The Project Gutenberg Ebook of Russian Roulette: Russia's Economy in Putin's Era, by Sam Vaknin
#6 in our series by Sam Vaknin

• This is a COPYRIGHTED Project Gutenberg eBook, Details Below **
• Please follow the copyright guidelines in this file. **

Copyright (C) 2002 Lidija Rangelovska.

We encourage you to keep this file, exactly as it is, on your own disk, thereby keeping an electronic path open for future readers. Please do not remove this header information.

This header should be the first thing seen when anyone starts to view the eBook. Do not change or edit it without written permission. The words are carefully chosen to provide users with the information they need to understand what they may and may not do with the eBook.

**Welcome To The World of Free Plain Vanilla Electronic Texts**

**EBooks Readable By Both Humans and By Computers, Since 1971**

*****These eBooks Are Prepared By Thousands of Volunteers!*****

Information on contacting Project Gutenberg to get eBooks, and further information, is included below. We need your donations.

The Project Gutenberg Literary Archive Foundation is a 501(c)(3) organization with EIN [Employee Identification Number] 64-6221541

Title: Russian Roulette: Russia's Economy in Putin's Era

Author: Sam Vaknin

Release Date: December, 2003 [EBook #4779] [This file was first posted on September 15, 2002]

Edition: 11

Language: English

Character set encoding: ASCII

The Project Gutenberg eBook of Russian Roulette: Russia's Economy in Putin's Era, by Sam Vaknin
*******This file should be named rroul11.txt or rroul11.zip *******

Corrected EDITIONS of our eBooks get a new NUMBER, rroul12.zip

We are now trying to release all our eBooks one year in advance of the official release dates, leaving time for better editing. Please be encouraged to tell us about any error or corrections, even years after the official publication date.

Please note neither this listing nor its contents are final til midnight of the last day of the month of any such announcement. The official release date of all Project Gutenberg eBooks is at Midnight, Central Time, of the last day of the stated month. A preliminary version may often be posted for suggestion, comment and editing by those who wish to do so.

Most people start at our sites at:
http://gutenberg.net or
http://promo.net/pg

These Web sites include award-winning information about Project Gutenberg, including how to donate, how to help produce our new eBooks, and how to subscribe to our email newsletter (free!).

Those of you who want to download any eBook before announcement can get to them as follows, and just download by date. This is also a good way to get them instantly upon announcement, as the indexes our cataloguers produce obviously take a while after an announcement goes out in the Project Gutenberg Newsletter.

http://www.ibiblio.org/gutenberg/etext03 or ftp://ftp.ibiblio.org/pub/docs/books/gutenberg/etext03

Or /etext02, 01, 00, 99, 98, 97, 96, 95, 94, 93, 92, 92, 91 or 90

Just search by the first five letters of the filename you want, as it appears in our Newsletters.

Information about Project Gutenberg (one page)

We produce about two million dollars for each hour we work. The time it takes us, a rather conservative estimate, is fifty hours to get any eBook selected, entered, proofread, edited, copyright searched and analyzed, the copyright letters written, etc. Our projected audience is one hundred million readers. If the value per text is nominally estimated at one dollar then we produce $2 million dollars per hour in 2001 as we release over 50 new eBook files per month, or 500 more eBooks in 2000 for a total of 4000+ If they reach just 1-2% of the world's population then the total should reach over 300 billion eBooks given away by year's end.

The Goal of Project Gutenberg is to Give Away One Trillion eBook Files by December 31, 2001. [10,000 x 100,000,000 = 1 Trillion] This is ten thousand titles each to one hundred million readers, which is only about 4% of the present number of computer users.

At our revised rates of production, we will reach only one-third of that goal by the end of 2001, or about 4,000 eBooks. We need funding, as well as continued efforts by volunteers, to maintain or increase our production and reach our goals.

The Project Gutenberg Literary Archive Foundation has been created to secure a future for Project Gutenberg into the next millennium.

As of February, 2002, contributions are being solicited from people and organizations in: Alabama, Alaska, Arkansas, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.

We have filed in all 50 states now, but these are the only ones that have responded.

As the requirements for other states are met, additions to this list will be made and fund raising will begin in the additional states. Please feel free to ask to check the status of your state.

In answer to various questions we have received on this:

We are constantly working on finishing the paperwork to legally request donations in all 50 states. If your state is not listed and you would like to know if we have added it since the list you have, just ask.

While we cannot solicit donations from people in states where we are not yet registered, we know of no prohibition against accepting donations from donors in these states who approach us with an offer to donate.

International donations are accepted, but we don't know ANYTHING about how to make them tax-deductible, or even if they CAN be made deductible, and don't have the staff to handle it even if there are ways.

Donations by check or money order may be sent to:

Project Gutenberg Literary Archive Foundation PMB 113
1739 University Ave.
Oxford, MS 38655-4109

Contact us if you want to arrange for a wire transfer or payment method other than by check or money order.

The Project Gutenberg Literary Archive Foundation has been approved by the US Internal Revenue Service as a 501(c)(3) organization with EIN [Employee Identification Number] 64-622154. Donations are tax-deductible to the maximum extent permitted by law. As fund-raising requirements for other states are met, additions to this list will be made and fund-raising will begin in the additional states.

We need your donations more than ever!

You can get up to date donation information online at:

http://www.gutenberg.net/donation.html

***

If you can't reach Project Gutenberg,
you can always email directly to:

Michael S. Hart <hart@pobox.com>

Prof. Hart will answer or forward your message.

We would prefer to send you information by email.

**Information prepared by the Project Gutenberg legal advisor** (Three Pages)

***START** SMALL PRINT! for COPYRIGHT PROTECTED EBOOKS ***

TITLE AND COPYRIGHT NOTICE:

Russian Roulette: Russia's Economy in Putin's Era, by Sam Vaknin Copyright (C) 2002 Lidija Rangelovska.

This eBook is distributed by Professor Michael S. Hart through the Project Gutenberg Association (the "Project") under the "Project Gutenberg" trademark and with the permission of the eBook's copyright owner.

Please do not use the "PROJECT GUTENBERG" trademark to market any commercial products without permission.

LICENSE
You can (and are encouraged!) to copy and distribute this Project Gutenberg-tm eBook. Since, unlike many other of the Project's eBooks, it is copyright protected, and since the materials and methods you use will effect the Project's reputation, your right to copy and distribute it is limited by the copyright laws and by the conditions of this "Small Print!" statement.

[A] ALL COPIES: You may distribute copies of this eBook electronically or on any machine readable medium now known or hereafter discovered so long as you:

(1) Honor the refund and replacement provisions of this "Small Print!" statement; and

(2) Pay a royalty to the Foundation of 20% of the gross profits you derive calculated using the method you already use to calculate your applicable taxes. If you don't derive profits, no royalty is due. Royalties are payable to "Project Gutenberg Literary Archive Foundation" within the 60 days following each date you prepare (or were legally required to prepare) your annual (or equivalent periodic) tax return.

[B] EXACT AND MODIFIED COPIES: The copies you distribute must either be exact copies of this eBook, including this Small Print statement, or can be in binary, compressed, markup, or proprietary form (including any form resulting from word processing or hypertext software), so long as *EITHER*:

(1) The eBook, when displayed, is clearly readable, and does *not* contain characters other than those intended by the author of the work, although tilde (~), asterisk (*) and underline (_) characters may be used to convey punctuation intended by the author, and additional characters may be used to indicate hypertext links; OR

(2) The eBook is readily convertible by the reader at no expense into plain ASCII, EBCDIC or equivalent form by the program that displays the eBook (as is the case, for instance, with most word processors); OR

(3) You provide or agree to provide on request at no additional cost, fee or expense, a copy of the eBook in plain ASCII.

LIMITED WARRANTY; DISCLAIMER OF DAMAGES This eBook may contain a "Defect" in the form of incomplete, inaccurate or corrupt data, transcription errors, a copyright or other infringement, a defective or damaged disk, computer virus, or codes that damage or cannot be read by your equipment. But for the "Right of Replacement or Refund" described below, the Project (and any other party you may receive this eBook from as a PROJECT GUTENBERG-tm eBook) disclaims all liability to you for damages, costs and expenses, including legal fees, and YOU HAVE NO REMEDIES FOR NEGLIGENCE OR UNDER STRICT LIABILITY, OR FOR BREACH OF WARRANTY OR CONTRACT, INCLUDING BUT NOT LIMITED TO INDIRECT, CONSEQUENTIAL, PUNITIVE OR INCIDENTAL DAMAGES, EVEN IF YOU GIVE NOTICE OF THE POSSIBILITY OF SUCH DAMAGES.

If you discover a Defect in this eBook within 90 days of receiving it, you can receive a refund of the money (if any) you paid for it by sending an explanatory note within that time to the person you received it from. If you received it on a physical medium, you must return it with your note, and such person may choose to alternatively give you a replacement copy. If you received it electronically, such person may choose to alternatively give you a second opportunity to receive it electronically.

THIS EBOOK IS OTHERWISE PROVIDED TO YOU "AS-IS". NO OTHER WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, ARE MADE TO YOU AS TO THE EBOOK OR ANY MEDIUM IT MAY BE ON, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Some states do not allow disclaimers of implied warranties or the exclusion or limitation of consequential damages, so the above disclaimers and exclusions may not apply to you, and you may have other legal rights.

INDEMNITY
You will indemnify and hold Michael Hart and the Foundation, and its trustees and agents, and any volunteers associated with the production and distribution of Project Gutenberg-tm texts harmless, from all liability, cost and expense, including legal fees, that arise directly or indirectly from any of the following that you do or cause: [1] distribution of this eBook, [2] alteration, modification, or addition to the eBook, or [3] any Defect.

WHAT IF YOU *WANT* TO SEND MONEY EVEN IF YOU DON'T HAVE TO? Project Gutenberg is dedicated to increasing the number of public domain and licensed works that can be freely distributed in machine readable form.

The Project gratefully accepts contributions of money, time, public domain materials, or royalty free copyright licenses. Money should be paid to the:
"Project Gutenberg Literary Archive Foundation."

If you are interested in contributing scanning equipment or software or other items, please contact Michael Hart at: hart@pobox.com

*SMALL PRINT! Ver.03.17.02 FOR COPYRIGHT PROTECTED EBOOKS*END*

Russian Roulette
Russia's Economy
In Putin's Era

1st EDITION

Sam Vaknin, Ph.D.

Editing and Design:
Lidija Rangelovska

Lidija Rangelovska
A Narcissus Publications Imprint, Skopje 2002

First published by United Press International - UPI Not for Sale! Non-commercial edition.

(C) 2002 Copyright Lidija Rangelovska.
All rights reserved. This book, or any part thereof, may not be used or reproduced in any manner without written permission from: Lidija Rangelovska - write to:
palma@unet.com.mk or to
vaknin@link.com.mk

Visit the Author Archive of Dr. Sam Vaknin in "Central Europe Review": http://www.ce-review.org/authorarchives/vaknin_archive/vaknin_main.html

ISBN: 9989-929-31-9

http://samvak.tripod.com/guide.html
http://economics.cjb.net
http://samvak.tripod.com/after.html

Created by: LIDIJA RANGELOVSKA
REPUBLIC OF MACEDONIA

C O N T E N T S

I.      The Security Apparatus
II.     The Energy Sector
III.    Financial Services
IV.     The Russian Devolution - The Regions
V.      Agriculture
VI.     The Author

VII. About "After the Rain"

The Security Apparatus

Shabtai Kalmanovich vanished from London in late 1980's. He resurfaced in Israel to face trial for espionage. He was convicted and spent years in an Israeli jail before being repatriated to Russia. He was described by his captors as a mastermind, in charge of an African KGB station. In the early 1970's he even served as advisor (on Russian immigration) to Israel's Iron Lady, Golda Meir. He then moved to do flourishing business in Africa, in Botswana and then in Sierra Leone, where his company, LIAT, owned the only bus operator in Freetown. He traded diamonds, globetrotted flamboyantly with an entourage of dozens of African chieftains and their mistresses, and fraternized with the corrupt elite, President Momoh included. In 1986-7 he even collaborated with IPE, a London based outfit, rumored to have been owned by former members of the Mossad and other paragons of the Israeli defense establishment (including virtually all the Israelis implicated in the ill-fated Iran-Contras affair). Being a KGB officer was always a lucrative and liberating proposition. Access to Western goods, travel to exotic destinations, making new (and influential) friends, mastering foreign languages, and doing some business on the side (often with one's official "enemies" and unsupervised slush funds) - were all standard perks even in the 1970's and 1980's. Thus, when communism was replaced by criminal anarchy, KGB personnel (as well as mobsters) were the best suited to act as entrepreneurs in the new environment. They were well traveled, well connected, well capitalized, polyglot, possessed of management skills, disciplined, armed to the teeth, and ruthless. Far from being sidetracked, the security services rode the gravy train. But never more so than now. January 2002. Putin's dour gaze pierces from every wall in every office. His obese ministers often discover a sudden sycophantic propensity for skiing (a favorite pastime of the athletic President). The praise heaped on him by the servile media (Putin made sure that no other kind of media survives) comes uncomfortably close to a Central Asian personality cult. Yet, Putin is not in control of the machinery that brought him to the pinnacle of power, under-qualified as he was. This penumbral apparatus revolves around two pivots: the increasingly fractured and warlord controlled military and, ever more importantly, the KGB's successors, mainly the FSB.
A. The Military
Two weeks ago, Russia announced yet another plan to reform its bloated, inefficient, impoverished, demoralized and corrupt military. Close to 200,000 troops are to go immediately and the same number in the next 3 years. The draft is to be abolished and the army professionalized. At its current size (officially, 1.2 million servicemen), the armed forces are severely under-funded. Cases of hunger are not uncommon. Ill (and late) paid soldiers sometimes beg for cigarettes, or food.
Conscripts, in what resembles slave labour, are "rented out" by their commanders to economic enterprises (especially in the provinces). A host of such "trading" companies owned by bureaucrats in the Ministry of Defense was shut down last June by the incoming Minister of Defense (Sergei Ivanov), a close pal of Putin. But if restructuring is to proceed apace, the successful absorption of former soldiers in the economy (requiring pensions, housing, start up capital, employment) - if necessary with the help of foreign capital - is bound to become a priority sooner or later.
But this may be too late and too little - the much truncated and disorientated armed forces have been "privatized" and commandeered for personal gain by regional bosses in cahoots with the command structure and with organized crime. Ex-soldiers feature prominently in extortion, protection, and other anti-private sector rackets.
The war in Chechnya is another long standing pecuniary bonanza - and a vested interest of many generals. Senior Russian Interior Ministry field commanders trade (often in partnership with Chechen "rebels") in stolen petroleum products, food, and munitions.
Putin is trying to reverse these pernicious trends by enlisting the (rank and file) army (one of his natural constituencies) in his battles against secessionist Chechens, influential oligarchs, venal governors, and bureaucrats beyond redemption.
As well as the army, the defense industry - with its 2 million employees - is also being brutally disabused of its centralist-nationalistic ideals. Orders placed with Russia's defense manufacturers by the destitute Russian armed forces are down to a trickle. Though the procurement budget was increased by 50% last year, to c. $2.2 billion (or 4% of the USA's) and further increased this year to 79 billion rubles ($2.7 billion) - whatever money is available goes towards R&D, arms modernization, and maintaining the inflated nuclear arsenal and the personal gear of front line soldiers in the interminable Chechen war. The Russian daily "Kommersant" quotes Former Armed Forces weapons chief, General Anatoly Sitnov, as claiming that $16 billion should be allocated for arms purchases if all the existing needs are to be satisfied. Having lost their major domestic client (defense constituted 75% of Russian industrial production at one time) - exports of Russian arms have soared to more than $4.4 billion annually (not including "sensitive" materiel). Old markets in the likes of Iran, Iraq, Syria, Algeria, Eritrea, Ethiopia, China, India, and Libya have revived. Decision makers in Latin America and East Asia (including Malaysia and Vietnam) are being avidly courted. Bribes change hands, off-shore accounts are open and shut, export proceeds mysteriously evaporate. Many a Russian are wealthier due to this export cornucopia. The reputation of Russia's weapons manufacturers is dismal (no spare parts, after sales service, maintenance, or quality control). But Russian weapons (often Cold War surplus) come cheap and the list of Russian firms and institutions blacklisted by the USA for selling weapons (from handguns to missile equipped destroyers) to "rogue states" grows by the day. Less than one quarter of 2500 defense-related firms are subject to (the amorphous and inapt) Russian Federal supervision. Gradually, Russia's most advanced weaponry is being made available through these outfits.
Close to 4000 R&D programs and defense conversion projects (many financed by the West) have failed abysmally to transform Russia's "military-industrial complex". Following a much derided "privatization" (in which the state lost control over hundreds of defense firms to assorted autochthonous tycoons and foreign manufacturers) - the enterprises are still being abused and looted by politicians on all levels, including the regional and provincial ones. The Russian Federation, for instance, has controlling stakes in only 7 of c. 250 privatized air defense contractors. Manufacturing and R&D co-operation with Ukraine and other former Soviet republics is on the ascendant, often flying in the face of official policies and national security.
Despite the surge in exports, overproduction of unwanted goods leads to persistent accumulation of inventory. Even so, capacity utilization is said to be 25% in many factories. Lack of maintenance renders many plant facilities obsolete and noncompetitive. The Russian government's new emphasis on R&D is wise - Russia must replenish its catalog with hi-tech gadgets if it wishes to continue to export to prime clients. Still, the Russian Duma's prescription of a return to state ownership, central planning, and subsidies, if implemented, is likely to prove to be the coup de grace rather than a graceful coup.

B. The FSB (the main successor to the KGB) Note:
The KGB was succeeded by a host of agencies. The FSB inherited its internal security directorates. The SVR inherited the KGB's foreign intelligence directorates.
With the ascendance of the Vladimir Putin and his coterie (all former KGB or FSB officers), the security services revealed their hand - they are in control of Russia and always have been. They number now twice as many as the KGB at its apex. Only a few days ago, the FSB had indirectly made known its enduring objections to a long mooted (and government approved) railway reform (a purely economic matter). President Putin made December 20 (the day the murderous Checka, the KGB's ancestor, was established in 1917) a national holiday. But the most significant tectonic shift has been the implosion of the unholy alliance between Russian organized crime and its security forces. The Russian mob served as the KGB's long arm until 1998. The KGB often recruited and trained criminals (a task it took over from the Interior Ministry, the MVD). "Former" (reserve) and active agents joined international or domestic racketeering gangs, sometimes as their leaders.
After 1986 (and more so after 1991), many KGB members were moved from its bloated First (SVR) and Third Directorates to its Economic Department. They were instructed to dabble in business and banking (sometimes in joint ventures with foreigners). Inevitably, they crossed paths - and then collaborated - with the Russian mafia which, like the FSB, owns shares in privatized firms, residential property, banks, and money laundering facilities. The co-operation with crime lords against corrupt (read: unco-operative) bureaucrats became institutional and all-pervasive under Yeltsin. The KGB is alleged to have spun off a series of "ghost" departments to deal with global drug dealing, weapons smuggling and sales, white slavery, money counterfeiting, and nuclear material.
In a desperate effort at self-preservation, other KGB departments are said to have conducted the illicit sales of raw materials (including tons of precious metals) for hard currency, and the laundering of the proceeds through financial institutions in the West (in Cyprus, Israel, Greece, the USA, Switzerland, and Austria). Specially established corporate shells and "banks" were used to launder money, mainly on behalf of the party nomenklatura. All said, the emerging KGBcrime cartel has been estimated to own or control c. 40% of Russian GDP as early as 1994, having absconded with c. $100 billion of state assets. Under the dual pretexts of "crime busting" and "fighting terrorism", the Interior Ministry and FSB used this period to construct massive, parallel, armies - better equipped and better trained than the official one. Many genuinely retired KGB personnel found work as programmers, entrepreneurs, and computer engineers in the Russian private sector (and, later, in the West) - often financed by the KGB itself. The KGB thus came to spawn and dominate the nascent Information Technology and telecommunications industries in Russia. Add to this former (but on reserve duty) KGB personnel in banks, hi-tech corporations, security firms, consultancies, and media in the West as well as in joint ventures with foreign firms in Russia - and the security services' latter day role (and next big fount of revenue) becomes clear: industrial and economic espionage. Russian scholars are already ordered (as of last May) to submit written reports about all their encounters with foreign colleagues. This is where the FSB began to part ways with crime, albeit hitherto only haltingly.
The FSB has established itself both within Russian power structures and in business. What it needs now more than money and clout - are respectability and the access it brings to Western capital markets, intellectual property (proprietary technology), and management. Having co-opted criminal organizations for its own purposes (and having acted criminally themselves) - the alphabet soup of security agencies now wish to consolidate their gains and transform themselves into legitimate, globe-spanning, business concerns. The robbers' most fervent wish is to become barons. Their erstwhile, less exalted, criminal friends are on the way. Expect a bloodbath, a genuine mafia gangland war over territory and spoils. The result is by no means guaranteed.
Return

The Energy Sector

The pension fund of the Russian oil giant, Lukoil, a minority shareholder in TV-6 (owned by a discredited and self-exiled Yeltsin-era oligarch, Boris Berezovsky), this week forced the closure of this television station on legal grounds. Gazprom (Russia's natural gas monopoly) has done the same to another television station, NTV, last year (and then proceeded to expropriate it from its owner, Vladimir Gusinsky).
Gazprom is forced to sell natural gas to Russian consumers at 10% the world price and to turn a blind eye to debts owed it by Kremlin favorites. Both Lukoil and Gazprom are, therefore, used by the Kremlin as instruments of domestic policy.
But Russian energy companies are also used as instruments of foreign policy. A few examples:
Russia has resumed oil drilling and exploration in war ravaged Chechnya. About 230 million rubles have been transferred to the federal Ministry of Energy. A new refinery is in the works.
Russia lately signed a production agreement to develop oilfields in central Sudan in return for Sudanese arms purchases.
Armenia owes Itera, a Florida based, Gazprom related, oil concern, $35 million. Itera has agreed to postpone its planned reduction in gas supplies to the struggling republic to February 11.
Last month, President Putin called for the establishment of a "Eurasian alliance of gas producers" - probably to counter growing American presence, both economic and military, in Central Asia and the much disputed oil rich Caspian basin. The countries of Central Asia have done their best to construct alternative oil pipelines (through China, Turkey, or Iran) in order to reduce their dependence on Russian oil transportation infrastructure. These efforts largely failed (a new $4 billion pipeline from Kazakhstan to the Black Sea through Russian territory has just been inaugurated) and Russia is now on a charm offensive. Its PR efforts are characteristically coupled with extortion. Gazprom owns the pipelines. Russia exports 7 trillion cubic feet of gas a year - six times the combined output of all other regional producers put together. Gazprom actually competes with its own clients, the pipelines' users, in export markets. It is owed money by all these countries and is not above leveraging it to political or economic gain.
Lukoil is heavily invested in exploration for new oil fields in Iraq, Algeria, Sudan, and Libya.

Russian debts to the Czech Republic, worth $2.5 billion in face value, have just been bought by UES, the Russian electricity monopoly, for a fraction of their value and through an offshore intermediary. UES then transferred the notes to the Russian government against the writing off of $1.35 billion in UES debts to the federal budget. The Russians claim that Paris Club rules have ruled out a direct transaction between Russia (a member of the Club) and the Czech Republic (not a member).
In the last decade, Russia has been transformed from an industrial and military power into a developing country with an overwhelming dependence on a single category of commodities: energy products. Russia's energy monopolies - whether state owned or private - serve as potent long arms of the Kremlin and the security services and implement their policies faithfully. The Kremlin (and, indirectly, the security services) maintain a tight grip over the energy sector by selectively applying Russia's tangle of hopelessly arcane laws. In the last week alone, the Prosecutor General's office charged the president and vice president of Sibur (a Gazprom subsidiary) with embezzlement. They are currently being detained for "abuse of office". Another oil giant, Yukos, was forced to disclose documents regarding its (real) ownership structure and activities to the State Property Fund in connection with an investigation regarding asset stripping through a series of offshore entities and a Siberian subsidiary.
Intermittently, questions are raised about the curious relationship between Gazprom's directors and Itera, upon which they shower contracts with Gazprom and what amounts to multi-million dollar gifts (in the from of ridiculously priced Gazprom assets) incessantly.
Gazprom is now run by a Putin political appointee, its former chairman, the oligarch Vyakhirev, ousted in a Kremlin-instigated boardroom coup. Foreign (including portfolio) investors seem to be happy. Putin's pervasive micromanagement of the energy titans assures them of (relative) stability and predictability and of a reformist, businesslike, mindset. Following a phase of shameless robbery by their new owners, Russian oil firms now seem to be leading Russia - albeit haltingly - into a new age of good governance, respect for property rights, efficacious management, and access to Western capital markets. The patently dubious UES foray into sovereign debt speculation, for instance, drew surprisingly little criticism from foreign shareholders and board members. "Capital Group", an international portfolio manager, is rumored to have invested close to $700 million in accumulating 10% of Lukoil, probably for some of its clients. Sibneft has successfully floated a $250 million Eurobond (redeemable in 2007 with a lenient coupon of 11.5%). The issue was oversubscribed.

The (probably temporary) warming of Russia's relationship with the USA and Russia's acceptance (however belated and reluctant) of its technological and financial dependence on the West - have transformed the Russian market into an attractive target. Commercial activity is more focused and often channeled through American diplomatic missions.
The U.S. Consul General in Vladivostok and the Senior Commercial Officer in Moscow have announced that they will "lead an oil and gas equipment and services and related construction sectors trade mission to Sakhalin, Russia from March 11-13, 2002." The oil and gas fields in Sakhalin attract 25% of all FDI in Russia and more than $35 billion in additional investments is expected. Other regions of interest are the Arctic and Eastern Siberia. Americans compete here with Japanese, Korean, Royal Dutch/Shell, French, and Canadian firms, among others. Even oil multinationals scorched in Russia's pre-Putin incarnation - like British Petroleum which lost $200 million in Sidanco in 11 months in 1997-8 - are back.

Takeovers of major Russian players (with their proven reserves) by foreign oil firms are in the pipeline. Russian firms are seriously undervalued - their shares being priced at one third to one tenth their Western counterparts'. Some Russian oil firms (like Yukos and Sibneft) have growth rates among the highest and production costs among the lowest in the industry. The boards of the likes of Lukoil are packed with American fund managers and British investment bankers. The forthcoming liberalization of the natural gas market (the outcome of an oftheralded and much needed Gazprom divestiture) is a major opportunity for new - possibly foreign - players.
This gold rush is the result of Russia's prominence as an oil producer, second only to Saudi Arabia. Russia dumps on the world markets c. 4.5 million barrels daily (about 10% of the global trade in oil). It is the world's largest exporter of natural gas (and has the largest known natural gas reserves). It is also the world's second largest energy consumer. In 1992, it produced 8 million bpd and consumed half as much. In 2001, it produced 7 million bpd and consumed 2 million bpd.

Russia has c. 50 billion oil barrels in proven reserves but decrepit exploration and extraction equipment, and a crumbling oil transport infrastructure is in need of total replacement. More than 5% of oil produced in Russia is stolen by tapping the leaking pipelines. An unknown quantity is lost in oil spills and leakage. Transneft, the state's oil pipelines monopoly, is committed to an ambitious plan to construct new export pipelines to the Baltic and to China. The market potential for Western equipment manufacturers, building contractors, and oil firms is evidently there.
But this serendipity may be a curse in disguise. Russia is chronically suffering from an oil glut induced by over-production, excess refining capacity, and subsidized domestic prices (oil sold inside Russia costs one third to one half the world price). Russian oil companies are planning to increase production even further. Rosneft, the eighth largest, plans to double its crude output. Yukos (Russia's second largest oil firm) intends to increase output by 20% this year. Surgut will raise its production by 14%. Last week, Russia halved export duties on fuel oil. Export duties on lighter energy products, including gas, were cut in January. As opposed to previous years, no new export quotas were set. Clearly, Russia is worried about its surplus and wishes to amortize it through enhanced exports.

Russia also squandered its oil windfall and used it to postpone the much needed restructuring of other sectors in the economy - notably the wasteful industrial sector and the corrupt and archaic financial system. Even the much vaunted plans to break apart the venal and inefficient natural gas and electricity monopolies and to come up with a new production sharing regime have gone nowhere (though some pipeline capacity has been made available to Gazprom's competitors). Both Russia's tax revenues and its export proceeds (and hence its foreign exchange reserves and its ability to service its monstrous and oft-rescheduled $158 billion in foreign debt) are heavily dependent on income from the sale of energy products in global markets. More than 40% of all its tax intake is energy-related (compared to double this figure in Saudi Arabia). Gazprom alone accounts for 25% of all federal tax revenues. Almost 40% of Russia's exports are energy products as are 13% of its GDP. Domestically refined oil is also smuggled and otherwise sold unofficially, "off the books".
But, as opposed to Saudi Arabia's or Venezuela's, Russia's budget is based on a far more realistic price range of $14-18 per barrel. Hence Russia's frequent clashes with OPEC (of which it is not a member) and its decision to cut oil production by only 150,000 bpd in the first quarter of 2002 (having increased it by more than 400,000 bpd in 2001). It cannot afford a larger cut and it can increase its production to compensate for almost any price drop.

Russia's energy minister told the Federation Council, Russia's upper house of parliament, that Russia "should switch from cutting oil output to boosting it considerably to dominate world markets and push out Arab competitors". The Prime Minister told the US-Russia Business Council that Russia should "increase oil production and its presence in the international marketplace." It may even be that Russia is spoiling for a bloodbath which it hopes to survive as a near monopoly in the energy markets. Russia already supplies more than 25% of all natural gas consumed by Europe and is building or considering to construct pipelines to Turkey, China, and Ukraine. Russia also has sizable coal and electricity exports, mainly to CIS and NIS countries. Should it succeed in its quest to dramatically increase its market share, it will be in the position to tackle the USA and the EU as an equal, a major foreign policy priority of both Putin and all his predecessors alike.
Return

Financial Services

An expatriate relocation Web site, settler-international.com, has this to say about Russian banks: "Do not open a bank account in a Russian bank : you might not see your deposit again." Russia's Central Bank, aware of the dismal lack of professionalism, the venality, and the criminal predilections of Russian "bankers" (and their Western accomplices) - is offering "complementary vocational training" in the framework of its Banking School. It is somewhat ironic that the institution suspected of abusing billions of US dollars in IMF funds by "parking" them in obscure off-shore havens - seeks to better the corrupt banking system in Russia. I. The Banks
On paper, Russia has more than 1,300 banks. Yet, with the exception of the 20-odd (two new ones were added last year) state-owned (and, implicitly, stateguaranteed) outfits - e.g., the mammoth Sberbank (the savings bank, 61% owned by the Central Bank) - very few provide minimal services, such as corporate finance and retail banking. The surviving part of the private banking sector ("Alfa Bank", "MDM Bank") is composed of dwarfish entities with limited offerings. They are unable to compete with the statal behemoths in a market tilted in the latters' favor by both regulation and habit.

The Agency for the Reconstruction of Credit Organizations (ARCO) - established after the seismic shock of 1998 - did little to restructure the sector and did nothing to prevent asset stripping. More than one third of the banks are insolvent - but were never bankrupted. The presence of a few foreign banks and the emergence of non-bank financing (e.g., insurance) are rays of hope in an otherwise soporific scene.
Despite the fact that most medium and large corporations in Russia own licensed "banks" (really, outsourced treasury operations) - more than 90% of corporate finance in 2000-2001 was in the form of equity finance, corporate bonds, and (mainly) reinvested retained earnings. Some corporate bond issues are as large as $100 million (with 18-months maturity) and the corporate bond market may quintuple to $10 billion in a year or two, reports "The Economist", quoting Renaissance Capital, a Russian investment bank.
Still, that bank credits are not available to small and medium enterprises retards growth, as Stanley Fischer pointed out in his speech to the Higher School of Economics in Moscow, in June 2001, when he was still the First Deputy Managing Director of the IMF. Last week, the OECD warned Russia that its economic growth may suffer without reforms to the banking sector.

Russian banks are undercapitalized and poorly audited. Most of them are exposed to one or two major borrowers, sectors, or commodities. Margins have declined (though to a still high by Western standards 14%). Costs have increased. The vast majority of these fledglings have less than $1 million in capital. This is because shareholders (and, for that matter, depositors) - having been fleeced in the 1998 meltdown - are leery of throwing good money after very bad. The golden opportunity to consolidate and rationalize following the 1998 crisis was clearly missed. The government's (frail) attempts to reform the sector by overhauling bank supervision and by passing laws which deal with anti-money laundering, deposit insurance, minimum capital and bankruptcy regulations, and mandatory risk evaluation models - did little to erase the memory of its collusion in the allpervasive, massive, and suspiciously orchestrated defaults of 1998-1999. Russia is notoriously strong on legislation and short on its enforcement. Moreover, the opaque, overly-bureaucratic, and oligarch-friendly Central Bank is at loggerheads with would be reformers and gets its way more often than not. It supports a minimum capital requirement of less than $5 million. Government sources have gone as high as $200 million. The government retaliates with thinly-veiled threats in the form of inane proposals to replace the Bank with newly-created "independent" institutions.

Viktor Gerashchenko - the current, old-school, Governor - is set to leave on September 2002. He will likely be replaced by someone more Kremlin-friendly. As long as the Kreml is the bastion of reform, these are good news. But a weak Central Bank will remove one of the last checks and balances in Russia. Moreover, a hasty process of consolidation coupled with draconian regulation may decimate private sector Russian banking for good. This, perhaps, is what the Kremlin wants. After all, he who controls the purse strings - rules Russia. II. The Stock Exchange
The theory of financial markets calls for robust capital markets where banks are lacking and dysfunctional. Equity financing and corporate debt outstrip bank lending as sources of corporate finance even in the West. But Russia's stock market - the worst performer among emerging markets in 1998, the best one in 2001 - is often cornered and manipulated, prey to insider trading and worse. It is less liquid that the Tel-Aviv Stock Exchange, though the market capitalization of RTS, Russia's main marketplace, is up 430% since 1998 (80% last year alone). Bonds climbed 500% in the same period and a flourishing corporate bonds markets has erupted on the scene. Many regard this surge as a speculative bubble inflated by the high level of oil prices.

Others (mostly Western brokerage houses) swear that the market is undervalued, having fallen by more than 90% in 1998. Russia is different - they say - it is better managed, sports budget and trade surpluses, is less indebted (and re-pays its debts on time, for a change), and the economy is expanding. The same pundits talked the RTS up 180% in 1997 only to see it shrivel in an egregious case of Asian contagion. The connection between Russia's macro and micro is less than straightforward.
Whatever the truth, investors are clearly more discriminating. Both the New York Times and The Economist cite the example of Yukos Oil (up 190%) versus Lukoil (up a mere 30%). The former is investor friendly and publishes internationally audited accounts. The latter has no investor relations to speak of and is disclosureaverse. Still, both firms - as do a few pioneering others - seek to access Western capital markets.
The intrepid investor can partake by purchasing mutual funds dedicated, wholly or partially, to Russia - or by trading ADR's of Russian firms on NYSE (10-20 times the US dollar volume of the RTS). ADR's of smaller firms are traded OTC and, according to the New York Times, one can short sell Russian securities through offshore vehicles. The latter are also used to speculate in the shares of defunct Russian firms ("shells") traded in the West.

III. Debt Markets
Perhaps the best judges of Russia's officially minuscule economy (smaller than the Netherlands' and less than three times Israel's) - are the Russians. When the author of this article suggested that Russia's 1998 chaos was serendipitous (in "Argumenti i Fakti" dated October 28, 1998), he was derided by Western analysts but supported by Russian ones. In hindsight, the Russians were right. They may be right today as well when they claim that Russia has never been better. The ruble devaluation (which made Russian goods competitive) and rising oil prices yielded a trade surplus of more than $50 billion last year. For the first time in its modern and turbulent history, Russia was able to prepay both foreign (IMF) and domestic debts (it redeemed state bonds ahead of maturity). It is no longer the IMF's largest debtor. Its Central Bank boasts $40 billion in foreign exchange reserves. Exactly a year ago, Russia tried to extort a partial debt write-off from its creditors (as it has done numerous times in its post-Communist decade). But Russia's oft-abused creditors and investors seem to have surprisingly short memories and an unsurpassed capacity for masochistic self-delusion.

Stratfor.com reports ("Russia Buys Financial Maneuverability" dated January 31, 2002) that "Deutsche Bank Jan. 30 granted Vneshekonombank a $100 million loan, the largest private loan to a Russian bank since the 1998 ruble crisis. As Russia works to reintegrate into the global financial network, the cost of domestic borrowing should drop. That should spur a fresh wave of domestically financed development, which is essential considering Russia's dearth of foreign investment."
The strategic forecasting firm also predicts the emergence of a thriving mortgage finance market (there is almost none now). One of the reasons is a belated November 2001 pension reform which allows the investment of retirement funds in debt instruments - such as mortgages. A similar virtuous cycle transpired in Kazakhstan. Last year the Central Bank allowed individuals to invest up to $75,000 outside Russia.

IV. The Bandits
In August 1999, a year and four days after Moscow's $40 billion default, the New York Times reported a $15 billion money laundering operation which involved, inter alia, the Bank of New York and Russia's first Representative to the IMF. The Russian Central Bank invested billions of dollars (through an offshore entity) in the infamous Russian GKO (dollar-denominated bonds) market, thus helping to drive yields to a vertiginous 290%.
Staff members and collaborators of the now dismantled brainchild of Prof. Jeffrey Sachs, HIID (Harvard Institute of International Development) - the architect of Russian "privatization" - were caught in potentially criminal conflicts of interest.
Are we to believe that such gargantuan transgressions have been transformed into new-found market discipline and virtuous dealings? Putin doesn't. Last year, riding the tidal wave of the fight against terror, he formed the Financial Monitoring Committee (KFM). Ostensibly, its role is to fight money laundering and other financial crimes, aided by brand new laws and a small army of trained and tenacious accountants under the aegis of the Ministry of Finance.
Really, it is intended to circumvent irredeemably compromised extant structures in the Ministry of Interior and the FSB and to stem capital flight (if possible, by reversing the annual hemorrhage of $15-20 billion). Non-cooperative banks may lose their licenses. Banks have been transferring 5 daily Mb of encoded reports regarding suspicious financial dealings (and all transactions above 600,000 rubles - equal to $20,000) since February 1 - when the KFM opened for business. So much for Russian bank secrecy ("Did we really have it?" - mused President Putin a few weeks ago).

Last month, Mikhail Fradkov, the Federal Tax Police Chief confirmed to Interfax the financial sector's continued involvement in bleeding Russia white: "...fly-bynight firms usually play a key role in illegal money transfers abroad. Fradkov recalled that 20 Moscow banks inspected by the tax police alone transferred about $5 billion abroad through such firms." ITAR-TASS, the Russian news agency, reports a drop of 60% in the cash flow of Russian banks since anti-money laundering measures took effect, a fortnight ago.
V. The Foreign Exchange Market
Russians, the skeptics that they are, still keep most of their savings (c. $40-50 billion) in foreign exchange (predominantly US dollars), stuffed in mattresses and other exotic places. Prices are often quoted in dollars and ATM's spew forth both dollars and rubles. This predilection for the greenback was aided greatly by the Central Bank's panicky advice (reported by Moscow Times) to ditch all European currencies prior to January 1, 2002. The result is a cautious and hitherto minor diversification to euros. Banks are reporting increased demand for the new currency - a multiple of the demand for all former European currencies combined. But this is still a drop in the dollar ocean.

The exchange rate is determined by the Central Bank - by far the decisive player in the thin and illiquid market. Lately, it has opted for a creeping devaluation of the ruble, in line with inflation. Foreign exchange is traded in eight exchanges across Russia but many exporters sell their export earnings directly to the Central Bank. Permits are required for all major foreign exchange transactions, including currency repatriation by foreign firms. Currency risk is absolute as a 1998 court ruling rendered ruble forwards contracts useless ("unenforceable bets").
VI. The International Financial Institutions (IFI's) Of the World Bank's $12 billion allocated to 51 projects in Russia since 1992, only $0.6 billion went to the financial sector (compared to 8 times as much wasted on "Economic Planning"). Its private sector arm, the International Finance Corporation (IFC) refrained from lending to or investing in the financial sector from March 1999 to June 2001. It has approved (or is considering) six projects since then: a loan of $20 million to DeltaCredit, a smallish project and residential finance, USAID backed, fund; a Russian pre-export financing facility (with the German bank, WestLB); Two million US dollars each to the Russian-owned Baltiskii Leasing and Center Invest (a regional bank); $2.5 million to another regional bank (NBD) - and a partial guarantee for a $15 million bond issued by Russian Standard Bank. There is also $5 million loan to Probusiness Bank.

Another active player is the EBRD. Having suffered a humiliating deterioration in the quality of its Russian assets portfolio in 1998-2000, it is active there again. By midyear last year, it had invested c. $300 million and lent another $700 million to Russian banks, equity and mutual funds, insurance companies, and pension funds. This amounts to almost 30% of its total involvement in the Russian Federation. Judging by this commitment, the EBRD - a bank - seems to be regarding the Russian financial system as either an extremely attractive investment - or a menace to Russia's future stability.
VII. So, What's Next?
No modern country, however self-deluded and backward, can survive without a banking system. The Central Bank's pernicious and overwhelming presence virtually guarantees a repeat of 1998. Russia - like Japan - is living on time borrowed against its oil collateral. Should oil prices wither - what remains of the banking system may collapse, Russian securities will be dumped, Russian debts "deferred". The Central Bank may emerge either more strengthened by the devastation - or weakened to the point of actual reform.

In the eventuality of a confluence between this financial Armageddon and Russia's entry to the WTO - the crisis is bound to become more ominous. Russia is on the verge of opening itself to real competition from the West - including (perhaps especially so) in the financial sector. It is revamping its law books - but does not have the administrative mechanism it takes to implement them. It has a rich tradition of obstructionism, venality, political interference, and patronage. Foreign competition is the equivalent of an economic crisis in a country like Russia. Should this be coupled with domestic financial mayhem - Russia may be transformed to the worse. Expect interesting times ahead. Return

The Russian Devolution
The Regions

Russia's history is a chaotic battle between centrifugal and centripetal forces - between its 50 oblasts (regions), 2 cities (Moscow and St. Petersburg), 6 krais (territories), 21 republics, and 10 okrugs (departments) - and the often cashstrapped and graft-ridden paternalistic center. The vast land mass that is the Russian Federation (constituted officially in 1993) is a patchwork of fictitious homelands (the Jewish oblast), rebellious republics (Chechnya), and disaffected districts - all intermittently connected with decrepit lines of transport and communications.
The republics - national homelands to Russia's numerous minorities - have their own constitutions and elected presidents (since 1991). Oblasts and krais are run by elected governors (a novelty - governors have been appointed by Yeltsin until 1997). They are patchy fiefdoms composed of autonomous okrugs. "The Economist" observes that the okrugs (often populated with members of an ethnic minority) are either very rich (e.g., Yamal-Nenets in Tyumen, with 53% of Russia's oil reserves) - or very poor and, thus, dependent on Federal handouts.

In Russia it is often "Moscow proposes - but the governor disposes" - but decades of central planning and industrial policy encouraged capital accumulation is some regions while ignoring others, thus irreversibly eroding any sense of residual solidarity. In an IMF working paper ("Regional Disparities and Transfer Policies in Russia" by Dabla-Norris and Weber), the authors note that the ten wealthiest regions produce more than 40% of Russia's GDP (and contribute more than 50% of its tax revenues) - thus heavily subsidizing their poorer brethren. Output contracted by 90% in some regions - and only by 15% in others. Moscow receives more than 20% of all federal funds - with less than 7% of the population. In the Tuva republic - three quarters of the denizens are poor - compared to less than one fifth in Moscow. Moscow lavishes on each of its residents 30 times the amount per capita spent by the poorest region.
Nadezhda Bikalova of the IMF notes ("Intergovernmental Fiscal Relations in Russia") that when the USSR imploded, the ratio of budgetary income per person between the richest and the poorest region was 11.6. It has since climbed to 30. All the regions were put in charge of implementing social policies as early as 1994 - but only a few (the net "donors" to the federal budget, or food exporters to other regions) were granted taxing privileges.

As Kathryn Stoner-Weiss has observed in her book, "Local Heroes: The Political Economy of Russian Regional Governance", not all regions performed equally well (or equally dismally) during the transition from communism to (rabid) capitalism. Political figures in the (relatively) prosperous Nizhny-Novgorod and Tyumen regions emphasized stability and consensus (i.e., centralization and cooperation). Both the economic resources and the political levers in prosperous regions are in the hands of a few businessmen and "their" politicians. In some regions, the movers and shakers are oligarch-tycoons - but in others, businessmen formed enterprise associations, akin to special interest lobbying groups in the West.
Inevitably such incestuous relationships promotes corruption, imposes conformity, inhibits market mechanisms, and fosters detachment from the centre. But they also prevent internecine fighting and open, economically devastating, investordeterring, conflicts. Economic policy in such parts of Russia tend to be coherent and efficiently implemented. Such business-political complexes reached their apex in 1992-1998 in Moscow (ranked #1 in creditworthiness), Samara, Tyumen, Sverdlovsk, Tatarstan, Perm, Nizhny-Novgorod, Irkutsk, Krasnoyarsk, and St. Petersburg (Putin's lair). As a result, by early 1997, Moscow attracted over 50% of all FDI and domestic investment and St. Petersburg - another 10%.

These growing economic disparities between the regions almost tore Russia asunder. A clunky and venal tax administration impoverished the Kremlin and reduced its influence (i.e., powers of patronage) commensurately. Regional authorities throughout the vast Federation attracted their own investors, passed their own laws (often in defiance of legislation by the centre), appointed their own officials, levied their own taxes (only a fraction of which reached Moscow), and provided or withheld their own public services (roads, security, housing, heating, healthcare, schools, and public transport). Yeltsin's reliance on local political bosses for his 1996 re-election only exacerbated this trend. He lost his right to appoint governors in 1997 - and with it the last vestiges of ostensible central authority. In a humiliating - and wellpublicized defeat - Yeltsin failed to sack the spectacularly sleazy and incompetent governor of Primorsky krai, Yevgeni Nazdratenko (later "persuaded" by Putin to resign his position and chair the State Fisheries Committee instead). The regions took advantage of Yeltsin's frail condition to extract economic concessions: a bigger share of the tax pie, the right to purchase a portion of the raw materials mined in the region at "cost" (Sakha), the right to borrow independently (though the issuance of promissory notes was banned in 1997) and to spend "off-budget" - and even the right to issue Eurobonds (there were three such issues in 1997). Many regions cut red tape, introduced transparent bookkeeping, lured foreign investors with tax breaks, and liberalized land ownership. Bikalova (IMF) identifies three major problems in the fiscal relationship between centre and regions in the Yeltsin era:
"(1) the absence of an objective normative basis for allocating budget revenues, (2) the lack of interest shown by local and regional governments in developing their own revenues and cutting their expenditures, and (3) the federal government's practice of making transfer payments to federation members without taking account of the other state subsidies and grants they receive." Then came Russia's financial meltdown in August 1998, followed by Putin's disorientating ascendance. A redistribution of power in Moscow's favor seemed imminent. But it was not to be.
The recommendations of a committee, composed of representatives of the government, the Federation Council, and the Duma, were incorporated in a series of laws and in the 1999 budget, which re-defined the fiscal give and take between regions and centre.
Federal taxes include the enterprise profit tax, the value-added tax (VAT), excise, the personal income tax (all of it returned to the regions), the minerals extraction tax, customs and duties, and other "contributions" . This legislation was further augmented in April-May 2001 (by the "Federalism Development Program 2001-2005").

The regions are allowed to tax the property of organizations, sales, real estate, roads, transportation, and gambling enterprises, and regional license fees (all tax rates are set by the center, though). Municipal taxes include the land tax, individual property, inheritance, and gift taxes, advertising tax, and license fees.
The IMF notes that "more than 90 percent of sub-national revenues come from federal tax sharing. Revenues actually raised by regional and local governments account for less than 15 percent of their expenditures". The federal government has also signed more than 200 special economic "contracts" with the richer, donor and exporting, regions - this despite the constitutional objections of the Ministry of Justice. This discriminating practice is now being phased out. But it has not been replaced by any prioritized economic policies and preferences on the federal level, as the OECD has noted.
One of Putin's first acts was to submit a package of laws to the State Duma in May 2000. The crux of the proposed legislation was to endow the President with the power to sack regional elected officials at will. The alarmed governors forgot their petty squabbles and in a rare show of self-interested unity fenced the bill with restrictions. The President can fire a governor, said the final version, only if a court rules that the latter failed to incorporate federal legislation in regional laws, or if charged with serious criminal offenses. The wholesale dismissal of regional legislatures requires the approval of the State Duma. Some republics insist that even these truncated powers are excessive and Russia's Constitutional Court is currently weighing their arguments. Putin then resorted to another stratagem. He established, two years ago, by decree, a bureaucratic layer between centre and regions: seven administrative mega-regions whose role is to make sure that federal laws are both adopted and enforced at the local level. The presidential envoys report back to the Kremlin but, otherwise, are fairly harmless - and useless. They did succeed, however, in forcing local elections upon the likes of Ingushetiya - and to organize all federal workers in regional federal collegiums, subordinated to the Kremlin. The war in Chechnya was meant to be another unequivocal message that cessation is not an option, that there are limits to regional autonomy, and that the center - as authoritative as ever - is back. It, too, flopped painfully when Chechnya evolved into a second - internal - Afghani quagmire. Having failed thrice, Putin is lately leaning in favor of restoring and even increasing the Federation Council's erstwhile powers at the expense of the (incensed) Duma. Governors have sensed the changing winds and have acted to trample over democratic institutions in their regions. Thus, the Governor of Orenburg has abolished the direct elections of mayors in his oblast. Russia's big business is moving in as well in an attempt to elect its own mayors (for instance, in Irkutsk).
Regional finances are in bad shape. Only 40 out 89 regions managed, by February, to pay their civil servants their December 2001 salaries (raised 89% - or 1.5% of GDP - by the benevolent president). Many regions had to go deeper into deficit to do so. Salaries make three quarters of regional budgets. The East-West Institute reports that arrears have increased 10% in January alone - to 33 billion rubles (c. $1 billion). The Finance Ministry is considering to declare seven regions bankrupt. Yet another committee, headed by Deputy Head of the Presidential Administration, Dimitri Kozak, is on the verge of establishing an external administration for insolvent regions. The recent housing reform - which would force Russians to pay market prices for their apartments and would subsidize the poor directly (rather than through the regional and municipal authorities) - is likely to further weaken regional balance sheets. Luckily for Russia, the regions are less cantankerous and restive now. The emphasis has shifted from narcissistic posturing to economic survival and prosperity. The Moscow region still attracts the bulk of Russian domestic and foreign investments, leaving the regions to make do with leftovers. Sergei Kirienko, a former short lived Prime Minister, and, currently the president's envoy to the politically mighty Volga okrug, attributes this gap, in a comment to Radio Free Europe, to non-harmonized business legislation (between center and regions). Boris Nemtsov, a member of the Duma (and former Deputy Prime Minister) thinks that the problem is a "lack of democratic structures" - press freedom, civil society, and democratic government. Others attribute the deficient interest to a dearth of safety and safe institutions, propagated by entrenched interest groups.

Small business is back in fashion after years of investments in behemoths such as Gazprom and Lukoil. Politicians make small to medium enterprises a staple of their speeches. The EBRD has revived its moribund small business funds (and grants up to $125,000 loans to eligible enterprises). Bank lending is still absent (together with a banking system) - but foreign investment banks and retail banks are making hesitant inroads into the regional markets. Small businessmen are more assertive and often demonstrate against adverse tax laws, high prices, and poor governance. Russia is at a crossroad. It must choose which of the many models of federalism to adopt. It can either strengthen the center at the expense of the regions, transforming the latter into mere tax collectors and law enforcement agents - or devolve more powers to tax and spend to the regions. The pendulum swings. Putin appears sometimes to be an avowed centralist - and at other times a liberal. Contrary to reports in the Western media, Putin failed to subdue the regions. The donors and exporters among them are as powerful as ever. But he did succeed to establish a modus vivendi and is working hard on a modus operandi. He also weeded out the zanier governors. Russia seems to be converging on an equilibrium of sorts - though, as usual, it is a precarious one. Return

Russian Agriculture

In Soviet times, Kremlinologists used to pore over grain harvest figures to divine the fortunes of political incumbents behind the Kremlin's inscrutable walls. Many a career have ended due to a meager yield. Judging by official press releases and interviews, things haven't changed that much. The beleaguered VicePremier and Minister of Agriculture of the Russian Federation admitted openly last October that what remains of Russia's agriculture is "in a critical situation" (though he has since hastily reversed himself). With debts of $9 billion, he may well be right. Russian decision makers recently celebrated the reversal of a decade-old trend: meat production went up 1% and milk production - by double that. But the truth is, surprisingly, a lot rosier. Agricultural output has been growing for four years now (last year by more than 5%). Even much maligned sectors, such as food processing, show impressive results (up 9%). As the private sector takes over (government procurement ceased long ago, though not so regional procurement), agriculture throughout Russia (especially in its western parts) is being industrialized. Even state and collective farms are reviving, though haltingly so. In a recently announced deal, Interros will invest $100 million in cultivating a whopping million acres. Additionally, Russia is much less dependent on food imports than common myths have it - it imports only 20% of its total food consumption.
Despite this astounding turnaround - foreign investors are still shy. The complex tariff and customs regulations, the erratic tax administration, the poor storage and transport infrastructure, the vast distances to markets, the endemic lawlessness, the venal bureaucracy, and, above all, the questionable legal status of the ownership of agricultural land - all serve to keep them at bay. Moreover, the agricultural sector is puny and disastrously inefficient. Having fallen by close to half since 1991 (as state subsidies dropped), it contributes only c. 8% to GDP and employs c. 11% of the active labour force (compared to 30% in industry and 59% in services). Agricultural exports (c. $3 billion annually) are one fourth Russia's agricultural imports - despite a fall of 40% in the latter after the 1998 meltdown. The average private farm is less than 50 hectares large. Though in control of 6% of farmland - private farms account for only 2% of agricultural output.
Much of the land (equal to c. 1.8 times the contiguous US) lacks in soil, or in climate, or in both. Thus, only 8% of the land is arable and less than 40,000 sq. km. are irrigated. Pastures make up another 4%. The soil is contaminated by what the CIA calls "improper application of agricultural chemicals". It is often eroded. Ground water is absolutely toxic. The new law permitting private quasi-ownership of agricultural land may reduce the high rents which (together with a ruble over-valued until 1998) rendered Russian farmers non-competitive - but this is still a long way off. In the meantime, general demand for foodstuffs has declined together with disposable incomes and increasing unemployment.
The main problem nowadays is not lack of knowledge, management, or new capital - it is an unsustainable mountain of debts. Even with a lenient "Law on the Financial Recovery of Agricultural Enterprises" currently being passed through the Duma - only 30% of farms are expected to survive. The law calls for rescheduling current debt payments over ten years.
The sad irony is that Russian agriculture is now much more viable than it ever was. Well over half the active enterprises are profitable (compared to 12% in 1998). The grain harvest exceeded 90 million tons, far more than the 75 million tons predicted by the government (though Russia still imports $8 billion worth of grains a year). The average crop for 1993-7 was 80 million tones (with 88 million in 1997). But grain output was decimated in 1998 (48 million tons) and 1999 (55 million tons).
Luckily, grain is used mostly for livestock feed - Russians consume only c. 20 million tons annually. But by mid 1999, Russian grain reserves declined to a paltry 2 million tons, according to USDA figures. The problem is that the regions of Russia's grain belt restrict imports of this "agricultural gold" and hoard it. Corrupt officials turn a quick profit on the resulting shortage-induced price hikes.
The geographical location of an agricultural enterprise often determines its fate. In a study ("The Russian Food System's Transformation at Close Range") of two Russian regions (oblasts) conducted by Grigori Ioffe (of Radford University) and Tatyana Nefedova (Institute of Geography of the Russian Academy of Sciences) in August 2001, the authors found that:
"... farms in Moscow Province are more productive than farms in equivalent locations in Ryazan Provinces, while farms closer to the central city of either province do better than farms near the borders of that province." It seems that well-located farms enjoy advantages in attracting both investments and skilled labour. They are also closer to their markets. But the vicissitudes of Russia's agriculture are of geopolitical consequence. A hungry Russia is often an angry Russia. Hence the food aid provided by the USA in 1998-9 (worth more than $500 million and coupled with soft PL-480 trade credits). The EU also donated a comparable value in food. Russia asked for additional aid in the form of animal feed in the years 2000-2001 - and the USA complied. Russia's imports are an important prop to the economies of its immediate and far neighbors. Russia is also a major importer of American agricultural products, such as poultry (it consumes up to 40% of all US exports of this commodity). It is a world class importer of meat products (especially from the EU), its livestock inventory having been halved by the transition. If it accedes to the WTO (negotiations have been dragging on since 1995), it may become even more appealing commercially.
It will have to reduce its import tariffs (the tariff on poultry is 30% and the average tariff on agricultural products is 20%). It is also likely to be forced to scale back - albeit gradually - the subsidies it doles out to its own producers (10% of GDP in the USSR, less than 3% of GDP now). Privileged trading by state entities will also be abolished as will be non-tariff obstructions to imports. Whether the re-emergent center will be able to impose its will on the recalcitrant agricultural regions, still remains to be seen. A series of apocalyptic economic crises forced Russian agriculture to rationalize. Russia has no comparative advantage in livestock and meat processing. Small wonder its imports of meat products skyrocketed. It is questionable whether Russia possesses a comparative advantage in agriculture as a whole - given its natural endowments, or, rather, the lack thereof. Its insistence to produce its own food (especially the High Value Products) has failed with disastrous consequences. Perhaps it is time for Russia to concentrate on the things it does best. Agriculture, alas, is not one of them.

Return

T H E A U T H O R

SHMUEL (SAM) VAKNIN

Curriculum Vitae

Click on blue text to access relevant web sites - thank you. Born in 1961 in Qiryat-Yam, Israel.
Served in the Israeli Defence Force (1979-1982) in training and education units.

Education
Graduated a few semesters in the Technion - Israel Institute of Technology, Haifa. Ph.D. in Philosophy (major : Philosophy of Physics) - Pacific Western University, California.
Graduate of numerous courses in Finance Theory and International Trading. Certified E-Commerce Concepts Analyst.
Certified in Psychological Counselling Techniques. Full proficiency in Hebrew and in English.

Business Experience
1980 to 1983
Founder and co-owner of a chain of computerized information kiosks in Tel-Aviv, Israel.
1982 to 1985
Senior positions with the Nessim D. Gaon Group of Companies in Geneva, Paris and New-York (NOGA and APROFIM SA):
- Chief Analyst of Edible Commodities in the Group's Headquarters in Switzerland. - Manager of the Research and Analysis Division - Manager of the Data Processing Division - Project Manager of The Nigerian Computerized Census - Vice President in charge of RND and Advanced Technologies - Vice President in charge of Sovereign Debt Financing

1985 to 1986
Represented Canadian Venture Capital Funds in Israel. 1986 to 1987
General Manager of IPE Ltd. in London. The firm financed international multilateral countertrade and leasing transactions.
1988 to 1990
Co-founder and Director of "Mikbats - Tesuah", a portfolio management firm based in Tel-Aviv. Activities included large-scale portfolio management, underwriting, forex trading and general financial advisory services. 1990 to Present
Free-lance consultant to many of Israel's Blue-Chip firms, mainly on issues related to the capital markets in Israel, Canada, the UK and the USA. Consultant to foreign RND ventures and to Governments on macro-economic matters. President of the Israel chapter of the Professors World Peace Academy (PWPA) and (briefly) Israel representative of the "Washington Times".

1993 to 1994
Co-owner and Director of many business enterprises: - The Omega and Energy Air-Conditioning Concern - AVP Financial Consultants
- Handiman Legal Services

Total annual turnover of the group: 10 million USD. Co-owner, Director and Finance Manager of COSTI Ltd. - Israel's largest computerized information vendor and developer. Raised funds through a series of private placements locally, in the USA, Canada and London. 1995 to 1996
Publisher and Editor of a Capital Markets Newsletter distributed by subscription only to dozens of subscribers countrywide. Managed the Internet and International News Department of an Israeli mass media group, "Ha-Tikshoret and Namer". Assistant in the Law Faculty in Tel-Aviv University (to Prof. S.G. Shoham).

1996 to 1999
Financial consultant to leading businesses in Macedonia, Russia and the Czech Republic.
Collaborated with the Agency of Transformation of Business with Social Capital. Economic commentator in "Nova Makedonija", "Dnevnik", "Izvestia", "Argumenti i Fakti", "The Middle East Times", "Makedonija Denes", "The New Presence", "Central Europe Review" , and other periodicals and in the economic programs on various channels of Macedonian Television.
Chief Lecturer in courses organized by the Agency of Transformation, by the Macedonian Stock Exchange and by the Ministry of Trade. 1999-
Economic Advisor to the Government of the Republic of Macedonia and to the Ministry of Finance.
2001-
Senior Business Correspondent for United Press International (UPI) Web and Journalistic Activities
Author of extensive websites in Psychology ("Malignant Self Love") - An Open Directory Cool Site
Philosophy ("Philosophical Musings")
Economics and Geopolitics ("After the Rain") Owner of the Narcissistic Abuse Announcement and Study List and the Narcissism Revisited mailing list (more than 3800 members) Editor of mental health disorders and Central and Eastern Europe categories in web directories (Open Directory, Suite 101, Search Europe). Columnist and commentator in "The New Presence", United Press International (UPI), InternetContent, eBookWeb and "Central Europe Review". Web Activities
Author of extensive websites in Psychology ("Malignant Self Love") - An Open Directory Cool Site
Philosophy ("Philosophical Musings")
Economics and Geopolitics ("After the Rain") Owner of the Narcissistic Abuse Announcement and Study List and the Narcissism Revisited mailing list (more than 3800 members) Editor of mental health disorders and Central and Eastern Europe categories in web directories (Open Directory, Suite 101, Search Europe). Weekly columnist in "The New Presence", United Press International (UPI), InternetContent, eBookWeb.org and "Central Europe Review".

Publications and Awards
"Managing Investment Portfolios in States of Uncertainty", Limon Publishers, TelAviv, 1988
"The Gambling Industry", Limon Publishers., Tel-Aviv, 1990 "Requesting my Loved One - Short Stories", Yedioth Aharonot, Tel-Aviv, 1997 "The Macedonian Economy at a Crossroads - On the way to a Healthier Economy" (with Nikola Gruevski), Skopje, 1998
"Malignant Self Love - Narcissism Revisited", Narcissus Publications, Prague and Skopje, 1999, 2001
"The Exporters' Pocketbook", Ministry of Trade, Republic of Macedonia, Skopje, 1999
"The Suffering of Being Kafka" (electronic book of Hebrew Short Fiction) "After the Rain - How the West Lost the East", Narcissus Publications in association with Central Europe Review/CEENMI, Prague and Skopje, 2000 Winner of numerous awards, among them the Israeli Education Ministry Prize (Literature) 1997, The Rotary Club Award for Social Studies (1976) and the Bilateral Relations Studies Award of the American Embassy in Israel (1978). Hundreds of professional articles in all fields of finances and the economy and numerous articles dealing with geopolitical and political economic issues published in both print and web periodicals in many countries. Many appearances in the electronic media on subjects in philosophy and the sciences and concerning economic matters.

Contact Details:
palma@unet.com.mk
vaknin@link.com.mk
My Web Sites:
Economy / Politics:
http://ceeandbalkan.tripod.com/
Psychology:
http://samvak.tripod.com/index.html
Philosophy:
http://philosophos.tripod.com/
Poetry:
http://samvak.tripod.com/contents.html

Return

After the Rain
How the West
Lost the East

The Book
This is a series of articles written and published in 1996-2000 in Macedonia, in Russia, in Egypt and in the Czech Republic. How the West lost the East. The economics, the politics, the geopolitics, the conspiracies, the corruption, the old and the new, the plough and the internet - it is all here, in colourful and provocative prose. From "The Mind of Darkness":
"'The Balkans' - I say - 'is the unconscious of the world'. People stop to digest this metaphor and then they nod enthusiastically. It is here that the repressed memories of history, its traumas and fears and images reside. It is here that the psychodynamics of humanity - the tectonic clash between Rome and Byzantium, West and East, Judeo-Christianity and Islam - is still easily discernible. We are seated at a New Year's dining table, loaded with a roasted pig and exotic salads. I, the Jew, only half foreign to this cradle of Slavonics. Four Serbs, five Macedonians. It is in the Balkans that all ethnic distinctions fail and it is here that they prevail anachronistically and atavistically. Contradiction and change the only two fixtures of this tormented region. The women of the Balkan - buried under provocative mask-like make up, retro hairstyles and too narrow dresses. The men, clad in sepia colours, old fashioned suits and turn of the century moustaches. In the background there is the crying game that is Balkanian music: liturgy and folk and elegy combined. The smells are heavy with muskular perfumes. It is like time travel. It is like revisiting one's childhood."

The Author Sam Vaknin was born in Israel in 1961. A financial consultant and columnist, he lived and published in 11 countries. An author of short stories, the winner of many literary awards, an amateur philosopher - he is a controversial figure. This is his tenth book.

END OF THE PROJECT GUTENBERG EBOOK RUSSIAN ROULETTE: RUSSIA'S ECONOMY IN PUTIN'S ERA