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CDI Library > Johnson's Russia List

Johnson's Russia List
 

 

July 8, 1999    
This Date's Issues: 3382 3383 


Johnson's Russia List
#3383
8 July 1999
davidjohnson@erols.com

[Note from David Johnson:
1. AFP: Yeltsin Calls Talk Of Army Collapse "Utter Nonsense"
2. Itar-Tass: Luzhkov on Moscow Government Economic, Market Aims.
3. Financial Times: John Thornhill, RUSSIA: Life returns to economy's
corpse.

4. New book: Stefan Hedlund, Russia's "Market" Economy: A Bad Case of 
Predatory Capitalism.

5. Rossiyskaya Gazeta: Veshnyakov on Duma Election Law.
6. Moscow Times EDITORIAL: Why All The Haste On Belarus? 
7. New York Times: John Varoli, In Russia, Charity Rides on Corporate 
Shoulders.

8. Andrei Liakhov: RE: 3381-Palazchenko/Russia and West Back in Business?
9. Ira Straus:
U.S. shifts toward Russia on Taliban and India-Pakistan.
10. Ajay Goyal: Investing in Russia/Goyal/Devane.]

******

#1
Yeltsin Calls Talk Of Army Collapse "Utter Nonsense"

MOSCOW, Jul 8, 1999 -- (Agence France Presse) President Boris Yeltsin told
a group of top army generals in the Kremlin on Thursday that rumors of a
Russian army collapse were "utter nonsense," NTV television reported.

"They say that the Russian army has collapsed," Yeltsin was quoted as
saying. "I will speak literally here. I think this is utter nonsense."

Yeltsin singled out some 200 troops who last month surprised NATO by taking
up position at Pristina airport in Kosovo ahead of the deployment of NATO
peacekeeping troops in the war-torn Serb province.

He order the soldiers to be decorated for their feat

******

#2
Luzhkov on Moscow Government Economic, Market Aims 

MUNICH, July 2 (Itar-Tass) -- A goal of the Moscow 
government is the socially-oriented market economy where the production 
will mostly develop through private enterprise, Mayor Yuri Luzhkov said 
in Munich on Friday evening. He is visiting the capital of Bavaria to 
attend the Days of Moscow scheduled for July 3-17. 

"The state ruling shall aim to form a legal environment and a social 
atmosphere which will protect property, rights and interests of citizens 
and give equal possibilities to all, primarily in the sphere of 
education," Luzhkov said in a report on the Moscow policy in economics 
and international relations delivered to the leading politicians and 
businessmen of the federal land. 

None doubts the fact that many mistakes have been made in the course of 
the Russian reforms, the mayor noted. "The overwhelming majority of 
Russian average citizens, politicians and statesmen share the opinion 
that the reform processes have not been theoretically considered. We 
proceed from the fact that reforms shall be done for the benefit of 
people," Luzhkov said. The interests of citizens on the global level 
shall be represented by a state "with which other countries reckon 
because of deeds, and not because of fear or diplomatic courtesy," he 
remarked. 

For several decades Germany has been a leading Western economic partner 
of Russia, Luzhkov said. It is the leading investor in the Russian real 
economics, and the German investments make over 35 percent of the overall 
foreign investments in the country, he noted. German companies "show 
patience and, possibly, have some losses" but do not flee the Russian 
market. Luzhkov is sure their patience will be rewarded. [Description 

*******

#3
Financial Times
8 July 1999
[for personal use only]
RUSSIA: Life returns to economy's corpse 
By John Thornhill in Moscow

There is a Russian saying, nyet khudya bez dobra, which, roughly
translated, means there is good in every ill. Paradoxical though it may
seem, Russia's devastating financial crash of last year has produced some
benign economic effects.

In the immediate aftermath of Russia's financial crisis, economists were
forecasting gross domestic product would fall by up to 9 per cent this year
amid high, if not hyper, inflation. Many economists now believe the economy
will turn out flat in 1999 with annual inflation pegged to about 50 per cent.

The recent rise in international commodity prices, the reduction of debt
servicing costs through unilateral default on domestic debt, and a
surprising adherence to tough fiscal and monetary disciplines have
prevented the economy from sliding out of control, as many had initially
feared.

The effects of the devaluation, which have not been whittled away by
excessive inflation, have also boosted Russia's competitive position,
stimulating production and exports. Industrial output in May was 6.1 per
cent higher than a year ago with the metals, energy, and timber sectors
showing strong growth. Although the total volume of trade has fallen
heavily, the trade surplus grew to $2.9bn in April, with exports of $6.5bn
outstripping imports of $3.6bn.

Vladimir Konovalov, chief economist at the Moscow office of Credit Suisse
First Boston, said the rouble's fall from 6.2 to the US dollar in July last
year to 24.3 has "brought life back into the corpse". "With hindsight,
Russia was wrong to have such an aggressively fixed exchange rate for so
long. This acted as a subsidy for imports and a tax on the export sector,"
he said.

Mikhail Zadornov, Russia's special representative to the international
financial institutions, said it was clear devaluation was inevitable. "The
devaluation should have happened significantly earlier: some time in 1997
or the beginning of 1998. But then there was not the political will," he
told the Argumenti i Fakti newspaper.

However, some economists are still far from convinced there has been a real
turnaround in the economy.

Ben Slay, senior economist at PlanEcon, a Washington-based economic
institute, said the apparent upturn in Russia's industrial output could
reflect the targeted subsidies of the previous government, headed by
Yevgeny Primakov, rather than a genuine turnaround in the real economy.

"There are some positive trends at work but there are very major questions
about how sustainable these trends are," he says. "If there is growing
output, there has to be extra demand for it, but where is that coming from?
Household surveys suggest personal consumption is down 21 per cent. Fixed
investment is also down. There is no evidence of a recovery on the demand
side."

Although the economic situation could have been much worse, the population
has yet to see many of the benefits of Russia's resilience. Unemployment
has risen to more than 12.4 per cent, and an estimated 37.7 per cent of the
Russian population is attempting to survive below the officially defined
subsistence level of Rbs924 ($37) a month.

Such frightening levels of mass poverty may soon start to put increased
pressure on the federal budget in the run-up to parliamentary and
presidential elections, jeopardising Russia's fragile stabilisation.

*******

#4
From: "Stefan Hedlund" <stefan.hedlund@east.uu.se>
Date: Thu, 8 Jul 1999 
Subject: New book on Russian economy

Dear David, Perhaps you might want to publish the following promotion,
for a new book that details how Russia's attempt at constructing a market
economy ended in such shambles. The main focus is on the financial side,
but it also emphasizes the role of the country's troublesome historical
legacy. Sincerely yours, Stefan Hedlund Professor of East European
Studies 

Russia's "Market" Economy 
A Bad Case of Predatory Capitalism 
Stefan Hedlund, Uppsala University, Sweden 

Russia's "Market" Economy is a seminal account of Russia's transition to
the market, its torturous development as a fledgling market economy
through the 1990's, right through to its spectacular collapse in August
1998. Rather than beginning with the economic collapse, the book traces the
historical mismanagement of Russian wealth through to the Soviet command
economy, and on to Gorbachev. Stefan Hedlund finally discusses what lessons
should be learned from the damage inflicted on the Russian economy, as
well as its social, legal and political infrastructure, by the race of
reform. This fascinating and pioneering study is the first genuinely
interdisciplinary explantion of why Boris Yeltsin's economic reforms ended
in such dismal failure. Providing an essential background, through its
systematic institutional analysis, on how and why Russian cultural
specificity and history makes it different from the 'Western ' role model;
and how that should affect current decision-making. It is written for
those studying politics, economics, East European Studies, as well as for
general courses on Russia's post-Soviet development. 

UCL Press 
July 1999: 390pp: 234x156mm 
Hb: 1-84142-054-9: 60.00 
Pb: 1-84142-893-9: 15.95 

*******

#5
Veshnyakov on Duma Election Law
Rossiyskaya Gazeta
1 July 1999
[translation for personal use only]
Article by Aleksandr Veshnyakov, chairman of the Central 
Electoral Commission of Russia: "Law of the Season" 

The Federal law, "On Elections of Deputies to the State Duma 
of the Federal Assembly of the Russian Federation," is presented by 
Chairman of the Central Electoral Commission of Russia Aleksandr Veshnyakov. 

Work on the law, with which Rossiyskaya Gazeta readers are the 
first to become acquainted today, lasted for over a year-and-a-half. 
During this time, around a thousand amendments to this document were 
proposed, over 70 of which were adopted or considered. The draft law 
several times underwent expert appraisal in the Tsentrizbirkom RF 
[Central Electoral Commission of the Russian Federation] and in the 
electoral commissions of the subjects of the Federation. And this was 
no accident. Because the document being presented is a fateful one. In 
the literal sense, it will influence how we will elect and how all of us 
will live tomorrow. 

What does the new law give to the citizens of Russia? First of 
all--an adequate legal base for holding elections of State Duma 
deputies. It fully correlates with the Federal law, "On Principle 
Guarantees of Electoral Rights and Rights of Citizens of the Russian 
Federation to Participate In Referendum." The document takes into 
consideration all the basic shortcomings identified as a result of past 
electoral campaigns. And the main thing: A series of measures has been 
introduced which hinder penetration of criminal elements into power, the 
use of "dirty electoral technologies" and uncontrolled financing of 
electoral campaigns of candidates for deputy. 

Why did the new law turn out to be so all-encompassing? Why, 
because a detailed listing of various electoral procedures was needed. 
We may, of course, dispute the need for filling the law with 
instructional standards. However, the practical experience of recent 
years speaks in favor of a detailed listing of standards in the law. 
And the practical experience is such that it is always better to have a 
specific standard of law than its various interpretations, or 
instructions from the electoral commission on its application. 

The new Federal law precisely defines the day of voting at the 
regularly scheduled elections: The first Sunday after 4 years have 
elapsed from the day of voting in the preceding general elections to the 
State Duma. Thus, the day of voting in the scheduled elections must be 
19 December 1999. 

The new law retains the former system of elections: 225 deputies 
will be elected from single-mandate districts, and 225--by house lists. 
The new scheme of formulating the districts shall be presented by the 
TsIK [Central Electoral Commission] of Russia to the State Duma 7 days 
after the law goes into effect. 

Publication of the new scheme, approved by Federal law, must be 
performed no later than 100 days prior to election day. 
If the scheme for single-mandate electoral districts is not 
approved within this time, the elections shall be conducted according to 
the previous scheme used in the 1995 elections. At the same time, 
nomination of candidates in single-mandate electoral districts may begin 
only 90 days prior to election day (Section 5, Article 37; Section 7, 
Article 38 of the new Federal law). 

The law establishes strict terms and procedures of formulating 
district, territorial and divisional electoral commissions. This will 
ensure representation of various political public associations in them, 
represented by factions in the State Duma. 

In accordance with the new Federal law, a candidate from a single- 
mandate electoral district may be nominated by a citizen or citizens 
having active electoral right on the territory of the said electoral 
district (Section 1, Article 37), as well as by an electoral association 
or electoral bloc (Article 38). 

An electoral association or electoral bloc may also present a 
federal list of candidates (Article 39). 

According to the data of the Ministry of Justice of the RF 
[Russian Federation], 139 nationwide Russian political public 
associations in the Russian Federation will have the status of electoral 
association in the regularly scheduled elections of State Duma deputies. 

A significant place in the new Federal law has been relegated to 
various aspects of conducting pre-electoral campaigning, questions of 
financing preparations for and performance of elections, as well as 
electoral campaigns of candidates, electoral associations and blocs. 

Questions of voting procedure and tallying of votes cast are also 
regulated in detail. The law provides for maximal openness of all 
actions of the electoral commissions at this vital stage of the 
elections, and creates conditions for real public control over the 
summary of election results. 

...They say that one does not choose one's fate. I do not agree! 
Each time we go to the polls, we have a real chance of doing so. And it 
is very important to utilize this chance. 

********

#6
Moscow Times
July 8, 1999 
EDITORIAL: Why All The Haste On Belarus? 

For those who insist President Boris Yeltsin is a democrat and will leave the 
Kremlin on schedule next summer, here is a question: Why is the Kremlin so 
frantically and insistently charging ahead to unify Russia and Belarus? 

Prime Minister Sergei Stepashin said Monday that Yeltsin had ordered him to 
personally oversee the unification process. Yeltsin has spoken in public 
since then - but he has not corrected his prime minister. 

Then Wednesday, Stepashin announced that a treaty unifying Russia and Belarus 
would be ready by autumn. 

By autumn! What's the rush? 

We are talking about the unification of two countries - with separate 
constitutions, political institutions, militaries, economies, currencies - 
into one single state. And all of a sudden, the lame-duck Kremlin and 
Belarussian President Alexander Lukashenko are insisting they want to figure 
this all out and have a treaty signed in a matter of weeks. 

It's absurd - so absurd that the haste can only be understood in one way. The 
Belarus Union is indeed a Trojan horse to keep Yeltsin in power. Every day 
Stepashin talks about a Belarus Union, he is actually - and knowingly - 
speaking about subverting democracy. 

What's more, Yeltsin is driving this process. It's not some Kremlin cabal 
freelancing behind the president's back. 

This means that Yeltsin was not honest with us in his interview this week 
with Izvestia. He says he is ready to step down, but he is not. In the 
worst-case scenario, Yeltsin is already actively scheming to become 
dictator-for-life. Even in the very best-case scenario, Yeltsin has not made 
up his mind yet - but is still actively constructing extraconstitutional 
roads to stay in power, just in case. 

The situation calls to mind the 1996 presidential elections, when Yeltsin had 
tycoon Boris Berezovsky and Kremlin security chief Alexander Korzhakov 
publicly urging him to cancel the elections. They were afraid Yeltsin would 
lose power - and take them with him out of the Kremlin. 

Back then, another camp headed by privatizer Anatoly Chubais urged Yeltsin to 
hold the elections and aim to win. Yeltsin agreed, but his decision seems to 
have been more tactical than philosophical. 

This time around, who is left to cajole Yeltsin into taking the high road? 
According to the constitution, Yeltsin can't legally stay in office - but 
it's hard to imagine either Chubais or Berezovsky urging him to step aside in 
favor of President Yury Luzhkov. 

Perhaps the only "camp" left that could usefully weigh in is Washington - but 
neither U.S. President Bill Clinton nor the IMF seem willing to cross their 
good friend and strategic partner Boris Yeltsin. 

*******

#7
New York Times
July 7, 1999
[for personal use only]
In Russia, Charity Rides on Corporate Shoulders 
By JOHN VAROLI

ST. PETERSBURG, Russia -- Businessmen are often vilified in Russia as
exploiters, who flout tax laws and played a role in the financial crash of
last August. 

Yet many of them, from small shop owners to leading tycoons, have been
making significant contributions to nonprofit causes -- sponsoring culture
and education, sporting events, helping the poor and supporting religious
institutions. 

Of course, many Russian businessmen may be simply using a tactic well
known by their counterparts in the West: showering money on worthy causes
can often improve a businessman's poor reputation. 

"Many have earned their money in dubious ways, but it's better that they
give away something than nothing at all," said Daniil Granin, 80, a
leading Russian writer who was activein the rebirth of the country's
charitable sector in the late 1980's. 

Vladimir Potanin, a wealthy executive who runs a financial-industrial
group called Interros, donated $1.4 million to support the reconstruction
of the Rostral Columns, one of St. Petersburg's most venerable historic
landmarks. This donation is the largest made by a Russian company or
individual since 1917. 

In November, when organizers of the Kremlin Cup tennis tournament thought
the event would fall through, Alfa Bank, controlled by another leading
Russian businessman, Mikhail Fridman, stepped in with $400,000. 

In January, the Russian tycoon Boris Berezovsky, now the target of a
criminal investigation for his business dealings, sponsored the seventh
annual Triumph Prize, awarded to leading cultural figures. Five winners
shared $250,000. 

Culture is the prime beneficiary of Russian corporate charity. Last year
in St. Petersburg, there were 53 festivals of theater, music, dance, film
and opera, but only 3 were fully financed by the city government. 

Financing for the rest came from private corporations, most of them
Russian. 

This is a far cry from eight years ago, when the Government was the only
source of financing. 

"Rich people in Russia are becoming educated and understand that they must
invest in the future of their children and country," said Vladimir
Yakovlev, deputy governor of St. Petersburg and head of the city Culture
Committee. "Historically, going back to czarist times, support of culture
was always a foremost consideration among the rich." 

There is hardly a commercial entity in Russia, no matter how small, that
does not engage in some nonprofit activity, and if not with donations of
cash, then with goods or services. 

"It is not possible to give an exact picture of Russian corporate charity
because so much of it goes unaccounted for in the shadow economy, just
like business itself," said Eduard Fomin, a sociologist who has been
studying corporate charity in Russia since 1995, and who works at the
Center of Independent Sociological Research in St. Petersburg. According to
Mr. Fomin's research, between five-tenths of a percent and 3.5 percent of
a Russian company's income goes to a nonprofit purpose. 

This past winter, when the Moscow and St. Petersburg chapters of the
Salvation Army appealed for help, most who came forward were midsized and
small Russian companies, making donations of food, clothing and blankets. 

Donations jumped 60 percent over last year's drive, said Capt. Joseph
Smith, regional head of the Salvation Army's social services in St.
Petersburg. 

Before the Revolution in 1917, giving to noble causes was common among
Russia's aristocracy and commercial elite. The Tretyakov Art Museum in
Moscow, for example, bears the name of the late 19th century industrialist
who founded and sponsored it. 

Since the collapse of the Soviet Union, many foreigners of Russian
descent have played an important role bringing charity back to their
homeland. 

A leading Russian banker, Boris Jordan, is one such person. A descendant
of a long line of military officers who were forced to leave 

Russia after 1917, the American-born Jordan moved to Russia in 1992 to
run Credit Suisse First Boston's Moscow office. A few years later, he
started his own company, Renaissance Capital, now known as MFK Renaissance. 

Most of Jordan's support has gone to Russia's military cadets, and he has
donated more than half a million dollars to repair their crumbling
schools, provide text books and buy new uniforms. 

Assistance to children is another focus of corporate largess. Lukoil,
Russia's leading oil company, sponsors three orphanages in the oil-rich
Khanty-Mansi Autonomous Okrug in western Siberia, a children's hospital,
and assistance to the aged, physically impaired and refugees from the
rebellious province of Chechnya. 

Many Russian companies acknowledge that projecting a positive corporate
image is an important consideration in their charitable donations. 

"Our company provides support to culture and sport because we understand
that it is necessary to help during these difficult times in Russia," said
Taimuraz Bolloyev, general director of Baltika Breweries, one of Russia's
most successful enterprises. "Yet, we do not deny that such actions do
improve the reputation of Baltika." 

Others give to charity for another reason. They would rather do that than
pay taxes. 

"Businessmen prefer giving directly to nonprofit causes because they see
where the money goes," Fomin said. "While if they would pay that amount
in taxes the money only disappears into the Government's black hole." 

*******

#8
Date: Wed, 7 Jul 1999 
From: "Andrei Liakhov" <liakhova@nortonrose.com> 
Subject: RE: 3381-Palazchenko/Russia and West Back in Business?

Comments on Palaschenko:

I understand that Pavel is gently trying to defend his boss against the
obvious charge against M.S. Gorbachev - his complete miscalculation of the
true intentions of the West and too much use of "pink glasses" when dealing
with international affairs lead to the almost complete disregard of Russian
interests by the international institutions currently playing leading roles
in international politics. MSG practically unilaterally capitualted to the
West without getting anything but promises in return. 

I do not want to continue here a very old debate about whether you can start
doing anything without firstly having analysed the current situation,
determined the goals, prepared a plan of action, but precisely the lack of
plan of action and understanding of what you want to achieve was one of the
prime causes of all the turmoil in the former USSR. 

As to the claims the MSG saw the future world order as based on the
strengthening of the UN - I hope Pavel remembers the analytical report from
the IGPAN and the International Law Centre of the MID submitted to MSG
around 1989-90 the jist of which was that to preserve the stragetic intrests
of the USSR if the Comecon and the Warsaw Pact are to be disbanded (i)
serious reform of the UN is required; and (ii) a new regional European
International Security organisation is to be created. The other point of the
report was that the UN was created as a mechanism to avoid Cold War becoming
hot and will be very ill suited to the post Cold War realities if one of the
balancing powers of the UN disappears. As many other warning signals this
report was totally ignored. 

Now Russia has to live with the consequences..............

The lesson is obvious - if you are praised by the enemy - you are doing
something wrong. MSG chose not to remember this saying.

*******

#9
From: IRASTRAUS@aol.com (Ira Straus)
Date: Wed, 7 Jul 1999 
Subject: U.S. shifts toward Russia on Taliban and India-Pakistan

The U.S. shift on Taliban and on India-Pakistan -- a step toward Russia
By Ira Straus

The U.S. adoption of sanctions against Taliban is an important geopolitical 
shift. So is the G-8 statement supporting India against Pakistan. They 
provide an opportunity for rebuilding U.S.-Russian relations in a serious 
way, not just putting a good face on things, after all the damage that has 
been done in recent years.

The sanctions put the U.S. implicitly on the same side as Russia in 
Afghanistan. A sound next step would be for the U.S. make an explicit 
statement that it is placing itself on Russia's side. 

Potentially, there is a tripartite US-Russia-India alignment in the making 
here (US being used as a stand-in for the West as a whole).

Realigning decisively in Afghanistan to the side of Russia would mean joining 
Russia in support of the resistance forces in northern Afghanistan -- forces 
that might contribute significantly to bringing down Taliban, unlike the 
meager U.S. sanctions which are not expected to accomplish anything real. It 
would also have the effect of finally allaying the Russian fears -- fears 
that were too often justified in the past -- of Western policy in the region. 

Russia has regarded Taliban as the worst Islamic fundamentalist regime in the 
world, and the most dangerous one for Russia itself -- a view that has had 
some merit, since Taliban, alone among Islamicist regimes, has provided an 
active base of support for Islamicist militants in Central Asia. For too 
long, Western policy seemed to be aimed at isolating Russia even if it meant 
swallowing Taliban. If the US were to correct this mistake publicly, it would 
go a long way toward defusing the Russian suspicions that have been building 
up ever since the end of 1991 about the goals of the West vis-a-vis Russia.

When the Soviet Union realigned to the side of the West on the Gulf War in 
1990-91, it worked wonders for changing American feelings toward Russia; as 
did Russia's much deeper realignment in 1991-92 and the massive geopolitical 
gifts it gave to the West. Reciprocation from our side today, even if 
belated, could work similar wonders.

In Afghanistan, the U.S. at first welcomed the stability that Taliban might 
bring to the country. For a long time thereafter, it treated Taliban with kid 
gloves. The U.S. did not recognize Taliban (it was on the verge of it at the 
beginning, but was dissuaded by the extremely negative U.S. media reporting 
on Taliban at the time when it captured Kabul), and formally remained neutral 
toward it, but credible Afghans tell me that, until maybe a year ago, the 
U.S. seemed to be supporting Taliban on the operational level on the ground. 
When the U.S. bombed bin Laden's camps in Afghanistan, it took care to assure 
the Taliban -- formally and publicly -- that the attack was not directed 
against them; although this was in retrospect the beginning of the end of 
U.S. support. 

The main explanation for this pro-Taliban instinct appears to be the 
persistence of the pattern of Cold War client relations. It was a pattern 
that ran through our direct clients, Saudi Arabia and Pakistan, to their 
clients in turn in Afghanistan. Taliban was armed, trained and funded by 
Pakistan and the Saudis. Russia remained on the other side of the fence from 
our old chain of client relations -- even though Russia had reversed its own 
client pattern, and was now supporting some of the same warlords in northern 
Afghanistan that we used to be supporting against the Soviet Union. 

A realignment, in which we would join Russia in opposing Taliban, would have 
been logical, since Russia was no longer an ideological adversary. Such a 
realignment would have been in our national interest. But it did not take 
place. The perpetuation of the cold war client patterns on our side gave 
evidence for the suspicions of Russians -- suspicions usually dismissed in 
the West as showing complete irrationality on Russia's side -- that we were 
still treating them as the enemy and working to surround them at all costs.

Recently, the cold war pattern of client relations finally began to break 
down on our side of this fence, too. Saudi Arabia got upset at Taliban for 
harboring bin Laden, and cut off all official connections and support 
(although rich Saudis and individuals from the emirates are still financing 
Taliban privately). Pakistan got partly disillusioned with its Taliban 
clients (although it is still supporting Taliban through government and 
military organs and, with its weak control over its own military, would have 
a hard time cutting off the support). And the U.S. got disillusioned with 
Pakistan. The stage has thus been well set for the realignment finally to 
take place.

Now, for the first time, the U.S. has publicly taken an action against 
Taliban, without apologizing or denying that it is directed against the 
regime. 

If the U.S. uses some strategic vision, it will take the next step: to state 
outright that it is against the Taliban regime, and that it is coming over to 
Russia's views on this question. The implementation of such a policy would 
mean: joining Russia in supporting the northern Afghan groups vis-a-vis 
Taliban; and not just putting symbolic sanctions on Afghanistan, but putting 
real pressure on Pakistan to cut off help Taliban, and offering "assistance" 
to Pakistan and the Saudis in cutting off the flow of help to Taliban.

The main resistance inside Afghanistan is led by Massoud. During the war a 
dozen years ago against the Soviet Union, the U.S. supported, among other 
mujaheddin, the Rabbani group which included Massoud. In the present era, the 
Russian defense minister met with Massoud in Tajikistan about a year ago and 
gave him some land there, where weapons can be stored for him without much 
danger of being captured by the Taliban. Massoud has been supplied with about 
$150 million worth of weapons, including heavy weapons such as rockets and 
tanks, by Russia. It is unlikely that Massoud can ever unify Afghanistan, 
since he is a Panchiri, a small Farsi-speaking Tajik minority; but Uzbeks 
support him out of convenience, and he is the main force holding off Taliban 
from total control of Afghanistan. 

Another force opposing Taliban is Iran. If Massoud were strengthened, if 
Pakistan were not helping Taliban, if the regime were totally isolated, and 
if Iran were threatening it, Taliban might fall.

If we were really daring, we could say that we are coming over to Iran's 
"side" as well as Russia's on this question. And that we look forward to a 
strategic rapprochement with Iran, if and as Iran keeps reforming and as 
Iranian behavior changes in other venues. However, probably there would be 
too many objections to making any statement at this time in support of Iran. 

Despite this limitation, the potential for a grand realignment is better at 
this moment than at just about any time since the lost opportunity of late 91 
- early '92. The potential is enhanced by the coincidence of the turn against 
Taliban at the same time as the U.S. and G-8 tilt toward India against 
Pakistan. 

In the present war over Kashmir, Pakistan has shown not only careless 
aggression, but a degree of lack of control over its military and its 
domestic militant factions that makes even India and Russia look like 
well-organized states. As a better as well as bigger democracy, India is 
inherently a better partner for the West than Pakistan. With the Cold War 
over, there is no more reason to be angry at India for its friendly links 
with Russia, and no more need to rely on Pakistan against both. America has 
gradually been adjusting its relations in the region accordingly, slowly 
warming up to India and cooling off on Pakistan. The change has proceeded 
slowly, perhaps too slowly, but now suddenly it has crystallized in a sharp, 
visible form. 

The fact that the statement in support of India was made together with Russia 
at the G-8 is important symbolically. Further steps are in order. 

1) For the sake of our relations with Russia and India, we could acknowledge 
publicly that we have made mistakes in the past and have now come over for 
the most part to their view of the situation and problems in South Asia; that 
would be a purely symbolic concession, one that the world's only superpower 
should be big enough to make. 

2) We should begin thinking of India, like Russia, as a natural partner, and 
thinking about the implications of this.

3) An informal tripartite summit meeting of America, Russia and India would 
be in order at this time. This would provide a clear symbolic picture of an 
emerging partnership. Practically, it would provide a venue small enough to 
have some serious open-ended initial discussions about joint opportunities, 
the potential for better realizing our interests by reversing some past 
alignments, and how we view the problems we jointly face in the world and how 
we might support one another in addressing them. 

Perhaps Kamaljit Sood, JRL's corresponding expert on India as well as Russia, 
will also have some thoughts on this.

P.S. 
I can foresee two objections to this approach. One is that any grouping such 
as US-Russia-India is too limited, and the world is going to change again 
anyway so it'll become obsolete. This is a fair enough point, in the sense 
that a US-Russia-India grouping would not be the final strategic realignment 
in history; it's simply the main realignment that's possible at this time, 
and it's sorely needed. Probably, once the grouping has been successfully 
formed and developed a substantive basis for operating together, a 
US-Russia-India summit would act as a nucleus and draw in other countries, 
like the rest of the G-8, that are already strategically on the same 
wavelength. Potentially, it would also provide a basis for drawing other 
countries such as China and Iran into a strategic dialogue, and for doing 
this in the coordinated yet timely fashion that is needed, as they go through 
regime changes that are likely to provide opportunities for a still wider 
covergence of strategic alignments.

The second objection would come in at this point. I can see a dialectician 
jumping into the picture here and warning that, if everyone's strategic 
alignment converges, then there is no longer any strategic alignment left at 
all. Maybe so. But even if that were true, it would simply mean that 
geopolitical strategizing would gradually disappear and get sublimated into 
joint strategizing on global problems; a sublimation that is already 
beginning to occur. Meanwhile the end of that path is a long way down the 
road, and we need to get there before we can think about kicking away the 
ladder up which we have been climbing.

******

#10
Date: Wed, 7 Jul 1999 
From: "Ajay Goyal" <norasco@logos.cy.net> 
Subject: Investing in Russia/Goyal/Devane

This refers to my opinion in 3373 and comments from Mr. Devane in 3376.

I am sure Mr. Devane has his own ways of valuing companies but surely he can
tolerate the views of the old school that gives weight to all kinds of risk,
above all the professionalism and integrity of managers, in making an
investment decision. The views, as expressed in my article, could well apply
to any market. A good part of 1997-98 disaster could have been avoided and
markets around the world would have been breathing easy if some of the
questions I pointed to had been asked before so much money was thrown into
Russian debt and equity. I maintain my position that Russia was not ready
then, and is not ready yet, for passive portfolio investment based on
financial and technical valuations alone. There are enormous investment
opportunities in Russia but the so called "blue chips', or those factories
that continue to produce sub-standard, unwanted and unneeded products,
follow the outdated Soviet production techniques, with no care for
environment, investor value, or any of the market principles are not among
them.

When I look around and talk to Russian portfolio investors, there are a lot
of unhappy people out there. Clearly, many took calculated risks but many
also complain of bad and inadequate advice, most of which came from the
Russia desks of wall street and city firms or those adventurists who
relocated to Russia and essentially became the marketing agents for a rotten
system. Most Soviet era amalgamations continue to function in their
arrogant, corrupt and inefficient ways. The western perception about them
changed because of some very effective spin but the rise and fall of stock
market indices have little or no relation with how they function. I have
visited factory towns and shop floors across Russia. The only correct
investment in those places is to update production technology, get rid of
outdated plant and machinery, install environment friendly technology, bring
in new professional management and clean up the mess of last 70 years and
then, if, they start making quality products, pay the salaries and trade in
cash, operate as any company should in a market, there stock might be
eligible for investment. Boom-bust cycles on stock exchanges, created by
large amounts of speculative capital, that does not care about production
and operational standards is the biggest bane of an emerging economy.
Western capital, in the hands of inexperienced fund managers, has no or
little patience for long cycles of growth in an emerging economy. The
speculative portfolio investment techniques that work in the west, because
of a whole system (that too, at times, shows signs of fatigue and failure)
of market oriented practices, can not function in Russia. The fundamentals
of the economy are weak. Money is going into consumption, not production. An
economy that simply digs for oil and essentially consumes without adding any
value to its raw materials, has no decent production to speak of, can not
qualify for portfolio investments on the stock market.

Russia needs investment in improving productivity, in new small and medium
scale enterprises and in creating and nurturing a whole new class of
businesses. That process has hardly even begun. The direct investment in the
country is a fraction of what Poland or Hungary receive each year. Once the
factories start functioning, clear their debts, sell goods for cash, pay
their workers and basically produce something that has a value addition to
the raw materials, they might qualify for stock market listings. Every other
scheme to sugar wrap ineptly managed, corrupt and dismal enterprises and
list them for hectic trading on a stock market is criminal enterprise.

The investors have a right to know, before they invest and after they do,
what goes on inside these factories and their shop floors.

Many fund managers, just as Mr. Devane, even seem to confuse accounting for
accountability. Though many Russian firms have started accounting in IAS and
GAAP formats and a few have even been forced to become investor friendly by
some investors or fund managers, most privatized Russian companies have a
long way to go towards being accountable (to their
minority/foreign/individual shareholders, their workers, their consumers and
the society). The gap in accountability can not be fulfilled by GAAP
accounting. Massive financial frauds occur everyday in the west because of a
lack of due diligence, despite high accounting standards.

Visiting a (Russian) company and ensuring that the management is good, that
assets are not being( if they already have not been) stripped off in a
systematic manner, that goods are actually being produced and sold for cash
( and not bartered as most Russian companies do) by the company itself and
not though satellite trading companies; and that employees and management
share the goals and mission of producing quality goods and serving their
clients to make profit are an essential exercise before making any
investment decisions.

Direct contact with invested companies is essential. That is why companies
hold annual shareholder meetings in the west, not dodge them as in Russia.
That is why company accounts are published for public. The transparency that
we take for granted in the west and the trust investors have in most western
firms is a result of decades of brand building and familiarity with the
products and their quality. Compared to that, let us try and name ten or
even two Russian brand names of publicly traded companies. The few well
known Russian quality products are produced by post-Soviet private companies
or FMCGs, which are not among the so called "blue chip" Russians stocks that
I refereed to and have attracted such euphoric attention from some fund
managers.

Mr. Devane' counter argument, if it can be called one, that he wears Italian
suits and Swiss watches, eats German food, drinks Brazilian coffee and yet
has never been to these countries, is self defeating. Perhaps I missed
something-- but he does not mention anything Russian on this list. Yet, the
name of his company and the wounded and abusive tone of his message suggests
that he sells or advises on Russia stock. Mr. Devane, it is bad judgment to
invest in companies whose products and production practices you do not know,
approve or like, even if it is your grandpa's or other people's money you
are playing with.

Until recently, every Russian or foreign investor in Russia drove foreign
cars on imported fuel, drank imported coffee, brewed on imported machines,
in offices built and furnished on imported materials and by foreign
companies, flew western airlines in and out of Moscow, drank Coca cola and
smoked Marlboro cigarettes, stayed in western hotels... and invested in
Russian companies. If only they had cared to go visit some of the factories,
they would not have thrown their investor's money into the black holes of an
unreformed economic system. At the same time, they did not come across
better investment opportunities because while the real companies in real
Russia were too busy making money to publish GAAP accounts, they did not
even think it important to learn the language and travel into the heartland
of the country to see what really is happening there.

Russian companies do have, at times, attractive balance sheets. They are
supposed to have a lot of rich assets that have been used to seduce many a
foreign investor. But name one foreign investor that actually has been able
to use those assets and make an exit with his money.

The fund manager's fixation with balance sheets while the companies continue
to churn out shoddy goods are the reason why most investments in Russia have
not done well. Things have definitely improved over the years but last week
Russian trading System suspended trading in a few dozen of the most liquid
stocks because of failure to comply with rules to report accounts.

The fact that some Russian companies started doing IAS and GAAP standard
accounting does not mean that one can start making investment decisions
based on the balance sheets alone. A lot more goes into an investment
decision than analysis of balance sheets. There are business risks that can
not get projected into balance sheets. They can not be discounted or
accounted for.

In early 90s, the Russians had really taken to drinking instant coffee. Till
then, one used to get roasted and crushed coffee beans in the "Gastronoms"
that, once brewed, used to taste like boiled cola. Quality instant brands
were new to Russia. Seeing the demand and price spreads between Europe/US
and Russia, I decided to buy stock of some Coffee exporting/producing
companies with well established brand names. It proved to be a good
investment decision. At the same time, I recall having been offered stock in
one of Russian coffee processing companies in 1996 by a well known Moscow
brokerage, that has since gone bankrupt. But a visit to the company, after a
ritual sauna with a very friendly director was enough to convince us that
nothing short of a controlling stake with a strategic investment and
complete overhaul of management practices would ever work in that company.
It was a state of art processing plant with Red directors. While hundreds of
Coffee producers around the world capitalized on Russian love for a good
brew, well equipped Russian factories continued to do tolling and supplying
bad beans to the lowest end of the market.The company I mention, still makes
a lot of money for its directors-turned-owners but does not pay any
dividends to shareholders and pays scandalously low wages to its employees.
It has no hope in hell till it gets taken over by an MNC or another serious
investor. It does its accounts in GAAP, publishes them on glossy paper, but
does that qualify it for (passive, mutual/hedge fund) investment? Not if it
is your own money you are talking about. When it comes to making a sound
investment decision, there is no alternative to a detailed exercise of
evaluation that goes beyond translated memos and accounts. I know it is an
extra effort away from the comfort of heated board rooms and conference
chambers of five star hotels, but it might save a lot of precious American
or European pension money.

Let us take the case of another of Mr. Devane's favorite products, watches.
In 1992, I visited almost all Russian watch and watch movement producers. A
Hong Kong industrialist friend of mine who had been buying Russian watch
movements for decades wanted to know if he could acquire a Russian company
or have a JV to have regular, reliable supplies and reduce trading costs in
the process. He was being pestered with proposals to contribute a large
amount of money into an undefined JV with one of these producers. My advice
to him ,having visited all the major manufacturers was, "only if you can
acquire a majority stake and change the management." He could not. I do not
know of any one that wears Russian watches today, while his business
flourishes with 11 production units in the far east. Whose stock would you
rather invest in? The Russian watch industry is as good as dead, but not
before some shares in one Moscow plant that I prefer not to name, were sold
off to a group of unsuspecting investors. I doubt that they ever saw their
money again.

On the other hand, one does not need to visit Coca Cola to ensure they make
a good beverage. Or one does not need to visit Boeing to see how they make
their planes and manage their business. The Italian suits fit and sit well.
( I do not know about German food though!) There is sufficient information--
painstakingly compiled, analyzed and researched over decades -- at hand
about these companies to be able to make an investment decision from
thousand miles away, even on the Internet. Try doing search on some Russian
companies. Ask those who bought Russian stock in 1994-97.

Russian companies do not have the tradition and culture of European and US
companies. They can not be measured with the same yard stick. If some one
offers you stock of a helicopter plant in Siberia and the financial
projections show an export market of a few hundred machines each year, it
is well advised to go a little deeper and ask a few questions. Unless you
visit the plant after the mandatory sauna and drinking binges with top
managers and make serious queries , you may never find out that the
helicopter is not-certified to fly civilians anywhere in the world. Not even
in Somalia. It does not meet the most basic safety requirements. That does
not stop a Moscow brokerage from dumping a minority stake in the company for
a huge price, citing attractive comparative P/E ratios to a US investment
fund. The fund, now, can not sell the stock and can not even take the
helicopters for onward sale to recover their money. They have probably
written off their investment but the fund manager who arranged the
'presentation" and the broker who came up with the stock, made hefty
commissions. I am not feeling sorry for the fund, they are supposed to be
professionals, but I have a feeling who my comments might hurt.

The Golden rule in investment is, if you do not like the product, do not see
that the company adds value to it, do not think it is value for consumer's
money, do not think that the company is doing justice to its customers, then
irrespective what the balance sheets say, you should not invest in such
company. There are fund managers that operate outside the domain of all
these rules and universally accepted principles. There is simply too much
capital available after years of boom on US and European markets to be
wasted on pyramid schemes. Last year, John Galbraith, in an interview with
FT said something like " There is more money in the mutual funds that the
intelligence available to manage it." And he was talking in the context of
US. Hedge fund managers have been running amuck in emerging markets and
their company has proven dangerous to Russian economy and their investors
alike.

Mr. Devane is certainly free to reject my advice but I am sure that those,
burnt by the events of past two years in Russia will have their own opinion
on the matter. While most are staying away, those who come in to invest
again, would be well advised to go deeper into the business and practices of
companies they are being offered to invest in.

Now Mr. Devane thinks that this is all amateurish rubbish and "yellow
journalism." Well, if this is yellow journalism, Warren Buffet would be Hugh
Hefner of investment strategies.

Mr. Devane also thinks that I am an amateur. I certainly am not managing
director of a research and advisory firm but take heart in the fact that I
did not lose anything on the Russian stock market despite having had a
considerable exposure in 1996. I disinvested because of the reasons I cite
above. I took my own councel. I even sold my GKO positions in June last
year...Sorry!

That is not say that hands on direct investments do not lose money. They do,
all the time. But at least we know that money is not being siphoned off to
Switzerland or Bahamas.

*******

 

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