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Poland, Belarus & Ukraine Report: April 29, 2003

29 April 2003, Volume 5, Number 16
PREMIER TESTIFIES IN RYWINGATE. Prime Minister Leszek Miller on 26 April testified before the special parliamentary commission set up in January to investigate the bribery scandal dubbed "Rywingate" by Polish media. The commission is probing allegations by "Gazeta Wyborcza" that prominent film producer Lew Rywin in July 2002 sought a $17.5 million bribe from Agora, the newspaper's publisher, on behalf of Miller's Democratic Left Alliance in return for changes to a media bill to benefit Agora (see "RFE/RL Poland, Belarus, and Ukraine Report," 14 January 2003). Miller's interrogation, which was covered live by Polish Television, continued on 28 April.

Miller told the commission that he did not send Rywin to solicit a bribe from Agora, as alleged by Agora Chairwoman Wanda Rapaczynska in a note she made for "Gazeta Wyborcza" Editor in Chief Adam Michnik, following her conversation with Rywin in mid-July. Rywin subsequently repeated his bribe offer to Michnik on 22 July, but without mentioning Miller's name (this conversation was secretly taped by Michnik and published by "Gazeta Wyborcza" on 27 December).

"From the very start, the whole matter seemed to me to be so absurd that it did not seem to merit serious attention," Miller told the commission. "At the same time, however, as transpired from Adam Michnik's words and Wanda Rapaczynska's note, Lew Rywin had cited my plenipotentiary powers in this matter.... Nobody knows better than I do how unambiguously lacking in any basis what can be read in this regard in Wanda Rapaczynska's note. For me the content of this text is absurd, from the sphere of fantasy and delusion."

Miller said there was no need to send Rywin to solicit a bribe from anybody in July 2002, since the government and Agora had already agreed on a compromise version of the media bill.

Miller told the commission that in August 2002, Jerzy Urban, editor in chief of the "Nie" weekly -- who, according to Miller, was "well-informed" about Rywin's bribe offer -- urged him to make the Rywingate scandal public. "I replied that this was an absurd story and it was difficult to make something so absurd public and promote an atmosphere of gossip, sensationalism, etc.," Miller said. "And I told him that since he [Urban] knew so much about this case, he could make it public, too." According to Urban, who testified before the commission in March, Miller, in explaining his motives for not making the bribery scandal public, said: "The damage might be greater than the advantage because people might think about this as a confirmation, and the resulting impression will be negative."

In expounding on why he did not report Rywin's bribe offer as a crime to prosecutors, Miller said: "In my deep conviction, informing of a crime requires an appropriate justification and the manifestation of circumstances rendering probable the manifestation of a criminal event.... I judged that this story was improbable and not credible."

Miller vowed before the commission that he "will not rest" until he has clarified why he himself and his party have been involved in Rywingate.

Most Polish commentators agree that Miller -- in contrast to his earlier declaration that he will tell the commission "interesting things" -- did not add anything of substance to the Rywingate case on 26 April. Miller's interrogation on 28 April turned out to be even more insubstantial than the earlier one, and ended in a scandal. On this day, Miller was questioned by only one lawmaker, Zbigniew Ziobro from the opposition Law and Justice. Ziobro was primarily interested in why Miller did not notify prosecutors after he was informed about Rywin's attempt to solicit a bribe, and repeated this question in a multitude of variations. Miller was essentially repeating what he testified two days earlier or was repeating himself when Ziobro asked the same or similar questions.

Polish Radio presented the conclusion of the questioning on 28 April:

Miller: The behavior of deputy Ziobro can only by described by one word: despicable.

Ziobro: I can see that the prime minister doesn't intend to reply to questions, instead, he uses invectives. I understand that seeking the truth can be painful and unpleasant at times.

Miller: You're nobody, deputy Ziobro.

It is not known when the parliamentary commission will continue the questioning of the prime minister. Seven more lawmakers are waiting to ask Miller questions. According to the head of the commission, Tomasz Nalecz, the questioning will probably continue after 8 June when the EU referendum takes place. (Jan Maksymiuk)

WILL LUKASHENKA EVER START REFORMS? Economic reforms have been contemplated for the past two years in Belarus at every level of the government, including the presidency. The trend was set during the presidential elections in 2001, when President Alyaksandr Lukashenka made generous promises concerning liberalization of the economic activities and privatization of big industry. Later, the authorities declared an intention to streamline the country's Soviet-style social-security system, while talks about agricultural reform resulted in a plan to restructure the collective-farm system. But with the passing of time, one can see little, if any, sign of progress. Now, the circle seems to be closed, as Lukashenka reiterates his adherence to his decade-long market-socialism policies.

This can be concluded from Lukashenka's annual address to the National Assembly on 16 April, in which he claimed yet another success for his economic model. "GDP growth was 104.7 percent in 2002. Comparing to the 1 percent growth in European countries like France and Germany, our development has a good dynamic," he declared in the address. Not even the integration with Russia should be used as an excuse to change his economic policy course. "A part of the Russian economic and political elite tries to condition the union by our adoption of the Russian neo-liberal economic mode," he said. "But the claim that the difference of economic systems hampers the creation of a single economic space is incorrect. The convincing evidence is the example of China and Hong Kong united according to the principle 'one country, two systems.'"

The record of economic policy making in the past few months may confirm that the long-awaited economic liberalization has turned into a never-ending story that had hardly any substantial chance to be realized. Thus, grandiose privatization talks have so far ended in a sell-off of the minority share owned by the government in the Slavneft oil company. At the same time, however, the government completed the process of corporatization (i.e., transformation of a state enterprise into a joint-stock company, initially with 100 percent state capital) of the Beltranshaz gas-transportation network and much of the petrochemical industry giants, which technically paves the way for their privatization. But Lukashenka still insists that the government will maintain control over every privatized enterprise in the initial stage, irrespective of investors' proposals or conditions.

This reluctance to surrender control over property became absurd in the case of the beer industry, where several companies in Belarus received investment offers from large beer manufacturers in Russia and the United States. The list includes the Krynitsa brewery in Minsk (offers from the St. Petersburg-based Baltika), as well as breweries in Brest, Slutsk (offers from Ochakovo in Moscow), and Babruysk (offers from the U.S. Detroit-Belarus Brewing Inc.) All of them have now postponed or abandoned their investment plans, and Baltika had to withdraw after having invested about $10 million in Krynitsa. Lukashenka gave no apologies for the confiscation of the investment, declaring to the students of Belarusian State University in March: "Oh, they [the Russian press and opposition] started to moan that, you see, Lukashenka has robbed Russian oligarchs. Say thanks that there is at least one president who robbed them!"

Lukashenka played a similar role when he invited the president of Detroit-Belarus Brewing for talks and expressed interest in the investment. The next day, however, he held a meeting with the heads of all major beer manufacturers, in which he declared that the country needs no foreign investment in the industry, and ordered one of the country�s largest commercial banks, Priorbank, to administer a three-year investment program instead. Ironically, a share in Priorbank was purchased by the Austrian Raiffeisen bank just several weeks before. Moreover, Lukashenka set new production targets for the enterprises, ordering them to double output and threatening severe punishment if these targets are not met. "I warn you that I will not tolerate this even if you are a privatized company, I don't care. Since your enterprises were built by our people, the state has the right to interfere in them."

In the agricultural sector, another sphere where ambitious transformation plans have been drafted, reform still remains on paper as the government refuses to consider the abolition of collective farms as the main units of economic activity in the countryside. The current "reform" plans foresee their transformation into agricultural "cooperatives" that generally preserve the old system with some minor modifications. Most importantly, the issue of recognition of private property rights to land is not even on the table. Moreover, the current plan gives heads of collective farms authority regarding the final decision on whether or not to undergo any transformation plan. It is very unlikely that this group will have any motivation to change the current status quo while the survival of "kolkhozes" (collective farms) is still guaranteed by government subsidies (every third ruble invested in the agriculture currently comes from the state budget). So far, merging kolkhozes with industrial enterprises (which subsequently cover their losses) remains the most widespread form of "reforming" the collective-farm system. Over the last year, this was done with at least 300 collective farms.

This only seems to aggravate problems in the industrial sector, where, according to the Statistics Ministry, the share of loss-making companies reached 48 percent (some 4,000 companies) of their total number. However, bankruptcy mechanisms are still defunct as maintaining full employment, not financial revitalization of enterprises, remains the primary consideration of the authorities. Last year, courts considered only 90 bankruptcy cases for public companies (and over 1,000 for private ones), while most disputes remain to be settled out of court. In practice, such cases result in debt write-offs, as a majority of creditors represent state-owned entities as well, and a debt-for-property swap is impossible in this case.

And finally, some of the reform measures introduced in the last several months are at the brink of reversal. Thus, Lukashenka ordered his control bodies to check the "adequacy" of pricing policies in the housing and utility sector after partial liberalization of tariffs resulted in their tripling in the past several months.

In sum, Lukashenka's "reformism" can be summarized in the formula "one step forward, two steps back." Most of the reform plans were drafted, and partial measures to implement them taken, under severe pressure from Russia (such was the case with the privatization plans) or were forced by changing circumstances (as happened with price liberalization). But reforms are being curtailed each time Lukashenka faces the final step, when he is faced with surrendering control over state assets or allowing reforms fraught with a potential political cost to fully unwind.

Moreover, Lukashenka has demanded that the government fulfill his economic-development forecasts by any means. In particular, he wants economic growth in 2003 to be accelerated up to 8 percent, while investment should be boosted by 18 percent. There is a big chance that the government may resort to the inflationary stimulation it used to boost economic growth in 1997-98. But it is highly unlikely that they will be able to find an external sponsor ready to finance such an "economic miracle." Therefore, the growth may be materialized only through cooking up statistics in official reports, with the population hardly noticing its existence.

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

MOSCOW REACHES ENERGY ACCORD WITH KYIV. Ukraine has ended a three-year argument with the Russian gas monopoly Gazprom, but the solution may cost the Russian budget $700 million.

So far, Moscow appears willing to forgo an enormous amount of budget revenue in order to close the books on one of the longest-running disputes in the Commonwealth of Independent States (CIS), as it consolidates control over the region's gas supplies.

Earlier this month, officials announced that the Ukrainian state petroleum company Naftohaz Ukrayiny had agreed with Gazprom to pay $1.4 billion in debt for Russian gas with eurobonds.

Ukraine ran up the huge bill in 1999 and 2000 by diverting gas from the former Soviet pipelines that cross its territory on the way to Europe, which relies on Russia for one-fourth of its gas.

The problem of Ukraine's gas debt has ruffled relations with Russia for years. Officials previously announced they had settled the issue in October 2001, but eight months passed before they disclosed that they had overlooked a massive tax liability that stopped the debt deal dead in its tracks.

After nearly two years of negotiating the agreement, someone at Gazprom apparently realized that if it accepted Ukraine's bonds as payment, the company would owe $700 million in taxes to the Russian state. The discovery caused Gazprom to refuse acceptance of the bonds for more than a year.

It has taken that long for officials to figure out how Gazprom can collect Ukraine's debt while ducking the tax. On 18 April, Yuriy Boyko, Naftohaz's chief executive, told reporters in Kyiv: "We will transfer the papers by 1 July. We have found a scheme which is convenient for Gazprom."

The scheme involves transferring the bonds to Gazprom at a discount, while Gazprom will pay for much of its gas transit to Europe through Ukraine with gas instead of cash.

The murky details may matter less than the results, because the debt problem has been holding up the formation of an international consortium that will manage Ukraine's gas-transit system. The pipelines are Russia's main export route for gas to the European Union and a lifeline for EU energy supplies.

The consortium plan could end a decade of tension over Russia's ability to secure its export routes after the Soviet breakup, when Ukraine gained unexpected leverage through control of the pipelines.

The consortium plan will fudge the control question because neither country will hold a majority of the shares, although the group will be organized under Ukrainian law. If the gas companies of Germany and France join the consortium, as expected, it can be argued that Gazprom's power will be diluted even more, while billions of dollars in investment can be channeled to improving the Ukrainian lines.

On the other hand, Ruhrgas of Germany and Gaz de France are also top Gazprom customers and partners, making it a close call as to who will wield power. Fifty-one percent of Gazprom shares are owned by the Russian state and Gazprom itself. Ukrainian President Leonid Kuchma seems to see the benefit of proceeding anyway, in part because Russia has spent years planning bypass routes for gas transit around Ukraine.

Moscow now seems to be as ready to gloss over the tax question as Kyiv is willing to fudge the control issue. Both may see overriding benefits in going ahead.

But so far, there has been surprisingly little notice given to the size of Russia's tax loss. By comparison, the amount is almost as large as the $775 million that the government was supposed to get from the sale of its 5.9 percent stake in oil giant LUKoil on the London share market in December 2002. Last month, the Russian State Duma launched an inquiry after reports that those funds also never reached the state treasury.

But Gazprom's $700 million in taxes may be written off in the midst of a sweeping consolidation from which Russia may emerge as master of nearly all the region's gas. This month, Russia signed a 25-year import and cooperation deal with Turkmenistan that seems likely to dominate that country's gas sector.

Last week, Naftohaz's Boyko gave assurances that Ukraine would also sign a 25-year gas pact with Ashgabat, but Turkmen President Saparmurat Niyazov said that Kyiv's supplies will depend on building a new $1 billion pipeline, because commitments to Russia will fill all existing lines. Russia's move may again raise questions of energy security for Ukraine, making it eager to put the debt and consortium issues to rest.

Russia's deal with Turkmenistan follows a 10-year gas cooperation pact with Kazakhstan signed in late 2001 and the formation of a Gazprom joint venture last June for transit and foreign sales. In December, Uzbekistan also signed a cooperation and sales agreement with Gazprom, which is good through 2012.

In one sense, the consolidation may be a natural product of the geography that the Soviet Union left behind, making it hard for CIS countries to export without Russia. But there are also signs that Moscow wants to maximize its role in tangential spheres.

One example is President Vladimir Putin's recent call for CIS countries to coordinate policies on joining the World Trade Organization (WTO) as they move toward creating a unified economic space. Speaking at a meeting of officials from Belarus, Ukraine, and Kazakhstan, Putin said, "We know how to reach the goal, but there are major obstacles on our road to it," the RIA-Novosti news agency reported. "I mean the four countries must coordinate their stances as they join the WTO," Putin added.

The EU's demand that Russia raise its domestic gas prices to world levels remains the biggest roadblock to Russian membership. The EU is upset that its gas prices are kept high so that Russia's can stay low. But Russia's growing control over gas in all the neighboring countries could turn into a unified front to resist the EU's demand.

If Russia can hold the line on gas prices, $700 million in lost taxes might be a small price to pay.

RFE/RL correspondent Michael Lelyveld wrote this report.

"There is no confrontation [between me and Yuliya Tymoshenko]. This is like comparing what is better -- soup or dessert. When you sit down to eat dinner, you eat borshch first, then you take the main dish.... Regarding the segment [of the electorate] Yuliya Volodymyrovna [Tymoshenko] works with, I deeply understand it. But I want to add to this segment, which amounts to 6-7 percent [of voters], some 30-40 percent of those who are opposed to the government but have not declared their radical opposition to the authorities. They constitute that part of Ukraine that will probably decide the country's future." -- Our Ukraine leader Viktor Yushchenko about his relations with Yuliya Tymoshenko, leader of the radical Yuliya Tymoshenko Bloc; quoted by the "Ukrayinska pravda" website on 25 April.