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Russia Report: October 22, 2004


22 October 2004, Volume 4, Number 41
FOREIGN RELATIONS
PUTIN'S CHINESE CARD
By Victor Yasmann

Russian President Vladimir Putin ended a three-day visit to China on 16 October during which he held talks with Chinese President Hu Jintao, Prime Minister Wen Jiabao, and other officials. Putin signed 13 agreements during the trip, including a final accord on the demarcation of their 4,200-kilometer border and a protocol on Beijing's support for Russia's accession to the World Trade Organization, international news agencies reported.

Putin, who was accompanied on the trip by Foreign Minister Sergei Lavrov and a dozen senior members of his cabinet and administration, said at a press conference in Beijing on 15 October that his visit was a "breakthrough both strategically and economically." He announced that both countries agreed to a fourfold increase in bilateral trade so that it reaches $80 billion by 2010. Putin also said that China has pledged to invest $12 billion in the Russian Far East and Siberia, mainly in the energy and timber industries and in infrastructure projects.

The focus of Sino-Russian relations, however, lies in energy cooperation and especially the route of the major oil pipeline from the Siberian city of Angarsk eastward. China, which is already the second-largest consumer of oil in the world, will drastically increase its demand as it endeavors to increase its Gross National Product by 400 percent by 2019.

But to do this it desperately needs Russian oil from eastern Siberia. Commenting on this fact, ORT reported on 13 October that: "China is moving rapidly towards the role of the leading world power, but the lever [allowing] this movement is in Russia's hands." In this context, Beijing has been pressuring Moscow for the last couple of years for the pipeline from Angarsk to be routed to the northeastern Chinese city of Daqing, though Moscow is more inclined to make another choice: towards the Sea of Japan port of Nakhodka. The latter option -- which of course is favored by Tokyo -- will provide Moscow with Japanese investment as well as the possibility for Russia to export its oil to Korea and North America. Explaining Russia's reluctance to build the pipeline towards Daqing, Putin said in an interview with Chinese newspapers on 13 October that Russia intends first "to follow national interests," kremlin.ru reported. In Beijing, the head of the expert directorate of the presidential administration, Arkadii Dvorkovich, announced that if Russia sees that China's demand for oil is not being met it will build a branch from the main pipeline to Nakhodka towards China, polit.ru reported on 14 October.

Despite the failure to sign an agreement on the pipeline, the general mood of Putin's visit was reportedly upbeat. "Both countries are united in the nonacceptance of a unipolar world. And there is no tension in relations between the two countries despite a desire by some circles in the United States to disengage Russia and China," TV Tsentr commented on 16 October.

Putin's visit to China comes at a time when Russia's political direction is undergoing a serious revision and there is a visible cooling of relations between Moscow and the West, according to Andrei Piontkovskii, the director of the Center for Strategic Research. Piontkovskii told "Nezavisimaya gazeta" on 14 October that "every time Russia's relations with the West deteriorate, Moscow experiences a rising tide of Eurasian sentiment." The beginning of this process was initiated by Prime Minister Yevgenii Primakov, who in 1999 talked about China and India "as Russia's main strategic partners." But a new turn toward Beijing certainly does not mean that Russia is about to enter into a new "Cold War" with the West, despite the rhetoric of current Kremlin strategists. As former U.S. National Security Adviser and connoisseur of Russian foreign policy Zbigniew Brzezinski said to "Novaya gazeta" on 14 October: "Russia can simply not endure such a development."

Still, as far as China is concerned, Putin's Russia no longer plays the traditional role of "authoritative older brother." Rather it poses itself as "impoverished older sister," leaving China in the role of "the now grown up and mighty younger brother," as it was described by one of Russia's leading experts on China, Andrei Devyatov. A colonel in Russian military intelligence (GRU), Devyatov worked for 35 years in China, first as a GRU officer under diplomatic cover and, after retirement, as an independent businessman. He is also the chairman of the Union of Military Sinologists. As a result of his experience in China he published several best-selling books, including his last one, "Chinese Breakthrough: Lessons for Russia," published in 2003. In the book, Devyatov outlines a strategy of interaction for the political forces of the U.S.-Russia-China triangle in the first quarter of the 21st century.

Devyatov postulates that in the next couple of decades a strategic confrontation between China and the United States is inevitable because of China's robust economic growth, its accelerating demand for energy and other resources, and because it is staking a claim as the leading global power. In his view, such a development poses no threat to Russia. "China's advance towards being the leading world power does not endanger Russia, because it is being turned culturally towards Europe and China -- towards the southern seas; so that Russia and China are standing back to back. In such a position it is impossible to struggle against each other and, therefore, Russia is appearing [more and more] as a strategic rear flank for China in its confrontation with the United States."

Under such a presumption, Siberia's natural resources should be viewed as the "reserve supply base for China in a confrontation with the United States," Devyatov wrote. He did, however, warn that Russia should not provide China access to Siberian natural resources in the form of investment, but only for trade. "If we allow direct investment then our exports of energy and other resources will cover only the interest from the invested capital, while to repay principal capital Russia would sacrifice its sovereignty over the natural resources." To deal with this situation, Devyatov suggested Russia's aforementioned role of "impoverished older sister." As the "sister," he said, Russia should share "in a family way" with China their advanced technology in the military and aerospace sectors in exchange for Chinese capital to modernize Russian industry and infrastructure. Such a scenario would make China an active economic and political competitor with the United States, Devyatov added. China will resist the correlation of such a role, as in the past China was content watching the furious competition between the two superpowers; but the dynamics of China's development has made this new role a reality, Devyatov declared.

Devyatov's second postulate is that Russia should in no way "hamper a confrontation between China and the United States or take a side in any such conflict." Instead, Devyatov proposed that Russia act as a shock absorber for such a confrontation. "If Russia will establish itself as a passive observer then it will not be an illusory investment climate, but rather a sober calculation that will bring to it a land of natural and intellectual resources, technology from the West, contracts from China, and capital from both sides," Devyatov said. Moreover, each side of the future superpower confrontation will try "to buy" Russia's support and will even try to use "neutral" Russia as a haven for some of its financial assets, Devyatov predicted.

In his book, Devyatov also touched on one of the most problematic issues of Sino-Russian relations, i.e., Chinese immigration to the Russian Far East and Siberia, which some observers believe could lead to a kind of Chinese colonization of the Russian provinces and thus alienate those areas from the rest of Russia. Devyatov does not consider this a problem because he believes the bulk of Chinese expansion is directed southward and therefore Chinese migration to Russia is not an official state policy. However, Devyatov -- perhaps as a conciliatory note to those who are worried by Chinese immigrants -- mentions a prophecy by the elders from the famous Russian Orthodox Athos Monastery in Greece. According to this prophecy, "at the end of time the Chinese will begin, en masse, to adopt Russian Orthodoxy and this process will help cause a transfiguration in Russia."

The prophecy quoted by Devyatov perhaps explains a surprise remark made by Putin during a meeting with leading officials of the Russian Orthodox Church in October (see "RFE/RL Newsline," 7 October 2004). Reacting to a complaint from Baikal and Chita Archbishop Evlampii that Chinese immigrants are depriving local residents of work in Russia's Far East, Putin asked him whether there were efforts to convert the immigrants to Russian Orthodoxy.

It is not known whether Putin knows about this prophecy, as written in Devyatov's book, but several other bits of advice toward Beijing made by Devyatov have already found their way into Putin's China policy.

It is also notable that Devyatov said in his book that Putin is ready -- more so that any other Russian or Soviet leader -- to deal with Russia's powerful neighbor. As someone trained in the martial arts, Putin knows that in order to beat a superior opponent one must slip away from their momentum, then recapture and redirect the opponent's thrust for your own advantage, Devyatov wrote. Putin is obviously applying Devyatov's advice in the country's dealings with China.

ENERGY
THE DISMANTLING OF YUKOS
By Roman Kupchinsky

Will the Kremlin reward state-owned natural-gas monopoly Gazprom for its loyalty with a murky $18 billion deal as a year-end bonus? Many financial analysts in Moscow are leaning toward that conclusion, as Russian officials appear bent on the dismemberment of integrated oil and gas giant Yukos.

Yukos has paid $3 billion of a $3.4 billion tax claim for 2000, according to "The Moscow Times" of 13 October, but the company faces a further $4.1 billion tax claim concerning 2001.

Complaining that Russian tax authorities "are not satisfied" over the speed with which Yukos is paying off its back taxes, however, the Justice Ministry on 12 October announced its plans to sell an unspecified stake in Yukos's main production unit, Yuganskneftegaz, as early as November, "The Moscow Times" reported the next day.

Western and Russian financial observers were quick to point out that the Justice Ministry's reported valuation of Yuganskneftegaz at $10.4 billion is about two-thirds of what they had expected.

Soon afterward, in a move that furthered fears that Yukos is being dismantled, Natural Resources Minister Yurii Trutnev said on 16 October that Yuganskneftegaz risks losing its licenses over what he termed "rather serious" technical violations, "The Moscow Times" reported.

"The Moscow Times" on 18 October reported that an inspection of Yukos licenses last year by the ministry "failed to turn up any serious violations. It was unclear Sunday [17 October] what significant changes could have occurred since then." In November 2003, President Vladimir Putin said that recalling licenses from Yukos "would give the impression that the state was trying to shut down the company," the paper reported.

One analyst at United Financial Group in Moscow reportedly told "The Wall Street Journal" of 13 October, "It's pretty ugly; the fact that Yukos is being broken up at all is a complete scandal."

Investment bank Dresdner Kleinwort Wasserstein estimated the upper limit of Yuganskneftegaz's value at $18 billion in work it carried out for the ministry, according to a number of local and international news reports. Representatives at Dresdner would not confirm those reports, and officials at the Natural Resources Ministry have declined to comment either.

The sale of Yuganskneftegaz -- the core unit of Yukos that produces roughly two-thirds of its oil, equivalent to the output of Indonesia -- would mean the effective demise of Yukos in its current form.

Eric Kraus, chief strategist for Sovlink Securities, was quoted by "The Moscow Times" as commenting, "The game is proceeding according to plan -- the state intends to rip Yugansk out of Yukos and sell it, presumably to more Kremlin-friendly companies."

The most "Kremlin-friendly" energy companies in Russia are arguably Gazprom and Surgutneftegaz. Both have denied that they are interested in buying Yukos assets, but many analysts have countered that they are skeptical of those denials.

One Russian energy analyst told RFE/RL that he believes Yuganskneftegaz will be sold to Surgutneftegaz and that Gazprom will then take over Surgutneftegaz and form a single, giant Russian energy company that is effectively controlled by the Kremlin.

Lending credibility to this scenario is the fact that the Kremlin recently gave the green light for Gazprom to take over the state-owned oil company Rosneft, and Gazprom is preparing to create Gazpromneft, a wholly owned Gazprom oil subsidiary. This appears to jibe with Gazprom Chairman Aleksei Miller's strategy of transforming Gazprom into a diversified energy company involved in a range of activities beginning with oil and natural-gas extraction and continuing through electricity generation.

The takeover of Rosneft is significant in another aspect -- it increased the state's share in Gazprom from 38 percent to just over 50 percent.

Gazprom recently bought a 10 percent stake in Unified Energy Systems and, as Miller told NTV on 9 October, a "significant" stake in Mosenergo, the city of Moscow's electricity-generation company. Some reports placed the latter stake at 30 percent.

On 18 October, "The Moscow Times" quoted Federal Atomic Energy Inspectorate Director Andrei Malyshev as saying that a fully-owned Gazprom subsidiary, Gazprombank, purchased a 50 percent stake in Atomstroieksport, Russia's key nuclear company. That company is involved in the ongoing construction of the controversial $1 billion Bushehr nuclear plant in Iran.

A vastly enlarged, state-controlled Gazprom is bound to create consternation among the former Soviet republics as well as in Western Europe. Gazprom presently supplies about one-quarter of Western Europe's natural gas; it is the sole supplier to Estonia, Latvia, Lithuania, and Slovakia; it provides 91 percent of Hungary's gas imports, 79 percent of Poland's, and some 75 percent of the Czech Republic's.

This reliance has prompted the European Commission to call for Eastern European countries to diversify their gas suppliers. But by establishing a series of joint ventures and offshore trading companies with Eastern European companies -- in which it has invested $2.6 billion, according to the "International Herald Tribune" on 1 October -- Gazprom appears to have managed to control the entire chain of supply through investments and subsidiaries.

Gazprom's role in Russian foreign policy has also been of continuing concern to the West. By controlling the pipelines that deliver natural gas to Europe as well as to Ukraine and Belarus, Gazprom has arguably been in a position to exert pressure on these states to ensure they are more amenable to Moscow's policies. Europeans are reportedly concerned that this tendency might easily be extended to include them.

"Novaya gazeta" reported in October 2003 that Putin told visiting German Chancellor Gerhard Schroeder: "The pipelines are our legacy from the Soviet Union. We intend to retain state control over the gas-transportation system and over Gazprom. We are not going to divide Gazprom. The European Commission had better forget about its illusions. As far as the gas is concerned, they will have to deal with the Russian state."

Commenting in the same article on the situation surrounding Yukos, "Novaya gazeta" made the following observation: "There is, for example, the opinion that the Kremlin put Yukos under pressure because of its financial relations with [opposition political party] Yabloko. This is not even laughable. When have parliamentary elections decided anything in Russia? What counts is that Yukos became a leader in the movement of oil companies toward construction of their own export pipelines independent of the state. This encroachment on the rules is what cannot be tolerated."

More recently, "Newsweek" on 2 August spelled out the rationale behind the breakup of Yukos in somewhat different terms: "'A few billion extra dollars would come in handy right now,' says Nikolai Petrov of Moscow's Carnegie Center, laying out a scenario whereby Yukos's prize asset [Yuganskneftegaz] is sold at a deep discount...to Gazprom, the state-controlled gas monopoly. Yukos's oil could then be sold at a hefty profit for the benefit of the state, either to fund Putin's new cash subsidies directly or to defray government expenses elsewhere."

Despite Putin's public pledges not to break up Yukos as reported by "Newsweek," recent events suggest that such pledges will not be kept and that deliveries of natural gas are not the only things that will be placed under direct Kremlin control: Oil production and deliveries are likely to follow suit.

CORRUPTION
PUTIN'S SECRET PLAN TO COMBAT CORRUPTION?
By Julie A. Corwin

This week, Russia wound up again at the top of another international ranking of corruption. Russia shared the 90th slot with India and Gambia in a ranking of 146 countries, with the countries perceived to be the least corrupt on top, according to a survey by Transparency International. Last week, Russia got another vote of no confidence, when it finished fifth in terms of corruption, according to a survey of business leaders in 104 countries conducted by the World Economic Forum. Only Madagascar, Ukraine, Macedonia, and Chad registered higher levels of corruption. That survey concluded that corruption is Russia's greatest economic weakness.

Help might be on the way, according to Jonathan Schiffer, vice president of Moody's Investors Service. In an interview with Interfax published on 15 October, Schiffer argued that President Vladimir Putin's recent proposal to abolish gubernatorial elections could reduce corruption. "It is possible that the new reforms for the appointment of governors could lead to a different situation in the regions and a more efficient economic situation with less close connections between regional governors, banks, and, local wealthy individuals; more room for competition; and more room for small business enterprises," he said.

"We all know that many regional administrations in the past even interfered with taxation legislation and things like this formally and informally through some pressure on local entrepreneurs," Schiffer continued. "I think it's possible that an unintended consequence of these reforms in the economic area will be a little more space for local and regional entrepreneurs and a little more competition."

In addition, Schiffer said the cancellation of the elections could have a positive impact on the judiciary. "Breaking up the power of the local public administrations can be seen as a 'necessary if not sufficient' condition for the possibility of a more independent judiciary operating in the regions in the future," he said.

Putin did not link his proposals with the fight against corruption when unveiling them on 13 September. However, RFE/RL's Russian Service reported on 15 September that an unnamed administration official admitted that the proposals had been developed long ago and that the tragic school hostage taking in Beslan, North Ossetia, last month merely created an appropriate political atmosphere for bringing them forward. "Izvestiya" wrote on 16 September that an unnamed "upper-level" official divulged that "the point" of the president's proposals "is to remove regional leaders from the influence of regional circumstances and private businesses." In addition, Sergei Markov of the Institute of Political Studies told ORT on 14 September that "the promotion of executive-branch unity should become an instrument, a lever to significantly decrease corruption."

The optimism of analysts like Schiffer and Markov seems based on the assumption that when making his regional-executive appointments, Putin will clean house, removing corrupt or ineffective members of the current crew of governors.

Interestingly, the governors themselves do not seem to be worrying about this possibility. Almost without exception they have publicly embraced Putin's proposal, and according to "Nezavisimaya gazeta" on 19 October, they have been meeting with Putin in droves seeking the renewal of their current "contracts." Center for Political Technologies Deputy General Director Aleksei Markarkin told the daily that "each [regional leader] wants a solid guarantee from the Kremlin that he will remain in power, or at the very least will be able to name his successor."

Putin's track record in past gubernatorial elections undoubtedly contributes to the governors' sense of ease. In those gubernatorial races in which the presidential administration expressed a preference, loyalty -- often measured in terms of the ability to deliver local votes for the pro-Kremlin Unified Russia party in the State Duma elections -- seems to have been the only requirement. In 2000, Putin showed some sign of wanting to install his own people in the regions. However, by the time the 2003 State Duma elections rolled around, pragmatism prevailed. The Kremlin backed for reelection, for example, the authoritarian president of Bashkortostan, Murtaza Rakhimov, head of a republic where there is little political or economic pluralism. Like former President Boris Yeltsin, Putin has placed the highest value on loyalty.

Perhaps for this reason, few of Russia's leading experts on both corruption and elections have rushed to embrace Putin's plan. Georgii Satarov, head of the INDEM Foundation and author of many studies of corruption, has condemned Putin's plan to cancel regional elections. In remarks published in "Izvestiya" on 16 September, Satarov said, "when viewed as a whole, the measures proposed by the president indicate the intention to create a simulation of politics, a simulation of activity, a simulation of civic oversight." Commenting on Putin's proposed Public Chamber, Saratov noted that "Putin has already created a body that was supposed to oversee lawmaking: the Anticorruption Council. And the only thing this council ever did was elect [then Prime Minister] Mikhail Kasyanov as its chairman. In my view, civic oversight is not a matter for state bodies created from the top down."

Putin's proposal also attracted criticism from the usually loyal Central Election Commission Chairman Aleksandr Veshnyakov. While on a trip to Vologda last week, Veshnyakov said that among the possible negative consequences of appointing regional governors could be increased opportunities for corruption, "Novye izvestiya" reported on 15 October. He noted that once elections are abolished, the fate of each regional leader will be decided by an increasingly small number of people -- no more than 200 -- who work in the presidential administration and regional legislatures. "There might be a temptation," Veshnyakov said, "to make some incorrect decisions, in connection with personal or financial relations." And this was not Veshnyakov's first mention of corruption in connection with the election reforms. In an interview with "Rossiiskaya gazeta" on 15 September, Veshnyakov recommended that "it would make sense to retain the four-year election cycle for regional leaders and introduce a number of measures to deter the spread of corruption during the process of electing regional leaders."

Schiffer and Markov apparently want to give Putin the benefit of the doubt. However, if the past is any guide to the future, there is little reason to expect that this set of reforms was intended to produce anything but greater centralization, the increased marginalization of regional political elites in the formation of national policy, and less economic and political pluralism at the regional level.

PRESENTATION
CHECHEN TERRORISM IS 'HOMEGROWN PHENOMENON.'
On 12 October, Yekaterina Sokiryanskaya, the Nazran representative of the Memorial human rights organization and an eyewitness to the tragedy at Beslan, gave a presentation at RFE/RL's Washington office. You can hear the complete audio of her presentation at http://www.regionalanalysis.org/briefings/latest/en/2004/10/F76BD5A8-49FD-4394-B070-120C3F5E5D67.ASP. Readers of "RFE/RL Russian Political Weekly" who are interested in developments in the North Caucasus and throughout the Caucasus region should see the weekly "RFE/RL Caucasus Report" at http://www.rferl.org/reports/caucasus-report/.

In her presentation, Sokiryanskaya discussed the origins of the 10-year armed conflict in Chechnya and offered possible solutions to end the war. She said that Chechen terrorism is a "homegrown social phenomenon with domestic origins and roots." During the past decade of separatist war, Sokiryanskaya asserted, both Chechen and federal forces have "neglected the Geneva accords" and applied terrorist tactics with little regard for civilian casualties. "Unresolved conflict leads to human disaster," she said, explaining that the continuing violence and disregard for human rights in Chechnya is intensifying internal divisions within a society already fragmented by warfare.

While reviewing the categories of human rights violations in Chechnya, Sokiryanskaya said that Memorial and its monitors had documented a climate of "impunity," where the "double jurisdiction" of civilian and military authorities there allows criminal investigations to be lost in the bureaucracy while policies that allow federal forces to engage in gross violations of civil and human rights go unchallenged. This has made Chechen civilians reluctant to file charges against federal forces for crimes or sustained physical injuries because of a fear of government persecution, she said.

Sokiryanskaya stressed the need for a peaceful resolution in Chechnya soon, as the violence there is spilling over into the surrounding republics of Daghestan, Ingushetia, and North Ossetia and raising intercommunal tensions throughout the region. She said that any lasting solution must involve negotiations between Chechnya and Russia, in which both sides can reach a "symbolic settlement where acceptance as well as compromise can take place." Once a political solution is achieved, the more difficult process of reconciliation between Russia and Chechnya can begin, which Sokiryanskaya said will take many years and cannot be accomplished in the "current political situation."

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

24 October: Legislative elections in Chita Oblast.

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

26 October: A synod of the Russian Orthodox Church Abroad to discuss possible reunification with the Moscow Patriarchate

28 October: Federation Council to hold a roundtable discussion of proposed election-law amendments

31 October: Presidential election in Ukraine

November: Gubernatorial election in Pskov and Kurgan oblasts

November: Italian Prime Minister Silvio Berlusconi to visit Moscow

November: Prime Minister Mikhail Fradkov to visit Egypt

14 November: Mayoral election will take place in Blagoveshchensk

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

22 November: President Putin to visit Brazil

27 November: Regular Congress of the Unified Russia party

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

December: Gubernatorial elections in Vladimir, Bryansk, Kamchatka, Ulyanovsk, and Volgograd oblasts; Khabarovsk Krai; and Ust-Ordynskii Autonomous Okrug

December: Presidential elections in Marii-El and Khakasia republics

5 December: By-elections for State Duma seats will be held in two single-mandate districts in Ulyanovsk and Moscow

5 December: Gubernatorial elections will be held in Astrakhan and Ulyanovsk oblasts

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

January 2005: President Putin to visit Poland for the 60th anniversary of the liberation of the Auschwitz concentration camp

1 February 2005: Former President Boris Yeltsin's 74th birthday

March 2005: Gubernatorial election in Saratov Oblast.

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