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Russia Report: June 18, 2004

18 June 2004, Volume 4, Number 23
With just a few words, President Vladimir Putin this week appeared to defuse three growing crises, one on the stock market, one on the domestic banking market, and the other involving Russia's bilateral relationship with the United Kingdom.

In comments to reporters during an official visit to Tashkent on 17 June, Putin said, "The Russian administration, government, and economic authorities are not interested in bankrupting a company like Yukos." Traders eagerly seized on Putin's comments, and the company's shares soared in trading on the Russian stock exchange by more than one-third that day. The RTS benchmark rose by 10 percent.

On 11 June, in one of his televised daily meetings with senior government officials, Putin called on Central Bank Chairman Sergei Ignatev not to undertake any "mopping-up operations in the banking sector," thus reassuring jittery sector officials who feared the existence of a "blacklist" of banks suspected of money laundering.

Similarly, a budding controversy over the British Council, the cultural wing of the British Embassy, seemed to fade away just days after Putin promised British Prime Minister Tony Blair during the Group of Eight (G-8) summit in Sea Island, Georgia, that he would look into the matter.

The British Council came under scrutiny last week when media reported that the Interior Ministry was investigating it for allegedly violating tax laws. The council, which is funded by the British government, promotes British culture abroad and organizes English-language courses. The Russian Foreign Ministry on 8 June issued a statement saying that the council does not have diplomatic status and is engaged in commercial activities, namely the language courses it runs. British Embassy spokesman Richard Turner countered that while the council takes in money for English lessons, that money is then funneled back into its programs. He added that the council suffers an annual net loss of 5.5 million pounds ($10.1 million) on its Russian operations.

After a quick word from Blair to Putin on the sidelines of the G-8 summit on 9 June, the taxmen retreated. "Kommersant-Daily" on 15 June quoted an Interior ministry spokeswoman as saying that the ministry does not plan to file any charges against the council and the conflict can now be considered resolved.

Panic in the interbank market also seemed to dissolve as quickly as the hubbub over the British Council. Just last week, bankers were describing the situation as increasingly reminiscent of the 1995 banking crisis. Many banks had stopped extending credits to one another. Orgresbank First Deputy Chairman Igor Bulantsev told "Vedomosti" on 7 June that the "situation is clearly panic." "Kommersant-Daily" reported the same day that a blacklist of dozens of banks that the Central Bank and Federal Financial Monitoring Service are planning to audit was circulating in the sector.

During his televised meeting with Putin on 11 June, Ignatev did not comment directly on rumors of a blacklist. He said only that revoking Sodbiznesbank's license on suspicion of money laundering and other "tough measures" to prevent money laundering might have "affected the mood of Moscow bankers and created some tensions on the Moscow interbank credit market." Putin weighed in, saying that order should be established in the banking system but it should be done cautiously and "precisely."

By this week, the mood on the banking market had calmed down. Whether it was Putin's words or the Central Bank's effort to increase liquidity by lowering refinancing rates and reserve requirements, only bankers know for sure. Meanwhile, the stock market responded enthusiastically to Putin's reassurances regarding Yukos. As was the case in the banking markets, traders and issuers have become wary of abrupt shifts in government policy. In addition, the prospect of the bankruptcy of Russia's second-largest oil company seemed all too real. What is striking about all three incidents is Putin's increasing willingness to step into the fray, and even to render not only an opinion but an order.

And this week was not unique. During the hubbub over the State Duma's law on public demonstrations, Putin reportedly pitched in personally to redraft certain features of the bill, making it more liberal -- although not liberal enough, according to some critics (see "RFE/RL Newsline," 27 April 2004).

During his first term too, Putin was rarely absent from the television airwaves, conferring with this or that minister and occasionally even a governor or two. But on some of the thorniest issues of the day -- such as the November 2000 quashing of an attempted referendum on importing spent nuclear fuel, the 2001 takeover of NTV, and, more recently, the arrests of Menatep Chairman Platon Lebedev and former Yukos CEO Mikhail Khodorkovskii -- Putin has preferred to let either market forces or the legal process work its course. With the reopening of the Khodorkovskii/Lebed trial next week and heated discussion of the possible bankruptcy of Yukos and how to avoid it, it will be interesting to see which Putin emerges -- the demure, detached observer of the first term or the more interventionist Putin of recent weeks. With regard to Yukos, Putin has left some wiggle room for the old Putin to reemerge: "The government will do all it can to prevent the collapse of the company," he said. "But what happens in the courts is a separate matter. The courts should speak of this themselves." (Julie A. Corwin)

For years, many Russians have been addicted to Latin American soap operas, one of the most popular of which was titled "The Rich Also Cry." That would be an apt designation for the real-life drama that began in a Moscow courtroom on 16 June, when one of Russia's richest men, former Yukos head Mikhail Khodorkovskii, was brought from his jail cell to face the country's highest-profile fraud trial ever. Khodorkovskii, the former CEO and biggest shareholder of Russia's second-largest oil company, Yukos, faces seven criminal charges, including defrauding the state and evading billions of dollars in taxes. If found guilty, he could face 10 years' imprisonment.

Platon Lebedev, another major Yukos shareholder, faces similar counts and is being tried alongside Khodorkovskii. The authorities say six other top former Yukos managers are under investigation and could face charges.

Since his 25 October arrest, Khodorkovskii has accused the government of persecuting him for political reasons. Khodorkovskii says the Kremlin felt threatened by his company's business success and by his growing political activities, which included generous funding of opposition political groups ahead of last December's State Duma elections and the March presidential election. The Kremlin rejects the allegations, pointing to Khodorkovskii's murky past financial dealings and his dubiously acquired fortune as the reasons for his prosecution.

But by that same token, critics argue, all of Russia's so-called oligarchs -- virtually all of whom made their money by various doubtful schemes during the 1990s sell-off of state assets -- could be brought up on fraud charges. Khodorkovskii says his crime was to break an implicit agreement not to meddle in politics. One of his lawyers this week called his impending trial "worthy of a banana republic."

The court case is being closely watched by foreign observers and especially by Western investors in Russia's oil and gas sector, who worry about the independence of the country's judiciary. Those worries were stoked this week, when the Moscow Arbitration Court removed the judge who was due to preside over the case, deeming her biased in Yukos's favor. The venue of the trial was also switched to a small courtroom away from the city center, where few journalists will be able to be accommodated despite promises of open proceedings.

Stephan De Spiegeleire, a Russia analyst at the RAND Europe think tank in The Hague, told RFE/RL that it appears that Khodorkovskii will face a "show trial" in the Soviet tradition. "All the indications that we're seeing so far -- both the preparations for the trial, which have been entirely secret, and some of the recent developments -- certainly indicate that this might be something that will be reminiscent of some of the worst episodes in even the Soviet history of legal trials," De Spiegeleire said.

The irony is that a "victory" for the government and a "crushing defeat" for Yukos will benefit no one at this stage, according to De Spiegeleire, especially as Russia's oil sector seeks more foreign investment to develop its fields and export pipelines with the aim of achieving Putin's stated goal of doubling GDP within a decade. The decline of Yukos, which once accounted for one-third of all trades on the Moscow RTS stock exchange and was held up as a model of Western-style management, has spooked investors. The company's possible liquidation could scare them off for good.

"With oil prices being at the levels that they are, with the uncertainty in the Middle East continuing, it's in everybody's interest -- certainly in the West's interest -- to be able to open some of these new fields, which at current oil prices are becoming very interesting indeed," De Spiegeleire said. "And Russia, of course, for a variety of reasons, is still more attractive as a potential alternative to Middle Eastern oil than some of the other alternatives that are out there, including, for instance, the Caspian Sea. So it does seem to me that from a purely economic point of view, there's a good case to be made that Russia should be waiting for new investment and should be attracting it. That's why this whole case has been a public-relations fiasco for the Russian economy."

Perhaps the Kremlin is counting on the fact that Russia's oil market is simply too vast and too attractive to ignore, as Julian Lee of the London-based Center for Global Energy Studies told RFE/RL.

"At the end of the day, big oil companies need to do big deals and need to develop big projects," Lee said. "And Russia's one of the few places in the world where they have access to that."

Given the security and political risks associated with oil-drilling operations in many parts of the Middle East, Africa, and Latin America, Russia's problems might seem acceptable to multinationals that invest all over the world, Lee argued. Nevertheless, a politically driven Yukos bankruptcy -- should it happen -- would probably dampen enthusiasm among foreign investors.

Even as the trial is about to start, both sides -- Yukos and the government -- continue to face off in a high-stakes game of brinkmanship, with the Tax Ministry presenting ever-increasing demands and the company saying it has no money to foot the bill -- a claim doubted by most economists.

Some observers say a face-saving out-of-court settlement could still be reached, allowing Yukos to pay off its debts by forfeiting some of its stock to the state. Short of an acquittal for Khodorkovskii, that would be the outcome most welcomed by investors.

As far as most ordinary Russians are concerned, few would shed tears for Khodorkovskii if he were sent to prison. It would be proof that sometimes, even in real life, the rich also cry. (Jeremy Bransten)

Last week, the Supreme Court overturned a jury's acquittal of physicist Valentin Danilov, who was charged with handing over state secrets to China. Danilov was acquitted by a jury in Krasnoyarsk Krai in December. At the time, human rights activists hailed the acquittal as a rare victory for their cause and a vindication of the jury system, which legal-reform advocates had argued would lead to a higher acquittal rate (see "RFE/RL Newsline," 30 December 2003). While jury trials have been resulting in more not-guilty verdicts than bench trials do, higher courts have been increasingly inclined to overturn such acquittals. The Supreme Court's decision in the Danilov is just one example of this pattern.

Participating in a panel discussion about human rights in Russia at RFE/RL on 10 June, Mara Polyakova, director of the Independent Legal Expertise Council, said her organization has been monitoring jury trials. It compared the rates of reversal by higher courts of juries' guilty and not-guilty decisions and found "the number of not-guilty verdicts that were overturned exceeded the number of guilty verdicts by eight hundred times."

Polyakova also noted that, as expected, juries render more acquittals than judges do. "Until the time when the jury system was expanded from the original nine to 80 regions of Russia [starting in January 2003]," she explained, "the percentage of not-guilty verdicts by bench courts was four-tenths of 1 percent. Now this number has risen just a little, but it still hasn't gone to beyond 1 percent. In jury trials, 16 percent of verdicts are not guilty. We, as lawyers, have studied all the decisions made by juries, and we found that usually when there is an unjust decision, the fault lies not with the jurors but with the professionals who organized the court proceeding."

Polyakova also found that the selection of jurors is not as random as the law requires. "In many cases, we find that the selection is very suspect," she said. "So we are trying to reform that particular aspect and make sure that defense lawyers have a say in the selection of jurors," she said. Polyakova's group, together with other lawyers and human rights activists, plans to create a special committee to study juries and jury trials.

Speaking at the same 10 June briefing, Lyudmila Alekseeva of the Moscow Helsinki Group echoed Polyakova's criticism of the judicial reforms. Regarding juries, Alekseeva noted, "This is a very new system, and everything indicates that attempts are being made to build it into the existing [legal] system, where it will assume all of the vices of that system."

Meanwhile, Danilov and his attorneys plan to request a bench trial if they are given that option as the case is retried. They say they were not surprised by the Supreme Court's ruling. In comments to on 9 June, Sergei Pashin, a professor at the Moscow Institute of Economics, Politics, and the Law, also called the decision predictable, noting that Danilov's lawyer should not have discussed access to evidence in front of the jury. However, he also said that "no civilized country in the world would overturn a jury's verdict [simply] because of violations in an attorney's speech." (Julie A. Corwin)

Filipp Kirkorov is one of Russia's most high-profile pop stars and the husband of the legendary singer Alla Pugacheva. He has long had a scandalous reputation for arrogant behavior and has had a number of run-ins with journalists, but he has always come out with his popularity intact. So, most likely, he didn't think twice about taking on a young provincial journalist. But perhaps he should have.

At a 20 May press conference in Rostov-na-Donu, "Gazeta Dona" journalist Irina Aroyan asked Kirkorov why he has recorded so many cover songs lately, wondering if he had a shortage of original material. Kirkorov responded with a tirade of obscenities and boorishness that caught everyone present off-guard. Among other things, he insulted Aroyan's professionalism, said that he was "sick of [her] pink sweater," made sexually suggestive comments, and poked fun at her southern accent, telling her that she should "learn to speak Russian" before coming to press conferences with "stars." He then ordered her to leave the hall. As she was leaving, Aroyan said, "And you should learn how to behave, star!"

According to Aroyan, she was then manhandled and threatened by two of Kirkorov's security guards. Immediately following the incident, Aroyan lodged a complaint against the security guards, and on 15 June she filed a suit against the singer for insulting the honor and dignity of a journalist.

Local television crews recorded Kirkorov's outburst and the tape was broadcast on Don-TV. There was a strong, negative public outcry, and the tape soon found its way to the Internet (see, for instance, Locals have collected more than 1,000 signatures on a petition calling for Kirkorov to be declared persona non grata in Rostov-na-Donu, "Novye izvestiya" reported on 15 June, and the petition was printed in the local media and presented to the city's mayor.

In the past, such cases likely would have ended at this point. The Soviet legacy of state-dominated media and weak, isolated private media would likely have hemmed in such a scandal, unless for some reason one of the national television channels picked it up.

But "Gazeta Dona" is not a typical regional newspaper. It is part of the Provintsiya publishing house (, a leading chain of local newspapers owned by entrepreneur Boris Giller. Provintsiya publishes 30 newspapers in 29 regions of the country and also owns three private newspaper-printing plants. The "Gazeta Dona" report of the Kirkorov press conference and the ensuing outcry was published throughout the chain, sparking a budding national campaign to compel Kirkorov to apologize. In addition, a correspondent for the Rostov-na-Donu edition of "Komsomolskaya pravda" was also allegedly assaulted by the security guards when he came to Aroyan's defense, so the national daily picked up his story as well.

On 9 June, the Chelyabinsk broadcasting company Vostochnyi ekspress announced that its journalists had reviewed the tape of the press conference and had decided to no longer cover Kirkorov or broadcast any of his music or videos. "No one, not even stars, has the right to act so boorishly with other people, especially women," Vostochnyi express General Director Yurii Vishnya told on 9 June. Chelyabinsk radio station Studio-1 has joined the boycott, "Novye izvestiya" reported on 15 June, refusing to play Kirkorov even upon request. And several hosts of programs on Chelyabinsk's Nezavisimyi television station have also signed on, according to the daily.

A journalist at "Gazeta Dona" told "Novye izvestiya" that journalists and media outlets from the Rostov Oblast cities of Azov, Taganrog, and Bataisk have joined in the boycott as well. on 11 June published a list of six incidents in the last three years when Kirkorov or his security guards verbally or physically assaulted journalists and fans.

Nonetheless, Aroyan told Regnum on 10 June that she was reluctant to sue Kirkorov. After the incident was publicized, Aroyan said she received threatening and obscene telephone calls at home. In the end, however, she said, a feeling of solidarity with journalists, who are "too often the victims of arbitrary behavior," prompted her to act.

Ironically, Aroyan's cause has also attracted the attention of the Rostov-na-Donu branch of the pro-Putin youth movement Walking Together, Regnum reported. The chairman of that organization reportedly telephoned Aroyan and said the boycott fits well into the group's program to combat cursing and to promote public morality. He reportedly offered financial and legal assistance.

This time, Kirkorov might have cause to regret his behavior. According to on 15 June, his unofficial fan sites have been flooded with negative e-mail messages and some of them have even been inaccessible. Kirkorov's official site ( has not recognized the scandal.

In February 2001, Kirkorov was named a UN goodwill ambassador. "Show business," Kirkorov said at the time, according to, "is not just putting out albums and doing concerts. We artists have the possibility to appear on enormous stages and to influence our audiences. Therefore, with my new status, I will try, no matter where I am, to do everything possible so that guns are silenced and music plays." (Robert Coalson)

Duma deputies on 11 June approved in its second and third readings a controversial bill on conducting referendums, NTV and other Russian media reported. All 172 proposed amendments to the bill were rejected (see "RFE/RL Newsline," 9 June 2004). "Kommersant-Daily" reported on 10 June that the legislature seems intent on setting a record, commenting that "never before has the Duma approved a constitutional law in such a short time." The bill was introduced in the legislature on 18 May and could become law before the end of this month. Radio Rossii reported on 11 June that under the draft law questions relating to cutting short or extending the president's term of office or the term of a Duma cannot be put to a referendum. Independent Duma Deputy Vladimir Ryzhkov said that he will challenge at least 15 points in the bill before the Constitutional Court if it becomes law. "This whole law was rushed through in just 10 days," Ryzhkov told NTV. "It is unheard-of that a constitutional law goes through the Duma in 10 days." RC

Deputies on 11 June rejected a bill that would have criminalized Wahhabism and other "extremist" activities, ITAR-TASS reported (see "RFE/RL Newsline," 15 April 2004). The government and the Duma's Public and Religious Associations Committee recommended that the bill be rejected. Among other things, critics noted that the bill contained terms such as "Wahhabi activity" and "Wahhabi associations" that were not properly defined. Deputies on 11 June also rejected a bill that would have shifted certain functions of the national capital away from Moscow, ITAR-TASS reported. Only one deputy voted in favor of the bill, which would have moved the Supreme Court to Omsk, the Supreme Arbitration Court to Irkutsk, the Duma to Nizhnii Novgorod, and the government to Yekaterinburg. The presidential administration would have remained in Moscow. The purpose of the bill, according to its author, was to "narrow the gap in living standards between the regions and the center and to restore Russia's state integrity." RC

The Duma on 11 June passed in its third reading a bill amending the law on defense that would limit the responsibilities of the Armed Forces' General Staff, RosBalt and Interfax reported. Under the current law, the defense minister commands the Armed Forces through the General Staff, the main operational command body of the armed forces. The amendment would place the defense minister in command of the military via the Defense Ministry. An unidentified military expert told RosBalt that with the approval of this bill, the Duma has resolved one of the most acute issues in the administrative reform of a power ministry. reported earlier that under Defense Minister Sergei Ivanov's plan for reforming the military administration, the General Staff will become the "brain" of the army, an "intellectual center for the military-administration system" (see "RFE/RL Newsline," 30 April 2004). JAC

Discussion on the floor of the State Duma of a package of housing-reform bills prompted the Communist and Motherland factions to walk out of the 10 June session, Russian media reported. Communist Party leader Gennadii Zyuganov and Motherland faction member Oleg Shein told reporters that their factions are categorically against the bills, which they characterized as an attack on citizens' rights. After the factions left the hall, deputies voted to pass the draft Housing Code in its first reading by a vote of 337-10, reported. Deputies also passed a number of bills amending various laws, such as the Budget Code; the Tax Code; the Civil Code; and the laws on mortgages, mortgage insurance, the basics of federal housing policies, housing owners' associations, payments for land, and privatization of the Russian Federation's housing fund, reported. Unified Russia and government experts worked together to write the draft Housing Code. According to ITAR-TASS, the code is a framework document for the package of 27 bills aimed at creating an affordable housing market. Duma Speaker Boris Gryzlov told ORT that the goal of the legislation is to reduce housing prices and to spark demand for new construction. JAC

Motherland faction member Shein had a different take on the bills. He said that if they are adopted in their current form, Russia "will have a very big housing market, because a colossal number of apartments will lose their owners," reported on 10 June. The Communist Party announced that it will file a complaint with the Constitutional Court regarding procedural violations it claims occurred in the passage of the Housing Code in its first reading. Article 72 of the constitution requires that federation subjects be given 30 days to participate in discussions on the housing legislation. According to Deputy Galina Khovanskaya (independent), the 30-day period will not expire until 12 June. JAC

The State Duma passed in their first reading on 9 June amendments to the law on the Audit Chamber that are designed to bring the law into conformity with the constitution, RIA-Novosti reported. Under the bill, the head and deputy head of the Audit Chamber may be dismissed before their term is up if more than half of the members of the Federation Council or State Duma favor dismissal. Previously, 300 votes rather than 226 were needed for the Duma to dismiss the state's top auditor. A bill allowing local organs of self-government to participate in the establishment of mass-media outlets was also approved in its first reading, reported. Speaking in favor of that bill, Duma Information Policy Committee Chairman Valerii Komissarov (Unified Russia) said its implementation would require no additional funds from the federal budget. JAC

Deputies on 9 June also rejected a number of bills, including one that would have provided needy families with a one-time subsidy of 450 rubles ($15) per child at the start of the school year, one that would have increased penalties for poaching, and one that would have set out penalties for the illegal use of insider information, RIA-Novosti reported. JAC

IN: Prime Minister Mikhail Fradkov named Vladimir Matyukhin director of the Federal Information Technology Agency on 10 June, RIA-Novosti reported. Matyukhin is a former director of the Federal Agency for Government Communications and Information (FAPSI). The same day, Fradkov appointed Sergei Mazurenko, a former deputy industry and science minister, to head the Federal Science and Innovation Agency. Fradkov has also dismissed Eumurd Rustamov as deputy property-relations minister, "Kommersant-Daily" reported on 9 June.

20 June: Former Beatle Sir Paul McCartney will give a concert in St. Petersburg's Palace Square

Late June: Supreme Shaman of Siberia Toizin Bergenov will visit Moscow to conduct a ritual purging of the State Duma building of evil spirits, Interfax reported on 6 May

23-25 June: Japanese Foreign Minister Yoriko Kawaguchi to visit Moscow

23 June: Supreme Court will consider an appeal by Liberal Russia co-Chairman Mikhail Kodanev of his conviction for the murder of State Duma Deputy Sergei Yushenkov

23-25 June: Six-country talks on North Korea's nuclear program will be held in Beijing

25 June: Gazprom will hold a shareholders meeting

26 June: Union of Rightist Forces will hold party congress

27 June: International Atomic Energy Agency Director-General Muhammad el-Baradei will visit Russia

29 June: Founding meeting of the Association of Russian-Armenian Economic Cooperation will be held in Moscow

30 June: The Qatari court hearing the case of two Russians accused of carrying out the assassination of former acting Chechen President Zelimkhan Yandarbiev expected to announce its verdict

Early July: British Foreign Secretary Jack Straw will visit Russia

July: Russia and the United States will hold bilateral negotiations on Russia's possible entry into the World Trade Organization

July: Audit Chamber will complete its checks on major oil companies

1 July: First anniversary of the creation of Federal Antinarcotics Agency

1-2 July: The fourth annual Volga forum on "Strategy for Regional Development" will be held in Kirov

2 July: State Duma will consider a bill changing the rules for monetary compensation for social benefits in its first reading

2 July: The Audit Chamber will hold a session examining the results of privatization over the last 10 years

2-4 July: Russian Foreign Minister Sergei Lavrov will visit Seoul

3 July: Communist Party congress will be held to elect new leadership

3 July: Yabloko will hold its 12th party congress

4 July: Vladivostok will hold mayoral election

10 July: State Duma will end its spring session

31 July: State Duma will hold a special session

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

3 August: State Duma will hold a special session

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

29 August: Presidential elections will be held in Chechnya

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

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

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

October: President Putin will visit China

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

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

31 October: Presidential election in Ukraine

November: Gubernatorial election in Pskov Oblast

22 November: President Putin to visit Brazil

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

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

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

March 2005: Gubernatorial election in Saratov Oblast