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Caucasus Report: February 1, 2008

Kabardino-Balkaria Seeks To Break Out Of Economic Stagnation

By RFE/RL analyst Liz Fuller
On January 23, the Russian website posted a detailed analysis of the political and economic situation in the Kabardino-Balkaria Republic (KBR), highlighting in particular how corruption, nepotism, and incompetence within the republic's leadership since the collapse of the USSR has contributed to economic decline, and how failure to reverse that decline and address popular grievances is in turn eroding support for Arsen Kanokov, whom Russian President Vladimir Putin named as KBR president in September 2005 in the apparent hope that he would eradicate corruption and reform and revitalize the economy.

The website construes the appointment of Kanokov, formerly a highly successful Moscow-based businessman, as reflecting a new "business approach" by the Kremlin to the North Caucasus in which appointees are given carte blanche to take whatever measures they consider appropriate in return for delivering the required political and economic results. The website does not, however, speculate whether that new approach, which it dismisses on the basis of Kanokov's track record as having failed dismally, may have been prompted by the trenchant criticism of corruption in the North Caucasus addressed to Russian President Vladimir Putin in 2005 by then-presidential envoy to the Southern Federal District Dmitry Kozak.

The anonymous authors of the analysis trace the current crisis situation in the KBR to the privatization process that transferred total control of the economy to a small group of local elites, a process that was facilitated by the lack of legislation protecting the interests of small-business owners. Moreover, privatization "from the top down" placed Balkars and members of other minorities at a disadvantage vis-a-vis the Kabardian elite. The Balkars, who are concentrated primarily in mountainous districts, suffered disproportionately from the introduction of legislation that transferred ownership of land located between villages (used by Balkars for grazing purposes) from the local authorities to the republic's government, which has hopes of using it to build lucrative exclusive ski resorts. The Balkars staged protests in 2005 against that legislation, which Kanokov has since suspended; the Russian State Duma has formed a working group to study it, according to on January 29.

Over the past 16 years, noted, the industrial base of the KBR has virtually collapsed. The industrial flagship, the Tyrnyauz Mining Complex, is standing idle and no potential investors have yet shown an interest in it, even though it is reportedly located in close proximity to half the world's reserves of wolfram and molybdenum. Most defense-industry plants too have closed, or continue to operate at limited capacity purely on the basis of government subsidies. The only flourishing branch of industry is the production of vodka and other alcoholic beverages.

The agricultural sector is likewise run-down, with the result that unemployment in the KBR is officially estimated at 23 percent -- three times the national average -- although the true figure is believed to be far higher. Almost 20 percent of the population lives below the poverty line.

Statistical data cited by Kanokov at a government session on January 10 attended by visiting Russian Prime Minister Viktor Zubkov and several other federal ministers only serve to substantiate the conclusion the KBR has made only modest economic progress in the two years since Kanokov's appointment. True, Kanokov noted that whereas two years ago federal subsidies accounted for 65 percent of the republic's annual budget, the figure has now fallen to 57 percent, and he predicted that by 2010 it will be down to 50 percent, and by 2022 to zero, reported on January 10.

But Kozak, in his current capacity as federal minister for economic development, noted that while the percentage of federal subsidies in the republic' s budget has declined, the actual sum of money involved has trebled over the past seven years, according to And Zubkov pointed that the greater part of those subsidies still goes on salaries for budget-sector employees, rather than the modernization of obsolescent enterprises or creating new jobs, according to Kozak also observed that the KBR has a total of 1,600 federal officials and 3,000 republican officials; the republic's total population is approximately 900,000. Regional Development Minister Elvira Nabiullina deplored the fact that not a single foreign investor has channeled money into the republic since 2003, a failing that Kanokov blamed on sensational Russian media reporting that depicts the North Caucasus as inherently unstable and thus frightens away potential investors.

Addressing the January 10 meeting with Zubkov and other federal ministers, Kanokov identified as a top priority increasing or resuming production at four unidentified Defense Ministry enterprises, and the federal representatives reportedly agreed to provide funding to modernize the plants in question. Kanokov predicted that the resumption of production at those plants would help reduce unemployment, but, according to, most of the highly qualified workers who were pensioned off when the plants closed or reduced production have since died. The federal ministers did not, however, immediately agree to Kanokov's request for additional federal funding for the reconstruction of Nalchik airport and selected highways.

Kanokov identified as further potential growth areas agriculture and tourism. He predicted that investment in tourism, particularly ski resorts, could raise the contribution made by that sector to the republic's budget from 1 percent to 25 percent by 2010. Some federal funding will be provided from the "South" federal program to develop ski resorts that will be used during the 2014 Olympic Games in Sochi.

At a cabinet meeting on January 25, Industry Minister Kazim Uyanayev unveiled a three-year industrial development program for the period 2008-10, reported. That program includes the modernization of the four defense-industry plants, and that of the Tyrnyauz Mining Complex. The total cost of the program, which will create some 2,965 new jobs, is estimated at 4.6 billion rubles ($188.6 million). But even those measures are implemented within the planned time frame, they will take time to bear results; meanwhile, political instability and the alienation of much of the republic's population from the leadership is only likely to increase.

Prospects For Abkhaz Peace Plummet

By RFE/RL analyst Liz Fuller
In his latest half-yearly report to the UN Security Council on the situation in Abkhazia, which was released on January 23, UN Secretary-General Ban Ki-moon noted with regret that efforts to mediate a political settlement of the conflict are "at a standstill," and that "reliable observers on both sides of the cease-fire line have commented that the relationship between the two sides was in 2007 at its lowest point since the large-scale violence of 1998."

The tensions that persisted throughout 2007 are in part the logical continuation of the deterioration registered the previous year as a result of the deployment of Georgian special forces in July 2006 to the Kodori Gorge to quash an apparent insurrection masterminded by renegade local official Emzar Kvitsiani. Since then, the Abkhaz authorities have repeatedly said that a resumption of peace talks is contingent on the withdrawal of those Georgian forces, even though the UN has concluded that their presence does not, as the Abkhaz claim, violate a UN-mediated cease-fire agreement signed in 1994. And a series of disquieting incidents in which Russia was perceived to have played spoiler -- including the firing in March by unidentified aircraft of rockets at a Georgian-populated village in the Kodori Gorge, and a standoff in western Georgia in late October between Russian peacekeepers and Georgian forces that was defused only with the advent of Georgian President Mikheil Saakashvili -- only contributed to a hardening of the Georgian position.

The timing of that latter incident was all the more infelicitous in that it occurred less than a week after then-Georgian Minister for Conflict Resolution David Bakdradze traveled to Sukhum for talks with Abkhaz Foreign Minister Sergei Shamba. The talks lasted far longer than scheduled, and Bakradze was quoted as saying they might have paved the way for a resumption of dialogue. Similarly, in June 2006, President Saakashvili's envoy for Abkhazia, Irakli Alasania, who enjoyed a good working relationship with Shamba, was named Georgia's envoy to the UN less than a month after the resumption of talks with Abkhaz officials after a four-year hiatus.

At those talks in Tbilisi, Shamba and Alasania discussed the possibility of the two sides signing a formal agreement on the nonresumption of hostilities, a move that Tbilisi now categorically rules out. Speaking at RFE/RL's headquarters in Prague in June 2007, then-Prime Minister Zurab Noghaideli said that Georgia would sign such a pact only as part of a broader set of agreements that would permit Georgian displaced persons to return to Abkhazia and provide guarantees of their security. Moreover, in the wake of the October standoff, Georgian officials are now demanding first, that the Russian peacekeeping force deployed in the conflict zone under the CIS aegis since July 1994 be replaced by an international force under the UN aegis, and second, that the UN undertake an in-depth evaluation of the effectiveness of the ongoing mediation process in which Russia plays a key role.

Ban identified a number of interrelated trends as contributing to the perceived further deterioration over the past six months in relations between Tbilisi and Sukhum(i), including a consistent pattern of "disinformation and misrepresentation" by the media that only serves to reinforce the existing "image of the enemy." Ban acknowledged that "a measure of disinformation is understandable and unavoidable in an environment where real apprehensions exist, tensions abound, and means of independent verification are scarce. But such disconnect as illustrated in the present report, between, on the one hand, realities on the ground and, on the other hand, media or official statements, is a matter of concern."

Elsewhere in his report, Ban similarly referred to "a large number of allegations concerning military deployment on both sides of the cease-fire line and incidents involving the Abkhaz militia or the CIS peacekeeping force." He noted that the UN Observer Mission in Georgia followed up on those allegations and found most of them to be "baseless or exaggerated," and he recalled his December 12 appeal to "all parties concerned" to demonstrate restraint and refrain from "acts of provocation," including militant rhetoric.

Ban cited as a further negative influence the political crackdown by the Georgian authorities in early November 2007 and the subsequent preterm presidential election held on January 5, to which the Abkhaz authorities responded with enhanced security measures along the cease-fire line. He also noted continued uncertainty over the future of Kosovo, insofar as the Georgian authorities fear Russia could respond to international recognition of a declaration of independence by the Kosovo leadership by similarly recognizing Abkhazia and other breakaway unrecognized republics as independent states.

In an apparent bid to dispel such fears, Russian Foreign Minister Sergei Lavrov stressed at a press conference in Moscow on January 23 that "the Russian leadership has never affirmed that as soon as Kosovo [is recognized as an independent state] we shall immediately recognize Abkhazia and South Ossetia. I stress that the Russian leadership has never said this." Lavrov continued: "I have the impression that the idea has become firmly rooted in many peoples' minds that Russia is taking such a firm stance on Kosovo, warns that it will set a precedent, but at the same time is secretly waiting for this to happen in order to begin recognizing all [the unrecognized states] on its borders. Nothing could be more wrong with regard to the Russian position. We understand perfectly the destabilizing effect of any separatist tendencies. It was not so long ago that we experienced this threat acutely ourselves, and for that reason you can suspect us of anything at all, but not of [encouraging separatism]. It is in our interests to preserve stability, not to permit separatism, not to permit any violations of international law. That will remain our position."

Ban concluded his report to the Security Council by referring to both the Georgian demands for a revision of the peacekeeping and negotiation formats, and to Abkhaz objections to any fundamental change. He proposed a "reassessment of the peace process," while at the same time making clear that Russia, which Georgia hopes to sideline if not exclude, will, in its capacity as a member of the "Group of Friends of the Secretary General" group of countries, participate in that reassessment.