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CDI Library > Johnson's Russia List

Johnson's Russia List
 

 

September 17, 2000    
This Date's Issues: 4519  4520   

 



Johnson's Russia List
#4250
17 September 2000
davidjohnson@erols.com


[Note from David Johnson:
1. AP: Jim Heintz, Russians Not Paying for Electricity.
2. BBC MONITORING: PETROL CRISIS WORSENS FUEL SHORTAGE IN RUSSIA.
3. Rossiyskaya Gazeta: Russia's Place in World Oil Market Commented 
On in Context of OPEC.

4. Christian Caryl: re David Remnick remarks in New Yorker.
5. Peter Ekman: re: Blank/4517.
6. Richard Thomas: RE: 4518/Patrick Cockburn/Russia.
7. Financial Times (UK): BOOKS: Imperial urges: The collapse of empires 
can be a dangerous business: John Lloyd reports. (Review of EMPIRE by 
Dominic Lieven)

8. Interfax: GORBACHEV SAYS FREEDOM OF SPEECH IN RUSSIA WAS IN CRISIS 
LAST MONTH.

9. Nezavisimaya Gazeta: 2001 DEFENCE BUDGET UNACCEPTABLE TO THE ARMY.
General of the Army Andrei NIKOLAYEV, chairman of the Duma defence 
committee, interviewed by Valery ALEXIN.

10. Executive Intelligence Review: Rachel Douglas, Investment, 
Eurasian Infrastructure Are Burning Questions for Russia. And
A Strategy for National Industrial Development by Yuri D. Maslyukov, 
Chairman of the Russian State Duma's Committee on Industry, Construction, 
and Science-Intensive Technologies.]


******


#1
Russians Not Paying for Electricity
September 17, 2000
By JIM HEINTZ

MOSCOW (AP) - As the electricity monopoly in the world's largest country, 
Russia's Unified Energy Systems has plenty of prodigious statistics - 
including what could be the world's longest list of deadbeat customers. 


Not only do they owe the partly state-owned UES an estimated $5 billion, but 
they include some of the country's most secret sites, including nuclear 
missile bases and the Plesetsk space launch facility. 


The utility's attempts to collect its bills grabbed national attention last 
week when one of its local branches cut off power to a missile base that owed 
$683,000. The base retaliated by sending soldiers to a switching station to 
turn the lights back on. 


In the wake of that dispute, the Plesetsk cosmodrome announced it had 
received a warning that switchoffs were imminent unless it paid $1.6 million 
in arrears. A missile base in Altai said it was being pressured to pay up on 
bills exceeding $180,000. 


UES later ordered its subsidiaries not to cut power to strategic military 
units. But if that order quelled the uproar, it did not resolve the company's 
debt crisis. 


The utility is caught in a web of financial problems that seem as complex as 
the 1.8 million miles of power lines it manages. It is both a victim of 
Russia's economic troubles and a contributor to them. 


UES can't collect from many state-run installations, such as the military 
bases, because those operations are themselves underfunded. Even when it does 
collect, it's often in barter or in-kind services. 


In the first half of this year, only 62 percent of the payments to UES were 
in cash, board member Andrei Trapeznikov said in a statement. Nonetheless, 
that's an improvement over past years, when cash collections were reported as 
low as 10 percent. 


UES complains it has to sell electricity for unreasonably low rates, about 1 
cent per kilowatt-hour. ``I am not proud of the epithet that UES is the 
world's largest and also the world's cheapest power company,'' chief 
executive Anatoly Chubais said in a letter to shareholders. 


According to UES, power demand in Russia is rising at about 3 percent a year 
while the utility's troubles reduce its ability to increase supply, and it 
predicts demand will exceed capacity within about five years. 


But charging more realistic rates could be catastrophic for Russia's economy, 
where many businesses survive by being able to sell their products at low 
prices made possible in part because of low power rates. Analysts say the 
energy-intensive aluminum industry, one of Russia's major exporters, could be 
especially vulnerable. 


Industries that are effectively subsidized in this way are at the heart of 
what many Western economists have taken to calling Russia's ``virtual 
economy.'' 


According to one of the scholars who popularized the phrase, Barry Ickes of 
the University of Pennsylvania, rationalizing UES operations is the key to 
bringing Russia out of its economic bind. 


``But you would need to have in place policies to cope with the political 
byproducts,'' such as wide unemployment that would be caused by raising 
rates, he said. 


The Russian government, plagued by low tax collections, is unlikely to be 
able to marshal the money for that, he noted. 


``At the end of the whole chain, the state hasn't been able to collect 
taxes,'' agreed William Browder of the Hermitage Fund, which has invested in 
UES. 


The Russian state holds 52.5 percent of the utility's shares and foreigners 
own about 30 percent of the stock. 


Chubais has proposed a complicated restructuring plan that he argues would 
bring more efficiency to the electricity market. Generating facilities would 
be spun off into some 70 regional operations while transmission and 
distribution facilities would remain national. 


The plan has been widely criticized. Analysts say it would accomplish little 
and could be a new opportunity for unscrupulous entrepreneurs to grab pieces 
of an important enterprise at bargain prices. That happened at many other 
state-owned firms when Chubais was chief of the Russian government's 
privatization program. 


``We see it as a thinly disguised attempt at asset-stripping,'' Browder said. 


******


#2
BBC MONITORING
PETROL CRISIS WORSENS FUEL SHORTAGE IN RUSSIA
Text of report in English by Russian newspaper 'Kommersant' on 15th September 


The world fuel crisis has spread to Russia. Petrol stations have been closed 
in a number of regions owing to the lack of fuel. Experts are confidently 
forecasting a rise in the price of the "popular" A-92 gasoline to R10 a 
litre. Two scenarios of the development of events are possible in this 
situation: mass civil disobedience protests, as in Europe, or the flooding of 
the market with low-grade, but cheap, petrol. 


OPEC's decision on a minimum increase in oil production has been heard by 
sellers of automotive fuel around the world. Russia is no exception. 
According to data of the State Statistics Committee, the average retail price 
of petrol in the country in the past two weeks has risen by almost 2.5 per 
cent. Earlier such a growth had occurred over 2-2.5 months and not in all 
regions. 


The Ministry of Fuel and Energy is explaining the petrol crisis by the 
increased cost of oil on the domestic market, which is gradually resulting in 
a growth of the wholesale-transfer prices for petroleum products. According 
to ministry data, in the past two months the domestic price of oil has 
increased by almost one-third (a tonne of Russian oil now costs R4,000 with 
an average production cost at the refineries of R3,200 a tonne). Experts 
explain the increase in prices in Russia, a country which produces a surplus 
quantity of oil and could keep its price low even without subsidies, by 
speculative demand for hydrocarbon raw material in the European countries and 
the USA. The producer companies are oriented towards the prices of the export 
contracts, the state, though, has no levers for regulating the domestic 
market. 


The increase in the domestic oil price is not the sole reason for the 
increased cost of fuel, though. In the estimation of Daniil Smirnov, director 
of the public relations office of the Norsi-Oil company, "natural price 
matching" is taking place in the country. The cost of consumer goods (to 
which petrol also pertains) is being adjusted with regard to the growth of 
energy tariffs (by 35 per cent) and the increased cost of railway freight 
haulage (25 per cent). 


"If prices go even higher, people will stop buying petrol," Eduard 
Grushevenko, chairman of the expert-advisory board at the Ministry of Fuel 
and Energy, maintains. In his opinion, the limit of effective demand 
fluctuates in the range of R9-10 for a litre of A-92-grade petrol. In the 
majority of regions the price of fuel is already close to the "critical 
mark". 


Prices remain relatively stable only in Moscow - A-92 costs R7.5 a litre on 
average. True, as Sergey Borisov, president of the Moscow Fuel Association, 
observes, the demand for automotive fuel has increased by 30 per cent in the 
capital in the past several days owing to the influx of out-of-town vehicles. 
According to him, tank trucks with regional plates, "which are purchasing 
fuel from the capital's operators and taking it to other cities", have been 
showing up increasingly on the streets of Moscow. Borisov emphasized that 
there is today a real danger of a "drain" of petrol to the regions that are 
more profitable to operators. In his opinion, though, there will be no fuel 
crisis in the capital in the coming days: the capital's tank farms have a 
seven-day reserve of petrol and diesel fuel. 


Meanwhile, many regions are today experiencing a real fuel shortage. In 
Khakassia, Novosibirsk, Kemerovo, Tula and Tomsk, for example, the majority 
of petrol stations have come to a complete halt, despite the fact that nearly 
all these cities are located close to oil refineries. "The refineries are 
underloaded because their owners underestimated how much petrol the country 
would need. Twenty five per cent of the petrol stations are closed in 
Yaroslavl alone, despite the fact that the Yaroslavl oil refinery is located 
there," Borisov explained. 


In the opinion of the majority of fuel-market experts, restrictions on oil 
exports would help us avoid a fuel crisis and maintain prices if only at 
today's level. The government had only under pressure from the oil companies 
to cancel as of July the balance targets for petrol and diesel fuel exports 
to immediately increase by a factor of 1.5. In Eduard Grushevenko's opinion, 
we cannot manage with just customs duty alone. The government has already 
decided that the balance targets for petrol this year need to be brought 
back, otherwise its shortage on the domestic market will amount to 500,000 
tonnes. 


True, German Gref, the minister of economic development and trade, believes 
that there are no grounds for anxiety as regards price rises. "The increased 
demand for petrol is seasonal," the minister believes. Gref believes that the 
price of petrol "will either stabilize or decline" before the end of October. 


The Ministry of Fuel and Energy's forecasts are more pessimistic. "The 
increase in the price of fuel will inevitably pull up with it the prices of 
all types of product and of rail transportation," Grushevenko believes. 
Ministry specialists are convinced here that the cost of petrol in Russia 
will increase, all the same. "The most popular Ai-92 brand will soon be 
costing no less than R9," Aleksandr Degtyarev, director of the press 
department of the Ministry of Fuel and Energy, surmised. And he added that 
"this price is in keeping with world standards". 


We would note that the owners of the petrol stations are in no panic over the 
price rise. "We will have no sale problems in Moscow," a spokesman for a 
company that owns a network of petrol stations told Kommersant. In the 
opinion of observers, Russia will hardly be engulfed by petrol revolts. The 
owners of domestic motor vehicles will most likely convert their engines to 
low-octane petrol, as was the case in the 1970s, when the price of Ai-92 rose 
for the first time. In addition, there will also be an increase on the market 
in the proportion of adulterated petrol (Ai-76 is made from straight-run, the 
high-octane grades, from commercial-grade, petrol). Even now the proportion 
of primitive petrol amounts to 60 per cent in certain regions. With an 
increase in prices, its proportion will obviously grow. 


******


#3
Russia's Place in World Oil Market Commented On in Context of OPEC 


Rossiyskaya Gazeta
September 12, 2000
[translation for personal use only]
Article by Aleksey Chichkin under the "Topic of the Day" rubric: 
"Oil as a Political Category" 


The current fantastic world prices for oil are such 
that they could perfectly well provoke an energy crisis in the countries 
of the West similar to that which occurred in the mid-seventies. 
Therefore, the industrial world, which advocates the so-called free 
market, craves just one thing -- stable price by any means. The 
Organization of Petroleum Exporting Countries is capable of doing this. 
Although not on its own, but only if other major exporters and, in 
particular, Russia go along with its decisions. 
And this is understandable: Russia has a 15% share of the world oil 
market and, in terms of world extraction, produces roughly one-fifth of 
the oil. The "Russian factor" is becoming increasingly important. 
We should remember that the USSR did not support OPEC in the second 
half of the seventies, dramatically increasing its oil exports at low 
prices at the time, which literally saved many Western countries from the 
current fate of our long-suffering northern territories, which are 
freezing without fuel. 
But since 1991 Russia has become far more sympathetic to OPEC's 
ideas, if only because this organization establishes price bands for all 
oil. And -- what is no less important -- the quotas for the extraction 
and export of oil and the prices for it are determined (unlike in 
previous decades) during consultations with the leading Western 
oil-importing countries and companies. 
Another thing is also obvious. The current world situation, which 
has already raised world prices to $31-32 a barrel, is extremely 
advantageous to Russia. It is this factor which has enabled the 
government to build up sufficient foreign currency reserves. But there 
is no point at all in driving our Western partners into an energy crisis. 
This is also disadvantageous to the majority of OPEC countries and 
other supplier countries. 
Particularly as the world oil situation depends to a decreasing 
extent on purely economic categories -- the balance of supply and demand. 
This is an extremely politicized sphere. Conflicts involving Russian 
tankers in the Persian Gulf, the bombing of Iraq, the growing separatism 
in oil-exporting countries and regions, Islamist terror in Algeria, 
and... even reports about Saddam Husayn's incurable illness -- these 
events dramatically boost oil prices. 
Russia spoke of the need to collaborate with OPEC for the first time 
in 1998: Sergey Generalov, the then Russian Federation minister of fuel 
and energy, supported on the government's behalf the idea of our 
participating in OPEC's work as an associate member (six countries, 
incidentally, have enjoyed this status since 1970). And then Russia for 
the first time supported measures to restrain exports and particularly 
extraction in order to "return" the plummeting oil prices to their former 
level. The next minister, Viktor Kalyuzhnyy, enabled our country, while 
not 
formally party to quotas or other OPEC instructions, to support the 
measures to raise world oil prices (notably introducing export 
restrictions, particularly on supplies to the market involved in 
relatively cheap, nonrecurring deals). Other countries not 
participating in OPEC -- Mexico, Norway, and a number of Arab, South 
American, and African states -- acted likewise. As a result, the prices 
this fall have reached a record level -- the highest in the last 15 years. 
But it is this "record" which threatens to backfire on all sides. 
The United States and other Western countries have even been forced to 
announce that they will imminently "release" oil (their own imported oil) 
on to the market if the suppliers themselves will not do so. According 
to certain estimates, this will cause prices to fall by $8-10 a barrel. 
This means that the execution of the 2001 Russian budget, which has a 
$21-a-barrel price "factored" into it, could become difficult. 
Although, according to the OECD (26 industrialized countries), a range of 
$19-26 would suit Western countries. In short, the lower it is the more 
reliable. In this situation Russia and other associate partners of OPEC 
supported the decision the day before yesterday (10 September) to 
increase the extraction of oil designed for export by 800,000 barrels a 
day from 1 October, thereby warding off the threat of not only a collapse 
of the world market but the freezing of many Western capitals. 


******


#4
Date: Sat, 16 Sep 2000 
From: Christian Caryl <CCaryl@compuserve.com>
Subject: David Remnick remarks in New Yorker


Dear David:


Perhaps I haven't been following the list religiously enough, but I'm
surprised that no one has commented on David Remnick's extraordinary
throwaway line on Russia in the September 11 issue of The New Yorker (p.
35):


"Anyone [i.e., in Russia] can report anything, print anything, say
anything."


As examples, he cites personal ads, "O Schastlivchik," and "Golaya Pravda"
(!).


He then adds:
"The sole danger to serious literature now is not censorship but, rather,
the danger it faces everywhere: indifference."


I would very much like to visit the Russia he's describing from New York. I
certainly don't live there.


******


#5
From: "Peter D. Ekman" <pdek@co.ru>
Subject: re: Blank/4517
Date: Sun, 17 Sep 2000


I was surprised by the passion of Blanks's response to my suggestion that
Putin's response to the Kursk sinking might be viewed as something a bit
more than the usual "Putin lied to the press for a week."


I was out of Russia that week, so I don't know all the details, but in
comparison to previous Soviet/Russian leaders' responses to similar events,
Putin's response seemed remarkable good. By comparison to American
Presidents' responses to similar events it might not be so good.


Choosing "similar events" might be controversial, but lets try 4:
Gorbachov's responses to Chernobyl, the Tbilisi "riots," and the seizure of
the television tower in Latvia, and Yeltsin's response (to the press)
during the shelling of the White House in Oct. 1993. If anyone has
personal recollections of the leaders' responses to the press during these
times, maybe you could disabuse me of the impression that almost nothing
was told to the press directly by the leaders, that they didn't take many
questions, and that much of what they did say was disinformation. I'm
relying on my wife's fairly vague recollections.


In comparison, it seems that Putin addressed the press several times,
answered questions, and responded to public pressure to go to Murmansk and
talk to the relatives. In short, a remarkable performance by Russian
standards.


By American standards - well, I think we can all think of a few examples of
where the press converged on the president and he didn't perform very well
- the Monica scandal might be an example. In general,American presidents
handle this type of pressure from the press a lot better than Putin did
however. I'm interested in whether anybody knows how the US gov't handled
past nuclear sub sinkings? I'd guess the president stayed as far away from
it as possible, and the news came out weeks or months later.


******


#6
From: "Richard Thomas" <map-rjt@vld.pma.ru>
Subject: RE: 4518/Patrick Cockburn/Russia
Date: Sun, 17 Sep 2000 


Dear David, It is remarkable how occasionally, amidst the onrushing and
seemingly relentless waves of self-righteous, self-congratulatory and,
frequently, self-interested commentary and "reporting" (both foreign and
domestic) on Russia, a clear, strong, knowing voice stands out. Patrick
Cockburn's voice, in the article reprinted from The Independent (UK) in
JRL 4518, is, I think, one of these. (Nick Wadhams for AP is another. As
for the Moscow Times, well... it's good that it's out there. The
Economist, of course, is above all that, but even there you sometimes find
a gem.) It is infuriating at times for someone who has lived in Russia
for nearly a decade, outside of Moscow in this case, to read the
ill-informed, tendentious things that so often are written about the
place. How refreshing and good it is to read, from time to time, clear,
strong, insightful accounts from people who have truly understood what
they have heard and seen. One of the things I appreciate most about the
JRL is that it presents a carefully selected cross-section of the range of
things being written about Russia today. That most of this would miss the
mark is only to be expected.That some of it hits the mark straight and true
is also to be expected, and these moments are also represented in the
List. If this seems a back-handed compliment, it is not. I feel that you
want the list to reflect what is actually being written, and in this you
succeed very well. 
Richard Thomas, Vladivostok 


*******


#7
Financial Times (UK)
16 September 2000
BOOKS: Imperial urges: The collapse of empires can be a dangerous
business:John Lloyd reports


EMPIRE by Dominic Lieven 


Publishers' blurbs can be right, sometimes. "Immensely readable, lucid and
erudite, this is a masterly account which combines the grand sweep of
history with the fascination of detail." Yes, and even more. Dominic
Lieven, a historian of Russia, has stepped outside his specialist box and
out of the limitations of purely professional historical judgment to craft
a book which is provocative and wise about our (contemporary western
liberal) perceptions of empire. 


It can thus be read, as it were, twice simultaneously: as a history (and of
more than merely the Russian and Soviet empires) and as a corrective to
correctness which never descends to a mere counter-blast against
fashionable notions. To hold these strands at the level of intensity which
Lieven does is a very great intellectual achievement. 


Any scholar of Russia would, 10 years after the collapse of the Soviet
Union, be led to reflect on the pluses and minuses of empire. The collapse
has been a bitter cud for most of the former Soviet peoples to chew. That
contemporary fact, which we witness still, prompts the memory that imperial
collapse often brought a myriad of horrors to replace the imperial
repression - which might, in the case of almost all the empires he
considers, be relatively mild. It is not the least of the virtues of this
book that Lieven reminds us that empire at its best at least took some
responsibility for its many peoples - while nationalist movements rarely
took care of any people other than that it designated as its own. 


"What, after all, is the point in driving one more nail into the coffin of
the Soviet Union?" he writes. "The tale of empire's wickedness and
redundancy, contrasted to the morality and modernity of the democratic
nation, is much too simple. In its time empire was often a force for peace,
prosperity and the exchange of ideas . . . It sustained great cultures and
civilisations. From its origins in the savage repression of the Vendee and
revolutionary France's attempted conquest of Europe, the history of the
would-be democratic nation has sometimes been very chequered." 


Thus his discussion of the Austro-Hungarian (Hapsburg) empire, for which he
clearly has a fondness, reminds us that in its last decade, though crippled
by archaisms and inefficiencies, it was still economically successful,
pluralist and tolerant. It also gave rise, in fin-de-sie`cle (and
debut-de-sie`cle) Vienna a culture of unparalleled richness, much of it
produced by Jews whom the empire did not simply tolerate, but protected
rather better than most nation states of the time. 


Even the Ottoman empire, often cruel and the perpetrator of an early
genocide on its Armenian subjects, was for much of its existence culturally
pluralist and non-racist. Of course, the quid pro quo for tolerance was
loyalty to the Sultan. When the nationalities began to show signs of
wishing to march to the beat of nationalist drums and the pressure of more
successful empires - particularly the British and Russian - became intense,
the reaction was brutal. 


The cold-eyed quality in Lieven's writing leads him to remind us what even
the imperial power which thought itself the most civilised - the British -
actually did. While the mother country's polity reflected smugly (and not
incorrectly) on itself as a haven of constitutional liberties, British
imperialists imposed slaughter, disease and cultural obliteration on a
hundred societies across the globe. And all the while, until deep into the
20th century, it remained largely secure in the belief that it existed for
the good of man and the glory of God. And again - the very
constitutionality and liberties which were promoted at home, and belatedly
and selectively exported to the empire (as to the Indian wealthy classes)
dug the grave of the imperial project. 


In Russia's case, the grave-digging and the collapse happened at breakneck
speed. Mikhail Gorbachev - among the most mysterious of world historical
figures because his achievements were so often the opposite of what he
intended, and his actions so little conditioned by the necessities of the
empire he inherited - imported western liberalism to bolster his rule and
refresh socialism. Yet it ate away at his authority and tore the guts out
of a socialism which had failed to keep the materialist promises on which
it was founded. 


It had been, in its time, the most cruel of empires - if one assumes, as
Lieven does, that Hitler's Reich cannot properly be counted in empire's
pantheon, being more a "product of pathology" than of imperial calculation.
Yet Stalin, who was among the fastest and most successful of empire
builders, and the most ruthless, undertook his own bit of imperial
grave-digging. He, and his successors, quick-marched the Soviet peoples to
literacy, numeracy and thus to the ability to think beyond the local
borders which had constrained the Russian masses for centuries. He created
a federal system which both kept alive old nations like those on the Baltic
and created them where Central Asian tribes had existed before -a move
which, in the 1990s, meant that 15 new nations appeared suddenly on the
international scene, most with little clue of how to give the national form
a civil or even working content. 


The incivility of that empire, the lack of preparation of its successor
elites, the failure of neo-liberal economic models, have produced a doleful
post-imperial reality, suffused with nostalgia for what had gone before.
It, no more than any of the previous empires, is capable of re-assembly.
But the post-imperial order is shaky: as Lieven stresses, we have been
lucky that the collapse has been (with the exception of the Caucasus,
especially Chechnya) so peaceful; and that a nuclear-armed state should
have remained so relatively responsible. Can we count on it for much
longer? Only if we in the west add our efforts to those of the Russians to
stave off a disaster. This book gives us new insight into how possible that
is, and how terrible it might be. Order 'Empire' at a special price of
Pounds 25.50 (free UK p&p) from +44 (0)20 8324 5511 or www.ftbookshop.com 


*****
#8
GORBACHEV SAYS FREEDOM OF SPEECH IN RUSSIA WAS IN CRISIS LAST MONTH
Interfax 


St Petersburg, 15th September: The freedom of speech was in crisis in
Russia this past August, former President of the USSR Mikhail Gorbachev
told the press at St Petersburg's Pulkovo airport on Friday [15th September]. 


Gorbachev arrived in Russia's "Northern Capital" for the 75th anniversary
of the birth of People's Artist of the USSR and Russia Kirill Lavrov. 


"There is a problem with the freedom of speech" in today's Russia,
Gorbachev said, "and in August there was a real crisis". "People felt that
the authorities were making fools of them, and the press could get no
information." 


"I think there was a moment," Gorbachev said, having the Kursk submarine
disaster in mind, "when Vladimir Putin missed something, and he should have
got involved because he was also being made a fool of." But then Putin
"corrected the mistake". 


The last Soviet leader said he believes that the Russian president "himself
took this very hard and learnt a lesson". 


Gorbachev went on to say he does "not doubt Putin's plans to bring Russia
out of the crisis, even though there are many questions and will be more
yet". He then added that he understands "Vladimir Putin more than anyone
else". 


******


#9
Nezavisimaya Gazeta
September 15, 2000
[translation from RIA Novosti for personal use only]
2001 DEFENCE BUDGET UNACCEPTABLE TO THE ARMY
General of the Army Andrei NIKOLAYEV, chairman of the Duma 
defence committee, interviewed by Valery ALEXIN 


Question: Will you comment on the defence part of the 2001 
draft budget, submitted by the government to the Duma in late 
August?
Answer: Under it, defence spending is to grow by 30% on 
2000, but a comparative analysis of the volume spending on 
defence in 2000 and 2001 (in comparable expense structures) 
shows that it has not grown in terms of the GDP share. 
Moreover, its share in the budget will shrink from 2.63% of the 
GDP in 2000 to 2.4% in 2001 (by 0.23%). 
Besides, the government neglected the demands stipulated 
in "The Guidelines (Concept) of the State Policy of the Russian 
Federation in the Sphere of Military Development in the Period 
Until 2005," approved by a presidential decree on July 30, 1998.
They provide for spending at least 3.5% of the GDP on defence. 
In fact, the government has violated its own pledges made in 
1999, when the 2000 draft budget was submitted to the Duma. It 
pledged then to gradually raise allocations to 3.5% of the GDP 
in 2000-2005. 
The 2001 draft budget is based on the prices of June 2000 
and does not take into consideration the current and potential 
inflation rates. Consequently, the proclaimed growth of defence 
spending by 30% (in absolute figures) will be slashed by 
inflation by 12%. 
A careful analysis of the draft prompts the conclusion 
that the so-called growth of defence spending in absolute 
figures was attained by the simple trick of including all 
spending financed from other budgetary items into defence 
allocations. This concerns the peacekeeping actions of the 
Defence Ministry (used to be an element of "International 
Activities"), railway troops and state assistance to industries 
(once a part of "Industries, Power Engineering and 
Construction"), the military reform and certain privileges to 
servicemen (used to be financed from other budgetary sources). 
This growth of pressure on the item "National Defence" 
will reduce to naught the planned growth of defence spending. 
And changes in the functional and departmental structure of 
budgetary expenses contradict the defence and security 
legislation. 

*******


#10
From: "Rachel Douglas" <cmgusa@intrepid.net>
Subject: Maslyukov memorandum
Date: Fri, 15 Sep 2000 


Executive Intelligence Review
Vol. 27, No. 36
September 15, 2000
Investment, Eurasian Infrastructure Are Burning Questions for Russia
by Rachel Douglas

``Only economic development will allow us to
avoid such calamities in the future,'' said Russian
President Vladimir Putin after the Ostankino television
broadcast tower burned in August. The sinking of the
nuclear submarine {Kursk}, in a moment of high tension
that it took Russian-American Presidential consultations
to defuse, was fresh in people's minds. Still undecided,
is just what will be done to shift economic processes in
Russia.
As the State Duma, the Russian Parliament, reconvened
at the beginning of September, there was economic policy
action in two directions. One of them goes by the
old rules of the international financial game. The other,
could take Russia into a Eurasian ``Survivors' Club,'' as
the biggest Anglo-American financial bubble of all time
blows out.
Under the old rules, Russia must adopt a budget for
2001, in which the biggest expenditure line item is
servicing the foreign debt. Defense spending is set at
2.66% of the Gross Domestic Product indicator, but after
the sinking of the {Kursk}, a political fight over this
level has shaped up. Former Prime Minister Yevgeni
Primakov's Fatherland-All Russia group in the Duma has
called for a defense budget at 3% of GDP, while Deputy
Chairman of the Duma's Committee on Economic Policy
Anatoli Aksakov says the budget can accommodate a defense
line of 3.5% of GDP.
Politicians from all quarters note that the budget
calculates Russian oil export revenues at a price of $19
per barrel, whereas it currently fetches nearly $30 per
barrel, and they demand that the budget revenues be
recalculated upwards. State Duma Speaker Gennadi Seleznyov
anticipates attempts to increase not only defense
spending, but also monies for ``basic science, medicine,
and culture,'' which are all drastically underfunded. Prime
Minister Mikhail Kasyanov rejoins, that Russia must have
an eye toward a change in ``the conjuncture''--that is, a
possible dramatic crash of the oil price--and not change
the basic rates of calculation.


- Eurasian Corridors -
Russian defense spending and Moscow's awareness of
the conjunctural crisis potential are by no means
insignificant, but there is not yet a fundamental policy
shift, embedded in the budget debate as such. Far more
profound, are the implications of a new level of
engagement of Russia, under Putin's leadership, with other
Eurasian countries that are in the forefront of a global
shift against the financial and strategic power of the
Anglo-American establishment.
In St. Petersburg in mid-September, will be held the
Second International Euro-Asian Conference on Transport,
attended by representatives of over 50 countries,
including China and India. According to Kseniya Gokoyeva,
writing in {Nezavisimaya Gazeta} of Sept. 7, ``The Russian
delegation plans to sign agreements with India and Iran on
the development of the North-South transportation
corridor,'' ensuring that Russia will not be left out of
the new ``Silk Road'' developments on the Eurasian
continent.
On Sept. 7, the Russian cabinet discussed the ``Europe
to East Asia'' transport corridor, as well as north-south
routes. On the agenda, according to Deputy Prime Minister
Viktor Khristenko, were ``priorities in international
transport corridors ...|, so that the geographical
advantages that Russia has and that were used in the times
of the Soviet Union should be restored, considering ...
the shift of the centers from which goods are shipped and
accordingly the centers of production from developed
countries, to, shall we say, the south.'' The extension of
a Eurasian corridor down the Korean peninsula, said
Khristenko, was discussed at the meeting, and by President
Putin during his visit to Japan. In October, Putin will
visit India.
Engagement in the great Eurasian transport projects
can pull Russian economic policy into the critical,
neglected area of physical infrastructure. ``One of
Russia's top economic priorities--rebuilding
infrastructure,'' Prof. Stanislav Menshikov called it, in an
Aug. 31 commentary in the {Moscow Tribune}. He wrote that
investment in infrastructure construction would be a route
to the pressing task of ``reviving capital investment'' in
general.
Because these are burning questions in Russia, the
documentation of Russian economic policy deliberation,
presented here, is excerpted not from the government's current 
briefs, but from a memorandum by a leading advocate of 
change in economic policy, Yuri D. Maslyukov.


---------------------
Documentation


A Strategy for National Industrial Development


{The memorandum, excerpted here in translation,
was prepared by Yuri D. Maslyukov, Chairman of the Russian
State Duma's Committee on Industry, Construction, and
Science-Intensive Technologies, after hearings he held on
an economic program for the nation. It was published on
Aug. 31. An expert on the Soviet defense industries,
Maslyukov was the last Chairman of the state planning
agency, Gosplan. He served as First Deputy Prime Minister
of Russia in the Yevgeni Primakov government (1998-99).
His memo is subtitled, ``The Place of Industry in
Providing for Sustained Economic Growth.''}


In the framework of the ongoing discussion of the
paths for Russian economic development, one often hears
mention of the need to achieve average annual GDP growth
of 5-10% throughout the next decade.
It should be understood, that there are only two
essential models for the increase of GDP: through the
furious development of the financial sector (leading to
the inflation of a financial bubble, as is familiar from
world experience, as well as Russia's), or through the
development of the real sector, industry above all.
The structure of the Russian economy at present is
such, that GDP growth is essentially determined by the
growth of industrial production, which has been completely
sluggish this year. An acceptable increase of GDP,
therefore, cannot be ensured without an industrial
upswing.... Even if there is balanced growth of the
financial and real sectors, the very structure of the
production of GDP requires that the growth rate of
industry consistently exceed growth rates in the economy
as a whole.
Therefore, when the necessity of sustained growth at
an average rate of 5-10% per annum is discussed, we should
understand that this means either a new ``financial
bubble,'' or annual growth of industrial production at the
rate of at least 10% (including growth in the
electric power sector of at least 7-8%), which is unlikely
under conditions of today's ``investment famine.''
It cannot be argued, that there are no grounds for
such optimistic prognoses. Indeed, thanks to the
strengthening of state support for domestic producers and
the restriction of the growth of fees for the services of
the natural monopolies, certain consequences of the
fourfold devaluation [of the ruble] and the increase of
world oil prices in 1999 gave a significant positive
impulse to the Russian economy. It was preserved into the
first quarter of 2000, when there was 11.9% growth in
industry, an increase in investments of 5.9%, growth of
agricultural production, 1.2%; real incomes of the
population, 7.6%; exports, 47.1%; and imports, 2.9% (the
data for exports and imports are for January-February).
True, the pre-crisis level of the first quarter of 1998
was exceeded only by industrial production (by 10.1%) and
exports (by 20%). The decline of investments was also not
compensated, and continued at a rate of 7.7% for those two
years, while agricultural production fell 4.1% in that
period, real incomes of the population fell 21.3%, and
imports fell by exactly one-half.
But, despite this, the first quarter of 2000 was the
most successful period since the very beginning of reforms
[in 1992]. This gave rise to problems, as well as
successes.
The main problem, is that the market has pre-divided
the economy into two parts: sectors, capable of successful
independent development, and sectors in need of active
support from the state.
In 1999 and the beginning of 2000, Russia experienced
an unprecedented investment boom. It was concentrated,
however, primarily in sectors with relatively stable
effective demand and, most important, rapid recoupment of
investments, which qualitatively reduces political risks.
Thus, investments in non-ferrous metallurgy rose by
one-third, in machine-building and transport by 28%, and
in the chemicals and petrochemicals industries, as well as
food-processing, by 17.7%....
The most important sectors for national development,
however, are the spheres of life-support and
infrastructure, which are capital-intensive sectors with a
slow rate of recoupment. They constitute a second,
``non-liberalized'' sector of the economy. For these
sectors, the standard liberal recipes are absolutely
inadequate. There has to be some serious activation of
state regulation. It is guaranteed, that private capital
will not enter this sphere on the minimum scale, required
for its survival, simply because the high capital
intensity and slow recoupment of investments make the
political risks prohibitively high.
Thus, investment in the electric power industry
declined by over 10% in 1999.
To ignore this, creates a threat of physical
destruction of the life-support systems, due to chronic
underinvestment. In this connection, Russia is threatened
already today with the emergence of a shortage of material
resources, and a qualitatively new phase of degradation,
in which national development will be blocked for the
first time not by financial, but by resource limitations.
In particular, the countryside today is already
suffocating, without equipment. This, and not only bad
weather, was the main reason for the harvest failure in
1999. The cause of anticipated difficulties with the 2000
harvest is the same: You could pay the producers tomorrow,
if you wished, but there is already no time for the
production and repair of the equipment.
During the next three to five years, the electric
power, oil, and natural gas industries will begin to reap
the fruits of chronic underinvestment. A little bit
longer, and no amount of financing for advanced
technologies and geological prospecting will save
them--and with them, the economy as a whole--from the
consequences of the decade-long ``investment pause.''
Today, it is increasingly a shortage of material
resources, not just money, that begins to hold the country
back. Russia is finishing up its consumption of ``the
U.S.S.R. inheritance,'' especially with respect to
investment. It will require a different organization of
the economy and the state, to replenish what Russia has
grown accustomed to drawing from its seemingly
inexhaustible reserves.
According to specialists at the Russian Academy's
Institute for National Economic Forecasting, the inertia,
which has been taking shape, despite the cheerful current
indicators, will lead to a decline of production,
investment, and consumption by as much as 8-12% during the
first decade of the 21st Century.
In order to ensure an acceptable future, there must
be a transition to a qualitatively new model of economic
development, which relies on the interconnected growth of
consumption and investments, achieving balance among the
financial, production, and resource spheres.
Such a transition can be brought about only by an
active state.... The top priority task is to compensate
for the expected gradual deterioration of the conjunctural
situation (including as a result of the increase of fees
for the products of the natural monopolies, the
intensification of domestic fiscal pressures, and the
possible decline of world oil prices), with an energetic
and well-conceived state policy. In order to implement
such a policy, the state must unite all of society's
forces and concentrate them on achieving key goals.


- An Effective Reproductive Model -
...|It is necessary to create a social-psychological
``atmosphere of recovery and upswing,'' characterized by
accord within society on the goals of development and the
means to achieve them.... A condition of society should be
sought, where the key institutions link their vital
prospects and strategic interests with expanded
reproduction and modernization, with the increase of
national wealth and productive capital, rather than with
their redistribution, as was the case in recent years.
There need to be powerful motors for an economic
upswing--groups of interconnected types of manufactures
and economic institutions, which form a coherent system
and possess not only a powerful potential for growth, but
also sufficient ``critical mass'' for the qualitative
transformation of the economy. The model of economic
growth must rest on innovation and improvements in
efficiency.|...


- The Key Problems of the Economy Today -
In the framework of the indicated preconditions,
there are concrete economic problems to be solved, which
may destabilize Russia's economy by 2005, if they are left
unattended.
{The first of these, is the investment crisis.} Due
to the lack of a consistent state investment policy,
investments fell by a factor of five in 1991-99. In 1994,
the share of equipment that was ``younger'' than ten years
was 44.5%; by 1997, it had fallen to 29.4%. At current
rates of reproduction, fixed capital will have shrunk so
much by 2005, that it will become the main factor limiting
development. By 2010, fixed capital will have shrunk by
25% since 1998, with only 55-60% of the pre-reform
capacity remaining.
The quality and competitiveness of productive
capacities must be raised. Their modernization requires an
annual increase of investments of 10-12%, or 8% as a
minimum.... Within this, resources must be reoriented
toward the agro-industrial complex (AIC) and capital
machine-building. The ``investment leap'' must occur only on
the basis of Russian machine-building, because to import
the equipment needed for this growth--more than doubling
by the year 2010--is beyond our means (costing $15-18
billion).|...
{The second, is the social crisis.} A gap between
production and consumption has emerged in Russia. In
1991-98, production fell by more than half, while
consumption declined only 21%. Consumption was maintained
by building up imports of consumer goods, in exchange for
raw materials exports, by reducing investment and defense
spending, and--since 1995--by domestic and foreign
borrowing. As of 1998, the potential of these factors was
exhausted.
The financial crisis of 1998 partially overcame the
gap between production and consumption, through a decline
of consumption. The number of citizens, whose income is
below the subsistence minimum, increased by 20 million
people, to 37% of the population. In 1999, the
population's consumption fell by 5%. If this tendency were
to continue, by 2005 consumption would have fallen 5-10%
since 1999, which would bring our social problems into a
medical-demographic and political dimension.
Without restoring the standard of living, it is
impossible to restore the population's confidence in the
state, and to create constructive motivation for business
or labor.
The price scissors at the start of the reforms led to
the subsidization of industry and middlemen at the expense
of the rural areas, which has produced a food crisis....
The purchasing power of the rural sector fell by more than
a factor of three, in 1992-99, while investment in that
sector fell by a factor of 25. The decline of agricultural
production has outstripped the collapse of industry since
1995. In 1991-99, it was 44%.|...
Enough combines and tractors are produced to replace
only 10-15% of those taken out of service. The shrinkage
of the number of units of agricultural machinery (at the
rate of 5-8% per annum) causes a reduction of land under
crops (by 25-30% in ten years), and will slash the grain
harvest (from 65 million tons in 2000 to 50 million tons
in 2005, and 40-45 million tons in 2010). Meat and dairy
production will decline by a factor of 1.5 in 2000-10. If
events develop according to this scenario in 2005-10, the
AIC will supply only 75-85% of the population's biological
needs.|...
To prevent this will require tripling investments in
agriculture in 2000-05, and another increase by a factor
of 2.4 by the year 2010.
The minimal requirements for subsidies, state
institutions, and capital spending by the state currently
comprise 33% of GDP.... According to Russian Academy of
Sciences specialists, no more than 70% of budget
obligations are covered by allocated budget spending,
which can be called a situation of budget tension, if not
a crisis.
Restructuring of foreign debt payments and new
borrowing could reduce the rate of printing money to cover
this gap, to 1-3% of GDP in the medium term. Exceeding
that level means hyperinflation.
The fuel sector is a major creditor of the economy,
in which around 40% of the net indebtedness of industrial
consumers is concentrated. After 2000, the possibilities
for that sector to develop without capital intensity will
have been exhausted. By 2005, the volume of investments in
the fuel sector should grow 150% above the 1999 level, and
they should double by 2010. Otherwise, the country may
encounter a shortage of fuel resources by 2005.|...
The devaluation of the ruble and growth of a trade
surplus have created an illusion of prosperity. The
necessity of stimulating exports, under conditions of
exorbitant costs and poor management, however, requires a
lower exchange rate for the dollar. This, in turn, will
stimulate inflation.|...


- Scenarios for the Russian Economy -
The most important practical question for determining
Russia's prospects is the recovery of the state. Without
addressing the question of state construction, it makes no
sense to prepare programs, and Russia will be condemned to
the least favorable, inertial path of development. On that
path, the limitations and inadequacy of demand virtually
preclude the possibility of smooth, evolutionary
development. The devaluation took the economy into a new
phase, which may continue until 2002. The growth of
import-substitution, exports, the money supply, and the
mitigation of imbalances through the decline of the
standard of living, may sustain an increase of industrial
production of up to 15%, until that time.
In 2003-06, however, the mass decommissioning of
production capacities and the reduction of agricultural
output will aggravate the systemic crisis. It may unfold
in the following way:
1. A low level of investments will reduce the
potential of several sectors, including the AIC.... Food
shortages will force increased imports, straining the
country's balance of payments.
2. The trade surplus will be insufficient to increase
imports. The tax burden and low investment will allow the
increase exports solely by means of reducing the exchange
rate of the ruble, which will accelerate inflation.
3. A falling ruble exchange rate will make it more
expensive to service the foreign debt.|...
4. The fall in the exchange rate and increased
printing of money will intensify inflation, reducing
consumption by the population, leading to a new spiral of
collapsing production and retirement of capacities.
5, This will aggravate a negative tendency--regional
segmentation of the economy.|...
Under this inertial scenario, the sole sphere of
growth will remain raw materials exports, which will
increase by more than 15%. The economy will be further
deindustrialized, with production capacities slashed by
one-third, in comparison with 2000.
As a result, by 2010 Russia will finally have a model
of economy, on the periphery of world development. It will
feature a low standard of living, with great social and
regional differentiation.|...
All society is united today, by the rejection of such
prospects and the search for an alternative. There are two
variants being most actively considered: an attempt to
move to sustained growth through the stimulation of
exports, or by means of increasing consumer demand.
The ``export-oriented'' path of development fits the
liberal ideology, but calculations show that it is
inadequate for today's Russian realities and
requirements.|...
The ``consumption-oriented'' path of development,
through building up consumer demand and promoting
import-substitution, will lead to support for consumption
and the social sphere, by means of reallocating budget
spending from raw materials exports and of economizing on
investments (by utilizing idle capacities). This will
ensure more rapid growth, but it is also inadequate for
the revival of our country's economy.
The only way out of the situation is for the state to
stimulate simultaneously exports and consumer demand,
which requires active incentives for investments, as the
basis for such a policy. The ``investment'' path of
development will not only provide for maximum growth
rates, but will make it stable, relying not only on the
quantitative increase of output, but on the qualitative
modernization of the technologies in use.
{The remainder of Yuri Maslyukov's memorandum spells
out specific measures for the achievement of an investment
mobilization.}


*******

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