Johnson's Russia List #6018 12 January 2002 davidjohnson@erols.com A CDI Project www.cdi.org [Note from David Johnson: 1. Luba Schwartzman: ORT Review. 2. Rossiyskaya Gazeta: Interview with Russian emigre writer Vasiliy Aksenov. (Government Paper Cites Critic of 'Anti-Western Spirit' in Russia) 3. Reuters: Russia slams US blacklist as alliance wobbles. 4. AP: Russia Passes on Missile Defense. 5. RIA Novosti: KREMLIN DENIES U.S. ACCUSATIONS OF HUMAN RIGHTS ABUSE IN CHECHNYA. 6. RIA Novosti: MIKHAIL GORBACHEV COMES OUT FOR INTRODUCING QUOTAS FOR WOMEN IN REPRESENTATIVE BODIES. 7. Moscow Times: Kevin O'Flynn, Stars Aren't Smiling Down on 2002. 8. UPI: Martin Hutchinson, Interview: Building capitalism, Part 1 (Anders Aslund) 9. UPI: Martin Hutchinson, Interview: Building capitalism, Part 2 (Anders Aslund) 10. Trud: Vitaliy Golovachev, Invisible Octopus. Scope of Shadow Economy in Russia Estimated at $90-$110 Billion. (Russia's Shadow Economy Examined)] ******* #1 ORT Review www.ortv.ru Compiled by Luba Schwartzman (luba7@bu.edu) Research fellow at the Institute for the Study of Conflict, Ideology and Policy at Boston University HEADLINES, Friday, January 11, 2002 - Russian Foreign Minister Igor Ivanov presented Aleksei Venetsianov's "Senokos" [Hay-making] to Moscow's Tretyakov Gallery. The painting was bought at an action by a British intelligence agent of Russian descent, Viktor Provatorov, who left the painting to the Russian museum in his will. - Three men who carjacked a Subaru this evening are suspected of belonging to the group of Ingush criminals who were stealing import cars last fall. Investigators suspect that these same men stole writer Mikhail Zhvanetsky's Mercedes. - The Electoral Commission of North Ossetia has postponed the review of Sergei Khetagurov's candidacy in the presidential election. Khetagurov may be denied registration because he indicated an address in Vladikavkaz as his permanent residence, while he's been living in Moscow for several years. He is also accused of holding two passports. Finally, the tax police suspect that the income and family property information Khetagurov filed is false. - Sibur Chairman of the Board Vyacheslav Sheremet has been released from custody. Sibur President Yakov Goldovsky and Vice President Yevgeny Koshchitsa will be detained for ten more days. - In Karelia's Pigmushi settlement, the heating season has not began yet and thousands of people are freezing. - A representative of the General Prosecutor's office declared that Federation Council Speaker Sergei Mironov's statement concerning the verdict against journalist Grigory Pasko is an attempt to pressure the court and the security services. - The Georgian Security Council is expected to make a final decision today concerning Russian peacekeepers in Abkhazia. - The Russian Emergency and Defense Ministries are helping to repair the flood damage in the Krasnodarsk krai. - Russian President Vladimit Putin met with Transneft President Semyon Vainshtock to discuss the work along the Baltic pipeline. President Putin noted that it is vital to de-politicize the pipeline. - The Presidium of the Supreme Arbitration Court has backed up the decision concerning the liquidation of TV-6. The television station's lawyers will file a protest with the Constitutional Court. - A press conference was held by the General Prosecutor's Office on the eve of its 280th anniversary. General Prosecutor Vladimir Ustinov relayed President Putin's congratulations to the employees of the organ; Advisor to the General Prosecutor's Office, Vladimir Kolesnikov, briefed journalists on the latest major cases. - Air Force Commander Anatoly Kornukov announced his intention to retire to the reserves. - Former Ingush President Ruslan Aushev will represent his republic in the Federation Council. - Train fares are expected to rise by about 30 percent in connection with the higher tariffs set by the Railways Ministry. A ticket from Khabarovsk to Moscow, for example, will cost over 3,000 rubles [$100]. - Three Emergency Ministry trucks carrying humanitarian aid have set off for Tajikistan. They are delivering tents, warm clothing, stoves, and fuel to the victims of the Rogun earthquake. ******** #2 Government Paper Cites Critic of 'Anti-Western Spirit' in Russia Rossiyskaya Gazeta 9 January 2002 [translation for personal use only] Interview with Russian emigre writer Vasiliy Aksenov by Vitaliy Dymarskiy under "The Russian West" rubric; date, place not given: "Vasiliy Aksenov: 'If It Had Not Been for the Act of Terrorism, I Would Have Retired'" The writer has already appeared in Rossiyskaya Gazeta, hot on the heels of the tragic events of 11 September. Almost four months have passed since then -- a sufficient period for at least an initial reflection on what happened. That is where our conversation with Aksenov began. [Dymarskiy] People say that those terrorist actions changed the world. What changes have you noticed? [Aksenov] As far as Russia is concerned, in my view it is Putin who has changed. And if those events did affect him, that characterizes him very well. It means that he is not simply a calculating individual but is susceptible to human feelings like sympathy with another country and with other people. At the same time we have also seen some quite cynical approaches to the situation, moreover from a completely unexpected quarter. From the Russian Orthodox Church, for example. Judging from press reports, certain speakers at the recent synod tried to point the finger back at the West by saying that it was to blame for the tragedy because it had engendered terrorism. That is utterly absurd. I was struck by the way that the Russian people, who are subjected to powerful conditioning in an anti-Western spirit, moreover by some of the nation's smartest people, showed sincere solidarity and proved to be much closer to the natural flow of things than might have been expected. Even now all those wise men of a Eurasian bent in Russia are trying to extinguish the renewed sympathy that has emerged for the West by trying to instill in them the ludicrous theory of Eurasian dominance. My view is that Russia could very easily become a part of Eurasia, but by no means could it become the leading part. The fact is that Russia is in Eurasia's backwoods, servicing it with its manpower and mineral resources, but that's all. Russia is hardly going to be capable of holding its own and surviving among those perfidious Asian giants, so it has only one way to go, and that is to the West. Strangely enough, when the 11 September tragedy came along it really did open up new prospects. The fact is that, not only have we never fought against the States, but at critical moments in history we have actually always been together. [Dymarskiy] The events of 11 September have so far given mainly politicians and military people food for thought and for conclusions of some kind. But where are the writers, the artists, the film-makers, the theater? [Aksenov] You know, a lot of writers like to flaunt their independence and make paradoxical pronouncements. For example, one well-known American colleague came to Europe and, evidently eager to impress some gathering, came out with all kinds of nonsense, saying that we Americans were the guilty ones, that we had bombed and killed so many people and were now getting what was coming to us. New Republic magazine even publishes his utterances under the rubric "Looking After Cretins". As far as serious literature is concerned, the tragic events and their consequences will of course find reflection in it, but I am not about to predict when that will happen. In the cinema these nightmares have already been portrayed a thousand times, but the reality has proved much more intense and terrible than the fantasies. Although I am confident that Hollywood and mass culture generally will play around with it some more. To be honest, I had pretty much had enough of America altogether. I was fed up with it. Even before 11 September I was thinking of resigning from the university. Not that I was going to make a demonstrative break from teaching work; I was just going to kind-of drift out of it. But the events that took place showed me an aspect of this nation that made me suddenly realize that Americans are very dear to me. That does not mean that I have suddenly fallen in love with their dreadful mass culture or their weird way of selling books. It is simply that we have been shown the profound meaning of this country, which is surprisingly important to mankind if it still wants to achieve something. [Dymarskiy] What is your forecast for 2002 for relations between Russia and the West? [Aksenov] I am not about to make forecasts, because I have serious fears concerning the situation around Putin. It seems to me that he himnself sincerely wants rapprochement with the West and realizes that Russia has no alternative to taking that path. And that could do him a lot of harm. Moreover our intellectual circles have, unfortunately, failed to understand the need to support the president in that area. It needs to be said plainly that we have no alternative. Otherwise we will be trampled by all those behemoths from the south. ******* #3 Russia slams US blacklist as alliance wobbles By Clara Ferreira-Marques MOSCOW, Jan 11 (Reuters) - Russia on Friday slammed a U.S. decision to keep it on a list of states with a poor track record on the spread of weapons of mass destruction, as old disputes returned to haunt the allies in the war against terrorism. Last week President George W. Bush allowed U.S. technology firms to sell high-speed computers to countries previously excluded by a Cold War-era ban designed to limit the spread of nuclear arms. But Russia remained in the third of four categories, far below countries deemed "reliable" by the United States, the Foreign Ministry said. "This draws attention to the preservation of the Cold War-era system of open discrimination, dividing countries which import U.S. computer technology into different risk groups," the ministry said in a sharply-worded statement. "We would like to hope that, in the light of the new strategic relationship announced by the president of the United States and the president of the Russian Federation, the American administration will reconsider this discriminatory decision." Washington slapped a ban on high-speed computer exports in 1979, in a bid to restrict advanced computing power that could allow countries such as Libya and Cuba to develop missile systems and other weapons of mass destruction. Exports to Canada, Mexico and all of Western Europe do not face such restrictions. Russia's sharp reaction came amid signs that the honeymoon period in the Russian-U.S. alliance forged following the September 11 airline attacks, was under strain. Russian President Vladimir Putin was the first foreign leader to telephone President Bush to offer his support after the hijacked airliner strikes on New York and Washington. Initially, the support won Putin a second hearing on his two-year crackdown on rebels in Russia's secessionist Chechnya province. But as the U.S.-led campaign in Afghanistan winds down the issue has resurfaced, along with fears over media freedoms and disagreements over arms control. WAR OF WORDS On Thursday, the United States accused Russia of using "overwhelming force" in its battle to crush Chechen rebels. "The latest information on Russian operations in Chechnya indicates a continuation of human rights violations and the use of force against civilian targets," State Department spokesman Richard Boucher said. Senior Kremlin aide Sergei Yastrzhembsky refused to comment on the statement, and some experts said Moscow could now come under renewed pressure from the West. "If there does not appear that there is a serious attempt to provide a political solution, if it looks like there are still a lot of abuses by Russian troops, then this is going to be an enormous source of irritation," Robert Nurick of the Carnegie Endowment for International Peace told Reuters. Relations could be further complicated by a court decision to uphold a closure order against TV6, the only television network outside Kremlin control. On Wednesday Washington criticised the "flawed" law on which the closure order was based, and urged the authorities to defend media freedom. Washington's plans to store, rather than destroy, warheads removed from nuclear missiles as part of a post-Cold War disarmament pact, have also left Russian policymakers uneasy. "This is not so important militarily as it is politically, because the Americans tried to weaken Putin's position," said the Institute of Eastern Studies expert Grigory Bondarevsky. "This is not a disaster. This will not totally change our relation with the United States, but it makes cooperation slower, and much more difficult." Nurick said despite the success of the military campaign in Afghanistan, Washington still needed Russia's help if it planned to retain a presence in Central Asia, an issue that could provoke Russian nationalists hostile to Putin's pro-West stance. ******* #4 Russia Passes on Missile Defense January 11, 2001 By VLADIMIR ISACHENKOV MOSCOW (AP) - Russia is the only country in the world to have a shield against ballistic missiles over its capital, but it has shown no intention of matching the U.S. plan to build a nationwide missile defense system, analysts say. A senior U.S. State Department official said Thursday that the Bush administration would welcome Russia's development of its own anti-missile technology for protection against regional threats. He added that the United States would be willing to cooperate with Russia in an anti-missile venture. There was no official Russian reaction to the statement Friday. A Foreign Ministry spokesman said he was aware of the statement, but declined to comment. Analysts said Russia and the United States were unlikely to pool their efforts because the U.S. statement appeared to be an attempt to improve the two countries' relationship rather than a practical proposal. Some saw the U.S. offer as an attempt to mend the diplomatic damage inflicted by the U.S. withdrawal from the 1972 Anti-Ballistic Missile Treaty and differences over upcoming nuclear arms control talks. ``It was intended to sweeten the pill for the Russians after recent Pentagon statements,'' said Yevgeny Volk, the head of the Heritage Foundation's Moscow office. ``It's an attempt to show that Russia and the United States are still partners.'' Other analysts pointed out that Russia sees little sense in building such a system. ``Russia has no enemy to protect against and can't afford such a system anyway,'' said retired Lt.-Gen. Vasily Lata, the former deputy chief of staff of Russia's Strategic Missile Forces. Lata, who is now a consultant to the PIR-Center, an independent think tank, said that the Soviet Union had conducted research to develop missile defense system components in parallel with President Reagan's Star Wars plans in the 1980s. ``The research was dropped after we saw that such a system would be too costly and inefficient,'' Lata said. Soviet and then Russian designers concentrated instead on developing countermeasures to missile defenses as a cheaper and more effective option, he said. The Soviet Union deployed the A-35 anti-ballistic missile system, consisting of radars and 64 missile interceptors, around Moscow in 1974. In later years, that system was continually modified to enhance its ability to intercept ballistic missiles with independently-targeted multiple warheads. The latest version, the A-135, which includes both long- and medium-range missile interceptors, was put on duty in 1994. Moscow's missile defense system complied with the ABM Treaty, which allows both the United States and Russia to protect a single site with no more than 100 interceptors. The United States had a similar system to protect missile fields in North Dakota in the 1970s but shut it down. President Bush last month warned Russia that in six months, the United States would withdraw from the ABM treaty, which bars a nationwide missile shield of the kind the U.S. administration wants to deploy. Bush's statement followed several years of heated arguments with Moscow, which tried to prevent the United States from scrapping the treaty. Last year, Russia proposed to create a joint missile defense system with Western European countries - a move seen as an attempt to rally European opposition to the U.S. missile defense plan. The Russian military said the proposed system could use Russia's S-300 and S-400 long-range air defense missiles, which have a limited capability to intercept missile warheads on close approach along with aircraft. Russia revealed few other specific details of its proposal, which has quietly been shelved. ******* #5 KREMLIN DENIES U.S. ACCUSATIONS OF HUMAN RIGHTS ABUSE IN CHECHNYA MOSCOW, January 11. /RIA Novosti/ - Moscow has denied U.S. State Department spokesman Richard Boucher's allegations that the Russian federal forces used "overwhelming force against civilian targets" in a recent raid on Chechnya's third largest city, Argun. Commenting on Boucher's allegations, the Russian President's Information Department said these must have been made on the basis of "distorted, unverified information carried by the American press." Thus, for instance, Los Angeles Times, referring to Russia's Memorial human rights organization, cited statistics according to which dozens of civilians had been killed in the Argun crackdown. And The Washington Post, referring to another Russian watchdog, Glasnost, reported on 200 civilian casualties. As he commented on the State Department spokesman's pronouncements, Chechen Prosecutor Vsevolod Chernov said he had been taken aback by the criticism of the Russian federal troops for their "use of overwhelming force" in Chechnya and by reports about hundreds or dozens of slain civilians in that secessionist province. He claimed he had personally monitored the Argun operation. According to Chernov, no other weapons than firearms and grenade launchers were used in Argun. The federals employed warplanes exclusively for reconnaissance purposes, he said. Chernov said the police had received six complaints from local citizens in the course of the Argun operation. An investigation was launched on one of them. Of the 70 persons detained in Argun on suspicion of belonging to illegal armed formations, five detainees are currently being checked up on, while the rest have been released, the Chechen Prosecutor reported. Chernov said he didn't know what to make of the American media's reference to Memorial. He cooperates closely with this human rights organization, but has not received any statements from its representatives as of yet. For his part, Chechen Premier Stanislav Ilyasov said, as he commented on Boucher's statement, that "administration officials and local elders had an opportunity to monitor the [Argun] operation." Heat and water supplies were never disrupted and traffic circulation resumed in full as early as January 10, he reported. "Our own experience in Chechnya and the United States' experience in Afghanistan show how difficult it may be to hunt down terrorists without inflicting any casualties on non-combatants," remarked officials at the Russian President's Information Department. Nonetheless, this is what both Russia and the United States seek, department officials said in conclusion, expressing regret over the tone of Mr. Boucher's pronouncements against Russia. ******** #6 MIKHAIL GORBACHEV COMES OUT FOR INTRODUCING QUOTAS FOR WOMEN IN REPRESENTATIVE BODIES MOSCOW, JANUARY 11, 2002 /FROM RIA NOVOSTI CORRESPONDENT NIKOLAI MAKAROV/ -- Women in Russia do not have a strong enough say, which adversely affects politics, business and public life. Ex-president of the USSR Mikhail Gorbachev voiced this view speaking in Moscow on Friday at the conference Women and Elections timed to the 70th anniversary of Raisa Gorbacheva's birthday. Gorbachev came out for introducing quotas for women - from 30 to 50 per cent - in the representative bodies of power. According to him, this measure which will help overcome the "Domostroi principles" is not "humiliation of women but is a real chance for them". The ex-president of the USSR also stressed that "a cardinal turn must occur also in the consciousness of women themselves". The address of the participants in the conference to the president of Russia, to parliament and to public organisations contains a call for taking a decision on introduction of such quotas in the legislation on elections. The participants in the conference address parties and movements with a demand to include at least 30 per cent of women candidates into the election rolls at the forthcoming elections. About 150 women representing political and public organisations, scientists and business-ladies from fifteen regions of the country are participating in the work of the conference. ******* #7 Moscow Times January 11, 2002 Stars Aren't Smiling Down on 2002 By Kevin O'Flynn Staff Writer Astrologers say that 2002 will be pretty good for one large, female star sign Aquarius, although a world war in 2008 may cramp its style. As the year starts -- either as the Old New Year on Sunday or the more widely celebrated New New Year on Jan. 1 -- the country's astrologers are looking at the stars to predict what is in store for Russia, judged an Aquarius since at least astrologer Ptolemy's time in the second century. Whether you think astrology is science, superstitious nonsense or a remnant of the Dark Ages, the fact remains that millions of people read their horoscopes every day. Even several current and former Russian and U.S. leaders and their wives have shown an interest in astrological predictions. Apart from the gossip columns of Komsomolskaya Pravda -- where predictions by one Yury Longo were focused on pop stars (a child for fop pop star Filipp Kirkorov, although not by his wife Alla Pugachyova) -- most astrologers looked at the state of Russia for 2002. Before the new year of Jan. 1, a group of astrologers gathered at a news conference professing their optimism for Russia in the year ahead. Their Putinesque predictions were that the "worst times have gone" and that a beneficial 12 months lie ahead because it would be "a year of the realization of decisions already taken," Interfax reported. Much depends -- according to Sergei Bezborodny, head of the astrology center at the Central House of the Russian Army -- on the period from Jan. 26-28 when oil prices will sink to a critical level. If Russia survives those days, then things will be fine. Bezborodny does warn, though, of a natural disaster between July 21 and Sept. 15 or from Nov. 27 to year's end, which is about as risky as predicting snow in December. Perhaps the most pessimistic of the astrologers doing the rounds in the Russian media was Alexander Zarayev. He predicted in Argumenty i Fakty that Russia would see a bumpy ride between Feb. 28 and March 12 and an even worse time after July 27, with problems in the Middle East and other hot spots. "It will be similar to the [ruble] default in 1998," said Zarayev, who, like many astrologers, was short on details. Zarayev forecasts lots of changes in the government, especially around May. He said Moscow Mayor Yury Luzhkov and the city -- both Virgos, apparently -- would become seriously unglued in the summer. The astrologer with the most specific predictions is probably Alexander Buzinov, a former supervisor at the now-disbanded laboratory for space and astrological forecasts at the Defense Ministry. Buzinov, who is said to have predicted President Boris Yeltsin's early resignation and the events of Sept. 11, told the Pravda.ru web site that inflation will jump in March, Prime Minister Mikhail Kasyanov will be sacked in May and presidential chief of staff Alexander Voloshin will resign in September. Casting his eye on the longer term, he said World War III could start in 2008. With 2002 being the Chinese Year of the Horse, dark horses are a popular prediction among some astrologers, with Pavel Globa saying two of the beasts will rise from nowhere in the political world. Globa said one of the dark horses will be a leader with an economic program of neocommunist leanings who will become president in "12, 13 years when the opposition to Mars has finished," Interfax reported. There was bad news from Albert Timashev, who runs the Astrologer.ru web site. Although he refused to make any predictions for Russia for 2002, he warned that the modern state of Russia, born June 12, 1990, is a Gemini with Virgo rising rather than an Aquarius. "I predict that the current Russian state will not survive until the end of 2004," Timashev said in an e-mail interview. He also ventured a word on the national soccer team, which "will do well but not that well" at this summer's World Cup finals. Argentina will flop, the United States will do well and Brazil is his tip for the title. ******* #8 Interview: Building capitalism, Part 1 By Martin Hutchinson UPI Business and Economics Editor WASHINGTON, Jan. 10 (UPI) -- Having served as an economic adviser to the Russian, Ukranian and Kyrgyz governments during the 1990s, the Swedish-born Anders Aslund expects many of the former Soviet Union and Eastern European economies to grow stronger, with particularly high hopes for Ukraine. Currently senior associate at the Carnegie Endowment for International Peace, Aslund's book "Building Capitalism" (Cambridge University Press) discusses the restructuring process in Eastern Europe and the former Soviet Union. I interviewed him at his office to find out where he thought these countries would go from here, and what lessons his work might teach us about China, another economy recovering from central planning. Q: Where do these economies go from here; it's been 10 years? A: The big question now is the extent to which the rule of law will be introduced. These countries have now done privatization, liberalization and financial stabilization, and now comes the question of whether property rights and contractual rights will be sufficiently well-enforced. What has really happened in terms of crime development is that first there was an explosion of individual crime, from 1989-1994, and then crime became centralized, because it was more efficient to pay off one person than to pay many. After that the oligarchs with their private security forces became dominant. After 1998 crime became institutionalized, and it became evident that the police, security forces, tax police, court and customs are the most corrupt -- this is not well-understood, that it is now the police and not the oligarchs that are the principal source of corruption. Today crime is concentrated, and the question in the different countries is to what extent the rule of law will be re-established, and I expect very different outcomes. It really all comes back to this one question; the others are sorted out. The laws are in place -- they need improvement, but they're there -- even Ukraine has now adopted a civil code and a commercial code. Q: Did you see UPI's Sam Vaknin's piece on Ukraine? His basic thesis is that the oligarchs now control the companies, and want to run the companies properly, and that they have a wonderful base to do it from, in terms of good education, low wage costs, good geographical position, etc. They have people around them who are decent businessmen, like the Russian oil barons have. Thus Ukraine could surprise everybody. A: There are several things in Ukraine that all work in the same direction. Last year Industry and Energy Minister Timoshenko extracted $4 billion from the Ukrainian oligarchy, which is 13 percent of Ukrainian GDP, by cleaning out the energy sector -- $2 billion from the gas trade alone -- and the oligarchs simply ran out of money. There are now only two other major oligarchs standing. For example, Victor Pinchuk, 40 years old, who dominates the steel sector, wants to play within the established legal framework -- the Russian Alfa Group is his ideal. The remaining big oligarchs are businessmen, and those who were not -- the bad guys -- they're gone. It was enough to liberalize a little bit and demand that people pay their taxes. The other part of it in Ukraine is land reform; 50 percent of the land is now in private hands. The problem is that some of the holdings are huge, one I've heard of is 60,000 hectares. That's a problem, but still there is a market, it's not just rent seeking. Then since President (Leonid) Kuchma kicked out the minister of Security after the Gongaza scandal, the police organizations, that used to function as a centralized organized crime apparatus, can no longer do so because the leadership is too weak. There's an enormous frustration in the Ukrainian elite now, they can't steal any longer -- they're blocking each other from stealing all the time. Ukraine is thus a clear model for the thesis that democracy produces conflicts and competition that drives down rent seeking. The other approach is of course Russia, where everything is done on a top-down basis by the president and his aides through parliament. Everybody likes the Russian model but you have to compare Russian growth in 2001 of 5-6 percent, with problems beginning to appear because of the lower oil price; and Ukraine, where growth in 2001 was about 9 percent. Ukraine seems much more stable actually -- everybody complains about it because it's totally opaque at the top -- you can't talk to one person and say "can I trust your word?" -- nobody has such power. In Russia now it's orderly at the top, on the other hand only those reforms that are started from above go through; you can't have reform from below, as there is in Ukraine, where you have a model that is essentially bottom-up. In central Asia, the position is bleaker, even in countries such as Kyrgyzstan that seemed models of reform in the mid 1990s. The problem with small countries, such as Kyrgyzstan (which unlike Kazakhstan, does have a lot of small enterprises), is that you can't do substantial business without the support of the ruling family. Ukraine and Russia are too big for that; to some extent democracy is easier in a large country, look at India. Democracy and economic reform work closely together, because it's a matter of controlling the elite, particularly now the elite in law enforcement. So far things have changed very fast, and now probably that era of change will slow down -- we are in a post-revolutionary period. Q: My impression is that structurally a lot less will change in the next 10 years than in the last 10, but that hopefully average rates of economic growth will be considerably higher. You may also see Pat Buchanan's "giant sucking sound" of Western European jobs heading to Eastern Europe. A: It will be very interesting to see, but in my view the growth rates in the former Soviet Union may be higher than in Eastern Europe. There the EU accession process has in general already taken place as far as the easy, helpful items are concerned, and now you're coming to the hard, damaging ones such as agriculture and labor legislation. Estonia, in particular has had to re-impose an external tariff as a result of EU harmonization, as well as regulating its free agriculture and free labor market, and probably raising tax and social transfer rates. So Estonia, in entering the EU will undergo a strange regression, as well as closing the doors to Russia and its neighbors. In the former Soviet Union, on the other hand, tax rates are coming down and reforms are continuing; for example, Estonia, Latvia and Kazakhstan have a free labor market. So some of the Central European countries, such as Poland and the Czech Republic, have got stuck, and are looking to Brussels, which itself is more concerned with the situation in Western European countries, which want stability rather than growth. This I think can produce a very interesting collision of ideas and values. Q: It's an interesting question then whether some of the Eastern European countries may turn Euro-Sceptic, and decide they'd be better off outside the EU. A: There are two obvious candidates for this. One is the Czech Republic, where ex-Prime Minister Vaclav Klaus is anti-EU, or at least very critical, and which, because of its geographical position, doesn't need to join the EU to get the benefits of its economy -- very like Switzerland, for example. The other is Estonia, which really has a different ideology from the EU -- Estonia is a truly free trading country -- and Estonia now has a majority against joining the EU. Q: I think this may happen in some of the former Yugoslavia, too -- in Croatia, the HDZ (the party of the late President Tudjman) did very well in the recent local elections, so there could be a Euro-Sceptic government there from the end of 2003. A: Yes, and since the last chapters of the acquis communautaire are the most difficult, you may get some countries that are priced out of the market by the new social costs. Q: In the case of a Bulgaria or Romania, though, they're fairly strongly Europhile because almost whatever they do, if they're in the EU they're a lot richer than they are now, since particularly Bulgaria has very well-educated people. A: You have to look at say East Germany, which has 35 percent unemployment. Q: Yes, but that's because the two marks were united at 1 to 1 -- presumably nobody's going to raise Bulgarian wages to German levels in a hurry. A: But if you have a common labor market, there will be a tendency that way. That's why Poland, which was the great success of the first decade, now has unemployment of 18 percent and is one of the most problematic countries, partly because they haven't privatized fully and still have a huge unproductive state sector, for example their coal industry which they haven't privatized and Russia, for instance, has. Q: And Poland exemplifies the habit that electorates have of throwing out governments regardless, like in Bulgaria where they threw out President Stoyanov only five months after electing a reformist government. A: Yes, that was quite shocking. The point you have to remember about these elections is that all elections in these countries are essentially referenda on corruption, and that is the cleansing mechanism for the state. In Lithuania for example each election goes the opposite way of the last one, but there's very little ideological or policy differences between the parties. So in summary we'll see quite an interesting picture in that Russia and Ukraine will look much sounder than most of Eastern Europe, provided next March's Ukrainian elections have reasonable results, as seems likely. ******* #9 Interview: Building capitalism: Part 2 By Martin Hutchinson Business and Economics Editor WASHINGTON, Jan. 11 (UPI) -- Having served as an economic adviser to the Russian, Ukrainian, and Kyrgyz governments during the 1990s, the Swedish-born Anders Aslund expects many of the former Soviet and Eastern European economies to grow stronger, with particularly high hopes for Ukraine. Currently senior associate at the Carnegie Endowment for International Peace, Aslund's "Building Capitalism" (Cambridge University Press) discusses the restructuring process in Eastern Europe and the former Soviet Union. Following is the second and final part of his interview, discussing the economic prospects of countries which remain communist. Q: China's obviously gone quite a long way towards the free market, Vietnam has played at moving in this direction. A: Well, it doesn't tell us too much, at least that's the optimistic view. You have to remember that there were fundamental differences between China and the former Soviet Union -- the Chinese state was strong enough to undertake reforms, whereas the Soviet state was not -- Gorbachev could not get anything done without democratization, and when he tried to democratize the state collapsed. Another difference is the economic structure. The Soviet Union had 30 percent-50 percent of gross domestic product that was value subtracting and had to go, while China had an industry of maybe 10 percent of GDP, about half of which was bad. So China could resolve that problem because it was still a primarily agricultural economy. There's also the matter of scale; many of the Soviet factories and collective farms were gigantic, whereas the Chinese ones were much more modest. Q: Do you believe Chinese economic statistics? A: No. It's easy to compare; if you look at the annual reports of the World Bank and you compare China and India, you'll see that China always has the higher growth rate and yet, at purchasing power parity, the economies are more or less in the same place. China obviously has wrong statistics, with growth rates exaggerated by 2 percent-3 percent per annum. Q: Yes, and there's the bad debts in the banks as well -- there's a 2 percent-3 percent per annum exaggeration and another 2 percent-3 percent of GDP per annum over a 10-year period that's gone into bad debts that they aren't about to sort out. A: What you would look for in China, is, did they solve any of their problems? There's no alternative to the Party, the bad state sector is not decreasing, in fact it's growing, their bad debts, which indeed are a major problem, are not showing a decline. Q: They're up to about 70 percent of GDP, as far as one can tell, and are getting fairly close to the total deposits in the economy, which would presumably produce a huge liquidity crisis if the two numbers crossed. A: And if you take examples of what you shouldn't do in order to produce economic stability, then you get Chinese policy. Certain regions have been developed, certain parts of the economy have been liberalized and not others, and this has given certain people fairly high incomes and left the rest in poverty. It's a bit like the former Yugoslav system, with poverty and socialism down in Macedonia and Kosovo and relative wealth and liberalization in Slovenia and Croatia. Q: And the Yugoslav model ended badly, so therefore presumably at some stage you're looking at a Chinese economic crisis, which is my view and that of Gordon Chang in "The Coming Collapse of China" although he said that entry into the World Trade Organization would precipitate it, and I'm not sure I believe the mechanism. A: It's too important to be governed by an international organization. Q: They'll just ignore the WTO rules, surely. A: Yes. So I would expect there to be major difficulties, but I don't know China very well, I emphasize. But I don't see them disarming the problem, by education for example, which was the major shortfall in the former Soviet Union where huge mistakes were made in the first couple of years because nobody knew what to do. The real conclusion, when you compare China and Russia is that Russia has made an enormous investment in becoming a democracy, and China still has all those costs ahead of it. While China has the advantage of being more or less ethnically homogenous, the social strains are still there, and of course China is at least as corrupt as Russia, if not more corrupt. Corporate governance for example, the difficulties of which in Russia are freely discussed, in China is completely impossible, since almost all large companies have a government majority shareholding. Q: Yes, surely the Chinese stock market has to be a complete casino, with steel companies for example doing Initial Public Offerings on 28 times earnings. A: While in Russia you have a P/E of 5 on average, even after stock prices have doubled in the last two years. Indeed, my worry for Russia is that you'll have too much money coming in again, as you had in 1997-98 -- they just can't handle it. Large "easy money" portfolio investment in particular is very demoralizing. Q: That's counter-intuitive, isn't it, that the stock market boom is the biggest threat to the economy? A: Of course. ******* #10 Russia's Shadow Economy Examined Trud 10 January 2002 [translation for personal use only] Article by Vitaliy Golovachev, Trud political observer: "Invisible Octopus. Scope of Shadow Economy in Russia Estimated at $90-$110 Billion" Parallel to the official economy in Russia, there is also a shadow economy, which greatly affects practically all sectors. Specialists subdivide it into the "gray" [semi-legal] economy (legal enterprises which conceal income or engage in false export and other machinations) and the criminal economy (trade in narcotics, arms, racketeering, prostitution). In 2001, the volume of the "gray" segment of the economy was estimated by government experts at $50 billion, or 18 percent of the gross domestic product (GDP). For comparison: $50 billion was the income portion of the entire federal budget of Russia last year. Furthermore, $40-$60 billion circulates within criminal business. According to the latest data of the General Prosecutor's Office, up to 60 percent of Russian enterprises and organizations are controlled by organized crime groups. Altogether, the shadow economy has reached fantastic proportions--from $90 to $110 billion. Public officials take a big bite Many public officials, politicians and entrepreneurs are involved in the shadow sphere. Lobbyists act almost openly, and bribery is practically the norm in our life. There are even tariffs for obtaining permits and licenses in various organizations. And, for example, when graduate students enroll in many medical schools, they must "give" $15,000-$20,000, and in law and economic faculties of universities--$10,000-$20,000. In small and medium business, one cannot take a step without an "envelope" or expensive gift. State Duma Deputy and leader of the Development of Enterprise Party, Ivan Grachev, cited a shocking figure: Entrepreneurs in our country spend around $10 billion a year on bribes to public officials of all levels. Another fact: According to the data of the MVD [Ministry of Internal Affairs], in one year, the sum of $1.5 million was handed over to the "right" people for what would seem to be a routine procedure--granting of licenses for production of alcoholic products. Shadow money is laundered and placed into circulation, and a large part of it goes abroad. In one of his interviews, former General Prosecutor of Russia Yuriy Skuratov stated that, several years ago, high ranking Russian public officials had millions of dollars in accounts in foreign banks. In his words, "in only one of them, in Lugano (Switzerland), individual deposits by dozens of Russian public officials were reported." Similar accounts were also discovered in banks in Greece, Cyprus, the USA and France... Has this situation changed in recent years? In the opinion of the Russian Federation Presidential Advisor on Economic Questions, Andrey Illarionov, "the scope of corruption today is even higher than before. Previously, this was done in somewhat of an amateurish manner, but now corruption is becoming institutionalized." Of course, there are similar phenomena in the developed countries as well. However, while in the countries of the European Union the relative share of the shadow economy fluctuates from 7 to 16 percent, here, in the opinion of Director of the Federal Tax Police Service Mikhail Fradkov, it takes up around 40 percent (taking into consideration the criminal segment). Economic crime and corruption have taken on menacing proportions. "In a year, 20,000 public officials used their official positions to commit 55,000 crimes. And within the complement of organized groups there were 1,405 crimes reported," Russian Federation First Deputy General Prosecutor Yuriy Biryukov announced recently. And this is only what we have been able to uncover. Much more still remains "outside the picture." For example, in half a year, there were 6,980 cases of bribery uncovered. It is unlikely that anyone would argue the fact that for Russia this is a mere drop in the bucket. One of the leading analysts of the Federal Tax Police Service, Dmitriy Makarov, tells about how the struggle against the shadow economy is proceeding. [Correspondent] Dmitriy Gennadyevich, what are the most typical schemes of obtaining shadow income? [Makarov] There are very many of them. For example, the so-called one-day firms--or, in our terminology, anonymous structures--are widely used in the shadow economy. These firms are registered under lost or stolen passports (often hundreds of fictitious structures are "housed" in one apartment, whose owner does not even suspect this), as well as to non-existent persons or at non-existent addresses. One-day firms are used for all sorts of machinations! Here is one of the schemes: Firm "A" makes a verbal agreement with company "B" for performance of certain work or provision of services. However, the written agreement with "B" is concluded not by "A", but by fictitious firm "C." When the work is fulfilled, the money is transferred to the account of "C", generally in non-cash form. Then it is cashed and handed over in a suitcase to firm "A," and firm "C" simply disappears. Naturally, no taxes are paid. When the tax inspectors come to the registration address of "C," it turns out that this is a residential apartment whose owner had at one time lost his passport, or else a pensioner who had given his documents to someone for a time. Threat to economic security These one-day firms also inflict great detriment upon the state by using another scheme: They unlawfully receive from the budget the sum of value-added tax (VAT), which, as proscribed by law, is refunded to exporter enterprises when the products are shipped abroad. The swindling in this case consists of the fact that either there was no exported product at all, or that its volume had been greatly overstated. In 2000, machinations with VAT took on mass proportions and encompassed practically all regions of Russia. An analysis of the monetary flows in the foreign economic sphere showed that the rates of increasing payments by exporter enterprises significantly surpassed the growth in volumes of export itself. The overpayments "for air" comprised almost 12 billion rubles (R). Huge sums were lost from the budget. In this case, not only one-day firms were used, but also fictitious accounts in banks, overstated export value of goods, and forged customs declarations. The situation was so serious that a special report had to be sent to the President's Administration of Russia. The discussion, in essence, centered around a threat to the country's economic security. The FSNP [Federal Tax Police Service] developed a secret operation, "Zachet," ["mutual offset"], in which associates of the tax police, the tax services, the internal affairs agencies, the FSB [Federal Security Service], and customs officials participated. They tossed a huge dragnet over criminals, so to speak, which encompassed the entire country. Another operation under the code name, "Podsnezhniki" ["snowdrops"], was aimed at identifying one-day firms and suppressing their activity. Today, we may summarize certain results. During 9 months of 2001, losses from replacement of VAT "for air" in the sum of over R6.9 billion were uncovered. Over R2.2 billion were returned to the budget. VAT refunds in the amount of over R4 billion were prevented. Hundreds of attempts at certifying false export under falsified documents were suppressed. In the course of Operation Snowdrop, 115,258 anonymous structures were exposed, through which considerable sums had passed (R8.9 billion were recorded). Operations were halted on 1,956 accounts. Thousands of materials were sent to the tax agencies for the purpose of initiating lawsuits on recognizing the unlawful registration of one-day firms. [Correspondent] Was money transferred abroad through such fictitious firms? [Makarov] Of course. I will cite only that sum which we were able to determine in the course of the operation--over $33 million. But, naturally, it is already impossible to investigate those anonymous structures which have "evaporated." I will only say that, according to data of the Central bank of the Russian Federation, the drain of capital from our country in 1999-2000 surpassed $40 billion. Obviously, not all of these transfers were performed in violation of the law, but those enterprises which used the services of one-day firms in most cases consciously opted for serious violations. Over 660 criminal cases were filed in the course of the operation. [Correspondent] Were you able to identify those who organized the fictitious firms? [Makarov] Our "dragnet" netted over 500 people. [Correspondent] Could you cite at least a few examples? [Makarov] In the Khanty-Mansi Autonomous Okrug, we audited the closed joint-stock company Asta. It turned out that the director had organized a well-concealed criminal group for registering firms and entrepreneurs to fictitious persons. Various accounts were used for cashing monetary means and transferring bank notes to enterprises in Nizhnevartovsk, as well as to private individuals who were concealing their entrepreneurial activity. The complement of the crime syndicate included not only associates of Asta, but also of the closed joint-stock company Yuridicheskoye Byuro, NGAB Yermak, the Tyumen branch of Vneshtorgbank, as well as middlemen who gave the cash money to clients. Enterprise managers and shadow entrepreneurs employed the services of Asta. As a result, the budget lost R55 million due to unpaid taxes and unlawful refund of VAT. Thirty-one criminal cases were filed against all the participants. The directors of Asta and Yuridicheskoye Byuro were taken into custody. Their current accounts were seized, and cash money in the sum of R1.9 billion was confiscated. Here is another case. In Maritime Kray, two Russians and a citizen of South Korea organized but did not register a firm. They had falsified paperwork, and they were supposedly acting under power of attorney from entrepreneur Pak Ok Sun, who had in fact died back in 2000. The trio did business on the sale of a large amount of fish through illegal channels. Their gross income for 2000 comprised $1.3 million. Their net income was R1.7 million. Two of the participants in the crime group were arrested, and one--O. V. Lepeshkin--managed to flee and is currently being sought. There are many machinations in the timber industry complex. In the course of a search of the offices of OOO [limited liability company] Vityaz (Maritime Kray) and at the residence of its director, falsified documents on five one-day firms were found. By sending saw-timber abroad, the director had concealed R2.3 million from taxation. Serious violations were discovered also in the organizations of the Ministry of Defense. Specifically, the enterprises belonging to the Main Rocket-Artillery Administration had engaged in the procurement, processing and sale of non-ferrous metal scrap without having a license and without showing the obtained income in the bookkeeping documents. Over R30 million were returned to budgets of all levels. There are thousands of such cases. For some firms, the investigation continues, while others still await an in-depth audit. We were interested, for example, in the fact that over 1.5 million organizations had presented to the tax organs either "zero balances," or had not filed tax declarations at all. A significant part of these firms is "anonymous," as practical experience shows. Be assured: We will sift through our sieve everyone who evokes suspicion. Illegal income of oil companies [Correspondent] In the USA and a number of other countries, many secret agents are planted in illegal business, who transmit most valuable information. Does the tax police make use of this experience? [Makarov] Not a single structure which engages in exposing secret operations can successfully operate without a network of agents. Of course, we too have such a network. But this is only one of the channels of obtaining information. [Correspondent] In the shadow economy, as in the criminal world, there are harsh customs. If a secret agent is exposed, he has few chances of saving himself. Have you lost many of your agents? [Makarov] Thank God, we have not had any failures. However, there have been some casualties among the officers of the tax police--around 20 associates have perished. There is an ongoing fierce struggle with underground business, in which tens of billions of dollars circulate. Wherever there is big "shadow" money, there is always a very high risk for operative workers. After all, war is war. [Correspondent] Do large Russian companies engage in shadow machinations? [Makarov] Investigations have either already been conducted on some of them, or there are signals which require investigation. I will not repeat what has been published in the press. I will tell about Operation Stakhanovtsy, which began around a year-and-a-half ago. Specifically, the oil companies were investigated in the course of this operation. Some of them had used exploratory and survey wells in the regimen of industrial exploitation, but did not show the profits in their documents. Also, wells were exploited which were not even listed on the balance sheets. The oil companies received (and I believe, still receive) huge amounts of money through "unlawful" channels, so to speak. For example, at the time of the audit, the Belyye Nochi Oil Company had been performing industrial exploitation of wells which were not listed on the balance sheet. We can imagine what kind of shadow funds the managers of Belyye Nochi had at their disposal if the supplemental payments to the budget alone comprised R33.8 million. On the whole, 146 crimes were exposed. Losses in the amount of R2 billion 181 million were recovered. [Correspondent] Is it generally possible to conquer the "shadow octopus?" You expose a thousand one-day firms, and 10,000 new ones crop up in their place. You expose the machinations of the oil generals, and when the tax policemen leave they begin industrial exploitation of new wells which are not listed on the balance sheets. Is this not reminiscent of tilting windmills? [Makarov] No, because we must judge the effectiveness of our work by objective indicators. And they are such: In January-November of 2001, the Federal Tax Police Service returned R97.2 billion to the state. Re-computed, this is over $3 billion. Around 35,000 criminal cases were filed, and 132,000 people were brought to administrative responsibility (with fines totaling R455 million). And the relative share of the "gray" segment of the shadow economy, I would like to stress, has declined. In 1999, it comprised 25 percent of the GDP, and today it is 18 percent. Although there will always be unscrupulous dealers who want to circumvent the law in order to get rich at the expense of the state. And we will always need the tax police. It is another matter that we must improve the legislation and eliminate the "gaps" which exist in it. In my opinion, we should significantly tighten sanctions for machinations and deceit of the state. [Correspondent] In recent years, there has been an energetic merging of criminal business with the "gray" economy. Legally operating enterprises are financing criminal groups. Are the tax police able to expose these ties? Including the channels of transfer of monetary means to bandit formations in Chechnya? [Makarov] Obviously. The FSNP Main Administration on the Central Federal District has sent to the FSB and MVD [Ministry of Internal Affairs] materials on 65 commercial structures which are suspected of financing bandit formations on the territory of Chechnya. Fifty-four criminal cases have already been filed. Such firms have been exposed, specifically, in Kostroma. Many of the aforementioned 65 structures engaged in the unlawful production and sale of alcohol, and the money received went to Chechnya. Altogether, the Federal Tax Police Service is currently studying the activity of around 3,000 legal entities and individuals suspected of involvement in financing of organized crime groups. *******