Lacking Money to Pay,
Russian Firms Survive
On Deft Barter System
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It Keeps Commerce Going,
But No Cash Prices Mean
No Market Discipline
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Blankets for Power for Taxes

KOSTROMA, Russia -- Away from the mayhem in Moscow, Igor Sizov, director of the Kostroma Textile Machinery Design Bureau, has more urgent matters to worry about: 6,000 pairs of thick woolen socks for the local police department.

No money will change hands. In the economic twilight zone inhabited by most Russians, it rarely does. Instead of rubles, Mr. Sizov will get a reprieve.

The deal is simple. Kostroma's police, among the millions who get paid late or never, will get warm toes. In return, they will take the heat off Mr. Sizov's decrepit plant over its unpaid taxes. "This is not a solution," says Mr. Sizov, "it is just a way to keep going."

But in which direction? Behind all the sound and fury in Moscow -- where the ruble, government debt and now the government itself have been cast to the wind -- lies a fundamental question about Russia: Is this market capitalism as it emerges from its chrysalis or the survival mechanism of a system unable to embrace real market forces?

In the saga of the socks lurks the dead soul of Russia's economy. The deal helps police to patrol the streets, and the Textile Machinery Design Bureau to stagger on. But, along with countless similar transactions, it hobbles Russia's clubfooted transition to capitalism.

Mr. Sizov's plant can't sell its products, it can't pay its taxes, it can't pay its electricity bills, and it often can't pay its workers. (They, too, get stuck with socks.) But like tens of thousands of crumbling Russian enterprises, it has survived, just.

Protected from the harsh discipline of money and markets, it finds shelter from bankruptcy in a ruble-free zone of barter, debt and favors. This sanctuary has saved Russia from mass unemployment, but it has dulled the promise, along with the pain, of the market.

A government report dissecting Russia's deformed economic anatomy calls it "Syndrome X." The International Monetary Fund refers to it coyly as Russia's "structural agenda." Clifford Gaddy, a Brookings Institution authority on Russian industry, dubs it "the virtual economy."

An official survey of 210 enterprises at the backbone of the economy estimated that barter, debt-swaps and other nonmonetary deals accounted for 73% of transactions in 1996 and 1997. The businesses surveyed paid only 8% of their taxes with real -- what Russians call "live" -- money.

An announcement yesterday by the central bank that it would curtail support for the rapidly dropping ruble will add another layer of unreality. The withering of Russia's currency, while making it easier for companies to pay off their bills and debts, is likely to further entrench barter.

For this surreal system to survive, however, every link in the chain must hold firm. In Moscow, markets and the government buckled under the strain. And in Kostroma, too, the chain is badly fatigued; city hall went dark for several days this summer. Across Russia, a showdown looms. The outcome will decide whether taxes, bills and wages get paid and whether the discipline of live money takes hold.

Until last week, foreign investors stood aloof from such woes. The markets were tumbling, but the causes seemed to lie elsewhere. Today, investors have been sucked into the virtual economy. They, too, might not get much more than socks. Last Friday, Sergei Kiriyenko, then prime minister, told parliament: "We are getting rid of a disease. It is called the habit of living in debt." Two days later, President Boris Yeltsin got rid of Mr. Kiriyenko.

The disease has spread to every vital organ, from the central government in Moscow to factories across the country. All live in debt. Workers are owed more than $11 billion in unpaid wages -- equal to what the IMF pledged in new loans to Russia for the entire year. The electricity network, RAO Unified Energy Systems, or UES, owes the government at least five billion to six billion rubles but says it is owed twice this by deadbeat customers. RAO Gazprom, Russia's natural-gas monopoly, owes 12 billion rubles in back taxes but says it is owed 13 billion itself.

"The blood of industry is cash," says Yuri Filippov, head of the Kostroma region's industry department. "There is not blood in our veins." Without money there are no real prices; without prices there can be no effective market.

Kostroma, 200 miles northeast of Moscow, has a peculiar relationship with cash. Five years ago, when the government canceled all Soviet-era money, it chose the region as the graveyard for notes bearing Lenin's portrait. A cavalcade of trucks lumbered through the city, carrying coffins of cash to a ballistic-missile base outside town. Billions of old rubles now sit rotting at the bottom of unused silos.

The region's Communist-backed governor, Viktor Shershunov, declares the cash-clogged missile silos an environmental danger and laments the irony: The place is jammed with useless rubles even as "our biggest headache is getting money." He hasn't had his power cut off yet but has taken precautions. "We have a stock of candles ready," he says.

The problem for Kostroma, and the country as a whole, is that while the currency of Lenin's realm has been buried, the economic system it oiled still rumbles on. Factories have been put in private hands, but not into a real market.

In the main workshop of Mr. Sizov's plant, a handful of men hammer chunks of metal in semidarkness. The lights are off to save money. Unable to sell the machine technology it was set up to develop for the Soviet Union, the plant now makes primitive spare parts, mostly nuts, bolts and washers. Payment for them clogs corridors and offices: plastic bags stuffed with wool from a textile mill in Uzbekistan; heaps of blankets from a Moscow manufacturer; a mountain of tablecloths and heaps of flax from a linen combine.

The flight from money began as a rational response to hyperinflation. Back in 1992, it made sense to accept solid goods, not withering rubles. But the habit became a crippling addiction.

Now, Russia's newly reinstated prime minister, Viktor Chernomyrdin, faces a critical decision: Feed the addiction or force cold turkey. His past makes the former more likely. As prime minister from 1992 until March, he nurtured the debt habit. Earlier, he ran Gazprom, the biggest pusher of economic painkillers.

Last year, Gazprom's Russian customers paid only 15% of their bills with cash, covering the rest with IOUs and barter. Gazprom, in turn, begged off paying taxes. Moscow has tried this year to halt the cycle. It told all companies to pay federal taxes with money. From Moscow to Magadan in the East, the virtual economy shuddered. And, in Kostroma, the lights went out in city hall.

Gazprom's domestic gas supplier, Mezhregiongaz, had passed the pressure to pay on to its local customers. In Kostroma, this meant KostromaEnergo, a branch of the UES electricity network. It acknowledged owing 173 million rubles for gas but said it couldn't pay until it got paid itself-by Mr. Sizov, by the police, by bureaucrats and by other customers.

Mezhregiongaz refused to budge. In May, it turned off the power company's gas. The power company got some fuel from a neighboring region that owed it a debt, but when that ran out it pulled the plug on city apparatchiks. "I warned them," says its director, Yuri Nazarov. "It was very simple: Pay up or we'll cut off your power."

Simple, but also revolutionary. "I've worked in this business for 37 years, and this is the first time anything like this has happened," he says, waving sheaves of paper listing his deadbeat customers. So novel is the notion of mandatory payment that the main power station last year raised output by 46%, while consumers paid only 1.8% of their bills with money.

At city hall, the lights went off, computers crashed and bureaucrats scurried to the canteen, the only room left with power. The mayor, Boris Korobov, rushed back from a trip and sent an SOS to the military. Russia's strategic rocket forces came to the rescue: The local commander provided an emergency generator. "Nobody likes this mess," the mayor says. "This is not the market. It is the Middle Ages."

After three days, the power came back on. Municipal authorities agreed to pay up in part. Gas and electricity companies reshuffled the pack of unpaid invoices. Gas supplies resumed. But while the blackout has left much bitterness, it solved nothing. The spiral of debts and counterdebts has begun again.

This Monday, KostromaEnergo struck a deal with Mr. Sizov's textile-machinery plant for 50,000 rubles' worth of electricity. "We didn't have to pay a single kopeck," said Alexander Dobrokhodov, the plant's deputy director. In return for power, the factory is giving 400 woolen blankets to a camp for handicapped children. Their value will be deducted from KostromaEnergo's local taxes, just as the socks for the local police will wipe out part of the machinery plant's own municipal tax bill.

And why does Mr. Sizov have blankets? He got them from a Moscow factory, in return for deliveries of wool, which he earlier got from a textile factory in Uzbekistan in return for equipment.

Meanwhile, the Kostromskie Vedomosty newspaper has just sold off the last of hundreds of linen sheets and pillowcases that for months cluttered its offices. It got them in return for money it had on deposit with a bank that closed after one of Mr. Sizov's old customers, the Big Linen Manufacturer, failed to repay a loan.

Under the socks and blankets hides both the tenacity and decrepitude of the past. The Kostroma Textile Machinery Design Bureau was once a flower of Soviet industry. It never had to look for customers: They were assigned. Today, "nobody is interested in buying my equipment," Mr. Sizov says. "All my customers are in a deep crisis. Their products cannot compete."

In a market economy, they and he would be out of business. A new bankruptcy law will encourage that, but only a tiny fraction of the estimated 800,000 technically bankrupt companies are expected to file. And even those that do rarely close. For some, the new law allows up to 10 years in court-administered limbo.

More important is political will: Can government embrace a discipline that throws millions out of work and into cold darkness?

More likely is slow-motion decay. Mr. Sizov has slashed his work force to less than 100 from 260 and evacuated all but the lower three floors of a seven-story building, to save on heat and power. (He rents the third floor to homeless soldiers.)

Production has shriveled to a few rudimentary parts and the odd lightweight weaving machine. The plant's only new product is socks -- made on equipment it can't sell, from the wool it gets from customers without cash.

Now that the federal government wants its taxes paid in money, Mr. Sizov has turned one of his offices into a cash-only emporium of barter flotsam. The system "is very difficult for people like me," says the 58-year-old engineer.

It is less so for people like Vladimir Zelentsov, a 39-year-old maestro of the barter system. Dressed in a black-denim jacket and jeans, wearing a chunky gold ring, he crisscrosses the country stitching together deals.

Recently he was in Kostroma to see an old friend, the director of a linen mill whose workers haven't been paid for two months. It has been closed for an extended summer break, though the director does have one achievement he is proud of: He recruited a 6-foot model from the local fashion school as secretary. "She was top of her class," he says.

Together, the director, 38-year-old Yevgeny Shibanov, and Mr. Zelentsov play the barter game, shuffling IOUs, electricity allowances and goods from one end of the country to the other. Chemicals for the linen mill come from a factory in Chuvash region at the end of long chain, while part of its electricity comes courtesy of a nuclear power station in Kursk that owed money to KostromaEnergo -- and needed linen to complete its own elaborate barter sequence. (KostromaEnergo, meanwhile, has three tractors and tons of Siberian lumber that it got in lieu of live money.)

"Americans won't understand this," says Kostroma's mayor, Mr. Korobov. "You have to have gone through the university of our market economy to understand what is going on."

The head of the region's industry department, Mr. Filippov, thinks someone should write a book on the bizarre and perilous system. "It will be more interesting than a horror film," he says.