October 4, 2000    
This Date's Issues: 4556 • 4557 • 4558 4559

Johnson's Russia List
#4559
4 October 2000
davidjohnson@erols.com


[Note from David Johnson:
1. Reuters: Yeltsin describes sense of joy after resignation.
2. Financial Times (UK): Russia tries to come to terms with West: 
New production sharing agreements seen as last chance to draw foreign 
investment to oil and gas sector, says Anna Sherman.
3. Segodnya: The Red and Crimson. (re Communists)
4. Bloomberg: News Corp May Buy Media Most Stake From Gazprom, 
Paper Says.
5. Robert Devane: Re: Ekman 4557. (re Media-Most)
6. Rossiyskaya Gazeta: Russian Nuclear Material Monitoring System 
'Far From Ideal'
7. Bloomberg: US Ambassador Pifer on Ukraine's Reforms, Policies.
8. Financial Times (UK): Andrew Jack, Internet revenues remain 
uncertain.
9. Current History: James Millar, Can Putin Jump-Start Russia's 
Stalled Economy?
10. Washington Times editorial: Harvard on the Volga.]


******


#1
Yeltsin describes sense of joy after resignation

MOSCOW, Oct 4 (Reuters) - Former Russian President Boris Yeltsin felt largely 
unmoved when he read his resignation speech on New Year's Eve followed by a 
sense of joy at being free from office, a newspaper quoted his new book as 
saying. 


The extract of ``The Presidential Marathon,'' published in the Argumenti I 
Fakti weekly newspaper on Wednesday, centred on Yeltsin's decision to resign, 
his choice of Vladimir Putin as his successor and the reactions of his staff. 


Yeltsin, who told the newspaper the book would be on sale in Moscow on 
October 10, described his feelings as he recorded his resignation speech for 
television in a Kremlin office. 


``I was almost unmoved... To tell the truth, at one point I had a speck of 
dust in my eye and I wiped it away with my hand,'' he said in the extract, 
describing a moment when many who watched the recording thought he was wiping 
away a tear. 


``I lifted my eyes (after the speech) and saw how the whole television crew 
was saluting me. I did not know where to put myself,'' he said. 


``I tried to assess internally how I felt, my mood, and I realised with some 
surprise that my mood was good. Very good. Cheerful,'' he wrote. 


The rest of the extract described how Yeltsin had come to his decision to 
step down after eight years in office, years when he had forged a new Russia 
but had been often criticised for flawed reforms. 


Yeltsin had said before he shocked the world with his resignation that he 
would serve until his term ended in the summer of 2000. 


The extract did not give a clear reason for his decision to quit, saying only 
that he made it on his own and that once his mind was made up, he refused to 
go back. 


It also described how he had told his chosen successor Putin, prime minister 
at the time, of his decision and that Putin was the first one to hear of it. 


``Putin's first reaction discouraged me: 'I do not think I am ready for this 
decision, Boris Nikolayevich,'.'' 


``...No this was not weakness. You cannot call Putin weak. This was the doubt 
of a strong man,'' Yeltsin added in the extract. 


******


#2
Financial Times (UK)
4 October 2000
Russia tries to come to terms with West: New production sharing agreements
seen as last chance to draw foreign investment to oil and gas sector, says
Anna Sherman:


Today the European Commission is expected to discuss proposals for
developing a long-term strategic energy partnership with Russia following
exploratory talks about importing oil and gas. 


Last month Mikhail Kasyanov, the Russian prime minister, visited London and
tried to encourage Western oil and gas companies to take advantage of new
production sharing agreements (PSAs). Yet western energy companies remain
wary of Russia's investment climate, and are asking how much it has
changed, if at all. 


Before the 1998 crisis, Russia's oil sector assumed portfolio investors
could fund development, an assumption that Glen Waller, director of the
Petroleum Advisory Forum (PAF), rejects. 


"Portfolio investment is like a yo-yo this year: completely speculative,"
he says. The finance involved is also too small to develop new fields, he
adds. 


Other experts agree. "Until 1998, Russian oil companies felt that the
country could develop its oil sector alone and didn't need PSAs, but the
crisis triggered a sense of reality that they needed a stable legal system
to attract foreign investors," says Isabel Murray, an International Energy
Agency analyst. 


The Russian government has also recognised the need for change. After a
Confederation of British Industry meeting on September 19 in London, Mr
Kasyanov promised UK investors his administration would simplify PSA
legislation for foreigners seeking to develop Russia's oil and gas reserves. 


Western investors treat the new laws, which have languished in the Duma, as
a precondition before substantial investment can begin again in Russia's
oil sector. 


Mr Kasyanov admits current PSA laws are flawed. "In previous
administrations, the government resolved PSAs capriciously, and not on the
basis of strict legislation," he says. 


Western companies have responded favourably to the new initiatives. Both
Exxon Mobil and TotalFina Elf told the FT the developments were
"encouraging". 


Mr Waller says the industry believes the government is listening to western
oil companies at last. "There is political will to move forward," he says.
"The question is just whether it can be translated into action." 


But there is a sense that this represents Russia's last chance to get the
legal framework right. Stephen O'Sullivan, head of research at Moscow's
United Financial Group, warns of stark consequences if the government fails
to offer foreigners favourable terms again. 


"Our understanding is that the western oil industry will give it one final
shot with a letter to Putin explaining that if their requirements are not
met, their interest in Russia is finished." 


John Capps, president of Conoco Russia, says: "President Putin wishes to
create a pro-business environment. This was evident from his appearance at
a recent Sakhalin PSA conference. He endorsed PSAs, and charged minister
Gref to make it happen. The business community in Russia has a champion at
the top, and now the only question will be the speed of change. 


"Decisions still require agreement between many ministries, and this slows
the process. For our industry, the government has set a date of year-end
for the act on normative cost recovery. This will define how the investor
recoups costs and is at the heart of the PSA laws. So we'll just have to
see." 


Russian oil and gas contributes more than 10 per cent to its GDP and over
half its tax revenues. The pickings are rich. Russia has 49bn tonnes of oil
equivalent in proven reserves alone. 


But over the past decade, the sector lost finance as western groups
abandoned Russia for more friendly regimes in West Africa, the Far East,
Latin America, or other former Soviet states. 


A 1998 PAF report quantified the loss to Russia's treasury by analysing the
cash influx that six of 24 proposed production sharing agreement projects
with foreign companies would have brought, had they been concluded as
agreed in 1996. 


According to the so-called multiplier effect, PAF calculated that some
Dollars 2.5bn in direct and indirect government revenues would have flowed
in by 1998, Dollars 3.1bn by 2000, and Dollars 64bn by 2008. 


For the western companies that have toughed out the transition, the choice
of Russian partner is clearly critical to success or failure. 


Anglo-Dutch group Shell and Germany's biggest gas importer, Ruhrgas,
negotiating with gas monopoly Gazprom, have fared better than BP, which
wrote off Dollars 200m of its Dollars 571m investment in oil company
Sidanco. BP then had to wrangle with Russian oil company TNK over Sidanco's
most prized assets in a bankruptcy dispute that is being settled only now. 


While the oil groups have committed themselves cautiously, service
companies such as Norway's Kvaerner and Schlumberger of the US have
flourished in Russia by providing technologies to rehabilitate old fields. 


But Mr Waller says raising production by bringing marginal fields onstream
is not a sustainable strategy. He says Russian oil production has fallen
from a 550m tonnes peak to 310m tonnes forecast for 2000. "In the longer
term, Russia can only replace (falling) reserves with big new fields. And
they need western companies 


******


#3
Russia Today press summaries
Segodnya
October 3, 2000
The Red and Crimson
Summary


There are certain tendencies in the Left movement in Russia, which the
Kremlin has started to use quite actively. The old Communist elite, mostly,
former regional CPSU secretaries, have lost their influence in the KPRF
party, which is the largest opposition movement in Russia. Their places
have been occupied by "crimson jackets" ­ representatives of big business,
who know how to find common language with the powers.


In the NPSR (the movement that unites Left parties of Russia), the key post
of the executive committee secretary was taken by Gennady Semigin. He is
one of the Communist party’s main sponsors, but formally, is not even a
member. In January, KPRF paid him for his investment by making him a Duma
deputy speaker on the quota of the Agrarian deputies group.


Now the businessman, who is still under forty years of age, has also taken
the administrative machinery of NPSR in his hands. Other businessmen who
are very close with the KRRF are former Alba Alliance Bank board chair Igor
Annensky and Semigin's companions in business, Valery Shituyev and Vitaly
Yuzhilin. One tendency of the Red "new Russians" is the search for
"reasonable compromises" with any power in Russia.


In this connection, one can suppose that Communists will not criticize
Vladimir Putin personally or interfere with the projects that the President
believes to have vital importance. For example, they assisted the President
in passing the ongoing reform of the Upper House through the Duma. In
exchange for this, pro-Putin's factions voted against buy and sale of
lands, which was very important for the Communist opposition.


The red and crimson KPRF will soon be allowed to have their media holding -
the author supposed ­ thus, replacing the opposition Media Most.


******


#4
News Corp May Buy Media Most Stake From Gazprom, Paper Says


Moscow, Oct. 4 (Bloomberg) -- Rupert Murdoch's News Corp., the world's No.
5 media company, may buy Media Most, Russia's biggest private media group,
Kommersant daily reported, citing unnamed sources in OAO Gazprom, Russia's
natural gas monopoly. 


The world's largest gas company by reserves said it will sell the company
to News Corp., after it wins a Moscow Court case set for next Monday to
enforce its takeover of Media Most under a settlement deal since repudiated
by the media holding, the paper said. Gazprom, 38.3 percent state-owned,
denied Media Most's claims it is acting to tame a media holding the
government dislikes for its criticism of President Vladimir Putin, the
paper said. 


``There is no politics here,'' said Gazprom Chief Executive Officer Rem
Vyakhirev, speaking in New Delhi where he accompanied Putin on an official
visit, the paper reported. ``If they won't pay the money, we will receive
shares of Media Most and will sell them to whoever pays the most.'' 


Last month, Russian prosecutors opened a criminal fraud case against Media
Most directors after probing allegations by Gazprom that Media Most moved
assets offshore and relinquished control of NTV, Russia's only privately
owned national station. 



******


#5
From: "Robert Devane" <robertdevane@dnn.express.ru>
Subject: Re: Ekman 4557
Date: Wed, 4 Oct 2000 


A couple of points. First, Pete Ekman keeps saying NTV where he should be
saying Media Most. They're not one and the same. Second, it should be clear
to a novice that NTV is managing to continue operating as a going concern.
It's problem, in my humble opinion, isn't that it's insolvent but rather
that it's illiquid. BIG DIFFERENCE! Assuming that Russia's valuations bounce
back over the next couple of years to their pre-crisis highs, Media Most
companies' worth may well triple, quadruple, quintuple, in which case its
current management may well be able to resolve its debt problems and keep
the company going. Third, be that as it may, Media Most companies such as
NTV and Echo Moskvy derive a significant portion of their value from their
current staff (Kiselyov, Venediktov, et. al.). It is thus fairly clear that
the company's value as a going concern exceeds its liquidation value. Since
top Media Most people have indicated that they won't stay on if the company
is taken over, there's a clear conflict of interest in Gazprom's and now
Sberbank's attempts to bankrupt it. I would argue that from a purely
financial perspective, Gazprom's and Sberbank's policy vis-a-vis Media Most
are not in the companies shareholders' best interest. On the other hand,
that's what the regime wants, and these corporations are doing the regime's
bidding. That, I think, is "the point" that Garfield Reynolds had referred
to. Finally, since Pete Ekman keeps referring to the "way it would have been
in the US", I'd like to point out that the concept of "too big to fail" was
pioneered in the US. Like a large minority of Russians and foreigners, I
believe that NTV is too big to fail in terms of its contribution to
"national interest". The problem is that the regime is either taking a
diametrically opposite view of what is in the national interest, or else is
blatantly acting NOT in the best interest of the nation in the broad sense.


******


#6
Russian Nuclear Material Monitoring System 'Far From Ideal'

Rossiyskaya Gazeta
29 September 2000
[translation for personal use only]
Report by Vladimir Kucherenko under "In Russian Federation 
Government" rubric: "Nuclear Materials Will Not Go Unsupervised" -- 
first paragraph is separate boxed section 


At the present time all nuclear materials, being 
the property of the state, are located within the walls of 61 
organizations, only 14 of which do not belong to the Atomic Energy 
Ministry system. To function normally, the entire system of recording 
and monitoring must embrace almost 70 enterprises of 13 federal departments. 
The main topic of the day at yesterday's session of the country's 
government was a discussion of the system for recording and monitoring 
fissionable materials in Russia. 
Valentin Ivanov, Russian Federation first deputy minister of atomic 
energy, delivered the report. It dealt with nuclear materials which are 
used in technological cycles in our nuclear industry. Both in its 
civilian branch and in its military branch. 
Monitoring of nuclear materials back in the Soviet Union was on an 
exceptionally high level. Everything was based on personal 
responsibility and the constant filling out of acceptance and transfer 
documents. Therefore only two attempts to steal fissionable materials 
were recorded between 1945 and 1991. On the other hand, the new times 
of uncertainty, of the breakup of the old system and the emergence of 
lots of private firms, have caused the picture to change. Between 1991 
and 1995 there were 21 attempts to steal nuclear materials, and in one 
instance it was a question of three kg of a highly enriched substance -- 
material for a possible nuclear munition. During 1995 through 1999 the 
measures taken by the state reduced the number of attempts at theft to two. 
But at whose expense has the Atomic Energy Ministry been agonizingly 
creating a new recording and monitoring system since 1995? It includes 
special systems at enterprises where fissionable material balance areas 
are created. Recording takes place there constantly with the help of 
new objective monitoring apparatus. These data in turn are fed 
constantly to the Federal Information Center. However, the situation 
here is far from ideal: Western funds are being used to create the 
system. The West also supplies us with monitoring apparatus, which far 
from always meets Russia's requirements. There is a shortage of this 
apparatus today, and the Atomic Energy Ministry insists on gathering 
together fissionable materials at a limited number of installations. 
However, what is needed for this is a different normative-legal base. 
Is it possible at the same time to count on the state budget? 
Unfortunately, the federal targeted program proposed by the Atomic Energy 
Ministry in 1995 for developing the state system for recording and 
monitoring nuclear materials was later downgraded to the level of a 
subprogram. Its funding is extremely bad -- just 70 million rubles for 
the period 2000-2006, which is roughly 30 times less than what is 
required. Therefore Atomic Energy Ministry specialists, when developing 
perfectly modern models of monitoring apparatus, are unable to put it 
into production, confining themselves just to experimental models. At 
the same time there is no clear-cut system of coordination and 
centralized monitoring of the work that is being done, for this is mainly 
funded out of foreign aid. 
What does the Atomic Energy Ministry propose? The adoption of an 
intersectoral program to improve the recording system, involving all 
interested structures in it. This provides an opportunity to 
consolidate the Russian means. For now this proposal has, by and large, 
been approved. Our nuclear scientists hope that the present wholesale 
reduction of federal programs will not affect this important problem. 
On the same day the government approved a draft statute on the 
Russian Federation Ministry of Taxes and Levies. Under this document 
the ministry gains the right to participate in the elaboration and 
implementation of the country's tax policy and also to exercise currency 
control and control over the production and circulation of ethyl alcohol 
and alcoholic and tobacco products. 


******


#7
US Ambassador Pifer on Ukraine's Reforms, Policies: Comment

Kiev, Oct. 4 (Bloomberg)
-- The following are comments by Steven Pifer, U.S. Ambassador to Ukraine, 
who completes his assignment as ambassador to Ukraine next Monday after 
working here since January 1998. 


Pifer talked on his impressions of the last three years in Ukraine and 
frustrations. He made his comments in an address to students of Kiev Mohyla 
Academy in Kiev today. 


On his frustrations: 


``My biggest frustration is what I would call the underdeveloped stage of our 
economic relations (between U.S. and Ukraine). The United States is the 
biggest foreign direct investor in Ukraine, but that is based on Ukraine's 
total foreign direct investments. The United States have only invested $600 
million, compared to (the U.S.) investments in Poland, which is 10 times as 
much, about $6 billion. And when you look at Ukraine's resources, geographic 
location, workforce here, those numbers of $600 million don't make any 
sense.'' 


On challenges before Ukraine: 


``One challenge is to get past Soviet attitudes. Unfortunately, these 
attitudes persist among many officials and government bureaucrats. 


``A second challenge is to strengthen democracy and the rule of law. It is 
important to consolidate democratic institutions, so that the will of people 
governs. 


``A third challenge is to accelerate economic reform. Reform is not easy; it 
will at times be painful. But as Poland has shown, it is a challenge that can 
be met successfully. Building an open, transparent and competitive economy is 
a struggle, particularly when certain individuals or groups fear their 
economic interests will suffer from reforms. But if Ukraine wishes to succeed 
economically, it cannot allow the interest of these few to block reforms. 
Ukraine must accelerate reforms in order to open the economy and allow it to 
grow. 


``A related challenge is combating corruption. American companies often tell 
me of the problems of operating in (Ukraine's) business climate where 
corruption is so prevalent. Ukraine needs to face the problem of corruption 
forthrightly. Much has been said here about the need to deal with the 
corruption. But one has to ask whether Ukraine is doing all it can in this 
struggle.'' 


On Ukraine's energy policy: 


``I think it's very important for Russia and Ukraine to work out the issue of 
(supplies of Russian) natural gas. And I hope that will be done based on 
economic and commercial terms without interference of politics. In our dialog 
with Ukrainian officials we encourage Ukraine to look at ways to expand its 
domestic production of gas. Ukraine, we believe, could double and perhaps 
even triple the amount of natural gas that produced here, within Ukraine's 
borders.'' 


On Ukraine's press policy: 


``An absolutely key aspect of a democratic state is a free, diverse and 
robust press. Ukraine's media is increasingly sophisticated, but there are 
also serious problems. Journalists come under pressure. Ukraine needs to 
create conditions in which journalists can tackle any subject or any 
individual, free of pressures, free of worry about personal attack.'' 


On Ukraine-U.S. bilateral relations: 


``First, our bilateral relationship has developed greatly since the summer of 
1993 when I first began to work on U.S-Ukraine relations. We have built a 
relationship that covers a broad range of political, security and economic 
issues. It's impressive how active the bilateral high-level dialog has 
become. If you look at this region during last three years, not many 
countries received that level of attention at the highest level. 


``A second impression is that our foreign policy relations are in sound 
shape. We have addressed issues in cooperative ways that reflect our 
strategic partnership and have worked to support Ukraine's integration to 
Europe. We have put in place mechanisms that fix small problems before they 
become big problems. While we will not always agree, those channels allow us 
to understand and to take account of the positions of each other. 


``A third impression is how relations between the U.S. and Ukrainian armed 
forces have developed. An extremely active contact program brings our 
militaries together, and in Kosovo, U.S. and Ukrainian peacekeepers operate 
side by side. 


On Ukraine's small business: 


``A fourth impression is the potential of small and medium businesses. This 
sector has expanded over the last three years. As in America, small business 
in Ukraine can be a very big factor in a growing economy.'' 


On Ukraine's agriculture: 


``A fifth impression is the rich agricultural potential of Ukraine's 
countryside. The key in unlocking that potential is putting the means of 
production, especially land, into the hands of farmers.'' 


On proliferation policy: 


``In 1997, the question of how our countries approached proliferation was the 
single biggest problem on our bilateral agenda. Today, our approaches to 
controlling proliferation are largely aligned. This kind of cooperation made 
possible an agreement on exchanges of sensitive civil nuclear technology. It 
made possible expanded cooperation in commercial space. Other countries have 
not been as forthcoming in controlling proliferation; they do not enjoy these 
benefits.'' 


******


#8
Financial Times (UK)
4 October 2000
Internet revenues remain uncertain: RUSSIA ONLINE by Andrew Jack in Moscow:
Companies in Russia are more hesitant about the medium-term commercial
future of the web, particularly against a backdrop of growing scepticism
about the internet sector elsewhere in the world


In the fast-changing world of the internet, Russia has gone from creativity
and initial optimism to consolidation and guarded scepticism in an
accelerated life-cycle of just a few months. 


At the end of 1999, there was little sign of the presence of serious
commercial players in the "ru.net" cyberspace. Today, most of the
significant websites in the country have been snapped up, and the talk is
of restructuring while revenues remains uncertain. 


On paper, the trends certainly look promising. Data from the Yandex search
engine, which constantly scans Russian websites, now puts the total number
of servers at nearly 207,000, more than double since the start of 2000. 


Information from Spylog, a web-ranking service, suggests that there are
3.4m core internet users in Russia, meaning those who have visited a
website at least once a week over the two previous months up to September
this year. 


Andrei Zotov, head of the web applications company V6 and the industry
trade body Rotsit, suggests that there are up to 5.7m periodic internet
users. "Russia is starting to become more of an information society," he
says. 


A number of high-profile transactions have taken place during 2000, with
both foreign institutions and local investors setting up specialist
technology funds and looking for business. The result has been the creation
of a handful of leading operators which control most of the best known and
most popular websites, leaving few independent operators: Rambler, Port,
Aport, Yandex, Memonet and Netbridge. 


While, in Russian terms, the sums paid have been considerable - and led to
criticism of an over-heated market - the transactions were modest by
international standards, with none exceeding a few million dollars. 


"Cold water has been thrown on the internet mania. It's excellent for the
industry," says Victor Huaco, head of Orion, which jointly controls the
Rambler group. "People are really beginning to look at it as a proper
business. They are not just throwing money at anything. There are still
large discounts in Russia compared with markets such as India and Brazil
which had a similar penetration two to three years ago." 


He says that his group is now generating Dollars 100,000 a month in
advertising revenues, and that companies operating in Russia are starting
to include the internet as part of their media planning strategy. There is
considerable scope for growth, with more sophisticated sponsorship and
marketing deals, he adds. 


Brokers' reports 


There has also been growing interest from brokers. Four firms - Brunswick
Warburg, Deutsche Bank, United Financial Group (UFG) and Troika Dialog -
have all produced lengthy reports on the Russian internet sector for the
first time this year, and these have provided some heady valuations. 


But others are more hesitant about the medium-term commercial future of the
Russian web, particularly against a backdrop of growing scepticism about
the internet sector elsewhere in the world. Stewart Reich, chief executive
of Golden Telecom, a US-quoted Moscow-based phone operator which has
diversified into the internet, says that while usage figures may be high,
there are still only some 400,000 paying subscribers. 


"I would not want to be pessimistic, but it's hard to believe that it's
possible to incubate projects in Russia on the web," says Mr Zotov. "The
probability of success is not astoundingly large." 


That is why he has focused his company, instead, on the development of
software for international clients. 


Along with many analysts, he points to the feeble health of the Russian
economy, with its low disposable incomes, particularly outside the leading
urban centres such as Moscow and St Petersburg. Add the logistical
difficulties and cultural suspicion of banks and online transfer of
sensitive financial information, and many question how far or fast
electronic commerce will take off. 


A number of Russian websites are considering fees and commissions, but few
have yet dared introduce them. In the meantime, some have started tapping
the Russian-speaking diaspora, notably in Israel and the US. Ozon.ru, for
example, an online purchasing site, has specifically targeted these
communities, which have credit cards, higher disposable income, and are
already imbued with the internet culture. 


There remain serious infrastructure issues to be tackled in Russia. Poor
quality phone lines - in Moscow in particular, and in the country's
multiple local telecoms operators in general - help explain why the time
spent online is low compared with other countries. And internet use has
added extra stresses to existing capacity. 


There may be some scope to leap-frog to wireless systems, with the recent
experimental introduction of Wireless application protocol (Wap) mobile
services by Russia's leading mobile operators, and ISDN-speed GPRS (General
Packet Radio Service) in the coming months. But low income levels and the
lack of sophistication of handsets may prove considerable obstacles for the
foreseeable future. 


Many observers and practitioners alike argue that the internet in Russia is
following the same pattern as in other emerging markets. 


"I don't see why Russia should be any different from other internet
markets," says Ari Krel, an analyst with UFG. "The market will grow in 2000
because it is coming off such a low base in 1999. In the medium term, there
will be barriers, but I think the problems will be overcome." 


There are, nevertheless, some elements which are specific to Russia. These
include a strong aversion to transparency, which means that the scope for
business-to-business services, such as commodity exchanges, may be limited
- or at least that it will not be the internet providers who benefit. 


So far, there are few opportunities for stock market investors to
demonstrate their confidence or otherwise in the Russian market. And the
international groups - AOL, Lycos, MSN, Yahoo! - are still keeping their
distance. 


Orion's Mr Huaco predicts that could change, with alliances being formed
and local companies starting to merge in the coming months. "Everyone in
this market is talking to each other on a very active basis," he says. 


******


#9
Current History
October 2000
Can Putin Jump-Start Russia's Stalled Economy?
By James R. Millar
James R. Millar is a professor of economics and international affairs at
George Washington University and editor of Problems of Post-Communism. An
earlier version of this article was presented at the United States-Japan
Joint Symposium on the Russian Economy in Tokyo this May.


Nikolai Petrakov, a former economic adviser to Soviet President Mikhail
Gorbachev, summed up the sentiments of many Russians in the preface to his
new book, Russian Roulette: "For an entire century Russia has served as a
gigantic laboratory. Only the experimenters have changed."
Russian and Soviet leaders alike have favored large-scale, dramatic
reforms designed to revolutionize or reverse the entire social system. Each
has failed at its objective, with great human cost.
The effects of the most recent experiment, "shock therapy," or the attempt
by Russian President Boris Yeltsin and his advisers to rapidly transform
the Soviet command economy into a market economy, have been described by
political critic Boris Kagarlitsky in Novaya gazeta as similar to those of
a nuclear attack: "According to the experts of the 1960s and 1970s, a
limited nuclear conflict would mean the loss of three to five million
people, about 40 percent of industry, and more than half of agriculture.
After the nuclear strike the country would only recover production after
two years.
"Fortunately, nuclear war did not happen. Instead, in the '90s economic
reform took place, 'shock therapy' to be exact. The result of this
wonderful experiment on us precisely matched the consequences expected from
a medium-scale nuclear attack."
Regardless of whether one agrees with Kagarlitsky's specific analysis, the
attempt to transform the Soviet economy into a market-oriented one open to
the global economic system has proved costly. This is the Russia Vladimir
Putin has been selected to rule as the country's new president.
The etiology of Russia's current economic ill-health is not in question.
The main causes are 70 years of Soviet comprehensive command planning and
the largely successful extirpation of all market institutions and private
property; the loss of the Soviet empire in Eastern Europe in 1989 and the
breakup of the Soviet Union in 1991, with the concomitant break in economic
links and the exposure of systematic and ingrained inefficiencies relative
to the global economy; the absence of a real commitment to economic reform
since 1992 by both the Russian people and a large segment of the Russian
elite, which became distracted by the possibilities for personal enrichment
through rent-seeking behavior; a general reluctance to view the loss of
empire realistically and a consequent high degree of empire envy, which has
resulted in the fever of the second Chechen war and much expensive
posturing in the so-called near abroad. There is also another cause, the
"schizophrenia of the Russian political class," which Andrei Piontkovsky
has vividly captured. "As was the case 300, 200, or 20 years ago, we
understand that we need Western technology and investments, and that
autarky and an iron curtain would bring economic and geopolitical disaster
to Russia. We understand that Russian culture is a part of European culture.
"But, nonetheless, the West, it seems, annoys us through its very
existence. We perceive it as throwing down before us an economic,
information, and spiritual challenge. We're constantly convincing ourselves
of the West's imminent hostility and ill intentions toward Russia because
it flatters our ego and makes it easier to explain our errors and failures."1


RUSSIA'S DEVELOPMENTAL DESCENT
Just before his appointment as acting president on January 1, 2000, Prime
Minister Vladimir Putin posted a diagnosis of the Russian economy-"Russia
at the Turn of the New Millennium"-on the web page of the Russian
Federation (http://pravitelstvo.gov.ru). Putin described a country in which
GDP had fallen by 45 percent during the 1990s and was currently
approximately one-tenth that of the United States; per capita GDP was about
one-fifth the average level of the Group of Seven industrial nations; labor
productivity was generally only about 25 percent that of the United States;
70 percent of plant and equipment was more than 10 years old; gross
domestic investment, the lifeblood of the future, was at only 20 percent of
1989 levels; and foreign direct investment was minuscule.
The quality of life of Russian citizens had fallen "catastrophically,"
Putin noted. "For the first time in the past 200-300 years, [Russia] is
facing a real threat of sliding to the second, and possibly even the third,
echelon of world states." He added: "It would be a mistake . . . to deny
the unquestionable achievements [of communism in Russia]. But it would be
an even bigger mistake not to realize the outrageous price our country and
its people had to pay for that Bolshevik experiment."
Putin pointed out also that it would take 15 years of an 8 percent growth
rate for Russia to attain the per capita GDP of today's Portugal or Spain.
To attain the per capita GDP that Britain and France enjoy today would
require a 10 percent growth rate over 15 years.
"Who's to blame?" Putin asked. "We could have avoided certain problems. .
. . They are the result of our own mistakes, miscalculations, and lack of
experience." However, he saw "no alternative to reform."
Although Putin's July 8 state-of-the-nation address reinforced this bleak
evaluation, one can understand why many observers are optimistic about the
future of economic reform under the new president's leadership. The first
and essential step toward a correct prescription is a realistic diagnosis,
and Putin certainly provided that. The new president has also been
fortunate because the economy has rebounded nicely since the August 17,
1998 financial crisis that saw Russia devalue the ruble and default on both
domestic and foreign financial obligations. The vital signs of the economy
are reasonably positive, mainly because of external factors. The question
is whether the recovery can be sustained and accelerated.


ECONOMIC RECOVERY
The most general and important index of economic activity, gross domestic
product, turned up significantly in 1999 to 3.2 percent for the first time
since 1989, and indications are that it will show positive growth in 2000
as well. However, because GDP fell by 4.6 percent in 1998, Russia will not
regain the 1997 level until some time in 2000.
Exports have been steady and have been the main stabilizer of the economy.
Oil export revenue is up sharply, thanks to the success of the Organization
of Petroleum Exporting Countries in restricting oil production. Oil prices,
of course, are not under Russia's control. The current band set by OPEC,
$24 to $28 per barrel, will likely be honored by its members, which means
that additional windfalls from oil price increases are unlikely. Moreover,
prices for other exports are down or stagnant. These include fertilizer,
timber, ferrous metals, and paper products, which offset a portion of the
gain from oil exports. Exports are unlikely, therefore, to be a major
source of growth in GDP in the near future.
The devaluation of the ruble that resulted from the August 1998 financial
crisis caused a sharp rise in the cost of imported goods. Consequently,
imports were down by about $3 billion in 1999, which of course represents
an increase in aggregate demand and in GDP. Import substitution increased
demand for domestic producers and stimulated industrial and agricultural
production (8.1 percent and 2.4 percent, respectively). Stabilization of
the ruble (currently about 28 rubles to the dollar) makes it unlikely that
further import substitution will drive GDP growth in the immediate future.
Tax collections are up reportedly, thanks mainly to exports of oil and
gas. Consequently, federal revenue rose to 13.7 percent of GDP in 1999
versus 11.3 percent in 1998. This was offset by a rise in government
expenditures. Much depends on the Putin government's ability to maintain
and increase tax collections while holding expenditures down. The latter
will be difficult as Putin seeks to consolidate his political position.
Attempts to use strong-arm methods have proved counterproductive. It is now
hoped that a reduced tax rate will induce better compliance.
Inflation fell from 85 percent annually in 1998 to 37 percent in 1999, and
indications are that it will fall farther in 2000, which is obviously a
healthy sign, especially since real average wages fell by 15 percent in
1999. A further decrease in inflation in 2001 is unlikely due to
appreciation of the ruble as the economy grows.
Investment in plant and equipment grew by 1 percent in 1999, but this was
still only about 20 percent of the level of investment in 1991, when
reforms began. It is no wonder that the average age of the capital stock
has increased sharply. Much of it is therefore obsolete or in poor working
condition. Without a sustained increase in the rate and volume of
investment, the recent growth rate in GDP cannot be maintained and exports
are also likely to falter. The slight investment indicates the lack of
confidence domestic producers, lenders, and borrowers have in the economy's
future, and this view is confirmed by the very low volume of direct foreign
investment. In 1999 Russia received about $2 billion in FDI out of a world
total of over $800 billion.
Rather than investing in the Russian economy, individuals and firms
continue to export capital. Capital flight is defined as the abnormal
conversion of national financial assets into a more stable currency-which
in Russia is usually dollars. The best estimate is that about $150 billion
has been exported since market reforms began in 1992. The Russian Central
Bank estimates that the rate has been $1 billion a month on average.
Unfortunately, this has apparently increased to $2 billion as economic
growth has resumed, thus undercutting the long-run beneficial consequences
of growth. As long as the security of fixed and financial investment is not
assured by the Russian government and courts, and while personal property
remains subject to the caprice of politics and clan rule, capital flight
will continue.
Government debt represents an enormous drag on the economy; total
sovereign debt outstanding at the beginning of 1999 was in excess of $150
billion. In 1999, internal GKOs (government short-term securities) amounted
to approximately 25 percent of GDP; external debt acquired by the Russian
government was about 40 percent of GDP; and external debt carried over from
the Soviet period represented another 70 percent of GDP before
restructuring in February 2000 by the private financial creditors that make
up the London Club. Russia also is hoping to restructure debts with the
government creditors of the Paris Club, but thus far no progress has been
made. Germany holds the largest share of foreign sovereign debt ($23
billion), and has shown little interest in restructuring it.
Without the London Club restructuring, which wrote off one-third of the
debt, service charges would have claimed 80 percent of all anticipated
federal tax revenue. Clearly, the health of the Russian economy depends
heavily on its success in restructuring or obtaining debt forgiveness. If
no further relief is provided, Russia can probably avoid default only if
the price of oil remains in the high $20s per barrel or increases. Since
debt forgiveness by the Paris Club has been ruled out by both Germany and
Japan, rescheduling is the only alternative, which offers short-term
benefits but prolongs the burden of Soviet-era debt by stretching out
interest and principal payments over time.
The fundamental problem is that the Russian government does not control
or can little influence the more favorable economic indicators that have
been noted, since they depend variously on OPEC, the Paris Club, the IMF,
the World Bank, the German government (especially), and potential foreign
investors and speculators. It is not just a case of Russia being on its
best behavior. That will help with the international financial
institutions, but OPEC and other determinants of the prices of Russia's
exports of primary commodities are indifferent to Russia's plight. Yet
Russia's recent behavior under President Putin has not been so benign, and
this may complicate returning the economy to robust health.


RUSSIAN BOOTSTRAPS
The August 1998 financial crash has, paradoxically, proved to have been a
favorable condition for continued economic recovery. The Russian economy
hit bottom as the government was forced to devalue the ruble and default
(or delay) payments on outstanding domestic and foreign debt. An inability
to collect sufficient taxes and to restrict government expenditures
produced a cumulative deficit that the government could no longer finance.
The crisis seems to have finally persuaded the government that it could not
borrow its way to prosperity, nor could it depend on the rest of the world
and the various international financial institutions to bail it out.
The IMF has also learned a lesson. It and the other international
financial institutions are no longer enabling Russian fiscal improprieties.
Russia can expect no new net money from the IMF, but it will not be
abandoned by the fund either. The IMF wants its money and reputation back
and can be expected to develop ways to allow Russia to repay its debt,
keeping the IMF from realizing the financial loss that would otherwise
occur. The IMF remains important, however, because its approval is the
gateway through which funds may flow from other institutions and from
private sources.
Bankruptcy provided a necessary dose of reality, but it also made skeptics
of even the most durable optimists in the West, including especially the
Clinton administration and the IMF. It is now obvious to all parties both
inside and outside Russia that Russia will have to pull itself up by its
own bootstraps. The alternative is Russia's continued descent into the
third world.
The Chechen war represents perhaps the most serious unfavorable condition
with respect to economic recovery. This is partly because the treasury is
continuously drained by the tasks of keeping a sizable army in the field
and restoring and reconstructing the Chechen republic. More important, the
war is symptomatic of Russia's continuing empire envy, of the unwillingness
of the power elite to accept the loss of the empire, especially of the near
abroad.
President Putin also has apparently given the military its head, and the
consequences suggest an increased influence of the military in economic as
well as political decision making. But generals do not make good economic
reformers. Their training and mind-set is antithetical to market solutions.
Moreover, a continuing quarrel between Minister of Defense Igor Sergeyev
and Chief of the General Staff Anatoly Kvashnin over the allocation of
defense-budget funds and the autonomy of strategic missile forces has
paralyzed even reform of the military establishment.
Another unfavorable circumstance is that most of the Russian people and a
significant share of the political elite are not ready for full capitalism.
In January 2000, half the population reported that the country was on the
"wrong course." Despite the apparent realization of Russia's need to
attract direct foreign investment in its economy, the populace is
ambivalent about foreign ownership. A recent survey shows that, "in
Russians' opinion, it would be good if foreigners gave us money . . . but
did not own anything." Only 32 percent, for example, approved of foreign
ownership of small enterprises, cafes, and shops. Some 87 percent opposed
foreign ownership of large plants and factories (89 percent opposed private
ownership of large land plots). More than half also want Soviet-style price
controls on consumer goods.
Of course, a favorable circumstance is the realistic nature of President
Putin's diagnosis of the Russian economy's problems. This favorable
circumstance has been offset thus far by Putin's reluctance to provide an
unambiguous and realistic prescription for the economy's ills. Several
think tanks have published plans that say all the right things: Russia must
guarantee private property rights; ensure competition to prevent
monopolistic practices; create healthy market institutions and market
infrastructure; ensure free movement in the country for commodities,
capital, and labor; reduce and simplify taxes; and assure and reorganize
the social safety net. Putin has yet to come down squarely on a plan of
action, and the "to do" lists are notably silent on many critical needs,
such as eliminating corruption at the highest levels of the government
bureaucracy. Also troubling is the 10-year plan (for 2010) authored by
principal economic adviser German Gref, which is reminiscent of
Soviet-style planning in both form and content. It is too optimistic
fiscally, and the "industrial policy" it envisions relies too heavily on
domestic political priorities rather than on hard-nosed evaluations of
potential foreign investors.
Why has so little focus been placed on implementation of economic and
political reform under Putin? Empire envy aside, Putin has moved with great
caution in all political arenas. He owes his position to several powerful
interest groups. These include first the "Family," the term used to
describe Yeltsin's relatives and close associates who were undoubtedly
active in persuading Yeltsin to turn over the reins of government to Putin
as acting president at the beginning of the year. He is be-holden to the
"oligarchs," the handful of wealthy individuals who profited greatly from
privatization and other governmental perks and control or share control of
major industries, banks, and other private and quasi-private institutions
and firms. Their support was essential in Putin's quest for the presidency,
and they command as individuals and as a group Putin's ear. Putin is also
beholden to the military and the Federal Security Service (FSB), the
successor to the KGB. The FSB is Putin's old employer and one of the few
sources he has of trusty supporters.
Other powerful interest groups must be dealt with, especially republic and
regional leaders. The rebuilding of central power that Putin seeks will
have to be done at the expense of the republic leaders, and he has made
some progress in this direction. Recentralization of power, however, may
simply not be feasible because of the extent to which it has drained away
to the periphery already, largely with Yeltsin's blessing. It is doubtful
that the military and FSB have the means and the will to restore central
power by force.
It is too early to tell whether Putin is paralyzed by fear of offending
one or more of the main interest groups or if he is simply irrelevant
because they are running the show. Political leaders come in two broad
types. One type has a mission; they want to accomplish something. Gorbachev
and Yeltsin were this type of leader early in their administrations. Then
there are leaders who just want to be "somebody," as was the case with
Soviet General Secretary Leonid Brezhnev. Those with messianic impulses are
prepared to spend political power to accomplish their ends. Those who want
to be somebody hoard political power to protect their positions. Putin to
date appears to be in the latter category, in which case economic and
political reform, elimination of bureaucratic corruption, and modernization
of the Russian social system are likely to be casualties.


PROGNOSIS 
Putin has had almost a year in which, as prime minister, acting president,
and elected president, he could have moved decisively on the economy. He
failed to do so. His principal economic advisers hold contradictory views
on most issues, and the much-touted economic plan for 2010 has been
undergoing extensive and endless fine-tuning by the bureaucracy. The best
bet is that economic policy will not change dramatically in the near future.
A market economy has been created in Russia, but it remains fragile and
incomplete. Aggregate markets for financial instruments (including banking
operations), investment goods, existing productive assets, equity shares,
and land are inadequate, or not healthy, or both. Putin must work with the
Duma to reduce these deficiencies. Attempts to reform by means of
presidential decrees were a failure under Yeltsin.
As was noted, the Russian people are not ready for full capitalism either.
They must be educated about the requirements and costs of creating a
functional market economy, and trust in governmental economic policy must
be repaired through consistency and equitable dealing. Continued economic
growth will depend on endogenous sources: land, labor, and capital.
Restrictions on land use, unmotivated labor, and the flight of capital all
undercut prospects for continued growth.
Putin has moved slowly and ambiguously on the economy, and it is unlikely
that the pace will quicken as he and his supporters consolidate political
power and pursue pacification in Chechnya and the projection of influence
into the near abroad. Economic reform will, for the next six months to two
years, be gradual and halting. Radical change will be avoided. Currently
favorable economic conditions will allow a degree of maneuverability for
the near term. The evidence is that the initial main thrust of economic
policy will be to increase the flow of funds and resources to the military
and the military-industrial complex.
The political influence of some of the oligarchs may be diminished in
internecine political struggles, but dispossession of the oligarchs as a
group is highly unlikely because Putin and the political leadership need
their financial support. A broad attack could also end badly, leading to a
significant increase in economic turmoil. The attempt to rein in the
regional leaders has had a degree of success, but it is too early to
determine whether it will assert effective control over republic resources
and curtail regional power.
The possibility of accession to membership in the European Union and
Russia's willingness to seek it earnestly would provide the best possible
prospect for market reform in Russia and for Russia's entry into the global
economy on a solid footing. However, neither party seems prepared to move
in this direction. This is unfortunate, because the plans for economic
reform that have been developed for Putin are not promising. Russia appears
to be stuck halfway between a command economy and a market economy,
incapable of moving forward except by small, halting, and irresolute steps.
1Andrei Piontkovsky, "Season of Discontent: The Russian Patient," The
Russian Journal, May 22, 2000.

******


#10
Washington Times
October 3, 2000
Editorial
Harvard on the Volga

Just weeks after Congress released a scathing evaluation of the Clinton
administration's Russia policy, the country's problematic relationship with
foreign aid is back in the spotlight. This time, the involvement of experts
from Harvard University promises to make this crony-capitalist scheme all
the more interesting. 
Last Thursday, the Justice Department sued Harvard University and two
of its experts for $120 million in damages. The suit alleges that the
Harvard experts used the U.S. Agency for International Development (AID)
program as a front of influence to enrich themselves. Harvard University,
the suit said, didn't do enough to supervise its experts who ran the program. 
The Justice Department contends that economics Professor Andrei
Shleifer and legal expert Jonathan Hay leveraged insider information and
the cachet associated with the AID program to make investments in Russia.
Also, the suit said Mr. Shleifer's wife used AID-staff and office resources
to purchase thousands of dollars in Russian bonds. 
Even worse, though, Mr. Shleifer and Mr. Hay appear to be guilty of
giving the Russian government bad advice. Rather than promoting transparent
business practices in Russia, Mr. Shleifer and Mr. Hay ensconced themselves
in the Kremlin's crony-capitalist traditions. Mr. Shleifer and Mr. Hay
oversaw Moscow's infamous privatization program, which allowed some Russian
officials to make millions of dollars in kickbacks for doling out some
35,000 state-owned businesses to government allies at fire-sale prices. The
program has since been highly criticized, but at the time, the two experts'
work was so respected that the Russian Privatization Center, which they
founded, also received loans from the World Bank and the European Bank for
Reconstruction and Development.
In a statement earlier last week, Harvard's vice president and general
counsel, Anne Taylor, said "There is no suggestion that Harvard
institutionally knew about, participated in, or profited from the alleged
private conduct of these individuals." But Mrs. Taylor failed to deal with
the Justice Department's charge that Harvard failed to supervise its
experts adequately, and she also said that Harvard would be open to
settling with the government to drop the suit.
If parties can be sued for lack of appropriate supervision, then
perhaps AID itself should be held responsible. In 1996, a General
Accounting Office audit criticized AID's oversight of the Harvard-led
program as lax, an allegation bitterly disputed by AID officials. AID
appears to have banked blindly on Harvard's reputation, without ensuring
the individuals in charge of the program were making responsible decisions
with U.S. taxpayer dollars. Interestingly, some of Mr. Shleifer's and Mr.
Hay's misguided policies regarding Russia were emulated by the
administration's point man on Russia, Al Gore, who also seemed to believe
that privatization should be achieved by any means possible. But the
chaotic and Byzantine environment in Russia would have conspired against
any aid program, no matter how much American money was thrown at the
country's problems. 


*****