It irritates me when IMF delegations of young kids who've seen almost nothing but have read a lot of books start to dictate development plans. We are obliged to act in our own fashion, but also to listen.

Prime Minister Yevgeny Primakov, 1998

A fledgling market goes through several stages: rampant theft, trade and services, and only at the final stage development of production.

Roundtable of six Russian regional governors, 1998

In early 1998, the Russian pharmaceutical company Akrikhin was riding high, with profits having jumped for three years in a row and reaching $8 million in 1997. Despite the company's impressive performance, buyers began cooling on Akrikhin stock, along with all other Russian stocks. Russian government spokesmen blamed the decline of the stock market on the Asian financial crisis and the related drop in worldwide prices for oil which has always been one of Russia's export staples.

The company's expansion plans were put on hold. Then, in the summer of 1998, the economy crashed: the government defaulted on debt payments, inflation spiraled upward, and a number of major banks abruptly closed their doors. Akrikhin suddenly lost its customer base and was close to becoming a basket case. Its new priority was simply to avoid bankruptcy.

As a producer of generic drugs, Akrikhin was hardly in the same technological league as major western pharmaceutical firms. But, in

Russia, it certainly was an innovator. It had converted a rusting chemical production facility into a plant producing drugs that were not only cheaper than the imports flooding the market but were so cheap that impoverished Russians would buy them. To sell its products, the firm had successfully coped with a steady stream of corrupt officials. Needing special attention were those officials demanding favors to put specific drugs on the government's approval lists. Purchasers of these drugs would be reimbursed for the costs if they figured out how to qualify for elusive health insurance payments.

Before the economy collapsed, the company planned to retool outmoded facilities. It needed to expand its product lines of pills and ointments so as to benefit from economies of scale. Also, it planned to include in its product offerings a variety of injected solutions that were not available in Russia. But it was short of operating cash to buy raw materials from abroad that would ensure uninterrupted operation of its lines.

Even the most solvent Russian banks had never warmed to the idea of providing loans for more than a few months to any firm, and Akrikhin itself could not absorb the costs of factory renovation. Thus, the only source of financing was western investors. As the fiscal turmoil within the Russian government intensified, western organizations were not only stopping their investments, they were frantically pulling out as much money as they could from Russian financial institutions. In short, if a potential depositor inquired of any Russian as to whom he should see concerning a new account at a Russian bank, he would be told “a psychiatrist.”

Despite difficulties in attracting investment capital, Akrikhin was in better shape than most Russian companies that relied on modern technologies. It had operated on a cash and not a barter basis, thereby avoiding acrimonious entanglements with other Russian firms. It had a good accounting system so as to avoid problems with the tax police. Most importantly, it had a highly motivated management team that was determined to find solutions to the latest series of setbacks. 1

Will Akrikhin survive? Probably, but not as the independent technological leader that its management had envisaged as 1997 came to a close. By 1998, the U.S. Agency for International Development

(USAID) had provided Bristol-Myers Squibb with grants totalling $4.9 million to train Akrikhin personnel in improved plant operations and to provide advice on better marketing and management practices. When the Russian economy crashed, this western partner decided to continue its close relationship with Akrikhin, which had become a customer for some of the new materials it provided. Both USAID and Bristol-Myers Squibb believe that Akrikhin will be able to claim a small market share in the years ahead.

Given the huge demands for generic drugs in the country, there will always be some room for Russian pharmaceutical companies. In 1998, two-thirds of the drugs on the Russian market came from a variety of foreign countries. An even larger percentage of pharmaceutical manufacturing equipment was imported, primarily from western Europe. The Russian companies most likely to succeed in providing domestic substitutes for these imports in the near term are those that establish alliances with western partners that provide cash for retooling and upgrading. Should Russia drift towards a more controlled economy, however, then those Russian firms chosen by the government for support will obviously have an advantage.

Russian government support for existing or new domestic firms capable of producing a significant share of drugs or other imported items —support through preferential government purchasing of products of these firms or through higher import duties—is a concept that attracts Russian politicians not enamored with technological dependency on the West. But advocacy of such impediments to international trade in order to spur technological growth is a policy that sends shock waves through western governments determined to push Russia into an open trading nation.

Beyond pharmaceuticals, every sector of the economy was rocked by the financial meltdown of 1998. Many technological aspirations of both large enterprises and individual entrepreneurs were shelved. The government faced an immediate need to reschedule its foreign debts, since unpaid creditors were knocking on the door. This knocking is likely to intensify in the future, even if international prices for Russian oil exports continue their upward spiral of 1999. The only place for Russia to turn for debt rescheduling is the International Monetary

Fund (IMF) which in the past has paid little heed to preserving Russia 's technological base. A review of IMF policies at the time of the 1998 collapse is instructive in anticipating future pressures from abroad for economic reform with clear implications for technology-based companies in Russia.

Three dimensions of economic developments also shape the challenges of innovation. First, barter and other non-cash payment schemes pervade business transactions to the detriment of the innovator who has not yet developed useful products to barter but needs cash to purchase specialized equipment and materials. Second, a growing number of small businesses are beginning to find high-tech market niches, and a special focus on problems confronting the small business sector is warranted. Third, each region of Russia has unique geographic characteristics and its own political and economic history, leading to highly diversified approaches to technological innovation.

Whatever the perspective, the economic road ahead will be rocky and uncertain. The western prescription so eagerly adopted by Russian reformers in the early-1990s has been repeatedly discredited. The emphasis on free international trade and readily exchanged currency, deep cuts in government spending for social programs, and rapid privatization of industry simply did not produce the results predicted. Free to choose quickly became free to lose. Of particular importance for innovation, the emergence of capital markets which would allow newly privatized industries to borrow cheaply and rebuild never took root. 2

Among the many warning signs about undesirable byproducts of western intervention in Russian economic policy has been the behavior of Anatoly Chubais, for years the symbol in Moscow of the western economic model, both as an intellectual and as deputy prime minister. In 1998, Chubais admitted that while representing the Russian government, he had deliberately covered up the weakness of the Russian economy in his efforts to obtain IMF credits. If Chubais is not reliable, who can western economists trust?3

When Akrikhin reached the pinnacle of profit-making at the beginning of 1998, western economists were hailing the unprecedented performance of the Russian stock market as a sign that macroeconomic policies imported from the West had been a huge success. During the previous six years, according to the IMF, Russia had made remarkable progress toward a free market economy. The IMF outlook emphasized that Russia had become a democracy. A large and increasing share of Russian economic activity was being channeled through market mechanisms. A professional central bank had made impressive movement toward price stability. Output had begun to grow, and inflation had been reduced to near single-digit levels.4 Still western economists were calling for more reforms of the economy as a condition for assistance. Among these demands of early 1998 that still remain on the front burners of western financial institutions are a tax code that is enforced, faster and more transparent privatization, and an efficient banking system.5

In 1998, with the IMF clearly able to jerk the most sensitive purse strings, it seemed that Russia would pay attention and take decisive steps to improve the economy. Yet, despite the IMF optimism and its prescription for further growth, in May of 1998 the IMF was confronted with a Russian economy about to implode without an immediate infusion of large sums of western funds. In staying its course of optimism, the IMF apparently was relying on the long shot that the prime minister would be successful in encouraging the Russian Duma to immediately adopt his anti-crisis package. This package included additional reform elements—shifting the tax burden from oil producers and refiners to consuming industries, leasing federal property on a competitive basis, cutting the public work force by 20 percent, and accelerating bankruptcies.6

Even in June 1998, as investors fled the Russian market, the IMF insisted that, contrary to what the market was experiencing, there was no financial crisis. In July, the IMF delivered to Moscow payments and commitments totaling $20 billion. It drew on its own financial coffers

and on the resources of other western lending organizations. But this financial bailout was not without controversy.

Opponents of the IMF policy were abhorrent of the idea of sending money to a country whose major economic achievement was development of techniques for companies to escape debts by declarations of bankruptcy. They protested that the continuing infusion of western capital was simply delaying the inevitable day when all activity would stop in Russia and paychecks would simply become historical remembrances. Russia should put its financial house in order and pay its bills before receiving additional western resources. In short, they added, bailing out a sick economy had turned into abetting it.⁷

The U.S. government put its full weight behind the IMF to buy time for yet another wave of government reformers to take promised steps that would shore up the Russian economy. As Russia's experts continued to plead that the country was a victim of the global economic crisis, the IMF was willing to trade loans for actions to reform the economy. However, as reflected in Box 1.1, skeptics have long considered the IMF policy as simply a series of politically inspired bribes to keep the Russian government, with its nuclear arsenal, quiet and non-threatening.

One month later, the economy did implode. Russia's external debt was approaching $140 billion, including $100 billion of liabilities inherited from the Soviet Union. The government's internal debt added another $100 billion. Interest payments were absorbing any government funds that were not protected by the most powerful Russian interest groups.8 While the debt burden was low by international standards, it was too much for Russia to handle. When financial relief from the IMF and other foreign sources arrived, the dollar infusions were used to buy up mountains of rubles that were threatening to trash the ruble/dollar exchange rate, which had been at a near-steady state for almost two years.

Soon the value of the ruble had fallen dramatically, while speculators pocketed much of the money that had come in from abroad. By fall, the only discernible trace of the tranche of foreign money was increased debt. The results were disastrous.9 Even the financial giant Agrobank closed its doors; and one of its former customers, the Russian Ministry of Foreign Affairs, was in a quandry trying to figure out how to pay its diplomats. Indeed, the ministry informed me they could not even process a cash deposit into their frozen bank account so they could authorize my multiple entry visa into the country. (Finally, they waived the fee.)10

As the country struggled to climb out of the rubble of devalued rubles, the explanations of Russia's economic troubles were as varied as the commentators. For example, in searching for an instant economic miracle, Russia went too far in attempting to adopt western principles of a market economy. Alternatively, in trying to avoid confrontations with the Russian robber barons who systematically plundered Russian financial reserves, industrial assets, and natural resources, the government was too timid in enforcing privatization regulations that were essential for decentralization of economic power. Other theories blamed the communists in the Duma who tied the hands of government officials, decried inept procedures for controlling capital flight from the country, bemoaned inherent inefficiencies in operating defense plants as producers of civilian goods, and ridiculed reliance on obsolete manufacturing equipment and an aging workforce.11 Finally, cold warriors have been accused of recklessly

manipulating western aid so they could socially engineer a “pure” private property market to replace evil communist institutions. 12 There is no single explanation of what went wrong. All of these theories contain elements of the underlying causes. Reluctant to accept responsibility for the economic mess, Russian politicians have repeatedly singled out two American institutions as major contributors to the collapse of their economy.

The now discredited Harvard Institute for International Development —and particularly its Director Jeffrey Sachs—have been portrayed as designers of misguided economic reform packages. According to critics, their scheme allowed ousted Soviet political leaders to become economic czars presiding over massive industrial assets through a poorly conceived privatization process. Sachs defended his role in the Russian newspaper, Novoye Vremya, in December 1997. In an article entitled “The Immaculate Conception of Capitalism in Russia,” Sachs regreted that his name was linked to Russian reform. He argued that reform was impossible in view of the widespread corruption within the Russian government that had no analog in the last 50 years of the world's history. This theme is often repeated by other western reformers, who just a few years earlier urged that Russia move ever faster in changing its economic system despite well known corruption problems.13 Skeptics of the approach of the Sachs' team believe they were trying to apply cookie cutter solutions developed in Latin America and Poland to a Russia that was quite different in geography, history, and mentality. Neither the Russian government nor the Russian people were prepared to adopt his formula for shock therapy.14

Another American villain identified as contributing to Russia's 1998 economic problems, in the view of at least a few leading Russian economists, was the New York City-based investment firm Goldman Sachs and Company. With ex-President George Bush in their entourage, the American financiers announced in Moscow in the spring of 1998 their plan for financial “deals” to generate badly needed money. After an initial success in brokering Eurobonds for the Russian government, the firm reportedly designed the scheme for Russia to sell short-term treasury bills, or GKOs, that earned high near-term interest rates in exchange for paybacks of the principal over a long-term period

of many years. But this and related efforts to raise cash for the near-term were not sufficient. The Russian government stopped debt payments—whether they be principal or interest—leaving the holders of the GKOs with nearly worthless paper. At the same time, according to press reports, Goldman Sachs turned a healthy profit on each of its deals.15

The story is undoubtedly far more complex. Still, many Russian officials resent the firm's speed in quickly selling securities it had bought and had advocated for other investors. These critics doubt that the company was concerned about the long-term interests of its client, namely the Russian Federation.

The Russian government cannot escape its share of blame. It clung to shortsighted western advice that reform means reform at the macro level—get the government's policies right and good things will happen. Not enough attention has been paid to microeconomics. Broad policies, however perfect by western standards, cannot have the desired effect within a society that does not behave according to western rules, rules that recognize the legitimacy of financial gains from risk taking and that are based on enforcement of regulations. For innovation, economic incentives also matter at the micro level (the level of the firm and the institute which provide the environment for innovation) and at the microscopic level (the level of the individual researcher and the entrepreneur who promote innovation). Make no mistake, government actions to encourage an appropriate macroeconomic framework are important. They simply are not adequate, particularly if nurturing technologies with economic payoff is a goal.

Against such a discouraging background mosaic, what can be said about the relationship between the state of the economy and opportunities to profit from introducing improved and cheaper products into the marketplace? Clearly, the healthier an economy the more likely that funds will be spent by government and industry on developing products of the future. A healthier economy means more cash is available to companies that are interested in product or process improve-

ment, to banks that desire to expand their loan operations, and to entrepreneurs who need new equipment to upgrade their activities. Also, a healthy economy is more likely to attract risk takers from home and abroad who are looking for ways to use technology to increase personal wealth.

But the relationship is not so jigsaw puzzle neat. For example, in the early 1990s the Russian oil companies had large sums of money to invest. Historically, the state had supported widespread oil exploration activities. When the privatized companies took over, it was reasonable to expect they would invest in the sustainability of their activities as the older oil fields began to run dry. However, such reasoning made little sense to the financial magnates who controlled the companies.

It seemed far more profitable for the companies to invest available funds into Russian bank accounts that paid 50 percent interest than to take a chance that oil exploration would in a few years lead to large returns. It was even more profitable for the companies to establish their own banks for their funds—and they did. Is it any wonder that new fields were not ready to come on line as production began to slip? By 1995, oil production had dropped to one-half the levels in the late 1980s, underscoring predictions of communist politicians in the oil-producing regions that new capitalistic approaches would lead to economic disaster.16

Thus, it is not only the state of the economy as reflected in macro-economic indicators that is important in providing an environment for innovation. It is also how those individuals who control financial resources perceive the utility of innovation in enhancing their personal futures. Surely if a large oil company cannot appreciate the importance of opening new fields, less well endowed industrial enterprises will lean toward options other than research and development for investing funds in ways that maximize returns. While innovation has earned its place in the West as an important vehicle for enhancing profits, in Russia—where financial outlooks are usually measured in weeks and not years—the economic framework simply has not been conducive for research and development investments.

Even more basic, as a result of the economic crisis, most scientists

and engineers receive minimum wage, if they are paid at all; and their firms and institutes have outdated equipment and limited supplies needed for productive work. Why should they press forward to solve technical problems of interest to nonpaying customers? Also, they have little enthusiasm to search for technological solutions to problems they cannot solve without upgraded laboratories. As researchers have repeatedly demonstrated during recent years, under such conditions they prefer to spend their time looking for ways to put food on their tables tomorrow—driving taxis, refurbishing apartments, and tending their gardens.

Because of the weak economy, most manufacturing plants are stagnant; and few companies are interested in financing new product development activities. As to government support for research, the Ministry of Finance, with little tax revenue, places research near the bottom of its priority list even if proposed technological innovations appear to be certain winners. Finally, the economy is perceived internationally to be foundering on rough shoals, and few foreign investors will risk funds against a distant hope that they will provide the impetus for new customer spending patterns. As we have seen, even well-endowed Bristol-Myers Squibb required cost sharing by the U.S. government before investing in Akrikhin.

In short, technological innovation is never without costs. Someone must put up the funds in advance to allow it to take place. With Russian companies unable to meet their payrolls and with foreign investors hesitant, industry interest in funding innovation—however cost-effective in the long run—has waned; and linkages between manufacturers and researchers have atrophied badly. Also, few rich Russian angels are willing to take a chance on backing a new idea when there are more certain investments to multiply profits from other activities.

With reduced tax collections and a mounting foreign debt, the Russian government has very limited funds to fill the void and support technology innovation. The Ministry of Science and Technology tries to ensure that its modest funds will mean the difference between a few research results languishing in the laboratory and these results reflected in commercial products. However, the state of the economy clearly reduces the success rate for projects financed by the ministry.17

That said, what can a Russian company with no excess cash do when it needs technical help to maintain even its current technological levels? It usually draws on the skills of its own personnel who are on the job, with or without paychecks, and with or without appropriate technical credentials for the needed fixes. Alternatively, it searches for outside specialists who will accept some of the company's products as pay for services. For some companies, barter is the only route for obtaining technical support.

The degree of non-cash transactions among Russian firms and institutes reached a startling level in 1998. Transactions based on barter, use of promissory notes, trading debt for goods, and debt swaps represented between one-half and two-thirds of inter-enterprise commerce. Bicycles for diesel fuel, trucks for electricity, cranes for rolled steel, and of course vodka for spare parts are but several examples of the way of life of Russian industry.

The stories of employees being paid in the goods that they produce edge toward a state of ridiculousness. Somehow, employees at a brassiere factory are expected to accept brassieres as compensation and then develop a distribution system for selling a commodity that can no longer compete with western brassieres. A dozen employees at an automobile plant have the opportunity to accept joint ownership in a new car as their paychecks, with the only alternative being personal faith that the company will someday pay them in devalued rubles. A television plant ensures that employees are provided with an abundant supply of new television sets that technologically are at least one generation behind the Sony models most Russians covet. Even in the army, units in the north are paid in licenses for hunting reindeer. They can then sell the antlers and eat the meat.18

One widespread practice of local authorities is the issuing of promissory notes to be used by enterprises in a specific region for facilitating non-cash trade. Under this scheme, when an enterprise cannot find a customer who has items of interest as payment for goods of the enterprise, the enterprise can accept promissory notes for its products and

then try to use them for acquiring useful items produced by other enterprises of the region. While early in 1998 Moscow authorities had been hopeful that this practice could be phased out to protect the integrity of the ruble, the subsequent collapse of the ruble convinced many regional leaders that reliance on their promissory notes is far safer than reliance on the ruble. Meanwhile, the tax service attempts to gain control of its rightful cut of the value of transactions. But it has not yet been interested in brassieres; and it is having trouble finding cash.

In 1997, a Russian commission investigated payment of taxes and released the “Karpov Report” on the extent of trade in goods and promissory notes of over 200 of the largest firms. In the case of the Berezovsky coal mine, the report pointed out that in 1997 the mine had gross revenues of 551 billion rubles—335 billion were in promissory notes, 215 billion in barter, and only one billion in cash. This was an extreme case of operating outside the cash economy. However, only 16 percent of the surveyed companies received more than one-half of their revenues in cash.19

As to tax obligations and required contributions to the pension fund, the companies paid about 7 percent in cash. The remainder were settled either through offsets against unpaid debts by government agencies for their purchases or through provision of goods or services. For example, the Gorky Automobile Plant, which employs about 100,000 workers, actually overpaid its federal taxes in 1997, but not in cash. It wrote off the entire payment against debts owed to the plant by government agencies which received its vehicles. What did the government do with those thousands of automobiles?20 As to local taxes, a similar pattern of payment of taxes through offsets against goods and services provided to city departments is revealed in data from the city of Zarechny in the Urals, with cash revenues flowing to the city limited to 7 percent of the city's income. 21 In short, if you do not have cash to pay your local taxes, volunteer to repair the roof of the schoolhouse and deduct the value of your labor.

The Karpov report indicates that the true value of the promissory notes is much less than the declared value—in some cases only 20 percent. This overvaluing by enterprises of payments made to each other

and to the government has led to the description of the Russian economy as a virtual economy. The economy simply does not exist in the size that it is portrayed in the statistics of the Russian government. 22 Despite this distorted portrayal of the economy, non-cash payments have been essential in keeping enterprises operational.23

Meanwhile, most research institutes have innovations from years past and from research efforts in progress that they hope will eventually lead to commercial successes. Moving these innovations to market requires some level of financial support—for adapting technologies to specific customer needs, for pilot runs, and even for marketing expenses. But the institutes have few tangible items to offer employees or suppliers as alternatives to cash, and the emergence of a barter economy has hampered their operations considerably.

A lonely non-cash success story in settling debts of research institutes is the provision of technical services by a few institutes to utility companies in exchange for electricity, gas, telephone service, heat, water, or waste disposal. The Kurchatov Institute for Atomic Energy, for example, has set up an arrangement with the gas monopoly, Gazprom, whereby the institute has paid its $15 million annual gas bill by providing technical services that will enhance the operating efficiencies of Gazprom.24 And the Research and Engineering Institute for Water Supply, Sewage Systems, Hydraulic Engineering Structures, and Engineering Hydrogeology, located in Moscow, has a well-heeled customer in the city administration that is struggling to maintain the functioning of its water and sewage treatment facilities. The institute is able to trade a variety of advisory and repair services in exchange for many types of communal services provided by the city's departments.25

Do such technical services contribute to an institute's innovation capability? Probably not very much, but many research institutes have no choice but to become low-tech service centers in exchange for payments to them in other types of services that they can use (e.g., power and heat). Until economic recovery leads to greater reliance on cash transactions throughout the country, such service activities will continue to displace innovation as focal points within research institutes.

Of even greater significance for many research institutes, the budgets at all levels of government are being starved by the lack of cash

payments to the tax collectors. This means there is less state money to support research, or any other activity that is traditionally the responsibility of government. In the words of the Karpov report:

The negligible amount of cash paid to the budget raises the question: How does the budget receive any cash at all? The answer: From customs duties, personal income taxes, privatization revenues, taxes on retail and wholesale trade and banking—but not from industrial enterprises which are traditionally regarded as the main taxpayers (emphasis in report).26

The widespread practice of non-cash payments declined in 1999 as devalued rubles became more available. But it will not end soon— nor should it end abruptly lest more production activities come to a halt.

One intriguing exit strategy from this morass is the “gas ruble” proposed by Gazprom for the fuel and electricity industries. Under this scheme, Gazprom would issue gas commodity bonds (or gas rubles) which the Ministry of Finance purchases from Gazprom with loans from abroad. The ministry would distribute the gas rubles to state-funded enterprises. The enterprises would then use the gas rubles to repay their debts to Gazprom; and Gazprom would use its own “real money ” to pay back taxes, thus enabling the ministry to pay off its original loans while reducing the level of unpaid debts throughout the industry. Variations on this scheme have also been discussed for the agricultural sector. 27

But, until the level of cash payments for goods and services and for taxes increases dramatically, research institutes will continue to be at a disadvantage in participating in economic activity.

Since the early 1990s, the Ministry of Science and Technology has advocated greater attention to small technology-oriented businesses that can be started and sustained by individuals with modest investment capabilities. The important role of small businesses in the West as suppliers of goods and services to large and medium high-tech companies has intrigued Russian officials. While the role of small firms that are dedicated to technological innovation will be discussed in subsequent chapters, small businesses as providers of low-tech goods and

services have been pathfinders for important economic reforms on a broad front and deserve special attention in considering economic trends.

The number of small firms registered in Russia in 1998 was about 900,000, reportedly employing 12 million people. Of course, many individual entrepreneurs do not register with the authorities, often to avoid taxes; and the total number of persons earning a portion of their income from loosely defined small business activities is estimated at 20 million. Some businesses thrive. Others barely function. Some registered businesses are transient, lasting but a few months before disappearing even though they may remain on the official records of the government. While extremely important for a decade in a number of fields, such as restaurants, transportation, and retailing, small business activity in the industrial sector is still many years away from maturity.28

In 1993, I came to respect Russian business instincts during an encounter with a small businessman who owned a brew pub. His first and probably most important decision was to locate his establishment behind well-guarded walls in an exclusive housing area of Moscow. I joined the owner at a well-appointed table in his upscale restaurant next to the brewery, where his beeping Japanese cell phone was always at the ready. The heavy security inside and outside the restaurant surely meant that this 22 year-old entrepreneur was tightly linked to some branch of the Russian mafia.

Nevertheless, his business strategy was impressive. First, he established and aggressively promoted his core business of brewing beer, using the most modern brewing equipment available. The vats and piping from New Jersey, with a glistening, antiseptic appearance, produced a high quality product at reasonable cost. The silvery equipment had an equally important byproduct—excellent photo opportunities for advertising a cutting edge business.

He spread additional financial resources over five small companies rather than building one large company—expanding and contracting each one as the market or changing government regulations dictated. Given Russian labor laws, shifting personnel between companies was easier than trying to reorganize a large company. If price regulations made bakery products in state stores more competitive than his

cakes and breads, he would simply expand activities at his sawmill. If rich Russians stopped building wooden dachas, he would increase candy production. His workforce was sufficiently flexible that layoffs were unknown, and the need to provide surge capabilities at any particular facility was easily handled. He could always count on beer sales to keep his empire solvent.29

Even if a Russian businessman has a marketable product, such as beer, there are formidable barriers to sustaining a profitable undertaking. Purchase of land where facilities can be built is not yet an established practice. Seldom are there desirable buildings simply waiting for buyers. Thus, rental of space is usually essential; and squabbles among claimants have become legendary in Russia. The tax system has been in a state of flux for years, both in revisions of the code and in enforcement of what appear to be the regulations at any given moment. On a daily basis, droves of inspectors from health, fire, sanitary, architectural, and other government agencies visit small businesses and for a fee provide stamped papers necessary for conducting business. Crime and corruption haunt any activity that involves the handling of money, particularly small businesses that cannot hire large security forces or provide heavy bribes to ensure that no one hassles them every day.

Despite Russia's economic difficulties, small entrepreneurs—whether they're interested in producing beer, construction materials, or computer software—have before them many yet-to-be-realized opportunities for providing a multitude of goods and services that are currently imported. Indeed, if the small business sector is to become a vital part of the Russian industrial economy, the government should, as a start, strictly enforce import duties already required on a wide range of items that are within the grasp of individual Russian entrepreneurs. 30

Regional and local leaders are taking an increasingly aggressive role in attempting to promote development of new technologies within their jurisdictions, particularly as the secrecy wraps begin to come off hundreds of previously closed enterprises and institutes throughout

the country. Some governors and mayors have obtained a measure of control of activities at federal research facilities on their territories. Others have gained various types of federal tax exemptions as a basis for attracting investments. Still others have established regional facilities that conduct innovative activities at the behest of regional leaders.

While most governors want the maximum amount of autonomy, whether dealing with small businesses or large enterprises, they inevitably seek financial support of all types from Moscow. But, with a sputtering economy such support is slow in coming. Thus, the regions have become accustomed to fending for themselves with a gradual weakening of the role of the central govermment. With four different prime ministers in Moscow in the span of 12 months during 1998 and 1999, the governors were seldom challenged as they exerted greater leadership for their regions.

The outlook for spinning out of economic decline seems brightest in regions rich in natural resources, particularly with a greater emphasis on processing resources prior to export. One “region” with no natural resources, however, stands out as perhaps the biggest success story —namely the city of Moscow. The Far East economic region and the Samara region provide other perspectives on the need for diverse and pragmatic approaches to technology development throughout the sprawling country.

Moscow's economic revival has been the result of a money-oriented effort led by a mayor who has been good both for the city and for dozens of research and educational institutions within. The impressive accomplishments of Mayor Yuri Luzhkov have little to do with neo-liberal market theories. They simply reflect pragmatic urban corporatism as a realistic alternative to abstract economic principles.31

In 1992, potholes in the streets of the capital were so large that entire cars sank into deep pools of water during heavy downpours. Not a flower could be found in the parks; babushkas had scavenged them and were selling them on street corners. Metal handrails along crumbling concrete stairways leading to metro stations were peeling

from rust, and uncollected garbage was burning everywhere in overstuffed bins. These and other ugly scenes made lasting impressions on foreign visitors.32

By 1996, Moscow had become a new city. The roads were newly paved. The parks had begun to sparkle. Fresh paint was in evidence everywhere, and modern glass buildings were dotting the landscape. The revitalization of an ailing metropolis of 10 million people stood in stark contrast to conditions in other cities.

Luzhkov won an important early battle with the federal government, insisting that privatization in Moscow be in the hands of local authorities. Consequently, the city could assess assets of Moscow's enterprises at a high level. Luzhkov and his associates adopted their own brand of privatization—demanding high prices for the sale of city assets. They boasted they earned more money from privatization than did the federal government throughout the entire country.33 At the same time, the city has retained title to much property within the city limits, with the right to grant long-term leases of up to 49 years.

Still, most of the city's early revenue came from taxes on corporations. Due to a quirk in Russian law, corporations paid federal taxes through the local government of the city where their headquarters were located. Thus, the gas and oil companies paid taxes through and to Moscow until 1997, when the federal government began a campaign to stop this practice. But by then, Moscow had benefited from billions of tax dollars flowing into its coffers.

To ensure that the wealth is not spread too thin, Moscow has retained the Soviet system of residential permits (propiska). The permits, ostensibly based on birthplace, marriage commitments, and employment location, help keep undesirable residents out. At the same time, city officials welcome those who enrich the city's revenues.34

A large portion of the working population of the city—perhaps one-half—are directly or indirectly on the municipal payroll. One example of a mega-employer, under the direct patronage of the mayor, is the holding company AFK Sistema, with assets of $2.6 billion and a payroll of 50,000. This company is the owner of the Moscow city telephone company, Moscow newspapers, a TV station, major department stores, automobile plants, oil companies, and other enterprises.35

An often overlooked tactic of a mayor with an insatiable appetite for capital renovation has been his habit of borrowing from the West. Now the city is saddled with repayment of more than $1 billion in loans.36 Nevertheless, it has so many assets, geographic advantages, and friends in the federal government that this debt burden will not seriously challenge its economic leadership among the cities of Russia.

The bustling laboratories of the firm Radon, financed by the city to clean up radioactive waste sites in Moscow and also hired by other cities in the Moscow region, provide convincing evidence that science is not forgotten by the city administration. I had known about the radioactive hospital waste deposited decades ago in the lot adjacent to what is now the American School. But the dozens of other spots in the city glowing on the maps of Radon raised apprehension about every vacant lot and each pile of rubble.

Just prior to my visit to Radon, I had walked through the dormant radiation chemistry laboratories at two leading research institutes of the Academy of Sciences and the Ministry of Atomic Energy, both closed because of lack of funds to pay electricity bills. This was not the case at Radon, where research was booming and achievements were reported in the best scientific journals. With access to resources of the city, these scientists were secure in their professional futures. They were not only providing services in cleaning up wastes, they were carrying out important research that would improve capabilities of the company.

As to state-owned research facilities and universities located in Moscow, the city government has taken many initiatives to supplement their meager budgets. The mayor has a special affinity for biotechnology. Also, ecological research projects are especially popular with the mayor and his constituency and are generously supported.

Many time zones to the east of Moscow, the cities of Yuzhno-Sakhalinsk, Vladivostok, and Khabarovsk are largely on their own in dealing with the economic crisis. Aside from the presence of units of the Russian army, navy, and air force, the links with Moscow are often

hard to find. The cities are three of the administrative centers in a loosely defined territory, the Far East economic region.

Some geographers extend this territory westward to include over one-third of the country. However defined, it is sparsely populated, with even the broadest geographic boundaries encompassing a population of less than two-thirds the number of inhabitants of Moscow. It is punctuated with a handful of small cities. It has vast reserves of land-based natural resources and a coastline that should provide easy access to rich marine resources. However, the downturn in the economy during the past decade has devastated the population and has brought a near halt to most efforts to modernize the technological base of the territory.

A bright star on the horizon is the discovery of oil off the cost of Sakhalin Island and the influx onto the island of hundreds of specialists from Marathon, Arco, Shell, and a dozen other western companies poised to help recover the oil. With them come sophisticated drilling and pumping technologies and the latest techniques for survival in extremely harsh climates. Already the local government has been the beneficiary of millions of dollars in taxes that help strengthen the infrastructure for the 600,000 residents of the island.37

Another favorable development has been the increase of timber and processed food exports from the area near Khaborovsk following the fall of the ruble in August 1998. However, the outlook remains bleak in this area as the Ministry of Defense does not pay for the ships and planes that are built. Also, “butterfly” companies quickly register, conduct their business, and then fly away before tax payments become due.

Fisheries are at the top of the list of important industries in the Far East economic region, and there has been growth in the catches after dramatic declines through the mid-1990s. In recent years, the stocks of salmon and other fish have become a poacher's mecca, with illegal catches said to rival legal catches in value. One report from the Kamchatka Penisula indicates that fishermen may be earning more than $20,000 per year and that one of every five residents has a car.

At the same time, there often is no heat or light in some areas of Kamchatka. Authorities cannot afford the costs of providing these ser-

vices. The shipyards have lost much of their repair business to Korean competitors due to the heavy Russian tax burden, and the municipality has lost tax income from the shipyards, from its workers, and from the poachers.38

Overall, the situation in the Far East region is grim, as illustrated in a report from the village of Dappi 200 miles north of Khabarovsk, where 400 people have no work and no place to go. Since no one pays wages, logging has been abandoned, and the tractors that dragged logs out of the woods have departed. The single remaining priority is keeping children clothed and fed. The only growth industry in the entire district is employment of young women abroad—as prostitutes. While the word is out that a free ticket to Japan means bondage, desperate young women feel that somehow they will be able to escape from this fate and are willing to risk going abroad in preference to facing another miserable winter in villages like Dappi.39

Many Far Eastern enterprises, cut off from their historical partners in other parts of the country, have been faced with the choice of either closing their doors or finding profitable markets in neighboring countries of the Asia-Pacific rim. In a few cases, enterprises have developed limited export opportunities in the fishing, mining, forestry, and machine building sectors. They are hardly of sufficient scope, however, to restore the standard of living to a tolerable level.

At the same time, Russian enterprises in the Moscow region and in the Urals that had supplied goods to the Far Eastern region—metals, oil products, and consumer items, for example—have been forced to look elsewhere for customers, often with little success. It has become cheaper for Far Eastern enterprises to buy oil from the Persian Gulf, oil products from the United States and Korea, and even gasoline from Japan than to pay for deliveries from Russian suppliers thousands of miles away.

Also contributing to the increased isolation of the region has been an 8,000-fold increase in the prices of rail and air travel since 1991. Graduates from universities in the western part of the country seldom go east. If they do, they will be unable to return home on holidays or possibly ever.

The economic woes have greatly weakened a research base that

had been heavily financed from Moscow. The decline in production, capital investment, and population in the region will continue to bode ill for researchers. Some have left their laboratories, others are content in providing testing and repair services, and still others continue their research despite the lack of regular paychecks.

Two frequent complaints from researchers have been that market demand calls for mundane engineering services, not scientific endeavors, and that privatization of government research institutes has placed technical assets in the hands of entrepreneurs interested only in immediate returns.40Clearly, research for the sake of science must give way to research for economic development, although a payoff period that is too short may drive the best researchers from their laboratories. Also, unless Moscow devotes greater resources to supporting the transportation and communication infrastructure of the region, which are important for both researchers and commercial interests, much of the region 's potential will remain very distant from the marketplace.

Located in the heartland of Russia about 1,000 miles southeast of Moscow is Samara, the capital city of a region with a long heritage of carefully guarded military production. The region is rich in natural gas and is a major oil producing and refining area. Samara is home to several important aerospace enterprises, and the city is an important transportation hub of the lower Volga River basin. The region has attracted investments from the likes of General Motors, IBM, Corning, and Bayer.

Russia's largest automobile manufacturer, Avtovaz, is the leading employer in the region, reporting increased sales during 1999. Avtovaz claims important strides in moving to cash rather than barter transactions. Also, the company contends it is reducing the crime and corruption that have plagued the sales force of every automobile manufacturer in the country; but machine gun-toting guards are still in evidence near outlet facilities.

Following the devaluation of the ruble at the end of 1998, a number of companies in the Samara region took advantage of opportuni-

ties to expand sales on the Russian market as imported products became prohibitively expensive. For example, Nestle promptly increased its investment in the country's largest chocolate factory, Rossiya, and expanded production lines. As one simple example of cost control so often neglected in Russia, the company shifted from increasingly expensive imported sugar to less expensive Russian sugar.

Overall, the region is doing much better than most areas of the country, with salaries perhaps double the national average. At the same time, despite a few bright spots, the industrial base is on the decline. Most companies did not take advantage of the window for expanding the customer base in Russia as foreign products became more expensive following the financial crisis of 1998. The urgent need to upgrade outdated production lines is reflected even at Avtovaz, with unreliable electrical systems and corrosion plaguing many owners of the cars it produces.

Small firms, which currently account for 10 percent of the region 's production and should be wellsprings of technology, are on the rise. However, only 2 percent are seriously involved in innovative activities, with most seeking immediate profits through trading and public catering. Credit lines for activities that will not turn profits for more than a few months are simply difficult to find regardless of the long-term potential of the proposed investment.

The higher education system is well established in Samara, with a number of strong universities that have long been attuned to the region's reliance on well-trained engineers. Most engineering graduates find employment locally, with Avtovaz among the highest paying companies and offering new graduates $120 per month. Although most graduates find jobs, there is substantial unemployment and underemployment for technical support personnel, as the engineers provide their own supporting services in order to keep busy.

Still, the market demand for high-tech products or services is very weak. A startling example of desperate efforts to market high-tech products came to light in 1999. A former defense factory attempting to convert to civilian products began producing titanium shovels, virtually giving them away. While the women who shovel snow rave about

the light weight of these shovels, this can hardly be categorized as a conversion success story.41

There are similarities in Russia between the economic situations in 1999 and in 1992, when the specter of financial instability—and particularly rampant inflation and delayed paychecks—also clouded all proposed policies. But there are particularly disturbing trends in the contemporary scene. The population is numbed by its inability to buy goods that fill the shops, reconciled to sustained widespread unemployment, and disenchanted with repeated promises of a brighter future. A swollen international debt and a substantial internal debt demand larger repayments. A virtual economy provides the government with less budgetary resources than advertised. All the while, stubborn financial kingpins will not easily give up resources they have stolen and those they plan to add to their treasuries.

In October 1999, the highly respected McKinsey Global Institute brought a surprising degree of optimism to predictions over the industrial future of Russia. In a detailed analysis of 10 industrial sectors, McKinsey economists and consultants concluded that about three-quarters of the country's industrial assets are still usable. They added that from a microeconomic point of view there should be no insurmountable constraints that would prevent Russia from quickly joining the ranks of the advanced economies.42

However, this optimism must be tempered with the harsh realities of life in Russia in 1999. Almost 40 percent of the population had crossed below the poverty level of incomes of less than $34 per month, and the purchasing power of average salaries had declined by a third from 1998 to 1999.43While reliance on barter may be slowly declining, production levels gradually increasing, and tax revenues also rising, many years of economic growth will be needed to provide an acceptable standard of living for most Russians.

Can current policies be fine tuned to improve economic efficiency? At present, there are so many distortions in the economy that fre-

quently less efficient producers of commodities win out in competitions with more efficient producers. These distortions include unequal taxation, different energy payment requirements for different consumers, privileged access to government procurements and land allocation, arbitrary red tape requirements, and tolerance of stealing trademarks and false advertising. Such distortions are often traced to policies and practices at the regional and municipal levels. Better overarching laws and enforcement at the federal level are the obvious responses, but the distortions are deeply ingrained and will be difficult to uproot.44

What about a major upsurge in foreign investment as the eventual salvation? Should the Russian government sell the rights to a small portion of Russian natural resources—say 5 percent—with trillions of dollars eventually flowing into the country and thereby saving the day?45As indicated on Sakhalin Island, small steps are being taken in the oil sector. But a massive sale of Russian resources seems out of the question for political reasons alone.46

Finally, why should Russia be expected to carry the debt burden of the former Soviet Union? Western creditors eased the burden for Poland 's repayment of its old debts. Russia is unable to collect the $140 billion owed to it by North Korea, Cuba, Afghanistan, and other Soviet debtors. Nevertheless, western institutions will resist letting Russia off the hook, noting that it acquired not only the Soviet debt but also most of the Soviet military assets, its overseas bank accounts and embassies, and other riches. Still, these acquisitions are dwarfed in current value by the debt. A degree of relief of the debt that is hobbling the economy could be important in the evolution of a prosperous Russia as an alternative to a struggling Russia with a nuclear arsenal.

Looking at broader solutions, in the early 1990s, only Japanese experts stood up among the foreign advisers to warn that government protection from imports and/or government subsidies would be necessary to sustain Russian industrial economic growth. They argued that stability depended on equitable wealth-sharing among the Russian people, which meant jobs in the manufacturing sector. They predicted that if only a few hundred thousand people are busy and rich while

tens of millions are idle and poor, political turmoil will soon destroy economic policies.47

Japanese specialists have had great difficulty watching the evolution of an economy that seems to encompass all the undesirable developments in Latin America. Latin American experiences of high inflation, a heavy debt burden, negative economic growth, low levels of foreign investment, depressed industrial research and development, weak electronics industries, deteriorating higher education, and growing disparities in income distribution certainly have a familiar ring in Russia.

The Japanese reflect on the advantages of an Asian model that enabled Japan to leapfrog into the new technological age and then concentrate on the transition to a less centrally driven economy. They acknowledge that Japan had a relatively reliable civil service to carry out policies, that capitalism already had a history in Japan, and that the country was aided by an unexpected market demand associated with the Korean War. However, they point to the advantages of the huge technical workforce in Russia and the underexploited markets in most of the countries of the former Soviet Union.48

The marriage of government and industry interests that transformed Japan after World War II also attracts interest among Russian financial magnates who control many industrial purse strings. Of course, they twist the approach to serve their personal interests. They have called for an Industrial Policy Board akin to Japan's Ministry for International Trade and Industry, apparently believing that they could serve on such a board and then direct the Russian economy. European governments too seem increasingly interested in a heavier governmental hand, one that could ensure economic stability. However, they underscore the importance of concurrently attacking graft and theft and insisting on the rule of law, even if the law is not the western model.49

There will be violent criticism, particularly in Washington, of policies that divert from Russia's original path to reform. The free marketeers will argue that any move toward central planning and control—cluding the Japanese model—will lead to government confiscation and misuse of assets, simply providing opportunities for an-

other wave of corrupt officials to steal even more. But it is not at all clear that the level of corruption inside the government would be any worse than the current degree of corruption led by forces outside the government in failed efforts to separate private and public sector activities.50

In general, potential innovators believe they would see more of their ideas incorporated into manufacturing activities if the government played a more effective role in supporting and promoting their research activities. The technological achievements of the Soviet Union cannot be denied. Much of the Soviet philosophy remains dogma among many inventive people of the country—a philosophy that emphasizes that, once technologies are demonstrated, they will somehow find their way into the manufacturing sectorif the government helps. A partial return to this philosophy, at least on an interim basis, seems essential to reverse the current course of technological decay of state assets and provide the country with new capabilities for economic growth. But coupled with such a move should be insistence on transparency of financial dealings, early bankruptcy procedures when even subsidized activities are not viable, and mechanisms for enforcing contracts.

The Russian research community has cause to be apprehensive about receiving its due within a free market economy. An example of a no-win situation is the development in the Urals of a process to leach gold from underground ore deposits. Using technologies developed to mine uranium, a Russian research institute in Zarechny has succeeded in leaching gold valued at $1 million dollars from veins located on municipal property and stockpiling it on the surface, with many times that amount of gold readily available underground. The city has enacted legislation that provides for one-half the revenues from the gold mine to be devoted to support of research activities. But the banks cannot buy the gold because they have no money, and the notion of exporting the gold has raised grave governmental concerns. All the scientists want is some of the money so they can get on with the job of extracting more gold and can use some of the income to restore the research and development base of the region.51

In sum, both Russian and international policy officials should

adopt a long-term perspective of at least 10 years in designing economic and industrial policies and programs intended to energize the Russian economy rather than the three-year formulas of the past. They should recognize that, at least for this transition period, the economic model will differ substantially from western approaches. The Japanese post-war model may be the most relevant experience in attempting to jump start the manufacturing sector. However, as emphasized in Chapter 10, anti-corruption measures must be buik into the model.

The eventual goal should be a technology-driven market economy that enables Russia to be an important participant in the global trading system. The alternative is a Russian economy increasingly dependent on exports of arms and natural resources and imports of equipment and consumer goods that stymie employment opportunities and delay indefinitely an increased standard of living in Russia.52 The challenge is to design an approach that harnesses the creativity of the owners of Akrikhin, of investors in breweries, and of the gold miners of Zarechny in pushing toward the goal of a market economy. But the push must be responsive to the immediate needs of the population while restoring the technological base of the country on a step-by-step basis as quickly as possible.

1. Sharon LaFraniere, “Russian Crisis Saps Companies' Hopes,” The Washington Post, August 29, 1998, p. A13. For difficulties faced by U.S. companies see David Lynch,”U.S. Companies in Russia,” USA Today, September 8, 1998, p. 11b.

2. Katy Daigle and Matt Bivens, “The Way Out,” The Moscow Times, September 8, 1998. For different viewpoints see Vladimir Milovidov, “Solving the Russian Economic Puzzle,” Investing in Russia, Moscow, January 1998, pp. 16-19, and Lawrence H. Summers, “Russia in 1998: Building a Pluralist Market Economy,” Presentation to US-Russia Business Council, Washington, April 1, 1998.

3. Richard C. Paddock, “Russia Lied To Get Loans, Says Aide to Yeltsin,” Los Angeles Times, September 9, 1998, p. 4.

4. Stanley Fischer, “The Russian Economy at the Start of 1998,” The Potential of Russia, vol. 1, no. 1, Moscow, 1998, p. 39. Also, Michel Camdessus, “Russia and the IMF,” Presentation to the U.S.-Russia Business Council, April 1, 1998.

5. Ibid.

6. “What's in Kiriyenko's Anti-Crisis Package,” Russia Review, vol. 5, no. 13, July 17, 1998.

7. Ibid.

8. Michael R. Gordon and David E. Sanger, “IMF Comes Through. Now, Will Russia?” Russia Review, vol. 5, no. 15, August 14, 1998, pp. 12-14.

9. See for example “Russia: Is There a Solution?” Business Week, September 7, 1998, pp. 28-29. Also see Neela Banerjee, “The Bottom Falls Out in Moscow,” U.S. News and World Report, September 7, 1998, pp. 10-12.

10. This situation came to light when I applied for a multiple-entry visa.

11. See for example “Special Crisis Report, What Went Wrong?” Russia Review, vol. 5, no. 17, September 25, 1998, pp. 12-35.

12. John Lloyd, “The Russian Devolution,” The New York Times Magazine, August 15, 1999, p. 38.

13. Jeffery Sachs, “The Immaculate Conception of Capitalism in Russia,” Novoye Vremya, no. 49/97, December 14, 1997, p. 14.

14. See also D.W. Miller, “An Anthropologist Faults Academics for Offering ‘Misguided' Assistance to Former Soviet-Bloc Nations,” The Chronicle of Higher Education, November 27, 1998, p A16. This article summarizes relevant parts of a book by Janine Werdel, Collision and Collusion: The Strange Case of Western Aid to Eastern Europe 1989-1998 (New York: St. Martin's Press, 1998). My personal interactions with members of the Harvard team also confirm this observation.

15. Joseph Kahn and Timothy L. O'Brien, “How Goldman Sachs |andsymbol| Co. Aided Russia's Collapse...and Got Rich,” The St. Petersburg Times, November 3, 1998, pp. VI-VII.

16. Discussions in Tyumen and Moscow with Russian specialists, June 1997.

17. Discussions in Moscow with officials of the Ministry of Science and Technology, June 1999.

18. Discussion in Moscow with Russian specialists who follow the Russian press, April 1998.

19. “On the Causes of the Low Collection of Taxes, General Reasons for the Nonpayment Crisis, and Possibilities for Payments by Russian Enterprises,” Interagency Commission under the Chairmanship of P.A. Karpov (Karpov Commission), Moscow, December, 1997.

20. Ibid.

21. Discussions with a participant in the activities of the Zarechny city council and a review of that city's budget documents.

22. Clifford G. Gaddy and Barry W. Ickes, “Russia's Virtual Economy,” Foreign Affairs, vol. 77, no. 5, September/October 1998, pp. 53-68.

23. Stephen S. Moody, “The Virtual Monetary Fund and Russia's Current Industrial Expansion,” Foreign Policy Research Institute, Philadelphia, distributed by e-mail, August 20, 1999.

24. Discussion at Kurchatov Institute in Moscow, April 1998.

25. Discussion at the Ministry of Science and Technology in Moscow, July 1998.

26. Karpov Commission, “Russian Enterprises.”

27. “Gazprom Lobbies for Gas Ruble,” The Russia Journal, May 31-June 6, 1999, p. 15.

28. For background on small businesses see, for example, Irina Khakamach, “In Search of the Middle Class,” The Potential of Russia,Moscow, vol. 1, no. 1, 1998, pp. 46-48. Also see “Troubles of Small Business,” Argumenti i Fakti, No. 46, November 1999, p. 8.

29. For a more detailed description, see Carole D. Schweitzer, Russian Lessons (Arlington, VA: Cameron Publications, 1997).

30. Discussions in Moscow with Russian economists, November 1998. For a typical and overly optimistic assessment of developments in the regions by governors, see “Investment: Expectations Boom, A Roundtable with Six Regional Governors,” The Potential of Russia, Moscow, vol. 1, no. 1, 1998, pp. 13-22.

31. Blair Ruble, “The Rise of Moscow, Inc.,” Wilson Quarterly, Spring, 1998, pp. 81-87.

32. For an expanded description of these impressions see Schweitzer, Russian Lessons, pp. 149-152.

33. Judith Matloff, “A Russian Leader on Porridge, Czars, and Real Estate,” The Christian Science Monitor, February 25, 1999, p. 11.

34. Ruble, “Moscow, Inc.”

35. Paul Klebnikov, “The Slick City Boss or the Rough Edged Populist General,” Forbes, November 16, 1998; “The Meteoric Rise of Luzhkov's System,” The Russian Business Review, February 1999, pp. 10-13.

36. David Hoffman, “Economic Crisis Reaches Moscow, City Must Restructure Debt,” The Washington Post, May 9, 1999, p. A18.

37. “Commercial Overview of the Russian Far East,” BISNIS, U.S. Department of Commerce, October 1998.

38. Yulia Latynina, “When a Rich Land Has No Heat or Light,” The Moscow Times, August 25, 1999, p. 8.

39. “Black Winter in Russia's Far East,” Russia Review, January 1999; Comments by experts from American University during seminars in Washington, D.C., and Boston, February, 1999. Also see Gillian Caldwell, Steve Galster, Jyothi Kanics, and Nadia Steinzor, “Capitalizing on Transition Economies: The Role of the Russian Mafia in Trafficking Women for Forced Prostitution,” Transnational Organized Crime, vol. 32, no. 4, Winter 1997, pp 45-46.

40. Yaroslav N. Semenikhin, “Economic Change in the Far East and the Role of Science and Technology Institutes,” Russian Science and Industrial Policy, Moscow and the Regions, A Conference Report, Georgetown University, Washington, D.C., March 24-25, 1997, pp. 205-217.

41. Joan Agerholm, “Samara Region: In the Vanguard of Change,” USAID, Moscow, September 1999; “Sweetly Flows the Volga,” Economist, June 5, 1999, p. 38; Comments concerning the shovel were made by Vladimir Shorin at a conference at the National Academy of Sciences, November 1999.

42. Unlocking Economic Growth in Russia, McKinsey Global Institute, Moscow, October 1999, Chapter 4.

43. Comments by Clifford Gaddy at a conference at the National Academy of Sciences, November 1999.

44. McKinsey Global Institute, Growth in Russia.

45. V.I. Vidyapin, “Russia's Choice, a Socially Oriented Market Economy,” Management of Technology, Russian-American Workshop, Russian Academy of Engineering, Moscow, 1996, pp. 79-85.

46. Jim Hoagland, “Russia on the Brink,” The Washington Post, September 10, 1998, op-ed page.

47. Seminikhin, op. cit.; William Odum, “Losing It! Our Russian Illusions, Crushed by Reality,” The Washington Post, September 6, 1998, p. C1.

48. Alexander A. Dynkin and Natalia N. Ivanova, “The Russian Innovation System: Painful Adjustments in the Process of Economic Transition,” Russian Science and Industrial Policy: Moscow and the Regions, A Conference Report,Georgetown University, Washington, D.C., March 24-25, 1997, pp. 45-59; “The Strange Rage of Boris Yeltsin,” The Economist, March 28, 1998, p. 15.

49. Daigle and Bivens, op. cit.

50. Gerald Hough, Presentation at Woodrow Wilson Center, Washington, D.C., October 18, 1999. He argued that corruption within government may be preferable to corruption outside government.

51. Discussions in Bellagio, Italy, with specialists from Zarechny, Russia, September, 1998.

52. Discussions in Moscow with directors and deputy directors of three Russian economic research institutes, November 1998.