Tooth And Claw In Moscow: The Reformers Bite Back

After weeks of chaotic signals from the Kremlin, an authoritative-looking Prime Minister Viktor Chernomyrdin finally appeared on television on Jan. 16. He announced new efforts to end the bloody debacle in Chechnya and pledged that economic reform would stay on track.

There was an almost audible sigh of relief in the foreign investment community in Moscow. Chernomyrdin, who is respected by foreign investors and international aid officials, has been nearly invisible in recent weeks as hard-liners, including Security Council boss Oleg Lobov and Alexander Korzhakov, head of the presidential bodyguard, vastly increased their clout. These men are believed to have pushed President Boris Yeltsin into the messy Chechen war. And they've leaked xenophobic charges that Western aid programs, including financier George Soros' efforts to aid Russian science, are really fronts for espionage.

Among these officials, the most outspoken on economic matters is Vladimir Polevanov, the new privatization chief. He wants foreigners banned from buying into "strategic" industries, such as aluminum, energy, and defense. Meanwhile, he has banished foreign advisers from his offices, even though some played key roles in creating the highly successful sell-off program.

SERIOUS DAMAGE. But in the past few days, Chernomyrdin and his deputy, former privatization boss Anatoli B. Chubais, have counterattacked, stripping away some of Polevanov's authority. Now they're trying to reassure Western governments and investors.

Whatever the outcome, serious damage has already been done. Foreign investment has slowed to about $50 million a month, or 10% of August's volume. Without the Chechnya debacle, Chubais believes, it could have reached $3 billion per month by spring. "Whatever money was going to come in will be less," says Bernard Sucher, a Moscow-based broker. In addition, $15 billion in aid from the International Monetary Fund is in jeopardy.

The uncertainty will continue, because the power struggle isn't over between the reformers and those who want to turn back the clock. The former--the Chernomyrdin group--have close ties to officials in energy companies, such as Gazprom and Lukoil, who stand to get rich from stock shares if privatization and foreign investment flourish.

They are opposed by the defense and intelligence chiefs and Deputy Prime Minister Oleg N. Soskovets, who is backed by the managers of largely obsolete smelters, steel mills, and weapons factories. Unlike the energy companies, these industries will be big losers if privatization proceeds. They aren't likely to get much foreign investment, and they face huge layoffs as state subsidies dry up.

SCARING PEOPLE. Moscow analysts believe that the hard-liners engineered the Chechen conflict as a prelude to bringing back some state economic control and media censorship--and perhaps even staging a coup. But so far, they haven't accomplished much more than scaring people.

Even so, the feud is hurting foreign investors. While reformers did manage to eliminate oil-export quotas, the Kremlin chaos also brought new restrictions on foreign oil companies' access to pipelines that threaten such projects as Conoco's $385 million Polar Lights venture.

All this is embarrassing to President Clinton, whose devotion to the increasingly erratic Yeltsin is already under fire from the new Republican majority in Congress. The Administration's hope is that the Chechen war can be ended and reformers can regroup and win back their influence. But that's far from a sure thing: The hard-liners have made their strongest stab at control yet, while Yeltsin is looking like a spent force.

    Before it's here, it's on the Bloomberg Terminal.