October 16, 1999    
This Date's Issues: 3565 • 3566 • 3567

Johnson's Russia List
#3565
16 October 1999
davidjohnson@erols.com


[Note from David Johnson:
1. Moscow Times editorial: Yeltsin's War Needs Some Explaining.
2. Reuters: Outline of parties contesting Russian election.
3. Itar-Tass: Tuberculosis Rate on the Rise in Russia.
4. Financial Times (UK): Andrew Jack, CHECHNYA: Fears of a long and bloody war.
5. Moscow Times: Melissa Akin, Yabloko Clears Election Hurdle.
6. RFE/RL: Michael Lelyveld, Caspian's Trade Route Direction Uncertain.
7. Robert Devane: RE: 3563/Helmer - Jihad bonds.
8. Testimony of Thomas Graham on Corruption in Russia and Future U.S. 
Policy.]


******


#1
Moscow Times
October 16, 1999 
EDITORIAL: Yeltsin's War Needs Some Explaining 


Boris Yeltsin, we are told, is very interested in events in the Caucausus, 
and he often discusses the region with Prime Minister Vladimir Putin. 


That's fine, as far as it goes. But now - as troops and armor are moving 
inexorably deeper into the republic - towards Grozny, Yeltsin's Waterloo - 
isn't it time the president shared with the rest of us what he's planning 
next? 


After all, we know from hard experience by now that the Russian prime 
minister is no one. He can do nothing without the president's backing; he can 
be sacked in the wink of an eye. 


How many people have to die before Yeltsin feels compelled to address the 
nation? Already 179 soldiers have been killed in recent fighting, the Defense 
Ministry reports - 47 of them in Chechnya and 132 in Dagestan - while Chechen 
sources say hundreds of civilians have died in bombing raids. 


Happily 3,500 soldiers have so far also been selected for medals - and 
Putin's popularity has spiked too. So, perhaps it all balances out in the 
Kremlin's view of things. 


It is a Quixotic exercise, complaining that Yeltsin is hiding while the 
Kremlin pursues a dangerous policy. His legendary two-week minor nose 
operation was the highlight of the beginning of the first Chechen war; now he 
conveniently has "the flu." 


Does either ailment constitute an excuse not to address the nation, and to 
explain to Russian parents why you've decided some of their children must now 
die for the state? 


Perhaps it simply can't be explained; so far it makes precious little sense. 


On the one hand, Yeltsin on Friday appointed an old Caucasus hand, Nikolai 
Koshman, to administer occupied territory - presumably this means, for now at 
least, the easily held steppes above the Terek River that are a third of 
Chechnya. The Kremlin talks about Koshman restoring "faith," befriending 
childrenand reviving the local economy. 


But Koshman probably won't be getting any Russian money for reviving that 
economy; the last $150 million lying around as pocket change is already being 
sent off to help rebuild Serbia, because "morally, we are above the 
Americans." (Never mind that this $150 million was pretty much borrowed from 
the Americans in the first place). 


Meanwhile, Koshman is going to have a helluva time selling occupied Chechnya 
on the glories of Russian rule if that rule is marked by airstrikes on 
civilians. Nor is it going to be easy to talk up that Chechen economy if the 
occupation sinks, month by month, into ever more chaos and blood - as it 
probably will as troops invade deeper. 


Where is Yeltsin? 


******


#2
Outline of parties contesting Russian election

MOSCOW, Oct 15 (Reuters) - Russia's electoral commission registered the 
liberal Yabloko bloc on Friday for the December 19 election to the State Duma 
lower house of parliament. 


Following are the main parties and blocs contesting the election. Parties 
must win five percent of votes to win seats in the Duma from the 50 percent 
of seats reserved for party lists. 


PARTIES AND BLOCS OFFICIALLY REGISTERED BY THE CENTRAL ELECTORAL COMMISSION 
AND ALLOWED TO CAMPAIGN 


FATHERLAND-ALL RUSSIA - Left-leaning centrist coalition, which is leading in 
opinion polls, made up of Moscow Mayor Yuri Luzhkov's Fatherland Party and 
the All-Russia bloc led by former Prime Minister Yevgeny Primakov. Also 
includes the Agrarian party, former allies of the Communists, who split on 
joining the bloc. 


LEADING CANDIDATES - Primakov, Luzhkov and Vladimir Yakovlev, governor of St 
Petersburg. 


PROSPECTS - Likely to do well although other groups, like the new Yedinstvo 
bloc, will actively court its electorate. 


COMMUNIST PARTY - Far left-wing party advocating redirecting economic 
reforms, including more state protection for industry, slower privatisation 
and a wide social security net, as well as voluntary rebuilding of the Soviet 
Union. It has a steady and inflexible election base of about 20 percent of 
the electorate. 


LEADING CANDIDATES - Party leader Gennady Zyuganov, State Duma speaker 
Gennady Seleznyov and Vasily Starodubtsev, a one-time member of a group of 
coup plotters who tried to overthrow Mikhail Gorbachev as Soviet president in 
1991. 


PROSPECTS - Won more than 22 percent of the vote in 1995, more than any other 
party. The Communists may not do quite as well this time as rivals will be 
gnawing at their protest electorate, but they will remain a key force. 


YABLOKO - Liberal party which promises more reforms, campaigns against 
corruption and vows to defend the middle class. Its leader, Grigory 
Yavlinsky, has declined posts in government and is therefore not tainted with 
blame for unpopular reforms as are most other liberal leaders. He has lured 
popular former Prime Minister Sergei Stepashin to stand with him in the poll. 


LEADING CANDIDATES - Yavlinsky, Stepashin and Vladimir Lukin, a former 
Russian ambassador to the United States. 


PROSPECTS - Came forth in 1995 with 45 seats. Opinion polls predict similar 
results in 1999. 


PARTIES AND BLOCS WAITING TO BE REGISTERED BY THE CENTRAL ELECTORAL 
COMMISSION TO BE ALLOWED TO CAMPAIGN 


UNION OF RIGHT-WING FORCES - Coalition of "young reformers," who held senior 
positions in the cabinet and whose names are associated by many with hardship 
suffered during economic reform. Links the New Force movement of former Prime 
Minister Sergei Kiriyenko and the Right Cause movement of former First Deputy 
Prime Minister Boris Nemtsov. 


LEADING CANDIDATES - Kiriyenko, Nemtsov and Irina Khakamada, a former 
government official in charge of promoting small and medium business. 


PROSPECTS - The group has a large campaign war chest, but its main task will 
be to clear the five percent barrier. Opinion polls show it is unlikely to 
achieve that goal unless helped by some ingenious last-minute campaigning. 


YEDINSTVO (UNITY) - Newly formed regions-based election bloc with a vague 
programme, describing its electoral base as "all thinking people." Branded by 
rivals as a Kremlin creation designed to steal votes from Fatherland-All 
Russia, hinges on the popularity of its leader, respected Emergencies 
Minister Sergei Shoigu, and support from a string of governors. 


LEADING CANDIDATES - Shoigu, nine-times world wrestling champion Alexander 
Karelin, former senior police official Alexander Gurov. 


PROSPECTS - Opinion poll findings bode well for the one- month-old bloc 
although it has done little to organise so far. Its success would come at the 
expense of Fatherland-All Russia. 


OUR HOME IS RUSSIA - Centre-right bloc created in 1995 by then Prime Minister 
Viktor Chernomyrdin with Kremlin blessing to contest parliamentary elections. 
Chernomyrdin's sacking as prime minister pulled the rug from under the party, 
previously seen as the "party of power." Forward, Russia!, a small party of 
former tax collector Boris Fyodorov has joined its bloc. 


LEADING CANDIDATES - Chernomyrdin, parliamentary faction leader Vladimir 
Ryzhkov, Saratov regional governor Dmitry Ayatskov. 


PROSPECTS - Won over 60 seats in 1995, the second biggest standing after the 
Communists. In disarray since Chernomyrdin's sacking and will be lucky to 
pass the five percent barrier. 


LIBERAL DEMOCRATIC PARTY (LDPR) - Ultra-nationalist one-man party of 
firebrand politician Vladimir Zhirinovsky which enjoyed surprise success in 
1993 and came third in 1995. Advocated radical policy changes including state 
controls of the economy and tough reprisals against criminals, but later 
became the government's strongest supporter in the Duma. The party's list was 
thrown out by the Central Electoral Commission which said many candidates had 
failed to declare their assets. Now planning to register a new list under the 
name Zhirinovsky Bloc. 


PROSPECTS - Zhirinovsky's support hovers around five percent of the 
electorate and, being a good last-minute campaigner, he stands a fair chance 
of breaking the barrier. 


*******


#3
Tuberculosis Rate on the Rise in Russia.


MOSCOW, October 15 (Itar-Tass) - The Russian cabinet has made changes in a 
resolution on the federal program against tuberculosis for 1998-2004. The 
Health Ministry is now the state coordinator of the program, and the Justice 
Ministry is instructed to supervise anti-tuberculosis measures in 
penitentiaries and prisons. 


The number of TB patients is on the rise in Russia. A total of 42,372 new 
tuberculosis patients were registered in the first half of this year, sources 
at the Health Ministry told Itar-Tass on Friday. In the opinion of experts, 
the actual number of new TB cases is, at least, thrice higher. Hoboes, 
migrants and asocial persons stay outside the medical control. 


Two people die of tuberculosis in Moscow every day. About 50 out of every 
100,000 Muscovites have the infection, and the index for children is even 
higher -- 62 per every 100,000. Under the medical standards, the index of 100 
TB-infected per 100,000 residents means an epidemics. 


The doctors are especially worried by the tuberculosis form stable to 
medicines. It appeared as a result of the interrupted treatment caused by the 
shortage of medicines, and the TB infection grew immune to antibiotics. In 
that case the treatment shall be done with the use of other medicines and 
last twice longer. The situation is the worst in prisons and penitentiaries, 
where the tuberculosis rate is 50 times higher than the Russian average. 


Almost all the prison cells for tuberculosis-infected inmates do not comply 
with sanitary norms. The shortage of medicines is acute because of the 
interior financing. Many ex-inmates of prisons have an open form of 
tuberculosis and pose a danger to society. The Doctors without Borders 
organization has been holding an anti-tuberculosis campaign in penitentiaries 
of the Russian Kemerovo region since 1995. The campaign is expected to be 
spread onto other reformatories. 


******


#4
Financial Times (UK)
16 October 1999
[for personal use only]
CHECHNYA: Fears of a long and bloody war 
By Andrew Jack in Moscow


As Russian forces continued their advance toward the capital of the breakaway 
North Caucasus republic of Chechnya yesterday, a growing number of observers 
were questioning just how and when the conflict would end. Many fear a long 
and bloody end-game.


In late September, Vladmir Putin, Russia's prime minister, said federal 
troops were merely sealing off Chechnya's borders. In early October, as they 
moved across the frontiers, he said they would occupy a "buffer zone" in the 
third of the region north of the Terek river. But now they appear to be 
heading south to Grozny and the heartland.


Aided by a hostile army and fears of kidnapping, few journalists have entered 
the region to verify claims made by either side. Yet it seems that, so far, 
the military advance has been relatively smooth. For Russia's soldiers and 
politicians alike, it may well be the calm before a political and military 
storm.


"I hope they will stay north of the Terek," says Alexander Iskandryan, from 
the Centre for the Study of the Caucasus in Moscow. "To move towards the 
south would be stupid. It could lead to a conflict that may be worse than in 
1994," referring to the previous war in which 80,000 died.


In the three years since the last conflict ended, conditions have worsened 
for the Chechens. It seems hard to believe they would be any more ready now 
than in the past to abandon their autonomy. And, with their families 
despatched as refugees across the borders, many believe that the men who 
remain are digging themselves in for a fierce and bitter defence of their 
territory.


On military grounds, Colonel Charles Blandy from the Conflict Studies Centre 
at Sandhurst Royal Military Academy in the UK, argues that the best strategy 
for the Russians would be to consolidate their position within the buffer 
zone until next spring before attempting any further advances.


"It would be better for combat conditions and visibility," he says. "Russian 
aircraft are quite old and don't have proper sights. And you need observers 
on the ground to adjust your artillery fire."


He questions whether the Russians are any better equipped than in the 
previous conflict, and argues that the Chechens are likely to nip in and out 
of Russian lines, picking off the most vulnerable contingents. He also 
suggests that their knowledge of the mountainous terrain in the south of the 
republic would be likely to see off Russian advances.


The next step for the federal government will partly depend on who wins the 
tough internal debates now taking place. Within the armed forces, a number of 
decision-makers, frustrated that they were forced into an uneasy peace in 
1996, are keen to press ahead and seize full control of Chechnya. The 
casualties among the family members of some of the top commanders may have 
fuelled a desire for revenge.


The political equation is more complicated. Mr Putin, endorsed by President 
Boris Yeltsin as his preferred successor, has so far benefited from a sharp 
rise in his popularity in response to his firm and apparently successful 
action in Chechnya.


But it is still at least eight months before presidential elections, and a 
protracted conflict - or even the short-term benefits of one that is rapidly 
resolved - could be dissipated if Russian casualties climb sharply, or the 
Chechens return to terrorist bombings.


The prime minister also faces some modest domestic political criticism, 
coupled with growing international concern over the blunt approach of 
military bombardments, and the escalating humanitarian crisis they have 
triggered. Well over 150,000 refugees fleeing the battle region have created 
huge social tensions in the regions neighbouring Chechnya.


"You can't resolve the problems of terrorism and guerrilla warfare only with 
military operations," says Mr Iskandryan. "You need to address the social, 
economic and political issues. This will drag on for years."


******


#5
Moscow Times
October 16, 1999 
Yabloko Clears Election Hurdle 
By Melissa Akin
Staff Writer


The Yabloko Party was cleared to run for parliament by the Central Election 
Commission on Friday despite the commission's ruling that top candidates 
Grigory Yavlinsky and Sergei Stepashin had failed to declare thousands of 
dollars of income. 


Late Friday evening, the CEC also registered the pro-Kremlin bloc Unity, 
according to reports on ORT television. 


Elections officials said Yavlinsky, a liberal economist whose Yabloko party 
trades on its squeaky-clean image, failed to declare 81,000 rubles in 1998 
income (about $8,100 at the 1998 average ruble-dollar rate of 10 to 1). They 
also said Yavlinsky's new No. 2, Stepashin, a former prime minister and 
interior minister, failed to declare 13,000 rubles. 


Those violations could have been enough to bar Yabloko, a significant liberal 
force in the State Duma, from running in Dec. 19 elections. Under the law, if 
any of a party's top troika is kicked off the slate the whole party is 
barred. 


But elections officials said Yabloko was too credible a party to ban on such 
a violation. 


"We looked at the issues in the aggregate," said commission head Alexander 
Veshnyakov after a hearing Friday. "Understanding that the exclusion of one 
candidate from the top troika requires us to turn down the entire list, the 
Central Election Commission has decided to recognize that the inaccuracy of 
the information provided by Grigory Yavlinsky is not of a significant 
nature." 


The Yabloko Duma faction press office said the violations were real but a 
matter of honest confusion. They said Stepashin's paperwork was complicated 
by his having moved from place to place and job to job over the past year. 
They said Yavlinsky's problem stemmed from a speech he was contracted to give 
last year but then canceled when he suffered a heart attack; Yavlinsky was 
paid anyway but had not realized it, the press service said. 


In remarks to Itar-Tass, Yavlinsky pronounced himself satisfied that Yabloko 
was registered and impressed by the thorough nature of the vetting process, 
which he saw as "a useful thing for the Russian political system." 


Stepashin also praised the process to Itar-Tass, saying, "All are equal 
before the law, including prime ministers and faction leaders." 


Veshnyakov said that even though the "volume" of the inaccurately declared 
sum was "fairly large," the commission had the right to register the slate 
anyway, Itar-Tass reported. However, Itar-Tass also reported, confusingly, 
that authorities were not done checking into the declarations of Yabloko's 
candidates, including the top three. 


Yabloko's No. 3, senior Duma Deputy Vladimir Lukin, was under scrutiny for 
declarations made on his car, the commission said. Another top Yabloko 
candidate, Nationalities Minister Vyacheslav Mikhailov, was kicked off the 
list altogether for failing to declare real estate holdings, said commission 
spokesman Artyom Golev. Yabloko lost a total of nine candidates from its 
174-member list. 


Only one of the 12 elections commission members - State Duma Deputy Yevgeny 
Ishchenko - voted against registering the Yabloko slate. 


Ishchenko is a member of flamboyant nationalist Vladimir Zhirinovsky's 
Liberal Democratic Party, which was barred from running last week over flawed 
declarations. The commission is still deliberating on whether to clear an 
alternative slate put up under the aegis of a friendly party, the Zhirinovsky 
Bloc. 


Under newly passed election legislation, each candidate must declare his 
income, real estate and vehicle holdings, and the declarations are 
double-checked by law-enforcement agencies. 


So far, all three parties registered by the commission - Fatherland-All 
Russia, the Communist Party and Yabloko - have lost candidates and been 
criticized in the registration process. 


Fatherland-All Russia lost 10 candidates while the CEC made a show of 
scrutinizing candidates' declarations. The Communists also lost nine 
candidates, with prominent Duma members Ivan Melnikov and Vitaly Sevastyanov 
under investigation for failing to declare property. 


"This could be a big blow to some people," said Vladimir Pribylovsky, a 
parliament-watcher at the Panorama research center. Veshnyakov, for example, 
"showed that the Communist Party is not the poor party it presents itself as. 
Its members have property and bank accounts." 


But Pribylovsky said major "system forming" parties such as Yabloko and the 
Communists would be cleared to run to avoid scandals, while smaller parties 
might end up as fodder for a display of power by Veshnyakov's commission. 


"Veshnyakov has almost become a minister, a minister of elections, and the 
commission has become a ministry. Ministers love to pick on people to display 
their power," Pribylovsky said. "I think he had specific orders to pick on 
Fatherland-All Russia, but the rest is his own decision." 


*******


#6
Caucasus: Caspian's Trade Route Direction Uncertain
By Michael Lelyveld


Boston, 15 October 1999 (RFE/RL) -- One year after the deadline for deciding 
on an export route from the Caspian Sea, the direction of the region's vital 
trade seems just as uncertain as it did in 1994.


Russia's war in Chechnya has drawn a new curtain of doubt over all pipeline 
plans in the Caucasus, including Moscow's own scheme for a bypass line to 
carry oil from Baku to Novorossiysk through Dagestan.


This week, Azerbaijan quickly rejected Russia's appeal to help pay for the 
line. It is perhaps no coincidence that Moscow almost immediately switched 
tactics and announced that it would extend its control over all of Chechnya 
instead of only occupying the north. If Russia does march on Grozny, it may 
try to restore its original pipeline route and secure it with troops.


The long-term viability of such a solution seems highly unlikely. But 
Russia's forces in the region could checkmate any competition, particularly 
from construction of the Baku-Ceyhan oil pipeline, on the other side of the 
mountains to the south.


Western oil companies have been negotiating on Baku-Ceyhan since the signing 
of Caspian offshore agreements by the Azerbaijan International Operating 
Company in September 1994. The contractual deadline for a decision in October 
1998 is now a year old. According to reports from Azerbaijan, talks are in 
the "final phase."


But even the long-sought decision on construction will not reduce the risk of 
going ahead. In fact, it may increase the chance of instability or 
interference to prevent the plan from being carried out.


Elsewhere in the region, the outlook for pipeline routes is equally 
unsettled. Plans for the second major U.S.-backed project, the trans-Caspian 
gas pipeline to Turkey, also appear to be stalled.


Turkmenistan said this week that it plans to sign an inter-state framework 
agreement for the line next month in Ankara with Azerbaijan, Georgia and 
Turkey. The pact has been delayed since a missed deadline in July because of 
disputes with Azerbaijan over its own plan for gas sales to Turkey and its 
claims to the Kyapaz oilfield, which Turkmenistan calls Serdar.


The wrangles have created a virtual deadlock in development. For two years, 
U.S. officials argued that the trans-Caspian and Baku-Ceyhan lines could be 
paired along the same route through the Caucasus for efficiency. Now that 
neither has progressed, the fate of the entire route remains unclear.


Within the past week, Turkmenistan has confused the issue even further by 
sending a series of conflicting signals about the direction of its exports. 
In a sequence of pronouncements, President Saparmurat Niyazov lashed out at 
Turkey for agreeing to buy Russian gas through the planned Blue Stream 
pipeline across the Black Sea instead of supporting the trans-Caspian line 
from Turkmenistan.


Niyazov charged that Russia would simply buy Turkmen gas and sell it through 
Blue Stream at about three times the price. He also threatened to export gas 
through Russia and Iran if trans-Caspian construction did not start in six or 
seven months. He further announced plans to increase gas sales to Iran by 11 
billion cubic meters a year, an amount that far exceeds current pipeline 
capacity.


In fact, Turkmenistan has no agreement for gas sales to Russia, either. 
Niyazov's frustration has been evident since last month when he fired some of 
the nation's top bankers for disclosing the country's debt figures to the 
International Monetary Fund.


The true picture of the region's energy trade is further clouded by 
Turkmenistan's plan to sell electricity to Turkey. The trade can only be 
accomplished through Iran. Because of the great transmission distance that 
must be covered, the deal is likely to become a swap of Turkmen power for 
that used in northern Iran, while Iran then uses its own excess generating 
capacity to supply Turkey with electricity.


Although Turkmenistan has charged that Russia could turn a big profit on its 
gas to supply Turkey, it has made no mention of the terms with Iran to play a 
similar role both for electricity and the Turkmen gas that could be used to 
produce it. The country would clearly be vulnerable to profiteering by one 
country or the other. The only question is which one.


Last week, Iran also complicated the situation by proposing to buy 
Azerbaijan's gas after 2005. Tehran said it would rebuild a gas line to Baku 
at its own cost. Although the first reaction from Azerbaijan has been 
negative, such a link could further upset the competition with Ashgabat.


Turkmenistan may be the last Caspian country in the long line of willing 
energy suppliers, but a solution to its problems may be critical to a 
regional export plan. War in the Caucasus and Russian designs have now made 
such a solution even more elusive. Without new strategies, the Caspian 
countries could still be arguing over export routes five years from now. 


******


#7
From: "Robert Devane" <robertdevane@glasnet.ru>
Subject: RE: 3563/Helmer - Jihad bonds
Date: Fri, 15 Oct 1999 


Since there is no such thing as Jihad bonds, I assume that Mr. Helmer is
talking about Obligations of the Bank of Russia (OBRs), whose issuance was
just approved by Prime Minister Putin. A couple of things ought to be
mentioned about these bonds as they relate to monetary policy.


First, getting away from the passionate side of Russia watching, it is
difficult to tie CBR bond issuance to the financing of anything not related
to CBR's activities. Of course, there is the historical lesson of FIMACO,
which has taught us all that nothing is holy, not even CBR reserves.
Nonetheless, without any evidence of criminal misappropriation of funds
(which is what I think Mr. Helmer is implying in his criticism of CBR bond
issuance policy), one is tempted to believe that OBRs are what they are
purported to be -- an instrument for managing ruble liquidity.


Second, bond issuance of an kind has for he time being been marred by the
experience with GKOs, which essentially equated state borrowing with
pyramids of the MMM type. Here again, I must point out that the sin is not
in the instrument but in its use (or misuse). A hammer is a productive
useful tool that brings about benefits if it is used to drive nails into
boards. However, if someone applies a hammer to someone else's skull, that
is hardly a reason to declare hammers murder weapons and tr to have them
banned. Sure, there won't be anymore hammer murders. But there also won't
be any nails nailed, and chances are that murderers will find suitable
substitutes in no time at all. Extrapolating this analogy to state
borrowing, I'd like to point out the obvious -- every single modern
financial system (all the ones that we tend to hold out as examples)
incorporate some measure of bond financing. Russia too should have a bond
market. The issue is really WHO is making policies that drive this market,
and what their objectives are.


Third, as I am sure most JRL readers are aware, there is a pretty serious
problem with Russia's current monetary policy. If one looks at the ruble
balances of Russian banks in their correspondent accounts at the CBR, one
sees that they have been rising steeply since early September, having now
reached 60 billion rubles (just over US$2 billion at the current exchange
rate and approximately the same as the amount of Jihad bond issuance that
Mr. Helmer refers to). This is money that is essentially sitting in
accounts at the CBR with nowhere to go. Lending to the real sector is
pretty much out of the question for obvious reasons, all of which can be
summed up by saying that government policy of recent months has ensured
that credit markets remain comatose for many months to come. Investing in
financial instruments at home is equally complicated, since there aren't
any instruments at this juncture that provide an acceptable level of credit
risk, an adequate return, and sufficient liquidity to move this much money
in and out of the market without causing an earthquake in the center of
Moscow. If one looks at the OFZ market, it has sucked up as much as it can
for the time being. Most of the issues are far too long-term to appeal to
burnt investors, particularly because they provide no devaluation risk
protection. The corporate bonds issued by several blue chip companies have
been scooped up in primary placements, but have yet to mature into an
active secondary market. As far as equities are concerned, with weekly RTS
volumes of US$30 million, it would be foolish to talk about that market
providing a home for 60 billion rubles, or for that matter 6 billion
rubles. Without other ruble instruments, Russian banks have but one
alternative -- the US dollar, which can either be kept in its natural form
as a hedge against inflation and currency depreciation, or invested in
dollar assets which will yield an additional return.


Thus, the CBR is proposing issuing OBRs for the express purpose of managing
ruble liquidity. There are however other problems with the CBR's plan. 


First, as a liquidity measurement tool, OBRs are of questionable value.
Since they offer a positive return (in nominal and real terms), their
issuance implies that relatively shortly thereafter the CBR will have to
inject more rubles into the banking system that the amount hat it sucked
out in the first place by issuing the OBRs. If it can be shown that after
issuing OBRs the CBR is capable of managing the proceeds more effectively
than the banking system and earning a corresponding return on the funds,
such a policy wouldn't be at all bad. However, nothing of the sort has been
shown, which suggests that the redemption amounts of the OBRs will come
from the printing press or from contraction in F/X reserves.


Second, it is pretty difficult to understand what the CBR is trying to do
with its policy of propping up the ruble, which in recent months has cost
hundreds of millions of dollars (actually more like billions if the amounts
spent on interventions are summed up). Certain observers have recently
applauded an apparent rise in the CBR's reserves. Stop! If on takes a close
look, one sees that the rises of US$300 million per week for two weeks in a
row is nothing more than creative accounting, which is debiting amounts
from the CBR's holdings at its foreign subsidiaries and crediting the same
amount to reserves (US$299.8 in the week to October 1st and US$289.8 in the
week to October 8th). In all, the CBR's holdings in its foreign
subsidiaries was just over US$900 million. Thus it is to be expected that
next week the reported reserves number will again increase by US$300
million, bringing Gross International Reserves to US$12 billion. In reality
however, it is probably the case that the CBR has been depleting it foreign
currency reserves over the same period. Keeping in mind that Gross
International Reserves consist of gold and hard currency, and in light of
the fact that the world price of gold has climbed quite steeply over the
past few weeks, one sees that there are two ways for GIR to have remained
flat (adjusting for the accounting entries described above). Either the CBR
has been spending its F/X reserves, thereby decreasing the relative share
of F/X in the GIR structure, or it has been selling some of its gold,
thereby preserving the GIR structure, and using the proceeds to intervene
in the currency market. If one looks at the rise in the price of gold in
recent weeks and applies that to the approximate volume of gold reserves,
one sees that the gold has appreciated by well over US$500 million. Where
did that go? Either way, it is evident that the CBR is spending vast
amounts of money to keep the ruble in a tight corridor, much as it did
leading up to the August-September 1998 crisis. One of the reasons why it
might be making the ruble artificially overvalued, is precisely to keep
banks from pulling their correspondent account rubles out of the CBR and
dumping this mass onto the F/X market, which would cause the ruble to lose
at least 20% of its value overnight. The introduction of the OBRs would
provide an alternative tool for managing ruble liquidity, which would
enable the CBR to run a more export-friendly currency policy.
Unfortunately, there is still no long-term solution in sight. At the end of
the day, if the investment climate in Russia isn't changed in such a way as
to make it attractive for the Russians to invest domestically (in the real
sector), neither the propped up ruble nor the OBRs will do any good.


Robert Devane
Managing Director
Renegade Capital
Investment Research & Management
Moscow 


******


#8
Date: Thu, 14 Oct 1999 18:29:43 -0400
From: Tom Graham <tgraham@ceip.org>
Subject: Testimony On Corruption in Russia and Future U.S. Policy


Testimony On Corruption in Russia and Future U.S. Policy
Before the Senate Committee on Foreign Relations
September 30, 1999


Thomas E. Graham, Jr.
Senior Associate
Carnegie Endowment for International Peace
[Prior to joining the Carnegie Endowment in September 1998, Mr. Graham was
a Foreign Service Officer on academic leave with RAND in Moscow from 1997
to 1998. From 1994-1997, he served as Head of the Political/Internal Unit
and then Acting Political Counselor at the U.S. Embassy in Moscow. During
this period he managed a 12-person unit that reported on Russian domestic
political developments, and supervised a 25-person section that managed
U.S.-Russian bilateral political and security relations and reported on
Russian foreign and security policy, military affairs, and domestic
political developments. He also served in the Political Section in Moscow
from 1987-1990. Between tours in Moscow, he was a member of the Policy
Planning Staff of the State Department (1992-1994) and a Policy Assistant
in the Office of the Under Secretary of Defense for Policy (1990-1992).] 


Mr. Chairman, I deeply appreciate the opportunity to speak before this
committee on the issue of corruption in Russia and U.S. policy responses.


This committee has already spent a day focused on the nature of corruption
and organized crime in Russia. I only want to stress two points on this
matter, before turning to the question of U.S. policy. 


First, corruption has deep roots in the historical conflation of the
private and the public in Russia. For most of Russian history, the state
was for all practical purposes the property of the Tsar. There was no
formal distinction between sovereignty and ownership, between the public
sphere and the private sphere. Almost by definition, public positions were
exploited for private gain. This situation was beginning to change in the
nineteenth century, but the Bolshevik coup d'etat put an end to this
positive evolution in 1917. The Communists reverted to the old Tsarist
tradition, with one distinction: The state became the collective property
of the rigidly hierarchical Communist Party of the Soviet Union, not the
sole property of a single ruler. 


What we have witnessed since the breakup of the Soviet Union and the demise
of the Communist Party of the Soviet Union is the fragmentation of the
state. Much power has flowed out of Moscow into the regions. The central
governmental bureaucracy has become less coherent and disciplined. But the
important point is that various key pieces of the state remain the private
preserves of specific individuals, managed primarily for private gain
rather than for the public good. Moreover, unlike the Soviet period, when
"property owners" derived profit from the state's strength and control of
society, today's proprietors find it more advantageous for the state to be
weak and incapable of mobilizing resources for its own projects at home or
abroad. They enrich themselves by preying on the weakness of the state, by
stripping assets from property that once belonged to the state as a whole.


This fragmentation of the state has exacerbated the problems of corruption
that grew out of the Soviet period. Corruption has become pervasive, more
chaotic; the holders of state power greedier. The Russians have a word to
describe the situation: bespredel, or a world without limits, constraints,
or rules. The corrupt Soviet state was in some ways better for the
population as a whole. It may have squandered resources on excessive
military production, but it did keep wealth within the country and slowly
raised living standards. The new Russian, fragmented state has overseen
the collapse of production - GDP has plummeted by nearly a half since 1991
- and sent much of the country's wealth abroad, while the standard of
living of most Russians has sharply deteriorated. Over 37 percent of the
population now lives below the official poverty line; five years ago, the
corresponding figure was just over 20 percent. Should it be surprising
that, according to recent polls, Russians look back to the Brezhnev period,
once known as the "time of stagnation," as a time when life was better?


Second, there are no easy solutions to the problem of corruption in Russia,
and some remedies can be worse than the disease. While we understandably
would like the Russian government to move aggressively against corruption,
we need to appreciate the dangers of doing so in a country where the rule
of law has not been institutionalized in a reliable, independent, and
non-politicized court system or internalized by most citizens as a code of
conduct. Under such circumstances, "mafioso" or "corrupt official" could
easily become the functional equivalent of "enemy of the people" of
Stalinist notoriety. The only difference would be that whereas most of the
charges against "enemies of the people" were absurd, those against
"mafiosi" or "corrupt officials" would have a certain ring of credibility.
An aggressive anti-corruption campaign could easily turn into a witch-hunt,
which in the long run would only serve to destabilize Russian society,
erode support for democratic principles, and deepen lawlessness.


Combating corruption will demand political will, imagination,
judiciousness, patience, and money applied over many years, and even then
corruption will not be eradicated but only reduced to manageable
proportions. The campaign against corruption has to proceed simultaneously
with efforts to rebuild the capacity of the state to govern effectively; to
separate the public from the private sphere and make the state an
autonomous entity for the promotion of the public good; to construct an
independent and reliable court system; and to instill respect for law
within the political class and more generally across society. Both Russian
and Western leaders must pay close attention to ensure that there are no
excesses, no dangerous encroachments on human rights. 


This is not counsel for slow movement on corruption or leniency toward the
Russian government. It is counsel to proceed with full awareness of what
is realistically possible and the potential downsides, so that we can take
steps to minimize them. At the very least, we can - and should - insist
that the Russian law enforcement agencies cooperate with us in the
investigation of cases such as that involving the Bank of New York. But
even here, we must proceed with caution. Any Russian can tell you that his
country's law enforcement agencies are themselves corrupt and highly
politicized. Much of the mud-slinging, or kompromat wars, now escalating
as Russia enters an electoral cycle, has at its origins information
obtained from these agencies. As a result, even as we cooperate, we will
need to verify repeatedly the information we receive and reassess the
motives of our Russian interlocutors.


So, Mr. Chairman, how do we deal with Russia? What principles should guide
U.S. foreign policy? I would add my voice to those who have warned against
disengaging. That is not an option, given the importance of what happens
in and around Russia for the security and well-being of the United States,
as well as of our allies and partners the world over. Moreover, we cannot
reliably isolate or contain the problems arising from the breakdown of
governance and the rise of corruption in Russia. We need to deal with the
problems at their origins. 


That said, we also need to appreciate the difficulties of engagement. It
takes two to engage. And Russia in its current state has an increasingly
lesser capacity to engage productively. We need to take care not to
overburden the circuits or impose engagement on the Russians where they are
not ready for it. Rather than broad engagement, we need pragmatic
engagement on those issues that are priorities to the two sides. Strategic
nuclear stability, for example, is a shared top priority issue for both
sides, even if we differ on the solutions. On this matter, engagement is
both necessary and natural. 


Non-proliferation of weapons of mass destruction is another matter,
however. There is a shared interest, but the priority each side attaches
to it is different. It is a top priority for us, one of the few real
threats to our security. For the Russians, the immediate security threats
arise more from socio-economic decline than proliferation. Russians are
more lax in their technology export controls in part because the sale of
technology brings into the country desperately needed resources for dealing
with urgent domestic problems. The challenge for the United States is to
create incentives for Moscow to give non-proliferation greater attention,
and that will only occur if we begin to address issues of great value to
them that might be of lesser priority to us, say, debt relief, restrictions
on imports of Russian steel, or repeal of the Jackson-Vanik amendment.
This is not to say these are the right or only possible linkages, but
rather that we will have to be prepared to make tough trade-offs if we are
to engage Russia to our benefit.


On the more specific issue of engaging Russia, knowing what we now do about
corruption, I would offer the following five recommendations. 


First, we need to ensure the integrity of our own institutions. The
Congress is to be commended for introducing legislation that will tighten
the supervision of our own banking and financial system to make it less
vulnerable to money laundering operations. At the same time, we need to
press ahead with the investigation of the current charges, taking care to
distinguish criminal actions from capital flight, not accepting allegations
against specific individuals as fact, and refraining from generalizing from
this case to all Russian businessmen and officials. There are thousands of
honest and decent Russians engaged in business or trying to make government
work for the welfare of the people.


Second, we need to continue our efforts to integrate Russia - and Russian
business - into the global economy. To succeed globally, Russian
businessmen will have to adapt to the values and principles of the world
economy, where corruption is - or at least can be - punished more harshly
than it is within Russia. Integrating Russia entails that we continue to
provide properly safeguarded IMF funding to the Russian government (at
least to cover past debt to the IMF) and that we consider debt relief, but
only in exchange for Russian movement on a genuine program of
micro-economic restructuring. Finally, this means we have to take a tough
look at our own practices to determine whether we can open our own markets
up further to competitive Russian products. 


Third, we need to refocus some of our technical assistance. As others have
noted, the United States has spent relatively little on programs designed
to advance the rule of law and other democratic practices, choosing to
concentrate instead on economic reforms and business practices. These
programs can range from developing programs to train judges to assisting in
the development of civic education courses for schools and universities.
Our goal should not be to impose our system on Russian society, but to help
Russia develop one that fits its own conditions, while meeting
international standards.


At the same time, we need to remember that, like the rest of our assistance
programs, our influence will be only at the margins. The demand for a rule
of law society must emerge from within Russian society. At best, we can
help nurture and channel it. This is true of democracy-building more
generally. In the ongoing debate on where Russia is headed, the
Administration and others have pointed to regular elections, a vigorous
media, and respect for basic democratic freedoms as signs of progress and
the success of Administration policy. It is important to remember,
however, that the origins of the great democratic opening of Russian
society occurred under Soviet leader Gorbachev when there were few credible
promises of Western assistance. It happened because the Russian elites and
society more broadly saw these developments as critical to restoring the
country's vitality and turning it into a "normal country." 


Fourth, we need to do a better job of selling America and our values in
Russia. Over the past eight years, we have squandered the vast reservoir
of goodwill Russians had for the United States through our close
identification with an increasingly enfeebled Yeltsin, strong backing of
profoundly unpopular "radical reformers," and unwavering support for
economic policies, which Russians believe led their country to ruin.
Preaching to the Russians about the evils of corruption now will do nothing
to restore that reservoir. There are two ways, however, in which we can
restore some of this goodwill, while imparting values to Russians in a
non-patronizing fashion and laying the foundation for the development of
rule of law over the longer term.


· Exchange programs. We have already done a considerable amount in this
area, and many observers have pointed to these programs as the best payoff
in imparting values and winning friends for the United States. As we look
toward the future, there is less of a need to impart specific technical
skills in democracy-building, NGO-building, and so on. Rather, we need to
give a greater number of Russians the opportunity to enjoy a liberal
education in the United States. Longer-term exchanges will allow them to
experience first-hand how our society functions, as well as to become
acquainted with values that are essential to the building of a rule of law
society. This approach has the added advantage of letting the Russians
themselves adapt our experience to Russian realities. 


· Dissemination of information and information centers. There remains a
critical need for information about the United States and the West in
general in Russia. One of the unsung successes of the past several years
has been the information centers we have set up in several cities across
Russia (Moscow, Vladivostok, St. Petersburg, Rostov-on-Don, Tomsk, Nizhniy
Novgorod, and Yekaterinburg). These centers play to the natural curiosity
Russians still have about the United States as a prosperous and successful
power. They provide not only books and other printed material but also
access to the Internet. As such, they are a source of valuable information
on the United States, including our political and legal systems. Over the
years, Duma deputies and local officials from across the political spectrum
have routinely requested information on U.S. legislation from these centers
on a range of issues that were under consideration in the Duma and other
legislative bodies. This information has improved the overall quality of
Russian legislation. For these reasons, we should consider building up the
collections of these centers and expanding them into other cities. 


Last, senior officials of this and future Administrations need to establish
and maintain a respectful distance from their Russian counterparts. The
problem was not that this Administration overpersonalized the relationship
with Yeltsin - although that did happen - but rather that a relatively
small group of senior Administration officials entered into a "partnership"
with a similarly small group of senior Russian officials to push forward an
agenda focused primarily on the domestic transformation of Russia. Like
all partnerships, this one required constant interaction and a high level
of trust to function effectively. The result was that senior
Administration officials were tempted to turn more to their Russian
partners than to the Intelligence Community and the Foreign Service for
insights as to what was happening in Russia and how to proceed. Moreover,
the success of their partners became critical to the success of the
enterprise as a whole, and slowly the political survival of someone like
privatization czar Chubais became a symbol of the success of reform as a
whole. This ultimately led to a grave misreading of the political
situation, which resulted in the Administration's being caught off guard by
the financial collapse of August 1998.


The example senior Administration officials set had a pernicious influence
down the line, as lesser officials began to see their counterparts in the
Russian governments in a similar fashion, as partners, rather than as first
of all representatives of a foreign government with its own agenda. The
goal was to push forward the domestic transformation of Russia, not to
provide critical assessments of the policies themselves. These official
contacts became the primary sources of information about what was happening
in Russian society, in part because dealing with policy issues left little
time for nurturing contacts elsewhere in Russian society. As a result, we
developed as a government a tendency to see Russia through the prism of our
Russian partners, who had a vested interest in persuading us that they
alone knew what was really happening and what needed to be done.


To guard against such tunnel vision, we need as a government to engage a
broader range of Russian contacts in serious discussion. There are, of
course, limited possibilities for doing this at the highest levels; the
time constraints and press of other business leave little time for serious
grooming of contacts. But we need to utilize to the maximum the
opportunities afforded to Embassy and Consulate officials and official
Washington visitors to engage Russians, not only to argue our policies and
represent our interests, but to listen attentively to what they are saying
about their own country. This task we have not taken seriously enough to
date.


Thank you, Mr. Chairman.


********