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Johnson's Russia List


June 8, 1999    
This Date's Issues: 3331 3332

Johnson's Russia List
8 June 1999

[Note from David Johnson:
1. Interfax: Poll: Most Russians Disappointed by Impeachment Vote.
2. Interfax: Russian Experts: Balkan Crisis Buries START-2 Treaty.
3. AP: Angela Charlton, Russia Recoils at New Sex Freedoms.
4. Sovetskaya Rossiya: Yeltsin Seen Guilty of US, NATO 'Appeasement' 
5. Itar-Tass: Meeting with Stepashin Fruitful-Lebed.
6. Itar-Tass: Any Actions Ending NATO Strikes Are Beneficial-Lebed.
7. NTV: 'Big Money' Sees IMF-Backed Laws Destabilizing Russia.
8. Moskovskiy Komsomolets: Leonid Krutakov, Gazprom Is Our Home.
(1996 Budget Money Laundering for NDR Claimed). (DJ: Interesting food
for thought. The whole range of illegalities in the 1996 elections, including 
those in which foreigners participated, needs to be further investigated and 
publicized as we get ready for the next round. Sunday's pro-Yeltsin editorial
in the New York Times shows how easy it will be to slip back into 

9. Moscow Times: Igor Semenenko, The Money Tree. (DJ: Ditto.)
10. Cato Institute: Replacing Potemkin Capitalism: Russia's Need for a 
Free-Market Financial System.]


Poll: Most Russians Disappointed by Impeachment Vote 

MOSCOW, June 3 (Interfax) - A majority of Russians 
[62%] were disappointed with the outcome of the State Duma vote in the 
impeachment proceedings against President Boris Yeltsin. Especially upset 
with the impeachment failure were supporters of the communist leader 
Gennady Zyuganov [81%], the Krasnoyarsk region governor Alexander Lebed 
[72%], Russian ex-prime minister Yevgeny Primakov, rural residents [70%], 
and citizens over the age of fifty [67%]. These statistics were reported 
to Interfax by the Public Opinion Foundation on Thursday, following a 
poll among 1,500 urban and rural residents on May 22. At the same time, 
nearly one-fifth [17%] welcomed the impeachment vote results. Approving 
of the no-impeachment vote outcome more often than others were supporters 
of Moscow Mayor Yuri Luzhkov, leader of the Otechestvo or Fatherland 
movement [27%], leader of the Yabloko movement Grigory Yavlinsky [25%], 
people with higher education [29%], Muscovites and St.Peterburg residents 
[42%]. After the failed impeachment, opposition leaders have urged 
Yeltsin to resign on his own. This idea draws support from 61% of the 
Russians, i.e., all who are dissatisfied with the impeachment ballot 


Russian Experts: Balkan Crisis Buries START-2 Treaty 

MOSCOW, June 3 (Interfax) - The Balkan crisis has 
buried the START- 2 Treaty, has virtually halted Russian-American 
consultations on nuclear disarmament, and has bred a dangerous trend 
pushing some countries out the nuclear non-proliferation accord, Vladimir 
Orlov, director of Russia's Center for Political Studies, said at a news 
conference in Moscow on Thursday. Experts believe that the Russian party 
of power has suffered a serious setback during the Yugoslav crisis, 
robbing it of fundamentally new options for geopolitical maneuver and 
making it politically unwilling to put the policy of nuclear reduction 
into effect Former chief of the Russian Defense Ministry's 12th Main 
Department, retired Col. Gen. Yevgeny Maslin has said that Russia should 
"revise its nuclear policy and program." The strategic nuclear weapons 
that, according to analysts, will remain in place until the middle of 
next century, should become an element in the policy of deterrence not 
only globally but regionally as well. Consequently, it is necessary to 
stop and think what kind of a nuclear arsenal would be needed by Russia 
and think about a new generation of tactical nuclear weapons and new 
forms of nuclear weapons, the general said. 


Russia Recoils at New Sex Freedoms
June 7, 1999

MOSCOW (AP) -- People once joked that there was no sex in Russia. Now some 
say there's too much.

It beckons from newsstands in almost every town, where magazines detailing 
``How to Stage an Orgy'' dangle next to children's coloring books and recipe 
journals. It steams from young couples groping each other on escalators and 
park benches, eager to escape apartments overcrowded with watchful relatives.

Dismayed by the flood of personal freedom unleashed by the Soviet Union's 
demise, conservative lawmakers and church leaders are crusading to reverse 
Russia's sexual revolution.

In the Soviet era, people were imprisoned if caught with erotic books, 
homosexuality was illegal and even basic information about sex was difficult 
to come by. In a notorious televised discussion between U.S. and Soviet 
students in 1988, a Soviet woman responded to a sex-related question saying, 
``We don't have sex.''

The Soviet collapse changed that. But it also spurred a rise in pornography, 
prostitution and sexually transmitted diseases.

On one recent day in Moscow, Olga, a 20-year-old prostitute, sidled up to a 
potential client in the Hotel Moskva near Red Square. Within moments, she and 
the graying visitor were openly discussing her fees: $200 for a half-hour, 
$2,000 for the night.

``Moscow flows with sex,'' said Olga, who spoke on condition her last name 
not be used. ``You can't get away from it.''

Participants on the Russian talk show ``About It'' describe masturbation, 
losing their virginity and sado-masochism. Women on a Moscow trolleybus, 
giggling, confer about their partners' sexual prowess.

Sex scandals raise few eyebrows, and adultery is widespread. Russian 
television viewers were amused but hardly shocked when state-run television 
aired a videotape in February showing a man resembling Russia's top 
prosecutor, Yuri Skuratov, having sex with two prostitutes.

Olga said she began selling her body last year, after the hair salon where 
she worked trimmed her hours to just a handful a week because of Russia's 
economic crisis.

``I don't have any illusions that (prostitution) is an ideal job,'' she said, 
speaking at a clinic where she was being tested for venereal disease. ``It's 

Venereal disease rates have soared since the Soviet collapse. Syphilis cases 
in Russia increased 50-fold from 1990 to 1998, according to World Health 
Organization estimates. Even accounting for Soviet habits of underreporting 
health problems, today's infection rate in Russia is staggering: at least 262 
syphilis cases per 100,000 people, compared with about three per 100,000 in 
European countries.

AIDS, which appeared relatively late in Russia, also is on the rise.

Doctors say the main problem is the lack of sex education. Russians have 
grown accustomed to seeing soft-core porn on mainstream television, yet are 
still timid about teaching teen-agers about sex.

Contraceptives are unpopular and abortion remains the primary method of birth 
control; the Health Ministry estimates that Russian women on average have 
three to eight abortions.

Stanislav Govorukhin, a film director and hard-line parliament member, 
believes it's time for Russia to introduce ``morality police.''

Earlier this year, the Communist-dominated lower house of parliament, the 
State Duma, approved a bill on closing radio and television stations whose 
broadcasts were deemed morally impure. The president vetoed it. The Duma then 
voted to require strict licensing of sex-related goods and services.

Govorukhin has also spoken out against prostitution rings that allegedly 
peddle Russian teen-agers to brothels overseas.

Govorukhin's campaign has struck a nerve among many Russians, particularly 
parents worried about children's access to sex-related materials.

``Newspapers are serving as pimps, printing ads about sexual products and 
services,'' he said. ``Turn on the television, and you get the same.''

The editor of Russian Playboy, Konstantin Chernozatonsky, said the backlash 
was inevitable after sex in Russia moved so quickly from the closet to the 
family living room.

``It's not that (Russians) are trying new positions or anything. The 
difference is that the whole thing is more discussable,'' he said.

The Russian Orthodox Church, which holds significant sway over Russian 
politics, has opposed sex education in schools and spoken out against 
homosexuality, which was illegal in Russia until 1993.

Gay clubs now thrive in many Russian cities, but most gays and lesbians still 
keep their orientation quiet around colleagues. Homophobia remains rampant 
and same-sex couples have no domestic partner rights.

Flamboyant ultranationalist lawmaker Vladimir Zhirinovsky -- who published a 
book called ``The A to Z of Sex'' last year -- spoke out against severe 
restrictions on sexual material during the Duma debates.

Zhirinovsky said he wrote his book about sex because ``man doesn't live for 
the factory whistle, for machine-gun fire, for stocks and shares, for 
revolution and reform.''

``Man needs something more in life,'' he said.


Yeltsin Seen Guilty of US, NATO 'Appeasement' 

Sovetskaya Rossiya 
5 June 1999
[translation for personal use only]
Report by Yevgeniy Popov: "Balkan Munich; Diplomacy of Conniving 
With Aggressors Has Driven Itself Into a Corner" 

[passage omitted recounting Serb Radical Party 
leader Seselj, former FRY Premier Draskovic responses to NATO peace plan, 
noting that NATO bombing is continuing and listing Serb losses over the 
course of the bombing]. 

Russia was still trying somehow to counter the cruse pressure on Yugoslavia 
while Primakov was head of the foreign policy department and then of the 
government, but with the appearance on the scene of ChVS [Chernomyrdin], 
the president's special representative in Yugoslavia, the game went just 
one way and with fierce pressure against the cornered Serbs! 

Yeltsin's recent message to the 10-year-old girl Maja Rukavina from the 
Slovenian city of Maribor, which failed to receive due political 
assessment in the press, is most notable in this respect. Maja's letter, 
distributed via the Internet, contained lines obviously written under the 
influence of the anti-Serbian propaganda conducted extensively in the 
Western mass media: "You must not kill and torture innocent people as the 
Serb soldiers are doing in Kosovo." The Russian president deemed it 
possible to avoid noticing this propaganda cliche and thus in fact to 
agree with the monstrous accusation! But on the other hand he hastened to 
assure Maja that Russia will in no circumstances resort to the force of 
its missiles to stop the NATO bombings of Yugoslavia! It will not even 
resort to the threat to use them (although this is a real case of where, 
as in chess, a threat is more terrible than its execution). 

All that Yeltsin's Russia has proved capable of is the appeasement of 
the US and NATO aggressors and pressure on the Serbs to make Belgrade 
accept Washington's ultimatum anyway. ChVS is proud of the results of his 
"peacemaking." But did British Prime Minister Chamberlain, who promised 
his compatriots "peace for a hundred years," not rejoice in the same way 
in September 1938 on his return from Munich? 


Meeting with Stepashin Fruitful-Lebed.

MOSCOW, May 7 (Itar-Tass) - Governor of the Krasnoyarsk Territory Alexander 
Lebed, speaking with reporters about his meeting with Prime Minister Sergei 
Stepashin on Monday, said that in his opinion, the cabinet head "is ready to 
pursue an independent policy. However, it is another question how much 
headway he will be permitted to make in this direction," Lebed added. 

The governor described his meeting with the premier as "fruitful, and held in 
an atmosphere of full mutual understanding." 

"It was pleasant to speak with the premier," Lebed said. According to Lebed, 
he has known Stepashin well for a long time. The governor agreed that a man 
can maneuver under some circumstances, but there is a line which cannot be 
crossed. "Stepashin will not cross this line," the governor noted. 

Lebed reported that they discussed, among other things, the criminal 
situation in the Krasnoyrask Territory. A commission, led by First Deputy 
Interior Minister Vladimir Kolesnikov, is now working in the territory. 

"I'm waiting for most serious results, the premier is also waiting," Lebed 
stressed. "It is enough to go around the world, begging for alms. We are a 
rich country, but distribution of money went awry due to increased 
criminality," Lebed stated. "It is necessary to reverse the process, and we 
shall do it," he noted confidently. 

He said that their positions also concurred on the sale of the Krasnoyarsk 
coal company--which provides coal to 36 Russian regions and is poised to sell 
it abroad. Its value stands at 335 million U.S. dollars. However, attempts 
are now made to sell the company for only 100 million dollars. Lebed put it 
bluntly that he would not permit this. 

The sides also discussed the question of issuing quotas and licences for 
buying and receiving non-ferrous metals--which are now literally pillaged--as 
well as on issuing quotas for liquors. 

The two statesmen also examined the need for reviving the programme for 
developing the lower reaches of the Angara river and production of silicon 
semiconductors, necessary for the electron industry. 

Later in the day, the Krasnoyarsk governor had a meeting with first 
vice-premier Nikolai Aksyonenko. According to Lebed, they discussed the need 
to slash the number of federal structures and officials in the territory. 


Any Actions Ending NATO Strikes Are Beneficial-Lebed.

MOSCOW, May 7 (Itar-Tass) - Any actions, aimed at ending the NATO air strikes 
on Yugoslavia, are described by Krasnoyarsk Governor Alexander Lebed "as 
beneficial". Replying to Itar-Tass on Monday, he said that "it is necessary 
to first stop the moloch of war and then to start negotiations". 

Lebed welcomed "what was achieved by Finnish President Martti Ahtisaari and 
the Russian president's special envoy on Yugoslavia Viktor Chernomyrdin". As 
for a peacemaking action in Kosovo, in the governor's opinion, Russia should 
participate in it, "we cannot remain on the sidelines". 

According to Lebed, "a great bluff is now underway. NATO is bluffing. It is 
not for nothing that Javier Solana fled his office," the governor added. He 
suggested that the standoff "will be won by those who have stronger nerves". 

Lebed claimed that the NATO bombings "are of zoological nature". Pinpoint air 
strikes are out of the question, he continued. NATO jets bomb refugees, 
Albanians, embassies and reporters, Lebed concluded. 


'Big Money' Sees IMF-Backed Laws Destabilizing Russia 

June 3, 1999
[translation for personal use only]

Presenter Igor Pototskiy devotes "Big Money" on 3rd June to 
IMF-backed laws the Russian State Duma is discussing. 

Georgiy Luntovskiy from the State Duma is shown at a news conference saying: 
"The main question in dispute now is the status of ARCO [the agency for 
the restructuring of credit organizations]. 

Presenter says that Russia is technically in default with Soviet debts. 
Aleksandr Shokhin from the State Duma is shown at RIA news conference saying: 
"I don't exclude the fact that the IMF will demand some additional 
measures to be taken by Russia. That means the whole thing is dragging 
out until July, August or even September." 

The presenter agrees with Luntovskiy that the status of ARCO is a very 
complicated issue. He wonders how much responsibility it will have? If it 
gets the status of a noncommercial organization created in the form of a 
state corporation, ARCO will be able to carry out operations with bank 
assets without the government being responsible for them and the state 
giving its permission. However, ARCO's capital is only R10bn. 
Luntovskiy says: " The thing is to let the Central Bank issue securities and 
bonds quickly." 

Presenter stresses that the Duma should be careful adopting laws on taxes. 
This should not provoke Stepashin's resignation followed by a Duma 
dissolution or establish a government that will leave people too poor to 
bear any thought of elections. Communist leader Gennadiy Zyuganov is 
shown at a news conference warning against another change of government. 
Pototskiy says that it has become a political tradition in Russia to consider 
IMF-agreed draft laws in summer. He is afraid, though, that this summer 
may end the same way as summer 1998 -- in financial crisis. 


Budget Money Laundering for NDR Claimed 

Moskovskiy Komsomolets
3 June 1999
[translation for personal use only]
Article by Leonid Krutakov: "Gazprom Is Our Home" 

At the center of all the schemes for "laundering" 
budget money in the last elections stood the National Reserve Bank. 
Russian elections without scandals are like a cake without icing. In the 
last elections the most sensational scandal for society was the one 
connected with the empty Xerox paper box. We remind readers that this box 
was carried out of the White House by two of Anatoliy Chubays' aides, 
Yevstafyev and Lisovskiy, and that it contained $500,000 in cash, no more 
nor less. 

The scandal was loud, but the criminal proceedings were wound up quietly 
-- because of the absence of a criminal act. Put simply, the 
investigation failed to establish the owner of the money, and therefore 
the fact that it had been stolen. 

In other words, the General Prosecutor's Office reached the conclusion 
that citizens Lisovskiy and Yevstafyev certainly never carried 0.5 
million "standard monetary units" [dollars] out of Yeltsin's election 
headquarters. They were simply strolling past the front door to the White 
House with a box under their arms, and they knew nothing about the money. 

It emerges from the documents at Moskovskiy Komsomolets's disposal that 
virtually all the money spent on Yeltsin's election campaign and on 
publicity for "Russia Is Our Home" at the parliamentary elections was 
taken from the state budget! And it was "laundered" through mutual 
offsets between Gazprom and the Finance Ministry. The National Reserve 
Bank [NRB] was at the center of these schemes. And to judge by the same 
documents the Xerox box was also filled by NRB staffers. 

Who Is Using Dollars To Get the Better of Whom.... 

Immediately after the dismissal of Korzhakov and Soskovets, who had in fact 
organized the arrest of Lisovskiy and Yevstafyev, Chernomyrdin stated on 
television: "Actions of flagrant irresponsibility verging on cynicism 
were perpetrated.... This is not the first occasion when there has been 
an attempt to blame it on Chernomyrdin." 

No one at that moment even understood what Viktor Stepanovich 
[Chernomyrdin] had to do with it. 

In actual fact -- given the existence of certain documents -- it is 
hard not to agree with the former premier and current NDR [Russia Is Our 
Home] leader. The $500,000 removed from the box literally shout out the 
irresponsibility of the authorities, an irresponsibility verging on 
cynicism. It is another matter that this shout has remained unanswered 
because most of "the authorities' flagrant actions" were aimed at 
funding... the "Russia Is Our Home" movement. 

The Moskovskiy Komsomolets editorial office has the NDR funding 
estimate. We cite from it the figures for just one period -- from 1 
December 1995 through 15 January 1996. The period of the elections to the 
Duma and of payment for them.... 

And so: 
Activity of committee (headquarters) -- 54,174,369,000 rubles [R]/12,038,749 
standard units. 
Information system -- R1,304,446,985/289,877 standard units. 
Election technologies center -- R17,550,000,000/3,900,000 standard units. 
Union of Russian landowners -- R1,309,000,000/290,883 standard units. 
Federal youth center -- R5,997,775,000/1,332,899 standard units. 
Information propaganda -- R70,721,150,000/15,715,811 standard units. 
S. Mikhalkov -- R18,000,000,000/4,000,000 standard units. 

Mass youth events -- R31,500,000,000/7,000,000 standard units. 
Moscow campaign -- R4,050,000,000/900,000 standard units. 
People's Home -- R1,142,000,000/56,121,942 standard units. 
In all an estimated R252,548,740,965/56,121,942 standard units. 

Let us remind you that this estimate is for just six months. If we 
decipher it for each item of expenditure the picture becomes even more 
obvious. Thus, under the heading "Activity of committee (headquarters)" 
the renting of transport is three times (!) greater than the cost of the 
events held by the NDR. And the bonus fund is 12.5 times greater. Thus, 
Viktor Chernomyrdin's meeting with a famous soccer club alone cost the 
political movement's coffers R200 million. Which is exactly 10 times more 
expensive than his meeting with representatives of the Association of 
Young Leaders. 

To all appearances the NDR did not stint on money for itself and its 
favorites. And who cares -- in the end every party or movement decides 
for itself what to spend its own money on. 

But what if it is not its own money? 

"National Reserve Pocket" 

The account sheet recording the receipt of money to pay for NDR's 
election events records mainly just one name -- the National Reserve Bank 
(names like Menatep and SBS only occasionally break the NRB's monopoly). 
The sums entered in the record are pleasing to the eye -- daily receipts 
sometimes reached as much as $4 million! 

One very strange paper accidentally found its way into the NDR's 
numerous expenditure payments: 
"Transferred 3 October 1995 (Ilinka) 
"Further to letter of 21 September. "ARSMI" [expansion unknown] for placing 
advertisement (Karpov) -- $500,000. 
"Account 17/7. NDR All-Russia Sociopolitical Movement sponsorship aid -- 
"Account 18/7. For holding seminars and conferences. NDR All-Russia 
Sociopolitical Movement -- R5,300,000,000. 
"Account 15/7. For holding seminars. NDR All-Russia Sociopolitical Movement 
Fund -- R2,100,000,000. 
"Account B/N. Sponsorship aid to NDR All-Russia Sociopolitical Movement fund 
-- R6,800,000,000. 
"Total: R18,500,000,000, $500,000." 

The Russian Federation Ministry of Finance is on Ilinka. We only have to 
remind you that the $500,000 found in the Xerox box with Yevstafyev and 
Lisovskiy were also from Ilinka. And they were delivered to the White 
House by National Reserve Bank employee Boris Lavrov. 

Clearly no Russian commercial bank could withstand such expenditure. And 
here we return again to the question of this money's provenance. Today we 
have every grounds for saying that in the period of the election struggle 
the NRB regularly received money from the state coffers. For this a 
scheme of mutual offsets was elaborated between Gazprom and the state 
budget, making it possible to "launder" up to $50,000 in a second. 

On 24 November 1995 the Duma approved Sergey Dubinin as chairman of the 
Central bank. At the time Viktor Chernomyrdin called this event a 
"historical milestone" and Dubinin himself stated that the Central Bank 
and the government had a coordinated and tested policy. Precisely what 
policy became clear later on. 

The first thing the new Central Bank chief did (incidentally, like NRB 
Lebedev he came from "Imperial" and Dubinin's wife for a long timed 
headed an NRB subdivision -- Moskovskiy Komsomolets editor) was to rid 
himself of Viktor Gerashchenko's influence on Central Bank policy, 
removing Tatyana Paramonova and depriving his deputy Aleksandr Khandruyev 
of any real powers. Then it was the turn of the banks whose controlling 
blocks of shares belonged to the state. Sberbank, Vneshekonombank, and 
Vneshtorgbank changed their leaders almost instantly. Sergey Dubinin 
personally headed the boards of these institutions of key importance to 
Russia's budget. 

After this solid preparation the scheme to "launder" budget money to fund 
the NDR right through the year 2000 was put into play. Incidentally, the 
scheme, like everything of genius, was a primitive one. 

Five Into Three Wont's Go 

On 6 April 1996 Gazprom agreed on the sale to the Russian Federation 
Finance Ministry of internal foreign-currency loan bonds of the fifth 
series. To the sum of $100 million. After 180 days Gazprom undertook to 
buy bonds from the Finance Ministry for exactly this sum. The National 
Reserve Bank -- in the shape of Chairman of the Board A.Ye. Lebedev -- 
was appointed as the agent for the deal. What would seem to be the point 
of this deal? First selling bonds to the Finance Ministry for $100 
million and then buying them for the same sum? Where is the benefit? 
But only very naive people could ask such a question. 

In real life the operation looked like this. The NRB submitted to the 
Finance Ministry fifth-series bonds with a nominal value of $100 million. 

In exchange it received from the budget the same amount in Treasury Tax 
Exemptions for Gazprom. Gazprom paid $70 million for the Treasury Tax 
Exemptions and surrendered them to the budget instead of taxes in "real 
money," once again at their nominal value -- that is at the full $100 

With the money received from Gazprom the NRB bought new bonds -- for the 
same nominal value of $100 million. But the bank bought internal 
foreign-currency loan bonds not of the fifth but the seventh series. At 
that moment seventh-series bonds cost about 15-20 percent of their 
nominal value on the market.... 

Complicated? Did you really think our bankers have an easy life? But look at 
profits.... And now arm yourself with a calculator and add it up. As a 
result of this entire deal the Finance Ministry credited Gazprom with 
paying taxes of $100 million. Here Gazprom itself had paid just $70 
million. And the seventh-series bonds which it had exchanged for 
fifth-series bonds had cost the NRB just $15-20 million. And what is the 

Not only has the budget eaten its fill of shit for free, as the joke has 
it, but about $55 million has ended up in the NRB accounts. Our sources 
attest that at least $20 million of this sum went to fund the NDR. 

The once scandalous deal involving Ukrainian state bonds issued to pay 
debts for supplies of our gas proceeded according to approximately the 
same scenario. By government directive no. 623 dated 17 April 1996 
Gazprom was allowed to receive compensation from the budget for gas 
supplies under the intergovernment agreement on the construction of the 
Yamburg gas pipeline through the method of offsetting against Ukrainian 

The compensation was to be $800 million. Gazprom submitted to the budget 
Ukrainian bonds with a nominal value of $800 million, while the real cost 
of these bonds at the moment was no more than 30 percent of that figure. 
here Gazprom received tax exemptions for the entire $800 million and half 
the bonds returned to Gazprom -- under the intergovernmental agreement. 
Thus there was dual funding from the state budget to the sum of $400 
million and in reality the gas company received not $800 million in 
compensation but about $1 billion. 

The fox Alisa, who was quite unable to share five gold pieces with the 
cat Basilio [reference to Pinnocchio story] should have taken a few 
lessons from Messrs. Lebedev, Dubinin, and Chernomyrdin. 

It Is All Still in the Future 

Brilliant schemes never go to waste. The potential worked out before the 
previous elections has been used actively since then to "launder" money 
received from the GKO market through the offshore firm FIMAKO. All the 
indications are that the future elections promise to be no less 
interesting and no less inventive in the field of the receipt of revenue 
from the state budget. 

The dismissal of Primakov's government, the pornography scandal 
involving the general prosecutor, the likely dissolution of the State 
Duma....Journalists have happy days ahead of them. The situation is being 
repeated. Again there are attempts to remove Viktor Gerashchenko from the 
central Bank and to purge the leadership of the commercial banks under 
the state's control. It is all to come.... 


Moscow Times
June 8, 1999 
The Money Tree 
By Igor Semenenko
Staff Writer

Russia, as so many of its creditors have discovered to their discomfort, is 
so short of cash that it is unable to service its foreign debts. 

Its 1999 budget projects revenues of just 473.7 billion rubles (about $20 
billion at current exchange rates), compared to expenditures of 575 billion 
rubles ($23.5 billion) and maturing debt commitments of $17.5 billion. 

However, the frantic grab in recent weeks for certain government posts - and 
the accompanying storm of media speculation that this grab is all about 
gaining access to state cash flows - belies the idea that Russia hasn't got 
two spare kopeks to rub together. 

The rise of new First Deputy Prime Minister Nikolai Aksyonenko has been 
accompanied by howls of protest from some media outlets claiming that he has 
been put forward by a Kremlin clique that wants him to place state cash flows 
within their reach. 

With President Boris Yeltsin's second term just over a year away from its 
scheduled end, the Kremlin "family" is said to be busy accumulating money, 
power and influence to make sure that June 2000 does not spell the end of 
their time ruling the Russian roost. 

NTV television program "Itogi" and others have claimed that Aksyonenko is 
working on behalf of a clique centering on Yeltsin's favorite daughter 
Tatyana Dyachenko, who also holds an official post as the president's 
official PR adviser. The other members of this group are said to be Valentin 
Yumashev, former Kremlin chief-of-staff and the ghost writer for Yeltsin's 
memoirs, current Kremlin chief of staff Alexander Voloshin and publicity-shy 
businessman Roman Abramovich, a director at Sibneft who has been accused of 
being the Kremlin cashier. 

Many of the media organizations making these allegations are themselves run 
by powerful business figures with their own agendas, but that doesn't mean 
there is no substance to their claims. 

Control Points 

When Aksyonenko was promoted to first deputy prime minister, the move caused 
some disquiet, especially after he started talking about overseeing 
"everything." But it was only when his rise was followed by the appointments 
of new heads at the customs service and the State Pension Fund that 
opinion-formers such as "Itogi" began portraying Aksyonenko as the front man 
for a Kremlin grab at government cash flows. 

Other areas that soon came under scrutiny were the Railways Ministry that 
Aksyonenko used to run, the Fuel and Energy Ministry, especially its role in 
supervising access to the oil export pipelines run by Transneft, the state 
oil pipelines monopoly, weapons exporter Rosvooruzheniye and the state's 37.5 
percent stake in Gazprom. 

New Fuel and Energy Minister Viktor Kalyuzhny fed the flames by handing 
Sibneft 6 million barrels of Iraqi crude almost as soon as he was appointed. 

Finally, soon after Prime Minister Sergei Stepashin succeeded - at the third 
attempt - in getting a second first deputy prime minister appointed to run 
the financial side of government, Aksyonenko began pushing for a 
stabilization fund. Apparently concerned that the new man - Viktor Khristenko 
- might limit his access to funding, Aksyonenko has said several times that 
Russia needs to set up a fund into which every Russian enterprise would pay 
the equivalent of 2 percent of their gross output. 

While no one is sure how - or even if - such a fund would work, various 
economists and political analysts have said that it could bring in as much as 
100 billion rubles (a shade over $4 billion). 

Rolling On In 

Leaving to one side the question of whether or not these maneuverings are 
part of a grand money-grabbing plot, let's take a look at what's up for 
grabs, keeping in mind that Russia's lax controls on government money flows 
make it easy for such funds to go missing. 

For a start, eight years into this round of its existence as a sovereign 
state Russia still does not possess a proper treasury system. Instead of 
channeling state funds through state entities, the government uses so-called 
upolnomochenny, or authorized banks, to handle its accounts. This system has 
seen many government departments' accounts treated as slush funds for favored 

The prevalence of barter further complicates matters, making revenues and 
taxes hard to assess and opening the door ever wider to the corruption that 
pervades Russia's economy. 

The one independent body that does attempt to scrutinize public spending - 
the State Duma's audit chamber - has found plenty of evidence of corruption 
and waste. Set up by parliament as a public spending watch dog, the chamber 
is in effect toothless because it must rely on the Prosecutor General's 
Office to indict offenders. 

The audit chamber has reported finding misappropriations at almost all 
government institutions and state-owned companies that it has investigated. 
However, prosecutors have rarely filed any charges over these matters. 

As a result, the cash that sloshes through state coffers is open only to 
toothless scrutiny - there is no danger of top officials actually being 
brought to account. 

Customs and Pensions 

Turning first to the two appointments that started people pointing fingers in 
Aksyonenko's direction, the customs service and the State Pension Fund 
between them can count on more than $18 billion passing through their hands 
this year - almost the equivalent of projected federal budget revenues. 

Last year, the State Customs Committee collected 28 percent of federal budget 
revenues, some $10 billion. Even though Russia's shrinking economy has 
resulted in a big decrease in the country's trade figures, this year customs 
expects to collect about $8 billion. 

The man now supervising these cash flows is Mikhail Vanin. He was suspended - 
placed on reserve duty - last June during a crack down at the customs service 
that saw 700 officers dismissed or demoted for suspicions of corruption. 

While no cloud of corruption allegations surrounded his predecessor, Nikolai 
Bordyuzha, the two previous customs chiefs were both dogged by allegations of 
graft aired in the media and the Duma. 

Meanwhile, the State Pension Fund has an annual budget projected at 244.5 
billion rubles ($10 billion). The fund is supposed to invest this money in 
order to generate sufficient returns to meet pension commitments. However, it 
has not always been a particularly wise investor. 

While a fund spokesman recently insisted that only minor "shortfalls" have 
been revealed in regular audits, the State Duma's audit chamber concluded 
earlier this year that between 1995 and 1998 the fund lost more than $1 
billion when surplus pension fund money was unwisely invested or disappeared 
into state bonds that were not accounted for. 

It also reported that in 1997 the pension fund invested 157 billion rubles 
($25.5 million) in equity of commercial banks, failed to control expenditures 
on construction works and gave out non-performing loans to commercial banks 
without any reasonable excuse. 

For 1997, the chamber determined that $174 million of pension fund money was 
embezzled. A further $615 million were paid out to different legal entities 
in dubious deals, most of which were illegal according to the chamber's 

Black Gold 

Oil. It's the most important business in Russia - positive developments in 
the nation's currency and equity markets this year have overwhelmingly been 
driven by increases in world oil prices. The government played a major role 
earlier this decade in handing out huge chunks of Russia's oil industry to 
well-connected insiders, and the oil business remains as opaque and dirty as 
the substance it extracts from the ground. 

The audit chamber found that dealings at the Fuel and Energy Ministry were 
almost as questionable as those at the pension fund. 

In a report released in March of this year, the chamber revealed that the 
ministry had set up a currency reserve worth $545 million, using proceeds 
from Zarubezhneft and Vietsovpetro, Russia's joint venture with Vietnam. 

Out of this money some $8 million was used in 1997 for extra remunerations at 
the ministry, meaning that the ministry's payroll payouts were in excess of 
the amount earmarked by the budget law. 

However, the bulk of the currency reserve - $400 million - was simply parked 
at Bank Imperial, which paid minimal interest on these amounts of money at 
irregular intervals. 

The fund was used to finance operating activities of commercial entities and 
$184 million was simply given away, the report concluded. 

But the state's best single means of tapping into oil wealth remains its 
control of the nation's oil pipes: its 100 percent ownership of Transneft. 

To make this part of the tale even murkier, the important factor here is not 
the revenues that Transneft earns directly - estimated 1998 revenues were a 
mere 16.1 billion rubles - it is the sheer power it possesses as the main 
source of those precious export revenues. 

Judicious use of this power can make, or break, oil companies, analysts said. 

"Transneft can delay shipments for some companies when prices go down and 
increase supplies on their behalf when they are up," said Sergei Markov, head 
of Institute of Political Studies. 

"It can also give a large grace period for payments and distribute orders 
among various construction companies at its own choice," he added. 

And bureaucrats paid according to Russia's parlous civil service wage scales 
are more interested in exercising this kind of power than in earning money 
for the state or acting to ensure a level playing field, analysts said. 

"It is much more important for civil servants to be able to distribute 
benefits in kind rather than receive any money in form of cash," said Andrei 
Piontkovsky, head of the Center for Strategic Studies. 

Gaseous Dealings 

Russia's single most powerful entity, Gazprom, looms as the next battlefield 
in the struggle to control the purse strings. The Russian state holds a 37.5 
percent stake in Gazprom, but this stake has been managed for many years by 
Gazprom chief executive Rem Vyakhirev, who has long maintained excellent 
contacts with the government. 

In 1995 the Finance Ministry gave a loan worth $45 million to Bank 
Natsionalny Kredit at the request of Vyakhirev and of Oleg Boiko, then head 
of the OLBI company. The money disappeared after Natsionalny Kredit went bust 
but OLBI's subsidiary bank - National Reserve Bank - soon became one of 
Gazprom's major banks and was recapitalized after additional capital was 
plowed in. 

Andrei Vavilov, the first deputy finance minister who signed off on the $45 
million loan to Natsionalny Kredit, left the government not long after. He 
took up a job as Vyakhirev's financial adviser. 

These days, Vyakhirev's position at Gazprom is under siege. With the annual 
shareholders meeting looming, Fuel and Energy Minister Kalyuzhny has floated 
the idea of rewriting the agreement between the state and Vyakhirev under 
which he manages the state's stake. 

"Vyakhirev's position is very vulnerable in current circumstances," said 

At a news conference Friday, Vyakhirev said he suspected the coming elections 
were behind the moves against him. He also held out the possibility of 
cutting a deal of some sort with Kalyuzhny, saying they would "have a talk" 
this week. 

In addition to its billion-dollar revenues, Gazprom can wield enormous power 
through its status as monopoly supplier to many power stations and to 

Whether or not Vyakhirev stays in place, Kalyuzhny is obviously determined 
that the man running Gazprom should be a team player. 

Guns and Butter 

Two other targets are weapons wholesaler Rosvooruzheniye and aircraft 
producer Sukhoi. 

The two companies account for the bulk of Russia's arms exports, which 
amounted to $2 billion last year, down from $2.6 billion in 1997. Sukhoi - 
which makes the Su-30 fighter that has become the industry benchmark - 
traditionally accounts for half of arms exports.The company was put under new 
management 10 days ago when Mikhail Pogosyan was nominated as director 
general. Pogosyan is close to the president's family, the influential 
financial newspaper Kommersant reported last week. 

Some media are reporting that the post of director general at Rosvooruzheniye 
might well be the next one to be filled by a trusted hanger-on to the 
family's entourage. The company would be an especially lucrative prize, 
because its status as the state's weapons dealer makes it well nigh 
sacrosanct. Even its accounts are classified, meaning that no outsiders can 
look at its books. 

Rolling Stocks 

The Railways Ministry - until very recently Aksyonenko's fiefdom - is one of 
Russia's three so-called natural monopolies, along with Gazprom and Unified 
Energy Systems, the power grid. The ministry had revenues last year of $16 
billion, even more than Gazprom. 

Insiders describe the Railways Ministry as "a state within a state," which 
operates on its own rules and shuns outsiders. Relatives of ministry 
officials - including Aksyonenko - reportedly hold key posts in companies 
that have or had financial dealings with the ministry. It has been run as a 
mixture of full state firms and state-private joint ventures - with the 
latter effectively getting the lion's share of the cash through transfer 
pricing. One of those ventures, Swiss-based TransRail, has recently gained 

TransRail is 50 percent owned by the ministry and was set up in 1989 to serve 
as a middleman between the ministry and foreign clients who transport freight 
on Russia's railways. The other 50 percent is held by Militzer & Munch, a 
leading international freight forwarder based in Switzerland. 

Last fall, the weekly business magazine Expert quoted First Deputy Railways 
Minister Valery Kovalyov as saying that TransRail brings the ministry more 
than $1 billion a year in cash, equal to 48 percent of the ministry's 
hard-currency receipts. 

People involved in the freight business say TransRail has gained an unfair 
advantage on the market thanks to tremendous discounts it receives from the 
ministry on use of the railroads. 

"TransRail is a monopolist. I don't know a company that could compete with 
them," said the director of one shipping company. 

Officials at TransRail have refused to comment. 

Officially, discounts are given based on volume. And while now TransRail may 
undoubtedly have greater volumes, as a semi-state structure it had an 
advantage in getting to that position. 

Railways Ministry spokesmen have insisted that TransRail receives no unfair 

Those who speculate that ministry money is being redirected through the 
TransRail scheme can offer no real proof, but the fact that the company is 
located in Switzerland has raised eyebrows. 

"It's very difficult to control transfers [of hard currency from abroad]," 
said a former ministry employee, who declined to be identified. 

Aksyonenko has vehemently denied persistent media reports that his son works 
in TransRail or other companies connected with rail transport. 

Family Man 

He and others have also denied that he is a figurehead for "the family," but 
this theory has become a commonplace for most Russian politicians. 

"Some people call it the gang of four - Dyachenko, Voloshin, Yumashev and 
Abramovich," said Alexander Shokhin, centrist Duma member and former deputy 
prime minister. 

"Aksyonenko is fully trusted by members of the family and is close to both 
[Boris] Berezovsky and Abramovich," said Vyacheslav Nikonov, head of Politika 

Aksyonenko has been reported by NTV, Kommersant and others to be connected to 
Berezovsky through Abramovich. Novaya Gazeta reported that in 1997 and 1998 
Sibneft received preferential rates for transporting oil products. 

Whatever Aksyonenko's connections, he obviously feels very free to throw his 
weight around, barging in on meetings between premier and president and 
barely troubling to hide his conviction that he is the real leader of the 

Introducing his successor at the Railways Ministry, Aksyonenko carelessly 
remarked that it is a rare occasion when "the prime minister gives flowers" 
to a minister. He immediately back-pedaled, saying "deputy prime minister" 
and attempted to laugh off his own absentmindedness. 

Last week saw Stepashin mount a counter-offensive that has made Aksyonenko's 
grip on state cash flows more tenuous than it might have been. The more 
dangerous Mikhail Zadornov has been squeezed out into the lightweight role of 
negotiator with international lenders - a post that carries no real power to 
oversee spending - but new First Deputy Prime Minister Khristenko will be no 
pushover. Neither will Finance Minister Mikhail Kasyanov. 

Stepashin called these three his team and Russian media have reported that 
this grouping will attempt to balance the Yeltsin family's influence and 
fight to keep at least some of the state's money in the till. 


Cato Institute
Washington DC
Cato Policy Analysis No. 348 June 7, 1999 
Replacing Potemkin Capitalism: Russia's Need for a Free-Market Financial
by Kurt Schuler and George A. Selgin 
Kurt Schuler is a senior economist with the Joint Economic Committee of the
U.S. Congress and author, with Steve H. Hanke and Lars Jonung, of Russian
Currency and Finance: A Currency Board Approach to Reform (1993). He
participated in writing this paper before assuming his current position,
and the views expressed here are his own. George A. Selgin is an associate
professor at the University of Georgia and an adjunct scholar of the Cato
Institute. He is the author of The Theory of Free Banking (1988) and Bank
Deregulation and Monetary Order (1996). 

Executive Summary 

On August 17, 1998, Russia devalued the ruble and stopped payment on its
government debt, creating a financial crisis that continues today. Some
observers have blamed the financial crisis, and the poor performance of the
Russian economy generally, on government policies that they claim are
rigidly laissez faire. However, a closer look at the Russian financial
system reveals that it remains fundamentally socialist, though it has
superficial capitalist features. 

Attempts to preserve the value of the ruble and to prop up Russia’s ailing
banking system are misguided. The ruble is a currency of socialism; the
government uses it as a tool for making forced transfers of wealth from the
Russian people to inefficient enterprises that are holdovers from the
socialist era. Russian banks likewise have been mainly vehicles for
subsidizing enterprises. 

Russia needs a genuinely capitalist monetary system. The system should have
two pillars: the U.S. dollar, Russia’s de facto free-enterprise money, and
sound banks. Foreign banks should be allowed to compete on equal terms with
Russian banks. The central bank should be eliminated, and with it the
privileged access of some Russian banks to the resources of the Russian
government. Similar reforms have been implemented at least in part in other
former socialist countries with good results. In addition to fostering
economic growth, the reforms have been politically popular. The U.S.
government and international institutions should learn from the experience
of those countries and stop supporting Russia’s current monetary

Full Text of Policy Analysis No. 348 (PDF, 16 pgs, 114 Kb) 


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