November 14, 1998    
This Date's Issues: 2476 •2477•

Johnson's Russia List
#2477
14 November 1998
davidjohnson@erols.com

[Note from David Johnson:
1. Reuters: U.S. businessmen try to be optimistic on Russia.
2. Voice of America: Ed Warner, RUSSIAN AND POLISH PATHS TO REFORM.
3. Chicago Tribune: Georgie Anne Geyer, RUSSIA'S CRIMINALIZED STATE 
KILLS POST-COLD WAR PROMISE.
4. David Rowell: Report from the "front lines" in St Petersburg.
5. The International Economy: S. Frederick Starr, Petro-State.
Wondering about the future of Russia? It all comes down to the price
of oil.
6. Moscow Times: Katy Daigle, No Shortages of Imports Expected.
7. Los Angeles Times letter: Economic Crisis in Russia.
8. St. Petersburg Times: John Varoli, U.S. Consulate Marks 25 Years 
in City. 
9. AP: Russia, Japan Sign Kuril Agreement.]

******

#1
U.S. businessmen try to be optimistic on Russia 
By Karl Emerick Hanuska 

MOSCOW, Nov 13 (Reuters) - U.S. businessmen, said to have lost $500 million at
the start of Russia's latest crisis, were determined on Friday to be as upbeat
as possible about the country's fate but warned optimism was not enough. 
Representatives of leading U.S. companies met for a conference on the ex-
Soviet nation's prospects organised by the American Chamber of Commerce, which
in October said 50 major U.S. firms lost $500 million in the first month of
the crisis. 
They said Russia's crisis, which has seen the rouble slump and inflation leap,
was a chance for a top-to-bottom reform of the country but that political
courage was needed. 
``This year could be a watershed year for Russia...but political will is
necessary to create the needed legislation that will allow companies to work
here,'' said Stan Golis, vice-president of Exxon Neftegaz. 
U.S. firms are some of the leading investors in Russia, where the business
environment had been improving before the latest crisis broke in mid-August. 
``Problems with legislation are not new. We've been warning about them for
years but the government never listened. Leaders may be nodding their heads in
agreement now, but we've no real reason to think they've finally changed their
tune,'' said a lawyer with one U.S. company. 
Speakers at the forum said U.S. firms were ready to invest tens of billion of
dollars in Russia in the next decade but would only do so once the crippled
bank system had been revived and after a clear and stable legislative base was
created. 
The said current laws, especially archaic tax laws, hampered businesses and
were arbitraily applied. They also said laws were needed to guarentee
investments. 
Despite such pessimism, others insisted their companies were committed to
Russia and that the country of 150 million people was too big a market to turn
their backs on. 
``Of course it's hard. Everybody's been hurt by the crisis. The good companies
will be those who show they have what it takes to get through it,'' said Linda
Chase, a representative of architects Ellerbe Becket International. 
Chase said she expected the next few months would be very tough for some
foreign companies, but that improvement should be apparent in the next six to
nine months. 

*******

#2
Voice of America
DATE=11/13/98

TITLE=RUSSIAN AND POLISH PATHS TO REFORM
BYLINE= ED WARNER
DATELINE= WASHINGTON
INTRO: HOW COULD TWO FORMER COMMUNIST COUNTRIES TURN OUT SO 
DIFFERENTLY? RUSSIA AND POLAND EMERGED AT ABOUT THE SAME TIME 
FROM THE WRECK OF COMMUNIST CENTRAL PLANNING WITH A SIMILAR GOAL 
-- ACHIEVING A CAPITALIST ECONOMY. TODAY, POLAND IS PROSPERING, 
WITH ONE OF THE HIGHEST ECONOMIC GROWTH RATES IN EUROPE, WHILE 
RUSSIA IS IN A DISASTROUS DECLINE, WITH NO END IN SIGHT. 
V-O-A'S ED WARNER ASKED TWO ECONOMISTS TO ASSESS THE CONTRASTING 
PATHS TO REFORM. 
TEXT: ECONOMICS IS NOT ENOUGH. THAT IS THE OPINION OF TWO 
ECONOMISTS COMPARING THE POST-COMMUNIST POLICIES OF RUSSIA AND 
POLAND. THEY SAY THERE MUST BE THE POLITICAL WILL TO ACHIEVE A 
FREE-MARKET ECONOMY, AND THE STRENGTH OF CHARACTER TO SUSTAIN IT.
THESE WERE DEMONSTRATED IN POLAND, SAYS BEN SLAY, A SENIOR 
ECONOMIST AT PLANECON [PRON: 'PLAN-EE-CONN], A WASHINGTON-BASED 
INTERNATIONAL CONSULTING FIRM: 
/// FIRST SLAY ACT ///
IN POLAND'S CASE, THERE IS A TREMENDOUS DESIRE TO MOVE 
TOWARD THE WEST, TO PUT IN PLACE THE INSTITUTIONS OF A 
WELL-FUNCTIONING CAPITALIST ECONOMY AND A LIBERAL 
DEMOCRACY IN A POLITICAL FRAMEWORK. AND TO A MUCH 
GREATER EXTENT, THE POLITICAL ELITE WAS WILLING TO MAKE 
ECONOMIC SACRIFICES IN THE SHORT TERM IN ORDER TO MAKE 
THESE POLITICAL GOALS ACHIEVABLE.
/// END ACT ///
THAT HAS NOT BEEN THE CASE IN RUSSIA, SAYS MR. SLAY. THROUGH 
THEIR POLITICAL CONNECTIONS, THE SO-CALLED OLIGARCHS HAVE SEIZED 
MUCH OF THE NATION'S BASIC INDUSTRY FOR THEIR OWN ENRICHMENT.
MIRON WOLNICKI, PROFESSOR OF ECONOMICS AT VILLANOVA UNIVERSITY, 
SAYS POLAND DID NOT ALLOW A SMALL, WELL-CONNECTED ELITE TO 
DOMINATE THE ECONOMY: 
/// FIRST WOLNICKI ACT ///
IN RUSSIA, MANY OF THE NOMENKLATURA -- DIRECTORS, 
MANAGERS OF THE STATE ECONOMY -- HAVE JOINED THE MARKET 
ECONOMY AND HAVE DONE IT THEIR OWN WAY. IN OTHER WORDS,
THEY DO NOT PURSUE THE POLICIES THAT WOULD EQUALIZE 
RULES OF THE GAME FOR EVERYBODY. THEY WANT A LIBERAL 
ECONOMY. THEY WANT FREEDOM OF ENTERPRISE, BUT NOT 
FREEDOM OF ENTERPRISE FOR EVERYBODY BUT FREEDOM OF 
ENTERPRISE FOR THEMSELVES. 
// END ACT //
PRIVATIZATION OF STATE-OWNED INDUSTRIES AND NATURAL RESOURCES HAS
BEEN CRUCIAL. PROFESSOR WOLNICKI SAYS RUSSIA PRIVATIZED FAST, 
BUT WITH LITTLE PREPARATION OR PROPER SCRUTINY: 
/// SECOND WOLNICKI ACT ///
IT HAS CREATED A HIGH CONCENTRATION OF CAPITAL WITHOUT A
TRICKLE-DOWN EFFECT ON THE POPULATION, WITHOUT CREATING 
A MIDDLE CLASS IN RUSSIA. THE PROCESS HAS BEEN PREPARED
MORE METICULOUSLY IN POLAND. THE AUCTIONS HAVE BEEN 
ADVERTISED AHEAD OF TIME. THERE WAS A SCRUTINY OF THE 
PROCESS BY THE MINISTRY OF PRIVATIZATION, AND THERE HAVE
BEEN MANY FOREIGN INDEPENDENT AUDITING COMPANIES 
INVOLVED IN THE PROCESS. 
/// END ACT ///
PLUNDERED AND MISMANAGED, RUSSIA'S BIG INDUSTRIES CONTINUE TO 
PRODUCE WHAT NOBODY WANTS TO BUY. THEY ALSO PROVIDE JOBS FOR 
VAST NUMBERS OF RUSSIANS WHO WOULD NOT BE ABLE TO FIND WORK ELSEWHERE.
MR SLAY NOTES THAT IN POLAND, SMALL PRIVATE COMPANIES HAVE BEEN 
ABLE TO ABSORB WORKERS FROM THE COLLAPSING DINOSAURS. POLAND HAS
ENCOURAGED ENTREPRENEUERS EVERYWHERE, WHILE RUSSIA HAS PUT 
OBSTACLES IN THEIR WAY: 
/// SECOND SLAY ACT ///
THE SMALL-BUSINESS SECTOR REALLY BECAME A DYNAMO, A 
LOCOMOTIVE THAT POWERED THE POLISH ECONOMY ALONG, 
WHEREAS IN RUSSIA BY CONTRAST, YOU STILL HAVE 
SMALL-BUSINESS DEVELOPMENT HAMSTRUNG BY REGULATIONS THAT
LEAD TO CORRUPTION, AND A LOT OF RENT-SEEKING ACTIVITY 
BY LOCAL AND FEDERAL BUREAUCRATS THAT LINE THEIR OWN 
POCKETS AT THE EXPENSE OF WEALTH THAT COULD BE GENERATED
FOR THE ENTIRE SOCIETY. 
/// END ACT ///
MR. SLAY ADDS THAT RUSSIA, VASTLY LARGER THAN POLAND, MUST COPE 
WITH INTERNAL STRESSES AND QUARRELSOME NEIGHBORS. IT ALSO 
SUFFERED UNDER COMMUNISM LONGER THAN POLAND. ECONOMIC REFORM IS 
MORE OF A STRUGGLE.
BUT NOW THAT RUSSIA CAN NOT PAY ITS FOREIGN DEBT, AND FACES A 
SEVERE FOOD SHORTAGE, MR. SLAY SAYS IT SHOULD TAKE A CLOSER LOOK 
AT POLAND'S WAY OF REFORM. 

******

#3
Chicago Tribune
November 13, 1998
[for personal use only]
RUSSIA'S CRIMINALIZED STATE KILLS POST-COLD WAR PROMISE
Georgie Anne Geyer
Universal Press Syndicate

WASHINGTON -- Usually even in this confused "modern" century, major events
announce themselves with hymns, heraldry or hope.
The Russian Revolution of 1917 was a scream from the Russian soul. The
American Depression of 1929 was notably punctured by the moans and cries of
human pain. Even the collapse of the Soviet Union in 1991, although far from
the explosion of 1917, had its moment of formal announcement in Moscow.
But today, great seismic changes in history eschew such convenient notices.
Instead, change sneaks in silently, on (with apologies to the poet) little
cats' paws. Suddenly, we realize that the world has changed completely--and
that we face totally new challenges and realities.
We should have grasped the truth, of course, when everyone started to call the
period after the Soviet Union's implosion in 1991 the "post-Cold War world."
This ambivalent period of seven years never had a name of its own, poor thing.
It was eternally engaged, never married, a martini without an olive.
And now it is gone.
But if we are willing to see that this seven-year period never was--and never
was going to be--the peaceful and inexorable transition of Russia to some form
of democratic and free market society, then it is time to ask two questions:
1) What was Russia in these seven years that were supposed to carry it out of
communism, and 2) what is it now?
What it was, was a communist state in collapse, where "elections" and "stock
markets" were just Potemkin false fronts for an unstable state that was
swiftly taken over by its most ruthless and irresponsible elements. These were
the men who bought up Russia when its post-communist government put the big
enterprises up for sale. They then looted the country, leaving it in the utter
collapse it enjoys today.
It is now, finally, close to being the wholly criminalized state that many of
us have long feared was on the horizon.
In a brilliant analysis of how the mafia-types took over Russia through
"hyperinflation, privatization and criminalization," Russian scholar David
Satter, lecturing recently to the prestigious Kennan Institute here, concluded
in words that mark the new age: "The society which exists in Russia today is
run by and for criminals. The Russian government operates like a business in
which every license, contract or permission must be paid for. Businesses adopt
the methods of gangsters, criminals pretend to respectability and ordinary
citizens live in fear . . .
"When the reforms began," he said, "it was hoped that they would break the
tragic cycle of Russian history in which relaxation of repression is followed
by chaos, and, then, by renewed and even crueler repression. But it is now
clear that seven years of `reforms,' carried out with criminal methods and a
Marxist psychology, did not represent a new departure for Russia."
Other analysts carry these dire predictions even further. "Russia is on the
verge of becoming a criminal syndicalist state," says Frank J. Cillufo, a
specialist on the issue with the Center for Strategic and International
Studies here. And more and more analysts are seeing that, without the cultural
handmaidens of traditional capitalism--the rule of law, a genuine electoral
system, those inner moral controls that have historically gone by the name of
the Protestant ethic--there could never be any realistic hope that Russia
would be transformed.
Indeed, such naive and unrooted expectations, which the Clinton administration
indulged in from the very beginning, actually held Russia back. Western
compliance with just about anything the Russian governments did gave them no
external reason to change, while Western aid served to make it easier for the
"oligarchs" to loot the country in comfort.
But we in the West have this other problem besides the one of the Russian
people's suffering: How will this rise of Russia's criminalized state affect
the United States and, indeed, the world?
In an unusual burst of openness, the FBI recently testified to Congress that
Russian criminals have even purchased controlling interests in "offshore"
banks on the Caribbean islands of Antigua and Aruba. In short, these
increasingly "professional" groups, using former Russian military and ex-
intelligence officials, having ruined Russia, now are closing in on the rest
of the world.
Secretary of State Madeleine Albright has been the only official to step
forward to speak the truth. In an early October speech to the U.S.-Russia
Business Council in Chicago, she was notably--and honorably--downbeat about
future relations with Russia.
It is far beyond time for this administration, with its maidenly romantic
notions of "saving Russia," to drop its post-Cold War illusions about that
shell of a government and take steps to protect our own citizens from the
threat that its policies have helped to loose on the world.

*******

#4
Date: Fri, 13 Nov 1998
From: David M Rowell <david@anzac.com> 
Subject: Report from the "front lines" in St Petersburg

David -

Much of JRL's worthy content covers Russia on a "macro" or national
overview level. Here are some "micro" level observations after spending
the last week in St Petersburg that hopefully are of interest to
readers.

As quick background, I’ve been a regular visitor to Russia for the last
three years, and the previous time I was there was in May, (before the
August economic crisis). I have some business dealings with Russia, and
a Russian wife. I’ve tried to summarise some semi-random thoughts about
my visit last week as follows; however, like most things in Russia, it
is very hard to put over-arching comments into a cohesive and accurate
whole.

The depreciation in the ruble’s value to something like 40% of its
pre-August level has now had time to filter through much of the economy,
and the last month or more has seen it trade in a fairly stable and
narrower range than the wild oscillations of the first week or two after
the crisis hit. (Note that a large drop in the ruble’s value just these
last two days may be already contradicting the comments I am currently
making!)

It is already common knowledge at many levels of Russian society that
the ruble strengthens in the middle of each the month; and, of course,
if that is so, then the ability for the Russian Central Bank to
manipulate the currency value in this way will become more difficult as
the rest of the market starts to anticipate and emulate.

Other people have sporadically written about the curious anomalies that
have appeared as product pricing struggles to accurately reflect the new
cost price inputs. For example, we were advised a while ago that
Pepsi-Cola products showed little price increase (a product with a
significant imported content) while Russian bottled water showed large
price increases (a product with low import content). This is the
opposite of what one would expect, and probably illustrates more the
contrast between an ethical and careful approach to the market (Pepsi
with their western management and orientation) on the one hand and a
profiteering short-term approach to the market (Russian bottled water
companies) on the other hand.

Another illustration - a three fold increase in underlying dollar cost
terms - of a bar of imported chocolate shows the profiteering that
occurred shortly after the crisis hit, magnified by the good
old-fashioned law of supply and demand. As people went crazy buying
everything off the shelves in a desperate hope to convert the rapidly
diminishing value of their rubles into any form of tangible goods on the
one hand, and importation of these same goods became very difficult on
the other hand, of course prices moved substantially beyond that which
cost inputs alone would have suggested.

Imported goods are (at present - read on for comments about this) more
commonly available again, and the panic buying has gone away, and in
underlying dollar terms, most products seem to have tended back to
levels at which they previously were, or just slightly higher. Some
products are markedly lower (in dollar terms) than they used to be, the
example that springs most readily to mind is imported bottled beer as
sold in Russian food shops (not western style supermarkets), with dollar
costs being, as best I recall, something like half that compared to in
May. I have no idea why this is so, but was pleased to experience the
benefits!

The price of petrol seems to have increased in underlying dollar terms.
As best I could establish, it seems that premium grade petrol is now
selling for at least US$1.50 per US gallon - more than it costs in the
US! But in contrast to this, the price of hiring a "gypsy cab" - ie,
waving down a private car and paying them to transport you to wherever
you want to go - has almost not changed at all since May. Perhaps at
best (or should I say, worst?) there may be a 10-20% increase in costs,
which makes taking a taxi an incredibly good value (figure on a rate of
about 1 ruble per minute of hire as a rough rule of thumb - in other
words, about $1 for a 10-15 minute journey).

Still on a car related subject, imported cars have gone down in price by
about 10% in dollar terms. The high related costs of spare parts and
maintenance of imported cars have made them less attractive to much of
the population, and so Russian cars are slightly more in favor, and the
profit margins on selling imported cars have dwindled accordingly.

As a side-bar comment, Soviet manufacturing attitudes remain alive and
well with Lada cars (or Zhiguli as they are often branded in Russia,
Lada being the name created for the export models). I was advised that
the cheapest types of these cars were the white colored ones. Upon
asking why a white colored car should be any price other than identical
to a blue or green colored car, I was told that this was because white
is not a popular color, and so dealers have to sell these at a discount
to get people to buy them. Further questioning revealed that the
factory continues to make cars in the color proportions that it chooses,
without any thought to what the marketplace wants!

For those preferring to ride the Metro rather than take a car, I can’t
recall if a metro token was 1.2 or 1.5 rubles in May; but now it is 2
rubles, (about 12cents). This contrasts starkly with the current
minimum fee of £1.60 (about $2.60) for the shortest ride on London’s
underground - more than twenty times more expensive for a probably
shorter journey! Obviously an unsustainably low price for the St
Petersburg Metro, and it is no wonder that progress on repairing the
collapsed tunnel on one of their lines continues at a pathetic snail’s
pace and shows no signs of being completed in the foreseeable future.
Train frequency seemed to be on a par with past visits.

Moving to the ultimate economic measure of the underlying value of a
currency, the cost of a Big Mac in St Petersburg was 23.4 rubles. It
seems by this measure that the ruble is currently undervalued ­ quite
the opposite of what most conventional wisdom would suggest! The
MacDonald stores I observed in St Petersburg all seemed reasonably busy,
but not as busy as in May and earlier visits.

Restaurant prices tended to be quoted in "units" rather than in rubles,
with one unit being the same as one dollar, and being converted at the
day’s exchange rate to rubles at time of payment. Most restaurants had
some form of discounting, whether it be in the form of Table d’hote
menus supplementing their a la carte menus, or corporate discounts or
whatever. I was able to negotiate a 25% discount off the a la carte
prices in one restaurant, and am sure that this effort could have been
repeated or even exceeded elsewhere. None of the restaurants I ate in
seemed busy.

However, if the local population isn’t eating out, it is still enjoying
entertainment events. Opera and ballet prices are almost unchanged from
May in ruble terms, making them incredible value (if you’re as lucky as
to buy at local resident prices rather than at foreigner prices, of
course!), and the couple of concerts I attended were both fully sold
out, with a notable diminuition in foreigners present. And, for the
less high-brow minded, a local pop star of middling appeal was about to
start a one month run at a local stadium, and to everyone’s surprise,
the not very cheap tickets to his performances were completely sold out
shortly after they opened for sale.

The restaurants weren’t busy, and the airport was almost completely
deserted. My BA flight from London was maybe 10% full, and my return
flight maybe 30% full. There were none of the crowds of people waiting
to go through Customs and Immigration, and none of the crowds of people
waiting to meet arriving passengers. Interestingly, the duty free shop
in the arrivals area was almost completely empty of goods for sale,
whereas the duty free shop in the departures lounge was as full of
things as ever. As a side-bar comment, knowledgeable travellers sneak
over to the departures duty free shop when arriving into St Petersburg
to buy whatever it might be that takes their fancy, as prices there are
cheaper than in the arrivals shop, and particularly now, the range of
product vastly better.

Several airlines were running special fares from Russia to European
countries (and even to the USA). Of course, these special fares are
rather pointless if potential international travellers can’t get visas
for the countries they wish to visit (as is often the case for Russian
nationals). One Russian travel agency I spoke with said that they still
had strong outbound tourism from the New Russian part of the market, but
travel for the putative middle class has decreased markedly.

I understand that Russian Consulates in North America are finding their
level of visa issuance significantly down on last year, confirming my
ground zero observations, although I don’t know the split and trends as
between tourist and business type travel.

Hotel rates for business oriented hotels (eg the Astoria) are very soft,
and only a gentle bit of negotiation should secure a room rate under
$140 a night. Tourist oriented hotels aren’t being quite so strongly
hurt, but rates are slightly lower than before and few hotels are
outlooking increases in rates for next year’s season.

It appears that for people that were being paid on a dollar-based salary
rather than a ruble based salary, the notional exchange rate in which
their salary is being paid has not accurately kept up with actual
exchange rates, with a rate of around 10 to the dollar being quoted. At
least these people have had a 65% increase in their pay each month - few
if any people being paid in rubles reported any increase in their salary
at all since August.

The various new restrictions on hard currency flows out of the country,
and the problems of the last few months are resulting in the obvious
response from commercial companies. In the estimate of one small
business owner, the amount of “off the books” business has increased and
now represents, in his case, more than 80% of his business, a steep
increase on where it was a few months ago. The phantom economy
continues to grow (we hope) while the official economy appears to
continue to decrease.

Not only is the share of business being officially transacted decreasing
as a response to increasingly difficult regulations to do with
international trading, but the penalties of doing business honestly are
increasing. Another small business owner told me that they had received
last week a demand from the Tax Police to pay $2000, which had to be
paid within a week. What for, she asked? Some discussion resulted
eventually in the brutally honest answer that this sum was levied based
on a directive from Moscow to "collect more taxes any way possible" and
so the Tax Police were simply taxing anyone they could as much as they
thought they could get. There was no underlying accounting
justification for it, just a simple basis of "give it to us or else",
and of course, little practical opportunity to appeal this arbitrary
levy. One has to assume that this is not the type of action the World
Bank has been seeking when it has been demanding that Russia increase
its tax collections! The distinction between dealing with the Mafia and
dealing with the official organs of the Government continues to be very
blurry, doesn’t it! Some might argue that doing business with the Mafia
is easier than doing business with the official government - more
predictable, more rational.

On the same note, a very disturbing article in the St Petersburg Times
(forgive me if this has been already quoted - I was not receiving
articles during my sojourn in Russia) recounted how some members of the
local Police were preying on foreigners. They’d catch people late in an
evening as they left bars and restaurants known to be frequented by
foreigners. What happened next - at best, they would be searched, and
subsequently would find that their wallet had mysteriously been
lightened during the course of the search; at worst, they’d be beaten
up, and spend a night naked in a cold cell. The official police
response to complaints and the newspaper article - bored apathetic
indifference. While I hasten to add that this is not a commonplace
event that all tourists and businesspeople should anticipate occuring on
a regular basis to themselves, it does indicate the rottenness at the
core of Russian government. As for the Catch-22 nightmare that poor
Aleksandr Nikitin faces with his espionage charges and the inability of
the Court to acquit him until the prosecution brings adequate charges
for him to be found not guilty, what can I say! Until some core

underlying social values change and some social protection is given to
its citizens, Russia’s problems transcend mere balance of payment and
economic issues, and there is little point focussing on the
macro-economy if the micro-economy remains at complete variance with the
desired macro structure.

Local Russian people talk about increased lawlessness and the growth in
crime. At one extreme, an elderly couple is afraid to leave their
apartment except in the height of the daylight hours, something becoming
increasingly confining as Russia enters its long dark winter once
again. At a more mild level, locals were cautioning me against using
the suburban trains in the evening, or even about walking alone at
night, to a much greater extent than ever before. Whether these
concerns are backed by real facts or not, it is clear that the social
fabric is continuing to fray in ever increasing amounts.

As many readers will appreciate, the total stock of food in Russia has
been steadily decreasing since August, due to the twin effects of poor
local harvests and diminished levels of imports. This may be
approaching a surprise crisis point. Until now, as product already in
the distribution system has continued to flow through it, there haven’t
been huge uncontrollable problems, but now that the distribution system
is almost empty, the need to refill it is becoming severely pressing -
all of a sudden, in a single day one day, shelves could go from nearly
full to completely empty, and with no product in the warehouses to
resupply from.

Discussions with the representative of an off-shore supplier of primary
foodstuffs revealed that they are in a serious quandary about what to do
- their Russian customers now urgently need to buy more product from
them, and they in turn are keen to sell product to what has become a
large and important market to them. But the unresolved issue of how to
get guaranteed payment for future shipments of food is demanding an
answer, especially as they haven’t yet been paid for past shipments, and
as best they can tell, it would be very difficult for their clients to
pay for these. This situation is probably occuring for many different
companies at present.

To conclude, things were both better than I expected and worse. And I
guess this contradictory statement is about as fair a way of summarising
the complete enigma that is this still vast country. Like, sadly, much
of Russia’s population, I felt closer to despair and an abandonment of
future hope on this visit than on any previous visit. The final chapter
in Russia’s tragedy is a long way from being commenced, let alone
concluded.

*******

#5
The International Economy
November/December 1998
Petro-State
Wondering about the future of Russia? It all comes down to the price
of oil.
By S. Frederick Starr (sfstarr@mail.jhuwash.jhu.edu)
Frederick Starr is Chairman of the Central Asia-Caucasus Institute at the 
Nitze School of Advanced International Studies, The Johns Hopkins University.

Many of the factors involved in Russia's crash have been carefully
dissected, but one has gone mysteriously unnoticed. Surely "it is no 
accident," as the Soviets used to say, that Russia
defaulted on its vast loans just after the price of Brent crude dropped
from $15 to $10-13 a barrel. When this shoe fell, just under half of Russia's 
foreign currency income was derived from the sale of oil and gas, and a 
proportionate share of taxes came from this same source. Hence the default. 
Could the Russian economy have hung on longer had the price of oil not
dropped? In spite of all the other problems -- yes! Income from oil and 
gas sales had propped up Russia's flagging economy before. By the early 
l970s many of the key indicators of Soviet economic
health were heading south. The rate of investment, return on investment,
and productivity of labor were slipping backward after a brief post-Thaw 
upswing. Economists in Moscow and the West knew something was fundamentally 
wrong, though they differed on how long a breakdown
could be averted. Then came the oil crisis of 1973. Over American
objections, new export pipelines were laid down. As the oil and gas began 
to flow, the sagging Soviet economy gained a second wind which enabled it 
to muddle along into the Gorbachev era. 
The rise and fall of "Perestroika" tracked with the world price for
energy. Gorbachev counted on income from this source continuing. But it
began to fall at the time the Soviet budget was hit by the effects of 
Gorbachev's ill-conceived abolition of the state's liquor monopoly. He
tried to fill the breach by borrowing. When the world price of oil took a
nosedive, the Soviet economy followed. Shortly thereafter, the Soviet 
Union itself was felled.
For a generation the USSR and Russia have been on the path toward
becoming a petro-state. This is large part the result of Soviet planners'
failure to develop other viable exports. A century ago Russia's Ukrainian 
provinces had been the world's biggest exporters of grain. In the 1970s, 
Gosplan dreamt of developing new export products, including automobiles,
machine tools, and even consumer goods. In the end it had little to show
for its efforts except electrical turbines, tractors, and military hardware. 
The inevitable consequence of this failure was a growing dependence on energy
exports and on commodity exports generally. 
Elizabethan English visitors to Muscovy considered the tsar's country
to be a good source of timber and furs. Nearly half a millennium later 
prospects of the manufacturing sector becoming competitive are (and have been) 
bleak. The falling ruble will give Russian industry a
short boost, but ultimately it will have to compete on quality as well as
price. This will not be easy. In the meantime, sales of oil, gas, and 
other commodities will only grow in importance. It is no surprise that two 
of the last three Russian prime ministers have been recruited from the
energy sector.
Evidence that Russia is an emerging petro-state is not limited to the
way in which epochal events in recent Russian history track with world 
prices on gas and oil. Several features of Russia's recent economic and
political development are common to other countries that have
experienced windfall profits on the sale of energy resources. Much has
been written about the political decentralization of Russia today, but 
never in Russian history has so much of the nation's economic wealth been
concentrated in the capital. The energy sector leads the way:
Nearly all the major firms are headquartered in Moscow. In spite of
partial privatization, the Russian energy sector remains heavily 
governmentalized, with the monster combine Gasprom
leading the way. The unequal distribution of incomes and the spread of
corruption in Russia today are undoubtedly phenomenon with many causes, 
and the growing dependence on oil and gas exports is only one. But it 
cannot be denied that both of these have soared as oil and gas
exports have come to dominate the national income accounts.
Centralization, governmentalization, polarization of incomes, and
corruption are all common features of petro-state economies that have 
mismanaged their windfall profits. It remains to be seen whether Russia 
will also be infected by the so-called "Dutch disease," which
kills off domestic manufacturing when the price of inputs rises faster than
the price that producers can charge abroad. Clearly, Russia will have to 
develop viable manufactured goods before this hypothesis can be tested there.
Russia's shift towards the status of a petro-state is reflected also
in its politics. It has been fashionable in Moscow to draw comparisons between
Russia and Pinochet's Chile. Another Latin American model was introduced 
recently when Sergei Fedorov and Boris Berezovsky sponsored the visit of 
Argentine politician Domingo Cavallo to Moscow, where he
preached to a largely unresponsive audience about Argentina's great success
with a currency board. Unfortunately, a far more applicable model than either
of these is provided by Venezuela. Here a rent-seeking economy based 
overwhelmingly on oil and gas exports fostered
patrimonialism, centralization, corruption, general economic deterioration,
the disorganization of the state, and regime decay. Economist Terry Lynn
Karl has pointed out that oil booms, when mismanaged, can make the state 
"both the subject and object of predation." This is what
happened in Venezuela and has been occurring in Russia as well. The fact
that the Venezuelan state hit the wall at about the time Perestroika 
collapsed is revealing. 
Strange to say, Primakov's economists do not seem to grasp how much
the economy's fate hangs on energy exports, and how that fact might 
influence political processes. They persist in seeing the energy industry 
as a tax cow, but are unwilling to face down municipal and regional
governments for not paying their delinquent oil and gas bills. Meanwhile,
the industry cites these overdue bills as its chief reason for not paying 
the taxes it owes. Similarly, it is scarcely conceivable that Russia can 
exploit its oil and gas without infusions of foreign capital,
technology, and bottom-line oriented management. Yet nationalists in the
government and Duma love to point to energy reserves as their national 
patrimony and to raise the banner of renationalization. 
Where will Russia go from here? It goes without saying that Primakov
should support policies that enable the country to exploit the energy 
resources and other commodity exports that are its main life-support today. 
As of this writing, however, he is a long way from doing this. 
But there's a catch. If Russia only develops the energy sector, it will
doom itself to following the road of other petro-states. And given the 
underdevelopment of Russia's core legal and political institutions, the 
country is far more likely to follow the rocky path taken by Nigeria, 
Algeria, Iran, and Venezuela than that taken by Norway or Britain. In short,
Prikmakov should open up the domestic energy industry to further foreign 
participation and hold it accountable for taxes (meanwhile pressing local 
governments to pay for the energy they consume). At the same time,
he must strengthen Russian manufacturing and agriculture. 
Gratefully, the question of how he can do the latter is beyond the
scope of this article. But he can be sure that one-sided success in the 
energy sector will condemn Russia to being the biggest petro-state on earth, 
with all the attendant problems observed elsewhere. For now, this
remains the most likely prospect for Russia's future.

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#6
Moscow Times
November 14, 1998 
No Shortages of Imports Expected 
By Katy Daigle
Staff Writer

Contrary to recent doomsday predictions, shoppers in Moscow this winter will
not find store shelves stripped of Western imports like they did when the
crisis started in August, importers and analysts said. 
According to the Economics Ministry, imports are expected to shrink 14 to 18
percent this year. This is a potentially ominous drop considering Russia's
dependence on foreign products. Last year, Russia imported one-third of its
consumer goods. But a fresh trickle of imports and slumping consumer demand
are ensuring there will be a sufficient supply of goods - albeit probably at
higher prices and in limited selections. 
"Yes there is a crisis, but life hasn't ended," said Maxim Pavlushin, a
spokesman for major Russian wholesaler Uniland. "I very much doubt there will
be another shortage like there was in August. Companies have been working for
a few months now to ensure that doesn't happen again." 
Analysts and retailers had predicted store shelves would empty at the end of
November, as stocks of pre-Aug. 17 imports ran out. Importers have had trouble
signing new deals with suppliers because trade financing has been cut off by
the collapse of the Russian banking system. But Pavlushin said Uniland has
already prepared for the future and found new suppliers to replace the
associates it has lost. 
Some retailers, too, say they have been able to maintain supplies. 
Turkish-owned Ramenka Co., which imports goods ranging from ice cream to
cleaning supplies and sells them through its Moscow hypermarket Ramstore, says
it has seen little change in sales figures since the crisis. Company
warehouses are full, said advertising and public relations manager Anastasia
Karmazina, and business is solid enough to keep Ramenka's plans on track to
open a second hypermarket at the end of November. 
"During this uncertainty, customers are relieved to go to a store where prices
are somewhat stable and there is a wide selection. We are fortunate in that
most of our customers have maintained their buying power, and that our large
size enables us to offer them everything they need," Karmazina said. 
While imports may not run out, they are likely to come at a cost. Stores will
probably be forced to mark up prices because they need to find extra funds to
make prepayments on goods, said Michael Sassarini, an analyst with United City
Bank. 
"And there won't be quite the [pre-crisis] variety of imports, but the basics
will still be there," Sassarini added. 
For many Russian consumers the prices charged by stores that have been able to
maintain import stocks are now too steep. Government measures to boost trade
are not enough to fix that, economists say. 
The government has slashed duties on some agricultural imports by 5 percent,
lowering milk import tariffs to 5 percent, meat to 10 percent and butter to 15
percent. But the ruble devaluation has caused ruble retail prices to at least
double, while most salaries have not been indexed to inflation. 
"Consumer demand has been cut in half, approximately," said World Bank
economist Vladimir Drebentsov. 

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#7
Los Angeles Times
November 14, 1998 
Letter
Economic Crisis in Russia 

* Poor, tortured Russia! The Times' Nov. 8 Sunday Report only details the
second death of a people and country that have suffered so much and deserved
better for the tribulations they have been through. Whipsawed between two
ideologies in 80 years, what spirit can remain when, having elbowed their way
out of one ideology, they emerge from that frying pan only to be reduced to
economic and social ashes by another: free-market capitalism. 
The prospects for further adoption or success of this newly hatched
ideology have not been improved by the U.S.'s "do as I say; not as I do"
prescription to others. Our Federal Reserve Bank leads the team to bail out
the largest hedge fund, Long-Term Capital Management, in direct contradiction
of the cold-turkey economic medicine we are forcing down the throats of other
countries through the International Monetary Fund. 
We might paraphrase William Blake to say: "The visions of ideologies
breed monsters." And that goes for free-market capitalism as well as communism
and Nazism. 
FREDERIC E. PAMP 
Santa Barbara 

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#8
St. Petersburg Times
November 13, 1998
U.S. Consulate Marks 25 Years in City 
By John Varoli
STAFF WRITER

The United States Consulate in St. Petersburg celebrated its 25th year in the
city on Thursday, with U.S. Consul General Thomas Lynch hosting the birthday
party at his residence just off of Ulitsa Vosstaniya.
A number of the city's leading business, cultural and government figures were
in attendance to toast the opening of an institution which many now take for
granted, though which 25 years ago seemed more like a miracle.
"The American Consulate has really helped St. Petersburg fulfill its role of a
leading world cultural center," said Mikhail Piotrovsky, director of the State
Hermitage Museum. "For instance, it has helped the Hermitage develop contacts
with museums in America, and provided us with new ideas for development."
Despite the anniversary, Lynch pointed out that the first official American
presence in St. Petersburg dates back to the American War of Independence
(1775-83), when a delegation, led by Francis Dana, unsuccessfully tried to
enlist Catherine the Great's help against the British. Some years later a
permanent American embassy was established in the Russian imperial capital,
but it was eventually closed in early 1918, shortly after the Bolsheviks had
come to power. Only in 1973 were the Americans able to establish their second
beachhead in the Soviet Union. 
"The opening of the American Consulate was quite an event," said Konstantin
Khodolai, dean of the department of International Relations at St. Petersburg
State University. "Though this event only affected a small circle of people,
it nevertheless was a step in the development of relations between the two
countries."
The impetus for the consulate's founding came from the Soviet government, when
it asked to set up a consulate outside of its embassy in Washington and its UN
mission in New York City. The Soviets wanted San Francisco. The Americans
agreed, asking for a consulate in Leningrad in exchange.
Though the consulate is involved with many activities - visa-processing,
support services to Americans, facilitating exchanges - Lynch says it is
especially active in business issues.
"These are the issues that offer the most opportunity, but at the same time
where many of the problems are concentrated," Lynch said during Thursday's
dinner. But Lynch cautioned those who see Russia's current plight as hopeless.
"I think that the present period which Russia is going through is an abnormal
one because Russia is fundamentally a rich country. It is not a basket case,
nor some developing country with missiles, as many say it is."

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#9
Russia, Japan Sign Kuril Agreement
November 14, 1998
By ANGELA CHARLTON

MOSCOW (AP) -- Japanese Prime Minister Keizo Obuchi's trip to Moscow produced
a Russian promise to work toward the speedy settlement of a 53-year-old
territorial dispute -- and a Japanese pledge to give Russia nearly $1 billion
in aid and loans.
Obuchi and Russian President Boris Yeltsin signed an agreement released Friday
in which they pledged to resolve their differences over the Kuril Islands by
the end of next year.
A settlement would pave the way for the two countries to end World War II; the
dispute over ownership of the tiny islands has stopped them from ever signing
a formal peace treaty.
The declaration gives no hint of how the conflict might be settled, but sets
up a new mechanism -- and a new resolve -- for doing it.
``I think we have made significant progress at this meeting,'' Obuchi said at
a news conference before he left Friday. ``It is necessary to expand
cooperation, while creating conditions for concluding a peace treaty and
resolving the territorial question.''
The declaration was issued at the outset of talks between Obuchi and Prime
Minister Yevgeny Primakov on Friday. The two had been expected to focus on the
details of when and how Japan will hand over an $800 million installment of a
loan it promised last summer.
``All of us gained something,'' said Yeltsin's spokesman, Dmitry Yakushkin.
There was no immediate indication that the loan details had been resolved.
The Japanese loan is part of a $22.6 billion bailout package arranged by the
International Monetary Fund this summer. The IMF and the World Bank put their
loans on hold after Russia effectively defaulted on foreign loans at the
beginning of its economic crisis in August.
Obuchi offered to free up the Japanese loan and give Russia another $100
million to promote economic development, $10 million for medical assistance
and $20 million to support youth exchange programs -- all for the Kuril
Islands.
The two prime ministers signed an agreement on guarantees of capital
investments and on a joint investment company that would promote direct
investments in Russia by Japanese companies.
Relations between the two countries have long been clouded by the Kuril
dispute.
Tokyo claimed title to the islands -- Etorofu, Kunashiri, Shikotan and the
Habomai islets -- in an 1875 treaty with Russia. The Soviet Union took them
back in the closing days of World War II, a move Japan has protested as
illegal.
The islands have about 17,000 poor and restive residents, nearly all Russians.
Many would welcome Japanese administration. The Kurils are important to both
countries for symbolic reasons and because they are surrounded by prime
fishing waters.

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