[PEN-L:6235] Russia: Down Not Out?

["Seth Sandronsky" <ssandron@xxxxxxxxxxx>]

Pen-l Friends,

While agreeing with much of Richter's commentary beow, I think he overlooks
the geopolitical implications of another Russia debt default to Western
creditors, who want to avoid a replay of the financial crisis last August.
Such a strategy must surely be related to an expanded Russian role in a
peace settlement for the war over Kosovo.  As the IMF irons out the details
of a new agreement with Russia, I wouldn't be surprised to see at the same
time NATO also agree to Russia's expanded peacekeeping role in the Balkans.
Could this be the first glimpse of a new global financial architecture,
opening the door to a debtors' cartel against the West?

Seth


WSWS : News & Analysis : Europe : Russia
Russia: The end of a world power

What lies behind the domestic crisis?

By Patrick Richter
30 April 1999

The arrogant attitude of Washington towards the Russian government
during the bombardment of Serbia marks a turn in relations with Russia
and gives cause to assess the real character of the liberal reforms which
have been carried out there since 1991.

These policies were aimed at completely destroying the Russian economy
as a potential competitor and turning the country into a market and
source for cheap raw materials. With the many big collective
corporations bought by Western businesses--above all in the food,
chemical and pharmaceutical industries--productive plants were closed
while the retail networks were retained as an outlet for Western
products.

Following the financial crisis last summer, apart from the chocolate
factory "Red October", no larger profit-making "Russian" factories have
survived. Coal and steel companies are subsidised by the government and the
contracts for the arms industry have dropped dramatically. Only the raw
materials industry is able to yield a profit.

The type of future perspectives regarding foreign investment, in which so
much hope is still invested by the Central European countries, has been
summed up by the American banker and industrialist Thomas
Wainwright: "Where should they [the foreign investors] go with their
money? Who would they produce for? The international market is in a
depression and foreign competitors would reject products manufactured
in Russia with all sorts of protectionist measures." Steel and aluminium are
already now being threatened by such anti-dumping measures.

Last August's financial crisis burst the bubble of the overblown Russian
credit market, which on the one hand expressed the boundless and naive
illusions in a capitalist upturn but which was also consciously inflated in
order to increase Russia's dependence on the West.

The credit policies of the IMF since 1991 served the purpose of
strengthening particular layers in Russia whose job was to carry out such a
policy. Its chief supporters were chosen amongst the most corrupt and
ruthless economic and political climbers who, under the leadership of
President Boris Yeltsin, could bring the most profitable parts of the
economy under their control--the finance and oil sector--and then build up
very influential media empires.

At the height of their power these men were reputed to control over 90
percent of the economy and were known as the so-called oligarchs:
Boris Berezovsky (who built his empire with LogoWAS, the Lada
distribution network; owns newspapers, television stations and shares in oil
companies and the Russian airline Aeroflot), Vladimir Potanin (of
Oneximbank; one of the richest men in Russia, according to Forbes, with $1.6
billion), Alexander Smolensky (SBS-Agrobank), Vladimir
Gussinsky (Mostbank group), Vladimir Vinogradov (Inkombank), Vagit
Alekperov (Lukoil) and Michael Chodorovsky (Yukos-Oil), to name just
a few of the most important ones.

Their elevation came relatively easily. During perestroika the mathematics
graduates and young members of the Communist Party's youth
organisation founded private banks with party money, or just took over
privatised parts of the national banking system. In the unstable situation
in the first years after 1991 they were given cheap state credits which they
could use to speculate during a period of hyperinflation. On this basis they
were able to rack up their first millions of dollars. In the following
period, the oligarchs gradually acquired shares in industry through their
banks--nearly always at underrated market value--above all in the raw
materials sector.

In 1995 the head of privatisation at the time, Anatoli Chubais, enabled them
to carry out their biggest coup with the help of the so-called "shares
against credit" privatisation program, which privatised the most profitable
key industries. In the name of a few of the oligarchs, Oneximbank head
Potanin organised a loan of $2 billion in exchange for shares of the
Berezovsky company due to be privatised. This is how Berezovsky and
Smolensky gained the majority of shares of Russia's seventh biggest oil
company, Sibneft. After the privatisation program had been carried out, this
handful of super-rich controlled the lion's share in the companies.

They continued to receive help from the state right up to the financial
crisis. The short-term government loans with which the state financially met
the demands of its private national and foreign creditors came onto the
market through the above mentioned banks. Up until the crisis, state
provision and free loans constituted the bank's main source of income and
strengthened the position of the oligarchs.

In a study dealing with the lives and intentions of this layer, Maxim
Boyko, Andrei Shleifer and Robert Vishny established that they "have
absolutely no entrepreneurial abilities, are unusually keen on wealth and
are absolutely not interested in becoming rich through hard work"
(Privatising Russia, MIT Press, 1995: Cambridge).

The fine sounding words of IMF economists like Jeffrey Sachs, or
politicians like Clinton and Kohl--who declared that doing away with the
sprawling corruption had to be seen as the most pressing task in order to
overcome the economic problems--stood in sharp contradiction to the fact
that these politicians and bankers worked hand in hand with the oligarchs.
This was particularly clear at the time of the presidential elections in
1996.

At that time the oligarchs and the IMF, and the American and German
governments jointly supported Yeltsin's election campaign. It was only
thanks to their concerted help that he was narrowly re-elected. In his
book So long, Russia ( Pros'hai, Rossija, Moscow: 1997) the Italian
journalist Giulietto Chiesa describes how the American government not
only supported Yeltsin's election campaign but also directly organised it.

For this purpose four American election campaign experts were brought
over to Moscow four months before the election campaign. One of them,
Richard Dresner, basing himself on the work that he had done with
opinion polls, explained that: (a) Yeltsin would be beaten by five
candidates in all ranking lists, (b) the current president could only count
on 6 percent of Russians supporting him, and (c) he (Yeltsin) is
considered by even fewer Russians to be a "competent leader". "If we
were in the USA, I would advise a guy under such conditions to change
his job" (ibid, page 18).

For finances, Chiesa then writes, the IMF temporarily "passed over to
the Soviet system of 'unlimited budgets for particular projects' and
announced the allocation of over $10.3 billion on the eve of the
elections"(ibid, page 17). Helmut Kohl awarded 3 billion DMs so that Yeltsin
had enough means to quieten the opposition in the press.

The oligarchs gained direct entrance into politics due to their massive
financial support and their collaboration with the West. Vladimir Potanin
was temporarily named vice-prime minister and Berezovsky vice-security
advisor.

Boris Berezovsky--who supported the election of General Lebed as
governor of the Krasnoyarsk region in 1998, and is described as the
modern Rasputin because of his direct influence upon Yeltsin's
policies--already held several posts, serving until March as general
secretary of the Community of Independent States (CIS).

President Yeltsin's declarations of his resolve to clip the wings of the
oligarchs with the help of the liberals remained empty words as the latter
revealed themselves meanwhile to be hungry for power and intent on carrying
out "real reforms at long last". The growing protest movement of the working
class prevented Yeltsin from implementing additional social cutbacks, whilst
the oligarchs asserted their influence through their media empire. Boris
Nemtzov and Anatoli Chubais, who had been appointed to the government, did
not last longer than 15 months. And the Kiriyenko government, appointed a
year later in March, did not even survive until the end of August.

The breakdown of the status quo of the past years, due to the lack of
further foreign financial help, fundamentally changed the relations of
power in domestic policy. The communists and nationalists, with a
majority of representatives in the national Duma, have up to now
expressed their opposition to the government in radical words only, but have
consistently supported Yeltsin's policies and in turn have benefited from
generous privileges. Since August they have increasingly attempted to push
through the interests of their clientele.

Those behind these parties are the directors and owners of the industrial
sector who came off short during the enrichment orgy of the "reform period",
and had to just stand and watch while foreign producers disputed their right
to a share of the market. Amongst them are, above all, the arms and steel
industry. The defence industry was particularly badly hit because its main
customer, the state, had to drastically reduce its budget for armaments. In
addition, Russia's traditional markets in Eastern Europe have nearly all
completely collapsed as a result of NATO's East European expansion.

After Kiriyenko's dismissal in August, Yeltsin initially proposed Victor
Chernomyrdin as new prime minister for a "stabilisation period" for the
Russian economy--someone regarded as the main enemy by the
nationalists and communists. A compromise was reached and the
Primakov government was founded. Yuri Masliukov, who led the
national planning body Gosplan in the 80s and is a member of the CP of
the Russian Federation, was named vice-prime minister. This government
clearly is clearly of a transitional character and has the task of
manoeuvring between the interests of foreign capital and the oligarchs on
the one hand and the interests of the nationalists on the other.

The impeachment proceedings against Yeltsin and the recent incident
concerning Boris Berezovsky and the chief public prosecutor Yuri
Skuratov have to be viewed against this backdrop, which has been
further fuelled by the outbreak of the war in Kosovo.

In typical manner, police chief Skuratov was sacked by Yeltsin at the
beginning of February following revelations of various corruption
scandals. These involved Yeltsin's daughter Tatiana Diachenko,
ex-premier Victor Chernomyrdin and Boris Berezovsky embezzling an
IMF credit instalment amounting to $4.8 billion last August. However
Skuratov pursued his work, with the support of the national Duma, until a
video was made public at the beginning of March showing Skuratov in bed with
two prostitutes.

The outbreak of war seemed to further strengthen the nationalists.
Accompanied by the media, they demanded direct military support for
Milosevic, and some even demanded the use of atomic weapons against
NATO. An arrest warrant was issued against Berezovsky and
Smolensky on April 7, and impeachment proceedings against Yeltsin
took an increasingly concrete shape.

But then came a rapid about-turn. "More objective" reports about the
war began to appear in the media, the arrest warrant against Berezovsky and
Smolensky was dropped and the impeachment procedure was
adjourned until mid-May.

Commentaries spoke of a renewed strengthening of Yeltsin, to whom the
World Bank held out the prospect of a credit of $3 billion, while Victor
Chernomyrdin was appointed delegate for Yugoslavia to lead peace talks.

The background to the turnaround is above all Europe's and particularly
Germany's efforts to make sure that Russia can save face regarding the war
in Kosovo. The United States is openly trampling on Russia's interests in
foreign policy, and the spreading of the conflict to Russia is rapidly
becoming a tangible possibility. In this vein Israeli Defence Minister Moshe
Arens declared recently, with respect to the alleged Russian transfer of
nuclear technology to Iran, "The USA are the only ones who can stop Russia."

The European governments are very well aware that Russia's
weaknesses will become an increasing problem for all of Europe. The
European standpoint was summed up in a comment by the prominent
German journalist and expert on Russia, Gerd Ruge: "Russia is not the
Titanic, Russia is the iceberg."

See Also:
Russia and the Balkan war: NATO's bombing of Belgrade changes the political
balance of forces in Moscow [13 April 1999]

Eight years after capitalist reforms--a social crisis in Russia "without
parallel" [2 February 1999]
Red Cross and Red Crescent issue report: Warnings of famine and starvation
in the former Soviet Union [7 October 1999]

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