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Johnson's Russia List
 

 

September 23, 1998    
This Date's Issues: 23922393

Johnson's Russia List
#2393
23 September 1998
davidjohnson@erols.com

[Note from David Johnson:
1. Ray Thomas: Re 2392-Armstrong/Printing Money.
2. Fred Weir in Moscow on latest economic developments.
3. Alexander Domrin: "Rabbits" on Russian railroads.
4. AP: Russia Seeks Additional Aid.
5. Renfrey Clarke in Moscow: RUSSIA: GOVERNMENT BLOWS WAGE ARREARS 
TO SAVE OLIGARCHS.

6. Len Cormier: Re 2385- Kaufman/Cormier. (Re program to help Russia).
7. Los Angeles Times: Vanora Bennett, Russia's Harvest of Have-Nots.
Nation's bureaucrats and social institutions fail to prepare youths for society. Instead, they
foster the growth of an angry and alienated underclass that turns to crime and violence for its
survival. 

8. Financial Times (UK): John Thornhill, MOSCOW: Central bank under attack.
9. RFE/RL NEWSLINE: INDUSTRIAL, AGRICULTURAL LOBBY GAINS STRENGTH and 
ZYUGANOV-LUZHKOV ALLIANCE EMERGING?] 


********

#1
From: Ray Thomas <r.thomas@open.ac.uk>
Subject: Re: 2392-Armstrong/Printing Money
Date: Wed, 23 Sep 1998 

Inflation is the product of expectations, rather than money supply. If
Russian people have confidence in that the rouble will not lose value they
will hold rubles and ruble acccounts. The Russian economy may not develop
under such conditions, but people would be able to live a normal life.
But money is a store of value as well as a medium of exchange. If people
think that there will be inflation then they will try to change their rubles
into dollars. That will drive up the price of dollars in terms of rubles,
which is the same thing as saying that the value of the ruble will fall,
which is the same thing as saying there will be inflation.
The confidence factor with Primakov is crucial. To the extent that
Primakov's government can convince people that it will be effective in
controlling the ruble prices of the basic necessities, so can the govenment
print money, get wage arrear payments made, etc., without inflation.
The real problems do not seem to lie in this kind of area. The real
problem seems to be that firms in Russia have not had, and do not have, the
financial support services required to conduct business without the aid of
the mafia. When the international speculators (who include BTW those who
are providing pension funds for me and many members of this list) became
aware of the failure of the development of the Russian economy, they lost
confidence in the ruble and sold out, and so instigated ruble devaluation
and inflation.
I can't resist quoting Harold Wilson on the international speculators
against sterling in 1957 which also resulted in devaluation. "They had
slashed their own, and the nation's wrists, and then fainted at the sight of
their own blood".
The immediate sufferers were the banks who might have provided financial
services for firms. Many observers think that these banks were so corrupt
that this is not a serious loss to the Russian economy. But the real
problem is that it is difficult to imagine how the Russian economy can
develop without a financial services sector.
Forgive me, gentle readers, for this bold and simplified account of the

economy of the world's sixth most populous country. If my simplifications
go too far, I would welcome correction.

********

#2
From: fweir@rex.iasnet.ru
Date: Wed, 23 Sep 1998
For the Hindustan Times
From: Fred Weir in Moscow

MOSCOW (HT Sept 23) -- Russia's economic news is grim and
growing worse by the day, but politicians are still haggling over
the formation of a new government and no decisive anti-crisis
measures are yet in sight, analysts say.
Russia has been hammered in recent months by the global
financial storm but the problems of its own economy, which is
trapped in a botched transition from Soviet socialism to
capitalism, have deeply aggravated the crisis.
In August Russia devalued its currency and defaulted on much
of its foreign debt, triggering a wave of banking failures and
widespread business collapse.
The latest economic trends are little short of catastrophic.
The State Customs Committee announced this week that imports
were down 19 per cent in August, due to the crash of the rouble.
By some estimates imports have fallen much further in September,
by as much as half.
In the years since the demise of the USSR Russia has grown
dependent on foreign imports. As much as 70 per cent of the food
consumed in large cities like Moscow comes from abroad.
The International Red Cross has warned that some regions of
the country may face mass starvation this winter because of
falling food imports combined with Russia's worst grain harvest
in 40 years.
"We have built an import dependency in some crucial areas,
such as meat, which cannot be changed quickly," says Ruslan
Grinberg, an expert at the Institute of Economic Research. 
"About 90 per cent of the meat consumed in Moscow is
imported, and this cannot be substituted with Russian supplies
because livestock herds have been drastically trimmed in recent
years."
Russia's State Statistics Committee reported this week that
industrial output -- which appeared to be recovering earlier this
year -- fell by 11.5 per cent in August compared to a year
earlier. Gross domestic product was down 2.1 per cent on the
first eight months of 1998, the Committee said.
At the same time inflation skyrocketed to 43 per cent for
the first two weeks of September, while prices for some basic
foodstuffs have doubled or tripled.
Unemployment has surged as well, reaching 11.5 per cent of
the workforce in August, or just over 8-million people. The ranks
of the jobless have been swelled over the past month by hundreds
of thousands of middle class professionals and skilled workers
who've been made redundant by the financial crisis.
"The loss of middle class jobs is the most serious thing,
since these people have been the backbone of political stability
for the past few years," says Olga Krishtanovskaya, an expert at
the Institute of Sociology in Moscow.
"We have a body of well-educated people, concentrated in
Moscow, who have suddenly become impoverished, bitter and angry.
This could portend dangerous political changes," she says.
The economic crisis has not hit Russia's industrial and

agricultural workers as hard, mainly because they had no savings
to lose in collapsing banks and were already living to a great
extent outside the cash economy.
"Russian workers have been living in depression
circumstances for years already, but they are bound to suffer in
the longer term from higher prices and fresh cuts in government
spending," says Ms. Krishtanovskaya.
The 50-million member Federation of Independent Trade Unions
of Russia is planning a one-day general strike on October 7, to
protest the growing mountain of wage non-payments. The turnout,
which union leaders forecast as high as 36-million, will provide
a clear indication of how the crisis is affecting Russia's long-
suffering and so far largely quiescent majority.
Meanwhile, the business of putting together a new cabinet
under Prime Minister Yevgeny Primakov is well into its second
week, with many observers warning that the window of opportunity
to reverse the economic crisis is closing fast.
"There are no signs from the government yet about any
concrete anti-crisis steps," says Mr. Grinberg. "The only thing
that's obvious is that emergency measures are required." 

*******

#3
From: "Alexander Domrin" <expert@jurfak.spb.ru> 
Subject: "Rabbits" on Russian railroads 
Date: Wed, 23 Sep 1998 

Just another illustration of the situation in Russia.
I don't know what term is used in English-American
slang for those who take a train or a bus without
a ticket; in Russian they are called "zaitsy", rabbits.
According to information from the Moscow Railroad
Department, in the first eight months of 1998 the number
of "zaitsy" caught and fined on Moscow suburbs trains
only was equal to 1,729,400. This figure is 38% bigger 
than in the first eight months of 1997. 
Now - extrapolate this number on the rest of the country,
much less "prosperous" than Moscow region,
and on other spheres of life, including collection of taxes,
and answer: if this is not civil disobedience, than what is it?

*********

#4
Russia Seeks Additional Aid 
By Vladimir Isachenkov
September 23, 1998

MOSCOW (AP) -- Prime Minister Yevgeny Primakov's new government sought
foreign assistance in a series of meetings with international lenders
today, but Russia appeared unlikely to get additional money anytime soon. 
Primakov has been calling on foreign lenders to help Russia through its
economic crisis, and he renewed his request in discussions with the
visiting head of the European Bank for Reconstruction and Development. 
``We favor expansion of the EBRD's operations in Russia,'' Primakov said
at the start of talks with the bank's president, Horst Koehler. 
The EBRD, established in 1991 to help Eastern European nations move
toward free-market economies, has provided loans to a number of Russian
industries. 
``I believe in Russia's ability to overcome the current difficulties,''
Koehler was quoted as saying by the ITAR-Tass news agency. 
However, many private investors have fled Russia in recent months, and
foreign banks that bought billions of dollars of government bonds have
complained that they are being discriminated against while the government
tries to bail out Russian banks. 
Other lenders, such as the International Monetary Fund, are expected to
delay installments on existing loans at least until the new government
details its plans for dealing with the crisis. There has been no serious
talk of new loans to Russia by the IMF or anyone else. 

Russian officials were planning to hold separate talks with a visiting
IMF delegation, as well as discussions with Western banks seeking better
terms on debt restructuring deals. 
Russia's banking system has been virtually paralyzed by the crisis,
which hit just over a month ago. Some banks remain closed, while others are
handling only limited transactions. Most individual and corporate clients
still cannot make routine payments and transfers. 
The foreign lenders are seeking assurances that Primakov's government
will continue free-market reforms, maintain control over the money supply
and offer foreign investors equal terms with Russian companies and banks. 
Primakov has been in office for 12 days and has yet to outline his
economic program or fill several key Cabinet posts. 
A new finance minister is expected to be named Thursday, and the
government also plans to present a tax reform package to parliament soon,
Deputy Prime Minister Alexander Shokhin said. 
Russian oil production in August was 24.8 million tons, 1.9 percent
lower than in the same month last year. Oil is a leading Russian export,
and sagging world prices have contributed to the country's economic woes. 

*******

#5
Date: Wed, 23 Sep 1998
From: austgreen@glas.apc.org (Renfrey Clarke)
Subject: Russian government blows wage arrears

#RUSSIA: GOVERNMENT BLOWS WAGE ARREARS TO SAVE OLIGARCHS
#By Renfrey Clarke

#MOSCOW - After weeks in which it was regarded as a certainty,
there will be no crash of Russia's speculative, mafia-infested
banking system - not yet, anyway. Instead, the crash is likely to
take place in the living standards of anyone in the country whose
income is calculated in rubles rather than dollars, or who is not
well-placed in financial or resource-exporting circles.
#This is the upshot of a deliberate choice made sometime in mid-
September by the new government of Prime Minister Yevgeny
Primakov. Appreciating that if it did not capitulate to Russia's
most powerful business magnates - the so-called oligarchs - it
would have to mount a serious offensive against them, the
government opted for surrender.
#On September 18, banks in Moscow, St Petersburg and several
other important regions took part in a state-supervised ``debt
swap''. This was intended to overcome the paralysis that had
gripped the banking sector since August 17, when the previous
government of Sergey Kiriyenko devalued the ruble and defaulted
on huge sums in short-term bonds. In technical terms, the banks
were permitted on September 18 to settle their debts with the
state, their depositors and one another by borrowing from the
reserve funds they are required to lodge with the Central Bank.
#In a later process completed on September 19, the banks were
allowed to ``pay back'' the new loans using the bonds on which
Kiriyenko's government had earlier refused payment. But this
repayment was fictitious, since the bonds were almost worthless.
The Kiriyenko government defaulted on them because it had no way
of raising the money to redeem them. Simply issuing unbacked

credits - in the term often used by journalists, cranking up the
printing presses - was considered at the time to pose an
unacceptable risk of sparking uncontrollable inflation.
#The new authorities do not share Kiriyenko's scruples. Because
the ``debt swap'' credits are effectively a gift, the effect of
Primakov's manoeuvre is that billions of new rubles, backed by
nothing more than thin air, have entered the general money
supply. According to the English-language <I>Moscow Times<D> on
September 22, the Central Bank put the additional sum at 4.2
billion rubles, equivalent to about US$250 million.
#While this is only about 4 per cent of the total money supply,
analysts fear it will have a catastrophic ``trigger'' effect on
price rises. At 43 per cent in the first two weeks of September
alone, these are already in the hyperinflation range. Increased
inflation is virtually guaranteed by the use to which many of the
banks are expected to put their newly-restored liquidity - buying
dollars, thus forcing down the ruble rate and raising the cost of
the imports which account for around half the purchases made by
the Russian population.
#Was pumping up the banking system with unbacked credits the best
choice available? Central Bank Deputy Chairperson Andrei Kozlov
insisted on September 18 that it was. ``The negative consequences
of this action are less than of any other,'' Reuters quoted him
as saying.
#But this is simply not true. The government had a perfectly
workable alternative to emitting money. It could have
nationalised the banks.
#With the banks under state management, their debts to depositors
could have been paid out or put on hold in line with the
government's real possibilities. The available funds could have
been directed not toward currency speculation, but toward ends
such as maximising production, employment and the payment of
wages.
#All this would have met with furious resistance from the
oligarchs, backed up by Western governments and financial
interests. The Russian banking sector, along with energy and raw
materials exports, represents a vital component in the business
empires of the country's most notorious ``crony capitalists''.
#The resistance of the business moguls could, however, have been
effectively countered through mobilising Russia's workers and
poor - that is, the prime victims of inflation. At a time when
the oligarchs are weaker than at any time since the early 1990s,
mass demonstrations could have forced them to swallow their
losses.
#But there is no point in looking to Primakov to call such
actions. A long-time senior <I>Pravda<D> correspondent and
foreign policy adviser, Primakov served the Soviet elite
faithfully for decades, and remains loyal to them now that they
have metamorphosed into owners of capital.
#With the decision to emit billions of rubles to bail out the
banking sector, many of Primakov's utterances on the economy have
to be regarded as pure demagogy. In an interview published on
September 20 in the German newspaper <I>Bild am Sonntag,<D> the

prime minister stated: ``The biggest problem to tackle is that of
[unpaid] salaries and pensions.'' He also pledged to boost
industrial and agricultural production.
#The question of whether unbacked credits could be used to pay
wage arrears without disastrous results has been the topic of
sharp debate in Russia in recent weeks. In an article in
<I>Nezavisimaya Gazeta<D> on September 16 prominent economist
Leonid Abalkin maintained that the Russian economy was heavily
demonetised, and that there was a need for controlled emission to
drive pseudo-money such as bartered goods and promissory notes
out of circulation.
#It could be argued that paying wage and pension arrears would
have been an ideal mechanism here, since the rubles would not as
a rule have been used to buy dollars, but to purchase cheap
foodstuffs and other basic consumer goods. The extra money would
thus have translated directly into additional demand for the
products of Russia's heavily depressed consumer manufacturing and
agriculture.
#But now that unbacked credits have been poured into saving the
private banking system, and inflationary expectations are at
extreme levels, the possibility of paying off wage and pension
arrears without sending prices into orbit seems effectively nil.
#Deputy Prime Minister Aleksandr Shokhin admitted as much on
September 20 when he ruled out emitting more money to meet wage
and pension payments, saying it would depreciate the ruble. ``The
best option is to attract external resources to pay our
obligations,'' Shokhin said.
#``External resources''? Who is going to lend money to Russia
now? What Shokhin could not bring himself to say is that the
government has no serious plans for meeting the arrears. The sum
that might have been used to begin this process has been given to
the oligarchs.
#Primakov's weakness for ``solutions'' that fail to challenge the
rich and do nothing for the ordinary population is showing up in
other areas as well.
#To curb the dollarisation of the Russian economy, restrict
capital flight, and build up the Central Bank's hard currency
reserves, the new Prime Minister has promised to tighten controls
on the foreign exchange market. According to the English-language
<I>Moscow Times,<D> the Central Bank on September 18 announced it
had drafted a presidential decree requiring exporters to sell 25
per cent of their foreign currency revenues to the Central Bank,
in addition to the 50 per cent that already has to be sold
through the currency exchange.
#However, analysts quoted by the paper pointed out that the new
measure would encourage exporters to conceal their earnings, and
implied that they would have little trouble doing just that. The
inflow to the Central Bank's reserves, the sources predicted,
would not be great.
#The Russian state's reserves of hard currency and gold were
badly depleted during the effort, abandoned on August 17, to
maintain an artificially strong ruble. Replenishing these
reserves is vital if the government is to have even a medium-term

prospect of stabilising its finances.
#If exporters - above all in the oil, gas and metals sectors -
sabotage this effort, the case for nationalising their firms is
strong. But after rescuing the oligarchs' banking interests,
Primakov is hardly likely to strip the business chiefs of their
energy and raw materials operations.
#Meanwhile, what are Russian banks like, that the prime minister
should be willing to risk sending inflation over the moon to keep
them in business?
#In all but a few cases, these institutions bear little
resemblance to banks in the West. The great majority have never
shown any interest in building up a large network of depositors.
Few provide anything remotely like Western-level services to
their clients. Only a handful have a record of lending
substantial sums to producers in the ``real economy''.
#Instead, the banks have made high profits out of currency
manipulations and from lending to the government on the short-
term debt market. Many, especially among the smaller ones, are
reputed to be fronts for mafia money-laundering operations. The
banking industry has also played a big role in expediting illegal
capital flight, estimated at a staggering US$140 billion over the
past seven years.
#Such are the institutions that Primakov, at serious peril to
Russia's economy and society, has now plucked from the gutter and
set back on their unsteady feet.

********

#6
Date: Tue, 22 Sep 1998
From: Len Cormier <thirdmillennium@tour2space.com> 
Subject: Re: 2385- Kaufman/Cormier

Len Cormier's Response to Wallace Kaufman

In JRL #2385, #14, Wallace Kaufman commented on Len 
Cormier's proposed 9-point program (JRL #2380, # 7).

Mr. Kaufman begins:
>Perhaps financing Russian recovery by sale of nuclear 
>weapons to a country that is in the eyes of some Russians 
>still its enemy is akin to Ronald Reagan's proposal 
>that the US give the Soviet Union all new Star Wars 
>defense technology. Whether this foundation proposal 
>might come to pass or not, some of the nine points 
>indicate real remedies. I would like to suggest a 
>few amendments.

Thanks for the qualified support, and let me respond 
to some of your reservations. 
With regard to your intial comment, it has been my experience 
that many Russians did not regard the U.S. as a real 
enemy even during the cold war. With respect to the current 
situation, I believe that with Mr. Primakov as PM, 
that the objections of those Russians who may still 
regard the U.S. as an enemy may be manageable. For one 
thing, Mr. Primakov has already urged the Duma to approve 
the strategic arms treaty with the U.S. -- in part as an 
economic necessity. Moreover,the first three points of 
my nine points are tightly interrelated: purchase of 
Russian nuclear warheads would be accompanied by 
corresponding reductions in U.S. nuclear warheads 
-- and coopearation with respect to ballistic missile 
defense. Another point covers back payments to the 
military as well as pensioners. Finally, with substantial 
money from the sale of nuclear warheads and by staying up 

to date on military pay, Russia may be able depend more upon 
conventional forces for defense (I understand that 
Susan Eisenhower's reservations on a purchase plan 
are based upon a presumed Russian belief that, in the present 
situation, nuclear defense is the only practical substitute 
for deteriorated conventional forces. Interestingly 
enough, NATO apparently felt this way 20 years ago with 
respect to the "overwhelming" threat represented by the 
Warsaw Pact).
Actually, selling the plan within the U.S. may 
be much more difficult -- although some of the momentum 
for this type of plans comes from conservative 
thinkers like William Buckley. And as you point out 
-- perhaps derisively -- Ronald Reagan had suggested 
cooperating an ballistic missile defense. And then 
there is the cost. I personally feel that expenditures 
of this sort are far more justifiable from the point 
of view of the founding fathers than expenditures 
for such things as farm subsidies.
In summary, there appears to be two question with 
respect to my first three points: 1) Is this plan 
a good idea? and 2) If it is a good idea, is it 
salable in both Russia and the U.S.?

>Point 6: 
> Adjust the ownership of certain Russian national assets 
> particularly oil and other extraction assets so that 
> 50 percent of the profits from these privately run assets 
> would flow into the national treasury.
>This is a modified re-nationalization. It is better accomplished by a
>special independent judicial review board that could bring back to the
>national treasury stock in natural resource companies (and other
>industrials) that were illegally or improperly &quot;privatized.&quot;
>There were rules and guidelines, and there were violations. Stock could
>also be accepted in lieu of unpaid taxes. Finally, the government should
>consider backing Russian debt instruments with natural resource futures,
>promises to pay in a particular resource if it cannot pay in cash. (This
>still requires a measure of trust that investors might not give, but I
>suggest setting up an international escrow account in which Russia might
>place something of significant value, such as art, diamonds, jewels,
>titles to property in Western nations, etc. I suppose this is akin to the
>medieval hostage system.)

I like your approach. I hadn't intended to lay out how
the "adjustment of ownership" might come about. However,
enlighted self interest may help ease things when the 
oligarchs see the handwriting on the wall written by a 
PM who is not beholden to them.
A modified Point 6 might read as follows:
Subject the prior and future sales of certain Russian 
national assets -- particularly oil and other extraction 
assets -- to a special independent judicial review board 
with powers to award stock ownership in such assets to the 
Russian Federation and/or appropriate regional governments. 
Awards of stock could be made on the basis of any of the 
following: a) illegal procedures; b) improper procedures; 
c) inadequate consideration; or d) the non-payment of taxes.
Any stock awarded to government entities could be used as 
as collateral for government debt instruments.

(Apparently we both see a need for changes that could 
drive PM Primakov to use central planning techniques as 
the means to the end. Apparently, we both also would like 
to use means that are more friendly to the marketplace. 
Your suggestion for judicial review in lieu of 
renationalization (or partial renationalization) and 
my suggestion of food stamps in lieu of price controls 
are cases in point).

>Point 9. Inauguration of a cooperative Russian/American program 
> designed to encourage joint economic ventures between 
> private Russian and American companies.
>To encourage the sound investment of funds supplied unwittingly by
>taxpayers in developed countries, no IMF, EBRD or World Bank funds should
>be allotted to Russia except on as matching funds when Russia has
>established risk levels that will bring in a specified level of private
>lending and/or investment. This would at least assure US members of
>Congress and taxpayers that dollars were not being given to Russia under
>terms riskier than those acceptable to generally prudent risk takers. It
>would also guarantee better underwriting in the IMF and World Bank.
>With the exception of humanitarian aid, US and other aid programs should
>be provided for payment. Payment could be on favorable terms or even
>&quot;in kind,&quot; but at least agreement to a nominal payment would
>guarantee that Russia had a stake in their success. American taxpayers
>might at least feel they were not being taken for chumps. The contractors
>delivering the aid might feel more welcomed by their clients.

A lot of so-called investment in Russia has been 
to set up businesses in Russia to sell products 
imported into Russia. What I have in mind are joint 
ventures that would create Russian jobs while making 
joint U.S./Russian products very competitive on the 
world market. There are also many Russian products that 
might be integrated into a new U.S. product. For 
example, I would like to import Rybinsk RD-38 engines 
used in the Yak-38 VTOL fighter for use is several 
new aerospace concepts that I feel have great potential 
(none of which require FAA certification or a bilateral 
agreement). But your points are well taken. How does 
one finance such ventures in a business-like manner? 
Perhaps tax incentives would help to raise capital 
needed for such joint projects (I myself have a long list). 
Small, cash-poor startup businesses may have some of 
the best ideas for joint ventures. If such businesses 
could issue debentures that enabled the purchasers of 
the debentures to deduct expenses and claim R&D credits,
then such businesses might be able to raise matching 
funds much more easily -- especially if securities 
regulators would rely much more on fraud prosecution 
than "qualification" standards that tend to be a very 
expensive hurdle for entrepreneurs.
I'm not sure how to change the "general" wording in 
Point 9 to cover the points that both of us have made above 
-- except to say that a "cooperative program to encourage 
joint ventures between Russian and American companies" 
would imply some system of checks and balances to make 

such a prgram workable while conforming to sound business 
principles.

*********

#7
Los Angeles Times
September 22, 1998 
[for personal use only]
COLUMN ONE 
Russia's Harvest of Have-Nots 
Nation's bureaucrats and social institutions fail to prepare youths for
society. Instead, they foster the growth of an angry and alienated underclass
that turns to crime and violence for its survival. 
By VANORA BENNETT, Times Staff Writer

MOSCOW--When he was arrested with his three older brothers for kicking a tramp
to death, 10-year-old Volodya Yakovlev was still a round-faced kid from a
problem family in deprived outer Moscow. 
Despite his confession, Volodya's innocent smile and sweet treble voice
made the 1994 crime seem unbelievable. Police and courts blamed his oldest
brother, who was then 14, for instigating the violence. Volodya was not
punished, although he was later separated from his mother and sent to a state
children's home. 
Now, however, after three years of brutalizing "care" by local
authorities, Volodya has started to look like a hardened criminal. Tall,
gangling, shaven-headed and perpetually grinning, he boasts between cigarettes
about his lock-picking expertise, thefts, truancy and multiple arrests. 
His future? More crime, he says. At 13, it's too late for anything else. 
"Jobs? No way. And I won't be bothering with military service, either,"
Volodya says in brutal street speak. "There's nothing to do. The army wouldn't
take me with my record. Anyway, there's nothing to steal there." 
The story of Volodya Yakovlev bears chilling witness to the way Russia's
grim social institutions--orphanages, children's homes, reform schools, the
army and, later, prisons--fail in their stated aim of creating order in
society. Instead, a mix of official neglect and excessive severity at these
institutions actually encourages the formation of an angry and alienated
underclass, with no way of surviving except through crime and violence. 
Social workers and human rights activists are unanimous in saying that the
best way to get rid of Russia's criminal underclass is not to attack the
violent victims of society who make it up--but the state officials whose
negligence and greed create it. They accuse the chinovniki, the self-serving
class of invisible bureaucrats who channel funds from budgets to institutions,
of cynically perpetuating an abusive system that does little to correct

wrongdoing or foster civic virtues--for no other reason than to line its own
pockets. 
For children such as Volodya, one step into this system can become a life
sentence. Horrifying statistics cited by activist Boris Altshuler, head of a
children's rights program, reveal that the 200,000 youths in state homes are
likelier than others to inflict violence in the future. 
"Every year, 15,000 to 17,000 of these kids are released into the real
world at 18. But they're completely institutionalized. They can't handle
normal life," Altshuler says. "So, in their first year of freedom, 5,000 of
these kids go to prison, 3,000 become tramps and 1,500 commit suicide." 

Brothers Beat Man Until He Dies 
Volodya's story is typical. The attack on the 60-year-old tramp took
place in 1994, in a badly lighted underpass next to McDonald's in central
Moscow. As he told it at the time, he and three of his brothers asked the man
for a cigarette. When the tramp kicked at Volodya, the four brothers, ages 10
to 14, "defended themselves" by beating the old man until they realized he was
dead. Then they called an ambulance. 
Only the 14-year-old brother was officially deemed old enough to be
punished. He was sent to a juvenile penitentiary. Volodya's mother insisted
that her younger children had done nothing wrong
Disturbingly, however, while in detention, the Yakovlev boys also claimed
to have killed five other people at railway and subway stations around Moscow.
Indifferent police refused to investigate the claims, insisting that the
children must have made them up. But no counseling or social help was given to
help establish what might have caused them to make such claims. 
The local school refused to have any more to do with the Yakovlevs. So
Volodya and his brothers carried on roaming the streets, stealing. When his
mother, Svetlana, the mentally ill widow of a violent and alcoholic husband
who died in 1992, was taken to a mental hospital, Volodya also ended up in
local authority care. 
Like the other kids in the children's home, Volodya lives under
surveillance. But it's the weekend, and he's done what he does most
weekends--slipped through a hole in the wire fence and headed off into the
real world. No one bothers to mend the wire, he says with a shrug. Why would
they? 
Either he goes to the center of Moscow to get some money by begging,
picking pockets or mugging, or he returns to the apartment where he was
raised. 
"He stays here till he steals something. Then, if they feel like it, the
police come around and take him back," explains his sister Nika, a 21-year-old
unemployed shop assistant who shrugs after the explanation. 
Volodya is one of seven siblings. In theory, three of them are currently
locked up. But they come home to the filthy apartment whenever they escape
from prison or reform school. There's always someone in the ninth-floor
apartment--papered with girlie-magazine nudes--to feed meat to the caged black
rat with the foot-long tail, the terrified cat, a parrot and a muzzled pit
bull terrier. 
What the Yakovlevs live on is unclear. They laugh when asked. But the
anger that emanates from the forsaken boys is palpable. Their speech is
underworld jargon, all swagger and swear words. Lyosha, the oldest boy and at
20 an ex-convict, carries a flick knife. 
That anger, psychologist Nina Yuditseva says, is the legacy of brutal
Russian state care in a society that doesn't understand the notion of
rehabilitation--for all the orphans and juvenile offenders she sees. 
"People who come out of any kind of state child care here are alienated
and don't believe they or anyone else have any value," she says. "Their
emotions aren't awakened, and they can't become fully integrated people. 
"When you get them to draw you pictures, kids from homes draw war, rape,

chaos, blackness, horrors. The pictures often have no people in them. The
main
feature of their drawings is fear, and aggression to protect themselves. 
"They've lived up to 10 years in these homes. What social adaptation can
be expected?" 

Brutal Hazing, Suicide Part of Military Life 
Top among the other Russian institutions that produce graduates headed
for crime is the army. Russia's vast and poverty-stricken armed forces number
nearly 1.5 million, most of them reluctant conscripts younger than 27. Under
the law, they must serve for two years. 
Those with strings to pull--a friend in high places, or just enough money
for bribes--get their sons excused from the army. The stories of vicious
hazing, starvation, suicide and murderous rampages through garrisons are too
frequent and disturbing for any concerned parent to do anything else. 
Those who are unable to think up ways to dodge the draft legally tend to
be orphans and the children of the poor. Once called up in a twice-yearly
conscript intake of, in theory, 190,000, they run away in droves--thereby
breaking the law and laying themselves open to arrest and imprisonment. 
According to Valentina D. Melnikova, head of the Soldiers' Mothers
Committee, an organization that campaigns to protect the rights of the young
soldiers and keep them safe, every year 2,000 runaway conscripts knock on her
door with complaints of sadistic bullying, theft, hunger and illness. 
Even those who complete their service are at risk in society, she says.
They face alcoholism, stress-related illness and a high failure rate in
marriage: "Boys who do make it through military service have post-traumatic
stress from being trapped in a desperate situation for so long. They're
anxious, and they're trying to restore the balance in their lives. They very
often marry the first girl who comes along, a thoughtless marriage, an attempt
to escape their loneliness. Or they take to the bottle. 
"The ones who fought in the war in Chechnya are the worst off. Everyone
knows they came back with huge psychological stress. No one wants to give them
a job. It's virtually impossible for them to get work." 
For many, prison is the end of the line. In Russia, prison means years of
darkness, unbearable heat, overcrowding and exposure to the deadly
tuberculosis that infects nearly half the inmates of the prison system. 
"Our state criminal policy is cruel and arbitrary," says Valery Abramkin,
head of the Moscow Center for Prison Reform. "The severity of sentencing is
out of proportion to the severity of the crime. People who steal a loaf of
bread because they're unemployed and hungry get three to four years in jail. 
"Because it's official policy to liquidate marginal groups, about 40% of
the people in prison have done nothing worse than be rounded up for being
homeless. Our prisons are the theater of the absurd." 
He added: "A lot of people of employable age get locked up unnecessarily.
Then their kids suffer--and the vicious cycle moves on to the next
generation." 


Crime From Different Quarters 
In modern America, there are 565 convicts per 100,000 people; in Russia,
there are 780. A perception that Russia is in the grip of a crime wave is only
partially borne out by government statistics. These show the total number of
reported crimes falling--from 2,760,652 in 1992 to 2,397,311 in 1997. But the
number of "underclass" crimes--murders, robberies and random street
violence--has risen, as have the numbers of crimes committed by drunk people. 
This violent crime by have-nots is unconnected to the "glamour" end of
illegality in Russia--the high-powered organized crime that has emptied
government coffers, allowed shadowy tycoons to share economic spheres of
influence, and led to the assassinations of meddlesome bankers. 
"Three-quarters of the people involved in crime are the educated ones in
some kind of organized activity," says Vladimir Grib of the Interior
Ministry's Laboratory for Analyzing Organized Crime. "Then there's the rest:
the people we call 'the Frostbitten.' They're from institutions, orphanages,
prisons, the unwanted veterans of Afghanistan or Chechnya--the aimlessly
violent, people who have lost their direction in life." 
Even organized-crime bosses find random violence distasteful, he says. 
"These people are as much of an irritant to the intelligentsia of the
crime world as to the forces of law and order. There are even stories about
organized-crime bosses ordering cleanups of towns to get rid of them. The
down-and-outs of crime are hated by everyone." 
But the blame for the behavior of Russia's lowlifes should fall primarily
on the crooked bureaucrats who monitor treatment, activists and social workers
say. They give horrifying details of how these bureaucrats distort--and
perpetuate--the system for their own financial advantage. 
In Moscow, for instance, the city's Education Department pays lip service
to the aim of taking children out of state homes and putting them in foster
families. This is more humane because it gives children a chance for a normal
family life. And it's also cheaper: It costs the state $350 a month to keep a
child in a home, while foster families get only half that to take in an
orphaned child. 
But Altshuler says some bureaucrats have done all they can to make this
effort fail--because they get a cut of the money that goes through state
orphanages. They get no share of foster-care money. 
"There are murky indications everywhere that the chinovniki don't want to
cut their own income by fulfilling government orders," he says. 
"The bureaucrats don't care about what's more humane. They're happy
dividing up the state pie between themselves, and it would be a financial
catastrophe for them to lose the money," Altshuler says. "So there are big,
and undeclared, financial-corporate interests inside the education and health
departments that understand very well that they have nothing to gain from
reform." 

Making Money Off Inefficiency 
The same goes for the army, according to Melnikova of the mothers
committee. Despite repeated promises to reform and scale back a mass conscript

army that has outlived its usefulness, nothing is actually done--because too
many people make a good living out of its inefficiency at the expense of the
soldiers at the bottom. 
"It's only bribery and corruption that move things along in the army,"
she charges. "When an officer realizes that his promotion depends on how much
he pays to get to an acceptable garrison, he loses his idealism and his
interest in work. And he starts treating his men like so many bodies to be
robbed. 
"Funds and supplies come down the line. People pilfer at every stage, and
there's nothing left to feed the soldiers at the bottom with. They're left to
starve. It's secret privatization or, more honestly, theft. If the army can't
feed its soldiers, it should just send them home." 
But she despairs at the prospects for change. "No one at the top really
wants to do anything about reform because the army is a big source of
corruption," she says. "It has millions of men. It needs huge sums of money
lavished on it. Reform is only possible when there's a will." 
The best way to reform the system is to limit the power of the
chinovniki, Altshuler suggests, by creating Western-style independent
inspectorates, ombudsmen and watchdog bodies. None of these ideas has yet
gotten off the ground, however; the bureaucrats shoot them down as impractical
or damaging to national security. 
But Abramkin says he believes that the political uncertainty of today's
Russia means that the vicious circle could be broken soon. There are less than
two years to go before presidential elections. President Boris N. Yeltsin is
increasingly capricious. So bureaucrats are running scared. 
Among changes suddenly in the works is the planned transfer of Russian
prisons from the military Interior Ministry to the civilian Justice Ministry. 
"Now's our chance," Abramkin says. "The entrenched authorities are
feeling uncertain and ready for dialogue. There are always changes for the
better when chinovniki, and their Communist friends, are running scared." 

******** 

#8
Financial Times (UK)
23 September 1998
[for personal use only]
MOSCOW: Central bank under attack
By John Thornhill in Moscow

Yuri Boldyrev, deputy chairman of Russia's Accounting Chamber, yesterday
accused the central bank of "gross violations of the law" over the past few
months, saying it must be subject to greater financial accountability.
Mr Boldyrev, who has earned a reputation as a fierce anti-corruption
campaigner, said the central bank had spent lavishly on salaries, property,
and consultancy fees and made big discretionary loans with little or no
transparency.
He also announced the Accounting Chamber, which monitors government
spending, would conduct an audit into how the latest $4.8bn tranche of an
International Monetary Fund loan was spent. Russia's prosecutor general has
launched an investigation into whether IMF money was misused.
Sergei Dubinin, former head of the central bank, has denied any
wrongdoing while he was in charge and insisted that all IMF money was spent
as intended.
Bankers said the central bank's efforts this week to free up frozen
payments by injecting fresh liquidity into the banking system had not yet
had much impact. On Monday, the central bank printed Rbs1bn ($62m) of new
money and provided additional short-term credits to banks backed on frozen
government debt. The central bank intends to repeat the exercise on Friday,
but this time it will force more banks to participate.

The central bank has temporarily halted trading on Moscow's small
electronic currency exchange market to try to prevent this extra liquidity
from flooding into the hard currency market. The official rate for the
rouble was set at 16.22 to the US dollar, down from 6.2 before the crisis
began.
Andrei Kozlov, the first deputy chairman of the central bank, said he
did not expect the small Rbs1bn emission to have a harmful effect on
inflation. Base money increased by Rbs4.5bn to Rbs167.3bn between September
7 and 14.
Mikhail Zadornov, acting finance minister, also reiterated his position
that the government would not resort to large-scale emissions in the next
two to three months to finance its needs. "We will suggest tax reform," he
said.
But Mr Zadornov's position within the government is not yet clear. It
also emerged yesterday that Boris Fyodorov, the tough-talking reformer who
had devised an emergency financial package for the previous government,
would not find any "space" in the new cabinet.
*******

#9
RFE/RL NEWSLINE Vol 2, No. 184, Part I, 23 September 1998

INDUSTRIAL, AGRICULTURAL LOBBY GAINS STRENGTH. "Kommersant-
Daily" on 22 September reported that representatives of
Russia's military-industrial complex have gained influence in
the Kremlin at the expense of the "oil and gas lobby" and the
"oligarchs." The newspaper cited Primakov's recent appearance
at a meeting of the Russian Union of Industrialists and
Entrepreneurs, where Primakov was presented with a proposal
for the government to provide "targeted loans for high-tech
exports." It concluded that the interests of the agriculture
sector will also be well represented by Deputy Prime Minister
Gennadii Kulik. A member of the Agrarian faction, Kulik
"intends to lobby for maintaining agricultural output prices
at the same level as manufacturing." JAC

ZYUGANOV-LUZHKOV ALLIANCE EMERGING? "Kommersant-Daily" on 22
September pointed out the sudden show of public warmth
between Communist Party leader Gennadii Zyuganov and Moscow
Mayor Yurii Luzhkov and concluded that the pair have formed
an alliance of convenience to promote their mutual interests
in the State Duma. However, the partnership may last only
until presidential elections in 2000, when both men are
likely to run for president. Zyuganov told reporters on 19
September that Luzhkov had "adopted a stance in favor of
strengthening order in the country" during the crisis.
According to the newspaper, Luzhkov on 21 September "stated
unambiguously that he really is headed in the same direction
as the Communists: 'It is not a question of a chance
situation occurring but of a consolidation for the sake of
implementing the important principles that we serve.'" JAC

*******



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