August 21, 1999    
This Date's Issues: 3454 • 3455 •

Johnson's Russia List
#3454
21 August 1999
davidjohnson@erols.com

[Note from David Johnson:
1. Moscow Times: Roy Medvedev, Yeltsin Will Quit Soon.
2. AFP: Yeltsin's friends in frantic search for new leader.
3. Financial Times: RUSSIA: The robbery of nations. Billions of dollars 
are flowing out of the former Soviet Union, say John Thornhill and Charles 
Clover.
4. AP: Report: Ex-Russian Premiers To Unite.
5. Edward Lozansky: New Russian Newspaper out of Washington & Moscow.
6. William Mandel: Outside Moscow.
7. Interfax: RUSSIA ACCUSES NATO OF TRYING TO REVISE ACCORDS ON KOSOVO.
8. Interfax: OPERATION IN DAGESTAN MAY LAST MONTHS - FEDERAL COMMANDMENT.
9. Foreign Policy Research Institute: Stephen Moody, THE VIRTUAL MONETARY 
FUND AND RUSSIA'S CURRENT INDUSTRIAL EXPANSION.
10. AP: Progress Seen With Russia Scientists.
11. AP: Greg Myre, Longstanding Hatreds Fuel Russia War.]

*******

#1
Moscow Times
August 21, 1999 
Yeltsin Will Quit Soon 
By Roy A. Medvedev 
Roy A. Medvedev, the author of Let History Judge, is a Russian historian 
living in Moscow. His latest book Kapitalizm v Rossii? was published in 
Moscow in 1998. He contributed this comment to The Moscow Times. 

In announcing that the new prime minister, Vladimir Putin, would be his 
nomination for the presidential post, President Boris Yeltsin made it clear 
to Russian politicians that he is preparing to take early retirement - 
perhaps very soon. 

Putin, who is so little known that his name has not figured in the election 
campaign that is already under way, has very little chance of being elected 
president in June 2000. Yeltsin's personal support will not add to his 
popularity. 

But Putin will automatically become acting president if Yeltsin gives up the 
post before the end of his term. According to the Constitution, if the 
president dies or resigns, presidential power is transferred to the prime 
minister for three months, during which time new elections must be held. In 
those three months, Putin, with the combined posts of prime minister and 
president, would have almost unlimited power. Yeltsin and his immediate 
circle hope that this power would give him a jumping-off point from which to 
make the leap into the Kremlin through democratic elections. 

And in the three months before the elections, Putin can play the same role 
for Yeltsin, his family and his inner circle that U.S. President Gerald Ford 
played for Richard Nixon after Nixon's resignation in 1974. On Sept. 8, 1974, 
President Ford granted a full pardon to Nixon for any laws that he might have 
broken, guaranteeing a halt to investigations that had been launched against 
Nixon. Yeltsin and his administration need a similar amnesty. 

Objective conditions have arisen in Russia this year for the Communists to 
come to power by democratic means. Russians perceived NATO's war against 
Yugoslavia as a "demonstration of force" directed against Russia. The 
unexpected and unfounded dismissal of Yevgeny Primakov, the most popular 
prime minister in Russia since Alexei Kosygin, was perceived to be the result 
of a plot by oligarchs - bankers and other big property owners who had become 
anxious about the campaign against corruption. The anti-corruption measures 
had become much broader and had extended to the circle of people close to 
Yeltsin, or "the family." 

Although Primakov did not belong to a political party, his government was 
left of center. After Sergei Stepashin's appointment as prime minister, 
government policy took a sharp turn to the right. As a result, left-wing 
forces became more active and the position of Gennady Zyuganov, the leader of 
the Communist Party of the Russian Federation, was strengthened. He emerged 
in first place in public opinion surveys of presidential candidates. 

The move to the left was also intensified by the deterioration in the 
economic indices and the rise in food prices caused by severe drought and a 
very poor harvest. In the communist past, the government subsidized the price 
of bread and it did not depend on the harvest. Propaganda and promises cannot 
argue away a fall in the standard of living. 

In these circumstances, a plan was formulated to ban the Communist Party. The 
Communists would be provoked into demonstrating and protesting by closing the 
Mausoleum on Red Square and reburying Lenin's body in a cemetery in St. 
Petersburg. However, this plan has been postponed temporarily, since the 
political and economic elites realize that demonstrations might not occur, 
and respect for government might simply fall still further. 

There was only one remaining way to prevent a Communist victory - uniting the 
center-left political groups and small social democratic organizations with 
the regional governors, leaders of the national republics and the mayors of 
large cities. This plan was put into operation at the beginning of August 
when the Fatherland and All Russia political movements formed a coalition. It 
put the upper house of parliament, the Federal Council - consisting of 
governors, national republican leaders and the mayors of Moscow and St. 
Petersburg - in opposition to the president. 

This new political coalition will ensure that the right wing is defeated in 
the parliamentary elections, but it does not guarantee a victory over 
Zyuganov and the Communist Party. To achieve that, the new bloc needs a 
genuinely popular leader. The only possible candidate is Primakov, who stands 
outside parties and blocs. 

When Primakov was made to retire in May, he announced that he was leaving 
politics and would write his memoirs. In October, he will turn 70. But his 
publishing plans have been interrupted for the moment. He must, literally and 
figuratively, save the fatherland by becoming leader of the Fatherland-All 
Russia bloc and putting his name forward as a candidate for the presidential 
elections in 2000. 

Moscow Mayor Yury Luzhkov, who has frequently announced his intention of 
contesting the presidential elections and who established the Fatherland 
bloc, has probably agreed to take the post of prime minister. As a talented 
organizer but a mediocre politician, this role suits Luzhkov better than the 
presidency. 

A combined ticket of Primakov and Luzhkov would almost certainly guarantee 
Primakov's victory in the presidential election. But the hopes of the new 
bloc for the State Duma elections in December are premature. The 
Fatherland-All Russia bloc is not a political party, but a coalition of 
elites. It opposes Yeltsin but is based not on the people, and not even on 
the middle class (which does not yet exist in Russia), but on governors and 
mayors. It is a revolt of the boyars against the tsar. 

For the tsar himself, the boyars may be more dangerous than a popular 
uprising. This is why Yeltsin has begun to prepare his departure from the 
throne in favor of a personally selected successor. He hopes to end the game 
in a draw. The completely unexpected "Putin move" took everyone by surprise. 
But the "Primakov countermove" was even stronger. The end game is very close. 

******

#2
Yeltsin's friends in frantic search for new leader

MOSCOW, Aug 20 (AFP) - Russia's pro-Kremlin forces held talks Friday in a 
frantic bid to build a challenge to a powerful opposition bloc forged by the 
Moscow mayor and ex-premier Yevgeny Primakov.

However President Boris Yeltsin's allies were reported to have spent more 
time fighting each other than their future election foes, and the Kremlin's 
own strategy remained in flux.

"The talks are not easy," conceded Boris Nemtsov, a former first deputy 
premier with reformist credentials and long-term presidential hopes.

"But everyone, including our most ambitious politicians, agree that Sergei 
Stepashin should lead the right-wing bloc."

The Kremlin was shaken when mayor Yury Luzhkov and hawkish ex-premier 
Primakov linked up to establish an anti-Yeltsin coalition that is likely to 
rival the Communists for dominance in December's parliamentary polls.

A strong performance in the State Duma serves as a springboard for candidates 
in June's presidential elections. But Russia's pro-Kremlin forces are 
scattered into tiny factions with little public appeal of their own.

Just as it unsuccessfully tried to do four years ago, the Kremlin 
administration is angling to mould all the relatively reformist parties into 
one -- and stick a well-liked figure on top.

But personal rivalries and a reported sense of Kremlin panic have turned this 
into a tricky task.

Yeltsin named new premier Vladimir Putin as his hand-picked successor when he 
abruptly fired Stepashin last week.

His low-profile chief of staff, Alexander Voloshin, who disliked the 
strong-willed Stepashin and sought a more obedient cabinet chief, was 
reported to have influenced Yeltsin's decision.

Yeltsin however is known for wild mood swings and informed political 
observers believe Putin's top billing will be brief.

"Putin has been named as a temporary successor, who hides at least three 
other candidates behind his back," the Nezavisimaya Gazeta wrote.

The paper further cited sources as saying that Stepashin currently 
represented the Kremlin's top pick to replace Yeltsin as president.

And yet Stepashin has also run into trouble. On Thursday he tried and failed 
to build a coalition with liberal opposition leader Grigory Yavlinsky.

"Stepashin has still not formed a strategy for participating in the 
elections, which may exclude him from the proceedings altogether," the United 
Financial Group investment house said in a research note.

The Vremya daily meanwhile reported the main hitch in the right-wing alliance 
was the refusal by Viktor Chernomyrdin -- a dour former premier who heads the 
floundering Our Home Is Russia movement -- to play second fiddle to anyone in 
the potential alliance.

The Kremlin was dealt another blow when one of Chernomyrdin's top deputies, 
Vladimir Ryzhkov, said after coalition-building talks Friday that the party 
would probably run in the Duma elections "on its own."

Chernomyrdin however cannot simply be dumped from the new pro-Kremlin bloc. 
He remains useful due to his old links to the energy gas giant Gazprom -- 
this month ranked Russia's second-largest company after oil major LUKoil.

Gazprom, now headed by Rem Vyakhirev, has reportedly taken a liking to the 
Luzhkov alliance. The Russian media is filled with speculation that the 
Kremlin is desperately trying to reshuffle the company's management in its 
favor.

The company is partially owned by the government, although most of the 
state's shares are currently managed by Vyakhirev.

While tacking Gazprom and trying to make peace among Russia's fractious 
right-wing forces, the Kremlin has also sent one of its emissaries to the 
provinces in a bid to plug up the flow of powerful local bosses who are 
joining the Luzhkov-Primakov team.

Boris Berezovsky, an oil and media tycoon who is reported to be closely 
linked to the Kremlin, has already held private talks with Eduard Rossel -- 
governor of the industrial hub of Sverdlovsk who has been invited into the 
anti-Kremlin alliance.

Berezovsky was also due to meet with Krasnoyarsk governor Alexander Lebed, 
who is mulling a run on the Kremlin himself. 

****** 

#3
Financial Times
21 August 1999
[for personal use only]
RUSSIA: The robbery of nations 
Billions of dollars are flowing out of the former Soviet Union, say John 
Thornhill and Charles Clover

In the dying days of the Soviet Union, as ethnic tensions flared and the 
economy crumbled, the Communist party began secreting part of its vast assets 
abroad. Fearful of losing power, the party nomenklatura instructed the KGB to 
set up a web of foreign banks and companies to channel their wealth overseas. 
Soviet embassies, trade delegations and central bank subsidiaries all became 
part of this sophisticated state-sanctioned machine.

Nobody knows how much money leaked out of the Soviet Union in the late 1980s 
and early 1990s, but it is thought to have run into billions of dollars. 
Russia's first post-Soviet government hired Kroll Associates, the private 
detective agency, to try to track down where the Communist party money had 
disappeared. The agency's inquiries were quickly squashed by powerful 
interests in Moscow.

Some of the money later returned to Russia and other former Soviet states, 
enabling the nomenklatura to buy privatised companies and reassert its 
political influence. To this day, the 12 countries of the Commonwealth of 
Independent States remain in the grip of former Communist party officials. 
But much of the cash has probably remained abroad, invested in everything 
from houses in London to night clubs in Budapest and US Treasury bonds. It 
finances extravagant lifestyles for many Russian jetsetters.

Nor did the flow of money out of Russia cease with the fall of Communism. 
Indeed, the move to a market economy may simply have accelerated the process. 
A money laundering scandal in New York this week is only the latest example 
of capital flight to emerge. Citing US law enforcement officials, the New 
York Times newspaper reported that the Bank of New York may have been used to 
handle up to $10bn from suspect Russian sources since early last year.

If the individuals exporting Russian money have changed, the network remains 
largely the same. Many of the experts who worked for the Communists found 
lucrative employment as the former Soviet Union lurched towards a market 
economy in the early 1990s. Oleg Babinov, director of the Moscow office of 
Risk Advisory Group, a business intelligence consultancy, says criminal 
gangs, commercial banks and industrial companies were all keen to take 
advantage of their expertise.

"By the time all the CPSU [Communist Party of the Soviet Union] money had 
been laundered and legitimised, the mechanisms that had been set up started 
accepting other clients," he says. "It was a business arrangement available 
to a fairly large group of people with the right connections."

The New York Times report suggested that the Bank of New York accounts were 
linked to Semyon Mogilevich, a 53-year-old businessman originally from 
Ukraine, who it said was being investigated by international law authorities. 
He was said to be suspected of involvement in drugs running, arms trafficking 
and prostitution rings.

But bankers in Moscow and New York find it inconceivable that Mr Mogilevich 
alone could have been handling such colossal sums of money. The $10bn that is 
believed to have passed through the New York accounts is equivalent to about 
40 per cent of the Russian government's budget or 6 per cent of the country's 
post-devaluation gross domestic product. They suspect some big Russian 
corporations or banks must have been involved.

Russia's largest exporters have certainly grown adept at channelling much of 
their money offshore. In spite of stiffer central bank regulations introduced 
earlier this year, Russian oil and gas companies have seemingly been 
under-reporting how much profit they make abroad through convoluted transfer 
pricing mechanisms. In spite of running a big trade surplus so far this year, 
the central bank's reserves have been under pressure, suggesting there is 
still an alarming level of capital flight.

Earlier this week, Fitch IBCA, the international credit rating agency, 
estimated that $136bn of capital had poured out of Russia between 1993 and 
1998, far exceeding the capital inflows from foreign investors and 
international financial organisations.

Western banks face enormous difficulties in trying to decide on the 
legitimacy of much of the money emanating from the former Soviet Union. Some 
of Russia's biggest banks and companies are suspected of having close links 
with criminal organisations - even if they are not controlled by them. Even 
the endorsement of a Russian state organisation means little, given the 
prevalence of corruption in the bureaucracy.

"There is such a mix of legitimate and illegitimate businesses in Russia that 
it is extremely difficult to distinguish between the two," says Mr Babinov. 
"Criminals have turned into legitimate businessmen. They may run soft drinks 
companies or steel plants but they still use the same practices and methods 
as they did when they were drug dealers."

Western law enforcement agencies have been stepping up their surveillance of 
capital flows from the former Soviet Union. In particular, the Swiss 
authorities - stung by controversy over how their banks handled money stolen 
from Holocaust victims - have been pursuing investigations into "dirty money" 
from the former Soviet Union now sitting in local bank vaults. The Swiss 
authorities estimate the figure may be as high as $40bn.

At the request of the Russian prosecutor general, the Swiss authorities have 
recently been investigating the foreign finances of Pavel Borodin, a top 
Kremlin official, who has placed orders worth hundreds of millions of dollars 
to remodel the Kremlin and other government offices. A team of investigators 
is looking into allegations that Mr Borodin took bribes from Mabetex, a Swiss 
contractor involved in the renovation work. The investigators raided 
Mabetex's offices in Lugano in January. Both Mabetex and Mr Borodin fiercely 
deny the charges.

Earlier this week, the Swiss authorities also froze a series of bank accounts 
containing about $65m. The Swiss media have reported the move was linked to 
an investigation into Andava, a Swiss-based company, which handled the 
foreign finances of Aeroflot, Russia's main international airline. Earlier 
this year, Russian law officials issued an arrest warrant against Boris 
Berezovsky, the influential financier and powerbroker, in connection with 
money laundering allegations involving Andava. Mr Berezovsky subsequently 
persuaded the prosecutor general to drop the charges against him.

One of the most striking cases to come to light of the connections among 
former Soviet officials, large companies and money laundering is in Ukraine. 
Last year, the Swiss authorities arrested Pavlo Lazarenko, the former 
Ukrainian prime minister who was travelling on a Panamanian passport, and 
charged him with money laundering. Yevhym Zviagelsky, one of Mr Lazarenko's 
predecessors as prime minister, fled to Israel in 1994 to evade investigators.

The allegations against Mr Lazarenko centred on the looting of many of 
Ukraine's most profitable export factories using a variety of barter schemes. 
Mr Lazarenko allegedly benefited from a scheme under which a gas trading 
company received exclusive rights to sell natural gas to some state 
enterprises. Essentially, it was a way to buy valuable export goods at cost, 
without paying taxes. The goods could then be exported at below-market prices 
to offshore trading companies linked to Mr Lazarenko.

While Mr Lazarenko was prime minister in 1996, at least $72m in profits from 
Ukrainian state factories went to a Cyprus-registered company, Somolli 
Enterprises. The profits were then deposited in Mr Lazarenko's bank accounts 
in two Swiss banks before being transferred to accounts in the Caribbean.

One of the most alarming features of the case - at least from the Swiss point 
of view - was how compliant some Swiss banks appear to have been in dealing 
with suspect transactions. The Swiss authorities have launched an 
investigation into whether either of the two banks violated local laws. 
Banque Populaire, which handled $43m of the money, was an affiliate of Credit 
Suisse, one of Switzerland's biggest banks, at the time.

Public outcry in the west about "mafia money" from the former Soviet Union 
has until now been chiefly directed at the supposed criminality of much of 
the post-Soviet elite. The role of western banks has attracted less 
attention. Yet the awkward fact is that many banks - inadvertently or 
otherwise - have provided services to Russia's shadier and richer 
capitalists. This week's events in New York may give them some pause.

******

#4
Report: Ex-Russian Premiers To Unite
By ANGELA CHARLTON
August 20, 1999

MOSCOW (AP) - Three former Russian prime ministers reportedly agreed Friday 
to form a centrist political alliance ahead of December parliamentary 
elections, apparently to counter mounting opposition to Boris Yeltsin and his 
coterie. 

The bloc will be led by Sergei Stepashin, who was sacked as premier last 
week. It would include political parties led by two other ex-premiers: Viktor 
Chernomyrdin's Our Home is Russia and Sergei Kiriyenko's New Force, the 
Interfax news agency reported. 

Russia's politicians and parties are staking out positions for the 
parliamentary elections and presidential elections next June. The battle 
lines are mostly forming not according to ideology, but personal loyalties - 
whether they are for or against Yeltsin and his inner circle. 

The new union - dubbed by Russia's NTV television ``The Former Premiers' 
Club'' - would likely be pro-Yeltsin, even though he fired all of them over 
the past year and a half. 

It was unclear whether the union would pack much punch. Stepashin, 
Chernomyrdin and Kiriyenko have little electoral support. Yeltsin is widely 
disliked, and many voters link his premiers with the poverty and loss of 
global clout associated with the Yeltsin regime. 

The union was apparently a response to an alliance between two Yeltsin foes, 
Moscow Mayor Yuri Luzhkov and yet another former prime minister, Yevgeny 
Primakov. 

Luzhkov and Primakov are topping the polls as perspective presidential 
candidates, although neither has formally declared candidacy. Their alliance 
hopes to make a strong showing in the parliamentary elections, creating a 
support base for one of them to run for president. 

Yeltsin is barred by law from seeking a third presidential term in 2000, but 
his circle has made it clear it wants to influence the race to protect its 
own interests. Yeltsin says he wants his latest prime minister, Vladimir 
Putin, to become his successor. 

The Russian media have speculated that Yeltsin fired Stepashin for his lack 
of action against a growing number of Kremlin foes, and named Putin, an 
ex-KGB agent and former national security chief, to take a tougher line 
against the opposition. 

The trio of ex-premiers discussed their alliance at Stepashin's country home 
outside Moscow on Friday. Also attending the meeting was close Yeltsin 
adviser Anatoly Chubais. The three were to meet again Saturday, Interfax 
said, citing sources close to the ex-premiers. 

Putin had convened the same group Wednesday. It was unclear whether he would 
have any role in their union. 

Earlier Friday, Putin said his Cabinet wouldn't meddle in political 
infighting. ``The government must not support any coalitions,'' he said. ``It 
must stay above political battles, dealing with economic issues.'' 

Yeltsin was in the Kremlin on Friday to meet with members of the new Cabinet, 
which he and Putin finished forming Thursday, reappointing almost all the 
same officials. 

*******

#5
From: Lozansky@aol.com (Edward Lozansky)
Date: Fri, 20 Aug 1999
Subject: New Russian Newspaper out of Washington & Moscow 

A group of Russian and American scholars has decided to launch a new Russian 
language newspaper out of Washington, D.C. named Kontinent, USA. The paper 
will be distributed both in USA and Russia. The first issue will be published 
September 9, 99 and it will start as a biweekly edition. Hopefully, it will 
become a weekly in a year or two. This paper is an outgrowth of the famous 
dissident literary magazine Kontinent which was founded by Russian exile 
writer Vladimir Maximov in Paris in 1974. It is now published in Moscow 
(Editor-in-Chief Igor Vinogradov) and its issue #100 is expected later this 
year. The paper will publish analytical information and reviews on US - 
Russian and East - West relations. Readers and contributors of Johnson list 
are invited to submit their articles electronically to 
<Kontinent@RussiaHouse.org>. Ideally we prefer to receive the text in Russian 
as an attached winword.doc file but accepted English texts will be translated 
by our staff. Those interested in subscribing or placing the ads please send 
inquires to the above address or call 202-986-6010.

*******

#6
Date: Sat, 21 Aug 1999
From: William Mandel <wmmmandel@earthlink.net>
Subject: Outside Moscow

A friend with whom I spent twelve days in Kuzbass a year ago, and then
traveled to Moscow via Trans-Siberian in compartments with Russians has
just been back, spending most of three weeks in Kuzbass. He tells me
that no one pays any attention to politics, to government in Moscow, and
life goes on, at all levels and in all ways. Perhaps more attention
should be given to that phenomenon than to the musical chairs game in
the Kremlin. 

*****

#7
RUSSIA ACCUSES NATO OF TRYING TO REVISE ACCORDS ON KOSOVO

MOSCOW. Aug 20 (Interfax) - The leadership of NATO and the Kosovo
peacekeeping force want to revise previous agreements concerning
Russia's participation in the operation, Defense Ministry Foreign
Cooperation Chief Leonid Ivashov said at a press conference in Moscow
Friday.
Russia has been offered other zones of responsibility, different
from those, determined at the Helsinki talks, Ivashov said.
Russian peacekeepers have fully been deployed only in the U.S. and
British sectors, he said. These issues were not finalized with the
commanders of sectors North and South, controlled by French and German
contingents respectively.
"We reject any attempts to revise agreements, which detail the
deployment of our contingent," he said.
The situation in Kosovo remains tense because "Yugoslavia's
sovereignty and participation in the settlement process are being
ignored. The issue of demilitarizing the Kosovo Liberation Army remains
unresolved," he said.
The Kosovo border with Albania and Macedonia is not protected,
permitting "an uncontrolled flow of militants, arms and drugs," he said.
"If analyzed today, we can say that the peacekeepers' mandate is
executed properly only with regard to the deployment of security forces.
Its other aspects either are not carried out, or the implementation is
sluggish," he said.
"The Kosovo mandate cannot be successfully executed without close
cooperation with the Yugoslav leadership," he said.
Foreign Ministry special representative for Former Yugoslavia
issues Boris Maiorsky said at the press conference that the U.N.
Security Council resolution for a Kosovo settlement permits the
international contingents to use force against armed formations there.
Maiorsky reiterated that the conditions set up to disarm the KLA
were "too lenient and the dates were drawn-out." These issues were
settled without Russia's consent.
The KLA was to lay down 60% of its arms by June 20, he said.
However, the "quantity of the surrendered guns is much lower," he said.
"Furthermore, those who engage in illegal actions are the ones with"
weapons, he said.
NATO actions "demonstrate its double standard," he said.

******

#8
OPERATION IN DAGESTAN MAY LAST MONTHS - FEDERAL COMMANDMENT

MAKHACHKALA. Aug 20 (Interfax) - The operation of quelching the
Chechen fighters in Dagestan will take several months estimates the
commander of federal forces in that republic.
Routing the Islamists' groups in the Botlikh district "has somewhat
dragged out", as military sources told Interfax Friday. Despite massive
bombing and missile strikes aginst the rebels' positions in Ansalta,
Ashino, Tando, Shodroda, and Rakhata, the federal forces have failed to
take them under control.
"In the past few days the front-line aviation stepped up the
bombing. Where it was 10-12 strikes at the beginning of the week, now
they are up to 30," say the military sources. In their opinion, the
final phase of the operation "may not begin before next week."
The federal command starts regrouping the forces, setting the main
directions and combat missions "which may last till December."
One of the principal directions may be North Ossetia which is to be
handled by the Interior Troops commander General Vyacheslav Ovchinnikov.
It is in Ossetia bordering on Ingushetia that Islamists are known
by military intelligence to organize a number of provocations in order
to distract attention from Dagestan.
Meanwhile, in Dagestan troops are still concentrated on the Kizlyar
and Hasavyurt regions where an active assault by the Chechen fighters is
likely. The commander expects the Islamists to move the units
concentrated now on the Chechen territory opposite the Botlikh district
there.

*******

#9
From: Foreign Policy Research Inst <fpri@aol.com>
Date: Fri, 20 Aug 1999 
Subject: Russia's Virtual Monetary Fund by Stephen S. Moody 

Foreign Policy Research Institute
A Catalyst for Ideas

THE VIRTUAL MONETARY FUND
AND RUSSIA'S CURRENT INDUSTRIAL EXPANSION
by Stephen S. Moody

August 20, 1999

Stephen S. Moody is a trustee of the Foreign Policy Research
Institute, with extensive business experience in Russia.

One year ago the Russian government defaulted on about $40
billion of short-term debt. The ruble plummeted to sixteen from
six to the dollar; Russian inflation soared, Russian banks
shuttered their windows and barricaded their doors, Russian
stocks fell to damn near zero. Russia, headline banners
screamed, had melted down. And in a fit of executive privilege,
Boris Yeltsin fired his prime minister -- a scene grown all too
common through the ensuing months.

That was a year ago. Today, of course, the year's third new
prime minister is making headlines. But something far stranger is
happening in Russia, and it's not getting much press: Russia's
industrial economy is expanding. Russian industrial production
grew 3.9 percent in the first seven months this year; it's now
some 11 percent above pre-crash levels. And, as if celebrating
the anniversary of the August crash, government tax receipts are
rising. A (former) First Deputy Prime Minister announced
recently that tax receipts in July came in fifteen percent above
target. And there are widespread reports of import substitution.
Import substitution, as a rule, doesn't make headlines.

Any sign of economic life in Russia would be welcome, of course,
were it not for one perplexing fact: there are no banks. The
Russian banking system collapsed a year ago in the August crash.
How do you launch industrial recovery without the banks -- or the
money -- to finance it? The money's not coming from foreign
investors; foreign investment was down 40 percent in the first
quarter of this year. Nor is it coming from the IMF, which is
suddenly shy about disbursing funds to Russia. More vexing
still, the money's not coming from the Russian Central Bank
(RCB). If the RCB were wantonly printing rubles, as many have
long feared it would, then inflation rates wouldn't be falling.
According to preliminary estimates, Russian inflation in June was
1.4 percent, down from 2.2 percent in May.

Absent banks, foreign investment and inflation, one is forced to
conclude that the money (actually, the credit) financing Russia's
industrial recovery is coming from the "virtual economy" -- the
barterers. Russia's current industrial expansion appears to
refute the contention that barter simply masks deceptive pricing
among enterprises, and that its primary benefit to practitioners
is tax evasion. To the contrary, it appears barter has allowed
Russian industry to capitalize on the economic benefits of the
August devaluation, channeling redirected Russian consumer
spending into real increases in capacity utilization and, as
recent anecdotal evidence suggests, genuine import substitution -
- things the Russian commercial banking system, even in its
heyday, was unable or unwilling to do. The "virtual economy," it
seems, isn't quite as virtual as some thought. Virtual economies
don't spawn real growth.

Real growth notwithstanding, demonetization still cripples the
Russian economy. Since 1994, at least, the broad measure of
Russian money supply (M2) has never exceeded fifteen percent of
GDP, compared with 56 percent in the United States and more than
100 percent in some West European economies. Likewise,
commercial bank credits to the Russian economy have also remained
at consistently low levels -- ten to fifteen percent of GDP.
Under the best of circumstances, such extraordinarily low levels
of money and credit could never have adequately funded even half
of reported Russian GDP. This observation led to the novel
notion that, if money supply and credit are real, then the
unfunded portion of reported GDP must be, well, virtual -- a
fiction. GDP, argue the virtualists, is really what money supply
and bank credit imply it should be, and all the rest is phony
barter transactions or phony barter prices which, after the dust
hits the filter, result in dramatic shortfalls in government tax
receipts -- the acid test for real economic growth. The analysis
may be flawed, but it adds a delightfully arcane phrase to the
vocabulary of economics: "Virtual Economy." Unfortunately, the
phrase enjoys greater currency than the ruble.

The real explanation for the demonetized state of the Russian
economy and the discrepancies among GDP, money supply and bank
credit isn't barter, anyway. It's nonpayments (neplatezhi, in
Russian). Nonpayments are essentially accounts payable.
Currently, the total stock of nonpayments in Russia amounts to
3.1 trillion rubles -- about 100 percent of GDP. Not all of the
payables are commercial. About half are taxes arrears, penalties
and interest due tax collectors; others are government pensions
and wage arrears due civil employees (teachers, the military, et
al.). Historically, purely commercial accounts receivable
(payables' counterparts) have run at 25 to 30 percent of GDP,
roughly comparable to the level of commercial receivables in the
United States.

The essential difference between Russian accounts receivable and
receivables anywhere else in the world is that only a tiny
fraction of Russian receivables are financed by Russian
commercial banks. As a rule, Russian banks don't make working
capital loans to Russian industry, nor do they discount its
receivables. Russian industry, in fact, finances itself . . .
with the result that its receivables aren't backed by bank loans
and don't show up as demand deposits in banks. Therefore,
obviously, they don't get counted in Russian money supply. And
since they don't get counted in the money supply, the Russian
Central Bank is under no obligation to fund them.
Thus, industrial expansion does not naturally trigger a
commensurate expansion of the money supply. Unfortunately, the
reverse is also true: expanding money supply doesn't necessarily
beget industrial growth. For barter and the stock of nonpayments
also mean that the RCB long ago lost control over credit
formation. A central bank that doesn't control credit formation
isn't a real bank at all; and the rubles it prints aren't real
money. In fact, as Russia's August Crash revealed, the fiction
wasn't barter; it was "ruble stabilization," the Russian banking
system and IMF-led monetarist reform. What good is a stable
currency if nobody uses it? If banks don't make loans and
manufacturers barter and citizens stuff dollar bills into socks
for savings, how effective can monetary policy -- tight or
otherwise -- be? And what good is a monetary fund that doesn't
know real money when it sees it?

Compared to barter, central banks are relatively recent
innovations. So is the IMF. And neither was created solely to
fight inflation. In fact, if you credit the Federal Reserve Act,
a central bank's primary mandates are "to furnish an elastic
currency, [and] to afford means of rediscounting commercial
paper."

By elastic currency, the Act's authors had in mind a money supply
that expands or contracts to accommodate seasonal and cyclical
variations in business activity. The underlying principle
obtains in Russia as it does everywhere else: business activity
will go on regardless of the form of payment -- dollars, rubles,
wampum or barter. If the government wants people to use its
currency, the central bank has to make it available in quantities
sufficient to fund all transactions in the economy, and keep the
cost of holding it (i.e., interest rates) reasonably low. Under
IMF tutelage, of course, the RCB has done neither.

Nor has it encouraged member banks to discount commercial paper,
though the paper indeed abounds. The barter system teems with
commercial bills of exchange (veksel, in Russian) which banks
won't touch because the federal government, on IMF instructions,
refuses to accept them in payment of taxes. Oddly, commercial
paper in Russia is deemed a "monetary surrogate" and considered a
threat to the commonweal. Of course, the IMF didn't prevent the
government from issuing its own "commercial paper" -- the $40
billion or so GKOs (Russian treasury bills) Russia defaulted on
last year -- even though there clearly weren't sufficient tax
receipts to back them. Industry can't pay taxes if there's no
money.

Russian enterprises use barter for cash and nonpayments for
credit because the supply of rubles -- cash and credit -- is too
tight. Russian banks can't make loans to enterprises if there
isn't any money to lend, and enterprises can't pay taxes if there
isn't any money to pay them with. There are no exotic
mathematical formulae for this. As theory goes, it's not much
more than common sense. In Russia, of course, the only thing in
shorter supply than rubles is common sense.

Russia needs rubles -- not dollars. The essence of economic
reform in Russia is remonetization: the RCB has to grow the
money supply, even if it risks inflation -- which it shouldn't,
since production and productivity are rising. The government has
to get Russian banks out of the business of collecting taxes and
into the business of discounting commercial paper. And, in spite
of explicit IMF covenants forbidding it, the government has to
take veksel in payment of taxes; if the Treasury takes them, the
banks will buy them, and nonpayments will start showing up where
they rightly belong -- in the money supply. Veksel aren't
monetary surrogates; they're the real money. Enterprise
"nonpayments" are not, as the IMF contends, the root cause of
Russia's poverty; they're its primary source of wealth. If
nothing else, Russia's current industrial expansion is testimony
to that.

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#10
Progress Seen With Russia Scientists
By NICK WADHAMS
August 20, 1999

MOSCOW (AP) - A U.S. congressional delegation working to keep underpaid 
Russian defense scientists from selling their knowledge to rogue nations made 
progress in talks this week, officials said Friday. 

Ellen Tauscher, a California Democrat, and other delegation members spoke in 
Moscow after traveling to the closed city of Snezhinsk in Russia's Ural 
Mountains. Members of the delegation said defense scientists in Snezhinsk are 
warming to the idea of using their expertise in the private sector instead of 
selling their knowledge of weaponry to the highest bidder. 

The delegation was in Russia on behalf of a U.S. government project called 
the Nuclear Cities Program. It aims to bring private sector high-tech jobs to 
Russia's scientific centers so the scientists there aren't lured abroad. 

The program will ``not only help us with national security but is clearly 
moving Russians toward the new economy, toward stability, toward self 
sustaining, long-term gainful employment,'' Tauscher said. 

According to U.S. intelligence estimates, at least 3,000 underpaid scientists 
with expertise in weapons of mass destruction have left the country in the 
last eight years. The problem, industry experts say, is wages. 

Scientists and other workers at Russia's defense centers saw their high wages 
and benefits disappear with the Soviet collapse. They now earn an estimated 
$150 a month, the delegation said. 

The United States fears that countries like Iran, Iraq, Libya and North Korea 
will try to hire on those scientists to help build weapons of mass 
destruction. 

``At some point in time your hope just can't last forever without some 
encouragement,'' said delegation member Ron Cochran, executive officer at 
Lawrence Livermore Laboratory in northern California. ``What we need to avoid 
is any situation which causes them to lose hope.'' 

Snezhinsk in particular was a large concern. It has the site of several 
strikes by scientists demanding wage payments, and the Commerce Department 
has warned that institutes there may have been involved in nuclear 
proliferation activities. 

But members of the delegation said Friday they were encouraged by what 
appeared to be a shift in the scientists' thinking. 

Previously, ``it was just beneath the dignity of the scientists to think that 
they would stoop so low as to produce a product that didn't make a big light 
in the sky and lots of energy,'' said Janet Hauber, with Lawrence Livermore. 
``This time when we traveled there we were almost overwhelmed with 
commercial-style proposals.'' 

Bringing the scientists around, though, is only half the battle for the 
Nuclear Cities Program. It also is trying to match the scientists with 
high-tech U.S. companies that could use their expertise. 

The goal: to create a high-tech commercial sector in Russia similar to 
America's Silicon Valley. 

Though the project just started last year and no deals have been signed, 
computer chip maker Intel and software-maker Oracle are interested. Officials 
believe medical technology and telecommunication firms also may invest. 

This week's trip had political implications as well. It was part of a booster 
effort for the Nuclear Cities Program before what is expected to be a tough 
appropriations vote in Congress next month. 

Tauscher admitted that it has been difficult to get the program moving. 
Obstacles, she said, include Russia's struggling economy and a daunting 
bureaucratic system that makes closed cities like Snezhinsk hard to visit. 

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#11
Longstanding Hatreds Fuel Russia War
By GREG MYRE
August 20, 1999

MOSCOW (AP) - Even in its diminished state, Russia's military still has the 
firepower to crush a stubborn band of Muslim rebels seeking to carve out an 
Islamic state along Russia's southern frontier - at least on paper. 

Moscow is woefully short, however, of the money and will needed to persuade 
the impoverished people of the Caucasus Mountains that they have a prosperous 
future as part of Russia. 

All things being equal, Russia should eventually prevail in its battle in the 
barren mountains of Dagestan. But Moscow is losing the long-term war for the 
hearts and minds of Muslims and other minorities who have faced centuries of 
discrimination and second-class status. 

More than 1,000 militants based in breakaway Chechnya crossed the mountain 
border and entered Dagestan on Aug. 7, capturing several isolated hamlets. 
After two weeks of daily clashes, the rebels still hold the villages despite 
Russian bombing raids and a troop buildup now believed to number several 
thousand. 

Russia exercised its military might Friday by sending war planes against 
Islamic rebel units inside breakaway Chechnya, while also raiding villages 
held by the militants in neighboring Dagestan, the Defense Ministry said. 

The airstrikes on two villages inside Chechnya were a rare case of Russian 
forces attacking the rebellious territory. 

Russia has three strong reasons for trying to suppress the rebels quickly: It 
wants to fence off the chaos in neighboring Chechnya; it needs to protect a 
key oil export route; and it fears a tide of Islamic fundamentalism washing 
up from other countries in the volatile region. 

Yet these are all massive tasks, not goals the military can achieve in one 
sweeping offensive. 

``Islamic radicalism cannot be uprooted by wiping out several mountain 
villages,'' political analyst Andrei Piontkovsky wrote this week in the 
Moscow Times. ``It is a long-term social problem which (Moscow) can only 
tackle with a great deal of spending and constructive effort.'' 

Russia's politicians and generals insist they learned painful lessons from 
the 1994-96 war in Chechnya, where the army withdrew in humiliation and the 
territory descended into anarchy. 

Yet Russia's approach in Dagestan, while more cautious and on a smaller 
scale, still appears to depend almost entirely on the military. 

The Kremlin has failed to build strong ties with regional leaders and has not 
solved any of the simmering political disputes plaguing the Caucasus. The 
region remains saturated in poverty, receiving little assistance from Moscow. 
And other Russians frequently utter racial slurs against the darker-skinned 
people of the Caucasus and routinely blame them for the country's high crime 
rate. 

``Russia has no program for developing the Caucasus,'' said Alexei 
Malashenko, an expert on Russia's Muslims at the Carnegie Endowment for Peace 
in Moscow. ``Russia's whole experience in the Caucasus has been one of 
suppression, not development.'' 

Russia fought repeated wars in the 18th and 19th centuries to systematically 
bring dozens of ethnic groups into the Russian empire. Moscow was viewed as a 
conquering power throughout the Caucasus, and both sides harbor deep 
suspicions of the other. 

When the Soviet empire splintered in 1991, three independent states emerged 
from the region - Georgia, Armenia and Azerbaijan. 

Tiny Chechnya also demanded independence and was refused, only to launch its 
separatist war in 1994. Chechnya has run its own affairs for nearly three 
years, but the territory has been rendered ungovernable by heavily armed 
criminal gangs that include many of the same young men who fought the 
Russians. 

This lawlessness has infected neighboring regions, including Dagestan, which 
sits on the west coast of the Caspian Sea. 

A major oil export pipeline from the Caspian Sea runs across Dagestan and 
Chechnya, and the current conflict threatens to further complicate security. 

Chechen rebels repeatedly sabotaged the pipeline during their war, and the 
Russians don't want a repeat experience. Dagestan doesn't have oil itself, 
but the wider Caspian oil development depends on huge investments from major 
Western companies who don't want to find themselves caught in the cross-fire. 
In the economically depressed Caucasus, oil transit revenues are a major 
moneymaker. 

Meanwhile, the Russians give daily assurances that the conflict will end 
soon, but the signs point to protracted fighting. 

The militants, made up of Chechens, Dagestanis and other Muslims from the 
former Soviet Union, have not been able to infiltrate beyond the villages 
they captured initially. 

The Russians have begun to squeeze them from three sides, yet the rebels have 
made no retreat to Chechnya, the one direction they can move with relative 
freedom. 

The militants were not greeted by a groundswell of popular support in 
Dagestan, as they might have expected. In Chechnya, the homogeneous 
population overwhelmingly supported independence from Russia. 

Dagestan's 2 million people are a patchwork of more than 30 ethnic groups who 
often quarrel among themselves. The republic's secular politicians and 
moderate religious leaders have sided with Moscow, and Dagestani police and 
civilian volunteers have taken up arms against the rebels. 

EDITOR'S NOTE: Greg Myre is the Moscow news editor of The Associated Press. 

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