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Johnson's Russia List


October 9, 1998    
This Date's Issues: 24202421

Johnson's Russia List
9 October 1998

[Note from David Johnson:
1. The Electronic Telegraph (UK): Marcus Warren, Yeltsin is 'suffering
senile dementia.'

2. Stanislav Menshikov: re The "virtual economy" debate.
3. Barry Ickes: Helmer's Ad Hominem attacks.
4. Matthew Rendall: Kotkin and the merchants of death.
5. The Moscow Tribune: John Helmer, BEGGARS CAN BE CHOOSERS.
6. Carnegie meeting report/Washington DC: “Russia in Turmoil.”
Speakers: Arnold Horelick, Thomas Graham, Anders Åslund, Martha Brill Olcott.

7. Financial Times (UK): John Thornhill and Arkady Ostrovsky,
PRESIDENCY: Seleznyov states leadership hopes.

8. Argumenty i Fakty: Vitaliy Tseplyayev, "Should the President Resign?"
9. Moscow Times: Sergeyev Says Legal to Use Nuclear Arms.]


The Electronic Telegraph (UK)
9 Octdober 1998
[for personal use only only]
Yeltsin is 'suffering senile dementia'
By Marcus Warren in Moscow 

A SENIOR Russian psychiatrist has for the first time dared to question in
public the mental health of President Yeltsin.
Mikhail Vinogradov, a psychiatrist for 30 years, believes that Mr Yeltsin may
be suffering from progressive senile dementia, or Alzheimer's disease.
"The President is ill," he told The Telegraph. "He is not aware of his own
actions and cannot control them." He stressed that this was not a diagnosis,
only an "assumption" based on watching the Russian leader on television.
Mr Vinogradov, head of the Moscow-based International Centre for
Psychophysiology, is calling on Mr Yeltsin to undergo a mental examination
supervised by Russia's Constitutional Court. His comments break an important
Russian taboo. Everybody suspects that Mr Yeltsin is a sick man, but it is not
a subject for public debate.
Although Mr Vinogradov claims that many colleagues share his views about Mr
Yeltsin, his willingness to comment publicly on the President's psychiatric
state has provoked some unease.
Professor Alexander Goffman, of the Moscow Institute of Psychiatry, said: "It
is very unethical and discourteous to speculate on the health of someone one
has not examined properly."
Officials react angrily to suggestions that Mr Yeltsin's state of health and
mental acuity are less than satisfactory. All the same, his appearances on
television are now confined to brief glimpses of him greeting ministers in his
Kremlin office. During his last prolonged exposure to the cameras, President
Clinton's visit a month ago, his performance was uncomfortable to watch.
Asked a direct question about Russia's political crisis during the summit
press conference, Mr Yeltsin appeared dumbstruck, pausing for more than 10
seconds before attempting a barely coherent response. "He used to stumble in
answering questions but at least made a joke of it," Mr Vinogradov said. "Now
he often appears not even to understand the question.
"His walk and gesticulation have changed and his face has a mask-like
expression, half-surprised, half-angry, with the eyes bulging. Often the
facial expression does not correspond to what he is trying to say."
Openly questioning the President's mental health is not a step Mr Vinogradov
has taken lightly. "My family is more worried than I am," he said. "I have no
fears, although people have rung me up and warned me to be careful."


Date: Thu, 08 Oct 1998
From: Stanislav Menshikov <> 
Subject: re: The "virtual economy" debate

I have refrained so far from the discussion on the "virtual economy" for a
simple reason: too much of it was based on hearsay and anecdotal evidence or 
was a product of hollow theorising. Thanks to John Helmer with his 
concrete steel example, the discussion has come down to hard facts. As to the 
latter, Barry Ickes and Clifford Gaddy seem to be on the losing side.
1. When Ickes quotes a newspaper article by a prejudiced reporter to 
claim that a Russian steel mill underpays his suppliers of energy and gas via 
inflated steel prices in barter deals, he avoids telling us exactly how much
are these costs underreported. But is he aware that total costs of energy and 
gas inputs add up to only 7.2 per cent of the price of steel on the average in
the Russian ferrous metallurgy? Adjusting for real relative prices in barter
exchange would not substantially change this figure. Ickes also makes a lot
of noise about unpaid wages. But again, labor costs are only 6.1 per cent of
the price of steel and do not materially affect value creation in that
2. Which brings me to my major point. I wonder whether Ickes and Gaddy 
have ever seen a Russian Input-Output table? The latest one available for 1995 
shows that there were only four industries in Russia that were net subsidy 
receivers, namely, coal, agriculture, communal services and science. All
other industries were value creators under any valid definition of the term,
whether it is gross value added to material (intermediate) inputs or in the
more narrow sense of covering labor costs, too. This major statistical
evidence is supported by national accounts statistics, available also for
1996 when the profit picture in Russia deteriorated sharply. Even then,
practically all branches of the economy remained value creators, not value
destroyers. To serious Russian economist with a first-hand knowledge of
facts and figures, claims about value destruction in Russia seem at best a
wild fantasy.
3. Ickes-Gaddy might object that prices in Russian I/O tables are
skewed in favor of energy and gas consumers. However, all available evisence
seems to point in the other direction. According 5to Goskomstat data,
electric power and fuels industrial prices have been rising substanially
faster than the average price index and certainly faster than prices for
steel. Electricity and gas are natural monopolies and, until lately, very
poorly controlled. If consumers tended to offset exorbitant energy and gas
prices by kickbacks via barter that would not tend to change the overall
4. The Russian situation is very similar to that of the US economy in the
depression 1930s. A look at "Historical Statistics" (a classic statistical
reference source for that period and earlier times) shows that gross value
added fell drastically in all industries, while quite a few showed a net
loss (rather than profit) on an industry-wide basis. Would Ickes and Gaddy
claim that the US 
economy was a major value-destroyer at the time? Probably not. In a deep 
contraction (Russia has lost half of its GDP in 1991-1997, US lost more
than 30 
per cent in 1929-1933) widespread losses are to be expected. Yet, the same 
industries tend to recover and show large profits when deflationary gaps are 
closed. Economists who in the 1930s would have advised scrapping most US 
industries would have been considered in grave error, to put it mildly. Yet, 
making similar claims vis-a-vis Russia today makes such economists famous 
and eagerly published in leading US newspapers. The double standard is 
5. As to theory, Ickes beats himself when he claims: "The whole point
about the virtual economy is that if goods are not exchanged at their true 
opportunity costs we simply do not know which firms are profitable and which
are not, and which are value creating and which are not". But if that is true
with respect to the Russian economy, his and Gaddy's theories about the 
"virtual economy" simply have no logical foundation. When nobody (including 
themselves) knows what true opportunity costs are, how can anybody at all 
seriously theorise about value destruction in Russia? Sounds like a futile 
adventure in propaganda rather than serious analysis.
6. In real life, most firms in the West (as in Russia) measure their costs
and prices irrespective of true opportunity costs (which are hard and costly
to calculate anyway) because profits based on market prices (which do not 
necessarily represent true opportunity costs, either) are what counts with 
shareholders and the stock market, not the abstract opportunity cost concept. 
The latter is good for the classroom, not for the corporation board room or
for the floor of the NYSE. As to the stock market which is an important
indicator guiding corporate decisions, its permanent zigzags in market
values and company capitalisation with very little direct connection to real
value make it no less "virtual" than the predominantly barter Russian
7. That is not to say that barter is admirable. Of course, it is not. But
unless the banking system in Russia is thoroughly reformed, barter and
inter-enterprise arrears are unavoidable. The previous governments (together
with the IMF) have practically ignored the issue. The Primakov government
shows signs of recognising the priority of these issues. 
8. I have to conclude that with all due respect, Ickes's and Gaddy's 
concepts have little relation to Russian realities. 


Date: Thu, 08 Oct 1998 
From: "Barry W. Ickes" <> 
Subject: Helmer's Ad Hominem attacks

Obviously John Helmer cannot respond to substantive points about the
meaning of revenues and costs when transactions are made using non-monetary
means of payment. So he resorts to ad hominem attacks on my character. Most
readers of this list will be quite familiar with how much time I spend in
Russia and how many enterprises I have visited and how many surveys I have
conducted. I suppose Helmer's comments are just indicative of the quality
of research that guides his reporting.
Helmer should pause and catch his breath. Then he should note that it was
a top-level report of the Russian government which documented the degree to
which transactions take place at virtual prices. I will quote from their
document: "An economy is emerging where prices are charged which no one
pays in cash; where no one pays anything on time; where huge mutual debts
are created that also can't be paid off in reasonable periods of time;
where wages are declared and not paid; and so on. [...] [This creates]
illusory, or virtual earnings, which in turn lead to unpaid, or virtual
fiscal obligations, [with business conducted at] nonmarket, or virtual
Now we get lumped together with a "secret report" of Soros and Sachs. I
suppose that Cliff and I cannot possibly be independent researchers: we
must be the frontmen for some secret cabal. No point in considering our
arguments. Just lump us in with the others. And Helmer must be right, since
I am also Jewish. I guess he caught us. We must all be part of some plot to
destroy the Russian steel industry. 
By the way, what was quoted in JRL 2412 was not a TV interview, but
a written interview with on ABC's on-line service. And the quoted comments 
never mention Magnitogorsk; that is the reporters after-the-interview
But if you read the interview, you can see Cliff is simply articulating
four points (which could hardly be considered anti-Russian) necessary to
get Russia out of its long-term crisis. These are the same points we have
been making in comments we have recently been circulating, and I quote them
1.The Pretense: Abandon It.
Russian leaders must lay bare the reality of the economy. Now is the time
to do it. In contrast to the recent past, they now have no reason to fear
that "telling the truth will only make things worse." 
Step one, therefore, is to stop concealing the fact of value destruction.
In fact, try to quantify it, if possible. By all means, also speak openly
about the benefits of continuing the value-destroying enterprises (social,
political stability, etc.). But admit the costs. Then people can decide.
Stop the Byzantine maneuvers and the pretense.
In the same spirit, be more realistic about the potential of the Russian
economy. It is much lower than has been acknowledged. This makes it clear
that the cost of sustaining the value-subtractors is high in the long run.
2. Value Destruction: Begin to Reduce It.
It is important to note the phrase, "begin to reduce ...." This means that
it will not be done suddenly and comprehensively. But there has to be a
systematic effort. The mechanics are simple: enforce bankruptcy, etc. But
the political will is the key issue. Step one—disclosure of the costs of
maintaining the virtual ecnomy—is a precondition to gaining support for a
reasonable program to reduce value destruction.
3. Leakage: Eliminate It.. 
Stop the sweetheart deals. [Distinguish between good and bad leakage.]
Tighten government; reduce waste. Improve the tax code. Perhaps go as far
as nationalizing Gazprom. Impose exchange controls. 
Some of these points are already demanded by the IMF. Others may challenge
the standard recommendations.
4. The Debt: Write It Off.
To give the country the breathing space to make steps (1)-(3) meaningful,
Russia's $70- plus billion [?] of post-Soviet era debt must be radically
restructured. The model will be the agreements Russia finally reached with
the London and Paris Clubs of creditors with respect to its Soviet-era
debt. In those cases, the debt was stretched out over a period of 20 years
and a grace period of 6-7 years was granted on repayments of principal.


Date: Thu, 08 Oct 1998
From: Matthew Tobias Rendall <>
Subject: Kotkin and the merchants of death

Stephen Kotkin notes (NYT 10/5/98/JRL 2413) that among the Russian
economy's many woes is the decline of military industry, and notes the
need for "renewing sales of military equipment." This is the way Russia's
foreign policy elite has thought for years, and not surprisingly
(Karaganov 1994). But a revival of Russian military industry and arms
sales could have nasty consequences. 
However disastrous the Yeltsin administration's economic policies
may have been in most respects, some of their effects on foreign policy
been fairly benign. In particular, the dominance of raw materials
exporters has discouraged Russia from taking actions that could disrupt
trade (Khripunov 1996; McFaul 1997/98). In contrast, the
military-industrial complex would actually benefit from increased
international tensions, and its revival would probably push Russia toward
less cooperative policies.
Military industry is seldom if ever a force for international
peace and understanding. In Wilhelmine and Weimar Germany it supported
aggressive policies (Kurth 1979; Snyder 1991), and in the United States,
as Miroslav Nincic (1989) points out, "the three major upswings in
anti-Soviet hostility...overlapped with three surges in the possibility
for new strategic developments and procurement"--strategic bombers,
ballistic missiles, and MIRVing/improvement in missile accuracy. More
recently, U.S. weapons makers were in the vanguard of the campaign for
NATO expansion. 
In Russia military industry has had a similarly bad influence.
It was a core constituency behind Brezhnev's military buildup (Snyder
1991). Under Gorbachev, it lobbied for developing strategic defenses and
the resumption of nuclear testing (Evangelista 1995). Under Yeltsin it
played an important role in the decision to invade Chechnya (McFaul
1997/98). In this respect the recent economic proposals developed under
Masliukov are disturbing. According to *Nezavisimaia gazeta* (10/2/98),
priority in "budgetary financing and state orders [goszakaze]" is to be
given to military enterprises. The result, as the authors point out,
would be "the militarization of the economy and...a change in Russian
foreign policy." 
Now it is true that if reviving military industry helps to get the
Russian economy moving again, by damping down nationalism this could
encourage more conciliatory policies, as well as alleviating much human
suffering. If we assume that countries are going to buy a given quantity
of weapons somewhere, it's no doubt better that Russian exporters get the
contracts than their U.S. or European counterparts. But Russia is likely
to sell precisely to the countries the West won't, and, by flooding the
world market with cheap weapons, encourage military proliferation. And a
revived military industrial complex could mean more confrontational
Russian policies around the world.


Date: Thu, 08 Oct 1998
From: (John Helmer) 

>From The Moscow Tribune, October 9, 1998
>From John Helmer in Moscow

Russian beggars work on the principle that the more abject your plea,
the bigger your reward. It's a bad mistake.
Take, for example, the trade problem the Russian government currently
has with the United States. On the one hand, U.S. steelmakers want to 
stop about $500 million worth of Russian steel from landing in the American
market for the rest of this year, and as much of next year as they can manage.
The Russian Ambassador to the U.S., Yuli Vorontsov, recently sent Vice 
President Albert Gore a note begging him for help.
On the other hand, U.S. chicken and pork producers want to make sure that
about $500 million worth of their products are exported to Russia for the rest
of this year, even though devaluation has made them too expensive for Russians
to buy, and there is no Russian banking system to arrange the trade.
The pork and chicken producers aren't begging the Russian government for
help. They have asked their Russian import agents and meat processors
to do that. At the same time, the American meat and fowl trade have
asked the American government to subsidize their exports, or give them
to Russia as humanitarian aid.
Similar arithmetic is being contemplated right now by every major
trading partner Russia has. The European Union already keeps Russian steel
out of its market, but European farmers are going to be desperate, and
Europe's food support budgets will start to balloon, if Russia
can't consume Europe's meat, dairy products, and other staples, as it did 
until the August crash.
New Zealand doesn't buy much of anything from Russia, compared to the $250
million load of butter it would like to continue selling to Russia, its 
single largest customer in the world. The Greeks, Finns, Norwegians, 
Australians, South Africans, Moroccans, and Egyptians all need Russia to 
survive this winter, not die. They need Russia to cook with olive oil, and 
eat fish, butter, ham, beef sausage, onions, oranges and apples.
So why is the Russian government begging for help? And why are the Americans
dragging their feet, unwilling even to schedule negotiations on steel
or food? Why does Leon Brittan, the European Commission's Vice President and
its chief hypocrite on free trade, continue to encourage protection against 
Russian imports, at the same time as issuing ultimata to Russia 
not to raise trade barriers.
What's needed in Moscow, first of all, is a degree of uncorrupt 
clear-headedness to see that Russia has a bargain noone in the world should 
be able to resist. Instead of several pickpocket ministries, run by officials 
who are already known in the west to be fools and crooks, Russia needs
a single policy to swap food imports for manufactured exports. (Oil, gas,
nickel, copper, titanium, precious metals, and diamonds can be left to fend 
for themselves, because their demand multiplier isn't as great.) 
Instead of humanitarian aid, financed by American and European taxpayers, 
Russia's trade partners should be buying steel and aluminium coil, cans, and 
machines of every type, including tractors, aircraft, turbines, reactors, 
refrigerators, and rockets.
If the chicken growers of Arkansas and the pork producers of Wisconsin want
to be fed, let them tell Vice President Gore that Russian steel exports for 
the next six months should be given a quota not less than they earned in
the first six months of this year, and not less than chicken and pork
shipments to Russia will earn over the next half year.
If the New Zealanders want to sell another quarter of a billion dollars in
butter, or the Greeks oranges, the Egyptians onions, and the Norwegians 
salmon, let them commit to buying Russian industrial manufactures of
equal value. If Italy's shoemakers face a cold winter
without Russian money, let's see what Russian products they can think of
importing, if that's a necessary condition for mutual survival. Last
year, the scaffold builders of Venice got a European Commission ruling
to block imports of Russian steel pipes. Let them explain why that's
necessary this year to the shoe exporters of Verona, and perhaps commonsense
(common greed) will prevail.
Think of this as a grand extension of what the know-nothing protectionists
of Washington have been calling Russia's virtual economy, into that
vast real world where trade stimulates domestic production, which in turn
stimulates consumption of imports, and growth of exports. In the real
world, beggars can be choosers.


Date: Thu, 08 Oct 1998
From: Elizabeth Reisch <>
Organization: Carnegie Endowment
Subject: Carnegie meeting report/Washington DC

“Russia in Turmoil”
Speakers: Arnold Horelick, Thomas Graham,
Anders Åslund, Martha Brill Olcott

On October 1, 1998 the Carnegie Endowment’s Russian & Eurasian Program
hosted a panel discussion on the Russian crisis and its implications for
U.S.-Russian relations. Over 90 representatives from government, area
universities, the media, and private companies attended. This meeting
report summarizes the remarks of the four presenters. For a full
transcript of the discussion, including the question and answer period,
please visit our web site at:

Arnold Horelick, Vice President for Russian & Eurasian Affairs
An Overview

"This crisis has shown that the Yeltsin era is effectively over,” Arnold
Horelick said in his introductory remarks. In a showdown with the Duma
over his nomination of Viktor Chernomyrdin, Russian President Boris Yeltsin
was compelled to make a humiliating retreat, shattering his aura of
invincibility, and triggering a succession struggle that will henceforth
dominate Russian politics.

Equally discredited in crisis-ridden Russia is the model of economic reform
that Russian governments under Yeltsin have generally pursued since 1992 –
however imperfectly, haltingly, and incompletely. The policies generated
by that model failed because they lacked any substantial political or
social base of support in the country, a prerequisite for economic reform
under conditions of political pluralism and constitutional democracy. The
leading figures associated with those policies have now been politically
sidelined, perhaps indefinitely.

The crisis provoked by the Russian financial collapse and the fall of
Sergei Kiriyenko’s “dream team” of reformers add up to a serious
disappointment and setback for U.S. policy. The U.S. administration is
losing its Russian partners, to whom President Clinton and his team have
been deeply committed, both personally and politically, since Clinton took
office in 1993. 

“Yeltsin has been the bedrock of U.S. policy toward Russia,” said Horelick,
“and helping keep him at the helm has been a cardinal policy objective, at
times causing the administration to minimize or overlook what was unhealthy
or unwise in Yeltsin’s rule.” 

The crisis provoked by the Russian financial collapse and the fall of the
Kiriyenko “dream team” of reformers add up to a serious disappointment and
setback for U.S. policy. 

As long as Yeltsin held the reins of power, democracy and generally good
relations with the West seemed assured, and the administration could
concentrate its policy energies on helping Russian economic reformers on
the macroeconomic stabilization problems that they and the U.S. Treasury
believed were the keys to successful reforms. Washington now sees Yeltsin
as a spent political force, whose decline is accompanied by the departure
of the liberal economists to whom Washington and the West generally have
looked to lead Russia’s reform. 

The Clinton administration does not want to be seen as turning its back on
Russia and has depicted the election of Yevgeny Primakov favorably,
accepting Russian conventional wisdom that he is the best compromise
candidate available to stabilize a tense and potentially dangerous
situation in Russia. But Washington is hardly encouraged by Primakov’s
senior personnel choices, uneasy about his government’s failure to present
a coherent plan for economic recovery, and concerned about the prospect of

Despite Washington’s misgivings about the direction Russian economic
policy appears to be moving, the administration has declared its readiness
to cooperate if and when the Russian government comes up with a coherent
economic program that Western governments and institutions believe they can
reasonably support.

Meanwhile, Horelick said, Washington will have to take a “policy time-out,”
without signaling to Moscow that it is disengaging. The administration
must also hold at bay Republican critics in the Congress, who are readying
demands for measures that would even further reduce the administration’s
already limited flexibility in dealing with Russia.

Thomas Graham, Senior Associate
The Domestic Political Situation

Thomas Graham discussed three key features of Russian politics today: the
fragmentation of power, the absence of strong leadership at the center, and
a sharpening succession struggle.

Over the past decade, Russia has witnessed a tremendous fragmentation,
decentralization, and erosion of power, both economic and political. The
current crisis has accelerated this process, although not to the point that
there is an immediate danger of Russia’s dissolution. 

Graham identified two groups that have benefited from this process:
regional leaders and big capitalists (or oligarchs). Elite struggles and
disarray in Moscow allowed the more ambitious regional leaders to enhance
their autonomy while compelling the more timid to assume greater
responsibility in order to survive. At the same time, the oligarchs made
fortunes by seizing state assets and public funds with the connivance of
top-ranking government officials. 

Elite struggles and disarray in Moscow allowed the more ambitious regional
leaders to enhance their autonomy while compelling the more timid to assume
greater responsibility in order to survive.

Graham views these two groups as the most powerful political forces in
Russia, and says it is impossible to govern the country against their will.
“The challenge for any leader in Moscow,” according to Graham, “is to play
upon the self-interests of these two groups and the contradictions within
them to carve out an area of autonomous power.” Primakov may be the best
person to deal with this situation, which Graham characterized as
“multipolarity in one country.” Primakov has already indicated that he
understands the problem by bringing several regional leaders into his

Graham explained that there are advantages to the fragmentation of power,
because it creates the conditions for the building of a genuine federal
system and a pluralistic society. The key to taking advantage of this
promise is strong, capable, credible leadership at the center, which Russia
has lacked since the beginning of this year. Yeltsin’s deteriorating
health has raised doubts about his ability to govern and the possibility of
early presidential elections. As a result, Yeltsin’s political support has
collapsed, and the Russian elites are focused more on the succession
struggle than on dealing with the country’s multiple socio-economic ills.
The situation will likely continue to deteriorate until the succession
struggle is resolved. 

Graham predicted that the succession struggle will likely be conducted
according to constitutional norms, not because the key political forces are
committed to democratic principles, but because “none feels strong enough
to bypass the constitution.”

Graham noted that Russian politicians generally unite when they are against
something rather than for a positive program. For example, the two camps
that have emerged in Russian politics over the past several months can be
called the “anti-Lebed” and the “anti-Luzhkov” camps, led by Moscow Mayor
Yuri Luzhkov and Krasnoyarsk Kray Governor Aleksandr Lebed, respectively.
Luzhkov and Lebed have both benefited politically from the current crisis,
at least in part because Chernomyrdin’s failure to be confirmed as Prime
Minister dashed his presidential ambitions. Graham noted that Luzhkov and
Lebed were running neck-to-neck in opinion polls.

Anders Åslund, Senior Associate
The Economic/Financial Scene

“Russia is effectively today in hyperinflation,” stated Anders Åslund, in his
discussion of the collapsing Russian economy. Since the devaluation of the
ruble in late August, the exchange rate has fluctuated between 7 and 21
rubles/dollar. The ensuing financial panic caused prices to skyrocket,
especially on imported goods, and led to a shortage of commodities. Until
July, annual inflation was barely at 6 percent; by August, monthly
inflation had reached 15 percent; and during the first 3 weeks of
September, 45 percent, just short of the 50 percent threshold which marks

Åslund explained that the real economy – especially the modern, monetized
economy of trade and finance in Moscow and in other big cities – is
collapsing accordingly, and predicted GDP to fall 15 to 20 percent by the
end of this year. A few hundred thousand young professionals have been
laid off in Moscow alone.

Compounding the crisis is a new Russian government “that is as clueless as
it is helpless.” Central Bank Chairman Viktor Gerashchenko and First
Deputy Prime Minister Yuri Maslyukov propose to increase the money supply
by 30 to 60 percent, respectively, by the end of 1998, to cut taxes while
increasing government expenditures, and to index wages and pensions. These
measures, argued Åslund, represent “a return to the Gorbachev economic
strategy that failed so totally in 1991.” 

Meanwhile, federal tax revenues dropped in half in September, regional tax
services are keeping revenues for themselves, and some regional governors
are introducing massive price and export controls. According to Åslund,
Anatoly Chubais and Yegor Gaidar are saying that Russia will default on its
external debt obligations within two to four months. 

Until July, annual inflation was barely at 6 percent; by August, monthly
inflation had reached 15 percent; and during the first 3 weeks of
September, 45 percent, just short of the 50 percent threshold that marks

The fundamental problem, stated Åslund, is clear: corrupt elites have been
competing for every ruble rather than thinking even minimally about the
common future of the country. An example of this is the large, corrupt
federal government apparatus, which expanded by almost two percent of the
labor force under Chernomyrdin. There have been no incentives for
businessmen to behave decently; in fact, the incentives have favored

Åslund postulated that the Primakov government could be so discredited in
two months that it could be replaced byLuzkhov, who would likely fail as
Prime Minister just as quickly, possibly paving the way for the communists
to take their turn in government. Several scenarios are now possible: a
parallel to the Bulgarian economic collapse two years ago, which would
happen more swiftly with different political effects; Slobodan Milosevic’s
Yugoslavia, where there is stabilization without liberalization, nor any
far-reaching democratization; or a third scenario – sheer chaos.

Martha Brill Olcott, Senior Associate
The Spill-Over Effect to the Neighboring States

Martha Brill Olcott discussed the numerous ways in which Russia’s economic
crisis is affecting the Caspian states. While Russia’s economic crisis has
been detrimental to these states’ trade, currencies, and prospects for
foreign investment, its political crisis – represented by Yeltsin’s
political mortality – is emboldening opposition movements in many other CIS

Olcott outlined five effects of the Russian crisis on the Caspian states.
First, it has further stimulated the decline of international investor
confidence in emerging markets. For example, Kazakhstan was forced to
immediately withdraw two offerings of its Treasury notes, as well as a
Eurobond offer, because of the need to sharply raise their interest rates.
Similarly, Standard and Poor’s and Moody’s both lowered ratings in Kazakhstan.

While Russia’s economic crisis has been detrimental to the Caspian states’
trade, currencies, and prospects for foreign investment, its political
crisis – represented by Yeltsin’s political mortality – is emboldening
opposition movements in many other CIS countries.

Second, Russia remains a major trading partner for all the Caspian states,
particularly for those states most energy-interdependent with Russia. 

Third, the Caspian states are losing their remittances from Russia. Wages
earned in Russia and transferred back home are the principal source of
income for a substantial number of households in Azerbaijan and Georgia.
In addition pensioners throughout the region are dependent upon support
from Russia, and the collapse of the Russian banking system has cut off
these revenues.

Fourth, the currencies of the various Caspian states are beginning to
sharply lose value.

Fifth, all of these states are bound to experience growing budgetary
deficits. Kazakhstan is already responding to theirs by sponsoring
“bargain basement” sales of oil and gas deposits. 

Finally, Primakov’s efforts to reinvigorate the CIS could lead to
burdensome customs and tariff policies that inhibit these countries’
ability to transit freight across Russia. 


Arnold L. Horelick is the Endowment’s Vice President for Russian and
Eurasian Affairs, a position he has held since November 1997. Before that,
he was a Senior Corporate Fellow at Rand, holder of Rand’s first corporate
research chair, and Professor of Political Science at UCLA. He was the
founding director of the Rand/UCLA Center for Soviet Studies, serving in
that position from 1983 to 1989. Before joining the UCLA faculty, he was
also visiting professor of political science at Columbia University, the
City University of New York, the California Institute of Technology, and
Cornell University. From 1977 to 1981 he served in Washington, D.C., as
National Intelligence Officer for the Soviet Union and Eastern Europe. He
is a member of the Council on Foreign Relations, the International
Institute of Strategic Studies, and the Aspen Strategy Group. He is
co-author of Strategic Power and Soviet Foreign Policy and U.S.-Soviet
Relations: The Next Phase. His articles have appeared in Foreign Affairs,
World Politics, Survey, Bulletin of the Atomic Scientists, and others.

Thomas Graham joined the Carnegie Endowment in September 1998 as a Senior
Associate on the Russian and Eurasian Program. Mr. Graham was a Foreign
Service Officer on academic leave with RAND in Moscow from 1997 to 1998.
>From 1994-1997, he served as Head of the Political/Internal Unit and then
Acting Political Counselor at the U.S. Embassy in Moscow. During this
period he managed a 12-person unit that reported on Russian domestic
political developments, and supervised a 25-person section that managed
U.S.-Russian bilateral political and security relations and reported on
Russian foreign and security policy, military affairs, and domestic
political developments. He also served in the Political Section in Moscow
from 1987-1990. Between tours in Moscow, he was a member of the Policy
Planning Staff of the State Department (1992-1994) and a Policy Assistant
in the Office of the Under Secretary of Defense for Policy (1990-1992).
Mr. Graham has a Ph.D. in Political Science from Harvard University, a M.A.
in History from Harvard University, and a B.A. in Russian Studies from Yale

Anders Åslund, co-chair of the Project on Post-Soviet Economies in
Transition, specializes in the economic reform programs under way in Russia
and Ukraine, as well as in the broader economic reform processes in Eastern
and Central Europe. Dr. Åslund served as an economic advisor to the
Russian government from 1991 to 1994, to the president of Ukraine from 1994
to 1997, and to the president of Kyrgyzstan in 1998. Before joining the
Endowment, Dr. Åslund was a guest scholar at the Brookings Institution and
Director of the Stockholm Institute of East European Economics. Åslund’s
most recent book is How Russia Became a Market Economy.

Martha Brill Olcott, a specialist on the states of Central Asia, co-chairs
the Ethnicity and Nation-Buklding Project. In addition to her work at the
Carnegie Endowment, Dr. Olcott is a Professor of Political Science at
Colgate University – a position she has held since 1975 – and a Director of
the Central Asian-American Enterprise Fund. Previously, she was a
Carnegie Fellow at Duke Univeristy and an Advisor to Secretary of State
Lawrence Eagleburger. She received her Ph.D. from the University of
Chicago and is the author of several books, including The Kazakhs, now in
its expanded second edition, and The New States of Central Asia. Her
articles have appeared in Orbis, Current History, Foreign Affairs, and
Foreign Policy.

The Carnegie Endowment for International Peace is one of the nation’s
premier foreign policy institutions. Established in 1910 with a gift from
Andrew Carnegie, the Endowment is a nonprofit organization based in
Washington, DC. With an annual operating budget of $14 million and a staff
of 110, including 30 in its Moscow office, the Endowment carries out
programs of research, discussion, and education in international affairs
and U.S. foreign policy. The Endowment also publishes Foreign Policy
magazine. The Endowment’s web site is at


Financial Times (UK)
9 October 1998
[for personal use only]
PRESIDENCY: Seleznyov states leadership hopes
By John Thornhill and Arkady Ostrovsky in Moscow

The undeclared race for the Russian presidency hotted up yesterday as Gennady
Seleznyov, the Communist speaker of the lower house of parliament, said he
would be willing to stand as the candidate from the left-centre bloc.
Mr Seleznyov's comments were a pointed rebuff to Yuri Luzhkov, Moscow's
demagogic mayor, who last week stated his own presidential ambitions and
started angling for support from the Communist party, Russia's best-organised
political force.
Mr Seleznyov, a chain-smoking former editor of the Pravda newspaper and a
party moderate, hit out at Mr Luzhkov's attempts to woo Communist support.
"Yuri Mikhailovich is as distant from the left-centre as I am from the Pope of
Rome," he said.
Leading Russian politicians are working themselves into a frenzy as they sense
President Boris Yeltsin has been wounded by the country's deepening financial
crisis and may not last until June 2000, when his term expires. The interior
ministry announced that 1.3m people had participated in mass protests on
Wednesday calling for Mr Yeltsin to be sacked.
But while the politicians squabble among themselves, the country's economic
problems are daily growing more severe. A senior government official said real
budget revenues in the fourth quarter were only likely to amount to Rbs60bn
($3.7bn), leaving a budget deficit of Rbs100bn.
While the cabinet is finalising its economic programme, it remains unclear how
this budget deficit can be financed without printing money. Without further
support from the International Monetary Fund, it also appears increasingly
unlikely that Russia will be able to service the $3.2bn of foreign debt that
falls due before the end of the year.
Andrei Nikolayev, a popular nationalist MP and former head of the border guard
service, is playing an influential role in trying to consolidate the centre
ground of Russian politics. He forecast that a unified electoral bloc would
emerge by the end of the month. This bloc would contest the parliamentary
election due in December 1999 and field a single candidate in the presidential
"There is a leftwing and a rightwing in Russian politics, but the centre-stage
of Russian politics is empty. Not a single political party represents the
interests of the majority. And that is the main reason for Russia's crisis,"
he said in an interview with the Financial Times.
Mr Nikolayev, who strongly supports Mr Luzhkov, said he had already enlisted
the support of 12 left-leaning parties and was also trying to win over the
liberal Yabloko party, headed by Grigory Yavlinsky.
"We have already talked to Yavlinsky and we hope that by the end of October we
will have a coalition of left-centrist forces," he said.
The presidential press spokesman said Mr Yeltsin was reacting "calmly" to the
flurry of political activity. "The more candidates declare they want to ballot
for the presidency in 2000, the more it highlights how the process of
democratisation has taken force in our society and is working normally," he


Consequences of Yeltsin's Possible Resignation Viewed 

Argumenty i Fakty, No. 938
October 1998 (Signed to Press 6 Oct)
[translation for personal use only]
Article by Vitaliy Tseplyayev in the "Commentary" column:
"Should the President Resign?"

Russia cannot be comprehended rationally. That is why, in 1996, we
elected our President from the heart, disregarding the bruises received on
the road from socialism to capitalism, the Belovezhye agreement, and the
Chechen war.However, today, as if waking from a deep sleep, our society is
repeating like an incantation the words "President, resign!" We crave
revenge for the lost savings, unpaid pensions, crazy prices, and miserlywages.
Nevertheless, let us try to look at things soberly. Let us put
emotions aside, even if we, journalists, are sometimes short of patience,
tact, and even common sense. But let us try to look at things from a
standpoint of sensible egoism: what do we stand to gain if the President
resigns NOW rather than in the year 2000?Pros:
"Avenged" population will sigh with relief. According to polls
conducted by the Russian Center for Public Opinion Studies [RCPOS], 50
percent of town residents believe that Boris Yeltsin's immediate
resignation would be beneficial. And only one in five (19 percent) see the
resignation as dangerous.
However, on the whole society will let off steam and avoid a riot;
will stop for a time and passions will subside. There will be enough
patience to survive the winter, at least;
will have a feeble hope that by next spring a healthy and predictable
leader will move into the Kremlin, the branches of authority will embrace
each other in love and accord, while the Government will have an
opportunity to sort out the economic mess in peace.
The pros are mostly from the sphere of social psychology, if not
psychotherapy, whereas on the contrary the cons are quite palpable and will
have a direct effect. 
Elections cost a lot. Estimates show that the campaign will require
some 2.5 billion rubles. However, there is no money available. The
money-printing press will have to be set off and this will lead to higher
prices. Are we prepared to have a whip- round to buy a bit of democracy?
Politicians will have other things on their mind than dealing with the
crisis. They will use all their energies toward setting up blocs and
alliances and for behind-the-curtain squabbles. The country will
precipitate toward the abyss at double the current speed, accompanied by
the election ballyhoo of the "vote or lose" kind.
The growing unemployment and poverty; we run the risk of electing as
President someone who will tell the best lies about our happy future but
who will later lead us into our dreary past.
Coming to power; even an most intelligent president will need at least
six months to get to know the ropes and pick out a team. The new circle
will, first of all, take care of their own interests. They will plunder the
country openly or on the sly, share out powers, spheres of influence,
access to the boss, and so on. Hungry mosquitoes are always the most
vicious: faced with criticism, the new masters will not hesitate to use
repression, introduce censorship, or close down independent newspapers and
television. Whatever may be said about Yeltsin, he at least allows his
enemies to lambaste and challenge him.
In accordance with the above RCPOS poll, only 8 percent of our
population believe that the President will resign of his own accord,
against 85 percent who do not. Even Gennadiy Zyuganov himself it seems
does not believe this. Moreover, whatever he may tell his radical
supporters at rallies, he is not ready now to pick up power if it falls
into his lap. To stay in opposition without any responsibility is more
comfortable than to steer a country along a bumpy road.
Changing a leader is not a panacea. Let us not overestimate the role
of the individual in history. The crisis will stay with us if we do not
cure the economy. And who will take the scalpel after the elections is
still a question to which we should try to give the right answer.


Moscow Times
October 9, 1998 
Sergeyev Says Legal to Use Nuclear Arms 

Russia believes it has the legal right to use its nuclear weapons to defend
itself from an external threat, especially given the weakened state of the
country's conventional forces, the defense minister said Thursday. 
"We frankly admit that at a time of reform of the entire military organization
of the country, and of certain reduction in the combat ability of the
conventional forces, the role of the nuclear deterrent factor is increasing,"
Igor Sergeyev said. 
Sergeyev's comments, in a speech at the Greek Academy of National Defense in
Athens, were carried by Itar-Tass. 
However, Sergeyev said Russia is aware of the dangers of nuclear weapons and
remains committed to the principles of nuclear deterrence. 
Many Russian officials have said that the country's army f plagued by chronic
underfunding, hazing among conscripts and miserable living conditions f has
lost much of its combat ability. 
President Boris Yeltsin wants to create a leaner, profession force. Many
defense experts say the reform has made little progress, but Yeltsin said
Thursday "military reform is under way." 


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