RESTORATION WATCH #8 ⁽¹⁾: A ‘VALENTINE’S DAY MASSACRE’ FOR REFORM LOOMS AS KREMLIN CONTEMPLATES RENATIONALIZATION

(Washington, D.C.): The Russian Duma is expected
to debate today what may arguably be the most alarming
Russian economic development since Vladimir Lenin first
read Das Kapital ⁽²⁾:
On 9 February 1996, Interior Minister Anatoly Kulikov
called for the re- nationalization of select Russian
industrial concerns, oil and gas companies and banks.
He suggested that “We should partially nationalize
those major commercial monopoly structures which can put
money into the treasury but are not doing so for various
reasons. I think it’s fair that 50 percent belong to the
state.” Among the companies Kulikov would
re-nationalize are: the natural resource giants LUKoil,
Yukos and Gazprom, vehicle makers ZIL, KamAZ and AvtoVAZ,
and the Most, Imperial, Promstroybank, Agroprombank and
Mosbiznesbank banking groups.

The Interior Minister also proposed several other
revenue-generating schemes. According to the Reuter
European Business Report, these include: issuing the
ultimate junk bond — “securities backed by the
debts owed to Russia by other former Soviet republics
which [Kulikov] said amounted to some $9 billion”;
increased petroleum export duties; and a widening of the
rouble exchange-rate band.

Such dramatic, regressive actions appear to have been
floated by Kulikov as a trial balloon. He claims, though,
that they enjoy the support of fellow Cabinet members who
serve on Boris Yeltsin’s Security Council and who share
his desire to raise money to pay wage arrearages to the
armed forces, Interior Ministry troops and police.

Other members of the Yeltsin team — including
Economics Advisor Alexander Livshits, Central Bank Deputy
Chairman Alexander Khandruyev and Deputy Economy Minister
Sergei Vasilyev — were quick to disavow the proposals.
For example, Vasilyev told the Interfax news agency: “This
call by the minister not only contradicts the
government’s economic program, aimed at privatizing oil
companies, but also the conditions of the $9 billion
credit proposed to Russia by the International Monetary
Fund.” Reuters notes that “The IMF, in
the final stages of negotiating a $9 billion loan to
Moscow, wants to see the oil and gas business — Russia’s
main export earner — in private hands.”

The Bottom Line

As the Center for Security Policy has repeatedly
noted ⁽³⁾, U.S.
taxpayers should not be compelled to support — either
directly or indirectly — the increasingly
anti-reform policies being pursued by the Yeltsin
government. Were the United States, the IMF and other
Western lenders to fail to react promptly and unfavorably
to the Kulikov trial balloon, it is predictable that
these kinds of regressive policy initiatives (and
worse) will be forthcoming.

Consequently, the Western reaction must be swift and
negative. Policy-makers in Washington and allied
capitals must contact their Russian counterparts to
protest vigorously the Kulikov proposals. Aid donors,
both individual nations and the IMF, should make clear
that any moves to turn back privatization and reform will
result in the immediate suspension of all
assistance flows.

Whether such signals are sent or not, however, the
adoption of proposals like Kulikov’s would spell disaster
for Russia. Private investors will no doubt respond by
abandoning the Russian market, quite possibly triggering
in its fledgling bond, currency and equities exchanges a
costly collapse in the value of the rouble and stocks
similar to October 1994’s Black Tuesday. For these
reasons among others, Kulikov’s trial balloon must be
shot down at once.

(1) Restoration Watch is a
series of Center for Security Policy Decision Briefs
that — together with an earlier series entitled Transformation
Watch — has chronicled important developments in the
rise and fall of pro-Western, democratic forces in the
former Soviet Union. To obtain previous papers in these
series, contact the Center.

(2) The importance of this
development has largely gone unnoticed by such American
press outlets as the Washington Post. It was
reported in an unbylined six-column inch blurb in today’s
edition, in sharp contrast to the nearly half-page
devoted to the printing of a new Talmud in Russia.

(3) See, most recently, the
Center’s Decision Brief entitled Clinton’s
Political Fundraising for Yeltsin Will Entail High Costs
for U.S. Taxpayers — and Interests ( href=”index.jsp?section=papers&code=96-D_12″>No. 96-D 12, 9 February 1996).