Book: Russian Roulette

S >> Sam Vaknin >> Russian Roulette




The East-West Institute reports that arrears have increased 10% in
January alone - to 33 billion rubles (c. $1 billion). The Finance
Ministry is considering to declare seven regions bankrupt. Yet another
committee, headed by Deputy Head of the Presidential Administration,
Dimitri Kozak, is on the verge of establishing an external
administration for insolvent regions. The recent housing reform - which
would force Russians to pay market prices for their apartments and
would subsidize the poor directly (rather than through the regional and
municipal authorities) - is likely to further weaken regional balance
sheets.

Luckily for Russia, the regions are less cantankerous and restive now.
The emphasis has shifted from narcissistic posturing to economic
survival and prosperity. The Moscow region still attracts the bulk of
Russian domestic and foreign investments, leaving the regions to make
do with leftovers.

Sergei Kirienko, a former short lived Prime Minister, and, currently
the president's envoy to the politically mighty Volga okrug, attributes
this gap, in a comment to Radio Free Europe, to non-harmonized business
legislation (between center and regions). Boris Nemtsov, a member of
the Duma (and former Deputy Prime Minister) thinks that the problem is
a "lack of democratic structures" - press freedom, civil society, and
democratic government. Others attribute the deficient interest to a
dearth of safety and safe institutions, propagated by entrenched
interest groups.

Small business is back in fashion after years of investments in
behemoths such as Gazprom and Lukoil. Politicians make small to medium
enterprises a staple of their speeches. The EBRD has revived its
moribund small business funds (and grants up to $125,000 loans to
eligible enterprises). Bank lending is still absent (together with a
banking system) - but foreign investment banks and retail banks are
making hesitant inroads into the regional markets. Small businessmen
are more assertive and often demonstrate against adverse tax laws, high
prices, and poor governance.

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

Russian Agriculture

In Soviet times, Kremlinologists used to pore over grain harvest
figures to divine the fortunes of political incumbents behind the
Kremlin's inscrutable walls. Many a career have ended due to a meager
yield. Judging by official press releases and interviews, things
haven't changed that much. The beleaguered Vice-Premier and Minister of
Agriculture of the Russian Federation admitted openly last October that
what remains of Russia's agriculture is "in a critical situation"
(though he has since hastily reversed himself). With debts of $9
billion, he may well be right. Russian decision makers recently
celebrated the reversal of a decade-old trend: meat production went up
1% and milk production - by double that.

But the truth is, surprisingly, a lot rosier. Agricultural output has
been growing for four years now (last year by more than 5%). Even much
maligned sectors, such as food processing, show impressive results (up
9%). As the private sector takes over (government procurement ceased
long ago, though not so regional procurement), agriculture throughout
Russia (especially in its western parts) is being industrialized. Even
state and collective farms are reviving, though haltingly so. In a
recently announced deal, Interros will invest $100 million in
cultivating a whopping million acres. Additionally, Russia is much less
dependent on food imports than common myths have it - it imports only
20% of its total food consumption.

Despite this astounding turnaround - foreign investors are still shy.
The complex tariff and customs regulations, the erratic tax
administration, the poor storage and transport infrastructure, the vast
distances to markets, the endemic lawlessness, the venal bureaucracy,
and, above all, the questionable legal status of the ownership of
agricultural land - all serve to keep them at bay.

Moreover, the agricultural sector is puny and disastrously inefficient.
Having fallen by close to half since 1991 (as state subsidies dropped),
it contributes only c. 8% to GDP and employs c. 11% of the active
labour force (compared to 30% in industry and 59% in services).
Agricultural exports (c. $3 billion annually) are one fourth Russia's
agricultural imports - despite a fall of 40% in the latter after the
1998 meltdown. The average private farm is less than 50 hectares large.
Though in control of 6% of farmland - private farms account for only 2%
of agricultural output.

Much of the land (equal to c. 1.8 times the contiguous US) lacks in
soil, or in climate, or in both. Thus, only 8% of the land is arable
and less than 40,000 sq. km. are irrigated. Pastures make up another
4%. The soil is contaminated by what the CIA calls "improper
application of agricultural chemicals". It is often eroded. Ground
water is absolutely toxic.

The new law permitting private quasi-ownership of agricultural land may
reduce the high rents which (together with a ruble over-valued until
1998) rendered Russian farmers non-competitive - but this is still a
long way off. In the meantime, general demand for foodstuffs has
declined together with disposable incomes and increasing unemployment.

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

The sad irony is that Russian agriculture is now much more viable than
it ever was. Well over half the active enterprises are profitable
(compared to 12% in 1998). The grain harvest exceeded 90 million tons,
far more than the 75 million tons predicted by the government (though
Russia still imports $8 billion worth of grains a year). The average
crop for 1993-7 was 80 million tones (with 88 million in 1997). But
grain output was decimated in 1998 (48 million tons) and 1999 (55
million tons).

Luckily, grain is used mostly for livestock feed - Russians consume
only c. 20 million tons annually. But by mid 1999, Russian grain
reserves declined to a paltry 2 million tons, according to USDA
figures. The problem is that the regions of Russia's grain belt
restrict imports of this "agricultural gold" and hoard it. Corrupt
officials turn a quick profit on the resulting shortage-induced price
hikes.

The geographical location of an agricultural enterprise often
determines its fate. In a study ("The Russian Food System's
Transformation at Close Range") of two Russian regions (oblasts)
conducted by Grigori Ioffe (of Radford University) and Tatyana Nefedova
(Institute of Geography of the Russian Academy of Sciences) in August
2001, the authors found that:

"... farms in Moscow Province are more productive than farms in
equivalent locations in Ryazan Provinces, while farms closer to the
central city of either province do better than farms near the borders
of that province."

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

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

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

It will have to reduce its import tariffs (the tariff on poultry is 30%
and the average tariff on agricultural products is 20%). It is also
likely to be forced to scale back - albeit gradually - the subsidies it
doles out to its own producers (10% of GDP in the USSR, less than 3% of
GDP now). Privileged trading by state entities will also be abolished
as will be non-tariff obstructions to imports. Whether the re-emergent
center will be able to impose its will on the recalcitrant agricultural
regions, still remains to be seen.

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

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 its
debts. It has defaulted and re-scheduled its obligations more times in
the last decade than it has in the preceding century. Yet, Russia is
also one of the world's largest creditor nations. It is owed more than
$25 billion by Cuba alone and many dozens of additional billions by
other failed states. Indeed, the dismal quality of its forlorn
portfolio 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 Paris
Club - as a creditor nation. The 27 countries with Paris Club
agreements owe roughly half of what Russia claims. Some of them -
Algeria in cash, Vietnam in kind - have been paying back
intermittently. Others have abstained.

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

The sticking point is a communist-era fiction. When the USSR expired it
was owed well over $100 billion in terms of a fictitious accounting
currency, the "transferable ruble". At an arbitrary rate of 0.6 to the
US dollar, protest many debtors, the debt is usuriously inflated. This
is disingenuous. The debtors received inanely subsidized Russian goods
and commodities for the transferable rubles they so joyously borrowed.

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

On March 25, Russia's prime minister and erstwhile lead debt
negotiator, 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 Russian
behemoth, Norilsk Nickel, purchase 49% of Erdenet, Mongolia's copper
producer, it will have bagged 20% of Mongolia's GDP in a single debt
conversion. A similar scheme has been concluded between Armenia and
Russia. 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 Algeria
which owes Russia c. $4 billion. The Algerians gave Gazprom access to
Algeria's natural gas exports.

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

Russia uses the profusion of loans gone bad on its tattered books to
gain entry to international financial fora and institutions. Its
accession to the Paris Club of official bilateral creditors is
conditioned on its support for the HIPC (Highly Indebted Poor
Countries) 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 - in
1994. These awesome figures will have swelled by yet another 25% by
2001. The UNCTAD thinks that Russia intentionally under-reports these
outstanding obligations and that Sub-Saharan Africa actually owed
Russia $17 billion in 1994.

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

Other African countries have manipulated their debt to Russia to their
financial gain. Nigeria is known to have re-purchased, at heavily
discounted prices, large chunks of its $2.2 billion debt to Russia in
the secondary market through British and American intermediaries. It
claims to have received a penalty waiver "from some of its creditors".

Russia has settled the $1.7 billion owed it by Vietnam last year. The
original debt - of $11 billion - was reduced by 85 percent and spread
over 23 years. Details are scarce, but observers believe that Russia
has extracted trade and extraction concessions as well as equity in
Vietnamese enterprises.

But Russia is less lenient with its former satellites. Two years ago,
Ukraine had to supply Russia with sophisticated fighter planes and
hundreds of cruise missiles incorporating proprietary technology. This
was in partial payment for its overdue $1.4 billion natural gas bill.
Admittedly, Ukraine is also rumored to have "diverted" gas from the
Russian 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. Gazprom
has been trying to coerce Ukraine for years now to turn over control of
the major transit pipelines and giant underground storage tanks to
Russian safe hands. Various joint ownership schemes were floated - the
latest one, in 1999, was for a pipeline to Bulgaria and Turkey to be
built at Ukrainian expense but co-owned by Gazprom.

After an initial period of acquiescence, Ukraine recoiled, citing
concerns that the Russian stratagem may compromise its putative
sovereignty. Already UES, Russia's heavily politicized electricity
utility, has begun pursuing stakes in debtor Ukrainian power producers.

Surprisingly, Russia is much less aggressive in the "Near Abroad". It
has rescheduled Kirghizstan's entire debt (c. $60 million) for a period
of 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 - as
it goes along. Its predilections and readiness to compromise change
with its geopolitical fortunes, interests, and emphases. As a result it
is perceived by some as a bully - by others as a patsy. It would do
well 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 (up
to 50 times) booster-rocket engine. It will be built by two Russian
missile manufacturers for a consortium of French, German, and Swedish
aerospace firms. ESA - the European Space Agency - intends to invest 1
billion euros over 10-15 years in this new toy. This is a negligible
sum in an $80 billion a year market.

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

Still, many civilian satellites are not much more than stripped
military bodices. Commercial operators and Rosaviakosmos (Russia's
NASA) report to the newly re-established (June 2001) Russian Military
Space Forces. Technology gained in collaborative efforts with the West
is immediately transferred to the military.

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

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

American aerospace multinationals closely collaborate with
Rosaviakosmos. Boeing maintains a design office in Russia to monitor
joint projects such as the commercial launch pad Sea Launch and the
ISS. It employs hundreds of Russian professionals in and out of Russia.

There is also an emerging collaboration with the European Aeronautic
Defense and Space (EADS) company as well as with Arianespace, the
French group. A common launch pad is taking shape in Kourou and the
Soyuz is now co-owned by Russians and Europeans through Starsem, a
joint venture. Russia also intends to participate in the hitherto
dormant 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 GPS
network of satellites. It will most likely incorporate Russian
technology, use Russian launch facilities, and employ Russian
engineers.

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

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

Stratfor, the Strategic Forecasting firm, reported about a deal
concluded 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 Russian
Aurora rocket outside Russia. In return, Russia will gain access to the
ideally 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, being
based, as it is, on existing military R&D. It has been licensed to
other space-aspiring countries. India's troubled Geosynchronous
Satellite Launch Vehicle (GSLV) is based on Russian technology, reports
Stratfor. Many private satellite launching firms - Australian and
others - find Russian offerings commercially irresistible. Russia -
unlike the US - places no restrictions on the types of load launched to
space with its rockets.

Still, launch technologies are simple matters. Until 1995, Russia
launched more loads annually than the rest of the world combined -
despite its depleted budget (less than Brazil's). But Russia's space
shuttle 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 dismally
to deliver on its end of the $660 million ISS bargain with NASA. This
has 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 quality
criteria of the Americans. It is noisy and inadequately protected
against meteorites, reported "The Economist". Russia continues to
supply the astronauts and has just launched from Baikonur a Progress
M1-8 cargo ship with 2.4 tons of food, fuel, water, and oxygen.

The dark side of Russia's space industry is its sales of missile
technology to failed and rogue states throughout the world. Timothy
McCarthy and Victor Mizin of the U.S. Center for Nonproliferation
Studies wrote in the "International Herald Tribune in November 2001:
"[U.S. policy to date] leaves unsolved the key structural problem that
contributes to illegal sales: over-capacity in the Russian missile and
space industry and the inability or unwillingness of Moscow to do
anything about it ... There is simply too much industry [in Russia]
chasing too few legitimate dollars, rubles or euros. [Downsizing] and
restructuring must be a major part of any initiative that seeks to stop
Russian missile firms from selling 'excess production' to those who
should not have them."

The official space industry has little choice but to resort to missile
proliferation for its survival. The Russian domestic market is
inefficient, technologically backward, and lacks venture capital. It is
thus unable to foster innovation and reward innovators in the space
industry. Its biggest clients - government and budget-funded agencies -
rarely pay or pay late. Prices for space-related services do not
reflect market realities.

According to fas.org's comprehensive survey of the Russian space
industry, investment in replacement of capital assets deteriorated from
9 percent in 1998 to 0.5 percent in 1994. In the same period, costs of
materials shot up 382 times, cost of hardware services went up by 172
times, while labour costs increased 82-fold. The average salary in the
space industry, once a multiple of the Russian average wage, has now
fallen beneath it. The resulting brain drain was crippling. More than
35 percent of all workers left - and more than half of all the experts.

Private firms are doing somewhat better, though. A Russian company
unveiled, two weeks ago, a reusable vehicle for space tourism. The
ticket price - $100,000 for a 3-minutes trip. One hundred tickets were
already sold. The mock-up was exposed to the public in a Russian air
base.

As opposed to grandiosity-stricken Russia, Kazakhstan has few
pretensions to being anything but a convenient launching pad. It
reluctantly rents out Baikonur, its main site, to Russia for an $115
million a year. Russia pays late, reports accidents even later, and
pollutes the area frequently. Baikonur is only one of a few civilian
launch 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 carrier
rocket, the Sodruzhestvo. It is even budgeted for in the Russian-Kazakh
space program budget 2000-2005. But both the Russians and the
Ukrainians were unable to cough up the necessary funds and the project
was put on indefinite hold.

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

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