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Russia Report: July 29, 2004

29 July 2004, Volume 4, Number 29
By Robert Coalson

As the shockwaves from the recent crisis of confidence that passed through the Russian banking sector recede, analysts and pundits have struggled to identify the effects of that crisis and to predict future developments in the sector. No consensus has emerged on the crucial questions of what caused the crisis, who benefited from it, and whether a second wave of instability looms in the near future. Perhaps most importantly, the role of the government -- and especially the Central Bank -- has come under harshly critical scrutiny.

The crisis is widely perceived as having been initiated by a Central Bank decision in May to withdraw the license of Sodbiznesbank on suspicion that it facilitated money laundering in the amount of more than $1 billion. Central Bank Chairman Sergei Ignatev told Interfax on 19 May that the decision to revoke the license had been "thought out very carefully" and he sought to assure panicked depositors that they would get their money, although he stopped short of offering a guarantee.

Center for Political Technologies General Director Igor Bunin told on 20 July that the shock going through the banking sector was "a strange crisis." After revoking the Sodbiznesbank license, "the Central Bank not only didn't bother to settle problems using politically correct methods and to manage the crisis, but it actually gave it an additional push," Bunin said.

At almost the same time, reports began to appear in the media to the effect that the Central Bank had prepared a "blacklist" of banks that were to be liquidated. Although Ignatev and other Central Bank and government officials repeatedly denied the reports, the panic was fomented by numerous earlier statements that the Central Bank is pursuing a policy of consolidation in the sector. "The most important element in the state's policy regarding credit organizations will be the stimulation of their enlargement through voluntary combination and mergers," Prime Minister Mikhail Fradkov told a cabinet session on 8 July at the height of the banking crisis, "Rossiiskaya gazeta" and other Russian media reported on 9 July. "Ekspert," No. 26, noted that one of the elements of the government policy that Fradkov articulated at that meeting is a move to compel banks to identify publicly their shareholders.

Despite the nervousness such statements provoked on the edgy interbank market, Deputy Prime Minister Aleksandr Zhukov on 20 July told Interfax that the Central Bank's steps to ameliorate the crisis "will encourage bank mergers and instill true competition in the industry."

Shortly after the Sodbiznesbank episode, the panic spread to Guta Bank, one of the 30 largest banks in Russia. Banking-sector analysts argued that Guta Bank was fundamentally healthy and urged the Central Bank to offer it a stabilization loan to carry it through the crisis. The Central Bank, however, responded by brokering the purchase of Guta Bank by the state-owned Vneshtorgbank at a price that many observers considered highly suspicious. On 21 July it was made public that an 85.8 percent stake in Guta Bank, which listed assets of about $1 billion, was sold for just 1 million rubles ($33,000). "Russkii fokus" this month speculated that the owners of troubled Guta Bank might have agreed so quickly to sell to state-owned Vneshtorgbank because they were "inspired by the example of 'jailbird' Mikhail Khodorkovskii," the jailed former CEO of embattled oil giant Yukos.

Many analysts have emphasized a connection between the perceived threat to property rights inherent in the Yukos affair and the nervousness in the banking sector. Moscow Interbank Currency Association President Aleksei Mamontov, writing in "Vedomosti" on 19 July, said "the authorities have never recognized the fact that the reasons for the banking crisis lie not in the psychological or the regulatory sphere but specifically in the sphere of adhering to rights of ownership." He added that the banking crisis demonstrated most clearly that "incursion into these rights may be both sudden and ruinous to any credit institution." Presidential economics adviser Andrei Illarionov said on 10 July that the crisis was provoked by the actions of state agencies, particularly the Central Bank, that are leading to "the socialization or communalization of the banking system, which, strictly speaking, leads directly to nationalization," "Russkii fokus" reported.

The Center for Development on 23 July released a report predicting that capital flight from Russia will rise dramatically to $17.2 billion this year, "Vedomosti" reported. The center attributed the rise to both the Yukos affair and the banking crisis. Institute for Problems of Globalization head Mikhail Delyagin, who served as an economics adviser to former Prime Minister Mikhail Kasyanov, told "Novaya gazeta," No. 52, that the state takeover of Guta Bank shows that "nationalization is being performed to instill fear, in order to frighten business, so as to turn it into a cash cow in someone's private interests."

Association of Regional Banks Vice President and former Central Bank Deputy Chairman Andrei Sedov, in a 19 July interview with the popular daily "Komsomolskaya pravda," was unambiguous in blaming the Central Bank for the recent crisis and for creating the atmosphere for another. "[The Central Bank] cleaned up the small Sodbiznesbank, but they cleaned it up so clumsily that the entire banking system nearly collapsed," Sedov said. "Our people have a good memory. They haven't forgotten the [August 1998] default. Now it will be a long time before their confidence is restored. In effect, the banking system has been thrown back several years."

RBK reported on 26 July that a study conducted by the Levada Center on 16-19 July found that 56 percent of Russians believe that a crisis similar to the August 1998 financial meltdown could happen again in the near future, an increase of 12 percent over last year. Against the background of such jitters and the widespread lack of confidence in the motives and methods of the Central Bank, any misstep on the part of the authorities could produce an unpredictable resonance in what a 23 July "Vedomosti" editorial called "our fragile financial system."

by Julie Corwin

Most assessments of Russian President Vladimir Putin's accomplishments during his first term in office assert that he reined in the country's regional leaders, who had supposedly become too independent during his predecessor's two terms in office.

By stripping the governors of their forum in the Federation Council, by establishing the system of presidential envoys to the seven federal districts, and by crafting legislation making it possible to dismiss governors who disregard federal laws, Putin purportedly eroded the governors' ability to treat their regions like personal fiefdoms. However, the recent mayoral election in Vladivostok raises questions about how much control over the regions the federal authorities really have -- at least in this important port city on the country's Pacific coast.

The winner of the 18 July second round, Vladimir Nikolaev, is a convicted felon who served 3 1/2 years in prison for beating up one Primorskii Krai legislator and threatening to murder another. Numerous local and national media reports have described Nikolaev as a mid-level gangster, known in the criminal world as "Winnie the Pooh." During the campaign Nikolaev had the backing of Primorskii Krai Governor Sergei Darkin, who himself was accused of ties to organized crime during his successful gubernatorial campaign in 2001. Dmitrii Glotov, a close associate of Nikolaev, is reportedly going to run for mayor of Nakhodka -- another port city and the likely destination for an important oil pipeline -- in December, according to "Transitions Online" on 19 July. Glotov, chairman of the Association of Fishing Enterprises of Primorskii Krai, has also been accused of ties to a crime family headed by the late Sergei Baulo. "Izvestiya" alleged on 12 July that Glotov and Nikolaev started a new underworld group after Baulo was killed in 1995.

Russia is, of course, an extremely large country, and the Kremlin is therefore forced to adopt positions of benign neglect or neutrality regarding the goings-on in many areas at various times, although presumably the presidential envoys are keeping tabs. Primorskii Krai, however, is not one of the regions where irregularities are tolerated. Just one year after he was first elected, Putin personally intervened in the krai, which had been the subject of countless news stories of frozen, disgusted citizens who, after months of electricity shut-offs, had begun taking to the streets in protest. In February 2001, Putin telephoned then-Governor Yevgenii Nazdratenko, who the next day announced that he was stepping down to accept an offer to head the State Fisheries Committee in Moscow. Some three years later, Nazdratenko still has a high-level -- if largely symbolic -- position in Moscow, now as a deputy secretary in the Security Council, even though the citizens of Vladivostok continue to suffer. Now local media are focusing on the city's inability to maintain regular water supplies to local residents.

Soon they may have to start wearing bulletproof vests while dining out in the city. On the night after Nikolaev's 18 July second-round victory, his supporters shot off guns in Vladivostok's outskirts, according to on 20 July. Restaurants in the city experienced a night of wild revelry and fracases by Nikolaev's supporters. In one of the most publicized incidents, a group of about 16 people virtually took over a local restaurant, drinking toasts and singing songs in praise of Nikolaev, terrorizing restaurant staff, dragging a number of young women in the restaurant around by their hair and exposing their breasts, "Komsomolskaya pravda -- Dalnii vostok" reported on 21 July. They wound up breaking all the dishes in the restaurant and threatened restaurant manager Lilya Barkova when they suspected she was going to call the police. Barkova told "Komsomolskaya pravda" that she never seriously considered calling the police. "Everyone, not only me, thinks that in such a situation the police would not get involved and would not help us," she said. "I think if we had called the police, we would have had an even bigger problem." According to Barkova, when the group left the restaurant at 3:00 a.m., they said "Get ready, this is only the beginning."

Election day itself was also marked by impropriety. RFE/RL's Vladivostok correspondent reported on 19 July that observers witnessed carousel voting and attempts to buy votes with offers of 50 to 300 rubles ($1.70-$10.30). Voters from outside Vladivostok were also reportedly bused in and allowed to vote, despite not being registered in the city. Nikolai Markovtsev, who ran against Nikolaev in the second round, charged that Nikolaev's team of T-shirt-clad youth were handing out blank ballots together with flyers supporting Nikolaev at polling sites, "Kommersant-Daily" reported on 19 July.

Markovtsev made it to the second round despite finishing in fifth place in the first round because the third- and fourth-place finishers refused to participate in the election after a krai court disqualified State Duma Deputy and second-place finisher Viktor Cherepkov days before the ballot. The night before the court decision, Cherepkov was seriously injured when he triggered a trip wire connected to a grenade planted outside his campaign headquarters.

Central Election Commission (TsIK) Chairman Aleksandr Veshnyakov condemned the court decision to disqualify Cherepkov, but said the ballot itself had proceeded according to the law. In an interview with Ekho Moskvy on 19 July, however, he allowed for the possibility that if a appeals court overturns the krai court's decision, then new elections might have to be held. Nikolaev, meanwhile, shows little concern that this will happen. On 23 July, he appointed his first deputy mayor, a former director of finance from his shipping company.

So far, Nikolaev is the first mayor of a major Russian city to have a criminal record. Another convicted felon, Andrei Klimentev, was elected to the mayor's office in Nizhnii Novgorod in 1998, but the election results were annulled. Therefore, it could be argued that drawing conclusions based on Vladivostok's experience would be a mistake. However, in an interview with RFE/RL's Moscow bureau on 20 July, Nikolai Petrov of the Moscow Carnegie Center suggested that elections take place in Vladivostok "perhaps even more freely than in a number of other regions." "Violations of election law take place in many other regions and are also reported in practically all regional and federal elections," he said. "The problem is that the violations in Vladivostok are very scandalous, and [because of this] a lot of attention is paid to them."

In short, the Vladivostok scenario might just be a more dramatic rendition of scenes being played out across the Russian stage. The question is: Why is the situation in Vladivostok still so clearly out of control despite the attention the city has received from the federal authorities -- including Putin himself? Could it be that the federal center's ability to project its power and influence is more limited than most observers imagine?

IN: The board of directors of Rosneft selected on 27 July deputy presidential administration head Igor Sechin as its new chairman. Sergei Oganesyan, director of the Federal Energy Agency, and Yuri Medvedev, acting deputy director of the Federal Agency for the Administration of Federal Property, were tapped as deputy chairmen.

IN: Prime Minister Mikhail Fradkov's son, Petr Fradkov, was named as deputy general director of the Far Eastern Shipping Company (FESCO), Russia's third largest shipping company. Fradkov, 26, who previously worked for Vneshekonombank in the United States has never held a job in the transportation sector, according to "Gazeta" on 25 July.

28 July: Pope John Paul II will give representatives of the Russian Orthodox Church a 17th-century copy of the venerated Mother of God of Kazan (Our Lady of Kazan) icon

29 July: Celebration honoring the 250th anniversary of the birth of Saint Serafim of Sarov will be held in Nizhnii Novgorod

29 July: Government will examine the 2005 plan for the privatization of state property

29 July: Unified Russia's Central Political Council will meet to determine its position on the law on reform of social benefits

29 July: An appeals court in Doha will consider the case of the two Russian agents convicted of murdering former acting Chechen President Zelimkhan Yandarbiev

31 July: State Duma will hold a special session and consider bills reforming the housing sector and a bill limiting the advertising of beer on television

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

1-25 August: State Statistics Committee will undertake agricultural census in four regions

3 August: State Duma will hold a special session and will consider social benefits reform legislation in its second and third readings

8 August: Supreme Court will consider an appeal by Pavel Zaitsev, the special police investigator who headed a high-profile corruption probe into the Grand and Tri Kita furniture stores and who was found guilty of exceeding the authority of his office

12 August: Fourth anniversary of the sinking of the "Kursk" nuclear submarine

12-15 August: BMW Russian Open Golf Tournament in Moscow

17 August: Supreme Court will hear an appeal of the 15-year sentence passed against Russian political scientist Igor Sutyagin on charges of espionage

13-29 August: Russian athletes will participate in the Summer Olympics in Greece

23 August: The trial of the accused murderers of State Duma Deputy Galina Starovoitova will reopen

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 State Hermitage Museum plans to open the Hermitage Center, which will exhibit works from the Hermitage's collection, in the city of Kazan

September: OPEC President and Indonesian Energy Minister Purnomo Yusgiantoro will visit Moscow, according to Interfax

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

7 October: President Putin's birthday

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

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

31 October: Presidential election in Ukraine

November: Gubernatorial election in Pskov and Kurgan Oblasts

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

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

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

March 2005: Gubernatorial election in Saratov Oblast