#43 | July 16 - 30, 1998  

by Matt Taibbi

"[The stock market crisis is]...totally unrelated to average Russians and rich Russians. It's a media event. It means a couple of brokers won't be able to put gas in their Blazers or Jeeps."
 - Bruce Bean, American Chamber of Commerce

Actually, Bruce, it goes a little beyond that. You might want to ask a few of those brokers where they're going in those jeeps this week. A lot of them are splitting town.

You heard it here first (and isn't that amazing?): on the heels of Russia's economic meltdown, the financial community in Moscow has been struck by a wave of layoffs, with some firms cutting their research and brokerage departments by as much as half. The carnage has struck big houses and little ones alike, and a disproportionate number of the victims have been eXpats, who've been told to take their big salaries and hardship compensation packages and sink their fangs into someone else's vein for a change.

Renaissance Capital cut 41 people from its rolls last week. Alfa-Capital cut its research section from 43 people to 23, and isn't finished cutting. Flemings UCB has let 15 people go in recent weeks, including six from the research department. Pioneer Investments has laid off a few, as did Troika Dialog. If you dig deeply enough, you'll find that pretty much every brokerage house in town has undergone some kind of staff reduction or reorganization in recent weeks.

The reason is obvious: Russia's capital markets are collapsing, and the volume of trading is now so low that brokerages simply don't earn enough to pay their higher-paid workers. Once the best-performing market in the world, Russia at its peak last year saw an average of about $100 million in trading per day. Now it's down to about a tenth of that- if that.

"The volume is now ridiculously low," said Peter Lovell of Alfa-Capital. "It's down to between $6-$12 million turnover a day. In fact, the volume of daily trading in the entire Russian market is only equal to about 2% of the General Electric stock traded in the States. Obviously, there's going to be some cutting back."

The layoffs are an important story because they demonstrate the level of pessimism about the Russian economy among people in the know. If hirings and firings are the ultimate indicator of an economy's well-being, then Russia's financial condition has taken a sharp turn for the worse. The recent staff reductions only happened once companies passed the point of no return, leaving any room for optimism behind. Most made the cuts after conservative revenue projections at the six-month mark foresaw horrific losses unless deep cuts were made. And there was no indication that things were going to get better. Significantly, a lot of the people who've been laid off have elected not to stay around to look for a new job.

"A lot of people have gone back West," said one well-known Moscow headhunter, who asked not to be named. "They sense that the economic situation is not going to improve in the next year and a half or so at least. So they're looking for better situations."

Such migrations actually aren't unusual in emerging markets, which tend to run in cycles, with booms and busts. Traders talk about these cycles as though they're a normal phenomenon, but the truth is that emerging markets players usually hang in there until total catastrophe sets in-as happened in Mexico or Indonesia, for instance. The fact that some traders are bailing out on Russia now is an indication that the Russian capital markets are already at or near Defcon 5.

The only reason the eXpats who've remained at their jobs can have any public confidence at all right now that their positions are safe is that Russia has not yet devalued the ruble. Virtually everyone agrees that if devaluation occurs, the banking sector will be wiped out and the capital markets will more or less cease to exist. That's why brokers are talking reverently about the ruble; they know it's their last chance.

"I don't think anything bad will happen," said Grant Sinitzin of Flemings UCB, who was a trader in Mexico before the peso devaluation gave him "Mexican hotpants" and he relocated to Russia. "As long as they avoid devaluation, we're okay."

Lovell put it more bluntly. "If there's a devaluation, this government will fail," he said.

The suddenly very conspicuous dependence of a community that just a year ago was sitting pretty atop the biggest boomtown in the world on handouts from the IMF has given rise to some gallows humor in the financial world.

"What do you mean, crisis?" asked Kirill Surikov of Pioneer Investments on Monday, just after the IMF bailout package was announced. "Didn't you hear? The IMF just officially declared Russia a first world nation."

That the livelihood of the Russian financial community now depends entirely on the continuation of a policy that would bankrupt the country without international help should be a major story for the city's press corps, but for some reason Western journalists have left it alone.

In fact, one of the more striking things about this story is that in a city packed with foreign business reporters, it was left to a biweekly nightlife paper to be the first to report that the expatriate community's best and brightest are being laid off in droves. Few stories have exposed the foreign community's see-no-evil, hear-no-evil attitude as effectively as this layoff business, which literally everyone has been talking about (even the bartenders at the Hungry Duck have been keeping a finance community body count) but no one has written about.

The most atrocious performer in all of this, of course, is the Moscow Times, a newspaper whose core readership is exactly the expatriate financial community that's been taking the heat. The Times in the past few weeks has elected to pursue the remarkable strategy of running front-page pieces on the World Cup and the Youth Games virtually every day, apparently having judged the mass firings of its target readers a non-news event. Why anyone would read that paper for anything other than the sports scores is pretty much beyond us now. They didn't even put the Tokobank collapse in the news section, for Christ's sake.

Part of the mayhem in the financial community is just plain bad luck: there were a number of mergers in the months running up to the crisis, and a lot of the layoffs came as part of planned restructuring. However, even the biggest houses admit that the mergers were made a lot more painful by the financial meltdown.

"Most of the cuts were planned, but the pencil was certainly a lot sharper because of the current environment," said Andrei Bogolubov, a spokesman for Renaissance Capital, which is still completing its merger with MFK. In any case, if you want to pinpoint the week that Moscow first started turning into an eXpat ghost town, you just missed it. For confirmation, wait for the Moscow Times headine: "Those Aren't Tumbleweeds on Tverskaya."

The IMF bailed Russia out with a 17.1 billion emergency loan on Monday, but make no mistake about it- this government is doomed, and the country is faced with its most pressing political crisis since 1991. The daily Moskovsky Komsomolets even reported Monday that President Boris Yeltsin's own daughter, Tatiana Dyatchenko, teamed up with Yeltsin aide Valentin Yumashin over the weekend to try to convince the doddering President to step down before he was hurt in a coup. A few days before, Yeltsin himself had rounded up a host of power structure types to show that he was well-guarded against a coup; since then, many Russian newspapers have reported in near-hysteria that not only are rumors of coup attempts flying throughout the Kremlin, but that politicians in the Presidential administration are speaking openly of the impossibility of keeping their man in office much longer. Miners continue to protest outside the White House, and on the rails in Siberia; new austerity programs promise still more draconian cuts in social spending, and meanwhile, nothing anywhere is getting any better. This week, we're doing what the Moscow Times has refused so far to do, which is look at some of the more disturbing aspects of the crisis. We're so annoyed, frankly, that the local "paper of record" has been so lax at its job, forcing us to completely eschew being funny and actually cover the news, that we've decided to send a bill to interim editor Geoff Winestock for the trouble. He better pay up- this is depressing work. In the meantime, read up about layoffs in the financial sector, the myth that the financial crisis didn't affect business and about the collapse of the consumer goods market, all signs that those of us eXpats left in Moscow could be sinking in the world's most dangerous submerging market:

by Mark Ames

Common sense would tell you that a financial meltdown of the scale witnessed here this year would have a devastating effect on nearly every strata of society. And no shit, too. It's not like we have to dig too far deep into the history books to find a precedent. Just pick up today's paper: massive strikes in South Korea, political unrest and exploding poverty in Indonesia, Thailand doomed to at least three more years of a depression. These were the lucky ones, the chosen few who were granted mega-IMF bailouts. To deny that Russia is heading down the same drain, only, possibly deeper, is sheer insanity, no less deluded than the attempt to deny, up until last month, that Russia was in a crisis.

To understand the extent to which this harshest, and perhaps final leg of Russia's ten-year financial crisis is affecting the population, consider what is happening in the imported consumer goods trade. Imports make up an astonishing 60% of consumer goods sold hereÑmeaning that they are the consumer goods industry. The consumer goods industry links the Western bank to the small-town, provincial Russian purchaser, via a sophisticated network of businesses and service companies. And what people in that chain are telling the eXile is that the situation has never been so dire. Financing has dried up, squeezing the entire distribution and sales network. And on the other side, the consumer no longer spends. Sales of non-essential goods are almost non-existent. It's a disaster of such enormous, Indonesian-style proportions that it seems impossible that anyone could miss it.

The imported consumer goods market has developed, up until now, as a kind of managed trade board. Most Western multi-nationals have local representative offices to sell and market their goods. They sell goods to preferred, established Russian importers. The importers take care of clearing customs and warehousing the goodsÑoften several hundred thousand to several millions of dollars worth of goods at a time. Distributors from various regions and territories buy the goods on some kind of consignment, usually a month-credit, and wholesale them to retailers in their region. Thus, the whole system is dependent on the credit of each link in the chain.

That chain was disrupted with the financial crisis. Importers, instead of pre-paying for their goods, often use letters of credit from their Russian banks. A letter of credit from a bank essentially tells the seller that the money for the purchase is sitting in the account and the funds will be released when the goods arrive or are custom-cleared. The advantage of using a letter of credit, instead of pre-paying for the goods, is that it cuts the time down between paying, receiving the goods, and selling them. Thus, money is freed up. At the very top of the credit food chain sits the Western banks. Most multinational consumer goods companies require that a Russian bank's letter of credit be guaranteed by a Western bank. Up until a few months ago, Western banks with experience in Russia were willing to guarantee those letters of credit issued by Russian banks. Now, according to sources in the industry, because of the financial crisis, those Western banks have stopped guaranteeing the Russian banks' letters of credit. No Western bank wants to be exposed in Russia, especially after the bitter Tokobank lesson. Tokobank was the showpiece Western-style bank, and it turned out to be little more than a smooth front for a street hustling shell game. What shocked due-diligence happy Westerners most was learning first, how many bad and risky hedges could be kept off-books, and secondly, how little anyone, to this day, knows about the extent to which Tokobank is overleveraged and in debt.

Menatep Bank Press Secretary Pavel Yuresev, admitted, "We have observed a marked rise in difficulty in obtaining Western bank backing for letters of credit and other trade financing over the past few months."

He said that Monday's announced IMF loan, along with the recent GKO restructuring, appear to be making a positive impression on Western banks. However, it always harder to rebuild confidence than to shatter it. The other source of financing trade and import, taking out loans, has also become virtually impossible to obtain, and prohibitively expensive.

According to Igor Podubny, director of Technoservice, a large cigarette-importing company, short-term dollar borrowing rates have soared from 30% to 45%, while ruble rates have shot up to 80%. "Western banks are afraid to work with the Russian banks, so they won't guarantee the Letters of Credit now," he said. "And it's too expensive to borrow."

This has led to a situation where importers are leaning on the wholesalers to pay for the goods in a much shorter period of time. That means they have to pay before the goods are sold, hurting their ability to finance larger consignments. The same holds true for much of the retail market.

"No one pays up front for goods in this business," said a marketing manager for a large consumer goods company who asked to remain anonymous. "The whole system is built on credit, and on giving people time to sell the goods before paying for them."

Now, with importers strapped for funds to finance their operations, they've been forcing wholesalers to pay for the goods in much shorter timeframes.

"The distributors are forcing wholesalers to pay within a week of delivery. It's really killing them," said an anonymous Western source from a top multinatoinal FMCG. "The whole sales and distribution network is being squeezed."

That leaves wholesalers with less cash to finance their operations, meaning that retailers have to pay them up front for goods. So the distribution and sales network is undergoing a shock and contraction. Which means, everything now relies on spending habits of the consumer.

And this is where the news gets really ugly...

"The importers and distributors I know who deal in household appliances and electronics tell me that sales today are one-eight or one-ninth of what they were six months ago," Podubny said. "It's much worse for non-essential goods, especially luxury goods. Consumers just don't have money anymore, because they're not being paid salaries and companies are going broke. Consumers are afraid."

Igor Sedletsky, the official trade representative for Pioneer Electronics in Moscow, confirmed that his company has also seen sales plummet. "It's bad," he said. "We began to notice it in February. Now, we can say that sales are about 50 percent lower than they were a year ago this time." He said that most of his competitors are in the same boat. As for his Russian importers, he said, "What can we do? Our policy is that all goods must be pre-paid, and we don't arrange credit for our clients. They're going to have find a way to survive."

A month ago, the French household appliances maker Moulinex described the situation in Russia as "brutal." Sales fell so sharply that earnings shocked European investors, and the stock plunged to 52-week lows.

"Russia is in a financial crisis," Moulinex's chairman, Pierre Blayoa, said last month. "When salaries aren't paid, there isn't much that we can do."

Podubny feels comparatively lucky: "People are still buying the essentials: food, vodka and cigarettes. I'm not as worried as other importers I know." But his margins are being squeezed by the higher costs of financing, while competition is forcing prices down. He can't pass his higher costs onto the consumers because their meager spending "power" is barely flickering, and because, in yet another example of how Russia is shit-out-of-luck, increased supply from local production is driving the retail price of his goods down. If there's been one area of relatively significant investment into the Russian economy, it's been in the consumer goods: soft drinks, food, cigarettes, candy, bubble gum. Also, last year's economic bubble convinced once-cautious multinationals to enter the market with guns blazing. Just as that excess supply is hitting the market, the consumer is broke and credit has dried up. It's a triple-whammy of dire news, making it that much more dangerous to be Boris Yeltsin.

Most people, from overseas-based investment bankers to local importers and FMCG sales people, agree that they haven't seen anything this scary before. Cigarette sales, which normally boom in the summer, have gone flat. Non-essential goods are collecting dust. It's a crisis within a crisis, a depression within a depression.

The danger is that if the financial squeeze continues, and if the payments crisis isn't solved, then wholesalers and distributors could go under, disrupting or destroying the tenuous distribution network developed over the past six years. A disruption or collapse of the distribution network, at a time when people aren't getting paid and they're blocking railway lines, could mean that OMON troops are going to have to practice their forehand strokes and overhead slams, because come autumn, that practice will pay off.

So the financial crisis isn't just a media event affecting a small circle of filthy rich bankers. It's just as destructive and all-encompassing as any other.The real media circus, then, is the show where three reporters hold their hands in different poses on their heads: "I see nothing"; "I hear nothing"; "I say nothing."

Sergeant Schultz would be proud.

eXile readers may recall that exactly one month ago, our newspaper assumed the role of official media organ of the American Subtropical Liberation Army, the radical American wing of the Subtropical Russian Party. In order to further the party's central goal of establishing a minimum temperature of 25 degrees celsius across the territory of Russia-and the world- we decided to focus our efforts on reforming one Senator Frank Murkowski, Republican from Alaska. We sent Murkowski a lengthy list of demands, asking, among other things, that he effect the separation of Alaska from Canada and move the state south to the Hawaiian islands. We gave him two weeks to fulfill our demands, darkly instructing the staid rape-the-environment Republican that failure to do so would result in harassment and sarcasm. Last week, we decided to check and see if Murkowski had fulfilled our demands. We called the National Weather Service outpost in Anchorage, Alaska, and learned that the temperature there was 57 degrees Fahrenheit- far below the limit of 25 celsius degrees (77 Fahrenheit) we'd set. Angered that our instructions had been ignored, we upped the ante. First, we sent off our platform and a list of our demands to every major newspaper in Alaska; some were sympathetic to our cause and agreed to cooperate (see insert). Next, we sent another letter to Murkowski. What follows is a transcript of that second letter: TO: Senator Frank Murkowski FROM: The Subtropical Liberation Army Senator Murkowski: Words cannot describe how disappointed we are in your failure to comply with our last set of demands. As a result of your insolence, we are now forced to make good on the first of our threats: the use of sarcasm. Second, we announced in our previous letter that we were prepared to make use of rare ex-Soviet climatic technology, which would give us the ability to send an individual-sized cloud after you that will follow you wherever you go, and snow on you. Because you have failed to comply with our requests, we have launched a test cloud to convince you of our seriousness. In the course of the next few days, you will notice a cloud overhead. There may be several clouds, but only one of them will be ours. This cloud will follow you, but will not snow on you. However, we want you to be aware that should it become necessary for us to do so, we can arrange for that cloud to snow. In connection with your failure to comply with our earlier demands, we have now added a series of additional demands. If you comply with these by July 25, 1998, we will withdraw our threat of snow and sarcasm. Our additional demands are:   1) That you publicly endorse Jesse Jackson for President.   2) That you introduce a bill that would make all Brooks Brothers suit purchases tax deductible for members of the Nation of Islam.   3) That you ban the sale of Rogaine in your home state.   4) That you propose marriage to NASCAR race driver Darrell Waltrip, and take a honeymoon drive across South America in a cream-colored Dodge Challenger with crushed velvet seats, listening to Pearl Jam and Stone Temple Pilots cassettes.   5) That you wear a Lone Ranger costume to your next Indian Affairs Committee hearing.   6) That you replace the pronoun "I" with the pronoun "me" in all public discourse, as in "Me submit to you, Mr. Vice President..."   7) That you introduce a bill on the floor of the Senate that would declare Washington, D.C. a national disaster area, and name author Douglas Copeland mayor by decree. Revoke Copeland's secret service privileges, then force him to tour the city wearing a white hood. Film the tour from an AWACS aircraft. If you do not comply with these demands, we will be even more sarcastic in our next letter. We are not joking. This means you. Sincerely, Matt Taibbi Commander-in-Chief Mark Ames Chief of Ideology American Subtropical Liberation Army

The following is a transcript of our phone call to Senator Frank Murkowski's press secretary, Chuck Kleeschulte.

Hi Matt, Greetings from The Bush Blade, your neighbor across the Bering Sea. Cool!-Or should I say Hot-Your American Subtropical Liberation Party. We hassled Murkowski, ourselves most recently on global warming. Problem-how hot or cold is 25 degrees Celsius? Americans are too brain-dead to operate outside of feet, inches, miles, and Fahrenheit. I'd do the conversion-and probably get it wrong. Will print your letter and Terms to Murkowski in this edition of our monthly state-wide newspaper. CHEERS! Ingrid at The Blade

PART II FINANCIAL COVERAGE Hey, don't ask us. We don't get it either. Maybe it was the French victory at the World Cup, but the folks over at Ulitsa Pravdy have once again returned to their Salvador Dali-esque techniques, apparently feeling that it is now avant-garde to report the opposite of what the story is about in the headline. Take a look at the headline at right and tell us if we're missing something. If we are, please call and let us know. Maybe it's time to invest in the market. Until then, we're hanging this article on our wall, upside down. It looks good next to our Dali sketch.

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