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Jewish World Review April 30, 1999 /14 Iyar 5759

Mort Zuckerman

Mort Zuckerman
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Econophone

On Kosovo, Russia talked loudly and carried a small stick

(JWR) ---- (http://www.jewishworldreview.com)
NATO'S AIR WAR ON SERBIA is justified. It is also risky. But imagine how the world would be trembling today if Russia felt able to transmute its rhetorical support for its historic ally into military action. Prime Minister Primakov turns around in midair on his way to Washington. President Yeltsin speaks of "extreme measures," and a mob assaults the U.S. Embassy, but Russia effectively stays out, refraining even from servicing its military equipment in Serbia.

Russia is, of course, weighed down by its enormous international debt and the restructuring Primakov was hoping to accomplish in Washington. So Moscow's economic crisis is good news, yes? No. The country is near collapse, and the consequences would far outweigh its inability to cause problems for NATO in the Balkans. The prospect of Russia sinking into criminal anarchy or a Communist dictatorship is horrifying. Imagine Russia, with thousands of nuclear weapons, taken over by people who will do anything for money–from Iraq, Iran, or Libya, say, or any gang of terrorists.

That collapse is frighteningly close. The state is bankrupt. The ruble buys less every day. Russia's institutions–military, legal, educational, and health–are atrophying. The discredited reforms of the '90s have sapped political will. The Russian people have seen their GDP and standard of living erode by over 55 percent, compared with the 32 percent that Americans endured during the Great Depression.

Financial pariah. So far the Russians have shown amazing resilience. They are no strangers to suffering: Eighteen million people in the former Soviet Union died during World War II and even more in the genocidal purges of state communism. Hope sustained them, but these days it is in short supply. Russia, with total national budget revenues of $22 billion, owes $17.5 billion this year alone. If that debt is not restructured, Russia will become an international financial pariah, unable to finance its deficits. It will have to print money. That will fuel an inflation that may well rip apart its flimsy social fabric.

The problem can't be solved by simply pumping in more dollars, since hard currency seems to flow out as quickly as it arrives. Capital that should go for investment is leaving the country at $2 billion a month. Most of the $4.8 billion transfusion last summer quickly found its way to Swiss bank accounts and Riviera real estate controlled by corrupt oligarchs and politicians. The commercial banks siphoned off their assets while abandoning their liabilities to their creditors and depositors. Even the central bank's management of money is suspect.

To attract domestic investments, the Russians have to root out corruption, give legal force to contracts, and fashion a sound banking system. To make the state work, they have to develop an effective system of tax collection and produce realistic budgets. Current estimates, for example, assume a surplus of 2 percent of GDP–but that rests on calculating federal revenues at 12 percent of GDP when they are running closer to 9 percent. Even at that, tax collections from major companies that are paid in cash are less than 10 percent, with the rest paid in offsets or barter in which the companies overstate the value of their goods.

Primakov treats the decision-making process as political rather than economic and assumes the IMF will bend its rules to accommodate Russia. The negotiations for him are like a political poker game rather than a joint effort to rescue his economy. His implicit message is blackmail, relying on our recognition that the collapse of Russia would bring nuclear risks and the spread of crime and pollution.

This creates a real dilemma for the Clinton administration. On one hand, it is wary of Primakov, the former head of Russia's spy agency and a supporter of Iran and Iraq. On the other, it fears that parliamentary elections next December could cause a power shift, with the communists taking control of both the Duma and the government.

The big question for the political year 2000 in the United States may be one with an ominous echo: "Who lost Russia?"



JWR contributor Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report. Send your comments to him by clicking here.

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04/21/99: No time to go wobbly
04/13/99: The Evil of two lessers

©1999, Mortimer Zuckerman