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. Last Updated: 07/27/2016

The Best and Worst of '98

Only time will judge what 1998 meant for Russia. A bundle of interpretation s have already been offered, including the demise of the nation's oligarchic system and the total failure of liberal democratic reforms. Russia's politicians, in their selfish quest for public ratings, sounded doomsday scenarios. The end of the world, they droned, is nigh.

But for those of us who lived through 1991 and 1993, this year was more a matter of depressed cash flow. Instead of numbly staring at heavy artillery in Moscow's streets and running home to make the midnight curfew, we kicked the cash machine when it told us to bugger off.

1998 was essentially a financial problem; Russia, alas, has seen a lot worse. As exasperating and tumultuous as the year was, at least we can rejoice that there was no Chechnya, no battering of the government's headquarters with tanks. For a former empire struggling with its identity and its future, this is progress.

Let all take note: There were plenty of positive events over the past 365 days, which can hardly be said of years gone by. Future generations will be obliged to clean up the mess of 1998, but if the hard lessons are learned, perhaps Russia will be the better for it.


One durable piece of paper

By far the greatest accomplishment of 1998 was legal. Russia's Constitution withstood the two strongest attacks ever made against its integrity - one in the spring and then another in the fall. In both instances the catalyst was a decision by the president to fire his entire government, thereby pushing a dangerous ball down the side of a snowy mountain.

In April, rather than face dissolution, the State Duma blinked first and confirmed Sergei Kirienko on the third vote. In September, however, deputies held their ground and forced the president to offer a different candidate after former prime minister Viktor Chernomyrdin was twice rejected. Parliamentarians used one of their few constitutional levers of influence, and won. The president, though visibly distraught by the affair, displayed the necessary respect for the document which he forced everyone to accept in 1993.

When giants fall

They began the year owning a large part of the country; they ended it virtually broke. Russia's gang of oligarchs, about whom many a vituperative word has been written, had the silken rug pulled out from under their feet on Aug. 17 by the same government that helped create them.

These men - Vladimir Potanin, Mikhail Khodorkovsky, Alexander Smolensky, to name a few - owed their massive wealth to the state, a fact which aroused unparalleled ire from nearly everyone. They accumulated billions on currency speculation, handling budget funds, "winning" inside privatizations, and speculating on the domestic T-bill market, only to watch much of it vanish when the government announced it would default on domestic debt. Justice was served.

Remembering people called shareholders

In a simultaneous double-joust aimed directly at the hearts of two oligarchs, Russia's Federal Securities Commission in February issued decisions on abuse of shareholders' rights by two major oil companies: Sidanco and Eastern Oil. For Russia, it was the first public attempt by a bureaucrat to take on the excesses of a few businessmen who were inclined to believe that they were above the law.

Both cases were different: Sidanko's Potanin was an outright dilution, and management of Yukos, which controls Eastern Oil, was accused of sucking funds out of the latter to boost the former. The FSC's Dmitry Vasiliev signed an order canceling Sidanco's dilutive convertible bonds and a letter recommending that Yukos' financial management activities be investigated. 4. Hard-ball with the big boys

In one of the most dramatic simulations of the biblical tale in contemporary history, nouveau politician Sergei "David" Kirienko launched a July attack against RAO "Goliath" Gazprom to overcome the gas company's reluctance to pay its monthly tax bill of approximately $550 million in June.

Though Gazprom was made to fork out billions in 1997, the manner in which Kirienko blind-sided the behemoth was unprecedented. Gazprom CEO Rem Vyakhirev was conducting strategic negotiations with Shell in Austria when Kiriyenko froze his assets. Invincible Gazprom was given a lesson in shirking its obligations to the "new" Russian state.

Reversing obvious insanity

While no one was looking, a Moscow court sold a controlling stake in a 160,000 barrel per day oil company for $10 million. The stake in Purneftegaz, a daughter company of state-owned Rosneft, disappeared into the hands of four unknown Moscow oil traders in mid-September. With it disappeared all hope that the government would ever become a respectable asset manager.

However, after having been ripped off from right under its nose, the state grew a tad indignant. Starting with the president himself, a fight ensued to get Purneftegaz back. Political will was finally vented against a crooked deal (one involving, by the way, extremely powerful forces), and property was returned to its rightful owner. If there was a provocative legal precedent set in 1998, it was Purneftegaz.

Repentance never comes late

Most people missed this event, which is a shame. The president, thankfully, did not. At the last minute Yeltsin decided it was his highest duty to attend the St. Petersburg funeral of the first victims of Communist terror: Tsar Nicholas II and his family. Though more an event of historical interest than of modern importance, the July 19 funeral reminded Russia once more that there can be no return to totalitarianism.

One thousand rubles ago....

Exactly one year ago the money is our pockets was just a little different. And on Jan. 2, when the government began swapping it for new bills with three less digits, most people expected chaos. Past attempts to change rubles in circulation in Russia were so outrageously disorganized that they could only be described as confiscatory. This time around the Central Bank did everything possible to assure its citizens that the 1998 monetary exchange would be conducted in a civilized fashion. Imagine that....the Russian government treating its people with respect. Definite progress.


Creeping out of the woodwork

By far the worst thing to come out of 1998 was a trend: An ugly, unpunished, largely unrestrained rise in racism. Once the Communist party placed a few of its men in the government in September, they felt a surge of omnipotence. They could do no wrong.

A rabid general shouts that Jews should be exiled; a communist spokesman reads from a report that Jews are committing genocide against Russians; a booklet written by a party organizer claims that representatives of the Caucasian nations and republics are feeding off Russia. Ugly stuff.

On the other extreme, fascist organizations prepare for a mass rally in Moscow. Russia's economic collapse has millions searching for scapegoats, including parliamentarians and governors. Prejudice and chauvinism have seeped out of the woodwork, and there is no telling how far they will be allowed to spread their filth.

Death of a soldier

It was the shot that reverberated across the scattered remnants of democratic Russia. Galina Starovoitova, a St. Petersburg politician and a fearless member of the anti-communist vanguard, was gunned down outside her apartment in Russia's second city. For the first time in post-Soviet Russia a prominent figure was killed not out of greed or other vice, but for what they believed. The fact that the target was a woman did not cause her enemies to think twice.

Through this assassination, the world was shown just how corrupt Russian politics truly is. Worse, everyone assumed (correctly) from the start that the hitmen would never be found. They themselves in all likelihood have already been disposed of, so that the link to the ultimate killer is forever severed.

Back to 1994

In one day, Aug. 17, the government's two undeniable accomplishments of the past 5 years - low inflation and a stable currency - were vanquished. The resulting loss in confidence on the part of the population set the country back four years. Investors and depositors who, despite their reservations, had begun to trust the state, were taught once again that they shouldn't.

Books will be written about the crash of Russia's financial system. Each one will offer its "insight" (or more accurately, "hindsight") into what could have been done to prevent the complete catastrophe that ensued. The bottom line is that there is plenty of blame to go around, and that the governments of both Chernomyrdin and Kirienko proved incapable of moderating the severity of an inevitable crisis despite the clear warnings.

Cruising on the IMF ambulance

The International Monetary Fund may be feeling a bit guilty too. Russia desperately begged the IMF for money last June. President Yeltsin even gave his financial liaison Anatoly Chubais emergency power to deal with the lending institution. Perseverance paid off, and eventually Russia received what it was after: a $22.6 billion financial support package with $4.8 billion for immediate disbursal. Many economists claim that the critical economic mistake was made right at this summer juncture. Along with the funds, the IMF should have granted Russia some decent advice: "World energy prices are likely to get worse, so devalue the ruble slowly. It will be painful, but at least that way you can maintain a tenuous grip on the situation." As it was, the eventual conclusion was an utter disaster for the country. The IMF could have stuck by Russia rather than drop it at the first hint of trouble.

A POWERful xenophobia

In May, legislators combined their hostility to the new Kiriyenko government with an ingrained xenophobia, and the fruit of this mixture was a law restricting foreign ownership in Unified Energy Systems, the country's utility monopoly, to 25 percent. The fact that non-residents already owned some 30 percent of the company's stock didn't seem to bother anyone, not even the president, who signed the bill into law.

Why the government didn't do more to confront lawmakers on this score, to assure foreign investors, is the exact reason why this unconstitutional law deserves a spot on this list. The state, even after seven years, has done an outstandingly rotten job at protecting investors - the one group that can save Russia. The law on UES shares, which accounted for most of the stock market's liquidity, signaled the beginning of the long decline of faith in Russia's markets.

Why not just bankrupt the thing?

Bankruptcy is a natural phenomena in any market economy, and is generally regarded as no more than an embarrassment to the outgoing managers and a loss to shareholders. The economy at large marches on. The Central Bank of Russia, nonetheless, typically considered bankruptcy of a top financial institution to be an affront to its policy line and professionalism.

Tokobank was just a bad bank, and should have been closed. Granted, there still is no law on bankrupting financial institutions in Russia, but once it became obvious that the bank was beyond hope, immediate and decisive actions should have been undertaken. For foreign creditors and shareholders, Tokobank was a test case as to whether the Central Bank could steer an insolvent financial institution through the motions of bankruptcy. How did the Central Bank handle it? By trying to dump Toko onto the Bank of Moscow.

What does merger mean?

The biggest deal of the year in Russia was one that never took place: A merger between the second and seventh-largest oil companies, Yukos and Sibneft. Announced in January in the presence of the prime minister and a group of oligarchs, Yuksi was supposed to become a 65 million tons per year crude producer, or the third largest privately-owned oil company in the world. LUKoil would have become the No. 2 guy in town.

Over the past year, merger fever has inflicted the entire world, with a new multinational monster being fabricated every month. Tougher competition is forcing corporations to cut costs through economies of scale. Abysmal oil prices are furthering this process.

But in Russia, merger is a proving to be elusive. Not only did Yuksi disintegrate by mid-year, but another touted marriage - that of Izhorsky Zavody and Uralmash - also fell apart. Enterprise directors prefer to remain king on their home turf rather than to share with someone else. The latest proposal - to merge Rosneft, Slavneft, and Onaco and create a strong state-owned presence in the industry - is likely to hit the ground before ever taking off.

The seller is sick

At the beginning of 1998, the overwhelming opinion was that Russia is completely incapable of conducting a civilized privatization. By the end of the year this opinion hadn't change a bit.

In January, investors laughed at a sale of 14.9 percent of Norsi-Oil, a downstream oil company located along the Volga. In March, a 19.7 percent sale of Slavneft flopped when an electrician from Ryazan filed a complaint on the legality of the sale in a local court. Then in May, foreign oil companies told Russia to stop dreaming when the latter wanted $2.5 billion for Rosneft, a company that was being dismantled by managers.

The only thing the government can sell, it seems, is a tiny slice of Gazprom, a piece of property that will always be in favor. But nothing to write home about. One oligarch suggested this year that management of all privatization sales should be transferred to foreigners. Most investors would support the idea.