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Johnson's Russia List


December 28, 1998    
This Date's Issues: 2534    

Johnson's Russia List
28 December 1998

[Note from David Johnson:
1. Reuters: Yeltsin says army achieves cuts, reform still slow.
2. Masha Gessen: Danzer on keywords. (DJ: Let me second Masha's
suggestion that contributors identify themselves where appropriate.)

3. Larissa Titarenko: Who Will Be the Next President...Re: Goble (2529) 
and Kalganov (2532).

4. Financial Times: John Thornhill, PM heads off clash with governors.
5. Edward Hodgman: Re Dyson on commercial lending.
6. Jo-Ellen Pozner: Response to E Dyson, JRL 2532.
7. Esther Dyson: Re Response to E Dyson, JRL 2532.
8. Reuters: Elizabeth Piper, Russian computer pirates flourish in crisis.
9. Christian Science Monitor: Judith Matloff, Kremlin chafes at backseat

10. Los Angeles Times: Richard Paddock, Russians Bank on Bartering.]


Yeltsin says army achieves cuts, reform still slow

MOSCOW, Dec 28 (Reuters) - President Boris Yeltsin said on Monday the Russian
armed forces had met a target of cutting troop numbers to 1.2 million this
year but noted military reform was still very slow, Russian news agencies
``This figure has been achieved. Mission accomplished,'' Interfax quoted
Yeltsin as telling his defence minister, Marshal Igor Sergeyev, during a
meeting in the Kremlin. 
Sergeyev, appointed in 1997 after his predecessor was sacked for dragging
feet on cutbacks, said in August he expected 400,000 jobs to go this year to
reach the 1.2 million target. About 200,000 were cut last year. 
Military reform is going on ``but still slowly for the time being,'' Itar-
Tass, which also had access to the talks, quoted the president as saying. 
``Problems remain, unfortunately, with financing the armed forces but,
nonetheless, the defence minister is working particularly resolutely, the
government is helping the army and even I, as far as I am able, am helping and
we will pull this load by joining our forces,'' he added, according to Tass. 
Yeltsin noted the importance of the inauguration by Sergeyev on Sunday of
first regiment of Topol-M rockets, the new generation of ballistic missiles
which Moscow sees as the backbone of its strategic defence in the next
The Topol-M (Poplar) is also known as the RS-12M and is classified by
the SS-27. 
Yeltsin also noted that a reform of the armed forces which merged various
branches to reduce the number of arms of the services to four -- army, navy,
air force and missile forces -- had been accomplished and would make military
management easier. 
Russia is still struggling to slim down its vast Soviet-era military machine
while maintaining modern defences. 
Even though a smaller army might save sorely needed money in the long term,
laying off troops, slimming down command structures and acquiring more
efficient, modern weaponry is proving an expensive and lengthy process. 
During his re-election campaign in 1996, Yeltsin announced the most
goal of these military reforms, ending conscription by 2000 to transform the
largely conscript-based army into a modern, professional force. 
Yeltsin has made little mention of that deadline since, however, and
has said it is not realistic. 


From: "Masha Gessen" <>
Subject: Danzer on keywords
Date: Mon, 28 Dec 1998 0

John Danzer's message on keywords is a brilliantly un-self-conscious
illustration of what is wrong with Russia studies. If Mr. Danzer won't
bestir himself to read anything that doesn't affirm his view of Lebed as
the key figure in Russia's future, he isn't exactly going to be disabused
of this notion (which I happen to think is erroneous, but that's beside the
point of this message).

Masha Gessen
Itogi Magazine

P.S. And another thing. I would like to plead with everyone who writes to
JRL to identify themselves and state their affiliation. I don't see any
reason for any of us to assume the rest of us know who we are, and I, for
one, appreciate knowing in what country a particular view originates and
whether the writer is a journalist, say, or an academic.


Date: Sun, 27 Dec 1998
From: "Larissa G. Titarenko" <>
Subject: Who Will Be the Next President of 
Izvestia's OGRB The United State of Russia and 
Belarus? Re: Goble (2529) and Kalganov (2532)
Larissa Titarenko, currently a Fellow of the Kennan Institute for
Advanced Russian Studies, is Professor of Sociology of Belarus State
University in Minsk
Both Goble and Kalganov make valuable contributions, each important in
their own right. Goble is correct in noting the diversification of the
post-Soviet republics and Kalganov is generally on target regarding the
chances of currently known front-runners in the 2000 presidential elections
in Russia. The point to note is that on the same day the Kalganov article
appeared, there were reports concerning OGRB and the ratification of the
friendship pact between Russian and Ukraine. This news brings up the need
for taking a somewhat different approach to the problems at hand.
In line with what Goble observes, one finds that the Baltics are
striving to join the NATO, Chechnya formally part of Russia intends to
become an Islamic republic, clan conflicts continue in parts of Central
Asia, while Russia and Ukraine battle oligarchs including the Panamanian
scion Pavlo Lazarenko. Further, in Kazakhstan, two months before the
presidential election no one was sure who the candidates were going to be,
and at the same time in Russia even two years before the presidential
elections the would-be candidates all seem to be identified and are
engaging in busy dividing the proverbial hide of the bear as yet not killed. 
Russia continues to be at the center of attention. Because of that it is
important to note its loss of superpower status and even that of a major
regional power who deserves to be considered in international politics.
Russia's economic crises, including the Damocles' sword of a default, are
aggravated by the political blunders. As a result, there is a deepening
crisis of trust vis-à-vis authorities that actually rule the country and
the political elites that are desperately striving to rule it as described
by Kalganov.
Quite naturally, many Russian politicians and men-in-the street struck
upon the idea of turning back the clock to days of the Union, the more so
because there is Belarus -- a willing candidate waiting in the wings for
several years to join such a Union. Belarus, suffering from a severe
economic crisis, is eager to join the OGRB to improve its own economic
situation by coming closer to Russia's natural resources, even if this will
require sacrificing political ambitions. (Although there seems to be no
official mention as yet of Belarus becoming Russia's 89th administrative
subdivision, some Russian politicians consider this to be an inevitable
condition for making the OGRB experiment work at least in economic terms).
Much of the support for OGRB comes from the Russian communists and
various patriots from Zyuganov to Luzhkov. Quite likely this idea has
lobbyists in the Yeltsin administration. Indeed, despite rather cool
personal relations with Belarus President Alexander Lukashenko, Yeltsin has
unfailingly supported since April of 1996 the idea of a union culminating
in OGRB.
Can Belarus in any way help Russia solve its problems? Economic benefits
seem minimal at best, if the idea is to raise Belarus to the level of
economic reforms in Russia. These arguments are at the heart of objections
raised by the Russian liberals and even Zhirinovsky. At the same time, the
OGRB political benefits to Russia are beyond the shadow of a doubt.
In the first place, Russia is gaining some "symbolic capital." There is
obvious hope that others may join. Will it be Yugoslavia or Ukraine?
Secondly, Russia is gaining major foreign-policy benefits by appearing to
respond to NATO expansion and now having a common border with Poland. This
may even provide reasons to place its missiles closer to Poland with all of
the other consequences. Thirdly, there are underlying realities that may
emerge in the utterly irrational post-Soviet space. Namely, in the light of
the promised mid-1999 referendum and a single OGRB citizenship, it is quite
reasonable to look at the possible political fortunes of Lukashenko and his
chances of being a candidate for the presidency if not of Russia, then of
Despite the cardboard images of Lukashenko popularized by the media, it
is time to take him seriously. In survey after survey, conducted by
different people and sponsored by different organizations, including the
political opposition, his popularity remains unexpectedly high. The
impression is that the political space of Belarus has only a single viable
player, who cannot lose Alexander Lukashenko. Sociological studies
indicate that since his coming to power in mid-1994, Lukashenko's ratings
have never fallen below those of any other political leader in Belarus.
Moreover, his popularity ratings in the range of about 30 45% were always
higher than those of any Russian political leader of whatever ilk.
These ratings seem not to depend on real successes or failures of
Lukashenko or of the country as a whole. Rather, they appear to be
determined by his being at the seat of power and are being supported by the
irrational desire of the population, raised on monarchy and communist
leadership, to believe in a benevolent ruler and live under his protection.
The wide support commanded by Lukashenko leads one to doubt Kalganov's
thesis that the people of Russia do not need any more "dictators" like
general Lebed. The same holds for Kalganov's assertions that the patience
is running out, and that although the "people are still silent" this may be
the calm before the storm. As VTsIOM's Yuri Levada mentioned in his
interview to Argumenty i fakty last fall, sociological surveys show that
Russia seems in no danger of popular revolt. For this reason all talk about
the "last valve" seems premature as well the assumption that the list of
candidates for the 2000 presidential election has no vacancies. If OGRB
become a reality, the logical choice would be to elect not just the
president of Russia but of OGRB or both. In this case Lukashenko candidacy
is superior to that of other Kalganov-recognized candidates, inasmuch as he
has a proven that he can bring "law and order" to Belarus and can be
trusted to do the same for OGRB. Unlike Lebed, whom the electorate trusted
in 1996 presidential election and in 1998 governor election, taking his
merits for granted, Lukashenko has some track record to his credit. As a
charismatic leader Lukashenko may not be as good as Yeltsin but is much
better than Lebed and can command the trust of the people no less than
Russian TV anchors Dorenko or Kiselev. 
The real question is whether the Russian people want a new charismatic
leader on the horizon and are they really ready not only to join forces
with Belarus but to accept Belarus president as their own. While not
pretending to have an answer, I suggest that the possible result of the
union of Russia and Belarus, the OGRB, may turn out to be quite different
than its supporters expect, based on lingering nostalgia and re-emerging
geopolitical ambitions. 


Financial Times
December 28, 1998
[for personal use only]
RUSSIA: PM heads off clash with governors
By John Thornhill

Yevgeny Primakov, Russia's prime minister, appears to have headed off a
potentially explosive clash with the country's powerful regional governors
after agreeing to a new split of tax revenues next year.
The weekend agreement came after the lower house of parliament, the Duma,
approved the draft 1999 budget at its first reading on Thursday.
Mr Primakov had threatened to resign if MPs did not accept the tough budget,
designed to bring the country's runaway public finances under control.
He hailed the parliamentary vote as a "victory for common sense".
President Boris Yeltsin heaped praise on his new prime minister's
handling of
the country's worst economic crisis since 1991 and his diplomatic skills in
dealing with parliament. "He is the strongest premier, the most reliable one,
supported by the president, government, the state Duma, and the regional
authorities," Mr Yeltsin said in a rare television interview.
The Russian president, ever-fickle in his judgments, was in effect forced
accepting Mr Primakov as his prime minister by parliament in September after
his first choice candidate, Victor Chernomyrdin, was twice rejected by unruly
Over the weekend, a trilateral commission, consisting of representatives of
both houses of parliament and the government, agreed that Moscow would next
year spend Rbs33.7bn ($1.54bn) - or 14 per cent of all tax revenues - on
supporting the regions but that the subsidies would be reallocated.
Russia's 39 worst-hit regions, including Dagestan in the north Caucasus and
Kamchatka and Sakhalin in the far east, will receive additional support next
year. But 36 better-off territories, such as the oil region of Tyumen and the
industrial city of Nizhny Novgorod, will lose some of their subsidies. Twelve
regions will receive no financial support from Moscow.
"The government and parliament have managed to find a possible balance of
interest in sharing tax revenues," Mr Primakov said, adding that the federal
government would receive 49.5 per cent of all tax revenues with regional
authorities keeping the rest.
The upper house of parliament, which contains Russia's 89 regional leaders,
will vote on the 1999 budget once it has passed all four readings in the Duma.
Several economists have argued that the 1999 budget looks tough on paper but
contains a series of unrealistic forecasts. The budget plans are also based on
the assumption that Russia will receive additional support from the
International Monetary Fund.
Mikhail Kasyanov, deputy finance minister, said he hoped the budget would
final approval in January enabling the government to resume serious talks with
the IMF.
"In February an IMF mission comes to Moscow and we hope that we will reach
agreements and will prove to them that this budget is the only possible
option. We hope the mission approves of the plan," he said. 


Date: Mon, 28 Dec 1998 11:18:39 +0300
From: "Edward B. Hodgman" <>
Subject: Re Dyson on commercial lending

There is at least one lending program like the one you describe. It's
administered by Moscow-based Probiznesbank and supported by the World Bank,
the EBRD, and The U.S.-Russia Investment Fund. The microlending program
lends up to $30K, and the small business program has loans for up to $125K
for companies having up to 50 employees. According to representatives of
the Fund, the program has been extremely successful to date, with some 30
loans made in the last year and a nearly 100% repayment rate. Training and
advice for potential borrowers are part of the package.


Date: Mon, 28 Dec 1998
From: Jo-Ellen Pozner <>
Subject: Response to E Dyson, JRL 2532

I would like to respond to Ms. Dyson's comment in JRL 2532. In fact, there
are several organizations that are working on commercial bank training,
including the firm I work for, Financial Services Volunteer Corps. Our
efforts and those of our colleagues at organizations like International
Executive Service Corps, Citizens Democracy Corps and ACDI-VOCA are helping
banks and financial institutions across Russia and the NIS develop the
skills to conduct effective lending by providing assistance free of charge
through the work of Volunteers. I am attaching some information about FSVC
for those that area interested.
FSVC was established in response to the historic events that took place in
Central Europe and the former Soviet Union during the late 1980s and early
1990s. Recognizing that healthy financial market infrastructures are
required if free markets and civil societies are to flourish, FSVC mobilizes
the expertise of financial professionals to assist countries making the
transition to market economies. It does this by recruiting senior bankers,
lawyers, accountants and other professionals to serve as Volunteers on
targeted assistance missions.
Founded in 1990 by Cyrus R. Vance and John C. Whitehead, FSVC is currently
co-chaired by Mr. Whitehead and Paul A. Volcker. FSVC works with private
and public sector organizations in over fifteen countries. FSVC is a
non-profit organization supported by grants from the United States Agency
for International Development, private foundations, corporations and
FSVC's mission is to contribute to the process of building the sound
financial market infrastructure required by countries making the transition
from state-planned to market-oriented economies. FSVC provides technical
assistance and training in:
* Commercial banking;
* Central banking;
* Capital markets;
* Bank supervision and regulation;
* Payments systems;
* Pension systems;
* Credit fundamentals;
* Risk management; and
* Legislation relating to capital markets, commercial and central banking,
and foreign investment.
FSVC provides assistance only if there is a demonstrated need. Staff
members working overseas and at the New York headquarters receive requests
from host institutions and help them clearly define their needs. These
requests are then carefully reviewed, and a determination is made as to the
urgency of the need and the viability of the project. FSVC then responds
quickly by creating specific and focused assistance projects and recruiting
Volunteers with the required skills and experience. Volunteers provide
short-term and ongoing assistance, as circumstances warrant. FSVC also
sponsors U.S.-based training for qualified professionals from the financial
sectors of host countries.
FSVC projects are designed to be practical and results-oriented, rather
than general and diagnostic. Among hundreds of projects to date, FSVC has:
* Assisted the Russian government in designing, organizing and implementing
its government securities market;
* Advised the Latvian government on the development of the Investment
Companies Act and Securities Law;
* Assisted central banks in Central Europe and the former Soviet Union in
creating legal and regulatory regimes governing electronic payments;
* Trained Slovak fund managers in portfolio management techniques, drafted a
code of ethics for fund managers, and advised on the establishment of
self-regulatory organizations;
* Worked with key Polish legislators and Russian Labor Ministry officials on
pension reform;
* Provided management training to Hungarian executives in the fundamentals
of Employee Stock Ownership Plans, which have played a key role in the
privatization process in Hungary; 
* Advised the Russian and Ukrainian central banks on developing laws
establishing a deposit insurance system and governing the resolution of
troubled and insolvent banks;
* Trained nearly 40 officials at the National Bank of Moldova to analyze
problem banks more effectively; and 
* Participated with the International Monetary Fund, the World Bank, the
European Union and central banks of several major Western countries as a
member of the International Steering Committee for the Improvement of the
Payment System in the Russian Federation.
FSVC's success has been made possible by the experienced professionals from
commercial and investment banks, law and accounting firms, and public
financial institutions who have served as Volunteers.
By relying on Volunteer experts, FSVC is able to leverage its funding in a
highly cost-effective manner. Since 1990, more than 1,000 Volunteers have
served on projects in twenty-three countries, and the value of their pro
bono services has exceeded $80 million.
FSVC has played a meaningful role, often by serving as an important
catalyst, in a process of economic transformation that has already radically
altered the course of development for much of the world stretching from
Central Europe to the Pacific. At stake are the creation and maintenance of
effective market-oriented economies, supported by sound and efficient
national banking systems, in a large number of countries throughout this
enormous region.
Those interested in volunteering or providing other support are invited to
contact FSVC's New York office. Prospective Volunteers should provide a
summary of their work experience and identify the areas of their expertise,
country or countries of interest, relevant language skills, and dates of
Assignments usually range from one to several weeks, following which
Volunteers may be asked to maintain ongoing involvement, if warranted. Once
FSVC approves a project, Volunteers are selected and briefed on the details
and goals of the assignment and the expectations of the host institution.
Upon completion of the assignment, Volunteers are asked to submit a written
report to FSVC summarizing and evaluating the project. FSVC reimburses
project-related travel costs, including transportation, hotel and meal

To receive additional information, or to 
participate in Volunteer programs, contact: 
10 East 53rd Street, 24th floor
New York, New York 10022
Telephone (212) 771-1400
Facsimile (212) 421-2162


To: Jo-Ellen Pozner <>
From: (Esther Dyson)
Subject: Re: Response to E Dyson, JRL 2532
Date: Mon, 28 Dec 1998 

Thanks for your response. It's great to know there are so many such
institutions out there. Please do send info to the address below. (As it
happens, I'm on the board of the Eurasia Foundation, which is working on
several small-business lending programs..) 
All of the activities you mention are worthwhile. In the list below
however, I don't see much about actual lending, credit decisions,
monitoring...the day-to-day business of small-business commercial banking.
That is what I was focusing on, not that the other things are not also
helpful. Question: Is that out of your turf, is there no demand, or what do
you think the reason is? It troubles me that Russian banks simply don't
seem to do much lending to small businesses (and of course, that's one
reason there are so few of them to lend to...) 
I'm asking this not to be argumentative, but because I'd really like to
understand the problem better.


FEATURE-Russian computer pirates flourish in crisis
By Elizabeth Piper

MOSCOW, Dec 28 (Reuters) - They are skilled, intelligent and sit quietly in
front of a computer screen for hours or even days on end. 
But security systems companies say Russia's economic crisis could soon turn
these unassuming information technology experts into a threat to any firm in
the world that uses a computer system. 
Growing redundancies and low salaries mean they could soon follow the path
taken by many before them into Russia's flourishing world of hacking, software
theft and piracy. 
``Some time ago we lived through times when programmers were receiving large
amounts of money for their work,'' said Mikhail Salnikov, chief editor of
Compulog magazine. 
``It's hard these days to find honest work which pays money...Think of poor
people in (the central city of) Tula, students who have no prospects, then you
can understand why (they turn to hacking and software piracy).'' 
Aladdin Software Security, the Russian branch of Aladdin Knowledge Systems
Ltd, said in a promotional brochure that the problem looked set to grow. 
``By the end of this year only 50 percent of Russian software companies will
survive. What will the qualified personnel who have been thrown onto the
streets do?'' it asked. 
``It's clear that they are not going to start trading Pampers (disposable
Aladdin said most will turn to software theft and piracy. 


A growing number of hackers have found a lucrative market for their wares in
Russia as licensed software sales have been hit by the economic crisis, which
has led to a rouble devaluation, job losses and inflation. 
People simply cannot afford to buy licensed software, according to
experts who
discussed hacking and piracy at a recent meeting in Moscow. 
``They have put hacking on an industrial track,'' Sergei Gruzdev,
director of
Aladdin Software Security said, adding that huge amounts of money could be
made from software piracy. 
Counterfeiters sell bogus software on the street and some personal computer
sellers pre-install unauthorised software on the hard drive, leaving buyers to
presume they have got the genuine article. 
Gruzdev said the number of Russian web sites on the Internet offering
software and hacking tools had risen this year. 
Only three sites offering pirate software existed last year. During the last
six months Aladdin had helped Internet providers find and close 15 sites run
by pirates and crackers, he said. 
In Russia around 89 percent of all software used is pirated. 


A greater fear gripping the computer world is that Russia's computer
specialists could turn to more sinister crimes to reap more profitable
rewards, experts said. 
Gruzdev grouped hackers into three categories: crackers who want to see if
they can get into programs, hooligans who leave viruses on programs and the
most dangerous group who want to find and use confidential information and
maybe commit fraud. 
Vladimir Levin, a computer expert from Russia's second city of St
used his skills for ill-gotten gains. 
He was caught stealing from Citigroup's Citibank in a fraud scheme and
said he
used Citibank customer passwords and codes to transfer funds from their
accounts to others he controlled in Finland, the Netherlands, Germany, Israel
and the United States. 
The total transfers exceeded $3.7 million but Levin and his co-conspirators
were able to withdraw only $240,015 before they were caught. 
He was sentenced to 36 months in prison and ordered to pay back the $240,015
he admitted stealing. 
His case is not an isolated incident. 
A Moscow court recently handed hacker Pavel Sheyko one of the longest
sentences given to a super highway fraudster after finding him guilty of bank
swindling ``on a particularly large scale.'' 
Sheyko received a five-year suspended sentence, but most computer experts
agree that computer crimes should be punished more severely. 
``The court did the right thing, hackers have to know that their gift cannot
be used in the criminal world,'' Salnikov said, adding that Sheyko had been
treated lightly. 


Some computer experts say, however, that hackers are not all bad, and that
they are more akin to artists than criminals. 
``There's been a huge furore in connection with hackers penetrating bank
systems, defence systems and the computer systems of big corporations,''
Salnikov said. 
``But in my opinion you cannot think all locksmen are criminals because
it is
so easy for them to open a safe.'' 
Andrei Sebrant, marketing director of Russia Internet service provider
Glasnet, said most hackers crack into companies' files and programs to
increase their computer knowledge. 
``Hackers are like guys on Harley Davidsons cruising down free street,''
Sebrant said. 
But in these crisis ridden days the temptation is to profit from their
knowledge has become greater. 
``The threat is bigger than the positive side of hacking,'' warned Gruzdev.
``A kind hacker, like the ones you have been talking about, can soon turn


Christian Science Monitor
December 28, 1998 
[for personal use only]
Kremlin chafes at backseat role 
Judith Matloff, Staff writer of The Christian Science Monitor 

MOSCOW -- The Anglo-American bomb raids on Iraq earlier this month have
created a new frostiness toward the West in Moscow, which feels affronted by
not having been consulted as an equal power.
While Russian officials have stopped short of declaring a new cold war, they
warn that the perceived snub may be a turning point in already deteriorating
relations. They say they have been forced to look eastward for new allies, are
rethinking cooperation with NATO, and - most seriously - have frozen
ratification of the Start II nuclear arms treaty. 
While the US view is largely that Russia's policy hands are impotently
tied by
its dependence on Western economic aid, Russians say their anger is being
underestimated by a Washington distracted by domestic impeachment affairs. 
"A cloud hangs over our longterm relations," says one Russian government
official, who asked not to be identified. "We cannot trust the US anymore. We
have to take precautions and distance ourselves so that we don't find
ourselves at the mercy of the West one day." 
The root of the problem is Russia's world role since the Soviet Union
collapsed in 1991. American officials say Russia has difficulty accepting its
decline from an imperial superpower to essentially a Third World country taken
seriously only for its nuclear missiles.
"Russia is a special case of course, because of its nukes," says one US
official, who also requested anonymity. "But that doesn't mean it has the same
influence as before."
The Americans note that Russia's economy is on the verge of collapse,
held up
only by foreign assistance including food aid. Russia has lost its influence
in former cold war satellites in Africa and Central Europe and, most
ignominiously, in its neighbors that used to make up the Soviet Union.
Adding to Russia's frustration is that it never formed the true equal
partnership it hoped for with NATO after signing a 1997 cooperation agreement.
To a large extent, Moscow has been treated as a junior protégé of the US,
which it accuses of condescension.
Such a secondary role does not come easy to Russia, which continues to view
itself as a major power due to its status as the world's largest country (in
terms of territory), huge arsenal of nuclear arms, and key membership with
veto powers on the UN Security Council. 
A desire to reassert its influence on world events has deepened with the
appointment in September of Prime Minister Yevgeni Primakov, who earlier as
Foreign Minister made it his mission to restore Moscow's past glory.
The Kremlin was outraged when Washington and London bombed Baghdad without
support from the UN Security Council, ignoring Russia's pleas to pursue
diplomacy against Iraqi leader Saddam Hussein's resistance to UN weapons
The lack of consultation was particularly irritating to Primakov, an old
Middle East hand proud of his good ties with Saddam. 
The air raids, moreover, came at a time of acute Russian sensitivity about
NATO plans for expansion eastward and a sense that the economy is being
directed by outside forces such as International Monetary Fund creditors.
"We don't want to accept a humiliation whereby Russia is treated like a
defeated power presented with the dictates of winners," says Sergei Rogov,
director of the US-Canada Institute, a state-funded think tank based in
Russia took the extreme step of recalling "for consultations" its
to London and Washington, although the US envoy was sent back on Wednesday.
Primakov further signalled his dissatisfaction last week by suggesting a
triangular strategic alliance with India and China. The notion was coolly
received by both Asian countries, although officials in Moscow officials say
to expect more aloofness toward the West in coming months.
Leonid Ivashov, head of international military cooperation at the Defense
Ministry, warned that future joint exercises with the North Atlantic Treaty
Organization might be jeopardized.
"By attacking Iraq, the Americans have raised serious doubts over
between US and Russian military forces in 1999," he said in a recent interview
with the Nezavisimaya Gazeta newspaper.
Without doubt, the most damaging ramification of the airstrikes was the
derailment of plans to ratify Start II.
The US Senate endorsed the treaty in 1996 but the initiative has been
by Communist opposition in the Duma, or lower house of parliament. Primakov,
after savvy lobbying, had finally persuaded them to relent - but the Iraq
attacks stopped all that.
Nuclear weapons are Russia's trump card, as the Communists and Americans
all too well. Russia watchers in Washington are keenly aware of the dangers of
rising nationalistic, xenophobic sentiment in Russia what with the economic
meltdown and uncertainty over who will be president following the 2000
"I would be lying if I said Russia didn't matter," said the American
"We must be aware of the inherent dangers of an unstable situation."


Los Angeles Times
December 28, 1998
[for personal use only] 
Russians Bank on Bartering 
Instead of a modern market economy, a medieval system of trade has emerged.
Critics see the cashless exchange of goods and services as a 'virtual
economy.' But for many it is the only way to stay alive. 
By RICHARD C. PADDOCK, Times Staff Writer

SMOLENSK, Russia--Every hour, thousands of shiny cans of beef and pork roll
off the assembly line at the Smolmyaso cannery here. For the company, it's
better than printing rubles. 
In this part of the world, Smolmyaso's 12-ounce cans of meat are as good
as cash. The cannery trades its finished product for cows and pigs to
slaughter, aluminum to make the cans, equipment to can the meat, electricity
to run the equipment, and cardboard boxes to ship the cans. It even pays its
taxes in canned beef and pork. 
"Canned meat has become like the dollar here," said Smolmyaso Director
Vadim D. Skorbyashchev, holding up one of the cans. "These are our dollars." 
With the dismantling of the Soviet command economy, Western advisors and
international lenders expected a modern market economy to emerge in Russia.
Instead, a medieval system of barter has grown in its place. 
Economist Dmitri S. Lvov, an advisor to Prime Minister Yevgeny M.
Primakov, estimates that 70% of Russia's economy operates through the cashless
exchange of goods and services. 
"For seven years, we have been brainwashed into believing we were headed
for a market economy," said Lvov, director of the Central Institute of Economy
and Mathematics in Moscow. "Seven years later, we realize we have ended in a
sort of feudal communism where forks and knives are exchanged for oil, and oil
is exchanged for tires." 
Struggling businesses are compelled to negotiate complex trades that can
involve more than half a dozen companies and span thousands of miles. Local
governments finance their budgets with milk, lumber and vodka that they
receive in taxes. Down-and-out commodities brokers who once negotiated major
international sales now search the Internet for firms with something to trade.
Workers are paid in products they make or in goods their employers
acquire by barter: Some get televisions, others clothes or sex toys or toilet
bowls. Many try to sell their "wages" for cash by the side of the road or at
open-air markets. Some who have been laid off get their unemployment benefits
in the form of manure. 
"People gladly take manure and are grateful for it," said Vyacheslav P.
Mishchenkov, chief of the Smolensk regional employment service. "It may sound
somewhat gross, but people who live in town and have small gardens in the
countryside are happy to get manure. They can use it as natural fertilizer and
get a good crop." 
Barter first became widespread in Russia in 1994, when investors, bankers
and even factory managers found it more profitable to invest their money in
get-rich-quick schemes than in manufacturing or agriculture, diverting cash
that could have been invested in production. 
The system of cashless transactions has spread as well to most of the 14
other nations that emerged from the former Soviet Union, which are plagued by
the same economic problems facing Russia. Gazprom, the giant Russian energy
company, recently agreed to accept $1.3 billion worth of food and other goods
from Ukraine and Belarus as payment for debts outstanding for natural gas. 
With their reliance on barter, most Russian companies have weathered the
economic crisis triggered in August when the government froze foreign debt
payments and the ruble began falling to about 30% of its previous value. After
all, the plunging ruble and the collapse of the banking sector have less
significance to businesses that hardly deal in money anyway. 
Even companies that officially have been bankrupt for a year have not
gone under during the crisis. They keep turning out their marginal
goods--usually at a loss--and trading them to other firms in similar straits. 
"In such conditions, barter is our only outlet," said Mikhail G. Vyrov,
the Smolensk region's economic advisor. "Everybody understands that it's one
of the worst evils an economy can be possessed by. Barter corrodes, corrupts
and eventually destroys the economy. But the bitter irony of our situation is
that right now it is our only means of salvation." 
In Smolensk, a city near the Belarus border that dates to 863 and was
overrun by the armies of Napoleon and Hitler, barter now makes up 80% of the
economy, Vyrov said. 
Arranging trades is a complex and time-consuming business. Many companies
have at least one barter specialist whose job is to find trading partners and
put together swaps. 
"We have to spend all our time studying the industrial map of Russia and
leafing through outdated directories to look for information on what is
produced and where," said Yuri V. Dadychenko, marketing director for
Analitpribor, a Smolensk firm that makes gas detectors for mines and power

Firm Has Six-Stage Deal to Pay Taxes 

Dadychenko recently set up a six-stage deal to pay the company's taxes by
finding supplies for the city hospital. It worked like this: Analitpribor
shipped its safety devices to a nuclear power plant in the Tver region
northwest of Moscow, which canceled debts owed by a smaller electric company.
The electric company canceled debts owed by a glass factory. The glass factory
sent bottles to a plant in the republic of Mordvinia southeast of Moscow that
manufactures hospital supplies. That factory filled some of the bottles with
saline solution and shipped them to the Smolensk hospital. The city of
Smolensk credited Analitpribor with paying its local taxes. 
"Some experts call barter a dead end," Dadychenko said. "It is a dead
end, but what do we care if it helps us feel we are functioning? Without
barter, most of the enterprises in the region would have been long dead and
cold already." 
U.S. scholars Clifford G. Gaddy, a Brookings Institution fellow, and
Barry W. Ickes, a professor at Pennsylvania State University, make the case
that barter is a central part of a "virtual economy" that has developed in
Russia in place of a market system--despite what they said has been more than
$70 billion in Western aid to help build a market economy since the collapse
of the Soviet Union. 
The virtual economy, they say, has maintained social stability by
providing jobs, but the cost has been the creation of a steadily shrinking,
noncompetitive economy. By reducing the need for cash transactions, they note,
barter helps hide the fact that Russia's industrial sector is continually
operating at a loss. 
"What has emerged in Russia is something that arguably qualifies as a new
type of economic system, with its own rules of behavior and criteria for
success and failure," the two scholars wrote in a paper published on the
Brookings Institution's Internet Web site. "We call the new system Russia's
virtual economy because it is based on illusion, or pretense, about almost
every important parameter of the economy: prices, sales, wages, taxes and
Lvov and other Russian economists attribute the rise of barter to
government policies that restricted the supply of money available to industry
and agriculture. Aid from the International Monetary Fund and other major
lenders was granted with the idea that Russia would maintain a tight monetary
So-called young reformers brought in by President Boris N. Yeltsin to
build a market economy instead helped create a system of gangster capitalism
that transferred much of the country's cash to foreign bank accounts. And
rather than encouraging investment in production, Yeltsin's government
attracted money to its own treasury by selling short-term bonds that paid
interest rates of up to 200%. 
"The young reformers have managed to eliminate the line for goods that
existed in Soviet times and replace it with a line for money," Lvov said. "We
have managed to build an economy in which, instead of a deficit of goods and
services, there is a deficit of money." 
Now, with Russia's tight money policy, the fallen ruble has become
Russia's second currency, according to government figures. On Nov. 30,
Russia's Central Bank reports, there were 191.9 billion rubles in
circulation--the equivalent of $10.7 billion at the official rate. By
contrast, there are $30 billion to $40 billion worth of U.S. bills in
circulation in Russia, Primakov said in a recent speech. 
Most of the dollars are the personal savings of individuals who keep them
hidden in their apartments, safe from devaluations and bank closures. The
prime minister is trying to lure that money back into the economy. 
For most Russians, however, cash is too valuable a commodity to spend on
the shoddy goods being produced by the aging industrial machine Russia
inherited from the Soviet Union, observed Kirill Vishnepolsky, business editor
of the Kommersant Daily newspaper. 
Producers of low-grade goods have little choice but to trade with other
companies making products of similarly poor quality--and then blame their
problems on the country's lack of money, he said. 
"True, there is not much cash hanging around these days," Vishnepolsky
said. "But if for a change you began producing something people really
wanted--something of good quality with a price tag that wouldn't immediately
send the customer into a coma--you'd be surprised to see how soon you would be
offered cash for it." 

Canned Meat Helps Company Thrive 

One company that appears to be thriving under the barter system is the
Smolmyaso cannery, which has nearly tripled its work force, from 792 to 2,200
employees, in the past five years. 
The enterprise has established five pig and cattle farms with a total of
5,000 animals, built up a fleet of 200 vehicles, opened a bakery and begun
construction on a block of apartments. It has started processing hides and
making shoes from the leather so it will have more goods to exchange with
suppliers who raise cattle and pigs. And it has opened 60 retail outlets to
sell its canned meat for cash. Skorbyashchev, the director, says he hopes to
double the cannery's output of 2 million cans of pork and beef a month. 
The 120-year-old company has done well in the barter economy because
canned food is a commodity that is always in demand and keeps its
value--unlike the steadily eroding ruble. 
Skorbyashchev, who has been director for 27 years, said he negotiates all
the firm's barter deals himself. He is able to arrange most trades with
individual partners, without need for a long chain of transactions, because of
Smolmyaso's strong market position. 
"I usually keep all the trades and multi-move combinations in my head,"
he said. "The shorter the chain, the more profitable to me. Instead of one big
scheme, we have a couple dozen schemes. The main thing I have to worry about
is getting cash to pay salaries." 
To keep the system operating, the company usually pays its suppliers a
share of the finished products. For example, the cannery receives animals from
farmers, slaughters them and sends the hides to a tannery in Yaroslavl, about
350 miles northeast of Smolensk. The tannery tans the hides, keeping a
percentage of the leather in payment. Smolmyaso gets the remaining hides back,
finishes processing the leather and pays it to the farmers who provided the
The cannery makes canned meat and sausage from the same animals, paying
the farmers with part of the finished product. The company trades some canned
meat for fodder, which it feeds to animals on its own farms and also trades to
farmers for more animals. To pay its taxes, the company delivers sausages and
canned meat to hospitals and schools. 
"The surviving enterprises today are survivors only thanks to barter,"
Skorbyashchev said. "The industry keeps on running, people still have their
jobs, and everything works." 
Across town, however, barter is not working nearly so well for the
Diffuzion machine tool factory, which once supplied high-precision tools to
factories across Russia. It declared bankruptcy in the summer of 1997 but
keeps operating rather than laying off its workers. 
"The machine-building industry has basically been paralyzed," Diffuzion
Director Vladimir K. Moiseyev said. "We need ball bearings made by a company
in Saratov. The factory that manufactures ball bearings is bankrupt. But we
are also bankrupt, so we pay for the ball bearings with drills." 

Workers Get Paid in Food, Clothes, TVs 

At one point, the company tried to survive by paying its workers in hand
drills. The workers sold the tools in town for whatever they could get and
saturated the market. 
"The result is we completely lost the drill market in Smolensk," said
Moiseyev, who was brought in to handle the bankruptcy. Now he tries to arrange
trades for televisions, food, clothes and footwear to pay his workers. 
"All these barter schemes and other cashless schemes appear because there
is no other way out," he said. "My personal opinion is that barter will only
lead to a further destruction of industry. It's only a way to prolong our
Sergei L. Loiko of The Times' Moscow Bureau contributed to this report. 

Barter Chain in Russia 
The Analitpribor plant in Smolensk, which produces gas safety meters for
use in mines and nuclear power stations, owed money in local taxes that it
could not pay. Working backward, it researched and organized this barter chain
until it came full circle. 
1. The Analitpribor plant in Smolensk shipped gas meters to the Kalinin
nuclear power plant in the Tver region. 
2. The Kalinin nuclear plant canceled debt owed for electricity supplied
to the Tverenergo power company, also in the Tver region. 
3. Tverenergo canceled debt owed for electricity used by a glass factory
in the region. 
4. The glass factory supplied bottles to a factory in Saransk, in the
republic of Mordvinia, that manufactures saline solution. 
5. The saline solution company bottled the solution and delivered it to
the city hospital in Smolensk. 
6. The Smolensk city government canceled the tax debt of the Analitpribor
Source: SERGEI L. LOIKO / Times Moscow Bureau 


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