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Johnson's Russia List
21 September 1998
[Note from David Johnson:
1. Toronto Sun: Matthew Fisher, Moscow suburb grim face of life in
2. AFP: Lebed could become Russian president, poll predicts.
3. AFP: More loans needed to settle wage arrears: Russian finance chief.
4. New York Times: Celestine Bohlen, Yeltsin's Role May Become Largely
5. THE JAMESTOWN FOUNDATION PRISM: A.V. Buzgalin and A.I.
IS THE RUSSIAN STATE BANKRUPT?
6. The Independent (UK): Adam Lebor, Eastern Europe: laughing all the
way to economic meltdown.
7. Moscow Times: Helen Womack, FACES & VOICES: Will to Build Survives
the Stormy Season.
8. Testimony on Russia of DEPUTY TREASURY SECRETARY LAWRENCE SUMMERS.
9. International Herald Tribune: Walter Pincus, U.S. Widening Aid to
Russia Program Aims to Retrain Nuclear Weapon Scientists.]
September 20, 1998
[for personal use only]
Moscow suburb grim face of life in Russia
By MATTHEW FISHER (74511.357@CompuServe.com)
Sun's Columnist at Large
LYUBERTSY, Russia -- Tomatoes for 50c a kilo and bread for 40c a loaf might
not seem like such a bad deal to a Canadian.
But if you are an elderly Russian who has not received his or her pension for
months and months, or even one of the lucky few teachers to have actually been
paid the Canadian equivalent of $60 this month, such prices mean that tomatoes
and even bread are now luxuries.
Keeping a lid on dissent caused by Russia's ever worsening economic situation
is one of the most vexing problems facing Boris Yeltsin's new prime minister,
Evgeni Primakov. What might ultimately decide the matter is the price and
availability of staples such as vegetables and bread in thousands of
communities such as Lyubertsy, on the eastern outskirts of Moscow.
As the ruble plummeted to new depths amid classic signs of hyper-inflation
such as prices being marked up two or three times a day, I rode a shabby
commuter train called an Elektrichka to Lyubertsy from Moscow to check out the
prices in the grim little market which straddles the local train station.
Whether fair or not, this satellite city of 300,000 has a dubious reputation.
Considered to be the greatest centre for organized crime in the Soviet Union
and now in Russia, it doesn't get written up in many guide books.
Muscovites reacted with mock horror when I said that I was coming here. To
them it seemed as if I was entering a den of iniquity.
However, I was in particularly safe hands. My guide on an uncommonly blustery
fall afternoon was the gorgeous daughter of the city's most notorious and
"Nobody here ever wanted to be a communist. They wanted to belong to the
mafia. They wanted to join the Moscow region's strongest family," Julia, a
24-year-old art student, told me as we made our way to the market. "Ask the
little boys. They all want to be bandits because they're the ones with money."
Lyubertsy was much leafier and more pleasant than I had been led to believe
by the rumours and half-truths of Muscovites who had never dared to make the
30-minute journey. But like most places in Russia, it's crumbling.
Factories on the edge of town that once made farm machinery are derelict.
Impossibly overloaded Soviet-era buses, known locally as cattle cars, lurch
around. The merry-go-round in what must have once been a fine urban park is a
Strange to say, but Lyubertsy's crowning glory and only significant economic
achievement is a McDonald's, for which the mayor, a controversial fellow
apparently known only by his last name, Akkuratov, is forever taking credit.
But patrons were scarce when we dropped in for dinner at the Canadian-owned
The manager said business was off by a third from a month earlier. Staff
members confided that a two-thirds drop in custom was closer to the truth.
As elsewhere in Russia, there have never been any hard numbers on
unemployment in Lyubertsy, nor are there any statistics about how many folks
have recently lost the relatively well-paying jobs they commuted to in Moscow.
But every one of Julia's friends who had been employed in August is jobless
Although Julia has long been estranged from her father, she's considering
going to him for help now. She is sure that he and his cronies are the only
people in town capable of weathering the economic storm.
"All my friends only want one thing. To get out. To get to America," she
said. "But I guess that if everyone has the same idea, there is no chance of
Come what may, Julia said she was a patriot. She would never emigrate.
"I still remember the Red flag and I still hate it. When they raised our new
Russian flag, I was so proud. I now wish we could turn it vertically and
pretend that we are French."
Lebed could become Russian president, poll predicts
MOSCOW, Sept 20 (AFP) - Russian ex-general Alexander Lebed would be elected
president if elections were staged now, according to a poll broadcast Sunday
by the NTV television station.
It is the first time presidential hopeful Lebed, the populist governor of
Krasnoyarsk in Siberia, has outpointed Communist leader Gennady Zyuganov in
forecasts for a second round vote, as shown in a weekly poll organised by
NTV's politics programme Itogi.
Over a first round both potential contenders for the Kremlin would
receive 17 percent of the vote, compared to 13 percent for Moscow mayor Yury
Luzhkov and 12 percent for opposition reformist Grigory Yavlinsky.
But in a second round, run-off vote Lebed would score 34 percent to
Zyuganov's 29 percent, and 32 percent to Luzhkov's 30.
Yavlinsky's ratings showed a substantial improvement after he rejected a
post in Yevgeny Primakov's new government last week.
Lebed, who has stated his ambitions to become head of state, has also put
himself forward as a possible premier.
More loans needed to settle wage arrears: Russian finance chief
MOSCOW, Sept 20 (AFP) - Russia's finance chief Alexander Shokhin stressed
Sunday that paying wages and pension arrears was the new government's top
priority, but said it should be funded by foreign loans rather than by
He said drawing up a scheme to end the backlog of public sector salaries
and pensions was "the most important" problem facing the freshly-appointed
administration, in an interview on the RTR state television channel.
He ruled out printing more money to meet the payments saying it would
depreciate the ruble.
"The best option is to attract external resources to pay our obligations
without risking a depreciation", he said.
Initial payments on wages and pension arrears would start in October, he
"I don't rule out that we will have to reopen talks on restructuring our
debts", Shokhin added.
He admitted that foreign investors had lost confidence in Russia
following August's debt restructuring, but said it could be restored by
presenting a strong economic programme.
Fiscal reform would be a central plank in the as yet undecided crisis
rescue package, he said.
Striking miners and civil servants throughout Russia are demanding 11
months of unpaid wages.
New York Times
September 20, 1998
[for personal use only]
Yeltsin's Role May Become Largely Ceremonial
By CELESTINE BOHLEN
MOSCOW -- President Boris Yeltsin made a rare appearance in public last
Wednesday evening at a gala concert at Moscow's Conservatory. At least, he was
there for the start of a performance by the Russian cellist Mstislav
Rostropovich and Seiji Ozawa, the Boston Symphony's conductor.
By intermission, he was gone.
As Russia's new prime minister, Yevgeny Primakov, struggled to patch
together a coalition Cabinet last week, Yeltsin's involvement in the affairs
of his crisis-ridden country has provided the background noise, audible enough
but increasingly distant.
In an eerie sequence reminiscent of the stylized protocol of Soviet times,
television news broadcasts show him in his Kremlin office, ushering a visitor
to a table where the cameras silently track opening remarks. The next news
item shows an identical scene, with a different guest. The images only support
the growing impression that Russia's once powerful president, weakened by
crisis and poor health, has been sidelined to a largely ceremonial role.
News agencies report his telephone conversations with world leaders, and his
decrees on ministerial appointments. But Primakov, the artful diplomat, is
clearly making the choices that will define Russia's future course, as he
sifts through opposing political factions in the difficult search for
How Yeltsin will figure into that consensus is no longer relevant: His views
on Russia's economic policies have been washed over by events that have left
him isolated, and humbled.
For the first time in a career that capitalized on conflicts, Yeltsin backed
away from a certain showdown with the parliamentary opposition over the
nomination of Viktor Chernomyrdin as prime minister. In Russia's play-for-
keeps politics, a compromise -- in this case, the nomination of Primakov --
carries with it the faint aroma of defeat.
"Today, very little remains of President Yeltsin's clout," wrote Natalia
Konstantinova in the newspaper Independent last week. Even Boris Berezovsky,
the Russian tycoon and master intriguer said to have close ties to the
president's family, told British television last week that Yeltsin's time had
Instead of statements of policy, or words of reassurance, the Kremlin has
been the source of tales of shadowy intrigue and petty power plays in the last
Soon after Primakov's nomination was confirmed, two top Kremlin aides --
Andrei Kokoshin, secretary of the National Security Council, and Sergei
Yastrzhembsky, Yeltsin's top press spokesman -- were summarily dismissed,
reportedly for disloyalty to the president.
Neither has been available to provide his version of events, but according
to press reports, and people who know the details, their transgressions
consisted of going directly to Yeltsin with unsolicited advice on how to get
Parliament to confirm a new prime minister.
They reportedly argued that the situation was too volatile to contain a
conflict between the president and the Parliament, and urged Yeltsin to drop
Chernomyrdin for a compromise candidate. According to one version, they pushed
the candidacy of Moscow's mayor, Yuri Luzhkov; according to another, they were
advocating anyone but Chernomyrdin.
By picking Primakov, Yeltsin would seem to have heeded their advice.
"It is a paradox, but it is in the tradition of Russian paradoxes," said
Pavel Voshchanov, a journalist who is also one of Yeltsin's former press
secretaries. "When servants come to their master with unwelcome advice with
which he is obliged to agree, he accepts it grudgingly, and resentfully."
Although the dismissal of the two highly respected advisers was undoubtedly
ordered by Yeltsin, it was pushed by his chief of staff, Valentin Yumashev, a
former journalist who became Yeltsin's top aide and chief gatekeeper after he
helped write Yeltsin's book, "The Struggle for Russia."
According to press reports, Yumashev and his close ally, Yeltsin's daughter
and adviser Tatyana Dyachenko, 38, had pressed the president to stand firm
against the Parliament. In the end, they were overruled, but eventually took
Kokoshin and Yastrzhembsky had acted without informing Yumashev, who then
preferred to insist on their dismissal "rather than undermine his power and
ability to control the president," said Vyacheslav Nikonov, director of the
Politica Fund, a Moscow research organization.
Their departure has depleted Yeltsin's already dwindling circle of close
advisers. His team of young free-market reformers -- figures like Anatoly
Chubais, the architect of Russia's privatization, and former Prime Minister
Sergei Kiriyenko, who used to huddle under his long political shadow -- have
been dispersed, unlikely to return. His old allies from Russia's democratic
movement now lack a leader, or even a credible heir.
Even Chernomyrdin, the yo-yo of Russian politics for his ability to rebound
in difficulty, has been left stranded, with little hope of another
Yumashev, 40, who began his career editing letters to the popular weekly
Ogonyok, has neither the skills nor the authority to fill the widening gap
left around Yeltsin, observers say.
"I saw him at a number of meetings during the 1996 campaign, and afterward,
and I don't remember him ever saying a word," Nikonov said. His former
newspaper colleagues remember Yumashev as an unimpressive, scruffy figure
whose power lies in his total loyalty to the president.
Sensing Yeltsin's weakness, the leftist opposition continues to press its
advantage. An impeachment process is still wending its way to the floor of the
Parliament, even though its chances of clearing the constitutional hurdles
remain slight. More realistically, a series of legal changes to the
constitution would reduce the powers of the presidency. These have already
been drafted and are also making their way through the opposition-dominated
In tracking the decline of Yeltsin's influence, many look to Berezovsky,
seeing in him a political bellwether whose main loyalty is to power, no matter
who holds it. In his interview with the BBC, Berezovsky was asked if Yeltsin
should resign. "I think yes," he replied. "Of course, that depends on what the
alternative would be, but I think we have an alternative better than him."
Typically, he gave no clues on whom he had in mind.
Yeltsin's health is another handicap, although no one knows for sure what
ails him, other than the aftereffects of his 1996 quintuple bypass heart
surgery and a history of heavy drinking. He has his good days when his step is
firm and his gaze focused. But he also has his bad days, when his attention
drifts and his off-the-cuff remarks have to be interpreted by aides. Whatever
the nature of his medical problem, both he and his staff seem leery of his
being before the public for long periods.
And yet, in these past hectic weeks, Yeltsin has surprised his harshest
detractors by proving that he can still make decisions, and even impromptu
appearances. On Thursday, he paid a 15-minute visit to a Moscow grocery store,
although no reporters or television crews were present to record the scene.
Several analysts still caution against ruling him out of the picture
entirely, noting that as long as he still has power he will try to wield it,
if for no other reason than to insure his survival in office.
Yeltsin's retirement before the end of his term in 2000, followed by early
presidential elections, is a recurrent theme among Moscow's political elite.
Few who know the president expect him to leave office of his own free will.
"I would give anything for Boris Nikolayevich to quit -- I would promise him
anything he wants," Pyotr Sumin, the governor of the Chelyabinsk region, told
the Russian magazine Profil. "We could live without him. But he will not
THE JAMESTOWN FOUNDATION
A BI-WEEKLY ON THE POST-SOVIET STATES
9/18/98 No.18 Part 3
IS THE RUSSIAN STATE BANKRUPT?
By A.V. Buzgalin and A.I. Kolganov
Aleksandr Buzgalin is a Doctor Economics and a professor at Moscow State
University. In the perestroika period, he was a leading member of the reform
wing of the CPSU. He is now one of the leaders of the Democratic Socialist
Movement in Russia. Andrei Kolganov is a Doctor of Economics and a Senior
Research Fellow at Moscow State University.
This question has long been asked figuratively. Today it has become
relevant literally. Announcing a restructuring of its foreign debt, the
Russian government has refused to meet its responsibilities. For the first
time since they appeared, state short-term bonds (GKOs) will not be redeemed
when they mature. GKO holders can count only on a restructuring of the debt
by exchanging GKOs for new state securities, and the likelihood is that it
will only be possible to cash even these gradually (and the state has not
yet specified exactly how long a period that might be).
At the same time, devaluation of the ruble, the possibility of which had
been categorically denied by the state's highest officials -- the president,
the prime minister and the head of the Central Bank -- became a fait
accompli. The government was unable even to maintain the upper limit of the
new hard currency corridor (9.5 rubles to the dollar) and the ruble
continues to fall. Perhaps it will stabilize around the 12-13 ruble level,
but the panic on the money markets is capable of upsetting this forecast too.
So what happened?
One would have thought that the efforts of the government led by Kirienko
-- the young ambitious technocrat who, with the active mediation of Anatoly
Chubais, had managed, by the beginning of July, to secure rather large
credits from the West -- ought to have at least postponed the collapse of
the very unhealthy Russian financial credit system. Many analysts thought
that the crisis had been averted, at least until the end of the year. Some
were more cautious (or more independent), attaching to their forecast the
qualification, "if the government manages to overcome the difficulties in
the autumn." Yet the collapse came even before autumn set in.
But if we are looking at long-term forecasts, people began talking of the
threat of collapse of the GKO pyramid back in 1996, when the need to finance
Boris Yeltsin's election campaign forced the government to borrow money
domestically at colossal interest rates. Even without the election campaign,
however, the system of financing the state budget deficit through domestic
and foreign borrowing could only be maintained if the state could ensure the
stability of federal budget income, which would allow the holders of state
securities to be paid a reasonable yield. However, budget earnings fell, and
at the same time the government, in desperate need of money, was forced to
borrow at totally unreasonable rates.
The root of the problem lies, therefore, in the general economic situation.
In almost eight years of reforms, Boris Yeltsin's team has not only failed
to revive the national economy. It has also been unable to stop the economic
decline, which has been accompanied by the redistribution of the main income
into the pockets of "new Russians" who have never paid tax before, do not
pay tax now and are not planning to pay tax on the bulk of their income. In
such a situation a constant reduction of the tax base and a contraction in
the income of the state budget are an inevitable reality. The efforts of the
government to maintain an appearance of relative social well-being, financed
by unsecured debts, was always going to lead -- sooner or later -- to state
bankruptcy. This bankruptcy is only a formal confirmation of the bankruptcy
of the entire social and economic policy of the Yeltsin administration,
which has long been evident.
In such an economic situation the banking system cannot be stable. The real
sector of the economy -- the only reliable basis for the well-being of the
monetary credit system -- is in depression. The banks are hardly investing
any money in production, and are certainly not drawing any income from it --
about half of industry is making a loss, and the few profitable enterprises
have not been able to provide the bankers with incomes even comparable to
the GKO operations income. The corporate securities market has until now
amounted to a share market of a few large companies from the energy and raw
materials sectors, which are mainly geared towards export. Banks therefore
inevitably placed the majority of their funds in GKOs.
A vicious circle was created: The state had no income apart from borrowing
from banks by selling them GKOs. In their turn, the banks' very existence
depended on the income they could generate from GKO operations. So the
collapse of the GKO pyramid is not just a collapse of the state's finances,
but also of corporate finances. Freely convertible currency, particularly
the U.S. dollar, is practically the only reliable security left on the
Russian market. This is why there is continual demand for dollars and the
ruble continues to fall.
The immediate consequences of this crisis for Russian citizens and the
Russian economy are already evident. Lending to trade and industry has
decreased dramatically. Signed contracts are being torn up or not being
honored. The uncertainty in the exchange rates is forcing traders to cease
making deals. Prices began to rise quickly: In Moscow they had almost
doubled by September 2, even on some domestically-produced food products.
Throughout the country, trade in imported goods is being sharply curtailed
(and Russia is currently more than 50 percent reliant on imported
foodstuffs). In industry, the majority of long-term projects are under
threat. The incomes of workers (particularly in the budget sectors) and
pensioners are rapidly losing their value.
In its attempts to overcome this crisis, the government has begun borrowing
slogans from the opposition. Phrases about nationalizing the banks and price
control are being bandied about. Some officials are resorting to covert and
sometimes open threats about introducing repressive measures against
businessmen who do not follow the recommendations of the central or local
authorities. Such loud words, however, are powerless to influence the
Most serious experts agree that without some package of harsh mobilization
measures it will be impossible to overcome the crisis: It has gone too far.
The question is whether the current administration has the will and
competence to design and implement such a set of measures. The problem
cannot be reduced simply to whether the government and the Central Bank will
resort to printing money. If one limits oneself in this situation to
choosing between soft and harsh monetary policies, then either choice will
be wrong. By holding back from printing money, the state can expect the
ruble to stabilize after a while -- at a significantly lower rate than its
current one, naturally. But this will mean averting the crisis at the cost
of a dramatic reduction in the living standard of Russian citizens and a
significant contraction of the domestic market, which will mean that the
speed of industrial decline will quickly increase. By printing money, the
state can revive the domestic market to some extent, but at the price of a
long, inflationary price spiral, which will also lead to a fall in
production and living standards.
Of course, other policies are possible. The reality is that no government
can fulfill its social obligations at their current levels. In this sense, a
decrease in the average standard of living of the Russian population is
inevitable. With progressive taxation and other measures, however, it is
possible to ensure that the incomes of the majority are protected by sharply
reducing the semi-legal incomes of today's privileged classes.
In addition to this, harsh mobilization measures may facilitate a
redistribution of resources, in such a way as to concentrate them on
resolving the urgent (and subsequently also the long-term) tasks of
modernizing domestic production. If the competitiveness of industry were
increased, it would in turn lead to economic revival and a growth in real
incomes. It will at the same time provide the state with real resources for
reestablishing social spending.
Whether such policies are undertaken (analogies can be drawn with the
post-war recovery policies of Japan and South Korea) depends first on
resolving the question of whose interests the Russian state is serving. Will
the government have the will to carry out the measures necessary not just to
postpone economic collapse for another few months, but to really break
through the destructive economic tendencies which have set in over many
years (the roots of which date back to the Soviet period)? To do this,
however, will entail going against the interests of those groups of
businessmen -- and the bureaucracy related to them -- upon which the
government has been depending up until now: groups connected mainly with the
financial markets and the export of raw materials and natural resources.
Thus, it is no coincidence that the escalation of the economic crisis has
led to an exacerbation of the political situation. A change of the
authorities may be an essential prerequisite for finding a way out of the
crisis. But Russia's constitution, which was designed to keep Boris Yeltsin
in power, hampers any political change. This is why a smooth transfer of
power is difficult, and the risk of serious political upheaval increases.
The reluctance and inability of Russia's elite to serve the interests of the
majority of their own population has not as yet led to large-scale civil
protest. The people are exhausted after the political upheaval of 1991-93,
having absorbed the lesson that any political change is for the worse. But
another blow to the standard of living of Russia's citizens could be enough
to test the limits of their long-suffering.
Translated by Paul and Katya Tann.
The Independent (UK)
20 September 1998
[for personal use only]
Eastern Europe: laughing all the way to economic meltdown
>From Adam Lebor in Budapest
WHAT'S the difference between a Russian optimist, a Russian pessimist and a
Russian realist? The optimist is learning German, the pessimist is learning
Chinese and the realist is learning how to shoot a Kalashnikov.
As freedom and out-of-control market economics replace dictatorships in Russia
and its east European neighbours, a new bitter- sweet humour has appeared.
Instead of being about five-year-plans and shortages, jokes poke fun at
rampant capitalism, organised crime and economic meltdown, with all its
attendant social chaos.
Among Russia mafiosi, ostentation is the order of the day. Two of them are
sitting in a bar, showing off their clothes. "How much did you pay for that
tie?" asks one. "It's pure Italian silk. It cost me $300," his friend says
proudly. "Is that all?" says the other. "You were ripped off, my friend. This
cost me $800!"
The political systems may have changed, but wit remains a vital safety valve
in turbulent times, according to Dr Laszlo Petrovics-Ofner, a psychologist in
Budapest. "Humour is very important," he said. "It's a means for people to hit
back at authority, especially when they feel that they are powerless with
regard to all the momentous changes in society that they see around them."
George Orwell, who knew a thing or two about totalitarian regimes, referred to
political jokes as "tiny revolutions", which helps to explain their long
pedigree in the former Soviet bloc. Under communism, a system that did not
allow for independent opinions, political jokes were often the only way to hit
back at a succession of authoritarian, frightening regimes. For many they
almost acted as the only substitute for participation in a democratic
The more liberal Marxist regimes even tolerated anti-government jokes as a
means of defusing social tension. Such as the following: a Polish housewife
goes shopping in Warsaw's main department store. "I want to buy some caviar,"
she says to the shop assistant. "I'm sorry, Madam," says the assistant, "this
is the department where they have no meat. The department with no caviar is
over there." Policemen jokes were also always popular. Q: "Why do eastern
European policeman go around in threes?" A: "One to read, one to write and one
to keep an eye on the two dangerous intellectuals."
Hungary is one of the region's economic success stories, but a third of the
population lives on or below the poverty line, with an income of less than £55
a month. "Rather than blow up a government building, they tell a joke to
assuage their sense of powerlessness," said Dr Petrovics-Ofner.
One of the biggest issues is how to rescue the Russian economy. Boris
Yeltsin's secretary tells him he has two visitors: the Pope and the head of
the International Monetary Fund, who wishes to discuss Russia's debt crisis.
"Who shall I show in first, Mr President?" she asks.
"The Pope," her boss replies. "I only have to kiss his hand."
September 19, 1998
FACES & VOICES: Will to Build Survives the Stormy Season
By Helen Womack
Special to The Moscow Times
It has been a summer of hurricanes, both actual and metaphorical. Now that the
latest political storm has eased, Russians are picking up the pieces of their
lives. For the average Western newspaper reader or television viewer, there is
less of a frisson in this than in the prospect of vicarious apocalypse. But it
takes real courage to start building again.
Feeling battered myself by the crisis, I was wondering whether I had the
emotional strength to watch any more painful perestroika. To which a Russian-
Jewish friend replied that in Soviet times people were always telling her to
"put up with the mess here or emigrate." But she believed in the possibility
of a third way -- staying and standing up for a decent life.
This inspired me and when I looked around, I saw that many Russians were
indeed doing just that.
One of them was Lyudmila Sushkova, the manager of a small literary agency that
sells Western books in Russia. A member of the emerging middle class, who has
now slipped down a rung again, she was bewailing the effects of the economic
meltdown. But she was not about to give up.
"The crisis has hit us very hard. Nobody is buying books now when it is a
matter of survival. Everybody in the agency will have to take a salary cut.
But we will come through this by working."
Lyuda was not just preparing to endure more suffering, like the Siberian miner
interviewed on television, who said that "things will never be better in this
country." Declaring that "hope dies last," she was making a long-term
investment in Russia, her only home, a place she could not conceive of
leaving. At the moment, everything seems to lie in ruins around her.
"We Russians have experienced so much stress," she said. "In communist times,
it was as if we were in prison. Then Gorbachev let in some fresh air, but that
was not wholly positive because ethnic tensions also came out into the open.
Then there was the putsch in 1991 and the uprising in 1993. I feel now as if
we have been thrown back to 1992. We are starting from scratch all over
Two things give Lyuda hope for the future. One is that the new prime minister,
Yevgeny Primakov, while having a communist and KGB background, is not leading
a backlash against democratic reform but forming a mixed government to correct
and continue the transition to capitalism. The other is Russian youth.
"I watched the young people on Moscow Day, enjoying themselves in the middle
of the crisis, and I saw how free they are compared with us when we were
young," said Lyuda, who is in her 40s. "They will never accept a return to the
The energy of youth could serve new forms of darkness in future, I said,
thinking of the danger of fascism. But she thought extreme rightists were an
unrepresentative minority and in time would dwindle away. "Did you notice?
Nobody sought scapegoats in this latest crisis. For the first time, nobody
blamed the Jews. That's something new in Russia. And we did get by without
So now the rebuilding must begin, with no guarantee that there will not be
more cyclones to blow away hard-won achievements. "It's going to take a long
time to make Russia a happy place," Lyuda said. "We were naive to think
otherwise. After all, Russia is not Poland. You cannot expect quick results in
such a vast country."
TEXT: SUMMERS SAYS U.S. HAS LARGE STAKE IN RUSSIAN RECOVERY
Text as Prepared for Delivery
September 17, 1998
DEPUTY TREASURY SECRETARY LAWRENCE H. SUMMERS
TESTIMONY BEFORE THE HOUSE INTERNATIONAL RELATIONS COMMITTEE ON RUSSIA
I. Russia's Transition Since 1992
Mr. Chairman, since the dissolution of the USSR, Russia has been
struggling with the profound challenge of creating an entirely new
kind of economy, a new kind of politics, and a new geo-political
setting. While recent events will have very severe consequences for
Russia and raise a great many uncertainties, it is important to begin
any discussion with a recognition that Russia is already a very, very
different country than it was seven years ago:
-- Russia has a democratic leader and democratic system, even if it
has also experienced the uncertainties that democracy can bring with
-- Russia has been greatly demilitarized and is no longer channeling
one fifth of its national resources into the maintenance of military
forces directed at America. Last year Russian military spending was
only one-seventh of its peak in 1988 and two-fifths of its level in
-- three-fifths of the Russian workforce now works in the private
sector after 70 years of central planning. Russia has private banks
and private capital markets.
-- Russia is now a country that is open, whose people know what
happens in the markets and systems beyond their borders and have
access to all the ideas and products that the rest of the world has to
Bringing about change on such a scale is enormously difficult in any
country and uniquely challenging in a country with 150 million people,
countless ethnic and nationalist groups, ten time zones -- and
three-fourths of a century of communism to overcome. Russia is now a
functioning democracy and a market economy. But it is widely
recognized by outsiders and Russians themselves that the new Russian
economy is also seriously flawed. It is these flaws that helped sowed
the seeds of today's crisis.
II. Roots of the Crisis
Russia's economic policy framework collapsed in the middle of last
month as the Russian authorities -- in the face of severe market
pressures -- decided on the enormously risky course of simultaneously
devaluing the ruble, imposing a debt moratorium and restructuring
government bonds. This was the Russian government's decision and not
one which we supported. In this regard, as in so many others, Russia
is a unique case and should in no sense be viewed as a precedent or
guide for other emerging markets under pressure. Indeed, the
government's actions served to undermine confidence still further,
unleash spending, lending, and inflationary pressures, and prompt a
change in government. The result is an economic and financial crisis
as serious as any since the reform process began.
The immediate problems leading up to this crisis are simply stated: an
inability to control the budget deficit, an excessive reliance on
short-term debt and -- partly as a result -- enormous difficulties
with maintaining a fixed exchange rate peg. During the past ten months
investors had become increasingly doubtful that Russia would be able
to maintain the fixed exchange rate while paying its mounting debt
service costs. This led to ever-higher interest rates, and a rapid
depletion of foreign reserves -- a vicious cycle which culminated in
the very unfortunate events I have already described.
Thus, at a purely financial level, this crisis was caused by the usual
problem of too much borrowing, creating too little ability to repay.
But at a deeper level the crisis can be traced to two broad political
problems that have dogged Russian reforms since the beginning.
The first of these has been a failure to resolve a basic mismatch
between the government's spending needs and its available resources --
a mismatch in many ways inherited from the previous regime but
exacerbated by political stalemates and disagreements of the
transition period. At 9 percent of GDP, the tax revenues the federal
government was able to collect last year is at odds with the role the
government and its electorate envision for the state, indeed, cannot
credibly sustain the operations of the most minimal state. Yet there
has been a repeated political failure, either to increase sufficiently
the supply of revenues to the center or to reduce sufficiently the
central government's spending commitments.
The second, related problem that Russia has failed to overcome has
been a fundamental weakness of post-Communist institutions. This
weakness has come through particularly in the inability to collect
sufficient tax revenues and, critically, in the failure to build and
institutionalize a favorable investment climate and the rule of law.
The broader consequences of these failures are severe and
wide-ranging. The Russian private sector has been starved of the
private capital it needs; large parts of the economy have been left
off-the-books, under-monetized, vulnerable to crime and dependent on
barter; the financial sector is poorly regulated and a poor
intermediator funds for investment; the terms of privatization have
frequently been noncompetitive, and private ownership often failed to
improve company management. Worst of all, corruption remains pervasive
and fundamentally undermines peoples' faith in the legitimacy of the
political and economic system. And social payments are not adequately
targeted and, as a result, the truly needy often receive little or no
While it was possible for such a flawed system to go on for some
considerable time, in the end it was Russia's inability to service the
most basic institutions of an effective state that led to the
financial collapse that occurred last month....
It would be difficult to exaggerate the uncertainties of a moment such
as this one. Until there has been a resolution of the direction in
which the Russian political authorities will go it is difficult to
calibrate an appropriate international response. The United States has
a strong stake in Russia successfully overcoming today's crisis and
laying the grounds for a more stable future -- by carrying out the
kind of macroeconomic and structural reforms included in the IMF
program. We will strongly support a Russian government that is
determined to carry out these changes and continue the process of
democratization. But international programs have always to be built on
the recognition that countries shape their own destiny: the Russian
authorities and the Russian people themselves have to choose their own
With this basic warning in mind let me just make three basic points
that will guide the approach of the international community going
First, it is critical in the present climate of mistrust that the
government present a coherent economic strategy and that the strategy
be Russian- "owned". The new government of Russia has asked to be
judged on its actions. And so it will be. But Russian commitments must
precede its actions. A critical step toward regaining the confidence
of Russians themselves and winning the support of the international
community will be for the government to explain its approach to
restoring stability and fulfilling its international obligations --
and to describe clearly how this approach is to be implemented.
Second, while any plan must be pragmatic and respond to the political
conditions facing the government, it has also to recognize that Russia
cannot repeal basic economic laws. Russia has its own unique history
and traditions and it will have to make its own decisions about
specific institutions and market arrangements. Yet, as President
Clinton said in Moscow earlier this month, if the past year has taught
anything it is that no country can escape the imperatives of the
global marketplace. Money cannot be printed in excess without causing
inflation. And an exchange rate peg that is not combined with
appropriate monetary and fiscal policies will not hold.
By devaluing and restructuring debt, Russia has taken drastic measures
to cope with failed policies. Russia's authorities urgently need to
clarify those steps and begin a cooperative dialogue with official and
commercial creditors. They must resist pressures to spend and lend
which will doom the economy to another bout of high, perhaps
hyper-inflation. Just as important, they need to take on the failings
of the financial system and finally put in place the core institutions
and policies of a private market economy.
The broader long-term challenge that Russia faces in the wake of this
crisis is finally to create an environment in which business and
investment can flourish. That means sound money, the rule of law, fair
tax laws and enforcement; private ownership and free land markets;
independent courts that enforce laws and contracts; strong banks that
safeguard peoples' savings and channel those savings to productive
private investment; securities markets that deter fraud and protect
legitimate investor rights; social spending targeted to those really
in need, and it means the prevention of hidden, anti-competitive ties
between government and business interests.
Finally, let me add that to the extent that international finance is
used to support Russia we will and must work to ensure that they reach
the parts of the population that need help -- not just enrich
off-shore bank accounts. Our confidence in making this judgment will
speak to the Russian authorities' commitment to rooting out some of
the underlying flaws of Russia's reform process that have held it back
for so long -- not least, the growing popular belief that only those
with poor connections play by the rules.
Many will argue that the present crisis and politics make the chances
of Russia taking this course remote. But if the greater connectivity
within the world economy and more rapid flow of capital around the
world has meant that these kinds of problems come to the surface more
quickly -- it can also mean that where they are addressed, capital and
growth can return that much faster. And while it is true that reforms
can cause economic dislocation of workers that may have negative
consequences for reform-minded governments, the economic political
consequences of a failure to reform -- and continued decline in the
economy -- would be graver still.
Russia faces a choice, to restart, accelerate and deepen reform, or to
drift in dangerous policy directions. As President Clinton said,
"There is no shortcut to developing a system that will have the
confidence of investors around the world. These are not American rules
or anybody else's rules. These are (the rules) in a global economy."
We all have an interest in Russian economic success and the President
made clear that the administration is ready to offer further
assistance if Russia stays with the path of reform. But the choice is
for Russia, and Russia alone, to make.
International Herald Tribune
September 21, 1998
[for personal use only]
U.S. Widening Aid to Russia Program Aims to Retrain Nuclear Weapon Scientists
By Walter Pincus Washington Post Service
WASHINGTON - Against the background of the Russian government's plans to cut
45,000 jobs and warhead production in its massive nuclear weapons complex,
Energy Secretary Bill Richardson is preparing to sign a new agreement Monday
in Vienna for U.S. aid to help the displaced Russian scientists move into
A House-Senate conference panel last week approved $20 million for the
program, Initiatives for Proliferation Prevention, as part of the fiscal 1999
Defense Authorization Bill.
Also called the ''nuclear cities'' program, it will provide seed money ''to
move scientists into commercial roles,'' according to Rose Gottemoeller,
director of the Office of Nonproliferation and National Security in the
Department of Energy.
The underlying purpose of the program ''is to prevent a brain drain to Iran,
Iraq or North Korea,'' according to Steve Younger, associate director of Los
Alamos National Laboratory, who ran earlier versions of the program from 1992
Russian nuclear weapons workers have suffered from the country's economic
decline, waiting months for paychecks and enduring a severe drop in their
standard of living. But since the end of the Cold War, Russia has continued
developing and producing warheads despite agreements to reduce strategic
weapons and end the production of tactical weapons.
Unlike U.S nuclear warheads, which are constructed with high technology and
designed to last for decades, Russian warheads have a reliable lifetime of 10
years. ''They work on a 10-year cycle,'' one intelligence official said
recently, ''and they have never stopped production.''
The roughly 1.5 million employees involved in Russian nuclear weapons
development and production work in facilities in 10 specially constructed
cities, closed to foreigners, and 25 other sites spread across the country.
Most of the closed cities remain secret, not indicated on maps.
Arzamas-16, which is 400 kilometers (250 miles) east of Moscow, was once the
small town of Sarov, known for its monastery and pure water that was supposed
to have healing powers. Today, it is a city of 80,000.
Last February, the then-head of the Ministry of Atomic Energy, Viktor
Mikhailov, announced the first planned cutbacks in the nuclear weapons complex
scheduled to take place over two to three years. It would include the shutdown
of two of four weapons production facilities, including one at Arzamas-16 that
involves 10,000 jobs, according to Ms. Gottemoeller.
The initial ''nuclear cities'' program contracts were signed in 1994 with $35
million in funding and projects worked out under existing laboratory-to-
According to the Department of Energy, more than 3,000 weapons scientists,
engineers and technicians have been involved in 375 projects funded by the