Russian businessman German Sterligov carries hay at his farm in the Istra region near Moscow
One of Russia’s original commodities traders, German L. Sterligov, carries hay at his farm in the Istra region some 80 km (50 miles) from Moscow February 3, 2009. Sterligov who blew his fortune on a failed presidential bid is convinced barter is back in vogue. He says his scheme to trade products online, unveiled as Russia faces its first recession in a decade, has already grabbed the interest of some companies. His failed 2004 presidential bid put him at odds with the Kremlin, leading to more than four years of self-imposed exile on a farm near Moscow.

Have Car, Need Briefs? In Russia, Barter Is Back
BY Ellen Barry / February 8, 2009

Moscow — Does the Taganrog Automobile Factory have a deal for you! Rows of freshly minted Hyundai Santa Fe sport utility vehicles are available right now. In exchange — well, do you have any circuit boards? Or sheet metal? Or sneakers?

Here is a sign of the financial times in Russia: Barter is back on the table. Advertisements are beginning to appear in newspapers and online, like one that offered “2,500,000 rubles’ worth of premium underwear for any automobile,” and another promising “lumber in Krasnoyarsk for food or medicine.” A crane manufacturer in Yekaterinburg is paying its debtors with excavators. And one of Russia’s original commodities traders, German L. Sterligov, has rolled out a splashy “anti-crisis” initiative that he says will link long chains of enterprises in a worldwide barter system.

All this evokes a bit of déjà vu. In the mid-1990s, barter transactions in Russia accounted for an astonishing 50 percent of sales for midsize enterprises and 75 percent for large ones. The practice kept businesses afloat for years but also allowed them to defer some fundamental changes needed to make them more competitive, like layoffs and price reductions. It also hurt tax revenues. The comeback is on a small scale so far. The most recent statistics available, from November, showed that barter deals made up about 3 to 4 percent of total sales, according to the Russian Economic Barometer, an independent bulletin. Nevertheless, economists are taking note. “Russians are so arrogant that they never cut prices,” said Vladimir Popov, a professor at Moscow’s New Economic School. By turning to barter systems during an economic downturn, he said, “you are hiding your head in the sand.”

It would be hard, however, to dissuade business owners who see barter as a point of light on a bleak financial horizon. Among the most upbeat of them is Mr. Sterligov, who, just as the credit crunch brought most business deals to a halt, shoveled $13 million into the Anti-Crisis Settlement and Commodity Center. Mr. Sterligov, 42, is one of the great characters of Russian capitalism. In his mid-20s, on the eve of the Soviet Union’s collapse, he was a freewheeling, chain-smoking commodities trader surrounded by leggy assistants. But Mr. Sterligov sat out the oil-fueled prosperity of recent years. After a failed run against Vladimir V. Putin in the 2004 presidential election, he retreated to a log house outside Moscow, opting for the beard and boots of a Russian shepherd. In August, intimations of the financial crash lured him out of the woods. He plans to use a computer database to create chains of six or seven enterprises having difficulty selling their products for cash, in which the last firm on the chain would pay the first in a single cash transaction.

It is the kind of multiparty barter that rose to prominence in the 1990s, when managers of factories across Russia devised complex barter chains to keep the maximum number of enterprises in business when none had cash to pay their bills. A computer, he said, can do the same job faster and more efficiently. “What was in the past will remain in the past,” Mr. Sterligov said in an interview last month, from the 26th-floor suite he has rented in a Moscow high-rise. “We are making a step into the future.”

So far, economists doubt that barter will grow to the level it reached in the 1990s. Earlier in the transition to a market economy, industrialists still had little monetary stake in their businesses but were dependent on the prestige that went with executive positions, said Andrei Yakovlev of the Higher School of Economics here. They had little incentive to cut costs, and barter deals kept them going for five years, he said. Now, business owners and managers “are really trying to reduce costs and reduce inefficiency,” Mr. Yakovlev said. Interest in barter, he said, is more likely to come from regional governments, which have the most to lose from high unemployment.

Barter is a side effect of tight monetary policy, said Mr. Popov, who is teaching at Carleton University in Ottawa. Russia is in the grip of a liquidity crisis. As in the mid-1990s, the government has made it a priority to shore up the economy by buying up rubles, hoping to avoid the panicky sell-off that comes with rapid devaluation. The ruble has gradually slid from 23.4 to the dollar in early August, before Russia’s war in Georgia, to 36.2 to the dollar last week. As a result, the money supply continues to contract, and some enterprises turn to barter to survive. “We are stepping for the second time on the same rake,” Mr. Popov said. “The second time is a greater sin.”

Long-term macroeconomic trends, however, are the last thing manufacturers were thinking about in recent weeks. The Hyundai factory in Taganrog, the southern seaport where Chekhov was born, rolled out a barter promotion on its Web site, offering to trade vehicles for “raw materials,” “high-tech equipment” or “other liquid goods, including finished products of various branches of industry.” Gleb Korotkov, a spokesman for the factory, said he could not be specific about what goods were meant, saying it was a “commercial secret.”

Barter deals seem to be spreading fastest in construction industries. Dmitri Smorodin, who runs a large St. Petersburg building firm, said he thought for two months before announcing in late January that he was willing to accept barter items — including food products — as payment for construction work. He said he hoped that adopting the strategy early in the crisis would give him an edge over his competitors. “Food we would happily accept, because it’s easy to sell,” he said. “Of course, money is always preferable.” In contrast, Uralchem, a fertilizer producer, refused payment in grain and beef, because the company conforms to international financial reporting standards in its reports to shareholders, said Andrei Kocherov, a spokesman for Uralchem, which was founded in 2007. The modern accounting system would preclude barter, he said.

Meanwhile, in Bashkortostan, a republic in southwestern Russia, local development officials publicly encouraged businesses to develop barter chains. Sergei Ryazanov, 30, a businessman from the Siberian city of Surgut, took out an advertisement a month ago offering to barter excess metal piping. So far, he has not been impressed by the offers he has received; he said people were not desperate enough to drop prices. He is looking for a truly liquid commodity, something universal, like gasoline. Even underwear, which, he said, “is much more liquid than automobiles.” He was intrigued by Mr. Sterligov’s idea, though he questioned the wisdom of planning a career in barter. “It will take him a couple years to get it right,” Mr. Ryazanov said. “And then, in two years, liquidity will be back.”

Nations turn to barter deals to secure food
by Javier Blas / January 26 2009

Countries struggling to secure credit have resorted to barter and secretive government-to-government deals to buy food, with some contracts worth hundreds of millions of dollars. In a striking example of how the global financial crisis and high food prices have strained the finances of poor and middle-income nations, countries including Russia, Malaysia, Vietnam and Morocco say they have signed or are discussing inter-government and barter deals to import commodities from rice to vegetable oil. The revival of these trade practices, used rarely in the last 20 years and usually by nations subject to international embargoes and the old communist bloc, is a result of the countries’ failure to secure trade financing as bank lending has dried up. The countries have not disclosed the value of any deals, and some have refused even to confirm their existence. Officials estimated that they ranged from $5m for smaller contracts to more than $500m for the biggest. Josette Sheeran, head of the United Nations’ World Food Programme, said senior government officials, including heads of state, had told the WFP they were facing “difficulties” obtaining credit to purchase food. “This could be a big problem,” she told the Financial Times.

Last week, Malaysia’s commodities minister, Datuk Peter Chin Fah Kui, said Kuala Lumpur had already signed a barter deal swapping palm oil for fertilizer and machinery with North Korea, Cuba and Russia. He said Malaysia was talking to Morocco, Jordan, Syria and Iran about other barter deals. “[Bartering] could be used for contracts with other countries that do not have the cash,” Mr Chin told the local press. “We can set the conditions for them to supply us with the raw materials that we need.” Thailand, the world’s largest exporter of rice, is discussing barter deals with Middle Eastern countries, including Iran. The Philippines, the world’s largest importer of rice, has secured rice needs for this year through a diplomatic agreement with Hanoi. The countries’ struggle to obtain credit to import food is boosting the price of domestic crops. Ms Sheeran said that prices of crops in some African countries were rising sharply even as international food commodities prices had fallen from last summer. The move to barter shows the global food crisis that started last year is far from over.

Thais to barter rice for oil with Iran
by Javier Blas + Tim Johnston / October 27 2008

Thailand on Monday said it planned to barter rice for oil with Iran in the clearest example to date of how the triple financial, fuel and food crisis is reshaping global trade as countries struggle with high commodity prices and a lack of credit. The United Nations’ Food and Agriculture Organisation said such government-to-government bartering – a system of trade not used for decades – was likely to become more common as the private sector was finding it hard to access credit for food imports. “Government-to-government deals will increase in number,” said Concepción Calpe, a senior economist at the FAO in Rome. “The lack of credit for trade could lead also to a resurgence of barter deals between countries,” she added.

Officials  and traders noted, however, that Iran was not typical because the US-led sanctions against its banks meant the country was facing difficulties financing agricultural trade even before the financial crisis. Bangkok’s commerce ministry said it was sending a delegation to Tehran to discuss the barter deal. Thailand is the world’s largest rice exporter, controlling a third of the global market, while Iran is one of the top 10 importers. Last year Iran bought some 600,000 tonnes of rice from Thailand, but so far this year it has bought only 60,000 tonnes as it has waited for prices to fall.

The price of Thai medium-quality white rice soared to an all-time high of above $1,000 (€798, £641) a tonne in May but has since dropped to $660 a tonne on the back of a large global crop. Prices are still well above their pre-crisis average of $250 a tonne. Chaiya Sasomsab, Thailand’s commerce minister, said Thai officials planned to travel to Iran by the middle of November to “discuss the specifications of oil and rice that would be exchanged”.

Agriculture officials such as Jacques Diouf, the FAO director-general, are warning that the financial crisis could deepen this year’s food crisis through its impact on credit availability. “Borrowing, bank lending . . . all may be compromised by a deepening financial crisis,” Mr Diouf said this month. With some developing countries’ official currency reserves facing serious depletion, particularly in Africa and Asia, agricultural officials said countries could barter more to avoid exacerbating their current account difficulties. Ben Savage, managing director at London-based rice brokers Jackson Son & Co, said the full effects of the credit crunch had not been felt as most of current food trade related to contracts signed before the crisis. “Trade finance has tightened sharply and, in many cases, letter of credit confirmation fees have doubled or tripled,” he said. “Exporters are reviewing the terms of payment they are ready to accept and credit they are prepared to give.”

Agricultural commodities traders said that the banking cost to confirm a letter of credit – a common instrument to finance trading – has risen to 3-4 per cent of the value of the contract, up from 1-1.25 per cent before the collapse of Lehman Brothers in September.

Barter Fits the Bill for Strapped Firms
By Raymund Flandez / February 17, 2009

Small businesses, squeezed for cash and unable to get loans, are turning to an ancient payment system: barter. Daniel Blank, creative director at Bureau Blank Inc., a New York graphic-design and brand-identity company, first used bartering when he started the company in 2004, because it was hard to get capital for a start-up. But he hadn’t had to barter since then, until now. For the past couple of months, Mr. Blank has been getting advice on running his business from Joe Hunt, a former ad-agency owner who has started Workforce Enterprises LLC, a document-solutions company in New York. For about two hours each week, Mr. Hunt helps Bureau Blank with its accounting and finance operations, among other things. In return, Bureau Blank is helping Mr. Hunt shape his company’s communications strategy, as well as designing the company’s logo and Web site. “It’s a result of the economy being a lot tougher now,” says Mr. Blank, who estimates the traded work amounts to about $10,000 worth of services. He adds: “I wouldn’t have done the project if I had to pay the cash.”

As small businesses find it impossible to borrow money and customers are slower to pay bills, the barter economy is becoming a crucial way for many companies to find the cash they need to keep operating. “It’s really of value to small businesses because it helps them to survive through the recession,” says Carmen Bianchi, director of the Entrepreneurial Management Center Business Forum and adjunct professor of family business management at San Diego State University. Atlanta Refrigeration Service Co. worked out a deal with a local sandwich shop that was 90 days overdue on a $1,500 bill: The sandwich shop paid $500 and agreed to cater lunch to Atlanta Refrigeration’s office five times over the next six months. Bartering is “critical to us in this recession,” says Dave Brautigan, chief operating officer of the Atlanta-based refrigeration company. “As more and more of our clients find themselves in positions where they cannot pay the bill in full, it becomes our responsibility to figure out how to get that money in.”

Although companies do bartering one on one, many deals are conducted via membership networks in barter companies, where technology and tracking software have modernized the centuries-old system. Typically, a small business sets up an account at a barter company, similar to a checking account at a bank, for a one-time fee. “Trade dollars” earned for services rendered are deposited into the account and can be spent on any product or service in the network. Companies regularly find others willing to barter via the barter site’s online directory of services, email newsletters, referrals or by contacting a firm’s account manager. On top of the setup fee, both parties pay the barter company a transaction fee of about 5% to 6% on each deal.

In 2008, about 250,000 North American companies conducted barter transactions worth more than $16 billion, according to the International Reciprocal Trade Association, a nonprofit based in Portsmouth, Va., that regulates and provides standards for modern trade and barter-service companies. The amount for small businesses climbed to an estimated $11 billion last year from $10 billion in 2007. David Wallach, the association’s president, says if the trend continues he expects a 15% gain this year to about $12.7 billion., a barter company in Savannah, Ga., has seen its sales grow — from $285,000 in transactions in the first quarter of last year to $464,000 in the fourth quarter. In addition, the number of transactions has doubled in the past six months, to 650 per month from 310 a month. NuBarter has 800 members, up from 400 a year ago. “Companies that had turned us down a few years ago are joining now,” says Gary Field, NuBarter’s president. Similarly, Seattle-based BizXChange Inc. saw a 40% increase in new members to 1,300 last year. Its transactions were up 55% to $5.5 million. of Orlando, Fla., saw membership rise 25%, or 400, to 1,600 clients in 2008 and finished the year with $16 million in transactions, up 8% from 2007. Scott Whitmer, FloridaBarter’s president, says members in the construction and real-estate industries were new to the network. Bartering has been helpful to new start-ups. Viscape Ltd., an Arlington, Va., company whose online listings site for vacation properties went live in July, would be hard-pressed to find the cash to send its executives to places to promote the company. So it has given clients free ads on its site — in return for discounted or free hotel rooms. “It’s all good for everybody,” says Dan Engfer, Viscape’s founder and chief executive. “They get an ad for more business. We get cheaper accommodations to do onsite PR stints.” Mr. Engfer, who says he has saved about $10,000 by bartering, would obviously prefer to sell the ads. But he didn’t feel like he had much choice. In addition, Mr. Engfer has used the bartering strategy to hire staff, who were all willing to take a pay cut to be able to potentially stay at the vacation properties that they sell. The 10 employees just have to pay their own way to get there, he says.

Other small-business owners who have done bartering in the past have seen their bartering activity increase, as their businesses take a hit. Eddie Bolch, owner of Specialty Moving & Delivery in Savannah, Ga., says he conducted about $10,000 worth of bartering last year, about 30% more than in 2007. Among other things, he was able to trade moving services for business cards, as well as to rent monthly storage units. Saving the cash was important, since the housing market’s woes cut his revenue to $140,000 in 2008, from $200,000 in 2007. Companies whose services aren’t widely used must be prepared to spend a lot of effort finding another business that wants its services in a barter deal. “It takes work,” says Matthew Weiss, president of Weiss & Associates PC, which fights traffic tickets on behalf of clients. “Sometimes, you call three painters…and they’re not interested.” Recently he wanted to hire a caterer for an event in downtown New York, but couldn’t find one wanting to barter for his services, so he had to hire someone out of pocket. “It doesn’t always work,” says Mr. Weiss, who is a member of two barter companies and saved his company $10,000 worth of barter transactions in 2008, including flower purchases and theater tickets. “And even if it does work, you must be willing to invest the time.”

“The Barter Hall of Fame is the highest honor the Modern Trade and Barter Industry can bestow. The honor recognizes individuals of the highest professional character and ethical conduct who are regarded as indisputable leaders of the Modern Trade and Barter Industry. An inductee must have a minimum of ten years of continuous Industry service and have made recognizable and specific contributions to the Industry as a whole.”


Ron Whitney Executive Director of the International Reciprocal Trade Association reported that Sirri Simsek will be formally recognized as the 2008 inductee into the Barter Hall of Fame in September, during IRTA’s 29th Annual Barter Convention to be held at the Westgate River Ranch near Orlando Florida. “Sirri Simsek has truly contributed to the trade and barter industry in a universally recognized manner,” asserted Whitney. “The industry is very proud to honor him.” Mr. Simsek is CEO of Turk Barter located in Istanbul, Turkey. The company has over 10,000 participating business clients that are active in domestic and international barter transactions through the Turk Barter system.

His other industry accomplishments include:
* Authoring an educational book titled “Moneyless Trade: Barter”
* Serving several years on the IRTA Global Board of Directors and Ethics Committee
* Applying swipe technology to barter transactions (the first)
* Working with the Turkish government securing standards of barter system operations for the benefit of all barter clients. “We congratulate Sirri for earning and receiving the Barter Hall of Fame Award” said IRTA President David Wallach. “He exemplifies all of the best qualities our industry has to offer.”

Current Members Of The Barter Hall Of Fame
1997: Paul Suplizio, Bob Meyer, Mac McConnell, Paul Enz
and Werner Zimmerman
1998: Susan Groenwald, Colonel Bill Austin
1999: Alan Elkin
2000: Steve Webster
2001: Allan Hackel
2002: Art Wagner
2003: Steve Goldbloom, Wayne Sharpe
2004: Andrew Federowski
2006: David Wallach
2007: Art Goehring

“To date, the only national barter company to totally reinvent organized barter is Merchants Barter Exchange. Because they do things so differently to all the other exchanges out there, they do not belong to either IRTA or NATE, as MBE does not allow its members to inflate prices, nor do they allow any part of the exchange to be paid in cash, which makes them the only ‘true’ barter company in the US today. In fact, MBE has made bartering similar to spending cash within a private bank or economy, which accounts for their incredible growth since their inception in 2000.”


Michael Linton
email : lcs [at] mars.ark [dot] com, mwl [at] openmoney [dot] org


Besides monetary benefits like avoiding the bank, barter or “LETS” (Local Exchange Trading Service) systems also help develop rewarding socio-economic relationships between people, giving manual labor the same value as professional services, by keeping track of hours, instead of dollars. While LETS system were originally designed to work locally, they are starting to reach a global scale. Traditionally, the problem with barter is that exchanges are not always possible between two people. The baker doesn’t need his house painted – but could use a seamstress. The seamstress doesn’t need any painting or baked goods, but needs a plumber. LETS solves direct-exchange bartering issues. Its uses an alternative time-based system as currency, allowing each member of a community to trade goods and services with any member they choose. Members are debited and credited as they give and take goods and services from one another, without ever having to “pay up”. Whether you’re a plumber, a psychiatrist or a babysitter, the “receiving” end of the barter simply agrees on how many hours the service is worth. Real money does enter the system, in cases where obtaining supplies, such as the paint needed to paint a house.

Worldwide alternatives
Started in Canada in 1984 by Vancouver-based Michael Linton, LETS systems developed simultaneously around the world, wherever a need for alternative economics presented itself. Today, there are thousands of LETS communities worldwide in almost every country, including Japan, Australia, the U.S., and South Africa. There are systems in nearly every province in Canada, and in many cases, several systems. While the original LETS idea is sustaining local communities, cross-border barter is catching on. UNILETS Online, an Internet-based LETS group, is seeing a lot of success by posting services on its site, and keeping track of hours through an online computer system.

The practical benefits of LETS are best seen in Argentina. The country’s economic crisis has led it to depend on them. Called “Trueque Clubs” (“Exchange Clubs”), they have nearly replaced the national money system. With strict government limits on bank withdrawals in an attempt to prevent the collapse of the financial system, barter became the only way to survive. Turmel reports that LETS systems in Argentina have grown exponentially, and are a good example of how the system works. “In Argentina, the last estimate was eight million members. It’s that or starve.”


Argentine Revolution / Spontaneous assemblies
by Jesse Walker / December 2002

Late last year, Argentina plunged into political turmoil as the economy collapsed, the president fled, and angry citizens rioted, at one point storming Congress and looting the legislature’s furniture. One can scarcely blame the rioters: The Argentine government, long enmeshed in crony capitalism, had been looting the citizens’ wealth for much longer. In 1998 its policies plunged the country into recession, and its economy is showing no signs of a recovery.

Since then, the outside world has been generous with detailed plans for reform. But even as Argentina’s rulers contend with competing schemes, of domestic origin as well as foreign, ordinary Argentines are enacting reforms of their own, building parallel institutions to fill the void left by the collapsing state. The most famous of these are the neighborhood assemblies that have sprouted in the cities, especially Buenos Aires, as an alternative to normal party politics. The function and makeup of these bodies vary from one assembly to another. They have naturally attracted the usual would-be vanguards of the socialist revolution, and many are, in the words of The Economist, mere “talking shops for bearded leftists.”

Others, however, have bought food in bulk at reduced prices, set up canteens and community gardens, opened neighborhood banks, negotiated with landlords and utilities, and sent their best tinkers to reconnect members to the power grid when they fall behind on their bills. The groups are organized with as little hierarchy as possible, and their most popular slogan, according to the Inter Press Service, is “All the politicians out.” Grassroots alternatives to the official economy have also emerged. Barter clubs have sprung up across the country, evolving quickly from cumbersome swap meets into a full-fledged alternative currency, with creditos redeemable for goods and services. At its peak, an estimated 6 to 10 million Argentines participated in the barter system, including doctors, manufacturers, and even railways.

As the barter network grew more popular, though, it began to fall prey to the same problems that were eating away at the country’s more established institutions. Crooks started printing creditos of their own, inflating the currency and prompting many people to abandon it. In September the clubs responded with a new credito that is supposed to be harder to counterfeit. Even if this manages to revive the movement, however, it faces another problem: With poverty rampant, the goods available for barter simply aren’t worth as much as they used to be. “People are just bringing in rubbish now,” one organizer complained to USA Today. “It’s all they have left.” Even so, the assemblies and the barter clubs have done more to revive Argentina than the central state, whose most notable achievements in the last year have been to devalue the currency, shoot protesters, and fail to deal with the nation’s frozen banking system and $14.5 billion debt.

by Michael R. Gordon / September 6, 1998

Russia’s currency may be tumbling. Its stock market may lie in ruins. But Yevgeny Shulman is used to operating without money. Mr. Shulman’s factory churns out valves for nuclear power plants and heavy industry. What his company receives in return is clear from a stroll around headquarters: Newly minted cars and trucks are lined up near small mountains of railroad car brake pads and raw metal. Mr. Shulman even set up a small chain of drugstores to sell the medicines he receives in his transactions with drug companies. ”This is the way everybody in Russia does business these days,” Mr. Shulman said. ”Of course, we’d prefer to receive cash. But it is barter that has saved us.”

Since the collapse of the Soviet Union, Russian companies have coped with a mountain of debt by developing a special brand of cashless capitalism. Now, with economic shockwaves rippling across Russia, companies are counting more than ever on barter to survive. Western economists ridicule the barter economy as a perversion of the free market, saying it distorts prices and makes a mockery of tax collection. But barter also reflects gritty determination to get by without the bank credits and investment capital that fuel Western-style capitalism and add a level of insulation during times of economic turmoil.

Virtually every Russian city has a tale of factory workers who are paid in glasswear or pantyhose. Teachers in Voronezh, 300 miles south of Moscow, recently received headstones; the Government wanted to give the teachers a product that is in constant demand and which they can easily turn into cash. Much of the barter economy, however, is far more elaborate: Russian industry increasingly depends on Rube Goldberg schemes in which goods are shipped across the country in complex swaps that can involve a dozen enterprises or more. ”The economy has already adjusted to the lack of money and is ready to abide without it,” the reformist Boris Nemtsov, now ousted from the Kremlin, predicted this summer.

No one knows the barter business better than Mr. Shulman, 43, the general director of Splav and a chain-smoking perpetual-motion machine. A small picture of Lenin stands in a corner of his office. The portrait, Mr. Shulman explains, belonged to his grandfather and is not an ideological badge. In four years he has expanded the company’s work force to 4,000 from 500 and raised revenues to $80 million a year — mostly by barter.

His preoccuptions these days are to start a project with Dresser Industries to make valves for the Russian oil industry and to weather the economic shock. Mr. Shulman founded Splav (which means alloy in Russian) after the collapse of the Soviet Union, hoping to carve a niche as a manufacturer of scientific instruments. That business faltered, but in 1994 Mr. Shulman and his partners acquired control of a valve factory in Novgorod, a storied city of cathedrals 300 miles northwest of Moscow. The factory had a long tradition of doing quality work but was bankrupt. Worse, its potential customers — state-owned Russian nuclear plants and privatized metal, chemical and oil industries — had no cash.

So Mr. Shulman assigned the best of his staff — some of whom ran factories in Soviet times — to rebuild the business without money. Today 50 executives work full time putting together barter deals, building transactions around debt-burdened utilities, rail lines, nuclear power plants and metal factories. Splav uses barter for just about everything. Railroad-car brake pads are used to pay rail tariffs, which have been kept artificially high to subsidize passenger travel. Barter gives Mr. Shulman some flexibility to maneuver around such pricing. ”For a lot of savvy people in business, barter’s a way to get around a rigid pricing system and make more sales,” said David Woodruff, a visiting professor at European University in St. Petersburg.

Splav has not paid a kopeck for its machine tools. Like the office furniture, they are also the fruit of barter. The company was even offered a small plane as part of one swap, but finally rejected the deal because the aircraft lacked the range to ferry the company’s barter negotiators around the country. Splav gives the Novgorod city administration Volga sedans in lieu of some local taxes. It pays the state road tax with excavators. Company medical insurance is paid for with ambulances.

During Soviet times, barter was used between Communist bloc countries. Ordinary citizens also learned to barter to maneuver around shortages. But it was only after the collapse of the Soviet Union that corporate barter soared. A Government survey of 210 of the biggest companies in Russia indicates that more than 70 percent of their receipts are non-monetary. But Splav cannot do entirely without money; it needs cash to pay salaries and federal taxes. The company had succeeded in limiting barter to 75 percent of its receipts, but Russia’s new financial crisis has increased its dependence on barter deals to 90 percent.

Barter plays the critical role is raising cash. Mr. Shulman’s customers may not be able to pay for his valves, but that does not mean the company cannot trade them for items that Russian businesses or consumers might actually buy with money. Cars, metal and diesel fuel, Mr. Shulman patiently explains, are ”liquid” goods. The catch is that the goods Splav receives often must be sold at a discount. That in turn forces the company to raise the price of its valves in barter terms. That practice, which is endemic, distorts prices and plays havoc with traditional accounting, critics say. Because Splav marks up its prices, it ships about $135 million in valves each year. But because it sells the goods it gets below market prices, it receives about $80 million in revenue. While that may appear to be a loss, Mr. Shulman figures his real profit is about 15 percent. ”It’s hard to talk about our revenues with exact figures,” he says.

Barter is also an enormous drain on manpower. The company’s barter teams work the phones, trying to line up deals. Even in an age of fax machines and computers, transaction need to be sealed in person, and working out the angles takes months. Company negotiators fly as far as Siberia, Kazakhstan or Ukraine to work out the contracts, which need to be signed and stamped at each of the links in the chain.

Anatoly I. Fedotov, 42, used to be a high-ranking factory manager in Soviet times. Like most former Communist managers, he says he had little experience with barter deals. Now his job is to keep the barter chains linked to support millions of dollars in sales to three nuclear power plants. Decked out in a deep purple suit, he explains that he hits the road after the preliminaries are worked out, armed with the authority to seal the deal. His job requires both business acumen and technical knowledge of the goods traded. ”The responsibility is pretty high,” he said. ”The transactions are huge.”

Top barter negotiators receive $1,000 a month, a hefty sum in provincial Novgorod and five times the wage of one of Splav’s factory workers. But the negotiators are the key to survival. ”Setting up a barter chain is a tedious and long process,” said Mr. Shulman. ”Can you imagine what we could accomplish if we could use these people to do something else? We could penetrate new markets.” Splav’s sale of quality valves to the Balakovo nuclear power station in southern Russia shows the lengths the company often has to go to. The Balakovo plant cannot pay in cash; it has more debtors than paying customers. For Splav’s ingenious staff, that was an opportunity, not a roadblock. After dogged discussions, they negotiated a barter chain that zig-zags through Russia and other former Soviet republics.

In return for the valves it receives from Splav, the Balakovo nuclear power forgives part of the debt for electricity from a factory in nearby Uralsk, Kazakhstan. The Uralsk factory then ships metal castings to a factory in Blagoveshchensk, which is situated in the Russian republic of Bashkiriya. The Blagoveshchensk factory makes a different type of valve than Splav. It carries the chain a step further by sending some to Splav. But the swaps do not stop here. Splav needs to take the Blagoveshchensk valves and turn them into a ”liquid” goods it can sell for cash. So Splav ships some to the Lipetsk Metallurgical Combine, south of Moscow. Lipetsk, in turn, provides sheet metal to a half dozen car and truck factories in Russia and Belarus. The vehicle manufacturers then ship cars and trucks to Splav, which sells some for cash and uses others to pay some of its taxes. It generally takes a year for Splav to receive payment for the valves it shipped to Balakovo plant. Nor is this the end of the chain.

Splav also sends some of the Blagoveshchensk valves to the Norilsk Metallurgical Combine in northern Siberia. In return it receives nickel and copper, which it sells in Russia and abroad. The current financial crisis has been hard on the company. It lost $2 million when the Government abruptly devalued the ruble and rescheduled its short-term debt repayments. Splav has frozen hiring, cut costs and forsworn exorbitant bank credits. But the barter team is still busy. Marching through one of his warehouses, Mr. Shulman pointed toward a pile of sheets of nickel, the fruit of a barter deal with Norilsk Nickel. ”That,” he said with evident satisfaction, ”is our strategic reserve.”


David Woodruff
email : d.woodruff [at] [dot] uk

Paul Seabright
email : seabrigh[ at] cict [dot] fr

Russians Bank on Bartering
by Richard C. Paddock / December 28, 1998

Every hour, thousands of shiny cans of beef and pork roll off the assembly line at the Smolmyaso cannery here. For the company, it’s better than printing rubles.

In this part of the world, Smolmyaso’s 12-ounce cans of meat are as good as cash. The cannery trades its finished product for cows and pigs to slaughter, aluminum to make the cans, equipment to can the meat, electricity to run the equipment, and cardboard boxes to ship the cans. It even pays its taxes in canned beef and pork. “Canned meat has become like the dollar here,” said Smolmyaso Director Vadim D. Skorbyashchev, holding up one of the cans. “These are our dollars.”

With the dismantling of the Soviet command economy, Western advisors and international lenders expected a modern market economy to emerge in Russia. Instead, a medieval system of barter has grown in its place. Economist Dmitri S. Lvov, an advisor to Prime Minister Yevgeny M. Primakov, estimates that 70% of Russia’s economy operates through the cashless exchange of goods and services. “For seven years, we have been brainwashed into believing we were headed for a market economy,” said Lvov, director of the Central Institute of Economy and Mathematics in Moscow. “Seven years later, we realize we have ended in a sort of feudal communism where forks and knives are exchanged for oil, and oil is exchanged for tires.”

Struggling businesses are compelled to negotiate complex trades that can involve more than half a dozen companies and span thousands of miles. Local governments finance their budgets with milk, lumber and vodka that they receive in taxes. Down-and-out commodities brokers who once negotiated major international sales now search the Internet for firms with something to trade.

Workers are paid in products they make or in goods their employers acquire by barter: Some get televisions, others clothes or sex toys or toilet bowls. Many try to sell their “wages” for cash by the side of the road or at open-air markets. Some who have been laid off get their unemployment benefits in the form of manure. “People gladly take manure and are grateful for it,” said Vyacheslav P. Mishchenkov, chief of the Smolensk regional employment service. “It may sound somewhat gross, but people who live in town and have small gardens in the countryside are happy to get manure. They can use it as natural fertilizer and get a good crop.”

Barter first became widespread in Russia in 1994, when investors, bankers and even factory managers found it more profitable to invest their money in get-rich-quick schemes than in manufacturing or agriculture, diverting cash that could have been invested in production. The system of cashless transactions has spread as well to most of the 14 other nations that emerged from the former Soviet Union, which are plagued by the same economic problems facing Russia. Gazprom, the giant Russian energy company, recently agreed to accept $1.3 billion worth of food and other goods from Ukraine and Belarus as payment for debts outstanding for natural gas.

With their reliance on barter, most Russian companies have weathered the economic crisis triggered in August when the government froze foreign debt payments and the ruble began falling to about 30% of its previous value. After all, the plunging ruble and the collapse of the banking sector have less significance to businesses that hardly deal in money anyway.

Even companies that officially have been bankrupt for a year have not gone under during the crisis. They keep turning out their marginal goods–usually at a loss–and trading them to other firms in similar straits. “In such conditions, barter is our only outlet,” said Mikhail G. Vyrov, the Smolensk region’s economic advisor. “Everybody understands that it’s one of the worst evils an economy can be possessed by. Barter corrodes, corrupts and eventually destroys the economy. But the bitter irony of our situation is that right now it is our only means of salvation.” In Smolensk, a city near the Belarus border that dates to 863 and was overrun by the armies of Napoleon and Hitler, barter now makes up 80% of the economy, Vyrov said.

Arranging trades is a complex and time-consuming business. Many companies have at least one barter specialist whose job is to find trading partners and put together swaps. “We have to spend all our time studying the industrial map of Russia and leafing through outdated directories to look for information on what is produced and where,” said Yuri V. Dadychenko, marketing director for Analitpribor, a Smolensk firm that makes gas detectors for mines and power plants.

Firm Has Six-Stage Deal to Pay Taxes
Dadychenko recently set up a six-stage deal to pay the company’s taxes by finding supplies for the city hospital. It worked like this: Analitpribor shipped its safety devices to a nuclear power plant in the Tver region northwest of Moscow, which canceled debts owed by a smaller electric company. The electric company canceled debts owed by a glass factory. The glass factory sent bottles to a plant in the republic of Mordvinia southeast of Moscow that manufactures hospital supplies. That factory filled some of the bottles with saline solution and shipped them to the Smolensk hospital. The city of Smolensk credited Analitpribor with paying its local taxes. “Some experts call barter a dead end,” Dadychenko said. “It is a dead end, but what do we care if it helps us feel we are functioning? Without barter, most of the enterprises in the region would have been long dead and cold already.”

U.S. scholars Clifford G. Gaddy, a Brookings Institution fellow, and Barry W. Ickes, a professor at Pennsylvania State University, make the case that barter is a central part of a “virtual economy” that has developed in Russia in place of a market system–despite what they said has been more than $70 billion in Western aid to help build a market economy since the collapse of the Soviet Union. The virtual economy, they say, has maintained social stability by providing jobs, but the cost has been the creation of a steadily shrinking, noncompetitive economy. By reducing the need for cash transactions, they note, barter helps hide the fact that Russia’s industrial sector is continually operating at a loss. “What has emerged in Russia is something that arguably qualifies as a new type of economic system, with its own rules of behavior and criteria for success and failure,” the two scholars wrote in a paper published on the Brookings Institution’s Internet Web site. “We call the new system Russia’s virtual economy because it is based on illusion, or pretense, about almost every important parameter of the economy: prices, sales, wages, taxes and budgets.”

Lvov and other Russian economists attribute the rise of barter to government policies that restricted the supply of money available to industry and agriculture. Aid from the International Monetary Fund and other major lenders was granted with the idea that Russia would maintain a tight monetary policy. So-called young reformers brought in by President Boris N. Yeltsin to build a market economy instead helped create a system of gangster capitalism that transferred much of the country’s cash to foreign bank accounts. And rather than encouraging investment in production, Yeltsin’s government attracted money to its own treasury by selling short-term bonds that paid interest rates of up to 200%. “The young reformers have managed to eliminate the line for goods that existed in Soviet times and replace it with a line for money,” Lvov said. “We have managed to build an economy in which, instead of a deficit of goods and services, there is a deficit of money.”

Now, with Russia’s tight money policy, the fallen ruble has become Russia’s second currency, according to government figures. On Nov. 30, Russia’s Central Bank reports, there were 191.9 billion rubles in circulation–the equivalent of $10.7 billion at the official rate. By contrast, there are $30 billion to $40 billion worth of U.S. bills in circulation in Russia, Primakov said in a recent speech.

Most of the dollars are the personal savings of individuals who keep them hidden in their apartments, safe from devaluations and bank closures. The prime minister is trying to lure that money back into the economy. For most Russians, however, cash is too valuable a commodity to spend on the shoddy goods being produced by the aging industrial machine Russia inherited from the Soviet Union, observed Kirill Vishnepolsky, business editor of the Kommersant Daily newspaper.

Producers of low-grade goods have little choice but to trade with other companies making products of similarly poor quality–and then blame their problems on the country’s lack of money, he said. “True, there is not much cash hanging around these days,” Vishnepolsky said. “But if for a change you began producing something people really wanted–something of good quality with a price tag that wouldn’t immediately send the customer into a coma–you’d be surprised to see how soon you would be offered cash for it.”

Canned Meat Helps Company Thrive
One company that appears to be thriving under the barter system is the Smolmyaso cannery, which has nearly tripled its work force, from 792 to 2,200 employees, in the past five years. The enterprise has established five pig and cattle farms with a total of 5,000 animals, built up a fleet of 200 vehicles, opened a bakery and begun construction on a block of apartments. It has started processing hides and making shoes from the leather so it will have more goods to exchange with suppliers who raise cattle and pigs. And it has opened 60 retail outlets to sell its canned meat for cash. Skorbyashchev, the director, says he hopes to double the cannery’s output of 2 million cans of pork and beef a month.

The 120-year-old company has done well in the barter economy because canned food is a commodity that is always in demand and keeps its value–unlike the steadily eroding ruble. Skorbyashchev, who has been director for 27 years, said he negotiates all the firm’s barter deals himself. He is able to arrange most trades with individual partners, without need for a long chain of transactions, because of Smolmyaso’s strong market position. “I usually keep all the trades and multi-move combinations in my head,” he said. “The shorter the chain, the more profitable to me. Instead of one big scheme, we have a couple dozen schemes. The main thing I have to worry about is getting cash to pay salaries.”

To keep the system operating, the company usually pays its suppliers a share of the finished products. For example, the cannery receives animals from farmers, slaughters them and sends the hides to a tannery in Yaroslavl, about 350 miles northeast of Smolensk. The tannery tans the hides, keeping a percentage of the leather in payment. Smolmyaso gets the remaining hides back, finishes processing the leather and pays it to the farmers who provided the animals.

The cannery makes canned meat and sausage from the same animals, paying the farmers with part of the finished product. The company trades some canned meat for fodder, which it feeds to animals on its own farms and also trades to farmers for more animals. To pay its taxes, the company delivers sausages and canned meat to hospitals and schools. “The surviving enterprises today are survivors only thanks to barter,” Skorbyashchev said. “The industry keeps on running, people still have their jobs, and everything works.”

Across town, however, barter is not working nearly so well for the Diffuzion machine tool factory, which once supplied high-precision tools to factories across Russia. It declared bankruptcy in the summer of 1997 but keeps operating rather than laying off its workers. “The machine-building industry has basically been paralyzed,” Diffuzion Director Vladimir K. Moiseyev said. “We need ball bearings made by a company in Saratov. The factory that manufactures ball bearings is bankrupt. But we are also bankrupt, so we pay for the ball bearings with drills.”

Workers Get Paid in Food, Clothes, TVs
At one point, the company tried to survive by paying its workers in hand drills. The workers sold the tools in town for whatever they could get and saturated the market. “The result is we completely lost the drill market in Smolensk,” said Moiseyev, who was brought in to handle the bankruptcy. Now he tries to arrange trades for televisions, food, clothes and footwear to pay his workers. “All these barter schemes and other cashless schemes appear because there is no other way out,” he said. “My personal opinion is that barter will only lead to a further destruction of industry. It’s only a way to prolong our agony.”

Russia: What Happens When Markets Fail
by Patricia Kranz / April 26, 1999

Easter has replaced Revolution Day as the most widely celebrated holiday in Russia. This Easter, my last in Russia, I spent with my friend Marina Nikolaevna Chudakova. At 73, she was too tired to attend Easter services, which started Saturday at midnight and continued almost till dawn. But she invited me to share her Easter meal. Her 78-year-old husband, Alexander Yevgenevich Chudakov, was in the hospital with heart problems. Their combined monthly pensions total $100. When Alexander feels strong enough to work at his physics lab, he brings in an additional $70 a month.

But the Chudakovs are hardly starving. The Easter table was loaded with caviar, dyed eggs, and cakes. As a physicist in the Soviet era, Alexander Chudakov was given a spacious five-room apartment in the center of Moscow during the 1950s. He also inherited two country houses from his father, who had been a prominent engineer. These dachas provide the Chudakovs with a tremendous cushion. They spend the summer months in one of the dachas and rent it out to me and a group of my friends for $1,200 a month in the winter. For their other dacha, the Chudakovs also receive $1,500 a month. By Russian standards, they live well and can afford not just food but also other consumer goods, medicine, and even trips to the U.S.

Other pensioners aren’t so lucky. Galina Filatova, 62, retired seven years ago from her job at an apparel factory. But her pension is only $15 a month, and sometimes it is paid several weeks late. She lives with her son, daughter, and son-in-law–all unemployed–in a decrepit two-room apartment in Kuzminko, a grimy neighborhood on Moscow’s southeastern outskirts. To survive, she works nights as a security guard at the factory. That gives her $25 a month and an occasional bonus of clothing, which she sells at a nearby metro station. Galina spends nearly all of her income on food for herself and her children–and, she confesses, on vodka for her 36-year-old son, an alcoholic. ”He will die without vodka,” she says matter-of-factly.

Never-Never Land
That’s life in post-crash Russia. The Chudakovs and Filatovs reflect the realities facing Russians since the country defaulted on its debt and devalued the ruble last August. A few years ago, many in Russia and the West thought the country was on the road to creating a more advanced capitalist economy, where Russians could rely on their skills to generate wealth–rather than live off communist-era privileges or simply scrape by. But the financial crisis has highlighted just what happens when markets fail. In the months before the crash, it was already apparent that Russia was developing its own brand of capitalism. Now the country is operating in a kind of economic never-never land that seems to grow stranger by the day.

This is an economy that defies Western logic. You have to live here and talk to people to understand how they can keep going when they don’t get paid. Most companies are essentially bankrupt but keep cranking out goods. You have to travel outside Moscow to get a feeling for how an economy can function when there is no effective banking system and never enough cash. Only in Russia could companies get away without paying their electricity or heating bills yet rarely face power cutoffs. To keep the electricity company from turning off the lights, the government makes up for its missing payments with a tax credit.

Makeshift Economy
It’s a bizarre and oddly flexible economic model. Some economists call it the ”virtual economy,” because real money, real goods, and real output play such a small role. It is, in fact, a three-tier economy. The Russian currency, the ruble, is used mainly to buy necessities such as food. IOUs, barter, and ”surrogate currencies” are used in most dealings involving companies. Instead of paying cash wages, the giant Magnitogorsk Metal Works issues its employees cards that can be used in company-owned shops and the city department store. Russians, meanwhile, keep their savings in dollars. Nearly as many dollars as rubles–the equivalent of $35 billion–are believed to be circulating in Russia’s economy.

Even President Boris Yeltsin calls Russia’s economy ”freakish” these days. ”We have become stuck halfway in our transition from the planned and command economy to a normal market economy,” he told the Russian people in his recent State of the Nation address.

Freakish or not, Russia’s exploding barter economy has more in common with its Soviet and Czarist predecessors than with a Western market economy. Yet the makeshift setup has sheltered most Russians from the worst effects of August’s meltdown. When the government defaulted on $40 billion in short-term debt and devalued the ruble, most Russians had little or no money in commercial banks. Most owned no stocks or government bonds. Workers who were paid in goods cared little about the value of the ruble. And just a minority of enterprises held loans from banks. So ordinary Russians stayed calm.

Now, it’s clear that Russia’s economic transition could last well into the next century. Prime Minister Yevgeny M. Primakov isn’t pushing reforms such as industrial restructuring, which would put people out of work just before parliamentary elections in December and presidential elections in June, 2000. So every day, Russia’s virtual economy grows deeper roots. In the six months since he was appointed Prime Minister, Primakov has done little to curb the proliferation of IOUs.

To get a sense of how this jury-rigged system works, take a look at the local economy of Perm, a city of 1 million ringed by smoke-belching refineries and sprawling defense plants in the Ural Mountains. Because the surrounding region produces oil and gas, Perm is wealthy by Russian standards and has a ready source of hard currency. Yet the government is so short of cash that the city’s 83,000 public employees aren’t paid on time and services such as the water utility are on the verge of collapse. Why isn’t there more money?

One answer lies with companies such as Lukoil, Russia’s biggest oil company and a major employer in the Perm region. The local government lets Lukoil and its affiliates pay only half their taxes in cash. They pay the other half with IOUs, known as veksels, which the company pledges to redeem later for oil.

But the local government doesn’t need oil: It needs money to pay for public services. Lacking cash, it gives veksels to suppliers as payment for goods and services, and passes them along to public institutions such as schools, in lieu of operating funds. Noncash forms of payment now make up 45% of the city’s $80 million annual budget.

Bikes For Meat
All this has given rise to a new business in Perm and other cities: traders who buy veksels for rubles and resell them to customers who actually need oil or other commodities. The traders usually pay only 50% of the veksels’ face value, leaving public agencies chronically starved for cash. Perm’s school administrators are now experts in barter and other improvised solutions. One school principal recently persuaded city authorities to grant a tax credit to the local power company to prevent it from shutting off her school’s lights and heat. ”I’m capable of fixing up these deals, but you can imagine how much time it takes,” the exasperated principal says.

Why does the government agree to take these IOUs? Local authorities say they have little choice because even wealthy companies such as Lukoil don’t have enough money to pay their taxes. Lukoil gets hard currency for exports, but the government requires it to sell a large percentage of its oil in Russia to customers who often don’t pay. So even with middlemen taking a big cut, the authorities reason, IOUs pump at least some money into government coffers.

By contrast, the poorest companies must rely totally on barter. One is Velta Co., a crumbling factory on Perm’s outskirts. Once it was one of the Soviet Union’s biggest bicycle makers, supplying the military with bicycles and exporting to Eastern Europe. Now privatized, it has almost no cash coming in, and production has slumped from 1 million bikes a year to 200,000. Exports have dried up, and the Defense Ministry can’t pay for its orders. In most countries, such a company would go bankrupt. Yet in Russia, Velta stumbles along.

Sitting in his office in Velta’s dingy administration building, Executive Director Vladimir Mironov, 49, acknowledges that the factory is so inefficient that the bikes it makes aren’t worth enough to cover the cost of production. Yet Mironov is determined to keep it running. ”After all, bicycles are needed by many people,” he says, hopefully. So Velta keeps making bikes, swapping them for raw materials and electric power to keep the factory running. The company doesn’t pay taxes, but local authorities look the other way because Velta supplies free heat to nearby apartment buildings.

The biggest losers at Velta are its 4,000 employees, who for more than a year have been receiving one bicycle a month instead of a paycheck. These days, the factory parking lot is an impromptu bazaar where workers and their relatives hawk bicycles. ”We are luckier than those people over at the chemical plant. At least our factory gives us something we can sell,” says Rosa Mikhailovna, one of more than two dozen people trying to sell bikes in the blowing snow one morning. Mikhailovna, whose husband works at the plant, admits she probably won’t find a buyer for her ten-speed bike, though she is asking only $25. Yet with luck, she may trade it for meat to supplement her family’s diet of potatoes and pickled vegetables from their garden. ”By doing this, we can live O.K.,” she says.

Insider Deals
Odd as it may seem, even basket-case factories such as Velta provide a good living for the middlemen. While Mikhailovna stands patiently in the snow, Yuri Polushkin, 38, and his associates sit down to lunch a few kilometers away in the lavish headquarters of FSG Sintez, a company that negotiates barter deals between factories. As waiters serve grilled salmon and pour glasses of Spanish wine, Polushkin outlines how his business works. ”Let’s say there’s a company that has some metal and needs to raise cash to pay its electric bill,” he says. ”We could help them swap some of their metal to a farm. Then we take food from the farm and sell it to stores or restaurants for cash.”

Such barter chains often involve more than a dozen companies, Polushkin says. Even as factories such as Velta slide deeper into debt, Sintez has prospered, posting $46 million in revenues last year and building its own casino, health club, and the restaurant where Polushkin and his colleagues dine.

Middlemen such as Sintez aren’t the only ones who profit from the barter chain. Because companies agree among themselves on the value of goods being traded, there’s plenty of room for insider dealing by top managers. Government authorities get in on the act, too, because regional governments often hold a stake in privatized industries. The losers are unpaid workers and citizens who can’t get basic services from their broke government (table). ”When you don’t get paid in cash, it’s unclear how to value the goods,” says Alexander Blavatnik, vice-president of Access Industries, a New York-based investment firm with industrial holdings in Russia. ”There’s great opportunity for midlevel managers and traders to manipulate the price and siphon money from the company to their own pockets.”

This crazy setup developed because the government never took the tough steps necessary to transform Russian industry. After privatizing most state enterprises in 1993 and 1994, the government never forced unproductive enterprises to go out of business. Such a move would have put representatives of the socialist managerial elite and their workers out on the street.

The barter economy has also grown as a direct result of the Kremlin’s weakness. The government has failed at one of its primary responsibilities–collecting taxes. The situation has grown even worse since August’s financial crash. With little cash coming in, the federal government has no money to send to regional governments for social services, the military, or state-sector wages. It has trouble running the judicial system and enforcing federal laws.

So regional governors, power companies, and factory directories all across Russia have resorted to barter, veksels, and debt swaps to keep their economies running and their political power intact. In the process, they have become quiet supporters of the bizarre system. Managers, governors, and bureaucrats all have grown rich from the price inefficiencies, which camouflage insider dealing, bribes, and money laundering. ”These practices have become so implanted that it’s difficult to uproot them,” says Alexander Bekker, an economic analyst for the daily Segodnya.

These days, regional governors and other local leaders are taking advantage of the breakdown to grab even more power and property. Ironically, many are using a new Russian bankruptcy law as their weapon. The law allows creditors to go after debtors in court, but local politicians and factory managers are using it to seize control of enterprises in their regions.

“Out Of Control”
In the Volga region, for example, Samara Governor Konstantin Titov is demanding that local branches of oil giant Yukos, now controlled by Moscow tycoon Mikhail B. Khodorkovsky, be transferred to his government to cover back taxes. Vladimir Potanin, head of the once-powerful Interros financial group, is under siege from creditors and competitors in Siberia and the Urals who want to grab his near-bankrupt Sidanko oil company, the country’s fourth-largest. ”The situation is out of control. The local creditors do whatever they like with the company,” Potanin complains. He and Russia’s other tycoons have lost both money and political clout since last August. Boris A. Berezkovsky, once a close ally of Yeltsin, is under investigation for alleged money-laundering and fraud.

It all adds up to a bleak picture for Russia. Although many companies and individuals can keep going on barter and veksels for now, the economy is likely to shrink a further 6% this year, after plunging 5% in 1998. The past seven years have shown just how difficult it is to transform a huge, complicated country like Russia. The Yeltsin government has wasted many opportunities and lost the trust of the people. It will take a new leader after next year’s elections–and a great deal of time–for the Russians to trust their government, their banking system, and their currency.

Most important, the next Russian leader will finally have to find a way to boost industrial productivity by closing down worthless companies. In the meantime, the government faces a desperate battle collecting taxes to pay for social services. No one wants to support a corrupt system that cheats them out of their savings every few years through devaluation or default.

Survival Instinct
For the Russian people, their saving grace is their ability to press on despite economic hardship. In many ways, Russians are entrepreneurs of survival, and Russia’s multitiered economy is just another example of their ingenuity. Imagine what Russians might be able to do if their entrepreneurial natures were put into productive work rather than negotiating barter deals or devising hustles to avoid taxes. Russian leaders might be surprised at the result if they would only tackle the country’s dilapidated industry and free businesspeople from corruption so they could set up new companies. Such a prospect looks dim. Still, as I prepare to leave Russia after six years working here, I hope that somehow Russians get to live in a more stable, prosperous democracy. They deserve a chance.

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