline was
replaced by stagnation. Then in the spring of 1998 the economy again
started to contract. According to information

provided by the trade unions, the real incomes of working people declined
by 9% in the first half of 1998 alone. Wage arrears increased as well, with
the state's wage debt growing at more than twice the rate of arrears as a
whole (the state's wage debt in August was up by 14.6% over the July
figure, compared with an overall rise of 6.5%).

Worst hit were services such as health care (a 33% increase in
nonpayments), culture and arts (28%), education (17%), housing (10%),
science and research programs (7%) and communal services (3,8%). The living
conditions of the people deteriorated, and at the same time public services
were cut. That meant that where the state stopped providing services no
private investor moved in, because people simply had no money with which to
pay. The schools do not have enough textbooks, school buildings are falling
apart, and in many villages local schools are simply closing down. The
number of high school students has also declined.

Government borrowing became a sort of drug to which the ruling elites
became addicted. At the urging of its foreign advisers, the government
created a market in short-term state bonds. Sales of these bonds would
allow the government to lower its deficits and dampen price rises. Lower
inflation, the economic ministers gambled, would encourage investment and
lead to economic growth, and as the tax system improved, to steadily
increasing state revenues. These, it was hoped, would allow the government
to service the additional debt.

In fact, this diagram turned out to be full of short circuits.

The lenders - at first exclusively Russian financial institutions, but
later including many foreigners - understood from the first that lending to
the Russian government was a risky proposition. If they were to play an
increasingly hazardous game of financial roulette, they demanded big
returns. Real annual rates of interest in the Russian bond market at times
exceeded 100 per cent. 

If the state was prepared to give lenders high returns on loans for three
or six months, why would they invest in long-term projects, where they
would have to leave their money for years, endure risks that were just as
hair-raising, and have much lower returns at the end of it? So private
investment in the real economy was virtually wiped out. Economic decline
continued, halting only for a period from mid-1997. The government was
hooked on short-term debt. The only way it could meet the payments on its
bonds was to borrow ever more money. Like every drug addict, the
administration was not only incapable of imagining life without borrowing,
but also needed ever-greater doses of loan funds. The state's financial
operations came to resemble the notorious "pyramid scheme" investment funds
of the early 1990s, through which Russia's gullible and reckless were
stripped of their cash. Inevitably, the point finally came where there was
simply no money in the budget to continue servicing the debt. In mid 1998
it was announced that no less than 30% of the budget was being used for
that purpose. Economists calculated that if this trend continued, by the
year 2000 more than 60% of the budget would go there.

Now, the Russian government's economic ministers in the early 1990s had
watched the growth and collapse of the pyramid schemes with as much horror
as anyone else. Why did they then go and blunder their way into the same
kind of mess? A great deal of the blame lies with the IMF. Not only did the
IMF encourage the Russian leaders in the illusion that squashing inflation
would automatically lead to growth, but IMF spokespeople also fed the
misconception that if things went wrong, there'd be plenty of money in the
world financial system to bail the Russians out. 

The Russian government, of course, didn't rely only on borrowed money to
lower its deficits. The screws went on government spending, including
public investment. But meanwhile, the spending of financial institutions
both private and public was a bacchanalia of waste. Huge skyscrapers were
build by the Russian Central Bank and the publicly-owned State Savings
Bank. Staff numbers mushroomed, and salaries increased. The Russian press
now tells us that money borrowed from the IMF was used to pay for all these
luxuries. However the IMF and its experts in Russia never questioned the
expenses of the banking institutions. They only stressed the need to spend
less on education, social welfare, healthcare etc.

It is important to note that the finance ministry was one of the most
corrupt institutions of the Russian regime, which is anyway famous for
corruption. Officials of the ministry are now being investigated, and some
arrests have already been made (for example deputy minister of finance
Vladimir Petrov). No doubt more will follow. 

Misuse of the funds provided by international financial institutions is
well known; it has been reported in the Russian press and discussed in the
parliament. Perhaps the most impressive example was when $5 billion
provided by the World Bank for the restructuring of the coal industry
simply disappeared. The Chechen war didn't stop IMF and other international
lenders either. It is very clear that credits given to the Yeltsin regime
were used to guarantee the government's political survival in a context of
growing resistance.

The conditions that the IMF, the World Bank or other Western financial
institutions have placed on their Russian counterparts have never meant
very much. How can you talk about due safeguards when it is a notorious
fact that capital flight from Russia has far exceeded the sums provided as
credits by international financial institutions and world financial
markets? To a large extent this is the same money which immediately leaves
the country through private banks working with government agencies. It is
impossible to imagine that IMF experts are not aware of these facts, which
every shopkeeper in Moscow knows about. On th contrary western experts
always insisted on open markets and liberal regulations of international
financial transactions. In Russian conditions, open markets and liberal
regulations on international financial transactions mean not only a green
light for capital flight, but also excellent prospects for the mafia. It is
no accident that Russian financial markets have become one of the main
centers of money-laundering for international drug dealers. But none of
this has stopped the IMF and similar institutions from insisting that
controls be kept loose.

Foreign credits did not save Russia. They did not prevent the current
crisis. On the contrary they provoked it. At the same time, the conditions
imposed on Russia by the IMF and other international financial institutions
prevented Russian decision-makers from seeking realistic solutions to the
country's problems using domestic resources, which even now are impressive.
The IMF created the situation in which banks and trade grew at the expense
of industry, in which the enormous possibilities of the public sector were
wasted, and in which Russian developed an entrepreneurial community totally
uninterested in long-term domestic economic projects.

It is quite possible that the chief concern of the IMF decision-makers was
not the success of Russia but the prosperity of the Western financial
community which made a lot of money out of our crisis. But if the IMF
chiefs take this attitude, they are extremely shortsighted. Today's
collapse of the ruble shows that the compradora economy which emerged in
our country is a problem not only for us, but for others as well. American
companies are not making money in Russia any more, but are losing it.

In 1994-97 the ruble was strengthened against Western currencies.
Inflation fell, to about 14 per cent in 1997. Commentators wrote glowingly
of ``stabilization''. But the crunch was approaching. In May this year, as
investment analysts weighed the Russian government's real chances, the
stock market collapsed. 

Foreign investors began a stampede to get their money out of the country.
The government's financial position was now dire. ``Each week we were
paying 6 to 7 billion rubles [a little over US$1 billion] in state
short-term bonds, or 35 billion a month,'' former prime minister Sergey
Kiriyenko recalled after his ouster. ``But our entire budget receipts in
May were only 20-21 billion.'' Wage arrears spiraled upward, as funds
needed for state payrolls were diverted to debt servicing; workers'
protests multiplied as a result. 

Efforts to improve tax collection yielded only mediocre results. 

Meanwhile, potential lenders were losing their nerve. Even at astronomical
interest rates, offerings of state bonds began to be ignored.

To pay off maturing bonds and prevent a collapse of the ruble, the state
authorities began massive sales of foreign currency. This, however, was a
desperate resort that could not be sustained for more than a few months. To
restore confidence and allow bond sales to resume, the government began
seeking a huge loan from international financial agencies. Lengthy
petitioning resulted in a pledge of US$22.6 billion, mostly from the
International Monetary Fund, in mid-July.

Towards the end of July the IMF delivered the first tranche of its money.
In the weeks that followed a reported US$3.8 billion in IMF loan funds was
handed over to the bondholders. Then the debt pyramid shattered.

Although this collapse was a mathematical certainty, various factors helped
decide the timing. The one cited most often was a sharp dip, in early
August, in already weak world prices for the crude oil that is Russia's
largest export earner. But even before this, the broader Russian economy
had begun to sag. According to official figures, Russian GDP in July
slumped to a level 4.5 per cent below that of the same month a year
earlier. Industrial output was down by 9.4 per cent on July 1997, and
agricultural production by a catastrophic 16.7 per cent. The steepening
decline in the real economy increased pressures on the banking sector at
the same time as state short-term bonds were becoming near-worthless as a
source of liquidity. So long as bankers had felt reasonably certain that
the state would pay out on the bonds, a standard way for banks to raise
cash had been to sell bonds or to use them as collateral for loans. But as
the bankers analysed the government's financial position early in August,
their jitters turned to panic. Suddenly, many Russian banks were in acute
financial trouble.

Further efforts to prop up the ruble were now doomed. The government could
devalue the currency immediately, and keep its remaining reserves of gold
and foreign currency intact, or put the devaluation off for perhaps four or
five months, by which time the country would have lost its reserves for good.

The pyramid of Russian state debt, built up on the same principles as the
private pyramids in Russia and Albania, finally crumbled. 

Dumbfounded bankers learned that the government would not pay out on its
bonds. Instead of money, it would give the banks new state securities that
were supposed to be even more valuable. Payments on the private foreign
debts of Russian firms were frozen for 90 days. 

Today a crisis of the elites is unfolding in Russia. Neither the collapse
of the economy, nor the impoverishment of the population, nor the drawn-out
slide in production have posed serious problems for this layer of Russians.
They have been preoccupied with other matters. 

However bad things have become in the country, their aims have been
fulfilled. The richest resources have been seized and divided up, and the
demands of Western financial institutions have been satisfied. But it has
finally proven impossible to continue along this path. The banking system
is quickly becoming ungovernable, demonstrating the truth of the well-known
Marxist thesis that the state of production determines the state of
finances, and not the other way round. Seized with foreboding, Western
investors are rushing to scoop up their money and quit the country. Yeltsin
is hastily reorganizing the security forces, which are bearing more and
more of a resemblance to the Soviet KGB. 

Market mechanisms are paralyzed, and the Russian capitalist class (if there
ever was such a thing) is bankrupt both politically and economically. The
dominant mood is anger. No one has any trust in the official institutions.
Most of support for Yeltsin is now external. This means that the
International Monetary Fund and G7, which supported him, gave him money,
and dictated his economic policies, are in crisis as well. 

The IMF gave its money in the form of loans, and these still have to be
paid back. But the way things are turning out, the repayment of the loans
could be in question. It is worth reminding the Western bankers that after
the fall of the Romanov dynasty, there was no-one to pay back the debts of
the tsar.

The IMF, however, only recently gave Russia a new credit, in order to stave
off devaluation. And even after the crash of the ruble, it seems, the IMF
will continue to hand over money. The fund simply has no other choice. But
in order to lend money, it first of all has to get it from somewhere else.
The directors of the fund have already passed the hat around, seeking
additional contributions from donor countries, above all the US. The
directors of the IMF are in the same trap as the Russian government. They
are the hostages of earlier decisions, and above all, the hostages of
neo-liberalism. The US government is in the trap as well. The cost of
maintaining "stability" in Russia is rising all the time. The "taxi
principle" that operates here was familiar to Soviet citizens as far back
as the time of Brezhnev - the longer the ride, the higher the fare. And the
financial resources of the US are not limitless. 

During the 1990s the neo-liberal economic model has been implemented on a
global scale. As a result, the IMF and the World Bank have begun to play
approximately the same role on a global scale as the Central Committee of
the Communist Party of the Soviet Union once played for the "communist
bloc". IMF and World Bank experts decide what to do with the coal industry
in Russia, how to reorganize companies in South Korea, and how to manage
enterprises in Mexico. Despite all that is said about the "free market",
world practice has never before known such centralization. Even Western
governments are forced to reckon with this parallel authority. But this
spectacular success has given birth to no less spectacular problems of the
type that are inherent to any hyper-centralized system. The point is not
that the neo-liberal model of capitalism dooms most of humanity to hopeless
poverty, and the countries of the "periphery" to dependency on those of the
"centre". Such "moral" and "ideological" issues cannot disturb "serious
people". The trouble is that the price of mistakes is becoming unbelievably
high. The huge resources at the disposal of the IMF make it possible to
"stabilize" the situaton and the Soviet Union collapsed.

In Russia, the international financial institutions are not passive
onlookers. They bear full responsibility for what is done in our country.
All the major decisions that led to the present crisis were cleared with
them. The policies of the present day are being agreed with them too. This
is why they will do their utmost to maintain the present state of play. It
may be a comfort to our national pride to know that the IMF is more
interested in Russia than in some African country impoverished under the
fund's wise guidance. Russian patriots sincerely think that the West sets
out deliberately to play foul tricks on us. "Westernizers", who think that
the countries of the West want to help us, scarcely exist any more.
Meanwhile Russia, as in the early years of the century, has again become
"the weak link of world capitalism." The Russian soul, mystical
"collectivism" and other national peculiarities count for nothing here. Our
country has come to occupy a particular place in the world system, and the
economic collapse here could serve as the prelude to global shocks. 

This is also the result of the policies implemented under the guidance of
the IMF. The fund set out to incorporate Russia, with its corrupt
authorities and debauched lumpen bourgeoisie, into the world system - at
any price. The international banks got what they were looking for.

In the late spring and early summer, when the inevitability of devaluation
was already obvious to any street trader in Moscow, official spokespeople
and international financial bureaucrats spoke of a victory over the crisis.
In a country on the verge of hunger, millions of dollars were thrown into
"supporting the national currency". The outcome was a humiliating failure.
The ruble fell.

The stable ruble was proof that the course that had been followed was
correct no matter what. About a year ago the Western press was full of
prophesies of future success for Russia. One economist even published a
book entitled The Coming Russian Boom. In fact, not even the authors of
these predictions believed them. Such forecasts are like aspirins: they are
not good for any long-term effect, but are meant for immediate pain relief.
When used persistently, pain-relieving drugs often become less and less
effective. With the devaluation of the ruble, such methods of collective
psychotherapy will have to be taken out of use for a time. 

The available financial resources will become less, and the demand by the
fund's clients for rescue credits will increase. The resources of
international financial institutions are not unlimited. It may be that
defending "weak positions" on the periphery results in the loss of
something important in the "center". Europe has its own potential for
social explosion; it is enough to look at the eastern laender of Germany.
How things will proceed with the unified European currency is not clear
either.

The growing difficulties of the IMF inevitably arouse a certain malicious
joy among Russians. But the situation will not make things easier for us.
In order to escape from the present dead-end, we have to recognize our
position in the modern world, our possibilities and our global
responsibility. And we have to learn finally to take decisions
independently. Even if these decisions are very painful.

There is one thing we need from the West now - for it to leave us in
peace. We need it to stop imposing economic policies that are ruinous for
us, while using the pretext of giving us aid. The money that has been sent
to support Yeltsin could have been used far better - for creating jobs in
Europe and America, for helping the poorest countries, and for solving
environmental problems. But you will never get money from the international
bankers for these purposes.

*******

#3
Date: 17 Sep 98 
From: "Craig Copetas" <craig.copetas@news.wsj.com>
Subject: Battle Fatigue: Fed Up and Fearful, Western Executives 
Bail Out of Russia

Battle Fatigue: Fed Up and Fearful, Western Executives Bail Out of Russia
---
Exodus Bodes Ill for Efforts To Introduce Some Order Into a Chaotic Market
---
`Riding With the Bedouins'
----
By A. Craig Copetas
Staff Reporter
The Wall Street Journal Europe via Dow Jones

MOSCOW -- Neil Burchell is a chaos manager. His job: to navigate grocery
giant Del Monte Foods Inc. through the riptide of Russia's economic maelstrom.
"The rule for success and survival in this environment is to trust nobody,
believe nobody and realize absolutely nothing is predictable," says Mr.
Bruchell, Del Monte's exhausted managing director in Russia.
If his prescription for a healthy business built on suspicion, fear and
loathing sounds bewildering, your company probably doesn't belong in Russia
these days. Even before the country plummeted into financial turmoil last
month,
Western business success here could only be created by executives who had the
chutzpah to guide their companies through one of the world's most chaotic
markets -- one plagued by systemic corruption and trapped in a twilight zone
between those who barter for cabbages and those who run hedge funds.
Yet the very Western executives who are equipped to handle the job have also
become casualties of the country's current fiscal dysfunction. Emotionally and
physically drained, executives like Mr. Burchell are now succumbing to battle
fatigue. They are cutting their losses and, in many cases, running.
"There's still excitement to help rebuild Russia, but the real talent is
tired and scared of the corruption," says Nathalie Behar, chief Russian
strategist at
executive-recruitment firm Russell Reynolds Inc. "There was always a very
shallow pool of executive talent that understood the cultural mechanics that
contributed greatly to the meltdown. Now they no longer want to live here
-- no matter the money."
That spells serious trouble for Russia at a time when the country
desperately
needs all the economic help it can get. With the country in default and its
banking system in tatters, the need has seldom been greater for seasoned
managers who can generate business in an economy driven more by rumor than by
reality.
Yet Ms. Behar and other recruitment specialists are finding few talented
takers. "I have a perhaps $650,000-a-year package to manage a Western firm in
Russia," explains Ms. Behar, who has in the past filled senior management posts
here for such multinationals as Coca-Cola Co. and Proctor & Gamble Inc. "The
salary is payable anywhere in the world, and the client absorbs all school
fees, quality housing and as many trips out of the country as the candidate
would
like."
What Ms. Behar is looking for are a few good executives like Charles Bausman,
a 34-year-old veteran of the Russian management wars. But Mr. Bausman is
heading
in the opposite direction. Mentally exhausted and "emotionally alienated"
after 11 years of running businesses in Russia, he's leaving Moscow for
Manhattan, he
says, because he feels like Lawrence of Arabia: "I've been riding with the
Bedouins for too long."
Mr. Bausman's gallop through recent history here has been both wild and
successful. An American who speaks fluent Russian, his adventure began in
1988,
as a consultant to many of the foreign firms seeking to take advantage of
Mikhail Gorbachev's era of glasnost and perestroika. Since then, Mr.
Bausman has
advised everyone from former Russian Finance Minister Valentin Pavlov to the
DeBeers diamond conglomerate.
He also launched closely held Post International, a highly successful cargo
company that each month ships more than 10 metric tons of express mail and
commercial goods out of Russia. But a few days before Russia's financial crisis
erupted, Mr. Bausman sold out to his Russian partner for an undisclosed profit
and bought a ticket home. He suspects a "huge exodus" of foreign executives
will follow him by the end of this winter.
"Westerners hang on too long in Russia," Mr. Bausman says. "They get
tired of 
slogging away."
Much of the exhaustion, he maintains, stems from the helplessness of seeing
delinquent activity erode Russia's economy. "There's just a huge underworld of
corruption," he says. "It can't be quantified in a ledger book, so our reaction
is to act like it's not a contributing factor of consequence. ... Sure, there
are success stories, but there was a more powerful surge of dishonesty that
overwhelmed the success and caused the crisis."
If that sounds exaggerated, just listen to Michael Mears, a Russian business
historian and former director of the U.S. Commerce Department's office in
Moscow. "It's politically incorrect to come right out and brand Russia a
corrupt
society," he says. "The result has been a parade of Western economists and
businesses either unable or unwilling to change the character of Russian
business and government."
These days, the ranks of the unwilling are swelling. "I'm just tired of the
system," says Peter Martin, chief executive of Peter Martin Associates, a
U.S.-based consulting and public-relations firm for media clients in Russia
since 1990. "Many of us tried to break the criminal pattern, but the government
and the Russian private sector never offered any rewards for zero tolerance of
economic crime."
Of course, somebody has to do the job of building Western business here, no
matter how distasteful. "Deal with it," advises Thomas Shannon, vice president
of the global strategic consulting firm Bain & Co. "Corruption remains an
unfortunate reality of this market."
The trick, Mr. Shannon suggests, is to "outsource the corruption." That's
exactly the advice that Bain's 20 consultants give to clients. "We suggest
that Western companies take on a Russian partner who can handle all the black
activity," he explains.
That kind of brutal realism, Russian experts say, may be the only
antidote to
a contagion that has plagued Russia ever since Peter the Great. "The chaos
caused by corruption is systematic and as natural as breathing in Russia," says
Jonathan Sanders, a noted professor of Russian history and a founder of the
Harriman Institute of Advanced Russian Studies at Columbia University in New
York. "Western financiers mostly failed to incorporate endemic corruption into
their business plans."
The trouble, of course, is that the unpleasant business of outsourcing
corruption often leads to a moral "churn" inside Western executives -- and a
resulting rapid turnover of personnel. When an executive realizes that blackmail
and payoffs are a conventional component of business here, "then the executive
wants to leave Russia," Mr. Shannon explains. "He's tired, burned out. But the
head office -- which sees Russia as the largest untapped market in the world -- 
makes the institutional decision to send the next guy in and see what he can
make of the situation, and the cycle starts all over again."
Del Monte's Mr. Burchell isn't ready to pack his bags just yet. But he is
putting his operation on hold and has instructed his London office to
warehouse
all products destined for Russia. "They have a shelf life of one year," Mr.
Burchell says. "I hope that will be enough time."
Like most Western executives working here, Mr. Burchell is unwilling to
divulge many details about Del Monte's Russian operation. But he does
acknowledge that he's having trouble attracting top talent to the country at a
time when they face "losing over 50% of their salaries to devaluation, the
specter of nationalized industry, bankruptcy, capital control, exchange-rate
control and hyperinflation."
Not all of the emotional churn among Western executives here involves
corruption per se. Some of it flows from the visceral feeling that the West's
willingness to bankroll Russia was itself immoral, like paying off a
blackmailer. Just ask Bob Brown, a Nebraska-born representative for U.S.
scientific instrument-maker Transgenomic Inc. who lives in the southern
Russian city of Saratov.
"Russia looks to default on over $100 billion -- the largest single credit
loss ever taken by the international banking community," Mr. Brown says
incredulously. "Don't tell me the West didn't know this was going to happen. Our
conventional wisdom was to write off any loss as payment on the peace dividend
for Russia's nuclear disarmament. Well, enough of that: It was blackmail."
Some of the churn flows from old-fashioned fear, too. Anxiety and underworld
threats, says Ms. Behar of recruitment firm Russell Reynolds, have made Western
executives nervous about forcibly reproaching the Russian government about
corruption and compelling lawmakers into enacting enforceable anticrime
legislation. "The fear of government complicity in the mafias is but one of
the reasons executives don't want to come to Russia," she says. "These issues
matter intensely, and their impact on one's professional and family life is
paramount."
"I can negotiate anything," Ms. Behar adds. "But I can't negotiate fear."
That fear has helped Lee Timmins build a thriving business. As vice
president and managing director of Texas-based real-estate developer Hines
International,
Mr. Timmins is busy building walled and guarded upscale communities. By the end
of 1999, his firm expects to have 685 rental homes, priced from around $80,000
to $144,000 a year. "I have three rules on doing business in Russia," he says.
"Concede the fact you'll make big mistakes; life here costs money, and accept
brain damage."
Fear has also sent Western firms with interests in Russia scurrying back to
the drawing board to find a more workable management model, says David
Bechhoffer, a vice president at Bain and specialist in emerging markets. "Crisis
management, strategic management -- you name the system, it's been thrown out
the window," Mr. Bechhoffer says. "Global business is data-driven,
analytical in
approach. At the end of the day, people are rational. Nothing is rational in
Russia."
Or perhaps it just follows a logic that most Westerners can't grasp. "Western
businessmen would have made far fewer mistakes had they ... spent more time
studying Russian literature than they did Russian stock-market reports," says
distinguished Russian author Solomon Volkov.
Mr. Volkov's point is well taken, says Julie Rasmussen, the president of the
Russian division of Mary Kay Cosmetics and a graduate of the Harriman Institute.
"It's absolutely critical for managers to understand Russian culture, but more
often than not they're clueless," says Ms. Rasmussen, who heads a firm of 230
employees whose salaries depend on 65,000 women freelancers networking
cosmetic sales throughout the former Soviet Union.
"The IMF now tells us it just found out about corruption. Please!," Ms.
Rasmussen declares. "You just don't come here unless you understand and thrive
on Russian chaos. Otherwise, you get eaten alive."

******