Global Intelligence Update
Red Alert
July 10, 1998
Russia Speeding Toward Disaster
With its economy in a state of collapse, coup rumors flying, and the recent
murder of an opposition political leader, Russia's situation is more grave
than at any time since the collapse of the Soviet Union. Caught in a cash
crisis stemming from its inability to collect taxes and from declining
petroleum prices, Moscow is facing increasingly hostile state workers and
miners to whom the government owes billions of dollars in unpaid wages.
The Russian government this week took on its number one tax delinquent, the
partially state-owned Gazprom, in an attempt to wrest payments from the
company. Gazprom responded that it could not pay taxes without revenues
from its customers, and promptly shut off gas deliveries to the city of St.
Petersburg.
The Russian Central Bank announced on Friday, July 3, that even after
spending nearly one billion dollars to defend the ruble, the country still
had $15.1 billion in reserves. However, unofficial reports suggest that
the bank has subsequently been forced to spend from $300 to $500 million
per day to defend the ruble, dragging reserves as low as $11 billion.
Russia can not afford to devalue its currency, as its banking system would
subsequently collapse, but with defense of the ruble consuming 25 percent
of its reserves in a week, Russia is running out of time.
On Wednesday, July 8, Russia's treasury bill market nearly collapsed, as
the government was forced to accept more than 100 percent annualized yields
on 45-day bonds. The government had to use its reserves to make payments.
A further sign of Russia's economic distress, Russia's stock market has
plunged 67 percent since January, and total market capitalization is at
only $40 billion.
On Thursday, July 9, Russia's international finance negotiator Anatoly
Chubais said that he was a day away from finalizing a $10-15 billion
bailout plan with the International Monetary Fund and the World Bank.
Outside estimates are that Russia needs $20 billion to stabilize its
economy. Chubais added that he expected to finalize the World Bank's
component of the overall package, reportedly $500-600 million in structural
loans, sometime next week. Deputy Prime Minister Boris Nemtsov told Moscow
Echo radio that the World Bank funds would be available before the end of
the year. Unless "before the end of the year" translates to "next week,"
it will not be soon enough, and next week is impossible. Russian Deputy
Finance Minster Oleg Vyugin said Wednesday that the IMF would not consider
approving additional funds until the end of July or the beginning of
August. Furthermore, the IMF insists that the Russian parliament approves
the bulk of the government's anti-crisis package before its July 16 recess.
While some in parliament have said that most of the anti-crisis package's
21 laws would be approved by the deadline, retired general and likely
presidential candidate Aleksander Lebed on Wednesday said that, "The
program is by default dead and buried. The Federation Council and the Duma
are not ready to look at the program seriously." In an interview with
"Kommersant Daily" newspaper, Lebed charged Yeltsin with failing to
consolidate all of Russia's factions behind the government to battle the
country's "systemic crisis." Lebed cited former Soviet dictator Josef
Stalin's appeal to the country after Germany's surprise attack in 1941,
saying "Maybe he (Yeltsin) should pronounce a phrase like the one Stalin
once used: `Brothers and sisters, my friends, things are bad for all of us,
we are in danger...'." "Alas," said Lebed, "the president has either not
understood this yet, or has not wanted to understand." Additionally, Lebed
called Yeltsin's current government inexperienced "lads," who did not have
what it takes to guide Russia out of its current economic and political
crisis.
Lebed is hardly alone in his criticism of Yeltsin. The liberal Yabloko
party leader, Grigory Yavlinsky, warned that Russia's current situation was
similar to 1991, when hardline Communists staged a coup against then-
President Mikhail Gorbachev. In an interview with the Reuters news agency,
Yavlinsky said "No one is in control of the country. Its debt is too big
and cannot be serviced."
Yavlinsky is not the only one talking coups. Yeltsin's press service felt
the need to release a statement on June 7, criticizing the newspaper
"Nezavisimaya Gazeta" for publishing a story entitled "Will the Crisis
Culminate in a Coup?" The newspaper cited the governing body of the
social-patriotic "Derzhava" group as saying, "All the ingredients for a
coup are there, in particular the president's next vacation, during which
he will stay in Karelia, far from Moscow." Yeltsin will leave for Karelia
on July 14 or 15 for a two week-vacation. The press service statement said
that such coup rumors are quite common, but never play out, and that "a
respected newspaper regarding itself as a pillar of democracy should not
spread such panicky scenarios." Coup rumors may be common, but Russia's
current crisis is not, and there are those who are speaking openly about
carrying out such a coup.
Duma member Viktor Ilyukhin, the newly-elected leader of the All-Russia
Movement in Support of the Army, the Defense Industry and Military Science,
on Wednesday echoed Lebed's argument, saying that in order "to extricate
Russia from its present crisis," all political parties and movements "must
act as a single fist, as a single coordinated organism." Like Lebed,
Ilyukhin argued that Yeltsin could not form that "fist." Ilyukhin said at
a press conference, "Our patience is running out, and Boris Nikolayevich
(Yeltsin) must take this in. If I were in his place, I would go to Red
Square today, call on people to assemble, repent for what has been done to
Russia and then say: `Excuse me, I have failed to cope with my task and I
am leaving.' Unfortunately, this is not happening. Well, we will have to
help him." Ilyukhin's newly-appointed first deputy told the same press
conference, "We have to throw out all that scum from the Kremlin, the White
House, from Brest to the Kurile Islands, and as soon as possible."
Ilyukhin, whose party cooperates closely with the Communists, was
elected to head the All-Russia Movement in Support of the Army, the Defense
Industry and Military Science following the murder last week of its
founder, retired General Lev Rokhlin. A vehement foe of Yeltsin, Rokhlin
was shot dead in his dacha near Moscow in the early hours of Friday, July
3. Though his wife initially confessed to the shooting, his daughter and
son-in-law later went on television, saying the confession was coerced by
unidentified people. Rokhlin's daughter alleged that unidentified people
had threatened her mother to make Rokhlin "pipe down" in his calls to
overthrow Yeltsin. On top of the daughter's statement, other factors have
cast doubt on the official inquiry into the general's murder. An
unexplained second cartridge was found in another room in the dacha, and
three burned corpses were found in a neighboring forest the following day.
NTV Television on July 7 stated, "Nobody any longer believes the official
version of the inquiry."
Russia's economy is collapsing, with little hope of recovery. The
opposition is circulating rumors and threats of coups, and the extremists
now have a martyr. We do not know which personalities will survive and
which will fall in this melodrama. But we are confident of one victim: We
do not believe that the Russian experiment in liberal capitalism will
survive. The crisis is too deep and too broad. Its roots are not in
accidents but in fundamental Russian realities. Love affairs with the
West, followed by failure and rejection of everything Western are not new
in Russian history. Russia normally settles scores with the Westernizers
in a rather direct and brutal way. We see no reason why this exercise in
Westernization should not end the same way as the others. Indeed, we
expect it shortly.
Errata: In the first line of the last paragraph of yesterday's Global
Intelligence Update, the word "Malaysia" was accidentally substituted for
"Myanmar." We apologize for any confusion this may have caused.
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