Most analysts and journalists cite purely political factors when speculating on the reasons for the fall of Yevgeny Primakov's government. The press has the emphasized frictions between the president and the former prime minister.

But there is another deeper and equally convincing explanation behind the rift between the Kremlin and the Primakov-led Cabinet.

The Business of Politics: a Historical Context

It is well known that major financial-industrial and business interest groups influence Russian politics.

The real triumph of the "party of banks and importers" came after President Boris Yeltsin's victory in the 1996 presidential elections. An immediate consequence of the banking lobby's triumph was the entry of UNEXIMbank President Vladimir Potanin into the government and the accelerated build-up of "oligarchic" capitalism in Russia.

Banks that supported Yeltsin were rewarded with more slices of the privatization pie, including the Tyumen Oil Company which went to Alpha-Bank, Sibneft to Boris Berezovsky and Agroprombank to SBS-Agro. As bankers gained the political upper hand, Prime Minister Viktor Chernomyrdin's position gradually weakened as that of First Deputy Prime Minister Anatoly Chubais-one of Russia's chief market reformers -strengthened.

The period of the ruble's stability and strength brought immense profits to the financial sector and consumer goods importers, while raw material exporters and domestic manufacturers saw a freeze on earnings and profits. Chernomyr-

din's dismissal as prime minister in early 1998 marked the beginning of the end of this period. And the beginning of Russia's financial crisis in August of that year put the nail in the coffin.

The Fall of the Banking Lobby and Rise of Industrial Czars

Russia's banking system suffered greatly from the crisis. But the widespread belief that the banking system was hurt primarily by the government's default on GKO and OFZ T-bills has little to do with reality.

As of mid-1998, GKOs and OFZs constituted only 13 percent of the combined total of the Russian banking system's assets (not including Sberbank and Vnesheconombank). Having been aware of the threat of default, two-thirds of banks reduced the proportion of GKO/OFZ in their assets to less than two percent by August. Therefore, the GKO/OFZ default could not have caused a devastating collapse.

The real reason was the Central Bank's forex policy, which pandered to the interests of financial capital. Ruble assets generated much higher yields than hard currency assets, leading banks to maintain liabilities in hard currency and assets in rubles. The Central Bank's policy of maintaining a ruble/dollar exchange rate corridor created the illusion that the ruble was stable and prompted banks to conduct reckless operations on the forex market.

As a result, banks incurred huge liabilities in hard currency. Back then, banks were allowed to maintain open positions in hard currency as large as 30 percent of share holders' equities, a high risk in hindsight. Naturally, in this situation, a 75 percent devaluation of the ruble was a shattering blow to the banks. As of August 1, 1998, the foreign currency denominated liabilities of Russia's banks exceeded their foreign currency denominated assets by $4.2 billion.

Unfulfilled forward contracts, however, were more problematic. The existence of the ruble/dollar exchange rate corridor stimulated the largest banks to conclude multi-million dollar forward contracts on the ruble/dollar exchange rate with their foreign counterparts.

By early August 1998, the combined obligations of the banks for outstanding forward contracts stood at $15.2 billion, an insurmountable amount given that the combined pre-crisis capital of Russia's banking system was slightly over $16 billion. The Central Bank's forex policy therefore made the country's banking system extremely vulnerable to ruble/dollar exchange rate oscillations.

Banks fell as much due to their own mismanagement and greed as to the bad policies of the Central Bank. Facing a number of problems, including an evaporating asset base, banks were forced to cede power to a rival economic clan. While the ruble devaluation was crushing banks and importers, exporters were struggling against weak oil prices on the world market, and the domestic industrial lobby gained the upper hand.

That resulted in political support from industrial lobbyists and Communists for Primakov, and the entry of Yury Maslyukov and Gennady Kulik into the government.

Six Month Rule of the Industrialists

Having severely hurt the banks, the ruble's devaluation positively affected the manufacturing sector.

By late February of this year, Russia's five backbone industries recorded an almost 6 percent increase in output.

The sharp fall of imports, especially the import of fast-moving consumer goods (on some items, the decline was as high as 80 percent), helped improve the country's foreign trade balance, boosting it to a positive $2 billion to $3 billion.

But the stimulating effect of the ruble's devaluation lost momentum by mid-April and early May 1999 as the ruble/dollar exchange rate stabilized. The foreign trade balance surplus dropped by approximately 10 percent. In other words, domestic industries could not show sustained gain and the economy started turning to foreign consumer goods in exchange for raw materials.

Meanwhile, commodities' prices rose sharply on world markets. Raw material exporters could again complain of domestic industry being subsidized at their cost. As oil prices rose, exporters quickly became cash earners for the economy and started asserting their position.

In view of these factors, it is not surprising that Primakov's dismissal quickly followed the stabilization of the ruble/dollar exchange rate and the upsurge of commodity prices on the world market.

The strengthening of export-oriented industries and the recovery of the banks and importers could not but lead to changes in the political domain.

Where Moscow Goes, the Regions Are Sure to Follow

A number of regional political blocs have recently formed in Russia. While some analysts tend to portray them as potential embryos of separatism, in fact they signify the strengthening of Russia's export-oriented sector.

LUKoil vice president Leonid Fedun is a member of the Vsya Rossiya (All Russia) bloc's committee of founders, and nearly all regional leaders who entered the bloc have close ties to LUKoil management. LUKoil CEO Vagit Alekperov also played an important role in the bloc's creation. The recent coalition between Vsya Rossiya, Otechestvo (Fatherland), a political movement headed by Moscow Mayor Yury Luzhkov, and a group of regional leaders headed by Tatarstan Governor Mintimer Shaimiev, reinforced the trend.

It is well known that the Moscow government has strong ties to LUKoil and that the two are involved in several projects together.

Another political bloc, Golos Rossi (Russia's Voice), is the brainchild of the Siberian Aluminium Corporation. Samara Region Governor Konstantin Titov leads the bloc and Khakassia Republic Governor Alexei Lebed (Krasnoyarsk Governor Alexandr Lebed's brother) is a member. The main constituent parts of Siberian Aluminium include Sayany Aluminium Plant, located in Republic of Khakassia, and Samara Aluminium Plant, located in the Samara Region.

Golos Rossii also includes Yamal-Nenets Autonomous Area Governor Yury Neelov and Astrakhan Region Governor Anatoly Guvzhin. The Yamal-Nenets autonomous area hosts Gazprom's main production facilities, and the Astrakhan Region is Gazprom's second most important region in Russia. Gazprom is cautious enough not to put all of its eggs in one basket, i.e., the federal government's.

In other words, Russia's major export-oriented corporations are consolidating their position with the regional political elite to have a greater say in Moscow. The obvious goal is to oppose leftist parties in the upcoming elections, who draw their strength from Soviet-era industrial enterprises.

If these assumptions are correct, the newly-formed regional coalitions and blocs pose no danger of separatism. Governors will simply acquire the support of strong businesses with immense cash and take their lobbying beyond banal regional politics.

Something similar happened on the eve of the 1996 presidential elections, when Russia's banking lobby met in Davos, Switzerland, and decided to support Yeltsin. It's easy to predict that this time, the "party of exporters" will be the main victor in the upcoming parliamentary elections.