Security Watch: April 16, 2001

PUTIN, SCHROEDER FAIL TO RESOLVE DEBT PROBLEM... President Vladimir Putin and Chancellor Gerhard Schroeder have suspended or possibly reversed their earlier accord which would allow Russia to use shares in its companies to pay off its Soviet-era debt, "Kommersant-Daily" reported on 11 April. Adding insult to injury, German Finance Ministry State Secretary Caio Koch-Weser reminded the Russians that it is time for Moscow to pay off Soviet debts to the former East Germany. Such debts amount to DM 15 billion ($6.7 billion).

...BUT DO AGREE TO JOINT MONITORING OF OFF-SHORE CAPITAL. Interior Minister Boris Gryzlov and his German counterpart Otto Schilly did agree on joint efforts to combat illegal capital flows in off-shore zones, Interfax reported on 10 April. Gryzlov said that such cooperation will also help Moscow to combat money-laundering operations. At the same time, Gryzlov said that his agency is drafting an economic amnesty bill. For his part, Schilly said that Berlin is waiting for Moscow to be more forthcoming in fighting Russian organized crime activities in Germany.

KYIV PROTESTS RUSSIAN TV ATTACK ON UKRAINIAN PRIME MINISTER. Ukrainian Foreign Ministry spokesman Natalia Zaruda said that Kyiv has asked Moscow for an official explanation concerning a broadcast by Russian state-controlled ORT television that said Ukrainian Prime Minister Viktor Yushchenko takes his instructions from Washington, pravda.ru reported on 11 April. Zarudna said that ORT anchorman Mikhail Leontiev, who is known to be close to the Kremlin, said on the air that "Yushchenko is under the complete control of his strong-willed wife, Katherina Chumachenko, who controls him following instructions she receives from Washington." Zaruda said that such characterizations were "anti-Ukrainian" and "slanderous."

PUTIN'S POLICIES FOLLOW COMMUNIST LINE. Oleg Kulikov, an ideological secretary of the Communist Party of the Russian Federation, said in an interview published in "Kommersant" on 9 April that President Putin's policies, especially in the area of foreign affairs, reflect the views of communist leaders and the communist electorate. He said that Putin has "taken a lot from our ideology and from old patriotic traditions -- and has ended the policy of active anti-communism." But Kulikov said that not all of Putin's policies are correct, especially in the economic and social areas. Consequently, communists cannot support him uncritically.

KREMLIN STEPS UP ITS CAMPAIGN AGAINST NMD. Speaking at a Putin-convened international conference against the militarization of space, Deputy Foreign Minister Georgii Mammedov said that Moscow seeks the adoption of an international agreement banning the deployment of military systems in space, RIA-Novosti reported on 11 April. Mammedov said that the steps taken by the U.S. so far do not represent the passing of "a point of no return." Meanwhile, Major General Vladimir Belous, a specialist on space weapons, said that if the U.S. goes forward with NMD, Russia will no longer fulfill its obligations concerning anti-satellite weapons or similar systems, ITAR-TASS reported on 11 April.

RUSSIAN ADVISERS TO ASSIST KYRGYZ BORDER GUARDS. Moscow has already sent 100 advisers to help Kyrgyz forces patrol the Kyrgyz-China border, Yurii Litovskii, the chief of the Russian Federal Border Troops in Kyrgyzstan, told ITAR-TASS on 11 April. In addition, Moscow has given the border guards of that Central Asian republic 100 million rubles ($3.3 million) in equipment and provided training for Kyrgyz officers and men.

AN ECONOMIC CONDOMINIUM ON THE KURILES. A Duma delegation visited the disputed islands to examine their status, and one of their number said that Moscow supports the idea of joint economic development of the islands as long as Russia's rights and interests in the continental shelf are protected, RIA-Novosti reported. (For background on this idea, see "RFE/RL Security Watch," Vol. 1, no. 14.)

MOSCOW PREPARES TO BREAK 'BUSH DRUMSTICKS.' Sergei Dankwert, first deputy agriculture minister, said that he is going to launch an anti-dumping investigation of U.S. chicken exports to Russia, Interfax reported on 8 April. Dankwert said that the American chicken, now known in Russia as "Bush drumsticks" because they were first exported to Russia under former President George Bush, has dropped in price by almost 50 percent over the last six years. Dankwert said that he found that price pattern suspicious. "Izvestiya" reported the same day that such an action constitutes yet another Russian response to deteriorating relations with Washington and is intended to hurt U.S. chicken farmers who actively backed current President George W. Bush. At present, Russia consumes some 17 percent of all American chicken production.

RUSSIAN PRESSURE ON EURO UPSETS EUROPEANS. European financial institutions are increasingly concerned that the massive Russian sales of German marks by Russians is putting pressure on the euro, NTV reported on 10 April. Russians are doing so, the station said, out of fear that they will not be able to convert their marks after the euro becomes the official currency of the EU next year. Bundesbank head Ernst Welteke arrived in Moscow the same day to reassure the Russian government that his bank will guarantee the continued exchange of marks in the future and hence that there is no need for exchanges now.

BORIS JORDAN SAYS HE CAN MAKE NTV PROFITABLE... The new board chairman of the contested channel NTV said that the initial owner of the channel, Vladimir Gusinsky, and his managers had never cared about making the company profitable, "Kommersant-Dengi," no. 14, reported. Jordan said that his Capital Group plans to reorganize the company to make it profitable, even though defenders of the station say it already is.

...AS BASHKIR PRESIDENT URGES REGIONS TO BUY INTO CHANNEL... Bashkortostan's president, Murtaza Rakhimov, called on regional leaders to block a change in the control of NTV and to make the ownership of that station "more democratic," RIA-Novosti reported on 11 April. Rakhimov added that regional ownership would mean that the station would represent the views of more than just those in Moscow.

...AS DUMA MULLS RESTRICTING FOREIGN OWNERSHIP OF MEDIA OUTLETS. SPS leader Viktor Pokhmelkin told RIA-Novosti on 10 April that he plans to introduce a bill that would ban anyone -- Russian or foreign -- from owning more than 25 percent of any media outlet in Russia. The Unity-proposed alternative would limit just foreign owners.

KILLER FOR HIRE OFFERS SERVICES VIA INTERNET. Samara interior officers have arrested a man who offered via the Internet to kill people for a fee, "Izvestiya" reported on 11 April. The advertiser of this unusual service turned out to be a 21-year-old student at the local aerospace university. The student said that he simply wanted to collect money and then disappear rather than actually follow through with the murders. At the same time, the police questioned 10 people who had expressed an interest in the offer.

MOST SOFTWARE SOLD IN MOSCOW IS COUNTERFEIT. Up to 80 percent of software and audio-video products sold in Moscow is counterfeit, Yuri Belkin, the head of the economic crimes unit at the Interior Ministry, told ITAR-TASS. Many of these products were sold through the Gorbushka black market closed by city authorities in January 2001. Belkin said that his agency has identified approximately a dozen major producers and 415 groups involved in distribution.

NEW ATOMIC MINISTER WON'T CHANGE COURSE... Aleksandr Rumyantsev, who recently replaced Yevgenii Adamov as atomic energy minister, has more to do with cash flow than policy, "Vremya Novostei" reported on 9 April. The minister's first announcement was that he will transfer the assets of the ministry from Konversbank and MDM-Bank, which are controlled by oligarchs, to Sberbank, which is completely controlled by the government. Rumyantsev said that otherwise he will continue all the policies of his predecessor including advocating a law allowing for the importation and permanent storage of nuclear wastes from abroad.

...AS DUMA LIKELY TO ALLOW NUCLEAR WASTE IMPORTS. Despite ecological concerns and warnings that the process will not bring in as much money as promised, the Duma is currently leaning toward approval on second-reading legislation that will allow Moscow to import and permanently store nuclear wastes, RIA-Novosti reported on 11 April. Meanwhile, new Atomic Energy Minister Rumyantsev said in an interview published in "Rossiiskaya gazeta" on 10 April that a green light on this program will allow Russia to compete for profits with the major Western countries. Adding their voice to the argument, a group of nuclear physicists led by Academician Yevgenii Velikhov published an article in "Izvestiya" arguing that earnings from such imports will actually allow Russia to improve the environment.

GOVERNMENT MODIFIES PRIVATIZATION PROGRAM. Aleksandr Broverman, first deputy property minister, told Interfax on 11 April that Duma restrictions will prevent the further privatization of Gazprom, Aeroflot, Rosneft, and Slavneft this year. But he added that the government does plan to reduce the number of state-owned enterprises from 11,000 to 1,500-2,500 by the end of the process. But so far in 2001, only 19 companies have been put up for sale.

MILITARY LEADERSHIP CHANGES AHEAD. New Defense Minister Sergei Ivanov has set up a commission to examine the qualifications of all top commanders, the first step toward firing or transferring some of them, "Izvestiya" reported on 10 April and "Komsomolskaya Pravda" reported the next day. Nominally headed by General Staff chief Anatolii Kvashnin, the body's key figure is Aleksei Moskovskii, a close associate of Ivanov from his time at the Security Council. The commission is charged with making proposals on reducing the number of generals and reorganizing the general staff in ways that, to use Ivanov's words, will make it again "the brains" of the military. Many observers expect Kvashnin to be replaced soon by General Yurii Baluevskii, who heads the main operational department of the general staff and was one of the planners of the Russian Prishtina operation in 1999.

FSB CHARGES TWO WITH SPYING FOR TURKEY... Stavropol FSB officers announced that they had captured two Turkish "spies," both of whom are from the Turkish community in Bulgaria, "Kommersant-Daily" reported on 9 April. One was detained when he tried to join a local Kuban cossack group; the other after she tried to recruit an FSB officer.

...AND SEEKS AN EGYPTIAN SPY AS WELL. The FSB office in Daghestan said that it is working with Interpol to track down an Egyptian citizen, Abid Saad Servakh, who reportedly has engaged in espionage in that north Caucasus republic in support of the Chechens, "Segodnya" reported on 10 April. The FSB said that he worked for the Saudi Arabians as well as the Egyptians after acquiring Russian citizenship by marriage.

A TURNING POINT FOR CORPORATE GOVERNANCE IN RUSSIA?

By Victor Yasmann

The long-running struggle over the ownership of NTV highlights a more fundamental and widespread problem in Russia: the emergence of a crisis of corporate governance that has arisen because of the lack of generally-accepted legal arrangements for owners and minority stockholders. Indeed, if Russia had the kind of laws that other modern states do, the entire Gusinsky-Gazprom saga would almost certainly not have taken place.

In research published in the April 2001 political-economical supplement to "Nezavisimaya gazeta," Nikolai Sofronov and Leonid Volkov of the government's financial academy argue that without the creation of corporate governance and the complex legislation needed to support it, Russian capitalism will face either endless conflicts or complete stalemate and that will make its future development virtually impossible.

Unlike most advanced industrial societies, shareholders in Russian enterprises have no effective way to protect their ownership rights. Because of the botched handling of privatization, Sofronov and Volkov argue, the right of ownership itself has never been clearly defined legally. In addition, managers of companies have virtually unlimited opportunities to defend themselves against outsiders, including transforming a public shareholding company into a closed one, the mandatory transfer of ownership shares into the initial capital fund, and so on.

Moreover, Russia lacks institutional constraints such as a liquid stock market and accountability legislation, and in Russia, there is no linkage between the income of managers and the performance of the enterprises they manage. Most Russian managers, Sofronov and Volkov point out, now have incomes roughly equal to their Western counterparts even though the average Russian's income is about 20 times lower. They cite as an example the results of a recent probe in Tula Oblast where investigators discovered that in that oblast alone at least 46 local managers have incomes above $1 million a year, a figure that is 1,000 times larger than the per capita income of the oblast's population.

Managers also can use the threat of firing to restrain any protests from a group that is often the largest shareholder, the workers who were given shares during privatization. And with regard to the second largest shareholder in many firms -- the state -- managers have worked to make the state's representatives on their boards dependent on management for their salaries, thus eliminating any possibility that government representatives will actually exercise supervision.

And as a result, Sofronov and Volkov argue, Russian firms seldom can project the stability and transparency Western investors and even Russian investors expect. And that in turn means that the failure to develop modern standards and mechanisms of corporate governance will not only preclude any significant investment in most firms but lead to even more capital flight until the problem is addressed.