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

Russian spy rings now operate from Canada to Japan. Many of the spies
have been dormant for decades and recalled to service following the
implosion of the USSR. According to Asian media, Russians have become
increasingly 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 as
laser shields, positronics, unmanned vehicles, wearable computing, and
real time triple C (communication, command and control) computerized
battlefield management. The main targets are, surprisingly, Israel and
France. According to media reports, the substantive clients of Russia's
defense industry - such as India - insist on hollowing out Russian
craft 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-Nenets
autonomous okrug (district) restricted access to foreigners citing
concerns about industrial espionage and potential sabotage of oil and
gas companies. The Kremlin maintains an ever-expanding list of regions
and territories with limited - or outright - forbidden - access to
foreigners.

The FSB, the KGB's main successor, is busy arresting spies all over the
vast country. To select a random events of the dozens reported every
year - and many are not - the Russian daily Kommersant recounted in
February how when the Trunov works at the Novolipetsk metallurgical
combine concluded an agreement with a Chinese company to supply it with
slabs, its chief negotiator was nabbed as a spy working for "circles in
China". His crime? He was in possession of certain documents which
contained "intellectual property" of the crumbling and antiquated mill
pertaining to a slab quality enhancement process.

Foreigners are also being arrested, though rarely. An American
businessman, Edmund Pope, was detained in April 2000 for attempting to
purchase the blueprints of an advanced torpedo from a Russian
scientist. There have been a few other isolated apprehensions, mainly
for "proper", military, espionage. But Russians bear the brunt of the
campaign against foreign economic intelligence gathering.

Strana.ru reported last December that, speaking on the occasion of
Security Services Day, Putin - himself a KGB alumnus - warned veterans
that the most crucial task facing the services today is "protecting the
country's economy against industrial espionage."

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

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 is
way poorer than Slovenia, the Czech Republic, Hungary, or even Poland.
But, as income disparities grow, a group of discriminating consumers
with the purchasing power to match, is re-emerging, having been
submerged by the 1998 implosion of the financial sector.

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

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

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

Figures culled from the census conducted this year throughout the
Russian Federation - the first since 1989 - are expected to confirm
these findings. About one fifth to one quarter of all Russian
households earn more than the average monthly income of $150 per
person.

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

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

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

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

Last month, Citibank opened a retail outlet for affluent individuals in
Moscow - though its standards of transparency may yet scare them off,
as Gazeta.ru observed astutely. A private cemetery in Samara caters to
the needs of the expired newly rich. Opulently-stocked emporiums have
sprouted in all urban centers. TV shopping and even online commerce are
on the up. According to the Washington Post, Moscow retail space will
have tripled by the end of next year from its level at the beginning of
2002.

The Russian Expert magazine says that the middle class, minuscule as it
is, accounted last year for a staggering 55 percent of all consumer
goods purchased and generates one third of Russia's gross domestic
product. The middle class is Russia's most important engine of wealth
formation and investment, far outweighing foreign capital.

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

But being middle class is a state of mind more than a measure of
wealth. It is an all-encompassing worldview, a set of values, a code of
conduct, a list of goals, aspirations, fantasies and preferences and a
catalog 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 innovation
and entrepreneurship in the long-oppressed populations of east Europe.
When this prescription - known as "shock therapy" - bombed, the West
tried to engender a stable, share-holding, business-owning, middle
class by financing small size enterprises. It then proceeded to
strengthen and transform indigenous institutions.

None of it worked. Transition had no grassroots support and its
prescriptive - and painful - nature caused wide resentment and
obstruction. When the dust settled, Russia found itself with a putative
- and puny - middle class. But it was an anomalous beast, very
different 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 August
2001 issue, the Serbian author Milorad Pavic as saying that "the
Russian middle class is like a young generation whose fathers suffered
a severe defeat in a war: with no feeling of guilt and no victorious
fathers to boss them around, the children of defeat see no obstacles
before them."

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

"In democracies the middle class is the nation proper. The typical
member of a national community is a member of the middle class. When
democratic governments need a social group they can address, a
universal class that carries the overarching, common interest of the
country, they appeal to the middle class. This appeal, while it calls
on a common interest, also acknowledges that there are conflicting
interests within society. The middle class is not everyone, but it is
the 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 between
haves and haves not. Its members' conspicuous consumption, mostly of
imports, does little to support the local economy. Its political might
is self-serving. It has no ethos, or distinct morality, no narrative,
or ideology. The Russian middle class is at a Hobbesian and primordial
stage.

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

Granted, this muted, subterranean, interaction is not entirely
deleterious. It is the social role of the rich to generate demand by
provoking in the poor jealousy and attempts at emulation. The wealthy
are the trendsetters, the early adopters, the pioneers, the buzz
leaders. They are the engine that engenders social and economic
mobility.

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

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

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

That is, the amount of money that Russians say that they need in order
to stay out of poverty has been steadily falling over the past five
years. It is even below the objective poverty line. For the time being,
at least, these curious Russian attitudes, along with the existence of
the non-monetary virtual economy, have insulated the country against
political 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 of
the financially strapped intelligentsia. It is brawn with little
brains. In dissonance with western Europe, according to a survey
published in the last two years by Expert magazine, the majority of its
members are nationalistic, authoritarian and xenophobic. Their
self-interested economic liberalism is coupled with social and
political intolerance. But two thirds of them support some kind of
welfare state.

Thus, there are major differences between the middle class in the West
and 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 and
its inevitable calamities though they are not risk averse and are
rather optimistic in the short run. They keep their money under the
proverbial mattress, invest it surreptitiously in their ventures, or
smuggle it abroad. They are not - yet - stakeholders in their country's
stability and prosperity.

Often bamboozled by other businessmen and fleeced by a rapacious
bureaucracy, they are paranoid. Tax evasion is still rampant, though
abating. They trust in equity and avoid debt. Some of them have
criminal roots or a criminal mindset - or are former members of
Russia's shady security services.

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

Early capitalism is always unruly. It is transformed into a highly
structured edifice by the ownership of land and realty (the prime
collateral), the protection of private property, a functioning
financial system comprised of both banks and capital markets and the
just and expedient application of the rule of law.

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

The state and the oligarchs continue to represent a rent-seeking
opportunity. Businessmen spend time seeking concessions, permits,
exemptions and licenses rather than conducting business. The "civic
institutions" they form - chambers of commerce, clubs - are often mere
glorified lobbying outfits of special and vested interests. Informal
networks of contacts count more than any statute or regulation. In such
a mock "modern state" no wonder Russia ended up with a Potemkin "middle
class".

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 vigorously
pursued by Yeltsin. Still, 2002 marks the year in which Russia became
merely another satellite of the United States - though one armed with
an ageing nuclear arsenal.

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

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

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

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

Russians polled by the American Pew Research Center admitted that they
feel much better in a world dominated by the United States as a single
superpower. The KGB and its successors - Putin's former long-term
employers - actually engineered Russia's opening to the West and the
president's meteoric ascendancy. And no one in the army seriously
disputes the need for reform, professionalization and merciless
trimming of the bloated corps.

Reforms - of the military, Russia's decrepit utilities, dilapidated
infrastructure and housing, inflated and venal bureaucracy, corrupt
judiciary and civil service, choking monopolies and pernicious banking
sector - depend on the price of oil. Russia benefited mightily from the
surge in the value of the "black gold". But the windfall has helped
mask pressing problems and allowed timid legislators and officials to
postpone much needed - and fiercely resisted - changes.

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

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

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

Thus, falling oil prices - though detrimental to Russia's ability to
repay its external debt and balance its budget - are a blessing in
disguise. Such declines will force the hand of the Putin administration
to engage in some serious structural reform - even in the face of
parliamentary 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 capita
is actually up by more than 8 percent this year alone. Income
inequality, though, has, indeed, gaped.

Responding to these concerns, though, in a "coattails" effect, the
president is expected to carry pro-Kremlin parties back into power in
2003 - a modicum of elections-inspired bribing is inevitable. State
wages and pensions will outpace inflation. The energy behemoths - major
sources of campaign financing - will be rewarded with rises in tariffs
to match cost of living increases.

Russia faces more than merely a skewed wealth distribution or
dependence on mineral wealth. Its difficulties are myriad. On cue from
Washington, it is again being hyped in the Western press as a sure-fire
investment destination and a pair of safe geostrategic hands. But the
dismal truth is that it is a third world country with first world
pretensions (and nuclear weapons). It exhibits all the risks attendant
to other medium-sized developing countries and emerging economies.

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

Russia's population is both contracting and ageing. A ruinous pension
crisis is in the cards unless both the run-down health system and the
abysmally low birthrate recover. Immigration of ethnic Russians from
the former republics of the USSR to the Russian Federation has largely
run its course. According to Pravda.ru, more than 7 million people
emigrated from the Federation in the last decade.

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

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

Russia is slated to join the World Trade Organization in 2004. This
happy occasion would mean deregulation, liberalization and opening up
to competition - all agonizing moves. Russian industry and agriculture
are not up to the task. It took a massive devaluation and a
debilitating financial crisis in 1998 to resurrect consumer appetite
for indigenous goods.

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

Russians are still ambivalent about foreigners. Paranoid xenophobia was
replaced by guarded wariness. Recently, Russia revoked the fast track
work permit applications hitherto put to good use by managers, scholars
and experts from the West. Foreign minority shareholders still complain
of being ripped-off by powerful, well-connected - and minacious -
business interests.

With the bloody exception of Chechnya, Putin's compelling personality
has 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 the
renegade province prior to the 2004 elections, but will fail. Reform is
anathema to many suborned governors of the periphery and the Kremlin's
miserly handouts are insufficient to grant it a decisive voice in
matters provincial. Devolution - a pet Putin project - is more about
accepting an unsavory reality than about re-defining the Russian state.

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

"The processing industry is concentrated in the cities of Moscow, St
Petersburg, Yekaterinburg and Nizhny Novgorod. These larger cities have
managed the transition relatively well, as size has tended to bring
with it industrial diversity; smaller industrial centers have fared far
worse. The Soviet regime created new industrial centers such as Tomsk
and Novosibirsk, but Siberia and the Russian Far Eastern regions remain
largely unindustrialised, having traditionally served as a raw
materials and energy base. Owing to the boundless faith of Soviet
planners in the benefits of scale, one massive enterprise, or a small
group of related enterprises, often formed the basis for the entire
local economy of a substantial city or region. This factor, compounded
by the absence of unemployment benefits, makes the closure of bankrupt
enterprises a politically difficult decision."

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

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