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Slide 1: Russian Roulette Russia's Economy In Putin's Era 1st EDITION Sam Vaknin, Ph.D. Editing and Design: Lidija Rangelovska Lidija Rangelovska A Narcissus Publications Imprint, Skopje 2003 First published by United Press International – UPI Not for Sale! Non-commercial edition.
Slide 2: © 2002, 2003 Copyright Lidija Rangelovska. All rights reserved. This book, or any part thereof, may not be used or reproduced in any manner without written permission from: Lidija Rangelovska – write to: palma@unet.com.mk or to vaknin@link.com.mk Visit the Author Archive of Dr. Sam Vaknin in "Central Europe Review": http://www.ce-review.org/authorarchives/vaknin_archive/vaknin_main.html Visit my United Press International (UPI) Article Archive –Click HERE! ISBN: 9989-929-31-9 http://samvak.tripod.com/guide.html http://samvak.tripod.com/briefs.html http://economics.cjb.net http://samvak.tripod.com/after.html Created by: LIDIJA RANGELOVSKA REPUBLIC OF MACEDONIA
Slide 3: CONTENTS I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. XIII. XIV. XV. XVI. XVII. XVIII. XIX. XX. XXI. XXII. The Security Apparatus The Energy Sector Russia’s Energy Behemoths Financial Services The Russian Devolution - The Regions Agriculture Russia as a Creditor Russia’s Space Industry Russia’s Vodka Wars Let My People Go Fimaco Wouldn’t Die The Chechen Theatre Ticket Russia’s Israeli Oil Bond Russia’s Idled Spies Russia’s Middle Class Russia in 2003 Russia Straddles the Euro-Atlantic Divide Russia’s Stealth Diplomacy The Axis of Oil Russia’s Second Empire The Author About "After the Rain"
Slide 4: The Security Apparatus Shabtai Kalmanovich vanished from London in late 1980's. He resurfaced in Israel to face trial for espionage. He was convicted and spent years in an Israeli jail before being repatriated to Russia. He was described by his captors as a mastermind, in charge of an African KGB station. In the early 1970's he even served as advisor (on Russian immigration) to Israel's Iron Lady, Golda Meir. He then moved to do flourishing business in Africa, in Botswana and then in Sierra Leone, where his company, LIAT, owned the only bus operator in Freetown. He traded diamonds, globetrotted flamboyantly with an entourage of dozens of African chieftains and their mistresses, and fraternized with the corrupt elite, President Momoh included. In 1986-7 he even collaborated with IPE, a London based outfit, rumored to have been owned by former members of the Mossad and other paragons of the Israeli defense establishment (including virtually all the Israelis implicated in the ill-fated Iran-Contras affair). Being a KGB officer was always a lucrative and liberating proposition. Access to Western goods, travel to exotic destinations, making new (and influential) friends, mastering foreign languages, and doing some business on the side (often with one's official "enemies" and unsupervised slush funds) - were all standard perks even in the 1970's and 1980's. Thus, when communism was replaced by criminal anarchy, KGB personnel (as well as mobsters) were the best suited to act as entrepreneurs in the new environment.
Slide 5: They were well traveled, well connected, well capitalized, polyglot, possessed of management skills, disciplined, armed to the teeth, and ruthless. Far from being sidetracked, the security services rode the gravy train. But never more so than now. January 2002. Putin's dour gaze pierces from every wall in every office. His obese ministers often discover a sudden sycophantic propensity for skiing (a favorite pastime of the athletic President). The praise heaped on him by the servile media (Putin made sure that no other kind of media survives) comes uncomfortably close to a Central Asian personality cult. Yet, Putin is not in control of the machinery that brought him to the pinnacle of power, under-qualified as he was. This penumbral apparatus revolves around two pivots: the increasingly fractured and warlord controlled military and, ever more importantly, the KGB's successors, mainly the FSB. A. The Military Two weeks ago, Russia announced yet another plan to reform its bloated, inefficient, impoverished, demoralized and corrupt military. Close to 200,000 troops are to go immediately and the same number in the next 3 years. The draft is to be abolished and the army professionalized. At its current size (officially, 1.2 million servicemen), the armed forces are severely under-funded. Cases of hunger are not uncommon. Ill (and late) paid soldiers sometimes beg for cigarettes, or food. Conscripts, in what resembles slave labour, are "rented out" by their commanders to economic enterprises (especially in the provinces).
Slide 6: A host of such "trading" companies owned by bureaucrats in the Ministry of Defense was shut down last June by the incoming Minister of Defense (Sergei Ivanov), a close pal of Putin. But if restructuring is to proceed apace, the successful absorption of former soldiers in the economy (requiring pensions, housing, start up capital, employment) - if necessary with the help of foreign capital - is bound to become a priority sooner or later. But this may be too late and too little - the much truncated and disorientated armed forces have been "privatized" and commandeered for personal gain by regional bosses in cahoots with the command structure and with organized crime. Ex-soldiers feature prominently in extortion, protection, and other anti-private sector rackets. The war in Chechnya is another long standing pecuniary bonanza - and a vested interest of many generals. Senior Russian Interior Ministry field commanders trade (often in partnership with Chechen "rebels") in stolen petroleum products, food, and munitions. Putin is trying to reverse these pernicious trends by enlisting the (rank and file) army (one of his natural constituencies) in his battles against secessionist Chechens, influential oligarchs, venal governors, and bureaucrats beyond redemption. As well as the army, the defense industry - with its 2 million employees - is also being brutally disabused of its centralist-nationalistic ideals.
Slide 7: Orders placed with Russia's defense manufacturers by the destitute Russian armed forces are down to a trickle. Though the procurement budget was increased by 50% last year, to c. $2.2 billion (or 4% of the USA's) and further increased this year to 79 billion rubles ($2.7 billion) - whatever money is available goes towards R&D, arms modernization, and maintaining the inflated nuclear arsenal and the personal gear of front line soldiers in the interminable Chechen war. The Russian daily "Kommersant" quotes Former Armed Forces weapons chief, General Anatoly Sitnov, as claiming that $16 billion should be allocated for arms purchases if all the existing needs are to be satisfied. Having lost their major domestic client (defense constituted 75% of Russian industrial production at one time) - exports of Russian arms have soared to more than $4.4 billion annually (not including "sensitive" materiel). Old markets in the likes of Iran, Iraq, Syria, Algeria, Eritrea, Ethiopia, China, India, and Libya have revived. Decision makers in Latin America and East Asia (including Malaysia and Vietnam) are being avidly courted. Bribes change hands, off-shore accounts are open and shut, export proceeds mysteriously evaporate. Many a Russian are wealthier due to this export cornucopia. The reputation of Russia's weapons manufacturers is dismal (no spare parts, after sales service, maintenance, or quality control). But Russian weapons (often Cold War surplus) come cheap and the list of Russian firms and institutions blacklisted by the USA for selling weapons
Slide 8: (from handguns to missile equipped destroyers) to "rogue states" grows by the day.
Slide 9: Less than one quarter of 2500 defense-related firms are subject to (the amorphous and inapt) Russian Federal supervision. Gradually, Russia's most advanced weaponry is being made available through these outfits. Close to 4000 R&D programs and defense conversion projects (many financed by the West) have failed abysmally to transform Russia's "military-industrial complex". Following a much derided "privatization" (in which the state lost control over hundreds of defense firms to assorted autochthonous tycoons and foreign manufacturers) - the enterprises are still being abused and looted by politicians on all levels, including the regional and provincial ones. The Russian Federation, for instance, has controlling stakes in only 7 of c. 250 privatized air defense contractors. Manufacturing and R&D cooperation with Ukraine and other former Soviet republics is on the ascendant, often flying in the face of official policies and national security. Despite the surge in exports, overproduction of unwanted goods leads to persistent accumulation of inventory. Even so, capacity utilization is said to be 25% in many factories. Lack of maintenance renders many plant facilities obsolete and non-competitive. The Russian government's new emphasis on R&D is wise - Russia must replenish its catalog with hi-tech gadgets if it wishes to continue to export to prime clients. Still, the Russian Duma's prescription of a return to state ownership, central planning, and subsidies, if implemented, is likely to prove to be the coup de grace rather than a graceful coup.
Slide 10: B. The FSB (the main successor to the KGB) Note: The KGB was succeeded by a host of agencies. The FSB inherited its internal security directorates. The SVR inherited the KGB's foreign intelligence directorates. With the ascendance of the Vladimir Putin and his coterie (all former KGB or FSB officers), the security services revealed their hand - they are in control of Russia and always have been. They number now twice as many as the KGB at its apex. Only a few days ago, the FSB had indirectly made known its enduring objections to a long mooted (and government approved) railway reform (a purely economic matter). President Putin made December 20 (the day the murderous Checka, the KGB's ancestor, was established in 1917) a national holiday. But the most significant tectonic shift has been the implosion of the unholy alliance between Russian organized crime and its security forces. The Russian mob served as the KGB's long arm until 1998. The KGB often recruited and trained criminals (a task it took over from the Interior Ministry, the MVD). "Former" (reserve) and active agents joined international or domestic racketeering gangs, sometimes as their leaders.
Slide 11: After 1986 (and more so after 1991), many KGB members were moved from its bloated First (SVR) and Third Directorates to its Economic Department. They were instructed to dabble in business and banking (sometimes in joint ventures with foreigners). Inevitably, they crossed paths - and then collaborated - with the Russian mafia which, like the FSB, owns shares in privatized firms, residential property, banks, and money laundering facilities. The co-operation with crime lords against corrupt (read: unco-operative) bureaucrats became institutional and allpervasive under Yeltsin. The KGB is alleged to have spun off a series of "ghost" departments to deal with global drug dealing, weapons smuggling and sales, white slavery, money counterfeiting, and nuclear material. In a desperate effort at self-preservation, other KGB departments are said to have conducted the illicit sales of raw materials (including tons of precious metals) for hard currency, and the laundering of the proceeds through financial institutions in the West (in Cyprus, Israel, Greece, the USA, Switzerland, and Austria). Specially established corporate shells and "banks" were used to launder money, mainly on behalf of the party nomenklatura. All said, the emerging KGB-crime cartel has been estimated to own or control c. 40% of Russian GDP as early as 1994, having absconded with c. $100 billion of state assets.
Slide 12: Under the dual pretexts of "crime busting" and "fighting terrorism", the Interior Ministry and FSB used this period to construct massive, parallel, armies - better equipped and better trained than the official one. Many genuinely retired KGB personnel found work as programmers, entrepreneurs, and computer engineers in the Russian private sector (and, later, in the West) - often financed by the KGB itself. The KGB thus came to spawn and dominate the nascent Information Technology and telecommunications industries in Russia. Add to this former (but on reserve duty) KGB personnel in banks, hitech corporations, security firms, consultancies, and media in the West as well as in joint ventures with foreign firms in Russia - and the security services' latter day role (and next big fount of revenue) becomes clear: industrial and economic espionage. Russian scholars are already ordered (as of last May) to submit written reports about all their encounters with foreign colleagues. This is where the FSB began to part ways with crime, albeit hitherto only haltingly. The FSB has established itself both within Russian power structures and in business. What it needs now more than money and clout - are respectability and the access it brings to Western capital markets, intellectual property (proprietary technology), and management. Having coopted criminal organizations for its own purposes (and having acted criminally themselves) - the alphabet soup of security agencies now wish to consolidate their gains and
Slide 13: transform themselves into legitimate, globe-spanning, business concerns.
Slide 14: The robbers' most fervent wish is to become barons. Their erstwhile, less exalted, criminal friends are on the way. Expect a bloodbath, a genuine mafia gangland war over territory and spoils. The result is by no means guaranteed. Return
Slide 15: The Energy Sector The pension fund of the Russian oil giant, Lukoil, a minority shareholder in TV-6 (owned by a discredited and self-exiled Yeltsin-era oligarch, Boris Berezovsky), this week forced the closure of this television station on legal grounds. Gazprom (Russia's natural gas monopoly) has done the same to another television station, NTV, last year (and then proceeded to expropriate it from its owner, Vladimir Gusinsky). Gazprom is forced to sell natural gas to Russian consumers at 10% the world price and to turn a blind eye to debts owed it by Kremlin favorites. Both Lukoil and Gazprom are, therefore, used by the Kremlin as instruments of domestic policy. But Russian energy companies are also used as instruments of foreign policy. A few examples: Russia has resumed oil drilling and exploration in war ravaged Chechnya. About 230 million rubles have been transferred to the federal Ministry of Energy. A new refinery is in the works. Russia lately signed a production agreement to develop oilfields in central Sudan in return for Sudanese arms purchases.
Slide 16: Armenia owes Itera, a Florida based, Gazprom related, oil concern, $35 million. Itera has agreed to postpone its planned reduction in gas supplies to the struggling republic to February 11. Last month, President Putin called for the establishment of a "Eurasian alliance of gas producers" - probably to counter growing American presence, both economic and military, in Central Asia and the much disputed oil rich Caspian basin. The countries of Central Asia have done their best to construct alternative oil pipelines (through China, Turkey, or Iran) in order to reduce their dependence on Russian oil transportation infrastructure. These efforts largely failed (a new $4 billion pipeline from Kazakhstan to the Black Sea through Russian territory has just been inaugurated) and Russia is now on a charm offensive. Its PR efforts are characteristically coupled with extortion. Gazprom owns the pipelines. Russia exports 7 trillion cubic feet of gas a year - six times the combined output of all other regional producers put together. Gazprom actually competes with its own clients, the pipelines' users, in export markets. It is owed money by all these countries and is not above leveraging it to political or economic gain. Lukoil is heavily invested in exploration for new oil fields in Iraq, Algeria, Sudan, and Libya.
Slide 17: Russian debts to the Czech Republic, worth $2.5 billion in face value, have just been bought by UES, the Russian electricity monopoly, for a fraction of their value and through an offshore intermediary. UES then transferred the notes to the Russian government against the writing off of $1.35 billion in UES debts to the federal budget. The Russians claim that Paris Club rules have ruled out a direct transaction between Russia (a member of the Club) and the Czech Republic (not a member). In the last decade, Russia has been transformed from an industrial and military power into a developing country with an overwhelming dependence on a single category of commodities: energy products. Russia's energy monopolies - whether state owned or private - serve as potent long arms of the Kremlin and the security services and implement their policies faithfully. The Kremlin (and, indirectly, the security services) maintain a tight grip over the energy sector by selectively applying Russia's tangle of hopelessly arcane laws. In the last week alone, the Prosecutor General's office charged the president and vice president of Sibur (a Gazprom subsidiary) with embezzlement. They are currently being detained for "abuse of office". Another oil giant, Yukos, was forced to disclose documents regarding its (real) ownership structure and activities to the State Property Fund in connection with an investigation regarding asset stripping through a series of offshore entities and a Siberian subsidiary.
Slide 18: Intermittently, questions are raised about the curious relationship between Gazprom's directors and Itera, upon which they shower contracts with Gazprom and what amounts to multi-million dollar gifts (in the from of ridiculously priced Gazprom assets) incessantly. Gazprom is now run by a Putin political appointee, its former chairman, the oligarch Vyakhirev, ousted in a Kremlin-instigated boardroom coup. Foreign (including portfolio) investors seem to be happy. Putin's pervasive micromanagement of the energy titans assures them of (relative) stability and predictability and of a reformist, businesslike, mindset. Following a phase of shameless robbery by their new owners, Russian oil firms now seem to be leading Russia - albeit haltingly - into a new age of good governance, respect for property rights, efficacious management, and access to Western capital markets. The patently dubious UES foray into sovereign debt speculation, for instance, drew surprisingly little criticism from foreign shareholders and board members. "Capital Group", an international portfolio manager, is rumored to have invested close to $700 million in accumulating 10% of Lukoil, probably for some of its clients. Sibneft has successfully floated a $250 million Eurobond (redeemable in 2007 with a lenient coupon of 11.5%). The issue was oversubscribed.
Slide 19: The (probably temporary) warming of Russia's relationship with the USA and Russia's acceptance (however belated and reluctant) of its technological and financial dependence on the West - have transformed the Russian market into an attractive target. Commercial activity is more focused and often channeled through American diplomatic missions. The U.S. Consul General in Vladivostok and the Senior Commercial Officer in Moscow have announced that they will "lead an oil and gas equipment and services and related construction sectors trade mission to Sakhalin, Russia from March 11-13, 2002." The oil and gas fields in Sakhalin attract 25% of all FDI in Russia and more than $35 billion in additional investments is expected. Other regions of interest are the Arctic and Eastern Siberia. Americans compete here with Japanese, Korean, Royal Dutch/Shell, French, and Canadian firms, among others. Even oil multinationals scorched in Russia's pre-Putin incarnation - like British Petroleum which lost $200 million in Sidanco in 11 months in 1997-8 - are back. Takeovers of major Russian players (with their proven reserves) by foreign oil firms are in the pipeline. Russian firms are seriously undervalued - their shares being priced at one third to one tenth their Western counterparts'. Some Russian oil firms (like Yukos and Sibneft) have growth rates among the highest and production costs among the lowest in the industry. The boards of the likes of Lukoil are packed with American fund managers and British investment bankers.
Slide 20: The forthcoming liberalization of the natural gas market (the outcome of an oft-heralded and much needed Gazprom divestiture) is a major opportunity for new possibly foreign - players. This gold rush is the result of Russia's prominence as an oil producer, second only to Saudi Arabia. Russia dumps on the world markets c. 4.5 million barrels daily (about 10% of the global trade in oil). It is the world's largest exporter of natural gas (and has the largest known natural gas reserves). It is also the world's second largest energy consumer. In 1992, it produced 8 million bpd and consumed half as much. In 2001, it produced 7 million bpd and consumed 2 million bpd. Russia has c. 50 billion oil barrels in proven reserves but decrepit exploration and extraction equipment, and a crumbling oil transport infrastructure is in need of total replacement. More than 5% of oil produced in Russia is stolen by tapping the leaking pipelines. An unknown quantity is lost in oil spills and leakage. Transneft, the state's oil pipelines monopoly, is committed to an ambitious plan to construct new export pipelines to the Baltic and to China. The market potential for Western equipment manufacturers, building contractors, and oil firms is evidently there. But this serendipity may be a curse in disguise. Russia is chronically suffering from an oil glut induced by overproduction, excess refining capacity, and subsidized domestic prices (oil sold inside Russia costs one third to one half the world price). Russian oil companies are planning to increase production even further.
Slide 21: Rosneft, the eighth largest, plans to double its crude output. Yukos (Russia's second largest oil firm) intends to increase output by 20% this year. Surgut will raise its production by 14%. Last week, Russia halved export duties on fuel oil. Export duties on lighter energy products, including gas, were cut in January. As opposed to previous years, no new export quotas were set. Clearly, Russia is worried about its surplus and wishes to amortize it through enhanced exports. Russia also squandered its oil windfall and used it to postpone the much needed restructuring of other sectors in the economy - notably the wasteful industrial sector and the corrupt and archaic financial system. Even the much vaunted plans to break apart the venal and inefficient natural gas and electricity monopolies and to come up with a new production sharing regime have gone nowhere (though some pipeline capacity has been made available to Gazprom's competitors). Both Russia's tax revenues and its export proceeds (and hence its foreign exchange reserves and its ability to service its monstrous and oft-rescheduled $158 billion in foreign debt) are heavily dependent on income from the sale of energy products in global markets. More than 40% of all its tax intake is energy-related (compared to double this figure in Saudi Arabia). Gazprom alone accounts for 25% of all federal tax revenues. Almost 40% of Russia's exports are energy products as are 13% of its GDP. Domestically refined oil is also smuggled and otherwise sold unofficially, "off the books".
Slide 22: But, as opposed to Saudi Arabia's or Venezuela's, Russia's budget is based on a far more realistic price range of $1418 per barrel. Hence Russia's frequent clashes with OPEC (of which it is not a member) and its decision to cut oil production by only 150,000 bpd in the first quarter of 2002 (having increased it by more than 400,000 bpd in 2001). It cannot afford a larger cut and it can increase its production to compensate for almost any price drop. Russia's energy minister told the Federation Council, Russia's upper house of parliament, that Russia "should switch from cutting oil output to boosting it considerably to dominate world markets and push out Arab competitors". The Prime Minister told the US-Russia Business Council that Russia should "increase oil production and its presence in the international marketplace." It may even be that Russia is spoiling for a bloodbath which it hopes to survive as a near monopoly in the energy markets. Russia already supplies more than 25% of all natural gas consumed by Europe and is building or considering to construct pipelines to Turkey, China, and Ukraine. Russia also has sizable coal and electricity exports, mainly to CIS and NIS countries. Should it succeed in its quest to dramatically increase its market share, it will be in the position to tackle the USA and the EU as an equal, a major foreign policy priority of both Putin and all his predecessors alike. Return
Slide 23: Russian Synergies - YukosSibneft By: Dr. Sam Vaknin Also published by United Press International (UPI) Also Read Russia's Israeli Oil Bond Russian Roulette - The Energy Sector Lukoil's Changing Fortunes Russia's British Turning Point The Axis of Oil YukosSibneft Oil - the outcome of the announced merger of Yukos Oil and Sibneft, two of Russia's prominent energy behemoths - will pump 2.06 to 2.3 million barrels of crude a day. This is more than Kuwait, Canada, or Iraq do. With 19.3 to 20.7 billion barrels in known reserves (excluding Slavneft's), 150,000 workers, $15 billion in annual revenues and a market valuation of c. $36 billion YukosSibneft is, by some measures, the fourth largest oil company in the world behind only ExxonMobil, Royal Dutch/Shell and British Petroleum. Its production cost around $1.70 per barrel - is half the average outlay of its competitors. The merger offers no synergies - but, in oil, size does matter.
Slide 24: The listing of Yukos stock on the New York State Exchange, slated for the end of this year, will have to be postponed. Still, its American Depository Receipts shot up by 10 percent on the news. In contrast, Sibneft's barely budged, up 3 percent. Having been shelved in 1998, the annus horribilis of the Russian economy, the deal was successfully struck two days ago. Yukos will pay $3 billion and dole out 26 percent of the combined group to Sibneft's "core" shareholders - namely the oligarchs Roman Abramovich and Boris Berezovsky. Minority stock owners are to be made a "fair offer" backed by a valuation produced by "an internationally recognized bank". This would be Citigroup. Citibank placed $900 million of Sibneft's corporate debt in the past 5 quarters. It also advised Sibneft in its controversial acquisition, with Tyumen, of the government's stake in Slavneft. The purchase of Lithuanian oil company Mazeiku Nafta by Yukos was virtually designed by Citibank. Yukos, owned 36 percent by Khodorkovsky, may also distribute a chunk of its $4 billion cash trove either in the form of a dividend or through a share buyback. Whatever the future of this merger, the magnate-shareholders seem to be eager to cash in prior to the expected plunge in oil prices.
Slide 25: Such mergers have become a staple of the sector in recent years. Spurred to consolidate by dropping oil prices and wild competition from Latin America, Central Asia and the Middle East - the giants of the industry mate fervently. Mikhail Khodorkovsky, the chief executive officer of YukosSibneft, is already eyeing acquisition targets to expand retail operations abroad. Yukos has recently acquired refineries and pipelines in Lithuania and the Czech Republic, for instance. The combined outfit owns, in Lithuania, Belarus and Russia, ten refineries with a total capacity of c. 2 million bpd and more than 2500 filling stations. The merger - coupled with British Petroleum's takeover of Tyumen Oil in February - depletes the pool of investments available to Western corporate suitors. It also cements Russia's dependence on energy. Oil accounts for close to one third of the vast country's gross domestic product and one half of its exports. Production in the oil segment has been growing by annual leaps of 20 to 30 percent - compared to a standstill in the rest of Russian industry excluding energy. Reflecting this disparity, YukosSibneft's market value amounts to one half that of all other listed Russian firms combined.
Slide 26: Contrary to congratulatory noises made by self-interested Western bankers and securities analysts, the merger is not good news. It rewards rapacious oligarchs for the unabashed robbery of state assets in the 1990s, keeps much-needed foreign competition, management and capital out and reinforces Russia's addiction to extracted wealth. It spells another orgy of asset stripping and colossal self-enrichment by the junta of former spooks and their business allies. This is the first time that the Putin administration approves of cooperation between oligarchs. The Kremlin also permitted Yukos to build the first private pipeline to the northern port of Murmansk, the export gateway to the lucrative American market. The avaricious elite sees no reason to share this bonanza with foreigners. Vladimir Katrenko, the Chairman of the State Duma's Committee on Energy, Transport and Communications confirmed that "by uniting their capital, leading Russian oil and energy companies are trying to stand up to international corporations which exploit every opportunity to squeeze out competitors." Furthermore, with a parliamentary vote by yearend and presidential elections looming next March, Putin, like president Boris Yeltsin before him, may be discovering the charms of abundant campaign finance and mogul sponsorship in the provinces. Yukos contributes heavily to political outfits, such as the Communist Party, the Union of the Right Forces (SPS), and the Apple (Yabloko) party.
Slide 27: Kohodorkovsky even announced his presidential ambitions in the 2008 campaign. Should he team up with the Family - the inner core of the Yeltsin-era crony machine - The Kremlin would justly feel besieged. In a thinly-veiled allusion to Khodorkovsky's political aspirations, Deputy Chairman of the State Duma Budget Committee, Sergei Shtogrin, mused that "certain people in Russia have a great deal of influence in national politics and economics. At the moment it is still unclear what the policy of the new management will be and whether or not it will support the government in developing the economy or not." Not surprisingly, therefore, Kremlin involvement is ubiquitous. It virtually micro-manages the oil sector. Putin leaned heavily on Sibneft not to conclude a deal with foreign suitors such as TotalFinaElf, ExxonMobil and Shell and to favor Yukos. Abramovich is said to be impotently seething at the loss of control over Sibneft. The merger was also a way to denude the outspoken Berezovsky, much-hated by the Kremlin, of his last assets in Russia. The disgraced tycoon - whose extradition from the United Kingdom on fraud charges has been officially requested by Russian authorities last month - bought Sibneft for a mere $100 million in the heyday of Yeltsin the corrupt, in 1995-6. Asia Times reported, based on Moscow "banking sources", that Yukos has hitherto refrained from going public in New York due to Kremlin pressure. The firms have been hitherto closely held with the free floats of Yukos and Sibneft equal to less than one quarter and one seventh of their capital, respectively.
Slide 28: While it maintained Yukos' rating as is, Moody's Investors Service kept Sibneft under review for a possible downgrade: "Moody's sees significant benefits of the transaction in terms of scale, the limited cash financing of the merger, and the good underlying reserve quality and operational efficiency of the two companies ... The enlarged group's intention (is) to maintain a moderate level of leverage and a strong working capital position. (But) the new entity's activities will remain wholly concentrated in Russia ... (and) while positive changes are being promised, corporate governance is also likely to persist as a constraining rating issue. This reflects the ongoing discussions with TNK regarding the split of the assets of Slavneft acquired in late 2002 by the two companies and Sibneft's practice of making high dividend payments." These civil understatements disguise an unsettling opaqueness as to who exactly owns Sibneft. Nor are its frequent dealings more transparent. It recently sold its stakes in oil company Onaco and its chief production subsidiary, Orenburgneft, to Tyumen Oil - yet, no one knows for how much. Another imponderable is Gazprom, now a formidable and superbly connected direct competitor - with state-owned partner Rosneft - for energy reserves in eastern Siberia. The YukosSibneft merger is in the worst of Russian traditions: self-dealing, self-serving and murky. This offspring of political meddling, egregious profit taking, insider trading, backstabbing and xenophobia it is unlikely to produce another Shell or BP. It is the venomous fruit of a poisoned tree.
Slide 29: LUKoil's Changing Fortunes By: Dr. Sam Vaknin Also published by United Press International (UPI) LUKoil's American Depositary Receipts hardly wavered but its Moscow-traded shares tanked yesterday by 5 percent on news that British Petroleum is pulling out of the Russian energy behemoth. BP was saddled with its share of the Russian oil giant when it bought ARCO two years ago. LUKoil's oil production topped 75 million tons last year, up 20 percent on 2001. More than one third of its production was exported via Transneft to foreign clients, the bulk of it by sea or through the Druzhba pipeline. LUKoil Overseas Holding presented revenues of $1.4 billion. It produces c. 11 million tons of oil annually. LUKoil and its subsidiaries also extract and sell natural gas. LUKoil likes to tout its image as a veritable multinational. But its cross-border expansion strategy is encountering mounting difficulties.
Slide 30: Last April, together with London-based Rotch Energy, it bid c. $1 billion for the Polish state-owned Gdansk Refinery and its web of 300 gasoline stations. The network controls one sixth of the Polish market. The deal was presented as synergetic: the refinery was supposed to process LUKoil's produce and the latter's tankers would be patched at the Gdansk shipyards. LUKoil pledged to purchase $500 million of Polish agricultural goods annually and to expand the capacity of the antiquated refinery by at least two fifths. Yet, according to Business Week, LUKoil's chances to clinch the deal are "dimming fast", due mainly to a tide of Russophobia. Rotch Energy abandoned the fast sinking ship and joined a competing bid. As European Union membership looms nearer, Russia is relegated by its erstwhile - and distrustful - satellites to niche markets such as Serbia, Ukraine, and Bulgaria. Russia's second largest oil producer, Yukos' $150 million controlling stake in Lithuania's Mazheikiu Nafta refinery may be the only exception. Even in these manageable, Russophile and traditional markets, LUKoil's performance is far from spectacular. In December 2001, Russian president, Vladimir Putin, visited Greece, accompanied by LUKoil's chief, Vagit Alekperov. According to the Russian business weekly, Vedomosti, LUKoil expressed interest in purchasing the Greek state-owned oil company Hellenic Petroleum.
Slide 31: Hellenic owns refining assets in Greece, Montenegro and Cyprus. In 1999 it purchased the Okta Refinery in Macedonia but its reputedly murky dealings with the previous government of the tiny, landlocked country led to an on-going judicial and administrative review of the privatization deal. According to RossBusiness Consulting, LUKoil teamed up with the Greek Latsis-Petrola Group in preparing a joint bid for 23 percent of Hellenic Petroleum at a valuation of c. $2 billion. But the LUKoil/Petrola consortium seems to be in disarray. According to the Greek daily, Kathimerini, it recently asked the Greek government to extend its deadline by one week "so that the consortium partners complete their own talks on sharing responsibilities." Last month, LUKoil reluctantly disposed of its 10 percent of Azerbaijan's Azeri-Chirag-Guneshli oil field. It sold it for $1.4 billion to Inpex, a Japanese firm. According to the Moscow Times, this may have had to do with Alekperov's unwelcome political aspirations in the host country. Russian firms are poised to benefit from any development in Iraq. They already secured deals with the tottering regime of Saddam Hussein. The Americans are alleged to have promised Putin to honor some of these commitments in a post-Saddam Iraq in return for Russia's support for a US-led military campaign. The exception is, yet again, LUKoil. A $3.7 billion exploration and development contract it concluded was recently cancelled unilaterally by the irate Iraqis.
Slide 32: Still, Russian emerging dominance in the global energy market is irresistible - as is its seemingly inexhaustible pile of cash. It has the world's seventh or sixth largest oil reserves. Its cost of production is lower than Indonesia's, or Mexico's, let alone Canada's. Its oil industry is in private hands and, with the exception of LUKoil, run efficiently and rather transparently. Low domestic prices push producers to export. Gazprom, Russia's gas monopoly, partnered with the German gas supplier Wintershall to create Wingas, a west European gas retailing outfit. It also acquired 10 percent of the UK-Europe gas pipeline and, through its subsidiary, Sibur, some assets in Hungary. Romania's drilling company Upetrom was bought by the Russian united Heavy Machinery. LUKoil purchased Getty Petroleum and its 1500 gas stations in the United States. Another Russian energy leviathan, Yukos, took over the activities in Britain of the Norwegian oil service firm, Kaverner. The 3000-mile Transneft Druzhba pipeline, which connects Russia to Ukraine, Belarus and central Europe is slated to link to the Croatian Adria pipeline, by way of Yugoslavia. This will provide Russian oil with improved access to both central European and Balkan markets. LUKoil is carried by this wave of sectoral restructuring.
Slide 33: Last year, LUKoil won a government tender in Cyprus to develop a network of gas stations. According to PrimeTASS, the company already controls one quarter of the Cypriot market. Alekperov announced that LUKoil intends to branch into oil storage and transportation in this would-be new member of the European Union. It also owns and operates 80 pump stations in Bulgaria and has invested half a billion dollars there. According to Christopher Deliso of UPI, the $700 million, 175-miles long Bourgas-Alexandroupolis line between the Black and Aegean seas is a joint project of the Russian, Greek and Bulgarian governments. Its capacity is projected to be 40 million tons annually. Both LUKoil which owns Bourgas' Neftochim refinery - and Yukos are involved. LUKoil is positioned to enjoy Russia's dawning age of dominance as an oil and gas producer and supplier with a quarter of western markets. But to do so it would need to render itself less fuliginous and better managed. A hostile takeover, with the blessing of the Kremlin, may be in the cards. It cannot be a bad thing as far as LUKoil's shareholders are concerned.
Slide 34: Russia's British Turning Point By: Dr. Sam Vaknin Also published by United Press International (UPI) British Petroleum teamed up with the Alfa Group-AccessRenova (AAR) concern to equally form Russia's third largest energy company. The new titan will digest Tyumen Oil Company (TNK) International, Rusia Petroleum and Sidanco Oil, which produce, between them, c. 1.2 million barrels per day. The combined outfit will tap between 5-9 billion barrels of proven oil reserves as well as perhaps 100 trillion cubic feet of gas . The mix includes lucrative exploration contracts in Sakhalin (an island in Russia's Far East) and in western Siberia as well as 2100 gas stations and five refineries in Russia and Ukraine. Slavneft shares owned by AAR are excluded as are Sibneft's warrants convertible to TNK stock. BP keeps out its interests in various local businesses and its sizable oil trading operations in the Russian Federation. BP will pay $3 billion for its stake in cash and another $3.75 billion in shares over three years. The market valuation of BP's stock is at an ebb - but some analysts say that, in a world of rising global tensions and surging oil prices, the deal may yet turn out to be a masterstroke. BP's earnings jumped a whopping 49 percent in the fourth quarter, they point out. But the far likelier scenario is less friendly.
Slide 35: BP was forced - by a series of humiliating revisions to past released figures - not to set a future production growth target, merely claiming to be in a "strong competitive position". Moreover, when the change in the value of its oil inventories is stripped, the company's profits last year are down by a quarter compared to 2001. Its return on capital also plummeted from 19 percent in 2001 to 13 percent the year after. Dwindling margins in refining and retail - mainly in the USA - threaten the viability of these operations, though they have been improving as of late. Only hefty reserves and a higher dividend cushioned the - widely expected - decline in net earnings. According to the Dow Jones Newswires, the energy behemoth embarked on an ambitious $2 billion share buyback plan. BP has withdrawn from the Russian market posthaste, having been scorched by shady dealings in Sidanco, a tenth of which it acquired in 1998. At the time, it claimed to have been defrauded by the very partners it has taken on board in the current collaboration. But it now firmly believes that its Russian re-entry is auspicious: "The deal would be immediately accretive to cashflow, earnings per share and return on capital employed, and it expected to improve performance significantly over the next four years through synergies, cost reductions and output growth." Alas, life - let alone Russia - are far more complicated.
Slide 36: In the proposed partnership, BP is paying c. $3 per barrel. It stands to gain c. 500,000 barrels per day from the joint venture. Only two fifths of this quantity can be exported as crude and another 15 percent as refined products. The rest must be sold domestically at artificially subdued prices. Russia is already flooded with c. 170 million barrels of unsold oil, in no small measure due to an ongoing conflict between private producers and the country's state-owned pipeline monopoly, Transneft. LUKoil foresees an increase of yet another 130 million barrels by November, according to the New York Times. With the indigenous market thus saturated, any post-war plunge in world prices could prove calamitous to BP. As Venezuela's output recovers, the weather warms, the global recession deepens, and a regime-changed Iraq rejoins the world market, an oil glut is in the cards. Despite crude's currently bloated price, OPEC has been talking about production cuts to sustain a level of $18-20 per barrel. Russia is unlikely to support such a policy. Its dependence on oil has matured into a full-fledged addiction in the last three years. Russia's budget assumes an average price of $21.50 per barrel. Its production is also more rigid than Saudi Arabia's. It cannot turn extraction on and off at will. Output increased by 9 percent last year.
Slide 37: Additionally, Russia will gleefully leverage the fortuity of a crumbling and internecine OPEC into gaining the number one oil producer spot by increasing its market share. BP may find this policy reckless and shortsighted but still be forced to cooperate with it to the detriment of its long-term interests. Analyst Frederick Leuffer of Bear Stearns reiterated his "outperform" recommendation for BP's shares before it embarked on the Russian joint venture. The analyst predicted "restructuring and capital expenditure reduction initiatives shortly ... the company (is expected) to redeploy proceeds and cash flow towards share buybacks and dividend increases." These seem less likely now. BP is also involved in other costly projects in Georgia, Ukraine and the countries of the Caspian Basin. This pervasive exposure to the east is nothing short of a gamble. BP's attempts to minimize the weight of its latest foray into Russia is disingenuous. Once concluded and cleared by competition authorities in the Russian Federation and the European Union, this single venture will account for one third of British Petroleum's reserves and one seventh of its production. BP's traditional haunts in the North Sea, the Gulf of Mexico and Alaska are mature and extraction may become prohibitively expensive at much reduced crude prices. But the company is endowed with massive - and oft-replenished - reserves. it is also geographically diversified. Its output is poised to grow by one fifth, to 4.3 million barrels per day, within 3-4 years.
Slide 38: So, why risk another round of bad governance, venal bureaucracy, oil transport monopoly, obstructive local partners, corrupt judiciary, capricious legislation, restive employees, organized crime and cunning competitors? In short: why risk Russia? Virtually all other oil majors steered clear of Russia and chose to invest in countries like Kazakhstan, or Azerbaijan. BP's move is driven by an unorthodox assessment that the Caspian is over-rated and that black gold is to be found in the Far East. Russia's low cost of production and its enormous reserves make it as attractive as the Gulf once was. And Russia is changing for the better. BP implausibly claims that the country is now a stable and promising investment destination. This may be going too far. But alternative crude transport infrastructure is being put in place - from pipelines to deep sea harbors. Corporate governance has improved. The oil sector is almost entirely private. Awareness of property rights has grown. BP's shares went up a mere 4 percent following the announcement. This cautious welcome reflects the uncertainty surrounding the company's strategy. In ten years time, its managers would be either praised as visionary pioneers - or castigated as gullible dupes who were taken for a second ride by the very same partners. Time will tell.
Slide 39: Financial Services An expatriate relocation Web site, settlerinternational.com, has this to say about Russian banks: "Do not open a bank account in a Russian bank : you might not see your deposit again." Russia's Central Bank, aware of the dismal lack of professionalism, the venality, and the criminal predilections of Russian "bankers" (and their Western accomplices) - is offering "complementary vocational training" in the framework of its Banking School. It is somewhat ironic that the institution suspected of abusing billions of US dollars in IMF funds by "parking" them in obscure off-shore havens - seeks to better the corrupt banking system in Russia. I. The Banks On paper, Russia has more than 1,300 banks. Yet, with the exception of the 20-odd (two new ones were added last year) state-owned (and, implicitly, state-guaranteed) outfits - e.g., the mammoth Sberbank (the savings bank, 61% owned by the Central Bank) - very few provide minimal services, such as corporate finance and retail banking. The surviving part of the private banking sector ("Alfa Bank", "MDM Bank") is composed of dwarfish entities with limited offerings. They are unable to compete with the statal behemoths in a market tilted in the latters' favor by both regulation and habit.
Slide 40: The Agency for the Reconstruction of Credit Organizations (ARCO) - established after the seismic shock of 1998 - did little to restructure the sector and did nothing to prevent asset stripping. More than one third of the banks are insolvent - but were never bankrupted. The presence of a few foreign banks and the emergence of non-bank financing (e.g., insurance) are rays of hope in an otherwise soporific scene. Despite the fact that most medium and large corporations in Russia own licensed "banks" (really, outsourced treasury operations) - more than 90% of corporate finance in 2000-2001 was in the form of equity finance, corporate bonds, and (mainly) reinvested retained earnings. Some corporate bond issues are as large as $100 million (with 18-months maturity) and the corporate bond market may quintuple to $10 billion in a year or two, reports "The Economist", quoting Renaissance Capital, a Russian investment bank. Still, that bank credits are not available to small and medium enterprises retards growth, as Stanley Fischer pointed out in his speech to the Higher School of Economics in Moscow, in June 2001, when he was still the First Deputy Managing Director of the IMF. Last week, the OECD warned Russia that its economic growth may suffer without reforms to the banking sector.
Slide 41: Russian banks are undercapitalized and poorly audited. Most of them are exposed to one or two major borrowers, sectors, or commodities. Margins have declined (though to a still high by Western standards 14%). Costs have increased. The vast majority of these fledglings have less than $1 million in capital. This is because shareholders (and, for that matter, depositors) - having been fleeced in the 1998 meltdown - are leery of throwing good money after very bad. The golden opportunity to consolidate and rationalize following the 1998 crisis was clearly missed. The government's (frail) attempts to reform the sector by overhauling bank supervision and by passing laws which deal with anti-money laundering, deposit insurance, minimum capital and bankruptcy regulations, and mandatory risk evaluation models - did little to erase the memory of its collusion in the all-pervasive, massive, and suspiciously orchestrated defaults of 1998-1999. Russia is notoriously strong on legislation and short on its enforcement. Moreover, the opaque, overly-bureaucratic, and oligarchfriendly Central Bank is at loggerheads with would be reformers and gets its way more often than not. It supports a minimum capital requirement of less than $5 million. Government sources have gone as high as $200 million. The government retaliates with thinly-veiled threats in the form of inane proposals to replace the Bank with newlycreated "independent" institutions.
Slide 42: Viktor Gerashchenko - the current, old-school, Governor is set to leave on September 2002. He will likely be replaced by someone more Kremlin-friendly. As long as the Kreml is the bastion of reform, these are good news. But a weak Central Bank will remove one of the last checks and balances in Russia. Moreover, a hasty process of consolidation coupled with draconian regulation may decimate private sector Russian banking for good. This, perhaps, is what the Kremlin wants. After all, he who controls the purse strings - rules Russia. II. The Stock Exchange The theory of financial markets calls for robust capital markets where banks are lacking and dysfunctional. Equity financing and corporate debt outstrip bank lending as sources of corporate finance even in the West. But Russia's stock market - the worst performer among emerging markets in 1998, the best one in 2001 - is often cornered and manipulated, prey to insider trading and worse. It is less liquid that the Tel-Aviv Stock Exchange, though the market capitalization of RTS, Russia's main marketplace, is up 430% since 1998 (80% last year alone). Bonds climbed 500% in the same period and a flourishing corporate bonds markets has erupted on the scene. Many regard this surge as a speculative bubble inflated by the high level of oil prices.
Slide 43: Others (mostly Western brokerage houses) swear that the market is undervalued, having fallen by more than 90% in 1998. Russia is different - they say - it is better managed, sports budget and trade surpluses, is less indebted (and repays its debts on time, for a change), and the economy is expanding. The same pundits talked the RTS up 180% in 1997 only to see it shrivel in an egregious case of Asian contagion. The connection between Russia's macro and micro is less than straightforward. Whatever the truth, investors are clearly more discriminating. Both the New York Times and The Economist cite the example of Yukos Oil (up 190%) versus Lukoil (up a mere 30%). The former is investor friendly and publishes internationally audited accounts. The latter has no investor relations to speak of and is disclosure-averse. Still, both firms - as do a few pioneering others - seek to access Western capital markets. The intrepid investor can partake by purchasing mutual funds dedicated, wholly or partially, to Russia - or by trading ADR's of Russian firms on NYSE (10-20 times the US dollar volume of the RTS). ADR's of smaller firms are traded OTC and, according to the New York Times, one can short sell Russian securities through offshore vehicles. The latter are also used to speculate in the shares of defunct Russian firms ("shells") traded in the West.
Slide 44: III. Debt Markets Perhaps the best judges of Russia's officially minuscule economy (smaller than the Netherlands' and less than three times Israel's) - are the Russians. When the author of this article suggested that Russia's 1998 chaos was serendipitous (in "Argumenti i Fakti" dated October 28, 1998), he was derided by Western analysts but supported by Russian ones. In hindsight, the Russians were right. They may be right today as well when they claim that Russia has never been better. The ruble devaluation (which made Russian goods competitive) and rising oil prices yielded a trade surplus of more than $50 billion last year. For the first time in its modern and turbulent history, Russia was able to prepay both foreign (IMF) and domestic debts (it redeemed state bonds ahead of maturity). It is no longer the IMF's largest debtor. Its Central Bank boasts $40 billion in foreign exchange reserves. Exactly a year ago, Russia tried to extort a partial debt write-off from its creditors (as it has done numerous times in its post-Communist decade). But Russia's oft-abused creditors and investors seem to have surprisingly short memories and an unsurpassed capacity for masochistic self-delusion. Stratfor.com reports ("Russia Buys Financial Maneuverability" dated January 31, 2002) that "Deutsche Bank Jan. 30 granted Vneshekonombank a $100 million loan, the largest private loan to a Russian bank since the 1998 ruble crisis. As Russia works to reintegrate into the
Slide 45: global financial network, the cost of domestic borrowing should drop.
Slide 46: That should spur a fresh wave of domestically financed development, which is essential considering Russia's dearth of foreign investment." The strategic forecasting firm also predicts the emergence of a thriving mortgage finance market (there is almost none now). One of the reasons is a belated November 2001 pension reform which allows the investment of retirement funds in debt instruments - such as mortgages. A similar virtuous cycle transpired in Kazakhstan. Last year the Central Bank allowed individuals to invest up to $75,000 outside Russia. IV. The Bandits In August 1999, a year and four days after Moscow's $40 billion default, the New York Times reported a $15 billion money laundering operation which involved, inter alia, the Bank of New York and Russia's first Representative to the IMF. The Russian Central Bank invested billions of dollars (through an offshore entity) in the infamous Russian GKO (dollar-denominated bonds) market, thus helping to drive yields to a vertiginous 290%. Staff members and collaborators of the now dismantled brainchild of Prof. Jeffrey Sachs, HIID (Harvard Institute of International Development) - the architect of Russian "privatization" - were caught in potentially criminal conflicts of interest.
Slide 47: Are we to believe that such gargantuan transgressions have been transformed into new-found market discipline and virtuous dealings? Putin doesn't. Last year, riding the tidal wave of the fight against terror, he formed the Financial Monitoring Committee (KFM). Ostensibly, its role is to fight money laundering and other financial crimes, aided by brand new laws and a small army of trained and tenacious accountants under the aegis of the Ministry of Finance. Really, it is intended to circumvent irredeemably compromised extant structures in the Ministry of Interior and the FSB and to stem capital flight (if possible, by reversing the annual hemorrhage of $15-20 billion). Noncooperative banks may lose their licenses. Banks have been transferring 5 daily Mb of encoded reports regarding suspicious financial dealings (and all transactions above 600,000 rubles - equal to $20,000) since February 1 when the KFM opened for business. So much for Russian bank secrecy ("Did we really have it?" - mused President Putin a few weeks ago). Last month, Mikhail Fradkov, the Federal Tax Police Chief confirmed to Interfax the financial sector's continued involvement in bleeding Russia white: "...flyby-night firms usually play a key role in illegal money transfers abroad. Fradkov recalled that 20 Moscow banks inspected by the tax police alone transferred about $5 billion abroad through such firms." ITAR-TASS, the Russian news agency, reports a drop of 60% in the cash flow of Russian banks since anti-money laundering measures took effect, a fortnight ago.
Slide 48: V. The Foreign Exchange Market Russians, the skeptics that they are, still keep most of their savings (c. $40-50 billion) in foreign exchange (predominantly US dollars), stuffed in mattresses and other exotic places. Prices are often quoted in dollars and ATM's spew forth both dollars and rubles. This predilection for the greenback was aided greatly by the Central Bank's panicky advice (reported by Moscow Times) to ditch all European currencies prior to January 1, 2002. The result is a cautious and hitherto minor diversification to euros. Banks are reporting increased demand for the new currency - a multiple of the demand for all former European currencies combined. But this is still a drop in the dollar ocean. The exchange rate is determined by the Central Bank - by far the decisive player in the thin and illiquid market. Lately, it has opted for a creeping devaluation of the ruble, in line with inflation. Foreign exchange is traded in eight exchanges across Russia but many exporters sell their export earnings directly to the Central Bank. Permits are required for all major foreign exchange transactions, including currency repatriation by foreign firms. Currency risk is absolute as a 1998 court ruling rendered ruble forwards contracts useless ("unenforceable bets"). VI. The International Financial Institutions (IFI's) Of the World Bank's $12 billion allocated to 51 projects in Russia since 1992, only $0.6 billion went to the financial
Slide 49: sector (compared to 8 times as much wasted on "Economic Planning").
Slide 50: Its private sector arm, the International Finance Corporation (IFC) refrained from lending to or investing in the financial sector from March 1999 to June 2001. It has approved (or is considering) six projects since then: a loan of $20 million to DeltaCredit, a smallish project and residential finance, USAID backed, fund; a Russian preexport financing facility (with the German bank, WestLB); Two million US dollars each to the Russianowned Baltiskii Leasing and Center Invest (a regional bank); $2.5 million to another regional bank (NBD) - and a partial guarantee for a $15 million bond issued by Russian Standard Bank. There is also $5 million loan to Probusiness Bank. Another active player is the EBRD. Having suffered a humiliating deterioration in the quality of its Russian assets portfolio in 1998-2000, it is active there again. By midyear last year, it had invested c. $300 million and lent another $700 million to Russian banks, equity and mutual funds, insurance companies, and pension funds. This amounts to almost 30% of its total involvement in the Russian Federation. Judging by this commitment, the EBRD - a bank - seems to be regarding the Russian financial system as either an extremely attractive investment - or a menace to Russia's future stability. VII. So, What's Next? No modern country, however self-deluded and backward, can survive without a banking system. The Central Bank's pernicious and overwhelming presence virtually guarantees a repeat of 1998. Russia - like Japan - is living on time borrowed against its oil collateral.
Slide 51: Should oil prices wither - what remains of the banking system may collapse, Russian securities will be dumped, Russian debts "deferred". The Central Bank may emerge either more strengthened by the devastation - or weakened to the point of actual reform. In the eventuality of a confluence between this financial Armageddon and Russia's entry to the WTO - the crisis is bound to become more ominous. Russia is on the verge of opening itself to real competition from the West including (perhaps especially so) in the financial sector. It is revamping its law books - but does not have the administrative mechanism it takes to implement them. It has a rich tradition of obstructionism, venality, political interference, and patronage. Foreign competition is the equivalent of an economic crisis in a country like Russia. Should this be coupled with domestic financial mayhem - Russia may be transformed to the worse. Expect interesting times ahead. Return
Slide 52: The Russian Devolution The Regions Russia's history is a chaotic battle between centrifugal and centripetal forces - between its 50 oblasts (regions), 2 cities (Moscow and St. Petersburg), 6 krais (territories), 21 republics, and 10 okrugs (departments) - and the often cash-strapped and graft-ridden paternalistic center. The vast land mass that is the Russian Federation (constituted officially in 1993) is a patchwork of fictitious homelands (the Jewish oblast), rebellious republics (Chechnya), and disaffected districts - all intermittently connected with decrepit lines of transport and communications. The republics - national homelands to Russia's numerous minorities - have their own constitutions and elected presidents (since 1991). Oblasts and krais are run by elected governors (a novelty - governors have been appointed by Yeltsin until 1997). They are patchy fiefdoms composed of autonomous okrugs. "The Economist" observes that the okrugs (often populated with members of an ethnic minority) are either very rich (e.g., Yamal-Nenets in Tyumen, with 53% of Russia's oil reserves) - or very poor and, thus, dependent on Federal handouts.
Slide 53: In Russia it is often "Moscow proposes - but the governor disposes" - but decades of central planning and industrial policy encouraged capital accumulation is some regions while ignoring others, thus irreversibly eroding any sense of residual solidarity. In an IMF working paper ("Regional Disparities and Transfer Policies in Russia" by Dabla-Norris and Weber), the authors note that the ten wealthiest regions produce more than 40% of Russia's GDP (and contribute more than 50% of its tax revenues) thus heavily subsidizing their poorer brethren. Output contracted by 90% in some regions - and only by 15% in others. Moscow receives more than 20% of all federal funds - with less than 7% of the population. In the Tuva republic - three quarters of the denizens are poor compared to less than one fifth in Moscow. Moscow lavishes on each of its residents 30 times the amount per capita spent by the poorest region. Nadezhda Bikalova of the IMF notes ("Intergovernmental Fiscal Relations in Russia") that when the USSR imploded, the ratio of budgetary income per person between the richest and the poorest region was 11.6. It has since climbed to 30. All the regions were put in charge of implementing social policies as early as 1994 - but only a few (the net "donors" to the federal budget, or food exporters to other regions) were granted taxing privileges.
Slide 54: As Kathryn Stoner-Weiss has observed in her book, "Local Heroes: The Political Economy of Russian Regional Governance", not all regions performed equally well (or equally dismally) during the transition from communism to (rabid) capitalism. Political figures in the (relatively) prosperous Nizhny-Novgorod and Tyumen regions emphasized stability and consensus (i.e., centralization and co-operation). Both the economic resources and the political levers in prosperous regions are in the hands of a few businessmen and "their" politicians. In some regions, the movers and shakers are oligarchtycoons - but in others, businessmen formed enterprise associations, akin to special interest lobbying groups in the West. Inevitably such incestuous relationships promotes corruption, imposes conformity, inhibits market mechanisms, and fosters detachment from the centre. But they also prevent internecine fighting and open, economically devastating, investor-deterring, conflicts. Economic policy in such parts of Russia tend to be coherent and efficiently implemented. Such businesspolitical complexes reached their apex in 1992-1998 in Moscow (ranked #1 in creditworthiness), Samara, Tyumen, Sverdlovsk, Tatarstan, Perm, Nizhny-Novgorod, Irkutsk, Krasnoyarsk, and St. Petersburg (Putin's lair). As a result, by early 1997, Moscow attracted over 50% of all FDI and domestic investment and St. Petersburg - another 10%.
Slide 55: These growing economic disparities between the regions almost tore Russia asunder. A clunky and venal tax administration impoverished the Kremlin and reduced its influence (i.e., powers of patronage) commensurately. Regional authorities throughout the vast Federation attracted their own investors, passed their own laws (often in defiance of legislation by the centre), appointed their own officials, levied their own taxes (only a fraction of which reached Moscow), and provided or withheld their own public services (roads, security, housing, heating, healthcare, schools, and public transport). Yeltsin's reliance on local political bosses for his 1996 reelection only exacerbated this trend. He lost his right to appoint governors in 1997 - and with it the last vestiges of ostensible central authority. In a humiliating - and wellpublicized defeat - Yeltsin failed to sack the spectacularly sleazy and incompetent governor of Primorsky krai, Yevgeni Nazdratenko (later "persuaded" by Putin to resign his position and chair the State Fisheries Committee instead). The regions took advantage of Yeltsin's frail condition to extract economic concessions: a bigger share of the tax pie, the right to purchase a portion of the raw materials mined in the region at "cost" (Sakha), the right to borrow independently (though the issuance of promissory notes was banned in 1997) and to spend "off-budget" - and even the right to issue Eurobonds (there were three such issues in 1997). Many regions cut red tape, introduced transparent bookkeeping, lured foreign investors with tax breaks, and liberalized land ownership.
Slide 56: Bikalova (IMF) identifies three major problems in the fiscal relationship between centre and regions in the Yeltsin era: "(1) the absence of an objective normative basis for allocating budget revenues, (2) the lack of interest shown by local and regional governments in developing their own revenues and cutting their expenditures, and (3) the federal government's practice of making transfer payments to federation members without taking account of the other state subsidies and grants they receive." Then came Russia's financial meltdown in August 1998, followed by Putin's disorientating ascendance. A redistribution of power in Moscow's favor seemed imminent. But it was not to be. The recommendations of a committee, composed of representatives of the government, the Federation Council, and the Duma, were incorporated in a series of laws and in the 1999 budget, which re-defined the fiscal give and take between regions and centre. Federal taxes include the enterprise profit tax, the valueadded tax (VAT), excise, the personal income tax (all of it returned to the regions), the minerals extraction tax, customs and duties, and other "contributions" . This legislation was further augmented in April-May 2001 (by the "Federalism Development Program 2001-2005").
Slide 57: The regions are allowed to tax the property of organizations, sales, real estate, roads, transportation, and gambling enterprises, and regional license fees (all tax rates are set by the center, though). Municipal taxes include the land tax, individual property, inheritance, and gift taxes, advertising tax, and license fees. The IMF notes that "more than 90 percent of sub-national revenues come from federal tax sharing. Revenues actually raised by regional and local governments account for less than 15 percent of their expenditures". The federal government has also signed more than 200 special economic "contracts" with the richer, donor and exporting, regions - this despite the constitutional objections of the Ministry of Justice. This discriminating practice is now being phased out. But it has not been replaced by any prioritized economic policies and preferences on the federal level, as the OECD has noted. One of Putin's first acts was to submit a package of laws to the State Duma in May 2000. The crux of the proposed legislation was to endow the President with the power to sack regional elected officials at will. The alarmed governors forgot their petty squabbles and in a rare show of self-interested unity fenced the bill with restrictions. The President can fire a governor, said the final version, only if a court rules that the latter failed to incorporate federal legislation in regional laws, or if charged with serious criminal offenses. The wholesale dismissal of regional legislatures requires the approval of the State Duma. Some republics insist that even these truncated
Slide 58: powers are excessive and Russia's Constitutional Court is currently weighing their arguments. Putin then resorted to another stratagem. He established, two years ago, by decree, a bureaucratic layer between centre and regions: seven administrative mega-regions whose role is to make sure that federal laws are both adopted and enforced at the local level. The presidential envoys report back to the Kremlin but, otherwise, are fairly harmless - and useless. They did succeed, however, in forcing local elections upon the likes of Ingushetiya and to organize all federal workers in regional federal collegiums, subordinated to the Kremlin. The war in Chechnya was meant to be another unequivocal message that cessation is not an option, that there are limits to regional autonomy, and that the center as authoritative as ever - is back. It, too, flopped painfully when Chechnya evolved into a second - internal - Afghani quagmire. Having failed thrice, Putin is lately leaning in favor of restoring and even increasing the Federation Council's erstwhile powers at the expense of the (incensed) Duma. Governors have sensed the changing winds and have acted to trample over democratic institutions in their regions. Thus, the Governor of Orenburg has abolished the direct elections of mayors in his oblast. Russia's big business is moving in as well in an attempt to elect its own mayors (for instance, in Irkutsk). Regional finances are in bad shape. Only 40 out 89 regions managed, by February, to pay their civil servants their December 2001 salaries (raised 89% - or 1.5% of GDP - by the benevolent president). Many regions had to
Slide 59: go deeper into deficit to do so. Salaries make three quarters of regional budgets. The East-West Institute reports that arrears have increased 10% in January alone - to 33 billion rubles (c. $1 billion). The Finance Ministry is considering to declare seven regions bankrupt. Yet another committee, headed by Deputy Head of the Presidential Administration, Dimitri Kozak, is on the verge of establishing an external administration for insolvent regions. The recent housing reform - which would force Russians to pay market prices for their apartments and would subsidize the poor directly (rather than through the regional and municipal authorities) - is likely to further weaken regional balance sheets. Luckily for Russia, the regions are less cantankerous and restive now. The emphasis has shifted from narcissistic posturing to economic survival and prosperity. The Moscow region still attracts the bulk of Russian domestic and foreign investments, leaving the regions to make do with leftovers. Sergei Kirienko, a former short lived Prime Minister, and, currently the president's envoy to the politically mighty Volga okrug, attributes this gap, in a comment to Radio Free Europe, to non-harmonized business legislation (between center and regions). Boris Nemtsov, a member of the Duma (and former Deputy Prime Minister) thinks that the problem is a "lack of democratic structures" press freedom, civil society, and democratic government. Others attribute the deficient interest to a dearth of safety and safe institutions, propagated by entrenched interest groups.
Slide 60: Small business is back in fashion after years of investments in behemoths such as Gazprom and Lukoil. Politicians make small to medium enterprises a staple of their speeches. The EBRD has revived its moribund small business funds (and grants up to $125,000 loans to eligible enterprises). Bank lending is still absent (together with a banking system) - but foreign investment banks and retail banks are making hesitant inroads into the regional markets. Small businessmen are more assertive and often demonstrate against adverse tax laws, high prices, and poor governance. Russia is at a crossroad. It must choose which of the many models of federalism to adopt. It can either strengthen the center at the expense of the regions, transforming the latter into mere tax collectors and law enforcement agents - or devolve more powers to tax and spend to the regions. The pendulum swings. Putin appears sometimes to be an avowed centralist - and at other times a liberal. Contrary to reports in the Western media, Putin failed to subdue the regions. The donors and exporters among them are as powerful as ever. But he did succeed to establish a modus vivendi and is working hard on a modus operandi. He also weeded out the zanier governors. Russia seems to be converging on an equilibrium of sorts - though, as usual, it is a precarious one. Return
Slide 61: Russian Agriculture In Soviet times, Kremlinologists used to pore over grain harvest figures to divine the fortunes of political incumbents behind the Kremlin's inscrutable walls. Many a career have ended due to a meager yield. Judging by official press releases and interviews, things haven't changed that much. The beleaguered Vice-Premier and Minister of Agriculture of the Russian Federation admitted openly last October that what remains of Russia's agriculture is "in a critical situation" (though he has since hastily reversed himself). With debts of $9 billion, he may well be right. Russian decision makers recently celebrated the reversal of a decade-old trend: meat production went up 1% and milk production - by double that. But the truth is, surprisingly, a lot rosier. Agricultural output has been growing for four years now (last year by more than 5%). Even much maligned sectors, such as food processing, show impressive results (up 9%). As the private sector takes over (government procurement ceased long ago, though not so regional procurement), agriculture throughout Russia (especially in its western parts) is being industrialized. Even state and collective farms are reviving, though haltingly so. In a recently announced deal, Interros will invest $100 million in cultivating a whopping million acres. Additionally, Russia is much less dependent on food imports than common myths have it it imports only 20% of its total food consumption.
Slide 62: Despite this astounding turnaround - foreign investors are still shy. The complex tariff and customs regulations, the erratic tax administration, the poor storage and transport infrastructure, the vast distances to markets, the endemic lawlessness, the venal bureaucracy, and, above all, the questionable legal status of the ownership of agricultural land - all serve to keep them at bay. Moreover, the agricultural sector is puny and disastrously inefficient. Having fallen by close to half since 1991 (as state subsidies dropped), it contributes only c. 8% to GDP and employs c. 11% of the active labour force (compared to 30% in industry and 59% in services). Agricultural exports (c. $3 billion annually) are one fourth Russia's agricultural imports - despite a fall of 40% in the latter after the 1998 meltdown. The average private farm is less than 50 hectares large. Though in control of 6% of farmland - private farms account for only 2% of agricultural output. Much of the land (equal to c. 1.8 times the contiguous US) lacks in soil, or in climate, or in both. Thus, only 8% of the land is arable and less than 40,000 sq. km. are irrigated. Pastures make up another 4%. The soil is contaminated by what the CIA calls "improper application of agricultural chemicals". It is often eroded. Ground water is absolutely toxic. The new law permitting private quasi-ownership of agricultural land may reduce the high rents which (together with a ruble over-valued until 1998) rendered Russian farmers non-competitive - but this is still a long way off. In the meantime, general demand for foodstuffs
Slide 63: has declined together with disposable incomes and increasing unemployment. The main problem nowadays is not lack of knowledge, management, or new capital - it is an unsustainable mountain of debts. Even with a lenient "Law on the Financial Recovery of Agricultural Enterprises" currently being passed through the Duma - only 30% of farms are expected to survive. The law calls for rescheduling current debt payments over ten years. The sad irony is that Russian agriculture is now much more viable than it ever was. Well over half the active enterprises are profitable (compared to 12% in 1998). The grain harvest exceeded 90 million tons, far more than the 75 million tons predicted by the government (though Russia still imports $8 billion worth of grains a year). The average crop for 1993-7 was 80 million tones (with 88 million in 1997). But grain output was decimated in 1998 (48 million tons) and 1999 (55 million tons). Luckily, grain is used mostly for livestock feed - Russians consume only c. 20 million tons annually. But by mid 1999, Russian grain reserves declined to a paltry 2 million tons, according to USDA figures. The problem is that the regions of Russia's grain belt restrict imports of this "agricultural gold" and hoard it. Corrupt officials turn a quick profit on the resulting shortage-induced price hikes. The geographical location of an agricultural enterprise often determines its fate. In a study ("The Russian Food System's Transformation at Close Range") of two Russian regions (oblasts) conducted by Grigori Ioffe (of Radford University) and Tatyana Nefedova (Institute of
Slide 64: Geography of the Russian Academy of Sciences) in August 2001, the authors found that: "... farms in Moscow Province are more productive than farms in equivalent locations in Ryazan Provinces, while farms closer to the central city of either province do better than farms near the borders of that province." It seems that well-located farms enjoy advantages in attracting both investments and skilled labour. They are also closer to their markets. But the vicissitudes of Russia's agriculture are of geopolitical consequence. A hungry Russia is often an angry Russia. Hence the food aid provided by the USA in 1998-9 (worth more than $500 million and coupled with soft PL-480 trade credits). The EU also donated a comparable value in food. Russia asked for additional aid in the form of animal feed in the years 2000-2001 - and the USA complied. Russia's imports are an important prop to the economies of its immediate and far neighbors. Russia is also a major importer of American agricultural products, such as poultry (it consumes up to 40% of all US exports of this commodity). It is a world class importer of meat products (especially from the EU), its livestock inventory having been halved by the transition. If it accedes to the WTO (negotiations have been dragging on since 1995), it may become even more appealing commercially. It will have to reduce its import tariffs (the tariff on poultry is 30% and the average tariff on agricultural products is 20%). It is also likely to be forced to scale back - albeit gradually - the subsidies it doles out to its
Slide 65: own producers (10% of GDP in the USSR, less than 3% of GDP now). Privileged trading by state entities will also be abolished as will be non-tariff obstructions to imports. Whether the re-emergent center will be able to impose its will on the recalcitrant agricultural regions, still remains to be seen. A series of apocalyptic economic crises forced Russian agriculture to rationalize. Russia has no comparative advantage in livestock and meat processing. Small wonder its imports of meat products skyrocketed. It is questionable whether Russia possesses a comparative advantage in agriculture as a whole - given its natural endowments, or, rather, the lack thereof. Its insistence to produce its own food (especially the High Value Products) has failed with disastrous consequences. Perhaps it is time for Russia to concentrate on the things it does best. Agriculture, alas, is not one of them. Return
Slide 66: Russia as a Creditor By: Dr. Sam Vaknin Also published by United Press International (UPI) Russia is notorious for its casual attitude to the repayment of its debts. It has defaulted and re-scheduled its obligations more times in the last decade than it has in the preceding century. Yet, Russia is also one of the world's largest creditor nations. It is owed more than $25 billion by Cuba alone and many dozens of additional billions by other failed states. Indeed, the dismal quality of its forlorn portfolio wouldn't shame a Japanese bank. In the 18 months to May 2001, it has received only $40 million in repayments. It is still hoping to triple this trifle amount by joining the Paris Club - as a creditor nation. The 27 countries with Paris Club agreements owe roughly half of what Russia claims. Some of them - Algeria in cash, Vietnam in kind have been paying back intermittently. Others have abstained. Russia has spent the last two years negotiating generous package deals - rescheduling, write-offs, grace periods measured in years - with its most obtuse debtors. Even the likes of Yemen, Mozambique, and Madagascar - started coughing up - though not Syria which owes $12 billion for weapons purchases two decades ago. But the result of these Herculean efforts is meager. Russia expects to get back an extra $100 million a year. By comparison, in 1999 alone Russia received $800 million from India.
Slide 67: The sticking point is a communist-era fiction. When the USSR expired it was owed well over $100 billion in terms of a fictitious accounting currency, the "transferable ruble". At an arbitrary rate of 0.6 to the US dollar, protest many debtors, the debt is usuriously inflated. This is disingenuous. The debtors received inanely subsidized Russian goods and commodities for the transferable rubles they so joyously borrowed. Russia could easily collect on some of its debts simply by turning off the natural gas tap or by emitting ominous sounds of discontent backed by the appropriate military exercises. That it chooses not to do so - is telling. Russia has discovered that it could profitably leverage its portfolio of defunct financial assets to geopolitical and commercial gain. On March 25, Russia's prime minister and erstwhile lead debt negotiator, Kasyanov, has "agreed" with his Mongolian counterpart, Enkhbayar, to convert Mongolia's monstrous $11.5 billion debt to Russia - into stakes in privatized Mongolian enterprises. Mongolia's GDP is minuscule (c. $1 billion). Should the Russian behemoth, Norilsk Nickel, purchase 49% of Erdenet, Mongolia's copper producer, it will have bagged 20% of Mongolia's GDP in a single debt conversion. A similar scheme has been concluded between Armenia and Russia. Five enterprises will change hands and thus eliminate Armenia's $94 million outstanding debt to Russia. Identical deals have been struck with other countries such as Algeria which owes Russia c. $4 billion. The Algerians gave Gazprom access to Algeria's natural gas exports.
Slide 68: Russia's mountainous credit often influences its foreign policies to its detriment. It has noisily resisted every American move to fortify sanctions against Iraq and make them "smarter". Russia is owed $8 billion by that shredded country and would like to recoup at least a part of it by trading with the outcast or by gaining lucrative oil-related contracts. The sanctions regime is in its way hence its apparent obstructionism. Its recent weapons deals with Syria are meant to compensate for its unpaid past debts to Russia - at the cost of destabilizing the Middle East and provoking American ire. Russia uses the profusion of loans gone bad on its tattered books to gain entry to international financial fora and institutions. Its accession to the Paris Club of official bilateral creditors is conditioned on its support for the HIPC (Highly Indebted Poor Countries) initiative. This is no trifling matter. Sub-Saharan debt to Russia amounted to c. $14 billion and North African debt to yet another $11 billion - in 1994. These awesome figures will have swelled by yet another 25% by 2001. The UNCTAD thinks that Russia intentionally under-reports these outstanding obligations and that Sub-Saharan Africa actually owed Russia $17 billion in 1994. Russia would have to forgo at least 90% of the debt owed it by the likes of Angola, Ethiopia, Guinea, Mali, Mozambique, Somalia, Tanzania, and Zambia. Russian debts amount to between one third and two thirds of these countries' foreign debt. Moreover, its hopes to offset money owed it by countries within the framework of the Paris Club against its own debts to the Club were dashed last year. Hence its incentive to distort the data.
Slide 69: Other African countries have manipulated their debt to Russia to their financial gain. Nigeria is known to have repurchased, at heavily discounted prices, large chunks of its $2.2 billion debt to Russia in the secondary market through British and American intermediaries. It claims to have received a penalty waiver "from some of its creditors". Russia has settled the $1.7 billion owed it by Vietnam last year. The original debt - of $11 billion - was reduced by 85 percent and spread over 23 years. Details are scarce, but observers believe that Russia has extracted trade and extraction concessions as well as equity in Vietnamese enterprises. But Russia is less lenient with its former satellites. Two years ago, Ukraine had to supply Russia with sophisticated fighter planes and hundreds of cruise missiles incorporating proprietary technology. This was in partial payment for its overdue $1.4 billion natural gas bill. Admittedly, Ukraine is also rumored to have "diverted" gas from the Russian pipeline which runs through it. The Russians threatened to bypass Ukraine by constructing a new, Russian-owned, pipeline to the EU through Poland and Slovakia. Gazprom has been trying to coerce Ukraine for years now to turn over control of the major transit pipelines and giant underground storage tanks to Russian safe hands. Various joint ownership schemes were floated - the latest one, in 1999, was for a pipeline to Bulgaria and Turkey to be built at Ukrainian expense but co-owned by Gazprom.
Slide 70: After an initial period of acquiescence, Ukraine recoiled, citing concerns that the Russian stratagem may compromise its putative sovereignty. Already UES, Russia's heavily politicized electricity utility, has begun pursuing stakes in debtor Ukrainian power producers. Surprisingly, Russia is much less aggressive in the "Near Abroad". It has rescheduled Kirghizstan's entire debt (c. $60 million) for a period of 15 years (including two years grace) with the sole - and dubious - collateral of the former's promissory notes. Russia has no clear, overall, debt policy. It improvises badly - as it goes along. Its predilections and readiness to compromise change with its geopolitical fortunes, interests, and emphases. As a result it is perceived by some as a bully - by others as a patsy. It would do well to get its act together.
Slide 71: The Space Industry in Eastern Europe By: Dr. Sam Vaknin Also published by United Press International (UPI) "Volga" is the name of a new liquid-fueled retrievable and reusable (up to 50 times) booster-rocket engine. It will be built by two Russian missile manufacturers for a consortium of French, German, and Swedish aerospace firms. ESA - the European Space Agency - intends to invest 1 billion euros over 10-15 years in this new toy. This is a negligible sum in an $80 billion a year market. Russian rockets, such as the Soyuz U and Tsiklon, have been launching satellites to orbit for decades now and not only for the Russian defense ministry, their erstwhile exclusive client. Communications satellites, such as Gonets D1 ("Courier" or "Messenger"), and other commercial loads are gradually overtaking their military observation, navigation, and communications brethren. The Strategic Rocket Forces alone have earned more than $100 million from commercial launches between 1997-9, reports "Kommersant", the Russian business daily. Still, many civilian satellites are not much more than stripped military bodices. Commercial operators and Rosaviakosmos (Russia's NASA) report to the newly reestablished (June 2001) Russian Military Space Forces. Technology gained in collaborative efforts with the West is immediately transferred to the military.
Slide 72: Russia is worried by America's lead in space. The USA has 600 satellites to Russia's 100 (mostly obsolete) birds, according to space.com. The revival of US plans for an anti-missile shield and the imminent, unilateral, and inevitable American withdrawal from the Anti-Ballistic Missile Treaty add urgency to Russian scrambling to catch up. Despite well-publicized setbacks - such as the ominous crash at Baikonur in Kazakhstan in July 1999 - Russian launchers are among the most reliable there are. Fiftyseven of 59 launch attempts were successful last year. By comparison, in 1963, only 55 out of 70 launch attempts met the same happy fate. American aerospace multinationals closely collaborate with Rosaviakosmos. Boeing maintains a design office in Russia to monitor joint projects such as the commercial launch pad Sea Launch and the ISS. It employs hundreds of Russian professionals in and out of Russia. There is also an emerging collaboration with the European Aeronautic Defense and Space (EADS) company as well as with Arianespace, the French group. A common launch pad is taking shape in Kourou and the Soyuz is now coowned by Russians and Europeans through Starsem, a joint venture. Russia also intends to participate in the hitherto dormant European RLV (Reusable Launch Vehicle) project. The EU's decision, in the recent Barcelona summit, to give "Galileo" the go ahead, would require close cooperation with Russia.
Slide 73: "Galileo" is a $3 billion European equivalent of the American GPS network of satellites. It will most likely incorporate Russian technology, use Russian launch facilities, and employ Russian engineers. This collaboration may well revive Russia's impoverished and, therefore, moribund space program with an infusion of more than $2 billion over the next decade. But America and Europe are not the only ones queuing at Russia's doorstep. Stratfor, the Strategic Forecasting firm, reported about a deal concluded in May last year between the Australian Ministry of Industry, Science and Resources and the Russian Aviation and Space Agency. Australian companies were granted exclusive rights to use the Russian Aurora rocket outside Russia. In return, Russia will gain access to the ideally located launch site at Christmas Island in the Indian Ocean. This is a direct blow to competitors such as India, South Korea, Japan, China, and Brazil. Russian launch technology is very advanced and inexpensive, being based, as it is, on existing military R&D. It has been licensed to other space-aspiring countries. India's troubled Geosynchronous Satellite Launch Vehicle (GSLV) is based on Russian technology, reports Stratfor. Many private satellite launching firms Australian and others - find Russian offerings commercially irresistible. Russia - unlike the US - places no restrictions on the types of load launched to space with its rockets.
Slide 74: Still, launch technologies are simple matters. Until 1995, Russia launched more loads annually than the rest of the world combined - despite its depleted budget (less than Brazil's). But Russia's space shuttle program, the EnergiaBuran, was its last big investment in R&D. It was put to rest in 1988. Perhaps as a result, Russia failed dismally to deliver on its end of the $660 million ISS bargain with NASA. This has cost NASA well over $3 billion in replanning. The living quarters of the International Space Station (ISS), codenamed "Zvezda", launched two years late, failed to meet the onerous quality criteria of the Americans. It is noisy and inadequately protected against meteorites, reported "The Economist". Russia continues to supply the astronauts and has just launched from Baikonur a Progress M1-8 cargo ship with 2.4 tons of food, fuel, water, and oxygen. The dark side of Russia's space industry is its sales of missile technology to failed and rogue states throughout the world. Timothy McCarthy and Victor Mizin of the U.S. Center for Nonproliferation Studies wrote in the "International Herald Tribune in November 2001: "[U.S. policy to date] leaves unsolved the key structural problem that contributes to illegal sales: over-capacity in the Russian missile and space industry and the inability or unwillingness of Moscow to do anything about it ... There is simply too much industry [in Russia] chasing too few legitimate dollars, rubles or euros. [Downsizing] and restructuring must be a major part of any initiative that seeks to stop Russian missile firms from selling 'excess production' to those who should not have them."
Slide 75: The official space industry has little choice but to resort to missile proliferation for its survival. The Russian domestic market is inefficient, technologically backward, and lacks venture capital. It is thus unable to foster innovation and reward innovators in the space industry. Its biggest clients - government and budget-funded agencies rarely pay or pay late. Prices for space-related services do not reflect market realities. According to fas.org's comprehensive survey of the Russian space industry, investment in replacement of capital assets deteriorated from 9 percent in 1998 to 0.5 percent in 1994. In the same period, costs of materials shot up 382 times, cost of hardware services went up by 172 times, while labour costs increased 82-fold. The average salary in the space industry, once a multiple of the Russian average wage, has now fallen beneath it. The resulting brain drain was crippling. More than 35 percent of all workers left - and more than half of all the experts. Private firms are doing somewhat better, though. A Russian company unveiled, two weeks ago, a reusable vehicle for space tourism. The ticket price - $100,000 for a 3-minutes trip. One hundred tickets were already sold. The mock-up was exposed to the public in a Russian air base. As opposed to grandiosity-stricken Russia, Kazakhstan has few pretensions to being anything but a convenient launching pad. It reluctantly rents out Baikonur, its main site, to Russia for an $115 million a year. Russia pays late, reports accidents even later, and pollutes the area frequently. Baikonur is only one of a few civilian launch sites (Kapustin Yar, Plesetsk).
Slide 76: It is supposed to be abandoned by Russia in favor of Svobodny, a new (1997) site. Kazakhstan expressed interest in a Russian-KazakhUkrainian carrier rocket, the Sodruzhestvo. It is even budgeted for in the Russian-Kazakh space program budget 2000-2005. But both the Russians and the Ukrainians were unable to cough up the necessary funds and the project was put on indefinite hold. Umirzak Sultangazin, the head of the Kazakh Institute for Space Research, complained bitterly in an interview he granted last year to the Russian-language "Karavan": "Our own satellite is an dire need. So far, we are using data "received" from US and Russian satellites. Some information we use is free, but we have to pay for certain others ... We have high-class specialists but they are leaving the institute for commercial structures because they are offered several times bigger salaries. I have many times raised this question and said: Look, Russia pays us not a small amount to lease Baykonur [some 115m dollars a year], why should we not spend part of this money on space research? We could have developed the space sector and become a real space power." Kazakhstan has its own earth profiling program administered by its own cosmonauts. It runs biological and physical experiments in orbit. The "tokhtar" is a potato developed in space and named after Kazakhstan's first astronaut, the eponymous Tokhtar Aubakirov.
Slide 77: Almost all the former satellites of the USSR have established their own space programs after they broke away, vowing never again to be dependent on foreign good will. Romania founded ROSA, the Romanian Space Agency in 1991. Hungary created the Hungarian Space Office. The Baltic states - to the vocal dismay of many of their citizens - work closely with NATO on military applications of satellites within the framework of BALTNET (the Baltic air space control project). Poland (1994), Hungary (1991), Romania (1992) and the Czech Republic have been cooperating with ESA on a variety of space-related commercial and civil projects. Ukraine hedges its bets. It signed with Brazil a space industry bilateral accord in January. A month later it signed five bilateral agreements regarding the space industry with Russia. Many Western academic institutions, NGO's, and commercial interests created frameworks for collaboration with space scientists from Central Asia, Central and Eastern Europe, Russia, CIS, and NIS. The University of Maryland pioneered this trend with its East-West Space Science Center, formed in 1990. The space industry - and particularly the emerging field of launch technologies - represents one of the few areas in which the former communist countries may retain a competitive edge and a relative advantage. The West would do well to encourage the commercialization of this knowledge.
Slide 78: The alternative is proliferation of missile technologies and military applications of technology transferred within collaborative efforts on civilian projects with Western partners. The West can save itself a lot of money and heartache by being generous early on.
Slide 79: Russia's Vodka Wars By: Dr. Sam Vaknin Also published by United Press International (UPI) Vodka is a crucial component in Russian life. And in Russian death. Alcohol-related accidents and cardiac arrests have already decimated Russian life expectancy by well over a decade during the last decade alone. Vodka is also big business. The brand "Stolichnaya" sells $2 billion a year worldwide. Hence the interminable and inordinately bitter battle between the Russian ministry of agriculture and SPI Spirits. The latter, still partly owned by the state, is the on and off owner of the haloed brand "Stolichnaya", James Bond's favorite. SPI's PR firm, Burson-Marsteller, posits this commercial conflict as a classic case of the violation of the property rights of hapless foreign shareholders by the avaricious and ruthless functionaries of an unreformed evil empire. They question Russia's readiness to accede to the WTO and its respect for the law. SPI's latest press release consists of the detailed history of this harrowing tale. The brand Stolichnaya, as well as 42 others, were privatized in 1992.
Slide 80: The firm quotes a document, bearing the official seal of the maligned ministry, which states unambiguously: "VAO Sojuzplodoimport has the right to export Russian vodka to the USA under the following trademarks: Stolichnaya, Stolichnaya Cristall, Pertsovka, Limonnnaya, Privet, Privet Orange (Apelsinovaya), Russian and Okhotnichya." The privatization was completed in 1997 when the old SPI was sold to the new SPI Spirits. The new SPI claims to have assumed $40 million in debt and invested another $20 million to rebuild the company into "one of the world's leading vodka producers". Yet, the Russian government, as heavy handed as ever, clearly is unhappy with SPI. It says the privatization deal was dubious and that SPI paid only $300,000 (or maybe as little as $61,000 claim other sources) for the multi-billion dollar brands, including "Stolichnaya", "Moskovskaya", and "Russkaya". The government values the brands at a far more reasonable $400 million. Other appraisers came up with a figure of $1.4 billion. The government, in a bout of new-found legal rectitude, also insists that the seller of the brands, the defunct (stateowned) SPI, was not their legal owner. It also questions the mysterious shareholders of the new SPI - including a holding company in tax-lenient Delaware. SPI's trademarks portfolio is represented by an Australian law firm, Mallesons Stephen Jaques.
Slide 81: Putin himself set up a committee for the repatriation of these and other consumer brands to the state. He craves the beneficial effects the alcohol sector's tax revenues could have on the federal budget - and on its powers of patronage. A central state-owned brand-holding and distribution company was set up less than two years ago. Ever since then, the alcohol sector has been subjected to relentless state interference. SPI is not the most egregious case either. "The Observer" mentions that SPI currently runs most of its business from inscrutable Cyprus, a favorite destination for Russian money launderers, tycoon tax evaders, and mobsters. SPI's German distributor, Plodimex, is increasingly less active - as three new off shore distribution entities (in Cyprus, the Dutch Antilles, and Gibraltar) are increasingly more so. The FSB ordered Kaliningrad customs to prohibit bulk exports of Stolichnaya. Cases of the drink are routinely confiscated. Criminal charges were brought against directors and managers in the firm. The Deputy Minister of Agriculture is discrediting SPI in meetings with its distributors and business partners abroad. He is also accused by the firm of obstructing the court-mandated registration of its trademarks. The courts have lately been good to SPI, coming out with a spate of decisions against the government's conduct in this convoluted affair. But on February 1, the firm suffered a setback, when a Moscow court ruled against it and ordered 43 of its brands, the prized Stolichnaya included, returned to the government (i.e., renationalized).
Slide 82: SPI is doing its best to placate the authorities. It is rumored to have offered last month to use its ample funds to supplement the federal budget. It has indicated last September that it is on the prowl for additional acquisitions in Russia - a bizarre statement for a firm claiming to have been victimized. "The Moscow Times" reported that it is planning to sign a $500,000 sponsorship agreement with the Russian Olympic Committee. Summit Communications, a country image specialist, placed this on its Web site in November last year: "One example of a savvy Russian company that has managed to do well in the West by finding the right partner is the Soyuzplodimport company (see also p. 14). Soyuzplodimport, or SPI, has the exclusive rights to export Stolichnaya, which vodka lovers in the U.S. fondly refer to as 'Stoli'. Some 50% of the company's export turnover comes from the United States, thanks mostly to its strategic alliance with Allied-Domecq for U.S. distribution. 'I'm not sure that all Americans know where Russia is on the map, but most of them know what Stolichnaya is,' muses Andrey Skurikhin, general director of SPI. 'I want the quality of Stolichnaya in America to create an image of Russia that is pure, strong and honest, just like the vodka. At SPI, we feel that we are like ambassadors and we will try to do everything to create a more objective and positive image of Russia in the U.S.' "
Slide 83: SPI's troubles may prove to be contagious. Allied Domecq, its British distributor in America and Mexico, now faces competition from Kryshtal International, a subsidiary of the troubled Kristal distillery, 51% owned by Rosspirtprom, a government agency. Kryshtal signed distribution contracts for "Stolichnaya" with distilleries backed by the Russian ministry of agriculture. Allied and Miller Brewing have announced a $50 million investment in product launch and marketing campaigns only two years ago. "Stolichnaya" (nicknamed "Stoli" in the States) sells 1 million 12-bottle cases a year in the USA (compared to Absolut's 3 million cases). The trouble started almost immediately with the first foreign investments in SPI. As early as 1991, Vneshposyltorg, a government foreign trade agency, tried to export Stolichnaya in Greece. This led to court action by the Greeks. Vodka wars also erupted between the newly-registered Russian firm "Smirnov" and Grand Metropolitan over the brand "Smirnoff". The vodka wars are sad reminders of the long way ahead of Russia. Its legal system is rickety - different courts upheld government decisions and SPI's position almost simultaneously. Russia's bureaucrats - even when right are abusive, venal, and obstructive. Russia's "entrepreneurs" are a penumbral lot, more enamored with off-shore tax havens than with proper management. The rule of law and private property rights are still fantasies. The WTO - and the respectability it lends - are as far as ever.
Slide 84: Let My People Go The Jackson-Vanik Controversy By: Dr. Sam Vaknin Also published by United Press International (UPI) The State of Israel was in the grip of anti-Soviet jingoism in the early 1970's. "Let My People Go!" - screamed umpteen unfurled banners, stickers, and billboards. Russian dissidents were cast as the latest link in a chain of Jewish martyrdom. Russian immigrants were welcomed by sweating ministers on the sizzling tarmac of the decrepit Lod Airport. Russia imposed exorbitant "diploma taxes" (reimbursement of educational subsidies) on emigrating Jews, thus exacerbating the outcry. The often disdainful newcomers were clearly much exercised by the minutia of the generous economic benefits showered on them by the grateful Jewish state. Yet, they were described by the Israeli media as zealous Zionists, returning to their motherland to re-establish in it a long-interrupted Jewish presence. Thus, is a marvelous fiat of spin-doctoring, economic immigrants became revenant sons.
Slide 85: Congress joined the chorus in 1974, with the JacksonVanik Amendment to the Trade Reform Act - now Title IV of the Trade Act. It was Sponsored by Senator Henry ("Scoop") Jackson of Washington and Rep. Charles Vanik of Ohio, both Democrats. It forbids the government to extend the much coveted "Most Favored Nation (MFN)" status - now known as "Normal Trade Relations" - NTR - with its attendant trade privileges to "non-market economy" countries with a dismal record of human rights - chiefly the right to freely and inexpensively emigrate. This prohibition also encompasses financial credits from the various organs of the American government - the Export-Import Bank, the Commodity Credit Corporation (CCC), and the Overseas Private Investment Corporation (OPIC). Though applicable to many authoritarian countries - such as Vietnam, the subject of much heated debate with every presidential waiver - the thrust of the legislation is clearly anti-Russian. Henry Kissinger, the American Secretary of State at the time, was so alarmed, that he flew to Moscow and extracted from the Kremlin a promise that "the rate of emigration from the USSR would begin to rise promptly from the 1973 level." The demise of the USSR was hastened by this forced openness and the increasing dissidence it fostered. Jackson-Vanik was a formidable instrument in the cold warrior's arsenal. More than 1.5 million Jews left Russia since 1975. At the time, Israelis regarded the Kremlin as their mortal enemy.
Slide 86: Thus, when the Amendment passed, official Israel was exuberant. The late Prime Minister Yitzhak Rabin wrote this to President Gerald Ford: "The announcement that agreement has been obtained facilitating immigration of Soviet Jews to Israel is causing great joy to the people of Israel and to Jewish communities everywhere. This achievement in the field of human rights would not have been possible but for your personal sympathy for the cause involved, for your direct concern and deep interest." And, to Senator Henry Jackson, one of the two sponsors of the bill: "Dear Scoop, The agreement which has been achieved concerning immigration of Soviet Jews to Israel has been published in this country -a few hours ago and is evoking waves of joy throughout Israel and no doubt throughout Jewish communities in every part of the globe. This great achievement could not have been possible but for your personal leadership which rallied such wide support in both Houses of Congress, for the endurance with which you pursued this struggle and for the broad human idealism which motivated your activities on behalf of this great humanitarian cause. At this time therefore I would like to send you my heartfelt appreciation and gratitude." US trade policy is often subordinated to its foreign policy. It is frequently sacrificed to the satisfaction of domestic constituencies, pressure groups, and interest lobbies. It is used to reward foreign allies and punish enemies overseas.
Slide 87: The Jackson-Vanik Amendment represents the quintessence of this relationship. President Clinton tacitly admitted as much when he publicly decoupled trade policy from human rights in 1994. The disintegration of the Evil Empire - and the privatization of Russian foreign trade - has rendered the law a relic of the Cold War. Russian Jews - including erstwhile "refuseniks", such as Natan (Anatoly) Sharansky - now openly demand to rescind it and to allow Russia to "graduate" into a Permanent Normal Trade Relations (PNTR) status by act of Congress. American Jews - though sympathetic - would like guarantees from Russia, in view of a rising wave of antiSemitism, that Jews in its territory will go unharmed. They also demand the right of unhindered and unsupervised self-organization for Jewish communities and a return of Jewish communal property confiscated by the Soviet regime. Congress is even more suspicious of Russian intentions. Senator Gordon Smith, a Republican from Oregon, recently proposed an amendment that would deprive Russia of foreign aid if it passes legislation impinging on religious freedom. Together with Hillary Clinton, a Democrat from New York, he introduced a damning Jackson-Vanik resolution, saying:
Slide 88: "Any actions by the United States Government to "graduate" or terminate the application of the JacksonVanik Amendment to any individual country must take into account ... appropriate assurances regarding the continued commitment of that government to enforcing and upholding the fundamental human rights envisioned in the Amendment. The United States Government must demonstrate how, in graduating individual countries, the continued dedication of the United States to these fundamental rights will be assured." The Senate still refuses to repeal the Jackson-Vanik Amendment despite its impact on six former Soviet republics and other countries and despite passionate pleas from the administration. On May 22 it passed a nonbinding resolution calling for PNTR with Russia. JacksonVanik remained in place because of the row with Russia over imports of US poultry. Senator Joseph Biden, Chairman of the Senate Foreign Relations Committee, who represents a major poultry producing state (Delaware) made these statesmanlike comments following the session: "I can either be Russia's best friend or worst enemy. They keep fooling around like this, they're going to have me as their enemy." Mikhail Margelov, Chairman of the Foreign Relations Committee of the Federation Council, understandably retorted, according to Radio Free Europe/Radio Liberty quoting from strana.ru:
Slide 89: "By citing the controversy over chicken legs, the Democrats have openly acknowledged that Jackson-Vanik does not protect Russian Jews, but American farmers." According to ITAR-TASS, he presented to President Putin a report which blamed Russia's "unstable" trade relations with the USA on the latter's "discriminatory legislative norms." The Amendment has been a dead letter since 1994, due to a well-entrenched ritual of annual Presidential waiver which precedes the granting of NTR status to Russia. The waiver is based on humiliating semi-annual reviews. The sole remaining function of Jackson-Vanik seems, therefore, to be derogatory. This infuriates Russians of all stripes - pro-Western reformers included. "This demonstrates the double standards of the U.S." - Anatoly B. Chubais, the Chairman of UES, Russia's electricity monopoly, told BusinessWeek. "It undermines trust." Putin called the law "notorious". In October last year, the Russian Foreign Ministry released this unusually strongly-worded statement: "The Jackson-Vanik Amendment has blocked the granting to Russia of most favored nation status in trade with the USA on a permanent and unconditional basis over many years, inflicting harm upon the spirit of constructive and equal cooperation between our countries. It is rightly considered one of the last anachronisms of the era of confrontation and distrust."
Slide 90: Considering that China - with its awful record of egregious human rights violations - was granted PNTR last year, Russia rightly feels slighted. Its non-recognition as a "market economy" under the Jackson-Vanik Amendment led to the imposition of import restrictions on some of its products (e.g. steel). The Amendment also prevents Russia from joining the WTO. Worst of all, the absence of PNTR also inhibits foreign investment and the conclusion of long term contracts. Boeing expressed to the Associated Press its relief at the decision to normalize trade relations with China thus: ``Stability is key in our business. We must look 18 to 24 months ahead in terms of building parts, planes and servicing them. It has been difficult for China to make such agreements when they don't know if they would have an export license the following year or whether the United States would allow the planes to be delivered.''
Slide 91: Fimaco Wouldn't Die Russia's Missing Billions By: Dr. Sam Vaknin Also published by United Press International (UPI) Russia's Audit Chamber - with the help of the Swiss authorities and their host of dedicated investigators - may be about to solve a long standing mystery. An announcement by the Prosecutor's General Office is said to be imminent. The highest echelons of the Yeltsin entourage - perhaps even Yeltsin himself - may be implicated - or exonerated. A Russian team has been spending the better part of the last two months poring over documents and interviewing witnesses in Switzerland, France, Italy, and other European countries. About $4.8 billion of IMF funds are alleged to have gone amiss during the implosion of the Russian financial markets in August 1998. They were supposed to prop up the banking system (especially SBS-Agro) and the ailing and sharply devalued ruble. Instead, they ended up in the bank accounts of obscure corporations - and, then, incredibly, vanished into thin air.
Slide 92: The person in charge of the funds in 1998 was none other than Mikhail Kasyanov, Russia's current Prime Minister at the time, Deputy Minister of Finance for External Debt. His signature on all foreign exchange transactions - even those handled by the central bank - was mandatory. In July 2000, he was flatly accused by the Italian daily, La Reppublica, of authorizing the diversion of the disputed funds. Following public charges made by US Treasury Secretary Robert Rubin as early as March 1999, both Russian and American media delved deeply over the years into the affair. Communist Duma Deputy Viktor Ilyukhin jumped on the bandwagon citing an obscure "trustworthy foreign source" to substantiate his indictment of Kremlin cronies and oligarchs contained in an open letter to the Prosecutor General, Yuri Skuratov. The money trail from the Federal Reserve Bank of New York to Swiss and German subsidiaries of the Russian central Bank was comprehensively reconstructed. Still, the former Chairman of the central bank, Sergei Dubinin, called Ilyukhin's allegations and the ensuing Swiss investigations - "a black PR campaign ... a lie." Others pointed to an outlandish coincidence: the ruble collapsed twice in Russia's post-Communist annals. Once, in 1994, when Dubinin was Minister of Finance and was forced to resign. The second time was in 1998, when Dubinin was governor of the central bank and was, again, ousted.
Slide 93: Dubinin himself seems to be unable to make up his mind. In one interview he says that IMF funds were used to prop up the ruble - in others, that they went into "the national pot" (i.e., the Ministry of Finance, to cover a budgetary shortfall). The Chairman of the Federation Council at the time, Yegor Stroev, appointed an investigative committee in 1999. Its report remains classified but Stroev confirmed that IMF funds were embezzled in the wake of the 1998 forced devaluation of the ruble. This conclusion was weakly disowned by Eleonora Mitrofanova, an auditor within the Duma's Audit Chamber who said that they discovered nothing "strictly illegal" - though, incongruously, she accused the central bank of suppressing the Chamber's damning report. The Chairman of the Chamber of Accounts, Khachim Karmokov, quoted by PwC, said that "the audits performed by the Chamber revealed no serious procedural breaches in the bank's performance." But Nikolai Gonchar, a Duma Deputy and member of its Budget Committee, came close to branding both as liars when he said that he read a copy of the Audit Chamber report and that it found that central bank funds were siphoned off to commercial accounts in foreign banks. The Moscow Times cited a second Audit Chamber report which revealed that the central bank was simultaneously selling dollars for rubles and extending ruble loans to a few well-connected commercial banks, thus subsidizing their dollar purchases. The central bank went as far as
Slide 94: printing rubles to fuel this lucrative arbitrage. The dollars came from IMF disbursements. Radio Free Europe/Radio Liberty, based on its own sources and an article in the Russian weekly "Novaya Gazeta", claims that half the money was almost instantly diverted to shell companies in Sydney and London. The other half was mostly transferred to the Bank of New York and to Credit Suisse. Why were additional IMF funds transferred to a chaotic Russia, despite warnings by many and a testimony by a Russian official that previous tranches were squandered? Moreover, why was the money sent to the Central Bank, then embroiled in a growing scandal over the manipulation of treasury bills, known as GKO's and other debt instruments, the OFZ's - and not to the Ministry of Finance, the beneficiary of all prior transfers? The central bank did act as MinFin's agent - but circumstances were unusual, to say the least. There isn't enough to connect the IMF funds with the money laundering affair that engulfed the Bank of New York a year later to the day, in August 1999 - though several of the personalities straddled the divide between the bank and its clients. Swiss efforts to establish a firm linkage failed as did their attempt to implicate several banks in the Italian canton of Ticino. The Swiss - in collaboration with half a dozen national investigation bureaus, including the FBI - were more successful in Italy proper, where they were able to apprehend a few dozen suspects in an elaborate undercover operation.
Slide 95: FIMACO's name emerged rather early in the swirl of rumors and denials. At the IMF's behest, PricewaterhouseCoopers (PwC) was commissioned by Russia's central bank to investigate the relationship between the Russian central bank and its Channel Islands offshoot, Financial Management Company Limited, immediately when the accusations surfaced. Skuratov unearthed $50 billion in transfers of the nation's hard currency reserves from the central bank to FIMACO, which was majority-owned by Eurobank, the central bank's Paris-based daughter company. According to PwC, Eurobank was 23 percent owned by "Russian companies and private individuals". Dubinin and his successor, Gerashchenko, admit that FIMACO was used to conceal Russia's assets from its unrelenting creditors, notably the Geneva-based Mr. Nessim Gaon, whose companies sued Russia for $600 million. Gaon succeeded to freeze Russian accounts in Switzerland and Luxemburg in 1993. PwC alerted the IMF to this pernicious practice, but to no avail. Moreover, FIMACO paid exorbitant management fees to self-liquidating entities, used funds to fuel the speculative GKO market, disbursed non-reported profits from its activities, through "trust companies", to Russian subjects, such as schools, hospitals, and charities - and, in general, transformed itself into a mammoth slush fund and source of patronage. Russia admitted to lying to the IMF in 1996. It misstated its reserves by $1 billion.
Slide 96: Some of the money probably financed the fantastic salaries of Dubinin and his senior functionaries. He earned $240,000 in 1997 - when the average annual salary in Russia was less than $2000 and when Alan Greenspan, Chairman of the Federal Reserve of the USA, earned barely half as much. Former Minister of Finance, Boris Fedorov, asked the governor of the central bank and the prime minister in 1993 to disclose how were the country's foreign exchange reserves being invested. He was told to mind his own business. To Radio Free Europe/Radio Liberty he said, six years later, that various central bank schemes were set up to "allow friends to earn handsome profits ... They allowed friends to make profits because when companies are created without any risk, and billions of dollars are transferred, somebody takes a (quite big) commission ... a minimum of tens of millions of dollars. The question is: Who received these commissions? Was this money repatriated to the country in the form of dividends?" Dubinin's vehement denials of FIMACO's involvement in the GKO market are disingenuous. Close to half of all foreign investment in the money-spinning market for Russian domestic bonds were placed through FIMACO's nominal parent company, Eurobank and, possibly, through its subsidiary, co-owned with FIMACO, Eurofinance Bank. Nor is Dubinin more credible when he denies that profits and commissions were accrued in FIMACO and then drained off. FIMACO's investment management agreement with Eurobank, signed in 1993, entitled it to 0.06 percent of the managed funds per quarter.
Slide 97: Even accepting the central banker's ludicrous insistence that the balance never exceeded $1.4 billion - FIMACO would have earned $3.5 million per annum from management fees alone - investment profits and brokerage fees notwithstanding. Even Eurobank's president at the time, Andrei Movchan, conceded that FIMACO earned $1.7 million in management fees. The IMF insisted that the PwC reports exonerated all the participants. It is, therefore, surprising and alarming to find that the online copies of these documents, previously made available on the IMF's Web site, were "Removed September 30, 1999 at the request of PricewaterhouseCoopers". The cover of the main report carried a disclaimer that it was based on procedures dictated by the central bank and "... consequently, we (PwC) make no representation regarding the sufficiency of the procedures described below ... The report is based solely on financial and other information provided by, and discussions with, the persons set out in the report. The accuracy and completeness of the information on which the report is based is the sole responsibility of those persons. ... PricewaterhouseCoopers have not carried out any verification work which may be construed to represent audit procedures ... We have not been provided access to Ost West Handelsbank (the recipient of a large part of the $4.8 IMF tranche)"
Slide 98: The scandal may have hastened the untimely departure of the IMF's Managing Director at the time, Michel Camdessus, though this was never officially acknowledged. The US Congress was reluctant to augment the Fund's resources in view of its controversial handling of the Asian and Russian crises and contagion. This reluctance persisted well into the new millennium. A congressional delegation, headed by James Leach (R, Iowa), Chairman of the Banking and Financial Services Committee, visited Russia in April 2000, accompanied by the FBI, to investigate the persistent contentions about the misappropriation of IMF funds. Camdessus himself went out of his way to defend his record and reacted in an unprecedented manner to the allegations. In a letter to Le Mond, dated August 18, 1999 - and still posted on the IMF's Web site, three years later he wrote, inadvertently admitting to serious mismanagement: "I wish to express my indignation at the false statements, allegations, and insinuations contained in the articles and editorial commentary appearing in Le Monde on August 6, 8, and 9 on the content of the PricewaterhouseCoopers (PWC) audit report relating to the operations of the Central Bank of Russia and its subsidiary, FIMACO.
Slide 99: Your readers will be shocked to learn that the report in question, requested and made public at the initiative of the IMF ... (concludes that) no misuse of funds has been proven, and the report does not criticize the IMF's behavior ... I would also point out that your representation of the IMF's knowledge and actions is misleading. We did know that part of the reserves of the Central Bank of Russia was held in foreign subsidiaries, which is not an illegal practice; however, we did not learn of FIMACO's activities until this year--because the audit reports for 1993 and 1994 were not provided to us by the Central Bank of Russia. The IMF, when apprised of the possible range of FIMACO activities, informed the Russian authorities that it would not resume lending to Russia until a report on these activities was available for review by the IMF and corrective actions had been agreed as needed ... I would add that what the IMF objected to in FIMACO's operations extends well beyond the misrepresentation of Russia's international reserves in mid-1996 and includes several other instances where transactions through it had resulted in a misleading representation of the reserves and of monetary and exchange policies. These include loans to Russian commercial banks and investments in the GKO market." No one accepted - or accepts - the IMF's convoluted postfacto "clarifications" at face value. Nor was Dubinin's tortured sophistry - IMF funds cease to be IMF funds when they are transferred from the Ministry of Finance to the central bank - countenanced.
Slide 100: Even the compromised office of the Russian ProsecutorGeneral urged Russian officials, as late as July 2000, to re-open the investigation regarding the diversion of the funds. The IMF dismissed this sudden burst of rectitude as the rehashing of old stories. But Western officials interviews by Radio Free Europe/Radio Liberty - begged to differ. Yuri Skuratov, the former Prosecutor-General, ousted for undue diligence, wrote in a book he published two years ago, that only c. $500 million of the $4.8 were ever used to stabilize the ruble. Even George Bush Jr., when still a presidential candidate accused Russia's former Prime Minister Viktor Chernomyrdin of complicity in embezzling IMF funds. Chernomyrdin threatened to sue. The rot may run even deeper. The Geneva daily "Le Temps", which has been following the affair relentlessly, accused, two years ago, Roman Abramovich, a Yeltsinera oligarch and a member of the board of directors of Sibneft, of colluding with Runicom, Sibneft's trading arm, to misappropriate IMF funds. Swiss prosecutors raided Runicom's offices just one day after Russian Tax Police raided Sibneft's Moscow headquarters. Absconding with IMF funds seemed to have been a pattern of behavior during Yeltsin's venal regime. The columnist Bradley Cook recounts how Aldrich Ames, the mole within the CIA, "was told by his Russian control officer during their last meeting, in November 1993, that the $130,000 in fresh $100 bills that he was being bribed with had come directly from IMF loans." Venyamin Sokolov, who headed the Audit Chamber prior to Sergei
Slide 101: Stepashin, informed the US Senate of $2 billion that evaporated from the coffers of the central bank in 1995. Even the IMF reluctantly admits: "Capital transferred abroad from Russia may represent such legal activities as exports, or illegal sources. But it is impossible to determine whether specific capital flows from Russia-legal or illegal-come from a particular inflow, such as IMF loans or export earnings. To put the scale of IMF lending to Russia into perspective, Russia's exports of goods and services averaged about $80 billion a year in recent years, which is over 25 times the average annual disbursement from the IMF since 1992."
Slide 102: The Chechen Theatre Ticket By: Dr. Sam Vaknin Also published by United Press International (UPI) One hundred and eighteen hostages and 50 of their captors died in the heavy handed storming of the theatre occupied by Chechen terrorists four days ago. This has been only the latest in a series of escalating costs in a war officially terminated in 1997. On August 22, a helicopter carrying 115 Russian servicemen and unauthorized civilians went down in flames. The Russian military is stretched to its limits. Munitions and spare parts are in short supply. The defense industry shrunk violently following the implosion of the USSR. Restarting production of small-ticket items is prohibitively expensive. Even bigger weapon systems are antiquated. A committee appointed by the Duma, Russia's lower house of parliament, found that the average age of the army's helicopters is 20. Russia lost dozens of them hitherto and does not have the wherewithal to replace them. The Russian command acknowledges 3000 fatalities and 8000 wounded but the numbers are probably way higher. The Committee of Soldiers' Mothers pegs the number of casualties at 12-13,000. Unpaid, disgruntled, and undersupplied troops exert pressure on their headquarters to airstrafe Chechnya, to withdraw, or to multiply the money budgeted to support the ill-fated operation.
Slide 103: Russia maintains c. 100,000 troops in Chechnya, including 40,000 active soldiers and 60,000 support and logistics personnel. The price tag is sizable though not unsustainable. As early as October 1999, the IMF told Radio Free Europe/Radio Liberty: "Yes, we're concerned that it could undermine the progress in improving (Russia's) public finances." As they did in the first Chechen conflict in 1994-6, both the IMF and the World Bank reluctantly kept lending billions to Russia throughout the current round of devastation. A $4.5 billion arrangement was signed with Russia in July 1999. Though earmarked, funds are fungible. The IMF has been accused by senior economists, such as Jeffrey Sachs and Marshall Goldman, of financing the Russian war effort against the tiny republic and its 1.5 million destitute or internally displaced citizens. Even the staid Jane's World Armies concurred. No one knows how much the war has cost Russia hitherto. It is mostly financed from off-budget clandestine bank accounts owned and managed by the Kremlin, the military, and the security services. Miriam Lanskoy, Program Manager at the Institute for the Study of Conflict, Ideology and Policy at Boston University, estimated for "NIS Observed" and "The Analyst" that Russia has spent, by November 2001, c. $8 billion on the war, money sorely needed to modernize its army and maintain its presence overseas.
Slide 104: Russia was forced to close, post haste, bases in Vietnam and Cuba, two erstwhile pillars of its geopolitical and geostrategic presence. It was too feeble to capitalize on its massive, multi-annual assistance to the Afghan Northern Alliance in both arms and manpower. The USA effortlessly reaped the fruits of this continuous Russian support and established a presence in central Asia which Russia will find impossible to dislodge. The Christian Science Monitor has pegged the cost of each month in the first three months of offensive against the separatists at $500 million. This guesstimate is supported by the Russians but not by Digby Waller, an economist at the International Institute for Strategic Studies (IISS), a London-based military think tank. He put the real, out-of-pocket expense at $110 million a month. Other experts offer comparable figures - $100-150 a month. Similarly, Jane's Defense Weekly put the outlay at $40-50 million a day - but most of it in cost-free munitions produced during Soviet times. A leading Soviet military analyst, Pavel Felgengauer, itemized the expenditures. The largest articles are transport, fuel, reconstruction of areas shattered by warfare, and active duty bonuses to soldiers. The expense of this brawl exceed the previous scuffle's. The first Chechen war is estimated to have cost at most $5.5 billion and probably between $1.3 and $2.6 billion. Russia allocated c. $1 billion to the war in its 2000 budget. Another $263 million were funded partly by Russia's behemoth electricity utility, UES. Still, these figures are misleading underestimates.
Slide 105: According too the Rosbalt News Agency, last year, for instance, Russia was slated to spend c. $516 million on rebuilding Chechnya - but only $158 million of these resources made it to the budget. Russia has been lucky to enjoy a serendipitous confluence of an export-enhancing and import-depressing depreciated currency, tax-augmenting inflation, soaring oil prices, and Western largesse. It is also a major producer and exporter of weapons. Chechnya serves as testing grounds where proud designers and trigger-craving generals can demonstrate the advantages and capabilities of their latest materiel. Some - like the Institute of Global Issues - say that the war in Chechnya has fully self-financed by reviving the military-industrial complex and adding billions to Russia's exports of armaments. This surely is a wild hyperbole. Chechnya - a potentially oil-rich territory - is razed to dust. Russia is ensnared in an ever-escalating cycle of violence and futile retaliation. Its society is gradually militarized and desensitized to human rights abuses. Corruption is rampant. Russia's Accounting Board disclosed that a whopping 12 percent of the money earmarked to fight the war two years ago has vanished without a trace. About $45 million dollars in salaries never reached their intended recipients - the soldiers in the field. Top brass set up oil drilling operations in the ravaged territory.
Slide 106: They are said by Rosbalt and "The Economist" to be extracting up to 2000 tons daily - double the amount the state hauls. Another 7000 tons go up in smoke due to incompetence and faulty equipment. There are 60 oil wells in Grozny alone. Hence the predilection to pursue the war as leisurely - and profitably - as possible. Often in cahoots with their ostensible oppressors, dispossessed and dislocated Chechens export crime and mayhem to Russia's main cities. The war is a colossal misallocation of scarce economic resources and an opportunity squandered. Russia should have used the windfall to reinvent itself - revamp its dilapidated infrastructure and modernize its institutions. Oil prices are bound to come down one day and when they do Russia will discover the true and most malign cost of war - the opportunity cost.
Slide 107: Russia's Israeli Oil Bond By: Dr. Sam Vaknin Also published by United Press International (UPI) Also Read Russian Roulette - The Energy Sector Last week, Russia and Israel - erstwhile bitter Cold War enemies - have agreed to make use of Israel's neglected oil pipeline, known as the Tipline. The conduit, an IranianIsraeli joint venture completed in 1968 is designed to carry close to a million barrels per day, circumventing the Suez canal. It rarely does, though. The Shah was deposed in 1979, Egypt became a pivotal Western ally, the Israelideveloped Sinai oil fields were returned to Egypt in the early 1980's, and, in a glutted market, Israel resorted to importing 99 percent of the 280,000 barrels it consumes daily. According to Stratfor, the Strategic Forecasting consultancy, "tankers bearing Russian crude from the Black Sea port of Novorossiysk would unload at Israel's Mediterranean port of Ashkelon. After that, the oil would traverse the Tipline to Israel's Red Sea port of Eilat, where it would be reloaded onto tankers for shipment to Asia. The Eilat-Ashkelon Pipeline Co. estimates the pipeline will be ready for Russian crude in mid-2003."
Slide 108: Russia is emerging as a major oil supplier and a serious challenge to the hegemony of Saudi Arabia and OPEC. Even the USA increasingly taps the Russian market for crude and derivatives. With Arab countries - including the hitherto unwaveringly loyal Gulf states - progressively perceived as hostile by American scholars and decision makers, Russia arises as a potent alternative. The newfangled Russian-Israeli commercial alliance probably won applause from Washington hardliners, eager to relieve the Saudi stranglehold on energy supplies. Quoted by the American Foreign Policy Council, Russia's Energy Minister, Igor Yusufov, addressing the RussianUS Energy Forum in Houston, Texas, last month said that "the high degree of economic and political stability that the Russian Federation has achieved makes it a reliable supplier of oil and gas." He expressed his belief - shared by many analysts - that Russia will become a major exporter of oil to the USA "in the foreseeable future". According to the Dow Jones Newswires, private Russian oil firms, such as Lukoil, are heavily invested in US gas stations and refineries in anticipation of these inevitable developments. As if to underline these, the Financial Times reported, on October 3, a purchase of 300,000 barrels of oil from the Russian Tyumen Oil company. The deal with Israel will allow Russia to peddle its oil in the Asian market, a major export target and a monopoly of the Gulf producers.
Slide 109: Russia is in the throes of constructing several pipelines to Asia through its eastern territories and Pacific coastline but completion dates are uncertain. For its part, according to the Department of Energy, Israel extracts natural gas from offshore fields but has no commercial fossil fuel resources of its own. It imports oil from Mexico, Norway, and the United Kingdom and coal from as far away as Australia, Colombia, and South Africa. Israel buys natural gas and oil from Egypt. The bulk of the energy sector is moribund and state-owned, ostensibly for reasons of national security. The deal with Russia is a godsend. Israel is perfectly located to offer an affordable alternative to expensive and often clogged oil shipping lanes through the Suez Canal or the Cape. A revival of the TransArabian pipeline (Tapline) to Haifa can considerably under-price the politically wobbly Iraqi-Turkish and the costly Suez-Mediterranean (Sumed) alternatives. With one of every five Israelis a Russian émigré and confronted with the common enemy of Islamic militancy, Israel and Russia have embarked on a path of close cooperation. Prime Minister Sharon's visit to Russia last month was a resounding success. Faced with these millennial geopolitical developments, anti-Semitic conspiracy theorists are having a field day.
Slide 110: The Jewish lobby, they say, is coercing America, its long arm, to hijack the Iraqi oil fields in the forthcoming war and thus to counterbalance surging Russian oil exports. Israel, they aver, planned to carry out, in October 2001, an operation - "Mivtza Shekhina" - to secure southern Iraq's oil fields while also mitigating the threat of weapons of mass destruction aimed at its population centers. Conspiratorial paranoia notwithstanding, it is unlikely that the USA is motivated by oil interests in its war on Saddam. A battle in Iraq aimed solely at apprehending its crude would be fighting over yesterday's oilfields. Only an easily replaceable one tenth to one eighth of American oil consumption emanates from the Gulf, about a million barrels per day of it from Iraq. Moreover, the war is likely to alienate far more important suppliers, such as Russia as well as the largest European clients of Gulf oil extracted by American firms. Strictly in terms of oil, a war in Iraq is counterproductive. Additionally, such a war is likely to push oil prices up. According to the Council on Foreign Relations, "for every dollar-per-barrel increase in oil prices, about $4 billion a year would leave America's $11 trillion economy, and other importing countries would lose another $16 billion per year." Israel understandably did discuss with the USA its role in a showdown with Iraq. Russia, unsettled as it is by America's growing presence in central Asia and exercised by its determination to take on Iraq - may be trying to lure Israel away from its automatic support of US goals by dangling the oiled carrot of a joint pipeline.
Slide 111: Russia also hopes to neuter the rapprochement between Israel and the Islamic nations of Turkey and Azerbaijan, traditional adversaries of Moscow. Israel is the second largest buyer of oil from Azerbaijan. It is one of the sponsors of a pipeline from the Baku oilfields to the port of Ceyhan in Turkey. The pipeline stands to compete with a less costly and more hostile to the West Russian-Iranian route. These are momentous times. Oil is still by far the most strategic commodity and securing its uninterrupted flow is essential to the functioning of both developed and developing countries. There is a discernible tectonic shift in production and proven reserves from the Persian Gulf, the US except Alaska, the North Sea, and Latin America to northern Europe, Russia, and the Caspian Basin. Yet, oil is still a buyers' market. OPEC has long been denuded of its mythical power and oil prices - even at the current interim peak - are still historically low in real terms. But Russia stands to gain whichever way. Middle East tensions, in Palestine and Iraq, have ratcheted oil prices up resulting in a much-needed budgetary windfall. Russia's mostly-privatized oil industry has cleverly ploughed back its serendipitous profits into pipelines, drilling, and exploration. When the dust settles in the deserts of Arabia, Russia will emerge victorious with the largest oil market share. Israel is not oblivious to this scenario.
Slide 112: Russia's Idled Spies By: Dr. Sam Vaknin Also published by United Press International (UPI) Also Read The Industrious Spies Russian Roulette - The Security Apparatus Sweden expelled yesterday two Russian diplomats for spying on radar and missile guidance technologies for the JAS 39 British-Swedish Gripen fighter jet developed by Telefon AB LM Ericsson, the telecommunications multinational. The Russians threatened to reciprocate. Five current and former employees of the corporate giant are being investigated. Ironically, the first foreign buyer of the aircraft may well be Poland, a former Soviet satellite state and a current European Union candidate. Sweden arrested in February last year a worker of the Swiss-Swedish engineering group, ABB, on suspicion of spying for Russia. The man was released after two days for lack of evidence and reinstated. But the weighty Swedish daily, Dagens Nyheter, speculated that the recent Russian indiscretion was in deliberate retaliation for Swedish espionage in Russia. Sweden is rumored to have been in the market for Russian air radar designs and the JAS radar system is said by some observers to uncannily resemble its eastern counterparts.
Slide 113: The same day, a Russian military intelligence (GRU) colonel, Aleksander Sipachev, was sentenced in Moscow to eight years in prison and stripped of his rank. According to Russian news agencies, he was convicted of attempting to sell secret documents to the CIA. Russian secret service personnel, idled by the withering of Russia's global presence, resort to private business or are redeployed by the state to spy on industrial and economic secrets in order to aid budding Russian multinationals. According to the FBI and the National White-collar Crime Center, Russian former secret agents have teamed with computer hackers to break into corporate networks to steal vital information about product development and marketing strategies. Microsoft has recently admitted to such a compromising intrusion. In a December 1999 interview to Segodnya, a Russia paper, Eyer Winkler, a former high-ranking staffer with the National Security Agency (NSA) confirmed that "corruption in the Russian Government, the Foreign Intelligence Service, and the Main Intelligence Department allows Russian organized criminal groups to use these departments in their own interests. Criminals receive the major part of information collected by the Russian special services by means of breaking into American computer networks." When the KGB was dismantled and replaced by a host of new acronyms, Russian industrial espionage was still in diapers. as a result, it is a bureaucratic no-man's land roamed by agents of the GRU, the Foreign Intelligence Service (SVR), and smaller outfits, such as the Federal
Slide 114: Agency on Government Communications and Information (FAPSI). According to Stratfor, the strategic forecasting consultancy, "the SVR and GRU both handle manned intelligence on U.S. territory, with the Russian Federal Security Service (FSB) doing counterintelligence in America. Also, both the SVR and GRU have internal counterintelligence units created for finding foreign intelligence moles." This, to some extent, is the division of labor in Europe as well. Germany's Federal Prosecutor has consistently warned against $5 billion worth of secrets pilfered annually from German industrial firms by foreign intelligence services, especially from east Europe and Russia. The Counterintelligence News and Developments newsletter pegs the damage at $13 billion in 1996 alone: "Modus operandi included placing agents in international organizations, setting up joint-ventures with German companies, and setting up bogus companies. The (Federal Prosecutor's) report also warned business leaders to be particularly wary of former diplomats or people who used to work for foreign secret services because they often had the language skills and knowledge of Germany that made them excellent agents." Russian spy rings now operate from Canada to Japan. Many of the spies have been dormant for decades and recalled to service following the implosion of the USSR. According to Asian media, Russians have become increasingly active in the Far East, mainly in Japan, South Korea, Taiwan, and mainland China.
Slide 115: Russia is worried about losing its edge in avionics, electronics, information technology and some emerging defense industries such as laser shields, positronics, unmanned vehicles, wearable computing, and real time triple C (communication, command and control) computerized battlefield management. The main targets are, surprisingly, Israel and France. According to media reports, the substantive clients of Russia's defense industry - such as India - insist on hollowing out Russian craft and installing Israeli and west European systems instead. Russia's paranoid state of mind extends to its interior. Uralinformbureau reported earlier this year that the Yamal-Nenets autonomous okrug (district) restricted access to foreigners citing concerns about industrial espionage and potential sabotage of oil and gas companies. The Kremlin maintains an ever-expanding list of regions and territories with limited - or outright forbidden - access to foreigners. The FSB, the KGB's main successor, is busy arresting spies all over the vast country. To select a random events of the dozens reported every year - and many are not - the Russian daily Kommersant recounted in February how when the Trunov works at the Novolipetsk metallurgical combine concluded an agreement with a Chinese company to supply it with slabs, its chief negotiator was nabbed as a spy working for "circles in China". His crime? He was in possession of certain documents which contained "intellectual property" of the crumbling and antiquated mill pertaining to a slab quality enhancement process.
Slide 116: Foreigners are also being arrested, though rarely. An American businessman, Edmund Pope, was detained in April 2000 for attempting to purchase the blueprints of an advanced torpedo from a Russian scientist. There have been a few other isolated apprehensions, mainly for "proper", military, espionage. But Russians bear the brunt of the campaign against foreign economic intelligence gathering. Strana.ru reported last December that, speaking on the occasion of Security Services Day, Putin - himself a KGB alumnus - warned veterans that the most crucial task facing the services today is "protecting the country's economy against industrial espionage." This is nothing new. According to History of Espionage Web site, long before they established diplomatic relations with the USA in 1933, the Soviets had Amtorg Trading Company. Ostensibly its purpose was to encourage joint ventures between Russian and American firms. Really it was a hub of industrial undercover activities. Dozens of Soviet intelligence officers supervised, at its peak during the Depression, 800 American communists. The Soviet Union's European operations in Berlin (Handelsvertretung) and in London (Arcos, Ltd.) were even more successful.
Slide 117: Russia's Middle Class By: Dr. Sam Vaknin Also published by United Press International (UPI) Also Read Women in Transition A conference held, at the beginning of the month, in St. Petersburg, was aptly titled "Middle Class - The Myths and the Reality". Russia is way poorer than Slovenia, the Czech Republic, Hungary, or even Poland. But, as income disparities grow, a group of discriminating consumers with the purchasing power to match, is re-emerging, having been submerged by the 1998 implosion of the financial sector. The typical salary in the large metropolises is now more than $600 per month - four times the meager national average. Some 20 percent of the workforce in Moscow earns more than $1700 a month, comparable to many members of the European Union. Real average wages across Russia have surpassed the pre-1998 level in May. Moreover, Russians are unburdened by debt and their utility bills and food are heavily subsidized, though decreasingly so. Few pay taxes - lately dramatically reduced and simplified - and even fewer save. Every rise in disposable income is immediately translated to unadulterated consumption. Takings are understated Russia's informal economy is probably half as big as its formal sector.
Slide 118: A study, financed by the Carnegie Foundation, found that only 7 percent of Russians qualify as middle class. Another 12 percent or so have some bourgeois characteristics. Sixty percent of them are men, though the Komkon marketing research agency says that the genders are equally represented. Figures culled from the census conducted this year throughout the Russian Federation - the first since 1989 are expected to confirm these findings. About one fifth to one quarter of all Russian households earn more than the average monthly income of $150 per person. Political parties which purport to represent the middle class - such as the Union of the Forces of the Right (SPS) - garnered 10-15 percent of the votes in the 1999 parliamentary elections. Direct action groups of the "third estate" may transform the political landscape in forthcoming elections. In a recent study by sociologists from the Russian Academy of Sciences' Institute of Philosophy, more than half of all Russians self-flatteringly considered themselves middle class. This is delusional. Even the optimistic research firm Premier-TGI pegs the number at 19 percent at most. Businesses adapt to these new demands of shifting tastes and preferences. The St. Petersburg-based cellular operator Delta Telecom, owner of the first license to provide wireless-communications services in Russia, intends to test the market among middle class clients.
Slide 119: Ikea, the Swedish home improvement chain, has plunged $200 million into a new shopping center. French, German and Dutch cash-and-carry and do-it-yourself groups are slated to follow. Russian competitors, every bit as sleek, have erupted on the scene. The investment spree has engulfed the provinces as well. Last month, Citibank opened a retail outlet for affluent individuals in Moscow - though its standards of transparency may yet scare them off, as Gazeta.ru observed astutely. A private cemetery in Samara caters to the needs of the expired newly rich. Opulently-stocked emporiums have sprouted in all urban centers. TV shopping and even online commerce are on the up. According to the Washington Post, Moscow retail space will have tripled by the end of next year from its level at the beginning of 2002. The Russian Expert magazine says that the middle class, minuscule as it is, accounted last year for a staggering 55 percent of all consumer goods purchased and generates one third of Russia's gross domestic product. The middle class is Russia's most important engine of wealth formation and investment, far outweighing foreign capital. Russia's post-1998 fledgling middle class is described as young, well-educated, well-traveled, communityorientated, entrepreneurial and suffused with work ethic and a desire for social mobility. It is almost as if the crisis four years ago served as a purgatory, purging sins and sinners alike and creating the conditions for the revival of a healthier, longer-lived, bourgeoisie.
Slide 120: But being middle class is a state of mind more than a measure of wealth. It is an all-encompassing worldview, a set of values, a code of conduct, a list of goals, aspirations, fantasies and preferences and a catalog of moral do's and don'ts. This is where transition, micromanaged by western "experts" failed. The mere exposure to free markets was supposed to unleash innovation and entrepreneurship in the longoppressed populations of east Europe. When this prescription - known as "shock therapy" - bombed, the West tried to engender a stable, share-holding, businessowning, middle class by financing small size enterprises. It then proceeded to strengthen and transform indigenous institutions. None of it worked. Transition had no grassroots support and its prescriptive - and painful - nature caused wide resentment and obstruction. When the dust settled, Russia found itself with a putative - and puny - middle class. But it was an anomalous beast, very different from its ostensible European or American counterparts. To start with, Russia's new middle class is a distinct minority. Prism, a publication of the Jamestown Foundation, quoted, in its August 2001 issue, the Serbian author Milorad Pavic as saying that "the Russian middle class is like a young generation whose fathers suffered a severe defeat in a war: with no feeling of guilt and no victorious fathers to boss them around, the children of defeat see no obstacles before them."
Slide 121: But this metaphor is misleading. The Russian middle class is a nascent exception - not an overarching rule. As Akos Rona-Tas, Associate Professor in the Sociology Department at the University of California, San Diego, notes correctly in his paper "Post Communist Transition and the Absent Middle Class in Central East Europe", a middle class that is in the minority is an oxymoron: "In democracies the middle class is the nation proper. The typical member of a national community is a member of the middle class. When democratic governments need a social group they can address, a universal class that carries the overarching, common interest of the country, they appeal to the middle class. This appeal, while it calls on a common interest, also acknowledges that there are conflicting interests within society. The middle class is not everyone, but it is the majority and it represents what everyone else can become." Russia has a long way to go to achieve this ubiquity. Its middle class, far from representing the consensus, reifies the growing abyss between haves and haves not. Its members' conspicuous consumption, mostly of imports, does little to support the local economy. Its political might is self-serving. It has no ethos, or distinct morality, no narrative, or ideology. The Russian middle class is at a Hobbesian and primordial stage.
Slide 122: Whether it emerges from its narcissistic cocoon to become a leading and guiding social force, is doubtful. The middle class' youth, urbaneness, cosmopolitanism, polyglotism, mobility, avarice and drive are viewed with suspicion and envy by the great unwashed - the overwhelming majority of Russia's destitute population. Empowered by their wealth, the new bourgeoisie, in turn, regards the "people" with naive admiration, patronizing condescension, or horror. Granted, this muted, subterranean, interaction is not entirely deleterious. It is the social role of the rich to generate demand by provoking in the poor jealousy and attempts at emulation. The wealthy are the trendsetters, the early adopters, the pioneers, the buzz leaders. They are the engine that engenders social and economic mobility. A similar dynamic is admittedly evident in Russia - but, again, it is tampered by a curious local phenomenon. Writing for the Globalist, two Brookings Institution scholars, Carol Graham, a Senior Fellow of Economic Studies and Clifford Gaddy, a Fellow of Foreign Policy and Governance Studies described it thus: "The eyes of Russia's middle class, on the other hand, are figuratively directed downward, towards the poor. In fact, as poverty in Russia increased dramatically in the 1990s, the middle class's reference norms shifted downward as well. As a result, Russia may be the only country in the world where the "subjective poverty line" is falling.
Slide 123: That is, the amount of money that Russians say that they need in order to stay out of poverty has been steadily falling over the past five years. It is even below the objective poverty line. For the time being, at least, these curious Russian attitudes, along with the existence of the non-monetary virtual economy, have insulated the country against political upheaval." The list of anomalies is not exhausted. The new middle class comprises the embryonic legitimate business elite - entrepreneurs, professionals and managers - but not the remnants of the financially strapped intelligentsia. It is brawn with little brains. In dissonance with western Europe, according to a survey published in the last two years by Expert magazine, the majority of its members are nationalistic, authoritarian and xenophobic. Their self-interested economic liberalism is coupled with social and political intolerance. But two thirds of them support some kind of welfare state. Thus, there are major differences between the middle class in the West and its ostensible counterpart in Russia. The Russian parvenus - many of them women - do not believe their state, their banks, or their compatriots. They fear a precarious future and its inevitable calamities though they are not risk averse and are rather optimistic in the short run. They keep their money under the proverbial mattress, invest it surreptitiously in their ventures, or smuggle it abroad. They are not - yet - stakeholders in their country's stability and prosperity.
Slide 124: Often bamboozled by other businessmen and fleeced by a rapacious bureaucracy, they are paranoid. Tax evasion is still rampant, though abating. They trust in equity and avoid debt. Some of them have criminal roots or a criminal mindset - or are former members of Russia's shady security services. Three fifths, according to the Expert-Komkon survey, find it "hard to survive" when "observing all laws". "Strong leaders are better than all sorts of laws" is their motto, quoted by Izvestia. Generally, they are closer to being robbers than barons. Early capitalism is always unruly. It is transformed into a highly structured edifice by the ownership of land and realty (the prime collateral), the protection of private property, a functioning financial system comprised of both banks and capital markets and the just and expedient application of the rule of law. Russia has none of these. According to Business Week, bank deposits amount to 4 percent of the country's midsize GDP - compared to half of GDP in other industrialized countries. Mortgages are unheard of, deposits are not insured and land ownership is a novel proposition. The judiciary is venal and incompetent. Might is still right in vast swathes of the land.
Slide 125: The state and the oligarchs continue to represent a rentseeking opportunity. Businessmen spend time seeking concessions, permits, exemptions and licenses rather than conducting business. The "civic institutions" they form chambers of commerce, clubs - are often mere glorified lobbying outfits of special and vested interests. Informal networks of contacts count more than any statute or regulation. In such a mock "modern state" no wonder Russia ended up with a Potemkin "middle class".
Slide 126: Russia in 2003 By: Dr. Sam Vaknin Also published by United Press International (UPI) Contrary to recent impressions, Russia's Western (American-German) orientation is at least as old as Gorbachev's reign. It was vigorously pursued by Yeltsin. Still, 2002 marks the year in which Russia became merely another satellite of the United States - though one armed with an ageing nuclear arsenal. Russia's economy has revived remarkably after the 1998 crisis, but it is still addicted to Western investments, aid and credits. Encircled by NATO to its West and US troops stationed in its central Asian hinterland, Russia's capitulation is complete. In the aftermath of conflicts to be engineered by the United States in Afghanistan, Iraq, North Korea, Iran, Syria and, potentially, Cuba - Russia may feel threatened geopolitically as well as economically. Both Iran and Iraq, for instance, are large trading partners and leading export destinations of the Russian Federation. If anything can undo the hitherto impressive personality cult of Russia's new "strong man", Vladimir Putin, it is this injured pride among the more penumbral ranks of the country's security services. Russia's history is littered with the bloodied remains of upheavals wrought by violent ideological minorities and by assorted conspirators.
Slide 127: Hence Putin's tentative - and reluctant - attempts to team up with China and India to establish a multi-polar world and his closer military cooperation with Kyrgyzstan and Armenia - both intended to counter nationalistic opposition at home. Luckily, the sense of decline is by no means prevalent. Russians polled by the American Pew Research Center admitted that they feel much better in a world dominated by the United States as a single superpower. The KGB and its successors - Putin's former long-term employers actually engineered Russia's opening to the West and the president's meteoric ascendancy. And no one in the army seriously disputes the need for reform, professionalization and merciless trimming of the bloated corps. Reforms - of the military, Russia's decrepit utilities, dilapidated infrastructure and housing, inflated and venal bureaucracy, corrupt judiciary and civil service, choking monopolies and pernicious banking sector - depend on the price of oil. Russia benefited mightily from the surge in the value of the "black gold". But the windfall has helped mask pressing problems and allowed timid legislators and officials to postpone much needed - and fiercely resisted changes. Russia's "economic miracle" - oft-touted by the "experts" that brought you "shock therapy" and by egregiously selfinterested, Moscow-based, investment bankers - is mostly prestidigitation. As the European Bank for Reconstruction and Development (EBRD) correctly noted in November, Russia's 20 percent growth in the last three years merely reflects enhanced usage of capacity idled by the ruination of 1998.
Slide 128: Neutering the positive externality of rising oil prices, one is left with no increase in productivity since 1999. Industrial production - outside the oil sector - actually slumped. As metropolitan incomes rise, Russians revert to imports rather than consume shoddy and shabby local products. This, in turn, adversely affects the current account balance and the viability of local enterprises, some of which are sincerely attempting to restructure. According to Trud, a Russian business publication, two fifths of the country's businesses are in the red. Russia's number of small and medium enterprises peaked at 1 million in 1995-6. They employ less than one fifth of the workforce (compared to two thirds in the European Union and in many other countries in transition). Thus, falling oil prices - though detrimental to Russia's ability to repay its external debt and balance its budget are a blessing in disguise. Such declines will force the hand of the Putin administration to engage in some serious structural reform - even in the face of parliamentary elections in 2003 and presidential ones the year after. Russians - wrongly - feel that their standard of living has stagnated. Gazeta.ru claims that 39 million people are below the poverty line. Many pensioners survive on $1 a day. In truth, real income per capita is actually up by more than 8 percent this year alone. Income inequality, though, has, indeed, gaped.
Slide 129: Responding to these concerns, though, in a "coattails" effect, the president is expected to carry pro-Kremlin parties back into power in 2003 - a modicum of electionsinspired bribing is inevitable. State wages and pensions will outpace inflation. The energy behemoths - major sources of campaign financing - will be rewarded with rises in tariffs to match cost of living increases. Russia faces more than merely a skewed wealth distribution or dependence on mineral wealth. Its difficulties are myriad. On cue from Washington, it is again being hyped in the Western press as a sure-fire investment destination and a pair of safe geostrategic hands. But the dismal truth is that it is a third world country with first world pretensions (and nuclear weapons). It exhibits all the risks attendant to other medium-sized developing countries and emerging economies. External debt repayments next year will exceed $15 billion. It can easily afford them with oil prices anywhere above $20 and foreign exchange reserves the highest since 1991. Russia even prepaid some of its debt mountain this year. But if its export proceeds were to decline by 40 percent in the forthcoming 3-4 years, Russia will, yet again, be forced to reschedule or default. Every $1 dollar decline in Ural crude prices translates to more than $1 billion lost income to the government.
Slide 130: Russia's population is both contracting and ageing. A ruinous pension crisis is in the cards unless both the rundown health system and the abysmally low birthrate recover. Immigration of ethnic Russians from the former republics of the USSR to the Russian Federation has largely run its course. According to Pravda.ru, more than 7 million people emigrated from the Federation in the last decade. Russia's informal sector is a vital, though crime-tainted, engine of growth. Laundered money coupled with reinvested profits - from both legitimate and illicit businesses - drive a lot of the private sector and underlie the emergence of an affluent elite, especially in Moscow and other urban centers. According to the Economist Intelligence Unit, Goskomstat - the State Statistics Committee - regularly adjusts the formal figures up by 25 percent to incorporate estimates of the black economy. Russia faces a dilemma: to quash the economic underground and thus enhance both tax receipts and Russia's image as an orderly polity - or to let the pent-up entrepreneurial forces of the "gray sectors" work their magic? Russia is slated to join the World Trade Organization in 2004. This happy occasion would mean deregulation, liberalization and opening up to competition - all agonizing moves. Russian industry and agriculture are not up to the task. It took a massive devaluation and a debilitating financial crisis in 1998 to resurrect consumer appetite for indigenous goods.
Slide 131: Farming is mostly state-owned, or state-sponsored. Monopolies, duopolies and cartels make up the bulk of the manufacturing and mining sectors - especially in the wake of the recent tsunami of mergers and acquisitions. The Economist Intelligence Unit quotes estimates that 20 conglomerates account for up to 70 percent of the country's $330 billion GDP. The oligarchs are still there, lurking. The banks are still paralyzed and compromised, though their retail sector is reviving. Russians are still ambivalent about foreigners. Paranoid xenophobia was replaced by guarded wariness. Recently, Russia revoked the fast track work permit applications hitherto put to good use by managers, scholars and experts from the West. Foreign minority shareholders still complain of being ripped-off by powerful, well-connected - and minacious - business interests. With the bloody exception of Chechnya, Putin's compelling personality has helped subdue the classic tensions between center and regions. But, as Putin himself admitted in a radio Q-and-A session on December 19, this peaceful co-existence is fraying at the edges. The president will try to reach a top-down political settlement in the renegade province prior to the 2004 elections, but will fail. Reform is anathema to many suborned governors of the periphery and the Kremlin's miserly handouts are insufficient to grant it a decisive voice in matters provincial. Devolution - a pet Putin project - is more about accepting an unsavory reality than about re-defining the Russian state.
Slide 132: The economic disparity between rural and urban is striking. The Economist Intelligence Unit describes this chasm thus: "The processing industry is concentrated in the cities of Moscow, St Petersburg, Yekaterinburg and Nizhny Novgorod. These larger cities have managed the transition relatively well, as size has tended to bring with it industrial diversity; smaller industrial centers have fared far worse. The Soviet regime created new industrial centers such as Tomsk and Novosibirsk, but Siberia and the Russian Far Eastern regions remain largely unindustrialised, having traditionally served as a raw materials and energy base. Owing to the boundless faith of Soviet planners in the benefits of scale, one massive enterprise, or a small group of related enterprises, often formed the basis for the entire local economy of a substantial city or region. This factor, compounded by the absence of unemployment benefits, makes the closure of bankrupt enterprises a politically difficult decision." The politically incorrect truth is that Russia's old powerstructure is largely intact, having altered only its ideological label. It is as avaricious, nefarious and obstructive as ever. Nor does the Russian state sport any checks and balances. Its institutions are suspect, its executive untouchable, its law enforcement agencies delinquent. Russians still hanker after "men of iron" and seek tradition rather than innovation, prefer unity to pluralism, and appreciate authority more than individualism. Russia - a ramshackle amalgamation of competing turfs - is still illsuited for capitalism or for liberal democracy, though far less than it was only ten years ago.
Slide 133: Conspicuous consumption of imported products by vulgar parvenus is no substitute to true modernity and a functioning economy. Russia is frequently praised by expats with vested interests and by international financial institutions, the long arms of its newfound ally, the United States. But, in truth, "modern", "stable", Russia is merely a glittering veneer beneath which lurk, festering, the old ills of authoritarianism, lawlessness, oligarchy, aggression, ignorance, superstition, and repression mingled with extremes of poverty and disease. Here is one safe prediction: none of these will diminish next year.
Slide 134: Russia Straddles the Euro-Atlantic Divide By: Dr. Sam Vaknin Also published by United Press International (UPI) Also Read The Janus Look Russia's Second Empire Russian Roulette - The Security Apparatus Russia as a Creditor Let My People Go - The Jackson-Vanik Controversy The Chechen Theatre Ticket Russia's Israeli Oil Bond Russia's Idled Spies Russia in 2003 Russian President Vladimir Putin warned on Tuesday, in an interview he granted to TF1, a French television channel, that unilateral American-British military action against Iraq would be a "grave mistake" and an "unreasonable use of force". Russia might veto it in the Security Council, he averred.
Slide 135: In a joint declaration with France and Germany, issued the same day, he called to enhance the number of arms inspectors in Iraq as an alternative to war. Only weeks ago Russia was written off, not least by myself, as a satellite of the United States. This newfound assertiveness has confounded analysts and experts everywhere. Yet, appearances aside, it does not signal a fundamental shift in Russian policy or worldview. Russia could not resist the temptation of playing once more the Leninist game of "inter-imperialist contradictions". It has long masterfully exploited chinks in NATO's armor to further its own economic, if not geopolitical, goals. Its convenient geographic sprawl - part Europe, part Asia - allows it to pose as both a continental power and a global one with interests akin to those of the United States. Hence the verve with which it delved into the war against terrorism, recasting internal oppression and meddling abroad as its elements. As Vladimir Lukin, deputy speaker of the Duma observed recently, Britain having swerved too far towards America - Russia may yet become an intermediary between a bitterly disenchanted USA and an irked Europe and between the rich, industrialized West and developing countries in Asia. Publicly, the USA has only mildly disagreed with Russia's reluctance to countenance a military endgame in Iraq - while showering France and Germany with vitriol for saying, essentially, the same things.
Slide 136: The United States knows that Russia will not jeopardize the relevance of the Security Council - one of the few remaining hallmarks of past Soviet grandeur - by vetoing an American-sponsored resolution. But Russia cannot be seen to be abandoning a traditional ally and a major customer (Iraq) and newfound friends (France and Germany) too expediently. Nor can Putin risk further antagonizing Moscow hardliners who already regard his perceived "Gorbachevlike" obsequiousness and far reaching concessions to the USA as treasonous. The scrapping of the Anti Ballistic Missile treaty, the expansion of NATO to Russia's borders, America's presence in central Asia and the Caucasus, Russia's "near abroad" - are traumatic reversals of fortune. An agreed consultative procedure with the crumbling NATO hardly qualifies as ample compensation. There are troubling rumblings of discontent in the army. A few weeks ago, a Russian general in Chechnya refused Putin's orders publicly - and with impunity. Additionally, according to numerous opinion polls, the vast majority of Russians oppose an Iraqi campaign. By aligning itself with the fickle France and the brooding and somnolent Germany, Russia is warning the USA that it should not be taken for granted and that there is a price to pay for its allegiance and good services. But Putin is not Boris Yeltsin, his inebriated predecessor who overplayed his hand in opposing NATO's operation in Kosovo in 1999 - only to be sidelined, ignored and humiliated in the postwar arrangements.
Slide 137: Russia wants a free hand in Chechnya and to be heard on international issues. It aspires to secure its oil contracts in Iraq - worth tens of billions of dollars - and the repayment of $9 billion in old debts by the postbellum government. It seeks pledges that the oil market will not be flooded by a penurious Iraq. It desires a free hand in Ukraine, Armenia and Uzbekistan, among others. Russia wants to continue to sell $4 billion a year in arms to China, India, Iran, Syria and other pariahs unhindered. Only the United States, the sole superpower, can guarantee that these demands are met. Moreover, with a major oil producer such as Iraq as a US protectorate, Russia becomes a hostage to American goodwill. Yet, hitherto, all Russia received were expression of sympathy, claimed Valeri Fyodorov, director of Political Friends, an independent Russian think-tank, in an interview in the Canadian daily, National Post. These are not trivial concerns. Russia's is a primitive economy, based on commodities - especially energy products - and an over-developed weapons industry. Its fortunes fluctuate with the price of oil, of agricultural produce and with the need for arms, driven by regional conflicts. Should the price of oil collapse, Russia may again be forced to resort to multilateral financing, a virtual monopoly of the long arms of US foreign policy, such as the International Monetary Fund (IMF). The USA also has a decisive voice in the World Trade Organization (WTO), membership thereof being a Russian strategic goal.
Slide 138: It was the United States which sponsored Russia's seat at table of the G8 - the Group of Eight industrialized states a much coveted reassertion of the Russian Federation's global weight. According to Rossiiskaya Gazeta, a Russian paper, the USA already announced a week ago that it is considering cutting Russia off American financial aid - probably to remind the former empire who is holding the purse strings. But siding with America risks alienating the all-important core of Europe: Germany and France. Europe - especially Germany - is Russia's largest export destination and foreign investor. Russia is not oblivious to that. It would like to be compensated generously by the United States for assuming such a hazard. Still, Europe is a captive of geography and history. It has few feasible alternatives to Russian gas, for instance. As the recent $7 billion investment by British Petroleum proves, Russia - and, by extension, central and east Europe - is Europe's growth zone and natural economic hinterland. Yet, it is America that captures the imagination of Russian oligarchs and lesser businesses. Russia aims to become the world's largest oil producer within the decade. With this in mind, it is retooling its infrastructure and investing in new pipelines and ports. The United States is aggressively courted by Russian officials and "oiligarchs" - the energy tycoons.
Slide 139: With the Gulf states cast in the role of anti-American Islamic militants, Russia emerges as a sane and safe - i.e., rationally driven by self-interest - alternative supplier and a useful counterweight to an increasingly assertive and federated Europe. Russia's affinity with the United States runs deeper that the confluence of commercial interests. Russian capitalism is far more "Anglo-Saxon" than Old Europe's. The Federation has an educated but cheap and abundant labor force, a patchy welfare state, exportable natural endowments, a low tax burden and a pressing need for unhindered inflows of foreign investment. Russia's only hope of steady economic growth is the expansion of its energy behemoths abroad. Last year it has become a net foreign direct investor. It has a vested interest in globalization and world order which coincide with America's. China, for instance, is as much Russia's potential adversary as it is the United State's. Russia welcomed the demise of the Taliban and is content with regime changes in Iraq and North Korea - all American exploits. It can - and does - contribute to America's global priorities. Collaboration between the two countries' intelligence services has never been closer. Hence also the thaw in Russia's relations with its erstwhile foe, Israel. Russia's population is hungry and abrasively materialistic. Its robber barons are more American in spirit than any British or French entrepreneur. Russia's business ethos is
Slide 140: reminiscent of 19th century frontier America, not of 20th century staid Germany. Russia is driven by kaleidoscopically shifting coalitions within a narrow elite, not by its masses - and the elite wants money, a lot of it and now. In Russia's unbreakable cycle, money yields power which leads to more money. The country is a functioning democracy but elections there do not revolve around the economy. Most taxes are evaded by most taxpayers and half the gross national product is anyhow underground. Ordinary people crave law and order - or, at least a semblance thereof. Hence Putin's rock idol popularity. He caters to the needs of the elite by cozying up to the West and, in particular, to America - even as he provides the lower classes with a sense of direction and security they lacked since 1985. But Putin is a serendipitous president. He enjoys the aftereffects of a sharply devalued, export-enhancing, imports-depressing ruble and the vertiginous tripling of oil prices, Russia's main foreign exchange generator. The last years of Yeltsin have been so traumatic that the bickering cogs and wheels of Russia's establishment united behind the only vote-getter they could lay their hands on: Putin, an obscure politician and former KGB officer. To a large extent, he proved to be an agreeable puppet, concerned mostly with self-preservation and the imaginary projection of illusory power. Putin's great asset is his pragmatism and realistic assessment of the shambles that Russia has become and of his own limitations. He has turned himself into a kind of benevolent and enlightened arbiter among feuding
Slide 141: interests - and as the merciless and diligent executioner of the decisions of the inner cabals of power. Hitherto he kept everyone satisfied. But Iraq is his first real test. Everyone demands commitments backed by actions. Both the Europeans and the Americans want him to put his vote at the Security Council where his mouth is. The armed services want him to oppose war in Iraq. The intelligence services are divided. The Moslem population inside Russia - and surrounding it on all sides - is restive and virulently anti-American. The oil industry is terrified of America' domination of the world's second largest proven reserves - but also craves to do business in the United States. Intellectuals and Russian diplomats worry about America's apparent disregard for the world order spawned by the horrors of World War II. The average Russian regards the Iraqi stalemate as an internal American affair. "It is not our war", is a common refrain, growing commoner. Putin has played it admirably nimbly. Whether he ultimately succeeds in this impossible act of balancing remains to be seen. The smart money says he would. But if the last three years have taught us anything it is that the smart money is often disastrously wrong.
Slide 142: Russia's Stealth Diplomacy By: Dr. Sam Vaknin Also published by United Press International (UPI) Also Read The Janus Look Russia's Second Empire Russia as a Creditor The Chechen Theatre Ticket Russia's Israeli Oil Bond Russia's Idled Spies Russia in 2003 Russia Straddles the Euro-Atlantic Divide Russian Roulette - The Security Apparatus Let My People Go - The Jackson-Vanik Controversy Possibly irked by persistent American U-2 aerial spy missions above its fringes, Russia fired yesterday, from a mobile launcher, a "Topol" RS-12M Intercontinental Ballistic Missile (ICBM).
Slide 143: On Wednesday, Agriculture Minister Alexei Gordeyev, offered Iraq aid in the form of wheat. The Russian Grain Union, the industry lobby group, claims to have already provided the besieged country with half a million tons of grain under the oil-for-food program. Russia linked with Syria in declining to approve the new oil-for-food draft resolution as long as it implied a regime change in Iraq. The Duma - having failed to ratify a key nuclear treaty with the USA - called to increase defense spending by at least 3.5 percent of gross domestic product, or about $4 billion this year. Only 28 percent of Russians polled now view the United States favorably, compared with 68 percent a mere few months ago. A majority of 55 percent disapprove of the USA in a country that was, until very recently, by far the most pro-American in Europe. A Russian telecom, Excom, is offering unlimited free phone calls to the White House to protest U.S. "aggression". Washington, on its part, has accused the Russian firm, Aviaconversiya, of helping Iraqi forces to jam global positioning system (GPS) signals. Other firms - including anti-tank Kornet missile manufacturer, KBP Tula - have also been fingered for supplying Iraq with sensitive military technologies. These allegations were vehemently denied by President Vladimir Putin in a phone call to Bush - and ridiculed by the companies ostensibly involved. Russia exported c. $5 billion of military hardware and another $2.6 billion in nuclear equipment and expertise last year, mostly to India and China - triple the 1994 figure.
Slide 144: Russia and the United States have continually exchanged barbs over the sale of fission technology to Iran. In retaliation, Atomic Energy Minister, Alexander Rumyantsev, exposed an Anglo-German-Dutch deal with the Iranians, which, he said, included the sale of uranium enrichment centrifuges. Is Putin reviving the Cold War to regain his nationalist credentials, tarnished by the positioning, unopposed, of American troops in central Asia, the unilateral American withdrawal from the Anti-Ballistic Missile (ABM) treaty and the expansion of NATO and the European Union to Russia's borders? Or, dependent as it is on energy exports, is Russia opposed to the war because it fears an American monopoly on the second largest known reserves of crude? Russia announced on Thursday that it would insist on honoring all prewar contracts signed between Iraq and Russian oil companies and worth of billions of dollars and on the repayment of $8-9 billion in Iraqi overdue debt to Russia. According to Rosbalt, every drop of $1 in oil prices translates into annual losses to the Russian treasury of $2 billion. Aggregate corporate profits rose in January by one fifth year on year, mostly on the strength of surging crude quotes. The Economist Intelligence Unit expects this year's GDP to grow by 3.8 percent. Foreign exchange reserves are stable at $54 billion.
Slide 145: The threat to Russia's prominence and market share is not imminent. Iraqi oil is unlikely to hit world markets in the next few years, as Iraq's dilapidated and outdated infrastructure is rebuilt. Moreover, Russian oil is cheap compared to the North Sea or Alaskan varieties and thus constitutes an attractive investment opportunity as the recent takeover of Tyumen Oil by British Petroleum proves. Still, the long-term risk of being unseated by a reconstructed Iraq as the second largest oil producer in the world is tangible. Russia has spent the last six months enhancing old alliances and constructing new bridges. According to Interfax, the Russian news agency, yesterday, Russia has made yet another payment of $27 million to the International Monetary Fund. The Russian and Romanian prime ministers met and signed bilateral agreements for the first time since 1989. This week, after 12 years of abortive contacts, the republics of the former Yugoslavia agreed with the Russian Federation on a framework for settling its $600 million in clearing debts. Recent spats notwithstanding, the Anglo-Saxon alliance still regards Russia as a strategically crucial ally. Last week, British police, in a sudden display of unaccustomed efficacy, nabbed Russian oligarch and mortal Putin-foe, Boris Berezovsky, charged by the Kremlin with defrauding the Samara region of $13 million while he was director of LogoVaz in 1994-5.
Slide 146: The Russian foreign minister, Igor Ivanov, did not remain oblivious to these overtures. Russia and the USA remain partners, he asserted. RIA Novosti, the Russian news agency, quoted him as saying: "If we settle the Iraqi problem by political means and in an accord, the road will open to teamwork on other, no less involved problems." As Robert Kagan correctly observes in his essay "Of Paradise and Power: America and Europe in the New World Order", the weaker a polity is militarily, the stricter its adherence to international law, the only protection, however feeble, from bullying. Putin, presiding over a decrepit and bloated army, naturally insists that the world must be governed by international regulation and not by the "rule of the fist". But Kagan - and Putin - get it backwards as far as the European Union is concerned. Its members are not compelled to uphold international prescripts by their indisputable and overwhelming martial deficiency. Rather, after centuries of futile bloodletting, they choose not to resort to weapons and, instead, to settle their differences juridically. Thus, Putin is not a European in the full sense of the word. He supports an international framework of dispute settlement because he has no armed choice, not because it tallies with his deeply held convictions and values. According to Kagan, Putin is, in essence, an American: he believes that the world order ultimately rests on military power and the ability to project it.
Slide 147: Russia aspires to be America, not France. Its business ethos, grasp of realpolitik, nuclear arsenal and evolving values place it firmly in the Anglo-Saxon camp. Its dalliance with France and Germany is hardly an elopement. Had Russia been courted more aggressively by Secretary of State, Colin Powell and its concerns shown more respect by the American administration, it would have tilted differently. It is a lesson to be memorized in Washington.
Slide 148: The Axis of Oil By: Dr. Sam Vaknin Also published by United Press International (UPI) Also Read The Janus Look Russia's Second Empire Russia as a Creditor Russia's Israeli Oil Bond Russia in 2003 Russia Straddles the Euro-Atlantic Divide Russian Roulette - The Security Apparatus Russia's Stealth Diplomacy Success is the best proselytizer. Faced with the imminent demise of Saddam Hussein's regime, both Russia and Germany - erstwhile champions of peace and the sanctity of international law - expressed their hope yesterday for a swift victory of the hitherto much-decried coalition forces.
Slide 149: But this may be too little and way too late, as far as the United States is concerned. The two prostrates are firmly included in the victors' grey list - if not yet in their black one. The friction is not merely the outcome of sanctimonious hectoring about human rights from the Chechen-bashing Russians. It runs deeper and it turns on more than a dime. Another German-Russian collaboration may shortly attain the limelight: the $800 million, 1000 megawatt light water reactor in Bushehr, an Iranian Persian Gulf port facing southern Iraq. Abandoned by West Germany in 1979, following the Iranian revolution, it was adopted by the Russians in the 1990s. A second reactor is in the offing. More than 2000 Russians are employed in the site. Following the discovery by the International Atomic Energy Agency (IAEA) of a uranium enrichment facility near the city of Natanz and an Iranian admission that they are mining their own ore, Alexander Rumyantsev, the Russian Atomic Energy Minister, acknowledged that his country lost control over Iran's nuclear program. Iran, like Iraq, is a celebrated member of the "Axis of Evil". Thus, the atomic complex, though protected by at least 10 SAM batteries, may well be the target of an attack, Israeli and Russian officials told the Bellona Foundation, a Norwegian environmental group. This will not be without precedent: in a daring air operation, Israeli jets pulverized an Iraqi nuclear power plant in Osirak in 1981.
Slide 150: Ironically, it is America's aggressive stance towards Iraq that drives the likes of Iran and North Korea back into the arms - and nuclear technologies - of the Russian Federation. Russia is positioning itself to become an indispensable channel of communication and intermediary between the USA and what the State Department calls "rogue states". On March 17, Russia's State Property Minister, Farid Gazizulin, met Iran's Defense Minister, Ali Shamkhani, during a session of the Iran-Russia Economic Commission in Tehran. The host's message was unequivocal: "Cooperation between Iran and Russia is to contribute to sustaining peace and prevent conflicts in the region." According to Asia Times, in an earlier visit to Tehran, Russia's Foreign Minister, Igor Ivanov, pledged to continue to collaborate with Iran on nuclear energy projects. "Iran has no plans to produce nuclear military projects, this is a fundamental truth." - he insisted. Nor is the teamwork limited to commercial goods and services. An October 2001 bilateral framework agreement has since fostered more than $400 million in Russian annual military exports to Iran, including air defense systems and fighter jets. Russia is also increasingly involved in the crisis in the Korean Peninsula. South Korean President Roh Moohyun's security adviser, Ra Jong-il, have held talks earlier this week with their counterparts in Moscow and Beijing. Russia, like the United States, opposes the military nuclear efforts of North Korea.