Now, Fault Lines Split Russia Itself

Like the former Soviet Union before it, Russia itself is now in danger of splitting apart. Frustrated by the political chaos in Moscow and angered at growing economic malaise, the mosaic of the 88 political subdivisions that make up the Russian Federation is beginning to take charge. Localities and regions are seizing control over their own oil reserves and precious metals. They're challenging Moscow's role as tax collector and policy dictator. Some energetic local leaders are moving even faster than President Boris Yeltsin had planned to privatize state companies. At the same time, conservative leaders in other areas are pulling in precisely the opposite direction.

These centrifugal forces could gain speed should Yeltsin lose big in a national referendum on Apr. 25 and resign. But even if he wins and stays in power, he could be caught up in the same tornado of intense change that brought about the demise of Mikhail Gorbachev and the Soviet Union. The critical question facing a victorious Yeltsin will be whether he can shrewdly forge policies that empower the regions while leaving a central government with real authority. "The only way forward is decentralization," says economist Grigory Yavlinsky, a former Gorbachev adviser. "But what we have now is disintegration--a chaotic, unmanageable, even criminal decentralization."

Look at a map of Russia and you see one challenge to Moscow after another. The former Soviet autonomous republics of Yakutia (now known as Sakha) and Tatarstan, for example, have declared sovereignty over natural resources, such as oil and diamonds. They want to use these as collateral to seek loans from foreign banks and to issue their own credits--moves that could add to Russia's 2,000% annual inflation and $84 billion in foreign debt.

In Siberia, 19 different regions led by Tomsk and Krasnoyarsk have teamed up to form the Siberia Assn., which independently aims to export Siberian resources to the West and not share earnings with Russia. Since Siberia has independent access to big Pacific seaports, the threat is real. Not surprisingly, Russian Prime Minister Viktor Chernomyrdin sharply criticized the association at its founding meeting in February. "There will be no strong Russia if the regions are strong. We do not need strong regions," he told them.

IGNORED LAWS. Even progressive regions such as Nizhni Novgorod, which boldly introduced Yeltsin's reforms, are raising eyebrows in Moscow. Reform-minded Nizhni Novgorod Governor Boris Nemtsov is calling for greater local tax- and fund-raising powers, threatening some of the central authority's biggest roles. Nemtsov, a 34-year-old physicist, has moved fast to privatize local stores and industry. He thinks most economic-reform decisions should devolve to the local level.

But elsewhere, the winds are blowing the other way. In the major industrial regions of Chelyabinsk and Novosibirsk, conservative regional councils have tried to stall the government's privatization effort. Ignoring Russian law and a presidential decree, they decided to suspend privatization auctions. They made their moves after investors from Moscow and other parts of Russia purchased shares of lucrative regional enterprises, threatening their control. BUSINESS WEEK visited Chelyabinsk, along with Tatarstan and Volgograd (box) to assess three different versions of regionalism.

The growing clout of Russia's regions comes as another blow for Western business executives, many of whom have just gotten used to dealing with former Soviet republics that are now independent countries. Some find that negotiating in a progressive region of Russia can put deals on the fast track. Others, however, find regionalism to be one more joke in bad taste. White Nights, an oil venture of Phibro Energy Production and Anglo-Suisse, found itself in a jungle of capriciousness after plunking $110 million into a western Siberian oil venture. First, the project was almost snuffed out by a national export tax on oil. Then, regional and local governments added on tax after tax. Whereas White Nights once paid four separate taxes, now it faces a total of 12.

The results of the Apr. 25 referendum are unlikely to quell this regional muscle-flexing quickly. Indeed, such assertiveness will surely increase if new elections for President and Parliament are called, spinning out the political confrontation until this autumn or next spring. At worst, this could lead to an uncontrolled breakdown of power in Russia, with its 10,000 nuclear warheads and army of 2.8 million troops.

'IMPERIAL THINKING.' But if Yeltsin wins enough of a mandate in the referendum to act decisively, he could finally begin building what he calls a stable "full-blooded federation." That would allow him to implement market reforms, effectively use new pledges of $43 billion in Western aid, and attract more Western investment.

Even so, Russia would be a profoundly different place, with Moscow assuming a dramatically different role. "The government at the federal level should not try to appear to be capable of managing all the regions, as it used to do," says Tatarstan Vice-Premier Ravil F. Muratov. "The quicker Moscow gives up its imperial thinking, the faster reform will happen in Russia." Much depends on Yeltsin heeding that advice.

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