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Security Watch: July 31, 2000

31 July 2000, Volume 1, Number 2
RUSSIA AND CHINA TO BOOST ENERGY COOPERATION. In addition to opposing the rise of a unipolar world and declaring their willingness to sign a friendship treaty of the kind Moscow and Beijing had during the Cold War, Russian President Vladimir Putin and Chinese leader Jiang Zemin signed seven economic accords concerning the export of energy from Siberia and the Russian Far East to China. These projects involve sending Russian natural gas from Irkutsk Oblast and Sakha-Yakutia to China, with Beijing retaining the option to re-export that gas to third countries and supplying oil from western Siberia and Kazakhstan (via a Russian pipeline) to China as well.

PUTIN ALARMIST ABOUT FATE OF RUSSIAN FAR EAST. On his way from North Korea to Okinawa, President Vladimir Putin told Russian regional leaders in Blagoveshchensk that "things in the [Russian] Far East are getting bad" and that Russia could lose this region to neighboring countries if things do not improve over the next few years, ORT television reported on 20 July. The Russian leader said that in several decades, "even the indigenous Russian population will speak Chinese, Korean, or Japanese." To prevent that from happening, he said, social and economic links between that region and central Russia must be improved and improved quickly. Speaking to the same audience, Economic Development Minister German Gref gave a mixed message: On the one hand, he said that the state would like to reduce its role in the economy to the bare minimum; but on the other, he indicated that Moscow would promote development by spending money on infrastructure, creating a liberal tax climate, and making administration more efficient.

FOR MOSCOW, U.S. REMAINS UNNAMED OPPONENT. Despite the much praised pragmatic and realistic elements of the newly-published foreign policy concept, there is one element of it which remains unchanged from the 1993 version: its promotion of the concept of a multipolar world, a term that most Russian officials and many others accept as a reference to opposition to U.S. dominance. Putin reaffirmed this approach during his meetings with China's Jiang.

RUSSIAN STRATEGIST SKEPTICAL ON EUROPEAN ABM. Major-General Vladimir Slipchenko, a leading Russian military strategist, believes that the "non-strategic" European ABM system proposed by President Putin as an alternative to the U.S. plans for MND is "a utopia," "Devoboi vtornik" no. 22 reported. He added that the technical basis of Putin's proposal was pure bluff and noted that Russia currently has no functioning weapons system to support such a proposal. Existing anti-missile types like the S-300 and S-400 would work only if they are deployed very close to the launch point of the missiles they are to shoot down. Slipchenko highlighted his own skepticism by asking "would Iran or North Korea allow us to do that?"

PUTIN SEES DEMOGRAPHIC TRENDS AS MAIN THREAT TO RUSSIA. In his annual address to nation, President Vladimir Putin suggested that unfavorable demographic trends which threaten to depopulate the country are the gravest threat to Russia's future. If current trends continue, he said, Russia could lose as many as 22 million people over the next 15 years. Following Putin's speech, several Russian officials and scholars urged the introduction of a pro-natalist policy. Semen Novoprudskii, for example, suggested in the 12 July "Izvestiya" that Moscow should open its doors to the reentry of ethnic Russians from the former Soviet republics by ending restrictions on immigration and abolishing the "propiska" residential registration system. Later, at a hearing of the Duma's Health and Sports Committee, Professor Aleksandr Koreshkin proposed abolishing all family planning and sex education programs and blocking any immigration to Russia of non-Slavs.

PUTIN BEHIND OFFENSIVE ON OLIGARCHS. Press suggestions to the contrary notwithstanding, Russian President Putin is behind the moves against the country's industrial titans. The chief of the Federal Service of Tax Police (FSNP), Vyacheslav Soltaganov, has reported to Putin regularly, with the presidential press service noting that Putin is keeping track of the most active tax evasion and money-laundering investigations. After one such meeting, the FSNP, the office of the procurator-general and FSB stepped up their investigations of firms connected with Vladimir Potanin, Vagit Alekperov, and Boris Berezovskii. And they increased their pressure on the media empire of Vladimir Gusinsky. Putin's campaign against the oligarchs recalls the methods employed by the secret police in the early Soviet period. During Lenin's New Economic Policy, the forerunners of the KGB frequently arrested rich entrepreneurs and demanded that the latter "voluntarily" surrender their assets in exchange for personal safety. This month, the FSB and its allies have made the same offer.

SECURITIES COMMISSION RESHUFFLED. Igor Kostikov, the chairman of the Federal Commission for Securities Markets in which many Western investors have placed so much confidence, fired his deputy, Aleksandr Kolesnikov, "for improper expenditure of international monetary funds," "Kommersant-Daily" reported on 15 July. "Segodnya" on the same day said that another Kostikov deputy, Igor Bazhan, would soon be dismissed for "misappropriation of state funds." Both Kolesnikov and Bazhan have close ties with former commission chairman Dmitrii Vasiliev, an ally of Anatolii Chubais. President Putin, who fired Vasiliev, told Kostikov to evaluate all his deputies.

IMPROVED ECONOMY FAILS TO CUT CAPITAL FLIGHT. Recent improvements in Russia's economic situation have not had the expected effect of reducing capital flight from that country, "Vedomosti" reported on 12 July. Using the balance of payments system of calculating capital flight--a method which measures the growth of delayed debt by foreign companies, the non-repatriation of export revenues, and bank errors and omissions--the Central Bank found that capital outflow had increased to $7.7 billion in the first quarter of 2000, up 30 percent from the same period a year earlier.

BUYING DUMA VOTES--A PRICE LIST. Vladimir Semago, a former Duma deputy and one-time Communist faction member, told "Novaya gazeta" on 17 July that corruption in the parliament has been institutionalized and now works as "a precise mechanism." He cited as an example the fact that some 60 to 80 deputies were paid $5,000 apiece to vote against Yeltsin's impeachment in spring 1999. He said that there are also established prices for other services. An inquiry to the Office of the Prosecutor-General costs $10,000-15,000 if it comes from the chairman of an important committee, but as much as $30,000 of if it comes from a group of mere deputies. At the same time, he said, some large Russian corporations in effect "own" groups of deputies whom they buy--not individually--but collectively. Among the firms with purchased groups of deputies are Gazprom, Yukos, and the Alfa group.

RUSSIA DRUG TRAFFICKING UP 1000 PERCENT IN DECADE. Directorate N of the FSB, which is responsible for combating illegal trafficking in drugs, can claim few successes, "Nezavisimoye voennoye obozreniye" reported on 21 July. According to an internal study, the number of addicts in the country now stands at up to 5 million and the turnover in drug trafficking has increased 1,000 percent over the last decade. As a result, the "successes" of Directorate N, even those widely reported, have made but a small dent in the $1.5 billion internal drug market.

NOGA AFFAIR THREATENS RUSSIAN ASSETS ABROAD... A French court ordered the seizure of a Russian sailing vessel, AFP reported on 13 July, as part of an effort to enforce an arbitration award to Switzerland's Noga company by a Swedish court. Noga has been locked in litigation against the Russian authorities since 1993 when Moscow stopped payments for almost a billion dollars of consumer goods and agricultural products. At that time, the Russian government accused Noga of overvaluing its products, but Noga lawyers insisted that the Moscow payouts reflected the siphoning off of funds by senior Kremlin officials to private accounts abroad. In 1995-1996, Noga won several legal cases against Russia and succeeded in freezing several Russian accounts in Switzerland, Liechtenstein and elsewhere. But until very recently, Moscow had managed to prevent the seizure of Russian assets and to conceal the scope of the case. However, a Paris court on 18 May decided to freeze assets of 70 Russian entities and diplomatic missions in France--including the Russian Federation representation to UNESCO--and opened the way to possible sale for recovery of damages. On 10 July, a French appellate court rejected a Russian appeal against that decision.

...AND THE KREMLIN HAS REASONS TO BE CONCERNED. Following the French court's decision, the Moscow media launched a veritable campaign against that action and protesters have organized picket lines near the French embassy. But this popular anger is perhaps exceeded by official concern behind the scenes. In his 1998 book "Mrakobesie," Colonel Valeri Streletskii said that Kremlin officials had devoted enormous effort towards hiding funds through the use of the Noga accounts. And Central Bank Director Viktor Gerashchenko admitted as much to the "St. Petersburg Times" on 28 April. Reflecting both popular anger and official concern, the Russian parliament has adopted a resolution calling on President Putin to respond with "proper measures" if France seizes Russian property, ORT reported 20 July. Dmitrii Rogozin, the chairman of the Duma's Foreign Relations Committee, said that "the situation is intolerable and the time has come for some very tough action." Several deputies proposed seizing Air France airplanes that land in Russia.

KREMLIN THREATENS MOSCOW MAYOR WITH LEGAL ACTION. Georgii Poltavchenko, Putin's envoy for the new central superdistrict, has threatened Moscow Mayor Yurii Luzhkov with legal action for his supposed violation of constitutional provisions, reported on 21 July. A former KGB officer, Poltavchenko said that continued existence in Moscow of the Soviet style residence permit (propiska) violates federal law and shows Luzhkov's willingness to disobey the country's Constitutional Court, which banned such practices in 1996. Luzhkov is widely known for using the "propiska" institution to discriminate against non-Russian migrants from the Caucasus. Poltavchenko's initiative is nominally in support of a democratic cause, but his intention appears to be to intimidate Luzhkov, who has spoken out against several of Putin's proposals, rather than to improve the lives of Moscow residents.

SERGEYEV, KVASHNIN CLASH ON MILITARY PLANNING. Russian Defense Minister Igor Sergeev and Chief of the General Staff Anatolii Kvashnin continue to clash over how to conduct military reform. Kvashnin wants to reduce the size of the Strategic Missile Forces in order to shift resources into conventional forces--including an increase of 50,000 ground troops in the south and southwestern areas of the country where Kvashnin sees threats emerging. In widely quoted remarks, Sergeyev has denounced Kvashnin's proposal as "criminal stupidity and an attempt to harm the national interests of Russia." Most military commentators in the Russian media argue that this interservice squabble is about resources rather than strategy and say that it has intensified because of the rising costs of the Chechen conflict that have eaten up more than the nearly 50 percent increase in Russian appropriations for the military this year over 1999.

PUTIN PLAYS DOWN MILITARY DEBATE. Speaking in Nizhnii Tagil on 14 July, Russian President Putin said that the reform of the country's nuclear forces must be discussed calmly and in a collegial way, AVN reported. Such questions, Putin continued, "cannot be taken within a closed circle but cannot be debated in public." He said that he had asked Sergeev, Kvashnin, and Security Council chief Sergei Ivanov to jointly prepare a discussion on this issue for an upcoming meeting of the council. The open clash between Sergeev and Kvashnin has created a serious problem for Putin: he cannot afford to alienate Kvashnin, who has been the moving force behind the Chechen campaign, but he cannot do without Sergeyev's support given Russia's obligations under START-II and its aspirations as a recovering great power.

RUSSIA CAN'T FUND TROOPS IN CHECHNYA... Defense Minister Igor Sergeyev has concluded that budget constraints will force Moscow to reduce the number of troops it had planned to deploy permanently in Chechnya, "Vechernyaya Moskva" reported on 4 July. The 42nd division, which is slated to be the main Russian force there, will be cut to only 15,000 men. Last spring, General Staff chief Anatolii Kvashnin said that the division would be kept at 25,000 men.

...OR MEET DEFENSE ORDERS. Deputy Prime Minister Ilya Klebanov told "Rossiiskaya gazeta" on 4 July that Moscow had been able to execute only 15 percent of its planned defense orders during the first six months of 2000 because of budgetary constraints. He added that he expects government spending on defense to increase rapidly during the second half of the year.

UES READY TO CUT POWER SUPPLY TO KEY MINISTRIES. A spokesman for the United Electrical System (UES), which is headed by Anatolii Chubais, told "Nezavisimaya gazeta" on 15 July that the power grid monopoly is preparing to stop supplying power to the most delinquent customers the ministries of defense, internal affairs, justice, and education. These agencies owe the UES about 13 billion rubles and the UES cannot supply the debtors any more due to low electrical tariffs and its lack of operating funds.

STRATEGIC MISSILES COMMANDER PROTESTS POWER CUTOFF. Major-General Konstantin Sviderskii, who commands the strategic missile forces division in Altai Krai, has issued an appeal to the local UES affiliate Altaienergo to drop its plan to ration power supplies to his units because of delinquent payments. In an open letter published in "Sovetskaya Rossiya" on 8 July, Sviderskii warned that Altaienergo's proposal could force him to use "coercive methods" in solving the problem, adding that he has already placed armed guards around power distribution centers.

MILITARY OFFICER SENTENCED FOR ESPIONAGE. A Moscow court on 10 July found Lieutenant-Colonel Sergei Avramenko guilty of "high treason in the form of espionage" for an unnamed foreign power and sentenced him to four years in prison. FSB Promotion Programs Department chief Aleksandr Zdanovich said that by its actions, his agency had limited the damage Avramenko might have inflicted on Russian national interests.

MOSCOW FSB CHIEF REPLACED. The chief of Moscow's division of the Federal Security Service (FSB), General-Colonel Aleksandr Tsarenko, has been removed from his position, "Segodnya" reported on 4 July. His position was taken by the chief of the Moscow FSB Counterintelligence Department, Valentin Vlasov. The newspaper believes that Tsarenko was replaced because of his close ties with the Moscow mayor, Yurii Luzhkov.

MOSCOW SEEKS FUNDS FOR LAW ENFORCEMENT. The Russian government has approved the statute of a fund to combat crime. According to the document, the fund will be formed from several sources, including 100 percent of the property confiscated by court sentences, 100 percent of the revenues from the licensing of private security and investigation, 50 percent of weapon licensing fees, and voluntary contributions, the press service of the Russian government reported on 10 July.


By Victor Yasmann

Russia is expected to earn $21-23 billion this year from the export of oil and natural gas, but it will also earn approximately $7 billion from the sale abroad of steel and other metals, all of which have seen significant price increases during the past year. But unlike the case of oil and gas--where most of the increase reflects rising prices--the new earnings from the sale of metals reflects Moscow's commitment to export more and consume less at home. Indeed, if current trends hold, Russia will export up to 70 percent of its production of metals.

This increase is possible largely due to Russia's practice of subsidized dumping of its products on world markets. Last year, the U.S. Department of Commerce began an anti-dumping investigation, as did the European Union. And in October 1999, U.S. and Russian trade agencies agreed that Washington will suspend the introduction of countervailing duties on Russian steel if Moscow agrees to observe U.S. anti-dumping regulations. But the two sides failed to reach an agreement on minimum prices--and Russian exporters used this loophole to step up exports.

Because Russian violations of anti-dumping regulations are so blatant, there are now more than 55 national and international investigations into Russian metal exports. But despite this, Russia continues many of these disputed practices even as it takes advantage of new price increases. Moscow stepped up its export of palladium to the U.S. and the EU, and because it controls 70 percent of the world supply, there are some indications that it is involved in raising the prices. According to Moscow estimates, total exports of Russian palladium are likely to reach 180 tons this year with the price rising from $444 in January to $754 by July.