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Russia Report: July 15, 2004


15 July 2004, Volume 4, Number 27
ECONOMY
BANKING CRISIS EASES: PROBLEM SOLVED?
This week the banking crisis that flared up last week appeared to ease: Both government financial officials and bankers reported fewer lines of panicked banking customers seeking to cash out their accounts. Andrei Kozlov, first deputy chairman of the Central Bank, declared on 10 July that the "situation in the banking market has been stabilized." And Aleksandr Gafin, a member of Alfa Bank's board of directors, said on 12 July that for the first time in recent days the inflow of private deposits to the bank was higher than the outflow, according to "Vremya novostei" on 13 July.

Last week, individual account holders at Alfa Bank withdrew around $200 million over the course of three days, according to Andrei Kosogov, Alfa Bank's first deputy chairman. But neither Kozlov nor his boss, Central Bank Chairman Sergei Ignatev, nor Finance Minister Aleksei Kudrin were willing to use the words "crisis" to describe the situation in the banking sector. "There is no banking crisis," Finance Minister Kudrin, said. "The banking system is in a normal state. What we see now is a reform process... and the fact that some banks cannot cope with that...should not affect the whole system."

Over the past two months, first a number of smallish banks and then some larger ones started to close their doors. On 13 May, Sodbiznesbank, the 101st-largest bank in terms of net assets, shut down after the Central Bank suspended its license on suspicion of money laundering. On 4 June, KreditTrast, Russia's 63rd largest, which had been connected to Sodbiznesbank, announced its voluntary liquidation. On 21 June, the tiny Kommercheskii Bank ceased all of its operations, and Paveletskii Bank, 159th largest, stopped paying out cash and private deposits. On 22 June Dialog Optim, 53rd largest, limited payouts on deposits and was processing all client payments with delays, and by 30 June, it stopped accepting individual deposits. On 28 June, the Central Bank stripped the tiny Novocherkassk City Bank of its license because of violations of the money-laundering law and failure to make payments.

The real panic started among customers when Guta Bank, Russia's 21st-largest bank in terms of net assets, stopped operating on 6 July, leaving only a note on its door saying that it was closed for "technical reasons," according to "Izvestiya" on 8 July. When newspaper articles appeared hinting that Alfa Bank, Russia's fourth-largest bank, might be the next to close, a stampede of customers wanting their money quickly followed. The story was a spurious one, planted according to Alfa Bank officials by their enemies.

The Central Bank and Alfa Bank took a series of measures, but which one or which combination finally put an end to the run is unclear. On 7 July, the Central Bank pumped liquidity in the banking system by lowering the mandatory reserve requirement for banks from 7 percent to 3.5 percent. On 9 July, Alfa Bank imposed a 10 percent commission on early withdrawals. The same day, the state-owned Vneshtorgbank acquired an 86 percent stake in Gutabank, ensuring that that bank will reopen. And on 10 July, the State Duma passed in all three readings a bill that when enacted will guarantee deposits up to 100,000 rubles ($3,400) for customers of uninsured banks. This means that at least some of the money of customers of Sobbiznesbank and KreditTrast and others will be recovered.

The question remains whether these measures are enough to forestall a new crisis, restore banks' faith in each other and their customers' confidence in the banking system. While some questionable banks may have closed their doors in the past weeks, most analysts agree that many more survived. In a comment to "The Moscow Times" on 12 July, Peter Westin, chief economist at Aton Brokerage, noted that "there are 1,200 banks with the right to take deposits, and the current capital requirement is 1 million euros -- 400 banks do not meet this requirement and should not be allowed to exist." Aleksandr Baranov, the vice president of the investment group Russkie Fondy, was quoted by the Economist Intelligence Unit on 10 June as saying that Russia needs no more than 300 banks. He pointed out that over the last six years, Russia has made little progress in consolidating the bank sector. At the height of the crisis last week, Prime Minister Mikhail Fradkov told cabinet ministers that the government would try to enact a state policy to stimulate more bank mergers. The government's success in achieving consolidation in the sector may be an essential ingredient in restoring consumer confidence.

Even before the events of last week, consumer trust had still not completely recovered from the financial crisis of 1998. In an interview with RFE/RL on 6 February, Margarita Taraeva, chairwoman of the administration of the Yuzhnii Torgovii Bank in Rostov-na-Donu, said, "In the regions, the section of the population that still does not operate in the banking system is huge." "Vedomosti" quoted Central Bank First Deputy Chairman Kozlov on 13 July as saying that "the problems of various banks were not reflected in the majority of regions." The newspaper disputed this statement, saying that it is "well known that depositors panicked all over the country." At the same time, the degree of panic may have be relatively smaller outside of Moscow and St. Petersburg for the simple reason that those populations had still not returned to banks after 1998. And after last week, it may be long time before they do. (Julie A. Corwin)

KREMLIN/WHITE HOUSE
WHAT'S NEXT FOR YUKOS?
By Victor Yasmann

The drama surrounding embattled Russian oil major Yukos reached its culmination on 7 July when the "Financial Times" reported that in order to keep Yukos from being driven into bankruptcy, jailed former Yukos CEO Mikhail Khodorkovskii has offered to surrender to the state the 44 percent stake in the company that he and other major shareholders control. The daily reported that Khodorkovskii's offer was made in a letter to Prime Minister Mikhail Fradkov and to Finance Minister Aleksei Kudrin that asks the government to unfreeze the company's bank accounts and to give the company three years to pay its tax arrears. This information was confirmed the same day by Khodorkovskii's lawyer Anton Drel. On 12 July, Drel quoted Khodorkovskii as having stressed that he will give up the stake "if the government is really interested in saving the company from defaulting and is ready" to unfreeze his accounts and of those of his partners, which have been blocked since October.

Khodorkovskii's last-ditch appeal was prompted by numerous legal and financial measures by the state against Yukos this month, steps that brought the company to the verge of bankruptcy despite President Vladimir Putin's 17 June statement that the Russian government does not wish to see the company go under.

On 1 July, court bailiffs accompanied by armed police officers arrived at Yukos's Moscow headquarters to present a demand for payment of $3.4 billion in unpaid taxes, fines, and penalties dating from 2000. The same day, bailiffs froze all the company's domestic bank accounts, and the Tax Ministry announced that it has filed an additional demand for $3.4 billion for taxes allegedly owed from 2001. The ministry also said that it is investigating the company's records from 2002 and 2003. A Yukos spokesman stated that the freezing of the accounts could halt the company's production and hamper its efforts to pay taxes and creditors.

On the weekend of 3-4 July, several dozen officers from the Prosecutor-General's Office and the Interior Ministry searched Yukos's Moscow headquarters, including the offices of the company's newly installed senior management, "Izvestiya" reported on 5 July. They reportedly confiscated documents and computer hard drives.

On 5 July, a syndicate of Western banks led by Societe Generale notified Yukos that it has defaulted on a $1 billion credit extended to the company in September. Yukos CEO Bruce Misamore issued a statement saying that "the actions of representatives of the Russian government have driven the best and most creditworthy Russian company into an unintended and artificial state of insolvency and even possible bankruptcy," AP reported.

On 6 July, Prosecutor-General Vladimir Ustinov told Ekho Moskvy that Yukos may face additional tax claims for 2002 and 2003. "It is like a snowball," Ustinov said. "This case has begun, but it is impossible to see the end." Ustinov added that Yukos shareholders should pay the company's tax debts from their dividends. "The assets of Yukos are now frozen, that is, the ones that are the subject of the probe," Ustinov said. "But there are dividends. Huge ones, many billion dollars. From them, the taxes can easily be paid."

On 8 July, Finance Minister Kudrin said that Yukos will not receive any deferment for its debt payments as "the company has enough assets, the sale of which will allow it to pay the bills."

Most analysts agree that the campaign against Yukos began in May 2003 when the National Strategy Institute headed by Stanislav Belkovskii issued a report accusing the country's oligarchs of plotting a creeping coup (see "RFE/RL Russian Political Weekly," 7 April 2004). Moreover, few doubt that Belkovskii was simply expressing the opinion of the Kremlin. However, commentators differ on just what exactly the Kremlin's intentions are. Some believe the Kremlin's motivation is political and its goal is to eliminate an uncontrolled agent that used its resources to support some of the Kremlin's political opponents. "Perhaps the Kremlin's real motive is to split Mr. Khodorkovsky from his money," the "Financial Times" suggested on 5 July. "By breaking Yukos, the authorities can destroy most of his wealth."

Other analysts, though, believe the Kremlin's objective is the more prosaic one of simply taking under its control the revenues of one of the country's most successful oil companies. "Izvestiya" commented on 3 July that the major oil companies should either be controlled directly by the state or sold to someone selected by the state, while the government retains a blocking stake. "It seems as if the state would like to create a triad of energy companies under its management: Unified Energy Systems (EES); Gazprom; and, let's say, Nefteprom, which would include Yukos and Rosneft and would account for 20 percent of Russia's oil production," the daily wrote.

Former Deputy Finance Minister and former Central Bank Deputy Chairman Sergei Aleksashenko, who is now vice president of Vladimir Potanin's Interros group (which owns "Izvestiya"), told Ekho Moskvy on 5 July that the two goals actually go together and that the first is impossible to achieve without the second. He said the government is trying to force Khodorkovskii, Menatep Chairman Platon Lebedev, and other major Yukos shareholders to sell their stake in the company, a necessary step to taking over ultimate control of Yukos. "I think that Khodorkovskii and the other major shareholders are more interested in their personal freedom than in saving the company, which they actually cannot help now anyway," Aleksashenko said.

Belkovskii on 5 July posted on the National Strategy Institute's website (http://www.apn.ru) his predictions about the fate the Kremlin is preparing for Yukos. He said that the Kremlin will implement a plan lobbied by presidential-administration deputy head Igor Sechin to create a new holding based on the two state-run energy giants, Gazprom and Rosneft, which together will acquire about one-half of Yukos's assets.

According to Belkovskii, the new holding will buy out foreign minority shareholders' stakes in Yukos. Chukotka Autonomous Okrug Governor Roman Abramovich will then buy the other half of Yukos, which includes Yukos's 35 percent stake in his former company, Sibneft, with the understanding that he will then resell this stake in Sibneft to French oil major Total.

Belkovskii noted that this scheme would mean that, at least nominally, Putin's statement denying any intention of bankrupting Yukos would hold true. He added that the new holding will be headed by Sechin himself. Sechin is widely expected to be named board chairman of Rosneft soon.

Belkovskii wrote that the only thing that could hamper such a scenario would be the appearance of a major Western oil company interested in buying Yukos in its present form. He said that Putin discussed possible scenarios for Yukos with "a European leader" during the June summit of the Group of Eight (G-8) leading industrialized countries in the United States. From the context, it seems apparent that Belkovskii is alluding to French President Jacques Chirac and that the discussion included the possible sale of Yukos's Sibneft stake to Total. Obviously, Belkovskii concluded, such a scenario does not bode well for Khodorkovskii.

Although the finale of the Yukos saga is yet to come, it seems clear that the ending will not be a happy one either for Yukos or for Khodorkovskii. Moreover, the scandal has caused considerable damage to the overall political situation in Russia. Yabloko leader Grigorii Yavlinskii told Ekho Moskvy on 5 July that the Yukos affair is being duplicated on the local level in many federation subjects, with local authorities using law-enforcement organs either to pressure businesspeople to change their behavior or to destroy the businesses of renegade entrepreneurs. "In the 1990s, we created an economic system in which business and power were interconnected like Siamese twins," Yavlinskii said. "Now watching them fight one another creates a very depressing impression." He added that he understands the feelings of people who feel no sympathy for either side.

"In 1992, inflation was 2,600 percent and tens of millions of people lost all their savings and the savings of their parents," Yavlinskii said. "Then two or three years afterwards all of a sudden a group of young people appeared and said that they are billionaires, without any explanation of how they got their property, how, why, and for how much it was sold to them."

Yavlinskii said that the political class's main mistake was that it has not made any legal and political evaluation of the privatization process. Instead, the government is using selective, arbitrary "justice" and "in fact has begun a crippling renationalization." "And all this is happening not openly, but behind the scenes, which is destroying both the Russian economy and public trust," Yavlinskii concluded.

STATE DUMA
DUMA DEPUTIES PASS NEW LAW PROTECTING BANK CUSTOMERS...
State Duma deputies finished the last day of their spring session on 10 July by adopting a number of new bills in their third and final readings, Russian news agencies reported. Deputies voted on 10 July to approve in its first, second, and third readings a bill protecting bank customers if their bank becomes insolvent. Depositors in any bank have the right to receive up to 100,000 rubles ($3,400) of the money in their account if the bank fails. Support for the bill was unanimous with 403 deputies voting in favor, according to lenta.ru The bill had been proposed by Central Bank Chairman Ignatev to bolster consumer confidence in the Russian banking system following the runs at Guta Bank and Alfa Bank last week (see "RFE/RL Newsline," 8 and 9 July 2004). According to "Vremya novostei" on 12 July, the new law resembles an old law on insuring bank deposits that came into force at the end of last year; however, Duma Banking Committee Chairman Vladislav Reznik believes the new law is necessary because the panicked mood of the population must be quieted. JAC

...APPROVE CHANGES TO THE LAW ON THE AUDIT CHAMBER...
Also passed in its third and final reading was a bill amending the law on the Audit Chamber, which changes the process for appointing the head of that body, RosBalt and RIA-Novosti reported. The bill was supported by 334 deputies. Under the bill, both the State Duma and Federation Council have the right to confirm or dismiss the head of the Audit Chamber and his or her deputy. The amendments are supposed to make it easier for the legislative chambers to dismiss the leadership of the Audit Chamber (see "RFE/RL Newsline," 10 June 2004). JAC

...AND APPROVE PART OF THE HOUSING REFORM LEGISLATIVE PACKAGE.
Deputies also approved in their second reading on 10 July a total of 18 bills from a 28-bill package of legislation reforming the housing sector, RosBalt reported. Other bills in the package, such as the Housing Code and the Town Planning Code, which have already been passed in their first reading, will be considered in the fall session. Legislators also rejected a number of bills before adjourning. Deputies rejected on 9 July a bill that would have made the use of Nazi symbols in public a crime, a bill that would have allowed direct elections to the Federation Council, and a declaration that would have supported a call in the German Bundestag to provide financial compensation to Romany communities for the suffering they endured during World War II, Interfax reported. JAC

LEGISLATORS GIVE FINAL NOD TO BILL ON CIVIL SERVICE.
State Duma deputies voted on 7 July to pass the presidential law on civil service in its third and final reading, Russian news agencies reported. The vote was 330 for and 106 against, according to RIA-Novosti and RosBalt. The bill establishes legal, economic, and organizational guidelines for regulating the civil service and introducing new ranks. The bill also introduces the concept of a service contract, similar to a labor agreement, which can be terminated if a bureaucrat causes harm to the state, issues illegal orders, or reveals state secrets. The bill also prohibits civil servants from engaging in commercial activities or using their position to assist election campaigns. JAC

PUNISHMENT FOR DRUNK DRIVING TOUGHENED.
Also on 7 July, deputies voted to approve in their third and final reading amendments to the Administrative Code that toughen the punishment for drunk driving, RosBalt reported. The vote was 337 in favor with 36 against and two abstentions. The amendments increase the time period that a drunk driver can be deprived of his license. According to data from the traffic police, Moscow catches 110-120 drunk drivers daily. About 30 are fined and the rest of the cases are taken to court, according to the agency. JAC

BENEFITS REFORM BILL PASSES FIRST HURDLE IN LEGISLATURE.
The government-sponsored bill reforming the system of benefits, such as free public transportation for veterans, passed the State Duma in its first reading on 2 July, Russian news agencies reported. The vote was 296 in favor with 116 against and three abstentions, RosBalt reported. According to the agency, just 10 members of the more than 300-member Unified Russia faction voted against the bill, 10 didn't vote at all, and two officially abstained. Although Liberal Democratic Party of Russia leader and Deputy Duma Speaker Vladimir Zhirinovskii has publicly criticized the bill and voted against it, 12 members of his 36-member faction voted for it. The Communist Party and Motherland factions voted unanimously against the bill. Under the bill, persons who currently have the right to unlimited free public transportation will receive 40 rubles ($1.40) a month, and those with the right for free medicine will receive 350 rubles a month, "Vremya novostei" reported on 5 July. JAC

COMINGS & GOINGS
OUT: A raion court in Vladivostok on 12 July struck State Duma Deputy Viktor Cherepkov (independent) from the second round of the city's mayoral election, Russian media reported. The court ruled that Cherepkov used his State Duma office during the first round of the campaign, in which he came in second. Cherepkov is currently hospitalized following a 9 July assassination attempt (see "RFE/RL Newsline," 12 July 2004).

IN: Gazprom-Media Deputy General Director Tamara Gavrilova has been named NTV first deputy general director responsible for finances, management, and personnel, Russian media reported on 8 July. In 1993, she began working for the External Relations Committee of the St. Petersburg city administration, which was headed by Putin.

IN: RTR Deputy Programming Director Yevgenii Kucherenko was named the programming director of NTV on 12 July, Russian media reported. Anchorwoman Tatyana Mitkova was named NTV deputy general director in charge of information programming.

POLITICAL CALENDAR
15 July: Government will consider projects which can be financed in 2005 using World Bank credits

16 July: Foreign Minister Sergei Lavrov will visit Paris

18 July: Second round of mayoral elections will be held in Vladivostok

20 July: An all-Russia celebration in memory of Saint Seraphim of Sarov will begin in the city of Kursk

21 July: Dutch Foreign Minister Bernard Bot will visit Russia

24 July: Aeroflot shareholders meeting will elect new board of directors

31 July: State Duma will hold a special session

1 August: Deadline for the Finance Ministry to present its draft 2005 budget to the government

3 August: State Duma will hold a special session

8 August: Supreme Court will consider an appeal by Pavel Zaitsev, the special police investigator who headed a high-profile corruption probe into the Grand and Tri Kita furniture stores and who was found guilty of exceeding the authority of his office

12 August: Fourth anniversary of the sinking of the "Kursk" submarine

12-15 August: BMW Russian Open Golf Tournament in Moscow

13-29 August: Russian athletes will participate in the Summer Olympics in Greece

23 August: The trial of the alleged murderers of State Duma Deputy Galina Starovoitova will reopen

26 August: Deadline for the government to submit its draft 2005 budget to the State Duma

29 August: Presidential elections will be held in Chechnya

September: St. Petersburg's Hermitage Museum plans to open the Hermitage Center, which will exhibit works from the Hermitage's collection, in the city of Kazan

15-18 September: The third International Conference of Mayors of World Cities will be held in Moscow

20 September: The State Duma's fall session will begin

October: President Putin will visit China

October: International forum of the Organization of the Islamic Conference will be held in Moscow

7 October: President Putin's birthday

23-26 October: Second anniversary of the Moscow theater hostage crisis

25 October: First anniversary of Yukos head Khodorkovskii's arrest at airport in Novosibirsk

31 October: Presidential election in Ukraine

November: Gubernatorial election in Pskov Oblast

20 November: Sixth anniversary of the killing of State Duma Deputy Galina Starovoitova

22 November: President Putin to visit Brazil

December: A draft law on toll roads will be submitted to the Russian government, according to the Federal Highways Agency's Construction Department on 6 April

December: Gubernatorial elections in Bryansk, Kamchatka, Ulyanovsk, and Ivanovo oblasts

29 December: State Duma's fall session will come to a close

1 February: Former President Boris Yeltsin's 74th birthday

March 2005: Gubernatorial election in Saratov Oblast.

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