In this issue:

Fiscal Austerity Bill Advances in Russian Duma

Government Insists Russian Bank Panic Is Not 'Crisis'

Mont Pelerinite Specter Over Russian Social Sphere

Russian Communist Party Splits

Soros Brags About Georgia Coup, Targets Uzbekistan

From Volume 3, Issue Number 28 of Electronic Intelligence Weekly, Published July 13, 2004
Russia and the CIS News Digest

Fiscal Austerity Bill Advances in Russian Duma

The Russian government's regressive plan to substitute cash payments for the free or discounted transportation, and other services and benefits, that Russian veterans, pensioners, and the disabled have received since the Soviet period, cleared its first reading in the State Duma July 3 by a vote of 296-123. The legislation, which affects 34 million Russians, including 14 million war veterans, is one of several projects to "modernize" the Russian social sector by imitating the worst fiscal austerity practices of the West. Others include pension funds controlled by market speculators, and residential utilities price reform.

The conflict between the impulse toward a more national-interest-oriented economic policy, and these cuts in the already low living standard, is a central paradox in current Russian economic policy. As President Vladimir Putin continues to maintain that reducing poverty is one of his three top priorities, the government has rewritten the bill, supposedly to mitigate its impact. Calculations have been published in the Russian press, showing how far short of the value of the benefits, the cash payments will fall. On June 24, Health and Social Development Minister Mikhail Zurabov told the Duma that people will be allowed to choose between continued in-kind social benefits and the cash payments. Zurabov also denied that the government intended to revise the list of people eligible to receive benefits because of their service during World War II.

Two-thirds of the majority United Russia bloc voted for the bill in the first reading. There have to be two more readings.

Several tens of thousand Russians demonstrated against the bill in Moscow and other cities during the Duma hearing, because they are not confident that the new policy will secure their living standards, and suspect the contrary.

Government Insists Russian Bank Panic Is Not 'Crisis'

On July 6, Guta Bank, the 22nd-largest bank in Russia (in assets), suspended operations. Beginning July 7, there was a run on Alpha Bank, the fourth-largest, but Russian Central Bank head Sergei Ignatyev went to the Duma to assure the nation that "there is no crisis." The Central Bank's decision, late on July 7, to cut the mandatory reserves level for Russian banks in half, sent a sigh of relief through the banking sector. Negotiations were reportedly under way for Vneshtorgbank (the former Soviet Foreign Trade Bank) to acquire Guta Bank, yet people continued to wait in line to get their cash out of Alpha Bank and a number of other institutions. Prime Minister Mikhail Fradkov, addressing the Cabinet on July 8, said that the situation in banking was "favorable" overall and would become stronger through "voluntary mergers" to create larger banks. But he sounded far more nervous than usual, as he asserted that the Central Bank "is overcoming the problems that have come up for objective as well as subjective reasons."

In a country where people's savings were thrice wiped out—by shock therapy in 1992, the currency crisis in 1994, and the bond default/banking crisis in 1998—the difficulties of several small and medium-sized banks rapidly turned into panic. People stood in line overnight to get their money out of Alpha. In May, the Central Bank revoked the license of Sodbiznesbank on charges of criminal money-laundering. Another bank, CreditTrust, suffered a run based on rumors of its ties with Sodbiznesbank, and went into liquidation. Several other small banks imposed ceilings on withdrawals and stopped taking new business. Between April 1 and May 15, Russian banks' total liquidity shrank from R518 billion to just over R200 billion. The cost of inter-bank credits rose from 8% to 16% in one week in May. Kommersant noted July 6 that the inter-bank credit crisis over the past month has already reduced reported economic growth in Russia.

The Russian banking sector is relatively small. With the exception of the state-owned Sberbank (Savings Bank), which accounts for half of all deposits in Russia, the banks each have small capitalization and have yet to become a major credit-generating facility for the economy, in the absence of a national policy to make this happen. Many of the banks are closely tied with one or another industrial group, and some of them are, accordingly, involved in tax evasion and capital flight. Guta Bank is linked with Sistema Corporation, a telecommunications, electronics, and investment company involved in expanding Russian economic cooperation with countries in Southwest Asia, among other projects.

In its statement about the suspension of operations, Guta Bank said it had suffered an outflow of R10 billion ($344 million) in June, leaving insufficient liquidity to make checking account payments or cover withdrawals from savings accounts. Itar-TASS quoted unnamed sources as saying that Guta Bank's rivals had maneuvered to cut off loans to Guta and present bills for payment. According to Vedomosti, major corporate clients of Guta, like the communications giant Svyazinvest and ex-privatization official Alfred Kokh's Montes Auri ("Mountains of Gold") investment outfit, were tipped off and got their money out of Guta before accounts were frozen.

Economist Alexander Livshits, a government official in the 1990s, wrote in Izvestia that the crisis was "produced from nothing." Evidently troubled that it would be used as an excuse to reshuffle the Central Bank leadership, Livshits stressed that the Central Bank is managed by "qualified and decent people." The analysis alluded to by Livshits is that the crisis is being fanned by private interests, in order to precipitate a purge of the Bank of Russia (Central Bank). Rumors that the run on Guta Bank and Alpha Bank had been instigated by enemies of the current Central Bank leadership, were bolstered by July 8 comments from Presidential adviser Andrei Illarionov. That radical free-marketeer blamed the Central Bank for the current crisis, saying that any and all of the CB's policies involving exchange controls, reserve requirements, and other regulations, were nothing but "silent socialism."

The government is preparing legislation for a deposit insurance system, which would cover deposits up to R100,000 ($3,450). In preparation for this law, banks are being audited. Those that have lied, or are "not transparent," will lose their licenses; Central Bank officials have said that 300 banks will fail to qualify.

On July 8, Moody's rating service put 18 Russian banks, including Alpha, on a "watch" list for potential downgrading. At one of them, Bank of Moscow, depositors wishing to withdraw funds were being told on July 8 to sign up for an appointment several days later.

Mont Pelerinite Specter Over Russian Social Sphere

The July 8 address to the Cabinet by Russian Premier Fradkov was an hour-long presentation of the government's priorities. It contained a heavy dose of the radical anti-general-welfare schemes, which have been promoted in Russia with special fervor by Presidential adviser Andrei Illarionov, especially since he arranged a four-hour audience for leading international Mont Pelerin Society activists with President Putin earlier this year (EIR #19, May 14, 2004: "Mont Pelerinite Walpurgisnacht in Moscow").

Fradkov did voice a commitment to improve the standard of living and he did present an outline for upgrading infrastructure in major areas, including roads, ports and pipelines. But the new element was more ominous: "Public-private partnership," Frakov said, "above all means the consolidation of business and government around social projects." What this means, he said, is that "the social sector should become the main generator of economic growth," through "pushing non-market elements out of the social sector; new management for social projects, up to and including a managerial revolution (attracting managers from private companies into the social sector), and developing transparent and understandable rules of the game for businessmen who become active in public-private partnership." In Russia, "the social sector" means large areas of "soft" infrastructure: education, health care, pensions, transportation, housing, and other services. Alongside the intended elimination of benefits for millions of Russians, Illarionov is vigorously promoting a deregulated, "free-market" approach in all these areas. Jose Pinera, father of Chile's privatized pensions reform, is one of the visitors he brought to meet with Putin.

Russian Communist Party Splits

The long-brewing split of the Communist Party of the Russian Federation is under way, as Central Committee plenary sessions and congresses were held, on July 1 and July 3, respectively, by two rival CP groups. The congress schedule was set long in advance, but several commentators called it "no accident" that the CP split coincided with the government's push to get State Duma approval for a social benefits reform bill, which will slash benefits to millions of Russians. The CPRF has been a major opponent of these fiscal austerity cuts.

Reportedly, 86 members of the CPRF Central Committee attended the plenum that supported incumbent party chief Gennadi Zyuganov, while 96 gathered at a meeting associated with businessman Gennadi Semigin (expelled from the CPRF in February), which elected Ivanovo Province Governor Vladimir Tikhonov. After the July 3 rival congresses, both groups are seeking validation by the Ministry of Justice as the real CPRF. On July 5, Zyuganov sought support in a meeting with President Vladimir Putin, who promised to "look into" the matter.

Soros Brags About Georgia Coup, Targets Uzbekistan

In a July 5 interview with the Los Angeles Times, megaspeculator George Soros announced that his Open Society Institute (OSI) will now prioritize undercutting "repressive regimes" in Central Asia. In particular, Soros called the government of Uzbekistan, which just recently refused to register the OSI in that country, "very repressive." Soros not only acknowledged, but downright boasted of, having brought Michael Saakashvili to power in Georgia. "I'm delighted by what happened in Georgia," he said, "and I take great pride in having contributed to it."

Less than two years ago, Soros announced he was scaling back his operations in Russia and the former Soviet Union, in order to prioritize the United States as the front lines of Open Society organizing. This has translated into a big presence of Soros and his money, in and around the Democratic Party.

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