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1. National Post (Canada): Matthew Fisher, Putin takes a page from Lenin as he tours Paris, Berlin. Russia still has a strategic interest in thwarting U.S.
2. Luba Schwartzman: TV1 Review.
3. Izvestia: Grigori Yavlinsky, MORE EFFECTIVE THAN WAR. War on terrorism should not encroach on basic values.
5. New York Times: Sabrina Tavernise, Russia to Build 2 Pipelines in the East.
6. Moscow Times: Alex Nicholson, The Wheels of Industry Grind to a Halt.
7. The Independent (UK): Terry Kirby, 'New capitalists' head for the Moscow borough of London.
8. www.eng.yabloko.ru: Grigory Yavlinsky, Demodernization.


National Post (Canada)
February 11, 2003
Putin takes a page from Lenin as he tours Paris, Berlin
Russia still has a strategic interest in thwarting U.S.
By Matthew Fisher 

MOSCOW - As Vladimir Putin, the Russian President, engages in a
high-profile four-day sweep through Germany and France this week, he may be
paying attention to the world view of his communist predecessor.

According to the doctrine of "inter-imperialist contradictions" laid out by
Lenin, Russia is in a position to take advantage of efforts by France and
Germany to thwart U.S. plans to depose Saddam Hussein.

Lenin, founder of the Soviet state, saw such situations as an opportunity
for the Kremlin to boost its international clout by playing capitalist
nations off against each other.

"Anyone who follows events around Iraq can see that, in essence, the
positions of Russia, France and Germany practically coincide," Mr. Putin
said in Berlin at the start of his tour and again, with slightly different
words, in Paris yesterday.

While Washington fumed, Mr. Putin, Gerhard Schroeder, the German
Chancellor, and Jacques Chirac, the French President, were clearly singing
from the same song book.

At a series of photo opportunities, they agreed that unlike 1991, when a
U.S.-led coalition expelled Saddam's army from Kuwait, there is currently
no justification for a U.S. invasion of Iraq.

Although the Cold War is over, Russia still has a strategic interest in
blocking U.S. hegemony. However, it has had few opportunities to do so in
recent years.

The Kremlin is backing a Franco-German plan to stiffen the UN inspections
regime in Iraq with armed peacekeepers because it would establish
international rather than U.S. control over the country, and Russia would
be part of it.

There is no political downside for Mr. Putin in this position. Siding with
Germany and France -- and irritating the United States -- can only make the
Russian President more popular at home than he already is.

A series of polls in Russia this winter has shown enormous hostility to
U.S. plans to invade Iraq. One recent nationwide survey found only 3% of
respondents approved of what the United States proposes to do, while 52%
were strongly opposed.

Quite apart from any inter-imperialist contradictions Russia might exploit,
there is huge oil money at stake in Iraq.

In an interview with a French television network yesterday, Mr. Putin
rejected the suggestion his country would support the United States on Iraq
if its oil companies were promised a share of Iraq's resources.

"We have got our own interests there and not only in the oil sphere," he
said. "But we are not going to engage in horse-trading as if in a bazaar,
or sell out principled position for any economic advantage."

Valeri Fyodorov, director of Political Friends, an independent Russian
think-tank, sees it differently.

"There were talks with the U.S. about Russian economic interests in Iraq,
but they did not succeed," Mr. Fyodorov said. "There were expressions of
sympathy but no guarantees."

So Russia decided to do the next best thing to protect its interests,
siding with two of its strongest economic partners, Germany and France.

"We want to be partners with the U.S., but we will not be part of a
partnership between a giant and a dwarf," Mr. Fyodorov said.

Whatever manoeuvres Russia, France and Germany are able to manage, it will
do little to alter the fact the United States will likely invade Iraq and
conquer it easily, said Viktor Kremeniuk, deputy director of the Institute
of Canada-USA Studies in Moscow.

However, he warned the United States will face serious long-term
consequences if it continues to ignore the opinions of Russia, Germany,
France and the many other countries opposing U.S. intervention in Iraq.

"On the surface, this is quite an anti-American coalition," Mr. Kremeniuk
said. "But the fact is that there is only one superpower in the world and
it wants to change the rules that currently exist. Others fear this change."

In his view, the United States has either miscalculated or simply
disregarded the opinion of the United Nations, Europe and Russia, and the
White House would do well to reconsider.

"This Iraqi question has activated feelings that the U.S. has been abusing
its position as a superpower," Mr. Kremeniuk said.

"The whole question quickly slipped from being about Iraq to something much
bigger about respect for international law, respect for the UN and respect
for allies."


TV1 Review
Compiled by Luba Schwartzman (luba_sch@hotmail.com)
Research Analyst, Center for Defense Information, Moscow office

Monday, February 10, 2003
- After his talks with German Chancellor Gerhard Schroeder, Russian 
President Vladimir Putin declared that the positions of most of the members 
of the UN Security Council coincide: The possibilities of peaceful 
disarmament of Iraq have not been exhausted.
- President Putin arrived in Paris in the afternoon. The state visit began 
with an official ceremony of the presidential meeting. Putin and French 
President Jacques Chirac then discussed a number of international issues in 
a one-on-one meeting before inviting the delegations of both countries.
- During his three-day visit to France Putin will meet with government 
officials and representatives of the political and business elite and visit 
the French Academy of Sciences.
- The "Journalists of the 20th Century: People and Fates" book was presented 
at the Moscow Journalists' House.
- Representatives of the Duma's Coordinating Council -- four centrist 
factions that make up the majority of the lower house -- met to discuss the 
bill on energy reform.
- Russian Defense Minister Sergei Ivanov arrived in Italy to discuss the 
fight against international terrorism with Italian Minister of Defense 
Antonio Martino. He declared that Russia is worried by the situation in 
Afghanistan, and noted that a number of regions bordering on Afghanistan, 
including Chechnya, host camps that prepare terrorist. Ivanov also stated 
that Russia is ready to help the UN inspectors in Iraq.
- Head of the Chechen Administration Akhmad Kadyrov signed a decree 
appointing Anatoly Popov as the new Prime Minister. The appointment was 
approved by President Putin and Presidential Plenipotentiary to the Southern 
Federal District Viktor Kazantsev. Popov was previously the director of a 
federal enterprise for the reconstruction of Chechnya.
- The ballots that will be used in the Referendum on the Chechen 
Constitution and Presidential and Parliamentary Elections have been 
approved. The ballots are to be printed and delivered to the regional 
electoral commissions throughout Chechnya by March 2nd. The referendum will 
be held on March 23rd. Questions and explanations are written in Russian 
and in Chechen.
- President Putin had a telephone conversation with Turkish Prime Minister 
Abdullah Gul to discuss issues concerning bilateral relations.
- A Wahhabite band formation, led by a field commander who went by the name 
of Salman, was destroyed in the Vedeno region of Chechnya. A large quantity 
of weapons and explosives was found at the rebels' base.
- Hundreds of people have been trapped by snow in the Volgograd Oblast. 
Over 400 cars and three buses were snowed in on the Volgograd-Syrzan federal 
- The Day of the Diplomat is celebrated in Russia for the first time this 
year. Ivan Grozny created the Ambassadorial Department on February 10, 
- Five thousand Russian citizens are among the 2 million Muslims who have 
taken the Hajj to Mecca.
- A memorial board will be placed on a house by the Griboedov Channel where 
Aleksandr Pushkin lived in 1817 and 1818.
- Svetlana Koroleva, the 19-year-old Miss Europe 2002, returned to Moscow 
from Lebanon. She declared that being beautiful is a full time job.
- About 350 various cultural events will be held as part of the Year of 
Russian Culture in Germany.


February 11, 2003
War on terrorism should not encroach on basic values
Author: Grigori Yavlinsky
[from WPS Monitoring Agency, www.wps.ru/e_index.html]

Finding a politician in Russia who would not elaborate on the 
necessity of "joining Europe" is difficult indeed nowadays.
Russia is a European country. I do not doubt that provided 
everything turns out right, Russia will be a member of all European 
political, economic, and defense structures in 10-15 years. They will 
be mostly new organizations altogether.
We should work for the mutual opening of the markets of Russia 
and the European Union, of a free trade zone and the zone of free 
movement of capitals and workforce eventually, for a common security 
framework, etc. We need a timetable of the happenings that will 
facilitate the Russia-European rapprochement.
The work on the Russian-European anti-ballistic missile defense 
system, already started within the Russia - NATO Twenty, should 
proceed along with the work on manufacture of strategic mobility 
transport means. The Russian-European anti-ballistic missile defense 
system will mean jobs for Russia and new bearing points for the 
Russian army, something to help overcome Cold War stereotypes.
As far as labor legislation, social policy, and protection of 
consumer rights are concerned Russia is not ready yet. The problems 
cannot be laid at Russia's door alone. There are problems with 
European bureaucracy as well.
The war on dictatorships is one of the worst problems Russia and 
Europe are facing. We already have Kim Jong-Il, Niyazov, Lukashenko, 
and others. There are no technologies of preventing the likes of them 
from appearing again; hence the importance of Russia, and whether or 
not it sides with Europe. Cooperation between Russia and the European 
Union may become instrumental in a solution to the most pressing 
problem of the moment - the problem of Iraq. The price of the war is 
more than money. It also entails sufferings of the population, 
devaluation of the United Nations, and new attempts to proliferate 
weapons of mass destruction.
Neither shall we forget that there is a whole number of countries 
with "good" dictatorial regimes that are either omitted or outright 
supported. This will lead to trouble.
(Translated by A. Ignatkin)


February 10, 2003
Author: Vladimir Rudakov
[from WPS Monitoring Agency, www.wps.ru/e_index.html]

The power party is going down rapidly. It is far behind 
communists already. This is based, however, on results of a single 
opinion poll and according to a single sociological service.
The other day the All-Russian Public Opinion Research Center 
published truly sensational results of a survey. It turns out that in 
a single month the rating of the power party, United Russia, fell from 
27% to 14%.
The power party has always been on top of the lists of all 
sociological services without exception ever since the previous 
election. These days, however, communists are ahead of it by 10%.
Actually, observers tend to trust the latest results of surveys 
conducted by the All-Russian Public Opinion Research Center more than 
previous ones. United Russia did its honest best to get its rating 
down. For starters, it transformed from the party of Rescue Ranger 
Sergei Shoigu into a party of bosses and officials (traditionally 
disliked throughout the country). After that, all sorts of conflicts 
plagued the party, every one of them followed by a scandal.
It does not take a genius to understand that the data nettled 
party functionaries immensely. Vladimir Medinsky, Chairman of the 
Executive Committee of Moscow's United Russia, called conclusions of 
the All-Russian Public Opinion Research Center "utter rubbish" and 
implied that ratings were quite conditional.
United Russia activists clearly consider results of the opinion 
poll as having been ordered by their political enemies. They even have 
the list of who may be interested in implicating the power party in 
this manner. "Firstly, the matter may concern PR specialists who want 
the power party unsure in its position and therefore running to them 
for help," says a party functionary. "Secondly, these results might 
have been ordered by the people ousted in the course of the recent 
shuffle in the upper echelons. That means the people close to 
Alexander Bespalov, dismissed but not exactly deprived of access to 
the party treasury. These men may be out to try and prove that making 
Boris Gryzlov the party leader is a mistake on the Kremlin's part. 
Thirdly, the results might have been ordered and paid for by our 
political opponents, and we have lots of them."
On the other hand, not everybody in United Russia itself accepts 
this evaluation. A political consultant who worked with United Russia 
at the very beginning of its presence on the political arena is stone-
cold confident that the All-Russian Public Opinion Research Center 
"has published a nearly true state of affairs and we should thank it 
for this." He is of the opinion that "the party is used to exaggerated 
ratings owed to active PR campaigns" and assumes that the order to 
lower down the rating could have been originated in the Kremlin. 
Allegedly, it is fed up with bureaucratic wars and empty words of the 
United Russia apparatus. Moreover, the Kremlin is allegedly vexed by 
the lack of results despite all activities of PR structures on the 
In other words, the opinion is split. But only with regard to who 
might have ordered all of the above.
The situation being what it is, results of the latest opinion 
poll by the All-Russian Public Opinion Research Center once again 
strike at the political system in the country. The All-Russian Public 
Opinion Research Center is not to be blamed. Even the least 
politically active population has gotten used to the idea that ratings 
are bought, questions are deliberately phrased, and respondents 
carefully selected. Results of sociological surveys always depend on 
the sums. No matter what results sociologists come up with, they will 
be credited less and less. Some Russians will always think that 
sociologists have been bought by the authorities, others will claim 
that sociologists are on the payroll of adversaries of the regime, and 
the third will stake their lives on the assumption that sociologists 
distort the results they get to the parameters ordered by political 
factions and parties fighting one another.
Dmitry Oreshkin of the Mercator group says that even the 
professional community "is under the impression that sociological 
services began tampering with results of surveys twelve or eighteen 
months before the elections." A mistake is unforgivable right on the 
eve of the election, but six months before is a wholly different 
matter. There are six months to correct the results.
(Translated by A. Ignatkin)


New York Times
February 11, 2003
Russia to Build 2 Pipelines in the East

IRKUTSK, Russia, Feb. 10 Along a snow-swept highway, an oil pipeline with
a capacity of one million barrels a day is running at a relative trickle.
The pipeline comes to an abrupt end at a giant refinery in Angarsk, a short
distance from this Siberian city 150 miles from the Mongolian border. That
is as far east as the Russian crude oil pipeline system goes.

But there are vast energy-hungry markets further east, and Russia's
government and its oil industry have been wrangling for months over two
competing visions of how to reach them with a relatively short pipeline
to China's industrial northeast, or a much larger and longer line to the
port of Nakhodka on the Sea of Japan, where oil could be shipped to Japan,
South Korea, or perhaps even California. The issue touched off debates
about private property rights and Russia's geopolitical future.

Now a compromise has been struck: build them both. 

According to a senior executive of Yukos Oil, Russia's largest producer and
the main backer of the China route, a single new pipeline will start at
Angarsk and then split, with one the first to be built going to China
and the other to Nakhodka. At 2,300 miles, the project would be one of the
longest pipelines in the world, nearly three times the length of the
Trans-Alaskan Pipeline, and would traverse terrain nearly as harsh. The
government has projected a cost of $6 billion, though analysts say $8
billion is more realistic. Details of the plan are to be filled in by March
12, when the Russian cabinet is scheduled to meet to discuss it.

Yukos had wanted to build and own the China pipeline itself, and had argued
that the longer route was impractical. But the company said it was
satisfied with the compromise. 

"China is a developed market that's ready for our oil," said the Yukos
executive, Yuri D. Ivanov, deputy director of oil trade and transportation.
"Let the government stretch it further if it wants." 

In some ways, politics seemed to trump economics in the government's
decision. It shrugged off criticism of the route to Nakhodka as too
expensive, insisting on it as a way to accelerate development in Siberia, a
vast territory the size of Australia where most roads are dirt and
telephones are rarely seen. A pipeline could help carry prosperity as well
as oil from western Russia to the east, the thinking has been.

"What leader would refuse investment, when life is so difficult for us
here?" said Pyotr M. Gerasimov, the mayor of Usolye-Sibirskoye, a town near
Angarsk that is along the pipeline's route. "It would be shameful not to
take the chance. It will bring jobs, money for our budget."

For the oil companies, the pipelines promise to bypass bottlenecks in the
existing export pipeline system. The line to China is meant to carry
400,000 barrels a day, with the Pacific route planned for one million
barrels a day potentially expanding Russia's current export capacity of
3.2 million barrels a day by nearly half. 

The decision also seemed to settle the debate over pipeline ownership in
Russia. The existing 30,200-mile network, the world's largest, is
controlled by Transneft, a government-owned monopoly. The oil companies say
they want to move faster and export more than Transneft can allow them to
do, but the government has been deeply reluctant to give up any of the
revenue or the influence over geopolitically important trade flows that
Transneft commands.

"Unfortunately, experience shows that we can't regulate fully and
efficiently what we don't own," said one senior government official.

Extensive government involvement, however, could mean delays in completing
the pipelines. Mr. Ivanov of Yukos said the timetable for building the
China pipeline "has obviously been disrupted," though construction might
yet start this year. And the reassertion of Transneft's monopoly may
complicate a proposal for a new privately owned pipeline to the Barents Sea
port of Murmansk to ship oil to America. 

Analysts expressed some skepticism that the eastern pipeline project would
succeed. The high cost of building the link to Nakhodka would have to be
reflected in shipping rates, they said, and that would deter producers in
western Siberia, where the great majority of Russia's oil is extracted,
from using the eastern routes. 

Eastern Siberia, meanwhile, does not yet have enough proven reserves to
fill the pipe economically, according to Philip Vorobyov, a Russia
specialist at Cambridge Energy Research Associates in Moscow who recently
prepared a report on Russia's eastern energy sources.

"Energy security is very important, but ultimately you'll have to find a
source of funds for this pipeline," Mr. Vorobyov said. "Unless it's
economic, it's very difficult to imagine it being built. They still need to
prove additional reserves, specifically in eastern Siberia." 

The China pipeline backed by Yukos, which was well along in planning, had
been challenged by local environmentalists. The route crosses areas where
earthquake risks are high and cuts through the Tunkinsky National Park, a
spectacular, sparsely populated forest region set aside in 1991.

But the company's environmental impact study "does not inspire trust," said
Victor A. Kuznetsov, a former park ranger who works at Baikal Ecological
Wave, an environmental group in Irkutsk. "Responsibility is up in the air.
There is no mechanism for who will answer for a spill."

Executives at Yukos said the precautions they planned go far beyond
Soviet-era practices, and use modern earthquake engineering. And Yukos said
the China pipeline project alone would create 1,500 jobs and bring new
roads, bridges and tax revenue to some of the poorest regions of the country. 

The portion of the pipeline in Chinese territory is to be built in
cooperation with CNPC, a Chinese state oil company. The Japanese government
had publicly urged Russia to build the pipeline to Nakhodka.


Moscow Times
February 11, 2003
The Wheels of Industry Grind to a Halt
By Alex Nicholson 
Staff Writer 

To hear manufacturers tell it, the economy is in crisis and recovery is
nowhere in sight.

After 49 consecutive months of production growth, the manufacturing sector
contracted in January for the first time since the economy was temporarily
shellshocked from the debt default and steep ruble devaluation of 1998,
according to the latest seasonally adjusted Purchasing Managers' Index
(PMI) conducted by Moscow Narodny Bank.

"It's the first time in four years that we've actually seen an index below
50," says MNB economist Paul Timmons.

In the single-figure snapshot of manufacturing conditions, any figure below
the no-change level of 50 signals shrinking output in the sector.

"Widespread uncertainty over the strength of underlying demand for
manufacturing goods was mentioned by a number of panel members for the
slowdown in output growth," MNB said in its monthly survey for January,
released last week.

Economists say the benchmark index proves what many observers have been
warning about for months -- high world oil prices may be continuing to put
a shine on the nation's headline economic figures, but the benefits to the
bulk of Russian industry afforded by the 1998 ruble devaluation are over. 

As during the banner economic year of 1997, consumers with relatively high
disposable incomes are increasingly choosing imported goods over domestic
products, forcing the majority of manufacturers -- already reeling from
rising costs and thirsty for investment -- to scramble for survival.

"Over the past year particularly there has been a sense, a growing sense,
that everything is OK in the economy," says Chris Weafer, chief strategist
at Alfa Bank. "It is absolutely wrong that people have become so
complacent. ... The economy is still very fragile and vulnerable to
something like an oil price shock.

"The strength that we see at the top line clearly has not extended across
the whole economy, and the [PMI] survey illustrates this very starkly."

The Soviet Sandwich

Anton Strutchenevsky, an economist at Troika Dialog, says the government
needs to dramatically overhaul its concept of the economy if it is to meet
its ambitious annual growth targets of 6 percent to 8 percent in the coming

"It is impossible to live according to the economic model of economic
growth that was in place in 2002, when growth came not from investment but
mostly from the oil sector, which guaranteed an influx of currency into the
country that was then redistributed through the system of budget finance,"
Strutchenevsky says.

"The model that exists now is limited by the world demand for oil products
and can support no more than a slowing growth rate."

Falling export orders, shaky domestic demand and climbing input costs have
managers jittery and are symptomatic of an unhealthy economic model that
some economists have dubbed the "Soviet sandwich."

In this Epicurean model of capitalism, the bread of the sandwich is far
from stale and was chiefly responsible for industry's 3.7 percent output
growth last year. The top slice is the raw materials companies that have
restructured, consolidated and invested heavily on a wave of oil revenues.
The bottom slice is the newer industries -- food processing, retail and
construction -- that are free of the Soviet heritage of scattered
structure, confused management and antiquated equipment.

Renaissance Capital strategist Roland Nash describes the filling: "In the
middle is the icky processed pink salami of industry struggling with its
Soviet legacy -- automobiles, aeronauticals, heavy machinery defense,
textiles, etc. Unable to obtain capital and with market-challenged
management, they ramped up production behind the protective barrier of an
artificially cheap ruble and are now cutting output as their
competitiveness is squeezed."

Nash says heavy machinery output grew 53 percent between 1999 and 2001, but
just 2 percent last year, while textiles grew 45 percent and shrank by 1
percent in the same periods, respectively.

A Bitter Taste

"There is no investment in industry, in machine building," says Nikolai
Panichev, president of Stankoinstrument, the successor to the Machinery and
Tool Building Ministry that unites more than 100 manufacturers of machine
tools making parts for automobiles, airplanes, railroad cars, drilling rigs
and tanks.

"Investment goes into everything -- oil, gas, electricity, all raw
materials -- but unfortunately we can't seem to understand that Russia,
which is so rich in natural resources, cannot live without its own

"Machine-building factories are in a crazy position -- interest rates are
too high for borrowing to be affordable, while utility bills are growing
and getting closer to those in the West," Panichev says. 

"The industrial base of the country is unprepared for this.
Machine-building factories can barely pay their debts, but they can't
afford to buy a new lathe or press."

One area that has been hit especially hard is the automobile industry.

As the government moved last year to protect the sector by raising tariffs
on imported used cars -- the main competitors to new domestic cars --
Russians hurried to buy the imports before the duties came into effect,
forcing lead automakers VAZ and GAZ to temporarily halt production. 

"But even so, this tells us that consumers have more money. Disposable
income grew by 8 percent last year, and they are starting to choose
quality," Troika's Strutchenevsky says.

The automotive sector is not alone. 

According to the State Statistics Committee, or Goskomstat, output in the
tractor industry fell by more than 60 percent last year despite a bumper
grain harvest. In fact, across the manufacturing spectrum, any pockets of
booming productivity are generally due to one-off factors. 

The machine tools factories that service the railways, for example, are
enjoying a temporary surge in orders from oil majors trying to avoid
pipeline bottlenecks until new export capacity is added to the network. 

Russian aircraft manufacturers, once the world's most prolific, are
operating at 30 percent capacity and have been forced into noncore
activities such as building boats and railway car interiors to make ends

And many firms in the defense industry, once the nation's largest employer,
have had to branch into completely new activities to survive. 

One of these is Splav, a manufacturer of high-precision missile systems. It
has adapted its production facilities to turn out equipment that can
extract milk and additives for yogurt and cheese from soya beans. 

As for the consumer electronics sector, it is virtually nonexistent, with a
few exceptions, such as television sets.

"All the stores are filled with imported goods," says Natalya Zagvozdina,
consumer markets analyst at Renaissance Capital. 

"The entire industry is extremely depressed. Modern technology is an area
where Russia has lost its position. We still have scientific institutes and
research, but they are not applied to industry." 

Rising Costs

Manufacturers' real costs have risen as much as 35 percent in the last
year, according to Weafer of Alfa Bank. 

While rising energy prices are certainly putting the squeeze on companies,
what is really hurting the largest manufacturers is their inability to
streamline their workforces, according to Weafer. 

"Russia really has to avoid going the route of the Japanese or Central
Europe, where it is impossible to reduce labor forces. Wages are the
biggest single factor in cost growth. It's not really tariff increases or
energy costs, it's the cost of employing people and the fact that you can't
reduce," he says.

Stanislav Budnikov, technical director of Elektroagregat, a Kursk-based
company that makes generators, says that since tax breaks on capital
investments were terminated by amendments to the Tax Code in January 2002,
orders have dried up.

Elektroagregat's only hope of survival now, he says, is a depreciation tax
the government is talking about introducing from next January. Until then,
"we'll have to find a way to survive," Budnikov says.

Another pressing issue is the exorbitant cost of money.

Panichev of Stankoinstrument says interest rates of 25 percent for ruble
loans or 18 percent for hard-currency loans are laughable. "Where in the
world would you see an idiot take loans like that?"

Peter Westin, chief economist at Aton, says financing isn't likely to get
much cheaper in the near term.

"On the one side, you have the manufacturing sector. On the other, you have
the banking sector, which is not willing to lend to these companies because
there's no single credit agency in Russia, so there's no way of checking
credit history."

And for many of these companies raising cash from exports is not a viable

"It makes no sense for us because it takes so long for the tax bodies to
return VAT to us," says Valery Ermilov, general director of the Novaya
Ivanovskaya Manufaktura textiles plant. 

Reclaiming VAT on exports has long been a thorn in the side of domestic

The procedure takes months and requires voluminous documentation. Despite
government plans to make the procedure the same as reclaiming VAT on the
internal market, Yermilov is holding out little hope. 

"We've been waiting 10 years. They've been promising to pay more attention
to us, but they just erect more barriers." 

Bright Spots

One area where overseas investment has been considerable is the food and
drinks sector. Here, as in the retail and construction segments, growth --
particularly in Moscow -- has been propelled by relatively high disposable
incomes, and Western and domestic companies alike have been rushing to fill
the gaps in the market. 

The average Russian has no mortgage, pays no school bills, and utilities
are still relatively cheap. Add to that all the dollars kept under
mattresses and a consumer boom is born.

The optimism of a company like Happyland, which makes alcoholic soft
drinks, reflects the trend. 

"In Russia the low alcoholic beverage consumption culture is extremely well
developed," says Svetlana Drozd, head of PR for Happyland. "The target
group is prepared to try new things, use and accept new things. The market
has all the necessary conditions for growth. No slowdown is predicted in
the coming years."

According to Drozd, Russia is the fourth-fastest growing market in the
world for alcoholic soft drinks. 

Still, as Drozd puts it, the shelves in food stores aren't endless and
there are signs of stagnation in certain areas. 

Vladimir Salnikov, a leading expert at the Center for Macroeconomic
Analysis, believes that disposable incomes will soon start to fall.

This, he says, would come as a result of real income growing much faster
than labor productivity, and he anticipates that the balance at least in
the short term will be re-established as the lack of financial resources in
the real sector increases. 

The Road Ahead

"The big problem facing the government in the next few years is to create
conditions that would allow investment flows into manufacturing so that the
economy grows in a more balanced way," Weafer says.

The government has made it its declared goal to shake the oil needle from
the vein of the economy and introduce changes that will breathe life into
the country's struggling manufacturing sector. 

But those changes are still at the discussion stage. 

At a recent conference on exports, Economic Development and Trade Minister
German Gref said: "We, with full decisiveness, intend to change the
situation so that Russian manufacturers and exporters are in no worse a
position than their Western counterparts.

"God has given Russia a lot of carbon reserves but this should not be a
factor that allows us to ignore traditional Russian exports," Gref said.

At last week's Cabinet meeting, a range of tax incentives for businesses
were aired, including proposals for reducing the burdensome unified social
tax and VAT. 

Prime Minister Mikhail Kasyanov instructed the Finance Ministry and the
Economic Development and Trade Ministry to prepare and submit a draft law
on "the future reduction of the tax burden on the economy and primarily in
the sectors of the manufacturing industry."

But the experts say that like it or not, bolder reforms are required to cut
the deadwood from industry. However, implementing the reforms and handling
the social fallout as unprofitable companies implode are not questions
likely to be addressed in the buildup to parliamentary elections in
December, followed by the presidential election three months later. 

"The reforms will be progressed," Weafer says, "but none will be completed. 

"No one seriously expects reforms to be finalized because of the political


The Independent (UK)
8 February 2003
'New capitalists' head for the Moscow borough of London
By Terry Kirby

Once, Lenin and Trotsky arrived as exiles, to plot in the Reading Room of
the British Museum. Later, White Russians fled to London from the Bolshevik
revolution. After the downfall of Communism, the "new capitalists" of Moscow
and St Petersburg bought into the property market, and mafia gangs sought
control of the capital's drugs and vice rackets.

Now a new wave of Russians has arrived. Bright, businesslike and
aspirational, they revel in London's cultural and social life, want the best
schools for their children and seek the ultimate goal: British citizenship.
The Russian middle classes are here.

The thriving Russian community in London now numbers at least 200,000, far
more if Georgians, Ukrainians, Lithuanians and other former Soviet bloc
countries are included. They have three newspapers, a radio station and an
orchestra as well as websites, special nights at discos and scores of
restaurants, shops and businesses to serve them.

And although Russian arts companies and performers such as the Bolshoi and
Kirov Ballets have always visited London, other artists are regularly on
show, from dance troupes to stand-up comedians. Michael Zhavanetskiy, known
as Russia's Billy Connolly, will be arriving soon and the highly regarded
but relatively unknown Abalian Choir from St Petersburg is to appear in the
autumn. Britain seems to like the Russians, too.

Not only are there warm relations between Tony Blair and Vladimir Putin, but
Britain has streamlined visa procedures at the Moscow embassy, which led to
a 13 per cent increase in applications. In 1991, just one person from Russia
was granted British citizenship. Ten years later the figure had risen to
790, among the highest for any country, with most of the increase in the
previous two years.

Although the new Russians cannot be pigeonholed into one particular type, no
one talks of Gucci loafer-clad gangsters flashing gold watches any more.
Many work in banking or commerce for established companies with Russian
links or live in London to study. Many have set up businesses, often in the
media or similar professions. Some find the ideal climate for their
entrepreneurial skills.

Ten years ago, Natasha Chouvaeva, 36, arrived from the closed Soviet-era
town of Gorki, where her working-class parents did manual jobs. Her husband,
Yevgeny, was with her, working for what was then a fledgling Ukrainian bank.
Mrs Chouvaeva was a translator until she had saved enough money. In 1994 she
started a newspaper to serve the growing Russian community. So the London
Courier was born.

It is now published twice monthly from offices in Edgware, employs several
full-time staff, has a circulation of 15,000, with a mixture of Russian and
international news and the activities of the expatriate community. It has
advertisements for a wide range of Russian and Russian-speaking businesses,
from travel agents to language schools. Her husband runs the technical side
of the business.

Mrs Chouvaeva says: "I think we are typical of the new Russians here. They
are much more settled and middle-class, and they come here because they like
Britain and its history and want a decent standard of living. For many,
British citizenship is the ultimate goal."

Like many Russians, the couple, who now live in the Hertfordshire commuter
belt, are educating their six-year old daughter, Marie, at a local
independent school. "Russians like the British education system and will
spend their last penny to get the best for their children." Paradoxically,
she said, many sought the same high educational standards that once
prevailed during the old, Soviet-era days.

Although the couple are proud to be Russian and proud of their cultural
heritage, like many in their community, they are not inward-looking and sit
easily between both cultures. They are just as likely to be found at an
English social or cultural event as a Russian one; they eat mostly
French-style at home, but will buy Russian food for special occasions. And
they are worried Marie does not speak enough Russian.

Mrs Chouvaeva has not been back to visit Gorki, although her parents, now
retired, have visited them. "They didn't understand why I am here. But I
told them I couldn't do what I am doing in Russia."

The couple have recently published the second edition of The Russian
Directory, a glossy guide to Russian businesses and services in London
packed with advertisements for designer goods and private schools, and
helped form the Russian British Cultural Association to help promote Russian
performing artists in London.

Also involved in the association is Olga Balakleets, a pianist, who began
the Russian Chamber Orchestra of London some years ago. She finds the number
of Russian musicians in London has grown to a point where they can often
drop the "chamber" bit. "Being able to perform as a full orchestra
demonstrates the size of the Russian community in London," she says. "But we
perform for Russians and British people."

London's newer arrivals appear to have meshed easily with the older, more
established migr community of Russians and residual monarchists,
international socialites and businessmen.

Count Andrei Tolstoy-Miloslavsky, a relative of Leo Tolstoy, a Russian
events organiser and long-time pillar of the older community, welcomes the
arrivals. "It's a very, very active group of middle-class business people."

They have boosted the congregation at the recently built cathedral in
Chiswick of the Russian Orthodox Church Abroad, a branch of the Russian
Orthodox Church that split away in 1917. Although it was largely completed
and has been used for worship since 1998, work on the internal decoration is
still continuing. Count Andrei, who is in charge of fund-raising for the
church, says: "Although the church was planned in the early Eighties, long
before the collapse of Communism, most people who worship there now,
alongside the last vestiges of the old White Russian community, are the

Someone who sees it from all sides is Aliona Muchinskaya, who arrived in
Britain as a 19-year-old correspondent for Moscow Komsomoletz, organ of the
Moscow Community Party's youth league. Now 31, she runs Red Square PR
(motto: "It's hip to be Square") from her Muswell Hill home, deep in the
heart of middle-class north London. She married a Briton and they have a
four-year-old son at a nursery school. She still writes for Russian papers
and is also involved with First Russian Radio, said to be London's only
Russian radio station, which broadcasts for an hour each day, a mixture of
music, news, sport and serious interviews.

Although the image is trendy public relations, Red Square has been involved
in publicity for events involving Faberg, the Tsarist-era jewellers, as
well as promoting last year's Russian Stand-up Comedy Festival. She says:
"When I first came here I loved London. I though it was the most fantastic
place and even the burger bars I thought were wonderful, because we had
nothing like that in Moscow.

"Now many of my Russian friends work in the city, in banking or
stockbroking. When they go out they are just as likely to go to a normal
nightclub, like Chinawhite, as they are to go to a Russian restaurant. I
love the diversity of culture and the education; my son knows a thousand
times more things than I did when I was four. For a person with brains and
ambition, London is a great place to be."

Where they are and what they do ...

* They live mostly in smart west London, in areas such as Kensington, Fulham
and Chelsea, or middle-class north London, including Hampstead, Highgate and
Golders Green;

* Many breakfast at Troika, a Russian-style tearoom and restaurant in
Primrose Hill;

* They dine on home-style borsht (beetroot soup) and pelmeni (Siberian pork
dumplings) at Potemkin, in Clerkenwell;

* They drink copious quantities of vodka, with blinis and caviar at Nikita's
in Fulham;

* Young and old dance the night away to Russian pop at special nights at
clubs such as Aquarium in Old Street in Shoreditch;

* They buy pickled herring at Zina Kirk's delicatessan in Fulham, watched by
a bust of Lenin, left;

* Most worship at the Russian Orthodox Church Abroad, above, in Chiswick;

* Most send their children to private schools including Aldenham, in
Hertfordshire which advertise in Russian in newspapers;

* They pore over news from home and items about their fellow expatriates in
the London Courier, available from more than 100 shops;

* Most tune into First Russian Radio, London's only Russian-language radio
show, Sunday to Friday lunchtime on 558AM for interviews with visiting
Russian celebrities and politicians;

* Many listen to the Russian Chamber Orchestra of London play Prokofiev at
St John's Church in Smith Square every month; and

* They don posh frocks and dinner jackets for the Russian Summer Ball at the
Banqueting House in Whitehall in June.


By Grigory Yavlinsky

Economic Gains

The past few years have been relatively favourable for the Russian economy.
Production increased visibly after seven years of recession from 1991 to
1998. In 2000 and 2001 real GDP increased by about 14% and, in view of the
anticipated 4% rise in 2002, GDP growth will amount to 19% over three
years. People's real incomes and consumer demand increased after a nosedive
during the 1998 crisis. The past two years have also been marked by greater
investor optimism regarding the export sector and some of the processing
industries that compete with imports on the domestic market. For the second
year running exports exceeded USD100 billion, yielding a significant trade
and balance of payments surplus, which normalized repayment of the foreign
debt and ensured a relatively stable national exchange rate.

Economists and politicians usually ascribe the substantial improvement in
the economy to the devaluation of the rouble and the high oil prices. In
principle, this is true: the impact of events at the time may be described
as extraordinary - a rapid devaluation of the rouble at the end of 1998 and
in early 1999 (three- to four-fold within a few months) and a nearly
three-fold leap in world oil prices in 1999 and 2000. Not to mention the
undeniably positive changes in the Russian economy over the past few years.

Increasing investments in the export-oriented raw materials sector, which
were stimulated by a rise in revenues resulting from rocketing raw
materials prices internationally, have gradually been transferred to a
number of sectors primarily in the domestic market. An increasingly
important role is being played by expansion of domestic demand, buttressed
by people's growing incomes and investments in the real sector.
Furthermore, the growth in personal consumption has today become a chief
factor in increasing production.

The banking infrastructure that was almost totally crippled by the "August"
crisis has partly recovered over the past three years. The principal cost
indices, namely, shareholder capital, debt volumes, including those of the
population, and crediting of the real sector of the economy, are growing
steadily. The dependence of the banking sector on state finances has
decreased, while its role in servicing financial flows in the private
sector has been growing. Various forms of non-cash settlements, above all
barter, have contracted in volume. Meanwhile legal financial transactions
have expanded.

At the same time, we are witnessing the emergence of new market players
that comply more with the meet the requirements of today's market economy.
The largest Russian companies are not only rapidly increasing sales and
profits: they are also starting to transform themselves into international
companies through the nature of their operations and variety of their
partners. Firms that today claim to be "the face of Russian capitalism,"
are beginning to devote more and more attention to their public image. They
not only engage in primitive forms of company advertising and the
establishment of contacts with the mass media. They also strive to
circumvent the more odious forms of relations that were typical of
so-called "wild capitalism" and participate in charitable activities. They
seek to create a positive image with their foreign partners and local
public. In this drive to establish a positive image for "new Russian
capital" and in their attempts to build a democratic market economy, these
companies are, whether consciously or not, imposing certain restraints on
their practices, and are thereby beginning to work in accordance with the
norms and methods that are common in advanced countries. 

Economic Problems

As I see it, however, these successes and positive changes simultaneously
demonstrated and still do demonstrate the fundamental limitations of the
economic system created in Yeltsin's time that has become even more
engrained over the past few years. (Naturally, the President's criticism of
the government we heard a while ago regarding the relatively low rate of
economic growth amounts in essence to a political admission - conscious or
not - that the system has exhausted its potential.) To all intents and
appearances, this growth does not within the framework of the prevailing
economic system and probably cannot enable the country to resolve
fundamental problems without qualitative changes in the overall picture. I
am referring above all to the gap between Russia and countries with highly
and relatively developed economies and also to the increasing problems in
our country.

Rates and nature of growth

This concerns first and foremost the numeric growth indices. The rate of
growth of production and incomes, considering the low initial level and
extremely favourable foreign situation, may at best be described as
moderate, but in no way as high . As this favourable situation
deteriorates, as may well happen, annual GDP growth will contract to 3 or 4
per cent, which is wholly insufficient to secure any long-term qualitative
gains in the economy and society. Even if we take the optimistic scenarios
of the Ministry of Economic Development and Trade and forecast medium-term
economic trends (up to 6% annual growth), this means, in effect, that the
gap separating Russia from advanced countries will not shrink to any
substantial degree, at least not for the foreseeable future. Consequently,
we cannot expect a radical improvement in the situation at the present
growth rates in such vitally important fields for our country as a high
standard of full employment consistent with the level of accumulated human
capital, comfortable living standards for most citizens, stabilization of
the demographic situation, the requisite security of our borders, and so on.

Even this modest rate of growth is fragile and unstable owing to the
underlying mechanism, which is not attributable to the exceedingly high
level of dependence of the Russian economy on oil and gas exports, and
consequently on their price on world markets. This dependence definitely
exists and constitutes a serious problem; however, another factor is far
more serious for a number of reasons, some of which are referred to below.
The Russian market is in prevailing conditions highly segmented, and an
individual economic player has a very limited opportunity to gain a niche
in new segments, as they are already divided and rigidly protected. As a
result, the country lacks the requisite conditions to organize a really
modern industry required to gain access to the big markets. This is the
reason why the boost in raw materials exports failed, despite the
expectations of optimists, to generate any mechanism to mutually stimulate
rapid growth in the main industries. Growth in export incomes has had an
insignificant impact on incomes in other sectors, and the growth in
domestic demand is not becoming a truly powerful engine for a
self-perpetuating spiral of growth.

Investments and reproduction

The rate of accumulation in the Russian economy has dropped several-fold
against the 1980s: even compared to 2000 and 2001 this rise amounted to
something like 20%, which in no way meets the modernization requirements of
production assets in the real sector of the economy. 

In view of the decline in real GDP, it may be estimated that capital input
decreased in absolute terms four-fold. The financing of over two-thirds of
investments in industry by companies' internal resources by the end of the
decade and their failure to attract external resources speaks less of their
financial power and rather of the modest size of their investment programmes.

The decline in the volume and change in the structure of investments in
fixed assets is no compensating factor: over half the capital input in the
relatively favourable period of 2000-2001 was produced by the mineral
industry, primarily companies with an export focus that aimed solely to
meet their own needs. No institution of financial intermediaries appeared,
that could have transferred capital from industries with surplus current
incomes (for their own needs in production investments) into objectively
promising sectors. The forms resulting from the dearth of such an
institution (similar to the Korean "chaebols") - where companies
specializing in one industry buy companies in other industries, i.e.,
purchase of enterprises in other sectors by companies related to raw
materials - offer a highly dubious road in terms of efficiency and stability.

Structural distortions in the economy

It is becoming more and more evident that the growth over the past few
years offers no panacea to the obvious (and in a certain sense threatening)
structural distortions in the economy towards the raw materials industries.
Although raw materials account for a relatively moderate proportion of
Russian GDP , this sector, which is heavily dependent for objective reasons
on global fluctuations, accounts for the bulk of the financial resources
available to Russian companies, cash flows and investments in production.

This sector has accounted and still accounts for a visibly larger
proportion of cumulative production investments all these years than the
manufacturing industry. In industry electricity companies and companies in
the export-oriented fuels and raw materials sector account for almost 80%
of all capital investments , while the share of investments in the
processing industries - mechanical engineering, and the light and food
industries - amounted to no more than 15%. In other words over the past
three years the raw materials industries could be described as the engine
of industrial growth, creating the lion's share of investment demand for
Russia's machine-building and metalworking. 

This sector of the Russian economy is tied most to the world economy.
Output of fuels and raw materials (in the broad sense, including lightly
processed industrial goods) accounts for 70% of total exports and may
increase. Crude oil and natural gas account for over 50% of all exports .
These industries guarantee the balance of foreign trade surplus: without
this surplus it would have been impossible to service the large foreign
debt accumulated over the past few decades.

The raw materials sector is the main generator of people's cash incomes. In
addition to the considerable number of people directly employed in the
extraction, transportation, and processing of raw materials, the sector is
also a source of livelihood for the workforce of a fairly far-flung
infrastructure - a large number of labour-intensive fields, where the raw
materials export sector is the main or critically important consumer. The
decline of incomes in the fuel and raw materials sector is increasingly
resulting in a sales cut in a large number of sectors that could
cumulatively have a decisive impact on the state of the domestic economy.

A relatively small number of key companies that are mainly active in the
raw materials industry have begun to directly or indirectly control an even
greater share of the servicing sectors, even those fields with enhanced
profitability that are in no way technologically connected with the main
line of business of these companies . The sphere controlled by these
companies absorbs in one way or another not only the cash flows directly
related to the extraction and export of natural resources, but also those
of contiguous or aggregate financial flows.

Lastly, this sector is critically important for the state of the
government's finances, as it accounts for over 50% of indirect taxes
(including payments for use of the sub-soil). These taxes account for more
than half the cumulative budget revenues and constitute an extremely
important source of federal revenues. Moreover, as mentioned earlier, this
sector of the economy helps maintain the foreign exchange flows into the
country required to service foreign debts.

Naturally the conspicuous role of the raw materials sector has no less
conspicuous negative implications for the country's economy. The sustained
predominant role played by the fuel and raw materials complex in aggregate
production investments means that it will consume for the foreseeable
future the bulk of resources invested in expanding and retooling the
production sector. In addition, the efficiency of investments in the
extractive industries will for objective reasons (higher prospecting and
extraction costs) inevitably decline. As these industries account for a
significant share of total output, this development will lead to a drop of
the effectiveness in the efficiency of production investments and the
Russian economy as a whole.

The high percentage of fuel and raw materials in exports imposes stringent
constraints on possible growth and also engenders instability owing to
sharp price fluctuations for these products. Not to mention the impact of
such a form of exchange with the outside world: the country's human and
intellectual potential will not be fully mobilised and the national
resources will not be fully exploited.

Lastly, economic growth and efficiency faces an even greater threat owing
to the domination of the economy by large raw materials corporations. As a
result the country's economic health is excessively dependent on the
decisions and sentiments of a close-knit group of top managers at these
companies. As soon as Gazprom, the oil companies and United Energy Systems
curtail investment projects owing to doubts over the prospects on world
energy markets or even internal personnel problems, recession strikes the
economy and production activity in most industries, above all
machine-building and petrochemicals, metallurgy, and building materials.
This is followed by a noticeable decline in consumer demand. As a result
the mechanism of economic growth is out of sync for a long period. At the
same time, excessive capital accumulates in energy and above all oil
sectors, finds no outlet in other sectors, and more often than not flows
out of Russia, either legally or illegally, asthe raw materials companies
prefer to do business in an area they know abroad, instead of trying to
engage in new and unfamiliar spheres of activity inside the country.

This also holds true for state finances - budget revenues are severely
destabilized owing to price fluctuations, primarily crude oil prices and
the prices of its derivatives, both indirectly (through the decline in
revenue from corresponding export duties and the profits tax of the
producers), and, to a still greater extent, indirectly - through a general
deterioration in the economic situation and slower growth in investments
and consumption.

Employment, income and the social structure of society 

The economic growth we observed over the past two years did not resolve,
nor could it have resolved, the problem of unemployment. We should not be
deceived by the relatively low indicators for unemployment in the country:
the bulk of the active labour force have neither normal or properly paid
jobs, and have no chance to find such employment before the end of their
working lives. The raw materials industry requires only a small fraction of
the human resources available, while demand for skilled labour is generally
insignificant for a country with a population like Russia. Consequently the
system abandons at least half of Russians today to an existence akin to
poverty in conditions of stagnant unemployment and medieval subsistence
farming on small plots allotted to every citizen, while the other half
predominantly eke out an existence as employees with no need for special
training and are consequently low paid and bereft of any social benefits.

As a result, after nearly four years of economic growth, the indicators for
social prosperity have remained at a very low level. Russia's per capita
GDP is about the same as that of average developing countries, and is, to
put it bluntly, below average compared to the group of developed countries.
Official statistics indicate that the ratio of average earnings and
pensions to the subsistence minimum has not changed perceptibly, and the
average pension is approximately 25% lower than the corresponding
subsistence minimum.

Meanwhile, incomes differentiate significantly. The income gap between the
top and bottom 10% of the population is fourteen-fold and has remained
virtually unchanged throughout the past ten years. At least 30% of the
population live in absolute poverty, in other words people who find it hard
to meet their basic needs.

Russia's socio-economic structure has evolved accordingly. The five per
cent of the population who seized control of the country's raw materials
and financial flows, have incomes that enable them to feel, if not
omnipotent, then in any case like people who have forgotten entirely what
material needs mean. Another 15-20% of the population represent our middle
class who owe their relative prosperity to the present system and who are,
accordingly, their chief social buttress and defender. However, the middle
class in this system does not consist of engineers, officers, physicians,
teachers, researchers and middle-range entrepreneurs, highly-skilled
workers or farmers, but instead people from the service sector,
entertainers, officials, and individuals living on dividends from their
property holdings or investments. The remaining 70-75% of the population
are "old" and "new" poor people who, in keeping with the Marxist theory of
capitalism, live at the level of simple reproduction of working power or
even lower. This is demonstrated most clearly by the low birth rate and
high mortality rate in most Russian regions.

The biggest problem here is that the existing system does not have any
in-built-mechanisms to redistribute income on a national scale.
Domestically produced goods and services account at best for 25% of
consumption by the well-off: moreover, these are mainly food products and
the triple "restaurant-taxi-girls" formula. In these circumstances, hopes
that a large domestic market will be the chief mechanism ensuring the
development of extensive economic growth are wholly unfounded under the
prevailing system.

Reduction in state expenditures and mini-budget

In our opinion, the optimism expressed over the improvement in state
finances is unfounded. Despite all the talk about a deficit-free budget,
regulation of the state debt problem, and the state's improved financial
health, we must not disregard the fact that this "recovery" was secured by
foregoing vital expenditure on a civilized level of education, the
financing of R&D, social security, and public health. Indeed, expenditure
on the wages of public servants, maintenance of the army and the law and
enforcement agencies are nothing short is humiliatingly low. Moreover, in
view of the existing system, the country is doomed to the same balanced out
"mini-budget", where revenues will always fall dismally short of offering
even a reasonable wage to workers and decent salary for civil servants, to
say nothing of the investments required to ensure future economic growth,
namely, expenditures on infrastructure, general and vocational education,
R&D financing, etc. With such a budget, the country will have neither
modern armed forces nor an independent judiciary system, nor honest and
professional law and enforcement agencies, while the arbitrary application
of a depraved system of "informal" justice will never be curtailed, even
with the most sincere political will.

Science and education represent other key areas sacrificed to financial
"recovery". Our estimates, which are based on official Russian statistics,
indicate that over the past eight or nine years social outlays on education
in factual terms fell on average by 55%, while the increase in private
expenses have only slightly compensated for the reduction in federal and
local budget expenditures. State outlays on science have been reduced even
more. The prestige of professional scientific and science-intensive
production has dropped sharply. As a result, the quality of education and
standard of training of school-leavers and university graduates have
plummeted. The lack of unofficial contributions to schooling is hindering
school access for needy segments of the population. As a result almost 10%
of school-age children have stopped going to school.

This inflicts enormous damage on the country's human (labour and
intellectual) resources. The workforce has visibly decreased in number and,
more importantly, in quality. A drop in employment in production and the
few high technology sectors of the former Soviet economy, coupled with
degradation of the system of state research institutions (and the almost
complete absence of private research centres) have compelled a large number
of highly skilled specialists to change their jobs. According to some
polls, no more than 10% of those who were dismissed or were compelled to
stop working in Russia's scientific institutions have found a niche in
large private companies or credit institutions. The remaining 90% work for
small and very small businesses, or official structures where their
intellectual capacity is not needed, and their accumulated knowledge and
experience are gradually going to waste. At least a million people have
emigrated from Russia (Russian companies professionally involved in
migration estimate that the exodus from Russia amounts on average to
100,000 people annually), A considerable number of emigrants are educated
people who had until departure performed intellectual work or were about to
obtain a higher education degree.

Lastly, the chronic under-financing of the maintenance and development of
the social infrastructure during this period has visibly affected the
functioning of public works, decreased their safety, and increased the risk
of technogenous and environmental disasters.

Political economy

Russia does not have a democratic market economy. The economy in Russia
today is a mixed economy, not in the sense used in economic theory, but in
a different, specific sense: it is an economy with a mixed logic of
economic behaviour. It is quasi capitalism, but not quite capitalism, and
in a way not capitalism at all. It is in no sense a rule-of-law democracy,
but neither is it anarchy or rule of the criminal mafia as it may sometimes
appear. It is a society in which there is a little of everything: rule of
law, rule of custom, political abuse, and crime. Society abides by
"understandings", that is, rules which cannot be aligned into a clear
logical system, and which are still in a state of continuous change.

Many relations and institutions incompatible with present-day notions of an
efficient market economy, relations and institutions that have existed in
Russia since 

Soviet and in some cases since pre-Soviet times, are less relics of the
past and more full-scale components of a functioning economic system. In
fact, the symbiosis of corrupt officialdom and opaque business practices is
to this day a factor governing usage of a very considerable share of
national resources. The country's budget, even though it has an
incomparably more reliable foundation than in the period preceding the 1998
financial crisis, is still dangerously dependent on the financial standing
and negotiating positions of a dozen or so large raw-material and
infrastructure companies that have virtually shaken loose from public
control and are exploiting national resources. The apparent prosperity in
banking is attributable in many ways to the devious methods and criteria
underlying financial accounting and control. At micro-economic level,
economic activity in Russia does not demonstrate a consistent transition
from the administrative economy of the totalitarian Soviet state to a
modern (normal) Western society, but rather an odd mish-mash of different
types and levels of institutions and relations: modern and traditional,
market and pre-market, legal and illegal, civilized civic, outright
violence, etc.

Ask any Russian businessman about the rules he follows, lives and works by.
If he is frank, he will be unable to give a clear answer, first of all, as
there are no unified rules whereby a businessman (and, for that matter, any
socially active citizen) in Russia can guarantee his chances of success and
relative security. In some matters he acts in accordance with official law,
in others he relies on the strength of the authorities, on the inertia of
relations, and now and then simply instinctively gropes for a form of
behaviour that is liable to yield success.

In other words, if Russia has managed to escape economic collapse and
achieve a degree of social and economic stabilization, this does not mean
that the long-term development of the Russian economy and society is merely
a question of resources and time. A stagnant social corporate-criminal
system with an extremely ineffective segmented market and without any
mechanism for long-term reproduction and increase in economic resources is,
unfortunately, the most realistic outlook for Russia today. We will not
have a law-based state with an open dynamic economy and a responsible
political and economic elite.

Despite its eclectic nature and apparent lack of logic, the system has
intrinsic stability, is capable reproducing itself and achieving moderate
progress. This is evidenced in the successes of the past three years. The
system has consolidated with the emergence of a considerable segment of
influential people and groups that are extracting no small personal profit
in one way or another. Moreover, it is not much of an exaggeration to state
that virtually the entire Russian elite today is intimately tied to the
exiting state of affairs and cannot tear it down without sustaining direct
or indirect crippling damage.

This concerns both the upper layer of state officials or the notorious old
and new "oligarchs." The interest groups, whose collaboration shapes the
real conditions in the economy, are only partly connected to official
governmental structures at various levels. Real control over economic
resources is the main criterion that allows various groups to participate
in organizing economic affairs, irrespective of whether they are economic
territories, infrastructure, manpower or money. The groups may be organized
along different lines, particularly on territorial, industrial, corporal
and clan principles, and may have different degrees of intrinsic
integration. The specific forms of organization of the groups also differ -
they may be official administrative authorities, semi-official structures,
including public monopolies at different levels, large private enterprises,
and diverse financial structures with or without a varying degree of state

Despite the diversity of forms, all these structures are united by two main
factors - first, real control over the main economic resources and, second,
a predominantly supra-economic administrative nature of this control.
Control over resources is reflected in their physical ability to promote or
hinder use of the resources for profit. The right of control is not so much
a legal right of ownership and much more an opportunity for constraint
regarding other parties that do not recognize the rights of the respective
group to exercise control. Compulsion may be direct or indirect, legal or
illegal, but in the end amounts to use of economic pressure or downright

Another specific feature of these structures is that their members rarely
derive profit by immediately exploiting economic resources. In most cases
they transfer the right to use these resources to other organizations and
receive rental income (in the shape of various royalties, bribes, dues,
regular and irregular extortion, etc.). This does not mean, of course, that
all high-ranking officials take bribes, simply embezzle or steal funds. The
system is so constructed that it also enables them to use the
administrative resource in more subtle, non-criminal ways. Naturally, this
does not alter the substance of the matter: profit is not extracted on the
basis of productive activity, but rather by belonging to various corporate

During the final years of the Yeltsin period, the economic system gained
some muscle and even stability, which made it possible to define its basic
sociopolitical features.

1. The large if not predominant role of informal, officially unregistered
relations: a colossal gap between existing legislation and economic reality.

The game followed rules that had evolved over the previous ten years -
rules that were more or less adhered to by all players of the economy under
threat of "spontaneous sanctions". The norms of officially existing
economic law operated within the limits and to a degree in which they did
not obstruct the spontaneously impregnated rules of economic behaviour. The
aggregate of these rules, and the economic activity they govern, accounting
for about half the GNP in Russia, are quite precisely reflected by the
term, "informal economy" (the more widespread term, "shadow economy", is
somewhat more narrow, as it mainly implies accounting fraud and tax evasion).

2. Unofficial coercion plays a special role. 

The informal economy inevitably requires an "informal" system of power to
function. Both the economy, society and the state begin to live in
accordance with unwritten rules, where citizens (especially the socially
active) and even official authorities breach the law or other legal acts
and proceed on the basis of personal relations, precedents, the ability to
enforce their will, etc. However, when this issue concerns major economic
interests, the individual's or group's ability to enforce his or their
decision in confrontation with conflicting interests is often the only
effective factor. (They may or not appear to comply with legislation.) The
means of coercion may involve recourse to administrative methods, control
over the market or its members, or outright violence (crime), but in all
these cases it is based on informal "rights" (the "right of the strong").

3. The state does not and moreover cannot act as impartial arbiter in
economic disputes or be a guarantor of contracts. The business parties are
compelled to assume this function, relying exclusively on their own
resources and those of their owners.

4. Trust between economic parties is at an extremely low level.

As the state machine is not the guarantor of obligations, and the economic
agents have to rely on their own power and ability, we face a systemic
dearth of trust. Owners and entrepreneurs do not trust the state, while the
state authorities do not trust business. The banks do not trust their
clients, the clients do not trust the banks, and enterprises do not trust
their creditors and partners. The public trusts no one at all and is deeply
convinced that if someone failed to cheat them today, this is because they
were deceived the day before and are about to be deceived tomorrow.

5. The need to independently ensure fulfillment of obligations and reliance
on informal "rights" are bound to generate an oligarchic economic
structure, when at least 70% of the gross product is controlled one way or
another by two or three dozen business structures, where decisions are
taken by a few hundred people consisting of Russia's business and
administrative elite.

6. In such a system the rights of ownership and private property are not
unconditional. Neither compliance with the law, any relatively
conscientious behaviour in business, or even observance of the unwritten
"rules of the game," can guarantee property against a "redistribution" or
appropriation by an economically, politically or administratively stronger
player. Controlling a territory, industry, infrastructure and the like,
interest groups seize possession of the rights of another owner with
relative ease, using the authority of bought or controlled arbitration
courts, false bankruptcies, sabotage by the administrative authorities or
the "workforce", etc. The noisy conflicts that are covered extensively in
the press from time to time on particular enterprises are no more than the
tip of the iceberg of a permanent process of property redistribution for
reasons unrelated to economic management of the property in question.


Any student knows that a situation can only be improved, if you have a
system of purposeful legal and law and enforcement agencies, control over
compliance with economic legislation, and rigid prosecution of any
violations. You also need control over distribution and proper use of
public resources, and a transparent system of taxation and financial
control, and many other levers.

From this standpoint, no necessary measures were taken during the Yeltsin
period to construct and ensure efficient functioning of these basic
institutions; on the contrary, we have witnessed their obvious degradation.
The law enforcement and judicial systems were partly privatized or corrupt,
and partly simply not up to the mark. The financial control agencies were
transformed into an instrument of pressure on business and citizens or
semi-feudal extortion of official and unofficial duties, with the amount
fixed less by law and rather by arbitrary decisions and bargaining. The
state structures were not subject to public control, and their officials
were, in effect, permitted to use their position above all to line their
own pockets.

The new President was brought to power by a specific political and
corporate economic group on condition of his responsibility to them and

The active political and law-abiding rhetoric changed nothing. The main
concern of the new-old administration, as before, is to combat its
opponents, and to devise and implement various political scenarios to
appease the population, the central and regional executive authorities,
with the sole purpose of preserving and perpetuating their economic

The most important achievement of the past two years was to put an end to
public politics and political pluralism on the pretext of "ensuring a
second term" and, in actual fact, to protect its absolutely exclusive
economic position.

The years since the autumn 1998 financial crisis, and especially since the
transfer of leadership in the Kremlin, demonstrated that the aforementioned
system was stable and no personality who had been its public embodiment in
the preceding period could manipulate this system. Similarly the physical
liquidation of key members of the Bolshevik nomenclature did not change the
substance of nomenclature power as a corporation in the 1930s and led to
its degradation and wastage. The financial and banking crisis has
substantially undermined those major businesses, whose influence was based
exclusively on diverting financial flows through banks under their control.
The change of guards in the Kremlin pushed out the "oligarchs", whose
prosperity was too closely dependent on the favourable and interested
actions by figures in the government and presidential administration, who
were compelled owing to reshuffles compelled to take a back seat. New forms
of " organization" of major business sprang up. At the same time the system
itself, where crucial decisions are taken on the basis of political power
and various pressure mechanisms (or, as they say in the milieu, "on the
basis of notions and understandings") has not only survived but, on the
whole, gathered muscle. The uneven conditions for companies and groups
operating in one and the same business remain the same in terms of taxation
and access to various attractive resources, despite the proclaimed
principle of "equidistance" in their relation to the authorities, so that
the larger and more influential a group happens to be, the greater its
opportunities to deviate from the principle of universality in the business
climate and fair competition.

In this context it is not in the least surprising that the phrase
"dictatorship of law" slogan was stillborn: it was not demanded by any
influential group. Moreover, they are not interested in such a situation,
as they could lose a considerable amount. Regarding any backing from the
"firm and tough power" as supreme arbiter in private disputes, such backing
is highly conditional and, moreover, leaves room for influencing this "firm
and tough power." In addition to other factors, it is based on an
understanding that official power is unlikely to have for the foreseeable
future the requisite resources to play the role of individual and
independent arbiter. During the last few years of Yeltsin's rule, the
official power under the new President relies less on its own strength and
much more on using one set of groups in the struggle against another, which
cannot be achieved without mutual concessions and compromises. The declared
intention, voiced two years ago, to eliminate the control of narrow
corporate groups over the main financial flows and other resources in the
country and place them under the control of society was not implemented,
while the so-called anti-oligarchic campaign was reduced to persecution of
politically disloyal leaders of the media business. Moreover, signs
appeared that a new stage of struggle was building up between corporate
clans for a redistribution of spheres of influence, above all in export

In these circumstances, political will is hardly able to approve a radical
tax reform that would officially align taxation with the sums really paid
into the budget, and a radical revision of the system of currency controls
that would at least help by partially legalizing the export of capital and
thereby establishing a more rigid control over exporter finances and put an
end to the concealment and laundrying of illegally accumulated and criminal

Power for the sake of power is one thing, and power for the economy is
another. In the first case it is above all a matter of one's own security,
that is, survival and succession, outward legitimacy and indisputability,
an ability to cut short any demonstrative disloyalty and insubordination.
The content of power (i.e. politics as such and the ability to pursue this
goal) is also, of course, important, but in conditions where time,
strength, and the means of power are limited, pride of place is accorded to
resolving one's own problems and distributing what is left over.

The opposite is true for the economy, however: the personal stability of
power, the solid nature of its external attributes, is a secondary matter.
The main issue concerns the substance of the law established by the
authorities and the relation between this law and real life, existing
economic and judicial relations. However, this is where the authorities
today are weak and impotent - they cannot control the aforementioned
relations and their own apparatus, which follows its own laws and ideas
that are often independent of the will of the people at the top of the
administrative pyramid.


In my opinion the spring polemic between the President and the government
concerning rates of economic growth was highly revealing. The prime
minister was right and wrong in his impertinent rebuttal of the President
who demanded more ambition in competition with Portugal. He was right, as
in the existing economic system any attempt to abruptly raise the rates of
growth would lead to nothing but eye-wash at best, and would at worst
undermine relative stability. He was wrong, as his government personifies
all the fundamental faults of the system which doom Russia to lag behind
other countries.

Russia does not need figures. In the final analysis, we are interested in
creating economic opportunities to overcome this backwardness, in other
words, to ensure the country's survival and the survival of Russian
statehood and sovereignty. To understand this, we need only glance at the
map and see that Russia has the longest borders with the most dangerous and
unpredictable regions in the world, and must urgently estimate the
expenditures that need to be made over the next ten to twelve years on the
armed forces, on the housing and public utilities infrastructure, health,
education, on rectifying the demographic crisis, modern development of
Siberia, and consolidating our economic sovereignty in the Russian Far East.

Analyzing the results of our economic development from this angle, we must
accept that the gap between Russia and developed countries is increasing,
and the state of the aforementioned sectors is becoming more and more
critical, and irreversibly so for some key components. 

We should also note that the economy in the West has for a number of years
been in a serious recession. Sooner or later the situation will change and
it will start growing again. Then our comparative backwardness will be
simply staggering.

In Russia we have created a variant of a market economy which will in
principle be incapable now and forever (unless it is radically altered) to
reduce the scale of our backwardness, compared to advanced countries. The
gap will increase, owing to the economic system we have created.

Asking our government to reduce this gap by raising growth rates is akin to
expecting an old dilapidated car to run at the same speed as a Mercedes
(even if the latter's engine snarls up from time to time).

This old car has structural features, which means that it cannot run at a
faster speed than 100 m.p.h., however hard you step on the gas, change the
petrol or driver or confer with experts - but nothing will change and the
top speed will remain unchanged.

We face the same situation with our economy. It is constructed to provide
an acceptable standard of living for approximately 25% of Russia's
population. Moscow and another one or two large Russian cities can possibly
resemble big up-to-date European cities. 

The material for the system's sociopolitical stability will amount to 25%
of the population; they will provide its reproduction, provided that world
oil and gas prices remain at the peak.

The "market economy" built in Russia can do nothing for the majority of

The economic potential of Russia's market system is in principle incapable
of preserving the existing national educational system, science, health,
armed forces, and the house and public utility infrastructures, let alone
create a new and better one.

Dangerous processes are beginning to occur in society, leading to its
profound demodernization.

Conclusion: Can Anything Be Changed?

The aforementioned is in substance a wide-ranging attempt to define the
current Russian socio-economic system. The definition is hindered by the
poverty of the traditional political economy lexicon, based on notions such
as capitalism and socialism. Contemporary Russian, Chinese and Japanese
society, Stalin's Soviet system, and the Korean Chaebol system until the
1997 crisis, is a far from complete list of different structures, which
each had or have their own intrinsic logic and something we might call
local stability. These structures have appeared in various traditional
societies as a response to the challenges of modernization, in other words,
the spiralling technical and information overload created by mankind. As a
rule, at some stages they manage (although the price they pay is another
question) to resolve some aspects of modernization. (Even Stalin's system
resolved, by applying its tried and tested method of heinous crimes, the
task of Russia's protracted transition from agrarian to industrial society).

Korean corporate capitalism resolved the same challenge in the 1970s to
1990s by establishing a system referred to as Chaebol.

However, all these systems proved impotent when the countries in question
faced the challenge of switching to a post-industrial society. Their
contradictions, and certainly not the "plotting by that bad man" Soros,
were the fundamental causes of the crisis in Southeast Asia in 1997. 

That is why the on-going process of "chaebolization" under way in the
Russian economy appears a strange anachronism.

The current Russian system resulted from the crisis in the Soviet model,
which was unable to make the leap to the post-industrial stage. I think
that certain historical circumstances of the crisis (the aggressive
embezzlements by the communist party and KGB bosses, who converted their
absolute collective political power into enormous power for individual
members, and the unscrupulousness of the new "democratic" bosses) fostered
a locally stable freak socio-economic system objectively aimed at
"demodernizing" Russian society. 

This evolution creates a terrible risk of society's irreversible
degradation. First of all demodernization tends to wipe out the creatively
active segment of the nation capable of considering the country's direction
and opposing such a direction. Secondly, irrespective of subjective wishes,
this structure of power and society leads inevitably to the evolution of a
police state, combined with a political superstructure, with a monopoly on
information, that is, a system where any dispute about the chosen path of
the country's development will in be principle ruled out. Both these
processes are making headway before our very eyes. 

I noted earlier that the entire Russian elite is involved somehow or other
in the existing order and cannot destroy this system without sustaining
serious damage. Owing to the surviving democratic exterior is maintained
for a number of considerations (including foreign-political factors), the
system has it to appoint a chief executive for the regime every four years
capable of ensuring the preservation of the existing structure.

Despite the painstaking and regulated process of selecting and appointing a
"successor", he still poses a potential threat tothe elite and its regime. 

The President of the Russian Federation with his seat in the Kremlin is
bound to begin understanding what is happening in the country, and start
understanding his role as a statesman - that is the specific feature of the
Kremlin walls and this position. As a result, a bearer of all state
interests and values may emerge, who may the first such case in the entire
governing elite. However, he will understand that he is being controlled by
the people who brought him to power, and realize that he was not expected
to become a statesman. If he is courageous, he may act with resolution:
revive freedom of speech, ensure the independence of the judiciaries,
organize a round-table mechanism, involving the public forces who stand
"outside the corporation", and enlist their aid in stopping the country's
slide to the backyard of world civilization.

This is possibly one of the last chances for something still to be done.


Is this hope for a "kind tsar" another attempt to "obtain a good president
with bad boyars and generals?" 

To a certain extent, it is. This is due to the specific kind of power in

What is this hope? 

Hope that "the tsar will not abide by a tsar's discipline and, furthermore,
will turn out to be clever." 

Are there grounds for such hopes? 

I do not know. I am not sure. However, about 15 years ago something similar
happened and had unexpected consequences: the totalitarian system

Are there other variants? 

Judge for yourself. Only citizens, who do not behave like Soviets (I do
mean behave, and not simply speak), can be a positive alternative to a
"kind tsar." 

What does that mean? 

This implies loyalty to our morality, responsibility, and, lastly, faith in
human values. 

If we as a people believe that everything today is right or that we cannot
change anything and if we are still prepared to vote at referendums to
immortalize the memory of executioners like Dzerzhinsky; to keep silent or,
what is worse, approve the extermination of towns and villages in the
Northern Caucasus, hold auctions for shares and voucher privatizations,
reconcile ourselves with explicit corruption, daily lies at state level,
accept the incipient fascism and seeds of a personality cult, the lack of
justice, and progressive poverty... 

Then there can be no real alternative to a "kind tsar", and a few hundred
of the most influential people in the country can always be convinced that
they have "popular support" and that all of us, all the millions of us, are
no different and would simply like to change places with them. 

This means that society is asleep and everything will remain as it is. 

However, I am convinced that it will awaken. 

Hopefully, not too late. 

April - November, 2002