Benjamin C. Works, Executive Director

--Celebrating Chaos Theory Since 1990--

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SIT 8-28; Friday. August 28, 1998 11AM

Strategic Issues Today:  Russia; Scott Ritter & Iraqi Inspections

- Winston Churchill

While I largely reprint an expanded version of last night's analysis, I got a chance to watch Moscow's evening news on C-span at 11:35 EDT.. The tone is pro-Yeltsin and explanatory, as with trying to build a case for the Executive, and against the Duma. This morning's reports are a bit less panicky. Michel Camdesus of the IMF is in Moscow, meeting with Viktor Chirnomyrdin. This confirms that what is going on is an attempt at a controlled high-stakes game --street theater-- rather than random "crisis." But the other side is attempting to control the game as well. So who has the real power? Usually it is in the hands of the Executive Branch, but not always, as Louis XVI learned the very hard way.

Look, this is exploratory writing and somewhat speculative in part, though disciplined by rules. To me, forecasting differs from predicting in that in forecasting one is attempting to take the known facts through models of known behaviors and map out the likely outcomes. Predicting may be subjective or objective and seem fixed in time. Forecasting is an open-ended process subjecting itself to the deductive rules of scientific thought. It seeks to be objective in view while dealing with all the passions and subjectivity of the human realm as it projects out in time towards alternative outcomes. Forecasts, like plans, change given successive events.

Russia is naturally rich and the Russians should not be having this tough a time getting sorted out, but they are. Seven years ago, in the Gorbachev meltdown, Russia collapsed because nobody in charge knew how to do anything. Most of these same people remained in position, though while the Soviet empire broke into 16 less unmanageable parts. Seven years later, the most experienced people are entrepreneurs of seven-years experience, and most people drift on in their bureaucratic satrapies, or in the Duma, or out on the old collective farm. That is, most Russians, especially over 30, are incompetent by any western measure and the older you get the less motivated you become. But they are the people on the ground, in charge of the national capital asset base, and they must be dealt with, as there is no alternative pool of talented people of the western mindedness. Russia continues to lack educated and experienced talent, though it does not lack raw talent over time. Russia is also Asiatic in outlook, not European or Western. --This is important and not necessarily intuitive.

This morning it appears in my reading that the Duma knows the risk of its being shut down and there are serious "negotiations" of positions underway. The anti-Yeltsin parties, Communists and others, want to hang on to their power and to renegotiate the balance of power between the executive and legislative in their favor. But Yeltsin is weaker because Clinton is weakened, so the Duma has a plausible chance of usurping power back from him. Again we see opportunists advancing their games amid the perception that Clinton is increasingly impotent. We are in danger of seeing our foreign policy "fouled up beyond all recognition" -FUBAR for the ladies' ears.

There is a gross misperception in the west that Democracy is a panacea and that Democracy can reform the broken economies of the East. In fact, Democracy, defined as the will of the majority, is a force for inertia at most times, and a tyranny of the majority at its worst. Reform requires resolution and wisdom to make tough policy changes and that requires constitutionalism and republican principles of checks, balances and a sense for restraint for a strong leader to work matters through --we just saw such a failure with Japan's weak leadership, and we can see it in the sag of the Canadian Dollar toUS$0.634. The Nikkei index close at a 12 year low, below 14,000 (and to its level a year before the speculative run up to our 1987 Crash, which involved Tokyo and Hongkong, too) just adds to the costs of their dithering. More on that some time soon.

In smaller, more homogenous states, some substantial reform can be accomplished within the context of democracy, as we see with Poland and the Czech Republic, but a deterioration into kleptocracy (theft mercantalism of the oligarchs and conglomeratists) is also likely, and we have seen elements of that in Hungary, Slovakia and Russia.

Yeltsin's latest gambit this morning is to dismiss Anatoly Chubais from his role of working with international lenders. The banking system is broken to the point where Pharmacia-Upjohn reports they are not shipping into Russia because they cannot get paid. But on the other hand, the stock market has sunk so low, it was having a meaningful rally today when I looked. This is hard ball politics being played out and perhaps the western media reacted a bit hysterically.

Still, we remain close to a repetition of the October 1993 parliamentary shutdown. Last night I wrote a "flash" news advisory outlining Yeltsin's options going into such a showdown --and the threat of such a showdown is a real dilemma for his opposition in the Duma. Here is an expanded version.

I will have a more coherent report in the mid morning, but the crisis between Yeltsin's "free-enterprisers" and the communist-oligarchist crowd in the Duma has reached this very real showdown and the world needs for Yeltsin's side to win, while it is the conglomeratists like Boris Berishovsky who want to continue the impasse and are at the core of why the economy is further collapsing. The best deal --objectively, not necessarily politically-- is for Yeltsin to offer elections for both the Duma and presidency. But the likely deal, as in Oct. 1993, is to dissolve the Duma and hold elections with Yeltsin playing the strong-man once again. As you recall, he had to send the troops in to close down the Moscow "White House." There is a lot of theater in this, and a lot managed, by both sides against each other and the world --scare tactics.

The west is supporting Yeltsin and the pressure for him to resign comes entirely from, and only from, his well-identified foes in the Duma and the conglomerates. I'd bet on Boris and Bill on their Tuesday meeting. But I'd also watch my screen --and will-- like a hawk for surprises either way.

If Yeltsin has to crack down, the major choices are:

* Yeltsin replays 1993, shuts down Duma and holds elections (That needs strong army support).

* Yeltsin offers a deal with presidential and Duma elections. (Army support is weak)

* Yeltsin resigns and backs Chirnomyrdin to gain Duma elections. (Army says let's have a change).

The potential for foreign funding is zero and even the IMF can withhold credit to make the Duma's damage to the ruble even more glaring, which Camdesus indicates in Friday's wires. The question I have, not being in Moscow, is can Yeltsin's spin doctors succeed in pinning the blame on the Duma --where it does belong-- and rally the people as well as the army, which I think will follow Boris again. Gen Aleksandr Lebed might have a new role to play in this, and Boris Gromov, too. I'm keeping my eye peeled. The weak-spined aging preppy, Strobe Talbott, is now involved, and I would rather see the street-smart Thomas Pickering engaged, instead.

Russia is a "house divided against itself" --half free-enterprise, half mercantilist. It cannot stand this way, and that is what this showdown is all about. It has gotten to the point where even premium Stolichnaya and Kristal vodkas are imported in 55-gallon drums of 190 proof grain alcohol from McCormick distillers in Missouri --as I wrote two months back after seeing the shipping documents. That is a broken system.

Yeltsin may be a drunken boor, but he is tough and understands which side has to lose in this. His team of musical-chairs players Kiriyenko, Chubais, Chirnomyrdin) are more in alignment with each other than with Bereshovsky's gang of buccaneers.

The stock market visited a low of 7700 in January and may return there as the emotional doubts and questions regarding Moscow continue to drive gossip and speculation. Support between Thursday's close and 7700 is critical. It should show itself with interest rates moving beyond Alan Greenspan's control, but that part remains to be seen. A Fed Funds rate cut is in order, but a meeting for that is not in the routine calendar. The "flight to safety" in Treasuries puts great pressure on the Fed to loosen money, and that would also slow the Dollar's rise.

The exposure of US banks to Russia totals less than $8 Bil and even the German exposure amounts to only about 2% of their loan portfolios. There are almost no ripples from the Russian collapse in real economic terms; but this is a market bubble bursting. The long bond at a 5.35% yield on the close is a positive signal for the stocks to turn around, but a 356 point sell off to 8165 does sound dramatic.

Fridays are not good days to buy, but news may settle down and computer programs may signal a buy as support at 8000-8100 is tested. This remains emotion v. reason, with fear and uncertainty providing emotional fuel. The buyers will come back at some price level, but this is tough to call. On the other hand our "masters of the universe" and well-heeled Gen-X yuppies need to feel this one.

If you are a money manager, you have to invest, if you are a personal investor you do not have to invest today. "Keep cash" and keep cool, for the buy opportunity will come and the US market has good upside potential six months out.

I won't really breathe easy until latish on Tuesday, recalling the Friday-Monday of Oct. 1987.As of Friday morning, I am seeing technical buys, but weak --a dead-cat bounce. A quarter point cut in Fed Funds would shore up things nicely and Greenspan is due to speak today. Let us see how he does in a crisis.

UN weapons inspector Scott Ritter wrote in his Wednesday resignation letter: "The illusion of arms control is more dangerous than no arms control at all. What is being propagated by the Security Council today is such an illusion, one which in all good faith I cannot, and will not, be a party to."

In interviews Friday morning Ritter observed that the UN Security Council had accepted a shift in emphasis from non-proliferation and disarmament to a focus on sanctions and their human impact. This labels the extent of Saddam's victory over Mr Clinton, Mme Albright and Kofi Annan: he shifted the terms of debate. Fixed policies must be tended, when applied against agile moving targets such as Saddam. The UN policy is a Maginot Line, and Arab sympathies have turned against its mute permanence.

Richard Butler and his teams can politely play out the clock and extend the period of inspections and site monitoring, but their ability to uncover further stashes appears to be traded away in order to avoid another propaganda war over humanitarian relief and the plight of the Iraqi people.

In that context, the attack on Khartoum remains a warning of some value, but Saddam retains internal capabilities of being back in production of Chemical and biological agents within weeks. Khartoum became necessary because the UN regime is not working, but again, it generated sympathy for those punished and loud antipathy for the enforcers. This is a downward spiral or "orbital decay" in progress.

Copyright 1998 Benjamin C. Works-SIRIUS