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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. Russia as a Creditor

VII. Russia's Space Industry

VIII. Russia's Vodka Wars

IX. Let My People Go

X. Fimaco Wouldn't Die

XI. The Chechen Theatre Ticket

XII. Russia's Israeli Oil Bond

XIII. Russia's Idled Spies

XIV. Russia's Middle Class

XV. Russia in 2003

XVI. Russia Straddles the Euro-Atlantic Divide

XVII. Russia's Stealth Diplomacy

XVIII. Russia's Second Empire

XIX. The Author

XX. About "After the Rain"

The Security Apparatus

Shabtai Kalmanovich vanished from London in late 1980's. He resurfacedin Israel to face trial for espionage. He was convicted and spent yearsin an Israeli jail before being repatriated to Russia. He was describedby 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 flourishingbusiness in Africa, in Botswana and then in Sierra Leone, where hiscompany, LIAT, owned the only bus operator in Freetown. He tradeddiamonds, globetrotted flamboyantly with an entourage of dozens ofAfrican chieftains and their mistresses, and fraternized with thecorrupt elite, President Momoh included. In 1986-7 he even collaboratedwith IPE, a London based outfit, rumored to have been owned by formermembers of the Mossad and other paragons of the Israeli defenseestablishment (including virtually all the Israelis implicated in theill-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 (andinfluential) friends, mastering foreign languages, and doing somebusiness on the side (often with one's official "enemies" andunsupervised slush funds) - were all standard perks even in the 1970'sand 1980's. Thus, when communism was replaced by criminal anarchy, KGBpersonnel (as well as mobsters) were the best suited to act asentrepreneurs in the new environment. 

They were well traveled, well connected, well capitalized, polyglot, possessed of management skills, disciplined, armed to the teeth, andruthless. Far from being sidetracked, the security services rode thegravy train. But never more so than now. 

January 2002. Putin's dour gaze pierces from every wall in everyoffice. His obese ministers often discover a sudden sycophanticpropensity for skiing (a favorite pastime of the athletic President). The praise heaped on him by the servile media (Putin made sure that noother kind of media survives) comes uncomfortably close to a CentralAsian personality cult. Yet, Putin is not in control of the machinerythat brought him to the pinnacle of power, under-qualified as he was. This penumbral apparatus revolves around two pivots: the increasinglyfractured 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 to200, 000 troops are to go immediately and the same number in the next 3years. The draft is to be abolished and the army professionalized. Atits current size (officially, 1. 2 million servicemen), the armed forcesare severely under-funded. Cases of hunger are not uncommon. Ill (andlate) paid soldiers sometimes beg for cigarettes, or food. 

Conscripts, in what resembles slave labour, are "rented out" by theircommanders to economic enterprises (especially in the provinces). 

A host of such "trading" companies owned by bureaucrats in the Ministryof Defense was shut down last June by the incoming Minister of Defense(Sergei Ivanov), a close pal of Putin. But if restructuring is toproceed apace, the successful absorption of former soldiers in theeconomy (requiring pensions, housing, start up capital, employment) -if necessary with the help of foreign capital - is bound to become apriority sooner or later. 

But this may be too late and too little - the much truncated anddisorientated armed forces have been "privatized" and commandeered forpersonal gain by regional bosses in cahoots with the command structureand 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 avested interest of many generals. Senior Russian Interior Ministryfield commanders trade (often in partnership with Chechen "rebels") instolen 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 battlesagainst secessionist Chechens, influential oligarchs, venal governors, and bureaucrats beyond redemption. 

As well as the army, the defense industry - with its 2 millionemployees - is also being brutally disabused of itscentralist-nationalistic ideals. 

Orders placed with Russia's defense manufacturers by the destituteRussian armed forces are down to a trickle. Though the procurementbudget was increased by 50% last year, to c. $2. 2 billion (or 4% of theUSA's) and further increased this year to 79 billion rubles ($2. 7billion) - whatever money is available goes towards R&D, armsmodernization, and maintaining the inflated nuclear arsenal and thepersonal gear of front line soldiers in the interminable Chechen war. The Russian daily "Kommersant" quotes Former Armed Forces weaponschief, General Anatoly Sitnov, as claiming that $16 billion should beallocated for arms purchases if all the existing needs are to besatisfied. 

Having lost their major domestic client (defense constituted 75% ofRussian industrial production at one time) - exports of Russian armshave 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 andVietnam) are being avidly courted. Bribes change hands, off-shoreaccounts 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 spareparts, after sales service, maintenance, or quality control). ButRussian weapons (often Cold War surplus) come cheap and the list ofRussian firms and institutions blacklisted by the USA for sellingweapons (from handguns to missile equipped destroyers) to "roguestates" grows by the day. 

Less than one quarter of 2500 defense-related firms are subject to (theamorphous and inapt) Russian Federal supervision. Gradually, Russia'smost advanced weaponry is being made available through these outfits. 

Close to 4000 R&D programs and defense conversion projects (manyfinanced 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 toassorted autochthonous tycoons and foreign manufacturers) - theenterprises are still being abused and looted by politicians on alllevels, including the regional and provincial ones. The RussianFederation, for instance, has controlling stakes in only 7 of c. 250privatized air defense contractors. Manufacturing and R&D co-operationwith 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 topersistent accumulation of inventory. Even so, capacity utilization issaid to be 25% in many factories. Lack of maintenance renders manyplant facilities obsolete and non-competitive. The Russian government'snew emphasis on R&D is wise - Russia must replenish its catalog withhi-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 tobe 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 itsinternal security directorates. The SVR inherited the KGB's foreignintelligence directorates. 

With the ascendance of the Vladimir Putin and his coterie (all formerKGB or FSB officers), the security services revealed their hand - theyare in control of Russia and always have been. They number now twice asmany as the KGB at its apex. Only a few days ago, the FSB hadindirectly made known its enduring objections to a long mooted (andgovernment approved) railway reform (a purely economic matter). President Putin made December 20 (the day the murderous Checka, theKGB's ancestor, was established in 1917) a national holiday. 

But the most significant tectonic shift has been the implosion of theunholy alliance between Russian organized crime and its securityforces. The Russian mob served as the KGB's long arm until 1998. TheKGB often recruited and trained criminals (a task it took over from theInterior Ministry, the MVD). "Former" (reserve) and active agentsjoined international or domestic racketeering gangs, sometimes as theirleaders. 

After 1986 (and more so after 1991), many KGB members were moved fromits bloated First (SVR) and Third Directorates to its EconomicDepartment. They were instructed to dabble in business and banking(sometimes in joint ventures with foreigners). Inevitably, they crossedpaths - and then collaborated - with the Russian mafia which, like theFSB, owns shares in privatized firms, residential property, banks, andmoney laundering facilities. 

The co-operation with crime lords against corrupt (read:unco-operative) bureaucrats became institutional and all-pervasiveunder Yeltsin. The KGB is alleged to have spun off a series of "ghost"departments to deal with global drug dealing, weapons smuggling andsales, white slavery, money counterfeiting, and nuclear material. 

In a desperate effort at self-preservation, other KGB departments aresaid to have conducted the illicit sales of raw materials (includingtons of precious metals) for hard currency, and the laundering of theproceeds through financial institutions in the West (in Cyprus, Israel, Greece, the USA, Switzerland, and Austria). Specially establishedcorporate shells and "banks" were used to launder money, mainly onbehalf of the party nomenklatura. All said, the emerging KGB-crimecartel has been estimated to own or control c. 40% of Russian GDP asearly 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 officialone. 

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 KGBthus came to spawn and dominate the nascent Information Technology andtelecommunications industries in Russia. Add to this former (but onreserve duty) KGB personnel in banks, hi-tech corporations, securityfirms, consultancies, and media in the West as well as in jointventures 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 encounterswith foreign colleagues. 

This is where the FSB began to part ways with crime, albeit hithertoonly haltingly. 

The FSB has established itself both within Russian power structures andin business. What it needs now more than money and clout - arerespectability and the access it brings to Western capital markets, intellectual property (proprietary technology), and management. Havingco-opted criminal organizations for its own purposes (and having actedcriminally themselves) - the alphabet soup of security agencies nowwish to consolidate their gains and transform themselves intolegitimate, 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, agenuine mafia gangland war over territory and spoils. The result is byno means guaranteed. 

The Energy Sector

The pension fund of the Russian oil giant, Lukoil, a minorityshareholder in TV-6 (owned by a discredited and self-exiled Yeltsin-eraoligarch, Boris Berezovsky), this week forced the closure of thistelevision station on legal grounds. Gazprom (Russia's natural gasmonopoly) has done the same to another television station, NTV, lastyear (and then proceeded to expropriate it from its owner, VladimirGusinsky). 

Gazprom is forced to sell natural gas to Russian consumers at 10% theworld price and to turn a blind eye to debts owed it by Kremlinfavorites. 

Both Lukoil and Gazprom are, therefore, used by the Kremlin asinstruments of domestic policy. 

But Russian energy companies are also used as instruments of foreignpolicy. 

A few examples:

Russia has resumed oil drilling and exploration in war ravagedChechnya. About 230 million rubles have been transferred to the federalMinistry of Energy. A new refinery is in the works. 

Russia lately signed a production agreement to develop oilfields incentral Sudan in return for Sudanese arms purchases. 

Armenia owes Itera, a Florida based, Gazprom related, oil concern, $35million. Itera has agreed to postpone its planned reduction in gassupplies to the struggling republic to February 11. 

Last month, President Putin called for the establishment of a "Eurasianalliance of gas producers" - probably to counter growing Americanpresence, both economic and military, in Central Asia and the muchdisputed oil rich Caspian basin. The countries of Central Asia havedone their best to construct alternative oil pipelines (through China, Turkey, or Iran) in order to reduce their dependence on Russian oiltransportation infrastructure. These efforts largely failed (a new $4billion pipeline from Kazakhstan to the Black Sea through Russianterritory has just been inaugurated) and Russia is now on a charmoffensive. 

Its PR efforts are characteristically coupled with extortion. Gazpromowns the pipelines. Russia exports 7 trillion cubic feet of gas a year- six times the combined output of all other regional producers puttogether. Gazprom actually competes with its own clients, thepipelines' users, in export markets. It is owed money by all thesecountries 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 afraction of their value and through an offshore intermediary. UES thentransferred the notes to the Russian government against the writing offof $1. 35 billion in UES debts to the federal budget. The Russians claimthat Paris Club rules have ruled out a direct transaction betweenRussia (a member of the Club) and the Czech Republic (not a member). 

In the last decade, Russia has been transformed from an industrial andmilitary power into a developing country with an overwhelmingdependence on a single category of commodities: energy products. Russia's energy monopolies - whether state owned or private - serve aspotent long arms of the Kremlin and the security services and implementtheir policies faithfully. 

The Kremlin (and, indirectly, the security services) maintain a tightgrip over the energy sector by selectively applying Russia's tangle ofhopelessly arcane laws. In the last week alone, the ProsecutorGeneral's office charged the president and vice president of Sibur (aGazprom subsidiary) with embezzlement. They are currently beingdetained for "abuse of office". 

Another oil giant, Yukos, was forced to disclose documents regardingits (real) ownership structure and activities to the State PropertyFund in connection with an investigation regarding asset strippingthrough a series of offshore entities and a Siberian subsidiary. 

Intermittently, questions are raised about the curious relationshipbetween Gazprom's directors and Itera, upon which they shower contractswith Gazprom and what amounts to multi-million dollar gifts (in thefrom 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'spervasive 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 theirnew owners, Russian oil firms now seem to be leading Russia - albeithaltingly - into a new age of good governance, respect for propertyrights, efficacious management, and access to Western capital markets. 

The patently dubious UES foray into sovereign debt speculation, forinstance, drew surprisingly little criticism from foreign shareholdersand 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 successfullyfloated a $250 million Eurobond (redeemable in 2007 with a lenientcoupon of 11. 5%). The issue was oversubscribed. 

The (probably temporary) warming of Russia's relationship with the USAand Russia's acceptance (however belated and reluctant) of itstechnological and financial dependence on the West - have transformedthe Russian market into an attractive target. Commercial activity ismore focused and often channeled through American diplomatic missions. 

The U. S. Consul General in Vladivostok and the Senior CommercialOfficer in Moscow have announced that they will "lead an oil and gasequipment and services and related construction sectors trade missionto Sakhalin, Russia from March 11-13, 2002. " The oil and gas fields inSakhalin attract 25% of all FDI in Russia and more than $35 billion inadditional investments is expected. Other regions of interest are theArctic 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 monthsin 1997-8 - are back. 

Takeovers of major Russian players (with their proven reserves) byforeign oil firms are in the pipeline. Russian firms are seriouslyundervalued - their shares being priced at one third to one tenth theirWestern counterparts'. Some Russian oil firms (like Yukos and Sibneft)have growth rates among the highest and production costs among thelowest in the industry. The boards of the likes of Lukoil are packedwith American fund managers and British investment bankers. 

The forthcoming liberalization of the natural gas market (the outcomeof an oft-heralded and much needed Gazprom divestiture) is a majoropportunity 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. 5million barrels daily (about 10% of the global trade in oil). It is theworld's largest exporter of natural gas (and has the largest knownnatural gas reserves). It is also the world's second largest energyconsumer. 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 decrepitexploration and extraction equipment, and a crumbling oil transportinfrastructure is in need of total replacement. More than 5% of oilproduced in Russia is stolen by tapping the leaking pipelines. Anunknown quantity is lost in oil spills and leakage. Transneft, thestate's oil pipelines monopoly, is committed to an ambitious plan toconstruct new export pipelines to the Baltic and to China. The marketpotential for Western equipment manufacturers, building contractors, and oil firms is evidently there. 

But this serendipity may be a curse in disguise. Russia is chronicallysuffering from an oil glut induced by over-production, excess refiningcapacity, and subsidized domestic prices (oil sold inside Russia costsone third to one half the world price). Russian oil companies areplanning 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 onlighter energy products, including gas, were cut in January. As opposedto previous years, no new export quotas were set. Clearly, Russia isworried about its surplus and wishes to amortize it through enhancedexports. 

Russia also squandered its oil windfall and used it to postpone themuch needed restructuring of other sectors in the economy - notably thewasteful industrial sector and the corrupt and archaic financialsystem. Even the much vaunted plans to break apart the venal andinefficient natural gas and electricity monopolies and to come up witha new production sharing regime have gone nowhere (though some pipelinecapacity has been made available to Gazprom's competitors). 

Both Russia's tax revenues and its export proceeds (and hence itsforeign exchange reserves and its ability to service its monstrous andoft-rescheduled $158 billion in foreign debt) are heavily dependent onincome from the sale of energy products in global markets. More than40% of all its tax intake is energy-related (compared to double thisfigure in Saudi Arabia). Gazprom alone accounts for 25% of all federaltax revenues. Almost 40% of Russia's exports are energy products as are13% of its GDP. Domestically refined oil is also smuggled and otherwisesold unofficially, "off the books". 

But, as opposed to Saudi Arabia's or Venezuela's, Russia's budget isbased on a far more realistic price range of $14-18 per barrel. HenceRussia's frequent clashes with OPEC (of which it is not a member) andits decision to cut oil production by only 150, 000 bpd in the firstquarter 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 tocompensate for almost any price drop. 

Russia's energy minister told the Federation Council, Russia's upperhouse of parliament, that Russia "should switch from cutting oil outputto boosting it considerably to dominate world markets and push out Arabcompetitors". The Prime Minister told the US-Russia Business Councilthat Russia should "increase oil production and its presence in theinternational marketplace. "

It may even be that Russia is spoiling for a bloodbath which it hopesto survive as a near monopoly in the energy markets. Russia alreadysupplies more than 25% of all natural gas consumed by Europe and isbuilding or considering to construct pipelines to Turkey, China, andUkraine. Russia also has sizable coal and electricity exports, mainlyto CIS and NIS countries. Should it succeed in its quest todramatically increase its market share, it will be in the position totackle the USA and the EU as an equal, a major foreign policy priorityof both Putin and all his predecessors alike. 

Financial Services

An expatriate relocation Web site, settler-international. Com, has thisto say about Russian banks: "Do not open a bank account in a Russianbank : you might not see your deposit again. " Russia's Central Bank, aware of the dismal lack of professionalism, the venality, and thecriminal predilections of Russian "bankers" (and their Westernaccomplices) - is offering "complementary vocational training" in theframework of its Banking School. It is somewhat ironic that theinstitution suspected of abusing billions of US dollars in IMF funds by"parking" them in obscure off-shore havens - seeks to better thecorrupt banking system in Russia. 

I. The Banks

On paper, Russia has more than 1, 300 banks. Yet, with the exception ofthe 20-odd (two new ones were added last year) state-owned (and, implicitly, state-guaranteed) outfits - e. G. , the mammoth Sberbank (thesavings bank, 61% owned by the Central Bank) - very few provide minimalservices, such as corporate finance and retail banking. The survivingpart of the private banking sector ("Alfa Bank", "MDM Bank") iscomposed of dwarfish entities with limited offerings. They are unableto 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 restructurethe sector and did nothing to prevent asset stripping. More than onethird of the banks are insolvent - but were never bankrupted. Thepresence 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 ownlicensed "banks" (really, outsourced treasury operations) - more than90% of corporate finance in 2000-2001 was in the form of equityfinance, corporate bonds, and (mainly) reinvested retained earnings. Some corporate bond issues are as large as $100 million (with 18-monthsmaturity) and the corporate bond market may quintuple to $10 billion ina year or two, reports "The Economist", quoting Renaissance Capital, aRussian investment bank. 

Still, that bank credits are not available to small and mediumenterprises retards growth, as Stanley Fischer pointed out in hisspeech to the Higher School of Economics in Moscow, in June 2001, whenhe was still the First Deputy Managing Director of the IMF. Last week, the OECD warned Russia that its economic growth may suffer withoutreforms to the banking sector. 

Russian banks are undercapitalized and poorly audited. Most of them areexposed to one or two major borrowers, sectors, or commodities. Marginshave declined (though to a still high by Western standards 14%). Costshave increased. The vast majority of these fledglings have less than $1million in capital. This is because shareholders (and, for that matter, depositors) - having been fleeced in the 1998 meltdown - are leery ofthrowing good money after very bad. The golden opportunity toconsolidate and rationalize following the 1998 crisis was clearlymissed. 

The government's (frail) attempts to reform the sector by overhaulingbank supervision and by passing laws which deal with anti-moneylaundering, deposit insurance, minimum capital and bankruptcyregulations, and mandatory risk evaluation models - did little to erasethe memory of its collusion in the all-pervasive, massive, andsuspiciously orchestrated defaults of 1998-1999. Russia is notoriouslystrong on legislation and short on its enforcement. 

Moreover, the opaque, overly-bureaucratic, and oligarch-friendlyCentral Bank is at loggerheads with would be reformers and gets its waymore often than not. It supports a minimum capital requirement of lessthan $5 million. Government sources have gone as high as $200 million. The government retaliates with thinly-veiled threats in the form ofinane proposals to replace the Bank with newly-created "independent"institutions. 

Viktor Gerashchenko - the current, old-school, Governor - is set toleave on September 2002. He will likely be replaced by someone moreKremlin-friendly. As long as the Kreml is the bastion of reform, theseare good news. But a weak Central Bank will remove one of the lastchecks and balances in Russia. Moreover, a hasty process ofconsolidation coupled with draconian regulation may decimate privatesector Russian banking for good. This, perhaps, is what the Kremlinwants. After all, he who controls the purse strings - rules Russia. 

II. The Stock Exchange

The theory of financial markets calls for robust capital markets wherebanks are lacking and dysfunctional. Equity financing and corporatedebt outstrip bank lending as sources of corporate finance even in theWest. 

But Russia's stock market - the worst performer among emerging marketsin 1998, the best one in 2001 - is often cornered and manipulated, preyto insider trading and worse. It is less liquid that the Tel-Aviv StockExchange, though the market capitalization of RTS, Russia's mainmarketplace, is up 430% since 1998 (80% last year alone). Bonds climbed500% in the same period and a flourishing corporate bonds markets haserupted on the scene. Many regard this surge as a speculative bubbleinflated by the high level of oil prices. 

Others (mostly Western brokerage houses) swear that the market isundervalued, having fallen by more than 90% in 1998. Russia isdifferent - they say - it is better managed, sports budget and tradesurpluses, is less indebted (and re-pays its debts on time, for achange), and the economy is expanding. The same pundits talked the RTSup 180% in 1997 only to see it shrivel in an egregious case of Asiancontagion. The connection between Russia's macro and micro is less thanstraightforward. 

Whatever the truth, investors are clearly more discriminating. Both theNew York Times and The Economist cite the example of Yukos Oil (up190%) versus Lukoil (up a mere 30%). The former is investor friendlyand publishes internationally audited accounts. The latter has noinvestor relations to speak of and is disclosure-averse. Still, bothfirms - as do a few pioneering others - seek to access Western capitalmarkets. 

The intrepid investor can partake by purchasing mutual funds dedicated, wholly or partially, to Russia - or by trading ADR's of Russian firmson NYSE (10-20 times the US dollar volume of the RTS). ADR's of smallerfirms are traded OTC and, according to the New York Times, one canshort sell Russian securities through offshore vehicles. The latter arealso 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 thatRussia's 1998 chaos was serendipitous (in "Argumenti i Fakti" datedOctober 28, 1998), he was derided by Western analysts but supported byRussian ones. In hindsight, the Russians were right. They may be righttoday as well when they claim that Russia has never been better. 

The ruble devaluation (which made Russian goods competitive) and risingoil prices yielded a trade surplus of more than $50 billion last year. For the first time in its modern and turbulent history, Russia was ableto prepay both foreign (IMF) and domestic debts (it redeemed statebonds ahead of maturity). It is no longer the IMF's largest debtor. ItsCentral Bank boasts $40 billion in foreign exchange reserves. Exactlya year ago, Russia tried to extort a partial debt write-off from itscreditors (as it has done numerous times in its post-Communist decade). But Russia's oft-abused creditors and investors seem to havesurprisingly short memories and an unsurpassed capacity for masochisticself-delusion. 

Stratfor. Com reports ("Russia Buys Financial Maneuverability" datedJanuary 31, 2002) that "Deutsche Bank Jan. 30 granted Vneshekonombank a$100 million loan, the largest private loan to a Russian bank since the1998 ruble crisis. As Russia works to reintegrate into the globalfinancial 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 athriving mortgage finance market (there is almost none now). One of thereasons is a belated November 2001 pension reform which allows theinvestment of retirement funds in debt instruments - such as mortgages. A similar virtuous cycle transpired in Kazakhstan. Last year theCentral 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 billiondefault, the New York Times reported a $15 billion money launderingoperation which involved, inter alia, the Bank of New York and Russia'sfirst Representative to the IMF. 

The Russian Central Bank invested billions of dollars (through anoffshore 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 ofProf. Jeffrey Sachs, HIID (Harvard Institute of InternationalDevelopment) - the architect of Russian "privatization" - were caughtin potentially criminal conflicts of interest. 

Are we to believe that such gargantuan transgressions have beentransformed into new-found market discipline and virtuous dealings?

Putin doesn't. Last year, riding the tidal wave of the fight againstterror, he formed the Financial Monitoring Committee (KFM). Ostensibly, its role is to fight money laundering and other financial crimes, aidedby brand new laws and a small army of trained and tenacious accountantsunder the aegis of the Ministry of Finance. 

Really, it is intended to circumvent irredeemably compromised extantstructures in the Ministry of Interior and the FSB and to stem capitalflight (if possible, by reversing the annual hemorrhage of $15-20billion). Non-cooperative banks may lose their licenses. Banks havebeen transferring 5 daily Mb of encoded reports regarding suspiciousfinancial dealings (and all transactions above 600, 000 rubles - equalto $20, 000) since February 1 - when the KFM opened for business. Somuch for Russian bank secrecy ("Did we really have it?" - musedPresident Putin a few weeks ago). 

Last month, Mikhail Fradkov, the Federal Tax Police Chief confirmed toInterfax the financial sector's continued involvement in bleedingRussia white: "... Fly-by-night firms usually play a key role in illegalmoney transfers abroad. Fradkov recalled that 20 Moscow banks inspectedby the tax police alone transferred about $5 billion abroad throughsuch firms. " ITAR-TASS, the Russian news agency, reports a drop of 60%in the cash flow of Russian banks since anti-money laundering measurestook 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 quotedin dollars and ATM's spew forth both dollars and rubles. Thispredilection for the greenback was aided greatly by the Central Bank'spanicky advice (reported by Moscow Times) to ditch all Europeancurrencies prior to January 1, 2002. The result is a cautious andhitherto minor diversification to euros. Banks are reporting increaseddemand for the new currency - a multiple of the demand for all formerEuropean currencies combined. But this is still a drop in the dollarocean. 

The exchange rate is determined by the Central Bank - by far thedecisive player in the thin and illiquid market. Lately, it has optedfor a creeping devaluation of the ruble, in line with inflation. Foreign exchange is traded in eight exchanges across Russia but manyexporters 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 isabsolute as a 1998 court ruling rendered ruble forwards contractsuseless ("unenforceable bets"). 

VI. The International Financial Institutions (IFI's)

Of the World Bank's $12 billion allocated to 51 projects in Russiasince 1992, only $0. 6 billion went to the financial sector (compared to8 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 fromMarch 1999 to June 2001. It has approved (or is considering) sixprojects since then: a loan of $20 million to DeltaCredit, a smallishproject and residential finance, USAID backed, fund; a Russianpre-export financing facility (with the German bank, WestLB); Twomillion US dollars each to the Russian-owned Baltiskii Leasing andCenter Invest (a regional bank); $2. 5 million to another regional bank(NBD) - and a partial guarantee for a $15 million bond issued byRussian Standard Bank. There is also $5 million loan to ProbusinessBank. 

Another active player is the EBRD. Having suffered a humiliatingdeterioration in the quality of its Russian assets portfolio in1998-2000, it is active there again. By midyear last year, it hadinvested c. $300 million and lent another $700 million to Russianbanks, equity and mutual funds, insurance companies, and pension funds. This amounts to almost 30% of its total involvement in the RussianFederation. Judging by this commitment, the EBRD - a bank - seems to beregarding the Russian financial system as either an extremelyattractive investment - or a menace to Russia's future stability. 

VII. So, What's Next?

No modern country, however self-deluded and backward, can survivewithout a banking system. The Central Bank's pernicious andoverwhelming 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 maycollapse, 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 Armageddonand Russia's entry to the WTO - the crisis is bound to become moreominous. Russia is on the verge of opening itself to real competitionfrom the West - including (perhaps especially so) in the financialsector. It is revamping its law books - but does not have theadministrative mechanism it takes to implement them. It has a richtradition of obstructionism, venality, political interference, andpatronage. 

Foreign competition is the equivalent of an economic crisis in acountry like Russia. Should this be coupled with domestic financialmayhem - Russia may be transformed to the worse. Expect interestingtimes ahead. 

The Russian Devolution

 The Regions

Russia's history is a chaotic battle between centrifugal andcentripetal forces - between its 50 oblasts (regions), 2 cities (Moscowand St. Petersburg), 6 krais (territories), 21 republics, and 10 okrugs(departments) - and the often cash-strapped and graft-riddenpaternalistic 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 disaffecteddistricts - all intermittently connected with decrepit lines oftransport 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 - governorshave been appointed by Yeltsin until 1997). They are patchy fiefdomscomposed of autonomous okrugs. "The Economist" observes that the okrugs(often populated with members of an ethnic minority) are either veryrich (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 encouragedcapital accumulation is some regions while ignoring others, thusirreversibly eroding any sense of residual solidarity. In an IMFworking paper ("Regional Disparities and Transfer Policies in Russia"by Dabla-Norris and Weber), the authors note that the ten wealthiestregions produce more than 40% of Russia's GDP (and contribute more than50% of its tax revenues) - thus heavily subsidizing their poorerbrethren. Output contracted by 90% in some regions - and only by 15% inothers. Moscow receives more than 20% of all federal funds - with lessthan 7% of the population. In the Tuva republic - three quarters of thedenizens are poor - compared to less than one fifth in Moscow. Moscowlavishes on each of its residents 30 times the amount per capita spentby the poorest region. 

Nadezhda Bikalova of the IMF notes ("Intergovernmental Fiscal Relationsin Russia") that when the USSR imploded, the ratio of budgetary incomeper person between the richest and the poorest region was 11. 6. It hassince climbed to 30. All the regions were put in charge of implementingsocial policies as early as 1994 - but only a few (the net "donors" tothe federal budget, or food exporters to other regions) were grantedtaxing privileges. 

As Kathryn Stoner-Weiss has observed in her book, "Local Heroes: ThePolitical Economy of Russian Regional Governance", not all regionsperformed equally well (or equally dismally) during the transition fromcommunism to (rabid) capitalism. Political figures in the (relatively)prosperous Nizhny-Novgorod and Tyumen regions emphasized stability andconsensus (i. E. , centralization and co-operation). Both the economicresources and the political levers in prosperous regions are in thehands 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 interestlobbying groups in the West. 

Inevitably such incestuous relationships promotes corruption, imposesconformity, inhibits market mechanisms, and fosters detachment from thecentre. But they also prevent internecine fighting and open, economically devastating, investor-deterring, conflicts. Economicpolicy in such parts of Russia tend to be coherent and efficientlyimplemented. Such business-political complexes reached their apex in1992-1998 in Moscow (ranked #1 in creditworthiness), Samara, Tyumen, Sverdlovsk, Tatarstan, Perm, Nizhny-Novgorod, Irkutsk, Krasnoyarsk, andSt. Petersburg (Putin's lair). As a result, by early 1997, Moscowattracted over 50% of all FDI and domestic investment and St. Petersburg - another 10%. 

These growing economic disparities between the regions almost toreRussia asunder. A clunky and venal tax administration impoverished theKremlin and reduced its influence (i. E. , powers of patronage)commensurately. Regional authorities throughout the vast Federationattracted their own investors, passed their own laws (often in defianceof legislation by the centre), appointed their own officials, leviedtheir own taxes (only a fraction of which reached Moscow), and providedor 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-electiononly exacerbated this trend. He lost his right to appoint governors in1997 - and with it the last vestiges of ostensible central authority. In a humiliating - and well-publicized defeat - Yeltsin failed to sackthe spectacularly sleazy and incompetent governor of Primorsky krai, Yevgeni Nazdratenko (later "persuaded" by Putin to resign his positionand chair the State Fisheries Committee instead). 

The regions took advantage of Yeltsin's frail condition to extracteconomic concessions: a bigger share of the tax pie, the right topurchase a portion of the raw materials mined in the region at "cost"(Sakha), the right to borrow independently (though the issuance ofpromissory notes was banned in 1997) and to spend "off-budget" - andeven the right to issue Eurobonds (there were three such issues in1997). Many regions cut red tape, introduced transparent bookkeeping, lured foreign investors with tax breaks, and liberalized landownership. 

Bikalova (IMF) identifies three major problems in the fiscalrelationship between centre and regions in the Yeltsin era:

"(1) the absence of an objective normative basis for allocating budgetrevenues, (2) the lack of interest shown by local and regionalgovernments in developing their own revenues and cutting theirexpenditures, and (3) the federal government's practice of makingtransfer payments to federation members without taking account of theother state subsidies and grants they receive. "

Then came Russia's financial meltdown in August 1998, followed byPutin's disorientating ascendance. A redistribution of power inMoscow's favor seemed imminent. But it was not to be. 

The recommendations of a committee, composed of representatives of thegovernment, the Federation Council, and the Duma, were incorporated ina series of laws and in the 1999 budget, which re-defined the fiscalgive 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 theregions), the minerals extraction tax, customs and duties, and other"contributions" . This legislation was further augmented in April-May2001 (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, andregional 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 comefrom federal tax sharing. Revenues actually raised by regional andlocal governments account for less than 15 percent of theirexpenditures". The federal government has also signed more than 200special economic "contracts" with the richer, donor and exporting, regions - this despite the constitutional objections of the Ministry ofJustice. This discriminating practice is now being phased out. But ithas not been replaced by any prioritized economic policies andpreferences on the federal level, as the OECD has noted. 

One of Putin's first acts was to submit a package of laws to the StateDuma in May 2000. The crux of the proposed legislation was to endow thePresident with the power to sack regional elected officials at will. The alarmed governors forgot their petty squabbles and in a rare showof self-interested unity fenced the bill with restrictions. ThePresident can fire a governor, said the final version, only if a courtrules that the latter failed to incorporate federal legislation inregional laws, or if charged with serious criminal offenses. Thewholesale dismissal of regional legislatures requires the approval ofthe State Duma. Some republics insist that even these truncated powersare excessive and Russia's Constitutional Court is currently weighingtheir arguments. 

Putin then resorted to another stratagem. He established, two yearsago, by decree, a bureaucratic layer between centre and regions: sevenadministrative mega-regions whose role is to make sure that federallaws are both adopted and enforced at the local level. The presidentialenvoys report back to the Kremlin but, otherwise, are fairly harmless -and useless. They did succeed, however, in forcing local elections uponthe likes of Ingushetiya - and to organize all federal workers inregional federal collegiums, subordinated to the Kremlin. 

The war in Chechnya was meant to be another unequivocal message thatcessation 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 andeven increasing the Federation Council's erstwhile powers at theexpense of the (incensed) Duma. Governors have sensed the changingwinds and have acted to trample over democratic institutions in theirregions. Thus, the Governor of Orenburg has abolished the directelections of mayors in his oblast. Russia's big business is moving inas well in an attempt to elect its own mayors (for instance, inIrkutsk). 

Regional finances are in bad shape. Only 40 out 89 regions managed, byFebruary, to pay their civil servants their December 2001 salaries(raised 89% - or 1. 5% of GDP - by the benevolent president). Manyregions had to go deeper into deficit to do so. Salaries make threequarters of regional budgets. 

The East-West Institute reports that arrears have increased 10% inJanuary alone - to 33 billion rubles (c. $1 billion). The FinanceMinistry is considering to declare seven regions bankrupt. Yet anothercommittee, headed by Deputy Head of the Presidential Administration, Dimitri Kozak, is on the verge of establishing an externaladministration for insolvent regions. The recent housing reform - whichwould force Russians to pay market prices for their apartments andwould subsidize the poor directly (rather than through the regional andmunicipal authorities) - is likely to further weaken regional balancesheets. 

Luckily for Russia, the regions are less cantankerous and restive now. The emphasis has shifted from narcissistic posturing to economicsurvival and prosperity. The Moscow region still attracts the bulk ofRussian domestic and foreign investments, leaving the regions to makedo with leftovers. 

Sergei Kirienko, a former short lived Prime Minister, and, currentlythe president's envoy to the politically mighty Volga okrug, attributesthis gap, in a comment to Radio Free Europe, to non-harmonized businesslegislation (between center and regions). Boris Nemtsov, a member ofthe Duma (and former Deputy Prime Minister) thinks that the problem isa "lack of democratic structures" - press freedom, civil society, anddemocratic government. Others attribute the deficient interest to adearth of safety and safe institutions, propagated by entrenchedinterest groups. 

Small business is back in fashion after years of investments inbehemoths such as Gazprom and Lukoil. Politicians make small to mediumenterprises a staple of their speeches. The EBRD has revived itsmoribund small business funds (and grants up to $125, 000 loans toeligible enterprises). Bank lending is still absent (together with abanking system) - but foreign investment banks and retail banks aremaking hesitant inroads into the regional markets. Small businessmenare more assertive and often demonstrate against adverse tax laws, highprices, and poor governance. 

Russia is at a crossroad. It must choose which of the many models offederalism to adopt. It can either strengthen the center at the expenseof the regions, transforming the latter into mere tax collectors andlaw enforcement agents - or devolve more powers to tax and spend to theregions. The pendulum swings. Putin appears sometimes to be an avowedcentralist - and at other times a liberal. Contrary to reports in theWestern media, Putin failed to subdue the regions. The donors andexporters among them are as powerful as ever. But he did succeed toestablish a modus vivendi and is working hard on a modus operandi. Healso weeded out the zanier governors. Russia seems to be converging onan equilibrium of sorts - though, as usual, it is a precarious one. 

Russian Agriculture

In Soviet times, Kremlinologists used to pore over grain harvestfigures to divine the fortunes of political incumbents behind theKremlin's inscrutable walls. Many a career have ended due to a meageryield. Judging by official press releases and interviews, thingshaven't changed that much. The beleaguered Vice-Premier and Minister ofAgriculture of the Russian Federation admitted openly last October thatwhat remains of Russia's agriculture is "in a critical situation"(though he has since hastily reversed himself). With debts of $9billion, he may well be right. Russian decision makers recentlycelebrated the reversal of a decade-old trend: meat production went up1% and milk production - by double that. 

But the truth is, surprisingly, a lot rosier. Agricultural output hasbeen growing for four years now (last year by more than 5%). Even muchmaligned sectors, such as food processing, show impressive results (up9%). As the private sector takes over (government procurement ceasedlong ago, though not so regional procurement), agriculture throughoutRussia (especially in its western parts) is being industrialized. Evenstate and collective farms are reviving, though haltingly so. In arecently announced deal, Interros will invest $100 million incultivating a whopping million acres. Additionally, Russia is much lessdependent on food imports than common myths have it - it imports only20% of its total food consumption. 

Despite this astounding turnaround - foreign investors are still shy. The complex tariff and customs regulations, the erratic taxadministration, the poor storage and transport infrastructure, the vastdistances to markets, the endemic lawlessness, the venal bureaucracy, and, above all, the questionable legal status of the ownership ofagricultural 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 activelabour force (compared to 30% in industry and 59% in services). Agricultural exports (c. $3 billion annually) are one fourth Russia'sagricultural imports - despite a fall of 40% in the latter after the1998 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 insoil, or in climate, or in both. Thus, only 8% of the land is arableand less than 40, 000 sq. Km. Are irrigated. Pastures make up another4%. The soil is contaminated by what the CIA calls "improperapplication of agricultural chemicals". It is often eroded. Groundwater is absolutely toxic. 

The new law permitting private quasi-ownership of agricultural land mayreduce the high rents which (together with a ruble over-valued until1998) rendered Russian farmers non-competitive - but this is still along way off. In the meantime, general demand for foodstuffs hasdeclined together with disposable incomes and increasing unemployment. 

The main problem nowadays is not lack of knowledge, management, or newcapital - it is an unsustainable mountain of debts. Even with a lenient"Law on the Financial Recovery of Agricultural Enterprises" currentlybeing passed through the Duma - only 30% of farms are expected tosurvive. The law calls for rescheduling current debt payments over tenyears. 

The sad irony is that Russian agriculture is now much more viable thanit 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 (thoughRussia still imports $8 billion worth of grains a year). The averagecrop for 1993-7 was 80 million tones (with 88 million in 1997). Butgrain output was decimated in 1998 (48 million tons) and 1999 (55million tons). 

Luckily, grain is used mostly for livestock feed - Russians consumeonly c. 20 million tons annually. But by mid 1999, Russian grainreserves declined to a paltry 2 million tons, according to USDAfigures. The problem is that the regions of Russia's grain beltrestrict imports of this "agricultural gold" and hoard it. Corruptofficials turn a quick profit on the resulting shortage-induced pricehikes. 

The geographical location of an agricultural enterprise oftendetermines its fate. In a study ("The Russian Food System'sTransformation 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 August2001, the authors found that:

"... Farms in Moscow Province are more productive than farms inequivalent locations in Ryazan Provinces, while farms closer to thecentral city of either province do better than farms near the bordersof that province. "

It seems that well-located farms enjoy advantages in attracting bothinvestments and skilled labour. They are also closer to their markets. 

But the vicissitudes of Russia's agriculture are of geopoliticalconsequence. A hungry Russia is often an angry Russia. Hence the foodaid provided by the USA in 1998-9 (worth more than $500 million andcoupled with soft PL-480 trade credits). The EU also donated acomparable value in food. Russia asked for additional aid in the formof animal feed in the years 2000-2001 - and the USA complied. 

Russia's imports are an important prop to the economies of itsimmediate and far neighbors. Russia is also a major importer ofAmerican agricultural products, such as poultry (it consumes up to 40%of all US exports of this commodity). It is a world class importer ofmeat products (especially from the EU), its livestock inventory havingbeen halved by the transition. If it accedes to the WTO (negotiationshave been dragging on since 1995), it may become even more appealingcommercially. 

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 alsolikely to be forced to scale back - albeit gradually - the subsidies itdoles out to its own producers (10% of GDP in the USSR, less than 3% ofGDP now). Privileged trading by state entities will also be abolishedas will be non-tariff obstructions to imports. Whether the re-emergentcenter will be able to impose its will on the recalcitrant agriculturalregions, still remains to be seen. 

A series of apocalyptic economic crises forced Russian agriculture torationalize. Russia has no comparative advantage in livestock and meatprocessing. Small wonder its imports of meat products skyrocketed. Itis questionable whether Russia possesses a comparative advantage inagriculture as a whole - given its natural endowments, or, rather, thelack thereof. Its insistence to produce its own food (especially theHigh Value Products) has failed with disastrous consequences. Perhapsit is time for Russia to concentrate on the things it does best. Agriculture, alas, is not one of them. 

Russia as a Creditor

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Russia is notorious for its casual attitude to the re-payment of itsdebts. It has defaulted and re-scheduled its obligations more times inthe last decade than it has in the preceding century. Yet, Russia isalso one of the world's largest creditor nations. It is owed more than$25 billion by Cuba alone and many dozens of additional billions byother failed states. Indeed, the dismal quality of its forlornportfolio wouldn't shame a Japanese bank. In the 18 months to May 2001, it has received only $40 million in repayments. 

It is still hoping to triple this trifle amount by joining the ParisClub - as a creditor nation. The 27 countries with Paris Clubagreements owe roughly half of what Russia claims. Some of them -Algeria in cash, Vietnam in kind - have been paying backintermittently. Others have abstained. 

Russia has spent the last two years negotiating generous package deals- rescheduling, write-offs, grace periods measured in years - with itsmost obtuse debtors. Even the likes of Yemen, Mozambique, andMadagascar - started coughing up - though not Syria which owes $12billion for weapons purchases two decades ago. But the result of theseHerculean efforts is meager. Russia expects to get back an extra $100million a year. By comparison, in 1999 alone Russia received $800million from India. 

The sticking point is a communist-era fiction. When the USSR expired itwas owed well over $100 billion in terms of a fictitious accountingcurrency, the "transferable ruble". At an arbitrary rate of 0. 6 to theUS dollar, protest many debtors, the debt is usuriously inflated. Thisis disingenuous. The debtors received inanely subsidized Russian goodsand commodities for the transferable rubles they so joyously borrowed. 

Russia could easily collect on some of its debts simply by turning offthe natural gas tap or by emitting ominous sounds of discontent backedby the appropriate military exercises. That it chooses not to do so -is telling. Russia has discovered that it could profitably leverage itsportfolio of defunct financial assets to geopolitical and commercialgain. 

On March 25, Russia's prime minister and erstwhile lead debtnegotiator, Kasyanov, has "agreed" with his Mongolian counterpart, Enkhbayar, to convert Mongolia's monstrous $11. 5 billion debt to Russia- into stakes in privatized Mongolian enterprises. 

Mongolia's GDP is minuscule (c. $1 billion). Should the Russianbehemoth, Norilsk Nickel, purchase 49% of Erdenet, Mongolia's copperproducer, it will have bagged 20% of Mongolia's GDP in a single debtconversion. A similar scheme has been concluded between Armenia andRussia. Five enterprises will change hands and thus eliminate Armenia's$94 million outstanding debt to Russia. 

Identical deals have been struck with other countries such as Algeriawhich owes Russia c. $4 billion. The Algerians gave Gazprom access toAlgeria's natural gas exports. 

Russia's mountainous credit often influences its foreign policies toits detriment. It has noisily resisted every American move to fortifysanctions against Iraq and make them "smarter". Russia is owed $8billion by that shredded country and would like to recoup at least apart of it by trading with the outcast or by gaining lucrativeoil-related contracts. The sanctions regime is in its way - hence itsapparent obstructionism. Its recent weapons deals with Syria are meantto compensate for its unpaid past debts to Russia - at the cost ofdestabilizing the Middle East and provoking American ire. 

Russia uses the profusion of loans gone bad on its tattered books togain entry to international financial fora and institutions. Itsaccession to the Paris Club of official bilateral creditors isconditioned on its support for the HIPC (Highly Indebted PoorCountries) initiative. 

This is no trifling matter. Sub-Saharan debt to Russia amounted to c. $14 billion and North African debt to yet another $11 billion - in1994. These awesome figures will have swelled by yet another 25% by2001. The UNCTAD thinks that Russia intentionally under-reports theseoutstanding obligations and that Sub-Saharan Africa actually owedRussia $17 billion in 1994. 

Russia would have to forgo at least 90% of the debt owed it by thelikes of Angola, Ethiopia, Guinea, Mali, Mozambique, Somalia, Tanzania, and Zambia. Russian debts amount to between one third and two thirds ofthese countries' foreign debt. Moreover, its hopes to offset money owedit by countries within the framework of the Paris Club against its owndebts to the Club were dashed last year. Hence its incentive to distortthe data. 

Other African countries have manipulated their debt to Russia to theirfinancial gain. Nigeria is known to have re-purchased, at heavilydiscounted prices, large chunks of its $2. 2 billion debt to Russia inthe secondary market through British and American intermediaries. Itclaims to have received a penalty waiver "from some of its creditors". 

Russia has settled the $1. 7 billion owed it by Vietnam last year. Theoriginal debt - of $11 billion - was reduced by 85 percent and spreadover 23 years. Details are scarce, but observers believe that Russiahas extracted trade and extraction concessions as well as equity inVietnamese enterprises. 

But Russia is less lenient with its former satellites. Two years ago, Ukraine had to supply Russia with sophisticated fighter planes andhundreds of cruise missiles incorporating proprietary technology. Thiswas in partial payment for its overdue $1. 4 billion natural gas bill. Admittedly, Ukraine is also rumored to have "diverted" gas from theRussian pipeline which runs through it. 

The Russians threatened to bypass Ukraine by constructing a new, Russian-owned, pipeline to the EU through Poland and Slovakia. Gazpromhas been trying to coerce Ukraine for years now to turn over control ofthe major transit pipelines and giant underground storage tanks toRussian safe hands. Various joint ownership schemes were floated - thelatest one, in 1999, was for a pipeline to Bulgaria and Turkey to bebuilt at Ukrainian expense but co-owned by Gazprom. 

After an initial period of acquiescence, Ukraine recoiled, citingconcerns that the Russian stratagem may compromise its putativesovereignty. Already UES, Russia's heavily politicized electricityutility, has begun pursuing stakes in debtor Ukrainian power producers. 

Surprisingly, Russia is much less aggressive in the "Near Abroad". Ithas rescheduled Kirghizstan's entire debt (c. $60 million) for a periodof 15 years (including two years grace) with the sole - and dubious -collateral of the former's promissory notes. 

Russia has no clear, overall, debt policy. It improvises - badly - asit goes along. Its predilections and readiness to compromise changewith its geopolitical fortunes, interests, and emphases. As a result itis perceived by some as a bully - by others as a patsy. It would dowell to get its act together. 

The Space Industry in Eastern Europe

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

"Volga" is the name of a new liquid-fueled retrievable and reusable (upto 50 times) booster-rocket engine. It will be built by two Russianmissile manufacturers for a consortium of French, German, and Swedishaerospace firms. ESA - the European Space Agency - intends to invest 1billion euros over 10-15 years in this new toy. This is a negligiblesum in an $80 billion a year market. 

Russian rockets, such as the Soyuz U and Tsiklon, have been launchingsatellites to orbit for decades now and not only for the Russiandefense ministry, their erstwhile exclusive client. Communicationssatellites, such as Gonets D1 ("Courier" or "Messenger"), and othercommercial loads are gradually overtaking their military observation, navigation, and communications brethren. The Strategic Rocket Forcesalone have earned more than $100 million from commercial launchesbetween 1997-9, reports "Kommersant", the Russian business daily. 

Still, many civilian satellites are not much more than strippedmilitary bodices. Commercial operators and Rosaviakosmos (Russia'sNASA) report to the newly re-established (June 2001) Russian MilitarySpace Forces. Technology gained in collaborative efforts with the Westis immediately transferred to the military. 

Russia is worried by America's lead in space. The USA has 600satellites to Russia's 100 (mostly obsolete) birds, according tospace. Com. The revival of US plans for an anti-missile shield and theimminent, unilateral, and inevitable American withdrawal from theAnti-Ballistic Missile Treaty add urgency to Russian scrambling tocatch up. 

Despite well-publicized setbacks - such as the ominous crash atBaikonur in Kazakhstan in July 1999 - Russian launchers are among themost reliable there are. Fifty-seven of 59 launch attempts weresuccessful last year. By comparison, in 1963, only 55 out of 70 launchattempts met the same happy fate. 

American aerospace multinationals closely collaborate withRosaviakosmos. Boeing maintains a design office in Russia to monitorjoint projects such as the commercial launch pad Sea Launch and theISS. It employs hundreds of Russian professionals in and out of Russia. 

There is also an emerging collaboration with the European AeronauticDefense and Space (EADS) company as well as with Arianespace, theFrench group. A common launch pad is taking shape in Kourou and theSoyuz is now co-owned by Russians and Europeans through Starsem, ajoint venture. Russia also intends to participate in the hithertodormant European RLV (Reusable Launch Vehicle) project. 

The EU's decision, in the recent Barcelona summit, to give "Galileo"the go ahead, would require close cooperation with Russia. 

"Galileo" is a $3 billion European equivalent of the American GPSnetwork of satellites. It will most likely incorporate Russiantechnology, use Russian launch facilities, and employ Russianengineers. 

This collaboration may well revive Russia's impoverished and, therefore, moribund space program with an infusion of more than $2billion over the next decade. 

But America and Europe are not the only ones queuing at Russia'sdoorstep. 

Stratfor, the Strategic Forecasting firm, reported about a dealconcluded in May last year between the Australian Ministry of Industry, Science and Resources and the Russian Aviation and Space Agency. Australian companies were granted exclusive rights to use the RussianAurora rocket outside Russia. In return, Russia will gain access to theideally located launch site at Christmas Island in the Indian Ocean. This is a direct blow to competitors such as India, South Korea, Japan, China, and Brazil. 

Russian launch technology is very advanced and inexpensive, beingbased, as it is, on existing military R&D. It has been licensed toother space-aspiring countries. India's troubled GeosynchronousSatellite Launch Vehicle (GSLV) is based on Russian technology, reportsStratfor. Many private satellite launching firms - Australian andothers - find Russian offerings commercially irresistible. Russia -unlike the US - places no restrictions on the types of load launched tospace with its rockets. 

Still, launch technologies are simple matters. Until 1995, Russialaunched more loads annually than the rest of the world combined -despite its depleted budget (less than Brazil's). But Russia's spaceshuttle program, the Energia-Buran, was its last big investment in R&D. It was put to rest in 1988. Perhaps as a result, Russia failed dismallyto deliver on its end of the $660 million ISS bargain with NASA. Thishas cost NASA well over $3 billion in re-planning. 

The living quarters of the International Space Station (ISS), codenamed"Zvezda", launched two years late, failed to meet the onerous qualitycriteria of the Americans. It is noisy and inadequately protectedagainst meteorites, reported "The Economist". Russia continues tosupply the astronauts and has just launched from Baikonur a ProgressM1-8 cargo ship with 2. 4 tons of food, fuel, water, and oxygen. 

The dark side of Russia's space industry is its sales of missiletechnology to failed and rogue states throughout the world. TimothyMcCarthy and Victor Mizin of the U. S. Center for NonproliferationStudies wrote in the "International Herald Tribune in November 2001:"[U. S. Policy to date] leaves unsolved the key structural problem thatcontributes to illegal sales: over-capacity in the Russian missile andspace industry and the inability or unwillingness of Moscow to doanything about it ... There is simply too much industry [in Russia]chasing too few legitimate dollars, rubles or euros. [Downsizing] andrestructuring must be a major part of any initiative that seeks to stopRussian missile firms from selling 'excess production' to those whoshould not have them. "

The official space industry has little choice but to resort to missileproliferation for its survival. The Russian domestic market isinefficient, technologically backward, and lacks venture capital. It isthus unable to foster innovation and reward innovators in the spaceindustry. Its biggest clients - government and budget-funded agencies -rarely pay or pay late. Prices for space-related services do notreflect market realities. 

According to fas. Org's comprehensive survey of the Russian spaceindustry, investment in replacement of capital assets deteriorated from9 percent in 1998 to 0. 5 percent in 1994. In the same period, costs ofmaterials shot up 382 times, cost of hardware services went up by 172times, while labour costs increased 82-fold. The average salary in thespace industry, once a multiple of the Russian average wage, has nowfallen beneath it. The resulting brain drain was crippling. More than35 percent of all workers left - and more than half of all the experts. 

Private firms are doing somewhat better, though. A Russian companyunveiled, two weeks ago, a reusable vehicle for space tourism. Theticket price - $100, 000 for a 3-minutes trip. One hundred tickets werealready sold. The mock-up was exposed to the public in a Russian airbase. 

As opposed to grandiosity-stricken Russia, Kazakhstan has fewpretensions to being anything but a convenient launching pad. Itreluctantly rents out Baikonur, its main site, to Russia for an $115million a year. Russia pays late, reports accidents even later, andpollutes the area frequently. Baikonur is only one of a few civilianlaunch sites (Kapustin Yar, Plesetsk). 

It is supposed to be abandoned by Russia in favor of Svobodny, a new(1997) site. 

Kazakhstan expressed interest in a Russian-Kazakh-Ukrainian carrierrocket, the Sodruzhestvo. It is even budgeted for in the Russian-Kazakhspace program budget 2000-2005. But both the Russians and theUkrainians were unable to cough up the necessary funds and the projectwas put on indefinite hold. 

Umirzak Sultangazin, the head of the Kazakh Institute for SpaceResearch, complained bitterly in an interview he granted last year tothe Russian-language "Karavan":

"Our own satellite is an dire need. So far, we are using data"received" from US and Russian satellites. Some information we use isfree, but we have to pay for certain others ... We have high-classspecialists but they are leaving the institute for commercialstructures because they are offered several times bigger salaries. Ihave many times raised this question and said: Look, Russia pays us nota small amount to lease Baykonur [some 115m dollars a year], why shouldwe not spend part of this money on space research? We could havedeveloped the space sector and become a real space power. "

Kazakhstan has its own earth profiling program administered by its owncosmonauts. It runs biological and physical experiments in orbit. The"tokhtar" is a potato developed in space and named after Kazakhstan'sfirst astronaut, the eponymous Tokhtar Aubakirov. 

Almost all the former satellites of the USSR have established their ownspace programs after they broke away, vowing never again to bedependent on foreign good will. Romania founded ROSA, the RomanianSpace Agency in 1991. Hungary created the Hungarian Space Office. 

The Baltic states - to the vocal dismay of many of their citizens -work closely with NATO on military applications of satellites withinthe framework of BALTNET (the Baltic air space control project). Poland(1994), Hungary (1991), Romania (1992) and the Czech Republic have beencooperating with ESA on a variety of space-related commercial and civilprojects. 

Ukraine hedges its bets. It signed with Brazil a space industrybilateral accord in January. A month later it signed five bilateralagreements regarding the space industry with Russia. 

Many Western academic institutions, NGO's, and commercial interestscreated frameworks for collaboration with space scientists from CentralAsia, Central and Eastern Europe, Russia, CIS, and NIS. The Universityof Maryland pioneered this trend with its East-West Space ScienceCenter, formed in 1990. 

The space industry - and particularly the emerging field of launchtechnologies - represents one of the few areas in which the formercommunist countries may retain a competitive edge and a relativeadvantage. The West would do well to encourage the commercialization ofthis knowledge. 

The alternative is proliferation of missile technologies and militaryapplications of technology transferred within collaborative efforts oncivilian projects with Western partners. The West can save itself a lotof money and heartache by being generous early on. 

Russia's Vodka Wars

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Vodka is a crucial component in Russian life. And in Russian death. Alcohol-related accidents and cardiac arrests have already decimatedRussian life expectancy by well over a decade during the last decadealone. 

Vodka is also big business. The brand "Stolichnaya" sells $2 billion ayear worldwide. Hence the interminable and inordinately bitter battlebetween the Russian ministry of agriculture and SPI Spirits. Thelatter, still partly owned by the state, is the on and off owner of thehaloed brand "Stolichnaya", James Bond's favorite. 

SPI's PR firm, Burson-Marsteller, posits this commercial conflict as aclassic case of the violation of the property rights of hapless foreignshareholders by the avaricious and ruthless functionaries of anunreformed evil empire. They question Russia's readiness to accede tothe WTO and its respect for the law. 

SPI's latest press release consists of the detailed history of thisharrowing tale. The brand Stolichnaya, as well as 42 others, wereprivatized in 1992. 

The firm quotes a document, bearing the official seal of the malignedministry, which states unambiguously: "VAO Sojuzplodoimport has theright to export Russian vodka to the USA under the followingtrademarks: Stolichnaya, Stolichnaya Cristall, Pertsovka, Limonnnaya, Privet, Privet Orange (Apelsinovaya), Russian and Okhotnichya. "

The privatization was completed in 1997 when the old SPI was sold tothe new SPI Spirits. The new SPI claims to have assumed $40 million indebt and invested another $20 million to rebuild the company into "oneof the world's leading vodka producers". Yet, the Russian government, as heavy handed as ever, clearly is unhappy with SPI. 

It says the privatization deal was dubious and that SPI paid only$300, 000 (or maybe as little as $61, 000 claim other sources) for themulti-billion dollar brands, including "Stolichnaya", "Moskovskaya", and "Russkaya". The government values the brands at a far morereasonable $400 million. Other appraisers came up with a figure of $1. 4billion. 

The government, in a bout of new-found legal rectitude, also insiststhat the seller of the brands, the defunct (state-owned) SPI, was nottheir legal owner. It also questions the mysterious shareholders of thenew SPI - including a holding company in tax-lenient Delaware. SPI'strademarks portfolio is represented by an Australian law firm, Mallesons Stephen Jaques. 

Putin himself set up a committee for the repatriation of these andother consumer brands to the state. He craves the beneficial effectsthe alcohol sector's tax revenues could have on the federal budget -and on its powers of patronage. A central state-owned brand-holding anddistribution company was set up less than two years ago. Ever sincethen, the alcohol sector has been subjected to relentless stateinterference. SPI is not the most egregious case either. 

"The Observer" mentions that SPI currently runs most of its businessfrom inscrutable Cyprus, a favorite destination for Russian moneylaunderers, tycoon tax evaders, and mobsters. SPI's German distributor, Plodimex, is increasingly less active - as three new off shoredistribution entities (in Cyprus, the Dutch Antilles, and Gibraltar)are increasingly more so. 

The FSB ordered Kaliningrad customs to prohibit bulk exports ofStolichnaya. Cases of the drink are routinely confiscated. Criminalcharges were brought against directors and managers in the firm. TheDeputy Minister of Agriculture is discrediting SPI in meetings with itsdistributors and business partners abroad. He is also accused by thefirm of obstructing the court-mandated registration of its trademarks. 

The courts have lately been good to SPI, coming out with a spate ofdecisions against the government's conduct in this convoluted affair. But on February 1, the firm suffered a setback, when a Moscow courtruled against it and ordered 43 of its brands, the prized Stolichnayaincluded, returned to the government (i. E. , re-nationalized). 

SPI is doing its best to placate the authorities. It is rumored to haveoffered last month to use its ample funds to supplement the federalbudget. It has indicated last September that it is on the prowl foradditional acquisitions in Russia - a bizarre statement for a firmclaiming to have been victimized. "The Moscow Times" reported that itis planning to sign a $500, 000 sponsorship agreement with the RussianOlympic Committee. 

Summit Communications, a country image specialist, placed this on itsWeb site in November last year:

"One example of a savvy Russian company that has managed to do well inthe West by finding the right partner is the Soyuzplodimport company(see also p. 14). Soyuzplodimport, or SPI, has the exclusive rights toexport Stolichnaya, which vodka lovers in the U. S. Fondly refer to as'Stoli'. Some 50% of the company's export turnover comes from theUnited States, thanks mostly to its strategic alliance withAllied-Domecq for U. S. Distribution. 

'I'm not sure that all Americans know where Russia is on the map, butmost of them know what Stolichnaya is, ' muses Andrey Skurikhin, generaldirector of SPI. 'I want the quality of Stolichnaya in America tocreate an image of Russia that is pure, strong and honest, just likethe vodka. At SPI, we feel that we are like ambassadors and we will tryto do everything to create a more objective and positive image ofRussia in the U. S. ' "

SPI's troubles may prove to be contagious. Allied Domecq, its Britishdistributor in America and Mexico, now faces competition from KryshtalInternational, a subsidiary of the troubled Kristal distillery, 51%owned by Rosspirtprom, a government agency. Kryshtal signeddistribution contracts for "Stolichnaya" with distilleries backed bythe Russian ministry of agriculture. 

Allied and Miller Brewing have announced a $50 million investment inproduct launch and marketing campaigns only two years ago. "Stolichnaya" (nicknamed "Stoli" in the States) sells 1 million12-bottle cases a year in the USA (compared to Absolut's 3 millioncases). 

The trouble started almost immediately with the first foreigninvestments in SPI. As early as 1991, Vneshposyltorg, a governmentforeign trade agency, tried to export Stolichnaya in Greece. This ledto court action by the Greeks. Vodka wars also erupted between thenewly-registered Russian firm "Smirnov" and Grand Metropolitan over thebrand "Smirnoff". 

The vodka wars are sad reminders of the long way ahead of Russia. Itslegal system is rickety - different courts upheld government decisionsand SPI's position almost simultaneously. Russia's bureaucrats - evenwhen right - are abusive, venal, and obstructive. Russia's"entrepreneurs" are a penumbral lot, more enamored with off-shore taxhavens than with proper management. The rule of law and privateproperty rights are still fantasies. The WTO - and the respectabilityit lends - are as far as ever. 

Let My People Go

The Jackson-Vanik Controversy

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

The State of Israel was in the grip of anti-Soviet jingoism in theearly 1970's. "Let My People Go!" - screamed umpteen unfurled banners, stickers, and billboards. Russian dissidents were cast as the latestlink in a chain of Jewish martyrdom. Russian immigrants were welcomedby sweating ministers on the sizzling tarmac of the decrepit LodAirport. Russia imposed exorbitant "diploma taxes" (reimbursement ofeducational subsidies) on emigrating Jews, thus exacerbating the outcry. 

The often disdainful newcomers were clearly much exercised by theminutia of the generous economic benefits showered on them by thegrateful Jewish state. Yet, they were described by the Israeli media aszealous Zionists, returning to their motherland to re-establish in it along-interrupted Jewish presence. Thus, is a marvelous fiat ofspin-doctoring, economic immigrants became revenant sons. 

Congress joined the chorus in 1974, with the Jackson-Vanik Amendment tothe Trade Reform Act - now Title IV of the Trade Act. It was Sponsoredby Senator Henry ("Scoop") Jackson of Washington and Rep. Charles Vanikof Ohio, both Democrats. 

It forbids the government to extend the much coveted "Most FavoredNation (MFN)" status - now known as "Normal Trade Relations" - NTR -with its attendant trade privileges to "non-market economy" countrieswith a dismal record of human rights - chiefly the right to freely andinexpensively emigrate. 

This prohibition also encompasses financial credits from the variousorgans of the American government - the Export-Import Bank, theCommodity Credit Corporation (CCC), and the Overseas Private InvestmentCorporation (OPIC). 

Though applicable to many authoritarian countries - such as Vietnam, the subject of much heated debate with every presidential waiver - thethrust of the legislation is clearly anti-Russian. Henry Kissinger, theAmerican Secretary of State at the time, was so alarmed, that he flewto Moscow and extracted from the Kremlin a promise that "the rate ofemigration from the USSR would begin to rise promptly from the 1973level. "

The demise of the USSR was hastened by this forced openness and theincreasing dissidence it fostered. Jackson-Vanik was a formidableinstrument in the cold warrior's arsenal. More than 1. 5 million Jewsleft Russia since 1975. At the time, Israelis regarded the Kremlin astheir mortal enemy. 

Thus, when the Amendment passed, official Israel was exuberant. Thelate Prime Minister Yitzhak Rabin wrote this to President Gerald Ford:

"The announcement that agreement has been obtained facilitatingimmigration of Soviet Jews to Israel is causing great joy to the peopleof Israel and to Jewish communities everywhere. This achievement in thefield of human rights would not have been possible but for yourpersonal sympathy for the cause involved, for your direct concern anddeep interest. "

And, to Senator Henry Jackson, one of the two sponsors of the bill:

"Dear Scoop, The agreement which has been achieved concerning immigration of SovietJews to Israel has been published in this country -a few hours ago andis evoking waves of joy throughout Israel and no doubt throughoutJewish communities in every part of the globe. This great achievementcould not have been possible but for your personal leadership whichrallied such wide support in both Houses of Congress, for the endurancewith which you pursued this struggle and for the broad human idealismwhich motivated your activities on behalf of this great humanitariancause. At this time therefore I would like to send you my heartfeltappreciation and gratitude. "

US trade policy is often subordinated to its foreign policy. It isfrequently sacrificed to the satisfaction of domestic constituencies, pressure groups, and interest lobbies. It is used to reward foreignallies and punish enemies overseas. 

The Jackson-Vanik Amendment represents the quintessence of thisrelationship. President Clinton tacitly admitted as much when hepublicly decoupled trade policy from human rights in 1994. 

The disintegration of the Evil Empire - and the privatization ofRussian foreign trade - has rendered the law a relic of the Cold War. Russian Jews - including erstwhile "refuseniks", such as Natan(Anatoly) Sharansky - now openly demand to rescind it and to allowRussia to "graduate" into a Permanent Normal Trade Relations (PNTR)status by act of Congress. 

American Jews - though sympathetic - would like guarantees from Russia, in view of a rising wave of anti-Semitism, that Jews in its territorywill go unharmed. They also demand the right of unhindered andunsupervised self-organization for Jewish communities and a return ofJewish communal property confiscated by the Soviet regime. 

Congress is even more suspicious of Russian intentions. Senator GordonSmith, a Republican from Oregon, recently proposed an amendment thatwould deprive Russia of foreign aid if it passes legislation impingingon religious freedom. Together with Hillary Clinton, a Democrat fromNew York, he introduced a damning Jackson-Vanik resolution, saying:

"Any actions by the United States Government to "graduate" or terminatethe application of the Jackson-Vanik Amendment to any individualcountry must take into account ... Appropriate assurances regarding thecontinued commitment of that government to enforcing and upholding thefundamental human rights envisioned in the Amendment. The United StatesGovernment must demonstrate how, in graduating individual countries, the continued dedication of the United States to these fundamentalrights will be assured. "

The Senate still refuses to repeal the Jackson-Vanik Amendment despiteits impact on six former Soviet republics and other countries anddespite passionate pleas from the administration. On May 22 it passed anon-binding resolution calling for PNTR with Russia. Jackson-Vanikremained in place because of the row with Russia over imports of USpoultry. 

Senator Joseph Biden, Chairman of the Senate Foreign RelationsCommittee, who represents a major poultry producing state (Delaware)made these statesmanlike comments following the session:

"I can either be Russia's best friend or worst enemy. They keep foolingaround like this, they're going to have me as their enemy. "

Mikhail Margelov, Chairman of the Foreign Relations Committee of theFederation Council, understandably retorted, according to Radio FreeEurope/Radio Liberty quoting from strana. Ru:

"By citing the controversy over chicken legs, the Democrats have openlyacknowledged that Jackson-Vanik does not protect Russian Jews, butAmerican farmers. "

According to ITAR-TASS, he presented to President Putin a report whichblamed Russia's "unstable" trade relations with the USA on the latter's"discriminatory legislative norms. "

The Amendment has been a dead letter since 1994, due to awell-entrenched ritual of annual Presidential waiver which precedes thegranting of NTR status to Russia. The waiver is based on humiliatingsemi-annual reviews. The sole remaining function of Jackson-Vanikseems, therefore, to be derogatory. 

This infuriates Russians of all stripes - pro-Western reformersincluded. "This demonstrates the double standards of the U. S. " -Anatoly B. Chubais, the Chairman of UES, Russia's electricity monopoly, told BusinessWeek. "It undermines trust. " Putin called the law"notorious". 

In October last year, the Russian Foreign Ministry released thisunusually strongly-worded statement:

"The Jackson-Vanik Amendment has blocked the granting to Russia of mostfavored nation status in trade with the USA on a permanent andunconditional basis over many years, inflicting harm upon the spirit ofconstructive and equal cooperation between our countries. It is rightlyconsidered one of the last anachronisms of the era of confrontation anddistrust. "

Considering that China - with its awful record of egregious humanrights violations - was granted PNTR last year, Russia rightly feelsslighted. Its non-recognition as a "market economy" under theJackson-Vanik Amendment led to the imposition of import restrictions onsome of its products (e. G. Steel). The Amendment also prevents Russiafrom joining the WTO. 

Worst of all, the absence of PNTR also inhibits foreign investment andthe conclusion of long term contracts. Boeing expressed to theAssociated Press its relief at the decision to normalize traderelations with China thus:

``Stability is key in our business. We must look 18 to 24 months aheadin terms of building parts, planes and servicing them. It has beendifficult for China to make such agreements when they don't know ifthey would have an export license the following year or whether theUnited States would allow the planes to be delivered. ''

Fimaco Wouldn't Die

Russia's Missing Billions

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Russia's Audit Chamber - with the help of the Swiss authorities andtheir host of dedicated investigators - may be about to solve a longstanding mystery. An announcement by the Prosecutor's General Office issaid to be imminent. The highest echelons of the Yeltsin entourage -perhaps even Yeltsin himself - may be implicated - or exonerated. ARussian team has been spending the better part of the last two monthsporing over documents and interviewing witnesses in Switzerland, France, Italy, and other European countries. 

About $4. 8 billion of IMF funds are alleged to have gone amiss duringthe implosion of the Russian financial markets in August 1998. Theywere supposed to prop up the banking system (especially SBS-Agro) andthe ailing and sharply devalued ruble. Instead, they ended up in thebank accounts of obscure corporations - and, then, incredibly, vanishedinto thin air. 

The person in charge of the funds in 1998 was none other than MikhailKasyanov, Russia's current Prime Minister - at the time, DeputyMinister of Finance for External Debt. His signature on all foreignexchange transactions - even those handled by the central bank - wasmandatory. In July 2000, he was flatly accused by the Italian daily, LaReppublica, of authorizing the diversion of the disputed funds. 

Following public charges made by US Treasury Secretary Robert Rubin asearly as March 1999, both Russian and American media delved deeply overthe years into the affair. Communist Duma Deputy Viktor Ilyukhin jumpedon the bandwagon citing an obscure "trustworthy foreign source" tosubstantiate his indictment of Kremlin cronies and oligarchs containedin an open letter to the Prosecutor General, Yuri Skuratov. 

The money trail from the Federal Reserve Bank of New York to Swiss andGerman subsidiaries of the Russian central Bank was comprehensivelyreconstructed. Still, the former Chairman of the central bank, SergeiDubinin, called Ilyukhin's allegations and the ensuing Swissinvestigations - "a black PR campaign ... A lie. "

Others pointed to an outlandish coincidence: the ruble collapsed twicein Russia's post-Communist annals. Once, in 1994, when Dubinin wasMinister of Finance and was forced to resign. The second time was in1998, when Dubinin was governor of the central bank and was, again, ousted. 

Dubinin himself seems to be unable to make up his mind. In oneinterview he says that IMF funds were used to prop up the ruble - inothers, that they went into "the national pot" (i. E. , the Ministry ofFinance, to cover a budgetary shortfall). 

The Chairman of the Federation Council at the time, Yegor Stroev, appointed an investigative committee in 1999. Its report remainsclassified but Stroev confirmed that IMF funds were embezzled in thewake of the 1998 forced devaluation of the ruble. 

This conclusion was weakly disowned by Eleonora Mitrofanova, an auditorwithin the Duma's Audit Chamber who said that they discovered nothing"strictly illegal" - though, incongruously, she accused the centralbank of suppressing the Chamber's damning report. The Chairman of theChamber of Accounts, Khachim Karmokov, quoted by PwC, said that "theaudits performed by the Chamber revealed no serious procedural breachesin the bank's performance. "

But Nikolai Gonchar, a Duma Deputy and member of its Budget Committee, came close to branding both as liars when he said that he read a copyof the Audit Chamber report and that it found that central bank fundswere siphoned off to commercial accounts in foreign banks. 

The Moscow Times cited a second Audit Chamber report which revealedthat the central bank was simultaneously selling dollars for rubles andextending ruble loans to a few well-connected commercial banks, thussubsidizing their dollar purchases. The central bank went as far asprinting rubles to fuel this lucrative arbitrage. The dollars came fromIMF disbursements. 

Radio Free Europe/Radio Liberty, based on its own sources and anarticle in the Russian weekly "Novaya Gazeta", claims that half themoney was almost instantly diverted to shell companies in Sydney andLondon. The other half was mostly transferred to the Bank of New Yorkand to Credit Suisse. 

Why were additional IMF funds transferred to a chaotic Russia, despitewarnings by many and a testimony by a Russian official that previoustranches were squandered? Moreover, why was the money sent to theCentral Bank, then embroiled in a growing scandal over the manipulationof treasury bills, known as GKO's and other debt instruments, the OFZ's- and not to the Ministry of Finance, the beneficiary of all priortransfers? The central bank did act as MinFin's agent - butcircumstances were unusual, to say the least. 

There isn't enough to connect the IMF funds with the money launderingaffair that engulfed the Bank of New York a year later to the day, inAugust 1999 - though several of the personalities straddled the dividebetween the bank and its clients. Swiss efforts to establish a firmlinkage failed as did their attempt to implicate several banks in theItalian canton of Ticino. The Swiss - in collaboration with half adozen national investigation bureaus, including the FBI - were moresuccessful in Italy proper, where they were able to apprehend a fewdozen suspects in an elaborate undercover operation. 

FIMACO's name emerged rather early in the swirl of rumors and denials. At the IMF's behest, PricewaterhouseCoopers (PwC) was commissioned byRussia's central bank to investigate the relationship between theRussian central bank and its Channel Islands offshoot, FinancialManagement Company Limited, immediately when the accusations surfaced. 

Skuratov unearthed $50 billion in transfers of the nation's hardcurrency reserves from the central bank to FIMACO, which wasmajority-owned by Eurobank, the central bank's Paris-based daughtercompany. According to PwC, Eurobank was 23 percent owned by "Russiancompanies and private individuals". 

Dubinin and his successor, Gerashchenko, admit that FIMACO was used toconceal Russia's assets from its unrelenting creditors, notably theGeneva-based Mr. Nessim Gaon, whose companies sued Russia for $600million. Gaon succeeded to freeze Russian accounts in Switzerland andLuxemburg in 1993. PwC alerted the IMF to this pernicious practice, butto no avail. 

Moreover, FIMACO paid exorbitant management fees to self-liquidatingentities, used funds to fuel the speculative GKO market, disbursednon-reported profits from its activities, through "trust companies", toRussian subjects, such as schools, hospitals, and charities - and, ingeneral, transformed itself into a mammoth slush fund and source ofpatronage. Russia admitted to lying to the IMF in 1996. It misstatedits reserves by $1 billion. 

Some of the money probably financed the fantastic salaries of Dubininand his senior functionaries. He earned $240, 000 in 1997 - when theaverage annual salary in Russia was less than $2000 and when AlanGreenspan, Chairman of the Federal Reserve of the USA, earned barelyhalf as much. 

Former Minister of Finance, Boris Fedorov, asked the governor of thecentral bank and the prime minister in 1993 to disclose how were thecountry's foreign exchange reserves being invested. He was told to mindhis own business. To Radio Free Europe/Radio Liberty he said, six yearslater, that various central bank schemes were set up to "allow friendsto earn handsome profits ... They allowed friends to make profitsbecause when companies are created without any risk, and billions ofdollars are transferred, somebody takes a (quite big) commission ... Aminimum of tens of millions of dollars. The question is: Who receivedthese commissions? Was this money repatriated to the country in theform of dividends?"

Dubinin's vehement denials of FIMACO's involvement in the GKO marketare disingenuous. Close to half of all foreign investment in themoney-spinning market for Russian domestic bonds were placed throughFIMACO's nominal parent company, Eurobank and, possibly, through itssubsidiary, co-owned with FIMACO, Eurofinance Bank. 

Nor is Dubinin more credible when he denies that profits andcommissions were accrued in FIMACO and then drained off. FIMACO'sinvestment management agreement with Eurobank, signed in 1993, entitledit to 0. 06 percent of the managed funds per quarter. 

Even accepting the central banker's ludicrous insistence that thebalance never exceeded $1. 4 billion - FIMACO would have earned $3. 5million per annum from management fees alone - investment profits andbrokerage fees notwithstanding. Even Eurobank's president at the time, Andrei Movchan, conceded that FIMACO earned $1. 7 million in managementfees. 

The IMF insisted that the PwC reports exonerated all the participants. It is, therefore, surprising and alarming to find that the onlinecopies of these documents, previously made available on the IMF's Website, were "Removed September 30, 1999 at the request ofPricewaterhouseCoopers". 

The cover of the main report carried a disclaimer that it was based onprocedures dictated by the central bank and "... Consequently, we (PwC)make no representation regarding the sufficiency of the proceduresdescribed below ... The report is based solely on financial and otherinformation provided by, and discussions with, the persons set out inthe report. The accuracy and completeness of the information on whichthe report is based is the sole responsibility of those persons. ... PricewaterhouseCoopers have not carried out any verification work whichmay be construed to represent audit procedures ... We have not beenprovided access to Ost West Handelsbank (the recipient of a large partof the $4. 8 IMF tranche)"

The scandal may have hastened the untimely departure of the IMF'sManaging Director at the time, Michel Camdessus, though this was neverofficially acknowledged. The US Congress was reluctant to augment theFund's resources in view of its controversial handling of the Asian andRussian crises and contagion. 

This reluctance persisted well into the new millennium. A congressionaldelegation, headed by James Leach (R, Iowa), Chairman of the Bankingand Financial Services Committee, visited Russia in April 2000, accompanied by the FBI, to investigate the persistent contentions aboutthe misappropriation of IMF funds. 

Camdessus himself went out of his way to defend his record and reactedin an unprecedented manner to the allegations. In a letter to Le Mond, dated August 18, 1999 - and still posted on the IMF's Web site, threeyears later - he wrote, inadvertently admitting to seriousmismanagement:

"I wish to express my indignation at the false statements, allegations, and insinuations contained in the articles and editorial commentaryappearing in Le Monde on August 6, 8, and 9 on the content of thePricewaterhouseCoopers (PWC) audit report relating to the operations ofthe Central Bank of Russia and its subsidiary, FIMACO. 

Your readers will be shocked to learn that the report in question, requested and made public at the initiative of the IMF ... (concludesthat) no misuse of funds has been proven, and the report does notcriticize the IMF's behavior ... I would also point out that yourrepresentation of the IMF's knowledge and actions is misleading. We didknow that part of the reserves of the Central Bank of Russia was heldin foreign subsidiaries, which is not an illegal practice; however, wedid not learn of FIMACO's activities until this year--because the auditreports for 1993 and 1994 were not provided to us by the Central Bankof Russia. 

The IMF, when apprised of the possible range of FIMACO activities, informed the Russian authorities that it would not resume lending toRussia until a report on these activities was available for review bythe IMF and corrective actions had been agreed as needed ... I wouldadd that what the IMF objected to in FIMACO's operations extends wellbeyond the misrepresentation of Russia's international reserves inmid-1996 and includes several other instances where transactionsthrough it had resulted in a misleading representation of the reservesand of monetary and exchange policies. These include loans to Russiancommercial banks and investments in the GKO market. "

No one accepted - or accepts - the IMF's convoluted post-facto"clarifications" at face value. Nor was Dubinin's tortured sophistry -IMF funds cease to be IMF funds when they are transferred from theMinistry of Finance to the central bank - countenanced. 

Even the compromised office of the Russian Prosecutor-General urgedRussian officials, as late as July 2000, to re-open the investigationregarding the diversion of the funds. The IMF dismissed this suddenburst of rectitude as the rehashing of old stories. But Westernofficials - interviews by Radio Free Europe/Radio Liberty - begged todiffer. 

Yuri Skuratov, the former Prosecutor-General, ousted for unduediligence, wrote in a book he published two years ago, that only c. $500 million of the $4. 8 were ever used to stabilize the ruble. EvenGeorge Bush Jr. , when still a presidential candidate accused Russia'sformer Prime Minister Viktor Chernomyrdin of complicity in embezzlingIMF funds. Chernomyrdin threatened to sue. 

The rot may run even deeper. The Geneva daily "Le Temps", which hasbeen following the affair relentlessly, accused, two years ago, RomanAbramovich, a Yeltsin-era oligarch and a member of the board ofdirectors of Sibneft, of colluding with Runicom, Sibneft's trading arm, to misappropriate IMF funds. Swiss prosecutors raided Runicom's officesjust one day after Russian Tax Police raided Sibneft's Moscowheadquarters. 

Absconding with IMF funds seemed to have been a pattern of behaviorduring Yeltsin's venal regime. The columnist Bradley Cook recounts howAldrich Ames, the mole within the CIA, "was told by his Russian controlofficer during their last meeting, in November 1993, that the $130, 000in fresh $100 bills that he was being bribed with had come directlyfrom IMF loans. " Venyamin Sokolov, who headed the Audit Chamber priorto Sergei Stepashin, informed the US Senate of $2 billion thatevaporated from the coffers of the central bank in 1995. 

Even the IMF reluctantly admits:

"Capital transferred abroad from Russia may represent such legalactivities as exports, or illegal sources. But it is impossible todetermine whether specific capital flows from Russia-legal orillegal-come from a particular inflow, such as IMF loans or exportearnings. To put the scale of IMF lending to Russia into perspective, Russia's exports of goods and services averaged about $80 billion ayear in recent years, which is over 25 times the average annualdisbursement from the IMF since 1992. "

The Chechen Theatre Ticket

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

One hundred and eighteen hostages and 50 of their captors died in theheavy handed storming of the theatre occupied by Chechen terroristsfour days ago. This has been only the latest in a series of escalatingcosts in a war officially terminated in 1997. On August 22, ahelicopter carrying 115 Russian servicemen and unauthorized civilianswent down in flames. 

The Russian military is stretched to its limits. Munitions and spareparts are in short supply. The defense industry shrunk violentlyfollowing the implosion of the USSR. Restarting production ofsmall-ticket items is prohibitively expensive. Even bigger weaponsystems are antiquated. A committee appointed by the Duma, Russia'slower house of parliament, found that the average age of the army'shelicopters is 20. Russia lost dozens of them hitherto and does nothave the wherewithal to replace them. 

The Russian command acknowledges 3000 fatalities and 8000 wounded butthe numbers are probably way higher. The Committee of Soldiers' Motherspegs the number of casualties at 12-13, 000. Unpaid, disgruntled, andunder-supplied troops exert pressure on their headquarters toair-strafe Chechnya, to withdraw, or to multiply the money budgeted tosupport the ill-fated operation. 

Russia maintains c. 100, 000 troops in Chechnya, including 40, 000 activesoldiers and 60, 000 support and logistics personnel. The price tag issizable though not unsustainable. As early as October 1999, the IMFtold Radio Free Europe/Radio Liberty: "Yes, we're concerned that itcould undermine the progress in improving (Russia's) public finances. "

As they did in the first Chechen conflict in 1994-6, both the IMF andthe World Bank reluctantly kept lending billions to Russia throughoutthe current round of devastation. A $4. 5 billion arrangement was signedwith Russia in July 1999. Though earmarked, funds are fungible. The IMFhas been accused by senior economists, such as Jeffrey Sachs andMarshall Goldman, of financing the Russian war effort against the tinyrepublic and its 1. 5 million destitute or internally displacedcitizens. Even the staid Jane's World Armies concurred. 

No one knows how much the war has cost Russia hitherto. It is mostlyfinanced from off-budget clandestine bank accounts owned and managed bythe Kremlin, the military, and the security services. Miriam Lanskoy, Program Manager at the Institute for the Study of Conflict, Ideologyand Policy at Boston University, estimated for "NIS Observed" and "TheAnalyst" that Russia has spent, by November 2001, c. $8 billion on thewar, money sorely needed to modernize its army and maintain itspresence overseas. 

Russia was forced to close, post haste, bases in Vietnam and Cuba, twoerstwhile pillars of its geopolitical and geostrategic presence. It wastoo feeble to capitalize on its massive, multi-annual assistance to theAfghan Northern Alliance in both arms and manpower. The USAeffortlessly reaped the fruits of this continuous Russian support andestablished a presence in central Asia which Russia will findimpossible to dislodge. 

The Christian Science Monitor has pegged the cost of each month in thefirst three months of offensive against the separatists at $500million. This guesstimate is supported by the Russians but not by DigbyWaller, an economist at the International Institute for StrategicStudies (IISS), a London-based military think tank. He put the real, out-of-pocket expense at $110 million a month. Other experts offercomparable figures - $100-150 a month. 

Similarly, Jane's Defense Weekly put the outlay at $40-50 million a day- but most of it in cost-free munitions produced during Soviet times. Aleading Soviet military analyst, Pavel Felgengauer, itemized theexpenditures. The largest articles are transport, fuel, reconstructionof areas shattered by warfare, and active duty bonuses to soldiers. 

The expense of this brawl exceed the previous scuffle's. The firstChechen war is estimated to have cost at most $5. 5 billion and probablybetween $1. 3 and $2. 6 billion. Russia allocated c. $1 billion to thewar in its 2000 budget. Another $263 million were funded partly byRussia's behemoth electricity utility, UES. Still, these figures aremisleading underestimates. 

According too the Rosbalt News Agency, last year, for instance, Russiawas slated to spend c. $516 million on rebuilding Chechnya - but only$158 million of these resources made it to the budget. 

Russia has been lucky to enjoy a serendipitous confluence of anexport-enhancing and import-depressing depreciated currency, tax-augmenting inflation, soaring oil prices, and Western largesse. Itis also a major producer and exporter of weapons. Chechnya serves astesting grounds where proud designers and trigger-craving generals candemonstrate the advantages and capabilities of their latest materiel. 

Some - like the Institute of Global Issues - say that the war inChechnya has fully self-financed by reviving the military-industrialcomplex and adding billions to Russia's exports of armaments. Thissurely is a wild hyperbole. Chechnya - a potentially oil-rich territory- is razed to dust. 

Russia is ensnared in an ever-escalating cycle of violence and futileretaliation. Its society is gradually militarized and desensitized tohuman rights abuses. Corruption is rampant. Russia's Accounting Boarddisclosed that a whopping 12 percent of the money earmarked to fightthe war two years ago has vanished without a trace. 

About $45 million dollars in salaries never reached their intendedrecipients - the soldiers in the field. Top brass set up oil drillingoperations in the ravaged territory. 

They are said by Rosbalt and "The Economist" to be extracting up to2000 tons daily - double the amount the state hauls. 

Another 7000 tons go up in smoke due to incompetence and faultyequipment. There are 60 oil wells in Grozny alone. Hence thepredilection to pursue the war as leisurely - and profitably - aspossible. Often in cahoots with their ostensible oppressors, dispossessed and dislocated Chechens export crime and mayhem toRussia's main cities. 

The war is a colossal misallocation of scarce economic resources and anopportunity squandered. Russia should have used the windfall toreinvent itself - revamp its dilapidated infrastructure and modernizeits institutions. Oil prices are bound to come down one day and whenthey do Russia will discover the true and most malign cost of war - theopportunity cost. 

Russia's Israeli Oil Bond

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Also Read

Russian Roulette - The Energy Sector

Last week, Russia and Israel - erstwhile bitter Cold War enemies - haveagreed to make use of Israel's neglected oil pipeline, known as theTipline. The conduit, an Iranian-Israeli joint venture completed in1968 is designed to carry close to a million barrels per day, circumventing the Suez canal. 

It rarely does, though. The Shah was deposed in 1979, Egypt became apivotal Western ally, the Israeli-developed Sinai oil fields werereturned to Egypt in the early 1980's, and, in a glutted market, Israelresorted to importing 99 percent of the 280, 000 barrels it consumesdaily. 

According to Stratfor, the Strategic Forecasting consultancy, "tankersbearing Russian crude from the Black Sea port of Novorossiysk wouldunload at Israel's Mediterranean port of Ashkelon. After that, the oilwould traverse the Tipline to Israel's Red Sea port of Eilat, where itwould be reloaded onto tankers for shipment to Asia. The Eilat-AshkelonPipeline Co. Estimates the pipeline will be ready for Russian crude inmid-2003. "

Russia is emerging as a major oil supplier and a serious challenge tothe hegemony of Saudi Arabia and OPEC. Even the USA increasingly tapsthe Russian market for crude and derivatives. With Arab countries -including the hitherto unwaveringly loyal Gulf states - progressivelyperceived as hostile by American scholars and decision makers, Russiaarises as a potent alternative. The newfangled Russian-Israelicommercial alliance probably won applause from Washington hardliners, eager to relieve the Saudi stranglehold on energy supplies. 

Quoted by the American Foreign Policy Council, Russia's EnergyMinister, Igor Yusufov, addressing the Russian-US Energy Forum inHouston, Texas, last month said that "the high degree of economic andpolitical stability that the Russian Federation has achieved makes it areliable supplier of oil and gas. "

He expressed his belief - shared by many analysts - that Russia willbecome a major exporter of oil to the USA "in the foreseeable future". According to the Dow Jones Newswires, private Russian oil firms, suchas Lukoil, are heavily invested in US gas stations and refineries inanticipation of these inevitable developments. As if to underlinethese, the Financial Times reported, on October 3, a purchase of300, 000 barrels of oil from the Russian Tyumen Oil company. 

The deal with Israel will allow Russia to peddle its oil in the Asianmarket, a major export target and a monopoly of the Gulf producers. 

Russia is in the throes of constructing several pipelines to Asiathrough its eastern territories and Pacific coastline - but completiondates are uncertain. 

For its part, according to the Department of Energy, Israel extractsnatural gas from offshore fields but has no commercial fossil fuelresources of its own. It imports oil from Mexico, Norway, and theUnited Kingdom and coal from as far away as Australia, Colombia, andSouth Africa. Israel buys natural gas and oil from Egypt. The bulk ofthe energy sector is moribund and state-owned, ostensibly for reasonsof national security. The deal with Russia is a godsend. 

Israel is perfectly located to offer an affordable alternative toexpensive and often clogged oil shipping lanes through the Suez Canalor the Cape. A revival of the Trans-Arabian pipeline (Tapline) to Haifacan considerably under-price the politically wobbly Iraqi-Turkish andthe costly Suez-Mediterranean (Sumed) alternatives. 

With one of every five Israelis a Russian ‚migr‚ and confronted withthe common enemy of Islamic militancy, Israel and Russia have embarkedon a path of close cooperation. Prime Minister Sharon's visit to Russialast month was a resounding success. Faced with these millennialgeopolitical developments, anti-Semitic conspiracy theorists are havinga field day. 

The Jewish lobby, they say, is coercing America, its long arm, tohijack the Iraqi oil fields in the forthcoming war and thus tocounterbalance surging Russian oil exports. Israel, they aver, plannedto carry out, in October 2001, an operation - "Mivtza Shekhina" - tosecure southern Iraq's oil fields while also mitigating the threat ofweapons of mass destruction aimed at its population centers. 

Conspiratorial paranoia notwithstanding, it is unlikely that the USA ismotivated by oil interests in its war on Saddam. A battle in Iraq aimedsolely at apprehending its crude would be fighting over yesterday'soilfields. Only an easily replaceable one tenth to one eighth ofAmerican oil consumption emanates from the Gulf, about a millionbarrels per day of it from Iraq. Moreover, the war is likely toalienate far more important suppliers, such as Russia - as well as thelargest European clients of Gulf oil extracted by American firms. Strictly in terms of oil, a war in Iraq is counterproductive. 

Additionally, such a war is likely to push oil prices up. According tothe Council on Foreign Relations, "for every dollar-per-barrel increasein oil prices, about $4 billion a year would leave America's $11trillion economy, and other importing countries would lose another $16billion per year. "

Israel understandably did discuss with the USA its role in a showdownwith Iraq. Russia, unsettled as it is by America's growing presence incentral Asia and exercised by its determination to take on Iraq - maybe trying to lure Israel away from its automatic support of US goals bydangling the oiled carrot of a joint pipeline. 

Russia also hopes to neuter the rapprochement between Israel and theIslamic nations of Turkey and Azerbaijan, traditional adversaries ofMoscow. Israel is the second largest buyer of oil from Azerbaijan. Itis one of the sponsors of a pipeline from the Baku oilfields to theport of Ceyhan in Turkey. The pipeline stands to compete with a lesscostly and more hostile to the West Russian-Iranian route. 

These are momentous times. Oil is still by far the most strategiccommodity and securing its uninterrupted flow is essential to thefunctioning of both developed and developing countries. There is adiscernible tectonic shift in production and proven reserves from thePersian Gulf, the US except Alaska, the North Sea, and Latin America tonorthern Europe, Russia, and the Caspian Basin. Yet, oil is still abuyers' market. OPEC has long been denuded of its mythical power andoil prices - even at the current interim peak - are still historicallylow in real terms. 

But Russia stands to gain whichever way. Middle East tensions, inPalestine and Iraq, have ratcheted oil prices up resulting in amuch-needed budgetary windfall. Russia's mostly-privatized oil industryhas cleverly ploughed back its serendipitous profits into pipelines, drilling, and exploration. When the dust settles in the deserts ofArabia, Russia will emerge victorious with the largest oil marketshare. Israel is not oblivious to this scenario. 

Russia's Idled Spies

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Also Read

The Industrious Spies

Russian Roulette - The Security Apparatus

Sweden expelled yesterday two Russian diplomats for spying on radar andmissile guidance technologies for the JAS 39 British-Swedish Gripenfighter jet developed by Telefon AB LM Ericsson, the telecommunicationsmultinational. The Russians threatened to reciprocate. Five current andformer employees of the corporate giant are being investigated. Ironically, the first foreign buyer of the aircraft may well be Poland, a former Soviet satellite state and a current European Union candidate. 

Sweden arrested in February last year a worker of the Swiss-Swedishengineering group, ABB, on suspicion of spying for Russia. The man wasreleased after two days for lack of evidence and reinstated. But theweighty Swedish daily, Dagens Nyheter, speculated that the recentRussian indiscretion was in deliberate retaliation for Swedishespionage in Russia. Sweden is rumored to have been in the market forRussian air radar designs and the JAS radar system is said by someobservers to uncannily resemble its eastern counterparts. 

The same day, a Russian military intelligence (GRU) colonel, AleksanderSipachev, was sentenced in Moscow to eight years in prison and strippedof his rank. According to Russian news agencies, he was convicted ofattempting to sell secret documents to the CIA. Russian secret servicepersonnel, idled by the withering of Russia's global presence, resortto private business or are re-deployed by the state to spy onindustrial and economic secrets in order to aid budding Russianmultinationals. 

According to the FBI and the National White-collar Crime Center, Russian former secret agents have teamed with computer hackers to breakinto corporate networks to steal vital information about productdevelopment and marketing strategies. Microsoft has recently admittedto such a compromising intrusion. 

In a December 1999 interview to Segodnya, a Russia paper, Eyer Winkler, a former high-ranking staffer with the National Security Agency (NSA)confirmed that "corruption in the Russian Government, the ForeignIntelligence Service, and the Main Intelligence Department allowsRussian organized criminal groups to use these departments in their owninterests. Criminals receive the major part of information collected bythe Russian special services by means of breaking into Americancomputer networks. "

When the KGB was dismantled and replaced by a host of new acronyms, Russian industrial espionage was still in diapers. As a result, it is abureaucratic no-man's land roamed by agents of the GRU, the ForeignIntelligence Service (SVR), and smaller outfits, such as the FederalAgency on Government Communications and Information (FAPSI). 

According to Stratfor, the strategic forecasting consultancy, "the SVRand GRU both handle manned intelligence on U. S. Territory, with theRussian Federal Security Service (FSB) doing counterintelligence inAmerica. Also, both the SVR and GRU have internal counterintelligenceunits created for finding foreign intelligence moles. " This, to someextent, is the division of labor in Europe as well. 

Germany's Federal Prosecutor has consistently warned against $5 billionworth of secrets pilfered annually from German industrial firms byforeign intelligence services, especially from east Europe and Russia. The Counterintelligence News and Developments newsletter pegs thedamage at $13 billion in 1996 alone:

"Modus operandi included placing agents in international organizations, setting up joint-ventures with German companies, and setting up boguscompanies. The (Federal Prosecutor's) report also warned businessleaders to be particularly wary of former diplomats or people who usedto work for foreign secret services because they often had the languageskills and knowledge of Germany that made them excellent agents. "

Russian spy rings now operate from Canada to Japan. Many of the spieshave been dormant for decades and recalled to service following theimplosion of the USSR. According to Asian media, Russians have becomeincreasingly active in the Far East, mainly in Japan, South Korea, Taiwan, and mainland China. 

Russia is worried about losing its edge in avionics, electronics, information technology and some emerging defense industries such aslaser shields, positronics, unmanned vehicles, wearable computing, andreal time triple C (communication, command and control) computerizedbattlefield management. The main targets are, surprisingly, Israel andFrance. According to media reports, the substantive clients of Russia'sdefense industry - such as India - insist on hollowing out Russiancraft and installing Israeli and west European systems instead. 

Russia's paranoid state of mind extends to its interior. Uralinformbureau reported earlier this year that the Yamal-Nenetsautonomous okrug (district) restricted access to foreigners citingconcerns about industrial espionage and potential sabotage of oil andgas companies. The Kremlin maintains an ever-expanding list of regionsand territories with limited - or outright - forbidden - access toforeigners. 

The FSB, the KGB's main successor, is busy arresting spies all over thevast country. To select a random events of the dozens reported everyyear - and many are not - the Russian daily Kommersant recounted inFebruary how when the Trunov works at the Novolipetsk metallurgicalcombine concluded an agreement with a Chinese company to supply it withslabs, its chief negotiator was nabbed as a spy working for "circles inChina". His crime? He was in possession of certain documents whichcontained "intellectual property" of the crumbling and antiquated millpertaining to a slab quality enhancement process. 

Foreigners are also being arrested, though rarely. An Americanbusinessman, Edmund Pope, was detained in April 2000 for attempting topurchase the blueprints of an advanced torpedo from a Russianscientist. There have been a few other isolated apprehensions, mainlyfor "proper", military, espionage. But Russians bear the brunt of thecampaign against foreign economic intelligence gathering. 

Strana. Ru reported last December that, speaking on the occasion ofSecurity Services Day, Putin - himself a KGB alumnus - warned veteransthat the most crucial task facing the services today is "protecting thecountry's economy against industrial espionage. "

This is nothing new. According to History of Espionage Web site, longbefore they established diplomatic relations with the USA in 1933, theSoviets had Amtorg Trading Company. Ostensibly its purpose was toencourage joint ventures between Russian and American firms. Really itwas a hub of industrial undercover activities. Dozens of Sovietintelligence officers supervised, at its peak during the Depression, 800 American communists. The Soviet Union's European operations inBerlin (Handelsvertretung) and in London (Arcos, Ltd. ) were even moresuccessful. 

Russia's Middle Class

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Also Read

Women in Transition

A conference held, at the beginning of the month, in St. Petersburg, was aptly titled "Middle Class - The Myths and the Reality". Russia isway poorer than Slovenia, the Czech Republic, Hungary, or even Poland. But, as income disparities grow, a group of discriminating consumerswith the purchasing power to match, is re-emerging, having beensubmerged by the 1998 implosion of the financial sector. 

The typical salary in the large metropolises is now more than $600 permonth - four times the meager national average. Some 20 percent of theworkforce in Moscow earns more than $1700 a month, comparable to manymembers of the European Union. Real average wages across Russia havesurpassed the pre-1998 level in May. 

Moreover, Russians are unburdened by debt and their utility bills andfood are heavily subsidized, though decreasingly so. Few pay taxes -lately dramatically reduced and simplified - and even fewer save. Everyrise in disposable income is immediately translated to unadulteratedconsumption. Takings are understated - Russia's informal economy isprobably half as big as its formal sector. 

A study, financed by the Carnegie Foundation, found that only 7 percentof Russians qualify as middle class. Another 12 percent or so have somebourgeois characteristics. Sixty percent of them are men, though theKomkon marketing research agency says that the genders are equallyrepresented. 

Figures culled from the census conducted this year throughout theRussian Federation - the first since 1989 - are expected to confirmthese findings. About one fifth to one quarter of all Russianhouseholds earn more than the average monthly income of $150 perperson. 

Political parties which purport to represent the middle class - such asthe Union of the Forces of the Right (SPS) - garnered 10-15 percent ofthe votes in the 1999 parliamentary elections. Direct action groups ofthe "third estate" may transform the political landscape in forthcomingelections. 

In a recent study by sociologists from the Russian Academy of Sciences'Institute of Philosophy, more than half of all Russiansself-flatteringly considered themselves middle class. This isdelusional. Even the optimistic research firm Premier-TGI pegs thenumber at 19 percent at most. 

Businesses adapt to these new demands of shifting tastes andpreferences. The St. Petersburg-based cellular operator Delta Telecom, owner of the first license to provide wireless-communications servicesin Russia, intends to test the market among middle class clients. 

Ikea, the Swedish home improvement chain, has plunged $200 million intoa new shopping center. French, German and Dutch cash-and-carry anddo-it-yourself groups are slated to follow. Russian competitors, everybit as sleek, have erupted on the scene. The investment spree hasengulfed the provinces as well. 

Last month, Citibank opened a retail outlet for affluent individuals inMoscow - though its standards of transparency may yet scare them off, as Gazeta. Ru observed astutely. A private cemetery in Samara caters tothe needs of the expired newly rich. Opulently-stocked emporiums havesprouted in all urban centers. TV shopping and even online commerce areon the up. According to the Washington Post, Moscow retail space willhave tripled by the end of next year from its level at the beginning of2002. 

The Russian Expert magazine says that the middle class, minuscule as itis, accounted last year for a staggering 55 percent of all consumergoods purchased and generates one third of Russia's gross domesticproduct. The middle class is Russia's most important engine of wealthformation and investment, far outweighing foreign capital. 

Russia's post-1998 fledgling middle class is described as young, well-educated, well-traveled, community-orientated, entrepreneurial andsuffused with work ethic and a desire for social mobility. It is almostas if the crisis four years ago served as a purgatory, purging sins andsinners alike and creating the conditions for the revival of ahealthier, longer-lived, bourgeoisie. 

But being middle class is a state of mind more than a measure ofwealth. It is an all-encompassing worldview, a set of values, a code ofconduct, a list of goals, aspirations, fantasies and preferences and acatalog of moral do's and don'ts. This is where transition, micromanaged by western "experts" failed. 

The mere exposure to free markets was supposed to unleash innovationand entrepreneurship in the long-oppressed populations of east Europe. When this prescription - known as "shock therapy" - bombed, the Westtried to engender a stable, share-holding, business-owning, middleclass by financing small size enterprises. It then proceeded tostrengthen and transform indigenous institutions. 

None of it worked. Transition had no grassroots support and itsprescriptive - and painful - nature caused wide resentment andobstruction. When the dust settled, Russia found itself with a putative- and puny - middle class. But it was an anomalous beast, verydifferent from its ostensible European or American counterparts. 

To start with, Russia's new middle class is a distinct minority. 

Prism, a publication of the Jamestown Foundation, quoted, in its August2001 issue, the Serbian author Milorad Pavic as saying that "theRussian middle class is like a young generation whose fathers suffereda severe defeat in a war: with no feeling of guilt and no victoriousfathers to boss them around, the children of defeat see no obstaclesbefore them. "

But this metaphor is misleading. The Russian middle class is a nascentexception - not an overarching rule. As Akos Rona-Tas, AssociateProfessor in the Sociology Department at the University of California, San Diego, notes correctly in his paper "Post Communist Transition andthe Absent Middle Class in Central East Europe", a middle class that isin the minority is an oxymoron:

"In democracies the middle class is the nation proper. The typicalmember of a national community is a member of the middle class. Whendemocratic governments need a social group they can address, auniversal class that carries the overarching, common interest of thecountry, they appeal to the middle class. This appeal, while it callson a common interest, also acknowledges that there are conflictinginterests within society. The middle class is not everyone, but it isthe majority and it represents what everyone else can become. "

Russia has a long way to go to achieve this ubiquity. Its middle class, far from representing the consensus, reifies the growing abyss betweenhaves and haves not. Its members' conspicuous consumption, mostly ofimports, does little to support the local economy. Its political mightis self-serving. It has no ethos, or distinct morality, no narrative, or ideology. The Russian middle class is at a Hobbesian and primordialstage. 

Whether it emerges from its narcissistic cocoon to become a leading andguiding social force, is doubtful. The middle class' youth, urbaneness, cosmopolitanism, polyglotism, mobility, avarice and drive are viewedwith suspicion and envy by the great unwashed - the overwhelmingmajority of Russia's destitute population. Empowered by their wealth, the new bourgeoisie, in turn, regards the "people" with naiveadmiration, patronizing condescension, or horror. 

Granted, this muted, subterranean, interaction is not entirelydeleterious. It is the social role of the rich to generate demand byprovoking in the poor jealousy and attempts at emulation. The wealthyare the trendsetters, the early adopters, the pioneers, the buzzleaders. They are the engine that engenders social and economicmobility. 

A similar dynamic is admittedly evident in Russia - but, again, it istampered by a curious local phenomenon. 

Writing for the Globalist, two Brookings Institution scholars, CarolGraham, a Senior Fellow of Economic Studies and Clifford Gaddy, aFellow of Foreign Policy and Governance Studies described it thus:

"The eyes of Russia's middle class, on the other hand, are figurativelydirected downward, towards the poor. In fact, as poverty in Russiaincreased dramatically in the 1990s, the middle class's reference normsshifted downward as well. As a result, Russia may be the only countryin the world where the "subjective poverty line" is falling. 

That is, the amount of money that Russians say that they need in orderto stay out of poverty has been steadily falling over the past fiveyears. It is even below the objective poverty line. For the time being, at least, these curious Russian attitudes, along with the existence ofthe non-monetary virtual economy, have insulated the country againstpolitical upheaval. "

The list of anomalies is not exhausted. 

The new middle class comprises the embryonic legitimate business elite- entrepreneurs, professionals and managers - but not the remnants ofthe financially strapped intelligentsia. It is brawn with littlebrains. In dissonance with western Europe, according to a surveypublished in the last two years by Expert magazine, the majority of itsmembers are nationalistic, authoritarian and xenophobic. Theirself-interested economic liberalism is coupled with social andpolitical intolerance. But two thirds of them support some kind ofwelfare state. 

Thus, there are major differences between the middle class in the Westand its ostensible counterpart in Russia. 

The Russian parvenus - many of them women - do not believe their state, their banks, or their compatriots. They fear a precarious future andits inevitable calamities though they are not risk averse and arerather optimistic in the short run. They keep their money under theproverbial mattress, invest it surreptitiously in their ventures, orsmuggle it abroad. They are not - yet - stakeholders in their country'sstability and prosperity. 

Often bamboozled by other businessmen and fleeced by a rapaciousbureaucracy, they are paranoid. Tax evasion is still rampant, thoughabating. They trust in equity and avoid debt. Some of them havecriminal roots or a criminal mindset - or are former members ofRussia's shady security services. 

Three fifths, according to the Expert-Komkon survey, find it "hard tosurvive" when "observing all laws". "Strong leaders are better than allsorts of laws" is their motto, quoted by Izvestia. Generally, they arecloser to being robbers than barons. 

Early capitalism is always unruly. It is transformed into a highlystructured edifice by the ownership of land and realty (the primecollateral), the protection of private property, a functioningfinancial system comprised of both banks and capital markets and thejust and expedient application of the rule of law. 

Russia has none of these. According to Business Week, bank depositsamount to 4 percent of the country's mid-size GDP - compared to half ofGDP in other industrialized countries. Mortgages are unheard of, deposits are not insured and land ownership is a novel proposition. Thejudiciary is venal and incompetent. Might is still right in vastswathes of the land. 

The state and the oligarchs continue to represent a rent-seekingopportunity. Businessmen spend time seeking concessions, permits, exemptions and licenses rather than conducting business. The "civicinstitutions" they form - chambers of commerce, clubs - are often mereglorified lobbying outfits of special and vested interests. Informalnetworks of contacts count more than any statute or regulation. In sucha mock "modern state" no wonder Russia ended up with a Potemkin "middleclass". 

Russia in 2003

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Contrary to recent impressions, Russia's Western (American-German)orientation is at least as old as Gorbachev's reign. It was vigorouslypursued by Yeltsin. Still, 2002 marks the year in which Russia becamemerely another satellite of the United States - though one armed withan ageing nuclear arsenal. 

Russia's economy has revived remarkably after the 1998 crisis, but itis still addicted to Western investments, aid and credits. Encircled byNATO to its West and US troops stationed in its central Asianhinterland, Russia's capitulation is complete. In the aftermath ofconflicts to be engineered by the United States in Afghanistan, Iraq, North Korea, Iran, Syria and, potentially, Cuba - Russia may feelthreatened geopolitically as well as economically. Both Iran and Iraq, for instance, are large trading partners and leading exportdestinations of the Russian Federation. 

If anything can undo the hitherto impressive personality cult ofRussia's new "strong man", Vladimir Putin, it is this injured prideamong the more penumbral ranks of the country's security services. Russia's history is littered with the bloodied remains of upheavalswrought by violent ideological minorities and by assorted conspirators. 

Hence Putin's tentative - and reluctant - attempts to team up withChina and India to establish a multi-polar world and his closermilitary cooperation with Kyrgyzstan and Armenia - both intended tocounter nationalistic opposition at home. 

Luckily, the sense of decline is by no means prevalent. 

Russians polled by the American Pew Research Center admitted that theyfeel much better in a world dominated by the United States as a singlesuperpower. The KGB and its successors - Putin's former long-termemployers - actually engineered Russia's opening to the West and thepresident's meteoric ascendancy. And no one in the army seriouslydisputes the need for reform, professionalization and mercilesstrimming of the bloated corps. 

Reforms - of the military, Russia's decrepit utilities, dilapidatedinfrastructure and housing, inflated and venal bureaucracy, corruptjudiciary and civil service, choking monopolies and pernicious bankingsector - depend on the price of oil. Russia benefited mightily from thesurge in the value of the "black gold". But the windfall has helpedmask pressing problems and allowed timid legislators and officials topostpone much needed - and fiercely resisted - changes. 

Russia's "economic miracle" - oft-touted by the "experts" that broughtyou "shock therapy" and by egregiously self-interested, Moscow-based, investment bankers - is mostly prestidigitation. As the European Bankfor Reconstruction and Development (EBRD) correctly noted in November, Russia's 20 percent growth in the last three years merely reflectsenhanced usage of capacity idled by the ruination of 1998. 

Neutering the positive externality of rising oil prices, one is leftwith no increase in productivity since 1999. Industrial production -outside the oil sector - actually slumped. As metropolitan incomesrise, Russians revert to imports rather than consume shoddy and shabbylocal products. 

This, in turn, adversely affects the current account balance and theviability of local enterprises, some of which are sincerely attemptingto restructure. According to Trud, a Russian business publication, twofifths of the country's businesses are in the red. Russia's number ofsmall and medium enterprises peaked at 1 million in 1995-6. They employless than one fifth of the workforce (compared to two thirds in theEuropean Union and in many other countries in transition). 

Thus, falling oil prices - though detrimental to Russia's ability torepay its external debt and balance its budget - are a blessing indisguise. Such declines will force the hand of the Putin administrationto engage in some serious structural reform - even in the face ofparliamentary elections in 2003 and presidential ones the year after. 

Russians - wrongly - feel that their standard of living has stagnated. Gazeta. Ru claims that 39 million people are below the poverty line. Many pensioners survive on $1 a day. In truth, real income per capitais actually up by more than 8 percent this year alone. Incomeinequality, though, has, indeed, gaped. 

Responding to these concerns, though, in a "coattails" effect, thepresident is expected to carry pro-Kremlin parties back into power in2003 - a modicum of elections-inspired bribing is inevitable. Statewages and pensions will outpace inflation. The energy behemoths - majorsources of campaign financing - will be rewarded with rises in tariffsto match cost of living increases. 

Russia faces more than merely a skewed wealth distribution ordependence on mineral wealth. Its difficulties are myriad. On cue fromWashington, it is again being hyped in the Western press as a sure-fireinvestment destination and a pair of safe geostrategic hands. But thedismal truth is that it is a third world country with first worldpretensions (and nuclear weapons). It exhibits all the risks attendantto other medium-sized developing countries and emerging economies. 

External debt repayments next year will exceed $15 billion. It caneasily afford them with oil prices anywhere above $20 and foreignexchange reserves the highest since 1991. Russia even prepaid some ofits debt mountain this year. But if its export proceeds were to declineby 40 percent in the forthcoming 3-4 years, Russia will, yet again, beforced to reschedule or default. Every $1 dollar decline in Ural crudeprices translates to more than $1 billion lost income to the government. 

Russia's population is both contracting and ageing. A ruinous pensioncrisis is in the cards unless both the run-down health system and theabysmally low birthrate recover. Immigration of ethnic Russians fromthe former republics of the USSR to the Russian Federation has largelyrun its course. According to Pravda. Ru, more than 7 million peopleemigrated from the Federation in the last decade. 

Russia's informal sector is a vital, though crime-tainted, engine ofgrowth. Laundered money coupled with reinvested profits - from bothlegitimate and illicit businesses - drive a lot of the private sectorand underlie the emergence of an affluent elite, especially in Moscowand other urban centers. According to the Economist Intelligence Unit, Goskomstat - the State Statistics Committee - regularly adjusts theformal figures up by 25 percent to incorporate estimates of the blackeconomy. 

Russia faces a dilemma: to quash the economic underground and thusenhance both tax receipts and Russia's image as an orderly polity - orto let the pent-up entrepreneurial forces of the "gray sectors" worktheir magic?

Russia is slated to join the World Trade Organization in 2004. Thishappy occasion would mean deregulation, liberalization and opening upto competition - all agonizing moves. Russian industry and agricultureare not up to the task. It took a massive devaluation and adebilitating financial crisis in 1998 to resurrect consumer appetitefor indigenous goods. 

Farming is mostly state-owned, or state-sponsored. Monopolies, duopolies and cartels make up the bulk of the manufacturing and miningsectors - especially in the wake of the recent tsunami of mergers andacquisitions. The Economist Intelligence Unit quotes estimates that 20conglomerates account for up to 70 percent of the country's $330billion GDP. The oligarchs are still there, lurking. The banks arestill paralyzed and compromised, though their retail sector isreviving. 

Russians are still ambivalent about foreigners. Paranoid xenophobia wasreplaced by guarded wariness. Recently, Russia revoked the fast trackwork permit applications hitherto put to good use by managers, scholarsand experts from the West. Foreign minority shareholders still complainof being ripped-off by powerful, well-connected - and minacious -business interests. 

With the bloody exception of Chechnya, Putin's compelling personalityhas helped subdue the classic tensions between center and regions. But, as Putin himself admitted in a radio Q-and-A session on December 19, this peaceful co-existence is fraying at the edges. 

The president will try to reach a top-down political settlement in therenegade province prior to the 2004 elections, but will fail. Reform isanathema to many suborned governors of the periphery and the Kremlin'smiserly handouts are insufficient to grant it a decisive voice inmatters provincial. Devolution - a pet Putin project - is more aboutaccepting an unsavory reality than about re-defining the Russian state. 

The economic disparity between rural and urban is striking. TheEconomist Intelligence Unit describes this chasm thus:

"The processing industry is concentrated in the cities of Moscow, StPetersburg, Yekaterinburg and Nizhny Novgorod. These larger cities havemanaged the transition relatively well, as size has tended to bringwith it industrial diversity; smaller industrial centers have fared farworse. The Soviet regime created new industrial centers such as Tomskand Novosibirsk, but Siberia and the Russian Far Eastern regions remainlargely unindustrialised, having traditionally served as a rawmaterials and energy base. Owing to the boundless faith of Sovietplanners in the benefits of scale, one massive enterprise, or a smallgroup of related enterprises, often formed the basis for the entirelocal economy of a substantial city or region. This factor, compoundedby the absence of unemployment benefits, makes the closure of bankruptenterprises a politically difficult decision. "

The politically incorrect truth is that Russia's old power-structure islargely intact, having altered only its ideological label. It is asavaricious, nefarious and obstructive as ever. Nor does the Russianstate sport any checks and balances. Its institutions are suspect, itsexecutive untouchable, its law enforcement agencies delinquent. 

Russians still hanker after "men of iron" and seek tradition ratherthan innovation, prefer unity to pluralism, and appreciate authoritymore than individualism. Russia - a ramshackle amalgamation ofcompeting turfs - is still ill-suited for capitalism or for liberaldemocracy, though far less than it was only ten years ago. 

Conspicuous consumption of imported products by vulgar parvenus is nosubstitute to true modernity and a functioning economy. Russia isfrequently praised by expats with vested interests and by internationalfinancial institutions, the long arms of its newfound ally, the UnitedStates. 

But, in truth, "modern", "stable", Russia is merely a glittering veneerbeneath which lurk, festering, the old ills of authoritarianism, lawlessness, oligarchy, aggression, ignorance, superstition, andrepression mingled with extremes of poverty and disease. Here is onesafe prediction: none of these will diminish next year. 

Russia Straddles the Euro-Atlantic Divide

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Also Read

The Janus Look

Russia's Second Empire

Russian Roulette - The Security Apparatus

Russia as a Creditor

Let My People Go - The Jackson-Vanik Controversy

The Chechen Theatre Ticket

Russia's Israeli Oil Bond

Russia's Idled Spies

Russia in 2003

Russian President Vladimir Putin warned on Tuesday, in an interview hegranted to TF1, a French television channel, that unilateralAmerican-British military action against Iraq would be a "gravemistake" and an "unreasonable use of force". Russia might veto it inthe Security Council, he averred. 

In a joint declaration with France and Germany, issued the same day, hecalled to enhance the number of arms inspectors in Iraq as analternative to war. 

Only weeks ago Russia was written off, not least by myself, as asatellite of the United States. This newfound assertiveness hasconfounded analysts and experts everywhere. Yet, appearances aside, itdoes not signal a fundamental shift in Russian policy or worldview. 

Russia could not resist the temptation of playing once more theLeninist game of "inter-imperialist contradictions". It has longmasterfully exploited chinks in NATO's armor to further its owneconomic, if not geopolitical, goals. Its convenient geographic sprawl- part Europe, part Asia - allows it to pose as both a continentalpower and a global one with interests akin to those of the UnitedStates. Hence the verve with which it delved into the war againstterrorism, recasting internal oppression and meddling abroad as itselements. 

As Vladimir Lukin, deputy speaker of the Duma observed recently, Britain having swerved too far towards America - Russia may yet becomean intermediary between a bitterly disenchanted USA and an irked Europeand between the rich, industrialized West and developing countries inAsia. Publicly, the USA has only mildly disagreed with Russia'sreluctance to countenance a military endgame in Iraq - while showeringFrance and Germany with vitriol for saying, essentially, the samethings. 

The United States knows that Russia will not jeopardize the relevanceof the Security Council - one of the few remaining hallmarks of pastSoviet grandeur - by vetoing an American-sponsored resolution. ButRussia cannot be seen to be abandoning a traditional ally and a majorcustomer (Iraq) and newfound friends (France and Germany) tooexpediently. 

Nor can Putin risk further antagonizing Moscow hardliners who alreadyregard his perceived "Gorbachev-like" obsequiousness and far reachingconcessions to the USA as treasonous. The scrapping of the AntiBallistic Missile treaty, the expansion of NATO to Russia's borders, America's presence in central Asia and the Caucasus, Russia's "nearabroad" - are traumatic reversals of fortune. 

An agreed consultative procedure with the crumbling NATO hardlyqualifies as ample compensation. There are troubling rumblings ofdiscontent in the army. A few weeks ago, a Russian general in Chechnyarefused Putin's orders publicly - and with impunity. Additionally, according to numerous opinion polls, the vast majority of Russiansoppose an Iraqi campaign. 

By aligning itself with the fickle France and the brooding andsomnolent Germany, Russia is warning the USA that it should not betaken for granted and that there is a price to pay for its allegianceand good services. But Putin is not Boris Yeltsin, his inebriatedpredecessor who over-played his hand in opposing NATO's operation inKosovo in 1999 - only to be sidelined, ignored and humiliated in thepostwar arrangements. 

Russia wants a free hand in Chechnya and to be heard on internationalissues. It aspires to secure its oil contracts in Iraq - worth tens ofbillions of dollars - and the repayment of $9 billion in old debts bythe postbellum government. It seeks pledges that the oil market willnot be flooded by a penurious Iraq. It desires a free hand in Ukraine, Armenia and Uzbekistan, among others. Russia wants to continue to sell$4 billion a year in arms to China, India, Iran, Syria and otherpariahs unhindered. 

Only the United States, the sole superpower, can guarantee that thesedemands are met. Moreover, with a major oil producer such as Iraq as aUS protectorate, Russia becomes a hostage to American goodwill. Yet, hitherto, all Russia received were expression of sympathy, claimedValeri Fyodorov, director of Political Friends, an independent Russianthink-tank, in an interview in the Canadian daily, National Post. 

These are not trivial concerns. Russia's is a primitive economy, basedon commodities - especially energy products - and an over-developedweapons industry. Its fortunes fluctuate with the price of oil, ofagricultural produce and with the need for arms, driven by regionalconflicts. 

Should the price of oil collapse, Russia may again be forced to resortto multilateral financing, a virtual monopoly of the long arms of USforeign policy, such as the International Monetary Fund (IMF). The USAalso has a decisive voice in the World Trade Organization (WTO), membership thereof being a Russian strategic goal. 

It was the United States which sponsored Russia's seat at table of theG8 - the Group of Eight industrialized states - a much covetedreassertion of the Russian Federation's global weight. According toRossiiskaya Gazeta, a Russian paper, the USA already announced a weekago that it is considering cutting Russia off American financial aid -probably to remind the former empire who is holding the purse strings. 

But siding with America risks alienating the all-important core ofEurope: Germany and France. Europe - especially Germany - is Russia'slargest export destination and foreign investor. Russia is notoblivious to that. It would like to be compensated generously by theUnited States for assuming such a hazard. 

Still, Europe is a captive of geography and history. It has fewfeasible alternatives to Russian gas, for instance. As the recent $7billion investment by British Petroleum proves, Russia - and, byextension, central and east Europe - is Europe's growth zone andnatural economic hinterland. 

Yet, it is America that captures the imagination of Russian oligarchsand lesser businesses. 

Russia aims to become the world's largest oil producer within thedecade. With this in mind, it is retooling its infrastructure andinvesting in new pipelines and ports. The United States is aggressivelycourted by Russian officials and "oiligarchs" - the energy tycoons. 

With the Gulf states cast in the role of anti-American Islamicmilitants, Russia emerges as a sane and safe - i. E. , rationally drivenby self-interest - alternative supplier and a useful counterweight toan increasingly assertive and federated Europe. 

Russia's affinity with the United States runs deeper that theconfluence of commercial interests. 

Russian capitalism is far more "Anglo-Saxon" than Old Europe's. TheFederation has an educated but cheap and abundant labor force, a patchywelfare state, exportable natural endowments, a low tax burden and apressing need for unhindered inflows of foreign investment. 

Russia's only hope of steady economic growth is the expansion of itsenergy behemoths abroad. Last year it has become a net foreign directinvestor. It has a vested interest in globalization and world orderwhich coincide with America's. China, for instance, is as much Russia'spotential adversary as it is the United State's. 

Russia welcomed the demise of the Taliban and is content with regimechanges in Iraq and North Korea - all American exploits. It can - anddoes - contribute to America's global priorities. Collaboration betweenthe two countries' intelligence services has never been closer. Hencealso the thaw in Russia's relations with its erstwhile foe, Israel. 

Russia's population is hungry and abrasively materialistic. Its robberbarons are more American in spirit than any British or Frenchentrepreneur. Russia's business ethos is reminiscent of 19th centuryfrontier America, not of 20th century staid Germany. 

Russia is driven by kaleidoscopically shifting coalitions within anarrow elite, not by its masses - and the elite wants money, a lot ofit and now. In Russia's unbreakable cycle, money yields power whichleads to more money. The country is a functioning democracy butelections there do not revolve around the economy. Most taxes areevaded by most taxpayers and half the gross national product is anyhowunderground. Ordinary people crave law and order - or, at least asemblance thereof. 

Hence Putin's rock idol popularity. He caters to the needs of the eliteby cozying up to the West and, in particular, to America - even as heprovides the lower classes with a sense of direction and security theylacked since 1985. But Putin is a serendipitous president. He enjoysthe aftereffects of a sharply devalued, export-enhancing, imports-depressing ruble and the vertiginous tripling of oil prices, Russia's main foreign exchange generator. 

The last years of Yeltsin have been so traumatic that the bickeringcogs and wheels of Russia's establishment united behind the onlyvote-getter they could lay their hands on: Putin, an obscure politicianand former KGB officer. To a large extent, he proved to be an agreeablepuppet, concerned mostly with self-preservation and the imaginaryprojection of illusory power. 

Putin's great asset is his pragmatism and realistic assessment of theshambles that Russia has become and of his own limitations. He hasturned himself into a kind of benevolent and enlightened arbiter amongfeuding interests - and as the merciless and diligent executioner ofthe decisions of the inner cabals of power. 

Hitherto he kept everyone satisfied. But Iraq is his first real test. Everyone demands commitments backed by actions. Both the Europeans andthe Americans want him to put his vote at the Security Council wherehis mouth is. The armed services want him to oppose war in Iraq. Theintelligence services are divided. The Moslem population inside Russia- and surrounding it on all sides - is restive and virulentlyanti-American. 

The oil industry is terrified of America' domination of the world'ssecond largest proven reserves - but also craves to do business in theUnited States. Intellectuals and Russian diplomats worry aboutAmerica's apparent disregard for the world order spawned by the horrorsof World War II. The average Russian regards the Iraqi stalemate as aninternal American affair. "It is not our war", is a common refrain, growing commoner. 

Putin has played it admirably nimbly. Whether he ultimately succeeds inthis impossible act of balancing remains to be seen. The smart moneysays he would. But if the last three years have taught us anything itis that the smart money is often disastrously wrong. 

Russia's Stealth Diplomacy

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Also Read

The Janus Look

Russia's Second Empire

Russia as a Creditor

The Chechen Theatre Ticket

Russia's Israeli Oil Bond

Russia's Idled Spies

Russia in 2003

Russia Straddles the Euro-Atlantic Divide

Russian Roulette - The Security Apparatus

Let My People Go - The Jackson-Vanik Controversy

Possibly irked by persistent American U-2 aerial spy missions above itsfringes, Russia fired yesterday, from a mobile launcher, a "Topol"RS-12M Intercontinental Ballistic Missile (ICBM). 

On Wednesday, Agriculture Minister Alexei Gordeyev, offered Iraq aid inthe form of wheat. The Russian Grain Union, the industry lobby group, claims to have already provided the besieged country with half amillion tons of grain under the oil-for-food program. 

Russia linked with Syria in declining to approve the new oil-for-fooddraft resolution as long as it implied a regime change in Iraq. TheDuma - having failed to ratify a key nuclear treaty with the USA -called to increase defense spending by at least 3. 5 percent of grossdomestic product, or about $4 billion this year. 

Only 28 percent of Russians polled now view the United Statesfavorably, compared with 68 percent a mere few months ago. A majorityof 55 percent disapprove of the USA in a country that was, until veryrecently, by far the most pro-American in Europe. A Russian telecom, Excom, is offering unlimited free phone calls to the White House toprotest U. S. "aggression". 

Washington, on its part, has accused the Russian firm, Aviaconversiya, of helping Iraqi forces to jam global positioning system (GPS) signals. Other firms - including anti-tank Kornet missile manufacturer, KBP Tula- have also been fingered for supplying Iraq with sensitive militarytechnologies. 

These allegations were vehemently denied by President Vladimir Putin ina phone call to Bush - and ridiculed by the companies ostensiblyinvolved. Russia exported c. $5 billion of military hardware andanother $2. 6 billion in nuclear equipment and expertise last year, mostly to India and China - triple the 1994 figure. 

Russia and the United States have continually exchanged barbs over thesale of fission technology to Iran. In retaliation, Atomic EnergyMinister, Alexander Rumyantsev, exposed an Anglo-German-Dutch deal withthe Iranians, which, he said, included the sale of uranium enrichmentcentrifuges. 

Is Putin reviving the Cold War to regain his nationalist credentials, tarnished by the positioning, unopposed, of American troops in centralAsia, the unilateral American withdrawal from the Anti-BallisticMissile (ABM) treaty and the expansion of NATO and the European Unionto Russia's borders?

Or, dependent as it is on energy exports, is Russia opposed to the warbecause it fears an American monopoly on the second largest knownreserves of crude? Russia announced on Thursday that it would insist onhonoring all prewar contracts signed between Iraq and Russian oilcompanies and worth of billions of dollars - and on the repayment of$8-9 billion in Iraqi overdue debt to Russia. 

According to Rosbalt, every drop of $1 in oil prices translates intoannual losses to the Russian treasury of $2 billion. Aggregatecorporate profits rose in January by one fifth year on year, mostly onthe strength of surging crude quotes. The Economist Intelligence Unitexpects this year's GDP to grow by 3. 8 percent. Foreign exchangereserves are stable at $54 billion. 

The threat to Russia's prominence and market share is not imminent. Iraqi oil is unlikely to hit world markets in the next few years, asIraq's dilapidated and outdated infrastructure is rebuilt. Moreover, Russian oil is cheap compared to the North Sea or Alaskan varieties andthus constitutes an attractive investment opportunity as the recenttakeover of Tyumen Oil by British Petroleum proves. Still, thelong-term risk of being unseated by a reconstructed Iraq as the secondlargest oil producer in the world is tangible. 

Russia has spent the last six months enhancing old alliances andconstructing new bridges. According to Interfax, the Russian newsagency, yesterday, Russia has made yet another payment of $27 millionto the International Monetary Fund. The Russian and Romanian primeministers met and signed bilateral agreements for the first time since1989. This week, after 12 years of abortive contacts, the republics ofthe former Yugoslavia agreed with the Russian Federation on a frameworkfor settling its $600 million in clearing debts. 

Recent spats notwithstanding, the Anglo-Saxon alliance still regardsRussia as a strategically crucial ally. Last week, British police, in asudden display of unaccustomed efficacy, nabbed Russian oligarch andmortal Putin-foe, Boris Berezovsky, charged by the Kremlin withdefrauding the Samara region of $13 million while he was director ofLogoVaz in 1994-5. 

The Russian foreign minister, Igor Ivanov, did not remain oblivious tothese overtures. Russia and the USA remain partners, he asserted. RIANovosti, the Russian news agency, quoted him as saying: "If we settlethe Iraqi problem by political means and in an accord, the road willopen to teamwork on other, no less involved problems. "

As Robert Kagan correctly observes in his essay "Of Paradise and Power:America and Europe in the New World Order", the weaker a polity ismilitarily, the stricter its adherence to international law, the onlyprotection, however feeble, from bullying. Putin, presiding over adecrepit and bloated army, naturally insists that the world must begoverned by international regulation and not by the "rule of the fist". 

But Kagan - and Putin - get it backwards as far as the European Unionis concerned. Its members are not compelled to uphold internationalprescripts by their indisputable and overwhelming martial deficiency. Rather, after centuries of futile bloodletting, they choose not toresort to weapons and, instead, to settle their differencesjuridically. 

Thus, Putin is not a European in the full sense of the word. Hesupports an international framework of dispute settlement because hehas no armed choice, not because it tallies with his deeply heldconvictions and values. According to Kagan, Putin is, in essence, anAmerican: he believes that the world order ultimately rests on militarypower and the ability to project it. 

Russia aspires to be America, not France. Its business ethos, grasp ofrealpolitik, nuclear arsenal and evolving values place it firmly in theAnglo-Saxon camp. Its dalliance with France and Germany is hardly anelopement. Had Russia been courted more aggressively by Secretary ofState, Colin Powell and its concerns shown more respect by the Americanadministration, it would have tilted differently. It is a lesson to bememorized in Washington. 

Russia's Second Empire

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

History teaches us little except how little we can learn from it. Still, there is nothing new under the sun. Thus, drawing too manyparallels between the environmentalist movements of the late 19thcentury and their counterparts in the second half of the twentiethcentury - would probably prove misleading. Similarly, every fin desiecle has its Fukuyama, proclaiming the end of history and the victoryof liberalism and capitalism. 

Liberal parliamentarianism (coupled with unbridled individualisticcapitalism) seemed to irreversibly dominate the political landscape by1890 - when it was suddenly and surprisingly toppled by the confluenceof revolutionary authoritarian nationalism and revolutionaryauthoritarian socialism. 

Yet, every ostensibly modern (or post-modern) phenomenon has roots andmirrors in history. The spreading of the occult, materialism, rationalism, positivism, ethnic cleansing, regionalism, municipalautonomy, environmentalism, alienation ("ennui"), informationnetworking, globalization, anti-globalization, mass migration, capitaland labour mobility, free trade - are all new mantras but very oldphenomena. 

Sometimes the parallels are both overwhelming and instructive. 

Overview

Karl Marx regarded Louis-Napoleon's Second Empire as the first moderndictatorship - supported by the middle and upper classes butindependent of their patronage and, thus, self-perpetuating. Otherswent as far as calling it proto-fascistic. 

Yet, the Second Empire was insufficiently authoritarian orrevolutionary to warrant this title. It did foster and encourage apersonality cult, akin to the "Fuhrerprinzip" -but it derived itslegitimacy, conservatively, from the Church and from the electorate. Itwas an odd mixture of Bonapartism, militarism, clericalism, conservatism and liberalism. 

In a way, the Second Republic did amount to a secular religion, repletewith martyrs and apostles. It made use of the nascent mass media tomanipulate public opinion. It pursued industrialization andadministrative modernization. But these features characterized all thepolitical movements of the late 19th century, including socialism, andother empires, such as the Habsburg Austro-Hungary. 

The Second Empire was, above all, inertial. It sought to preserve thebureaucratic, regulatory, and economic frameworks of the First Empire. 

It was a rationalist, positivist, and materialist movement - despitethe deliberate irrationalism of the young Louis-Napoleon. It was notaffiliated to a revolutionary party, nor to popular militias. It wasnot collectivist. And its demise was the outcome of military defeat. 

The Second Empire is very reminiscent of Vladimir Putin's reign inpost-Yeltsin Russia. 

Like the French Second Empire, it follows a period of revolutions andcounter-revolutions. It is not identified with any one class but doesrely on the support of the middle class, the intelligentsia, themanagers and industrialists, the security services, and the military. 

Putin is authoritarian, but not revolutionary. His regime derives itslegitimacy from parliamentary and presidential elections based on aneo-liberal model of government. It is socially conservative but seeksto modernize Russia's administration and economy. Yet, it manipulatesthe mass media and encourages a personality cult. 

Disparate Youths

Like Napoleon III, Putin started off as president (he was shortly asprime minister under Yeltsin). Like him, he may be undone by a militarydefeat, probably in the Caucasus or Central Asia. 

The formative years of Putin and Louis-Napoleon have little in common, though. 

The former was a cosseted member of the establishment and witnessed, first hand, the disintegration of his country. Putin was a KGBapparatchik. The KGB may have inspired, conspired in, or eveninstigated the transformation in Russian domestic affairs since theearly 1980's - but to call it "revolutionary" would be to stretch theterm. 

Louis-Napoleon, on the other hand, was a true revolutionary. Henarrowly escaped death at the hands of Austrian troops in a rebellionin Italy in 1831. His brother was not as lucky. Louis-Napoleon's claimto the throne of France (1832) was based on a half-baked ideology ofimperial glory, concocted, disseminated and promoted by him. In 1836and 1840 he even initiated (failed) coups d'etat. He was expelled evenfrom neutral Switzerland and exiled to the USA. He spent six years inprison. 

An Eerie Verisimilitude

Still, like Putin, Napoleon III was elected president. Like him, he wasregarded by his political sponsors as merely a useful and disposableinstrument. Like Putin, he had no parliamentary or politicalexperience. Both of them won elections by promising "order" and"prosperity" coupled with "social compassion". And, like Putin, Louis-Napoleon, to the great chagrin of his backers, proved to be hisown man - independent-minded, determined, and tough. 

Putin, like Louis-Napoleon before him, proceeded to expand his powersand installed loyalists in every corner of the administration and thearmy. Like Louis-Napoleon, Putin is a populist, traveling throughoutthe country, posing for photo opportunities, responding to citizens'queries in Q-and-A radio shows, siding with the "average bloke" onevery occasion, taking advantage of Russia's previous economic andsocial disintegration to project an image of a "strong man". 

Putin is as little dependent on the Duma as Napoleon III was on hisparliament. But Putin reaped what Boris Yeltsin, his predecessor, hassown when he established an imperial presidency after what amounted toa coup d'etat in 1993 (the bombing of the Duma). Napoleon had toorganize his own coup d'etat all by himself in 1852. 

The Balancing Act

Napoleon III - as does Putin now - faced a delicate balancing actbetween the legitimacy conferred by parliamentary liberalism and theneed to maintain a police state. When he sought to strengthen theenfeebled legislature he reaped only growing opposition within it tohis domestic and foreign policies alike. 

He liberalized the media and enshrined in France's legal code variouscivil freedoms. But he also set in motion and sanctioned a penumbral, all-pervasive and clandestine security apparatus which regularlygathered information on millions of Frenchmen and foreigners. 

Modernization and Reform

Putin is considerably less of an economic modernizer than was NapoleonIII. Putin also seems to be less interested in the social implicationsof his policies, in poverty alleviation and in growing economicinequalities and social tensions. Napoleon III was a man for allseasons - a buffer against socialism as well as a utopian social andadministrative reformer. 

Business flourished under Napoleon III - as it does under Putin. The1850's witnessed rapid technological change - even more rapid thantoday's. France became a popular destination for foreign investors. Napoleon III was the natural ally of domestic businessmen until heembarked on an unprecedented trade liberalization campaign in 1860. Similarly, Putin is nudging Russia towards WTO membership and enhancedforeign competition - alienating in the process the tycoon-oligarchs, the industrial complex, and the energy behemoths. 

Foreign Policy

Napoleon III was a free trader - as is Putin. He believed in thebeneficial economic effects of free markets and in the free exchange ofgoods, capital, and labour. So does Putin. But economic liberalism doesnot always translate to a pacific foreign policy. 

Napoleon III sought to annul the decisions of the Congress of Vienna(1815) and reverse the trend of post-Napoleonic French humiliation. Hewanted to resurrect "Great France" pretty much as Putin wants torestore Russia to its "rightful" place as a superpower. 

But both pragmatic leaders realized that this rehabilitation cannot beachieved by force of arms and with a dilapidated economy. Napoleon IIItried to co-opt the tidal wave of modern, revolutionary, nationalism toachieve the revitalization of France and the concomitant restoration ofits glory. Putin strives to exploit the West's aversion to conflict andaddiction to wealth. Napoleon III struggled to establish a new, inclusive European order - as does Putin with NATO and, to a lesserdegree, with the European Union today. 

Putin artfully manipulated Europe in the wake of the September 11terrorist attacks on the USA, his new found ally. He may yet findhimself in the enviable position of Europe's arbitrator, NATO's mostweighty member, a bridge between Central Asia, the Caucasus, NorthKorea and China - and the USA. The longer his tenure, the more likelyhe is to become Europe's elder statesman. This is a maneuverreminiscent of Louis-Napoleon's following the Crimean War, when heteamed up with Great Britain against Russia. 

Like Putin, Napoleon III modernized and professionalized his army. But, unlike Putin hitherto, he actually went to war (against Austria), movedby his (oft-thwarted) colonial and mercantilist aspirations. Putin islikely to follow the same path (probably in Central Asia, but, possibly, in the Baltic and east Europe as well). Reinvigorated armies(and industrialists) often force expansionary wars upon their reluctantostensible political masters. 

Should Putin fail in his military adventures as Napoleon III did in hisand be deposed as he was - these eerie similarities will have come totheir natural conclusion. 

T H E A U T H O R

SHMUEL (SAM) VAKNIN

Curriculum Vitae

Born in 1961 in Qiryat-Yam, Israel. 

Served in the Israeli Defence Force (1979-1982) in training andeducation units. 

Education

Graduated a few semesters in the Technion - Israel Institute ofTechnology, Haifa. 

Ph. D. In Philosophy (major : Philosophy of Physics) - Pacific WesternUniversity, California. My doctoral thesis is available through theLibrary of Congress. 

Graduate of numerous courses in Finance Theory and InternationalTrading. 

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 inTel-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 inSwitzerland. 

- 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 internationalmulti-lateral countertrade and leasing transactions. 

1988 to 1990

Co-founder and Director of "Mikbats - Tesuah", a portfolio managementfirm 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 onissues related to the capital markets in Israel, Canada, the UK and theUSA. 

Consultant to foreign RND ventures and to Governments on macro-economicmatters. 

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'slargest computerized information vendor and developer. Raised fundsthrough a series of private placements locally, in the USA, Canada andLondon. 

1993 to 1996

Publisher and Editor of a Capital Markets Newsletter distributed bysubscription only to dozens of subscribers countrywide. 

In a legal precedent in 1995 - studied in business schools and lawfaculties across Israel - was tried for his role in an attemptedtakeover of Israel's Agriculture Bank. 

Was interned in the State School of Prison Wardens. 

Managed the Central School Library, wrote, published and lectured onvarious occasions. 

Managed the Internet and International News Department of an Israelimass 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 theCzech Republic. 

Collaborated with the Agency of Transformation of Business with SocialCapital. 

Economic commentator in "Nova Makedonija", "Dnevnik", "Izvestia", "Argumenti i Fakti", "The Middle East Times", "Makedonija Denes", "TheNew Presence", "Central Europe Review", and other periodicals and inthe economic programs on various channels of Macedonian Television. 

Chief Lecturer in courses organized by the Agency of Transformation, bythe Macedonian Stock Exchange and by the Ministry of Trade. 

1999 to 2002

Economic Advisor to the Government of the Republic of Macedonia and tothe Ministry of Finance. 

2001 to present

Senior Business Correspondent for United Press International (UPI)

Web and Journalistic Activities

Author of extensive Websites in Psychology ("Malignant Self Love") - AnOpen Directory Cool Site

Philosophy ("Philosophical Musings")

Economics and Geopolitics ("World in Conflict and Transition")

Owner of the Narcissistic Abuse Announcement and Study List and theNarcissism Revisited mailing list (more than 3900 members)

Owner of the Economies in Conflict and Transition Study list. 

Editor of mental health disorders and Central and Eastern Europecategories in web directories (Open Directory, Suite 101, SearchEurope). 

Columnist and commentator in "The New Presence", United PressInternational (UPI), InternetContent, eBookWeb and "Central EuropeReview". 

Publications and Awards

"Managing Investment Portfolios in states of Uncertainty", LimonPublishers, Tel-Aviv, 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 HealthierEconomy" (with Nikola Gruevski), Skopje, 1998

"Malignant Self Love - Narcissism Revisited", Narcissus Publications, Prague and Skopje, 1999, 2001, 2002

The Narcissism Series - e-books regarding relationships with abusivenarcissists (Skopje, 1999-2002)

"The Exporters' Pocketbook", Ministry of Trade, Republic of Macedonia, Skopje, 1999

"The Suffering of Being Kafka" (electronic book of Hebrew ShortFiction, Prague, 1998)

"After the Rain - How the West Lost the East", Narcissus Publicationsin association with Central Europe Review/CEENMI, Prague and Skopje, 2000

Winner of numerous awards, among them the Israeli Education MinistryPrize (Literature) 1997, The Rotary Club Award for Social Studies(1976) and the Bilateral Relations Studies Award of the AmericanEmbassy in Israel (1978). 

Hundreds of professional articles in all fields of finances and theeconomy and numerous articles dealing with geopolitical and politicaleconomic issues published in both print and web periodicals in manycountries. 

Many appearances in the electronic media on subjects in philosophy andthe 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

After the Rain

How the West

Lost the East

The Book

This is a series of articles written and published in 1996-2000 inMacedonia, in Russia, in Egypt and in the Czech Republic. 

How the West lost the East. The economics, the politics, thegeopolitics, the conspiracies, the corruption, the old and the new, theplough and the internet - it is all here, in colourful and provocativeprose. 

From "The Mind of Darkness":

"'The Balkans' - I say - 'is the unconscious of the world'. People stopto digest this metaphor and then they nod enthusiastically. It is herethat the repressed memories of history, its traumas and fears andimages reside. It is here that the psychodynamics of humanity - thetectonic clash between Rome and Byzantium, West and East, Judeo-Christianity and Islam - is still easily discernible. We areseated at a New Year's dining table, loaded with a roasted pig andexotic salads. I, the Jew, only half foreign to this cradle ofSlavonics. Four Serbs, five Macedonians. It is in the Balkans that allethnic distinctions fail and it is here that they prevailanachronistically and atavistically. Contradiction and change the onlytwo fixtures of this tormented region. The women of the Balkan - buriedunder provocative mask-like make up, retro hairstyles and too narrowdresses. The men, clad in sepia colours, old fashioned suits and turnof the century moustaches. In the background there is the crying gamethat is Balkanian music: liturgy and folk and elegy combined. Thesmells are heavy with muskular perfumes. It is like time travel. It islike revisiting one's childhood. "

The Author

Sam Vaknin is the author of Malignant Self Love - Narcissism Revisitedand After the Rain - How the West Lost the East. He is a columnist forCentral Europe Review, PopMatters, and eBookWeb, a United PressInternational (UPI) Senior Business Correspondent, and the editor ofmental health and Central East Europe categories in The Open Directoryand Suite101 . 

Until recently, he served as the Economic Advisor to the Government ofMacedonia. 

Visit Sam's Web site at http://samvak. Tripod. Com