Center for Defense Information
Research Topics
CDI Library
What's New
CDI Library > Johnson's Russia List

Johnson's Russia List


February  22, 1998  
This Date's Issues:    2073      

Johnson's Russia List
22 February 1998

[Note from David Johnson:
1. New York Times: Marina Lakhman, Official Russia Embraces 


3. Business Week: Patricia Kranz, IN RUSSIA, A RISING CHORUS: 

4. Reuters: Russia to ratify Human Rights convention.
5. AP: Russians May Legalize Prostitution.
6. Journal of Commerce: John Helmer, Average Russian beer 
drinker can't afford to tap into imports.

7. Journal of Commerce: Michael Lelyveld, Russia's motives 
questioned in Caspian blockage.

8. Rossiiskaya Gazeta: Alexei Baliyev, THE BAGHDAD CONUNDRUM: 

9. Nezavisimaya Gazeta: Natalia Konstantinova, YELTSIN SACKS 
HIS CLOSEST AIDES. Kremlin Completes "Quiet Bureaucratic Coup."

10. Nezavisimaya Gazeta: LUZHKOV SAYS "NO" TO MONETARISM.]


New York Times
21 February 1998
[for personal use only]
Official Russia Embraces Internet

MOSCOW -- Vladimir Lenin's statements on the electrification of society put
a light bulb in every village shack. More than 75 years later, Bill Gates's
vision for the future during a trip to Moscow has spurred the Russian
government to plug in their computers and start realizing the potential of the
Ever since the computer billionaire made a highly publicized trip to Moscow
in October -- during which he proclaimed that the growth of the Internet has
the potential to make companies and the country's technically talented
population more competitive in the world market without creating a brain drain
-- Russian government structures seem to be busy installing servers and
building Web sites. 
Every day, it seems, use of the Internet is gaining momentum in government
structures: Boris Yeltsin is considering a proposal to do an online interview;
the State Duma, the country's parliament, approved a resolution calling for it
to have its own Internet servers; the Central Bank decided to reach out to the
Russian people with a "hot line" on its Internet site and employees of the
Moscow mayor's technology office are preparing to moonlight as Internet
President Boris Yeltsin, who is not known for any particular willingness to
give interviews to the Western press, is considering a proposal from NBC to do
an online interview. According to the president's press office, the proposal,
which was sent to the president's e-mail address through the administration's
Web site, interested him; his staff is exploring its perspectives. 
The presidential administration's page is under the heading of the "Russian
Government Internet's Network", which is a site that lists the various
structures of the federal government who have a presence online and offers
links to them. But other than enumerating the president's powers under the
constitution and his publicized earnings, the most interesting thing on the
president's page is the opportunity to send Yeltsin e-mail, which of course is
read by his press service. 
But if the outcome of the next Russian presidential election could be based
on best use of new technology, Yuri Luzhkov, Moscow's mayor and a presidential
hopeful, would be the victor. The official Web site of the Moscow mayor was
officially born during the 1996 presidential election when it was one of a few
Russian sites that were publicizing up-to-the-minute results, according to
Konstantin Zhigunov, deputy director of the Information Technology Center for
the mayor's office. 
The site contains important information for Muscovites such as the upcoming
phone rate hike, important Moscow phone numbers and a receptacle for surfers'
complaints and suggestions, as well as Luzhkov propaganda. According to
Zhigunov, the site gets an estimated 10,000 hits a month. 
"There was a hunger for information on the mayor and we decided to satisfy
that hunger through the Internet," said Zhigunov, explaining the office's
early realization of the potential of the new technology. Shortly after the
richest man in the world took Moscow by storm, the mayor's office announced
that Muscovites would soon be able to report municipal problems such as
plumbing and street cleaning by e-mail from the Web site. Although the
announcement has yet to become reality, Zhigunov said it is still on the
agenda but has been slightly delayed by the fact that the main editor of the
site was elected a deputy of the Moscow City Duma this past December. However,
he said the proposal would not be difficult to implement since most city
government structures have had e-mail for five years. 
The latest project of the mayor's technology office is the site it built for
the Moscow City Duma which enumerates all the laws and resolutions passed by
the city's legislative body. 
Zhigunov said the various Internet projects of the mayor's office have not
required a huge expenditure of money, since the work is generally performed by
those who are already on the city's payroll. He said that those who have been
involved in the mayor's Internet projects are even considering making extra
money on the side as independent contractors, developing Web sites and
databases -- a career that remains still relatively rare in the country,
despite a rapidly growing 600,000 Internet users. 
Other government structures, including the State Duma, jumped on the
bandwagon with the Mayor's office, using the office's server to post their own
information since April of last year. But a visit from Gates, with his
proclamations of the bright future of the Internet, spurred the State Duma,
the lower house of the Russian parliament, to approve a resolution to make
greater use of the Internet and to move its site to its own server. 
Currently, the site contains just general information on the Duma, its
factions and individual Duma deputies, but Yuri Nesterov, deputy chairman of
the Committee on Communications and Information Policy for the Duma, said he
hopes the information available on the site will increase and that eventually
Russian residents would be able to go to the site to see how their deputy
voted on any issue under discussion by the Duma. Nesterov called his
committee's decision to go online a retaliation against the highly politicized
Russian mass media, whose political leanings are not confined to editorial
"The Duma is far from ideal and the mass media is far from ideal and the
political bias of various media agencies is also very wide. Therefore whatever
appears in the media on the Duma is far from objective," he said in an
interview in his Duma office. "The first kind are newspapers that are to the
left, which write that the Duma is wonderful. Then the second kind are the
pro-government, pro-president newspapers that write that the Duma is horrible
and incompetent. And then the third write about everything mockingly because
that kind of style is considered good in journalism. The Internet allows
everyone who is interested in this information to receive the information
firsthand without intermediaries." 
In the face of a hotly debated and much talked about new currency
denomination as of the first of the year, the Central Bank of Russia also
decided to utilize its Web site to give people firsthand information. In
November, the bank introduced a hot line on its site to state its position on
ruble revaluation and other upcoming banking changes. The hot line also allows
Russian citizens to send in their feedback and concerns. 
During his trip, Gates met with Sergei Dubinin, chairman of the Central
Bank, which is one of Microsoft's major Russian clients. As a result of the
talks, the Central Bank agreed to purchase Microsoft software to help with the
bank's ambitious automation program and vowed its assistance in battling
piracy by monitoring legal software use in all Russian commercial banks. In
addition to his grandiose statements on the promises of the Internet, Gates
made the problem of software piracy a central issue during his visit to
Russia, where an estimated 70 to 90 percent of the American compact disks and
computer software sold are illegal copies. 


Business Week
February 23, 1998
[for personal use only]

Boris Y. Nemtsov shares more than a first name with Russian President
Boris N.
Yeltsin. Like Yeltsin, the 38-year-old former governor of Nizhny Novgorod came
to Moscow from a regional power base. Since appointing Nemtsov first deputy
prime minister in March, 1997, Yeltsin has treated him as heir apparent and
almost as a son.
But the golden boy is having a rough ride. Bureaucrats and Big Business
have crimped Nemtsov's push to restructure Russia's energy giants. In January,
Prime Minister Viktor S. Chernomyrdin, who backs slower reforms, grabbed
control of Russia's Fuel & Energy Ministry from Nemtsov.
On Feb. 5, Yeltsin gave a new vote of support to Nemtsov. To bolster
investor confidence in Russia (page 38), Yeltsin pledged to keep Nemtsov and
his ally, First Deputy Prime Minister Anatoly Chubais, in government until
2000. Nemtsov later talked to BUSINESS WEEK Moscow Bureau Manager Patricia
Kranz about economic and political power in his country.

Q: You have said that a battle is raging in Russia among competing models of
capitalism. Which one will win?
A: There are three types of capitalism coexisting here. The first is so-called
oligarchical capitalism. The author of this type is [businessman and former
deputy security adviser] Boris A. Berezovsky. In this case, all political
power, money, and property are concentrated in big companies, and their
leaders control the mass media, budget, international relations--everything.
There is an elected president and a democratic parliament and government, but
everything depends on this handful of people. In my view, this is very sad for
The second type is bureaucratic capitalism, of which the most famous author
is Moscow Mayor Yuri Luzhkov. In this type, money, property, and political
power are concentrated inside a bureaucratic system. There are private
companies, but their future depends on their relation with bureaucratic
forces. This type of capitalism lacks any clear property rights. There are
limitations on privatization, no private land ownership, and bureaucratic
systems controlling everything from sewage disposal to licenses. This is crony
capitalism. Very dangerous.
Third is what I call ``people's capitalism,'' or perhaps it would be better
to call it democratic capitalism. This type derives from small and medium
companies and even big companies located [outside Moscow]. Companies are
struggling for political rights, open and clear rules, and influence. My main
concern is to support small and medium businesses and de-monopolize big
companies, and create a more stable structure for the economy. We should offer
tax privileges, develop small-scale privatization, ensure property rights for
people and security.
Russia faces a dramatic challenge: What will the country be like in the
21st century? Who will win? I hope that the supporters of a society based on
democratic capitalism will win. But many powerful people here think
differently. In my view, they have an 80% chance, while I have about 20%.

Q: When you joined the government almost a year ago, Yeltsin put you in charge
of demonopolization. Progress does not seem significant.
A: We have done a lot. For the first time in 10 years, tariffs were reduced
for natural gas by 13%. Gazprom has had to pay money to the budget. There's
even a Gazprom advertisement on TV now, which says: ``We are paying money for
pensions, we are paying taxes!'' This is one of my achievements. We curbed the
corrupted system of oil exports. Open tenders for distribution of [state]
budget money started last year. These helped us to save more than 3 trillion
rubles. We organized a strong check on big companies, using international
auditors. We adopted a program for de-monopolizing the railways.

Q: Yeltsin recently said he had chosen his successor but did not say who. Do
you want to run for President in 2000?
A: No....I only want to do those things that will succeed.

Q: Don't you think your candidacy would appeal to the voters?
A: Every politician believes that people love him. I don't believe that.

Q: Do you think they'd love you four years later, in 2004?
A: It's difficult to predict.

Q: If you don't run, whom would you like to support?
A: I'm thinking about it. I have not yet made my choice, but I'll do so in the
next year. [Meanwhile,] Yeltsin wants the political system to be stable. When
he referred to his successor, he was saying that no one in the political
system [should] begin their election campaign before he gives the signal. This
is important for stability.


Business Week
February 23, 1998
[for personal use only]
The market is in a mess pending shareholder reform

Viktor S. Chernomyrdin appeared shell-shocked. The Russian Prime Minister
thought his government had inoculated markets against the Asian flu in
December when it raised interest rates to 36%. But when Chernomyrdin flew to
Davos, Switzerland, on Jan. 30 to hobnob with the world's business and
political elite, investor after investor chewed him out.
They told him Russian markets could melt down unless the government boosts
tax collection, cuts spending, and curbs its budget deficit. Then George
Soros, who has invested more than $2.5 billion in Russia, blasted business
leaders for violating minority shareholder rights--and made it clear he is
selling some of his Russian stocks.
NOT ENOUGH. The wake-up call came none too soon. Caught up in political
infighting, Chernomyrdin was paying little attention to the economy. When the
government failed to back up the central bank's Dec. 1 rate increase with
budget and spending cuts, investors started to lose faith in the Russian
A spate of shareholder-rights scandals brought the market down further. In
January, foreigners dumped at least $1 billion worth of shares, sending Moscow
down 30% <A HREF="aol://4344:109.B3566190.6681792.571787384">(chart)</A>. It
has lost most of the gains it made in 1997, when its 111% return made it the
best-performing emerging market.
Shaken, Moscow officialdom has struck back. The government now plans to
slash spending. The central bank has pushed interest rates to 48% and pledges
to do whatever is necessary to prevent a ruble devaluation. And President
Boris N. Yeltsin, whose recent demotions of reformers Anatoly B. Chubais and 
<A HREF="aol://4344:109.B3566191.6681816.571787386">Boris Y. Nemtsov</A>
generated fears that economic restructuring was being derailed, has promised
to keep them on to 2000. Yeltsin also halted new borrowing in the first
quarter, called for tax reform, and demanded strong measures to protect
shareholders' rights. The moves pushed the stock market up almost 7% by Feb.
But investors still are nervous. ``Statements aren't enough,'' says Lucca
Parmeggiani, portfolio manager for Zurich-based Vontobel Eastern Europe Equity
Fund. He and other foreign investors want hard results--and say the next six
months will be crucial.
Also key to any market revival is an expansion of shareholders' rights. One
of the biggest violators is the oil industry. Last year, most independent
production outfits were merged into huge energy holding companies, including
Sibneft, Sidanko, and Yukos. Instead of reaping a merger windfall, the value
of foreign investors' shares has been diluted. Sibneft, for example, sold
shares in oil producer Noyabrskneftegaz to affiliates at a 50% discount to the
market, according to Brunswick Warburg, a Moscow investment bank.
REAL SHARE? Russia's Federal Securities Commission is investigating possible
abuses in the industry, and Michigan investor Kenneth B. Dart has lodged
complaints of unfair treatment by Tomskneft, an oil production company whose
parent recently merged into Yukos.
Another target of complaints is Sidanko, an oil holding company 85%
controlled by Russia's giant Oneximbank and its affiliate, Moscow-based
investment bank MFK Renaissance. British Petroleum bought 10% of Sidanko on
Dec. 31 for $571 million. But some minority shareholders claim they were
excluded from taking part in a convertible bond issue in December that will
reduce their stake in Sidanko from 4% to 1.4%. The new share issue will be
sold only to Oneximbank, Renaissance, and BP at a fraction of the current
market value.
William F. Browder, managing director of Hermitage Capital Management and a
dissenting shareholder says that the sale ``raises questions about whether a
Russian share is really a share.'' Oneximbank President Vladimir O. Potanin
says the sale was legal and that Browder was notified about its terms before
he bought shares for his Hermitage Fund.
Shareholder rights violations are hardly new in Russia, of course. But
they're one more reason why foreign investors are getting antsy about the
Moscow market and aren't jumping back in yet.

By Patricia Kranz in Moscow 


FOCUS-Russia to ratify Human Rights convention
By Alastair Macdonald 

MOSCOW, Feb 20 (Reuters) - Russia's communist-led parliament voted
overwhelmingly on Friday to ratify the European Convention on Human Rights,
marking another step away from the country's authoritarian past. 
For the first time in their history, Russians will be able to appeal to
international jurists based in Strasbourg if they feel national courts have
failed to protect rights ranging from the fundamental right to life itself, to
private property and a fair trial, freedom of speech and religion. 
The Duma also ratified Europe's anti-torture convention. 
President Boris Yeltsin, urging the State Duma lower house to ratify the
document two years after joining the Council of Europe human rights body, said
it would ``confirm our country's commitment to the principles of democracy and
the rule of law.'' 
``Ratification of the convention is an important step on the road to
real protection for human rights in Russia,'' Vladimir Lukin, the liberal
chairman of the Duma's international affairs committee, told the chamber. 
Approval by the upper house and signature by Yeltsin should now be
in the process of ratifying the document. 
Only 11 votes opposed ratification to 294 in favour in a chamber dominated by
socially conservative communists and nationalists. Success was aided by the
fact the government left out a protocol banning the highly popular death
Russia signed that protocol, No 6, prohibiting capital punishment in
peacetime, last year and in theory has a further year to ratify it. But public
opinion, amid an unprecedented violent crime wave, is strongly in favour of
executions and few Russian officials expect to meet that deadline. 
Deputy foreign minister Igor Ivanov, presenting the convention to the Duma,
said Yeltsin's moratorium on executions would suffice. Some 900 people are on
death row and death sentences are still being handed down but no one has been
shot since August 1996 under the presidential decree. 
General Albert Makashov, a Communist deputy, was one of the few to raise his
voice against the convention. 
He said it laid Russia open to claims for compensation from victims of
Stalinist persecution, citing among others citizens of the Baltic states who
want reparations for their deportation after the Soviet annexations of their
countries in 1940. 
``Joining the Council of Europe has done nothing for Russia but given us
a lot
of liabilities. It is not worth it,'' he said. 
But Lukin, a former ambassador to the United States, said: ``Ratification is
in the interests above all of Russia's citizens and therefore, of course, it
must be in the national interest.'' 
In Strasbourg, France, senior officials of the 40-member Council of Europe
welcomed the vote. 
``(It) will open the way for almost 150 million Russian citizens to use the
Council of Europe's human rights protection machinery,'' Leni Fischer,
president of the Council's parliamentary assembly, said in a statement. 
Despite much greater freedoms than in Soviet times and good intentions in the
Kremlin embodied in a 1993 constitution, some observers say many Russians
still suffer human rights abuses. 
Amnesty International last year alleged widespread torture in Russian prisons
and said police routinely flouted the law. 
Other groups alleged that some provincial leaders persecute local human
activists in ways little different to those used against Soviet-era


Russians May Legalize Prostitution
21 February 1998

MOSCOW (AP) - Prostitution, so taboo in the Soviet Union that it was said not
to exist, may soon be legal in one Russian region.
A bill legalizing and regulating prostitution is working its way through the
legislature of the Saratov region, about 450 miles southeast of Moscow. It
already has the support of the regional governor, the Interfax news agency
reported Saturday.
Gov. Dmitry Ayatskov said legalized prostitution could help control a growing
problem of AIDS and syphilis in Saratov, and also would bring much-needed tax
dollars into the regional treasury.
Illegal prostitution is flourishing in Saratov, as it is almost everywhere in
Russia, and Ayatskov said syphilis rates have quadrupled in the past three
If prostitution is legalized, the governor told Interfax, ``Ladies of the
night will have to undergo regular medical checks. Their clients will have to
respect safe-sex standards.''
It also would bring in substantial tax income, he said. Police in Saratov
estimate that the monthly illegal income from prostitution exceeds $417,000.
While prostitution has not been legalized anywhere in Russia, it isn't
specifically outlawed in most of the country - a holdover from Soviet days,
when there were no laws against prostitution because it was considered a
capitalist problem that could not exist here.
Since the Soviet collapse, prostitution has come into the open in many
cities, and newspapers are filled with thinly veiled classified ads for
``leisure'' services.


Journal of Commerce
February 23, 1998
Average Russian beer drinker can't afford to tap into imports

MOSCOW -- Genuine beer was in short supply here and throughout the 
Soviet Union, until the union dissolved in 1991. Since then, imported 
beer has flooded into the country. But the average Russian beer drinker 
can't afford to drink it.
Russian Market Research Co. surveyed consumers nationwide a year ago, 
asking what alcoholic beverage brands come to mind. Most named a dozen 
vodkas, cognac, champagne, wine and liqueur, before beer got a mention. 
Even Baltika, a brand produced by the powerful Scandinavian group Baltic 
Beverages Holding (B.B.H.) of Stockholm, was overlooked; high-income 
Russians were the only ones who said they could afford Baltika's price. 

Should be tempting

In theory, the Russian beer market should be tempting to big American 
brewers with international marketing clout like Miller, Anheuser-Busch
and Stroh. A recent study by the Boston Consulting Group found that 
Russian beer consumption in 1995 was 17 liters per capita, one of the 
lowest in Europe. But the population of Russian beer drinkers, 
multiplied by their 25-liter appetite for beer in the Soviet period, 
creates a large, unsatisfied market. Anislav Tsyrlin, Boston Consulting 
Group's expert on beer, says, "Cheap Soviet beer was replaced by beer 
that was relatively expensive. Vodka is cheaper to produce than beer. As 
prices shot up, real incomes fell, and a 40% excise tax was added to 
beer in 1992, the Russian drinker switched."
Data gathered by the Boston Consulting Group for domestic and foreign 
brewers show that beer consumption has begun to climb back toward the 
1980s' average. But Oleg Ponomarev, an executive with investment bank 
Kreditanstalt, says if other European markets are saturated, brewers 
must look to Russia.
When Miller and Anheuser-Busch analyzed the Russian market, executives 
saw the potential, but they didn't like the risk. Mr. Tsyrlin said 
Miller and Anheuser-Busch opted not to spend money acquiring local 
Russian breweries, even when these assets were being offered at distress 
sale prices in 1992 and 1993. 

Another approach

Instead, the Americans tried to promote their brands through imports, a 
low-cost option, compared with the promotional campaigns of competitors 
like Tuborg and Guinness.
The problem for the American brewers, according to Mr. Tsyrlin, "is that 
the price of a bottle or can is relatively high, so what they market as 
mass beer in the United States is a specialty product in Russia. This 
makes up only 5% of the overall market, and it is a segment that is 
crowded with many competing brands from Germany, the Netherlands, 
Ireland and elsewhere."
A recent Russian survey of the beer market indicates that Russia's most 
popular brands are from 10% to 15% higher in price than comparable beer 
in the United States. According to the Boston Consulting Group, the 
price of premium brands in Russia is about $3 per bottle or can, and $6 
for speciality brands, well above European levels.
Stroh has aimed its import marketing strategy below the price point of 
Miller and Anheuser-Busch, and is selling its "Red Bull" brand 
successfully in the premium segment. Mr. Tsyrlin says this segment is 
highly competitive, too, but at 15% of consumption, bigger than the 
specialty imports. 

$2 million campaign

Stroh is estimated to have spent at least $2 million on billboard and 
media advertising in 1996 in one of the most costly beer marketing 
campaigns that year in Russia. This year, Russian marketers claim, a 
newcomer to the market should spend not less than $5 million to gain a 
foothold among the imports.
European brewers hope to capture the biggest share of the Russian 
market, as it grows, by cutting costs and lowering prices. That's good 
news for consumers, but puts pressure on domestic breweries, which have 
declined from around 300 in 1991 to 180, said Vladimir Shishin, chairman 
of the domestic Beer Industry Association. Another 50 are in serious 
trouble, he adds.
B.B.H. is planning to spend at least $100 million on its Russian 
breweries in the next two years. Baltika alone will have a 60 million 
decaliter capacity, making it the largest in Europe. In 1997, B.B.H. 
estimates its pretax profit was $50 million, up 66% on 1996.
Other foreign investors competing with B.B.H. include: Sun Brewing Group
, controlled by Indian and British interests; Carlsberg of Denmark; and 
Turkey's Efes, which is building a brand new brewery in Moscow at a cost 
of $150 million. 


Journal of Commerce
February 23, 1998
[for personal use only]
Russia's motives questioned in Caspian blockage

After two weeks of delay, analysts are growing increasingly skeptical 
about Russia's reasons for blocking Caspian Sea oil exports from a 
U.S.-backed consortium in Azerbaijan.
The problem, first reported on Feb. 8, is said to be the result of 
Russia's unexpected eleventh-hour demands for customs documentation on 
pipeline exports from a Caspian offshore project under development by 
Azerbaijan International Operating Co. for the past three years.
The consortium, which is 36% U.S.-owned, is the first foreign group to 
test the viability of piping oil from the landlocked Caspian into the 
world market since the Soviet breakup. The offshore resources have been 
the subject of the hottest strategic competition in decades, involving 
the interests of some 20 countries.
Tamam Bayatly, a consortium spokeswoman, said in a phone interview from 
the Azerbaijan capital Baku that officials hope the customs problem will 
be solved shortly, when the $7.4 billion project's oil is expected to 
reach the Russian border.
Other reports have indicated that the consortium's "early" oil began 
crossing into Russia last month, but that the customs hitch halted the 
flow over a 900-mile pipeline to Russia's Port of Novorossiisk on the 
Black Sea.
An official of one consortium member indicated Wednesday that the group 
had avoided a confrontation at the border by deciding to fill its 
storage tanks in Azerbaijan instead. But he also said the consortium may 
"just start pumping" into the Russian pipeline in an attempt to end the 
The paperwork pretext has seemed farfetched from the start, in light of 
the fact that Russia has been trying since 1994 to convince the 
consortium to use its pipeline instead of alternate routes through 
Georgia and Turkey. 

Transneft deal

The consortium's delivery agreement is with the Russian pipeline 
operator Transneft, a state-owned monopoly and instrument of Kremlin 
policy. The shipments are also the subject of an intergovernmental 
agreement between Russia and Azerbaijan, making the customs excuse 
appear absurd.
Ms. Bayatly said that the consortium plans to produce 1.5 million metric 
tons, or 11 million barrels, of early oil this year.
Moscow's real motives are a matter of guesswork at best, but suspicion 
is growing that Russia may be trying to discourage foreign investment in 
the Caspian by raising hurdles for the first consortium exports.
Julia Nanay, director of Petroleum Finance Co. in Washington, said 
Russia may prefer to see the big Caspian offshore project "shut in." 
Kazakstan's Tengiz oil project, led by Chevron Corp., is facing similar 
frustrations with Russian pipeline export plans. 

Back to failed policy?

One theory is that Moscow may be returning to a failed policy it pursued 
briefly in 1994, when it tried to reverse a slump in oil prices and 
Russian revenue by cutting its own exports to reduce world supplies.
Russia's Oil and Gas Ministry deluded itself into thinking that the 
OPEC-like strategy was working when world prices temporarily rose by 50 
cents a barrel. But they soon resumed their decline.
With oil prices now at a four-year low, the same factors and reasoning 
may be at work again.
If more Caspian projects come on line, Russia will have no control over 
the region's growing exports while its own oil earnings suffer. 

Chechnya troubles

Another possible reason for the delay is Russia's continuing problems 
with Chechnya. The breakaway republic controls 95 miles of the pipeline 
route, and Russia has already started building a bypass.
An interim deal for transport through Chechnya expired on Dec. 31 but 
was reportedly extended through the end of this month. Russia may be 
stalling the consortium's exports because it knows there will problems 
farther up the line.


>From RIA Novosti
Rossiiskaya Gazeta
February 20, 1998

The time for peaceful dialogue with Hussein is running
out. The American forces aimed at Iraq are on full alert. The
official pretext for the conflict are the obstacles created by
the Iraqi leader for international inspectors seeking to
establish control over Iraq's arsenals of weapons of mass
destruction. By the way, official reports make no mention of
the fact that these arsenals were accumulated not without the
aid of western companies. 
However, the financial undertone can easily be detected in
the political hullabaloo. Many analysts believe that crises
which constantly break out around Iraq have purely economic
causes. The financial context of the situation was disclosed
with utmost bluntness by the Moroccan weekly Le Journal:
"Washington is concerned about Iraq's oil projects with Russia
and France, because the future reconstruction of Iraq promises
substantial dividends which American companies want to
receive... We are on the threshold of a new round of the
economic war, in which the industrialised nations have become
What facts bear out this view? According to some
estimates, the Iraqi debt to Russia, which accumulated in the
era of "unshakeable Soviet-Iraqi friendship" in the sixties,
seventies and eighties, is $5 billion to $7 billion. Iraq's
debt to France is even bigger - about $11 billion.
After Desert Storm in 1991 many American and British
companies set up a consortium "to restore Iraq", which is now
comprised of about 200 companies and banks. The idea was that
impoverished Iraq would become fully dependent on the
consortium financially. The Iraqi leaders, however, refused to
follow the western economic scenario and chose to establish
ties with Moscow and Paris. 
There is no need to pretend: that turn of events was in
Russia's interest. It also met our practical interests: Baghdad
has repeatedly expressed its readiness to begin Soviet debt
payments. Russia may also gain a lot from developing Iraq's
vast reserves of oil and gas and chemical and metallurgical
resources. However, all these financial prospects may become
reality only after the UN Security Council lifts sanctions
against Iraq.
"Iraqi money" would come in handy for the Russian economy,
the more so since it may come in different ways. For example,
Baghdad has offered a number of Russian oil companies as
repayment of Iraqi debt a long-term concession for the
development of major oil fields at Rumaila and Qurna. Russia
may also receive from Iraq as debt repayments liquified gas,
petroleum products, cotton and other products. Lastly, Russia
might use Iraqi ports, railways and oil and gas pipelines at
discount fees (something the Soviet Union did).
Experts believe that potentially Russian capital
investments in Iraq may amount to $10 billion by 2005-2007 (if
sanctions are lifted). 
Such are our potential gains if the blockade is lifted.
But this is only one side of the coin. The other side,
which may be far more important, is that in the present
situation Moscow cannot be interested in the lifting of the
embargo on Iraqi oil exports. 
The kernel of the matter is that Iraq is one of the
world's leaders in oil reserves and with its extensive network
of oil pipelines and terminals linked with the Persian Gulf and
the Mediterranean it has the potential to literally flood the
world oil market.
At least 70 per cent of the favourable balance of Russia's
foreign trade result from growth in oil export earnings. It is
clear that if Iraq is allowed to export its oil, the world
price of oil will fall. Consequently, Russia's revenues from
oil exports will drop. As Iraq remains isolated, the price
dynamics is quite different.
During the last five years the price of Russian oil has
risen from $130 to $145 a ton. OPEC and IEA (International
Energy Agency) experts believe that if Iraqi oil had not been
barred from the world market, a ton of Russian oil would have
cost $15-$20 dollars less. The same applies to oil exported by
other countries - Saudi Arabia, the United Arab Emirates,
Kuwait, Qatar, Iran and Venezuela. 
Why should Russia lose petrodollars, which account for
more than 30-35 per cent of this country's foreign trade
revenues and are growing thanks to the absence of Iraq at the
world's fuel exchanges? 
Here is one typical example: a short while ago Baghdad
turned down the UN proposal that it increase oil exports by 150
per cent. The formal pretext for the refusal is quite logical:
petrodollars will go not to the Iraqi treasury, but a special
UN fund for compensation payments to the victims of Iraqi
aggression against Kuwait in 1990. 
In reality Iraq also had some other political motives. To
its own detriment Iraq wanted to secure "peaceableness" of the
oil-rich Arab monarchies should Washington decide to launch an
attack. Hussein's consent would automatically lead to a
freezing and subsequent fall of the world price of oil. 
That diplomatic ploy used by Iraq produced the desired
result: Saudi Arabia, the United Arab Emirates, Qatar and even
Iran, Iraq's former arch enemy, recently spoke in favour of a
peaceful settlement of the crisis. Moreover, the Saudis are
dragging their feet on giving permission to the US and British
air forces to use their airspace and air bases in Operation
Desert Thunder (this is how Nato dubbed its possible military
attack on Baghdad).
Of course, Baghdad's oil policy is designed to compel
Moscow to resist Desert Thunder more effectively. The more so
since it is impossible to produce oil without the delivery of
advanced equipment and without sending specialists, in short,
without building up production in basic industries. This factor
is quite important for the Russian economy today, because
Russian industrial products - mining and power engineering
equipment, machine-tools and spare parts and components - are
not always welcome in the West.
In short, there is no doubt that Russian business is
interested in the Iraqi market. On the other hand, one should
bear in mind that world demand for oil will be, in the
foreseeable future, less than oil supply. So, objectively
Russia and other countries are not interested in the lifting of
the blockade of Iraq. That is why our policy to Baghdad is
between the devil and the deep sea. 
The situation is like this: since the early nineties
Russia's average annual returns of oil exports exceeded
$10bn-$11bn. During the last five years they totalled almost
$60 billion and this year they are expected to grow further
owing to price growth, which, in turn, results from the embargo
on oil exports from Iraq.
At the same time, if we invest $10 billion in the Iraqi
economy and get back our debts from Baghdad (about $7 billion)
within 1998-2006, the "payoff" from these investments,
according to OPEC, IEA and other sources, will be $2bn-$2.5bn a
year at the outside. That will happen not immediately, but
after "Russia returns" to the Iraqi economy and all sanctions
against Iraq are lifted.
In short, the question is: which of the two scenarios is
best for Russia?
The answer to this question depends not only on the
economic factors, but also on Moscow's geo-political strategy
in the Middle and Near East and the world situation in general.
So oil is not the only factor. It is also important that
Baghdad withdrew from Western control in the summer of 1958 and
it has no intention to return. This fact cannot fail to
influence the policy of the great powers to Iraq and in the
Persian Gulf. It seems that Russia, one of the great powers, is
fighting for a peacful settlement of the crisis contrary to its
own economic interests, but there are more important things in
politics than pure gain.


>From RIA Novosti
Nezavisimaya Gazeta
February 20, 1998
Kremlin Completes "Quiet Bureaucratic Coup"

President Boris Yeltsin's aide for legal questions Mikhail
Krasnov handed in his resignation statement on Wednesday,
thereby proving that a plan aimed at reorganizing the
Kremlin's structures (that was conceived by Yeltsin's revamped
Elections-96 team) will be fulfilled already in the near
Georgi Satarov, Dmitri Ryurikov, Leo Sukhanov, Mikhail
Barsukov, Alexander Korzhakov and other presidential cronies
have already stepped down. As a result, presidential aides have
virtually become non-existent at this stage. At the same time,
people in charge of the Kremlin's secret services now occupy
more modest positions alongside Yeltsin.
As a matter of fact, Alexander Livshits is seen as the
only "old-time" presidential aide today.
In essence, a "quiet coup" has taken place in the Kremlin.
That coup was so quiet that even Boris Yeltsin himself has not
yet noticed anything because this coup has been staged by his
cronies, who have not lost their powers and influence, and who
have even consolidated their positions.
So, what has happened in the Kremlin over the entire 1997
The first fundamental ideological innovation was
introduced by Boris Yeltsin's spokesman Sergei Yastrzhembsky.
With his arrival, the presidential press service has turned
into a real information monster reminiscent of Korzhakov's
security service.
The presidential press service became one of the most
authoritative and powerful divisions catering to Boris Yeltsin.
No one had cared much about presidential spokesmen and
people working for information departments only 4-5 years ago.
It ought to be mentioned in this connection that the
fourth floor of a Kremlin-building wing has now been vacated by
the Federal Frontier Service and occupied by the above-said
press service.
This fact speaks volumes.
Previously, all presidential video, audio-cassettes and
presidential photos were stored at tiny labs of Yeltsin's
private photographers. Right now, each tape and video cassette
is being registered rather meticulously and stored inside safes
belonging to the chief of a special press-service department.
The President's Staff now controls all information being
prepared by presidential structures; such control has become
more widespread than ever before.
None of the few remaining presidential aides has the right
to contact the press without the blessing of President's Chief
of Staff Valentin Yumashev, or at least that of his deputy
Mikhail Komissar.
The mass-media contacts of Boris and Naina Yeltsin are
being constantly monitored by Sergei Yastrzhembsky and Tatiana
The second innovation has something to do with the
personnel policy itself. It's an open secret that many people,
who are now working for the presidential press service, the
presidential-protocol service, etc., used to work together with
Sergei Yastrzhembsky at the Russian Foreign Ministry and
Russia's Embassy in Slovakia (Yastrzhembsky had served as
Russia's Ambassador in that country some time ago - Ed.).
Kremlin old-timers used to refer to the new presidential
team as a Foreign-Ministry subsidiary in the past. Small
wonder, any boss tries hard to install his own team, while
taking up a new job; and this hardly scares anyone today.
The third component of the Kremlin-reorganization plan is
as follows - fewer people now have an opportunity to contact
the President direct. As of today, their list includes Tatiana
Dyachenko, Valentin Yumashev, Sergei Yastrzhembsky, Viktor
Chernomyrdin, Boris Nemtsov and Anatoli Chubais.
Boris Yeltsin's chief of protocol Vladimir Shevchenko, as
well as Pavel Borodin in charge of the Kremlin business
administration and chief Kremlin doctor Sergei Mironov, also
have an opportunity to discuss various organizational and
economic issues with the Russian leader.
As distinct from old-time "military" ministers, their
present-day counterparts have to put up with official reports
alone, after being summoned by the President.
It turns out that Boris Yeltsin is quite happy about this
line-up because he trusts the above-said persons a great deal.
Strange as it may seem, but the Russian President has decided
to complete his second term in office without his old-time and
devoted supporters.
Still there can be only one explanation for this - Boris
Yeltsin apparently won't object if his current entourage
constitutes the backbone of the future Russian government
system that would be devoid of Yeltsin himself.
By all looks, we should look for the new president and the
new ministers among such people.


Nezavisimaya Gazeta
February 20, 1998

Moscow Mayor Yuri Luzhkov believes that the so-called
"young reformists" cannot suggest any effective economic
trouble-shooting methods to the Russian state.
Luzhkov made this remark, while speaking before students
of Moscow's International University February 19.
The so-called young reformists are unable to suggest
anything else but a monetarist policy to the state, Luzhkov
According to Luzhkov, they have gained a theoretical
insight into financial operations; however, they know nothing
about concrete economics and production. Consequently, they are
attached to monetary games, he added.
In Luzhkov's words, he has repeatedly voiced hopes to the
effect that the monetarist era will soon end in Russia.
However, First Deputy Prime Minister Anatoli Chubais has
stated after President Boris Yeltsin's annual Federal-Assembly
address that he will continue the old-time tax and
privatization policy. In fact, Chubais' statement resembles
that of Khlestakov from Nikolai Gogol's immortal play "The


Return to CDI's Home Page  I  Return to CDI's Library