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Poland, Belarus & Ukraine Report: January 28, 2003

28 January 2003, Volume 5, Number 3
CHIEF BANKER DISCLOSES STEPS TOWARD COMMON CURRENCY WITH RUSSIA. Commenting on the meeting of Belarusian President Alyaksandr Lukashenka and Russian President Vladimir Putin within the framework of the Russia-Belarus Union Supreme Council in Minsk on 20 January, Belarusian National Bank Chairman Pyotr Prakapovich told journalists on 23 January that Belarus is planning to allow the circulation of the Russian ruble, along with Belarusian currency, in noncash operations and bank clearings as of 1 July 2003, ITAR-TASS reported. According to Prakapovich, this will be the first phase in the introduction of the Russian ruble as the single currency of the Russia-Belarus Union. The second phase, Prakapovich divulged, will be the pegging of the Belarusian ruble to its Russian namesake as of 1 January 2004. Prakapovich admitted that both sides still differ on who is going to control the emission of the single currency as of 1 January 2005, since Moscow wants to run the union's money-printing machines completely on its own, while Minsk wants to have a say in this process.

Prakapovich also said the introduction of the single union currency envisions a Russian cash loan to Belarus of some $300 million, a sum approximately equal to Belarus's present money supply. The loan from Russia is to be interest-free and extended for an indefinite term. It will be returned to Russia, Prakapovich explained, only if Belarus rejects the Russian ruble and reintroduces its national currency. Belarusian rubles are to be exchanged for Russian ones at a jointly coordinated rate.

At the same time, Prakapovich said Minsk will keep the Belarusian rubles withdrawn from circulation after 1 January 2005 in a special repository. "A wise manager never destroys anything, he keeps it in storage," RFE/RL's Belarusian Service quoted Prakapovich as saying. (Jan Maksymiuk)

RUSSIA-BELARUS CURRENCY UNION: PRELUDE TO A POLITICAL ROW? The meeting of the Supreme Council of the Russia-Belarus Union that took place in Minsk on 20 January manifested two remarkable tendencies in the relations between Presidents Putin and Lukashenka. First, the conspicuously friendly meeting created an impression that the two leaders have overcome the last year's conflict over the model of the union that strained relations between the two countries for nearly half a year and gave room to speculation that Putin is plotting the political destruction of his Belarusian counterpart. Second, the introduction of the Russian ruble as the single currency in the Russia-Belarus Union has overshadowed all other issues on the bilateral agenda.

The presidents have confirmed their commitment to the monetary union and have urged their governments and the national banks to speed up the preparations. Immediately upon his return from Minsk, Putin instructed his finance minister "to remove possible concerns from both our [side] and the Belarusian side." He warned that, "We have to generate momentum, otherwise, the process can slow down or even collapse."

The reestablishment of the "ruble zone" has been an obsession of Belarusian policymakers since the country was forced out of it in the summer of 1993. The failure to arrange this cost former Prime Minister Vyachaslau Kebich a possible victory over Lukashenka in presidential elections one year later. The monetary union was unearthed after several years of oblivion in the treaty on the single state signed in December 1999, which foresaw the introduction of "a single currency of the union state" on 1 January 2005. All Belarusian proposals regarding a common currency in the past, however, were met with skepticism and even open opposition in the Kremlin. Concerns that Russia would have to pay too high a price to salvage the unreformed Belarusian economy outweighed the political benefits the single currency could bring. Now, however, it is Putin who is taking the lead in promoting the unification of the two countries' monetary systems, while concerns about the conditions and consequences of the union prevail over enthusiasm in Minsk.

In spite of official promises that all the particulars of the deal will be worked out by the middle of this year, the reality may bring little progress and a lot of political power play. While declaring support for the union, neither side is willing to sacrifice sovereignty and lose control over its own affairs. Likewise, the incentives for the two leaders to join the union can still hardly be reconciled. Putin is putting pressure on Belarus in order to get control over its economy, which will pave the way for political absorption in the future. Lukashenka still dreams about getting access to printing Russian rubles in order to keep Belarus's unreformed economy afloat and thus maintain the stability of his political regime. As a result, Russia and Belarus are still locked in the dispute over where the union's central bank should be located and whether it should be an institution founded by the two countries on the basis of parity or whether its functions should be transferred to the Russian Central Bank, with the National Bank of Belarus thus becoming its regional branch. This has been one of the stumbling blocks of negotiations throughout the last decade.

Moreover, little indicates that the sides have made any progress on issues that cannot be left unresolved if the monetary union is to be considered realistic Thus, Belarus insists that its companies should be given equal conditions in the Russian market. This includes, among other things, reducing the price for raw materials in Belarus to the level paid by Russian consumers. Furthermore, negotiations are being slowed by the unsolved issue of the payment of value-added tax. For several years, Russia has been using the pretext of the existence of the union state to apply to Belarus the "country of origin" principle of VAT collection, i.e., the tax on goods produced in Russia and exported to Belarus is paid in Russia and not in Belarus, as it is practiced in the countries where the "country of destination" principle is applied. This costs the Belarusian budget approximately $150 million per year. Belarus insists that the deal on currency (as well as customs and other areas) should include retroactive reimbursement of all VAT revenue it has lost in this way.

But politics is even more important than economics in obstructing monetary integration. No single currency is possible unless the economic systems of the two countries converge. Belarusian authorities thus face the challenge of unifying tax and customs legislation, ending the practice of issuing direct negative-interest loans by the National Bank to boost production in the industrial and agricultural sectors, unifying pricing policy with Russia, developing its financial markets, and sharply reducing interference in the economy. This involves no less than a comprehensive economic-reform program for Belarus. There is no sign that Minsk is willing to embark upon this path, as it would bring forth a comprehensive dismantling of the major element of the present political regime in Belarus, i.e., unlimited state interference in the economy, which allows the control over society, and the redistribution of financial resources in order to maintain social coherence.

The cost of moving toward the union may generate even bigger political problems than simply losing leverage on economic activity. The problem here is a big difference in the inflation levels between two countries (10-15 percent in Russia and approximately 35 percent in Belarus), which reflects the different approaches toward monetary policy practiced by the two. Belarus has yet to abolish the practice of stimulating economic growth by printing money and thus keeping insolvent state-run companies afloat. If hard budgetary constraints are withdrawn momentarily, this may bring forth a sharp decline in production; cause the bankruptcy of loss-making companies (which account for 40 percent of the total number of firms in Belarus); and lead to a sharp rise in unemployment and accumulation of wages arrears, a fall in government revenues and a ballooning budget deficit, and the collapse of the banking system, which is currently burdened by unpaid loans to the industrial and agricultural sector. If Russia agrees to salvage the Belarusian economy in the worst-case scenario, it will have to tolerate higher inflation in its own economy. If not, it will push its ally to the brink of economic, and possibly political, turmoil.

There is little doubt that the Kremlin (as well as Minsk) understands the transition costs of adopting the Russian ruble in Belarus and the political implications of this decision. And yet, Putin has even insisted that the union should be brought to life on 1 January 2004. It now looks like it is his turn to politicize the issue and use it as a weapon of choice in dealing with Lukashenka. Besides seeking tangible progress in integration with Belarus before upcoming parliamentary and presidential elections in Russia, hurrying up with the currency union may only indicate the Russian president's wish to galvanize economic processes that would soften up Lukashenka's grip on power. But Lukashenka, who has yet to take measures to prolong his political existence and carry out the referendum on abolishing the currently existing term limits for the presidency, has no illusions that surrendering sovereignty in monetary affairs may destroy his own rule. One can only guess whether or not Putin has plans concerning the suspension of Lukashenka's political career. But his readiness to elevate the most conflict-prone issue to the forefront of the Russia-Belarus agenda hints that last year's row between the two presidents is far from being exhausted, whatever the recent return of friendly rhetoric into the political lexicon of the two leaders may indicate otherwise.

This report was written by Vital Silitski, an associate professor at the Department of Economics at European Humanities University, Minsk.

BELARUS AS NEITHER DEMOCRACY NOR DICTATORSHIP. A book review by Vera Rich of Elena Korosteleva, Colin W. Lawson, and Rosalind J. Marsh (eds.), "Contemporary Belarus -- Between Democracy and Dictatorship," Routledge/Curzon, London and New York, 2003, 201 pp. ISBN 0-7007-1613-0.

This book --- yet another with a subtitle in the form "Belarus Between X and Y" -- is based on papers from the conference "Belarus: the forgotten heart of Europe," which was held at the University of Bath in February 2000, plus an afterword covering the presidential elections of September 2001. It is also, in some sense, derived from a two-year collaborative research project with academics from Belarusian State University, the Ukrainian Academy of Sciences, and Moscow State University, which was funded by both INTAS and the British Academy, called "Comparative Analysis of Charismatic Leadership in Russia, Belarus and Ukraine: Its Emergence, Mobilization, and Sustainability." This latter research, we are told, provided the empirical grounds on which the research conclusions of the book are based.

The result is a high-powered academic collection, with almost all the contributors either currently holding academic posts or writing doctoral dissertations at Western or Belarusian universities. The exceptions are Teresa Dumasy ("Belarus's Relations with the European Union -- a Western Perspective"), who at the time of writing was a senior research analyst on Ukraine, Belarus, and Moldova at the Foreign and Commonwealth Office in London and who is now at the British Embassy in Paris, and the eminent emigre Belarusian scholar, Jan Zaprudnik, now retired after a long stint with RFE/RL. The individual papers consider Belarus from the viewpoint of such topics as "postcommunist authoritarianism," the "difficulties of elite formation," the development of political parties and their election platforms, "president and opposition," the consequences of late economic reforms, the Russia-Belarus Union, and Belarus's relations with foreign states. Particularly valuable (especially to those who have only recently become involved in, or even aware of, Belarus) will be the papers "History and Politics in Post-Soviet Belarus (David R. Marples, University of Alberta) and "Belarus in Search of National Identity Between 1986 and 2000 (Zaprudnik).

To draw together the findings of the individual contributors, the editors provide a substantial introduction focusing in particular on economic problems, institutional and structural environments, the "paradoxical" nature of the Belarusian electorate, the "stability" of the existing regime and the prospects of what might happen if it were overthrown, and how far Russia is prepared to bear the costs of "union" with Belarus. Addressing the question implicit in the subtitle of the book, this introduction concludes that Belarus is not a "total dictatorship" since it "retains some aspects of a democratic state" but is rather an "elected dictatorship" possessing the "preconditions for democracy," though not democracy itself. They further conclude that, "Belarus has arrived at a crossroads of transition: what lies ahead is either an irrevocable path to democracy or a slide backwards to dictatorship."

During the three years since these papers were first presented in Bath, Belarus has shown little sign of firmly setting off on the path to democracy. However, in spite of some worrying increases in authoritarianism and infringements of human and civil rights (notably the 2002 law on religion), the backward slide has not become inevitable, and the "preconditions for democracy" still exist. Belarus remains stuck at the crossroads, and in spite of its long gestation period, this book, and the findings of the individual papers, remain largely relevant today.

Some of the numerical data is, of course, now outdated, and some contributors exhibit a somewhat naive tendency to take official Belarusian statistics and the findings of "pro-presidential" opinion polls at their face value without further discussion. Overall, however, the book provides a stimulating and challenging contribution to the study of contemporary Belarus.

Vera Rich is a London-based freelance researcher.

UKRAINE-NATO ACTION PLAN UNVEILED. The Ukrainian Foreign Ministry and NATO on 22 January published on their respective official websites the text of the Ukraine-NATO Action Plan adopted by the NATO-Ukraine Commission at the NATO summit in Prague in November (see "The purpose of the Action Plan is to identify clearly Ukraine's strategic objectives and priorities in pursuit of its aspirations towards full integration into Euro-Atlantic security structures, and to provide a strategic framework for existing and future NATO-Ukraine cooperation under the Charter," the text says, adding that the plan will be reviewed periodically. The plan lays out jointly agreed principles and objectives in five sections: Political and Economic Issues; Security, Defense, and Military Issues; Information Protection and Security; Legal Issues; and Mechanisms of Implementation.

In accordance with the document, Kyiv has committed itself to pursuing "internal policies based on strengthening democracy and the rule of law, respect for human rights, the principle of separation of power of judicial independence, democratic elections in accordance with Organization of Security and Cooperation in Europe (OSCE) norms, political pluralism, freedom of speech and press, respect for the rights of national and ethnic minorities, and non-discrimination on political, religious or ethnic grounds."

In the sphere of foreign and security policies, Ukraine pledged in particular to update these policies to reflect its declared goal of full Euro-Atlantic integration, to be a key contributor to regional stability and security, to sustain and enhance participation in peacekeeping operations, and to fully observe international arms-control obligations.

In the sphere of economic policy, Ukraine promised to ensure the openness of its economy in conformity with World Trade Organization standards.

The document obliged Ukraine -- in close cooperation with NATO's Joint Working Group on Defense Reform -- to reform its defense and security system in general in order to obtain "a well-trained, well-equipped, more mobile and modern armed force" and to strengthen civil control over the armed forces and other security forces. In particular, Ukraine committed itself to achieving the following objectives: to increase the country's contribution to NATO-led peacekeeping operations in the Balkans and to NATO measures in the fight against terrorism; to develop the full interoperability, sustainability, and mission effectiveness of its armed forces through effective implementation of Partnership for Peace goals; and to maintain the readiness of rapid-reaction-force units for participation in joint operations with NATO.

Ukraine has also obliged itself to present annually a draft Annual Target Plan (ATP) for achieving principles and objectives of the action plan. The action plan stipulates that "within the framework of the NATO-Ukraine Commission (NUC), NATO member states will provide advice on the proposed specific measures and timelines, and the NUC will agree [on] any joint NATO-Ukraine actions. Ukraine will then approve its ATP at the highest level, which will include joint NATO-Ukraine activities agreed by the NUC and activities Ukraine undertake[s] on its own." The NUC is to review on an annual basis progress in achieving the objectives of the action plan. Quoting a source in the NATO press service, Deutsche Welle in Ukraine reported last week that the action plan does not automatically guarantee Ukraine membership in NATO. At the same time, the source said the implementation of the plan's principles and objectives will allow Ukraine to make essential progress on the path to full membership. (Jan Maksymiuk)

UKRAINIANS LESS TRUSTING OF NATO. The NATO-Ukraine Action Plan was published on 22 January. The five-chapter document outlines Ukraine's strategy for meeting NATO criteria on issues like policy, economy, security, defense, information, and law. It also proposes developing joint programs in disarmament, air defense, research, science, and emergency situations.

But a nationwide poll conducted in December by the Social Monitoring Center and the Ukrainian Social Studies Institute and published last week shows that confidence in NATO has dropped dramatically since a similar survey made last summer after Ukrainian President Leonid Kuchma declared his country's intention to join. The results published show that out of a sample of more than 3,000 Ukrainians, just 28 percent said they trusted the Atlantic alliance, down 11 percent from the poll last summer. Likewise, 44 percent of respondents said they did not consider NATO a trustworthy organization this time around. Last summer, just 34 percent said they had doubts.

The head of NATO's representative office in Kyiv, Michel Duray, said that opinion polls only partially reflect reality and that NATO is not disheartened by the poll. "Polls are like tides in the sea. They can go up, they can go down. So I'm personally convinced that [, although] there may have been some problems and misunderstandings, and there maybe still are some misunderstandings between NATO and Ukraine, this does not hamper our decision to go forward and to contribute to the implementation of the recently published action plan," Duray said.

Duray said another document will appear soon explaining how to implement the objectives outlined in the plan year by year. "The next practical step will be the publication of the annual target plan, which should occur, hopefully, in a few weeks -- no more than three weeks, I hope -- which describes, indeed, all the practical steps which are to be undertaken by Ukraine and by NATO and Ukraine [jointly]," Duray said.

When Kuchma declared in May that Ukraine wanted to join NATO, it was a dramatic departure from the country's previous policy of treading a neutral path between the West and its former colonial master, Russia.

Ukraine has been a member of NATO's Partnership for Peace since 1997, and joint NATO and Ukrainian military maneuvers are conducted frequently in Ukraine. But Kyiv's decision to intensify relations emerged from a growing fear Ukraine was being left behind as many former Soviet-bloc countries raced toward membership in not only NATO but the European Union as well.

However, Ukraine has only seen its isolation grow in recent months, as Kuchma has come under fire from Western leaders for his alleged corruption and possible role in the killing of an opposition journalist. The Ukrainian leader was roundly snubbed during November's NATO summit, which he attended despite requests that he not come to Prague.

The United States has also imposed financial sanctions on Ukraine amid claims that Kuchma authorized the sale of a sophisticated radar system to Iraq. And last week, Britain and Canada imposed additional sanctions on Ukraine, saying it had not done enough to combat money laundering.

Some of the organizers of the poll on NATO entry say many Ukrainians see the snub against Kuchma at the Prague summit as a snub against Ukraine overall.

This view is seconded by Serhiy Komisarenko, Ukraine's former ambassador to the United Nations and Britain and current head of the nongovernmental Ukrainian International Institute for Peace and Democracy. He said that many Ukrainians feel shunned not only by NATO but by the West overall.

Recent statements by the European Union appearing to dismiss Ukraine's chance of joining the bloc, Komisarenko said, have only contributed to that feeling of growing isolation. "Many Ukrainians are, I won't call it disappointed, but they objectively see that Western Europe and the United States are turning away from Ukraine. But what's the reason for this? Well that's another question," Komisarenko said.

Komisarenko said that most Ukrainians believe that "prevailing politics," i.e., the policies of Kuchma and his administration, are to blame for the country's isolation from the West. He added that the Western stance is understandable, given that Ukraine has consistently failed to honor pledges to introduce the reforms necessary for membership in the EU or NATO. "Therefore Ukraine, unfortunately -- I repeat, unfortunately -- even though it talks about wanting to be [closer to Western] Europe, it has done everything to show Europe that it is not ready for that process," Komisarenko said.

Commenting on the recent poll, Komisarenko said that many people are still locked into Soviet-era prejudices that color their outlook on institutions like NATO. "Different people look at issues in different ways depending on their world outlook and the events that happen in the world. It depends on the extent to which they are tied to the past. The attitude toward NATO, to a large degree, depends on the attitude toward NATO that prevailed during Soviet times," Komisarenko said.

Komisarenko's theory is supported by survey findings indicating that those Ukrainians most likely to distrust NATO are over 50 and remember the Soviet Union fondly. Geographically, most NATO doubters in Ukraine are found in areas with large numbers of ethnic Russians and Russian speakers: Crimea and eastern Ukraine. The most pro-NATO responses came from western Ukraine, where national consciousness is most firmly entrenched.

Komisarenko said that reporting on NATO by the Ukrainian mass media is largely negative. He said that NATO itself should do more to teach Ukrainians about the alliance and what it can offer Ukraine. "Unfortunately, I think that NATO publicizes itself too little in Ukraine. Ukrainians still know very little about NATO: what role it played previously in the world, what it did when the Cold War finished, and what NATO's current plans are," Komisarenko said.

Duray said that NATO does not want to isolate Ukraine and does not rule out Kyiv's eventual full membership in the alliance if it implements reforms like those in the plan outlined last week.

RFE/RL correspondent Askold Krushelnycky wrote this report.

"Lazarenko was a natural phenomenon in the chaos that followed the creation of the independent [Ukrainian] state, [the chaos characterized by] the total absence of the understanding that national interests should be a priority, the domination of private interests, the uncontrollability and corruptibility of the entire power system, and the immaturity of society itself. Without doubt, he was a gifted man. I would have never hit upon [the ideas he had]." -- Opposition Sobor Party leader Anatoliy Matviyenko on former Prime Minister Pavlo Lazarenko, who is in a U.S. prison awaiting trial on charges of laundering $114 million through private U.S. financial establishments. When Lazarenko was prime minister (May 1996-July 1997), Matviyenko was governor of Vinnytsya Oblast and headed the pro-presidential Popular Democratic Party. Quoted by the "Ukrayinska pravda" website on 23 January.