Russia: Conference Ponders Meltdown in 2003

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Conference Ponders Meltdown in 2003

By Alla Startseva STAFF WRITER

MOSCOW - Here's the paradox: The more the economy grows, the more energy is consumed and the more strain is put on the fragile and dilapidated national infrastructure.

The good news is that the Economic Development and Trade Ministry has come up with a formula that targets the moment when industrial growth, infrastructural wear-and-tear, demographics and sovereign debt repayments all collide to bring the whole system down.

The bad news? That moment begins in 2003 and no one is exactly sure how to deal with it.

This is "Crisis 2003 - Myths and Reality," a full-day conference attended by a slew of officials, analysts and prognosticators armed with ideas, warnings and solutions for the impending crisis.

The first industries to be hit will be the most archaic - the power grid, the chemical, petrochemical and metal sectors and the transportation network, said Vladimir Kozlov, an expert of the Center for Strategic Research.

Indeed, maintaining the power grid, in the corporate form of Unified Energy Systems, is a national priority.

The reasons to fret are real, said UES' top economist Vasily Zubatkin. In some regions of the country, some 80 percent of the company's fixed assets are already obsolete.

"Some of our equipment in the Mos cow region was brought to the country in 1945 from Nazi Germany - and it still works!" Zubatkin said. "This may be good, but it is not effective," he said.

This year's electricity and heat shutoffs in the Far East is just the beginning," warned the Emergency Situation Ministry's Yury Lalazarov.

Andrei Sharonov, deputy economic development and trade minister, said his ministry would present its UES reform plan to President Vladimir Putin on Sunday.

Sharonov said that handling the power grid problem alone would take $25 billion to $35 billion over 10 years. This figure is a compromise between UES's $60 billion estimate and the $7 billion put forth by Arthur Andersen.

"Arthur Andersen's plan was nothing more than patching up the holes, which would only delay the crisis by three or four years," said Sharonov.

Viktor Chekhunov, the chairman of the board and deputy director of Energomashkorporatsiya, which makes electrical generators, slammed the Energy Ministry for not helping his company get the financing it needs to modernize and grow. "Governments all over the world help their energy companies," Chek hu nov said. "But the Energy Ministry is like the Titanic with no sign of life."

Sergei Kurtsov, the deputy director of Leningrad Metal Plant, or LMZ, one of the largest producers of energy turbines in the world, said his company plans to invest $400 million through 2005 to modernize. But LMZ, too, needs the government's help with financing, he said.

http://www.sptimes.ru/current/news/b_2980.htm

-- Martin Thompson (mthom1927@aol.com), April 14, 2001

Answers

April 14, 2001 Russia Trying to Head Off a Debt Crisis

By SABRINA TAVERNISE MOSCOW, April 13 — The order seemed simple enough in the late 1980's: 79 brand-new fishing trawlers for the Soviet Union to upgrade its fleet.

Work began at European shipyards, financed by bank loans backed by millions of dollars in guarantees from the Soviet government.

But when the Soviet Union collapsed in 1991, the trawlers and the bills for them went separate ways. The boats slipped into private hands; the new owners promptly disappeared into a web of offshore companies, and the Russian government was left owing $1.5 billion. The debts were later rolled into the $42 billion Russia owes to a group of Western governments known as the Paris Club.

After 10 years of stalling and haggling with its creditors and two defaults, Russia is now paying up. Ample oil revenue and a booming economy have made Russia's 2001 and 2002 interest and principal payments manageable.

After that, though, it may not be so easy: nearly $19 billion will come due in 2003, and the government is trying to negotiate relief of some of the burden. This week in St. Petersburg, the German chancellor, Gerhard Schröder, discussed Russia's debts with Russia's president, Vladimir V. Putin, though little progress was made. Germany is the biggest single creditor in the Paris Club, holding about half the total owed.

Even if it does win some relief, Russia is feeling the cost of servicing all this debt, prompting it to take a closer look at just how it was run up.

Much of it, like the cost of the trawlers, was borrowed hastily in the chaos of the Soviet Union's dying days, and is now the legacy of a bankrupt state that lost control of its finances, and ultimately, its very property.

Often missing from the back-and-forth between Russia and creditors like Germany and the United States, who have taken a tough line in negotiations, is the identity of some big beneficiaries of the borrowing: Western companies like the shipyards. Many credits granted to Mikhail Gorbachev and his failing state were tied specifically to Soviet purchases of western goods, from German industrial equipment to American grain. For this reason, politicians and taxpayers alike are questioning whether it is fair to expect Russia to pay in full.

The Soviet Union had been borrowing modestly since the 1960's, and made a deal in 1970 with Fiat S.p.A. to build what is now Russia's biggest car manufacturer. In the late 1980's, the onset of Mr. Gorbachev's glasnost policies brought both an opening to the West and a relaxation of state controls over company managers. Many of those managers seized their new chance, borrowing recklessly and then privatizing the companies they ran, leaving the government to pay their debts.

"It was like someone died and left a will, a car, an apartment — and all the heirs came and took the goods, but skipped out on all the payments," said Valentin Pavlov, the Soviet prime minister under Mr. Gorbachev, who also served as finance minister.

In one case, the renowned eye surgeon Svyatoslav Fyodorov bought the surgical center he directed, which was built largely on Soviet-era loans, and then persuaded the Russian government to assume responsibility for the debts, according to Anatoly Chubais, the architect of Russia's state-asset sales program.

"That was the worst Wild West period," said one western adviser to the Russian government, who spoke on the condition of anonymity. "There was a lot of what you'd call self-privatization — Red managers grabbing things.

"Gosplan had lost control," he continued, referring to the state planning agency, "and Gorbachev wasn't asserting his authority. A lot of joint ventures spinning off from state enterprises gave rise to theft."

The fishing trawlers exemplify the problem. About half the boats never even reached Russia, instead disappearing abroad along with the bureaucrats who were supposed to oversee the purchase, according to the state fishing committee chairman, who investigated the case last year. The trawlers that did reach Russia were transferred to private owners, but the lease payments on them were made sporadically or not at all.

Foreign debt tripled over the six years that Mr. Gorbachev led the Soviet Union, from 1985 to 1991. A combination of low world prices for oil, the Soviet Union's biggest export, and an ill-fated anti- alcohol campaign had left the treasury depleted. Mr. Gorbachev began asking for loans to prop up his crumbling state.

"Our officials were running all over the world taking loans — Gorbachev in Paris, billions coming, Gorbachev in London, billions coming," said Boris Fyodorov, a former Russian finance minister, who at the time was an adviser to the Soviet government. "It was clear that the amount of loans was quickly exceeding Russia's capacity to repay them. In May 1990 we warned Gorbachev of an impending debt crisis."

At a time when the Soviet state was at its least cost-conscious, it had vast new access to funds, and it was borrowing uncontrollably, in many cases simply to cover current costs, like subsidizing imported food and clothing to cover gaps in the rapidly disintegrating Soviet supply system.

Russia was running out of everything. Even city governments were borrowing overseas. Mr. Chubais tells of how a 1990 cigarette shortage in St. Petersburg led to a crowd of desperate smokers blocking the city's main road demanding deliveries. As deputy mayor, he approved a loan to replenish the city's supply.

"The whole ship was sinking, and loans were taken to plug the holes," Mr. Chubais said in an interview.

In the West, export credits were seen as good business. Companies were eager to get access to a vast and underserved market ahead of competitors, or to unload excess supplies where they would not depress prices at home. At one point in the early 1990's, there was so much American chicken for sale in Russian markets that people began jokingly calling drumsticks "Bush legs."

In hindsight, some experts say, it was hardly wise to lend so lavishly to a very weak Soviet state deep in financial crisis. Credits were poured into industries that had never before been obliged to stick to a budget or repay a loan.

"The West was closing its eyes," said Mr. Fyodorov, formerly of the finance ministry. "We never needed so much grain. Everyone was interested in selling cheap surplus, but inside Russia it wasn't so efficiently used. The average Soviet official never looked at loans as something you have to repay."

In a way, the situation in Russia prefigured the trouble seen today in the technology sector. Like the manufacturers who lent dot-com start- ups the money to buy equipment from them, the Paris Club countries enjoyed making debt-fueled sales to Russia without worrying too much about the borrowers' profligacy. Unlike many dot-coms, though, Russia is still around to collect from.

Even with extra oil revenue, the Russia that is now making its payments is significantly poorer than the one that inherited the Soviet Union's debts in 1992. The economy is beginning to recover after a decade of decline, but output remains one-third below 1991 levels.

"It was fair then that Russia took on the entire Soviet debt," said Russia's current finance minister, Aleksei Kudrin, in an interview. "And it would be fair now if the G-8 countries would agree on restructuring with a partial write-off."

Copyright 2001 The New York Times Company

http://www.nytimes.com/2001/04/14/business/14RUSS.html? pagewanted=print

-- Martin Thompson (mthom1927@aol.com), April 14, 2001.


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