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RFE/RL NEWSLINE

RFE/RL NEWSLINE Vol. 3, No. 188, Part I, 27 September 1999


___________________________________________________________
RFE/RL NEWSLINE Vol. 3, No. 188, Part I, 27 September 1999

A daily report of developments in Eastern and Southeastern
Europe, Russia, the Caucasus and Central Asia prepared by the
staff of Radio Free Europe/Radio Liberty.

This is Part I, a compilation of news concerning Russia,
Transcaucasia and Central Asia. Part II covers Central,
Eastern, and Southeastern Europe and is distributed
simultaneously as a second document.  Back issues of
RFE/RL NewsLine and the OMRI Daily Digest are online at
RFE/RL's Web site: http://www.rferl.org/newsline

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Headlines, Part I

* RUSSIA PERSISTS WITH BOMBING OF GROZNY

* POPULAR MINISTER AGREES TO HEAD NEW ELECTION BLOC

* KAZAKHSTAN'S PARLIAMENT REJECTS DRAFT BUDGET

End Note: THE LONG SHADOW OF THE SECOND ECONOMY
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RUSSIA

RUSSIA PERSISTS WITH BOMBING OF GROZNY. Russian aircraft
continued to hit targets in the Chechen capital on 24-26
September, targeting the oil sector, destroying the
television tower, and disrupting mobile telephone
communications. On 26 September, dpa quoted Chechen estimates
as stating that more than 30 people were killed and 60
injured in the raids. The same day, Ingushetia closed its
border with Chechnya after admitting some 10,000 Chechen
fugitives, saying it could not cope with a further influx.
"Nezavisimaya gazeta" on 25 September quoted a North Caucasus
Interior Ministry official as saying that Major General
Gennadii Shpigun, who was abducted in Grozny in early March,
is alive and being held in the Chechen capital (see "RFE/RL
Newsline," 8 March 1999). LF

RUSSIA'S FUTURE TACTICS STILL UNCLEAR. Russian Prime Minister
Vladimir Putin said on 24 September that currently there are
no plans for a large-scale ground offensive in Chechnya, but
he did not exclude "precise" commando raid to target various
field commanders. "Our task is to protect Russia from
bandits," he commented. Two days later, Defense Minister Igor
Sergeev declined to rule out a ground offensive, noting that
several variants are under consideration. Sergeev, too,
defined Russia's objective as eliminating bandits as well as
creating a security zone along Chechnya's borders. Russian
Air Force Commander Colonel-General Anatolii Kornukov told
RTR television on 26 September that the bombing raids may
last for one month, according to ITAR-TASS. Kornukov said
that only high-precision armaments are being used in order to
ensure civilian targets are not hit. The previous day,
Kornukov had assured Interfax that the Russian military
command has no plans to carpet-bomb Chechnya. LF

CHECHEN PRESIDENT CALLS FOR RESTRAINT. Addressing the Chechen
people on 26 September, Aslan Maskhadov said he is ready "for
any political dialogue with the Russian leadership" in order
to prevent a full-scale war, ITAR-TASS reported. Two days
earlier, Maskhadov had called on Moscow to halt the air
strikes against Chechen targets, which he termed "a waste of
effort, means, and time" given that at some point, Moscow and
Grozny will have to negotiate a settlement. However, he
warned that Chechnya will never agree to "concessions that
run counter to its constitution and the will of its people"
to build an Islamic state. On 25 September, "Nezavisimaya
gazeta" noted that Chechen military formations loyal to
Maskhadov have been ordered not to open fire on Russian
bombers. Also on 25 September, Maskhadov issued an appeal to
international organizations to send inspectors to Chechnya to
determine there are no guerrilla bases there. LF

IRAN PLEDGES SUPPORT FOR RUSSIA'S NORTH CAUCASUS POLICY.
Meeting on 25 September with Deputy Foreign Minister Grigorii
Karasin, Iran's Ambassador to Moscow Mehdi Safari said Tehran
condemns terrorism in all its manifestations and supports the
measures taken by the Russian government to normalize the
situation in the North Caucasus, ITAR-TASS and Reuters
reported. Safari said Iran is prepared to cooperate with
Moscow to prevent attempts by terrorists to destabilize the
situation in Russia. LF

RUSSIA AGAIN CASTIGATES GEORGIA FOR FAILING TO INTERCEPT
CHECHEN MILITANTS... Georgian Ambassador to Russia Malkhaz
Kakabadze was summoned to the Russian Foreign Ministry on 25
September to be informed of concrete evidence of Chechen and
Dagestan rebels' use of Georgian territory, Interfax and
ITAR-TASS reported. Russian officials told Kakabadze that
Moscow is ready to intensify cooperation and the exchange of
information with Tbilisi in order to curtail terrorist
activities in the North Caucasus. They advised the Georgian
government to liaise with the Russian Embassy in Tbilisi and
the Russian army command in the North Caucasus. LF

...AS AZERBAIJAN STRENGTHENS BORDER CONTROLS. Meanwhile, the
commander of Azerbaijan's border guards, Abbasali Novruzov,
said after meeting with a senior Russian border official on
25 September that President Heidar Aliev has called for
additional measures to prevent the transport of guerrillas,
drugs, and weapons from Azerbaijan to Russia, ITAR-TASS
reported. Novruzov said that Russian officials' charges that
Islamic militants enter Russia from Azerbaijani territory are
"irresponsible." LF

CAUCASUS CONFLICT PUTTING PRESSURE ON BUDGET. The head of the
Defense Ministry's budget and finance department, Colonel
General Georgii Oleinik, told reporters on 24 September that
because of the conflict in Dagestan, the government has
boosted by 2.5 billion rubles ($99 million) the ministry's
8.3 billion ruble spending limit for September, according to
Reuters. Oleinik said he hopes that as a result of the
conflict, the amount of money allotted to defense in the 2000
budget will be increased by 25 billion rubles. On 16
September, deputy chief of the Russian General Staff Colonel
General Valerii Manilov said some 2 billion rubles have
already been spent already in Daghestan in operations that
have resulted in the killing of some 2,000 Chechen
insurgents, ITAR-TASS reported. JAC

SOME REGIONAL LEADERS CRITICAL OF MOSCOW'S 'OPERATION
FOREIGNER.' In an interview with "Novye izvestiya" on 25
September, Samara Governor Konstantin Titov blasted the
Moscow city government for its policies vis-a-vis non-
Muscovites, saying that Moscow Mayor Yurii Luzhkov "is
hunting down Caucasians, has turned Moscow into a screening
camp, and is eliciting a chauvinistic wave in this
multinational state." Titov, who is also head of the Voice of
Russia bloc, which is aligned with Right Cause and New Force,
said that Luzhkov's policy "threatens the stability of Russia
no less than terrorism." Two days later, Saratov Governor
Dmitrii Ayatskov, who is a member of Our Home Is Russia, told
ITAR-TASS that his region will "not allow civil rights to be
infringed upon or people divided on an ethnic basis." The
governor added that he is planning to meet with members of
the local Chechen diaspora to discuss their involvement in
settling the North Caucasus conflict. JAC

DEFENSE OFFICIAL SAYS NATO-RUSSIAN TIES MUST BE 'MUTUALLY
BINDING.' In an interview with Interfax-Vremya on 24
September, deputy chief of the Russian General Staff Colonel
General Manilov argued that relations between Russia and NATO
must be "mutually binding" so that Russia is able to
influence decision-making related to European security. This
is a condition for Moscow to restore relations with the
Atlantic alliance, he noted, adding that the proposal is
aimed at preventing the recurrence of such "unprovoked
aggression" as that against Yugoslavia. Manilov added that if
NATO does not accept this proposal, Moscow will "evidently
have to seek other ways of developing a comprehensive
European security system together with other countries."
Relations between Moscow and NATO have been frozen since the
bombing campaign against Yugoslavia earlier this year. JC

POPULAR MINISTER AGREES TO HEAD NEW ELECTION BLOC...
Emergencies Minister Sergei Shoigu told "Kommersant-Daily" on
25 September that he has agreed to head the new Unity
(Edinstvo) bloc (see "RFE/RL Newsline," 24 September 1999).
According to the daily, President Boris Yeltsin asked Shoigu
to lead the new group when he bestowed on him the Hero of
Russia award for dealing with a variety of natural and man-
made disasters. The newspaper also claimed that Shoigu made
his participation conditional on the new bloc's not being
associated in any way with media magnate Boris Berezovskii.
Berezovskii owns a controlling stake in "Kommersant-Daily."
An unidentified source in Shoigu's ministry told ITAR-TASS
the same day that Shoigu will not leave his cabinet post for
the election campaign. Prime Minister Putin pledged the
government's support for the new bloc, saying it can help
stabilize the political situation in Russia. JAC

...AS BLOC'S SUCCESS SAID TO DEPEND ON MARRIAGE WITH ANOTHER
GROUP. Mark Urnov of the Center for Economic Reforms told
"Nezavisimya gazeta" on 25 September that if Unity "succeeds
in obtaining the support of at least one reasonable and
recognizable power, the bloc will immediately be able to win
more than 5 percent of the vote" in the State Duma elections
and might significantly decrease the number of nominees from
[the Fatherland-All Russia alliance] in single-mandate
districts. However, he noted that Moscow Mayor Yurii
Luzhkov's Fatherland movement enjoys quite strong support
nationwide. Sergei Markov of the Institute for Political
Research agreed, noting that Unity's main chance would be
through an alliance with an established party that has an
organization, ideology, and electoral headquarters. Our Home
Is Russia leaders have admitted that they are in talks with
Unity (see "RFE/RL Newsline," 24 September 1999). JAC

IMF ACCUSED PRIVATELY OF DELAYING TACTICS... On arriving in
Washington, D.C. on 26 September for the annual meeting of
the IMF and World Bank, First Deputy Prime Minister Viktor
Khristenko told reporters that Russia is hoping to receive
the next tranche of its IMF loan in the first half of
October, Interfax reported. Khristenko was named Russia's
director to the fund on 21 September. An unidentified Russian
negotiator to talks with the IMF told Interfax on 24
September that the fund is thinking up new obstacles such as
the continuing audit of the Central Bank's transactions with
Russia's foreign banks and the investigation into the bank's
and the Finance Ministry's handling of hard currency
reserves. According to the negotiator, the IMF would like to
send Russia on "a mission impossible." JAC

...AS G-7 RAPS RUSSIA FOR INSUFFICENT FINANCIAL CONTROLS. The
same day, the Group of Seven finance ministers issued a
statement citing the "critical need" for Russia to fight
corruption and money laundering and insisting that future aid
be granted only after the Russian government enacts stronger
controls to prevent the misuse of funds, according to dpa.
The IMF's Interim Committee sounded a similar note, telling
Russia that it must strengthen the integrity of its financial
system, RFE/RL's Washington bureau reported. JAC

FSB ADMITS RYAZAN 'BOMB' WAS EXERCISE. Federal Security
Service (FSB) Director Nikolai Patrushev told NTV on 24
September that the dummy bomb that police discovered the
previous day in a Ryazan apartment house was planted by the
FSB as part of a security training exercise (see "RFE/RL
Newsline," 24 September 1999). He noted that "to the credit
of Ryazan law enforcement officials and the local population,
they responded." An FSB spokesman noted that similar
exercises have been conducted in other cities but, unlike in
Ryazan "in a number of places, law enforcement officials did
not perform adequately." National newspapers were critical of
the FSB: "Izvestiya" noted on 25 September that "exercises
like the one in Ryazan make you uneasy, knowing that one day
you might be thrown out of your own car [and] home or your
movements will be 'temporarily restricted' for the sake of an
exercise." JAC

YELTSIN DEFENDED BY WIFE, SUSPENDED PROSECUTOR. Suspended
Prosecutor-General Yurii Skuratov told Interfax on 25
September that there is no evidence linking President Yeltsin
with the so-called Mabetex scandal, which involved a Swiss
firm's alleged payment of bribes to top Kremlin officials.
The next day, Yeltsin's wife, Naina Yeltsin, in a rare
interview with Russian Public Television expressed her dismay
that "not only the president but also his family is being
publicly dragged through the mud." With regard to unfavorable
articles in the press about her daughter, Tatyana, who is
also a presidential adviser, Naina Yeltsin noted that "it is
a shame that so many lies are being spread about Tatyana."
JAC

NUMBER OF UNPROFITABLE BANKS CONTINUES TO DECLINE. Twenty
Russian commercial banks were operating at a loss in the
first half of 1999, compared with 36 during the same period
last year, Interfax reported on 26 September. Banks' net
losses fell 25 percent during the first half of the year,
compared with the same period in 1998. Last week, creditors
of the once mighty Menatep voted overwhelmingly in favor of
bankrupting the institution on 21 September, "The Moscow
Times" reported the next day. The bank's temporary manager
told reporters that "the most difficult part of our work has
been trying to find Menatep's assets abroad." JAC

RUSSIA CONSIDERS HOW TO FUND OIL PIPELINE BYPASSING CHECHNYA.
Fuel and Energy Minister Viktor Kalyuzhnii told journalists
in Moscow on 23 September that his ministry and the pipeline
operating company Transneft are considering three approaches
to raising the estimated $200-250 million required to fund
construction of the oil pipeline bypassing Chechnya, which
Prime Minister Putin recently called for (see "RFE/RL
Newsline," 17 September 1999), Caucasus Press and Interfax
reported on 24 September. Those options are that Transneft
funds the project; an international consortium similar to the
Caspian Pipeline Consortium is formed; or money earlier
allocated for funding of the Baltic Pipeline Network is
"borrowed." Kalyuzhnii said that the government is not
abandoning plans for the Baltic network but that in the
present political conditions it regards the pipeline
circumventing Chechnya as a priority. LF

MORE PROTESTS IN KARACHAEVO-CHERKESSIA. Responding to a
threat by republican Interior Minister Aleksandr Volkodav to
restore order by force, supporters of Cherkessk Mayor
Stanislav Derev on 26 September ended the picket of the
government building that they had begun three days earlier,
ITAR-TASS reported. Derev's supporters had also temporarily
blockaded the republic's television center on 24 September as
part of their ongoing protest against the assumption of his
presidential duties by Vladimir Semenov, who according to
official data defeated Derev in the 16 May presidential
runoff. LF

CIS CUSTOMS UNION MEETS. Meeting in Astana on 24 September,
the prime ministers of the five members of the CIS Customs
Union (Russia, Belarus, Kazakhstan, Kyrgyzstan, and
Tajikistan) signed a protocol on developing trade and
economic cooperation and simplifying customs regulations for
the movement of goods between their countries. Russian
Premier Putin said the union's most immediate objective is to
reverse the decline in trade between its members by creating
a free trade zone, according to ITAR-TASS. The customs union
had originally pledged in November 1995 to create such a
zone, "Izvestiya" noted on 23 September. Addressing the
meeting, Kazakhstan's President Nursultan Nazarbaev deplored
the continuing disintegration of the CIS, which, he said, is
reflected in an almost 70 percent drop in trade between CIS
states since 1991. Nazarbaev also noted that Kyrgyzstan's
membership in the World Trade Organization has created
"serious problems" for other members of the customs union,
which are coordinating their terms for joining the WTO. LF

TRANSCAUCASUS AND CENTRAL ASIA

ARMENIAN MINISTER UPBEAT ON CHANCES OF WTO MEMBERSHIP. The
prospects that Armenia will be admitted to the World Trade
Organization by the end of 1999 are "pretty bright," Trade
and Energy Minister Hayk Gevorgian told RFE/RL's Yerevan
bureau on 24 September. He said bilateral talks in Geneva
between an Armenian government delegation and the WTO are
nearing completion and will be followed by multilateral
discussions with WTO member states. Last month, a senior US
trade official mentioned Armenia, along with Estonia,
Georgia, Lithuania, and Moldova, as likely to win admission
to the WTO when the next round of global trade talks takes
place in Seattle in November. Gevorgian said WTO membership
would be good for both foreign investors and domestic
businesses. Armenia's trade and investment legislation is
seen as among the most liberal in the former Soviet Union. LF

EU TO FUND SAFETY PROGRAM FOR ARMENIAN NUCLEAR POWER STATION.
Under the terms of a recent protocol, the EU will grant
Armenia 10 million euros ($10.04 million) annually from 2000-
2006 to ensure the safe operating of the Medzamor nuclear
power plant, Noyan Tapan reported on 24 September, quoting
Armenian Energy Minister David Zadoyan. Zadoyan added that
Armenia will abide by an earlier agreement with the EU to
close down Medzamor by 2004 only if new generating capacities
totaling 600 megawatts are available by that date (see
"RFE/RL Newsline," 18 December 1998). Zadoyan said that a
decision is likely to be made at talks with the EU in October
on whether a new nuclear power plant should be built to
replace Medzamor. LF

AZERBAIJAN OPPOSITION CALLS OFF PLANNED DEMONSTRATION.
Representatives of nine Azerbaijani opposition parties
decided late on 24 September to cancel a mass demonstration
planned for the following day, Turan reported. The opposition
had picketed the Baku City Mayor's Office for days to demand
permission to hold the rally. Participants in that meeting
had intended to adopt a resolution condemning the Azerbaijani
leadership's inability to resolve the Karabakh conflict and
outlining its proposals for trying to do so (see "RFE/RL
Newsline," 21 and 23 September 1999). Baku Mayor Rafael
Allakhverdiev had refused permission to hold the rally in
central Baku; on 24 September, he offered instead to make
available a stadium on the city outskirts. Musavat Party
chairman Isa Gambar told Turan on 25 September that the
opposition decided to cancel the demonstration rather than
risk a confrontation with the authorities by convening an
unsanctioned rally in the city center. LF

SUSPECT IN GEORGIAN PRESIDENTIAL ASSASSINATION BID DETAINED.
Russian police in the North Ossetian capital, Vladikavkaz,
have detained Nugzar Chukhua, a 44-year-old Georgian citizen,
on suspicion of involvement in the unsuccessful bid to
assassinate Georgian President Eduard Shevardnadze in
February 1998, Caucasus Press reported on 24 September,
citing a Georgian television report that was subsequently
confirmed by the Georgian National Security Ministry. It is
unclear whether Chukhua will be extradited to Georgia.
Russian police are investigating the possibility that he may
also have participated in the March 1999 terrorist bomb
attack in Vladikavkaz, which killed dozens of people. If
those suspicions prove correct, Chukhua will stand trial in
Russia on terrorism charges. LF

GEORGIA WANTS COUNCIL OF EUROPE TO HELP CLOSE RUSSIAN BASES.
In an address to the Parliamentary Assembly of the Council of
Europe Mikhail Saakashvili, who heads the parliamentary
faction of the Union of Citizens of Georgia, appealed for
help from the Council of Europe in securing the closure of
Russia's four military bases in Georgia, Caucasus Press
reported on 24 September. Saakashvili claimed that those
bases serve to destabilize the internal situation in Georgia
and that the use of the Russian ruble at those facilities
negatively impacts on the stability of the Georgian currency
(see "RFE/RL Newsline," 20 September 1999). He also said that
personnel at those bases "sell arms to the hot spots in the
Caucasus." That statement is at odds with Georgian Foreign
Ministry denials that any arms are entering Chechnya or
Daghestan from Georgian territory (see "RFE/RL Caucasus
Report," Vol. 2, No. 38, 24 September 1999). LF

SOUTH OSSETIA ACCUSES GEORGIAN LEADERSHIP OF SABOTAGING
TALKS. In a statement issued on 24 September, Merab Chigoev,
who heads the government of Georgia's breakaway Republic of
South Ossetia, accused the central Georgian government of
reneging on a previous agreement on providing economic aid
and electricity to South Ossetia, Caucasus Press reported.
Georgia cut off power supplies to South Ossetia on 1
September because the local government had failed to pay its
debt for previous energy supplies. Chigoev said that move
risks jeopardizing the ongoing talks on defining relations
between the central authorities in Tbilisi and the former
autonomous region. LF

KAZAKHSTAN'S PARLIAMENT REJECTS DRAFT BUDGET... As
anticipated, both chambers of Kazakhstan's parliament
rejected the government's proposed draft budget for 2000 at a
joint session on 25 September, Interfax reported (see "RFE/RL
Newsline," 24 September 1999). That draft cuts social
spending in a bid to reduce the budget deficit from 3.6
percent to 3 percent of GDP in 1999, according to Reuters.
But the draft also allocated about 570 million tenges ($4.1
million) for the needs of the Kazakh parliament, a sum that
lower chamber speaker Marat Ospanov said is exorbitant,
RFE/RL's Kazakh Service reported. LF

...PROMPTING PREMIER TO CALL FOR NO-CONFIDENCE VOTE. Prime
Minister Nurlan Balghymbaev responded to the rejection of the
budget by calling for a vote of confidence in his cabinet,
the second time he has done so within just over three months
(see "RFE/RL Newsline," 22 and 24 June 1999). If the required
two-thirds of deputies in both chambers fail to vote no
confidence in the cabinet, the budget is automatically
passed. Balghymbaev explained to deputies that the budget
must be passed within the next week in order to secure a new
IMF loan on which the government is counting in order to pay
off external loans as well as wage and pension arrears,
Reuters reported. Kazakhstan failed last month to reach
agreement with the IMF on a new loan (see "RFE/RL Newsline,"
11 and 12 August 1999). Meanwhile, on 27 September, the tenge
was trading in Almaty at 143 to $1, down from 137.5 last
week, RFE/RL's bureau in the former capital reported. LF

KAZAKH, RUSSIAN PREMIERS MEET. Balghymbaev and Vladimir Putin
expressed satisfaction at the present state of bilateral
relations following talks in Astana on 24 September. Putin
told journalists later that agreement was reached on settling
mutual debts, including the rent Russia pays for the Baikonur
cosmodrome, Interfax reported. He added that Russia will
increase the quota for oil that Kazakhstan may export via
Russian pipelines. In return, Kazakhstan acceded to a Russian
request to open more consulates in the northern,
predominantly Russian-populated oblasts of Kazakhstan,
"Nezavisimaya gazeta" reported on 25 September. The two
premiers also signed an agreement on cooperation in guarding
Kazakhstan's borders. Under that accord, Moscow will provide
two coast-guard vessels to patrol Kazakhstan's sea border. LF

SITUATION STABILIZING IN SOUTHERN KYRGYZSTAN. Kyrgyzstan's
Prime Minister Amangeldy Muraliev told journalists in Astana
on 24 September that the situation in the south of the
country has stabilized and that all approaches to the
guerrillas' bases are blocked, ITAR-TASS reported. Meeting
with Muraliev on the sidelines of the CIS Customs Union
session (see above), Russian Prime Minister Putin assured him
that Moscow fully supports Bishkek's actions against the
guerrillas. Uzbekistan's President Islam Karimov conveyed
similar assurances in a letter to his Kyrgyz counterpart,
Askar Akaev. Also on 24 September, Akaev telephoned with
Japanese Premier Keizo Obuchi to promise him that Kyrgyzstan
is continuing to do everything in its power to secure the
release of four Japanese geologists taken hostage by the
guerrillas five weeks ago, Interfax reported. LF

TAJIK PRESIDENT PARDONS OPPOSITION PRISONERS. Imomali
Rakhmonov on 24 September issued a decree pardoning 22
members of the United Tajik Opposition who were serving
prison sentences ranging from eight to 14 years. Presidential
press secretary Zafar Saidov told ITAR-TASS that the pardon
is intended to promote trust and the process of national
reconciliation. Also on 24 September, Tajikistan's Communist
Party voiced its support for Rakhmonov's bid for re-election
in the 6 November presidential poll, AP reported. LF

END NOTE

THE LONG SHADOW OF THE SECOND ECONOMY

by Paul Goble

	Russia's second or shadow economy is now so large and
pervasive that it is likely to define whatever kind of legal
economic arrangements do emerge in that country in the
future.
	That is the unsettling conclusion of a recently
published study prepared by the Russian Academy of Sciences'
Institute of Socioeconomic Problems of the Population.
	According to the authors of the study, the earlier
conviction in both Moscow and the West that "the scale of the
shadow economy would diminish and the legal economy would
grow as the country moved in the direction of capitalism" has
not proved to be true.
	Instead, they suggest, "just the opposite has taken
place." In 1990-1991, 10-11 percent of the country's GDP was
produced by the shadow economy, but the illegal or semi-legal
second economy accounted for 27 percent of GDP in 1993, 46
percent in 1996, and quite possibly more than 50 percent in
more recent years.
	Because of the size of this sector of the economy and
because it is so interwoven with the legal economy, the new
study argues that the rules of the game within the shadow
economy are far more likely to define behavior within what
will emerge as the legal economy rather than be fundamentally
transformed by that legalization.
	And because this is so, the study suggests, it is
critical to understand both where the shadow economy came
from, what the current rules of the game are, and how these
are likely to play a role as Russia moves to legalize many
economic activities that are now part of the second economy.
	According to the study, the second economy was
relatively small during most of the Soviet period. Its
authors cite a Western study that found that the shadow
economy produced only 3-4 percent of Soviet GDP in 1973--a
percentage far smaller, the study notes, than in many
developed market economies.
	Until nearly the end of the Soviet period, the shadow
economy performed two fundamental functions: it compensated
for shortcomings in the functioning of the official legal
economy, and it provided a field of activity for
entrepreneurs who could not easily fit into Soviet
institutions.
	With the collapse of communism, these two functions
fused, particularly under conditions of what many have
described as "incomplete" marketization, a system in which
the role of the state or at least of its agents remained
large and hence the social space for illegal activities
actually grew.
	The Moscow study suggests that the shadow economic
system now has six defining features: close ties between
bureaucrats and entrepreneurs, continuing interference by the
state in the economy, preservation of many old monopolies and
the growth of new ones, high and repressive taxes that are
easy to avoid, the impoverishment of much of the population,
and the absence of a legal framework for the economic
transformations that have occurred.
	The study continues by observing that even though
"approximately two-thirds of all enterprises are almost
unaffected by the shadow economy in their activities, those
firms that are involved are heavily so." Moreover, the
behavior of these firms casts a long shadow on all the
others, in many cases because the shadow economy produces
higher incomes for those who are involved it.
	And the report draws three conclusions: First, until
legal economic activity produces more wealth than the semi-
legal or illegal activities of the shadow economy, many
people will continue to turn to the shadow economy to seek
their livelihood.
	Second, the percentage of the country's GDP produced by
the shadow economy will begin to fall only when the country
enters a long period of stable economy growth, during which
enterprises will be able to renew their technologies and thus
generate real wealth on their own.
	And third, even when this change takes place in Russia--
and the authors are optimistic that it will--many of the
values and patterns of the shadow economy will help to define
the values and patterns of the future legalized market
economy there for many years to come.
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Natasha Bulashova, Greg Cole
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Updated: 1998-11-

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