Publication: Monitor Volume: 3 Issue: 105

One month ago Russian president Boris Yeltsin ordered the Defense Ministry to introduce competitive bidding for contracts to supply it with provisions. The aim of the initiative, which originated with First Deputy Prime Minister Boris Nemtsov, is to cut costs and fight corruption. An auction for the purchase of 10,000 tons of sugar (worth $6 million) was hastily arranged, and Nemtsov attended the auction’s opening in Monino, near Moscow, on May 20. (ORT, May 21)

Nemtsov’s supporters will cite the auction as an example of the swift introduction of market mechanisms in the effort to help the cash-strapped armed forces make better use of their scarce resources. Skeptical journalists were quick to challenge the effectiveness of the innovation, suggesting that "One can safely assume that the only winner in the auctions was friendship. The friendship between the old suppliers and the organizers of the auctions." (Segodnya, May 24)

Due to the haste with which the auction was arranged, the criteria for choosing winners were not publicized in advance. Contracts were awarded to three of the 13 bidders. The winners were not those offering the lowest price, however, but the firms which were willing to delay receipt of payment for two to three months. The army’s budget crisis means that it cannot afford to pay cash up front. It turned out that it was the army’s traditional supplier, the Federal Food Corporation, which won half the tender, with a price 15-20 percent above that of other bidders. (Kommersant-daily, May 27)

Pavel Fitnikov, the president of another of the auction winners, Agrompromsoyuz, explained that the bid conditions were unprofitable, but that for firms wanting to supply federal agencies "the long term political benefits exceed the short-term economic loss." He added that "supplying the army is a lottery — if they pay in two months you win, but if you wait four months you lose." He said that such deliveries are unprofitable for commercial firms that operate on a cash turnover basis, but good for firms like the Federal Food Corporation, since they can use the debts owed to them by federal agencies to offset their old tax liabilities. This shows how Russia’s chronic non-payments crisis threatens to undermine even the best of Nemtsov’s reformist efforts.

A recent investigation of the Federal Food Corporation by the procuracy found that it bought 90 percent of the food for the army in 1996, but at prices usually 50 percent higher than wholesale. Moreover, of the 2.9 trillion rubles ($5 billion) it was paid in 1996, an estimated 490 billion was stolen and another 520 billion used for purposes not specified in the contracts. The corporation’s director, Gennady Makin, a deputy agriculture minister, has long-standing ties with officials in the army’s rear services. (Kommersant-daily, May 27)

Disaffection within the Ranks.