Russians Bank on Bartering

SMOLENSK, Russia — 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.”

Sergei L. Loiko of The Times’ Moscow Bureau contributed to this report.

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Barter Chain in Russia

The Analitpribor plant in Smolensk, which produces gas safety meters for use in mines and nuclear power stations, owed money in local taxes that it could not pay. Working backward, it researched and organized this barter chain until it came full circle.

1. The Analitpribor plant in Smolensk shipped gas meters to the Kalinin nuclear power plant in the Tver region.

2. The Kalinin nuclear plant canceled debt owed for electricity supplied to the Tverenergo power company, also in the Tver region.

3. Tverenergo canceled debt owed for electricity used by a glass factory in the region.

4. The glass factory supplied bottles to a factory in Saransk, in the republic of Mordvinia, that manufactures saline solution.

5. The saline solution company bottled the solution and delivered it to the city hospital in Smolensk.

6. The Smolensk city government canceled the tax debt of the Analitpribor plant.

Source: SERGEI L. LOIKO / Times Moscow Bureau