E.A. Preobrazhensky

From N.E.P. to Socialism

Lecture 9

The organization of state industry

The question of how industry was organized and managed in this period is of very great interest: in the first place we see here for the first time in history the combination of two economic systems, the socialist and the capitalist, the combination of socialist management with regulation by the capitalist market. Equilibrium in the economic system was attained here on the basis of these two principles simultaneously. Looking through the economic writings of this period, we can see that some extremely worthy Communists did not always take into account not only the inevitability but also the expediency of combining both methods, in certain circumstances. There was a moment when some industrial executives rejected the principle of socialist regulation, assuming mistakenly that this method and the capitalist method were mutually exclusive in all circumstances. They reasoned like this: since the attempt at socialist management of industry has failed in the period of War Communism, now exclusively capitalist regulation must appear on the scene, and we must not hinder it but give it a clear road, or otherwise there will be no regulation. In reality it turned out that this ‘maximalist’ way of putting the issue, which was absolutely correct in politics (either the dictatorship of the bourgeoisie or the dictatorship of the proletariat), did not justify itself in practice, in such a simplified form, in the field of economic relations. Historically we had in Russia a combination of socialism with capitalism in the economic sphere, with the dictatorship of the proletariat in the political sphere, a gradual subordination of the lower capitalist form by the higher socialist form, and eventually the complete triumph of the latter. True, this process was not merely evolutionary, as the capitalist form endeavoured to resist in the political sphere too, and was crushed, as we shall see later. But this defeat of the capitalist form occurred because it carne to blows with socialism after it had become intertwined with the socialist system and taken its place within the latter as a lower economic formation.

The period under examination is interesting also because in this decade it became clear enough which capitalist forms and methods were the more vital and would only gradually give way to the superior socialist ones, and which fell away, like the old scales of a snake sloughing its skin, as soon as proletarian industry was more or less on its feet. In any case, experience showed that socialism could successfully use many capitalist forms (capitalist calculation) and categories of simple commodity production (money) long after the political power of the class which represented all these forms taken together had been destroyed. Experience also showed something else. It showed (as also in the case of consistent democracy) that many tasks of an economic character thrown up by capitalism, and even caused by capitalist methods, could not be carried out in practice so long as the capitalist class was in power.

Economic construction in the period being studied proceeded to a considerable extent gropingly. From the heritage of War Communism whatever in practice began to hinder progress was rejected, while from capitalist forms was taken whatever was clearly advantageous for the given period. And this was a good thing. Thanks to this cautious approach, socialist methods were not scrapped which later on began to play an important role, while only those capitalist forms were adopted which were needed, without the economy being subjected to all the storms and stresses of market spontaneity.

Let us begin from the very top. What organs regulated economic life in general, and in particular large-scale state industry?

At the top we see, side by side, the State Planning Commission (Gosplan) and the State Bank (Gosbank). The former is the brain of the socialist economy, the latter is (if this analogy be permissible) the spinal cord in the world of capitalist spontaneity. (A brain is, as you know, in general not characteristic of a capitalist economy.) It seemed to some economic specialists In this period that Gosbank should oust Gosplan, turning the latter into its own planning commission. This was said in the heyday of the taking-over by socialism of those capitalist methods which were suitable for the particular moment. Exaggerations were natural at that time. But Gosplan remained in being, and its role began to grow with each year that passed. Gosbank remained, too, and its role also grew. But the difference between them proved to be that Gosplan still exists now, as you know, whereas Gosbank is no longer with us. When we look now at the long historical space of time covered by our economic past, the role played by particular institutions becomes clear. Gosbank had to be organized and to adapt capitalist relations to socialism (to some extent bringing to completion in our circumstances that which our poorly-developed capitalism had not completed) and then to place the capitalist elements under the leadership of socialism – in concrete terms, under the guidance of Gosplan. Gosbank’s task under the dictatorship of the proletariat con-sisted in betraying capitalism to socialism, like a provocateur, using capitalist methods. Gosplan’s task consisted in adapting socialism, which it represented, to the capitalist and commodity relations existing in the country, while endeavouring to make itself master of them. To describe the roles played by these two organizations, which represented two historically different types of economy, one could employ Plato’s famous comparison of the two horses, soul and body, harnessed to one chariot. Gosbank and Gosplan, like wheelhorse and tracehorse, were harnessed to one cart, and whoever drove the wheelhorse thereby also drove the tracehorse. But the good driver knows that sometimes horses have to be allowed their heads before they are again reined in.

In this period the capitalist tracehorse also rushed wildly ahead until it was restrained by the wheelhorse and its driver. It must be pointed out, though, that by Gosplan I here understand not so much the actual institution which was then housed in No.7, Vorontsov Place, but the entire socialist principle in the economy as a whole. In exactly the same way, Gosbank is for us only a collective concept of the organizing principle in the sphere of capitalist spontaneity. Before Gosbank and Gosplan were correctly delimited from each other and each assigned its appropriate task, some time passed. There was a period when many economic organizations tried to escape from the control of Gosplan and other organs of state regulation, and Gosplan itself was to a certain extent repudiated. In the same way, Gosbank took its place as dictator in the sphere of the capitalist regulationof the economy only some years after its foundation and after the stabilization of the currency and grant to Gosbank of the right to issue money on behalf of the State.

In concrete terms, the picture as a whole now looks like this.

The State Bank began its operations with means that were quite inadequate for the financing of industry, which was half-ruined, lacking all circulating media, and which moreover came up against a sales crisis right from the start. Quite inadequate also were the means which the bank could assign for the financing of peasant economy, which required enormous sums for long-term credit. In addition, owing to the acute and uninterrupted decline in the value of the currency, the bank’s basic capital quickly depreciated, and thereby the financial lever which was to have exerted an active influence on the country’s life was gravely weakened. Only continuous support by the state saved the bank from inevitable collapse. Under these conditions the bank could, naturally, give credit only to those enterprises which had a chance of survival and seemed likely to be able to repay what was lent them. Absolutely hopeless enterprises, which in the War Communism period were given the means to survive along with the healthy ones, and at the expense of the latter, and which had concealed a hole through which state resources wasted uselessly away, now died a natural death, or else were obliged to reorganize themselves radically and make ends meet. The substitution of bank financing for the system of estimated supply undoubtedly played a positive role, training enterprises in strict accounting methods, economy in expenditure, business-like avoidance of waste in carrying on their affairs, and flexibility. But this system also had its negative consequences. Under it, enterprises which were important for the whole economy but were unprofitable from the capitalist standpoint were of course, pushed into the background so far as finance was concerned, and were looked upon as not specially desirable clients of Gosbank. Only the intervention of Gosplan, that is, of socialist reason, ensured the possibility of survival to these enterprises; the power of element forces was even then so strong that enterprises which were commercially profitable, though of little importance from the general economic standpoint, were still in a better position than enterprises of importance to the state. In the newspapers of those days, over many years of NEP, we constantly come upon complaints that heavy industry is irt a critical position while light industry is flourishing.

Endeavouring to save itself from going bankrupt, and in the interests of a more expedient distribution of state resources, Gosbank was not only forced to carry out a ‘natural selection’ among enterprises when financing them, but also, in conditions in which the currency was falling, it tried to make its operations, if not profitable, then, at least, free from loss. For this reason it demanded payment of interest, and of part of the principal, in kind, it reserved the right to share in the profits of the enterprises it financed, and it undertook trading operations on commission. The immediate stimulus to this was transitory, as we have seen, being caused by the conditions of a falling currency. After that phase had passed, however, the system was maintained for other reasons too. The point was that repayment in kind, especially in the sphere of agricultural credit, led gradually to the elimination of the private middleman between state and peasantry, which resulted in a reduction in expenditure on the distributive apparatus in the country. Also in line with the direction of economic progress was the bank’s sharing in profits and its more intimate connexion with the enterprises it financed. This connexion helped the state to get its hands, reaching out from the financial centre, on to those reins which in the period of NEP were beyond the control of the Supreme Council of the National Economy, as a result of which state industry was without helm or sail. Participation in trade was of great importance because, owing to the decline in the importance of large industry in the country’s economy, there was an increase in the relative weight of petty production, which was linked up into a single entity with the whole economic organism mainly by way of trade. By financing trade in all its forms, the Banks acquired great economic influence over unorganized petty production. At the same time, with an economic structure in which large-scale industry was still weak, trade was the most effective instrument for accumulating capital at the expense of petty production. The Bank not only should not have refrained from all these activities but, on the contrary, should have intensified in every way the role it played in trade, indirectly subjecting it to ‘socialist reason’ and carrying out accumulation in a capitalistic form for the benefit of the socialist exchequer.

All this organizational activity of the Bank in the sphere of private economy, and of state economy working by capitalist methods, developed, of course, more fully when the currency became stabilized and when the Bank was given the right of issue. Stabilization of the rouble was accomplished in Soviet Russia very much sooner than might have been expected; having in mind the frightful state of monetary circulation at the very start of NEP. Stabilization was achieved by putting an end to the budgetary deficit. They began to make ends meet in the budget thanks to punctual receipt of the tax in kind and all the money taxes, through the reduction in the number of enterprises working at a loss and the increase in those making a profit, through further cutting down of the bureaucratic apparatus and, finally, through ‘the re-establishment of the export of grain and raw materials. Once equilibrium had been achieved in the budget, it was not very difficult technically to organize a stable currency. The old money was exchanged for new paper roubles of full value, with silver coins serving as change for these notes. At the same time, the right of issue was transferred from the state treasury to the State Bank, which before this had had the right to issue only bank-notes, secured on gold and foreign currency. The right of issue enabled the State Bank to become a powerful economic force in the country’s whole economy, the financial brain-centre in the sphere of monetary circulation. This happened in the following way. When the currency was falling, accumulation in monetary form was impossible, cash was exchanged as rapidly as possible, and. even an expansion of goods-exchange could not in these circumstances produce any marked increase in demand for money. When the currency was stabilized the rapidity with which money circulated declined sharply, which meant an in-crease in the demand for money throughout the country. While during the period when the currency was falling rapidly, owing to the quick circulation of money the value of all the paper-money in the country declined to 40 million gold roubles and less, now the demand for purposes of circulation and accumulation was reckoned in hundreds of millions of gold roubles. To meet this demand a supplementary issue of stable currency was needed, which meant at the same time a very great increase in the monetary resources of whatever institution undertook this issue: it brought rich fruits to Gosbank and enormously enhanced its financial power. The country’s international trade, increasing from year to year, and also the demand for the Soviet rouble abroad owing to the development of foreign trade, had the result that, despite the increase in all kinds of resources calculated otherwise than in money, an increase in the mass of circulation media was needed. This annual extra issue was now undertaken by the State Bank, which skimmed the cream from circulation, never varying the value of the rouble in the slightest. Furthermore, the financial power of Gosbank was increased by what were called the seasonal issues. What was meant here was that Russia, as a predominantly agricultural country, suffered from very great fluctuations in the demand for money in the period when the harvest was being realized, and in this respect was markedly different from the industrial countries. In the latter the goods produced found their way on to the market more or less evenly throughout the year. A great agricultural country, however, threw on to the market in the autumn a greater part of its production than in the other seasons of the year. The need for circulation media increased enormously in this period, agricultural produce became cheaper, money acquired greater purchasing power. In spring and in the first half of summer, on the other hand, the opposite phenomenon was observed, that is, a reduction in circulation media. When it was given the right of issue, Gosbank brilliantly utilized these seasonal fluctuations, in the market and currency conjunctures, for the purpose of accumulating capital. In the autumn, when all the commodity procedures in the countryside were obtaining money and trying to rid themselves of goods, Gosbank, hastening to meet these elemental forces, extensively utilized its right of issue within the limits of demand for monetary circulation media. Gosbank put into circulation hundreds of millions of roubles of full value, financing the grain trade and buying up, at an expenditure of many tens of millions, various agricultural products. In the spring and summer, when the currency ‘hangover’ had set in, and the large quantity of paper money issued in the autumn could have resulted in a fall in the value of the rouble, in this period when it was not a case of goods chasing money but of money chasing goods, Gosbank again set itself against the wind of elemental fortes, and sold off at favourable prices everything that it had bought cheaply in the autumn. Thus, when the elemental forces called for goods, Gosbank provided goods, pumping the surplus money out of circulation and leaving it with only that surplus, in comparison with the previous year, which was required by the annual increase in circulation. This regulation of seasonal fluctuations on the money and goods markets ensured enormous profits to the Bank, which increased every year the amount of circulating media at its command.

With a stable currency the power of the Bank increased also through the growth of its income from loan operations. At the same time the stability of the currency led to a rapid increase in deposits. The Bank now relied not only on its own capital but also on that of all the depositors in all its branches and in the credit institutions subordinate to them, and became the centre of all the monetary accumulation occurring in the country. Currency, commission, middleman, deposit and other operations, participation in mixed branches with foreign capital, sharing in the profits of the state trusts, all this made the bank a huge power during the first decades, the significance of which increased still further in the period when new enterprises were being established. In contrast to the capitalist countries, in that period of the history of capitalism when it was in excellent health and expansion, Soviet Russia in the period we are studying possessed very slender resources for new construction. While in the capitalist countries fatty excrescences of capital were always formed, which were not absorbed into production, so that surplus capital appeared on the market and the rate of discount fell, in Russia, on the contrary, reviving industry and agriculture completely swallowed up the entire increase in new values. Both industry and agriculture suffered continually from the shortage of capital for extending production. This enormously strengthened the influence of the Bank over every individual enterprise which was firmly attached to it by the string of credit. As regards new enterprises, it was almost impossible to establish these without the Bank’s participation, unless, of course, an enterprise was founded by foreign capital. Consequently, the Bank not only ensured itself exceptional profits but also obtained influence on the management of enterprises. At the same time, the fact that new enterprises could not be started otherwise than with the aid of Gosbank enabled the state to implement its economic plan, encouraging the establishment only of such enterprises as were expedient from the standpoint of this plan.

Private trading and industrial capital was at first very tenuously connected with the Bank. It was very difficult for a private person to obtain a loan, because Gosbank had not sufficient resources for more important enterprises. At first this credit to private economy was given rather on grounds of principle than for the sake of direct practical results. Moreover, private enterpreneurs and merchants were still not creditworthy, as they lacked as yet sufficient property to serve as security for bank loans, and had only just began to fleece the sheep. Gradually however, in this sphere too, after a number of bankruptcies, a group of more stable enterprises emerged. These applied to Gosbank for credit, because the interest demanded by moneylenders, owing to the general shortage of capital in the country, varied from 1 to 3 per cent per day. These enterprises now obtained credit from Gosbank, and this financial string tied them in to the general economic pyramid which was headed by Gosplan. As the actual power of Gosbank increased in the whole field of state credit, and its role in private economy increased, the bank was not only made, little by little, an instrument of the regulation of this part of the economy, but also was sometimes used as an axe by the socialist state to cut down whatever in private economy was harmful to state economy. The government did not need to issue a decree for the closing down of a private enterprise the existence of which was for some reason undesirable in the eyes of the state. The Bank killed this enterprise by refusing it credit, killed it in the legitimate capitalist way, just as the big banks in capitalist countries kill hundreds of enterprises. In the great majority of cases the mere threat of a withdrawal of credit was enough to make enterprises which were financed by the Bank work as the state required.

In capitalist countries the banking system made masters over the economic life of the country those who were masters of the banks. In the epoch of finance capital the banks disposed not only of their own capital but of all the surplus capital in the country. As a result, out of the savings of the French peasants, workers, petty-bourgeois and officials, a railway could be built somewhere on the other side of the globe, and new enterprises could be opened, without the depositors being asked at all whether they considered these constructions necessary or not. The mighty State Bank of the Soviet Government, with its ramified network of provincial branches and the subsidiary credit institutions dependent on them, also acquired the practical possibility of disposing of all the free resources of private economy which were deposited in these credit institutions. Some kulak in Tula or Kursk province, realizing that it was senseless to keep his money in his own ‘land bank’, the cellar of his house, deposited it with the local branch of Gosbank, with a credit association, or with a savings-and-loans office, so as to obtain interest. These deposits, amounting to hundreds of millions of gold roubles in Russia, as a whole, did not lie idle in the bank. They now found their way via Gosbank into loans to Soviet industry and transport which were used for building the next power-stations on the list, for increasing the circulating capital of the state trading organs, for providing long-term agricultural credit, and so on. In brief, the capital accumulated by the kulaks now served to extend socialist production.

Thus, capitalist accumulation in the country was made an instrument of socialist accumulation.

But this was done not only through the bank, not only indirectly, but also directly. State taxes – in money and in kind – imposed on petty production and private economy in general, including concessions, served the same purpose. In addition, state industry and state trade extracted part of the surplus value from petty production in the form of trading profit. This profit was obtained from petty production in the main not only through internal trade but through foreign trade, because state organs were the monopolist traders in grain and raw materials on the foreign market. Wherever trade was carried on by private Russian or foreign capital, the state obtained revenue from them by import and export duties. At the beginning it seemed to many that when state industry was on its feet, when state trade was organized and the state banking system consolidated, direct taxes could be abolished, and their place taken by an appropriate addition to the retail prices of goods.

This would have been possible had the country’s economy contained only two magnitudes-state industry, artisan and petty peasant production. But so long as private industry, artisans and craftsmen, still existed and competed with large-scale state industry, so long as a considerable part of trade was in the hands of private, including foreign capital, and, lastly, so long as concession capital continued to exist in the country, such a method was not practicable. Additions to the prices of goods would enable not only the state to obtain additional income but also its capitalist satellites and competitors of the transitional period. This measure was practicable only in that sphere of production which was exclusively in the hands of the state. Consequently, this system was fully introduced only much later, when all the social and economic consequences needed for it had been established.

Thus, the values received by the state were dual in origin: the income from state industry, on the one hand, and, on the other, an alienation of a certain part of the income from non-socialized production, particularly peasant economy. Both of those parts of the state’s revenue increased, though at a quite different tempo. The first-narred part increased more slowly than the second. Essentially, the income from industry at first consisted of excise charges, taxes and interest-payments on loans by the State Bank. And since the state’s subsidies to industry exceeded the total amount of this income from industry, industry as a whole was run at a loss, if one confines oneself to capitalistic methods of calculation. Industry advanced to a considerable extent at the expense of petty economy, though at the same time it also helped the latter – especially peasant economy – to recover. That part of its revenue which the state obtained from petty production provided the chief basis for introducing planning into the state economy. Through cuts in state expenditure on the army, the bureaucratic apparatus, education and cultural activities, a certain amount was set aside every year to go towards expanding industry and new construction. The task of Gosplan, the Supreme Council of the National Economy, Gosbank and the Bank of Trade and Indus-try was to ensure the most expedient use of these resources (together with foreign state loans, which, however, were not great). The economic organs had to know in what proportions particular branches of production were to be developed, and the production programmes of the trusts and of whole branches of production were sanctioned or not in accordance with these proportions. In this sphere the state had to overcome the inertia, if one can so express it, of capitalist methods of calculation and a number of prejudices derived from the capitalist way of running industry. With the dual system of economy, when combined methods of regulation were most suitable, capitalist ways of thinking obstinately imposed some capitalist prejudice on the leaders of the economy. This was the case, for instance, with what was called the sales crisis, when, however, it was not capitalist practice but socialist understanding of the entire economic process, in the interests of the working class, that prompted the way out that was found. The surplus production of consumer goods went to increase consumption by the working class and ensured higher productivity of labour in the subsequent phase. This sales crisis compelled the authorities to ascertain more or less exactly all the food and raw material requirements of the state economy as a whole, and this stimulated the state to speed up the organization of its own large-scale farming, as well as to ascertain the directions in which it should regulate peasant economy, which crops to develop and which to curtail, and so on.

The crisis of industry’s circulating media and the restoration of its fixed capital was also gradually solved. When the capitalist method of accounting as between trusts and separate branches of production was found to be threatening, in some spheres, to act as a brake on the expansion of certain branches, the state intervened and broke through the blockage that had been formed. It carne to the help of the necessary branches, using its reserves, and did not allow the fetishism of capitalist forms of accounting, in the grip of which certain enterprises or branches of industry were, to stand in the way of the development of industry as a whole.

In just the same way the organization of long-term credit for the rural areas, on a scale which was unprecedented for any capitalist economic system, was undertaken not only and not so much in accordance with the idea that these operations should be directly profitable in the immediate future, but rather so as to secure the agricultural basis of large-scale industry in the future, and the de facto linking up of the whole of peasant economy with large-scale industry. This long-term credit in its turn solved, from another direction, the crisis in finding outlets for goods.

The fact that the principal and indeed monopolist producer in some branches of industry was the state, and that the greater Part of the country’s wholesale trade was in its hands and in those of the co-operatives and mixed companies, enabled the state to regulate prices, as though the state were conducting a planned economy on the basis of the capitalist mode of distribution. The market, with its capriciousness and its elemental waves of rising and falling prices, gradually ceased to be a source of surprises for planned economy, partly through study of the demands of petty production, and partly through the power over it which the state wielded owing to its dual monopoly in the production of large-scale industry and the trade in its products. It was gradually ‘domesticated’ to socialism. The restriction of the power of the market proceeded along two paths, that of mastering it on the basis of its own laws, and that of distributing part of the values produced, in ways which by-passed it: collective payment of bonus to enterprises out of the state’s wages fund; advancing of long-term loans outside of the market mechanism, and distribution of credit in kind, without middlemen; sale of goods to the peasants on credit in winter and spring on the security of the next harvest; new planned constructions right outside any influence by market conditions on the distribution of the state’s free capital; and so on.

As a result of this sort of regulation of the non-socialized part of production and of the management of the other, state-owned part – that is, on the basis of combined methods of planned guidance of the economy, on the one hand, and capitalist calculation and consideration of the market, on the other – the new commodity socialist system of economy which came into being in this country in the NEP period exhibited a far greater equilibrium of its different parts than had ever been within the capacity of pure capitalism. The management and regulation of the economy were not yet socialist in character, but at the same time they constituted, economically and historically, a higher form than capitalism. For example, the most powerful trusts and syndicates in America were able to regulate sales, prices and, to some extent, production branches, but, as against that, the resultant in the economy as a whole emerged as the spontaneous product of their mutual conflict, while the barriers to the expansion of production which are connected with the existence of profit, and so with the need for a definite volume of effective demand, could not be eliminated. In contrast to this, the mixed form of regulation and management of the economy in Soviet Russia united all the potentialities of purely capitalist regulation with the methods of planned economy, which ensured wide possibilities for unhindered and rapid development of the productive forces of the whole economy.

In the period we are studying, the country’s private economy in general, and petty rural production in particular were drawn into the orbit of influence of large-scale industry and state regulation mainly through trade, in the first place,, and credit in the second, that is, through the exchange aspect. This connection did not yet lead to the organic transformation of petty peasant production into a different, higher form of production, but it approached close to it. Peasant economy began to be transformed organically and included in the economic system as a whole, as a constituent part, only when it was linked with large-scale industry not merely on the exchange side but also on the production side. This inclusion of peasant economy in the system of state economy as a whole took place by way of the ‘inclusion’ of entire rural areas in the system of power-lines of the district power stations, which necessarily led to a sharp change in the entire mode of production and the whole way of working in the areas concerned, even when the actual ploughing was not immediately taken over by the electric ploughs. It also took place by way of the extension of tractorized cultivation. State tractor squads of eight to ten machines were themselves large-scale economic units in mobile form, which by their work in the peasants’ fields linked the peasants with large-scale industry-providing tractors, repairing them, supplying them with liquid fuel and with skilled workers. But the linking of the peasant economy with large-scale industry was effected in another way, too. Peasant economy became dependent on large-scale state economy when it received fertilizer from state chemical works, when it received improved seed from neighbouring state farms, when it used state breeding centres, and so on. Finally, it depended on large-scale production for the extensive and costly land-improvement undertakings which could not be carried out without state aid. If one adds to this the influence of state and co-operative trade, of long-term state credit, under the terms of which the peasants’ harvest was sold to the state for several years ahead, that is, if one adds to production influences the influence through exchange which has already been described, the whole situation can be defined as peasant economy ‘in socialist encirclement’.

But these were only tendencies. In the period we have described, only indications of development in this direction were to be seen. Mechanical methods of cultivation had not been introduced at all extensively in peasant economy, all the district power stations designated in the electrification plan were not yet built, and not all of those which had been built ‘were yet connected up with the peasant economy. In this period, therefore, ‘socialist reason’ penetrated peasant economy only obliquely, through the banking system, state and co-operative trade, credit, and the productive and agronomic activities of the People’s Commissariat of Agriculture. But even in this period it was possible to observe the beginnings, alongside of the ‘link’ with peasant economy through exchange, of a link through production. The development of this process of linking on a production basis was the content of the second and longer period, in which Gosplan brought the rural areas into the orbit of planned economy not only through the capitalist controls of Gosbank but also through the power lines of the district power stations.

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Last updated on 24.1.2009