October 1, 1998    
This Date's Issues: 2404•2405

Johnson's Russia List
#2405
1 October 1998
davidjohnson@erols.com

[Note from David Johnson:
1. Economic programme authored by the Economic Department of the 
Russian Academy of Sciences. (Translated with comment by Stanislav
Menshikov).
2. Trud: Interview with Oleg Bogomolov, prominent economist and 
academician, "Oleg Bogomolov: Was the Shock Inevitable?"
3. AP: Mitchell Landsberg, Russia Mulls `Soviet' Economic Plan.]

******

#1
From: Stanislav Menshikov <menschivok@globalxs.nl>
Subject: Open letter of the Russian Academy
Date: Wed, 30 Sep 1998

Dear David:

I am sending my translation of suggestions for an economic programme
authored by the Economic Department of the Russian Academy of Sciences. A
lot of nonsense, as usual has been written and said about this programme
which I thought was quite sensible on many points. To my knowledge, it is
largely ignored in the West which prefers to live by its own cathesism even
when Russia is concerned.

To make my own position clear, I am also attaching my comment on the programme.

AN OPEN LETTER TO THE PRESIDENT, PARLIAMENT AND GOVERNMENT OF RUSSIA

Scholars of the Academy's Department of Economics have always been and remain 
initiators and supporters of profound socio-economic transformation in
Russian society. They have always called for a well thought out and balanced
transition to a socially oriented and effectively regulated market economy,
as well as for the creation of the basic foundations of civic society and
its multifaceted democratisation.

At the same time, we wish to place a definite divide between the overall
directions of transformation and the clumsy, primitive and largely
unprofessional methods of so called "shock therapy". We have once and again
warned the President and the Government of the danger of experimenting with
the economy of such an enormous country as Russia on the basis of
recommendations of foreign consultants and experts that had not undergone
the proper examination by domestic scholars and practical approbation. As a
result, Russia has been thrown far backward. A destruction of its
scientific, technological, economic and 
intellectual potential has started, the impoverishment of its population has
assumed gigantic proportions, the moral foundations of our society are being
undermined, the insolence of crime is on the rise.

Today, when Russia is on the edge of an abyss, somebody again - without
consulting with domestic science - is suggesting another model, this time of
a Latin American brand.

In such conditions, the scholars of the Department of Economics believe it
their 
professional and civic duty to submit to the President of Russia, the
Parliament and the Government their proposals as to policies that can
guarantee the minimum economic security of the country and its population
and shield them from the severe dangers of the current financial crisis.

Expedient problems have to be solved of defending our citizens from
inflation, from bare shelves in shops, from the breakdown of the banking
system, from the catastrophic fall of the rouble exchange rate.

1. Defending people from inflation

Central to the proposed urgent measures is the maximum possible defence of
material interests of the population, particularly its poorest part. With
this in view:

1.1. It is necessary to introduce regular indexation of wages of the
employed part of the population, of pensions, subsidies, stipends and other
social payments. In our view, the full indexation is necessary of incomes
that are below the average level and a partial indexation of higher incomes.
Additional budget revenues at all levels accruing as a result of the rise in
prices should be one of the main sources of covering the costs of indexation.

1.2. The state should guarantee as a matter of legislation, not simple
declaration of intent, money deposits of individuals not only in the state
savings bank but also in all commercial banks. This guarantee should cover
the real value of all rouble and foreign currency deposits. There are two
possible ways of doing so: first, the indexation of deposits on a monthly
basis, and, second, raising the interest rate paid on deposits to compensate
for the loss in real value of the principal. To induce personal savings
interest rates and ndexation coefficients could be differentiated - lower
for those withdrawing their savings and higher for those who prefer to
increase their deposits.

Banks should expand loans to individuals to finance housing construction
with the partial use of savings deposits. The housing and communal reform as
declared by the former cabinet should be delayed until after overcoming the
crisis and it should be tied to a reform of personal incomes.

1.3. A state food insurance fund should be created to ensure that the
population of all regions of the country is guaranteed normal food supply
throughout the period of the crisis. The federal government should
appropriate for this purpose the necessary financial, including hard
currency, resources. Food imports should be made for this purpose not later
than within a month from now to ensure against hunger.

1.4. A moratorium should be announced on all public events (particularly
costly ones) in the current year irrespective of the source of financing,
except for events that are directly needed to save lives and protect the
health of the people. A regime of strict economy will help in the proper
definition of socio-economic priorities.

1.5. Normal conditions for retail trade in imported goods should be
restored, including the preservation of the "shuttle" business.

2. Stabilising the currency market

The principal aim of these measures is to reduce the outflow of foreign
currency from the country and to mobilise it to enhance the solvency of the
state.

2.1. We recommend the introduction of the 100% compulsory sale of all currency 
revenues to the Central Bank for the period of stabilising the market.
Exporters who are also importers of food would be exempt from this obligation.

Regulations governing the use of foreign currency should be tightened.
Currency should be sold primarily for payment of import contracts and
indebtedness.

It is necessary in current conditions to substantially limit the number of
commercial banks permitted to perform currency operations.

2.2. The government and the Central Bank should reduce the time limits for
compulsory repatriation of currency revenues from exports (excluding exports
of high technology) and for repayment of import advances. Failure to pay on
time should lead to stiff penalties, including compulsory conversion into
roubles of currency accounts and full requisition of delayed sums by the
state Treasury.

2.3. In order to maintain convertibility of the rouble on current account it
is necessary to temporarily amend the rules of currency trading in the
trading system of the Interbank Currency Exchange and introduce additional
limitations on requests to buy currency. The Central Bank could set a short
term corridor to reduce inflationary expectations, requests to buy currency
would be accepted only in lieu of bona fide client importation contracts and
to supplement demand of retail currency exchange units. Commercial banks
should be held responsible for submission of fictitious or speculative
requests. Under these conditions 
the Central Bank could support the exchange rate by its interventions inside
the corridor.

2.4. In order to reduce cash transactions in dollars and to increase
currency reserves of the state it is recommended to issue state bonds
denominated in dollars and available to individuals. The Central Bank should
organise the secondary market in such paper. Income from these bonds should
be tax free and no limits on investment in them should be imposed. Current
currency deposits should be freely used for purchase of such bonds.

2.5. The category of "special exporters" should be re-established in the
area of strategic goods. Currency flows and accounts in the trade in these
goods should be centralised in state banks, primarily in Vneshtorgbank.

3. Cleansing financial blockages in the economy.

3.1. It is necessary to completely exclude government arrears, including the
imposition of various money surrogates as means of payment. We consider it
completely justified to legally introduce the rule under which the mechanism
of managed money emission automatically starts operating when the federal
government is unable to pay for goods and services acquired by it and is not
in a position to document its debt in a civilised manner. We are deeply
convinced that such a measure will not lead to accelerated inflation, but to
a substantial increase in the fiscal responsibility of the government.

3.2. The phenomenon of delayed non-payments should be eliminated. The
essence of this very complicated operation is a one-time saturation with
money of an economy that is prepared to function according to market rules.
Technically it consists of the following. Indebtedness on fines and penalty
payments is amnestied. Remaining mutual arrears of all economic agents is
cleared off. Those with a positive balance have money credited to their
accounts. Those with a deficit become debtors to the state. The latter,
depending on the condition of the enterprise in question, imperatives of
industrial policy and other 
considerations, can either convert the debt into shares of the enterprise,
or introduce procedures of sanation or bankruptcy. It is very important that
wage arrears are settled at the same time.

4. Mobilising resources of the banking system for purposes of stabilisation.

4.1. Increasing possibilities of regulating crucial commercial banks by the
participation of the Central Bank and Government in their charter capital.

The Central Bank should announce an increase in the minimal size of the
charter capital of banks that have obtained a general currency license. If
the bank is unable to make the necessary increase, the additional capital is
issued by the Central Bank and/or the government.

4.2. Increasing target crediting of commercial banks by the Central Bank.
Discounting bank and enterprise paper and issuing short-term loans to
commercial banks for specific purposes (targets).

4.3. An interbank pool (similar to member banks of the US Federal Reserve
System) should be created as a mechanism of consolidated responsibility for
the stability of the banking sector and financial markets. The resources of
the pool could be formed by reducing minimum obligatory bank reserves and
other contributions (in roubles or in foreign currencies) as a certain share
of their total liabilities. Banks would be obliged to maintain a designated
minimum of total pool reserves, including a certain ratio in foreign
currencies. The pool would have to operate on market principles. It would be
managed by representatives of member banks, the Central Bank and the
Government. The pool 
resources would be used to insure deposits, support member liquidity and to
maintain stability of the national currency.

5. Mobilising additional resources to finance government expenditure.

5.1. The Government will submit for the Duma's approval an extraordinary
federal budget for the fourth quarter of the current year.

5.2. The principle of unconditional non-emission financing of the deficit of
the federal budget will be renounced.

The resumption of direct crediting of the Government by the Central Bank
will be allowed in the following forms:

credits to cover temporary cash deficits that emerge in the process of the
implementation of the budget to be secured by guaranteed revenues
forthcoming in later periods;

direct acquisition by the central bank of federal securities during periods
of low activity (excluding securities in the process of restructuring);

refinancing credits of commercial banks provided under government guarantee
and bank investments into non-marketable government debt (though formally
this item does not pertain to direct crediting of the government).

The volumes of all such credits of the Central Bank will be determined
subject to the general monetary policy directives and limited by quotas to
be set quarterly (or monthly and even weekly in critical periods).

5.3. Accounts of budget organisations should be consolidated on sub accounts
at the Treasury so as to utilise temporarily free moneys on these accounts
to cover cash deficits within approved limits (in other words, temporarily
free funds of the budget and budget organisations should be used for budget
purposes and not for the purposes of commercial banks).

6. Restructuring the domestic securitised debt.

6.1. The joint decision of the Government and Central Bank of 17 August 1998
should be substantially corrected in what pertains to restructuring payments
on short-term government paper (GKOs):

repayment of debt on GKOs acquired by the Central Bank and the Savings Bank
should be rescheduled for the period of 5 to 10 years (in the long run, it
is a case of the government repaying itself);

repayment of the main debt on GKOs acquired by commercial banks, insurance 
companies, pension funds and individuals should be made by the government
either at market prices as of 1 August, or at prices of acquisition, but in
both cases with compensation for the depreciation of the rouble.

6.2. In order to increase the attractiveness of new government securities it
is necessary:

to allow commercial banks to use such long-term securities as part of
obligatory minimal reserves;

allow the Central Bank to provide short-term refinancing of commercial banks
using such securities as collateral.

6.2. Introduce obligatory hedging by non-residents in the Central bank of
funds newly invested in government securities with a view to limit their
yield to a maximum of 15% per annum in hard currency.

7. Restoring normal relations with world financial institutions.

7.1. The Government should reaffirm that in present conditions Russia will
continue to honour all its contractual obligations including the servicing
of government loans and eurobonds. As to banking and commercial credits, all
their Russian recipients should immediately and at the most within the
announced 3-month moratorium hold negotiations as to terms and time
schedules of such payments.

7.2. In the long-term perspective, substantial corrections should be made in
the policy of foreign borrowing The main directions should be:

attracting foreign direct, not portfolio (which, in Russian conditions, are
mostly speculative) investments. In this connection legislation should be
expedited concerning production-sharing, concessions and strict guarantees
for foreign investors;

developing a long-term programme of servicing the existing external
government debt, including possibilities of its restructuring and
transformation into other forms of assets (conversion into fixed
investments, exchange for securities of third countries, sale on secondary
markets, etc.). This is in addition to a more active work to repay Russia's
debts to foreign states;

Receiving new foreign loans only for financing investment projects that
create sources of repayment.

7.3. It is also necessary to actively utilise the possibilities of
developing commercial and other economic relations with CIS countries,
primarily with Ukraine, Belarus and Kazakhstan. Problems in our relations
with the West and the need to utilise available production capacity are
making indispensable a reorientation to these countries of part of our
exports and imports. Issues of economic integration, creation of a free
trade zone and customs union, settling mutual payments, increasing the
attractiveness of the rouble are all 
matters of high expediency.

8. Achieving sustainable economic growth.

8.1. The erroneous assumption of the reform ideologues should be refuted that 
traditionally ties economic growth exclusively to capital investment.
According to this theory, domestic savings will never be sufficient to solve
the country's problems even if all of them are transformed into capital
investment. This leads to the conclusion that large foreign investment is
needed which again necessitates the super-liberalisation of the Russian
financial markets.

Our approach to economic growth is different. We feel that it should be
initiated by increasing the utilisation of production capacity by
stimulating current consumer expenditure. Such an approach is not our
invention and should not be construed as opposed to capital investment,
including foreign investment.

When large production capacity is under-utilised, it is consumer demand
(primarily for domestic output) that should be stimulated rather than
savings and investment. Though the savings rate does fall in this case, the
overall flow of savings is not reduced due to increasing output and a fuller
utilisation of capacity.

This is the basis of our proposal to reanimate and utilise the scientific
and technological potential of domestic manufacturing which today exists in
the form of physical capital only less than a half of which is currently used.

8.2. It is necessary to normalise price relationships in the domestic market
in conformity with existing technological structures and taking into account
price disparities. On the one hand, this implies control of prices of
natural monopolies, on the other, the possibility of moderate growth in
prices of manufactured products which is necessary to achieve an adequate
level of profitability. It is necessary also to normalise the payments
mechanism in 
the economy, to pursue a foreign economic policy favourable for domestic
producers, to provide initial financial support to enterprises.

8.3. The current crisis and falling imports provide favourable conditions
for activating domestic production, primarily light and food industry, as
well as small business. A special credit facility would be useful to support
this process.

8.4. To stimulate industrial production tax reduction is necessary. We
recommend the abolition of direct and indirect taxation of wages, the repeal
or at least a substantial reduction of the value-added tax. This would
permit domestic producers to reduce their production costs by at least a
half, reduce their prices and enhance competitiveness.

Reduction in these taxes could be easily compensated by (1) increased output
and thus the tax base, and (2) by increasing taxation of natural resources,
real estate, renting out city land, excise taxes on alcohol, tobacco and
luxury items.

8.5. It is necessary to re-orient the financial and credit sphere to
servicing the production of real goods and services. Speculative financial
intermediation should be restricted by means of serious institutional reforms.

8.9. Economic strategy and tactics should take better account of the overall
interests of the federation, as well as of the social, ethnic, productive
and technological specifics of the various regions, industry branches, types
of enterprises.

The successful solution of the above problems in a foreseeable time frame would 
necessitate new methods and degrees of exerting government influence on the
behaviour of all economic agents.

If decisive measures are not taken in the stated directions, cataclysms like
the current one will reappear with enviable permanency.

9. Political conditions of overcoming the growing catastrophe.

The main and only condition necessary to save Russia from its pending
destruction is to restore confidence. Confidence in the authorities, in the
rouble, in the wisdom, dignity and honour of the Russian people.

The road to this lies via an open frank dialogue with the people with a
sincere admission of faults and errors in economic and social policies of
the past. It is not looking for culprits, calling for criminal
investigation, or engaging in the fruitless and frustrating confrontation
between the legislative and executive branches of power, between the
president and the oligarchs, between the centre and the regions. Only the
openness and sincerity of the dialogue will restore the confidence of the
people.

The basis for confidence could be created by a straightforward determination
of the long-run strategy of reforms. Our children and grandchildren have to
clearly understand what awaits them tomorrow. Unfortunately, in recent
years, nobody ever tried to give then an answer to that question. One of the
greatest flaws of the reforms so far was that they lost their orientation.
Their meaning and final aim was lost. When there is no aim, there cannot be
success.

The organic tie between the authorities and science has been weakened, and
in many ways lost. It is the authorities who have placed themselves into a
kind of opposition to natural and humanitarian sciences, have failed to use
its advice and expertise. It is a disgrace to Russia that its unique
scientific and spiritual potential has been ignored in favour of primitive
recommendations of experts who have little knowledge of the history and
culture of our country.

We declare once again that we have serious suggestions based on research as
to the strategy of socio-economic development and to short-term means of
overcoming the pending catastrophe.

We hope that our voice will at long last be heard by the authorities and the
country as a whole. We are prepared for a constructive dialogue and the
implementation of a new course of reforms.

Members of the Department of Economics, Russian Academy of Sciences:

Academicians: D.Lvov (Academic Secretary of the Department), L.Abalkin, 
O.Bogomolov, V. Makarov, A.Nekipelov, N.Petrakov, S.Sitarian, N.Fedorenko;
Corresponding Members: A Afinogentova, V.Ivanter, E.Kapustin, G.Luzin,
V.Mayevsky, P.Minaker, V.Perlamutrov, A.Tatarkin;
Doctor of Economics N. Rimashevskaya.

COMMENT BY STANISLAV MENSHIKOV

There are no simple ways out of the present debacle. There will probably be
more 
defaults and crises before the situation finally stabilises. Any policies of
new reform should take into account the serious proposals made by the
Russian Academy. Ignoring that advice would be inexcusable. 

When studying their programme one should realise that it is proposed by
economists who have a first-hand working knowledge of how the Russian
economy really operates which is, of course, very different from the way it
is seen from far away by people versed in standard western economic
treatises. Though some of its points and particularly ways of expressing
them may seem peculiar, this is the way Russian scholars think, and the
message they project deserves attention because it reflects their reality.
The approach is completely pragmatic and non-ideological.

Let me point to a few most important points that distinguish this approach.

- First, the Russian Academy stresses personal incomes and consumption as
the most important base for engineering economic growth at this juncture.
Not investment, because production capacity is heavily under-utilised, and
not government military spending which is not even once mentioned. It is a
kind of Keynesian programme of a very special type which has not been so far
very much represented in other countries. It is Keynesian because the
starting point is stimulating aggregate demand. But unlike other variants of
Keynsianism it stresses maintaining and expanding personal incomes, mainly
of the lower income categories, because that is where a lot of additional
demand for consumer goods and eventually for producer goods can be generated.

- Second, the Academy clearly sees that the crisis cannot be overcome unless
the 
arrears problem is solved, both in government arrears and in
inter-enterprise non-payments. The way to do this is via a thorough clearing
of mutual debts in the economy in the course of which the really bankrupt
market agents can be singled out and then either closed or sold or
restructured or whatever. It is not a programme of mass bankruptcies that
the former cabinets wanted to implement and could not because the country
and the people would not permit a total destruction of the economy. It is
also a programme of radically reforming the banking system and cleansing it
of the unnecessary and dangerous involvement in speculation and adventurism.

- Third, contrary to most western media reports IT IS NOT A PROGRAMME OF 
RESTORING A COMMAND ECONOMY. It does suggest stricter controls over natural 
monopolies and the currency market, as well as over commercial banks. But
that is only normal in a crisis economy.

This is not an abstract or highly theoretical programme. Some of its
elements are already being implemented by the new cabinet, for instance,
compulsory sale of 75% of currency from export revenue to the currency
exchange and the Central Bank. The Academy suggested selling 100% , but the
government reduced the figure to 75% for obvious reasons: it needed support
from the very influential exporters lobby (oil, gas, aluminium, nickel,
etc.). But it accepted the substance which was correct and to the point. It
is obvious that exports are the principal source of hard currency earnings
in Russia. To stabilise the supply of dollars in the exchange market and
thus the market itself there is no other way than to tap that source. A very
practical suggestion in a crisis, indeed.

The Academy also suggested tapping the principal former Soviet and Tsarist
source of government tax revenue - alcohol production and sales. There is
the usual objection that a monopoly on alcohol creates a black market. Well,
Yeltsin completely liberalised alcohol production and sales permitting some
of his cronies to profit from alcohol imports in unprecedented quantities.
It all led to a current situation in which nearly two thirds of the current
vodka consumed in Russia is either produced, imported or sold without
paying taxes. Who needs that kind of liberalisation and why is this black
market better than the one that will remain after the monopoly is
introduced. Mind you, private retail trade in alcohol is permitted provided
that taxes are paid in full. It is 
a system that preserves private ownership, only puts it into some order.

The most controversial point in the Academy programme is permitting federal 
deficits to be partially financed through direct Central Bank credits. This
has led to a lot of brouhaha about inevitable hyperinflation. I respectfully
disagree. The previous reform governments printed a hell of a lot of money,
nearly equal to what they borrowed in securitised debt on which they finally
defaulted creating a crisis of unheard of magnitude. Those governments never
stopped printing money because it was always needed. Eliminating arrears and
barter by the new government will necessitate a lot of extra money. But that
does not necessarily mean hyperinflation. The important thing is to keep
supply of goods and services rising in accordance with demand. That is the
function of Russian business. If the Primakov cabinet can promote and
stimulate business, particularly small business in consumer industries, it
will lead the country 
out of the crisis. That is exactly what the Russian Academy is suggesting.

******

#2
Academician Bogomolov on Financial Crisis 

Trud 
September 18-24, 1998
[translation for personal use only]
Interview with Oleg Bogomolov, prominent economist and academician,
conducted by Nadezhda Nadezhdina: "Oleg Bogomolov: Was the Shock
Inevitable?"

After the 3-week exacerbation of the political crisis in the country,
we finally have a prime minister, the government is almost formulated, and
its program will be publicized any time now. However, it will take a long
time to bring the economy out of its crisis state. This makes it all the
more important to analyze the causes and consequences of the crisis, to
seek solutions to it, and to think about correcting the state
socio-economic policy. Our Trud correspondent talks about this with the
prominent economist, Academician Oleg Bogomolov.
[Correspondent] Oleg Timofeyevich, was the crisis which developed in
our country inevitable? What were its deep-seated reasons, and what led to
the collapse of the ruble, prices and the banking system?
[Bogomolov] Before analyzing the reasons, I would like to say that,
no matter how terrible what happened was, it also has its positive result. 
The collapse, which dealt a painful blow to the population and to the
country"s economy, facilitated the fact that the people, and also the
politicians, received an insight, an understanding of the fact that our
current socio-economic course cannot bring the country out onto the path of
progress, that the political system and the distribution of powers and
authorities between the branches of power are in need of change.
For specialists, the collapse of the ruble and the banks, as well as
the soaring prices, were not an unexpected occurrence. Many Russian
economists, as well as prominent Western authorities, have long been
talking about the adventuristic nature of the policy of the Kremlin and of
our government. Industrial production dropped with every passing year, and
that which could have brought income to the state was given away to private
hands: Production and trade in alcohol, export of oil and non-ferrous
metals. At the expense of what did we manage to keep the budget and the
consumer market afloat? At the expense of selling off (for a pittance, we
might add) our mineral resources and production capacities, at the expense
of getting Western credits and eating up the heritage which we received. 
And at the expense of the GKO [state short-term bonds] pyramid. It was
obvious to any unprejudiced person that this pyramid would not hold up for
long. But to those who made the decisions, it was necessary and
profitable. You may recall that all the newspapers wrote that Chubays had
taken an interest-free credit from the bank and used it to buy GKOs. The
high-level official evidently made huge money on this. And he was not the
only one to do so... Western bankers also skimmed off considerable fat
from the GKOs.
Despite the general decline in production, degradation of the economy,
and impoverishment of the population, financial-industrial oligarchs arose,
with great wealth. They were not eager to invest in domestic production,
but preferred to play the market, to take capital out of the country or to
use it for wasteful consumption. The German journal, Der Spiegel, once ran
an article about Bryntsalov, complete with photographs. One of them showed
the garage at his villa in the Moscow suburbs. In the huge building stood
a beautiful Mercedes, a hydraulic lift, and on the ceiling... were five
huge crystal chandeliers.
And this was on the background of general poverty. Both in Russia and
in the West, merchants and industrialists, regardless of how they had
acquired their initial wealth, kept their personal consumption within
rational limits, trying to invest more money into the development of
production. Yes, they got rich, but the country also got rich along with
them. But now? According to estimates of RAN [Russian Academy of
Sciences] scientists, in Russia the income of the 10 percent of the richest
residents surpasses the income of the 10 percent of the poorest residents
by almost 25 times. For comparison: In the USA it is 6-7 times, and in
Poland--5 times.
However, we cannot live in debt forever, squandering the inheritance
which we have received. As the former government admitted, in 1999 up to
70 percent of the budget was to be spent just for servicing of the debt
(payment of interest and repayment of the principle sum of the debt). Then
there were also the unpaid wages, pensions and child subsidies which added
up. As a way out of this situation, they proposed increasing payment for
housing, raising the value-added tax on foodstuffs, and introducing new
fees. They tried to overcome the difficulties by fleecing the already
poverty-stricken population and by begging for money on loan from the West.
I might add, however, that they did not touch the rich. What palaces
arose throughout the entire country, what offices and bank buildings, and
yet there is still no real tax on property.
And so, the financial crisis developed: The ruble was devalued and
prices rose. Now even if the miners are paid their wages, this will in
essence be only half, or perhaps even a third, of what is owed to them. Add
to this the loss of deposits in the bankrupted banks. The acute debt
crisis is being resolved at the expense of the people and of a further
decline in their standard of living.
[Correspondent] Now it is easy to talk about what we have seen-- the
country is being led in the wrong direction. The course which our liberal
reformers selected is erroneous. Why did they keep quiet then? You, Oleg
Timofeyevich, were a member of the President"s Council...
[Bogomolov] Let us return to the comparatively recent past. We will
recall how it all was. After the victory over the putchists in "91,
the president went to the south and did not appear for a long time.
Burbulis, who was the state secretary at that time, decided to prepare a
proposal on radical reform of the economy for the president"s return.
He chose Gaydar and other young economists, and put them to work at the
governmental dacha [summer cottage]. There, in their narrow circle, they
"molded" the concept of shock therapy. This model was also discussed at
the President"s Council. Many people expressed serious doubts at that
time, understanding that liberalization of prices would give impetus to the
inflationary spiral, that prices would grow not by 3-3.5 times, as Gaydar
had assured us, but many times over. The public savings would become
devalued--and in the former Soviet Union there were up to R500 billion of
them invested in various bonds and deposits. Why, what devaluation, they
assured us, this money is not secured by anything--after all, the market is
empty. Both then and later, I tried to explain in the press that this
money had been used to build bridges, roads, schools, hospitals, and
plants. The funds had been invested into the national economy, and all
this belongs to the people--so give it back to them... But no one listened
to me.
Speaking in the Urals, the president noted that some believe shock
therapy to be a risky experiment, but in fact all of this is scientifically
justified, well-planned, and would lead to uplift of the Russian economy. 
We tried to object in the press, and in January of 1992 we held a
"roundtable," which was attended by leading economists and journalists
along with members of government. However, the criticism was not
perceived. All the decisions were adopted in secret, in the narrow
encirclement of the president. In July of 1992, a number of members of the
President"s Council sent a letter to B. Yeltsin, with proposals on
correcting the course of reform. This resulted in G. Arbatov, N. Shmelev,
Ye. Yakovlev, myself and others being removed from the President"s
Council.
We also tried to attract attention to the government"s errors
later as well. In "96, prominent Russian economists and five American
laureates of the Nobel Prize in economics appealed to the president with an
open letter. Somewhat later, the book, "Reforms Through the Eyes of
American and Russian Scientists," which I edited, was published. In it,
these same authors proposed an alternative to the dead-end path of reform. 
At that time, one of the newspapers wrote: Why should we listen to some
Nobel Prize laureates? I believe that we should have acted more
decisively. The economy and objective processes cannot be fooled. Without
development of industry and agriculture, the country has no future. The
people must have work and earn a living.
[Correspondent] If scientists could clearly see the adventurous
nature of the course almost from the very first steps, then why did the
international financial organizations give such support to our reformers?
[Bogomolov] There are two points of view on this. I am not a
proponent of those who believe in the "plot" to make Russia weak, so that
it could not pose either a military or an economic threat to the West. I
do not believe that anyone set such goals. The matter is simply one of
insufficient competency of the associates of the international financial
organizations and a number of the Western leaders, who imposed this
economic model. Our reformers accepted the standard set of
recommendations--liberalization of prices, privatization, and a
deficit-free budget... The International Monetary Fund, in coordination
with the Washington administration, advises that they be broadly utilized
in all countries of the world which are in crisis. Without consideration
for the real situation or the state of the economy of one country or
another.
Unfortunately, this policy has not brought positive results in many
places, perhaps with the sole exception of certain countries of Latin
America which already had institutions of the market economy. It did not
lead to improvement of the situation in the countries of Southeast Asia or
in Indonesia. Yet we did not even trouble ourselves by thinking: Why was
it rejected by China, which for many years now has had stable economic
growth?
And the international financial organizations themselves do not have a
synonymous attitude toward such market reforms. The first vice- president
of the World Bank, Professor G. Stiglits, recently presented a lecture in
Helsinki. In it, he convincingly demonstrated the limited nature of shock
therapy and other recipes of the International Monetary Fund which were
placed at the foundation of our reforms. I still cannot understand why we
invited Jeffrey Sachs or the Argentinian Cavalio to act as consultants,
instead of those same leading Nobel laureates, as for example Professor
Stiglits.
[Correspondent] Yet in Poland, where shock therapy was also used, the
reforms proceeded successfully?
[Bogomolov] The example of Poland is but one more confirmation of the
fact that the recommendations of the International Monetary Fund cannot be
used without consideration of the specific economic conditions. In Poland,
unlike Russia, there was a large private sector in trade, highly productive
individual private farming in the rural regions, and dollar savings of the
population held in accounts in Polish banks. Poland was much more
receptive to market reforms.
[Correspondent] Let us return to our realities. Why did we not
listen to rational opinions, or even discuss other variants of reform?
[Bogomolov] This is not an easy question. It rests already not on
the economy, but on our political system, under which decisions are adopted
behind closed doors, in a narrow circle of minions and advisors, when the
fate of millions of people depends on the whims, caprices, competency or
incompetency of one man. Leading political scientists referred to the
political system which we built as being a "selective monarchy."
Constant conflict between legislative, executive and presidential
authority lies at its very principle. The president believes that he has
been elected by the people, that he has the mandate of the entire
population, and that he can therefore ignore the parliament, which is
elected by those same people. The parliament, in turn, in accordance with
the constitution, is so limited in its rights that it in essence represents
little more than a democratic decoration. The president formulates
whatever government he wants. Its complement does not depend on the will
of the voters or the parliamentarians. All this leads to total
arbitrariness, which was manifested most clearly this summer in the
governmental reshuffling which was entirely incompatible with common sense.
The oligarchs want to retain the current political system by all
means. It suits them, since it allows them to legitimize the wealth which
they have amassed in the course of reforms. They are concerned most of all
by the possible re-division of property. However, even they feel that the
authorities must be made more civilized. Nevertheless, they would like to
put a man who is convenient for them at the head of government.
However, this system should not be developed. It must be changed. The
discussion here is not about re-division of property--there have been more
than enough re-divisions in this century. Nevertheless, a correction of
the political system and of the course of reform is necessary.
In order to amend the Constitution, the consent of the main political
forces is needed. And it is a good thing that they understand this in
parliament. We must convene a new constitutional congress, where there
would be not appointees, but representatives of all parties and
movements--authoritative politicians, scientists, and the creative
intelligentsia. It would be good if the names of the participants were
publicized in both houses of parliament. The renovated constitution must
specify a rational distribution of the powers and authorities between all
branches of power, a strict development of the system of checks and
balances, and a mechanism of elections and responsibility of the political
parties.
[Correspondent] All these problems are acute and pressing. However,
the Constitution cannot be changed all at once. Yet we must live today,
tomorrow and every day. And we must bring the economy out of crisis
immediately...
[Bogomolov] Naturally, we cannot put this off until better times,
until more favorable political weather. It is encouraging that the State
Duma voted in favor of the new prime minister, Yevgeniy Primakov, by an
overwhelming majority. We would like to believe that Yevgeniy Maksimovich
is a high class professional, a broadly educated specialist, a man of
compromise, as he is called, and that he will be able to consolidate the
politial forces and bring the country out of the dead end. It is
encouraging that, in his first speeches, he said that he would consistently
continue the market reform, giving attention not only to fiscal
stabilization, but mainly to production; That reforms are needed to improve
the life of the people, and that we need a socially oriented market
economy. The most important words for the country have resounded at last. 
Now if only they do not remain mere words.

******

#3
Russia Mulls `Soviet' Economic Plan
September 30, 1998
By MITCHELL LANDSBERG

MOSCOW (AP) -- Russia's new government will consider a Soviet-style economic
plan that would roll back reforms by nationalizing banks and flooding the
economy with newly minted money, a newspaper reported Wednesday.
However, the head of the Central Bank strongly denied that the government was
going to take over banks.
The government did not specifically deny the rest of the reported plan, said
to have been drafted by a group of Soviet-era economists. According to the
Kommersant business newspaper, it would boost the money supply by 60 percent,
undoubtedly fueling inflation.
It also would reintroduce currency controls, Kommersant said. The newspaper
said the Cabinet will consider the plan Thursday.
Government spokesman Andrei Korotkov confirmed that Yuri Maslyukov, a
Communist who is first deputy prime minister for economic strategy, had worked
out an economic plan that the Cabinet will discuss Thursday. He said it would
become the basis for a government program to be unveiled on Oct. 8.
Maslyukov was the last chairman of the Soviet central planning agency,
Gosplan.
Korotkov would not describe the plan in detail, but he acknowledged that it
calls for more state controls over banks and the currency market. He said it
was aimed at ``the recovery and stabilization of the banking system,'' and
overall economic stabilization, the Interfax news agency reported.
Central Bank chief Viktor Gerashchenko vehemently denied that the government
intended to nationalize banks.
``I wouldn't work in such a system. I would retire,'' Interfax quoted him as
saying.
Prime Minister Yevgeny Primakov, traveling in Belarus, insisted that he
supported free-market economic reforms, but with more state control and a
greater emphasis on social welfare.
``This movement is not a backward but a forward change in the economy, and
consists of market changes in particular, but with a strengthening of
government regulation so that the economy turns its face toward the people,''
Primakov told reporters in Minsk, the Belarusian capital.
Kommersant was less approving. ``Maslyukov's program again turns Russia into a
transition economy, only this time it will move backward -- to the Russian
Soviet Federal Socialist Republic,'' the newspaper wrote.
Former tax chief Boris Fyodorov, ousted Tuesday by President Boris Yeltsin,
said the government should move to boost tax collection and radically cut
spending instead of printing new money.
``Printing money is like a drug. Once you grow addicted to that, it's hard to
stop,'' he said in an interview published in the liberal daily Izvestia.
The ruble's value has dropped sharply since being devalued last month. It was
at about 6 rubles to the dollar before the devaluation; on Wednesday, it was
trading at about 16 to the dollar.

*******