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Russia Report: August 11, 2006

August 11, 2006, Volume 6, Number 15
The U.S. sanctions on Russia's arms export body Rosoboroneksport and the Sukhoi aircraft manufacturer may put a two-year freeze on business dealings between those firms and private U.S. companies -- including the aeronautics giant Boeing. What's behind the sanctions, and how will they affect U.S.-Russian ties?

WASHINGTON, August 11, 2006 (RFE/RL) -- The U.S. State Department's August 4 announcement that it was imposing sanctions on the two Russian defense firms set off a firestorm in Moscow.

It also sent many American enterprises running to review their Russian contracts.

The sanctions were leveled against a total of seven firms -- in Russia, North Korea, India, and Cuba -- for their dealings with Iran.

U.S. government agencies and private firms are facing a two-year block on working with any of the targeted companies on projects that could be interpreted as having a military function.

Russia has no direct military contracts with the United States. But the sanctions could still hit private companies with long-standing business ties in Russia.

The most notable of these is Boeing. It is working with Sukhoi on a Russian civilian regional jet, the SuperJet 100. It is also the main consumer of titanium produced by a Russian firm (VSMPO-Avisma) that is set to be purchased by Rosoboroneksport.

And it also hopes to hold on to a $3-billion contract to supply Russia's Aeroflot with Boeing 787 jumbo jets.

Boeing spokesperson Tim Neil says the company is attempting to gauge the impact of the sanctions.

"Boeing is still assessing the effect of these sanctions on our business in Russia," Neil said. "However, based on our initial review, we do not believe that the sanctions will affect our commercial relationships with Russian suppliers of titanium, or our work with Sukhoi on the SuperJet 100 program. That said, we are continuing to assess the situation and coordinate with the U.S. government to make sure that we're in full compliance."

Such assessments are meant to ensure that private firms are collaborating with Russia on civilian, not military, projects.

Items like titanium parts do not appear to fall under the current U.S. restrictions; Boeing officials have said the company's projects in Russia "fully adhere" to both U.S. and Russian export law.

Boeing is one of a number of U.S. firms to review its contracts with Sukhoi and Rosoboroneksport.

Sharon Weinberger, the editor of "Defense Technology International" magazine, says companies are racing to determine how, and if, the sanctions will affect their business dealings.

"When these State Department regulations go out, the first thing that companies will tell you is that it's very, very hard," Weinberger said. "U.S. companies struggle a lot with State Department regulations -- most notably, trying to figure out which items are civil items, and not necessarily controlled by the State Department, and which items are military items."

Spokespeople like Boeing's Tim Neil say it is not the job of private firms to second guess political decisions by the government -- even those that may affect their business.

But Russian officials openly criticized the sanctions as an "unfriendly act" that will only exacerbate existing tensions in the Moscow-Washington relationship.

Sergei Chemezov, the director of Rosoboroneksport and a former KGB colleague of Russian President Vladimir Putin, said this week that the sanctions would hurt "the effectiveness of U.S. contingents in Iraq and Afghanistan."

Chemezov's remarks were an apparent reference to a proposal that would allow U.S. trading firms to sell Russian weapons to those countries.

The United States says the sanctions were imposed because the seven targeted firms were involved in the sale of materials to Iran that could contribute to the development of weapons of mass destruction.

But, Weinberger notes, many Russian officials are skeptical.

"Of course that's the stated reason," Weinberger said. "People are certainly looking, especially in Russia, for subplots. There's certainly a political motivation to this. One has to look at the timing. There was the recently announced $3 billion in arms sales to Venezuela that the U.S. has protested repeatedly. So yes, that should, by the letter of the law, be separate from the concerns over Iran. But I think you'd have to be very, very optimistic not to think that the two are related, at least in timing."

Venezuelan leader Hugo Chavez, an open critic of the United States, drew condemnation from Washington for his highly publicized arms deal with Russia, which was signed July 27.

The U.S. sanctions were officially registered two days earlier, on July 25.

It remains to be seen how the sanctions will affect Russia's defense exports. (Heather Maher)

PRAGUE, August 8, 2006 (RFE/RL) -- The United States has imposed sanctions on two major Russian arms dealers -- state arms exporter Rosoboroneksport and the aviation firm Sukhoi -- for allegedly selling high-tech equipment to Iran. The August 4 move has been widely condemned in Russia as an "unfriendly act" aimed at crippling Russia's arms industry.

It comes against the backdrop of strained bilateral relations in recent weeks. Moscow and Washington have failed to reach agreement on Russia's World Trade Organization bid and continue to disagree on resolving the Middle East conflict and on dealing with Iran's nuclear program. And during a recent high-profile Moscow meeting, Russian President Vladimir Putin and Venezuela's Hugo Chavez inked arms deals worth about $1 billion. RFE/RL's Russian Service spoke with Nikolai Zlobin, the director of the Russia and Eurasia Program at the Washington-based Center for Defense Information, about the U.S. sanctions.

RFE/RL: Is there any foundation behind the U.S. decision to impose sanctions on Rosoboroneksport and Sukhoi?

Nikolai Zlobin: I think that, of course, the motivation is serious. The Americans usually act on the basis of laws and facts and evidence. Of course, they might choose not to use these facts and evidence, but I have no doubt that their decision has a logical basis. From a purely legal point of view, it won't be possible to contest this decision. You can contest it at the political level, but from the economic and legal points of view, I'm sure that everything has been thought through. The Americans usually think about these things carefully and don't make mistakes.

RFE/RL: The U.S. State Department spokesman said that this decision is not directed against state organs, but only affects private companies in the United States. How can we speak of a political component?

Zlobin: Whenever the State Department or the Commerce Department or the Justice Department advises defense contractors, arms producers, not to deal with certain companies around the world, you can be sure that the advice is seriously thought out on the legal level. There can be no questions about the legal side of this. As for the political side, the State Department made a decision about when and how to announce this decision and even whether to announce this decision regarding these companies. The fact that they made this decision, I think, means that it has a political nature.

RFE/RL: Do you think it is connected to recent developments in Russian-Venezuelan relations?

Zlobin: I think that it is connected with a whole complex of factors, including the fact that the Americans suspect that Russia occasionally violates international agreements and directly or indirectly sells or transfers weapons -- or at least facilitates the sale or transfer of weapons -- to countries, regimes, or companies that the United States does not approve of or that are under international sanction. So, there is definitely a political component, and Venezuela plays a role -- the Russian-Venezuelan military contracts have alarmed the Americans. There are various points of view on this, but it is a fact that possible future Russian-Venezuelan military cooperation -- not so much what is happening now, but what could happen in the future -- played a role. I completely agree with that.

RFE/RL: Judging by press reports, the head of Sukhoi has repeatedly sworn that for at least the last seven or eight years, his firm has not sold a single screw to Iran. Can we believe such statements?

Zlobin: I think you can. Of course, one should look into the matter concretely. The Americans generally look into such situations carefully because a firm like Boeing can hire very competent, very professional, very expensive lawyers to prove that the U.S. government is wrong. Statistics show that American firms win cases against the government rather more often than the government wins such cases against firms.

RFE/RL: That means there is something to fight for if the sanctions are enforced?

Zlobin: Of course there is. And I think they will fight; they will appeal. If they are able to prove that the sanctions were introduced with even the slightest violation of some law or other, they can succeed in having the sanctions lifted.

PRAGUE, August 10, 2006 (RFE/RL) -- As tensions rise in the Middle East with the conflict between Israel and Hizballah and the continuing Iran nuclear crisis, Russia continues to play a careful game.

Moscow has called on Hizballah to stop its rocket strikes against Israel and return the captured Israeli soldiers, while it has also appealed to Israel to stop its aerial and artillery bombardment of Lebanon and withdraw its troops from the south of the country.

Even Yevgeny Primakov, one of Russia's leading experts on the Islamic world and known for his pro-Arab stance, said that Hizballah should be disarmed and did not exclude the possibility that Russian troops could participate in a multinational force on the Israeli-Lebanese border.

And Moscow, together with Beijing, on July 31 supported a U.S.-backed UN Security Council resolution on Iran demanding that Tehran stop its nuclear program in the course of a month or face international sanctions. Moscow said, however, it could not support the sanctions as it is "against a language of threats and ultimatums toward Iran."

Now, a new wrangle between the United States and Russia over Iran is possibly on the horizon. On August 4, the United States announced that it has imposed sanctions on two Russian arms companies that had violated a U.S. Congress ban on selling material to Iran that could be used to make weapons of mass destruction. Moscow has denounced the sanctions as "groundless."

These diplomatic maneuverings are consistent with Russia's policy in the Middle East, which attempts to strike a balance between the major protagonists: Iran, Syria, Israel, China, the European Union, and the United States.

But if war escalates in the Middle East, Russia would most likely have to abandon its balancing act. That would probably mean that Moscow, if not allying itself directly with Israel and the United States, would distance itself from Iran and its Arab partners -- just as Moscow did with Saddam Hussein's Iraq.

In many respects, Moscow's policy converges with the position of the United States. Both countries do not want to see nuclear weapons in the hands of Tehran's ayatollahs. Especially as Iran poses a more immediate threat to Russia as its medium-range missiles could penetrate into the European part of the country.

Moreover, if Iran obtained nuclear weapons it could become less dependent on Russia diplomatically and militarily and could compete more fiercely against Russian interests in Central Asia and the Caspian basin.

Russia and the United States are also united by their antipathy toward the "revolutionary Islamic" ideology propagated by Tehran and Hizballah.

Shi'a Hizballah, which was the brainchild of Iran and created in the early 1980s, originally aimed to drive Israeli troops from Lebanon and pioneered the use of suicide bombers, known as shaheeds. In 1983, suicide bombers carried out two terrorist acts in which 242 U.S. servicemen and 58 French paratroopers were killed in two strikes in Beirut. The identity of the bombers was never proven and a number of groups claimed responsibility. Many within past and current U.S. administrations believe Hizballah was responsible for the attack.

Hizballah's ideology incorporates traditional Islamic elements along with radical leftist and Marxists teachings. The group sees its allies not only among Islamists, but has the support of various leftist, Marxist, and antiglobalization groups in the West.

Russia could, however, feasibly benefit from an escalation of hostilities in the Middle East. As a major energy exporter, Russia would benefit from the likely major rise in oil and gas prices. China and the EU, on the other hand, would likely face severe economic difficulties.

Not only would Russia profit financially, but could gain new geopolitical ground, with the EU more dependent on Russia for energy. That could also push China to rely more on Russian energy resources, causing Beijing to invest in building pipelines in Russia's Far East. (Victor Yasmann)

The Russian government has announced plans to make the Kurile Islands in the Pacific Ocean the best-funded region in Russia. The 2007-15 program will boost federal funding to more than $600 million -- the equivalent of $1,000 per person per month - on the sparsely populated islands. The announcement is likely to anger Japan.

PRAGUE, August 9, 2006 (RFE/RL) -- Which part of the Russian Federation -- a country deep in demographic crisis -- has suffered the worst population decline of the last decade?

Chechnya, you might suppose, after years of bloodshed and population flight, or the rapidly emptying spaces of northern Siberia.

But you would be wrong -- at least in percentage terms. The record is held by the Kurile Islands, a string of rocky outcrops stretching south from the Kamchatka Peninsula to the Japanese island of Hokkaido.

Sixty-one years after the Kuriles were seized from Japan by the Soviet Union at the end of World War II, scarcely 6,000 civilians still make a living on the islands. They are outnumbered by soldiers almost two to one.

But, says Russian Economic Development and Trade Minister German Gref, enough is enough. His 17 billion-ruble program to develop the islands promises a transformation.

And not just in the economy. According to Dmitry Trenin, deputy director of the Moscow Carnegie Center, Russia is sending an unequivocal message to Japan that the Kuriles are no longer up for negotiation.

"The message is unambiguous: The limit of Russian potential concessions to Japan, which was made clear by both President [Vladimir] Putin and Foreign Minister Lavrov, would have Russia, in case of a peace treaty being signed with Japan, transferring the island of Shikotan and the Habomai group of islands to Japan," Trenin said. "That limit is now being confirmed by the development project."

Shikotan and the Habomai group, which form part of the southern Kuriles and are of little economic or strategic interest to Russia, were first offered to Japan in 1956 by the Soviet Union in an effort to reach agreement on a formal peace treaty pertaining to World War II. Tokyo didn't agree then and is unlikely to do so now. It insists on the return of all the Kurile Islands.

Japan refers to the islands as the Northern Territories. Even before Moscow's investment program was unveiled, Prime Minister Junichiro Koizumi, speaking ahead of July's G8 summit in St. Petersburg, complained that the impasse over the islands was having a damaging effect on Japanese investment in Russia.

Why though has Moscow decided to act now?

Trenin sees the plan as part of a wider attempt to address weaknesses along Russia's vast border.

"It also sends I think a very clear signal that the exposed territories of the Russian state are now being taken care of and you look at Kaliningrad, which now has received much more attention than it was getting for many years; you look at the North Caucasus; and you look at the money which the government is about to spend on reconstructing Chechnya, and to me this is all part of the pattern," Trenin said.

The Kremlin must have considered, too, how the program will be received by Japan. John Swenson-Wright is an expert on Japan and North-East Asian security issues at Chatham House, a London-based international affairs think tank.

"I suspect that this may in part be an effort to anticipate the change of leadership in Japan," Swenson-Wright said. "The prime minister [Koizumi] steps down in September. Some people have argued that there is growing nationalism in Japan and the Russians may be attempting to reassert their position in the face of what they anticipate may be a more hard-line position by whoever takes over as prime minister."

The strategy appears to be to present Japan with a fait accompli.

Until now, the future of the islands was kept in doubt by Moscow's apparent lack of interest and their isolation from the mainland. The only airport is too short for most aircraft. It was built by the Japanese for kamikaze pilots who showed little concern for the length of the landing strip.

That is about to change. By 2017 the Kuriles will have a new all-weather airport linking them with the mainland, a port, new roads, 20 fish-processing factories in place of the ramshackle pair that exist today, and, it is hoped, a precious-metals mining industry.

But, as Trenin argues, Moscow cannot afford to alienate the Japanese.

"Japan is a significant player and the potential for Russian-Japanese collaboration is not to be ignored," Trenin said. "The development of the Far East and Siberia is one of the most important, if not the most important geopolitical problem that Russia is facing in the 21st century and in order to have Japan as a bona fide partner you would have to give Japan something from the territories that they are claiming."

By putting facts on the ground -- like the airport and new infrastructure -- Russia may calculate that Japan will ultimately have little choice but to accept the reality of Russian sovereignty. But, says Swenson-Wright, Moscow may be misjudging the Japanese mood.

"The Russia-Japan relationship has always been one in which the economic incentives have been relatively limited in terms of swaying political and diplomatic opinion within the Japanese political establishment," Swenson-Wright said. "This is one bilateral relationship where economics have taken a back seat to these larger territorial and political issues. There is a great deal of emotional sensitivity on the part of the Japanese. The legacy of the war is still in many ways a live issue in the minds of Japanese negotiators and their political leaders."

Which, if he is right, may yet undermine the scheme for the regeneration of the islands. Federal investment is undoubtedly needed, but without private investment from Japan -- the Kuriles nearest neighbor - the long-term future of the islands may be little brighter than it is today. (Robert Parsons)

The revelation that St. Petersburg's renowned Hermitage Museum had been systematically robbed of 221 precious art objects has underscored yet again the vulnerability of Russia's cultural treasures.

PRAGUE, August 7, 2006 (RFE/RL) -- It has all the elements of a classic mystery novel.

Hundreds of icons and precious objects worth an estimated $5 million are systematically stolen from Russia's most storied art museum, the Hermitage in St. Petersburg.

The majority of the items, it becomes clear, were taken from a single storeroom -- whose guardian, a curator identified as Larisa Zavadskaya, died suddenly late last year.

Museum officials bring in investigators, suggesting the heist is an inside job.

Those suspicions gains credence when the first two arrests in the case, made this weekend, are Zavadskaya's husband and son. A third person has since been reported arrested as well.

Museum Director Mikhail Piotrovsky has called the theft "a stab in the back."

It isn't the first time such a crime has been committed. Russian museum workers are notoriously underpaid, and museum security admittedly lax.

But in a press conference today in Moscow, federal cultural officials sought to lay blame with museum officials and their lackadaisical approach to record-keeping.

Boris Boyarskov, the director of Rosokhrankultura, the federal service for the protection of Russia's cultural heritage, said that keeping track of the Hermitage's material and cultural valuables is a problem that has existed for a long time.

"This could be seen as early as 1993, in inventories that were done by what was then the Culture Ministry. A number of subsequent checks offer the same conclusion -- museum authorities were conducting very incomplete inventories," Boyarskov said. "In recent checks we conducted together with the federal cultural agency [Roskultura], we became convinced that the inventory records are a mess."

Frequent inventories are key to museum security, says Julian Radcliffe, chairman of the Art Loss Register, a private international firm specializing in tracking stolen art and antiques.

Radcliffe says the Hermitage theft bears all the trademarks of a standard museum theft: nearly all of the 221 items were in storage, none were insured, and the records keeping track of them were sloppy at best

"The great majority of thefts from museums are from storage. The ones that are given the great headlines are the thefts of major items which are on public display, but the much bigger and constant problem is theft from items in storage where they can only undertake a stock check once every three or four year because of the volume of items," Radcliffe says.

Speaking from London, Radcliffe says large British museums like the Victoria and Albert -- which, like the Hermitage, has close to 3 million items -- are lucky to be able to take stock of their collection every three or four years.

Police in St. Petersburg have suggested that it may have been 30 years since some of the stolen items were checked. They also said that only 19 of the items were in the care of curators who were still alive.

Radcliffe says clean records and external auditors are key to keeping a collection secure, particularly in a museum like the Hermitage that has 2,500 employees -- who may not always have the museum's best interests at heart.

"The other necessity is to make certain that the staff of the museum are well-motivated and security is good in relation to your own staff as well as to the public who are viewing," Radcliffe says. "The great problem for museums has been theft by curators or contractors. And for many years, a lot of those thefts were never reported, because the curator couldn't work out which of his staff was dishonest and just didn't want to rock the confidence of his directors, potential donors, and the public, by admitting that he had staff that were corrupt."

Boyarskov of Rosokhrankultura says between 50 and 100 thefts are registered each year in Russian museums, many of them inside jobs.

Such recent crimes include the theft of more than 300 works from Moscow's State Historical Museum, and the disappearance of nearly 200 objects from the armory of St. Petersburg's Peter and Paul Fortress.

The Hermitage has posted a detailed list of the missing items on its website ( Several objects have been returned to the museum in recent days, although it is unclear if they are among the stolen works.

Radcliffe says it's unlikely the Hermitage will see many of the objects ever again. "The recovery ratio for expensive, good paintings is probably 15 percent. But for smaller, decorative art objects like these [taken from the Hermitage], I'm afraid the usual recovery ratio is much lower," Radcliffe says. (Daisy Sindelar)

(RFE/RL's Russian Service contributed to this report.)