November 2, 1999    
This Date's Issues: 3599  3600 3601

Johnson's Russia List
#3601
2 November 1999
davidjohnson@erols.com


[Note from David Johnson:
1. US White House: BACKGROUND BRIEFING BY SENIOR ADMINISTRATION OFFICIAL 
in Oslo, Norway, on meeting between Clinton and Putin.
2. Stratfor: Russia 2000. Part 1: The Economy: Russia Turns Back.]


******


#1
November 2, 1999
BACKGROUND BRIEFING BY SENIOR ADMINISTRATION OFFICIAL 
THE WHITE HOUSE
Office of the Press Secretary
(Oslo, Norway)


SENIOR ADMINISTRATION OFFICIAL: Let me just say a few things about
the President's meeting with Prime Minister Putin. This was the second
meeting that the two of them had together. They previously met in
Auckland. I would say that it was a serious meeting and it was a frank
meeting. It was a useful discussion, consistent with what we've been doing
in the past. We've been engaging Russia at times where there have been
difficult issues in the relationship, and obviously, there are some
difficult issues now where there are differences such as in Chechnya, such
as the need to bring to a conclusion an adaptation of the Conventional
Armed Forces in Europe Treaty, some issues on arms control. And as we have
in the past, what we found is that when we engage and work through these
problems, that that's the most constructive way to come up with effective
solutions.


Let me just say a few points about some specific issues that we talked
about. First, on Chechnya, that very much was the dominant issue in the
discussion. It revolved around four different points.


The first is a recognition of Russia's territorial integrity, its
right to protect its people; on an understanding of the importance of
dealing with terrorist threats. That's something that we've consistently
said in the past and we, obviously, reaffirmed again.


Secondly, we stressed that we're very concerned that Russia is
pursuing a strategy that could entail major and increasing civilian
casualties in Chechnya, and we stressed that it's not in the interest of
any country, for that matter, to try to resolve internal problems at the
price of a major loss of life of innocent people, particularly in a
situation like Chechnya where the rebel forces are very much intermingled
with the civilian population.


One of the things I think we effectively did, the President
effectively did, was to highlight some of the costs that this would entail
-- costs in humanitarian terms, costs in terms of making it harder to, in
the end, achieve a political solution to the Chechnya conflict, and costs
in terms of the damage that this could cause to Russia's international
reputation.


The third point was that, for these reasons, for these very costs that
we were outlining, we stressed the importance of having a political
strategy in order to bring the conflict to a close. President Clinton
stressed that it was very clear that what people want is obviously to be
able to live a normal life. And in order to satisfy that basic desire,
there has to be a situation of peace, and that the only way they were going
to get peace is through a political solution that everybody could buy into.


We urged Russia to be proactive in pursuing a political dialogue,
either directly, or if it needs to, to seek a third party for discussions,
and that without a political strategy, that it could in fact, end up in a
worst case situation where it, in fact, sees significant humanitarian
losses as well as not achieving an end to the conflict.


The fourth point, on Chechnya, was the importance of dealing with the
immediate humanitarian problems. And again, we stressed that it's
absolutely crucial to let people get to safety, particularly those people
who have been displaced by the conflict.


Prime Minister Putin told us that they have agreed to invite the OSCE
on a mission to, Ingushetia, to the northern areas of Chechnya and to
Dagestan to review the humanitarian situation. That's an important first
step to, in fact, possibly get the humanitarian situation under control.


Obviously, we have stressed the importance of opening borders and
allowing people to be able to get to safe and secure situations where they
can receive humanitarian aid.


The second issue that we discussed was the CFE Treaty, the
Conventional Armed Forces in Europe Treaty. We stressed from the outset
that compliance with the treaty is important, and that in order to be able
to move forward with the treaty, there needs to be an assurance that the
parties will eventually come into compliance. Russia has declared, and
everybody knows that, currently that they have exceeded the CFE levels and
the flank area as a result of the operations in the North Caucasus area.


Yesterday, Prime Minister Putin indicated, made a statement that
Russia intends to comply with these levels. He also committed himself,
committed Russia to be transparent about the force levels in the North
Caucasus. Those are important steps.


In addition to those, one of the things that we stressed was the need
to reach agreements between Russia and Moldova and Russia and Georgia on
Russian withdrawal from those territories. The CFE Treaty provides for
host government consent for the stationing of foreign forces on their
territory, and as part of that, one of the things that both Moldova and
Georgia have indicated is that they want to negotiate withdrawal schedules,
Russian troops, and that we expect there to be a serious dialogue on these
issues. Both Moldova and Georgia have made serious proposals which the
Russians are seeking to address.


On arms control, Prime Minister Putin provided President Clinton with
the signed copy of a letter that President Yeltsin had sent on arms control
issues, which I understand has generally or broadly met its way around
already. President Clinton acknowledged that we obviously have some
differences on arms control issues, but it's important to continue work.


He said that what we are dealing with here is a common threat, a
threat that affects both the United States and Russia and is from rogue
states. And from that perspective, our work on a limited national defense
is not directed against Russia, but in fact, against a threat that can
affect both of our countries. And from that perspective, it's in our
interest to be able to share in security benefits that are developed from
work on a missile defense system.


We've made a number of suggestions to the Russians on the kind of
cooperation that we might be willing to consider. We think that they're
serious proposals. We've already had a number of meetings with the
Russians on these issues. While on one hand, there have been some strong
statements in the press by Russia about their differences and disagreement
with an ABM system, at the same time, there's also been serious dialogue,
and it's important to continue that dialogue, and that's one of the things
that the President underscored.


Let me stop there. That was sort of the core elements of the meeting,
and I'm glad to answer whatever questions --


Q Did the letter from Yeltsin surprise you in its tone or its
warnings of dangers, the treaty collapsing?


SENIOR ADMINISTRATION OFFICIAL: Not really. It's a serious letter,
and President Clinton said that we would respond to it in a serious way.
There are parts of it that are quite familiar. First of all, the letter
emphasizes the importance of continuing a dialogue on reduction of nuclear
arsenals, and we, in fact, have agreed with that, and in the statement that
President Clinton, President Yeltsin issued in Cologne, they said -- they
both said that we should continue parallel discussions in START III and on
the ABM Treaty.


The Russians have, in the past, indicated to us a concern that an ABM
system can somehow affect or mitigate the deterrent fact of the strategic
forces. We have consistently said that we don't believe that's the case,
because we're looking at a limited system that, in fact, no decisions have
been made at this point, but we are looking at a limited system that's not
directed at Russia.


In fact, some of Russia's own generals have indicated that the kind of
limited system that we're looking at is not directed against Russian
strategic forces. And what we have consistently said is that we want to
work with the Russians on ways to address issues specific to the treaty to
strengthen the treaty, and that from our perspective, if we look ahead to
the future and we assess potential security threats for the future, it's
important for us to begin thinking now how to respond to those, and in
fact, last -- in September of '98 at the Moscow summit, the two Presidents
actually issued a joint statement on security challenges for the 12st
century, which reinforced the importance of looking ahead to the future.
And I think it's in that context that we're going to continue its dialogue.


Q Did the President say anything to the Prime Minister about what
steps the United States was willing to take, either through positive or
negative reinforcement to convince the Russians that the military option in
Chechnya is not the wise course to pursue?


SENIOR ADMINISTRATION OFFICIAL: Let me put it this way. Russia is
dealing with a situation in Chechnya which it considers fundamental to its
territorial integrity and national security. And Russia is going to take
actions in that situation that are consistent with its own assessment of
its security interests. So, from our perspective, the most important
arguments and the most effective arguments that we think that we can
marshal with the Russians on the question is whether or not the strategy
that they're pursuing is one that is likely to achieve the national
security ends that they have.


Now, for that reason, one of the things that the President has
continually underscored is that if there are major civilian casualties,
that that is something that is potentially going to turn civilians against
a dialogue with the government, that it's going to make it harder to
achieve a solution, that it's potentially going to, in fact, going to be
inconsistent with what Russia said it wants to achieve, which is a
normalization of the situation there and potentially a continuation of a
conflict over time, whether through hit-and-run tactics or other tactics.


And so, what we have continually stressed is, number one, look at the
civilian casualties; number two, get a political dialogue going because
political dialogue is going to be absolutely fundamental to achieving a
solution; and number three, address the immediate humanitarian crisis
because this is something that is directly in Russia's control right now.


Q Was there an "or else we might" in there somewhere?


SENIOR ADMINISTRATION OFFICIAL: No, there was not and "or else we
might," but I thing it's important to look at that in the context of the
overall relationship, which is we have a relationship with Russia as with
any other country where we're pursuing things that are in our own interest,
so we're pursuing a discussion on arms control because it's in our
interest; we're pursuing a discussion on economics issues because we want
to see Russia change, internally and economically, and that's in our
interest. We're pursuing a discussion on non-proliferation because it's in
our interest to see a control over sensitive technologies.


And so what we're trying to do is recognize that there are a whole
series of issues in the Russia relationship that are difficult and hard
questions, and we need to pursue them, recognizing that there may be
interlinkages among them, but that also each one of them has an end that we
want to achieve and we need to keep on pursuing that.


Q Did the President even present it to Mr. Putin in a way that
there may be multilateral arrangements where world public opinion could be
undermined if the Chechnya situation continued? Was there any kind of
argument along those lines, setting aside the bilateral relationship?


SENIOR ADMINISTRATION OFFICIAL: Yes, and excuse me if I wasn't clear
enough about that. The President made very clear that if there is a
significant increase in civilian casualties, that not only is that going to
have an immediate humanitarian costs that Russia should be concerned about,
it's going to affect Russia's international reputation, which it's been
working very hard to try to restore.


I would also say that I think it's very clear in the Russians minds
that they recognize that the upcoming summit in Istanbul is -- it's an OSC
summit; it's focused on issues of how states interrelate with one another,
but also how states treat their own people; that if the conflict is, in
fact, continuing to escalate and there are humanitarian casualties, that
there's going to be a tremendous amount of international scrutiny.


And it's partly in that context I think that Russia is so avidly
trying to respond and address some of the questions that are being put
forward to it. Now, I think one of the key questions is to move from that
recognition that Russia, I think, has increasingly developed to try to get
actions on the ground that address the humanitarian crisis and bring us
closer -- bring the Russians closer to a political solution.


Q Did the President bring up that summit as a venue where this
could come up, where the Russians have indicated to us in other forums
their concern that that could come up --


SENIOR ADMINISTRATION OFFICIAL: It came up in the discussion
recognizing that the Istanbul summit is somewhere where this kind of issue
could very well come up.


Q Did the President use the phrase "indiscriminate attack against
civilians." which has been used at this podium yesterday? I didn't hear it
in your briefing. And secondly, what kind of conflict is this? The
Russians portray this as a police action against terrorists. It seems like
there is about 40,000 troops involved, so some would call it an internal
armed conflict. How do you regard it?


SENIOR ADMINISTRATION OFFICIAL: I don't think that the President
specifically used the term "indiscriminate attacks." It's been used in
other discussions. What was clear in the President's discussion was that
in a situation where civilians and these rebel forces are, indeed, very
much intermingled, that addressing that conflict through intensive shelling
can result in significant humanitarian casualties, and that, indeed, where
the rebel camps have very much dispersed and there is no specific rebel
infrastructure, that it becomes extremely difficult to pinpoint any
specific attack. And so, from that perspective, it's particularly
important to be sensitive to the potential humanitarian impacts of the
intensification of both the air strikes and the shelling which the Russians
have announced as being part of their current strategy.


Q My other question is about what type of conflict is this? Is
this just a police action against terrorists?


SENIOR ADMINISTRATION OFFICIAL: I think when you recognize that there
have been significant attacks against lawful authorities in Russia, that
rebels began attacks in Dagestan, at the same time we have an extremely
complex situation where you have a significant number of rebels -- I don't
think any of us know what the numbers are -- the Russians have used the
numbers in the tens of thousands -- and there is not one particular group
-- they're not individuals that can be isolated specifically, and they're
very much interspersed and intermingled with the civilian population. And
in that context, it becomes much more difficult to know how to specifically
get at those rebels without having major humanitarian casualties.


And it further reaffirms, it further underscores the need to actually
pursue a political dialogue because there is no obvious military solution
that one can achieve without major costs, human life costs also being
entailed.


Q How long did the meeting last?


SENIOR ADMINISTRATION OFFICIAL: About 50 minutes.


Q What kind of measure has the President gotten of Prime Minister
Putin after two meetings now? How would you describe him as a leader, as a
negotiating partner, and as a power within Russia?


SENIOR ADMINISTRATION OFFICIAL: I would say that it's very clear in
any discussion with him that he is extremely serious, that he is engaged in
the details of the situation that he's occupied with. He is extremely
involved in the situation in Chechnya and has been looking at all aspects
of the strategy of what Russia has been doing from, I think, the broader
strategic to the tactical. And he suggests that he's very much in command
of that situation. There was -- well, let me just leave it there.


Q How do you expect the CFE agreement to be handled in Istanbul?
Do you expect them to come to an agreement, to resolve this difference, or
do you think it's going to still be left hanging?


SENIOR ADMINISTRATION OFFICIAL: First of all, to put in context, I
would say that there has been, in fact, a lot of progress already made
toward adapting a CFE treaty. And last March there was a joint statement
issued in Vienna that set out the basic parameters for the adapted treaty.
And many of the key issues were hammered out already at that point.


Some of the outdated elements of the treaty -- particularly its
division into two blocks -- some of the provisions on reduction of levels
were already addressed at that point, and that's particularly important to
keep in mind.


There still are those other questions which I mentioned, which are
very important in the overall scope of the treaty. I think they are
certainly doable and resolvable, but it's going to take the parties
involved, particularly the Russians and Moldovans, the Russians and the
Georgians, sitting down at a table and working through their differences,
particularly on withdrawal schedules for Russian forces.


Q Do you expect it to be done in Istanbul or not?


SENIOR ADMINISTRATION OFFICIAL: The negotiators are still working.
We would like it to be done, but it will be done when we have a good
treaty.


Q On ABM, does Russia have reason to believe that the United States
would deploy a new missile defense system without a renegotiated treaty?


SENIOR ADMINISTRATION OFFICIAL: We've consistently said that we want
to be able to address issues of missile defense in a way that's cooperative
and transparent, and that we want to do that through a parallel discussion
on nuclear reductions and requirements for missile defense.


We have consistently stressed the importance of having transparency
measures in any form of agreement on adaptation of the ABM Treaty. The
importance of that is, particularly, to address Russians' concerns about a
breakout capacity. And so what we have consistently focused on is how to
do this in a cooperative way, how to do it in a way that maintains
strategic stability and recognizing that what we're trying to do is not
negate the Russians' strategic deterrence, but to address a different
threat and maintain at the same time a balance in strategic stability.


Q Could you elaborate on the contents of the Yeltsin letter, the
main points that you saw?


SENIOR ADMINISTRATION OFFICIAL: The contents were very much as I laid
out; a desire to continue discussions on nuclear arms reductions, which is
not something new. We have, in fact, shared that view and indicated that
it should move ahead jointly with discussions on missile defense. The
letter indicated a concern that the ABM Treaty could somehow affect
Russia's strategic deterrent, and as I indicated before, it's not our
perspective that that will be the case.


The letter indicated a concern that amendments to the ABM Treaty could
weaken the treaty. Our perspective has been that, in fact, a strong treaty
is one that addresses changes in a changing international security
situations, and in Cologne when the two Presidents issued a statement on
arms control, it recognized that the ABM Treaty has provisions for
amendment for changing international security environments.


The letter indicated that we should address questions of threats from
rogue states by cooperation on export control and control of ballistic
missile technology. We agree with that fully. The concern that, of
course, we've had is that the countries that may actually get this
technology are not necessarily operating on the basis of a rational basis
of what kind of impact a strike against the United States might have, and
therefore it's important to maintain a defense against such strikes.


The letter indicated that it hoped -- President Yeltsin hoped that the
United States would work with Russia on a resolution that they are
introducing at the United Nations, and we indicated to them that in fact,
if such a resolution is based on the principles that both countries have
accepted in the past -- in particular, the principles that are embodied in
the Cologne statement issued by the two Presidents that that's something
that we could discuss.


Q The Prime Minister said that he was willing to have the OSCE come
in and have a look at the humanitarian situation in connection with
Chechnya. Was there any thought about having the OSCE involved as a
mediator or trying to get a political solution started?


SENIOR ADMINISTRATION OFFICIAL: I think that's a good question for
the Russians to answer.


Q Did the President ask them?


SENIOR ADMINISTRATION OFFICIAL: What we suggested to them, as I said
before, was that they need to get a dialogue going, they need to be
proactive, they need to be creative about it. If they can't do it
directly, they should think about third parties. If this is a third party
the Russians think they could work with, then that's good; if it's not,
then there are other things that they might consider. And we hope that
they do.


Q Is it not true that the National Security Advisor already raise
that scenario with Mr. Putin and was rebuffed?


SENIOR ADMINISTRATION OFFICIAL: The National Security Advisor was
very clear in his conversations with Prime Minister Putin about the
importance of a political dialogue. Each time we've had this discussion, I
think we've continued to look at different ways that we can advance it. I
think that we were clearer today about the importance of seeking creative
solutions and potentially looking at third parties, if that is a useful
alternative, than we have been in the past.


Q Again, but the heart of the question -- is it not true that the
National Security Advisor suggested that to Prime Minister Putin, and Prime
Minister Putin said no thank you -- or words to that effect?


SENIOR ADMINISTRATION OFFICIAL: No.


Q Did the President raise the question of the plight of the
refugees --


SENIOR ADMINISTRATION OFFICIAL: Let me just say certainly not that
I'm aware of. I mean, Sandy may have said something and I wasn't aware of
it, but not that I'm aware of.


Q Did the President raise the plight of the refugees -- the
hundreds of thousands who are trying to get out -- with Putin? Because the
Russians apparently are still blocking the borders.


SENIOR ADMINISTRATION OFFICIAL: Yes, we have raised that, and it was
in that context that Prime Minister Putin said that they recognize that
there needs to be quick action to address the humanitarian situation and
that he also raised the OSCE mission to look at the humanitarian situation.


Obviously, the answer, or the solution here is to open the border, and
that's what we're going to look at.


Q Did the President raise them today?


SENIOR ADMINISTRATION OFFICIAL: Yes.


Q Where did Putin say that the OSCE could go? Could they go into
and all around Chechnya or just in the neighboring countries?


SENIOR ADMINISTRATION OFFICIAL: He had said Dagestan, areas in
Northern Chechnya, and Ingushetia.


Q What was the restriction --


SENIOR ADMINISTRATION OFFICIAL: Because of the security situation --
their answer was because of the security situation and a concern that
people may be taken hostage, as has happened on other occasions.


Q Other than talking about the OSCE mission, did the Prime Minister
respond in some way to the logic that you laid out about the desirability
of a military solution and so forth? And what was his general answer to
those arguments?


SENIOR ADMINISTRATION OFFICIAL: It's a good question. Let me sort of
summarize what some of the key pieces of his response were. One is a
recognition that the desperate economic situation in Chechnya was one that,
in fact, has made the situation even more difficult, and has increased the
prospect for unrest there, and that implicit in that, being that you need
to deal with the long-term economic situation and to, in fact, actually be
able to resolve the problem.


Second, very strong view on his part that this is a conflict that was
initiated by the rebels because of their attack into Dagestan. Third, a
view on his part that there has to be a strong response against the
terrorists, and fourth, he did agree that the way to resolve the problem is
going to have to be through some form of political dialogue.


The question, I think, that where we still have some differences, how
do they get to that political dialogue, are they being proactive about it,
how quickly are they going to get to it. Those are questions that the
Russians are going to have to answer for themselves, and from our
perspective, the quicker that they can move on this, the better it's going
to be.


Q Who do you think would be the third party in that political
dialogue?


SENIOR ADMINISTRATION OFFICIAL: We didn't specify. That's going to
be something they're going to have to make some judgment about.


Q -- thinking about.


SENIOR ADMINISTRATION OFFICIAL: There are a number of different
parties out there. Obviously, the question of the OSCE was raised before.
There are individuals within Russia that could be turned to. There are
other international parties. I think the key question right now is for
Russia to make a decision that either such a third party dialogue or a
direct dialogue is going to be something that they're going to pursue,
because there is a need for an effective political strategy that brings the
conflict to an end.


Q I just want to know one thing. Is the United States suggesting,
then, that Russia negotiate with -- the known leaders of the armed Chechen
opposition? Because Putin said himself at his news conference last night,
that he is -- Russia is ready to open political talks with political
authorities in Chechnya, but they won't talk to the leaders of the armed
resistance. Is the United States suggesting that they do?


SENIOR ADMINISTRATION OFFICIAL: No, we're not suggesting that the
Russian government enter into a dialogue or a discussion with Basayev.
They're going to have to make judgments about what representatives of the
Chechen people they may be able to work with. They have given different
signals at different times of who those people may be.


For example, Chechen President Maskhadov is one person who, at one
point, they indicated they might have a discussion with. Later, Putin
indicated that they could not. Just in the last day or two, the Minister
of Regions -- I forgot what his exact title is -- indicated that, in fact,
that Maskhadov was a legally elected President of Chechnya, and that if he
renounced terrorism, that he may be somebody that they could talk with.


Those are the kinds of questions that they're going to have to work
through and decide who our credible partners on the other side that they're
willing to talk to.


Q Did Prime Minister Putin suggest when the mission might be
allowed in?


SENIOR ADMINISTRATION OFFICIAL: I don't know the answer to that
question, sorry. All right. Sorry. You've been patient.


Q You may regret this if you will answer this. Just standing back,
what would you see the difference in argument between Serbia's view that
was protecting the territorial integrity of what remains of the former
Yugoslavia, and Russia protecting the territory integrity of Russia?


SENIOR ADMINISTRATION OFFICIAL: I would say that they're extremely
different situations and that I wouldn't go into a comparison between the
two. What I think is clear in the situation in Chechnya is that in order
to bring an end to the conflict in an extremely complex situation where the
rebels are very much intermixed with the civilian population, that it is
important for the Russian government to look at a proactive political
dialogue that can address some of the core issues that led to the conflict
to begin with, and that that political dialogue has to be the absolute
foundation for a successful solution because we don't see how a military
solution is going to work in this situation.


THE PRESS: Thank you.


******


#2
Stratfor.com
Russia 2000
November 2, 1999


A decade after the Cold War, Russia is on the brink of dramatic change.
Stratfor.com predicts that in the coming year, the wide-open nature of
Russian-style capitalism will reverse course. The West has misunderstood
much of what is happening in Russia, including Prime Minister Vladimir
Putin’s career in the KGB and its implications. After years of separatism,
Moscow is poised to reassert control over the country’s restive regions.
Finally, upcoming elections point to a government more centralized than any
since the final years of the Soviet Union. Today we begin with the economy:
Part I
Coming Thursday: Russia's spy prime minister.


The Economy: Russia Turns Back


After years of decline, Russia’s flirtation with capitalism has now reached
a critical juncture. The experiment with Western-style capitalism has
collapsed. And the invention of Russia’s peculiar ­ and wild ­ brand of
capitalism has ended in outrageous scandal and popular discontent. A decade
worth of foreign aid and investment has left Russia a pauper nation.



Burned by its post-Cold War experience, Russia is now poised to turn back
the economic clock and to narrow its economic relations with the West.
Russian politics increasingly point to a return of centralized,
state-directed planning which can direct Western investment, minimize
corruption and begin to satisfy everyday Russians. Most major presidential
candidates, for example, come from backgrounds of strong state planning.


Why Russia's economy is hard to quantify.
A decade ago, such planning was known as perestroika. For the West, it was
the beginning of Russia’s financial opening. But for Russia, perestroika
was an altogether different endeavor. It was a calculated effort by the
government’s security apparatus to close the technology gap with the West
through foreign investment, while still maintaining the Communist Party's
stronghold. In the coming 12 to 18 months, the new perestroika will attempt
to rebuild highly centralized control, while keeping the door cracked for
Western capital. 


The economy is in such critical condition that a return to some form of
centralized planning now presents itself as the only viable option. Though
Russian statistics do a poor job of measuring the true state of the
economy, they generally portray a situation that cannot continue.
Productivity is half of what it was a decade ago. Real disposable incomes
have also fallen by half. Up to $500 billion in capital has fled for havens
abroad. Foreign investors are expected to pump just $1 billion into the
country by the end of this year, down from $2.2 billion last year. [click
graph for more on statistics]


Whether the new perestroika succeeds or not, Russia’s relations with the
West will change dramatically. The economic situation is so dire failure to
control it will likely plunge the country into political crisis and force a
break with the West. Even if the return to centralized planning succeeds,
relations with the West will narrow sharply. The economy’s wide open,
free-for-all will grind to a halt as Western investors wait on bureaucrats
to put them into constrictive joint ventures, as now exist in China.
Hunting for large returns on investment, the government will have little
interest in either small, entrepreneurial investors or portfolio investment.


Either way, Russia is now poised to return to its past. 


The Truth About Perestroika


There has been a fundamental flaw in the West’s approach to Russia since
the end of the Cold War: no one has noticed that there has been no
revolution. 


The West’s initial elation at the collapse of the Soviet Union ignored the
fact that the old regime’s politicians, bureaucracy and attitudes remained
intact. Intact alongside them in the late 1980s and early 1990s was
Russia’s history of centralized control. Russia had never had an industrial
revolution, history of free markets, democracy or rule of law. 


Even President Boris Yeltsin inherited a Russia that lacked only the
political superstructure of the Soviet empire. Apart from a handful of
eager reformers zealously encouraged by the West, Russia’s "new" economy
has rested on the same institutions as the old. The Soviet legal system
remained in place, as did its socio-economic structures. Even the post-USSR
reformist initiative was a legacy of Soviet planning. 


The troubles of Russia at the end of the 1990s can be traced directly to
the early 1980s, when the ponderous, centralized control of the Soviet
Union began a subtle shift in the desperate hope of competing with the more
advanced economies of the West. Indeed, Yuri Andropov, former KGB chairman
and short-lived general secretary of the Communist Party (CPSU), not only
laid the groundwork for perestroika and the collapse of the Soviet Union ­
but also hopelessly handicapped the reformist effort that has followed. 


In the early 1980s, the KGB became aware that the West was rapidly
outstripping the Soviet Union in civilian and military high technology. The
KGB warned that the Soviets would lose the Cold War. And so, plans were
laid to restructure economic relations with the West, through perestroika,
and politically, through glasnost. In this way, Russia could capture
foreign direct investment and the willing transfer of technology ­ all
while maintaining the Communist Party’s grip on power.


As early as 1984, a select group of Politburo members and KGB First Chief
Directorate officers began planning to set perestroika in motion. By 1986,
KGB officers and Komsomol officials were building the new economic
infrastructure ­ banks, trading companies, stock and currency exchanges,
and corporate shells ­ that were to attract and exploit Western investment.
The KGB and trusted party members in trade ministries were also tasked with
generating hard currency from the export of raw materials, which was to be
laundered through offshore financial institutions and eventually return
disguised as "Western" capital investment. 


While the West overlooked it, the KGB in fact permeated the entire
perestroika economy. Its officers took executive positions in all the new
firms to guide and contain the process. Soviet perestroika law required all
foreign investors to have Russian partners. According to officers who took
part, the KGB’s Fifth Chief Directorate formed most of the 1989-1990 joint
ventures, while the Central Committee of the Communist Party was
responsible for the rest. In 1992, an estimated 80 percent of joint
ventures included KGB officers. Western businessmen even sought out KGB men
as business partners, since they had a reputation for getting things done.


But the fundamental flaw of perestroika quickly became apparent: once the
door was open, the Communist Party couldn't keep control of the economy. On
orders from senior officials anxious to safeguard the Party's assets, the
KGB began the first great wave of Russian capital flight since the
overthrow of Czar Nicholas II. The KGB used its own foreign residencies, as
well as institutions established under perestroika, to hide billions of
dollars of Party and state resources abroad. The scale of the KGB project
was impressive. From 1989 to 1991, the KGB first chief directorate funneled
at least 60 metric tons of gold, 150 metric tons of silver, 8 metric tons
of platinum, and from $15 to $50 billion in hard currency abroad, according
to Russian investigators. 


To conceal and protect the Party’s fortune, officials formed some 100 banks
and other commercial enterprises in Moscow between 1990 and 1991, with 600
more in the regions and still more outside the Soviet Union. One of these,
founded in late November 1990 by Eurobank, the Paris based arm of the
Soviet Central Bank, was the Jersey based Financial Management Company Ltd.
­ FIMACO. In 1990, then-Politburo member Primakov negotiated a $1 billion
loan from Arab gulf states, which reportedly vanished into FIMACO. FIMACO
would later serve the same purpose for the erstwhile reformist Russian
government. (back to top)


Russia Today: The Men of Perestroika Return
Ten years later, the truth about perestroika resonates more loudly than
ever ­ though largely unheard in the West. The entire generation of key
politicians and businessmen who are now vying for control of the country
were intimately involved in perestroika and the export of party assets. 


For example, in 1992, Yevgeny Primakov, then head of the Russian Foreign
Intelligence Service (SVR), the successor to the KGB’s First Chief
Directorate, stifled a parliamentary investigation of Soviet Communist
Party capital flight. 


Primakov was reportedly one of five senior officials, including Soviet
Central Bank Chairman Viktor Gerashchenko, to be briefed by KGB Col. Leonid
Veselovsky on the methods available for hiding Communist Party funds
overseas. Primakov is not the only senior Russian official with these ties.
Some evidence suggests that Prime Minister Vladimir Putin, then a KGB
officer in Germany, took part in Soviet capital flight in the late 1980s.


Several Russian oligarchs, now deep in the country’s economic scandals, got
their start during this period. Some traded Russian resources under
perestroika, purchasing them at cheap, state-subsidized prices and selling
abroad at higher, world market prices. Others established and headed banks
on behalf of the Communist Party. 


All benefited wildly from Russia’s opening to the West. These banks scored
huge profits when then-Russian Central Bank chief Viktor Gerashchenko
issued them extremely cheap credits. In 1992, with inflation at 2,500
percent, the Central Bank lent the equivalent of 32 percent of Russia’s
entire Gross Domestic Product (GDP) at 10 to 25 percent of annual interest
rates. A few privileged banks have also handled the accounts of Russian
government ministries and agencies, the president’s office, the parliament
and regional governments. 


The West, in turn, has fundamentally miscalculated, enthusiastically
supporting a small group of reformers who administered unpopular shock
therapy to the economy in a short-lived program of privatization,
liberalization and tight monetary policy. The Russian public has seen its
buying power plummet and savings evaporate in hyperinflation, marking the
beginning of the Russian public’s disillusionment with reform. Today, real
disposable income is down more than 50 percent since 1991. Nearly 40
percent of Russians earn incomes below the official subsistence level of
787 rubles, or $31, per month.


As they rose in prominence in the early 1990s, reformers came up against
both the entrenched Soviet-era managers and the proto-oligarchs. In the
early stages of privatization, the reformers handed control of inefficient
old Soviet factories to Soviet-era managers ­ who balked at reform,
downsizing and restructuring. 


The main clash occurred in early 1992 and effectively marked the end of
reform, though Russia has wrestled with it ever since. At the time,
Yeltsin, at the urging of his economic advisor, Yegor Gaidar, attempted to
undermine the looting of subsidized commodities by liberalizing commodity
prices and exports. Russian oil sold domestically at 1 percent of world
prices, and those who traded this abroad made $24 billion on the difference
in that year alone ­ the peak of the scheme. The lost revenues amounted to
about 30 percent of Russia’s GDP. 


Backed by the communists, Viktor Chernomyrdin and others in the state
energy apparatus who benefited from the looting challenged Gaidar, arguing
the rationalization of prices would destroy Russian industry. Chernomyrdin
won, becoming energy minister and later replacing Gaidar as prime minister.
The rejection of Gaidar’s reforms both highlighted the pervasiveness of the
pre-Soviet apparatus and effectively marked the end of reform. From that
moment forward, reformists like Anatoly Chubais, Moscow’s privatization
chief, have waged a series of losing battles against the old Soviet
apparatchiks and have been forced into shortsighted tactical compromises. 


The reformists’ losing rear-guard battle has effectively laid the
foundation for today’s scandals. Reformists sought to counter the
apparatchiks by building up power and influence of a few bankers ­ soon to
be full-blown oligarchs. The oligarchs emerged with the most power and as a
result have done the most looting.


In December 1995, Anatoly Chubais, then-first deputy prime minister, struck
the first of these Faustian bargains. Reformists have struck them ever
since, steadily losing power. In what became known as the loans-for-shares
scheme, Chubais convinced a small group of bankers ­ the rising oligarchs ­
to issue loans to the government against the collateral of shares in some
of the country’s largest and most lucrative firms, including the oil
companies Yukos, Sibneft and Sidanko. As expected, the Russian government
could not repay its loans at the end of the one-year term, and the
oligarchs organized rigged auctions to divide the spoils.


Chubais’ second bargain again enlisted the rising oligarchs, in a desperate
attempt to keep Yeltsin in power when his prospects looked grim in the
run-up to the 1996 presidential election. Most Russians blamed Yeltsin’s
erratic economic reform program for the substantial declines in their
standard of living and the communists and presidential candidate Gennady
Zyuganov capitalized. Chubais called on the oligarchs to finance Yeltsin’s
re-election. Having sold the economy to the oligarchs in order to defeat
the apparatchiks, Chubais then effectively sold the government to the
oligarchs to defeat the Communists at the polls. 


The oligarchs fronted the election and Yeltsin prevailed, but not before
his personal bodyguard Alexander Korzhakov exposed the financing scheme
after catching two of Chubais’ campaign staff slipping out of the Kremlin
after dark with a satchel full of cash. Korzhakov paid for blowing the
whistle with his job, while Chubais and oligarchs Boris Berezovsky and
Vladimir Potanin were given jobs in the government. 


The resulting unholy alliance of government and full-fledged oligarchs
completely eliminated all hopes of reform. Together, the seven oligarchs
who backed Yeltsin together controlled 50 percent of the Russian economy.
Considering that 40 percent of Russia’s GDP was produced by businesses run
by organized crime, according to a 1995 multi-department Russian committee
report, the Kremlin had few targets to reform or tax. 


The pressure to increase tax revenue in the face of evasion by politically
connected oligarchs and big business has caused the tax agencies to bleed
small and medium businesses dry. It has also led the tax agencies to
promulgate a host of tax regulations and petty fees that have made it
difficult for foreign investors to do business. Today, only the politically
protected or criminal empires thrive.
With the oligarchs inside the Kremlin walls, Russia has settled into a
state of unbridled kleptocracy. Exemplary of this, Berezovsky gradually
took control of the state-run airline Aeroflot beginning in 1997, and
allegedly proceeded to embezzle most of its profits, stashing hundreds of
millions of dollars in his Swiss bank accounts. 


But as the economy has increasingly dwindled there is less left to steal
and the alliances of recent years are becoming uncommon. The auction of the
telecommunications holding company Svyazinvest in July 1997 marked the end
of cooperation between the oligarchs and set off the Bankers War.
Svyazinvest was "promised" to MOST Group chairman Vladimir Gusinsky, but
Oneximbank chief Vladimir Potanin, backed by George Soros, outbid him at
the last moment. 


But the ensuing war of accusations and counteraccusations was waged on the
front pages and TV screens of the media empires controlled by the competing
oligarchs. To this day, the battle irrevocably factionalized the oligarchs
as they aired their dirty laundry in front of the public. Yeltsin called
them together to urge them to put national interest first, but it was too
late. The oligarchs, their scandal exposed to the public, have long since
sown the seeds of their eventual destruction. 


Perstroika Revisited


With a nearly dead economy and the oligarchs’ corrupt empire exposed,
Yeltsin has made his own Faustian bargains. Increasingly, these bargains
point to a return to some form of centralized planning. After all, the
economies of both the reformists and the oligarchs have now proven to be
utter failures.


Yeltsin’s selection of Primakov for prime minister in 1998 was the first of
these deals that increasingly point the way to Russia’s future. Initially,
Primakov was merely an effort to appease the Communist-dominated Duma. But
long after Primakov was dismissed, the old Soviet perestroika men have
taken the opportunity to gain ground they had lost to the oligarchs. 


More significant than Primakov’s brief tenure were the Communist Party
loyalists who returned at other levels of government to reign in the
oligarchs and reassert central control. Primakov appointed several classic
Soviet apparatchiks to the upper ranks of government. He brought in First
Deputy Prime Minister Yuri Maslyukov, a Communist and the last chairman of
Gosplan, the USSR's State Planning Committee, and put him in charge of
economic policy. He also appointed Gennady Kulik, one of many early
post-Soviet profiteers, as deputy prime minister in charge of agriculture.


The rise of the apparatchiks has also meant a crackdown on the oligarchs.
Prosecutor General Yuri Skuratov was given free rein to investigate and
expose their economic crimes. Skuratov managed to expose the FIMACO,
Aeroflot and Mabetex scandals and to issue arrest warrants against
Berezovsky and Smolensky before Yeltsin struck him down. These scandals
broke in early 1999. 


The emerging dominance of Soviet-era influences can also be seen in foreign
policy. Russia has turned against the West over Kosovo, arms sales to Iraq
and Syria, assistance to Iran on nuclear and missile programs, and the
START II and ABM treaties. Meanwhile, the Yeltsin administration launched
its own series of tactical moves aimed at consolidating its hold over the
lucrative remnants of state-controlled industry, specifically arms exports
and the oil and gas industries.


In a last gasp, Yeltsin fired Primakov and appointed Sergei Stepashin in
his place. Stepashin stalled investigations and wooed the IMF for another
loan, but he had little room to maneuver. The cat was out of the bag
regarding the scandals and Russian security services were leaking
information directly to the Western media and investigators. The
reactionary forces quickly regrouped. Primakov found a power base in
Fatherland-All Russia (OVR), which the Kremlin feared Stepashin couldn’t or
wouldn’t assail. So, Yeltsin sacked Stepashin on Aug. 9 and appointed
Federal Security Services Director Vladimir Putin, an ex-KGB operative, to
the post. 
The rise of Putin marks the final step back to the days of perestroika.
Whether Yeltsin’s decision was shortsighted and voluntary or forced on him
is unclear. Yeltsin hopes that Putin can draw on his KGB resources to win
the election for Yeltsin allies. Putin, however, reflects complete
continuity of background, outlook, and behavior from Primakov and the
perestroika faction. 


Russia 2000?


So Russia has been left looted and dispirited, with an aging physical
plant, some heavy industry, a little investment, and a trusty stock of raw
materials. Perestroika failed to build a Russian Silicon Valley. Reformists
failed to modernize and Westernize the economy. Oligarchs have been caught
stealing everything that was not nailed down.


Now the perestroikists will have another turn, their second chance to
centralize Russia’s economy, while keeping the country open to foreign
investment. As a model, the perestroikist candidates will look to China,
where the ruling party thus far has managed to maintain order and control ­
while accepting hundreds of billions of dollars in Western investment.
Primakov, Putin, Lebed or their proteges will attempt to put the system in
order, first turning against the oligarchs, trying them for economic
crimes, and at least temporarily nationalizing their assets. The oligarchs
are convenient scapegoats and their elimination will win approval from the
Russian people. 


Russia, in fact, appears to be headed for a serious economic crisis and
capital shortage in the year 2000. The real challenge for the next regime
will be convincing international lending organizations ­ specifically the
International Monetary Fund (IMF) ­ to prop up the economy. Burned by
Russia’s scandals, the IMF is reluctant to continue pouring money into
Russia. It will be even less inclined to do so if Yeltsin’s successor
boosts spending on military and security, social safety nets, and subsidies
to regional governments. 


Attempting to re-establish the power and authority of the central
government, the perestroikists simply cannot afford to meet the IMF’s
demands. Putin has already warned that Russia will gladly implement the
IMF’s austerity measures ­ so long as they do not conflict with Russia’s
national interests. For Putin and others, Russia’s international position
and domestic political pressures take precedence over appeasing the IMF,
despite the desperate need for funds. The prime minister scarcely pretended
to defend the IMF-approved budget, opening it immediately to negotiation.
In addition to the changes at the hands of Communist deputies, the budget
is destined for three major revisions by Putin, none of which will appeal
to the IMF. 


Putin intends to finance the war in Chechnya and subsequent arms purchases
in the new budget. He plans to buy the support of the regional governors by
attuning the budget more to their desires ­ more federal subsidies
dispensed to the regions, fewer taxes collected from the regions.
Additional funds will be earmarked to pay overdue wages, also with the
intent of winning votes. 


The IMF is likely to disburse at least two more tranches of its last loan
package to Russia pending investigation of the scandals. The first will
come before the Duma election; no matter how badly they have been burned,
Western leaders are unwilling to risk throwing Russia into economic turmoil
immediately before an election ­ and thus hand victory to extremists. For
the same reason, another tranche is likely before next year’s presidential
election.


But after that, Russia will be hard pressed to bum a cigarette from IMF
managing director Michel Camdessus. If the IMF in turn ceases to loan
money, Russia will default on its foreign debt ­ expected to top $166
billion by the beginning of next year. Technically, as new IMF loans are
only servicing Russia’s debt to the IMF, Russia has already defaulted. The
IMF is only hiding the fact to prevent panic and the complete abandonment
and ensuing economic collapse of Russia. Presented with the inevitability
of Russian default, the IMF may choose to accept Russia’s appeal for
forgiveness of at least the $100 billion debt it inherited from the Soviet
Union.


There is a small chance that Russia could repatriate up to $500 billion
estimated to have been hidden abroad over the past decade by everyone from
the Communist Party and the KGB to the oligarchs and organized criminals.
This would depend on the cooperation of Western banks and investigators and
the next regime will not push the issue until the national debt issue is
resolved ­ it won’t want the lost capital to go straight into the IMF’s
coffers. Still, a Putin or a Primakov could be quite a national savior with
that kind of slush fund.


Without those funds, Russia’s next president will find his options sharply
narrowed. The politicians poised to take Russia’s helm are those who were
left hanging by the sudden collapse of perestroika. 


Russia has now come full circle. It has exited the political and economic
cul-de-sac of the Yeltsin years and the perestroikists stand ready to
resume their work. Left unanswered is the question why, having once
experienced perestroika disintegrate, they feel they can make it work this
time. 


*******