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Johnson's Russia List


October 20, 1998   
This Date's Issues: 2439 2440 

Johnson's Russia List
20 October 1998

[Note from David Johnson:
1. Financial Times (UK): Arkady Ostrovsky, Yavlinsky pledges to run
for presidency.

2. Reuters: OECD report highlights Russian food crisis.
3. Reuters: Yeltsin likely to serve out term - Chubais.
4. Moscow Times: Yevgenia Borisova, Russia Says Number of Poor People
Leapt 25%.

5. Toronto Sun: Matthew Fisher, Russian wolves poised for the kill.
6. The Sunday Times (UK): Mark Franchetti, Moscow 'Starr' bids to impeach 
ailing Yeltsin.

7. Kennan Institute (DC) Seminar: "The Selling of the Soviet Empire,"
with Alfred Kokh.

8. WHAT THE PAPERS SAY: An interview with Vladimir Polevanov, former chairman 
of the Russian Property State Committee.

9. Stanislav Menshikov: Further response to Ickes in JRL 2435.
10. RFE/RL: Paul Goble, Financial Crisis Threatens Regional Press.
11. Christian Science Monitor: Judith Matloff, Making Do in Russia Means Not 
Making TVs. A defunct TV factory shows how Soviet-era industries have failed. 
Yet leaders seek industrial revival.

12. Reuters: Russian charged with treason will get open trial. (Nikitin).
13. Ira Straus: Virtual economics.]


Financial Times (UK)
20 October 1998
[for personal use only]
RUSSIA: Yavlinsky pledges to run for presidency
By Arkady Ostrovsky in Moscow

Grigory Yavlinsky, the leader of Russia's liberal Yabloko party, yesterday cut
short speculation that he would back another candidate for the presidency and
said he would run for the post himself.
Mr Yavlinsky, who had been wooed by Yuri Luzhkov, the mayor of Moscow,
returned to work yesterday after suffering a heart attack last month.
Mr Luzhkov's supporters had tried to include Yabloko in the political
coalition behind the Moscow mayor, capitalising on Mr Yavlinsky's base of
middle class support.
General Andrei Nikolaev, a former general of the border guards who is close to
Mr Luzhkov, said recently that he had already talked to Mr Yavlinsky and was
hoping to form a centre-left coalition with Mr Luzhkov as its candidate by the
end of the month.
Mr Yavlinsky said he knew nothing about such coalitions. "I could understand
if we were talking about economic programmes - that would have been a
meaningful conversation," he said.
Sergei Vasilyev, a director of Video International, a large advertising agency
which helped mastermind Boris Yeltsin's campaign for the presidency in 1996,
said: "Yavlinsky has to change his image if he wants to be the president. He
is not a practical administrator, like Luzhkov, he is a theoretician, a
refined intellectual which is a wrong image in Russia."
Mikhail Gorbachev, the former Soviet president who initiated a period of
liberal reforms in the 1980s, gave his support to Mr Luzhkov yesterday, saying
his potential alliance with the Communists would create a strong political
"I do not want to idealise him but I think he is the most probable candidate
for presidency," he said.
The undeclared presidential race has been intensified by the uncertainties
over the health of Mr Yeltsin, who last week cut short his trip to Central
Asia because of the bronchitis.
Yesterday he cancelled meetings in the Kremlin and remained in his residence
outside Moscow. "The president is feeling quite satisfactory but some symptoms
of bronchitis still persist," the Kremlin said.
Oleg Sysuev, first deputy head of the president's administration, said there
were no doubts Mr Yeltsin was fit enough to perform his duties till the end of
his term in June 2000.


OECD report highlights Russian food crisis
By Sebastian Alison

MOSCOW, Oct 19 (Reuters) - Russian agricultural output fell to 64 percent of
its 1990 level last year, while agriculture's share of GDP fell to 6.5 percent
from 15.4 percent in 1990, the Organisation for Economic Co-operation and
Development said in a report publicly discussed for the first time on Monday. 
Andrzej Kwiecinski, main author of the OECD's Review of Agricultural Policies
- Russian Federation, told a round table that while the sector's share of GDP
had fallen dramatically, its share in employment had actually risen, to 13.9
percent last year from 12.9 percent in 1990. 
The report outlined a number of dismal statistics showing how agriculture has
declined during Russia's transition from a centrally planned economy in the
Soviet era. 
Total capital investment in the agro-industrial complex, for example,
expressed in 1991 prices, shrank some 16 times, from 70.4 billion roubles in
1990 to 4.3 billion in 1997. 
Large scale farms appear to have been unable to cope with the transition.
Kwiecinski said that while the whole farming sector produced 64 percent of
1990 levels last year, on large scale farms the figure was just 44 percent. 
By contrast, output on household plots was up 19 percent last year in
comparison with 1990. 
The report said that about 5.7 million hectares of land, representing around
three percent of all farmland and divided into 16 million household plots of
0.4 hectares each, produced a staggering 50 percent of gross agricultural
output last year. 
But Gerard Viatte, the head of the OECD's directorate for food, agriculture
and fishing, told the meeting at the agriculture ministry that the OECD had no
strong views on the optimum farm structure. 
"I would not adopt a dogmatic approach to farm structures," he said. "In all
countries there is a range of possibilities. One can't say household plots are
better than large farms." 
"The main issue is to make sure they're run efficiently. Economic training and
advisory services are needed," he added. 
He said that a recent meeting of all OECD agriculture ministers had reaffirmed
the body's commitment to putting agriculture in an increasingly market-
orientated framework, and no deviation from this policy was expected. 
But he added that in Russia and other countries the role agriculture played in
social policy issues, especially regional development, was widely recognised. 
"The main duty of agricultural policy makers is to reconcile these objectives,
market orientation and fulfilment of social goals which society expects from
agriculture," he said, adding "It's a great challenge to policy makers for 10
years or more." 
Russian Agriculture Minister Viktor Semyonov, opening the round table,
welcomed the report and pointed to many areas where the OECD and the ministry
appeared to be in basic agreement. 
As Russia has plunged into economic chaos, food consumption patterns have
changed. Kwiecinski noted that meat consumption was down to 51 kg per person
last year, from 75 kg in 1990. 
Dairy product consumption was also down, from 386 kg per head in 1990 to 235
kg last year. Conversely, potato consumption rose to 126 kilos last year from
106 kg in 1990. 
"There's a substantial decline in consumption of products which depends on a
certain level of income," Kwiecinski said. 


Yeltsin likely to serve out term - Chubais

VIENNA, Oct 19 (Reuters) - Russia's former deputy prime minister Anatoly
Chubais said on Monday he did not believe President Boris Yeltsin would step
down before his term of office ends in 2000. 
Speaking to journalists in Vienna, Chubais said the only way he could envisage
Yeltsin's presidency ending prematurely would be if he volunteered to step
``I don't believe this option at all,'' said Chubais, a key architect of
Russia's post-communist reforms who is now president of the country's
electricity monopoly, Unified Energy Systems. 
Chubais said he had not seen Yeltsin for several months and could give no
assessment of his state of health. 
Yeltsin's health has been the subject of increasing speculation since he cut
short a visit to Central Asia last week because of bronchitis. 
He cancelled plans to attend a meeting of the Asia-Pacific Economic
Cooperation (APEC) forum in Malaysia in November but a Kremlin spokesman said
on Friday a Russia-European Union summit in Vienna would go ahead next week as


Moscow Times
October 20, 1998 
Russia Says Number of Poor People Leapt 25% 
By Yevgenia Borisova
Staff Writer

The number of Russians living below the poverty line has soared to more than
44 million people, a figure about 25 percent higher than last year, a top
Russian official said Monday. 
But the staggering jump in impoverished Russians is due to the adoption of a
new measuring method by the State Statistics Committee, the committee's deputy
head, Oleg Rybak, said at a news conference. After receiving training from a
U.S. expert, the committee for the first time used the sample method instead
of census. 
Statistics committee figures said 44.3 million Russians now live in poverty,
up from 31 million Russians last year. 
The poverty line has been drawn by the state at a meager 552 rubles ($32) a
month, while the average salary in Russia this month is 1,000 rubles ($67). 
Rybak said that according to his committee's findings, wages account for less
than half of what people actually earn. 
Rybak said that in 1995, 1996 and 1997, household wages made up 42 to 43
percent of family income. Earnings from other legitimate activities accounted
for 13 percent to 16 percent of total income, and revenues from the shadow
economy comprised 14 percent to 17 percent. 
Before the financial crisis, the situation was just beginning to change for
the better. In the first half of 1998, revenues from the shadow economy fell
to 8.6 percent while the portion of the population's earnings originating from
wages increased to 47.8 percent. 
Additional income the average Russian earned from trading dollar savings for
rubles increased from 6.5 percent in 1995 to 7.3 percent in 1998, the
committee said. 
The sampling method used for this research is a change of pace for the State
Statistics Committee, which for the past 80 years has only used censuses,
prescribed by the planned Soviet economy. 
During the past month, some 20 committee members were trained how to conduct a
sample by an American expert from the U.S. Census Bureau, committee officials
said. The program, funded by the U.S. Agency for International Development,
cost $60,000. 
The committee plans to use the sampling method to widen its study of
households, income, prices and small businesses, officials said. Research of
medium and large businesses will still be conducted by census. 
But reliability of the initial data remains the main problem for the Russian
statistics, especially the data that concerns production costs and volumes
connected to the shadow economy. 
"Objectivity has always been our problem, and our work is focused on this
particular issue," Rybak said. 
In the past, Russians reporting to the committee had been tempted to inflate
figures to win the praise of Communist leaders, he said. Now, Russians are
under-reporting earnings to evade taxes. 
"We are controlling and monitoring the objectivity of our data on the federal
level," he said. "We compare production figures provided by the industries
with the volumes of energy consumption or volumes of transportation." 
The committee assumes the shadow economy accounts for 25 percent of Russia's


Toronto Sun
October 19, 1998 
[for personal use only]
Russian wolves poised for the kill
Sun's Columnist at Large
MOSCOW -- There was something pathetic about Boris Yeltsin's brave
attempts to show up at the Kremlin last week after a tragi-comic visit to
Central Asia, which suddenly ended a day early because the Russian
president once again allegedly had the sniffles. 
Yeltsin is often in a daze, but however addled his mind, his legendary
political instincts still remain sound. Despite the physical toll, the
doddery silver fox intuitively understood that it was imperative for him to
show up at the office after slurring his speech and then falling asleep
during a meeting with the Uzbek president. 
The Russian media has come alive this month with damning reports quoting
psychiatrists assessing Yeltsin's mental health. There have also been so
many vicious comparisons with Leonid Brezhnev's feeble last years in the
Kremlin that the fascist leader, Vladimir Zhirinovsky, jokingly defended
the president last week by telling television viewers that Russians should
be happy their president is incapable of getting into the kind of trouble
Bill Clinton has become famous for. 
Sensing that after many close calls the 68-year-old Russian leader is
finally on his last legs, the wolves who would replace the fox have become
braver, openly baying for the old man's blood. 
Leading the pack, if not the polls, has been Yuri Luzhkov, the
outrageously self-confident mayor of Moscow, who has devoted the past few
years to turning the capital into a private business empire for himself,
his cronies and his presidential election campaign. 
A few weeks ago, when the government was in crisis over who should be
prime minister, Luzhkov proposed himself for the job and then, when Yeltsin
didn't make him an offer, denied that he had ever put his name forward. As
unctuous as ever, Luzhkov told the BBC last Thursday that Yeltsin might
resign before his term expires in 2000 and then urged the president to do so. 
Although only six years younger than Yeltsin, the diminutive, bald-headed
mayor has attempted to portray himself as a virile young man by taking
wintry dips in the Moscow River, acquiring a much younger wife and running
around construction sites demanding that everyone hurry up. 
Luzhkov has been selling himself in the West as a responsible social
democrat and capitalist who would come down hard on corruption. At home
he's an autocrat who prefers to score easy points with his constituents by
attacking the West, and by making patriotic speeches about reclaiming the
Crimea from Ukraine. 
The mayor likes to boast that under his rule, Moscow has been transformed
into a glittering international city. But as a Canadian businessman based
here said a few months back, as almost all of the hundreds of billions of
dollars which poured into Russia ended up within Moscow's Garden Ring, the
real question is how much better the city might have turned out if Luzhkov
hadn't tried micro-managing everything for his own personal and political
Although his name was jeered at a big trade union rally near the Kremlin
on Oct. 7, there have been few other signs that Luzhkov is losing his grip
on Moscow, where he remains hugely popular. But that doesn't mean Luzhkov
can carry the country if there are, in fact, presidential elections to
replace Yeltsin. 
During a recent visit to Tyumen, in the Urals, it was impossible to find
anyone with a good word to say about Luzhkov. Everyone in the hinterlands
knows that Muscovites seized almost all of the country's post-Soviet wealth
and either spent it on themselves or spirited it out of the country. It is
also widely known that Luzhkov has repeatedly defied the Russian Supreme
Court by having his police arrest and deport tens of thousands of
non-residents from his wonderful city. 
Moscow's ultra-smug and ultra-greedy elites are understandably keen on
Luzhkov. If he's their man it might just be better if Boris Yeltsin is able
to hang as long as possible. 


The Sunday Times (UK)
18 October 1998
[for personal use only]
Moscow 'Starr' bids to impeach ailing Yeltsin 
by Mark Franchetti 

WITH his white hair and cheap Soviet-style grey suit, Vadim Filimonov, 67,
looks little different from the massed ranks of other ageing communists in
the Russian parliament. 
But the obscure, gentle former law professor has suddenly been catapulted
into the limelight - as Russia's answer to Kenneth Starr. The head of an
impeachment commission set up by the duma, the lower house of parliament,
Filimonov will this week recommend that proceedings should commence to
force President Boris Yeltsin from office. 
Starr, the special prosecutor investigating Bill Clinton, may have steamier
accusations to make, but they are far less weighty than the charges being
levelled by Filimonov against Yeltsin. 
The Russian leader, 68, is accused of causing the collapse of the Soviet
Union, of illegally shelling his own parliament in 1993, and of starting a
bloody war the following year in the breakaway republic of Chechnya which
cost more than 70,000 lives. 
In a complex legal process laid out in the 1993 constitution - designed by
Yeltsin to maximise his power - Filimonov's case against the president will
be voted on by duma deputies later this month. If two-thirds vote to start
impeachment proceedings, the evidence will then be presented to Russia's
constitutional and supreme courts. 
Should the two courts also decide against Yeltsin, then the Federation
Council, the upper house, made up of Russia's regional governors, would be
asked to take the final vote on impeachment. 
Initially dismissed as an empty political gesture, Filimonov's commission
has been taken increasingly seriously over the past few months as the
Russian economy has foundered and Yeltsin's health weakened. 
Yuri Luzhkov, the powerful cannonball-headed mayor of Moscow and a leading
contender to succeed Yeltsin, warned last week that "temporary incapacity
is one thing", permanent inability to work is another. 
Yeltsin, who underwent a quintuple heart bypass operation in 1996, last
week cut short his first foreign trip in five months after taking 25
seconds to sign his own name, and nearly falling over in front of the
cameras in Uzbekistan. 
Some sources claimed Yeltsin was suffering from Alzheimer's or Parkinson's
disease, others that his reluctance to follow a strict diet and carry out
regular exercises has led to poor blood supply to his brain. 
Faced with a power vacuum, the president's enemies and rivals have come out
in force against him. 
Even if Filimonov fails to get Yeltsin impeached, his commission has sent
the president a clear political message. 
"Every day I am flooded with letters of encouragement," he said, laughing
off comparisons with Starr. "When we first started investigating the
accusations against Yeltsin I didn't think we'd get very far. But the mood
has changed drastically." 


Date: Mon, 19 Oct 1998 10:22:42 -0400
Subject: Kennan Institute announcement
Content-Disposition: inline

"The Selling of the Soviet Empire"

Alfred Kokh
former Deputy Prime Minister of the Russian Federation, 
former Chairman of the Russian Federation State Committee for State Property

Co-sponsored by:
The Kennan Institute for Advanced Russian Studies
and Liberty Publishing House, NY

Thursday, October 22, 1998
3:30 * 5:30 p.m.

Auditorium, 6th Floor
Kennan Institute, Woodrow Wilson Center
One Woodrow Wilson Plaza
1300 Pennsylvania Ave., NW
Washington, DC

No R.S.V.P is necessary, event is open to the public. 
Please note that seating is on a first-come, first-served basis. 
Please call the morning of the event to confirm at (202) 691-4100

For a map showing our location, please visit our web site:


From: Katryna Turner-London <>
Subject: An interview with Vladimir Polevanov, former chairman of the
Russian Property State Committe
Date: Mon, 19 Oct 1998 

WHAT THE PAPERS SAY (WWTP); Page: 10; 15 October 1998; 198.
An interview with Vladimir Polevanov, former chairman of the
Russian Property State Committee. Question: To what extent do you
think mistakes in privatization influenced aggravation of the
economic crisis in the country? Answer: They were a decisive factor.
Let me recall what happened in Russia with regard to the so called
vouchers. You and me both got a 1/150,000,000 share of the general
state property. Actually, of 50% of that property. If you recall, no
names were on the vouchers. Every voucher cost 10,000 rubles in the
prices of early 1993. Do you know how every one of us should have
got for his share? Question: How much? Answer: Two million rubles.
For every voucher... Do you know see the scale of the swindle? These
days, they claim that it was the only way. As I see it, it's a lie.
All they had to do was take a look at how they implemented
privatization in Czechoslovakia or Poland. They all had their names
on the vouchers, and the securities signified the real cost of the
property, not symbolic. That's how they made them true state
securities, which would have been madness to barter for a bottle of
vodka or a kilogram of sugar. And in this country that was precisely
what the majority did. Actually, two privatizations took place in
Russia. One of them for the masses. The other one, in secrecy, for
the selected few. And the latter was thoroughly criminal. Huge slabs
of state property ended up in the hands of some previously obscure
men who had nothing for their country... It's just that they turned
up at the right time in the right place. And probably, with the
necessary sum of money on them. Not to buy property as such, you
know. To buy the state official in charge. Hence the appearance of
so called oligarchs... The second phase of privatization followed,
so-called investment auctions. They offered considerable enterprises
for sale. Nobody thought about issuing vouchers with our names on
them, and let those who wanted these enterprises buy the vouchers
from the population. No, they began explaining at once that
investment auctions were only for the rich. The media did all they
could to drag us into the discussion over who will get Svyazinvest -
Potanin, Berezovsky, or Khodorkovsky. Why is it that nobody recalled
that Svyazinvest had been built by generations of Russians and
belonged to them? And that it should be bought from Russians, not
from some state bureaucrat? Nobody recalled that Svyazinvest gave us
a billion dollars in annual profits, and it was sold for only 1.8
billion. And only 100 million of the sum were directly invested in
economy. And that is not all there is. The money our oligarchs paid
at the auctions were, more often than not, interest-free credits
from the Central Bank. I.e. they were buying expensive enterprises
virtually for a song. Question: Would you care to give facts?
Answer: In April 1995, the governmental commission for financial and
credit policy transferred accounts of Federal treasury in Moscow and
Moscow region to Menatep bank. Soon afterwards Economy Minister
Panskov issued personal order to place 50 million dollars in Menatep
with very little interest. All the money was spent by the bank to
repay its obligations for investment competitions. In other words,
we ourselves were cutting the geese laying gold eggs. It's hardly
surprising that in the long run we got the crisis of 1997 and
finally the current one. In mid-1998 we have living standards in the
country we had in 1947. We remain afloat only thanks to the giants
like Gazprom. Thanks God, they haven't split it yet and sold for a
pittance. Question: Sorry, but you are talking as if you were not
the Property State Committee Chairman. As if you didn't have a
chance to prevent all these swindles... Answer: Twenty days after
the appointment I saw what was really happening... I discovered a
colossal redistribution of property by criminal methods. The next
discovery shocked me - during privatization, no thought was given to
Russia's actual national interests. They were selling strategic
industries, losing control over vital processes, and turning the
country into a global ecological dump... Before my appointment, 500
largest Russian enterprises totaling at least 200 billion dollars
had been sold for a pittance (for approximately 7.2 billion) and
ended up in the hands of foreign companies and their dummy
corporations. 77 such enterprises in metallurgy, 85 in engineering,
66 in oil and gas industry, and 65 in chemical industry. Question:
Could you be more specific, please? Answer: I can. I found out for
example, that 30% shares of the Moscow Electrodes Plant (which
included Grafit research institute, manufacturer of graphite for
missiles) belonged to Griniks dummy Russian company which had been
sponsored by one D. Hame, an American whose name was associated with
secret services. As a result, Grafit research institute was pressed
by Hame into rejection of the order of the Russian Military Spatial
Forces and began to manufacture items for American orders related to
the Stealth technology. Nonsense? No, ordinary privatization. Want
more? Using the notorious MMM and Sadko-Arkada, Boeing and Sikorsky
companies bought 28% shares of Mil's helicopter plant. Only a fool
won't guess, why. Imagine, what US State Department or FBI would
have done if we tried to buy the controlling interest of Boeing or
Sikorsky... Question: So, what did you do about it all? Answer: For
starters, I suspended privatization of some large enterprises. Like
the Novokuznetsk Aluminium Plant. Kicked out 35 foreigners from the
Property State Committee computer center who, it turned out, had
felt themselves quite at home there. And sent a message to Viktor
Chernomyrdin with the proposals on what I thought should be done.
Question: And? Answer: And was ousted. Yuri Luzhkov was the only man
to support me. Question: Why do you think Anatoly Chubais, a clever
and energetic man that he is, stood for precisely this kind of
privatization? Answer: I think he was after some political goals
rather than any economic ones. He wanted to create a class of
property owners, the sooner the better. Chubais disregarded the fact
that privatization was criminal, that our national interests were
harmed, and very many men were tricked... Question: And what would
you have done now, had you been Property State Committee Chairman?
Answer: I'd have abolished these investment auctions and turned the
attention of the state to the way its property was managed. The
state still has controlling interests of a great deal of
enterprises, and doesn't have anybody to manage these enterprises.
We need at least 100,000 young and energetic administrators.


From: Stanislav Menshikov <>
Subject: Further response to Ickes in JRL 2435 
Date: Mon, 19 Oct 1998 

In his latest response to myself and others, Ickes avoids the two basic
propositions of his theory: (1) that Russian industry, as he previously
claimed, is mostly value-destroying, and that (2) because in Russia prices
do not reflect true opportunity costs, they cannot be used as a measure of
value-creation or value-destruction. None of these propositions, so far,
have been supported by hard evidence.
On the first point, as I demonstrated by referring to the Russian
Input-Output table for 1995, all Russian industries except four (coal,
agriculture, communal services and science) were value-creators, not
value-destroyers. Ickes has so far produced no evidence, at all, to the
contrary. Discussing minor details about other points does not change this
basic conclusion.
His claim that nothing can be said before we know actual prices is avoiding
the issue. If he does not know what the actual prices are, he cannot present
a theory about value-destruction or value creation. Input-output tables are
made in reported prices which are different from actual prices. We took
steel as an example because that was the case Ickes himself used. In this
example he again is trying to confuse the issue. If, in reported prices,
electric energy and gas inputs amount to 7 per cent of the average reported
price of steel, while in fact steel companies receive electric energy and
gas via barter at an actual price that is twice cheaper, then their actual
costs in these items are 3.5 per cent of the average price of steel. But the
industry creates value even if it pays a full 7 per cent, as evidenced by
the table.
Ickes does not like I/O tables, but happily they do provide the
non-specialist in any particular industry with valuable data on the
structure of average costs in all industries. When you look in that table,
there is no need to guess about that structure. Ickes claims it is
unbelievable that the costs of iron ore and capital services should account
for 84 per cent of the costs of steel. 
But there is no need for such wild guesses if one looks into the I/O table
which shows that the combined costs of iron ore and capital services
(including depreciation and net profit) amount to only 43 per cent of the
price. But there are also other costs, such as coal, non-ferrous metals,
machinery and metalworking and other material costs amounting to some 16 per
cent, transportation costs -- another 10 per cent, payments to trade
intermediaries -
- 12 per cent, value-added tax and export duties -- 6 per cent. Now
(together with electric energy, gas and labour) it all adds up to exactly
100 per cent. Even if Ickes was right about increasing electric and gas
costs to 14 per cent, that would not change the basic conclusion about this
being a value-creating industry, because gross value added equals about have
of the price, and net profit -- 14 per cent. Ickes should not tread into the
treacherous Russian waters before first consulting his statistical map.
As I pointed out in my previous response, measuring value added in world
prices is relevant but for other exercises, not for this one. As to Ickes's
treatment of comparative advantage, it raises serious questions. In a cold
country like Russia the use of energy may be always less efficient than in
the relatively warmer US, West Europe and Japan. Does that mean that we
should rather freeze than use our energy inefficiently and burn manufactured
import products instead? Comparative advantage means something different. If
it costs RELATIVELY less to produce item X than item Y in Russia than in the
US though in both cases Russian costs are higher, than the optimal solution
for the two countries is for Russia to keep producing item X while importing
item Y. That applies to the various manufacturing industries some of which
may have definite comparative advantages when measured in world prices. One
should not lump all manufacturing together but make a careful
industry-by-industry analysis in order to reach meaningful conclusions. 
On the second point, my remark was that nobody in western business, let
alone the Russian economy, as a rule, uses true opportunity costs because
they are hard to measure. If Ickes agrees, then there is no reason for using
this argument in favour of the value-destruction theory for the Russian
economy. In Dutch cheese example, it is not self evident that the price of
15 guilders reflects the true opportunity cost if there is a possibility of
selling it in other markets for 60 guilders which yields an enormous
superprofit even after accounting for additional transportation costs and risk. 
The issue about the causes of the Russia crisis is, of course, not the key
one in our discussion. It was brought up by myself to show that in a deep
downturn industries that are normally value-creators can temporarily loose
value due to special circumstances. The main issue is that, as Ickes
believes, most Russian industry is good for nothing, its products are
unusable and that therefore even an increase in aggregate demand will not
lead to their revival but rather to a rise in imports and inflation. 
This assumption, however, is not well founded. There is very little
protection in Russian industry today and plenty of foreign competition.
However, imports were (before the recent financial crisis) only 15 per cent
of Russian GDP. If 85 per cent of GDP was domestically produced even under
the very unfavourable circumstances, how can one seriously believe that if
aggregate demand starts growing in real terms, most of it will lead to a
rise in domestic output rather than in import demand? Quite the contrary
seems to be more reasonable to project. 
To call Russian products "unusable" is equally unfounded. If they are really
unusable, where then do they go? No great inventory accumulation is
noticeable, at least not on a general or continuous scale. Everything that
is produced is somehow sold and used. Ickes's contention is that Russian
goods are dumped at low prices. But products cannot sold at discount price
if they are not needed and cannot be used.
A recent report by the "Expert" magazine shows that 10 large Russian
companies in 1997 increased their sales by 55-200 per cent compared to 1996
without investing new capital but simply by using their spare capacity. This
was made possible by a sudden surge in demand from local industries for
Russian, not imported equipment. Why? It is cheaper, easier to operate, more
applicable to rough Russian conditions. A similar thing happened with
domestic refrigerators. Reason? Much cheaper than imported refrigerators per
unit of quality and convenience. More suitable for the average low income
Russian consumer. 
These examples demonstrate that Russian manufacturing is far from dead and
is ready for an upsurge. 


Russia: Financial Crisis Threatens Regional Press
By Paul Goble

Washington, 19 October 1998 (RFE/RL) -- The slow but steady progress
Russia's privately owned regional newspapers have made in the seven years
since the collapse of communism has been undermined in less than a month by
that country's financial crisis. 
Across the country, some of these papers have been forced to close. Many
more have cut back in size, frequency, and staffing. And still a larger
number have been forced to drop links to the Internet and subscriptions to
national and international wire services. 
Not surprisingly, the publishers of many of them have concluded that the
only way they can survive is to make deals with local businesses or seek
government support, a conclusion that both of the latter are certain to
exploit if the crisis deepens. 
Taken together, these developments threaten the survival of freedom of the
press across much of the Russian Federation. 
That sweeping conclusion arises from the findings of a recent survey
released by the National Press Institute, a Moscow-based press watchdog
Last month, that body surveyed editors and publishers across Russia to see
how they were coping with the collapse of the ruble, the banking system,
and public confidence in key institutions. It reached three main conclusions. 
First, NPI found, the privately owned regional press was in trouble even
before the current crisis hit. Most faced stiff competition from
state-owned monopolies that denied them the necessary autonomy to do their
Many of these newspapers were and are managed by journalists with little
experience in running a business and who had done little to build the kind
of cash and other reserves necessary to weather any serious downturn. 
And few had been able to attract the kind of advertising revenues that
would free them from dependence on either subscriptions or subsidies. 
There are several reasons for this: Russian enterprises have little
experience with advertising. The country's tax system does little to
encourage them to spend money on commercial advertising. And most
publishers have done little to develop this market. 
Second, the current crisis has already claimed its first victims and will
claim more as the crisis continues. 
Because so few newspapers had any cash reserves, the impact of the economic
crisis was hard and immediate. 
Faced with a decline or even complete loss of advertising revenue and
dramatically higher costs for paper and printing, newspapers laid off
staff, cut back in their print runs, and eliminated subscriptions to major
news organizations. 
And consequently, even though relatively few of these newspapers have
closed so far, the Russian public has lost an important window on the world
at precisely the time when it needs one most. 
Third, the National Press Institute report suggests, the consequences of
this crisis even if it does prove relatively short-lived seem likely to
prove far more severe to the future of freedom in Russia than many appear
to expect. 
By highlighting the volatility of advertising as a source of revenue, the
crisis has led ever more publishers and editors to turn back to single
businesses or governments for assistance. 
That may save some papers in the short run but it guarantees that those
rescued in this way will be less free to report the truth in the future. 
By underscoring the weakness of the privately-owned press to business
cycles, NPI found, the crisis has undercut the authority of the press
itself and thus sent much of it on a continuing downward spiral. 
And by forcing so many journalists out of their traditional work, the
crisis has called attention to something that few in Russia have wanted to
take seriously: namely, the intimate relationship between the strength of
the market and the strength of the media. 
Indeed, the National Press Institute underscores this final point by
quoting former U.S. President Herbert Hoover. 
Speaking just before the onset of the Great Depression in the United States
in 1929, President Hoover said that "Free speech does not live many hours
after free industry and free commerce die," a lesson the Russian regional
press is learning in a most difficult school. 


Christian Science Monitor
OCTOBER 20, 1998 
[for personal use only]
Making Do in Russia Means Not Making TVs
A defunct TV factory shows how Soviet-era industries have failed. Yet leaders
seek industrial revival.
Judith Matloff 
Staff writer of The Christian Science Monitor


At the Rubin television factory in Moscow you can rent office space or a stall
to sell goods. You can buy practically anything here: watches, film, perfume,
irons, telephones, or even a guitar.

But you won't see anyone making TV sets.

The company, which was once one of Russia's leading television producers, has
found various other means of earning money.

"There's nothing to see," says General Director Anatoly Lashkevich, when asked
for a tour of the workshop. "We're not making anything at present."

He takes visitors past offices leased to 130 other companies. Vendors sell
wares - but not televisions - that are mainly imported from outside Russia.

The tale of Rubin's manufacturing decline is an oft-repeated one in this
former superpower. All across the world's largest country, towns are dying
because their one factory has closed down.

Russia's once-thriving industrial output has withered by half since the Soviet
system collapsed in 1991, unable to meet the challenge of capitalism. State
subsidies dried up, and cheaper foreign goods flooded in across newly opened

"Russian producers never learned to adjust to competition," says Yuri Ten,
deputy chairman of industry in the Duma, or lower house of parliament.

Instead of injecting capital into heavy industry, much of the money invested
in Russia made its way to foreign bank accounts or treasury bills.

Part of the problem is that during Soviet times an estimated 80 percent of
factories were linked to the defense industry. Many closed when the cold war

The figures are enough to make an industry minister shut his office and go

Nearly 44 percent of factories were unprofitable in 1996, the last available
igures by the state statistics service, versus only 7.2 percent in 1992. The
number of factories has dropped from 20,998 in 1990 to 14,934 in 1996.

But what this second set of numbers does not take into account is that a lot
of these factories, such as Rubin's, are not fully operational.

>From bad to worse

The situation has gone from bad to worse with the economic crisis over the
past two months, which saw the ruble collapse and foreign investors flee.
Demand for many consumer goods has dried up, and the unfavorable exchange rate
makes importing components and raw materials exorbitant.

For example, Rubin was already struggling to compete against cheaper Japanese
and Korean imports. The company's annual production had dwindled from nearly
half a million sets a decade ago to at most 120,000. It has stopped for now.
Demand has gone down while the cost of components from abroad has gone up.

"People want to buy bread and butter now. They do not want to buy TVs," says
shareholders' representative Alexander Miliavski.

Russia's new prime minister, Yevgeny Primakov, says a key to economic revival
is government support for industry. This would create jobs and help the
country become more self-sufficient, he says.

It's not that easy, respond skeptics. Yegor Gaidar, the architect of radical
market reforms in the early 1990s, notes that industry needs low inflation to
flourish. But the government would have to print more money, and thus generate
hyperinflation, to bolster industry.

"This will not lead to sustainable economic recovery," Mr. Gaidar says. "It is
unlikely that this policy will be successful."

Mr. Ten estimates that "billions of dollars" of investment are needed, but
wonders: "What foreigner is going to invest now?" 

Efficiency no safety net

Even well-run factories are having problems. Men's tailoring company AKRO was
a model of a new type of privatized firm whose dynamic young managers emulated
American efficiency.

With the slogan "the customer is king" they were one of the few successful
firms in a moribund textile industry, marketing well-cut suits at reasonable

But, "if the ruble drops abruptly we'll have to stop production," says Igor
Nikiforov, AKRO's director.

He says his company is dependent on imported raw materials, because Russia
does not produce adequate cloth, zippers, or buttons.

Elena Vigdorchik, an industrial analyst at the Expert Institute in Moscow,
believes Russia should concentrate on raw materials, especially agroindustrial
production such as meat and milk processing.

Machinery, engines, vehicle parts, pipelines, escalators, and bulldozers are
not as vital.

Forget about long-use durables, she says, "The train has gone. We are too

"Only total isolation would help the production of Russian television sets,"
Ms. Vigdorchik adds. Such an isolation is not to be ruled out, if the economic
crisis deepens, she says.

On a positive note, the higher cost of imports is a blessing for some Russian

One of the first things shoppers noticed when the ruble crashed was that
locally made cheeses and jarred tomatoes replaced foreign ones on the store

"Spaghetti factories were working 30 percent above normal during the height of
the crisis," says Ms. Vigdorchik.

"If there was one industry which benefited from the economic crisis, it was

Russian charged with treason will get open trial

ST PETERSBURG, Russia, Oct 19 (Reuters) - A former Russian navy captain
charged with treason for his work on nuclear pollution said on Monday he was
glad his trial would be open to the media and denied claims he was a foreign
The trial of Alexander Nikitin, who faces charges for publicising the danger
of pollution posed by ageing nuclear submarines based on Russia's Kola
Peninsula, starts on Tuesday. 
``It inspires optimism (that the trial will be public). It is the first time
in Soviet and post-Soviet times, as far as I know, when a trial about state
secrets will be open to the press,'' Nikitin said at a news conference. 
Nikitin, 46, joined the Bellona Foundation, a Norwegian environmental group,
after he retired and co-authored a report on the Russian northern fleet. 
He was arrested in February 1996 on charges of high treason and espionage for
releasing what the Russian authorities said were state secrets. 
``I want to say that before the start of the trial I feel very sure of myself,
and think that if the trial fulfils the law, we will win,'' he said. 
``I am not a spy...I do not even know what a spy is or does.'' 
According to a Bellona representative, the trial will be watched by around 20
international human rights organisations. 
Nikitin has attracted support from abroad. Nearly a year ago, Canadian Prime
Minister Jean Chretien said he was ready to offer Nikitin a visa. 
Former Norwegian prime minister Thorbjoern Jagland quizzed President Boris
Yeltsin over the Nikitin case at a Council of Europe human rights summit last
year, asking publicly for fair treatment for Nikitin. 


Date: Mon, 19 Oct 1998 
From: (Ira Straus)
Subject: Virtual economics

Two brief observations on what has been an excellent and illuminating debate:

1. The social utility of a product is NOT identical to its price, or its
marginal price, or the point at the margin at which production costs equal
selling price and it makes no sense to produce any additional units. The price
may end up nearly equal to marginal price, but meanwhile the whole reason the
thing is produced is because, before the point at the margin is reached, there
is a surplus of utility over costs of production. 

If, for one of various reasons (subsidies, or to realize economies of scale
and cut unit costs, or stupidity and inertia), production is continued beyond
the point at the margin, one may end up with a selling price that is below
cost. This could lead to an appearance that the entire production is value-
destroying. And in fact, the final units of production beyond the margin ARE
sometimes value-destroying. But the total production is not shown to be value-
destroying by this fact; such a conclusion would ignore the whole vast area
under the curve before one arrives at the margin, an area where social utility
exceeds selling price. 

Thus, American agriculture is not value-destroying, even if subsidies exceed
profits. Likewise for some of the Russian products whose marginal production
cost exceeds marginal selling price.

2. Value-destroying has been used in two different ways. 

a. Use that produces an end-product worth less than the material inputs, so
that no matter even if labor costs are cut to zero, still there is a loss.
(This was the original strict use, and the one that could justify shock-

b. Use whose product fails to cover all the production costs, labor costs
included. If the labor costs reflect a genuine labor market, then the labor is
being poorly, but still gainfully, employed. (This is a looser usage, and a
misleading one, since the workers are not destroying material value, they are
simply producing less than their market share of value, or not justifying the
opportunity costs of employing them. It may justify all kinds of restructuring
or wage cuts, but not an uncushioned shock or immediate total lay-offs.)



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