[PEN-L:9423] The free market in Russia

[D Shniad <shniad@xxxxxx>]

The Globe and Mail 				Wednesday, April 9, 1997

MAYOR TURNS MOSCOW INTO GIANT
CORPORATION

	Luzhkov channels capital's vast wealth into pet projects

	By  Geoffrey York, Moscow Bureau

	When two of Russia's biggest auto makers came close to collapsing
under the weight of heavy debts, they were rescued by an unlikely saviour--the
mayor of Moscow.
	The automobile companies, Zil and Moskvich, were swiftly absorbed
into the flourishing financial empire of Mayor Yuri Luzhkov and his municipal
government.
	Other politicians might be content with this coup. But without pausing
for breath, Mr. Luzhkov is now plunging ahead with a bid for a giant Siberian
oil company.
	In most other countries, a city government would not be involved in
auto factories and oil exploration. But this is no ordinary city. This is "Moscow
Inc.", one of the biggest and most powerful financial empires in Russia.
	Mr. Luzhkov, 60, is a burly, thick-necked autocrat who wears a black
leather cap on his weekly visits to Moscow's construction sites, where he chides
the workers to move faster.
	The mayor is worshipped as a benevolent czar by the city's masses. Last
year he captured almost 90 per cent of the vote in the municipal election. Now
he is quietly laying the groundwork for a campaign for Russia's presidency.
Some analysts have already pegged him as the front-runner to succeed Boris
Yeltsin in the next national election, three years from now.
	Mr. Luzhkov has not yet acquired as much popularity as his chief rival,
the charismatic military hero Alexander Lebed. But his national profile has
increased steadily in the past year. He has travelled widely, giving generous
gifts to impoverished cities and forging strategic alliances with regional power
brokers.
	Mr. Luzhkov, unlike the maverick Mr. Lebed, enjoys close connections
with Russia's political and economic elite. Through his business friends, he has
significant influence in the Russian media.
	But his most important asset is the vast wealth of the city government,
which he freely channels into his favourite projects, including a $300-million
gold-domed Orthodox church and a retractable roof for the city's biggest soccer
stadium.
	The Moscow government is the dominant force in Russia's wealthiest
city. It owns a share of almost every major commercial enterprise in the
booming capital--luxury hotels, office towers, fast-food restaurants, grocery
stores, food markets, shopping malls, television companies, textbook
publishers, gasoline stations, travel agencies, taxis, milk and cheese producers,
bread factories, even an oil refinery.
	Nobody really knows the extent of the Moscow empire. The city
recently released a list of 141 enterprises in which it held ownership stakes, but
many of its holdings were left off the list.
	That's only the tip of the iceberg, said a Western banker, who asked not
to be identified. The city of Moscow has enormous tentacles. They deliberately
take a piece of the action in every investment in the city. Wherever you go, in
order to get anything done, you have to deal with a joint venture that is partly
owned by the city.
	When financial analysts are asked to estimate the value of Moscow's
vast holdings, they throw up their hands. It's like trying to count the stars in the
sky, one analyst said. Pressed to make a guess, he said the city-owned property
is worth more than $25-billion.
	Although it contains only 7 per cent of Russia's population, Moscow
provides almost one-third of the country's tax revenue and 20 per cent of its
foreign trade. It receives the bulk of Russia's foreign investment. And its
unemployment rate of 0.8 per cent is the lowest in the country.
	Almost every high-profile enterprise in Moscow has been obliged to
give an ownership chunk to the city government. Perhaps the best known of
these is the local branch of the McDonald's restaurant chain, which is rapidly
expanding its operations in the capital.
	Mr. Luzhkov has also ordered the city to create its own chain of fast-
food restaurants, known as Russkoye Bistro, which serves Russian specialities
such as cabbage salad and vodka.
	The city owns a share of every major hotel in Moscow, including the
Western-managed luxury hotels. Because of the lack of competition, these
hotels are enormous cash cows, the Western banker said.
	The Moscow government earned almost $3-billion in real-estate
transactions last year. But this is only a small indicator of the wealth that falls
under Mr. Luzhkov's control. Many of his top officials have created their own
private enterprises, which are heavily involved in joint ventures and
construction projects on properties that the city controls.
	In any other society, that's a conflict of interest, the Western banker said.
Here, it's actively encouraged.
	In a city where crime and corruption are rampant, the Moscow
government is the toughest businessman on the block.
	The city appointed a controversial Chechen businessman, Umar
Dzhabrailov, to represent its interest in the luxurious Radisson Slavyanskaya
hotel. He soon feuded with the hotel's U.S. partner, Paul Tatum, who was
eventually killed in a gangland-style shooting last year. After the Tatum murder,
the U.S. government revoked a visa that it had issued to Mr. Dzhabrailov,
citing his alleged criminal links.
	U.S. congressman Christopher Cox has told the Federal Bureau of
Investigation that the killers of Mr. Tatum will never be brought to justice
without intense outside scrutiny, since the grip of organized crime on Moscow's
city government is so pervasive.
	Mr. Luzhkov's financial power can be traced back to the early 1990s,
when he was a loyal supporter of Mr. Yeltsin in the attempted coups and power
struggles of that period.
	As a reward for his loyalty, Mr. Yeltsin helped Mr. Luzhkov to
manoeuvre into the mayor's job in 1992 without an election. Then he allowed
the city government to gain complete control of all real estate and property in
the Russian capital. The city was also exempted from Russia's privatization
program. Five years later, virtually nothing in Moscow has been fully
privatized, and Moscow is the least-privatized city in the country.
	Because of its monopoly on property and real estate, the Moscow
government has been able to restrict competition in key sectors such as office
development and retail shops. As a result, Moscow's retail prices are twice as
expensive as anywhere else in Europe, and its office rents are among the
highest in the world.
	Anders Aslund, a former economic adviser to the Yeltsin government,
says the artificial limits on competition have fuelled corruption in Moscow.
Business permits are often allocated by bribery, and corruption has become
notoriously widespread, from the traffic police on the streets to the municipal
officials who control every development.
	Why are there so many murders in Moscow? Mr. Aslund asks. Because
there is so much corruption in Moscow. And the city government is deeply
involved in all of this.
	To support his presidential ambitions, Mr. Luzhkov has combined his
financial power with a shrewd sense of populism and patriotism. He has
demanded Russian ownership of the Ukrainian port of Sevastopol, where
thousands of Russian sailors are based. He has issued decrees requiring
Russian-language signs on every store in his city. He has cultivated the media,
inviting television cameras to his appearances at soccer matches and
construction sites. And he is employing 100,000 workers from all over Russia
on a massive freeway-construction project.
	As the mayor of Moscow, he is entitled to sit on the Federation Council,
the upper chamber of the Russian parliament. He exploits this position to build
close alliances with regional governors.
	He has managed to form good relations with almost all regional leaders,
said Nikolai Petrov, a political analyst at the Moscow Carnegie Centre. He is
very active, visiting all the regions, signing bilateral agreements with the
regions and giving money to them. And he has good connections with almost
all of the Moscow-based banks.
	In the primitive democracy of today's Russia, the mayor's financial
resources are probably a more valuable asset than the personal charisma of
rivals such as Mr. Lebed.
	It is possible to buy charisma and popularity, Mr. Petrov said.
	Only two obstacles are blocking Mr. Luzhkov's path to the Kremlin.
First, there is still a tendency for Russians outside the capital to resent the
wealth and power of Moscow. But this envy of Moscow could ultimately work
in Mr. Luzhkov's favour, if he can convince the voters that his leadership could
make their regions as prosperous as the capital.
	Second, there is a possibility that the Russian political establishment
will prefer to endorse the stolid and conservative Prime Minister, Viktor
Chernomyrdin, as the successor to Mr. Yeltsin at the next election. Several key
Kremlin insiders, such as deputy prime minister Anatoly Chubais, are long-time
opponents of Mr. Luzhkov. If the establishment decides to close ranks behind
Mr. Chernomyrdin, it will be difficult for Mr. Luzhkov to run.
	I think the 'party of power' will choose between these two personalities,
said Leonid Sedov, a Moscow pollster. The decision hasn't been reached yet.
	Yet in this contest, too, Mr. Luzhkov has some key advantages. He is a
proven campaigner and vote winner, whereas Mr. Chernomyrdin flopped
miserably when he formed a political party in the 1995 parliamentary election.
And many voters blame Mr. Chernomyrdin for the country's economic woes.
	Mr. Luzhkov's chances are not so bad, Mr. Petrov said.