Impressions from Russia during Board of Directors Meeting of the East-West Institute with Russian Leaders, the Patriarch of the Russian Orthodox Church, Members of the State and City Duma, Business Leaders, and New Youth Leadership Groups*

Moscow, Helsinki, and St. Petersburg October 3-10, 1998

John M. Palms President, University of South Carolina

October 21, 1998

*From lecture given to students in the University of South Carolina MBA and Master of International Business Studies Program on Wednesday, October 14, 1998. Work supported by the Samuel Freeman Charitable Trust.

Note: These comments are organized under headings, which seemed an appropriate thematic classification. They are somewhat in order of my view of priorities. Under each heading individuals who expressed strong opinions on these subjects are listed. However, many others also had opinions and contributed to my impressions.

1. Federal Finances

[Meeting with Vladimir Bulgak, Deputy Prime Minister (responsible for industry and conununication); Aleksli Kudrin, First Deputy Finance Minister; Donald Kendall, former Chairman and CHIEF EXECUTIVE OFFICER Pepsi-Co, and Chairman of the Board of East- West Institute; and Veniamin Sokolov, member of the Committee of Government Accounting Chamber; Nikolai Gavrilov, Deputy Director, Department of External Debt in the Ministry of Finance.]

The country is in crisis because of the decision made by the Russian government to default (or, as some in Russia put it, place a moratorium on the federal debt payment). This was caused by a deficit in the tax revenues and an over-expenditure in the federal budget. In addition, money loaned to Russia has been misappropriated, with up to perhaps $ 100 billion leaving the country because of cooption. Much of the money derived from Russian bond sales in the country has been used to speculate in the monetary system and is now lost. These funds should have been invested in the real economy, which would have enhanced production and created value. Russia is now exploring restructuring that debt. It also is exploring ways it might reduce the federal budget, perhaps by printing money in a way that won't cause significant inflation, by price controls, by revising taxes, or by other means. They are negotiating with the Paris club, the IMF, the World Bank, their internal banks, and other lenders to restructure their debt. This crisis has had many consequences. The salaries and pensions of federal employees, including the military, are in arrears by three to four months. Venture and new entrepreneurial investment capital has been confiscated, millions of the brightest new business owners or workers have lost their businesses or their jobs, and the people have lost their trust in the government and their hope for the future.

Tax collection is down to 6% of expectations, from 10% last year, and no enforcement of tax collection-to improve this situation, as currently conducted, seems possible. Accounting systems are not adequate to support the operation.

There exists widespread opinions among members of the state Duma about the government's decision to default. During our meetings, these opinions as well as what should be done next were freely discussed and debated.

2. Economic Development

[Same persons as in I., and Andrei Netchaev, President of Russian Finance Corporation; Vagit Alikperov, President of largest oil company in Russia, LUKEOIL; Nikolai Gavrilov, Deputy

Director, Department of External Debt; Alexander Yeutuishkin, Editor in Chief, Business and Computer Publishing; Olga Dergunova, General Manager, Microsoft Representative office, Moscow; Andreas Meyer-Landaut, President of Daimler-Benz; Vladimir Vakovlev, the Governor of St. Petersburg.]

Economic development seems, at the moment, to be in chaos in many regions. This is principally because there is not an adequate infrastructure or culture to conduct a free-market, democratic economy. There are political, economic, and social reasons for this. Politically, the new federal constitution has not facilitated a white-market infrastructure of business law that can be used by all the regions. Even the constitutions of the regions are not yet in concurrence with the federal constitution. Some of the regions are doing economically better than the others, but are refusing to pay their full share of taxes.

Russia does not have a single economy based on one currency. There are in fact several economic systems in existence that create serious problems for central data and evaluation and control and meaningful revenue prediction or collection. One economy is based on the ruble, and it makes up roughly 10% of the economy. Another economy is based on the dollar circulation, and it makes up about 20% of the economy. Yet another economy is based on bartering (no currency), and it makes up from 60% to 70% of the economy, which therefore provides little or no revenue since it has no documented value for accounting purposes. In addition, there is widespread corruption, and economic criminal activity is on the rise.

The commercial banking system also is not appropriate for the free-market economy. There are good and bad banks. The bad banks have confiscated flow-through funds, leaving producers who have sold products unpaid even though buyers have sent payments to the banks. This is also the case for distributors, wholesalers, and, finally, consumers. This chain of tragedy is causing millions of layoffs. The situation does not look as if it can improve in the immediate future.

The economic well-being is strongest in the regions immediately around Moscow and particularly in a couple of regions in and around St. Petersburg called the Leningrad Oblast. The governor of St. Petersburg in a speech at one of the conferences boasted about the city's balanced budget, on-time payments to all city employees, pensions, the stability of the region's banks, the foreign investments, and the rebuilding of the city in preparation for the celebration of the city's three hundredth anniversary. Certainly, he described a different atmosphere than what we heard in Moscow. A similar perspective was provided in pre-dinner comments and a formal dinner speech in St. Petersburg by Mr. Martti Ahtisaari, President of the Republic of Finland.

The brightest aspect of the Russian economy may be the growing middle class of honest, ambitious Russian businessmen. They have experienced the free-market economy and enjoy its competitive reward system. During a town-hall type discussion on ATV (the only commercial TV station in Russia), a group of young businessmen expressed their strong support for the new economy and no inclination ever to return to the old system.

3. Nuclear Weapons ("Loose Nukes")

[Vladimir Lukin, Chairman of the Foreign Affairs Committee of the State Duma, former Ambassador to the U.S.; Alexei Arbatov, M.D., Deputy Chairman of the Defense Committee; Colonel Robert Boudeau, Chief Defense Corporation Office, Embassy of the U.S.; Andrei Kortunov, President, Russian Science Foundation.]

Prime Minister Primakov was recently asked what the most critical issues facing Russia are. Without hesitation, he responded: the safety of the nuclear arsenal and the protection of nuclear materials (highly enriched uranium and plutonium) from stored obsolete and dismantled nuclear weapons. There are now approximately 20,000 warheads stored at over I 00 sites widely distributed throughout Russia. These sites are neither properly secured physically nor secured with properly trained and compensated security personnel. I would add to this issue the dilemma of the more than 700,000 people, including 150,000 nuclear engineers, scientists, and technicians, who work in the so-called ten "Nuclear Cities" of Russia. With the end of the Cold War, the production of nuclear weapons has been dramatically reduced, along with the affiliated work force.

The United States, through legislation introduced by Senators Lugar and Nunn, is spending about $400 million a year to purchase the weapons materials after Russia processes them into suitability for use as fuel in U.S. nuclear reactors. A U.S. government corporation, the United States Enrichment Corporation (USEC), was recently privatized to continue this program. The current program budget is, in my opinion, of inadequate magnitude and duration (scheduled to operate ten years) to provide the national security the U.S. should be demanding. In addition, the program is in trouble because the now-private USEC and its stockholders are demanding purchase prices that the Russians, even with their desperate need for cash, feel are inadequate. They may be investigating other possible buyers.

The employment of nuclear workers is another related challenge. Excellently trained Ph.D. nuclear physicists can be hired for $5,000 to S10,000 per year. Many of these physicists who work for the government have not been paid for their work in four to five months. The government must provide investments and tax incentives to the cities and regions in which workers in -the nuclear industry reside. Some high-tech companies from around the world have invested in these areas and are employing these workers. The recent financial crisis, however, has impeded the cash flow through the banks to these employees and created a loss of thrust for these investments. Appropriate guarantees must be provided for this initiative to be successful. The security of Russia and the U.S., and perhaps the world, are at stake.

4. Social Structure

[Meeting with over 20 key members of the Duma, including Alekander Shokin, leader of the NDR Faction in the Duma; General Andrei Nikolaev, State Duma Deputy; Yuri Maslyukov, First Deputy Prime Minister of the Russian Federation; U.S. Ambassador to Russia Jim Collins; John

Mroz, President East-West Institute.]

The social structure does not have a history conducive to support the concept of a free-market economy and certainly not its radical implementation. There were, up to the time of this crisis, millions of new entrepreneurial businesses that seemed to be successful. But, in retrospect, they were autonomous from any integrated social, tax, or social service government structure. Few taxes were paid, and the government's social obligation to its workers and pensioners could therefore not be satisfied. The military were inadequately compensated, if at all, and those relieved from military duty have not been able to find employment.

The major autonomous (almost) regions, approximately eighty of them, increasingly have become more independent and some much more prosperous than others. Their governors, however, are more autocratic and authoritative, leaving less opportunity for participatory democracy. Without strong central governmental leadership, this trend will continue and intensify. The idea of a collective consensus about what Russia is today, what it can be in the future, and what it will take to get there needs wider discussion by the best Russia has to offer in leadership. There are many new young leaders in Russia who are able and willing to participate in such a dialogue. They are waiting for the opportunity, but further mass education is necessary. The governors of the most powerful regions have more political leverage as has the mayor of Moscow.

5. Religious Revival

The religious revival in Russia is profound. This view is based on a discussion a group of us had with the Patriarch of the Russian Orthodox Church, Alexii 11, and several Russian members of the Duma, ordinary citizens, and other members of the government.

The Patriarch definitely sees a spiritual rebirth in Russia. People are returning to church services, churches are being restored and new ones built, monasteries are increasing dramatically, and good works for the elderly, orphans and the sick are flourishing under the church's leadership. The Patriarch made it very clear: people cannot live without faith, and they need places to pray. He offered this latter remark as his answer to criticism from the media and others that the church spends too much money building churches. In 1988, there were 19 monasteries; today there are 425. Each monastery is involved with welfare activities. The Patriarch has established the Charitable Fund, "Sanctuaries of Russia." This fund has widespread support from the government and many other organizations and businesses. The main activities of the fund are the following: Support of socially unprotected people, especially children, elders, sick people, and orphans, spiritual enlightenment, organization of "The weeks of Russia," spiritual culture, restoration of Christian churches and monasteries, assistance for better understanding, and cooperation between the church and businesses.

These are difficult times for Russia. The Patriarch stressed that the winter will be difficult. All my observations confirm this bleak perspective. The Patriarch believes that:

The prime minister has a responsibility to prepare the people. People need to be paid for their work. The people of the world are mutually interdependent. One planet--we all need each other. A market economy requires patience. The 21st century will be a happier and brighter one for Russia, and certainly more humane. Welfare for individuals should not last long. People should not feel they are living off of someone else's support. The Cold War was not good, and I hope it is in the past, never to return. We need cooperation to build the future. Christians must be optimistic. The future depends on good relations between our two countries. Mass media accuses the church of ambition for power, but church and state must be separate. Church views are different from government views.

To a question about young people and the church, the Patriarch cited statistics about church construction and parish creations and Sunday schools. In 1993 there were 46 parishes, and today there are 338.

He also felt agriculture will always be important to Russia because of the country's good black soil and the vastness of its beauty.

To a question about the acceptance of other religions in Russia, he indicated that 80% of Russians come from a heritage of Orthodoxy and that he believes that one should use the religion of their heritage. Heritage is important: "without the past there is no future." He had no problems with traditional religions, such as Islam, Judaism, Buddhism, and Japanese religions. He did not mention Catholicism or Protestantism. In spite of his stated views on separation of church and state, the government has passed laws restricting other religions. The Patriarch might have been reminded that such restrictions were proposed in early America, but finally rejected. Subsequently, both government and religion have flourished in America.

The views from ordinary citizens about religious rebirth were not as enthusiastic as those of the Patriarch. They do attend church, but not as frequently as the clergy said. Christmas, Easter, weddings, and funerals are some of the church functions and activities citizens typically attend in Churches.

6. Health Care

[A group including Norma Palms, board member of Providence Hospital; former Ambassador to the Soviet Union Heyward Ishamir and Naton Shkyla and Helen Flynn; Elaine Freeman, board member of SCANA and ETV; medical faculty and staff of hospital number 2 in St. Petersburg; Dr. Yuri Shusev, Director, Polenov Institute; Mavlet Vakhitov, Pavlov State Medical University; Pavel Romashev, Academy of Medical Hygiene; Rector Shalrov.]

Although much better than most average hospitals in Russia, there were many inefficiencies and problems compared to the average American hospital. The average patient stay was twelve to fourteen days as compared to two to three days in the U.S. The facilities were inadequately cleaned, smoking was allowed in certain places, and the smell of smoke was everywhere. Medicine was scarce, particularly in the present financial crisis, when 70% of medicine comes from outside the country. Physicians are paid between $40 and $50 dollars per month, and only seven percent of patients have private health insurance. This hospital served 30,000 patients a year with 400 doctors who performed from 15,000-17,000 operations per year. There were many volunteers around, but not enough nursing volunteers. The overall atmosphere was gloomy, and our hosts, although polite, were not enthusiastic and seem rather sad about conditions to come. We agreed.

7. Political Structure

[Yegor Gaidar, Chairman of Russia's Democratic Choice Party, former member of Duma; Alexandre Shokhin, Liberal Duma member (resigned from Yeltsin's Cabinet); Major Luzhkov of Moscow; Sergei Papov, member of the party, Time for Russia; Arkadig Volskiy, Chairman of Russian Union;,,Representatives from over twenty young Russia parties; Eric Edleman, U.S. Ambassador to Finland; Vladimir Vakovlev, the governor of St. Petersburg.]

The democratic political system in Russia is very young and immature. There is a newly adopted federal constitution, and the regions governed by governors are completing their own constitutions, which are to concur with the federal constitution. Many regions claim their constitutions so concur, but Moscow representatives in those regions contradict these claims. These differences need to be resolved. There is no cultural tradition of participating in a free- market democracy, there are no effective political parties, and there is very little effective grass- roots political activity. There is little trust in government leaders and little hope a political working system can be formulated in the near future. They need help. The most visible political activist, General Alek Sands Lebed, the governor of the prosperous Krasnoyarsk region, and Major Yuri Luzhkov, from Moscow, are effectively using poll-taking and spin masters to gain political popularity and power. President Yeltsin is not well-respected or regarded, and Prime Minister Primakov is regarded as a temporary gatekeeper who at least will do no harm. A strong consensus leader has not yet evolved. Perhaps it could be the dynamic major of St Petersburg, Vladimir Vakovlev.

8. The Fine and Performing Arts and Architectural Preservation

[William Lucers, President of the Metropolitan Museum of Art; William Murray, a USC graduate and Chairman of the American Friends of the Hermitage Museum, St. Petersburg; Anatoly Soldatenko, Development Department, The State Hermitage Museum.]

In spite of the financial crisis, strong interest continues in the fine and performing arts and architectural preservation of many old buildings, houses, churches, and new cathedrals indicate

Russia's continued interest in the beauty of the major cities of Moscow and St. Petersburg particularly. Perfomiing arts in dance (ballet) and music continue to be the pride of the country. Our visit to the Hermitage Museum in St. Petersburg was one of the highlights of our trip. It possesses some of the finest art that has ever been produced by the masters.

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