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CDI Library > Johnson's Russia List

Johnson's Russia List
 

 

August 23, 1999   
This Date's Issues: 3458  3459  

Johnson's Russia List
#3459
23 August 1999
davidjohnson@erols.com

[Note from David Johnson:
1. The Independent (UK): ROADSIDE GIRLS OF RUSSIA SELL SEX FOR 
POUNDS 2.50.

2. The Times (UK): Michael Binyon, Russia's health crisis strikes 
the weaker sex.

3. Washington Post editorial: A Rocky Path for Russia.
4. STRATFOR.COM: Putin: Yeltsin's Madness or Silent Coup? 
5. Financial Times: Quentin Peel and Robert Chote, Moscow considers 
tax to control capital flight.

6. Los Angeles Times editorial: Crossroads for Russia.
7. The Russia Journal: Adell Karian, Russia's dirtiest secret: Where 
the money goes.

8. New York Times: Michael Gordon, Hardened to Hardships, Russians 
Simply Stretch the Rubles Further.]


******

#1
The Independent (UK)
23 August 1999
[for personal use only]
ROADSIDE GIRLS OF RUSSIA SELL SEX FOR POUNDS 2.50 
author?

"LOOK OUT for the war memorial," I was told. I had passed the town of Torzhok 
on the highway north from Moscow to St Petersburg and left behind two 
villages with the curious names of Bolshaya Kiselyonka (Big Jelly) and 
Malenkaya Kiselyonka (Little Jelly). Where the road turned off to Vydrapusk 
(Otter's Chute), there was an overgrown garden with a white plaster statue of 
Mother Russia, beckoning with one hand, with the other protecting a child. 
Could that be it? 

On closer inspection, I noticed that the lips of Mother Russia and of the 
child had been painted a bright carmine red. That was all. The monument was 
not defaced in any other way. It was hard to be sure. Kids might have done it 
for a joke. 

But when I entered the village of Domoslavl, there could be no mistake. A 
teenage girl, dressed in white like the statue and with lips painted the same 
shade of red, was sitting on a bench. Down the whole length of the village, 
outside the fairytale wooden cottages, other girls were sitting on benches in 
the gathering dusk. 

It was as my source had said. Here, on the edge of the Valdai lake district, 
one of the most beautiful national parks in European Russia, the population 
was reduced to such poverty that young women were selling themselves as 
prostitutes to passing drivers. The war memorial marked the start of the sex 
zone. 

Last August, I drove up the same road and saw country people hawking buckets 
of berries, and workers from the Red May crystal factory, paid in kind rather 
than cash, trying to sell goblets and vases by the roadside. A year is a long 
time in Russian politics. Three prime ministers have come and gone. But 
ordinary Russians have only got poorer. 

How do you start a conversation with a prostitute? In Domoslavl, it was all 
so obvious that the conversation happened naturally. "Yes, it's true," the 
pretty girl in the white dress said simply. She introduced herself as Katya. 
Soon she was joined by a fat lass in a white blouse, also called Katya. And a 
woman with straggly blond hair called Ira. And a giggly girl in velvet called 
Vika. 

They were working. They were ready to serve clients, to be sure. But 
consciously or unconsciously, they were also making a statement. By 
the identification with the statue, they were saying: "We and our country
have 
come to this." It was a cry of despair, one they could not or did not want to 
articulate to me. "Some other girls did it," was all they said, when I asked 
who had painted the lips of Mother Russia. 

With a pimp hovering in a nearby shop doorway - he made a note of my car 
registration number - our conversation was necessarily terse. Pretty Katya 
gave direct, practical answers but was not inclined to chat. 

The girls earned 50 roubles (pounds 1.25) for oral sex and 100 roubles for 
intercourse during daylight hours, she said. The rate went up at night. The 
mafia controlled the business and the police took their cut. "Sure, it's 
dangerous and frightening for us," said Katya. "The clients take us off the 
road and we do it in their cars. So far, none of the girls has been hurt." 

Katya, 21, said she had trained as a hairdresser but there was no work in the 
area. Fat Katya, 18, said that her qualification as a seamstress was equally 
useless as jobs were unobtainable. Ira, an older married woman with children, 
said that since her husband was unemployed, she had to go on the game to keep 
the family. 

The area north of the industrial city of Tver is, indeed, an economic 
wasteland. Apart from the Red May glass factory, turning out crystal that 
nobody wants, there are few employers. The textile factories in the town of 
Vyshny Volochok are dying. Collective farms have collapsed while private 
agriculture has yet to flourish. 

The region, with its pine trees and lakes, has great tourist potential but 
the infrastructure is not there to attract visitors who can get the same 
beauty with more comfort and service in Scandinavia. Girls who might have 
made hotel receptionists or waitresses turn to the oldest profession. 

"If there is nothing for the older generation, then it is even harder for the 
youngsters to find a place in life," said Valya, a retired teacher, tending 
her goat on the grass verge. "It's common knowledge that this [the 
prostitution] is going on. Of course, we don't like it. We find it painful 
and embarrassing. But we all turn a blind eye to it." 

"Never happened in my day," laughed Nina Vladimirovna, a pensioner. Suddenly 
she had to dash for the bus, the only one of the afternoon in this public 
transport desert where bus and train timetables are made not to co-ordinate. 

The police station at Vyshny Volochok, the nearest administrative centre, 
looked like a Wild West jailhouse. On the pavement outside, a middle-aged man 
in a shell suit stood smoking with a swaggering youth in a cowboy hat, 
shoelace tie and square-cut black boots. 

"Have you got permission from the chief?" asked the junior detective inside 
the station. I answered in the affirmative. He agreed to speak on condition 
that I did not name him. 

"What can I tell you about the situation on the road?" he said. "We know who 
all the pimps are. And the ex- prostitutes, who are now madams. We know that 
something stands above them. The mafia, Russian in this case, not Caucasian. 
The girls are mostly local. They get transported from village to village by 
minibus. 

"Both soliciting and exploiting prostitutes are illegal in Russia. Of course, 
the girls are only to be pitied, really. We would like to help them but it is 
a hard struggle. They simply won't give evidence against the people using 
them." 

On the street outside again, the shell suit and the cowboy had met the police 
chief. Laughing, they all got into a car and zoomed on to the highway. 

Returning to Moscow, I passed through Domoslavl once more. At a motel outside 
the village, some "hitchhikers" I had seen before were still flagging down 
cars in the same place for the second day running. In the town five lorries 
were parked. "Broken down," said one of the drivers. "I know about the girls, 
poor things. Would never use one. Happily married man with kids, hurrying 
home to the wife." 

Five lorries, all broken down in one village. And as I drove away, I saw in 
my mirror a couple of girls approach the cabs. Waifs in white dresses. One of 
the most haunting sights in this suffering country. 

*******

#2
The Times (UK)
23 August 1999
[for personal use only]
Russia's health crisis strikes the weaker sex 
Suicide, alcohol and accidents are taking their toll on men, reports Michael 
Binyon 

ALMOST six million Russian men are missing from the nation's expected 
statistical profile - killed by drink, accidents, suicide, poor healthcare 
and high male infant mortality. 

This alarming figure has been released in a United Nations report that gives 
grim support to the growing concern over Russia's falling birthrate, low life 
expectancy and unusually high male mortality rate. 

It comes amid reports of the reappearance on Russia's borders of diseases 
such as anthrax and bubonic plague, once considered conquered but now causing 
deaths in Siberia and southern Russia. 

Britain has taken a lead in trying to focus Western aid on halting the slide 
in public health. After a promise given at the last Group of Eight meeting in 
Germany in June, Britain is to target specific aid programmes at improving 
healthcare in Russia. 

Russia's population has fallen by two million in the past decade already, 
from 148 million to 146 million. A particular worry is the high death rate of 
men, maintaining Russia's unenviable position of having one of the biggest 
gender imbalances in the world - a position it held 50 years ago after the 
very high casualties of the Second World War. The UN report estimates that 
there are 5.9 million fewer men in Russia than there would be in a country 
where the sex ratio was the normal 96 men per 100 women. 

In Ukraine, it says, there are a further 2.6 million men missing. Similar 
gaps are found in Belarus and Moldova. The total number of men missing from 
throughout the former Soviet Union is nine million. 

The report says that the most alarming statistic is the sharp decline in life 
expectancy among Russian men. "Today life expectancy for males in the Russian 
Federation is only 58 years. This is ten years less than the life expectancy 
of men in China!" it says. Latest Russian statistics have shown a slight 
rise, to 61 years. 

Echoing studies done even in the Brezhnev era, the report finds many 
contributory factors. Suicide among Russian men is high and has increased 
markedly in the turmoil since the end of communism. Some 66 men out of every 
100,000 killed themselves each year between 1989 and 1993 - far more than 
anywhere else, except in the Baltic republics, and more than three times the 
average for the European Union. The comparable figure for women was 13. 
Alcoholism, largely a male affliction, also takes a heavy toll, with a 
related large number of industrial and domestic accidents. Men are especially 
vulnerable to alcoholic poisoning, heart disease and car crashes. 

Infant mortality is high and this leads invariably to the death of more male 
babies, who are weaker than girls. 

"The transition to a market economy has been accompanied by a demographic 
collapse and a rise is selfdestructive behaviour, especially among men," the 
UN report says. It attributes most of the deaths to widespread human 
insecurity, the main factors being a loss of earnings, a rise in economic 
uncertainty, job losses and a decline in social services. 

Russia has long worried about its declining male population, but overall 
statistics are just as bleak. Russia has one of the highest rates of abortion 
in the world, with 66 for every 100 pregnancies. It has a correspondingly 
high rate of maternal mortality and the drop in total population in the first 
five months of this year was 346,700 people- or 0.24 per cent. This is almost 
double the decrease in the same period last year. 

******

#3
Washington Post
23 August 1999
Editorial
A Rocky Path for Russia

THE CHALLENGE of a few thousand Muslim separatist guerrillas in the
southern Russian province of Dagestan once again raises the question of
whether Russia can hold together. The empire controlled from Moscow has
been shrinking for a decade. With the collapse of the Berlin Wall in 1989,
the captive nations of Central and Eastern Europe slipped their bonds. With
the collapse of the Soviet Union in 1991, Russia suddenly had 14 new
neighbors and far less territory. Moscow relinquished effective control of
its southern province of Chechnya after losing a war with that breakaway
republic in 1994 and 1995. Has Russia (still the world's-largest country)
now shrunk to its "natural" borders or is further unraveling in the cards?

Elements of the latest challenge must be familiar to the Moscow power
brokers who failed to prevent Chechnya's secession. On one side are highly
motivated insurgents fighting in familiar terrain; on the other, poorly
armed, poorly fed Russian draftees transported to treacherous mountains
that they have no interest in defending or recapturing. Chechen guerrillas
often shot Russian troops by night with weapons that Russian troops had
sold them by day. This time around the Russian armed forces are no less
corrupt, and certainly no less impoverished. As during the war in Chechnya,
Russian leaders proclaim imminent victory in plain contradiction of the
evident facts.

Both Dagestan and Chechnya are predominately Muslim entities in the
Caucasus region. But the ethnic Chechen population was fairly united in its
desire for independence, and Dagestan is a patchwork of ethnic and tribal
affiliation that is not united in anything. Many people there fear that a
break from Russia would lead to internal conflicts. Much of Dagestan's
elite has traditionally aligned itself with Moscow.

But -- and here we return to the central question of Russia's viability --
that loyalty in the past has been bought, at least in part. Moscow took
money from the few provinces that operate profitably -- primarily oil- and
diamond-producing areas -- and recycled it to provinces such as Dagestan
that never paid their own way. Now the capital has far less power to
extract taxes from those who can pay and so fewer inducements to bind those
who cannot.

The answer to the central question, in other words, does not lie in
Dagestan's mountains as much as in Moscow itself. If Russia can put its
economic reform on track and protect its fragile democratic institutions,
most Russians will want to remain just that -- Russian. If the economy
spirals downward and corruption becomes a permanent fixture, Dagestan may
seem a few years from now to have been nothing but a harbinger. 

*******

#4
STRATFOR.COM
Global Intelligence Update
Weekly GIU August 23, 1999

Putin: Yeltsin's Madness or Silent Coup?

Summary:

The appointment of Vladimir Putin appears to be another of an
endless round of random appointments by Boris Yeltsin. We think it
is of greater, more lasting significance. Putin, a lifetime
operative for the KGB, currently sits on top of Russia's
intelligence apparatus. Unlike the other Yeltsin appointees, he
has an institutional base with a distinct, sophisticated agenda.
Given the converging crises inside of Russia and Yeltsin's
inability to control the situation, we see the appointment of Putin
as part of an attempt by the intelligence and defense communities
to arrest and reverse the catastrophic slide of Russia into the
abyss. Putin may or may not succeed. He has enormous opposition
and problems. But his appointment is moving Russia to a different
place.

Analysis:

On August 9, 1999, Boris Yeltsin fired Sergei Stepashin, his prime
minister of a few short months, and replaced him with Vladimir
Putin, head of the renamed KGB (the FSB) and of the State Security
Council. Putin is the latest of a string of prime ministers
appointed by Yeltsin, none of whom lasted more than a few months.
The obvious question is whether this latest firing and appointment
has any real significance or whether, in the words of Yuri Luzhkov,
Moscow's mayor and contender for national power, this represented
the "continuous, nonstop absurdity of those in power." Or, as
Boris Nemtsov, a former deputy prime minister and power broker put
it: "It is hard to explain madness."

There are two competing explanations for what is going on in
Moscow. One is that, in the words of Macbeth, "It is a tale told
by an idiot, full of sound and fury signifying nothing." Yeltsin
is an old, confused alcoholic, and nothing is happening but his
random whims. Then there is the other explanation, which we
subscribe to, that there is in fact meaning behind the political
maneuverings: a struggle for the soul of Russia between two
insufficiently defined factions, with a third, darker force waiting
in the wings. This view is not in any way incompatible with the
notion that Yeltsin is not in control of his faculties, although we
very much doubt that this is true. Nor is it incompatible with the
idea that there are many other more personal and private issues
involved. History is rarely clear cut. Nevertheless, it is our
view that the emergence of Vladimir Putin represents a breakpoint
in recent Russian history and may well be a defining moment.

Putin's appointment is not like the appointment of his
predecessors. Putin is a different personality who comes directly
from the intelligence community. He has his own bureaucratic power
base, and that power base has its own agenda. We believe that
agenda is increasingly divergent from Yeltsin's and his backers and
followers. Indeed, it is our view that the appointment of Putin is
not simply a new, random action by Yeltsin, as much as it is an
attempt by the intelligence-defense community in Russia to gain
control of a badly deteriorating situation. It is not clear to us,
in fact, whether Yeltsin selected Putin or whether Putin was forced
on Yeltsin.

It is, of course, becoming increasingly difficult to figure out
what is happening in the Kremlin. In the old days of communism,
Kremlinologists, as they were called, worked with the merest scraps
of information trying to figure out who was rising and falling in
power. A politician missing from an official picture, a casual
comment from an apparently drunken diplomat, the wording of a party
proclamation - these were the bare indicators Kremlinologists
worked with, trying to figure out who was in, who was out and why.
It has not quite become that bad, but it has gone a long way in
that direction. Over the past year or so, the Russian political
system has been losing transparency. The constitutional
arrangements have evolved in such a way that the Duma, for all its
bellowing, ultimately rubber stamps Yeltsin's selections.
Decisions on who rises and falls are announced by Yeltsin, but the
fact is that a complex and extremely opaque political process has
emerged behind the Russian presidency, involving a complex
interplay of individuals, groups and social forces. We see the
outcome of the struggles among these forces as officials rise and
fall. We focus on Yeltsin since he is both the president and the
announcer of the winners and losers. It can therefore appear that
Yeltsin is simply and arbitrarily in control. We think this
appearance is an optical illusion. Stepashin said in an interview
a few days after he was fired that he thought that Yeltsin was
forced to dismiss him, because he "refused to serve the interest of
certain groups, which made them realize [he] wasn't pliable." He
went on to say that Yeltsin was not alone in his office when he
fired Stepashin, although he did not say who else was there. We
are returning to the politics of conspiracy. The very difficulty
of figuring out what is going on inside the Kremlin speaks volumes
about the state of democracy in Russia.

As we said, there are two factions competing for power inside the
Kremlin, with another waiting outside the walls. The first
faction, the faction that has dominated Russia since the fall of
Gorbachev, is the Russia of the extreme reformists and
Westernizers. Their intention was to transform Russia into a
constitutional democracy with a functioning market economy. For
them, the very existence of the Soviet Union was an encumbrance,
forcing the more developed regions of Russia to stop and wait for
the less developed ones. Intimately linked to Western academics
and bankers, this revolutionary faction intended to transform
Russia into a modern European state.

The extreme reformists and Westernizers failed. Russia used to be
poor but powerful. Today Russia is much poorer and much less
powerful. At the heart of the reformist failure was Russia's
deeply embedded inefficiency and the faction's own corruption.
Money invested in Russia did not turn into capital. It did not
generate more production, but was simply soaked up in consumption
and corruption. In the face of Russia's resistance to effective
structural change, the reformers turned into thieves. Vast amounts
of Western investment and aid were stolen by leading reformers,
moved out of Russia and invested in the West. The breathtaking
extent of this thievery is only now being calculated with some
precision, although the order of magnitude has been known for a
long time.

The second faction might be called Gorbachev's heirs, of whom Putin
is a prime specimen. Putin has spent his career in the state
security apparatus. He rose from a KGB field operative in Germany
to the head of the renamed KGB. Contrary to the popular view of
the KGB as mindlessly brutal, the KGB's cadre was probably the most
educated, well-traveled and sophisticated social group in the old
Soviet Union. By the very nature of their jobs, they were forced
to confront the degree to which the Soviet Union was falling behind
the West technologically and economically. As guarantors of the
regime inside the Soviet Union, they knew better than anyone the
levels of inefficiency, corruption and cynicism that had gripped
the Soviet Union. Along with their counterparts in the upper
reaches of the military, they understood how much trouble the
Soviet Union was in long before Western experts got a sense of it.

Gorbachev was very much their invention. Gorbachev's mission was
to reform the Soviet Union, not dismantle it. Gorbachev understood
that the old Stalinist model of central planning had to be replaced
by market mechanisms. He also understood that intellectual
liberalization was necessary in order to increase economic
efficiency. Finally, Gorbachev understood that Western investment
and technology transfer were essential if the Soviet Union was to
become competitive. It followed from this that the Cold War had to
be ended if the West was to be induced to invest in the Soviet
Union. Gorbachev tried to negotiate an armistice that would leave
the Soviet Union in a position of equality with the West.

What Gorbachev never intended happened. Relieving pressure on the
system meant that the centrifugal forces within the Soviet Union
took over, shredding it along many lines. Soviet institutions were
torn apart. The Gorbachevites tacked with the wind, attaching
themselves to various reform factions. The key thrust of the
Gorbachevites - the radical reform of the economy and Soviet
society - was also the position of Yeltsin and the reformers,
albeit with a Russian focus and an even more radical bent. This
was not intolerable to the Gorbachevites. The subordination of
Russian national interests to the West followed even from
Gorbachev's own strategy of detente in exchange for investment.
Men like Putin could live within the dynamics of Yeltsin's Russia.
Indeed, they would have disappeared invisibly into a reformed
Russia had everything not gone disastrously wrong.

In all of this, one institution remained relatively intact: the
KGB, now renamed the FSB in a purely cosmetic shift. The FSB was
genuinely committed to reform because of its obsession with
national security. The same impulse toward national security
caused the FSB to maintain its old internal and external
infrastructure. The FSB did not dismantle the KGB's
infrastructure. It put parts of it on hold, parts of it in the
deep freeze and continued operating other parts of it. But all of
the structure continued to exist. The KGB, as the leading
reformist faction within the Soviet Union, collaborated comfortably
with the new reformers, both in their legitimate and illegitimate
activities. But in the final analysis, while they shared much with
the reformers, they differed in one fundamental way: they were
Soviet men. They believed, if not in the ideology of the Soviet
Union, then in its imperial mission. Their tentacles ran
throughout the former Soviet Union and into Eastern Europe as well.
So long as reform held out the promise of a greater Russia, they
were prepared to give their loyalty to the reformers. But there
were limits.

Three limits were hit within a short period of time:

1. Kosovo: When Kiriyenko was fired and replaced by Primakov,
another KGB man, Stratfor was able to predict the Kosovo crisis.
It was our view that Primakov would take Russia on a more assertive
course in relation to the West, and as a result, the Serbs would be
encouraged to take greater risks than they had before. When
Primakov was overthrown in the middle of the war, Serbia's
geopolitical position collapsed. Russia essentially abandoned
Serbia under Chernomyrdin's and Stepashin's hands, forcing
Milosevic to capitulate. There was a major crisis at the time,
including the Pristina airport affair. Stepashin survived, but the
sense of humiliation ran deep in both the military and the FSB.
Most important, it was not clear that Russia was receiving anything
of value in return for its services in Kosovo.

2. In the past few weeks, the crisis in the Caucasus has been
coming unhinged. There was real fear of losing Dagestan. Giving
up the Soviet Union was one thing. Allowing Russia itself to
disintegrate was another. Stepashin clearly had no clear-cut idea
about what to do with that crisis. Given Russia's economic
problems, the inability to contain that crisis could have led to
disintegration.

3. The West was about to find out just how much money had been
stolen by Russian oligarchs under the reform regime. The
revelation in the New York Times of the Bank of New York's role in
money laundering in Russia was just the tip of the iceberg. The
vast amounts of diverted money were now going to come to light.
With that revelation, any hope of further investment, loans or aid
to Russia had gone out the window. Paradoxically, the same people
that the West liked to deal with, the reformers, were precisely the
ones who would be shown to have been most deeply involved in the
theft of the century. The justification for their presence - that
men like Chernomyrdin were known and trusted by the West - was
about to be turned on its head. The reformers were the last ones
to be trusted by anyone.

Putin, even more than Primakov, represents the return of the
Gorbachevite - men interested in reform as a means to preservation
of the state apparatus and the national interest. Putin struck
quickly. The Swiss bank accounts of Berezovsky, a leading oligarch
closely tied to Yeltsin, were frozen while criminal investigations
moved forward. A massive military force was gathered around
Dagestan, including air power. Significantly, Putin announced that
these soldiers would be paid the same amount as troops in Kosovo:
US$1,000 a month for privates, not the US$100 promised and
frequently not paid. Russia began raising the specter of Russian
troops not remaining under NATO command and instead collaborating
with Serb forces in order to protect Kosovo Serbs from the KLA.
Russia began building pressure on the Baltics. Russia condemned
and threatened Latvia on human rights violations concerning Russian
citizens in Latvia. Russia cut off energy supplies to Lithuania.

On August 25, Boris Yeltsin will visit Beijing to hold a summit
with Jiang Zemin. Topics to be discussed include military
cooperation, Kosovo and other issues, according to ITAR-TASS. We
remain more convinced than ever that an alliance between the two
countries will eventually emerge. With Putin as prime minister we
are further convinced of this fact, even though officially his
portfolio only concerns domestic matters.

The reason for our conviction is the third faction we alluded to
earlier as the "darker force": Zhirinovsky and the Communists. The
current situation in Russia is intolerable and cannot continue.
The idea that somehow this will remain the permanent condition in
Russia is absurd. Russia has its periodic flirtations with the
West and Western culture and then invariably returns to its own
course. The debate now is how far in the anti-Western direction
Russia will swing. Putin represents a moderate anti-Western
faction. He will assert the Russian national interest both within
the former Soviet Union and globally. But he is a Gorbachevite.
He understands the need for Western investment and technology. He
will not simply impose blockade and conflict. But there are others
outside the Kremlin walls who are far more anti-Western and are
less interested in economic development. If Putin fails, the
deluge nears.

But Putin has strong cards. He owns the famous personal files on
everyone. He knows where the money has gone, he knows who has
taken it, and he even knows how to get some of it back. If Yeltsin
decides to fire Putin, Putin may not be as willing to go as were
Stepashin, Primakov or Kiriyenko. He has his own cards to play and
they include some very high ones. He also has cards to play in the
West. He remembers the old Soviet principle of linkage. If you
threaten Cuba, we threaten Berlin. He is already orchestrating his
Baltic card and his China card. But his best card is the money
card. He knows where it went. Whether he tells or doesn't tell
will effect individuals and countries.

We can't be sure, of course, but Putin is a man who looks like he
has staying power. A coup involves illegality. There was nothing
illegal here. But we think something definitive has happened in
Russia. Putin is not just another pretty face. The KGB is sitting
in the prime minister's chair. To put it differently: having
forced Primakov out of the chair, the shadow forces fighting the
KGB in the Kremlin lost another round, and put the boss himself in
charge. Yeltsin announced to anyone who would listen that he is
healthy and doesn't need hospitalization. That may be true. But
it isn't clear that he is still in charge.

******

#5
Financial Times
23 August 1999
[for personal use only]
RUSSIA: Moscow considers tax to control capital flight
By Quentin Peel and Robert Chote in London

The Russian government is to consider drastic measures to control the flight 
of capital from the country, including taxing all transfers of money to pay 
for imports.

The plan is being put forward by Alexander Livshits, appointed last week as 
minister in the new government responsible for negotiations with global 
financial institutions.

He proposes introducing the tax to curb the practice of false invoicing for 
imports, as an illegal way of transferring money abroad, or keeping foreign 
exchange earnings out of the country.

At the same time, the government has agreed to the formation of a working 
group of officials from the Group of Eight industrialised nations to consider 
wider measures to curb capital flight, which is draining billions of dollars 
from the Russian economy.

The moves come after details of an investigation into alleged Russian money 
laundering, involving up to $10bn, emerged in New York. Law enforcement 
agencies in London and New York have been involved in the inquiry into the 
use of bank facilities at the Bank of New York.

The Russian moves were revealed by Mr Livshits, who is also President Boris 
Yeltsin's personal "Sherpa" for the G8, after talks in London with his 
British counterpart.

"The problem [of capital flight] is really important," he said. "But it is 
not just a question of capital flight. It is also the normal export of 
capital which exists in any developed country. This flow is connected with 
the bad investment climate in Russia. If we can't improve the investment 
climate in Russia, people will export money."

As for illegal currency export, he said one of the main means was through 
false invoices for non-existent imports. "We have to tax these flows," he 
said. Instead of taxing the imports when they arrive in the country, the 
money transfers would be taxed when they were remitted. In that way, the 
government would raise tax whether the imports existed or not.

"If a river flows, it doesn't make sense to try to stop it," he said. "It 
does make sense to construct a power station to produce electricity."

Mr Livshits, who is also visiting Paris, Brussels, Berlin and Rome, was 
cautious about the new government's ability to meet all the conditions of the 
International Monetary Fund's latest standby loan, which include strict 
control of inflation and the budget deficit, and tougher laws to ensure 
investor protection.

"There are 148 measures which have to be done," he said. "Part of them will 
be adopted in September. But at the same time we have the budget, and then in 
December there are elections for the Duma [the Russian parliament]. This 
combination creates a serious problem for the government." 

*******

#6
Los Angeles Times
August 22, 1999 
Editorial
Crossroads for Russia 

The date to watch in Russia is Dec. 18. That's when voters will choose the 
450 members of the Duma, the lower house of parliament, a choice that could 
do much to shape their country's future, including its relations with the 
West. With Boris N. Yeltsin's presidency a shambles and the Duma dominated by 
the naysaying Communist Party and its allies, Russians growing ever more 
desperate for better lives appear ready for change. Election of a centrist 
Duma could foreshadow the outcome of next June's presidential election, which 
will end the Yeltsin era. 
The key figure in the new political equation is Yevgeny M. Primakov, who 
served eight months as prime minister before Yelt- sin fired him last spring, 
partly because he was becoming too popular, partly because his anticorruption 
efforts were reaching too close to Yeltsin's inner circle. Primakov will head 
the new Fatherland-All Russia electoral alliance. He promises to increase the 
Duma's powers while reducing those of the president, to enact stronger 
anticrime measures and to improve Russia's notoriously inefficient tax 
system. In polls, no one stands higher in public confidence. 
But however sweeping the political changes that might occur, Russia's 
monumental economic woes will remain. The government reports that 51 million 
Russians--one-third of the population--live below the poverty line, on an 
income of less than $38 a month. Millions of pension-dependent elderly 
Russians subsist on no more than $18 a month. 
Western efforts to ease Russia's transition from communism to democracy 
and a market economy have too often been ineffective or ill considered. They 
have also been repeatedly frustrated by bureaucratic sabotage and the 
systematic looting of Russia's resources by criminals and economic oligarchs. 
As loans and credits from the International Monetary Fund and other sources 
have trickled in through Russia's front door, tens of billions of dollars 
have been spirited out the back. Moscow's foreign debt, a staggering $150 
billion, remains essentially uncollectable. 
The Clinton administration's Russia policy has been consistent, if 
uninspired. Pondering the alternatives, it has opted to stick with the 
erratic and ineffectual Yeltsin. There are some valid reasons for doing so. 
As Stephen Schwartz, the publisher of the Bulletin of the Atomic Scientists 
notes, implementing strategic arms reduction agreements and financing the 
dismantling of Russia's vast nuclear arsenal remain essential U.S. interests. 
Yeltsin is cooperating in these efforts. Some who aspire to succeed him might 
not. 
The West can't pick Russia's leaders; it can only hope Russians will 
have the sense to reject extremism. Margot Light of the London School of 
Economics and Political Science remarks that there is still room "for 
cautious optimism about Russia's democratic prospects, just as long as 
Russians continue to defend their democracy, using only democratic means." 
The December election will be another exercise in democratic practice. If it 
sets Russia on a strong and responsible centrist course, the future should 
look brighter. 

******

#7
The Russia Journal
www.russiajournal.com
23 August 1999
The Insider
Russia's dirtiest secret: Where the money goes 
By Adell Karian

Say it ain't so, Rem: Gazprom's long-delayed 1998 financial results,
audited according to international accounting standards, were apparently
delayed for a reason - the "glavny bukhgalter," or head accountant, at the
gas giant probably wanted to flee the country first. The $7.1 billion
after-tax loss was enough to make the provisions taken by multinationals
(that is, real companies) for massive restructuring look like pocket change
by comparison. 

To its credit, Gazprom is arguably laying the groundwork for improved
results in future years by "provisioning for the kitchen sink," as one
brokerage house puts it. Take the losses for future problems now, the
reasoning goes, so they won't hit earnings later. Meanwhile, the company
that accounts for roughly 25 percent of Russia's total tax take is a
complete enigma - IAS financials notwithstanding. Where cash flow winds up
is anybody's guess, and whether the company's numbers even remotely reflect
reality is a question that securities analysts would far prefer to avoid.
The dirty secret of virtually every company in Russia - that no one, except
(maybe) for top management, has any clue at all about where the money goes
- is perhaps most true for the monster cash cow Gazprom. 

Gazprom CEO Rem Vyakhirev is clearly on his way out, thanks in large part
to the Kremlin's desire to secure cash flows, and to Chairman Viktor
Chernomyrdin's desire to find something to do after the end of his Kosovo
gig. It would be an ironically Western touch if Rem were given the axe on
the pretext of lousy financial results. Don't count on it. 

Goodbye Uneximbank, Hello Rosbank: Perhaps the single most poignant example
of the revolting hypocrisy of Russia's oligarchs - and of the total failure
of Russian legislation to protect investors - is the opening of a Rosbank
branch on a very large patch of Moscow's priciest real estate. Rosbank, the
successor to Uneximbank, will soon be opening an office on Tverskaya, a
stone's throw away from the august offices of Moscow Mayor Yury Luzhkov. 

Just a bit more than a year ago, Vladimir Potanin's Uneximbank blanketed
Moscow with images of Zeus in an ad campaign claiming that the bank could
"withstand the elements." Potanin presented himself to Western investors -
eagerly searching for a face to apply to the new, dynamic, growing Russia -
as an agent of the future of a transparent, honest, moneymaking Russia. 

After the August 1998 financial crisis, though, Potanin looked out for
himself. Uneximbank transferred its remaining good assets to Rosbank, a
shell institution in waiting. Interros, Potanin's holding company, and
Uneximbank defaulted on every ruble they had ever borrowed. In February,
Uneximbank became the first Russian issuer to default on its eurobond. 

The holdings affiliated with Uneximbank - including oil giant Sidanco, the
Novolipetsk steel combine, Norilsk Nickel, telecom holding Svyazinvest, and
a bevy of other properties - probably generate enough cash every day to
cover the paltry $12 million Uneximbank coupon payment. Despite the August
devaluation and financial crisis, Interros could pay its bills - if it
wanted to. For Vladimir Potanin and his ilk, the joke was on the stupid
foreigners who bought into their fantasies. 

Despite his moral bankruptcy, Potanin insisted on propagating his own
myths. Uneximbank, Potanin wrote in a letter to the editor of the Wall
Street Journal in March, was engaged in discussions with its creditors
following the principle of "transparency of information." Potanin, the
letter intimated, would be working shoulder to shoulder, elbow to elbow,
with his foreign friends to ensure that they were treated fairly. Wow !
Ain't that sweet. 

And that's the view from the inside... 

******

#8
New York Times
August 23, 1999
[for personal use only]
Hardened to Hardships, Russians Simply Stretch the Rubles Further
By MICHAEL R. GORDON

MOSCOW -- By early evening, there was already a crush of young
professionals, families and couples lined up to eat at Arkady Novikov's
newest restaurant. 

For 130 rubles a plate (slightly over $5), Novikov was offering an Oriental
buffet of stir-fried vegetables, topped with a mound of sliced meat.
Festooned with colorful banners and other trappings from the East, the
restaurant has been a huge hit since it opened near Pushkin Square a month
ago. For a time, it had looked as if the financial crisis that struck
Russia last August would sound the death knell for restaurants like
Yolki-Palki, Novikov's chain of Moscow eateries aimed squarely at the small
but emerging middle class. 

The plunging ruble was sending costs through the roof and scaring away
customers. Novikov's restaurants, established to serve cheap food to the
middle class, would soon be serving expensive food to the poor, the
37-year-old restaurateur said glumly at the time. 

One year and several prime ministers later, Novikov has weathered the
storm. By substituting home-grown produce for imported ingredients and
trimming his staff, he has managed to hold down prices. Instead of
collapsing, Yolki-Palki has even managed to expand. 

The devaluation of the ruble dealt a heavy blow to the nation. Russia's
economic reformers were discredited. The capital's fledgling financial
sector was hit by massive layoffs. The purchasing power of Russian
consumers dwindled. And the ranks of the poor swelled. 

But by using the particularly Russian talent of adapting to seemingly any
hardship, many people have managed to cling to vestiges of their lives
before the crisis. Some Russian enterprises have even prospered, with the
weakened ruble protecting them from competition from foreign-produced
goods, both at home and abroad. 

The crisis has made a cynical public even more distrustful of the
government and its seemingly endless promises of economic reform. But a
strange mixture of self-reliance, humor and weary resignation have kept a
nation famous for revolutions from falling apart. 

"Russians lost confidence in their country's future a year ago, and they
still have no faith in the government," Yevgeny Yasin, a former economics
minister under President Boris Yeltsin, wrote in Moscow News. "They also
have more self-reliance." 

Before the crisis, the basic precepts of the Russian economy were very
different. Russia's leading politicians and the International Monetary Fund
cast the ruble as a pillar of political stability. 

A free-falling currency, one Clinton administration official warned
ominously before the devaluation, might even lead to "Indonesia with
nuclear weapons." 

Then came Aug. 17, 1998, a dark day that Russians refer to grimly, the way
Americans might think of the 1929 stock market crash, when the Yeltsin
government announced it would no longer try to prop up the ruble. A wave of
panic swept the capital as the ruble begin to slide from its exchange rate
of 6 rubles to a dollar to a rate of 20 to a dollar and even more. 

Russians raced to retrieve their savings from the nation's poorly regulated
banks, only to find that the banks had shut their doors. Shop shelves were
picked clean as consumers frantically bought foreign televisions and old
Soviet-era staples like salt and toilet paper, fearing a return to the
shortages of old. 

The rich were humbled but still managed to hang on to their place at the
top. Virtually none of the nation's oligarchs -- the tycoons who dominate
the economy and politics -- were displaced. 

For the poorest, life was so hard before the devaluation that many barely
noticed the crisis. None of them had credit cards, and they lived off the
potatoes and vegetables from their modest kitchen gardens. 

The most dramatic effects were felt by those in between: the small middle
class and the large number of working poor. As unemployment rose and
employers sought to cut costs by slashing wages, millions of Russians slid
from a threadbare existence into absolute poverty. 

A year ago, 33 million people -- 22 percent of the population -- had
incomes below $6 a month, the official poverty level, according to the
Russian government. Now 55 million people -- 37 percent of the population
-- live in poverty, according to government statistics. 

The political consequences were also huge. Sergei Kiriyenko, the pro-free
market prime minister, was ousted. Yevgeny Primakov, a former Soviet
official, was installed in his place. 

Primakov's approval ratings rose after he declared that he lacked a master
plan to pull the economy out of its crisis; the public had become so
mistrustful of the government that it preferred inaction to bold new
policies. 

"No one I know expects anything from the government or any other
authorities," said Tatyana Tolstaya, one of Russia's most trenchant
writers. "People try to survive without the government as much as possible." 

Surviving has not been easy, particularly in the far-flung ruins of the
Soviet state, where electricity and hot water are often a luxury. And even
in better-off cities like Moscow, the rising costs of gas and food have
prompted concerns about a return of inflation. But for many Russians, the
hardship may remain but the sense of panic has gone. 

Eya Motskobili, a 37-year-old journalist at Kommersant, one of Russia's
leading financial newspapers, typifies the stoicism of many middle-class
Russians. 

Her monthly salary was slashed from more than $1,500 a month to $250. Long
years of toil went for naught when her bank refused to return $8,000 in
savings. And it became harder for Ms. Motskobili to find the imported
medicine that her mother needs to battle cancer. 

"We were just beginning to feel like we were living in a European country,
so what happened was a real blow," she said bluntly but without bitterness. 

By cutting back on vacations, shopping at secondhand clothing stores and
buying food at wholesale markets, however, she has managed to cope. 

It is not an isolated story. Russian television recently highlighted a
former business manager who pumps gas for a living. He was depicted not as
a failure but as a hardy and philosophic survivor. 

The middle class -- a group whose family incomes may have been $1,000 a
month or more before the crisis, and who became accustomed to Western
appliances and vacations abroad -- may have only a fraction of the money it
had a year ago. But it still has middle-class values and has struggled hard
to preserve what it could of life before the crisis. 

New Zhigulis, the boxy Russian automobiles, have displaced foreign cars as
prestige automobiles. Hotels at the Russian Black Sea resort of Sochi have
served record numbers of guests as Russians have cut back on more expensive
vacations in Spain and Greece. 

Use of the Internet has also soared as Russians look for the latest
financial news and for an escape. 

Having regained some confidence, some people are able to joke about the
crisis, and one of the most popular Web sites is a collection of black
humor about the debacle by Artemy Lebedev, a leading graphic artist
(http://www.tema.ru/roboty). 

"I never miss a chance to take on a subject, but the idea was to make
people think that the crisis was not the end of the world," Lebedev said. 

One of Lebedev's parodies shows the "consumer market basket" after the
crisis. It is an empty basketball net. 

Public opinion polls also indicate that many Russians have regained their
equilibrium, shaky as it was. 

Right after the August 1998 crash, 60 percent were pessimistic about
Russia's future, according to the VTSIOM polling organization. Now the
percentage of pessimists has dropped to 54 percent, about the level before
the crisis, returning Russia to its unusual version of normalcy. 

"The August crisis was a great economic shock, but the psychological shock
was even stronger," said Yuri Levada of VTSIOM. "But after several months
the country began to calm down." 

As Russians have honed their survival skills and the government has
dithered over its economic strategy, some of the nation's industries have
begun to revive on their own. 

The weakening ruble has raised the price of imported goods, protecting
domestic producers of cars, sausages and yogurt from foreign competition.
The currency devaluation has also made Russian commodities more attractive
for foreign buyers, helping exports like timber and steel. 

The petroleum industry received a badly needed lift as the price of oil
rose. Falling oil prices were one factor that worsened the effects of last
year's economic crash. 

In contrast, production of many consumer goods is down because the average
Russian has less money to spend. 

Lyudmila Kazmina, a 72-year-old pensioner, knows that trend well. She sells
romance novels and calendars outside of her Moscow apartment house to
supplement her monthly pension of 500 rubles, which was worth nearly $100
before the crisis but is now worth only $20. 

These days, her customers are far more careful in parting with their rubles
than they used to be. And on one balmy day last week, she had trouble
making a sale. 

"Practically everything we had this morning we still have," she said. "I
wouldn't say life has become that much worse, but it's become more
complicated. People spend more money on food and on what they absolutely
need to buy. So they have less money to spend for this." 

At the Yolki-Palki chain, Novikov has worked hard to to cut costs and keep
his clientele. 

Novikov, who studied cooking at a Soviet institute as a young man and was
once rejected for a job at McDonald's after that fast-food chain began to
penetrate the Russian market, is an energetic businessmen. He pioneered a
series of expensive theme restaurants before starting the mid-priced
Yolki-Palki chain two and half years ago. But Yolki-Palki was threatened by
the crisis. As with many restaurants at the time, most of its food came
from foreign suppliers. Now almost 90 percent is produced in Russia, a
major cost savings. 

Still, the effects of the crisis have lingered. Because he has held prices
down and some customers have drifted away, Novikov estimates that revenue
is down about 30 percent. 

Profits are down. But at least there are profits, enough that Novikov has
expanded the chain to nine restaurants. His enthusiasm for business,
however, is tempered by uncertainty over the future. 

"You really have to be prepared for anything in this country," he said.
"And you have to learn to rely on yourself." 

*******

 

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