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November 23, 2007 (the date of publication in Russian)

Maxim Kalashnikov

THE KEYS TO FINANCE MINISTRY'S TREASURES

State finances management: fears of a guard mount?

The November 15 arrest of Deputy Finance Minister Sergey A. Storchak is formally related to wrongdoings over Algeria's debt to Russia. Still, this story looks like a mere pretext. The leading power group is definitely going to overtake control of the whole sphere of state reserves and debt management, until today conveniently monopolized by "birds from Anatoly Chubais's nest".

 

A HYBRID OF SHYLOCK AND SCROOGE

The way the Ministry of Finance treats debt issues have brought up a lot of questions. It often seemed that the Ministry is ready to benefit anybody but Russia.

During the last seven years, the Ministry developed a habit of premature return of debts to major Western creditors. It has lately paid back huge sums along with compensation for the missed interest. These efforts have been described as a desire to guarantee Russia's financial independence. However, the return of the debts is followed with excessive purchases of Western bonds, thus benefiting economic growth in the Western community, with no regard of the policy the selling side pursues towards Russia. Moreover, these massive purchases of securities help the West to overcome its crisis of bank liquidity. This practice is favorable not only for foreign banks but also for a lot of intermediates which acquire generous commissions for Russia's expense.

This ostensible generousness could be interpreted either as naive philanthropy or as a reflection of massive corruption. In case the officials are so kind-hearted, why doesn't this kindness benefit domestic industry? A generous Ministry of Finance could provide tax relief to high-tech companies and to clear off debts of military industrial enterprises generated during the disastrous 1990s. But instead of pumping the superprofits into Russian industry and building modern infrastructure, the Ministry sterilizes this money by abducting them from domestic circulation. At any time when MPs demand relief of tax pressure for Russian producers, the Ministry of Finance is fighting tooth and nail to keep the existing practice unchanged. Any initiative of increase of export crediting and establishing tax-exempt zones of accelerated development breaks against the walls of the Finance Ministry which behaves as a hybrid of Shylock and Scrooge. The Ministry thus behaves as a double-faced Janus, a friendly face displayed to foreign banks and a sniffy grimace turned to domestic producers.

 

THE MENTOR AND MASTERMIND

The described tradition dates back to Anatoly Chubais's policy in his capacity of Minister of Property. In late 1990s, he served as Vice Prime Minister and Minister of Finance, and deserved the honorary title of "the world's best financier" exactly at the time when the most generous write-offs of foreign debts were started.

In September 1997 in Hong Kong, Russia's First Deputy Premier Anatoly Chubais signed a "Memorandum of Mutual Understanding" defining the conditions of Russia's membership in the Paris Club, then described as a great achievement of national diplomacy. In accordance with the memorandum, Mr. Chubais agreed to immediately write off an amount of $80 billion debt of Third World nations to Russia, as USSR's successor – though at that time, Russia was choked with severe obligations on debts earlier created by Mikhail Gorbachov and Boris Yeltsin. As a matter of fact, Mr. Chubais timidly surrendered to the arbitrary condition of the West: Russia was promised restructurization of its debt in exchange for massive write-off of Third World countries' debts. But that was not the only discriminative condition. Besides, the Memorandum imposed on Russia an obligation to service the debt to Paris Club on a 7% annual interest. That meant an annual amount of payments of $2.7bln. Even on the height of the Cold War, the USSR, with its label of the Empire of Evil, could borrow under conditions of a 1.5-2% annual interest.

One more condition, infringing Russia's interests, was the obligation of preferred payment of interests and penalties for delay of interest payments. In addition, according to the paragraphs on "equal approach" included in all of the agreements with Paris Club's creditors, Russia was actually deprived of the possibility to directly negotiate with any of the particular creditors on a premature amortization, in cash or commodities. This restriction stole away the possibility of restructurization of debts, automatically obliging Russia to pay a high interest on USSR's debts until 2020.

Thus, the tradition of generous gifts to the Western financial system was initiated by Anatoly Chubais. Though in the same year 1997, he had to leave his post due to a financial scandal involving also his deputy Alfred Koch, his influence in the Ministry of Finance had since persisted, as the Ministry was staffed by his liberal fundamentalist colleagues.

Another tradition was to generously pay debts which could be contested and never returned. In 2002, Anatoly Chubais, though already serving as CEO of United Energy Systems, promoted a debt relief operation illustrating the murkiest type of the government's debt management policy. Ostensibly, Russia was determined to return the Soviet-time debt of $2.2 billion to Czech Republic Ц the sum that the Czech side did not even hope to receive. At that time, an odd intermediate company named Falcon and owned by several ethnic Georgians and one Armenian, purchased this debt from the Czech government for a sum comprising 22% of the nominal amount. This company was later proven to be a front of United Energy Systems (UES). Using his intimate connections with the ministry of Finance, Chubais took charge of the debt repayment, borrowing $550 million in exchange for delivery of electricity to Czechia. Since the dubious Falcon shifted the debt to Russia into the hands of United Energy Systems, the Russian Federation owed already not to Czechia but to this company.

In order to write off the debt Ц which was actually contestable Ц the Ministry of Finance wrote off UES's debt to the federal budget for a sum of 40 billion rubles (which then comprised $1.35 billion. This trick actually allowed United Energy System to spend $550 million and get back $800 million.

Next year, the Ministry of Finance displayed greater humbleness, agreeing to write off Iraq's $7bln debt to the USSR, without any compensations or guarantees of exchange Ц actually in the interests of the United States.

The tradition, initiated by Anatoly Chubais, was gladly continued by Alexei Kudrin, Chubais's deputy first in the Ministry and later in UES, from where he was conveniently transplanted back into the chair of Deputy Minister and later Minister, elevated to the position of a Vice Premier already in this year.

In Kudrin's office, debt issues were supervised by Sergey Storchak, who was regarded as a especially reliable person. The criminal case on the Algeria debt aroused panic not only in Kudrin's office but in the whole of Chubais's team. Two days after the arrest of the Deputy Minister, Mr. Chubais hurried to display his loyalty to Kremlin by leaving the Rightist Alliance Party. However, this information was later denounced, and on November 25, Rightist Alliance's leaders took part in the fabulous Dissenters' March, a now regular illegal public rally of radical opposition which the party earlier used to ignore.

Though Chubais himself did not take part in the event, two of his closest liberal fundamentalist comrades, Nikita Belykh and Boris Nemtsov, two days earlier endorsed for Presidency from the party, joined the rally, intentionally violating the accord with the city powers and falling over themselves get seized by the police. This episode was used as a convenient pretext for George W. Bush's White House to force OSCE to abstain from monitoring Russian elections, obviously in order to later declare them illegitimate.

In this way, Chubais and his team displayed more than disloyalty: they clearly demonstrated both to Kremlin and the Russians that their motivation has nothing to do with the interests of the country, and that during the last years, they had been serving as obedient and valuable agents of the West's political and financial community in the Russian Government. They would go to any lengths to keep themselves in their position, kin to the status of Faktoren, the medieval topsmen, at the courts of German knights.

 

THE SPELL REMOVED

The reasons for this open political resistance are obvious. Control of the $440 billion of state finances provides a formidable lever of influence. The way the huge budget reserves are treated actually determines the strategy of Russia's development.

Responsible use of the budget would enable Russia to rise and succeed in a breakthrough in industrial, scientific, technological and infrastructural development. Treated in a different way, the huge reserves can be used Ц and have been excessively used Ц in the interests of other powers for expense of the Russians.

Russia is thus facing a moment of truth. The country can't afford dependence of budget management from outside interests. Major Russian corporations have lately borrowed unprecedented amounts of loans; they are forced to borrow even more to pay the earlier loans. However, the sources of credit may dry out in today's conditions of a banking crisis overwhelming the West. In case of a default, Russia would have to pay the accumulated debts with the reserves destined, officially, for the next generations. The above described scheme with the Czech debt payment, as well as the murky circumstances of the 1998 crisis, indicate that in the situation of a default, huge amounts of national reserves may conveniently sink in the pockets of a narrow circle of corrupted officials and corporate managers, while the state may be exposed to huge obligations.

Thus, the first attempt to intervene into the "enchanted kingdom" should be continued with a massive crackdown on the class of corruptionists. In case Russia fails to perform the urgently necessary "managerial revolution", Russia may waste the huge potential it had accumulated with great difficulty Ц with direst consequences for economy and statehood.


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