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Johnson's Russia List


October 14, 1998   
This Date's Issues: 2429  2430  

Johnson's Russia List
14 October 1998

[Note from David Johnson:
1. Reuters: Doctor-defying Yeltsin says he's fine.
2. Reuters: US and Soviet successor states sign ABM documents.
3. Summary of contents of Current History magazine October issue,
Russia and Eurasia.

4. Current History: Dale Herspring, Russia's Crumbling Military.
5. Moscow Times: Bruce Bean, Court Direct Investors.
6. Rossiyskaya Gazeta: Vladimir Kuznechevskiy, "Premier's Three
Arguments. Where To Get the Money and How To Use It." (Government 
Paper Defends 'Silent' Premier)]


Doctor-defying Yeltsin says he's fine
By Martin Nesirky

MOSCOW, Oct 14 (Reuters) - President Boris Yeltsin defied his doctors and
confounded his critics on Wednesday by putting in a brief, upbeat appearance
at the Kremlin despite being ill. 
``Can you see how the president is? Well, here I am,'' the 67-year-old
Kremlin chief told Prime Minister Yevgeny Primakov, Defence Minister Igor
Sergeyev and Foreign Minister Igor Ivanov. ``You won't even let me sneeze.'' 
The Kremlin meeting lasted less than an hour and covered the Kosovo
crisis and Russia's own economic problems. The president then returned to
his Gorky-9 country residence -- where doctors had said he should stay all
Yeltsin curtailed a visit to Central Asia on Monday because of what
doctors said was tracheo-bronchitis -- an infectious disease caused by
inflammation of the bronchial tubes and involving coughing and chest pains. 
Russian media have speculated this is not the whole truth. 
Either way, Yeltsin looked far better in television footage on Wednesday
than he did in Kazakhstan and Uzbekistan, where he stumbled, coughed and
Kremlin spokesman Dmitry Yakushkin, who said on Tuesday he did not expect
Yeltsin back in the office this week, was quoted by Itar-Tass news agency as
saying the president was not out of the woods yet. He was still running a
slight temperature. 
``When we told him he should listen to the doctors and stay in bed he
dismissed it with a wave of his hand,'' Primakov said. 
Primakov interrupted his session at the Federation Council upper house of
parliament to meet Yeltsin. He had been outlining his as yet incomplete
plans to tackle Russia's economic crisis. 
He said the main priorities were to restructure the creaking banking
system, reform the tax system and ease the problem of non-payments between
Opposition Communist Party leader Gennady Zyuganov said Primakov was
displaying ``a pragmatic approach to the crisis.'' 
Zyuganov has been less flattering about Yeltsin, lining up with other
opposition leaders to demand the president step down, questioning his
ability to cope with the country's economic problems -- which include
inflation, frozen markets, debts and a rouble that has lost two thirds of
its value in two months. 
The rouble was firmer against the dollar on Wednesday, partly because of
central bank intervention ahead of Thursday's settlement of some $1.5-$2.0
billion in currency forwards. The rate for Thursday was 13.00 against
Wednesday's 15.05. 
Yeltsin has withstood pressure to quit and says he plans to see out his
term to 2000. Primakov echoed this, telling reporters he saw no need for the
president to step down. 
The president, who has a history of recurrent health problems, had heart
surgery two years ago. But he also has a track record of sidestepping
doctors' orders and surprising the world. 
``The number of Boris Yeltsin's illnesses are as legendary as his
obstinacy,'' noted the daily newspaper Sevodnya. 
Primakov said Yeltsin had welcomed a last-ditch deal on Kosovo that
averted the immediate threat of NATO air strikes against Yugoslavia. Ivanov
hailed Russia's rare political consensus over Kosovo. 
He was due to fly to Paris later to attend a meeting of the six-nation
Contact Group on Yugoslavia on Thursday that would discuss the deal brokered
by U.S. envoy Richard Holbrooke. 


US and Soviet successor states sign ABM documents

GENEVA, Oct 13 (Reuters) - Officials from the United States, Russia, Belarus,
Kazakhstan and the Ukraine on Tuesday signed documents related to implementing
agreements on the Anti-Ballistic Missile Treaty (ABM), U.S. officials said. 
Stanley Riveles, who headed the U.S. delegation to the closed-door talks in
Geneva, signed the documents relating to an agreement on confidence-building
measures reached in September 1997. Viktor Koltunov of Russia's Defence
Ministry also signed. 
Details were not disclosed and it was not clear whether the step would boost
chances of the Russia State Duma, the lower house of parliament, ratifying the
stalled START-2 nuclear arms reduction treaty. Russian Prime Minister Yevgeny
Primakov has called for quick ratification by the opposition-dominated Duma. 
``We understand the DUMA wanted to get the ABM issue squared away before they
are willing to act on START 2,'' said one U.S. official familiar with the
Geneva talks. 
Under the 1993 START pact, which has been ratified by the U.S. Senate, the
number of deployed Russian and U.S. nuclear warheads would be cut by up to
two-thirds from about 6,000 each to no more than 3,500 each by the year 2007. 
In September 1997 in New York, U.S. Secretary of State Madeleine Albright
signed a ``memorandum of understanding on succession'' establishing that the
parties to the 1972 ABM treaty -- originally the United States and Soviet
Union -- would be the United States, Belarus, Kazakhstan, Russia and the
The foreign ministers of the five participating states also reached agreements
relating to demarcation between anti-ballistic missile defence systems limited
by the treaty and theater ballistic missile defence systems that are not
At the time, a U.S. State Department statement said this meant that only a
single ABM deployment area would be permitted among the four successor states.
A collective 15 ABM launchers at ABM test ranges would be permitted. 


Current History magazine
Russia and Eurasia
October 1998

October Article Abstracts

Title: Russia's Summer of Discontent
Author: Michael McFaul
"For the first time in several years, politicians across the
spectrum-liberals, communists, and nationalists alike-have begun to speak
about the specter of Russian fascism should the current economic and
political crises continue. Others, including even President Yeltsin, have
warned of coup plots aimed at toppling Russia's fragile democracy. What went
wrong, so quickly?" 

Title: A Flawed Democracy
Author: Peter Rutland
"Towering above [Russia's] fractured political system is the enigmatic
figure of Boris Yeltsin. . . His style of rule is that of a monarch, but his
source of legitimacy is public elections. This kind of elective autocracy
leads to the worst of both worlds: the instability of periodic elections and
the inflexibility of autocratic rule." 

Title: The Cashless Society
Author: Marshall I. Goldman
One of the more curious responses to the introduction of the market in
Russia has been the growth of "barter, which has displaced the ruble in
anywhere from 70 to 80 percent of the country's business transactions. . .
Why is barter, which is avoided by Western businesspeople, so attractive to
their Russian counterparts?" 

Title: Russia's Crumbling Military
Author: Dale R. Herspring
"There has been a tendency in some circles to ignore the military's role in
many polities, including Russia. But if the military represents the last
barrier against collapse and chaos, then the state of the armed forces is
critical. For Russia, the situation is not encouraging. The Russian military
may not yet have collapsed, but it is not far from doing so." 

Title: The Politics of Corruption
Author: John M. Kramer
"Postcommunist Russia's half-hearted and often chaotic efforts to create a
market economy in which private entrepreneurship would figure prominently
have exacerbated" opportunities for corruption. The crux of the problem?
"The state simultaneously exhibits too much and too little regulation in the
exercise of its powers." 

Title: The Dismal State of Health Care in Russia
Author: David E. Powell
>From the spread of cholera, tuberculosis, and aids to the heavy use of
alcohol and tobacco, from the highest abortion rate in the world to a
plummeting life expectancy, Russia is beset by health problems with which it
is ill prepared to deal. David Powell surveys this bleak situation and
concludes that a quick fix is unlikely: "the poverty of medical care in
Russia is an expression of Russia's overall economic condition." 

Title: Ukraine: The Muddle Way
Author: Dominique Arel
"Although most observers have argued that political instability in Ukraine
will occur because of Russia, it may instead be generated internally as a
result of domestic policy choices. Will Ukraine have to undergo a severe
crisis to understand that more of the same cannot work?" 


Date: Tue, 13 Oct 1998 
From: (Bill Finan)
Subject: Herspring/Russia's Crumbling Military

Current History
October 1998
Russia's Crumbling Military
Dale R. Herspring
Dale R. Herspring is a professor of political science and head of the
department at Kansas State University. This article draws on the author's
"The Search for Stability in the Russian Army," in Constantine Danopoulos
and Daniel Zirker, eds., The Military and Society in the Former Eastern
Bloc (Boulder, Colo.: Westview, forthcoming).

The best indicator of stability in a political system is the military. Why?
Because the armed forces are usually the strongest, most cohesive, and most
disciplined organization in any polity. If they have lost cohesion and
discipline, then the outlook for the political system is bleak.
Unfortunately, this is exactly the condition the Russian military finds
itself in. Discipline has collapsed, equipment is becoming antiquated,
morale has sunk to an all-time low, good officers and noncommissioned
officers are leaving the service, the country's generals have been
politicized, and Moscow's ability to ensure the military's obedience in a
crisis is doubtful.

Budget promises unkept

The Russian military is shot through with problems. The greatest concern is
money. Not only has the military's budget been cut each year over the past
decade, but it has rarely received even the funds promised. In 1997, the
military received only 56 percent of its budgeted appropriation. It was
given only 43 percent of its budget allocation for medical services, 41
percent of monies earmarked for clothing and equipment, and only 50 percent
of what was promised to feed its soldiers. The last shortfall has led to a
constant delay in paying officers, whose salaries are often used to feed
enlisted personnel.
This budget crisis has had a cataclysmic impact on the entire military.
Because of cutbacks in weapons purchases (only 2 combat aircraft were
purchased in 1995, compared with 585 in 1991), by 1998 only 30 percent of
all weapons in the Russian inventory could be classified as modern-in nato
countries the number stood at between 60 and 80 percent. If current trends
continue, by 2005 only 5 to 7 percent of all Russian weaponry will be new,
and Russia's military will hold third world status. 
Moscow's worry about weapons does not end with the need for new systems.
Existing equipment is also in desperate need of repair. Marshal Igor
Sergeyev, the Russian defense minister, noted this April that 53 percent of
all aircraft as well as 40 percent of anti-aircraft systems, helicopters,
armored equipment, and artillery required repair. The navy is in even worse
Equipment problems have had a disastrous effect on Russian combat
operations. During the war to suppress the insurrection in the republic of
Chechnya in 1994-1996, the army quickly discovered that it lacked the money
needed to carry out operations. Funds had to be diverted from its regular
budget, further worsening the situation for the armed forces as a whole. At
one point the shoes and winter hats worn by Russian troops in Chechnya were
paid for by a Moscow bank; the army simply could not afford to buy such
"luxuries." And because of a lack of modern weapons, the military relied
heavily on older arms and ammunition, some of which were manufactured
during World War II.
Other examples abound. By 1997, almost all government meteorological
stations had stopped passing critical weather information to the military
because of nonpayment, and Prime Minister Viktor Chernomyrdin had to order
power stations to continue to supply military installations with power even
if they had not paid their electricity bills. At the end of 1997, the
military's total debts exceeded 40 trillion rubles, or half the 1996
military budget.
Lack of money has also hurt training. If soldiers do not train, their
ability to carry out their assigned missions quickly degrades. Training
funds are down 90 percent since 1991, and Russia's armed forces have not
conducted a single division-level ground forces operation since 1992.
Similarly, Russian pilots are lucky if they get in 25 hours of flying a
year-just a fraction of the 150 to 200 hours that nato recommends for its
pilots. According to Russian sources, pilots often spend more time sweeping
runways than flying planes. Many can be found working part-time as cab
drivers (it is also not unusual to see soldiers begging for money on the
streets of Moscow). With the exception of some elite units (airborne troops
and those engaged in peacekeeping operations), the vast majority of Russian
soldiers receive little or no training, and are thus in no position to
carry out combat operations. If the Russian army were called on to go to
war (especially if the operations were large-scale and offensive), the cost
in terms of human life would be tremendous-a cost that would be exacerbated
by the lack of sophisticated weapons and equipment.

A breakdown in discipline

At one time observers could talk of "Prussian-style" discipline in the
Soviet military. This writer can remember seeing many cases in which Soviet
soldiers and sailors were subject to the most brutal discipline and behaved
almost like puppets. Although some criminal acts probably occurred, they
often were limited to activities such as senior officers using soldiers to
build dachas for themselves. Soldiers might not have been exceptionally
efficient, and they might have taken whatever they could from the state,
but generally crime in the Soviet military was limited.
Over the past 10 years, however, discipline has deteriorated to the point
where the military prosecutor's office has a full-time job pursuing those
accused of the most serious forms of crime, such as murder. Yuri Demin, the
chief military prosecutor, noted in 1997 that 50 soldiers were shot by
fellow servicemen-and this was just those on guard duty who shot each
other! He further reported that by March 1998, another 10 had been killed
in similar circumstances. The problem continues to grow. In May, in the Far
Eastern military district, 4 soldiers reportedly shot and killed their
commanding officer. In all, during 1997 approximately 521 servicepeople
died because they were engaged in criminal activity. In addition, Demin
reported that 14 generals were under investigation for committing crimes.
Suicides are also a growing concern. In 1997, 487 soldiers committed
suicide, 57 more than in the previous year. The Duma reported that between
January and April 1998, another 132 committed suicide. While the cause is
unclear, most observers agree that poor food and working conditions,
frequent delays in wage payments, and the widespread hazing of recruits
were the primary factors.
The last is a long-standing problem. Rather than exerting close personal
supervision of enlisted personnel, Russian officers have traditionally
relied on senior conscripts to keep the junior ones in line. However, the
senior conscripts have brutalized many of the junior conscripts-to the
point that a number of them have committed suicide. Others have been
killed. As recently as May a young soldier was beaten to death because he
refused to mend an older conscript's soccer shoe. The army is aware of the
problem, but ending it would require major changes in the training and
conduct of officers and noncommissioned officers. There is little
indication that the high command is prepared to make these fundamental
changes. Meanwhile, it was reported that 50,000 young men evaded the draft
in 1997, while more than 12,000 conscripts went awol rather than endure the
brutality of barracks life. 
The quality of those who do answer their draft notices has dropped
considerably. In 1997, some 40 percent of new conscripts had not attended
school or held a job in the two years before their military service.
Furthermore, one in twenty had a police record and others were, according
to the Russian defense minister, "drug addicts, toxic substance abusers,
mentally disabled, and syphilitics."
Problems are also found at the junior-officer level. Not only are these
officers resigning their commissions at an alarming rate, but competition
among candidates for officer school (which once was intense) has dropped
sharply. In 1989, for example, it was 1.9 candidates per space; in 1993,
only 1.35. Recent comments by Russian officers suggest that it has since
decreased even further. Moreover, by 1996 more than 50 percent of all
junior officers had left the military as soon as their duty was completed
in order to enter the business world. Why should they remain in a military
that pays them about $100 per month for doing a job that requires heavy
labor and the physical discomforts that go with it? Poor salaries, an
insecure future, inadequate family quarters and support institutions, and
declining prestige have all taken their toll.
Given the problems facing the military, it is not surprising that morale
is at an all-time low. Many military professionals no longer see any future
in the armed forces. Pavel Felgenhauer, the highly respected Russian
commentator on military affairs, has reported that senior officers have
begun to tell journalists openly that Marshal Sergeyev is not fit to
command the Russian army-public criticism that would have been
inconceivable during the Soviet period. Even more troubling from the
Kremlin's standpoint are the questions being raised concerning what
officers would do if called on to support Moscow internally. A 1995 survey
of 600 field-grade Russian officers illuminated doubts about the army's
reliability. According to the survey, "officers were particularly adamant
in their opposition to using the military to quell a separatist rebellion
in one of the regions of the Russian Federation." Only 7 percent supported
such an action. When asked if they would follow Moscow's orders if a
Russian republic declared independence, 39 percent "admitted that they
probably or definitely would not follow orders."
The survey's results confirm defense analyst Felgenhauer's comment in March
1998 that "sending the present Russian armed forces into any kind of action
would be a serious error. Things could get worse than they were in
Chechnya-the troops could rebel instantly." 
To compound morale matters, the government has increased the income taxes
soldiers must pay. At the same time, military officers whose incomes
previously were not taxed must now not only pay this tax but also suffer a
reduction in benefits such as free travel and a 50 percent discount on

Politicizing the military

The general breakdown in discipline and decline in morale has been
accompanied by another major change in the post-Soviet Russian military.
There has long been a misperception in the West that the Soviet military
was highly politicized. Much depended on how one defined the term
"politicization." If it referred to the effort of a party-state such as the
Soviet Union to inculcate a particular political point of view in the
hearts and minds of its troops, then the Soviet military was very
politicized. Political officers and indoctrination lectures were part of
the life of the Soviet soldier.
There is, however, another type of politicization: the involvement of
military officers in politics. In this sense, Western military officers
have been much more politicized than Soviet military officers. For example,
American military officers often enjoy close ties with members of Congress,
something that would have been inconceivable in the Soviet Union. Soviet
officers were far more isolated from civilian society and, with the
exception of a few at the very top, seldom became involved in the political
Since the end of the Soviet Union, Russian military officers have cast off
this apolitical stance. Former Soviet (and Russian) generals such as
Aleksandr Rutskoi, Boris Gromov, Aleksandr Lebed, and Andrei Nikolayev have
become household names among those who follow politics in Moscow; all have
taken the political plunge, with varying degrees of success. As far as
civil-military relations are concerned, this has increased the possibility
that at some point active-duty Russian generals may move directly into the
political realm. As for the military, it has further undermined cohesion as
generals have begun to view themselves as political actors and sometimes
find themselves on different sides of issues in public.
This does not mean that the Russian military is likely to intervene
directly in the political process. The military itself is too divided
internally to carry out a coup successfully. And although Aleksandr Lebed
stands a better than 50:50 chance of winning the next presidential election
(assuming it is open and fair), his election would be a case of a former
general who used his military background to political benefit and who won
office through the electoral process.

Can it be reformed?

Military reform has been widely discussed in Russian military circles, but
there has been little effort to make it a reality. The most ambitious and
controversial plan is the one currently being implemented. Designed under
Marshal Sergeyev's leadership, the plan divides military reform into two
Under the first stage, which is to be completed by the year 2000, the
military is to be reduced to 1.2 million troops. Reaching this level will
require the discharge of thousands of soldiers. The maximum number of
generals (in both the military and paramilitary units) is also to be cut to
2,300. Funds must be found to pay those who are discharged, since Russian
law requires that forcibly discharged soldiers receive a hefty separation
The reform plan also calls for the abolition of the position of commander
in chief of ground forces, one of the most powerful in the Russian army. It
will be replaced by a Ground Forces Main Department. The introduction of
more mobile forces is called for as well. The plan also combines the air
defense and air force into one service. Some 125,000 air force personnel
will be discharged by the end of 1998, and a number of redundant offices
and organizations have been combined in an effort to save money.
Stage two calls for even more ambitious changes. Space forces may be
combined with the air force, military academies will undergo major changes
both in curriculum and numbers, and there are suggestions that the military
will be divided into conventional and strategic nuclear forces. This last
change would lead to a blurring of service lines (each has both
conventional and nuclear forces); opposition by more traditional military
and navy officers is already evident.
The proposed changes to the nuclear forces come at a time when Russia is
placing primary reliance on nuclear weapons as it restructures its
conventional forces. Nuclear weapons are cheaper than conventional systems,
and easier to maintain. The danger, however, is that by adopting a "launch
on warning" strategy, even greater reliance is placed on Moscow's
command-and-control systems as well as its missiles. After all, launch on
warning means that as soon as Moscow detects an incoming missile, it has no
alternative but to launch its own missiles in response. It does not have
time to evaluate the situation and determine if the threat is real.
Unfortunately, radar systems no longer work as well as they did in the
past, and the reliability of Moscow's aging missiles is a grave problem.
There is a serious danger that these antiquated warning systems could lead
the Kremlin to believe it is under attack when it is not. The September
1998 agreement by the United States to share missile launch data with
Russia underscores America's concern about this deficiency.

A bleak outlook

Despite the introduction of reform measures, it is hard to be optimistic
about the Russian military's future. President Boris Yeltsinx gives the
impression that he neither understands nor cares about the state of the
armed forces. He seems to tolerate the military and, if anything, appears
more interested in the country's internal security forces-which are
specially trained to deal with domestic conflict.
As for the reform process, it is true that for the first time the country
has a plan and is attempting to implement it. The problem is that the
military continues to fall apart in the process. As the West knows only too
well, downsizing is expensive. As recently as this July, Yeltsin promised
the military-again-that the government would find enough funds to cover the
costs involved in reform. Whether he will follow through is open to
question. As it stands, the newly combined air force and air defense forces
are attempting to sell 600 surplus aircraft in an effort to raise money to
help pay basic operating expenses.
Even if the reforms are fully carried out, it will be a long time before
Russia has a military similar to that under the Soviet government. First,
the equipment is so old that almost all of it will have to be replaced, a
very expensive undertaking. Second, the hemorrhage of young officers from
the military and the drop in prestige of military service mean it will be
some time before the army is able to attract the high-quality people it needs.
The chaos present in the military is indicative of a greater problem: the
instability that haunts Russia. This means that the Kremlin can only hope
that it will not have to call on the military to protect it from internal
or external enemies. What it needs is a honeymoon for the next 5 to 10
years, a period of foreign and domestic tranquillity in which it can
rebuild its shattered armed forces. Unfortunately, the country's leaders
seem to believe that they can ignore the military until the rest of the
country recovers. While it would be wrong to rule out such a possibility,
the instability that seems to reign throughout Russia suggests that this
will not be the case.
There has been a tendency in some circles to ignore the role played by the
military in many polities, including Russia. But if the military represents
the last barrier against collapse and chaos, then the state of the armed
forces is critical. For Russia, the situation is not encouraging. The
Russian military may not yet have collapsed, but it is not far from doing so.


Moscow Times
October 14, 1998 
Court Direct Investors 
By Bruce Bean
Bruce Bean is a corporate partner at Clifford Chance and chairman of the
American Chamber of Commerce in Russia. He contributed this comment to The
Moscow Times. 

Russia continues to reel from the actions of the government on Aug. 17 that
radically affected the stability of the ruble and the repayment of both
government debt and private foreign loans. Expatriate managers for global
corporations are understandably gloomy as they now face the tasks of
explaining the total failure of their aggressive 1998 business plans and
convincing corporate headquarters of the rosy prospects 1999 will bring to
Where do we really stand? It is no surprise, given the enormity of the
problems facing Russia, that Prime Minister Yevgeny Primakov has yet to
release his government's program. Assuming he has a credible plan for
restoring the banking system and insuring that any additional hard currency
from the International Monetary Fund would not be immediately siphoned off to
Switzerland, how can he build support for such a plan within his "broad
spectrum" Cabinet and then get the required support from the Duma? Given the
political realities of Russia today, the easiest part of establishing a
banking system may be dealing with the IMF. 
Portfolio investment in Russian debt and equity securities cannot be relied
upon to rebuild the entire Russian economy since, by their nature, portfolio
investments are undertaken with the expectation that they may be instantly
reversed with a simple computer keystroke. Direct investments, however, are
made for the long run, and a number of Primakov's ministers have already
declared that to build a viable economy for the 21st century, Russia must now
foster direct investment. 
The minuscule amount of direct investment in Russia ($2 billion in 1997
compared to $40 billion in China) must be both a source of acute embarrassment
to a proud Russian government and a stimulus to prompt, decisive action.
Direct investors do not expect guarantees of profit or protection from market
forces. They do need some prospect of tax stability, even-handed treatment and
reasonable support, rather than interference and obstruction from government
Given Russia's very poor track record of producing successful foreign
investments and the shocks all investors have suffered since Aug. 17, there is
no hope of stimulating productive direct investment in Russia, by either
Russian or foreign investors, without major changes in government priorities
and attitudes toward direct investment. 
While a legislative and government agenda that fosters direct investment can
be drafted and endorsed, the government must also acknowledge and deal with
the anti-business attitudes instilled over the generations in government
officials and employees. The current uncertainty about equal treatment of
foreign holders of Russian government bonds and the recent reports that even
the federal government through UpDK f the administration of the diplomatic
corpus f has allegedly been trying to push foreign investors out of successful
Russian investments, only reinforces the need for strong governmental action
to support direct investors. 
The new government must encourage direct investment by implementing an
economic program which includes at least the following: 
First, a broad, open inquiry into the reported instances of foreign investors
being forced out of profitable investments. Second, a pledge by the government
to oppose further measures arising in the Duma designed to drive away foreign
direct investment, such as the recently enacted Law on Foreign Investment
(subsequently vetoed by President Yeltsin) and the now pending amendments to
the Law on Production Sharing. Third, enactment of the draft Enabling Law
which would implement the production sharing law. Fourth, a prompt conforming
of Russian tax laws and administration to modern market realities. 
As one who has spent the past three and a half years assisting direct
investors in Russia, I believe the single greatest source of potential direct
investment for Russia for the next 10 years will be investments made under
production sharing arrangements. A production sharing agreement, or PSA, is a
commercial contract between the government and those investors (foreign or
Russian or both) who wish to develop an oil or mineral deposit. It binds the
government, most importantly with respect to applicable taxes, for the term
set forth in the agreement, and determines how the production generated will
be shared by the government and the investors and how the investors will
recover their investment and costs. 
In the present environment finding anyone interested in investing in Russia is
difficult. However, the international oil firms reconfirmed to U.S. Energy
Secretary Bill Richardson during President Bill Clinton's visit to Moscow last
month that they remain ready, even in today's uncertain environment, to
proceed with massive investments in Russia under the tax and legal stability
that the PSA Law can provide. Duma leaders have previously acknowledged that
between $60 billion and $100 billion would be invested in Russia if the draft
PSA Enabling Law were enacted. The Duma knows of the billions in taxes and the
tens of thousands of real jobs that these projects would create if only they
were permitted to proceed. 
Today's Russian financial crisis must become the trigger for the government
and the Duma to take the actions needed to stimulate direct investment.
Development of a portion of the country's vast resources through production
sharing agreements will help set Russia on a path to its rightful place as an
economic superpower in the 21st century. 


Government Paper Defends 'Silent' Premier 

Rossiyskaya Gazeta
9 October 1998
[translation for personal use only]
Article by Vladimir Kuznechevskiy: "Premier's Three
Arguments. Where To Get the Money and How To Use It" -- passages
within slantlines published in boldface

The public in Russia and the Western countries is not even breaking
for meals as it monitors the kind of administrative model that the new
Russian Government is creating for the country and the world. The nerves
of Russian observers frequently fail to stand up to it. The newspapers are
full of headlines along the lines of "Primakov's Silence Becoming Irksome."
Yevgeniy Primakov himself loves in his leisure time (although, does
the current prime minister have any leisure time?) to read what Prince
Aleksandr Gorchakov, Russian foreign minister in the second half of the
last century, wrote. And he usually quotes one phrase which the prince
wrote 21 August 1856 in a circular to Russian foreign missions: "Russia is
accused of being isolated and of keeping silent in the face of facts which
square with neither the law nor with justice. It is said that Russia is
angry. /Russia is not angry. Russia is concentrating./" I would recall
that those were hard times. Following the defeat in the Crimean War, the
great powers set up a protectorate over Moldavia, Wallachia, and Serbia,
and Moscow was forbidden to have bases or a fleet in the Black Sea. Many
people believed they were attending Russia's funeral service.
Today it can be said that Primakov too is neither silent nor angry --
Primakov is concentrating. He is addressing the broadest audiences --
governors, businessmen, bankers, mayors -- and making highly important
state decisions (for instance, the five-year deferment of agricultural
producers' debts to the state, the state monopoly on vodka, and other
decisions). And these speeches and decrees, incidentally, contain a very
great deal of information. For a professional journalist as well.
Thus, for instance, Primakov makes no secret of the fact that -- like
F.D. Roosevelt in 1933 -- he is planning to make greater use of state
levers than did his predecessors in order to run a crisis-ridden economy. 
And he is relying in his aspirations on a very broad social base. Ekho
Moskvy radio station reported 6 October that an opinion poll in Russia had
shown that 83 percent of the country's population believe that the state
should definitely control price movements for consumer goods and
participate more actively in the functioning of the economy in general.
There are some more important things too.
Last Friday Ye. Primakov along with some of his ministers took part in
a conference with the leaders of organs of local self-government. And he
very meaningfully stated in his speech that today it is necessary to "take
a different look at many domestic political issues." Which issues? The
prime minister identified four areas: property issues, land issues, tax
policy, and interbudgetary relations.
The head of the cabinet did not go into details, proposing that people
listen to the report on this score from his first deputy Vadim Gustov. He
told the audience that the prime minister had already given instructions to
draw up proposals on the sphere of privatization and property since, as the
former governor of Leningrad put it, "authorities without property and land
are not authorities but something else."
It was a very transparent hint. After all, what is the Primakov
government currently facing? Primarily a shortage of money. Where will it
come from? There is not a big choice. The media are vying with one
another to discuss (and in the main are discussing) just one source --
emission. Serious academics (D. Lvov, N. Shmelev, and others), many
current governors, the new Central Bank leadership, and most government
members see nothing terrible in strictly controlled emission if implemented
within a calculated framework (Rossiyskaya Gazeta has repeatedly written
about this, I will not repeat it). The fact that it will be impossible to
get out of the barter labyrinth unless the money supply is increased is
something that is unclear only to the monetarists.
Not everything in this area is so simple, of course. Lukoil President
Vagit Alekperov rightly draws attention to the fact that a "strictly
measured" increase in the money supply should not be used solely to paper
over the cracks that the Primakov cabinet inherited from its predecessors
-- to clear budget arrears and to support the banking sector. Mostly and
even mainly, Alekperov believes, emission should be used to ensure the
normal functioning of the payment system and investment in the real
economy, explaining what is specifically in mind -- ruble loans should be
channeled primarily into export sectors (the oil sector, the gas industry,
metallurgy, the defense sector in the broad sense of the word, and so
forth) in order to turn those ruble loans into foreign-exchange earnings. 
Academics from the Russian Academy of Sciences Economics Branch concur with
the Lukoil president, adding that the loans should also be channeled into
enterprises and sectors capable of immediately producing competitive output
for the foreign and domestic markets.
But emission is just one source. There is another one. And it
relates to property.
It was not by chance that Ye. Primakov said the words "property" and
"privatization." You get the impression that the government is by no means
avoiding the problem of partially reviewing the results of privatization.
Prior to the catastrophe of 17 August only "fanatical Communists"
could have talked about a revision in this respect. These calls were no
more than hot air -- the financial (and that means the real) power was in
the hands of the so-called piratizers, the oligarchs and their
representatives, and they, having mainly built up their fortunes during the
period of the voucherization of the entire country, did not permit any
notion of changing the situation in this respect even within their own
narrow circle. Since 17 August the oligarchs have dissolved in the crisis.
The banking system has crumbled. The oligarchs' personal fortunes are
mainly in foreign accounts, and their power has been reduced. And it is
not just the Communists but also their bitterest enemies -- the bourgeoisie
-- who have started talking about revising the privatization that was
carried out in Russia.
In September America's Forbes Magazine -- the publication of business
circles -- published an article which directly stated that one of the main
tasks for the Primakov Government /"would be to bring back the money that
has settled in the overseas accounts of the Russian kleptocrats (members of
the class of thieves -- Vl.K.) and to undo the so-called privatization that
was tantamount to grand larceny."/ "If the ill-gotten enterprises were put
up for sale again, this would produce, according to the most modest
calculations, /an instant profit of $30 billion/ -- which would ensure an
adequate base for levying taxes capable of meeting current needs. 
Precisely this must be a first essential step toward creating a sound
economy that might be able to support true democracy."
The magazine points to recent precedents, where international public
opinion and legal institutions permitted the return of Marcos' capital to
the Philippines, and other instances.
Such articles have recently been assuming the nature of a campaign. 
Thus, Michael Bernstam, a professor at Stanford University in California
(United States), harshly criticizes the Russian Government for "not
venturing to do precisely what is the simplest and most logical thing,
namely to review the results of privatization. /This must be put into a
legal state/, and then the state will have currency, will have dollars, and
will be able to save the population's bank deposits, reorganize the banks,
and pay debts, and there will be none of this collapse."
At the same time all these pieces of advice and recommendations are
certainly not pushing Primakov toward Bolshevik nationalization. No way. 
It is proposed just to return to the state the difference, which cannot be
called honest earnings. If, say, hypothetically speaking, Uralmash was
sold to someone for 100 million rubles [R] and its price is now R100
billion, then the owner must return this entire difference to the state and
remain the owner of Uralmash, otherwise the state returns the R100 million
to him and takes back the enterprise. The West is making it clear to the
Russian Government that, if the present owners do not want to do this and
if they organize obstruction in the mass media controlled by them, then the
West, having already had the experience of confiscating the capital of
General Noriega, President Marcos, and others -- that is, having the
mechanism for detecting accounts in foreign banks and bringing that capital
back home -- will easily tell the Russian Government the banks, the account
numbers, the size of the deposits, and the names, making all this public.
Primakov has now been ensured practically the same support in the
West, if he undertakes decisive actions, as the West gave Boris Yeltsin in
August 1991. You get the impression that in response to just such actions
Western financial institutions will now undertake both to restructure
Russia's foreign debts and to open tranches of credit from the World Bank,
the IMF, and the governments of Western countries.
Finally, the last point. Money literally lies in the export sectors
of the economy, although it is impossible to get it now, today, because
they have been crushed by the tax burden. Indeed, how is it possible to
increase exports of oil and gas, for example -- and these must be
increased, for this is the most stable source of currency -- if the volume
of the oil and gas companies' tax payments is as high as 55 percent of
their earnings?! The companies have already ceased to be profitable. But
Mikhail Zadornov proposes also to impose additional taxes on them! Where
is the logic?! Let us take the aforementioned Lukoil. Maybe I will be
giving away a commercial secret, but how can one of the best firms in the
country stay afloat if the price of its shares has fallen by a factor of 15
times in the space of a few months?
The government must give the export sectors of the real economy the
opportunity to keep turning over at least for six months. And only then
start "shearing" them. Because the wool will definitely have grown during
this time.
The mass media are now quite actively criticizing Primakov and are
doing so not only for his supposed silence over his plans but also for the
fact that he is not an economist and so does not have the moral right to
lead the government when extracting the country from the crisis. These are
ignorant and ill-intentioned accusations, characterizing not the premier
but those who write such naive things.
Competent and professional journalists well know about a really
anecdotal incident from the early thirties. John Keynes, the British
founder of Keynesianism, worked out the theory of practical ways to
stabilize the economy in a period of crisis by increasing the state's role
in the functioning of the economy. He published his main work -- "General
Theory of Employment, Interest and Money" -- in 1936. He had met with U.S.
President F.D. Roosevelt in 1933. The conversation was very long. 
Emerging afterward into the president's reception room, the great economist
pensively said that never in his life had he met a less well-informed
person about economic matters than Roosevelt. Meanwhile, the system of
reforms created by Roosevelt back in 1933 for extricating U.S. society from
the Great Depression (the "New Deal") had been entirely tied to Keynes'
theory. So much for "economic ignorance"!
Of course, the prime minister must be more open to journalists, speak
more frequently about his plans, and explain them to society. This is his
strength, not his weakness. And yet there is a time for everything. 
Primakov is already starting to open up. I wish to repeat after Nikolay
Shmelev: "The house is on fire. We must all proceed from this premise. 
Probably far from all of those who have come into the country's leadership
today are ideal in far from everything. But they have come and have
assumed responsibility. They have come, risking their career, their
political future, and their reputation in the eyes of people. May God
grant them all courage, fortitude, and success. Let us speak later, when
we have extricated ourselves, about which of us is 'White' and which



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