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February 17, 1999    
This Date's Issues: 30563057   



Johnson's Russia List
#3057
17 February 1999
davidjohnson@erols.com

[Note from David Johnson:
1. Bloomberg: Russian Premier Primakov Says He Sees Signs of Economic
Revival.

2. The Times (UK): Alice Lagnado, Yeltsin accused of oil deal scandal.
3. Itar-Tass: Karaganov: Consensus Critical to Russia's Stability.
4. St. Petersburg Times editorial: KGB Tactics Alive, Well In Cyber Age.
5. Boston Globe: S. Frederick Starr, Tiny Kyrgyzstan follows the West's 
rules but gets no rewards.

6. Washington Post: Nora Boustany, The 'Marriott Brigades.'
7. Russia Business Review: Fritz Kaegi, Dumping U.S. Jobs. U.S. steelmakers'
success in charging Russia with dumping also hurts the United States.

8. John Helmer, RUSSIA AND THE IMF: WHO PAYS THE PIPER CALLS THE TUNE.]

******

#1
Russian Premier Primakov Says He Sees Signs of Economic Revival

Moscow, Feb. 17 (Bloomberg) -- Russian daily Kommersant published a speech
on the economy given by Prime Minister Yevgeny Primakov speech at the
Foreign and Defense Policy Council. Following are excerpts from his speech:

On the achievements of the government: 
``Some people reproach the government for not caring about the economy.
This is not true. We had to pass the budget and we did everything to pass
it. 
``We have passed the regulation demanding 75 percent of foreign currency
received by exporters should be sold to the state for rubles. Other steps
to keep the ruble stable are being made. We realize that inflation hasn't
gone, but it has decreased 10 percent for the last month. We are glad that
slight signs of revival can be seen in some of the industries.'' 
On the shadow economy: 
``The shadow part of the economy makes up a third of the whole. All the
smaller companies, banks, etc. use the practice of paying salaries on
underground payrolls, not paying any kind of taxes on those amounts. And
nobody objects to this practice. 
``Many enterprises are being artificially bankrupted, to be taken over by
some groups. When they come into power, they rip the plant off. The problem
is not the form of the ownership but about how to locate and intercept the
criminality.'' 
On banks: 
``It is clear for us that banks like Sberbank, Vneshtorgbank and
Vnesheconombank have to be supported by the government. Also some other
major banks, like SBS-Agro, which holds more than 12,000 corporate
accounts, not speaking about private ones. The interesting thing about the
Russian banking system is that the minor regional banks which didn't take
an active part in financial speculations have been affected by the crisis
the least. We have been trying to avoid lobbying the interests of some
powerful groups. We receive piles and piles of letters asking to support
this or that bank or enterprise. We realize that in most of the cases big
money is standing behind them.'' 
On the budget: 
``We are busy trying to increase budget revenue now by increasing the
level of tax collection, which has been increasing recently not only
because of inflation but because of better collection. We have started
fighting fraud and there are examples when people, scared of prosecution,
just come and bring the money. 
``In tax collection, January is known to be the worst month. This
January, we have collected two billion rubles more than in December.'' 
On wage arrears: 
``The major question is arrears to budget workers: teachers, doctors,
cultural workers, etc. In the past, this problem was solved locally by
getting loans. We can not continue this addictive practice any longer.''
(Kommersant 02/17 7 www.kommersant.ru) 

******

#2
The Times (UK)
February 17 1999 
[for personal use only]
Yeltsin accused of oil deal scandal
FROM ALICE LAGNADO IN MOSCOW

RUSSIA has been hit by another corruption scandal after a liberal MP
accused President Yeltsin's family of turning a blind eye to the transfer
of millions of dollars out of one of its republics. 
Yuri Shchekochikhin, the MP, wrote in the Novaya Gazeta newspaper, of
which he is deputy editor, that the Government of the northern republic of
Komi had moved $10 million (£6.1 million) to an account in Luxembourg with
plans to move up to $21 million over a number of years. 
He also said that a company which had close links to Mr Yeltsin bought a
controlling interest in a Komi oil company after putting pressure on the
Danish owners of the shares to sell. Some of the profits from sales of
Komi's oil, which rightly should go back to the region, have thus
disappeared into private hands. 
According to Mr Shchekochikhin, the Yeltsin family is implicated in the
oil deal and that is why the Government has not prevented Komi officials
moving the money. 
The Central Bank said it could neither confirm nor deny that it approved
the deal. 
The scandal broke only days after the former head of the Russian Central
Bank admitted moving millions of pounds of currency reserves to an account
in Jersey. No further details have emerged since the initial news of the
"scam", which could prove the worst of post-Soviet shocks. 

******

#3
Karaganov: Consensus Critical to Russia's Stability 

MOSCOW, February 13 (Itar-Tass) -- A political consensus is a litmus 
test of responsibility of different forces for the fate of Russia, Sergey
Karaganov, deputy director of the Institute of Europe of the Russian 
Academy of Sciences, said. Karaganov, who also heads the presidium of the 
Council for Foreign and Defence Policy (CFDP), which held a discussion on 
Saturday [13 February] on how to resolve the current crisis in Russia, 
said that the country has reached a dangerous line beyond which both the
Communists and right-wing forces can simply "lose Russia" if they continue
to fight against each other. 
"We have to make it to parliamentary and presidential elections and ensure a
legitimate change of power," Karaganov said. 
He noted that calls for an early resignation of the president are
provocative
and destabilising. 
Karaganov believes that they can benefit only those forces which have "lost
the political process and seek fierce revenge." 
"Someone keeps on proposing these provocative ideas all the time. Someone
keeps on destabilising the political situation all the time and interfering
with the work of the government, trying to undermine its power and
legitimacy,"
he added. He warned against "any sharp moves" against the government and 
stressed that most CFDP members are categorically against creating a
parliamentary
republic in Russia. Karaganov stressed that some amendments to the
constitution 
could be relevant, including those 
which would balance out the powers of the president, the government and both
houses of parliament. 
He proposed to restore the post of vice-president in order to expand the
"political base" of presidency. 
The CFDP meeting was also addressed by Prime Minister Yevgeniy Primakov. 

*******

#4
St. Petersburg Times
February 16, 1999
EDITORIAL
KGB Tactics Alive, Well In Cyber Age

IT'S an image that belongs somewhere between Kafka and Orwell: a master
control room in the bowels of the Big House, where a team of FSB agents
spend their days intercepting private correspondences sent via the Internet
between friends, lovers, business partners, politicians. And there is no
one watching the watchers.
It's a disturbing image. And Internet users, providers and analysts from
across Russia are saying it is well on its way to becoming a reality. 
A new regulation, known as SORM-2, or System for Ensuring Investigated
Activity II, is nestling in the friendly confines of the Justice Ministry,
awaiting minor tweaks before its eventual enactment. This regulation would
allow the FSB to instigate real-time monitoring of every e-mail message and
Web page sent or received in Russia - and make it even easier for its
agents to play fast and loose with the official presentation of warrants,
which, last time we checked, were still required by law.
When a warrant, presented legally and up front, is no longer needed for
a government agency to monitor the population at will, it means that agency
can essentially operate above and without respect to the law. As the
successor to the KGB, the FSB should be the last agency presented with this
kind of freedom.
The SORM-II proposal could also ultimately reduce the overall amount of
cybertraffic in the country and thereby increase the percentage of that
traffic that can be monitored. This could happen because the proposal also
calls for Internet Service Providers themselves to lay out the thousands of
dollars it will likely cost to install the surveillance hardware the FSB
needs to monitor the Internet. Some experts estimate that it will cost ISPs
$1,000 a month alone to foot the bill for maintaining direct telephone
lines to FSB surveillance headquarters.
In order to remain competitive and insure its own survival, the ISP
would be forced to pass on the cost of this hardware to the consumer. If
the ISP refuses, the FSB simply revokes their license. If the ISP goes
along, the Internet becomes more expensive and fewer people use it. It's a
simple economic formula: Higher rates will mean fewer users. And fewer
users will ultimately lead to fewer ISPs. It's a vicious cycle that stifles
freedom.
At a time when nearly every country in the world is making great strides
toward embracing the Internet as the greatest tool in the history of
civilization for the exchange of information and ideas, Russia is
retreating back toward its dark, despotic past. SORM-II is a disturbing
idea, indeed. In practice, it will be even worse.

*******

#5
Boston Globe
February 15, 1999
[for personal use only]
Tiny Kyrgyzstan follows the West's rules but gets no rewards 
By S. Frederick Starr
S. Frederick Starr is chairman of the Central Asia-Caucasus Institute at
the Nitze School of Advanced International Studies at Johns Hopkins
University.

Russia's economic collapse, we are told, was due to the failure of
reform in that country. Rather than bite the bullet, Moscow tried fancy
shortcuts to reform, which created not a market economy but bandit
capitalism. Now, instead of more American aid, Russia needs ''tough love.''
But what if a country introduces all the right reforms and is still on the
brink of economic disaster? What should the United States do then?
Little Kyrgyzstan, the beguilingly beautiful ''Switzerland of Central
Asia,'' poses precisely this problem. Shortly after gaining independence
from Russian rule, its president, former physicist Askar Akaev, boldly
declared that his country would seek entry into the World Trade
Organization. To achieve this, the Kyrgyz knew they would have to
completely reform their economy, laws, and government practices, especially
in the area of foreign trade. These tasks would have been tough for any
country, but for impoverished Kyrgyzstan, with few natural resources beyond
water and some gold, they were nearly impossible.
Last Dec. 20 the WTO voted to admit Kyrgyzstan, thus making it, along
with Latvia, the first country of the former Soviet Union to be so honored.
Russia is still miles from achieving the same goal. By any measure
Kyrgyzstan's achievement was stunning. Yet four months after being received
into this world body of free-trading market economies, this heroic country
is on the brink of economic collapse. The government's deficit today is a
whopping 2 percent of gross domestic product, one of the world's highest.
Its top doctors and scientists are living on $50 a month, while many
workers have forgotten what a paycheck looks like. To date, not one Kyrgyz
citizen can point to any concrete benefit from their supposed achievement.
Why not? There are many causes. But an important one is that Russia
marked Kyrgyzstan's triumph by slapping heavy tariffs on trade with that
country and lowering import quotas on Kyrgyz goods. It also forced Kyrgyz
exporters to pay Russia's value-added tax at the border, even before the
goods are sold. This all means that Kyrgyz industries pay more for
necessary imports from Russia and get less when they sell back to Russia
their final products. Neighboring Kazakstan, under pressure from Russia,
has raised its tariffs as well, inflicting further pain on the struggling
Kyrgyz economy.
Why did Russia do this, when it is trying to knit Kyrgyzstan more
closely into its Moscow-dominated Commonwealth of Independent States? But
this is precisely the problem. Some Russian officials apparently view
Kyrgyzstan's move as a ''second declaration of independence,'' drawing it
closer to Europe, America, and Asia and away from Russia's economic and
political control. Amazingly, Moscow felt threatened by the actions of a
country less than a 50th its size.
Also, Kyrgyzstan has raised the bar for Russia's own entry into the WTO.
Before October, Moscow thought it could work out a deal to gain admission
to the WTO by promising reforms rather than actually doing them. But
Kyrgyzstan ''did it the old fashioned way,'' by working for it. Now Moscow
sees that it has no choice but to roll up its sleeves and follow the lead
of its former dependent republic. This won't be easy.
The Kyrgyz were by tradition a nomadic people, focused more on herding
than on state-building and geopolitics. They are mild by temperament and
patient negotiators. Many in Russia, including Prime Minister Yevgeny
Primakov, know that Akaev merely did what was best for his country and that
Moscow must eventually follow suit. There is therefore good reason to
expect that the two will reach an agreement that will remove Russia's
punitive tariffs.
Even if this happens, Kyrgyzstan will need a lot more help than it is
getting. So far the only thing the International Monetary Fund has done has
been to increase its support by $13 million, far less than the $35 million
the Kyrgyz lost last year due to Russia's muscular move on tariffs. The
United States has heaped praise on Kyrgyzstan and opened a brand new
embassy in the Kyrgyz capital of Bishkek, but as yet no major help is
forthcoming. Aid from the European Community peaked several years ago,
leaving only Japan as a major contributor.
Kyrgyzstan deserves better from the international community. It took
guts to follow Western prescriptions for reform, but the Kyrgyz did not
flinch. More than any other of the newly independent states, it has
sacrificed present rewards in the hope of future gains from being a market
economy. But if the reform is all pain and no gain, who will follow
Kyrgyzstan's pioneering example?
The United States has a serious interest in Kyrgyzstan's economic
success and should act on the interest now, and with real support, not
''tough love.''

*******

#6
Washington Post
17 February 1999
[for personal use only]
Diplomatic Dispatches
By Nora Boustany

The 'Marriott Brigades'

Janine R. Wedel spent several years in Poland in the early 1980s, and
while she was a Fulbright scholar working on her dissertation there 10
years ago she saw the first wave of foreign advisers and delegations coming
to help Eastern Europe's former communist countries map their economic
futures. She traveled to Russia and other places to take a hard look at the
phenomenon of global entrepreneurs and hedge-fund investors who came in and
turned a world of babushkas, labor unions and subsistence living upside
down. "It became clear it was not going to work out," she said of the
foreign advisers, self-styled privatization magicians who stayed a couple
of days in smart hotels and then moved on to peddle their know-how
elsewhere. She called it the "Marriott Brigade syndrome" in her book
"Collision and Collusion," a cautionary tale about efforts to impose change
on societies through the delivery of aid without understanding how they
really work.
Wedel is now an associate research professor at George Washington
University and a research fellow at the university's Institute for
European, Russian and Eurasian Studies.
The chapter on Russia in her book deals with the actions of the Harvard
Institute for International Development, a private entity with its own
corporate agreement to preside over the U.S. aid portfolio to Russia. In
the case of former deputy prime minister Anatoly Chubais and his
colleagues, who benefited as conduits of Western aid, the Western advice
was ignored as long as the aid money kept coming, she wrote on the basis of
extensive interviews. The Harvard project poured millions into Russia's
privatization program -- what became known as prikhvatizatsiya or, as Wedel
chose to translate it, "grabitization."
She charges that favoritism and corruption played a large role in the
failure of U.S. policy toward post-communist Russia. A federal grand jury
in Boston is conducting a criminal investigation into the work of a Harvard
professor and former Harvard legal expert who ran the assistance program to
Russia and allegedly benefited from private business dealings using
institute resources and staff to make investments of hundreds of thousands
of dollars in Russian bonds. In May 1997, the U.S. Agency for International
Development suspended its ties to the Harvard program in Russia and
canceled the last installment of $14 million in contracts with the
university. Wedel said the group managed $300 million between 1992 and
1997, in addition to $57 million in contracts awarded directly to the
university by AID.
Cartoons are used to illustrate the tediously abstract details of
Wedel's book. One depicts a group from the Harvard Institute shaking hands
with a representative of the Chubais clan. It lists the agenda of both
groups as "Money, Power, Influence." The dialogue, however, is as follows:
"It's so important to work with people who share our values."
Wedel's probing look at cross-cultural miscommunication demonstrates
that Western resolve and the global rush to benefit from the demise of
communist rule was costly not only to societies resistant to change, but to
the American taxpayer as well. 

*******

#7
Date: Tue, 16 Feb 1999
From: garfield@imedia.ru (Garfield Reynolds) 
Subject: Steel

Hi David.

The following ran in the latest issue of The Russia Business Review, a
monthly color business magazine distributed in Moscow inside The Moscow
Times and available to international subscribers.
Cheers,
Garfield Reynolds, Business Editor, The Moscow Times

-------

Dumping U.S. Jobs
U.S. steelmakers' success in charging Russia with dumping also hurts the
United States.
By Fritz Kaegi

Give American steelmakers credit: They've got chutzpa! In persuading U.S.
authorities that Russian steel producers are selling hot-rolled coil (a key
steel category) in the United States at below cost, or "dumping" it, the
steelmakers accomplish several goals at once. They protect the U.S. market
from the world's largest steel exporter, prolong Russia's special pariah
status as a "non-market economy" under U.S. law, gain cover for laying off
their own steel workers and force Russia to supply U.S. steel plants with
cheap, unfinished steel.
The American mills are employing Depression-era trade laws, including the
notorious Smoot-Hawley bill, that fly in the face of both the free trade
principles that Washington espouses and the interests of major steel
consumers such as Ford and General Motors. Why steelmakers alone should
benefit from this protection is a mystery. Texas oil producers, for
example, have to cope with falling world prices; that's life in a free
economy.
But the steel companies called their lawyers and hit the jackpot in
November, when U.S. authorities ruled against Russia. The Department of
Commerce is preparing corrective measures, which are likely to include
severe quotas and tariffs. The annual cost to Russian steel exporters will
be well over $1 billion in sales.
In making this determination, the regulators ignored clear evidence that
Russia is exporting profitably. Last spring CRU International, a leading
global steel consultancy, published a global survey of steel producers that
showed Severstal, Russia's largest mill, had the world's second-lowest
production costs after Korea's Posco for hot-rolled coil. This was before
the ruble devaluation. Virtually every study of the global steel industry
shows Russia has among the world's lowest production costs - prima facie
evidence that its producers' low prices are not a matter of dumping, but
rather are due to comparative advantage.
However, Russia's status as a "non-market economy" under U.S. law renders
all this evidence irrelevant. The law sets up obscure and dubious standards
to determine what is and is not a "market economy." Non-market economies
have their "true costs" measured with reference to data from "comparable"
countries such as Turkey, Mexico and Brazil. Yet as we all know, Russia has
no peers (for better or worse), if only because most Russians own their
apartments and grow their own food. The inevitable result is that Russia is
"shown" to be dumping.
Meanwhile, U.S. steel companies are employing misinformation to get
Congressional backing. They imply that dumping occurs because Russian
plants are state-owned and subsidized. This charge is false, since
government ownership in Russia's Big Three (Severstal, Novolipetsk and
Magnitogorsk) has long been 15 percent, zero and 23 percent respectively.
Moreover, the government has a totally passive role in Severstal and
Magnitogorsk. A government unable to pay its teachers or creditors cannot
subsidize companies with annual expenses of more than $1 billion each. If
anything, steel companies' unpaid receivables for shipments to state
defense and construction companies subsidize the government. The firms that
are getting state aid are in fact the U.S. ones, since quotas and tariffs
are by economic definition subsidies.
But U.S. steel corporations are engaged in something more devious than
straight protectionism. The real story is that even as they shut Russian
producers out of the market for hot-rolled coil - loudly protesting about
the need to preserve U.S. jobs - they are also America's largest importers
of other kinds of Russian steel. About 35 percent of Russia's 1997 steel
exports to the United States went to steel producers, not to manufacturers
that use hot-rolled coil.
What's going on here? Because the terminology can be arcane, it's best to
look at steel products as if they were cookies. U.S. steel producers say
Russia should not be allowed to sell its cookies (or hot-rolled coil) in
the United States, but that Russia can continue shipping over dough (in
steel terms, slab). This is because the Russians can sell the "dough" for
much cheaper than it costs American plants to make it, while nobody in
America can turn the dough into cookies but U.S. steel plants.
With the U.S. market for finished steel closed to them, Russian plants will
be forced to sell more slab at even cheaper prices than currently to U.S.
steel producers. In this case, Russia can "dump" as much as it likes,
because no one benefits from the savings but the U.S. steel companies, who
can make a killing on the much greater profit margins available for
hot-rolled coil, a much less labor intensive process than making slab.
That U.S. companies are doing this is unmistakable, thanks to excellent
reporting by the Chicago Tribune last February. One major U.S. company,
Inland Steel, has already stopped making its own steel in favor of imported
slab. Ironically, Britain used this same exact stratagem in the days of
Colonial America, provoking outrage by forbidding American finished iron
and steel products while allowing imports of American slab duty-free.
This means, of course, that many American steelworkers - who have been
persuaded to support the trade barriers - will be fired. In fact, this past
summer U.S. steelmakers began dismissing blast furnace workers (those who
make slab) in anticipation of the switchover. How did they get away with
this? Easy: they blamed the job losses on Russian hot-rolled coil imports.
You have to admit, it's a brilliant political and business maneuver.

*******

#8
Date: Tue, 16 Feb 1999
From: helmer@glas.apc.org (John Helmer) 
Subj: RUSSIA AND THE IMF: WHO PAYS THE PIPER CALLS THE TUNE

THE IMF AND RUSSIA -- WHO PAYS THE PIPER CALLS THE TUNE
By John Helmer

--------------
John Helmer received a PhD in Sociology at Harvard University, and
served as a bureau chief in the US Office of Management and Budget
during the Carter Administration. He has lived in Moscow since 1989, 
where he is the Russia Correspondent for The Journal of Commerce of 
New York.
--------------

The decisions that were made by the Russian government and the International
Monetary Fund (IMF) during 1993 were decisive in transforming the rouble from
a central to a marginal role in the country's economic policy. In that year,
the rouble went from being an instrument that integrated production and 
credit facilities of the former Soviet Union, to being an appendage of the 
dollar and inducement to massive capital flight.

This is the story of what happened.

President Boris Yeltsin's success in demolishing the Congress of People's
Deputies and holding elections to a new parliament were
rewarded with a $1.5 billion loan -- money which Fund officials said, just 
before Yeltsin dismissed parliament on September 21, they didn't want to 
hand over (see Author's Note).

The loan decision by the IMF was complicated by a policy division over Russia
inside the world organization. That was a split between those who made a 
highly political alliance with a faction of monetarists in the Russian 
government; and those who thought this alliance, and the economic policy that 
came out of it, were grave mistakes for both Russia and the IMF. When the 
tanks opened fire on the Russian parliament building on October 4, they
blew away, not only the Russian opposition to Yeltsin, but the opposition
within the IMF to radical monetarism. The Russian opposition revived quite
quickly, but at the IMF the argument over Russia's policy course was
over.

The most persuasive evidence to explain that is not the ideological
record of the argument, but the political and financial interests --
the personal financial interests -- that drove a group of US advisors,
economists and government officials to promote an alliance of Russian and IMF 
officials. Under the auspices of the IMF, and in the name of monetary and 
fiscal orthodoxy, their goal -- they explained in confidential memoranda at
the time -- was to put Russia's internationally competitive industries into 
bankruptcy, and sever Russia's economic links with the former Soviet 
republics. 

That group was headed by Jeffrey Sachs. It included his business partner,
David Lipton, who moved into a senior post in the US Treasury early in 1993. 
George Soros participated in the group's lobbying of the IMF. He also
benefitted from the asset transfers that were set in motion by the IMF policy
that year. Janine Wedel and Anne Williamson have written at length about
the activities of this group (Wedel: June 1998; Wedel 1998; Williamson 1998). 

Individually and corporately, the proceeds of their Russian policy made them 
all very rich.

But in 1993 they were opposed by Jakues de Groote, the most senior director 
on the IMF board. He drew fire for privately circulating a memorandum in 
which he questioned whether the Fund was being used by "certain intelligence 
circles and by some Western media", to promote the objective that "any 
weakness of Russia is advantageous for the West" (De Groote 1993).

IMF staff admitted that de Groote fell under investigation for embarrassing 
leaks from an IMF board meeting at which he blocked a move by the
Russian director, Konstantin Kagalovskiy. The Russian, egged on by the
Sachs-Lipton group, tried to block an IMF loan for Kazakhstan until
the republic left the rouble zone.

In Washington, as Russian finance officials attended the
annual general meeting of the IMF and World Bank, IMF officials predicted 
that support for the rouble through the current political crisis is likely 
to exhaust the Russian Central Bank's current reserves, estimated at about 
$2 billion.

On September 23, Prime Minister Viktor Chernomyrdin ordered the Central 
Bank to take measures to prevent a sharp deterioration in the currency's 
position, after trading on the Moscow Inter-Bank Currency Exchange cut a 
quarter of its value against the dollar, following Yeltsin's decree to 
dismiss parliament.

Until then, the currency had been holding relatively stable at around 
Rbs1,000 to the US dollar. Since June, the combination of stability for the 
rouble and falling imports had led to a rapid rise in the Central Bank's 
dollar reserves.

On paper, Russia's exports for the first seven months of the year
earned $22 billion, while imports cost only $10 billion. There is
"no credible surplus if you count clandestine imports and unremitted
export earnings", a Moscow official in a position to know acknowledged.

The political crisis convinced currency traders that, despite 
Yeltsin's victory in capturing legislative power, the government was facing a
budget blow-out. That in turn, they believed, would force the government into 
unexpectedly heavy outlays to keep the rouble steady.

A senior Western finance official said at the time, sotto voce, that his 
"estimate is that the $2 billion in [Russia's current] reserves will be 
exhausted quickly."

An IMF negotiating team was in Moscow the week before President Yeltsin
began the initiative to eliminate parliament. They recommended to Washington 
that Russia should not receive a promised credit of $1.5 billion for a trial
period of at least three months. The IMF wanted to see if in that interval
the government could cut budget spending, reduce inflation, and stabilize the 
rouble.

That trial period coincided with Yeltsin's campaign to elect
his supporters to a new parliament. And because of the President's tactics, 
there was intense pressure on the government
to boost spending to surmount support for the ousted Congress in Russia's
outlying republics and regions.

The new parliamentary election itself, together with increased security
measures that were put into effect around the country, and funding
for candidates to campaign for the December poll, opened an additional drain 
on the state budget.

In Moscow, the Finance Ministry issued a statement expressing more hope 
than conviction. "The government does not intend to indulge in populism",
the ministry said, "and give out money right and left in the lead-up to the 
election."

A senior official of the Central Bank of Russia told me: "Now the President 
will have to face the same demands and pressures from the regions. He will 
not be able to blame parliament for paying to meet them. On the eve of 
elections, the government won't be able to reject the demands for increased 
spending if it wants to win".

Washington officials said privately that the appointment by Yeltsin
of Yegor Gaidar as First Deputy Prime Minister, which was announced
the week before the clash with parliament, wouldn't lead to the
tighter fiscal and monetary policy which the IMF is demanding.

Gaidar's responsibilities overlapped those of the Deputy Prime
Minister in charge of finance, Boris Fyodorov. The two didn't see eye to eye, 
and Fyodorov had been highly critical of Gaidar's performance as acting prime 
minister in 1992.

With Gaidar sensitive to the pressure for increased budget spending,
and Fyodorov opposed to it, "I don't see them working well together",
a Western finance official told me.

"Gaidar is now part of a political strategy. He is much more cautious
than the West wants him to be."
...

Exactly what the West wants, or should want, from the Russian government
was the subject of an extraordinary memorandum circulated privately within the
IMF, and to Western European governments, in the summer of 1993, before the
Russian political crisis came to a head (De Groote 1993).

This was written by de Groote, the executive director representing the 
fourth most powerful bloc of IMF member states, including several Western 
and Eastern European countries, Turkey, Kazakhstan, and Belarus.
A professor of economics in his native Belgium, de Groote had been on
the IMF board for longer than anyone else at the time.

In his memorandum, he recommended against policies "copied from the
stereotyped image of the US economy held by some economists", and criticized
the Russian government for following American advisors "marked by the
ideological bias of the Reaganite school".

Sachs and Lipton are not mentioned by name, but they were
de Groote's intended American targets. During negotiations between
the IMF and the Russian government, the Sachs group had been paid to serve
as advisors to the Russian side. They played both sides, writing secret 
memoranda advising the IMF negotiators as well (Author's Note). 

Exactly who paid for Sachs and a team of half a dozen assistants
was not clear. A senior Russian official involved in the IMF negotiations
said the Russian government was not paying, but he didn't know who was. IMF 
officials said they weren't sure either. There was speculation that at one 
time Soros paid the bill. Others rumoured to be 
paying for Sachs's advice to Russia include foundations from Scandinavia
and Japan. Queries to Sachs on this point went unanswered.

The IMF official argued that post-war Japan, South Korea and other Asian 
economic development provided a better example for Russia, suggesting that 
the government in Moscow should "develop its own approach, based
on its own national characteristics and taking account of the ways in which
the European and Far Eastern models seem to fit the Russian situation
better than the US model."

He described Anatoly Chubais's voucher privatization scheme as a "botched 
attempt", and Gaidar's liberalization of prices as "premature and misguided."

In his recommendations for an alternative economic reform program for
Russia, de Groote urged the restoration of some price controls in
large-scale industries and agriculture, and a slowdown of the drive to
privatizing state industries. 

"It is a fact that the number of industrial and service sectors, particularly 
transportation and communications, remaining in the hands of western
governments is greater than generally supposed".

De Groote also called for a "revised budget..to incorporate, as a temporary
measure, a sufficient amount of subsidies for certain specifically
designated enterprises in the consumer, transportation and the public
health sectors."

To make this acceptable to the IMF, de Groote recommended "a reform of
tax collection methods and by restoring the satisfactory level of enterprise
activity needed to generate the required amount of fiscal revenue."

He also advised Russian negotiators that putting a new priority on
restoring production and recovering administrative control over the
economy would achieve IMF targets for the economy more effectively
than the government's current policies.

"It is one of the most crucial but paradoxical aspects of Russia's
relations with the Fund, that certain policies, which are traditionally
viewed as contradicting Fund objectives... are in reality necessary for the 
achievement of those very objectives."

De Groote had differed publicly with Russian government economic 
policy once before.

Late in 1992, after meeting in Moscow with the Russian industrial leader, 
Arkady Volskiy, de Groote proposed an alternative strategy. IMF officials
responded by saying their director was expressing a personal view. After 
that, the division within the IMF staff over Russia's economic 
development continued to grow.

De Groote's paper appeared at a time when Moscow officials were 
attempting to use an agreement with the IMF to enforce credit and budget 
policies which were broadly opposed by the Chairman of the Russian Central 
Bank, Viktor Gerashchenko, members of parliament, as well as several senior 
ministers.

In his paper, de Groote wrote that the Yeltsin government had failed to 
realize "that a large segment of the opposition advocates more realistic 
policies than they themselves, and that the Central Bank's inability to 
control inflation can be seen as the direct consequence of their own
misguided policy choices."

Describing Russian officials as "pseudo-reformers", he blamed them for 
fostering "the illusion that Russia could easily step over to a market 
economy through an immediate and full liberalization of prices and imports". 

He also singled out Deputy Prime Minister Shokhin for sending a 
confidential letter to the Managing Director of the IMF, Michel Camdessus.
In that, Shokhin claimed his government's policy was to end cooperation 
with other former Soviet republics wishing to pursue a coordinated economic 
policy within the rouble zone.

At the same time, other officials of the Russian government promised
the governments of Kazakhstan, Belarus, and Uzbekistan to support
a "mini rouble zone", and work towards closer monetary and economic union.

Officials of the Commonwealth of Independent States (CIS) blamed 
Shokhin, together with Deputy Prime Minister Fyodorov for provoking the 
move by the republic of Kyrgyzstan on May 12, 1993, to issue its own 
currency, the som. The action caused massive economic losses within 
Kyrgyzstan, and disrupted commerce with the surrounding CIS countries.

Kyrgyz officials privately told other CIS governments their
currency action was forced after Fyodorov broke his government's 
pledge to supply rouble credits, by demanding repayment of prior
debts to Moscow with hard currency and interest penalties.

Although they did not appear publicly to agree, Shokhin and Fyodorov 
also backed the move by the Russian Central Bank to withdraw pre-1993 notes 
from circulation, which was announced on July 24. The rouble "reform"
backfired badly on the government, and put the IMF in an unexpected quandary.

In his paper, written weeks before this occurred, de Groote acknowledged 
that the IMF had been a supporter of the rouble zone, and then "changed 
course by making the adoption of an autonomous currency a precondition for 
the approval of an IMF program for the new republics."

He suggested the IMF was persuaded to do this by Russian officials. 

Private memoranda written at the time to the IMF by Sachs and Lipton reveal 
they too urged Russian officials to end the rouble zone (Author's Note).

"It is urgent," de Groote argues, "to eliminate all equivocation
and to recognize that to protect trade and payments, it is time to consider
establishing a common payments union, which could be based on the rouble
and would accommodate any autonomous currencies".

De Groote proposed IMF support for "a fundamental redirection of the
current program", increasing the Russian government's role in regulating the 
economy "along the lines followed in many western countries during the 
postwar period." He also called for restoration of some price controls
and subsidies for "specifically designated enterprises".

His decision to signal the change in IMF thinking was based, his memorandum
said, on "the Fund's recent experience with transition in Central and
Eastern Europe".

When the July move to withdraw old roubles was announced, the IMF 
issued an internal advisory to its resident representatives, declaring it had
not recommended and did not support the decision taken by the Russian
government. IMF officials believed it threatened to undermine popular 
confidence in the rouble itself among Russians, with a multiplier effect on
the credibility of the government's reform programme.

That much Fund officials were willing to admit.

What many were not prepared to acknowledge -- and some did not know --
was that, the week before the July rouble "reform", the government had
arrived at a consensus with the Central Bank, and between the Chernomyrdin 
and Fyodorov factions within the cabinet, to impose the currency reform as 
quickly as possible.

At the time, the evidence for this consensus was clearer to finance 
officials of the republics of the Commonwealth of Independent States (CIS), 
far from Moscow, than it was in the capital.
...

The republics' interpretation of what was behind the Russian 
currency move was very different from interpretations in the US press
that emphasized Moscow's political rivalries, incompetence, or the revival 
of administrative command methods of governing.

The CIS republican officials said the currency move was merely the last in a 
series of unilateral measures which, they claimed, had been ordered by 
Shokhin and Fyodorov since April. The purpose was to put an end to the 
rouble zone once and for all.

These measures included suspension of earlier agreements to deliver rouble 
credits; the demand for repayment of 1992-93 debts in dollars at an 
exchange rate two-thirds below market; payment of interest on past rouble 
credits at the London inter-bank rate plus one percent; and advance deposit 
of several million dollars with the Russian Central Bank as security for 
repayment of new rouble credits. 

The CIS officials, who flew secretly to Moscow at the end of July, to 
negotiate the terms of their bailout, pointed out there was no international 
precedent for cancelling loan agreements, and then retrospectively imposing 
interest and other penalties running into the hundreds of millions of 
dollars that were never raised, let alone agreed, before. "Finance 
imperialism" was what they called it, noting Russia's demands were much 
harsher than the terms Russia was begging its own creditors in the west
to accept.

Thus, the CIS republican governments viewed the currency reform as the final 
move which the Fyodorov faction in Moscow expected to lead to the end of the 
rouble zone. 

But republican officials also believe that the Chernomyrdin-Gerashchenko 
faction decided to back the move for the opposite purpose.

Instead of forcing the republics to issue their own currencies and close
the rouble frontier, these officials viewed the move as a way of
reconstructing the rouble zone by deciding which republics would be 
granted supplies of the new Russian currency, and on what terms.

This is what was quietly negotiated in August and September. So quietly, in 
fact, that the restraint with which Kazakhstan, Belarus, Uzbekistan and 
other governments reacted to the currency action went almost unnoticed.

How effective these negotiations became clear in Moscow on September 24,
when all but one of the CIS signed a pact on economic union (Turkmenistan 
excepted). Six of the CIS put their signatures to an agreement to preserve 
the rouble as their currency, and follow the Russian Central Banl's terms 
for monetary emission, tax and credit.

Thus, the secret game behind the rouble "reform" turned out to be a 
fight between those in the Russian government who wanted to preserve 
Russia's special relationship with the former Soviet republics, and those 
who wanted to destroy it.

For the republican officials who supported the alliance with Russia, the
Chernomyrdin-Gerashchenko move came up trumps. 

But by the time that was obvious to everyone, the government in Moscow
was engaged in its decisive battle with the Russian parliament. Yeltsin's
decree dismissing the Congress of People's Deputies, and the first 
deployment of troops around the parliament building diverted attention from
what had been done to save the rouble zone from those Russian ministers
who wanted to destroy it.

The approach recommended from Washington by de Groote had prevailed in
Moscow. But not for long.

Ten days later, the White House was destroyed, the principal opposition
leaders arrested, and a presidential decree proscribed 18 organizations 
and 13 newspapers -- the most vocal of the so-called nationalist-communist
alliance.

This alliance had had virtually no impact on all that had transpired between 
the IMF and the Russian government. The most rabid of the newspapers liked to
lump the IMF, Soros, Sachs, and the Clinton Administration
into a single conspiracy of international capital with a Zionist mastermind.
Those in the Russian parliament who took a non-semitic version of the 
conspiracy idea seriously chose not to press the government on the details 
of the IMF negotiations.

Instead, they left them for Gerashchenko -- their ally, the deputies
thought -- to handle at the Central Bank.

Not once did the Supreme Soviet or the Congress of People's Deputies
hold a debate, or cast a vote on the terms which government ministers were
signing with the IMF. The Speaker, Ruslan Khasbulatov, an economist himself
advised by Professor Anatoliy Milyukov, an international banking specialist,
never complained at the government's reluctance to disclose the texts of
the IMF agreements.

The real battle was waged inside the Russian government, and inside
the IMF itself. It has taken five years before this revived on the Russian
side. But the events of 1993 eliminated all traces of opposition within the
IMF. (Text ends) 

Footnotes
Author's Note: The author's sources include officials of the IMF whose 
identities require protection still. They provided internal IMF files 
including memoranda over the 1992-93 period signed by or referring to the 
views of Jeffrey Sachs, David Lipton, George Soros, Richard Erb, Ernesto 
Hernandez-Cata, Jack Boorman, Manuel Guitian, Tom Wolf, and John 
Odling-Smee. The latter six were IMF officials working on
Russia at the time. The material was reported by the author in newspapers
published in 1993. Publication caused the IMF to start an internal 
investigation to identify the source of the leaks. The investigation failed.
Publications by the author of the material include: The Moscow Tribune
(Moscow), June 16, 1993; June 18, 1993; July 27, 1993; and July 30, 1993;
and Business Times (Singapore), July 28, 1993.

De Groote, Jakues 1993: Reform in Russia: Another Chance, Washington, DC:
International Monetary Fund, internal document.

Wedel, Janine 1998: Collision and Collusion: The Strange Case of Western Aid 
to Eastern Europe 1989-1998, [what place?], St.Martin's Press.

Wedel, Janine June 1998: "The Harvard Boys Do Russia", The Nation (New York),
June 1, 1998, 11-16.

Williamson, Anne 1998: How America Built the New Russian Oligarchy,
[what place? what publisher?].

******** 

 

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