Russian Roulette Part 3

Having failed thrice, Putin is lately leaning in favor of restoring and even increasing the Federation Council's erstwhile powers at the expense of the (incensed) Duma. Governors have sensed the changing winds and have acted to trample over democratic inst.i.tutions in their regions. Thus, the Governor of Orenburg has abolished the direct elections of mayors in his oblast. Russia's big business is moving in as well in an attempt to elect its own mayors (for instance, in Irkutsk).

Regional finances are in bad shape. Only 40 out 89 regions managed, by February, to pay their civil servants their December 2001 salaries (raised 89% - or 1.5% of GDP - by the benevolent president). Many regions had to go deeper into deficit to do so. Salaries make three quarters of regional budgets.

The East-West Inst.i.tute 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 munic.i.p.al 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 inst.i.tutions, 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 a.s.sertive 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 inc.u.mbents 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-compet.i.tive - 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 pa.s.sed 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 h.o.a.rd 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 (Inst.i.tute 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 cla.s.s 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 ent.i.ties 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 att.i.tude 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 j.a.panese 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 fict.i.tious 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 a.s.sets 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 inst.i.tutions. 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 bypa.s.s 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.