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Johnson's Russia List


October 12, 1998    
This Date's Issues: 24252426

Johnson's Russia List
12 October 1998

[Note from David Johnson:
1. Diana Pearson: Hopeful examples.
2. Matthew Rendall: "Chto dozvoleno Iupiteru..." (re Goldgeier & 
McFaul)(Russia and Balkans).

3. Frank Durgin: Hunger in Russia.
4. Reuters: Yeltsin suffers from a cold in Uzbek trip.
5. The Independent (UK): Andrew Marshall, US loses out to Russia over 
Azerbaijan oil.

6. Reuters: Former Russian PM pondering bank job, Duma seat.

7. Sovetskaya Rossiya: Yuriy Nikiforenko, State Duma deputy, chairman 
of the subcommittee for the integration of Slavic peoples, "Personal 
Impressions of the Parliamentary Visit to Kiev. Overcoming Adversity

8. Journal of Commerce: John Helmer, Exporters: Russia's food policy 

9. Grzegorz Kolodko: "virtual economy" and output collapse.
10. Chicago Tribune: Colin McMahon, AS RUSSIA SINKS, FORMER SUBJECTS 

11. Rossiyskaya Gazeta: Igor Tsukanov, "The Flight of Capital."]


From: "Diana O. Pearson, M.Ed." <>
Subject: Hopeful examples
Date: Sun, 11 Oct 1998

Dear David,
In #2424, SARAH CAREY and CHARLES WILLIAM MAYNES said: " Roads in Russia
are terrible. So are airports and rail stations."
In the Russian Far East, the roads are definitely terrible, but, since we
need to be optimistic about whatever deserves any optimism in Russia today,
I would like to say that the international airport in Khabarovsk is just
fine (even the toilets which sometimes even have paper) and the railway
station in Blagoveshensk, Amur is not only fine, it is even beautiful
(except the toilets . . .)
Keep up the dedicated work; I wish someone would figure a way to fund
translating JRL--I cringe to think of the time my various Russian
associates spend translating JRL tidbits which I send . . .


Date: Sun, 11 Oct 1998
From: Matthew Tobias Rendall <>
Subject: "Chto dozvoleno Iupiteru..." (re Goldgeier & McFaul)

From the standpoint of pure *Realpolitik*, James Goldgeier and
Michael McFaul are right that Moscow should swallow its objections to
bombing the Serbs in the interest of not angering the West (Moscow
Times/JRL 2422). But by treating Moscow's stance as mere political
grandstanding, they neglect the possibility that Russian policy makers
really believe it's a bad idea, and that they may have legitimate reasons
for thinking so. Just as bad, they ignore NATO's willingness to run
roughshod over the wishes of one of Europe's major powers in a region
close to its borders. 
In 1994-95 I conducted interviews among the Moscow foreign policy
elite in an effort to explain why Russia had taken a view of the Bosnian
crisis so different from the West. While some of my interviewees cited
domestic political considerations or the desire to reassert Russia's
status as a great power, it was also clear that many believed that the
Serbs had been unjustly singled out, and that air strikes would only make
matters worse. As any examination of the Russian press makes clear, this
is how not only politicians but most scholars and journalists writing on
the matter see it. Their views--right or wrong--cannot simply be written
off as playing politics.
Goldgeier and McFaul, however, follow the usual pattern of the
Western press, attributing Russian leaders' Balkan policies to injured
pride, domestic politics, Panslavism and so forth--anything except the
reasons they actually give: that both sides are to blame, and that
bombing won't work. Why not take these objections seriously, even if you
disagree with them? If Moscow is motivated by domestic political
considerations, isn't this at least as likely to be true of the Clinton
administration, which has every motive at present to seek a foreign
diversion? And, supposing Russian policy makers really do think bombing
is destructive, what are they apt to think of Westerners who advise them
to shut up if they want the loans to keep on flowing?
It is also worth asking what sort of security order can endure in
Europe if some powers are prepared to bomb over other powers' objections.
As Iuliia Petrovskaia and Dmitrii Gornostaev observe (NG, 10/10/98), "By
her [Albright's] logic (a regional organization in the name of the good
intention of protecting national minorities can bomb the territory of a
sovereign state), after NATO's strikes against the territory of the
Yugoslav state, the countries of the Tashkent agreement on collective
security within the CIS...could in theory launch rockets against the
Turkish armed forces now conducting operations against the Kurds." Is
NATO prepared to grant Russia this privilege? 
If the great powers are to get along, it is desirable--if not
essential--that they recognize each other's veto on the use of force,
particularly in other powers' backyards. That is by no means always easy
to do. It can require sitting on the sidelines of a civil conflict, as
Europe did from 1821-25 with Greece and in 1992-95 with Bosnia, while a
bunch of people get butchered. But what is the long run alternative? We
had two all-European wars just from 1853 to 1918 after one of the great
powers intervened over another's objections in the Near East. In the
nuclear age, we can't afford another one. Sarajevo in 1992-95 was bad,
but Sarajevo in 1914 was worse.


From: "Frank Durgin" <>
Date: Sat, 10 Oct
Subject: Hunger in Russia

Anne Applebaum, in her Intellectual Capital piece "Don't forget 
about the Real Russians" that you posted on October 9, wrote "It is 
not true, for example, that people are starving"
I don't know what she has in mind by the word starvation, but there 
is widespread malnutrition and hunger in Russia, and that fact is a
significant contributor to that nation's deteriorating health and the
soaring death rate. 
Up until about a year ago I collected and filed Russian press 
reports of hunger in Russia. I sent you a scaled down collection of 
those reports well over a year ago, but I guess you thought took up 
too much space for posting. But even if no one reads those reports, a 
priori reasoning inexorably leads to the conclusion that there is 
hunger in Russia. 
Agricultural production has plummeted. In 1997 gross agricultural
production was down by 40% from the 1990 level. (Sels.Khoz, April, 28,
1998 p. 1) The decline in net agricultural output (a concept which
factors in the depletion of the machine parks, livestock, soil
degradation etc) was of a much larger magnitude. By way of comparison,
the decline in gross output trigged by the collectivization in the
1930's was 24%. Meat production has plunged 55% and the production of
milk and dairy products and eggs by over a third 
The plunging output has dragged per capita consumption with it and
produced deterioration in the structure of diets. While the per capita
consumption of bread has risen from 119 kg in 1990 to 130 in 1997 and
that of potatoes 106 to 126, corresponding figures for other foods
are: vegetables 89 to 70: fruits and berries 34 to 28: meat and meat
products 75 to 52: fish and fish products 20 to 7:milk and dairy
products 386 to 246: eggs 297 pieces to 208.
The Russian daily per-capita caloric intake has declined by 25%: 
i.e., from an average of 3300 kcal. for the period 1986-1990, to 
2,460 kcal. in 1997. Were it not for the imports it would have fallen 
by some 40%
Those are per capita figures. Given the astronomic inequality 
of incomes that has swept the country, it is clear that many are 
going hungry. Sadly, the situation continues to deteriorate. 
This years grain harvest, according to Sov Ekon, will not exceed 
50 million tons, i.e, less than in 1940. The potato crop, too. is 
expected to be a poor one and, has been posted on this list, the 
Russian's are requesting humanitarian aid.
Should anyone wish to receive some items from my collection of 
very depressing Russian press reports on hunger, many running back 
to 1991 and 1992, I would be very happy to e-mail them.


Yeltsin suffers from a cold in Uzbek trip
By Dmitry Solovyov

TASHKENT, Oct 11 (Reuters) - Russian President Boris Yeltsin, who has a long
history of illness in office, is suffering from a cold and cough, the Kremlin
said on Sunday after he looked pale and unwell during a visit to Uzbekistan. 
Spokesman Dmitry Yakushkin said the welcoming ceremony with Uzbek President
Islam Karimov had been cut short because of Yeltsin's cold during his first
trip abroad in half a year. 
``This happened not only due to his health conditions but to the chilly
weather,'' Yakushkin said, referring to cooler than usual temperatures in
``The president had a difficult flight. This is the end of a difficult week,
and finally he has a cold,'' the spokesman said in explaining the president's
weak gait. ``Nothing extraordinary has happened. I only told you that he has
got a cold.'' 
The Russian president looked palid and unsteady during a welcoming ceremony at
Karimov's presidential mansion, and made a difficult step forward towards the
guard of honour at one point. Karimov then took his elbow to help him get back
When asked how Yeltsin, 67, was feeling, Yakushkin said: ``A cold is a cold. I
can only tell you that he has a cold and he is coughing.'' 
Yeltsin, who had heart bypass surgery in 1996 and then double pneumonia after
suffering a cold in early 1997, has only rarely been seen in recent months as
the country's economic problems have worsened. 
His trips are closely watched for clues about his physical and mental state. 
Earlier, when Yeltsin, who had not left the Moscow region since August,
arrived at the airport in Tashkent, he smiled broadly but did not speak with
The Russian president's last trip abroad was in March, when he went to the
English city of Birmingham to meet U.S. President Clinton and other leaders of
the world's seven largest capitalist economies. 
He has put off several planned foreign trips since then. 
Yeltsin, 67, is visiting independent Uzbekistan for two days for the first
time in a trip aimed at boosting bilateral ties. 
``We'll have an opportunity to hold a broad discussion on international
security and on how regional problems are being solved, including those in
direct proximity to our borders,'' Igor Ivanov, Russia's foreign minister,
told reporters. 
In an interview with Russia's Itar-Tass and two Uzbek news agencies prior to
departing, Yeltsin said he was concerned by the situation in Afghanistan where
Taleban forces, who control about 95 percent of the country including the
capital Kabul, have continued fighting against opposition forces. 
``The Taleban attempt to establish control over the entire country is dragging
out the settlement of the conflict inside Afghanistan and increasing tensions
around Afghanistan,'' he said. ``This, of course, concerns us and, even more,
Afghanistan's neighbours.'' 
Earlier this year Russia, Uzbekistan and Tajikistan formed a ``troika'' to
fight militant Islam together. 
While Karimov fears that calm within his secular Moslem nation of 24 million
people could be disturbed by purist Taleban-style Islam from Afghanistan,
Russia is more concerned about contraband drugs and arms from the region. 
An Uzbek foreign ministry official said that during the visit the two
countries would sign a 10-year agreement on economic cooperation and accords
to expand cooperation in trade, science and technology. 
After leaving Tashkent at midday on Monday, Yeltsin is expected to visit
Almaty, the commercial capital of neighbouring resource-rich Kazakhstan, and
stay until October 13. 


The Independent (UK)
12 October 1998
[for personal use only] 
US loses out to Russia over Azerbaijan oil
By Andrew Marshall in Washington 

The United states fears it has lost the battle to persuade oil companies to
ship oil from Azerbaijan to Turkey. The defeat would indicate a US retreat in
a much broader war - the Great Game for influence in the vast region which
encompasses the Caucuses and Central Asia, newly liberated from Soviet
Azerbaijan is a vital piece in a struggle for political mastery between
Russia, Iran and the US - a struggle that America may be losing, the New York
Times reported yesterday. The country is set to become one of the world's most
important oil producers, and is of immense strategic importance to the West.
But Washington fears it will slip back into the Russian orbit. It wanted Azeri
oil shipped by a new pipeline from Azerbaijan through Armenia and Georgia to
Turkey. But oil companies have balked at the $4bn (2.3bn) cost, and instead
are likely to go ahead with a much shorter alternative which terminates on
Georgia's Black Sea coast when they announce a decision on 26 October. 
The pipeline to Georgia will disgorge its riches into tankers which will then
have to use the Bosphorus to reach the rest of the world. Turkey objects to a
vast increase in Bosphorus traffic, and wanted the oil to go to Ceyhan on its
Mediterranean coast instead. 
Meanwhile, the Azeri President, Heydar Aliyev, one of the former Soviet
Union's most enduring political strongmen, asked voters for another five years
in office yesterday as they cast ballots in the first round of a presidential
"We have solved a lot of problems in the country, but many still exist. We
will solve them," he told reporters after arriving to vote. 
Mr Aliyev, the subject of a sometimes bizarre personality cult in which he is
revered by some followers as an envoy of God, campaigned on his
accomplishments of bringing Azerbaijan stability and concluding deals worth
$40bn to develop its offshore Caspian Sea oil reserves. 
The 75-year-old leader is widely believed to be a shoo-in for a two-thirds
majority and first-round victory over five challengers amid a boycott of the
poll by opposition parties who say it will be rigged. 


Former Russian PM pondering bank job, Duma seat

MOSCOW, Oct 11 (Reuters) - Russia's former prime minister, Sergei Kiriyenko,
said on Sunday he was considering seeking a seat in parliament and taking up a
job offer to serve as the head of the state savings bank. 
Kiriyenko, who headed a liberal reform government for four months this year,
has kept a low profile since he was dismissed following the devaluation of the
Russian rouble and default on some debt in August. He also spent time on
vacation in Australia. 
Asked in an interview by NTV television if he had received an offer to head
the Sberbank savings bank chain, Kiriyenko, a former banker, said: ``There is
such an offer along with some others. I have not yet made a decision.'' 
He also said he intended to remain active in politics. 
``I consider that I have not left politics,'' he said, adding that he had not
ruled out competing for a seat in parliament. 
During the NTV interview, Kiriyenko defended his time in government, and said
his austerity programme to revive the economy failed because the parliament
did not embrace it. 
He also said Yeltsin knew that the government was to devalue the rouble,
despite later attempts by the Kremlin to distance the president from the
``During the four months of my work I never hid anything from the president,''
Kiriyenko said. 
Asked if Yeltsin knew about the decision to devalue the Russian rouble --
which the president promised would not happen just two days before, Kiriyenko
replied: ``I've answered your question.'' 


Deputy Writes on Relations With Ukraine 

Sovetskaya Rossiya 
6 October 1998
[translation for personal use only]
Article by Yuriy Nikiforenko, State Duma deputy, chairman of
the subcommittee for the integration of Slavic peoples, deputy
chairman of the State Duma Committee for Geopolitical Questions,
and member of the CPRF Central Committee: "Personal Impressions
of the Parliamentary Visit to Kiev. Overcoming Adversity

As if we didn't have enough problems. Who is causing trouble now? The
enemies of the Russian and Ukrainian peoples, as usual. Some are fat cats,
while others are living off financial big shots. And they are earning
their keep by sowing enmity and suspicion between Ukraine and Russia,
driving a wedge between us.
But recently, following the elections to the Ukrainian Supreme
Council, these forces have been getting completely hysterical, furiously
disparaging everything that brings the Slavic peoples close together and
that serves integration and the revival of fraternal relations.
A Russian Federation Federal Assembly State Duma delegation headed by
G. Seleznev went to Kiev on an official visit a few days ago. We went to
Ukraine with a sincere heart, with the most positive feelings for Ukrainian
land and our Slav brothers.
The Supreme Council auditorium greeted the appearance of G. Seleznev
and the members of the delegation warmly. The Ukrainian deputies stood up
to applaud and welcome their guests. They greeted the initiatives that
were made with ovations -- the invitation to the Interparliamentary
Assembly, the more steadfast unification of three peoples into a single
union of Slavic states, with each subject keeping its own sovereignty.... 
And only a small band of Rukh [Ukrainian People's Movement] members reacted
badly to these proposals -- they stamped their feet, thumped their fists,
and left the hall toward the end of Seleznev's speech.
I repeat, the Supreme Council ardently supported the speech made by
the State Duma chairman, responding sincerely to the Muscovites' appeals. 
But what did certain television channels show? Reporters behaved craftily,
trying to hide from the public what exactly happened in the auditorium, and
gave prominent coverage to the "protesters," the Rukh members, and their
walk-out from the session. Commentators moaned that Ukraine is rejecting
Moscow's "terms," that it will not give in to new "imperial claims," and
will not give up its sovereignty.
In Russia too there were some newspapers which were not embarrassed to
distort the essence of the event. Kommersant: "Gennadiy Seleznev was
hissed in Kiev." Nezavisimaya Gazeta: "Scandal in the Ukrainian Supreme
Council." Journalist B. Volkhonskiy produced the following report: 
"Seleznev's speech... was virtually disrupted by delegates from right-wing
parties." Ukrainian President Leonid Kuchma "has categorically opposed
joining the union of Russia and Belarus," "the right-wing opposition has
created a real obstruction." It turns out that the Russian guest "was not
allowed to finish his speech."
You can respond to such frank disinformation by saying just as frankly
that these are lies. The speech was made in full. It was greeted warmly
by the majority of Ukrainian deputies. As for the "obstruction," then it
would be a good idea for honest journalists not to make use of rumors and
gossip but reflect various points of view, without being ashamed of
pluralism of opinions. Then the true moods in society and the parliament
would not be hushed up.
Rukh leader V. Chornovil arrived for a meeting with the Moscow
delegation and had a normal, civilized conversation. And in the evening he
did not fail to appear in the Russian Federation Embassy and mingle with
guests, and he even kissed Ambassador Yu. Dubinin. I witnessed this
personally. I think that Chornovil's comrades-in-arms might suspect their
leader of being two-faced. How else can you interpret this behavior? Maybe
the right-wingers are catching on that their time is passing, Ukrainian
society is turning away from nationalistic fever, and is giving the
brush-off to the most malicious forces which are splitting the people?
We had a concrete discussion here in the Ukrainian Government.
Problems had built up over customs tariffs, mutual commitments, and
payments for supplies. Why cut the umbilical cord which links the
countries? We can trade in the broadest selection of goods and articles. 
It is mutually advantageous and honest. Without spending enormous amounts
of money on transport to "distant lands."
We were told about how closely rural dwellers from Ukrainian and
Russian farms are working together. They help each other with fuel,
construction materials, groceries, and feed. Premier V. Pustovoytenko is a
business-like person. He believes that it is necessary to meet more often
with Russian ministers, and that the premiers are called upon to regularly
coordinate mutual plans, monitor agreements, and sort out
misunderstandings. It must be noted that the Moscow authorities are not
being outstandingly responsible either. And we are justly being
criticized. Five premiers have changed on both sides, and our
relationship is at times left kind of unattended. And Ukrainian President
L. Kuchma was right to be perplexed that at the peak of the financial
crisis the Ukrainian and Russian ministers of finance did not even get
around to meeting, in order to consult each other about how to get out of
this breakdown together.
The idea is not to meet up to drink a toast to the health of state and
government leaders. It is time to lend concrete substance to our
agreements. Russia accounts for 33.9 percent of Ukraine's foreign trade. 
However, in 1997 the volume of reciprocal shipments fell by 22 percent. 
The fall in trade is also continuing in 1998. To whose advantage is this? 
Let us be honest: Both sides are suffering losses. And it is those who
are trying to set the peoples against each other, who have come out of the
shadow business world "onto the straight and narrow" and are unfairly
amassing capital at the state's expense who stand to gain here.
Let us recall that Russia, Belarus, and Ukraine were the founders of
the CIS. But Kiev never signed the CIS Charter, it did not join the CIS
countries' Interparliamentary Assembly. The way is clear. It is not too
late to confirm legal membership. Ukraine has not signed the Treaty on
Cooperation in Protecting CIS States' External Borders, or its blueprint,
or the agreement on cooperation between our states' border troops in the
event of the emergence of crises on external borders.
The meetings on Ukrainian soil have helped us to get a better
awareness of present moods and detect problem areas in our mutual
relations. Personally, I am convinced that there is no reason for the
process of the ratification of a major treaty on friendship, cooperation,
and partnership between the Russian Federation and Ukraine to be dragged
out. It has already been ratified in Kiev. Debates are still going on in
Moscow. True, there were reasons for this. These were discussed at
parliamentary hearings in the State Duma, and Crimea and Sevastopol have
been reacting sharply to this. There are costs involved in the treaty
itself. But ultimately we do not represent hostile peoples, but fraternal
peoples, and we must not frighten each other with "irreversible losses" to
the gratification of nationalists. I dream of the revival of a single
union of peoples, with the city of Sevastopol of Russian glory and Crimea
clasped to our bosom. With the inhabitants of Kiev feeling at home in
Moscow. If we think positively, the "advisers" and "experts" who are
prompting a split among the Slavic people will disappear. NATO must not
see the disgrace of our bowing to foreign troops! We will not see another
Belovezhskaya Pushcha. The peoples will not allow it.
I am writing these observations in order to share my personal
impressions of the visit to Kiev and express my perplexity about the
"spite" of the reporters who are acting as instigators. And I emphasize
that we have carried out our mission, we have handed our proposals to the
deputies and through them to the inhabitants of fraternal Ukraine. We are
waiting for a countermovement and mutual understanding. The members of
Rukh can rest easy: They do not have great prospects. In the latest
elections they obtained 9.4 percent of the votes. They have 32 seats in
the parliament. Can such a "force" play a leading role, and dictate to all
of the people how they should live and with whom they should associate?
It is our duty to express the interests of the majority of citizens
and the will of the peoples, and not of a narrow stratum of fat cat
pseudodemocrats. Sober-minded politicians, even those who have lost their
way in the recent past, have the possibility to rehabilitate themselves in
the eyes of their descendants, and revive our destroyed fatherland.
We had meetings in the Ukrainian Foreign Ministry, with deputies, and
with friends. I particularly remember a warm conversation with
Metropolitan Volodymyr of Kiev and all Ukraine in the Kiev-Pecherskiy
monastery. And if the church is moving into the world, then so be it.
We are expecting a delegation from the Ukrainian Supreme Council in
Moscow. We will receive it warmly, in a fraternal way. We will discuss our
matters. We will determine a range of legislative initiatives to ensure
that there are fewer obstacles for the ordinary inhabitants of our
countries. The State Duma and Ukrainian Supreme Council committees have
already done some work on this, they are trying to act in synchrony, and
create a single legislative base. We particularly need to concern
ourselves with the clearing up of the consequences of the accident at the
Chernobyl Nuclear Electric Power Station. The relics of a heroic page of
history and a great tragedy, whose consequences the people are not aware of
yet, have been collected in the Chernobyl memorial museum, which has been
opened at a fire station in Kiev. If this misfortune had happened in our
day, then there would have been considerably more losses. But at that
time, in 1986, all the republics of the USSR and all of the peoples were
involved in clearing up the accident.
We are prepared to discuss all problems and seek compromises, to
protect our relationship. We will not allow anyone to defile sincere
feelings and loyalty to the ideals of good and justice.


Journal of Commerce
October 13, 1998
[for personal use only]
Exporters: Russia's food policy baffles

MOSCOW -- Russian importers and western traders express confusion and
frustration at the spate of import policy changes that were recently
Prime Minister Yevgeny Primakov, in a nationally televised speech last week,
said the tariff for transporting food between regions had been cut by 50%.
At the same time, regional and big-city authorities are enforcing regulations
to hold down local food prices, and prevent food producers and traders from
taking advantage of higher prices by transporting their cargoes for sale
Mr. Primakov also implied that food and grain imported from neighboring
Belarus, Ukraine, and Kazakstan, would also be carried at the new discount
Ukrainian and Belarus officials said in Moscow they are planning to ship
substantial volumes of bulk foodstuffs, according to an agreement with the
Russian government.
The agreement provides for shipment of foodstuffs to clear debts owed for
Russian natural gas. The foods identified by the Ukrainians and Belorussians
include beef, poultry, eggs, butter, cheese, sugar, grain, potatoes, and
Western exporters of these products, including U.S beef and chicken companies,
express concern at the impact this food-for-energy exchange will have on their
sales to Russia.
Mr. Primakov also mentioned in his speech that the government has listed food
and pharmaceutical products that are proposed for import on an emergency
basis, possibly with state-subsidized credits and at concessional duties. He
didn't give details. 
Foreign trade attaches in Moscow, including the U.S. Agricultural Trade
Office, say they are hearing rumors of the food products that have been
designated. Meat for reprocessing into sausage may be one.
Bob Walker, director of the U.S. Agricultural Trade Office in Moscow, said,
"there has been no official confirmation."
Russian government officials admit to being confused themselves. The Ministry
of Trade said it does not know what items are on the new list.
A Ministry of Economy official said his agency's version of the list includes
frozen beef in carcass form, suitable for grinding for sausages, fish for
canning, and butter.
Freight forwarders claim to have heard that the government is abandoning the
3% duty surcharge on food imports that was introduced by Mr. Primakov's
predecessor as a revenue-raising measure.
But food importers say the surcharge is still being collected on some cargoes.
According to a U.S. government assessment of the food supply situation in
Vladivostok, the main city of Russia's far eastern region, only 10% of the
30,000 families registered for emergency food assistance are getting money.
This is limited to 100 rubles over a three-month period -- less than US$7.
Another 120,000 old-age pensioners are estimated to be receiving a pension of
270 rubles (US$17) per month, an amount the Russian government calculates is
40% below the minimum subsistence level. 


Date: Fri, 09 Oct 1998
From: "Grzegorz Kolodko" <> 
Subject: "virtual economy" and output collapse

Grzegorz W. Kolodko on "virtual economy"

Post-Communist Depression and Negative Value Added Output. 

The biggest failure of transition process in Russia and a number of
other post-Soviet Republics has been the dearth of strong, positive supply
response and thus meager, if at all economic growth so far. Contrary to the
early expectations and promises, the fundamental systemic and political
changes have not delivered expansion and improvement of living standard.
Hence, as the depression continues, there are several attempts to explain
the causes of output collapse by non-standard factors. Among them time and
again the concept of negative value added output is brought to the fore and
recently so-called "virtual economy" is being discussed. 
Not surprisingly these attempts try to minimize the actual range of
dire consequences of wrong economics and wrong policies, which have led to
such severe contraction as over last seven lean years in Russia. The
perplexity and confusion of different processes, like shortage removal
effect, liquidation of negative value added output and unregistered economic
activities, lead sometime to indeed weird opinions. They try to exploit the
complexity of the changes by arguing that contraction was better than
growth, decline of real salaries was better than its increase, higher prices
were more suitable for consumption than the lower ones, etceteras. Some
advisers still claim that there is a market economy in Russia, only the
people don't understand it. Yet as long as they do so, there is no market
economy, since market system presumes that there are private property and
liberalization, but also organizations and the rules as well as proper
understanding of these rules and market culture. Jeffrey Sachs - instead of
taking his part of blame and making at last a sound effort to understand and
explain what and why have not worked in Russian economy - tries to say that
they didn't listened to his advise. The problem is that some of Russian
policymakers, unfortunately, have followed his ill-advised recipe - as in
Poland at the early 1990s, what caused deep contraction and vast crisis at
the time - and he should claim now due credit for his role in such
There are more examples. For instance Jan Winiecki repeats his early
false assertions about the improvement of standard of living and general
economic situation despite the great slump, while suggesting in ridiculous
way that: "An Estonian who bought a packet of western-made (and therefore
reliable) condoms for 1$ in 1991 was spending 3% of his monthly income. Now
(after contraction of one-third of GDP! - GWK) he is spending less than
0.5%, so the relative price to him of these high-quality foreign goods has
fallen steeply - a rise in his living standard that most measures would
ignore." (Quoted in "Now you see it, now you don't" "The Economist",
November 22nd, 1997). Of course, now one pays relatively less, if the income
and prices are expressed in dollars, but if they are denominated in the
local currency, that happens to be all the time in circulation as the legal
tender, one pays much more in the real terms. After all, if still only the
Western products would be reliable in a country aspiring to join the
European Union after a decade of transition, for what sake this transition
would be launched altogether? 
There are abundant good reasons to be a real fan of the transition
and one indeed must not try to support it by false declarations and trivial
and vague arguments. Therefore it is worth to continue the debate about the
phenomenon of so-called virtual economy. But Russia is not a such. Though it
is true that a part of production was of poor quality and in the extreme
cases the value added during manufacturing process happened to be indeed
negative, that type of output was neither that big, nor it was substituted
by any other production soon after it ceased to flow. The same is true
vis--vis other transition economies including the former GDR. Whatever was
the genuine quality of the famous Eastern German "piece of art" of
automotive industry, i.e. Trabant car, its past possession, even if it was
manufactured at a negative value added, could not be substituted by the
current lack of the brand new BMW! That is not virtual reality, but the real
problem of lost output and wealth due to the transitional contraction, of
which a great part in turn is due to the wrong policies based upon wrong
It could be objected that cutting negative value added activities
should raise rather than reduce GDP. But it is only after price
liberalization that the negative nature of many productive activities was
revealed. Cutting negative value added activities raises GDP with respect to
what it would have been without such cuts, but it still causes GDP to fall
with respect to earlier levels achieved when domestic prices diverged from
the opportunity costs and the international prices. Over the transitional
contraction a great deal of output was wiped out in a radical way, without
instant replacement by other production. At most, the falling output was
substituted by growing import. Some companies were crowded out from the
market by credit crunch, especially by prohibitively high real interest
rates imposed not only on the new loans (what was justified, considering the
need of financial squeeze for the sake of successful stabilization policy),
but on the old debt too.


Chicago Tribune
October 9, 1998
[for personal use only]
By Colin McMahon
Tribune Foreign Correspondent

VILNIUS, Lithuania -- Having escaped Russia's clutches once this decade,
the Baltic nations of Lithuania, Latvia and Estonia appear determined not
to get sucked into the economic whirlwind enveloping their giant neighbor
and threatening economies across the former Soviet Union.
Facing economic disaster, Russia and other former Soviet republics are
contemplating a retreat on free-market reforms. Although neighboring
economies will be hurt by the crisis, Lithuanians and their Baltic partners
hope to emerge even stronger and more independent than they have been in
the seven years since their split from Russia.
"This could stimulate efforts to modernize the economy and force companies
to produce better-quality goods for other markets," said Antanas Bartulis,
Lithuania's vice minister of the economy. "A second positive impact is that
industrial producers have been taught a very valuable lesson: Profits may
be bigger in Russia, but the risks are greater."
That lesson is especially clear in the financial sector, which offered
astounding returns on investments until Russia let its ruble devalue in
mid-August and defaulted on much of its debt. Like their Western
counterparts, Baltic banks expect to suffer tens of millions of dollars in
losses from trading in Russian government and corporate bonds.
About 8 percent of all assets held by Latvian banks are Russian debt, and
some regional economists fear a spillover crisis in that sector could
undermine the nation's economy. Russian debt accounts for about 2 percent
of assets in Lithuanian banks. Estonian banks have only limited exposure.
The Russian market for consumer goods also proved lucrative, for a time.
Products that do not meet European or Scandinavian standards, and thus are
cheaper to produce, can sell in Russia.
Lithuanian companies took advantage. Goods sold to Russia account for 21
percent of the nation's exports, about 9 percent of Lithuania's gross
national product.
"Part of the problem is that some of these companies did not adjust
themselves to deal with the West," said Rimvydas Valatka, a commentator for
the national newspaper Lietuvos Rytas. "They were run by old-style red
directors who did not want to change. Now maybe they'll get in some new
The business casualties are varied and include some well-managed firms.
Lithuanian truckers sit idle. A Latvian textile company furloughed much of
its staff. An Estonian dairy is trying to unload a warehouse full of milk
products and other perishable goods.
The loss of exports is not the only pain. With the Russian market
practically evaporated, all three countries are teeming with products.
Prices are falling, helping consumers but hurting producers, so much so
that Lithuania has experienced deflation for a couple of months.
Lithuania's government has bought up surplus foodstuffs and medicine,
pledging to use them as humanitarian aid to Russia. While the gesture has
been warmly received in the Russian enclave of Kaliningrad, which is
suffering hard times, Russians elsewhere despair at the idea of the tiny
Baltic state coming to their rescue.
Lithuania recently adopted emergency measures, including subsidies for
exporters. Latvia curbed some imports. Estonia, which has a strong
commitment to the free market, said it would take no direct steps but is
working behind the scenes to persuade its trading partners to accept more
Estonian-made goods.
Lithuania, too, is looking to expand its markets, and Illinois Gov. Jim
Edgar has visited Vilnius to discuss broader trade ties.
Elena Leontjeva, president of the Free Market Institute in Vilnius, worries
that under the pressure of shrinking profits and job cuts, Lithuania might
backslide on market reforms.
"Export guarantees could make it so that the whole Lithuanian society is
paying to subsidize companies that are making bad-quality products and
losing money," she said. "These companies need restructuring. Sometimes you
need such a shock."
Leontjeva and others cited the wrenching changes imposed by independence in
the years after the fall of the Soviet Union. The Baltic states and their 8
million people had to rebuild their economies practically from scratch.
The Lithuanian government says economic growth this year, once forecast at
7 percent, will be closer to 5.5 percent, and unemployment may rise.
"The government said the crisis would not have much of an influence in
Lithuania, but look, it's already affecting us," said Sergei Masnikov, 26,
who buys used cars from the West, mainly Germany, then fixes up and sells
them to Russians and Belarussians.
Masnikov, like the nation's trucking companies, has benefited from
Lithuania's location between East and West. Standing in a huge, dusty car
lot that on a good day holds 6,000 vehicles, he lamented an economic
collapse that has slowed the flow of potential customers to a trickle.
"The government should be trying to help us, but this place could end up
closing," he said. "Look at the jobs the cars provide--someone to buy and
sell it, someone to wash it, someone to paint it, the mechanic."
One element missing from many discussions about what Russia's crisis means
for the Baltics has been the political and military one. Though Russia's
Communists and nationalists are regaining influence, few people in the
Baltics seem to fear Moscow would try to reassert control.
"The more problems they have within Russia, the longer it will take them to
remember that Lithuania once belonged to their empire," Valatka said. "The
crisis should demonstrate that Lithuania is not the former Soviet Union.
We're already on the other shore."
To stay there, Leontjeva and others say, the Baltics must press ahead with
the kind of reforms its former Soviet partners--Russia, Belarus, Ukraine
and many Central Asian republics--have been unable or unwilling to embrace.


Rossiyskaya Gazeta
October 6, 1998 
[tranlation for personal use only]
Article by Igor Tsukanov: "The Flight of Capital"

The other day, RF Prime Minister Yevgeniy Primakov met with major 
Russian exporters. The subject of the conversation was the huge amount of
money which has, for many years now, been a deep river flowing out of 
Russia and settling in foreign banks.
Up to now, it has been primarily the scholars in our country who have
been working on the problem of the "flight" of capital from Russia. In
particular, scholars from the Institute of Economics at the Russian 
Academy of Sciences, in conjunction with the Canadian University of 
Western Ontario, who have been dedicated to studying the problem for about
one-and-a-half years. The state has also been working on this, but in the
person of so many bodies (the TsB [Central Bank] Special Administration,
the State Customs Committee (GTK), the Federal Currency and Export Control
Service (VEK), the Department of Tax Policy, the Ministry of Finance, the
Ministry of Economics and even the State Investment Corporation), that
there was no occasion to talk about specific, especially unified measures.
The scholars of the Institute of Economics were the first to count 
up: a total of about $140 billion has left Russia since 1992. This is 
more than the sum of money which "vanished" from Brazil, Venezuela, Mexico
and Peru taken together during 1979-1987 (the period of the financial
crisis in these states). By 1997, the amount of former Russian capital
which has now settled abroad reached one-fourth of the domestic GDP, and
practically equaled the value of the country"s foreign debt!
The reason for such an active outflow of money is obvious -- it is,
first of all, the lack of confidence of our countrymen (incidentally, not
of them alone) in the ruble and the entire financial policy followed by
the state. It is quite natural that the most noticeable "splashes" of the
economy"s dollarization and transfer of currency abroad fell in
October 1994 (the "black Tuesday" on the MMVB [Moscow Inter-Bank Currency
Exchange], during the period of elections for the RF President, and
Researchers calculated that Russia has lost up to $17 billion yearly
since 1994. We can only guess how much money "migrated" beyond the
borders of our native land during the last one-and-a-half months.... At
the meeting with the exporters (the directors of Gazprom, LUKOIL, YUKOS
and the banks servicing them, Sberbank, ONEKSIM Bank, MENATEP, Rossiyskiy
Kredit and Avtobank, took part in it), the Russian prime minister stated: 
by the beginning of September, the country had failed to receive, in the
established time limit, export currency earnings amounting to $3.4 billion
dollars. Moreover, according to the data of Ye. Primakov, "in
approximately 80 percent of the cases there had been instructions from the
exporters to their foreign contractors not to transfer funds to Russia." 
For this reason, the Government feels that control over return of the
earnings to Russia is necessary. The TsB, the VEK and the GTK have been
instructed to think about how to do this. The basic direction has already
been proclaimed, however: oblige the exporters to sell 75 percent (and
not 50 percent, as before) of their currency earnings on the domestic
market, as well as to reduce the time-limits for their return (up until
now, a gap of 180 days was permitted between the supply of the goods and
the payment for them). Ye. Primakov reminded them: a delay in payments
and an understatement of the total currency earnings will cost the
violators 200-300 percent of the earnings themselves. The measures of
which we are speaking are not merely timely actions by the state, but part
of the government program for a way out of the crisis.
There is so far no talk about returning the "fugitive" capital to 
Russia. But it would be worthwhile to keep the money which is still here
(the so-called "flying" capital). Strict administrative regulation, in
the opinion of Leonik Abalkin, director of the RAN [Russian Academy of
Sciences] Institute of Economics, will not help in this matter. "Gaps"
can always be found in any law, even the strictest one: despite any
obstacles, there are still more than enough ways to take money abroad --
including fully legal ones, such as, for example, offshore business.
In addition, capital can flee the country without every crossing its
borders: this is precisely what happens in the dollarization of the 
economy, when the population begins actively ridding itself of ruble cash,
using it to buy up foreign currency. According to the data of the RAN
Institute of Economics, the amount of cash dollars (the population has $30
billion "in stockings," plus about another one-and-a-half dozen billion in
turnover in "shuttle" trade) in September considerably exceeded the amount
of the ruble money supply (approximately 180 billion rubles or, at the
exchange rate at that time, $10-18 billion). According to the estimates
of economists, over 40 percent of the country"s monetary flow right
now is in foreign currency and, therefore, not under the control of the
Central Bank.The procedure for the obligatory sale of currency by exporters is
stiffening very little. This must be done, but it is hardly the first 
thing to do. First, we must think about stabilizing the economy and about
how -- at least partially -- to restore the investor"s confidence in
the ruble. The first step here, obviously, should be a clear and precise
government program. Which we are anxiously awaiting.


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