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Johnson's Russia List


September 24, 1998    
This Date's Issues: 23942395

Johnson's Russia List
24 September 1998

[Note from David Johnson:
1. Jim Vail: Wiemar comparison? (Walter Russell Mead in Esquire).
2. Peter Mahoney: Who Lost Russia.
3. AP: Russia Poll: Bring On Dictatorship.
4. Reuters: Communists hint might end support for Russia govt.
5. Moscow Times: Andrei Piontkovsky, SEASON OF DISCONTENT: New Hercules 
Launches Into Risky Cleanup.

6. Moscow Times: Jeanne Whalen, NEWS ANALYSIS: Nationalization Unlikely 
Despite Talk.

7. Reuters: Most Russians approve Primakov as PM, poll finds.
8. Journal of Commerce: John Helmer, Mr. Primakov's slow-motion start.
9. Newsday: Dimitri Simes, Don't Mess With Russia's Self-Rule.
10. Charley Warner: Cultural factors and the current crisis.
11. Barry W. Ickes: Re 2392-Armstrong/Printing Money.
12. Reuters: INTERVIEW-Russian small business frozen in crisis. (Irina

13. Jerry Hough: Re 2393-Clarke/Government Blows Wage Arrears.]


Date: Wed, 23 Sep 1998 
From: "Jim Vail" <>
Subj: Wiemar comparison?

One of the questions I have asked time and again is whether Russia's 
situation today is comparable to the Weimar Republic in Germany before 
the second world war. I would appreciate it if any Johnson subscribers 
would give their opinions on this subject. Meanwhile, I ran across an 
excellent article in the October issue of Esquire which puts the global 
crisis in perspective and sheds some light on the question I posed 
I quote part of the cover story by Walter Russell Mead: 
"Since the end of the cold war, Western policy toward Russia has been a 
textbook case in how to drive a people to fascism. Almost everything we 
have done to Russia repeats what the foolish Western Allies did to 
Germany after World War I. That, plus the Depression, put Hitler in 
power. Unless something radically changes, or unless we are much luckier 
than we deserve to be, something similar could happen in Russia.
"The cold war ended without a military defeat of the Red army. The same 
thing happened to Germany in World War I. The United States told the 
Russians that we had nothing against the Russian people-it was only the 
Soviet system that we detested. This is exactly what Woodrow Wilson said 
to the Germans in 1918. Furthermore, Wilson, in the Fourteen Points, 
promised a just peace to the Germans. That is what we did in the cold 
war-and we also said that the transition to a market economy would make 
the Russians better off.
"Lies, lies, lies, it turned out both times.
"Both the cold war and World War I ended with punitive peace agreements. 
Germany lost land to Poland, and millions of Germans suddenly became 
ethnic minorities in badly run countries where they were second-class 
citizens. The same thing happened to the Russians. Russia's current 
borders are obviously absurd and unjust; tens of millions of Russians in 
babushka republics as Ukraine and the various central-Asian 'ickystans' 
are second class citizens, despised and mistrusted by their incompetent 
new rulers.
"Add economic trouble. In both Germany and Russia, hyperinflation wiped 
out the savings of the middle class. Living standards dropped, criminals 
prospered, and honest people starved.
"Finally, after 1918, the Allies continued to discriminate against 
Germany. The same thing is happening today. Russia is being shut out of 
both NATO and the European Union and is still treated as an enemy. Even 
with all these disadvantages, democracy almost won in Germany. Late in 
the twenties, the German economy began to revive. The Communists and 
Nazis lost support; it looked as if democracy might put down roots after 
"Then came the Depression, and millions of Germans were thrown back into 
poverty. Under those conditions, the majority of voters in Germany soon 
opted for anti-democratic parties. By the end, the Nazis and the 
Communists between them accounted for almost two-thirds of the vote. The 
democratic, centrist parties fought a losing battle, and in the end, 
Hitler won.
"Democracy and weak government in Russia have brought only national 
humiliation and personal economic privation for millions of Russians. 
Russia today is a land awaiting a master. Russia today looks ominously 
like Weimar Germany." 


Date: Wed, 23 Sep 1998
From: (Peter Mahoney) 
Subject: Who Lost Russia

In regards to the burgeoning debate over who lost Russia, it seems to me
there are two basic premises to the argument which need to be examined: 
the first, that Russia is actually "lost", and the second, that Russia 
was ours to lose to begin with.

1. What exactly do we mean by "losing Russia"? Last time I checked, Russia 
was still in the same old place it has always been, taking up a lot of space 
between Europe and China. Kind of a big country to misplace. 
Do we mean losing it to the Commies? Seems to me that the Commies never 
stopped running Russia in the first place. They just changed their label
to "free market reformer" when that became the flavor-of-the-day. They'll 
change their label to Zoroastrian, if they think that will get them and keep 
them in power. Power is what counts; political and ideological labels are mere
accoutrements to that end.
Do we mean losing it to some "right-wing dictatorship"? Heaven forbid that
our fragile democratic reforms in Russia would be lost. Of course, describing
Russia as a democracy is kind of like describing the local syphilitic whore as a
virgin of mercy. Is it not true that right-wing dictatorships have
been our government of choice for third world countries? After all, the
of a capitalist economy is to MAKE MONEY, and the role of the third world in a 
capitalist economy is to be the docile doormat on which the first world can 
conduct its business. We much prefer a good local dictator to establish the 
order necessary for the conduct of business, and to keep the natives in their 
place. This democracy thing gets messy. The locals might start demanding
their rights, like a share in the market spoils or something. Not that we're
against a little economic trickle-down, as long as they spend their money on 
good old American exports. On second thought, this dictatorship thing might not 
be so bad. After all, you can't lose something you never had.
Do we mean losing it into the abyss, which, if we listen to the bleating of
the Russian intelligentsia and the crisis-mongering of the western press, we
perennially on the edge of? I remember the same stories, the same doomsday-
is-around-the-corner scenarios from the late eighties and early nineties. 
According to the conventional wisdom of that time, Russia simply was not going 
to survive the painful transition to a market economy. Son-of-a-gun, it's
still here, the same massive, byzantine, god-awful country it's always been,
plodding along in its own distinctively Russian style - not a democracy, not a 
market economy, but surviving nonetheless. Do we seriously think that a country
which survived several hundred years of the tsars, twenty-something years of
Stalin, the German invasion in World War II, and a host of other calamities too 
numerous to mention is going to go belly-up over some little oligarchical 
meltdown? To quote that great western philosopher, Yogi Berra, "This is deja-vu
all over again." 
Of course, all this doesn't mean that I don't have a "Plan B" in place for
myself and my family. Historically, the Russian people have been slow to
but they also, historically, have shown themselves to get rather ugly when they
do finally lose it. I would expect that Americans would become very popular
when the Russian mob starts roaming the streets looking for targets of
opportunity on which to vent their wrath. I would prefer not to be here if and 
when that happens.

2. I find it particularly interesting that the "Who Lost Russia" banner is
being carried on JRL by The New York Post. Granted, I left New York for the
confines of Moscow about seven years ago, and things might have changed,
but I remember that ever since Rupert Murdoch bought the Post, the only thing I
ever found worth reading in that newspaper was the sports pages. I mean, a 
newspaper which makes its former racing tout, Ray Kerrison, its principal 
political commentator, can't really be taken seriously, can it? The fact
that the principal target of the Post article is Al Gore, the likely next
Democratic presidential candidate, would seem to indicate that their argument 
is nothing more than a cheap, transparent opening shot in the next election 
It is a peculiarly American conceit that the entire world actually belongs
to us, and that we are the cause, and therefore bear responsibility, for
everything that happens. In point of fact, most of the world carries on its 
day-to-day existence in blissful ignorance of the old U.S. of A., and its 
self-proclaimed importance to their lives. In terms of Russia, it seems to me
there is nothing of consequence 
that has happened here that would not have happened had the US simply kept 
its hands off or had somehow pursued a different policy. Some of the faces
at the top may have changed, some of the timing of events may have been 
different, but the particular political, social, and economic dynamics of
this place have always been completely immune to the application of western 
"medicine", and have wended their own inexorable Russian way despite the 
western "cosmetics" applied to dress it up. The only real effect of American 
intervention here has been to put a few dollars into the pockets of a few AID 
contractors (myself included) and their Russian cronies who learned to play
the AID game.
Let's face facts. The only "loss" we're talking about here is the money that 
western investors (again, myself included, although on a very modest basis) 
foolishly dumped into this economic cesspool in an effort to make a quick
buck. Let's frame the question correctly. It's not "Who lost Russia". It's 
"Who caused the West to lose its money in Russia".
Let the blame game begin.


Russia Poll: Bring On Dictatorship
September 23, 1998

MOSCOW (AP) -- One third of Russians believe the president should have
``supreme power,'' and that dictatorship is the only way out of the current
economic crisis, according to a poll released Wednesday.
Those polled named former Gen. Alexander Lebed as the most likely person to
establish a dictatorship, according to the Interfax news agency, which
reported on the poll.
The nationwide poll was conducted last weekend by the National Public Opinion
Center, which said it had a margin of error of plus or minus 3 percentage
The poll findings correspond to a common perception that many Russians yearn
for strong -- and even dictatorial -- leadership to solve the country's deep
problems. When he was acting prime minister earlier this month, Viktor
Chernomyrdin explicitly warned that the country was in danger of lurching into
Thirty-three percent of those polled said the Russian president should have
``supreme power,'' the pollsters said, while 34 percent said the establishment
of a dictatorship was the only solution to the economic crisis.
Forty-five percent disagreed that a dictatorship was the only solution; 21
percent were undecided.
Asked who is most likely to establish a dictatorship, 19 percent named Lebed,
the governor of the Siberian region of Krasnoyarsk. Lebed, a nationalist, says
he strongly believes in the democratic process.
Fourteen percent said the communists and their allies were the most likely
dictators, and 8 percent said they thought a military dictatorship was most
Only 18 percent said they thought nobody could establish a dictatorship, and
23 percent were undecided.


Communists hint might end support for Russia govt
By Ivan Rodin

MOSCOW, Sept 23 (Reuters) - Russia's influential Communist Party on Wednesday
toned down its support for what it called the "bourgeois" new government of
Yevgeny Primakov and hinted it might withdraw its backing completely in the
Valentin Kuptsov, the party's hardline first deputy chairman, also criticised
the time the prime minister was taking in forming his cabinet and said
parliament should have a big say in drawing up Russian economic policy. 
The Communists voted to confirm Primakov in office on September 11. The former
foreign minister has appointed a senior Communist, Yuri Maslyukov, as one of
two first deputy prime ministers. Maslyukov is responsible for broad economic
"If the course of the government does not correspond to the demands of the
opposition, then the party will propose that Maslyukov quit the cabinet after
six months," Kuptsov said. 
He told reporters the party wanted Primakov to swiftly fill remaining key
cabinet posts including the finance ministry. 
Primakov has been building a broad-based government comprised of leftists and
pro-market centrists. He has vowed to press ahead with market reforms but also
wants to give more cash to industry and the poor. 
Asked how he would describe the Primakov team, Kuptsov said it was "a normal
bourgeois government," dismissing suggestions that it was on the centre-left. 
He said the government's economic programme, once prepared, should be
submitted to parliamentary scrutiny and amended where deemed necessary by the
relevant committees in the State Duma lower house, where the Communists are
the largest party. 
Party sources said Communist leader Gennady Zyuganov, now on a foreign trip,
had also criticised Primakov over the past week and said Maslyukov should
consider pulling out of the government. 
The sources said Maslyukov himself, who headed the state planning Gosplan
organisation in Soviet times, was unhappy that Primakov had not appointed
Communists to the economy and industry ministries. 
But even if the Communists stopped supporting Primakov's government, Maslyukov
is known as an independently-minded politician who might prefer to stay put. 
He angered his party in July by agreeing to take the trade and industry
portfolio in Sergei Kiriyenko's short-lived cabinet. Kiriyenko was sacked
after being forced into an effective devaluation of the rouble and a temporary
moratorium on some foreign debt repayments. 


For more articles from The Moscow Times, check out their website at

Moscow Times
September 24, 1998 
SEASON OF DISCONTENT: New Hercules Launches Into Risky Cleanup 
By Andrei Piontkovsky
Special to The Moscow Times

When Yevgeny Primakov was confirmed Sept. 11 as prime minister by an
overwhelming majority in the State Duma, commentators bubbled about a
government of accord and national unity. 
Primakov's honeymoon lasted but a few days, however, as the political forces
that had supported his nomination began one after the other to distance
themselves from the government. Victory has many fathers, defeat only orphans.
Primakov was orphaned even before he went into battle. 
Following Viktor Gerashchenko's swift and provocative appointment as chairman
of the Central Bank, Yabloko was naturally the first party to announce that it
would not join the government. Since there were no doubts about Gerashchenko's
intended policy, its participation became pointless. 
Gerashchenko's appointment and that of Yury Maslyukov as first deputy prime
minister have apparently opened the way to a virtual one-party government of
communists. A massive ruble emission and the propping up of ineffective
enterprises and the military-industrial complex in particular suits both the
ideological preferences of the communists and their corporative interests.
It's no secret that the so-called red directors of the defense complex
represent an influential source of support for the Communist Party of the
Russian Federation, the KPRF. 

This made it all the more significant when the KPRF clearly began to distance
itself from Primakov's government at the start of last week. 

While fully approving the plans of the gerontocratic dinosaurs that have now
returned to power, the communists fully understand the economic and social
consequences of their policies: In four or five months at most, galloping
inflation, total collapse of the ruble and empty shop shelves will have become
an unavoidable reality. 

Not wanting to bear responsibility for this -- and particularly since early
presidential elections may be called in this period -- the communists are
happy to let Primakov's government do all the dirty work, while responsibility
for the further collapse of the economy falls on the "anti-national regime" of
Boris Yeltsin. "Tactics, comrades, tactics," as Animal Farm's Napoleon the pig
told his followers. 

This crude logic of events over the coming months seems to have been well
calculated by all those at the top of the political heap, and explains why
ambitious young career politicians like Vladimir Ryzhkov fled from the prime
minister as if from a leper. Only those who must now choose between a seat in
the Cabinet or a bunk in prison are showing iron resolve to serve the
Fatherland, such as Andrei Vavilov, straining to get into the finance
minister's chair, and Boris Fyodorov, clinging on to his place as head tax

Now that the president is finally off the scene and that, according to The
Peter Principle, the premier has risen beyond the extent of his competence,
Gerashchenko is now the country's real master. Living up to his nickname of
Hercules, he carried out Friday the first of his 12 tasks, cleansing Russia's
Augean stables of the banks' nonpayments. 

Just as his mythical predecessor steered the Alpheus and Peneus rivers through
the cattle stables of King Augeas to clean away the filth, our modern-day
Hercules is using the rivers of Emission and Inflation to muck out for Tsar
Boris. Together with the dung, they seem likely to sweep the whole frail
structure of the Russian economy away too. 


Moscow Times
September 24, 1998 
NEWS ANALYSIS: Nationalization Unlikely Despite Talk 
By Jeanne Whalen
Staff Writer

The Kremlin has hinted at it, Yury Luzhkov has demanded it and investors are
scared to death of it. 
Nationalization of private property has been on the minds and tongues of
market-watchers and business leaders since Prime Minister Yevgeny Primakov
took power this month promising greater control over industry. 
If the government follows Russian law, it will have a tough time affording
massive seizure of property. The Constitution and civil code require the
government to fork over a fair market price for private property and allow the
owners to contest the terms in court. 
Yet First Deputy Prime Minister Yury Maslyukov said Tuesday the state may
seize factories that are poorly run or were sold for rock-bottom prices in
crooked sell-off sales -- a threat that could apply to many of the holdings of
Russia's big financial-industrial groups. 
The political dividends gained by threatening big business are great. Public
abhorrence of the nation's financial elite has only grown since the
devaluation of the ruble and the collapse of the banking sector. Graffiti
spray-painted on a St. Petersburg wall last week read, "Got no money? Kill the
Corrupt management of the nation's key natural-resource enterprises, made
possible by privatization auctions considered by many to have been fixed, has
been blamed as one of the main causes of Russia's economic stagnation. 
Luzhkov, Moscow's mayor, pandered to this sentiment last week when he said the
government should seize "property that is not being used for Russia's good." 
Despite the tough talk, most economists see the straight seizure of property
as unlikely, particularly because unanimous support for such a bold strategy
could be hard to build in Primakov's coalition government. 
"To wrest away property like the Bolsheviks did in 1917 -- I don't see this as
a possibility," said Otto Latsis, an economist and editor of the daily
newspaper Noviye Izvestia. 
But Latsis and others see more indirect forms of state control emerging, such
as nationalizing bankrupt companies, forming monopolies or taking control of
export earnings. 
A 1997 decree targeting tax debtors forces these companies to double their
share capital and hand half to the government. If a company fails to meet its
rescheduled tax payments, the government can exercise its 50 percent stake to
either bankrupt or manage the company. 
AvtoVAZ and Norilsk Nickel last year deposited shares against tax debts owed
to the federal budget, though the government declined to exercise its shares
even when the companies continued to miss tax payments. 
Using this power, however, would be an easy way for the state to increase
control over industry without shelling out the money to buy back shares. 
"This would be in keeping with Maslyukov's ideology of the state controlling
manufacturing companies, as many of these are likely to be bankrupt,"
brokerage United Financial Group wrote in a report. 
An even more insidious trend is the nationalization of an industry's cash flow
through state monopolies or through controls on foreign exchange. 
Primakov already has pledged to create state monopolies on alcohol and tobacco
to raise federal revenue. The Communists have called for a similar monopoly on
energy firms, which could empower the government to buy oil and gas at below-
market prices from producers and export the reserves for a profit. 
"The gold industry, which had to deal with exactly this kind of arrangement,
has already suffered badly in the last few years, and it is likely that the
same thing would happen to any other companies on which a state monopoly was
imposed," the UFG report said. 
A Central Bank order requiring exporters to sell 25 percent of their hard-
currency earnings to the Central Bank and to sell an additional 50 percent on
the domestic market could amount to appropriation of cash flows if companies
are forced to sell at an unprofitable rate, said Maxim Basov, a metals analyst
with MFK Renaissance. 
"We don't think nationalization will happen soon because owners will fight
hard to keep the companies," Basov said. "But exporters could be subject to
100 percent hard-currency sales." 
Still others believe the government could try to make an example of some of
the worst tax debtors, including big oil companies such as Yukos and Sibneft,
by wresting the oil fields from their owners. 
"If you'd asked me six months ago if companies would be nationalized, I would
have laughed," said one oil analyst in London. "But then, I wouldn't have
thought Russia would default on its [Treasury] bill debt, either." 


Most Russians approve Primakov as PM, poll finds

MOSCOW, Sept 23 (Reuters) - A majority of Russians approve of the choice of
Yevgeny Primakov as prime minister and blame the country's deep economic
crisis on President Boris Yeltsin, an opinion poll showed on Wednesday. 
Nearly half of the country thinks a Communist comeback is possible, and of
those, most think it would be welcome, figures released by the VTsIOM polling
agency showed. 
Sixty-two percent of Russians approved of Primakov's appointment and only 14
percent disapproved. 
Primakov was confirmed as premier 12 days ago in a compromise between Yeltsin
and the opposition-dominated parliament. His activities since taking office
were welcomed by 47 percent of those polled, while only 24 percent
The agency questioned 2,342 Russians across the country from September 18 to
Most aimed their anger at Yeltsin, who has been president for seven years.
Fifty-seven percent blamed him for the latest crisis, while 40 percent blamed
former prime minister Viktor Chernomyrdin's administration. 
While 34 percent of respondents thought Communists would never return to power
in Russia, 47 percent thought they could. And 60 percent of those who believed
a return of Communists was possible said they would be pleased if it came to
The presence of opposition members in Primakov's government already signalled
a "Communist revolution" to 28 percent, of whom two thirds welcomed it. 
In response to Russia's age-old question "Who is to Blame" -- the phrase is
the title of a classic 19th century novel by Alexander Gertsen -- those
questioned were allowed to pick more than one villain and were lavish with
their wrath. 
In addition to Yeltsin and Chernomyrdin's low marks, 17 percent blamed the
central bank under former chairman Sergei Dubinin and 12 percent blamed the
former government of Sergei Kiriyenko. Parliament, earning the fury of 11
percent, was tied with a broad category that includes big business and banks. 
Ten percent blamed liberal economic policies. Six percent blamed foreign banks
and the same number blamed tax dodgers. Five percent blamed the world
financial crisis. 
But in a sign of the bewilderment many ordinary people feel when confronted by
the economic disarray, one in 10 respondents could not pin the blame on
anybody at all. 


Journal of Commerce
24 September 1998
[for personal use only]
Guest Opinion
Mr. Primakov's slow-motion start
By John Helmer

MOSCOW -- "Walk fast," goes an old Russian maxim, "and you can overtake
misfortune. Walk slowly, and it will overtake you."
If you watch the feet of Yevgeny Primakov, it's difficult to detect any
movement at all. And if you could follow his eyes one day last week, as
Russia's new prime minister faced a small, carefully selected group of
journalists, you could see that Mr. Primakov was reading from a hastily typed
piece of paper with several scribbled corrections.
That piece of paper launched the first economic reform of the Primakov
administration -- a massive swap of bank and government debts, with a
controlled emission of rubles intended to revive the economy's liquidity. It
was also the first start by a Russian government to clean up the seven-year
looting of state finance by legions of so-called reformers, bankers and
corrupt government, Central Bank and Kremlin officials.
Perhaps Mr. Primakov couldn't bring himself to openly call his spade a spade.
And perhaps he also can't bring himself to defy the powers that put him
office, and get to work digging the state out of the dirt into which it has
This is so obvious to Russia's parliamentary opposition that they aren't
giving Mr. Primakov himself more than a few months to survive.
Those who give him longer claim he's had a lifetime of experience proving he's
a clever enough fox to survive against the odds. For a country that has been
governed by bigger and more youthful predators, having an aging fox in charge
hardly means reform, especially when there's so little left in the chicken
coop to steal.
For a man who has occupied high office, empowering him to sit, watch, analyze
and contribute to every twist and turn of Russian policy since 1991, Mr.
Primakov isn't doing any better than President Boris Yeltsin or former Prime
Minister Victor Chernomyrdin in articulating his thoughts.
In fact, he's far worse at articulation than Yegor Gaidar, Anatoly Chubais,
even Sergei Kirienko -- unpopular and discredited predecessors now who had no
trouble speaking without scripts when their turn for leadership came.
For a man with Mr. Primakov's academic credentials, his performance
introducing the government's first economic reform demonstrated more than a
surprising lack of confidence and direction. It showed that Russia is once
again headed by a man lacking the basic connection between his brain and his
feet. He doesn't know how to lead.
If Mr. Primakov is serious about meeting the vague promises he's made to put
things in Russia to rights, he should already have done three things to be
First, instead of leaking to the press how many times, early this month, he
turned down the offer to be prime minister, Mr. Primakov should have convened
an open press conference and taken questions in the full glare of the public
spotlight. Instead of doing that, he ordered a blackout of all official
conversations with the press, unless his chief of staff approves them in
advance. Instead of talking freely to the Russian press, he favored a German
magazine with a contrived interview that posed no difficult questions.
Second, instead of spending his time holding closed-door talks with industry
and bank lobbyists, Mr. Primakov could have requested the independent
Accounting Chamber to open audits of Central Bank and Finance Ministry
administration of the proceeds of Russia's foreign loans for the past year,
including funds provided by George Soros; international commercial banks; the
World Bank; and the International Monetary Fund.
Even discredited former Prime Minister Chernomyrdin has blamed the Central
Bank under its former chairman, Sergei Dubinin. By failing to act, Mr.
Primakov gives the impression he is covering up for Russia's corrupt bankers.
What does he owe them?
Third, instead of toying with the ambitions of a dozen different political
factions and their leaders, Mr. Primakov could have sent a message to the Duma
personally endorsing legislation his predecessors, and President Yeltsin, have
refused to enact. This includes a proposed law that punishes government
officials for violating the budget passed by Parliament, and an extension of
the bankruptcy law to cover Russia's commercial banks (vetoed by Mr. Yeltsin a
few weeks ago at the bankers' insistence).
Unless Mr. Primakov pushes the first proposal, Parliament will continue to
lack the power the Russian constitution grants it to regulate the spending and
taxing policies of the government. Without parliamentary confidence in the
government, there is no political consensus for the economic sacrifices that
lie ahead.
Unless Mr. Primakov pushes the second proposal, Russia's bankers will continue
to run the state -- even now, after they have sacked the treasury. They have
proved that they would rather export capital than invest it at home.
By doing none of these things, Mr. Primakov has demonstrated there is one
reform he isn't promising to deliver any time soon: democracy. And if there is
a price for the economic recovery Mr. Primakov claims to be planning, it won't
be paid by those who have already benefitted so corruptly from his


September 23, 1998
[for personal use only]
Don't Mess With Russia's Self-Rule
By Dimitri K. Simes. Dimitri K. Simes, president of the Nixon Center,
is a special correspondent for Newsday.

THE APPOINTMENT of the government led by Prime Minister Yevgeny Primakov
marks a major shift in Russia's post-Soviet political evolution. It is
the first Russian government since the collapse of the Soviet Union that
does not include any radical economic reformers.
Primakov's statements leave little doubt that the changes in the
government will not be limited to personalities. His new team - which
includes a number of familiar faces from the Gorbachev era - is
promising to emphasize economic growth and social protection for
Russia's people, rather than the tight monetary controls pushed by the
Clinton administration and the International Monetary Fund, without
abandoning reforms.
In another major departure, Primakov was approved by the Duma after
President Boris Yeltsin's candidate, Viktor Chernomyrdin, was rejected
twice. For the first time since Yeltsin used tanks to get rid of the old
Congress of People's Deputies in October, 1993, and subsequently won
approval of a new constitution providing him with enormous powers, the
parliament was able to play a meaningful rule in the selection of
Russia's prime minister. Primakov's ascendance signifies Yeltsin'sdecline.
Finally - and most ominously from the standpoint of American
interests - this change in course takes place against the background
of growing political instability in Russia. For the first time since the
armed conflict between Yeltsin and the Congress of People's Deputies
five years ago, anarchy and civil war in a country with thousands of
nuclear weapons are real, if still remote, prospects. A less dire, but
also more likely, possibility is increased Russian disillusionment with
the West, manifested in Moscow's working at cross-purposes with U.S.
foreign policy from Kosovo to Iraq.
After triumphantly portraying Yeltsin's achievements as its own
international successes for years, the Clinton administration is now
eager to avoid all responsibility for disturbing developments in Russia.
According to administration officials, Russia's crisis was brought about
by a combination of negative global trends, such as the Asian financial
crisis and declining oil prices, and obstructionism on the part of the
Communists and nationalists in the Duma.
In reality, while global events triggered the Russian debacle, it
had easily identifiable domestic roots. Despite its professed commitment
to market reform, the Yeltsin regime instead busied itself
redistributing the Soviet economic pie among the privileged few. It was
capitalism without investment, the market without regulation or property
rights and democracy without respect for the law and separation ofpowers.
After triggering 2,500 percent hyperinflation in 1992, Yeltsin and
his radical reformers eventually brought prices under control through
draconian fiscal policies. But those policies resulted in the
demonetarization of the Russian economy - in which barter accounts for
75 percent of turnover - and the imposition of regular wage and
pension arrears on tens of millions of Russians.
Despite continuing economic decline, the Yeltsin regime survived by
borrowing 50 kopecks to every ruble (100 kopecks) of tax revenues it
collected while simultaneously wasting billions of dollars trying to
protect the Russian currency's artificially high exchange rate.
Devaluation and default were inevitable. It is difficult to comprehend
how and why the Clinton administration failed to see the writing on the
wall until it was too late.
It is even more difficult to comprehend that, as U.S. officials
revealed in their testimony before several congressional committees last
week, the administration still claims to have all the answers and
insists that Moscow continue to follow its guidance.
Instead, during Russia's hour of trial, the United States should
finally let Moscow develop its own solutions. Russia needs solutions
that can be sustained by its political process and that will result in
legislation rather than presidential decrees of questionable legality.
Though highly imperfect, decrees have thus far been Yeltsin's preferred
instrument to advance reforms - with clear results. If Russia's new
solutions offer a credible chance of success, Washington should
encourage the IMF to release the second round of its portion of the
$22.6 billion loan announced in July.
Of course, if the Primakov government discriminates against foreign
investors in compensating for serious losses incurred since August as a
result of Russia's de facto default on internal debt, no further IMF
funds should be forthcoming. This is not just a question of fairness: If
foreign investors feel cheated, they will not return to Russia. Such
economic isolation would put an end to any realistic hope to salvage
what remains of the country's market reforms. Similarly, there is no
point in throwing good money after bad if Primakov's self-proclaimed
"new deal" proves to be no more than a return to discredited practices
of the past.
There is also little purpose in outside help if the printing press
becomes Russia's principal financial tool and the government triggers a
new round of hyperinflation to save Russia's oligarchs and their
ill-managed empires from collapse.
Even in these circumstances we should show respect for Russia's
right to make its own decisions, while refusing to pay for them, and
continue - as much as possible - normal diplomatic dialogue with
Moscow. But if Primakov manages to adjust the reformist course instead
of abandoning it altogether, the United States should not be too
particular in judging how he keeps Russia afloat and whom he brings into
the government to make it happen.
In the long run, an element of broad-minded humility on
Washington's part would best promote not only Russia's stability and
progress, but also America's ability to serve as an effective world
leader without triggering a costly backlash.


Date: Wed, 23 Sep 1998
From: Charley Warner <> )
Subject: Cultural factors and the current crisis

This is another second to the comments of Vladimir Shlapentokh (JRL
2390)and Yale Richmond (JRL 2392) regarding the necessity of understanding
Russian cultural patterns. Russian political and economic reform can't
happen in a cultural vacuum. We in the West have assumed as such and are
paying the price.
Even before the current crisis it was not unusual to hear on the streets of
Moscow the comment: "We tried democracy, it didn't work," or "We tried
capitalism, it didn't work." In short, the inoculation against reform has
already occurred for a large part of the Russian population. Reform will
now be even harder to bring about in the future.
The value of Samuel Huntington's 1996 book <The Clash of Civilizations> was
not that it was an all-encompassing theory of international relations
following the end of the Cold War (this it was not); but rather that it
brought to the forefront the importance of cultural factors as a necessary
part of the overall puzzle of understanding both domestic and international
politics. To ignore cultural factors in 21st century politics, especially
on a global scale, is to our own peril.
Western consultants to the Russia government have failed in this regard.
They would have done well to read Richmond's short, but cogent, book.


Date: Wed, 23 Sep 1998 
From: "Barry W. Ickes" <> )
Subject: Re: 2392-Armstrong/Printing Money

Patrick Armstrong (JRL 2392) is curious about the inflationary effects of
monetary emission under current Russian conditions. He is correct to point
out that Russia has a low ratio of M2/GDP. This is an indication that
Russia was financially underdeveloped; jargon for most people being afraid
to keep their savings in Russian banks, and the fact that checking accounts
are still virtually unknown. Moreover, as Armstrong points out, Russian
holdings of dollars exceed (at the high end of current exchange rates) the
value of the ruble money supply. Does this mean that there is too little
Hardly. It is precisely because people fear what will happen to the
purchasing power of the ruble that they hold so much of their wealth in
dollars. Clearly there is no shortage of rubles. Anyone willing to trade
dollars for them will be able to find them. Suppose the bank prints more
money. Is there any reason to believe that this will not also be used to
buy dollars, thus further depreciating the ruble and contributing to
But what about the unpaid wages and goods that have no buyers? Suppose
that the government prints the money and distributes it directly to these
workers. What will they do with the money? Assuming that they do not
immediately buy dollars they will buy goods. What goods? Not the unsold
manufactured output of the industrial sector. There will be no run on
Yak-42's. There will be increased demand for consumer goods and this will
lead to upward price pressure. But the primary inflationary effect will
come from the effect on the exchange rate. 
What is most important to understand is that the demonetization of the
Russian economy is not a result of too few rubles; it is not a money supply
problem. It is rather the result of two different factors. First, the fact
that the tax authorities use the banking system as a collection mechanism.
If an enterprise is in tax arrears it faces a 100% marginal tax rate on any
revenue that appears in its account. Second, as Gaddy and I have explained
in a series of papers, enterprises use barter to protect themselves from
the market. They use barter and tax offsets to continue to produce goods
for which there is no effective demand. The primary problem of the virtual
economy is that there are too many claims on the actual amount of
production, which is smaller than the nominal amount.
So what happens if the government purchases the unwanted output with the
money emission? Assume first that the goods had no cost of production; that
they appear out of thin air. Then the government would simply be
transferring money to workers and owners at these enterprises. They would
then use these incomes to purchase other goods or dollars (nobody wants the
junk; if someone did, they could sell their dollars for rubles now to buy
it). This would then have the inflationary impact discussed above. In this
case the emission would have an impact on inflation, but that is all.
Now assume, more realistically, that the unsold goods have costs of
production. In fact, these costs are in excess of the market value of these
goods (that is why they go unsold in the first place). These are the value
destroyers that Gaddy and I talk about. Now the emission keeps fuels these
enterprises to continue to produce these goods that destroy value. True
Russian national income falls even though the increased production by these
dinosaurs will go up. Goskomstat will show a rebound in industrial
production, and households will face higher (and rising) prices for the
goods they buy. 
So this is my prediction. More emission leads to a burst in industrial
production (which will be seen as a triumph by Maslyukov, and is a triumph
for the virtual economy), the ruble will depreciate further, and inflation
will accelerate with a lag of several months.


INTERVIEW-Russian small business frozen in crisis
By Peter Henderson

MOSCOW, Sept 23 (Reuters) - Russia's banking and currency crises have sent
hardy small businesses into sudden hibernation, a senior government official
said on Wednesday. 
Irina Khakamada, head of the State Committee for Support and Development of
Small Business, said the future of small and medium businesses, which make up
about 12 percent of the economy, depended on banks straightening their
troubles and the government straightening out its own policy. 
"About 30 percent of small businesses have stopped their business activity,"
Khakamada said in a telephone interview. "That doesn't mean they are dead but
frozen. They are waiting." 
Though Russian markets have been troubled for almost a year, the real economy
has felt sharp pain only since August 17, when the rouble was effectively
devalued and the domestic debt market, including treasury bills held by banks,
was frozen. 
Small businesses which had grown despite punishing taxes and government
neglect suddenly stopped. "This happened spontaneously and quickly," Khakamada
Banks now face solvency and liquidity problems and distrust each other, so
they have stopped making payments to each other, leaving businesses unable to
work making normal transactions. 
Khakamada said the reality was that 860,000 small businesses depended on
banks. "They are not criminals," she said. 
"The payments crisis affected them most, and second the erratic course of the
rouble and third the rising cost of imports and inability to pay for them with
Small businesses, including those companies with fewer than 100 employees,
would wait for the payments to begin moving and the rouble to stabilise,
whatever the level. 
The currency has moved up and down between six and 25 roubles to the dollar
since mid-August. It is now at around 16. 
Trading companies, which made up 43 percent of small businesses at the
beginning of the year, would see the slowest return to business because of
high import costs, she said. 
Industry and construction, which make up about 16 percent each, are the other
main small businesses, and they would also look for ways to save money by
using cheap manpower. 
Road construction companies, for instance, would order their equipment in
components and assemble it themselves, she said. 
Government support for small business was still an open question, however.
Khakamada's committee and others are to be swept into a new ministry to deal
with anti-monopoly and industrial support policy. The minister has not been
Khakamada, a liberal former member of parliament who gave up her seat in the
State Duma lower house to head the small business committee, said she would be
willing to remain if she could become the first deputy to a market-oriented
That would give her a base to lobby for tax cuts for small businesses, which
she said would also serve to legalise the trade-oriented grey sector, which
does not pay taxes but accounts for 40 percent of the economy. 
It would put her in a position to help small business. 
"This...simply has to be lived through," she said. "In three months it could
be better." 


Date: Wed, 23 Sep 1998 
From: "Jerry F. Hough" <>
Subject: Re: 2393-Clarke/Government Blows Wage Arrears

Like many others, I keep thinking of Kerensky, but I think 
Renfrey Clarke is probably wrong about refinancing the banks. The banks 
never were private, but were state enterprises. Their function was to 
make "loans" to enterprises to keep employment and consumption up. A 
simple paying of arrears encounters the problem that many state 
enterprises were formally "privatized" so that the state would not be 
responsible for their wages, and their arrears are greater than those of 
the state. If one wants to maintain consumption and political stability 
among the industrial workers, one cannot simply pay off state employees 
like teachers. Keeping the banks formally private is probably the best 
way to get wages--and investment--to the formally private plants unless 
one wants to nationalize them too. I hope you translate Abalkin's 
article in Literaturnaia gazeta. Westerners need to begin to grasp that 
Yeltsin's system was, in fact, demonetized--which meant it functioned 
largely as did the old Soviet economic system with the distribution of 
goods by institutions similar to Gosplan. There was a reason Yeltsin's 
government has more bureaucrats than the old Soviet one. Primakov acts 
like he really wants to move to a market economy for the first time. I 
applaud, but think he needs to get the rationing, etc., in place first.


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